<PAGE>
As filed with the SEC on August 1, 1995
UST Master Funds, Inc. - Registration Nos. 2-92665; 811-4088
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [x]
UST Master Funds, Inc.: Post-Effective Amendment No. 21 [x]
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY [x]
ACT OF 1940
UST Master Funds, Inc.: Amendment No. 23 [x]
(Exact Name of Registrant as Specified in Charter)
73 Tremont Street
Boston, Massachusetts 02108-3913
(Address of Principal Executive Offices)
Registrant's Telephone Number: (800) 446-1012
W. Bruce McConnel, III
Drinker Biddle & Reath
Philadelphia National Bank Building
1345 Chestnut Street
Philadelphia, Pennsylvania 19107-3496
(Name and Address of Agent for Service)
It is proposed that this post-effective amendment will become effective (check
appropriate box)
[_] immediately upon filing pursuant to paragraph (b)
[X] on August 1, 1995 pursuant to paragraph (b)
[_] 60 days after filing pursuant to paragraph (a)(i)
[_] on (date) pursuant to paragraph (a)(i)
[_] 75 days after filing pursuant to paragraph (a)(ii)
[_] on (date) pursuant to paragraph (a)(ii) of rule 485.
If appropriate, check the following box:
[_] this post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
__________________________
The Registrant has registered an indefinite number of securities under the
Securities Act of 1933 pursuant to Rule 24f-2. The Rule 24f-2 Notice for the
Registrant's fiscal year ended March 31, 1995 was filed on May 26, 1995.
<PAGE>
CROSS-REFERENCE SHEET
---------------------
UST MASTER FUNDS, INC.
(Money Fund, Government Money Fund, Treasury Money Fund)
UST MASTER TAX-EXEMPT FUNDS, INC.
(Short-Term Tax-Exempt Fund)
Form N-1A, Part A, Item Prospectus Caption
----------------------- ------------------
1. Cover Page................................ Cover Page
2. Synopsis.................................. Background and
Expense Summary
3. Financial Highlights...................... Selected Per Share
Data and Ratios;
Performance and
Yield Information
4. General Description of Registrant......... Introduction;
Investment
Objectives and
Policies; Portfolio
Instruments and
Other Investment
Information;
Investment
Limitations;
Description of
Capital Stock
5. Management of the Fund.................... Management of the
Funds; Custodian and
Transfer Agent
6. Capital Stock and
Other Securities........................ How to Purchase and
Redeem Shares;
Dividends and
Distributions;
Taxes; Description
of Capital Stock;
Miscellaneous
7. Purchase of Securities
Being Offered........................... Pricing of Shares;
How to Purchase and
Redeem Shares;
Investor Programs
8. Redemption or Repurchase.................. How to Purchase and
Redeem Shares
9. Pending Legal Proceedings................. Inapplicable
<PAGE>
[LOGO OF UST
APPEARS HERE]
MASTER FUNDS, INC.
MASTER TAX-EXEMPT
Management Investment Companies FUNDS, INC.
-------------------------------------------------------------------------------
Money Fund For initial purchase information, current
Government Money Fund prices, yield and performance information
Treasury Money Fund and existing account information, call (800)
Short-Term Tax-Exempt Fund 446-1012.
(From overseas, call (617) 557-8280.)
73 Tremont Street
Boston, Massachusetts 02108-3913
-------------------------------------------------------------------------------
This Prospectus describes the Service Shares ("Shares") offered by the Money
Fund, Government Money Fund and Treasury Money Fund, three separate diversi-
fied portfolios offered to investors by UST Master Funds, Inc. ("Master Fund")
and the Short-Term Tax-Exempt Fund, a diversified portfolio offered by UST
Master Tax-Exempt Funds, Inc. ("Master Tax-Exempt Fund" and, collectively with
Master Fund, the "Corporation"). Master Fund and Master Tax-Exempt Fund are
open-end, management investment companies. Each portfolio (individually, a
"Fund" and collectively, the "Funds") has its own investment objective and
policies:
MONEY FUND'S investment objective is to seek as high a level of current in-
come as is consistent with liquidity and stability of principal. The Fund will
generally invest in money market instruments, including bank obligations, com-
mercial paper and U.S. Government obligations.
GOVERNMENT MONEY FUND'S investment objective is to seek as high a level of
current income as is consistent with liquidity and stability of principal. The
Fund will generally invest in short-term obligations issued or guaranteed by
the U.S. Government, its agencies or instrumentalities and repurchase agree-
ments collateralized by such obligations.
TREASURY MONEY FUND'S investment objective is to seek current income with li-
quidity and stability of principal. The Fund invests primarily in direct
short-term obligations of the U.S. Treasury and certain agencies or instrumen-
talities of the U.S. Government with a view toward providing interest income
that is generally considered exempt from state and local income taxes. Under
normal market conditions, at least 65% of the Fund's total assets will be in-
vested in direct U.S. Treasury obligations. The Fund will not enter into re-
purchase agreements.
SHORT-TERM TAX-EXEMPT FUND'S investment objective is to seek a moderate level
of current interest income exempt from Federal income taxes consistent with
stability of principal. The Fund (hereinafter referred to as the "Short-Term
Fund") will invest substantially all of its assets in high-quality short-term
Municipal Securities.
Each of the Funds is sponsored and distributed by Edgewood Services, Inc. and
advised by United States Trust Company of New York ("Investment Adviser" or
"U.S. Trust").
This Prospectus sets forth concisely the information about the Funds that a
prospective investor should consider before investing. Investors should read
this Prospectus and retain it for future reference. A Statement of Additional
Information dated August 1, 1995 and containing additional information about
the Funds has been filed with the Securities and Exchange Commission. The cur-
rent Statement of Additional Information is available to investors without
charge by writing to the address shown above or by calling (800) 446-1012. The
Statement of Additional Information, as it may be supplemented from time to
time, is incorporated by reference in its entirety into this Prospectus.
SHARES IN THE FUNDS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR EN-
DORSED BY, UNITED STATES TRUST COMPANY OF NEW YORK, ITS PARENT OR AFFILIATES
AND THE SHARES ARE NOT FEDERALLY INSURED BY, GUARANTEED BY OR OBLIGATIONS OF
OR OTHERWISE SUPPORTED BY THE U.S. GOVERNMENT, THE FEDERAL DEPOSIT INSURANCE
CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER GOVERNMENTAL AGENCY. THE
FUNDS SEEK TO MAINTAIN THEIR NET ASSET VALUE PER SHARE AT $1.00 FOR PURPOSES
OF PURCHASES AND REDEMPTIONS, ALTHOUGH THERE CAN BE NO ASSURANCE THAT THEY
WILL DO SO ON A CONTINUOUS BASIS. INVESTMENT IN THE FUNDS INVOLVES INVESTMENT
RISK, INCLUDING THE POSSIBLE LOSS OF THE PRINCIPAL AMOUNT INVESTED.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE AC-
CURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
August 1, 1995
<PAGE>
EXPENSE SUMMARY
<TABLE>
<CAPTION>
GOVERNMENT TREASURY
MONEY MONEY MONEY SHORT-TERM
FUND FUND FUND FUND
----- ---------- -------- ----------
<S> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load on Purchases
(as a percentage of offering price)..... None None None None
Sales Load on Reinvested Dividends....... None None None None
Deferred Sales Load...................... None None None None
Redemption Fees/1/....................... None None None None
Exchange Fees............................ None None None None
ANNUAL FUND OPERATING EXPENSES FOR
SERVICE SHARES
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
Advisory Fees (after fee waivers)/2/..... .22% .22% .28% .22%
12b-1 Fees............................... None None None None
Other Operating Expenses
Administrative Servicing Fee............ .03% .03% .02% .03%
Other Expenses.......................... .24% .25% .25% .24%
Total Fund Operating Expenses (after fee
waivers)/2/............................. .49% .50% .55% .49%
</TABLE>
-------
1. The Funds' transfer agent imposes a direct $8.00 charge on each wire redemp-
tion by noninstitutional (i.e. individual) investors which is not reflected
in the expense ratios presented herein. Shareholder organizations may charge
their customers transaction fees in connection with redemptions. See "Re-
demption Procedures."
2. The Investment Adviser and Administrators may from time to time voluntarily
waive part of their respective fees, which waivers may be terminated at any
time. Until further notice, the Investment Adviser and/or Administrators in-
tend to voluntarily waive fees in an amount equal to the Administrative Ser-
vicing Fee. Without such fee waivers, "Advisory Fees" would be .25%, .25%,
.30% and .25% and total operating expenses for Service Shares would be .52%,
.53%, .57% and .52% for the Money, Government Money, Treasury Money and
Short-Term Funds, respectively.
2
<PAGE>
Example: You would pay the following expenses on a $1,000 investment, assuming
(1) 5% annual return, and (2) redemption of your investment at the end of the
following periods.
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
Money Fund...................................... $ 5 $16 $27 $62
Government Money Fund........................... 5 16 28 63
Treasury Money Fund............................. 6 18 31 69
Short-Term Fund................................. 5 16 27 62
</TABLE>
The foregoing expense summary and example are intended to assist the investor
in understanding the costs and expenses that an investor in Service Shares of
the Funds will bear directly or indirectly. The expense summary sets forth ad-
visory and other expenses payable with respect to Service Shares of the Funds
for the fiscal year ended March 31, 1995. For more complete descriptions of the
Funds' operating expenses, see "Management of Funds" in this Prospectus and the
financial statements and notes incorporated by reference in the Statement of
Additional Information.
THE FOREGOING EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE EXPENSES OR RATE OF RETURN. ACTUAL EXPENSES AND RATE OF RETURN MAY BE
GREATER OR LOWER THAN THOSE SHOWN IN THE EXPENSE SUMMARY AND EXAMPLE.
3
<PAGE>
FINANCIAL HIGHLIGHTS
The following tables include selected data for a Service Share outstanding
throughout each period and other performance information derived from the fi-
nancial statements included in Master Fund's and Master Tax-Exempt Fund's An-
nual Reports to Shareholders for the fiscal year ended March 31, 1995 (the "Fi-
nancial Statements"). The information contained in the Financial Highlights for
each period has been audited by Ernst & Young LLP, Master Fund's and Master
Tax-Exempt Fund's independent auditors. It should be read in conjunction with
the Financial Statements.
MONEY FUND
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
------------------------------------------------------------------------------------------------------------
1995 1994 1993 1992 1991 1990 1989 1988 1987 1986/1/
--------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of
Period.......... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
--------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
Income From
Investment
Operations
Net Investment
Income......... 0.04494 0.02780 0.03234 0.05165 0.07589 0.08454 0.07698 0.06260 0.06123 0.06824
Net Gains or
(Losses) on
Securities
(both realized
and
unrealized).... 0.00002 0.00000 0.00000 0.00017 0.00001 0.00000 0.00000 0.00000 0.00000 0.00000
--------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
Total From
Investment
Operations..... 0.04496 0.02780 0.03234 0.05182 0.07590 0.08454 0.07698 0.06260 0.06123 0.06824
--------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
Less
Distributions
Dividends From
Net Investment
Income......... (0.04496) (0.02780) (0.03234) (0.05165) (0.07589) (0.08454) (0.07698) (0.06260) (0.06123) (0.06824)
Distributions
From Net
Realized Gain
on Investments. 0.00000 0.00000 0.00000 (0.00019) 0.00000 0.00000 0.00000 0.00000 (0.00001) 0.00000
--------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
Total
Distributions.. (0.04496) (0.02780) (0.03234) (0.05184) (0.07589) (0.08454) (0.07698) (0.06260) (0.06124) (0.06905)
--------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
Net Asset Value,
End of Period... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
========= ========= ========= ========= ========= ========= ========= ========= ========= =========
Total Return..... 4.59% 2.82% 3.25% 5.19% 7.64% 8.71% 7.76% 6.28% 6.30% 7.04%
Ratios/Supplemental
Data
Net Assets, End
of Period
(in millions).. $ 824.58 $ 736.08 $ 784.02 $ 574.27 $ 471.32 $ 432.37 $ 369.69 $ 321.27 $ 373.38 $ 174.21
Ratio of Net
Operating
Expenses to
Average Net
Assets......... 0.49% 0.51% 0.51% 0.51% 0.52% 0.55% 0.56% 0.55% 0.56% 0.60%/2/
Ratio of Gross
Operating
Expenses to
Average Net
Assets......... 0.52% 0.51% 0.51% 0.51% 0.52% 0.55% 0.56% 0.55% 0.56% 0.74%/2/
Ratio of Net
Income to
Average Net
Assets......... 4.49% 2.78% 3.21% 5.11% 7.56% 8.42% 7.71% 6.25% 6.05% 7.41%/2/
</TABLE>
-------
1.Inception date of the Fund was May 3, 1985.
2. Annualized.
4
<PAGE>
GOVERNMENT MONEY FUND
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
------------------------------------------------------------------------------------------------------------
1995 1994 1993 1992 1991 1990 1989 1988 1987 1986/1/
--------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of
Period.......... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
--------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
Income From
Investment
Operations
Net Investment
Income......... 0.04397 0.02736 0.03205 0.05069 0.07379 0.08379 0.07498 0.06111 0.05941 0.06560
Net Gains or
(Losses) on
Securities
(both realized
and
unrealized).... 0.00000 0.00000 0.00000 0.00002 0.00008 0.00000 0.00000 (0.00002) 0.00000 0.00000
--------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
Total From
Investment
Operations..... 0.04397 0.02736 0.03205 0.05071 0.07387 0.08379 0.07498 0.06109 0.05941 0.06560
--------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
Less
Distributions
Dividends From
Net Investment
Income......... (0.04397) (0.02736) (0.03205) (0.05069) (0.07379) (0.08379) (0.07498) (0.06111) (0.05941) (0.06560)
Distributions
From Net
Realized Gain
on Investments. 0.00000 0.00000 0.00000 (0.00005) (0.00005) (0.00001) 0.00000 (0.00023) (0.00016) 0.00000
--------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
Total
Distributions.. (0.04397) (0.02736) (0.03205) (0.05074) (0.07384) (0.08380) (0.07498) (0.06134) (0.05957) (0.06686)
--------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
Net Asset Value,
End of Period... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
========= ========= ========= ========= ========= ========= ========= ========= ========= =========
Total Return..... 4.49% 2.77% 3.20% 5.09% 7.31% 8.30% 7.49% 6.44% 6.11% 6.92%
Ratios/Supplemental
Data
Net Assets, End
of Period
(in millions).. $ 725.77 $1,034.94 $ 710.49 $ 740.69 $ 700.22 $ 392.02 $ 241.13 $ 198.32 $ 191.51 $ 63.16
Ratio of Net
Operating
Expenses to
Average Net
Assets......... 0.50% 0.50% 0.50% 0.50% 0.50% 0.57% 0.57% 0.56% 0.56% 0.62%/2/
Ratio of Gross
Operating
Expenses to
Average Net
Assets......... 0.53% 0.50% 0.50% 0.50% 0.50% 0.57% 0.57% 0.56% 0.56% 0.77%/2/
Ratio of Net
Income to
Average Net
Assets......... 4.38% 2.74% 3.20% 5.09% 7.31% 8.30% 7.49% 6.10% 5.81% 7.26%/2/
</TABLE>
-------
NOTES:
1.Inception date of the Fund was May 8, 1985.
2.Annualized.
5
<PAGE>
SHORT-TERM TAX-EXEMPT FUND
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
------------------------------------------------------------------------------------------------------------
1995 1994 1993 1992 1991 1990 1989 1988 1987 1986/1/
--------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of
Period.......... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
--------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
Income From
Investment
Operations
Net Investment
Income......... 0.02825 0.01938 0.02395 0.03849 0.05292 0.05808 0.05348 0.04572 0.04233 0.04171
Net Gains or
(Losses) on
Securities
(both realized
and
unrealized).... 0.00000 0.00000 0.00000 0.00000 (0.00001) 0.00000 0.00000 0.00000 0.00000 0.00000
--------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
Total From
Investment
Operations..... 0.02825 0.01938 0.02395 0.03849 0.05291 0.05808 0.05348 0.04572 0.04233 0.04171
--------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
Less
Distributions
Dividends From
Net Investment
Income......... (0.02825) (0.01938) (0.02395) (0.03849) (0.05292) (0.05808) (0.05348) (0.04572) (0.04233) (0.04171)
Distributions
From Net
Realized Gain
on Investments. 0.00000 0.00000 0.00000 0.00000 0.00000 0.00000 0.00000 0.00000 0.00000 0.00000
--------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
Total
Distributions.. (0.02825) (0.01938) (0.02395) (0.03849) (0.05292) (0.05808) (0.05348) (0.04572) (0.04233) (0.04238)
--------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
Net Asset Value,
End of Period... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
========= ========= ========= ========= ========= ========= ========= ========= ========= =========
Total Return..... 2.86% 1.96% 2.42% 3.92% 5.42% 5.97% 5.48% 4.67% 4.32% 4.99%
Ratios/Supplemental
Data
Net Assets, End
of Period
(in millions).. $ 814.89 $ 694.58 $ 659.33 $ 666.35 $ 662.34 $ 600.06 $ 525.30 $ 580.98 $ 561.08 $ 296.73
Ratio of Net
Operating
Expenses to
Average Net
Assets......... 0.49% 0.52% 0.52% 0.52% 0.53% 0.55% 0.53% 0.52% 0.54% 0.64%/2/
Ratio of Gross
Operating
Expenses to
Average Net
Assets......... 0.52% 0.52% 0.52% 0.52% 0.53% 0.55% 0.53% 0.52% 0.54% 0.75%/2/
Ratio of Net
Income to
Average Net
Assets......... 2.85% 1.94% 2.39% 3.84% 5.28% 5.79% 5.33% 4.58% 4.18% 5.28%/2/
</TABLE>
-------
NOTES:
1. Inception date of the Fund was May 24, 1985.
2. Annualized.
6
<PAGE>
TREASURY MONEY FUND
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-----------------------------------------------------
1995 1994 1993 1992 1991/1/
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period.... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
--------- --------- --------- --------- ---------
Income From Investment
Operations
Net Investment Income. 0.04165 0.02590 0.02987 0.04731 0.00782
Net Gains or (Losses)
on Securities
(both realized and
unrealized).......... 0.00000 0.00000 0.00000 0.00036 0.00001
--------- --------- --------- --------- ---------
Total From Investment
Operations........... 0.04165 0.02590 0.02987 0.04767 0.00783
--------- --------- --------- --------- ---------
Less Distributions
Dividends From Net
Investment Income.... (0.04165) (0.02590) (0.02987) (0.04731) (0.00782)
Distributions From Net
Realized Gain on
Investments.......... 0.00000 0.00000 (0.00030) (0.00011) 0.00000
--------- --------- --------- --------- ---------
Total Distributions... (0.04165) (0.02590) (0.03017) (0.04742) (0.00782)
--------- --------- --------- --------- ---------
Net Asset Value, End of
Period................. $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
========= ========= ========= ========= =========
Total Return............ 4.25% 2.62% 3.06% 4.85% 0.78%
Ratios/Supplemental Data
Net Assets, End of
Period (in millions). $ 196.93 $ 254.68 $ 227.79 $ 172.29 $ 110.37
Ratio of Net Operating
Expenses to Average
Net Assets........... 0.55% 0.58% 0.58% 0.52% 0.09%/2/
Ratio of Gross
Operating Expenses to
Average Net Assets... 0.57% 0.58% 0.58% 0.57% 0.60%/2/
Ratio of Net Income to
Average Net Assets... 4.09% 2.59% 2.97% 4.60% 5.98%/2/
</TABLE>
-------
NOTES:
1. Inception date of the Fund was February 13, 1991.
2. Annualized.
7
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
The Investment Adviser uses its best efforts to achieve the investment objec-
tive of each Fund, although its achievement cannot be assured. The investment
objective of each Fund may not be changed without a vote of the holders of a
majority of the particular Fund's outstanding Shares (as defined under "Miscel-
laneous"). Except as noted below in "Investment Limitations," the investment
policies of each Fund may be changed without a vote of the holders of a major-
ity of the outstanding Shares of such Fund.
Each Fund uses the amortized cost method to value securities in its portfolio
and has a dollar-weighted portfolio maturity not exceeding 90 days.
MONEY FUND
The Money Fund's investment objective is to seek as high a level of current
income as is consistent with liquidity and stability of principal. The Fund
will generally invest in money market instruments, such as bank certificates of
deposit, bankers' acceptances, commercial paper (including variable and float-
ing rate instruments) and corporate bonds with remaining maturities of 13
months or less, as well as obligations issued or guaranteed by the U.S. Govern-
ment, its agencies or instrumentalities and repurchase agreements collateral-
ized by such obligations. Additional information about the Fund's policies and
portfolio instruments is set forth below under "Portfolio Instruments and Other
Investment Information."
GOVERNMENT MONEY FUND
The Government Money Fund's investment objective is to seek as high a level of
current income as is consistent with liquidity and stability of principal. The
Fund will invest in obligations with remaining maturities of 13 months or less
issued or guaranteed by the U.S. Government, its agencies or instrumentalities
and repurchase agreements collateralized by such obligations. See "Portfolio
Instruments and Other Investment Information" for information on other portfo-
lio instruments in which the Fund may invest.
TREASURY MONEY FUND
The Treasury Money Fund's investment objective is to seek current income with
liquidity and stability of principal. The Fund invests primarily in direct ob-
ligations of the U.S. Treasury with remaining maturities of 13 months or less,
such as Treasury bills and notes. Under normal market conditions, the Fund will
invest at least 65% of its total assets in direct U.S. Treasury obligations.
The Fund may also from time to time invest in obligations with remaining matu-
rities of 13 months or less issued or guaranteed as to principal and interest
by certain agencies or instrumentalities of the U.S. Government, such as the
Farm Credit System Financial Assistance Corporation, Federal Financing Bank,
General Services Administration, Federal Home Loan Banks, Farm Credit System,
Tennessee Valley Authority and the Student Loan Marketing Association. Income
on direct investments in U.S. Treasury securities and obligations of the afore-
mentioned agencies and instrumentalities is generally not subject to state and
local income taxes by reason of Federal law. In addition, the Fund's dividends
from income that is attributable to such investments will also be exempt in
most states from state and local income taxes. Shareholders in a particular
state should determine through consultation with their own tax advisors whether
and to what extent dividends payable by the Treasury Money Fund from its in-
vestments will be considered by the state to have retained exempt status, and
whether the Fund's capital gain and other income, if any, when distributed will
be subject to the state's income tax. See "Taxes--State and Local." The Trea-
sury Money Fund will not enter into repurchase agreements.
SHORT-TERM FUND
The Short-Term Fund's investment objective is to seek a moderate level of cur-
rent interest income exempt from Federal income taxes consistent with stability
of principal. The Fund will invest substantially all of its assets in high-
quality debt obligations exempt from Federal income tax issued by or on behalf
of states, territories, and possessions of the United
8
<PAGE>
States, the District of Columbia, and their authorities, agencies, instrumen-
talities, and political subdivisions ("Municipal Securities"). Portfolio secu-
rities in the Fund will generally have remaining maturities of not more than
13 months. (See "Portfolio Instruments and Other Investment Information.")
The Short-Term Fund is designed for investors in relatively high tax brackets
who are seeking a moderate amount of tax-free income with stability of princi-
pal and less price volatility than would normally be associated with interme-
diate-term and long-term Municipal Securities.
The Short-Term Fund invests in Municipal Securities which are determined by
the Investment Adviser to present minimal credit risks. As a matter of funda-
mental policy, except during temporary defensive periods, the Fund will main-
tain at least 80% of its assets in tax-exempt obligations. (This policy may
not be changed with respect to the Fund without the vote of the holders of a
majority of its outstanding Shares). However, from time to time on a temporary
defensive basis due to market conditions, the Short-Term Fund may hold
uninvested cash reserves or invest in taxable obligations in such proportions
as, in the opinion of the Investment Adviser, prevailing market or economic
conditions may warrant. Uninvested cash reserves will not earn income. Should
the Fund invest in taxable obligations, it would purchase: (i) obligations of
the U.S. Treasury; (ii) obligations of agencies and instrumentalities of the
U.S. Government; (iii) money market instruments such as certificates of depos-
it, commercial paper, and bankers' acceptances; (iv) repurchase agreements
collateralized by U.S. Government obligations or other money market instru-
ments; or (v) securities issued by other investment companies that invest in
high-quality, short-term securities.
The Short-Term Fund may also invest from time to time in "private activity
bonds" (see "Types of Municipal Securities" below), the interest on which is
treated as a specific tax preference item under the Federal alternative mini-
mum tax. Investments in such securities, however, will not exceed under normal
market conditions 20% of the Fund's total assets when added together with any
taxable investments by the Fund.
Although the Short-Term Fund does not presently intend to do so on a regular
basis, it may invest more than 25% of its assets in Municipal Securities the
interest on which is paid solely from revenues of similar projects, if such
investment is deemed necessary or appropriate by the Investment Adviser. To
the extent that the Fund's assets are concentrated in Municipal Securities
payable from revenues on similar projects, the Fund will be subject to the pe-
culiar risks presented by such projects to a greater extent than it would be
if the Fund's assets were not so concentrated.
PORTFOLIO INSTRUMENTS AND OTHER INVESTMENT INFORMATION
GOVERNMENT OBLIGATIONS
Government obligations acquired by the Money, Government Money, Treasury
Money and Short-Term Funds include obligations issued or guaranteed by the
U.S. Government, its agencies and instrumentalities. Such investments may in-
clude obligations issued by the Farm Credit System Financial Assistance Corpo-
ration, the Federal Financing Bank, the General Services Administration, Fed-
eral Home Loan Banks, the Tennessee Valley Authority and the Student Loan Mar-
keting Association. Obligations of certain agencies and instrumentalities of
the U.S. Government are supported by the full faith and credit of the U.S.
Treasury; others are supported by the right of the issuer to borrow from the
Treasury; others are supported by the discretionary authority of the U.S. Gov-
ernment to purchase the agency's obligations; still others are supported only
by the credit of the instrumentality. No assurance can be given that the U.S.
Government would provide financial support to U.S. Government-sponsored in-
strumentalities if it is not obligated to do so by law. Obligations of such
instrumentalities will be purchased only when the Investment Adviser believes
that the credit risk with respect to the instrumentality is minimal. The Ap-
pendix to the Statement of Additional Information contains further information
on the various types of U.S. Government obligations.
9
<PAGE>
Securities issued or guaranteed by the U.S. Government have historically in-
volved little risk of loss of principal if held to maturity. However, due to
fluctuations in interest rates, the market value of such securities may vary
during the period a shareholder owns shares of a Fund.
As stated above, the Treasury Money Fund will purchase primarily direct obli-
gations of the U.S. Treasury and obligations of those agencies or instrumental-
ities of the U.S. Government interest income from which is generally not sub-
ject to state and local income taxes.
MONEY MARKET INSTRUMENTS
"Money market instruments" that may be purchased by the Money, Government Mon-
ey, and Short-Term Funds in accordance with their investment objectives and
policies stated above include, among other things, bank obligations, commercial
paper and corporate bonds with remaining maturities of 13 months or less.
Bank obligations include bankers' acceptances, negotiable certificates of de-
posit, and non-negotiable time deposits earning a specified return and issued
by a U.S. bank which is a member of the Federal Reserve System or insured by
the Bank Insurance Fund of the Federal Deposit Insurance Corporation ("FDIC"),
or by a savings and loan association or savings bank which is insured by the
Savings Association Insurance Fund of FDIC. Bank obligations acquired by the
Money Fund may also include U.S. dollar-denominated obligations of foreign
branches of U.S. banks and obligations of domestic branches of foreign banks.
Investments in bank obligations are limited to the obligations of financial in-
stitutions having more than $2 billion in total assets at the time of purchase.
Investments in bank obligations of foreign branches of domestic financial in-
stitutions or of domestic branches of foreign banks are limited so that no more
than 5% of the value of the Fund's total assets may be invested in any one
branch, and that no more than 20% of the Fund's total assets at the time of
purchase may be invested in the aggregate in such obligations. Investments in
non-negotiable time deposits are limited to no more than 5% of the value of a
Fund's total assets at time of purchase, and are further subject to the overall
10% limit on illiquid securities.
Investments in obligations of foreign branches of U.S. banks and of U.S.
branches of foreign banks may subject the Money Fund to additional investment
risks, including future political and economic developments, the possible impo-
sition of withholding taxes on interest income, possible seizure or national-
ization of foreign deposits, the possible establishment of exchange controls,
or the adoption of other foreign governmental restrictions which might ad-
versely affect the payment of principal and interest on such obligations. In
addition, foreign branches of U.S. banks and U.S. branches of foreign banks may
be subject to less stringent reserve requirements and to different accounting,
auditing, reporting, and recordkeeping standards than those applicable to do-
mestic branches of U.S. banks. Investments in the obligations of U.S. branches
of foreign banks or foreign branches of U.S. banks will be made only when the
Investment Adviser believes that the credit risk with respect to the instrument
is minimal.
VARIABLE AND FLOATING RATE INSTRUMENTS
Commercial paper may include variable and floating rate instruments. While
there may be no active secondary market with respect to a particular instrument
purchased by a Fund, the Fund may, from time to time as specified in the in-
strument, demand payment of the principal of the instrument or may resell the
instrument to a third party. The absence of an active secondary market, howev-
er, could make it difficult for a Fund to dispose of the instrument if the is-
suer defaulted on its payment obligation or during periods that the Fund is not
entitled to exercise its demand rights, and the Fund could, for this or other
reasons, suffer a loss with respect to such instrument. While the Funds will in
general invest only in securities that mature within 13 months of date of pur-
chase,
10
<PAGE>
they may invest in variable and floating rate instruments which have nominal
maturities in excess of 13 months if such instruments have demand features that
comply with conditions established by the Securities and Exchange Commission
("SEC") (see "Additional Information on Portfolio Instruments--Variable and
Floating Rate Instruments" in the Statement of Additional Information).
Some of the instruments purchased by the Government Money and Treasury Money
Funds may also be issued as variable and floating rate instruments. However,
since they are issued or guaranteed by the U.S. Government or its agencies or
instrumentalities, they may have a more active secondary market.
QUALITY OF INVESTMENTS
The Funds may only invest in: (i) securities in the two highest rating catego-
ries of an NRSRO, provided that if they are rated by more than one Nationally
Recognized Statistical Rating Organization ("NRSRO"), at least one other NRSRO
rates them in one of its two highest categories; and (ii) unrated securities
determined to be of comparable quality at the time of purchase (collectively,
"Eligible Securities"). Except for the Short-Term Fund, a Fund may not invest
more than 5% of its assets in Eligible Securities that are not "First Tier Se-
curities" (as defined below under "Diversification Requirements"). The rating
symbols of the NRSROs which the Fund may use are described in the Appendix to
the Statement of Additional Information.
REPURCHASE AGREEMENTS
The Money, Government Money and Short-Term Funds may agree to purchase portfo-
lio securities subject to the seller's agreement to repurchase them at a mutu-
ally agreed upon date and price ("repurchase agreements"). A Fund will enter
into repurchase agreements only with financial institutions that are deemed to
be creditworthy by the Investment Adviser, pursuant to guidelines established
by the Boards of Directors. No Fund will enter into repurchase agreements with
the Investment Adviser or any of its affiliates. Repurchase agreements with re-
maining maturities in excess of seven days will be considered illiquid securi-
ties and will be subject to the 10% limit applicable to such securities (see
"Investment Limitations" in the Statement of Additional Information).
The seller under a repurchase agreement will be required to maintain the value
of the securities which are subject to the agreement and held by a Fund at not
less than the repurchase price. Default or bankruptcy of the seller would, how-
ever, expose a Fund to possible delay in connection with the disposition of the
underlying securities or loss to the extent that proceeds from a sale of the
underlying securities were less than the repurchase price under the agreement.
Income on the repurchase agreements will be taxable.
SECURITIES LENDING
To increase return on their portfolio securities, the Money Fund and Govern-
ment Money Fund may lend their portfolio securities to broker/dealers pursuant
to agreements requiring the loans to be continuously secured by collateral
equal at all times in value to at least the market value of the securities
loaned. Collateral for such loans may include cash, securities of the U.S. Gov-
ernment, its agencies or instrumentalities, or an irrevocable letter of credit
issued by a bank which meets the investment standards of these Funds, or any
combination thereof. Such loans will not be made if, as a result, the aggregate
of all outstanding loans of a Fund exceeds 30% of the value of its total as-
sets. There may be risks of delay in receiving additional collateral or in re-
covering the securities loaned or even a loss of rights in the collateral
should the borrower of the securities fail financially. However, loans are made
only to borrowers deemed by the Investment Adviser to be of good standing and
when, in the Investment Adviser's judgment, the income to be earned from the
loan justifies the attendant risks.
INVESTMENT COMPANY SECURITIES
In connection with the management of their daily cash positions, the Funds may
invest in securities
11
<PAGE>
issued by other investment companies which invest in high-quality, short-term
securities and which determine their net asset value per share based on the
amortized cost or penny-rounding method. The Short-Term Fund will invest in
securities of investment companies only if such companies invest primarily in
high-quality, short-term Municipal Securities. The Government Money and Trea-
sury Money Funds intend to limit their acquisition of shares of other invest-
ment companies to those companies which are themselves permitted to invest
only in securities which may be acquired by the respective Funds. Securities
of other investment companies will be acquired by a Fund within the limits
prescribed by the Investment Company Act of 1940 (the "1940 Act"). Each Fund
currently intends to limit its investments so that, as determined immediately
after a securities purchase is made: (a) not more than 5% of the value of its
total assets will be invested in the securities of any one investment company;
(b) not more than 10% of the value of its total assets will be invested in the
aggregate in securities of investment companies as a group; and (c) not more
than 3% of the outstanding voting stock of any one investment company will be
owned by the Fund. In addition to the advisory fees and other expenses a Fund
bears directly in connection with its own operations, as a shareholder of an-
other investment company, a Fund would bear its pro rata portion of the other
investment company's advisory fees and other expenses. As such, the Fund's
shareholders would indirectly bear the expenses of the Fund and the other in-
vestment company, some or all of which would be duplicative. Any change by the
Funds in the future with respect to their policies concerning investments in
securities issued by other investment companies will be made only in accor-
dance with the requirements of the 1940 Act.
TYPES OF MUNICIPAL SECURITIES
The two principal classifications of Municipal Securities which may be held
by the Short-Term Fund are "general obligation" securities and "revenue" secu-
rities. General obligation securities are secured by the issuer's pledge of
its full faith, credit, and taxing power for the payment of principal and in-
terest. Revenue securities are payable only from the revenues derived from a
particular facility or class of facilities or, in some cases, from the pro-
ceeds of a special excise tax or other specific revenue source such as the
user of the facility being financed. Private activity obligations are in most
cases revenue securities and are not payable from the unrestricted revenues of
the issuer. Consequently, the credit quality of private activity revenue obli-
gations is usually directly related to the credit standing of the corporate
user of the facility involved.
The Short-Term Fund's portfolio may also include "moral obligation" securi-
ties, which are normally issued by special-purpose public authorities. If the
issuer of moral obligation securities is unable to meet its debt service obli-
gations from current revenues, it may draw on a reserve fund the restoration
of which is a moral commitment but not a legal obligation of the state or mu-
nicipality which created the issuer. There is no limitation on the amount of
moral obligation securities that may be held by the Fund.
The Short-Term Fund may also purchase custodial receipts evidencing the right
to receive either the principal amount or the periodic interest payments or
both with respect to specific underlying Municipal Securities. In general,
such "stripped" Municipal Securities are offered at a substantial discount in
relation to the principal and/or interest payments which the holders of the
receipt will receive. To the extent that such discount does not produce a
yield to maturity for the investor that exceeds the original tax-exempt yield
on the underlying Municipal Security, such yield will be exempt from Federal
income tax for such investor to the same extent as interest on the underlying
Municipal Security. The Short-Term Fund intends to purchase custodial receipts
and "stripped" Municipal Securities only when the yield thereon will be, as
described above, exempt from Federal income tax to the same extent as interest
on the underlying Municipal Securities. "Stripped" Municipal Securities are
considered illiquid securities subject to the Fund's 10% restriction on in-
vestments in illiquid securities.
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<PAGE>
WHEN-ISSUED AND FORWARD TRANSACTIONS AND STAND-BY COMMITMENTS
The Funds may purchase eligible securities on a "when-issued" basis and may
purchase or sell such securities on a "forward commitment" basis. These trans-
actions involve a commitment by a Fund to purchase or sell particular securi-
ties with payment and delivery taking place in the future beyond the normal
settlement date at a stated price and yield. Securities purchased on a "for-
ward commitment" or "when-issued" basis are recorded as an asset and are sub-
ject to changes in value based upon changes in the general level of interest
rates. Absent unusual market conditions, "forward commitments" and "when-
issued" purchases will not exceed 25% of the value of a Fund's total assets,
and the length of such commitments will not exceed 45 days. The Funds do not
intend to engage in "when-issued" purchases or "forward commitments" for spec-
ulative purposes, but only in furtherance of their investment objectives.
In addition, the Short-Term Fund may acquire "stand-by commitments" with re-
spect to Municipal Securities held by it. Under a "stand-by commitment," a
dealer agrees to purchase at the Fund's option specified Municipal Securities
at a specified price. The Short-Term Fund will acquire "stand-by commitments"
solely to facilitate portfolio liquidity and does not intend to exercise its
rights thereunder for trading purposes. "Stand-by commitments" acquired by the
Short-Term Fund would be valued at zero in determining the Fund's net asset
value. Further information concerning "stand-by commitments" is contained in
the Statement of Additional Information under "Additional Information on Port-
folio Instruments."
ILLIQUID SECURITIES
No fund will knowingly invest more than 10% of the value of its net assets in
securities that are illiquid. Each Fund may purchase securities which are not
registered under the Securities Act of 1933 (the "Act") but which can be sold
to "qualified institutional buyers" in accordance with Rule 144A under the
Act. Any such security will not be considered illiquid so long as it is deter-
mined by the Investment Adviser, acting under guidelines approved and moni-
tored by the Board, that an adequate trading market exists for that security.
This investment practice could have the effect of increasing the level of il-
liquidity in a Fund during any period that qualified institutional buyers be-
come uninterested in purchasing these restricted securities.
DIVERSIFICATION REQUIREMENTS
Each Fund other than the Short-Term Fund will limit its purchases of any one
issuer's securities (other than U.S. Government obligations and customary de-
mand deposits) to 5% of the Fund's total assets, except that it may invest
more than 5% (but no more than 25%) of its total assets in "First Tier Securi-
ties" of one issuer for a period of up to three business days. First Tier Se-
curities include: (i) securities in the highest rating category by the only
NRSRO rating them, (ii) securities in the highest rating category of at least
two NRSROs, if more than one NRSRO has rated them, (iii) securities that have
no short-term rating, but have been issued by an issuer that has other out-
standing short-term obligations that have been rated in accordance with (i) or
(ii) above and are comparable in priority and security to such securities, and
(iv) certain unrated securities that have been determined to be of comparable
quality to such securities. In addition, each Fund other than the Short-Term
Fund will limit its purchases of "Second Tier Securities" (Eligible Securities
that are not First Tier Securities) of one issuer to the greater of 1% of its
total assets or $1 million.
INVESTMENT LIMITATIONS
The investment limitations set forth below are matters of fundamental policy
and may not be changed with respect to a Fund without the vote of the holders
of a majority of the Fund's outstanding Shares (as defined under "Miscellane-
ous").
13
<PAGE>
No Fund may:
1. Purchase securities of any one issuer, other than U.S. Government obliga-
tions, if immediately after such purchase more than 5% of the value of its
total assets would be invested in the securities of such issuer, except that
up to 25% of the value of its total assets may be invested without regard to
this 5% limitation; and
2. Borrow money except from banks for temporary purposes, and then in
amounts not in excess of 10% of the value of its total assets at the time of
such borrowing; or mortgage, pledge, or hypothecate any assets except in con-
nection with any such borrowing and in amounts not in excess of the lesser of
the dollar amounts borrowed and 10% of the value of its total assets at the
time of such borrowing. (This borrowing provision is included solely to fa-
cilitate the orderly sale of portfolio securities to accommodate abnormally
heavy redemption requests and is not for leverage purposes.) A Fund will not
purchase portfolio securities while borrowings in excess of 5% of its total
assets are outstanding.
The Treasury Money Fund may not:
Purchase securities other than obligations issued or guaranteed by the U.S.
Treasury or an agency or instrumentality of the U.S. Government and securities
issued by investment companies that invest in such obligations.
* * *
If a percentage limitation is satisfied at the time of investment, a later
increase or decrease in such percentage resulting from a change in value of a
Fund's portfolio securities will not constitute a violation of such limita-
tion.
In Investment Limitation No. 1 above: (a) a security is considered to be is-
sued by the governmental entity or entities whose assets and revenues back the
security, or, with respect to a private activity bond that is backed only by
the assets and revenues of a non-governmental user, such non-governmental us-
er; (b) in certain circumstances, the guarantor of a guaranteed security may
also be considered to be an issuer in connection with such guarantee; and (c)
securities issued or guaranteed by the United States Government, its agencies
or instrumentalities (including securities backed by the full faith and credit
of the United States) are deemed to be U.S. Government obligations.
The Funds are subject to additional investment limitations which are deemed
matters of their fundamental policies and, as such, may not be changed without
a requisite shareholder vote. Among such limitations are a prohibition on con-
centrating investments in a particular industry or group of industries and a
policy of limiting investments in illiquid securities to 10% of a Fund's as-
sets. For a full description of the Funds' additional fundamental investment
limitations, see the Statement of Additional Information.
PRICING OF SHARES
The net asset value of each Fund is determined and the Shares of each Fund
are priced for purchases and redemptions as of 1:00 p.m. (Eastern Time) and
the close of regular trading hours on the New York Stock Exchange (the "Ex-
change"), currently 4:00 p.m. (Eastern Time). Net asset value and pricing for
each Fund are determined on each day the Exchange and the Investment Adviser
are open for trading ("Business Day"). Currently, the holidays which the Funds
observe are New Year's Day, Martin Luther King, Jr. Day, Presidents' Day, Good
Friday, Memorial Day, Independence Day, Labor Day, Columbus Day, Veterans Day,
Thanksgiving Day and Christmas. Net asset value per Share for purposes of
pricing sales and redemptions is calculated by dividing the value of all secu-
rities and other assets belonging to a Fund, less the liabilities charged to
the Fund, by the number of its outstanding Shares. The assets in each Fund are
valued by the Funds' administrators based upon the amortized cost method.
14
<PAGE>
HOW TO PURCHASE AND REDEEM SHARES
DISTRIBUTOR
Shares in each Fund are continuously offered for sale by the Companies' spon-
sor and distributor, Edgewood Services, Inc. (the "Distributor"), a wholly-
owned subsidiary of Federated Investors. The Distributor is a registered
broker/dealer. Its principal offices are at Federated Investors Tower, 1001
Liberty Avenue, Pittsburgh, PA 15222-3779.
PURCHASE OF SHARES
Shares in each Fund are offered without any purchase or redemption charge im-
posed by the Companies. The Distributor has established several procedures for
purchasing Shares in order to accommodate different types of investors.
Shares may be purchased directly by individuals ("Direct Investors") or by in-
stitutions ("Institutional Investors" and, collectively with Direct Investors,
"Investors"). Shares may also be purchased by customers ("Customers") of the
Investment Adviser, its affiliates and correspondent banks, and other institu-
tions ("Shareholder Organizations") that have entered into shareholder servic-
ing agreements with one of the Companies. A Shareholder Organization may elect
to hold of record Shares for its Customers and to record beneficial ownership
of Shares on the account statements provided by it to its Customers. If it does
so, it is the Shareholder Organization's responsibility to transmit to the Dis-
tributor all purchase orders for its Customers and to transmit, on a timely ba-
sis, payment for such orders to Mutual Funds Service Company ("MFSC"), the
Funds' sub-transfer agent, in accordance with the procedures agreed to by the
Shareholder Organization and the Distributor. Confirmations of all such Cus-
tomer purchases and redemptions will be sent by MFSC to the particular Share-
holder Organization. As an alternative, a Shareholder Organization may elect to
establish its Customers' accounts of record with MFSC. In this event, even if
the Shareholder Organization continues to place its Customers' purchase and re-
demption orders with the Funds, MFSC will send confirmations of such transac-
tions and periodic account statements directly to Customers. A Shareholder Or-
ganization may also elect to establish its Customers as record holders.
The Companies enter into shareholder servicing agreements with Shareholder Or-
ganizations which agree to provide their Customers various shareholder adminis-
trative services with respect to their Shares (hereinafter referred to as
"Service Organizations"). See "Management of the Funds--Service Organizations."
Customers wishing to purchase Shares through their Shareholder Organization
should contact such entity directly for appropriate instructions. (For a list
of Shareholder Organizations in your area, call (800) 446-1012.) An investor
purchasing Shares through a registered investment adviser or certified finan-
cial planner may incur transaction charges in connection with such purchases.
Such investors should contact their registered investment adviser or certified
financial planner for further information on transaction fees. Investors may
also purchase Shares directly in accordance with procedures described below un-
der "Purchase Procedures."
PURCHASE PROCEDURES
General
Direct Investors may purchase Shares by completing the Application for pur-
chase of Shares accompanying this Prospectus and mailing it, together with a
check payable to UST Master Funds, to:
UST Master Funds
c/o Mutual Funds Service Company
P.O. Box 2798
Boston, MA 02208-2798
15
<PAGE>
Subsequent investments in an existing account in any Fund may be made at any
time by sending to the above address a check payable to UST Master Funds along
with: (a) the detachable form that regularly accompanies the confirmation of a
prior transaction; (b) a subsequent order form which may be obtained from MFSC;
or (c) a letter stating the amount of the investment, the name of the Fund and
the account number in which the investment is to be made. Institutional Invest-
ors may purchase Shares by transmitting their purchase orders to MFSC by tele-
phone at (800) 446-1012 or by terminal access. Institutional Investors must pay
for Shares with Federal funds or funds immediately available to MFSC.
Purchases by Wire
Investors may also purchase Shares by wiring Federal funds to MFSC. Prior to
making an initial investment by wire, an Investor must telephone MFSC at (800)
446-1012 (from overseas, call (617) 557-8280) for instructions. Federal funds
and registration instructions should be wired through the Federal Reserve Sys-
tem to:
United States Trust Company of New York
ABA #021001318
UST Funds, Account No. 2901447
For further credit to:
Wire Control Number
UST Master Funds
Account Registration (including account number)
Investors making initial investments by wire must promptly complete the Appli-
cation accompanying this Prospectus and forward it to MFSC. Redemptions by In-
vestors will not be processed until the completed Application for purchase of
Shares has been received by MFSC and accepted by the Distributor. Investors
making subsequent investments by wire should follow the above instructions.
Other Purchase Information
Except as provided in "Investor Programs" below, the minimum initial invest-
ment by an Investor or initial aggregate investment by a Shareholder Organiza-
tion investing on behalf of its Customers is $500 per Fund. The minimum subse-
quent investment for both types of investors is $50 per Fund. Customers may
agree with a particular Shareholder Organization to make a minimum purchase
with respect to their accounts. Depending upon the terms of the particular ac-
count, Shareholder Organizations may charge a Customer's account fees for auto-
matic investment and other cash management services provided. The Companies re-
serve the right to reject any purchase order, in whole or in part, or to waive
any minimum investment requirements.
REDEMPTION PROCEDURES
Customers of Shareholder Organizations holding Shares of record may redeem all
or part of their investments in the Funds in accordance with procedures gov-
erning their accounts at the Shareholder Organizations. It is the responsibil-
ity of the Shareholder Organizations to transmit redemption orders to MFSC and
credit such Customer accounts with the redemption proceeds on a timely basis.
Redemption orders for Institutional Investors must be transmitted to MFSC by
telephone at (800) 446-1012 or by terminal access. No charge for wiring redemp-
tion payments to Shareholder Organizations or Institutional Investors is im-
posed by the Companies, although Shareholder Organizations may charge a Custom-
er's account for wiring redemption proceeds. Information relating to such re-
demption services and charges, if any, is available from the Shareholder Orga-
nizations. An investor redeeming Shares through a registered investment adviser
or certified financial planner may incur transaction charges in connection with
such redemptions. Such investors should contact their registered investment ad-
viser or certified financial planner for further information on transaction
fees. Investors may redeem all or part of their Shares in accordance with any
of the procedures described below (these procedures also apply to Customers of
Shareholder Organizations for whom individual accounts have been established
with MFSC).
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<PAGE>
Redemption by Mail
Shares may be redeemed by a Direct Investor by submitting a written request
for redemption to:
UST Master Funds
c/o Mutual Funds Service Company
P.O. Box 2798
Boston, MA 02208-2798
A written redemption request to MFSC must (i) state the number of Shares to be
redeemed, (ii) identify the shareholder account number and tax identification
number, and (iii) be signed by each registered owner exactly as the Shares are
registered. If the Shares to be redeemed were issued in certificate form, the
certificates must be endorsed for transfer (or accompanied by a duly executed
stock power) and must be submitted to MFSC together with the redemption re-
quest. A redemption request for an amount in excess of $50,000 per account, or
for any amount if the proceeds are to be sent elsewhere than the address of
record, must be accompanied by signature guarantees from an eligible guarantor
institution approved by MFSC in accordance with its Standards, Procedures and
Guidelines for the Acceptance of Signature Guarantees ("Signature Guarantee
Guidelines"). Eligible guarantor institutions generally include banks,
broker/dealers, credit unions, national securities exchanges, registered secu-
rities associations, clearing agencies and savings associations. All eligible
guarantor institutions must participate in the Securities Transfer Agents Me-
dallion Program ("STAMP") in order to be approved by MFSC pursuant to the Sig-
nature Guarantee Guidelines. Copies of the Signature Guarantee Guidelines and
information on STAMP can be obtained from MFSC at (800) 446-1012 or at the ad-
dress given above. MFSC may require additional supporting documents for redemp-
tions made by corporations, executors, administrators, trustees and guardians.
A redemption request will not be deemed to be properly received until MFSC re-
ceives all required documents in proper form. Payment for Shares redeemed will
ordinarily be made by mail within five Business Days after proper receipt by
MFSC of the redemption request. Questions with respect to the proper form for
redemption requests should be directed to MFSC at (800) 446-1012 (from over-
seas, call (617) 557-8280).
Redemption by Wire or Telephone
Direct Investors who have so indicated on the Application, or have subse-
quently arranged in writing to do so, may redeem Shares by instructing MFSC by
wire or telephone to wire the redemption proceeds directly to the Direct In-
vestor's account at any commercial bank in the United States. Direct Investors
who are shareholders of record may redeem Shares by instructing MFSC by tele-
phone to mail a check for redemption proceeds of $500 or more to the share-
holder of record at his or her address of record. Institutional Investors may
also have their Shares redeemed by wire by instructing MFSC by telephone at
(800) 446-1012 or by terminal access. Only redemptions of $500 or more will be
wired to a Direct Investor's account. An $8.00 fee for each wire redemption by
a Direct Investor is deducted by MFSC from the proceeds of the redemption. The
redemption proceeds for Direct Investors must be paid to the same bank and ac-
count as designated on the Application or in written instructions subsequently
received by MFSC.
Investors may request that Shares be redeemed and redemption proceeds wired on
the same day if telephone redemption instructions are received by 1:00 p.m.
(Eastern Time) on the day of redemption. Shares redeemed and wired on the same
day will not receive the dividend declared on the day of redemption. Redemption
requests made after 1:00 p.m. (Eastern Time) will receive the dividend declared
on the day of redemption, and redemption proceeds will be wired the following
Business Day. To request redemption of Shares by wire, Direct Investors should
call MFSC at (800) 446-1012 (from overseas, call (617) 557-8280).
In order to arrange for redemption by wire or telephone after an account has
been opened or to change the bank or account designated to receive redemption
17
<PAGE>
proceeds, a Direct Investor must send a written request to the Companies, c/o
MFSC, at the address listed above under "Redemption by Mail." Such request
must be signed by the Direct Investor, with signature guaranteed (see "Redemp-
tion by Mail" above, for details regarding signature guarantees). Further doc-
umentation may be requested.
MFSC and the Distributor reserve the right to refuse a wire or telephone re-
demption if it is believed advisable to do so. Procedures for redeeming Shares
by wire or telephone may be modified or terminated at any time by the Compa-
nies, MFSC or the Distributor. THE COMPANIES, MFSC AND THE DISTRIBUTOR WILL
NOT BE LIABLE FOR ANY LOSS, LIABILITY, COST OR EXPENSE FOR ACTING UPON TELE-
PHONE INSTRUCTIONS THAT ARE REASONABLY BELIEVED TO BE GENUINE. IN ATTEMPTING
TO CONFIRM THAT TELEPHONE INSTRUCTIONS ARE GENUINE, THE COMPANIES WILL USE
SUCH PROCEDURES AS ARE CONSIDERED REASONABLE, INCLUDING RECORDING THOSE IN-
STRUCTIONS AND REQUESTING INFORMATION AS TO ACCOUNT REGISTRATION.
Redemption by Check
Except as described in "Investor Programs" below, Direct Investors in the
Funds may redeem Shares, without charge, by check drawn on the Direct Invest-
or's particular Fund account. Checks may be made payable to the order of any
person or organization designated by the Direct Investor and must be for
amounts of $500 or more. Direct Investors will continue to earn dividends on
the Shares to be redeemed until the check clears at United States Trust Com-
pany of New York.
Checks are supplied free of charge, and additional checks are sent to Direct
Investors upon request. Checks will be sent only to the registered owner at
the address of record. Direct Investors who want the option of redeeming
Shares by check must indicate this in the Application for purchase of Shares
and must submit a signature card with signatures guaranteed with such Applica-
tion. The signature card is included in the Application for the purchase of
Shares contained in this Prospectus. In order to arrange for redemption by
check after an account has been opened, a written request must be sent to the
Companies, c/o MFSC, at the address listed above under "Redemption by Mail"
and must be accompanied by a signature card with signatures guaranteed (see
"Redemption by Mail" above, for details regarding signature guarantees).
Stop payment instructions with respect to checks may be given to the Compa-
nies by calling (800) 446-1012 (from overseas, call (617) 557-8280). If there
are insufficient Shares in the Direct Investor's account with the Fund to
cover the amount of the redemption check, the check will be returned marked
"insufficient funds," and MFSC will charge a fee of $25.00 to the account.
Checks may not be used to close an account.
If any portion of the Shares to be redeemed represents an investment made by
personal check, the Companies and MFSC reserve the right not to honor the re-
demption until MFSC is reasonably satisfied that the check has been collected
in accordance with the applicable banking regulations which may take up to 15
days. A Direct Investor who anticipates the need for more immediate access to
his or her investment should purchase Shares by Federal funds or bank wire or
by certified or cashier's check. Banks normally impose a charge in connection
with the use of bank wires, as well as certified checks, cashier's checks and
Federal funds. If a Direct Investor's purchase check is not collected, the
purchase will be cancelled and MFSC will charge a fee of $25.00 to the Direct
Investor's account.
During periods of substantial economic or market change, telephone redemp-
tions may be difficult to complete. If an Investor is unable to contact MFSC
by telephone, the Investor may also deliver the redemption request to MFSC in
writing at the address noted above under "How to Purchase and Redeem Shares--
Redemption by Mail."
Other Redemption Information
Except as provided in "Investor Programs" below, Investors may be required to
redeem Shares in a Fund upon 60 days' written notice if due to investor re-
demptions the balance in the particular account with respect
18
<PAGE>
to the Fund remains below $500. If a Customer has agreed with a particular
Shareholder Organization to maintain a minimum balance in his or her account at
the institution with respect to Shares of a Fund, and the balance in such ac-
count falls below that minimum, the Customer may be obliged by the Shareholder
Organization to redeem all or part of his or her Shares to the extent necessary
to maintain the required minimum balance.
The Companies may also redeem Shares involuntarily or make payment for redemp-
tion in securities if it appears appropriate to do so in light of the Compa-
nies' responsibilities under the Investment Company Act of 1940.
EFFECTIVE TIME OF PURCHASES AND REDEMPTIONS
Purchase orders for Shares which are received and accepted no later than 1:00
p.m. (Eastern Time) on any Business Day will be effective as of 1:00 p.m. and
will receive the dividend declared on the day of purchase as long as MFSC re-
ceives payment in Federal funds prior to the close of regular trading hours on
the Exchange (currently 4:00 p.m., Eastern Time). Purchase orders received and
accepted after 1:00 p.m. (Eastern Time) and prior to 4:00 p.m. (Eastern Time),
on any Business Day for which payment in Federal funds has been received by
4:00 p.m. (Eastern Time), will be effective as of 4:00 p.m., and will begin re-
ceiving dividends the following day. Purchase orders for Shares made by Direct
Investors are not effective until the amount to be invested has been converted
to Federal funds. In those cases in which a Direct Investor pays for Shares by
check, Federal funds will generally become available two Business Days after a
purchase order is received. In certain circumstances, the Companies may not re-
quire that amounts invested by Shareholder Organizations on behalf of their
Customers or by Institutional Investors be converted into Federal funds. Re-
demption orders are executed at the net asset value per Share next determined
after receipt of the order.
INVESTOR PROGRAMS
EXCHANGE PRIVILEGE
Investors and Customers of Shareholder Organizations may, after appropriate
prior authorization and without an exchange fee imposed by the Companies, ex-
change Shares in any Fund having a value of at least $500 for Service Shares of
any other portfolio offered by the Companies, provided that such other shares
may legally be sold in the state of the investor's residence.
Master Fund currently offers, in addition to the Money Fund, Government Money
Fund and Treasury Money Fund, 17 diversified portfolios:
Short-Term Government Securities Fund, a fund seeking a high level of cur-
rent income by investing principally in obligations issued or guaranteed by
the U.S. Government, its agencies or instrumentalities and repurchase agree-
ments collateralized by such obligations, and having a dollar-weighted aver-
age portfolio maturity of 1 to 3 years;
Intermediate-Term Managed Income Fund, a fund seeking a high level of cur-
rent interest income by investing principally in investment grade or better
debt obligations and money market instruments, and having a dollar-weighted
average portfolio maturity of 3 to 10 years;
Managed Income Fund, a fund seeking higher current income through invest-
ments in investment grade debt obligations, U.S. Government obligations and
money market instruments;
Equity Fund, a fund seeking primarily long-term capital appreciation through
investments in a diversified portfolio of primarily equity securities;
Income and Growth Fund, a fund investing substantially in equity securities
in seeking to provide moderate current income and to achieve capital appreci-
ation as a secondary objective;
Long-Term Supply of Energy Fund, a fund seeking long-term capital apprecia-
tion by investing in companies benefitting from the availability, develop-
19
<PAGE>
ment and delivery of secure hydrocarbon and other energy sources;
Productivity Enhancers Fund, a fund seeking long-term capital appreciation
by investing in companies benefitting from their roles as innovators, devel-
opers and suppliers of goods and services which enhance service and manufac-
turing productivity or companies that are most effective at obtaining and ap-
plying productivity enhancement developments;
Environmentally-Related Products and Services Fund, a fund seeking long-term
capital appreciation by investing in companies benefitting from their provi-
sion of products, technologies and services related to conservation, protec-
tion and restoration of the environment;
Aging of America Fund, a fund seeking long-term capital appreciation by in-
vesting in companies benefitting from the changes occurring in the demo-
graphic structure of the U.S. population, particularly of its growing popula-
tion of individuals over the age of 40;
Communication and Entertainment Fund, a fund seeking long-term capital ap-
preciation by investing in companies benefitting from the technological and
international transformation of the communications and entertainment indus-
tries, particularly the convergence of information, communication and enter-
tainment media;
Business and Industrial Restructuring Fund, a fund seeking long-term capital
appreciation by investing in companies benefitting from their restructuring
or redeployment of assets and operations in order to become more competitive
or profitable;
Global Competitors Fund, a fund seeking long-term capital appreciation by
investing in U.S.-based companies benefitting from their position as effec-
tive and strong competitors on a global basis;
Early Life Cycle Fund, a fund seeking long-term capital appreciation by in-
vesting in smaller companies in the earlier stages of their development or
larger or more mature companies engaged in new and higher growth potential
operations;
International Fund, a fund seeking total return derived primarily from in-
vestments in foreign equity securities;
Emerging Americas Fund, a fund seeking long-term capital appreciation
through investments in companies and securities of governments based in all
countries in the Western Hemisphere, except the U.S.;
Pacific/Asia Fund, a fund seeking long-term capital appreciation through in-
vestments in companies and securities of governments based in Asia and on the
Asian side of the Pacific Ocean; and
Pan European Fund, a fund seeking long-term capital appreciation through in-
vestments in companies and securities of governments located in Europe.
Master Tax-Exempt Fund currently offers, in addition to the Short-Term Fund,
4 other portfolios:
Short-Term Tax-Exempt Securities Fund, a diversified fund seeking a high
level of current interest income exempt from Federal income taxes through in-
vestments in municipal obligations and having a dollar-weighted average port-
folio maturity of 1 to 3 years;
Intermediate-Term Tax-Exempt Fund, a diversified fund seeking a high level
of current income exempt from Federal income taxes through investments in mu-
nicipal obligations and having a dollar-weighted average portfolio maturity
of three to ten years;
Long-Term Tax-Exempt Fund, a diversified fund attempting to maximize over
time current income exempt from Federal income taxes, investing primarily in
municipal obligations and having a dollar-weighted average portfolio maturity
of 10 to 30 years; and
New York Intermediate-Term Tax-Exempt Fund, a non-diversified fund designed
to provide New York investors with a high level of current income exempt from
Federal and, to the extent possible, New York state and New York City income
taxes; this fund
20
<PAGE>
invests primarily in New York municipal obligations and has a dollar-weighted
average portfolio maturity of three to ten years.
An exchange involves a redemption of all or a portion of the Shares in a Fund
and the investment of the redemption proceeds in shares of another portfolio of
the Companies. The redemption will be made at the per Share net asset value of
the Shares being redeemed next determined after the exchange request is re-
ceived. The Service Shares of the portfolio to be acquired will be purchased at
the per share net asset value of those shares (plus any applicable sales load)
next determined after acceptance of the exchange request.
Investors may find the exchange privilege useful if their investment objec-
tives or market outlook should change after they invest in any of the Funds.
For further information regarding the Companies' exchange privileges, share-
holders should call (800) 446-1012 (from overseas, call (617) 557-8280). In-
vestors exercising the exchange privilege with the Companies' portfolios not
described herein should request and review the prospectuses of those portfolios
prior to making an exchange. Such prospectuses may be obtained by calling the
numbers listed above. The Companies may modify or terminate the exchange pro-
gram at any time upon 60 days' written notice to shareholders, and may reject
any exchange request in the amount exceeding $100,000. In order to prevent
abuse of this privilege to the disadvantage of other shareholders, Master Fund
and Master Tax-Exempt Fund reserve the right to limit the number of exchange
requests of Investors and Customers of Shareholder Organizations to no more
than six per year. THE COMPANIES, MFSC AND THE DISTRIBUTOR ARE NOT RESPONSIBLE
FOR THE AUTHENTICITY OF EXCHANGE REQUESTS RECEIVED BY TELEPHONE THAT ARE REA-
SONABLY BELIEVED TO BE GENUINE. IN ATTEMPTING TO CONFIRM THAT TELEPHONE IN-
STRUCTIONS ARE GENUINE, THE COMPANIES WILL USE SUCH PROCEDURES AS ARE CONSID-
ERED REASONABLE, INCLUDING RECORDING THOSE INSTRUCTIONS AND REQUESTING INFORMA-
TION AS TO ACCOUNT REGISTRATION.
SYSTEMATIC WITHDRAWAL PLAN
An Investor who owns Shares of a Fund with a value of $10,000 or more may es-
tablish a Systematic Withdrawal Plan. The Investor may request a declining-bal-
ance withdrawal, a fixed-dollar withdrawal, a fixed-share withdrawal, or a
fixed-percentage withdrawal (based on the current value of Shares in the ac-
count) on a monthly, quarterly, semi-annual or annual basis. To initiate the
Systematic Withdrawal Plan, an investor must complete the Supplemental Applica-
tion contained in this Prospectus and mail it to MFSC at the address given
above. Further information on establishing a Systematic Withdrawal Plan may be
obtained by calling the Distributor at (800) 446-1012 (from overseas, call
(617) 557-8280).
Shareholder Organizations may, at their discretion, establish similar system-
atic withdrawal plans with respect to the Shares held by their Customers. In-
formation about such plans and the applicable procedures may be obtained by
Customers directly from their institutions.
RETIREMENT PLANS
Shares are available for purchase by Investors in connection with the follow-
ing tax- deferred prototype retirement plans offered by United States Trust
Company of New York:
IRAs (including "rollovers" from existing retirement plans) for individu-
als and their spouses;
Profit Sharing and Money-Purchase Plans for corporations and self-employed
individuals and their partners to benefit themselves and their employees;
and
Keogh Plans for self-employed individuals.
Investors investing in the Funds pursuant to Profit Sharing and Money-Purchase
Plans and Keogh Plans are not subject to the minimum investment and forced re-
demption provisions described above. The minimum initial investment for IRAs is
$250 per
21
<PAGE>
Fund and the minimum subsequent investment is $50 per Fund. Detailed informa-
tion concerning eligibility, service fees and other matters related to these
plans can be obtained by calling (800) 446-1012 (from overseas, call (617) 557-
8280). Customers of Shareholder Organizations may purchase Shares of the Funds
pursuant to retirement plans if such plans are offered by their Shareholder Or-
ganizations.
AUTOMATIC INVESTMENT PROGRAM
The Automatic Investment Program permits Investors to purchase Shares (minimum
of $50 per Fund per transaction) at regular intervals selected by the Investor.
The minimum initial investment for an Automatic Investment Program account is
$50 per Fund. Provided the Investor's financial institution allows automatic
withdrawals, Shares are purchased by transferring funds from an Investor's
checking, bank money market or NOW account designated by the Investor. At the
Investor's option, the account designated will be debited in the specified
amount, and Shares will be purchased, once a month, on either the first or fif-
teenth day, or twice a month, on both days.
To establish an Automatic Investment account, an Investor must complete the
Supplemental Application contained in this Prospectus and mail it to MFSC. An
Investor may cancel his participation in this Program or change the amount of
purchase at any time by mailing written notification to MFSC, P.O. Box 2798,
Boston, MA 02208-2798 and notification will be effective three Business Days
following receipt. The Companies may modify or terminate this privilege at any
time or charge a service fee, although no such fee currently is contemplated.
DIVIDENDS AND DISTRIBUTIONS
The net investment income of the Funds is declared daily as a dividend to the
persons who are shareholders of the respective Funds immediately after the
1:00 p.m. pricing of Shares on the day of declaration. All such dividends are
paid within ten days after the end of each month or within seven days after the
redemption of all of a shareholder's Shares of a Fund. For dividend purposes, a
Fund's investment income is reduced by accrued expenses directly attributable
to that Fund and the general expenses of the Companies prorated to that Fund on
the basis of its relative net assets. Net realized capital gains, if any, are
distributed at least annually.
All dividends and distributions paid on Shares held of record by the Invest-
ment Adviser and its affiliates or correspondent banks will be paid in cash.
Direct and Institutional Investors and Customers of other Shareholder Organiza-
tions will receive dividends and distributions in additional Shares of the Fund
on which the dividend is paid or the distribution made (as determined on the
payable date), unless they have requested in writing (received by MFSC at the
Companies' address prior to the payment date) to receive dividends and distri-
butions in cash. Reinvested dividends and distributions receive the same tax
treatment as those paid in cash.
TAXES
FEDERAL
Each of the Funds qualified for their last taxable year as a "regulated in-
vestment company" under the Internal Revenue Code of 1986, as amended (the
"Code"). Each Fund expects to so qualify in future years. Such qualification
generally relieves a Fund of liability for Federal income taxes to the extent
its earnings are distributed in accordance with the Code.
Qualification as a regulated investment company under the Code requires, among
other things, that a Fund distribute to its shareholders an amount equal to at
least the sum of 90% of its investment company taxable income and 90% of its
exempt-interest income (if any) net of certain deductions for each taxable
year. In general, a Fund's investment company taxable income will be its tax-
able income (including interest) subject to certain adjustments and excluding
22
<PAGE>
the excess of any net long-term capital gain for the taxable year over the net
short-term capital loss, if any, for such year. The taxable Funds intend to
distribute substantially all of their investment company taxable income each
year. Such dividends will be taxable as ordinary income to Fund shareholders
who are not currently exempt from Federal income taxes, whether such income is
received in cash or reinvested in additional Shares. (Federal income taxes for
distributions to IRAs and qualifying pension plans are deferred under the
Code.) Because all of each Fund's net investment income is expected to be de-
rived from earned interest, it is anticipated that no part of any distributions
will be eligible for the dividends received deduction for corporations.
Dividends declared in October, November or December of any year payable to
shareholders of record on a specified date in such months will be deemed to
have been received by shareholders and paid by a Fund on December 31 of such
year in the event such dividends are actually paid during January of the fol-
lowing year.
The Short-Term Fund: The Short-Term Fund's policy is to pay dividends each
year equal to at least the sum of 90% of its net exempt-interest income and 90%
of its investment company taxable income, if any. Dividends derived from ex-
empt-interest income ("exempt-interest dividends") may be treated by the Fund's
shareholders as items of interest excludable from their gross income under Sec-
tion 103(a) of the Code, unless, under the circumstances applicable to the par-
ticular shareholder, exclusion would be disallowed. (See Statement of Addi-
tional Information under "Additional Information Concerning Taxes.")
If the Short-Term Fund should hold certain "private activity bonds" issued af-
ter August 7, 1986, the portion of dividends paid by the Fund which are attrib-
utable to interest on such bonds must be included in a shareholder's Federal
alternative minimum taxable income, as an item of tax preference, for the pur-
pose of determining liability (if any) for the 26% to 28% alternative minimum
tax for individuals and the 20% alternative minimum tax and the environmental
tax applicable to corporations. Corporate shareholders must also take all ex-
empt-interest dividends into account in determining certain adjustments for
Federal alternative minimum and environmental tax purposes. The environmental
tax applicable to corporations is imposed at the rate of .12% on the excess of
the corporation's modified Federal alternative minimum taxable income over $2
million. Shareholders receiving Social Security benefits should note that all
exempt-interest dividends will be taken into account in determining the tax-
ability of such benefits.
Dividends payable by the Short-Term Fund which are derived from taxable income
or from long-term or short-term capital gains will be subject to Federal income
tax, whether such dividends are paid in the form of cash or additional Shares.
STATE AND LOCAL
The Treasury Money Fund is structured to provide shareholders, to the extent
permissible by Federal and state law, with income that is exempt or excluded
from taxation at the state and local level. Most states--by statute, judicial
decision or administrative action--have taken the position that dividends of a
regulated investment company such as the Treasury Money Fund that are attribut-
able to interest on obligations of the U.S. Treasury and certain U.S. Govern-
ment agencies and instrumentalities (including those authorized for purchase by
the Fund) are the functional equivalent of interest from such obligations and
are, therefore, exempt from state and local income taxes. As a result, substan-
tially all dividends paid by the Treasury Money Fund to shareholders residing
in those states will be exempt or excluded from state income tax.
Nevertheless in some jurisdictions, exempt-interest dividends and other dis-
tributions paid by the Short-Term Fund may be taxable to shareholders under
23
<PAGE>
state or local law as dividend income, even though all or a portion of such
distributions is derived from interest on tax-exempt obligations which, if re-
alized directly, would be exempt from such income taxes.
MISCELLANEOUS
The foregoing summarizes some of the important tax considerations generally
affecting the Funds and their shareholders and is not intended as a substitute
for careful tax planning. Accordingly, potential investors in the Funds should
consult their tax advisers with specific reference to their own tax situa-
tions. Shareholders will be advised annually as to the Federal income tax con-
sequences of distributions made each year.
MANAGEMENT OF THE FUNDS
The business and affairs of the Funds are managed under the direction of the
Companies' Boards of Directors. The Statement of Additional Information con-
tains the names of and general background information concerning the Compa-
nies' directors.
INVESTMENT ADVISER
United States Trust Company of New York serves as the Investment Adviser to
each Fund. U.S. Trust is a state-chartered bank and trust company created by
Special Act of the New York Legislature in 1853. The Investment Adviser pro-
vides trust and banking services to individuals, corporations, and institu-
tions both nationally and internationally, including investment management,
estate and trust administration, financial planning, corporate trust and
agency banking, and personal and corporate banking. The Investment Adviser is
a member bank of the Federal Reserve System and the Federal Deposit Insurance
Corporation and is one of the twelve members of the New York Clearing House
Association.
On December 31, 1994, the Investment Adviser's Asset Management Group had ap-
proximately $33 billion in assets under management. The Investment Adviser,
which has its principal offices at 114 W. 47th Street, New York, New York
10036, is a subsidiary of U.S. Trust Corporation, a registered bank holding
company.
The Investment Adviser manages each Fund, makes decisions with respect to and
places orders for all purchases and sales of the Funds' portfolio securities,
and maintains records relating to such purchases and sales. For the services
provided and expenses assumed pursuant to its Investment Advisory Agreements,
the Investment Adviser is entitled to a fee, computed daily and paid monthly,
at the annual rate of .25% of the average daily net assets of each of the Mon-
ey, Government Money and Short-Term Funds. For the services provided and ex-
penses assumed with respect to the Treasury Money Fund, the Investment Adviser
is entitled to an annual fee, computed daily and paid monthly, at the annual
rate of .30% of the Fund's average daily net assets. For the fiscal year ended
March 31, 1995, the Investment Adviser received an advisory fee at the effec-
tive annual rates of .22%, .22%, .22% and .28% of the average daily net assets
of the Money, Government Money, Short-Term and Treasury Money Funds, respec-
tively. For the same period, the Investment Adviser waived advisory fees at
the effective annual rate of .03%, .03%, .03% and .02% of the average daily
net assets of the Money, Government Money, Short-Term and Treasury Money Fund,
respectively.
From time to time, the Investment Adviser may waive (either voluntarily or
pursuant to applicable state expense limitations) all or a portion of the ad-
visory fees payable to it by a Fund, which waiver may be terminated at any
time. See "Management of the Funds--Service Organizations" for additional in-
formation on fee waivers.
ADMINISTRATORS
MFSC and Federated Administrative Services serve as the Funds' administrators
(the "Administrators") and provide them with general administrative and opera-
tional assistance. The Administrators also serve as
24
<PAGE>
administrators of the other portfolios of the Companies, which are also advised
by the Investment Adviser and distributed by the Distributor. For the services
provided to all portfolios of both Companies (except the International, Emerg-
ing Americas, Pacific/Asia and Pan European Funds), the Administrators are en-
titled jointly to annual fees, computed daily and paid monthly, based on the
combined aggregate average daily net assets of the Companies (excluding the In-
ternational, Emerging Americas, Pacific/Asia and Pan European Funds) as fol-
lows:
<TABLE>
<CAPTION>
COMBINED AGGREGATE AVERAGE DAILY
NET ASSETS OF BOTH COMPANIES
(EXCLUDING THE INTERNATIONAL
EMERGING AMERICAS, PACIFIC/ASIA
AND PAN EUROPEAN FUNDS) ANNUAL FEE
-------------------------------- ----------
<S> <C>
first $200 million.................................................. .200%
next $200 million................................................... .175%
over $400 million................................................... .150%
</TABLE>
Administration fees payable to the Administrators by each portfolio of the
Companies are allocated in proportion to their relative average daily net as-
sets at the time of determination. From time to time, the Administrators may
waive (either voluntarily or pursuant to applicable state expense limitations)
all or a portion of the administration fee payable to them by a Fund, which
waivers may be terminated at any time. See "Management of the Funds--Service
Organizations" for additional information on fee waivers. For the fiscal year
ended March 31, 1995, MFSC and Concord Holding Corporation, the former co-ad-
ministrator, received an aggregate administration fee (under the same compensa-
tion arrangements noted above) at the effective annual rate of .154% of the av-
erage daily net assets of each of the Money, Government Money, Treasury Money
and Short-Term Funds, respectively.
SERVICE ORGANIZATIONS
Each Company will enter into an agreement ("Servicing Agreement") with each
Service Organization requiring it to provide administrative support services to
its Customers beneficially owning Shares. As a consideration for the adminis-
trative services provided to Customers, a Fund will pay the Service Organiza-
tion an administrative service fee at the annual rate of up to .40% of the av-
erage daily net asset value of its Shares held by the Service Organization's
Customers. Such services, which are described more fully in the Statement of
Additional Information under "Management of the Funds--Service Organizations,"
may include assisting in processing purchase, exchange and redemption requests;
transmitting and receiving funds in connection with Customer orders to pur-
chase, exchange or redeem Shares; and providing periodic statements. Under the
terms of the Servicing Agreement, Service Organizations will be required to
provide to Customers a schedule of any fees that they may charge in connection
with a Customer's investment. Until further notice, the Investment Adviser and
Administrators have voluntarily agreed to waive fees payable by a Fund in an
amount equal to administrative service fees payable by that Fund.
BANKING LAWS
Banking laws and regulations currently prohibit a bank holding company regis-
tered under the Federal Bank Holding Company Act of 1956 or any bank or non-
bank affiliate thereof from sponsoring, organizing or controlling a registered,
open-end investment company continuously engaged in the issuance of its shares,
and prohibit banks generally from issuing, underwriting, selling or distribut-
ing securities such as Shares of the Funds, but such banking laws and regula-
tions do not prohibit such a holding company or affiliate or banks generally
from acting as investment adviser, transfer agent, or custodian to such an in-
vestment company, or from purchasing shares of such company for and upon the
order of customers. The Investment Adviser, MFSC and certain Shareholder Orga-
nizations may be subject to such banking laws and regulations. State securities
laws may differ from the interpretations of Federal law discussed in this para-
graph and banks and financial institutions may be required to register as deal-
ers pursuant to state law.
25
<PAGE>
Should legislative, judicial, or administrative action prohibit or restrict
the activities of the Investment Adviser or other Shareholder Organizations in
connection with purchases of Fund Shares, the Investment Adviser and such
Shareholder Organizations might be required to alter materially or discontinue
the investment services offered by them to Customers. It is not anticipated,
however, that any resulting change in the Funds' method of operations would af-
fect their net asset values per Share or result in financial loss to any share-
holder.
DESCRIPTION OF CAPITAL STOCK
Master Fund was organized as a Maryland corporation on August 2, 1984. Cur-
rently, Master Fund has authorized capital of 35 billion shares of Common
Stock, $.001 par value per share, classified into 34 series of shares repre-
senting interests in 20 investment portfolios. Master Fund's Charter authorizes
the Board of Directors to classify or reclassify any class of shares of Master
Fund into one or more classes or series. Shares of Class A, Class B and Class G
represent interests in the Money Fund, Government Money Fund and Treasury Money
Fund Funds, respectively.
Master Tax-Exempt Fund was organized as a Maryland corporation on August 8,
1984. Currently, UST Master Tax-Exempt Funds, Inc. has authorized capital of 14
billion shares of Common Stock, $.001 par value per share, classified into 5
classes of shares representing 5 investment portfolios currently being offered.
Master Tax-Exempt Fund's Charter authorizes the Board of Directors to classify
or reclassify any class of shares of Master Tax-Exempt Fund into one or more
classes or series. Shares of Class A Common Stock represent interests in the
Short-Term Fund's Shares.
Each Share represents an equal proportionate interest in the particular Fund
with other shares of the same class, and is entitled to such dividends and dis-
tributions out of the income earned on the assets belonging to such Fund as are
declared in the discretion of the Companies' Boards of Directors.
Shareholders are entitled to one vote for each full share held, and fractional
votes for fractional shares held, and will vote in the aggregate and not by
class, except as otherwise expressly required by law.
Certificates for Shares will not be issued unless expressly requested in writ-
ing to MFSC and will not be issued for fractional Shares.
As of July 11, 1995, U.S. Trust held of record substantially all of the Shares
in the Funds as agent or custodian for its customers, but did not own such
Shares beneficially because it did not have voting or investment discretion
with respect to such Shares.
CUSTODIAN AND TRANSFER AGENT
United States Trust Company of New York serves as the custodian of the Funds'
assets and as their transfer and dividend disbursing agent. Communications to
the custodian and transfer agent should be directed to United States Trust Com-
pany of New York, Mutual Funds Service Division, 770 Broadway, New York, New
York 10003-9598.
U.S. Trust has also entered into a sub-transfer agency arrangement with MFSC,
73 Tremont Street, Boston, Massachusetts 02108-3913, pursuant to which MFSC
provides certain transfer agent, dividend disbursement and registrar services
to the Funds.
YIELD INFORMATION
From time to time, in advertisements or in reports to shareholders, the yields
of the Funds may be quoted and compared to those of other mutual funds with
similar investment objectives and to other relevant indexes or to rankings pre-
pared by independent services or other financial or industry publications that
monitor the performance of mutual funds. For
26
<PAGE>
example, the yields of the Funds may be compared to the applicable averages
compiled by Donoghue's Money Fund Report, a widely recognized independent pub-
lication that monitors the performance of money market funds. The yields of the
taxable Funds may also be compared to the average yields reported by the Bank
Rate Monitor for money market deposit accounts offered by the 50 leading banks
and thrift institutions in the top five standard metropolitan statistical
areas.
Yield data as reported in national financial publications including, but not
limited to, Money Magazine, Forbes, Barron's, The Wall Street Journal and The
New York Times, or in publications of a local or regional nature, may also be
used in comparing the Funds' yields.
Each Fund may advertise its Shares seven-day yield which refers to the income
generated over a particular seven-day period identified in the advertisement by
an investment in the Fund. This income is annualized, i.e., the income during a
particular week is assumed to be generated each week over a 52-week period and
is shown as a percentage of the investment. The Funds may also advertise the
"effective yields" of Shares which are calculated similarly but, when
annualized, income is assumed to be reinvested, thereby making the effective
yields slightly higher because of the compounding effect of the assumed rein-
vestment.
In addition, the Short-Term Fund may from time to time advertise the "tax-
equivalent yields" of Shares to demonstrate the level of taxable yield neces-
sary to produce an after-tax yield equivalent to that achieved by the Fund.
This yield is computed by increasing the yields of the Fund's Shares (calcu-
lated as above) by the amount necessary to reflect the payment of Federal in-
come taxes at a stated tax rate.
Yields will fluctuate and any quotation of yield should not be considered as
representative of a Fund's future performance. Since yields fluctuate, yield
data cannot necessarily be used to compare an investment in the Funds with bank
deposits, savings accounts and similar investment alternatives which often pro-
vide an agreed or guaranteed fixed yield for a stated period of time. Share-
holders should remember that yield is generally a function of the kind and
quality of the instruments held in a portfolio, portfolio maturity, operating
expenses, and market conditions. Any fees charged by Shareholder Organizations
with respect to accounts of Customers that have invested in Shares will not be
included in calculations of yield.
MISCELLANEOUS
Shareholders will receive unaudited semiannual reports describing the Funds'
investment operations and annual financial statements audited by the Funds' in-
dependent auditors.
The staff of the SEC has expressed the view that the use of this combined Pro-
spectus for the Funds may subject the Funds to liability for losses arising out
of any statement or omission regarding a particular Fund. The Companies do not
believe, however, that such risk is significant under the circumstances.
As used in this Prospectus, a "vote of the holders of a majority of the out-
standing shares" of a Company or a particular Fund means, with respect to the
approval of an investment advisory agreement, a distribution plan or a change
in a fundamental investment policy, the affirmative vote of the lesser of (a)
more than 50% of the outstanding Shares of such Company or such Fund, or (b)
67% or more of the Shares of such Company or such Fund present at a meeting if
more than 50% of the outstanding Shares of such Company or such Fund are repre-
sented at the meeting in person or by proxy.
Inquiries regarding any of the Funds may be directed to the Distributor at the
address or telephone number listed under "Distributor."
27
<PAGE>
INSTRUCTIONS FOR NEW ACCOUNT APPLICATION
OPENING YOUR ACCOUNT:
Complete the Application(s) and mail to: FOR OVERNIGHT DELIVERY: send to:
UST Master Funds UST Master Funds
c/o Mutual Fund Service Company c/o Mutual Funds Service Company--
P.O. Box 2798 Transfer Agent
Boston, MA 02208-2798 73 Tremont Street
Boston, MA 02108-3913
Please enclose with the Application(s) your check made payable to the "UST
Master Funds" in the amount of your investment.
For direct wire purchases please refer to the section of the Prospectus enti-
tled "How to Purchase and Redeem Shares--Purchase Procedures."
MINIMUM INVESTMENTS:
Except as provided in the Prospectus, the minimum initial investment is $500
per Fund; subsequent investments must be in the minimum amount of $50 per Fund.
Investments may be made in excess of these minimums.
REDEMPTIONS:
Shares can be redeemed in any amount and at any time in accordance with pro-
cedures described in the Prospectus. In the case of shares recently purchased
by check, redemption proceeds will not be made available until the transfer
agent is reasonably assured that the check has been collected in accordance
with applicable banking regulations.
Certain legal documents will be required from corporations or other organiza-
tions, executors and trustees, or if redemption is requested by anyone other
than the shareholder of record. Written redemption requests in excess of
$50,000 per account must be accompanied by signature guarantees.
SIGNATURES: Please be sure to sign the Application(s).
If the shares are registered in the name of:
- an individual, the individual should sign.
- joint tenants, both tenants should sign.
- a custodian for a minor, the custodian should sign.
- a corporation or other organization, an authorized officer should sign
(please indicate corporate office or title).*
- a trustee or other fiduciary, the fiduciary or fiduciaries should sign
(please indicate capacity).*
* A corporate resolution or appropriate certificate may be required.
QUESTIONS:
If you have any questions regarding the Application or redemption require-
ments, please contact the transfer agent at (800) 446-1012 between 9:00 a.m.
and 5:00 p.m. (Eastern Time).
28
<PAGE>
[LOGO OF UST MUTUAL FUNDS SERVICE COMPANY
MASTER FUNDS CLIENT SERVICES
APPEARS HERE] P.O. Box 2798
Boston, MA 02208-2798
(800) 446-1012 NEW ACCOUNT APPLICATION
-----------------------------------------------------------------------------
-----------------------------------------------------------------------------
ACCOUNT REGISTRATION
-----------------------------------------------------------------------------
[_] Individual [_] Joint Tenants [_] Trust [_] Gift/Transfer to Minor
[_] Other ____________
Note: Joint tenant registration will be as "joint tenants
with right of survivorship" unless otherwise specified. Trust
registrations should specify name of the trust, trustee(s),
beneficiary(ies), and the date of the trust instrument.
Registration for Uniform Gifts/Transfers to Minors should be
in the name of one custodian and one minor and include the
state under which the custodianship is created (using the
minor's Social Security Number ("SSN")). For IRA accounts a
different application is required.
------------------------------ -----------------------------
Name(s) (please print) Social Security # or Taxpayer
Indentification #
( )
------------------------------ -----------------------------
Name Telephone #
------------------------------
Address
[_] U.S. Citizen
------------------------------ [_] Other (specify)____________
City/State/Zip
-----------------------------------------------------------------------------
FUND SELECTION (THE MINIMUM INITIAL AND SUBSEQUENT INVESTMENT IS $500 PER
FUND AND $50 PER FUND, RESPECTIVELY. MAKE CHECKS PAYABLE TO "UST MASTER
FUNDS.")
-----------------------------------------------------------------------------
INITIAL INVESTMENT
[_] Money Fund $ ____________ 803
[_] Short-Term Tax-Exempt Fund $ ____________ 806
[_] Government Money Fund $ ____________ 804
[_] Treasury Money Fund $ ____________ 811
TOTAL INITIAL INVESTMENT: $ ____________
NOTE: If investing by wire, you must obtain a Bank Wire Control Number. To
do so, please call (800) 446-1012 and ask for the Wire Desk.
A. BY MAIL: Enclosed is a check in the amount of $ ____ payable to "UST
Master Funds."
B. BY WIRE: A bank wire in the amount of $ ______ has been sent to the
Fund from
------------------ ---------------------
Name of Bank Wire Control Number
CAPITAL GAIN AND DIVIDEND DISTRIBUTIONS: All capital gain and
dividend distributions will be reinvested in additional
shares unless appropriate boxes below are checked:
All dividends are to be [_] reinvested [_] paid in cash
All capital gains are to be [_] reinvested [_] paid in cash
-----------------------------------------------------------------------------
ACCOUNT PRIVILEGES
-----------------------------------------------------------------------------
TELEPHONE EXCHANGE AND REDEMPTION
[_] I/We appoint MFSC as my/our agent to act upon instructions received by
telephone in order to effect the telephone exchange and redemption
privileges. I/We hereby ratify any instructions given pursuant to this
authorization and agree that Master Fund, Master Tax-Exempt Fund, MFSC and
their directors, officers and employees will not be liable for any loss,
liability, cost or expense for acting upon instructions believed to be
genuine and in accordance with the procedures described in the then current
Prospectus. To the extent that Master Fund and Master Tax-Exempt Fund fail
to use reasonable procedures as a basis for their belief, they or their
service contractors may be liable for instructions that prove to be
fraudulent or unauthorized.
I/We further acknowledge that it is my/our responsibility to read the
Prospectus of any Fund into which I/we exchange.
[_] I/We do not wish to have the ability to exercise telephone redemption
and exchange privileges. I/We further understand that all exchange and
redemption requests must be in writing.
SPECIAL PURCHASE AND REDEMPTION PLANS
I/We have completed and attached the Supplemental Application for:
[_] Automatic Investment Plan
[_] Systematic Withdrawal Plan
AUTHORITY TO TRANSMIT REDEMPTION PROCEEDS TO PRE-DESIGNATED ACCOUNT.
I/We hereby authorize MFSC to act upon instructions received by telephone to
withdraw $500 or more from my/our account in the UST Master Funds and to
wire the amount withdrawn to the following commercial bank account. I/We
understand that MFSC charges an $8.00 fee for each wire redemption, which
will be deducted from the proceeds of the redemption.
Title on Bank Account*____________________________________________________
Name of Bank _____________________________________________________________
Bank A.B.A. Number____________________ Account Number ____________________
Bank Address _____________________________________________________________
City/State/Zip ___________________________________________________________
(attach voided check here)
A corporation, trust or partnership must also submit a "Corporate
Resolution" (or "Certificate of Partnership") indicating the names and
titles of officers authorized to act on its behalf.
* TITLE ON BANK AND FUND ACCOUNT MUST BE IDENTICAL.
<PAGE>
------------------------------------------------------------------
CHECK WRITING PRIVILEGE
------------------------------------------------------------------
[_] I/We wish to take advantage of the check writing privilege
and have signed and attached the Check Writing Signature
Card to this application.
[_] I/We do not wish to take advantage of the check writing
privilege at this time, but I/we may elect to do so at a
later date.
SIGNATURE CARD SIGNATURE REQUIREMENTS. If the shares are
registered in the name of:
. AN INDIVIDUAL, the individual must sign the Card.
. JOINT ACCOUNT, both individuals must sign the Card.
. INSTITUTIONAL ACCOUNT, an officer must sign the Card
indicating corporate, trust or partnership office or title.
. TRUST ACCOUNT, trustee or other fiduciary must sign the
Card indicating capacity.
. CUSTODIAN FOR MINOR, custodian must sign the Card.
------------------------------------------------------------------
AGREEMENT AND SIGNATURES
------------------------------------------------------------------
By signing this application, I/we hereby certify under
penalty of perjury that the information on this application
is complete and correct and that as required by Federal law:
[_] I/We certify that (1) the number(s) shown on this form
is/are the correct taxpayer identification number(s) and (2)
I/we are not subject to backup withholding either because
I/we have not been notified by the Internal Revenue Service
that I/we are subject to backup withholding, or the IRS has
notified me/us that I am/we are no longer subject to backup
withholding. (NOTE: IF ANY OR ALL OF PART 2 IS NOT TRUE,
PLEASE STRIKE OUT THAT PART BEFORE SIGNING.)
[_] If no taxpayer identification number ("TIN") or SSN has
been provided above, I/we have applied, or intend to apply,
to the IRS or the Social Security Administration for a TIN or
a SSN, and I/we understand that if I/we do not provide this
number to MFSC within 60 days of the date of this
application, or if I/we fail to furnish my/our correct SSN or
TIN, I/we may be subject to a penalty and a 31% backup
withholding on distributions and redemption proceeds. (Please
provide this number on Form W-9. You may request the form by
calling MFSC at the number listed above).
I/We represent that I am/we are of legal age and capacity to
purchase shares of the UST Master Funds. I/We have received,
read and carefully reviewed a copy of the appropriate Fund's
current Prospectus and agree to its terms and by signing
below I/we acknowledge that neither the Fund nor the
Distributor is a bank and that Fund Shares are not deposits
or obligations of, or guaranteed or endorsed by, United
States Trust Company of New York, its parent and affiliates
and the Shares are not federally insured by, guaranteed by,
obligations of or otherwise supported by the U.S. Government,
the Federal Deposit Insurance Corporation, the Federal
Reserve Board, or any other governmental agency; and that an
investment in the Funds involves investment risks, including
possible loss of principal amount invested.
X ___________________________ Date __________________________
Owner Signature
X ___________________________ Date __________________________
Co-Owner Signature
Sign exactly as name(s) of registered owner(s) appear(s) above
(including legal title if signing for a corporation, trust
custodial account, etc.).
------------------------------------------------------------------
FOR USE BY AUTHORIZED AGENT (BROKER/DEALER) ONLY
------------------------------------------------------------------
We hereby submit this application for the purchase of shares
in accordance with the terms of our selling agreement with
UST Distributors, Inc., and with the Prospectus and Statement
of Additional Information of each Fund purchased.
----------------------------- -------------------------------
Investment Dealer's Name Source of Business Code
----------------------------- -------------------------------
Main Office Address Branch Number
----------------------------- -------------------------------
Representative's Number Representative's Name
----------------------------- -------------------------------
Branch Address Telephone
----------------------------- -------------------------------
Investment Dealer's Title
Authorized Signature
<PAGE>
CHECK WRITING SIGNATURE CARD UST MASTER FUNDS
By signing on the reverse, I/we hereby appoint as agent United States Trust
Company of New York ("U.S. Trust") and, as such agent, U.S. Trust is hereby
authorized and directed, upon presentment of check(s), to request the
redemption of shares of the applicable Fund registered in my/our name(s) in
the amount of such check(s) drawn on my/our Fund account. I/We further
authorize Mutual Funds Service Company ("MFSC"), the transfer agent, to accept
and execute instructions relating to this check writing privilege. I/We agree
that U.S. Trust and MFSC, acting as agents on my/our behalf in connection with
the foregoing check writing privileges, shall be liable only for their own
willful misfeasance, bad faith or gross negligence.
I/We acknowledge that this check writing arrangement is subject to the
applicable terms and restrictions, including charges, set forth in the current
Prospectus for each Fund with respect to which I/we have arranged to redeem
Fund shares by check writing. I/We understand and agree to be bound and
subject to U.S. Trust's rules, regulations and associated laws governing check
collection, as amended from time to time.
Stop payment instructions must be given to MFSC by calling toll-free (800)
446-1012.
To take advantage of the check writing privilege, please complete the
Signature Card on the reverse. Each person signing below guarantees the
genuineness of the other's signature. You will receive a supply of checks
approximately 3 weeks after this application is processed.
<PAGE>
Account Number ___ FUND
_______________ __ [_] Money[_] Short-
Last First Fund Term
Name M.I. Tax-
Exempt
Fund
_______________ __ [_] Government
Money
Fund
[_] Treasury
Last First M.I. Money
Name Fund
By signing this
Signature Card,
the undersigned
agree(s) that the
UST Master Funds
check writing
privileges will
be subject to the
instructions and
rules of Master
Fund, Master Tax-
Exempt Fund and
U.S. Trust, as
now in effect and
as amended from
time to time, as
they pertain to
the use of
redemption
checks.
(Please use black [_] Check here if both signatures required on checks.
ink) [_] Check here if only one signature required on checks.
__________________ If neither box is checked, all checks will require both
Signature signatures.
__________________
Joint Signature UST MASTER FUNDS
<PAGE>
[LOGO OF UST MUTUAL FUNDS SERVICE COMPANY
MASTER FUNDS CLIENT SERVICES SUPPLEMENTAL APPLICATION
APPEARS HERE] P.O. Box 2798 SPECIAL INVESTMENT AND
Boston, MA 02208-2798 WITHDRAWAL OPTIONS
(800) 446-1012
-----------------------------------------------------------------------------
-----------------------------------------------------------------------------
ACCOUNT REGISTRATION PLEASE SUPPLY THE FOLLOWING INFORMATION EXACTLY AS IT
APPEARS ON THE FUND'S RECORD.
-----------------------------------------------------------------------------
Fund Name __________________ Account Number _________________
Owner Name _________________ Social Security or Taxpayer ID
Street Address _____________ Number _________________________
Resident City, State, Zip Code __________
of [_] U.S. [_] Other ____ [_] Check here if this is a change of address
-----------------------------------------------------------------------------
DISTRIBUTION OPTIONS (DIVIDENDS AND CAPITAL GAINS WILL BE REINVESTED
UNLESS OTHERWISE INDICATED)
-----------------------------------------------------------------------------
A. CAPITAL GAIN AND DIVIDEND DISTRIBUTIONS: All capital gain and dividend
distributions will be reinvested in additional shares unless appropriate
boxes below are checked: All dividends are to be [_] reinvested
[_] paid in cash
All capital gains are to be [_] reinvested
[_] paid in cash
B. PAYMENT ORDER: Complete only if distribution checks are to be payable
to another party. Make distribution checks payable to:
Name of Your Bank ______________
Name _______________________ Bank Account Number ____________
Address ____________________ Address of Bank ________________
City, State, Zip Code ________________________________________
C. DISTRIBUTIONS REINVESTED-CROSS FUNDS: Permits all distributions from
one Fund to be automatically reinvested into another identically-
registered UST Master Fund. (NOTE: You may NOT open a new Fund account
with this option.) Transfer all distributions earned:
From: ______________________ Account No. ____________________
(Fund)
To: ________________________ Account No. ____________________
(Fund)
-----------------------------------------------------------------------------
AUTOMATIC INVESTMENT PLAN [_] YES [_] NO
-----------------------------------------------------------------------------
I/We hereby authorize MFSC to debit my/our personal checking account on
the designated dates in order to purchase shares in the Fund indicated at
the top of this application at the applicable public offering price
determined on that day.
[_] Monthly on the 1st day [_] Monthly on the 15th day [_] Monthly on both
the 1st and 15th
days
Amount of each debit (minimum $50 per Fund) $ ________________
NOTE: A Bank Authorization Form (below) and a voided personal check must
accompany the Automatic Investment Plan application.
------------------------------------------------------------------------------
------------------------------------------------------------------------------
UST MASTER FUNDS
CLIENT SERVICES AUTOMATIC INVESTMENT PLAN
-----------------------------------------------------------------------------
-----------------------------------------------------------------------------
BANK AUTHORIZATION
-----------------------------------------------------------------------------
----------------------- ------------------------ --------------------------
Bank Name Bank Address Bank Account Number
I/We authorize you, the above named bank, to debit my/our
account for amounts drawn by MFSC, acting as my agent for the
purchase of Fund shares. I/We agree that your rights in
respect to each withdrawal shall be the same as if it were a
check drawn upon you and signed by me/us. This authority
shall remain in effect until revoked in writing and received
by you. I/We agree that you shall incur no liability when
honoring debits, except a loss due to payments drawn against
insufficient funds. I/We further agree that you will incur no
liability to me if you dishonor any such withdrawal. This
will be so even though such dishonor results in the
cancellation of that purchase.
---------------------------- --------------------------------
Account Holder's Name Joint Account Holder's Name
X ---------------- --------- X ------------------ -----------
Signature Date Signature Date
<PAGE>
--------------------------------------------------------------------------------
SYSTEMATIC WITHDRAWAL PLAN [_] YES [_] NO NOT AVAILABLE FOR IRA'S
--------------------------------------------------------------------------------
AVAILABLE TO SHAREHOLDERS WITH ACCOUNT BALANCES OF $10,000 OR MORE.
I/We hereby authorize MFSC to redeem the necessary number of shares from
my/our UST Master Fund Account on the designated dates in order to make the
following periodic payments:
[_] Monthly on the 24th day [_] Quarterly on the 24th day of
January, April, July and October
[_] Other______
(This request for participation in the Plan must be received by the 18th day
of the month in which you wish withdrawals to begin.)
Amount of each check ($100 minimum) $______________________
Please make check payable to: Recipient ________________________
(To be completed only if redemption
proceeds to be paid to other than Street Address ___________________
account holder of record or mailed
to address other than address of City, State, Zip Code ____________
record)
NOTE: If recipient of checks is not the registered shareholder, signature(s)
----
below must be guaranteed. A corporation, trust or partnership must also submit
a "Corporate Resolution" (or "Certification of Partnership") indicating the
names and titles of officers authorized to act on its behalf.
--------------------------------------------------------------------------------
AGREEMENT AND SIGNATURES
--------------------------------------------------------------------------------
The investor(s) certifies and agrees that the certifications, authorizations,
directions and restrictions contained herein will continue until MFSC receives
written notice of any change or revocation. Any change in these instructions
must be in writing with all signatures guaranteed (if applicable).
Date ______________________
X X
--------------------------------------- -------------------------------------
Signature Signature
--------------------------------------- -------------------------------------
Signature Guarantee* (if applicable) Signature Guarantee* (if applicable)
X X
--------------------------------------- -------------------------------------
Signature Signature
--------------------------------------- -------------------------------------
Signature Guarantee* (if applicable) Signature Guarantee* (if applicable)
*ELIGIBLE GUARANTORS: An Eligible Guarantor institution is a bank, trust
company, broker, dealer, municipal or government securities broker or dealer,
credit union, national securities exchange, registered securities association,
clearing agency or savings association, provided that such institution is a
participant in STAMP, the Securities Transfer Agents Medallion Program.
--------------------------------------------------------------------------------
<PAGE>
CROSS-REFERENCE SHEET
---------------------
UST MASTER FUNDS, INC.
(Short-Term Government Securities Fund, Intermediate-Term
Managed Income Fund, Managed Income Fund)
Form N-1A, Part A, Item Prospectus Caption
----------------------- ------------------
1. Cover Page................................ Cover Page
2. Synopsis.................................. Background and
Expense Summary
3. Financial Highlights...................... Selected Per Share
Data and Ratios;
Performance and
Yield Information
4. General Description of Registrant......... Prospectus Summary;
Investment
Objectives and
Policies; Portfolio
Instruments and
Other Investment
Information;
Investment
Limitations;
Description of
Capital Stock
5. Management of the Fund.................... Management of the
Funds; Custodian and
Transfer Agent
6. Capital Stock and
Other Securities........................ How to Purchase and
Redeem Shares;
Dividends and
Distributions;
Taxes; Description
of Capital Stock;
Miscellaneous
7. Purchase of Securities
Being Offered........................... Pricing of Shares;
How to Purchase and
Redeem Shares;
Investor Programs
8. Redemption or Repurchase.................. How to Purchase and
Redeem Shares
9. Pending Legal Proceedings................. Inapplicable
<PAGE>
LOGO
A Management Investment Company MASTER FUNDS,
INC.
-------------------------------------------------------------------------------
Fixed-Income Funds For initial purchase information, current
prices, yield and performance information
73 Tremont Street and existing account information, call
Boston, Massachusetts 02108-3913 (800) 446-1012. (From overseas, call
(617) 557-8280.)
-------------------------------------------------------------------------------
This Prospectus describes the Service Shares ("Shares") offered by three sepa-
rate portfolios offered to investors by UST Master Funds, Inc. ("Master
Fund"), an open-end management investment company. This Prospectus describes
the fixed-income portfolios. Each portfolio (individually, a "Fund" and
collectively, the "Funds") has its own investment objective and policies as
follows:
SHORT-TERM GOVERNMENT SECURITIES FUND'S investment objective is to seek a
high level of current income consistent with stability of principal by invest-
ing principally in obligations issued or guaranteed by the U.S. Government,
its agencies or instrumentalities and repurchase agreements collateralized by
such obligations. As a result, the interest income on such investments gener-
ally should be exempt from state and local personal income taxes in most
states. The Fund will generally have a dollar-weighted average portfolio matu-
rity of one to three years.
INTERMEDIATE-TERM MANAGED INCOME FUND'S investment objective is to seek as
high a level of current interest income consistent with relative stability of
principal by investing principally in investment grade or better debt obliga-
tions and money market instruments. The Fund will ordinarily have a dollar-
weighted average portfolio maturity of three to ten years.
MANAGED INCOME FUND'S investment objective is to seek higher current income
consistent with what is believed to be prudent risk of capital. Subject to
this investment objective, the Fund's investment adviser will consider the to-
tal rate of return on portfolio securities in managing the Fund. Under normal
market or economic conditions, the Fund will invest a majority of its assets
in investment grade debt obligations and money market instruments.
Each of the Funds is sponsored and distributed by Edgewood Services, Inc. and
advised by United States Trust Company of New York (the "Investment Adviser"
or "U.S. Trust").
This Prospectus sets forth concisely the information about the Funds that a
prospective investor should consider before investing. Investors should read
this Prospectus and retain it for future reference. A Statement of Additional
Information dated August 1, 1995 and containing additional information about
the Funds has been filed with the Securities and Exchange Commission. The cur-
rent Statement of Additional Information is available to investors without
charge by writing to Master Fund at its address shown above or by calling
(800) 446-1012. The Statement of Additional Information, as it may be supple-
mented from time to time, is incorporated by reference in its entirety into
this Prospectus.
SHARES IN THE FUNDS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR EN-
DORSED BY, UNITED STATES TRUST COMPANY OF NEW YORK, ITS PARENT AND AFFILIATES
AND THE SHARES ARE NOT FEDERALLY INSURED BY, GUARANTEED BY, OBLIGATIONS OF OR
OTHERWISE SUPPORTED BY THE U.S. GOVERNMENT, THE FEDERAL DEPOSIT INSURANCE COR-
PORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER GOVERNMENTAL AGENCY.
AN INVESTMENT IN THE FUNDS INVOLVES INVESTMENT RISKS, INCLUDING POSSIBLE LOSS
OF PRINCIPAL AMOUNT INVESTED.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE AC-
CURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
August 1, 1995
<PAGE>
PROSPECTUS SUMMARY
UST MASTER FUNDS, INC. is an investment company offering various diversified
investment portfolios with differing objectives and policies. Founded in 1984,
Master Fund currently offers 20 Funds with combined assets of approximately
$2.5 billion. See "Description of Capital Stock."
INVESTMENT ADVISER: United States Trust Company of New York serves as the
Funds' investment adviser. U.S. Trust, whose predecessor was founded in 1853,
is a trust company offering a variety of specialized financial and fiduciary
services to high-net worth individuals, institutions and corporations. Master
Fund offers investors access to U.S. Trust's services. See "Management of the
Funds--Investment Adviser."
INVESTMENT OBJECTIVES AND POLICIES: Generally, the Short-Term Government Se-
curities Fund is a diversified investment portfolio which invests principally
in obligations issued or guaranteed by the U.S. Government, its agencies or in-
strumentalities and the Intermediate-Term Managed Income and Managed Income
Funds are diversified investment portfolios which invest principally in invest-
ment grade or better debt obligations. The Funds' investment objectives and
policies are summarized on the cover and explained in greater detail later in
this Prospectus. See "Investment Objectives and Policies," "Portfolio Instru-
ments and Other Investment Information" and "Investment Limitations."
HOW TO INVEST: The Funds' shares are offered at their public offering price,
i.e., their net asset value per share plus a sales load which is subject to
substantial reductions for large purchases and programs for accumulation. The
sales load is not applicable to investors making their investments through a
variety of institutions, such as U.S. Trust, other banks and trust companies.
See "How to Purchase and Redeem Shares."
The minimum initial investment is $500 per Fund, and the minimum subsequent
investment is $50 per Fund. The easiest way to invest is to complete the ac-
count application which accompanies this Prospectus and to send it with a check
to the address noted on the application. Investors may also invest by wire and
through investment dealers or institutional investors with appropriate sales
agreements with Master Fund. See "How to Purchase and Redeem Shares."
HOW TO REDEEM: Redemptions may be requested directly from Master Fund by
mail, wire or telephone. Investors investing through another institution should
request redemptions through their Shareholder Organization. See "How to Pur-
chase and Redeem Shares."
INVESTMENT RISKS AND CHARACTERISTICS: Generally, each Fund is affected di-
rectly by credit markets and fluctuations in interest rates. Although each Fund
generally seeks to invest for the long term, each Fund may engage in short-term
trading of portfolio securities. A high rate of portfolio turnover may involve
correspondingly greater transaction costs which must be borne directly by a
Fund and ultimately by its shareholders. Investments in non-investment grade
obligations may subject the Intermediate-Term Managed Income and Managed Income
Funds to increased risk of loss upon default. Such securities are generally
unsecured, are often subordinated debt and are often issued by entities with
high levels of indebtedness and that are more sensitive to adverse economic
conditions. Investments in the obligations of foreign issuers may subject the
Intermediate-Term Managed Income and Managed Income Funds to additional invest-
ment risks, including fluctuations in foreign exchange rates, future political
and economic developments and the possible imposition of exchange controls or
other foreign governmental laws or restrictions. See "Investment Policies Com-
mon to Intermediate-Term Managed Income and Managed Income Funds--Risk Fac-
tors." Investment in the Funds should not be considered a complete investment
program.
2
<PAGE>
EXPENSE SUMMARY
<TABLE>
<CAPTION>
SHORT-TERM INTERMEDIATE- MANAGED
GOVERNMENT TERM MANAGED INCOME
SECURITIES FUND INCOME FUND FUND
--------------- ------------- -------
<S> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load on Purchases
(as percentage of offering price)....... 4.50% 4.50% 4.50%
Sales Load on Reinvested Dividends....... None None None
Deferred Sales Load...................... None None None
Redemption Fee/1/........................ None None None
Exchange Fees............................ None None None
ANNUAL FUND OPERATING EXPENSES FOR
SERVICE SHARES
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
Advisory Fees (after fee waivers)/2/..... .25% .33% .63%
12b-1 Fees............................... None None None
Other Operating Expenses
Administrative Servicing Fee........... .02% .02% .02%
Other Expenses......................... .34% .31% .35%
Total Fund Operating Expenses (after fee
waivers)/2/............................. .61% .66% 1.00%
</TABLE>
-------
1. The Funds' transfer agent imposes a direct $8.00 charge on each wire re-
demption by noninstitutional (i.e. individual) investors which is not re-
flected in the expense ratios presented herein. Shareholder organizations
may charge their customers transaction fees in connection with redemptions.
See "Redemption Procedures."
2. The Investment Adviser and Administrators may from time to time voluntarily
waive part of their respective fees, which waivers may be terminated at any
time. Until further notice, the Investment Adviser and/or Administrators
intend to voluntarily waive fees in an amount equal to the Administrative
Servicing Fee; and to further waive fees and reimburse expenses to the ex-
tent necessary for the Short-Term Government Securities and Intermediate-
Term Managed Income Funds to maintain annual expense ratios of not more
than .62% and .72%, respectively. Without such fee waivers, "Other Ex-
penses" would be .35% for the Short-Term Government Securities Fund and
"Advisory Fees" would be .30%, .35% and .75% and total operating expenses
for Service Shares would be .67%, .68% and 1.12% for the Short-Term Govern-
ment Securities, Intermediate-Term Managed Income and Managed Income Funds,
respectively.
3
<PAGE>
Example: You would pay the following expenses on a $1,000 investment, assuming
(1) 5% annual return, and (2) redemption of your investment at the end of the
following periods:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
Short-Term Government Securities Fund........... $51 $64 $77 $118
Intermediate-Term Managed Income Fund........... 51 65 80 124
Managed Income Fund............................. 55 75 98 162
</TABLE>
The foregoing expense summary and example (based on the maximum sales load
payable on the Shares of the Funds) are intended to assist the investor in un-
derstanding the costs and expenses that an investor in Service Shares of the
Funds will bear directly or indirectly. The expense summary sets forth advisory
and other expenses payable with respect to Service Shares of the Funds for the
fiscal year ended March 31, 1995. For more complete descriptions of the Funds'
operating expenses, see "Management of the Funds" in this Prospectus and the
financial statements and notes incorporated by reference in the Statement of
Additional Information.
THE FOREGOING EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE EXPENSES OR RATE OF RETURN. ACTUAL EXPENSES AND RATE OF RETURN MAY BE
GREATER OR LOWER THAN THOSE SHOWN IN THE EXPENSE SUMMARY AND EXAMPLE.
4
<PAGE>
FINANCIAL HIGHLIGHTS
The following tables include selected data for a Service Share outstanding
throughout each period and other performance information derived from the fi-
nancial statements included in Master Fund's Annual Report to Shareholders for
the year ended March 31, 1995 (the "Financial Statements"). The information
contained in the Financial Highlights for each period has been audited by Ernst
& Young LLP, Master Fund's independent auditors. The following tables should be
read in conjunction with the Financial Statements and notes thereto. More in-
formation about the performance of each Fund is also contained in the Annual
Report to Shareholders which may be obtained from Master Fund without charge by
calling the number on the front cover of this Prospectus.
SHORT-TERM GOVERNMENT SECURITIES FUND
<TABLE>
<CAPTION>
YEAR ENDED
MARCH 31,
-------------- PERIOD ENDED
1995 1994 MARCH 31, 1993/1/
------ ------ -----------------
<S> <C> <C> <C>
Net Asset Value, Beginning of Period......... $ 6.93 $ 7.06 $ 7.00
------ ------ ------
Income From Investment Operations
Net Investment Income...................... 0.33 0.24 0.06
Net Gains or (Losses) on Securities (both
realized and unrealized).................. (0.04) (0.09) 0.06
------ ------ ------
Total From Investment Operations........... 0.29 0.15 0.12
------ ------ ------
Less Distributions
Dividends From Net Investment Income....... (0.33) (0.24) (0.06)
Dividends From Net Realized Gain on Invest-
ments..................................... 0.00 (0.02) 0.00
Distributions in Excess of Net Realized
Gain on Investments....................... 0.00 (0.02) 0.00
------ ------ ------
Total Distributions........................ (0.33) (0.28) (0.06)
------ ------ ------
Net Asset Value, End of Period............... $ 6.89 $ 6.93 $ 7.06
====== ====== ======
Total Return/2/.............................. 4.30% 2.12% 1.70%
Ratios/Supplemental Data
Net Assets, End of Period (in millions).... $25.22 $25.23 $13.37
Ratio of Net Operating Expenses to Average
Net Assets................................ 0.61% 0.62% 0.62%/3/
Ratio of Gross Operating Expenses to Aver-
age Net Assets............................ 0.67% 0.65% 0.82%/3/
Ratio of Net Income to Average Net Assets.. 4.80% 3.42% 3.62%/3/
Portfolio Turnover Rate.................... 198.0% 267.0% 93.0%/3/
</TABLE>
-------
NOTES:
1.Inception date of the Fund was December 31, 1992.
2.Total return data does not reflect the sales load payable on purchases of
Shares.
3.Annualized.
5
<PAGE>
INTERMEDIATE-TERM MANAGED INCOME FUND
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
----------------------
PERIOD ENDED
1995 1994 MARCH 31, 1993/1/
---------- ---------- -----------------
<S> <C> <C> <C>
Net Asset Value, Beginning of Period. $ 6.83 $ 7.19 $ 7.00
---------- ---------- ------
Income From Investment Operations
Net Investment Income.............. 0.39 0.31 0.08
Net Gains or (Losses) on Securities
(both realized and unrealized).... (0.07) (0.27) 0.19
---------- ---------- ------
Total From Investment Operations... 0.32 0.04 0.27
---------- ---------- ------
Less Distributions
Dividends From Net Investment
Income............................ (0.39) (0.31) (0.08)
Dividends From Net Realized Gain on
Investments....................... 0.00 0.00 0.00
Distributions in Excess of Net
Realized Gain on Investments...... (0.01) (0.09) 0.00
---------- ---------- ------
Total Distributions................ (0.40) (0.40) (0.08)
---------- ---------- ------
Net Asset Value, End of Period....... $ 6.75 $ 6.83 $ 7.19
========== ========== ======
Total Return/2/...................... 4.95% 0.45% 3.86%
Ratios/Supplemental Data
Net Assets, End of Period (in
millions)......................... $ 47.93 $ 42.56 $19.48
Ratio of Net Operating Expenses to
Average Net Assets................ 0.66% 0.69% 0.72%/3/
Ratio of Gross Operating Expenses
to Average Net Assets............. 0.68% 0.69% 0.98%/3/
Ratio of Net Income to Average Net
Assets............................ 5.91% 4.31% 4.69%/3/
Portfolio Turnover Rate............ 682.0% 385.0% 66.00%/3/
</TABLE>
-------
NOTES:
1.Inception date of the Fund was December 31, 1992.
2.Total return data does not reflect the sales load payable on purchases of
Shares.
3.Annualized.
6
<PAGE>
MANAGED INCOME FUND
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
----------------------------------------------------------------------------------
1995 1994 1993 1992 1991 1990 1989 1988 1987 1986/1/
------ ------- ------- ------ ------ ------ ------- ------ ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of period.... $ 8.57 $ 9.64 $ 9.15 $ 9.12 $ 8.77 $ 8.51 $ 8.61 $ 9.01 $ 8.62 $ 8.00
------ ------- ------- ------ ------ ------ ------- ------ ------ ------
Income From Investment
Operations
Net Investment Income.. 0.51 0.47 0.58 0.65 0.67 0.69 0.66 0.67 0.69 0.14
Net Gains or (Losses)
on Securities (both
realized and
unrealized)........... (0.18) (0.26) 0.79 0.27 0.44 0.32 (0.06) (0.08) 0.79 0.57
------ ------- ------- ------ ------ ------ ------- ------ ------ ------
Total From Investment
Operations............ 0.33 0.21 1.37 0.92 1.11 1.01 0.60 0.59 1.48 0.71
------ ------- ------- ------ ------ ------ ------- ------ ------ ------
Less Distributions
Dividends From Net
Investment Income..... (0.51) (0.47) (0.58) (0.65) (0.67) (0.69) (0.66) (0.67) (0.75) (0.09)
Dividends From Net
Realized Gain on
Investments........... 0.00 (0.31) (0.30) (0.24) (0.09) (0.06) (0.04) (0.32) (0.34) 0.00
Distributions in Excess
of Net Realized Gain
on Investments........ 0.00 (0.50) 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
------ ------- ------- ------ ------ ------ ------- ------ ------ ------
Total Distributions.... (0.51) (1.28) (0.88) (0.89) (0.76) (0.75) (0.70) (0.99) (1.09) (0.09)
------ ------- ------- ------ ------ ------ ------- ------ ------ ------
Net Asset Value, End of
Period................. $ 8.39 $ 8.57 $ 9.64 $ 9.15 $ 9.12 $ 8.77 $ 8.51 $ 8.61 $ 9.01 $ 8.62
====== ======= ======= ====== ====== ====== ======= ====== ====== ======
Total Return/2/......... 4.06% 1.73% 15.74% 10.36% 13.37% 12.03% 7.18% 7.20% 18.46% 8.93%
Ratios/Supplemental Data
Net Assets, End of
Period (in millions).. $86.02 $110.90 $108.94 $96.32 $52.74 $38.75 $ 19.53 $12.67 $11.53 $ 2.48
Ratio of Net Operating
Expenses to Average
Net Assets............ 1.00% 0.90% 0.89% 1.05% 1.11% 1.13% 1.07% 0.86% 0.81% 0.94%/3/
Ratio of Gross
Operating Expenses to
Average Net Assets.... 1.12% 1.06% 1.04% 1.05% 1.11% 1.14% 1.24% 1.32% 1.38% 3.34%/3/
Ratio of Net Income to
Average Net Assets.... 6.09% 4.89% 6.19% 6.97% 7.57% 7.73% 7.69% 7.76% 7.72% 8.01%/3/
Portfolio Turnover
Rate.................. 492.0% 459.0% 455.0% 369.0% 342.0% 350.0% 1226.0% 576.0% 751.0% 265.0%/3/
</TABLE>
-------
NOTES:
1. Inception date of the Fund was January 9, 1986.
2. Total return data does not reflect the sales load payable on purchases of
Shares.
3. Annualized.
7
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
The Investment Adviser will use its best efforts to achieve the investment
objective of each Fund, although their achievement cannot be assured. The in-
vestment objective of each Fund may not be changed without a vote of the hold-
ers of a majority of the particular Fund's outstanding Shares (as defined un-
der "Miscellaneous"). Except as noted below and in "Investment Limitations,"
the investment policies of each Fund may be changed without the vote of the
holders of a majority of the outstanding Shares of such Fund.
SHORT-TERM GOVERNMENT SECURITIES FUND
The Short-Term Government Securities Fund's investment objective is to seek a
high level of current income consistent with stability of principal by invest-
ing principally in obligations issued or guaranteed by the U.S. Government,
its agencies or instrumentalities and repurchase agreements collateralized by
such obligations. As a result, the interest income on such investments gener-
ally should be exempt from state and local personal income taxes in most
states. In all states this tax exemption is passed through to the Fund's
shareholders. The Fund will generally have a dollar-weighted average portfolio
maturity of one to three years. Changes in interest rates will affect the
value of the portfolio investments held by the Short-Term Government Securi-
ties Fund. As a result, investment in the Short-Term Government Securities
Fund should not be considered a complete investment program. Additional infor-
mation about the Fund's policies and portfolio instruments is set forth below
under "Portfolio Instruments and Other Investment Information."
INTERMEDIATE-TERM MANAGED INCOME FUND
The Intermediate-Term Managed Income Fund's investment objective is to seek
as high a level of current interest income as is consistent with relative sta-
bility of principal. The Fund will have a dollar-weighted average portfolio
maturity of three to ten years.
MANAGED INCOME FUND
The Managed Income Fund's investment objective is to seek high current income
consistent with what is believed to be prudent risk of capital. Subject to
this investment objective, the Investment Adviser will consider the market
value appreciation of portfolio securities in managing the Fund. The Managed
Income Fund's dollar-weighted average portfolio maturity will vary from time
to time in light of current market and economic conditions, the comparative
yields on instruments with different maturities and other factors.
INVESTMENT POLICIES COMMON TO INTERMEDIATE-TERM MANAGED INCOME AND MANAGED
INCOME FUNDS
The Intermediate-Term Managed Income and Managed Income Funds may invest in
the following types of securities: corporate debt obligations such as bonds,
debentures, obligations convertible into common stocks and money market in-
struments; preferred stocks; and obligations issued or guaranteed by the U.S.
Government and its agencies or instrumentalities. The Intermediate-Term Man-
aged Income and Managed Income Funds are also permitted to enter into repur-
chase agreements. The Intermediate-Term Managed Income and Managed Income
Funds may, from time to time, invest in debt obligations exempt from Federal
income tax issued by or on behalf of states, territories and possessions of
the United States, the District of Columbia and their authorities, agencies,
instrumentalities and political subdivisions ("Municipal Bonds"). The purchase
of Municipal Bonds may be advantageous when, as a result of prevailing econom-
ic, regulatory or other circumstances, the performance of such securities, on
a pre-tax basis, is comparable to that of corporate or U.S. Government debt
obligations.
Under normal market conditions, at least 75% of the Intermediate-Term Managed
Income and Managed Income Fund's total assets will be invested in investment-
grade debt obligations rated within the four highest ratings of Standard &
Poor's Ratings Group ("S&P") or Moody's Investor Service, Inc. ("Moody's") (or
in unrated obligations considered to be of investment grade by the Investment
Adviser) and in U.S. Government obligations and money mar-
8
<PAGE>
ket instruments of the types listed below under "Money Market Instruments."
When, in the opinion of the Investment Adviser, a defensive investment posture
is warranted, the Funds may invest temporarily and without limitation in high
quality, short-term money market instruments.
Unrated securities will be considered of investment grade if deemed by the In-
vestment Adviser to be comparable in quality to instruments so rated, or if
other outstanding obligations of the issuers of such securities are rated
"Baa/BBB" or better. It should be noted that obligations rated in the lowest of
the top four ratings ("Baa" by Moody's or "BBB" by S&P) are considered to have
some speculative characteristics and are more sensitive to economic change than
higher rated bonds.
The Intermediate-Term Managed Income and Managed Income Funds may invest up to
25% of their respective total assets in: preferred stocks; dollar-denominated
debt obligations of foreign issuers, including foreign corporations and foreign
governments; and dollar-denominated debt obligations of U.S. companies issued
outside the United States (see additional limitation on investments in obliga-
tions of foreign branches of U.S. banks and U.S. branches of foreign banks un-
der "Money Market Instruments" below). The Intermediate-Term Managed Income and
Managed Income Funds may invest up to 10% and 25% of their respective total as-
sets in obligations rated below the four highest ratings of S&P or Moody's
(commonly called "junk bonds") with no minimum rating required. The Intermedi-
ate-Term Managed Income and Managed Income Funds will not invest in common
stocks, and any common stocks received through conversion of convertible debt
obligations will be sold in an orderly manner as soon as possible. Changes in
interest rates will affect the value of the portfolio investments held by the
Intermediate-Term Managed Income and Managed Income Funds.
RISK FACTORS
Investments in the obligations of foreign issuers may subject the Intermedi-
ate-Term Managed Income and Managed Income Funds to additional investment risks
including fluctuations in foreign exchange rates, future political and economic
developments and the possible imposition of exchange controls or other foreign
governmental laws or restrictions. In addition, with respect to certain coun-
tries, there is the possibility of expropriation of assets, confiscatory taxa-
tion, political or social instability or diplomatic developments which could
adversely affect investments in those countries. There may be less publicly
available information about a foreign company than about a U.S. company, and
foreign companies may not be subject to accounting, auditing and financial re-
porting standards and requirements comparable to or as uniform as those of
U.S.-based companies. Foreign securities markets, while growing in volume,
have, for the most part, substantially less volume than U.S. markets, and secu-
rities of many foreign companies are less liquid and their prices more volatile
than securities of comparable U.S.-based companies. Transaction costs on for-
eign securities markets are generally higher than in the United States. There
is generally less government supervision and regulation of foreign exchanges,
brokers and issuers than there is in the United States. The Intermediate-Term
Managed Income and Managed Income Funds might have greater difficulty taking
appropriate legal action in a foreign court. Interest payable on a Fund's for-
eign portfolio securities may be subject to foreign withholding taxes. To the
extent such taxes are not offset by credits or deductions allowed to investors
under the Federal income tax provisions, they may reduce the net return to the
shareholders.
The Intermediate-Term Managed Income and Managed Income Funds' investments in
obligations rated below the four highest ratings of S&P and Moody's have dif-
ferent risks than investments in securities that are rated "investment grade."
Risk of loss upon default by the borrower is significantly greater because low-
er-rated securities are generally unsecured and are often subordinated to other
creditors of the issuer, and because the issuers frequently
9
<PAGE>
have high levels of indebtedness and are more sensitive to adverse economic
conditions, such as recessions, individual corporate developments and increas-
ing interest rates than are investment grade issuers. As a result, the market
price of such securities, and the net asset value of the Funds' Shares, may be
particularly volatile.
Additional risks associated with lower-rated fixed-income securities are (a)
the relative youth and growth of the market for such securities, (b) the rela-
tively low trading market liquidity for the securities, (c) the impact that
legislation may have on the high-yield bond market (and, in turn, on the
Funds' net asset value and investment practices), (d) the operation of manda-
tory sinking fund or call/redemption provisions during periods of declining
interest rates whereby the Funds may be required to reinvest premature redemp-
tion proceeds in lower yielding portfolio securities, and (e) the creditwor-
thiness of the issuers of such securities. During an economic downturn or sub-
stantial period of rising interest rates, highly-leveraged issuers may experi-
ence financial stress which would adversely affect their ability to service
their principal and interest payment obligations, to meet projected business
goals and to obtain additional financing. An economic downturn could also dis-
rupt the market for lower-rated bonds generally and adversely affect the value
of outstanding bonds and the ability of the issuers to repay principal and in-
terest. If the issuer of a lower-rated security held by the Intermediate-Term
Managed Income and Managed Income Funds defaulted, the Fund could incur addi-
tional expenses to seek recovery. Adverse publicity and investor perceptions,
whether or not based on fundamental analysis, may also decrease the values and
liquidity of lower-rated securities held by the Fund, especially in a thinly
traded market. Finally, the Funds' trading in fixed-income securities to
achieve capital appreciation entails risks that capital losses rather than
gains will result. As a result, investment in the Intermediate-Term Managed
Income and Managed Income Funds should not be considered a complete investment
program.
Debt obligations rated "BB," "B" or "CCC" by S&P are regarded, on balance, as
predominately speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. "BB" represents the
lowest degree of speculation and "CCC" the highest degree of speculation.
While such debt will likely have some quality and protective characteristics,
these are outweighed by large uncertainties or major risk exposures to adverse
conditions. The rating "CC" is typically applied to debt subordinated to se-
nior debt that is assigned an actual or implied "CCC" rating. The rating "C"
is typically applied to debt subordinated to senior debt which is assigned an
actual or implied "CCC-" debt rating, and may be used to cover a situation
where a bankruptcy petition has been filed, but debt service payments are con-
tinued. The rating "CI" is reserved for income bonds on which no interest is
being paid. Debt obligations rated "D" are in default, and payments of inter-
est and/or repayment of principal is in arrears. The ratings from "AA" through
"CCC" are sometimes modified by the addition of a plus or minus sign to show
relative standing within the major rating categories. Moody's has a similar
classification scheme for non-investment grade debt obligations. Debt obliga-
tions rated "Ba," "B," "Caa," "Ca" and "C" provide questionable protection of
interest and principal. The rating "Ba" indicates that a debt obligation has
some speculative characteristics. The rating "B" indicates a general lack of
characteristics of desirable investment. Debt obligations rated "Caa" are of
poor quality, while debt obligations rated "Ca" are considered highly specula-
tive. "C" represents the lowest rated class of debt obligations. Moody's ap-
plies numerical modifiers 1, 2 and 3 in each generic classification from "Aa"
to "B" in its bond rating system. The modifier "1" indicates that a security
ranks in the higher end of its rating category; the modifier "2" reflects a
mid-range ranking; and the modifier "3" indicates that the security ranks at
the lower end of its generic rating category.
PORTFOLIO INSTRUMENTS AND OTHER INVESTMENT INFORMATION
MONEY MARKET INSTRUMENTS
Money market instruments that may be purchased by the Intermediate-Term Man-
aged Income and
10
<PAGE>
Managed Income Funds in accordance with their investment objectives and poli-
cies stated above include, among other things, bank obligations, commercial pa-
per and corporate bonds with remaining maturities of 13 months or less.
Bank obligations include bankers' acceptances, negotiable certificates of de-
posit, and non-negotiable time deposits earning a specified return and issued
by a U.S. bank which is a member of the Federal Reserve System or insured by
the Bank Insurance Fund of the Federal Deposit Insurance Corporation, or by a
savings and loan association or savings bank which is insured by the Savings
Association Insurance Fund of the Federal Deposit Insurance Corporation. Bank
obligations acquired by a Fund may also include U.S. dollar-denominated obliga-
tions of foreign branches of U.S. banks and obligations of domestic branches of
foreign banks. Investments in bank obligations of foreign branches of domestic
financial institutions or of domestic branches of foreign banks are limited so
that no more than 5% of the value of the Managed Income Fund's total assets
will be invested in obligations of any one foreign or domestic branch and no
more than 20% of the Fund's total assets at the time of purchase will be in-
vested in the aggregate in such obligations. Investments in time deposits are
limited to no more than 5% of the value of a Fund's total assets at time of
purchase.
Investments by the Funds in commercial paper will consist of issues that are
rated "A-2" or better by S&P or "Prime-2" or better by Moody's. In addition,
each Fund may acquire unrated commercial paper that is determined by the In-
vestment Adviser at the time of purchase to be of comparable quality to rated
instruments that may be acquired by the particular Fund.
Commercial paper may include variable and floating rate instruments. While
there may be no active secondary market with respect to a particular instrument
purchased by a Fund, a Fund may, from time to time as specified in the instru-
ment, demand payment of the principal of the instrument or may resell the in-
strument to a third party. The absence of an active secondary market, however,
could make it difficult for the Fund to dispose of the instrument if the issuer
defaulted on its payment obligation or during periods that the Fund is not en-
titled to exercise its demand rights, and the Fund could, for this or other
reasons, suffer a loss with respect to such instrument.
GOVERNMENT OBLIGATIONS
Government obligations acquired by the Funds include obligations issued or
guaranteed by the U.S. Government, its agencies and instrumentalities. Such in-
vestments may include obligations issued by the Farm Credit System Financial
Assistance Corporation, the Federal Financing Bank, the General Services Admin-
istration, Federal Home Loan Banks, the Tennessee-Valley Authority and the Stu-
dent Loan Marketing Association. Obligations of certain agencies and instrumen-
talities of the U.S. Government are supported by the full faith and credit of
the U.S. Treasury; others are supported by the right of the issuer to borrow
from the Treasury; others are supported by the discretionary authority of the
U.S. Government to purchase the agency's obligations; still others are sup-
ported only by the credit of the instrumentality. No assurance can be given
that the U.S. Government would provide financial support to U.S. Government-
sponsored instrumentalities if it is not obligated to do so by law. Obligations
of such instrumentalities will be purchased only when the Investment Adviser
believes that the credit risk with respect to the instrumentality is minimal.
The Statement of Additional Information contains further information on the
various types of U.S. Government obligations.
Securities issued or guaranteed by the U.S. Government have historically in-
volved little risk of loss of principal if held to maturity. However, due to
fluctuations in interest rates, the market value of such securities may vary
during the period a shareholder owns shares of a Fund.
REPURCHASE AGREEMENTS
As stated above, each Fund may agree to purchase portfolio securities subject
to the seller's agreement
11
<PAGE>
to repurchase them at a mutually agreed upon date and price ("repurchase
agreements"). Each Fund will enter into repurchase agreements only with finan-
cial institutions such as banks or broker/dealers which are deemed to be
creditworthy by the Investment Adviser under guidelines approved by Master
Fund's Board of Directors. No Fund will enter into repurchase agreements with
the Investment Adviser or its affiliates. Repurchase agreements with remaining
maturities in excess of seven days will be considered illiquid securities sub-
ject to the 10% limit described in Investment Limitation No. 5 below.
The seller under a repurchase agreement will be required to maintain the
value of the obligations subject to the agreement at not less than the repur-
chase price. Default or bankruptcy of the seller would, however, expose a Fund
to possible delay in connection with the disposition of the underlying securi-
ties or loss to the extent that proceeds from a sale of the underlying securi-
ties were less than the repurchase price under the agreement. Income on the
repurchase agreements will be taxable.
INVESTMENT COMPANY SECURITIES
The Funds may also invest in securities issued by other investment companies
which invest in high-quality, short-term securities and which determine their
net asset value per share based on the amortized cost or penny-rounding meth-
od. In addition to the advisory fees and other expenses a Fund bears directly
in connection with its own operations, as a shareholder of another investment
company, a Fund would bear its pro rata portion of the other investment
company's advisory fees and other expenses. As such, the Fund's shareholders
would indirectly bear the expenses of the Fund and the other investment compa-
ny, some or all of which would be duplicative. Such securities will be ac-
quired by the Funds within the limits prescribed by the Investment Company Act
of 1940 (the "1940 Act") which include, subject to certain exceptions, a pro-
hibition against a Fund investing more than 10% of the value of its total as-
sets in such securities.
WHEN-ISSUED AND FORWARD TRANSACTIONS AND STAND-BY COMMITMENTS
Each of the Funds may purchase eligible securities on a "when-issued" basis
and may purchase or sell securities on a "forward commitment" basis. These
transactions involve a commitment by a Fund to purchase or sell particular se-
curities with payment and delivery taking place in the future, beyond the nor-
mal settlement date, at a stated price and yield. Securities purchased on a
"forward commitment" or "when-issued" basis are recorded as an asset and are
subject to changes in value based upon changes in the general level of inter-
est rates. It is expected that forward commitments and "when-issued" purchases
will not exceed 25% of the value of a Fund's total assets absent unusual mar-
ket conditions, and that the length of such commitments will not exceed 45
days. The Funds do not intend to engage in "when-issued" purchases and forward
commitments for speculative purposes, but only in furtherance of their invest-
ment objectives.
In addition, the Intermediate-Term Managed Income and Managed Income Funds
may acquire "stand-by commitments" with respect to Municipal Bonds held by
them. Under a "stand-by commitment," a dealer agrees to purchase at a Fund's
option specified Municipal Bonds at a specified price. The Intermediate-Term
Managed Income and Managed Income Funds will acquire "stand-by commitments"
solely to facilitate portfolio liquidity and do not intend to exercise their
rights thereunder for trading purposes. "Stand-by commitments" acquired by a
Fund would be valued at zero in determining the Fund's net asset value.
TYPES OF MUNICIPAL BONDS
The two principal classifications of Municipal Bonds which may be held by the
Intermediate-Term Managed Income and Managed Income Funds are "general obliga-
tion" securities and "revenue" securities. General obligation securities are
secured by the issuer's pledge of its full faith, credit, and taxing power for
the payment of principal and interest. Revenue securities are payable only
from the revenues
12
<PAGE>
derived from a particular facility or class of facilities or, in some cases,
from the proceeds of a special excise tax or other specific revenue source such
as the user of the facility being financed. Private activity bonds held by the
Funds are in most cases revenue securities and are not payable from the unre-
stricted revenues of the issuer. Consequently, the credit quality of private
activity revenue bonds is usually directly related to the credit standing of
the corporate user of the facility involved.
The Intermediate-Term Managed Income and Managed Income Funds' portfolios may
also include "moral obligation" securities, which are normally issued by spe-
cial-purpose public authorities. If the issuer of moral obligation securities
is unable to meet its debt service obligations from current revenues, it may
draw on a reserve fund, the restoration of which is a moral commitment, but not
a legal obligation of the state or municipality which created the issuer. There
is no limitation on the amount of moral obligation securities that may be held
by the Intermediate-Term Managed Income and Managed Income Funds. The Invest-
ment Adviser will consider investments in Municipal Bonds for the Intermediate-
Term Managed Income and Managed Income Funds when the Investment Adviser be-
lieves that the total return on such securities is attractive relative to that
of taxable securities.
FUTURES CONTRACTS
The Funds may enter into interest rate futures contracts as a hedge against
changes in market conditions. An interest rate futures contract represents a
firm commitment by which two parties agree to take or make delivery of fixed-
income securities on the last trading date of the contract and the price at
which the futures contract is originally struck.
The Funds will not engage in transactions in futures contracts for specula-
tion, but only as a hedge against changes in market values of securities which
they hold or intend to purchase where the transactions are intended to reduce
risks inherent in the management of the Funds. Each Fund may engage in futures
contracts only to the extent permitted by the Commodity Futures Trading Commis-
sion ("CFTC") and the Securities and Exchange Commission ("SEC"). As of the
date of this Prospectus, each Fund intends to limit its hedging transactions in
futures contracts so that, immediately after any such transaction, the aggre-
gate initial margin that is required to be posted by the Fund under the rules
of the exchange on which the futures contract is traded does not exceed 5% of
the Fund's total assets, after taking into account any unrealized profits and
unrealized losses on the Fund's open contracts.
When investing in futures contracts, the Funds must satisfy certain asset seg-
regation requirements to ensure that the use of futures is unleveraged. When a
Fund takes a long position in a futures contract, it must maintain a segregated
account containing cash and/or certain liquid assets equal to the purchase
price of the contract, less any margin or deposit. When a Fund takes a short
position in a futures contract, the Fund must maintain a segregated account
containing cash and/or certain liquid assets in an amount equal to the market
value of the securities underlying such contract (less any margin or deposit),
which amount must be at least equal to the market price at which the short po-
sition was established. Asset segregation requirements are not applicable when
a Fund "covers" a futures position generally by entering into an offsetting po-
sition.
Transactions by a Fund in futures contracts may subject the Fund to a number
of risks. Successful use of futures by a Fund is subject to the ability of the
Investment Adviser to anticipate correctly movements in the direction of the
market. In addition, there may be an imperfect correlation, or no correlation
at all, between movements in the price of the futures contracts and movements
in the price of the instruments being hedged. Further, there is no assurance
that a liquid market will exist for any particular futures contract at any par-
ticular time. Consequently, a Fund may realize a loss on a futures transaction
that is not offset by a favorable movement in the price of securities which it
holds or intends to purchase or may be unable to close a futures position in
the event of adverse price movements.
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<PAGE>
SECURITIES LENDING
To increase return on its portfolio securities, each Fund may lend its portfo-
lio securities to broker/dealers pursuant to agreements requiring the loans to
be continuously secured by collateral equal at all times in value to at least
the market value of the securities loaned. Collateral for such loans may in-
clude cash, securities of the U.S. Government, its agencies or instrumentali-
ties, or an irrevocable letter of credit issued by a bank which meets the in-
vestment standards of a Fund, or any combination thereof. Such loans will not
be made if, as a result, the aggregate of all outstanding loans of a Fund ex-
ceeds 30% of the value of its total assets. There may be risks of delay in re-
ceiving additional collateral or in recovering the securities loaned or even a
loss of rights in the collateral should the borrower of the securities fail fi-
nancially. However, loans are made only to borrowers deemed by the Investment
Adviser to be of good standing and when, in the Investment Adviser's judgment,
the income to be earned from the loan justifies the attendant risks.
ILLIQUID SECURITIES
No Fund will knowingly invest more than 10% of the value of its net assets in
securities that are illiquid. Each Fund may purchase securities which are not
registered under the Securities Act of 1933 (the "Act") but which can be sold
to "qualified institutional buyers" in accordance with Rule 144A under the Act.
Any such security will not be considered illiquid so long as it is determined
by the Investment Adviser, acting under guidelines approved and monitored by
the Board, that an adequate trading market exists for that security. This in-
vestment practice could have the effect of increasing the level of illiquidity
in a Fund during any period that qualified institutional buyers become uninter-
ested in purchasing these restricted securities.
PORTFOLIO TURNOVER
Although each Fund generally seeks to invest for the long term, each Fund may
sell a portfolio investment immediately after its acquisition if the Investment
Adviser believes that such a disposition is consistent with a Fund's investment
objective. Portfolio investments may be sold for a variety of reasons, such as
a more favorable investment opportunity or other circumstances bearing on the
desirability of continuing to hold the investments. A high rate of portfolio
turnover may involve correspondingly greater transaction costs, which must be
borne directly by a Fund and ultimately by its shareholders. Portfolio turnover
will not be a limiting factor in making portfolio decisions. Each Fund's port-
folio turnover rate is not expected to exceed 400%. High portfolio turnover may
result in the realization of substantial net capital gains. To the extent that
net short-term capital gains are realized, any distributions resulting from
such gains are considered ordinary income for Federal income tax purposes. (See
"Financial Highlights" and "Taxes--Federal.")
INVESTMENT LIMITATIONS
The investment limitations enumerated below are matters of fundamental policy
and may not be changed without the vote of the holders of a majority of a
Fund's outstanding Shares (as defined under "Miscellaneous").
A Fund may not:
1. Purchase securities of any one issuer, other than U.S. Government obliga-
tions, if immediately after such purchase more than 5% of the value of its
total assets would be invested in the securities of such issuer, except that
up to 25% of the value of its total assets may be invested without regard to
this 5% limitation;
2. Borrow money except from banks for temporary purposes, and then in
amounts not in excess of 10% of the value of its total assets at the time of
such borrowing; or mortgage, pledge, or hypothecate any assets except in con-
nection with any such borrowing and in amounts not in excess of the
14
<PAGE>
lesser of the dollar amounts borrowed and 10% of the value of its total as-
sets at the time of such borrowing, provided that each Fund may enter into
futures contracts and futures options. (This borrowing provision is included
solely to facilitate the orderly sale of portfolio securities to accommodate
abnormally heavy redemption requests and is not for leverage purposes.) A
Fund will not purchase portfolio securities while borrowings in excess of 5%
of its total assets are outstanding;
3. Purchase any securities which would cause more than 25% of the value of
its total assets at the time of purchase to be invested in the securities of
one or more issuers conducting their principal business activities in the
same industry, provided that (a) with respect to the Managed Income Fund,
there is no limitation with respect to securities issued or guaranteed by the
U.S. Government or domestic bank obligations, (b) with respect to the Short-
Term Government Securities and Intermediate-Term Managed Income Funds, there
is no limitation with respect to securities issued or guaranteed by the U.S.
Government and (c) neither all finance companies, as a group, nor all utility
companies, as a group, are considered a single industry for purposes of this
policy; and
4. Make loans, except that (i) the Fund may purchase or hold debt securities
in accordance with its investment objective and policies, and may enter into
repurchase agreements with respect to obligations issued or guaranteed by the
U.S. Government, its agencies or instrumentalities, and (ii) each Fund may
lend portfolio securities in an amount not exceeding 30% of its total assets.
In addition, the Managed Income Fund may not:
5. Knowingly invest more than 10% of the value of its total assets in illiq-
uid securities, including repurchase agreements with remaining maturities in
excess of seven days, restricted securities, and other securities for which
market quotations are not readily available; and
6. Invest in obligations of foreign branches of financial institutions or in
domestic branches of foreign banks if immediately after such purchase (i)
more than 5% of the value of its total assets would be invested in obliga-
tions of any one foreign branch of the financial institution or domestic
branch of a foreign bank; or (ii) more than 20% of its total assets would be
invested in foreign branches of financial institutions or in domestic
branches of foreign banks.
* * *
In addition to the investment limitations described above, as a matter of
fundamental policy for each Fund, which may not be changed without the vote of
the holders of a majority of the Fund's outstanding shares, a Fund may not in-
vest in the securities of any single issuer if, as a result, the Fund holds
more than 10% of the outstanding voting securities of such issuer.
In Investment Limitation No. 1 above: (a) a security is considered to be is-
sued by the governmental entity or entities whose assets and revenues back the
security, or, with respect to a private activity bond that is backed only by
the assets and revenues of a non-governmental user, such non-governmental us-
er; (b) in certain circumstances, the guarantor of a guaranteed security may
also be considered to be an issuer in connection with such guarantee; and (c)
securities issued or guaranteed by the United States Government, its agencies
or instrumentalities (including securities backed by the full faith and credit
of the United States) are deemed to be U.S. Government obligations.
The Short-Term Government Securities and Intermediate-Term Managed Income
Funds may not knowingly invest more than 10% of the value of their respective
total assets in illiquid securities, including repurchase agreements with re-
maining maturities in excess of seven days, restricted securities and other
securities for which market quotations are not readily available. This invest-
ment policy may be changed by Master Fund's Board of Directors upon reasonable
notice to shareholders.
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<PAGE>
The Managed Income Fund will not invest more than 25% of the value of its to-
tal assets in domestic bank obligations.
With respect to all investment policies, if a percentage limitation is satis-
fied at the time of investment, a later increase or decrease in such percent-
age resulting from a change in the value of a Fund's portfolio securities will
not constitute a violation of such limitation.
In order to permit the sale of Shares in certain states, Master Fund may make
commitments that are more restrictive than the investment policies and limita-
tions described above. Should Master Fund determine that any such commitment
is no longer in the Funds' best interests, it will revoke the commitment by
terminating sales of Shares to investors residing in the state involved.
PRICING OF SHARES
The net asset value of each Fund's Shares is determined and priced for pur-
chases and redemptions at the close of regular trading hours on the New York
Stock Exchange (the "Exchange"), currently 4:00 p.m. (Eastern Time). Net asset
value and pricing for each Fund's Shares are determined on each day the Ex-
change and the Investment Adviser are open for trading ("Business Day"). Cur-
rently, the holidays which Master Fund observes are New Year's Day, Martin Lu-
ther King, Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence
Day, Labor Day, Columbus Day, Veterans Day, Thanksgiving Day and Christmas.
Net asset value per share for purposes of pricing sales and redemptions is
calculated by dividing the value of all securities and other assets allocable
to a Fund, less the liabilities charged to the Fund, by the number of its out-
standing Shares.
Assets in the Funds which are traded on a recognized stock exchange are val-
ued at the last sale price on the securities exchange on which such securities
are primarily traded or at the last sale price on the national securities mar-
ket. Securities traded on only over-the-counter markets are valued on the ba-
sis of closing over-the-counter bid prices. Securities for which there were no
transactions are valued at the average of the most recent bid and asked pric-
es. A futures contract is valued at the last sales price quoted on the princi-
pal exchange or board of trade on which such contract is traded, or in the ab-
sence of a sale, the mean between the last bid and asked prices. Restricted
securities, securities for which market quotations are not readily available,
and other assets are valued at fair value pursuant to guidelines adopted by
the Board of Directors. Absent unusual circumstances, portfolio securities ma-
turing in 60 days or less are normally valued at amortized cost. The net asset
value of Shares in the Funds will fluctuate as the market value of their port-
folio securities changes in response to changing market rates of interest and
other factors.
Portfolio securities held by the Intermediate-Term Managed Income and Managed
Income Funds which are primarily traded on foreign securities exchanges are
generally valued at the preceding closing values of such securities on their
respective exchanges, except that when an event subsequent to the time when
value was so established is likely to have changed such value, then the fair
value of those securities will be determined by consideration of other factors
under the direction of the Board of Directors. A security which is listed or
traded on more than one exchange is valued at the quotation on the exchange
determined to be the primary market for such security. Investments in foreign
debt securities having a maturity of 60 days or less are valued based upon the
amortized cost method. All other foreign securities are valued at the last
current bid quotation if market quotations are available, or at fair value as
determined in accordance with guidelines adopted by the Board of Directors.
For valuation purposes, quotations of foreign securities in foreign currency
are converted to U.S. dollars equivalent at the prevailing market rate on the
day of conversion. Some of the securities acquired by the Funds may be traded
on foreign ex-
16
<PAGE>
changes or over-the-counter markets on days which are not Business Days. In
such cases, the net asset value of the Shares may be significantly affected on
days when investors can neither purchase nor redeem a Fund's Shares.
The Funds' administrators have undertaken to price the securities in the
Funds' portfolios and may use one or more pricing services to value certain
portfolio securities in the Funds where the prices provided are believed to
reflect the fair market value of such securities. The methods used by the
pricing services and the valuations so established will be reviewed by the ad-
ministrators under the general supervision of the Board of Directors.
HOW TO PURCHASE AND REDEEM SHARES
DISTRIBUTOR
Shares in each Fund are continuously offered for sale by Master Fund's spon-
sor and distributor, Edgewood Services, Inc. (the "Distributor"), a wholly-
owned subsidiary of Federated Investors. The Distributor is a registered
broker/dealer. Its principal offices are at Federated Investors Tower, 1001
Liberty Avenue, Pittsburgh, PA 15222-3779.
PURCHASE OF SHARES
The Distributor has established several procedures for purchasing Shares in
order to accommodate different types of investors.
Shares may be purchased directly by individuals ("Direct Investors") or by
institutions ("Institutional Investors" and, collectively with Direct Invest-
ors, "Investors"). Shares may also be purchased by customers ("Customers") of
the Investment Adviser, its affiliates and correspondent banks, and other in-
stitutions ("Shareholder Organizations") that have entered into shareholder
servicing agreements with Master Fund. A Shareholder Organization may elect to
hold of record Shares for its Customers and to record beneficial ownership of
Shares on the account statements provided by it to its Customers. If it does
so, it is the Shareholder Organization's responsibility to transmit to the
Distributor all purchase orders for its Customers and to transmit, on a timely
basis, payment for such orders to Mutual Funds Service Company ("MFSC"), the
Funds' sub-transfer agent, in accordance with the procedures agreed to by the
Shareholder Organization and the Distributor. Confirmations of all such Cus-
tomer purchases and redemptions will be sent by MFSC to the particular Share-
holder Organization. As an alternative, a Shareholder Organization may elect
to establish its Customers' accounts of record with MFSC. In this event, even
if the Shareholder Organization continues to place its Customers' purchase and
redemption orders with the Funds, MFSC will send confirmations of such trans-
actions and periodic account statements directly to Customers. A Shareholder
Organization may also elect to establish its Customers as record holders.
Master Fund enters into shareholder servicing agreements with Shareholder Or-
ganizations which agree to provide their Customers various shareholder admin-
istrative services with respect to their Shares (hereinafter referred to as
"Service Organizations"). Shares in the Funds bear the expense of fees payable
to Service Organizations for such services. See "Management of the Funds--
Service Organizations."
Customers wishing to purchase Shares through their Shareholder Organization
should contact such entity directly for appropriate instructions. (For a list
of Shareholder Organizations in your area, call (800) 446-1012.) An investor
purchasing Shares through a registered investment adviser or certified finan-
cial planner may incur transaction charges in connection with such purchases.
Such investors should contact their registered investment adviser or certified
financial planner for further information on transaction fees. Investors may
also purchase Shares directly in accordance with procedures described below
under "Purchase Procedures."
17
<PAGE>
PUBLIC OFFERING PRICE
The public offering price for Shares of each Fund is the sum of the net asset
value of the Shares purchased plus a sales load according to the table below:
<TABLE>
<CAPTION>
REALLOWANCE TO
TOTAL SALES CHARGE DEALER
------------------------------ --------------
AS A % OF AS A % OF AS A % OF
OFFERING PRICE NET ASSET OFFERING PRICE
PER SHARE VALUE PER SHARE PER SHARE
-------------- --------------- --------------
<S> <C> <C> <C>
Amount of Transaction
---------------------
Less than $50,000................. 4.50% 4.71% 4.00%
$50,000 to $99,999................ 4.00 4.17 3.50
$100,000 to $249,999.............. 3.50 3.63 3.00
$250,000 to $499,999.............. 3.00 3.09 2.50
$500,000 to $999,999.............. 2.00 2.05 1.50
$1,000,000 to $1,999,999.......... 1.00 1.00 .50
$2,000,000 and over............... .50 .50 .25
</TABLE>
The reallowance to dealers may be changed from time to time but will remain
the same for all such dealers.
At various times the Distributor may implement programs under which a dealer's
sales force may be eligible to win nominal awards for certain sales efforts or
under which the Distributor will reallow to any dealer that sponsors sales con-
tests or recognition programs conforming to criteria established by the Dis-
tributor, or participates in sales programs sponsored by the Distributor, an
amount not exceeding the total applicable sales charges on the sales generated
by the dealer at the public offering price during such programs. Also, the Dis-
tributor in its discretion may from time to time, pursuant to objective crite-
ria established by the Distributor, pay fees to qualifying dealers for certain
services or activities which are primarily intended to result in sales of
Shares of the Funds. If any such program is made available to any dealer, it
will be made available to all dealers on the same terms and conditions. Pay-
ments made under such programs will be made by the Distributor out of its own
assets and not out of the assets of the Funds. These programs will not change
the price of Shares or the amount that the Funds will receive from such sales.
The sales load described above will not be applicable to: (a) purchases of
Shares by customers of the Investment Adviser or its affiliates; (b) trust,
agency or custodial accounts opened through the trust department of a bank,
trust company or thrift institution, provided that appropriate notification of
such status is given at the time of investment; (c) companies, corporations and
partnerships (excluding full service broker/dealers and financial planners,
registered investment advisers and depository institutions not covered by the
exemptions in (d) and (e) below); (d) financial planners and registered invest-
ment advisers not affiliated with or clearing purchases through full service
broker/dealers; (e) purchases of Shares by depository institutions for their
own account as principal; (f) exchange transactions (described below under "In-
vestor Programs-Exchange Privilege") where the Shares being exchanged were ac-
quired in connection with the distribution of assets held in trust, agency or
custodial accounts maintained with the trust department of a bank; (g) corpo-
rate/ business retirement plans (such as 401(k), 403(b)(7), 457 and Keogh ac-
counts) sponsored by the Distributor and IRA accounts sponsored by the Invest-
ment Adviser; (h) company-sponsored employee pension or retirement plans making
direct investments in the Funds; (i) purchases of Shares by officers, trustees,
directors, employees and retirees of Master Fund, UST Master Tax-Exempt Funds,
Inc. ("Master Tax-Exempt Fund"), the Investment Adviser, the Distributor or of
any direct or indirect affiliate of any of them; (j) purchases of Shares by all
beneficial shareholders of Master Fund or Master Tax-Exempt Fund as of May 22,
1989; (k) purchases of Shares by investment advisers registered under the In-
vestment Advisers Act of 1940 for their customers through an omnibus account
established with United States Trust Company of New York; (l) purchases of
Shares by directors, officers and employees of brokers and dealers selling
shares pursuant to a selling agreement with Master Fund and Master Tax-Exempt
Fund; (m) purchases of shares by investors who are members of affinity groups
serviced by USAffinity Investments Limited Partnership; and (n) customers of
certain
18
<PAGE>
financial institutions who purchase Shares through a registered representative
of UST Financial Services Corp. on the premises of their financial institu-
tions. In addition, no sales load is charged on the reinvestment of dividends
or distributions or in connection with certain share exchange transactions.
Investors who have previously redeemed shares in an "Eligible Fund" (as de-
fined below) on which a sales load has been paid also have a one-time privi-
lege of purchasing shares of another "Eligible Fund" at net asset value with-
out a sales charge, provided that such privilege will apply only to purchases
made within 30 calendar days from the date of redemption and only with respect
to the amount of the redemption. These exemptions to the imposition of a sales
load are due to the nature of the investors and/or reduced sales effort that
will be needed in obtaining investments.
Quantity Discounts
An investor in the Funds may be entitled to reduced sales charges through
Rights of Accumulation, a Letter of Intent or a combination of investments, as
described below, even if the investor does not wish to make an investment of a
size that would normally qualify for a quantity discount.
In order to obtain quantity discount benefits, an investor must notify MFSC
at the time of purchase that he or she would like to take advantage of any of
the discount plans described below. Upon such notification, the investor will
receive the lowest applicable sales charge. Quantity discounts may be modified
or terminated at any time and are subject to confirmation of an investor's
holdings through a check of appropriate records. For more information about
quantity discounts, please call (800) 446-1012 or contact your Shareholder Or-
ganization.
Rights of Accumulation. A reduced sales load applies to any purchase of
shares of any portfolio of Master Fund and Master Tax-Exempt Fund that is sold
with a sales load ("Eligible Fund") where an investor's then current aggregate
investment is $50,000 or more. "Aggregate investment" means the total of: (a)
the dollar amount of the then current purchase of shares of an Eligible Fund
and (b) the value (based on current net asset value) of previously purchased
and beneficially owned shares of any Eligible Fund on which a sales load has
been paid. If, for example, an investor beneficially owns shares of one or
more Eligible Funds with an aggregate current value of $49,000 on which a
sales load has been paid and subsequently purchases shares of an Eligible Fund
having current value of $1,000, the load applicable to the subsequent purchase
would be reduced to 4.00% of the offering price. Similarly, with respect to
each subsequent investment, all shares of Eligible Funds that are beneficially
owned by the investor at the time of investment may be combined to determine
the applicable sales load.
Letter of Intent. By completing the Letter of Intent included as part of the
New Account Application, an investor becomes eligible for the reduced sales
load applicable to the total number of Eligible Fund shares purchased in a 13-
month period pursuant to the terms and under the conditions set forth below
and in the Letter of Intent. To compute the applicable sales load, the offer-
ing price of shares of an Eligible Fund on which a sales load has been paid,
beneficially owned by an investor on the date of submission of the Letter of
Intent, may be used as a credit toward completion of the Letter of Intent.
However, the reduced sales load will be applied only to new purchases.
MFSC will hold in escrow shares equal to 5% of the amount indicated in the
Letter of Intent for payment of a higher sales load if an investor does not
purchase the full amount indicated in the Letter of Intent. The escrow will be
released when an investor fulfills the terms of the Letter of Intent by pur-
chasing the specified amount. If purchases qualify for a further sales load
reduction, the sales load will be adjusted to reflect an investor's total pur-
chases. If total purchases are less than the amount specified, an investor
will be requested to remit an amount equal to the difference between the sales
load actually paid and the sales load applicable to the total purchases. If
such remittance is not received within 20 days, MFSC, as attorney-in-
19
<PAGE>
fact pursuant to the terms of the Letter of Intent and at the Distributor's di-
rection, will redeem an appropriate number of shares held in escrow to realize
the difference. Signing a Letter of Intent does not bind an investor to pur-
chase the full amount indicated at the sales load in effect at the time of
signing, but an investor must complete the intended purchase in accordance with
the terms of the Letter of Intent to obtain the reduced sales load. To apply,
an investor must indicate his or her intention to do so under a Letter of In-
tent at the time of purchase.
Qualification for Discounts. For purposes of applying the Rights of Accumula-
tion and Letter of Intent privileges described above, the scale of sales loads
applies to the combined purchases made by any individual and/or spouse purchas-
ing securities for his, her or their own account or for the account of any mi-
nor children, or the aggregate investments of a trustee or custodian of any
qualified pension or profit sharing plan or IRA established (or the aggregate
investment of a trustee or other fiduciary) for the benefit of the persons
listed above.
PURCHASE PROCEDURES
General
Direct Investors may purchase Shares by completing the Application for pur-
chase of Shares accompanying this Prospectus and mailing it, together with a
check payable to UST Master Funds, to:
UST Master Funds
c/o Mutual Funds Service Company
P.O. Box 2798
Boston, MA 02208-2798
Subsequent investments in an existing account in any Fund may be made at any
time by sending to the above address a check payable to UST Master Funds along
with: (a) the detachable form that regularly accompanies the confirmation of a
prior transaction; (b) a subsequent order form which may be obtained from MFSC;
or (c) a letter stating the amount of the investment, the name of the Fund and
the account number in which the investment is to be made. Institutional Invest-
ors may purchase Shares by transmitting their purchase orders to MFSC by tele-
phone at (800) 446-1012 or by terminal access. Institutional Investors must pay
for Shares with Federal funds or funds immediately available to MFSC.
Purchases by Wire
Investors may also purchase Shares by wiring Federal funds to MFSC. Prior to
making an initial investment by wire, an Investor must telephone MFSC at (800)
446-1012 (from overseas, call (617) 557-8280) for instructions. Federal funds
and registration instructions should be wired through the Federal Reserve Sys-
tem to:
United States Trust Company of New York
ABA #021001318
UST Funds, Account No. 2901447
For further credit to:
UST Master Funds
Wire Control Number
Account Registration (including account number)
Investors making initial investments by wire must promptly complete the Appli-
cation accompanying this Prospectus and forward it to MFSC. Redemptions by In-
vestors will not be processed until the completed Application for purchase of
Shares has been received by MFSC and accepted by the Distributor. Investors
making subsequent investments by wire should follow the above instructions.
Other Purchase Information
Except as provided in "Investor Programs" below, the minimum initial invest-
ment by an Investor or initial aggregate investment by a Shareholder Organiza-
tion investing on behalf of its Customers is $500 per Fund. The minimum subse-
quent investment for both types of investors is $50 per Fund. Customers may
agree with a particular Shareholder Organization to make a minimum purchase
with respect to their accounts. Depending upon the terms of the particular
20
<PAGE>
account, Shareholder Organizations may charge a Customer's account fees for au-
tomatic investment and other cash management services provided. Master Fund re-
serves the right to reject any purchase order, in whole or in part, or to waive
any minimum investment requirements.
REDEMPTION PROCEDURES
Customers of Shareholder Organizations holding Shares of record may redeem all
or part of their investments in the Funds in accordance with procedures gov-
erning their accounts at the Shareholder Organizations. It is the responsibil-
ity of the Shareholder Organizations to transmit redemption orders to MFSC and
credit such Customer accounts with the redemption proceeds on a timely basis.
Redemption orders for Institutional Investors must be transmitted to MFSC by
telephone at (800) 446-1012 or by terminal access. No charge for wiring redemp-
tion payments to Shareholder Organizations or Institutional Investors is im-
posed by Master Fund, although Shareholder Organizations may charge a Custom-
er's account for wiring redemption proceeds. Information relating to such re-
demption services and charges, if any, is available from the Shareholder Orga-
nizations. An investor redeeming Shares through a registered investment adviser
or certified financial planner may incur transaction charges in connection with
such redemptions. Such investors should contact their registered investment ad-
viser or certified financial planner for further information on transaction
fees. Investors may redeem all or part of their Shares in accordance with any
of the procedures described below (these procedures also apply to Customers of
Shareholder Organizations for whom individual accounts have been established
with MFSC).
Redemption by Mail
Shares may be redeemed by a Direct Investor by submitting a written request
for redemption to:
UST Master Funds
c/o Mutual Funds Service Company
P.O. Box 2798
Boston, MA 02208-2798
A written redemption request to MFSC must (i) state the number of Shares to be
redeemed, (ii) identify the shareholder account number and tax identification
number, and (iii) be signed by each registered owner exactly as the Shares are
registered. If the Shares to be redeemed were issued in certificate form, the
certificates must be endorsed for transfer (or accompanied by a duly executed
stock power) and must be submitted to MFSC together with the redemption re-
quest. A redemption request for an amount in excess of $50,000 per account, or
for any amount if the proceeds are to be sent elsewhere than the address of
record, must be accompanied by signature guarantees from any eligible guarantor
institution approved by MFSC in accordance with its Standards, Procedures and
Guidelines for the Acceptance of Signature Guarantees ("Signature Guarantee
Guidelines"). Eligible guarantor institutions generally include banks,
broker/dealers, credit unions, national securities exchanges, registered secu-
rities associations, clearing agencies and savings associations. All eligible
guarantor institutions must participate in the Securities Transfer Agents Me-
dallion Program ("STAMP") in order to be approved by MFSC pursuant to the Sig-
nature Guarantee Guidelines. Copies of the Signature Guarantee Guidelines and
information on STAMP can be obtained from MFSC at (800) 446-1012 or at the ad-
dress given above. MFSC may require additional supporting documents for redemp-
tions made by corporations, executors, administrators, trustees and guardians.
A redemption request will not be deemed to be properly received until MFSC re-
ceives all required documents in proper form. Payment for Shares redeemed will
ordinarily be made by mail within five Business Days after proper receipt by
MFSC of the redemption request. Questions with respect to the proper form for
redemption requests should be directed to MFSC at (800) 446-1012 (from over-
seas, call (617) 557-8280).
Redemption by Wire or Telephone
Direct Investors who have so indicated on the Application, or have subse-
quently arranged in writing to
21
<PAGE>
do so, may redeem Shares by instructing MFSC by wire or telephone to wire the
redemption proceeds directly to the Direct Investor's account at any commercial
bank in the United States. Direct Investors who are shareholders of record may
redeem Shares by instructing MFSC by telephone to mail a check for redemption
proceeds of $500 or more to the shareholder of record at his or her address of
record. Institutional Investors may also redeem Shares by instructing MFSC by
telephone at (800) 446-1012 or by terminal access. Only redemptions of $500 or
more will be wired to a Direct Investor's account. An $8.00 fee for each wire
redemption by a Direct Investor is deducted by MFSC from the proceeds of the
redemption. The redemption proceeds for Direct Investors must be paid to the
same bank and account as designated on the Application or in written instruc-
tions subsequently received by MFSC.
In order to arrange for redemption by wire or telephone after an account has
been opened or to change the bank or account designated to receive redemption
proceeds, a Direct Investor must send a written request to Master Fund, c/o
MFSC, at the address listed above under "Redemption by Mail." Such requests
must be signed by the Direct Investor, with signatures guaranteed (see "Redemp-
tion by Mail" above, for details regarding signature guarantees). Further docu-
mentation may be requested.
MFSC and the Distributor reserve the right to refuse a wire or telephone re-
demption if it is believed advisable to do so. Procedures for redeeming Shares
by wire or telephone may be modified or terminated at any time by Master Fund,
MFSC or the Distributor. MASTER FUND, MFSC AND THE DISTRIBUTOR WILL NOT BE LIA-
BLE FOR ANY LOSS, LIABILITY, COST OR EXPENSE FOR ACTING UPON TELEPHONE INSTRUC-
TIONS THAT ARE REASONABLY BELIEVED TO BE GENUINE. IN ATTEMPTING TO CONFIRM THAT
TELEPHONE INSTRUCTIONS ARE GENUINE, MASTER FUND WILL USE SUCH PROCEDURES AS ARE
CONSIDERED REASONABLE, INCLUDING RECORDING THOSE INSTRUCTIONS AND REQUESTING
INFORMATION AS TO ACCOUNT REGISTRATION.
If any portion of the Shares to be redeemed represents an investment made by
personal check, Master Fund and MFSC reserve the right not to honor the redemp-
tion until MFSC is reasonably satisfied that the check has been collected in
accordance with the applicable banking regulations which may take up to 15
days. A Direct Investor who anticipates the need for more immediate access to
his or her investment should purchase Shares by Federal funds or bank wire or
by certified or cashier's check. Banks normally impose a charge in connection
with the use of bank wires, as well as certified checks, cashier's checks and
Federal funds. If a Direct Investor's purchase check is not collected, the pur-
chase will be cancelled and MFSC will charge a fee of $25.00 to the Direct In-
vestor's account.
During periods of substantial economic or market change, telephone redemptions
may be difficult to complete. If an Investor is unable to contact MFSC by tele-
phone, the Investor may also deliver the redemption request to MFSC in writing
at the address noted above under "How to Purchase and Redeem Shares--Redemption
by Mail."
Other Redemption Information
Except as described in "Investor Programs" below, Investors may be required to
redeem Shares in a Fund after 60 days' written notice if due to investor re-
demptions the balance in the particular account with respect to the Fund re-
mains below $500. If a Customer has agreed with a particular Shareholder Organ-
ization to maintain a minimum balance in his or her account at the institution
with respect to Shares of a Fund, and the balance in such account falls below
that minimum, the Customer may be obliged by the Shareholder Organization to
redeem all or part of his or her Shares to the extent necessary to maintain the
required minimum balance.
GENERAL
Purchase and redemption orders for Shares which are received and accepted
prior to the close of regular trading hours on the Exchange (currently 4:00
p.m., Eastern Time) on any Business Day are priced according to the net asset
value determined on that day.
22
<PAGE>
Purchase orders received and accepted after the close of regular trading hours
on the Exchange are priced at the net asset value per Share determined on the
next Business Day.
INVESTOR PROGRAMS
EXCHANGE PRIVILEGE
Investors and Customers of Shareholder Organizations may, after appropriate
prior authorization and without an exchange fee imposed by Master Fund, ex-
change Shares in any Fund having a value of at least $500 for Service Shares of
any other portfolio offered by Master Fund or Master Tax-Exempt Fund, provided
that such other shares may legally be sold in the state of the investor's resi-
dence.
Master Fund currently offers, in addition to the Short-Term Government Securi-
ties, Intermediate-Term Managed Income and Managed Income Funds, seventeen ad-
ditional portfolios as follows:
Money Fund, a money market fund seeking as high a level of current income as
is consistent with liquidity and stability of principal through investments
in high-quality money market instruments maturing within 13 months;
Government Money Fund, a money market fund seeking as high a level of cur-
rent income as is consistent with liquidity and stability of principal
through investments in obligations issued or guaranteed by the U.S. Govern-
ment, its agencies and instrumentalities and repurchase agreements collater-
alized by such obligations;
Treasury Money Fund, a money market fund seeking current income generally
exempt from state and local income taxes through investments in direct short-
term obligations issued by the U.S. Treasury and certain agencies or instru-
mentalities of the U.S. Government;
Equity Fund, a fund seeking long-term capital appreciation through invest-
ments in a diversified portfolio primarily of equity securities;
Income and Growth Fund, a fund investing substantially in equity securities
in seeking to provide moderate current income and to achieve capital appreci-
ation as a secondary objective;
Long-Term Supply of Energy Fund, a fund seeking long-term capital apprecia-
tion by investing in companies benefitting from the availability, development
and delivery of secure hydrocarbon and other energy sources;
Productivity Enhancers Fund, a fund seeking long-term capital appreciation
by investing in companies benefitting from their roles as innovators, devel-
opers and suppliers of goods and services which enhance service and manufac-
turing productivity or companies that are most effective at obtaining and ap-
plying productivity enhancement developments;
Environmentally-Related Products and Services Fund, a fund seeking long-term
capital appreciation by investing in companies benefitting from their provi-
sion of products, technologies and services related to conservation, protec-
tion and restoration of the environment;
Aging of America Fund, a fund seeking long-term capital appreciation by in-
vesting in companies benefitting from the changes occurring in the demo-
graphic structure of the U.S. population, particularly of its growing popula-
tion of individuals over the age of 40;
Communication and Entertainment Fund, a fund seeking long-term capital ap-
preciation by investing in companies benefitting from the technological and
international transformation of the communications and entertainment indus-
tries, particularly the convergence of information, communication and enter-
tainment media;
Business and Industrial Restructuring Fund, a fund seeking long-term capital
appreciation by investing in companies benefitting from their restructuring
or redeployment of assets and operations in order to become more competitive
or profitable;
Global Competitors Fund, a fund seeking long-term capital appreciation by
investing in U.S.-based
23
<PAGE>
companies benefitting from their position as effective and strong competitors
on a global basis;
Early Life Cycle Fund, a fund seeking long-term capital appreciation by in-
vesting in smaller companies in the earlier stages of their development or
larger or more mature companies engaged in new and higher growth potential
operations;
International Fund, a fund seeking total return derived primarily from in-
vestments in foreign equity securities;
Emerging Americas Fund, a fund seeking long-term capital appreciation
through investments in companies and securities of governments based in all
countries in the Western Hemisphere, except the U.S.;
Pacific/Asia Fund, a fund seeking long-term capital appreciation through in-
vestments in companies and securities of governments based in Asia and on the
Asian side of the Pacific Ocean; and
Pan European Fund, a fund seeking long-term capital appreciation through in-
vestments in companies and securities of governments located in Europe.
Master Tax-Exempt Fund currently offers five port- folios as follows:
Short-Term Tax-Exempt Fund, a diversified tax-exempt money market fund seek-
ing a moderate level of current interest income exempt from Federal income
taxes through investing primarily in high-quality municipal obligations ma-
turing within 13 months;
Short-Term Tax-Exempt Securities Fund, a diversified fund seeking a high
level of current interest income exempt from Federal income taxes through in-
vestments in municipal obligations and having a dollar-weighted average port-
folio maturity of 1 to 3 years;
Intermediate-Term Tax-Exempt Fund, a diversified fund seeking a high level
of current income exempt from Federal income taxes through investments in mu-
nicipal obligations and having a dollar-weighted average portfolio maturity
of 3 to 10 years;
Long-Term Tax-Exempt Fund, a diversified fund seeking to maximize over time
current income exempt from Federal income taxes, investing primarily in mu-
nicipal obligations and having a dollar-weighted average maturity of 10 to 30
years; and
New York Intermediate-Term Tax-Exempt Fund, a non-diversified fund designed
to provide New York investors with a high level of current income exempt from
Federal and, to the extent possible, New York state and New York City income
taxes; this fund invests primarily in New York municipal obligations and has
a dollar-weighted average portfolio maturity of three to ten years.
An exchange involves a redemption of all or a portion of the Shares in a Fund
and the investment of the redemption proceeds in shares of another portfolio of
Master Fund or Master Tax-Exempt Fund. The redemption will be made at the per
Share net asset value of the Shares being redeemed next determined after the
exchange request is received. The Service Shares of the portfolio to be ac-
quired will be purchased at the per share net asset value of those shares (plus
any applicable sales load) next determined after acceptance of the exchange re-
quest. No sales load will be payable on shares to be acquired through an ex-
change to the extent that a sales load was previously paid on the Shares being
exchanged.
Investors may find the exchange privilege useful if their investment objec-
tives or market outlook should change after they invest in any of the Funds.
For further information regarding Master Fund's exchange privilege, sharehold-
ers should call (800) 446-1012 (from overseas, call at (617) 557-8280). Invest-
ors exercising the exchange privilege with the other portfolios of Master Fund
or Master Tax-Exempt Fund should request and review the prospectuses of those
portfolios prior to making an exchange. Such prospectuses may be obtained by
calling the telephone numbers listed above. Master Fund may modify or terminate
the exchange program at any time upon 60 days' written notice to shareholders,
and may reject any exchange request. In order to prevent abuse of
24
<PAGE>
this privilege to the disadvantage of other shareholders, Master Fund and Mas-
ter Tax-Exempt Fund reserve the right to limit the number of exchange requests
of Investors and Customers of Shareholder Organizations to no more than six per
year. MASTER FUND, MFSC AND THE DISTRIBUTOR ARE NOT RESPONSIBLE FOR THE AUTHEN-
TICITY OF EXCHANGE REQUESTS RECEIVED BY TELEPHONE THAT ARE REASONABLY BELIEVED
TO BE GENUINE. IN ATTEMPTING TO CONFIRM THAT TELEPHONE INSTRUCTIONS ARE GENU-
INE, MASTER FUND WILL USE SUCH PROCEDURES AS ARE CONSIDERED REASONABLE, INCLUD-
ING RECORDING THOSE INSTRUCTIONS AND REQUESTING INFORMATION AS TO ACCOUNT REG-
ISTRATION.
For Federal income tax purposes, an exchange of Shares is a taxable event and,
accordingly, a capital gain or loss may be realized by an investor. Before mak-
ing an exchange, an investor should consult a tax or other financial adviser to
determine tax consequences.
SYSTEMATIC WITHDRAWAL PLAN
An Investor who owns Shares of a Fund with a value of $10,000 or more may es-
tablish a Systematic Withdrawal Plan. The Investor may request a declining-bal-
ance withdrawal, a fixed-dollar withdrawal, a fixed-share withdrawal, or a
fixed-percentage withdrawal (based on the current value of Shares in the ac-
count) on a monthly, quarterly, semi-annual or annual basis. To initiate the
Systematic Withdrawal Plan, an investor must complete the Supplemental Applica-
tion contained in this Prospectus and mail it to MFSC at the address given
above. Further information on establishing a Systematic Withdrawal Plan may be
obtained by calling (800) 446-1012 (from overseas, call (617) 557-8280).
Shareholder Organizations may, at their discretion, establish similar system-
atic withdrawal plans with respect to the Shares held by their Customers. In-
formation about such plans and the applicable procedures may be obtained by
Customers directly from their institutions.
RETIREMENT PLANS
Shares are available for purchase by Investors in connection with the follow-
ing tax-deferred prototype retirement plans offered by United States Trust Com-
pany of New York:
IRAs (including "rollovers" from existing retirement plans) for individuals
and their spouses;
Profit Sharing and Money-Purchase Plans for corporations and self-employed
individuals and their partners to benefit themselves and their employees; and
Keogh Plans for self-employed individuals.
Investors investing in the Funds pursuant to Profit Sharing and Money-Purchase
Plans and Keogh Plans are not subject to the minimum investment and forced re-
demption provisions described above. The minimum initial investment for IRAs is
$250 per Fund and the minimum subsequent investment is $50 per Fund. Detailed
information concerning eligibility, service fees and other matters related to
these plans can be obtained by calling (800) 446-1012 (from overseas, call
(617) 557-8280. Customers of Shareholder Organizations may purchase Shares of
the Funds pursuant to retirement plans if such plans are offered by their
Shareholder Organizations.
AUTOMATIC INVESTMENT PROGRAM
The Automatic Investment Program permits Investors to purchase Shares (minimum
of $50 per Fund per transaction) at regular intervals selected by the Investor.
The minimum initial investment for an Automatic Investment Program account is
$50 per Fund. Provided the Investor's financial institution allows automatic
withdrawals, Shares are purchased by transferring funds from an Investor's
checking, bank money market or NOW account designated by the Investor. At the
Investor's option, the account designated will be debited in the specified
amount, and Shares will be purchased, once a month, on either the first or fif-
teenth day, or twice a month, on both days.
25
<PAGE>
The Automatic Investment Program is one means by which an Investor may use
"Dollar Cost Averaging" in making investments. Instead of trying to time market
performance, a fixed dollar amount is invested in Shares at predetermined in-
tervals. This may help Investors to reduce their average cost per share because
the agreed upon fixed investment amount allows more Shares to be purchased dur-
ing periods of lower share prices and fewer Shares during periods of higher
prices. In order to be effective, Dollar Cost Averaging should usually be fol-
lowed on a sustained, consistent basis. Investors should be aware, however,
that Shares bought using Dollar Cost Averaging are purchased without regard to
their price on the day of investment or to market trends. In addition, while
Investors may find Dollar Cost Averaging to be beneficial, it will not prevent
a loss if an Investor ultimately redeems his Shares at a price which is lower
than their purchase price.
To establish an Automatic Investment account permitting Investors to use the
Dollar Cost Averaging investment method described above, an Investor must com-
plete the Supplemental Application contained in this Prospectus and mail it to
MFSC. An Investor may cancel his participation in this Program or change the
amount of purchase at any time by mailing written notification to MFSC, P.O.
Box 2798, Boston, MA 02208-2798 and notification will be effective three Busi-
ness Days following receipt. Master Fund may modify or terminate this privilege
at any time or charge a service fee, although no such fee currently is contem-
plated. An Investor may also implement the Dollar Cost Averaging method on his
own initiative or through other entities.
DIVIDENDS AND DISTRIBUTIONS
Each Fund's net income for dividend purposes consists of (i) all accrued in-
come, whether taxable or tax-exempt, plus discount earned on the Fund's assets,
less (ii) amortization of premium on such assets, accrued expenses directly at-
tributable to the Fund, and the general expenses or the expenses common to more
than one Fund (e.g., legal, administrative, accounting, and Directors' fees)
prorated to each Fund on the basis of its relative net assets.
The net investment income of the Funds is declared daily as a dividend to the
persons who are shareholders of the respective Funds at the opening of business
on the day of declaration. All such dividends are paid within ten days after
the end of each month or within seven days after the redemption of all of a
shareholder's Shares of a Fund. Net realized capital gains are distributed at
least annually.
All dividends and distributions paid on Shares held of record by the Invest-
ment Adviser and its affiliates or correspondent banks will be paid in cash.
Direct and Institutional Investors and Customers of other Shareholder Organiza-
tions will receive dividends and distributions in additional Shares of the Fund
on which the dividend or distribution is paid (as determined on the payable
date), unless they have requested in writing (received by MFSC at Master Fund's
address prior to the payment date) to receive dividends and distributions in
cash. Reinvested dividends and distributions receive the same tax treatment as
those paid in cash.
TAXES
FEDERAL
Each of the Funds qualified for its last taxable year as a "regulated invest-
ment company" under the Internal Revenue Code of 1986, as amended (the "Code").
Each Fund expects to so qualify in future years. Such qualification generally
relieves a Fund of liability for Federal income taxes to the extent its earn-
ings are distributed in accordance with the Code.
Qualification as a regulated investment company requires, among other things,
that a Fund distribute to its shareholders an amount equal to at least the sum
of 90% of its investment company taxable income and 90% of its exempt-interest
income (if any), net of certain deductions for each taxable year. In
26
<PAGE>
general, a Fund's investment company taxable income will be its taxable income
(including interest) subject to certain adjustments and excluding the excess of
any net long-term capital gain for the taxable year over the net short-term
capital loss, if any, for such year. Each Fund intends to distribute substan-
tially all of its investment company taxable income each year. Such dividends
will be taxable as ordinary income to a Fund's shareholders who are not cur-
rently exempt from Federal income taxes, whether such income is received in
cash or reinvested in additional Shares. (Federal income taxes for distribu-
tions to IRAs and qualified pension plans are deferred under the Code.) The
dividends received deduction for corporations will apply to such distributions
to the extent of the total qualifying dividends received by a Fund from domes-
tic corporations for the taxable year. It is anticipated that only a small part
(if any) of the dividends paid by a Fund will be eligible for the dividends re-
ceived deduction.
Distribution by a Fund of the excess of its net long- term capital gain over
its net short-term capital loss is taxable to shareholders as long-term capital
gain, regardless of how long the shareholder has held the Shares and whether
such gains are received in cash or reinvested in additional Shares. Such dis-
tributions are not eligible for the dividends received deduction.
Dividends declared in October, November or December of any year payable to
shareholders of record on a specified date in such months will be deemed to
have been received by shareholders and paid by a Fund on December 31 of such
year in the event such dividends are actually paid during January of the fol-
lowing year.
An investor considering buying Shares of a Fund on or just before the record
date of a dividend should be aware that the amount of the forthcoming dividend
payment, although in effect a return of capital, will be taxable to them.
A taxable gain or loss may be realized by a shareholder upon his redemption,
transfer or exchange of Shares depending upon the tax basis of such Shares and
their price at the time of redemption, transfer or exchange. If a shareholder
holds Shares for six months or less and during that time receives a capital
gain dividend on those Shares, any loss recognized on the sale or exchange of
those Shares will be treated as a long-term capital loss to the extent of the
capital gain dividend. Generally, a shareholder may include sales charges in-
curred upon the purchase of Shares in his tax basis for such Shares for the
purpose of determining gain or loss on a redemption, transfer or exchange of
such Shares. However, if the shareholder effects an exchange of such Shares for
Shares of another Fund within 90 days of the purchase and is able to reduce the
sales charges applicable to the new Shares (by virtue of the exchange privi-
lege), the amount equal to reduction may not be included in the tax basis of
the shareholder's exchanged Shares, but may be included (subject to the limita-
tion) in the tax basis of the new Shares.
The foregoing summarizes some of the important tax considerations generally
affecting the Funds and their shareholders and is not intended as a substitute
for careful tax planning. Accordingly, potential investors in the Funds should
consult their tax advisers with specific reference to their own tax situations.
Shareholders will be advised at least annually as to the Federal income tax
consequences of distributions made each year.
STATE AND LOCAL
Purchasers are advised to consult their tax advisers concerning the applica-
tion of state and local taxes, which may have different consequences from those
of the Federal income tax law described above.
MANAGEMENT OF THE FUNDS
The business and affairs of the Funds are managed under the direction of Mas-
ter Fund's Board of Directors. The Statement of Additional Information contains
the names of and general background information concerning Master Fund's direc-
tors.
27
<PAGE>
INVESTMENT ADVISER
United States Trust Company of New York serves as the Investment Adviser to
each Fund. U.S. Trust (and its predecessor) is a state-chartered bank and trust
company created by Special Act of the New York Legislature in 1853. The Invest-
ment Adviser provides trust and banking services to individuals, corporations,
and institutions both nationally and internationally, including investment man-
agement, estate and trust administration, financial planning, corporate trust
and agency banking, and personal and corporate banking. The Investment Adviser
is a member bank of the Federal Reserve System and the Federal Deposit Insur-
ance Corporation and is one of the twelve members of the New York Clearing
House Association.
On December 31, 1994, the Investment Adviser's Asset Management Group had ap-
proximately $33 billion in assets under management. The Investment Adviser,
which has its principal offices at 114 W. 47th Street, New York, New York
10036, is a subsidiary of U.S. Trust Corporation, a registered bank holding
company.
The Investment Adviser manages each Fund, makes decisions with respect to and
places orders for all purchases and sales of each Fund's portfolio securities,
and maintains records relating to such purchases and sales.
The Short-Term Government Securities Fund's portfolio manager, Charles E.
Rabus, is the person primarily responsible for the day-to-day management of the
Fund's investment portfolio. Mr. Rabus, a Vice President and Fixed Income Port-
folio Manager of U.S. Trust, has been with U.S. Trust since 1987 and has been
the Fund's portfolio manager since its inception.
The Intermediate-Term Managed Income and Managed Income Funds' portfolio man-
ager, Henry M. Milkewicz, is the person primarily responsible for the day-to-
day management of the Funds' investment portfolios. Mr. Milkewicz, a Senior
Vice President and Senior Fixed Income Portfolio Manager of U.S. Trust, has
been with U.S. Trust since 1986 and has been the Intermediate-Term Managed In-
come Fund's portfolio manager since its inception and the Managed Income Fund's
portfolio manager since 1986.
For the services provided and expenses assumed pursuant to the Investment Ad-
visory Agreements, the Investment Adviser is entitled to be paid a fee, com-
puted daily and paid monthly, at the annual rates of .30% of the average daily
net assets of the Short-Term Government Securities Fund, .35% of the average
daily net assets of the Intermediate-Term Managed Income Fund, and .75% of the
average daily net assets of the Managed Income Fund. The advisory fee rate pay-
able by the Managed Income Fund is higher than the rate payable by most mutual
funds. The Board of Directors believes based on information supplied to it by
the Investment Adviser that this fee is comparable to the rate paid by many
other funds with similar investment objectives and policies and is appropriate
for the Fund in light of its investment objective and policies. For the fiscal
year ended March 31, 1995, the Investment Adviser received advisory fees at the
effective annual rates of .25%, .33% and .63% of the average daily net assets
of the Short-Term Government Securities, Intermediate-Term Managed Income and
Managed Income Funds, respectively. For that same period, the Investment Ad-
viser waived advisory fees at the effective annual rates of .05%, .02% and .12%
of the average daily net assets of the Short-Term Government Securities, Inter-
mediate-Term Managed Income and Managed Income Funds, respectively.
From time to time, the Investment Adviser may waive (either voluntarily or
pursuant to applicable statutory expense limitations) all or a portion of the
advisory fees payable to it by a Fund, which waiver may be terminated at any
time. See "Management of the Funds--Service Organizations" for additional in-
formation on fee waivers.
28
<PAGE>
ADMINISTRATORS
MFSC and Federated Administrative Services serve as the Funds' administrators
(the "Administrators") and provide them with general administrative and opera-
tional assistance. The Administrators also serve as administrators of the
other portfolios of the Master Fund and Master Tax-Exempt Fund, which are also
advised by the Investment Adviser and distributed by the Distributor. For the
services provided to all portfolios of Master Fund and Master Tax-Exempt Fund
(except the International, Emerging Americas, Pacific/Asia and Pan European
Funds), the Administrators are entitled jointly to annual fees, computed daily
and paid monthly, based on the combined aggregate average daily net assets of
Master Fund and Master Tax-Exempt Fund (excluding the International, Emerging
Americas, Pacific/Asia and Pan European Funds) as follows:
<TABLE>
<CAPTION>
COMBINED AGGREGATE AVERAGE DAILY
NET ASSETS OF MASTER FUND
AND MASTER TAX-EXEMPT FUND
(EXCLUDING THE INTERNATIONAL, EMERGING AMERICAS,
PACIFIC/ASIA AND PAN EUROPEAN FUNDS)
AND MASTER TAX-EXEMPT FUND ANNUAL FEE
------------------------------------------------ ----------
<S> <C>
first $200 million................................................... .200%
next $200 million.................................................... .175%
over $400 million.................................................... .150%
</TABLE>
Administration fees payable to the Administrators by each portfolio of Master
Fund and Master Tax-Exempt Fund are allocated in proportion to their relative
average daily net assets at the time of determination. After these allocations
have been made, the Administrators are entitled jointly to an annual minimum
fee of $50,000 from each of the Short-Term Government Securities and Interme-
diate-Term Managed Income Funds. From time to time, the Administrators may
waive (either voluntarily or pursuant to applicable state expense limitations)
all or a portion of the administration fee payable to them by a Fund, which
waiver may be terminated at any time. See "Management of the Funds--Service
Organizations" for additional information on fee waivers. For the fiscal year
ended March 31, 1995, MFSC and Concord Holding Corporation ("Concord"), the
former co-administrators, received an aggregate administration fee (under the
same compensation arrangements noted above) at the effective annual rate of
.154% of the average daily net assets of each of the Short-Term Government Se-
curities, Intermediate-Term Managed Income and Managed Income Funds, respec-
tively. For the same period MFSC and Concord waived administration fees at the
effective annual rate of .010% of the average daily net assets of the Short-
Term Government Securities Fund.
SERVICE ORGANIZATIONS
Master Fund will enter into an agreement ("Servicing Agreement") with each
Service Organization requiring it to provide administrative support services
to its Customers beneficially owning Shares. As a consideration for the admin-
istrative services provided to Customers, a Fund will pay the Service Organi-
zation an administrative service fee at the annual rate of up to .40% of the
average daily net asset value of its Shares held by the Service Organization's
Customers. Such services, which are described more fully in the Statement of
Additional Information under "Management of the Funds-Service Organizations,"
may include assisting in processing purchase, exchange and redemption re-
quests; transmitting and receiving funds in connection with Customer orders to
purchase, exchange or redeem Shares; and providing periodic statements. Under
the terms of the Servicing Agreement, Service Organizations will be required
to provide to Customers a schedule of any fees that they may charge in connec-
tion with a Customer's investment. Until further notice, the Investment Ad-
viser and Administrators have voluntarily agreed to waive fees payable by a
Fund in an amount equal to administrative service fees payable by that Fund.
BANKING LAWS
Banking laws and regulations currently prohibit a bank holding company regis-
tered under the Federal Bank Holding Company Act of 1956 or any bank or non-
bank affiliate thereof from sponsoring, organizing or controlling a regis-
tered, open-end investment
29
<PAGE>
company continuously engaged in the issuance of its shares, and prohibit banks
generally from issuing, underwriting, selling or distributing securities such
as Shares of the Funds, but such banking laws and regulations do not prohibit
such a holding company or affiliate or banks generally from acting as invest-
ment adviser, transfer agent, or custodian to such an investment company, or
from purchasing shares of such company for and upon the order of customers. The
Investment Adviser, MFSC and certain Shareholder Organizations may be subject
to such banking laws and regulations. State securities laws may differ from the
interpretations of Federal law discussed in this paragraph and banks and finan-
cial institutions may be required to register as dealers pursuant to state law.
Should legislative, judicial, or administrative action prohibit or restrict
the activities of the Investment Adviser or other Shareholder Organizations in
connection with purchases of Fund Shares, the Investment Adviser and such
Shareholder Organizations might be required to alter materially or discontinue
the investment services offered by them to Customers. It is not anticipated,
however, that any resulting change in the Funds' method of operations would af-
fect their net asset values per Share or result in financial loss to any share-
holder.
DESCRIPTION OF CAPITAL STOCK
Master Fund was organized as a Maryland corporation on August 2, 1984. Cur-
rently, Master Fund has authorized capital of 35 billion shares of Common
Stock, $.001 par value per share, classified into 34 series of shares repre-
senting interests in 20 investment portfolios. Master Fund's Charter authorizes
the Board of Directors to classify or reclassify any class of shares of Master
Fund into one or more classes or series. Shares of Class D, Class S and Class T
Common Stock represent interests in the Managed Income, Short-Term Government
Securities and Intermediate-Term Managed Income Funds, respectively.
Each Share represents an equal proportionate interest in the particular Fund
with other shares of the Fund, and is entitled to such dividends and distribu-
tions out of the income earned on the assets belonging to such Fund as are de-
clared in the discretion of Master Fund's Board of Directors.
Shareholders are entitled to one vote for each full Share held, and fractional
votes for fractional Shares held, and will vote in the aggregate and not by
class, except as otherwise expressly required by law.
Certificates for Shares will not be issued unless expressly requested in writ-
ing to MFSC and will not be issued for fractional Shares.
As of July 11, 1995, U.S. Trust held of record substantially all of the Shares
in the Funds as agent or custodian for its customers, but did not own such
Shares beneficially because it did not have voting or investment discretion
with respect to such Shares.
CUSTODIAN AND TRANSFER AGENT
United States Trust Company of New York serves as the custodian of the Funds'
assets and as their transfer and dividend disbursing agent. Communications to
the custodian and transfer agent should be directed to United States Trust Com-
pany of New York, Mutual Funds Service Division, 770 Broadway, New York, New
York 10003-9598.
U.S. Trust has entered into an International Custodian Agreement with Morgan
Stanley Trust Company, 1 Pierrepont Plaza, Brooklyn, NY 11201, providing for
the custody of foreign securities held by the Funds.
U.S. Trust has also entered into a sub-transfer agency arrangement with MFSC,
73 Tremont Street, Boston, Massachusetts 02108-3913, pursuant to which MFSC
provides certain transfer agent, dividend disbursement and regsitrar services
to the Funds.
30
<PAGE>
PERFORMANCE AND YIELD INFORMATION
From time to time, in advertisements or in reports to shareholders, the per-
formance and yields of the Funds may be quoted and compared to those of other
mutual funds with similar investment objectives and to other relevant indexes
or to rankings prepared by independent services or other financial or industry
publications that monitor the performance of mutual funds. For example, the
performance of a Fund may be compared to data prepared by Lipper Analytical
Services, Inc., a widely recognized independent service which monitors the per-
formance of mutual funds.
Performance and yield data as reported in national financial publications, in-
cluding but not limited to Money Magazine, Forbes, Barron's, The Wall Street
Journal and The New York Times, or in publications of a local or regional na-
ture, may also be used in comparing the performance and yields of the Funds.
Each Fund may advertise its effective yield which is calculated by dividing
its average daily net investment income per Share during a 30-day (or one
month) base period identified in the advertisement by its maximum offering
price per Share on the last day of the period, and annualizing the result on a
semiannual basis.
From time to time, each Fund may advertise its performance by using "average
annual total return" over various periods of time. Such total return figure re-
flects the average percentage change in the value of an investment in a Fund
from the beginning date of the measuring period to the end of the measuring pe-
riod. Average total return figures will be given for the most recent one-year
period and may be given for other periods as well (such as from the commence-
ment of a Fund's operations, or on a year-by-year basis). Each Fund may also
use aggregate total return figures for various periods, representing the cumu-
lative change in the value of an investment in the Fund for the specific peri-
od. Both methods of calculating total return assume that dividends and capital
gain distributions made by a Fund during the period are reinvested in Fund
Shares and also reflect the maximum sales load charged by the Fund.
Performance and yields will fluctuate and any quotation of performance and
yield should not be considered as representative of a Fund's future perfor-
mance. Since yields fluctuate, yield data cannot necessarily be used to compare
an investment in the Funds with bank deposits, savings accounts and similar in-
vestment alternatives which often provide an agreed or guaranteed fixed yield
for a stated period of time. Shareholders should remember that the performance
and yield are generally functions of the kind and quality of the instruments
held in a portfolio, portfolio maturity, operating expenses, and market condi-
tions. Any fees charged by the Shareholder Organizations with respect to ac-
counts of Customers that have invested in Shares will not be included in calcu-
lations of yield and performance.
MISCELLANEOUS
Shareholders will receive unaudited semiannual reports describing the Funds'
investment operations and annual financial statements audited by the Funds' in-
dependent auditors.
As used in this Prospectus, a "vote of the holders of a majority of the out-
standing shares" of Master Fund or a particular Fund means, with respect to the
approval of an investment advisory agreement or a change in a fundamental in-
vestment policy, the affirmative vote of the lesser of (a) more than 50% of the
outstanding shares of Master Fund or such Fund, or (b) 67% or more of the
shares of Master Fund or such Fund present at a meeting if more than 50% of the
outstanding shares of Master Fund or such Fund are represented at the meeting
in person or by proxy.
Inquiries regarding any of the Funds may be directed to the Distributor at the
address or telephone number listed under "Distributor."
31
<PAGE>
INSTRUCTIONS FOR NEW ACCOUNT APPLICATION
OPENING YOUR ACCOUNT:
Complete the Application(s) and mail to:
UST Master Funds
c/o Mutual Funds Service Company
P.O. Box 2798
Boston, MA 02208-2798
FOR OVERNIGHT DELIVERY: send to:
UST Master Funds
c/o Mutual Funds Service Company--Transfer Agent
73 Tremont Street
Boston, MA 02108-3913
Please enclose with the Application(s) your check made payable to the "UST
Master Funds" in the amount of your investment.
For direct wire purchases please refer to the section of the Prospectus enti-
tled "How to Purchase and Redeem Shares--Purchase Procedures."
MINIMUM INVESTMENTS:
Except as provided in the Prospectus, the minimum initial investment is $500
per Fund; subsequent investments must be in the minimum amount of $50 per Fund.
Investments may be made in excess of these minimums.
REDEMPTIONS:
Shares can be redeemed in any amount and at any time in accordance with pro-
cedures described in the Prospectus. In the case of shares recently purchased
by check, redemption proceeds will not be made available until the transfer
agent is reasonably assured that the check has been collected in accordance
with applicable banking regulations.
Certain legal documents will be required from corporations or other organiza-
tions, executors and trustees, or if redemption is requested by anyone other
than the shareholder of record. Written redemption requests in excess of
$50,000 per account must be accompanied by signature guarantees.
SIGNATURES: Please be sure to sign the Application(s).
If the shares are registered in the name of:
- an individual, the individual should sign.
- joint tenants, both tenants should sign.
- a custodian for a minor, the custodian should sign.
- a corporation or other organization, an authorized officer should sign
(please indicate corporate office or title).*
- a trustee or other fiduciary, the fiduciary or fiduciaries should sign
(please indicate capacity).*
* A corporate resolution or appropriate certificate may be required.
QUESTIONS:
If you have any questions regarding the Application or redemption require-
ments, please contact the transfer agent at (800) 446-1012 between 9:00 a.m.
and 5:00 p.m. (Eastern Time).
32
<PAGE>
[LOGO OF UST MUTUAL FUNDS SERVICE COMPANY
MASTER FUNDS CLIENT SERVICES
APPEARS HERE] P.O. Box 2798
Boston, MA 02208-2798
(800) 446-1012 NEW ACCOUNT APPLICATION
-----------------------------------------------------------------------------
-----------------------------------------------------------------------------
ACCOUNT REGISTRATION
-----------------------------------------------------------------------------
[_] Individual [_] Joint Tenants [_] Trust [_] Gift/Transfer to Minor
[_] Other ______________
Note: Joint tenant registration will be as "joint tenants
with right of survivorship" unless otherwise specified. Trust
registrations should specify name of the trust, trustee(s),
beneficiary(ies), and the date of the trust instrument.
Registration for Uniform Gifts/Transfers to Minors should be
in the name of one custodian and one minor and include the
state under which the custodianship is created (using the
minor's Social Security Number ("SSN")). For IRA accounts a
different application is required.
------------------------------ -----------------------------
Name(s) (please print) Social Security # or Taxpayer
Indentification #
( )
------------------------------ -----------------------------
Name Telephone #
------------------------------
Address
[_] U.S. Citizen
------------------------------ [_] Other (specify)____________
City/State/Zip
-----------------------------------------------------------------------------
FUND SELECTION (THE MINIMUM INITIAL AND SUBSEQUENT INVESTMENT IS $500 PER
FUND AND $50 PER FUND, RESPECTIVELY. MAKE CHECKS PAYABLE TO "UST MASTER
FUNDS.")
-----------------------------------------------------------------------------
Initial Investment
[_] Short-Term Government
Securities Fund $ ___________823
[_] Managed Income Fund $ ___________805
Initial Investment
[_] Intermediate-Term Managed
Income Fund $ ___________824
[_] Other _____________________ $ ___________
Total Initial Investment: $ ___________
NOTE: If investing by wire, you must obtain a Bank Wire Control Number. To
do so, please call (800) 446-1012 and ask for the Wire Desk.
A. BY MAIL: Enclosed is a check in the amount of $ ____ payable to "UST
Master Funds."
B. BY WIRE: A bank wire in the amount of $ ____ has been sent to the Fund
from
------------------ ---------------------
Name of Bank Wire Control Number
CAPITAL GAIN AND DIVIDEND DISTRIBUTIONS: All capital gain and dividend
distributions will be reinvested in additional shares unless appropriate
boxes below are checked:
All dividends are to be [_] reinvested [_] paid in cash
All capital gains are to be [_] reinvested [_] paid in cash
-----------------------------------------------------------------------------
ACCOUNT PRIVILEGES
-----------------------------------------------------------------------------
TELEPHONE EXCHANGE AND REDEMPTION
[_] I/We appoint MFSC as my/our agent to act upon instructions received by
telephone in order to effect the telephone exchange and redemption
privileges. I/We hereby ratify any instructions given pursuant to this
authorization and agree that Master Fund, Master Tax-Exempt Fund, MFSC and
their directors, officers and employees will not be liable for any loss,
liability, cost or expense for acting upon instructions believed to be
genuine and in accordance with the procedures described in the then current
Prospectus. To the extent that Master Fund and Master Tax-Exempt Fund fail
to use reasonable procedures as a basis for their belief, they or their
service contractors may be liable for instructions that prove to be
fraudulent or unauthorized.
I/We further acknowledge that it is my/our responsibility to read the
Prospectus of any Fund into which I/we exchange.
[_] I/We do not wish to have the ability to exercise telephone redemption
and exchange privileges. I/We further understand that all exchange and
redemption requests must be in writing.
SPECIAL PURCHASE AND REDEMPTION PLANS
I/We have completed and attached the Supplemental Application for:
[_] Automatic Investment Plan
[_] Systematic Withdrawal Plan
AUTHORITY TO TRANSMIT REDEMPTION PROCEEDS TO PRE-DESIGNATED ACCOUNT.
I/We hereby authorize MFSC to act upon instructions received by telephone to
withdraw $1,000 or more from my/our account in the UST Master Funds and to
wire the amount withdrawn to the following commercial bank account. I/We
understand that MFSC charges an $8.00 fee for each wire redemption, which
will be deducted from the proceeds of the redemption.
Title on Bank Account*____________________________________________________
Name of Bank _____________________________________________________________
Bank A.B.A. Number____________________ Account Number ____________________
Bank Address _____________________________________________________________
City/State/Zip ___________________________________________________________
(attach voided check here)
A corporation, trust or partnership must also submit a "Corporate
Resolution" (or "Certificate of Partnership") indicating the names and
titles of officers authorized to act on its behalf.
* TITLE ON BANK AND FUND ACCOUNT MUST BE IDENTICAL.
<PAGE>
------------------------------------------------------------------
RIGHTS OF ACCUMULATION
------------------------------------------------------------------
To qualify for Rights of Accumulation, you must complete this
section, listing all of your accounts including those in your
spouse's name, joint accounts and accounts held for your
minor children. If you need more space, please attach a
separate sheet.
[_] I/We qualify for the Rights of Accumulation sales charge
discount described in the Prospectus and Statement of
Additional Information.
[_] I/We own shares of more than one Fund distributed by
Edgewood Services, Inc. Listed below are the numbers of
each of my/our Shareholder Accounts.
[_] The registration of some of my/our shares differs from that
shown on this application. Listed below are the account
number(s) and full registration(s) in each case.
LIST OF OTHER UST MASTER FUND ACCOUNTS:
______________________ _______________________________________
______________________ _______________________________________
______________________ _______________________________________
ACCOUNT NUMBER ACCOUNT REGISTRATIONS
------------------------------------------------------------------
LETTER OF INTENT
------------------------------------------------------------------
[_] I agree to the Letter of Intent provisions set forth in
the Prospectus. Although I am not obligated to purchase, and
Master Fund is not obligated to sell, I intend to invest,
over a 13-month period beginning on , 19 , an aggregate
amount in Eligible Funds of Master Fund and Master Tax-Exempt
Fund at least equal to (check appropriate box):
[_] $50,000 [_] $100,000 [_] $250,000 [_] $500,000
[_] $1,000,000 [_] $2,000,000
By signing this application, I hereby authorize MFSC to
redeem an appropriate number of shares held in escrow to pay
any additional sales loads payable in the event that I do not
fulfill the terms of this Letter of Intent.
------------------------------------------------------------------
AGREEMENT AND SIGNATURES
------------------------------------------------------------------
By signing this application, I/we hereby certify under
penalty of perjury that the information on this application
is complete and correct and that as required by Federal law:
[_] I/We certify that (1) the number(s) shown on this form
is/are the correct taxpayer identification number(s) and (2)
I/we are not subject to backup withholding either because
I/we have not been notified by the Internal Revenue Service
that I/we are subject to backup withholding, or the IRS has
notified me/us that I am/we are no longer subject to backup
withholding. (NOTE: IF ANY OR ALL OF PART 2 IS NOT TRUE,
PLEASE STRIKE OUT THAT PART BEFORE SIGNING.)
[_] If no taxpayer identification number ("TIN") or SSN has
been provided above, I/we have applied, or intend to apply,
to the IRS or the Social Security Administration for a TIN or
a SSN, and I/we understand that if I/we do not provide this
number to MFSC within 60 days of the date of this
application, or if I/we fail to furnish my/our correct SSN or
TIN, I/we may be subject to a penalty and a 31% backup
withholding on distributions and redemption proceeds. (Please
provide this number on Form W-9. You may request the form by
calling MFSC at the number listed above).
I/We represent that I am/we are of legal age and capacity to
purchase shares of the UST Master Funds. I/We have received,
read and carefully reviewed a copy of the appropriate Fund's
current Prospectus and agree to its terms and by signing
below I/we acknowledge that neither the Fund nor the
Distributor is a bank and that Fund Shares are not deposits
or obligations of, or guaranteed or endorsed by, United
States Trust Company of New York, its parent and affiliates
and the Shares are not federally insured by, guaranteed by,
obligations of or otherwise supported by the U.S. Government,
the Federal Deposit Insurance Corporation, the Federal
Reserve Board, or any other governmental agency; and that an
investment in the Funds involves investment risks, including
possible loss of principal amount invested.
X ___________________________ Date __________________________
Owner Signature
X ___________________________ Date __________________________
Co-Owner Signature
Sign exactly as name(s) of registered owner(s) appear(s) above
(including legal title if signing for a corporation, trust
custodial account, etc.).
------------------------------------------------------------------
FOR USE BY AUTHORIZED AGENT (BROKER/DEALER) ONLY
------------------------------------------------------------------
We hereby submit this application for the purchase of shares
in accordance with the terms of our selling agreement with
UST Distributors, Inc., and with the Prospectus and Statement
of Additional Information of each Fund purchased. We agree to
notify MFSC of any purchases made under the Letter of Intent
or Rights of Accumulation.
----------------------------- -------------------------------
Investment Dealer's Name Source of Business Code
----------------------------- -------------------------------
Main Office Address Branch Number
----------------------------- -------------------------------
Representative's Number Representative's Name
----------------------------- -------------------------------
Branch Address Telephone
----------------------------- -------------------------------
Investment Dealer's Title
Authorized Signature
<PAGE>
[LOGO OF UST MUTUAL FUNDS SERVICE COMPANY
MASTER FUNDS CLIENT SERVICES SUPPLEMENTAL APPLICATION
APPEARS HERE] P.O. Box 2798 SPECIAL INVESTMENT AND
Boston, MA 02208-2798 WITHDRAWAL OPTIONS
(800) 446-1012
-----------------------------------------------------------------------------
-----------------------------------------------------------------------------
ACCOUNT REGISTRATION PLEASE SUPPLY THE FOLLOWING INFORMATION EXACTLY AS IT
APPEARS ON THE FUND'S RECORD.
-----------------------------------------------------------------------------
Fund Name __________________ Account Number _________________
Owner Name _________________ Social Security or Taxpayer ID
Street Address _____________ Number _________________________
Resident City, State, Zip Code __________
of [_] U.S. [_] Other ____ [_] Check here if this is a change of address
-----------------------------------------------------------------------------
DISTRIBUTION OPTIONS (DIVIDENDS AND CAPITAL GAINS WILL BE REINVESTED
UNLESS OTHERWISE INDICATED)
-----------------------------------------------------------------------------
A. CAPITAL GAIN AND DIVIDEND DISTRIBUTIONS: All capital gain and dividend
distributions will be reinvested in additional shares unless appropriate
boxes below are checked: All dividends are to be [_] reinvested
[_] paid in cash
All capital gains are to be [_] reinvested
[_] paid in cash
B. PAYMENT ORDER: Complete only if distribution checks are to be payable
to another party. Make distribution checks payable to:
Name of Your Bank ______________
Name _______________________ Bank Account Number ____________
Address ____________________ Address of Bank ________________
City, State, Zip Code ________________________________________
C. DISTRIBUTIONS REINVESTED-CROSS FUNDS: Permits all distributions from
one Fund to be automatically reinvested into another identically-
registered UST Master Fund. (NOTE: You may NOT open a new Fund account
with this option.) Transfer all distributions earned:
From: ______________________ Account No. ____________________
(Fund)
To: ________________________ Account No. ____________________
(Fund)
-----------------------------------------------------------------------------
AUTOMATIC INVESTMENT PLAN [_] YES [_] NO
-----------------------------------------------------------------------------
I/We hereby authorize MFSC to debit my/our personal checking account on
the designated dates in order to purchase shares in the Fund indicated at
the top of this application at the applicable public offering price
determined on that day.
[_] Monthly on the 1st day [_] Monthly on the 15th day [_] Monthly on both
the 1st and 15th
days
Amount of each debit (minimum $50 per Fund) $ ________________
NOTE: A Bank Authorization Form (below) and a voided personal check must
accompany the Automatic Investment Plan application.
------------------------------------------------------------------------------
------------------------------------------------------------------------------
UST MASTER FUNDS
CLIENT SERVICES AUTOMATIC INVESTMENT PLAN
-----------------------------------------------------------------------------
-----------------------------------------------------------------------------
BANK AUTHORIZATION
-----------------------------------------------------------------------------
----------------------- ------------------------ --------------------------
Bank Name Bank Address Bank Account Number
I/We authorize you, the above named bank, to debit my/our
account for amounts drawn by MFSC, acting as my agent for the
purchase of Fund shares. I/We agree that your rights in
respect to each withdrawal shall be the same as if it were a
check drawn upon you and signed by me/us. This authority
shall remain in effect until revoked in writing and received
by you. I/We agree that you shall incur no liability when
honoring debits, except a loss due to payments drawn against
insufficient funds. I/We further agree that you will incur no
liability to me if you dishonor any such withdrawal. This
will be so even though such dishonor results in the
cancellation of that purchase.
---------------------------- --------------------------------
Account Holder's Name Joint Account Holder's Name
X ---------------- --------- X ------------------ -----------
Signature Date Signature Date
<PAGE>
--------------------------------------------------------------------------------
SYSTEMATIC WITHDRAWAL PLAN [_] YES [_] NO NOT AVAILABLE FOR IRA'S
--------------------------------------------------------------------------------
AVAILABLE TO SHAREHOLDERS WITH ACCOUNT BALANCES OF $10,000 OR MORE.
I/We hereby authorize MFSC to redeem the necessary number of shares from
my/our UST Master Fund Account on the designated dates in order to make the
following periodic payments:
[_] Monthly on the 24th day [_] Quarterly on the 24th day of
January, April, July and October
[_] Other______
(This request for participation in the Plan must be received by the 18th day
of the month in which you wish withdrawals to begin.)
Amount of each check ($100 minimum) $______________________
Please make check payable to: Recipient ________________________
(To be completed only if redemption
proceeds to be paid to other than Street Address ___________________
account holder of record or mailed
to address other than address of City, State, Zip Code ____________
record)
NOTE: If recipient of checks is not the registered shareholder, signature(s)
----
below must be guaranteed. A corporation, trust or partnership must also submit
a "Corporate Resolution" (or "Certification of Partnership") indicating the
names and titles of officers authorized to act on its behalf.
--------------------------------------------------------------------------------
AGREEMENT AND SIGNATURES
--------------------------------------------------------------------------------
The investor(s) certifies and agrees that the certifications, authorizations,
directions and restrictions contained herein will continue until MFSC receives
written notice of any change or revocation. Any change in these instructions
must be in writing with all signatures guaranteed (if applicable).
Date ______________________
X X
--------------------------------------- -------------------------------------
Signature Signature
--------------------------------------- -------------------------------------
Signature Guarantee* (if applicable) Signature Guarantee* (if applicable)
X X
--------------------------------------- -------------------------------------
Signature Signature
--------------------------------------- -------------------------------------
Signature Guarantee* (if applicable) Signature Guarantee* (if applicable)
*ELIGIBLE GUARANTORS: An Eligible Guarantor institution is a bank, trust
company, broker, dealer, municipal or government securities broker or dealer,
credit union, national securities exchange, registered securities association,
clearing agency or savings association, provided that such institution is a
participant in STAMP, the Securities Transfer Agents Medallion Program.
--------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PROSPECTUS SUMMARY......................................................... 2
EXPENSE SUMMARY............................................................ 3
FINANCIAL HIGHLIGHTS....................................................... 5
INVESTMENT OBJECTIVES AND POLICIES......................................... 8
PORTFOLIO INSTRUMENTS AND OTHER INVESTMENT INFORMATION..................... 10
INVESTMENT LIMITATIONS..................................................... 14
PRICING OF SHARES.......................................................... 16
HOW TO PURCHASE AND REDEEM SHARES.......................................... 17
INVESTOR PROGRAMS.......................................................... 23
DIVIDENDS AND DISTRIBUTIONS................................................ 26
TAXES...................................................................... 26
MANAGEMENT OF THE FUNDS.................................................... 27
DESCRIPTION OF CAPITAL STOCK............................................... 30
CUSTODIAN AND TRANSFER AGENT............................................... 30
PERFORMANCE AND YIELD INFORMATION.......................................... 31
MISCELLANEOUS.............................................................. 31
INSTRUCTIONS FOR NEW ACCOUNT APPLICATION................................... 32
</TABLE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESEN-
TATIONS NOT CONTAINED IN THIS PROSPECTUS, OR IN THE FUNDS' STATEMENT OF ADDI-
TIONAL INFORMATION INCORPORATED HEREIN BY REFERENCE, IN CONNECTION WITH THE OF-
FERING MADE BY THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REP-
RESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY MASTER FUND
OR BY ITS DISTRIBUTOR. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING BY MAS-
TER FUND OR BY ITS DISTRIBUTORS IN ANY JURISDICTION IN WHICH SUCH OFFERING MAY
NOT LAWFULLY BE MADE.
USTFXIP894
[LOGO OF UST MASTER FUNDS, INC. APPEARS HERE]
MASTER FUNDS, INC.
SHORT-TERM GOVERNMENT SECURITIES FUND
INTERMEDIATE-TERM MANAGED INCOME FUND
MANAGED INCOME FUND
SERVICE SHARES
Prospectus
August 1, 1995
<PAGE>
CROSS-REFERENCE SHEET
UST MASTER FUNDS, INC.
(EQUITY FUND, INCOME AND GROWTH FUND, LONG-TERM SUPPLY OF ENERGY FUND,
PRODUCTIVITY ENHANCERS FUND, ENVIRONMENTALLY-RELATED PRODUCTS AND SERVICES
FUND, AGING OF AMERICA, COMMUNICATION AND ENTERTAINMENT FUND, BUSINESS AND
INDUSTRIAL RESTRUCTURING FUND, GLOBAL COMPETITORS FUND, EARLY LIFE CYCLE FUND)
<TABLE>
<CAPTION>
FORM N-1A, PART A, ITEM PROSPECTUS CAPTION
----------------------- ------------------
<C> <S> <C>
1. Cover Page.......................... Cover Page
2. Synopsis............................ Prospectus Summary and
Expense Summary
3. Financial Highlights................ Selected Per Share Data and Ratios;
Performance Information
4. General Description of Registrant... Prospectus Summary; Investment
Objectives and Policies; Portfolio
Instruments and Other Investment
Information; Investment Limitations;
Description of Capital Stock
5. Management of the Fund.............. Management of the Fund; Custodian
and Transfer Agent
6. Capital Stock and Other Securities.. How to Purchase and Redeem Shares;
Dividends and Distributions; Taxes;
Description of Capital Stock;
Miscellaneous
7. Purchase of Securities Being Pricing of Shares; How to Purchase
Offered............................ and Redeem Shares; Investor Programs
8. Redemption or Repurchase............ How to Purchase and Redeem Shares
9. Pending Legal Proceedings........... Inapplicable
</TABLE>
<PAGE>
[LOGO OF UST
APPEARS HERE]
A Management Investment Company MASTER FUNDS, INC.
-------------------------------------------------------------------------------
Equity Funds For initial purchase information, current
prices, performance information and existing
73 Tremont Street account information, call (800) 446-1012.
Boston, MA 02108-3913 (From overseas, call (617) 557-8280.)
-------------------------------------------------------------------------------
This Prospectus describes the Service Shares ("Shares") offered by several
separate portfolios offered to investors by UST Master Funds, Inc. ("Master
Fund"), an open-end, management investment company. Master Fund also issues an
additional series of shares in the portfolios ("Distribution Shares"), which
are offered under a separate prospectus. Each portfolio (individually, a
"Fund" and collectively, the "Funds") has its own investment objective and
policies as follows:
EQUITY FUND seeks long-term capital appreciation by investing in companies
believed by the Investment Adviser to represent good long-term values not cur-
rently recognized in the market prices of their securities.
INCOME AND GROWTH FUND seeks moderate current income with capital apprecia-
tion as a secondary goal by investing in common stock, preferred stock and se-
curities convertible into common stock.
LONG-TERM SUPPLY OF ENERGY FUND seeks long-term capital appreciation by in-
vesting in companies which the Investment Adviser believes will benefit from
the availability, development and delivery of secure hydrocarbon and other en-
ergy sources.
PRODUCTIVITY ENHANCERS FUND seeks long-term capital appreciation by investing
in companies which the Investment Adviser believes will benefit from their
roles as innovators, developers and suppliers of goods and services which en-
hance service and manufacturing productivity or companies that are most effec-
tive at obtaining and applying productivity enhancement developments.
ENVIRONMENTALLY-RELATED PRODUCTS AND SERVICES FUND seeks long-term capital
appreciation by investing in companies which the Investment Adviser believes
will benefit from their provision of products, technologies and services re-
lated to conservation, protection and restoration of the environment.
AGING OF AMERICA FUND seeks long-term capital appreciation by investing in
companies which the Investment Adviser believes will benefit from the changes
occurring in the demographic structure of the U.S. population, particularly
its growing population of individuals over the age of 40.
COMMUNICATION AND ENTERTAINMENT FUND seeks long-term capital appreciation by
investing in companies which the Investment Adviser believes will benefit from
the technological and international transformation of the communications and
entertainment industries, particularly the convergence of information, commu-
nication and entertainment media.
BUSINESS AND INDUSTRIAL RESTRUCTURING FUND seeks long-term capital apprecia-
tion by investing in companies which the Investment Adviser believes will ben-
efit from their restructuring or redeployment of assets and operations in or-
der to become more competitive or profitable.
GLOBAL COMPETITORS FUND seeks long-term capital appreciation by investing
primarily in U.S.-based companies which the Investment Adviser believes will
benefit from their position as effective and strong competitors on a global
basis.
EARLY LIFE CYCLE FUND seeks long-term capital appreciation by investing in
smaller companies in the earlier stages of their development or larger or more
mature companies engaged in new and higher growth potential operations.
Each of the Funds is sponsored and distributed by Edgewood Services, Inc. and
advised by United States Trust Company of New York (the "Investment Adviser"
or "U.S. Trust").
This Prospectus sets forth concisely the information about the Funds that a
prospective investor should consider before investing. Investors should read
this Prospectus and retain it for future reference. A Statement of Additional
Information dated August 1, 1995 and containing additional information about
the Funds has been filed with the Securities and Exchange Commission. The cur-
rent Statement of Additional Information is available to investors without
charge by writing to Master Fund at its address shown above or by calling
(800) 446-1012. The Statement of Additional Information, as it may be supple-
mented from time to time, is incorporated by reference in its entirety into
this Prospectus.
SHARES IN THE FUNDS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR EN-
DORSED BY, UNITED STATES TRUST COMPANY OF NEW YORK, ITS PARENT OR AFFILIATES
AND THE SHARES ARE NOT FEDERALLY INSURED BY, GUARANTEED BY, OBLIGATIONS OF OR
OTHERWISE SUPPORTED BY THE U.S. GOVERNMENT, THE FEDERAL DEPOSIT INSURANCE COR-
PORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER GOVERNMENTAL AGENCY.
AN INVESTMENT IN THE FUNDS INVOLVES INVESTMENT RISKS, INCLUDING POSSIBLE LOSS
OF PRINCIPAL AMOUNT INVESTED.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE AC-
CURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
August 1, 1995
<PAGE>
PROSPECTUS SUMMARY
UST MASTER FUNDS, INC. is an investment company offering various diversified
investment portfolios with differing objectives and policies. Founded in 1984,
Master Fund currently offers 20 Funds with combined assets of approximately
$2.5 billion. See "Description of Capital Stock."
INVESTMENT ADVISER: United States Trust Company of New York ("U.S. Trust")
serves as the Funds' investment adviser. U.S. Trust whose predecessor was
founded in 1853, offers a variety of specialized financial and fiduciary serv-
ices to high-net worth individuals, institutions and corporations. Master Fund
offers investors access to U.S. Trust's services. See "Management of the
Funds--Investment Adviser."
INVESTMENT OBJECTIVES AND POLICIES: Generally, each Fund is a diversified in-
vestment portfolio which invests in equity securities. The Income and Growth
Fund also may invest significantly in bonds. The Funds' investment objectives
and policies are summarized on the cover and explained in greater detail later
in this Prospectus. See "Investment Objectives and Policies," "Portfolio In-
struments and Other Investment Information," and "Investment Limitations."
HOW TO INVEST: The Funds' Shares are offered at their public offering price,
i.e., their net asset value plus a sales load which is subject to substantial
reductions for large purchases and programs for accumulation. The sales load is
not applicable to investors making their investments through a variety of in-
stitutions, such as U.S. Trust Company, other banks and trust companies. See
"How to Purchase and Redeem Shares."
The minimum to start an account is $500 per Fund, with a minimum of $50 per
Fund for subsequent investments. The easiest way to invest is to complete the
account application which accompanies this Prospectus and to send it with a
check to the address noted on the application. Investors may also invest by
wire and through investment dealers or institutional investors with appropriate
sales agreements with Master Fund. See "How to Purchase and Redeem Shares."
HOW TO REDEEM: Redemptions may be requested directly from Master Fund by
mail, wire or telephone. Investors investing through another institution should
request redemptions through their Shareholder Organization. See "How to Pur-
chase and Redeem Shares."
INVESTMENT RISKS AND CHARACTERISTICS: Generally, each Fund is subject to mar-
ket and industry risk. Market risk is the possibility that stock prices will
decline over short or even extended periods. The stock markets tend to be cy-
clical, with periods of generally rising prices and periods of generally de-
clining prices. These cycles will affect the values of each Fund. In addition,
the Long-Term Supply of Energy Fund will normally concentrate its investments
in the crude oil, petroleum and natural gas industry. This Fund will be suscep-
tible to industry risk, the possibility that a particular group of stocks will
decline in price due to industry-specific developments. Because the Funds may
invest in securities of foreign issuers, they are subject to the risks of fluc-
tuations of the value of foreign currency relative to the U.S. dollar and other
risks associated with such investments. Because the Income and Growth Fund also
invests in bonds and other fixed-income securities, it will also be affected
directly by fluctuations in interest rates and the credit markets. Investments
in non-investment grade obligations may subject the Income and Growth Fund to
increased risk of loss upon default. Such securities are generally unsecured,
are often subordinated debt and are often issued by entities with high levels
of indebtedness and that are more sensitive to adverse economic conditions. Al-
though each Fund generally seeks to invest for the long term, each Fund may en-
gage in short-term trading of portfolio securities. A high rate of portfolio
turnover may involve correspondingly greater transaction costs which must be
borne directly by a Fund and ultimately by its shareholders. Investment in the
Funds should not be considered a complete investment program. See "Investment
Objectives and Policies."
2
<PAGE>
EXPENSE SUMMARY
<TABLE>
<CAPTION>
LONG-TERM PRODUCTIVITY ENVIRONMENTALLY-
EQUITY INCOME AND SUPPLY OF ENHANCERS RELATED PRODUCTS
FUND GROWTH FUND ENERGY FUND FUND AND SERVICES FUND
-------- ----------------- -------------- ------------ -----------------
<S> <C> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION
EXPENSES
Maximum Sales Load (as a
percentage of offering
price)................. 4.50% 4.50% 4.50% 4.50% 4.50%
Sales Load on Reinvested
Dividends.............. None None None None None
Deferred Sales Load..... None None None None None
Redemption Fees/1/...... None None None None None
Exchange Fees........... None None None None None
ANNUAL FUND OPERATING
EXPENSES FOR SERVICE
SHARES (AS A PERCENTAGE
OF AVERAGE NET ASSETS)
Advisory Fees (after fee
waivers)/2/............ .72% .72% .42% .47% 0%
12b-1 Fees.............. None None None None None
Other Operating Expenses
Administrative Servic-
ing Fee............... .03% .03% .03% .03% .04%
Other Expenses/2/ (af-
ter fee waivers)...... .30% .31% .53% .49% .95%
Total Fund Operating Ex-
penses (after fee waiv-
ers)/2/ ............... 1.05% 1.06% .98% .99% .99%
<CAPTION>
BUSINESS
AGING OF COMMUNICATION AND INDUSTRIAL GLOBAL
AMERICA AND ENTERTAINMENT RESTRUCTURING COMPETITORS EARLY LIFE
FUND FUND FUND FUND CYCLE FUND
-------- ----------------- -------------- ------------ -----------------
<S> <C> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION
EXPENSES
Maximum Sales Load (as a
percentage of offering
price)................. 4.50% 4.50% 4.50% 4.50% 4.50%
Sales Load on Reinvested
Dividends.............. None None None None None
Deferred Sales Load..... None None None None None
Redemption Fees/1/ ..... None None None None None
Exchange Fees........... None None None None None
ANNUAL FUND OPERATING
EXPENSES FOR SERVICE
SHARES (AS A PERCENTAGE
OF AVERAGE NET ASSETS)
Advisory Fees (after fee
waivers)/2/ ........... .44% .53% .52% .50% .52%
12b-1 Fees.............. None None None None None
Other Operating Expenses
Administrative Servic-
ing Fee............... .03% .03% .02% .02% .05%
Other Expenses/2/ (af-
ter fee waivers)...... .52% .42% .44% .45% .39%
Total Fund Operating Ex-
penses (after fee waiv-
ers)/2/ ............... .99% .98% .98% .97% .96%
</TABLE>
-------
1. The Fund's transfer agent imposes a direct $8.00 charge on each wire re-
demption by noninstitutional (i.e. individual) investors which is not re-
flected in the expense ratios presented herein. Shareholder organizations
may charge their customers transaction fees in connection with redemptions.
See "Redemption Procedures."
2. The Investment Adviser and Administrators may, from time to time, voluntar-
ily waive part of their respective fees, which waivers may be terminated at
any time. Until further notice, the Investment Adviser and/or Administra-
tors intend to voluntarily waive fees in an amount equal to the Administra-
tive Servicing Fee; and to further waive fees and reimburse expenses to the
extent necessary for each of the Long-Term Supply of Energy, Productivity
Enhancers, Environmentally-Related Products and Services, Aging of America,
Communication and Entertainment, Business and Industrial Restructuring,
Global Competitors and Early Life Cycle Funds (collectively, the "Theme
Funds"), respectively, to maintain an annual expense ratio of not more than
.99%. Without such fee waivers, "Advisory Fees" would be .75%, .75%, .60%,
.60%, .60%, .60%, .60%, .60%, .60% and .60%, total operating expenses would
be 1.08%, 1.09%, 1.35%, 1.21%, 2.42%, 1.26%, 1.06%, 1.08%, 1.18% and 1.04%
for the Equity, Income and Growth, Long-Term Supply of Energy, Productivity
Enhancers, Environmentally-Related Products and Services, Aging of America,
Communication and Entertainment, Business and Industrial Restructuring,
Global Competitors and Early Life Cycle Funds, respectively, and "Other Ex-
penses" for Service Shares would be .72%, .58%, 1.78%, .63%, .43%, .46% and
.56% for the Long-Term Supply of Energy, Productivity Enhancers, Environ-
mentally-Related Products and Services, Aging of America, Communication and
Entertainment, Business and Industrial Restructuring and Global Competitors
Funds, respectively.
3
<PAGE>
Example: You would pay the following expenses on a $1,000 investment, assuming
(1) 5% annual returns and (2) redemption of your investment at the end of the
following periods:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
Equity Fund.................................... $55 $77 $100 $167
Income and Growth Fund......................... 55 77 101 169
Long-Term Supply of Energy Fund................ 55 75 97 160
Productivity Enhancers Fund.................... 55 75 97 161
Environmentally-Related Products and Services
Fund.......................................... 55 75 97 161
Aging of America Fund.......................... 55 75 97 161
Communication and Entertainment Fund........... 55 75 97 160
Business and Industrial Restructuring Fund..... 55 75 97 160
Global Competitors Fund........................ 54 75 96 159
Early Life Cycle Fund.......................... 54 74 96 158
</TABLE>
The foregoing expense summary and example (based on the maximum sales load
payable on the Shares) are intended to assist investors in understanding the
costs and expenses that an investor in Service Shares of the Funds will bear
directly or indirectly. The expense summary sets forth advisory and other ex-
penses payable with respect to Service Shares of the Funds for the fiscal year
ended March 31, 1995. For more complete descriptions of the Funds' operating
expenses, see "Management of the Funds" in this Prospectus and the financial
statements and notes incorporated by reference in the Statement of Additional
Information.
THE FOREGOING EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE EXPENSES OR RATE OF RETURN. ACTUAL EXPENSES AND RATE OF RETURN MAY BE
GREATER OR LOWER THAN THOSE SHOWN IN THE EXPENSE SUMMARY AND EXAMPLE.
4
<PAGE>
FINANCIAL HIGHLIGHTS
The following tables include selected data for a Service Share outstanding
throughout each period and other performance information derived from the
financial statements included in Master Fund's Annual Report to Shareholders
for the year ended March 31, 1995 (collectively, the "Financial Statements").
The information contained in the Financial Highlights for each period has been
audited by Ernst & Young LLP, Master Fund's independent auditors. The following
tables should be read in conjunction with the Financial Statements and notes
thereto. More information about the performance of each Fund is also contained
in the Annual Report to Shareholders which may be obtained from Master Fund
without charge by calling the number on the front cover of this Prospectus.
Prior to the date of this Prospectus, each Fund offered a single series of
shares, the Service Shares. As of the date of this Prospectus, the Funds began
offering a new series of shares designated as Distribution Shares. Service
Shares and Distribution Shares represent equal pro rata interests in each Fund,
except they bear different expenses which reflect the difference in the level
of services provided to them. See "Description of Capital Stock."
EQUITY FUND
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
------------------------------------------------------------------------------------
1995 1994 1993 1992 1991 1990 1989 1988 1987 1986/1/
------- ------- ------- ------ ------ ------ ------ -------- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period.... $ 19.17 $ 18.77 $ 16.28 $14.13 $13.87 $13.22 $11.32 $ 13.56 $12.35 $ 8.00
------- ------- ------- ------ ------ ------ ------ -------- ------ ------
Income From Investment
Operations
Net Investment Income.. 0.07 0.05 0.08 0.13 0.28 0.34 0.19 0.15 0.18 0.18
Net Gains or (Losses)
on Securities (both
realized and
unrealized)........... 2.67 1.16 3.01 2.23 0.39 1.26 1.88 (1.63) 1.86 4.31
------- ------- ------- ------ ------ ------ ------ -------- ------ ------
Total From Investment
Operations............ 2.74 1.21 3.09 2.36 0.67 1.60 2.07 (1.48) 2.04 4.49
------- ------- ------- ------ ------ ------ ------ -------- ------ ------
Less Distributions
Dividends From Net
Investment Income..... (0.04) (0.08) (0.09) (0.21) (0.23) (0.34) (0.17) (0.14) (0.18) (0.14)
Dividends in Excess of
Net Investment Income. 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
Distributions From Net
Realized Gain on
Investments and
Options............... (0.47) (0.39) (0.51) 0.00 (0.18) (0.61) 0.00 (0.62) (0.65) 0.00
Distributions in Excess
of Net Realized Gain
on Investments and
Options............... 0.00 (0.34) 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
------- ------- ------- ------ ------ ------ ------ -------- ------ ------
Total Distributions.... (0.51) (0.81) (0.60) (0.21) (0.41) (0.95) (0.17) (0.76) (0.83) (0.14)
------- ------- ------- ------ ------ ------ ------ -------- ------ ------
Net Asset Value, End of
Period................. $ 21.40 $ 19.17 $ 18.77 $16.28 $14.13 $13.87 $13.22 $ 11.32 $13.56 $12.35
======= ======= ======= ====== ====== ====== ====== ======== ====== ======
Total Return/2/ ........ 14.65% 6.54% 19.26% 16.87% 5.11% 11.98% 18.52% (11.24)% 17.61% 56.74%
Ratios/Supplemental Data
Net Assets, End of
Period
(in millions)......... $137.42 $122.26 $106.14 $71.62 $29.87 $25.98 $17.61 $ 13.58 $13.40 $ 5.58
Ratio of Net Operating
Expenses to Average
Net Assets............ 1.05% 1.14% 1.08% 1.15% 1.23% 1.22% 1.16% 1.16% 1.21% 0.90%/3/
Ratio of Gross
Operating Expenses to
Average Net Assets.... 1.08% 1.14% 1.08% 1.15% 1.23% 1.22% 1.16% 1.16% 1.30% 2.74%/3/
Ratio of Net Investment
Income to Average
Net Assets............ 0.36% 0.25% 0.51% 0.87% 2.21% 2.45% 1.62% 1.26% 1.53% 2.63%/3/
Portfolio Turnover
Rate.................. 23.0% 17.0% 24.0% 20.0% 41.0% 53.0% 46.0% 67.0% 86.0% 207.0%/3/
</TABLE>
-------
NOTES:
1. Inception date of the Fund was April 25, 1985.
2. Total return data does not reflect the sales load payable on purchases of
Shares.
3. Annualized.
5
<PAGE>
INCOME AND GROWTH FUND
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-------------------------------------------------------------------------
1995 1994 1993 1992 1991 1990 1989 1988 1987/1/
------ ------ ------ ------ ------- ------ ------ ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period.... $11.94 $11.45 $ 9.10 $ 8.36 $ 8.84 $ 9.09 $ 8.12 $ 8.95 $ 8.00
------ ------ ------ ------ ------- ------ ------ ------- ------
Income From Investment
Operations
Net Investment Income.. 0.38 0.31 0.27 0.30 0.29 0.40 0.28 0.44 0.06
Net Gains or (Losses)
on Securities
(both realized and
unrealized)........... 0.26 0.46 2.43 0.72 (0.43) 0.19 1.15 (0.93) 0.89
------ ------ ------ ------ ------- ------ ------ ------- ------
Total From Investment
Operations............ 0.64 0.77 2.70 1.02 (0.14) 0.59 1.43 (0.49) 0.95
------ ------ ------ ------ ------- ------ ------ ------- ------
Less Distributions
Dividends From Net
Investment Income..... (0.35) (0.27) (0.35) (0.28) (0.34) (0.39) (0.46) (0.21) 0.00
Dividends in Excess of
Net Investment Income. 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
Distributions From Net
Realized Gain on
Investments and
Options............... (0.41) (0.01) 0.00 0.00 0.00 (0.45) 0.00 (0.13) 0.00
Distributions in Excess
of Net Realized Gain
on Investments and
Options............... 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
------ ------ ------ ------ ------- ------ ------ ------- ------
Total Distributions.... (0.76) (0.28) (0.35) (0.28) (0.34) (0.84) (0.46) (0.34) 0.00
------ ------ ------ ------ ------- ------ ------ ------- ------
Net Asset Value, End of
Period................. $11.82 $11.94 $11.45 $ 9.10 $ 8.36 $ 8.84 $ 9.09 $ 8.12 $ 8.95
====== ====== ====== ====== ======= ====== ====== ======= ======
Total Return/2/......... 5.74% 6.69% 30.45% 12.42% (1.30%) 6.14% 18.36% (5.43%) 11.88%
Ratios/Supplemental Data
Net Assets, End of
Period (in millions).. $99.93 $96.68 $51.30 $23.25 $ 19.59 $23.66 $14.62 $ 6.66 $ 3.71
Ratio of Net Operating
Expenses to Average
Net Assets............ 1.06% 1.17% 1.15% 1.23% 1.28% 1.24% 1.22% 1.27% 1.13%/3/
Ratio of Gross
Operating Expenses to
Average Net Assets.... 1.09% 1.17% 1.15% 1.23% 1.28% 1.24% 1.22% 1.27% 1.84%/3/
Ratio of Net Investment
Income to Average Net
Assets................ 3.31% 2.77% 2.76% 3.52% 3.64% 4.47% 4.09% 6.20% 4.25%/3/
Portfolio Turnover
Rate.................. 36.0% 28.0% 28.0% 81.0% 148.0% 29.0% 24.0% 27.0% 7.0%/3/
</TABLE>
-------
NOTES:
1. Inception date of the Fund was January 6, 1987.
2. Total return data does not reflect the sales load payable on purchases of
Shares.
3. Annualized.
6
<PAGE>
LONG-TERM SUPPLY OF ENERGY FUND
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
--------------------- PERIOD ENDED
1995 1994 MARCH 31, 1993/1/
---------- ---------- -----------------
<S> <C> <C> <C>
Net Asset Value, Beginning of Period.. $ 7.70 $ 7.81 $ 7.00
--------- ---------- ------
Income From Investment Operations
Net Investment Income............... 0.09 0.08 0.01
Net Gains or (Losses) on Securities
(both realized and unrealized)..... 0.24 (0.12) 0.80
--------- ---------- ------
Total From Investment Operations.... 0.33 (0.04) 0.81
--------- ---------- ------
Less Distributions
Dividends From Net Investment
Income............................. (0.10) (0.07) 0.00
Dividends in Excess of Net
Investment Income.................. 0.00 0.00 0.00
Distributions From Net Realized Gain
on Investments and Options......... (0.01) 0.00 0.00
Distributions in Excess of Net
Realized Gain on Investments and
Options............................ 0.00 0.00 0.00
--------- ---------- ------
Total Distributions................. (0.11) (0.07) 0.00
--------- ---------- ------
Net Asset Value, End of Period........ $ 7.92 $ 7.70 $ 7.81
========= ========== ======
Total Return/2/....................... 4.28% (0.57)% 11.57%
Ratios/Supplemental Data
Net Assets, End of Period (in
millions).......................... $ 15.81 $ 6.83 $ 1.46
Ratio Net Operating of Expenses to
Average Net
Assets............................. 0.98% 0.99% 0.99%/3/
Ratio of Gross Operating Expenses to
Average Net
Assets............................. 1.35% 2.03% 7.03%/3/
Ratio of Net Investment Income to
Average Net Assets................. 1.18% 1.21% 1.69%/3/
Portfolio Turnover Rate............. 31.0% 6.0% 0.0%/3/
</TABLE>
-------
NOTES:
1. Inception date of the Fund was December 31, 1992.
2. Total return data does not reflect the sales load payable on purchases of
Shares.
3. Annualized.
7
<PAGE>
PRODUCTIVITY ENHANCERS FUND
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
---------------------- PERIOD ENDED
1995 1994 MARCH 31, 1993/1/
---------- ---------- -----------------
<S> <C> <C> <C>
Net Asset Value, Beginning of Period.. $ 7.88 $ 6.94 $ 7.00
---------- --------- ---------
Income From Investment Operations
Net Investment Income............... (0.01) 0.00 0.01
Net Gains or (Losses) on Securities
(both realized and unrealized)..... 0.35 0.96 (0.07)
---------- --------- ---------
Total From Investment Operations.... 0.34 0.96 (0.06)
---------- --------- ---------
Less Distributions
Dividends From Net Investment
Income............................. 0.00 0.00 0.00
Dividends in Excess of Net
Investment Income.................. 0.00 (0.02) 0.00
Distributions From Net Realized Gain
on Investments and Options......... (0.10) 0.00 0.00
Distributions in Excess of Net
Realized Gain on Investments and
Options............................ 0.00 0.00 0.00
---------- --------- ---------
Total Distributions................. (0.10) (0.02) 0.00
---------- --------- ---------
Net Asset Value, End of Period........ $ 8.12 $ 7.88 $ 6.94
========== ========= =========
Total Return/2/....................... 4.45% 13.81% (0.86)%
Ratios/Supplemental Data
Net Assets, End of Period (in
millions).......................... $ 18.27 $ 15.70 $ 3.37
Ratio of Net Operating Expenses to
Average Net
Assets............................. 0.99% 0.99% 0.99%/3/
Ratio of Gross Operating Expenses to
Average Net Assets................. 1.21% 1.49% 4.23%/3/
Ratio of Net Investment
Income/(Loss) to Average Net
Assets............................. (0.10)% 0.01% 1.29%/3/
Portfolio Turnover Rate............. 276.0% 198.0% 183.0%/3/
</TABLE>
-------
NOTES:
1. Inception date of the Fund was December 31, 1992.
2. Total return data does not reflect the sales load payable on purchases of
Shares.
3. Annualized.
8
<PAGE>
ENVIRONMENTALLY-RELATED PRODUCTS AND SERVICES FUND
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
--------------------- PERIOD ENDED
1995 1994 MARCH 31, 1993/1/
---------- ---------- -----------------
<S> <C> <C> <C>
Net Asset Value, Beginning of Period.. $ 6.24 $ 6.95 $ 7.00
--------- ---------- -------
Income From Investment Operations
Net Investment Loss................. (0.01) 0.00 0.00
Net Gains or (Losses) on Securities
(both realized and unrealized)..... (0.01) (0.71) (0.05)
--------- ---------- -------
Total From Investment Operations.... (0.02) (0.71) (0.05)
--------- ---------- -------
Less Distributions
Dividends From Net Investment
Income............................. 0.00 0.00 0.00
Dividends in Excess of Net
Investment Income.................. (0.01) 0.00 0.00
Distributions From Net Realized Gain
on Investments and Options......... 0.00 0.00 0.00
Distributions in Excess of Net
Realized Gain on Investments and
Options............................ 0.00 0.00 0.00
--------- ---------- -------
Total Distributions................. (0.01) 0.00 0.00
--------- ---------- -------
Net Asset Value, End of Period........ $ 6.21 $ 6.24 $ 6.95
========= ========== =======
Total Return/2/....................... (0.27)% (10.15)% (0.71)%
Ratios/Supplemental Data
Net Assets, End of Period (in
millions).......................... $ 4.36 $ 4.53 $ 2.45
Ratio of Net Operating Expenses to
Average Net Assets................. 0.99% 0.99% 0.99%/3/
Ratio of Gross Operating Expenses to
Average Net Assets................. 2.42% 2.20% 2.83%/3/
Ratio of Net Investment
Income/(Loss) to Average Net
Assets............................. (0.10)% (0.07)% 0.32%/3/
Portfolio Turnover Rate............. 61.0% 28.0% 0.0%/3/
</TABLE>
-------
NOTES:
1. Inception date of the Fund was December 31, 1992.
2. Total return data does not reflect the sales load payable on purchases of
Shares.
3. Annualized.
9
<PAGE>
AGING OF AMERICA FUND
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
--------------------- PERIOD ENDED
1995 1994 MARCH 31, 1993/1/
---------- ---------- -----------------
<S> <C> <C> <C>
Net Asset Value, Beginning of Period.. $ 6.99 $ 7.01 $7.00
--------- ---------- -----
Income From Investment Operations
Net Investment Income............... 0.04 0.03 0.01
Net Gains or (Losses) on Securities
(both realized and unrealized)..... 0.85 (0.02) 0.00
--------- ---------- -----
Total From Investment Operations.... 0.89 0.01 0.01
--------- ---------- -----
Less Distributions
Dividends From Net Investment
Income............................. (0.04) (0.03) 0.00
Dividends in Excess of Net
Investment Income.................. 0.00 0.00 0.00
Distributions From Net Realized Gain
on Investments and Options......... 0.00 0.00 0.00
Distributions in Excess of Net
Realized Gain on Investments and
Options............................ 0.00 0.00 0.00
--------- ---------- -----
Total Distributions................. (0.04) (0.03) 0.00
--------- ---------- -----
Net Asset Value, End of Period........ $ 7.84 $ 6.99 $7.01
========= ========== =====
Total Return/2/....................... 12.80% 0.13% 0.14%
Ratios/Supplemental Data
Net Assets, End of Period (in
millions).......................... $ 22.17 $ 10.58 $2.39
Ratio of Net Operating Expenses to
Average Net
Assets............................. 0.99% 0.99% 0.99%/3/
Ratio of Gross Operating Expenses to
Average Net Assets................. 1.26% 1.82% 3.87%/3/
Ratio of Net Investment Income to
Average Net Assets................. 0.63% 0.59% 0.77%/3/
Portfolio Turnover Rate............. 14.0% 24.0% 14.0%/3/
</TABLE>
-------
NOTES:
1. Inception date of the Fund was December 31, 1992.
2. Total return data does not reflect the sales load payable on purchases of
Shares.
3. Annualized.
10
<PAGE>
COMMUNICATION AND ENTERTAINMENT FUND
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
---------------------- PERIOD ENDED
1995 1994 MARCH 31, 1993/1/
---------- ---------- -----------------
<S> <C> <C> <C>
Net Asset Value, Beginning of Period. $ 8.75 $ 7.61 $7.00
---------- ---------- -----
Income From Investment Operations
Net Investment Income.............. 0.04 0.02 0.01
Net Gains or (Losses) on Securities
(both realized and unrealized).... 1.06 1.52 0.60
---------- ---------- -----
Total From Investment Operations... 1.10 1.54 0.61
---------- ---------- -----
Less Distributions
Dividends From Net Investment
Income............................ (0.04) (0.03) 0.00
Dividends in Excess of Net
Investment Income................. 0.00 0.00 0.00
Distributions From Net Realized
Gain on Investments and Options... (0.17) (0.37) 0.00
Distributions in Excess of Net
Realized Gain on Investments and
Options........................... 0.00 0.00 0.00
---------- ---------- -----
Total Distributions................ (0.21) (0.40) 0.00
---------- ---------- -----
Net Asset Value, End of Period....... $ 9.64 $ 8.75 $7.61
========== ========== =====
Total Return/2/...................... 12.87% 20.07% 8.71%
Ratios/Supplemental Data
Net Assets, End of Period (in
millions)......................... $ 29.91 $ 21.02 $5.79
Ratio of Net Operating Expenses to
Average Net
Assets............................ 0.98% 0.98% 0.99%/3/
Ratio of Gross Operating Expenses
to Average Net Assets............. 1.06% 1.16% 2.20%/3/
Ratio of Net Investment Income to
Average Net Assets................ 0.46% 0.29% 1.06%/3/
Portfolio Turnover Rate............ 56.0% 60.0% 25.0%/3/
</TABLE>
-------
NOTES:
1. Inception date of the Fund was December 31, 1992.
2. Total return data does not reflect the sales load payable on purchases of
Shares.
3. Annualized.
11
<PAGE>
BUSINESS AND INDUSTRIAL RESTRUCTURING FUND
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
---------------------- PERIOD ENDED
1995 1994 MARCH 31, 1993/1/
---------- ---------- -----------------
<S> <C> <C> <C>
Net Asset Value, Beginning of Period. $ 9.64 $ 7.71 $ 7.00
---------- ---------- ------
Income From Investment Operations
Net Investment Income.............. 0.07 0.06 0.02
Net Gains or (Losses) on Securities
(both realized and unrealized).... 1.02 1.96 0.69
---------- ---------- ------
Total From Investment Operations... 1.09 2.02 0.71
---------- ---------- ------
Less Distributions
Dividends From Net Investment
Income............................ (0.06) (0.07) 0.00
Dividends in Excess of Net
Investment Income................. 0.00 0.00 0.00
Distributions From Net Realized
Gain on Investments and Options... (0.12) (0.02) 0.00
Distributions in Excess of Net
Realized Gain on Investments and
Options........................... 0.00 0.00 0.00
---------- ---------- ------
Total Distributions................ (0.18) (0.09) 0.00
---------- ---------- ------
Net Asset Value, End of Period....... $ 10.55 $ 9.64 $ 7.71
========== ========== ======
Total Return/2/...................... 11.49% 26.40% 10.14%
Ratios/Supplemental Data
Net Assets, End of Period (in
millions)......................... $ 30.18 $ 14.44 $ 1.94
Ratio of Net Operating Expenses to
Average Net
Assets............................ 0.98% 0.99% 0.99%/3/
Ratio of Gross Operating Expenses
to Average Net Assets............. 1.08% 1.73% 5.85%3
Ratio of Net Investment Income to
Average Net Assets................ 0.83% 0.77% 2.48%/3/
Portfolio Turnover Rate............ 82.0% 75.0% 9.0%/3/
</TABLE>
-------
NOTES:
1. Inception date of the Fund was December 31, 1992.
2. Total return data does not reflect the sales load payable on purchases of
Shares.
3. Annualized.
12
<PAGE>
GLOBAL COMPETITORS FUND
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
---------------------- PERIOD ENDED
1995 1994 MARCH 31, 1993/1/
---------- ---------- -----------------
<S> <C> <C> <C>
Net Asset Value, Beginning of Period. $ 7.69 $ 7.28 $7.00
---------- ---------- -----
Income From Investment Operations
Net Investment Income.............. 0.07 0.05 0.01
Net Gains or (Losses) on Securities
(both realized and unrealized).... 0.90 0.41 0.27
---------- ---------- -----
Total From Investment Operations... 0.97 0.46 0.28
---------- ---------- -----
Less Distributions
Dividends from Net Investment
Income............................ (0.07) (0.05) 0.00
Dividends in Excess of Net
Investment Income................. 0.00 0.00 0.00
Distributions from Net Realized
Gain on Investments and Options... 0.00 0.00 0.00
Distributions in Excess of Net
Realized Gain on Investments and
Options........................... 0.00 0.00 0.00
---------- ---------- -----
Total Distributions................ (0.07) (0.05) 0.00
---------- ---------- -----
Net Asset Value, End of Period....... $ 8.59 $ 7.69 $7.28
========== ========== =====
Total Return/2/...................... 12.73% 6.29% 4.00%
Ratios/Supplemental Data
Net Assets, End of Period (in
millions)......................... $ 25.50 $ 10.06 $2.04
Ratio of Net Operating Expenses to
Average Net Assets................ 0.97% 0.99% 0.99%/3/
Ratio of Gross Operating Expenses
to Average Net Assets............. 1.18% 1.72% 3.97%/3/
Ratio of Net Investment Income to
Average Net Assets................ 1.04% 0.81% 0.82%/3/
Portfolio Turnover Rate............ 29.0% 19.0% 0.0%
</TABLE>
-------
NOTES:
1. Inception date of the Fund was December 31, 1992.
2. Total return data does not reflect the sales load payable on purchases of
Shares.
3. Annualized.
13
<PAGE>
EARLY LIFE CYCLE FUND
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
---------------------- PERIOD ENDED
1995 1994 MARCH 31, 1993/1/
---------- ---------- -----------------
<S> <C> <C> <C>
Net Asset Value, Beginning of Period. $ 8.66 $ 7.40 $7.00
---------- ---------- -----
Income From Investment Operations
Net Investment Income.............. (0.02) (0.01) 0.00
Net Gains or (Losses) on Securities
(both realized and unrealized).... 1.31 1.36 0.40
---------- ---------- -----
Total From Investment Operations... 1.29 1.35 0.40
---------- ---------- -----
Less Distributions
Dividends From Net Investment
Income............................ 0.00 0.00 0.00
Dividends in Excess of Net
Investment Income................. 0.00 0.00 0.00
Distributions From Net Realized
Gain on Investments and Options... (0.18) (0.09) 0.00
Distributions in Excess of Net
Realized Gain on Investments and
Options........................... 0.00 0.00 0.00
---------- ---------- -----
Total Distributions................ (0.18) (0.09) 0.00
---------- ---------- -----
Net Asset Value, End of Period....... $ 9.77 $ 8.66 $7.40
========== ========== =====
Total Return/2/...................... 15.16% 18.27% 5.71%
Ratios/Supplemental Data
Net Assets, End of Period (in
millions)......................... $ 47.78 $ 24.95 $5.51
Ratio of Net Operating Expenses to
Average Net Assets................ 0.96% 0.95% 0.99%/3/
Ratio of Gross Operating Expenses
to Average Net Assets............. 1.04% 1.15% 2.70%/3/
Ratio of Net Investment
Income/(Loss) to Average Net
Assets............................ (0.23)% (0.25)% 0.12%/3/
Portfolio Turnover Rate............ 42.0% 20.0% 4.0%/3/
</TABLE>
-------
NOTES:
1. Inception date of the Fund was December 31, 1992.
2. Total return data does not reflect the sales load payable on purchases of
Shares.
3. Annualized.
14
<PAGE>
U.S. TRUST'S INVESTMENT PHILOSOPHY AND STRATEGIES
U.S. Trust, whose predecessor was founded in 1853, offers a variety of spe-
cialized fiduciary and financial services to high-net worth individuals, insti-
tutions and corporations. As one of the largest institutions of its type, U.S.
Trust prides itself in offering an attentive and high level of service to each
of its clients. The UST Master Funds offer individual investors access to U.S.
Trust's services.
Philosophy. In managing investments for the Funds, U.S. Trust follows a long-
term investment philosophy which generally does not change with the short-term
variability of financial markets or fundamental conditions. U.S. Trust's ap-
proach begins with the conviction that all worthwhile investments are grounded
in value. The Investment Adviser believes that an investor can identify funda-
mental values that eventually should be reflected in market prices. U.S. Trust
believes that over time, a disciplined search for fundamental value will
achieve better results than attempting to take advantage of short-term price
movements.
Implementation of this long-term value philosophy consists of searching for,
identifying and obtaining the benefits of present or future investment values.
For example, such values may be found in a company's future earnings potential
or in its existing resources and assets. Accordingly, U.S. Trust in managing
investments for the Funds is constantly engaged in assessing, comparing and
judging the worth of companies, particularly in comparison to the price the
markets place on such companies' shares.
Strategies. In order to translate its investment philosophy into more specific
guidance for selection of investments, the Investment Adviser uses three spe-
cific strategies. These strategies, while identified separately, may overlap so
that more than one may be applied in an investment decision.
U.S. Trust's "PROBLEM/OPPORTUNITY STRATEGY" seeks to identify industries and
companies with the capabilities to provide solutions to or benefit from complex
problems such as the changing demo-graphics and aging of the U.S. population or
the need to enhance industrial productivity. U.S. Trust's second strategy is a
"TRANSACTION VALUE" comparison of a company's real underlying asset value with
the market price of its shares and with the sale prices for similar assets
changing ownership in public market transactions. Differences between a
company's real asset value and the price of its shares often are corrected over
time by restructuring of the assets or by market recognition of their value.
U.S. Trust's third strategy involves identifying "EARLY LIFE CYCLE" companies
whose products are in their earlier stages of development or that seek to ex-
ploit new markets. Frequently such companies are smaller companies, but early
life cycle companies may also include larger established companies with new
products or markets for existing products. The Investment Adviser believes that
over time the value of such companies should be recognized in the market.
Themes. To complete U.S. Trust's investment philosophy, the three portfolio
strategies discussed above are applied in concert with several "longer-term in-
vestment themes" to identify investment opportunities. The Investment Adviser
believes these longer-term themes represent strong and inexorable trends. The
Investment Adviser also believes that understanding the instigation, catalysts
and effects of these longer-term trends should help to identify companies that
are beneficiaries of these trends.
INVESTMENT OBJECTIVES AND POLICIES
The Investment Adviser will use its best efforts to achieve the investment ob-
jective of each Fund, although their achievement cannot be assured. The invest-
ment objective of each Fund is "fundamental", meaning that it may not be
changed without a vote of the holders of a majority of the particular Fund's
outstanding shares (as defined under "Miscellaneous"). Except as noted be-
low in "Investment Limitations,"
15
<PAGE>
the investment policies of each Fund may be changed without a vote of the
holders of a majority of the outstanding shares of such Fund.
EQUITY FUND
The Equity Fund's investment objective is to seek long-term capital apprecia-
tion. The Equity Fund invests in companies which the Investment Adviser be-
lieves have value currently not recognized in the market prices of the compa-
nies' securities. The Investment Adviser uses the investment philosophy,
strategies and themes discussed above to identify such investment values and
to diversify the Fund's investments over a variety of industries and types of
companies. See "Investment Policies Common to the Equity Fund and the Theme
Funds" for a discussion of various investment policies applicable to the Eq-
uity Fund.
THEME FUNDS
Eight Theme Funds are offered having the common investment objective of long-
term capital appreciation. As noted above, these Theme Funds are based on
themes identified and followed by the Investment Adviser. Each Theme Fund's
key policies are discussed below. Additional policies common to all Theme
Funds are discussed after this section.
LONG-TERM SUPPLY OF ENERGY FUND--invests in companies which the Investment
Adviser believes will benefit from the availability, development and delivery
of secure hydrocarbon and other energy sources. Such companies include those
engaged in the following types of activities: the production, transmission,
marketing, control or measurement of energy or fuels; providing products or
services to companies engaged in such activities; energy-related research, ex-
perimentation and consulting; and environmental activities such as pollution
control and energy conservation. Included in such companies are oil and gas
production and pipeline companies; drilling and drilling service companies;
electric and gas utilities; and other energy resource companies such as coal
producers and newer resources such as geothermal and solar energy producers.
Normally, at least 25% of the Fund's assets will be invested in the crude oil,
petroleum and natural gas industry. However, less than that amount may be so
invested if there have been changes in governmental regulations, world eco-
nomic and political events, exploration or production spending; or supply, de-
mand or prices of crude oil, petroleum, natural gas or other energy sources,
and in the Investment Adviser's opinion, such changes would have an adverse
affect on the securities of companies in that industry. Under normal condi-
tions, at least 65% of the Fund's total assets will be invested in companies
of the type described in this paragraph.
Among the characteristics the Investment Adviser currently looks for in en-
ergy and energy-related investments are companies or energy sources which the
Investment Adviser believes are:
- dedicated to producing supplies of energy at economically acceptable cost;
- located in politically and economically stable or "secure" areas, i.e, sub-
ject only to minimal risk of disruption for political or ideological rea-
sons, or by economic "warfare" or systemic economic weakness;
- available in continuous, sufficient quantity to be reliable and economically
significant;
- involved in energy which is easily and economically transportable and dis-
tributable to where it is consumed.
PRODUCTIVITY ENHANCERS FUND--invests in companies which the Investment Ad-
viser believes will benefit from their roles as innovators, developers and
suppliers of goods and services which enhance service and manufacturing pro-
ductivity or companies that are most effective at obtaining and applying pro-
ductivity enhancement developments. The essential criteria for such products
and services is that they have the ability to increase a user's productivity,
e.g., enable the user to generate equal or greater economic value at lower to-
tal unit cost than alternatives or provide measurable improvement of produc-
tivity by the provider or the user. Such companies may include but are not
limited to production automation manufacturers, computer hardware and software
producers and distributors, communications and mobile telephone providers,
16
<PAGE>
and companies involved with cost control, asset redeployment and downsizing
activities and enhancing the utilization of technology. Under normal condi-
tions, at least 65% of the Fund's total assets will be invested in companies
of the type described in this paragraph.
ENVIRONMENTALLY-RELATED PRODUCTS AND SERVICES FUND--invests in companies
which the Investment Adviser believes will benefit from their provision of
products, technologies and services related to conservation, protection and
restoration of the environment. Such companies may include but are not limited
to companies engaged in waste management and pollution control, prevention and
cleanup activities. The Fund is not intended to be an "environmentally cor-
rect" fund and may invest in companies without regard to whether they are en-
gaged in operations harmful to the environment. Under normal conditions, at
least 65% of the Fund's total assets will be invested in companies of the type
described in this paragraph.
The Fund may also invest a portion of its assets in securities of companies
that offer products and services used by individuals in response to ecological
concerns and concerns relating to their social environment. Such investments
may include, without limitation, securities of companies that produce protec-
tive clothing, sunscreens and personal security products.
AGING OF AMERICA FUND--invests in companies which the Investment Adviser be-
lieves will benefit from the changes occurring in the demographic structure of
the U.S. population, particularly its growing proportion of individuals over
the age of 40. In analyzing companies for this Fund, the Investment Adviser
considers carefully the ongoing changes in the mean and median ages of the
U.S. population and the resulting effects on the lifestyles and day-to-day
economic actions of the population as a whole. Companies currently positioned
to benefit from such changes include health care, pharmaceutical, biotechnol-
ogy and similar health-related firms. In addition, certain clothing, financial
services, entertainment, real estate and housing, food and beverage and other
types of companies may be positioned to benefit from the demographic changes.
Under normal conditions, at least 65% of the Fund's total assets will be in-
vested in companies of the type described in this paragraph.
COMMUNICATION AND ENTERTAINMENT FUND--invests in companies which the Invest-
ment Adviser believes will benefit from the technological and international
transformation of the communications and entertainment industries, particu-
larly the convergence of information, communication and entertainment media.
Such companies may include those engaged in the development, production, sale
and distribution of products or services in the broadcast, radio and televi-
sion, leisure, entertainment, amusement, publishing, telecommunications serv-
ices and equipment, and tele- phone utilities industries. In analyzing compa-
nies for investment, the Investment Adviser may focus on firms which the In-
vestment Adviser believes are innovators of or will benefit from the melding
of computer, communications and entertainment technologies. Under normal con-
ditions, at least 65% of the Fund's total assets will be invested in companies
of the type described in this paragraph.
BUSINESS AND INDUSTRIAL RESTRUCTURING FUND--invests in companies which the
Investment Adviser believes will benefit from their restructuring or redeploy-
ment of assets and operations in order to become more competitive or profit-
able. Such companies may include those involved in prospective mergers, con-
solidations, liquidations, spin-offs, financial restructurings and reorganiza-
tions. The business activities of such companies are not limited in any way.
Under normal conditions, at least 65% of the Fund's total assets will be in-
vested in companies of the type described in this paragraph. The Investment
Adviser's focus is to find companies whose restructuring activities offer sig-
nificant value and investment potential. For example, several years ago
leveraged buy-outs and mergers were prominent trends, while currently a great
deal of value enhancing activity is occurring as companies deleverage or re-
duce their debt burdens in order to increase profitability. There is risk in
these
17
<PAGE>
types of investments. For example, should a company be unsuccessful in reduc-
ing its debt, it may be forced into default on its debt, increasing its debt
or bankruptcy.
GLOBAL COMPETITORS FUND--invests primarily in U.S.-based companies which the
Investment Adviser believes will benefit from their position as effective and
strong competitors on a global basis. Such companies are characterized by
their ability to supply something unique or of greater value, or to deliver
goods and services more efficiently or reliably. These companies develop and
implement international marketing strategies for their goods and services. The
range of businesses encompassed by this policy is broad and, by way of exam-
ple, may include companies engaged in soft drink production and sales, cloth-
ing manufacturers, tobacco product producers, precision instrument and aero-
space providers, and a variety of communications systems, biotechnology and
high technology suppliers. While the Fund will invest primarily in U.S.-based
companies with such features, up to 20% of the Fund's assets may be invested
in non-U.S.-based global competitors. The Fund will not engage in currency
hedging in an attempt to anticipate currency fluctuations with respect to any
such foreign investments. Under normal conditions, the Fund will invest in se-
curities of issuers from at least three countries and at least 65% of the
Fund's total assets will be invested in companies of the type described in
this paragraph.
EARLY LIFE CYCLE FUND--invests primarily in smaller companies which are in
the earlier stages of their development or larger or more mature companies en-
gaged in new and higher growth potential operations. An early life cycle com-
pany is one which is early in its development as a company, yet has demon-
strated or is expected to achieve substantial long-term earnings growth. More
mature or larger, established companies may also be positioned for accelerat-
ing earnings because of rejuvenated management, new products, new markets for
existing products or structural changes in the economy. In selecting companies
for investment, the Investment Adviser looks for innovative companies whose
potential has not yet been fully recognized by the securities markets. Under
normal conditions, at least 65% of the Fund's total assets will be invested in
companies with capitalization of $1 billion or less. The risk and venture ori-
ented nature of such companies naturally entails greater risk for investors
when contrasted with investing in more established companies.
INVESTMENT POLICIES COMMON TO THE EQUITY FUND AND THE THEME FUNDS
Under normal market and economic conditions, the Equity and each Theme Fund
will invest at least 65% of its total assets in common stock, preferred stock
and securities convertible into common stock. Normally, up to 35% of each such
Fund's total assets may be invested in other securities and instruments in-
cluding, e.g., other investment-grade debt securities, warrants, options, and
futures instruments as described in more detail below. During temporary defen-
sive periods or when the Investment Adviser believes that suitable stocks or
convertible securities are unavailable, each Fund may hold cash or invest some
or all of its assets in U.S. Government securities, high-quality money market
instruments and repurchase agreements collateralized by the foregoing obliga-
tions.
In managing the Equity and Theme Funds, the Investment Adviser seeks to pur-
chase securities having value currently not recognized in the market price of
a security, consistent with the strategies discussed above.
Portfolio holdings will include common stocks of companies having capitaliza-
tions of varying amounts, and all Funds will invest in the securities of high
growth, small companies where the Investment Adviser expects earnings and the
price of the securities to grow at an above-average rate. As discussed above,
the Early Life Cycle Fund emphasizes such companies. Certain securities owned
by the Equity and Theme Funds may be traded only in the over-the-counter mar-
ket or on a regional securities exchange,
18
<PAGE>
may be listed only in the quotation service commonly known as the "pink
sheets," and may not be traded every day or in the volume typical of trading on
a national securities exchange. As a result, there may be a greater fluctuation
in the value of a Fund's Shares, and a Fund may be required, in order to meet
redemptions or for other reasons, to sell these securities at a discount from
market prices, to sell during periods when such disposition is not desirable,
or to make many small sales over a period of time.
The Equity and Theme Funds may invest in the securities of foreign issuers.
The Funds may invest indirectly in the securities of foreign issuers through
sponsored and unsponsored American Depository Receipts ("ADRs"). ADRs represent
receipts typically issued by a U.S. bank or trust company which evidence owner-
ship of underlying securities of foreign issuers. Investments in unsponsored
ADRs involve additional risk because financial information based on generally
accepted accounting principles ("GAAP") may not be available for the foreign
issuers of the underlying securities. ADRs may not necessarily be denominated
in the same currency as the underlying securities into which they may be con-
verted.
INCOME AND GROWTH FUND
The Income and Growth Fund has two investment objectives. Its primary invest-
ment objective is to seek to provide moderate current income and then, as a
secondary objective, to achieve capital appreciation from its investments. In
attempting to achieve these two objectives, the Income and Growth Fund invests,
during normal market and economic conditions, a substantial portion of its as-
sets in common stock, preferred stock and securities convertible into common
stock. The Fund's investments in equity securities will be income-oriented, and
it is expected that a portion of its assets will be invested on a regular basis
in debt obligations.
The Fund may invest in the securities of foreign issuers. The Fund may also
invest indirectly in the securities of foreign issuers through sponsored and
unsponsored ADRs. For information on ADRs, see "Investment Policies Common to
the Equity Fund and the Theme Funds."
In managing the equity portion of the Income and Growth Fund, the Investment
Adviser will generally select securities that are expected to pay dividends and
other distributions which will result in moderate current income when added to
the income from the Fund's non-equity investments. As a general matter, the In-
vestment Adviser will use the three strategies described above in "U.S. Trust's
Investment Philosophy and Strategies"--problem/opportunity, transaction value,
and early life cycle. In applying these strategies, however, the Investment Ad-
viser will place greater emphasis on the current and anticipated income of par-
ticular securities and lesser emphasis on the potential for capital apprecia-
tion. As a result, the Income and Growth Fund can be expected to have a rela-
tively smaller proportion of its assets invested in common shares of early life
cycle companies than the Equity Fund or other Theme Funds. The Investment Ad-
viser may also purchase equity securities for the Income and Growth Fund from
time to time without regard to the strategies outlined above if it determines
that the purchase is in furtherance of the Fund's investment objectives.
Debt obligations may be acquired by the Income and Growth Fund to produce in-
come and (under certain conditions) capital appreciation, and may include both
convertible and non-convertible corporate and government bonds, debentures,
money market instruments, repurchase agreements collateralized by U.S. Govern-
ment obligations, and other types of instruments listed in the next paragraph.
Except as stated below, investments in debt obligations will be limited to
those that are considered to be investment grade-i.e., debt obligations classi-
fied within the four highest ratings of Moody's Investors Service, Inc.
("Moody's") or Standard & Poor's Ratings Group ("S&P") or, if unrated, which
are determined by the Investment Adviser to be of comparable quality. However,
the Investment Adviser may at any time ac-
19
<PAGE>
quire other, non-investment grade obligations when it believes that their in-
vestment characteristics make them desirable acquisitions for the Income and
Growth Fund in light of its investment objectives and current portfolio mix, so
long as, under normal market and economic conditions, no more than 5% of the
Fund's total assets are invested in non-investment grade debt obligations. Not-
withstanding the foregoing, the Fund may invest up to 35% of its total assets
in non-investment grade convertible debt obligations. Non-investment grade ob-
ligations (those that are rated "Ba" or lower by Moody's and, at the same time,
"BB" or lower by S&P or unrated obligations), commonly referred to as "junk
bonds", have speculative characteristics. Risks associated with lower-rated
debt securities are (a) the relative youth and growth of the market for such
securities, (b) the sensitivity of such securities to interest rate and eco-
nomic changes, (c) the lower degree of protection of principal and interest
payments, (d) the relatively low trading market liquidity for the securities,
(e) the impact that legislation may have on the high yield bond market (and, in
turn, on the Fund's net asset value and investment practices), and (f) the
creditworthiness of the issuers of such securities. During an economic downturn
or substantial period of rising interest rates, highly leveraged issuers may
experience financial stress which would adversely effect their ability to serv-
ice their principal and interest payment obligations, to meet projected busi-
ness goals and to obtain additional financing. An economic downturn could also
disrupt the market for lower-rated bonds and adversely effect the value of out-
standing bonds and the ability of the issuers to repay principal and interest.
If the issuer of a debt obligation held by the Fund defaulted, the Fund could
incur additional expenses to seek recovery. Adverse publicity and investor per-
ceptions, whether or not based on fundamental analysis, may also decrease the
values and liquidity of lower-rated securities held by the Fund, especially in
a thinly traded market.
Debt obligations rated "BB," "B" or "CCC" by S&P are regarded, on balance, as
predominately speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. "BB" represents the
lowest degree of speculation and "CCC" the highest degree of speculation. While
such debt will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major risk exposures to adverse condi-
tions. The rating "CC" is typically applied to debt subordinated to senior debt
that is assigned an actual or implied "CCC" rating. The rating "C" is typically
applied to debt subordinated to senior debt which is assigned an actual or im-
plied "CCC-" debt rating, and may be used to cover a situation where a bank-
ruptcy petition has been filed, but debt service payments are continued. The
rating "CI" is reserved for income bonds on which no interest is being paid.
Debt obligations rated "D" are in default, and payments of interest and/or re-
payment of principal is in arrears. The ratings from "AA" through "CCC" are
sometimes modified by the addition of a plus or minus sign to show relative
standing within the major rating categories. Moody's has a similar classifica-
tion scheme for non-investment grade debt obligations. Debt obligations rated
"Ba," "B," "Caa," "Ca" and "C" provide questionable protection of interest and
principal. The rating "Ba" indicates that a debt obligation has some specula-
tive characteristics. The rating "B" indicates a general lack of characteris-
tics of desirable investment. Debt obligations rated "Caa" are of poor quality,
while debt obligations rated "Ca" are considered highly speculative. "C" repre-
sents the lowest rated class of debt obligations. Moody's applies numerical
modifiers 1, 2 and 3 in each generic classification from "Aa" to "B" in its
bond rating system. The modifier "1" indicates that a security ranks in the
higher end of its rating category; the modifier "2" reflects a mid-range rank-
ing; and the modifier "3" indicates that the security ranks at the lower end of
its generic rating category.
In addition, the Income and Growth Fund may invest up to 10% of its total as-
sets in other types of instruments, including warrants, options and other
rights to purchase securities; liquidating trust re-
20
<PAGE>
ceipts; limited partnership interests; certificates of beneficial ownership;
creditor claims; and loan participations. Such instruments may represent owner-
ship or creditor interests in a wide range of assets or businesses, and may be
acquired by the Income and Growth Fund for either income purposes (as would
normally be the case with instruments such as liquidating trust receipts) or
capital appreciation (as would be the case with warrants and options). In cer-
tain instances, there may be no established market for such instruments. The
Income and Growth Fund will, however, at no time invest more than 10% of the
value of its net assets in securities that are illiquid or for which market
quotations are not readily available. Further, certain of these instruments may
have speculative characteristics. For example, certain instruments may be is-
sued by companies that are insolvent or have otherwise defaulted on their debt
obligations. Such companies may be involved in bankruptcy reorganization pro-
ceedings. Warrants and options acquired by the Income and Growth Fund are sub-
ject to the possible loss of the entire premium paid by the Fund if the market
price of the underlying security falls below the exercise price. The Investment
Adviser will purchase such obligations only when it determines that the poten-
tial return justifies the attendant risks. The investment features of the fore-
going instruments and investment risks involving their acquisition are
described further in the Statement of Additional Information. Additionally,
some of the instruments described above may not be "securities" or may not pro-
duce qualifying income for purposes of the provisions of the Internal Revenue
Code of 1986, as amended, applicable to investment companies. See "Taxes--Fed-
eral" below for a discussion of such provisions.
RISK FACTORS
Each Fund is subject to market risk, interest rate risk and in some cases in-
dustry risk. Market risk is the possibility that stock prices will decline over
short or even extended periods. The stock markets tend to be cyclical, with pe-
riods of generally rising prices and periods of generally declining prices.
These cycles will affect the values of each Fund. In addition, the prices of
bonds and other debt instruments generally fluctuate inversely with interest
rate changes. Factors affecting debt securities will affect all of the Funds'
debt holdings.
The Long-Term Supply of Energy Fund will normally concentrate its investments
in the crude oil, petroleum and natural gas industry. Accordingly, it will be
susceptible to industry risk, the possibility that a particular group of stocks
will decline in price due to industry-specific developments.
Energy-related investments are affected generally by supply, demand, and other
competitive factors for the companies' specific products and services. They are
also affected by unpredictable factors such as the supply and demand for oil,
gas, electricity and other energy sources, prices of such energy sources, ex-
ploration and production spending, governmental regulation, and world economic
and political events. In addition, utilities firms in the energy field are sub-
ject to a variety of factors affecting the public utilities industries, includ-
ing: difficulty obtaining adequate returns on invested capital which are typi-
cally subject to the control and scrutiny of public service commissions; re-
strictions on operations and increased costs and delays as a result of environ-
mental considerations; costs of and ability to secure financing for large con-
struction and development projects; difficulties in obtaining secure energy re-
sources; the uncertain effects of conservation efforts; and a variety of issues
concerning financing, governmental approval and environmental aspects of nu-
clear power facilities.
Environmentally-related investments are affected generally by issues and un-
certainties impacting the specialty chemicals, engineering and construction,
machinery and pollution control industries. Such factors include the supply,
demand, and other normal competitive factors for the various portfolio compa-
nies' products and services. The environmental products and services industry
generally has been affected positively by legislation resulting in stricter
governmental regulations and enforcement policies for both commercial and gov-
ernmental generators of waste, as
21
<PAGE>
well as by specific expenditures for cleanup efforts. Chemical products are af-
fected, for example, by product obsolescence and competition; the handling of
hazardous chemicals and products; and the potential for calamitous accidents.
In addition to supply and demand factors, engineering, construction and machin-
ery companies are affected by changes in interest rates and governmental spend-
ing and financing of public works and cleanup projects. Finally, all of these
types of companies are heavily affected by regulation of various governments,
including the federal Environmental Protection Agency and its state counter-
parts. As regulations are developed and enforced, such companies may be re-
quired to alter or cease production of a product or service or to agree to re-
strictions on their operations.
Companies in the various communications and entertainment industries encounter
intense competition, short product life cycles and rapidly changing consumer
tastes. In addition, companies in the telecommunications and utilities indus-
tries are subject to heavy governmental regulation.
Small companies may have limited product lines, markets, or financial re-
sources, or may be dependent upon a small management group, and their securi-
ties may be subject to more abrupt or erratic market movements than larger,
more established companies, both because their securities typically are traded
in lower volume and because the issuers typically are subject to a greater de-
gree to changes in their earnings and prospects.
All Funds may invest in the securities of foreign issuers. Investments in for-
eign securities involve certain risks not ordinarily associated with invest-
ments in domestic securities. Such risks include fluctuations in foreign ex-
change rates, future political and economic developments, and the possible im-
position of exchange controls or other foreign governmental laws or restric-
tions. In addition, with respect to certain countries there is the possibility
of expropriation of assets, confiscatory taxation, political or social insta-
bility or diplomatic developments which could adversely affect investments in
those countries. There may be less publicly available information about a for-
eign company than about a U.S. company, and foreign companies may not be sub-
ject to accounting, auditing and financial reporting standards and requirements
comparable to or as uniform as those of U.S.-based companies. Foreign securi-
ties markets, while growing in volume, have, for the most part, substantially
less volume than U.S. markets, and securities of many foreign companies are
less liquid and their prices more volatile than securities of comparable U.S.-
based companies. Transaction costs on foreign securities markets are generally
higher than in the United States. There is generally less government supervi-
sion and regulation of foreign exchanges, brokers and issuers than there is in
the United States and a Fund might have greater difficulty taking appropriate
legal action in a foreign court. Dividends and interest payable on a Fund's
foreign portfolio securities may be subject to foreign withholding taxes. To
the extent such taxes are not offset by credits or deductions allowed to in-
vestors under the Federal income tax provisions, they may reduce the net return
to the shareholders.
The Funds should not be considered a complete investment program. In view of
the specialized nature of their investment activities, investment in the Equity
and Theme Funds' shares may be suitable only for those investors who can invest
without concern for current income and are financially able to assume risk in
search of long-term capital gains.
Securities of companies discussed in this section may be more volatile than
the overall market.
PORTFOLIO INSTRUMENTS AND OTHER
INVESTMENT INFORMATION
MONEY MARKET INSTRUMENTS
All Funds may invest in "money market instruments," which include, among other
things, bank obligations, commercial paper and corporate bonds with remaining
maturities of 13 months or less.
Bank obligations include bankers' acceptances, negotiable certificates of de-
posit, and non-negotiable
22
<PAGE>
time deposits earning a specified return and issued by a U.S. bank which is a
member of the Federal Reserve System or insured by the Bank Insurance Fund of
the Federal Deposit Insurance Corporation ("FDIC"), or by a savings and loan
association or savings bank which is insured by the Savings Association Insur-
ance Fund of the FDIC. Bank obligations also include U.S. dollar-denominated
obligations of foreign branches of U.S. banks and obligations of domestic
branches of foreign banks. Investments in bank obligations of foreign branches
of domestic financial institutions or of domestic branches of foreign banks are
limited so that no more than 5% of the value of a Fund's total assets may be
invested in any one branch, and no more than 20% of a particular Fund's total
assets at the time of purchase may be invested in the aggregate in such obliga-
tions (see investment limitation No. 5 below under "Investment Limitations").
Investments in time deposits are limited to no more than 5% of the value of a
Fund's total assets at the time of purchase.
Investments by the Funds in commercial paper will consist of issues that are
rated "A-2" or better by S&P or "Prime-2" or better by Moody's. In addition,
each Fund may acquire unrated commercial paper that is determined by the In-
vestment Adviser at the time of purchase to be of comparable quality to rated
instruments that may be acquired by the particular Fund.
Commercial paper may include variable and floating rate instruments. While
there may be no active secondary market with respect to a particular instrument
purchased by a Fund, the Fund may, from time to time as specified in the in-
strument, demand payment of the principal of the instrument or may resell the
instrument to a third party. The absence of an active secondary market, howev-
er, could make it difficult for a Fund to dispose of the instrument if the is-
suer defaulted on its payment obligation or during periods that the Fund is not
entitled to exercise its demand rights, and the Fund could, for this or other
reasons, suffer a loss with respect to such instrument. Any security which can-
not be disposed of within seven days without taking a reduced price will be
considered an illiquid security subject to the 10% limitation discussed below
under "Investment Limitations."
GOVERNMENT OBLIGATIONS
All Funds may invest in U.S. Government obligations, including U.S. Treasury
Bills and the obligations of Federal Home Loan Banks, Federal Farm Credit
Banks, Federal Land Banks, the Federal Housing Administration, the Farmers Home
Administration, the Export-Import Bank of the United States, the Small Business
Administration, the Government National Mortgage Association, the Federal Na-
tional Mortgage Association, the General Services Administration, the Student
Loan Marketing Association, the Central Bank for Cooperatives, the Federal Home
Loan Mortgage Corporation, the Federal Intermediate Credit Banks and the Mari-
time Administration.
REPURCHASE AGREEMENTS
In order to effectively manage their cash holdings, the Funds may enter into
repurchase agreements. Each Fund will enter into repurchase agreements only
with financial institutions that are deemed to be creditworthy by the Invest-
ment Adviser, pursuant to guidelines established by Master Fund's Board of
Directors. No Fund will enter into repurchase agreements with the Investment
Adviser or any of its affiliates. Repurchase agreements with remaining maturi-
ties in excess of seven days will be considered illiquid securities and will be
subject to the 10% limit described in Investment Limitation No. 6 below.
The seller under a repurchase agreement will be required to maintain the value
of the securities which are subject to the agreement and held by a Fund at not
less than the repurchase price. Default or bankruptcy of the seller would, how-
ever, expose a Fund to possible delay in connection with the disposition of the
underlying securities or loss to the extent that proceeds from a sale of the
underlying securities were less than the repurchase price under the agreement.
23
<PAGE>
SECURITIES LENDING
To increase return on its portfolio securities, each Fund may lend its portfo-
lio securities to broker/dealers pursuant to agreements requiring the loans to
be continuously secured by collateral equal at all times in value to at least
the market value of the securities loaned. Collateral for such loans may in-
clude cash, securities of the U.S. Government, its agencies or instrumentali-
ties, or an irrevocable letter of credit issued by a bank, or any combination
thereof. Such loans will not be made if, as a result, the aggregate of all out-
standing loans of a Fund exceeds 30% of the value of its total assets. There
may be risks of delay in receiving additional collateral or in recovering the
securities loaned or even a loss of rights in the collateral should the bor-
rower of the securities fail financially. However, loans are made only to bor-
rowers deemed by the Investment Adviser to be of good standing and when, in the
Investment Adviser's judgment, the income to be earned from the loan justifies
the attendant risks.
OPTIONS
To further increase return on their portfolio securities in accordance with
their respective investment objectives and policies, the Funds may enter into
option transactions as described below.
The Income and Growth and Theme Funds may purchase put and call options listed
on a national securities exchange and issued by the Options Clearing Corpora-
tion in an amount not exceeding 5% of a Fund's net assets, as described further
in the Statement of Additional Information. Such options may relate to particu-
lar securities or to various stock or bond indices. Purchasing options is a
specialized investment technique which entails a substantial risk of a complete
loss of the amounts paid as premiums to the writer of the options.
In addition, each Fund may engage in writing covered call options (options on
securities owned by the particular Fund) and enter into closing purchase trans-
actions with respect to such options. Such options must be listed on a national
securities exchange and issued by the Options Clearing Corporation. The aggre-
gate value of the securities subject to options written by each Fund may not
exceed 25% of the value of its net assets. By writing a covered call option, a
Fund forgoes the opportunity to profit from an increase in the market price of
the underlying security above the exercise price except insofar as the premium
represents such a profit, and it will not be able to sell the underlying secu-
rity until the option expires or is exercised or the Fund effects a closing
purchase transaction by purchasing an option of the same series. The use of
covered call options is not a primary investment technique of the Funds and
such options will normally be written on underlying securities as to which the
Investment Adviser does not anticipate significant short-term capital apprecia-
tion. Additional information on option practices, including particular risks
thereof, is provided in the Funds' Statement of Additional Information.
FUTURES CONTRACTS
The Theme Funds may also enter into interest rate futures contracts, other
types of financial futures contracts and related futures options, as well as
any index or foreign market futures which are available on recognized exchanges
or in other established financial markets.
The Theme Funds will not engage in futures transactions for speculation, but
only as a hedge against changes in market values of securities which a Fund
holds or intends to purchase. The Theme Funds will engage in futures transac-
tions only to the extent permitted by the Commodity Futures Trading Commission
("CFTC") and the Securities and Exchange Commission ("SEC"). When investing in
futures contracts, the Funds must satisfy certain asset segregation require-
ments to ensure that the use of futures is unleveraged. When a Fund takes a
long position in a futures contract, it must maintain a segregated account con-
taining cash and/or certain liquid assets
24
<PAGE>
equal to the purchase price of the contract, less any margin or deposit. When a
Fund takes a short position in a futures contract, the Fund must maintain a
segregated account containing cash and/or certain liquid assets in an amount
equal to the market value of the securities underlying such contract (less any
margin or deposit), which amount must be at least equal to the market price at
which the short position was established. Asset segregation requirements are
not applicable when a Fund "covers" an options or futures position generally by
entering into an offsetting position. Each Fund will limit its hedging transac-
tions in futures contracts and related options so that, immediately after any
such transaction, the aggregate initial margin that is required to be posted by
the Fund under the rules of the exchange on which the futures contract (or
futures option) is traded, plus any premiums paid by the Fund on its open
futures options positions, does not exceed 5% of the Fund's total assets, after
taking into account any unrealized profits and unrealized losses on the Fund's
open contracts (and excluding the amount that a futures option is "in-the-mon-
ey" at the time of purchase). An option to buy a futures contract is "in-the-
money" if the then-current purchase price of the underlying futures contract
exceeds the exercise or strike price; an option to sell a futures contract is
"in-the-money" if the exercise or strike price exceeds the then-current pur-
chase price of the contract that is the subject of the option. In addition, the
use of futures contracts is further restricted to the extent that no more than
10% of a Fund's total assets may be hedged.
Transactions in futures as a hedging device may subject a Fund to a number of
risks. Successful use of futures by a Fund is subject to the ability of the In-
vestment Adviser to correctly anticipate movements in the direction of the mar-
ket. In addition, there may be an imperfect correlation, or no correlation at
all, between movements in the price of the futures contracts (or options) and
movements in the price of the instruments being hedged. Further, there is no
assurance that a liquid market will exist for any particular futures contract
(or option) at any particular time. Consequently, a Fund may realize a loss on
a futures transaction that is not offset by a favorable movement in the price
of securities which it holds or intends to purchase or may be unable to close a
futures position in the event of adverse price movements.
INVESTMENT COMPANY SECURITIES
In connection with the management of its daily cash positions, each Fund may
invest in securities issued by other investment companies which invest in high-
quality, short-term debt securities and which determine their net asset value
per share based on the amortized cost or penny-rounding method. The Income and
Growth Fund may also purchase securities of unit investment trusts registered
with the SEC as investment companies. In addition to the advisory fees and
other expenses a Fund bears directly in connection with its own operations, as
a shareholder of another investment company, a Fund would bear its pro rata
portion of the other investment company's advisory fees and other expenses. As
such, the Fund's shareholders would indirectly bear the expenses of the Fund
and the other investment company, some or all of which would be duplicative.
Such securities will be acquired by each Fund within the limits prescribed by
the Investment Company Act of 1940 (the "1940 Act") which include, subject to
certain exceptions, a prohibition against a Fund investing more than 10% of the
value of its total assets in such securities.
WHEN-ISSUED AND FORWARD TRANSACTIONS
Each Fund may purchase eligible securities on a "when-issued" basis and may
purchase or sell securities on a "forward commitment" basis. These transactions
involve a commitment by a Fund to purchase or sell particular securities with
payment and delivery taking place in the future, beyond the normal settlement
date, at a stated price and yield. Securities purchased on a "forward commit-
ment" or "when-issued" basis are recorded as an asset and are subject to
changes in value based upon changes in the general level of interest rates. It
is expected that forward commitments and "when-issued" purchases will not
25
<PAGE>
exceed 25% of the value of a Fund's total assets absent unusual market condi-
tions, and that the length of such commitments will not exceed 45 days. The
Funds do not intend to engage in "when-issued" purchases and forward commit-
ments for speculative purposes, but only in furtherance of their investment ob-
jectives.
ILLIQUID SECURITIES
No Fund will knowingly invest more than 10% of the value of its net assets in
securities that are illiquid. Each Fund may purchase securities which are not
registered under the Securities Act of 1933 (the "Act") but which can be sold
to "qualified institutional buyers" in accordance with Rule 144A under the Act.
Any such security will not be considered illiquid so long as it is determined
by the Investment Adviser, acting under guidelines approved and monitored by
the Board, that an adequate trading market exists for that security. This in-
vestment practice could have the effect of increasing the level of illiquidity
in a Fund during any period that qualified institutional buyers become uninter-
ested in purchasing these restricted securities.
PORTFOLIO TURNOVER
Each Fund may sell a portfolio investment immediately after its acquisition if
the Investment Adviser believes that such a disposition is consistent with the
investment objective of the particular Fund. Portfolio investments may be sold
for a variety of reasons, such as a more favorable investment opportunity or
other circumstances bearing on the desirability of continuing to hold such in-
vestments. A high rate of portfolio turnover may involve correspondingly
greater brokerage commission expenses and other transaction costs, which must
be borne directly by a Fund and ultimately by its shareholders. High portfolio
turnover may result in the realization of substantial net capital gains. To the
extent net short-term capital gains are realized, any distributions resulting
from such gains are considered ordinary income for Federal income tax purposes.
(See "Financial Highlights" and "Taxes--Federal").
INVESTMENT LIMITATIONS
The investment limitations enumerated below are matters of fundamental policy
and may not be changed with respect to a Fund without the vote of the holders
of a majority of a Fund's outstanding shares (as defined under "Miscellane-
ous").
A Fund may not:
1. Purchase securities of any one issuer, other than U.S. Government obliga-
tions, if immediately after such purchase more than 5% of the value of its
total assets would be invested in the securities of such issuer, except that
up to 25% of the value of its total assets may be invested without regard to
this 5% limitation;
2. Borrow money except from banks for temporary purposes, and then in
amounts not in excess of 10% of the value of its total assets at the time of
such borrowing; or mortgage, pledge, or hypothecate any assets except in con-
nection with any such borrowing and in amounts not in excess of the lesser of
the dollar amounts borrowed and 10% of the value of its total assets at the
time of such borrowing. (This borrowing provision is included solely to fa-
cilitate the orderly sale of portfolio securities to accommodate abnormally
heavy redemption requests and is not for leverage purposes.) A Fund will not
purchase portfolio securities while borrowings in excess of 5% of its total
assets are outstanding. Optioned stock held in escrow is not deemed to be a
pledge; and
3. Make loans, except that (i) each Fund may purchase or hold debt securi-
ties in accordance with its investment objective and policies, and may enter
into repurchase agreements with respect to obligations issued or guaranteed
by the U.S. Government, its agencies or instrumentalities, (ii) each Fund may
lend portfolio securities in an amount
26
<PAGE>
not exceeding 30% of its total assets, and (iii) the Income and Growth Fund
may purchase or hold creditor claims, loan participations and other instru-
ments in accordance with its investment objectives and policies.
Each Fund other than the Long-Term Supply of Energy Fund may not:
4. Purchase any securities which would cause more than 25% of the value of
its total assets at the time of purchase to be invested in the securities of
one or more issuers conducting their principal business activities in the
same industry, provided that (a) with respect to the Equity and Income and
Growth Funds, there is no limitation with respect to securities issued or
guaranteed by the U.S. Government or domestic bank obligations, (b) with re-
spect to each Theme Fund, there is no limitation with respect to securities
issued or guaranteed by the U.S. Government, and (c) neither all finance com-
panies, as a group, nor all utility companies, as a group, are considered a
single industry for purposes of this policy.
Each of the Equity and Income and Growth Funds may not:
5. Invest in obligations of foreign branches of financial institutions or in
domestic branches of foreign banks, if immediately after such purchase (i)
more than 5% of the value of its total assets would be invested in obliga-
tions of any one foreign branch of the financial institution or domestic
branch of a foreign bank; or (ii) more than 20% of its total assets would be
invested in foreign branches of financial institutions or in domestic
branches of foreign banks; and
6. Knowingly invest more than 10% of the value of its total assets in illiq-
uid securities, including repurchase agreements with remaining maturities in
excess of seven days, restricted securities, and other securities for which
market quotations are not readily available.
* * *
In addition to the investment limitations described above, no Fund may invest
in the securities of any single issuer if, as a result, the Fund holds more
than 10% of the outstanding voting securities of such issuer.
The Theme Funds may not invest in obligations of foreign branches of financial
institutions or in domestic branches of foreign banks if immediately after such
purchase (i) more than 5% of the value of their respective total assets would
be invested in obligations of any one foreign branch of the financial institu-
tion or domestic branch of a foreign bank; or (ii) more than 20% of their re-
spective total assets would be invested in foreign branches of financial insti-
tutions or in domestic branches of foreign banks. The Theme Funds may not know-
ingly invest more than 10% of the value of their respective total assets in il-
liquid securities, including repurchase agreements with remaining maturities in
excess of seven days, restricted securities and other securities for which mar-
ket quotations are not readily available. These investment policies may be
changed by Master Fund's Board of Directors upon reasonable notice to share-
holders.
The Equity and Income and Growth Funds will not invest more than 25% of the
value of their respective total assets in domestic bank obligations.
With respect to all investment policies, if a percentage limitation is satis-
fied at the time of investment, a later increase or decrease in such percentage
resulting from a change in value of a Fund's portfolio securities will not con-
stitute a violation of such limitation.
PRICING OF SHARES
The net asset value of each Fund is determined and the Shares of each Fund are
priced at the close of regular trading hours on the New York Stock Exchange
(the "Exchange"), currently 4:00 p.m. (Eastern Time). Net asset value and pric-
ing for each Fund
27
<PAGE>
are determined on each day the Exchange and the Investment Adviser are open for
trading ("Business Day"). Currently, the holidays which the Funds observe are
New Year's Day, Martin Luther King, Jr. Day, Presidents' Day, Good Friday, Me-
morial Day, Independence Day, Labor Day, Columbus Day, Veterans Day, Thanksgiv-
ing Day and Christmas. A Fund's net asset value per Service Share for purposes
of pricing sales and redemptions is calculated by dividing the value of all se-
curities and other assets allocable to its Service Shares, less the liabilities
allocable to its Service Shares, by the number of its outstanding Service
Shares.
Assets in the Funds which are traded on a recognized domestic stock exchange
are valued at the last sale price on the securities exchange on which such se-
curities are primarily traded or at the last sale price on the national securi-
ties market. Securities traded only on over-the-counter markets are valued on
the basis of closing over-the-counter bid prices. Securities for which there
were no transactions are valued at the average of the most recent bid and asked
prices. An option or futures contract is valued at the last sales price quoted
on the principal exchange or board of trade on which such option or contract is
traded, or in the absence of a sale, the mean between the last bid and asked
prices. Restricted securities, securities for which market quotations are not
readily available, and other assets are valued at fair value, pursuant to
guidelines adopted by Master Fund's Board of Directors.
Portfolio securities which are primarily traded on foreign securities ex-
changes are generally valued at the preceding closing values of such securities
on their respective exchanges, except that when an event subsequent to the time
where value was so established is likely to have changed such value, then the
fair value of those securities will be determined by consideration of other
factors under the direction of the Board of Directors. A security which is
listed or traded on more than one exchange is valued at the quotation on the
exchange determined to be the primary market for such security. Investments in
debt securities having a maturity of 60 days or less are valued based upon the
amortized cost method. All other foreign securities are valued at the last cur-
rent bid quotation if market quotations are available, or at fair value as de-
termined in accordance with guidelines adopted by the Board of Directors. For
valuation purposes, quotations of foreign securities in foreign currency are
converted to U.S. dollars equivalent at the prevailing market rate on the day
of conversion. Some of the securities acquired by the Funds may be traded on
foreign exchanges or over-the-counter markets on days which are not Business
Days. In such cases, the net asset value of the Shares may be significantly af-
fected on days when investors can neither purchase nor redeem a Fund's Shares.
Master Fund's administrators have undertaken to price the securities in the
Funds' portfolios, and may use one or more independent pricing services in con-
nection with this service.
HOW TO PURCHASE AND REDEEM SHARES
DISTRIBUTOR
Shares in each Fund are continuously offered for sale by Master Fund's sponsor
and distributor, Edgewood Services, Inc. (the "Distributor"), a wholly-owned
subsidiary of Federated Investors. The Distributor is a registered
broker/dealer. Its principal offices are at Federated Investors Tower, 1001
Liberty Avenue, Pittsburgh, PA 15222-3779.
PURCHASE OF SHARES
The Distributor has established several procedures for purchasing Shares in
order to accommodate different types of investors.
Shares may be purchased directly by individuals ("Direct Investors") or by in-
stitutions ("Institutional Investors" and, collectively with Direct Investors,
"Investors"). Shares may also be purchased by customers ("Customers") of the
Investment Adviser, its
28
<PAGE>
affiliates and correspondent banks, and other institutions ("Shareholder Orga-
nizations") that have entered into shareholder servicing agreements with Master
Fund. A Shareholder Organization may elect to hold of record Shares for its
Customers and to record beneficial ownership of Shares on the account state-
ments provided by it to its Customers. If it does so, it is the Shareholder Or-
ganization's responsibility to transmit to the Distributor all purchase orders
for its Customers and to transmit, on a timely basis, payment for such orders
to Mutual Funds Service Company ("MFSC"), the Funds' sub-transfer agent, in ac-
cordance with the procedures agreed to by the Shareholder Organization and the
Distributor. Confirmations of all such Customer purchases and redemptions will
be sent by MFSC to the particular Shareholder Organization. As an alternative,
a Shareholder Organization may elect to establish its Customers' accounts of
record with MFSC. In this event, even if the Shareholder Organization continues
to place its Customers' purchase and redemption orders with the Funds, MFSC
will send confirmations of such transactions and periodic account statements
directly to Customers. A Shareholder Organization may also elect to establish
its Customers as record holders.
Master Fund enters into shareholder servicing agreements with Shareholder Or-
ganizations which agree to provide their Customers various shareholder adminis-
trative services with respect to their Shares (hereinafter referred to as
"Service Organizations"). Shares in the Funds bear the expense of fees payable
to Service Organizations for such services. See "Management of the Funds--Serv-
ice Organizations."
Customers wishing to purchase Shares through their Shareholder Organization
should contact such entity directly for appropriate instructions. (For a list
of Shareholder Organizations in your area, call (800) 446-1012.) An investor
purchasing Shares through a registered investment adviser or certified finan-
cial planner may incur transaction charges in connection with such purchases.
Such investors should contact their registered investment adviser or certified
finan-
cial planner for further information on transaction fees. Investors may also
purchase Shares directly in accordance with procedures described below under
"Purchase Procedures."
PUBLIC OFFERING PRICE
The public offering price for Shares of each Fund is the sum of the net asset
value of the Shares purchased plus a sales load according to the table below:
<TABLE>
<CAPTION>
TOTAL SALES CHARGES REALLOWANCE TO DEALERS
------------------------------ ----------------------
AS A % OF AS A % OF AS A % OF
OFFERING PRICE NET ASSET OFFERING PRICE
AMOUNT OF TRANSACTION PER SHARE VALUE PER SHARE PER SHARE
--------------------- -------------- --------------- ----------------------
<S> <C> <C> <C>
Less than $50,000....... 4.50% 4.71% 4.00%
$50,000 to $99,999...... 4.00 4.17 3.50
$100,000 to $249,999.... 3.50 3.63 3.00
$250,000 to $499,999.... 3.00 3.09 2.50
$500,000 to $999,999.... 2.00 2.05 1.50
$1,000,000 to
$1,999,999............. 1.00 1.00 .50
$2,000,000 and over..... .50 .50 .25
</TABLE>
The reallowance to dealers may be changed from time to time but will remain
the same for all such dealers.
At various times the Distributor may implement programs under which a dealer's
sales force may be eligible to win nominal awards for certain sales efforts or
under which the Distributor will reallow to any dealer that sponsors sales con-
tests or recognition programs conforming to criteria established by the Dis-
tributor, or participates in sales programs sponsored by the Distributor, an
amount not exceeding the total applicable sales charges on the sales generated
by the dealer at the public offering price during such programs. Also, the Dis-
tributor in its discretion may from time to time, pursuant to objective crite-
ria established by the Distributor, pay fees to qualifying
29
<PAGE>
dealers for certain services or activities which are primarily intended to re-
sult in sales of Shares of the Funds. If any such program is made available to
any dealer, it will be made available to all dealers on the same terms and con-
ditions. Payments made under such programs will be made by the Distributor out
of its own assets and not out of the assets of the Funds. These programs will
not change the price of Shares or the amount that the Funds will receive from
such sales.
The sales load described above will not be applicable to: (a) purchases of
Shares by customers of the Investment Adviser or its affiliates; (b) trust,
agency or custodial accounts opened through the trust department of a bank,
trust company or thrift institution, provided that appropriate notification of
such status is given at the time of investment; (c) companies, corporations and
partnerships (excluding full service broker/dealers and financial planners,
registered investment advisers and depository institutions not covered by the
exemptions in (d) and (e) below); (d) financial planners and registered invest-
ment advisers not affiliated with or clearing purchases through full service
broker/dealers; (e) purchases of Shares by depository institutions for their
own account as principal; (f) exchange transactions (described below under "In-
vestor Programs--Exchange Privilege") where the Shares being exchanged were ac-
quired in connection with the distribution of assets held in trust, agency or
custodial accounts maintained with the trust department of a bank; (g) corpo-
rate/ business retirement plans (such as 401(k), 403(b)(7), 457 and Keogh ac-
counts) sponsored by the Distributor and IRA accounts sponsored by the Invest-
ment Adviser; (h) company-sponsored employee pension or retirement plans making
direct investments in the Funds; (i) purchases of Shares by officers, trustees,
directors, employees and retirees of Master Fund, UST Master Tax-Exempt Funds,
Inc. ("Master Tax-Exempt Fund"), the Investment Adviser, the Distributor or of
any direct or indirect affiliate of any of them; (j) purchases of Shares by all
beneficial shareholders of Master Fund or Master Tax-Exempt Fund as of May 22,
1989; (k) purchases of Shares by investment advisers registered under the In-
vestment Advisers Act of 1940 for their customers through an omnibus account
established with United States Trust Company of New York; (l) purchases of
Shares by directors, officers and employees of brokers and dealers selling
shares pursuant to a selling agreement with Master Fund and Master Tax-Exempt
Fund; (m) purchases of shares by investors who are members of affinity groups
serviced by USAffinity Investments Limited Partnership; and (n) customers of
certain financial institutions who purchase Shares through a registered repre-
sentative of UST Financial Services Corp. on the premises of their financial
institutions. In addition, no sales load is charged on the reinvestment of div-
idends or distributions or in connection with certain share exchange transac-
tions. Investors who have previously redeemed shares in an "Eligible Fund" (as
defined below) on which a sales load has been paid also have a one-time privi-
lege of purchasing shares of another "Eligible Fund" at net asset value without
a sales charge, provided that such privilege will apply only to purchases made
within 30 calendar days from the date of redemption and only with respect to
the amount of the redemption. These exemptions to the imposition of a sales
load are due to the nature of the investors and/or reduced sales effort that
will be needed in obtaining investments.
QUANTITY DISCOUNTS
An investor in the Funds may be entitled to reduced sales charges through
Rights of Accumulation, a Letter of Intent or a combination of investments, as
described below, even if the investor does not wish to make an investment of a
size that would normally qualify for a quantity discount.
In order to obtain quantity discount benefits, an investor must notify MFSC at
the time of purchase that he or she would like to take advantage of any of the
discount plans described below. Upon such notification, the investor will re-
ceive the lowest applicable sales charge. Quantity discounts may be modified or
30
<PAGE>
terminated at any time and are subject to confirmation of an investor's hold-
ings through a check of appropriate records. For more information about quan-
tity discounts, please call (800) 446-1012 or contact your Shareholder Organi-
zation.
Rights of Accumulation. A reduced sales load applies to any purchase of shares
of any portfolio of Master Fund and Master Tax-Exempt Fund that is sold with a
sales load ("Eligible Fund") where an investor's then current aggregate invest-
ment is $50,000 or more. "Aggregate investment" means the total of: (a) the
dollar amount of the then current purchase of shares of an Eligible Fund, and
(b) the value (based on current net asset value) of previously purchased and
beneficially owned shares of any Eligible Fund on which a sales load has been
paid. If, for example, an investor beneficially owns shares of one or more Eli-
gible Funds with an aggregate current value of $49,000 on which a sales load
has been paid and subsequently purchases shares of an Eligible Fund having a
current value of $1,000, the load applicable to the subsequent purchase would
be reduced to 4.00% of the offering price. Similarly, with respect to each sub-
sequent investment, all shares of Eligible Funds that are beneficially owned by
the investor at the time of investment may be combined to determine the appli-
cable sales load.
Letter of Intent. By completing the Letter of Intent included as part of the
New Account Application, an investor becomes eligible for the reduced sales
load applicable to the total number of Eligible Fund shares purchased in a 13-
month period pursuant to the terms and under the conditions set forth below and
in the Letter of Intent. To compute the applicable sales load, the offering
price of shares of an Eligible Fund on which a sales load has been paid, bene-
ficially owned by an investor on the date of submission of the Letter of In-
tent, may be used as a credit toward completion of the Letter of Intent. Howev-
er, the reduced sales load will be applied only to new purchases.
MFSC will hold in escrow shares equal to 5% of the amount indicated in the
Letter of Intent for payment of a higher sales load if an investor does not
purchase the full amount indicated in the Letter of Intent. The escrow will be
released when an investor fulfills the terms of the Letter of Intent by pur-
chasing the specified amount. If purchases qualify for a further sales load re-
duction, the sales load will be adjusted to reflect an investor's total pur-
chases. If total purchases are less than the amount specified, an investor will
be requested to remit an amount equal to the difference between the sales load
actually paid and the sales load applicable to the total purchases. If such re-
mittance is not received within 20 days, MFSC, as attorney-in-fact pursuant to
the terms of the Letter of Intent and at the Distributor's direction, will re-
deem an appropriate number of shares held in escrow to realize the difference.
Signing a Letter of Intent does not bind an investor to purchase the full
amount indicated at the sales load in effect at the time of signing, but an in-
vestor must complete the intended purchase in accordance with the terms of the
Letter of Intent to obtain the reduced sales load. To apply, an investor must
indicate his or her intention to do so under a Letter of Intent at the time of
purchase.
Qualification for Discounts. For purposes of applying the Rights of Accumula-
tion and Letter of Intent privileges described above, the scale of sales loads
applies to the combined purchases made by any individual and/or spouse purchas-
ing securities for his, her or their own account or for the account of any mi-
nor children, or the aggregate investments of a trustee or custodian of any
qualified pension or profit sharing plan or IRA established (or the aggregate
investment of a trustee or other fiduciary) for the benefit of the persons
listed above.
PURCHASE PROCEDURES
General
Direct Investors may purchase Shares by completing the Application for pur-
chase of Shares accompanying this Prospectus and mailing it, together with a
check payable to UST Master Funds, to:
31
<PAGE>
UST Master Funds
c/o Mutual Funds Service Company
P.O. Box 2798
Boston, MA 02208-2798
Subsequent investments in an existing account in any Fund may be made at any
time by sending to the above address a check payable to UST Master Funds along
with: (a) the detachable form that regularly accompanies the confirmation of a
prior transaction; (b) a subsequent order form which may be obtained from MFSC;
or (c) a letter stating the amount of the investment, the name of the Fund and
the account number in which the investment is to be made. Institutional Invest-
ors may purchase Shares by transmitting their purchase orders to MFSC by tele-
phone at (800) 446-1012 or by terminal access. Institutional Investors must pay
for Shares with Federal funds or funds immediately available to MFSC.
Purchases by Wire
Investors may also purchase Shares by wiring Federal funds to MFSC. Prior to
making an initial investment by wire, an Investor must telephone MFSC at (800)
446-1012 (from overseas, call (617) 557-8280 for instructions. Federal funds
and registration instructions should be wired through the Federal Reserve Sys-
tem to:
United States Trust Company of New York
ABA #021001318
UST Funds, Account No. 2901447
For further credit to:
UST Master Funds
Wire Control Number
Account Registration (including account number)
Investors making initial investments by wire must promptly complete the Appli-
cation accompanying this Prospectus and forward it to MFSC. Redemptions by In-
vestors will not be processed until the completed Application for purchase of
Shares has been received by MFSC and accepted by the Distributor. Investors
making subsequent investments by wire should follow the above instructions.
OTHER PURCHASE INFORMATION
Except as provided in "Investor Programs" below, the minimum initial invest-
ment by an Investor or initial aggregate investment by a Shareholder Organiza-
tion investing on behalf of its Customers is $500 per Fund. The minimum subse-
quent investment for both types of investors is $50 per Fund. Customers may
agree with a particular Shareholder Organization to make a minimum purchase
with respect to their accounts. Depending upon the terms of the particular ac-
count, Shareholder Organizations may charge a Customer's account fees for auto-
matic investment and other cash management services provided. Master Fund re-
serves the right to reject any purchase order, in whole or in part, or to waive
any minimum investment requirements.
REDEMPTION PROCEDURES
Customers of Shareholder Organizations holding Shares of record may redeem all
or part of their investments in the Funds in accordance with procedures gov-
erning their accounts at the Shareholder Organizations. It is the responsibil-
ity of the Shareholder Organizations to transmit redemption orders to MFSC and
credit such Customer accounts with the redemption proceeds on a timely basis.
Redemption orders for Institutional Investors must be transmitted to MFSC by
telephone at (800) 446-1012 or by terminal access. No charge for wiring redemp-
tion payments to Shareholder Organizations or Institutional Investors is im-
posed by Master Fund, although Shareholder Organizations may charge a Custom-
er's account for wiring redemption proceeds. Information relating to such re-
demption services and charges, if any, is available from the Shareholder Orga-
nizations. An investor redeeming Shares through a registered investment adviser
or certified financial planner may incur transaction charges in connection with
such re
32
<PAGE>
demptions. Such investors should contact their registered investment adviser or
certified financial planner for further information on transaction fees. In-
vestors may redeem all or part of their Shares in accordance with any of the
procedures described below (these procedures also apply to Customers of Share-
holder Organizations for whom individual accounts have been established with
MFSC).
REDEMPTION BY MAIL
Shares may be redeemed by a Direct Investor by submitting a written request
for redemption to:
UST Master Funds
c/o Mutual Funds Service Company
P.O. Box 2798 Boston, MA 02208-2798
A written redemption request to MFSC must (i) state the number of Shares to be
redeemed, (ii) identify the shareholder account number and tax identification
number, and (iii) be signed by each registered owner exactly as the Shares are
registered. If the Shares to be redeemed were issued in certificate form, the
certificates must be endorsed for transfer (or accompanied by a duly executed
stock power) and must be submitted to MFSC together with the redemption re-
quest. A redemption request for an amount in excess of $50,000 per account, or
for any amount if the proceeds are to be sent elsewhere than the address of
record, must be accompanied by signature guarantees from any eligible guarantor
institution approved by MFSC in accordance with its Standards, Procedures and
Guidelines for the Acceptance of Signature Guarantees ("Signature Guarantee
Guidelines"). Eligible guarantor institutions generally include banks,
broker/dealers, credit unions, national securities exchanges, registered secu-
rities associations, clearing agencies and savings associations. All eligible
guarantor institutions must participate in the Securities Transfer Agents Me-
dallion Program ("STAMP") in order to be approved by MFSC pursuant to the Sig-
nature Guarantee Guidelines. Copies of the Signature Guarantee Guidelines and
information on STAMP can be obtained from MFSC at (800) 446-1012 or at the ad-
dress given above. MFSC may require additional supporting documents for redemp-
tions made by corporations, executors, administrators, trustees and guardians.
A redemption request will not be deemed to be properly received until MFSC re-
ceives all required documents in proper form. Payment for Shares redeemed will
ordinarily be made by mail within five Business Days after proper receipt by
MFSC of the redemption request. Questions with respect to the proper form for
redemption requests should be directed to MFSC at (800) 446-1012 (from over-
seas, call (617) 557-8280).
REDEMPTION BY WIRE OR TELEPHONE
Direct Investors who have so indicated on the Application, or have subse-
quently arranged in writing to do so, may redeem Shares by instructing MFSC by
wire or telephone to wire the redemption proceeds directly to the Direct In-
vestor's account at any commercial bank in the United States. Customers of cer-
tain Shareholder Organizations who are shareholders of record may redeem Shares
by instructing MFSC by telephone to mail a check for redemption proceeds of
$500 or more to the shareholder of record at his or her address of record. In-
stitutional Investors may also redeem Shares by instructing MFSC by telephone
at (800) 446-1012 or by terminal access. Only redemptions of $500 or more will
be wired to a Direct Investor's account. An $8.00 fee for each wire redemption
by a Direct Investor is deducted by MFSC from the proceeds of the redemption.
The redemption proceeds for Direct Investors must be paid to the same bank and
account as designated on the Application or in written instructions subse-
quently received by MFSC.
In order to arrange for redemption by wire or telephone after an account has
been opened or to change the bank or account designated to receive redemption
proceeds, a Direct Investor must send a written request to Master Fund, c/o
MFSC, at the address listed above under "Redemption by Mail." Such requests
33
<PAGE>
must be signed by the Direct Investor, with signatures guaranteed (see "Redemp-
tion by Mail" above, for details regarding signature guarantees). Further docu-
mentation may be requested.
MFSC and the Distributor reserve the right to re- fuse a wire or telephone re-
demption if it is believed advisable to do so. Procedures for redeeming Shares
by wire or telephone may be modified or terminated at any time by Master Fund,
MFSC or the Distributor. MASTER FUND, MFSC, AND THE DISTRIBUTOR WILL NOT BE LI-
ABLE FOR ANY LOSS, LIABILITY, COST OR EXPENSE FOR ACTING UPON TELEPHONE IN-
STRUCTIONS THAT ARE REASONABLY BELIEVED TO BE GENUINE. IN ATTEMPTING TO CONFIRM
THAT TELEPHONE INSTRUCTIONS ARE GENUINE, MASTER FUND WILL USE SUCH PROCEDURES
AS ARE CONSIDERED REASONABLE, INCLUDING RECORDING THOSE INSTRUCTIONS AND RE-
QUESTING INFORMATION AS TO ACCOUNT REGISTRATION.
If any portion of the Shares to be redeemed represents an investment made by
personal check, Master Fund and MFSC reserve the right not to honor the redemp-
tion until MFSC is reasonably satisfied that the check has been collected in
accordance with the applicable banking regulations which may take up to 15
days. A Direct Investor who anticipates the need for more immediate access to
his or her investment should purchase Shares by Federal funds or bank wire or
by certified or cashier's check. Banks normally impose a charge in connection
with the use of bank wires, as well as certified checks, cashier's checks and
Federal funds. If a Direct Investor's purchase check is not collected, the pur-
chase will be cancelled and MFSC will charge a fee of $25.00 to the Direct In-
vestor's account.
During periods of substantial economic or market change, telephone redemptions
may be difficult to complete. If an Investor is unable to contact MFSC by tele-
phone, the Investor may also deliver the redemption request to MFSC in writing
at the address noted above under "How to Purchase and Redeem Shares--Redemption
by ?????????.
OTHER REDEMPTION INFORMATION
Except as described in "Investor Programs" below, Investors may be required to
redeem Shares in a Fund after 60 days' written notice if due to investor re-
demptions the balance in the particular account with respect to the Fund re-
mains below $500. If a Customer has agreed with a particular Shareholder Organ-
ization to maintain a minimum balance in his or her account at the institution
with respect to Shares of a Fund, and the balance in such account falls below
that minimum, the Customer may be obliged by the Shareholder Organization to
redeem all or part of his or her Shares to the extent necessary to maintain the
required minimum balance.
GENERAL
Purchase and redemption orders for Shares which are received and accepted
prior to the close of regular trading hours on the Exchange (currently 4:00
p.m., Eastern Time) on any Business Day are priced according to the net asset
value determined on that day. Purchase orders received and accepted after the
close of regular trading hours on the Exchange are priced at the net asset
value per Share determined on the next Business Day.
INVESTOR PROGRAMS
EXCHANGE PRIVILEGE
Investors and Customers of Shareholder Organizations may, after appropriate
prior authorization and without an exchange fee imposed by Master Fund, ex-
change Shares in a Fund having a value of at least $500 for Service Shares of
any other portfolio offered by Master Fund or Master Tax-Exempt Fund, provided
that such other shares may legally be sold in the state of the Investor's resi-
dence.
Master Fund currently offers, in addition to the Equity, Theme and Income and
Growth Funds, several additional portfolios as follows:
Money Fund, a money market fund seeking as high a level of current income as
is consistent with liquidity and stability of principal through investments
in high-quality money market investments maturing within 13 months;
34
<PAGE>
Government Money Fund, a money market fund seeking as high a level of cur-
rent income as is consistent with liquidity and stability of principal
through investments in obligations issued or guaranteed by the U.S. Govern-
ment, its agencies or instrumentalities and repurchase agreements collateral-
ized by such obligations;
Treasury Money Fund, a money market fund seeking current income generally
exempt from state and local income taxes through investments in direct short-
term obligations issued by the U.S. Treasury and certain agencies or instru-
mentalities of the U.S. Government;
Short-Term Government Securities Fund, a fund seeking a high level of cur-
rent income by investing principally in obligations issued or guaranteed by
the U.S. Government, its agencies or instrumentalities and repurchase agree-
ments collateralized by such obligations, and having a dollar-weighted aver-
age portfolio maturity of 1 to 3 years;
Intermediate-Term Managed Income Fund, a fund seeking a high level of cur-
rent interest income by investing principally in investment grade or better
debt obligations and money market instruments, and having a dollar-weighted
average portfolio maturity of 3 to 10 years;
Managed Income Fund, a fund seeking higher current income through invest-
ments in investment grade debt obligations, U.S. Government obligations and
money market instruments;
International Fund, a fund seeking total return derived primarily from in-
vestments in foreign equity securities;
Emerging Americas Fund, a fund seeking long-term capital appreciation
through investments in companies and securities of governments based in all
countries in the Western Hemisphere, except the U.S.;
Pacific/Asia Fund, a fund seeking long-term capital appreciation through in-
vestments in companies and securities of governments based in Asia and on the
Asian side of the Pacific Ocean; and
Pan European Fund, a fund seeking long-term capital appreciation through in-
vestments in companies and securities of governments located in Europe.
Master Tax-Exempt Fund currently offers five portfolios as follows:
Short-Term Tax-Exempt Fund, a diversified tax-exempt money market fund seek-
ing a moderate level of current interest income exempt from Federal income
taxes through investing primarily in high-quality municipal obligations ma-
turing within 13 months;
Short-Term Tax-Exempt Securities Fund, a diversified fund seeking a high
level of current interest income exempt from Federal income taxes through in-
vestments in municipal obligations and having a dollar-weighted average port-
folio maturity of 1 to 3 years;
Intermediate-Term Tax-Exempt Fund, a diversified fund seeking a high level
of current income exempt from Federal income taxes through investments in mu-
nicipal obligations and having a dollar-weighted average portfolio maturity
of 3 to 10 years;
Long-Term Tax-Exempt Fund, a diversified fund seeking to maximize over time
current income exempt from Federal income taxes, investing primarily in mu-
nicipal obligations and having a dollar-weighted average maturity of 10 to 30
years; and
New York Intermediate-Term Tax-Exempt Fund, a non- diversified fund designed
to provide New York investors with a high level of current income exempt from
Federal and, to the extent possible, New York state and New York City income
taxes; this fund invests primarily in New York municipal obligations and has
a dollar-weighted average portfolio maturity of three to ten years.
An exchange involves a redemption of all or a portion of the Shares in a Fund
and the investment of the
35
<PAGE>
redemption proceeds in shares of another portfolio of Master Fund or Master
Tax-Exempt Fund. The redemption will be made at the per Share net asset value
of the Shares being redeemed next determined after the exchange request is re-
ceived. The Service Shares of the portfolio to be acquired will be purchased
at the per share net asset value of those shares (plus any applicable sales
load) next determined after acceptance of the exchange request. No sales load
will be payable on shares to be acquired through an exchange to the extent
that a sales load was previously paid on the Shares being exchanged.
Investors may find the exchange privilege useful if their investment objec-
tives or market outlook should change after they invest in the Funds. For fur-
ther information regarding Master Fund's exchange privilege, shareholders
should call (800) 446-1012 (from overseas, call ((617) 557-8280). Investors
exercising the exchange privilege with the other portfolios of Master Fund or
Master Tax-Exempt Fund should request and review the prospectuses of such
funds. Such prospectuses may be obtained by calling the numbers listed above.
Master Fund may modify or terminate the exchange program at any time upon 60
days' written notice to shareholders, and may reject any exchange request. IN
ORDER TO PREVENT ABUSE OF THIS PRIVILEGE TO THE DISADVANTAGE OF OTHER SHARE-
HOLDERS, MASTER FUND AND MASTER TAX-EXEMPT FUND RESERVE THE RIGHT TO LIMIT THE
NUMBER OF EXCHANGE REQUESTS OF INVESTORS AND CUSTOMERS OF SHAREHOLDER ORGANI-
ZATIONS TO NO MORE THAN SIX PER YEAR. MASTER FUND, MFSC AND THE DISTRIBUTOR
ARE NOT RESPONSIBLE FOR THE AUTHENTICITY OF EXCHANGE REQUESTS RECEIVED BY TEL-
EPHONE THAT ARE REASONABLY BELIEVED TO BE GENUINE. IN ATTEMPTING TO CONFIRM
THAT TELEPHONE INSTRUCTIONS ARE GENUINE, MASTER FUND WILL USE SUCH PROCEDURES
AS ARE CONSIDERED REASONABLE, INCLUDING RECORDING THOSE INSTRUCTIONS AND RE-
QUESTING INFORMATION AS TO ACCOUNT REGISTRATION.
For Federal income tax purposes, an exchange of Shares is a taxable event
and, accordingly, a capital gain or loss may be realized by an investor. Be-
fore making an exchange, an investor should consult a tax or other financial
adviser to determine tax consequences.
SYSTEMATIC WITHDRAWAL PLAN
An Investor who owns Shares of a Fund with a value of $10,000 or more may es-
tablish a Systematic Withdrawal Plan. The Investor may request a declining-
balance withdrawal, a fixed-dollar withdrawal, a fixed-share withdrawal, or a
fixed-percentage withdrawal (based on the current value of Shares in the ac-
count) on a monthly, quarterly, semi-annual or annual basis. To initiate the
Systematic Withdrawal Plan, an investor must complete the Supplemental Appli-
cation contained in this Prospectus and mail it to MFSC at the address given
above. Further information on establishing a Systematic Withdrawal Plan may be
obtained by calling the Distributor at (800) 446-1012 (from overseas, call
(617) 521-8280.)
Shareholder Organizations may, at their discretion, establish similar system-
atic withdrawal plans with respect to the Shares held by their Customers. In-
formation about such plans and the applicable procedures may be obtained by
Customers directly from their institutions.
RETIREMENT PLANS
Shares are available for purchase by Investors in connection with the follow-
ing tax-deferred prototype retirement plans offered by United States Trust
Company of New York:
IRAs (including "rollovers" from existing retirement plans) for individuals
and their spouses;
Profit Sharing and Money-Purchase Plans for corporations and self-employed
individuals and their partners to benefit themselves and their employees; and
Keogh Plans for self-employed individuals.
Investors investing in the Funds pursuant to Profit Sharing and Money-Pur-
chase Plans and Keogh Plans
36
<PAGE>
are not subject to the minimum investment and forced redemption provisions de-
scribed above. The minimum initial investment for IRAs is $250 per Fund and the
minimum subsequent investment is $50 per Fund. Detailed information concerning
eligibility, service fees and other matters related to these plans can be ob-
tained by calling (800) 446-1012 (from overseas, call (617) 557-8280). Custom-
ers of Shareholder Organizations may purchase Shares of the Funds pursuant to
retirement plans if such plans are offered by their Shareholder Organizations.
AUTOMATIC INVESTMENT PROGRAM
The Automatic Investment Program permits Investors to purchase Shares (minimum
of $50 per Fund per transaction) at regular intervals selected by the Investor.
The minimum initial investment for an Automatic Investment Program account is
$50 per Fund. Provided the Investor's financial institution allows automatic
withdrawals, Shares are purchased by transferring funds from an Investor's
checking, bank money market or NOW account designated by the Investor. At the
Investor's option, the account designated will be debited in the specified
amount, and Shares will be purchased, once a month, on either the first or fif-
teenth day, or twice a month, on both days.
The Automatic Investment Program is one means by which an Investor may use
"Dollar Cost Averaging" in making investments. Instead of trying to time market
performance, a fixed dollar amount is invested in Shares at predetermined in-
tervals. This may help Investors to reduce their average cost per share because
the agreed upon fixed investment amount allows more Shares to be purchased dur-
ing periods of lower share prices and fewer Shares during periods of higher
prices. In order to be effective, Dollar Cost Averaging should usually be fol-
lowed on a sustained, consistent basis. Investors should be aware, however,
that Shares bought using Dollar Cost Averaging are purchased without regard to
their price on the day of investment or to market trends. In addition, while
Investors may find Dollar Cost Averaging to be beneficial, it will not prevent
a loss if an Investor ultimately redeems his Shares at a price which is lower
than their purchase price.
To establish an Automatic Investment account permitting Investors to use the
Dollar Cost Averaging investment method described above, an Investor must com-
plete the Supplemental Application contained in this Prospectus and mail it to
MFSC. An Investor may cancel his participation in this Program or change the
amount of purchase at any time by mailing written notification to MFSC, P.O.
Box 2798, Boston, MA 02208-2798 and notification will be effective three Busi-
ness Days following receipt. Master Fund may modify or terminate this privilege
at any time or charge a service fee, although no such fee currently is contem-
plated. An Investor may also implement the Dollar Cost Averaging method on his
own initiative or through other entities.
DIVIDENDS AND DISTRIBUTIONS
Dividends from the net investment income of the Funds are declared and paid
quarterly. For dividend purposes, a Fund's investment income is reduced by ac-
crued expenses directly attributable to that Fund and the general expenses of
Master Fund prorated to that Fund on the basis of its relative net assets. A
Fund's net investment income available for distribution to the holders of Serv-
ice Shares will be reduced by the amount of other expenses allocated to such
series. Net realized capital gains are distributed at least annually. Dividends
and distributions will reduce the net asset value of each of the Funds by the
amount of the dividend or distribution. All dividends and distributions paid on
Shares held of record by the Investment Adviser and its affiliates or corre-
spondent banks will be paid in cash. Direct and Institutional Investors and
Customers of other Shareholder Organizations will receive dividends and distri-
butions in additional Service Shares of the Fund on which the dividend or dis-
tribution is paid (as determined on the payable date), unless they have re-
quested in writing (received by MFSC at Master Fund's address prior to
37
<PAGE>
the payment date) to receive dividends and distributions in cash. Reinvested
dividends and distributions receive the same tax treatment as those paid in
cash.
TAXES
FEDERAL
Each of the Funds qualified for its last taxable year as a "regulated invest-
ment company" under the Internal Revenue Code of 1986, as amended (the "Code").
Each Fund expects to so qualify in future years. Such qualification generally
relieves a Fund of liability for Federal income taxes to the extent its earn-
ings are distributed in accordance with the Code.
Qualification as a regulated investment company under the Code requires, among
other things, that a Fund distribute to its shareholders an amount equal to at
least 90% of its investment company taxable income for each taxable year. In
general, a Fund's investment company taxable income will be its income (includ-
ing dividends and interest), subject to certain adjustments and excluding the
excess of any net long-term capital gain for the taxable year over the net
short-term capital loss, if any, for such year. Each Fund intends to distribute
substantially all of its investment company taxable income each year. Such div-
idends will be taxable as ordinary income to Fund shareholders who are not cur-
rently exempt from Federal income taxes, whether such income is received in
cash or reinvested in additional Shares. (Federal income taxes for distribu-
tions to IRAs and qualified pension plans are deferred under the Code.) The
dividends received deduction for corporations will apply to such ordinary in-
come distributions to the extent of the total qualifying dividends received by
a Fund from domestic corporations for the taxable year.
Distribution by a Fund of the excess of its net long- term capital gain over
its net short-term capital loss is taxable to shareholders as long-term capital
gain, regardless of how long the shareholders have held their Shares and
whether such gains are received in cash or reinvested in additional Shares.
Such distributions are not eligible for the dividends received deduction.
Dividends declared in October, November or December of any year payable to
shareholders of record on a specified date in such months will be deemed to
have been received by shareholders and paid by a Fund on December 31 of such
year in the event such dividends are actually paid during January of the fol-
lowing year.
An investor considering buying Shares of a Fund on or just before the record
date of a dividend should be aware that the amount of the forthcoming dividend
payment, although in effect a return of capital, will be taxable to them.
A taxable gain or loss may be realized by a shareholder upon his redemption,
transfer or exchange of Shares depending upon the tax basis of such Shares and
their price at the time of redemption, transfer or exchange. If a shareholder
holds Shares for six months or less and during that time receives a capital
gain dividend on those Shares, any loss recognized on the sale or exchange of
those Shares will be treated as a long-term capital loss to the extent of the
capital gain dividend. Generally, a shareholder may include sales charges in-
curred upon the purchase of Shares in his tax basis for such Shares for the
purpose of determining gain or loss on a redemption, transfer or exchange of
such Shares. However, if the shareholder effects an exchange of such Shares for
Shares of another Fund within 90 days of the purchase and is able to reduce the
sales charges applicable to the new Shares (by virtue of the exchange privi-
lege), the amount equal to such reduction may not be included in the tax basis
of the shareholder's exchanged Shares, but may be included (subject to the same
limitation) in the tax basis of the new Shares.
Qualification as a regulated investment company under the Code also requires
that each Fund satisfy certain requirements with respect to the source of its
income for a taxable year. At least 90% of the gross income of each Fund must
be derived from dividends, interest, payments with respect to securities loans,
gains from the sale or other disposition of stock, securities or foreign cur-
rencies, and other income (including, but not limited to, gains from options,
38
<PAGE>
futures, or forward contracts) derived with respect to the Fund's business of
investing in such stock, securities or currencies. The Treasury Department may
by regulation exclude from qualifying income foreign currency gains which are
not directly related to a Fund's principal business of investing in stock or
securities, or options and futures with respect to stock or securities. Any in-
come derived by a Fund from a partnership or trust is treated as derived with
respect to the Fund's business of investing in stock, securities or currencies
only to the extent that such income is attributable to items of income which
would have been qualifying income if realized by the Fund in the same manner as
by the partnership or trust. Some of the investments that the Income and Growth
Fund may make (such as liquidating trust receipts and creditor claims) may not
be securities or may not produce qualifying income. Therefore, it may be neces-
sary for the Investment Adviser to restrict the investments of that Fund to en-
sure that non-qualifying income does not exceed 10% of that Fund's total gross
income for a taxable year.
The foregoing summarizes some of the important tax considerations generally
affecting the Funds and their shareholders and is not intended as a substitute
for careful tax planning. Accordingly, potential investors in the Funds should
consult their tax advisers with specific reference to their own tax situations.
Shareholders will be advised annually as to the Federal income tax consequences
of distributions made each year.
STATE AND LOCAL
Purchasers are advised to consult their tax advisers concerning the applica-
tion of state and local taxes, which may have different consequences from those
of the Federal income tax law described above.
MANAGEMENT OF THE FUNDS
The business and affairs of the Funds are managed under the direction of Mas-
ter Fund's Board of Directors. The Statement of Additional Information
contains the names of and general background information concerning Master
Fund's directors.
INVESTMENT ADVISER
United States Trust Company of New York serves as the Investment Adviser to
each Fund. U.S. Trust (and its predecessor) is a state-chartered bank and trust
company created by Special Act of the New York Legislature in 1853. The Invest-
ment Adviser provides trust and banking services to individuals, corporations,
and institutions both nationally and internationally, including investment man-
agement, estate and trust administration, financial planning, corporate trust
and agency, and personal and corporate banking. The Investment Adviser is a
member bank of the Federal Reserve System and the Federal Deposit Insurance
Corporation and is one of the twelve members of the New York Clearing House As-
sociation.
On December 31, 1994, the Investment Adviser's Asset Management Group had ap-
proximately $33 billion in assets under management. The Investment Adviser,
which has its principal offices at 114 W. 47th Street, New York, New York
10036, is a subsidiary of U.S. Trust Corporation, a registered bank holding
company.
The Investment Adviser manages each Fund, makes decisions with respect to and
places orders for all purchases and sales of its portfolio securities, and
maintains records relating to such purchases and sales.
The Equity Fund's portfolio manager, David A. Tillson, is the person primarily
responsible for the day-to-day management of the Fund's investment portfolio.
Mr. Tillson, a Senior Vice President and Senior Portfolio Manager, has been
with U.S. Trust since 1993, and has been the Fund's portfolio manager since De-
cember 1994. Prior to joining U.S. Trust, Mr. Tillson was the founder and Pres-
ident of TDA Capital Management Company, and a Senior Vice President of Matrix
Asset Advisors until 1993. He was also a Vice President and Senior Portfolio
Manager with V C S & O Asset Management until 1990.
39
<PAGE>
The Income and Growth and Long-Term Supply of Energy Funds' portfolio manager,
Richard L. Bayles, is the person primarily responsible for the day-to-day man-
agement of the Funds' investment portfolios. Mr. Bayles, a Senior Vice Presi-
dent and Senior Portfolio Manager of U.S. Trust, has been with U.S. Trust since
1990 and has been the Income and Growth Fund's portfolio manager since 1990 and
the Long-Term Supply of Energy Fund's portfolio manager since its inception.
Prior to his reassociation with U.S. Trust, Mr. Bayles was a Managing Director
at John W. Bristol and Company, an investment advisory firm, from 1987 to 1990.
The Productivity Enhancers Fund's portfolio manager, Ronald C. Steele, is the
person primarily responsible for the day-to-day management of the Fund's in-
vestment portfolio. Mr. Steele, a Senior Vice President and Senior Portfolio
Manager of U.S. Trust, has been the Fund's portfolio manager since its incep-
tion.
The Environmentally-Related Products and Services Fund's portfolio manager,
Victor Sapuppo, is the person primarily responsible for the day-to-day manage-
ment of the Fund's investment portfolio. Mr. Sapuppo, Vice President and Senior
Portfolio Manager of the Personal Equity and Balanced Investment Division of
U.S. Trust, has been with U.S. Trust since 1962 and has been the Fund's portfo-
lio manager since its inception.
The Aging of America Fund's portfolio manager, Roger F. Schaefer, is the per-
son primarily responsible for the day-to-day management of the Fund's invest-
ment portfolio. Mr. Schaefer, a Vice President and Senior Portfolio Manager of
U.S. Trust, has been with U.S. Trust since 1970 and has been the Fund's portfo-
lio manager since its inception.
The Communication and Entertainment Fund's portfolio manager, John J.
Apruzzese, is the person primarily responsible for the day-to-day management of
the Fund's investment portfolio. Mr. Apruzzese, a Senior Vice President, De-
partment Manager and Senior Portfolio Manager of U.S. Trust, has been with U.S.
Trust since 1984 and has been the Fund's portfolio manager since its inception.
The Business and Industrial Restructuring Fund's portfolio manager, David J.
Williams, is the person primarily responsible for the day-to-day management of
the Fund's investment portfolio. Mr. Williams, Senior Vice President, Depart-
ment Manager and Senior Portfolio Manager of the Personal Equity and Balanced
Investment Division of U.S. Trust, has been with U.S. Trust since 1987 and has
been the Fund's portfolio manager since its inception.
The Global Competitors Fund's portfolio manager, Wendy S. Popowich, is the
person primarily responsible for the day-to-day management of the Fund's in-
vestment portfolio. Ms. Popowich, a Vice President and Portfolio Manager of the
Personal Investment Division of U.S. Trust, has been with U.S. Trust since 1983
and has been the Fund's portfolio manager since its inception.
The Early Life Cycle Fund's portfolio manager, Timothy W. Evnin, is the person
primarily responsible for the day-to-day management of the Fund's investment
portfolio. Mr. Evnin, a Vice President and Portfolio Manager of U.S. Trust, has
been with U.S. Trust since 1987 and has been the Fund's portfolio manager since
its inception.
For the services provided and expenses assumed pursuant to its Investment Ad-
visory Agreements, the Investment Adviser is entitled to be paid a fee, com-
puted daily and paid monthly, at the annual rate of: .75% of the average daily
net assets of the Equity and the Income and Growth Funds; and .60% of the aver-
age daily net assets of each Theme Fund. The advisory fee rates payable by the
Equity and Income and Growth Funds are higher than the rates payable by most
mutual funds. The Board of Directors believes, based on information supplied to
it by the Investment Adviser, that this fee is comparable to the rate paid by
many other funds with similar investment objectives and policies and is appro-
priate for the Funds in
40
<PAGE>
light of their investment objectives and policies. For the fiscal year ended
March 31, 1995, the Investment Adviser received an advisory fee at the effec-
tive an-
nual rates of .72%, .72%, .42%, .47%, 0%, .44%, .53%, .52%, .50% and .52% of
the average daily net assets of the Equity, Income and Growth, Long-Term Sup-
ply of Energy, Productivity Enhancers, Environmentally-Related Products and
Services, Aging of America, Communication and Entertainment, Business and In-
dustrial Restructuring, Global Competitors and Early Life Cycle Funds, respec-
tively. For the same period, the Investment Adviser waived advisory fees at
the effective annual rates of .03%, .03%, .18%, .13%, .60%, .16%, .07%, .08%,
.10% and .08% of the average daily net assets of the Equity, Income and
Growth, Long-Term Supply of Energy, Productivity Enhancers, Environmentally-
Related Products and Services, Aging of America, Communication and Entertain-
ment, Business and Industrial Restructuring, Global Competitors and Early Life
Cycle Funds, respectively.
From time to time, the Investment Adviser may waive (either voluntarily or
pursuant to applicable state expense limitations) all or a portion of the ad-
visory fees payable to it by a Fund, which waiver may be terminated at any
time. See "Management of the Funds--Service Organizations" for additional in-
formation on fee waivers.
ADMINISTRATORS
Mutual Funds Service Company and Federated Administrative Services serve as
the Funds' administrators (the "Administrators") and provide them with general
administrative and operational assistance. The Administrators also serve as
administrators of the other portfolios of Master Fund and Master Tax-Exempt
Fund, which are also advised by the Investment Adviser and distributed by the
Distributor. For the services provided to all portfolios of Master Fund (ex-
cept the International, Emerging Americas, Pacific/Asia and Pan European
Funds) and Master Tax-Exempt Fund, the Administrators are entitled jointly to
annual fees, computed daily and paid monthly, based on the combined aggregate
average daily net assets of the two companies (excluding the International,
Emerging Americas, Pacific/Asia and Pan European Funds) as follows:
<TABLE>
<CAPTION>
COMBINED AGGREGATE AVERAGE DAILY
NET ASSETS OF MASTER FUND
(EXCLUDING THE INTERNATIONAL, EMERGING AMERICAS,
PACIFIC/ASIA AND PAN EUROPEAN FUNDS) ANNUAL
AND MASTER TAX-EXEMPT FUND FEE
------------------------------------------------ ------
<S> <C>
first $200 million....................................................... .200%
next $200 million........................................................ .175%
over $400 million........................................................ .150%
</TABLE>
Administration fees payable to the Administrators by each portfolio of the
two investment companies are determined in proportion to their relative aver-
age daily net assets at the time of determination. After those allocations
have been made, the Administrators are entitled jointly to an annual minimum
fee of $50,000 from each Theme Fund. From time to time, the Administrators may
waive (either voluntarily or pursuant to applicable state expense limitations)
all or a portion of the administration fee payable to them by a Fund, which
waivers may be terminated at any time. See "Management of the Funds--Service
Organizations" for additional information on fee waivers. For the fiscal year
ended March 31, 1995, MFSC and Concord Holding Corporation ("Concord"), the
former co-administrator, received an aggregate administration fee (under the
same compensation arrangements noted above) at the effective annual rates of
.154%, .154%, .171%, .154%, .124%, .155%, .154%, .154%, .155% and .154% of the
average daily net assets of the Equity, Income and Growth, Long-Term Supply of
Energy, Productivity Enhancers, Environmentally-Related Products and Services,
Aging of America, Communication and Entertainment, Business and Industrial Re-
structuring, Global Competitors and Early Life Cycle Funds, respectively. For
the same period, MFSC And Concord waived fees at the effective annual rates of
.192%, .090%, .829%, .115%, .009%, .026%, and .106%, of the average daily net
assets of the Long-Term Supply of Energy, Productivity Enhancers, Environmen-
tally-Related Products and Services, Aging of America, Communication and En-
tertainment, Business and Industrial Restructuring and Global Competitors
Funds, respectively.
41
<PAGE>
SERVICE ORGANIZATIONS
Master Fund will enter into an agreement ("Servicing Agreement") with each
Service Organization requiring it to provide administrative support services to
its Customers beneficially owning Shares. As a consideration for the adminis-
trative services provided to Customers, a Fund will pay the Service Organiza-
tion an administrative service fee at the annual rate of up to .40% of the av-
erage daily net asset value of its Shares held by the Service Organization's
Customers. Such services, which are described more fully in the Statement of
Additional Information under "Management of the Funds--Service Organizations,"
may include assisting in processing purchase, exchange and redemption requests;
transmitting and receiving funds in connection with Customer orders to pur-
chase, exchange or redeem Shares; and providing periodic statements. Under the
terms of the Servicing Agreement, Service Organizations will be required to
provide to Customers a schedule of any fees that they may charge in connection
with a Customer's investment. Until further notice, the Investment Adviser and
Administrators have voluntarily agreed to waive fees payable by a Fund in an
amount equal to administrative service fees payable by that Fund.
BANKING LAWS
Banking laws and regulations currently prohibit a bank holding company regis-
tered under the Federal Bank Holding Company Act of 1956 or any bank or non-
bank affiliate thereof from sponsoring, organizing or controlling a registered,
open-end investment company continuously engaged in the issuance of its shares,
and prohibit banks generally from issuing, underwriting, selling or distribut-
ing securities such as Shares of the Funds, but such banking laws and regula-
tions do not prohibit such a holding company or affiliate or banks generally
from acting as investment adviser, transfer agent, or custodian to such an in-
vestment company, or from purchasing shares of such company for and upon the
order of customers. The Investment Adviser, MFSC and certain Shareholder Orga-
nizations may be subject to such banking laws and regulations. State securities
laws may differ from the interpretations of Federal law discussed in this para-
graph and banks and financial institutions may be required to register as deal-
ers pursuant to state law.
Should legislative, judicial, or administrative action prohibit or restrict
the activities of the Investment Adviser or other Shareholder Organizations in
connection with purchases of Fund Shares, the Investment Adviser and such
Shareholder Organizations might be required to alter materially or discontinue
the investment services offered by them to Customers. It is not anticipated,
however, that any resulting change in the Funds' method of operations would af-
fect their net asset values per Share or result in financial loss to any share-
holder.
DESCRIPTION OF CAPITAL STOCK
UST Master Funds, Inc. was organized as a Maryland corporation on August 2,
1984. Currently, Master Fund has authorized capital of 35 billion shares of
Common Stock, $.001 par value per share, classified into 34 series of shares
representing interests in 20 investment portfolios. This Prospectus describes
the Equity, Income and Growth, Early Life Cycle, Long-Term Supply of Energy,
Productivity Enhancers, Environmentally-Related Products and Services, Aging of
America, Communication and Entertainment, Business and Industrial Restructuring
and Global Competitors Funds. Master Fund offers Service Shares and Distribu-
tion Shares representing interests in each of those Funds. Service Shares and
Distribution Shares have different expenses, which may affect performance. Call
(800) 233-1136 for information regarding each of those Fund's Distribution
Shares, which are offered through a separate prospectus.
Each share (irrespective of series designation) in a Fund represents an equal
proportionate interest in the particular Fund with other shares of the same
class, and is entitled to such dividends and distributions out of the income
earned on the assets belong-
42
<PAGE>
ing to such Fund as are declared in the discretion of Master Fund's Board of
Directors. Master Fund's Charter authorizes the Board of Directors to classify
or reclassify any class of shares into one or more additional classes or se-
ries.
Master Fund's shareholders are entitled to one vote for each full share held
and fractional votes for fractional shares held and will vote in the aggregate
and not by class or series, except as otherwise expressly required by law.
Holders of Distribution Shares in a Fund bear the expense of payments de-
scribed in the prospectus for such shares that are made pursuant to Master
Fund's Distribution Plan. Under the Distribution Plan, Distribution Shares of
each Fund reimburse the Distributor monthly for distribution expenses in an
amount not to exceed the annual rate of .75% of the average daily net asset
value of the Fund's outstanding Distribution Shares. Distribution Shares of
each Fund currently bear the expense of such distribution fees at the annual
rate of .50% of the average daily net asset value of the Fund's outstanding
Distribution Shares. Distribution expenses payable by the Distributor under the
Distribution Plan include direct and indirect marketing expenses such as: i)
the expense of preparing, printing and distributing promotional materials and
prospectuses (other than prospectuses used for regulatory purposes or for dis-
tribution to existing shareholders); ii) the expense of other advertising via
radio, television or other print or electronic media; and iii) the expense of
payments to financial institutions that are not affiliated with the Distributor
for distribution assistance. Service Shares in a Fund bear no such distribution
fees. Distribution Shares also bear the expense of administrative service fees
described above under "Management of the Funds--Service Organizations." As a
result of their different expense structures, the net asset value and the total
returns on Service Shares of a Fund will generally be higher than those on Dis-
tribution Shares of the same Fund. Distribution Shares of the Funds are offered
to the public at the applicable net asset value per share plus a front-end
sales charge identical to the sales charge described above under "How to Pur-
chase and Redeem Shares--Public Offering Price." Distribution Shares are ex-
changeable at the option of the holder for Distribution Shares of Master Fund's
other investment portfolios.
Certificates for Shares will not be issued unless expressly requested in writ-
ing to MFSC and will not be issued for fractional Shares.
As of July 11, 1995, U.S. Trust held of record substantially all of the Shares
in the Funds as agent or custodian for its customers, but did not own such
Shares beneficially because it did not have voting or investment discretion
with respect to such Shares.
CUSTODIAN AND TRANSFER AGENT
United States Trust Company of New York serves as the custodian of the Funds'
assets and as their transfer and dividend disbursing agent. Communications to
the custodian and transfer agent should be directed to United States Trust Com-
pany of New York, Mutual Funds Service Division, 770 Broadway, New York, New
York 10003-9598.
U.S. Trust has entered into an International Custodian Agreement with Morgan
Stanley Trust Company, 1 Pierrepont Plaza, Brooklyn, NY 11201, providing for
the custody of foreign securities held by the Funds.
U.S. Trust has also entered into a sub-transfer agency arrangement with MFSC,
73 Tremont Street, Boston, Massachusetts 02108-3913, pursuant to which MFSC
provides certain transfer agent, dividend disbursement and registrar services
to the Funds.
PERFORMANCE INFORMATION
From time to time, in advertisements or in reports to shareholders, the per-
formance of the Shares of the Funds may be quoted and compared to that of other
43
<PAGE>
mutual funds with similar investment objectives and to stock or other relevant
indices or to rankings prepared by independent services or other financial or
industry publications that monitor the performance of mutual funds. For exam-
ple, the performance of a Fund may be compared to data prepared by Lipper Ana-
lytical Services, Inc., a widely recognized independent service which monitors
the performance of mutual funds. The performance of the Equity and Theme Funds
may be also compared to the Standard & Poor's 500 Stock Index ("S&P 500"), an
index of unmanaged groups of common stocks, the Consumer Price Index, or the
Dow Jones Industrial Average, a recognized unmanaged index of common stocks of
30 industrial companies listed on the New York Stock Exchange.
Performance data as reported in national financial publications, including but
not limited to Money Magazine, Forbes, Barron's, The Wall Street Journal and
The New York Times, or in publications of a local or regional nature, may also
be used in comparing the performance of the Funds.
From time to time, each Fund may advertise its performance by using "average
annual total return" over various periods of time. Such total return figure re-
flects the average percentage change in the value of an investment in a Fund
from the beginning date of the measuring period to the end of the measuring pe-
riod. Average total return figures will be given for the most recent one-year
period, and may be given for other periods as well (such as from the commence
ment of a Fund's operations, or on a year-by-year basis). Each Fund may also
use aggregate total return figures for various periods, representing the cumu-
lative change in the value of an investment in the Fund for the specific peri-
od. Both methods of calculating total return assume that dividends and capital
gain distributions made by a Fund during the period are reinvested in Fund
Shares and also reflect the maximum sales load charged by the Fund.
Performance will fluctuate and any quotation of performance should not be con-
sidered as representative of a Fund's future performance. Shareholders should
remember that performance is generally a function of the kind and quality of
the instruments held in a portfolio, portfolio maturity, operating expenses,
and market conditions. Any fees charged by Shareholder Organizations with re-
spect to accounts of Customers that have invested in Shares will not be in-
cluded in calculations of performance.
MISCELLANEOUS
Shareholders will receive unaudited semi-annual reports describing the Funds'
investment operations and annual financial statements audited by the Funds' in-
dependent auditors.
As used in this Prospectus, a "vote of the holders of a majority of the out-
standing shares" of Master Fund or a particular Fund means, with respect to the
approval of an investment advisory agreement or a change in a fundamental in-
vestment policy, the affirmative vote of the lesser of (a) more than 50% of the
outstanding shares of Master Fund or such Fund, or (b) 67% or more of the
shares of Master Fund or such Fund present at a meeting if more than 50% of the
outstanding shares of Master Fund or such Fund are represented at the meeting
in person or by proxy.
Inquiries regarding any of the Funds may be directed to the Distributor at the
address or telephone number listed under "Distributor."
44
<PAGE>
INSTRUCTIONS FOR NEW ACCOUNT APPLICATION
OPENING YOUR ACCOUNT:
Complete the Application(s) and mail to: FOR OVERNIGHT DELIVERY: send to:
UST Master Funds UST Master Funds
c/o Mutual Funds Service Company c/o Mutual Funds Service Company--
P.O. Box 2798 Transfer Agent
Boston, MA 02208-2798 73 Tremont Street
Boston, MA 02108-3913
Please enclose with the Application(s) your check made payable to the "UST
Master Funds" in the amount of your investment.
For direct wire purchases please refer to the section of the Prospectus enti-
tled "How to Purchase and Redeem Shares--Purchase Procedures."
MINIMUM INVESTMENTS:
Except as provided in the Prospectus, the minimum initial investment is $500
per Fund; subsequent investments must be in the minimum amount of $50 per Fund.
Investments may be made in excess of these minimums.
REDEMPTIONS:
Shares can be redeemed in any amount and at any time in accordance with pro-
cedures described in the Prospectus. In the case of shares recently purchased
by check, redemption proceeds will not be made available until the transfer
agent is reasonably assured that the check has been collected in accordance
with applicable banking regulations.
Certain legal documents will be required from corporations or other organiza-
tions, executors and trustees, or if redemption is requested by anyone other
than the shareholder of record. Written redemption requests in excess of
$50,000 per account must be accompanied by signature guarantees.
SIGNATURES: Please be sure to sign the Application(s).
If the shares are registered in the name of:
- an individual, the individual should sign.
- joint tenants, both tenants should sign.
- a custodian for a minor, the custodian should sign.
- a corporation or other organization, an authorized officer should sign
(please indicate corporate office or title).*
- a trustee or other fiduciary, the fiduciary or fiduciaries should sign
(please indicate capacity).*
* A corporate resolution or appropriate certificate may be required.
QUESTIONS:
If you have any questions regarding the Application or redemption require-
ments, please contact the transfer agent at (800) 446-1012 between 9:00 a.m.
and 5:00 p.m. (Eastern Time).
45
<PAGE>
-----------------------------------------------------------------------------
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[LOGO OF
UST MASTER MUTUAL FUNDS SERVICE COMPANY
FUNDS CLIENT SERVICES
APPEARS P.O. Box 2798
HERE] Boston, MA 02208-2798
(800) 446-1012 NEW ACCOUNT APPLICATION
-----------------------------------------------------------------------------
-----------------------------------------------------------------------------
ACCOUNT REGISTRATION
-----------------------------------------------------------------------------
[_] Individual [_] Joint Tenants [_] Trust [_] Gift/Transfer to Minor
[_] Other________________________
Note: Joint tenant registration will be as "joint tenants with right of
survivorship" unless otherwise specified. Trust registrations should specify
name of the trust, trustee(s), beneficiary(ies), and the date of the trust
instrument. Registration for Uniform Gifts/Transfers to Minors should be in
the name of one custodian and one minor and include the state under which
the custodianship is created (using the minor's Social Security Number
("SSN")). For IRA accounts a different application is required.
------------------------------ -----------------------------
Name(s) (please print) Social Security # or Taxpayer
Indentification #
( )
------------------------------ -----------------------------
Name Telephone #
------------------------------
Address
------------------------------ [_] U.S. Citizen
City/State/Zip [_] Other (specify)__________
-----------------------------------------------------------------------------
FUND SELECTION (THE MINIMUM INITIAL AND SUBSEQUENT INVESTMENT IS $500 PER
FUND AND $50 PER FUND, RESPECTIVELY. MAKE CHECKS PAYABLE TO "UST MASTER
FUNDS.")
-----------------------------------------------------------------------------
FUND INITIAL INVESTMENT
[_] Equity Fund $ ____________ 800
[_] Income and Growth Fund $ ____________ 801
[_] Long-Term Energy Fund $ ____________ 813
[_] Productivity Enhancers Fund $ ____________ 814
[_] Environmental Fund $ ____________ 815
[_] Aging of America Fund $ ____________ 816
[_] Communication & Entertainment Fund $ ____________ 817
[_] Business & Industrial Restructuring Fund $ ____________ 818
[_] Global Competitors Fund $ ____________ 819
[_] Early Life Cycle Fund $ ____________ 812
[_] Other $ ____________
TOTAL INITIAL INVESTMENT: $ ____________
NOTE: If investing by wire, you must obtain a Bank Wire Control Number. To
do so, please call (800) 446-1012 and ask for the Wire Desk.
A. BY MAIL: Enclosed is a check in the amount of $ ____ payable to "UST
Master Funds."
B. BY WIRE: A bank wire in the amount of $ ________ has been sent to the
Fund from
------------------ ---------------------
Name of Bank Wire Control Number
CAPITAL GAIN AND DIVIDEND DISTRIBUTIONS: All capital gain and dividend
distributions will be reinvested in additional shares unless appropriate
boxes below are checked:
All dividends are to be [_] reinvested [_] paid in cash
All capital gains are to be [_] reinvested [_] paid in cash
-----------------------------------------------------------------------------
ACCOUNT PRIVILEGES
-----------------------------------------------------------------------------
TELEPHONE EXCHANGE AND REDEMPTION
[_] I/We appoint MFSC as my/our agent to act upon instructions received by
telephone in order to effect the telephone exchange and redemption
privileges. I/We hereby ratify any instructions given pursuant to this
authorization and agree that Master Fund, Master Tax-Exempt Fund, MFSC and
their directors, officers and employees will not be liable for any loss,
liability, cost or expense for acting upon instructions believed to be
genuine and in accordance with the procedures described in the then current
Prospectus. To the extent that Master Fund and Master Tax-Exempt Fund fail
to use reasonable procedures as a basis for their belief, they or their
service contractors may be liable for instructions that prove to be
fraudulent or unauthorized.
I/We further acknowledge that it is my/our responsibility to read the
Prospectus of any Fund into which I/we exchange.
[_] I/We do not wish to have the ability to exercise telephone redemption
and exchange privileges. I/We further understand that all exchange and
redemption requests must be in writing.
SPECIAL PURCHASE AND REDEMPTION PLANS
I/We have completed and attached the Supplemental Application for:
[_] Automatic Investment Plan
[_] Systematic Withdrawal Plan
AUTHORITY TO TRANSMIT REDEMPTION PROCEEDS TO PRE-DESIGNATED ACCOUNT.
I/We hereby authorize MFSC to act upon instructions received by telephone to
withdraw $500 or more from my/our account in the UST Master Funds and to
wire the amount withdrawn to the following commercial bank account. I/We
understand that MFSC charges an $8.00 fee for each wire redemption, which
will be deducted from the proceeds of the redemption.
Title on Bank Account*____________________________________________________
Name of Bank _____________________________________________________________
Bank A.B.A. Number____________________ Account Number ___________________
Bank Address _____________________________________________________________
City/State/Zip ___________________________________________________________
(attach voided check here)
A corporation, trust or partnership must also submit a "Corporate
Resolution" (or "Certificate of Partnership") indicating the names and
titles of officers authorized to act on its behalf.
* TITLE ON BANK AND FUND ACCOUNT MUST BE IDENTICAL.
<PAGE>
------------------------------------------------------------------
------------------------------------------------------------------
RIGHTS OF ACCUMULATION
------------------------------------------------------------------
To qualify for Rights of Accumulation, you must complete this
section, listing all of your accounts including those in your
spouse's name, joint accounts and accounts held for your
minor children. If you need more space, please attach a
separate sheet.
[_] I/We qualify for the Rights of Accumulation sales charge
discount described in the Prospectus and Statement of
Additional Information.
[_] I/We own shares of more than one Fund distributed by Edgewood
Services Inc. Listed below are the numbers of each of
my/our Shareholder Accounts.
[_] The registration of some of my/our shares differs from that
shown on this application. Listed below are the account
number(s) and full registration(s) in each case.
LIST OF OTHER UST MASTER FUND ACCOUNTS:
______________________ _______________________________________
______________________ _______________________________________
______________________ _______________________________________
ACCOUNT NUMBER ACCOUNT REGISTRATIONS
------------------------------------------------------------------
LETTER OF INTENT
------------------------------------------------------------------
[_] I agree to the Letter of Intent provisions set forth in
the Prospectus. Although I am not obligated to purchase, and
Master Fund is not obligated to sell, I intend to invest,
over a 13-month period beginning on , 19 , an aggregate
amount in Eligible Funds of Master Fund and Master Tax-Exempt
Fund at least equal to (check appropriate box):
[_] $50,000 [_] $100,000 [_] $250,000 [_] $500,000
[_] $1,000,000 [_] $2,000,000
By signing this application, I hereby authorize MFSC to
redeem an appropriate number of shares held in escrow to pay
any additional sales loads payable in the event that I do not
fulfill the terms of this Letter of Intent.
------------------------------------------------------------------
AGREEMENT AND SIGNATURES
------------------------------------------------------------------
By signing this application, I/we hereby certify under
penalty of perjury that the information on this application
is complete and correct and that as required by Federal law:
[_] I/We certify that (1) the number(s) shown on this form
is/are the correct taxpayer identification number(s) and (2)
I/we are not subject to backup withholding either because
I/we have not been notified by the Internal Revenue Service
that I/we are subject to backup withholding, or the IRS has
notified me/us that I am/we are no longer subject to backup
withholding. (NOTE: IF ANY OR ALL OF PART 2 IS NOT TRUE,
PLEASE STRIKE OUT THAT PART BEFORE SIGNING.)
[_] If no taxpayer identification number ("TIN") or SSN has
been provided above, I/we have applied, or intend to apply,
to the IRS or the Social Security Administration for a TIN or
a SSN, and I/we understand that if I/we do not provide this
number to MFSC within 60 days of the date of this
application, or if I/we fail to furnish my/our correct SSN or
TIN, I/we may be subject to a penalty and a 31% backup
withholding on distributions and redemption proceeds. (Please
provide this number on Form W-9. You may request the form by
calling MFSC at the number listed above).
I/We represent that I am/we are of legal age and capacity to
purchase shares of the UST Master Funds. I/We have received,
read and carefully reviewed a copy of the appropriate Fund's
current Prospectus and agree to its terms and by signing
below I/we acknowledge that neither the Fund nor the
Distributor is a bank and that Fund Shares are not deposits
or obligations of, or guaranteed or endorsed by, United
States Trust Company of New York, its parent and affiliates
and the Shares are not federally insured by, guaranteed by,
obligations of or otherwise supported by the U.S. Government,
the Federal Deposit Insurance Corporation, the Federal
Reserve Board, or any other governmental agency; and that an
investment in the Funds involves investment risks, including
possible loss of principal amount invested.
X ___________________________ Date __________________________
Owner Signature
X ___________________________ Date __________________________
Co-Owner Signature
Sign exactly as name(s) of registered owner(s) appear(s) above
(including legal title if signing for a corporation, trust
custodial account, etc.).
------------------------------------------------------------------
FOR USE BY AUTHORIZED AGENT (BROKER/DEALER) ONLY
------------------------------------------------------------------
We hereby submit this application for the purchase of shares
in accordance with the terms of our selling agreement with
UST Distributors, Inc., and with the Prospectus and Statement
of Additional Information of each Fund purchased. We agree to
notify MFSC of any purchases made under the Letter of Intent
or Rights of Accumulation.
----------------------------- -------------------------------
Investment Dealer's Name Source of Business Code
----------------------------- -------------------------------
Main Office Address Branch Number
----------------------------- -------------------------------
Representative's Number Representative's Name
----------------------------- -------------------------------
Branch Address Telephone
----------------------------- -------------------------------
Investment Dealer's Title
Authorized Signature
<PAGE>
-----------------------------------------------------------------------------
-----------------------------------------------------------------------------
[LOGO OF MUTUAL FUNDS SERVICE COMPANY
MASTER CLIENT SERVICES
FUNDS P.O. Box 2798
APPEARS Boston, MA 02208-2798
HERE] (800) 446-1012 SUPPLEMENTAL APPLICATION
SPECIAL INVESTMENT AND WITHDRAWAL OPTIONS
-----------------------------------------------------------------------------
-----------------------------------------------------------------------------
ACCOUNT REGISTRATION PLEASE SUPPLY THE FOLLOWING INFORMATION EXACTLY AS IT
APPEARS ON THE FUND'S RECORD.
-----------------------------------------------------------------------------
Fund Name ________________________________________________________________
Owner Name _______________________________________________________________
Street Address ___________________________________________________________
Resident of [_] U.S. [_] Other _________________________________________
Account Number ___________________________________________________________
Social Security or Taxpayer ID Number ____________________________________
City, State, Zip Code ____________________________________________________
[_] Check here if this is a change of address
-----------------------------------------------------------------------------
DISTRIBUTION OPTIONS (DIVIDENDS AND CAPITAL GAINS WILL BE REINVESTED
UNLESS OTHERWISE INDICATED)
-----------------------------------------------------------------------------
A. CAPITAL GAIN AND DIVIDEND DISTRIBUTIONS: All capital gain and dividend
distributions will be reinvested in additional shares unless appropriate
boxes below are checked:
All dividends are to be [_] reinvested [_] paid in cash
All capital gains are to be [_] reinvested [_] paid in cash
B. PAYMENT ORDER: Complete only if distribution checks are to be payable
to another party. Make distribution checks payable to:
Name of Your Bank ______________
Name _______________________ Bank Account Number ____________
Address ____________________ Address of Bank ________________
City, State, Zip Code ________________________________________
C. DISTRIBUTIONS REINVESTED-CROSS FUNDS: Permits all distributions from
one Fund to be automatically reinvested into another identically-
registered UST Master Fund. (NOTE: You may NOT open a new Fund account
with this option.) Transfer all distributions earned:
From: ______________________ Account No. ____________________
(Fund)
To: ________________________ Account No. ____________________
(Fund)
-----------------------------------------------------------------------------
AUTOMATIC INVESTMENT PLAN [_] YES [_] NO
-----------------------------------------------------------------------------
I/We hereby authorize MFSC to debit my/our personal checking account on
the designated dates in order to purchase shares in the Fund indicated at
the top of this application at the applicable public offering price
determined on that day.
[_] Monthly on the 1st day [_] Monthly on the 15th day
[_] Monthly on both the 1st and 15th days
Amount of each debit (minimum $50 per Fund) $ ________________________
NOTE: A Bank Authorization Form (below) and a voided personal check must
accompany the Automatic Investment Plan application.
-----------------------------------------------------------------------------
-----------------------------------------------------------------------------
UST MASTER FUNDS
CLIENT SERVICES AUTOMATIC INVESTMENT PLAN
-----------------------------------------------------------------------------
-----------------------------------------------------------------------------
BANK AUTHORIZATION
-----------------------------------------------------------------------------
---------------------- -------------------------------- -------------------
Bank Name Bank Address Bank Account Number
I/We authorize you, the above named bank, to debit my/our
account for amounts drawn by MFSC, acting as my agent for the
purchase of Fund shares. I/We agree that your rights in
respect to each withdrawal shall be the same as if it were a
check drawn upon you and signed by me/us. This authority
shall remain in effect until revoked in writing and received
by you. I/We agree that you shall incur no liability when
honoring debits, except a loss due to payments drawn against
insufficient funds. I/We further agree that you will incur no
liability to me if you dishonor any such withdrawal. This
will be so even though such dishonor results in the
cancellation of that purchase.
---------------------------- --------------------------------
Account Holder's Name Joint Account Holder's Name
X ____________________ ___________ X ____________________ ___________
Signature Date Signature Date
<PAGE>
------------------------------------------------------------------
------------------------------------------------------------------
SYSTEMATIC WITHDRAWAL PLAN [_] YES [_] NO NOT AVAILABLE FOR IRA'S
------------------------------------------------------------------
AVAILABLE TO SHAREHOLDERS WITH ACCOUNT BALANCES OF $10,000 OR
MORE.
I/We hereby authorize MFSC to redeem the necessary number of
shares from my/our UST Master Fund Account on the designated
dates in order to make the following periodic payments:
[_] Monthly on the 24th day
[_] Quarterly on the 24th day of January, April, July and October
[_] Other_____________________
(This request for participation in the Plan must be received
by the 18th day of the month in which you wish withdrawals to
begin.)
Amount of each check ($100 minimum) $_______________________
Please make check payable to: (To be completed only if redemption
proceeds to be paid to other than account holder of record or mailed
to address other than address of record)
Recipient __________________________________________________________
Street Address _____________________________________________________
City, State, Zip Code ______________________________________________
NOTE: If recipient of checks is not the registered
shareholder, signature(s) below must be guaranteed. A
corporation, trust or partnership must also submit a
"Corporate Resolution" (or "Certification of Partnership")
indicating the names and titles of officers authorized to act
on its behalf.
------------------------------------------------------------------
AGREEMENT AND SIGNATURES
------------------------------------------------------------------
The investor(s) certifies and agrees that the certifications,
authorizations, directions and restrictions contained herein
will continue until MFSC receives written notice of any
change or revocation. Any change in these instructions must
be in writing with all signatures guaranteed (if applicable).
Date ______________________
X X
------------------------------- -----------------------------
Signature Signature
-------------------------------------------------------------
Signature Guarantee* (if applicable)
-------------------------------------------------------------
Signature Guarantee* (if applicable)
X X
------------------------------- -----------------------------
Signature Signature
-------------------------------------------------------------
Signature Guarantee* (if applicable)
-------------------------------------------------------------
Signature Guarantee* (if applicable)
*ELIGIBLE GUARANTORS: An Eligible Guarantor institution is a
bank, trust company, broker, dealer, municipal or government
securities broker or dealer, credit union, national
securities exchange, registered securities association,
clearing agency or savings association, provided that such
institution is a participant in STAMP, the Securities
Transfer Agents Medallion Program.
------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PROSPECTUS SUMMARY......................................................... 2
EXPENSE SUMMARY............................................................ 3
FINANCIAL HIGHLIGHTS....................................................... 5
U.S. TRUST'S INVESTMENT PHILOSOPHY AND STRATEGIES.......................... 15
INVESTMENT OBJECTIVES AND POLICIES......................................... 15
PORTFOLIO INSTRUMENTS AND OTHER INVESTMENT INFORMATION..................... 22
INVESTMENT LIMITATIONS..................................................... 26
PRICING OF SHARES.......................................................... 27
HOW TO PURCHASE AND REDEEM SHARES.......................................... 28
INVESTOR PROGRAMS.......................................................... 34
DIVIDENDS AND DISTRIBUTIONS................................................ 37
TAXES...................................................................... 37
MANAGEMENT OF THE FUNDS.................................................... 39
DESCRIPTION OF CAPITAL STOCK............................................... 42
CUSTODIAN AND TRANSFER AGENT............................................... 43
PERFORMANCE INFORMATION.................................................... 43
MISCELLANEOUS.............................................................. 44
INSTRUCTIONS FOR NEW ACCOUNT APPLICATION................................... 45
</TABLE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRE-
SENTATIONS NOT CONTAINED IN THIS PROSPECTUS, OR IN THE FUNDS' STATEMENT OF AD-
DITIONAL INFORMATION INCORPORATED HEREIN BY REFERENCE, IN CONNECTION WITH THE
OFFERING MADE BY THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY MASTER
FUND OR ITS DISTRIBUTOR. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING BY
MASTER FUND OR BY ITS DISTRIBUTOR IN ANY JURISDICTION IN WHICH SUCH OFFERING
MAY NOT LAWFULLY BE MADE.
USTEQP894
[LOGO OF UST MASTER FUNDS APPEARS HERE]
MASTER FUNDS, INC.
EQUITY FUND
INCOME AND GROWTH FUND
LONG-TERM SUPPLY OF ENERGY FUND
PRODUCTIVITY ENHANCERS FUND
ENVIRONMENTALLY-RELATED PRODUCTS AND SERVICES FUND
AGING OF AMERICA FUND
COMMUNICATION AND ENTERTAINMENT FUND
BUSINESS AND INDUSTRIAL RESTRUCTURING FUND
GLOBAL COMPETITORS FUND
EARLY LIFE CYCLE FUND
SERVICE SHARES
Prospectus
August 1, 1995
<PAGE>
CROSS-REFERENCE SHEET
UST MASTER FUNDS, INC.
(EQUITY FUND, INCOME AND GROWTH FUND, LONG-TERM SUPPLY OF ENERGY FUND,
PRODUCTIVITY ENHANCERS FUND, ENVIRONMENTALLY-RELATED PRODUCTS AND SERVICES
FUND, AGING OF AMERICA, COMMUNICATION AND ENTERTAINMENT FUND, BUSINESS AND
INDUSTRIAL RESTRUCTURING FUND, GLOBAL COMPETITORS FUND, EARLY LIFE CYCLE FUND)
<TABLE>
<CAPTION>
FORM N-1A, PART A, ITEM PROSPECTUS CAPTION
----------------------- ------------------
<C> <S> <C>
1. Cover Page.......................... Cover Page
2. Synopsis............................ Prospectus Summary and
Expense Summary
3. Financial Highlights................ Selected Per Share Data and Ratios;
Performance Information
4. General Description of Registrant... Prospectus Summary; Investment
Objectives and Policies; Portfolio
Instruments and Other Investment
Information; Investment Limitations;
Description of Capital Stock
5. Management of the Fund.............. Management of the Fund; Custodian
and Transfer Agent
6. Capital Stock and Other Securities.. How to Purchase and Redeem Shares;
Dividends and Distributions; Taxes;
Description of Capital Stock;
Miscellaneous
7. Purchase of Securities Being
Offered............................ Pricing of Shares; How to Purchase
and Redeem Shares; Investor Programs
8. Redemption or Repurchase............ How to Purchase and Redeem Shares
9. Pending Legal Proceedings........... Inapplicable
</TABLE>
<PAGE>
LOGO
A Management Investment Company MASTER FUNDS,
INC.
-------------------------------------------------------------------------------
Equity Funds For initial purchase information, current
prices, performance information and ex-
73 Tremont Street isting account information,
Boston, MA 02108-3913 call (800) 446-1012.
(From overseas, call (617) 557-8280.)
-------------------------------------------------------------------------------
This Prospectus describes the Distribution Shares ("Shares") offered by sev-
eral separate portfolios offered to investors by UST Master Funds, Inc. ("Mas-
ter Fund"), an open-end, management investment company. Master Fund also is-
sues an additional series of shares in the portfolios ("Service Shares"),
which are offered under a separate prospectus. Each portfolio (individually, a
"Fund" and collectively, the "Funds") has its own investment objective and
policies as follows:
EQUITY FUND seeks long-term capital appreciation by investing in companies
believed by the Investment Adviser to represent good long-term values not cur-
rently recognized in the market prices of their securities.
INCOME AND GROWTH FUND seeks moderate current income with capital apprecia-
tion as a secondary goal by investing in common stock, preferred stock and se-
curities convertible into common stock.
LONG-TERM SUPPLY OF ENERGY FUND seeks long-term capital appreciation by in-
vesting in companies which the Investment Adviser believes will benefit from
the availability, development and delivery of secure hydrocarbon and other en-
ergy sources.
PRODUCTIVITY ENHANCERS FUND seeks long-term capital appreciation by investing
in companies which the Investment Adviser believes will benefit from their
roles as innovators, developers and suppliers of goods and services which en-
hance service and manufacturing productivity or companies that are most effec-
tive at obtaining and applying productivity enhancement developments.
ENVIRONMENTALLY-RELATED PRODUCTS AND SERVICES FUND seeks long-term capital
appreciation by investing in companies which the Investment Adviser believes
will benefit from their provision of products, technologies and services re-
lated to conservation, protection and restoration of the environment.
AGING OF AMERICA FUND seeks long-term capital appreciation by investing in
companies which the Investment Adviser believes will benefit from the changes
occurring in the demographic structure of the U.S. population, particularly
its growing population of individuals over the age of 40.
COMMUNICATION AND ENTERTAINMENT FUND seeks long-term capital appreciation by
investing in companies which the Investment Adviser believes will benefit from
the technological and international transformation of the communications and
entertainment industries, particularly the convergence of information, commu-
nication and entertainment media.
BUSINESS AND INDUSTRIAL RESTRUCTURING FUND seeks long-term capital apprecia-
tion by investing in companies which the Investment Adviser believes will ben-
efit from their restructuring or redeployment of assets and operations in or-
der to become more competitive or profitable.
GLOBAL COMPETITORS FUND seeks long-term capital appreciation by investing
primarily in U.S.-based companies which the Investment Adviser believes will
benefit from their position as effective and strong competitors on a global
basis.
EARLY LIFE CYCLE FUND seeks long-term capital appreciation by investing in
smaller companies in the earlier stages of their development or larger or more
mature companies engaged in new and higher growth potential operations.
Each of the Funds is sponsored and distributed by Edgewood Services, Inc. and
advised by United States Trust Company of New York (the "Investment Adviser"
or "U.S. Trust").
This Prospectus sets forth concisely the information about the Funds that a
prospective investor should consider before investing. Investors should read
this Prospectus and retain it for future reference. A Statement of Additional
Information dated August 1, 1995 and containing additional information about
the Funds has been filed with the Securities and Exchange Commission. The cur-
rent Statement of Additional Information is available to investors without
charge by writing to Master Fund at its address shown above or by calling
(800) 446-1012. The Statement of Additional Information, as it may be supple-
mented from time to time, is incorporated by reference in its entirety into
this Prospectus.
SHARES IN THE FUNDS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR EN-
DORSED BY, UNITED STATES TRUST COMPANY OF NEW YORK, ITS PARENT OR AFFILIATES
AND THE SHARES ARE NOT FEDERALLY INSURED BY, GUARANTEED BY, OBLIGATIONS OF OR
OTHERWISE SUPPORTED BY THE U.S. GOVERNMENT, THE FEDERAL DEPOSIT INSURANCE COR-
PORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER GOVERNMENTAL AGENCY.
AN INVESTMENT IN THE FUNDS INVOLVES INVESTMENT RISKS, INCLUDING POSSIBLE LOSS
OF PRINCIPAL AMOUNT INVESTED.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE AC-
CURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
August 1, 1995
<PAGE>
PROSPECTUS SUMMARY
UST MASTER FUNDS, INC. is an investment company offering various diversified
investment portfolios with differing objectives and policies. Founded in 1984,
Master Fund currently offers 20 Funds with combined assets of approximately
$2.5 billion. See "Description of Capital Stock."
INVESTMENT ADVISER: United States Trust Company of New York ("U.S. Trust")
serves as the Funds' investment adviser. U.S. Trust, whose predecessor was
founded in 1853, offers a variety of specialized financial and fiduciary serv-
ices to high-net worth individuals, institutions and corporations. Master Fund
offers investors access to U.S. Trust's services. See "Management of the
Funds--Investment Adviser."
INVESTMENT OBJECTIVES AND POLICIES: Generally, each Fund is a diversified in-
vestment portfolio which invests in equity securities. The Income and Growth
Fund also may invest significantly in bonds. The Funds' investment objectives
and policies are summarized on the cover and explained in greater detail later
in this Prospectus. See "Investment Objectives and Policies," "Portfolio In-
struments and Other Investment Information," and "Investment Limitations."
HOW TO INVEST: The Funds' Shares are offered at their public offering price,
i.e., their net asset value plus a sales load which is subject to substantial
reductions for large purchases and programs for accumulation. The sales load is
not applicable to investors making their investments through a variety of in-
stitutions, such as U.S. Trust Company, other banks and trust companies. See
"How to Purchase and Redeem Shares."
The minimum to start an account is $500 per Fund, with a minimum of $50 per
Fund for subsequent investments. The easiest way to invest is to complete the
account application which accompanies this Prospectus and to send it with a
check to the address noted on the application. Investors may also invest by
wire and through investment dealers or institutional investors with appropriate
sales agreements with Master Fund. See "How to Purchase and Redeem Shares."
HOW TO REDEEM: Redemptions may be requested directly from Master Fund by
mail, wire or telephone. Investors investing through another institution should
request redemptions through their Shareholder Organization. See "How to Pur-
chase and Redeem Shares."
INVESTMENT RISKS AND CHARACTERISTICS: Generally, each Fund is subject to mar-
ket and industry risk. Market risk is the possibility that stock prices will
decline over short or even extended periods. The stock markets tend to be cy-
clical, with periods of generally rising prices and periods of generally de-
clining prices. These cycles will affect the values of each Fund. In addition,
the Long-Term Supply of Energy Fund will normally concentrate its investments
in the crude oil, petroleum and natural gas industry. This Fund will be suscep-
tible to industry risk, the possibility that a particular group of stocks will
decline in price due to industry-specific developments. Because the Funds may
invest in securities of foreign issuers, they are subject to the risks of fluc-
tuations of the value of foreign currency relative to the U.S. dollar and other
risks associated with such investments. Because the Income and Growth Fund also
invests in bonds and other fixed-income securities, it will also be affected
directly by fluctuations in interest rates and the credit markets. Investments
in non-investment grade obligations may subject the Income and Growth Fund to
increased risk of loss upon default. Such securities are generally unsecured,
are often subordinated debt and are often issued by entities with high levels
of indebtedness and that are more sensitive to adverse economic conditions. Al-
though each Fund generally seeks to invest for the long term, each Fund may en-
gage in short-term trading of portfolio securities. A high rate of portfolio
turnover may involve correspondingly greater transaction costs which must be
borne directly by a Fund and ultimately by its shareholders. Investment in the
Funds should not be considered a complete investment program. See "Investment
Objectives and Policies."
2
<PAGE>
EXPENSE SUMMARY
<TABLE>
<CAPTION>
LONG-TERM PRODUCTIVITY ENVIRONMENTALLY-
EQUITY INCOME AND SUPPLY OF ENHANCERS RELATED PRODUCTS
FUND GROWTH FUND ENERGY FUND FUND AND SERVICES FUND
-------- ----------------- -------------- ------------ -----------------
<S> <C> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION
EXPENSES
Maximum Sales Load (as a
percentage of offering
price)................. 4.50% 4.50% 4.50% 4.50% 4.50%
Sales Load on Reinvested
Dividends.............. None None None None None
Deferred Sales Load..... None None None None None
Redemption Fees/1/...... None None None None None
Exchange Fees........... None None None None None
ANNUAL FUND OPERATING
EXPENSES FOR
DISTRIBUTION SHARES
(AS A PERCENTAGE OF
AVERAGE NET ASSETS)
Advisory Fees (after fee
waivers)/2/............ .72% .72% .42% .47% 0%
12b-1 Fees/3/........... .50% .50% .50% .50% .50%
Other Operating Expenses
Administrative Servic-
ing Fee............... .03% .03% .03% .03% .04%
Other Expenses/2/ (af-
ter fee waivers)...... .30% .31% .53% .49% .95%
Total Fund Operating Ex-
penses (after fee waiv-
ers)/2/ ............... 1.55% 1.56% 1.48% 1.49% 1.49%
<CAPTION>
BUSINESS
AGING OF COMMUNICATION AND INDUSTRIAL GLOBAL
AMERICA AND ENTERTAINMENT RESTRUCTURING COMPETITORS EARLY LIFE
FUND FUND FUND FUND CYCLE FUND
-------- ----------------- -------------- ------------ -----------------
<S> <C> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION
EXPENSES
Maximum Sales Load (as a
percentage of offering
price)................. 4.50% 4.50% 4.50% 4.50% 4.50%
Sales Load on Reinvested
Dividends.............. None None None None None
Deferred Sales Load..... None None None None None
Redemption Fees/1/ ..... None None None None None
Exchange Fees........... None None None None None
ANNUAL FUND OPERATING
EXPENSES FOR
DISTRIBUTION SHARES
(AS A PERCENTAGE OF
AVERAGE NET ASSETS)
Advisory Fees (after fee
waivers)/2/ ........... .44% .53% .52% .50% .52%
12b-1 Fees/3/........... .50% .50% .50% .50% .50%
Other Operating Expenses
Administrative Servic-
ing Fee............... .03% .03% .02% .02% .05%
Other Expenses/2/ (af-
ter fee waivers)...... .52% .42% .44% .45% .39%
Total Fund Operating Ex-
penses (after fee waiv-
ers)/2/ ............... 1.49% 1.48% 1.48% 1.47% 1.46%
</TABLE>
-------
1. The Fund's transfer agent imposes a direct $8.00 charge on each wire redemp-
tion by noninstitutional (i.e. individual) investors which is not reflected
in the expense ratios presented herein. Shareholder organizations may charge
their customers transaction fees in connection with redemptions. See "Re-
demption Procedures."
2. The Investment Adviser and Administrators may, from time to time, voluntar-
ily waive part of their respective fees, which waivers may be terminated at
any time. Until further notice, the Investment Adviser and/or Administrators
intend to voluntarily waive fees in an amount equal to the Administrative
Servicing Fee; and to further waive fees and reimburse expenses to the ex-
tent necessary for Shares of each of the Long-Term Supply of Energy, Produc-
tivity Enhancers, Environmentally-Related Products and Services, Aging of
America, Communication and Entertainment, Business and Industrial Restruc-
turing, Global Competitors and Early Life Cycle Funds (collectively, the
"Theme Funds"), respectively, to maintain an annual expense ratio, net of
12b-1 fees, of not more than .99%. Without such fee waivers, "Advisory Fees"
would be .75%, .75%, .60%, .60%, .60%, .60%, .60%, .60%, .60% and .60%, to-
tal operating expenses would be 1.58%, 1.59%, 1.88%, 1.71%, 2.92%, 1.76%,
1.56%, 1.58%, 1.68% and 1.54% for the Equity, Income and Growth, Long-Term
Supply of Energy, Productivity Enhancers, Environmentally-Related Products
and Services, Aging of America, Communication and Entertainment, Business
and Industrial Restructuring, Global Competitors and Early Life Cycle Funds,
respectively, and "Other Expenses" for Distribution Shares would be .72%,
.58%, 1.78%, .63%, .43%, .46% and .56% for the Long-Term Supply of Energy,
Productivity Enhancers, Environmentally-Related Products and Services, Aging
of America, Communication and Entertainment, Business and Industrial Re-
structuring and Global Competitors Funds, respectively.
3
<PAGE>
3. The Distribution Shares offered by this Prospectus represent equal pro rata
interests in each Fund except that because the beneficial owners of Distri-
bution Shares bear a distribution fee, the net yield on Distribution Shares
can be expected, at any given time, to be lower than the net yield on the
other Shares of a Fund. As a result of the payment of sales charges and dis-
tribution fees, long-term shareholders may pay more than the economic equiv-
alent of the maximum front-end sales load permitted by the National Associa-
tion of Securities Dealers, Inc. ("NASD"). The NASD has adopted rules which
generally limit the aggregate sales charges and payments under Master Fund's
Distribution Plan to a certain percentage of total new gross share sales,
plus interest. Master Fund would stop accruing Distribution Plan fees if, to
the extent, and for as long as, such limit would otherwise be exceeded.
Example: You would pay the following expenses on a $1,000 investment, assuming
(1) 5% annual returns and (2) redemption of your investment at the end of the
following periods:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
Equity Fund.................................... $60 $92 $126 $221
Income and Growth Fund......................... 60 92 126 222
Long-Term Supply of Energy Fund................ 59 90 122 214
Productivity Enhancers Fund.................... 59 90 123 215
Environmentally-Related Products and Services
Fund.......................................... 59 90 123 215
Aging of America Fund.......................... 59 90 123 215
Communication and Entertainment Fund........... 59 90 122 214
Business and Industrial Restructuring Fund..... 59 90 122 214
Global Competitors Fund........................ 59 89 122 213
Early Life Cycle Fund.......................... 59 89 121 212
</TABLE>
The foregoing expense summary and example (based on the maximum sales load
payable on the Shares) are intended to assist investors in understanding the
costs and expenses that an investor in Distribution Shares of the Funds will
bear directly or indirectly. The expense summary sets forth advisory and other
expenses payable with respect to Service Shares of the Funds for the fiscal
year ended March 31, 1995, as restated to reflect the additional cost of dis-
tribution fees borne by Distribution Shares. For more complete descriptions of
the Funds' operating expenses, see "Management of the Funds" in this Prospectus
and the financial statements and notes incorporated by reference in the State-
ment of Additional Information.
THE FOREGOING EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE EXPENSES OR RATE OF RETURN. ACTUAL EXPENSES AND RATE OF RETURN MAY BE
GREATER OR LOWER THAN THOSE SHOWN IN THE EXPENSE SUMMARY AND EXAMPLE.
4
<PAGE>
FINANCIAL HIGHLIGHTS
The following tables include selected data for a Service Share outstanding
throughout each period and other performance information derived from the fi-
nancial statements included in Master Fund's Annual Report to Shareholders for
the year ended March 31, 1995 (collectively, the "Financial Statements"). The
information contained in the Financial Highlights for each period has been au-
dited by Ernst & Young LLP, Master Fund's independent auditors. The following
tables should be read in conjunction with the Financial Statements and notes
thereto. More information about the performance of each Fund is also contained
in the Annual Report to Shareholders which may be obtained from Master Fund
without charge by calling the number on the front cover of this Prospectus.
Prior to the date of this Prospectus, each Fund offered a single series of
shares, the Service Shares. As of the date of this Prospectus, the Funds began
offering a new series of shares designated as Distribution Shares. Service
Shares and Distribution Shares represent equal pro rata interests in each Fund,
except they bear different expenses which reflect the difference in the level
of services provided to them. See "Description of Capital Stock."
EQUITY FUND
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-----------------------------------------------------------------------------------------
1995 1994 1993 1992 1991 1990 1989 1988 1987 1986/1/
------- ------- ------- ------- ------ ------- ------- --------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period.... $ 19.17 $ 18.77 $ 16.28 $ 14.13 $13.87 $ 13.22 $ 11.32 $ 13.56 $ 12.35 $ 8.00
------- ------- ------- ------- ------ ------- ------- --------- ------- -------
Income From Investment
Operations
Net Investment Income.. 0.07 0.05 0.08 0.13 0.28 0.34 0.19 0.15 0.18 0.18
Net Gains or (Losses)
on Securities (both
realized and
unrealized)........... 2.67 1.16 3.01 2.23 0.39 1.26 1.88 (1.63) 1.86 4.31
------- ------- ------- ------- ------ ------- ------- --------- ------- -------
Total From Investment
Operations............ 2.74 1.21 3.09 2.36 0.67 1.60 2.07 (1.48) 2.04 4.49
------- ------- ------- ------- ------ ------- ------- --------- ------- -------
Less Distributions
Dividends From Net
Investment Income..... (0.04) (0.08) (0.09) (0.21) (0.23) (0.34) (0.17) (0.14) (0.18) (0.14)
Dividends in Excess of
Net Investment Income. 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
Distributions From Net
Realized Gain on
Investments and
Options............... (0.47) (0.39) (0.51) 0.00 (0.18) (0.61) 0.00 (0.62) (0.65) 0.00
Distributions in Excess
of Net Realized Gain
on Investments and
Options............... 0.00 (0.34) 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
------- ------- ------- ------- ------ ------- ------- --------- ------- -------
Total Distributions.... (0.51) (0.81) (0.60) (0.21) (0.41) (0.95) (0.17) (0.76) (0.83) (0.14)
------- ------- ------- ------- ------ ------- ------- --------- ------- -------
Net Asset Value, End of
Period................. $ 21.40 $ 19.17 $ 18.77 $ 16.28 $14.13 $ 13.87 $ 13.22 $ 11.32 $ 13.56 $ 12.35
======= ======= ======= ======= ====== ======= ======= ========= ======= =======
Total Return/2/ ........ 14.65% 6.54% 19.26% 16.87% 5.11% 11.98% 18.52% (11.24)% 17.61% 56.74%
Ratios/Supplemental Data
Net Assets, End of
Period
(in millions)......... $137.42 $122.26 $106.14 $ 71.62 $29.87 $ 25.98 $ 17.61 $ 13.58 $ 13.40 $ 5.58
Ratio of Net Operating
Expenses to Average
Net Assets............ 1.05% 1.14% 1.08% 1.15% 1.23% 1.22% 1.16% 1.16% 1.21% 0.90%/3/
Ratio of Gross
Operating Expenses to
Average Net Assets.... 1.08% 1.14% 1.08% 1.15% 1.23% 1.22% 1.16% 1.16% 1.30% 2.74%/3/
Ratio of Net Investment
Income to Average Net
Assets................ 0.36% 0.25% 0.51% 0.87% 2.21% 2.45% 1.62% 1.26% 1.53% 2.63%/3/
Portfolio Turnover
Rate.................. 23.0% 17.0% 24.0% 20.0% 41.0% 53.0% 46.0% 67.0% 86.0% 207.0%/3/
</TABLE>
-------
NOTES:
1. Inception date of the Fund was April 25, 1985.
2. Total return data does not reflect the sales load payable on purchases of
Shares.
3. Annualized.
5
<PAGE>
INCOME AND GROWTH FUND
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-----------------------------------------------------------------------
1995 1994 1993 1992 1991 1990 1989 1988 1987/1/
------ ------ ------ ------ ------ ------ ------ ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period.... $11.94 $11.45 $ 9.10 $ 8.36 $ 8.84 $ 9.09 $ 8.12 $ 8.95 $ 8.00
------ ------ ------ ------ ------ ------ ------ ------ ------
Income From Investment
Operations
Net Investment Income.. 0.38 0.31 0.27 0.30 0.29 0.40 0.28 0.44 0.06
Net Gains or (Losses)
on Securities
(both realized and
unrealized)........... 0.26 0.46 2.43 0.72 (0.43) 0.19 1.15 (0.93) 0.89
------ ------ ------ ------ ------ ------ ------ ------ ------
Total From Investment
Operations............ 0.64 0.77 2.70 1.02 (0.14) 0.59 1.43 (0.49) 0.95
------ ------ ------ ------ ------ ------ ------ ------ ------
Less Distributions
Dividends From Net
Investment Income..... (0.35) (0.27) (0.35) (0.28) (0.34) (0.39) (0.46) (0.21) 0.00
Dividends in Excess of
Net Investment Income. 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
Distributions From Net
Realized Gain on
Investments and
Options............... (0.41) (0.01) 0.00 0.00 0.00 (0.45) 0.00 (0.13) 0.00
Distributions in Excess
of Net Realized Gain
on Investments and
Options............... 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
------ ------ ------ ------ ------ ------ ------ ------ ------
Total Distributions.... (0.76) (0.28) (0.35) (0.28) (0.34) (0.84) (0.46) (0.34) 0.00
------ ------ ------ ------ ------ ------ ------ ------ ------
Net Asset Value, End of
Period................. $11.82 $11.94 $11.45 $ 9.10 $ 8.36 $ 8.84 $ 9.09 $ 8.12 $ 8.95
====== ====== ====== ====== ====== ====== ====== ====== ======
Total Return/2/......... 5.74% 6.69% 30.45% 12.42% (1.30%) 6.14% 18.36% (5.43%) 11.88%
Ratios/Supplemental Data
Net Assets, End of
Period (in millions).. $99.93 $96.68 $51.30 $23.25 $19.59 $23.66 $14.62 $ 6.66 $ 3.71
Ratio of Net Operating
Expenses to Average
Net Assets............ 1.06% 1.17% 1.15% 1.23% 1.28% 1.24% 1.22% 1.27% 1.13%/3/
Ratio of Gross
Operating Expenses to
Average Net Assets.... 1.09% 1.17% 1.15% 1.23% 1.28% 1.24% 1.22% 1.27% 1.84%/3/
Ratio of Net Investment
Income to Average Net
Assets................ 3.31% 2.77% 2.76% 3.52% 3.64% 4.47% 4.09% 6.20% 4.25%/3/
Portfolio Turnover
Rate.................. 36.0% 28.0% 28.0% 81.0% 148.0% 29.0% 24.0% 27.0% 7.0%/3/
</TABLE>
-------
NOTES:
1. Inception date of the Fund was January 6, 1987.
2. Total return data does not reflect the sales load payable on purchases of
Shares.
3. Annualized.
6
<PAGE>
LONG-TERM SUPPLY OF ENERGY FUND
<TABLE>
<CAPTION>
YEAR ENDED
MARCH 31,
--------------- PERIOD ENDED
1995 1994 MARCH 31, 1993/1/
------ ------- -----------------
<S> <C> <C> <C>
Net Asset Value, Beginning of Period........ $ 7.70 $ 7.81 $ 7.00
------ ------- ------
Income From Investment Operations
Net Investment Income..................... 0.09 0.08 0.01
Net Gains or (Losses) on Securities (both
realized and unrealized)................. 0.24 (0.12) 0.80
------ ------- ------
Total From Investment Operations.......... 0.33 (0.04) 0.81
------ ------- ------
Less Distributions
Dividends From Net Investment Income...... (0.10) (0.07) 0.00
Dividends in Excess of Net Investment
Income................................... 0.00 0.00 0.00
Distributions From Net Realized Gain on
Investments and Options.................. (0.01) 0.00 0.00
Distributions in Excess of Net Realized
Gain on Investments and Options.......... 0.00 0.00 0.00
------ ------- ------
Total Distributions....................... (0.11) (0.07) 0.00
------ ------- ------
Net Asset Value, End of Period.............. $ 7.92 $ 7.70 $ 7.81
====== ======= ======
Total Return/2/............................. 4.28% (0.57)% 11.57%
Ratios/Supplemental Data
Net Assets, End of Period (in millions)... $15.81 $ 6.83 $ 1.46
Ratio of Net Operating Expenses to Average
Net Assets............................... 0.98% 0.99% 0.99%/3/
Ratio of Gross Operating Expenses to
Average Net Assets....................... 1.35% 2.03% 7.03%/3/
Ratio of Net Investment Income to Average
Net Assets............................... 1.18% 1.21% 1.69%/3/
Portfolio Turnover Rate................... 31.0% 6.0% 0.0%/3/
</TABLE>
-------
NOTES:
1. Inception date of the Fund was December 31, 1992.
2. Total return data does not reflect the sales load payable on purchases of
Shares.
3. Annualized.
7
<PAGE>
PRODUCTIVITY ENHANCERS FUND
<TABLE>
<CAPTION>
YEAR ENDED
MARCH 31,
--------------- PERIOD ENDED
1995 1994 MARCH 31, 1993/1/
------- ------ -----------------
<S> <C> <C> <C>
Net Asset Value, Beginning of Period........ $ 7.88 $ 6.94 $ 7.00
------- ------ -------
Income From Investment Operations
Net Investment Income..................... (0.01) 0.00 0.01
Net Gains or (Losses) on Securities (both
realized and unrealized)................. 0.35 0.96 (0.07)
------- ------ -------
Total From Investment Operations.......... 0.34 0.96 (0.06)
------- ------ -------
Less Distributions
Dividends From Net Investment Income...... 0.00 0.00 0.00
Dividends in Excess of Net Investment
Income................................... 0.00 (0.02) 0.00
Distributions From Net Realized Gain on
Investments and Options.................. (0.10) 0.00 0.00
Distributions in Excess of Net Realized
Gain on Investments and Options.......... 0.00 0.00 0.00
------- ------ -------
Total Distributions....................... (0.10) (0.02) 0.00
------- ------ -------
Net Asset Value, End of Period.............. $ 8.12 $ 7.88 $ 6.94
======= ====== =======
Total Return/2/............................. 4.45% 13.81% (0.86)%
Ratios/Supplemental Data
Net Assets, End of Period (in millions)... $ 18.27 $15.70 $ 3.37
Ratio of Net Operating Expenses to Average
Net Assets............................... 0.99% 0.99% 0.99%/3/
Ratio of Gross Operating Expenses to
Average Net Assets....................... 1.21% 1.49% 4.23%/3/
Ratio of Net Investment Income/(Loss) to
Average Net Assets....................... (0.10)% 0.01% 1.29%/3/
Portfolio Turnover Rate................... 276.0% 198.0% 183.0%/3/
</TABLE>
-------
NOTES:
1. Inception date of the Fund was December 31, 1992.
2. Total return data does not reflect the sales load payable on purchases of
Shares.
3. Annualized.
8
<PAGE>
ENVIRONMENTALLY-RELATED PRODUCTS AND SERVICES FUND
<TABLE>
<CAPTION>
YEAR ENDED MARCH
31,
----------------- PERIOD ENDED
1995 1994 MARCH 31, 1993/1/
------- -------- -----------------
<S> <C> <C> <C>
Net Asset Value, Beginning of Period...... $ 6.24 $ 6.95 $ 7.00
------- -------- -------
Income From Investment Operations
Net Investment Income................... (0.01) 0.00 0.00
Net Gains or (Losses) on Securities
(both realized and unrealized)......... (0.01) (0.71) (0.05)
------- -------- -------
Total From Investment Operations........ (0.02) (0.71) (0.05)
------- -------- -------
Less Distributions
Dividends From Net Investment Income.... 0.00 0.00 0.00
Dividends in Excess of Net Investment
Income................................. (0.01) 0.00 0.00
Distributions From Net Realized Gain on
Investments and Options................ 0.00 0.00 0.00
Distributions in Excess of Net Realized
Gain on Investments and Options........ 0.00 0.00 0.00
------- -------- -------
Total Distributions..................... (0.01) 0.00 0.00
------- -------- -------
Net Asset Value, End of Period............ $ 6.21 $ 6.24 $ 6.95
======= ======== =======
Total Return/2/........................... (0.27)% (10.15)% (0.71)%
Ratios/Supplemental Data
Net Assets, End of Period (in millions). $ 4.36 $ 4.53 $ 2.45
Ratio of Net Operating Expenses to
Average Net Assets..................... 0.99% 0.99% 0.99%/3/
Ratio of Gross Operating Expenses to
Average Net Assets..................... 2.42% 2.20% 2.83%/3/
Ratio of Net Investment Income/(Loss) to
Average Net Assets..................... (0.10)% (0.07)% 0.32%/3/
Portfolio Turnover Rate................. 61.0% 28.0% 0.0%/3/
</TABLE>
-------
NOTES:
1. Inception date of the Fund was December 31, 1992.
2. Total return data does not reflect the sales load payable on purchases of
Shares.
3. Annualized.
9
<PAGE>
AGING OF AMERICA FUND
<TABLE>
<CAPTION>
YEAR ENDED
MARCH 31,
-------------- PERIOD ENDED
1995 1994 MARCH 31, 1993/1/
------ ------ -----------------
<S> <C> <C> <C>
Net Asset Value, Beginning of Period......... $ 6.99 $ 7.01 $7.00
------ ------ -----
Income From Investment Operations
Net Investment Income...................... 0.04 0.03 0.01
Net Gains or (Losses) on Securities (both
realized and unrealized).................. 0.85 (0.02) 0.00
------ ------ -----
Total From Investment Operations........... 0.89 0.01 0.01
------ ------ -----
Less Distributions
Dividends From Net Investment Income....... (0.04) (0.03) 0.00
Dividends in Excess of Net Investment
Income.................................... 0.00 0.00 0.00
Distributions From Net Realized Gain on
Investments and Options................... 0.00 0.00 0.00
Distributions in Excess of Net Realized
Gain on Investments and Options........... 0.00 0.00 0.00
------ ------ -----
Total Distributions........................ (0.04) (0.03) 0.00
------ ------ -----
Net Asset Value, End of Period............... $ 7.84 $ 6.99 $7.01
====== ====== =====
Total Return/2/.............................. 12.80% 0.13% 0.14%
Ratios/Supplemental Data
Net Assets, End of Period (in millions).... $22.17 $10.58 $2.39
Ratio of Net Operating Expenses to Average
Net Assets................................ 0.99% 0.99% 0.99%/3/
Ratio of Gross Operating Expenses to
Average Net Assets........................ 1.26% 1.82% 3.87%/3/
Ratio of Net Investment Income to Average
Net Assets................................ 0.63% 0.59% 0.77%/3/
Portfolio Turnover Rate.................... 14.0% 24.0% 14.0%/3/
</TABLE>
-------
NOTES:
1. Inception date of the Fund was December 31, 1992.
2. Total return data does not reflect the sales load payable on purchases of
Shares.
3. Annualized.
10
<PAGE>
COMMUNICATION AND ENTERTAINMENT FUND
<TABLE>
<CAPTION>
YEAR ENDED
MARCH 31,
-------------- PERIOD ENDED
1995 1994 MARCH 31, 1993/1/
------ ------ -----------------
<S> <C> <C> <C>
Net Asset Value, Beginning of Period......... $ 8.75 $ 7.61 $7.00
------ ------ -----
Income From Investment Operations
Net Investment Income...................... 0.04 0.02 0.01
Net Gains or (Losses) on Securities (both
realized and unrealized).................. 1.06 1.52 0.60
------ ------ -----
Total From Investment Operations........... 1.10 1.54 0.61
------ ------ -----
Less Distributions
Dividends From Net Investment Income....... (0.04) (0.03) 0.00
Dividends in Excess of Net Investment
Income.................................... 0.00 0.00 0.00
Distributions From Net Realized Gain on
Investments and Options................... (0.17) (0.37) 0.00
Distributions in Excess of Net Realized
Gain on Investments and Options........... 0.00 0.00 0.00
------ ------ -----
Total Distributions........................ (0.21) (0.40) 0.00
------ ------ -----
Net Asset Value, End of Period............... $ 9.64 $ 8.75 $7.61
====== ====== =====
Total Return/2/.............................. 12.87% 20.07% 8.71%
Ratios/Supplemental Data
Net Assets, End of Period (in millions).... $29.91 $21.02 $5.79
Ratio of Net Operating Expenses to Average
Net Assets................................ 0.98% 0.98% 0.99%/3/
Ratio of Gross Operating Expenses to
Average Net Assets........................ 1.06% 1.16% 2.20%/3/
Ratio of Net Investment Income to Average
Net Assets................................ 0.46% 0.29% 1.06%/3/
Portfolio Turnover Rate.................... 56.0% 60.0% 25.0%/3/
</TABLE>
-------
NOTES:
1. Inception date of the Fund was December 31, 1992.
2. Total return data does not reflect the sales load payable on purchases of
Shares.
3. Annualized.
11
<PAGE>
BUSINESS AND INDUSTRIAL RESTRUCTURING FUND
<TABLE>
<CAPTION>
YEAR ENDED
MARCH 31,
-------------- PERIOD ENDED
1995 1994 MARCH 31, 1993/1/
------ ------ -----------------
<S> <C> <C> <C>
Net Asset Value, Beginning of Period......... $ 9.64 $ 7.71 $ 7.00
------ ------ ------
Income From Investment Operations
Net Investment Income...................... 0.07 0.06 0.02
Net Gains or (Losses) on Securities (both
realized and unrealized).................. 1.02 1.96 0.69
------ ------ ------
Total From Investment Operations........... 1.09 2.02 0.71
------ ------ ------
Less Distributions
Dividends From Net Investment Income....... (0.06) (0.07) 0.00
Dividends in Excess of Net Investment
Income.................................... 0.00 0.00 0.00
Distributions From Net Realized Gain on
Investments and Options................... (0.12) (0.02) 0.00
Distributions in Excess of Net Realized
Gain on Investments and Options........... 0.00 0.00 0.00
------ ------ ------
Total Distributions........................ (0.18) (0.09) 0.00
------ ------ ------
Net Asset Value, End of Period............... $10.55 $ 9.64 $ 7.71
====== ====== ======
Total Return/2/.............................. 11.49% 26.40% 10.14%
Ratios/Supplemental Data
Net Assets, End of Period (in millions).... $30.18 $14.44 $ 1.94
Ratio of Net Operating Expenses to Average
Net Assets................................ 0.98% 0.99% 0.99%/3/
Ratio of Gross Operating Expenses to
Average Net Assets........................ 1.08% 1.73% 5.85%/3/
Ratio of Net Investment Income to Average
Net Assets................................ 0.83% 0.77% 2.48%/3/
Portfolio Turnover Rate.................... 82.0% 75.0% 9.0%/3/
</TABLE>
-------
NOTES:
1. Inception date of the Fund was December 31, 1992.
2. Total return data does not reflect the sales load payable on purchases of
Shares.
3. Annualized.
12
<PAGE>
GLOBAL COMPETITORS FUND
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
---------------------- PERIOD ENDED
1995 1994 MARCH 31, 1993/1/
---------- ---------- -----------------
<S> <C> <C> <C>
Net Asset Value, Beginning of Period. $7.69 $ 7.28 $7.00
---------- ---------- -----
Income From Investment Operations
Net Investment Income.............. 0.07 0.05 0.01
Net Gains or (Losses) on Securities
(both realized and unrealized).... 0.90 0.41 0.27
---------- ---------- -----
Total From Investment Operations... 0.97 0.46 0.28
---------- ---------- -----
Less Distributions
Dividends from Net Investment
Income............................ (0.07) (0.05) 0.00
Dividends in Excess of Net
Investment Income................. 0.00 0.00 0.00
Distributions from Net Realized
Gain on Investments and Options... 0.00 0.00 0.00
Distributions in Excess of Net
Realized Gain on Investments and
Options........................... 0.00 0.00 0.00
---------- ---------- -----
Total Distributions................ (0.07) (0.05) 0.00
---------- ---------- -----
Net Asset Value, End of Period....... $ 8.59 $ 7.69 $7.28
========== ========== =====
Total Return/2/...................... 12.73% 6.29% 4.00%
Ratios/Supplemental Data
Net Assets, End of Period (in
millions)......................... $ 25.50 $ 10.06 $2.04
Ratio of Net Operating Expenses to
Average Net Assets................ 0.97% 0.99% 0.99%/3/
Ratio of Gross Operating Expenses
to Average Net Assets............. 1.18% 1.72% 3.97%/3/
Ratio of Net Investment Income to
Average Net Assets................ 1.04% 0.81% 0.82%/3/
Portfolio Turnover Rate............ 29.0% 19.0% 0.0%/3/
</TABLE>
-------
NOTES:
1. Inception date of the Fund was December 31, 1992.
2. Total return data does not reflect the sales load payable on purchases of
Shares.
3. Annualized.
13
<PAGE>
EARLY LIFE CYCLE FUND
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
---------------------- PERIOD ENDED
1995 1994 MARCH 31, 1993/1/
---------- ---------- -----------------
<S> <C> <C> <C>
Net Asset Value, Beginning of Period. $ 8.66 $ 7.40 $7.00
---------- ---------- -----
Income From Investment Operations
Net Investment Income.............. (0.02) (0.01) 0.00
Net Gains or (Losses) on Securities
(both realized and unrealized).... 1.31 1.36 0.40
---------- ---------- -----
Total From Investment Operations... 1.29 1.35 0.40
---------- ---------- -----
Less Distributions
Dividends From Net Investment
Income............................ 0.00 0.00 0.00
Dividends in Excess of Net
Investment Income................. 0.00 0.00 0.00
Distributions From Net Realized
Gain on Investments and Options... (0.18) (0.09) 0.00
Distributions in Excess of Net
Realized Gain on Investments and
Options........................... 0.00 0.00 0.00
---------- ---------- -----
Total Distributions................ (0.18) (0.09) 0.00
---------- ---------- -----
Net Asset Value, End of Period....... $ 9.77 $ 8.66 $7.40
========== ========== =====
Total Return/2/...................... 15.16% 18.27% 5.71%
Ratios/Supplemental Data
Net Assets, End of Period (in
millions)......................... $ 47.78 $ 24.95 $5.51
Ratio of Net Operating Expenses to
Average Net Assets................ 0.96% 0.95% 0.99%/3/
Ratio of Gross Operating Expenses
to Average Net Assets............. 1.04% 1.15% 2.70%/3/
Ratio of Net Investment Income to
Average Net Assets................ (0.23)% (0.25)% 0.12%/3/
Portfolio Turnover Rate............ 42.0% 20.0% 4.0%/3/
</TABLE>
-------
NOTES:
1. Inception date of the Fund was December 31, 1992.
2. Total return data does not reflect the sales load payable on purchases of
Shares.
3. Annualized.
14
<PAGE>
U.S. TRUST'S INVESTMENT PHILOSOPHY AND STRATEGIES
U.S. Trust and its predecessor, the Funds' Investment Adviser, was founded in
1853 and offers a variety of specialized fiduciary and financial services to
high-net worth individuals, institutions and corporations. As one of the larg-
est institutions of its type, U.S. Trust prides itself in offering an attentive
and high level of service to each of its clients. The UST Master Funds offer
individual investors access to U.S. Trust's services.
Philosophy. In managing investments for the Funds, U.S. Trust follows a long-
term investment philosophy which generally does not change with the short-term
variability of financial markets or fundamental conditions. U.S. Trust's ap-
proach begins with the conviction that all worthwhile investments are grounded
in value. The Investment Adviser believes that an investor can identify funda-
mental values that eventually should be reflected in market prices. U.S. Trust
believes that over time, a disciplined search for fundamental value will
achieve better results than attempting to take advantage of short-term price
movements.
Implementation of this long-term value philosophy consists of searching for,
identifying and obtaining the benefits of present or future investment values.
For example, such values may be found in a company's future earnings potential
or in its existing resources and assets. Accordingly, U.S. Trust in managing
investments for the Funds is constantly engaged in assessing, comparing and
judging the worth of companies, particularly in comparison to the price the
markets place on such companies' shares.
Strategies. In order to translate its investment philosophy into more specific
guidance for selection of investments, the Investment Adviser uses three spe-
cific strategies. These strategies, while identified separately, may overlap so
that more than one may be applied in an investment decision.
U.S. Trust's "PROBLEM/OPPORTUNITY STRATEGY" seeks to identify industries and
companies with the capabilities to provide solutions to or benefit from complex
problems such as the changing demo-graphics and aging of the U.S. population or
the need to enhance industrial productivity. U.S. Trust's second strategy is a
"TRANSACTION VALUE" comparison of a company's real underlying asset value with
the market price of its shares and with the sale prices for similar assets
changing ownership in public market transactions. Differences between a
company's real asset value and the price of its shares often are corrected over
time by restructuring of the assets or by market recognition of their value.
U.S. Trust's third strategy involves identifying "EARLY LIFE CYCLE" companies
whose products are in their earlier stages of development or that seek to ex-
ploit new markets. Frequently such companies are smaller companies, but early
life cycle companies may also include larger established companies with new
products or markets for existing products. The Investment Adviser believes that
over time the value of such companies should be recognized in the market.
Themes. To complete U.S. Trust's investment philosophy, the three portfolio
strategies discussed above are applied in concert with several "longer-term in-
vestment themes" to identify investment opportunities. The Investment Adviser
believes these longer-term themes represent strong and inexorable trends. The
Investment Adviser also believes that understanding the instigation, catalysts
and effects of these longer-term trends should help to identify companies that
are beneficiaries of these trends.
INVESTMENT OBJECTIVES AND POLICIES
The Investment Adviser will use its best efforts to achieve the investment ob-
jective of each Fund, although their achievement cannot be assured. The invest-
ment objective of each Fund is "fundamental", meaning that it may not be
changed without a vote of the holders of a majority of the particular Fund's
outstanding Shares (as defined under "Miscellaneous"). Except as noted below in
"Investment Limitations,"
15
<PAGE>
the investment policies of each Fund may be changed without a vote of the
holders of a majority of the outstanding shares of such Fund.
EQUITY FUND
The Equity Fund's investment objective is to seek long-term capital apprecia-
tion. The Equity Fund invests in companies which the Investment Adviser
believes have value currently not recognized in the market prices of the com-
panies' securities. The Investment Adviser uses the investment philosophy,
strategies and themes discussed above to identify such investment values and
to diversify the Fund's investments over a variety of industries and types of
companies. See "Investment Policies Common to the Equity Fund and the Theme
Funds" for a discussion of various investment policies applicable to the Eq-
uity Fund.
THEME FUNDS
Eight Theme Funds are offered having the common investment objective of long-
term capital appreciation. As noted above, these Theme Funds are based on
themes identified and followed by the Investment Adviser. Each Theme Fund's
key policies are discussed below. Additional policies common to all Theme
Funds are discussed after this section.
LONG-TERM SUPPLY OF ENERGY FUND--invests in companies which the Investment
Adviser believes will benefit from the availability, development and delivery
of secure hydrocarbon and other energy sources. Such companies include those
engaged in the following types of activities: the production, transmission,
marketing, control or measurement of energy or fuels; providing products or
services to companies engaged in such activities; energy-related research, ex-
perimentation and consulting; and environmental activities such as pollution
control and energy conservation. Included in such companies are oil and gas
production and pipeline companies; drilling and drilling service companies;
electric and gas utilities; and other energy resource companies such as coal
producers and newer resources such as geothermal and solar energy producers.
Normally, at least 25% of the Fund's assets will be invested in the crude oil,
petroleum and natural gas industry. However, less than that amount may be so
invested if there have been changes in governmental regulations, world eco-
nomic and political events, exploration or production spending; or supply, de-
mand or prices of crude oil, petroleum, natural gas or other energy sources,
and in the Investment Adviser's opinion, such changes would have an adverse
affect on the securities of companies in that industry. Under normal condi-
tions, at least 65% of the Fund's total assets will be invested in companies
of the type described in this paragraph.
Among the characteristics the Investment Adviser currently looks for in en-
ergy and energy-related investments are companies or energy sources which the
Investment Adviser believes are:
- dedicated to producing supplies of energy at economically acceptable cost;
- located in politically and economically stable or "secure" areas, i.e, sub-
ject only to minimal risk of disruption for political or ideological rea-
sons, or by economic "warfare" or systemic economic weakness;
- available in continuous, sufficient quantity to be reliable and economically
significant;
- involved in energy which is easily and economically transportable and dis-
tributable to where it is consumed.
PRODUCTIVITY ENHANCERS FUND--invests in companies which the Investment Ad-
viser believes will benefit from their roles as innovators, developers and
suppliers of goods and services which enhance service and manufacturing pro-
ductivity or companies that are most effective at obtaining and applying pro-
ductivity enhancement developments. The essential criteria for such products
and services is that they have the ability to increase a user's productivity,
e.g., enable the user to generate equal or greater economic value at lower to-
tal unit cost than alternatives or provide measurable improvement of produc-
tivity by the provider or the user. Such companies may include but are not
limited to production automation manufacturers, computer hardware and software
producers and distributors,
16
<PAGE>
communications and mobile telephone providers, and companies involved with
cost control, asset redeployment and downsizing activities and enhancing the
utilization of technology. Under normal conditions, at least 65% of the Fund's
total assets will be invested in companies of the type described in this para-
graph.
ENVIRONMENTALLY-RELATED PRODUCTS AND SERVICES FUND--invests in companies
which the Investment Adviser believes will benefit from their provision of
products, technologies and services related to conservation, protection and
restoration of the environment. Such companies may include but are not limited
to companies engaged in waste management and pollution control, prevention and
cleanup activities. The Fund is not intended to be an "environmentally cor-
rect" fund and may invest in companies without regard to whether they are en-
gaged in operations harmful to the environment. Under normal conditions, at
least 65% of the Fund's total assets will be invested in companies of the type
described in this paragraph.
The Fund may also invest a portion of its assets
in securities of companies that offer products and services used by individu-
als in response to ecological concerns and concerns relating to their social
environment. Such investments may include, without limitation, securities of
companies that produce protective clothing, sunscreens and personal security
products.
AGING OF AMERICA FUND--invests in companies which the Investment Adviser be-
lieves will benefit from the changes occurring in the demographic structure of
the U.S. population, particularly its growing proportion of individuals over
the age of 40. In analyzing companies for this Fund, the Investment Adviser
considers carefully the ongoing changes in the mean and median ages of the
U.S. population and the resulting effects on the lifestyles and day-to-day
economic actions of the population as a whole. Companies currently positioned
to benefit from such changes include health care, pharmaceutical, biotechnol-
ogy and similar health-related firms. In addition, certain clothing, financial
services, entertainment, real estate and housing, food and beverage and other
types of companies may be positioned to benefit from the demographic changes.
Under normal conditions, at least 65% of the Fund's total assets will be in-
vested in companies of the type described in this paragraph.
COMMUNICATION AND ENTERTAINMENT FUND--invests in companies which the Invest-
ment Adviser believes will benefit from the technological and international
transformation of the communications and entertainment industries, particu-
larly the convergence of information, communication and entertainment media.
Such companies may include those engaged in the development, production, sale
and distribution of products or services in the broadcast, radio and televi-
sion, leisure, entertainment, amusement, publishing, telecommunications serv-
ices and equipment, and tele-phone utilities industries. In analyzing compa-
nies for investment, the Investment Adviser may focus on firms which the In-
vestment Adviser believes are innovators of or will benefit from the melding
of computer, communications and entertainment technologies. Under normal con-
ditions, at least 65% of the Fund's total assets will be invested in companies
of the type described in this paragraph.
BUSINESS AND INDUSTRIAL RESTRUCTURING FUND--invests in companies which the
Investment Adviser believes will benefit from their restructuring or redeploy-
ment of assets and operations in order to become more competitive or profit-
able. Such companies may include those involved in prospective mergers, con-
solidations, liquidations, spin-offs, financial restructurings and reorganiza-
tions. The business activities of such companies are not limited in any way.
Under normal conditions, at least 65% of the Fund's total assets will be in-
vested in companies of the type described in this paragraph. The Investment
Adviser's focus is to find companies whose restructuring activities offer sig-
nificant value and investment potential. For example, several years ago
leveraged buy-outs and mergers were prominent trends, while currently a great
deal of value enhancing activity is occurring as companies deleverage or re-
duce their debt burdens
17
<PAGE>
in order to increase profitability. There is risk in these types of invest-
ments. For example, should a company be unsuccessful in reducing its debt, it
may be forced into default on its debt, increasing its debt or bankruptcy.
GLOBAL COMPETITORS FUND--invests primarily in U.S.-based companies which the
Investment Adviser believes will benefit from their position as effective and
strong competitors on a global basis. Such companies are characterized by
their ability to supply something unique or of greater value, or to deliver
goods and services more efficiently or reliably. These companies develop and
implement international marketing strategies for their goods and services. The
range of businesses encompassed by this policy is broad and, by way of exam-
ple, may include companies engaged in soft drink production and sales, cloth-
ing manufacturers, tobacco product producers, precision instrument and aero-
space providers, and a variety of communications systems, biotechnology and
high technology suppliers. While the Fund will invest primarily in U.S.-based
companies with such features, up to 20% of the Fund's assets may be invested
in non-U.S.-based global competitors. The Fund will not engage in currency
hedging in an attempt to anticipate currency fluctuations with respect to any
such foreign investments. Under normal conditions, the Fund will invest in se-
curities of issuers from at least three countries and at least 65% of the
Fund's total assets will be invested in companies of the type described in
this paragraph.
EARLY LIFE CYCLE FUND--invests primarily in smaller companies which are in
the earlier stages of their development or larger or more mature companies en-
gaged in new and higher growth potential operations. An early life cycle com-
pany is one which is early in its development as a company, yet has
demonstrated or is expected to achieve substantial long-term earnings growth.
More mature or larger, established companies may also be positioned for
accelerating earnings because of rejuvenated management, new products, new
markets for existing products or structural changes in the economy. In select-
ing companies for investment, the Investment Adviser looks for innovative com-
panies whose potential has not yet been fully recognized by the securities
markets. Under normal conditions, at least 65% of the Fund's total assets will
be invested in companies with capitalization of $1 billion or less. The risk
and venture oriented nature of such companies naturally entails greater risk
for investors when contrasted with investing in more established companies.
INVESTMENT POLICIES COMMON TO THE EQUITY FUND AND THE THEME FUNDS
Under normal market and economic conditions, the Equity and each Theme Fund
will invest at least 65% of its total assets in common stock, preferred stock
and securities convertible into common stock. Normally, up to 35% of each such
Fund's total assets may be invested in other securities and instruments in-
cluding, e.g., other investment-grade debt securities, warrants, options, and
futures instruments as described in more detail below. During temporary defen-
sive periods or when the Investment Adviser believes that suitable stocks or
convertible securities are unavailable, each Fund may hold cash or invest some
or all of its assets in U.S. Government securities, high-quality money market
instruments and repurchase agreements collateralized by the foregoing obliga-
tions.
In managing the Equity and Theme Funds, the Investment Adviser seeks to pur-
chase securities having value currently not recognized in the market price of
a security, consistent with the strategies discussed above.
Portfolio holdings will include common stocks of companies having capitaliza-
tions of varying amounts, and all Funds will invest in the securities of high
growth, small companies where the Investment Adviser expects earnings and the
price of the securities to grow at an above-average rate. As discussed above,
the Early Life Cycle Fund emphasizes such companies. Certain securities owned
by the Equity and Theme Funds may be traded only in the over-the-counter mar-
ket or on a regional securities exchange,
18
<PAGE>
may be listed only in the quotation service commonly known as the "pink
sheets," and may not be traded every day or in the volume typical of trading on
a national securities exchange. As a result, there may be a greater fluctuation
in the value of a Fund's Shares, and a Fund may be required, in order to meet
redemptions or for other reasons, to sell these securities at a discount from
market prices, to sell during periods when such disposition is not desirable,
or to make many small sales over a period of time.
The Equity and Theme Funds may invest in the securities of foreign issuers.
The Funds may invest indirectly in the securities of foreign issuers through
sponsored and unsponsored American Depository Receipts ("ADRs"). ADRs represent
receipts typically issued by a U.S. bank or trust company which evidence owner-
ship of underlying securities of foreign issuers. Investments in unsponsored
ADRs involve additional risk because financial information based on generally
accepted accounting principles ("GAAP") may not be available for the foreign
issuers of the underlying securities. ADRs may not necessarily be denominated
in the same currency as the underlying securities into which they may be con-
verted.
INCOME AND GROWTH FUND
The Income and Growth Fund has two investment objectives. Its primary invest-
ment objective is to seek to provide moderate current income and then, as a
secondary objective, to achieve capital appreciation from its investments. In
attempting to achieve these two objectives, the Income and Growth Fund invests,
during normal market and economic conditions, a substantial portion of its as-
sets in common stock, preferred stock and securities convertible into common
stock. The Fund's investments in equity securities will be income-oriented, and
it is expected that a portion of its assets will be invested on a regular basis
in debt obligations.
The Fund may invest in the securities of foreign issuers. The Fund may also
invest indirectly in the securities of foreign issuers through sponsored and
unsponsored ADRs. For information on ADRs, see "Investment Policies Common to
the Equity Fund and the Theme Funds."
In managing the equity portion of the Income and Growth Fund, the Investment
Adviser will generally select securities that are expected to pay dividends and
other distributions which will result in moderate current income when added to
the income from the Fund's non-equity investments. As a general matter, the In-
vestment Adviser will use the three strategies described above in "U.S. Trust's
Investment Philosophy and Strategies"--problem/opportunity, transaction value,
and early life cycle. In applying these strategies, however, the Investment Ad-
viser will place greater emphasis on the current and anticipated income of par-
ticular securities and lesser emphasis on the potential for capital apprecia-
tion. As a result, the Income and Growth Fund can be expected to have a rela-
tively smaller proportion of its assets invested in common shares of early life
cycle companies than the Equity Fund or other Theme Funds. The Investment Ad-
viser may also purchase equity securities for the Income and Growth Fund from
time to time without regard to the strategies outlined above if it determines
that the purchase is in furtherance of the Fund's investment objectives.
Debt obligations may be acquired by the Income and Growth Fund to produce in-
come and (under certain conditions) capital appreciation, and may include both
convertible and non-convertible corporate and government bonds, debentures,
money market instruments, repurchase agreements collateralized by U.S. Govern-
ment obligations, and other types of instruments listed in the next paragraph.
Except as stated below, investments in debt obligations will be limited to
those that are considered to be investment grade-i.e., debt obligations classi-
fied within the four highest ratings of Moody's Investors Service, Inc.
("Moody's") or Standard & Poor's Ratings Group ("S&P") or, if unrated, which
are determined by the Investment Adviser to be of comparable quality. However,
the Investment Adviser may at any time ac-
19
<PAGE>
quire other, non-investment grade obligations when it believes that their in-
vestment characteristics make them desirable acquisitions for the Income and
Growth Fund in light of its investment objectives and current portfolio mix, so
long as, under normal market and economic conditions, no more than 5% of the
Fund's total assets are invested in non-investment grade debt obligations. Not-
withstanding the foregoing, the Fund may invest up to 35% of its total assets
in non-investment grade convertible debt obligations. Non-investment grade ob-
ligations (those that are rated "Ba" or lower by Moody's and, at the same time,
"BB" or lower by S&P or unrated obligations), commonly referred to as "junk
bonds", have speculative characteristics. Risks associated with lower-rated
debt securities are (a) the relative youth and growth of the market for such
securities, (b) the sensitivity of such securities to interest rate and eco-
nomic changes, (c) the lower degree of protection of principal and interest
payments, (d) the relatively low trading market liquidity for the securities,
(e) the impact that legislation may have on the high yield bond market (and, in
turn, on the Fund's net asset value and investment practices), and (f) the
creditworthiness of the issuers of such securities. During an economic downturn
or substantial period of rising interest rates, highly leveraged issuers may
experience financial stress which would adversely effect their ability to serv-
ice their principal and interest payment obligations, to meet projected busi-
ness goals and to obtain additional financing. An economic downturn could also
disrupt the market for lower-rated bonds and adversely effect the value of out-
standing bonds and the ability of the issuers to repay principal and interest.
If the issuer of a debt obligation held by the Fund defaulted, the Fund could
incur additional expenses to seek recovery. Adverse publicity and investor per-
ceptions, whether or not based on fundamental analysis, may also decrease the
values and liquidity of lower-rated securities held by the Fund, especially in
a thinly traded market.
Debt obligations rated "BB," "B" or "CCC" by S&P are regarded, on balance, as
predominately speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. "BB" represents the
lowest degree of speculation and "CCC" the highest degree of speculation. While
such debt will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major risk exposures to adverse condi-
tions. The rating "CC" is typically applied to debt subordinated to senior debt
that is assigned an actual or implied "CCC" rating. The rating "C" is typically
applied to debt subordinated to senior debt which is assigned an actual or im-
plied "CCC-" debt rating, and may be used to cover a situation where a bank-
ruptcy petition has been filed, but debt service payments are continued. The
rating "CI" is reserved for income bonds on which no interest is being paid.
Debt obligations rated "D" are in default, and payments of interest and/or re-
payment of principal is in arrears. The ratings from "AA" through "CCC" are
sometimes modified by the addition of a plus or minus sign to show relative
standing within the major rating categories. Moody's has a similar classifica-
tion scheme for non-investment grade debt obligations. Debt obligations rated
"Ba," "B," "Caa," "Ca" and "C" provide questionable protection of interest and
principal. The rating "Ba" indicates that a debt obligation has some specula-
tive characteristics. The rating "B" indicates a general lack of characteris-
tics of desirable investment. Debt obligations rated "Caa" are of poor quality,
while debt obligations rated "Ca" are considered highly speculative. "C" repre-
sents the lowest rated class of debt obligations. Moody's applies numerical
modifiers 1, 2 and 3 in each generic classification from "Aa" to "B" in its
bond rating system. The modifier "1" indicates that a security ranks in the
higher end of its rating category; the modifier "2" reflects a mid-range rank-
ing; and the modifier "3" indicates that the security ranks at the lower end of
its generic rating category.
In addition, the Income and Growth Fund may invest up to 10% of its total as-
sets in other types of instruments, including warrants, options and other
rights to purchase securities; liquidating trust re-
20
<PAGE>
ceipts; limited partnership interests; certificates of beneficial ownership;
creditor claims; and loan participations. Such instruments may represent owner-
ship or creditor interests in a wide range of assets or businesses, and may be
acquired by the Income and Growth Fund for either income purposes (as would
normally be the case with instruments such as liquidating trust receipts) or
capital appreciation (as would be the case with warrants and options). In cer-
tain instances, there may be no established market for such instruments. The
Income and Growth Fund will, however, at no time invest more than 10% of the
value of its net assets in securities that are illiquid or for which market
quotations are not readily available. Further, certain of these instruments may
have speculative characteristics. For example, certain instruments may be is-
sued by companies that are insolvent or have otherwise defaulted on their debt
obligations. Such companies may be involved in bankruptcy reorganization pro-
ceedings. Warrants and options acquired by the Income and Growth Fund are sub-
ject to the possible loss of the entire premium paid by the Fund if the market
price of the underlying security falls below the exercise price. The Investment
Adviser will purchase such obligations only when it determines that the poten-
tial return justifies the attendant risks. The investment features of the fore-
going instruments and investment risks involving their acquisition are
described further in the Statement of Additional Information. Additionally,
some of the instruments described above may not be "securities" or may not pro-
duce qualifying income for purposes of the provisions of the Internal Revenue
Code of 1986, as amended, applicable to investment companies. See "Taxes--Fed-
eral" below for a discussion of such provisions.
RISK FACTORS
Each Fund is subject to market risk, interest rate risk and in some cases in-
dustry risk. Market risk is the possibility that stock prices will decline over
short or even extended periods. The stock markets tend to be cyclical, with pe-
riods of generally rising prices and periods of generally declining prices.
These cycles will affect the values of each Fund. In addition, the prices of
bonds and other debt instruments generally fluctuate inversely with interest
rate changes. Factors affecting debt securities will affect all of the Funds'
debt holdings.
The Long-Term Supply of Energy Fund will normally concentrate its investments
in the crude oil, petroleum and natural gas industry. Accordingly, it will be
susceptible to industry risk, the possibility that a particular group of stocks
will decline in price due to industry-specific developments.
Energy-related investments are affected generally by supply, demand, and other
competitive factors for the companies' specific products and services. They are
also affected by unpredictable factors such as the supply and demand for oil,
gas, electricity and other energy sources, prices of such energy sources, ex-
ploration and production spending, governmental regulation, and world economic
and political events. In addition, utilities firms in the energy field are sub-
ject to a variety of factors affecting the public utilities industries, includ-
ing: difficulty obtaining adequate returns on invested capital which are typi-
cally subject to the control and scrutiny of public service commissions; re-
strictions on operations and increased costs and delays as a result of environ-
mental considerations; costs of and ability to secure financing for large con-
struction and development projects; difficulties in obtaining secure energy re-
sources; the uncertain effects of conservation efforts; and a variety of issues
concerning financing, governmental approval and environmental aspects of nu-
clear power facilities.
Environmentally-related investments are affected generally by issues and un-
certainties impacting the specialty chemicals, engineering and construction,
machinery and pollution control industries. Such factors include the supply,
demand, and other normal competitive factors for the various portfolio compa-
nies' products and services. The environmental products and services industry
generally has been affected positively by legislation resulting in stricter
governmental regulations and enforcement policies for both commercial and gov-
ernmental generators of waste, as
21
<PAGE>
well as by specific expenditures for cleanup efforts. Chemical products are af-
fected, for example, by product obsolescence and competition; the handling of
hazardous chemicals and products; and the potential for calamitous accidents.
In addition to supply and demand factors, engineering, construction and machin-
ery companies are affected by changes in interest rates and governmental spend-
ing and financing of public works and cleanup projects. Finally, all of these
types of companies are heavily affected by regulation of various governments,
including the federal Environmental Protection Agency and its state counter-
parts. As regulations are developed and enforced, such companies may be re-
quired to alter or cease production of a product or service or to agree to re-
strictions on their operations.
Companies in the various communications and entertainment industries encounter
intense competition, short product life cycles and rapidly changing consumer
tastes. In addition, companies in the telecommunications and utilities indus-
tries are subject to heavy governmental regulation.
Small companies may have limited product lines, markets, or financial re-
sources, or may be dependent upon a small management group, and their securi-
ties may be subject to more abrupt or erratic market movements than larger,
more established companies, both because their securities typically are traded
in lower volume and because the issuers typically are subject to a greater de-
gree to changes in their earnings and prospects.
All Funds may invest in the securities of foreign issuers. Investments in for-
eign securities involve certain risks not ordinarily associated with invest-
ments in domestic securities. Such risks include fluctuations in foreign ex-
change rates, future political and economic developments, and the possible im-
position of exchange controls or other foreign governmental laws or restric-
tions. In addition, with respect to certain countries there is the possibility
of expropriation of assets, confiscatory taxation, political or social insta-
bility or diplomatic developments which could adversely affect investments in
those countries. There may be less publicly available information about a for-
eign company than about a U.S. company, and foreign companies may not be sub-
ject to accounting, auditing and financial reporting standards and requirements
comparable to or as uniform as those of U.S.-based companies. Foreign securi-
ties markets, while growing in volume, have, for the most part, substantially
less volume than U.S. markets, and securities of many foreign companies are
less liquid and their prices more volatile than securities of comparable U.S.-
based companies. Transaction costs on foreign securities markets are generally
higher than in the United States. There is generally less government supervi-
sion and regulation of foreign exchanges, brokers and issuers than there is in
the United States and a Fund might have greater difficulty taking appropriate
legal action in a foreign court. Dividends and interest payable on a Fund's
foreign portfolio securities may be subject to foreign withholding taxes. To
the extent such taxes are not offset by credits or deductions allowed to in-
vestors under the Federal income tax provisions, they may reduce the net return
to the shareholders.
The Funds should not be considered a complete investment program. In view of
the specialized nature of their investment activities, investment in the Equity
and Theme Funds' shares may be suitable only for those investors who can invest
without concern for current income and are financially able to assume risk in
search of long-term capital gains.
Securities of companies discussed in this section may be more volatile than
the overall market.
PORTFOLIO INSTRUMENTS AND OTHER
INVESTMENT INFORMATION
MONEY MARKET INSTRUMENTS
All Funds may invest in "money market instruments," which include, among other
things, bank obligations, commercial paper and corporate bonds with remaining
maturities of 13 months or less.
Bank obligations include bankers' acceptances, negotiable certificates of de-
posit, and non-negotiable
22
<PAGE>
time deposits earning a specified return and issued by a U.S. bank which is a
member of the Federal Reserve System or insured by the Bank Insurance Fund of
the Federal Deposit Insurance Corporation ("FDIC"), or by a savings and loan
association or savings bank which is insured by the Savings Association Insur-
ance Fund of the FDIC. Bank obligations also include U.S. dollar-denominated
obligations of foreign branches of U.S. banks and obligations of domestic
branches of foreign banks. Investments in bank obligations of foreign branches
of domestic financial institutions or of domestic branches of foreign banks are
limited so that no more than 5% of the value of a Fund's total assets may be
invested in any one branch, and no more than 20% of a particular Fund's total
assets at the time of purchase may be invested in the aggregate in such obliga-
tions (see investment limitation No. 5 below under "Investment Limitations").
Investments in time deposits are limited to no more than 5% of the value of a
Fund's total assets at the time of purchase.
Investments by the Funds in commercial paper will consist of issues that are
rated "A-2" or better by S&P or "Prime-2" or better by Moody's. In addition,
each Fund may acquire unrated commercial paper that is determined by the In-
vestment Adviser at the time of purchase to be of comparable quality to rated
instruments that may be acquired by the particular Fund.
Commercial paper may include variable and floating rate instruments. While
there may be no active secondary market with respect to a particular instrument
purchased by a Fund, the Fund may, from time to time as specified in the in-
strument, demand payment of the principal of the instrument or may resell the
instrument to a third party. The absence of an active secondary market, howev-
er, could make it difficult for a Fund to dispose of the instrument if the is-
suer defaulted on its payment obligation or during periods that the Fund is not
entitled to exercise its demand rights, and the Fund could, for this or other
reasons, suffer a loss with respect to such instrument. Any security which can-
not be disposed of within seven days without taking a reduced price will be
considered an illiquid security subject to the 10% limitation discussed below
under "Investment Limitations."
GOVERNMENT OBLIGATIONS
All Funds may invest in U.S. Government obligations, including U.S. Treasury
Bills and the obligations of Federal Home Loan Banks, Federal Farm Credit
Banks, Federal Land Banks, the Federal Housing Administration, the Farmers Home
Administration, the Export-Import Bank of the United States, the Small Business
Administration, the Government National Mortgage Association, the Federal Na-
tional Mortgage Association, the General Services Administration, the Student
Loan Marketing Association, the Central Bank for Cooperatives, the Federal Home
Loan Mortgage Corporation, the Federal Intermediate Credit Banks and the Mari-
time Administration.
REPURCHASE AGREEMENTS
In order to effectively manage their cash holdings, the Funds may enter into
repurchase agreements. Each Fund will enter into repurchase agreements only
with financial institutions that are deemed to be creditworthy by the Invest-
ment Adviser, pursuant to guidelines established by Master Fund's Board of
Directors. No Fund will enter into repurchase agreements with the Investment
Adviser or any of its affiliates. Repurchase agreements with remaining maturi-
ties in excess of seven days will be considered illiquid securities and will be
subject to the 10% limit described in Investment Limitation No. 6 below.
The seller under a repurchase agreement will be required to maintain the value
of the securities which are subject to the agreement and held by a Fund at not
less than the repurchase price. Default or bankruptcy of the seller would, how-
ever, expose a Fund to possible delay in connection with the disposition of the
underlying securities or loss to the extent that proceeds from a sale of the
underlying securities were less than the repurchase price under the agreement.
23
<PAGE>
SECURITIES LENDING
To increase return on its portfolio securities, each Fund may lend its portfo-
lio securities to broker/dealers pursuant to agreements requiring the loans to
be continuously secured by collateral equal at all times in value to at least
the market value of the securities loaned. Collateral for such loans may in-
clude cash, securities of the U.S. Government, its agencies or instrumentali-
ties, or an irrevocable letter of credit issued by a bank, or any combination
thereof. Such loans will not be made if, as a result, the aggregate of all out-
standing loans of a Fund exceeds 30% of the value of its total assets. There
may be risks of delay in receiving additional collateral or in recovering the
securities loaned or even a loss of rights in the collateral should the bor-
rower of the securities fail financially. However, loans are made only to bor-
rowers deemed by the Investment Adviser to be of good standing and when, in the
Investment Adviser's judgment, the income to be earned from the loan justifies
the attendant risks.
OPTIONS
To further increase return on their portfolio securities in accordance with
their respective investment objectives and policies, the Funds may enter into
option transactions as described below.
The Income and Growth and Theme Funds may purchase put and call options listed
on a national securities exchange and issued by the Options Clearing Corpora-
tion in an amount not exceeding 5% of a Fund's net assets, as described further
in the Statement of Additional Information. Such options may relate to particu-
lar securities or to various stock or bond indices. Purchasing options is a
specialized investment technique which entails a substantial risk of a complete
loss of the amounts paid as premiums to the writer of the options.
In addition, each Fund may engage in writing covered call options (options on
securities owned by the particular Fund) and enter into closing purchase trans-
actions with respect to such options. Such options must be listed on a national
securities exchange and issued by the Options Clearing Corporation. The aggre-
gate value of the securities subject to options written by each Fund may not
exceed 25% of the value of its net assets. By writing a covered call option, a
Fund forgoes the opportunity to profit from an increase in the market price of
the underlying security above the exercise price except insofar as the premium
represents such a profit, and it will not be able to sell the underlying secu-
rity until the option expires or is exercised or the Fund effects a closing
purchase transaction by purchasing an option of the same series. The use of
covered call options is not a primary investment technique of the Funds and
such options will normally be written on underlying securities as to which the
Investment Adviser does not anticipate significant short-term capital apprecia-
tion. Additional information on option practices, including particular risks
thereof, is provided in the Funds' Statement of Additional Information.
FUTURES CONTRACTS
The Theme Funds may also enter into interest rate futures contracts, other
types of financial futures contracts and related futures options, as well as
any index or foreign market futures which are available on recognized exchanges
or in other established financial markets.
The Theme Funds will not engage in futures transactions for speculation, but
only as a hedge against changes in market values of securities which a Fund
holds or intends to purchase. The Theme Funds will engage in futures transac-
tions only to the extent permitted by the Commodity Futures Trading Commission
("CFTC") and the Securities and Exchange Commission ("SEC"). When investing in
futures contracts, the Funds must satisfy certain asset segregation require-
ments to ensure that the use of futures is unleveraged. When a Fund takes a
long position in a futures contract, it must maintain a segregated account con-
taining cash and/or certain liquid assets
24
<PAGE>
equal to the purchase price of the contract, less any margin or deposit. When a
Fund takes a short position in a futures contract, the Fund must maintain a
segregated account containing cash and/or certain liquid assets in an amount
equal to the market value of the securities underlying such contract (less any
margin or deposit), which amount must be at least equal to the market price at
which the short position was established. Asset segregation requirements are
not applicable when a Fund "covers" an options or futures position generally by
entering into an offsetting position. Each Fund will limit its hedging transac-
tions in futures contracts and related options so that, immediately after any
such transaction, the aggregate initial margin that is required to be posted by
the Fund under the rules of the exchange on which the futures contract (or
futures option) is traded, plus any premiums paid by the Fund on its open
futures options positions, does not exceed 5% of the Fund's total assets, after
taking into account any unrealized profits and unrealized losses on the Fund's
open contracts (and excluding the amount that a futures option is "in-the-mon-
ey" at the time of purchase). An option to buy a futures contract is "in-the-
money" if the then-current purchase price of the underlying futures contract
exceeds the exercise or strike price; an option to sell a futures contract is
"in-the-money" if the exercise or strike price exceeds the then-current pur-
chase price of the contract that is the subject of the option. In addition, the
use of futures contracts is further restricted to the extent that no more than
10% of a Fund's total assets may be hedged.
Transactions in futures as a hedging device may subject a Fund to a number of
risks. Successful use of futures by a Fund is subject to the ability of the In-
vestment Adviser to correctly anticipate movements in the direction of the mar-
ket. In addition, there may be an imperfect correlation, or no correlation at
all, between movements in the price of the futures contracts (or options) and
movements in the price of the instruments being hedged. Further, there is no
assurance that a liquid market will exist for any particular futures contract
(or option) at any particular time. Consequently, a Fund may realize a loss on
a futures transaction that is not offset by a favorable movement in the price
of securities which it holds or intends to purchase or may be unable to close a
futures position in the event of adverse price movements.
INVESTMENT COMPANY SECURITIES
In connection with the management of its daily cash positions, each Fund may
invest in securities issued by other investment companies which invest in high-
quality, short-term debt securities and which determine their net asset value
per share based on the amortized cost or penny-rounding method. The Income and
Growth Fund may also purchase securities of unit investment trusts registered
with the SEC as investment companies. In addition to the advisory fees and
other expenses a Fund bears directly in connection with its own operations, as
a shareholder of another investment company, a Fund would bear its pro rata
portion of the other investment company's advisory fees and other expenses. As
such, the Fund's shareholders would indirectly bear the expenses of the Fund
and the other investment company, some or all of which would be duplicative.
Such securities will be acquired by each Fund within the limits prescribed by
the Investment Company Act of 1940 (the "1940 Act") which include, subject to
certain exceptions, a prohibition against a Fund investing more than 10% of the
value of its total assets in such securities.
WHEN-ISSUED AND FORWARD TRANSACTIONS
Each Fund may purchase eligible securities on a "when-issued" basis and may
purchase or sell securities on a "forward commitment" basis. These transactions
involve a commitment by a Fund to purchase or sell particular securities with
payment and delivery taking place in the future, beyond the normal settlement
date, at a stated price and yield. Securities purchased on a "forward commit-
ment" or "when-issued" basis are recorded as an asset and are subject to
changes in value based upon changes in the general level of interest rates. It
is expected that forward commitments and "when-issued" purchases will not
25
<PAGE>
exceed 25% of the value of a Fund's total assets absent unusual market condi-
tions, and that the length of such commitments will not exceed 45 days. The
Funds do not intend to engage in "when-issued" purchases and forward commit-
ments for speculative purposes, but only in furtherance of their investment ob-
jectives.
ILLIQUID SECURITIES
No Fund will knowingly invest more than 10% of the value of its net assets in
securities that are illiquid. Each Fund may purchase securities which are not
registered under the Securities Act of 1933 (the "Act") but which can be sold
to "qualified institutional buyers" in accordance with Rule 144A under the Act.
Any such security will not be considered illiquid so long as it is determined
by the Investment Adviser, acting under guidelines approved and monitored by
the Board, that an adequate trading market exists for that security. This in-
vestment practice could have the effect of increasing the level of illiquidity
in a Fund during any period that qualified institutional buyers become uninter-
ested in purchasing these restricted securities.
PORTFOLIO TURNOVER
Each Fund may sell a portfolio investment immediately after its acquisition if
the Investment Adviser believes that such a disposition is consistent with the
investment objective of the particular Fund. Portfolio investments may be sold
for a variety of reasons, such as a more favorable investment opportunity or
other circumstances bearing on the desirability of continuing to hold such in-
vestments. A high rate of portfolio turnover may involve correspondingly
greater brokerage commission expenses and other transaction costs, which must
be borne directly by a Fund and ultimately by its shareholders. High portfolio
turnover may result in the realization of substantial net capital gains. To the
extent net short-term capital gains are realized, any distributions resulting
from such gains are considered ordinary income for Federal income tax purposes.
(See "Financial Highlights" and "Taxes--Federal").
INVESTMENT LIMITATIONS
The investment limitations enumerated below are matters of fundamental policy
and may not be changed with respect to a Fund without the vote of the holders
of a majority of a Fund's outstanding shares (as defined under "Miscellane-
ous").
A Fund may not:
1. Purchase securities of any one issuer, other than U.S. Government obliga-
tions, if immediately after such purchase more than 5% of the value of its
total assets would be invested in the securities of such issuer, except that
up to 25% of the value of its total assets may be invested without regard to
this 5% limitation;
2. Borrow money except from banks for temporary purposes, and then in
amounts not in excess of 10% of the value of its total assets at the time of
such borrowing; or mortgage, pledge, or hypothecate any assets except in con-
nection with any such borrowing and in amounts not in excess of the lesser of
the dollar amounts borrowed and 10% of the value of its total assets at the
time of such borrowing. (This borrowing provision is included solely to fa-
cilitate the orderly sale of portfolio securities to accommodate abnormally
heavy redemption requests and is not for leverage purposes.) A Fund will not
purchase portfolio securities while borrowings in excess of 5% of its total
assets are outstanding. Optioned stock held in escrow is not deemed to be a
pledge; and
3. Make loans, except that (i) each Fund may purchase or hold debt securi-
ties in accordance with its investment objective and policies, and may enter
into repurchase agreements with respect to obligations issued or guaranteed
by the U.S. Government, its agencies or instrumentalities, (ii) each Fund may
lend portfolio securities in an amount
26
<PAGE>
not exceeding 30% of its total assets, and (iii) the Income and Growth Fund
may purchase or hold creditor claims, loan participations and other instru-
ments in accordance with its investment objectives and policies.
Each Fund other than the Long-Term Supply of Energy Fund may not:
4. Purchase any securities which would cause more than 25% of the value of
its total assets at the time of purchase to be invested in the securities of
one or more issuers conducting their principal business activities in the
same industry, provided that (a) with respect to the Equity and Income and
Growth Funds, there is no limitation with respect to securities issued or
guaranteed by the U.S. Government or domestic bank obligations, (b) with re-
spect to each Theme Fund, there is no limitation with respect to securities
issued or guaranteed by the U.S. Government, and (c) neither all finance com-
panies, as a group, nor all utility companies, as a group, are considered a
single industry for purposes of this policy.
Each of the Equity and Income and Growth Funds may not:
5. Invest in obligations of foreign branches of financial institutions or in
domestic branches of foreign banks, if immediately after such purchase (i)
more than 5% of the value of its total assets would be invested in obliga-
tions of any one foreign branch of the financial institution or domestic
branch of a foreign bank; or (ii) more than 20% of its total assets would be
invested in foreign branches of financial institutions or in domestic
branches of foreign banks; and
6. Knowingly invest more than 10% of the value of its total assets in illiq-
uid securities, including repurchase agreements with remaining maturities in
excess of seven days, restricted securities, and other securities for which
market quotations are not readily available.
* * *
In addition to the investment limitations described above, no Fund may invest
in the securities of any single issuer if, as a result, the Fund holds more
than 10% of the outstanding voting securities of such issuer.
The Theme Funds may not invest in obligations of foreign branches of finan-
cial institutions or in domestic branches of foreign banks if immediately af-
ter such purchase (i) more than 5% of the value of their respective total as-
sets would be invested in obligations of any one foreign branch of the finan-
cial institution or domestic branch of a foreign bank; or (ii) more than 20%
of their respective total assets would be invested in foreign branches of fi-
nancial institutions or in domestic branches of foreign banks. The Theme Funds
may not knowingly invest more than 10% of the value of their respective total
assets in illiquid securities, including repurchase agreements with remaining
maturities in excess of seven days, restricted securities and other securities
for which market quotations are not readily available. These investment poli-
cies may be changed by Master Fund's Board of Directors upon reasonable notice
to shareholders.
The Equity and Income and Growth Funds will not invest more than 25% of the
value of their respective total assets in domestic bank obligations.
With respect to all investment policies, if a percentage limitation is satis-
fied at the time of investment, a later increase or decrease in such percent-
age resulting from a change in value of a Fund's portfolio securities will not
constitute a violation of such limitation.
PRICING OF SHARES
The net asset value of each Fund is determined and the Shares of each Fund
are priced at the close of regular trading hours on the New York Stock Ex-
change (the "Exchange"), currently 4:00 p.m. (Eastern Time). Net asset value
and pricing for each Fund are determined on each day the Exchange and the
27
<PAGE>
Investment Adviser are open for trading ("Business Day"). Currently, the holi-
days which the Funds observe are New Year's Day, Martin Luther King, Jr. Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day, Colum-
bus Day, Veterans Day, Thanksgiving Day and Christmas. A Fund's net asset value
per Distribution Share for purposes of pricing sales and redemptions is calcu-
lated by dividing the value of all securities and other assets allocable to its
Distribution Shares, less the liabilities allocable to its Distribution Shares,
by the number of its outstanding Distribution Shares.
Assets in the Funds which are traded on a recognized domestic stock exchange
are valued at the last sale price on the securities exchange on which such se-
curities are primarily traded or at the last sale price on the national securi-
ties market. Securities traded only on over-the-counter markets are valued on
the basis of closing over-the-counter bid prices. Securities for which there
were no transactions are valued at the average of the most recent bid and asked
prices. An option or futures contract is valued at the last sales price quoted
on the principal exchange or board of trade on which such option or contract is
traded, or in the absence of a sale, the mean between the last bid and asked
prices. Restricted securities, securities for which market quotations are not
readily available, and other assets are valued at fair value, pursuant to
guidelines adopted by Master Fund's Board of Directors.
Portfolio securities which are primarily traded on foreign securities ex-
changes are generally valued at the preceding closing values of such securities
on their respective exchanges, except that when an event subsequent to the time
where value was so established is likely to have changed such value, then the
fair value of those securities will be determined by consideration of other
factors under the direction of the Board of Directors. A security which is
listed or traded on more than one exchange is valued at the quotation on the
exchange determined to be the primary market for such security. Investments in
debt securities having a maturity of 60 days or less are valued based upon the
amortized cost method. All other foreign securities are valued at the last cur-
rent bid quotation if market quotations are available, or at fair value as de-
termined in accordance with guidelines adopted by the Board of Directors. For
valuation purposes, quotations of foreign securities in foreign currency are
converted to U.S. dollars equivalent at the prevailing market rate on the day
of conversion. Some of the securities acquired by the Funds may be traded on
foreign exchanges or over-the-counter markets on days which are not Business
Days. In such cases, the net asset value of the Shares may be significantly af-
fected on days when investors can neither purchase nor redeem a Fund's Shares.
Master Fund's administrators have undertaken to price the securities in the
Funds' portfolios, and may use one or more independent pricing services in con-
nection with this service.
HOW TO PURCHASE AND REDEEM SHARES
DISTRIBUTOR
Shares in each Fund are continuously offered for sale by Master Fund's sponsor
and distributor, Edgewood Services, Inc. (the "Distributor"), a wholly-owned
subsidiary of Federated Investors. The Distributor is a registered
broker/dealer. Its principal offices are at Federated Investors Tower, 1001
Liberty Avenue, Pittsburgh, PA 15222-3779.
Under Master Fund's Distribution Agreement and Distribution Plan, adopted pur-
suant to Rule 12b-1 under the 1940 Act, the Distribution Shares of each Fund
reimburse the Distributor monthly for distribution expenses in an amount not to
exceed the annual rate of .75% of the average daily net asset value of the
Fund's outstanding Distribution Shares. Distribution Shares of each Fund cur-
rently bear the expense of such distribution fees at the annual rate of .50% of
the average daily net asset value of the Fund's outstanding Distribution
Shares. Distribution expenses payable by the Distributor under the Distribution
Plan include direct and indirect marketing expenses such as: i) the expense of
preparing, printing and distributing promotional materials and prospectuses
28
<PAGE>
(other than prospectuses used for regulatory purposes or for distribution to
existing shareholders); ii) the expense of other advertising via radio, televi-
sion or other print or electronic media; and iii) the expense of payments to
financial institutions that are not affiliated with the Distributor ("Distribu-
tion Organizations") for distribution assistance (including sales incentives).
PURCHASE OF SHARES
Shares may be purchased by customers ("Customers") of financial institutions
("Shareholder Organizations"). A Shareholder Organization may elect to hold of
record Shares for its Customers and to record beneficial ownership of Shares on
the account statements provided by it to its Customers. If it does so, it is
the Shareholder Organization's responsibility to transmit to the Distributor
all purchase orders for its Customers and to transmit, on a timely basis, pay-
ment for such orders to Mutual Funds Service Company ("MFSC"), the Funds' sub-
transfer agent, in accordance with the procedures agreed to by the Shareholder
Organization and the Distributor. Confirmations of all such Customer purchases
and redemptions will be sent by MFSC to the particular Shareholder Organiza-
tion. As an alternative, a Shareholder Organization may elect to establish its
Customers' accounts of record with MFSC. In this event, even if the Shareholder
Organization continues to place its Customers' purchase and redemption orders
with the Funds, MFSC will send confirmations of such transactions and periodic
account statements directly to Customers. A Shareholder Organization may also
elect to establish its Customers as record holders.
Customers wishing to purchase Shares through their Shareholder Organization
should contact such entity directly for appropriate instructions. (For a list
of Shareholder Organizations in your area, call (800) 446-1012.) An investor
purchasing Shares through certain Shareholder Organizations may incur transac-
tion charges in connection with such purchases. Investors should contact their
Shareholder Organizations for further information on transaction fees.
PUBLIC OFFERING PRICE
The public offering price for Shares of each Fund is the sum of the net asset
value of the Shares purchased plus a sales load according to the table below:
<TABLE>
<CAPTION>
TOTAL SALES CHARGES REALLOWANCE TO DEALERS
------------------------------ ----------------------
AS A % OF AS A % OF AS A % OF
OFFERING PRICE NET ASSET OFFERING PRICE
AMOUNT OF TRANSACTION PER SHARE VALUE PER SHARE PER SHARE
--------------------- -------------- --------------- ----------------------
<S> <C> <C> <C>
Less than $50,000....... 4.50% 4.71% 4.00%
$50,000 to $99,999...... 4.00 4.17 3.50
$100,000 to $249,999.... 3.50 3.63 3.00
$250,000 to $499,999.... 3.00 3.09 2.50
$500,000 to $999,999.... 2.00 2.05 1.50
$1,000,000 to
$1,999,999............. 1.00 1.00 .50
$2,000,000 and over..... .50 .50 .25
</TABLE>
The reallowance to dealers may be changed from time to time but will remain
the same for all such dealers.
At various times the Distributor may implement programs under which a dealer's
sales force may be eligible to win nominal awards for certain sales efforts or
under which the Distributor will reallow to any dealer that sponsors sales con-
tests or recognition programs conforming to criteria established by the Dis-
tributor, or participates in sales programs sponsored by the Distributor, an
amount not exceeding the total applicable sales charges on the sales generated
by the dealer at the public offering price during such programs. Also, the Dis-
tributor in its discretion may from time to time, pursuant to objective crite-
ria established by the Distributor, pay fees to qualifying dealers for certain
services or activities which are primarily intended to result in sales of
Shares of the Funds. If any such program is made available to any dealer, it
will be made available to all dealers on the same terms and conditions. Pay-
ments made under such programs will be made by the Distributor out of its own
assets and not out of the assets of the Funds.
29
<PAGE>
These programs will not change the price of Shares or the amount that the Funds
will receive from such sales.
The sales load described above will not be applicable to: (a) purchases of
Shares by customers of the Investment Adviser or its affiliates; (b) trust,
agency or custodial accounts opened through the trust department of a bank,
trust company or thrift institution, provided that appropriate notification of
such status is given at the time of investment; (c) companies, corporations and
partnerships (excluding full service broker/dealers and financial planners,
registered investment advisers and depository institutions not covered by the
exemptions in (d) and (e) below); (d) financial planners and registered invest-
ment advisers not affiliated with or clearing purchases through full service
broker/dealers; (e) purchases of Shares by depository institutions for their
own account as principal; (f) exchange transactions (described below under "In-
vestor Programs--Exchange Privilege") where the Shares being exchanged were ac-
quired in connection with the distribution of assets held in trust, agency or
custodial accounts maintained with the trust department of a bank; (g) corpo-
rate/ business retirement plans (such as 401(k), 403(b)(7), 457 and Keogh ac-
counts) sponsored by the Distributor and IRA accounts sponsored by the Invest-
ment Adviser; (h) company-sponsored employee pension or retirement plans making
direct investments in the Funds; (i) purchases of Shares by officers, trustees,
directors, employees and retirees of Master Fund, UST Master Tax-Exempt Funds,
Inc. ("Master Tax-Exempt Fund"), the Investment Adviser, the Distributor or of
any direct or indirect affiliate of any of them; (j) purchases of Shares by all
beneficial shareholders of Master Fund or Master Tax-Exempt Fund as of May 22,
1989; (k) purchases of Shares by investment advisers registered under the In-
vestment Advisers Act of 1940 for their customers through an omnibus account
established with United States Trust Company of New York; (l) purchases of
Shares by directors, officers and employees of brokers and dealers selling
shares pursuant to a selling agreement with Master Fund and Master Tax-Exempt
Fund; (m) purchases of shares by investors who are members of affinity groups
serviced by USAffinity Investments Limited Partnership; and (n) customers of
certain financial institutions who purchase Shares through a registered repre-
sentative of UST Financial Services Corp. on the premises of their financial
institutions. In addition, no sales load is charged on the reinvestment of div-
idends or distributions or in connection with certain share exchange transac-
tions. Investors who have previously redeemed shares in an "Eligible Fund" (as
defined below) on which a sales load has been paid also have a one-time privi-
lege of purchasing shares of another "Eligible Fund" at net asset value without
a sales charge, provided that such privilege will apply only to purchases made
within 30 calendar days from the date of redemption and only with respect to
the amount of the redemption. These exemptions to the imposition of a sales
load are due to the nature of the investors and/or reduced sales effort that
will be needed in obtaining investments.
QUANTITY DISCOUNTS
An investor in the Funds may be entitled to reduced sales charges through
Rights of Accumulation, a Letter of Intent or a combination of investments, as
described below, even if the investor does not wish to make an investment of a
size that would normally qualify for a quantity discount.
In order to obtain quantity discount benefits, an investor must notify MFSC at
the time of purchase that he or she would like to take advantage of any of the
discount plans described below. Upon such notification, the investor will re-
ceive the lowest applicable sales charge. Quantity discounts may be modified or
terminated at any time and are subject to confirmation of an investor's hold-
ings through a check of appropriate records. For more information about quan-
tity discounts, please call (800) 446-1012 or contact your Shareholder Organi-
zation.
Rights of Accumulation. A reduced sales load applies to any purchase of shares
of any portfolio of Master
30
<PAGE>
Fund and Master Tax-Exempt Fund that is sold with a sales load ("Eligible
Fund") where an investor's then current aggregate investment is $50,000 or
more. "Aggregate investment" means the total of: (a) the dollar amount of the
then current purchase of shares of an Eligible Fund, and (b) the value (based
on current net asset value) of previously purchased and beneficially owned
shares of any Eligible Fund on which a sales load has been paid. If, for exam-
ple, an investor beneficially owns shares of one or more Eligible Funds with an
aggregate current value of $49,000 on which a sales load has been paid and sub-
sequently purchases shares of an Eligible Fund having a current value of
$1,000, the load applicable to the subsequent purchase would be reduced to
4.00% of the offering price. Similarly, with respect to each subsequent invest-
ment, all shares of Eligible Funds that are beneficially owned by the investor
at the time of investment may be combined to determine the applicable sales
load.
Letter of Intent. By completing the Letter of Intent included as part of the
New Account Application, an investor becomes eligible for the reduced sales
load applicable to the total number of Eligible Fund shares purchased in a 13-
month period pursuant to the terms and under the conditions set forth below and
in the Letter of Intent. To compute the applicable sales load, the offering
price of shares of an Eligible Fund on which a sales load has been paid, bene-
ficially owned by an investor on the date of submission of the Letter of In-
tent, may be used as a credit toward completion of the Letter of Intent. Howev-
er, the reduced sales load will be applied only to new purchases.
MFSC will hold in escrow shares equal to 5% of the amount indicated in the
Letter of Intent for payment of a higher sales load if an investor does not
purchase the full amount indicated in the Letter of Intent. The escrow will be
released when an investor fulfills the terms of the Letter of Intent by pur-
chasing the specified amount. If purchases qualify for a further sales load re-
duction, the sales load will be adjusted to reflect an investor's total pur-
chases. If total purchases are less than the amount specified, an investor will
be requested to remit an amount equal to the difference between the sales load
actually paid and the sales load applicable to the total purchases. If such re-
mittance is not received within 20 days, MFSC, as attorney-in-fact pursuant to
the terms of the Letter of Intent and at the Distributor's direction, will re-
deem an appropriate number of shares held in escrow to realize the difference.
Signing a Letter of Intent does not bind an investor to purchase the full
amount indicated at the sales load in effect at the time of signing, but an in-
vestor must complete the intended purchase in accordance with the terms of the
Letter of Intent to obtain the reduced sales load. To apply, an investor must
indicate his or her intention to do so under a Letter of Intent at the time of
purchase.
Qualification for Discounts. For purposes of applying the Rights of Accumula-
tion and Letter of Intent privileges described above, the scale of sales loads
applies to the combined purchases made by any individual and/or spouse purchas-
ing securities for his, her or their own account or for the account of any mi-
nor children, or the aggregate investments of a trustee or custodian of any
qualified pension or profit sharing plan or IRA established (or the aggregate
investment of a trustee or other fiduciary) for the benefit of the persons
listed above.
PURCHASE PROCEDURES
General
Customers of certain Shareholder Organizations may purchase Shares by complet-
ing the Application for purchase of Shares accompanying this Prospectus and
mailing it, together with a check payable to UST Master Funds, to:
UST Master Funds
c/o Mutual Funds Service Company
P.O. Box 2798
Boston, MA 02208-2798
31
<PAGE>
Subsequent investments in an existing account in any Fund may be made at any
time by sending to the above address a check payable to UST Master Funds along
with: (a) the detachable form that regularly accompanies the confirmation of a
prior transaction; (b) a subsequent order form which may be obtained from MFSC
or a Shareholder Organization; or (c) a letter stating the amount of the in-
vestment, the name of the Fund and the account number in which the investment
is to be made.
Purchases by Wire
Customers of certain Shareholder Organizations may also purchase Shares by
wiring Federal funds to MFSC. Prior to making an initial investment by wire, an
investor must telephone MFSC at (800) 446-1012 (from overseas, call (617) 557-
8280) for instructions. Federal funds and registration instructions should be
wired through the Federal Reserve System to:
United States Trust Company of New York
ABA #021001318
UST Funds, Account No. 2901447
For further credit to:
UST Master Funds
Wire Control Number
Account Registration (including account number)
Investors making initial investments by wire must promptly complete the Appli-
cation accompanying this Prospectus and forward it to MFSC. Redemptions by in-
vestors will not be processed until the completed Application for purchase of
Shares has been received by MFSC and accepted by the Distributor. Investors
making subsequent investments by wire should follow the above instructions.
OTHER PURCHASE INFORMATION
Except as provided in "Investor Programs" below, the minimum initial aggregate
investment by a Shareholder Organization investing on behalf of its Customers
is $500 per Fund. The minimum subsequent investment is $50 per Fund. Customers
may agree with a particular Shareholder Organization to make a minimum purchase
with respect to their accounts. Depending upon the terms of the particular ac-
count, Shareholder Organizations may charge a Customer's account fees for auto-
matic investment and other cash management services provided. Master Fund re-
serves the right to reject any purchase order, in whole or in part, or to waive
any minimum investment requirements.
REDEMPTION PROCEDURES
Customers of Shareholder Organizations holding Shares of record may redeem all
or part of their investments in the Funds in accordance with procedures gov-
erning their accounts at the Shareholder Organizations. It is the responsibil-
ity of the Shareholder Organizations to transmit redemption orders to MFSC and
credit such Customer accounts with the redemption proceeds on a timely basis.
No charge for wiring redemption payments to Shareholder Organizations is im-
posed by Master Fund, although Shareholder Organizations may charge a Custom-
er's account for wiring redemption proceeds. Information relating to such re-
demption services and charges, if any, is available from the Shareholder Orga-
nizations. An investor redeeming Shares through a Shareholder Organization may
incur transaction charges in connection with such redemptions. Such investors
should contact their Shareholder Organization for further information on trans-
action fees. Investors may redeem all or part of their Shares in accordance
with the procedures described below (these procedures also apply to Customers
of Shareholder Organizations for whom individual accounts have been established
with MFSC).
REDEMPTION BY MAIL
Customers of certain Shareholder Organizations may redeem shares by submitting
a written request for redemption to:
UST Master Funds
c/o Mutual Funds Service Company
P.O. Box 2798 Boston, MA 02208-2798
32
<PAGE>
A written redemption request to MFSC must (i) state the number of Shares to be
redeemed, (ii) identify the shareholder account number and tax identification
number, and (iii) be signed by each registered owner exactly as the Shares are
registered. If the Shares to be redeemed were issued in certificate form, the
certificates must be endorsed for transfer (or accompanied by a duly executed
stock power) and must be submitted to MFSC together with the redemption re-
quest. A redemption request for an amount in excess of $50,000 per account, or
for any amount if the proceeds are to be sent elsewhere than the address of
record, must be accompanied by signature guarantees from any eligible guarantor
institution approved by MFSC in accordance with its Standards, Procedures and
Guidelines for the Acceptance of Signature Guarantees ("Signature Guarantee
Guidelines"). Eligible guarantor institutions generally include banks,
broker/dealers, credit unions, national securities exchanges, registered secu-
rities associations, clearing agencies and savings associations. All eligible
guarantor institutions must participate in the Securities Transfer Agents Me-
dallion Program ("STAMP") in order to be approved by MFSC pursuant to the Sig-
nature Guarantee Guidelines. Copies of the Signature Guarantee Guidelines and
information on STAMP can be obtained from MFSC at (800) 446-1012 or at the ad-
dress given above. MFSC may require additional supporting documents for redemp-
tions made by corporations, executors, administrators, trustees and guardians.
A redemption request will not be deemed to be properly received until MFSC re-
ceives all required documents in proper form. Payment for Shares redeemed will
ordinarily be made by mail within five Business Days after proper receipt by
MFSC of the redemption request. Questions with respect to the proper form for
redemption requests should be directed to MFSC at (800) 446-1012 (from over-
seas, call (617) 557-8280).
REDEMPTION BY WIRE OR TELEPHONE
Customers of certain Shareholder Organizations who have so indicated on the
Application, or have subsequently arranged in writing to do so, may redeem
Shares by instructing MFSC by wire or telephone to wire the redemption proceeds
directly to the investor's account at any commercial bank in the United States.
Customers of certain Shareholder Organizations who are shareholders of record
may redeem Shares by instructing MFSC by telephone to mail a check for redemp-
tion proceeds of $500 or more to the shareholder of record at his or her ad-
dress of record. Only redemptions of $500 or more will be wired to an invest-
or's account. An $8.00 fee for each wire redemption by an investor is deducted
by MFSC from the proceeds of the redemption. The redemption proceeds for in-
vestors must be paid to the same bank and account as designated on the Applica-
tion or in written instructions subsequently received by MFSC.
In order to arrange for redemption by wire or telephone after an account has
been opened or to change the bank or account designated to receive redemption
proceeds, an investor must send a written request to Master Fund, c/o MFSC, at
the address listed above under "Redemption by Mail." Such requests must be
signed by the investor, with signatures guaranteed (see "Redemption by Mail"
above, for details regarding signature guarantees). Further documentation may
be requested.
MFSC and the Distributor reserve the right to re- fuse a wire or telephone re-
demption if it is believed advisable to do so. Procedures for redeeming Shares
by wire or telephone may be modified or terminated at any time by Master Fund,
MFSC or the Distributor. MASTER FUND, MFSC, AND THE DISTRIBUTOR WILL NOT BE LI-
ABLE FOR ANY LOSS, LIABILITY, COST OR EXPENSE FOR ACTING UPON TELEPHONE IN-
STRUCTIONS THAT ARE REASONABLY BELIEVED TO BE GENUINE. IN ATTEMPTING TO CONFIRM
THAT TELEPHONE INSTRUCTIONS ARE GENUINE, MASTER FUND WILL USE SUCH PROCEDURES
AS ARE CONSIDERED REASONABLE, INCLUDING RECORDING THOSE INSTRUCTIONS AND RE-
QUESTING INFORMATION AS TO ACCOUNT REGISTRATION.
If any portion of the Shares to be redeemed represents an investment made by
personal check, Master Fund and MFSC
33
<PAGE>
reserve the right not to honor the redemption until MFSC is reasonably satis-
fied that the check has been collected in accordance with the applicable bank-
ing regulations which may take up to 15 days. An investor who anticipates the
need for more immediate access to his or her investment should purchase Shares
by Federal funds or bank wire or by certified or cashier's check. Banks nor-
mally impose a charge in connection with the use of bank wires, as well as cer-
tified checks, cashier's checks and Federal funds. If an investor's purchase
check is not collected, the purchase will be cancelled and MFSC will charge a
fee of $25.00 to the investor's account.
During periods of substantial economic or market change, telephone redemptions
may be difficult to complete. If a Customer is unable to contact MFSC by tele-
phone, the Customer may also deliver the redemption request to MFSC in writing
at the address noted above under "How to Purchase and Redeem Shares--Redemption
by Mail."
OTHER REDEMPTION INFORMATION
Except as described in "Investor Programs" below, investors may be required to
redeem Shares in a Fund after 60 days' written notice if due to investor re-
demptions the balance in the particular account with respect to the Fund re-
mains below $500. If a Customer has agreed with a particular Shareholder Organ-
ization to maintain a minimum balance in his or her account at the institution
with respect to Shares of a Fund, and the balance in such account falls below
that minimum, the Customer may be obliged by the Shareholder Organization to
redeem all or part of his or her Shares to the extent necessary to maintain the
required minimum balance.
GENERAL
Purchase and redemption orders for Shares which are received and accepted
prior to the close of regular trading hours on the Exchange (currently 4:00
p.m., Eastern Time) on any Business Day are priced according to the net asset
value determined on that day. Purchase orders received and accepted after the
close of regular trading hours on the Exchange are priced at the net asset
value per Share determined on the next Business Day.
INVESTOR PROGRAMS
EXCHANGE PRIVILEGE
Customers of Shareholder Organizations may, after appropriate prior authoriza-
tion and without an exchange fee imposed by Master Fund, exchange Shares in a
Fund having a value of at least $500 for Distribution Shares of any other port-
folio offered by Master Fund, provided that such other shares may legally be
sold in the state of the investor's residence.
Master Fund currently offers, in addition to the Distribution Shares of the
Equity, Theme and Income and Growth Funds, Distribution Shares in four addi-
tional portfolios as follows:
International Fund, a fund seeking total return derived primarily from in-
vestments in foreign equity securities;
Emerging Americas Fund, a fund seeking long-term capital appreciation
through investments in companies and securities of governments based in all
countries in the Western Hemisphere, except the U.S.;
Pacific/Asia Fund, a fund seeking long-term capital appreciation through in-
vestments in companies and securities of governments based in Asia and on the
Asian side of the Pacific Ocean; and
Pan European Fund, a fund seeking long-term capital appreciation through in-
vestments in companies and securities of governments located in Europe.
An exchange involves a redemption of all or a portion of the Shares in a Fund
and the investment of the redemption proceeds in Distribution Shares of another
portfolio of Master Fund. The redemption will be made at the per Share net as-
set value of the Shares being redeemed next determined after the exchange re-
quest is received. The Distribution Shares of the portfolio to be acquired will
be purchased at the per
34
<PAGE>
share net asset value of those shares (plus any applicable sales load) next de-
termined after acceptance of the exchange request. No sales load will be pay-
able on shares to be acquired through an exchange to the extent that a sales
load was previously paid on the Shares being exchanged.
Investors may find the exchange privilege useful if their investment objec-
tives or market outlook should change after they invest in the Funds. For fur-
ther information regarding Master Fund's exchange privilege, shareholders
should call (800) 446-1012 (from overseas, call (617) 557-8280). Investors ex-
ercising the exchange privilege with the other portfolios of Master Fund should
request and review the prospectuses of such funds. Such prospectuses may be ob-
tained by calling the numbers listed above. Master Fund may modify or terminate
the exchange program at any time upon 60 days' written notice to shareholders,
and may reject any exchange request. In order to prevent abuse of this privi-
lege to the disadvantage of other shareholders, Master Fund reserves the right
to limit the number of exchange requests of investors to no more than six per
year. MASTER FUND, MFSC AND THE DISTRIBUTOR ARE NOT RESPONSIBLE FOR THE AUTHEN-
TICITY OF EXCHANGE REQUESTS RECEIVED BY TELEPHONE THAT ARE REASONABLY BELIEVED
TO BE GENUINE. IN ATTEMPTING TO CONFIRM THAT TELEPHONE INSTRUCTIONS ARE GENU-
INE, MASTER FUND WILL USE SUCH PROCEDURES AS ARE CONSIDERED REASONABLE, INCLUD-
ING RECORDING THOSE INSTRUCTIONS AND REQUESTING INFORMATION AS TO ACCOUNT REG-
ISTRATION.
For Federal income tax purposes, an exchange of Shares is a taxable event and,
accordingly, a capital gain or loss may be realized by an investor. Before mak-
ing an exchange, an investor should consult a tax or other financial adviser to
determine tax consequences.
SYSTEMATIC WITHDRAWAL PLAN
Customers of certain Shareholder Organizations who own Shares of a Fund with a
value of $10,000 or more may establish a Systematic Withdrawal Plan. The in-
vestor may request a declining-balance withdrawal, a fixed-dollar withdrawal, a
fixed-share withdrawal, or a fixed-percentage withdrawal (based on the current
value of Shares in the account) on a monthly, quarterly, semi-annual or annual
basis. Information concerning the availability of, and the procedures and fees
relating to, such plans may be obtained by Customers directly from their Share-
holder Organizations.
RETIREMENT PLANS
Shares are available for purchase by investors in connection with the follow-
ing tax-deferred prototype retirement plans offered by certain Shareholder Or-
ganizations:
IRAs (including "rollovers" from existing retirement plans) for individuals
and their spouses;
Profit Sharing and Money-Purchase Plans for corporations and self-employed
individuals and their partners to benefit themselves and their employees; and
Keogh Plans for self-employed individuals.
Investors investing in the Funds pursuant to Profit Sharing and Money-Purchase
Plans and Keogh Plans are not subject to the minimum investment and forced re-
demption provisions described above. The minimum initial investment for IRAs is
$250 per Fund and the minimum subsequent investment is $50 per Fund. Detailed
information concerning eligibility, service fees and other matters related to
these plans is available from Shareholder Organizations.
Information concerning the availability of, and the procedures and fees relat-
ing to, such retirement plans may be obtained by Customers directly from their
Shareholder Organizations.
AUTOMATIC INVESTMENT PROGRAM
The Automatic Investment Program permits Customers of certain Shareholder Or-
ganizations to purchase Shares (minimum of $50 per Fund per transaction) at
regular intervals selected by the Customer. Provided the investor's financial
institution allows automatic withdrawals, Shares are purchased by trans-
35
<PAGE>
ferring funds from an investor's checking, bank money market or NOW account
designated by the investor. At the investor's option, the account designated
will be debited in the specified amount, and Shares will be purchased, once a
month, on either the first or fifteenth day, or twice a month, on both days.
The Automatic Investment Program is one means by which an investor may use
"Dollar Cost Averaging" in making investments. Instead of trying to time market
performance, a fixed dollar amount is invested in Shares at predetermined in-
tervals. This may help investors to reduce their average cost per share because
the agreed upon fixed investment amount allows more Shares to be purchased dur-
ing periods of lower share prices and fewer Shares during periods of higher
prices. In order to be effective, Dollar Cost Averaging should usually be fol-
lowed on a sustained, consistent basis. Investors should be aware, however,
that Shares bought using Dollar Cost Averaging are purchased without regard to
their price on the day of investment or to market trends. In addition, while
investors may find Dollar Cost Averaging to be beneficial, it will not prevent
a loss if an investor ultimately redeems his Shares at a price which is lower
than their purchase price.
Information concerning the availability of, and the procedures and fees relat-
ing to, Automatic Investment accounts may be obtained by Customers directly
from their Shareholder Organizations.
DIVIDENDS AND DISTRIBUTIONS
Dividends from the net investment income of the Funds are declared and paid
quarterly. For dividend purposes, a Fund's investment income is reduced by ac-
crued expenses directly attributable to that Fund and the general expenses of
Master Fund prorated to that Fund on the basis of its relative net assets. A
Fund's net investment income available for distribution to the holders of Dis-
tribution Shares will be reduced by the amount of other expenses allocated to
such series, including the expense of distribution fees associated with Master
Fund's Distribution Plan. Net realized capital gains are distributed at least
annually. Dividends and distributions will reduce the net asset value of each
of the Funds by the amount of the dividend or distribution. All dividends and
distributions paid on Shares held of record by the Investment Adviser and its
affiliates or correspondent banks will be paid in cash. Customers of Share-
holder Organizations will receive dividends and distributions in additional
Distribution Shares of the Fund on which the dividend or distribution is paid
(as determined on the payable date), unless they have requested in writing (re-
ceived by MFSC at Master Fund's address prior to the payment date) to receive
dividends and distributions in cash. Reinvested dividends and distributions re-
ceive the same tax treatment as those paid in cash.
TAXES
FEDERAL
Each of the Funds qualified for its last taxable year as a "regulated invest-
ment company" under the Internal Revenue Code of 1986, as amended (the "Code").
Each Fund expects to so qualify in future years. Such qualification generally
relieves a Fund of liability for Federal income taxes to the extent its earn-
ings are distributed in accordance with the Code.
Qualification as a regulated investment company under the Code requires, among
other things, that a Fund distribute to its shareholders an amount equal to at
least 90% of its investment company taxable income for each taxable year. In
general, a Fund's investment company taxable income will be its income (includ-
ing dividends and interest), subject to certain adjustments and excluding the
excess of any net long-term capital gain for the taxable year over the net
short-term capital loss, if any, for such year. Each Fund intends to distribute
substantially all of its investment company taxable income each year. Such div-
idends will be taxable as ordinary income to Fund shareholders who are not cur-
rently exempt from Federal income taxes, whether such income is received in
cash or reinvested in additional Shares. (Federal income taxes for distribu-
tions to IRAs and qualified pension plans are deferred under the Code.) The div-
36
<PAGE>
idends received deduction for corporations will apply to such ordinary income
distributions to the extent of the total qualifying dividends received by a
Fund from domestic corporations for the taxable year.
Distribution by a Fund of the excess of its net long- term capital gain over
its net short-term capital loss is taxable to shareholders as long-term capital
gain, regardless of how long the shareholders have held their Shares and
whether such gains are received in cash or reinvested in additional Shares.
Such distributions are not eligible for the dividends received deduction.
Dividends declared in October, November or December of any year payable to
shareholders of record on a specified date in such months will be deemed to
have been received by shareholders and paid by a Fund on December 31 of such
year in the event such dividends are actually paid during January of the fol-
lowing year.
An investor considering buying Shares of a Fund on or just before the record
date of a dividend should be aware that the amount of the forthcoming dividend
payment, although in effect a return of capital, will be taxable to them.
A taxable gain or loss may be realized by a shareholder upon his redemption,
transfer or exchange of Shares depending upon the tax basis of such Shares and
their price at the time of redemption, transfer or exchange. If a shareholder
holds Shares for six months or less and during that time receives a capital
gain dividend on those Shares, any loss recognized on the sale or exchange of
those Shares will be treated as a long-term capital loss to the extent of the
capital gain dividend. Generally, a shareholder may include sales charges in-
curred upon the purchase of Shares in his tax basis for such Shares for the
purpose of determining gain or loss on a redemption, transfer or exchange of
such Shares. However, if the shareholder effects an exchange of such Shares for
Shares of another Fund within 90 days of the purchase and is able to reduce the
sales charges applicable to the new Shares (by virtue of the exchange privi-
lege), the amount equal to such reduction may not be included in the tax basis
of the shareholder's exchanged Shares, but may be included (subject to the same
limitation) in the tax basis of the new Shares.
Qualification as a regulated investment company under the Code also requires
that each Fund satisfy certain requirements with respect to the source of its
income for a taxable year. At least 90% of the gross income of each Fund must
be derived from dividends, interest, payments with respect to securities loans,
gains from the sale or other disposition of stock, securities or foreign cur-
rencies, and other income (including, but not limited to, gains from options,
futures, or forward contracts) derived with respect to the Fund's business of
investing in such stock, securities or currencies. The Treasury Department may
by regulation exclude from qualifying income foreign currency gains which are
not directly related to a Fund's principal business of investing in stock or
securities, or options and futures with respect to stock or securities. Any in-
come derived by a Fund from a partnership or trust is treated as derived with
respect to the Fund's business of investing in stock, securities or currencies
only to the extent that such income is attributable to items of income which
would have been qualifying income if realized by the Fund in the same manner as
by the partnership or trust. Some of the investments that the Income and Growth
Fund may make (such as liquidating trust receipts and creditor claims) may not
be securities or may not produce qualifying income. Therefore, it may be neces-
sary for the Investment Adviser to restrict the investments of that Fund to en-
sure that non-qualifying income does not exceed 10% of that Fund's total gross
income for a taxable year.
The foregoing summarizes some of the important tax considerations generally
affecting the Funds and their shareholders and is not intended as a substitute
for careful tax planning. Accordingly, potential investors in the Funds should
consult their tax advisers with specific reference to their own tax situations.
Shareholders will be advised annually as to the Federal income tax consequences
of distributions made each year.
37
<PAGE>
STATE AND LOCAL
Purchasers are advised to consult their tax advisers concerning the applica-
tion of state and local taxes, which may have different consequences from those
of the Federal income tax law described above.
MANAGEMENT OF THE FUNDS
The business and affairs of the Funds are managed under the direction of Mas-
ter Fund's Board of Directors. The Statement of Additional Information contains
the names of and general background information concerning Master Fund's direc-
tors.
INVESTMENT ADVISER
United States Trust Company of New York serves as the Investment Adviser to
each Fund. U.S. Trust (and its predecessor) is a state-chartered bank and trust
company created by Special Act of the New York Legislature in 1853. The Invest-
ment Adviser provides trust and banking services to individuals, corporations,
and institutions both nationally and internationally, including investment man-
agement, estate and trust administration, financial planning, corporate trust
and agency, and personal and corporate banking. The Investment Adviser is a
member bank of the Federal Reserve System and the Federal Deposit Insurance
Corporation and is one of the twelve members of the New York Clearing House As-
sociation.
On December 31, 1994, the Investment Adviser's Asset Management Group had ap-
proximately $33 billion in assets under management. The Investment Adviser,
which has its principal offices at 114 W. 47th Street, New York, New York
10036, is a subsidiary of U.S. Trust Corporation, a registered bank holding
company.
The Investment Adviser manages each Fund, makes decisions with respect to and
places orders for all purchases and sales of its portfolio securities, and
maintains records relating to such purchases and sales.
The Equity Fund's portfolio manager, David A. Tillson, is the person primarily
responsible for the day-to-day management of the Fund's investment portfolio.
Mr. Tillson, a Senior Vice President and Senior Portfolio Manager, has been
with U.S. Trust since 1993, and has been the Fund's portfolio manager since De-
cember 1994. Prior to joining U.S. Trust, Mr. Tillson was the founder and Pres-
ident of TDA Capital Management Company, and a Senior Vice President of Matrix
Asset Advisors until 1993. He was also a Vice President and Senior Portfolio
Manager with V C S & O Asset Management until 1990.
The Income and Growth and Long-Term Supply of Energy Funds' portfolio manager,
Richard L. Bayles, is the person primarily responsible for the day-to-day man-
agement of the Funds' investment portfolios. Mr. Bayles, a Senior Vice Presi-
dent and Senior Portfolio Manager of U.S. Trust, has been with U.S. Trust since
1990 and has been the Income and Growth Fund's portfolio manager since 1990 and
the Long-Term Supply of Energy Fund's portfolio manager since its inception.
Prior to his reassociation with U.S. Trust, Mr. Bayles was a Managing Director
at John W. Bristol and Company, an investment advisory firm, from 1987 to 1990.
The Productivity Enhancers Fund's portfolio manager, Ronald C. Steele, is the
person primarily responsible for the day-to-day management of the Fund's in-
vestment portfolio. Mr. Steele, a Senior Vice President and Senior Portfolio
Manager of U.S. Trust, has been the Fund's portfolio manager since its incep-
tion.
The Environmentally-Related Products and Services Fund's portfolio manager,
Victor Sapuppo, is the person primarily responsible for the day-to-day manage-
ment of the Fund's investment portfolio. Mr. Sapuppo, Vice President and Senior
Portfolio Manager of the Personal Equity and Balanced Investment Division of
U.S. Trust, has been with U.S. Trust since 1962 and has been the Fund's portfo-
lio manager since its inception.
38
<PAGE>
The Aging of America Fund's portfolio manager, Roger F. Schaefer, is the per-
son primarily responsible for the day-to-day management of the Fund's invest-
ment portfolio. Mr. Schaefer, a Vice President and Senior Portfolio Manager of
U.S. Trust, has been with U.S. Trust since 1970 and has been the Fund's portfo-
lio manager since its inception.
The Communication and Entertainment Fund's portfolio manager, John J.
Apruzzese, is the person primarily responsible for the day-to-day management of
the Fund's investment portfolio. Mr. Apruzzese, a Senior Vice President, De-
partment Manager and Senior Portfolio Manager of U.S. Trust, has been with U.S.
Trust since 1984 and has been the Fund's portfolio manager since its inception.
The Business and Industrial Restructuring Fund's portfolio manager, David J.
Williams, is the person primarily responsible for the day-to-day management of
the Fund's investment portfolio. Mr. Williams, Senior Vice President, Depart-
ment Manager and Senior Portfolio Manager of the Personal Equity and Balanced
Investment Division of U.S. Trust, has been with U.S. Trust since 1987 and has
been the Fund's portfolio manager since its inception.
The Global Competitors Fund's portfolio manager, Wendy S. Popowich, is the
person primarily responsible for the day-to-day management of the Fund's in-
vestment portfolio. Ms. Popowich, a Vice President and Portfolio Manager of the
Personal Investment Division of U.S. Trust, has been with U.S. Trust since 1983
and has been the Fund's portfolio manager since its inception.
The Early Life Cycle Fund's portfolio manager, Timothy W. Evnin, is the person
primarily responsible for the day-to-day management of the Fund's investment
portfolio. Mr. Evnin, a Vice President and Portfolio Manager of U.S. Trust, has
been with U.S. Trust since 1987 and has been the Fund's portfolio manager since
its inception.
For the services provided and expenses assumed pursuant to its Investment Ad-
visory Agreements, the Investment Adviser is entitled to be paid a fee, com-
puted daily and paid monthly, at the annual rate of: .75% of the average daily
net assets of the Equity and the Income and Growth Funds; and .60% of the aver-
age daily net assets of each Theme Fund. The advisory fee rates payable by the
Equity and Income and Growth Funds are higher than the rates payable by most
mutual funds. The Board of Directors believes, based on information supplied to
it by the Investment Adviser, that this fee is comparable to the rate paid by
many other funds with similar investment objectives and policies and is appro-
priate for the Funds in light of their investment objectives and policies. For
the fiscal year ended March 31, 1995, the Investment Adviser received an advi-
sory fee at the effective annual rates of .72%, .72%, .42%, .47%, 0%, .44%,
.53%, .52%, .50% and .52% of the average daily net assets of the Equity, Income
and Growth, Long-Term Supply of Energy, Productivity Enhancers, Environmental-
ly-Related Products and Services, Aging of America, Communication and Enter-
tainment, Business and Industrial Restructuring, Global Competitors and Early
Life Cycle Funds, respectively. For the same period, the Investment Adviser
waived advisory fees at the effective annual rates of .03%, .03%, .18%, .13%,
.60%, .16%, .07%, .08%, .10% and .08% of the average daily net assets of the
Equity, Income and Growth, Long-Term Supply of Energy, Productivity Enhancers,
Environmentally-Related Products and Services, Aging of America, Communication
and Entertainment, Business and Industrial Restructuring, Global Competitors
and Early Life Cycle Funds, respectively.
From time to time, the Investment Adviser may waive (either voluntarily or
pursuant to applicable state expense limitations) all or a portion of the advi-
sory fees payable to it by a Fund, which waiver may be terminated at any time.
See "Management of the Funds--Service Organizations" for additional information
on fee waivers.
39
<PAGE>
ADMINISTRATORS
Mutual Funds Service Company and Federated Administrative Services serve as
the Funds' administrators (the "Administrators") and provide them with general
administrative and operational assistance. The Administrators also serve as
administrators of the other portfolios of Master Fund and Master Tax-Exempt
Fund, which are also advised by the Investment Adviser and distributed by the
Distributor. For the services provided to all portfolios of Master Fund (ex-
cept the International, Emerging Americas, Pacific/Asia and Pan European
Funds) and Master Tax-Exempt Fund, the Administrators are entitled jointly to
annual fees, computed daily and paid monthly, based on the combined aggregate
average daily net assets of the two companies (excluding the International,
Emerging Americas, Pacific/Asia and Pan European Funds) as follows:
<TABLE>
<CAPTION>
COMBINED AGGREGATE AVERAGE DAILY
NET ASSETS OF MASTER FUND
(EXCLUDING THE INTERNATIONAL, EMERGING AMERICAS,
PACIFIC/ASIA AND PAN EUROPEAN FUNDS) ANNUAL
AND MASTER TAX-EXEMPT FUND FEE
------------------------------------------------ ------
<S> <C>
first $200 million....................................................... .200%
next $200 million........................................................ .175%
over $400 million........................................................ .150%
</TABLE>
Administration fees payable to the Administrators by each portfolio of the
two investment companies are determined in proportion to their relative aver-
age daily net assets at the time of determination. After those allocations
have been made, the Administrators are entitled jointly to an annual minimum
fee of $50,000 from each Theme Fund. From time to time, the Administrators may
waive (either voluntarily or pursuant to applicable state expense limitations)
all or a portion of the administration fee payable to them by a Fund, which
waivers may be terminated at any time. See "Management of the Funds--Service
Organizations" for additional information on fee waivers. For the fiscal year
ended March 31, 1995, MFSC and Concord Holding Corporation ("Concord"), the
former co-administrator, received an aggregate administration fee (under the
same compensation arrangements noted above) at the effective annual rates of
.154%, .154%, .171%, .154%, .124%, .155%, .154%, .154%, .151% and .154% of the
average daily net assets of the Equity, Income and Growth, Long-Term Supply of
Energy, Productivity Enhancers, Environmentally-Related Products and Services,
Aging of America, Communication and Entertainment, Business and Industrial Re-
structuring, Global Competitors and Early Life Cycle Funds, respectively. For
the same period, MFSC and Concord waived fees at the effective annual rates of
.192%, .090%, .829%, .115%, .009%, .026% and .106% of the average daily net
assets of the Long-Term Supply of Energy, Productivity Enhancers, Environmen-
tally-Related Products and Services, Aging of America, Communication and En-
tertainment, Business and Industrial Restructuring and Global Competitors
Funds, respectively.
SERVICE ORGANIZATIONS
Master Fund will enter into Shareholder Servicing agreements ("Servicing
Agreement") with Shareholder Organizations which agree to provide their Cus-
tomers various shareholder administrative services with respect to their
Shares (hereinafter referred to as "Service Organizations"). As a considera-
tion for the administrative services provided to Customers, a Fund will pay
each Service Organization an administrative service fee at the annual rate of
up to .40% of the average daily net asset value of its Shares held by the
Service Organization's Customers. Such services, which are described more
fully in the Statement of Additional Information under "Management of the
Funds--Service Organizations," may include assisting in processing purchase,
exchange and redemption requests; transmitting and receiving funds in connec-
tion with Customer orders to purchase, exchange or redeem Shares; and provid-
ing periodic statements. Under the terms of the Servicing Agreement, Service
Organizations will be required to provide to Customers a schedule of any fees
that they may charge in connection with a Customer's investment. Until further
notice, the Investment Adviser and Administrators have voluntarily agreed to
waive fees payable by
40
<PAGE>
a Fund in an amount equal to administrative service fees payable by that Fund.
BANKING LAWS
Banking laws and regulations currently prohibit a bank holding company regis-
tered under the Federal Bank Holding Company Act of 1956 or any bank or non-
bank affiliate thereof from sponsoring, organizing or controlling a registered,
open-end investment company continuously engaged in the issuance of its shares,
and prohibit banks generally from issuing, underwriting, selling or distribut-
ing securities such as Shares of the Funds, but such banking laws and regula-
tions do not prohibit such a holding company or affiliate or banks generally
from acting as investment adviser, transfer agent, or custodian to such an in-
vestment company, or from purchasing shares of such company for and upon the
order of customers. The Investment Adviser, MFSC and certain Shareholder Orga-
nizations may be subject to such banking laws and regulations. State securities
laws may differ from the interpretations of Federal law discussed in this para-
graph and banks and financial institutions may be required to register as deal-
ers pursuant to state law.
Should legislative, judicial, or administrative action prohibit or restrict
the activities of the Investment Adviser or other Shareholder Organizations in
connection with purchases of Fund Shares, the Investment Adviser and such
Shareholder Organizations might be required to alter materially or discontinue
the investment services offered by them to Customers. It is not anticipated,
however, that any resulting change in the Funds' method of operations would af-
fect their net asset values per Share or result in financial loss to any share-
holder.
DESCRIPTION OF CAPITAL STOCK
UST Master Funds, Inc. was organized as a Maryland corporation on August 2,
1984. Currently, Master Fund has authorized capital of 35 billion shares of
Common Stock, $.001 par value per share, classified into 34 series of shares
representing interests in 20 investment portfolios. This Prospectus describes
the Equity, Income and Growth, Early Life Cycle, Long-Term Supply of Energy,
Productivity Enhancers, Environmentally-Related Products and Services, Aging of
America, Communication and Entertainment, Business and Industrial Restructuring
and Global Competitors Funds. Master Fund offers Service Shares and Distribu-
tion Shares representing interests in each of those Funds. Service Shares and
Distribution Shares have different expenses, which may affect performance. Call
(800) 233-1136 for information regarding each of those Fund's Service Shares,
which are offered through a separate prospectus.
Each share (irrespective of series designation) in a Fund represents an equal
proportionate interest in the particular Fund with other shares of the same
class, and is entitled to such dividends and distributions out of the income
earned on the assets belonging to such Fund as are declared in the discretion
of Master Fund's Board of Directors. Master Fund's Charter authorizes the Board
of Directors to classify or reclassify any class of shares into one or more ad-
ditional classes or series.
Master Fund's shareholders are entitled to one vote for each full share held
and fractional votes for fractional shares held and will vote in the aggregate
and not by class or series, except as otherwise expressly required by law.
Holders of Distribution Shares in a Fund bear the expense of distribution fees
described above under "How to Purchase and Redeem Shares--Distributor." Service
Shares in a Fund bear no such distribution fees, but do bear the expense of ad-
ministrative service fees described above under "Management of the Funds--Serv-
ice Organizations." As a result of their different expense structures, the net
asset value and the total returns on Service Shares of a Fund will generally be
higher than those on Distribution Shares of the same Fund. Service Shares of
the Funds are offered to the public at the applicable net asset value per share
plus a front-end sales charge identical to the sales charge described above un-
der "How to Purchase and Redeem Shares--Public Of
41
<PAGE>
fering Price." Service Shares are exchangeable at the option of the holder for
Service Shares of Master Fund's and Master Tax-Exempt Fund's other investment
portfolios.
Certificates for Shares will not be issued unless expressly requested in writ-
ing to MFSC and will not be issued for fractional Shares.
As of July 11, 1995, U.S. Trust held of record substantially all of the Shares
in the Funds as agent or custodian for its customers, but did not own such
Shares beneficially because it did not have voting or investment discretion
with respect to such Shares.
CUSTODIAN AND TRANSFER AGENT
United States Trust Company of New York serves as the custodian of the Funds'
assets and as their transfer and dividend disbursing agent. Communications to
the custodian and transfer agent should be directed to United States Trust Com-
pany of New York, Mutual Funds Service Division, 770 Broadway, New York, New
York 10003-9598.
U.S. Trust has entered into an International Custodian Agreement with Morgan
Stanley Trust Company, 1 Pierrepont Plaza, Brooklyn, NY 11201, providing for
the custody of foreign securities held by the Funds.
U.S. Trust has also entered into a sub-transfer agency arrangement with MFSC,
73 Tremont Street, Boston, Massachusetts 02108-3913, pursuant to which MFSC
provides certain transfer agent, dividend disbursement and registrar services
to the Funds.
PERFORMANCE INFORMATION
From time to time, in advertisements or in reports to shareholders, the per-
formance of the Shares of the Funds may be quoted and compared to that of other
mutual funds with similar investment objectives and to stock or other relevant
indices or to rankings prepared by independent services or other financial or
industry publications that monitor the performance of mutual funds. For exam-
ple, the performance of a Fund may be compared to data prepared by Lipper Ana-
lytical Services, Inc., a widely recognized independent service which monitors
the performance of mutual funds. The performance of the Equity and Theme Funds
may be also compared to the Standard & Poor's 500 Stock Index ("S&P 500"), an
index of unmanaged groups of common stocks, the Consumer Price Index, or the
Dow Jones Industrial Average, a recognized unmanaged index of common stocks of
30 industrial companies listed on the New York Stock Exchange.
Performance data as reported in national financial publications, including but
not limited to Money Magazine, Forbes, Barron's, The Wall Street Journal and
The New York Times, or in publications of a local or regional nature, may also
be used in comparing the performance of the Funds.
From time to time, each Fund may advertise its performance by using "average
annual total return" over various periods of time. Such total return figure re-
flects the average percentage change in the value of an investment in a Fund
from the beginning date of the measuring period to the end of the measuring pe-
riod. Average total return figures will be given for the most recent one-year
period, and may be given for other periods as well (such as from the commence-
ment of a Fund's operations, or on a year-by-year basis). Each Fund may also
use aggregate total return figures for various periods, representing the cumu-
lative change in the value of an investment in the Fund for the specific peri-
od. Both methods of calculating total return assume that dividends and capital
gain distributions made by a Fund during the period are reinvested in Fund
Shares and also reflect the maximum sales load charged by the Fund.
Performance will fluctuate and any quotation of performance should not be con-
sidered as representative of a Fund's future performance. Shareholders
42
<PAGE>
should remember that performance is generally a function of the kind and qual-
ity of the instruments held in a portfolio, portfolio maturity, operating ex-
penses, and market conditions. Any fees charged by Shareholder Organizations
with respect to accounts of Customers that have invested in Shares will not be
included in calculations of performance.
MISCELLANEOUS
Shareholders will receive unaudited semi-annual reports describing the Funds'
investment operations and annual financial statements audited by the Funds' in-
dependent auditors.
As used in this Prospectus, a "vote of the holders of a majority of the out-
standing shares" of Master Fund or a particular Fund means, with respect to the
approval of an investment advisory agreement, a distribution plan or a change
in a fundamental investment policy, the affirmative vote of the lesser of (a)
more than 50% of the outstanding shares of Master Fund or such Fund, or (b) 67%
or more of the shares of Master Fund or such Fund present at a meeting if more
than 50% of the outstanding shares of Master Fund or such Fund are represented
at the meeting in person or by proxy.
Inquiries regarding any of the Funds may be directed to the Distributor at the
address or telephone number listed under "Distributor."
43
<PAGE>
INSTRUCTIONS FOR NEW ACCOUNT APPLICATION
OPENING YOUR ACCOUNT:
Complete the Application(s) and mail to: FOR OVERNIGHT DELIVERY: send to:
UST Master Funds UST Master Funds
c/o Mutual Funds Service Company c/o Mutual Funds Service Company--
P.O. Box 2798 Transfer Agent
Boston, MA 02208-2798 73 Tremont Street
Boston, MA 02108-3913
Please enclose with the Application(s) your check made payable to the "UST
Master Funds" in the amount of your investment.
For direct wire purchases please refer to the section of the Prospectus enti-
tled "How to Purchase and Redeem Shares--Purchase Procedures."
MINIMUM INVESTMENTS:
Except as provided in the Prospectus, the minimum initial investment is $500
per Fund; subsequent investments must be in the minimum amount of $50 per Fund.
Investments may be made in excess of these minimums.
REDEMPTIONS:
Shares can be redeemed in any amount and at any time in accordance with pro-
cedures described in the Prospectus. In the case of shares recently purchased
by check, redemption proceeds will not be made available until the transfer
agent is reasonably assured that the check has been collected in accordance
with applicable banking regulations.
Certain legal documents will be required from corporations or other organiza-
tions, executors and trustees, or if redemption is requested by anyone other
than the shareholder of record. Written redemption requests in excess of
$50,000 per account must be accompanied by signature guarantees.
SIGNATURES: Please be sure to sign the Application(s).
If the shares are registered in the name of:
- an individual, the individual should sign.
- joint tenants, both tenants should sign.
- a custodian for a minor, the custodian should sign.
- a corporation or other organization, an authorized officer should sign
(please indicate corporate office or title).*
- a trustee or other fiduciary, the fiduciary or fiduciaries should sign
(please indicate capacity).*
* A corporate resolution or appropriate certificate may be required.
QUESTIONS:
If you have any questions regarding the Application or redemption require-
ments, please contact the transfer agent at (800) 446-1012 between 9:00 a.m.
and 5:00 p.m. (Eastern Time).
44
<PAGE>
[LOGO OF UST MUTUAL FUNDS SERVICE COMPANY
MASTER FUNDS CLIENT SERVICES
APPEARS HERE] P.O. Box 2798
Boston, MA 02208-2798
(800) 446-1012 NEW ACCOUNT APPLICATION
-----------------------------------------------------------------------------
-----------------------------------------------------------------------------
ACCOUNT REGISTRATION
-----------------------------------------------------------------------------
[_] Individual [_] Joint Tenants [_] Trust [_] Gift/Transfer to Minor
[_] Other
Note: Joint tenant registration will be as "joint tenants
with right of survivorship" unless otherwise specified. Trust
registrations should specify name of the trust, trustee(s),
beneficiary(ies), and the date of the trust instrument.
Registration for Uniform Gifts/Transfers to Minors should be
in the name of one custodian and one minor and include the
state under which the custodianship is created (using the
minor's Social Security Number ("SSN")). For IRA accounts a
different application is required.
------------------------------ -----------------------------
Name(s) (please print) Social Security # or Taxpayer
Indentification #
( )
------------------------------ -----------------------------
Name Telephone #
------------------------------
Address
[_] U.S. Citizen
------------------------------ [_] Other (specify)____________
City/State/Zip
-----------------------------------------------------------------------------
FUND SELECTION (THE MINIMUM INITIAL AND SUBSEQUENT INVESTMENT IS $500 PER
FUND AND $50 PER FUND, RESPECTIVELY. MAKE CHECKS PAYABLE TO "UST MASTER
FUNDS.")
-----------------------------------------------------------------------------
FUND INITIAL INVESTMENT
[_] Equity Fund $ ____________ 800
[_] Income and Growth Fund $ ____________ 801
[_] Long-Term Energy Fund $ ____________ 813
[_] Productivity Enhancers Fund $ ____________ 814
[_] Environmental Fund $ ____________ 815
[_] Aging of America Fund $ ____________ 816
[_] Communication & Entertainment Fund $ ____________ 817
[_] Business & Industrial Restructuring Fund $ ____________ 818
[_] Global Competitors Fund $ ____________ 819
[_] Early Life Cycle Fund $ ____________ 812
[_] Other $ ____________
TOTAL INITIAL INVESTMENT: $ ____________
NOTE: If investing by wire, you must obtain a Bank Wire Control Number. To
do so, please call (800) 446-1012 and ask for the Wire Desk.
A. BY MAIL: Enclosed is a check in the amount of $ ____ payable to "UST
Master Funds."
B. BY WIRE: A bank wire in the amount of $ has been sent to the Fund from
------------------ ---------------------
Name of Bank Wire Control Number
CAPITAL GAIN AND DIVIDEND DISTRIBUTIONS: All capital gain and
dividend distributions will be reinvested in additional
shares unless appropriate boxes below are checked:
All dividends are to be [_] reinvested [_] paid in cash
All capital gains are to be [_] reinvested [_] paid in cash
-----------------------------------------------------------------------------
ACCOUNT PRIVILEGES
-----------------------------------------------------------------------------
TELEPHONE EXCHANGE AND REDEMPTION
[_] I/We appoint MFSC as my/our agent to act upon instructions received by
telephone in order to effect the telephone exchange and redemption
privileges. I/We hereby ratify any instructions given pursuant to this
authorization and agree that Master Fund, Master Tax-Exempt Fund, MFSC and
their directors, officers and employees will not be liable for any loss,
liability, cost or expense for acting upon instructions believed to be
genuine and in accordance with the procedures described in the then current
Prospectus. To the extent that Master Fund and Master Tax-Exempt Fund fail
to use reasonable procedures as a basis for their belief, they or their
service contractors may be liable for instructions that prove to be
fraudulent or unauthorized.
I/We further acknowledge that it is my/our responsibility to read the
Prospectus of any Fund into which I/we exchange.
[_] I/We do not wish to have the ability to exercise telephone redemption
and exchange privileges. I/We further understand that all exchange and
redemption requests must be in writing.
SPECIAL PURCHASE AND REDEMPTION PLANS
I/We have completed and attached the Supplemental Application for:
[_] Automatic Investment Plan
[_] Systematic Withdrawal Plan
AUTHORITY TO TRANSMIT REDEMPTION PROCEEDS TO PRE-DESIGNATED ACCOUNT.
I/We hereby authorize MFSC to act upon instructions received by telephone to
withdraw $1,000 or more from my/our account in the UST Master Funds and to
wire the amount withdrawn to the following commercial bank account. I/We
understand that MFSC charges an $8.00 fee for each wire redemption, which
will be deducted from the proceeds of the redemption.
Title on Bank Account*____________________________________________________
Name of Bank _____________________________________________________________
Bank A.B.A. Number____________________ Account Number ____________________
Bank Address _____________________________________________________________
City/State/Zip ___________________________________________________________
(attach voided check here)
A corporation, trust or partnership must also submit a "Corporate
Resolution" (or "Certificate of Partnership") indicating the names and
titles of officers authorized to act on its behalf.
* TITLE ON BANK AND FUND ACCOUNT MUST BE IDENTICAL.
<PAGE>
------------------------------------------------------------------
RIGHTS OF ACCUMULATION
------------------------------------------------------------------
To qualify for Rights of Accumulation, you must complete this
section, listing all of your accounts including those in your
spouse's name, joint accounts and accounts held for your
minor children. If you need more space, please attach a
separate sheet.
[_] I/We qualify for the Rights of Accumulation sales charge
discount described in the Prospectus and Statement of
Additional Information.
[_] I/We own shares of more than one Fund distributed by
Edgewood Services, Inc. Listed below are the numbers of
each of my/our Shareholder Accounts.
[_] The registration of some of my/our shares differs from that
shown on this application. Listed below are the account
number(s) and full registration(s) in each case.
LIST OF OTHER UST MASTER FUND ACCOUNTS:
______________________ _______________________________________
______________________ _______________________________________
______________________ _______________________________________
ACCOUNT NUMBER ACCOUNT REGISTRATIONS
------------------------------------------------------------------
LETTER OF INTENT
------------------------------------------------------------------
[_] I agree to the Letter of Intent provisions set forth in
the Prospectus. Although I am not obligated to purchase, and
Master Fund is not obligated to sell, I intend to invest,
over a 13-month period beginning on , 19 , an aggregate
amount in Eligible Funds of Master Fund and Master Tax-Exempt
Fund at least equal to (check appropriate box):
[_] $50,000 [_] $100,000 [_] $250,000 [_] $500,000
[_] $1,000,000 [_] $2,000,000
By signing this application, I hereby authorize MFSC to
redeem an appropriate number of shares held in escrow to pay
any additional sales loads payable in the event that I do not
fulfill the terms of this Letter of Intent.
------------------------------------------------------------------
AGREEMENT AND SIGNATURES
------------------------------------------------------------------
By signing this application, I/we hereby certify under
penalty of perjury that the information on this application
is complete and correct and that as required by Federal law:
[_] I/We certify that (1) the number(s) shown on this form
is/are the correct taxpayer identification number(s) and (2)
I/we are not subject to backup withholding either because
I/we have not been notified by the Internal Revenue Service
that I/we are subject to backup withholding, or the IRS has
notified me/us that I am/we are no longer subject to backup
withholding. (NOTE: IF ANY OR ALL OF PART 2 IS NOT TRUE,
PLEASE STRIKE OUT THAT PART BEFORE SIGNING.)
[_] If no taxpayer identification number ("TIN") or SSN has
been provided above, I/we have applied, or intend to apply,
to the IRS or the Social Security Administration for a TIN or
a SSN, and I/we understand that if I/we do not provide this
number to MFSC within 60 days of the date of this
application, or if I/we fail to furnish my/our correct SSN or
TIN, I/we may be subject to a penalty and a 31% backup
withholding on distributions and redemption proceeds. (Please
provide this number on Form W-9. You may request the form by
calling MFSC at the number listed above).
I/We represent that I am/we are of legal age and capacity to
purchase shares of the UST Master Funds. I/We have received,
read and carefully reviewed a copy of the appropriate Fund's
current Prospectus and agree to its terms and by signing
below I/we acknowledge that neither the Fund nor the
Distributor is a bank and that Fund Shares are not deposits
or obligations of, or guaranteed or endorsed by, United
States Trust Company of New York, its parent and affiliates
and the Shares are not federally insured by, guaranteed by,
obligations of or otherwise supported by the U.S. Government,
the Federal Deposit Insurance Corporation, the Federal
Reserve Board, or any other governmental agency; and that an
investment in the Funds involves investment risks, including
possible loss of principal amount invested.
X ___________________________ Date __________________________
Owner Signature
X ___________________________ Date __________________________
Co-Owner Signature
Sign exactly as name(s) of registered owner(s) appear(s) above
(including legal title if signing for a corporation, trust
custodial account, etc.).
------------------------------------------------------------------
FOR USE BY AUTHORIZED AGENT (BROKER/DEALER) ONLY
------------------------------------------------------------------
We hereby submit this application for the purchase of shares
in accordance with the terms of our selling agreement with
UST Distributors, Inc., and with the Prospectus and Statement
of Additional Information of each Fund purchased. We agree to
notify MFSC of any purchases made under the Letter of Intent
or Rights of Accumulation.
----------------------------- -------------------------------
Investment Dealer's Name Source of Business Code
----------------------------- -------------------------------
Main Office Address Branch Number
----------------------------- -------------------------------
Representative's Number Representative's Name
----------------------------- -------------------------------
Branch Address Telephone
----------------------------- -------------------------------
Investment Dealer's Title
Authorized Signature
<PAGE>
[LOGO OF UST MUTUAL FUNDS SERVICE COMPANY
MASTER FUNDS CLIENT SERVICES SUPPLEMENTAL APPLICATION
APPEARS HERE] P.O. Box 2798 SPECIAL INVESTMENT AND
Boston, MA 02208-2798 WITHDRAWAL OPTIONS
(800) 446-1012
-----------------------------------------------------------------------------
-----------------------------------------------------------------------------
ACCOUNT REGISTRATION PLEASE SUPPLY THE FOLLOWING INFORMATION EXACTLY AS IT
APPEARS ON THE FUND'S RECORD.
-----------------------------------------------------------------------------
Fund Name __________________ Account Number _________________
Owner Name _________________ Social Security or Taxpayer ID
Street Address _____________ Number _________________________
Resident City, State, Zip Code __________
of [_] U.S. [_] Other ____ [_] Check here if this is a change of address
-----------------------------------------------------------------------------
DISTRIBUTION OPTIONS (DIVIDENDS AND CAPITAL GAINS WILL BE REINVESTED
UNLESS OTHERWISE INDICATED)
-----------------------------------------------------------------------------
A. CAPITAL GAIN AND DIVIDEND DISTRIBUTIONS: All capital gain and dividend
distributions will be reinvested in additional shares unless appropriate
boxes below are checked: All dividends are to be [_] reinvested
[_] paid in cash
All capital gains are to be [_] reinvested
[_] paid in cash
B. PAYMENT ORDER: Complete only if distribution checks are to be payable
to another party. Make distribution checks payable to:
Name of Your Bank ______________
Name _______________________ Bank Account Number ____________
Address ____________________ Address of Bank ________________
City, State, Zip Code ________________________________________
C. DISTRIBUTIONS REINVESTED-CROSS FUNDS: Permits all distributions from
one Fund to be automatically reinvested into another identically-
registered UST Master Fund. (NOTE: You may NOT open a new Fund account
with this option.) Transfer all distributions earned:
From: ______________________ Account No. ____________________
(Fund)
To: ________________________ Account No. ____________________
(Fund)
-----------------------------------------------------------------------------
AUTOMATIC INVESTMENT PLAN [_] YES [_] NO
-----------------------------------------------------------------------------
I/We hereby authorize MFSC to debit my/our personal checking account on
the designated dates in order to purchase shares in the Fund indicated at
the top of this application at the applicable public offering price
determined on that day.
[_] Monthly on the 1st day [_] Monthly on the 15th day [_] Monthly on both
the 1st and 15th
days
Amount of each debit (minimum $50 per Fund) $ ________________
NOTE: A Bank Authorization Form (below) and a voided personal check must
accompany the Automatic Investment Plan application.
------------------------------------------------------------------------------
------------------------------------------------------------------------------
UST MASTER FUNDS
CLIENT SERVICES AUTOMATIC INVESTMENT PLAN
-----------------------------------------------------------------------------
-----------------------------------------------------------------------------
BANK AUTHORIZATION
-----------------------------------------------------------------------------
----------------------- ------------------------ --------------------------
Bank Name Bank Address Bank Account Number
I/We authorize you, the above named bank, to debit my/our
account for amounts drawn by MFSC, acting as my agent for the
purchase of Fund shares. I/We agree that your rights in
respect to each withdrawal shall be the same as if it were a
check drawn upon you and signed by me/us. This authority
shall remain in effect until revoked in writing and received
by you. I/We agree that you shall incur no liability when
honoring debits, except a loss due to payments drawn against
insufficient funds. I/We further agree that you will incur no
liability to me if you dishonor any such withdrawal. This
will be so even though such dishonor results in the
cancellation of that purchase.
---------------------------- --------------------------------
Account Holder's Name Joint Account Holder's Name
X ---------------- --------- X ------------------ -----------
Signature Date Signature Date
<PAGE>
--------------------------------------------------------------------------------
SYSTEMATIC WITHDRAWAL PLAN [_] YES [_] NO NOT AVAILABLE FOR IRA'S
--------------------------------------------------------------------------------
AVAILABLE TO SHAREHOLDERS WITH ACCOUNT BALANCES OF $10,000 OR MORE.
I/We hereby authorize MFSC to redeem the necessary number of shares from
my/our UST Master Fund Account on the designated dates in order to make the
following periodic payments:
[_] Monthly on the 24th day [_] Quarterly on the 24th day of
January, April, July and October
[_] Other______
(This request for participation in the Plan must be received by the 18th day
of the month in which you wish withdrawals to begin.)
Amount of each check ($100 minimum) $______________________
Please make check payable to: Recipient ________________________
(To be completed only if redemption
proceeds to be paid to other than Street Address ___________________
account holder of record or mailed
to address other than address of City, State, Zip Code ____________
record)
NOTE: If recipient of checks is not the registered shareholder, signature(s)
----
below must be guaranteed. A corporation, trust or partnership must also submit
a "Corporate Resolution" (or "Certification of Partnership") indicating the
names and titles of officers authorized to act on its behalf.
--------------------------------------------------------------------------------
AGREEMENT AND SIGNATURES
--------------------------------------------------------------------------------
The investor(s) certifies and agrees that the certifications, authorizations,
directions and restrictions contained herein will continue until MFSC receives
written notice of any change or revocation. Any change in these instructions
must be in writing with all signatures guaranteed (if applicable).
Date ______________________
X X
--------------------------------------- -------------------------------------
Signature Signature
--------------------------------------- -------------------------------------
Signature Guarantee* (if applicable) Signature Guarantee* (if applicable)
X X
--------------------------------------- -------------------------------------
Signature Signature
--------------------------------------- -------------------------------------
Signature Guarantee* (if applicable) Signature Guarantee* (if applicable)
*ELIGIBLE GUARANTORS: An Eligible Guarantor institution is a bank, trust
company, broker, dealer, municipal or government securities broker or dealer,
credit union, national securities exchange, registered securities association,
clearing agency or savings association, provided that such institution is a
participant in STAMP, the Securities Transfer Agents Medallion Program.
--------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PROSPECTUS SUMMARY......................................................... 2
EXPENSE SUMMARY............................................................ 3
FINANCIAL HIGHLIGHTS....................................................... 5
U.S. TRUST'S INVESTMENT PHILOSOPHY AND STRATEGIES.......................... 15
INVESTMENT OBJECTIVES AND POLICIES......................................... 15
PORTFOLIO INSTRUMENTS AND OTHER INVESTMENT INFORMATION..................... 22
INVESTMENT LIMITATIONS..................................................... 26
PRICING OF SHARES.......................................................... 27
HOW TO PURCHASE AND REDEEM SHARES.......................................... 28
INVESTOR PROGRAMS.......................................................... 34
DIVIDENDS AND DISTRIBUTIONS................................................ 35
TAXES...................................................................... 35
MANAGEMENT OF THE FUNDS.................................................... 38
DESCRIPTION OF CAPITAL STOCK............................................... 41
CUSTODIAN AND TRANSFER AGENT............................................... 42
PERFORMANCE INFORMATION.................................................... 42
MISCELLANEOUS.............................................................. 43
INSTRUCTIONS FOR NEW ACCOUNT APPLICATION................................... 44
</TABLE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRE-
SENTATIONS NOT CONTAINED IN THIS PROSPECTUS, OR IN THE FUNDS' STATEMENT OF AD-
DITIONAL INFORMATION INCORPORATED HEREIN BY REFERENCE, IN CONNECTION WITH THE
OFFERING MADE BY THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY MASTER
FUND OR ITS DISTRIBUTOR. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING BY
MASTER FUND OR BY ITS DISTRIBUTOR IN ANY JURISDICTION IN WHICH SUCH OFFERING
MAY NOT LAWFULLY BE MADE.
USTEQP894
[LOGO OF UST MASTER FUNDS, INC. APPEARS HERE]
MASTER FUNDS, INC.
EQUITY FUND
INCOME AND GROWTH FUND
LONG-TERM SUPPLY
OF ENERGY FUND
PRODUCTIVITY ENHANCERS FUND
ENVIRONMENTALLY-RELATED
PRODUCTS AND SERVICES FUND
AGING OF AMERICA FUND
COMMUNICATION AND
ENTERTAINMENT FUND
BUSINESS AND INDUSTRIAL
RESTRUCTURING FUND
GLOBAL COMPETITORS FUND
EARLY LIFE CYCLE FUND
DISTRIBUTION SHARES
Prospectus
August 1, 1995
<PAGE>
CROSS-REFERENCE SHEET
UST MASTER FUNDS, INC.
(INTERNATIONAL FUND, EMERGING AMERICAS FUND, PACIFIC ASIA FUND, PAN EUROPEAN
FUND)
<TABLE>
<CAPTION>
FORM N-1A, PART A, ITEM PROSPECTUS CAPTION
----------------------- ------------------
<C> <S> <C>
1. Cover Page.......................... Cover Page
2. Synopsis............................ Prospectus Summary and
Expense Summary
3. Financial Highlights................ Selected Per Share Data and Ratios;
Performance Information
4. General Description of Registrant... Prospectus Summary; Investment
Objectives and Policies; Portfolio
Instruments and Other Investment
Information; Investment Limitations;
Description of Capital Stock
5. Management of the Fund.............. Management of the Fund; Custodian
and Transfer Agent
6. Capital Stock and Other Securities.. How to Purchase and Redeem Shares;
Dividends and Distributions; Taxes;
Description of Capital Stock;
Miscellaneous
7. Purchase of Securities Being Pricing of Shares; How to Purchase
Offered............................ and Redeem Shares; Investor Programs
8. Redemption or Repurchase............ How to Purchase and Redeem Shares
9. Pending Legal Proceedings........... Inapplicable
</TABLE>
<PAGE>
[LOGO OF UST APPEARS HERE]
MASTER FUNDS, INC.
A Management Investment Company
-------------------------------------------------------------------------------
International Funds For initial purchase information, current prices,
performance information and existing account in-
formation, call (800) 446-1012. (From overseas,
call (617) 557-8280)
73 Tremont Street Boston, MA 02108-3913
-------------------------------------------------------------------------------
This Prospectus describes the Service Shares ("Shares") offered by several
separate portfolios offered to investors by UST Master Funds, Inc. ("Master
Fund"), an open-end, management investment company. Master Fund also issues an
additional series of shares in the portfolios ("Distribution Shares"), which
are offered under a separate prospectus. Each portfolio (each a "Fund" and
collectively the "Funds") has its own investment objective and policies as
follows:
INTERNATIONAL FUND seeks total return on its assets through capital apprecia-
tion and income derived primarily from investments in a diversified portfolio
of marketable foreign equity securities.
EMERGING AMERICAS FUND seeks long-term capital appreciation through invest-
ments in companies and securities of governments based in all countries in the
Western Hemisphere, except the U.S.
PACIFIC/ASIA FUND seeks long-term capital appreciation through investments in
companies and securities of governments based in all countries in Asia and on
the Asian side of the Pacific Ocean.
PAN EUROPEAN FUND seeks long-term capital appreciation through investments in
companies and securities of governments based in Europe.
Master Fund is sponsored and distributed by Edgewood Services, Inc. and ad-
vised by United States Trust Company of New York (the "Investment Adviser" or
"U.S. Trust").
This Prospectus sets forth concisely the information about the Funds that a
prospective investor should consider before investing. Investors should read
this Prospectus and retain it for future reference. A Statement of Additional
Information dated August 1, 1995 and containing additional information about
the Funds has been filed with the Securities and Exchange Commission. The cur-
rent Statement of Additional Information is available to investors without
charge by writing to Master Fund at its address shown above or by calling
(800) 446-1012. The Statement of Additional Information, as it may be supple-
mented from time to time, is incorporated by reference in its entirety into
this Prospectus.
SHARES OF THE FUNDS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR EN-
DORSED BY, UNITED STATES TRUST COMPANY OF NEW YORK, ITS PARENT OR AFFILIATES
AND THE SHARES ARE NOT FEDERALLY INSURED BY, GUARANTEED BY, OBLIGATIONS OF OR
OTHERWISE SUPPORTED BY THE U.S. GOVERNMENT, THE FEDERAL DEPOSIT INSURANCE COR-
PORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER GOVERNMENTAL AGENCY.
AN INVESTMENT IN THE FUNDS INVOLVES INVESTMENT RISKS, INCLUDING POSSIBLE LOSS
OF PRINCIPAL AMOUNT INVESTED.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE AC-
CURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
August 1, 1995
<PAGE>
PROSPECTUS SUMMARY
UST MASTER FUNDS, INC. is an investment company offering various diversified
investment portfolios with differing objectives and policies. Founded in 1984,
Master Fund currently offers 20 Funds with combined assets of approximately
$2.5 billion. See "Description of Capital Stock."
INVESTMENT ADVISER: United States Trust Company of New York serves as the
Funds' investment adviser. U.S. Trust, whose predecessor was founded in 1853,
is a trust company offering a variety of specialized financial and fiduciary
services to high-net worth individuals, institutions and corporations. Master
Fund offers investors access to U.S. Trust's services. The International and
Pan European Funds receive sub-advisory services from Foreign and Colonial As-
set Management ("FACAM"), and the Emerging Americas and Pacific/Asia Funds re-
ceive sub-advisory services from Foreign & Colonial Emerging Markets Limited
("FCEML"). FACAM and FCEML are U.S. Trust affiliates. See "Management of the
Funds--Investment Adviser."
INVESTMENT OBJECTIVES AND POLICIES: Generally, each Fund is a diversified in-
vestment portfolio which invests principally in the equity securities of for-
eign companies. The Funds also may invest in warrants, convertible securities,
bonds and other securities of foreign companies and governments. The Funds' in-
vestment objectives and policies are summarized on the cover and explained in
greater detail later in this Prospectus. See "Investment Objectives and Poli-
cies," "Portfolio Instruments and Other Information" and "Investment Limita-
tions."
HOW TO INVEST: The Funds' Shares are offered at their public offering price,
i.e., their net asset value plus a sales load which is subject to substantial
reductions for large purchases and programs for accumulation. The sales load is
not applicable to investors making their investments through a variety of in-
stitutions, such as U.S. Trust, other banks and trust companies. See "How to
Purchase and Redeem Shares."
The minimum to start an account is $500 per Fund, with a minimum of $50 per
Fund for subsequent investments. The easiest way to invest is to complete the
account application which accompanies this Prospectus and to send it with a
check to the address noted on the application. Investors may also invest by
wire and through investment dealers or institutional investors with appropriate
sales agreements with Master Fund. See "How to Purchase and Redeem Shares."
HOW TO REDEEM: Redemptions may be requested directly from Master Fund by
mail, wire or telephone. Investors investing through another institution should
request redemptions through their Shareholder Organization. See "How to Pur-
chase and Redeem Shares."
INVESTMENT RISKS AND CHARACTERISTICS: Generally, each Fund is subject to mar-
ket risk and currency risk. Market risk is the possibility that stock prices
will decline over short or even extended periods. Stock markets tend to be cy-
clical, with periods of generally rising prices and periods of generally de-
clining prices. These cycles will affect the values of each Fund. In addition,
since the Funds invest in foreign securities, the Funds are subject to the
risks of fluctuations of the value of foreign currencies relative to the U.S.
dollar and other risks associated with such investments. Finally, while the In-
ternational Fund diversifies its investments in a variety of companies and
countries, the Emerging Americas, Pacific/Asia and Pan European Funds (collec-
tively, the "Regional Funds") focus their investment activities in their desig-
nated regions. As a result each Regional Fund is susceptible to regional eco-
nomic, market, political and other more localized risks. Although each Fund
generally seeks to invest for the long term, each Fund may engage in short-term
trading of portfolio securities. A high rate of portfolio turnover may involve
correspondingly greater transaction costs which must be borne directly by a
Fund and ultimately by its shareholders. Investments in the Funds should not be
considered a complete investment program. See "Investment Objectives and Poli-
cies--Risk Factors" and "Portfolio Instruments and Other Investment Informa-
tion."
2
<PAGE>
EXPENSE SUMMARY
<TABLE>
<CAPTION>
INTERNATIONAL EMERGING AMERICAS PACIFIC/ASIA PAN EUROPEAN
FUND FUND FUND FUND
------------- ----------------- ------------ ------------
<S> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION
EXPENSES
Maximum Sales Load
(as a percentage of
offering price)........ 4.50% 4.50% 4.50% 4.50%
Sales Load on Reinvested
Dividends.............. None None None None
Deferred Sales Load..... None None None None
Redemption Fees/1/...... None None None None
Exchange Fees........... None None None None
ANNUAL FUND OPERATING
EXPENSES FOR SERVICE
SHARES (AS A PERCENTAGE
OF AVERAGE NET ASSETS)
Advisory Fees (after fee
waivers)/2/............ .94% .93% .95% .94%
12b-1 Fees.............. None None None None
Other Operating Expenses
Administrative Servic-
ing Fee............... .06% .06% .05% .06%
Other Expenses......... .47% .51% .47% .51%
Total Fund Operating Ex-
penses (after fee waiv-
ers)/2/................ 1.47% 1.50% 1.47% 1.51%
</TABLE>
-------
/1/ The Fund's transfer agent imposes a direct $8.00 charge on each wire redemp-
tion by noninstitutional (i.e. individual) investors which is not reflected
in the expense ratios presented herein. Shareholder organizations may charge
their customers transaction fees in connection with redemptions. See
"Redemption Procedures."
/2/ The Investment Adviser and Administrators may, from time to time,
voluntarily waive a portion of their respective fees which waivers may be
terminated at any time. Until further notice, the Investment Adviser and/or
Administrators intend to voluntarily waive fees in an amount equal to the
Administrative Servicing Fee; and to further waive fees and reimburse
expenses to the extent necessary for the Emerging Americas, Pacific/Asia and
Pan European Funds to maintain an annual expense ratio of not more than
1.67%. Without such fee waivers, "Advisory Fees" would be 1.00%, 1.00%,
1.00% and 1.00% and total op-erating expenses for Service Shares would be
1.53%, 1.57%, 1.52%, and 1.57% for each of the International, Emerging
Americas, Pacific/Asia and Pan Euro-pean Funds.
3
<PAGE>
Example: You would pay the following expenses on a $1,000 investment, assuming
(1) 5% annual returns; and (2) redemption of your investment at the end of the
following periods:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
International Fund.............................. $59 $89 $122 $213
Emerging Americas Fund.......................... 60 90 123 216
Pacific/Asia Fund............................... 59 89 122 213
Pan European Fund............................... 60 91 124 217
</TABLE>
The foregoing expense summary and example (based on the maximum sales load
payable on the Shares) are intended to assist investors in understanding the
costs and expenses that an investor in Service Shares of the Fund will bear di-
rectly or indirectly. The expense summary sets forth advisory and other ex-
penses payable with respect to Service Shares of the Funds for the fiscal year
ended March 31, 1995. For more complete descriptions of the Funds' operating
expenses, see "Management of the Funds" in this Prospectus and the financial
statements and notes incorporated by reference in the Statement of Additional
Information.
THE FOREGOING EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE EXPENSES OR RATE OF RETURN. ACTUAL EXPENSES AND RATE OF RETURN MAY BE
GREATER OR LOWER THAN THOSE SHOWN IN THE EXPENSE SUMMARY AND EXAMPLE.
4
<PAGE>
FINANCIAL HIGHLIGHTS
The following tables include selected data for a Service Share outstanding
throughout each period and other performance information derived from the fi-
nancial statements included in Master Fund's Annual Report to Shareholders for
the year ended March 31, 1995 (the "Financial Statements"). The information
contained in the Financial Highlights for each period has been audited by
Ernst & Young LLP, Master Fund's independent auditors. The following tables
should be read in conjunction with the Financial Statements and notes thereto.
More information about the performance of each Fund is also contained in the
Annual Report to Shareholders which may be obtained from Master Fund without
charge by calling the number on the front cover of this Prospectus.
Prior to the date of this Prospectus, each Fund offered a single series of
shares, the Service Shares. As of the date of this Prospectus, the Funds began
offering a new series of shares designated as Distribution Shares. Service
Shares and Distribution Shares represent equal pro rata interests in each
Fund, except they bear different expenses which reflect the difference in the
level of services provided to them. See "Description of Capital Stock."
INTERNATIONAL FUND
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
------------------------------------------------------------------
1995 1994 1993 1992 1991 1990 1989 1988/1/
------- ------ ------ ------- ------- ------ ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value, Begin-
ning of period......... $ 10.44 $ 8.66 $ 8.27 $ 8.75 $ 9.84 $ 8.61 $ 7.85 $ 8.00
------- ------ ------ ------- ------- ------ ------ -------
Income From Investment
Operations
Net Investment Income.. 0.10 0.05 0.15 0.08 0.13 0.15 0.05 0.05
Net Gains or (Losses)
on Securities (both
realized and
unrealized)........... (0.29) 1.88 0.25 (0.45) (0.64) 1.47 0.77 (0.16)
------- ------ ------ ------- ------- ------ ------ -------
Total From Investment
Operations............ (0.19) 1.93 0.40 (0.37) (0.51) 1.62 0.82 (0.11)
------- ------ ------ ------- ------- ------ ------ -------
Less Distributions
Dividends From Net
Investment Income..... 0.00 (0.02) (0.01) (0.11) (0.11) (0.16) (0.06) (0.03)
Dividends in Excess of
Net Investment Income. (0.11) (0.12) 0.00 0.00 0.00 0.00 0.00 0.00
Distributions From Net
Realized Gain on
Investments........... (0.32) (0.01) 0.00 0.00 (0.47) (0.23) 0.00 (0.01)
Distributions in Excess
of Net Realized Gain
on Investments........ 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
------- ------ ------ ------- ------- ------ ------ -------
Total Distributions.... (0.43) (0.15) (0.01) (0.11) (0.58) (0.39) (0.06) (0.04)
------- ------ ------ ------- ------- ------ ------ -------
Net Asset Value, End of
Period................. $ 9.82 $10.44 $ 8.66 $ 8.27 $ 8.75 $ 9.84 $ 8.61 $ 7.85
======= ====== ====== ======= ======= ====== ====== =======
Total Return/2/......... (1.93)% 22.34% 4.85% (4.35)% (5.20)% 18.91% 10.59% (1.28)%
Ratios/Supplemental Data
Net Assets, End of Pe-
riod (in millions).... $ 64.05 $55.74 $30.37 $ 46.92 $ 31.87 $21.49 $13.01 $ 8.56
Ratio of Net Operating
Expenses to Average
Net Assets............ 1.47% 1.53% 1.50% 1.52% 1.61% 1.34% 1.28% 1.09%/3/
Ratio of Gross Operat-
ing Expenses to Aver-
age Net Assets........ 1.53% 1.53% 1.50% 1.52% 1.61% 1.58% 1.93% 2.81%/3/
Ratio of Net Investment
Income to Average Net
Assets................ 0.71% 0.18% 1.27% 0.94% 1.57% 1.55% 0.75% 1.13%/3/
Portfolio Turnover
Rate.................. 66.0% 64.0% 31.0% 32.0% 47.0% 50.0% 80.0% 55.0%/3/
</TABLE>
-------
NOTES:
1. Inception date of the Fund was July 21, 1987.
2. Total return data does not reflect the sales load payable on purchases of
Shares.
3. Annualized.
5
<PAGE>
EMERGING AMERICAS FUND
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
---------------------- PERIOD ENDED
1995 1994 MARCH 31, 1993/1/
---------- ---------- -----------------
<S> <C> <C> <C>
Net Asset Value, Beginning of pe-
riod............................. $ 9.30 $ 7.12 $ 7.00
---------- --------- -------
Income From Investment Operations
Net Investment Income........... 0.01 0.05 0.00
Net Gains or (Losses) on
Securities (both realized and
unrealized).................... (2.56) 2.24 0.12
---------- --------- -------
Total From Investment Opera-
tions.......................... (2.55) 2.29 0.12
---------- --------- -------
Less Distributions
Dividends From Net Investment
Income......................... 0.00 (0.03) 0.00
Dividends in Excess of Net In-
vestment Income................ (0.17) (0.02) 0.00
Distributions From Net Realized
Gain on Investments............ 0.00 (0.06) 0.00
Distributions in Excess of Net
Realized Gain on Investments... (0.72) 0.00 0.00
---------- --------- -------
Total Distributions............. (0.89) (0.11) 0.00
---------- --------- -------
Net Asset Value, End of Period.... $ 5.86 $ 9.30 $ 7.12
========== ========= =======
Total Return/2/................... (30.47)% 32.25% 1.71%
Ratios/Supplemental Data
Net Assets, End of Period (in
millions)...................... $ 27.34 $ 39.28 $ 3.83
Ratio of Net Operating Expenses
to Average Net Assets.......... 1.50% 1.49% 1.67%/3/
Ratio of Gross Operating
Expenses to Average Net Assets. 1.57% 1.71% 2.56%/3/
Ratio of Net Investment
Income/(Loss) to Average Net
Assets......................... 0.06% 0.29% (0.04)%/3/
Portfolio Turnover Rate......... 69.0% 51.0% 76.0%/3/
</TABLE>
-------
NOTES:
1. Inception date of the Fund was December 31, 1992.
2. Total return data does not reflect the sales load payable on purchases of
Shares.
3. Annualized.
6
<PAGE>
PACIFIC/ASIA FUND
<TABLE>
<CAPTION>
YEAR ENDED
MARCH 31,
--------------- PERIOD ENDED
1995 1994 MARCH 31, 1993/1/
------- ------ -----------------
<S> <C> <C> <C>
Net Asset Value, Beginning of period........ $ 10.04 $ 7.54 $ 7.00
------- ------ ------
Income From Investment Operations
Net Investment Income..................... 0.08 0.08 0.00
Net Gains or (Losses) on Securities (both
realized and unrealized)................. (0.58) 2.81 0.54
------- ------ ------
Total From Investment Operations.......... (0.50) 2.89 0.54
------- ------ ------
Less Distributions
Dividends From Net Investment Income...... (0.03) (0.05) 0.00
Dividends in Excess of Net Investment In-
come..................................... (0.23) (0.06) 0.00
Distributions From Net Realized Gain on
Investments.............................. (0.83) (0.28) 0.00
Distributions in Excess of Net Realized
Gain on Investment....................... 0.00 0.00 0.00
------- ------ ------
Total Distributions....................... (1.09) (0.39) 0.00
------- ------ ------
Net Asset Value, End of Period.............. $ 8.45 $10.04 $ 7.54
======= ====== ======
Total Return/2/............................. (5.89)% 38.11% 7.71%
Ratios/Supplemental Data
Net Assets, End of Period (in millions)... $ 47.62 $53.03 $ 9.67
Ratio of Net Operating Expenses to Average
Net Assets............................... 1.47% 1.53% 1.67%/3/
Ratio of Gross Operating Expenses to Aver-
age Net Assets........................... 1.52% 1.77% 2.00%/3/
Ratio of Net Investment Income to Average
Net Assets............................... 0.85% 0.54% 0.27%/3/
Portfolio Turnover Rate................... 69.0% 68.0% 1.0%/3/
</TABLE>
-------
NOTES:
1. Inception date of the Fund was December 31, 1992.
2. Total return data does not reflect the sales load payable on purchases of
Shares.
3. Annualized.
7
<PAGE>
PAN EUROPEAN FUND
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
--------------------- PERIOD ENDED
1995 1994 MARCH 31, 1993/1/
---------- ---------- -----------------
<S> <C> <C> <C>
Net Asset Value, Beginning of period. $ 8.03 $ 7.34 $ 7.00
---------- ---------- -------
Income From Investment Operations
Net Investment Income.............. 0.09 0.03 0.00
Net Gains or (Losses) on Securities
(both realized and unrealized).... 0.25 0.70 0.34
---------- ---------- -------
Total From Investment Operations... 0.34 0.73 0.34
---------- ---------- -------
Less Distributions
Dividends From Net Investment In-
come.............................. (0.09) 0.00 0.00
Dividends in Excess of Net Invest-
ment Income....................... 0.00 (0.04) 0.00
Distributions From Net Realized
Gain on Investments............... (0.09) 0.00 0.00
Distributions in Excess of Net Re-
alized Gain on Investment......... 0.00 0.00 0.00
---------- ---------- -------
Total Distributions................ (0.18) (0.04) 0.00
---------- ---------- -------
Net Asset Value, End of Period....... $ 8.19 $ 8.03 $ 7.34
========== ========== =======
Total Return/2/...................... 4.33% 10.05% 4.86%
Ratios/Supplemental Data
Net Assets, End of Period (in mil-
lions)............................ $ 39.98 $ 36.68 $ 3.80
Ratio of Net Operating Expenses to
Average Net Assets................ 1.51% 1.61% 1.67%/3/
Ratio of Gross Operating to Average
Net Assets........................ 1.57% 1.72% 3.13%/3/
Ratio of Net Investment
Income/(Loss) to Average Net As-
sets.............................. 1.11% 0.06% (0.33%)/3/
Portfolio Turnover Rate............ 47.0% 30.0% 9.0%/3/
</TABLE>
-------
NOTES:
1. Inception date of the Fund was December 31, 1992.
2. Total return data does not reflect the sales load payable on purchases of
Shares.
3. Annualized.
8
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
The Investment Adviser will use its best efforts to achieve the investment
objectives of each Fund, although their achievement cannot be assured. The in-
vestment objective of each Fund is "fundamental", meaning that it may not be
changed without a vote of the holders of a majority of the particular Fund's
outstanding shares (as defined under "Miscellaneous"). Except as noted below
in "Investment Limitations," the investment policies of each Fund may be
changed without a vote of the holders of a majority of the outstanding shares
of such Fund.
INTERNATIONAL FUND
The International Fund's investment objective is to seek total return on its
assets through capital appreciation and income derived primarily from invest-
ments in a diversified portfolio of marketable foreign equity securities.
In seeking to achieve this investment objective, the International Fund will
invest primarily in equity securities of foreign issuers who will, in the
opinion of Foreign and Colonial Asset Management, the Fund's sub-adviser (the
"Sub-Adviser" or "FACAM") and the Investment Adviser, benefit from global eco-
nomic trends, promising technologies or products and specific country opportu-
nities resulting from changing geo-political, economic or currency relation-
ships. In making investment decisions, the Sub-Adviser and Investment Adviser
will seek to identify values not recognized in the market price of a security.
The primary emphasis will be on the achievement of a higher total return fo-
cusing, as circumstances warrant, solely on either growth of capital or gener-
ation of current income or any combination thereof.
The International Fund does not intend to have, at any time, a specified per-
centage of its assets invested either for growth or for income, and all or any
portion of its assets may be allocated among these two components based on the
Investment Adviser's and Sub-Adviser's analysis of the prevailing market con-
ditions. Although the Fund will seek to realize its investment objective pri-
marily through investments in foreign equity securities, it may, from time to
time, assume a defensive position by allocating all or any portion of its as-
sets to foreign debt obligations. In determining investment strategy and allo-
cating investments, the Sub-Adviser and Investment Adviser will continuously
analyze a broad range of international equity and fixed-income securities in
order to assess the level of return, and degree of risk, that can be expected
from each type of investment and from each market.
The International Fund's investments will generally be diversified among geo-
graphic regions and countries. While there are no prescribed limits on geo-
graphic distribution, the Fund will normally include in its portfolio securi-
ties of issuers collectively having their principal business in no fewer than
three foreign countries. The Fund's assets may be invested in securities of
issuers located in the Pacific Basin (e.g. Japan, Hong Kong, Singapore, Malay-
sia), Europe, Australia, Latin America and Canada. The Fund may also, from
time to time, invest in other regions, seeking to capitalize on investment op-
portunities emerging in other parts of the world.
REGIONAL FUNDS:
The investment objective of each Regional Fund is long-term capital apprecia-
tion. In seeking to achieve this investment objective, each Regional Fund will
invest primarily in equity securities of foreign issuers who will, in the
opinion of the particular Fund's Sub-Adviser and the Investment Adviser, bene-
fit from global and regional economic trends, promising technologies or prod-
ucts and specific country and regional opportunities resulting from changing
geo-political, economic or currency relationships. In making investment deci-
sions, the particular Fund's Sub-Adviser and the Investment Adviser will seek
to identify values not recognized in the market price of a security.
9
<PAGE>
Although each Regional Fund will seek to realize its investment objective
primarily through investments in foreign equity and government securities, it
may, from time to time, assume a defensive position by allocating all or any
portion of its assets to U.S. Government or foreign debt obligations. The Re-
gional Funds will limit their investments in foreign debt obligations to those
rated within the top three ratings by Moody's Investors Service, Inc.
("Moody's") or Standard & Poor's Ratings Group ("S&P") or, if unrated, deter-
mined by the Investment Advisory or the sub-adviser to be of comparable quali-
ty. No Regional Fund currently expects to invest more than 25% of its total
assets in the securities issued by any single foreign government. Any such in-
vestment would subject the particular Regional Fund to the risks presented by
investing in securities of such foreign government to a greater extent than it
would if that Fund's assets were not so concentrated. In determining invest-
ment strategy and allocating investments, the particular Fund's Sub-Adviser
and the Investment Adviser will continuously analyze a broad range of interna-
tional equity and fixed-income securities in order to assess the level of re-
turn, and degree of risk, that can be expected from each type of investment
and from each market.
Under normal circumstances, each Regional Fund will invest at least 65% of
its total assets in securities of issuers based in its targeted region. A com-
pany is "based in" a region if it derives more than half of its assets, reve-
nues or profits from such region. The Regional Funds and their targeted re-
gions are as follows:
EMERGING AMERICAS FUND. The Emerging Americas Fund invests primarily in secu-
rities of companies and governments based in all countries of the Western
Hemisphere except the U.S. Currently, the Investment Adviser believes that
such countries may include Canada, Mexico, the Bahamas, Costa Rica, Venezuela,
Colombia, Peru, Brazil, Argentina and Chile. Under normal conditions, the Fund
will invest at least 65% of its total assets in securities of issuers based in
Western Hemisphere countries other than Canada. The Fund may also invest in
Brady Bonds, which are securities issued in various currencies (primarily the
dollar) that have been created through the exchange of existing commercial
bank loans to Latin American public and private entities for new bonds in con-
nection with debt restructurings under a debt restructuring plan announced by
former U.S. Secretary of the Treasury Nicholas F. Brady (the "Brady Plan").
Brady Bonds have been issued only recently and for that reason do not have a
long payment history. Brady Bonds may be collateralized or uncollateralized,
are issued in various currencies (primarily the dollar) and are actively
traded in the over-the-counter secondary market for Latin American debt in-
struments. Brady Bonds are neither issued nor guaranteed by the U.S. Govern-
ment. Additional information on Brady Bonds is included in the Statement of
Additional Information.
PACIFIC/ASIA FUND. The Pacific/Asia Fund invests primarily in securities of
companies and governments based in Asia and on the Asian side of the Pacific
Ocean. Currently, the Investment Adviser believes that such countries may in-
clude Australia, New Zealand, Hong Kong, India, Japan, Indonesia, the Philip-
pines, Malaysia, Singapore, Taiwan, China, Thailand, South Korea, Sri Lanka
and Pakistan.
PAN EUROPEAN FUND. The Pan European Fund invests primarily in securities of
companies and governments based in Europe. Currently, the Investment Adviser
believes that such countries may include Ireland, the United Kingdom, Norway,
Sweden, Finland, Holland, Belgium, Luxembourg, France, Portugal, Spain, Den-
mark, Germany, Poland, Czech Republic, Slovakia, Hungary, Switzerland, Aus-
tria, Greece, Turkey and Italy. As other formerly communist and Eastern Euro-
pean countries become economically viable, investments may be made there as
well.
INVESTMENT POLICIES COMMON TO ALL FUNDS
Under normal market and economic conditions, at least 75% of each Fund's as-
sets will be invested in
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foreign securities. Foreign securities include common stock, preferred stock,
securities convertible into common stock, warrants, bonds, notes and other debt
obligations issued by foreign entities, as well as shares of U.S. registered
investment companies that invest primarily in foreign securities. Foreign debt
securities purchased by a Fund may include obligations issued in the
Eurocurrency markets and obligations of foreign governments and their political
subdivisions. In addition, each Fund may invest in U.S. Government obligations,
including the when-issued securities of such issuers, and obligations issued by
U.S. companies which are either denominated in foreign currency and sold abroad
or, if denominated in U.S. dollars, payment on which is determined by reference
to some other foreign currency.
Each Fund may invest indirectly in the securities of foreign issuers through
sponsored and unsponsored American Depository Receipts ("ADRs") and European
Depository Receipts ("EDRs"). Investments in unsponsored ADRs involve addi-
tional risk because financial information based on generally accepted account-
ing principles ("GAAP") may not be available for the foreign issuers of the un-
derlying securities. ADRs and EDRs may not necessarily be denominated in the
same currency as the underlying securities into which they may be converted.
Under unusual economic and market conditions, each Fund may restrict the secu-
rities markets in which its assets are invested and may invest all or a major
portion of its assets in U.S. Government obligations or in U.S. dollar-denomi-
nated securities of U.S. companies. Up to 25% of each Fund's assets may also be
held on a continuous basis in cash or invested in U.S. money market instruments
(see below under "Money Market Instruments") to meet redemption requests or to
take advantage of emerging investment opportunities. To the extent described
below under "Portfolio Instruments and Other Investment Information," each Fund
may purchase shares of other investment companies and may engage in repurchase
agreements, securities lending, forward currency contracts and futures con-
tracts, options on futures and covered call options.
Convertible and non-convertible debt securities purchased by each Fund will be
rated "investment grade," or, if unrated, deemed by the particular Sub-Adviser
and the Investment Adviser to be comparable to securities rated "investment
grade," by Moody's or S&P. Debt obligations rated in the lowest of the top four
"investment grade" ratings ("Baa" by Moody's and "BBB" by S&P) are considered
to have some speculative characteristics and may be more sensitive to adverse
economic change than higher rated securities. Each Fund will sell in an orderly
fashion as soon as possible any convertible and non-convertible debt securities
it holds if they are downgraded below "Baa" by Moody's or below "BBB" by S&P.
Foreign securities are generally unrated. In purchasing foreign equity securi-
ties, the particular Fund's Sub-Adviser will look generally to established for-
eign companies. Each Fund may purchase securities both on recognized stock ex-
changes and in over-the-counter markets. Most of the Funds' portfolio transac-
tions will be effected in the primary trading market for the given security.
Each Fund also may invest up to 5% of its total assets in gold bullion. Invest-
ments in gold will not produce dividends or interest income, and the Funds can
look only to price appreciation for a return on such investments.
RISK FACTORS
Generally. Each Fund is subject to market risk, interest rate risks and the
risks of investing in foreign securities. Market risk is the possibility that
stock prices will decline over short or even extended periods. The stock mar-
kets tend to be cyclical, with periods of generally rising prices and periods
of generally declining prices. These cycles will affect the values of each
Fund. In addition, to the extent that the Funds invest in fixed-income securi-
ties, their holdings of debt securities are sensitive to changes in interest
rates and the interest rate environment. Generally, the prices of bonds and
debt securities fluctuate inversely with interest rate changes.
11
<PAGE>
Investments in securities of foreign issuers involve certain risks not ordi-
narily associated with investments in securities of domestic issuers. Such
risks include fluctuations in foreign exchange rates, future political and
economic developments, and the possible imposition of exchange controls or
other foreign governmental laws or restrictions. Since each Fund will invest
heavily in securities denominated or quoted in currencies other than the U.S.
dollar, changes in foreign currency exchange rates will, to the extent a Fund
does not adequately hedge against such fluctuations, affect the value of secu-
rities in the portfolio and the unrealized appreciation or depreciation of in-
vestments so far as U.S. investors are concerned. In addition, with respect to
certain countries, there is the possibility of expropriation of assets, con-
fiscatory taxation, political or social instability or diplomatic developments
which could adversely affect investments in those countries.
There may be less publicly available information about a foreign company than
about a U.S. company, and foreign companies may not be subject to accounting,
auditing and financial reporting standards and requirements comparable to or
as uniform as those of U.S.-based companies. Foreign securities markets, while
growing in volume, have, for the most part, substantially less volume than
U.S. markets, and securities of many foreign companies are less liquid and
their prices more volatile than securities of comparable U.S.-based companies.
Transaction costs on foreign securities markets are generally higher than in
the United States. There is generally less government supervision and regula-
tion of foreign exchanges, brokers and issuers than there is in the U.S. The
Funds might have greater difficulty taking appropriate legal action in a for-
eign court than in a U.S. court.
Dividends and interest payable on a Fund's foreign portfolio securities may
be subject to foreign withholding taxes. To the extent such taxes are not off-
set by credits or deductions allowed to investors under the Federal income tax
provisions--see "Taxes--Federal"--they may reduce the net return to the Fund's
shareholders. Investors should also understand that the expense ratio of the
Funds can be expected to be higher than those of funds investing in domestic
securities. The costs attributable to investing abroad are usually higher for
several reasons, such as the higher cost of investment research, higher cost
of custody of foreign securities, higher commissions paid on comparable trans-
actions on foreign markets and additional costs arising from delays in settle-
ments of transactions involving foreign securities.
Emerging Americas Fund. The Latin American economies have experienced consid-
erable difficulties in the past decade. Although there have been significant
improvements in recent years, the Latin American economies continue to experi-
ence significant problems, including high inflation rates and high interest
rates. Inflation and rapid fluctuations in inflation rates have had and may
continue to have very negative effects on the economies and securities markets
of certain Latin American countries. The emergence of the Latin American econ-
omies and securities markets will require continued economic and fiscal disci-
pline which has been lacking at times in the past, as well as stable political
and social conditions. There is no assurance that economic initiatives will be
successful. Recovery may also be influenced by international economic condi-
tions, particularly those in the United States, and by world prices for oil
and other commodities.
Pan European Fund. Political and economic developments in Europe, especially
as they relate to changes in the structure of the European Economic Community
and the anticipated development of a unified common market, may have profound
effects upon the value of a large segment of the Fund's investment portfolio.
For example, continued progress in the evolution of a unified European common
market may be slowed by unanticipated political or social events and may,
therefore, adversely affect the value of certain of the securities held by the
Fund. In addition, Germany is currently experiencing significant economic
stress associated with its recent unification. These pressures
12
<PAGE>
are affecting other European countries to varying degrees and have caused con-
siderable currency volatility within the European monetary system.
Pacific/Asia Fund. The extent of economic development, political stability
and market depth of different countries in the Pacific/Asia region varies
widely. Certain countries in the region are either comparatively underdevel-
oped or are in the process of becoming developed, and investments in the secu-
rities of issuers in such countries typically involve greater potential for
gain or loss than investments in securities of issuers in more developed coun-
tries. Certain countries in the region also depend to a large degree upon ex-
ports of primary commodities and, therefore, are vulnerable to changes in com-
modity prices which, in turn, may be affected by a variety of factors. The
Fund may be particularly sensitive to changes in the economies of certain
countries in the Pacific/Asia region resulting from any reversal of economic
liberalization, political unrest or the imposition of sanctions by the United
States or other countries.
Latin America, Eastern Europe and the Pacific/Asia Region. Certain of the
risks associated with international investments are heightened with respect to
investments in developing countries and fledgling democracies in Latin Ameri-
ca, Eastern Europe and the Pacific/Asia region. The risks of expropriation,
nationalization and social, political and economic instability are greater in
those countries than in more developed capital markets. In addition, the de-
veloping countries and emerging democracies in those regions may have econo-
mies based on only a few industries and small securities markets with a low
volume of trading. Certain countries may also impose substantial restrictions
on investments in their capital markets by foreign entities, including re-
strictions on investments in issuers of industries deemed sensitive to rele-
vant national interests. These factors may limit the investment opportunities
available to the Funds and result in a lack of liquidity and a high price vol-
atility with respect to securities of issuers from the developing countries
and emerging democracies in those regions.
Countries in Latin America, Eastern Europe and the Pacific/Asia region may
also impose restrictions on the Funds' ability to repatriate investment income
or capital. Even where there is no outright restriction on repatriation of in-
vestment income or capital, the mechanics of repatriation may affect certain
aspects of the operations of the Funds. For example, funds may be withdrawn
from the People's Republic of China only in U.S. or Hong Kong dollars and only
at an exchange rate established by the government once each week.
Some of the currencies of developing countries and emerging democracies in
Latin America, Eastern Europe and the Pacific/Asia region have experienced de-
valuations relative to the U.S. dollar, and major adjustments have been made
periodically in certain of such currencies. Certain countries in these regions
face serious exchange constraints.
Lastly, governments of many developing countries and emerging democracies in
Latin America, Eastern Europe and the Pacific/Asia region exercise substantial
influence over many aspects of the private sector. In some countries, the gov-
ernment owns or controls many companies, including the largest in the country.
As such, government actions in the future could have a significant effect on
economic conditions in developing countries and emerging democracies in these
regions, which could affect private sector companies, a Fund and the value of
a Fund's portfolio securities. Furthermore, certain countries in Latin Ameri-
ca, Eastern Europe and the Pacific/Asia region are among the largest debtors
to commercial banks and foreign governments. Trading in debt obligations is-
sued or guaranteed by those governments or their agencies and instrumentali-
ties involves a high degree of risk.
* * *
Because of the Funds' investment policies and the considerations discussed
above, investments in Shares of the Funds may not be appropriate for all in-
vestors and should not be considered a complete investment program.
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<PAGE>
PORTFOLIO INSTRUMENTS AND OTHER INVESTMENT INFORMATION
MONEY MARKET INSTRUMENTS
"Money market instruments" which may be purchased by each Fund in accordance
with its policies set forth above include, among other things, bank obliga-
tions, commercial paper and corporate bonds with remaining maturities of 13
months or less.
Bank obligations include bankers' acceptances, negotiable certificates of de-
posit, and non-negotiable time deposits earning a specified return and issued
by a U.S. bank which is a member of the Federal Reserve System or insured by
the Bank Insurance Fund of the Federal Deposit Insurance Corporation, or by a
savings and loan association or savings bank which is insured by the Savings
Association Insurance Fund of the Federal Deposit Insurance Corporation. Bank
obligations also include U.S. dollar-denominated obligations of foreign
branches of U.S. banks and obligations of domestic branches of foreign banks.
Investments in time deposits are limited to no more than 5% of the value of a
Fund's total assets at time of purchase.
Investments by a Fund in commercial paper will consist of issues that are
rated "A-2" or better by S&P or "Prime-2" by Moody's. In addition, each Fund
may acquire unrated commercial paper and corporate bonds that are determined by
the Investment Adviser at the time of purchase to be of comparable quality to
rated instruments that may be acquired by each Fund.
Commercial paper may include variable and floating rate instruments. While
there may be no active secondary market with respect to a particular instrument
purchased by a Fund, each Fund may, from time to time as specified in the in-
strument, demand payment of the principal of the instrument or may resell the
instrument to a third party. The absence of an active secondary market, howev-
er, could make it difficult for a Fund to dispose of the instrument if the is-
suer defaulted on its payment obligation or during periods when a Fund is not
entitled to exercise its demand rights, and a Fund could, for this or other
reasons, suffer a loss with respect to such instrument.
REPURCHASE AGREEMENTS
In order to effectively manage its cash holdings, each Fund may enter into re-
purchase agreements. The Funds will enter into repurchase agreements only with
financial institutions that are deemed to be creditworthy by the Investment Ad-
viser, pursuant to guidelines established by Master Fund's Board of Directors.
The Funds will not enter into repurchase agreements with the Investment Adviser
or Sub-Advisers or any of their affiliates. Repurchase agreements with remain-
ing maturities in excess of seven days will be considered illiquid securities
and will be subject to the 10% limit described in Investment Limitation No. 5
below.
The seller under a repurchase agreement will be required to maintain the value
of the securities which are subject to the agreement and held by a Fund at not
less than the repurchase price. Default or bankruptcy of the seller would, how-
ever, expose a Fund to possible delay in connection with the disposition of the
underlying securities or loss to the extent that proceeds from a sale of the
underlying securities were less than the repurchase price under the agreement.
SECURITIES LENDING
To increase return on its portfolio securities, each Fund may lend its portfo-
lio securities to broker/ dealers pursuant to agreements requiring the loans to
be continuously secured by collateral equal at all times in value to at least
the market value of the securities loaned. Collateral for such loans may in-
clude cash, securities of the U.S. Government, its agencies or instrumentali-
ties, or an irrevocable letter of credit issued by a bank, or any combination
thereof. Such loans will not be made if, as a result, the aggregate of all out-
standing loans of a Fund exceeds 30% of the value of its total assets. There
may be risks of delay in
14
<PAGE>
receiving additional collateral or in recovering the securities loaned or even
a loss of rights in the collateral should the borrower of the securities fail
financially. However, loans are made only to borrowers deemed by the Investment
Adviser to be of good standing when, in the Investment Adviser's judgment, the
income to be earned from the loan justifies the attendant risks.
FORWARD CURRENCY TRANSACTIONS
Each Fund will conduct its currency exchange transactions either on a spot
(i.e. cash) basis at the rate prevailing in the currency exchange markets, or
by entering into forward currency contracts. A forward foreign currency con-
tract involves an obligation to purchase or sell a specific currency for a set
price at a future date. In this respect, forward currency contracts are similar
to foreign currency futures contracts described below; however, unlike futures
contracts, which are traded on recognized commodities exchanges, forward cur-
rency contracts are traded in the interbank market conducted directly between
currency traders (usually large commercial banks) and their customers. Also,
forward currency contracts usually involve delivery of the currency involved
instead of cash payment as in the case of futures contracts.
A Fund's participation in forward currency contracts will be limited to hedg-
ing involving either specific transactions or portfolio positions. Transaction
hedging involves the purchase or sale of foreign currency with respect to spe-
cific receivables or payables of the Fund generally arising in connection with
the purchase or sale of its portfolio securities. The purpose of transaction
hedging is to "lock in" the U.S. dollar equivalent price of such specific secu-
rities. Position hedging is the sale of foreign currency with respect to port-
folio security positions denominated or quoted in that currency. The Funds will
not speculate in foreign currency exchange transactions. Transaction and
position hedging will not be limited to an overall percentage of a Fund's as-
sets, but will be employed as necessary to correspond to particular transac-
tions or positions. A Fund may not hedge its currency positions to an extent
greater than the aggregate market value (at the time of entering into the for-
ward contract) of the securities held in its portfolio denominated, quoted in,
or currently convertible into that particular currency. When the Funds engage
in forward currency transactions, certain asset segregation requirements must
be satisfied. When a Fund takes a long position in a forward currency contract,
it must maintain a segregated account containing cash and/or certain liquid as-
sets equal to the purchase price of the contract, less any margin or deposit.
When a Fund takes a short position in a forward currency contract, the Fund
must maintain a segregated account containing cash and/or certain liquid assets
in an amount equal to the market value of the currency underlying such contract
(less any margin or deposit), which amount must be at least equal to the market
price at which the short position was established. Asset segregation require-
ments are not applicable when a Fund "covers" a forward currency position gen-
erally by entering into an offsetting position. Additional information on for-
ward currency transactions, including a discussion of risks involved in such
transactions (which are similar to those described below under "Futures Con-
tracts"), is included in the Statement of Additional Information.
FUTURES CONTRACTS
Each Fund may also enter into interest rate futures contracts, other types of
financial futures contracts (such as foreign currency futures contracts, which
are similar to forward currency contracts described above) and related futures
options, as well as any index or foreign market futures which are available on
recognized exchanges or in other established financial markets.
The Funds will not engage in futures transactions for speculation, but only as
a hedge against changes in market values of securities which a Fund holds or
intends to purchase. The Funds will engage in futures
15
<PAGE>
transactions only to the extent permitted by the Commodity Futures Trading
Commission ("CFTC") and the Securities and Exchange Commission ("SEC"). When
investing in futures contracts, the Funds must satisfy certain asset segrega-
tion requirements to ensure that the use of futures is unleveraged. When a
Fund takes a long position in a futures contract, it must maintain a segre-
gated account containing cash and/or certain liquid assets equal to the pur-
chase price of the contract, less any margin or deposit. When a Fund takes a
short position in a futures contract, the Fund must maintain a segregated ac-
count containing cash and/or certain liquid assets in an amount equal to the
market value of the securities underlying such contract (less any margin or
deposit), which amount must be at least equal to the market price at which the
short position was established. Asset segregation requirements are not appli-
cable when a Fund "covers" an options or futures position generally by enter-
ing into an offsetting position. Each Fund will limit its hedging transactions
in futures contracts and related options so that, immediately after any such
transaction, the aggregate initial margin that is required to be posted by a
Fund under the rules of the exchange on which the futures contract (or futures
option) is traded, plus any premiums paid by such Fund on its open futures op-
tions positions, does not exceed 5% of such Fund's total assets, after taking
into account any unrealized profits and unrealized losses on the Fund's open
contracts (and excluding the amount that a futures option is "in-the-money" at
the time of purchase). An option to buy a futures contract is "in-the-money"
if the then-current purchase price of the underlying futures contract exceeds
the exercise or strike price; an option to sell a futures contract is "in-the-
money" if the exercise or strike price exceeds the then-current purchase price
of the contract that is the subject of the option.
Transactions in futures as a hedging device may subject a Fund to a number of
risks. Successful use of futures by a Fund is subject to the ability of the
Investment Adviser and Sub-Adviser to correctly anticipate movements in the
direction of the market. In addition, there may be an imperfect correlation,
or no correlation at all, between movements in the price of the futures con-
tracts (or options) and movements in the price of the instruments being
hedged. Further, there is no assurance that a liquid market will exist for any
particular futures contract (or option) at any particular time. Consequently,
a Fund may realize a loss on a futures transaction that is not offset by a fa-
vorable movement in the price of securities which it holds or intends to pur-
chase or may be unable to close a futures position in the event of adverse
price movements.
COVERED CALL OPTIONS
To further increase return on its portfolio securities in accordance with its
investment objective and policies, each Fund may engage in writing covered
call options (options on securities owned by such Fund) and enter into closing
purchase transactions with respect to such options. Such options must be
listed on a national securities exchange and issued by the Options Clearing
Corporation or be traded on foreign exchanges. The aggregate value of the se-
curities subject to options written by the Fund may not exceed 25% of the
value of its net assets. By writing a covered call option, a Fund forgoes the
opportunity to profit from an increase in the market price of the underlying
security above the exercise price except insofar as the premium represents
such a profit, and it will not be able to sell the underlying security until
the option expires or is exercised or the Fund effects a closing purchase
transaction by purchasing an option of the same series. The use of covered
call options is not a primary investment technique of the Funds and such op-
tions will normally be written on underlying securities as to which the In-
vestment Adviser and Sub-Adviser do not anticipate significant short-term cap-
ital appreciation. Additional information on option-writing practices, includ-
ing particular risks thereof, is provided in the Statement of Additional In-
formation.
INVESTMENT COMPANY SECURITIES
In connection with the management of its daily cash positions, each Fund may
invest in securities issued by
16
<PAGE>
other investment companies which invest in high-quality, short-term debt secu-
rities and which determine their net asset value per share based on the amor-
tized cost or penny-rounding method. Each Fund may also purchase shares of in-
vestment companies investing primarily in foreign securities, including so
called "country funds" which have portfolios consisting exclusively of securi-
ties of issuers located in one foreign country. The Regional Funds will limit
their investments in such country funds to those funds which invest in the ap-
propriate regions in light of a Regional Fund's policies. Securities of other
investment companies will be acquired by a Fund within the strict limits pre-
scribed by the Investment Company Act of 1940 (the "1940 Act"). In addition to
the advisory fees and other expenses each Fund bears directly in connection
with its own operations, as a shareholder of another investment company, each
Fund would bear its pro rata portion of the other investment company's advisory
fees and other expenses. As such, a Fund's shareholders would indirectly bear
the expenses of the Fund and the other investment company, some or all of which
would be duplicative.
WHEN-ISSUED AND FORWARD TRANSACTIONS
Each Fund may purchase eligible securities on a "when-issued" basis and may
purchase or sell securities on a "forward commitment" basis. These transactions
involve a commitment by a Fund to purchase or sell particular securities with
payment and delivery taking place in the future, beyond the normal settlement
date, at a stated price and yield. Securities purchased on a "forward commit-
ment" or "when-issued" basis are recorded as an asset and are subject to
changes in value based upon changes in the general level of interest rates. It
is expected that forward commitments and "when-issued" purchases will not ex-
ceed 25% of the value of a Fund's total assets absent unusual market condi-
tions, and that the length of such commitments will not exceed 45 days. The
Funds do not intend to engage in "when-issued" purchases and forward commit-
ments for speculative purposes, but only in furtherance of their investment ob-
jectives.
ILLIQUID SECURITIES
No Fund will knowingly invest more than 10% of the value of its net assets in
securities that are illiquid. Each Fund may purchase securities which are not
registered under the Securities Act of 1933 (the "Act") but which can be sold
to "qualified institutional buyers" in accordance with Rule 144A under the Act.
Any such security will not be considered illiquid so long as it is determined
by the Investment Adviser, acting under guidelines approved and monitored by
the Board, that an adequate trading market exists for that security. This in-
vestment practice could have the effect of increasing the level of illiquidity
in a Fund during any period that qualified institutional buyers become uninter-
ested in purchasing these restricted securities.
PORTFOLIO TURNOVER
Each Fund may sell a portfolio investment immediately after its acquisition if
the Investment Adviser and Sub-Adviser believe that such a disposition is con-
sistent with attaining the investment objective of the particular Fund. Portfo-
lio investments may be sold for a variety of reasons, such as a more favorable
investment opportunity or other circumstances bearing on the desirability of
continuing to hold such investments. A high rate of portfolio turnover may in-
volve correspondingly greater brokerage commission expenses and other transac-
tion costs, which must be borne directly by the Fund and ultimately by its
shareholders. High portfolio turnover may result in the realization of substan-
tial net capital gains. (See "Financial Highlights" and "Taxes--Federal").
INVESTMENT LIMITATIONS
The investment limitations enumerated below are matters of fundamental policy
and may not be changed with respect to a Fund without the vote of the holders
of a majority of its outstanding shares (as defined under "Miscellaneous").
17
<PAGE>
A Fund may not:
1. Purchase securities of any one issuer, other than U.S. Government obliga-
tions, if immediately after such purchase more than 5% of the value of its
total assets would be invested in the securities of such issuer, except that
up to 25% of the value of its total assets may be invested without regard to
this 5% limitation;
2. Borrow money, except from banks for temporary purposes, and then in
amounts not in excess of 10% of the value of its total assets at the time of
such borrowing; or mortgage, pledge, or hypothecate any assets except in con-
nection with any such borrowing and in amounts not in excess of the lesser of
the dollar amounts borrowed and 10% of the value of its total assets at the
time of such borrowing. (This borrowing provision is included solely to fa-
cilitate the orderly sale of portfolio securities to accommodate abnormally
heavy redemption requests and is not for leverage purposes.) The Fund will
not purchase portfolio securities while borrowings in excess of 5% of its to-
tal assets are outstanding. Optioned stock held in escrow is not deemed to be
a pledge;
3. Purchase any securities which would cause more than 25% of the value of
its total assets at the time of purchase to be invested in the securities of
one or more issuers conducting their principal business activities in the
same industry, provided that (a) with respect to the International Fund,
there is no limitation with respect to securities issued or guaranteed by the
U.S. Government or domestic bank obligations, (b) with respect to the Emerg-
ing Americas, Pacific/Asia and Pan European Funds, there is no limitation
with respect to securities issued or guaranteed by the U.S. Government, and
(c) neither all finance companies, as a group, nor all utility companies, as
a group, are considered a single industry for purposes of this policy; and
4. Make loans, except that (i) a Fund may purchase or hold debt securities
in accordance with its investment objective and policies, and may enter into
repurchase agreements with respect to obligations issued or guaranteed by the
U.S. Government, its agencies or instrumentalities, and (ii) a Fund may lend
portfolio securities in an amount not exceeding 30% of its total assets.
The International Fund may not:
5. Knowingly invest more than 10% of the value of its total assets in illiq-
uid securities, including repurchase agreements with remaining maturities in
excess of seven days, restricted securities, and other securities for which
market quotations are not readily available.
* * *
In addition to the investment limitations described above, as a matter of fun-
damental policy for each Fund which may not be changed without the vote of the
holders of a majority of the Fund's outstanding shares, a Fund may not invest
in the securities of any single issuer if, as a result, the Fund holds more
than 10% of the outstanding voting securities of such issuer.
The Emerging Americas, Pan European and Pacific/Asia Funds may not knowingly
invest more than 10% of the value of their respective total assets in illiquid
securities, including repurchase agreements with remaining maturities in excess
of seven days, restricted securities and other securities for which market quo-
tations are not readily available. This investment policy may be changed by
Master Fund's Board of Directors upon reasonable notice to shareholders.
The International Fund will not invest more than 25% of the value of its total
assets in domestic bank obligations.
With respect to all investment policies, if a percentage limitation is satis-
fied at the time of investment, a later increase or decrease in such percentage
result-
18
<PAGE>
ing from a change in value of a Fund's portfolio securities will not consti-
tute a violation of such limitation.
PRICING OF SHARES
The net asset value of each Fund is determined and its Shares are priced at
the close of regular trading hours on the New York Stock Exchange (the "Ex-
change"), currently 4:00 p.m. (Eastern Time). Net asset value and pricing for
each Fund are determined on each day the Exchange and the Investment Adviser
and Sub-Adviser are open for trading ("Business Day"). Currently, the holidays
which the Funds observe are: New Year's Day, Martin Luther King, Jr. Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day, Co-
lumbus Day, Veterans Day, Thanksgiving Day and Christmas. A Fund's net asset
value per Service Share for purposes of pricing sales and redemptions is cal-
culated by dividing the value of all securities and other assets allocable to
its Service Shares, less the liabilities allocable to its Service Shares, by
the number of its outstanding Service Shares.
The Funds' portfolio securities which are primarily traded on a domestic ex-
change are valued at the last sale price on that exchange or, if there is no
recent sale, at the last current bid quotation. Portfolio securities which are
primarily traded on foreign securities exchanges are generally valued at the
preceding closing values of such securities on their respective exchanges, ex-
cept that when an event subsequent to the time when value was so established
is likely to have changed such value, then the fair value of those securities
will be determined by consideration of other factors under the direction of
the Board of Directors. A security which is listed or traded on more than one
exchange is valued at the quotation on the exchange determined to be the pri-
mary market for such security. Investments in foreign debt securities having a
maturity of 60 days or less are valued based upon the amortized cost method.
An option, futures or foreign currency futures contract is valued at the last
sales price quoted on the principal exchange or board of trade on which such
option or contract is traded, or in the absence of a sale, the mean between
the last bid and asked prices. A forward currency contract is valued based on
the last published forward currency rate which reflects the duration of the
contract and the value of the underlying currency. All other foreign securi-
ties are valued at the last current bid quotation if market quotations are
available, or at fair value as determined in accordance with guidelines
adopted by the Board of Directors. For valuation purposes, quotations of for-
eign securities in foreign currency are converted to U.S. dollars equivalent
at the prevailing market rate on the day of conversion.
Some of the securities acquired by the Funds may be traded on foreign ex-
changes or over-the-counter markets on days which are not Business Days. In
such cases, the net asset value of the Shares may be significantly affected on
days when investors can neither purchase nor redeem a Fund's Shares.
Master Fund's administrators have undertaken to price the securities in each
Fund's portfolio, and may use one or more independent pricing services in con-
nection with this service.
HOW TO PURCHASE AND REDEEM SHARES
DISTRIBUTOR
Shares in each Fund are continuously offered for sale by Master Fund's spon-
sor and distributor, Edgewood Services, Inc. (the "Distributor"), a wholly-
owned subsidiary of Federated Investors. The Distributor is a registered
broker/dealer. Its principal offices are at Federated Investors Tower, 1001
Liberty Avenue, Pittsburgh, PA 15222-3779.
PURCHASE OF SHARES
The Distributor has established several procedures for purchasing Shares in
order to accommodate different types of investors.
19
<PAGE>
Shares may be purchased directly by individuals ("Direct Investors") or by in-
stitutions ("Institutional Investors" and, collectively with Direct Investors,
"Investors"). Shares may also be purchased by customers ("Customers") of the
Investment Adviser, its affiliates and correspondent banks, and other institu-
tions ("Shareholder Organizations") that have entered into shareholder servic-
ing agreements with Master Fund. A Shareholder Organization may elect to hold
of record Shares for its Customers and to record beneficial ownership of Shares
on the account statements provided by it to its Customers. If it does so, it is
the Shareholder Organization's responsibility to transmit to the Distributor
all purchase orders for its Customers and to transmit, on a timely basis, pay-
ment for such orders to Mutual Funds Service Company ("MFSC"), the Funds' sub-
transfer agent, in accordance with the procedures agreed to by the Shareholder
Organization and the Distributor. Confirmations of all such Customer purchases
and redemptions will be sent by MFSC to the particular Shareholder Organiza-
tion. As an alternative, a Shareholder Organization may elect to establish its
Customers' accounts of record with MFSC. In this event, even if the Shareholder
Organization continues to place its Customers' purchase and redemption orders
with the Funds, MFSC will send confirmations of such transactions and periodic
account statements directly to Customers. A Shareholder Organization may also
elect to establish its Customers as record holders.
Master Fund enters into Shareholder servicing agreements with Shareholder Or-
ganizations which agree to provide their Customers various shareholder adminis-
trative services with respect to their Shares (hereinafter referred to as
"Service Organizations"). Shares in the Funds bear the expenses of fees payable
to Service Organizations for such services. See "Management of the Funds--Serv-
ice Organizations."
Customers wishing to purchase Shares through their Shareholder Organization
should contact such entity directly for appropriate instructions. (For a list
of Shareholder Organizations in your area, call (800) 446-1012.) An investor
purchasing Shares through a registered investment adviser or certified finan-
cial planner may incur transaction charges in connection with such purchases.
Such investors should contact their registered investment adviser or certified
financial planner for further information on transaction fees. Investors may
also purchase Shares directly in accordance with procedures described below un-
der "Purchase Procedures."
PUBLIC OFFERING PRICE
The public offering price for Shares of each Fund is the sum of the net asset
value of the Shares purchased plus a sales load according to the table below:
<TABLE>
<CAPTION>
REALLOWANCE
TOTAL SALES CHARGES TO DEALERS
------------------------------ --------------
AS A % OF AS A % OF AS A % OF
OFFERING PRICE NET ASSET OFFERING PRICE
AMOUNT OF TRANSACTION PER SHARE VALUE PER SHARE PER SHARE
--------------------- -------------- --------------- --------------
<S> <C> <C> <C>
Less than $50,000................. 4.50% 4.71% 4.00%
$50,000 to $99,999................ 4.00 4.17 3.50
$100,000 to $249,999.............. 3.50 3.63 3.00
$250,000 to $499,999.............. 3.00 3.09 2.50
$500,000 to $999,999.............. 2.00 2.05 1.50
$1,000,000 to $1,999,999.......... 1.00 1.00 .50
$2,000,000 and over............... .50 .50 .25
</TABLE>
The reallowance to dealers may be changed from time to time but will remain
the same for all such dealers.
At various times the Distributor may implement programs under which a dealer's
sales force may be eligible to win nominal awards for certain sales efforts or
under which the Distributor will reallow to any dealer that sponsors sales con-
tests or recognition programs conforming to criteria established by the Dis-
tributor, or participates in sales programs sponsored by the Distributor, an
amount not exceeding the total applicable sales charges on the sales generated
by the dealer at the public offering price during such programs. Also, the Dis-
tributor in its discretion may from time to time, pursuant to objective crite-
ria established by the Distributor, pay fees to qualifying dealers for certain
services or activities which are pri-
20
<PAGE>
marily intended to result in sales of Shares of the Funds. If any such program
is made available to any dealer, it will be made available to all dealers on
the same terms and conditions. Payments made under such programs will be made
by the Distributor out of its own assets and not out of the assets of the
Funds. These programs will not change the price of Shares or the amount that
the Funds will receive from such sales.
The sales load described above will not be applicable to: (a) purchases of
Shares by customers of the Investment Adviser or its affiliates; (b) trust,
agency or custodial accounts opened through the trust department of a bank,
trust company or thrift institution, provided that appropriate notification of
such status is given at the time of investment; (c) companies, corporations and
partnerships (excluding full service broker/dealers and financial planners,
registered investment advisers and depository institutions not covered by the
exemptions in (d) and (e) below); (d) financial planners and registered invest-
ment advisers not affiliated with or clearing purchases through full service
broker/dealers; (e) purchases of Shares by depository institutions for their
own account as principal; (f) exchange transactions (described below under "In-
vestor Programs--Exchange Privilege") where the Shares being exchanged were ac-
quired in connection with the distribution of assets held in trust, agency or
custodial accounts maintained with the trust department of a bank; (g) corpo-
rate/ business retirement plans (such as 401(k), 403(b)(7), 457 and Keogh ac-
counts) sponsored by the Distributor and IRA accounts sponsored by the Invest-
ment Adviser; (h) company-sponsored employee pension or retirement plans making
direct investments in the Funds; (i) purchases of Shares by officers, trustees,
directors, employees and retirees of Master Fund, UST Master Tax-Exempt Funds,
Inc. ("Master Tax-Exempt Fund"), the Investment Adviser, the Distributor or of
any direct or indirect affiliate of any of them; (j) purchases of Shares by all
beneficial shareholders of Master Fund or Master Tax-Exempt Fund as of May 22,
1989; (k) purchases of Shares by investment advisers registered under the In-
vestment Advisers Act of 1940 for their customers through an omnibus account
established with United States Trust Company of New York; (l) purchases of
Shares by directors, officers and employees of brokers and dealers selling
shares pursuant to a selling agreement with Master Fund and Master Tax-Exempt
Fund; (m) purchases of shares by investors who are members of affinity groups
serviced by USAffinity Investments Limited Partnership; and (n) customers of
certain financial institutions who purchase Shares through a registered repre-
sentative of UST Financial Services Corp. on the premises of their financial
institutions. In addition, no sales load is charged on the reinvestment of div-
idends or distributions or in connection with certain share exchange transac-
tions. Investors who have previously redeemed shares in an "Eligible Fund" (as
defined below) on which a sales load has been paid also have a one-time privi-
lege of purchasing shares of another "Eligible Fund" at net asset value without
a sales charge, provided that such privilege will apply only to purchases made
within 30 calendar days from the date of redemption and only with respect to
the amount of the redemption. These exemptions to the imposition of a sales
load are due to the nature of the investors and/or reduced sales effort that
will be needed in obtaining investments.
Quantity Discounts
An investor in the Funds may be entitled to reduced sales charges through
Rights of Accumulation, a Letter of Intent or a combination of investments, as
described below, even if the investor does not wish to make an investment of a
size that would normally qualify for a quantity discount.
In order to obtain quantity discount benefits, an investor must notify MFSC at
the time of purchase that he or she would like to take advantage of any of the
discount plans described below. Upon such notification, the investor will re-
ceive the lowest applicable sales charge. Quantity discounts may be modified or
terminated at any time and are subject to confirma-
21
<PAGE>
tion of an investor's holdings through a check of appropriate records. For more
information about quantity discounts, please call (800) 446-1012 or contact
your Shareholder Organization.
Rights of Accumulation. A reduced sales load applies to any purchase of shares
of any portfolio of Master Fund and Master Tax-Exempt Fund that is sold with a
sales load ("Eligible Fund") where an investor's then current aggregate invest-
ment is $50,000 or more. "Aggregate investment" means the total of: (a) the
dollar amount of the then current purchase of shares of an Eligible Fund, and
(b) the value (based on current net asset value) of previously purchased and
beneficially owned shares of any Eligible Fund on which a sales load has been
paid. If, for example, an investor beneficially owns shares of one or more Eli-
gible Funds with an aggregate current value of $49,000 on which a sales load
has been paid and subsequently purchases shares of an Eligible Fund having cur-
rent value of $1,000, the load applicable to the subsequent purchase would be
reduced to 4.00% of the offering price. Similarly, with respect to each subse-
quent investment, all shares of Eligible Funds that are beneficially owned by
the investor at the time of investment may be combined to determine the appli-
cable sales load.
Letter of Intent. By completing the Letter of Intent included as part of the
New Account Application, an investor becomes eligible for the reduced sales
load applicable to the total number of Eligible Fund shares purchased in a 13-
month period pursuant to the terms and under the conditions set forth below and
in the Letter of Intent. To compute the applicable sales load, the offering
price of shares of an Eligible Fund on which a sales load has been paid, bene-
ficially owned by an investor on the date of submission of the Letter of In-
tent, may be used as a credit toward completion of the Letter of Intent. Howev-
er, the reduced sales load will be applied only to new purchases.
MFSC will hold in escrow shares equal to 5% of the amount indicated in the
Letter of Intent for payment of a higher sales load if an investor does not
purchase the full amount indicated in the Letter of Intent. The escrow will be
released when an investor fulfills the terms of the Letter of Intent by pur-
chasing the specified amount. If purchases qualify for a further sales load re-
duction, the sales load will be adjusted to reflect an investor's total pur-
chases. If total purchases are less than the amount specified, an investor will
be requested to remit an amount equal to the difference between the sales load
actually paid and the sales load applicable to the total purchases. If such re-
mittance is not received within 20 days, MFSC, as attorney-in-fact pursuant to
the terms of the Letter of Intent and at the Distributor's direction, will re-
deem an appropriate number of shares held in escrow to realize the difference.
Signing a Letter of Intent does not bind an investor to purchase the full
amount indicated at the sales load in effect at the time of signing, but an in-
vestor must complete the intended purchase in accordance with the terms of the
Letter of Intent to obtain the reduced sales load. To apply, an investor must
indicate his or her intention to do so under a Letter of Intent at the time of
purchase.
Qualification for Discounts. For purposes of applying the Rights of Accumula-
tion and Letter of Intent privileges described above, the scale of sales loads
applies to the combined purchases made by any individual and/or spouse purchas-
ing securities for his, her or their own account or for the account of any mi-
nor children, or the aggregate investments of a trustee or custodian of any
qualified pension or profit sharing plan or IRA established (or the aggregate
investment of a trustee or other fiduciary) for the benefit of the persons
listed above.
PURCHASE PROCEDURES
General
Direct Investors may purchase Shares by completing the Application for pur-
chase of Shares accompa-
22
<PAGE>
nying this Prospectus and mailing it, together with a check payable to UST
Master Funds, to:
UST Master Funds
c/o Mutual Funds Service Company
P.O. Box 2798
Boston, MA 02208-2798
Subsequent investments in an existing account in any Fund may be made at any
time by sending to the above address a check payable to UST Master Funds along
with: (a) the detachable form that regularly accompanies the confirmation of a
prior transaction; (b) a subsequent order form which may be obtained from
MFSC; or (c) a letter stating the amount of the investment, the name of the
Fund and the account number in which the investment is to be made. Institu-
tional Investors may purchase Shares by transmitting their purchase orders to
MFSC by telephone at (800) 446-1012 or by terminal access. Institutional In-
vestors must pay for Shares with Federal funds or funds immediately available
to MFSC.
Purchases by Wire
Investors may also purchase Shares by wiring Federal funds to MFSC. Prior to
making an initial investment by wire, an Investor must telephone MFSC at (800)
446-1012 (from overseas, call (617) 557-8280) for instructions. Federal funds
and registration instructions should be wired through the Federal Reserve Sys-
tem to:
United States Trust Company of New York
ABA #021001318
UST Funds, Account No. 2901447
For further credit to:
UST Master Funds
Wire Control Number
Account Registration
(including account number)
Investors making initial investments by wire must promptly complete the Ap-
plication accompanying this Prospectus and forward it to MFSC. Redemptions by
Investors will not be processed until the completed Application for purchase
of Shares has been received by MFSC and accepted by the Distributor. Investors
making subsequent investments by wire should follow the above instructions.
Other Purchase Information
Except as provided in "Investor Programs" below, the minimum initial invest-
ment by an Investor or initial aggregate investment by a Shareholder Organiza-
tion investing on behalf of its Customers is $500 per Fund. The minimum subse-
quent investment for both types of investors is $50 per Fund. Customers may
agree with a particular Shareholder Organization to make a minimum purchase
with respect to their accounts. Depending upon the terms of the particular ac-
count, Shareholder Organizations may charge a Customer's account fees for au-
tomatic investment and other cash management services provided. Master Fund
reserves the right to reject any purchase order, in whole or in part, or to
waive any minimum investment requirements.
REDEMPTION PROCEDURES
Customers of Shareholder Organizations holding Shares of record may redeem
all or part of their investments in the Funds in accordance with procedures
governing their accounts at the Shareholder Organizations. It is the responsi-
bility of the Shareholder Organizations to transmit redemption orders to MFSC
and credit such Customer accounts with the redemption proceeds on a timely ba-
sis. Redemption orders for Institutional Investors must be transmitted to MFSC
by telephone at (800) 446-1012 or by terminal access. No charge for wiring re-
demption payments to Shareholder Organizations or Institutional Investors is
imposed by Master Fund, although Shareholder Organizations may charge a Cus-
tomer's account for wiring redemption proceeds. Information relating to such
redemption services and charges, if any, is available from the Shareholder Or-
ganizations. An investor redeeming Shares through a registered investment ad-
viser or cer
23
<PAGE>
tified financial planner may incur transaction charges in connection with such
redemptions. Such investors should contact their registered investment adviser
or certified financial planner for further information on transaction fees. In-
vestors may redeem all or part of their Shares in accordance with any of the
procedures described below (these procedures also apply to Customers of Share-
holder Organizations for whom individual accounts have been established with
MFSC).
Redemption by Mail
Shares may be redeemed by a Direct Investor by submitting a written request
for redemption to:
UST Master Funds
c/o Mutual Funds Service Company
P.O. Box 2798
Boston, MA 02208-2798
A written redemption request to MFSC must (i) state the number of Shares to be
redeemed, (ii) identify the shareholder account number and tax identification
number, and (iii) be signed by each registered owner exactly as the Shares are
registered. If the Shares to be redeemed were issued in certificate form, the
certificates must be endorsed for transfer (or accompanied by a duly executed
stock power) and must be submitted to MFSC together with the redemption re-
quest. A redemption request for an amount in excess of $50,000 per account, or
for any amount if the proceeds are to be sent elsewhere than the address of
record, must be accompanied by signature guarantees from any eligible guarantor
institution approved by MFSC in accordance with its Standards, Procedures and
Guidelines for the Acceptance of Signature Guarantees ("Signature Guarantee
Guidelines"). Eligible guarantor institutions generally include banks,
broker/dealers, credit unions, national securities exchanges, registered secu-
rities associations, clearing agencies and savings associations. All eligible
guarantor institutions must participate in the Securities Transfer Agents Me-
dallion Program ("STAMP") in order to be approved by MFSC pursuant to the Sig-
nature Guarantee Guidelines. Copies of the Signature Guarantee Guidelines and
information on STAMP can be obtained from MFSC at (800) 446-1012 or at the ad-
dress given above. MFSC may require additional supporting documents for redemp-
tions made by corporations, executors, administrators, trustees and guardians.
A redemption request will not be deemed to be properly received until MFSC re-
ceives all required documents in proper form. Payment for Shares redeemed will
ordinarily be made by mail within five Business Days after proper receipt by
MFSC of the redemption request. Questions with respect to the proper form for
redemption requests should be directed to MFSC at (800) 446-1012 (from over-
seas, call (617) 557-8280).
Redemption by Wire or Telephone
Direct Investors who have so indicated on the Application, or have subse-
quently arranged in writing to do so, may redeem Shares by instructing MFSC by
wire or telephone to wire the redemption proceeds directly to the Direct In-
vestor's account at any commercial bank in the United States. Customers of cer-
tain Shareholder Organizations who are shareholders of record may redeem Shares
by instructing MFSC by telephone to mail a check for redemption proceeds of
$500 or more to the shareholder of record at his or her address of record. In-
stitutional Investors may also redeem Shares by instructing MFSC by telephone
at (800) 446-1012 or by terminal access. Only redemptions of $500 or more will
be wired to a Direct Investor's account. An $8.00 fee for each wire redemption
by a Direct Investor is deducted by MFSC from the proceeds of the redemption.
The redemption proceeds for Direct Investors must be paid to the same bank and
account as designated on the Application or in written instructions subse-
quently received by MFSC.
In order to arrange for redemption by wire or telephone after an account has
been opened or to change the bank or account designated to receive redemption
24
<PAGE>
proceeds, a Direct Investor must send a written request to Master Fund, c/o
MFSC, at the address listed above under "Redemption by Mail." Such requests
must be signed by the Direct Investor, with signatures guaranteed (see "Redemp-
tion by Mail" above, for details regarding signature guarantees). Further docu-
mentation may be requested.
MFSC and the Distributor reserve the right to refuse a wire or telephone re-
demption if it is believed advisable to do so. Procedures for redeeming Shares
by wire or telephone may be modified or terminated at any time by Master Fund,
MFSC or the Distributor. MASTER FUND, MFSC AND THE DISTRIBUTOR WILL NOT BE LIA-
BLE FOR ANY LOSS, LIABILITY, COST OR EXPENSE FOR ACTING UPON TELEPHONE INSTRUC-
TIONS THAT ARE REASONABLY BELIEVED TO BE GENUINE. IN ATTEMPTING TO CONFIRM THAT
TELEPHONE INSTRUCTIONS ARE GENUINE, MASTER FUND WILL USE SUCH PROCEDURES AS ARE
CONSIDERED REASONABLE, INCLUDING RECORDING THOSE INSTRUCTIONS AND REQUESTING
INFORMATION AS TO ACCOUNT REGISTRATION.
If any portion of the Shares to be redeemed represents an investment made by
personal check, Master Fund and MFSC reserve the right not to honor the redemp-
tion until MFSC is reasonably satisfied that the check has been collected in
accordance with the applicable banking regulations which may take up to 15
days. A Direct Investor who anticipates the need for more immediate access to
his or her investment should purchase Shares by Federal funds or bank wire or
by certified or cashier's check. Banks normally impose a charge in connection
with the use of bank wires, as well as certified checks, cashier's checks and
Federal funds. If a Direct Investor's purchase check is not collected, the pur-
chase will be cancelled and MFSC will charge a fee of $25.00 to the Direct In-
vestor's account.
During periods of substantial economic or market change, telephone redemptions
may be difficult to complete. If an investor is unable to contact MFSC by tele-
phone, the Investor may also deliver the redemption request to MFSC in writing
at the address noted above under "How to Purchase and Redeem Shares--Redemption
by Mail."
Other Redemption Information
Except as described in "Investor Programs" below, Investors may be required to
redeem Shares in a Fund after 60 days' written notice if due to investor re-
demptions the balance in the particular account with respect to the Fund re-
mains below $500. If a Customer has agreed with a particular Shareholder Organ-
ization to maintain a minimum balance in his or her account at the institution
with respect to Shares of a Fund, and the balance in such account falls below
that minimum, the Customer may be obliged by the Shareholder Organization to
redeem all or part of his or her Shares to the extent necessary to maintain the
required minimum balance.
GENERAL
Purchase and redemption orders for Shares which are received and accepted
prior to the close of regular trading hours on the Exchange (currently 4:00
p.m., Eastern Time) on any Business Day are priced according to the net asset
value determined on that day. Purchase orders for Shares received and accepted
after the close of regular trading hours on the Exchange are priced at the net
asset value per Share determined on the next Business Day.
INVESTOR PROGRAMS
EXCHANGE PRIVILEGE
Investors and Customers of Shareholder Organizations may, after appropriate
prior authorization and without an exchange fee imposed by the Funds, exchange
their Shares having a value of at least $500 for Service Shares of any other
portfolio of Master Fund or Master Tax-Exempt Fund, provided that such other
shares may legally be sold in the state of the Investor's residence.
Master Fund currently offers, in addition to the International Fund and Re-
gional Funds, 16 additional portfolios as follows:
Money Fund, a money market fund seeking as high a level of current income as
is consistent with liquidity and stability of principal through investments
in high-quality money market instruments maturing within 13 months;
Government Money Fund, a money market fund seeking as high a level of cur-
rent income as is consistent with liquidity and stability of principal
25
<PAGE>
through investments in obligations issued or guaranteed by the U.S. Govern-
ment, its agencies or instrumentalities and repurchase agreements collateral-
ized by such obligations;
Treasury Money Fund, a money market fund seeking current income generally
exempt from state and local income taxes through investments in direct short-
term obligations issued by the U.S. Treasury and certain agencies or instru-
mentalities of the U.S. Government;
Short-Term Government Securities Fund, a fund seeking a high level of cur-
rent income by investing principally in obligations issued or guaranteed by
the U.S. Government, its agencies or instrumentalities and repurchase agree-
ments collateralized by such obligations, and having a dollar-weighted aver-
age portfolio maturity of 1 to 3 years;
Intermediate-Term Managed Income Fund, a fund seeking a high level of cur-
rent interest income by investing principally in investment grade or better
debt obligations and money market instruments, and having a dollar-weighted
average portfolio maturity of 3 to 10 years;
Managed Income Fund, a fund seeking higher current income through invest-
ments in investment grade debt obligations, U.S. Government obligations and
money market instruments;
Equity Fund, a fund seeking primarily long-term capital appreciation through
investments in a diversified portfolio of primarily equity securities;
Income and Growth Fund, a fund investing substantially in equity securities
in seeking to provide moderate current income and to achieve capital appreci-
ation as a secondary objective;
Long-Term Supply of Energy Fund, a fund seeking long-term capital apprecia-
tion by investing in companies benefitting from the availability, development
and delivery of secure hydrocarbon and other energy sources;
Productivity Enhancers Fund, a fund seeking long-term capital appreciation
by investing in companies benefitting from their roles as innovators, devel-
opers and suppliers of goods and services which enhance service and manufac-
turing productivity or companies that are most effective at obtaining and ap-
plying productivity enhancement developments;
Environmentally-Related Products and Services Fund, a fund seeking long-term
capital appreciation by investing in companies benefitting from their provi-
sion of products, technologies and services related to conservation, protec-
tion and restoration of the environment;
Aging of America Fund, a fund seeking long-term capital appreciation by in-
vesting in companies benefitting from the changes occurring in the demo-
graphic structure of the U.S. population, particularly of its growing popula-
tion of individuals over the age of 40;
Communication and Entertainment Fund, a fund seeking long-term capital ap-
preciation by investing in companies benefitting from the technological and
international transformation of the communications and entertainment indus-
tries, particularly the convergence of information, communication and enter-
tainment media;
Business and Industrial Restructuring Fund, a fund seeking long-term capital
appreciation by investing in companies benefitting from their restructuring
or redeployment of assets and operations in order to become more competitive
or profitable;
Global Competitors Fund, a fund seeking long-term capital appreciation by
investing in U.S.-based companies benefitting from their position as effec-
tive and strong competitors on a global basis; and
Early Life Cycle Fund, a fund seeking long-term capital appreciation by in-
vesting in smaller companies in the earlier stages of their development or
larger or more mature companies engaged in new and higher growth potential
operations.
Master Tax-Exempt Fund currently offers five portfolios as follows:
Short-Term Tax-Exempt Fund, a diversified tax-exempt money market fund seek-
ing a moderate level of current interest income exempt from Federal in-
26
<PAGE>
come taxes through investing primarily in high-quality municipal obligations
maturing within 13 months;
Short-Term Tax-Exempt Securities Fund, a diversified fund seeking a high
level of current interest income exempt from Federal income taxes through in-
vestments in municipal obligations and having a dollar-weighted average port-
folio maturity of 1 to 3 years;
Intermediate-Term Tax-Exempt Fund, a diversified fund seeking a high level
of current income exempt from Federal income taxes through investments in mu-
nicipal obligations and having a dollar-weighted average portfolio maturity
of three to ten years;
Long-Term Tax-Exempt Fund, a diversified fund seeking to maximize over time
current income exempt from Federal income taxes, investing primarily in mu-
nicipal obligations and having a dollar-weighted average portfolio maturity
of 10 to 30 years; and
New York Intermediate-Term Tax-Exempt Fund, a nondiversified fund designed
to provide New York investors with a high level of current income exempt from
Federal and, to the extent possible, New York state and New York City income
taxes; this fund invests primarily in New York municipal obligations and has
a dollar-weighted average portfolio maturity of three to ten years.
An exchange involves a redemption of all or a portion of the Shares and the
investment of the redemption proceeds in shares of another portfolio of Master
Fund or Master Tax-Exempt Fund. The redemption will be made at the per Share
net asset value of the Shares being redeemed next determined after the exchange
request is received. The Service Shares of the portfolio to be acquired will be
purchased at the per share net asset value of those shares (plus any applicable
sales load) next determined after acceptance of the exchange request. In order
to prevent abuse of this privilege to the disadvantage of other shareholders,
Master Fund and Master Tax-Exempt Fund reserve the right to limit the number of
exchange requests of Investors and Customers of Shareholder Organizations to no
more than six per year. No sales load will be payable on shares to be acquired
through an exchange to the extent that a sales load was previously paid on the
Shares being exchanged.
Investors may find the exchange privilege useful if their investment objec-
tives or market outlook should change after they invest in a Fund. For further
information regarding exchange privileges, shareholders should call (800) 446-
1012 (from overseas, call ((617) 557-8280). Investors exercising the exchange
privilege with the other portfolios of Master Fund or Master Tax-Exempt Fund
should request and review the prospectuses of such funds. Such prospectuses may
be obtained by calling the numbers listed above. Master Fund may modify or ter-
minate the exchange program at any time upon 60 days written notice to share-
holders, and may reject any exchange request. MASTER FUND, MFSC AND THE DIS-
TRIBUTOR ARE NOT RESPONSIBLE FOR THE AUTHENTICITY OF EXCHANGE REQUESTS RECEIVED
BY TELEPHONE THAT ARE REASONABLY BELIEVED TO BE GENUINE. IN ATTEMPTING TO CON-
FIRM THAT TELEPHONE INSTRUCTIONS ARE GENUINE, MASTER FUND WILL USE SUCH PROCE-
DURES AS ARE CONSIDERED REASONABLE, INCLUDING RECORDING THOSE INSTRUCTIONS AND
REQUESTING INFORMATION AS TO ACCOUNT REGISTRATION.
For Federal income tax purposes, an exchange of Shares is a taxable event and,
accordingly, a capital gain or loss may be realized by an investor. Before mak-
ing an exchange, an investor should consult a tax or other financial adviser to
determine tax consequences.
SYSTEMATIC WITHDRAWAL PLAN
An Investor who owns Shares of a Fund with a value of $10,000 or more may es-
tablish a Systematic Withdrawal Plan. The Investor may request a declining-bal-
ance withdrawal, a fixed-dollar withdrawal, a fixed-share withdrawal, or a
fixed-percentage withdrawal (based on the current value of Shares in the
27
<PAGE>
account) on a monthly, quarterly, semi-annual or annual basis. To initiate the
Systematic Withdrawal Plan, an investor must complete the Supplemental Applica-
tion contained in this Prospectus and mail it to MFSC at the address given
above. Further information on establishing a Systematic Withdrawal Plan may be
obtained by calling (800) 446-1012 (from overseas, call (617) 557-8280).
Shareholder Organizations may, at their discretion, establish similar system-
atic withdrawal plans with respect to the Shares held by their Customers. In-
formation about such plans and the applicable procedures may be obtained by
Customers directly from their institutions.
RETIREMENT PLANS
Shares are available for purchase by Investors in connection with the follow-
ing tax-deferred prototype retirement plans offered by United States Trust Com-
pany of New York:
IRAs (including "rollovers" from existing retirement plans) for individuals
and their spouses;
Profit Sharing and Money-Purchase Plans for corporations and self-employed
individuals and their partners to benefit themselves and their employees; and
Keogh Plans for self-employed individuals.
Investors investing in the Funds pursuant to Profit Sharing and Money-Purchase
Plans and Keogh Plans are not subject to the minimum investment and forced re-
demption provisions described above. The minimum initial investment for IRAs is
$250 per Fund and the minimum subsequent investment is $50 per Fund. Detailed
information concerning eligibility, service fees and other matters related to
these plans can be obtained by calling (800) 446-1012 (from overseas, call
(617) 557-8280). Customers of Shareholder Organizations may purchase Shares of
the Funds pursuant to retirement plans if such plans are offered by their
Shareholder Organizations.
AUTOMATIC INVESTMENT PROGRAM
The Automatic Investment Program permits Investors to purchase Shares (minimum
of $50 per Fund per transaction) at regular intervals selected by the Investor.
The minimum initial investment for an Automatic Investment Program account is
$50 per Fund. Provided the Investor's financial institution allows automatic
withdrawals, Shares are purchased by transferring funds from an Investor's
checking, bank money market or NOW account designated by the Investor. At the
Investor's option, the account designated will be debited in the specified
amount, and Shares will be purchased, once a month, on either the first or fif-
teenth day, or twice a month, on both days.
The Automatic Investment Program is one means by which an Investor may use
"Dollar Cost Averaging" in making investments. Instead of trying to time market
performance, a fixed dollar amount is invested in Shares at predetermined in-
tervals. This may help Investors to reduce their average cost per share because
the agreed upon fixed investment amount allows more Shares to be purchased dur-
ing periods of lower share prices and fewer Shares during periods of higher
prices. In order to be effective, Dollar Cost Averaging should usually be fol-
lowed on a sustained, consistent basis. Investors should be aware, however,
that Shares bought using Dollar Cost Averaging are purchased without regard to
their price on the day of investment or to market trends. In addition, while
Investors may find Dollar Cost Averaging to be beneficial, it will not prevent
a loss if an Investor ultimately redeems his Shares at a price which is lower
than their purchase price.
To establish an Automatic Investment account permitting Investors to use the
Dollar Cost Averaging investment method described above, an Investor must com-
plete the Supplemental Application contained in this Prospectus and mail it to
MFSC. An Investor may cancel his participation in this Program
28
<PAGE>
or change the amount of purchase at any time by mailing written notification to
MFSC, P.O. Box 2798, Boston, MA 02208-2798 and notification will be effective
three Business Days following receipt. Master Fund may modify or terminate this
privilege at any time or charge a service fee, although no such fee currently
is contemplated. An Investor may also implement the Dollar Cost Averaging
method on his own initiative or through other entities.
DIVIDENDS AND DISTRIBUTIONS
Dividends from the net income of each Fund are declared and paid semi-annual-
ly. For dividend purposes, a Fund's investment income is reduced by accrued ex-
penses directly attributable to that Fund and the general expenses of Master
Fund prorated to that Fund on the basis of its relative net assets. A Fund's
net investment income available for distribution to the holders of Service
Shares will be reduced by the amount of other expenses allocated to such se-
ries. Net realized capital gains are distributed at least annually. Dividends
and distributions will reduce the net asset value of a Fund by the amount of
the dividend or distribution. All dividends and distributions paid on Shares
held of record by the Investment Adviser and its affiliates or correspondent
banks will be paid in cash. Direct and Institutional Investors and Customers of
other Shareholder Organizations will receive dividends and distributions in ad-
ditional Service Shares (as determined on the payable date), unless they have
requested in writing (received by MFSC at Master Fund's address prior to the
payment date) to receive dividends and distributions in cash. Reinvested divi-
dends and distributions receive the same tax treatment as those paid in cash.
TAXES
FEDERAL
Each of the Funds qualified for its last taxable year as a "regulated invest-
ment company" under the Internal Revenue Code of 1986, as amended (the "Code").
Each Fund expects to so qualify in future years. Such qualification generally
relieves a Fund of liability for Federal income taxes to the extent its earn-
ings are distributed in accordance with the Code.
Qualification as a regulated investment company under the Code requires, among
other things, that a Fund distribute to its shareholders at least 90% of its
investment company taxable income for each taxable year. In general, a Fund's
investment company taxable income will be its taxable income (including divi-
dends, interest and short-term capital gains), subject to certain adjustments
and excluding the excess of any net long-term capital gain for the taxable year
over the net short-term capital loss, if any, for such year. Each Fund intends
to distribute substantially all of its investment company income each year.
Such dividends will be taxable as ordinary income to a Fund's shareholders who
are not currently exempt from Federal income taxes, whether such income is re-
ceived in cash or reinvested in additional Shares. (Federal income taxes for
distributions to IRAs and qualified pension plans are deferred under the Code.)
It is anticipated that none of the dividends paid by a Fund will be eligible
for the dividends received deduction for corporations.
Distributions by a Fund of the excess of its net long-term capital gain over
its short-term capital loss are taxable to shareholders as long-term capital
gain, regardless of how long the shareholders have held their Shares and
whether such gains are received in cash or reinvested in additional Shares.
Dividends declared in October, November or December of any year payable to
shareholders of record on a specified date in such months will be deemed to
have been received by shareholders and paid by a Fund on December 31 of such
year in the event such dividends are actually paid during January of the fol-
lowing year.
An investor considering buying Shares of a Fund on or just before the record
date of a dividend should be aware that the amount of the forthcoming dividend
payment, although in effect a return of capital, will be taxable to them.
29
<PAGE>
A taxable gain or loss may be realized by a shareholder upon his redemption,
transfer or exchange of Shares, depending upon the tax basis of such Shares and
their price at the time of redemption, transfer or exchange. If a shareholder
holds Shares for six months or less and during that time receives a capital
gain dividend on those Shares, any loss recognized on the sale or exchange of
those Shares will be treated as a long-term capital loss to the extent of the
capital gain dividend. Generally, a shareholder may include sales charges in-
curred upon the purchase of Shares in his tax basis for such Shares for the
purpose of determining gain or loss on a redemption, transfer or exchange of
such Shares. However, if the shareholder effects an exchange of Shares of a
Fund for shares of another portfolio of Master Fund or Master Tax-Exempt Fund
within 90 days of the purchase and is able to reduce the sales charges applica-
ble to the new shares (by virtue of the exchange privilege), the amount equal
to such reduction may not be included in the tax basis of the shareholder's ex-
changed Shares, but may be included (subject to the same limitation) in the tax
basis of the new shares.
It is expected that dividends and certain interest income earned by each Fund
from foreign securities will be subject to foreign withholding taxes or other
taxes. So long as more than 50% of the value of a Fund's total assets at the
close of any taxable year consists of equity or debt securities of foreign cor-
porations, such Fund may elect, for U.S. Federal income tax purposes, to treat
certain foreign taxes paid by it, including generally any withholding taxes and
other foreign income taxes, as paid by its shareholders. A Fund may make this
election. As a consequence, the amount of such foreign taxes paid by a Fund
will be included in its shareholders' income pro rata (in addition to taxable
distributions actually received by them), and each shareholder will be entitled
either (a) to credit their proportionate amounts of such taxes against their
U.S. Federal income tax liabilities or (b) if they itemize their deductions, to
deduct such proportionate amounts from their U.S. taxable income.
Qualification as a regulated investment company under the Code also requires
that a Fund satisfy certain requirements with respect to the source of its in-
come for a taxable year. At least 90% of the gross income of a Fund must be de-
rived from dividends, interest, payments with respect to securities loans,
gains from the sale or other disposition of stock, securities or foreign cur-
rencies, and other income (including, but not limited to, gains from options,
futures, or forward contracts) derived with respect to the Fund's business of
investing in such stock, securities or currencies. The Treasury Department may
by regulation exclude from qualifying income foreign currency gains which are
not directly related to a Fund's principal business of investing in stock or
securities, or options and futures with respect to stock or securities. Some of
the investments that a Fund may make (such as gold bullion) may not be securi-
ties or may not produce qualifying income. Therefore, it may be necessary for
the Investment Adviser and Sub-Adviser to restrict the investments of a Fund to
ensure that non-qualifying income does not exceed 10% of such Fund's total
gross income for a taxable year.
The foregoing summarizes some of the important tax considerations generally
affecting the Funds and their shareholders and is not intended as a substitute
for careful tax planning. Accordingly, potential investors in the Funds should
consult their tax advisers with specific reference to their own tax situations.
Shareholders will be advised annually as to the Federal income tax consequences
of distributions made each year.
STATE AND LOCAL
Purchasers are advised to consult their tax advisers concerning the applica-
tion of state and local taxes, which may have different consequences from those
of the Federal income tax law described above.
MANAGEMENT OF THE FUNDS
The business and affairs of the Funds are managed under the direction of Mas-
ter Fund's Board of Directors. The Statement of Additional Information con-
30
<PAGE>
tains the names of and general background information concerning Master Fund's
directors.
INVESTMENT ADVISER AND SUB-ADVISERS
United States Trust Company of New York serves as the Investment Adviser to
the Funds. The Investment Adviser is a state-chartered bank and trust company
created by Special Act of the New York Legislature in 1853. The Investment Ad-
viser provides trust and banking services to individuals, corporations, and
institutions both nationally and internationally, including investment manage-
ment, estate and trust administration, financial planning, corporate trust and
agency, and personal and corporate banking. The Investment Adviser is a member
bank of the Federal Reserve System and the Federal Deposit Insurance Corpora-
tion and is one of the twelve members of the New York Clearing House Associa-
tion.
On December 31, 1994, the Investment Adviser's Asset Management Group had ap-
proximately $33 billion in assets under management. The Investment Adviser,
which has its principal offices at 114 W. 47th Street, New York, New York
10036, is a subsidiary of U.S. Trust Corporation, a registered bank holding
company.
Foreign and Colonial Asset Management ("FACAM") (an SEC-registered investment
adviser) provides sub-advisory services to the International and Pan European
Funds. FACAM, a New York general partnership with offices at Exchange House,
Primrose Street, London EC2A2NY, is an investment management joint venture
created in 1982 by F&C Overseas Limited ("FCOC") and UST Overseas Corporation
("USTOC"), an indirect wholly owned subsidiary of the Investment Adviser. FCOC
and USTOC are general partners of FACAM with equal capital contribution. FCOC,
a private English company, is a wholly owned subsidiary of F&C Management,
Ltd. F&C Management, Ltd. is 50% owned by five U.K. investment trusts: F&C In-
vestment Trust Plc, F&C Pacific Investment Trust Plc, F&C Smaller Companies
Investment Trusts Plc, F&C Enterprise Trust Plc and F&C Eurotrust Plc. The re-
maining 50% of F&C Management, Ltd. is owned by Bayerische Hypotheken und
Wechsel Bank AG of Munich, Germany. FACAM currently manages and advises sev-
eral commingled funds with assets in excess of $ million at the end of 1994.
Under the current sub-advisory agreements FCEML (collectively with FACAM, the
"Sub-Advisers") provides sub-advisory services to the Emerging Americas and
Pacific/Asia Funds. FCEML was founded in 1987, and is a joint venture among
F&C Management, Ltd., the parent of FACAM, Banco de Investimentos Garantia
("Banco"), a Brazilian investment bank headquartered in Sao Paulo, Brazil, and
management of FCEML. Banco is owned by private investors. FCEML's offices are
at Exchange House, Primrose Street, London EC2A2NY.
The Sub-Advisers provide a continuous investment program for the Funds for
which they act as sub-adviser, including investment research and management
with respect to all foreign securities and investments of the Funds. The Sub-
Advisers prepare, subject to the Investment Adviser's approval, lists of rec-
ommended countries and determine what securities and other investments will be
purchased, retained or sold for each Fund for which they act as sub-adviser.
The Investment Adviser advises the Sub-Advisers with respect to U.S. economic
factors and trends, assists and consults with the Sub-Advisers in connection
with the particular Fund's continuous investment program, places orders with
respect to purchases and sales of U.S. issuers, manages the particular Fund's
short-term cash in cooperation with the particular Sub-Adviser, monitors the
Sub- Advisers' investment procedures and periodically reviews, evaluates and
reports to Master Fund's Board of Directors concerning the Sub-Advisers' per-
formance.
All investment decisions for the International, Emerging Americas,
Pacific/Asia and Pan European Funds are made by committee and no persons are
31
<PAGE>
primarily responsible for making recommendations to that committee.
For the services provided and expenses assumed pursuant to its Investment Ad-
visory Agreements with the Funds, the Investment Adviser is entitled to be paid
a fee, computed daily and paid monthly, at the annual rate of 1% of the average
daily net assets of each Fund. Although the advisory fee rate payable by the
Funds is higher than the rates payable by most mutual funds, Master Fund be-
lieves it is comparable to the rate paid by many other funds with similar in-
vestment objectives and policies and is appropriate for the Funds in light of
their investment objective and policies. FACAM is entitled to receive from the
Investment Adviser an annual fee, computed and paid quarterly, at the annual
rate of .70% of the average daily net assets of each of the International and
Pan European Funds. FCEML is entitled to receive from the Investment Adviser an
annual fee, computed and paid quarterly, at the annual rates of .50% and .70%
of the average daily net assets of the Emerging Americas and Pacific/Asia
Funds, respectively.
For the fiscal year ended March 31, 1995, the Investment Adviser received an
advisory fee after waivers at the effective annual rates of .94%, .93%, .95%
and .94% of the average daily net assets of the International, Emerging Ameri-
cas, Pacific/Asia and Pan European Funds, respectively. For the same period,
the Investment Adviser waived advisory fees at the effective annual rates of
.06%, .07% .05% and .06% of the average daily net assets of the International,
Emerging Americas, Pacific/Asia and Pan European Funds, respectively. For the
same period, FACAM received a sub-advisory fee from the Investment Adviser at
the effective annual rates of .70% and .70% of the average daily net assets of
the International and Pan European Funds, respectively. For the fiscal year
ended March 31, 1995, FCEML received a sub-advisory fee from the Investment Ad-
viser at the effective annual rates of .50% and .70% of the average daily net
assets of the Emerging Americas and Pacific/Asia Funds, respectively.
From time to time, the Investment Adviser and Sub-Advisers may waive (either
voluntarily or pursuant to applicable state expense limitations) all or a por-
tion of the advisory fees payable with respect to a Fund, which waivers may be
terminated at any time. See "Management of the Funds--Service Organizations"
for additional information on fee waivers.
ADMINISTRATORS
Mutual Funds Service Company and Federated Administrative Services serve as
the Funds' administrators (the "Administrators") and provide them with general
administrative and operational assistance. For the services provided to the
Funds, the Administrators are jointly entitled to annual fees, computed daily
and paid monthly, at the rate of .20% of the average daily net assets of each
Fund. The Administrators are entitled jointly to an annual minimum fee of
$50,000 from each of the Regional Funds. From time to time, the Administrators
may waive (either voluntarily or pursuant to applicable state expense limita-
tions) all or a portion of the administration fee payable to them by the Funds,
which waivers may be terminated at any time. See "Management of the Funds--
Service Organizations" for additional information on fee waivers. For the fis-
cal year ended March 31, 1995, Mutual Funds Service Company and Concord Holding
Corporation, the Funds' former co-administrator, received an aggregate adminis-
tration fee (under the compensation arrangements noted above) at the effective
annual rates of .20% of the average daily net assets of each of the Interna-
tional, Emerging Americas, Pacific/Asia and Pan European Funds.
SERVICE ORGANIZATIONS
Master Fund will enter into an agreement ("Servicing Agreement") with each
Service Organization requiring it to provide administrative support services to
its Customers beneficially owning Shares. As a consideration for the adminis-
trative services provided to Customers, a Fund will pay the Service Organiza-
tion
32
<PAGE>
an administrative service fee at the annual rate of up to .40% of the average
daily net asset value of its Shares held by the Service Organization's Custom-
ers. Such services, which are described more fully in the Statement of Addi-
tional Information under "Management of the Funds--Service Organizations," may
include assisting in processing purchase, exchange and redemption requests;
transmitting and receiving funds in connection with Customer orders to pur-
chase, exchange or redeem Shares; and providing periodic statements. Under the
terms of the Servicing Agreement, Service Organizations will be required to
provide to Customers a schedule of any fees that they may charge in connection
with a Customer's investment. Until further notice, the Investment Adviser and
Administrators have voluntarily agreed to waive fees payable by a Fund in an
amount equal to administrative service fees payable by that Fund.
BANKING LAWS
Banking laws and regulations currently prohibit a bank holding company regis-
tered under the Federal Bank Holding Company Act of 1956 or any bank or non-
bank affiliate thereof from sponsoring, organizing or controlling a regis-
tered, open-end investment company continuously engaged in the issuance of its
shares, and prohibit banks generally from issuing, underwriting, selling or
distributing securities such as Shares of the Funds, but such banking laws and
regulations do not prohibit such a holding company or affiliate or banks gen-
erally from acting as investment adviser, transfer agent, or custodian to such
an investment company, or from purchasing shares of such company for and upon
the order of customers. The Investment Adviser, MFSC and certain Shareholder
Organizations may be subject to such banking laws and regulations. State secu-
rities laws may differ from the interpretations of Federal law discussed in
this paragraph and banks and financial institutions may be required to regis-
ter as dealers pursuant to state law.
Should legislative, judicial, or administrative action prohibit or restrict
the activities of the Investment Adviser or other Shareholder Organizations in
connection with purchases of Fund Shares, the Investment Adviser and such
Shareholder Organizations might be required to alter materially or discontinue
the investment services offered by them to Customers. It is not anticipated,
however, that any resulting change in the Funds' method of operations would
affect their net asset values per Share or result in financial loss to any
shareholder.
DESCRIPTION OF CAPITAL STOCK
Master Fund was organized as a Maryland corporation on August 2, 1984. Cur-
rently, Master Fund has authorized capital of 35 billion shares of Common
Stock, $.001 par value per share, classified into 34 series of shares repre-
senting interests in 20 investment portfolios. This Prospectus describes the
International, Emerging Americas, Pacific/Asia and Pan European Funds. Master
Fund offers Service Shares and Distribution Shares representing interests in
each of those Funds. Service Shares and Distribution Shares have different ex-
penses, which may affect performance. Call (800) 233-1136 for information re-
garding each of those Fund's Distribution Shares, which are offered through a
separate prospectus.
Each share (irrespective of series designation) in a Fund represents an equal
proportionate interest in the particular Fund with other shares of the same
class, and is entitled to such dividends and distributions out of the income
earned on the assets belonging to such Fund as are declared in the discretion
of Master Fund's Board of Directors. Master Fund's Charter authorizes the
Board of Directors to classify or reclassify any class of shares into one or
more additional classes or series.
Master Fund's shareholders are entitled to one vote for each full share held
and fractional votes for fractional shares held, and will vote in the aggre-
gate and not by class or series, except as otherwise expressly required by
law.
Holders of Distributions Shares in a Fund bear the expense of payments de-
scribed in the prospectus for such shares that are made pursuant to Master
Fund's
33
<PAGE>
Distribution Plan. Under the Distribution Plan, Distribution Shares of each
Fund reimburse the Distributor monthly for distribution expenses in an amount
not to exceed the annual rate of .75% of the average daily net asset value of
the Fund's outstanding Distribution Shares. Distribution Shares of each Fund
currently bear the expense of such distribution fees at the annual rate of .50%
of the average daily net asset value of the Fund's outstanding Distribution
Shares. Distribution expenses payable by the Distributor under the Distribution
Plan include direct and indirect marketing expenses such as: i) the expense of
preparing, printing and distributing promotional materials and prospectuses
(other than prospectuses used for regulatory purposes or for distribution to
existing shareholders); ii) the expense of other advertising via radio, televi-
sion or other print or electronic media; and iii) the expense of payments to
financial institutions that are not affiliated with the Distributor for distri-
bution assistance. Service Shares in a Fund bear no such distribution fees.
Distribution Shares also bear the expense of administrative service fees de-
scribed above under "Management of the Funds--Service Organizations." As a re-
sult of their different expense structures, the net asset value and the total
returns on Service Shares of a Fund will generally be higher than those on Dis-
tribution Shares of the same Fund. Distribution Shares of the Funds are offered
to the public at the applicable net asset value per share plus a front-end
sales charge identical to the sales charge described above under "How to Pur-
chase and Redeem Shares--Public Offering Price." Distribution Shares are ex-
changeable at the option of the holder for Distribution Shares of Master Fund's
other investment portfolios.
Certificates for Shares will not be issued unless expressly requested in writ-
ing to MFSC and will not be issued for fractional Shares.
As of July 11, 1995, U.S. Trust held of record substantially all of the Shares
in the Funds as agent or custodian for its customers, but did not own such
Shares beneficially because it did not have voting or investment discretion
with respect to such Shares.
CUSTODIAN AND TRANSFER AGENT
United States Trust Company of New York serves as the custodian of the Funds'
assets and as their transfer and dividend disbursing agent. Communications to
the custodian and transfer agent should be directed to United States Trust Com-
pany of New York, Mutual Funds Service Division, 770 Broadway, New York, New
York 10003-9598.
U.S. Trust has entered into an International Custodian Agreement with Morgan
Stanley Trust Company, 1 Pierrepont Plaza, Brooklyn, NY 11201, providing for
the custody of foreign securities held by the Funds.
U.S. Trust has also entered into a sub-transfer agency arrangement with MFSC,
73 Tremont Street, Boston, Massachusetts 02108-3913, pursuant to which MFSC
provides certain transfer agent, dividend disbursement and registrar services
to the Funds.
PERFORMANCE INFORMATION
From time to time, in advertisements or in reports to shareholders, the per-
formance of the Shares of the Funds may be quoted and compared to that of other
mutual funds with similar investment objectives and to stock or other relevant
indices or to rankings prepared by independent services or other financial or
industry publications that monitor the performance of mutual funds. For exam-
ple, the performance of a Fund may be compared to data prepared by Lipper Ana-
lytical Services, Inc., a widely recognized independent service which monitors
the performance of mutual funds. The performance of a Fund may also be compared
to the Europe, Australia, and Far East Index ("EAFE") and the Financial Times
Index, unmanaged standard foreign securities indexes.
Performance data as reported in national financial publications, including but
not limited to Money Magazine, Forbes, Barron's, The Wall Street Journal and
The New York Times, or in publications of a local or regional nature, may also
be used in comparing the performance of the Funds.
34
<PAGE>
From time to time, each Fund may advertise its performance by using "average
annual total return" over various periods of time. Such total return figure re-
flects the average percentage change in the value of an investment in a Fund
from the beginning date of the measuring period to the end of the measuring pe-
riod. Average total return figures will be given for the most recent one-year
period, and may be given for other periods as well (such as from the commence-
ment of a Fund's operations, or on a year-by-year basis). Each Fund may also
use aggregate total return figures for various periods, representing the cumu-
lative change in the value of an investment in the Fund for the specific peri-
od. Both methods of calculating total return assume that dividends and capital
gain distributions made by a Fund during the period are reinvested in Fund
Shares and also reflect the maximum sales load charged by the Fund.
Performance will fluctuate and any quotation of performance should not be con-
sidered as representative of a Fund's future performance. Shareholders should
remember that performance is generally a function of the kind and quality of
the instrument held in a portfolio, portfolio maturity, operating expenses, and
market conditions. Any fees charged by Shareholder Organizations with respect
to accounts of Customers that have invested in Shares will not be included in
calculations of performance.
MISCELLANEOUS
Shareholders will receive unaudited semiannual reports describing the Funds'
investment operations and annual financial statements audited by the Funds' in-
dependent auditors.
As used in this Prospectus, a "vote of the holders of a majority of the out-
standing shares" of Master Fund or a particular Fund means, with respect to the
approval of an investment advisory agreement or a change in a fundamental in-
vestment policy, the affirmative vote of the lesser of (a) more than 50% of the
outstanding shares of Master Fund or such Fund, or (b) 67% or more of the
shares of Master Fund or such Fund present at a meeting if more than 50% of the
outstanding shares of Master Fund or the Fund are represented at the meeting in
person or by proxy.
Inquiries regarding any of the Funds may be directed to the Distributor at the
address or telephone number listed under "Distributor."
35
<PAGE>
INSTRUCTIONS FOR NEW ACCOUNT APPLICATION
OPENING YOUR ACCOUNT:
Complete the Application(s) and mail to: FOR OVERNIGHT DELIVERY: send to:
UST Master Funds UST Master Funds
c/o Mutual Funds Service Company c/o Mutual FundsService Company
P.O. Box 2798 --Transfer Agent
Boston, MA 73 Tremont Street
02208-2798 Boston, MA 02108-3913
Please enclose with the Application(s) your check made payable to the "UST
Master Funds" in the amount of your investment.
For direct wire purchases please refer to the section of the Prospectus
entitled "How to Purchase and Redeem Shares--Purchase Procedures."
MINIMUM INVESTMENTS:
Except as provided in the Prospectus, the minimum initial investment is $500
per Fund; subsequent investments must be in the minimum amount of $50 per Fund.
Investments may be made in excess of these minimums.
REDEMPTIONS:
Shares can be redeemed in any amount and at any time in accordance with
procedures described in the Prospectus. In the case of shares recently
purchased by check, redemption proceeds will not be made available until the
transfer agent is reasonably assured that the check has been collected in
accordance with applicable banking regulations.
Certain legal documents will be required from corporations or other
organizations, executors and trustees, or if redemption is requested by anyone
other than the shareholder of record. Written redemption requests in excess of
$50,000 per account must be accompanied by signature guarantees.
SIGNATURES: Please be sure to sign the Application(s).
If the shares are registered in the name of:
- an individual, the individual should sign.
- joint tenants, both tenants should sign.
- a custodian for a minor, the custodian should sign.
- a corporation or other organization, an authorized officer should sign
(please indicate corporate office or title).*
- a trustee or other fiduciary, the fiduciary or fiduciaries should sign
(please indicate capacity).*
*A corporate resolution or appropriate certificate may be required.
QUESTIONS:
If you have any questions regarding the Application or redemption
requirements, please contact the transfer agent at (800) 446-1012 between 9:00
a.m. and 5:00 p.m. (Eastern Time).
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<PAGE>
--------------------------------------------------------------------------------
MUTUAL FUNDS SERVICE COMPANY
[LOGO OF UST CLIENT SERVICES
MASTER FUNDS P.O. Box 2798
APPEARS HERE] Boston, MA 02208-2798 NEW ACCOUNT APPLICATION
(800) 446-1012
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
ACCOUNT REGISTRATION
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[_] Individual [_] Joint Tenants [_] Trust [_] Gift/Transfer to Minor
[_] Other
Note: Joint tenant registration will be as "joint tenants with right of
survivorship" unless otherwise specified. Trust registrations should specify
name of the trust, trustee(s), beneficiary(ies), and the date of the trust
instrument. Registration for Uniform Gifts/Transfers to Minors should be in the
name of one custodian and one minor and include the state under which the
custodianship is created (using the minor's Social Security Number ("SSN")). For
IRA accounts a different application is required.
------------------------------ -----------------------------------------------
Name(s) (please print) Social Security # or Taxpayer Identification #
( )
------------------------------ -----------------------------------------------
Name Telephone #
------------------------------
Address
------------------------------ [_] U.S. Citizen [_] Other (specify) _________
City/State/Zip
--------------------------------------------------------------------------------
FUND SELECTION (THE MINIMUM INITIAL AND SUBSEQUENT INVESTMENT IS $500 PER FUND
AND $50 PER FUND, RESPECTIVELY. MAKE CHECKS PAYABLE TO "UST MASTER FUNDS.")
--------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C> <C> <C>
INITIAL INVESTMENT INITIAL INVESTMENT
[_] International Fund $ ________________ 802 [_] Emerging Americas Fund $ ________________ 822
[_] Pan European Fund $ ________________ 821 [_] Other $ ________________
[_] Pacific/Asia Fund $ ________________ 820 TOTAL INITIAL INVESTMENT: $ ________________
</TABLE>
NOTE: If investing by wire, you A. BY MAIL: Enclosed is a check in the amount
must obtain a Bank Wire Control of $ ____ payable to "UST Master Funds."
Number. To do so, please call B. BY WIRE: A bank wire in the amount
(800) 446-1012 and ask for the of $ _________ has been sent to the Fund
Wire Desk. from ______________ _________________________
Name of Bank Wire Control Number
CAPITAL GAIN AND DIVIDEND DISTRIBUTIONS: All capital gain and dividend
distributions will be reinvested in additional shares unless appropriate boxes
below are checked:
All dividends are to be [_] reinvested [_] paid in cash
All capital gains are to be [_] reinvested [_] paid in cash
--------------------------------------------------------------------------------
ACCOUNT PRIVILEGES
--------------------------------------------------------------------------------
TELEPHONE EXCHANGE AND REDEMPTION
[_] I/We appoint MFSC as my/our agent to act upon instructions received by
telephone in order to effect the telephone exchange and redemption privilages.
I/We hereby ratify any instructions given pursuant to this authorization and
agree that Master Fund, Master Tax-Exempt Fund, MFSC and their directors,
officers and employees will not be liable for any loss, liability, cost or
expense for acting upon instructions believed to be genuine and in accordance
with the procedures described in the then current Prospectus. To the extent that
Master Fund and Master Tax-Exempt Fund fail to use reasonable procedures as a
basis for their belief, they or their service contractors may be liable for
instructions that prove to be fraudulent or unauthorized.
I/We further acknowledge that it is my/our responsibility to read the Prospectus
of any Fund into which I/we exchange.
[_] I/We do not wish to have the ability to exercise telephone redemption and
exchange privileges. I/We further understand that all exchange and redemption
requests must be in writing.
SPECIAL PURCHASE AND REDEMPTION PLANS
I/We have completed and attached the Supplemental Application for:
[_] Automatic Investment Plan
[_] Systematic Withdrawal Plan
AUTHORITY TO TRANSMIT REDEMPTION PROCEEDS TO PRE-DESIGNATED ACCOUNT.
I/We hereby authorize MFSC to act upon instructions received by telephone to
withdraw $500 or more from my/our account in the UST Master Funds and to wire
the amount withdrawn to the following commercial bank account. I/We understand
that MFSC charges an $8.00 fee for each wire redemption, which will be deducted
from the proceeds of the redemption.
Title on Bank Account*__________________________________________________________
Name of Bank ___________________________________________________________________
Bank A.B.A. Number ___________________ Account Number _________________________
Bank Address ___________________________________________________________________
City/State/Zip _________________________________________________________________
(attach voided check here)
A corporation, trust or partnership must also submit a "Corporate Resolution"
(or "Certificate of Partnership") indicating the names and titles of officers
authorized to act on its behalf.
* TITLE ON BANK AND FUND ACCOUNT MUST BE IDENTICAL.
--------------------------------------------------------------------------------
<PAGE>
--------------------------------------------------------------------------------
------------------------------------------------------------------
RIGHTS OF ACCUMULATION
------------------------------------------------------------------
To qualify for Rights of Accumulation, you must complete this section, listing
all of your accounts including those in your spouse's name, joint accounts and
accounts held for your minor children. If you need more space, please attach a
separate sheet.
[_] I/We qualify for the Rights of Accumulation sales charge discount described
in the Prospectus and Statement of Additional Information.
[_] I/We own shares of more than one Fund distributed by Edgewood Service, Inc.
Listed below are the numbers of each of my/our Shareholder Accounts.
[_] The registration of some of my/our shares differs from that shown on this
application. Listed below are the account number(s) and full
registration(s) in each case.
LIST OF OTHER UST MASTER FUND ACCOUNTS:
_____________________________ _________________________________________________
_____________________________ _________________________________________________
_____________________________ _________________________________________________
ACCOUNT NUMBER ACCOUNT REGISTRATIONS
--------------------------------------------------------------------------------
LETTER OF INTENT
--------------------------------------------------------------------------------
[_] I agree to the Letter of Intent provisions set forth in the Prospectus.
Although I am not obligated to purchase, and Master Fund is not obligated to
sell, I intend to invest, over a 13-month period beginning on , 19 , an
aggregate amount in Eligible Funds of Master Fund and Master Tax-Exempt Fund
at least equal to (check appropriate box):
[_] $50,000 [_] $100,000 [_] $250,000 [_] $500,000 [_] $1,000,000
[_] $2,000,000
By signing this application, I hereby authorize MFSC to redeem an
appropriate number of shares held in escrow to pay any additional sales
loads payable in the event that I do not fulfill the terms of this Letter of
Intent.
--------------------------------------------------------------------------------
AGREEMENTS AND SIGNATURES
--------------------------------------------------------------------------------
By signing this application, I/we hereby certify under penalty of perjury that
the information on this application is complete and correct and that as
required by Federal law:
[_] I/We certify that (1) the number(s) shown on this form is/are the correct
taxpayer identification number(s) and (2) I/we are not subject to backup
withholding either because I/we have not been notified by the Internal Revenue
Service that I/we are subject to backup withholding, or the IRS has notified
me/us that I am/we are no longer subject to backup withholding. (NOTE: IF ANY OR
ALL OF PART 2 IS NOT TRUE, PLEASE STRIKE OUT THAT PART BEFORE SIGNING.)
[_] If no taxpayer identification number ("TIN") or SSN has been provided above,
I/we have applied, or intend to apply, to the IRS or the Social Security
Administration for a TIN or a SSN, and I/we understand that if I/we do not
provide this number to MFSC within 60 days of the date of this application, or
if I/we fail to furnish my/our correct SSN or TIN, I/we may be subject to a
penalty and a 31% backup withholding on distributions and redemption proceeds.
(Please provide this number on Form W-9. You may request the form by calling
MFSC at the number listed above).
I/We represent that I am/we are of legal age and capacity to purchase shares of
the UST Master Funds. I/We have received, read and carefully reviewed a copy of
the appropriate Fund's current Prospectus and agree to its terms and by signing
below I/we acknowledge that neither the Fund nor the Distributor is a bank and
that Fund Shares are not deposits or obligations of, or guaranteed or endorsed
by, United States Trust Company of New York, its parent and affiliates and the
Shares are not federally insured by, guaranteed by, obligations of or otherwise
supported by the U.S. Government, the Federal Deposit Insurance Corporation, the
Federal Reserve Board, or any other governmental agency; and that an investment
in the Funds involves investment risks, including possible loss of principal
amount invested.
X ___________________________________ Date _____________________________________
Owner Signature
X ___________________________________ Date ____________________________________
Co-Owner Signature
Sign exactly as name(s) of registered owner(s) appear(s) above (including
legal title if signing for a corporation, trust custodial account, etc.).
--------------------------------------------------------------------------------
FOR USE BY AUTHORIZED AGENT (BROKER/DEALER) ONLY
--------------------------------------------------------------------------------
We hereby submit this application for the purchase of shares in accordance
with the terms of our selling agreement with UST Distributors, Inc., and with
the Prospectus and Statement of Additional Information of each Fund purchased.
We agree to notify MFSC of any purchases made under the Letter of Intent or
Rights of Accumulation.
------------------------------------------- ------------------------------------
Investment Dealer's Name Source of Business Code
------------------------------------------- ------------------------------------
Main Office Address Branch Number
------------------------------------------- ------------------------------------
Representative's Number Representative's Name
------------------------------------------- ------------------------------------
Branch Address Telephone
------------------------------------------- ------------------------------------
Investment Dealer's Authorized Signature Title
--------------------------------------------------------------------------------
<PAGE>
--------------------------------------------------------------------------------
MUTUAL FUNDS SERVICE COMPANY
[LOGO OF UST CLIENT SERVICES SUPPLEMENTAL APPLICATION
MASTER FUNDS P.O. Box 2798 SPECIAL INVESTMENT AND
APPEARS HERE] Boston, MA 02208-2798 WITHDRAWAL OPTIONS
(800) 446-1012
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
ACCOUNT REGISTRATION PLEASE SUPPLY THE FOLLOWING INFORMATION EXACTLY AS IT
APPEARS ON THE FUND'S RECORD.
--------------------------------------------------------------------------------
Fund Name _________________________ Account Number _____________________________
Owner Name ________________________ Social Security or Taxpayer ID Number_______
Street Address ____________________ City, State, Zip Code ______________________
Resident of [_] U.S. [_] Other ___ [_] Check here if this is a change of
address
--------------------------------------------------------------------------------
DISTRIBUTION OPTIONS (DIVIDENDS AND CAPITAL GAINS WILL BE REINVESTED
UNLESS OTHERWISE INDICATED)
--------------------------------------------------------------------------------
A. CAPITAL GAIN AND DIVIDEND DISTRIBUTIONS: All capital gain and dividend
distributions will be reinvested in additional shares unless appropriate boxes
below are checked: All dividends are to be [_] reinvested [_] paid in cash
All capital gains are to be [_] reinvested [_] paid in cash
B. PAYMENT ORDER: Complete only if distribution checks are to be payable to
another party. Make distribution checks payable to:
Name of Your Bank __________________________
Name _____________________________ Bank Account Number ________________________
Address __________________________ Address of Bank ____________________________
City, State, Zip Code __________________________________________________________
C. DISTRIBUTIONS REINVESTED-CROSS FUNDS: Permits all distributions from
one Fund to be automatically reinvested into another identically-registered
UST Master Fund. (NOTE: You may NOT open a new Fund account with this option.)
Transfer all distributions earned:
From: ____________________________ Account No. ________________________________
(Fund) Account No. ________________________________
To: ______________________________
(Fund)
--------------------------------------------------------------------------------
AUTOMATIC INVESTMENT PLAN [_] YES [_] NO
--------------------------------------------------------------------------------
I/We hereby authorize MFSC to debit my/our personal checking account on the
designated dates in order to purchase shares in the Fund indicated at the top
of this application at the applicable public offering price determined on that
day.
[_] Monthly on the 1st day [_] Monthly on the 15th day
[_] Monthly on both the 1st and 15th days
Amount of each debit (minimum $50 per Fund) $ ________________________
NOTE: A Bank Authorization Form (below) and a voided personal check must
accompany the Automatic Investment Plan application.
--------------------------------------------------------------------------------
UST MASTER FUNDS
CLIENT SERVICES AUTOMATIC INVESTMENT PLAN
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
BANK AUTHORIZATION
--------------------------------------------------------------------------------
---------------------------- ------------------------ --------------------------
Bank Name Bank Address Bank Account Number
I/We authorize you, the above named bank, to debit my/our account for amounts
drawn by MFSC, acting as my agent for the purchase of Fund shares. I/We agree
that your rights in respect to each withdrawal shall be the same as if it were a
check drawn upon you and signed by me/us. This authority shall remain in effect
until revoked in writing and received by you. I/We agree that you shall incur no
liability when honoring debits, except a loss due to payments drawn against
insufficient funds. I/We further agree that you will incur no liability to me if
you dishonor any such withdrawal. This will be so even though such dishonor
results in the cancellation of that purchase.
-------------------------------------- ----------------------------------------
Account Holder's Name Joint Account Holder's Name
X ______________________ _____________ X ________________________ _____________
Signature Date Signature Date
--------------------------------------------------------------------------------
<PAGE>
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
SYSTEMATIC WITHDRAWAL PLAN [_] YES [_] NO NOT AVAILABLE FOR IRA'S
--------------------------------------------------------------------------------
AVAILABLE TO SHAREHOLDERS WITH ACCOUNT BALANCES OF $10,000 OR MORE.
I/We hereby authorize MFSC to redeem the necessary number of shares from
my/our UST Master Fund Account on the designated dates in order to make the
following periodic payments:
[_] Monthly on the 24th day [_] Quarterly on the 24th day of January, April,
July and October [_] Other________________________________________________
(This request for participation in the Plan must be received by the 18th day of
the month in which you wish withdrawals to begin.)
Amount of each check ($100 minimum) $_________________________
Please make check payable to: Recipient ___________________________
(To be completed only if redemption
proceeds to be paid to other than Street Address ______________________
account holder of record or mailed
to address other than address of record) City, State, Zip Code _______________
NOTE: If recipient of checks is not the registered shareholder, signature(s)
below must be guaranteed. A corporation, trust or partnership must also submit a
"Corporate Resolution" (or "Certification of Partnership") indicating the names
and titles of officers authorized to act on its behalf.
--------------------------------------------------------------------------------
AGREEMENT AND SIGNATURES
--------------------------------------------------------------------------------
The investor(s) certifies and agrees that the certifications, authorizations,
directions and restrictions contained herein will continue until MFSC receives
written notice of any change or revocation. Any change in these instructions
must be in writing with all signatures guaranteed (if applicable).
Date ______________________
X X
---------------------------------------- ---------------------------------------
Signature Signature
---------------------------------------- ---------------------------------------
Signature Guarantee* (if applicable) Signature Guarantee* (if applicable)
X X
---------------------------------------- ---------------------------------------
Signature Signature
---------------------------------------- ---------------------------------------
Signature Guarantee* (if applicable) Signature Guarantee* (if applicable)
*ELIGIBLE GUARANTORS: An Eligible Guarantor institution is a bank, trust
company, broker, dealer, municipal or government securities broker or dealer,
credit union, national securities exchange, registered securities association,
clearing agency or savings association, provided that such institution is a
participant in STAMP, the Securities Transfer Agents Medallion Program.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PROSPECTUS SUMMARY......................................................... 2
EXPENSE SUMMARY............................................................ 3
FINANCIAL HIGHLIGHTS....................................................... 5
INVESTMENT OBJECTIVES AND POLICIES......................................... 9
PORTFOLIO INSTRUMENTS AND OTHER INVESTMENT INFORMATION..................... 14
INVESTMENT LIMITATIONS..................................................... 17
PRICING OF SHARES.......................................................... 19
HOW TO PURCHASE AND REDEEM SHARES.......................................... 19
INVESTOR PROGRAMS.......................................................... 25
DIVIDENDS AND DISTRIBUTIONS................................................ 29
TAXES...................................................................... 29
MANAGEMENT OF THE FUNDS.................................................... 30
DESCRIPTION OF CAPITAL STOCK............................................... 33
CUSTODIAN AND TRANSFER AGENT............................................... 34
PERFORMANCE INFORMATION.................................................... 34
MISCELLANEOUS.............................................................. 35
INSTRUCTIONS FOR NEW ACCOUNT APPLICATION................................... 36
</TABLE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESEN-
TATIONS NOT CONTAINED IN THIS PROSPECTUS, OR IN THE FUNDS' STATEMENT OF ADDI-
TIONAL INFORMATION INCORPORATED HEREIN BY REFERENCE, IN CONNECTION WITH THE
OFFERING MADE BY THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY MASTER
FUND OR ITS DISTRIBUTOR. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING BY
MASTER FUND OR BY ITS DISTRIBUTOR IN ANY JURISDICTION IN WHICH SUCH OFFERING
MAY NOT LAWFULLY BE MADE.
USTINLP894
[LOGO OF UST APPEARS HERE]
MASTER FUNDS, INC.
INTERNATIONAL FUND
EMERGING AMERICAS FUND
PACIFIC/ASIA FUND
PAN EUROPEAN FUND
SERVICE SHARES
Prospectus August 1, 1995
<PAGE>
CROSS-REFERENCE SHEET
UST MASTER FUNDS, INC.
(INTERNATIONAL FUND, EMERGING AMERICAS FUND, PACIFIC ASIA FUND, PAN EUROPEAN
FUND)
<TABLE>
<CAPTION>
FORM N-1A, PART A, ITEM PROSPECTUS CAPTION
----------------------- ------------------
<C> <S> <C>
1. Cover Page.......................... Cover Page
2. Synopsis............................ Prospectus Summary and
Expense Summary
3. Financial Highlights................ Selected Per Share Data and Ratios;
Performance Information
4. General Description of Registrant... Prospectus Summary; Investment
Objectives and Policies; Portfolio
Instruments and Other Investment
Information; Investment Limitations;
Description of Capital Stock
5. Management of the Fund.............. Management of the Fund; Custodian
and Transfer Agent
6. Capital Stock and Other Securities.. How to Purchase and Redeem Shares;
Dividends and Distributions; Taxes;
Description of Capital Stock;
Miscellaneous
7. Purchase of Securities Being Pricing of Shares; How to Purchase
Offered............................ and Redeem Shares; Investor Programs
8. Redemption or Repurchase............ How to Purchase and Redeem Shares
9. Pending Legal Proceedings........... Inapplicable
</TABLE>
<PAGE>
LOGO
MASTER FUNDS, INC.
A Management Investment Company
-------------------------------------------------------------------------------
International Funds For initial purchase information, current
prices, performance information and ex-
73 Tremont Street isting account information, call (800)
Boston, MA 02108-3913 446-1012. (From overseas, call (617) 557-
8280.)
-------------------------------------------------------------------------------
This Prospectus describes the Distribution Shares ("Shares") offered by sev-
eral separate portfolios offered to investors by UST Master Funds, Inc. ("Mas-
ter Fund"), an open-end, management investment company. Master Fund also is-
sues an additional series of shares in the portfolios ("Service Shares"),
which are offered under a separate prospectus. Each portfolio (each a "Fund"
and collectively the "Funds") has its own investment objective and policies as
follows:
INTERNATIONAL FUND seeks total return on its assets through capital apprecia-
tion and income derived primarily from investments in a diversified portfolio
of marketable foreign equity securities.
EMERGING AMERICAS FUND seeks long-term capital appreciation through invest-
ments in companies and securities of governments based in all countries in the
Western Hemisphere, except the U.S.
PACIFIC/ASIA FUND seeks long-term capital appreciation through investments in
companies and securities of governments based in all countries in Asia and on
the Asian side of the Pacific Ocean.
PAN EUROPEAN FUND seeks long-term capital appreciation through investments in
companies and securities of governments based in Europe.
Master Fund is sponsored and distributed by Edgewood Services, Inc. and ad-
vised by United States Trust Company of New York (the "Investment Adviser" or
"U.S. Trust").
This Prospectus sets forth concisely the information about the Funds that a
prospective investor should consider before investing. Investors should read
this Prospectus and retain it for future reference. A Statement of Additional
Information dated August 1, 1995 and containing additional information about
the Funds has been filed with the Securities and Exchange Commission. The cur-
rent Statement of Additional Information is available to investors without
charge by writing to Master Fund at its address shown above or by calling
(800) 446-1012. The Statement of Additional Information, as it may be supple-
mented from time to time, is incorporated by reference in its entirety into
this Prospectus.
SHARES OF THE FUNDS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR EN-
DORSED BY, UNITED STATES TRUST COMPANY OF NEW YORK, ITS PARENT OR AFFILIATES
AND THE SHARES ARE NOT FEDERALLY INSURED BY, GUARANTEED BY, OBLIGATIONS OF OR
OTHERWISE SUPPORTED BY THE U.S. GOVERNMENT, THE FEDERAL DEPOSIT INSURANCE COR-
PORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER GOVERNMENTAL AGENCY.
AN INVESTMENT IN THE FUNDS INVOLVES INVESTMENT RISKS, INCLUDING POSSIBLE LOSS
OF PRINCIPAL AMOUNT INVESTED.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE AC-
CURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
August 1, 1995
<PAGE>
PROSPECTUS SUMMARY
UST MASTER FUNDS, INC. is an investment company offering various diversified
investment portfolios with differing objectives and policies. Founded in 1984,
Master Fund currently offers 20 Funds with combined assets of approximately
$2.5 billion. See "Description of Capital Stock."
INVESTMENT ADVISER: United States Trust Company of New York serves as the
Funds' investment adviser. U.S. Trust, whose predecessor was founded in 1853,
is a trust company offering a variety of specialized financial and fiduciary
services to high-net worth individuals, institutions and corporations. Master
Fund offers investors access to U.S. Trust's services. The International and
Pan European Funds receive sub-advisory services from Foreign and Colonial As-
set Management ("FACAM"), and the Emerging Americas and Pacific/Asia Funds re-
ceive sub-advisory services from Foreign & Colonial Emerging Markets Limited
("FCEML"). FACAM and FCEML are U.S. Trust affiliates. See "Management of the
Funds--Investment Adviser."
INVESTMENT OBJECTIVES AND POLICIES: Generally, each Fund is a diversified in-
vestment portfolio which invests principally in the equity securities of for-
eign companies. The Funds also may invest in warrants, convertible securities,
bonds and other securities of foreign companies and governments. The Funds' in-
vestment objectives and policies are summarized on the cover and explained in
greater detail later in this Prospectus. See "Investment Objectives and Poli-
cies," "Portfolio Instruments and Other Information" and "Investment Limita-
tions."
HOW TO INVEST: The Funds' Shares are offered at their public offering price,
i.e., their net asset value plus a sales load which is subject to substantial
reductions for large purchases and programs for accumulation. The sales load is
not applicable to investors making their investments through a variety of in-
stitutions, such as U.S. Trust, other banks and trust companies. See "How to
Purchase and Redeem Shares."
The minimum to start an account is $500 per Fund, with a minimum of $50 per
Fund for subsequent investments. The easiest way to invest is to complete the
account application which accompanies this Prospectus and to send it with a
check to the address noted on the application. Investors may also invest by
wire and through investment dealers or institutional investors with appropriate
sales agreements with Master Fund. See "How to Purchase and Redeem Shares."
HOW TO REDEEM: Redemptions may be requested directly from Master Fund by
mail, wire or telephone. Investors investing through another institution should
request redemptions through their Shareholder Organization. See "How to Pur-
chase and Redeem Shares."
INVESTMENT RISKS AND CHARACTERISTICS: Generally, each Fund is subject to mar-
ket risk and currency risk. Market risk is the possibility that stock prices
will decline over short or even extended periods. Stock markets tend to be cy-
clical, with periods of generally rising prices and periods of generally de-
clining prices. These cycles will affect the values of each Fund. In addition,
since the Funds invest in foreign securities, the Funds are subject to the
risks of fluctuations of the value of foreign currencies relative to the U.S.
dollar and other risks associated with such investments. Finally, while the In-
ternational Fund diversifies its investments in a variety of companies and
countries, the Emerging Americas, Pacific/Asia and Pan European Funds (collec-
tively, the "Regional Funds") focus their investment activities in their desig-
nated regions. As a result each Regional Fund is susceptible to regional eco-
nomic, market, political and other more localized risks. Although each Fund
generally seeks to invest for the long term, each Fund may engage in short-term
trading of portfolio securities. A high rate of portfolio turnover may involve
correspondingly greater transaction costs which must be borne directly by a
Fund and ultimately by its shareholders. Investments in the Funds should not be
considered a complete investment program. See "Investment Objectives and Poli-
cies--Risk Factors" and "Portfolio Instruments and Other Investment Informa-
tion."
2
<PAGE>
EXPENSE SUMMARY
<TABLE>
<CAPTION>
INTERNATIONAL EMERGING AMERICAS PACIFIC/ASIA PAN EUROPEAN
FUND FUND FUND FUND
------------- ----------------- ------------ ------------
<S> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION
EXPENSES
Maximum Sales Load
(as a percentage of
offering price)........ 4.50% 4.50% 4.50% 4.50%
Sales Load on Reinvested
Dividends.............. None None None None
Deferred Sales Load..... None None None None
Redemption Fees/1/...... None None None None
Exchange Fees........... None None None None
ANNUAL FUND OPERATING
EXPENSES FOR DISTRIBU-
TION SHARES
(AS A PERCENTAGE OF AV-
ERAGE NET ASSETS)
Advisory Fees (after fee
waivers)/2/............ .94% .93% .95% .94%
12b-1 Fees/3/........... .50% .50% .50% .50%
Other Operating Expenses
Administrative Servic-
ing Fee............... .06% .06% .05% .06%
Other Expenses......... .47% .51% .47% .51%
Total Fund Operating Ex-
penses (after fee waiv-
ers)/2/................ 1.97% 2.00% 1.97% 2.01%
</TABLE>
-------
/1/The Fund's transfer agent imposes a direct $8.00 charge on each wire redemp-
tion by noninstitutional (i.e. individual) investors which is not reflected
in the expense ratios presented herein. Shareholder organizations may charge
their customers transaction fees in connection with redemptions. See "Redemp-
tion Procedures."
/2/The Investment Adviser and Administrators may, from time to time, voluntarily
waive a portion of their respective fees which waivers may be terminated at
any time. Until further notice, the Investment Adviser and/or Administrators
intend to voluntarily waive fees in an amount equal to the Administrative
Servicing Fee; and to further waive fees and reimburse expenses to the extent
necessary for the Shares of the Emerging Americas, Pacific/Asia and Pan Euro-
pean Funds to maintain an annual expense ratio, net of 12b-1 fees, of not
more than 1.67%. Without such fee waivers, "Advisory Fees" would be 1.00%,
1.00%, 1.00% and 1.00% and total operating expenses for Distribution Shares
would be 2.03%, 2.07%, 2.02% and 2.07% for each of the International, Emerg-
ing Americas, Pacific/Asia and Pan European Funds.
/3/The Distribution Shares offered by this Prospectus represent equal pro rata
interests in each Fund except that because the beneficial owners of Distribu-
tion Shares bear a distribution fee, the net yield on Distribution Shares can
be expected, at any given time, to be lower than the net yield on the other
Shares of a Fund. As a result of the payment of sales charges and distribu-
tion fees, long-term shareholders may pay more than the economic equivalent
of the maximum front-end sales load permitted by the National Association of
Securities Dealers, Inc. ("NASD"). The NASD has adopted rules which generally
limit the aggregate sales charges and payments under Master Fund's Distribu-
tion Plan to a certain percentage of total new gross share sales, plus inter-
est. Master Fund would stop accruing Distribution Plan fees if, to the ex-
tent, and for as long as, such limit would otherwise be exceeded.
3
<PAGE>
Example: You would pay the following expenses on a $1,000 investment, assuming
(1) 5% annual returns; and (2) redemption of your investment at the end of the
following periods:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
International Fund.............................. $64 $104 $146 $264
Emerging Americas Fund.......................... 64 105 148 267
Pacific/Asia Fund............................... 64 104 146 264
Pan European Fund............................... 64 105 148 268
</TABLE>
The foregoing expense summary and example (based on the maximum sales load
payable on the Shares) are intended to assist investors in understanding the
costs and expenses that an investor in Distribution Shares of the Fund will
bear directly or indirectly. The expense summary sets forth advisory and other
expenses payable with respect to Service Shares of the Funds for the fiscal
year ended March 31, 1995, as restated to reflect the additional cost of dis-
tribution fees borne by Distribution Shares. For more complete descriptions of
the Funds' operating expenses, see "Management of the Funds" in this Prospectus
and the financial statements and notes incorporated by reference in the State-
ment of Additional Information.
THE FOREGOING EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE EXPENSES OR RATE OF RETURN. ACTUAL EXPENSES AND RATE OF RETURN MAY BE
GREATER OR LOWER THAN THOSE SHOWN IN THE EXPENSE SUMMARY AND EXAMPLE.
4
<PAGE>
FINANCIAL HIGHLIGHTS
The following tables include selected data for a Service Share outstanding
throughout each period and other performance information derived from the fi-
nancial statements included in Master Fund's Annual Report to Shareholders for
the year ended March 31, 1995 (the "Financial Statements"). The information
contained in the Financial Highlights for each period has been audited by Ernst
& Young LLP, Master Fund's independent auditors. The following tables should be
read in conjunction with the Financial Statements and notes thereto. More in-
formation about the performance of each Fund is also contained in the Annual
Report to Shareholders which may be obtained from Master Fund without charge by
calling the number on the front cover of this Prospectus.
Prior to the date of this Prospectus, each Fund offered a single series of
shares, the Service Shares. As of the date of this Prospectus, the Funds began
offering a new series of shares designated as Distribution Shares. Service
Shares and Distribution Shares represent equal pro rata interests in each Fund,
except they bear different expenses which reflect the difference in the level
of services provided to them. See "Description of Capital Stock."
INTERNATIONAL FUND
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
------------------------------------------------------------------
1995 1994 1993 1992 1991 1990 1989 1988/1/
------- ------ ------ ------- ------- ------ ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value, Begin-
ning of period......... $ 10.44 $ 8.66 $ 8.27 $ 8.75 $ 9.84 $ 8.61 $ 7.85 $ 8.00
------- ------ ------ ------- ------- ------ ------ -------
Income From Investment
Operations
Net Investment Income.. 0.10 0.05 0.15 0.08 0.13 0.15 0.05 0.05
Net Gains or (Losses)
on Securities (both
realized and
unrealized)........... (0.29) 1.88 0.25 (0.45) (0.64) 1.47 0.77 (0.16)
------- ------ ------ ------- ------- ------ ------ -------
Total From Investment
Operations............ (0.19) 1.93 0.40 (0.37) (0.51) 1.62 0.82 (0.11)
------- ------ ------ ------- ------- ------ ------ -------
Less Distributions
Dividends From Net
Investment Income..... 0.00 (0.02) (0.01) (0.11) (0.11) (0.16) (0.06) (0.03)
Dividends in Excess of
Net Investment Income. (0.11) (0.12) 0.00 0.00 0.00 0.00 0.00 0.00
Distributions From Net
Realized Gain on
Investments........... (0.32) (0.01) 0.00 0.00 (0.47) (0.23) 0.00 (0.01)
Distributions in Excess
of Net Realized Gain
on Investments........ 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
------- ------ ------ ------- ------- ------ ------ -------
Total Distributions.... (0.43) (0.15) (0.01) (0.11) (0.58) (0.39) (0.06) (0.04)
------- ------ ------ ------- ------- ------ ------ -------
Net Asset Value, End of
Period................. $ 9.82 $10.44 $ 8.66 $ 8.27 $ 8.75 $ 9.84 $ 8.61 $ 7.85
======= ====== ====== ======= ======= ====== ====== =======
Total Return/2/......... (1.93)% 22.34% 4.85% (4.35)% (5.20)% 18.91% 10.59% (1.28)%
Ratios/Supplemental Data
Net Assets, End of Pe-
riod (in millions).... $ 64.05 $55.74 $30.37 $ 46.92 $ 31.87 $21.49 $13.01 $ 8.56
Ratio of Net Operating
Expenses to Average
Net Assets............ 1.47% 1.53% 1.50% 1.52% 1.61% 1.34% 1.28% 1.09%/3/
Ratio of Gross Operat-
ing Expenses to Aver-
age Net Assets........ 1.53% 1.53% 1.50% 1.52% 1.61% 1.58% 1.93% 2.81%/3/
Ratio of Net Investment
Income to Average Net
Assets................ 0.71% 0.18% 1.27% 0.94% 1.57% 1.55% 0.75% 1.13%/3/
Portfolio Turnover
Rate.................. 66.0% 64.0% 31.0% 32.0% 47.0% 50.0% 80.0% 55.0%/3/
</TABLE>
-------
NOTES:
1. Inception date of the Fund was July 21, 1987.
2. Total return data does not reflect the sales load payable on purchases of
Shares.
3. Annualized.
5
<PAGE>
EMERGING AMERICAS FUND
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
---------------------- PERIOD ENDED
1995 1994 MARCH 31, 1993/1/
---------- ---------- -----------------
<S> <C> <C> <C>
Net Asset Value, Beginning of period.. $ 9.30 $ 7.12 $ 7.00
---------- --------- -------
Income From Investment Operations
Net Investment Income............... 0.01 0.05 0.00
Net Gains or (Losses) on Securities
(both realized and unrealized)..... (2.56) 2.24 0.12
---------- --------- -------
Total From Investment Operations.... (2.55) 2.29 0.12
---------- --------- -------
Less Distributions
Dividends From Net Investment
Income............................. 0.00 (0.03) 0.00
Dividends in Excess of Net
Investment Income.................. (0.17) (0.02) 0.00
Distributions From Net Realized Gain
on Investments..................... 0.00 (0.06) 0.00
Distributions in Excess of Net
Realized Gain on Investments....... (0.72) 0.00 0.00
---------- --------- -------
Total Distributions................. (0.89) (0.11) 0.00
---------- --------- -------
Net Asset Value, End of Period........ $ 5.86 $ 9.30 $ 7.12
========== ========= =======
Total Return/2/....................... (30.47)% 32.25% 1.71%
Ratios/Supplemental Data
Net Assets, End of Period (in
millions).......................... $ 27.34 $ 39.28 $ 3.83
Ratio of Net Operating Expenses to
Average Net Assets................. 1.50% 1.49% 1.67%/3/
Ratio of Gross Operating Expenses to
Average Net Assets................. 1.57% 1.71% 2.56%/3/
Ratio of Net Investment
Income/(Loss) to Average Net
Assets............................. 0.06% 0.29% (0.04)%/3/
Portfolio Turnover Rate............. 69.0% 51.0% 76.0%/3/
</TABLE>
-------
NOTES:
1. Inception date of the Fund was December 31, 1992.
2. Total return data does not reflect the sales load payable on purchases of
Shares.
3. Annualized.
6
<PAGE>
PACIFIC/ASIA FUND
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
---------------------- PERIOD ENDED
1995 1994 MARCH 31, 1993/1/
---------- ---------- -----------------
<S> <C> <C> <C>
Net Asset Value, Beginning of period.. $ 10.04 $ 7.54 $ 7.00
---------- --------- ------
Income From Investment Operations
Net Investment Income............... 0.08 0.08 0.00
Net Gains or (Losses) on Securities
(both realized and unrealized)..... (0.58) 2.81 0.54
---------- --------- ------
Total From Investment Operations.... (0.50) 2.89 0.54
---------- --------- ------
Less Distributions
Dividends From Net Investment In-
come............................... (0.03) (0.05) 0.00
Dividends in Excess of Net Invest-
ment Income........................ (0.23) (0.06) 0.00
Distributions From Net Realized Gain
on Investments..................... (0.83) (0.28) 0.00
Distributions in Excess of Net
Realized Gain on Investment........ 0.00 0.00 0.00
---------- --------- ------
Total Distributions................. (1.09) (0.39) 0.00
---------- --------- ------
Net Asset Value, End of Period........ $ 8.45 $ 10.04 $ 7.54
========== ========= ======
Total Return/2/....................... (5.89)% 38.11% 7.71%
Ratios/Supplemental Data
Net Assets, End of Period (in
millions).......................... $ 47.62 $ 53.03 $ 9.67
Ratio of Net Operating Expenses to
Average Net Assets................. 1.47% 1.53% 1.67%/3/
Ratio of Gross Operating Expenses to
Average Net Assets................. 1.52% 1.77% 2.00%/3/
Ratio of Net Investment Income to
Average Net Assets................. 0.85% 0.54% 0.27%/3/
Portfolio Turnover Rate............. 69.0% 68.0% 1.0%/3/
</TABLE>
-------
NOTES:
1. Inception date of the Fund was December 31, 1992.
2. Total return data does not reflect the sales load payable on purchases of
Shares.
3. Annualized.
7
<PAGE>
PAN EUROPEAN FUND
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
---------------------- PERIOD ENDED
1995 1994 MARCH 31, 1993/1/
---------- ---------- -----------------
<S> <C> <C> <C>
Net Asset Value, Beginning of period. $ 8.03 $ 7.34 $ 7.00
---------- ---------- -------
Income From Investment Operations
Net Investment Income.............. 0.09 0.03 0.00
Net Gains or (Losses) on Securities
(both realized and unrealized).... 0.25 0.70 0.34
---------- ---------- -------
Total From Investment Operations... 0.34 0.73 0.34
---------- ---------- -------
Less Distributions
Dividends From Net Investment In-
come.............................. (0.09) 0.00 0.00
Dividends in Excess of Net Invest-
ment Income....................... 0.00 (0.04) 0.00
Distributions From Net Realized
Gain on Investments............... (0.09) 0.00 0.00
Distributions in Excess of Net Re-
alized Gain on Investment......... 0.00 0.00 0.00
---------- ---------- -------
Total Distributions................ (0.18) (0.04) 0.00
---------- ---------- -------
Net Asset Value, End of Period....... $ 8.19 $ 8.03 $ 7.34
========== ========== =======
Total Return/2/...................... 4.33% 10.05% 4.86%
Ratios/Supplemental Data
Net Assets, End of Period (in mil-
lions)............................ $ 39.98 $ 36.68 $ 3.80
Ratio of Net Operating Expenses to
Average Net Assets................ 1.51% 1.61% 1.67%/3/
Ratio of Gross Operating Expenses
to Average Net Assets............. 1.57% 1.72% 3.13%/3/
Ratio of Net Investment
Income/(Loss) to Average Net As-
sets.............................. 1.11% 0.06% (0.33%)/3/
Portfolio Turnover Rate............ 47.0% 30.0% 9.0%/3/
</TABLE>
-------
NOTES:
1. Inception date of the Fund was December 31, 1992.
2. Total return data does not reflect the sales load payable on purchases of
Shares.
3. Annualized.
8
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
The Investment Adviser will use its best efforts to achieve the investment
objectives of each Fund, although their achievement cannot be assured. The in-
vestment objective of each Fund is "fundamental", meaning that it may not be
changed without a vote of the holders of a majority of the particular Fund's
outstanding shares (as defined under "Miscellaneous"). Except as noted below
in "Investment Limitations," the investment policies of each Fund may be
changed without a vote of the holders of a majority of the outstanding shares
of such Fund.
INTERNATIONAL FUND
The International Fund's investment objective is to seek total return on its
assets through capital appreciation and income derived primarily from invest-
ments in a diversified portfolio of marketable foreign equity securities.
In seeking to achieve this investment objective, the International Fund will
invest primarily in equity securities of foreign issuers who will, in the
opinion of Foreign and Colonial Asset Management, the Fund's sub-adviser (the
"Sub-Adviser" or "FACAM") and the Investment Adviser, benefit from global eco-
nomic trends, promising technologies or products and specific country opportu-
nities resulting from changing geo-political, economic or currency relation-
ships. In making investment decisions, the Sub-Adviser and Investment Adviser
will seek to identify values not recognized in the market price of a security.
The primary emphasis will be on the achievement of a higher total return fo-
cusing, as circumstances warrant, solely on either growth of capital or gener-
ation of current income or any combination thereof.
The International Fund does not intend to have, at any time, a specified per-
centage of its assets invested either for growth or for income, and all or any
portion of its assets may be allocated among these two components based on the
Investment Adviser's and Sub-Adviser's analysis of the prevailing market con-
ditions. Although the Fund will seek to realize its investment objective pri-
marily through investments in foreign equity securities, it may, from time to
time, assume a defensive position by allocating all or any portion of its as-
sets to foreign debt obligations. In determining investment strategy and allo-
cating investments, the Sub-Adviser and Investment Adviser will continuously
analyze a broad range of international equity and fixed-income securities in
order to assess the level of return, and degree of risk, that can be expected
from each type of investment and from each market.
The International Fund's investments will generally be diversified among geo-
graphic regions and countries. While there are no prescribed limits on geo-
graphic distribution, the Fund will normally include in its portfolio securi-
ties of issuers collectively having their principal business in no fewer than
three foreign countries. The Fund's assets may be invested in securities of
issuers located in the Pacific Basin (e.g. Japan, Hong Kong, Singapore, Malay-
sia), Europe, Australia, Latin America and Canada. The Fund may also, from
time to time, invest in other regions, seeking to capitalize on investment op-
portunities emerging in other parts of the world.
REGIONAL FUNDS:
The investment objective of each Regional Fund is long-term capital apprecia-
tion. In seeking to achieve this investment objective, each Regional Fund will
invest primarily in equity securities of foreign issuers who will, in the
opinion of the particular Fund's Sub-Adviser and the Investment Adviser, bene-
fit from global and regional economic trends, promising technologies or prod-
ucts and specific country and regional opportunities resulting from changing
geo-political, economic or currency relationships. In making investment deci-
sions, the particular Fund's Sub-Adviser and the Investment Adviser will seek
to identify values not recognized in the market price of a security.
9
<PAGE>
Although each Regional Fund will seek to realize its investment objective pri-
marily through investments in foreign equity and government securities, it may,
from time to time, assume a defensive position by allocating all or any portion
of its assets to U.S. Government or foreign debt obligations. The Regional
Funds will limit their investments in foreign debt obligations to those rated
within the top three ratings by Moody's Investors Service, Inc. ("Moody's") or
Standard & Poor's Ratings Group ("S&P") or, if unrated, determined by the In-
vestment Advisory or the sub-adviser to be of comparable quality. No Regional
Fund currently expects to invest more than 25% of its total assets in the secu-
rities issued by any single foreign government. Any such investment would sub-
ject the particular Regional Fund to the risks presented by investing in secu-
rities of such foreign government to a greater extent than it would if that
Fund's assets were not so concentrated. In determining investment strategy and
allocating investments, the particular Fund's Sub-Adviser and the Investment
Adviser will continuously analyze a broad range of international equity and
fixed-income securities in order to assess the level of return, and degree of
risk, that can be expected from each type of investment and from each market.
Under normal circumstances, each Regional Fund will invest at least 65% of its
total assets in securities of issuers based in its targeted region. A company
is "based in" a region if it derives more than half of its assets, revenues or
profits from such region. The Regional Funds and their targeted regions are as
follows:
EMERGING AMERICAS FUND. The Emerging Americas Fund invests primarily in secu-
rities of companies and governments based in all countries of the Western Hemi-
sphere except the U.S. Currently, the Investment Adviser believes that such
countries may include Canada, Mexico, the Bahamas, Costa Rica, Venezuela, Co-
lombia, Peru, Brazil, Argentina and Chile. Under normal conditions, the Fund
will invest at least 65% of its total assets in securities of issuers based in
Western Hemisphere countries other than Canada. The Fund may also invest in
Brady Bonds, which are securities issued in various currencies (primarily the
dollar) that have been created through the exchange of existing commercial bank
loans to Latin American public and private entities for new bonds in connection
with debt restructurings under a debt restructuring plan announced by former
U.S. Secretary of the Treasury Nicholas F. Brady (the "Brady Plan"). Brady
Bonds have been issued only recently and for that reason do not have a long
payment history. Brady Bonds may be collateralized or uncollateralized, are is-
sued in various currencies (primarily the dollar) and are actively traded in
the over-the-counter secondary market for Latin American debt instruments.
Brady Bonds are neither issued nor guaranteed by the U.S. Government. Addi-
tional information on Brady Bonds is included in the Statement of Additional
Information.
PACIFIC/ASIA FUND. The Pacific/Asia Fund invests primarily in securities of
companies and governments based in Asia and on the Asian side of the Pacific
Ocean. Currently, the Investment Adviser believes that such countries may in-
clude Australia, New Zealand, Hong Kong, India, Japan, Indonesia, the Philip-
pines, Malaysia, Singapore, Taiwan, China, Thailand, South Korea, Sri Lanka and
Pakistan.
PAN EUROPEAN FUND. The Pan European Fund invests primarily in securities of
companies and governments based in Europe. Currently, the Investment Adviser
believes that such countries may include Ireland, the United Kingdom, Norway,
Sweden, Finland, Holland, Belgium, Luxembourg, France, Portugal, Spain, Den-
mark, Germany, Poland, Czech Republic, Slovakia, Hungary, Switzerland, Austria,
Greece, Turkey and Italy. As other formerly communist and Eastern European
countries become economically viable, investments may be made there as well.
INVESTMENT POLICIES COMMON TO ALL FUNDS
Under normal market and economic conditions, at least 75% of each Fund's as-
sets will be invested in foreign securities. Foreign securities include common
10
<PAGE>
stock, preferred stock, securities convertible into common stock, warrants,
bonds, notes and other debt obligations issued by foreign entities, as well as
shares of U.S. registered investment companies that invest primarily in foreign
securities. Foreign debt securities purchased by a Fund may include obligations
issued in the Eurocurrency markets and obligations of foreign governments and
their political subdivisions. In addition, each Fund may invest in U.S. Govern-
ment obligations, including the when-issued securities of such issuers, and ob-
ligations issued by U.S. companies which are either denominated in foreign cur-
rency and sold abroad or, if denominated in U.S. dollars, payment on which is
determined by reference to some other foreign currency.
Each Fund may invest indirectly in the securities of foreign issuers through
sponsored and unsponsored American Depository Receipts ("ADRs") and European
Depository Receipts ("EDRs"). Investments in unsponsored ADRs involve addi-
tional risk because financial information based on generally accepted account-
ing principles ("GAAP") may not be available for the foreign issuers of the un-
derlying securities. ADRs and EDRs may not necessarily be denominated in the
same currency as the underlying securities into which they may be converted.
Under unusual economic and market conditions, each Fund may restrict the secu-
rities markets in which its assets are invested and may invest all or a major
portion of its assets in U.S. Government obligations or in U.S. dollar-denomi-
nated securities of U.S. companies. Up to 25% of each Fund's assets may also be
held on a continuous basis in cash or invested in U.S. money market instruments
(see below under "Money Market Instruments") to meet redemption requests or to
take advantage of emerging investment opportunities. To the extent described
below under "Portfolio Instruments and Other Investment Information," each Fund
may purchase shares of other investment companies and may engage in repurchase
agreements, securities lending, forward currency contracts and futures con-
tracts, options on futures and covered call options.
Convertible and non-convertible debt securities purchased by each Fund will be
rated "investment grade," or, if unrated, deemed by the particular Sub-Adviser
and the Investment Adviser to be comparable to securities rated "investment
grade," by Moody's or S&P. Debt obligations rated in the lowest of the top four
"investment grade" ratings ("Baa" by Moody's and "BBB" by S&P) are considered
to have some speculative characteristics and may be more sensitive to adverse
economic change than higher rated securities. Each Fund will sell in an orderly
fashion as soon as possible any convertible and non-convertible debt securities
it holds if they are downgraded below "Baa" by Moody's or below "BBB" by S&P.
Foreign securities are generally unrated. In purchasing foreign equity securi-
ties, the particular Fund's Sub-Adviser will look generally to established for-
eign companies. Each Fund may purchase securities both on recognized stock ex-
changes and in over-the-counter markets. Most of the Funds' portfolio transac-
tions will be effected in the primary trading market for the given security.
Each Fund also may invest up to 5% of its total assets in gold bullion. Invest-
ments in gold will not produce dividends or interest income, and the Funds can
look only to price appreciation for a return on such investments.
RISK FACTORS
Generally. Each Fund is subject to market risk, interest rate risks and the
risks of investing in foreign securities. Market risk is the possibility that
stock prices will decline over short or even extended periods. The stock mar-
kets tend to be cyclical, with periods of generally rising prices and periods
of generally declining prices. These cycles will affect the values of each
Fund. In addition, to the extent that the Funds invest in fixed-income securi-
ties, their holdings of debt securities are sensitive to changes in interest
rates and the interest rate environment. Generally, the prices of
11
<PAGE>
bonds and debt securities fluctuate inversely with interest rate changes.
Investments in securities of foreign issuers involve certain risks not ordi-
narily associated with investments in securities of domestic issuers. Such
risks include fluctuations in foreign exchange rates, future political and
economic developments, and the possible imposition of exchange controls or
other foreign governmental laws or restrictions. Since each Fund will invest
heavily in securities denominated or quoted in currencies other than the U.S.
dollar, changes in foreign currency exchange rates will, to the extent a Fund
does not adequately hedge against such fluctuations, affect the value of secu-
rities in the portfolio and the unrealized appreciation or depreciation of in-
vestments so far as U.S. investors are concerned. In addition, with respect to
certain countries, there is the possibility of expropriation of assets, con-
fiscatory taxation, political or social instability or diplomatic developments
which could adversely affect investments in those countries.
There may be less publicly available information about a foreign company than
about a U.S. company, and foreign companies may not be subject to accounting,
auditing and financial reporting standards and requirements comparable to or
as uniform as those of U.S.-based companies. Foreign securities markets, while
growing in volume, have, for the most part, substantially less volume than
U.S. markets, and securities of many foreign companies are less liquid and
their prices more volatile than securities of comparable U.S.-based companies.
Transaction costs on foreign securities markets are generally higher than in
the United States. There is generally less government supervision and regula-
tion of foreign exchanges, brokers and issuers than there is in the U.S. The
Funds might have greater difficulty taking appropriate legal action in a for-
eign court than in a U.S. court.
Dividends and interest payable on a Fund's foreign portfolio securities may
be subject to foreign withholding taxes. To the extent such taxes are not off-
set by credits or deductions allowed to investors under the Federal income tax
provisions--see "Taxes--Federal"--they may reduce the net return to the Fund's
shareholders. Investors should also understand that the expense ratio of the
Funds can be expected to be higher than those of funds investing in domestic
securities. The costs attributable to investing abroad are usually higher for
several reasons, such as the higher cost of investment research, higher cost
of custody of foreign securities, higher commissions paid on comparable trans-
actions on foreign markets and additional costs arising from delays in settle-
ments of transactions involving foreign securities.
Emerging Americas Fund. The Latin American economies have experienced consid-
erable difficulties in the past decade. Although there have been significant
improvements in recent years, the Latin American economies continue to experi-
ence significant problems, including high inflation rates and high interest
rates. Inflation and rapid fluctuations in inflation rates have had and may
continue to have very negative effects on the economies and securities markets
of certain Latin American countries. The emergence of the Latin American econ-
omies and securities markets will require continued economic and fiscal disci-
pline which has been lacking at times in the past, as well as stable political
and social conditions. There is no assurance that economic initiatives will be
successful. Recovery may also be influenced by international economic condi-
tions, particularly those in the United States, and by world prices for oil
and other commodities.
Pan European Fund. Political and economic developments in Europe, especially
as they relate to changes in the structure of the European Economic Community
and the anticipated development of a unified common market, may have profound
effects upon the value of a large segment of the Fund's investment portfolio.
For example, continued progress in the evolution of a unified European common
market may be slowed by unanticipated political or social events and may,
therefore, adversely affect the value of certain of
12
<PAGE>
the securities held by the Fund. In addition, Germany is currently experienc-
ing significant economic stress associated with its recent unification. These
pressures are affecting other European countries to varying degrees and have
caused considerable currency volatility within the European monetary system.
Pacific/Asia Fund. The extent of economic development, political stability
and market depth of different countries in the Pacific/Asia region varies
widely. Certain countries in the region are either comparatively underdevel-
oped or are in the process of becoming developed, and investments in the secu-
rities of issuers in such countries typically involve greater potential for
gain or loss than investments in securities of issuers in more developed coun-
tries. Certain countries in the region also depend to a large degree upon ex-
ports of primary commodities and, therefore, are vulnerable to changes in com-
modity prices which, in turn, may be affected by a variety of factors. The
Fund may be particularly sensitive to changes in the economies of certain
countries in the Pacific/Asia region resulting from any reversal of economic
liberalization, political unrest or the imposition of sanctions by the United
States or other countries.
Latin America, Eastern Europe and the Pacific/Asia Region. Certain of the
risks associated with international investments are heightened with respect to
investments in developing countries and fledgling democracies in Latin Ameri-
ca, Eastern Europe and the Pacific/Asia region. The risks of expropriation,
nationalization and social, political and economic instability are greater in
those countries than in more developed capital markets. In addition, the de-
veloping countries and emerging democracies in those regions may have econo-
mies based on only a few industries and small securities markets with a low
volume of trading. Certain countries may also impose substantial restrictions
on investments in their capital markets by foreign entities, including re-
strictions on investments in issuers of industries deemed sensitive to rele-
vant national interests. These factors may limit the investment opportunities
available to the Funds and result in a lack of liquidity and a high price vol-
atility with respect to securities of issuers from the developing countries
and emerging democracies in those regions.
Countries in Latin America, Eastern Europe and the Pacific/Asia region may
also impose restrictions on the Funds' ability to repatriate investment income
or capital. Even where there is no outright restriction on repatriation of in-
vestment income or capital, the mechanics of repatriation may affect certain
aspects of the operations of the Funds. For example, funds may be withdrawn
from the People's Republic of China only in U.S. or Hong Kong dollars and only
at an exchange rate established by the government once each week.
Some of the currencies of developing countries and emerging democracies in
Latin America, Eastern Europe and the Pacific/Asia region have experienced de-
valuations relative to the U.S. dollar, and major adjustments have been made
periodically in certain of such currencies. Certain countries in these regions
face serious exchange constraints.
Lastly, governments of many developing countries and emerging democracies in
Latin America, Eastern Europe and the Pacific/Asia region exercise substantial
influence over many aspects of the private sector. In some countries, the gov-
ernment owns or controls many companies, including the largest in the country.
As such, government actions in the future could have a significant effect on
economic conditions in developing countries and emerging democracies in these
regions, which could affect private sector companies, a Fund and the value of
a Fund's portfolio securities. Furthermore, certain countries in Latin Ameri-
ca, Eastern Europe and the Pacific/Asia region are among the largest debtors
to commercial banks and foreign governments. Trading in debt obligations is-
sued or guaranteed by those governments or their agencies and instrumentali-
ties involves a high degree of risk.
* * *
Because of the Funds' investment policies and the considerations discussed
above, investments in
13
<PAGE>
Shares of the Funds may not be appropriate for all investors and should not be
considered a complete investment program.
PORTFOLIO INSTRUMENTS AND OTHER INVESTMENT INFORMATION
MONEY MARKET INSTRUMENTS
"Money market instruments" which may be purchased by each Fund in accordance
with its policies set forth above include, among other things, bank obliga-
tions, commercial paper and corporate bonds with remaining maturities of 13
months or less.
Bank obligations include bankers' acceptances, negotiable certificates of de-
posit, and non-negotiable time deposits earning a specified return and issued
by a U.S. bank which is a member of the Federal Reserve System or insured by
the Bank Insurance Fund of the Federal Deposit Insurance Corporation, or by a
savings and loan association or savings bank which is insured by the Savings
Association Insurance Fund of the Federal Deposit Insurance Corporation. Bank
obligations also include U.S. dollar-denominated obligations of foreign
branches of U.S. banks and obligations of domestic branches of foreign banks.
Investments in time deposits are limited to no more than 5% of the value of a
Fund's total assets at time of purchase.
Investments by a Fund in commercial paper will consist of issues that are
rated "A-2" or better by S&P or "Prime-2" by Moody's. In addition, each Fund
may acquire unrated commercial paper and corporate bonds that are determined by
the Investment Adviser at the time of purchase to be of comparable quality to
rated instruments that may be acquired by each Fund.
Commercial paper may include variable and floating rate instruments. While
there may be no active secondary market with respect to a particular instrument
purchased by a Fund, each Fund may, from time to time as specified in the in-
strument, demand payment of the principal of the instrument or may resell the
instrument to a third party. The absence of an active secondary market, howev-
er, could make it difficult for a Fund to dispose of the instrument if the is-
suer defaulted on its payment obligation or during periods when a Fund is not
entitled to exercise its demand rights, and a Fund could, for this or other
reasons, suffer a loss with respect to such instrument.
REPURCHASE AGREEMENTS
In order to effectively manage its cash holdings, each Fund may enter into re-
purchase agreements. The Funds will enter into repurchase agreements only with
financial institutions that are deemed to be creditworthy by the Investment Ad-
viser, pursuant to guidelines established by Master Fund's Board of Directors.
The Funds will not enter into repurchase agreements with the Investment Adviser
or Sub-Advisers or any of their affiliates. Repurchase agreements with remain-
ing maturities in excess of seven days will be considered illiquid securities
and will be subject to the 10% limit described in Investment Limitation No. 5
below.
The seller under a repurchase agreement will be required to maintain the value
of the securities which are subject to the agreement and held by a Fund at not
less than the repurchase price. Default or bankruptcy of the seller would, how-
ever, expose a Fund to possible delay in connection with the disposition of the
underlying securities or loss to the extent that proceeds from a sale of the
underlying securities were less than the repurchase price under the agreement.
SECURITIES LENDING
To increase return on its portfolio securities, each Fund may lend its portfo-
lio securities to broker/ dealers pursuant to agreements requiring the loans to
be continuously secured by collateral equal at all times in value to at least
the market value of the securities loaned. Collateral for such loans may in-
clude cash, securities of the U.S. Government, its agencies or in-
14
<PAGE>
strumentalities, or an irrevocable letter of credit issued by a bank, or any
combination thereof. Such loans will not be made if, as a result, the aggregate
of all outstanding loans of a Fund exceeds 30% of the value of its total as-
sets. There may be risks of delay in receiving additional collateral or in re-
covering the securities loaned or even a loss of rights in the collateral
should the borrower of the securities fail financially. However, loans are made
only to borrowers deemed by the Investment Adviser to be of good standing when,
in the Investment Adviser's judgment, the income to be earned from the loan
justifies the attendant risks.
FORWARD CURRENCY TRANSACTIONS
Each Fund will conduct its currency exchange transactions either on a spot
(i.e. cash) basis at the rate prevailing in the currency exchange markets, or
by entering into forward currency contracts. A forward foreign currency con-
tract involves an obligation to purchase or sell a specific currency for a set
price at a future date. In this respect, forward currency contracts are similar
to foreign currency futures contracts described below; however, unlike futures
contracts, which are traded on recognized commodities exchanges, forward cur-
rency contracts are traded in the interbank market conducted directly between
currency traders (usually large commercial banks) and their customers. Also,
forward currency contracts usually involve delivery of the currency involved
instead of cash payment as in the case of futures contracts.
A Fund's participation in forward currency contracts will be limited to hedg-
ing involving either specific transactions or portfolio positions. Transaction
hedging involves the purchase or sale of foreign currency with respect to spe-
cific receivables or payables of the Fund generally arising in connection with
the purchase or sale of its portfolio securities. The purpose of transaction
hedging is to "lock in" the U.S. dollar equivalent price of such specific secu-
rities. Position hedging is the sale of foreign currency with respect to port-
folio security positions denominated or quoted in that currency. The Funds will
not speculate in foreign currency exchange transactions. Transaction and
position hedging will not be limited to an overall percentage of a Fund's as-
sets, but will be employed as necessary to correspond to particular transac-
tions or positions. A Fund may not hedge its currency positions to an extent
greater than the aggregate market value (at the time of entering into the for-
ward contract) of the securities held in its portfolio denominated, quoted in,
or currently convertible into that particular currency. When the Funds engage
in forward currency transactions, certain asset segregation requirements must
be satisfied. When a Fund takes a long position in a forward currency contract,
it must maintain a segregated account containing cash and/or certain liquid as-
sets equal to the purchase price of the contract, less any margin or deposit.
When a Fund takes a short position in a forward currency contract, the Fund
must maintain a segregated account containing cash and/or certain liquid assets
in an amount equal to the market value of the currency underlying such contract
(less any margin or deposit), which amount must be at least equal to the market
price at which the short position was established. Asset segregation require-
ments are not applicable when a Fund "covers" a forward currency position gen-
erally by entering into an offsetting position. Additional information on for-
ward currency transactions, including a discussion of risks involved in such
transactions (which are similar to those described below under "Futures Con-
tracts"), is included in the Statement of Additional Information.
FUTURES CONTRACTS
Each Fund may also enter into interest rate futures contracts, other types of
financial futures contracts (such as foreign currency futures contracts, which
are similar to forward currency contracts described above) and related futures
options, as well as any index or foreign market futures which are available on
recognized exchanges or in other established financial markets.
15
<PAGE>
The Funds will not engage in futures transactions for speculation, but only as
a hedge against changes in market values of securities which a Fund holds or
intends to purchase. The Funds will engage in futures transactions only to the
extent permitted by the Commodity Futures Trading Commission ("CFTC") and the
Securities and Exchange Commission ("SEC"). When investing in futures con-
tracts, the Funds must satisfy certain asset segregation requirements to ensure
that the use of futures is unleveraged. When a Fund takes a long position in a
futures contract, it must maintain a segregated account containing cash and/or
certain liquid assets equal to the purchase price of the contract, less any
margin or deposit. When a Fund takes a short position in a futures contract,
the Fund must maintain a segregated account containing cash and/or certain liq-
uid assets in an amount equal to the market value of the securities underlying
such contract (less any margin or deposit), which amount must be at least equal
to the market price at which the short position was established. Asset segrega-
tion requirements are not applicable when a Fund "covers" an options or futures
position generally by entering into an offsetting position. Each Fund will
limit its hedging transactions in futures contracts and related options so
that, immediately after any such transaction, the aggregate initial margin that
is required to be posted by a Fund under the rules of the exchange on which the
futures contract (or futures option) is traded, plus any premiums paid by such
Fund on its open futures options positions, does not exceed 5% of such Fund's
total assets, after taking into account any unrealized profits and unrealized
losses on the Fund's open contracts (and excluding the amount that a futures
option is "in-the-money" at the time of purchase). An option to buy a futures
contract is "in-the-money" if the then-current purchase price of the underlying
futures contract exceeds the exercise or strike price; an option to sell a
futures contract is "in-the-money" if the exercise or strike price exceeds the
then-current purchase price of the contract that is the subject of the option.
Transactions in futures as a hedging device may subject a Fund to a number of
risks. Successful use of futures by a Fund is subject to the ability of the In-
vestment Adviser and Sub-Adviser to correctly anticipate movements in the di-
rection of the market. In addition, there may be an imperfect correlation, or
no correlation at all, between movements in the price of the futures contracts
(or options) and movements in the price of the instruments being hedged. Fur-
ther, there is no assurance that a liquid market will exist for any particular
futures contract (or option) at any particular time. Consequently, a Fund may
realize a loss on a futures transaction that is not offset by a favorable move-
ment in the price of securities which it holds or intends to purchase or may be
unable to close a futures position in the event of adverse price movements.
COVERED CALL OPTIONS
To further increase return on its portfolio securities in accordance with its
investment objective and policies, each Fund may engage in writing covered call
options (options on securities owned by such Fund) and enter into closing pur-
chase transactions with respect to such options. Such options must be listed on
a national securities exchange and issued by the Options Clearing Corporation
or be traded on foreign exchanges. The aggregate value of the securities sub-
ject to options written by the Fund may not exceed 25% of the value of its net
assets. By writing a covered call option, a Fund forgoes the opportunity to
profit from an increase in the market price of the underlying security above
the exercise price except insofar as the premium represents such a profit, and
it will not be able to sell the underlying security until the option expires or
is exercised or the Fund effects a closing purchase transaction by purchasing
an option of the same series. The use of covered call options is not a primary
investment technique of the Funds and such options will normally be written on
underlying securities as to which the Investment Adviser and Sub-Adviser do not
anticipate significant short-term capital appreciation. Additional information
on option-writing practices, including particular risks thereof, is provided in
the Statement of Additional Information.
16
<PAGE>
INVESTMENT COMPANY SECURITIES
In connection with the management of its daily cash positions, each Fund may
invest in securities issued by other investment companies which invest in high-
quality, short-term debt securities and which determine their net asset value
per share based on the amortized cost or penny-rounding method. Each Fund may
also purchase shares of investment companies investing primarily in foreign se-
curities, including so called "country funds" which have portfolios consisting
exclusively of securities of issuers located in one foreign country. The Re-
gional Funds will limit their investments in such country funds to those funds
which invest in the appropriate regions in light of a Regional Fund's policies.
Securities of other investment companies will be acquired by a Fund within the
strict limits prescribed by the Investment Company Act of 1940 (the "1940
Act"). In addition to the advisory fees and other expenses each Fund bears di-
rectly in connection with its own operations, as a shareholder of another in-
vestment company, each Fund would bear its pro rata portion of the other in-
vestment company's advisory fees and other expenses. As such, a Fund's share-
holders would indirectly bear the expenses of the Fund and the other investment
company, some or all of which would be duplicative.
WHEN-ISSUED AND FORWARD TRANSACTIONS
Each Fund may purchase eligible securities on a "when-issued" basis and may
purchase or sell securities on a "forward commitment" basis. These transactions
involve a commitment by a Fund to purchase or sell particular securities with
payment and delivery taking place in the future, beyond the normal settlement
date, at a stated price and yield. Securities purchased on a "forward commit-
ment" or "when-issued" basis are recorded as an asset and are subject to
changes in value based upon changes in the general level of interest rates. It
is expected that forward commitments and "when-issued" purchases will not ex-
ceed 25% of the value of a Fund's total assets absent unusual market condi-
tions, and that the length of such commitments will not exceed 45 days. The
Funds do not intend to engage in "when-issued" purchases and forward commit-
ments for speculative purposes, but only in furtherance of their investment ob-
jectives.
ILLIQUID SECURITIES
No Fund will knowingly invest more than 10% of the value of its net assets in
securities that are illiquid. Each Fund may purchase securities which are not
registered under the Securities Act of 1933 (the "Act") but which can be sold
to "qualified institutional buyers" in accordance with Rule 144A under the Act.
Any such security will not be considered illiquid so long as it is determined
by the Investment Adviser, acting under guidelines approved and monitored by
the Board, that an adequate trading market exists for that security. This in-
vestment practice could have the effect of increasing the level of illiquidity
in a Fund during any period that qualified institutional buyers become uninter-
ested in purchasing these restricted securities.
PORTFOLIO TURNOVER
Each Fund may sell a portfolio investment immediately after its acquisition if
the Investment Adviser and Sub-Adviser believe that such a disposition is con-
sistent with attaining the investment objective of the particular Fund. Portfo-
lio investments may be sold for a variety of reasons, such as a more favorable
investment opportunity or other circumstances bearing on the desirability of
continuing to hold such investments. A high rate of portfolio turnover may in-
volve correspondingly greater brokerage commission expenses and other transac-
tion costs, which must be borne directly by the Fund and ultimately by its
shareholders. High portfolio turnover may result in the realization of substan-
tial net capital gains. (See "Financial Highlights" and "Taxes--Federal").
INVESTMENT LIMITATIONS
The investment limitations enumerated below are matters of fundamental policy
and may not be changed with respect to a Fund without the vote of
17
<PAGE>
the holders of a majority of its outstanding Shares (as defined under "Miscel-
laneous").
A Fund may not:
1. Purchase securities of any one issuer, other than U.S. Government obliga-
tions, if immediately after such purchase more than 5% of the value of its
total assets would be invested in the securities of such issuer, except that
up to 25% of the value of its total assets may be invested without regard to
this 5% limitation;
2. Borrow money, except from banks for temporary purposes, and then in
amounts not in excess of 10% of the value of its total assets at the time of
such borrowing; or mortgage, pledge, or hypothecate any assets except in con-
nection with any such borrowing and in amounts not in excess of the lesser of
the dollar amounts borrowed and 10% of the value of its total assets at the
time of such borrowing. (This borrowing provision is included solely to fa-
cilitate the orderly sale of portfolio securities to accommodate abnormally
heavy redemption requests and is not for leverage purposes.) The Fund will
not purchase portfolio securities while borrowings in excess of 5% of its to-
tal assets are outstanding. Optioned stock held in escrow is not deemed to be
a pledge;
3. Purchase any securities which would cause more than 25% of the value of
its total assets at the time of purchase to be invested in the securities of
one or more issuers conducting their principal business activities in the
same industry, provided that (a) with respect to the International Fund,
there is no limitation with respect to securities issued or guaranteed by the
U.S. Government or domestic bank obligations, (b) with respect to the Emerg-
ing Americas, Pacific/Asia and Pan European Funds, there is no limitation
with respect to securities issued or guaranteed by the U.S. Government, and
(c) neither all finance companies, as a group, nor all utility companies, as
a group, are considered a single industry for purposes of this policy; and
4. Make loans, except that (i) a Fund may purchase or hold debt securities
in accordance with its investment objective and policies, and may enter into
repurchase agreements with respect to obligations issued or guaranteed by the
U.S. Government, its agencies or instrumentalities, and (ii) a Fund may lend
portfolio securities in an amount not exceeding 30% of its total assets.
The International Fund may not:
5. Knowingly invest more than 10% of the value of its total assets in illiq-
uid securities, including repurchase agreements with remaining maturities in
excess of seven days, restricted securities, and other securities for which
market quotations are not readily available.
* * *
In addition to the investment limitations described above, as a matter of fun-
damental policy for each Fund which may not be changed without the vote of the
holders of a majority of the Fund's outstanding shares, a Fund may not invest
in the securities of any single issuer if, as a result, the Fund holds more
than 10% of the outstanding voting securities of such issuer.
The Emerging Americas, Pan European and Pacific/Asia Funds may not knowingly
invest more than 10% of the value of their respective total assets in illiquid
securities, including repurchase agreements with remaining maturities in excess
of seven days, restricted securities and other securities for which market quo-
tations are not readily available. This investment policy may be changed by
Master Fund's Board of Directors upon reasonable notice to shareholders.
The International Fund will not invest more than 25% of the value of its total
assets in domestic bank obligations.
With respect to all investment policies, if a percentage limitation is satis-
fied at the time of investment, a
18
<PAGE>
later increase or decrease in such percentage resulting from a change in value
of a Fund's portfolio securities will not constitute a violation of such limi-
tation.
PRICING OF SHARES
The net asset value of each Fund is determined and its Shares are priced at
the close of regular trading hours on the New York Stock Exchange (the "Ex-
change"), currently 4:00 p.m. (Eastern Time). Net asset value and pricing for
each Fund are determined on each day the Exchange and the Investment Adviser
and Sub-Adviser are open for trading ("Business Day"). Currently, the holidays
which the Funds observe are: New Year's Day, Martin Luther King, Jr. Day, Pres-
idents' Day, Good Friday, Memorial Day, Independence Day, Labor Day, Columbus
Day, Veterans Day, Thanksgiving Day and Christmas. A Fund's net asset value per
Distribution Share for purposes of pricing sales and redemptions is calculated
by dividing the value of all securities and other assets allocable to its Dis-
tribution Shares, less the liabilities allocable to its Distribution Shares, by
the number of its outstanding Distribution Shares.
The Funds' portfolio securities which are primarily traded on a domestic ex-
change are valued at the last sale price on that exchange or, if there is no
recent sale, at the last current bid quotation. Portfolio securities which are
primarily traded on foreign securities exchanges are generally valued at the
preceding closing values of such securities on their respective exchanges, ex-
cept that when an event subsequent to the time when value was so established is
likely to have changed such value, then the fair value of those securities will
be determined by consideration of other factors under the direction of the
Board of Directors. A security which is listed or traded on more than one ex-
change is valued at the quotation on the exchange determined to be the primary
market for such security. Investments in foreign debt securities having a matu-
rity of 60 days or less are valued based upon the amortized cost method. An op-
tion, futures or foreign currency futures contract is valued at the last sales
price quoted on the principal exchange or board of trade on which such option
or contract is traded, or in the absence of a sale, the mean between the last
bid and asked prices. A forward currency contract is valued based on the last
published forward currency rate which reflects the duration of the contract and
the value of the underlying currency. All other foreign securities are valued
at the last current bid quotation if market quotations are available, or at
fair value as determined in accordance with guidelines adopted by the Board of
Directors. For valuation purposes, quotations of foreign securities in foreign
currency are converted to U.S. dollars equivalent at the prevailing market rate
on the day of conversion.
Some of the securities acquired by the Funds may be traded on foreign ex-
changes or over-the-counter markets on days which are not Business Days. In
such cases, the net asset value of the Shares may be significantly affected on
days when investors can neither purchase nor redeem a Fund's Shares.
Master Fund's administrators have undertaken to price the securities in each
Fund's portfolio, and may use one or more independent pricing services in con-
nection with this service.
HOW TO PURCHASE AND REDEEM SHARES
DISTRIBUTOR
Shares in each Fund are continuously offered for sale by Master Fund's sponsor
and distributor, Edgewood Services, Inc. (the "Distributor"), a wholly-owned
subsidiary of Federated Investors. The Distributor is a registered
broker/dealer. Its principal offices are at Federated Investors Tower, 1001
Liberty Avenue, Pittsburgh, PA 15222-3779.
Under Master Fund's Distribution Agreement and Distribution Plan, adopted pur-
suant to Rule 12b-1 under the 1940 Act, the Distribution Shares of each Fund
reimburse the Distributor monthly for distribu-
19
<PAGE>
tion expenses in an amount not to exceed .75% of the average daily net asset
value of the Fund's outstanding Distribution Shares. Distribution Shares of
each Fund currently bear the expense of such distribution fees at the annual
rate of .50% of the average daily net asset value of the Fund's outstanding
Distribution Shares. Distribution expenses payable by the Distributor under the
Distribution Plan include direct and indirect marketing expenses such as: i)
the expense of preparing, printing and distributing promotional materials and
prospectuses (other than prospectuses used for regulatory purposes or for dis-
tribution to existing shareholders); ii) the expense of other advertising via
radio, television or other print or electronic media; and iii) the expense of
payments to financial institutions that are not affiliated with the Distributor
("Distribution Organizations") for distribution assistance (including sales in-
centives).
PURCHASE OF SHARES
Shares may be purchased by customers ("Customers") of financial institutions
("Shareholder Organizations"). A Shareholder Organization may elect to hold of
record Shares for its Customers and to record beneficial ownership of Shares on
the account statements provided by it to its Customers. If it does so, it is
the Shareholder Organization's responsibility to transmit to the Distributor
all purchase orders for its Customers and to transmit, on a timely basis, pay-
ment for such orders to Mutual Funds Service Company ("MFSC"), the Funds' sub-
transfer agent, in accordance with the procedures agreed to by the Shareholder
Organization and the Distributor. Confirmations of all such Customer purchases
and redemptions will be sent by MFSC to the particular Shareholder Organiza-
tion. As an alternative, a Shareholder Organization may elect to establish its
Customers' accounts of record with MFSC. In this event, even if the Shareholder
Organization continues to place its Customers' purchase and redemption orders
with the Funds, MFSC will send confirmations of such transactions and periodic
account statements directly to Customers. A Shareholder Organization may also
elect to establish its Customers as record holders.
Customers wishing to purchase Shares through their Shareholder Organization
should contact such entity directly for appropriate instructions. (For a list
of Shareholder Organizations in your area, call (800) 446-1012.) An investor
purchasing Shares through certain Shareholder Organizations may incur transac-
tion charges in connection with such purchases. Investors should contact their
Shareholder Organizations for further information on transaction fees.
PUBLIC OFFERING PRICE
The public offering price for Shares of each Fund is the sum of the net asset
value of the Shares purchased plus a sales load according to the table below:
<TABLE>
<CAPTION>
REALLOWANCE
TOTAL SALES CHARGES TO DEALERS
------------------------------ --------------
AS A % OF AS A % OF AS A % OF
OFFERING PRICE NET ASSET OFFERING PRICE
AMOUNT OF TRANSACTION PER SHARE VALUE PER SHARE PER SHARE
--------------------- -------------- --------------- --------------
<S> <C> <C> <C>
Less than $50,000................. 4.50% 4.71% 4.00%
$50,000 to $99,999................ 4.00 4.17 3.50
$100,000 to $249,999.............. 3.50 3.63 3.00
$250,000 to $499,999.............. 3.00 3.09 2.50
$500,000 to $999,999.............. 2.00 2.05 1.50
$1,000,000 to $1,999,999.......... 1.00 1.00 .50
$2,000,000 and over............... .50 .50 .25
</TABLE>
The reallowance to dealers may be changed from time to time but will remain
the same for all such dealers.
At various times the Distributor may implement programs under which a dealer's
sales force may be eligible to win nominal awards for certain sales efforts or
under which the Distributor will reallow to any dealer that sponsors sales con-
tests or recognition programs conforming to criteria established by the Dis-
tributor, or participates in sales programs sponsored by the Distributor, an
amount not exceeding the total applicable sales charges on the sales generated
by the dealer at the public offering price during such programs. Also, the Dis-
tributor in its discretion may from time to time, pursuant to objective crite-
ria established by the Distributor, pay fees to qualifying dealers for certain
services or activities which are primarily intended to result in sales of
Shares of the
20
<PAGE>
Funds. If any such program is made available to any dealer, it will be made
available to all dealers on the same terms and conditions. Payments made under
such programs will be made by the Distributor out of its own assets and not out
of the assets of the Funds. These programs will not change the price of Shares
or the amount that the Funds will receive from such sales.
The sales load described above will not be applicable to: (a) purchases of
Shares by customers of the Investment Adviser or its affiliates; (b) trust,
agency or custodial accounts opened through the trust department of a bank,
trust company or thrift institution, provided that appropriate notification of
such status is given at the time of investment; (c) companies, corporations and
partnerships (excluding full service broker/dealers and financial planners,
registered investment advisers and depository institutions not covered by the
exemptions in (d) and (e) below); (d) financial planners and registered invest-
ment advisers not affiliated with or clearing purchases through full service
broker/dealers; (e) purchases of Shares by depository institutions for their
own account as principal; (f) exchange transactions (described below under "In-
vestor Programs--Exchange Privilege") where the Shares being exchanged were ac-
quired in connection with the distribution of assets held in trust, agency or
custodial accounts maintained with the trust department of a bank; (g) corpo-
rate/ business retirement plans (such as 401(k), 403(b)(7), 457 and Keogh ac-
counts) sponsored by the Distributor and IRA accounts sponsored by the Invest-
ment Adviser; (h) company-sponsored employee pension or retirement plans making
direct investments in the Funds; (i) purchases of Shares by officers, trustees,
directors, employees and retirees of Master Fund, UST Master Tax-Exempt Funds,
Inc. ("Master Tax-Exempt Fund"), the Investment Adviser, the Distributor or of
any direct or indirect affiliate of any of them; (j) purchases of Shares by all
beneficial shareholders of Master Fund or Master Tax-Exempt Fund as of May 22,
1989; (k) purchases of Shares by investment advisers registered under the In-
vestment Advisers Act of 1940 for their customers through an omnibus account
established with United States Trust Company of New York; (l) purchases of
Shares by directors, officers and employees of brokers and dealers selling
shares pursuant to a selling agreement with Master Fund and Master Tax-Exempt
Fund; (m) purchases of shares by investors who are members of affinity groups
serviced by USAffinity Investments Limited Partnership; and (n) customers of
certain financial institutions who purchase Shares through a registered repre-
sentative of UST Financial Services Corp. on the premises of their financial
institutions. In addition, no sales load is charged on the reinvestment of div-
idends or distributions or in connection with certain share exchange transac-
tions. Investors who have previously redeemed shares in an "Eligible Fund" (as
defined below) on which a sales load has been paid also have a one-time privi-
lege of purchasing shares of another "Eligible Fund" at net asset value without
a sales charge, provided that such privilege will apply only to purchases made
within 30 calendar days from the date of redemption and only with respect to
the amount of the redemption. These exemptions to the imposition of a sales
load are due to the nature of the investors and/or reduced sales effort that
will be needed in obtaining investments.
Quantity Discounts
An investor in the Funds may be entitled to reduced sales charges through
Rights of Accumulation, a Letter of Intent or a combination of investments, as
described below, even if the investor does not wish to make an investment of a
size that would normally qualify for a quantity discount.
In order to obtain quantity discount benefits, an investor must notify MFSC at
the time of purchase that he or she would like to take advantage of any of the
discount plans described below. Upon such notification, the investor will re-
ceive the lowest applicable sales charge. Quantity discounts may be modified or
terminated at any time and are subject to confirmation of an investor's hold-
ings through a check of ap-
21
<PAGE>
propriate records. For more information about quantity discounts, please call
(800) 446-1012 or contact your Shareholder Organization.
Rights of Accumulation. A reduced sales load applies to any purchase of shares
of any portfolio of Master Fund and Master Tax-Exempt Fund that is sold with a
sales load ("Eligible Fund") where an investor's then current aggregate invest-
ment is $50,000 or more. "Aggregate investment" means the total of: (a) the
dollar amount of the then current purchase of shares of an Eligible Fund, and
(b) the value (based on current net asset value) of previously purchased and
beneficially owned shares of any Eligible Fund on which a sales load has been
paid. If, for example, an investor beneficially owns shares of one or more Eli-
gible Funds with an aggregate current value of $49,000 on which a sales load
has been paid and subsequently purchases shares of an Eligible Fund having cur-
rent value of $1,000, the load applicable to the subsequent purchase would be
reduced to 4.00% of the offering price. Similarly, with respect to each subse-
quent investment, all shares of Eligible Funds that are beneficially owned by
the investor at the time of investment may be combined to determine the appli-
cable sales load.
Letter of Intent. By completing the Letter of Intent included as part of the
New Account Application, an investor becomes eligible for the reduced sales
load applicable to the total number of Eligible Fund shares purchased in a 13-
month period pursuant to the terms and under the conditions set forth below and
in the Letter of Intent. To compute the applicable sales load, the offering
price of shares of an Eligible Fund on which a sales load has been paid, bene-
ficially owned by an investor on the date of submission of the Letter of In-
tent, may be used as a credit toward completion of the Letter of Intent. Howev-
er, the reduced sales load will be applied only to new purchases.
MFSC will hold in escrow shares equal to 5% of the amount indicated in the
Letter of Intent for payment of a higher sales load if an investor does not
purchase the full amount indicated in the Letter of Intent. The escrow will be
released when an investor fulfills the terms of the Letter of Intent by pur-
chasing the specified amount. If purchases qualify for a further sales load re-
duction, the sales load will be adjusted to reflect an investor's total pur-
chases. If total purchases are less than the amount specified, an investor will
be requested to remit an amount equal to the difference between the sales load
actually paid and the sales load applicable to the total purchases. If such re-
mittance is not received within 20 days, MFSC, as attorney-in-fact pursuant to
the terms of the Letter of Intent and at the Distributor's direction, will re-
deem an appropriate number of shares held in escrow to realize the difference.
Signing a Letter of Intent does not bind an investor to purchase the full
amount indicated at the sales load in effect at the time of signing, but an in-
vestor must complete the intended purchase in accordance with the terms of the
Letter of Intent to obtain the reduced sales load. To apply, an investor must
indicate his or her intention to do so under a Letter of Intent at the time of
purchase.
Qualification for Discounts. For purposes of applying the Rights of Accumula-
tion and Letter of Intent privileges described above, the scale of sales loads
applies to the combined purchases made by any individual and/or spouse purchas-
ing securities for his, her or their own account or for the account of any mi-
nor children, or the aggregate investments of a trustee or custodian of any
qualified pension or profit sharing plan or IRA established (or the aggregate
investment of a trustee or other fiduciary) for the benefit of the persons
listed above.
PURCHASE PROCEDURES
General
Customers of certain Shareholder Organizations may purchase Shares by complet-
ing the Application for purchase of Shares accompanying this Prospectus
22
<PAGE>
and mailing it, together with a check payable to UST Master Funds, to:
UST Master Funds
c/o Mutual Funds Service Company
P.O. Box 2798
Boston, MA 02208-2798
Subsequent investments in an existing account in any Fund may be made at any
time by sending to the above address a check payable to UST Master Funds along
with: (a) the detachable form that regularly accompanies the confirmation of a
prior transaction; (b) a subsequent order form which may be obtained from MFSC
or a Shareholder Organization; or (c) a letter stating the amount of the in-
vestment, the name of the Fund and the account number in which the investment
is to be made.
Purchases by Wire
Customers of Certain Shareholder Organizations may also purchase Shares by
wiring Federal funds to MFSC. Prior to making an initial investment by wire,
an investor must telephone MFSC at (800) 446-1012 (from overseas, call (617)
557-8280) for instructions. Federal funds and registration instructions should
be wired through the Federal Reserve System to:
United States Trust Company of New York
ABA #021001318
UST Funds, Account No. 2901447
For further credit to:
UST Master Funds
Wire Control Number
Account Registration
(including account number)
Investors making initial investments by wire must promptly complete the Ap-
plication accompanying this Prospectus and forward it to MFSC. Redemptions by
investors will not be processed until the completed Application for purchase
of Shares has been received by MFSC and accepted by the Distributor. Investors
making subsequent investments by wire should follow the above instructions.
Other Purchase Information
Except as provided in "Investor Programs" below, the minimum initial aggre-
gate investment by a Shareholder Organization investing on behalf of its Cus-
tomers is $500 per Fund. The minimum subsequent investment is $50 per Fund.
Customers may agree with a particular Shareholder Organization to make a mini-
mum purchase with respect to their accounts. Depending upon the terms of the
particular account, Shareholder Organizations may charge a Customer's account
fees for automatic investment and other cash management services provided.
Master Fund reserves the right to reject any purchase order, in whole or in
part, or to waive any minimum investment requirements.
REDEMPTION PROCEDURES
Customers of Shareholder Organizations holding Shares of record may redeem
all or part of their investments in the Funds in accordance with procedures
governing their accounts at the Shareholder Organizations. It is the responsi-
bility of the Shareholder Organizations to transmit redemption orders to MFSC
and credit such Customer accounts with the redemption proceeds on a timely ba-
sis. No charge for wiring redemption payments to Shareholder Organizations is
imposed by Master Fund, although Shareholder Organizations may charge a Cus-
tomer's account for wiring redemption proceeds. Information relating to such
redemption services and charges, if any, is available from the Shareholder Or-
ganizations. An investor redeeming Shares through a Shareholder Organization
may incur transaction charges in connection with such redemptions. Such in-
vestors should contact their Shareholder Organizations for further information
on transaction fees. Investors may redeem all or part of their Shares in ac-
cordance with the procedures described below (these procedures also apply to
Customers of Shareholder Organizations for whom individual accounts have been
established with MFSC).
Redemption by Mail
Customers of certain Shareholder Organizations may redeem Shares by submit-
ting a written request for redemption to:
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UST Master Funds
c/o Mutual Funds Service Company
P.O. Box 2798
Boston, MA 02208-2798
A written redemption request to MFSC must (i) state the number of Shares to be
redeemed, (ii) identify the shareholder account number and tax identification
number, and (iii) be signed by each registered owner exactly as the Shares are
registered. If the Shares to be redeemed were issued in certificate form, the
certificates must be endorsed for transfer (or accompanied by a duly executed
stock power) and must be submitted to MFSC together with the redemption re-
quest. A redemption request for an amount in excess of $50,000 per account, or
for any amount if the proceeds are to be sent elsewhere than the address of
record, must be accompanied by signature guarantees from any eligible guarantor
institution approved by MFSC in accordance with its Standards, Procedures and
Guidelines for the Acceptance of Signature Guarantees ("Signature Guarantee
Guidelines"). Eligible guarantor institutions generally include banks,
broker/dealers, credit unions, national securities exchanges, registered secu-
rities associations, clearing agencies and savings associations. All eligible
guarantor institutions must participate in the Securities Transfer Agents Me-
dallion Program ("STAMP") in order to be approved by MFSC pursuant to the Sig-
nature Guarantee Guidelines. Copies of the Signature Guarantee Guidelines and
information on STAMP can be obtained from MFSC at (800) 446-1012 or at the ad-
dress given above. MFSC may require additional supporting documents for redemp-
tions made by corporations, executors, administrators, trustees and guardians.
A redemption request will not be deemed to be properly received until MFSC re-
ceives all required documents in proper form. Payment for Shares redeemed will
ordinarily be made by mail within five Business Days after proper receipt by
MFSC of the redemption request. Questions with respect to the proper form for
redemption requests should be directed to MFSC at (800) 446-1012 (from over-
seas, call (617) 557-8280).
Redemption by Wire or Telephone
Customers of certain Shareholder Organizations who have so indicated on the
Application, or have subsequently arranged in writing to do so, may redeem
Shares by instructing MFSC by wire or telephone to wire the redemption proceeds
directly to the investor's account at any commercial bank in the United States.
Customers of certain Shareholder Organizations who are shareholders of record
may redeem Shares by instructing MFSC by telephone to mail a check for redemp-
tion proceeds of $500 or more to the shareholder of record at his or her ad-
dress of record. Only redemptions of $500 or more will be wired to an invest-
or's account. An $8.00 fee for each wire redemption by an investor is deducted
by MFSC from the proceeds of the redemption. The redemption proceeds for in-
vestors must be paid to the same bank and account as designated on the Applica-
tion or in written instructions subsequently received by MFSC.
In order to arrange for redemption by wire or telephone after an account has
been opened or to change the bank or account designated to receive redemption
proceeds, an investor must send a written request to Master Fund, c/o MFSC, at
the address listed above under "Redemption by Mail." Such requests must be
signed by the investor, with signatures guaranteed (see "Redemption by Mail"
above, for details regarding signature guarantees). Further documentation may
be requested.
MFSC and the Distributor reserve the right to refuse a wire or telephone re-
demption if it is believed advisable to do so. Procedures for redeeming Shares
by wire or telephone may be modified or terminated at any time by Master Fund,
MFSC or the Distributor. MASTER FUND, MFSC AND THE DISTRIBUTOR WILL NOT BE LIA-
BLE FOR ANY LOSS, LIABILITY, COST OR EXPENSE FOR ACTING UPON TELEPHONE INSTRUC-
TIONS THAT ARE REASONABLY BELIEVED TO BE GENUINE. IN ATTEMPTING TO CONFIRM THAT
TELEPHONE INSTRUCTIONS ARE GENUINE, MASTER FUND WILL USE SUCH PROCEDURES AS ARE
CONSIDERED REASONABLE, INCLUDING RECORDING THOSE INSTRUCTIONS
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AND REQUESTING INFORMATION AS TO ACCOUNT REGISTRATION.
If any portion of the Shares to be redeemed represents an investment made by
personal check, Master Fund and MFSC reserve the right not to honor the redemp-
tion until MFSC is reasonably satisfied that the check has been collected in
accordance with the applicable banking regulations which may take up to 15
days. An investor who anticipates the need for more immediate access to his or
her investment should purchase Shares by Federal funds or bank wire or by cer-
tified or cashier's check. Banks normally impose a charge in connection with
the use of bank wires, as well as certified checks, cashier's checks and Fed-
eral funds. If an investor's purchase check is not collected, the purchase will
be cancelled and MFSC will charge a fee of $25.00 to the investor's account.
During periods of substantial economic or market change, telephone redemptions
may be difficult to complete. If a Customer is unable to contact MFSC by tele-
phone, the Customer may also deliver the redemption request to MFSC in writing
at the address noted above under "How to Purchase and Redeem Shares--Redemption
by Mail."
Other Redemption Information
Except as described in "Investor Programs" below, investors may be required to
redeem Shares in a Fund after 60 days' written notice if due to investor re-
demptions the balance in the particular account with respect to the Fund re-
mains below $500. If a Customer has agreed with a particular Shareholder Organ-
ization to maintain a minimum balance in his or her account at the institution
with respect to Shares of a Fund, and the balance in such account falls below
that minimum, the Customer may be obliged by the Shareholder Organization to
redeem all or part of his or her Shares to the extent necessary to maintain the
required minimum balance.
GENERAL
Purchase and redemption orders for Shares which are received and accepted
prior to the close of regular trading hours on the Exchange (currently 4:00
p.m., Eastern Time) on any Business Day are priced according to the net asset
value determined on that day. Purchase orders for Shares received and accepted
after the close of regular trading hours on the Exchange are priced at the net
asset value per Share determined on the next Business Day.
INVESTOR PROGRAMS
EXCHANGE PRIVILEGE
Customers of Shareholder Organizations may, after appropriate prior authoriza-
tion and without an exchange fee imposed by the Funds, exchange Shares having a
value of at least $500 for Distribution Shares of any other portfolio of Master
Fund, provided that such other shares may legally be sold in the state of the
investor's residence.
Master Fund currently offers, in addition to the Distribution Shares of the
International Fund and Regional Funds, Distribution Shares in ten additional
portfolios as follows:
Equity Fund, a fund seeking primarily long-term capital appreciation through
investments in a diversified portfolio of primarily equity securities;
Income and Growth Fund, a fund investing substantially in equity securities
in seeking to provide moderate current income and to achieve capital appreci-
ation as a secondary objective;
Long-Term Supply of Energy Fund, a fund seeking long-term capital apprecia-
tion by investing in companies benefitting from the availability, development
and delivery of secure hydrocarbon and other energy sources;
Productivity Enhancers Fund, a fund seeking long-term capital appreciation
by investing in companies benefitting from their roles as innovators, devel-
opers and suppliers of goods and services which enhance service and manufac-
turing productivity or companies that are most effective at obtaining and ap-
plying productivity enhancement developments;
Environmentally-Related Products and Services Fund, a fund seeking long-term
capital appreciation by investing in companies benefitting from their provi-
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<PAGE>
sion of products, technologies and services related to conservation, protec-
tion and restoration of the environment;
Aging of America Fund, a fund seeking long-term capital appreciation by in-
vesting in companies benefitting from the changes occurring in the demo-
graphic structure of the U.S. population, particularly of its growing popula-
tion of individuals over the age of 40;
Communication and Entertainment Fund, a fund seeking long-term capital ap-
preciation by investing in companies benefitting from the technological and
international transformation of the communications and entertainment indus-
tries, particularly the convergence of information, communication and enter-
tainment media;
Business and Industrial Restructuring Fund, a fund seeking long-term capital
appreciation by investing in companies benefitting from their restructuring
or redeployment of assets and operations in order to become more competitive
or profitable;
Global Competitors Fund, a fund seeking long-term capital appreciation by
investing in U.S.-based companies benefitting from their position as effec-
tive and strong competitors on a global basis; and
Early Life Cycle Fund, a fund seeking long-term capital appreciation by in-
vesting in smaller companies in the earlier stages of their development or
larger or more mature companies engaged in new and higher growth potential
operations.
An exchange involves a redemption of all or a portion of the Shares and the
investment of the redemption proceeds in Distribution Shares of another portfo-
lio of Master Fund. The redemption will be made at the per Share net asset
value of the Shares being redeemed next determined after the exchange request
is received. The Distribution Shares of the portfolio to be acquired will be
purchased at the per share net asset value of those shares (plus any applicable
sales load) next determined after acceptance of the exchange request. No sales
load will be payable on Distribution Shares to be acquired through an exchange
to the extent that a sales load was previously paid on the Shares being ex-
changed.
Investors may find the exchange privilege useful if their investment objec-
tives or market outlook should change after they invest in a Fund. For further
information regarding exchange privileges, shareholders should call (800) 446-
1012 (from overseas, call (617) 557-8280). Investors exercising the exchange
privilege with the other portfolios of Master Fund should request and review
the prospectuses of such funds. Such prospectuses may be obtained by calling
the numbers listed above. Master Fund may modify or terminate the exchange pro-
gram at any time upon 60 days written notice to shareholders, and may reject
any exchange request. In order to prevent abuse of this privilege to the disad-
vantage of other shareholders, Master Fund reserves the right to limit the num-
ber of exchange requests of investors to no more than six per year. MASTER
FUND, MFSC AND THE DISTRIBUTOR ARE NOT RESPONSIBLE FOR THE AUTHENTICITY OF EX-
CHANGE REQUESTS RECEIVED BY TELEPHONE THAT ARE REASONABLY BELIEVED TO BE GENU-
INE. IN ATTEMPTING TO CONFIRM THAT TELEPHONE INSTRUCTIONS ARE GENUINE, MASTER
FUND WILL USE SUCH PROCEDURES AS ARE CONSIDERED REASONABLE, INCLUDING RECORDING
THOSE INSTRUCTIONS AND REQUESTING INFORMATION AS TO ACCOUNT REGISTRATION.
For Federal income tax purposes, an exchange of Shares is a taxable event and,
accordingly, a capital gain or loss may be realized by an investor. Before mak-
ing an exchange, an investor should consult a tax or other financial adviser to
determine tax consequences.
SYSTEMATIC WITHDRAWAL PLAN
Customers of certain Shareholder Organizations who own Shares of a Fund with a
value of $10,000 or more may establish a Systematic Withdrawal Plan. The in-
vestor may request a declining-balance withdrawal, a fixed-dollar withdrawal, a
fixed-share withdrawal, or a fixed-percentage withdrawal (based on the current
value of Shares in the account) on a monthly, quarterly, semi-annual or annual
basis. In-
26
<PAGE>
formation concerning the availability of, and the procedures and fees relating
to, such plans may be obtained by Customers directly from their Shareholder Or-
ganizations.
RETIREMENT PLANS
Shares are available for purchase by investors in connection with the follow-
ing tax-deferred prototype retirement plans offered by certain Shareholder Or-
ganizations:
IRAs (including "rollovers" from existing retirement plans) for individuals
and their spouses;
Profit Sharing and Money-Purchase Plans for corporations and self-employed
individuals and their partners to benefit themselves and their employees; and
Keogh Plans for self-employed individuals.
Investors investing in the Funds pursuant to Profit Sharing and Money-Purchase
Plans and Keogh Plans are not subject to the minimum investment and forced re-
demption provisions described above. The minimum initial investment for IRAs is
$250 per Fund and the minimum subsequent investment is $50 per Fund. Detailed
information concerning eligibility, service fees and other matters related to
these plans is available from Shareholder Organizations.
Information concerning the availability of, and the procedures and fees relat-
ing to, such retirement plans may be obtained by Customers directly from their
Shareholder Organizations.
AUTOMATIC INVESTMENT PROGRAM
The Automatic Investment Program permits customers of certain Shareholder Or-
ganizations to purchase Shares (minimum of $50 per Fund per transaction) at
regular intervals selected by the Customer. Provided the investor's financial
institution allows automatic withdrawals, Shares are purchased by transferring
funds from an investor's checking, bank money market or NOW account designated
by the investor. At the investor's option, the account designated will be deb-
ited in the specified amount, and Shares will be purchased, once a month, on
either the first or fifteenth day, or twice a month, on both days.
The Automatic Investment Program is one means by which an investor may use
"Dollar Cost Averaging" in making investments. Instead of trying to time market
performance, a fixed dollar amount is invested in Shares at predetermined in-
tervals. This may help investors to reduce their average cost per share because
the agreed upon fixed investment amount allows more Shares to be purchased dur-
ing periods of lower share prices and fewer Shares during periods of higher
prices. In order to be effective, Dollar Cost Averaging should usually be fol-
lowed on a sustained, consistent basis. Investors should be aware, however,
that Shares bought using Dollar Cost Averaging are purchased without regard to
their price on the day of investment or to market trends. In addition, while
investors may find Dollar Cost Averaging to be beneficial, it will not prevent
a loss if an investor ultimately redeems his Shares at a price which is lower
than their purchase price.
Information concerning the availability of, and the procedures and fees relat-
ing to, Automatic Investment accounts may be obtained by Customers directly
from their Shareholder Organizations.
DIVIDENDS AND DISTRIBUTIONS
Dividends from the net income of each Fund are declared and paid semi-annual-
ly. For dividend purposes, a Fund's investment income is reduced by accrued ex-
penses directly attributable to that Fund and the general expenses of Master
Fund prorated to that Fund on the basis of its relative net assets. A Fund's
net investment income available for distribution to the holders of Distribution
Shares will be reduced by the amount of other expenses allocated to such se-
ries, including the expense of distribution fees associated with Master Fund's
Distribution Plan. Net realized capital gains are distributed at least annual-
ly. Divi
27
<PAGE>
dends and distributions will reduce the net asset value of a Fund by the amount
of the dividend or distribution. All dividends and distributions paid on Shares
held of record by the Investment Adviser and its affiliates or correspondent
banks will be paid in cash. Customers of Shareholder Organizations will receive
dividends and distributions in additional Distribution Shares (as determined on
the payable date), unless they have requested in writing (received by MFSC at
Master Fund's address prior to the payment date) to receive dividends and dis-
tributions in cash. Reinvested dividends and distributions receive the same tax
treatment as those paid in cash.
TAXES
FEDERAL
Each of the Funds qualified for its last taxable year as a "regulated invest-
ment company" under the Internal Revenue Code of 1986, as amended (the "Code").
Each Fund expects to so qualify in future years. Such qualification generally
relieves a Fund of liability for Federal income taxes to the extent its earn-
ings are distributed in accordance with the Code.
Qualification as a regulated investment company under the Code requires, among
other things, that a Fund distribute to its shareholders at least 90% of its
investment company taxable income for each taxable year. In general, a Fund's
investment company taxable income will be its taxable income (including divi-
dends, interest and short-term capital gains), subject to certain adjustments
and excluding the excess of any net long-term capital gain for the taxable year
over the net short-term capital loss, if any, for such year. Each Fund intends
to distribute substantially all of its investment company income each year.
Such dividends will be taxable as ordinary income to a Fund's shareholders who
are not currently exempt from Federal income taxes, whether such income is re-
ceived in cash or reinvested in additional Shares. (Federal income taxes for
distributions to IRAs and qualified pension plans are deferred under the Code.)
It is anticipated that none of the dividends paid by a Fund will be eligible
for the dividends received deduction for corporations.
Distributions by a Fund of the excess of its net long-term capital gain over
its short-term capital loss are taxable to shareholders as long-term capital
gain, regardless of how long the shareholders have held their Shares and
whether such gains are received in cash or reinvested in additional Shares.
Dividends declared in October, November or December of any year payable to
shareholders of record on a specified date in such months will be deemed to
have been received by shareholders and paid by a Fund on December 31 of such
year in the event such dividends are actually paid during January of the fol-
lowing year.
An investor considering buying Shares of a Fund on or just before the record
date of a dividend should be aware that the amount of the forthcoming dividend
payment, although in effect a return of capital, will be taxable to them.
A taxable gain or loss may be realized by a shareholder upon his redemption,
transfer or exchange of Shares, depending upon the tax basis of such Shares and
their price at the time of redemption, transfer or exchange. If a shareholder
holds Shares for six months or less and during that time receives a capital
gain dividend on those Shares, any loss recognized on the sale or exchange of
those Shares will be treated as a long-term capital loss to the extent of the
capital gain dividend. Generally, a shareholder may include sales charges in-
curred upon the purchase of Shares in his tax basis for such Shares for the
purpose of determining gain or loss on a redemption, transfer or exchange of
such Shares. However, if the shareholder effects an exchange of Shares of a
Fund for shares of another portfolio of Master Fund or Master Tax-Exempt Fund
within 90 days of the purchase and is able to reduce the sales charges applica-
ble to the new shares (by virtue of the exchange privilege), the amount equal
to such reduction may not be included in the tax basis of the shareholder's ex-
changed
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<PAGE>
Shares, but may be included (subject to the same limitation) in the tax basis
of the new shares.
It is expected that dividends and certain interest income earned by each Fund
from foreign securities will be subject to foreign withholding taxes or other
taxes. So long as more than 50% of the value of a Fund's total assets at the
close of any taxable year consists of equity or debt securities of foreign cor-
porations, such Fund may elect, for U.S. Federal income tax purposes, to treat
certain foreign taxes paid by it, including generally any withholding taxes and
other foreign income taxes, as paid by its shareholders. A Fund may make this
election. As a consequence, the amount of such foreign taxes paid by a Fund
will be included in its shareholders' income pro rata (in addition to taxable
distributions actually received by them), and each shareholder will be entitled
either (a) to credit their proportionate amounts of such taxes against their
U.S. Federal income tax liabilities or (b) if they itemize their deductions, to
deduct such proportionate amounts from their U.S. taxable income.
Qualification as a regulated investment company under the Code also requires
that a Fund satisfy certain requirements with respect to the source of its in-
come for a taxable year. At least 90% of the gross income of a Fund must be de-
rived from dividends, interest, payments with respect to securities loans,
gains from the sale or other disposition of stock, securities or foreign cur-
rencies, and other income (including, but not limited to, gains from options,
futures, or forward contracts) derived with respect to the Fund's business of
investing in such stock, securities or currencies. The Treasury Department may
by regulation exclude from qualifying income foreign currency gains which are
not directly related to a Fund's principal business of investing in stock or
securities, or options and futures with respect to stock or securities. Some of
the investments that a Fund may make (such as gold bullion) may not be securi-
ties or may not produce qualifying income. Therefore, it may be necessary for
the Investment Adviser and Sub-Adviser to restrict the investments of a Fund to
ensure that non-qualifying income does not exceed 10% of such Fund's total
gross income for a taxable year.
The foregoing summarizes some of the important tax considerations generally
affecting the Funds and their shareholders and is not intended as a substitute
for careful tax planning. Accordingly, potential investors in the Funds should
consult their tax advisers with specific reference to their own tax situations.
Shareholders will be advised annually as to the Federal income tax consequences
of distributions made each year.
STATE AND LOCAL
Purchasers are advised to consult their tax advisers concerning the applica-
tion of state and local taxes, which may have different consequences from those
of the Federal income tax law described above.
MANAGEMENT OF THE FUNDS
The business and affairs of the Funds are managed under the direction of Mas-
ter Fund's Board of Directors. The Statement of Additional Information contains
the names of and general background information concerning Master Fund's direc-
tors.
INVESTMENT ADVISER AND SUB-ADVISERS
United States Trust Company of New York serves as the Investment Adviser to
the Funds. The Investment Adviser is a state-chartered bank and trust company
created by Special Act of the New York Legislature in 1853. The Investment Ad-
viser provides trust and banking services to individuals, corporations, and in-
stitutions both nationally and internationally, including investment manage-
ment, estate and trust administration, financial planning, corporate trust and
agency, and personal and corporate banking. The Investment Adviser is a member
bank of the Federal Reserve System and the Federal Deposit Insurance Corpora-
tion and is one of the twelve members of the New York Clearing House Associa-
tion.
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On December 31, 1994, the Investment Adviser's Asset Management Group had ap-
proximately $33 billion in assets under management. The Investment Adviser,
which has its principal offices at 114 W. 47th Street, New York, New York
10036, is a subsidiary of U.S. Trust Corporation, a registered bank holding
company.
Foreign and Colonial Asset Management ("FACAM") (an SEC-registered investment
adviser) provides sub-advisory services to the International and Pan European
Funds. FACAM, a New York general partnership with offices at Exchange House,
Primrose Street, London EC2A2NY, is an investment management joint venture cre-
ated in 1982 by F&C Overseas Limited ("FCOC") and UST Overseas Corporation
("USTOC"), an indirect wholly owned subsidiary of the Investment Adviser. FCOC
and USTOC are general partners of FACAM with equal capital contribution. FCOC,
a private English company, is a wholly owned subsidiary of F&C Management, Ltd.
F&C Management, Ltd. is 50% owned by five U.K. investment trusts: F&C Invest-
ment Trust Plc, F&C Pacific Investment Trust Plc, F&C Smaller Companies Invest-
ment Trusts Plc, F&C Enterprise Trust Plc and F&C Eurotrust Plc. The remaining
50% of F&C Management, Ltd. is owned by Bayerische Hypotheken und Wechsel Bank
AG of Munich, Germany. FACAM currently manages and advises several commingled
funds with assets in excess of $ million at the end of 1994.
Under the current sub-advisory agreements FCEML (collectively with FACAM, the
"Sub-Advisers") provides sub-advisory services to the Emerging Americas and
Pacific/Asia Funds. FCEML was founded in 1987, and is a joint venture among F&C
Management, Ltd., the parent of FACAM, Banco de Investimentos Garantia ("Ban-
co"), a Brazilian investment bank headquartered in Sao Paulo, Brazil, and man-
agement of FCEML. Banco is owned by private investors. FCEML's offices are at
Exchange House, Primrose Street, London EC2A2NY.
The Sub-Advisers provide a continuous investment program for the Funds for
which they act as sub- adviser, including investment research and management
with respect to all foreign securities and investments of the Funds. The Sub-
Advisers prepare, subject to the Investment Adviser's approval, lists of recom-
mended countries and determine what securities and other investments will be
purchased, retained or sold for each Fund for which they act as sub-adviser.
The Investment Adviser advises the Sub-Advisers with respect to U.S. economic
factors and trends, assists and consults with the Sub-Advisers in connection
with the particular Fund's continuous investment program, places orders with
respect to purchases and sales of U.S. issuers, manages the particular Fund's
short-term cash in cooperation with the particular Sub-Adviser, monitors the
Sub-Advisers' investment procedures and periodically reviews, evaluates and re-
ports to Master Fund's Board of Directors concerning the Sub-Advisers' perfor-
mance.
All investment decisions for the International, Emerging Americas,
Pacific/Asia and Pan European Funds are made by committee and no persons are
primarily responsible for making recommendations to that committee.
For the services provided and expenses assumed pursuant to its Investment Ad-
visory Agreements with the Funds, the Investment Adviser is entitled to be paid
a fee, computed daily and paid monthly, at the annual rate of 1% of the average
daily net assets of each Fund. Although the advisory fee rate payable by the
Funds is higher than the rates payable by most mutual funds, Master Fund be-
lieves it is comparable to the rate paid by many other funds with similar in-
vestment objectives and policies and is appropriate for the Funds in light of
their investment objective and policies. FACAM is entitled to receive from the
Investment Adviser an annual fee, computed and paid quarterly, at the annual
rate of .70% of the average daily net assets of each of the International and
Pan European Funds. FCEML is entitled to receive from the Investment Adviser an
annual fee, computed and paid quarterly, at the annual rates of .50% and .70%
of the average daily net assets of the Emerging Americas and Pacific/Asia
Funds, respectively.
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For the fiscal year ended March 31, 1995, the Investment Adviser received an
advisory fee after waivers at the effective annual rates of .94%, .93%, .95%
and .94% of the average daily net assets of the International, Emerging Ameri-
cas, Pacific/Asia and Pan European Funds, respectively. For the same period,
the Investment Adviser waived advisory fees at the effective annual rates of
.06%, .07%, .05% and .06% of the average daily net assets of the International
Emerging Americas, Pacific/Asia and Pan European Funds, respectively. For the
same period, FACAM received a sub-advisory fee from the Investment Adviser at
the effective annual rates of .70% and .70% of the average daily net assets of
the International and Pan European Funds, respectively. For the fiscal year
ended March 31, 1995, FCEML received a sub-advisory fee from the Investment Ad-
viser at the effective annual rates of .50% and .70% of the average daily net
assets of the Emerging Americas and Pacific/Asia Funds, respectively.
From time to time, the Investment Adviser and Sub-Advisers may waive (either
voluntarily or pursuant to applicable state expense limitations) all or a por-
tion of the advisory fees payable with respect to a Fund, which waivers may be
terminated at any time. See "Management of the Funds--Service Organizations"
for additional information on fee waivers.
ADMINISTRATORS
Mutual Funds Service Company, an affiliate of the Investment Adviser, and Fed-
erated Administrative Services serve as the Funds' administrators (the "Admin-
istrators") and provide them with general administrative and operational assis-
tance. For the services provided to the Funds, the Administrators are jointly
entitled to annual fees, computed daily and paid monthly, at the rate of .20%
of the average daily net assets of each Fund. The Administrators are entitled
jointly to an annual minimum fee of $50,000 from each of the Regional Funds.
From time to time, the Administrators may waive (either voluntarily or pursuant
to applicable state expense limitations) all or a portion of the administration
fee payable to them by the Funds, which waivers may be terminated at any time.
See "Management of the Funds--Service Organizations" for additional information
on fee waivers. For the fiscal year ended March 31, 1995, Mutual Funds Service
Company and Concord Holding Corporation, the Funds' former co-administrator,
received an aggregate administration fee (under the compensation arrangements
noted above) at the effective annual rate of .20% of the average daily net as-
sets of each of the International, Emerging Americas, Pacific/Asia and Pan Eu-
ropean Funds.
SERVICE ORGANIZATIONS
Master Fund will enter into Shareholder servicing agreements ("Servicing
Agreement") with Shareholder Organizations which agree to provide their Custom-
ers various shareholder administrative services with respect to their Shares
(hereinafter referred to as "Service Organizations"). As a consideration for
the administrative services provided to Customers, a Fund will pay each Service
Organization an administrative service fee at the annual rate of up to .40% of
the average daily net asset value of its Shares held by the Service Organiza-
tion's Customers. Such services, which are described more fully in the State-
ment of Additional Information under "Management of the Funds--Service Organi-
zations," may include assisting in processing purchase, exchange and redemption
requests; transmitting and receiving funds in connection with Customer orders
to purchase, exchange or redeem Shares; and providing periodic statements. Un-
der the terms of the Servicing Agreement, Service Organizations will be re-
quired to provide to Customers a schedule of any fees that they may charge in
connection with a Customer's investment. Until further notice, the Investment
Adviser and Administrators have voluntarily agreed to waive fees payable by a
Fund in an amount equal to administrative service fees payable by that Fund.
BANKING LAWS
Banking laws and regulations currently prohibit a bank holding company regis-
tered under the Federal
31
<PAGE>
Bank Holding Company Act of 1956 or any bank or non-bank affiliate thereof from
sponsoring, organizing or controlling a registered, open-end investment company
continuously engaged in the issuance of its shares, and prohibit banks gener-
ally from issuing, underwriting, selling or distributing securities such as
Shares of the Funds, but such banking laws and regulations do not prohibit such
a holding company or affiliate or banks generally from acting as investment ad-
viser, transfer agent, or custodian to such an investment company, or from pur-
chasing shares of such company for and upon the order of customers. The Invest-
ment Adviser, MFSC and certain Shareholder Organizations may be subject to such
banking laws and regulations. State securities laws may differ from the inter-
pretations of Federal law discussed in this paragraph and banks and financial
institutions may be required to register as dealers pursuant to state law.
Should legislative, judicial, or administrative action prohibit or restrict
the activities of the Investment Adviser or other Shareholder Organizations in
connection with purchases of Fund Shares, the Investment Adviser and such
Shareholder Organizations might be required to alter materially or discontinue
the investment services offered by them to Customers. It is not anticipated,
however, that any resulting change in the Funds' method of operations would af-
fect their net asset values per Share or result in financial loss to any share-
holder.
DESCRIPTION OF CAPITAL STOCK
Master Fund was organized as a Maryland corporation on August 2, 1984. Cur-
rently, Master Fund has authorized capital of 35 billion shares of Common
Stock, $.001 par value per share, classified into 34 series of shares repre-
senting interests in 20 investment portfolios. This Prospectus describes the
International, Emerging Americas, Pacific/Asia and Pan European Funds. Master
Fund offers Service Shares and Distribution Shares representing interests in
each of those Funds. Service Shares and Distribution Shares have different ex-
penses, which may affect performance. Call (800) 233-1136 for information re-
garding each of those Fund's Service Shares, which are offered through a sepa-
rate prospectus.
Each share (irrespective of series designation) in a Fund represents an equal
proportionate interest in the particular Fund with other shares of the same
class, and is entitled to such dividends and distributions out of the income
earned on the assets belonging to such Fund as are declared in the discretion
of Master Fund's Board of Directors. Master Fund's Charter authorizes the Board
of Directors to classify or reclassify any class of shares into one or more ad-
ditional classes or series.
Master Fund's Shareholders are entitled to one vote for each full share held
and fractional votes for fractional shares held and will vote in the aggregate
and not by class or series, except as otherwise expressly required by law.
Holders of Distribution Shares in a Fund bear the expense of distribution fees
described above under "How to Purchase and Redeem Shares--Distributor." Service
Shares in a Fund bear no such distribution fees, but do bear the expense of ad-
ministrative service fees described above under "Management of the Funds--Serv-
ice Organizations." As a result of their different expense structures, the net
asset value and the total returns on Service Shares of a Fund will generally be
higher than those on Distribution Shares of the same Fund. Service Shares of
the Funds are offered to the public at the applicable net asset value per share
plus a front-end sales charge identical to the sales charge described above un-
der "How to Purchase and Redeem Shares--Public Offering Price." Service Shares
are exchangeable at the option of the holder for Service Shares of Master
Fund's and Master Tax-Exempt Fund's other investment portfolios.
Certificates for Shares will not be issued unless expressly requested in writ-
ing to MFSC and will not be issued for fractional Shares.
As of July 11, 1995, U.S. Trust held of record substantially all of the Shares
in the Funds as agent or
32
<PAGE>
custodian for its customers, but did not own such Shares beneficially because
it did not have voting or investment discretion with respect to such Shares.
CUSTODIAN AND TRANSFER AGENT
United States Trust Company of New York serves as the custodian of the Funds'
assets and as their transfer and dividend disbursing agent. Communications to
the custodian and transfer agent should be directed to United States Trust Com-
pany of New York, Mutual Funds Service Division, 770 Broadway, New York, New
York 10003-9598.
U.S. Trust has entered into an International Custodian Agreement with Morgan
Stanley Trust Company, 1 Pierrepont Plaza, Brooklyn, NY 11201, providing for
the custody of foreign securities held by the Funds.
U.S. Trust has also entered into a sub-transfer agency arrangement with MFSC,
73 Tremont Street, Boston, Massachusetts 02108-3913, pursuant to which MFSC
provides certain transfer agent, dividend disbursement and registrar services
to the Funds.
PERFORMANCE INFORMATION
From time to time, in advertisements or in reports to shareholders, the per-
formance of the Shares of the Funds may be quoted and compared to that of other
mutual funds with similar investment objectives and to stock or other relevant
indices or to rankings prepared by independent services or other financial or
industry publications that monitor the performance of mutual funds. For exam-
ple, the performance of a Fund may be compared to data prepared by Lipper Ana-
lytical Services, Inc., a widely recognized independent service which monitors
the performance of mutual funds. The performance of a Fund may also be compared
to the Europe, Australia, and Far East Index ("EAFE") and the Financial Times
Index, unmanaged standard foreign securities indexes.
Performance data as reported in national financial publications, including but
not limited to Money Magazine, Forbes, Barron's, The Wall Street Journal and
The New York Times, or in publications of a local or regional nature, may also
be used in comparing the performance of the Funds.
From time to time, each Fund may advertise its performance by using "average
annual total return" over various periods of time. Such total return figure re-
flects the average percentage change in the value of an investment in a Fund
from the beginning date of the measuring period to the end of the measuring pe-
riod. Average total return figures will be given for the most recent one-year
period, and may be given for other periods as well (such as from the commence-
ment of a Fund's operations, or on a year-by-year basis). Each Fund may also
use aggregate total return figures for various periods, representing the cumu-
lative change in the value of an investment in the Fund for the specific peri-
od. Both methods of calculating total return assume that dividends and capital
gain distributions made by a Fund during the period are reinvested in Fund
Shares and also reflect the maximum sales load charged by the Fund.
Performance will fluctuate and any quotation of performance should not be con-
sidered as representative of a Fund's future performance. Shareholders should
remember that performance is generally a function of the kind and quality of
the instrument held in a portfolio, portfolio maturity, operating expenses, and
market conditions. Any fees charged by Shareholder Organizations with respect
to accounts of Customers that have invested in Shares will not be included in
calculations of performance.
MISCELLANEOUS
Shareholders will receive unaudited semiannual reports describing the Funds'
investment operations and annual financial statements audited by the Funds' in-
dependent auditors.
33
<PAGE>
As used in this Prospectus, a "vote of the holders of a majority of the out-
standing shares" of Master Fund or a particular Fund means, with respect to the
approval of an investment advisory agreement, a distribution plan or a change
in a fundamental investment policy, the affirmative vote of the lesser of (a)
more than 50% of the outstanding shares of Master Fund or such Fund, or (b) 67%
or more of the shares of Master Fund or such Fund present at a meeting if more
than 50% of the outstanding shares of Master Fund or the Fund are represented
at the meeting in person or by proxy.
Inquiries regarding any of the Funds may be directed to the Distributor at the
address or telephone number listed under "Distributor."
34
<PAGE>
INSTRUCTIONS FOR NEW ACCOUNT APPLICATION
OPENING YOUR ACCOUNT:
Complete the Application(s) and mail to:
UST Master Funds
c/o Mutual Funds Service Company
P.O. Box 2798
Boston, MA 02208-2798
FOR OVERNIGHT DELIVERY: send to:
UST Master Funds
c/o Mutual FundsService Company--Transfer Agent
73 Tremont Street
Boston, MA 02108-3913
Please enclose with the Application(s) your check made payable to the "UST
Master Funds" in the amount of your investment.
For direct wire purchases please refer to the section of the Prospectus
entitled "How to Purchase and Redeem Shares--Purchase Procedures."
MINIMUM INVESTMENTS:
Except as provided in the Prospectus, the minimum initial investment is $500
per Fund; subsequent investments must be in the minimum amount of $50 per Fund.
Investments may be made in excess of these minimums.
REDEMPTIONS:
Shares can be redeemed in any amount and at any time in accordance with
procedures described in the Prospectus. In the case of shares recently
purchased by check, redemption proceeds will not be made available until the
transfer agent is reasonably assured that the check has been collected in
accordance with applicable banking regulations.
Certain legal documents will be required from corporations or other
organizations, executors and trustees, or if redemption is requested by anyone
other than the shareholder of record. Written redemption requests in excess of
$50,000 per account must be accompanied by signature guarantees.
SIGNATURES: Please be sure to sign the Application(s).
If the shares are registered in the name of:
- an individual, the individual should sign.
- joint tenants, both tenants should sign.
- a custodian for a minor, the custodian should sign.
- a corporation or other organization, an authorized officer should sign
(please indicate corporate office or title).*
- a trustee or other fiduciary, the fiduciary or fiduciaries should sign
(please indicate capacity).*
*A corporate resolution or appropriate certificate may be required.
QUESTIONS:
If you have any questions regarding the Application or redemption
requirements, please contact the transfer agent at (800) 446-1012 between 9:00
a.m. and 5:00 p.m. (Eastern Time).
35
<PAGE>
[LOGO OF UST MUTUAL FUNDS SERVICE COMPANY
MASTER FUNDS CLIENT SERVICES
APPEARS HERE] P.O. Box 2798
Boston, MA 02208-2798
(800) 446-1012 NEW ACCOUNT APPLICATION
-----------------------------------------------------------------------------
-----------------------------------------------------------------------------
ACCOUNT REGISTRATION
-----------------------------------------------------------------------------
[_] Individual [_] Joint Tenants [_] Trust [_] Gift/Transfer to Minor
[_] Other ______________
Note: Joint tenant registration will be as "joint tenants
with right of survivorship" unless otherwise specified. Trust
registrations should specify name of the trust, trustee(s),
beneficiary(ies), and the date of the trust instrument.
Registration for Uniform Gifts/Transfers to Minors should be
in the name of one custodian and one minor and include the
state under which the custodianship is created (using the
minor's Social Security Number ("SSN")). For IRA accounts a
different application is required.
------------------------------ -----------------------------
Name(s) (please print) Social Security # or Taxpayer
Indentification #
( )
------------------------------ -----------------------------
Name Telephone #
------------------------------
Address
[_] U.S. Citizen
------------------------------ [_] Other (specify)____________
City/State/Zip
-----------------------------------------------------------------------------
FUND SELECTION (THE MINIMUM INITIAL AND SUBSEQUENT INVESTMENT IS $500 PER
FUND AND $50 PER FUND, RESPECTIVELY. MAKE CHECKS PAYABLE TO "UST MASTER
FUNDS.")
-----------------------------------------------------------------------------
Initial Investment
[_] International Fund $ ___________ 802
[_] Pan European Fund $ ___________ 821
[_] Pacific/Asia Fund $ ___________ 820
Initial Investment
[_] Emerging Americas Fund $ ___________ 822
[_] Other _____________________ $ ___________
Total Initial Investment: $ ___________
NOTE: If investing by wire, you must obtain a Bank Wire Control Number. To
do so, please call (800) 446-1012 and ask for the Wire Desk.
A. BY MAIL: Enclosed is a check in the amount of $ ____ payable to "UST
Master Funds."
B. BY WIRE: A bank wire in the amount of $ ____ has been sent to the Fund
from
------------------ ---------------------
Name of Bank Wire Control Number
CAPITAL GAIN AND DIVIDEND DISTRIBUTIONS: All capital gain and dividend
distributions will be reinvested in additional shares unless appropriate
boxes below are checked:
All dividends are to be [_] reinvested [_] paid in cash
All capital gains are to be [_] reinvested [_] paid in cash
-----------------------------------------------------------------------------
ACCOUNT PRIVILEGES
-----------------------------------------------------------------------------
TELEPHONE EXCHANGE AND REDEMPTION
[_] I/We appoint MFSC as my/our agent to act upon instructions received by
telephone in order to effect the telephone exchange and redemption
privileges. I/We hereby ratify any instructions given pursuant to this
authorization and agree that Master Fund, Master Tax-Exempt Fund, MFSC and
their directors, officers and employees will not be liable for any loss,
liability, cost or expense for acting upon instructions believed to be
genuine and in accordance with the procedures described in the then current
Prospectus. To the extent that Master Fund and Master Tax-Exempt Fund fail
to use reasonable procedures as a basis for their belief, they or their
service contractors may be liable for instructions that prove to be
fraudulent or unauthorized.
I/We further acknowledge that it is my/our responsibility to read the
Prospectus of any Fund into which I/we exchange.
[_] I/We do not wish to have the ability to exercise telephone redemption
and exchange privileges. I/We further understand that all exchange and
redemption requests must be in writing.
SPECIAL PURCHASE AND REDEMPTION PLANS
I/We have completed and attached the Supplemental Application for:
[_] Automatic Investment Plan
[_] Systematic Withdrawal Plan
AUTHORITY TO TRANSMIT REDEMPTION PROCEEDS TO PRE-DESIGNATED ACCOUNT.
I/We hereby authorize MFSC to act upon instructions received by telephone to
withdraw $1,000 or more from my/our account in the UST Master Funds and to
wire the amount withdrawn to the following commercial bank account. I/We
understand that MFSC charges an $8.00 fee for each wire redemption, which
will be deducted from the proceeds of the redemption.
Title on Bank Account*____________________________________________________
Name of Bank _____________________________________________________________
Bank A.B.A. Number____________________ Account Number ____________________
Bank Address _____________________________________________________________
City/State/Zip ___________________________________________________________
(attach voided check here)
A corporation, trust or partnership must also submit a "Corporate
Resolution" (or "Certificate of Partnership") indicating the names and
titles of officers authorized to act on its behalf.
* TITLE ON BANK AND FUND ACCOUNT MUST BE IDENTICAL.
<PAGE>
------------------------------------------------------------------
RIGHTS OF ACCUMULATION
------------------------------------------------------------------
To qualify for Rights of Accumulation, you must complete this
section, listing all of your accounts including those in your
spouse's name, joint accounts and accounts held for your
minor children. If you need more space, please attach a
separate sheet.
[_] I/We qualify for the Rights of Accumulation sales charge
discount described in the Prospectus and Statement of
Additional Information.
[_] I/We own shares of more than one Fund distributed by
Edgewood Services, Inc. Listed below are the numbers of
each of my/our Shareholder Accounts.
[_] The registration of some of my/our shares differs from that
shown on this application. Listed below are the account
number(s) and full registration(s) in each case.
LIST OF OTHER UST MASTER FUND ACCOUNTS:
______________________ _______________________________________
______________________ _______________________________________
______________________ _______________________________________
ACCOUNT NUMBER ACCOUNT REGISTRATIONS
------------------------------------------------------------------
LETTER OF INTENT
------------------------------------------------------------------
[_] I agree to the Letter of Intent provisions set forth in
the Prospectus. Although I am not obligated to purchase, and
Master Fund is not obligated to sell, I intend to invest,
over a 13-month period beginning on , 19 , an aggregate
amount in Eligible Funds of Master Fund and Master Tax-Exempt
Fund at least equal to (check appropriate box):
[_] $50,000 [_] $100,000 [_] $250,000 [_] $500,000
[_] $1,000,000 [_] $2,000,000
By signing this application, I hereby authorize MFSC to
redeem an appropriate number of shares held in escrow to pay
any additional sales loads payable in the event that I do not
fulfill the terms of this Letter of Intent.
------------------------------------------------------------------
AGREEMENT AND SIGNATURES
------------------------------------------------------------------
By signing this application, I/we hereby certify under
penalty of perjury that the information on this application
is complete and correct and that as required by Federal law:
[_] I/We certify that (1) the number(s) shown on this form
is/are the correct taxpayer identification number(s) and (2)
I/we are not subject to backup withholding either because
I/we have not been notified by the Internal Revenue Service
that I/we are subject to backup withholding, or the IRS has
notified me/us that I am/we are no longer subject to backup
withholding. (NOTE: IF ANY OR ALL OF PART 2 IS NOT TRUE,
PLEASE STRIKE OUT THAT PART BEFORE SIGNING.)
[_] If no taxpayer identification number ("TIN") or SSN has
been provided above, I/we have applied, or intend to apply,
to the IRS or the Social Security Administration for a TIN or
a SSN, and I/we understand that if I/we do not provide this
number to MFSC within 60 days of the date of this
application, or if I/we fail to furnish my/our correct SSN or
TIN, I/we may be subject to a penalty and a 31% backup
withholding on distributions and redemption proceeds. (Please
provide this number on Form W-9. You may request the form by
calling MFSC at the number listed above).
I/We represent that I am/we are of legal age and capacity to
purchase shares of the UST Master Funds. I/We have received,
read and carefully reviewed a copy of the appropriate Fund's
current Prospectus and agree to its terms and by signing
below I/we acknowledge that neither the Fund nor the
Distributor is a bank and that Fund Shares are not deposits
or obligations of, or guaranteed or endorsed by, United
States Trust Company of New York, its parent and affiliates
and the Shares are not federally insured by, guaranteed by,
obligations of or otherwise supported by the U.S. Government,
the Federal Deposit Insurance Corporation, the Federal
Reserve Board, or any other governmental agency; and that an
investment in the Funds involves investment risks, including
possible loss of principal amount invested.
X ___________________________ Date __________________________
Owner Signature
X ___________________________ Date __________________________
Co-Owner Signature
Sign exactly as name(s) of registered owner(s) appear(s) above
(including legal title if signing for a corporation, trust
custodial account, etc.).
------------------------------------------------------------------
FOR USE BY AUTHORIZED AGENT (BROKER/DEALER) ONLY
------------------------------------------------------------------
We hereby submit this application for the purchase of shares
in accordance with the terms of our selling agreement with
UST Distributors, Inc., and with the Prospectus and Statement
of Additional Information of each Fund purchased. We agree to
notify MFSC of any purchases made under the Letter of Intent
or Rights of Accumulation.
----------------------------- -------------------------------
Investment Dealer's Name Source of Business Code
----------------------------- -------------------------------
Main Office Address Branch Number
----------------------------- -------------------------------
Representative's Number Representative's Name
----------------------------- -------------------------------
Branch Address Telephone
----------------------------- -------------------------------
Investment Dealer's Title
Authorized Signature
<PAGE>
[LOGO OF UST MUTUAL FUNDS SERVICE COMPANY
MASTER FUNDS CLIENT SERVICES SUPPLEMENTAL APPLICATION
APPEARS HERE] P.O. Box 2798 SPECIAL INVESTMENT AND
Boston, MA 02208-2798 WITHDRAWAL OPTIONS
(800) 446-1012
-----------------------------------------------------------------------------
-----------------------------------------------------------------------------
ACCOUNT REGISTRATION PLEASE SUPPLY THE FOLLOWING INFORMATION EXACTLY AS IT
APPEARS ON THE FUND'S RECORD.
-----------------------------------------------------------------------------
Fund Name __________________ Account Number _________________
Owner Name _________________ Social Security or Taxpayer ID
Street Address _____________ Number _________________________
Resident City, State, Zip Code __________
of [_] U.S. [_] Other ____ [_] Check here if this is a change of address
-----------------------------------------------------------------------------
DISTRIBUTION OPTIONS (DIVIDENDS AND CAPITAL GAINS WILL BE REINVESTED
UNLESS OTHERWISE INDICATED)
-----------------------------------------------------------------------------
A. CAPITAL GAIN AND DIVIDEND DISTRIBUTIONS: All capital gain and dividend
distributions will be reinvested in additional shares unless appropriate
boxes below are checked: All dividends are to be [_] reinvested
[_] paid in cash
All capital gains are to be [_] reinvested
[_] paid in cash
B. PAYMENT ORDER: Complete only if distribution checks are to be payable
to another party. Make distribution checks payable to:
Name of Your Bank ______________
Name _______________________ Bank Account Number ____________
Address ____________________ Address of Bank ________________
City, State, Zip Code ________________________________________
C. DISTRIBUTIONS REINVESTED-CROSS FUNDS: Permits all distributions from
one Fund to be automatically reinvested into another identically-
registered UST Master Fund. (NOTE: You may NOT open a new Fund account
with this option.) Transfer all distributions earned:
From: ______________________ Account No. ____________________
(Fund)
To: ________________________ Account No. ____________________
(Fund)
-----------------------------------------------------------------------------
AUTOMATIC INVESTMENT PLAN [_] YES [_] NO
-----------------------------------------------------------------------------
I/We hereby authorize MFSC to debit my/our personal checking account on
the designated dates in order to purchase shares in the Fund indicated at
the top of this application at the applicable public offering price
determined on that day.
[_] Monthly on the 1st day [_] Monthly on the 15th day [_] Monthly on both
the 1st and 15th
days
Amount of each debit (minimum $50 per Fund) $ ________________
NOTE: A Bank Authorization Form (below) and a voided personal check must
accompany the Automatic Investment Plan application.
------------------------------------------------------------------------------
------------------------------------------------------------------------------
UST MASTER FUNDS
CLIENT SERVICES AUTOMATIC INVESTMENT PLAN
-----------------------------------------------------------------------------
-----------------------------------------------------------------------------
BANK AUTHORIZATION
-----------------------------------------------------------------------------
----------------------- ------------------------ --------------------------
Bank Name Bank Address Bank Account Number
I/We authorize you, the above named bank, to debit my/our
account for amounts drawn by MFSC, acting as my agent for the
purchase of Fund shares. I/We agree that your rights in
respect to each withdrawal shall be the same as if it were a
check drawn upon you and signed by me/us. This authority
shall remain in effect until revoked in writing and received
by you. I/We agree that you shall incur no liability when
honoring debits, except a loss due to payments drawn against
insufficient funds. I/We further agree that you will incur no
liability to me if you dishonor any such withdrawal. This
will be so even though such dishonor results in the
cancellation of that purchase.
---------------------------- --------------------------------
Account Holder's Name Joint Account Holder's Name
X ---------------- --------- X ------------------ -----------
Signature Date Signature Date
<PAGE>
--------------------------------------------------------------------------------
SYSTEMATIC WITHDRAWAL PLAN [_] YES [_] NO NOT AVAILABLE FOR IRA'S
--------------------------------------------------------------------------------
AVAILABLE TO SHAREHOLDERS WITH ACCOUNT BALANCES OF $10,000 OR MORE.
I/We hereby authorize MFSC to redeem the necessary number of shares from
my/our UST Master Fund Account on the designated dates in order to make the
following periodic payments:
[_] Monthly on the 24th day [_] Quarterly on the 24th day of
January, April, July and October
[_] Other______
(This request for participation in the Plan must be received by the 18th day
of the month in which you wish withdrawals to begin.)
Amount of each check ($100 minimum) $______________________
Please make check payable to: Recipient ________________________
(To be completed only if redemption
proceeds to be paid to other than Street Address ___________________
account holder of record or mailed
to address other than address of City, State, Zip Code ____________
record)
NOTE: If recipient of checks is not the registered shareholder, signature(s)
----
below must be guaranteed. A corporation, trust or partnership must also submit
a "Corporate Resolution" (or "Certification of Partnership") indicating the
names and titles of officers authorized to act on its behalf.
--------------------------------------------------------------------------------
AGREEMENT AND SIGNATURES
--------------------------------------------------------------------------------
The investor(s) certifies and agrees that the certifications, authorizations,
directions and restrictions contained herein will continue until MFSC receives
written notice of any change or revocation. Any change in these instructions
must be in writing with all signatures guaranteed (if applicable).
Date ______________________
X X
--------------------------------------- -------------------------------------
Signature Signature
--------------------------------------- -------------------------------------
Signature Guarantee* (if applicable) Signature Guarantee* (if applicable)
X X
--------------------------------------- -------------------------------------
Signature Signature
--------------------------------------- -------------------------------------
Signature Guarantee* (if applicable) Signature Guarantee* (if applicable)
*ELIGIBLE GUARANTORS: An Eligible Guarantor institution is a bank, trust
company, broker, dealer, municipal or government securities broker or dealer,
credit union, national securities exchange, registered securities association,
clearing agency or savings association, provided that such institution is a
participant in STAMP, the Securities Transfer Agents Medallion Program.
--------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PROSPECTUS SUMMARY......................................................... 2
EXPENSE SUMMARY............................................................ 3
FINANCIAL HIGHLIGHTS....................................................... 5
INVESTMENT OBJECTIVES AND POLICIES......................................... 9
PORTFOLIO INSTRUMENTS AND OTHER INVESTMENT INFORMATION..................... 14
INVESTMENT LIMITATIONS..................................................... 17
PRICING OF SHARES.......................................................... 19
HOW TO PURCHASE AND REDEEM SHARES.......................................... 19
INVESTOR PROGRAMS.......................................................... 25
DIVIDENDS AND DISTRIBUTIONS................................................ 27
TAXES...................................................................... 28
MANAGEMENT OF THE FUNDS.................................................... 29
DESCRIPTION OF CAPITAL STOCK............................................... 32
CUSTODIAN AND TRANSFER AGENT............................................... 33
PERFORMANCE INFORMATION.................................................... 33
MISCELLANEOUS.............................................................. 33
INSTRUCTIONS FOR NEW ACCOUNT APPLICATION................................... 35
</TABLE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESEN-
TATIONS NOT CONTAINED IN THIS PROSPECTUS, OR IN THE FUNDS' STATEMENT OF ADDI-
TIONAL INFORMATION INCORPORATED HEREIN BY REFERENCE, IN CONNECTION WITH THE
OFFERING MADE BY THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY MASTER
FUND OR ITS DISTRIBUTOR. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING BY
MASTER FUND OR BY ITS DISTRIBUTOR IN ANY JURISDICTION IN WHICH SUCH OFFERING
MAY NOT LAWFULLY BE MADE.
USTINLP894
[LOGO OF UST MASTER FUNDS, INC. APPEARS HERE]
MASTER FUNDS, INC.
INTERNATIONAL FUND
EMERGING AMERICAS FUND
PACIFIC/ASIA FUND
PAN EUROPEAN FUND
DISTRIBUTION SHARES
Prospectus August 1, 1995
<PAGE>
UST MASTER FUNDS, INC.
Money Fund
Government Money Fund
Treasury Money Fund
UST MASTER TAX-EXEMPT FUNDS, INC.
Short-Term Tax-Exempt Fund
STATEMENT OF ADDITIONAL INFORMATION
SERVICE SHARES
August 1, 1995
This Statement of Additional Information is not a prospectus but should be read
in conjunction with the current prospectus for the Money Fund, Government Money
Fund and Treasury Money Fund of UST Master Funds, Inc. ("Master Fund") and the
Short-Term Tax-Exempt Fund of UST Master Tax-Exempt Funds, Inc. ("Master Tax-
Exempt Fund") dated August 1, 1995 (the "Prospectus"). Much of the information
contained in this Statement of Additional Information expands upon the subjects
discussed in the Prospectus. No investment in shares of the portfolios described
herein ("Shares") should be made without reading the Prospectus. A copy of the
Prospectus may be obtained by writing UST Master Funds c/o Mutual Funds Service
Company, 73 Tremont Street, Boston, MA 02108-3913 or by calling (800) 446-1012.
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
INVESTMENT OBJECTIVES AND POLICIES...............................
Additional Information on Portfolio Instruments.............
Additional Investment Limitations...........................
NET ASSET VALUE AND NET INCOME...................................
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION...................
INVESTOR PROGRAMS................................................
Systematic Withdrawal Plan..................................
Exchange Privilege..........................................
Other Investor Programs.....................................
DESCRIPTION OF CAPITAL STOCK.....................................
MANAGEMENT OF THE FUNDS..........................................
Directors and Officers......................................
Investment Advisory and
Administration Agreements.................................
Service Organizations.......................................
Expenses
Custodian and Transfer Agent................................
PORTFOLIO TRANSACTIONS...........................................
INDEPENDENT AUDITORS.............................................
COUNSEL..........................................................
ADDITIONAL INFORMATION CONCERNING TAXES..........................
Generally...................................................
Short-Term Fund.............................................
YIELD INFORMATION................................................
MISCELLANEOUS....................................................
FINANCIAL STATEMENTS.............................................
APPENDIX......................................................... A-1
</TABLE>
-ii-
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
----------------------------------
This Statement of Additional Information contains additional
information with respect to the Money Fund, Government Money Fund and Treasury
Money Fund of Master Fund (collectively, the "Taxable Funds") and the Short-Term
Tax-Exempt Fund of Master Tax-Exempt Fund (the portfolios are referred to
individually as a "Fund" and collectively as the "Funds"; Master Fund and Master
Tax-Exempt Fund are referred to individually as a "Company" and collectively as
the "Companies").
The investment objective of the Money Fund and the Government Money
Fund is to seek as high a level of current income as is consistent with
liquidity and stability of principal. The Money Fund generally invests in
money market instruments; the Government Money Fund generally invests in
obligations issued or guaranteed by the U.S. Government, its agencies or
instrumentalities and in repurchase agreements collateralized by such
obligations. The investment objective of the Treasury Money Fund is to seek
current income consistent with liquidity and stability of principal. The
Treasury Money Fund invests primarily in direct short-term obligations issued by
the U.S. Treasury and certain agencies or instrumentalities of the U.S.
Government with a view toward providing dividend income that is generally
considered exempt from state and local income taxes. The investment objective
of the Short-Term Tax-Exempt Fund ("Short-Term Fund") is to seek a moderate
level of current interest income exempt from Federal income taxes consistent
with stability of principal. The Short-Term Fund invests substantially all of
its assets in high-quality Municipal Securities (as defined in the Prospectus)
and, except during temporary defensive periods, maintains at least 80% of its
assets in tax-exempt obligations. All Funds invest in instruments that
generally have remaining maturities of not more than 13 months. The following
policies supplement the Funds' investment policies as set forth in the
Prospectus.
Additional Information on Portfolio Instruments
-----------------------------------------------
Variable and Floating Rate Instruments
--------------------------------------
With respect to variable and floating rate instruments described in
the Prospectus, United States Trust Company of New York ("U.S. Trust" or the
"Investment Adviser") will consider the earning power, cash flows and other
liquidity ratios of the issuers of such instruments and will continuously
monitor their financial ability to meet payment on demand. In determining
dollar-weighted average portfolio maturity and whether a variable or floating
rate instrument has a remaining maturity of 13 months or less, the maturity of
each instrument
<PAGE>
will be computed in accordance with guidelines established by the SEC.
Repurchase Agreements
---------------------
The repurchase price under the repurchase agreements described in the
Prospectus generally equals the price paid by a Fund plus interest negotiated on
the basis of current short-term rates (which may be more or less than the rate
on the securities underlying the repurchase agreement). Securities subject to
repurchase agreements are held by the Funds' custodian (or sub-custodian) or in
the Federal Reserve/Treasury Money book-entry system. Repurchase agreements are
considered loans by a Fund under the Investment Company Act of 1940 (the "1940
Act").
Securities Lending
-------------------
When the Money Fund or Government Money Fund lends its portfolio
securities, it continues to receive interest or dividends on the securities
lent and may simultaneously earn interest on the investment of the cash loan
collateral, which will be invested in readily marketable, high-quality, short-
term obligations. Although voting rights, or rights to consent, attendant to
securities lent pass to the borrower, such loans may be called at any time and
will be called so that the securities may be voted by a Fund if a material event
affecting the investment is to occur.
When-Issued and Forward Transactions
------------------------------------
When a Fund agrees to purchase securities on a "when-issued" or
"forward commitment" basis, the custodian will set aside cash or liquid
portfolio securities equal to the amount of the commitment in a separate
account. Normally, the custodian will set aside portfolio securities to satisfy
a purchase commitment and, in such case, the Fund may be required subsequently
to place additional assets in the separate account in order to ensure that the
value of the account remains equal to the amount of the Fund's commitment. It
may be expected that a Fund's net assets will fluctuate to a greater degree when
it sets aside portfolio securities to cover such purchase commitments than when
it sets aside cash. Because a Fund will set aside cash or liquid assets to
satisfy its purchase commitments in the manner described, the Fund's liquidity
and ability to manage its portfolio might be affected in the event its forward
commitments or commitments to purchase "when-issued" securities ever exceed 25%
of the value of its assets.
A Fund will purchase securities on a "when-issued" or "forward
commitment" basis only with the intention of completing the transaction. If
deemed advisable as a matter of investment
-2-
<PAGE>
strategy, however, a Fund may dispose of or renegotiate a commitment after it is
entered into, and may sell securities it has committed to purchase before those
securities are delivered to the Fund on the settlement date. In these cases,
the Fund may realize a taxable capital gain or loss.
When a Fund engages in "when-issued" or "forward commitment"
transactions, it relies on the other party to consummate the trade. Failure of
such other party to do so may result in the Funds incurring a loss or missing an
opportunity to obtain a price considered to be advantageous.
The market value of the securities underlying a "when-issued" purchase
or a forward commitment to purchase securities and any subsequent fluctuations
in their market value are taken into account when determining the market value
of a Fund starting on the day the Fund agrees to purchase the securities. The
Fund does not earn interest on the securities it has committed to purchase until
they are paid for and delivered on the settlement date.
Stand-By Commitments
--------------------
The Short-Term Fund may acquire "stand-by commitments" with respect to
Municipal Securities held by it. Under a "stand-by commitment," a dealer or bank
agrees to purchase from the Short-Term Fund, at the Fund's option, specified
Municipal Securities at a specified price. The amount payable to the Fund upon
its exercise of a "stand-by commitment" is normally (i) the Fund's acquisition
cost of the Municipal Securities (excluding any accrued interest which the Fund
paid on their acquisition), less any amortized market premium or plus any
amortized market or original issue discount during the period the Fund owned the
securities, plus (ii) all interest accrued on the securities since the last
interest payment date during that period. "Stand-by commitments" are exercisable
by the Short-Term Fund at any time before the maturity of the underlying
Municipal Securities, and may be sold, transferred or assigned by the Fund only
with the underlying instruments.
The Short-Term Fund expects that "stand-by commitments" will generally
be available without the payment of any direct or indirect consideration.
However, if necessary or advisable, the Fund may pay for a "stand-by commitment"
either separately in cash or by paying a higher price for securities which are
acquired subject to the commitment (thus reducing the yield to maturity
otherwise available for the same securities). Where the Short-Term Fund has
paid any consideration directly or indirectly for a "stand-by commitment," its
cost will be reflected as unrealized depreciation for the period during which
the commitment was held by the Fund.
-3-
<PAGE>
The Short-Term Fund intends to enter into "stand-by commitments" only
with banks and broker/dealers which, in the Investment Adviser's opinion,
present minimal credit risks. In evaluating the creditworthiness of the issuer
of a "stand-by commitment," the Investment Adviser will review periodically the
issuer's assets, liabilities, contingent claims and other relevant financial
information.
Municipal Securities
--------------------
The Short-Term Fund invests primarily in Municipal Securities as
defined in the Prospectus. Municipal Securities include debt obligations issued
by governmental entities to obtain funds for various public purposes, including
the con struction of a wide range of public facilities, the refunding of
outstanding obligations, the payment of general operating expenses, and the
extension of loans to public institutions and facilities. Private activity bonds
that are issued by or on behalf of public authorities to finance various
privately operated facilities are included within the term "Municipal
Securities" only if the interest paid thereon is exempt from regular Federal
income tax and not treated as a specific tax preference item under the Federal
alternative minimum tax.
The two principal classifications of Municipal Secur ities are
"general obligations" and "revenue" issues, but the Short-Term Fund's portfolio
may also include "moral obligation" issues, which are normally issued by
special-purpose authorities. There are, of course, variations in the quality of
Municipal Securities, both within a particular classification and between
classifications, and the yields on Municipal Securities depend upon a variety of
factors, including general money market conditions, the financial condition of
the issuer, general conditions of the municipal bond market, the size of a
particular offering, the maturity of the obligation, and the rating of the
issue. The ratings of Moody's Investors Service, Inc. ("Moody's") and Standard
& Poor's Ratings Group ("S&P") described in the Prospectus and Appendix hereto
represent their opinion as to the quality of Municipal Securities. It should be
emphasized that these ratings are general and are not absolute standards of
quality, and Municipal Securities with the same maturity, interest rate, and
rating may have different yields while Municipal Securities of the same maturity
and interest rate with different ratings may have the same yield. Subsequent to
its purchase by the Fund, an issue of Municipal Securities may cease to be
rated, or its rating may be reduced below the minimum rating required for
purchase by the Fund. The Investment Adviser will consider such an event in
determining whether the Short-Term Fund should continue to hold the
obligation.
-4-
<PAGE>
The payment of principal and interest on most securi ties purchased by
the Short-Term Fund will depend upon the ability of the issuers to meet their
obligations. Each state, the District of Columbia, each of their political
subdivisions, agencies, instrumentalities and authorities, and each multistate
agency of which a state is a member, is a separate "issuer" as that term is used
in this Statement of Additional Information and the Prospectus. The non-
governmental user of facilities financed by private activity bonds is also
considered to be an "issuer." An issuer's obligations under its Municipal
Securities are subject to the provisions of bankruptcy, insolvency, and other
laws affecting the rights and remedies of creditors, such as the Federal
Bankruptcy Code, and laws, if any, which may be enacted by Federal or state
legislatures extending the time for payment of principal or interest, or both,
or imposing other constraints upon enforcement of such obligations or upon the
ability of municipalities to levy taxes. The power or ability of an issuer to
meet its obligations for the payment of interest on and principal of its
Municipal Securities may be materially adversely affected by litigation or other
conditions.
Private activity bonds are or have been issued to obtain funds to
provide, among other things, privately operated housing facilities, pollution
control facilities, convention or trade show facilities, mass transit, airport,
port or parking facilities and certain local facilities for water supply, gas,
electricity or sewage or solid waste disposal. Private activity bonds are also
issued to privately held or publicly owned corporations in the financing of
commercial or industrial facilities. State and local governments are authorized
in most states to issue private activity bonds for such purposes in order to
encourage corporations to locate within their communities. The principal and
interest on these obligations may be payable from the general revenues of the
users of such facilities.
Among other instruments, the Short-Term Fund may purchase short-term
General Obligation Notes, Tax Anticipation Notes, Bond Anticipation Notes,
Revenue Anticipation Notes, Tax-Exempt Commercial Paper, Construction Loan Notes
and other forms of short-term loans. Such instruments are issued with a short-
term maturity in anticipation of the receipt of tax funds, the proceeds of bond
placements or other revenues. In addition, the Fund may invest in long-term
tax-exempt instruments, such as municipal bonds and private activity bonds, to
the extent consistent with the maturity restrictions applicable to it.
From time to time, proposals have been introduced before Congress for
the purpose of restricting or eliminating the Federal income tax exemption for
interest on Municipal Securities. For example, under the Tax Reform Act of
1986, interest on certain private activity bonds must be included in an
-5-
<PAGE>
investor's Federal alternative minimum taxable income, and corporate investors
must treat all tax-exempt interest as an item of tax preference. Master Tax-
Exempt Fund cannot, of course, predict what legislation may be proposed in the
future regarding the income tax status of interest on Municipal Securities, or
which proposals, if any, might be enacted. Such proposals, while pending or if
enacted, might materially adversely affect the availability of Municipal
Securities for investment by the Short-Term Fund and the liquidity and value of
its portfolio. In such an event, Master Tax-Exempt Fund would re-evaluate the
Fund's investment objective and policies and consider possible changes in its
structure or possible dissolution.
Opinions relating to the validity of Municipal Secur ities and to the
exemption of interest thereon from Federal income tax are rendered by bond
counsel to the respective issuers at the time of issuance. Neither Master Tax-
Exempt Fund nor the Investment Adviser will review the proceedings relating to
the issuance of Municipal Securities or the basis for such opinions.
Miscellaneous
-------------
The Funds may not invest in oil, gas, or mineral leases.
Additional Investment Limitations
---------------------------------
In addition to the investment limitations set forth in the Prospectus,
the Funds are subject to the investment limitations enumerated below, which may
be changed with respect to a particular Fund only by a vote of the holders of a
majority of such Fund's outstanding Shares (as defined under "Miscellaneous" in
the Prospectus).
No Fund may:
1. Purchase securities on margin, make short sales of securities, or
maintain a short position;
2. Act as an underwriter of securities within the meaning of the
Securities Act of 1933, except insofar as the Taxable Funds might be deemed to
be underwriters upon disposition of certain portfolio securities acquired within
the limitation on purchases of restricted securities; and except to the extent
that purchase by the Short-Term Fund of Municipal Securities or other securities
directly from the issuer thereof in accordance with the Fund's investment
objective, policies and limitations may be deemed to be underwriting;
3. Purchase or sell real estate, except that each Taxable Fund may
purchase securities of issuers which deal in
-6-
<PAGE>
real estate and may purchase securities which are secured by interests in real
estate; and except that the Short-Term Fund may invest in Municipal Securities
secured by real estate or interests therein;
4. Purchase or sell commodities or commodity con tracts, or invest
in oil, gas, or other mineral exploration or development programs;
5. Invest in or sell puts, calls, straddles, spreads, or any
combination thereof; and
6. Issue any senior securities, except insofar as any borrowing in
accordance with a Fund's investment limitations might be considered to be the
issuance of a senior security.
In addition, the Money, Government Money and Treasury Money Funds may
not:
7. Make loans, except that (i) each Fund may purchase or hold debt
securities in accordance with its investment objective and policies, and the
Money Fund and the Government Money Fund may enter into repurchase agreements
with respect to obligations issued or guaranteed by the U.S. Government, its
agencies or instrumentalities, and (ii) the Money Fund and the Government Money
Fund may lend portfolio securities in an amount not exceeding 30% of their total
assets;
8. Invest in bank obligations having remaining maturities in excess
of one year, except that securities subject to repurchase agreements may bear
longer maturities;
9. Invest in companies for the purpose of exercising management or
control;
10. Invest more than 5% of a Funds's total assets in securities
issued by companies which, together with any pre decessor, have been in
continuous operation for fewer than three years;
11. Purchase foreign securities; except the Money Fund may purchase
certificates of deposit, bankers' acceptances, or other similar obligations
issued by domestic branches of foreign banks and foreign branches of U.S. banks
in an amount not to exceed 20% of its total net assets;
12. Acquire any other investment company or investment company
security, except in connection with a merger, consolidation, reorganization, or
acquisition of assets or where otherwise permitted by the Investment Company Act
of 1940;
-7-
<PAGE>
13. Invest in obligations of foreign branches of financial
institutions or in domestic branches of foreign banks, if immediately after such
purchase (i) more than 5% of the value of a Fund's total assets would be
invested in obligations of any one foreign branch of the financial institution
or domestic branch of a foreign bank; or (ii) more than 20% of its total assets
would be invested in foreign branches of financial institutions or in domestic
branches of foreign banks;
14. Purchase any securities which would cause more than 25% of the
value of a Fund's total assets at the time of purchase to be invested in the
securities of one or more issuers conducting their principal business activities
in the same industry, provided that (a) there is no limitation with respect to
securities issued or guaranteed by the U.S. Government or domestic bank
obligations, and (b) neither all finance companies, as a group, nor all utility
companies, as a group, are considered a single industry for purposes of this
policy; and
15. Knowingly invest more than 10% of the value of a Fund's total
assets in illiquid securities, including repurchase agreements with remaining
maturities in excess of seven days, restricted securities, and other securities
for which market quotations are not readily available.
In addition, the Short-Term Fund may not:
16. Make loans, except that the Fund may purchase or hold debt
obligations in accordance with its investment objec tive, policies, and
limitations; and
17. Invest in industrial revenue bonds where the payment of principal
and interest are the responsibility of a company (including its predecessors)
with less than three years of continuous operation;
18. Knowingly invest more than 10% of the value of its total assets
in securities which may be illiquid in light of legal or contractual
restrictions on resale or the absence of readily available market quotations;
19. Purchase any securities which would cause more than 25% of the
value of its total assets at the time of purchase to be invested in the
securities of one or more issuers conducting their principal business activities
in the same industry, provided that there is no limitation with respect to
domestic bank obligations or securities issued or guaranteed by the United
States; any state or territory; any possession of the U.S. Government; the
District of Columbia; or any of their authorities, agencies, instrumentalities,
or political subdivisions; and
-8-
<PAGE>
20. Purchase securities of other investment companies (except as part
of a merger, consolidation or reorganization or purchase of assets approved by
the Fund's shareholders), provided that the Fund may purchase shares of any
registered, open-end investment company, if immediately after any such purchase,
the Fund does not (a) own more than 3% of the outstanding voting stock of any
one investment company, (b) invest more than 5% of the value of its total assets
in the securities of any one investment company, or (c) invest more than 10% of
the value of its total assets in the aggregate in securities of investment
companies.
* * *
If a percentage limitation is satisfied at the time of investment, a
later increase or decrease in such percentage resulting from a change in value
of a Fund's portfolio securities will not constitute a violation of such
limitation.
For the purpose of Investment Limitation No. 3, the prohibition of
purchases of real estate includes acquisition of limited partnership interests
in partnerships formed with a view toward investing in real estate, but does not
prohibit purchases of shares in real estate investment trusts.
Notwithstanding Investment Limitations Nos. 15 and 18 above, the
Companies intend to limit the Funds' investments in illiquid securities to 10%
of each Fund's net (rather than total) assets.
Notwithstanding the proviso in Investment Limitation No. 19, to the
extent that the Short-Term Fund has invested more than 20% of the value of its
assets in taxable securities on a temporary defensive basis, the industry
diversification limitation in Investment Limitation No. 19 shall apply to
taxable securities issued or guaranteed by any state, territory, or possession
of the U.S. Government; the District of Columbia; or any of their authorities,
agencies, instrumentalities, or political subdivisions.
In order to permit the sale of Shares in certain states, the Companies
may make other commitments more restrictive than the investment policies and
limitations described above and in the Funds' Prospectus. Should the Companies
determine that any such commitment is no longer in the Funds' best interests,
they will revoke the commitment by terminating sales of the Shares to investors
residing in the state involved.
-9-
<PAGE>
NET ASSET VALUE AND NET INCOME
------------------------------
The Companies use the amortized cost method of valuation to value
Shares in the Funds. Pursuant to this method, a security is valued at its cost
initially, and thereafter a constant amortization to maturity of any discount or
premium is assumed, regardless of the impact of fluctuating interest rates on
the market value of the security. This method may result in periods during which
value, as determined by amortized cost, is higher or lower than the price the
Fund involved would receive if it sold the security. The market value of
portfolio securities held by the Funds can be expected to vary inversely with
changes in prevailing interest rates.
The Funds invest only in high-quality instruments and maintain a
dollar-weighted average portfolio maturity appropriate to their objective of
maintaining a constant net asset value per Share. The Funds will not purchase
any security deemed to have a remaining maturity of more than 13 months within
the meaning of the 1940 Act or maintain a dollar-weighted average portfolio
maturity which exceeds 90 days. The Companies' Boards of Directors have
established procedures that are intended to stabilize the net asset value per
Share of each Fund for purposes of sales and redemptions at $1.00. These
procedures include the determination, at such intervals as the Boards deem
appropriate, of the extent, if any, to which the net asset value per Share of a
Fund calculated by using available market quotations deviates from $1.00 per
Share. In the event such deviation exceeds one half of one percent, the Boards
of Directors will promptly consider what action, if any, should be initiated.
If the Boards of Directors believe that the extent of any deviation from a
Fund's $1.00 amortized cost price per Share may result in material dilution or
other unfair results to new or existing investors, they will take appropriate
steps to eliminate or reduce, to the extent reasonably practicable, any such
dilution or unfair results. These steps may include selling portfolio
instruments prior to maturity; shortening the average portfolio maturity;
withholding or reducing dividends; redeeming Shares in kind; reducing the number
of the Fund's outstanding Shares without monetary consideration; or utilizing a
net asset value per share determined by using available market quotations.
Net income of each of the Funds for dividend purposes consists of (i)
interest accrued and discount earned on a Fund's assets, less (ii) amortization
of market premium on such assets, accrued expenses directly attributable to the
Fund, and the general expenses or the expenses common to more than one portfolio
of a Company (e.g., administrative, legal, accounting, and directors' fees)
prorated to each portfolio of the Company on the basis of their relative net
assets.
-10-
<PAGE>
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
----------------------------------------------
Shares are continuously offered for sale by Edgewood Services, Inc.
(the "Distributor"), a wholly-owned subsidiary of Federated Investors,
and the Distributor has agreed to use appropriate efforts to solicit all
purchase orders. As described in the Prospectus, Shares may be sold to customers
("Customers") of the Investment Adviser, its affiliates and correspondent banks,
and qualified banks, savings and loan associations, broker/dealers and other
institutions ("Shareholder Organizations") that have entered into servicing
agreements with one of the Companies. Shares are also offered for sale to
institutional investors ("Institutional Investors") and to members of the
general public ("Direct Investors", and collectively with Institutional
Investors, "Investors"). Different types of Customer accounts at Shareholder
Organizations may be used to purchase Shares, including eligible agency and
trust accounts. In addition, Shareholder Organizations may automatically "sweep"
a Customer's account not less frequently than weekly and invest amounts in
excess of a minimum balance agreed to by the Shareholder Organization and its
Customer in Shares of the Fund selected by the Customer. Investors purchasing
Shares may include officers, directors, or employees of the particular
Shareholder Organization.
As stated in the Prospectus, no sales charge is imposed by the
Companies on purchases of Shares. In addition, no sales load is charged on the
reinvestment of dividends or distributions or in connection with certain Share
exchanges as described in the Prospectus under "Investor Programs--Exchange
Privilege."
As described in the Prospectus, Direct Investors may redeem Shares by
writing a check. Checks to redeem Shares are drawn on the Companies' accounts
at United States Trust Company of New York. Direct Investors will be subject to
the same rules and regulations that U.S. Trust applies to checking accounts and
will have the same rights and duties with respect to stop-payment orders,
"stale" checks, unauthorized signatures, collection of deposits, alterations and
unauthorized endorsements as bank checking account customers do under the New
York Uniform Commercial Code. When a check is presented to U.S. Trust for
payment, U.S. Trust, as the shareholder's agent, will cause the Fund from which
the redemption is requested to redeem sufficient Shares in the shareholder's
account to cover the amount of the check.
The Companies may suspend the right of redemption or postpone the date
of payment for Shares for more than 7 days during any period when (a) trading on
the New York Stock Exchange (the "Exchange") is restricted by applicable rules
and regulations of the Securities and Exchange Commission; (b) the
-11-
<PAGE>
Exchange is closed for other than customary weekend and holiday closings; (c)
the Securities and Exchange Commission has by order permitted such suspension;
or (d) an emergency exists as determined by the Securities and Exchange
Commission.
In the event that Shares are redeemed in cash at their net asset
value, a shareholder may receive in payment for such Shares an amount that is
more or less than his original investment due to changes in the market prices of
that Fund's portfolio securities.
Under limited circumstances, the Companies may accept securities as
payment for Shares. Securities acquired in this manner will be limited to
securities issued in transactions involving a bona fide reorganization or
---------
statutory merger, or will be limited to other securities (except for municipal
debt securities issued by state political subdivisions or their agencies or
instrumentalities) that: (a) meet the investment objective and policies of any
Fund acquiring such securities; (b) are acquired for investment and not for
resale; (c) are liquid securities that are not restricted as to transfer either
by law or liquidity of market; and (d) have a value that is readily
ascertainable (and not established only by evaluation procedures) as evidenced
by a listing on the American Stock Exchange, New York Stock Exchange or NASDAQ,
or as evidenced by their status as U.S. Government securities, bank certificates
of deposit, banker's acceptances, corporate and other debt securities that are
actively traded, money market securities and other similar securities with a
readily ascertainable value.
INVESTOR PROGRAMS
-----------------
Systematic Withdrawal Plan
--------------------------
An Investor who owns Shares with a value of $10,000 or more may begin
a Systematic Withdrawal Plan. The withdrawal can be on a monthly, quarterly,
semiannual or annual basis. There are four options for such systematic
withdrawals. The Investor may request:
(1) A fixed-dollar withdrawal;
(2) A fixed-share withdrawal;
(3) A fixed-percentage withdrawal (based on the current value of the
account); or
(4) A declining-balance withdrawal.
-12-
<PAGE>
Prior to participating in a Systematic Withdrawal Plan, the Investor must
deposit any outstanding certificates for Shares with Mutual Funds Service
Company, the Funds' sub-transfer agent. Under this Plan, dividends and
distributions are automatically reinvested in additional Shares. Amounts paid
to Investors under this Plan should not be considered as income. Withdrawal
payments represent proceeds from the sale of Shares, and there will be a
reduction of the shareholder's equity in the Fund involved if the amount of the
withdrawal payments exceeds the dividends paid on the Shares. This in turn may
result in a complete depletion of the shareholder's investment. An Investor may
not participate in a program of systematic investing in a Fund while at the same
time participating in the Systematic Withdrawal Plan with respect to an account
in that Fund.
Exchange Privilege
------------------
Investors and Customers of Shareholder Organizations may exchange
Shares having a value of at least $500 for shares OF THE SAME SERIES of any
other portfolio of the Companies. Shares may be exchanged by wire, telephone or
mail and must be made to accounts of identical registration. There is no
exchange fee imposed by the Companies. In order to prevent abuse of this
privilege to the disadvantage of other shareholders, the Companies reserve the
right to limit the number of exchange requests of Investors and Customers of
Shareholder Organizations to no more than six per year. The Companies may
modify or terminate the exchange program at any time upon 60 days' written
notice to shareholders, and may reject any exchange request.
For Federal income tax purposes, exchanges are treated as sales on
which the shareholder will realize a gain or loss, depending upon whether the
value of the Shares to be given up in exchange is more or less than the basis in
such Shares at the time of the exchange. Generally, a shareholder may include
sales loads incurred upon the purchase of Shares in his or her tax basis for
such Shares for the purpose of determining gain or loss on a redemption,
transfer or exchange of such Shares. However, if the shareholder effects an
exchange of Shares for shares of another portfolio of the Companies within 90
days of the purchase and is able to reduce the sales load applicable to the new
shares (by virtue of the Companies' exchange privilege), the amount equal to
such reduction may not be included in the tax basis of the shareholder's
exchanged Shares but may be included (subject to the limitation) in the tax
basis of the new shares.
Other Investor Programs
-----------------------
As discussed in the Prospectus, Shares of the Funds may be purchased
in connection with the Automatic Investment Program. Shares of the Money,
Government Money and Treasury
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<PAGE>
Money Funds may also be purchased in connection with certain Retirement
Programs.
DESCRIPTION OF CAPITAL STOCK
----------------------------
Master Fund's Charter authorizes its Board of Directors to issue up to
35 billion full and fractional shares of capital stock; and Master Tax-Exempt
Fund's Charter authorizes its Board of Directors to issue up to 14 billion full
and fractional shares of capital stock. Both Charters authorize the respective
Boards of Directors to classify or reclassify any unissued shares of the
respective Companies into one or more additional classes or series by setting or
changing in any one or more respects their respective preferences, conversion or
other rights, voting powers, restrictions, limitations as to dividends,
qualifications, and terms and conditions of redemption. The Prospectus
describes the classes of shares into which the Companies' authorized capital is
currently classified.
Shares have no preemptive rights and only such con version or exchange
rights as the Boards of Directors may grant in their discretion. When issued
for payment as described in the Prospectus, Shares will be fully paid and non-
assessable. In the event of a liquidation or dissolution of a Fund,
shareholders of that Fund are entitled to receive the assets available for
distribution belonging to that Fund and a proportionate distribution, based upon
the relative asset values of the portfolios of the Company involved, of any
general assets of that Company not belonging to any particular portfolio of that
Company which are available for distribution. In the event of a liquidation or
dissolution of either Company, shareholders of such Company will be entitled to
the same distribution process.
Shareholders of the Companies are entitled to one vote for each full
share held, and fractional votes for fractional shares held, and will vote in
the aggregate and not by class, except as otherwise required by the 1940 Act or
other applicable law or when the matter to be voted upon affects only the
interests of the shareholders of a particular class. Voting rights are not
cumulative and, accordingly, the holders of more than 50% of a Company's
aggregate outstanding shares may elect all of that Company's directors,
regardless of the votes of other shareholders.
Rule 18f-2 under the 1940 Act provides that any matter required to be
submitted to the holders of the outstanding voting securities of an investment
company such as each Company shall not be deemed to have been effectively acted
upon unless approved by the holders of a majority of the outstanding shares of
each portfolio affected by the matter. A portfolio is affected by a
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<PAGE>
matter unless it is clear that the interests of each portfolio in the matter are
substantially identical or that the matter does not affect any interest of the
portfolio. Under the Rule, the approval of an investment advisory agreement or
any change in a fundamental investment policy would be effectively acted upon
with respect to a portfolio only if approved by a majority of the outstanding
shares of such portfolio. However, the Rule also provides that the ratification
of the appointment of independent public accountants, the approval of principal
underwriting contracts, and the election of directors may be effectively acted
upon by shareholders of each Company voting without regard to class.
The Companies' Charters authorize the Boards of Directors, without
shareholder approval (unless otherwise required by applicable law), to (a) sell
and convey the assets of a Fund to another management investment company for
consideration which may include securities issued by the purchaser and, in
connection therewith, to cause all outstanding Shares of the Fund involved to be
redeemed at a price which is equal to their net asset value and which may be
paid in cash or by distribution of the securities or other consideration
received from the sale and conveyance; (b) sell and convert a Fund's assets into
money and, in connection therewith, to cause all outstanding Shares to be
redeemed at their net asset value; or (c) combine the assets belonging to a Fund
with the assets belonging to another portfolio of the Company involved, if the
Board of Directors reasonably determines that such combination will not have a
material adverse effect on shareholders of any portfolio participating in such
combination, and, in connection therewith, to cause all outstanding shares of
any portfolio to be redeemed at their net asset value or converted into shares
of another class of the Company's capital stock at net asset value. The
exercise of such authority by the Boards of Directors will be subject to the
provisions of the 1940 Act, and the Boards of Directors will not take any action
described in this paragraph unless the proposed action has been disclosed in
writing to the particular Fund's shareholders at least 30 days prior thereto.
Notwithstanding any provision of Maryland law requiring a greater vote
of a Company's Common Stock (or of the Shares of a Fund voting separately as a
class) in connection with any corporate action, unless otherwise provided by law
(for example, by Rule 18f-2, discussed above) or by the Company's Charter, each
Company may take or authorize such action upon the favorable vote of the holders
of more than 50% of its outstanding Common Stock voting without regard to class.
-15-
<PAGE>
MANAGEMENT OF THE FUNDS
-----------------------
Directors and Officers
----------------------
The directors and executive officers of the Companies, their
addresses, ages, principal occupations during the past five years, and other
affiliations are as follows (the listed positions apply to both ):
<TABLE>
<CAPTION>
Position Principal Occupation
with the During Past 5 Years and
Name and Address Companies Other Affiliations
---------------- --------- -----------------------
<S> <C> <C>
Alfred C. Tannachion* Chairman of the Retired.
1135 Hyde Park Court Board, President
Mahwah, NJ 07430 and Treasurer
Age 69
Donald L. Campbell Director Retired; Senior Vice
333 East 69th Street President, Royal
Apt. 10-H Insurance Company, Inc.,
New York, NY 10021 until August, 1989;
Age 69 Director, Royal Life
Insurance Co. of N.Y.
Joseph H. Dugan Director Retired; President, CEO
913 Franklin Lake Road and Director, L.B. Foster
Franklin Lakes, NJ 07417 Company (tubular products),
Age 70 from September, 1987 until
May, 1990; Executive Vice
President and COO, L. B. Foster
Company, from September, 1986
until September, 1987; Senior
Vice President --Finance, Chief
Financial Officer and Director,
Todd Shipyards Corporation,
prior to January 3, 1986.
Wolfe J. Frankl Director Director, Deutsche Bank
40 Gooseneck Lane Financial, Inc.; Director,
Charlottesville, VA 22903 The Harbus Corporation;
Age 74 Trustee, Mariner Funds
Trust; Managing Director --
North America, Berlin Economic
Development Corp., prior to
1988.
Robert A. Robinson Director President Emeritus, The
Church Pension Fund Church Pension Fund and its
800 Second Avenue affiliated companies, since
New York, NY 10017 1968; Trustee, Mariner
Age 69 Funds Trust; Trustee, H.B.
</TABLE>
______________________
*This director is considered to be an "interested person" of the Companies as
defined in the 1940 Act.
-16-
<PAGE>
<TABLE>
<CAPTION>
Position Principal Occupation
with the During Past 5 Years and
Name and Address Companies Other Affiliations
---------------- --------- -----------------------
<S> <C> <C>
and F.H. Bugher Foundation and
Director of its wholly owned
subsidiaries --Rosiclear Lead
and Flourspar Mining Co. and
The Pigmy Corporation;
Director, Morehouse Publishing
Co.
W. Bruce McConnel, III Secretary Partner of the law firm
Philadelphia National of Drinker Biddle & Reath.
Bank Building
1345 Chestnut Street
Philadelphia, PA 19107
Age 52
Frank M. Deutchki Assistant Vice President, Mutual
Mutual Funds Service Co. Secretary Funds Service Company
73 Tremont Street since February, 1989;
Boston, MA 02108-3913 Senior Vice President --
Age 41 Risk Analysis and avoid-
ance, Putnam Investor Services
(mutual fund group), from
October, 1987 to January, 1989.
John M. Corcoran Assistant Assistant Vice President,
Mutual Funds Service Co. Treasurer Manager of Administration,
73 Tremont Street Mutual Funds Service
Boston, MA 02108-3913 Company, since October
Age 30 1993; Audit Manager, Ernst &
Young, from August, 1987 to
September, 1993.
</TABLE>
Each director receives an annual fee of $9,000 with respect to each
Company plus a per-Company meeting fee of $1,500 for each meeting attended and
is reimbursed for expenses incurred in attending meetings. The Chairman of the
Board is entitled to receive an additional $5,000 per annum with respect to each
Company for services in such capacity. Drinker Biddle & Reath, of which Mr.
McConnel is a partner, receives legal fees as counsel to the Companies. The
employees of Mutual Funds Service Company do not receive any compensation from
the Companies for acting as officers of the Companies. No person who is
currently an officer, director or employee of the Investment Adviser serves as
an officer, director or employee of the Companies. The directors and officers
of the Companies as a group own less than 1% of the Shares of each Fund.
-17-
<PAGE>
The following chart provides certain information about the fees
received by the Companies' directors in the most recently completed fiscal
year.
<TABLE>
<CAPTION>
Pension or
Retirement Total
Benefits Compensation
Accrued as from the Companies
Aggregate Part of and Fund
Name of Compensation from Fund Complex* Paid
Person/Position the Companies Expenses to Directors
--------------- ----------------- ---------- ------------------
<S> <C> <C> <C>
Alfred C. Tannachion $40,000 None $40,000
Chairman of the Board,
President and Treasurer
Donald L. Campbell $30,000 None $30,000
Director
Joseph H. Dugan $30,000 None $30,000
Director
Wolfe J. Frankl $30,000 None $30,000
Director
Robert A. Robinson
Director $30,000 None $30,000
</TABLE>
___________________________
* The "Fund Complex" consists of UST Master Funds, Inc., UST Master Tax-Exempt
Funds, Inc. and UST Master Variable Series, Inc. For the fiscal year ended
March 31, 1995, UST Master Variable Series, Inc. did not pay any directors'
fees.
Investment Advisory and Administration Agreements
-------------------------------------------------
United States Trust Company of New York serves as Investment Adviser
to the Funds. In the Investment Advisory Agreements, U.S. Trust has agreed to
provide the services described in the Prospectus. The Investment Adviser has
also agreed to pay all expenses incurred by it in connection with its activities
under the respective agreements other than the cost of securities, including
brokerage commissions, if any, purchased for the Funds. See "Expenses" in the
Prospectus.
For the fiscal year ended March 31, 1993, Master Fund paid the
Investment Adviser $1,776,065, $2,102,373 and $610,108 with respect to the
Money, Government Money and Treasury Money Funds, respectively. For the same
period, Master Tax-Exempt Fund paid the Investment Adviser $1,629,056 with
respect to the Short-Term Fund.
-18-
<PAGE>
For the fiscal year ended March 31, 1994, Master Fund paid the
Investment Adviser $2,183,204, $1,897,581 and $702,230 with respect to the
Money, Government Money and Treasury Money Funds, respectively. For the same
period, Master Tax-Exempt Fund paid the Investment Adviser $1,697,812 with
respect to the Short-Term Tax-Exempt Fund. For the fiscal year ended March 31,
1994, the Investment Adviser waived fees totalling $14,775, $20,874, $1,704 and
$20,732 with respect to the Money, Government Money, Treasury Money and Short-
Term Tax-Exempt Funds, respectively.
For the fiscal year ended March 31, 1995, Master Fund paid the
Investment Adviser $1,781,897, $1,665,344 and $674,259 with respect to the
Money, Government Money and Treasury Money Funds, respectively. For the same
period, Master Tax-Exempt Fund paid the Investment Adviser $1,698,879 with
respect to the Short-Term Fund. For the fiscal year ended March 31, 1995, the
Investment Adviser waived fees totalling $204,060, $173,321, $45,366 and
$236,867 with respect to the Money, Government Money, Treasury Money and Short-
Term Funds respectively.
The Investment Advisory Agreements provide that the Investment Adviser
shall not be liable for any error of judgment or mistake of law or for any loss
suffered by the Funds in connection with the performance of such agreements,
except a loss resulting from a breach of fiduciary duty with respect to the
receipt of compensation for advisory services or a loss resulting from willful
misfeasance, bad faith or gross negligence on the part of the Investment Adviser
in the performance of its duties or from reckless disregard by it of its duties
and obligations thereunder. In addition, the Investment Adviser has undertaken
in the Investment Advisory Agreements to maintain its policy and practice of
conducting its Asset Management Group independently of its Banking Group.
Mutual Funds Service Company ("MFSC") and Concord Holding Corporation
(the "Administrators") jointly served as the Funds' administrators until July
31, 1995. Under the Administration Agreements, the Administrators have agreed
to maintain office facilities for the Funds, furnish the Funds with statistical
and research data, clerical, accounting and bookkeeping services, and certain
other services required by the Funds, and to compute the net asset value, net
income, "exempt-interest dividends," and realized capital gains or losses, if
any, of the respective Funds. The Administrators prepare semiannual reports to
the Securities and Exchange Commission, prepare Federal and state tax returns,
prepare filings with state securities commissions, arrange for and bear the cost
of processing Share purchase and redemption orders, maintain the Funds'
financial accounts and records, and generally assist in the Funds'
operations.
-19-
<PAGE>
Effective August 1, 1995, administrative services will be provided to
the Funds by MFSC and Federated Administrative Services, an affiliate of the
Distributor, under administration agreements having substantially the same terms
as the Administration Agreements currently in effect.
For the fiscal year ended March 31, 1993, Master Fund paid the
Administrators $1,100,322, $1,301,645 and $315,026 in the aggregate with respect
to the Money, Government Money and Treasury Money Funds, respectively. For the
same period, Master Tax-Exempt Fund paid the Administrators $1,009,414 in the
aggregate with respect to the Short-Term Fund.
For the fiscal year ended March 31, 1994, Master Fund paid the
Administrators $1,362,669, $1,183,297 and $360,869 in the aggregate with respect
to the Money, Government Money and Treasury Money Funds, respectively. For the
same period, Master Tax-Exempt Fund paid the Administrators $1,060,325 in the
aggregate with respect to the Short-Term Tax-Exempt Fund. For the fiscal year
ended March 31, 1994, the Administrators waived fees totalling $384 and $358
with respect to the Government Money and Treasury Money Funds, respectively.
For the fiscal year ended March 31, 1995, Master Fund paid the
Administrators $1,223,349, $1,131,530 and $369,056 in the aggregate with respect
to the Money Fund, Government Money Fund and Treasury Money Fund, respectively.
For the same period, Master Tax-Exempt Fund paid the Administrators $1,193,896
in the aggregate with respect to the Short-Term Fund. For the fiscal year ended
March 31, 1995, the Administrators waived fees totalling $1,087 and $351 with
respect to the Government Money and Treasury Money Funds, respectively.
Service Organizations
---------------------
As stated in the Prospectus, the Companies will enter into agreements
with Service Organizations. Such shareholder servicing agreements will require
the Service Organizations to provide shareholder administrative services to
their Customers who beneficially own Shares in consideration for a Fund's
payment (on an annualized basis) of up to .40% of the average daily net assets
of the Fund's Shares beneficially owned by Customers of the Service
Organization. Such services with respect to a Fund may include: (a) assisting
Customers in designating and changing dividend options, account designations and
addresses; (b) providing necessary personnel and facilities to establish and
maintain certain shareholder accounts and records, as may reasonably be
requested from time to time by the Companies; (c) assisting in processing
purchases, exchange and redemption transactions; (d) arranging for the wiring
of funds; (e) transmitting and receiving funds in connection with Customer
orders to purchase, exchange or redeem Shares; (f) verifying and
-20-
<PAGE>
guaranteeing Customer signatures in connection with redemption orders, transfers
among and changes in Customer-designated accounts; (g) providing periodic
statements showing a Customer's account balances and, to the extent practicable,
integrating of such information with information concerning other client
transactions otherwise effected with or through the Service Organization; (h)
furnishing on behalf of the Companies' distributor (either separately or on an
integrated basis with other reports sent to a Customer by the Service
Organization) periodic statements and confirmations of all purchases, exchanges
and redemptions of Shares in a Customer's account required by applicable federal
or state law; (i) transmitting proxy statements, annual reports, updating
prospectuses and other communications from the Companies to Customers; (j)
receiving, tabulating and transmitting to the Companies proxies executed by
Customers with respect to annual and special meetings of shareholders of the
Companies; (k) providing reports (at least monthly, but more frequently if so
requested by the Companies' distributor) containing state-by-state listings of
the principal residences of the beneficial owners of the Shares; and (l)
providing or arranging for the provision of such other related services as the
Companies or a Customer may reasonably request.
The Companies' agreements with Service Organizations are governed by
Administrative Services Plans (the "Plans") adopted by the Companies. Pursuant
to the Plans, each Company's Board of Directors will review, at least quarterly,
a written report of the amounts expended under the Company's agreements with
Service Organizations and the purposes for which the expenditures were made. In
addition, the arrangements with Service Organizations will be approved annually
by a majority of each Company's directors, including a majority of the directors
who are not "interested persons" of the Company as defined in the 1940 Act and
have no direct or indirect financial interest in such arrangements (the
"Disinterested Directors").
Any material amendment to a Company's arrangements with Service
Organizations must be approved by a majority of the Company's Board of Directors
(including a majority of the Disinterested Directors). So long as the
Companies' arrangements with Service Organizations are in effect, the selection
and nomination of the members of the Companies' Boards of Directors who are not
"interested persons" (as defined in the 1940 Act) of the Companies will be
committed to the discretion of such non-interested Directors.
For the fiscal years ended March 31, 1995 and 1994, payments to
Service Organizations totalled $204,060 and $14,775, $174,408 and $21,258,
$45,717 and $2,062 and $236,867 and $20,732 with respect to the Money,
Government Money, Treasury Money and Short-Term Tax-Exempt Funds, respectively.
Of these
-21-
<PAGE>
respective amounts, $203,572 and $14,775, $171,257 and $20,233, $44,896 and
$1,075 and $236,399 and $20,732 were paid to affiliates of U.S. Trust with
respect to the Money, Government Money, Treasury Money and Short-Term Tax-Exempt
Funds.
Expenses
--------
Except as otherwise noted, the Investment Adviser and the
Administrators bear all expenses in connection with the performance of their
services. The Funds bear the expenses incurred in their operations. Expenses of
the Funds include taxes; interest; fees (including fees paid to the Companies'
Directors and officers who are not affiliated with the Distributor or the
Administrators); Securities and Exchange Commission fees; state securities
qualification fees, costs of preparing and printing prospectuses for regulatory
purposes and for distribution to shareholders; advisory, administration and
administrative servicing fees, charges of the custodian, transfer agent, and
dividend disbursing agent; certain insurance premiums; outside auditing and
legal expenses; costs of shareholder reports and meetings; and any extraordinary
expenses. The Funds also pay any brokerage fees and commissions in connection
with the purchase of portfolio securities.
If the expenses borne by a Fund in any fiscal year exceed expense
limitations imposed by applicable state securities regulations, the Investment
Adviser and the Administrators will reimburse such Fund for a portion of any
such excess to the extent required by such regulations in proportion to the fees
received by them in such year up to the amount of the fees payable to them,
provided, however, to the extent required by such state regulations, the
Investment Adviser and the Administrators have agreed to effect such
reimbursement regardless of the fees payable to them. The amounts of the above
reimbursements, if any, will be estimated, reconciled and paid on a monthly
basis. To the Companies' knowledge, of the applicable expense limitations in
effect on the date of this Statement of Additional Information, none is more
restrictive than the following: 2 1/2% of the first $30 million of average
annual net assets, 2% of the next $70 million of average annual net assets and 1
1/2% of average annual net assets in excess of $100 million.
Custodian and Transfer Agent
----------------------------
United States Trust Company of New York also serves as custodian of
the Fund's assets. Under the custodian agreement, U.S. Trust has agreed to (i)
maintain a separate account or accounts in the name of the Fund; (ii) make
receipts and disbursements of money on behalf of the Fund; (iii) collect and
receive all income and other payments and distributions on account of the Fund's
portfolio securities; (iv) respond to correspondence from securities brokers and
others relating to its duties; (v) maintain certain financial accounts and
records; and (vi) make periodic reports to Master Tax-Exempt Fund's Board of
Directors concerning the Fund's operations. U.S. Trust is entitled to monthly
fees for furnishing custodial services according to the following fee schedule:
on the face value of debt securities and the market value of equity securities,
a fee at the annual rate of .05%; on issues held, $50.00 for each physical issue
held, $25.00 for each book-entry issue held and 1/4 of 1% of market value for
each foreign issue held; on transactions, $25.00 for each physical transaction,
$15.00 for each book-entry transaction and $50.00 for each foreign security
transaction. In addition, U.S. Trust is entitled to reimbursement for its
out-of-pocket expenses in connection with the above services.
U.S. Trust also serves as the Fund's transfer agent and dividend
disbursing agent. In such capacity, U.S. Trust has agreed to (i) issue and
redeem Shares; (ii) address and mail all communications by the Fund to its
shareholders, including reports to shareholders, dividend and distribution
notices, and proxy materials for its meetings of shareholders; (iii) respond to
correspondence by shareholders and others relating to its duties; (iv) maintain
shareholder accounts; and (v) make periodic reports to Master Tax-Exempt Fund
concerning the Fund's operations. For its transfer agency, dividend disbursing,
and subaccounting services, U.S. Trust is entitled to receive $15.00 per annum
per account and subaccount. In addition, U.S. Trust is entitled to be
reimbursed for its out-of-pocket expenses for the cost of forms, postage,
processing purchase and redemption orders, handling of proxies, and other
similar expenses in connection with the above services.
U.S. Trust may, at its own expense, open and maintain custody accounts
with respect to the Fund with other banks or trust companies, and may delegate
its transfer agency obligations to another transfer agent registered or
qualified under applicable law, provided that U.S. Trust shall remain liable for
the performance of all of its custodial and transfer agency duties under the
Custodian and Transfer Agency Agreement, notwithstanding any delegation.
Pursuant to this provision in the agreement, U.S. Trust has entered into a
sub-transfer agency arrangement with MFSC, an affiliate of U.S. Trust, with
respect to accounts of shareholders who are not Customers of U.S. Trust. For
the services provided by MFSC, U.S. Trust has agreed to pay MFSC $15.00 per
annum per account or subaccount plus out-of-pocket expenses. MFSC receives no
fee directly from Master Tax-Exempt Fund for any of its sub-transfer agency
services.
-22-
<PAGE>
PORTFOLIO TRANSACTIONS
----------------------
Subject to the general control of the Companies' Boards of Directors,
the Investment Adviser is responsible for, makes decisions with respect to, and
places orders for all purchases and sales of all portfolio securities of each of
the Funds.
The Funds do not intend to seek profits from short-term trading. Their
annual portfolio turnover will be relatively high, but brokerage commissions are
not normally paid on money market instruments, and portfolio turnover is not
expected to have a material effect on the net income of the Funds.
Securities purchased and sold by the Funds are generally traded in the
over-the-counter market on a net basis (i.e., without commission) through
dealers, or otherwise involve transactions directly with the issuer of an
instrument. The cost of securities purchased from underwriters includes an
underwriting commission or concession, and the prices at which securities are
purchased from and sold to dealers include a dealer's mark-up or mark-down. With
respect to over-the-counter transactions, the Funds, where possible, will deal
directly with the dealers who make a market in the securities involved, except
in those circumstances where better prices and execution are available
elsewhere.
The Investment Advisory Agreements between the Companies and the
Investment Adviser provide that, in executing portfolio transactions and
selecting brokers or dealers, the Investment Adviser will seek to obtain the
best net price and the most favorable execution. The Investment Adviser shall
consider factors it deems 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 whether such broker or dealer is selling
shares of the Companies, and the reasonableness of the commission, if any, for
the specific transaction and on a continuing basis.
In addition, the Investment Advisory Agreements authorize the
Investment Adviser, to the extent permitted by law and subject to the review of
the Companies' Boards of Directors from time to time with respect to the extent
and continuation of the policy, to cause the Funds to pay a broker which
furnishes brokerage and research services a higher commission than that which
might be charged by another broker for effecting the same transaction, provided
that the Investment Adviser determines in good faith that such commission is
reasonable in relation to the value of the brokerage and research services
provided by such broker, viewed in terms of either that particular transaction
or the overall responsibilities of the Investment Adviser to the
-23-
<PAGE>
accounts as to which it exercises investment discretion. Such brokerage and
research services might consist of reports and statistics on specific companies
or industries, general summaries of groups of stocks and their comparative
earnings, or broad overviews of the stock market and the economy.
Supplementary research information so received is in addition to and
not in lieu of services required to be performed by the Investment Adviser and
does not reduce the investment advisory fees payable by the Funds. Such
information may be useful to the Investment Adviser in serving the Funds and
other clients and, conversely, supplemental information obtained by the
placement of business of other clients may be useful to the Investment Adviser
in carrying out its obligations to the Funds.
Portfolio securities will not be purchased from or sold to the
Investment Adviser, the Distributor, or any affiliated person of either of them
(as such term is defined in the 1940 Act) acting as principal, except to the
extent permitted by the Securities and Exchange Commission.
Investment decisions for the Funds are made independently from those
for other investment companies, common trust funds and other types of funds
managed by the Investment Adviser. Such other investment companies and funds may
also invest in the same securities as the Funds. When a purchase or sale of the
same security is made at substantially the same time on behalf of the Funds and
another investment company or common trust fund, the transaction will be
averaged as to price, and available investments allocated as to amount, in a
manner which the Investment Adviser believes to be equitable to the Funds and
such other investment company or common trust fund. In some instances, this
investment procedure may adversely affect the price paid or received by the
Funds or the size of the position obtained by the Funds. To the extent permitted
by law, the Investment Adviser may aggregate the securities to be sold or
purchased for the Funds with those to be sold or purchased for other investment
companies or common trust funds in order to obtain best execution.
The Companies are required to identify any securities of their regular
brokers or dealers (as defined in Rule 10b-1 under the 1940 Act) or their
parents held by the Companies as of the close of their most recent fiscal year.
As of March 31, 1995, the following portfolios of Master Fund held the following
securities of Master Fund's regular brokers or dealers or their parents: (a) the
Money Fund held the following security: repurchase agreement with Nomura
Securities, Inc. in the principal amount of $19,685,063; repurchase agreement
with Fuji Securities, Inc. on the principal amount of $20,000,000; commercial
paper of Merrill Lynch & Co., Inc. on the principal amount of $35,000,000, and
commercial paper of UBS Finance on the principal amount of $30,000,000; (b) the
Government Money Fund held the following securities: repurchase agreement with
Nomura Securities, Inc. on the principal amount of $20,216,462 and repurchase
agreement with Fuji Securities, Inc. on the principal amount of $20,000,000; (c)
the International Fund held the
-24-
<PAGE>
following security: 27,000 shares of Nomura Securities Co., Ltd.; and (d) the
Pacific/Asia Fund held the following security: 26,000 shares of Nomura
Securities Co., Ltd. Nomura Securities International, Inc., Fuji Bank & Trust,
Merrill Lynch, Pierce, Fenner & Smith, Inc. and UBS Securities are considered
to be a regular brokers and dealers of Master Fund. As of March 31, 1995, Master
Tax-Exempt Fund held no securities of Master Tax-Exempt Fund's regular brokers
or dealers and their parents.
INDEPENDENT AUDITORS
--------------------
Ernst & Young LLP, independent auditors, 200 Clarendon Street,
Boston, MA 02116, serve as auditors of the Companies. The Funds' Financial
Highlights included in the Prospectus and the financial statements for the
period ended March 31, 1995 incorporated by reference in this Statement of
Additional Information have been audited by Ernst & Young LLP for the periods
included in their reports thereon which appear therein.
COUNSEL
-------
Drinker Biddle & Reath (of which Mr. McConnel, Secretary of the
Companies, is a partner), located at 1345 Chestnut Street, Philadelphia,
Pennsylvania 19107, is counsel to the Companies, and will pass upon the legality
of the Shares offered by the Prospectus.
ADDITIONAL INFORMATION CONCERNING TAXES
---------------------------------------
Generally
---------
The following supplements the tax information contained in the
Prospectus.
Each of the Funds is treated as a separate corporate entity under the
Internal Revenue Code of 1986, as amended (the "Code"), and intends to qualify
as a regulated investment company. If, for any reason, a Fund does not qualify
for a taxable year for the special Federal tax treatment afforded regulated
investment companies, such Fund would be subject to Federal tax on all of its
taxable income at regular corporate rates, without any deduction for
distributions to shareholders. In such event, dividend distributions (whether
or not derived from interest on Municipal Securities) would be taxable as
ordinary income to shareholders to the extent of the Fund's current and
accumulated earnings and profits and would be eligible for the dividends
received deduction in the case of corporate shareholders.
A 4% non-deductible excise tax is imposed on regulated investment
companies that fail to currently distribute an amount
-25-
<PAGE>
equal to specified percentages of their ordinary taxable income and capital gain
net income (excess of capital gains over capital losses). The Funds intend to
make sufficient distributions or deemed distributions of their ordinary taxable
income and any capital gain net income prior to the end of each calendar year to
avoid liability for this excise tax.
Each Fund will be required in certain cases to withhold and remit to
the U.S. Treasury 31% of taxable dividends paid to shareholders who have failed
to provide a correct tax identification number in the manner required, who are
subject to withholding by the Internal Revenue Service for failure properly to
include on their return payments of taxable interest or dividends, or who have
failed to certify to the Fund when required to do so either that they are not
subject to backup withholding or that they are "exempt recipients."
Short-Term Fund
---------------
The Short-Term Fund is not intended to constitute a balanced
investment program and is not designed for investors seeking capital
appreciation or maximum tax-exempt income irrespective of fluctuations in
principal. Shares of the Short-Term Fund would not be suitable for tax-exempt
institutions and may not be suitable for retirement plans qualified under
Section 401 of the Code, H.R. 10 plans and individual retirement accounts
because such plans and accounts are generally tax-exempt and, therefore, not
only would not gain any additional benefit from the Short-Term Fund dividends
being tax-exempt, but such dividends would be ultimately taxable to the
beneficiaries when distributed to them. In addition, the Short-Term Fund may not
be an appropriate investment for entities which are "substantial users" of
facilities financed by private activity bonds or "related persons" thereof.
"Substantial user" is defined under the Treasury Regulations to include a non-
exempt person who regularly uses a part of such facilities in his trade or
business and whose gross revenues derived with respect to the facilities
financed by the issuance of bonds are more than 5% of the total revenues derived
by all users of such facilities, who occupies more than 5% of the usable area of
such facilities or for whom such facilities or a part thereof were specifically
constructed, reconstructed or acquired. "Related persons" include certain
related natural persons, affiliated corporations, a partnership and its partners
and an S Corporation and its shareholders.
In order for the Short-Term Fund to pay exempt-interest dividends for
any taxable year, at least 50% of the aggregate value of the Fund's portfolio
must consist of exempt-interest obligations at the close of each quarter of its
taxable year. Within 60 days after the close of the taxable year, the Short-
Term Fund will notify its shareholders of the portion of the
-26-
<PAGE>
dividends paid by the Fund which constitutes an exempt-interest dividend with
respect to such taxable year. However, the aggregate amount of dividends so
designated by the Short-Term Fund cannot exceed the excess of the amount of
interest exempt from tax under Section 103 of the Code received by the Short-
Term Fund during the taxable year over any amounts disallowed as deductions
under Sections 265 and 171(a)(2) of the Code. The percentage of total dividends
paid by the Short-Term Fund with respect to any taxable year which qualifies as
exempt-interest dividends will be the same for all shareholders receiving
dividends from the Short-Term Fund for such year.
A percentage of the interest on indebtedness incurred by a shareholder
to purchase or carry the Short-Term Fund's Shares, equal to the percentage of
the total non-capital gain dividends distributed during the shareholders taxable
year that is exempt-interest dividends, is not deductible for Federal income tax
purposes.
Master Tax-Exempt Fund intends to distribute to shareholders of the
Short-Term Fund any investment company taxable income earned by the Short-Term
Fund for each taxable year. In general, the Short-Term Fund's investment
company taxable income will be its taxable income (such as taxable interest and
short-term capital gains) subject to certain adjustments and excluding the
excess of any net long-term capital gain for the taxable year over the net
short-term capital loss, if any, for such year. Such distributions will be
taxable to the shareholders as ordinary income (whether paid in cash or
additional Shares).
* * *
The foregoing discussion is based on Federal tax laws and regulations
which are in effect on the date of this Statement of Additional Information;
such laws and regulations may be changed by legislative or administrative
action. Shareholders are advised to consult their tax advisers concerning their
specific situations and the application of state and local taxes.
YIELD INFORMATION
-----------------
The standardized annualized seven-day yields for the Shares of the
Funds are computed separately by determining the net change, exclusive of
capital changes, in the value of a hypothetical pre-existing account in the Fund
involved, having a balance of one Share at the beginning of the period, dividing
the net change in account value by the value of the account at the beginning of
the period to obtain the base period return, and multiplying the base period
return by (365/7). The net change in the value of an account in each of the
Funds includes the value
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<PAGE>
of additional Shares purchased with dividends from the original Share and
dividends declared on both the original Share and any such additional Shares,
net of all fees that are charged to all shareholder accounts and to the
particular series of Shares in proportion to the length of the base period,
other than nonrecurring account or any sales charges. For any account fees that
vary with the size of the account, the amount of fees charged is computed with
respect to the Fund's mean (or median) account size. The capital changes to be
excluded from the calculation of the net change in account value are realized
gains and losses from the sale of securities and unrealized appreciation and
depreciation. In addition, each Fund may use effective compound yield quotations
for its Shares computed by adding 1 to the unannualized base period return
(calculated as described above), raising the sums to a power equal to 365
divided by 7, and subtracting 1 from the results.
From time to time, in advertisements, sales literature or in reports
to shareholders, the yields of each Money Market Fund's Shares may be quoted and
compared to those of other mutual funds with similar investment objectives and
to stock or other relevant indices. For example, the yield of such a Fund's
Shares may be compared to the Donoghue's Money Fund average, which is an average
compiled by Donoghue's MONEY FUND REPORT of Holliston, MA 01746, a widely
recognized independent publication that monitors the performance of money market
funds, or to the data prepared by Lipper Analytical Services, Inc., a widely
recognized independent service that monitors the performance of mutual funds.
Advertisements, sales literature or reports to shareholders may from time to
time also include a discussion and analysis of each Fund's performance,
including without limitation, those factors, strategies and techniques that,
together with market conditions and events, materially affected each Fund's
performance.
The current yields for the Funds' Shares may be obtained by calling
(800) 233-9180. For the seven-day period ended March 31, 1995, the annualized
yields for Shares of the Money Fund, Government Money Fund, Treasury Money Fund
and Short-Term Fund were 5.69%, 5.62%, 5.30% and 3.64%, respectively, and the
effective yields for Shares of the Funds were 5.85%, 5.78%, 5.44% and 3.71%,
respectively.
The "tax-equivalent" yield of the Short-Term Fund is computed by: (a)
dividing the portion of the yield (calculated as above) that is exempt from
Federal income tax by one minus a stated Federal income tax rate and (b) adding
that figure to that portion, if any of the yield that is not exempt from Federal
income tax. Tax-equivalent yields assume the payment of Federal income taxes at
a rate of 31%.
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<PAGE>
Based on the foregoing calculation, the annualized tax-equivalent
yield of the Short-Term Fund for the seven-day period ended March 31, 1995 was
5.28%.
MISCELLANEOUS
-------------
As used in the Prospectus, "assets belonging to a Fund" means the
consideration received upon the issuance of Shares in the Fund, together with
all income, earnings, profits, and proceeds derived from the investment thereof,
including any proceeds from the sale of such investments, any funds or payments
derived from any reinvestment of such proceeds, and a portion of any general
assets of the Company involved not belonging to a particular portfolio of that
Company. In determining the net asset value of a Fund's Shares, assets belonging
to the Fund are charged with the direct liabilities in respect of that Fund and
with a share of the general liabilities of the Company involved which are
normally allocated in proportion to the relative asset values of the Company's
portfolios at the time of allocation. Subject to the provisions of the
Companies' Charters, determinations by the Boards of Directors as to the direct
and allocable liabilities, and the allocable portion of any general assets with
respect to a particular Fund, are conclusive.
As of July 11, 1995, U.S. Trust held of record substantially all of
the outstanding Shares in the Money Fund, Treasury Money Fund, Government Money
Fund, and Short-Term Tax-Exempt Fund, but did not own such Shares beneficially
because it did not have discretion to vote or invest such Shares.
As of July 11, 1995, the name, address and percentage ownership of
each person, in addition to U.S. Trust, that beneficially owned 5% or more of
the outstanding shares of the (i) Government Money Fund were as follows: NCNB
Corp. Retirement Team, c/o United States Trust Company of New York, 114 West
47th Street, New York, New York 10056, 6.9%; Fund American Ent. Holdings, Inc.,
c/o United States Trust Company of New York, 114 West 47th Street, New York, New
York 10056, 14.3%; and White River Corp., c/o United States Trust Company of New
York, 114 West 47th Street, New York, New York 10056, 5.7%; and (ii) Treasury
Money Fund was as follows: W.H. Reaves Co. Inc., c/o United States Trust Company
of New York, 114 West 47th Street, New York, New York 10056, 5.8%.
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<PAGE>
FINANCIAL STATEMENTS
--------------------
The Companies' Annual Reports to Shareholders for the fiscal year
ended March 31, 1995 (the "Annual Reports") for the fixed income and tax-exempt
fixed income portfolios accompany this Statement of Additional Information. The
financial statements in the Annual Reports for the Money, Government Money,
Treasury Money and Short-Term Tax-Exempt Funds (the "Financial Statements") are
incorporated in this Statement of Additional Information by reference. The
Financial Statements included in the Annual Reports for the fiscal year ended
March 31, 1995 have been audited by the Companies' independent auditors, Ernst &
Young LLP, whose reports thereon also appear in such Annual Reports and are
incorporated herein by reference. The Financial Statements in such Annual
Reports have been incorporated herein in reliance upon such reports given upon
the authority of such firm as experts in accounting and auditing. Additional
copies of the Annual Reports may be obtained at no charge by telephoning MFSC at
the telephone number appearing on the front page of this Statement of Additional
Information.
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<PAGE>
APPENDIX A
----------
COMMERCIAL PAPER RATINGS
------------------------
A Standard & Poor's commercial paper rating is a current assessment of
the likelihood of timely payment of debt considered short-term in the relevant
market. The following summarizes the rating categories used by Standard and
Poor's for commercial paper:
"A-1" - Issue's degree of safety regarding timely payment is strong.
Those issues determined to possess extremely strong safety characteristics are
denoted "A-1+."
"A-2" - Issue's capacity for timely payment is satisfactory. However,
the relative degree of safety is not as high as for issues designated "A-1."
"A-3" - Issue has an adequate capacity for timely payment. It is,
however, somewhat more vulnerable to the adverse effects of changes and
circumstances than an obligation carrying a higher designation.
"B" - Issue has only a speculative capacity for timely payment.
"C" - Issue has a doubtful capacity for payment.
"D" - Issue is in payment default.
Moody's commercial paper ratings are opinions of the ability of
issuers to repay punctually promissory obligations not having an original
maturity in excess of 9 months. The following summarizes the rating categories
used by Moody's for commercial paper:
"Prime-1" - Issuer or related supporting institutions are considered
to have a superior capacity for repayment of short-term promissory obligations.
Prime-1 repayment capacity will normally be evidenced by the following
characteristics: leading market positions in well established industries; high
rates of return on funds employed; conservative capitalization structures with
moderate reliance on debt and ample asset protection; broad margins in earning
coverage of fixed financial charges and high internal cash generation; and well
established access to a range of financial markets and assured sources of
alternate liquidity.
A-1
<PAGE>
"Prime-2" - Issuer or related supporting institutions are considered
to have a strong capacity for repayment of short-term promissory obligations.
This will normally be evidenced by many of the characteristics cited above but
to a lesser degree. Earnings trends and coverage ratios, while sound, will be
more subject to variation. Capitalization characteristics, while still
appropriate, may be more affected by external conditions. Ample alternative
liquidity is maintained.
"Prime-3" - Issuer or related supporting institutions have an
acceptable capacity for repayment of short-term promissory obligations. The
effects of industry characteristics and market composition may be more
pronounced. Variability in earnings and profitability may result in changes in
the level of debt protection measurements and the requirement for relatively
high financial leverage. Adequate alternate liquidity is maintained.
"Not Prime" - Issuer does not fall within any of the Prime rating
categories.
The three rating categories of Duff & Phelps for investment grade
commercial paper and short-term debt are "D-1," "D-2" and "D-3." Duff & Phelps
employs three designations, "D-1+," "D-1" and "D-1-," within the highest rating
category. The following summarizes the rating categories used by Duff & Phelps
for commercial paper:
"D-1+" - Debt possesses highest certainty of timely payment. Short-
term liquidity, including internal operating factors and/or access to
alternative sources of funds, is outstanding, and safety is just below risk-free
U.S. Treasury short-term obligations.
"D-1" - Debt possesses very high certainty of timely payment.
Liquidity factors are excellent and supported by good fundamental protection
factors. Risk factors are minor.
"D-1-" - Debt possesses high certainty of timely payment. Liquidity
factors are strong and supported by good fundamental protection factors. Risk
factors are very small.
"D-2" - Debt possesses good certainty of timely payment. Liquidity
factors and company fundamentals are sound. Although ongoing funding needs may
enlarge total financing requirements, access to capital markets is good. Risk
factors are small.
"D-3" - Debt possesses satisfactory liquidity, and other protection
factors qualify issue as investment grade. Risk
A-2
<PAGE>
factors are larger and subject to more variation. Nevertheless, timely payment
is expected.
"D-4" - Debt possesses speculative investment characteristics.
Liquidity is not sufficient to ensure against disruption in debt service.
Operating factors and market access may be subject to a high degree of
variation.
"D-5" - Issuer has failed to meet scheduled principal and/or interest
payments.
Fitch short-term ratings apply to debt obligations that are payable on
demand or have original maturities of up to three years. The following
summarizes the rating categories used by Fitch for short-term obligations:
"F-1+" - Securities possess exceptionally strong credit quality.
Issues assigned this rating are regarded as having the strongest degree of
assurance for timely payment.
"F-1" - Securities possess very strong credit quality. Issues
assigned this rating reflect an assurance of timely payment only slightly less
in degree than issues rated "F-1+."
"F-2" - Securities possess good credit quality. Issues ASSIGNED this
rating have a satisfactory degree of assurance for timely payment, but the
margin of safety is not as great as the "F-1+" and "F-1" categories.
"F-3" - Securities possess fair credit quality. Issues assigned this
rating have characteristics suggesting that the degree of assurance for timely
payment is adequate; however, near-term adverse changes could cause these
securities to be rated below investment grade.
"F-S" - Securities possess weak credit quality. Issues assigned this
rating have characteristics suggesting a minimal degree of assurance for timely
payment and are vulnerable to near-term adverse changes in financial and
economic conditions.
"D" - Securities are in actual or imminent payment default.
Fitch may also use the symbol "LOC" with its short-term ratings to
indicate that the rating is based upon a letter of credit issued by a commercial
bank.
Thomson BankWatch short-term ratings assess the likelihood of an
untimely or incomplete payment of principal or
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<PAGE>
interest of unsubordinated instruments having a maturity of one year or less
which is issued by United States commercial banks, thrifts and non-bank banks;
non-United States banks; and broker-dealers. The following summarizes the
ratings used by Thomson BankWatch:
"TBW-1" - This designation represents Thomson BankWatch's highest
rating category and indicates a very high degree of likelihood that principal
and interest will be paid on a timely basis.
"TBW-2" - This designation indicates that while the degree of safety
regarding timely payment of principal and interest is strong, the relative
degree of safety is not as high as for issues rated "TBW-1."
"TBW-3" - This designation represents the lowest investment grade
category and indicates that while the debt is more susceptible to adverse
developments (both internal and external) than obligations with higher ratings,
capacity to service principal and interest in a timely fashion is considered
adequate.
"TBW-4" - This designation indicates that the debt is regarded as non-
investment grade and therefore speculative.
IBCA assesses the investment quality of unsecured debt with an
original maturity of less than one year which is issued by bank holding
companies and their principal bank subsidiaries. The following summarizes the
rating categories used by IBCA for short-term debt ratings:
"A1" - Obligations are supported by the highest capacity for timely
repayment. Where issues possess a particularly strong credit feature, a rating
of A1+ is assigned.
"A2" - Obligations are supported by a good capacity for timely
repayment.
"A3" - Obligations are supported by a satisfactory capacity for timely
repayment.
"B" - Obligations for which there is an uncertainty as to the capacity
to ensure timely repayment.
"C" - Obligations for which there is a high risk of default or which
are currently in default.
A-4
<PAGE>
CORPORATE AND MUNICIPAL LONG-TERM DEBT RATINGS
----------------------------------------------
The following summarizes the ratings used by Standard & Poor's for
corporate and municipal debt:
"AAA" - This designation represents the highest rating assigned by
Standard & Poor's to a debt obligation and indicates an extremely strong
capacity to pay interest and repay principal.
"AA" - Debt is considered to have a very strong capacity to pay
interest and repay principal and differs from AAA issues only in small degree.
"A" - Debt is considered to have a strong capacity to pay interest and
repay principal although such issues are somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions than debt in
higher-rated categories.
"BBB" - Debt is regarded as having an adequate capacity to pay
interest and repay principal. Whereas such issues 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 debt in this category than in higher-rated categories.
"BB," "B," "CCC," "CC" and "C" - Debt is regarded, on balance, as
predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. "BB" indicates the
lowest degree of speculation and "C" the highest degree of speculation. While
such debt will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major risk exposures to adverse
conditions.
"BB" - Debt has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure
to adverse business, financial or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. The "BB"
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied "BBB-" rating.
"B" - Debt has a greater vulnerability to default but currently has
the capacity to meet interest payments and principal repayments. Adverse
business, financial or economic conditions will likely impair capacity or
willingness to pay interest and repay principal. The "B" rating category is
also used for debt subordinated to senior debt that is assigned an actual or
implied "BB" or "BB-" rating.
A-5
<PAGE>
"CCC" - Debt has a currently identifiable vulnerability to default,
and is dependent upon favorable business, financial and economic conditions to
meet timely payment of interest and repayment of principal. In the event of
adverse business, financial or economic conditions, it is not likely to have the
capacity to pay interest and repay principal. The "CCC" rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
"B" or "B-" rating.
"CC" - This rating is typically applied to debt subordinated to
senior debt that is assigned an actual or implied "CCC" rating.
"C" - This rating is typically applied to debt subordinated to
senior debt which is assigned an actual or implied "CCC-" debt rating. The "C"
rating may be used to cover a situation where a bankruptcy petition has been
filed, but debt service payments are continued.
"CI" - This rating is reserved for income bonds on which no interest
is being paid.
"D" - Debt is in payment default. This rating is used when interest
payments or principal payments are not made on the date due, even if the
applicable grace period has not expired, unless S & P believes such payments
will be made during such grace period. "D" rating is also used upon the filing
of a bankruptcy petition if debt service payments are jeopardized.
PLUS (+) OR MINUS (-) - The ratings from "AA" through "CCC" may be
modified by the addition of a plus or minus sign to show relative standing
within the major rating categories.
"r" - This rating is attached to highlight derivative, hybrid, and
certain other obligations that S & P believes may experience high volatility or
high variability in expected returns due to non-credit risks. Examples of such
obligations are: securities whose principal or interest return is indexed to
equities, commodities, or currencies; certain swaps and options; and interest
only and principal only mortgage securities.
The following summarizes the ratings used by Moody's for corporate and
municipal long-term debt:
"Aaa" - Bonds 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
A-6
<PAGE>
unlikely to impair the fundamentally strong position of such issues.
"Aa" - Bonds 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.
"A" - Bonds possess many favorable investment attributes and are to be
considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment sometime in the future.
"Baa" - Bonds considered medium-grade obligations, i.e., they are
neither highly protected nor poorly secured. Interest payments and principal
security appear adequate for the present but certain protective elements may be
lacking or may be characteristically unreliable over any great length of time.
Such bonds lack outstanding investment characteristics and in fact have
speculative characteristics as well.
"Ba," "B," "Caa," "Ca," and "C" - Bonds that possess one of these
ratings provide questionable protection of interest and principal ("Ba"
indicates some speculative elements; "B" indicates a general lack of
characteristics of desirable investment; "Caa" represents a poor standing; "Ca"
represents obligations which are speculative in a high degree; and "C"
represents the lowest rated class of bonds). "Caa," "Ca" and "C" bonds may be in
default.
Con. (---) - Bonds for which the security depends upon the completion
of some act or the fulfillment of some condition are rated conditionally. These
are bonds secured by (a) earnings of projects under construction, (b) earnings
of projects unseasoned in operation experience, (c) rentals which begin when
facilities are completed, or (d) payments to which some other limiting condition
attaches. Parenthetical rating denotes probable credit stature upon completion
of construction or elimination of basis of condition.
Moody's applies numerical modifiers 1, 2 and 3 in each generic
classification from "Aa" to "B" in its bond rating system. The modifier 1
indicates that the issuer ranks in the higher end of its generic rating
category; the modifier 2 indicates a mid-range ranking; and the modifier 3
indicates that
A-7
<PAGE>
the issuer ranks at the lower end of its generic rating category.
The following summarizes the long-term debt ratings used by Duff &
Phelps for corporate and municipal long-term debt:
"AAA" - Debt is considered to be of the highest credit quality. The
risk factors are negligible, being only slightly more than for risk-free U.S.
Treasury debt.
"AA" - Debt is considered of high credit quality. Protection factors
are strong. Risk is modest but may vary slightly from time to time because of
economic conditions.
"A" - Debt possesses protection factors which are average but
adequate. However, risk factors are more variable and greater in periods of
economic stress.
"BBB" - Debt possesses below average protection factors but such
protection factors are still considered sufficient for prudent investment.
Considerable variability in risk is present during economic cycles.
"BB," "B," "CCC," "DD," and "DP" - Debt that possesses one of these
ratings is considered to be below investment grade. Although below investment
grade, debt rated "BB" is deemed likely to meet obligations when due. Debt
rated "B" possesses the risk that obligations will not be met when due. Debt
rated "CCC" is well below investment grade and has considerable uncertainty as
to timely payment of principal, interest or preferred dividends. Debt rated
"DD" is a defaulted debt obligation, and the rating "DP" represents preferred
stock with dividend arrearages.
To provide more detailed indications of credit quality, the "AA," "A,"
"BBB," "BB" and "B" ratings may be modified by the addition of a plus (+) or
minus (-) sign to show relative standing within these major categories.
The following summarizes the highest four ratings used by Fitch for
corporate and municipal bonds:
"AAA" - Bonds considered to be investment grade and of the highest
credit quality. The obligor has an exceptionally strong ability to pay interest
and repay principal, which is unlikely to be affected by reasonably foreseeable
events.
"AA" - Bonds considered to be investment grade and of very high credit
quality. The obligor's ability to pay interest and repay principal is very
strong, although not quite as strong
A-8
<PAGE>
as bonds rated "AAA." Because bonds rated in the "AAA" and "AA" categories are
not significantly vulnerable to foreseeable future developments, short-term debt
of these issuers is generally rated "F-1+."
"A" - Bonds considered to be investment grade and of high credit
quality. The obligor's ability to pay interest and repay principal is
considered to be strong, but may be more vulnerable to adverse changes in
economic conditions and circumstances than bonds with higher ratings.
"BBB" - Bonds considered to be investment grade and of satisfactory
credit quality. The obligor's ability to pay interest and repay principal is
considered to be adequate. Adverse changes in economic conditions and
circumstances, however, are more likely to have an adverse impact on these
bonds, and therefore, impair timely payment. The likelihood that the ratings of
these bonds will fall below investment grade is higher than for bonds with
higher ratings.
"BB," "B," "CCC," "CC," "C," "DDD," "DD," and "D" -Bonds that possess
one of these ratings are considered by Fitch to be speculative investments. The
ratings "BB" to "C" represent Fitch's assessment of the likelihood of timely
payment of principal and interest in accordance with the terms of obligation for
bond issues not in default. For defaulted bonds, the rating "DDD" to "D" is an
assessment of the ultimate recovery value through reorganization or liquidation.
To provide more detailed indications of credit quality, the Fitch
ratings from and including "AA" to "C" may be modified by the addition of a plus
(+) or minus (-) sign to show relative standing within these major rating
categories.
IBCA assesses the investment quality of unsecured debt with an
original maturity of more than one year which is issued by bank holding
companies and their principal bank subsidiaries. The following summarizes the
rating categories used by IBCA for long-term debt ratings:
"AAA" - Obligations for which there is the lowest expectation of
investment risk. Capacity for timely repayment of principal and interest is
substantial such that adverse changes in business, economic or financial
conditions are unlikely to increase investment risk substantially.
"AA" - Obligations for which there is a very low expectation of
investment risk. Capacity for timely repayment of principal and interest is
substantial. Adverse changes in
A-9
<PAGE>
business, economic or financial conditions may increase investment risk albeit
not very significantly.
"A" - Obligations for which there is a low expectation of investment
risk. Capacity for timely repayment of principal and interest is strong,
although adverse changes in business, economic or financial conditions may lead
to increased investment risk.
"BBB" - Obligations for which there is currently a low expectation of
investment risk. Capacity for timely repayment of principal and interest is
adequate, although adverse changes in business, economic or financial conditions
are more likely to lead to increased investment risk than for obligations in
higher categories.
"BB," "B," "CCC," "CC," and "C" - Obligations are assigned one of
these ratings where it is considered that speculative characteristics are
present. "BB" represents the lowest degree of speculation and indicates a
possibility of investment risk developing. "C" represents the highest degree of
speculation and indicates that the obligations are currently in default.
IBCA may append a rating of plus (+) or minus (-) to a rating to
denote relative status within major rating categories.
Thomson BankWatch assesses the likelihood of an untimely repayment of
principal or interest over the term to maturity of long term debt and preferred
stock which are issued by United States commercial banks, thrifts and non-bank
banks; non-United States banks; and broker-dealers. The following summarizes
the rating categories used by Thomson BankWatch for long-term debt ratings:
"AAA" - This designation represents the highest category assigned by
Thomson BankWatch to long-term debt and indicates that the ability to repay
principal and interest on a timely basis is very high.
"AA" - This designation indicates a superior ability to repay
principal and interest on a timely basis with limited incremental risk versus
issues rated in the highest category.
"A" - This designation indicates that the ability to repay principal
and interest is strong. Issues rated "A" could be more vulnerable to adverse
developments (both internal and external) than obligations with higher ratings.
A-10
<PAGE>
"BBB" - This designation represents Thomson BankWatch's lowest
investment grade category and indicates an acceptable capacity to repay
principal and interest. Issues rated "BBB" are, however, more vulnerable to
adverse developments (both internal and external) than obligations with higher
ratings.
"BB," "B," "CCC," and "CC," - These designations are assigned by
Thomson BankWatch to non-investment grade long-term debt. Such issues are
regarded as having speculative characteristics regarding the likelihood of
timely payment of principal and interest. "BB" indicates the lowest degree of
speculation and "CC" the highest degree of speculation.
"D" - This designation indicates that the long-term debt is in
default.
PLUS (+) OR MINUS (-) - The ratings from "AAA" through "CC" may
include a plus or minus sign designation which indicates where within the
respective category the issue is placed.
MUNICIPAL NOTE RATINGS
----------------------
A Standard and Poor's rating reflects the liquidity concerns and
market access risks unique to notes due in three years or less. The following
summarizes the ratings used by Standard & Poor's Ratings Group for municipal
notes:
"SP-1" - The issuers of these municipal notes exhibit very strong or
strong capacity to pay principal and interest. Those issues determined to
possess overwhelming safety characteristics are given a plus (+) designation.
"SP-2" - The issuers of these municipal notes exhibit satisfactory
capacity to pay principal and interest.
"SP-3" - The issuers of these municipal notes exhibit speculative
capacity to pay principal and interest.
Moody's ratings for state and municipal notes and other short-term
loans are designated Moody's Investment Grade ("MIG") and variable rate demand
obligations are designated Variable Moody's Investment Grade ("VMIG"). Such
ratings recognize the differences between short-term credit risk and long-term
risk. The following summarizes the ratings by Moody's Investors Service, Inc.
for short-term notes:
"MIG-1"/"VMIG-1" - Loans bearing this designation are of the best
quality, enjoying strong protection by established
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<PAGE>
cash flows, superior liquidity support or demonstrated broad-based access to the
market for refinancing.
"MIG-2"/"VMIG-2" - Loans bearing this designation are of high quality,
with margins of protection ample although not so large as in the preceding
group.
"MIG-3"/"VMIG-3" - Loans bearing this designation are of favorable
quality, with all security elements accounted for but lacking the undeniable
strength of the preceding grades. Liquidity and cash flow protection may be
narrow and market access for refinancing is likely to be less well established.
"MIG-4"/"VMIG-4" - Loans bearing this designation are of adequate
quality, carrying specific risk but having protection commonly regarded as
required of an investment security and not distinctly or predominantly
speculative.
"SG" - Loans bearing this designation are of speculative quality and
lack margins of protection.
Fitch and Duff & Phelps use the short-term ratings described under
Commercial Paper Ratings for municipal notes.
A-12
<PAGE>
UST MASTER FUNDS, INC.
Short-Term Government Securities Fund
Intermediate-Term Managed Income Fund
Managed Income Fund
UST MASTER TAX-EXEMPT FUNDS, INC.
Short-Term Tax - Exempt Securities Fund
Intermediate-Term Tax-Exempt Fund
Long-Term Tax-Exempt Fund
STATEMENT OF ADDITIONAL INFORMATION
SERVICE SHARES
August 1, 1995
This Statement of Additional Information is not a prospectus but should be read
in conjunction with the current prospectuses for the Short-Term Government
Securities Fund, Intermediate-Term Managed Income Fund and Managed Income Fund
of UST Master Funds, Inc. ("Master Fund") and Short-Term Tax-Exempt Securities
Fund, Intermediate-Term Tax-Exempt Fund and Long-Term Tax-Exempt Fund of UST
Master Tax-Exempt Funds, Inc. ("Master Tax-Exempt Fund") dated August 1,
1995 , respectively (the "Fixed-Income Funds Prospectus" and the "Tax-
Exempt Funds Prospectus" , respectively; together, the "Prospectuses").
Much of the information contained in this Statement of Additional Information
expands upon the subjects discussed in the Prospectuses. No investment in
Service Shares of the portfolios described herein ("Shares") should be
made without reading the Prospectuses. A copy of each Prospectus may be
obtained by writing UST Master Funds c/o Mutual Funds Service Company,
73 Tremont Street, Boston, MA 02108-3913 or by calling (800)
446-1012 .
<PAGE>
TABLE OF CONTENTS
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Page
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INVESTMENT OBJECTIVES AND POLICIES. . . . . . . . . . . . . . . .
Additional Information on Portfolio Instruments. . . . . . .
Additional Investment Limitations. . . . . . . . . . . . . .
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION. . . . . . . . . .
INVESTOR PROGRAMS . . . . . . . . . . . . . . . . . . . . . . . .
Systematic Withdrawal Plan . . . . . . . . . . . . . . . . .
Exchange Privilege . . . . . . . . . . . . . . . . . . . . .
Other Investor Programs. . . . . . . . . . . . . . . . . . .
DESCRIPTION OF CAPITAL STOCK. . . . . . . . . . . . . . . . . . .
MANAGEMENT OF THE FUNDS . . . . . . . . . . . . . . . . . . . . .
Directors and Officers . . . . . . . . . . . . . . . . . . .
Investment Advisory and Administration Agreements. . . . . .
Service Organizations. . . . . . . . . . . . . . . . . . . .
Expenses . . . . . . . . . . . . . . . . . . . . . . . . . .
Custodian and Transfer Agent . . . . . . . . . . . . . . . .
PORTFOLIO TRANSACTIONS. . . . . . . . . . . . . . . . . . . . . .
INDEPENDENT AUDITORS. . . . . . . . . . . . . . . . . . . . . . .
COUNSEL . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ADDITIONAL INFORMATION CONCERNING TAXES . . . . . . . . . . . . .
Generally . . . . . . . . . . . . . . . . . . . . . . . . .
Tax-Exempt Funds. . . . . . . . . . . . . . . . . . . . . .
Taxation of Certain Financial Instruments . . . . . . . . .
PERFORMANCE AND YIELD INFORMATION . . . . . . . . . . . . . . . .
Yields and Performance. . . . . . . . . . . . . . . . . . .
MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . . .
FINANCIAL STATEMENTS. . . . . . . . . . . . . . . . . . . . . . .
APPENDIX A. . . . . . . . . . . . . . . . . . . . . . . . . . . .
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<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
----------------------------------
This Statement of Additional Information contains additional
information with respect to the Short-Term Tax-Exempt Securities Fund,
Intermediate-Term Tax-Exempt Fund and Long-Term Tax-Exempt Fund (collectively,
the "Tax-Exempt Funds") of Master Tax-Exempt Fund and the Short-Term Government
Securities Fund, Intermediate-Term Managed Income Fund and Managed Income Fund
of Master Fund (collectively, the "Fixed-Income Funds"). The portfolios are
referred to individually as a "Fund" and collectively as the "Funds"; Master
Tax-Exempt Fund and Master Fund are referred to individually as a "Company" and
collectively as the "Companies" .
For ease of reference, the various Funds are referred to as follows:
Short-Term Tax-Exempt Securities Fund as "Short - Term Tax-Exempt Fund";
Intermediate-Term Tax-Exempt Fund as "IT Tax-Exempt Fund"; Long-Term
Tax-Exempt Fund as "LT Tax - Exempt Fund" , Short-Term Government
Securities Fund as "ST Government Fund" , and Intermediate-Term Managed
Income Fund as "IT Income Fund" .
The following policies and disclosures supplement the Funds'
investment objectives and policies as set forth in the Prospectuses.
Additional Information on Portfolio Instruments
-----------------------------------------------
Municipal Obligations
---------------------
The Tax-Exempt Funds invest substantially all of their assets in
Municipal Obligations as defined in the Prospectus. Municipal Obligations
include debt obligations issued by governmental entities to obtain funds for
various public purposes, including the construction of a wide range of public
facilities, the refunding of outstanding obligations, the payment of general
operating expenses, and the extension of loans to public institutions and
facilities. Private activity bonds that are issued by or on behalf of public
authorities to finance various privately operated facilities are included within
the term "Municipal Obligations" only if the interest paid thereon is exempt
from regular Federal income tax and not treated as a specific tax preference
item under the Federal alternative minimum tax.
The two principal classifications of Municipal Obligations are
"general obligation" and "revenue" issues, but the Tax-Exempt Funds' portfolios
may include "moral obligation" issues, which are normally issued by special-
purpose authorities. There are, of course, variations in the quality of
Municipal Obligations, both within a particular classification and between
-1-
<PAGE>
classifications, and the yields on Municipal Obligations depend upon a variety
of factors, including general money market conditions, the financial condition
of the issuer, general conditions of the municipal bond market, the size of a
particular offering, the maturity of the obligation, and the rating of the
issue. The ratings of Moody's Investors Service, Inc. ("Moody's") and Standard
& Poor's Ratings Group ("S&P") described in the Prospectus and Appendix
A hereto represent their opinion as to the quality of Municipal Obligations. It
should be emphasized that these ratings are general and are not absolute
standards of quality, and Municipal Obligations with the same maturity, interest
rate, and rating may have different yields while Municipal Obligations of the
same maturity and interest rate with different ratings may have the same yield.
Subsequent to its purchase by a Fund, an issue of Municipal Obligations may
cease to be rated, or its rating may be reduced below the minimum rating
required for purchase by that Fund. United States Trust Company of New York,
the Funds' investment adviser ("Investment Adviser" or "U.S. Trust"), will
consider such an event in determining whether a Fund should continue to hold the
obligation.
The payment of principal and interest on most securities purchased by
the Tax-Exempt Funds will depend upon the ability of the issuers to meet their
obligations. Each state, the District of Columbia, each of their political
subdivisions, agencies, instrumentalities and authorities, and each
multistate agency of which a state is a member, is a separate "issuer" as
that term is used in this Statement of Additional Information and the
Prospectus. The non-governmental user of facilities financed by
private activity bonds is also considered to be an "issuer." An issuer's
obligations under its Municipal Obligations are subject to the provisions of
bankruptcy, insolvency, and other laws affecting the rights and remedies of
creditors, such as the Federal Bankruptcy Code, and laws, if any, which may be
enacted by Federal or state legislatures extending the time for payment of
principal or interest, or both, or imposing other constraints upon enforcement
of such obligations or upon the ability of municipalities to levy taxes. The
power or ability of an issuer to meet its obligations for the payment of
interest on and principal of its Municipal Obligations may be materially
adversely affected by litigation or other conditions.
Private activity bonds are or have been issued to obtain funds to
provide, among other things, privately operated housing facilities, pollution
control facilities, convention or trade show facilities, mass transit, airport,
port or parking facilities and certain local facilities for water supply, gas,
electricity or sewage or solid waste disposal. Private activity bonds are also
issued to privately held or publicly owned corporations in the financing of
commercial or industrial facilities. State and local governments are authorized
in most
-2-
<PAGE>
states to issue private activity bonds for such purposes in order to encourage
corporations to locate within their communities. The principal and interest on
these obligations may be payable from the general revenues of the users of such
facilities.
Among other instruments, the Tax-Exempt Funds may purchase short-term
General Obligation Notes, Tax Anticipation Notes, Bond Anticipation Notes,
Revenue Anticipation Notes, Tax-Exempt Commercial Paper, Construction
Loan Notes and other forms of short-term loans. Such instruments are issued
with a short-term maturity in anticipation of the receipt of tax
funds, the proceeds of bond placements or other revenues. In addition, each
Fund may invest in long-term tax-exempt instruments, such as municipal bonds and
private activity bonds, to the extent consistent with the maturity restrictions
applicable to it.
From time to time, proposals have been introduced before Congress for
the purpose of restricting or eliminating the Federal income tax exemption for
interest on Municipal Obligations. For example, under the Tax Reform Act of
1986, as amended, interest on certain private activity bonds must be included in
an investor's alternative minimum taxable income, and corporate investors must
treat all tax-exempt interest as an item of tax preference. Master Tax-Exempt
Fund cannot, of course, predict what legislation may be proposed in the future
regarding the income tax status of interest on Municipal Obligations, or which
proposals, if any, might be enacted. Such proposals, while pending or if
enacted, might materially adversely affect the availability of Municipal
Obligations for investment by the Tax-Exempt Funds and the liquidity
and value of their portfolios. In such an event, Master Tax-Exempt Fund would
reevaluate the Funds' investment objectives and policies and consider possible
changes in their structure or possible dissolution.
Opinions relating to the validity of Municipal Obligations and to the
exemption of interest thereon from Federal income tax are rendered by bond
counsel to the respective issuers at the time of issuance. Neither Master Tax-
Exempt Fund nor the Investment Adviser will review the proceedings relating to
the issuance of Municipal Obligations or the basis for such opinions.
The IT Income and Managed Income Funds may, when deemed appropriate by
the Investment Adviser in light of the Funds' investment objective, also invest
in Municipal Obligations. Although yields on municipal obligations can
generally be expected under normal market conditions to be lower than yields on
corporate and U.S. Government obligations, from time to time municipal
securities have outperformed, on a total return basis, comparable corporate and
Federal debt obligations as a result of prevailing economic, regulatory or other
circumstances. Dividends paid by the IT Income and Managed Income Funds that
are
-3-
<PAGE>
derived from interest on municipal securities would be taxable to the Funds'
shareholders for Federal income tax purposes.
Insured Municipal Obligations
-----------------------------
The Tax-Exempt Funds may purchase Municipal Obligations which are
insured as to timely payment of principal and interest at the time of purchase.
The insurance policies will usually be obtained by the issuer of the bond at the
time of its original issuance. Bonds of this type will be acquired only if at
the time of purchase they satisfy quality requirements generally applicable to
Municipal Obligations as described in the Prospectus. Although insurance
coverage for the Municipal Obligations held by the Tax-Exempt Funds reduces
credit risk by insuring that the Funds will receive timely payment of principal
and interest, it does not protect against market fluctuations caused by changes
in interest rates and other factors. Each Tax-Exempt Fund may invest
more than 25% of its net assets in Municipal Obligations covered by insurance
policies.
Repurchase Agreements
---------------------
The repurchase price under the repurchase agreements described in the
Prospectus generally equals the price paid by a Fund plus interest negotiated on
the basis of current short-term rates (which may be more or less than the rate
on the securities underlying the repurchase agreement). Securities subject to
repurchase agreements are held by the Funds' custodian (or sub-
custodian) or in the Federal Reserve/ Treasury book-entry system.
Repurchase agreements are considered loans by a Fund under the Investment
Company Act of 1940 (the "1940 Act").
Securities Lending
------------------
When the ST Government Fund, IT Income Fund and Managed Income Fund
lend their portfolio securities, they continue to receive interest or dividends
on the securities lent and may simultaneously earn interest on the investment of
the cash loan collateral, which will be invested in readily marketable,
high-quality , short-term obligations. Although voting rights, or rights to
consent, attendant to securities lent pass to the borrower, such loans may be
called at any time and will be called so that the securities may be voted by the
pertinent Fund if a material event affecting the investment is to occur.
Government Obligations
----------------------
Examples of the types of U.S. Government obligations that may be held
by the Funds include, in addition to U.S. Treasury Bills, the obligations of
Federal Home Loan Banks, Federal Farm Credit Banks, Federal Land Banks, the
Federal Housing Administration, Farmers Home Administration, Export-
-4-
<PAGE>
Import Bank of the United States, Small Business Administration, Government
National Mortgage Association, Federal National Mortgage Association, General
Services Administration, Student Loan Marketing Association, Central Bank for
Cooperatives, Federal Home Loan Mortgage Corporation, Federal Intermediate
Credit Banks and Maritime Administration.
When-Issued and Forward Transactions
------------------------------------
When a Fund agrees to purchase securities on a "when-issued "
or forward commitment basis, the custodian will set aside cash or liquid
portfolio securities equal to the amount of the commitment in a separate
account. Normally, the custodian will set aside portfolio securities to satisfy
a purchase commitment and, in such case, the Fund may be required subsequently
to place additional assets in the separate account in order to ensure that the
value of the account remains equal to the amount of the Fund's commitment. It
may be expected that a Fund's net assets will fluctuate to a greater degree when
it sets aside portfolio securities to cover such purchase commitments than when
it sets aside cash. Because a Fund will set aside cash or liquid assets to
satisfy its purchase commitments in the manner described, its liquidity and
ability to manage its portfolio might be affected in the event its forward
commitments or commitments to purchase "when-issued" securities ever exceeded
25% of the value of its assets.
A Fund will purchase securities on a "when-issued" or forward
commitment basis only with the intention of completing the transaction. If
deemed advisable as a matter of investment strategy, however, a Fund may dispose
of or renegotiate a commitment after it is entered into, and may sell securities
it has committed to purchase before those securities are delivered to the Fund
on the settlement date. In these cases, the Fund may realize a taxable capital
gain or loss.
When a Fund engages in "when-issued" or forward commitment
transactions, it relies on the other party to consummate the trade. Failure of
such other party to do so may result in the Fund incurring a loss or missing an
opportunity to obtain a price considered to be advantageous.
The market value of the securities underlying a "when-issued "
purchase or a forward commitment to purchase securities and any subsequent
fluctuations in their market value are taken into account when determining the
market value of a Fund starting on the day the Fund agrees to purchase the
securities. The Fund does not earn interest on the securities it has committed
to purchase until they are paid for and delivered on the settlement date.
-5-
<PAGE>
Stand-By Commitments
--------------------
The Managed Income and IT Income Funds and the Tax-Exempt
Funds may acquire "stand-by commitments" with respect to Municipal Obligations
held by them. Under a "stand-by commitment," a dealer or bank agrees to
purchase from a Fund, at the Fund's option, specified Municipal Obligations at a
specified price. The amount payable to a Fund upon its exercise of a "stand-by
commitment" is normally (i) the Fund's acquisition cost of the Municipal
Obligations (excluding any accrued interest which the Fund paid on their
acquisition), less any amortized market premium or plus any amortized market or
original issue discount during the period the Fund owned the securities, plus
(ii) all interest accrued on the securities since the last interest payment date
during that period. "Stand-by commitments" are exercisable by a Fund at any
time before the maturity of the underlying Municipal Obligations, and may be
sold, transferred or assigned by the Fund only with the underlying instruments.
The Managed Income and IT Income Funds and the Tax-Exempt
Funds expect that "stand-by commitments" will generally be available without the
payment of any direct or indirect consideration. However, if necessary or
advisable, a Fund may pay for a "stand-by commitment" either separately in cash
or by paying a higher price for securities which are acquired subject to the
commitment (thus reducing the yield to maturity otherwise available for the same
securities). Where a Fund has paid any consideration directly or indirectly for
a "stand-by commitment," its cost will be reflected as unrealized depreciation
for the period during which the commitment was held by the Fund.
The Managed Income and IT Income Funds and the Tax-Exempt
Funds intend to enter into "stand-by commitments" only with banks and
broker/dealers which, in the Investment Adviser's opinion, present minimal
credit risks. In evaluating the creditworthiness of the issuer of a "stand-by
commitment," the Investment Adviser will review periodically the issuer's
assets, liabilities, contingent claims and other relevant financial information.
Commercial Paper
----------------
Investments by the Funds in commercial paper will consist of issues
that are rated "A-2" or better by S&P or "Prime-2" or better by Moody's. In
addition, each Fund may acquire unrated commercial paper that is determined by
the Investment Adviser at the time of purchase to be of comparable quality to
rated instruments that may be acquired by the particular Fund. Each Fund will
generally limit its investments in such unrated commercial paper to 5% of its
total assets.
-6-
<PAGE>
Futures Contracts
-----------------
Each Fund may invest in futures contracts (interest rate futures
contracts or municipal bond index futures contracts, as applicable). Futures
contracts will not be entered into for speculative purposes, but to hedge risks
associated with a Fund's securities investments. Positions in futures contracts
may be closed out only on an exchange which provides a secondary market for such
futures. However, there can be no assurance that a liquid secondary market will
exist for any particular futures contract at any specific time. Thus, it may
not be possible to close a futures position. In the event of adverse price
movements, a Fund would continue to be required to make daily cash payments to
maintain its required margin. In such situations, if a Fund has insufficient
cash, it may have to sell portfolio securities to meet daily margin requirements
at a time when it may be disadvantageous to do so. In addition, a Fund may be
required to make delivery of the instruments underlying futures contracts it
holds. The inability to close options and futures positions also could have an
adverse impact on a Fund's ability to effectively hedge.
Successful use of futures by a Fund is also subject to the Investment
Adviser's ability to correctly predict movements in the direction of the market.
For example, if a Fund has hedged against the possibility of a decline in the
market adversely affecting securities held by it and securities prices increase
instead, the Fund will lose part or all of the benefit to the increased value of
its securities which it has hedged because it will have approximately equal
offsetting losses in its futures positions. In addition, in some situations, if
a Fund has insufficient cash, it may have to sell securities to meet daily
variation margin requirements. Such sales of securities may be, but will not
necessarily be, at increased prices which reflect the rising market. A Fund may
have to sell securities at a time when it may be disadvantageous to do so.
The risk of loss in trading futures contracts in some strategies can
be substantial, due both to the low margin deposits required, and the extremely
high degree of leverage involved in futures pricing. As a result, a relatively
small price movement in a futures contract may result in immediate and
substantial loss (as well as gain) to the investor. For example, if at the time
of purchase, 10% of the value of the futures contract is deposited as margin, a
subsequent 10% decrease in the value of the futures contract would result in a
total loss of the margin deposit, before any deduction for the transaction
costs, if the account were then closed out. A 15% decrease would result in a
loss equal to 150% of the original margin deposit, before any deduction for the
transaction costs, if the contract were closed out. Thus, a purchase or sale of
a futures contract may
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<PAGE>
result in losses in excess of the amount invested in the contract.
Utilization of futures transactions by a Fund involves the risk of
loss by a Fund of margin deposits in the event of bankruptcy of a broker with
whom the Fund has an open position in a futures contract or related option.
Most futures exchanges limit the amount of fluctuation permitted in
futures contract prices during a single trading day. The daily limit
establishes the maximum amount that the price of a futures contract may vary
either up or down from the previous day's settlement price at the end of a
trading session. Once the daily limit has been reached in a particular type of
contract, no trades may be made on that day at a price beyond that limit. The
daily limit governs only price movement during a particular trading day and
therefore does not limit potential losses, because the limit may prevent the
liquidation of unfavorable positions. Futures contract prices have occasionally
moved to the daily limit for several consecutive trading days with little or no
trading, thereby preventing prompt liquidation of futures positions and
subjecting some futures traders to substantial losses.
The trading of futures contracts is also subject to the risk of
trading halts, suspensions, exchange or clearing house equipment failures,
government intervention, insolvency of a brokerage firm or clearing house or
other disruptions of normal trading activity, which could at times make it
difficult or impossible to liquidate existing positions or to recover excess
variation margin payments.
Additional Investment Limitations
---------------------------------
In addition to the investment limitations disclosed in the Prospectus,
the Funds are subject to the investment limitations enumerated below.
Fundamental investment limitations may be changed with respect to a Fund only by
a vote of the holders of a majority of such Fund's outstanding Shares (as
defined under "Miscellaneous" in the Prospectuses). However, investment
limitations which are "operating policies" with respect to a Fund may be changed
by Master Fund's or Master Tax-Exempt Fund's Board of Directors upon
reasonable notice to investors.
The following investment limitations are fundamental with respect to
each Fund. No Fund may:
1. Act as an underwriter of securities within the meaning of the
Securities Act of 1933, except to the extent that the purchase of Municipal
Obligations or other securities directly from the issuer thereof in accordance
with the Tax-
-8-
<PAGE>
Exempt Funds' investment objectives, policies, and limitations may be deemed to
be underwriting; and except insofar as the Managed Income Fund might be deemed
to be an underwriter upon disposition of certain portfolio securities acquired
within the limitation on purchases of restricted securities;
2. Purchase or sell real estate, except that each Tax-Exempt Fund may
invest in Municipal Obligations secured by real estate or interests therein, and
the Managed Income and Intermediate-Term Managed Income Funds may purchase
securities of issuers which deal in real estate and may purchase securities
which are secured by interests in real estate; and
3. Issue any senior securities, except insofar as any borrowing by
each Fund in accordance with its investment limitations might be considered to
be the issuance of a senior security; provided that each Fund may enter into
futures contracts and futures options.
The following investment limitations are fundamental with respect to
the IT Tax-Exempt, LT Tax-Exempt and Managed Income Funds, but are operating
policies with respect to the Short-Term Tax-Exempt, ST Government and IT Income
Funds. The Funds may not:
4. Purchase securities on margin, make short sales of securities, or
maintain a short position; provided that each Fund may enter into futures
contracts and futures options; and
5. Write or sell puts, calls, straddles, spreads, or combinations
thereof; provided that each Fund may enter into futures contracts and futures
options.
The following investment limitation is fundamental with respect to
each Tax-Exempt Fund. A Tax-Exempt Fund may not:
6. Make loans, except that each Tax-Exempt Fund may purchase or hold
debt obligations in accordance with its investment objective, policies, and
limitations.
The following investment limitations are fundamental with respect to
the IT Tax-Exempt and LT Tax-Exempt Funds, but are operating policies with
respect to the Short-Term Tax-Exempt Fund. A Tax-Exempt Fund may not:
7. Invest in industrial revenue bonds where the payment of principal
and interest are the responsibility of a company (including its predecessors)
with less than three years of continuous operation; and
8. Purchase securities of other investment companies (except as part
of a merger, consolidation or reorganization or
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<PAGE>
purchase of assets approved by the Fund's shareholders), provided that a Fund
may purchase shares of any registered, open - end investment company, if
immediately after any such purchase, the Fund does not (a) own more than 3% of
the outstanding voting stock of any one investment company, (b) invest more than
5% of the value of its total assets in the securities of any one investment
company, or (c) invest more than 10% of the value of its total assets in the
aggregate in securities of investment companies.
The following investment limitations are fundamental with respect to
the Managed Income Fund, but are operating policies with respect to the IT
Income and ST Government Funds.
A Fixed-Income Fund may not:
9. Invest in companies for the purpose of exercising management or
control;
10. Invest more than 5% of its total assets in securities issued by
companies which, together with any predecessor, have been in continuous
operation for fewer than three years;
11. Purchase foreign securities; provided that subject to the limit
described below, the IT Income and Managed Income Funds may purchase (a) dollar-
denominated debt obligations issued by foreign issuers, including foreign
corporations and governments, by U.S. corporations outside the United States in
an amount not to exceed 25% of its total assets at time of purchase; and (b)
certificates of deposit, bankers' acceptances, or other similar obligations
issued by domestic branches of foreign banks, or foreign branches of U.S. banks,
in an amount not to exceed 20% of its total net assets; and
12. Acquire any other investment company or investment company
security, except in connection with a merger, consolidation, reorganization, or
acquisition of assets or where otherwise permitted by the 1940 Act.
The following investment limitation is fundamental with respect to the
IT Tax-Exempt, LT Tax-Exempt and Managed Income Funds. The IT Tax-Exempt, LT
Tax-Exempt and Managed Income Funds may not:
13. Purchase or sell commodity futures contracts, or invest in oil,
gas, or mineral exploration or development programs; provided that the Funds may
enter into futures contracts and futures options.
The following investment limitation is fundamental with respect to the
Short-Term Tax-Exempt, ST Government and IT Income
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<PAGE>
Funds. The Short-Term Tax-Exempt, ST Government and IT Income Funds may not:
14. Purchase or sell commodities or commodity futures contracts, or
invest in oil, gas, or mineral exploration or development programs; provided
that the Funds may enter into futures contracts and futures options.
* * *
For the purpose of Investment Limitation No. 2, the prohibition of
purchases of real estate includes acquisition of limited partnership interests
in partnerships formed with a view toward investing in real estate, but does not
prohibit purchases of shares in real estate investment trusts. The Funds do not
currently intend to invest in real estate investment trusts.
In addition to the above investment limitations, Master Fund currently
intends to limit the IT Income and Managed Income Funds' investments in warrants
so that, valued at the lower of cost or market value, they do not exceed
5% of a Fund's net assets. Included within that amount, but not to
exceed 2% of the value of the IT Income or Managed Income Fund's net assets, may
be warrants which are not listed on the New York or American Stock Exchange.
For the purpose of this limitation, warrants acquired by the IT Income or
Managed Income Fund in units or attached to securities will be deemed to be
without value.
The IT Tax-Exempt, LT Tax-Exempt and Managed Income Funds may not
purchase or sell commodities.
The Funds' transactions in futures contracts and futures options
(including the margin posted by the Funds in connection with such transactions)
are excluded from the Funds' prohibitions: against the purchase of securities
on margin, short sales of securities and the maintenance of a short position;
the issuance of senior securities; writing or selling puts, calls, straddles,
spreads, or combinations thereof; and the mortgage, pledge or hypothecation of
the Funds' assets.
If a percentage limitation is satisfied at the time of investment, a
later increase or decrease in such percentage resulting from a change in value
of a Fund's portfolio securities will not constitute a violation of such
limitation.
In order to permit the sale of Shares in certain states, Master Fund
may make other commitments more restrictive than the investment policies and
limitations described above and in the Prospectus. Should the Companies
determine that any such commitment is no longer in the Funds' best interests,
they will revoke the commitment by terminating sales of the Shares to investors
residing in the state involved.
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<PAGE>
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
----------------------------------------------
Shares are continuously offered for sale by Edgewood
Services , Inc. (the "Distributor"), a wholly-owned subsidiary of
Federated Investors , and the Distributor has agreed to use appropriate
efforts to solicit all purchase orders. As described in the Prospectus, Shares
may be sold to customers ("Customers") of the Investment Adviser, its affiliates
and correspondent banks, and qualified banks, savings and loan associations,
broker/dealers and other institutions ("Shareholder Organizations") that have
entered into servicing agreements with one of the Companies. Shares are also
offered for sale to institutional investors ("Institutional Investors") and to
members of the general public ("Direct Investors", and collectively with
"Institutional Investors", " Investors"). Different types of Customer
accounts at the Shareholder Organizations may be used to purchase Shares,
including eligible agency and trust accounts. In addition, Shareholder
Organizations may automatically "sweep" a Customer's account not less frequently
than weekly and invest amounts in excess of a minimum balance agreed to by the
Shareholder Organization and its Customer in Shares of the Fund
selected by the Customer. Investors purchasing Shares may include officers,
directors, or employees of the particular Shareholder Organization.
Shares of the Funds are offered for sale with a maximum sales charge
of 4.50%. An illustration of the computation of the offering price per share of
the Funds, using the value of each Fund's net assets and number of outstanding
securities at the close of business on March 31, 1995 , is as follows:
<TABLE>
<CAPTION>
Short-Term LT Tax-
Tax-Exempt IT Tax-Exempt Exempt
Fund Fund Fund
------------ ------------- -----------
<S> <C> <C> <C>
Net Assets.............. $ 48,187,543 $234,990,220 $78,880,450
Outstanding Shares...... 6,927,683 26,690,412 8,511,184
Net Asset Value Per
Share................... $ 6.96 $ 8.80 $ 9.27
Sales Charge (4.50% of
the offering price)..... $ .33 $ .41 $ .44
Offering to Public...... $ 7.29 $ 9.21 $ 9.71
</TABLE>
-12-
<PAGE>
<TABLE>
<CAPTION>
Managed IT Income ST Government
Income Fund Fund Fund
----------- ----------- -------------
<S> <C> <C> <C>
Net Assets....................... $86,024,245 $47,928,448 $25,215,627
Outstanding Shares............... 10,251,319 7,095,338 3,657,258
Net Asset Value Per
Share............................ $ 8.39 $ 6.75 $ 6.89
Sales Charge (4.50% of
the offering price).............. $ .40 $ .32 $ .3
Offering to Public...... $ 8.79 $ 7.07 $ 7.21
</TABLE>
As stated in the Prospectus, the sales load described above will not
be applicable to: (a) purchases of Shares by customers of the Investment Adviser
or its affiliates; (b) trust, agency or custodial accounts opened through the
trust department of a bank, trust company or thrift institution, provided that
appropriate notification of such status is given at the time of investment; (c)
companies, corporations and partnerships (excluding full service broker/dealers
and financial planners, registered investment advisers and depository
institutions not covered by the exemptions in (d) and (e) below); (d) financial
planners and registered investment advisers not affiliated with or clearing
purchases through full service broker/dealers; (e) purchases of Shares by
depository institutions for their own account as principal; (f) exchange
transactions (described below under "Investor Programs -- Exchange Privilege")
where the Shares being exchanged were acquired in connection with the
distribution of assets held in a trust, agency or custodial account maintained
with the trust department of a bank; (g) corporate/business retirement plans
(such as 401(k), 403(b)(7), 457 and Keogh accounts) sponsored by the Distributor
and IRA accounts sponsored by the Investment Adviser; (h) company-sponsored
employee pension or retirement plans making direct investments in the Funds; (i)
purchases of Shares by officers, trustees, directors, employees, former
employees and retirees of the Companies, the Investment Adviser, the
Distributor or of any direct or indirect affiliate of either of them; (j)
purchases of Shares by all beneficial shareholders of the Companies as of May
22, 1989; (k) purchases of Shares by investment advisers registered under the
Investment Advisers Act of 1940 for their customers through an omnibus account
established with United States Trust Company of New York; (l) purchases
of Shares by directors, officers and employees of brokers and dealers selling
shares pursuant to a selling agreement with the Companies ; (m) purchase of
Shares by investors who are members of groups services by USAffinity Investment
Limited Partnership; and (n) customers of certain financial institutions who
purchase Shares through a registered representative of UST Financial Services
Corp. on the premises of their financial institutions . In addition, no
sales load is charged on the reinvestment of dividends or distributions or in
connection with certain share exchange transactions. Investors who have
previously redeemed shares in a portfolio of Master Fund or Master Tax-Exempt
Fund on which a sales load has been paid
-13-
<PAGE>
also have a one-time privilege of purchasing shares of another portfolio of
either Company at net asset value without a sales charge, provided that such
--------
privilege will apply only to purchases made within 30 calendar days from the
date of redemption and only with respect to the amount of the redemption.
For the fiscal years ended March 31, 1995, 1994 and
1993 , total sales charges paid by shareholders: for the IT Tax-
Exempt Fund were $17,776, $8,588 and $15,256 , respectively;
for the LT Tax-Exempt Fund were $4,088, $16,720 and $22,984 ,
respectively; for the Managed Income Fund were $973, $17,120 and
$24,570 , respectively. Of these respective amounts, the Distributor retained
$431, $6,693 and $13,214 with respect to the IT Tax-Exempt
Fund; $3,188, $9,491 and $11,296 with respect to the LT Tax-
Exempt Fund; and $973, $14,297 and $16,204 with respect to the
Managed Income Fund. Total sales charges paid by shareholders of the Short-Term
Tax-Exempt, ST Government and IT Income Funds for the fiscal years
ended March 31, 1995 and 1994 were $20 and $42,285, $1 and
$11,744 and $815 and $741, respectively. Of these respective amounts,
UST Distributors, Inc., the Funds' former Distributor , retained
$20 and $27,165 with respect to the Short-Term Tax-Exempt Fund, $1
and $9,788 with respect to the ST Government Fund and $815 and $660
with respect to the IT Income Fund. The balance was paid to selling dealers.
Shareholders of the Short-Term Tax-Exempt, ST Government and IT Income
Funds paid no sales charges for the period from December 31, 1992 (commencement
of operations) to March 31, 1993.
The Companies may suspend the right of redemption or postpone the date
of payment for Shares for more than seven days during any period when (a)
trading on the New York Stock Exchange (the "Exchange") is restricted by
applicable rules and regulations of the Securities and Exchange Commission; (b)
the Exchange is closed for other than customary weekend and holiday closings;
(c) the Securities and Exchange Commission has by order permitted such
suspension; or (d) an emergency exists as determined by the Securities and
Exchange Commission.
In the event that Shares are redeemed in cash at their net asset
value, a shareholder may receive in payment for such Shares an amount that is
more or less than his original investment due to changes in the market prices of
that Fund's portfolio securities.
Under limited circumstances, the Companies may accept securities as
payment for Shares. Securities acquired in this manner will be limited to
securities issued in transactions involving a bona fide reorganization or
---------
statutory merger, or will be limited to other securities (except for municipal
debt securities issued by state political subdivisions or their agencies or
instrumentalities) that: (a) meet the investment
-14-
<PAGE>
objective and policies of any Fund acquiring such securities; (b) are acquired
for investment and not for resale; (c) are liquid securities that are not
restricted as to transfer either by law or liquidity of market; and (d) have a
value that is readily ascertainable (and not established only by evaluation
procedures) as evidenced by a listing on the American Stock Exchange, New York
Stock Exchange or NASDAQ, or as evidenced by their status as U.S. Government
securities, bank certificates of deposit, banker's acceptances, corporate and
other debt securities that are actively traded, money market securities and
other similar securities with a readily ascertainable value.
INVESTOR PROGRAMS
-----------------
Systematic Withdrawal Plan
--------------------------
An Investor who owns Shares with a value of $10,000 or more may begin
a Systematic Withdrawal Plan. The withdrawal can be on a monthly, quarterly,
semiannual or annual basis. There are four options for such systematic
withdrawals. The Investor may request:
(1) A fixed-dollar withdrawal;
(2) A fixed-share withdrawal;
(3) A fixed-percentage withdrawal (based on the current value of the
account); or
(4) A declining-balance withdrawal.
Prior to participating in a Systematic Withdrawal Plan, the Investor must
deposit any outstanding certificates for Shares with Mutual Funds Service
Company, the Funds' sub-transfer agent. Under this Plan, dividends and
distributions are automatically reinvested in additional Shares. Amounts paid
to Investors under this Plan should not be considered as income. Withdrawal
payments represent proceeds from the sale of Shares, and there will be a
reduction of the shareholder's equity in the Fund involved if the amount of the
withdrawal payments exceeds the dividends and distributions paid on the Shares
and the appreciation of the Investor's investment in the Fund. This in turn may
result in a complete depletion of the shareholder's investment. An Investor may
not participate in a program of systematic investing in a Fund while at the same
time participating in the Systematic Withdrawal Plan with respect to an account
in that Fund.
-15-
<PAGE>
Exchange Privilege
------------------
Investors and Customers of Shareholder Organizations may exchange
Shares having a value of at least $500 for Service Shares of
any other portfolio of the Companies. Shares may be exchanged by wire,
telephone or mail and must be made to accounts of identical registration. There
is no exchange fee imposed by the Companies. The Companies may modify or
terminate the exchange program at any time upon 60 days' written notice to
shareholders, and may reject any exchange request. In order to prevent abuse
of this privilege to the disadvantage of other shareholders, the Companies
reserve the right to limit the number of exchange requests of Investors and
Customers of Shareholder Organizations to no more than six per year.
For Federal income tax purposes, exchanges are treated as sales on
which the shareholder will realize a gain or loss, depending upon whether the
value of the Shares to be given up in exchange is more or less than the basis in
such Shares at the time of the exchange. Generally, a shareholder may include
sales loads incurred upon the purchase of Shares in his or her tax basis for
such Shares for the purpose of determining gain or loss on a redemption,
transfer or exchange of such Shares. However, if the shareholder effects an
exchange of Shares for shares of another portfolio of the Companies within 90
days of the purchase and is able to reduce the sales load applicable to the new
shares (by virtue of the Companies' exchange privilege), the amount
equal to such reduction may not be included in the tax basis of the
shareholder's exchanged Shares but may be included (subject to the limitation)
in the tax basis of the new shares.
Other Investor Programs
-----------------------
As described in the Prospectus, Shares of the Funds may be purchased
in connection with the Automatic Investment Program. Shares of the Managed
Income, IT Income and ST Government Funds may also be purchased in connection
with certain Retirement Programs.
DESCRIPTION OF CAPITAL STOCK
----------------------------
Master Fund's Charter authorizes its Board of Directors to issue up to
thirty-five billion full and fractional shares of capital stock; Master Tax-
Exempt Fund's Charter authorizes its Board of Directors to issue up to fourteen
billion full and fractional shares of capital stock. Both Charters authorize
the respective Boards of Directors to classify or reclassify any unissued shares
of the respective Companies into one or more additional classes or series by
setting or changing in any one or more respects their respective preferences,
conversion or other rights, voting powers, restrictions, limitations as to
dividends,
-16-
<PAGE>
qualifications, and terms and conditions of redemption. The Prospectus
describes the classes of shares into which the Companies' authorized capital is
currently classified.
Shares have no preemptive rights and only such conversion or exchange
rights as the Boards of Directors may grant in their discretion. When issued
for payment as described in the Prospectus, Shares will be fully paid and non-
assessable. In the event of a liquidation or dissolution of a Fund,
shareholders of that Fund are entitled to receive the assets available for
distribution belonging to that Fund and a proportionate distribution, based upon
the relative asset values of the portfolios of the Company involved, of any
general assets of that Company not belonging to any particular portfolio of that
Company which are available for distribution. In the event of a liquidation or
dissolution of either Company, shareholders of such Company will be entitled to
the same distribution process.
Shareholders of the Companies are entitled to one vote for each full
share held, and fractional votes for fractional shares held, and will vote in
the aggregate and not by class, except as otherwise required by the 1940 Act or
other applicable law or when the matter to be voted upon affects only the
interests of the shareholders of a particular class. Voting rights are not
cumulative and, accordingly, the holders of more than 50 % of the
aggregate of a Company's outstanding shares may elect all of that Company's
directors, regardless of the votes of other shareholders.
Rule 18f-2 under the 1940 Act provides that any matter required to be
submitted to the holders of the outstanding voting securities of an investment
company such as each Company shall not be deemed to have been effectively acted
upon unless approved by the holders of a majority of the outstanding shares of
each portfolio affected by the matter. A portfolio is affected by a matter
unless it is clear that the interests of each portfolio in the matter are
substantially identical or that the matter does not affect any interest of the
portfolio. Under the Rule, the approval of an investment advisory agreement or
any change in a fundamental investment policy would be effectively acted upon
with respect to a portfolio only if approved by a majority of the outstanding
shares of such portfolio. However, the Rule also provides that the ratification
of the appointment of independent public accountants, the approval of principal
underwriting contracts, and the election of directors may be effectively acted
upon by shareholders of each Company voting without regard to class.
The Companies' Charters authorize the Boards of Directors, without
shareholder approval (unless otherwise required by applicable law), to (a) sell
and convey the assets of a Fund to another management investment company for
consideration
-17-
<PAGE>
which may include securities issued by the purchaser and, in connection
therewith, to cause all outstanding Shares of the Fund involved to be redeemed
at a price which is equal to their net asset value and which may be paid in cash
or by distribution of the securities or other consideration received from the
sale and conveyance; (b) sell and convert a Fund's assets into money and, in
connection therewith, to cause all outstanding Shares to be redeemed at their
net asset value; or (c) combine the assets belonging to a Fund with the assets
belonging to another portfolio of the Company involved, if the Board of
Directors reasonably determines that such combination will not have a material
adverse effect on shareholders of any portfolio participating in such
combination, and, in connection therewith, to cause all outstanding shares of
any portfolio to be redeemed at their net asset value or converted into shares
of another class of the Company's capital stock at net asset value. The
exercise of such authority by the Boards of Directors will be subject to the
provisions of the 1940 Act, and the Boards of Directors will not take any action
described in this paragraph unless the proposed action has been disclosed in
writing to the particular Fund's shareholders at least 30 days prior thereto.
Notwithstanding any provision of Maryland law requiring a greater vote
of the Companies' Common Stock (or of the Shares of a Fund voting separately as
a class) in connection with any corporate action, unless otherwise provided by
law (for example, by Rule 18f-2, discussed above) or by the Companies' Charters,
the Companies may take or authorize such action upon the favorable vote of the
holders of more than 50% of the outstanding Common Stock of the particular
Company voting without regard to class.
MANAGEMENT OF THE FUNDS
-----------------------
Directors and Officers
----------------------
The directors and executive officers of the Companies, their
addresses, ages, principal occupations during the past five years, and
other affiliations are as follows (the listed positions apply to both
Companies):
-18-
<PAGE>
<TABLE>
<S> <C> <C>
Principal Occupation
Position with During Past 5 Years
Name and Address the Companies and Other Affiliations
---------------------- ---------------- ---------------------------
<S> <C> <C>
Alfred C. Tannachion// Chairman of the Retired.
1135 Hyde Park Court Board, President
Mahwah, NJ 07430 and Treasurer
Age 69
Donald L. Campbell Director Retired; Senior Vice
333 East 69th Street President, Royal
Apt. 10-H Insurance Company, Inc.,
New York, NY 10021 until August, 1989;
Age 69 Director, Royal Life
Insurance Co. of N.Y.
Joseph H. Dugan Director Retired; President, CEO
913 Franklin Lake Road and Director, L.B.
Franklin Lakes, NJ 07417 Foster Company, (tubular
Age 70 products), from September,
1987 until May, 1990;
Executive Vice President and
COO, L.B. Foster Company,
from September, 1986 until
September, 1987; Senior Vice
President--Finance, Chief
Financial Officer and
Director, Todd Shipyards
Corporation, prior to
January 3, 1986.
Wolfe J. Frankl Director Director, Deutsche Bank
40 Gooseneck Lane Financial, Inc.;
Charlottesville, VA 22903 Director, The Harbus
Age 74 Corporation; Trustee,
Mariner Funds Trust;
Managing Director -- North
America, Berlin Economic
Development Corp., prior to
1988.
</TABLE>
-19-
<PAGE>
<TABLE>
<S> <C> <C>
Robert A. Robinson Director President Emeritus,
Church Pension Fund The Church Pension Fund
800 Second Avenue and its affiliated
New York, New York 10017 companies since 1968;
Age 69 Trustee, Mariner Funds
Trust; Trustee, H.B. and
F.H. Bugher Foundation and
Director of its wholly owned
subsidiaries -- Rosiclear
Lead and Flourspar Mining
Co. and The Pigmy
Corporation; Director,
Morehouse Publishing Co.
W. Bruce McConnel, III Secretary Partner of the law
Philadelphia National firm of Drinker
Bank Building Biddle & Reath.
1345 Chestnut Street
Philadelphia, PA 19107-3496
Age 52
Frank M. Deutchki Assistant Vice President
Mutual Funds Service Co. Secretary Mutual Funds Service
73 Tremont Street Company. Since February,
Boston, MA 02108-3913 1989; Senior Vice
Age 41 President
-- Risk Analysis and
Avoidance, Putnam Investor
Services (mutual fund
group), from October, 1987
to January, 1989.
John M. Corcoran Assistant Assistant Vice President,
Mutual Funds Service Co. Treasurer Manager of Administration,
73 Tremont Street Mutual Funds Service
Boston, MA 02108-3913 Company, since October,
Age 30 1993; Audit Manager, Ernst &
Young, from August, 1987 to
September, 1993.
</TABLE>
Each director receives an annual fee of $9,000 with respect
to each Company plus a per-Company meeting fee of $1,500 for each meeting
attended and is reimbursed for expenses incurred in attending meetings. The
Chairman of the Board is entitled to receive an additional $5,000 per annum with
respect to each Company for services in such capacity. Drinker Biddle & Reath,
of which Mr. McConnel is a partner, receives legal fees as counsel to the
Companies. The employees of Mutual Funds Service Company do not receive any
compensation from the Companies for acting as officers of the Companies. No
person who is currently an officer, director or employee of the Investment
Adviser serves as an officer, director or employee of the Companies. The
directors and officers of the Companies as a group own less than 1% of
the Shares of each Fund.
-20-
<PAGE>
The following chart provides certain information about the fees
received by the Companies' directors in the most recently completed fiscal
year.
<TABLE>
<CAPTION>
Pension or
Retirement Total
Benefits Compensation
Accrued as from the Companies
Aggregate Part of and Fund
Name of Compensation from Fund Complex* Paid
Person/Position the Companies Expenses to Directors
----------------------- ----------------- ---------- ------------------
<S> <C> <C> <C>
Alfred C. Tannachion $40,000 None $40,000
Chairman of the Board,
President and Treasurer
Donald L. Campbell $30,000 None $30,000
Director
</TABLE>
/*/ The "Fund Complex" consists of UST Master Funds, Inc., UST Master
Tax-Exempt Funds, Inc. and UST Master Variable Series, Inc. For the fiscal
year ended March 31, 1995, UST Master Variable Series, Inc. did not pay any
directors' fees.
-21-
<PAGE>
<TABLE>
<S> <C> <C> <C>
Joseph H. Dugan $30,000 None $30,000
Director
Wolfe J. Frankl $30,000 None $30,000
Director
Robert A. Robinson $30,000 None $30,000
Director
</TABLE>
Investment Advisory and Administration Agreements
---------------------------------------------------------
United States Trust Company of New York serves as Investment Adviser
to the Funds. In the Investment Advisory Agreements, U.S. Trust has agreed to
provide the services described in the Prospectus. The Investment Adviser has
also agreed to pay all expenses incurred by it in connection with its activities
under the respective agreements other than the cost of securities, including
brokerage commissions, if any, purchased for the Funds.
For the fiscal year ended March 31, 1993, Master Tax-Exempt
Fund paid the Investment Adviser $908,764 with respect to the IT Tax-Exempt Fund
and $381,604 with respect to the LT Tax-Exempt Fund. For the same
period, Master Fund paid the Investment Adviser $679,262 with respect to the
Managed Income Fund and the Investment Adviser waived fees totalling $174,339
with respect to such Fund. For the period from December 31, 1992 (commencement
of operations) to March 31, 1993, Master Tax-Exempt Fund paid the Investment
Adviser $2,424 with respect to the Short-Term Tax-Exempt Fund and the Investment
Adviser waived fees totalling $10,372 with respect to such Fund. For the same
period, Master Fund paid the Investment Adviser $2,504 and $1,945 with respect
to the ST Government and IT Income Funds, respectively, and the Investment
Adviser waived fees totalling $4,865 and $7,000 with respect to such respective
Funds.
For the fiscal year ended March 31, 1994, the particular Company paid
the Investment Adviser advisory fees of $54,640, $137,367, $654,944, $143,413,
$1,052,739 and $426,183 with respect to the ST Government, IT Income, Managed
Income, Short-Term Tax-Exempt, IT Tax-Exempt and LT Tax-Exempt Funds,
respectively, and the Investment Adviser waived advisory fees of
-22-
<PAGE>
$5,489, $439, $177,587, $1,948, $6,157 and $1,779 with respect to such
respective Funds.
For the fiscal year ended March 31, 1995, the particular Company
paid the Investment Adviser adivsory fees of $62,036, $142,883, $634,922,
$149,283, $801,081 and $374,134 with respect to the ST Goverment, IT Income,
Manager Income, Short-Term Tax-Exempt, IT Tax-Exempt and LT Tax-Exempt Funds,
respectively. For the same period, the Investment Adviser waived fees totalling
$14,308, $8,255, $121,999, $12,322, $84,360 and $26,819 with respect to the ST
Government, IT Income, Managed Income, Short-Term Tax-Exempt, IT Tax-Exempt and
LT Tax-Exempt Funds, respectively.
The Investment Advisory Agreements provide that the Investment Adviser
shall not be liable for any error of judgment or mistake of law or for any loss
suffered by the Funds in connection with the performance of such agreements,
except a loss resulting from a breach of fiduciary duty with respect to the
receipt of compensation for advisory services or a loss resulting from willful
misfeasance, bad faith or gross negligence on the part of the Investment Adviser
in the performance of its duties or from reckless disregard by it of its duties
and obligations thereunder.
Mutual Funds Service Company ("MFSC") and Concord Holding Corporation
(the "Administrators") jointly served as the Funds' administrators
until July 31, 1995 . Under the Administration Agreements, the
Administrators have agreed to maintain office facilities for the Funds, furnish
the Funds with statistical and research data, clerical, accounting and
bookkeeping services, and certain other services required by the Funds, and to
compute the net asset value, net income, "exempt interest
dividends " and realized capital gains or losses, if any, of the
respective Funds. The Administrators prepare semiannual reports to the
Securities and Exchange Commission, prepare Federal and state tax returns,
prepare filings with state securities commissions, arrange for and bear the cost
of processing Share purchase and redemption orders, maintain the Funds'
financial accounts and records, and generally assist in all aspects of the
Funds' operations.
Effective August 1, 1995, administrative services will
be provided to the Funds by MFSC and Federated Administrative Services,
an affiliate of the Distributor, under administration agreements having
substantially the same terms as the Administration Agreements currently in
effect.
For the fiscal year ended March 31, 1993, Master Tax-Exempt
Fund paid the Administrators $405,828 and $119,289 in the aggregate with respect
to the IT Tax-Exempt Fund and the LT Tax-Exempt Fund, respectively.
For the same period, Master Fund
-23-
<PAGE>
paid the Administrators $177,890 in the aggregate with respect to the Managed
Income Fund. For the period from December 31, 1992 (commencement of operations)
to March 31, 1993, Master Tax-Exempt Fund paid the Administrators $7,169 in the
aggregate with respect to the Short-Term Tax-Exempt Fund. For the same period,
Master Fund paid the Administrators $4,663 and $5,277 in the aggregate with
respect to the ST Government Fund and the IT Income Fund, respectively.
For the fiscal year ended March 31, 1994, Master Tax-Exempt
Fund paid the Administrators $74,732, $466,189 and $131,739 in the aggregate
with respect to the Short-Term Tax-Exempt Fund, IT Tax-Exempt Fund and
LT Tax-Exempt Fund, respectively, and the Administrators waived fees totalling
$519 with respect to the IT Tax-Exempt Fund. For the same period Master Fund
paid the Administrators in the aggregate $31,686, $58,869 and $171,157 with
respect to the ST Government, IT Income and Managed Income Funds, respectively,
and the Administrators waived fees totalling $95 with respect to the Managed
Income Fund.
For the fiscal year ended March 31, 1995, Master Tax-Exempt Fund
paid the Administrators $82,797, $386,614 and $123,173 in the aggregate with
respect to the Short-Term Tax-Exempt Fund, IT Tax-Exempt Fund and the LT Tax-
Exempt Fund respectively. For the same period, Master Fund paid MFSC and
Concord Holding Corporation $39,116, $66,481 and $154,370 in the aggregate with
respect to the ST Government, IT Income and Managed Income Funds, respectively.
For the same period, the Administrators waived fees totalling $2,634, $19,
$1,051, $356, $3,455 and $321 with respect to the ST Government, IT Income,
Manager Income, Short-Term Tax-Exempt, IT Tax-Exempt and LT Tax-Exempt Funds,
respectively.
Service Organizations
-------- ---------------
As stated in the Prospectus, a Company will enter into agreements with
Service Organizations. Such shareholder servicing agreements will require the
Service Organizations to provide shareholder administrative services to their
Customers who beneficially own Shares in consideration for a Fund's payment (on
an annualized basis) of up to .40% of the average daily net assets of the Fund's
Shares beneficially owned by Customers of the Service Organization. Such
services may include: (a) assisting Customers in designating and changing
dividend options, account designations and addresses; (b) providing necessary
personnel and facilities to establish and maintain certain shareholder accounts
and records, as may reasonably be requested from time to time by the Companies;
(c) assisting in processing purchases, exchange and redemption transactions; (d)
arranging for the wiring of funds; (e) transmitting and receiving funds in
connection with Customer orders to purchase, exchange or redeem
-24-
<PAGE>
Shares; (f) verifying and guaranteeing Customer signatures in connection with
redemption orders, transfers among and changes in Customer-designated accounts;
(g) providing periodic statements showing a Customer's account balances and, to
the extent practicable, integrating such information with information concerning
other client transactions otherwise effected with or through the Service
Organization; (h) furnishing on behalf of the Companies' distributor
(either separately or on an integrated basis with other reports sent to a
Customer by the Service Organization) periodic statements and confirmations of
all purchases, exchanges and redemptions of Shares in a Customer's account
required by applicable federal or state law; (i) transmitting proxy statements,
annual reports, updating prospectuses and other communications from the
Companies to Customers; (j) receiving, tabulating and transmitting to the
Companies proxies executed by Customers with respect to annual and special
meetings of shareholders of the Companies; (k) providing reports (at least
monthly, but more frequently if so requested by the Companies'
distributor) containing state - by - state listings of the
principal residences of the beneficial owners of the Shares; and (l)
providing or arranging for the provision of such other related services as the
Companies or a Customer may reasonably request.
The Companies' agreements with Service Organizations are governed by
Administrative Services Plans (the "Plans") adopted by the Companies. Pursuant
to the Plans, each Company's Board of Directors will review, at least quarterly,
a written report of the amounts expended under the Company's agreements with
Service Organizations and the purposes for which the expenditures were made. In
addition, the arrangements with Service Organizations will be approved annually
by a majority of each Company's directors, including a majority of the directors
who are not "interested persons" of the Company as defined in the 1940 Act and
have no direct or indirect financial interest in such arrangements (the
"Disinterested Directors").
Any material amendment to a Company's arrangements with Service
Organizations must be approved by a majority of the Company's Board of Directors
(including a majority of the Disinterested Directors). So long as the
Companies' arrangements with Service Organizations are in effect, the selection
and nomination of the members of the Companies' Boards of Directors who are not
"interested persons" (as defined in the 1940 Act) of the Companies will be
committed to the discretion of such non-interested Directors.
For the fiscal year ended March 31, 1995 and 1994, payments to
Service Organizations under the Plans totalled $12,678 and $615,
$87,815 and $6,676, $27,140 and $1,779, $4,466 and $119,
$8,274 and $439 and $28,171 and $1,537 with respect to the Short-
Term Tax-Exempt , IT Tax-Exempt, LT Tax-Exempt, ST
-25-
<PAGE>
Government, IT Income and Managed Income Funds, respectively. Of these amounts
$11,475 and $615, $74,979 and $4,947, $25,075 and $1,779,
$3,649 and $119, $8,041 and $439 , $20,247 and $965 were
paid to affiliates of U.S. Trust with respect to the Short-Term Tax -
Exempt, IT Tax-Exempt , LT Tax-Exempt, ST Government, IT Income and
Managed Income Funds, respectively.
Expenses
--------
Except as otherwise noted, the Investment Adviser and the
Administrators bear all expenses in connection with the performance of their
advisory and administrative services. The Funds bear the expenses incurred in
their operations. Expenses of the Funds include: taxes; interest; fees
(including fees paid to the Companies' Directors and officers who are not
affiliated with the Distributor or the Administrators); SEC fees; state
securities qualification fees; costs of preparing and printing prospectuses for
regulatory purposes and for distribution to shareholders; advisory,
administration and administrative servicing fees; charges of the custodian,
transfer agent and dividend disbursing agent; certain insurance premiums;
outside auditing and legal expenses; cost of independent pricing service; costs
of shareholder reports and meetings; and any extraordinary expenses. The Funds
also pay for any brokerage fees and commissions in connection with the purchase
of portfolio securities.
If the expenses borne by a Fund in any fiscal year exceed expense
limitations imposed by applicable state securities regulations, the Investment
Adviser and the Administrators will reimburse such Fund for a portion of any
such excess to the extent required by such regulations in proportion to the fees
received by them in such year up to the amount of fees payable to them,
provided, however, to the extent required by such state regulations, the
Investment Adviser and the Administrators have agreed to effect such
reimbursement regardless of the fees payable to them. The amounts of the above
reimbursements, if any, will be estimated, reconciled and paid on a monthly
basis. To the Companies' knowledge, of the applicable expense
limitations in effect on the date of this Statement of Additional Information,
none is more restrictive than the following: 2 1/2% of the first $30 million of
average annual net assets, 2% of the next $70 million of average annual net
assets and l 1/2% of average annual net assets in excess of $100
million.
Custodian and Transfer Agent
----------------------------
United States Trust Company of New York also serves as custodian of
the Funds' assets. Under the custodian agreements, U.S. Trust has
agreed to (i) maintain a separate account or accounts for each of the Funds;
(ii) make receipts and disbursements of money on behalf of the Funds; (iii)
collect and
-26-
<PAGE>
receive income and other payments and distributions on account of the Funds'
portfolio securities; (iv) respond to correspondence from securities brokers and
others relating to its duties; (v) maintain certain financial accounts and
records; and (vi) make periodic reports to the Companies concerning the Funds'
operations. U.S. Trust is entitled to monthly fees for furnishing custodial
services according to the following fee schedule: on the face value of debt
securities and the market value of equities, a fee at the annual rate of .05%;
on issues held, $50.00 for each physical issue held, $25.00 for each book-
entry issue held, and 1/4 of 1% of market value for each foreign issue held;
on transactions, $25.00 for each physical transaction, $15.00 for each book-
entry transaction, and $50.00 for each foreign security transaction. In
addition, U.S. Trust is entitled to reimbursement for its out-of-pocket expenses
in connection with the above services.
U.S. Trust also serves as the Funds' transfer agent and dividend
disbursing agent. In such capacity, U.S. Trust has agreed to (i) issue and
redeem Shares; (ii) address and mail all communications by the Funds to their
shareholders, including reports to shareholders, dividend and distribution
notices, and proxy materials for their meetings of shareholders; (iii) respond
to correspondence by shareholders and others relating to its duties; (iv)
maintain shareholder accounts; and (v) make periodic reports to the Companies
concerning the Funds' operations. For its transfer agency, dividend disbursing,
and subaccounting services, U.S. Trust is entitled to receive $15.00 per annum
per account and subaccount. In addition, U.S. Trust is entitled to be
reimbursed for its out-of-pocket expenses for the cost of forms, postage,
processing purchase and redemption orders, handling of proxies, and other
similar expenses in connection with the above services.
U.S. Trust may, at its own expense, open and maintain custody accounts
with respect to the Funds with other banks or trust companies, and may delegate
its transfer agency obligations to another transfer agent registered or
qualified under applicable law, provided that U.S. Trust shall remain liable for
the performance of all of its custodial and transfer agency duties under the
Custodian and Transfer Agency Agreements, notwithstanding any delegation.
Pursuant to this provision in the agreements, U.S. Trust has entered into a sub-
transfer agency arrangement with MFSC, an affiliate of U.S. Trust, with respect
to accounts of shareholders who are not Customers of U.S. Trust. For the
services provided by MFSC, U.S. Trust has agreed to pay MFSC $15.00 per annum
per account or subaccount plus out - of - pocket expenses. MFSC
receives no fee directly from the Companies for any of its sub-transfer agency
services.
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<PAGE>
PORTFOLIO TRANSACTIONS
----------------------
Subject to the general control of the Companies' Boards of Directors,
the Investment Adviser is responsible for, makes decisions with respect to and
places orders for all purchases and sales of portfolio securities of each of the
Funds. Purchases and sales of portfolio securities will usually be principal
transactions without brokerage commissions.
The Funds may engage in short-term trading to achieve their investment
objectives. Portfolio turnover may vary greatly from year to year as well as
within a particular year. It is expected that the Funds' turnover rates may
remain higher than those of many other investment companies with similar
investment objectives and policies. However, since brokerage commissions are
not normally paid on instruments purchased by the Funds, portfolio turnover is
not expected to have a material effect on the net income of any of the Funds.
The Funds' portfolio turnover rate may also be affected by cash requirements for
redemptions of Shares and by regulatory provisions which enable the Funds to
receive certain favorable tax treatment. Portfolio turnover will not be a
limiting factor in making portfolio decisions. See "Financial Highlights" in
the Funds' prospectuses for the Funds' portfolio turnover rates.
Securities purchased and sold by the Funds are generally traded in the
over-the-counter market on a net basis (i.e., without commission) through
dealers, or otherwise involve transactions directly with the issuer of an
instrument. The cost of securities purchased from underwriters includes an
underwriting commission or concession, and the prices at which securities are
purchased from and sold to dealers include a dealer's mark-up or markdown. With
respect to over-the-counter transactions, the Funds, where possible, will deal
directly with dealers who make a market in the securities involved, except in
those situations where better prices and execution are available elsewhere.
The Investment Advisory Agreements between the Companies and the
Investment Adviser provide that, in executing portfolio transactions and
selecting brokers or dealers, the Investment Adviser will seek to obtain the
best net price and the most favorable execution. The Investment Adviser shall
consider factors it deems 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 whether such broker or dealer is selling
shares of the Companies, and the reasonableness of the commission, if any, for
the specific transaction and on a continuing basis.
In addition, the Investment Advisory Agreements authorize the
Investment Adviser, to the extent permitted by law
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<PAGE>
and subject to the review of the Companies' Boards of Directors from time to
time with respect to the extent and continuation of the policy, to cause the
Funds to pay a broker which furnishes brokerage and research services a higher
commission than that which might be charged by another broker for effecting the
same transaction, provided that the Investment Adviser determines in good faith
that such commission is reasonable in relation to the value of the brokerage and
research services provided by such broker, viewed in terms of either that
particular transaction or the overall responsibilities of the Investment Adviser
to the accounts as to which it exercises investment discretion. Such brokerage
and research services might consist of reports and statistics on specific
companies or industries, general summaries of groups of stocks and their
comparative earnings, or broad overviews of the stock market and the economy.
Supplementary research information so received is in addition to and
not in lieu of services required to be performed by the Investment Adviser and
does not reduce the investment advisory fee payable by the Funds. Such
information may be useful to the Investment Adviser in serving the Funds and
other clients and, conversely, supplemental information obtained by the
placement of business of other clients may be useful to the Investment Adviser
in carrying out its obligations to the Funds.
Portfolio securities will not be purchased from or sold to the
Investment Adviser, the Distributor, or any affiliated person of either of them
(as such term is defined in the 1940 Act) acting as principal, except to the
extent permitted by the Securities and Exchange Commission.
Investment decisions for the Funds are made independently from those
for other investment companies, common trust funds and other types of funds
managed by the Investment Adviser. Such other investment companies and funds
may also invest in the same securities as the Funds. When a purchase or sale of
the same security is made at substantially the same time on behalf of the Funds
and another investment company or common trust fund, the transaction will be
averaged as to price, and available investments allocated as to amount, in a
manner which the Investment Adviser believes to be equitable to the Funds and
such other investment company or common trust fund. In some instances, this
investment procedure may adversely affect the price paid or received by the
Funds or the size of the position obtained by the Funds. To the extent
permitted by law, the Investment Adviser may aggregate the securities to be sold
or purchased for the Funds with those to be sold or purchased for other
investment companies or common trust funds in order to obtain best execution.
The Companies are required to identify any securities of their regular
brokers or dealers (as defined in Rule 10b-1
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<PAGE>
under the 1940 Act) or their parents held by the Companies as of the close of
their most recent fiscal year. As of March 31, 1995 , the following
portfolios of Master Fund held the following securities of Master Fund's regular
brokers or dealers or their parents: (a) the Money Fund held the following
securities : repurchase agreement with Nomura Securities , Inc.
in the principal amount of $19,685,063, repurchase agreement with Fuji
Securities, Inc. in the principal amount of $20,000,000, commercial paper of
Merrill Lynch & Co., Inc. in the principal amount of $35,000,000 and commercial
paper of UBS Finance in the principal amount of $30,000,000; (b) the Government
Money Fund held the following securities: repurchase agreement with
Nomura Securities, Inc. in the principal amount of $20,216,462 and repurchase
agreement with Fuji Securities, Inc. in the principal amount of $20,000,000; (c)
the International Fund held the following security: 27,000 shares of
Nomura Securities Co., Ltd.; and (d) the Pacific/Asia Fund held the following
security: 26,000 shares of Nomura Securities Co., Ltd. Nomura Securities
International, Inc., Fuji Bank & Trust, Merrill Lynch, Pierce, Fenner & Smith,
Inc. and UBS Securities are considered to be regular brokers and dealers of
Master Fund. As of March 31, 1995 , Master Tax-Exempt Fund held no
securities of Master Tax-Exempt Fund's regular brokers or dealers and
their parents.
INDEPENDENT AUDITORS
--------------------
Ernst & Young LLP , independent auditors, 200 Clarendon Street,
Boston, MA 02116, serve as auditors of the Companies. The Funds' Financial
Highlights included in the Prospectuses and the financial statements for the
period ended March 31, 1995 incorporated by reference in this Statement
of Additional Information have been audited by Ernst & Young LLP for the
periods included in their reports thereon which appear therein.
COUNSEL
-------
Drinker Biddle & Reath (of which Mr. McConnel, Secretary of the
Companies, is a partner), Philadelphia National Bank Building, 1345 Chestnut
Street, Philadelphia, Pennsylvania 19107-3496, is counsel to the Companies and
will pass upon the legality of the Shares offered by the Prospectuses.
ADDITIONAL INFORMATION CONCERNING TAXES
------------------------------------------
Generally
---------
The following supplements the tax information contained in the
Prospectus.
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<PAGE>
Each of the Funds is treated as a separate corporate entity under the
Internal Revenue Code of 1986, as amended (the "Code"), and intends to qualify
as a regulated investment company. If, for any reason, a Fund does not qualify
for a taxable year for the special Federal tax treatment afforded regulated
investment companies, such Fund would be subject to Federal tax on all of its
taxable income at regular corporate rates, without any deduction for
distributions to shareholders. In such event, dividend distributions (whether or
not derived from interest on Municipal Securities) would be taxable as ordinary
income to shareholders to the extent of the Fund's current and accumulated
earnings and profits and would be eligible for the dividends received deduction
in the case of corporate shareholders.
A Fund will designate any distribution of the excess of net long-term
capital gain over net short-term capital loss as a capital gain dividend in a
written notice mailed to shareholders within 60 days after the close of the
Fund's taxable year. Shareholders should note that, upon the sale or exchange
of Shares, if the shareholder has not held such Shares for at least six months,
any loss on the sale or exchange of those Shares will be treated as long-term
capital loss to the extent of the capital gain dividends received with respect
to the Shares.
A 4% non-deductible excise tax is imposed on regulated investment
companies that fail to currently distribute an amount equal to specified
percentages of their ordinary taxable income and capital gain net income (excess
of capital gains over capital losses). Each Fund intends to make sufficient
distributions or deemed distributions of their ordinary taxable income and any
capital gain net income prior to the end of each calendar year to avoid
liability for this excise tax.
Each Fund will be required in certain cases to withhold and remit to
the U.S. Treasury 31% of taxable dividends or gross proceeds realized upon sale
paid to shareholders who have failed to provide a correct tax identification
number in the manner required, who are subject to withholding by the Internal
Revenue Service for failure properly to include on their return payments of
taxable interest or dividends, or who have failed to certify to the Fund when
required to do so either that they are not subject to backup withholding or that
they are "exempt recipients."
Tax-Exempt Funds
----------------
As stated in their Prospectus, the Tax-Exempt Funds are not intended
to constitute a balanced investment program and are not designed for investors
seeking capital appreciation or maximum tax-exempt income irrespective of
fluctuations in
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<PAGE>
principal. Shares of the Tax-Exempt Funds would not be suitable for tax-exempt
institutions and may not be suitable for retirement plans qualified under
Section 401 of the Code, H.R. 10 plans and individual retirement accounts
because such plans and accounts are generally tax-exempt and, therefore, not
only would not gain any additional benefit from the Tax-Exempt Funds' dividends
being tax-exempt, but such dividends would be ultimately taxable to the
beneficiaries when distributed to them. In addition, the Tax-Exempt Funds may
not be an appropriate investment for entities which are "substantial users" of
facilities financed by private activity bonds or "related persons" thereof.
"Substantial user" is defined under the Treasury Regulations to include a non-
exempt person who regularly uses a part of such facilities in his trade or
business and whose gross revenues derived with respect to the facilities
financed by the issuance of bonds are more than 5% of the total revenues derived
by all users of such facilities, who occupies more than 5% of the usable area of
such facilities or for whom such facilities or a part thereof were specifically
constructed, reconstructed or acquired. "Related persons" include certain
related natural persons, affiliated corporations, a partnership and its partners
and an S Corporation and its shareholders.
In order for a Tax-Exempt Fund to pay exempt-interest dividends for
any taxable year, at least 50% of the aggregate value of such Fund's portfolio
must consist of exempt-interest obligations at the close of each quarter of its
taxable year. Within 60 days after the close of the taxable year, each of the
Tax-Exempt Funds will notify its shareholders of the portion of the dividends
paid by that Fund which constitutes an exempt-interest dividend with
respect to such taxable year. However, the aggregate amount of dividends so
designated by that Fund cannot exceed the excess of the amount of interest
exempt from tax under Section 103 of the Code received by that Fund during the
taxable year over any amounts disallowed as deductions under Sections 265 and
171(a)(2) of the Code. The percentage of total dividends paid by each of the
Tax-Exempt Funds with respect to any taxable year which qualifies as exempt-
interest dividends will be the same for all shareholders receiving dividends
from that Tax-Exempt Fund for such year.
A percentage of the interest on indebtedness incurred by a shareholder
to purchase or carry a Tax-Exempt Fund's Shares, equal to the percentage of the
total non-capital gain dividends distributed during the shareholder's taxable
year that is exempt - interest dividends, is not deductible for Federal income
tax purposes. In addition, if a shareholder holds Tax-Exempt Fund Shares for
six months or less, any loss on the sale or exchange of those Shares will be
disallowed to the extent of the amount of exempt-interest dividends received
with respect to the Shares. The Treasury Department, however, is authorized to
issue regulations reducing the six-month holding requirement to a
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<PAGE>
period of not less than the greater of 31 days or the period between regular
dividend distributions where the investment company regularly distributes at
least 90% of its net tax-exempt interest. No such regulations had been issued
as of the date of this Statement of Additional Information.
Taxation of Certain Financial Instruments
-----------------------------------------
Generally, futures contracts held by the Funds at the close of their
taxable year will be treated for Federal income tax purposes as sold for their
fair market value on the last business day of such year, a process known as
"marking-to-market. " Forty percent of any gain or loss resulting from such
constructive sale will be treated as short-term capital gain or loss and 60% of
such gain or loss will be treated as long-term capital gain or loss, without
regard to the length of time a Fund has held the futures contract (the "40%-60%
rule"). The amount of any capital gain or loss actually realized by a Fund in a
subsequent sale or other disposition of those futures contracts will be adjusted
to reflect any capital gain or loss taken into account by the Fund in a prior
year as a result of the constructive sale of the contracts. With respect to
futures contracts to sell, which will be regarded as parts of a "mixed straddle"
because their values fluctuate inversely to the values of specific securities
held by a Fund, losses as to such contracts to sell will be subject to certain
loss deferral rules which limit the amount of loss currently deductible on
either part of the straddle to the amount thereof which exceeds the unrecognized
gain (if any) with respect to the other part of the straddle, and to certain
wash sales regulations. Under short sales rules, which also are applicable, the
holding period of the securities forming part of the straddle will (if they have
not been held for the long-term holding period) be deemed not to begin prior to
termination of the straddle. With respect to certain futures contracts,
deductions for interest and carrying charges will not be allowed.
Notwithstanding the rules described above, with respect to futures contracts to
sell which are properly identified as such, a Fund may make an election which
will exempt (in whole or in part) those identified futures contracts from being
treated for Federal income tax purposes as sold on the last business day of the
Fund's taxable year, but gains and losses will be subject to such short sales,
wash sales and loss deferral rules, and the requirement to capitalize
interest and carrying charges. Under temporary regulations, the Fund would be
allowed (in lieu of the foregoing) to elect either (1) to offset gains or losses
from positions which are part of a mixed straddle by separately identifying each
mixed straddle to which such treatment applies, or (2) to establish a mixed
straddle account for which gains and losses would be recognized and offset on a
periodic basis during the taxable year. Under either election, the 40%-60% rule
will apply to the net gain or loss attributable to the futures contracts, but in
the case of a
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<PAGE>
mixed straddle account election, not more than 50 percent of any net gain may be
treated as long term and no more than 40 percent of any net loss may be treated
as short term. Options on futures contracts generally receive Federal tax
treatment similar to that described above.
A Fund will not be treated as a regulated investment company under the
Code if 30% or more of the Fund's gross income for a taxable year is derived
from gains realized on the sale or other disposition of the following
investments held for less than three months (the "30% test"): (1) stock and
securities (as defined in section 2(a)(36) of the 1940 Act); (2) options,
futures and forward contracts other than those on foreign currencies; and (3)
foreign currencies (and options, futures and forward contracts on foreign
currencies) that are not directly related to the Fund's principal business of
investing in stock and securities (and options and futures with respect to
stocks and securities). Interest (including original issue discount and accrued
market discount) received by the Fund upon maturity or disposition of a security
held for less than three months will not be treated as gross income derived from
the sale or other disposition of such security within the meaning of this
requirement. However, any other income which is attributable to realized market
appreciation will be treated as gross income from the sale or other disposition
of securities for this purpose. With respect to forward contracts, futures
contracts, options on futures contracts, and other financial instruments subject
to the marking-to-market rules described above, the Internal Revenue Service has
ruled in private letter rulings that a gain realized from such a contract,
option or financial instrument will be treated as being derived from a security
held for three months or more (regardless of the actual period for which the
contract, option or instrument is held) if the gain arises as a result of a
constructive sale under the marking -to-market rules, and will be
treated as being derived from a security held for less than three months only if
the contract, option or instrument is terminated (or transferred) during the
taxable year (other than by reason of marking -to-market) and
less than three months have elapsed between the date the contract, option or
instrument is acquired and the termination date. Increases and decreases in the
value of a Fund's futures contracts and other investments that qualify as part
of a "designated hedge," as defined in Section 851(g) of the Code, may be netted
for purposes of determining whether the 30% test is met.
* * *
The foregoing discussion is based on Federal tax laws and regulations
which are in effect on the date of this Statement of Additional Information;
such laws and regulations may be changed by legislative or administrative
action. Shareholders
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<PAGE>
are advised to consult their tax advisers concerning their specific situations
and the application of state and local taxes.
PERFORMANCE AND YIELD INFORMATION
---------------------------------
Yields and Performance
----------------------
The Funds may advertise the standardized effective 30-day
(or one month) yields calculated in accordance with the method prescribed by the
Securities and Exchange Commission for mutual funds. Such yield will be
calculated separately for each Fund according to the following formula:
a-b
Yield = 2 [(-------- + 1)/6/ - 1]
cd
Where: a = dividends and interest earned during the period.
b = expenses accrued for the period (net of
reimbursements).
c = average daily number of Shares outstanding that were
entitled to receive dividends.
d = maximum offering price per Share on the last day of the
period.
For the purpose of determining interest earned during the period
(variable "a" in the formula), each of the Funds computes the yield to maturity
of any debt obligation held by it based on the market value of the obligation
(including actual accrued interest) at the close of business on the last
business day of each month, or, with respect to obligations purchased during the
month, the purchase price (plus actual accrued interest). Such yield is then
divided by 360, and the quotient is multiplied by the market value of the
obligation (including actual accrued interest) in order to determine the
interest income on the obligation for each day of the subsequent month that the
obligation is in the portfolio. It is assumed in the above calculation that
each month contains 30 days. Also, the maturity of a debt obligation with a
call provision is deemed to be the next call date on which the obligation
reasonably may be expected to be called or, if none, the maturity date. Each of
the Funds calculates interest gained on tax-exempt obligations issued without
original issue discount and having a current market discount by using the coupon
rate of interest instead of the yield to maturity. In the case of tax-exempt
obligations with original issue discount, where the discount based on the
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<PAGE>
current market value exceeds the then-remaining portion of original issue
discount, the yield to maturity is the imputed rate based on the original issue
discount calculation. Conversely, where the discount based on the current
market value is less than the remaining portion of the original issue discount,
the yield to maturity is based on the market value.
Expenses accrued for the period (variable "b" in the formula) include
all recurring fees charged by each of the Funds to all shareholder accounts and
to the particular series of Shares in proportion to the length of the base
period and that Fund's mean (or median) account size. Undeclared earned income
will be subtracted from the maximum offering price per Share (variable "d" in
the formula). The Funds' maximum offering price per Share for purposes of the
formula will include the maximum sales load imposed by the Funds -- currently
4.50% of the per share offering price. Based on the foregoing calculations, the
effective yields for Shares of the IT Tax-Exempt, LT Tax-Exempt, Managed
Income, Short-Term Tax-Exempt, IT Income and ST Government Funds for the 30-day
period ended March 31, 1995 were
4.43%, 5.48%, 6.44%, 3.95%, 6.38% and 5.88%, respectively.
The "tax-equivalent" yield of the Short-Term Tax-Exempt, IT Tax-Exempt
and LT Tax-Exempt Funds is computed by: (a) dividing the portion of the yield
(calculated as above) that is exempt from Federal income tax by one minus a
stated Federal income tax rate and (b) adding that figure to that portion, if
any, of the yield that is not exempt from Federal income tax. Tax-equivalent
yields assume the payment of Federal income taxes at a rate of 31%. Based on
the foregoing calculations, the tax-equivalent yield of the Short-Term
Tax-Exempt, IT Tax-Exempt and LT Tax-Exempt Funds for the 30-day period ended
March 31, 1995 were 5.72%, 6.42% and 7.94% ,
respectively.
Each Fund's "average annual total return" is computed by determining
the average annual compounded rate of return during specified periods that
equates the initial amount invested to the ending redeemable value of such
investment according to the following formula:
ERV /1/n/
T = [(-----) - 1]
P
Where: T = average annual total return.
ERV = ending redeemable value of a hypothetical $1,000
payment made at the beginning of the 1, 5 or 10
year (or other) periods at the end
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<PAGE>
of the applicable period (or a fractional portion
thereof).
P = hypothetical initial payment of $1,000.
n = period covered by the computation, expressed in
years.
Each Fund that advertises an "aggregate total return" computes such return
by determining the aggregate compounded rates of return during specified periods
that likewise equate the initial amount invested to the ending redeemable value
of such investment. The formula for calculating aggregate total return is as
follows:
ERV
Aggregate Total Return = [(------)] - 1
P
The above calculations are made assuming that (1) all dividends and
capital gain distributions are reinvested on the reinvestment dates at the price
per Share existing on the reinvestment date (reflecting any sales load charged
upon such reinvestment), (2) all recurring fees charged to all shareholder
accounts are included, and (3) for any account fees that vary with the size of
the account, a mean (or median) account size in the Fund during the periods is
reflected. The ending redeemable value (variable "ERV', in the formula) is
determined by assuming complete redemption of the hypothetical investment after
deduction of all nonrecurring charges at the end of the measuring period. In
addition, the Funds' average annual total return and aggregate total return
quotations will reflect the deduction of the maximum sales load charged in
connection with the purchase of Shares.
Based on the foregoing calculations, the average annual total returns
for Shares of the Short-Term Tax-Exempt Fund, IT Tax-Exempt Fund, LT Tax-Exempt
Fund, ST Government Fund, IT Income Fund and Managed Income Fund for the one
year period ended March 31, 1995 were (1.21)%, 1.52%, 5.99%, (0.44)%, 0.26%
and (0.58)% , respectively. The average annual total returns for the IT Tax-
Exempt Fund, LT Tax-Exempt Fund and Managed Income Fund for the five year period
ended March 31, 1995 were 6.40%, 8.69% and 7.91% ,
respectively. The average annual total returns for the IT Tax-Exempt, LT Tax-
Exempt and Managed Income Funds for the periods from their commencement of
operations (December 3, 1985, February 5, 1986, and January 9, 1986,
respectively) to March 31, 1995 were 7.69%, 10.67% and
10.10% , respectively. The average annual total returns for the Short -
Term Tax-Exempt, IT Income and ST Government Funds for the
-37
-
<PAGE>
period from their commencement of operations (December 31, 1992) to March 31,
1995 were 1.32%, 2.00% and 1.51% , respectively.
The Funds may also from time to time include in advertisements, sales
literature and communications to shareholders a total return figure that is not
calculated according to the formula set forth above in order to compare more
accurately a Fund's performance with other measures of investment return. For
example, in comparing a Fund's total return with data published by Lipper
Analytical Services, Inc., CDA Investment Technologies, Inc. or Weisenberger
Investment Company Service, or with the performance of an index, a Fund may
calculate its aggregate total return for the period of time specified in the
advertisement, sales literature or communication by assuming the investment of
$10,000 in Shares and assuming the reinvestment of each dividend or other
distribution at net asset value on the reinvestment date. Percentage increases
are determined by subtracting the initial value of the investment from the
ending value and by dividing the remainder by the beginning value. A Fund does
not, for these purposes, deduct from the initial value invested any amount
representing sales charges. A Fund will, however, disclose the maximum sales
charge and will also disclose that the performance data does not reflect sales
charges and that inclusion of sale charges would reduce the performance quoted.
The total return and yield of a Fund may be compared to those of other
mutual funds with similar investment objectives and to other relevant indices or
to ratings prepared by independent services or other financial or industry
publications that monitor the performance of mutual funds. For example, the
total return and/or yield of a Fund may be compared to data prepared by Lipper
Analytical Services, Inc., CDA Investment Technologies, Inc. and Weisenberger
Investment Company Service. Total return and yield data as reported in national
financial publications such as Money Magazine, Forbes, Barron's, The Wall Street
----- -------- ------ -------- --- ---- ------
Journal and The New York Times, or in publications of a local or regional
------- --- --- ---- -----
nature, may also be used in comparing the performance of a Fund.
Advertisements, sales literature or reports to shareholders may from time to
time also include a discussion and analysis of each Fund's performance,
including without limitation, those factors, strategies and technologies that
together with market conditions and events, materially affected each Fund's
performance.
The Funds may also from time to time include discussions or illustrations
of the effects of compounding in advertisements. "Compounding" refers to the
fact that, if dividends or other distributions of a Fund investment are
reinvested by being paid in additional Fund shares, any future income or capital
appreciations of a Fund would increase the value, not only of the
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<PAGE>
original Fund investment, but also of the additional Fund shares received
through reinvestment. As a result, the value of the Fund investment would
increase more quickly than if dividends or other distributions had been paid in
cash. The Funds may also include discussions or illustrations of the potential
investment goals of a prospective investor, investment management techniques,
policies or investment suitability of a Fund, economic conditions, the effects
of inflation and historical performance of various asset classes, including but
not limited to, stocks, bonds and Treasury bills. From time to time
advertisements, sales literature or communications to shareholders may summarize
the substance of information contained in shareholder reports (including the
investment composition of a Fund), as well as the views of the Investment
Adviser as to current market, economy, trade and interest rate trends,
legislative, regulatory and monetary developments, investment strategies and
related matters believed to be of relevance to a Fund. The Funds may also
include in advertisements charts, graphs or drawings which illustrate the
potential risks and rewards of investment in various investment vehicles,
including but not limited to, stocks, bonds, treasury bills and shares of a
Fund. In addition, advertisement, sales literature or shareholder
communications may include a discussion of certain attributes or benefits to be
derived by an investment in a Fund. Such advertisements or communicators may
include symbols, headlines or other material which highlight or summarize the
information discussed in more detail therein.
MISCELLANEOUS
-------------
As used in the Prospectus, "assets belonging to a Fund" means the
consideration received upon the issuance of Shares in the Fund, together with
all income, earnings, profits, and proceeds derived from the investment thereof,
including any proceeds from the sale of such investments, any funds or payments
derived from any reinvestment of such proceeds, and a portion of any general
assets of the Company involved not belonging to a particular portfolio of that
Company. In determining the net asset value of a Fund's Shares, assets
belonging to the Fund are charged with the direct liabilities in respect of that
Fund and with a share of the general liabilities of the Company involved which
are normally allocated in proportion to the relative asset values of the
Company's portfolios at the time of allocation. Subject to the provisions of
the Companies' Charters, determinations by the Boards of Directors as
to the direct and allocable liabilities and the allocable portion of any general
assets with respect to a particular Fund are conclusive.
As of July 11, 1995 U.S. Trust held of record substantially
all of the outstanding Shares in all Funds other than the Managed Income Fund,
where it held a majority of the
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<PAGE>
Shares, acting as agent or custodian for its customers, but did not own such
Shares beneficially because it did not have discretion to vote or invest such
Shares.
As of July 11, 1995 , the name, address and percentage
ownership of each person, in addition to U.S. Trust, that beneficially owned 5%
or more of the outstanding Shares of the Short-Term Tax-Exempt Fund was
as follows: G.L. & J.E. Swenson , c/o United States Trust Company of
New York, 114 West 47th Street, New York, New York 10036, 7.2%.
FINANCIAL STATEMENTS
--------------------
The Companies' Annual Reports to Shareholders for the fiscal year
ended March 31, 1995 (the "Annual Reports") for the fixed income and
tax-exempt fixed income portfolios accompany this Statement of Additional
Information. The financial statements in the Annual Reports for the ST
Government, IT Income, Managed Income, Short-Term Tax-Exempt, IT Tax-Exempt and
LT Tax-Exempt Funds (the "Financial Statements") are incorporated in this
Statement of Additional Information by reference. The Financial Statements
included in the Annual Reports for the fiscal year ended March 31, 1995
have been audited by the Companies' independent auditors, Ernst &
Young LLP , whose reports thereon also appear in such Annual Reports and
are incorporated herein by reference. The Financial Statements in such Annual
Reports have been incorporated herein in reliance upon such reports given upon
the authority of such firm as experts in accounting and auditing. Additional
copies of the Annual Reports may be obtained at no charge by telephoning
MFSC at the telephone number appearing on the front page of this
Statement of Additional Information.
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<PAGE>
APPENDIX A
----------
Commercial Paper Ratings
------------------------
A Standard & Poor's commercial paper rating is a current
assessment of the likelihood of timely payment of debt considered short-term in
the relevant market. The following summarizes the rating categories used by
Standard and Poor's for commercial paper:
"A - 1" - Issue's degree of safety regarding timely payment is
strong. Those issues determined to possess extremely strong safety
characteristics are denoted "A- 1+. "
"A-2" - Issue's capacity for timely payment is satisfactory. However,
the relative degree of safety is not as high as for issues designated "A -
1."
"A-3" - Issue has an adequate capacity for timely payment. It is,
however, somewhat more vulnerable to the adverse effects of changes and
circumstances than an obligation carrying a higher designation.
"B" - Issue has only a speculative capacity for timely payment.
"C" - Issue has a doubtful capacity for payment.
"D" - Issue is in payment default.
Moody's commercial paper ratings are opinions of the ability of
issuers to repay punctually promissory obligations not having an original
maturity in excess of 9 months. The following summarizes the rating categories
used by Moody's for commercial paper:
"Prime - 1" - Issuer or related supporting institutions are
considered to have a superior capacity for repayment of short-term promissory
obligations. Prime-1 repayment capacity will normally be evidenced by the
following characteristics: leading market positions in well established
industries; high rates of return on funds employed; conservative capitalization
structures with moderate reliance on debt and ample asset protection; broad
margins in earning coverage of fixed financial charges and high internal cash
generation; and well established access to a range of financial markets and
assured sources of alternate liquidity.
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<PAGE>
"Prime - 2" - Issuer or related supporting institutions are
considered to have a strong capacity for repayment of short-term
promissory obligations. This will normally be evidenced by many of the
characteristics cited above but to a lesser degree. Earnings trends and
coverage ratios, while sound, will be more subject to variation. Capitalization
characteristics, while still appropriate, may be more affected by external
conditions. Ample alternative liquidity is maintained.
"Prime-3" - Issuer or related supporting institutions have an
acceptable capacity for repayment of short-term promissory obligations. The
effects of industry characteristics and market composition may be more
pronounced. Variability in earnings and profitability may result in changes in
the level of debt protection measurements and the requirement for relatively
high financial leverage. Adequate alternate liquidity is maintained.
"Not Prime" - Issuer does not fall within any of the Prime rating
categories.
The three rating categories of Duff & Phelps for investment grade
commercial paper and short-term debt are "D-1," "D- 2" and "D- 3."
Duff & Phelps employs three designations, "D- 1+," "D- 1" and
"D- 1-," within the highest rating category. The following summarizes
the rating categories used by Duff & Phelps for commercial paper:
"D- 1+" - Debt possesses highest certainty of timely payment.
Short-term liquidity, including internal operating factors and/or access to
alternative sources of funds, is outstanding, and safety is just below risk-free
U.S. Treasury short-term obligations.
"D- 1" - Debt possesses very high certainty of timely payment.
Liquidity factors are excellent and supported by good fundamental protection
factors. Risk factors are minor.
"D- 1-" - Debt possesses high certainty of timely payment.
Liquidity factors are strong and supported by good fundamental protection
factors. Risk factors are very small.
"D- 2" - Debt possesses good certainty of timely payment.
Liquidity factors and company fundamentals are sound. Although ongoing funding
needs may enlarge total financing requirements, access to capital markets is
good. Risk factors are small.
"D- 3" - Debt possesses satisfactory liquidity, and other
protection factors qualify issue as investment grade. Risk
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<PAGE>
factors are larger and subject to more variation. Nevertheless, timely payment
is expected.
"D- 4" - Debt possesses speculative investment characteristics.
Liquidity is not sufficient to ensure against disruption in debt service.
Operating factors and market access may be subject to a high degree of
variation.
"D- 5" - Issuer has failed to meet scheduled principal and/or
interest payments.
Fitch short-term ratings apply to debt obligations that are payable on
demand or have original maturities of up to three years. The following
summarizes the rating categories used by Fitch for short-term obligations:
"F-1+" - Securities possess exceptionally strong credit quality.
Issues assigned this rating are regarded as having the strongest degree of
assurance for timely payment.
"F-1" - Securities possess very strong credit quality. Issues
assigned this rating reflect an assurance of timely payment only slightly less
in degree than issues rated "F- 1+. "
"F-2" - Securities possess good credit quality. Issues
assigned this rating have a satisfactory degree of assurance for timely
payment, but the margin of safety is not as great as the "F-1+" and "F-1"
categories.
"F-3" - Securities possess fair credit quality. Issues assigned this
rating have characteristics suggesting that the degree of assurance for timely
payment is adequate; however, near-term adverse changes could cause these
securities to be rated below investment grade.
"F-S" - Securities possess weak credit quality. Issues assigned this
rating have characteristics suggesting a minimal degree of assurance for timely
payment and are vulnerable to near-term adverse changes in financial and
economic conditions.
"D" - Securities are in actual or imminent payment default.
Fitch may also use the symbol "LOC" with its short-term ratings to
indicate that the rating is based upon a letter of credit issued by a commercial
bank.
Thomson BankWatch short-term ratings assess the likelihood of an
untimely or incomplete payment of principal or
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<PAGE>
interest of unsubordinated instruments having a maturity of one year or less
which is issued by United States commercial banks, thrifts and non-bank banks;
non-United States banks; and broker-dealers . The following summarizes
the ratings used by Thomson BankWatch:
"TBW-1" - This designation represents Thomson BankWatch's highest
rating category and indicates a very high degree of likelihood that principal
and interest will be paid on a timely basis.
"TBW-2" - This designation indicates that while the degree of safety
regarding timely payment of principal and interest is strong, the relative
degree of safety is not as high as for issues rated "TBW-1."
"TBW-3" - This designation represents the lowest investment grade
category and indicates that while the debt is more susceptible to adverse
developments (both internal and external) than obligations with higher ratings,
capacity to service principal and interest in a timely fashion is considered
adequate.
"TBW -4" - This designation indicates that the debt is regarded
as non-investment grade and therefore speculative.
IBCA assesses the investment quality of unsecured debt with an
original maturity of less than one year which is issued by bank holding
companies and their principal bank subsidiaries. The following summarizes the
rating categories used by IBCA for short-term debt ratings:
"A1" - Obligations are supported by the highest capacity for timely
repayment. Where issues possess a particularly strong credit feature, a rating
of A1+ is assigned.
"A2" - Obligations are supported by a good capacity for timely
repayment.
"A3" - Obligations are supported by a satisfactory capacity for timely
repayment.
"B" - Obligations for which there is an uncertainty as to the capacity
to ensure timely repayment.
"C" - Obligations for which there is a high risk of default or which
are currently in default.
Corporate and Municipal Long-Term Debt Ratings
----------------------------------------------
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<PAGE>
The following summarizes the ratings used by Standard &
Poor's for corporate and municipal debt:
"AAA" - This designation represents the highest rating assigned by
Standard & Poor's to a debt obligation and indicates an extremely strong
capacity to pay interest and repay principal.
"AA" - Debt is considered to have a very strong capacity to pay
interest and repay principal and differs from AAA issues only in small degree.
"A" - Debt is considered to have a strong capacity to pay interest and
repay principal although such issues are somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions than debt in
higher-rated categories.
"BBB" - Debt is regarded as having an adequate capacity to pay
interest and repay principal. Whereas such issues 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 debt in this category than in higher-rated categories.
"BB," "B," "CCC," "CC" and "C" - Debt is regarded, on balance, as
predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. "BB" indicates the
lowest degree of speculation and "C" the highest degree of speculation. While
such debt will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major risk exposures to adverse
conditions.
"BB" - Debt has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure
to adverse business, financial or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. The "BB"
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied "BBB-" rating.
"B" - Debt has a greater vulnerability to default but currently has
the capacity to meet interest payments and principal repayments. Adverse
business, financial or economic conditions will likely impair capacity or
willingness to pay interest and repay principal. The "B" rating category is
also used for debt subordinated to senior debt that is assigned an actual or
implied "BB" or "BB-" rating.
"CCC" - Debt has a currently identifiable vulnerability to default,
and is dependent upon favorable business, financial and economic conditions to
meet timely
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<PAGE>
payment of interest and repayment of principal. In the event of adverse
business, financial or economic conditions, it is not likely to have the
capacity to pay interest and repay principal. The "CCC" rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
"B" or "B-" rating.
"CC" - This rating is typically applied to debt subordinated
to senior debt that is assigned an actual or implied "CCC" rating.
"C" - This rating is typically applied to debt
subordinated to senior debt which is assigned an actual or implied "CCC-" debt
rating. The "C" rating may be used to cover a situation where a bankruptcy
petition has been filed, but debt service payments are continued.
"CI" - This rating is reserved for income bonds on which no interest
is being paid.
"D" - Debt is in payment default . This rating is used when
interest payments or principal payments are not made on the date due, even if
the applicable grace period has not expired, unless S & P believes such
payments will be made during such grace period. "D" rating is also used upon
the filing of a bankruptcy petition if debt service payments are jeopardized.
PLUS (+) OR MINUS (-) - The ratings from "AA" through "CCC" may be
modified by the addition of a plus or minus sign to show relative standing
within the major rating categories.
"r" - This rating is attached to highlight derivative, hybrid, and
certain other obligations that S & P believes may experience high volatility or
high variability in expected returns due to non-credit risks. Examples of such
obligations are: securities whose principal or interest return is indexed to
equities, commodities, or currencies; certain swaps and options; and interest
only and principal only mortgage securities.
The following summarizes the ratings used by Moody's for corporate and
municipal long-term debt:
"Aaa" - Bonds 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.
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<PAGE>
"Aa" - Bonds 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.
"A" - Bonds possess many favorable investment attributes and are to be
considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment sometime in the future.
"Baa" - Bonds considered medium-grade obligations, i.e., they are
neither highly protected nor poorly secured. Interest payments and principal
security appear adequate for the present but certain protective elements may be
lacking or may be characteristically unreliable over any great length of time.
Such bonds lack outstanding investment characteristics and in fact have
speculative characteristics as well.
"Ba," "B," "Caa," "Ca," and "C" - Bonds that possess one of these
ratings provide questionable protection of interest and principal ("Ba"
indicates some speculative elements; "B" indicates a general lack of
characteristics of desirable investment; "Caa" represents a poor standing; "Ca"
represents obligations which are speculative in a high degree; and "C"
represents the lowest rated class of bonds). "Caa," "Ca" and "C" bonds may be in
default.
Con. (---) - Bonds for which the security depends upon the completion
of some act or the fulfillment of some condition are rated conditionally. These
are bonds secured by (a) earnings of projects under construction, (b) earnings
of projects unseasoned in operation experience, (c) rentals which begin when
facilities are completed, or (d) payments to which some other limiting condition
attaches. Parenthetical rating denotes probable credit stature upon completion
of construction or elimination of basis of condition.
Moody's applies numerical modifiers 1, 2 and 3 in each generic
classification from "Aa" to "B" in its bond rating system. The modifier 1
indicates that the issuer ranks in the higher end of its generic rating
category; the modifier 2 indicates a mid-range ranking; and the modifier 3
indicates that the issuer ranks at the lower end of its generic rating
category.
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<PAGE>
The following summarizes the long-term debt ratings used by Duff &
Phelps for corporate and municipal long-term debt:
"AAA" - Debt is considered to be of the highest credit quality. The
risk factors are negligible, being only slightly more than for risk-free U.S.
Treasury debt.
"AA" - Debt is considered of high credit quality. Protection factors
are strong. Risk is modest but may vary slightly from time to time because of
economic conditions.
"A" - Debt possesses protection factors which are average but
adequate. However, risk factors are more variable and greater in periods of
economic stress.
"BBB" - Debt possesses below average protection factors but such
protection factors are still considered sufficient for prudent investment.
Considerable variability in risk is present during economic cycles.
"BB," "B," "CCC," "DD," and "DP" - Debt that possesses one of these
ratings is considered to be below investment grade. Although below investment
grade, debt rated "BB" is deemed likely to meet obligations when due. Debt
rated "B" possesses the risk that obligations will not be met when due. Debt
rated "CCC" is well below investment grade and has considerable uncertainty as
to timely payment of principal, interest or preferred dividends. Debt rated
"DD" is a defaulted debt obligation, and the rating "DP" represents preferred
stock with dividend arrearages.
To provide more detailed indications of credit quality, the "AA," "A,"
"BBB," "BB" and "B" ratings may be modified by the addition of a plus (+) or
minus (-) sign to show relative standing within these major categories.
The following summarizes the highest four ratings used by Fitch for
corporate and municipal bonds:
"AAA" - Bonds considered to be investment grade and of the highest
credit quality. The obligor has an exceptionally strong ability to pay interest
and repay principal, which is unlikely to be affected by reasonably foreseeable
events.
"AA" - Bonds considered to be investment grade and of very high credit
quality. The obligor's ability to pay interest and repay principal is very
strong, although not quite as strong as bonds rated "AAA." Because bonds rated
in the "AAA" and "AA" categories are not significantly vulnerable to foreseeable
future developments, short-term debt of these issuers is generally rated "F-1+."
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<PAGE>
"A" - Bonds considered to be investment grade and of high credit
quality. The obligor's ability to pay interest and repay principal is
considered to be strong, but may be more vulnerable to adverse changes in
economic conditions and circumstances than bonds with higher ratings.
"BBB" - Bonds considered to be investment grade and of satisfactory
credit quality. The obligor's ability to pay interest and repay principal is
considered to be adequate. Adverse changes in economic conditions and
circumstances, however, are more likely to have an adverse impact on these
bonds, and therefore, impair timely payment. The likelihood that the ratings of
these bonds will fall below investment grade is higher than for bonds with
higher ratings.
"BB," "B," "CCC, " "CC, " "C," "DDD," "DD," and "D" -Bonds that
possess one of these ratings are considered by Fitch to be speculative
investments. The ratings "BB" to "C" represent Fitch's assessment of the
likelihood of timely payment of principal and interest in accordance with the
terms of obligation for bond issues not in default. For defaulted bonds, the
rating "DDD" to "D" is an assessment of the ultimate recovery value through
reorganization or liquidation.
To provide more detailed indications of credit quality, the Fitch
ratings from and including "AA" to "C" may be modified by the addition of a plus
(+) or minus (-) sign to show relative standing within these major rating
categories.
IBCA assesses the investment quality of unsecured debt with an
original maturity of more than one year which is issued by bank holding
companies and their principal bank subsidiaries. The following summarizes the
rating categories used by IBCA for long-term debt ratings:
"AAA" - Obligations for which there is the lowest expectation of
investment risk. Capacity for timely repayment of principal and interest is
substantial such that adverse changes in business, economic or financial
conditions are unlikely to increase investment risk substantially.
"AA" - Obligations for which there is a very low expectation of
investment risk. Capacity for timely repayment of principal and interest is
substantial. Adverse changes in business, economic or financial conditions may
increase investment risk albeit not very significantly.
"A" - Obligations for which there is a low expectation of investment
risk. Capacity for timely repayment of principal and interest is strong,
although adverse changes in business,
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<PAGE>
economic or financial conditions may lead to increased investment risk.
"BBB" - Obligations for which there is currently a low expectation of
investment risk. Capacity for timely repayment of principal and interest is
adequate, although adverse changes in business, economic or financial conditions
are more likely to lead to increased investment risk than for obligations in
higher categories.
"BB," "B," "CCC," "CC," and "C" - Obligations are assigned one of
these ratings where it is considered that speculative characteristics are
present. "BB" represents the lowest degree of speculation and indicates a
possibility of investment risk developing. "C" represents the highest degree of
speculation and indicates that the obligations are currently in default.
IBCA may append a rating of plus (+) or minus (-) to a rating to
denote relative status within major rating categories.
Thomson BankWatch assesses the likelihood of an untimely repayment of
principal or interest over the term to maturity of long term debt and preferred
stock which are issued by United States commercial banks, thrifts and non-bank
banks; non-United States banks; and broker-dealers. The following summarizes
the rating categories used by Thomson BankWatch for long-term debt ratings:
"AAA" - This designation represents the highest category assigned by
Thomson BankWatch to long-term debt and indicates that the ability to repay
principal and interest on a timely basis is very high.
"AA" - This designation indicates a superior ability to repay
principal and interest on a timely basis with limited incremental risk versus
issues rated in the highest category.
"A" - This designation indicates that the ability to repay principal
and interest is strong. Issues rated "A" could be more vulnerable to adverse
developments (both internal and external) than obligations with higher ratings.
"BBB" - This designation represents Thomson BankWatch's lowest
investment grade category and indicates an acceptable capacity to repay
principal and interest. Issues rated "BBB" are, however, more vulnerable to
adverse developments (both internal and external) than obligations with higher
ratings.
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<PAGE>
"BB," "B," "CCC," and "CC," - These designations are assigned by
Thomson BankWatch to non-investment grade long-term debt. Such issues are
regarded as having speculative characteristics regarding the likelihood of
timely payment of principal and interest. "BB" indicates the lowest degree of
speculation and "CC" the highest degree of speculation.
"D" - This designation indicates that the long-term debt is in
default.
PLUS (+) OR MINUS (-) - The ratings from "AAA" through "CC" may
include a plus or minus sign designation which indicates where within the
respective category the issue is placed.
Municipal Note Ratings
----------------------
A Standard and Poor's rating reflects the liquidity concerns and
market access risks unique to notes due in three years or less. The following
summarizes the ratings used by Standard & Poor's Ratings Group for
municipal notes:
"SP-1" - The issuers of these municipal notes exhibit very strong or
strong capacity to pay principal and interest. Those issues determined to
possess overwhelming safety characteristics are given a plus (+)
designation.
"SP-2" - The issuers of these municipal notes exhibit satisfactory
capacity to pay principal and interest.
"SP-3" - The issuers of these municipal notes exhibit speculative
capacity to pay principal and interest.
Moody's ratings for state and municipal notes and other short-term
loans are designated Moody's Investment Grade ("MIG") and variable rate demand
obligations are designated Variable Moody's Investment Grade ("VMIG"). Such
ratings recognize the differences between short-term credit risk and long-term
risk. The following summarizes the ratings by Moody's Investors Service, Inc.
for short-term notes:
"MIG-1"/"VMIG-1" - Loans bearing this designation are of the best
quality, enjoying strong protection by established cash flows, superior
liquidity support or demonstrated broad-based access to the market for
refinancing.
"MIG-2"/"VMIG-2" - Loans bearing this designation are of high quality,
with margins of protection ample although not so large as in the preceding
group.
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<PAGE>
"MIG-3"/"VMIG-3" - Loans bearing this designation are of favorable
quality, with all security elements accounted for but lacking the undeniable
strength of the preceding grades. Liquidity and cash flow protection may be
narrow and market access for refinancing is likely to be less well established.
"MIG-4"/"VMIG-4" - Loans bearing this designation are of adequate
quality, carrying specific risk but having protection commonly regarded as
required of an investment security and not distinctly or predominantly
speculative.
"SG" - Loans bearing this designation are of speculative quality and
lack margins of protection.
Fitch and Duff & Phelps use the short-term ratings described under
Commercial Paper Ratings for municipal notes.
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<PAGE>
UST MASTER FUNDS, INC.
Equity Fund
Income and Growth Fund
Long-Term Supply of Energy Fund
Productivity Enhancers Fund
Environmentally-Related Products and Services Fund
Aging of America Fund
Communication and Entertainment Fund
Business and Industrial Restructuring Fund
Global Competitors Fund
Early Life Cycle Fund
STATEMENT OF ADDITIONAL INFORMATION
SERVICE SHARES
DISTRIBUTION SHARES
August 1, 1995
----
This Statement of Additional Information is not a prospectus but should be read
in conjunction with the current prospectuses for the Equity, Income and Growth,
Long-Term Supply of Energy, Productivity Enhancers, Environmentally-Related
Products and Services, Aging of America, Communication and Entertainment,
Business and Industrial Restructuring, Global Competitors and Early Life Cycle
Funds (individually, a "Fund" and collectively, the "Funds") of UST Master
Funds, Inc. ("Master Fund") dated August 1, 1995 (the "Prospectuses"). Much of
the information contained in this Statement of Additional Information expands
upon the subjects discussed in the Prospectuses. No investment in Service
Shares and Distribution Shares of the Funds described herein (collectively,
the "Shares") should be made without reading the Prospectuses. A copy of the
Prospectus may be obtained by writing Master Fund c/o Mutual Funds Service
Company, 73 Tremont Street, Boston, MA 02108-3913.
________________________________________________________________________________
__________________________________ or by calling (800) 446-1012.
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
-----------------
Page
----
<C>
<S>
INVESTMENT OBJECTIVES AND POLICIES .......................
Other Investment Considerations -
Equity and Theme Funds ...............................
Other Investment Considerations -
Income and Growth Fund ...............................
Additional Information on Portfolio Instruments ........
Additional Investment Limitations
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION ...........
INVESTOR PROGRAMS ........................................
Systematic Withdrawal Plan .............................
Exchange Privilege .....................................
Other Investor Programs ................................
DESCRIPTION OF CAPITAL STOCK .............................
MANAGEMENT OF THE FUNDS ..................................
Directors and Officers .................................
Investment Advisory and Administration Agreements ......
Service Organizations ..................................
Expenses ...............................................
Custodian and Transfer Agent............................
PORTFOLIO TRANSACTIONS ...................................
INDEPENDENT AUDITORS .....................................
COUNSEL ..................................................
ADDITIONAL INFORMATION CONCERNING TAXES ..................
PERFORMANCE INFORMATION ..................................
MISCELLANEOUS ............................................
FINANCIAL STATEMENTS .....................................
APPENDIX ................................................ A-1
</TABLE>
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
----------------------------------
The investment objective of the Equity Fund and of the Long-Term
Supply of Energy, Productivity Enhancers, Environmentally-Related Products and
Services, Aging of America, Communication and Entertainment, Business and
Industrial Restructuring, Global Competitors and Early Life Cycle Funds
(collectively, the "Theme Funds") is to seek long-term capital appreciation. The
investment objective of the Income and Growth Fund is to seek to provide
moderate current income and to attempt to achieve capital appreciation. Under
normal market and economic conditions, each Fund invests a significant portion
of its assets in common stock, preferred stock and debt securities convertible
into common stock. The following policies supplement the Funds' investment
objectives and policies as set forth in the Prospectuses.
Other Investment Considerations - Equity Fund and Theme Funds
-------------------------------------------------------------
The Equity Fund and the Theme Funds invest primarily in common stocks,
but each Fund may purchase both preferred stocks and securities convertible into
common stock at the discretion of United States Trust Company of New York (the
"Investment Adviser" or "U.S. Trust"). While current income is secondary to the
objective of long-term capital appreciation, Master Fund expects that the broad
and diversified strategies utilized by the Investment Adviser will result in
somewhat more current income than would be generated if the Investment Adviser
utilized a single strategy more narrowly focused on rapid growth of principal
and involving exposure to higher levels of risk.
The Investment Adviser's investment philosophy is to identify
investment values available in the market at attractive prices. Investment
value arises from the ability to generate earnings or from the ownership of
assets or resources. Underlying earnings potential and asset values are
frequently demonstrable but not recognized in the market prices of the
securities representing their ownership. The Investment Adviser employs the
following three different but closely interrelated portfolio strategies to focus
and organize its search for investment values.
1. Problem/Opportunity Companies. Important investment
-----------------------------
opportunities often occur where companies develop solutions to large, complex,
fundamental problems, such as declining industrial productivity; rising costs
and declining sources of energy; the economic imbalances and value erosion
caused by years of high inflation and interest rates; the soaring costs and
competing priorities of providing health care; and the accelerating
interdependence and "shrinking size" of the world.
<PAGE>
Solutions or parts of solutions to large problems may be generated by
established companies or comparatively new companies of all sizes through the
development of new products, technologies or services, or through new
applications of older ones.
Investment in such companies represents a very wide range of
investment potential, current income return rates, and exposure to fundamental
and market risks. Income generated by each Funds' investments in these
companies would be expected to be moderate, characterized by lesser rates than
those of a fund whose sole objective is current income, and somewhat higher
rates than those of a higher-risk growth fund.
2. Transaction Value Companies. In the opinion of the Investment
---------------------------
Adviser, the stock market frequently values the aggregate ownership of a company
at a substantially lower figure than its component assets would be worth if they
were sold off separately over time. Such assets may include intangible assets
such as product and market franchises, operating know-how, or distribution
systems, as well as such tangible properties as oil reserves, timber, real
estate, or production facilities. Investment opportunities in these companies
are determined by the magnitude of difference between economic worth and current
market price.
Market undervaluations are very often corrected by purchase and sale,
restructuring of the company, or market appreciation to recognize the actual
worth. The recognition process may well occur over time, however, incurring a
form of time-exposure risk. Success from investing in these companies is often
great, but may well be achieved only after a waiting period of inactivity.
Income derived from investing in undervalued companies is expected to
be moderately greater than that derived from investments in either the
Problem/Opportunity or Early Life Cycle companies.
3. Early Life Cycle Companies. Investments in Early Life Cycle
--------------------------
companies tend to be narrowly focused on an objective of higher rates of capital
appreciation. They correspondingly will involve a significantly greater degree
of risk and the reduction of current income to a negligible level. Such
investments will not be limited to new, small companies engaged only in frontier
technology, but will seek opportunities for maximum appreciation through the
full spectrum of business operations, products, services, and asset values.
Consequently, the Funds' investments in Early Life Cycle companies are primarily
in younger, small- to medium- sized companies in the early stages of their
development. Such companies are usually
-2-
<PAGE>
more flexible in trying new approaches to problem-solving and in making new or
different employment of assets. Because of the high risk level involved, the
ratio of success among such companies is lower than the average, but for those
companies which succeed, the magnitude of investment reward is potentially
higher.
Other Investment Considerations - Income and Growth Fund
--------------------------------------------------------
The Income and Growth Fund is expected to have a greater portion of
its assets invested in debt obligations under normal market conditions than the
Equity Fund and Theme Funds. Further, although the Investment Adviser will
generally use the three strategies described above for the Equity and Theme
Funds, the Income and Growth Fund will generally invest in those companies which
are expected to generate the greater income. As a result, the Income and Growth
Fund is likely to have a relatively small portion of its assets invested in
Early Life Cycle companies.
As stated in the Prospectuses, the Income and Growth Fund may invest
up to 10% of its assets in instruments such as liquidating trust receipts;
certificates of beneficial ownership; limited partnership interests; creditor
claims; loan participations; and warrants, options and other rights to purchase
securities. Liquidating trust receipts, as well as certificates of beneficial
interest, acquired by the Income and Growth Fund represent interests in trusts
holding specific assets. In the case of a liquidating trust, such assets may
include airplanes, ships and trucks that have been leased to third parties.
Limited partnership interests acquired by the Fund may represent equitable
interests in enterprises engaged in activities related to leasing of electronic,
computer and other types of equipment. Normally, the profits and losses
attributable to the foregoing types of instruments pass directly to the holders
of the instruments and are not taxed at the trust or partnership level.
Creditor claims (which may be in the form of notes or debentures)
acquired by the Income and Growth Fund comprise debt obligations of companies
being reorganized under bankruptcy or insolvency laws. Creditor claims normally
sell at a substantial discount from their face value, may be convertible into
stock of the reorganized company, and have a high degree of potential risk and
reward. Loan participations acquired by the Income and Growth Fund represent
interests in either separate, privately negotiated loans that have been made by
lending institutions to third parties or pools of privately negotiated loans
maintained in the loan portfolios of lending institutions. Lending institutions
may sell loan participations to the Income and
-3-
<PAGE>
Growth Fund and other institutional investors in order to achieve additional
revenues and to reduce their exposure on the loans involved, as well as for
other reasons. Loan participations are considered to be illiquid securities
subject to the 10% limitation on investments in illiquid securities described in
the Prospectuses.
The instruments described above may provide a higher than normal rate
of return but may also entail greater risks. These risks include the absence of
any secondary or other organized market for certain instruments that the Income
and Growth Fund may acquire; the likelihood that the transfer of certain
instruments will otherwise be restricted because they have not been registered
under Federal or state securities laws; the probability that certain instruments
will represent interests in a single asset or project and will be entirely
dependent upon market and economic factors affecting such asset or project and
upon the skill of project managers to produce value; the possibility of volatile
changes in the value of an instrument because of changes in the value of the
asset underlying the instrument; the possibility that certain instruments will
be subject to heavy cash flow dependency, defaults by borrowers, self-
liquidation and the risk that the underlying portfolio company will fail to
qualify for favorable tax treatment under the Internal Revenue Code of 1986, as
amended (the "Code"); the possibility that the Fund's loss with respect to an
instrument may exceed the amount of its investment; and, with respect to
creditor claims and other debt instruments, the quality of the credit extended.
In addition, as discussed in the Prospectuses , income from some of the Code and
must be monitored by the Investment Adviser so that the amount of any such non-
qualifying income does not exceed the amount permitted by the Code. The
Investment Adviser will purchase such instruments only when it determines that
the expected return justifies the attendant risks.
Additional Information on Portfolio Instruments
-----------------------------------------------
Options
-------
As stated in the Prospectuses, the Income and Growth Fund and the
Theme Funds may purchase put and call options listed on a national securities
exchange and issued by the Options Clearing Corporation. Such purchases would be
in an amount not exceeding 5% of each such Fund's net assets. Purchase of
options is a highly specialized activity which entails greater than ordinary
investment risks. Regardless of how much the market price of the underlying
security increases or decreases, the option buyer's risk is limited to the
amount of the original investment for the purchase of the option. However,
options may
-4-
<PAGE>
be more volatile than the underlying securities, and therefore, on a percentage
basis, an investment in options may be subject to greater fluctuation than an
investment in the underlying securities. A listed call option gives the
purchaser of the option the right to buy from a clearing corporation, and the
writer has the obligation to sell to the clearing corporation, the underlying
security at the stated exercise price at any time prior to the expiration of the
option, regardless of the market price of the security. The premium paid to the
writer is in consideration for undertaking the obligations under the option
contract. A listed put option gives the purchaser the right to sell to a
clearing corporation the underlying security at the stated exercise price at any
time prior to the expiration date of the option, regardless of the market price
of the security. Put and call options purchased by the Income and Growth and
Theme Funds will be valued at the last sale price or, in the absence of such a
price, at the mean between bid and asked prices.
Also as stated in the Prospectuses, each Fund may engage in writing
covered call options and enter into closing purchase transactions with respect
to such options. When any of the Funds writes a covered call option, it may
terminate its obligation to sell the underlying security prior to the expiration
date of the option by executing a closing purchase transaction, which is
effected by purchasing on an exchange an option of the same series (i.e., same
underlying security, exercise price and expiration date) as the option
previously written. Such a purchase does not result in the ownership of an
option. A closing purchase transaction will ordinarily be effected to realize a
profit on an outstanding call option, to prevent an underlying security from
being called, to permit the sale of the underlying security or to permit the
writing of a new call option containing different terms on such underlying
security. The cost of such a liquidation purchase plus transaction costs may be
greater than the premium received upon the original option, in which event the
writer will have incurred a loss on the transaction. An option position may be
closed out only on an exchange which provides a secondary market for an option
of the same series. There is no assurance that a liquid secondary market on an
exchange will exist for any particular option. A covered option writer, unable
to effect a closing purchase transaction, will not be able to sell the
underlying security until the option expires or the underlying security is
delivered upon exercise, with the result that the writer in such circumstances
will be subject to the risk of market decline in the underlying security during
such period. The Funds will write an option on a particular security only if
the Investment Adviser believes that a liquid secondary market will exist on an
exchange for options of the same series, which will permit the Funds to make a
closing purchase transaction in order to close out its position.
-5-
<PAGE>
When a Fund writes an option, an amount equal to the net premium (the
premium less the commission) received by that Fund is included in the liability
section of that Fund's statement of assets and liabilities as a deferred credit.
The amount of the deferred credit will be subsequently marked to market to
reflect the current value of the option written. The current value of the
traded option is the last sale price or, in the absence of a sale, the average
of the closing bid and asked prices. If an option expires on the stipulated
expiration date, or if the Fund involved enters into a closing purchase
transaction, the Fund will realize a gain (or loss if the cost of a closing
purchase transaction exceeds the net premium received when the option is sold),
and the deferred credit related to such option will be eliminated. If an option
is exercised, the Fund involved may deliver the underlying security from its
portfolio or purchase the underlying security in the open market. In either
event, the proceeds of the sale will be increased by the net premium originally
received, and the Fund involved will realize a gain or loss. Premiums from
expired call options written by the Funds and net gains from closing purchase
transactions are treated as short-term capital gains for Federal income tax
purposes, and losses on closing purchase transactions are short-term capital
losses.
Repurchase Agreements
---------------------
The repurchase price under the repurchase agreements described in the
Prospectuses generally equals the price paid by a Fund plus interest
negotiated on the basis of current short-term rates (which may be more or less
than the rate on the securities underlying the repurchase agreement).
Securities subject to repurchase agreements are held by the Funds' custodian (or
sub-custodian) or in the Federal Reserve/Treasury book-entry system. Repurchase
agreements are considered loans by a Fund under the Investment Company Act of
1940 (the "1940 Act").
Futures Contracts and Related Options
-------------------------------------
The Theme Funds may invest in futures contracts and options thereon.
The Theme Funds may enter into interest rate futures contracts and other types
of financial futures contracts, including foreign currency futures contracts, as
well as any index or foreign market futures which are available on recognized
exchanges or in other established financial markets. A futures contract on
foreign currency creates a binding obligation on one party to deliver, and a
corresponding obligation on another party to accept delivery of, a stated
quantity of a foreign currency for an amount fixed in U.S. dollars. Foreign
currency futures, which operate in a manner similar to interest rate futures
contracts may be used by the Theme Funds to hedge against exposure to
fluctuations in exchange rates between the U.S.
-6-
<PAGE>
dollar and other currencies arising from multinational transactions.
Futures contracts will not be entered into for speculative purposes,
but to hedge risks associated with a Fund's securities investments. Positions
in futures contracts may be closed out only on an exchange which provides a
secondary market for such futures. However, there can be no assurance that a
liquid secondary market will exist for any particular futures contract at any
specific time. Thus, it may not be possible to close a futures position. In
the event of adverse price movements, a Fund would continue to be required to
make daily cash payments to maintain its required margin. In such situations,
if the Fund has insufficient cash, it may have to sell portfolio securities to
meet daily margin requirements at a time when it may be disadvantageous to do
so. In addition, the Fund may be required to make delivery of the instruments
underlying futures contracts it holds. The inability to close options and
futures positions also could have an adverse impact on the Fund's ability to
effectively hedge.
Successful use of futures by the Theme Funds is also subject to the
Investment Adviser's ability to correctly predict movements in the direction of
the market. For example, if a Fund has hedged against the possibility of a
decline in the market adversely affecting securities held by it and securities
prices increase instead, the Fund will lose part or all of the benefit to the
increased value of its securities which it has hedged because it will have
approximately equal offsetting losses in its futures positions. In addition, in
some situations, if a Fund has insufficient cash, it may have to sell securities
to meet daily variation margin requirements. Such sales of securities may be,
but will not necessarily be, at increased prices which reflect the rising
market. The Fund may have to sell securities at a time when it may be
disadvantageous to do so.
The risk of loss in trading futures contracts in some strategies can
be substantial, due both to the low margin deposits required, and the extremely
high degree of leverage involved in futures pricing. As a result, a relatively
small price movement in a futures contract may result in immediate and
substantial loss (as well as gain) to the investor. For example, if at the time
of purchase, 10% of the value of the futures contract is deposited as margin, a
subsequent 10% decrease in the value of the futures contract would result in a
total loss of the margin deposit, before any deduction for the transaction
costs, if the account were then closed out. A 15% decrease would result in a
loss equal to 150% of the original margin deposit, before any deduction for the
transaction costs, if the contract were closed out. Thus, a purchase or sale of
a futures contract may
-7-
<PAGE>
result in losses in excess of the amount invested in the contract.
Utilization of futures transactions by the Theme Funds involves the
risk of loss by a Fund of margin deposits in the event of bankruptcy of a broker
with whom such Fund has an open position in a futures contract or related
option.
Most futures exchanges limit the amount of fluctuation permitted in
futures contract prices during a single trading day. The daily limit
establishes the maximum amount that the price of a futures contract may vary
either up or down from the previous day's settlement price at the end of a
trading session. Once the daily limit has been reached in a particular type of
contract, no trades may be made on that day at a price beyond that limit. The
daily limit governs only price movement during a particular trading day and
therefore does not limit potential losses, because the limit may prevent the
liquidation of unfavorable positions. Futures contract prices have occasionally
moved to the daily limit for several consecutive trading days with little or no
trading, thereby preventing prompt liquidation of futures positions and
subjecting some futures traders to substantial losses.
The trading of futures contracts is also subject to the risk of
trading halts, suspensions, exchange or clearing house equipment failures,
government intervention, insolvency of a brokerage firm or clearing house or
other disruptions of normal trading activity, which could at times make it
difficult or impossible to liquidate existing positions or to recover excess
variation margin payments.
Options on Futures Contracts
----------------------------
The Theme Funds may purchase options on the futures contracts
described above. A futures option gives the holder, in return for the premium
paid, the right to buy (call) from or sell (put) to the writer of the option a
futures contract at a specified price at any time during the period of the
option. Upon exercise, the writer of the option is obligated to pay the
difference between the cash value of the futures contract and the exercise
price. Like the buyer or seller of a futures contract, the holder, or writer,
of an option has the right to terminate its position prior to the scheduled
expiration of the option by selling, or purchasing, an option of the same
series, at which time the person entering into the closing transaction will
realize a gain or loss.
Investments in futures options involve some of the same considerations
that are involved in connection with investments
-8-
<PAGE>
in futures contracts (for example, the existence of a liquid secondary market).
In addition, the purchase of an option also entails the risk that changes in the
value of the underlying futures contract will not be fully reflected in the
value of the option purchased. Depending on the pricing of the option compared
to either the futures contract upon which it is based, or upon the price of the
instruments being hedged, an option may or may not be less risky than ownership
of the futures contract or such instruments. In general, the market prices of
options can be expected to be more volatile than the market prices on the
underlying futures contract. Compared to the purchase or sale of futures
contracts, however, the purchase of call or put options on futures contracts may
frequently involve less potential risk to the Fund because the maximum amount at
risk is the premium paid for the options (plus transaction costs). Although
permitted by its fundamental investment policies, the Fund does not currently
intend to write futures options, and will not do so in the future absent any
necessary regulatory approvals.
When-Issued and Forward Transactions
------------------------------------
When a Fund agrees to purchase securities on a "when-issued" or
forward commitment basis, the custodian will set aside cash or liquid portfolio
securities equal to the amount of the commitment in a separate account.
Normally, the custodian will set aside portfolio securities to satisfy a
purchase commitment and, in such case, the Fund may be required subsequently to
place additional assets in the separate account in order to ensure that the
value of the account remains equal to the amount of the Fund's commitment. It
may be expected that a Fund's net assets will fluctuate to a greater degree when
it sets aside portfolio securities to cover such purchase commitments than when
it sets aside cash. Because a Fund will set aside cash or liquid assets to
satisfy its purchase commitments in the manner described, its liquidity and
ability to manage its portfolio might be affected in the event its forward
commitments or commitments to purchase "when-issued" securities ever exceed 25%
of the value of its assets.
A Fund will purchase securities on a "when-issued" or forward
commitment basis only with the intention of completing the transaction. If
deemed advisable as a matter of investment strategy, however, a Fund may dispose
of or renegotiate a commitment after it is entered into, and may sell securities
it has committed to purchase before those securities are delivered to the Fund
on the settlement date. In these cases, the Fund may realize a taxable capital
gain or loss.
When a Fund engages in "when-issued" or forward commitment
transactions, it relies on the other party to consummate the trade. Failure of
such other party to do so may
-9-
<PAGE>
result in the Fund incurring a loss or missing an opportunity to obtain a price
considered to be advantageous.
The market value of the securities underlying a "when-issued" purchase
or a forward commitment to purchase securities and any subsequent fluctuations
in their market value are taken into account when determining the market value
of a Fund starting on the day the Fund agrees to purchase the securities. The
Fund does not earn interest on the securities it has committed to purchase until
they are paid for and delivered on the settlement date.
Securities Lending
------------------
When a Fund lends its securities, it continues to receive interest or
dividends on the securities lent and may simultaneously earn interest on the
investment of the cash loan collateral, which will be invested in readily
marketable, high-quality, short-term obligations. Although voting rights, or
rights to consent, attendant to lent securities pass to the borrower, such loans
may be called at any time and will be called so that the securities may be voted
by a Fund if a material event affecting the investment is to occur.
Restricted Securities
---------------------
The Productivity Enhancers Fund may invest in restricted securities
(privately placed securities) and other securities without readily available
market quotations. The Fund's investments in securities without readily
available market quotations will not exceed 5% of its total assets at the time
of purchase. Restricted securities may be sold only in private transactions or
in a public offering with respect to which a registration statement is in effect
under the Securities Act of 1933 (the "1933 Act"). Where registration may be
required, the Fund may be obligated to pay all or part of the registration
expenses and a considerable period may elapse between the time of the decision
to sell and the time the Fund may be permitted to sell a security under an
effective registration statement. If, during such a period, adverse market
conditions were to develop, the Fund might obtain a less favorable price than
prevailed when it decided to sell. Certain transactions in restricted
securities may qualify for the registration exemption provided in Rule 144A
under the 1933 Act.
Additional Investment Limitations
---------------------------------
In addition to the investment limitations disclosed in the
Prospectuses, the Funds are subject to the investment limitations enumerated
below. Fundamental investment limitations may be changed with respect to a Fund
only by a vote of a
-10-
<PAGE>
majority of the holders of such Fund's outstanding Shares (as defined under
"Miscellaneous" in the Prospectuses). However, investment limitations which
are "operating policies" with respect to a Fund may be changed by Master Fund's
Board of Directors upon reasonable notice to Investors.
The following investment limitations are fundamental with respect to
each Fund. Each Fund may not:
1. Act as an underwriter of securities within the meaning of the
Securities Act of 1933, except insofar as it might be deemed to be an
underwriter upon disposition of certain portfolio securities acquired within the
limitation on purchases of restricted securities;
2. Purchase or sell real estate, except that each Fund may purchase
securities of issuers which deal in real estate and may purchase securities
which are secured by interests in real estate; and
3. Issue any senior securities, except insofar as any borrowing in
accordance with a Fund's investment limitation contained in the Prospectuses
might be considered to be the issuance of a senior security.
The following investment limitations are fundamental with respect to
the Equity and Income and Growth Funds, but are operating policies with respect
to the Theme Funds. No Fund may:
4. Purchase securities on margin, make short sales of securities, or
maintain a short position;
5. Invest in or sell put options, call options, straddles, spreads,
or any combination thereof; provided, however, that each Fund may write covered
call options with respect to its portfolio securities that are traded on a
national securities exchange, and may enter into closing purchase transactions
with respect to such options if, at the time of the writing of such option, the
aggregate value of the securities subject to the options written by the Fund
involved does not exceed 25% of the value of its total assets; and provided that
the Income and Growth Fund and Theme Funds may purchase options and other rights
in accordance with their investment objectives and policies;
6. Invest in companies for the purpose of exercising management or
control;
7. Invest more than 5% of its total assets in securities issued by
companies which, together with any
-11-
<PAGE>
predecessor, have been in continuous operation for fewer than three years; and
8. Acquire any other investment company or investment company
security, except in connection with a merger, consolidation, reorganization, or
acquisition of assets or where otherwise permitted by the 1940 Act.
The following investment limitation is fundamental with respect to the
Equity and Income and Growth Funds. The Equity and Income and Growth Funds may
not:
9. Purchase or sell commodities futures contracts or invest in oil,
gas, or other mineral exploration or development programs; provided, however,
that this shall not prohibit either Fund from purchasing publicly traded
securities of companies engaging in whole or in part in such activities or the
Income and Growth Fund from investing in liquidating trust receipts,
certificates of beneficial ownership or other instruments in accordance with its
investment objectives and policies.
The following investment limitation is fundamental with respect to the
Theme Funds. Each Theme Fund may not:
10. Purchase or sell commodities or commodities futures contracts or
invest in oil, gas, or other mineral exploration or development programs;
provided, however, that i) this shall not prohibit any Theme Fund from
purchasing publicly traded securities of companies engaging in whole or in part
in such activities or from investing in liquidating trust receipts, certificates
of beneficial ownership or other instruments in accordance with its investment
objectives and policies, and ii) each Theme Fund may enter into futures
contracts and futures options.
* * *
For the purpose of Investment Limitation No. 2, the prohibition of
purchases of real estate includes acquisition of limited partnership interests
in partnerships formed with a view toward investing in real estate, but does not
prohibit purchases of shares in real estate investment trusts.
In addition to the above investment limitations, Master Fund currently
intends to limit the Funds' investments in warrants so that, valued at the lower
of cost or market value, they do not exceed 5% of the net assets of the Fund
involved. Included within that amount, but not to exceed 2% of the value of a
Fund's net assets, may be warrants which are not listed on the New York or
American Stock Exchanges. For the purpose of this limitation, warrants acquired
by a Fund in units or attached to
-12-
<PAGE>
securities will be deemed to be without value. The Funds also intend to refrain
from entering into arbitrage transactions.
Each of the Equity and Income and Growth Funds may not purchase or
sell commodities except as provided in Investment Limitation No. 9 above.
Pursuant to the requirements of state securities laws, each Fund
currently intends to limit its option transactions so that they do not exceed,
at the time when they are written, 25% of the net (rather than total) assets of
the particular Fund involved. See Investment Limitation No. 5 above.
If a percentage limitation is satisfied at the time of investment, a
later increase or decrease in such percentage resulting from a change in value
of a Fund's securities will not constitute a violation of such limitation.
In order to permit the sale of Shares in certain states, Master Fund
may make on behalf of the Funds other commitments more restrictive than the
investment policies and limitations described above and in the Prospectuses
Should Master Fund determine that any such commitment is no longer in the Funds'
best interests, it will revoke the commitment by terminating sales of Shares to
investors residing in the state involved.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
----------------------------------------------
Shares are continuously offered for sale by Edgewood Services, Inc.
(the "Distributor"), a wholly-owned subsidiary of Federated Investors, and the
Distributor has agreed to use appropriate efforts to solicit all purchase
orders. As described in the Prospectuses, Shares may be sold to customers
("Customers") of financial institutions ("Shareholder Organizations") .
Service Shares, Shares are also offered for sale directly to institutional
investors and to members of the general public. Different types of Customer
accounts at the Shareholder Organizations may be used to purchase Shares,
including eligible agency and trust accounts. In addition, Shareholder
Organizations may automatically "sweep" a Customer's account not less
frequently than weekly and invest amounts in excess of a minimum balance
agreed to by the Shareholder Organization and its Customer in Shares selected
by the Customer. Investors purchasing Shares may include officers, directors,
or employees of the particular Shareholder Organization.
Pursuant to Rule 12b-1 of the 1940 Act, Master Fund has adopted a
Distribution Plan (the "Distribution Plan") which permits the
-13-
<PAGE>
Distribution Shares of the Funds to bear certain expenses in connection with the
distribution of those Shares. As required by Rule 12b-1, the Funds' 12b-1 Plan
and related distribution agreement have been approved, and are subject to annual
approval by, a majority of Master Fund's Board of Directors, and by a majority
of the directors who are not interested persons of Master Fund and have no
direct or indirect interest in the operation of the Distribution Plan or any
agreement relating to the Distribution plan, by vote cast in person at a meeting
called for the purpose of voting on the Distribution Plan and related agreement.
Rule 12b-1 also requires that persons authorized to direct the disposition of
monies payable by a Fund (in the Funds' case, the Distributor) provide for the
directors' review of quarterly reports on the amounts expended and the purposes
for the expenditures.
Any change in the Distribution Plan that would materially increase the
distribution expenses of Distribution Shares requires approval by holders of
those Shares, but otherwise, the Distribution Plan may be amended by the
directors, including a majority of the disinterested directors who do not have
any direct or indirect financial interest in the Distribution Plan or any
related agreement. The Distribution Plan and related agreement may be terminated
as to a particular Fund by a vote of Master Fund's disinterested directors or
by vote of the holders of Distribution Shares of the Fund, on not more than
60 days written notice. The selection and nomination of disinterested directors
has been committed to the discretion of such disinterested directors as
required by Rule 12b-1.
The Distribution Plan provides that each Fund will reimburse the
Distributor for distribution expenses in an amount not to exceed the annual rate
of .75% of the average daily net asset value of outstanding Distribution Shares
of the Fund. Distribution expenses payable by the Distributor pursuant to the
Distribution Plan include direct and indirect costs and expenses incurred in
connection with advertising and marketing a Fund's Distribution Shares, and
direct and indirect costs and expenses of preparing, printing and distributing
its prospectuses to other than current shareholders and payments to financial
institutions that are not affiliated with the Distributor ("Distribution
Organizations").
The Distribution Plan continue in effect for successive one year
periods, provided that such continuance is specifically approved by the vote of
a majority of the directors who are not parties to the 12b-1 plan or interested
persons of any such party and who have no direct or indirect financial interest
in the Distribution Plan or any related agreement and the vote of a majority of
the entire Board of Directors.
-14-
<PAGE>
Any material amendment to Master Fund's arrangements with Distribution
Organizations must be approved by a majority of Master Fund's Board of Directors
(including a majority of the disinterested directors). So long as Master Fund's
arrangements with Distribution Organizations are in effect, the selection and
nomination of the members of Master Fund's Board of Directors who are not
"interested persons" (as defined in the 1940 Act) of Master Fund will be
committed to the discretion of such non-interested directors.
Shares of the Funds are offered for sale with a maximum sales charge
of 4.50%. An illustration of the computation of the offering price per share of
the Funds, using the value of each Fund's net assets and number of outstanding
securities at the close of business on March 31, 1995 and the value of the
initial capitalization of each Fund's Distribution Shares prior to the
commencement of operations, is as follows:
<TABLE>
<CAPTION>
Income
Equity & Growth
Fund Fund
-------- ---------
Service Shares Service Shares
<S> <C> <C> <C>
Net Assets.................. $137,416,899 $99,924,587
Outstanding Shares......... 6,420,813 8,455,564
Net Asset Value Per Share... $ 21.40 $ 11.82
Sales Charge (4.50% of the
offering price)........... $ 1.01 $ .56
Offering to Public.......... $ 22.41 $ 12.38
</TABLE>
<TABLE>
<CAPTION>
Long-Term Productivity Environmentally-
--------- ------------ ----------------
Supply Enhancers Related Products Aging of
------ --------- ---------------- --------
of Energy Fund and Services America
--------- ---- ------------ -------
Fund Fund Fund
---- ---- ----
Service Shares Service Shares Service Shares Service Shares
<S> <C> <C> <C> <C>
Net Assets.................. $18,265,270 $4,359,023 $22,173,584
$15,812,874
Outstanding Shares......... 2,250,747 701,832 2,826,981
1,996,785
Net Asset Value Per Share... $ $ 8.12 $ 6.21 $ 7.84
7.92
Sales Charge (4.50% of the
offering price)........... $ .37 $ .38 $ .29 $ .37
Offering to Public.......... $ $ 8.50 $ 6.50 $ 8.21
8.29
</TABLE>
-15-
<PAGE>
<TABLE>
<CAPTION>
Communication Business and
------------- ------------
and Industrial Global Early Life
--- ---------- ------ ----------
Entertainment Restructuring Competitors Cycle
------------- ------------- ----------- -----
Fund Fund Fund Fund
---- ---- ---- ----
Service Shares Service Shares Service Shares Service Shares
<S> <C> <C> <C> <C>
Net Assets.................. $30,182,757 $25,494,628 $47,782,354
$29,914,390
Outstanding Shares.......... 2,861,323 2,968,007 4,892,316
3,101,632
Net Asset Value Per Share... $ $ 10.55 $ 8.59 $ 9.77
9.64
Sales Charge (4.50% of the .46
offering price)............ .48 .50 .40
Offering to Public.......... $ $ 11.05 $ 8.99 $ 10.23
10.09
</TABLE>
<TABLE>
<CAPTION>
Income
------
____________ Equity & Growth
-------------------------------------
______________________ Fund Fund
------------- ----------------
Distribution Distribution
---------------------------------------
Shares Shares
-------------- ---------------
<S> <C> <C>
100 100
Net Assets.................. $---------- $----------
10 10
Outstanding Shares.......... ----------- ----------
Net Asset Value Per Share... $10.00 $10.00
Sales Charge (4.50% of the .47 .47
offering price)............ $---------- $----------
10.47 10.47
offering to public.......... $---------- $----------
</TABLE>
<TABLE>
<CAPTION>
Long-Term
----------
Supply Productivity Environmentally- Aging of
------ ------------ ---------------- --------
of Energy Enhancers Related Products America
--------- --------- ---------------- -------
Fund Fund and Services Fund
---- ---- ------------ ----
Distribution Distribution Fund Distribution
------------------------------------- ---- ---------------------------
Shares Shares Distribution shares Shares
------ ------ ------------------- ------
<C> <C> <C> <C> <C>
Net Assets.................. $ 100 $ 100 $ 100 $ 100
----------- ---------- ----------- ------------
10 10 10 10
Outstanding Shares.......... ----------- ---------- ----------- ------------
-- -- -- --
Net Asset Value Per Share... $ 10.00 $ 10.00 $ 10.00 $ 10.00
------------ ------------ ------------- -------------
-- -- -- --
</TABLE>
-16-
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Sales Charge (4.50% of the .47 .47 .47 .47
offering price)............ $--------- $---------- $--------- $---------
10.47 10.47 10.47 10.47
Offering to Public.......... $--------- $---------- $--------- $---------
</TABLE>
<TABLE>
<CAPTION>
Communication Business and
------------- ------------
and Industrial Early Life
--- ---------- ----------
Entertainment Restructuring Global Cycle
------------- ------------- ------ -----
Fund Fund Competitors Fund
---- ---- ----------- ----
Distribution Distribution Fund Distribution
---------------------------------------- ---- ----------------------
Shares Shares Distribution Shares Shares
------ ------ ------------------- ------
<S> <C> <C> <C> <C>
100 100 100 100
Net Assets.................. $---------- $---------- $---------- $----------
10 10 10 10
Outstanding Shares.......... ----------- ----------- ---------- ----------
Net Asset Value Per Share... $ 10.00 $ 10.00 $ 10.00 $ 10.00
----------- ----------- ----------- -----------
Sales Charge (4.50% of the .47 .47 .47 .47
$---------- $---------- $----------- $-----------
offering price)............
10.47 10.47 10.47 10.47
Offering to Public.......... $---------- $---------- $----------- $-----------
-- --
</TABLE>
As stated in the Prospectuses the sales load described above will not
be applicable to: (a) purchases of Shares by customers of the Investment
Adviser or its affiliates; (b) trust, agency or custodial accounts opened
through the trust department of a bank, trust company or thrift
institution, provided that appropriate notification of such status is given
at the time of investment; (c) companies, corporations and partnerships
(excluding full service broker/dealers and financial planners, registered
investment advisers and depository institutions not covered by the
exemptions in (d) and (e) below); (d) financial planners and registered
investment advisers not affiliated with or clearing purchases through full
service broker/dealers; (e) purchases of Shares by depository institutions
for their own account as principal; (f) exchange transactions (described
below under "Investor Programs --Exchange Privilege") where the Shares
being exchanged were acquired in connection with the distribution of assets
held in a trust, agency or custodial account maintained with the trust
department of a bank; (g) corporate/business retirement plans (such as
401(k), 403(b)(7), 457 and Keogh accounts) sponsored by the Distributor and
IRA accounts sponsored by the Investment
-17-
<PAGE>
Adviser; (h) company-sponsored employee pension or retirement plans making
direct investments in the Funds; (i) purchases of Shares by officers, trustees,
directors, employees, former employees and retirees of Master Fund, UST Master
Tax-Exempt Funds, Inc. ("Master Tax-Exempt Fund"), the Investment Adviser, or of
any direct or indirect affiliate of either of them; the Distributor (j)
purchases of Shares by all beneficial shareholders of Master Fund or Master Tax-
Exempt Fund as of May 22, 1989; (k) purchases of Shares by investment advisers
registered under the Investment Advisers Act of 1940 for their customers through
an omnibus account established with United States Trust Company of New York; (l)
purchases of Shares by directors, officers and employees of brokers and dealers
selling shares pursuant to a selling agreement with Master Fund and Master Tax-
Exempt Fund; (m) purchase of shares by investors who are members of affinity
groups serviced by US affinity Investments Limited Partnership; and (n)
customers of certain financial institutions who purchase shares through a
registered representative of UST Financial Services Corp. on the premises of
their financial institutions. In addition, no sales load is charged on the
reinvestment of dividends or distributions or in connection with certain share
exchange transactions. Investors who have previously redeemed shares in a
portfolio of Master Fund or Master Tax-Exempt Fund on which a sales load has
been paid also have a one-time privilege of purchasing shares of another
portfolio of either company at net asset value without a sales charge, provided
that such privilege will apply only to purchases made within 30 calendar days
from the date of redemption and only with respect to the amount of the
redemption.
Total sales charges paid by shareholders of the Equity and Income and
Growth Funds during the fiscal years ended March 31, 1995, 1994 AND 1993 were
$7,492 and $1,713, respectively, $10,877 AND $5,866, respectively and $17,258
and $5,665, respectively. Of these respective amounts, UST Distributors, Inc.,
the Funds' former distributor, retained $7,092, $9,249 and $12,392 with respect
to the Equity Fund and $1,703, $5,037 and $3,859 with respect to the Income and
Growth Fund for the fiscal years ended March 31, 1995, 1994 and 1993 . The
balance was paid to selling dealers. For the fiscal years ended March 31, 1995
and 1994 and during the period from December 31, 1992 (commencement of
operations) to March 31, 1993, total sales charges paid by shareholders of the
Long-Term Supply of Energy, Productivity Enhancers, Environmentally-Related
Products and Services, Aging of America, Communication and Entertainment,
Business and Industrial Restructuring, Global Competitors and Early Life Cycle
Funds were $84, $315 and $0, $143, $181 and $2, $0, $45 and $0, $357, $272
and $666, $438, $2,453 and $587, $779, $1,672 and $558, $353, $136 and $0 and
$1,107, $840 and $22, respectively. Of these respective amounts, UST
distributors, Inc., the funds' former distributor, retained $84.
-18-
<PAGE>
,$280 and $0 with respect to the Long-Term Supply of Energy Fund, $143,
$160 and $2 with respect to the Productivity Enhancers Fund, $0, $0 and $0 with
respect to the Environmentally-Related Products and Services-Fund, $37, $200 and
$600 with respect to the Aging of America Fund, $438, $2,175 and $48 with
respect to the Communication and Entertainment Fund, $779, $1,282 and $68 with
respect to the Business and Industrial Restructuring Fund, $353, $120 and $0
with respect to the Global Competitors Fund and $1,107, $744 and $22 with
respect to the Early Life Cycle Fund. The balance was paid to selling
dealers.
Master Fund may suspend the right of redemption or postpone the date
of payment for Shares for more than 7 days during any period when (a) trading on
the New York Stock Exchange (the "Exchange") is restricted by applicable rules
and regulations of the Securities and Exchange Commission; (b) the Exchange is
closed for other than customary weekend and holiday closings; (c) the Securities
and Exchange Commission has by order permitted such suspension; or (d) an
emergency exists as determined by the Securities and Exchange Commission.
In the event that Shares are redeemed in cash at their net asset
value, a shareholder may receive in payment for such Shares an amount that is
more or less than his original investment due to changes in the market prices of
that Fund's portfolio securities.
Under limited circumstances, Master Fund may accept securities as
payment for Shares. Securities acquired in this manner will be limited to
securities issued in transactions involving a bona fide reorganization or
---------
statutory merger, or will be limited to other securities (except for municipal
debt securities issued by state political subdivisions or their agencies or
instrumentalities) that: (a) meet the investment objective and policies of any
Fund acquiring such securities; (b) are acquired for investment and not for
resale; (c) are liquid securities that are not restricted as to transfer either
by law or liquidity of market; and (d) have a value that is readily
ascertainable (and not established only by evaluation procedures) as evidenced
by a listing on the American Stock Exchange, New York Stock Exchange or NASDAQ,
or as evidenced by their status as U.S. Government securities, bank certificates
of deposit, banker's acceptances, corporate and other debt securities that are
actively traded, money market securities and other similar securities with a
readily ascertainable value.
-19-
<PAGE>
INVESTOR PROGRAMS
-----------------
Systematic Withdrawal Plan
--------------------------
An investor who owns Shares with a value of $10,000 or more may begin
a Systematic Withdrawal Plan. The withdrawal can be on a monthly, quarterly,
semiannual or annual basis. There are four options for such systematic
withdrawals. The investor may request:
(1) A fixed-dollar withdrawal;
(2) A fixed-share withdrawal;
(3) A fixed-percentage withdrawal (based on the current value of the
account); or
(4) A declining-balance withdrawal.
Prior to participating in a Systematic Withdrawal Plan, the investor must
deposit any outstanding certificates for Shares with Mutual Funds Service
Company, the Funds' sub-transfer agent. Under this Plan, dividends and
distributions are automatically reinvested in additional Shares of a Fund.
Amounts paid to investors under this Plan should not be considered as income.
Withdrawal payments represent proceeds from the sale of Shares, and there will
be a reduction of the shareholder's equity in the Fund involved if the amount of
the withdrawal payments exceeds the dividends and distributions paid on the
Shares and the appreciation of the investor's investment in the Fund. This in
turn may result in a complete depletion of the shareholder's investment. An
investor may not participate in a program of systematic investing in a Fund
while at the same time participating in the Systematic Withdrawal Plan with
respect to an account in the same Fund. Customers of Shareholder Organizations
may obtain information on the availability of, and the procedures and fees
relating to, the Systematic Withdrawal Plan directly from their Shareholder
Organizations.
Exchange Privilege
------------------
Investors and Customers of Shareholder Organizations may exchange
Shares having a value of at least $500 for shares of the same series of any
other portfolio of Master Fund or Master Tax-Exempt Fund (the "Companies").
Shares may be exchanged by wire, telephone or mail and must be made to accounts
of identical registration. There is no exchange fee imposed by the Companies.
As of the date of this Statement of Additional Information, Distribution Shares
were available only in the equity and international portfolios of Master Fund.
The Companies may modify or terminate the exchange program at any time upon 60
days' written notice to shareholders, and may reject any exchange
-20-
<PAGE>
request. In order to prevent abuse of this privilege to the disadvantage of
other shareholders, the Companies reserve the right to limit the number of
exchange requests of investors to no more than six per year. Customers of
Shareholder Organizations may obtain information on the availability of, and the
procedures relating to, such programs directly from their Shareholder
Organizations.
For Federal income tax purposes, exchanges are treated as sales on
which the shareholder will realize a gain or loss, depending upon whether the
value of the Shares to be given up in exchange is more or less than the basis in
such Shares at the time of the exchange. Generally, a shareholder may include
sales loads incurred upon the purchase of Shares in his or her tax basis for
such Shares for the purpose of determining gain or loss on a redemption,
transfer or exchange of such Shares. However, if the shareholder effects an
exchange of Shares for shares of another portfolio of the Companies within 90
days of the purchase and is able to reduce the sales load applicable to the new
shares (by virtue of the Companies' exchange privilege), the amount equal to
such reduction may not be included in the tax basis of the shareholder's
exchanged Shares but may be included (subject to the limitation) in the tax
basis of the new shares.
Other Investor Programs
-----------------------
As described in the Prospectuses, Shares of the Funds may be
purchased in connection with the Automatic Investment Program, and certain
Retirement Programs. Customers of Shareholder Organizations may obtain
information on the availability of, and the fees and procedures relating to,
such programs directly from their Shareholder Organizations.
DESCRIPTION OF CAPITAL STOCK
----------------------------
Master Fund's Charter authorizes its Board of Directors to issue up to
thirty-five billion full and fractional shares of capital stock, and to
classify or reclassify any unissued shares of Master Fund into one or more
classes or series by setting or changing in any one or more respects their
respective prefer ences, conversion or other rights, voting powers,
restrictions, limitations as to dividends, qualifications, and terms and
conditions of redemption. The Prospectuses describe the classes of shares
into which Master Fund's authorized capital is currently classified.
Shares have no preemptive rights and only such conversion or exchange
rights as the Board of Directors may grant in its discretion. When issued for
payment as described in the Prospectuses, Shares will be fully paid and non-
assessable. In the event of a liquidation or dissolution of a Fund,
shareholders of that Fund are entitled to receive the assets available for
distribution belonging to that Fund and a proportionate distribution, based upon
the relative asset values of Master
-21-
<PAGE>
Fund's portfolios, of any general assets of Master Fund not belonging to any
particular portfolio of Master Fund which are available for distribution. In
the event of a liquidation or dissolution of Master Fund, its shareholders will
be entitled to the same distribution process.
Shareholders of Master Fund are entitled to one vote for each full
share held, and fractional votes for fractional shares held, and will vote in
the aggregate and not by class or series, except as otherwise required by the
1940 Act or other applicable law or when the matter to be voted upon affects
only the interests of the shareholders of a particular class or series.
Voting rights are not cumulative and, accordingly, the holders of more than
50% of the aggregate of Master Fund's shares may elect all of Master Fund's
directors, regardless of votes of other shareholders.
Rule 18f-2 under the 1940 Act provides that any matter required to be
submitted to the holders of the outstanding voting securities of an investment
company such as Master Fund shall not be deemed to have been effectively acted
upon unless approved by the holders of a majority of the outstanding shares of
each portfolio affected by the matter. A portfolio is affected by a matter
unless it is clear that the interests of each portfolio in the matter are
substantially identical or that the matter does not affect any interest of the
portfolio. Under the Rule, the approval of an investment advisory agreement or
any change in a fundamental investment policy would be effectively acted upon
with respect to a portfolio only if approved by a majority of the outstanding
shares of such portfolio. However, the Rule also provides that the ratification
of the appointment of independent public accountants, the approval of principal
underwriting contracts, and the election of directors may be effectively acted
upon by shareholders of Master Fund voting without regard to class.
Master Fund's Charter authorizes its Board of Directors, without
shareholder approval (unless otherwise required by applicable law), to (a) sell
and convey the assets of a Fund to another management investment company for
consideration which may include securities issued by the purchaser and, in
connection therewith, to cause all outstanding Shares of the Fund involved to be
redeemed at a price which is equal to their net asset value and which may be
paid in cash or by distribution of the securities or other consideration
received from the sale and conveyance; (b) sell and convert a Fund's assets into
money and, in connection therewith, to cause all outstanding Shares of the Fund
involved to be redeemed at their net asset value; or (c) combine the assets
belonging to a Fund with the assets belonging to another portfolio of Master
Fund, if the Board of Directors reasonably determines that such combination will
not have a
-22-
<PAGE>
material adverse effect on shareholders of any portfolio participating in such
combination, and, in connection therewith, to cause all outstanding Shares of
the Fund involved to be redeemed at their net asset value or converted into
shares of another class of Master Fund's capital stock at net asset value. The
exercise of such authority by the Board of Directors will be subject to the
provisions of the 1940 Act, and the Board of Directors will not take any action
described in this paragraph unless the proposed action has been disclosed in
writing to the particular Fund's shareholders at least 30 days prior thereto.
Notwithstanding any provision of Maryland law requiring a greater vote
of Master Fund's Common Stock (or of the Shares of a Fund voting separately as a
class) in connection with any corporate action, unless otherwise provided by law
(for example, by Rule 18f-2, discussed above) or by Master Fund's Charter,
Master Fund may take or authorize such action upon the favorable vote of the
holders of more than 50% of the outstanding Common Stock of Master Fund voting
without regard to class or series.
MANAGEMENT OF THE FUNDS
-----------------------
Directors and Officers
----------------------
The directors and executive officers of Master Fund, their addresses,
ages, principal occupations during the past five years, and other affiliations
are as follows:
<TABLE>
<CAPTION>
Position Principal Occupation
with During Past 5 Years and
Name and Address Master Fund Other Affiliations
---------------- ----------- ------------------------
<S> <C> <C>
Alfred C. Tannachion/1/ Chairman of the Retired.
1135 Hyde Park Court Board, President
Mahwah, NJ 07430 and Treasurer
Age 69
------
Donald L. Campbell Director Retired; Senior Vice
333 East 69th Street President, Royal Insurance
Apt. 10-H Company, Inc., until August,
New York, NY 10021 1989; Director, Royal Life
Age 69 Insurance Co. of N.Y.
------
</TABLE>
_______________________________
1. This director is considered to be an "interested person" of Master Fund as
defined in the 1940 Act.
-23-
<PAGE>
<TABLE>
<S> <C> <C>
Joseph H. Dugan Director Retired; President, CEO and
913 Franklin Lake Road Director, L.B. Foster
Franklin Lakes, NJ 07417 Company (tubular products),
Age 70 from September, 1987 until
------ May, 1990; Executive Vice
President and COO, L.B. Foster
Company, from September, 1986
until September, 1987; Senior
Vice President -- Finance,
Chief Financial Officer and
Director, Todd Shipyards
Corporation, prior to January 3,
1986.
Wolfe J. Frankl Director Director, Deutsche Bank
40 Gooseneck Lane Financial, Inc.; Director,
Charlottesville, VA 22903 The Harbus Corporation;
Age 74 Trustee, Mariner Funds Trust;
------ Managing Director -- North
America, Berlin Economic
Development Corp., prior to
1988.
Robert A. Robinson Director President Emeritus, The
Church Pension Fund Church Pension Fund and its
800 Second Avenue affiliated companies, since
New York, NY 10017 1968; Trustee, Mariner Funds
Age 69 Trust; Trustee, H.B. and F.H.
------ Bugher Foundation and Director
of its wholly owned subsid-
iaries -- Rosiclear Lead and
Flourspar Mining Co. and The
Pigmy Corporation; Director,
Morehouse Publishing Co.
W. Bruce McConnel, III Secretary Partner of the law firm
Philadelphia National of Drinker Biddle & Reath.
Bank Building
1345 Chestnut Street
Philadelphia, PA 19107
Age 52
------
Frank M. Deutchki Assistant Vice President, Mutual
Mutual Funds Service Co. Secretary Funds Service Company
73 Tremont Street since February, 1989; Senior
Boston, MA 02108-3913 Vice President - Risk Analysis
Age 41 and Avoidance, Putnam Investor
------ Services (mutual fund group),
from October, 1987 to January,
1989.
John M. Corcoran Assistant Assistant Vice President,
Mutual Funds Service Co. Treasurer Manager of Administration,
73 Tremont Street Mutual Funds Service Company,
Boston, MA 02108-3913 since October, 1993; Audit
Age 30 Manager, Ernst & Young, from August,
------ 1987 to September, 1993.
</TABLE>
-24-
<PAGE>
Each director of Master Fund receives an annual fee of $9,000 plus a
meeting fee of $1,500 for each meeting attended and is reimbursed for expenses
incurred in attending meetings. The Chairman of the Board is entitled to
receive an additional $5,000 per annum for services in such capacity. Drinker
Biddle & Reath, of which Mr. McConnel is a partner, receives legal fees as
counsel to Master Fund. The employees of Mutual Funds Service Company do not
receive any compensation from Master Fund for acting as officers of Master Fund.
No person who is currently an officer, director or employee of the Investment
Adviser serves as an officer, director or employee of Master Fund. The
directors and officers of Master Fund as a group own less than 1% of the
Shares of each Fund.
The following chart provides certain information about the fees
received by Master Fund's directors in the most recently completed fiscal
year.
<TABLE>
<CAPTION>
Pension or
Retirement Total
Benefits Compensation
Accrued as From Master Fund
Aggregate Part of and Fund
Name Of Compensation from Fund Complex* Paid
Person/Position Master Fund Expenses to Directors
<S> <C> <C> <C>
Alfred C. Tannachion $20,000 None $40,000
Chairman of the Board,
President and Treasurer
Donald L. Campbell $15,000 None $30,000
Director
Joseph H. Dugan $15,000 None $30,000
Director
Wolfe J. Frankl $15,000 None $30,000
Director
Robert A. Robinson
Director $15,000 None $30,000
</TABLE>
___________________________
* The "Fund Complex" consists of UST Master Funds, Inc., UST Master Tax-
Exempt Funds, Inc. and UST Master Variable Series, Inc. For the fiscal year
ended March 31, 1995, UST Master Variable Series, Inc. did not pay any
directors' fees.
Investment Advisory and Administration Agreements
-------------------------------------------------
United States Trust Company of New York serves as Investment Adviser
to the Funds. In the Investment Advisory Agreement, the Investment Adviser has
agreed to provide the
-25-
<PAGE>
services described in the Prospectuses. The Investment Adviser has also
agreed to pay all expenses incurred by it in connection with its activities
under the respective agreements other than the cost of securities, including
brokerage commissions, purchased for the Funds.
For the fiscal year ended March 31, 1993, Master Fund paid the
Investment Adviser $658,533 and $233,667 with respect to the Equity Fund and the
Income and Growth Fund, respectively. For the period from December 31, 1992
(commencement of operations) to March 31, 1993, the Investment Adviser received
no advisory fees with respect to the Long-Term Supply of Energy, Productivity
Enhancers, Environmentally-Related Products and Services, Aging of America,
Communication and Entertainment, Business and Industrial Restructuring, Global
Competitors and Early Life Cycle Funds. For the same period, the Investment
Adviser waived fees totalling $900, $2,899, $2,681, $2,353, $4,787, $1,266,
$1,731 and $4,895 with respect to the Long-Term Supply of Energy, Productivity
Enhancers, Environmentally-Related Products and Services, Aging of America,
Communication and Entertainment, Business and Industrial Restructuring, Global
Competitors and Early Life Cycle Funds, respectively.
For the fiscal year ended March 31, 1994, Master Fund paid the
Investment Adviser $870,735, $555,404, $599, $12,682, $0, $2,216, $59,196,
$4,566, $5,162 and $53,036 with respect to the Equity, Income and Growth, Long-
Term Supply of Energy, Productivity Enhancers, Environmentally-Related Products
and Services, Aging of America, Communication and Entertainment, Business and
Industrial Restructuring, Global Competitors and Early Life Cycle Funds,
respectively. For the same period, the Investment Adviser waived fees totalling
$1,516, $1,179, $22,139, $30,754, $18,247, $32,626, $22,594, $29,394, $26,625
and $23,696 with respect to the Equity, Income and Growth, Long-Term Supply of
Energy, Productivity Enhancers, Environmentally-Related Products and Services,
Aging of America, Communication and Entertainment, Business and Industrial
Restructuring, Global Competitors and Early Life Cycle Funds, respectively.
For the fiscal year ended March 31, 1995, the particular Company paid
the Investment Advisor advisory fees of $880,638, $726,295, $48,882, $79,570,
$0, $68,122, $136,328, $120,783, $79,924 and $194,501 with respect to the
Equity, Income and Growth, Long-Term Supply of Energy, Productivity Enhancers,
Environmentally-Related Products and Services, Aging of America, Communication
and Entertainment, Business and Industrial Restructuring, Global Competitors and
Early Life Cycle Fund, respectively. For the same period, the Investment
Advisor waived fees totalling $26,987, $24,620, $20,193, $22,983, $24,278,
$26,503, $17,130, $18,380, $15,637 and $26,625 with respect to the Equity,
Income and Growth, Long-Term Supply of Energy, Productivity Enhancers,
Environmentally-Related Products and Services, Aging of America, Communication
and Entertainment, Business and Industrial Restructuring, Global Competitors
and Early Life Cycle Funds, respectively.
The Investment Advisory Agreement provides that the Investment Adviser
shall not be liable for any error of judgment or mistake of law or for any loss
suffered by the Funds in
-26-
<PAGE>
connection with the performance of such agreements, except a loss resulting from
a breach of fiduciary duty with respect to the receipt of compensation for
services or a loss resulting from willful misfeasance, bad faith or gross
negligence on the part of the Investment Adviser in the performance of its
duties or from reckless disregard by it of its duties and obligations
thereunder. In addition, the Investment Adviser has undertaken in the
Investment Advisory Agreement to maintain its policy and practice of conducting
its Asset Management Group independently of its Banking Group.
Mutual Funds Service Company ("MFSC") and Concord Holding Corporation
(the "Administrators") jointly served as the Funds' administrators until July
31, 1995. Under the Administration Agreement, the Administrators have agreed to
maintain office facilities for the Funds, furnish the Funds with statistical and
research data, clerical, accounting and bookkeeping services, and certain other
services required by the Funds, and to compute the net asset value, net income
and realized capital gains or losses, if any, of the respective Funds. The
Administrators prepare semiannual reports to the Securities and Exchange
Commission, prepare Federal and state tax returns, prepare filings with state
securities commissions, arrange for and bear the cost of processing Share
purchase and redemption orders, maintain the Funds' financial accounts and
records, and generally assist in the Funds' operations.
As of August 1, 1995, administrative services will be provided to the
Funds by MFSC and Federated Investors, Inc. under an administration agreement
having substantially the same terms as the Administration Agreement currently in
effect.
For the fiscal year ended March 31, 1993, Master Fund paid the
Administrators $136,795 and $48,727 in the aggregate with respect to the Equity
and Income and Growth Funds, respectively. For the period from December 31,
1992 (commencement of operations) to March 31, 1993, the Administrators received
fees, before expense reimbursements, with respect to the Long-Term Supply of
Energy, Productivity Enhancers, Environmentally-Related Products and Services,
Aging of America, Communication and Entertainment, Business and Industrial
Restructuring, Global Competitors and Early Life Cycle Funds of $4,500, $4,500,
$4,500, $4,500, $4,500, $4,500, $4,500, and $4,500, respectively. For the same
period, the Administrators reimbursed expenses totalling $8,219, $12,971,
$6,053, $9,172, $5,101, $9,035, $7,034 and $9,326 with respect to the Long-Term
Supply of Energy, Productivity Enhancers, Environmentally - Related Products and
Services, Aging of America, Communication and Entertainment, Business and
Industrial Restructuring, Global Competitors and Early Life Cycle Funds,
respectively.
-27-
<PAGE>
For the fiscal year ended March 31, 1994, Master Fund paid the
Administrators $179,398, $114,452, $5,826, $17,527, $4,739, $7,444, $22,881,
$10,016, $10,462 and $21,420 in the aggregate with respect to the Equity, Income
and Growth, Long-Term Supply of Energy, Productivity Enhancers, Environmentally-
Related Products and Services, Aging of America, Communication and
Entertainment, Business and Industrial Restructuring, Global Competitors and
Early Life Cycle Funds, respectively. For the same period, the Administrators
waived fees totalling $17,424, $5,723, $18,511, $15,806, $2,360, $13,234,
$12,788 and $1,861 with respect to the Long-Term Supply of Energy, Productivity
Enhancers, Environmentally-Related Products and Services, Aging of America,
Communication and Entertainment, Business and Industrial Restructuring, Global
Competitors and Early Life Cycle Funds, respectively.
For the fiscal year ended March 31, 1995, Master Fund paid $186,366,
$154,582, $19,660, $26,357, $5,451, $24,003, $39,403, $35,765, $24,816 and
$56,809 in the aggregate with respect to the Equity, Income and Growth, Long-
Term Supply of Energy, Productivity Enhancers, Environmentally-Related Products
and Services, Aging of America, Communication and Entertainment, Business and
Industrial Restructuring, Global Competitors and Early Life Cycle Funds,
respectively. For the same period, the Administrator waived fees totalling
$22,090, $15,393, $36,299, $17,747, $2,347, $5,985 and $16,934 with respect to
the Long-Term Supply of Energy, Productivity Enhancers, Environmentally-Related
Products and Services, Aging of America, Communication and Entertainment,
Business and Industrial Restructuring and Global Competitors Funds,
respectively.
Service Organizations
---------------------
As stated in the Prospectuses, Master Fund will enter into
agreements with Service Organizations. Such shareholder servicing agreements
will require the Service Organizations to provide shareholder administrative
services to their Customers who beneficially own Shares in consideration for a
Fund's payment (on an annualized basis) of up to .40% of the average daily net
assets of the Fund's Shares beneficially owned by Customers of the Service
Organization. The expenses under these agreements will be borne by the
particular series of a Fund that were provided services. Such services may
including (a) assisting Customers in designating and changing dividend options,
account designations and addresses; (b) providing necessary personnel and
facilities to establish and maintain certain shareholder accounts and records,
as may reasonably be requested from time to time by Master Fund; (c) assisting
in processing purchases, exchange and redemption transactions; (d) arranging for
the wiring of funds; (e) transmitting and receiving funds in connection with
Customer
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<PAGE>
orders to purchase, exchange or redeem Shares; (f) verifying and guaranteeing
Customer signatures in connection with redemption orders, transfers among and
changes in Customer-designated accounts; (g) providing periodic statements
showing a Customer's account balances and, to the extent practicable,
integrating such information with information concerning other client
transactions otherwise effected with or through the Service Organization; (h)
furnishing on behalf of Master Fund's distributor (either separately or on an
integrated basis with other reports sent to a Customer by the Service
Organization) periodic statements and confirmations of all purchases, exchanges
and redemptions of Shares in a Customer's account required by applicable federal
or state law; (i) transmitting proxy statements, annual reports, updating
prospectuses and other communications from Master Fund to Customers; (j)
receiving, tabulating and transmitting to Master Fund proxies executed by
Customers with respect to annual and special meetings of shareholders of Master
Fund; (k) providing reports (at least monthly, but more frequently if so
requested by Master Fund's distributor) containing state-by-state listings of
the principal residences of the beneficial owners of the Shares; and (l)
providing or arranging for the provision of such other related services as
Master Fund or a Customer may reasonably request.
Master Fund's agreements with Service Organizations are governed by an
Administrative Services Plan (the "Plan") adopted by Master Fund. Pursuant to
the Plan, Master Fund's Board of Directors will review, at least quarterly, a
written report of the amounts expended under Master Fund's agreements with
Service Organizations and the purposes for which the expenditures were made. In
addition, the arrangements with Service Organizations will be approved annually
by a majority of Master Fund's directors, including a majority of the directors
who are not "interested persons" of Master Fund as defined in the 1940 Act and
have no direct or indirect financial interest in such arrangements (the
"Disinterested Directors").
Any material amendment to Master Fund's arrangements with Service
Organizations must be approved by a majority of Master Fund's Board of Directors
(including a majority of the Disinterested Directors). So long as Master Fund's
arrangements with Service Organizations are in effect, the selection and
nomination of the members of Master Fund's Board of Directors who are not
"interested persons" (as defined in the 1940 Act) of Master Fund will be
committed to the discretion of such non-interested Directors.
For the fiscal years ended March 31, 1995 and 1994, payments to
Service Organizations totalled $26,987 and $1,516, $24,620 and $1,179 and $3,576
and $124,
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<PAGE>
$4,525 and $239, $1,660 and $83, $4,051 and $180, $7,168 and $382, $5,189 and
$196, $3,243 and $117 and $17,091 and $779 with respect to the Equity, Income
and Growth, Long-Term Supply of Energy, Productivity Enhancers, Environmentally-
Related Products and Services, Aging of America, Communication and
Entertainment, Business and Industrial Restructuring, Global Competitors and
Early Life Cycle Funds, respectively. Of these amounts $18,606 and $1,516,
$22,697 and $1,179, $3,525 and $124, $4,446 and $239, $1,626 and $83, $3,902 and
$180, $6,707 and $382, $4,851 and $196, $3,163 and $117 and $16,428 and $779
were paid to affiliates of U.S. Trust. With respect to the Equity, Income and
Growth, Long-Term Supply of Energy, Productivity Enhancers, Environmentally-
Related Products and Services, Aging of America, Communication and
Entertainment, Business and Industrial Restructuring, Global Competitors and
Early Life Cycle Funds, respectively.
Expenses
--------
Except as otherwise noted, the Investment Adviser and the
Administrators bear all expenses in connection with the performance of their
services. The Funds bear the expenses incurred in their operations. Expenses
of the Funds include taxes; interest; fees (including fees paid to Master Fund's
Directors and officers who are not affiliated with the Distributor or the
Administrators); Securities and Exchange Commission fees; state securities
qualifications fees; costs of preparing and printing prospectuses for regulatory
purposes and for distribution to shareholders; expenses related to the 12b-1
Plan; advisory, administration and administrative servicing fees; charges of the
custodian, transfer agent, and dividend disbursing agent; certain insurance
premiums; outside auditing and legal expenses; costs of shareholders reports and
shareholder meetings; and any extraordinary expenses. The Funds also pay for
brokerage fees and commissions in connection with the purchase of portfolio
securities.
If the expenses borne by a Fund in any fiscal year exceed expense
limitations imposed by applicable state securities regulations, the Investment
Adviser and the Administrators will reimburse such Fund for a portion of any
such excess to the extent required by such regulations in proportion to the fees
received by them in such year up to the amount of the fees payable to them,
provided, however, to the extent required by such state regulations, the
Investment Adviser and the Administrators have agreed to effect such
reimbursement regardless of the fees payable to them. The amounts of the above
reimbursements, if any, will be estimated, reconciled and paid on a monthly
basis. To Master Fund's knowledge, of the applicable expense limitations in
effect on the date of this Statement of Additional Information, none is more
restrictive than the following: 2 1/2% of the first $30 million of average
annual net assets, 2% of the next $70 million of average annual net assets and 1
1/2% of average annual net assets in excess of $100 million.
Custodian and Transfer Agent
----------------------------
United States Trust Company of New York also serves as custodian of
the Fund's assets. Under the custodian agreement, U.S. Trust has agreed to (i)
maintain a separate account or accounts in the name of the Fund; (ii) make
receipts and disbursements of money on behalf of the Fund; (iii) collect and
receive all income and other payments and distributions on account of the Fund's
portfolio securities; (iv) respond to correspondence from securities brokers and
others relating to its duties; (v) maintain certain financial accounts and
records; and (vi) make periodic reports to Master Tax-Exempt Fund's Board of
Directors concerning the Fund's operations. U.S. Trust is entitled to monthly
fees for furnishing custodial services according to the following fee schedule:
on the face value of debt securities and the market value of equity securities,
a fee at the annual rate of .05%; on issues held, $50.00 for each physical issue
held, $25.00 for each book-entry issue held and 1/4 of 1% of market value for
each foreign issue held; on transactions, $25.00 for each physical transaction,
$15.00 for each book-entry transaction and $50.00 for each foreign security
transaction. In addition, U.S. Trust is entitled to reimbursement for its
out-of-pocket expenses in connection with the above services.
U.S. Trust also serves as the Fund's transfer agent and dividend
disbursing agent. In such capacity, U.S. Trust has agreed to (i) issue and
redeem Shares; (ii) address and mail all communications by the Fund to its
shareholders, including reports to shareholders, dividend and distribution
notices, and proxy materials for its meetings of shareholders; (iii) respond to
correspondence by shareholders and others relating to its duties; (iv) maintain
shareholder accounts; and (v) make periodic reports to Master Tax-Exempt Fund
concerning the Fund's operations. For its transfer agency, dividend disbursing,
and subaccounting services, U.S. Trust is entitled to receive $15.00 per annum
per account and subaccount. In addition, U.S. Trust is entitled to be
reimbursed for its out-of-pocket expenses for the cost of forms, postage,
processing purchase and redemption orders, handling of proxies, and other
similar expenses in connection with the above services.
U.S. Trust may, at its own expense, open and maintain custody accounts
with respect to the Fund with other banks or trust companies, and may delegate
its transfer agency obligations to another transfer agent registered or
qualified under applicable law, provided that U.S. Trust shall remain liable for
the performance of all of its custodial and transfer agency duties under the
Custodian and Transfer Agency Agreement, notwithstanding any delegation.
Pursuant to this provision in the agreement, U.S. Trust has entered into a
sub-transfer agency arrangement with MFSC, an affiliate of U.S. Trust, with
respect to accounts of shareholders who are not Customers of U.S. Trust. For
the services provided by MFSC, U.S. Trust has agreed to pay MFSC $15.00 per
annum per account or subaccount plus out-of-pocket expenses. MFSC receives no
fee directly from Master Tax-Exempt Fund for any of its sub-transfer agency
services.
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<PAGE>
PORTFOLIO TRANSACTIONS
----------------------
Subject to the general control of Master Fund's Board of Directors,
the Investment Adviser is responsible for, makes decisions with respect to, and
places orders for all purchases and sales of all portfolio securities of each of
the Funds.
The Funds may engage in short-term trading to achieve their investment
objectives. Portfolio turnover may vary greatly from year to year as well as
within a particular year. The Funds' portfolio turnover rate may also be
affected by cash requirements for redemptions of Shares and by regulatory
provisions which enable the Funds to receive certain favorable tax treatment.
Portfolio turnover will not be a limiting factor in making portfolio decisions.
See "Financial Highlights" in the Funds' Prospectuses for the Funds' portfolio
turnover rates.
Transactions on U.S. stock exchanges involve the payment of negotiated
brokerage commissions. On exchanges on which commissions are negotiated, the
cost of transactions may vary among different brokers. For the fiscal years
ended March 31, 1993, March 31, 1994 and March 31, 1995, the Equity Fund paid
brokerage commissions aggregating $94,569, $61,608, and $123,112, respectively,
and the Income and Growth Fund paid brokerage commissions aggregating $57,207,
$140,168 and $89,218 respectively.
For the period from December 31, 1992 (commencement of operations) to
March 31, 1993 and for the fiscal years ended March 31, 1994 and March 31, 1995,
the Long-Term Supply of Energy, Productivity Enhancers, Environmentally-Related
Products and Services, Aging of America, Communication and Entertainment,
Business and Industrial Restructuring, Global Competitors and Early Life Cycle
Funds paid brokerage commissions aggregating $3,493 , $15,871 and $36,759 ,
$6,074 , $40,563 and $141,290 $7,605 , $13,602 and $16,669 , $4,379 , 20,905 and
$28,296 , $11,086, $40,593 and $50,724 , $5,202 , $46,444 and $121,755 ,
$3,604 , $17,428 and $41,638 , and $7,077 , $40,397 and $13,534 ,
respectively.
Transactions in domestic over-the-counter markets are generally
principal transactions with dealers, and the costs of such transactions involve
dealer spreads rather than brokerage commissions. With respect to over-the-
counter transactions, the Funds, where possible, will deal directly with the
dealers who make a market in the securities involved, except in those
circumstances where better prices and execution are available elsewhere.
-31-
<PAGE>
The Investment Advisory Agreement between Master Fund and the
Investment Adviser provides that, in executing portfolio transactions and
selecting brokers or dealers, the Investment Adviser will seek to obtain the
best net price and the most favorable execution. The Investment Adviser shall
consider factors it deems 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 whether such broker or dealer is selling
shares of Master Fund, and the reasonableness of the commission, if any, for the
specific transaction and on a continuing basis.
In addition, the Investment Advisory Agreement authorizes the
Investment Adviser, to the extent permitted by law and subject to the review of
Master Fund's Board of Directors from time to time with respect to the extent
and continuation of the policy, to cause the Funds to pay a broker which
furnishes brokerage and research services a higher commission than that which
might be charged by another broker for effecting the same transaction, provided
that the Investment Adviser determines in good faith that such commission is
reasonable in relation to the value of the brokerage and research services
provided by such broker, viewed in terms of either that particular transaction
or the overall responsibilities of the Investment Adviser to the accounts as to
which it exercises investment discretion. Such brokerage and research services
might consist of reports and statistics on specific companies or industries,
general summaries of groups of stocks and their comparative earnings, or broad
overviews of the stock market and the economy.
Supplementary research information so received is in addition to and
not in lieu of services required to be performed by the Investment Adviser and
does not reduce the investment advisory fees payable by the Funds. Such
information may be useful to the Investment Adviser in serving the Funds and
other clients and, conversely, supplemental information obtained by the
placement of business of other clients may be useful to the Investment Adviser
in carrying out its obligations to the Funds.
Portfolio securities will not be purchased from or sold to the
Investment Adviser, Distributor, or any affiliated person of either of them (as
such term is defined in the 1940 Act) acting as principal, except to the extent
permitted by the Securities and Exchange Commission.
Investment decisions for the Funds are made independently from those
for other investment companies, common trust funds and other types of funds
managed by the Investment Adviser. Such other investment companies and funds
may also invest in the same securities as the Funds. When a purchase or sale of
the same security is made at substantially the same time
-32-
<PAGE>
on behalf of a Fund and another investment company or common trust fund, the
transaction will be averaged as to price, and available investments allocated as
to amount, in a manner which the Investment Adviser believes to be equitable to
the Fund and such other investment company or common trust fund. In some
instances, this investment procedure may adversely affect the price paid or
received by the Funds or the size of the position obtained by the Funds. To the
extent permitted by law, the Investment Adviser may aggregate the securities to
be sold or purchased for the Funds with those to be sold or purchased for other
investment companies or common trust funds in order to obtain best execution.
Master Fund is required to identify any securities of its regular
brokers or dealers (as defined in Rule 10b-1 under the 1940 Act) or their
parents held by Master Fund as of the close of its most recent fiscal year. As
of March 31, 1995, the following portfolios of Master Fund held the following
securities: (a) the Money Fund held the following securities: repurchase
agreement with Nomura Securities, Inc. in the principal amount of $19,685,063,
repurchase agreement with Fuji Securities, Inc. in the principal amount of
$20,000,000, commercial paper of Merrill Lynch & Co., Inc. in the principal
amount of $35,000,000 and commercial paper of UBS Finance in the principal
amount of $30,000,000; (b) the Government Money Fund held the following
securities: repurchase agreement with Nomura Securities, Inc. in the principal
amount of $20,216,462 and repurchase agreement with Fuji Securities, Inc. in the
principal amount of $20,000,000; (c) the International Fund held the following
security: 27,000 shares of Nomura Securities Co., Ltd.; and (d) the Pacific/Asia
Fund held the following security: 26,000 shares of Nomura Securities Co., Ltd.
Nomura Securities International, Inc., Fuji Bank & Trust, Merrill Lynch, Pierce,
Fenner & Smith, Inc. and UBS Securities are considered to be regular brokers and
dealers of Master Fund.
INDEPENDENT AUDITORS
--------------------
Ernst & Young, LLP, independent auditors, 200 Clarendon Street,
Boston, MA 02116, serve as auditors of Master Fund. The Funds' Financial
Highlights included in the Prospectuses and the financial statements for the
period ended March 31, 1995 are incorporated by reference in this Statement
of Additional Information have been audited by Ernst & Young LLP for the periods
included in their report thereon which appears thereon.
COUNSEL
-------
Drinker Biddle & Reath (of which Mr. McConnel, Secretary of Master
Fund, is a partner), Philadelphia National Bank Building, 1345 Chestnut
Streets, Philadelphia, Pennsylvania 19107, is counsel to Master Fund and will
pass upon the legality of the Shares offered by the Prospectuses.
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<PAGE>
ADDITIONAL INFORMATION CONCERNING TAXES
---------------------------------------
The following supplements the tax information contained in the
Prospectuses.
Each Fund is treated as a separate corporate entity under the Internal
Revenue Code of 1986, as amended (the "Code"), and intends to qualify as a
regulated investment company. If, for any reason, a Fund does not qualify for a
taxable year for the special Federal tax treatment afforded regulated investment
companies, such Fund would be subject to Federal tax on all of its taxable
income at regular corporate rates, without any deduction for distributions to
shareholders. In such event, dividend distributions (whether or not derived
from interest on Municipal Securities) would be taxable as ordinary income to
shareholders to the extent of the Fund's current and accumulated earnings and
profits and would be eligible for the dividends received deduction in the case
of corporate shareholders.
A Fund will designate any distribution of the excess of net long-term
capital gain over net short-term capital loss as a capital gain dividend in a
written notice mailed to shareholders within 60 days after the close of the
Fund's taxable year. Upon the sale or exchange of Shares, if the shareholder
has not held such Shares for more than six months, any loss on the sale or
exchange of those Shares will be treated as long-term capital loss to the extent
of the capital gain dividends received with respect to the Shares.
A 4% non-deductible excise tax is imposed on regulated investment
companies that fail to currently distribute an amount equal to specified
percentages of their ordinary taxable income and capital gain net income (excess
of capital gains over capital losses). The Funds intend to make sufficient
distributions or deemed distributions of their ordinary taxable income and any
capital gain net income prior to the end of each calendar year to avoid
liability for this excise tax.
A Fund will not be treated as a regulated investment company under the
Code if 30% or more of the Fund's gross income for a taxable year is derived
from gains realized on the sale or other disposition of the following
investments held for less than three months (the "30% test"): (1) stock and
securities (as defined in section 2(a)(36) of the 1940 Act); (2) options,
futures and forward contracts other than those on foreign currencies; and (3)
foreign currencies (and options, futures and forward contracts on foreign
currencies) that are not directly related to the Fund's principal business of
investing in stock and securities (and options and futures with respect to
stocks and securities). Interest (including original issue discount and accrued
market discount) received by a Fund upon maturity or
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<PAGE>
disposition of a security held for less than three months will not be treated as
gross income derived from the sale or other disposition of such security within
the meaning of this requirement. However, any other income which is
attributable to realized market appreciation will be treated as gross income
from the sale or other disposition of securities for this purpose. With respect
to covered call options, if the call is exercised by the holder, the premium and
the price received on exercise constitute the proceeds of sale, and the
difference between the proceeds and the cost of the securities subject to the
call is capital gain or loss. Premiums from expired call options written by a
Fund and net gains from closing purchase transactions are treated as short-term
capital gains for Federal income tax purposes, and losses on closing purchase
transactions are short-term capital losses. With respect to forward contracts,
futures contracts, options on futures contracts, and other financial instruments
subject to the "marking-to-market" rules, the Internal Revenue Service has ruled
in private letter rulings that a gain realized from such a contract, option or
financial instrument will be treated as being derived from a security held for
three months or more (regardless of the actual period for which the contract,
option or instrument is held) if the gain arises as a result of a constructive
sale under the marking-to-market rules, and will be treated as being derived
from a security held for less than three months only if the contract, option or
instrument is terminated (or transferred) during the taxable year (other than by
reason of marking-to-market) and less than three months has elapsed between the
date the contract, option or instrument was acquired and the termination date.
Increases and decreases in the value of the forward contracts, futures
contracts, options on futures contracts and other investments that qualify as
part of a "designated hedge," as defined in Section 851(g) of the Code, may be
netted for purposes of determining whether the 30% test is met.
Each Fund will be required in certain cases to withhold and remit to
the U.S. Treasury 31% of taxable dividends or gross proceeds realized upon sale
paid to shareholders who have failed to provide a correct tax identification
number in the manner required, who are subject to withholding by the Internal
Revenue Service for failure properly to include on their return payments of
taxable interest or dividends, or who have failed to certify to the Fund when
required to do so either that they are not subject to backup withholding or that
they are "exempt recipients."
The foregoing discussion is based on Federal tax laws and regulations
which are in effect on the date of this Statement of Additional Information;
such laws and regulations may be changed by legislative or administrative
action. Shareholders are
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<PAGE>
advised to consult their tax advisers concerning their specific situations and
the application of state and local taxes.
PERFORMANCE INFORMATION
-----------------------
The Funds may advertise the "average annual total return" for Service
Shares and Distribution Shares. Such return is computed by determining the
average annual compounded rate of return during specified periods that equates
the initial amount invested to the ending redeemable value of such investment
according to the following formula:
ERV /1/n/
T = [(-----) - 1]
P
Where: T = average annual total return.
ERV = ending redeemable value of a hypothetical $1,000
payment made at the beginning of the 1, 5 or 10 year
(or other) periods at the end of the applicable period
(or a fractional portion thereof).
P = hypothetical initial payment of $1,000.
n = period covered by the computation, expressed in years.
Each Fund that advertises an "aggregate total return" for its Service
Shares and Distribution Shares computes such return by determining the
aggregate compounded rates of return during specified periods that likewise
equate the initial amount invested to the ending redeemable value of such
investment. The formula for calculating aggregate total return is as
follows:
ERV
Aggregate Total Return = [(-----)] - 1
P
The above calculations are made assuming that (1) all dividends and
capital gain distributions are reinvested on the reinvestment dates at the price
per Share existing on the reinvestment date (reflecting any sales load charged
upon such reinvestment), (2) all recurring fees charged to all shareholder
accounts are included, and (3) for any account fees that vary with the size of
the account, a mean (or median) account size in a Fund during the periods is
reflected. The ending redeemable value (variable "ERV" in the formula) is
determined by assuming
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<PAGE>
complete redemption of the hypothetical investment after deduction of all
nonrecurring charges at the end of the measuring period. In addition, the
Funds' average annual total return and aggregate total return quotations will
reflect the deduction of the maximum sales load charged in connection with the
purchase of Shares.
Based on the foregoing calculations, the average annual total returns
for the Service Shares of the Equity, Income and Growth, Long-Term Supply of
Energy, Productivity Enhancers, Environmentally-Related Products and Services,
Aging of America, Communication and Entertainment, Business and Industrial
Restructuring, Global Competitors and Early Life Cycle Funds for the one year
period ended March 31, 1995 were 9.51%, 1.01%, (0.38)%, (0.23)%, (4.69)%, 7.72%
7.82%, 6.51%, 7.69% and 9.95%, respectively. The average annual total returns
for the Service Shares of the Equity Fund and the Income and Growth Fund for the
five year period ended March 31, 1995 were 11.30%, and 9.27%, respectively. The
average annual total returns for the Service Shares of the Equity Fund and the
Income and Growth Fund for the periods from April 25, 1985 and January 6, 1987
(the commencement of operations of such respective Funds) to March 31, 1995 were
14.10% and 9.25% respectively. The average annual total returns for the Service
Shares of the Long-Term Supply of Energy, Productivity Enhancers,
Environmentally-Related Products and Services, Aging of America, Communication
and Entertainment, Business and Industrial Restructuring, Global Competitors and
Early Life Cycle Funds for the period from December 31, 1992 (commencement of
operations) to March 31, 1995 were 4.53%, 5.40%, (6.99)%, 3.49%, 16.40%, 19.12%,
8.04% and 15.21% respectively. No Distribution Shares of the Funds had been
issued as of March 31, 1995.
The Funds may also from time to time include in advertisements, sales
literature and communications to shareholders a total return figure that is not
calculated according to the formula set forth above in order to compare more
accurately a Fund's performance with other measures of investment return. For
example, in comparing a Fund's total return with data published by Lipper
Analytical Services, Inc., CDA Investment Technologies, Inc. or Weisenberger
Investment Company Service, or with the performance of an index, a Fund may
calculate its aggregate total return for the period of time specified in the
advertisement or communication by assuming the investment of $10,000 in Shares
and assuming the reinvestment of each dividend or other distribution at net
asset value on the reinvestment date. Percentage increases are determined by
subtracting the initial value of the investment from the ending value and by
dividing the remainder by the beginning value. A Fund does not, for these
purposes, deduct from the initial value invested any amount representing sales
charges. A Fund will, however, disclose the maximum sales charge and will also
disclose
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<PAGE>
that the performance data does not reflect sales charges and that inclusion of
sales charges would reduce the performance quoted.
The total return of Shares of a Fund may be compared to those of
other mutual funds with similar investment objectives and to other relevant
indices or to ratings prepared by independent services or other financial or
industry publications that monitor the performance of mutual funds. For example,
the total return of a Fund may be compared to data prepared by Lipper Analytical
Services, Inc., CDA Investment Technologies, Inc. and Weisenberger Investment
Company Service. Total return and yield data as reported in national financial
publications such as Money Magazine, Forbes, Barron's, The Wall Street Journal
and The New York Times, or in publications of a local or regional nature, may
also be used in comparing the performance of a Fund. Advertisements, sales
literature or reports to shareholders may from time to time also include a
discussion and analysis of each Fund's performance, including without
limitation, those factors, strategies and techniques that together with market
conditions and events, materially affected each Fund's performance.
The Funds may also from time to time include discussions or
illustrations of the effects of compounding in advertisements. "Compounding"
refers to the fact that, if dividends or other distributions on a Fund
investment are reinvested by being paid in additional Fund shares, any future
income or capital appreciation of a Fund would increase the value, not only of
the original Fund investment, but also of the additional Fund Shares received
through reinvestment. As a result, the value of the Fund investment would
increase more quickly than if dividends or other distributions had been paid in
cash. The Funds may also include discussions or illustrations of the potential
investment goals of a prospective investor, investment management techniques,
policies or investment suitability of a Fund, economic conditions, the effects
of inflation and historical performance of various asset classes, including but
not limited to, stocks, bonds and Treasury bills. From time to time
advertisements, sales literature or communications to shareholders may summarize
the substance of information contained in shareholder reports (included the
investment composition of a Fund), as well as the views of the Investment
Adviser as to current market, economy, trade and interest rate trends,
legislative, regulatory and monetary developments, investment strategies and
related matters believes to be of relevance to a Fund. The Funds may also
include in advertisements charts, graphs or drawings which illustrate the
potential risks and rewards of investment in various investment vehicles,
including but not limited to, stocks, bonds, treasure bills and Shares of a
Fund. In addition, advertisement, sales literature or shareholder
communications may include a discussion
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<PAGE>
of certain attributes or benefits to be derived by an investment in a Fund.
Such advertisements or communicators may include symbols, headlines or other
material which highlight or summarize the information discussed in more detail
therein.
MISCELLANEOUS
-------------
As used in the Prospectuses, "assets belonging to a Fund" means the
consideration received upon the issuance of Shares in the Fund, together with
all income, earnings, profits, and proceeds derived from the investment thereof,
including any proceeds from the sale of such investments, any funds or payments
derived from any reinvestment of such proceeds, and a portion of any general
assets of Master Fund not belonging to a particular portfolio of Master Fund.
In determining a Fund's net asset value, assets belonging to the Fund are
charged with the direct liabilities in respect of the Fund and with a share of
the general liabilities of Master Fund which are normally allocated in
proportion to the relative asset values of Master Fund's portfolios at the time
of allocation. Subject to the provisions of Master Fund's Charter,
determinations by the Board of Directors as to the direct and allocable
liabilities, and the allocable portion of any general assets with respect to a
particular Fund, are conclusive.
As of July 11, 1995, U.S. Trust held of record substantially all of
the Shares in the Equity, Income and Growth, Long-Term Supply of Energy,
Productivity Enhancers, Environmentally-Related Products and Services, Aging of
America, Communication and Entertainment, Business and Industrial Restructuring,
Global Competitors and Early Life Cycle Funds, in each case as agent or
custodian for its customers, but did not own such Shares beneficially because it
did not have discretion to vote or invest such Shares.
-39-
<PAGE>
FINANCIAL STATEMENTS
--------------------
Master Fund's Annual Report to Shareholders for the fiscal year ended
March 31, 1995 (the "Annual Report") for the domestic equity portfolios
accompanies this Statement of Additional Information. The financial statements
in the Annual Report for the Equity, Income and Growth, Long-Term Supply of
Energy, Productivity Enhancers, Environmentally-Related Products and Services,
Aging of America, Communication and Entertainment, Business and Industrial
Restructuring, Global Competitors and Early Life Cycle Funds (the "Financial
Statements") are incorporated in this Statement of Additional Information by
reference. The Financial Statements included in the Annual Report for the fiscal
year ended March 31, 1995 have been audited by Master Fund's independent
auditors, Ernst & Young LLP, whose reports also appear in such Annual Report and
are incorporated herein by reference. The Financial Statements in such Annual
Reports have been incorporated herein in reliance upon such reports given upon
the authority of such firm as experts in accounting and auditing. Additional
copies of the Annual Report may be obtained at no charge by telephoning the
Distributor at the telephone number appearing on the front page of this
Statement of Additional Information.
-40-
<PAGE>
APPENDIX A
----------
COMMERCIAL PAPER RATINGS
------------------------
A Standard & Poor's commercial paper rating is a current assessment of
the likelihood of timely payment of debt considered short-term in the relevant
market. The following summarizes the rating categories used by Standard and
Poor's for commercial paper:
"A-1" - Issue's degree of safety regarding timely payment is strong.
Those issues determined to possess extremely strong safety characteristics are
denoted "A-1+."
"A-2" - Issue's capacity for timely payment is satisfactory. However,
the relative degree of safety is not as high as for issues designated "A-1."
"A-3" - Issue has an adequate capacity for timely payment. It is,
however, somewhat more vulnerable to the adverse effects of changes and
circumstances than an obligation carrying a higher designation.
"B" - Issue has only a speculative capacity for timely payment.
"C" - Issue has a doubtful capacity for payment.
"D" - Issue is in payment default.
Moody's commercial paper ratings are opinions of the ability of
issuers to repay punctually promissory obligations not having an original
maturity in excess of 9 months. The following summarizes the rating categories
used by Moody's for commercial paper:
"Prime-1" - Issuer or related supporting institutions are considered
to have a superior capacity for repayment of short-term promissory obligations.
Prime-1 repayment capacity will normally be evidenced by the following
characteristics: leading market positions in well established industries; high
rates of return on funds employed; conservative capitalization structures with
moderate reliance on debt and ample asset protection; broad margins in earning
coverage of fixed financial charges and high internal cash generation; and well
established access to a range of financial markets and assured sources of
alternate liquidity.
A-1
<PAGE>
"Prime-2" - Issuer or related supporting institutions are considered
to have a strong capacity for repayment of short-term promissory obligations.
This will normally be evidenced by many of the characteristics cited above but
to a lesser degree. Earnings trends and coverage ratios, while sound, will be
more subject to variation. Capitalization characteristics, while still
appropriate, may be more affected by external conditions. Ample alternative
liquidity is maintained.
"Prime-3" - Issuer or related supporting institutions have an
acceptable capacity for repayment of short-term promissory obligations. The
effects of industry characteristics and market composition may be more
pronounced. Variability in earnings and profitability may result in changes in
the level of debt protection measurements and the requirement for relatively
high financial leverage. Adequate alternate liquidity is maintained.
"Not Prime" - Issuer does not fall within any of the Prime rating
categories.
The three rating categories of Duff & Phelps for investment grade
commercial paper and short-term debt are "D-1," "D-2" and "D-3." Duff &
Phelps employs three designations, "D-1+," "D-1" and "D-1-," within the
highest rating category. The following summarizes the rating categories used by
Duff & Phelps for commercial paper:
"D-1+" - Debt possesses highest certainty of timely payment. Short-
term liquidity, including internal operating factors and/or access to
alternative sources of funds, is outstanding, and safety is just below risk-free
U.S. Treasury short-term obligations.
"D-1" - Debt possesses very high certainty of timely payment.
Liquidity factors are excellent and supported by good fundamental protection
factors. Risk factors are minor.
"D-1-" - Debt possesses high certainty of timely payment. Liquidity
factors are strong and supported by good fundamental protection factors. Risk
factors are very small.
"D-2" - Debt possesses good certainty of timely payment. Liquidity
factors and company fundamentals are sound. Although ongoing funding needs may
enlarge total financing requirements, access to capital markets is good. Risk
factors are small.
"D-3" - Debt possesses satisfactory liquidity, and other protection
factors qualify issue as investment grade. Risk
A-2
<PAGE>
factors are larger and subject to more variation. Nevertheless, timely payment
is expected.
"D-4" - Debt possesses speculative investment characteristics.
Liquidity is not sufficient to ensure against disruption in debt service.
Operating factors and market access may be subject to a high degree of
variation.
"D-5" - Issuer has failed to meet scheduled principal and/or interest
payments.
Fitch short-term ratings apply to debt obligations that are payable on
demand or have original maturities of up to three years. The following
summarizes the rating categories used by Fitch for short-term obligations:
"F-1+" - Securities possess exceptionally strong credit quality.
Issues assigned this rating are regarded as having the strongest degree of
assurance for timely payment.
"F-1" - Securities possess very strong credit quality. Issues
assigned this rating reflect an assurance of timely payment only slightly less
in degree than issues rated "F-1+."
"F-2" - Securities possess good credit quality. Issues assigned
this rating have a satisfactory degree of assurance for timely payment, but the
margin of safety is not as great as the "F-1+" and "F-1" categories.
"F-3" - Securities possess fair credit quality. Issues assigned this
rating have characteristics suggesting that the degree of assurance for timely
payment is adequate; however, near-term adverse changes could cause these
securities to be rated below investment grade.
"F-S" - Securities possess weak credit quality. Issues assigned this
rating have characteristics suggesting a minimal degree of assurance for timely
payment and are vulnerable to near-term adverse changes in financial and
economic conditions.
"D" - Securities are in actual or imminent payment default.
Fitch may also use the symbol "LOC" with its short-term ratings to
indicate that the rating is based upon a letter of credit issued by a commercial
bank.
Thomson BankWatch short-term ratings assess the likelihood of an
untimely or incomplete payment of principal or
A-3
<PAGE>
interest of unsubordinated instruments having a maturity of one year or less
which is issued by United States commercial banks, thrifts and non-bank banks;
non-United States banks; and broker-dealers. The following summarizes the
ratings used by Thomson BankWatch:
"TBW-1" - This designation represents Thomson BankWatch's highest
rating category and indicates a very high degree of likelihood that principal
and interest will be paid on a timely basis.
"TBW-2" - This designation indicates that while the degree of safety
regarding timely payment of principal and interest is strong, the relative
degree of safety is not as high as for issues rated "TBW-1."
"TBW-3" - This designation represents the lowest investment grade
category and indicates that while the debt is more susceptible to adverse
developments (both internal and external) than obligations with higher ratings,
capacity to service principal and interest in a timely fashion is considered
adequate.
"TBW-4" - This designation indicates that the debt is regarded as non-
investment grade and therefore speculative.
IBCA assesses the investment quality of unsecured debt with an
original maturity of less than one year which is issued by bank holding
companies and their principal bank subsidiaries. The following summarizes the
rating categories used by IBCA for short-term debt ratings:
"A1" - Obligations are supported by the highest capacity for timely
repayment. Where issues possess a particularly strong credit feature, a rating
of A1+ is assigned.
"A2" - Obligations are supported by a good capacity for timely
repayment.
"A3" - Obligations are supported by a satisfactory capacity for timely
repayment.
"B" - Obligations for which there is an uncertainty as to the capacity
to ensure timely repayment.
"C" - Obligations for which there is a high risk of default or which
are currently in default.
A-4
<PAGE>
CORPORATE AND MUNICIPAL LONG-TERM DEBT RATINGS
----------------------------------------------
The following summarizes the ratings used by Standard & Poor's for
corporate and municipal debt:
"AAA" - This designation represents the highest rating assigned by
Standard & Poor's to a debt obligation and indicates an extremely strong
capacity to pay interest and repay principal.
"AA" - Debt is considered to have a very strong capacity to pay
interest and repay principal and differs from AAA issues only in small degree.
"A" - Debt is considered to have a strong capacity to pay interest and
repay principal although such issues are somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions than debt in
higher-rated categories.
"BBB" - Debt is regarded as having an adequate capacity to pay
interest and repay principal. Whereas such issues 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 debt in this category than in higher-rated categories.
"BB," "B," "CCC," "CC" and "C" - Debt is regarded, on balance, as
predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. "BB" indicates the
lowest degree of speculation and "C" the highest degree of speculation. While
such debt will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major risk exposures to adverse
conditions.
"BB" - Debt has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure
to adverse business, financial or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. The "BB"
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied "BBB-" rating.
"B" - Debt has a greater vulnerability to default but currently has
the capacity to meet interest payments and principal repayments. Adverse
business, financial or economic conditions will likely impair capacity or
willingness to pay interest and repay principal. The "B" rating category is
also used for debt subordinated to senior debt that is assigned an actual or
implied "BB" or "BB-" rating.
A-5
<PAGE>
"CCC" - Debt has a currently identifiable vulnerability to default,
and is dependent upon favorable business, financial and economic conditions to
meet timely payment of interest and repayment of principal. In the event of
adverse business, financial or economic conditions, it is not likely to have the
capacity to pay interest and repay principal. The "CCC" rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
"B" or "B-" rating.
"CC" - This rating is typically applied to debt subordinated to
senior debt that is assigned an actual or implied "CCC" rating.
"C" - This rating is typically applied to debt subordinated to
senior debt which is assigned an actual or implied "CCC-" debt rating. The "C"
rating may be used to cover a situation where a bankruptcy petition has been
filed, but debt service payments are continued.
"CI" - This rating is reserved for income bonds on which no interest
is being paid.
"D" - Debt is in payment default. This rating is used when interest
payments or principal payments are not made on the date due, even if the
applicable grace period has not expired, unless S & P believes such payments
will be made during such grace period. "D" rating is also used upon the filing
of a bankruptcy petition if debt service payments are jeopardized.
PLUS (+) OR MINUS (-) - The ratings from "AA" through "CCC" may be
modified by the addition of a plus or minus sign to show relative standing
within the major rating categories.
"r" - This rating is attached to highlight derivative, hybrid, and
certain other obligations that S & P believes may experience high volatility or
high variability in expected returns due to non-credit risks. Examples of such
obligations are: securities whose principal or interest return is indexed to
equities, commodities, or currencies; certain swaps and options; and interest
only and principal only mortgage securities.
The following summarizes the ratings used by Moody's for corporate and
municipal long-term debt:
"Aaa" - Bonds 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
A-6
<PAGE>
unlikely to impair the fundamentally strong position of such issues.
"Aa" - Bonds 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.
"A" - Bonds possess many favorable investment attributes and are to be
considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment sometime in the future.
"Baa" - Bonds considered medium-grade obligations, i.e., they are
neither highly protected nor poorly secured. Interest payments and principal
security appear adequate for the present but certain protective elements may be
lacking or may be characteristically unreliable over any great length of time.
Such bonds lack outstanding investment characteristics and in fact have
speculative characteristics as well.
"Ba," "B," "Caa," "Ca," and "C" - Bonds that possess one of these
ratings provide questionable protection of interest and principal ("Ba"
indicates some speculative elements; "B" indicates a general lack of
characteristics of desirable investment; "Caa" represents a poor standing; "Ca"
represents obligations which are speculative in a high degree; and "C"
represents the lowest rated class of bonds). "Caa," "Ca" and "C" bonds may be in
default.
Con. (---) - Bonds for which the security depends upon the completion
of some act or the fulfillment of some condition are rated conditionally. These
are bonds secured by (a) earnings of projects under construction, (b) earnings
of projects unseasoned in operation experience, (c) rentals which begin when
facilities are completed, or (d) payments to which some other limiting condition
attaches. Parenthetical rating denotes probable credit stature upon completion
of construction or elimination of basis of condition.
Moody's applies numerical modifiers 1, 2 and 3 in each generic
classification from "Aa" to "B" in its bond rating system. The modifier 1
indicates that the issuer ranks in the higher end of its generic rating
category; the modifier 2 indicates a mid-range ranking; and the modifier 3
indicates that
A-7
<PAGE>
the issuer ranks at the lower end of its generic rating category.
The following summarizes the long-term debt ratings used by Duff &
Phelps for corporate and municipal long-term debt:
"AAA" - Debt is considered to be of the highest credit quality. The
risk factors are negligible, being only slightly more than for risk-free U.S.
Treasury debt.
"AA" - Debt is considered of high credit quality. Protection factors
are strong. Risk is modest but may vary slightly from time to time because of
economic conditions.
"A" - Debt possesses protection factors which are average but
adequate. However, risk factors are more variable and greater in periods of
economic stress.
"BBB" - Debt possesses below average protection factors but such
protection factors are still considered sufficient for prudent investment.
Considerable variability in risk is present during economic cycles.
"BB," "B," "CCC," "DD," and "DP" - Debt that possesses one of these
ratings is considered to be below investment grade. Although below investment
grade, debt rated "BB" is deemed likely to meet obligations when due. Debt
rated "B" possesses the risk that obligations will not be met when due. Debt
rated "CCC" is well below investment grade and has considerable uncertainty as
to timely payment of principal, interest or preferred dividends. Debt rated
"DD" is a defaulted debt obligation, and the rating "DP" represents preferred
stock with dividend arrearages.
To provide more detailed indications of credit quality, the "AA," "A,"
"BBB," "BB" and "B" ratings may be modified by the addition of a plus (+) or
minus (-) sign to show relative standing within these major categories.
The following summarizes the highest four ratings used by Fitch for
corporate and municipal bonds:
"AAA" - Bonds considered to be investment grade and of the highest
credit quality. The obligor has an exceptionally strong ability to pay interest
and repay principal, which is unlikely to be affected by reasonably foreseeable
events.
"AA" - Bonds considered to be investment grade and of very high credit
quality. The obligor's ability to pay interest and repay principal is very
strong, although not quite as strong
A-8
<PAGE>
as bonds rated "AAA." Because bonds rated in the "AAA" and "AA" categories are
not significantly vulnerable to foreseeable future developments, short-term debt
of these issuers is generally rated "F-1+."
"A" - Bonds considered to be investment grade and of high credit
quality. The obligor's ability to pay interest and repay principal is
considered to be strong, but may be more vulnerable to adverse changes in
economic conditions and circumstances than bonds with higher ratings.
"BBB" - Bonds considered to be investment grade and of satisfactory
credit quality. The obligor's ability to pay interest and repay principal is
considered to be adequate. Adverse changes in economic conditions and
circumstances, however, are more likely to have an adverse impact on these
bonds, and therefore, impair timely payment. The likelihood that the ratings of
these bonds will fall below investment grade is higher than for bonds with
higher ratings.
"BB," "B," "CCC," "CC," "C," "DDD," "DD," and "D" -Bonds that possess
one of these ratings are considered by Fitch to be speculative investments. The
ratings "BB" to "C" represent Fitch's assessment of the likelihood of timely
payment of principal and interest in accordance with the terms of obligation for
bond issues not in default. For defaulted bonds, the rating "DDD" to "D" is an
assessment of the ultimate recovery value through reorganization or liquidation.
To provide more detailed indications of credit quality, the Fitch
ratings from and including "AA" to "C" may be modified by the addition of a plus
(+) or minus (-) sign to show relative standing within these major rating
categories.
IBCA assesses the investment quality of unsecured debt with an
original maturity of more than one year which is issued by bank holding
companies and their principal bank subsidiaries. The following summarizes the
rating categories used by IBCA for long-term debt ratings:
"AAA" - Obligations for which there is the lowest expectation of
investment risk. Capacity for timely repayment of principal and interest is
substantial such that adverse changes in business, economic or financial
conditions are unlikely to increase investment risk substantially.
"AA" - Obligations for which there is a very low expectation of
investment risk. Capacity for timely repayment of principal and interest is
substantial. Adverse changes in
A-9
<PAGE>
business, economic or financial conditions may increase investment risk albeit
not very significantly.
"A" - Obligations for which there is a low expectation of investment
risk. Capacity for timely repayment of principal and interest is strong,
although adverse changes in business, economic or financial conditions may lead
to increased investment risk.
"BBB" - Obligations for which there is currently a low expectation of
investment risk. Capacity for timely repayment of principal and interest is
adequate, although adverse changes in business, economic or financial conditions
are more likely to lead to increased investment risk than for obligations in
higher categories.
"BB," "B," "CCC," "CC," and "C" - Obligations are assigned one of
these ratings where it is considered that speculative characteristics are
present. "BB" represents the lowest degree of speculation and indicates a
possibility of investment risk developing. "C" represents the highest degree of
speculation and indicates that the obligations are currently in default.
IBCA may append a rating of plus (+) or minus (-) to a rating to
denote relative status within major rating categories.
Thomson BankWatch assesses the likelihood of an untimely repayment of
principal or interest over the term to maturity of long term debt and preferred
stock which are issued by United States commercial banks, thrifts and non-bank
banks; non-United States banks; and broker-dealers. The following summarizes
the rating categories used by Thomson BankWatch for long-term debt ratings:
"AAA" - This designation represents the highest category assigned by
Thomson BankWatch to long-term debt and indicates that the ability to repay
principal and interest on a timely basis is very high.
"AA" - This designation indicates a superior ability to repay
principal and interest on a timely basis with limited incremental risk versus
issues rated in the highest category.
"A" - This designation indicates that the ability to repay principal
and interest is strong. Issues rated "A" could be more vulnerable to adverse
developments (both internal and external) than obligations with higher ratings.
A-10
<PAGE>
"BBB" - This designation represents Thomson BankWatch's lowest
investment grade category and indicates an acceptable capacity to repay
principal and interest. Issues rated "BBB" are, however, more vulnerable to
adverse developments (both internal and external) than obligations with higher
ratings.
"BB," "B," "CCC," and "CC," - These designations are assigned by
Thomson BankWatch to non-investment grade long-term debt. Such issues are
regarded as having speculative characteristics regarding the likelihood of
timely payment of principal and interest. "BB" indicates the lowest degree of
speculation and "CC" the highest degree of speculation.
"D" - This designation indicates that the long-term debt is in
default.
PLUS (+) OR MINUS (-) - The ratings from "AAA" through "CC" may
include a plus or minus sign designation which indicates where within the
respective category the issue is placed.
MUNICIPAL NOTE RATINGS
----------------------
A Standard and Poor's rating reflects the liquidity concerns and
market access risks unique to notes due in three years or less. The following
summarizes the ratings used by Standard & Poor's Ratings Group for municipal
notes:
"SP-1" - The issuers of these municipal notes exhibit very strong or
strong capacity to pay principal and interest. Those issues determined to
possess overwhelming safety characteristics are given a plus (+) designation.
"SP-2" - The issuers of these municipal notes exhibit satisfactory
capacity to pay principal and interest.
"SP-3" - The issuers of these municipal notes exhibit speculative
capacity to pay principal and interest.
Moody's ratings for state and municipal notes and other short-term
loans are designated Moody's Investment Grade ("MIG") and variable rate demand
obligations are designated Variable Moody's Investment Grade ("VMIG"). Such
ratings recognize the differences between short-term credit risk and long-term
risk. The following summarizes the ratings by Moody's Investors Service, Inc.
for short-term notes:
"MIG-1"/"VMIG-1" - Loans bearing this designation are of the best
quality, enjoying strong protection by established
A-11
<PAGE>
cash flows, superior liquidity support or demonstrated broad-based access to the
market for refinancing.
"MIG-2"/"VMIG-2" - Loans bearing this designation are of high quality,
with margins of protection ample although not so large as in the preceding
group.
"MIG-3"/"VMIG-3" - Loans bearing this designation are of favorable
quality, with all security elements accounted for but lacking the undeniable
strength of the preceding grades. Liquidity and cash flow protection may be
narrow and market access for refinancing is likely to be less well established.
"MIG-4"/"VMIG-4" - Loans bearing this designation are of adequate
quality, carrying specific risk but having protection commonly regarded as
required of an investment security and not distinctly or predominantly
speculative.
"SG" - Loans bearing this designation are of speculative quality and
lack margins of protection.
Fitch and Duff & Phelps use the short-term ratings described under
Commercial Paper Ratings for municipal notes.
A-12
<PAGE>
UST MASTER FUNDS, INC.
International Fund
Emerging Americas Fund
Pacific/Asia Fund
Pan European Fund
STATEMENT OF ADDITIONAL INFORMATION
SERVICE SHARES
DISTRIBUTION SHARES
August 1, 1995
This Statement of Additional Information is not a prospectus but should be read
in conjunction with the current prospectuses for the International, Emerging
Americas, Pacific/Asia and Pan European Funds (each a "Fund" and collectively
the "Funds") of UST Master Funds, Inc. ("Master Fund") dated August 1, 1995 (the
"Prospectus"). Much of the information contained in this Statement of Additional
Information expands upon the subjects discussed in the Prospectuses. No
investment in Service Shares and Distribution Shares of the Funds described
herein (collectively, the "Shares") should be made without reading the
Prospectuses. A copy of the Prospectuses may be obtained by writing Master Fund
c/o Mutual Funds Service Company, 73 Tremont Street, Boston, MA 02108-3913 or
by calling (800) 446-1012.
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
INVESTMENT OBJECTIVE AND POLICIES .......................
Other Investment Considerations ....................
Additional Information on Portfolio Instruments ....
Additional Investment Limitations ..................
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION ..........
INVESTOR PROGRAMS .......................................
Systematic Withdrawal Plan .........................
Exchange Privilege .................................
Other Investor Programs ............................
DESCRIPTION OF CAPITAL STOCK ............................
MANAGEMENT OF THE FUND ..................................
Directors and Officers .............................
Investment Advisory, Sub-Advisory and ..............
Administration Agreements ......................
Service Organizations ..............................
Expenses ...........................................
Custodian And Transfer Agent .......................
PORTFOLIO TRANSACTIONS ..................................
INDEPENDENT AUDITORS ....................................
COUNSEL .................................................
ADDITIONAL INFORMATION CONCERNING TAXES .................
Generally ..........................................
Taxation of Certain Financial Instruments ..........
PERFORMANCE INFORMATION .................................
MISCELLANEOUS ...........................................
FINANCIAL STATEMENTS ....................................
APPENDIX ................................................. A-1
</TABLE>
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
---------------------------------
The following policies and discussions supplement the Funds'
investment objectives and policies as set forth in the Prospectuses.
Other Investment Considerations
-------------------------------
In determining the preferred distribution of investments of the Funds
among various geographic regions and countries, United States Trust Company of
New York ("U.S. Trust" or the "Investment Adviser"), Foreign and Colonial Asset
Management ("FACAM") and Foreign & Colonial Emerging Markets Limited ("FCEML")
(FACAM and FCEML hereinafter collectively referred to as the "Sub-Advisers")
will consider, among other things, regional and country-by-country prospects for
economic growth, anticipated levels of inflation, prevailing interest rates, the
historical patterns of government regulation of the economy and the outlook for
currency relationships.
The transaction costs to the Funds of engaging in forward currency
transactions described in the Prospectus vary with factors such as the currency
involved, the length of the contract period and prevailing currency market
conditions. Because currency transactions are usually conducted on a principal
basis, no fees or commissions are involved. The use of forward currency
contracts does not eliminate fluctuations in the underlying prices of the
securities being hedged, but it does establish a rate of exchange that can be
achieved in the future. Thus, although forward currency contracts used for
transaction or position hedging purposes may limit the risk of loss due to an
increase in the value of the hedged currency, at the same time they limit
potential gain that might result were the contracts not entered into. Further,
the Investment Adviser and the Sub-Advisers may be incorrect in their
expectations as to currency fluctuations, and a Fund may incur losses in
connection with its currency transactions that it would not otherwise incur. If
a price movement in a particular currency is generally anticipated, a Fund may
not be able to contract to sell or purchase that currency at an advantageous
price.
At or before the maturity of a forward sale contract, a Fund may sell
a portfolio security and make delivery of the currency, or retain the security
and offset its contractual obligation to deliver the currency by purchasing a
second contract pursuant to which the Fund will obtain, on the same maturity
date, the same amount of the currency which it is obligated to deliver. If the
Fund retains the portfolio security and engages in an offsetting transaction,
the Fund, at the time of execution of the offsetting transaction, will incur a
gain or
<PAGE>
a loss to the extent that movement has occurred in forward contract prices.
Should forward prices decline during the period between a Fund's entering into a
forward contract for the sale of a currency and the date it enters into an
offsetting contract for the purchase of the currency, the Fund will realize a
gain to the extent the price of the currency it has agreed to sell exceeds the
price of the currency it has agreed to purchase. Should forward prices
increase, the Fund will suffer a loss to the extent the price of the currency it
has agreed to sell is less than the price of the currency it has agreed to
purchase in the offsetting contract. The foregoing principles generally apply
also to forward purchase contracts.
Each Fund may purchase gold bars primarily of standard weight
(approximately 400 troy ounces) at the best available prices in the New York
bullion market. However, the Investment Adviser and Sub-Advisers will have
discretion to purchase or sell gold bullion in other markets, including foreign
markets, if better prices can be obtained. Gold bullion is valued by the Funds
at the mean between the closing bid and asked prices in the New York bullion
market as of the close of the New York Stock Exchange each business day. When
there is no readily available market quotation for gold bullion, the bullion
will be valued by such method as determined by Master Fund's Board of Directors
to best reflect its fair value. For purpose of determining net asset value,
gold held by a Fund, if any, will be valued in U.S. dollars.
Additional Information on Portfolio Instruments
-----------------------------------------------
Repurchase Agreements
---------------------
The repurchase price under the repurchase agreements described in the
Prospectuses generally equals the price paid by a Fund plus interest negotiated
on the basis of current short-term rates (which may be more or less than the
rate on the securities underlying the repurchase agreement). Securities subject
to repurchase agreements are held by the Funds' custodian (or sub-custodian) or
in the Federal Reserve/Treasury book-entry system. Repurchase agreements are
considered to be loans by a Fund under the Investment Company Act of 1940 (the
"1940 Act").
Securities Lending
------------------
When a Fund lends its portfolio securities, it continues to receive
interest or dividends on the securities lent and may simultaneously earn
interest on the investment of the cash loan collateral, which will be invested
in readily marketable, high-quality, short-term obligations. Although voting
rights, or rights to consent, attendant to securities lent pass to the borrower,
such loans may be called at any time and
-2-
<PAGE>
will be called so that the securities may be voted by a Fund if a material event
affecting the investment is to occur.
Government Obligations
----------------------
Examples of the types of U.S. Government obligations that may be held
by the Funds include, in addition to U.S. Treasury Bills, the obligations of
Federal Home Loan Banks, Federal Farm Credit Banks, Federal Land Banks, the
Federal Housing Administration, Farmers Home Administration, Export-Import Bank
of the United States, Small Business Administration, Government National
Mortgage Association, Federal National Mortgage Association, General Services
Administration, Student Loan Marketing Association, Central Bank for
Cooperatives, Federal Home Loan Mortgage Corporation, Federal Intermediate
Credit Banks and Maritime Administration.
American and European Depository Receipts
-----------------------------------------
American Depository Receipts ("ADRs") that may be purchased by the
Funds are receipts typically issued by a U.S. bank or trust company which
evidence ownership of underlying securities of a foreign issuer. ADRs may be
sponsored or unsponsored. Investments in unsponsored ADRs involve additional
risk because financial information based on generally accepted accounting
principles ("GAAP") may not be available with respect to the foreign issuers of
the underlying securities. European Depository Receipts ("EDRs"), which are
sometimes referred to as Continental Depository Receipts ("CDRs"), are receipts
issued in Europe typically by non-U.S. banks or trust companies and foreign
branches of U.S. banks that evidence ownership of foreign or United States
securities. Generally, ADRs, which are in registered form, are designed for use
in U.S. securities markets, and EDRs, which are in bearer form, are designed for
use in European securities markets.
Covered Call Options
--------------------
When a Fund writes a covered call option, it may terminate its
obligation to sell the underlying security prior to the expiration date of the
option by executing a closing purchase transaction, which is effected by
purchasing on an exchange an option of the same series (i.e., same underlying
security, exercise price and expiration date) as the option previously written.
Such a purchase does not result in the ownership of an option. A closing
purchase transaction will ordinarily be effected to realize a profit on an
outstanding call option, to prevent an underlying security from being called, to
permit the sale of the underlying security or to permit the writing of a new
call option containing different terms on such underlying security. The cost of
such a liquidation purchase plus
-3-
<PAGE>
transaction costs may be greater than the premium received upon the original
option, in which event the writer will have incurred a loss on the transaction.
An option position may be closed out only on an exchange which provides a
secondary market for an option of the same series. There is no assurance that a
liquid secondary market on an exchange will exist for any particular option. A
covered option writer, unable to effect a closing purchase transaction, will not
be able to sell the underlying security until the option expires or the
underlying security is delivered upon exercise, with the result that the writer
in such circumstances will be subject to the risk of market decline in the
underlying security during such period. A Fund will write an option on a
particular security only if the Investment Adviser and the Sub-Advisers believe
that a liquid secondary market will exist on an exchange for options of the same
series, which will permit the Fund to make a closing purchase transaction in
order to close out its position.
When a Fund writes an option, an amount equal to the net premium (the
premium less the commission) received by the Fund is included in the liability
section of the Fund's statement of assets and liabilities as a deferred credit.
The amount of the deferred credit will be subsequently marked to market to
reflect the current value of the option written. The current value of the
traded option is the last sale price or, in the absence of a sale, the average
of the closing bid and asked prices. If an option expires on the stipulated
expiration date, or if a Fund enters into a closing purchase transaction, it
will realize a gain (or loss if the cost of a closing purchase transaction
exceeds the net premium received when the option is sold) and the deferred
credit related to such option will be eliminated. If an option is exercised, the
Fund may deliver the underlying security from its portfolio or purchase the
underlying security in the open market. In either event, the proceeds of the
sale will be increased by the net premium originally received, and the Fund will
realize a gain or loss. Premiums from expired call options written by a Fund
and net gains from closing purchase transactions are treated as short-term
capital gains for Federal income tax purposes, and losses on closing purchase
transactions are short-term capital losses.
Futures Contracts and Related Options
-------------------------------------
Each Fund may invest in futures contracts and related options. Each
Fund may enter into interest rate futures contracts and other types of financial
futures contracts, including foreign currency futures contracts, as well as any
index or foreign market futures which are available on recognized exchanges or
in other established financial markets. A futures contract on foreign currency
creates a binding obligation on one party to deliver, and a corresponding
obligation on another party
-4-
<PAGE>
to accept delivery of, a stated quantity of a foreign currency for an amount
fixed in U.S. dollars. Foreign currency futures, which operate in a manner
similar to interest rate futures contracts, may be used by the Funds to hedge
against exposure to fluctuations in exchange rates between the U.S. dollar and
other currencies arising from multinational transactions.
Futures contracts will not be entered into for speculative purposes,
but to hedge risks associated with a Fund's securities investments. Positions
in futures contracts may be closed out only on an exchange which provides a
secondary market for such futures. However, there can be no assurance that a
liquid secondary market will exist for any particular futures contract at any
specific time. Thus, it may not be possible to close a futures position. In
the event of adverse price movements, a Fund would continue to be required to
make daily cash payments to maintain its required margin. In such situations,
if a Fund has insufficient cash, it may have to sell portfolio securities to
meet daily margin requirements at a time when it may be disadvantageous to do
so. In addition, the Fund may be required to make delivery of the instruments
underlying futures contracts it holds. The inability to close options and
futures positions also could have an adverse impact on a Fund's ability to
effectively hedge.
Successful use of futures by the Funds is also subject to the ability
of the Investment Adviser or Sub-Advisers to correctly predict movements in the
direction of the market. For example, if a Fund has hedged against the
possibility of a decline in the market adversely affecting securities held by it
and securities prices increase instead, the Fund will lose part or all of the
benefit to the increased value of its securities which it has hedged because it
will have approximately equal offsetting losses in its futures positions. In
addition, in some situations, if a Fund has insufficient cash, it may have to
sell securities to meet daily variation margin requirements. Such sales of
securities may be, but will not necessarily be, at increased prices which
reflect the rising market. A Fund may have to sell securities at a time when it
may be disadvantageous to do so.
The risk of loss in trading futures contracts in some strategies can
be substantial, due both to the low margin deposits required, and the extremely
high degree of leverage involved in futures pricing. As a result, a relatively
small price movement in a futures contract may result in immediate and
substantial loss (as well as gain) to the investor. For example, if at the time
of purchase, 10% of the value of the futures contract is deposited as margin, a
subsequent 10% decrease in the value of the futures contract would result in a
total loss of the margin deposit, before any deduction for the transaction
costs,
-5-
<PAGE>
if the account were then closed out. A 15% decrease would result in a loss
equal to 150% of the original margin deposit, before any deduction for the
transaction costs, if the contract were closed out. Thus, a purchase or sale of
a futures contract may result in losses in excess of the amount invested in the
contract.
Utilization of futures transactions by a Fund involves the risk of
loss by the Fund of margin deposits in the event of bankruptcy of a broker with
whom the Fund has an open position in a futures contract or related option.
Most futures exchanges limit the amount of fluctuation permitted in
futures contract prices during a single trading day. The daily limit
establishes the maximum amount that the price of a futures contract may vary
either up or down from the previous day's settlement price at the end of a
trading session. Once the daily limit has been reached in a particular type of
contract, no trades may be made on that day at a price beyond that limit. The
daily limit governs only price movement during a particular trading day and
therefore does not limit potential losses, because the limit may prevent the
liquidation of unfavorable positions. Futures contract prices have occasionally
moved to the daily limit for several consecutive trading days with little or no
trading, thereby preventing prompt liquidation of futures positions and
subjecting some futures traders to substantial losses.
The trading of futures contracts is also subject to the risk of
trading halts, suspensions, exchange or clearing house equipment failures,
government intervention, insolvency of a brokerage firm or clearing house or
other disruptions of normal trading activity, which could at times make it
difficult or impossible to liquidate existing positions or to recover excess
variation margin payments.
Options on Futures Contracts
----------------------------
Each Fund may purchase options on the futures contracts described
above. A futures option gives the holder, in return for the premium paid, the
right to buy (call) from or sell (put) to the writer of the option a futures
contract at a specified price at any time during the period of the option. Upon
exercise, the writer of the option is obligated to pay the difference between
the cash value of the futures contract and the exercise price. Like the buyer
or seller of a futures contract, the holder, or writer, of an option has the
right to terminate its position prior to the scheduled expiration of the option
by selling, or purchasing, an option of the same series, at which time the
person entering into the closing transaction will realize a gain or loss.
-6-
<PAGE>
Investments in futures options involve some of the same considerations
that are involved in connection with investments in futures contracts (for
example, the existence of a liquid secondary market). In addition, the purchase
of an option also entails the risk that changes in the value of the underlying
futures contract will not be fully reflected in the value of the option
purchased. Depending on the pricing of the option compared to either the
futures contract upon which it is based, or upon the price of the instruments
being hedged, an option may or may not be less risky than ownership of the
futures contract or such instruments. In general, the market prices of options
can be expected to be more volatile than the market prices on the underlying
futures contract. Compared to the purchase or sale of futures contracts,
however, the purchase of call or put options on futures contracts may frequently
involve less potential risk to the Fund because the maximum amount at risk is
the premium paid for the options (plus transaction costs). Although permitted
by its fundamental investment policies, the Funds do not currently intend to
write futures options, and will not do so in the future absent any necessary
regulatory approvals.
When-Issued and Forward Transactions
------------------------------------
When a Fund agrees to purchase securities on a "when-issued" or
forward commitment basis, the custodian will set aside cash or liquid portfolio
securities equal to the amount of the commitment in a separate account.
Normally, the custodian will set aside portfolio securities to satisfy a
purchase commitment and, in such case, the Fund may be required subsequently to
place additional assets in the separate account in order to ensure that the
value of the account remains equal to the amount of the Fund's commitment. It
may be expected that a Fund's net assets will fluctuate to a greater degree when
it sets aside portfolio securities to cover such purchase commitments than when
it sets aside cash. Because a Fund will set aside cash or liquid assets to
satisfy its purchase commitments in the manner described, its liquidity and
ability to manage its portfolio might be affected in the event its forward
commitments or commitments to purchase "when-issued" securities ever exceed 25%
of the value of its assets.
A Fund will purchase securities on a "when-issued" or forward
commitment basis only with the intention of completing the transaction. If
deemed advisable as a matter of investment strategy, however, a Fund may dispose
of or renegotiate a commitment after it is entered into, and may sell securities
it has committed to purchase before those securities are delivered to the Fund
on the settlement date. In these cases, the Fund may realize a taxable capital
gain or loss.
-7-
<PAGE>
When a Fund engages in "when-issued" or forward commitment
transactions, it relies on the other party to consummate the trade. Failure of
such other party to do so may result in the Fund incurring a loss or missing an
opportunity to obtain a price considered to be advantageous.
The market value of the securities underlying a "when-issued" purchase
or a forward commitment to purchase securities and any subsequent fluctuations
in their market value are taken into account when determining the market value
of a Fund starting on the day the Fund agrees to purchase the securities. The
Fund does not earn interest on the securities it has committed to purchase until
they are paid for and delivered on the settlement date.
Brady Bonds
-----------
The Emerging Americas Fund may invest in Brady Bonds, which are
securities created through the exchange of existing commercial bank loans to
Latin American public and private entities for new bonds in connection with debt
restructurings under a debt restructuring plan announced by former U.S.
Secretary of the Treasury Nicholas F. Brady (the "Brady Plan"). Brady Bonds
may be collateralized or uncollateralized, are issued in various currencies
(primarily the U.S. dollar) and are currently actively traded in the over-the-
counter secondary market for Latin American debt instruments.
Dollar-denominated, collateralized Brady Bonds, which may be fixed
rate par bonds or floating rate discount bonds, are collateralized in full as to
principal by U.S. Treasury zero coupon bonds having the same maturity as the
bonds. Interest payments on these Brady Bonds generally are collateralized by
cash or securities in an amount that, in the case of fixed rate bonds, is equal
to at least one year of rolling interest payments or, in the case of floating
rate bonds, initially is equal to at least one year's rolling interest payments
based on the applicable interest rate at that time and is adjusted at regular
intervals thereafter.
All Mexican Brady Bonds issued to date, except New Money Bonds, have
principal repayments at final maturity fully collateralized by U.S. Treasury
zero coupon bonds (or comparable collateral in other currencies) and interest
coupon payments collateralized on an 18-month rolling-forward basis by funds
held in escrow by an agent for the bondholders. Approximately half of the
Venezuelan Brady Bonds issued to date have principal repayments at final
maturity collateralized by U.S. Treasury zero coupon bonds (or comparable
collateral in other currencies), while slightly more than half have interest
coupon payments
-8-
<PAGE>
collateralized on a 14-month rolling-forward basis by securities held by the
Federal Reserve Bank of New York as collateral agent.
Brady Bonds are often viewed as having three or four valuation
components: the collateralized repayment of principal at final maturity; the
collateralized interest payments; the uncollateralized interest payments; and
any uncollateralized repayment of principal at maturity (these uncollateralized
amounts constituting the "residual risk").
Miscellaneous
-------------
The Funds may not invest in oil, gas or mineral leases.
Additional Investment Limitations
---------------------------------
In addition to the investment limitations disclosed in the
Prospectuses, the Funds are subject to the investment limitations enumerated
below. Fundamental investment limitations may be changed with respect to a Fund
only by a vote of a majority of the holders of such Fund's outstanding Shares
(as defined under "Miscellaneous" in the Prospectuses). However, investment
limitations which are "operating policies" with respect to a Fund may be changed
by Master Fund's Board of Directors upon reasonable notice to shareholders.
The following investment limitations are fundamental with respect to
each Fund. A Fund may not:
1. Act as an underwriter of securities within the meaning of the
Securities Act of 1933, except insofar as it might be deemed to be an
underwriter upon disposition of certain portfolio securities acquired within the
limitation on purchases of restricted securities;
2. Purchase or sell real estate, except that the Fund may purchase
securities of issuers which deal in real estate and may purchase securities
which are secured by interests in real estate; and
3. Issue any senior securities, except insofar as any borrowing in
accordance with the Funds' investment limitation contained in the Prospectuses
might be considered to be the issuance of a senior security.
The following investment limitations are fundamental with respect to
the International Fund, but are operating policies with respect to the Emerging
Americas, Pacific/Asia and Pan European Funds (collectively, the "Regional
Funds"). Each Fund may not:
-9-
<PAGE>
4. Purchase securities on margin, make short sales of securities, or
maintain a short position;
5. Invest in or sell put options, call options, straddles, spreads,
or any combination thereof; provided, however, that each Fund may write covered
call options with respect to its portfolio securities that are traded on a
national securities exchange or on foreign exchanges and may enter into closing
purchase transactions with respect to such options if, at the time of the
writing of such option, the aggregate value of the securities subject to the
options written by the Fund does not exceed 25% of the value of its total
assets; and provided that each Fund may enter into forward currency contracts in
accordance with its investment objective and policies;
6. Invest in companies for the purpose of exercising management or
control;
7. Invest more than 5% of its total assets in securities issued by
companies which, together with any predecessor, have been in continuous
operation for fewer than three years; and
8. Acquire any other investment company or investment company
security, except in connection with a merger, consolidation, reorganization, or
acquisition of assets or where otherwise permitted by the Investment Company Act
of 1940.
The following investment limitation is fundamental with respect to the
International Fund. The International Fund may not:
9. Purchase or sell commodities futures contracts or invest in oil,
gas, or other mineral exploration or development programs; provided, however,
that (i) this shall not prohibit the Fund from purchasing publicly traded
securities of companies engaging in whole or in part in such activities; and
(ii) the Fund may enter into forward currency contracts, futures contracts and
related options and may invest up to 5% of its total assets in gold bullion.
The following investment limitation is fundamental with respect to the
Regional Funds. Each Regional Fund may not:
10. Purchase or sell commodities or commodities futures contracts or
invest in oil, gas, or other mineral exploration or development programs;
provided, however, that (i) this shall not prohibit a Fund from purchasing
publicly traded securities of companies engaging in whole or in part in such
-10-
<PAGE>
activities; and (ii) a Fund may enter into forward currency contracts, futures
contracts and related options and may invest up to 5% of its total assets in
gold bullion.
* * *
For the purpose of Investment Limitation No. 2, the prohibition of
purchases of real estate includes acquisition of limited partnership interests
in partnerships formed with a view toward investing in real estate, but does not
prohibit purchases of shares in real estate investment trusts.
In addition to the above investment limitations, Master Fund currently
intends to limit each Fund's investments in warrants so that, valued at the
lower of cost or market value, they do not exceed 5% of the net assets of the
particular Fund. Included within that amount, but not to exceed 2% of the value
of a Fund's net assets, may be warrants which are not listed on the New York or
American Stock Exchanges. For the purpose of this limitation, warrants acquired
by a Fund in units or attached to securities will be deemed to be without value.
Each Fund also intends to refrain from entering into arbitrage transactions.
Pursuant to the requirements of state securities laws, each Fund currently
intends to limit its option transactions so that they do not exceed, at the time
when they are written, 25% of the net (rather than total) assets of the
particular Fund. See Investment Limitation No. 5 above.
The International Fund may not purchase or sell commodities except as
provided in Investment Limitation No. 9 above.
If a percentage limitation is satisfied at the time of investment, a
later increase or decrease in such percentage resulting from a change in value
of a Fund's portfolio securities will not constitute a violation of such
limitation.
In order to permit the sale of Shares in certain states, Master Fund
may make on behalf of a Fund other commitments more restrictive than the
investment policies and limitations described above and in the Prospectuses.
Should Master Fund determine that any such commitment is no longer in a Fund's
best interests, it will revoke the commitment by terminating sales of such
Fund's Shares to investors residing in the state involved.
-11-
<PAGE>
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
----------------------------------------------
Shares are continuously offered for sale by Edgewood Services, Inc.
(the "Distributor"), a wholly-owned subsidiary of Federated Investors, and the
Distributor has agreed to use appropriate efforts to solicit all purchase
orders. As described in the Prospectuses, Shares may be sold to customers
("Customers") of financial institutions ("Shareholder Organizations"). Service
Shares are also offered for sale directly to institutional investors and to
members of the general public. Different types of Customer accounts at the
Shareholder Organizations may be used to purchase Shares, including eligible
agency and trust accounts. In addition, Shareholder Organizations may
automatically "sweep" a Customer's account not less frequently than weekly and
invest in amounts in excess of a minimum balance agreed to by the Shareholder
Organization and its Customer in Shares selected by the Customer. Investors
purchasing Shares may include officers, directors, or employees of the
particular Shareholder Organization.
Pursuant to Rule 12b-1 of the 1940 Act, Master Fund has adopted a
Distribution Plan (the "Distribution Plan") which permits the Distribution
Shares of the Funds to bear certain expenses in connection with the distribution
of those Shares. As required by Rule 12b-1, the Funds' Distribution Plan and
related distribution agreement have been approved, and are subject to annual
approval by, a majority of Master Fund's Board of Directors, and by a majority
of the directors who are not interested persons of Master Fund and have no
direct or indirect interest in the operation of the Distribution Plan or any
agreement relating to the Distribution Plan, by vote cast in person at a meeting
called for the purpose of voting on the Distribution Plan and related agreement.
Rule 12b-1 also requires that persons authorized to direct the disposition of
monies payable by a Fund (in the Funds' case, the Distributor) provide for the
directors' review of quarterly reports on the amounts expended and the purposes
for the expenditures.
Any change in the Distribution Plan that would materially increase the
distribution expenses of Distribution Shares requires approval by holders of
those Shares, but otherwise, the Distribution Plan may be amended by the
directors, including a majority of the disinterested directors who do not have
any direct or indirect financial interest in the Distribution Plan or any
related agreement. The Distribution Plan and related agreement may be terminated
as to a particular Fund by a vote of Master Fund's disinterested directors or by
vote of the holders of Distribution Shares of the Fund, on not more than 60 days
written notice. The selection and nomination of disinterested directors has been
committed to the discretion of such disinterested directors as required by Rule
12b-1.
-12-
<PAGE>
The Distribution Plan provides that each Fund will reimburse the
Distributor for distribution expenses in an amount not to exceed the annual rate
of .75% of the average daily net asset value of outstanding Distribution Shares
of the Fund. Distribution expenses payable by the Distributor pursuant to the
Distribution Plan include direct and indirect costs and expenses incurred in
connection with advertising and marketing a Fund's Distribution Shares, and
direct and indirect costs and expenses of preparing, printing and distributing
its prospectuses to other than current shareholders and payments to financial
institutions that are not affiliated with the Distributor ("Distribution
Organizations").
The Distribution Plan will continue in effect for successive one year
periods, provided that such continuance is specifically approved by the vote of
a majority of the directors who are not parties to the Distribution Plan or
interested persons of any such party and who have no direct or indirect
financial interest in the Distribution Plan or any related agreement and the
vote of a majority of the entire Board of Directors.
Any material amendment to Master Fund's arrangements with Distribution
Organizations must be approved by a majority of Master Fund's Board of Directors
(including a majority of the disinterested directors). So long as Master Fund's
arrangements with Distribution Organizations are in effect, the selection and
nomination of the members of Master Fund's Board of Directors who are not
"interested persons" (as defined in the 1940 Act) of Master Fund will be
committed to the discretion of such non-interested directors.
Shares are of the Funds and offered for sale with a maximum sales
charge of 4.50%. An illustration of the computation of the offering price per
share of the Funds, using the value of each Fund's net assets and number of
outstanding securities at the close of business on March 31, 1995 and the value
of the Fund's initial capitalization of each Fund's Distribution Shares prior to
the commencement of operations, is as follows:
-13-
<PAGE>
<TABLE>
<CAPTION>
Emerging Americas Fund
International Fund Pacific/Asia Fund Pan European Fund
------------------ ----------------- -----------------
Service Shares Service Shares Service Shares Service Shares
<S> <C> <C> <C> <C>
Net Assets........ $64,051,958 $27,343,730 $47,617,199 $39,976,962
Outstanding
Shares........... 6,525,104 4,668,226 5,635,215 4,882,358
Net Asset Value
Per Share........ $ 9.82 $ 5.86 $ 8.45 $ 8.19
Sales Charge (4.50%
of the offering
price).. $ .46 $ .28 $ .40 $ .39
Offering to
Public........... $ 10.28 $ 6.14 $ 8.85 $ 8.58
</TABLE>
<TABLE>
<CAPTION>
International Emerging Americas Pacific/Asia Fund Pan European Fund
Fund Fund distribution Distribution Distribution
Distribution Shares Shares Shares
Shares
------------- - - -
<S> <C> <C> <C> <C>
Net Assets........ $ 100 $ 100 $ 100 $ 100
Outstanding
Shares........... 10 10 10 10
Net Asset Value
Per Share........ $ 10.00 $ 10.00 $ 10.00 $ 10.00
Sales Charge
(4.50% of the
offering price).. $ .47 $ .47 $ .47 $ .47
Offering to
Public........... $ 10.47 $ 10.47 $ 10.47 $ 10.47
</TABLE>
As stated in the Prospectuses, the sales load described above will not
be applicable to: (a) purchases of Shares by customers of the Investment Adviser
or its affiliates; (b) trust, agency or custodial accounts opened through the
trust department of a bank, trust company or thrift institution, provided that
appropriate notification of such status is given at the time of investment; (c)
companies, corporations and partnerships (excluding full service broker/dealers
and financial planners, registered investment advisers and depository
institutions not covered by the exemptions in (d) and (e) below); (d) financial
planners and registered investment advisers not affiliated with or clearing
purchases through full service broker/dealers; (e) purchases of Shares by
depository institutions for their own account as principal; (f) exchange
transactions (described below under "Investor Programs - Exchange Privilege")
where the Shares being exchanged were acquired in connection with the
distribution
-14-
<PAGE>
of assets held in a trust, agency or custodial account maintained
with the trust department of a bank; (g) corporate/business
retirement plans (such as 401(k), 403(b)(7), 457 and Keogh accounts) sponsored
by the Distributor and IRA accounts sponsored by the Investment Adviser; (h)
company-sponsored employee pension or retirement plans making direct investments
in the Funds; (i) purchases of Shares by officers, trustees, directors,
employees, former employees and retirees of Master Fund, UST Master Tax-Exempt
Funds, Inc. ("Master Tax-Exempt Fund"), the Investment Adviser, the Distributor
or of any direct or indirect affiliate of either of them; (j) purchases of
Shares by all beneficial shareholders of Master Fund or Master Tax-Exempt Fund
as of May 22, 1989; (k) purchases of Shares by investment advisers registered
under the Investment Advisers Act of 1940 for their customers through an omnibus
account established with United States Trust Company of New York; (l) purchases
of Shares by directors, officers and employees of brokers and dealers selling
shares pursuant to a selling agreement with Master Fund and Master Tax-Exempt
Fund; (m) purchase of Shares by investors who are members of affinity groups
services by USAffinity Investments Limited Partnership; and (n) customers of
certain financial institutions who purchase shares through a registered
representative of UST Financial Services Corp. on the premises of their
financial institutions. In addition, no sales load is charged on the
reinvestment of dividends or distributions or in connection with certain share
exchange transactions. Investors who have previously redeemed shares in a
portfolio of Master Fund or Master Tax-Exempt Fund on which a sales load has
been paid also have a one-time privilege of purchasing shares of another
portfolio of either company at net asset value without a sales charge, provided
that such privilege will apply only to purchases made within 30 calendar days
from the date of redemption and only with respect to the amount of the
redemption.
Total sales charges paid by shareholders of the International Fund for
the fiscal years ended March 31, 1995, 1994 and 1993 were $4,219, $7,779 and
$2,186, respectively. Of these respective amounts, the Distributor retained
$4,169, $4,786 and $1,850. The balance was paid to selling dealers. Total
sales charges paid by shareholders of the Emerging Americas, Pacific/Asia and
Pan European Funds for the fiscal year ended March 31, 1995 and 1994 and for the
period from December 31, 1992 (commencement of operations) to March 31, 1993
were $8,465, $19,985 and $0, $144, $6,489 and $273, and $183, $1,112 and
$273, respectively. Of these respective amounts, the Distributor retained
$1,403, $8,643 and $0 with respect to the Emerging Americas Fund, $69,
$1,988 and $0 with respect to the Pacific/Asia Fund and $11, $980 and $0 with
respect to the Pan European Fund. The balance was paid to selling dealers.
-15-
<PAGE>
Master Fund may suspend the right of redemption or postpone the date
of payment for Shares for more than 7 days during any period when (a) trading on
the New York Stock Exchange (the "Exchange") is restricted by applicable rules
and regulations of the Securities and Exchange Commission; (b) the Exchange is
closed for other than customary weekend and holiday closings; (c) the Securities
and Exchange Commission has by order permitted such suspension; or (d) an
emergency exists as determined by the Securities and Exchange Commission.
In the event that Shares are redeemed in cash at their net asset
value, a shareholder may receive in payment for such Shares an amount that is
more or less than his original investment due to changes in the market prices of
a Fund's portfolio securities.
Under limited circumstances, Master Fund may accept securities as
payment for Shares. Securities acquired in this manner will be limited to
securities issued in transactions involving a bona fide reorganization or
---------
statutory merger, or will be limited to other securities (except for municipal
debt securities issued by state political subdivisions or their agencies or
instrumentalities) that: (a) meet the investment objective and policies of any
Fund acquiring such securities; (b) are acquired for investment and not for
resale; (c) are liquid securities that are not restricted as to transfer either
by law or liquidity of market; and (d) have a value that is readily
ascertainable (and not established only by evaluation procedures) as evidenced
by a listing on the American Stock Exchange, New York Stock Exchange or NASDAQ,
or as evidenced by their status as U.S. Government securities, bank certificates
of deposit, banker's acceptances, corporate and other debt securities that are
actively traded, money market securities and other similar securities with a
readily ascertainable value.
INVESTOR PROGRAMS
-----------------
Systematic Withdrawal Plan
--------------------------
An investor who owns Shares with a value of $10,000 or more may begin
a Systematic Withdrawal Plan. The withdrawal can be on a monthly, quarterly,
semiannual or annual basis. There are four options for such systematic
withdrawals. The investor may request:
(1) A fixed-dollar withdrawal;
(2) A fixed-share withdrawal;
-16-
<PAGE>
(3) A fixed-percentage withdrawal (based on the current value of the
account); or
(4) A declining-balance withdrawal.
Prior to participating in a Systematic Withdrawal Plan, the investor must
deposit any outstanding certificates for Shares with Mutual Funds Service
Company, the Funds' sub-transfer agent. Under this Plan, dividends and
distributions are automatically reinvested in additional Shares of a Fund.
Amounts paid to investors under this Plan should not be considered as income.
Withdrawal payments represent proceeds from the sale of Shares, and there will
be a reduction of the shareholder's equity in the Fund included if the amount of
the withdrawal payments exceeds the dividends and distributions paid on the
Shares and the appreciation of the investor's investment in the Fund. This in
turn may result in a complete depletion of the shareholder's investment. An
investor may not participate in a program of systematic investing in a Fund
while at the same time participating in the Systematic Withdrawal Plan with
respect to an account in the same Fund. Customers of Shareholder Organizations
may obtain information on the availability of, and the procedures and fees
relating to, the Systematic Withdrawal Plan directly from their Shareholder
Organization.
Exchange Privilege
------------------
Investors and Customers of Shareholder Organizations may exchange
Shares having a value of at least $500 for shares of the same series of any
other portfolio of Master Fund or Master Tax-Exempt Fund ("the Companies").
Shares may be exchanged by wire, telephone or mail and must be made to accounts
of identical registration. There is no exchange fee imposed by the Companies.
As of the date of this Statement of Additional Information, Distribution Shares
were available only in the equity and international portfolios of Master Fund.
The Companies may modify or terminate the exchange program at any time upon 60
days' written notice to shareholders, and may reject any exchange request. In
order to prevent abuse of this privilege to the disadvantage of other
shareholders, the Companies reserve the right to limit the number of exchange
requests of investors to no more than six per year. Customers of Shareholder
Organizations may obtain information on the availability of, and the procedures
relating to, such programs directly from their Shareholder Organizations.
For Federal income tax purposes, exchanges are treated as sales on
which the shareholder will realize a gain or loss, depending upon whether the
value of the Shares to be given up in exchange is more or less than the basis in
such Shares at the time of the exchange. Generally, a shareholder may include
sales loads incurred upon the purchase of Shares in his or her tax basis for
such Shares for the purpose of determining gain or loss on a redemption,
transfer or exchange of such Shares. However, if the shareholder effects an
exchange of Shares for shares of
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<PAGE>
another portfolio of the Companies within 90 days of the purchase and is able to
reduce the sales load applicable to the new shares (by virtue of the Companies'
exchange privilege), the amount equal to such reduction may not be included in
the tax basis of the shareholder's exchanged Shares but may be included (subject
to the limitation) in the tax basis of the new shares.
Other Investor Programs
-----------------------
As described in the prospectuses, Shares of a Fund may be purchased
in connection with the Automatic Investment Program, and certain Retirement
Programs. Customers of Shareholder Organizations may obtain information on the
availability of, and the procedures relating to, such programs.
DESCRIPTION OF CAPITAL STOCK
----------------------------
Master Fund's Charter authorizes its Board of Directors to issue up to
thirty-five billion full and fractional shares of capital stock, and to
classify or reclassify any unissued shares of Master Fund into one or more
classes or series by setting or changing in any one or more respects their
respective prefer ences, conversion or other rights, voting powers,
restrictions, limitations as to dividends, qualifications, and terms and
conditions of redemption. The Prospectuses describe the classes of shares
into which Master Fund's authorized capital is currently classified.
Shares have no preemptive rights and only such conversion or exchange
rights as the Board of Directors may grant in its discretion. When issued for
payment as described in the Prospectuses, Shares will be fully paid and non-
assessable. In the event of a liquidation or dissolution of a Fund, its
shareholders are entitled to receive the assets available for distribution
belonging to the particular Fund and a proportionate distribution, based upon
the relative asset values of Master Fund's portfolios, of any general assets of
Master Fund not belonging to any particular portfolio of Master Fund which are
available for distribution. In the event of a liquidation or dissolution of
Master Fund, its shareholders will be entitled to the same distribution
process.
Shareholders of Master Fund are entitled to one vote for each full
share held, and fractional votes for fractional shares held, and will vote in
the aggregate and not by class, except as otherwise required by the 1940 Act or
other applicable law or when the matter to be voted upon affects only the
interests of the shareholders of a particular class. Voting rights are not
cumulative and, accordingly, the holders of more than 50% of the aggregate of
Master Fund's shares may elect all
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<PAGE>
of Master Fund's directors, regardless of the votes of other shareholders.
Rule 18f-2 under the 1940 Act provides that any matter required to be
submitted to the holders of the outstanding voting securities of an investment
company such as Master Fund shall not be deemed to have been effectively acted
upon unless approved by the holders of a majority of the outstanding shares of
each portfolio affected by the matter. A portfolio is affected by a matter
unless it is clear that the interests of each portfolio in the matter are
substantially identical or that the matter does not affect any interest of the
portfolio. Under the Rule, the approval of an investment advisory agreement or
any change in a fundamental investment policy would be effectively acted upon
with respect to a portfolio only if approved by a majority of the outstanding
shares of such portfolio. However, the Rule also provides that the ratification
of the appointment of independent public accountants, the approval of principal
underwriting contracts, and the election of directors may be effectively acted
upon by shareholders of Master Fund voting without regard to class.
Master Fund's Charter authorizes its Board of Directors, without
shareholder approval (unless otherwise required by applicable law), to (a) sell
and convey the assets of a Fund to another management investment company for
consideration which may include securities issued by the purchaser and, in
connection therewith, to cause all outstanding Shares of the Fund to be redeemed
at a price which is equal to their net asset value and which may be paid in cash
or by distribution of the securities or other consideration received from the
sale and conveyance; (b) sell and convert a Fund's assets into money and, in
connection therewith, to cause all outstanding Shares of the Fund to be redeemed
at their net asset value; or (c) combine the assets belonging to a Fund with the
assets belonging to another portfolio of Master Fund, if Master Fund's Board of
Directors reasonably determines that such combination will not have a material
adverse effect on shareholders of any portfolio participating in such
combination, and, in connection therewith, to cause all outstanding Shares of
the Fund to be redeemed at their net asset value or converted into shares of
another class of Master Fund's capital stock at net asset value. The exercise
of such authority by the Board of Directors will be subject to the provisions of
the 1940 Act, and the Board of Directors will not take any action described in
this paragraph unless the proposed action has been disclosed in writing to the
affected Fund's shareholders at least 30 days prior thereto.
Notwithstanding any provision of Maryland law requiring a greater vote
of Master Fund's Common Stock (or of the Shares of a Fund voting separately as a
class) in connection with any
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<PAGE>
corporate action, unless otherwise provided by law (for example, by Rule 18f-2,
discussed above) or by Master Fund's Charter, Master Fund may take or authorize
such action upon the favorable vote of the holders of more than 50% of the
outstanding Common Stock of Master Fund voting without regard to class or
series.
MANAGEMENT OF THE FUND
----------------------
Directors and Officers
----------------------
The directors and executive officers of Master Fund, their addresses,
ages, principal occupations during the past five years, and other affiliations
are as follows:
<TABLE>
<CAPTION>
Position Principal Occupation
with During Past 5 Years and
Name and Address Master Fund Other Affiliations
---------------- ------------- -----------------------
<S> <C> <C>
Alfred C. Tannachion* Chairman of Retired.
1135 Hyde Park the Board,
Mahwah, NJ 07430 President and
Age 69 Treasurer
Donald L. Campbell Director Retired; Senior Vice
333 East 69th Street President, Royal Insur-
Apt. 10-H ance Company, Inc., until
New York, NY 10021 August, 1989; Director, Royal
Age 69 Life Insurance Co. of N.Y.
Joseph H. Dugan Director Retired; President, CEO and
913 Franklin Lake Road and Director, L.B. Foster
Franklin Lakes, NJ 07417 Company (tubular products),
Age 70 from September, 1987 until
May, 1990; Executive Vice
President and CEO, L.B. Foster
Company, from September, 1986
until September, 1987; Senior
Vice President -- Finance,
Chief Financial Officer and
Director, Todd Shipyards
Corporation, prior to
January 3, 1986.
Wolfe J. Frankl Director Director, Deutsche Bank
40 Gooseneck Lane Financial, Inc.; Director,
Charlottesville, VA 22903 The Harbus Corporation;
Age 74 Trustee, Mariner Funds Trust;
Managing Director -- North
America, Berlin Economic
Development Corp., prior to 1988.
</TABLE>
______________________
* This director is considered to be an "interested person" of Master Fund as
defined in the 1940 Act.
-20-
<PAGE>
<TABLE>
<S> <C> <C>
Robert A. Robinson Director President Emeritus, The
Church Pension Fund Church Pension Fund and its
800 Second Avenue affiliated companies, since
New York, NY 10017 1968; Trustee, Mariner Funds
Age 69 Trust; Trustee, H.B. and F.H.
Bugher Foundation and Director
of its wholly owned
subsidiaries -- Rosiclear Lead
and Flourspar Mining Co. and
The Pigmy Corporation;
Director, Morehouse Publishing
Co.
W. Bruce McConnel, III Secretary Partner of the law firm
Philadelphia National of Drinker Biddle & Reath.
Bank Building
1345 Chestnut Street
Philadelphia, PA 19107-3496
Age 52
Frank M. Deutchki Assistant Vice President, Mutual Funds
Mutual Funds Service Co. Secretary Service Company since
73 Tremont Street February, 1989; Senior Vice
Boston, MA 02108-3913 President - Risk Analysis and
Age 41 Avoidance, Putnam Investor
Services (mutual fund group),
from October, 1987 to January,
1989.
John M. Corcoran Assistant Assistant Vice President,
Mutual Funds Service Co. Treasurer Manager of Administration,
73 Tremont Street Mutual Funds Service Company,
Boston, MA 02108-3913 since October, 1993; Audit
Age 30 Manager, Ernst & Young, from August,
1987 to September, 1993.
</TABLE>
Each director receives an annual fee of $9,000 plus a meeting fee of
$1,500 for each meeting attended and is reimbursed for expenses incurred in
attending meetings. The Chairman of the Board is entitled to receive an
additional $5,000 per annum for services in such capacity. Drinker Biddle &
Reath, of which Mr. McConnel is a partner, receives legal fees as counsel to
Master Fund. The employees of Mutual Funds Service Company do not receive any
compensation from Master Fund for acting as officers of Master Fund. No person
who is currently an officer, director or employee of the Investment Adviser or
any Sub-Adviser serves as an officer, director or employee of Master Fund. The
directors and officers of Master Fund own less than 1% of the Shares of any
Fund.
-21-
<PAGE>
The following chart provides certain information about the fees
received by Master Fund's directors in the most recently completed fiscal year.
<TABLE>
<CAPTION>
Pension or
Retirement Total
Benefits Compensation
Accrued as from Master Fund
Aggregate Part of and Fund
Name of Compensation from Fund Complex* Paid
Person/Position Master Fund Expenses to Directors
--------------- ----------------- ---------- ----------------------------------
<S> <C> <C> <C>
Alfred C. Tannachion $20,000 None $40,000
Chairman of the Board,
President and Treasurer
Donald L. Campbell $20,000 None $40,000
Director
Joseph H. Dugan $20,000 None $40,000
Director
Wolfe J. Frankl $20,000 None $40,000
Director
Robert A. Robinson
Director $20,000 None $40,000
</TABLE>
________________________
* The "Fund Complex" consists of UST Master Funds, Inc., UST Master Tax-
Exempt Funds, Inc. and UST Master Variable Series, Inc. For the fiscal
year ended March 31, 1995, UST Master Variable Series, Inc. did not pay
any directors' fees.
Investment Advisory, Sub-Advisory and Administration Agreements
---------------------------------------------------------------
United States Trust Company of New York serves as Investment Adviser
to the Funds, and FACAM provides Sub-Advisory services with respect to the
International and Pan European Funds. FCEML serves as Sub-Adviser to the
Emerging Americas and Pacific/Asia Funds. In the Investment Advisory and Sub-
Advisory Agreements, the Investment Adviser and Sub-Advisers have agreed to
provide the services described in the Prospectuses. The Investment Adviser
and Sub-Advisers have also agreed to pay all expenses incurred by them in
connection with their activities under the respective agreements other than the
cost of securities, including brokerage commissions, purchased for the
Funds.
For the fiscal year ended March 31, 1993, Master Fund paid the
Investment Adviser $405,494 with respect to the
-22-
<PAGE>
International Fund. During this period, FACAM received sub-advisory fees with
respect to the International Fund from the Investment Adviser totalling
$283,846. For the period from December 31, 1992 (commencement of operations) to
March 31, 1993, Master Fund paid the Investment Adviser $561, $10,010 and $0
with respect to the Emerging Americas, Pacific/Asia and Pan European Funds,
respectively. For the same period, the Investment Adviser waived fees totalling
$5,530, $5,144 and $5,876 with respect to the Emerging Americas, Pacific/Asia
and Pan European Funds, respectively. During this period, FCEML received sub-
advisory fees with respect to the Emerging Americas Fund totalling $3,045 and
FACAM received sub-advisory fees with respect to the Pan European Fund totalling
$4,113. FACAM served as sub-adviser to the Pacific/Asia Fund from its
commencement of operations to June 30, 1993. During the period from commencement
of operations to March 31, 1993, FACAM received sub-advisory fees of $10,608
with respect to the Pacific/Asia Fund.
For the fiscal year ended March 31, 1994, Master Fund paid the
Investment Adviser $417,136, $131,416, $240,305 and $160,310 with respect to the
International, Emerging Americas, Pacific/Asia and Pan European Funds,
respectively. For the same period the Investment Adviser waived fees totalling
$2,244, $36,056, $75,624 and $20,318 with respect to the International, Emerging
Americas, Pacific/Asia and Pan European Funds, respectively. For the fiscal
year ended March 31, 1994, FACAM received sub-advisory fees with respect to the
International and Pan European Funds from the Investment Adviser totalling
$293,566 and $126,440, respectively. For the same period, FCEML received sub-
advisory fees with respect to the Emerging Americas Fund and FCEML and FACAM
received aggregate sub-advisory fees with respect to the Pacific/Asia Fund from
the Investment Adviser totalling $65,708 and $168,214, respectively.
For the fiscal year ended March 31, 1995, Master Fund paid the
Investment Advisor advisory fees of $574,455, $368,128, $480,194, and $375,873
with respect to the International, Emerging Americas, Pacific/Asia, and Pan
European Funds, respectively. For the same period the Investment Adviser waived
fees totalling $37,822, $24,068, $27,189 and $22,473, with respect to the
International, Emerging Americas, Pacific/Asia and Pan European Funds,
respectively. For the fiscal year ended March 31, 1995, FACAM received sub-
advisory fees with respect to the International and Pan European Funds totalling
$_______ and $_______, respectively, and FCEML received sub-advisory fees with
respect to the Emerging Americas and Pacific/Asia Funds totaling $______ and
$______, respectively.
The Investment Adviser may, from time to time, voluntarily waive a
portion of its fees, which waiver may be terminated at any time.
-23-
<PAGE>
The Investment Advisory Agreement and the Sub-Advisory Agreements
provide that the Investment Adviser and Sub-Advisers shall not be liable for any
error of judgment or mistake of law or for any loss suffered by the Funds in
connection with the performance of such agreements, except a loss resulting from
a breach of fiduciary duty with respect to the receipt of compensation for
services or a loss resulting from willful misfeasance, bad faith or gross
negligence on the part of the Investment Adviser or Sub-Advisers in the
performance of their duties or from reckless disregard by either of them of
their duties and obligations thereunder.
Mutual Funds Service Company ("MFSC") and Concord Holding Corporation
(the "Administrators") jointly served as the Funds' administrators until July
31, 1995. Under the Administration Agreement, the Administrators have agreed to
maintain office facilities for the Funds, furnish the Funds with statistical and
research data, clerical, accounting, and bookkeeping services, and certain other
services required by the Funds, and to compute the net asset values, net income
and realized capital gains or losses, if any, of the Funds. The Administrators
prepare semi-annual reports to the Securities and Exchange Commission, prepare
Federal and state tax returns, prepare filings with state securities
commissions, arrange for and bear the cost of processing Share purchase and
redemption orders, maintain the Funds' financial accounts and records, and
generally assist in the Funds' operations.
Effective August 1, 1995, administrative services will be provided by
MFSC and Federated Administrative Services, an affiliate of its Distributor,
under an administration agreement having substantially the same terms as the
Administration Agreement currently in effect.
For the fiscal year ended March 31, 1993, Master Fund paid the
Administrators $81,099 in the aggregate with respect to the International Fund.
For the period from December 31, 1992 (commencement of operations) to March 31,
1993, Master Fund paid the Administrators, after expense reimbursements, $4,500,
$1,450 and $4,500 in the aggregate with respect to the Emerging Americas,
Pacific/Asia and Pan European Funds, respectively. For the same period, the
Administrators reimbursed expenses totalling $3,050 with respect to the Pan
European Fund.
For the fiscal year ended March 31, 1994, Master Fund paid the
Administrators $83,885, $37,765, $63,192 and $41,471 in the aggregate with
respect to the International, Emerging Americas, Pacific/Asia and Pan European
Funds, respectively.
For the fiscal year ended March 31, 1995, Master Fund paid the
Administrators $122,374, $78,418, $101,468 and $79,669 in the aggregate with
respect to the International Funds, respectively. For the same period, MFSC and
Concord waived fees
-24-
<PAGE>
totalling $81, $21 and $9 with respect to the International, Emerging Americas
and Pacific/Asia Funds, respectively.
The Administrators may, from time to time, voluntarily waive a portion
of their fees, which waivers may be terminated at any time.
Service Organizations
---------------------
As stated in the Prospectuses, Master Fund will enter into
agreements with Service Organizations. Such shareholder servicing agreements
will require the Service Organizations to provide shareholder administrative
services to their Customers who beneficially own Shares in consideration for a
Fund's payment (on an annualized basis) of up to .40% of the average daily net
assets of the Fund's Shares beneficially owned by Customers of the Service
Organization. The expenses under these agreements will be borne by the
particular series of a Fund that were provided services. Such services may
include: (a) assisting Customers in designating and changing dividend options,
account designations and addresses; (b) providing necessary personnel and
facilities to establish and maintain certain shareholder accounts and records,
as may reasonably be requested from time to time by Master Fund; (c) assisting
in processing purchases, exchange and redemption transactions; (d) arranging for
the wiring of funds; (e) transmitting and receiving funds in connection with
Customer orders to purchase, exchange or redeem Shares; (f) verifying and
guaranteeing Customer signatures in connection with redemption orders, transfers
among and changes in Customer-designated accounts; (g) providing periodic
statements showing a Customer's account balances and, to the extent practicable,
integrating such information with information concerning other client
transactions otherwise effected with or through the Service Organization; (h)
furnishing on behalf of Master Fund's distributor (either separately or on an
integrated basis with other reports sent to a Customer by the Service
Organization) periodic statements and confirmations of all purchases, exchanges
and redemptions of Shares in a Customer's account required by applicable federal
or state law; (i) transmitting proxy statements, annual reports, updating
prospectuses and other communications from the Master Fund's to Customers; (j)
receiving, tabulating and transmitting to the Master Fund's proxies executed by
Customers with respect to annual and special meetings of shareholders of Master
Fund; (k) providing reports (at least monthly, but more frequently if so
requested by Master Fund's distributor) containing state-by-state listings of
the principal residences of the beneficial owners of the Shares; and (l)
providing or arranging for the provision of such other related services as
Master Fund or a Customer may reasonably request.
-25-
<PAGE>
Master Fund's agreements with Service Organizations are governed by an
Administrative Services Plan (the "Plan") adopted by Master Fund. Pursuant to
the Plan, Master Fund's Board of Directors will review, at least quarterly, a
written report of the amounts expended under Master Fund's agreements with
Service Organizations and the purpose for which the expenditures were made. In
addition, the arrangements with Service Organizations will be approved annually
by a majority of Master Fund's directors, including a majority of the directors
who are not "interested persons" of Master Fund as defined in the 1940 Act and
have no direct or indirect financial interest in such arrangements (the
"Disinterested Directors").
Any material amendment to Master Fund's arrangements with Service
Organizations must be approved by a majority of Master Fund's Board of Directors
(including a majority of the Disinterested Directors). So long as Master Fund's
arrangements with Service Organizations are in effect, the selection and
nomination of the members of Master Fund's Board of Directors who are not
"interested persons" (as defined in the 1940 Act) of Master Fund will be
committed to the discretion of such non-interested Directors.
For the fiscal year ended March 31, 1995 AND 1994, payments to Service
Organizations totalled $37,903 AND $2,244, $24,089 AND $2,025, $27,198 AND
$2,555 AND $22,473 and $1,499 with respect to the International, Emerging
Americas, Pacific/Asia and Pan European Funds, respectively. Of these amounts
$36,955 and $2,244, $23,712 and $2,025, $26,836 and $2,555 and $22,338 and
$1,499 were paid to affiliates of U.S. Trust with respect to the International,
Emerging Americas, Pacific/Asia and Pan European Funds, respectively.
Expenses
--------
Except as otherwise noted, the Investment Adviser, Sub-Advisers and
the Administrators bear all expenses in connection with the performance of their
services. Each Fund bears the expenses incurred in its operations. Expenses of a
Fund include taxes; interest; fees (including fees paid to its directors and
officers who are not affiliated with the Distributor or the Administrators);
Securities and Exchange Commission fees; state securities qualification fees;
costs of preparing and printing prospectuses for regulatory purposes and for
distribution to shareholders; expenses related to the 12b-1 plan; advisory,
administration and administrative servicing fees; charges of the custodian,
transfer agent, and dividend disbursing agent; certain insurance premiums;
outside auditing and legal expenses; costs of shareholder reports and meetings;
and any extraordinary expenses. A Fund also pays for brokerage fees and
commissions in connection with the purchase of portfolio securities.
If the expenses borne by a Fund in any fiscal year exceed expense
limitations imposed by applicable state securities
-26-
<PAGE>
regulations, the Investment Adviser and the Administrators will reimburse the
affected Fund for a portion of any such excess to the extent required by such
regulations in proportion to the fees received by them in such year up to the
amount of the fees payable to them, provided, however, to the extent required by
such state regulations, the Investment Adviser and the Administrators have
agreed to effect such reimbursement regardless of the fees payable to them. In
addition, FACAM and FCEML have agreed to pay the Investment Adviser an amount
equal to 70% and 50%, respectively, of each expense reimbursement made by the
Investment Adviser to any Fund for which they are Sub-Adviser pursuant to the
foregoing undertaking. The amounts of the above reimbursements, if any, will be
estimated, reconciled and paid on a monthly basis. To Master Fund's knowledge,
of the applicable expense limitations in effect on the date of this Statement of
Additional Information, none is more restrictive than the following: 2 1/2% of
the first $30 million of average annual net assets, 2% of the next $70 million
of average annual net assets and 1 1/2% of average annual net assets in excess
of $100 million.
Custodian and Transfer Agent
----------------------------
United States Trust Company of New York also serves as custodian of
the Fund's assets. Under the custodian agreement, U.S. Trust has agreed to (i)
maintain a separate account or accounts in the name of the Fund; (ii) make
receipts and disbursements of money on behalf of the Fund; (iii) collect and
receive all income and other payments and distributions on account of the Fund's
portfolio securities; (iv) respond to correspondence from securities brokers and
others relating to its duties; (v) maintain certain financial accounts and
records; and (vi) make periodic reports to Master Tax-Exempt Fund's Board of
Directors concerning the Fund's operations. U.S. Trust is entitled to monthly
fees for furnishing custodial services according to the following fee schedule:
on the face value of debt securities and the market value of equity securities,
a fee at the annual rate of .05%; on issues held, $50.00 for each physical issue
held, $25.00 for each book-entry issue held and 1/4 of 1% of market value for
each foreign issue held; on transactions, $25.00 for each physical transaction,
$15.00 for each book-entry transaction and $50.00 for each foreign security
transaction. In addition, U.S. Trust is entitled to reimbursement for its
out-of-pocket expenses in connection with the above services.
U.S. Trust also serves as the Fund's transfer agent and dividend
disbursing agent. In such capacity, U.S. Trust has agreed to (i) issue and
redeem Shares; (ii) address and mail all communications by the Fund to its
shareholders, including reports to shareholders, dividend and distribution
notices, and proxy materials for its meetings of shareholders; (iii) respond to
correspondence by shareholders and others relating to its duties; (iv) maintain
shareholder accounts; and (v) make periodic reports to Master Tax-Exempt Fund
concerning the Fund's operations. For its transfer agency, dividend disbursing,
and subaccounting services, U.S. Trust is entitled to receive $15.00 per annum
per account and subaccount. In addition, U.S. Trust is entitled to be
reimbursed for its out-of-pocket expenses for the cost of forms, postage,
processing purchase and redemption orders, handling of proxies, and other
similar expenses in connection with the above services.
U.S. Trust may, at its own expense, open and maintain custody accounts
with respect to the Fund with other banks or trust companies, and may delegate
its transfer agency obligations to another transfer agent registered or
qualified under applicable law, provided that U.S. Trust shall remain liable for
the performance of all of its custodial and transfer agency duties under the
Custodian and Transfer Agency Agreement, notwithstanding any delegation.
Pursuant to this provision in the agreement, U.S. Trust has entered into a
sub-transfer agency arrangement with MFSC, an affiliate of U.S. Trust, with
respect to accounts of shareholders who are not Customers of U.S. Trust. For
the services provided by MFSC, U.S. Trust has agreed to pay MFSC $15.00 per
annum per account or subaccount plus out-of-pocket expenses. MFSC receives no
fee directly from Master Tax-Exempt Fund for any of its sub-transfer agency
services.
PORTFOLIO TRANSACTIONS
----------------------
Subject to the general control of Master Fund's Board of Directors,
the Investment Adviser is responsible for and makes decisions with respect to
all U.S. securities acquired for the Funds. FACAM and FCEML supervise through
their trading desks the execution of all transactions in foreign securities for
the Funds for which they serve as Sub-Adviser.
The Funds may engage in short-term trading to achieve their investment
objectives. Portfolio turnover may vary greatly from year to year as well as
within a particular year. The Funds' portfolio turnover rate may also be
affected by cash requirements for redemptions of Shares and by regulatory
provisions which enable a Fund to receive certain favorable tax treatment.
Portfolio turnover will not be a limiting factor in making portfolio decisions.
See "Financial Highlights" in the Funds' Prospectuses for the Funds' portfolio
turnover rates.
Transactions on U.S. stock exchanges involve the payment of negotiated
brokerage commissions. On exchanges on which commissions are negotiated, the
cost of transactions may vary among different brokers. Transactions on foreign
stock exchanges involve payment for brokerage commissions which are generally
fixed. For the fiscal years ended March 31, 1993, March 31, 1994 and March 31,
1995, the International Fund paid brokerage commissions aggregating $177,294,
$187,670 and
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<PAGE>
$234,115, respectively. For the period from December 31, 1992 (commencement of
operations) to March 31, 1993 and for the fiscal years ended March 31, 1994 and
March 31, 1995, the Emerging Americas, Pacific/Asia and Pan European Funds paid
brokerage commissions aggregating $13,100, $167,502 and $200,467, $57,218,
$377,060 and $300,058, and $3,660, $97,169 and $88,275, respectively.
Transactions in both foreign and domestic over-the-counter markets are
generally principal transactions with dealers, and the costs of such
transactions involve dealer spreads rather than brokerage commissions. With
respect to over-the-counter transactions, a Fund, where possible, will deal
directly with the dealers who make a market in the securities involved, except
in those circumstances where better prices and execution are available
elsewhere. The cost of securities purchased from underwriters includes an
underwriting commission or concession.
The Investment Advisory Agreements between Master Fund and U.S. Trust,
and the Sub-Advisory Agreements between U.S. Trust and FACAM and between U.S.
Trust and FCEML, provide that, in executing portfolio transactions and selecting
brokers or dealers, the Investment Adviser and Sub-Advisers will seek to obtain
the best net price and the most favorable execution. The Investment Adviser and
Sub-Advisers shall consider factors they deem 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 whether such broker or
dealer is selling shares of Master Fund, and the reasonableness of the
commission, if any, for the specific transaction and on a continuing basis.
In addition, the Investment Advisory and Sub-Advisory Agreements
authorize the Investment Adviser and Sub-Advisers, to the extent permitted by
law and subject to the review of Master Fund's Board of Directors from time to
time with respect to the extent and continuation of the policy, to cause a Fund
to pay a broker which furnishes brokerage and research services a higher
commission than that which might be charged by another broker for effecting the
same transaction, provided that the Investment Adviser and Sub-Advisers
determine in good faith that such commission is reasonable in relation to the
value of the brokerage and research services provided by such broker, viewed in
terms of either that particular transaction or the overall responsibilities of
the Investment Adviser and Sub-Advisers to the accounts as to which they
exercise investment discretion. Such brokerage and research services might
consist of reports and statistics on specific companies or industries, general
summaries of groups of stocks and their comparative earnings, or broad overviews
of the stock market and the economy. Such services
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<PAGE>
might also include reports on global, regional, and country-by-country prospects
for economic growth, anticipated levels of inflation, prevailing and expected
interest rates, and the outlook for currency relationships.
Supplementary research information so received is in addition to and
not in lieu of services required to be performed by U.S. Trust, FACAM and FCEML
and does not reduce the investment advisory fees payable by the Funds. Such
information may be useful to U.S. Trust, FACAM or FCEML in serving the Funds and
other clients and, conversely, supplemental information obtained by the
placement of business of other clients may be useful to U.S. Trust, FACAM and
FCEML in carrying out their obligations to the Funds.
Portfolio securities will not be purchased from or sold to the
Investment Adviser, Sub-Advisers, or the Distributor, or any affiliated person
of any of them (as such term is defined in the 1940 Act) acting as principal,
except to the extent permitted by the Securities and Exchange Commission.
Investment decisions for each Fund are made independently from those
for other investment companies, common trust funds and other types of funds
managed by U.S. Trust or FACAM or FCEML. Such other investment companies and
funds may also invest in the same securities as the Funds. When a purchase or
sale of the same security is made at substantially the same time on behalf of a
Fund and another investment company or common trust fund, the transaction will
be averaged as to price, and available investments allocated as to amount, in a
manner which U.S. Trust, FACAM or FCEML, as applicable, believes to be equitable
to the Fund and such other investment company or common trust fund. In some
instances, this investment procedure may adversely affect the price paid or
received by a Fund or the size of the position obtained by the Fund. To the
extent permitted by law, U.S. Trust, FACAM and FCEML may aggregate the
securities to be sold or purchased for the Funds with those to be sold or
purchased for other investment companies or common trust funds in order to
obtain best execution.
Master Fund is required to identify any securities of its regular
brokers or dealers (as defined in Rule 10b-1 under the 1940 Act) or their
parents held by Master Fund as of the close of its most recent fiscal year. As
of March 31, 1995, the following portfolios of Master Fund held the following
securities of Master Fund's regular brokers or dealers or their parents: (a) the
Money Fund held the following securities: repurchase agreement with Nomura
Securities, Inc. in the principal amount of $19,685,063, repurchase agreement
with Fuji Securities, Inc. in the principal amount of $20,000,000, commercial
paper of Merrill Lynch & Co., Inc. in the principal amount of $35,000,000 and
commercial paper of UBS Finance in the principal amount of $30,000,000; (b) the
Government Money Fund held the following securities: repurchase agreement with
Nomura Securities, Inc. in the principal amount of $20,216,462 and repurchase
agreement with Fuji Securities, Inc. in the principal amount of $20,000,000; (c)
the International Fund held the following security: 27,000 shares of Nomura
Securities Co., Ltd.; and (d) the Pacific/Asia Fund held the following security:
26,000 shares of Nomura Securities Co., Ltd. Nomura Securities International,
Inc., Fuji Bank & Trust, Merrill Lynch, Pierce, Fenner & Smith, Inc. and UBS
Securities are considered to be regular brokers and dealers of Master Fund.
-29-
<PAGE>
INDEPENDENT AUDITORS
--------------------
Ernst & Young LLP, independent auditors, 200 Clarendon Street, Boston,
MA 02116, serve as auditors of Master Fund. The Funds' Financial Highlights
included in the Prospectuses and the financial statements for the period ended
March 31, 1995 incorporated by reference in this Statement of Additional
Information have been audited by Ernst & Young LLP for the periods included in
their report thereon which appears therein.
COUNSEL
-------
Drinker Biddle & Reath (of which Mr. McConnel, Secretary of Master
Fund, is a partner), 1345 Chestnut Street, Philadelphia, Pennsylvania 19107, is
counsel to Master Fund and will pass upon the legality of the Shares offered by
the PROSPECTUSES.
ADDITIONAL INFORMATION CONCERNING TAXES
---------------------------------------
Generally
---------
The following supplements the tax information contained in the
PROSPECTUSES.
Each Fund is treated as a separate corporate entity under the Internal
Revenue Code of 1986, as amended (the "Code"), and intends to qualify as a
regulated investment company. If, for any reason, a Fund does not qualify for a
taxable year for the special Federal tax treatment afforded regulated investment
companies, the Fund would be subject to Federal tax on all of its taxable income
at regular corporate rates, without any deduction for distributions to
shareholders. In such event, dividend distributions would be taxable as ordinary
income to shareholders to the extent of such Fund's current and accumulated
earnings and profits and would be eligible for the dividends received deduction
in the case of corporate shareholders.
A 4% non-deductible excise tax is imposed on regulated investment
companies that fail to currently distribute an amount equal to specified
percentages of their ordinary taxable income and capital gain net income (excess
of capital gains over capital losses). Each Fund intends to make sufficient
distributions or deemed distributions of its ordinary taxable income and any
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<PAGE>
capital gain net income prior to the end of each calendar year to avoid
liability for this excise tax.
A Fund will not be treated as a regulated investment company under the
Code if 30% or more of the Fund's gross income for a taxable year is derived
from gains realized on the sale or other disposition of the following
investments held for less than three months (the "30% test"): (1) stock and
securities (as defined in section 2(a)(36) of the 1940 Act); (2) options,
futures and forward contracts other than those on foreign currencies; and (3)
foreign currencies (and options, futures and forward contracts on foreign
currencies) that are not directly related to the Fund's principal business of
investing in stock and securities (and options and futures with respect to
stocks and securities). Interest (including original issue discount and, accrued
market discount) received by a Fund upon maturity or disposition of a security
held for less than three months will not be treated as gross income derived from
the sale or other disposition of such security within the meaning of this
requirement. However, any other income which is attributable to realized market
appreciation will be treated as gross income from the sale or other disposition
of securities for this purpose. With respect to covered call options, if the
call is exercised by the holder, the premium and the price received on exercise
constitute the proceeds of sale, and the difference between the proceeds and the
cost of the securities subject to the call is capital gain or loss. Premiums
from expired call options written by a Fund and net gains from closing purchase
transactions are treated as short-term capital gains for Federal income tax
purposes, and losses on closing purchase transactions are short-term capital
losses. With respect to forward contracts, futures contracts, options on futures
contracts, and other financial instruments subject to the marking-to-market
rules described below under "Taxation of Certain Financial Instruments," the
Internal Revenue Service has ruled in private letter rulings that a gain
realized from such a contract, option or financial instrument will be treated as
being derived from a security held for three months or more (regardless of the
actual period for which the contract, option or instrument is held) if the gain
arises as a result of a constructive sale under the marking-to-market rules, and
will be treated as being derived from a security held for less than three months
only if the contract, option or instrument is terminated (or transferred) during
the taxable year (other than by reason of marking-to-market) and less than three
months have elapsed between the date the contract, option or instrument is
acquired and the termination date. Increases and decreases in the value of a
Fund's forward contracts, futures contracts, options on futures contracts and
other investments that qualify as part of a "designated hedge," as defined in
Section 851(g) of the Code, may be netted for purposes of determining whether
the 30% test is met.
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<PAGE>
Each Fund will designate any distribution of the excess of net long-
term capital gain over net short-term capital loss as a capital gain dividend in
a written notice mailed to shareholders within 60 days after the close of the
Fund's taxable year. Shareholders should note that, upon the sale or exchange of
Fund Shares, if the shareholder has not held such Shares for more than six
months, any loss on the sale or exchange of those Shares will be treated as
long-term capital loss to the extent of the capital gain dividends received with
respect to the Shares.
A Fund will be required in certain cases to withhold and remit to the
U.S. Treasury 31% of taxable dividends or gross proceeds realized upon sale paid
to shareholders who have failed to provide a correct tax identification number
in the manner required, who are subject to withholding by the Internal Revenue
Service for failure properly to include on their return payments of taxable
interest or dividends, or who have failed to certify to the Fund when required
to do so either that they are not subject to backup withholding or that they are
"exempt recipients."
Taxation of Certain Financial Instruments
-----------------------------------------
Generally, futures contracts and options on futures held by a Fund at
the close of its taxable year will be treated for Federal income tax purposes as
sold for their fair market value on the last business day of such year, a
process known as "marking-to-market." Forty percent of any gain or loss
resulting from such constructive sale will be treated as short-term capital gain
or loss and 60% of such gain or loss will be treated as long-term capital gain
or loss without regard to the length of time the Fund holds the futures contract
or related option (the "40%-60% rule"). The amount of any capital gain or loss
actually realized by a Fund in a subsequent sale or other disposition of those
futures contracts and related options will be adjusted to reflect any capital
gain or loss taken into account by the Fund in a prior year as a result of the
constructive sale of the contracts and options. Losses with respect to futures
contracts to sell and related options, which are regarded as parts of a "mixed
straddle" because their values fluctuate inversely to the values of specific
securities held by a Fund, are subject to certain loss deferral rules which
limit the amount of loss currently deductible on either part of the straddle to
the amount thereof which exceeds the unrecognized gain (if any) with respect to
the other part of the straddle, and to certain wash sales regulations. Under
short sales rules, which are also applicable, the holding period of the
securities forming part of the straddle will (if they have not been held for the
long-term holding period) be deemed not to begin prior to termination of the
straddle. With respect to certain futures contracts and related options,
deductions for interest and
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<PAGE>
carrying charges will not be allowed. Notwithstanding the rules described above,
with respect to futures contracts to sell and related options which are properly
identified as such, a Fund may make an election which will exempt (in whole or
in part) those identified futures contracts and options from being treated for
Federal income tax purposes as sold on the last business day of the Fund's
taxable year, but gains and losses will be subject to such short sales, wash
sales and loss deferral rules, and the requirement to capitalize interest and
carrying charges. Under Temporary Regulations, a Fund would be allowed (in lieu
of the foregoing) to elect either (1) to offset gains or losses from positions
which are part of a mixed straddle by separately identifying each mixed straddle
to which such treatment applies, or (2) to establish a mixed straddle account
for which gains and losses would be recognized and offset on a periodic basis
during the taxable year. Under either election, the 40%-60% rule will apply to
the net gain or loss attributable to the futures contracts and options, but in
the case of a mixed straddle account election, not more than 50 percent of any
net gain may be treated as long term and no more than 40 percent of any net loss
may be treated as short term.
Certain foreign currency contracts entered into by the Funds
(including forward foreign currency exchange transactions) may be subject to the
"marking-to-market" rules described above. To receive such treatment, a foreign
currency contract must meet the following conditions: (1) the contract must
require delivery of a foreign currency of a type in which regulated futures
contracts are traded or upon which the settlement value of the contract depends;
(2) the contract must be entered into at arm's length at a price determined by
reference to the price in the interbank market; and (3) the contract must be
traded in the interbank market. The Treasury Department has broad authority to
issue regulations under these provisions. As of the date of this Statement of
Additional Information, the Treasury Department has not issued any such
regulations. Other foreign currency contracts entered into by the Funds may
result in the creation of one or more straddles for Federal income tax purposes,
in which case certain loss deferral, short sales, and wash sales rules and the
requirement to capitalize interest and carrying charges may apply.
The Funds' investments may also be subject to the provisions of
Subpart J of the Code which govern the Federal income tax treatment of certain
transactions denominated in terms of a currency other than the U.S. dollar or
determined by reference to the value of one or more currencies other than the
U.S. dollar. The types of transactions covered by the special rules include the
following: (1) the acquisition of, or becoming the obligor under, a bond or
other debt instrument (including, to the extent provided in Treasury
regulations, preferred stock);
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<PAGE>
(2) the accruing of certain trade receivables and payables; and (3) the entering
into or acquisition of any forward contract, futures contract, option and
similar financial instrument. The disposition of a currency other than the U.S.
dollar by a U.S. taxpayer is also treated as a transaction subject to the
special currency rules. However, foreign currency-related regulated futures
contracts and nonequity options are generally not subject to the special
currency rules if they are or would be treated as sold for their fair market
value at year-end under the marking-to-market rules unless an election is made
to have such currency rules apply. With respect to transactions covered by the
special rules, foreign currency gain or loss is calculated separately from any
gain or loss on the underlying transaction and is normally taxable as ordinary
gain or loss. A taxpayer may elect to treat as capital gain or loss foreign
currency gain or loss arising from certain identified forward contracts, futures
contracts and options that are capital assets in the hands of the taxpayer and
which are not part of a straddle. In accordance with the Treasury regulations,
certain transactions that are part of a "Section 988 hedging transaction" (as
defined in the Code and Treasury regulations) will be integrated and treated as
a single transaction or otherwise treated consistently for purposes of the Code.
"Section 988 hedging transactions" are not subject to the marking-to-market or
loss deferral rules under the Code. It is anticipated that some of the non-U.S.
dollar-denominated investments that a Fund may make (such as non-U.S. dollar-
denominated debt securities and obligations and certain preferred stocks) and
some of the foreign currency contracts a Fund may enter into will be subject to
the special currency rules described above. Exchange gains and losses
attributable to foreign currency transactions engaged in by a Fund which are not
subject to the special currency rules (such as foreign equity investments other
than certain preferred stocks) will be treated as capital gains or losses and
will not be segregated from the gain or loss on the underlying transaction.
The foregoing discussion is based on Federal tax laws and regulations
which are in effect on the date of this Statement of Additional Information;
such laws and regulations may be changed by legislative or administrative
action. Shareholders are advised to consult their tax advisers concerning their
specific situations and the application of state and local taxes.
PERFORMANCE INFORMATION
-----------------------
The Funds may advertise the "average annual total return" for Service
Shares and Distribution Shares. Such return is computed by determining the
average annual compounded rate of return during specified periods that equates
the initial amount invested to the ending redeemable value of such investment
according to the following formula:
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<PAGE>
ERV /1/n/
T = [(-----) - 1]
P
Where: T = average annual total return.
ERV = ending redeemable value of a hypothetical $1,000 payment
made at the beginning of the 1, 5 or 10 year (or other)
periods at the end of the applicable period (or a fractional
portion thereof).
P = hypothetical initial payment of $1,000.
n = period covered by the computation, expressed in years.
Each Fund that advertises an "aggregate total return" for its Service
Shares and Distribution Shares computes such return by determining the aggregate
compounded rates of return during specified periods that likewise equate the
initial amount invested to the ending redeemable value of such investment. The
formula for calculating aggregate total return is as follows:
ERV
Aggregate Total Return = [(------)] - 1
P
The above calculations are made assuming that (1) all dividends and
capital gain distributions are reinvested on the reinvestment dates at the price
per Share existing on the reinvestment date (reflecting any sales load charged
upon such reinvestment), (2) all recurring fees charged to all shareholder
accounts are included, and (3) for any account fees that vary with the size of
the account, a mean (or median) account size in a Fund during the periods is
reflected. The ending redeemable value (variable "ERV" in the formula) is
determined by assuming complete redemption of the hypothetical investment after
deduction of all nonrecurring charges at the end of the measuring period. In
addition, the Funds' average annual total return and aggregate total return
quotations will reflect the deduction of the maximum sales load charged in
connection with the purchase of Shares.
Based on the foregoing calculations, the average annual total returns
for the Service Shares of the International Fund for the one year period ended
March 31, 1995, for the five-year period ended March 31, 1995, and for the
period from July 21, 1987 (commencement of operations) to March 31, 1995 were
(6.33)%, 1.67%, and 4.60%, respectively. The average annual total returns for
the Service Shares of the Emerging Americas, Pacific/Asia and Pan European Funds
for the one year period ended March 31, 1995
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<PAGE>
and for the period from December 31, 1992 (commencement of operations) to March
31, 1995 were (33.61)%, (10.10)% and (0.38)% and (4.90)%, 13.78% and 6.40%,
respectively. No Distribution Shares of the International Emerging Americas,
Pacific/Asia and Pan European Funds had been issued as of March 31, 1995.
The Funds may also from time to time include in advertisements, sales
literature and communications to shareholders a total return figure that is not
calculated according to the formula set forth above in order to compare more
accurately a Fund's performance with other measures of investment return. For
example, in comparing a Fund's total return with data published by Lipper
Analytical Services, Inc., CDA Investment Technologies, Inc. or Weisenberger
Investment Company Service, or with the performance of an index, a Fund may
calculate its aggregate total return for the period of time specified in the
advertisement, sales literature or communication by assuming the investment of
$10,000 in Shares and assuming the reinvestment of each dividend or other
distribution at net asset value on the reinvestment date. Percentage increases
are determined by subtracting the initial value of the investment from the
ending value and by dividing the remainder by the beginning value. A Fund does
not, for these purposes, deduct from the initial value invested any amount
representing sales charges. A Fund will, however, disclose the maximum sales
charge and will also disclose that the performance data does not reflect sales
charges and that inclusion of sale charges would reduce the performance quoted.
The total return of Shares of a Fund may be compared to those of
other mutual funds with similar investment objectives and to other relevant
indices or to ratings prepared by independent services or other financial or
industry publications that monitor the performance of mutual funds. For example,
the total return of a Fund may be compared to data prepared by Lipper Analytical
Services, Inc., CDA Investment Technologies, Inc. and Weisenberger Investment
Company Service. Total return and yield data as reported in national financial
publications such as Money Magazine, Forbes, Barron's, The Wall Street Journal
----- -------- ------ -------- --- ---- ------ -------
and The New York Times, or in publications of a local or regional nature, may
--- --- ---- -----
also be used in comparing the performance of a Fund. Advertisements, sales
literature or reports to shareholders may from time to time also include a
discussion and analysis of each Fund's performance, including without
limitation, those factors, strategies and techniques that together with market
conditions and events, materially affected each Fund's performance.
The Funds may also from time to time include discussions or
illustrations of the effects of compounding in advertisements. "Compounding"
refers to the fact that, if
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<PAGE>
dividends or other distributions of a Fund investment are reinvested by being
paid in additional Fund Shares, any future income or capital appreciation of a
Fund would increase the value, not only of the original Fund investment, but
also of the additional Fund Shares received through reinvestment. As a result,
the value of the Fund investment would increase more quickly than if dividends
or other distributions had been paid in cash. The Funds may also include
discussions or illustrations of the potential investment goals of a prospective
investor, investment management techniques, policies or investment suitability
of a Fund, economic conditions, the effects of inflation and historical
performance of various asset classes, including but not limited to, stocks,
bonds and Treasury bills. From time to time advertisements, sales literature or
communications to shareholders may summarize the substance of information
contained in shareholder reports (including the investment composition of a
Fund), as well as the views of the Investment Adviser as to current market,
economy, trade and interest rate trends, legislative, regulatory and monetary
developments, investment strategies and related matters believed to be of
relevance to a Fund. The Funds may also include in advertisements charts, graphs
or drawings which illustrate the potential risks and rewards of investment in
various investment vehicles, including but not limited to, stocks, bonds,
treasury bills and Shares of a Fund. In addition, advertisement, sales
literature or shareholder communications may include a discussion of certain
attributes or benefits to be derived by an investment in a Fund. Such
advertisements or communicators may include symbols, headlines or other material
which highlight or summarize the information discussed in more detail
therein.
MISCELLANEOUS
-------------
As used in the Prospectuses, "assets belonging to a Fund" means the
consideration received upon the issuance of Shares in a Fund together with all
income, earnings, profits, and proceeds derived from the investment thereof,
including any proceeds from the sale of such investments, any funds or payments
derived from any reinvestment of such proceeds, and a portion of any general
assets of Master Fund not belonging to a particular portfolio of Master Fund. In
determining a Fund's net asset value, assets belonging to the Fund are charged
with the direct liabilities in respect of the Fund and with a share of the
general liabilities of Master Fund which are normally allocated in proportion to
the relative asset values of Master Fund's portfolios at the time of allocation.
Subject to the provisions of Master Fund's Charter, determinations by the Board
of Directors as to the direct and allocable liabilities, and the allocable
portion of any general assets with respect to the Fund, are conclusive.
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<PAGE>
As of July 11, 1995, U.S. Trust held of record substantially all of
the Shares in the Funds as agent or custodian for its customers, but did not own
such Shares beneficially because it did not have discretion to vote or invest
such Shares.
FINANCIAL STATEMENTS
--------------------
Master Fund's Annual Report to Shareholders for the fiscal year ended
March 31, 1995 (the "Annual Report") for the international equity portfolios
Annual Report accompanies this Statement of Additional Information. The
financial statements in the Annual Report for the International, Emerging
Americas, Pacific/Asia and Pan European Fund (the "Financial Statements") are
incorporated in this Statement of Additional Information by reference. The
Financial Statements included in the Annual Report for the fiscal year ended
March 31, 1995 have been audited by Master Fund's independent auditors, Ernst &
Young LLP, whose reports thereon also appear in such Annual Report and are
incorporated herein by reference. The Financial Statements in such Annual
Report have been incorporated herein in reliance upon such report given upon the
authority of such firm as experts in accounting and auditing. Additional copies
of the Annual Report may be obtained at no charge by telephoning MFSC at the
telephone number appearing on the front page of this Statement of Additional
Information.
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<PAGE>
APPENDIX A
----------
COMMERCIAL PAPER RATINGS
------------------------
A Standard & Poor's commercial paper rating is a current assessment of
the likelihood of timely payment of debt considered short-term in the relevant
market. The following summarizes the rating categories used by Standard and
Poor's for commercial paper:
"A-1" - Issue's degree of safety regarding timely payment is strong.
Those issues determined to possess extremely strong safety characteristics are
denoted "A-1+."
"A-2" - Issue's capacity for timely payment is satisfactory. However,
the relative degree of safety is not as high as for issues designated "A-1."
"A-3" - Issue has an adequate capacity for timely payment. It is,
however, somewhat more vulnerable to the adverse effects of changes and
circumstances than an obligation carrying a higher designation.
"B" - Issue has only a speculative capacity for timely payment.
"C" - Issue has a doubtful capacity for payment.
"D" - Issue is in payment default.
Moody's commercial paper ratings are opinions of the ability of
issuers to repay punctually promissory obligations not having an original
maturity in excess of 9 months. The following summarizes the rating categories
used by Moody's for commercial paper:
"Prime-1" - Issuer or related supporting institutions are considered
to have a superior capacity for repayment of short-term promissory obligations.
Prime-1 repayment capacity will normally be evidenced by the following
characteristics: leading market positions in well established industries; high
rates of return on funds employed; conservative capitalization structures with
moderate reliance on debt and ample asset protection; broad margins in earning
coverage of fixed financial charges and high internal cash generation; and well
established access to a range of financial markets and assured sources of
alternate liquidity.
A-1
<PAGE>
"Prime-2" - Issuer or related supporting institutions are considered
to have a strong capacity for repayment of short-term promissory obligations.
This will normally be evidenced by many of the characteristics cited above but
to a lesser degree. Earnings trends and coverage ratios, while sound, will be
more subject to variation. Capitalization characteristics, while still
appropriate, may be more affected by external conditions. Ample alternative
liquidity is maintained.
"Prime-3" - Issuer or related supporting institutions have an
acceptable capacity for repayment of short-term promissory obligations. The
effects of industry characteristics and market composition may be more
pronounced. Variability in earnings and profitability may result in changes in
the level of debt protection measurements and the requirement for relatively
high financial leverage. Adequate alternate liquidity is maintained.
"Not Prime" - Issuer does not fall within any of the Prime rating
categories.
The three rating categories of Duff & Phelps for investment grade
commercial paper and short-term debt are "D-1," "D-2" and "D-3." Duff & Phelps
employs three designations, "D-1+," "D-1" and "D-1-," within the highest rating
category. The following summarizes the rating categories used by Duff & Phelps
for commercial paper:
"D-1+" - Debt possesses highest certainty of timely payment. Short-
term liquidity, including internal operating factors and/or access to
alternative sources of funds, is outstanding, and safety is just below risk-free
U.S. Treasury short-term obligations.
"D-1" - Debt possesses very high certainty of timely payment.
Liquidity factors are excellent and supported by good fundamental protection
factors. Risk factors are minor.
"D-1-" - Debt possesses high certainty of timely payment. Liquidity
factors are strong and supported by good fundamental protection factors. Risk
factors are very small.
"D-2" - Debt possesses good certainty of timely payment. Liquidity
factors and company fundamentals are sound. Although ongoing funding needs may
enlarge total financing requirements, access to capital markets is good. Risk
factors are small.
"D-3" - Debt possesses satisfactory liquidity, and other protection
factors qualify issue as investment grade. Risk
A-2
<PAGE>
factors are larger and subject to more variation. Nevertheless, timely payment
is expected.
"D-4" - Debt possesses speculative investment characteristics.
Liquidity is not sufficient to ensure against disruption in debt service.
Operating factors and market access may be subject to a high degree of
variation.
"D-5" - Issuer has failed to meet scheduled principal and/or interest
payments.
Fitch short-term ratings apply to debt obligations that are payable on
demand or have original maturities of up to three years. The following
summarizes the rating categories used by Fitch for short-term obligations:
"F-1+" - Securities possess exceptionally strong credit quality.
Issues assigned this rating are regarded as having the strongest degree of
assurance for timely payment.
"F-1" - Securities possess very strong credit quality. Issues assigned
this rating reflect an assurance of timely payment only slightly less in degree
than issues rated "F-1+."
"F-2" - Securities possess good credit quality. Issues assigned this
rating have a satisfactory degree of assurance for timely payment, but the
margin of safety is not as great as the "F-1+" and "F-1" categories.
"F-3" - Securities possess fair credit quality. Issues assigned this
rating have characteristics suggesting that the degree of assurance for timely
payment is adequate; however, near-term adverse changes could cause these
securities to be rated below investment grade.
"F-S" - Securities possess weak credit quality. Issues assigned this
rating have characteristics suggesting a minimal degree of assurance for timely
payment and are vulnerable to near-term adverse changes in financial and
economic conditions.
"D" - Securities are in actual or imminent payment default.
Fitch may also use the symbol "LOC" with its short-term ratings to
indicate that the rating is based upon a letter of credit issued by a commercial
bank.
Thomson BankWatch short-term ratings assess the likelihood of an
untimely or incomplete payment of principal or
A-3
<PAGE>
interest of unsubordinated instruments having a maturity of one year or less
which is issued by United States commercial banks, thrifts and non-bank banks;
non-United States banks; and broker-dealers. The following summarizes the
ratings used by Thomson BankWatch:
"TBW-1" - This designation represents Thomson BankWatch's highest
rating category and indicates a very high degree of likelihood that principal
and interest will be paid on a timely basis.
"TBW-2" - This designation indicates that while the degree of safety
regarding timely payment of principal and interest is strong, the relative
degree of safety is not as high as for issues rated "TBW-1."
"TBW-3" - This designation represents the lowest investment grade
category and indicates that while the debt is more susceptible to adverse
developments (both internal and external) than obligations with higher ratings,
capacity to service principal and interest in a timely fashion is considered
adequate.
"TBW-4" - This designation indicates that the debt is regarded as non-
investment grade and therefore speculative.
IBCA assesses the investment quality of unsecured debt with an
original maturity of less than one year which is issued by bank holding
companies and their principal bank subsidiaries. The following summarizes the
rating categories used by IBCA for short-term debt ratings:
"A1" - Obligations are supported by the highest capacity for timely
repayment. Where issues possess a particularly strong credit feature, a rating
of A1+ is assigned.
"A2" - Obligations are supported by a good capacity for timely
repayment.
"A3" - Obligations are supported by a satisfactory capacity for timely
repayment.
"B" - Obligations for which there is an uncertainty as to the capacity
to ensure timely repayment.
"C" - Obligations for which there is a high risk of default or which
are currently in default.
A-4
<PAGE>
CORPORATE AND MUNICIPAL LONG-TERM DEBT RATINGS
----------------------------------------------
The following summarizes the ratings used by Standard & Poor's for
corporate and municipal debt:
"AAA" - This designation represents the highest rating assigned by
Standard & Poor's to a debt obligation and indicates an extremely strong
capacity to pay interest and repay principal.
"AA" - Debt is considered to have a very strong capacity to pay
interest and repay principal and differs from AAA issues only in small degree.
"A" - Debt is considered to have a strong capacity to pay interest and
repay principal although such issues are somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions than debt in
higher-rated categories.
"BBB" - Debt is regarded as having an adequate capacity to pay
interest and repay principal. Whereas such issues 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 debt in this category than in higher-rated categories.
"BB," "B," "CCC," "CC" and "C" - Debt is regarded, on balance, as
predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. "BB" indicates the
lowest degree of speculation and "C" the highest degree of speculation. While
such debt will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major risk exposures to adverse
conditions.
"BB" - Debt has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. The "BB"
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied "BBB-" rating.
"B" - Debt has a greater vulnerability to default but currently has
the capacity to meet interest payments and principal repayments. Adverse
business, financial or economic conditions will likely impair capacity or
willingness to pay interest and repay principal. The "B" rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
"BB" or "BB-" rating.
A-5
<PAGE>
"CCC" - Debt has a currently identifiable vulnerability to default,
and is dependent upon favorable business, financial and economic conditions to
meet timely payment of interest and repayment of principal. In the event of
adverse business, financial or economic conditions, it is not likely to have the
capacity to pay interest and repay principal. The "CCC" rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
"B" or "B-" rating.
"CC" - This rating is typically applied to debt subordinated to senior
debt that is assigned an actual or implied "CCC" rating.
"C" - This rating is typically applied to debt subordinated to senior
debt which is assigned an actual or implied "CCC-" debt rating. The "C" rating
may be used to cover a situation where a bankruptcy petition has been filed, but
debt service payments are continued.
"CI" - This rating is reserved for income bonds on which no interest
is being paid.
"D" - Debt is in payment default. This rating is used when interest
payments or principal payments are not made on the date due, even if the
applicable grace period has not expired, unless S & P believes such payments
will be made during such grace period. "D" rating is also used upon the filing
of a bankruptcy petition if debt service payments are jeopardized.
PLUS (+) OR MINUS (-) - The ratings from "AA" through "CCC" may be
modified by the addition of a plus or minus sign to show relative standing
within the major rating categories.
"r" - This rating is attached to highlight derivative, hybrid, and
certain other obligations that S & P believes may experience high volatility or
high variability in expected returns due to non-credit risks. Examples of such
obligations are: securities whose principal or interest return is indexed to
equities, commodities, or currencies; certain swaps and options; and interest
only and principal only mortgage securities.
The following summarizes the ratings used by Moody's for corporate and
municipal long-term debt:
"Aaa" - Bonds 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
A-6
<PAGE>
unlikely to impair the fundamentally strong position of such issues.
"Aa" - Bonds 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.
"A" - Bonds possess many favorable investment attributes and are to be
considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment sometime in the future.
"Baa" - Bonds considered medium-grade obligations, i.e., they are
neither highly protected nor poorly secured. Interest payments and principal
security appear adequate for the present but certain protective elements may be
lacking or may be characteristically unreliable over any great length of time.
Such bonds lack outstanding investment characteristics and in fact have
speculative characteristics as well.
"Ba," "B," "Caa," "Ca," and "C" - Bonds that possess one of these
ratings provide questionable protection of interest and principal ("Ba"
indicates some speculative elements; "B" indicates a general lack of
characteristics of desirable investment; "Caa" represents a poor standing; "Ca"
represents obligations which are speculative in a high degree; and "C"
represents the lowest rated class of bonds). "Caa," "Ca" and "C" bonds may be in
default.
Con. (---) - Bonds for which the security depends upon the completion
of some act or the fulfillment of some condition are rated conditionally. These
are bonds secured by (a) earnings of projects under construction, (b) earnings
of projects unseasoned in operation experience, (c) rentals which begin when
facilities are completed, or (d) payments to which some other limiting condition
attaches. Parenthetical rating denotes probable credit stature upon completion
of construction or elimination of basis of condition.
Moody's applies numerical modifiers 1, 2 and 3 in each generic
classification from "Aa" to "B" in its bond rating system. The modifier 1
indicates that the issuer ranks in the higher end of its generic rating
category; the modifier 2 indicates a mid-range ranking; and the modifier 3
indicates that
A-7
<PAGE>
the issuer ranks at the lower end of its generic rating category.
The following summarizes the long-term debt ratings used by Duff &
Phelps for corporate and municipal long-term debt:
"AAA" - Debt is considered to be of the highest credit quality. The
risk factors are negligible, being only slightly more than for risk-free U.S.
Treasury debt.
"AA" - Debt is considered of high credit quality. Protection factors
are strong. Risk is modest but may vary slightly from time to time because of
economic conditions.
"A" - Debt possesses protection factors which are average but
adequate. However, risk factors are more variable and greater in periods of
economic stress.
"BBB" - Debt possesses below average protection factors but such
protection factors are still considered sufficient for prudent investment.
Considerable variability in risk is present during economic cycles.
"BB," "B," "CCC," "DD," and "DP" - Debt that possesses one of these
ratings is considered to be below investment grade. Although below investment
grade, debt rated "BB" is deemed likely to meet obligations when due. Debt rated
"B" possesses the risk that obligations will not be met when due. Debt rated
"CCC" is well below investment grade and has considerable uncertainty as to
timely payment of principal, interest or preferred dividends. Debt rated "DD" is
a defaulted debt obligation, and the rating "DP" represents preferred stock with
dividend arrearages.
To provide more detailed indications of credit quality, the "AA," "A,"
"BBB," "BB" and "B" ratings may be modified by the addition of a plus (+) or
minus (-) sign to show relative standing within these major categories.
The following summarizes the highest four ratings used by Fitch for
corporate and municipal bonds:
"AAA" - Bonds considered to be investment grade and of the highest
credit quality. The obligor has an exceptionally strong ability to pay interest
and repay principal, which is unlikely to be affected by reasonably foreseeable
events.
"AA" - Bonds considered to be investment grade and of very high credit
quality. The obligor's ability to pay interest and repay principal is very
strong, although not quite as strong
A-8
<PAGE>
as bonds rated "AAA." Because bonds rated in the "AAA" and "AA" categories are
not significantly vulnerable to foreseeable future developments, short-term debt
of these issuers is generally rated "F-1+."
"A" - Bonds considered to be investment grade and of high credit
quality. The obligor's ability to pay interest and repay principal is considered
to be strong, but may be more vulnerable to adverse changes in economic
conditions and circumstances than bonds with higher ratings.
"BBB" - Bonds considered to be investment grade and of satisfactory
credit quality. The obligor's ability to pay interest and repay principal is
considered to be adequate. Adverse changes in economic conditions and
circumstances, however, are more likely to have an adverse impact on these
bonds, and therefore, impair timely payment. The likelihood that the ratings of
these bonds will fall below investment grade is higher than for bonds with
higher ratings.
"BB," "B," "CCC," "CC," "C," "DDD," "DD," and "D" -Bonds that possess
one of these ratings are considered by Fitch to be speculative investments. The
ratings "BB" to "C" represent Fitch's assessment of the likelihood of timely
payment of principal and interest in accordance with the terms of obligation for
bond issues not in default. For defaulted bonds, the rating "DDD" to "D" is an
assessment of the ultimate recovery value through reorganization or liquidation.
To provide more detailed indications of credit quality, the Fitch
ratings from and including "AA" to "C" may be modified by the addition of a plus
(+) or minus (-) sign to show relative standing within these major rating
categories.
IBCA assesses the investment quality of unsecured debt with an
original maturity of more than one year which is issued by bank holding
companies and their principal bank subsidiaries. The following summarizes the
rating categories used by IBCA for long-term debt ratings:
"AAA" - Obligations for which there is the lowest expectation of
investment risk. Capacity for timely repayment of principal and interest is
substantial such that adverse changes in business, economic or financial
conditions are unlikely to increase investment risk substantially.
"AA" - Obligations for which there is a very low expectation of
investment risk. Capacity for timely repayment of principal and interest is
substantial. Adverse changes in
A-9
<PAGE>
business, economic or financial conditions may increase investment risk albeit
not very significantly.
"A" - Obligations for which there is a low expectation of investment
risk. Capacity for timely repayment of principal and interest is strong,
although adverse changes in business, economic or financial conditions may lead
to increased investment risk.
"BBB" - Obligations for which there is currently a low expectation of
investment risk. Capacity for timely repayment of principal and interest is
adequate, although adverse changes in business, economic or financial conditions
are more likely to lead to increased investment risk than for obligations in
higher categories.
"BB," "B," "CCC," "CC," and "C" - Obligations are assigned one of
these ratings where it is considered that speculative characteristics are
present. "BB" represents the lowest degree of speculation and indicates a
possibility of investment risk developing. "C" represents the highest degree of
speculation and indicates that the obligations are currently in default.
IBCA may append a rating of plus (+) or minus (-) to a rating to
denote relative status within major rating categories.
Thomson BankWatch assesses the likelihood of an untimely repayment of
principal or interest over the term to maturity of long term debt and preferred
stock which are issued by United States commercial banks, thrifts and non-bank
banks; non-United States banks; and broker-dealers. The following summarizes the
rating categories used by Thomson BankWatch for long-term debt ratings:
"AAA" - This designation represents the highest category assigned by
Thomson BankWatch to long-term debt and indicates that the ability to repay
principal and interest on a timely basis is very high.
"AA" - This designation indicates a superior ability to repay
principal and interest on a timely basis with limited incremental risk versus
issues rated in the highest category.
"A" - This designation indicates that the ability to repay principal
and interest is strong. Issues rated "A" could be more vulnerable to adverse
developments (both internal and external) than obligations with higher ratings.
A-10
<PAGE>
"BBB" - This designation represents Thomson BankWatch's lowest
investment grade category and indicates an acceptable capacity to repay
principal and interest. Issues rated "BBB" are, however, more vulnerable to
adverse developments (both internal and external) than obligations with higher
ratings.
"BB," "B," "CCC," and "CC," - These designations are assigned by
Thomson BankWatch to non-investment grade long-term debt. Such issues are
regarded as having speculative characteristics regarding the likelihood of
timely payment of principal and interest. "BB" indicates the lowest degree of
speculation and "CC" the highest degree of speculation.
"D" - This designation indicates that the long-term debt is in
default.
PLUS (+) OR MINUS (-) - The ratings from "AAA" through "CC" may
include a plus or minus sign designation which indicates where within the
respective category the issue is placed.
MUNICIPAL NOTE RATINGS
----------------------
A Standard and Poor's rating reflects the liquidity concerns and
market access risks unique to notes due in three years or less. The following
summarizes the ratings used by Standard & Poor's Ratings Group for municipal
notes:
"SP-1" - The issuers of these municipal notes exhibit very strong or
strong capacity to pay principal and interest. Those issues determined to
possess overwhelming safety characteristics are given a plus (+) designation.
"SP-2" - The issuers of these municipal notes exhibit satisfactory
capacity to pay principal and interest.
"SP-3" - The issuers of these municipal notes exhibit speculative
capacity to pay principal and interest.
Moody's ratings for state and municipal notes and other short-term
loans are designated Moody's Investment Grade ("MIG") and variable rate demand
obligations are designated Variable Moody's Investment Grade ("VMIG"). Such
ratings recognize the differences between short-term credit risk and long-term
risk. The following summarizes the ratings by Moody's Investors Service, Inc.
for short-term notes:
"MIG-1"/"VMIG-1" - Loans bearing this designation are of the best
quality, enjoying strong protection by established
A-11
<PAGE>
cash flows, superior liquidity support or demonstrated broad-based access to the
market for refinancing.
"MIG-2"/"VMIG-2" - Loans bearing this designation are of high quality,
with margins of protection ample although not so large as in the preceding
group.
"MIG-3"/"VMIG-3" - Loans bearing this designation are of favorable
quality, with all security elements accounted for but lacking the undeniable
strength of the preceding grades. Liquidity and cash flow protection may be
narrow and market access for refinancing is likely to be less well established.
"MIG-4"/"VMIG-4" - Loans bearing this designation are of adequate
quality, carrying specific risk but having protection commonly regarded as
required of an investment security and not distinctly or predominantly
speculative.
"SG" - Loans bearing this designation are of speculative quality and
lack margins of protection.
Fitch and Duff & Phelps use the short-term ratings described under
Commercial Paper Ratings for municipal notes.
A-12
<PAGE>
UST MASTER FUNDS, INC.
FORM N-1A
PART C. OTHER INFORMATION
Item 24. Financial Statements and Exhibits
(a) Financial Statements:
(1) Included in Part A:
Financial Highlights for the Registrant's Managed Income
Fund for the period from January 9, 1986 (commencement
of operations) to March 31, 1986 and for the fiscal
years ended March 31, 1987 through March 31, 1995,
Income and Growth Fund for the period from January 6,
1987 (commencement of operations) to March 31, 1987 and
for the fiscal years ended March, 1988 through March 31,
1995. Equity Fund for the period from April 25, 1985
(commencement of operations) to March 31, 1986 and for
the fiscal years ended March 31, 1987 through March 31,
1995, Money Fund and Government Money Fund for the
periods from May 3, 1985 and May 8, 1985 (commencement
of operations), respectively, to March 31, 1986 and for
the fiscal years ended March 31, 1987 through March 31,
1995, International Fund for the period from July 21,
1987 to March 31, 1988 and for the fiscal years ended
March 31, 1989 through March 31, 1995, Treasury Money
Fund for the period from February 4, 1991 (commencement
of operations) to March 31, 1991 and for the fiscal
years ended March 31, 1992 and March 31, 1995, and for
the Aging of America Fund, Business & Industrial
Restructuring Fund, Communication & Entertainment Fund,
Early Life Cycle Fund, Environmentally-Related Products
& Services Fund, Global Competitors Fund, Long-Term
Supply of Energy Fund, Productivity Enhancers Fund,
Short-Term Government Securities Fund, Intermediate-Term
Managed Income Fund, Pacific/Asia Fund, Pan European
Fund and Emerging Americas Fund for the period from
December 28, 1992 (commencement of operations) to March
31, 1993 and for the fiscal years ended March 31, 1994
and March 31, 1995.
(2) Included in Part B:
The Registrant's March 31, 1995 Annual Report
to Shareholders has been filed with the
<PAGE>
Commission and the financial statements included therein
are incorporated herein by reference.
(b) Exhibits:
--------
(1) (a) Articles of Incorporation of Registrant
dated August 1, 1984 (1).
(b) Articles Supplementary of Registrant dated
October 30, 1985 (3).
(c) Articles Supplementary of Registrant dated
September 30, 1986 (4).
(d) Articles Supplementary of Registrant dated
April 10, 1987 (6).
(e) Articles Supplementary of Registrant dated
April 27, 1990 (12).
(f) Articles Supplementary of Registrant dated
October 26, 1990 (13).
(g) Articles Supplementary of Registrant
concerning the creation of the Treasury Fund (13).
(h) Articles Supplementary of Registrant
concerning the increase of authorized capital stock. (16)
(2) (a) Bylaws of Registrant (1).
(b) Amendment No. 1 to Bylaws of Registrant
(3).
(3) None.
(4) (a) Specimen copy of share certificate for
Class A Common Stock of Registrant (3).
(b) Specimen copy of share certificate for
Class B Common Stock of Registrant (3).
(c) Specimen copy of share certificate for
Class C Common Stock of Registrant (3).
(d) Specimen copy of share certificate for
Class D Common Stock of Registrant (3).
(e) Specimen copy of share certificate for
Class E Common Stock of Registrant (4).
(f) Specimen copy of share certificate for
Class F Common Stock of Registrant (5).
(g) Specimen copy of share certificate for
Class A Common Stock - Special Series 1 of Registrant (8).
(h) Specimen copy of share certificate for
Class B Common Stock - Special Series 1 of Registrant (8).
(i) Specimen copy of share certificate for
Class D Common Stock - Special Series 1 of Registrant (8).
-2-
<PAGE>
(j) Specimen copy of share certificate for
Class G Common Stock of Registrant (13).
(k) Specimen copy of share certificate for
Class G Common Stock - Special Series 1 of Registrant (13).
(l) Specimen copy of share certificate for
Class H Common Stock of Registrant. (15)
(m) Specimen copy of share certificate for
Class I Common Stock of Registrant. (15)
(n) Specimen copy of share certificate for
Class J Common Stock of Registrant. (15)
(o) Specimen copy of share certificate for
Class K Common Stock of Registrant. (15)
(p) Specimen copy of share certificate for
Class L Common Stock of Registrant. (15)
(q) Specimen copy of share certificate for
Class M Common Stock of Registrant. (15)
(r) Specimen copy of share certificate for
Class N Common Stock of Registrant. (15)
(s) Specimen copy of share certificate for
Class O Common Stock of Registrant. (15)
(t) Specimen copy of share certificate for
Class P Common Stock of Registrant. (15)
(u) Specimen copy of share certificate for
Class Q Common Stock of Registrant. (15)
(v) Specimen copy of share certificate for
Class R Common Stock of Registrant. (15)
(w) Specimen copy of share certificate for
Class S Common Stock of Registrant. (15)
(x) Specimen copy of share certificate for
Class S Common Stock - Special Series 1 of Registrant. (15)
(y) Specimen copy of share certificate for
Class T Common Stock of Registrant. (15)
(z) Specimen copy of share certificate for
Class T Common Stock - Special Series 1 of Registrant. (15)
(5) (a) Investment Advisory Agreement between
Registrant and United States Trust Company of New York
("U.S. Trust") dated February 6, 1985 (2).
(b) Amendment No. 1 to Investment Advisory
Agreement between Registrant and U.S. Trust dated
February 6, 1985 (10).
(c) Investment Advisory Agreement between
Registrant and U.S. Trust dated November 26, 1985 (3).
-3-
<PAGE>
(d) Amendment No. 1 to Investment Advisory
Agreement between Registrant and U.S. Trust dated
November 26, 1985 (10).
(e) Investment Advisory Agreement between
Registrant and U.S. Trust dated December 16, 1986 (5).
(f) Amendment No. 1 to Investment Advisory
Agreement between Registrant and U.S. Trust dated
December 16, 1986 (10).
(g) Investment Advisory Agreement between
Registrant and U.S. Trust dated May 27, 1987 (7).
(h) Amendment No. 1 to Investment Advisory
Agreement between Registrant and U.S. Trust dated May 27,
1987 (10).
(i) Sub-Advisory Agreement between U.S. Trust
and Foreign and Colonial Asset Management ("FACAM") dated
May 27, 1987 (7).
(j) Investment Advisory Agreement between
Registrant and United States Trust dated February 1, 1991
with respect to the Treasury Fund (13).
(k) Amendment No. 2 to Investment Advisory
Agreement between Registrant and U.S. Trust dated
February 6, 1985 with respect to Early Life Cycle Fund,
Long-Term Supply of Energy Fund, Productivity Enhancers
Fund, Environmentally-Related Products and Services Fund,
Aging of America Fund, Communications and Entertainment
Fund, Business and Industrial Restructuring Fund, Global
Competitors Fund, Emerging Americas Fund, Pacific/Asia Fund,
Pan European Fund, Short-Term Government Fund and
Intermediate-Term Managed Income Fund (17).
(l) Form of Sub-Advisory Agreement between U.S.
Trust and FACAM with respect to Pacific/Asia Fund and Pan
European Fund (16).
(m) Form of Agreement between FACAM and Latin
American Securities Limited with respect to the Emerging
Americas Fund (16).
(n) Form of Interim Sub-Advisory Agreement
between U.S. Trust and FCEML with respect to the Emerging
Americas Fund and the Pacific/Asia Fund dated July 1, 1993
(18).
(o) Form of Sub-Advisory Agreement between U.S.
Trust and FCEML with respect to the Emerging Americas Fund
and Pacific/Asia Fund (18).
(6) (a) Form of Distribution Agreement between
Registrant and Edgewood Services, Inc.
-4-
<PAGE>
(7) None.
(8) (a) Custody and Transfer Agency Agreement
between Registrant and U.S. Trust, Amended and Restated as
of November 1, 1987 (7).
(b) International Custodian Agreement between
U.S. Trust and Morgan Stanley Trust Company dated
December 15, 1989. (15)
(c) Amendment No. 1 dated December 18, 1989 to
the Amended and Restated Custody and Transfer Agency
Agreement between Registrant and U.S. Trust dated November
1, 1987 (10).
(d) Amendment No. 2 to Custody and Transfer
Agency Agreement between Registrant and U.S. Trust with
respect to Early Life Cycle Fund, Long-Term Supply of Energy
Fund, Productivity Enhancers Fund, Environmentally-Related
Products and Services Fund, Aging of America Fund,
Communications and Entertainment Fund, Business and
Industrial Restructuring Fund, Global Competitors Fund,
Emerging Americas Fund, Pacific/Asia Fund, Pan European
Fund, Short-Term Government Fund and Intermediate-Term
Managed Income Fund (17).
(9) (a) Form of Administration Agreement among
Registrant, UST Master Tax-Exempt Funds, Inc., Mutual Funds
Service Company and Federated Administrative Services.
(b) Form of Amended and Restated Administrative Services
Plan and related Shareholder Servicing Agreement
*(10) Opinion of counsel that shares are validly issued,
fully paid and non-assessable.
(11) (a) Consent of Ernst & Young LLP
(b) Consent of Drinker Biddle & Reath.
(12) None.
---------------
*Filed pursuant to Rule 24F-2 as part of Registrant's
Rule 24F-2 Notice.
-5-
<PAGE>
(13) (a) Purchase Agreement between Registrant and
Shearson Lehman Brothers Inc. dated February 6, 1985 (2).
(b) Purchase Agreement between Registrant and
UST Distributors, Inc. dated December 29, 1992 (17).
(14) None.
(15) Form of Amended and Restated Distribution Plan and form of
Restated Distribution Agreement (19).
(16) (a) Schedule for computation of performance
quotation (14).
(b) Schedule for computation of performance
quotation (17).
(p) Financial Data Schedule as of March 31, 1995 for the
Emerging Americas Fund.
(q) Financial Data Schedule as of March 31, 1995 for the
Pacific/Asia Fund.
(r) Financial Data Schedule as of March 31, 1995 for the
Pan European Fund.
(s) Financial Data Schedule as of March 31, 1995 for the
Short-Term Government Securities Fund.
(t) Financial Data Schedsule as of March 31, 1995 for the
Intermediate-Term Managed Income Fund.
(1) Incorporated herein by reference to Registrant's Registration Statement
on Form N-1A filed August 8, 1984.
(2) Incorporated herein by reference to Registrant's Post-Effective
Amendment No. 1 to its Registration Statement on Form N-1A filed October
30, 1985.
(3) Incorporated herein by reference to Registrant's Post-Effective
Amendment No. 2 to its Registration Statement on Form N-1A filed June
6, 1986.
(4) Incorporated herein by reference to Registrant's Post-Effective
Amendment No. 3 to its Registration Statement on Form N-1A filed October
17, 1986.
(5) Incorporated herein by reference to Registrant's Post Effective
Amendment No. 4 to its Registration Statement on Form N-1A filed March
19, 1987.
(6) Incorporated herein by reference to Registrant's Post-Effective
Amendment No. 5 to its Registration Statement on Form N-1A filed July
23, 1987.
(7) Incorporated herein by reference to Registrant's Post-Effective
Amendment No. 6 to its Registration Statement on Form N-1A filed July
29, 1988.
(8) Incorporated herein by reference to Registrant's Post-Effective
Amendment No. 7 to its Registration Statement on Form N-1A filed
November 1, 1988.
(9) Incorporated herein by reference to Registrant's Post-Effective
Amendment No. 8 to its Registration Statement on Form N-1A filed June
2, 1989.
(10) Incorporated herein by reference to Registrant's and UST Master
Tax-Exempt Funds, Inc.'s ("Master T/E Fund") joint Post-Effective
Amendments Nos. 9 and 7, respectively, to their Registration Statements
on Form N-1A filed March 12, 1990.
(11) Incorporated herein by reference to Registrant's and Master T/E Fund's
joint Post-Effective Amendments Nos. 10 and 8, respectively, to their
Registration Statements on Form N-1A filed July 27, 1990.
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<PAGE>
(12) Incorporated herein by reference to Registrant's and Master T/E Fund's
joint Post-Effective Amendments Nos. 11 and 9, respectively, to their
Registration Statements on Form N-1A filed December 7, 1990.
(13) Incorporated herein by reference to Registrant's and Master T/E Fund's
joint Post-Effective Amendments Nos. 12 and 10, respectively, to their
Registration Statements on Form N-1A filed May 31, 1991.
(14) Incorporated herein by reference to Registrant's and Master T/E Fund's
joint Post-Effective Amendments Nos. 13 and 11, respectively, to their
Registration Statements on Form N-1A filed August 1, 1991.
(15) Incorporated herein by reference to Registrant's Post-Effective
Amendment No. 15 to its Registration Statement on Form N-1A filed
October 29, 1992.
(16) Incorporated herein by reference to Registrant's Post-Effective
Amendment No. 16 to its Registration Statement on Form N-1A filed
December 24, 1992.
(17) Incorporated herein by reference to Registrant's Post-Effective
Amendment No. 17 to its Registration Statement on Form N-1A filed August
2, 1993.
(18) Incorporated herein by reference to Registrant's Post-Effective
Amendment No. 18 to its Registration Statement on Form N-1A filed
December 27, 1993.
(19) Incorporated herein by reference to Registrant's Post-Effective Amendment
No. 20 to its Registration Statement on Form N-1A filed June 2, 1995.
Item 25. Persons Controlled By or Under
Common Control with Registrant
------------------------------
Registrant is controlled by its Board of Directors.
-7-
<PAGE>
Item 26. Number of Holders of Securities
-------------------------------
The following information is as of May 19, 1995:
------------
<TABLE>
<CAPTION>
Title of Class Number of Record Holders
-------------- ------------------------
<S> <C>
Class A Common Stock 2098
Class B Common Stock 750
Class C Common Stock 887
Class D Common Stock 563
Class E Common Stock 1093
Class F Common Stock 1503
Class G Common Stock 418
Class H Common Stock 1419
Class I Common Stock 810
Class J Common Stock 831
Class K Common Stock 411
Class L Common Stock 829
Class M Common Stock 1032
Class N Common Stock 1058
Class O Common Stock 907
Class P Common Stock 1565
Class Q Common Stock 1714
Class R Common Stock 1350
Class S Common Stock 383
Class T Common Stock 427
</TABLE>
Item 27. Indemnification
---------------
Article VII, Section 3 of Registrant's Articles of Incorporation,
incorporated by reference as Exhibit (1) (a) hereto, and Article VI, Section
2 of Registrant's Bylaws, incorporated by reference as Exhibits (2) (a)
hereto, provide for the indemnification of Registrant's directors and officers.
Indemnification of Registrant's principal underwriter, custodian, and transfer
agent is provided for, respectively, in Section 1.11 of the Distribution
Agreement incorporated by reference as Exhibit (6) hereto and Sections 26
and 27 of the Custody and Transfer Agency Agreement, incorporated by reference
as Exhibit (8) (a) hereto. Registrant has obtained from a major insurance
carrier a directors' and officers' liability policy covering certain types
of errors and omissions. In no event will Registrant indemnify any of its
directors, officers, employees, or agents againt any liability to which
such person would otherwise be subject by reason of his willful misfeasance,
bad faith, gross negligence in the performance of his duties, or by reason
of his reckless disregard of the duties involved in the conduct of his
office or arising under his agreement with Registrant. Registrant will comply
with Rule 484 under the Securities Act of 1933 and Release No. 11330 under
the Investment Company Act of 1940 in connection with any indemnification.
Insofar as indemnification for liability arising under the Securities Act
of 1933 may be permitted to directors, officers, and controlling persons of
Registrant pursuant to the foregoing provisions, or otherwise, Registrant has
been advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by Registrant of expenses incurred or
paid by a director, officer, or controlling person of Registrant in the
successful defense of any action, suit, or proceeding) is asserted by such
director, officer, or controlling person in connection with the securities
being registered, 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 indeminification by
-8-
<PAGE>
it is against public policy as expressed in the Act and will be governed
by the final adjudication of such issue.
Item 28. Business and Other Connections of Investment Adviser
----------------------------------------------------
(a) United States Trust Company of New York.
United States Trust Company of New York ("U.S. Trust") is a full-service
state-chartered bank located in New York, New York. Set forth below are
the names and principal businesses of the trustees and certain senior executive
officers of U.S. Trust, including those who are engaged in any other business,
profession, vocation, or employment of a substantial nature.
Position
with U.S. Principal Type of
Trust Name Occupation Business
--------- ---- ---------- --------
Trustee/ Samuel C. Butler Partner in Cravath, Law Firm
Director Cravath, Swaine Swaine & Moore
& Moore
Worldwide Plaza
825 Eighth Avenue
New York, NY 10019
Trustee/ Peter O. Crisp General Partner in
Director Venrock Associates Venrock Associates
Room 5600
30 Rockefeller Plaza
New York, NY 10112
Trustee/ Antonia M. Grumbach Partner in Patterson, Law Firm
Director Patterson, Belknap, Belknap, Webb
Webb & Tyler & Tyler
30 Rockefeller Plaza
New York, NY 10112
Trustee/ H. Marshall Schwarz Chairman of the Bank
Director, United States Trust Board & Chief
Chairman of the Co. of New York Executive Officer of
Board and Chief 114 West 47th Street U.S. Trust Corp. and
Executive New York, NY 10036 U.S. Trust Company
Officer of N.Y.
Trustee/ Philippe de Montebello Director of the Art Museum
Director Metropolitan Museum Metropolitan
of Art Museum of Art
1000 Fifth Avenue
New York, NY 10028-0198
Trustee/ Paul W. Douglas
Director 250 Park Avenue
Room 1900
New York, NY 10177
-9-
<PAGE>
Position
with U.S. Principal Type of
Trust Name Occupation Business
--------- ---- ---------- --------
Trustee/ Frederic C. Hamilton Chairman of the Oil & Gas
Director Hamilton Oil Corp. Board of Hamilton Exploration
1560 Broadway Oil Corp.
Suite 2000
Denver, CO 80202
Trustee/ John H. Stookey
Director Hanson Industries
410 Park Avenue
New York, NY 10028
Trustee/ Robert N. Wilson Vice Chairman of
Director Johnson & Johnson the Board of Johnson
One Johnson & & Johnson
Johnson Plaza
New Brunswick, NJ 08933
Trustee/ Peter L. Malkin Chairman of Wein,
Director Wein, Malkin & Bettex Malkin & Bettex
Lincoln Building
60 East 42nd Street
New York, NY 10165
Trustee/ Richard F. Tucker Retired
Director 11 Over Rock Lane
Westport, CT 06880
Trustee/ Carroll L. Wainright, Jr. Consulting Partner Law Firm
Director Milbank, Tweed, Hadley of Milbank, Tweed,
& McCloy Hadley & McCloy
One Chase Manhattan Plaza
New York, NY 10005
Trustee/ Frederick S. Wonham Vice Chairman of Bank
Director and United States Trust the Board of U.S.
Vice Chairman Company of New York Trust Corporation
114 West 47th Street and United States
New York, NY 10036 Trust Company of
New York
Trustee/ Donald M. Roberts Vice Chairman of Bank
Director, United States Trust the Board and
Vice Chairman Company of New York Treasurer of U.S.
and Treasurer 114 West 47th Street Trust Corporation
New York, NY 10036 and United States
Trust Company of
New York
-10-
<PAGE>
Position
with U.S. Principal Type of
Trust Name Occupation Business
-------- ---- ---------- --------
Trustee/ Frederick B. Taylor Vice Chairman and Bank
Director, United States Trust Chief Investment
Vice Chairman Company of New York Officer of U.S. Trust
and Chief 114 West 47th Street Corporation and United
Investment New York, NY 10036 States Trust Company
Officer of New York
Trustee/ Jeffrey S. Maurer President of U.S. Bank
Director and United States Trust Trust Corporation and
President Company of New York United States Trust
114 West 47th Street Company of New York
New York, NY 10036
Trustee/ Daniel P. Davison Chairman, Christie, Fine Art
Director Christie, Manson & Woods Manson & Woods Auctioneer
International, Inc. International, Inc.
502 Park Avenue
New York, NY 10021
Trustee/ Orson D. Munn Chairman and Investment
Director Munn, Bernhard & Director of Munn, Advisory
Associates, Inc. Bernhard & Firm
6 East 43rd Street Associates, Inc.
28th Floor
New York, NY 10017
Trustee/ Philip L. Smith Corporate Director
Director P.O. Box 386 and Trustee
Ponte Verde Beach, FL 32004
Trustee/ Edwin D. Etherington President Emeritus, Education
Director P.O. Box 100 Wesleyan University
Old Lyme, CT 06371 and Former President
of American Stock
Exchange
-11-
<PAGE>
(b) Investment Sub-Adviser - Foreign and Colonial Asset Management.
Foreign and Colonial Asset Management ("FACAM") serves as sub-adviser
with respect to the International Fund and Pan European Fund. FACAM is a New
York partnership registered with the SEC under the Investment Advisers Act of
1940. Set forth below are the names and principal businesses of each senior
executive officer of FACAM, including those who are engaged in any other
business, profession, vocation or employment of a substantial nature.
Position
with Principal Type of
FACAM/1/ Name Occupation Business
---------- ---- ---------- --------
Simon James Director Foreign and Investment
Exchange House Colonial Management Adviser
Primrose Street,
London, England
EC2A 2NY
Oliver N. Dawson Chief Investment Investment
Exchange House Officer of Adviser
Primrose Street, Foreign &
London, England Colonial Management
EC2A 2NY Limited
Harry C. Rowney Senior Vice President Bank
114 W. 47th Street of United States
New York, NY 10036 Trust Company of New
York
Hon. James D. D. Ogilvy Chief Executive of Investment
Exchange House Foreign & Colonial Adviser
Primrose Street, Management Limited
London, England
EC2A 2NY
Managing Steve Darby Executive Vice Bank
Director 114 W. 47th Street President of U.S.
New York, NY 10036 Trust Company of
New York
Paul K. Napoli Executive Vice Bank
114 W. 47th Street President of United
New York, NY 10036 States Trust Company
of New York
Chairman Jeffrey S. Maurer President of Bank
114 W. 47th Street United States
New York, NY 10036 Trust Company
of New York
-----------------------------------------------
1. All individuals listed above are members of FACAM's investment committee
that determines general investment advice to be given to clients.
-12-
<PAGE>
(c) Investment Sub-Adviser - Foreign & Colonial Emerging Markets Limited
("FCEML").
Foreign & Colonial Emerging Markets Limited ("FCEML") serves as
sub-adviser with respect to the Emerging Americas Fund and Pacific/Asia Fund.
FCEML is a joint venture between Foreign & Colonial Management Limited in London
and Banco de Investimentos Garantia in Sao Paulo. Set forth below are the names
and principal businesses of the executive and non-executive directors of FCEML,
including those who are engaged in any other business, profession, vocation or
employment of a substantial nature.
Position Type of
with FCEML Name Principal Occupation Business
---------- ---- -------------------- --------
Director Tobias Cepelowicz Director, Petroserv SA
Av. Almirante Barroso
52/7th
20031 Rio de Janeiro
Director Mailson Ferreira de Director of an economic
Nobrega consultancy firm in
Exchange House Brazil
Primrose Street
London EC2A 2NY
Director Juan Carlos Iarezza Head of Corporate Bank
Esmerelda 130 Finance, Banco
(1035) Buenos Aires General de Negocios
Director Jorge Esteban Kalledey Vice President
25 de Mayo 367 Bolsa de Comercio
8th/9th Floor de Buenos Aires
1002 Buenos Aires
Director Roberto Hernandez Chairman
Ramirez Acciones y
Casa de Bolsa Valores de
Paseo de la Reforma Mexico SA de CV
398 CP 06600 Mexico DF
Director Lorenzo H. Zambrano President
Avenida Constitucion Cemex SA
444 Pte.
Apartado Postal 392
CP 64000, NL, Mexico
Executive Audley Twiston Davies Director of Investment Adviser
Director Exchange House Foreign & Colonial
Primrose Street Management Ltd.
London EC2A 2NY
-13-
<PAGE>
Position Type of
with FCEML Name Principal Occupation Business
---------- ---- -------------------- --------
Executive Eduardo C. G. de Faria
Director Exchange House
Primrose Street
London EC2A 2NY
Executive Marc Wenhammar
Director Exchange House
Primrose Street
London EC2A 2NY
Item 29. Principal Underwriter
---------------------
(a) Edgewood Services, Inc. (the "Distributor") currently serves
as distributor for Registrant and acts as principal underwriter or distributor
for UST Master Tax-Exempt Funds, Inc.
Positions and
(b) Name and Principal Positions and Officers with Offices with
Business Addresses the Distributor Registrant
------------------ --------------------------- -------------
James J. Dolan Trustee and President, --
Federated Investors Tower Edgewood Services, Inc.
Pittsburgh, PA 15222-3779
R. Jeffrey Niss Senior Vice President and --
Federated Investors Tower Trustee, Edgewood Services,
Pittsburgh, PA 15222-3779 Inc.
Douglas L. Hein Trustee, --
Federated Investors Tower Edgewood Services, Inc.
Pittsburgh, PA 15222-3779
Frank E. Polefrone Trustee, --
Federated Investors Tower Edgewood Services, Inc.
Pittsburgh, PA 15222-3779
Newton Heston, III Vice President, --
Federated Investors Tower Edgewood Services, Inc.
Pittsburgh, PA 15222-3779
Ernest L. Linane Assistant Vice President, --
Federated Investors Tower Edgewood Services, Inc.
Pittsburgh, PA 15222-3779
S. Elliott Cohan Secretary, --
Federated Investors Tower Edgewood Services, Inc.
Pittsburgh, PA 15222-3779
Charles H. Field Assistant Secretary, --
Federated Investors Tower Edgewood Services, Inc.
Pittsburgh, PA 15222-3779
Jeannette Fisher-Garber Assistant Secretary, --
Federated Investors Tower Edgewood Services, Inc.
Pittsburgh, PA 15222-3779
Kenneth W. Pegher, Jr. Treasurer, --
Federated Investors Tower Edgewood Services, Inc.
Pittsburgh, PA 15222-3779
(c) Not Applicable.
Item 30. Location of Accounts and Records
--------------------------------
(1) United States Trust Company of New York, 114 W. 47th Street,
New York, NY 10036 (records relating to its functions as investment adviser,
custodian and transfer agent).
(2) Foreign and Colonial Asset Management, Exchange House, Primrose
Street, London England EC2A 2NY (records relating to its function as sub-adviser
to the International and Pan European Funds).
(3) Foreign & Colonial Emerging Markets Limited, Exchange House,
Primrose Street, London EC2A 2NY (records relating to its function as
sub-adviser to the Emerging Americas and Pacific/Asia Funds.
(4) Edgewood Services, Inc., Federated Investors Tower, Pittsburgh,
PA 15222-3779 (records relating to its function as distributor).
(5) Mutual Funds Service Company, 73 Tremont Street, Boston,
Massachusetts 02108-3913; Federated Administrative Services, Federated Investors
Tower, Pittsburgh, PA 15222-3779 (records relating to their functions as
administrators and sub-transfer agent).
-14-
<PAGE>
(6) Drinker Biddle & Reath, Philadelphia National Bank Building,
1345 Chestnut Street, Philadelphia, Pennsylvania 19107-3496 (Registrant's
Articles of Incorporation, Bylaws, and Minute Books).
Item 31. Management Services
-------------------
Inapplicable.
Item 32. Undertakings
------------
Registrant undertakes to furnish each person to whom a prospectus
is delivered with a copy of Registrant's latest available Annual Report
to Shareholders which includes Management's Discussion of Registrant's
performance, upon request and without charge.
-15-
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, UST Master Funds, Inc. certifies that it meets
all of the requirements for effectiveness for this Post-Effective Amendment No.
21 to its Registration Statement ("Amendment No. 21") pursuant to Rule 485(b)
under the 1955 Act and has duly caused this Amendment No. 21 to its Registration
Statement on Form N-1A to be signed on its behalf by the undersigned thereunto
duly authorized, in the City of Mahwah and the State of New Jersey on the 31st
day of July, 1995.
UST MASTER FUNDS, INC.
Registrant
/s/ Alfred Tannachion
-------------------------
Alfred Tannachion, President
(Signature and Title)
Pursuant to the requirements of the Securities Act of 1933,
this Post-Effective Amendment No. 21 to UST Master Funds, Inc. Registration
Statement on Form N-1A has been signed below by the following persons in
the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Alfred Tannachion
---------------------
Alfred Tannachion Chairman of the July 31, 1995
Board, President
and Treasurer
/s/ Joseph H. Dugan
-------------------
Joseph H. Dugan Director July 31, 1995
/s/ Donald L. Campbell Director July 31, 1995
----------------------
Donald L. Campbell
/s/ Wolfe J. Frankl
-------------------
Wolfe J. Frankl Director July 31, 1995
/s/ Robert Robinson
-------------------
Robert Robinson Director July 31, 1995
-16-
<PAGE>
EXHIBIT INDEX
-------------
<TABLE>
<CAPTION>
Exhibit No. Description Page No.
----------- ----------- --------
<S> <C> <C>
(6)(a) Form of Distribution Agreement
between Registrant and Edgewood
Services, Inc.
(9)(a) Form of Administration Agreement
between Registrant, Mutual Funds
Service Company and Federated
Administrative Services.
(9)(b) Form of Amended and Restated
Administrative Services
Plan and related
Shareholder Servicing
Agreement.
(11)(a) Consent of Ernst &
Young LLP.
(11)(b) Consent of Drinker Biddle &
Reath.
(18) Plan pursuant to Rule 18f-3 for
Operation of a Multi - Class System.
(27)(a) Financial Data Schedule as of March 31,
1995 for the Money Fund.
(b) Financial Data Schedule as of March 31,
1995 for the Government Money Fund.
(c) Financial Data Schedule as of March 31,
1995 for the Equity Fund.
(d) Financial Data Schedule as of March 31,
1995 for the Managed Income Fund.
(e) Financial Data Schedule as of March 31,
1995 for the Income and Growth Fund.
(f) Financial Data Schedule as of March 31,
for the International Fund.
(g) Financial Data Schedule as of March 31,
1995 for the Treasury Money Fund.
(h) Financial Data Schedule as of March 31,
1995 for the Early Life Cycle Fund.
(i) Financial Data Schedule as of March 31,
1995 for the Long - Term Supply of
Energy fund.
(j) Financial Data Schedule as of March 31,
1995 for the Productivity Enhancers Fund.
(k) Financial Data Schedule as of March 31,
1995 for the Environmentally-Related
Products and Services Fund.
(l) Financial Data Schedule as of March 31,
1995 for the Aging of America Fund.
(m) Financial Data Schedule as of March 31,
1995 for the Communication and Entertainment
Fund.
(n) Financial Data Schedule as of March 31,
1995 for the Business and Industrial
Restructuring Fund.
(o) Financial Data Schedule as of March 31,
1995 for the Global Competitors Fund.
(p) Financial Data Schedule as of March 31,
1995 for the Emerging Americas Fund.
(q) Financial Data Schedule as of March 31,
1995 for the Pacific/Asia Fund.
(r) Financial Data Schedule as of March 31,
1995 for the Pan European Fund.
(s) Financial Data Schedule as of March 31,
1995 for the Short-Term Government
Securities Fund.
(t) Financial Data Schedule as of March 31,
1995 for the Intermediate - Term Managed
Income Fund.
</TABLE>
<PAGE>
FORM OF DISTRIBUTION CONTRACT
Edgewood Services, Inc.
Federated Investors Tower
1001 Liberty Avenue
Pittsburgh, Pennsylvania 15222-3779
Gentlemen:
This is to confirm that, in consideration of the agreements hereinafter
contained, the undersigned, UST Master Funds, Inc. (the "Company"), a Maryland
corporation, has agreed that Edgewood Services, Inc. (the "Distributor"), a
subsidiary of Federated Investors ("Federated"), shall be, for the period of
this Contract, a distributor of shares (the "Shares") of the Company's Common
Stock of one or more classes and series representing interests in the Company's
investment portfolios (individually, a "Fund," collectively, "Funds"), as
described and set forth on one or more exhibits to this Contract. In the event
that the Company establishes one or more additional investment portfolios other
than the Funds with respect to which it decides to retain the Distributor to act
as a distributor hereunder, the Company shall so notify the Distributor in
writing. If the Distributor is willing to render such services to a new
investment portfolio, it will notify the Company in writing whereupon such
investment portfolio will become a Fund under this Contract.
1. Services as Distributor.
-----------------------
1.1 The Distributor will act as agent for the distribution of Shares
in accordance with the instructions of the Company's Board of Directors and the
Company's registration statement and prospectuses then in effect under the
Securities Act of 1933, as amended, and will transmit promptly any orders
received by it for the purchase or redemption of Shares to the Company's
transfer agent or to any qualified broker/dealer for transmittal to said agent.
1.2 The Distributor agrees to use its best efforts to solicit orders
for the sale of Shares and will undertake such advertising and promotion as it
believes appropriate in connection with such solicitation. The Company
understands that the Distributor may in the future be the distributor of shares
of other investment company portfolios ("Portfolios") including Portfolios
having investment objectives similar to those of the Funds. The Company further
understands that existing and future investors in the Funds may invest in shares
of such other Portfolios. The Company agrees that the Distributor's duties to
such Portfolios shall not be deemed in conflict with its duties to the Company
under this Paragraph 1.2.
1
<PAGE>
1.3 The Distributor shall, at its own expense, finance such
activities as it deems reasonable and which are primarily intended to result in
the sale of Shares, including, but not limited to, advertising, compensation of
underwriters, dealers and sales personnel, the printing and mailing of
prospectuses to other than current shareholders, and the printing and mailing of
sales literature. In addition, the Distributor will provide one or more
persons, during normal business hours, to respond to telephone questions with
respect to the Funds. It is contemplated that the Distributor will enter into
selling agreements with qualified broker/dealers and other persons with respect
to the offering of Shares to the public, and in so doing will act only on its
own behalf as principal.
1.4 All Shares offered for sale by the Distributor shall be offered
for sale to the public at a price per share (the "offering price") equal to (a)
their net asset value (determined in the manner set forth in the Company's
charter documents and the then current prospectus) plus, except to those classes
of persons or transactions described in the then current Prospectus, (b) a sales
charge which shall be the percentage of the offering price of such Shares as set
forth in the Company's then current prospectus. The offering price, if not an
exact multiple of one cent, shall be adjusted to the nearest cent. Concessions
by the Distributor to broker/dealers and other persons shall be set forth in
either the selling agreements between the Distributor and such broker/dealers
and persons, as from time to time amended, or if such concessions are described
in the Company's then current prospectus, shall be as so set forth. No
broker/dealer or other person who enters into a selling agreement with the
Distributor shall be authorized to act as agent for the Company in connection
with the offering or sale of the Shares to the public or otherwise.
1.5 If any Shares sold by the Company are redeemed or repurchased by
the Company or by the Distributor as agent or are tendered for redemption within
seven business days after the date of confirmation of the original purchase of
said Shares, the Distributor shall forfeit the amount above the net asset value
received by the Distributor in respect of such Shares, provided that the
portion, if any, of such amount re-allowed by the Distributor to broker/dealers
or other persons shall be repayable to the Company only to the extent recovered
by the Distributor from the broker/dealer or other person involved. The
Distributor shall include in each selling agreement with such broker/dealers and
other persons a corresponding provision for the forfeiture by them of their
concession with respect to Shares sold by them or their principals and redeemed
or repurchased by the Company or by the Distributor as agent (or tendered for
redemption) within seven business days after the date of confirmation of such
initial purchases.
2
<PAGE>
1.6 All activities by the Distributor and its agents and employees as
distributor of Shares shall comply with all applicable laws, rules and
regulations, including, without limitation, all rules and regulations made or
adopted pursuant to the Investment Company Act of 1940 by the Securities and
Exchange Commission or any securities association registered under the
Securities Exchange Act of 1934.
1.7 Whenever in their judgment such action is warranted by unusual
market, economic or political conditions, or by abnormal circumstances of any
kind, the Company's officers may decline to accept any orders for or make any
sales of Shares until such time as those officers deem it advisable to accept
such orders and to make such sales.
1.8 The Company agrees at its own expense to execute any and all
documents and to furnish any and all information and otherwise to take all
actions that may be reasonably necessary in connection with the qualification of
Shares for sale in such states as the Company may approve, and the Company shall
pay all fees and other expenses incurred in connection with such qualification.
The Distributor agrees to pay all expenses related to its own qualification as a
broker or dealer required by any federal or state law or self-regulatory
organization and, except as otherwise specifically provided in this Contract,
all other expenses incurred by the Distributor in connection with the offering
of Shares as contemplated by this Contract.
1.9 The Company shall timely furnish from time to time, for use in
connection with the sale of Shares, such information with respect to the Funds
and Shares as the Distributor may reasonably request; and the Company warrants
that the statements contained in any such information shall fairly show or
represent what they purport to show or represent. The Company shall also
furnish the Distributor upon request with: (a) audited annual and unaudited
semi-annual statements of the Company's books and accounts with respect to each
Fund, and, (b) from time to time such additional information regarding the
Funds' financial condition as the Distributor may reasonably request.
1.10 The Company represents to the Distributor that all registration
statements and prospectuses filed by the Company with the Securities and
Exchange Commission under the Securities Act of 1933, as amended, with respect
to Shares have been prepared in conformity with the requirements of said Act and
rules and regulations of the Securities and Exchange Commission thereunder. As
used in this Contract, the terms "registration statement" and "prospectus" shall
mean any registration statement, prospectus (together with the related statement
of additional information) filed with respect to Shares with the Securities and
Exchange Commission, and any amendments and
3
<PAGE>
supplements thereto which at any time shall have been filed with said
Commission. The Company represents and warrants to the Distributor that any
registration statement and prospectus, when such become effective, will contain
all statements required to be stated therein in conformity with said Act and the
rules and regulations of said Commission; that all statements of fact contained
in any such registration statement and prospectus will be true and correct when
such registration statement and prospectus become effective; and that neither
any registration statement nor any prospectus, when they become effective, will
include an untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein not
misleading to a purchaser of Shares. The Company may but shall not be obligated
to propose from time to time such amendment or amendments to any registration
statement and such supplement or supplements to any prospectus which, in the
light of future developments, may, in the opinion of the Company's counsel, be
necessary or advisable. The Company shall promptly notify the Distributor of
any advice given to it by the Company's counsel regarding the necessity or
advisability so to amend or supplement such registration statement or
prospectus. If the Company shall not propose such amendment or amendments
and/or supplement or supplements within fifteen days after receipt by the
Company of a written request from the Distributor to do so, the Distributor may,
at its option, terminate this Contract. The Company shall not file any
amendment to any registration statement or supplement to any prospectus without
giving the Distributor reasonable notice thereof in advance; provided, however,
that nothing contained in this Contract shall in any way limit the Company's
right to file at any time such amendments to any registration statements and/or
supplements to any prospectus, of whatever character, as the Company may deem
advisable, such right being in all respects absolute and unconditional.
1.11 The Company authorizes the Distributor and dealers to use any
prospectus in the form furnished from time to time in connection with the sale
of Shares. The Company agrees to indemnify, defend and hold the Distributor,
its several officers and directors, and any person who controls the Distributor
within the meaning of Section 15 of the Securities Act of 1933, as amended, free
and harmless from and against any and all claims, demands, liabilities and
reasonable expenses (as those expenses are incurred) (including the cost of
investigating or defending such claims, demands or liabilities and any counsel
fees incurred in connection therewith) which the Distributor, its officers and
directors, or any such controlling person may incur under the Securities Act of
1933, as amended, or under common law or otherwise, arising out of or based upon
any untrue statement, or alleged untrue statement, of a material fact contained
in any registration statement or any prospectus or arising out of or based upon
any omission, or alleged omission, to state a material
4
<PAGE>
fact required to be stated in any registration statement or prospectus or
necessary to make any statement in such documents not misleading; provided,
--------
however, that the Company's agreement to indemnify the Distributor, it officers
-------
or directors, and any such controlling person shall not be deemed to cover any
claims, demands, liabilities or expenses arising out of any untrue statement or
alleged untrue statement or omission or alleged omission made in any
registration statement or prospectus or in any financial or other statements in
reliance upon and in conformity with any information furnished to the Company by
the Distributor and used in the preparation thereof; and further provided that
------- --------
the Company's agreement to indemnify the Distributor and the Company's
representations and warranties herein set forth shall not be deemed to cover any
liability to the Company or its shareholders to which the Distributor would
otherwise be subject by reason of willful misfeasance, bad faith or gross
negligence in the performance of its duties, or by reason of the Distributor's
reckless disregard of its obligations and duties under this Contract. The
Company's agreement to indemnify the Distributor, its officers and directors,
and any such controlling person, as aforesaid, is expressly conditioned upon the
Company's being notified of any action brought against the Distributor, its
officers or directors, or any such controlling person, such notification to be
given by letter or by telegram addressed to the Company at its principal office
in [Boston, Massachusetts] and sent to the Company by the person against whom
such action is brought within 20 days after the summons or other first legal
process shall have been served. The failure to so notify the Company of any
such action shall not relieve the Company from any liability which the Company
may have to the person against whom such action is brought by reason of any such
untrue, or allegedly untrue, statement or omission, or alleged omission,
otherwise than on account of the Company's indemnity agreement contained in this
paragraph 1.11. The Company will be entitled to assume the defense of any suit
brought to enforce any such claim, demand or liability, but, in such case, such
defense shall be conducted by counsel of good standing chosen by the Company and
approved by the Distributor, which approval shall not unreasonably be withheld.
In the event the Company elects to assume the defense of any such suit and
retain counsel of good standing approved by the Distributor, the defendant or
defendants in such suit shall bear the fees and expenses of any additional
counsel retained by any of them; but in case the Company does not elect to
assume the defense of any such suit, or in case the Distributor reasonably does
not approve of counsel chosen by the Company, the Company will reimburse the
Distributor, its officers and directors, or the controlling person or persons
named as defendant or defendants in such suit, for the reasonable fees and
expenses of any counsel retained by the Distributor or them. The Company's
indemnification agreement contained in this paragraph 1.11 and the Company's
representations and warranties in this Contract shall remain
5
<PAGE>
operative and in full force and effect regardless of any investigation made by
or on behalf of the Distributor, its officers and directors, or any controlling
person and shall survive the delivery of any Shares. This agreement of
indemnity will inure exclusively to the Distributor's benefit, to the benefit of
its several officers and directors, and their respective estates, and to the
benefit of the controlling persons and their successors. The Company agrees
promptly to notify the Distributor of the commencement of any litigation or
proceedings against the Company or any of its officers or directors in
connection with the issue and sale of any Shares.
1.12 The Distributor agrees to indemnify, defend and hold the
Company, its several officers and directors, and any person who controls the
Company within the meaning of Section 15 of the Securities Act of 1933, as
amended, free and harmless from and against any and all claims, demands,
liabilities and reasonable expenses (as those expenses are incurred) (including
the costs of investigating or defending such claims, demands or liabilities and
any counsel fees incurred in connection therewith) which the Company, its
officers or directors or any such controlling person may incur under the
Securities Act of 1933, as amended, or under common law or otherwise, but only
to the extent that such liability or expense incurred by the Company, its
officers or directors, or such controlling person resulting from such claims or
demands, shall arise out of or be based upon any untrue, or alleged untrue,
statement of a material fact contained in information furnished by the
Distributor to the Company or its counsel and used in the Company's registration
statement or corresponding statement made in the prospectus, or shall arise out
of or be based upon any omission, or alleged omission, to state a material fact
in connection with such information furnished by the Distributor to the Company
or its counsel required to be stated in such answers or necessary to make such
information not misleading. The Distributor's agreement to indemnify the
Company, its officers and directors, and any such controlling person, as
aforesaid, is expressly conditioned upon the Distributor being notified of any
action brought against the Company, its officers or directors, or any such
controlling person, such notification to be given by letter or telegram
addressed to the Distributor at its principal office in Pittsburgh, Pennsylvania
and sent to the Distributor by the person against whom such action is brought,
within 20 days after the summons or other first legal process shall have been
served. The failure to so notify the Distributor of any such action shall not
relieve the Distributor from any liability which the Distributor may have to the
Company, its officers or directors, or to such controlling person by reason of
any such untrue or alleged untrue statement, or omission or alleged omission,
otherwise than on account of the Distributor's indemnity agreement contained in
this paragraph 1.12. The Distributor shall have the right to control the
defense of such action, with
6
<PAGE>
counsel of its own choosing, satisfactory to the Company, if such action is
based solely upon such alleged misstatement or omission on the Distributor's
part, and in any other event the Company, its officers or directors or such
controlling person shall each have the right to participate in the defense or
preparation of the defense of any such action. In the event the Distributor
elects to assume the defense of any such suit and retain counsel of good
standing approved by the Company, the defendant or defendants in such suit shall
bear the fees and expenses of any additional counsel retained by any of them;
but in case the Distributor does not elect to assume the defense of any such
suit, or in case the Company reasonably does not approve of counsel chosen by
the Distributor, the Distributor will reimburse the Company, its officers and
directors, or the controlling person or persons named as defendant or defendants
in such suit, for the reasonable fees and expenses of any counsel retained by
the Company or them. The Distributor's indemnification agreement contained in
this paragraph 1.12 and the Distributor's representations and warranties in this
Contract shall remain operative and in full force and effect regardless of any
investigation made by or on behalf of the Company, its officers and directors,
or any controlling person and shall survive the delivery of any Shares. This
agreement of indemnity will inure exclusively to the Company's benefit, to the
benefit of its several officers and directors, and their respective estates, and
to the benefit of the controlling persons and their successors. The Distributor
agrees promptly to notify the Company of the commencement of any litigation or
proceedings against the Distributor or any of its officers or directors in
connection with the issue and sale of any Shares.
1.13 No Shares shall be offered by either the Distributor or the
Company under any of the provisions of this Contract and no orders for the
purchase or sale of Shares hereunder shall be accepted by the Company if and so
long as effectiveness of the registration statement then in effect or any
necessary amendments thereto shall be suspended under any of the provisions of
the Securities Act of 1933, as amended, or if and so long as a current
prospectus, as required by Section 10(b) of said Act, as amended, is not on file
with the Securities and Exchange Commission; provided, however, that nothing
contained in this paragraph 1.13 shall in any way restrict or have any
application to or bearing upon the Company's obligation to repurchase Shares
from any shareholder in accordance with the provisions of the Company's
prospectus or charter documents.
1.14 The Company agrees to advise the Distributor as soon as
reasonably practical:
(a) of any request by the Securities and Exchange Commission for
amendments to the registration statement or prospectus then in effect;
7
<PAGE>
(b) in the event of the issuance by the Securities and Exchange
Commission of any stop order suspending the effectiveness of the
registration statement or prospectus then in effect or the initiation
of any proceeding for that purpose;
(c) of the happening of any event that makes untrue any
statement of a material fact made in the registration statement or
prospectus then in effect or which requires the making of a change in
such registration statement or prospectus in order to make the
statements therein not misleading; and
(d) of all actions of the Securities and Exchange Commission
with respect to any amendment to any registration statement or
prospectus which may from time to time be filed with the Securities
and Exchange Commission.
For purposes of this section, informal requests by or acts of the
Staff of the Securities and Exchange Commission shall not be deemed actions of
or requests by the Securities and Exchange Commission.
1.15 The Distributor agrees on behalf of itself and its employees to
treat confidentially and as proprietary information of the Company all records
and other information relative to the Funds and its prior, present or potential
shareholders, and not to use such records and information for any purpose other
than performance of its responsibilities and duties hereunder, except after
prior notification to and approval in writing by the Company, which approval
shall not be unreasonably withheld any may not be withheld where the Distributor
may be exposed to civil or criminal contempt proceedings for failure to comply,
when requested to divulge such information by duly constituted authorities, or
when so requested by the Company.
2. Term.
----
This Contract shall become effective on August 1, 1995 and, unless
sooner terminated as provided herein, shall continue until July 31, 1996, and
thereafter shall continue automatically with respect to each Fund for successive
annual periods ending on July 31 of each year, provided such continuance is
specifically approved at least annually by (i) the Company's Board of Directors
or (ii) by a vote of a majority (as defined in the Investment Company Act of
1940) of the outstanding voting securities of the Fund, and provided that in
--------
either event the continuance is also approved by the majority of the Company's
directors who are not parties to this Contract or interested persons (as defined
in the Investment Company Act of 1940) of any such party, by vote cast in person
at a meeting called for the
8
<PAGE>
purpose of voting on such approval. This Contract is not assignable and is
terminable with respect to each Fund, without penalty, on not less than ninety
days' notice prior to each successive annual renewal periods, by the Company's
Board of Directors, by vote of a majority (as defined in the Investment Company
Act of 1940) of the outstanding voting securities of such Fund, or by the
Distributor. This Contract will terminate automatically in the event of its
"assignment" (as defined in the Investment Company Act of 1940). The parties
agree that an assignment includes the transfer of "control" of more than 25% of
the outstanding voting securities of the Distributor to a company that is not a
subsidiary of Federated.
3. Miscellaneous.
-------------
3.1 No provision of this Contract may be changed, waived, discharged
or terminated orally, but only by an instrument in writing signed by the party
against which an enforcement of the change, waiver, discharge or termination is
sought. This Contract may be executed in one or more counterparts and all such
counterparts will constitute one and the same instrument.
3.2 This Contract shall be governed by the laws of the Commonwealth
of Pennsylvania.
Please confirm that the foregoing is in accordance with your
understanding by indicating your acceptance hereof at the place below indicated,
whereupon it shall become a binding agreement between us.
Yours very truly,
UST MASTER FUNDS, INC.
By:________________________________
Title: President
Accepted:
EDGEWOOD SERVICES, INC.
By:_________________________________
Title: Executive Vice President
9
<PAGE>
Exhibit A to the
Distribution Contract
UST MASTER FUNDS, INC.
----------------------
Money Fund
Government Money Fund
Treasury Money Fund
Short-Term Government Securities Fund
Intermediate-Term Managed Income Fund
Managed Income Fund
Equity Fund
Income and Growth Fund
Long-Term Supply of Energy Fund
Productivity Enhancers Fund
Environmentally-Related Products and Services Fund
Aging of America Fund
Communications and Entertainment Fund
Business and Industrial Restructuring Fund
Global Competitors Fund
Early Life Cycle Fund
International Fund
Emerging Americas Fund
Pacific/Asia Fund
Pan European Fund
In consideration of the mutual covenants set forth in the Distribution
Contract dated as of August 1, 1995 between UST Master Funds, Inc. and Edgewood
Services, Inc., UST Master Funds, Inc. executes and delivers this Exhibit on
behalf of the Funds, and with respect to any Classes, thereof, first set forth
in this Exhibit.
Witness the due execution hereof this 1st day of August, 1995.
ATTEST: UST MASTER FUNDS, INC.
______________________________ ______________________________
Secretary President
(SEAL)
ATTEST: EDGEWOOD SERVICES, INC.
______________________________ _______________________________
Secretary Executive Vice President
(SEAL)
10
<PAGE>
Exhibit 9(a)
FORM OF ADMINISTRATION AGREEMENT
This AGREEMENT made as of August 1, 1991 by and among UST MASTER
TAX-EXEMPT FUNDS, INC., UST MASTER FUNDS, INC., each a Maryland corporation
(individually and collectively referred to as the "Company"), MUTUAL FUNDS
SERVICE COMPANY, a Delaware corporation ("MFSC"), and FEDERATED ADMINISTRATIVE
SERVICES ("FAS"), a Delaware trust, (MFSC and FAS are collectively referred
to as the "Administrators").
WITNESSETH:
WHEREAS, the Company is registered as an open-end, management
investment company under the Investment Company Act of 1940, as amended
(the "1940 Act"); and
WHEREAS, the Company wishes to retain the Administrators to provide,
as co-administrators, certain administration services with respect to one
or more of the Company's investment portfolios (individually, a "Fund,"
collectively, the "Funds"), as described and set forth on one or more exhibits
to this Agreement, and the Administrators are willing to furnish such services;
NOW, THEREFORE, in consideration of the premises and mutual covenants
herein contained, it is agreed between the parties hereto as follows:
1. Appointment. The Company hereby appoints the Administrators
-----------
to provide administration services to the Funds for the period and on the
terms set forth in this Agreement. The Administrators accept such appointment
and agree to furnish the services herein set forth in return for the
compensation as provided in Paragraph 4 of this Agreement. In the event
that the Company establishes one or more investment portfolios other than
the Funds with respect to which it decides to retain the Administrators
to act as co-administrators hereunder, the Company shall notify the
Administrators in writing. If the Administrators are willing to render such
services to a new investment portfolio, they shall so notify the Company
in writing whereupon such investment portfolio shall become a Fund hereunder
and shall be subject to the provisions of this Agreement to the same extent
as the Funds, except to the extent that said provisions (including those
relating to the compensation payable by the Company) may be modified with
respect to such investment portfolio in writing by the Company and the
Administrators at the time of the addition of such new investment portfolio.
2. Delivery of Documents. The Company has furnished each of the
---------------------
Administrators with copies, properly certified or authenticated, of each
of the following:
<PAGE>
(a) Resolutions of the Company's Board of Directors authorizing
the appointment of the Administrators to provide certain administration
services to the Company and approving this Agreement;
(b) The Company's Articles of Incorporation ("Charter");
(c) The Company's Bylaws ("Bylaws");
(d) The Company's Notification of Registration on Form N-8A
under the 1940 Act as filed with the Securities and Exchange Commission
("SEC") on [August 31, 1984/ ];
(e) The Company's most recent Post-Effective Amendment to its
Registration Statement on Form N-1A (No. 2-93068/2-92665) (the "Registration
Statement") under the Securities Act of 1933 and the 1940 Act, as filed
with the SEC;
(f) The Company's Administrative Services and Amended and Restated
Distribution Plans and the accompanying form of shareholder servicing
agreement; and
(g) The Company's most recent Prospectuses and Statements of
Additional Information and all amendments and supplements thereto (such
Prospectuses and Statements of Additional Information and supplements thereto,
as presently in effect and as from time to time amended and supplemented,
herein called the "Prospectus").
The Company will timely furnish each of the Administrators
from time to time with copies, properly certified or authenticated, of all
amendments of or supplements to the foregoing, if any.
3. Services and Duties. Subject to the supervision and control
-------------------
of the Company's Board of Directors, and as delineated on one or more Exhibit
to the Agreement, the Administrators agree to assist in supervising various
aspects of each Fund's administrative operations, including the performance
of the following specific services for each Fund:
(a) Provide office facilities (which may be in the offices
of either of the Administrators or a corporate affiliate of either of them,
but shall be in such location as the Company shall reasonably approve);
(b) Furnish statistical and research data, clerical services,
and stationery and office supplies;
-2-
<PAGE>
(c) Keep and maintain all financial accounts and records (other
than those required to be maintained by the Company's Custodian and Transfer
Agent);
(d) Compute each Fund's net asset value, net income and net
capital gain (loss) in accordance with the Company's Prospectus and resolutions
of its Board of Directors;
(e) Compile data for and prepare for execution and file with
the SEC required reports and notices to shareholders of record and the SEC
including, without limitation, Semi-Annual and Annual Reports to Shareholders,
Semi-Annual Reports on Form N-SAR and timely Rule 24f-2 Notices;
(f) Compile data for, prepare for execution and file all reports
or other documents required by Federal, state and other applicable laws and
regulations, including those required by applicable laws and regulations,
including those required by applicable Federal and state tax laws (other
than those required to be filed by the Company Custodian or Transfer Agent);
(g) Review and provide advice with respect to all sales literature
(advertisements, brochures and shareholder communications) for each of the
Funds and any class or series thereof;
(h) Assist in developing and monitoring compliance procedures
for each Fund and any class or series thereof, including, without limitation,
procedures to monitor compliance with applicable law and regulations, each
Fund's investment objectives, policies and restrictions, its continued
qualification as a regulated investment company under the Internal Revenue
Code of 1986, as amended, and other tax matters;
(i) Monitor the Company's arrangements with respect to services
provided by certain organizations ("Service Organizations") under its
Administrative Services and Amended and Restated Distribution Plans. With
respect to Service Organizations, the Administrators shall specifically
monitor and review the services rendered by Service Organizations to their
customers who are the beneficial owners of shares, pursuant to agreements
between the Company and such Service Organizations ("Servicing Agreements"),
including, without limitation, reviewing the qualifications of financial
institutions wishing to be Service Organizations, assisting in the execution
and delivery of Servicing Agreements, reporting to the Company's Board of
Directors with respect to the amounts paid or payable by the Company from
time to time under the Servicing Agreements and the nature of the services
provided by Service Organizations, and maintaining appropriate records in
connection with such duties.
-3-
<PAGE>
(j) Determine, together with the Company's Board of Directors, the
jurisdictions in which the Company's shares shall be registered or qualified
for sale and, in connection therewith, the Administrators shall be responsible
for the maintenance of the registration or qualification of shares for sale
under the securities laws of any state. Payment of share registration fees and
any fees for qualifying or continuing the qualification of any Fund as a
dealer or broker, if applicable, shall be made by that Fund;
(k) Assist to the extent requested by the Company and its outside
counsel with the preparation of the Company's Registration Statement on
Form N-1A or any replacement therefor; and
(l) Assist in the monitoring of regulatory and legislative
developments which may affect the Company and in response to such developments,
counseling and assisting the Company in routine regulatory examinations
or investigations of the Company, and working with outside counsel to the
Company in connection with regulatory matters or litigation.
In performing their duties as co-administrators of the Company, the
Administrators (a) will act in accordance with the Company's Charter, Bylaws,
Prospectus and the instructions and directions of the Company's Board of
Directors and will conform to, and comply with, the requirements of the
1940 Act and all other applicable Federal or state laws and regulations,
and (b) will consult with outside legal counsel to the Company, as necessary
or appropriate.
The Administrators will preserve for the periods prescribed by Rule
31a-2 under the 1940 Act the records required to be maintained by Rule 31a-1
under said Act in connection with the services required to be performed
hereunder. The Administrators further agree that all such records which
they maintain for the Company are the property of the Company and further
agree to surrender promptly to the Company any of such records upon the
Company's request.
4. Fees; Expenses; Expense Reimbursement.
-------------------------------------
For the services rendered pursuant to this Agreement for all Funds
(except the International Fund of UST Master Funds, Inc.), the Administrators
shall be entitled jointly to a fee based on the average net assets of the
Company, determined at the following annual rates applied to the average
combined daily net assets of all of the Funds (except the International
Fund): .20% of the first $200 million; .175% of the next $200 million; and
.15% of any amount in excess of $400 million. Each Fund (except the
International Fund) will pay a portion of the total fee payable by the Company
in an amount equal to the proportion that
-4-
<PAGE>
such Fund's average daily net assets bears to the total average daily net
assets of all the Funds of the Company (except the International Fund).
For the services provided to the International Fund, the Administrators
shall be entitled jointly to a fee, at the annual rate of .20% of the average
daily net assets of the International Fund. The fee attributable to each
Fund shall be the several (and not joint or joint and several) obligation
of each Fund. Such fees are to be computed daily and paid monthly on the
first business day of the following month. Upon any termination of this
Agreement before the end of any month, the fee for such part of the month
shall be pro-rated according to the proportion which such period bears to
the full monthly period and shall be payable upon the date of termination
of this Agreement. The Administrators agree that any fee payable by the
Company under this Agreement shall be payable to United States Trust Company
of New York, as agent for both Administrators, and that such payment shall
discharge the Company's payment obligation hereunder. However, such joint
fee payment does not create any joint and/or several liability between the
Administrators for the services provided by the other.
For purposes of determining fees payable to the Administrators, the
value of each Fund's net assets shall be computed as required by its
Prospectus, generally accepted accounting principles, and resolutions of
the Company's Board of Directors.
The Administrators will from time to time employ or associate with
themselves such person or persons as they may believe to be fitted to assist
them in the performance of this Agreement. Such person or persons may be
officers and employees who are employed by both the Administrators and the
Company. The compensation of such person or persons for such employment
shall be paid by the Administrators and no obligation may be incurred on
behalf of the Company in such respect.
The Administrators will bear all expenses in connection with the
performance of their services under this Agreement except as otherwise
expressly provided herein. Other expenses to be incurred in the operation
of the Funds, including taxes, interest, brokerage fees and commissions,
if any, salaries and fees of officers and directors who are not officers,
directors, shareholders or employees of the Administrators, or the Company's
investment Adviser or distributor for the Funds, Securities and Exchange
Commission fees and state Blue Sky qualification fees, advisory and
Administration fees, charges of custodians, transfer and dividend Disbursing
agents' fees, certain insurance premiums, outside auditing and legal expenses,
payments to Service Organizations, costs of maintenance of corporate existence,
typesetting and printing of prospectuses for regulatory purposes and for
distribution to current shareholders of the Funds, costs
-5-
<PAGE>
of shareholders' reports and corporate meetings and any extraordinary expenses,
will be borne by the Company, provided, however, that, except pursuant to
-------- -------
the Amended and Restated Distribution Plan the Company will not bear, directly
or indirectly, the cost of any activity which is primarily intended to result
in the distribution of shares of the Funds, and further provided that the
------- --------
Administrators may utilize one or more independent pricing services, approved
from time to time by the Board of Directors of the Company, to obtain
securities prices in connection with determining the net asset value of
each Fund and that each Fund will reimburse the Administrators for its share
of the cost of such services based upon its actual use of the services.
If in any fiscal year any Fund's aggregate expenses (as defined under
the securities regulations of any state having jurisdiction over the Fund)
exceed the expense limitations of any such state, the Administrators agree
to reimburse such Fund for a portion of any such excess expenses in an amount
equal to the proportion that the fees otherwise payable to the Administrators
bears to the total amount of investment advisory and administration fees
otherwise payable by the Fund. The expense reimbursement obligation of the
Administrators is limited to the amount of their fees hereunder for such
fiscal year, provided, however, that notwithstanding the foregoing, the
-------- -------
Administrators shall reimburse such Fund for a portion of any such excess
expenses in an amount equal to the proportion that the fee otherwise payable
to the Administrator bears to the total amount of investment advisory and
administration fees otherwise payable by the Fund regardless of the amount
of fee paid to the Administrators during such fiscal year to the extent
that the securities regulations of any state having jurisdiction over the
funds so require. Such expense reimbursement, if any, will be estimated,
reconciled and paid on a monthly basis.
5. Proprietary and Confidential Information. The Administrators agree
----------------------------------------
on behalf of themselves and their employees to treat confidentially and
as proprietary information of the Company all records and other information
relative to the Funds and prior, present or potential shareholders, and
not to use such records and information for any purpose other than performance
of their responsibilities and duties hereunder, except after prior notification
to and approval in writing by the Company, which approval shall not be
unreasonably withheld and may not be withheld where the Administrators may
be exposed to civil or criminal contempt proceedings for failure to comply,
when requested to divulge such information by duly constituted authorities,
or when so requested by the Company.
6. Limitation of Liability. Each Administrator shall not be liable for
any error of judgment or mistake of law or for any loss or expense suffered
by the Company, in connection with
-6-
<PAGE>
the matters to which this Agreement relates, except for a loss or expense
resulting from willful misfeasance, bad faith or gross negligence on its
part in the performance of its duties or from reckless disregard by it of
its obligations and duties under this Agreement. Any person, even though
also an officer, partner, employee or agent of either of the Administrators,
who may be or become an officer, director, employee or agent of the Company,
shall be deemed when rendering services to the Company or acting on any
business of the Company (other than services or business in connection with
the Administrators' duties hereunder) to be rendering such services to or
acting solely for the Company and not as an officer, partner, employee or
agent or one under the control or direction of the Administrators even though
paid by either of them.
7. Term. This agreement shall become effective August 1, 1995
----
and, unless sooner terminated as provided herein, shall continue until July
31, 1996, and thereafter shall continue automatically with respect to each
Fund for successive annual periods ending on July 31 of each year, provided
such continuance is specifically approved at least annually by the Company's
Board of Directors. This Agreement is terminable with respect to each Fund,
without penalty, on not less than ninety days' notice prior to each successive
annual renewal periods, by the Company's Board of Directors or by the
Distributor. This Agreement will terminate automatically in the event of
its "assignment" (as defined in the Investment Company Act 1940). The parties
agree that an assignment includes the transfer of "control" of more than
25% of the outstanding voting securities of the Distributor to a company
that is not a subsidiary of Federated.
8. Governing Law. This Agreement shall be governed by New York
-------------
law.
9. Miscellaneous. No provisions of this Agreement may be changed,
-------------
discharged or terminated orally, but only by an instrument in writing signed
by the party against which enforcement of the change, discharge or termination
is sought. If a change or discharge is sought against the Company, the
instrument must be signed by both Administrators. This Agreement
-7-
<PAGE>
may be executed in one or more counterparts and all such counterparts will
constitute one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement
to be executed by their officers designated below is of the date indicated
below.
ATTEST: UST TAX-EXEMPT MASTER FUNDS, INC.
By:_____________________________ By:_______________________________
Title:
(SEAL)
ATTEST: UST MASTER FUNDS, INC.
By:_____________________________ By:_______________________________
Title:
(SEAL)
ATTEST: MUTUAL FUNDS SERVICE COMPANY
By:_____________________________ By:_______________________________
Title:
(SEAL)
ATTEST: FEDERATED ADMINISTRATIVE
SERVICES
By:_____________________________ By:_______________________________
Title:
(SEAL)
-8-
<PAGE>
Exhibit A
to the
Administration Agreement
UST MASTER FUNDS, INC.
----------------------
Money Fund
Government Money Fund
Treasury Money Fund
Short-Term Government Securities Fund
Intermediate-Term Managed Income Fund
Managed Income Fund
Equity Fund
Income and Growth Fund
Long-Term Supply of Energy Fund
Productivity Enhancers Fund
Environmentally-Related Products and Services Fund
Aging of America Fund
Communications and Entertainment Fund
Business and Industrial Restructuring Fund
Global Competitors Fund
Early Life Cycle Fund
International Fund
Emerging Americas Fund
Pacific/Asia Fund
Pan European Fund
UST MASTER TAX-EXEMPT FUNDS, INC.
---------------------------------
Short-Term Tax-Exempt Fund
Short-Term Tax-Exempt Securities Fund
Intermediate-Term Tax-Exempt Fund
Long-Term Tax-Exempt Fund
New York Intermediate-Term Tax-Exempt Fund
In consideration of the mutual covenants set forth in the Administration
Agreement dated as of August 1, 1995 among UST Master Tax-Exempt Funds,
Inc., UST Master Funds, Inc., Master Funds Services Company ("MFSC"), and
Federated Administrative Services ("FAS"), UST Master Tax-Exempt Funds,
Inc. and UST Master Funds, Inc. each executes and delivers this Exhibit
on behalf of the Funds, and with respect to any Classes, thereof, first
set forth in this Exhibit.
Pursuant to Section 3 of the Agreement, FAS agrees to provide facilities,
equipment, and personnel to carry out the following administrative services
to these Funds, with the understanding that MFSC will provide all other
services and duties not otherwise listed below:
(a) Perform a due diligence review of SEC required reports and notices
to shareholders of record and the SEC including, without limitation,
Semi-Annual and Annual Reports to
<PAGE>
Shareholders' Semi-Annual Reports on Form N-SAR, Proxy Statements and SEC
share registration notices;
(b) Review the Company's Registration Statement on Form N-1A or any
replacement therefor;
(c) Review and file with the NASD all sales literature (advertisements,
brochures and shareholder communications) for each of the Funds and any
class or series thereof;
(d) Prepare distributor's reports to the Company's Board of Directors;
(e) Perform internal audit examinations in accordance with a charter
to be adopted by FAS and the Funds;
(f) Upon request, provide individuals reasonably acceptable to the
Company's Board of Directors for nomination, appointment, or election as
officers of the Company, who will be responsible for the management of certain
of the Funds' affairs as determined by the Company;
(h) Consult with the Funds and the Company's Board of Trustees, as
appropriate, on matters concerning the distribution of Funds; and
[(j) Consult with MFSC and the Company regarding the jurisdictions
in which the Company's shares shall be registered or qualified for sale
and, in connection therewith, review and monitor the actions of MFSC in
maintaining the registration or qualification of shares for sale under the
securities laws of any state. Payment of share registration fees and any
fees for qualifying or continuing the qualification of any Fund as a dealer
or broker, if applicable, shall be made by that Fund.] [MFSC to decide whether
or not it will perform blue sky. If so, above paragraph applies, if not,
then replace with modified version of Section 4(j) of Agreement to reflect
FAS's responsibility.]
-2-
<PAGE>
Witness the due execution hereof this 1st day of August, 1995.
ATTEST: UST MASTER TAX-EXEMPT FUNDS, INC.
--------------------------------- -----------------------------------
Secretary President
(SEAL)
ATTEST: UST MASTER FUNDS, INC.
--------------------------------- -----------------------------------
Secretary President
(SEAL)
ATTEST: FEDERATED ADMINISTRATIVE
SERVICES
--------------------------------- -----------------------------------
Secretary Executive Vice President
(SEAL)
ATTEST: MUTUAL FUNDS SERVICE COMPANY
--------------------------------- -----------------------------------
Secretary Executive Vice President
(SEAL)
-3-
<PAGE>
UST MASTER FUNDS, INC.
----------------------
AMENDED AND RESTATED ADMINISTRATIVE SERVICES PLAN
Section 1. Upon the recommendation of Mutual Funds Service Company
---------
("MFSC") an Administrator of UST Master Funds, Inc. (the "Company"), any
officer of the Company is authorized to execute and deliver, in the name and on
behalf of the Company, written agreements in substantially the form attached
hereto or in any other form duly approved by the Board of Directors ("Servicing
Agreements") with institutions that are shareholders of record or that have
clients that are shareholders of record or beneficial owners of any of the Funds
of the Company, including without limitation the Company's service providers and
their affiliates ("Service Organizations"). Such Servicing Agreements shall
require the Service Organizations to provide or arrange for the provision of
support services as set forth therein to their clients who beneficially own
Shares of any Fund offered by the Company in consideration of a fee, computed
and paid in the manner set forth in the Servicing Agreements, at the annual rate
of up to .40% of the applicable net asset value of Shares beneficially owned by
such clients. Among other institutions, any bank, trust company, thrift
institution or broker-dealer is eligible to become a Service Organization and to
receive fees under this Plan. All expenses incurred by the Company with respect
to a particular class or series of Shares of a particular Fund in connection
with Servicing Agreements and the implementation of this Plan shall be borne
entirely by the holders of that class or series.
Section 2. MFSC shall monitor the arrangements pertaining to the Company's
---------
Servicing Agreements with Service Organizations in accordance with the terms of
the Administration Agreement by and among MFSC, Federated Investors, Inc. and
the Company. MFSC shall not, however, be obliged by this Plan to recommend, and
the Company shall not be obliged to execute, any Servicing Agreement with any
qualifying Service Organization.
Section 3. So long as this Plan is in effect, MFSC shall provide to the
---------
Company's Board of Directors, and the Directors shall review, at least
quarterly, a written report of the amounts expended pursuant to this Plan and
the purposes for which such expenditures were made.
Section 4. This Plan shall become effective immediately upon the approval
---------
of the Plan (and the form of Servicing Agreement attached hereto) by a majority
of the Board
<PAGE>
of Directors, including a majority of the Directors who are not "interested
persons" as defined in the Investment Company Act of 1940 (the "Act") of the
Company and have no direct or indirect financial interest in the operation of
this Plan or in any Servicing Agreement or other agreements related to this Plan
(the "Disinterested Directors"), pursuant to a vote cast in person at a meeting
called for the purpose of voting on the approval of this Plan (or form of
Servicing Agreement).
Section 5. Unless sooner terminated, this Plan shall continue until July
---------
31, 1996 and thereafter shall continue automatically for successive annual
periods provided such continuance is approved at least annually in the manner
set forth in Section 4.
Section 6. This Plan may be amended at any time by the Board of Directors,
---------
provided that any material amendments of the terms of this Plan shall become
effective only upon the approvals set forth in Section 4.
Section 7. This Plan is terminable at any time by vote of a majority of
---------
the Disinterested Directors.
Section 8. While this Plan is in effect, the selection and nomination of
---------
the new Directors of the Company who are not "interested persons" (as defined in
the Act) of the Company shall be committed to the discretion of the existing
Disinterested Directors.
Section 9. The Company initially adopted this Plan as of February 21,
---------
1994, and amended this Plan as of February 10, 1995 and July 27, 1995.
-2-
<PAGE>
SHAREHOLDER SERVICING AGREEMENT
THIS AGREEMENT, by and between UST Master Funds, Inc. (the "Corporation")
and the shareholder service organization (the "Organization") listed on the
signature page hereof;
WITNESSETH:
WHEREAS, certain transactions in Shares of Common Stock, $.001 par value,
of the Corporation or of any series now existing or later created of the
Corporations ("Shares") may be made by investors who are customers of, and using
the services of or arranged by, an Organization, including without limitation
the Company's service providers and their affiliates, that has entered into a
shareholder servicing agreement with the Corporation; and
WHEREAS, the Organization wishes to make it possible for its customers (the
"Customers") to purchase Shares and wishes to act as the Customers' agent in
performing or arranging for the performance of certain administrative functions
in connection with purchases, exchanges and redemptions of Shares from time to
time upon the order and for the account of Customers and to provide related
services to its Customers in connection with their investments in the
Corporation; and
WHEREAS, it is in the interest of the Corporation to make the services of
the Organization available to Customers who are or may become beneficial owners
of Shares of the Corporation;
NOW, THEREFORE, the Corporation and the Organization hereby agree as
follows:
1. Appointment. The Organization, as an independent contractor, hereby
-----------
agrees to perform or to have performed certain services for Customers as
hereinafter set forth. The Organization's appointment hereunder is non-
exclusive, and the parties recognize and agree that, from time to time, the
Corporation may enter into other shareholder servicing agreements, with others
without the Organization's consent. For the purposes of this Agreement, the
Organization is deemed an independent contractor and will have no authority to
act as the Corporation's agent in any respect.
<PAGE>
2. Service to be Performed.
-----------------------
2.1 Type of Service. The Organization shall be responsible for performing
---------------
or having performed shareholder account administrative and servicing functions,
which shall include without limitation/1/: (a) assisting Customers in
designating and changing dividend options, account designations and addresses;
(b) providing necessary personnel and facilities to establish and maintain
certain shareholder accounts and records, as may reasonably be requested from
time to time by the Corporation; (c) assisting in processing purchases, exchange
and redemption transactions; (d) arranging for the wiring of funds; (e)
transmitting and receiving funds in connection with Customer orders to purchase,
exchange or redeem Shares; (f) verifying and guaranteeing Customer signatures in
connection with redemption orders, transfers among and changes in Customer-
designated accounts; (g) providing periodic statements showing a Customer's
account balances and, to the extent practicable, integration of such information
with information concerning other client transactions otherwise effected with or
through the Organization; (h) furnishing on behalf of the Corporation's
distributor (either separately or on an integrated basis with other reports sent
to a Customer by the Organization) periodic statements and confirmations of all
purchases, exchanges and redemptions of Shares in a Customer's account required
by applicable federal or state law, all such confirmations and statements to
conform to Rule 10b-10 under the Securities Exchange Act of 1934 and other
applicable federal or state law; (i) transmitting proxy statements, annual
reports, updating prospectuses and other communications from the Corporation to
Customers; (j) receiving, tabulating and transmitting to the Corporation proxies
executed by Customers with respect to annual and special meetings of
shareholders of the Corporation; (k) providing reports (at least monthly, but
more frequently if so requested by the Corporation's distributor) containing
state-by-state listings of the principal residences of the beneficial owners of
the Shares; and (l) providing or arranging for the provision of such other
related services as the Corporation or a Customer may reasonably request. The
Organization shall provide or arrange for all personnel and facilities to
perform the functions described in this paragraph with respect to its Customers.
_______________
1. Services may be modified or omitted in a particular case and items
relettered or renumbered.
-2-
<PAGE>
2.2 Standard of Services. All services to be rendered or arranged for by
--------------------
the Organization hereunder shall be performed in a professional, competent and
timely manner. The details of the operating standards and procedures to be
followed in performance of the services described above shall be determined from
time to time by agreement between the Organization and the Corporation. The
Corporation acknowledges that the Organization's ability to perform on a timely
basis certain of its obligations under this Agreement depends upon the
Corporation's timely delivery of certain materials and/or information to the
Organization. The Corporation agrees to use its best efforts to provide such
materials to the Organization in a timely manner.
3. Fees.
----
3.1 Fees from the Corporation. In consideration for the services
-------------------------
described in Section 2 hereof and the incurring of expenses in connection
therewith, the Organization shall receive fees set forth in Appendix A hereto,
such fees to be paid in arrears periodically (but in no event less frequently
than semi-annually) at annual rates of up to .40% of the average daily net
assets of the Corporation's Shares owned during the period for which payment has
been made by Customers for whom the Organization is the holder or agent of
record or with whom it maintains a servicing relationship. For purposes of
determining the fees payable to the Organization hereunder, the value of the
Corporation's net assets shall be computed in the manner specified in the
Corporation's then-current prospectus for computation of the net asset value of
the Corporation's Shares. The above fees constitute all fees to be paid to the
Organization by the Corporation with respect to the transactions contemplated
hereby. The Corporation may at any time in its discretion suspend or withdraw
the sale of its Shares.
3.2 Fees from Customers. It is agreed that the Organization may impose
-------------------
certain conditions on Customers, in addition to or different from those imposed
by the Corporation, such as requiring a minimum initial investment or charging
Customers direct fees for the same or similar services as are provided hereunder
by the Organization (which fees may either relate specifically to the
Organization's services with respect to the Corporation or generally cover
services not limited to those with respect to the Corporation). The
Organization shall bill Customers directly for such fees. In the event the
Organization charges Customers such fees, it shall notify the Corporation in
advance and make appropriate prior written disclosure (such disclosure to be in
accordance with all applicable laws) to Customers of any such fees charged to
the Customer. To the extent required by applicable rules and regulations of the
Securities and Exchange Commission, the
-3-
<PAGE>
Corporation shall make written disclosure of the fees paid or to be paid to the
Organization pursuant to Section 3.1 of this Agreement. It is understood,
however, that in no event shall the Organization have recourse or access to the
account of any shareholder of the Corporation except to the extent expressly
authorized by law or by such shareholder, or to any assets of the Corporation,
for payment of any direct fees referred to in this Section 3.2.
4. Information Pertaining to the Shares. The Organization and its
------------------------------------
officers, employees and agents are not authorized to make any representations
concerning the Corporation or the Shares to Customers or prospective Customers,
excepting only accurate communication of any information provided by or on
behalf of any administrator or distributor of the Corporation or any factual
information contained in the then-current prospectus relating to the Corporation
or to any series of the Corporation. In furnishing such information regarding
the Corporation or the Shares, the Organization shall act as agent for the
Customer only and shall have no authority to act as agent for the Corporation.
Advance copies or proofs of all materials which are generally circulated or
disseminated by the Organization to Customers or prospective Customers which
identify or describe the Corporation shall be provided to the Corporation at
least 10 days prior to such circulation or dissemination (unless the Corporation
consents in writing to a shorter period), and such materials shall not be
circulated or disseminated or further circulated or disseminated at any time
after the Corporation shall have given written notice within such 10 day period
to the Organization of any objection thereto.
Nothing in this Section 4 shall be construed to make the Corporation liable
for the use (or accuracy unless prepared by the Corporation for the specific
use) of any information about the Corporation which is disseminated by the
Organization.
5. Use of the Organization's Name. The Corporation shall not use the name
------------------------------
of the Organization (or any of its affiliates or subsidiaries) in any
prospectus, sales literature or other material relating to the Corporation in a
manner not approved by the Organization prior thereto in writing; provided,
however, that the approval of the Organization shall not be required for any use
of its name which merely refers in accurate and factual terms to its appointment
hereunder and the terms hereof or which is required by law, including without
limitation, by the Securities and Exchange Commission or any state securities
authority or any other appropriate regulatory, governmental or
judicial authority; provided, further, that in no event shall such approval be
unreasonably withheld or delayed.
-4-
<PAGE>
6. Use of the Corporation's Name. The Organization shall not use the name
-----------------------------
of the Corporation on any checks, bank drafts, bank statements or forms for
other than internal use in a manner not approved by the Corporation prior
thereto in writing; provided, however, that the approval of the Corporation
shall not be required for the use of the Corporation's name in connection with
communications permitted by Section 4 hereof or (subject to Section 4, to the
extent the same may be applicable) for any use of the Corporation's name which
merely refers in accurate and factual terms to the Corporation in connection
with the Organization's role hereunder or which is required by law, including
without limitations, by the Securities and Exchange Commission or any state
securities authority or any other appropriate regulatory, governmental or
judicial authority; provided, further, that in no event shall such approval be
unreasonably withheld or delayed.
7. Security. The Organization represents and warrants that to the best of
--------
its knowledge, the various procedures and systems which it has implemented
(including provision for twenty-four hours a day restricted access) with regard
to safeguarding from loss or damage attributable to fire, theft or any other
cause the Corporation's records and other data and the Organization's records,
data, equipment, facilities and other property used in the performance of its
obligations hereunder are adequate and that it will make such changes therein
from time to time as in its judgment are required for the secure performance of
its obligations hereunder. The parties shall review such systems and procedures
on a periodic basis, and the Corporation shall from time to time specify the
types of records and other data of the Corporation to be safeguarded in
accordance with this Section 7.
8. Compliance with Laws. The Organization shall comply with all
--------------------
applicable federal and state laws and regulations, including without limitation
securities laws. The Organization represents and warrants to the Corporation
that the performance of all its obligations hereunder will comply with all
applicable laws and regulations, the provisions of its charter documents and by-
laws and all material contractual obligations binding upon the Organization.
The Organization furthermore undertakes that it will promptly, after the
Organization becomes so aware, inform the Corporation of any change in
applicable laws or regulations (or interpretations thereof) or in its charter or
by-laws or material contracts which would prevent or impair full performance of
any of its obligations hereunder.
9. Reports. Quarterly, and more frequently to the extent requested by the
-------
Corporation from time to time, the Organization agrees that it will provide the
administrator of the Corporation
-5-
<PAGE>
with a written report of the amounts expended by the Organization pursuant to
this Agreement and the purposes for which such expenditures were made. Such
written reports shall be in a form satisfactory to the Corporation and shall
supply all information necessary for the Corporation to discharge its
responsibilities under applicable laws and regulations.
10. Record Keeping.
--------------
10.1 Section 31. The Organization shall maintain records in a form
----------
reasonably acceptable to the Corporation and in compliance with applicable laws
and the rules and regulations of the Securities and Exchange Commission,
including but not limited to the record-keeping requirements of Section 31 of
the Investment Company Act of 1940, as amended (the "1940 Act") and the rules
thereunder. Such records shall be deemed to be the property of the Corporation
and will be made available at the Corporation's request for inspection and use
by the Corporation, representatives of the Corporation and governmental
authorities. The Organization agrees that, for so long as it retains any
records of the Corporation, it will meet all reporting requirements pursuant to
the 1940 Act and applicable to the Organization with respect to such records.
Upon termination of this Agreement, the Organization shall deliver to the
administrator of the Corporation all books and records maintained by the
Organization and deemed to be the Corporation's property hereunder.
10.2 Rules 17a-3 and 17a-4. The Organization shall maintain accurate and
---------------------
complete records with respect to services performed by the Organization in
connection with the purchase and redemption of Shares. Such records shall be
maintained in form reasonably acceptable to the Corporation and in compliance
with the requirements of all applicable laws, rules and regulations, including
without limitation, Rules 17a-3 and 17a-4 under the Securities Exchange Act of
1934, as amended, pursuant to which any dealer of the Shares must maintain
certain records. All such records maintained by the Organization shall be the
property of such dealer and will be made available for inspection and use by the
Corporation or such dealer upon the request of either. The Organization shall
file with the Securities and Exchange Commission and other appropriate
governmental authorities, and furnish to the Corporation and any such dealer
copies of, all reports and undertakings as may be reasonably requested by the
Corporation or such dealer in order to comply with the said rules. If so
requested by any such dealer, the Organization shall confirm to such dealer its
obligations under this Section 10.2 by a writing reasonably satisfactory to such
dealer.
-6-
<PAGE>
10.3 Transfer of Customer Data. In the event this Agreement is terminated
-------------------------
or a successor to the Organization is appointed, the Organization shall transfer
to such designee as the Corporation may direct a certified list of the
shareholders of the Corporation serviced by the Organization (with name, address
and tax identification or Social Security number, if any), a complete record of
the account of each such shareholder and the status thereof, and all other
relevant books, records, correspondence, and other data established or
maintained by the Organization under this Agreement. In the event this
Agreement is terminated, the Organization will use its best efforts to cooperate
in the orderly transfer of such duties and responsibilities, including
assistance in the establishment of books, records and other data by the
successor.
10.4 Survival of Record-Keeping Obligations. The record-keeping
--------------------------------------
obligations imposed in this Section 10 shall survive the termination of this
Agreement for a period of three years.
10.5 Obligations Pursuant to Agreement Only. Nothing in this Section 10
--------------------------------------
shall be construed so that the Organization would, by virtue of its role
hereunder, be required under applicable law to maintain the records required to
be maintained by it under this Section 10, but is understood that the
Organization has agreed to do so in order to enable the Corporation and its
dealer or dealers to comply with laws and regulations applicable to them.
10.6 Organization's Rights to Copy Records. Anything in this Section 10
-------------------------------------
to the contrary notwithstanding, except to the extent otherwise prohibited by
law, the Organization shall have the right to copy, maintain and use any records
maintained by the Organization pursuant to this Section 10, except as otherwise
prohibited by Sections 4 and 6 hereof.
11. Force Majeure. The Organization shall not be liable or responsible
-------------
for delays or errors by reason of circumstances beyond its reasonable control,
including, but not limited to, acts of civil or military authority, national
emergencies, labor difficulties, fire, mechanical breakdown, flood or
catastrophe, Acts of God, insurrection, war, riots or failure of communication
or power supply.
12. Indemnification.
---------------
12.1 Indemnification of the Organization. The Corporation will indemnify
-----------------------------------
and hold the Organization harmless from all
-7-
<PAGE>
losses, claims, damages, liabilities or expenses (including reasonable counsel
fees and expenses) from any claim, demand, action or suit (collectively,
"Claims") arising in connection with material misstatements or omissions in the
Corporation's Prospectus. Notwithstanding anything herein to the contrary, the
Corporation will indemnify and hold the Organization harmless from any and all
losses, claims, damages, liabilities or expenses (including reasonable counsel
fees and expenses) resulting from any Claim as a result of its acting in
accordance with any written instructions reasonably believed by the Organization
to have been executed by any person duly authorized by the Corporation, or as a
result of acting in reliance upon any instrument or stock certificate reasonably
believed by the Organization to have been genuine and signed, countersigned or
executed by a person duly authorized by the Corporation, excepting only the
negligence or bad faith of the Organization.
In any case in which the Corporation may be asked to indemnify or hold the
Organization harmless, the Corporation shall be advised of all pertinent facts
concerning the situation in question and the Organization shall use reasonable
care to identify and notify the Corporation promptly concerning any situation
which presents or appears likely to present a claim for indemnification against
the Corporation. The Corporation shall have the option to defend the
Organization against any Claim which may be the subject of indemnification
hereunder. In the event that the Corporation elects to defend against such
Claim, the defense shall be conducted by counsel chosen by the Corporation and
satisfactory to the Organization. The Organization may retain additional
counsel at its expense. Except with the prior written consent of the
Corporation, the Organization shall not confess any Claim or make any compromise
in any case in which the Corporation will be asked to indemnify the
Organization.
12.2 Indemnification of the Corporation. Without limiting the rights of
----------------------------------
the Corporation under applicable law, the Organization will indemnify and hold
the Corporation harmless from all losses, claims, damages, liabilities or
expenses (including reasonable counsel fees and expenses) from any Claim (a)
arising from (i) the bad faith or negligence of the Organization, its officers,
employees or agents, (ii) any breach of applicable law by the Organization, its
officers, employees or agents, (iii) any action of the Organization, its
officers, employees or agents which exceeds the legal authority of the
Organization or its authority hereunder, or (iv) any actions, inactions, errors
or omissions of the Organization, its officers, employees or agents with respect
to the purchase, redemption, transfer and registration of Customers' Shares or
the
-8-
<PAGE>
Corporation's verification or guarantee of any Customer signature.
In any case in which the Organization may be asked to indemnify or hold the
Corporation harmless, the Organization shall be advised of all pertinent facts
concerning the situation in question and the Corporation shall use reasonable
care to identify and notify the Organization promptly concerning any situation
which presents or appears likely to present a claim for indemnification against
the Organization. The Organization shall have the option to defend the
Corporation against any Claim which may be the subject of indemnification
hereunder. In the event that the Organization elects to defend against such
Claim, the defense shall be conducted by counsel chosen by the Organization and
satisfactory to the Corporation. The Corporation may retain additional counsel
at its expense. Except with the prior written consent of the Organization, the
Corporation shall not confess any Claim or make any compromise in any case in
which the Organization will be asked to indemnify the Corporation.
12.3 Survival of Indemnities. The indemnities granted by the parties in
-----------------------
this Section 12 shall survive the termination of this Agreement.
13. Notices. All notices or other communications hereunder to either party
-------
shall be in writing and shall be deemed sufficient if mailed to such party at
the address of such party set forth on the signature page of this Agreement or
at such other address as such party may have designated by written notice to the
other.
14. Further Assurances. Each party agrees to perform such further acts
------------------
and execute such further documents as are necessary to effectuate the purposes
hereof.
15. Termination. Unless sooner terminated, this Agreement will continue
-----------
until July 31, 1995 and thereafter will continue automatically for successive
annual periods provided such continuance is specifically approved at least
annually by vote of a majority of (i) the Board of Directors of the Corporation
and (ii) those Directors who are not "interested persons" (as defined in the
1940 Act) of the Corporation and have no direct or indirect financial interest
in the operation of the Corporation's Administrative Services Plan or in any
agreement related thereto cast in person at a meeting called for the purpose of
voting on such approval ("Disinterested Directors"). This Agreement is
terminable, without penalty, at any time by the Corporation (which termination
may be by a vote of a majority of the Disinterested Directors) or by you upon
notice to the Corporation.
-9-
<PAGE>
16. Changes; Amendments. This Agreement may be changed or amended only by
-------------------
written instrument signed by both parties hereto.
17. Subcontracting By Organization. The Organization may, with the
------------------------------
written approval of the Corporation (such approval not to be unreasonably
withheld), subcontract for the performance of the Organization's obligations
hereunder with any one or more persons, including but not limited to any one or
more persons which is an affiliate of the Organization; provided, however, that
the Organization shall be as fully responsible to the Corporation for the acts
and omissions of any subcontractor as it would be for its own acts or omissions.
18. Compliance with Laws and Policies; Cooperation. The Corporation
----------------------------------------------
hereby agrees that it will comply with all laws and regulations applicable to
its operations and the Organization agrees that it will comply with all laws and
regulations applicable to its operations hereunder. Each party understands that
the other may from time to time adopt or modify policies relating to the subject
matter of this Agreement, in which case the party adopting or modifying such a
policy shall notify the other thereof and the parties shall consider the
applicability thereof and endeavor to comply therewith to the extent not
impracticable or unreasonably burdensome. Each of the parties agrees to
cooperate with the other in connection with the performance of this Agreement
and the resolution of any problems, questions or disagreements in connection
herewith.
18.1 Annual Financial Reports. At least once a year, the Corporation
------------------------
shall send to the record owners of its shares the Corporation's audited
financial statements.
18.2 Annual Certification. At least once a year, the Organization shall
--------------------
certify to the Corporation that it is conducting its business in accordance with
the terms and conditions of the Agreement.
19. Single Portfolio. Notwithstanding anything in this Agreement to the
----------------
contrary, any amount owed by Corporation to the Organization under this
Agreement or otherwise with respect to any matter hereunder shall be paid only
from and shall be limited to the assets and property of the particular
investment portfolio of the Corporation to which the matter relates.
20. Miscellaneous. This Agreement shall be construed and enforced in
-------------
accordance with and governed by the laws of the State of Maryland. The captions
in this Agreement are included for convenience of reference only and in no way
define or limit any of the provisions hereof or otherwise affect their
construction or effect. This Agreement may be executed simultaneously in two
-10-
<PAGE>
or more counterparts, each of which shall be deemed an original, but all of
which taken together shall constitute one and the same instrument. The terms of
this Agreement shall become effective as of the date set forth below.
IN WITNESS WHEREOF, intending to be legally bound hereby, the parties
hereto have caused this Agreement to be executed and delivered in their names
and on their behalf by the undersigned, thereunto duly authorized, all as of the
day and year set forth below.
Dated as of: ___________________
UST Master Funds, Inc. Address for Notices:
_________________________
_________________________
_________________________
By: ___________________________ _________________________
(Authorized Officer)
_________________________________ Address for Notices:
[Service Organization] ________________________
________________________
________________________
________________________
By: _______________________________
(Authorized Officer)
-11-
<PAGE>
APPENDIX A
----------
UST MASTER FUNDS, INC.
Pursuant to the terms and conditions set forth in the attached Shareholder
Servicing Agreement, the Organization will receive the fees set forth below in
consideration for the services described in Section 2 of said Agreement and the
incurring of expenses in connection therewith, such fees (calculated pursuant to
Section 3.1 of said Agreement) to be paid in arrears periodically (but in no
event less frequently than semi-annually):
<TABLE>
<CAPTION>
======================================================
FUND Shareholder
Servicing
Fee
======================================================
<S> <C>
Money Fund __ BP
Government Money Fund __ BP
Treasury Money Fund __ BP
======================================================
Short-Term Government Securities Fund __ BP
Intermediate-Term Managed Income Fund __ BP
Managed Income Fund __ BP
======================================================
Equity Fund __ BP
Income and Growth Fund __ BP
Long-Term Supply of Energy Fund __ BP
Productivity Enhancers Fund __ BP
Environmentally-Related Products and
Services Fund __ BP
Aging of America Fund __ BP
Communication and Entertainment Fund __ BP
Business and Industrial Restructuring
Fund __ BP
Global Competitors Fund __ BP
Early Life Cycle Fund __ BP
International Fund __ BP
Emerging Americas Fund __ BP
Pacific/Asia Fund __ BP
Pan European Fund __ BP
======================================================
</TABLE>
-12-
<PAGE>
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the references to our firm under the captions "Financial
Highlights" in each Prospectus and "Financial Statements" and "Independent
Auditors" in each Statement of Additional Information and to the incorporation
by reference in Post-Effective Amendment Number 21 to the Registration Statement
(Form N-1A No. 2-92665) of UST Master Funds, Inc. of our report dated May 19,
1995 on the financial statements and financial highlights included in the 1995
Annual Report.
ERNST & YOUNG LLP
Boston, Massachusetts
July 26, 1995
<PAGE>
EXHIBIT 11(b)
CONSENT OF COUNSEL
We hereby consent to the use of our name and to the references to our
Firm under the caption "Counsel" in the Statements of Additional Information
that are included in Post-Effective Amendment Nos. 21 and 23 to the Registration
Statement (Nos. 2-92665; 811-4088) on Form N-1A of UST Master Funds, Inc. under
the Securities Act of 1933 and the Investment Company Act of 1940, respectively.
This consent does not constitute a consent under Section 7 of the Securities Act
of 1933, and in consenting to the use of our name and the references to our Firm
under such caption we have not certified any part of the Registration Statement
and do not otherwise come within the categories of persons whose consent is
required under Section 7 or the rules and regulations of the Securities and
Exchange Commission thereunder.
/s/DRINKER BIDDLE & REATH
-------------------------
DRINKER BIDDLE & REATH
Philadelphia, Pennsylvania
July 31, 1995
<PAGE>
UST MASTER FUNDS, INC.
(the "Company")
PLAN PURSUANT TO RULE 18f-3 FOR OPERATION OF
A MULTI-CLASS SYSTEM
----------------------
I. INTRODUCTION
---------------
On February 23, 1995, the Securities and Exchange Commission (the
"Commission") adopted Rule 18f-3 under the Investment Company Act of 1940, as
amended (the "1940 Act"), which permits the creation and operation of a multi-
class distribution structure without the need to obtain an exemptive order under
Section 18 of the 1940 Act. Rule 18f-3, which became effective on April 3,
1995, requires an investment company to file with the Commission a written plan
specifying all of the differences among classes, including the various services
offered to shareholders, different distribution arrangements for each class,
methods for allocating expenses relating to those differences and any conversion
features or exchange privileges. On May 19, 1995, the Board of Directors of the
Company authorized the Company to operate a multi-class distribution structure
in compliance with Rule 18f-3. This Plan shall become effective on
____________.
II. ATTRIBUTES OF CLASSES
-------------------------
A. Generally
---------
The Company is initially authorized to offer two classes of shares under
this Plan as follows:
Equity Funds
------------
Class C shares ("Service Shares") and Class C-Special Series 1 shares
("Distribution Shares") in the Equity Fund, Class E shares ("Service Shares")
and Class E-Special Series 1 shares ("Distribution Shares") in the Income and
Growth Fund, Class H shares ("Service Shares") and Class H-Special Series 1
shares ("Distribution Shares") in the Early Life Cycle Fund, Class I shares
("Service Shares") and Class I-Special Series 1 shares ("Distribution Shares")
in the Long-Term Supply of Energy Fund; Class J shares ("Service Shares") and
Class J-Special Series 1 shares ("Distribution Shares") in the Productivity
Enhancers Fund, Class K shares ("Service Shares") and Class K-Special Series 1
shares ("Distribution Shares") in the Environmentally-Related Products and
Services Fund, Class L shares ("Service Shares") and Class L-Special Series 1
shares ("Distribution
<PAGE>
Shares") in the Aging of America Fund, Class M shares ("Service Shares") and
Class M-Special Series 1 shares ("Distribution Shares") in the Communication and
Entertainment Fund, Class N shares ("Service Shares") and Class N-Special Series
1 shares ("Distribution Shares") in the Business and Industrial Restructuring
Fund, and Class O shares ("Service Shares") and Class O-Special Series 1 shares
("Distribution Shares") in the Global Competitors Fund (each a "Fund",
collectively the "Equity Funds"); and
International Funds
-------------------
Class F shares ("Service Shares") and Class F-Special Series 1 shares
("Distribution Shares") in the International Fund, Class P shares ("Service
Shares") and Class P-Special Series 1 shares ("Distribution Shares") in the
Emerging Americas Fund, Class Q shares ("Service Shares") and Class Q-Special
Series 1 shares ("Distribution Shares") in the Pacific/Asia Fund, and Class R
shares ("Service Shares") and Class R-Special Series 1 shares ("Distribution
Shares") in the Pan European Fund (each a "Fund", collectively, the
"International Funds").
In general, shares of each class shall initially be identical except for
different expense variables (which will result in different returns for each
series), certain related rights and certain shareholder services. More
particularly, the Service Shares and the Distribution Shares shall initially
represent interests in the same portfolio of investments of the particular Fund,
and shall initially be identical in all respects, except for: (a) the impact of
(i) expenses assessed to a class pursuant to a Shareholder Services Agreement
("Non-12b-1 Plan") and/or a Distribution Plan ("12b-1 Plan") adopted for that
class, and (ii) any other incremental expenses identified from time to time that
is allocated to one class so long as any changes in expense allocations are
reviewed and approved by a vote of the Board of Directors, including a majority
of the independent Directors; (b) the fact that a class votes separately on any
matter to shareholders that pertains to (i) the Non-12b-1 Plan and/or the 12b-1
Plan adopted for that class or (ii) any class expense borne by that class; (c)
the different exchange privileges of the classes of shares; (d) the designation
of each class of shares of a Fund; and (e) any different shareholder services
relating to a class of shares.
B. Shareholder Servicing and Distribution Arrangements, Expenses and Sales
-----------------------------------------------------------------------
Charges
-------
Service Shares (Equity and International Funds)
Service Shares of each Equity and International Fund shall initially
be available for purchase directly by individuals
-2-
<PAGE>
("Direct Investors") or by institutions ("Institutional Investors," collectively
with Direct Investors, "Investors"). Service Shares also shall initially be
available for purchase by customers ("Customers") of United States Trust Company
of New York, its affiliates and correspondent banks, and other institutions that
have entered into a Non-12b-1 Plan with the Company ("Shareholder
Organization"). Service Shares of each Equity, Fixed-Income and International
Fund shall initially be subject to a sales charge which shall not initially
exceed 4.50% of the offering price of Service Shares of those Funds.
Service Shares of each Equity and International Fund shall initially
be subject to a fee payable pursuant to the Non-12b-1 Plan adopted for that
class which shall not initially exceed .40% (on an annual basis) of the average
daily net asset value of each Fund's Service Shares held by Customers of the
Shareholder Organization.
Shareholder services provided under the Non-12b-1 Plan adopted for the
class may include (i) assisting in processing purchase, exchange and redemption
requests; (ii) transmitting and receiving funds in connection with Customer
orders to purchase, exchange or redeem shares; and (iii) providing periodic
statements.
Distribution Shares (Equity and International Funds)
Distribution Shares of each Equity and International Fund shall
initially be available for purchase by customers of financial intermediaries
eligible to receive payments under a 12b-1 Plan. Distribution Shares of each
Equity and International Fund shall initially be subject to a sales charge which
initially shall not exceed 4.50% of the offering price of Distribution Shares of
those Funds.
Distribution Shares of each Equity and International Fund shall
initially further be subject to a fee payable pursuant to the Non-12b-1 and/or
12b-1 Plan adopted for that class which initially shall not exceed .40% and .75%
(on an annual basis), respectively, of the daily net asset value of the
outstanding Distribution Shares of the Fund.
C. Shareholder Services
--------------------
1. Exchange Privileges
-------------------
Service Shares
Investors and Customers of Shareholder Organizations generally shall
initially be permitted to exchange, without an exchange fee imposed by the
Company, their Service Shares in a
- 3 -
<PAGE>
Fund for Service Shares of another Fund of the Company or of UST Master Tax-
Exempt Funds, Inc., provided that such other shares may legally be sold in the
state of the Investor's or Customer's residence. No sales charge shall
initially be payable on Service Shares acquired through an exchange to the
extent that a sales charge was previously paid on the Service Shares being
exchanged.
Distribution Shares
Holders of Distribution Shares generally shall initially be permitted
to exchange, without an exchange fee imposed by the Company, their Distribution
Shares in a Fund for Distribution Shares of another Fund of the Company or of
UST Master Tax-Exempt Funds, Inc., provided that such other shares may legally
be sold in the state of the shareholders residence. No sales charge shall
initially be payable on Distribution Shares acquired through an exchange to the
extent that a sales charge was previously paid on the shares being exchanged.
2. Retirement Plans
----------------
Service and Distribution Shares
The Company generally shall initially make Service and Distribution
Shares available for purchase by Investors in connection with the following tax-
deferred prototype retirement plans: (i) IRAs (including "rollovers" from
existing retirement plans) for individuals and their spouses; (ii) profit
sharing and money-purchase plans for corporations and self-employed individuals
and their partners to benefit themselves and their employees; and (iii) Keogh
plans for self-employed individuals.
3. Automatic Investment Program
----------------------------
Service Shares
Investors of each Fund shall initially have an automatic investment
plan whereby, in general, an Investor may purchase Service Shares of a Fund at
regular intervals selected by the Investor. The Company shall not initially
make an automatic investment plan available to Customers of Shareholder
Organizations.
Distribution Shares
Holders of Distribution Shares shall initially have an automatic
investment plan whereby, in general, a holder of Distribution Shares may
purchase Distribution Shares of a Fund at regular intervals selected by the
holder.
- 4 -
<PAGE>
4. Systematic Withdrawal Plan
--------------------------
Service Shares
Investors of each Fund shall initially have a systematic withdrawal
plan whereby, in general, an Investor may request a declining-balance
withdrawal, a fixed-dollar withdrawal, a fixed-share withdrawal, or a fixed-
percentage withdrawal (based on the current value of Service Shares in the
account) on a monthly, quarterly, semi-annual or annual basis. The Company
shall not initially make a systematic withdrawal plan available to Customers of
Shareholder Organizations.
Distribution Shares
Holders of Distribution Shares of each Fund shall initially have a
systematic withdrawal plan whereby, in general, a holder of Distribution Shares
may request a declining-balance withdrawal, a fixed-share withdrawal, or a
fixed-percentage withdrawal (based on the current value of Distribution Shares
in the account) on a monthly, quarterly, semi-annual or annual basis.
D. Methodology for Allocating Expenses Between Classes
---------------------------------------------------
Expenses of the Funds will initially be apportioned to each class of
shares depending upon the nature of the expense item. Operating expenses which
are attributable to all classes of shares in the Company ("operating expenses")
will initially be allocated among the different funds in the Company based on
their relative net assets at the end of the prior day. Operating expenses will
initially include fees paid to United States Trust Company of New York under the
Investment Advisory Agreements, fees paid to Mutual Funds Service Company under
the Administration Agreements and other general expenses such as custody fees,
transfer agency fees, and audit fees, except those listed below. Within each
Fund, the operating expenses will initially be borne on a pro-rata basis based
on each classes' relative net assets.
In addition to its pro-rata share of the operating expenses, the
Service Shares in a Fund will initially bear a shareholder servicing fee payable
pursuant to the Non-12b-1 Plan adopted for that class which will initially be
calculated at an annual rate not to exceed .40% of the average daily net asset
value of each Fund's Service Shares held by Customers of Shareholder
Organizations.
The fee payable pursuant to a 12b-1 Plan adopted for a class of shares
will initially be calculated at an annual rate
- 5 -
<PAGE>
not to exceed .75% of the average daily net asset value of the Fund. The 12b-1
fee will initially be allocated on a pro-rata basis to the 12b-1 share class,
based on the relative net assets of the respective class.
- 6 -
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<SERIES>
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<PAID-IN-CAPITAL-COMMON> 725,835
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<SERIES>
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