PILGRIM AMERICA MASTERS SERIES, INC.
Pilgrim America Masters Asia-Pacific Equity Fund
Pilgrim America Masters MidCap Value Fund
Pilgrim America Masters LargeCap Value Fund
Two Renaissance Square
40 North Central Avenue
Suite 1200
Phoenix, Arizona 85004
(800) 331-1080
Statement of Additional Information
dated July 25, 1995
as supplemented November 24, 1995
Pilgrim America Masters Series, Inc. ("Masters Series") is an
open-end management investment company commonly known as a mutual
fund. Masters Series currently consists of three separate
diversified investment funds, Pilgrim America Masters Asia-
Pacific Equity Fund ("Asia-Pacific Equity Fund"), Pilgrim America
Masters MidCap Value Fund ("MidCap Value Fund") and Pilgrim
America Masters LargeCap Value Fund ("LargeCap Value Fund") each
with its own investment objective and policies.
This Statement of Additional Information is not a prospectus and
it should be read in conjunction with the Masters Series
Prospectus, dated July 25, 1995, as supplemented November 24,
1995 ("Prospectus"), which has been filed with the Securities and
Exchange Commission ("SEC"). Copies of the Prospectus may be
obtained at no charge by calling (800) 331-1080.
The Funds involve investment risk, including the risk of loss of
principal, and their shares are not obligations, deposits or
accounts of a bank and are not guaranteed by a bank. In
addition, shares of the Funds are not insured by the Federal
Deposit Insurance Corporation (the "FDIC"), the Federal Reserve
Board, or any other agency.
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TABLE OF CONTENTS
Organization of Pilgrim America Masters Series, Inc.
Management of the Funds
Supplemental Description of Investments
Supplemental Investment Techniques
Supplemental Discussion of Risks Associated With the
Funds' Investment Policies and Investment Techniques
Investment Restrictions
Portfolio Transactions
Additional Purchase and Redemption Information
Determination of Share Price
Shareholder Services and Privileges
Distributions
Tax Considerations
Shareholder Information
Calculation of Performance Data
General Information
Financial Statements
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ORGANIZATION OF PILGRIM AMERICA MASTERS SERIES, INC.
Pilgrim America Masters Series, Inc. is an open-end management
investment company commonly known as a mutual fund. Masters
Series currently consists of three separate diversified
investment funds, Asia-Pacific Equity Fund, MidCap Value Fund and
LargeCap Value Fund (each a "Fund" and collectively the "Funds"),
each with its own investment objective and policies. The Funds
are designed to give investors access to private money managers
who typically manage only the portfolios of high net worth
individuals and institutional investors.
The authorized capital stock of Masters Series consists of
1,000,000,000 shares having par value of $.01 per share. Holders
of shares of a Fund have one vote for each share held, and a
proportionate fraction of a vote for each fraction of a share
held. All shares issued and outstanding are fully paid and non-
assessable, transferrable, and redeemable at the option of the
shareholder. Shares have no preemptive rights. Shares have non-
cumulative voting rights, which means that the holders of more
than 50% of the shares voting for the election of Directors can
elect 100% of the Directors if they choose to do so, and in such
event the holders of the remaining shares voting for the election
of Directors will not be able to elect any person or persons to
the Board of Directors.
The Board of Directors may classify or reclassify any unissued
shares into shares of any series by setting or changing in any
one or more respects, from time to time, prior to the issuance of
such shares, the preferences, conversion or other rights, voting
powers, restrictions, limitations as to dividends or
qualifications of such shares. Any such classification or
reclassification will comply with the provisions of the
Investment Company Act of 1940 (the "1940 Act").
MANAGEMENT OF THE FUNDS
Board of Directors. Masters Series is managed by its Board of
Directors. The Directors and Officers of Masters Series are
listed below. An asterisk (*) has been placed next to the name
of each Director who is an "interested person," as that term is
defined in the 1940 Act, by virtue of that person's affiliation
with Masters Series or Pilgrim America Investments, Inc., Masters
Series' investment manager (the "Investment Manager").
Mary A. Baldwin, Ph.D, 2525 E. Camelback Road, Suite 200,
Phoenix, Arizona 85016. (Age 55.) Director. Realtor, The
Prudential Arizona Realty, for more than the last five years.
Ms. Baldwin is also Treasurer, United States Olympic Committee,
and formerly was on the teaching staff at Arizona State
University. Ms. Baldwin also is a director and/or trustee of
each of the funds managed by the Investment Manager.
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Al Burton, 2300 Coldwater Canyon, Beverly Hills, California
90210. (Age 67.) Director. President of Al Burton Productions,
for more than the last five years, and Executive Producer, Castle
Rock Entertainment. Mr. Burton also is a director and/or trustee
of each of the funds managed by the Investment Manager.
Bruce S. Foerster, 4045 Sheridan Avenue, Suite 432, Miami Beach,
Florida 33140. (Age 54.) Director. President and Chief
Executive Officer, South Beach Capital (since January 1995). Mr.
Foerster was formerly Managing Director, U.S. Equity Syndicates
Desk, Lehman Brothers (June 1992 - December 1994) and Managing
Director, Equity Transactions Group/Equity Syndicate, PaineWebber
Incorporated (September 1984 - May 1992). Mr. Foerster also is a
director and/or trustee of each of the funds managed by the
Investment Manager.
Jock Patton, 100 West Clarendon, Phoenix, Arizona 85013. (Age
49.) Director. President, StockVal, Inc. (1992 -present);
director and co-owner, StockVal, Inc. (1982 - present);
director of Artisoft, Inc. Mr. Patton was formerly a partner and
director of the law firm of Streich, Lang, P.A. (1972 - 1992).
Mr. Patton is also a director or trustee of each of the funds
managed by the Investment Manager.
*Robert W. Stallings, Two Renaissance Square, 12th Floor, 40
North Central Avenue, Phoenix, AZ 85004. (Age 46.) Director
and President. Chairman, Chief Executive Officer and President
of Pilgrim America Group, Inc. ("Pilgrim America Group") and
Pilgrim America Investments, Inc., and a director of Pilgrim
America Securities, Inc. (since December 1994). Chairman, Chief
Executive Officer and President of Pilgrim Regional BankShares,
Inc., Pilgrim Government Securities Income Fund, Inc., Pilgrim
America Investment Funds, Inc. and Pilgrim Prime Rate Trust
(since April 1995). Chairman and Chief Executive Officer of
Express America Holdings Corporation (since August 1990) and
Express America Mortgage Corporation (since May 1991) and
President of Express America Holdings Corporation and Express
America Mortgage Corporation (since December 1993). Mr.
Stallings formerly was Chairman and Chief Executive Officer of
First Western Partners, Inc., a consulting and management
services firm to financial institutions and private investors
(February 1990 - December 1991) and Chairman and Chief Executive
Officer of Western Savings & Loan Assoc. (April 1989 - February
1990).
Each Fund pays each Director who is not an interested person a
pro rata share, as described below, of (i) an annual retainer of
$20,000; (ii) $1,500 per quarterly and special Board meeting;
(iii) $500 per committee meeting; (iv) $100 per special
telephonic meeting; and (v) out-of-pocket expenses. The pro rata
share paid by the Funds is based on the Funds' average net assets
for the previous quarter as a percentage of the average net
assets of all the funds managed by the Investment Manager for
which the Directors serve in common as directors/trustees.
Compensation of Directors.
The following table sets forth information regarding estimated
compensation of Directors by the Masters Series and other funds
managed by the Investment Manager for the fiscal year ending June
30, 1996. Officers of the Masters Series and Directors who are
interested persons of the Masters Series do not receive any
compensation from the Fund or any other funds managed by the
Investment Manager. In the column headed "Total Compensation
From Registrant and Fund Complex Paid to Directors," the number
in parentheses indicates the total number of boards in the fund
complex on which the Director serves.
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Compensation Table*
Pension Total
or Compensa-
Retire- Estimated tion From
Aggregate ment Annual Registrant
Compensa- Benefits Benefits and Fund
tion from Accrued Upon Complex
Name of Person, Registrant As Part Retirement Paid
Position of to
Fund Directors
Expenses
Mary A Baldwin**, $3,000**** N/A N/A $24,000(5)
Director
Al Burton**, Director $3,000**** N/A N/A $24,000(5)
Bruce S. Foerster**, $3,000**** N/A N/A $24,000(5)
Director
Jock Patton**, $3,000**** N/A N/A $22,000(5)
Director
Robert W. Stallings***, $0 N/A N/A $0(5)
Director and Chairman
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* The information provided is for the fiscal year ending
June 30, 1996 and is based upon estimated future payments to
be made to the Directors.
** Member of the Audit Committee.
*** "Interested person," as defined in the Investment Company
Act of 1940, of the Masters Series because of the
affiliation with the Investment Manager.
**** The amount of the fee borne by Masters Series will depend
upon the total assets of Masters Series in relation to the
total assets of all funds managed by the Investment Manager.
The above projection is an estimate.
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Officers.
James R. Reis, Executive Vice President
Two Renaissance Square, 12th Floor, 40 North Central Avenue,
Phoenix, AZ 85004. (Age 38.)
Vice Chairman (since December 1994) and Executive Vice President
(since April 1995) of Pilgrim America Group and Pilgrim America
Investments, Inc. and a director (since December 1994) and
Assistant Secretary (since April 1995) of Pilgrim America
Securities, Inc. Executive Vice President of Pilgrim Government
Securities Income Fund, Inc., Pilgrim America Investment Funds,
Inc., Pilgrim Prime Rate Trust, and Pilgrim Regional BankShares
Inc. Vice Chairman and Chief Financial Officer of Express America
Holdings Corporation (since December 1993) and President and
Chief Financial Officer of Express America Holdings Corporation
(May 1991 - December 1993). Mr. Reis is also Vice Chairman
(since December 1993) of Express America Mortgage Corporation and
formerly was President (May 1991 - December 1993), and he was
also the President and Chief Financial Officer of First Western
Partners, Inc. (February 1990 - December 1991).
James M. Hennessy, Senior Vice President and Secretary
Two Renaissance Square, 12th Floor, 40 North Central Avenue,
Phoenix, AZ 85004. (Age 46.)
Senior Vice President and Secretary, Express America Holdings
Corporation, Pilgrim America Group, Pilgrim America Investments,
Inc. and Pilgrim America Securities, Inc. (since April 1995).
Senior Vice President and Secretary of Pilgrim Government
Securities Income Fund, Inc., Pilgrim America Investment Funds,
Inc., Pilgrim Prime Rate Trust, and Pilgrim Regional BankShares
Inc. Senior Vice President, Express America Mortgage Corporation
(June 1992 - August 1994). Mr. Hennessy was also the President
of Beverly Hills Securities (January 1990 - June 1992).
Daniel A. Norman, Senior Vice President
Two Renaissance Square, 12th Floor, 40 North Central Avenue,
Phoenix, AZ 85004. (Age 38.)
Senior Vice President and Secretary of Pilgrim America Group,
Inc., Senior Vice President and Assistant Secretary of Pilgrim
America Investments, Inc., Senior Vice President and Director of
Pilgrim America Securities, Inc. (since December 1994), Senior
Vice President of Express America Holdings Corporation (since
April 1995) and Senior Vice President of Express America Mortgage
Corporation (since February 1992). Senior Vice President and
Secretary of Pilgrim Government Securities Income Fund, Inc.,
Pilgrim America Investment Funds, Inc., Pilgrim Prime Rate Trust,
and Pilgrim Regional BankShares Inc. Mr. Norman was also Chief
Financial Officer of Prime Financial, Inc. (December 1985 -
February 1992).
Nancy L. Peden, Senior Vice President and Assistant Secretary
Two Renaissance Square, 12th Floor, 40 North Central Avenue,
Phoenix, AZ 85004. (Age 38.)
Senior Vice President and Assistant Secretary of Pilgrim America
Group, Inc. (since April 1994). Vice President of The Pilgrim
Group Inc. (for more than the past five years prior to April
1995). Senior Vice President and Assistant Secretary of Pilgrim
Regional BankShares Inc., Pilgrim Government Securities Income
Fund, Inc., Pilgrim America Investment Funds, Inc. and Pilgrim
Prime Rate Trust.
Michael J. Roland, CPA, Senior Vice President, Treasurer and
Principal Accounting Officer.
Two Renaissance Square, 12th Floor, 40 North Central Avenue,
Phoenix, AZ 85004. (Age 37.)
Senior Vice President and Chief Financial Officer of Pilgrim
America Group, Inc., Pilgrim America Investments, Inc. and
Pilgrim America Securities, Inc. (since April 1995). Senior Vice
President and Treasurer of Pilgrim Government Securities Income
Fund, Inc., Pilgrim Regional BankShares Inc., Pilgrim America
Investment Funds, Inc. and Pilgrim Prime Rate Trust (since April
1995). From July 1994 through December 1994, Partner at the
consulting firm of Corporate Savings Group in Newport Beach,
California. From 1992 to June 1994, Vice President of Pacific
Financial Asset Management Corp. Funds in Newport Beach,
California. From 1988 to 1992, Director of Financial Reporting
for Pacific Mutual Life Insurance Company in Newport Beach,
California.
The Directors and Officers as a group own less than 1% of each
Fund's outstanding shares.
Investment Manager. The Investment Manager serves as investment
manager to the Funds and has overall responsibility for the
management of the Funds. The Investment Management Agreement
between Masters Series and the Investment Manager requires the
Investment Manager to oversee the provision of all investment
advisory and portfolio management services for the Funds. The
Investment Manager, which was organized in December 1994, is
registered as an investment adviser with the SEC and serves as
investment adviser to five other registered investment companies
(or series thereof) with assets of approximately $1.4 billion.
The Investment Manager is a wholly owned subsidiary of Pilgrim
America Group, which itself is a wholly owned subsidiary of
Express America Holdings Corporation, a Delaware corporation
("Express America"), the shares of which are traded on the NASDAQ
National Market System and which is a holding company that
through its subsidiaries engages in the financial services
business. The Investment Manager, with the approval of Masters
Series' Board of Directors, selects and employs investment
advisers to serve as portfolio manager for each Fund ("Portfolio
Manager"), monitors the Portfolio Managers' investment programs
and results, and coordinates the investment activities of the
Portfolio Managers to ensure compliance with regulatory
restrictions.
The Investment Manager pays all of its expenses arising from the
performance of its obligations under the Investment Management
Agreement, including all fees payable to the Portfolio Managers,
executive salaries and expenses of the Directors and Officers of
Masters Series who are employees of the Investment Manager or its
affiliates and office rent of Masters Series. The Portfolio
Managers pay all of their expenses arising from the performance
of their obligations under the Portfolio Management Agreements.
Subject to the expense reimbursement provisions described in the
Prospectus, other expenses incurred in the operation of Masters
Series are borne by the Funds, including, without limitation,
investment advisory fees; brokerage commissions; interest; legal
fees and expenses of attorneys; fees of independent auditors,
transfer agents and dividend disbursing agents, accounting
agents, and custodians; the expense of obtaining quotations for
calculating each Fund's net asset value; taxes, if any, and the
preparation of each Fund's tax returns; cost of stock
certificates and any other expenses (including clerical expenses)
of issue, sale, repurchase or redemption of shares; expenses of
registering and qualifying shares of the Funds under federal and
state laws and regulations; salary and other expenses of the
employees of Investment Manager engaged in registering and
qualifying shares of the Funds under federal and state laws and
regulations, expenses of printing and distributing reports,
notices and proxy materials to existing shareholders; expenses of
printing and filing reports and other documents filed with
governmental agencies; expenses of annual and special shareholder
meetings; expenses of printing and distributing prospectuses and
statements of additional information to existing shareholders;
fees and expenses of Directors of Masters Series who are not
employees of the Investment Manager or any Portfolio Manager, or
their affiliates; membership dues in the Investment Company
Institute; insurance premiums; and extraordinary expenses such as
litigation expenses. Expenses directly attributable to a Fund
are charged to that Fund and other expenses are allocated
proportionately among all the Funds in relation to the net assets
of each Fund.
The Investment Manager bears the expense of providing its
services, and pays the fees of each Fund's Portfolio Manager.
For its services, the MidCap Value Fund and LargeCap Value Fund
pay the Investment Manager a monthly fee in arrears equal to 1/12
of 1.00% of the Fund's average daily net assets during the month
(approximately 1.00% on an annual basis) and the Asia-Pacific
Equity Fund pays the Investment Manager a monthly fee in arrears
equal to 1/12 of 1.25% of the Fund's average daily net assets
during the month (approximately 1.25% on an annual basis) . The
fee paid by each Fund is higher than that charged by many other
registered investment companies.
The Investment Manager will reduce its aggregate fees for any
fiscal year, or reimburse a Fund, to the extent required so that
the Fund's expenses do not exceed the expense limitations
applicable to the Fund under the securities laws or regulations
of those states or jurisdictions in which the Fund's shares are
registered or qualified for sale. Currently, the most
restrictive of such expense limitations would require the
Investment Manager to reduce its fees or to reimburse a Fund, to
the extent required so that the Fund's expenses, as described
above, for any fiscal year do not exceed 2.5% of the first $30
million of the Fund's average daily net assets, 2% of the next
$70 million of the Fund's average net assets and 1.5% of the
Fund's remaining average net assets. Expenses for purposes of
this expense limitation include the investment management fee,
but exclude distribution expenses, brokerage commissions and
fees, taxes, interest and extraordinary expenses, such as
litigation, paid or incurred by a Fund. The Fund's expense
limitation may change to reflect changes in the expense
limitations of the state having the most restrictive limitation
in which shares of a Fund may be registered or qualified for
sale.
Portfolio Managers. The Investment Manager has entered into a
Portfolio Management Agreement with each Portfolio Manager to
provide investment advisory services to the Funds. The
Investment Manager recommends Portfolio Managers to the Board of
Directors of Masters Series primarily on the basis of their
successful application of a consistent, well-defined, long-term
investment approach over a period of several market cycles. Each
Portfolio Manager has discretion to purchase and sell securities
for its Fund in accordance with that Fund's investment objective,
policies and restrictions. Although the Portfolio Managers are
subject to general supervision by the Investment Manager, the
Investment Manager does not evaluate the investment merits of
specific securities transactions.
CRM Advisors, LLC -- CRM Advisors, LLC ("CRM"), an affiliate of
Cramer Rosenthal McGlynn, Inc., serves as Portfolio Manager to
the MidCap Value Fund. Organized as a New York limited liability
company in June 1995, CRM Advisors is registered as an investment
adviser under the Investment Advisers Act of 1940. Although as a
new entity CRM has no previous experience managing a registered
investment company, the principal shareholders and portfolio
managers of CRM have significant experience in managing the money
of pension plans, endowment funds, other institutions and
individuals through its affiliate Cramer Rosenthal McGlynn, Inc.
Cramer Rosenthal McGlynn, Inc. was founded in 1973 to manage
portfolios for a select number of wealthy individuals and their
related foundations, pension plans and other entities. The three
founding principals of the firm have each spent an average of 33
years in the investment business. Cramer Rosenthal McGlynn, Inc.
manages approximately $1.6 billion for more than 170 individual
and institutional clients, with a minimum account size of $5
million. As compensation for its services to the MidCap Value
Fund, the Investment Manager pays CRM a monthly fee in arrears
equal to 1/12 of 0.50% of the Fund's average daily net assets
managed during the month. Accounts managed by Cramer Rosenthal
McGlynn, Inc. own in the aggregate approximately 10% of the
outstanding voting securities of Express America.
Ark Asset Management Co., Inc. -- Ark Asset Management Co., Inc.
("Ark") serves as Portfolio Manager to the LargeCap Value Fund.
Located in New York, Ark was established in 1929 as the private
money management division of Lehman Brothers. In 1989, the
division became independent when the employees purchased the
institutional business from Lehman Brothers and changed its name
to Ark in 1992. As of September 30, 1995, Ark managed
approximately $19.2 billion, including $8.8 billion in largecap
value portfolios, for more than 200 individual and institutional
clients, with a minimum account size of $25 million. As
compensation for its services to the LargeCap Value Fund, the
Investment Manager pays Ark a monthly fee in arrears equal to
1/12 of 0.50% of the Fund's average daily net assets managed
during the month.
HSBC Asset Management -- HSBC Asset Management Americas Inc. and
HSBC Asset Management Hong Kong Limited (collectively "HSBC")
serve collectively as Portfolio Managers to the Asia-Pacific
Equity Fund. HSBC is part of HSBC Asset Management, the global
investment advisory and fund management business of the HSBC
Group, which, with headquarters in London, is one of the world's
largest banking and financial organizations. HSBC Asset
Management currently manages approximately $31 billion of assets
globally for a wide variety of institutional, retail and private
clients, with a minimum account size of $10 million for Asia-
Pacific investors. As compensation for its services to the Asia-
Pacific Equity Fund, the Investment Manager pays HSBC a monthly
fee in arrears equal to 1/12 of 0.50% of the Fund's average daily
net assets managed during the month.
The Investment Management and Portfolio Management Agreements
will remain in effect for two years following their date of
execution, and thereafter will automatically continue for
successive annual periods as long as such continuance is
specifically approved at least annually by (a) the Board of
Directors or (b) the vote of a "majority" (as defined in the 1940
Act) of a Fund's outstanding shares voting as a single class;
provided, that in either event the continuance is also approved
by at least a majority of the Board of Directors who are not
"interested persons" (as defined in the 1940 Act) of the
Investment Manager or the Portfolio Managers by vote cast in
person at a meeting called for the purpose of voting on such
approval.
The Investment Management and Portfolio Management Agreements are
terminable without penalty with not less than 60 days notice by
the Board of Directors or by a vote of the holders of a majority
of the relevant Fund's outstanding shares voting as a single
class, or upon not less than 60 days notice by the Investment
Manager. Each of the Investment Management and Portfolio
Management Agreements will terminate automatically in the event
of its "assignment" (as defined in the 1940 Act).
Distributor. Shares of the Funds are distributed by Pilgrim
America Securities, Inc. (the "Distributor") pursuant to a
Distribution Agreement between Masters Series and the
Distributor. The Distribution Agreement requires the Distributor
to use its best efforts on a continuing basis to solicit
purchases of shares of the Funds. Masters Series and the
Distributor have agreed to indemnify each other against certain
liabilities. At the discretion of the Distributor, all sales
charges may at times be reallowed to an authorized dealer
("Authorized Dealer"). If 90% or more of the sales commission is
reallowed, such Authorized Dealer may be deemed to be an
"underwriter" as that term is defined under the Securities Act of
1933, as amended. The Distribution Agreement will remain in
effect for two years and from year to year thereafter only if its
continuance is approved annually by a majority of the Board of
Directors who are not parties to such agreement or "interested
persons" of any such party and must be approved either by votes
of a majority of the Directors or a majority of the outstanding
voting securities of Masters Series. See the Prospectus of
Masters Series for information on how to purchase and sell shares
of the Funds, and the charges and expenses associated with an
investment.
Rule 12b-1 Plans. Masters Series has a distribution plan
pursuant to Rule 12b-1 under the 1940 Act applicable to each
class of shares of each Fund ("Rule 12b-1 Plan"). Masters Series
intends to operate the Rule 12b-1 Plan in accordance with its
terms and the National Association of Securities Dealers, Inc.
rules concerning sales charges. Under the Rule 12b-1 Plan, the
Distributor may be entitled to payment each month in connection
with the offering, sale, and shareholder servicing of Class A,
Class B, and Class M shares in amounts not to exceed the
following: with respect to Class A shares at an annual rate of
up to 0.35% of the average daily net assets of the Class A shares
of the Fund; with respect to Class B shares at an annual rate of
up to 1.00% of the average daily net assets of the Class B shares
of the Fund; and with respect to Class M shares at an annual rate
of up to 1.00% of the average daily net assets of the Class M
shares of the Fund. The Board of Directors has approved under
the Rule 12b-1 Plan payments of the following amounts to the
Distributor each month in connection with the offering, sale, and
shareholder servicing of Class A, Class B, and Class M shares as
follows: (i) with respect to Class A shares at an annual rate
equal to 0.25% of the average daily net assets of the Class A
shares of a Fund; (ii) with respect to Class B shares at an
annual rate equal to 1.00% of the average daily net assets of the
class B shares of a Fund; and (iii) with respect to Class M
shares at an annual rate equal to 0.75% of the average daily net
assets of the Class M shares of a Fund. Of these amounts, fees
equal to an annual rate of 0.25% of the average daily net assets
of each of the Funds is for shareholder servicing for each of the
classes.
Under the Rule 12b-1 Plans, ongoing payments will be made on a
quarterly basis to Authorized Dealers for both distribution and
shareholder servicing at the annual rate of 0.25%, 0.25% and
0.65% of a Fund's average daily net assets of Class A, Class B,
and Class M shares, respectively, that are registered in the name
of that Authorized Dealer as nominee or held in a shareholder
account that designates that Authorized Dealer as the dealer of
record. Rights to these ongoing payments begin to accrue in the
13th month following a purchase of Class A or B shares and in the
1st month following a purchase of Class M shares. These fees may
be used to cover the expenses of the Distributor primarily
intended to result in the sale of Class A, Class B, and Class M
shares of the Funds, including payments to Authorized Dealers for
selling shares of the Funds and for servicing shareholders of
these classes of the Funds. Activities for which these fees may
be used include: preparation and distribution of advertising
materials and sales literature; expenses of organizing and
conducting sales seminars; overhead of the Distributor; printing
of prospectuses and statements of additional information (and
supplements thereto) and reports for other than existing
shareholders; payments to dealers and others that provide
shareholder services; and costs of administering the Rule 12b-1
Plan.
In the event a Rule 12b-1 Plan is terminated in accordance with
its terms, the obligations of a Fund to make payments to the
Distributor pursuant to the Rule 12b-1 Plan will cease and the
Fund will not be required to make any payments for expenses
incurred after the date the Plan terminates. The Distributor
will receive payment under the Rule 12b-1 Plan without regard to
actual distribution expenses it incurs.
In addition to providing for the expenses discussed above, the
Rule 12b-1 Plan also recognizes that the Investment Manager
and/or the Distributor may use their resources to pay expenses
associated with activities primarily intended to result in the
promotion and distribution of the Funds' shares and other funds
managed by the Investment Manager. In some instances, additional
compensation or promotional incentives may be offered to dealers
that have sold or may sell significant amounts of shares during
specified periods of time. Such compensation and incentives may
include, but are not limited to, cash, merchandise, trips and
financial assistance to dealers in connection with pre-approved
conferences or seminars, sales or training programs for invited
sales personnel, payment for travel expenses (including meals and
lodging) incurred by sales personnel and members of their
families, or other invited guests, to various locations for such
seminars or training programs, seminars for the public,
advertising and sales campaigns regarding one or more of the
Funds or other funds managed by the Investment Manager and/or
other events sponsored by dealers.
The Rule 12b-1 Plan has been approved by the Board of Directors,
including all of the Directors who are not interested persons of
Masters Series as defined in the 1940 Act, and by the Funds'
shareholders. Each Rule 12b-1 Plan must be renewed annually by
the Board of Directors, including a majority of the Directors who
are not interested persons of Masters Series and who have no
direct or indirect financial interest in the operation of the
Rule 12b-1 Plan, cast in person at a meeting called for that
purpose. It is also required that the selection and nomination
of such Directors be committed to the Directors who are not
interested persons. The Rule 12b-1 Plan and any distribution or
service agreement may be terminated as to a Fund at any time,
without any penalty, by such Directors or by a vote of a majority
of the Fund's outstanding shares on 60 days written notice. The
Distributor or any dealer or other firm may also terminate their
respective distribution or service agreement at any time upon
written notice.
In approving each Rule 12b-1 Plan, the Board of Directors has
determined that differing distribution arrangements in connection
with the sale of new shares of a Fund is necessary and
appropriate in order to meet the needs of different potential
investors. Therefore, the Board of Directors, including those
Directors who are not interested persons of Masters Series,
concluded that, in the exercise of their reasonable business
judgment and in light of their fiduciary duties, there is a
reasonable likelihood that the Rule 12b-1 Plan as tailored to
each class of each Fund, will benefit such Funds and their
respective shareholders.
Each Rule 12b-1 Plan and any distribution or service agreement
may not be amended to increase materially the amount spent for
distribution expenses as to a Fund without approval by a majority
of the Fund's outstanding shares, and all material amendments to
a Plan or any distribution or service agreement shall be approved
by the Directors who are not interested persons of Masters
Series, cast in person at a meeting called for the purpose of
voting on any such amendment.
The Distributor is required to report in writing to the Board of
Directors at least quarterly on the monies reimbursed to it under
each Rule 12b-1 Plan, as well as to furnish the Board with such
other information as may be reasonably be requested in connection
with the payments made under the Rule 12b-1 Plan in order to
enable the Board to make an informed determination of whether the
Rule 12b-1 Plan should be continued.
Under the Glass-Steagall Act and other applicable laws, certain
banking institutions are prohibited from distributing investment
company shares. Accordingly, such banks may only provide certain
agency or administrative services to their customers for which
they may receive a fee from the Distributor under a Rule 12b-1
Plan. If a bank were prohibited from providing such services,
shareholders would be permitted to remain as Fund shareholders
and alternate means for continuing the servicing of such
shareholders would be sought. In such event, changes in services
provided might occur and such shareholders might no longer be
able to avail themselves of any automatic investment or other
service then being provided by the bank. It is not expected that
shareholders would suffer any adverse financial consequences as a
result of any of these occurrences.
SUPPLEMENTAL DESCRIPTION OF INVESTMENTS
Some of the different types of securities in which the Funds may
invest, subject to their respective investment objectives,
policies and restrictions, are described in the Prospectus under
"The Funds' Investment Objectives and Policies" and "Investment
Practices and Risk Considerations." Additional information
concerning the characteristics of certain of the Funds'
investments are set forth below.
Common Stock, Convertible Securities and Other Equity Securities.
The Funds will invest in common stocks, which represent an equity
(ownership) interest in a company. This ownership interest
generally gives a Fund the right to vote on issues affecting the
company's organization and operations.
The Funds may also buy other types of equity securities such as
convertible securities, preferred stock, and warrants or other
securities that are exchangeable for shares of common stock. A
convertible security is a security that may be converted either
at a stated price or rate within a specified period of time into
a specified number of shares of common stock. By investing in
convertible securities, a Fund seeks the opportunity, through the
conversion feature, to participate in the capital appreciation of
the common stock into which the securities are convertible, while
investing at a better price than may be available on the common
stock or obtaining a higher fixed rate of return than is
available on common stocks.
U.S. Government Securities. U.S. Government securities include
instruments issued by the U.S. Treasury, such as bills, notes and
bonds. These instruments are direct obligations of the U.S.
Government and, as such, are backed by the full faith and credit
of the United States. They differ primarily in their interest
rates, the lengths of their maturities and the dates of their
issuances. In addition, U.S. Government securities include
securities issued by instrumentalities of the U.S. Government,
such as the Government National Mortgage Association, which are
also backed by the full faith and credit of the United States.
Also included in the category of U.S. Government securities are
instruments issued by instrumentalities established or sponsored
by the U.S. Government, such as the Student Loan Marketing
Association, the Federal National Mortgage Association and the
Federal Home Loan Mortgage Corporation. While these securities
are issued, in general, under the authority of an Act of
Congress, the U.S. Government is not obligated to provide
financial support to the issuing instrumentalities, although
under certain conditions certain of these authorities may borrow
from the U.S. Treasury. In the case of securities not backed by
the full faith and credit of the U.S., the investor must look
principally to the agency or instrumentality issuing or
guaranteeing the obligation for ultimate repayment, and may not
be able to assert a claim against the U.S. itself in the event
the agency or instrumentality does not meet its commitment. Each
Fund will invest in securities of such agencies or
instrumentalities only when the Portfolio Manager is satisfied
that the credit risk with respect to any instrumentality is
comparable to the credit risk of U.S. government securities
backed by the full faith and credit of the United States.
Banking Industry Obligations. The Funds may invest in banking
industry obligations, including certificates of deposit, bankers'
acceptances, and fixed time deposits. A Fund will not invest in
obligations issued by a bank unless (i) the bank is a U.S. bank
and a member of the FDIC and (ii) the bank has total assets of at
least $1 billion (U.S.) or, if not, the Fund's investment is
limited to the FDIC-insured amount of $100,000.
American Depositary Receipts and European Depositary Receipts.
Each of the Funds may invest in securities of foreign issuers in
the form of American Depositary Receipts ("ADRs"), European
Depositary Receipts ("EDRs") or other similar securities
representing securities of foreign issuers. These securities may
not necessarily be denominated in the same currency as the
securities they represent. ADRs are receipts typically issued by
a United States bank or trust company evidencing ownership of the
underlying foreign securities. EDRs are receipts issued by a
European financial institution evidencing a similar arrangement.
Generally, ADRs, in registered form, are designed for use in the
United States securities markets, and EDRs, in bearer form, are
designed for use in European securities markets.
When-Issued Securities and Delayed-Delivery Transactions. In
order to secure prices or yields deemed advantageous at the time,
the Funds may purchase or sell securities on a when-issued or a
delayed-delivery basis. The Funds will enter into a when-issued
transaction for the purpose of acquiring portfolio securities and
not for the purpose of leverage. In such transactions, delivery
of the securities occurs beyond the normal settlement periods,
but no payment or delivery is made by, and no interest accrues
to, the Fund prior to the actual delivery or payment by the other
party to the transaction. Due to fluctuations in the value of
securities purchased on a when-issued or a delayed-delivery
basis, the yields obtained on such securities may be higher or
lower than the yields available in the market on the dates when
the investments are actually delivered to the buyers. Similarly,
the sale of securities for delayed-delivery can involve the risk
that the prices available in the market when delivery is made may
actually be higher than those obtained in the transaction itself.
Each Fund will establish a segregated account with the Custodian
consisting of high quality liquid assets in an amount equal to
the amount of its when-issued and delayed-delivery commitments
which will be "marked to market" daily.
SUPPLEMENTAL INVESTMENT TECHNIQUES
Borrowing. A Fund may borrow money from banks solely for
temporary or emergency purposes, but not in an amount exceeding
one-third of its total assets. However, if a Fund borrows money,
its share price may be subject to greater fluctuation until the
borrowing is paid off. If the Fund makes additional investments
while borrowings are outstanding, this may be construed as a form
of leverage.
Short Sales Against the Box. MidCap Value Fund is authorized to
make short sales of securities it owns or has the right to
acquire at no additional cost through conversion or exchange of
other securities it owns (referred to as short sales "against the
box"). When the Fund makes a short sale, the proceeds it
receives are retained by the broker until the Fund replaces the
borrowed security. In order to deliver the security to the
buyer, the Fund must arrange through the broker to borrow the
security and, in so doing, the Fund becomes obligated to replace
the security borrowed at its market price at the time of
replacement, whatever that price may be. If the Fund makes a
short sale "against the box," the Fund would not immediately
deliver the securities sold and would not receive the proceeds
from the sale. The seller is said to have a short position in
the securities sold until it delivers the securities sold, at
which time it receives the proceeds of the sale. The Fund's
decision to make a short sale "against the box" may be a
technique to hedge against market risks when the Portfolio
Manager believes that the price of a security may decline,
causing a decline in the value of a security owned by the Fund or
a security convertible or exchangeable for such security. In
such case, any future losses in the Fund's long position would be
reduced by an offsetting future gain in the short position. No
more than 5% of the Fund's net assets may be used to cover such
short positions. In addition, the Fund's ability to enter into
short sales may be limited by certain tax requirements.
Other Investment Companies. Each Fund may invest in shares
issued by no-load investment companies. A Fund is limited in the
degree to which it may invest in shares of another investment
company in that it may not, at the time of the purchase, (1)
acquire more than 3% of the outstanding voting shares of the
investment company, (2) invest more than 5% of the Fund's total
assets in the investment company, or (3) invest more than 10% of
the Fund's total assets in all investment company holdings. As a
shareholder in any investment company, a Fund will bear its
ratable share of the investment company's expenses, including
management fees in the case of a management investment company.
SUPPLEMENTAL DISCUSSION OF RISKS
ASSOCIATED WITH THE FUNDS' INVESTMENT
POLICIES AND INVESTMENT TECHNIQUES
Additional information concerning risks associated with certain
of the Funds' investments is set forth below.
Emerging Market and Other Foreign Securities. Asia-Pacific
Equity Fund will invest substantially all of its assets in the
equity securities of companies based in the Asia-Pacific region.
Asia-Pacific countries include, but are not limited to, China,
Hong Kong, Indonesia, Korea, Malaysia, Philippines, Singapore,
Taiwan and Thailand, although the Fund will not invest in Japan
and Australia. Foreign financial markets, while growing in
volume, have, for the most part, substantially less volume than
United States markets, and securities of many foreign companies
are less liquid and their prices more volatile than securities of
comparable domestic companies. The foreign markets also have
different clearance and settlement procedures, and in certain
markets there have been times when settlements have been unable
to keep pace with the volume of securities transactions, making
it difficult to conduct such transactions. Delivery of
securities may not occur at the same time as payment in some
foreign markets. Delays in settlement could result in temporary
periods when a portion of the assets of the Asia-Pacific Equity
Fund is uninvested and no return is earned thereon. The
inability of the Fund to make intended security purchases due to
settlement problems could cause the Fund to miss attractive
investment opportunities. Inability to dispose of portfolio
securities due to settlement problems could result either in
losses to the Fund due to subsequent declines in value of the
portfolio security or, if the Fund has entered into a contract to
sell the security, could result in possible liability to the
purchaser.
As foreign companies are not generally subject to uniform
accounting, auditing and financial reporting standards and
practices comparable to those applicable to domestic companies,
there may be less publicly available information about certain
foreign companies than about domestic companies. There is
generally less government supervision and regulation of
exchanges, financial institutions and issuers in foreign
countries than there is in the United States. A foreign
government may impose exchange control regulations that may have
an impact on currency exchange rates, and there is the
possibility of expropriation or confiscatory taxation, political
or social instability, or diplomatic developments that could
affect U.S. investments in those countries.
Although Asia-Pacific Equity Fund will use reasonable efforts to
obtain the best available price and the most favorable execution
with respect to all transactions and the Portfolio Manager will
consider the full range and quality of services offered by the
executing broker or dealer when making these determinations,
fixed commissions on many foreign stock exchanges are generally
higher than negotiated commissions on U.S. exchanges. Certain
foreign governments levy withholding taxes against dividend and
interest income. Although in some countries a portion of these
taxes are recoverable, the non-recovered portion of foreign
withholding taxes will reduce the income received by the Fund on
these investments. However, these foreign withholding taxes are
not expected to have a significant impact on the Asia-Pacific
Equity Fund, since the Fund's investment objective is to seek
long-term capital appreciation and any income earned by the Fund
should be considered incidental.
The risks of investing in foreign securities may be intensified
in the case of investments in issuers domiciled or doing
substantial business in emerging markets or countries with
limited or developing capital markets. Security prices in
emerging markets can be significantly more volatile than in the
more developed nations of the world, reflecting the greater
uncertainties of investing in less established markets and
economies. In particular, countries with emerging markets may
have relatively unstable governments, present the risk of sudden
adverse government action and even nationalization of businesses,
restrictions on foreign ownership, or prohibitions of
repatriation of assets, and may have less protection of property
rights than more developed countries. The economies of countries
with emerging markets may be predominantly based on only a few
industries, may be highly vulnerable to changes in local or
global trade conditions, and may suffer from extreme and volatile
debt burdens or inflation rates. Local securities markets may
trade a small number of securities and may be unable to respond
effectively to increases in trading volume, potentially making
prompt liquidation of substantial holdings difficult or
impossible at times. Transaction settlement and dividend
collection procedures may be less reliable in emerging markets
than in developed markets. Securities of issuers located in
countries with emerging markets may have limited marketability
and may be subject to more abrupt or erratic price movements.
Investing in Developing Asia-Pacific Securities Markets and
Economies. The securities markets of developing Asia-Pacific
countries are not as large as the U.S. securities markets and
have substantially less trading volume, resulting in a lack of
liquidity and high price volatility. Certain markets, such as
those of China, are in only the earliest stages of development.
There is also a high concentration of market capitalization and
trading volume in a small number of issuers representing a
limited number of industries, as well as a high concentration of
investors and financial intermediaries. Many of such markets
also may be affected by developments with respect to more
established markets in the region, such as in Japan. Developing
Asia-Pacific brokers typically are fewer in number and less
capitalized than brokers in the United States. These factors,
combined with the U.S. regulatory requirements of open-end
investment companies and the restrictions on foreign investments
discussed below, result in potentially fewer investment
opportunities for Asia-Pacific Equity Fund and may have an
adverse impact on the investment performance of the Fund. The
Fund's investment restrictions permit it to invest up to 15% of
its net assets in securities that are determined by the Portfolio
Manager to be illiquid.
The investment objective of Asia-Pacific Equity Fund reflects the
belief that the economies of the developing Asia-Pacific
countries will continue to grow in such a fashion as to provide
attractive investment opportunities. At the same time, emerging
economies present certain risks that do not exist in more
established economies. Especially significant is that political
and social uncertainties exist for many of the developing Asia-
Pacific countries. In addition, the governments of many of such
countries, such as Indonesia, have a heavy role in regulating and
supervising the economy. Another risk common to most such
countries is that the economy is heavily export oriented and,
accordingly, is dependent upon international trade. The
existence of overburdened infrastructure and obsolete financial
systems also presents risks in certain countries, as do
environmental problems. Certain economies also depend to a
significant degree upon exports of primary commodities and,
therefore, are vulnerable to changes in commodity prices which,
in turn, may be affected by a variety of factors. In addition,
certain developing Asia-Pacific countries, such as the
Philippines, are especially large debtors to commercial banks and
foreign governments.
Archaic legal systems in certain developing Asia-Pacific
countries also may have an adverse impact on the Asia-Pacific
Equity Fund. For example, while the potential liability of a
shareholder in a U.S. corporation with respect to acts of the
corporation is generally limited to the amount of the
shareholder's investment, the notion of limited liability is less
clear in certain developing Asia-Pacific countries. Similarly,
the rights of investors in Asia-Pacific companies may be more
limited than those of shareholders of U.S. corporations.
Certain of the risks associated with international investments
and investing in smaller capital markets are heightened for
investments in developing Asia-Pacific countries. For example,
some of the currencies of developing Asia-Pacific countries have
experienced devaluations relative to the U.S. dollar, and major
adjustments have been made periodically in certain of such
currencies. Certain countries face serious exchange constraints.
In addition, as mentioned above, governments of many developing
Asia-Pacific countries have exercised and continue to exercise
substantial influence over many aspects of the private sector.
In certain cases, the government owns or controls many companies,
including the largest in the country. Accordingly, government
actions in the future could have a significant effect on economic
conditions in developing Asia-Pacific countries, which could
affect private sector companies and the Asia-Pacific Equity Fund,
as well as the value of securities in the Fund's portfolio.
In addition to the relative lack of publicly available
information about developing Asia-Pacific issuers and the
possibility that such issuers may not be subject to the same
accounting, auditing and financial reporting standards as are
applicable to U.S. companies, inflation accounting rules in some
developing Asia-Pacific countries require, for companies that
keep accounting records in the local currency, for both tax and
accounting purposes, that certain assets and liabilities be
restated on the company's balance sheet in order to express items
in terms of currency of constant purchasing power. Inflation
accounting may indirectly generate losses or profits for certain
developing Asia-Pacific companies.
Satisfactory custodial services for investment securities may not
be available in some developing Asia-Pacific countries, which may
result in the Asia-Pacific Equity Fund incurring additional costs
and delays in providing transportation and custody services for
such securities outside such countries, if possible.
As a result, the Portfolio Manager of the Asia-Pacific Equity
Fund may determine that, notwithstanding otherwise favorable
investment criteria, it may not be practicable or appropriate to
invest in a particular developing Asia-Pacific country. The Fund
may invest in countries in which foreign investors, including the
Portfolio Manager of the Fund, have had no or limited prior
experience.
Restrictions on Foreign Investments. Some developing Asia-
Pacific countries prohibit or impose substantial restrictions on
investments in their capital markets, particularly their equity
markets, by foreign entities such as the Asia-Pacific Equity
Fund. As illustrations, certain countries may require
governmental approval prior to investments by foreign persons or
limit the amount of investment by foreign persons in a particular
company or limit the investment by foreign persons to only a
specific class of securities of a company that may have less
advantageous terms (including price) than securities of the
company available for purchase by nationals. Certain countries
may restrict investment opportunities in issuers or industries
deemed important to national interests.
The manner in which foreign investors may invest in companies in
certain developing Asia-Pacific countries, as well as limitations
on such investments, also may have an adverse impact on the
operations of the Asia-Pacific Equity Fund. For example, the
Fund may be required in certain of such countries to invest
initially through a local broker or other entity and then have
the shares purchased re-registered in the name of the Fund. Re-
registration may in some instances not be able to occur on timely
basis, resulting in a delay during which the Fund may be denied
certain of its rights as an investor, including rights as to
dividends or to be made aware of certain corporate actions.
There also may be instances where the Fund places a purchase
order but is subsequently informed, at the time of re-
registration, that the permissible allocation of the investment
to foreign investors has been filled, depriving the Fund of the
ability to make its desired investment at that time.
Substantial limitations may exist in certain countries with
respect to the Asia-Pacific Equity Fund's ability to repatriate
investment income, capital or the proceeds of sales of securities
by foreign investors. The Fund could be adversely affected by
delays in, or a refusal to grant, any required governmental
approval for repatriation of capital, as well as by the
application to the Fund of any restrictions on investments. No
more than 15% of the Fund's net assets may be comprised, in the
aggregate, of assets that are (i) subject to material legal
restrictions on repatriation or (ii) invested in illiquid
securities. Even where there is no outright restriction on
repatriation of capital, the mechanics of repatriation may affect
certain aspects of the operations of the Fund. 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.
In certain countries, banks or other financial institutions may
be among the leading companies or have actively traded
securities. The 1940 Act restricts the Asia-Pacific Equity
Fund's investments in any equity securities of an issuer that, in
its most recent fiscal year, derived more than 15% of its
revenues from "securities related activities," as defined by the
rules thereunder. The provisions may restrict the Fund's
investments in certain foreign banks and other financial
institutions.
Foreign Currency Risks. Currency risk is the risk that changes
in foreign exchange rates will affect, favorably or unfavorably,
the U.S. dollar value of foreign securities held by the Asia-
Pacific Equity Fund. In a period when the U.S. dollar generally
rises against foreign currencies, the returns on foreign stocks
for a U.S. investor will be diminished. By contrast, in a period
when the U.S. dollar generally declines, the returns on foreign
securities will be enhanced. Unfavorable changes in the
relationship between the U.S. dollar and the relevant foreign
currencies, therefore, will adversely affect the value of the
Asia-Pacific Equity Fund's shares.
Foreign Currency Exchange Transactions. Because the Asia-Pacific
Equity Fund may buy and sell securities denominated in currencies
other than the U.S. Dollar, and receive interest, dividends and
sale proceeds in currencies other than the U.S. Dollar, the Fund
may enter into foreign currency exchange transactions to convert
to and from different foreign currencies and to convert foreign
currencies to and from the U.S. Dollar. The Fund either enters
into these transactions on a spot (i.e., cash) basis at the spot
rate prevailing in the foreign currency exchange market, or uses
forward foreign currency contracts to purchase or sell foreign
currencies. Asia-Pacific Equity Fund may not invest more than 5%
of its assets (taken at market value at the time of investment)
in forward foreign currency contracts.
A forward foreign currency exchange contract is an agreement to
exchange one currency for another -- for example, to exchange a
certain amount of U.S. Dollars for a certain amount of Korean Won
-- at a future date. Forward foreign currency contracts are
included in the group of instruments that can be characterized as
derivatives. Neither spot transactions nor forward foreign
currency exchange contracts eliminate fluctuations in the prices
of the Fund's portfolio securities or in foreign exchange rates,
or prevent loss if the prices of these securities should decline.
Although these transactions tend to minimize the risk of loss due
to a decline in the value of the hedged currency, at the same
time they tend to limit any potential gain that might be realized
should the value of the hedged currency increase. The precise
matching of the forward contract amounts and the value of the
securities involved will not generally be possible because the
future value of these securities in foreign currencies will
change as a consequence of market movements in the value of those
securities between the date the forward contract is entered into
and the date it matures. The projection of currency market
movements is extremely difficult, and the successful execution of
a hedging strategy is highly uncertain. Use of currency hedging
techniques may also be limited by management's need to protect
the status of the Fund as a regulated investment company under
the Code.
MidCap Company Equity Securities. MidCap Value Fund will invest
substantially all of its assets in the equity securities of
certain midcap companies. Midcap companies will tend to be
smaller, more emerging companies and investment in these
companies may involve greater risk than is customarily associated
with securities of larger, more established companies. Midcap
companies may experience relatively higher growth rates and
higher failure rates than do larger companies. The trading
volume of securities of midcap companies is normally less than
that of larger companies and, therefore, may disproportionately
affect their market price, tending to make them rise more in
response to buying demand and fall more in response to selling
pressure than is the case with larger companies.
Illiquid Securities. A Fund may invest in an illiquid or
restricted security if the Portfolio Manager believes that it
presents an attractive investment opportunity. Generally, a
security is considered illiquid if it cannot be disposed of
within seven days. Its illiquidity might prevent the sale of
such a security at a time when a Portfolio Manager might wish to
sell, and these securities could have the effect of decreasing
the overall level of a Portfolio's liquidity. Further, the lack
of an established secondary market may make it more difficult to
value illiquid securities, requiring the Fund to rely on
judgements that may be somewhat subjective in determining value,
which could vary from the amount that a Fund could realize upon
disposition.
Restricted securities, including private placements, are subject
to legal or contractual restrictions on resale. They can be
eligible for purchase without SEC registration by certain
institutional investors known as "qualified institutional
buyers," and under the Fund's procedures, restricted securities
could be treated as liquid. However, some restricted securities
may be illiquid and restricted securities that are treated as
liquid could be less liquid than registered securities traded on
established secondary markets. A Fund may not invest more than
15% of its net assets in illiquid securities, measured at the
time of investment. Each Fund will adhere to a more restrictive
investment limitation on its investments in illiquid or
restricted securities as required by the securities laws of those
jurisdictions where shares of the Fund are registered for sale.
Options on Securities. The Funds may purchase put options on
portfolio securities in which they may invest that are traded on
a U.S. exchange or in the over-the-counter market and, for the
Asia-Pacific Equity Fund, on a foreign securities exchange. A
Fund may not invest more than 5% of its assets (taken at market
value at the time of such investment) in put options. Such put
options are included in the group of instruments that can be
characterized as derivatives. A Fund may purchase put options on
portfolio securities at or about the same time that it purchases
the underlying security or at a later time. By buying a put, a
Fund limits its risk of loss from a decline in the market value
of the security until the put expires. Any appreciation in the
value of the underlying security, however, will be partially
offset by the amount of the premium paid for the put option and
any related transaction costs. Prior to their expirations, put
options may be sold in closing sale transactions.
The purchase of options involves certain risks. If a put option
purchased by a Fund is not sold when it has remaining value, and
if the market price of the underlying security remains equal to
or greater than the exercise price, the Fund will lose its entire
investment in the option. Also, where a put option is purchased
to hedge against price movements in a particular security, the
price of the put option may move more or less than the price of
the related security. There can be no assurance that a liquid
market will exist when a Fund seeks to close out an option
position. Furthermore, if trading restrictions or suspensions
are imposed on the options markets, a Fund may be unable to close
out a position.
Repurchase Agreements. Each Fund may invest any portion of its
assets otherwise invested in money market instruments in U.S.
Government securities and concurrently enter into repurchase
agreements with respect to such securities. Such repurchase
agreements will be made only with government securities dealers
recognized by the Board of Governors of the Federal Reserve
System or with member banks of the Federal Reserve System. Under
such agreements, the seller of the security agrees to repurchase
it at a mutually agreed upon time and price. The resale price is
in excess of the purchase price and reflects an agreed upon
interest rate for the period of time the agreement is
outstanding. The period of these repurchase agreements is
usually quite short, from overnight to one week, while the
underlying securities generally have longer maturities.
Each Fund will always receive as collateral securities acceptable
to it whose market value is equal to at least 100% of the amount
invested by the Fund, and the Fund will make payment for such
securities only upon physical delivery or evidence of book entry
transfer to the account of its Custodian. If the seller
defaults, a Fund might incur a loss or delay in the realization
of proceeds if the value of the collateral securing the
repurchase agreement declines and it might incur disposition
costs in liquidating the collateral.
INVESTMENT RESTRICTIONS
The Company has adopted the investment restrictions listed below
relating to the investment of each Fund's assets and its
activities. These are fundamental policies that may not be
changed without the approval of the holders of a majority of the
outstanding voting securities of a Fund (which for this purpose
and under the 1940 Act means the lesser of (i) 67% of the shares
represented at a meeting at which more than 50% of the
outstanding shares are represented or (ii) more than 50% of the
outstanding shares). None of the Funds may:
(1) invest in a security if, with respect to 75% of its
total assets, more than 5% of the total assets (taken
at market value at the time of such investment) would
be invested in the securities of any one issuer, except
that this restriction does not apply to securities
issued or guaranteed by the U.S. Government or its
agencies or instrumentalities;
(2) invest in a security if, with respect to 75% of its
assets, it would hold more than 10% (taken at the time
of such investment) of the outstanding voting
securities of any one issuer, except securities issued
or guaranteed by the U.S. Government, or its agencies
or instrumentalities;
(3) invest in a security if more than 25% of its total
assets (taken at market value at the time of such
investment) would be invested in the securities of
companies primarily engaged in any one industry, except
that this restriction does not apply to securities
issued or guaranteed by the U.S. Government, its
agencies and instrumentalities (or repurchase
agreements with respect thereto);
(4) lend any funds or other assets, except that a Fund may,
consistent with its investment objective and policies:
(a) invest in debt obligations, even though the
purchase of such obligations may be deemed to be
the making of loans;
(b) enter into repurchase agreements; and
(c) lend its portfolio securities in accordance
with applicable guidelines established by the SEC
and any guidelines established by the Board of
Directors;
(5) borrow money or pledge, mortgage, or hypothecate its
assets, (a) except that a Fund may borrow from banks,
but only if immediately after each borrowing and
continuing thereafter there is asset coverage of 300%;
and (b) and except that the following shall not be
considered a pledge, mortgage, or hypothecation of a
Fund's assets for these purposes: entering into
reverse repurchase agreements; transactions in options,
futures, options on futures, and forward currency
contracts; the deposit of assets in escrow in
connection with the writing of covered put and call
options; and the purchase of securities on a "when-
issued" or delayed delivery basis; collateral
arrangements with respect to initial or variation
margin and other deposits for futures contracts,
options on futures contracts, and forward currency
contracts;
(6) issue senior securities, except insofar as a Fund may
be deemed to have issued a senior security by reason of
borrowing money in accordance with that Fund's
borrowing policies, and except for purposes of this
investment restriction, collateral or escrow
arrangements with respect to the making of short sales,
purchase or sale of futures contracts or related
options, purchase or sale of forward currency
contracts, writing of stock options, and collateral
arrangements with respect to margin or other deposits
respecting futures contracts, related options, and
forward currency contracts are not deemed to be an
issuance of a senior security;
(7) act as an underwriter of securities of other issuers,
except, when in connection with the disposition of
portfolio securities, a Fund may be deemed to be an
underwriter under the federal securities laws;
(8) purchase or sell real estate (other than marketable
securities representing interests in, or backed by,
real estate or securities of companies that deal in
real estate or mortgages).
The Funds are also subject to the following restrictions and
policies that are not fundamental and may, therefore, be changed
by the Board of Directors (without shareholder approval). Unless
otherwise indicated, a Fund may not:
(1) invest in securities that are illiquid if, as a result
of such investment, more than 15% of the total assets
of the Fund (taken at market value at the time of such
investment) would be invested in such securities;
(2) invest in companies for the purpose of exercising
control or management;
(3) purchase or sell physical commodities or commodities
contracts (which, for purposes of this restriction,
shall not include foreign currency or forward foreign
currency contracts), except any Fund may engage in
interest rate futures contracts, stock index futures
contracts, futures contracts based on other financial
instruments or securities, and options on such futures
contracts;
(4) invest directly in interests in oil, gas or other
mineral exploration or development programs or mineral
leases (other than marketable securities of companies
engaged in the business of oil, gas, or other mineral
exploration).
(5) invest more than 5% of its total assets in warrants,
whether or not listed on the New York or American Stock
Exchanges, including no more than 2% of its total
assets which may be invested in warrants that are not
listed on those exchanges. Warrants acquired by a Fund
in units or attached to securities are not included in
this restriction;
(6) purchase securities of issuers which are restricted
from being sold to the public without registration
under the Securities Act of 1933 (unless such
securities are deemed to be liquid under Masters
Series' Liquidity Procedures) if by reason of such
investment the Fund's aggregate investment in such
securities will exceed 10% to the Fund's total assets;
(7) invest more than 5% of the value of its total assets in
securities of issuers which have been in continuous
operation less than three years;
(8) invest in puts, calls, straddles, spreads or any
combination thereof if, as a result of such investment,
more than 5% of the total assets of the Fund (taken at
market value at the time of such investment) would be
invested in such securities;
(9) loan portfolio securities unless collateral values are
continuously maintained at no less than 100% by
"marking to market" daily;
(10) invest in real estate limited partnerships.
Other non-fundamental policies include the following: each Fund
may not purchase securities on margin; make short sales, except
for short sales "against the box," or purchase or retain in its
portfolio any security if an officer or Director of Masters
Series or the Investment Manager or any Portfolio Manager owns
beneficially more than 1/2 of 1% of the outstanding securities of
such issuer, and in the aggregate such persons own beneficially
more than 5% of the outstanding securities of such issuer.
PORTFOLIO TRANSACTIONS
The Portfolio Management Agreements authorize the Portfolio
Managers to select the brokers or dealers that will execute the
purchase and sale of investment securities for each Fund. In all
purchases and sales of securities for the portfolio of a Fund,
the primary consideration is to obtain the most favorable price
and execution available. Pursuant to the Portfolio Management
Agreements, each Portfolio Manager determines, subject to the
instructions of and review by the Board of Directors of the Fund,
which brokers are to be eligible to execute portfolio
transactions of the Fund. Purchases and sales of securities in
the over-the-counter market will generally be executed directly
with a "market-maker," unless in the opinion of a Portfolio
Manager, a better price and execution can otherwise be obtained
by using a broker for the transaction.
In placing portfolio transactions, each Portfolio Manager will
use its best efforts to choose a broker capable of providing the
brokerage services necessary to obtain the most favorable price
and execution available. The full range and quality of brokerage
services available will be considered in making these
determinations, such as the size of the order, the difficulty of
execution, the operational facilities of the firm involved, the
firm's risk in positioning a block of securities, and other
factors. The Portfolio Managers will seek to obtain the best
commission rate available from brokers that are believed to be
capable of providing efficient execution and handling of the
orders. In those instances where it is reasonably determined
that more than one broker can offer the brokerage services needed
to obtain the most favorable price and execution available,
consideration may be given to those brokers that supply research
and statistical information to a Fund, the Investment Manager,
and/or the Portfolio Manager, and provide other services in
addition to execution services. Each Portfolio Manager considers
such information, which is in addition to and not in lieu of the
services required to be performed by the Portfolio Manager, under
its Portfolio Management Agreement, to be useful in varying
degrees, but of indeterminable value. Consistent with this
policy, portfolio transactions may be executed by brokers
affiliated with the Pilgrim America Group or any of the Portfolio
Managers, so long as the commission paid to the affiliated broker
is reasonable and fair compared to the commission that would be
charged by an unaffiliated broker in a comparable transaction.
The placement of portfolio brokerage with broker-dealers who have
sold shares of a Fund is subject to rules adopted by the National
Association of Securities Dealers, Inc. ("NASD") Provided the
Fund's officers are satisfied that the Fund is receiving the most
favorable price and execution available, the Fund may also
consider the sale of the Fund's shares as a factor in the
selection of broker-dealers to execute its portfolio
transactions.
While it will continue to be the Funds' general policy to seek
first to obtain the most favorable price and execution available,
in selecting a broker to execute portfolio transactions for a
Fund, the Fund may also give weight to the ability of a broker to
furnish brokerage and research services to the Fund, the
Investment Manager or the Portfolio Manager, even if the specific
services were not imputed just to the Fund and were useful to the
Investment Manager and/or Portfolio Manager in advising other
clients. In negotiating commissions with a broker, the Fund may
therefore pay a higher commission than would otherwise be the
case if no weight were given to the furnishing of these
supplemental services, provided that the amount of such
commission has been determined in good faith by the Portfolio
Manager to be reasonable in relation to the value of the
brokerage and research services provided by such broker, which
services either produce a direct benefit to the Fund or assist
the Investment Manager or Portfolio Manager in carrying out their
responsibilities to the Fund.
Some securities considered for investment by a Fund may also be
appropriate for other clients served by that Fund's Portfolio
Manager. If the purchase or sale of securities consistent with
the investment policies of a Portfolio and one or more of these
other clients serviced by the Portfolio Manager is considered at
or about the same time, transactions in such securities will be
allocated among the Fund and the Portfolio Manager's other
clients in a manner deemed fair and reasonable by the Portfolio
Manager. Although there is no specified formula for allocating
such transactions, the various allocation methods used by a
Portfolio Manager, and the results of such allocations, are
subject to periodic review by the Board of Directors.
While any of the Funds may from time to time sell a security it
has held for a short period of time, none of the Funds has a
policy of engaging in short-term trading or generating short-term
gains.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
Shares of the Funds are offered at the net asset value next
computed following receipt of the order by the dealer (and/or the
Distributor) or by Masters Series' transfer agent, Investors
Fiduciary Trust Company ("Transfer Agent"), plus, for Class A and
Class M shares, a varying sales charge depending upon the class
of shares purchased and the amount of money invested, as set
forth in the Prospectus. Authorized dealers will be paid
commissions on shares sold in Classes A and B, at net asset
value, which at the time of investment would have been subject to
the imposition of a contingent deferred sales charge if
liquidated. The Distributor may, from time to time, at its
discretion, allow the selling dealer to retain 100% of such sales
charge, and such dealer may therefore be deemed an "underwriter"
under the Securities Act of 1933, as amended. The Distributor,
at its expense, may also provide additional promotional
incentives to dealers in connection with sales of shares of the
Funds and other funds managed by the Investment Manager. In some
instances, such incentives may be made available only to dealers
whose representatives have sold or are expected to sell
significant amounts of such shares. The incentives may include
payment for travel expenses, including lodging, incurred in
connection with trips taken by qualifying registered
representatives and members of their families to locations within
or outside of the United States, merchandise or other items.
Dealers may not use sales of the Fund's shares to qualify for the
incentives to the extent such may be prohibited by the laws of
any state.
Certain investors may purchase shares of the Funds with liquid
assets with a value which is readily ascertainable by reference
to a domestic exchange price and which would be eligible for
purchase by a Fund consistent with the Fund's investment policies
and restrictions. These transactions only will be effected if
the Portfolio Manager intends to retain the security in the Fund
as an investment. Assets so purchased by a Fund will be valued
in generally the same manner as they would be valued for purposes
of pricing the Fund's shares, if such assets were included in the
Fund's assets at the time of purchase. Masters Series reserves
the right to amend or terminate this practice at any time.
Special Purchases at Net Asset Value. Class A or Class M shares
of the Funds may be purchased at net asset value, without a sales
charge, by persons who have redeemed their Class A or Class M
Shares of a Fund (or shares of other funds managed by the
Investment Manager in accordance with the terms of such
privileges established for such funds) within the previous 90
days. The amount that may be so reinvested in the Fund is
limited to an amount up to, but not exceeding, the redemption
proceeds (or to the nearest full share if fractional shares are
not purchased). In order to exercise this privilege, a written
order for the purchase of shares must be received by the Transfer
Agent, or be postmarked, within 90 days after the date of
redemption. This privilege may only be used once per calendar
year. Payment must accompany the request and the purchase will
be made at the then current net asset value of the Fund. Such
purchases may also be handled by a securities dealer who may
charge a shareholder for this service. If the shareholder has
realized a gain on the redemption, the transaction is taxable and
any reinvestment will not alter any applicable Federal capital
gains tax. If there has been a loss on the redemption and a
subsequent reinvestment pursuant to this privilege, some or all
of the loss may not be allowed as a tax deduction depending upon
the amount reinvested, although such disallowance is added to the
tax basis of the shares acquired upon the reinvestment.
Class A or Class M shares may also be purchased at net asset
value by any person who can document that Fund shares were
purchased with proceeds from the redemption (within the previous
90 days) of shares from any unrelated mutual fund on which a
sales charge was paid or which were subject, at any time, to a
contingent deferred sales charge.
Class A or Class M Shares of the Funds may also be purchased at
net asset value by any state, county, or city, or any
instrumentality, department, authority or agency thereof that has
determined that a Fund is a legally permissible investment and
that is prohibited by applicable investment law from paying a
sales charge or commission in connection with the purchase of
shares of any registered management investment company ("an
eligible governmental authority"). If an investment by an
eligible governmental authority at net asset value is made though
a dealer who has executed a selling group agreement with respect
to Masters Series (or the other funds in the Pilgrim America
Group) the Distributor may pay the selling firm 0.25% of the
Offering Price.
Shareholders of Pilgrim America General Money Market Shares who
acquired their shares by using all or a portion of the proceeds
from the redemption of Class A or Class M shares of other funds
in the Pilgrim America Group distributed by the Distributor may
reinvest such amount plus any shares acquired through dividend
reinvestment in Class A or Class M Shares of a Fund at its
current net asset value, without a sales charge.
Officers, directors and bona fide full-time employees of Masters
Series and officers, directors and full-time employees of the
Investment Manager, any Portfolio Manager, the Distributor,
Masters Series' service providers or affiliated corporations
thereof or any trust, pension, profit-sharing or other benefit
plan for such persons, broker-dealers, for their own accounts or
for members of their families (defined as current spouse,
children, parents, grandparents, uncles, aunts, siblings,
nephews, nieces, step-relations, relations at-law, and cousins)
employees of such broker-dealers (including their immediate
families) and discretionary advisory accounts of the Investment
Manager or any Portfolio Manager, may purchase Class A or Class M
Shares of a Fund at net asset value without a sales charge. Such
purchaser is required to sign a letter stating that the purchase
is for his own investment purposes only and that the securities
will not be resold except to the Fund. Masters Series may, under
certain circumstances, allow registered investment adviser's to
make investments on behalf of their clients at net asset value
without any commission or concession.
Class A or M shares may also be purchased at net asset value by
certain fee based registered investment advisers, trust companies
and bank trust departments under certain circumstances making
investments on behalf of their clients and by shareholders who
have authorized the automatic transfer of dividends from the same
class of another open-end fund managed by the Investment Manager
or from Pilgrim Prime Rate Trust.
Letters of Intent and Rights of Accumulation. An investor may
immediately qualify for a reduced sales charge on a purchase of
Class A or Class M shares of any of the Funds or any fund in the
Pilgrim America Group which offers Class A shares, Class M shares
or shares with front-end sales charges, by completing the Letter
of Intent section of the Shareholder Application in the
Prospectus (the "Letter of Intent" or "Letter"). By completing
the Letter, the investor expresses an intention to invest during
the next 13 months a specified amount which if made at one time
would qualify for the reduced sales charge. At any time within
90 days after the first investment which the investor wants to
qualify for the reduced sales charge, a signed Shareholder
Application, with the Letter of Intent section completed, may be
filed with the Fund. After the Letter of Intent is filed, each
additional investment made will be entitled to the sales charge
applicable to the level of investment indicated on the Letter of
Intent as described above. Sales charge reductions based upon
purchases in more than one investment in the Pilgrim America
Group will be effective only after notification to the
Distributor that the investment qualifies for a discount. The
shareholder's holdings in the Investment Manager's funds
(excluding Pilgrim America General Money Market Shares) acquired
within 90 days before the Letter of Intent is filed will be
counted towards completion of the Letter of Intent but will not
be entitled to a retroactive downward adjustment of sales charge
until the Letter of Intent is fulfilled. Any redemptions made by
the shareholder during the 13-month period will be subtracted
from the amount of the purchases for purposes of determining
whether the terms of the Letter of Intent have been completed.
If the Letter of Intent is not completed within the 13-month
period, there will be an upward adjustment of the sales charge as
specified below, depending upon the amount actually purchased
(less redemption) during the period.
An investor acknowledges and agrees to the following provisions
by completing the Letter of Intent section of the Shareholder
Application in the Prospectus. A minimum initial investment
equal to 25% of the intended total investment is required. An
amount equal to the maximum sales charge or 5.75% of the total
intended purchase will be held in escrow, in the form of shares,
in the investor's name to assure that the full applicable sales
charge will be paid if the intended purchase is not completed.
The shares in escrow will be included in the total shares owned
as reflected on the monthly statement; income and capital gain
distributions on the escrow shares will be paid directly by the
investor. The escrow shares will not be available for redemption
by the investor until the Letter of Intent has been completed, or
the higher sales charge paid. If the total purchases, less
redemptions, equal the amount specified under the Letter, the
shares in escrow will be released. If the total purchases, less
redemptions, exceed the amount specified under the Letter and is
an amount which would qualify for a further quantity discount, a
retroactive price adjustment will be made by the Distributor and
the dealer with whom purchases were made pursuant to the Letter
of Intent (to reflect such further quantity discount) on
purchases made within 90 days before, and on those made after
filing the Letter. The resulting difference in offering price
will be applied to the purchase of additional shares at the
applicable offering price. If the total purchases, less
redemptions, are less than the amount specified under the Letter,
the investor will remit to the Distributor an amount equal to the
difference in dollar amount of sales charge actually paid and the
amount of sales charge which would have applied to the aggregate
purchases if the total of such purchases had been made at a
single account in the name of the investor or to the investor's
order. If within 20 days after written request such difference
in sales charge is not paid, the redemption of an appropriate
number of shares in escrow to realize such difference will be
made. In the event of a total redemption of the account prior to
fulfillment of the Letter of Intent, the additional sales charge
due will be deducted from the proceeds of the redemption and the
balance will be forwarded to the Investor. By completing the
Letter of Intent section of the Shareholder Application, an
investor grants to the Distributor a security interest in the
shares in escrow and agrees to irrevocably appoint the
Distributor as his attorney-in-fact with full power of
substitution to surrender for redemption any or all shares for
the purpose of paying any additional sales charge due. The
investor or the securities dealer must inform the Transfer Agent
or the Distributor that this Letter is in effect each time a
purchase is made.
The value of shares of the Fund plus shares of the other funds
distributed by the Distributor (excluding Pilgrim America General
Money Market Shares) can be combined with a current purchase to
determine the reduced sales charge and applicable offering price
of the current purchase. The reduced sales charge apply to
quantity purchases made at one time or on a cumulative basis over
any period of time by (i) an investor, (ii) the investor's spouse
and children under the age of majority, (iii) the investor's
custodian accounts for the benefit of a child under the Uniform
gift to Minors Act, (iv) a trustee or other fiduciary of a single
trust estate or a single fiduciary account (including a pension,
profit-sharing and/or other employee benefit plans qualified
under Section 401 of the Code), by trust companies' registered
investment advisors, banks and bank trust departments for
accounts over which they exercise exclusive investment
discretionary authority and which are held in a fiduciary,
agency, advisory, custodial or similar capacity.
The reduced sales charge also apply on a non-cumulative basis, to
purchases made at one time by the customers of a single dealer,
in excess of $1 million. The Letter of Intent option may be
modified or discontinued at any time.
Shares of the Fund and other funds of the Pilgrim America Group
(excluding Pilgrim America General Money Market Shares) purchased
and owned of record or beneficially by a corporation, including
employees of a single employer (or affiliates thereof) including
shares held by its employees, under one or more retirement plans,
can be combined with a current purchase to determine the reduced
sales charge and applicable offering price of the current
purchase, provided such transactions are not prohibited by one or
more provisions of the Employee Retirement Income Security Act or
the Internal Revenue Code. Individuals and employees should
consult with their tax advisors concerning the tax rules
applicable to retirement plans before investing.
Redemptions. Payment to shareholders for shares redeemed will be
made within seven days after receipt by Masters Series' Transfer
Agent of the written request in proper form, except that Masters
Series may suspend the right of redemption or postpone the date
of payment as to a Fund during any period when (a) trading on the
New York Stock Exchange is restricted as determined by the SEC or
such exchange is closed for other than weekends and holidays;
(b) an emergency exists as determined by the SEC making disposal
of portfolio series or valuation of net assets of a Fund not
reasonably practicable; or (c) for such other period as the SEC
may permit for the protection of a Fund's shareholders. At
various times, a Fund may be requested to redeem shares for which
it has not yet received good payment. Accordingly, the Fund may
delay the mailing of a redemption check until such time as it has
assured itself that good payment has been collected for the
purchase of such shares, which may take up to 15 days or longer.
Each Fund intends to pay in cash for all shares redeemed, but
under abnormal conditions that make payment in cash unwise, a
Fund may make payment wholly or partly in securities at their
then current market value equal to the redemption price. In such
case, an investor may incur brokerage costs in converting such
securities to cash. However, Masters Series has elected to be
governed by the provisions of Rule 18f-1 under the 1940 Act,
which contain a formula for determining the minimum amount of
cash to be paid as part of any redemption. In the event a Fund
must liquidate portfolio securities to meet redemptions, it
reserves the right to reduce the redemption price by an amount
equivalent to the pro-rated cost of such liquidation not to
exceed one percent of the net asset value of such shares.
Due to the relatively high cost of handling small investments,
Masters Series reserves the right, upon 30 days written notice,
to redeem, at net asset value (less any applicable deferred sales
charge), the shares of any shareholder whose account has a value
of less than $1,000 in a Fund, other than as a result of a
decline in the net asset value per share. Before Masters Series
redeems such shares and sends the proceeds to the shareholder, it
will notify the shareholder that the value of the shares in the
account is less than the minimum amount and will allow the
shareholder 30 days to make an additional investment in an amount
that will increase the value of the account to at least $1,000
before the redemption is processed. This policy will not be
implemented where a Fund has previously waived the minimum
investment requirements.
The value of shares on redemption or repurchase may be more or
less than the investor's cost, depending upon the market value of
the portfolio securities at the time of redemption or repurchase.
Certain purchases of Class A shares and most Class B shares may
be subject to a CDSC. For purchase payments subject to such
CDSC, the Distributor may pay out of its own assets a commission
from 0.25% to 1.00% of the amount invested for Class A purchases
over $1 million and 4% of the amount invested for Class B shares.
Shareholders will be charged a CDSC if certain of those shares
are redeemed within the applicable time period as stated in the
prospectus.
No CDSC is imposed on any shares subject to a CDSC to the extent
that those shares (i) are no longer subject to the applicable
holding period, (ii) resulted from reinvestment of distributions
on CDSC shares or (iii) were exchanged for shares of another fund
managed by the Investment Manager, provided that the shares
acquired in such exchange and subsequent exchanges will continue
to remain subject to the CDSC, if applicable, until the
applicable holding period expires.
The CDSC will be waived for certain redemptions of shares upon
(i) the death or permanent disability of a shareholder, or (ii)
in connection with mandatory distributions from an Individual
Retirement Account ("IRA") or other qualified retirement plan.
The CDSC will be waived in the case of a redemption of shares
following the death or permanent disability of a shareholder if
the redemption is made within one year of death or initial
determination of permanent disability. The waiver is available
for total or partial redemptions of shares owned by an individual
or an individual in joint tenancy (with rights of survivorship),
but only for redemptions of shares held at the time of death or
initial determination of permanent disability. The CDSC will
also be waived in the case of a total or partial redemption of
shares in connection with any mandatory distribution from a tax-
deferred retirement plan or an IRA. The waiver does not apply in
the case of a tax-free rollover or transfer of assets, other than
one following a separation from services. The shareholder must
notify the Fund either directly or through the Distributor at the
time of redemption that the shareholder is entitled to a waiver
of CDSC. The waiver will then be granted subject to confirmation
of the shareholder's entitlement.
The CDSC, which may be imposed on Class A shares purchased in
excess of $1 million, will also be waived for registered
investment advisors, trust companies and bank trust departments
investing on their own behalf or on behalf of their clients.
Conversion of Class B Shares. A shareholder's Class B shares
will automatically convert to Class A shares in the Fund on the
first business day of the month in which the eighth anniversary
of the issuance of the Class B shares occurs, together with a pro
rata portion of all Class B shares representing dividends and
other distributions paid in additional Class B shares. The
conversion of Class B shares into Class A shares is subject to
the continuing availability of an opinion of counsel or an
Internal Revenue Service ("IRS") ruling to the effect that (1)
such conversion will not constitute taxable events for federal
tax purposes; and (2) the payment of different dividends on Class
A and Class B shares does not result in the Fund's dividends or
distributions constituting "preferential dividends" under the
Internal Revenue Code of 1986. The Class B shares so converted
will no longer be subject to the higher expenses borne by Class B
shares. The conversion will be effected at the relative net
asset values per share of the two Classes.
DETERMINATION OF SHARE PRICE
As noted in the Prospectus, the net asset value and offering
price of each class of each Fund's shares will be determined once
daily as of the close of trading on the New York Stock Exchange
(4:00 p.m. New York time) during each day on which that Exchange
is open for trading. As of the date of this Statement of
Additional Information, the New York Stock Exchange is closed on
the following holidays: New Year's Day, Presidents' Day, Good
Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving
Day, and Christmas Day.
Portfolio securities listed or traded on a national securities
exchange or included in the NASDAQ National Market System will be
valued at the last reported sale price on the valuation day.
Securities traded on an exchange or NASDAQ for which there has
been no sale that day and other securities traded in the over-
the-counter market will be valued at the last reported bid price
on the valuation day. In cases in which securities are traded on
more than one exchange, the securities are valued on the exchange
designated by or under the authority of the Board of Directors as
the primary market. Securities for which quotations are not
readily available and all other assets will be valued at their
respective fair values as determined in good faith by or under
the direction of the Board of Directors of Masters Series. Any
assets or liabilities initially expressed in terms of non-U.S.
dollar currencies are translated into U.S. dollars at the
prevailing market rates as quoted by one or more banks or dealers
on the day of valuation.
In computing a class of a Fund's net asset value, all class-
specific liabilities incurred or accrued are deducted from the
class' net assets. The resulting net assets are divided by the
number of shares of the class outstanding at the time of the
valuation and the result (adjusted to the nearest cent) is the
net asset value per share.
The per share net asset value of Class A shares generally will be
higher than the per share net asset value of shares of the other
classes, reflecting daily expense accruals of the higher
distribution fees applicable to Class B and Class M shares. It
is expected, however, that the per share net asset value of the
classes will tend to converge immediately after the payment of
dividends or distributions that will differ by approximately the
amount of the expense accrual differentials between the classes.
Orders received by dealers prior to the close of trading on the
New York Stock Exchange will be confirmed at the offering price
computed as of the close of trading on that Exchange provided the
order is received by the Distributor prior to its close of
business that same day (normally 4:00 P.M. Pacific time). It is
the responsibility of the dealer to insure that all orders are
transmitted timely to the Fund. Orders received by dealers after
the close of trading on the New York Stock Exchange will be
confirmed at the next computed offering price as described in the
Prospectus.
SHAREHOLDER SERVICES AND PRIVILEGES
As discussed in the Prospectus, Masters Series provides a Pre-
Authorized Investment Program for the convenience of investors
who wish to purchase shares of a Fund on a regular basis. Such a
Program may be started with an initial investment ($1,000
minimum) and subsequent voluntary purchases ($100 minimum) with
no obligation to continue. The Program may be terminated without
penalty at any time by the investor or Masters Series. The
minimum investment requirements may be waived by Masters Series
for purchases made pursuant to (i) employer-administered payroll
deduction plans, (ii) profit-sharing, pension, or individual or
any employee retirement plans, or (iii) purchases made in
connection with plans providing for periodic investments in Fund
shares.
For investors purchasing shares of a Fund under a tax-qualified
individual retirement or pension plan or under a group plan
through a person designated for the collection and remittance of
monies to be invested in shares of a Fund on a periodic basis,
Masters Series may, in lieu of furnishing confirmations following
each purchase of Fund shares, send statements no less frequently
than quarterly pursuant to the provisions of the Securities
Exchange Act of 1934, as amended, and the rules thereunder. Such
quarterly statements, which would be sent to the investor or to
the person designated by the group for distribution to its
members, will be made within five business days after the end of
each quarterly period and shall reflect all transactions in the
investor's account during the preceding quarter.
All shareholders will receive a confirmation of each new
transaction in their accounts, which will also show the total
number of Fund shares owned by each shareholder, the number of
shares being held in safekeeping by the Fund's Transfer Agent for
the account of the shareholder and a cumulative record of the
account for the entire year. SHAREHOLDERS MAY RELY ON THESE
STATEMENTS IN LIEU OF CERTIFICATES. CERTIFICATES REPRESENTING
SHARES OF A FUND WILL NOT BE ISSUED UNLESS THE SHAREHOLDER
REQUESTS THEM IN WRITING.
Self-Employed and Corporate Retirement Plans. For self-employed
individuals and corporate investors that wish to purchase shares
of a Fund, there is available through the Fund a Prototype Plan
and Custody Agreement. The Custody Agreement provides that
Investors Fiduciary Trust Company, Kansas City, Missouri, will
act as Custodian under the Plan, and will furnish custodial
services for an annual maintenance fee of $12.00 for each
participant, with no other charges. (These fees are in addition
to the normal Custodian charges paid by the Funds.) For further
details, including the right to appoint a successor Custodian,
see the Plan and Custody Agreements as provided by Masters
Series. Employers who wish to use shares of a Fund under a
custodianship with another bank or trust company must make
individual arrangements with such institution.
Individual Retirement Accounts. Investors having earned income
are eligible to purchase shares of a Fund under an IRA pursuant
to Section 408(a) of the Internal Revenue Code. An individual
who creates an IRA may contribute annually certain dollar amounts
of earned income, and an additional amount if there is a non-
working spouse. Copies of a model Custodial Account Agreement
are available from the Distributor. Investors Fiduciary Trust
Company, Kansas City, Missouri, will act as the Custodian under
this model Agreement, for which it will charge the investor an
annual fee of $12.00 for maintaining the Account (such fee is in
addition to the normal custodial charges paid by the Funds).
Full details on the IRA are contained in an IRS required
disclosure statement, and the Custodian will not open an IRA
until seven (7) days after the investor has received such
statement from Masters Series. An IRA using shares of a Fund may
also be used by employers who have adopted a Simplified Employee
Pension Plan.
Purchases of Fund shares by Section 403(b) and other retirement
plans are also available. It is advisable for an investor
considering the funding of any retirement plan to consult with an
attorney or to obtain advice from a competent retirement plan
consultant.
DISTRIBUTIONS
As noted in the Prospectus, shareholders have the privilege of
reinvesting both income dividends and capital gains
distributions, if any, in additional shares of the respective
class of the Fund at the then current net asset value, with no
sales charge. Alternatively, a shareholder can elect at any time
to receive dividends and/or capital gains distributions in cash.
In the absence of such an election, each purchase of shares of a
class of a Fund is made upon the condition and understanding that
the Transfer Agent is automatically appointed the shareholder's
agent to receive his dividends and distributions upon all shares
registered in his name and to reinvest them in full and
fractional shares of the respective class of the Fund at the
applicable net asset value in effect at the close of business on
the reinvestment date. A shareholder may still at any time after
a purchase of Fund shares request that dividends and/or capital
gains distributions be paid to him in cash.
TAX CONSIDERATIONS
The following discussion summarizes certain U.S. federal tax
considerations incident to an investment in a Fund.
Each Fund intends to qualify as a regulated investment company
under the Internal Revenue Code of 1986, as amended (the "Code").
To so qualify, each Fund must, among other things: (a) derive at
least 90% of its gross income from dividends, interest, payments
with respect to securities loans, gains from the sale or other
disposition of stock or securities and gains from the sale or
other disposition of foreign currencies, or other income
(including gains from options, futures contracts and forward
contracts) derived with respect to the Fund's business of
investing in stocks, securities or currencies; (b) derive less
than 30% of its gross income from the sale or other disposition
of the following assets held for less than three months: (i)
stock and securities, (ii) options, futures and forward contracts
(other than options, futures and forward contracts on foreign
currencies), and (iii) foreign currencies (and options, futures
and forward contracts on foreign currencies) which are not
directly related to the Fund's principal business of investing in
stocks and securities (or options and futures with respect to
stock or securities); (c) diversify its holdings so that, at the
end of each quarter, (i) at least 50% of the value of the Fund's
total assets is represented by cash and cash items, U.S.
Government securities, securities of other regulated investment
companies, and other securities, with such other securities
limited in respect of any one issuer to an amount not greater in
value than 5% of the Fund's total assets and to not more than 10%
of the outstanding voting securities of such issuer, and (ii) not
more than 25% of the value of the Fund's total assets is invested
in the securities (other than U.S. Government securities or
securities of other regulated investment companies) of any one
issuer or of any two or more issuers that the Fund controls and
that are determined to be engaged in the same business or similar
or related businesses; and (d) distribute at least 90% of its
investment company taxable income (which includes, among other
items, dividends, interest and net short-term capital gains in
excess of net long-term capital losses) each taxable year.
The U.S. Treasury Department is authorized to issue regulations
providing that foreign currency gains that 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) will be excluded from the income which qualifies for
purposes of the 90% gross income requirement described above. To
date, however, no such regulations have been issued.
The status of the Funds as regulated investment companies does
not involve government supervision of management or of their
investment practices or policies. As a regulated investment
company, a Fund generally will be relieved of liability for U.S.
federal income tax on that portion of its investment company
taxable income and net realized capital gains which it
distributes to its shareholders. Amounts not distributed on a
timely basis in accordance with a calendar year distribution
requirement also are subject to a nondeductible 4% excise tax.
To prevent application of the excise tax, each Fund intends to
make distributions in accordance with the calendar year
distribution requirement.
The Funds intend to seek a ruling from the IRS to the effect that
differing distributions among their classes of shares will not
affect a Fund's ability to qualify as a regulated investment
company. If a Fund so qualifies, among other things,
distributions from the Fund may qualify as capital gain
dividends, generally depending on the type of income generated by
the Fund. While similar rulings have been issued previously by
the IRS, complete assurance cannot, of course, be given that the
Funds will actually receive such ruling. Although an adverse
determination by the IRS is not expected, the Funds may be
required to reassess their multiple class share structure (and
reserve the right to do so) were the IRS not to rule favorably.
In addition, were the IRS not to rule favorably, the Funds might
make additional distributions (which could carry interest and
interest-related charges to the Funds) if doing so would assist
the Funds in complying with their general practice of
distributing sufficient income to reduce or eliminate U.S.
federal taxes.
Distributions. Dividends of investment company taxable income
(including net short-term capital gains) are taxable to
shareholders as ordinary income. Distributions of investment
company taxable income may be eligible for the corporate
dividends-received deduction to the extent attributable to a
Fund's dividend income from U.S. corporations, and if other
applicable requirements are met. However, the alternative
minimum tax applicable to corporations may reduce the benefit of
the dividends-received deduction. Distributions of net capital
gains (the excess of net long-term capital gains over net short-
term capital losses) designated by a Fund as capital gain
dividends are taxable to shareholders as long-term capital gains,
regardless of the length of time the Fund's shares have been held
by a shareholder, and are not eligible for the dividends-received
deduction. Generally, dividends and distributions are taxable to
shareholders, whether received in cash or reinvested in shares of
a Fund. Any distributions that are not from a Fund's investment
company taxable income or net capital gain may be characterized
as a return of capital to shareholders or, in some cases, as
capital gain. Shareholders will be notified annually as to the
federal tax status of dividends and distributions they receive
and any tax withheld thereon.
Dividends, including capital gain dividends, declared in October,
November, or December with a record date in such month and paid
during the following January will be treated as having been paid
by a Fund and received by shareholders on December 31 of the
calendar year in which declared, rather than the calendar year in
which the dividends are actually received.
Distributions by a Fund reduce the net asset value of the Fund
shares. Should a distribution reduce the net asset value below a
shareholder's cost basis, the distribution nevertheless may be
taxable to the shareholder as ordinary income or capital gain as
described above, even though, from an investment standpoint, it
may constitute a partial return of capital. In particular,
investors should be careful to consider the tax implication of
buying shares just prior to a distribution by a Fund. The price
of shares purchased at that time includes the amount of the
forthcoming distribution, but the distribution will generally be
taxable to them.
Original Issue Discount. Certain of the debt securities acquired
by the Funds may be treated as debt securities that were
originally issued at a discount. Original issue discount can
generally be defined as the difference between the price at which
a security was issued and its stated redemption price at
maturity. Although no cash income is actually received by the
Funds, original issue discount that accrues on a debt security in
a given year generally is treated for federal income tax purposes
as interest and, therefore, such income would be subject to the
distribution requirements of the Code.
Some of the debt securities may be purchased by the Funds at a
discount which exceeds the original issue discount on such debt
securities, if any. This additional discount represents market
discount for federal income tax purposes. The gain realized on
the disposition of any taxable debt security having market
discount generally will be treated as ordinary income to the
extent it does not exceed the accrued market discount on such
debt security. Generally, market discount accrues on a daily
basis for each day the debt security is held by a Fund at a
constant rate over the time remaining to the debt security's
maturity or, at the election of a Fund, at a constant yield to
maturity which takes into account the semi-annual compounding of
interest.
Foreign Currency Transactions. Under the Code, gains or losses
attributable to fluctuations in foreign currency exchange rates
which occur between the time a Fund accrues income or other
receivables or accrues expenses or other liabilities denominated
in a foreign currency and the time a Fund actually collects such
receivables or pays such liabilities generally are treated as
ordinary income or ordinary loss. Similarly, on disposition of
debt securities denominated in a foreign currency and on
disposition of certain financial contracts and options, gains or
losses attributable to fluctuations in the value of foreign
currency between the date of acquisition of the security or
contract and the date of disposition also are treated as ordinary
gain or loss. These gains and losses, referred to under the Code
as "section 988" gains and losses, may increase or decrease the
amount of a Fund's net investment income to be distributed to its
shareholders as ordinary income. For example, fluctuations in
exchange rates may increase the amount of income that a Fund must
distribute in order to qualify for treatment as a regulated
investment company and to prevent application of an excise tax on
undistributed income. Alternatively, fluctuations in exchange
rates may decrease or eliminate income available for
distribution. If section 988 losses exceed other net investment
income during a taxable year, a Fund would not be able to make
ordinary dividend distributions, or distributions made before the
losses were realized would be recharacterized as return of
capital to shareholders for federal income tax purposes, rather
than as an ordinary dividend, reducing each shareholder's basis
in his Fund shares, or as capital gain.
Passive Foreign Investment Companies. A Fund may invest in
stocks of foreign companies that are classified under the Code as
passive foreign investment companies ("PFICs"). In general, a
foreign company is classified as a PFIC if at least one-half of
its assets constitute investment-type assets or 75% or more of
its gross income is investment-type income. Under the PFIC
rules, an "excess distribution" received with respect to PFIC
stock is treated as having been realized ratably over the period
during which a Fund held the PFIC stock. A Fund itself will be
subject to tax on the portion, if any, of the excess distribution
that is allocated to that Fund's holding period in prior taxable
years (and an interest factor will be added to the tax, as if the
tax had actually been payable in such prior taxable years) even
though the Fund distributes the corresponding income to
shareholders. Excess distributions include any gain from the
sale of PFIC stock as well as certain distributions from a PFIC.
All excess distributions are taxable as ordinary income.
A Fund may be able to elect alternative tax treatment with
respect to PFIC stock. Under an election that currently may be
available, a Fund generally would be required to include in its
gross income its share of the earnings of a PFIC on a current
basis, regardless of whether any distributions are received from
the PFIC. If this election is made, the special rules, discussed
above, relating to the taxation of excess distributions, would
not apply. In addition, another election may be available that
would involve marking to market the Funds' PFIC shares at the end
of each taxable year (and on certain other dates prescribed in
the Code), with the result that unrealized gains are treated as
though they were realized. If this election were made, tax at
the Fund level under the PFIC rules would generally be
eliminated, but the Funds could, in limited circumstances, incur
nondeductible interest charges. Each Fund's intention to qualify
annually as a regulated investment company may limit its
elections with respect to PFIC shares.
Because the application of the PFIC rules may affect, among other
things, the character of gains, the amount of gain or loss and
the timing of the recognition of income with respect to PFIC
stock, as well as subject a Fund itself to tax on certain income
from PFIC stock, the amount that must be distributed to
shareholders, and which will be taxed to shareholders as ordinary
income or long-term capital gain, may be increased or decreased
substantially as compared to a fund that did not invest in PFIC
stock.
Foreign Withholding Taxes. Income received by a Fund from
sources within foreign countries may be subject to withholding
and other income or similar taxes imposed by such countries. If
more than 50% of the value of a Fund's total assets at the close
of its taxable year consists of securities of foreign
corporations, that Fund will be eligible and intends to elect to
"pass through" to the Fund's shareholders the amount of foreign
income and similar taxes paid by that Fund. Pursuant to this
election, a shareholder will be required to include in gross
income (in addition to taxable dividends actually received) his
pro rata share of the foreign taxes paid by a Fund, and will be
entitled either to deduct (as an itemized deduction) his pro rata
share of foreign income and similar taxes in computing his
taxable income or to use it as a foreign tax credit against his
U.S. federal income tax liability, subject to limitations. No
deduction for foreign taxes may be claimed by a shareholder who
does not itemize deductions, but such a shareholder may be
eligible to claim the foreign tax credit (see below). Each
shareholder will be notified within 60 days after the close of
the relevant Fund's taxable year whether the foreign taxes paid
by the Fund will "pass through" for that year.
Generally, a credit for foreign taxes is subject to the
limitation that it may not exceed the shareholder's U.S. tax
attributable to his foreign source taxable income. For this
purpose, if the pass-through election is made, the source of a
Fund's income flows through to its shareholders. With respect to
a Fund, gains from the sale of securities will be treated as
derived from U.S. sources and certain currency fluctuation gains,
including fluctuation gains from foreign currency denominated
debt securities, receivables and payables, will be treated as
ordinary income derived from U.S. sources. The limitation on the
foreign tax credit is applied separately to foreign source
passive income (as defined for purposes of the foreign tax
credit), including the foreign source passive income passed
through by a Fund. Shareholders may be unable to claim a credit
for the full amount of their proportionate share of the foreign
taxes paid by a Fund. Foreign taxes may not be deducted in
computing alternative minimum taxable income and the foreign tax
credit can be used to offset only 90% of the alternative minimum
tax (as computed under the Code for purposes of this limitation)
imposed on corporations and individuals. If a Fund is not
eligible to make the election to "pass through" to its
shareholders its foreign taxes, the foreign income taxes it pays
generally will reduce investment company taxable income and the
distributions by a Fund will be treated as United States source
income.
Options and Hedging Transactions. Certain options and financial
contracts in which the Funds may invest are "section 1256
contracts." Gains or losses on section 1256 contracts generally
are considered 60% long-term and 40% short-term capital gains or
losses ("60/40"); however, foreign currency gains or losses (as
discussed below) arising from certain section 1256 contracts may
be treated as ordinary income or loss. Also, section 1256
contracts held by a Fund at the end of each taxable year (and on
certain other dates as prescribed under the Code) are "marked-to-
market" with the result that unrealized gains or losses are
treated as though they were realized.
Generally, the hedging transactions undertaken by a Fund may
result in "straddles" for U.S. federal income tax purposes. The
straddle rules may affect the character of gains (or losses)
realized by a Fund. In addition, losses realized by a Fund on
positions that are part of the straddle may be deferred under the
straddle rules, rather than being taken into account in
calculating the taxable income for the taxable year in which the
losses are realized. Because only a few regulations implementing
the straddle rules have been promulgated, the tax consequences to
a Fund of hedging transactions are not entirely clear. The
hedging transactions may increase the amount of short-term
capital gain realized by a Fund which is taxed as ordinary income
when distributed to shareholders.
A Fund may make one or more of the elections available under the
Code which are applicable to straddles. If a Fund makes any of
the elections, the amount, character, and timing of the
recognition of gains or losses from the affected straddle
positions will be determined under rules that vary according to
the election(s) made. The rules applicable under certain of the
elections may operate to accelerate the recognition of gains or
losses from the affected straddle positions.
Because application of the straddle rules may affect the
character of gains or losses, defer losses and/or accelerate the
recognition of gains or losses from the affected straddle
positions, the amount which must be distributed to shareholders
and which will be taxed to shareholders as ordinary income or
long-term capital gain may be increased or decreased as compared
to a fund that did not engage in such hedging transactions.
Requirements relating to each Fund's tax status as a regulated
investment company may limit the extent to which a Fund will be
able to engage in transactions in options and foreign currency
forward contracts.
Short Sales Against the Box. If a Fund sells short "against the
box," it may realize a capital gain or loss upon the closing of
the sale. Such gain or loss generally will be long- or short-
term depending upon the length of time the Fund held the security
which it sold short. In some circumstances, short sales may have
the effect of reducing an otherwise applicable holding period of
a security in the portfolio. Were that to occur, the affected
security would again have to be held for the requisite period
before its disposition to avoid treating that security as having
been sold within the first three months of its holding period.
Other Investment Companies. It is possible that by investing in
other investment companies, a Fund may not be able to meet the
calendar year distribution requirement and may be subject to
federal income and excise tax. The diversification and
distribution requirements applicable to each Fund may limit the
extent to which each Fund will be able to invest in other
investment companies.
Sale of Shares. Upon the sale or exchange of his shares, a
shareholder will realize a taxable gain or loss depending upon
his basis in the shares. Such gain or loss will be treated as
capital gain or loss if the shares are capital assets in the
shareholder's hands, and generally will be long-term if the
shareholder's holding period for the shares is more than one year
and generally otherwise will be short-term. Any loss realized on
a sale or exchange will be disallowed to the extent that the
shares disposed of are replaced (including replacement through
the reinvesting of dividends and capital gain distributions in a
Fund) within a period of 61 days beginning 30 days before and
ending 30 days after the disposition of the shares. In such a
case, the basis of the shares acquired will be adjusted to
reflect the disallowed loss. Any loss realized by a shareholder
on the sale of a Fund's shares held by the shareholder for six
months or less will be treated for federal income tax purposes as
a long-term capital loss to the extent of any distributions of
capital gain dividends received by the shareholder with respect
to such shares.
In some cases, shareholders will not be permitted to take sales
charges into account for purposes of determining the amount of
gain or loss realized on the disposition of their shares. This
prohibition generally applies where (1) the shareholder incurs a
sales charge in acquiring the stock of a regulated investment
company, (2) the stock is disposed of before the 91st day after
the date on which it was acquired, and (3) the shareholder
subsequently acquires shares of the same or another regulated
investment company and the otherwise applicable sales charge is
reduced or eliminated under a "reinvestment right" received upon
the initial purchase of shares of stock. In that case, the gain
or loss recognized will be determined by excluding from the tax
basis of the shares exchanged all or a portion of the sales
charge incurred in acquiring those shares. This exclusion
applies to the extent that the otherwise applicable sales charge
with respect to the newly acquired shares is reduced as a result
of having incurred a sales charge initially. Sales charges
affected by this rule are treated as if they were incurred with
respect to the stock acquired under the reinvestment right. This
provision may be applied to successive acquisitions of stock.
Backup Withholding. Each Fund generally will be required to
withhold federal income tax at a rate of 31% ("backup
withholding") from dividends paid, capital gain distributions,
and redemption proceeds to shareholders if (1) the shareholder
fails to furnish a Fund with the shareholder's correct taxpayer
identification number or social security number and to make such
certifications as a Fund may require, (2) the IRS notifies the
shareholder or a Fund that the shareholder has failed to report
properly certain interest and dividend income to the IRS and to
respond to notices to that effect, or (3) when required to do so,
the shareholder fails to certify that he is not subject to backup
withholding. Any amounts withheld may be credited against the
shareholder's federal income tax liability.
Other Taxes. Distributions also may be subject to state, local
and foreign taxes. U.S. tax rules applicable to foreign
investors may differ significantly from those outlined above.
This discussion does not purport to deal with all of the tax
consequences applicable to shareholders. Shareholders are
advised to consult their own tax advisers for details with
respect to the particular tax consequences to them of an
investment in a Fund.
SHAREHOLDER INFORMATION
Certificates representing shares of a particular Fund will not
normally be issued to shareholders. The Transfer Agent will
maintain an account for each shareholder upon which the
registration and transfer of shares are recorded, and any
transfers shall be reflected by bookkeeping entry, without
physical delivery.
The Transfer Agent will require that a shareholder provide
requests in writing, accompanied by a valid signature guarantee
form, when changing certain information in an account (i.e.,
wiring instructions, telephone privileges, etc.).
Masters Series reserves the right, if conditions exist that make
cash payments undesirable, to honor any request for redemption or
repurchase order with respect to shares of a Fund by making
payment in whole or in part in readily marketable securities
chosen by the Fund and valued as they are for purposes of
computing the Fund's net asset value (redemption-in-kind). If
payment is made in securities, a shareholder may incur
transaction expenses in converting theses securities to cash.
Masters Series has elected, however, to be governed by Rule 18f-1
under the 1940 Act as a result of which a Fund is obligated to
redeem shares with respect to any one shareholder during any 90-
day period solely in cash up to the lesser of $250,000 or 1% of
the net asset value of the Fund at the beginning of the period.
CALCULATION OF PERFORMANCE DATA
Each Fund may, from time to time, include "total return" in
advertisements or reports to shareholders or prospective
investors. Quotations of average annual total return will be
expressed in terms of the average annual compounded rate of
return of a hypothetical investment in a Fund over periods of 1,
5 and 10 years (up to the life of the Fund), calculated pursuant
to the following formula which is prescribed by the SEC:
P(1 + T)superscript n = ERV
Where:
P = a hypothetical initial payment of $1,000,
T = the average annual total return,
n = the number of years, and
ERV = the ending redeemable value of a hypothetical
$1,000 payment made at the beginning of the period.
All total return figures assume that all dividends are reinvested
when paid.
From time to time, a Fund may advertise its average annual total
return over various periods of time. These total return figures
show the average percentage change in value of an investment in
the Fund from the beginning date of the measuring period. These
figures reflect changes in the price of the Fund's shares and
assume that any income dividends and/or capital gains
distributions made by the Fund during the period were reinvested
in shares of the Fund. Figures will be given for one, five and
ten year periods (if applicable) and may be given for other
periods as well (such as from commencement of the Fund's
operations, or on a year-by-year basis).
Quotations of yield for a Fund will be based on all investment
income per share earned during a particular 30-day period
(including dividends and interest), less expenses accrued during
the period ("net investment income") and are computed by dividing
net investment income by the maximum offering price per share on
the last day of the period, according to the following formula:
2[({[(a-b)/(cd)]+1}to the sixth power)-1]
where
a = dividends and interest earned during the period,
b = expenses accrued for the period (net of reimbursements),
c = the average daily number of shares outstanding during the
period that were entitled to receive dividends, and
d = the maximum offering price per share on the last day of
the period.
Additional Performance Quotations. Advertisements of total
return will always show a calculation that includes the effect of
the maximum sales charge but may also show total return without
giving effect to that charge. Because these additional
quotations will not reflect the maximum sales charge payable,
these performance quotations will be higher than the performance
quotations that reflect the maximum sales charge.
Total returns are based on past results and are not necessarily a
prediction of future performance.
Performance Comparisons. In reports or other communications to
shareholders or in advertising material, a Fund may compare the
performance of its Class A, Class B, and Class M shares with that
of other mutual funds as listed in the rankings prepared by
Lipper Analytical Services, Inc., Morningstar, Inc., CDA
Technologies, Inc. or similar independent services that monitor
the performance of mutual funds or with other appropriate indexes
of investment securities. In addition, certain indexes may be
used to illustrate historic performance of select asset classes.
The performance information may also include evaluations of the
Funds published by nationally recognized ranking services and by
financial publications that are nationally recognized, such as
Business Week, Forbes, Fortune, Institutional Investor, Money and
The Wall Street Journal. If a Fund compares its performance to
other funds or to relevant indexes, the Fund's performance will
be stated in the same terms in which such comparative data and
indexes are stated, which is normally total return rather than
yield. For these purposes the performance of the Fund, as well
as the performance of such investment companies or indexes, may
not reflect sales charges, which, if reflected, would reduce
performance results.
Reports and promotional literature may also contain the following
information: (i) a description of the gross national or domestic
product and populations, including age characteristics, of
various countries and regions in which a Fund may invest, as
compiled by various organizations, and projections of such
information; (ii) the performance of U. S. equity and debt
markets relative to foreign markets prepared or published by
Morgan Stanley Capital International or a similar financial
organization; (iii) the capitalization of U.S. and foreign stock
markets prepared or published by the International Finance
Corporation, Morgan Stanley Capital International or a similar
financial organization; (iv) the geographic distribution of a
Fund's portfolio; (v) the major industries located in various
jurisdictions as prepared or published by the Morgan Stanley
Index or a similar financial organization; and (vi) the number of
shareholders in the Funds or other Pilgrim America Funds and the
dollar amount of the assets under management.
In addition, reports and promotional literature may contain
information concerning the Manager, the Portfolio Managers, or
affiliates of Master Series, the Manager or the Portfolio
Managers, including (i) performance rankings of other funds
managed by a Portfolio Manager, or the individuals employed by a
Portfolio Manager who exercise responsibility for the day-to-day
management of a Fund, including rankings of mutual funds
published by Lipper Analytical Services, Inc., Morningstar, Inc.,
CDA Technologies, Inc., or other rating services, companies,
publications or other persons who rank mutual funds or other
investment products on overall performance or other criteria; and
(ii) lists of clients, the number of clients, or assets under
management.
GENERAL INFORMATION
Custodian. The cash and securities owned by each Fund are held
by Investors Fiduciary Trust Company, 127 W. 10th Street, Kansas
City, Missouri 64105, as Custodian, which takes no part in the
decisions relating to the purchase or sale of a Fund's portfolio
securities.
Legal Counsel. Legal matters for Masters Series are passed upon
by Dechert Price & Rhoads, 1500 K Street, N.W., Washington, D.C.
20005.
Independent Auditors. KPMG Peat Marwick LLP, 725 South Figueroa
Street, Los Angeles, California 90017, acts as independent
certified public accountants for Masters Series.
Other Information. Masters Series is registered with the SEC as
an open-end management investment company. Such registration
does not involve supervision of the management or policies of
Masters Series by any governmental agency. The Prospectus and
this Statement of Additional Information omit certain of the
information contained in the Registration Statement filed with
the SEC and copies of this information may be obtained from the
SEC upon payment of the prescribed fee or examined at the SEC in
Washington, D.C. without charge.
Investors in the Funds will be kept informed of their progress
through semi-annual reports showing portfolio composition,
statistical data and any other significant data, including
financial statements certified by independent certified public
accountants.
FINANCIAL STATEMENTS
KPMG Peat Marwick LLP
725 South Figueroa Street
Los Angeles CA 90017
Independent Auditors' Report
The Board of Directors and Shareholder
The Pilgrim America Masters Series, Inc.:
We have audited the accompanying statements of assets and
liabilties of the Pilgrim America Masters Series, Inc.
(comprising, respectively, the Asia-Pacific Equity Fund, MidCap
Value Fund and LargeCap Value Fund)(in organization) as of June
16, 1995. The financial statements are the responsibility of the
Company's management. Our responsibility is to express an
opinion on the financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the statements of assets and liabilities are free of material
misstatement. An audit of statements of assets and liabilities
includes examining, on a test basis, evidence supporting the
amounts and disclosures in the statements of assets and
liabilities. An audit also includes assessing the accounting
principles used and significant estimates made by management, as
well as evaluating the overall statement of assets and liabilties
presentation. We believe that our audits provide a reasonable
basis for our opinion.
In our opinion, the statements of assets and liabilities referred
to above present fairly, in all material respects, the financial
position of each of the aforementioned funds constitituing the
Pilgrim America Masters Series, Inc. as of June 16, 1995, in
conformity with generally accepted accounting principles.
/s/ KPMG Peat Marwick LLP
June 16, 1995
PILGRIM AMERICA MASTERS SERIES, INC.
NOTES TO STATEMENTS OF ASSETS AND LIABILITIES
1. GENERAL
Pilgrim America Masters Series, Inc. (the "Masters Series")
has applied for registration under the Investment Company
Act of 1940 (the "1940 Act"), as amended, as an open-end,
management investment company. The Masters Series was
organized as a Maryland Corporation on April 27, 1995 and
initially sold 10,000 shares of beneficial interest to
Pilgrim America Investments, Inc. ("PAII") for $100,000. As
of June 16, 1995, the Masters Series had not commenced
operations, other than the initial sale of shares to PAII
and matters pertaining to its organization.
The Masters Series consists of three separate diversified
investment portfolios ("the Funds"): the Asia-Pacific Equity
Fund, the MidCap Value Fund and the LargeCap Value Fund.
2. INVESTMENT MANAGEMENT FEE AND OTHER TRANSACTIONS WITH
AFFILIATES
Pursuant to the Investment Management Agreements, PAII will
provide or oversee all investment advisory and portfolio
management services for the Funds. PAII will also manage
and supervise all aspects of the general day-to-day business
activities and operations of Masters Series, including
custodial, transfer agency, dividend disbursing, accounting,
auditing, compliance and related services.
PAII will monitor the Portfolio Managers' investment
programs and results and coordinate the activities of the
various service providers to the Funds and oversee
compliance with regulatory requirements. In addition, PAII
will provide the Masters Series with office space, equipment
and personnel necessary to administer the Funds.
As compensation for its services, PAII receives investment
management fees based on the average daily net assets of
each Fund at the following annual rates: Asia-Pacific Equity
Fund - 1.25%; MidCap Value Fund - 1.00%; and LargeCap Value
Fund - 1.00%. These fees will be accrued daily and paid
monthly.
The Masters Series has adopted a plan pursuant to Rule 12b-1
under the 1940 Act, whereby shares of each Fund will be sold
through Pilgrim America Securities, Inc. (the "Distributer")
as principal underwriter and distributor subject to Rule
12b-1 Plans (the "Class A Plans," the "Class B Plans," the
"Class M Plans" and, collectively, the "Plans") under which
the Funds will compensate the Distributor for services it
provides and expenses it bears in distributing shares to the
shareholders of the Funds.
Under the Rule 12b-1 plan for each class of shares of the
Funds, the Distributor may receive from each Fund an annual
fee in connection with the offering, sale and shareholder
servicing of Class A, Class B and Class M shares at an
annual rate of .25%, 1.00%, and .75%, respectively, of the
average daily net assets of each of the Funds. These fees
will be accrued daily and paid monthly.
3. ORGANIZATION EXPENSES
PAII has charged each Fund for expenses incurred, or
estimated to be incurred, in connection with the
organization and registration as an investment company under
the Investment Company Act of 1940. The liabilities of each
Fund relate to amounts payable to PAII for these expenses.
Such expenses will be amortized on a straight-line basis
over 60 months from the date each Fund commences operations.
In the event any of the initial shares of beneficial
interest are redeemed during the 60 month amortization
period, PAII will reimburse the Funds for the unamortized
balance of such organizational costs in the same proportion
as the number of shares of beneficial interest reduced bears
to the number of initial shares of beneficial interest
outstanding at the time of redemption.
4. MULTIPLE CLASS FUND STRUCTURE
The Master Series has authorized one billion shares of $.01
par value stock to be issued among the Funds. Three such
Funds have been designated and each of the Funds offer three
classes of shares. The three classes of shares differ
principally in their respective sales charges and
distribution fees. Shareholders of each class bear the
specific expenses that pertain to that particular class.
All shareholders bear the common expenses of the Fund, and
earn income from the Fund, pro rata, based on the relative
net assets of each class, without distinction between share
classes. Dividends are declared separately for each class.
Gains are allocated to each class, pro rata, based upon the
relative net assets of each class. No class has
preferential dividend rights; differences in per share
dividend rates are generally due to differences in separate
class expenses (including distribution fees) and from the
relative weightings of pro rata income and gain allocations.
Class B shares are subject to a contingent deferred sales
charge for redemption occurring within six years following
their acquisition. In addition, shareholders of Class B
shares will automatically convert to Class A shares in the
Fund on the first business day of the month in which the
eighth anniversary of the issuance of the Class B shares
occurs, together with a pro rate portion of all Class B
shares representing dividends and other distributions paid
in additional Class B shares.
5. INVESTMENT MANAGEMENT REIMBURSEMENT
For the first year of each Fund's operations, PAII has
voluntarily agreed to limit expenses (excluding distribution
fees, interest, taxes, brokerage and extraordinary expenses)
to 1.75%, 1.50% and 1.50% for all classes of shares of the
Asia-Pacific Equity Fund, MidCap Value Fund and LargeCap
Value Fund, respectively. This expense limitation will
apply to each Fund individually only until such Fund reaches
$50 million in net assets.
Pilgrim America Masters Series, Inc.
Statements of Assets and Liabilities
June 16, 1995 Asia-Pacific
Equity Fund
ASSETS:
Cash $34,000
Deferred Organization Expenses
(Note 2) 125,000
Total Assets 159,000
LIABILITIES:
Accrued Organization Expenses
(Note 2) 125,000
Total Assets 125,000
NET ASSETS $34,000
Net Assets Consisting Primarily
of Paid in Capital are as Follows:
Class A Shares:
Net Assets (Issued and outstanding
3,200 shares) $32,000
Net Assets (Issued and outstanding
3,100 shares each fund)
Net asset value and redemption $10.00
price per share ($32,000/3,200
shares; 31,000/3,100 shares;
$31,000/3,100 shares)
Maximum offering price per share
(100/94.25 of $10.00) $10.61
Class B Shares:
Net Assets (Issued and outstanding
100 shares each fund) $1,000
Net assets value and redemption
price per share ($1,000/100
shares each fund) $10.00
Class M Shares:
Net Assets (Issued and outstanding
100 shares each fund) $1,000
Net asset value and redemption
price per share ($1,000/100
shares each fund) $10.00
Maximum offering price per share
(100/96.5 of $10.00 each fund) $10.36
See Notes to Financial Statements
<PAGE>
Pilgrim America Masters Series, Inc.
Statements of Assets and Liabilities
June 16, 1995 MidCap
Value Fund
ASSETS:
Cash $33,000
Deferred Organization Expenses
(Note 2) 125,000
Total Assets 158,000
LIABILITIES:
Accrued Organization Expenses
(Note 2) 125,000
Total Assets 125,000
NET ASSETS $33,000
Net Assets Consisting Primarily
of Paid in Capital are as Follows:
Class A Shares:
Net Assets (Issued and outstanding
3,200 shares) $31,000
Net Assets (Issued and outstanding
3,100 shares each fund)
Net asset value and redemption $10.00
price per share ($32,000/3,200
shares; 31,000/3,100 shares;
$31,000/3,100 shares)
Maximum offering price per share
(100/94.25 of $10.00) $10.61
Class B Shares:
Net Assets (Issued and outstanding
100 shares each fund) $1,000
Net assets value and redemption
price per share ($1,000/100
shares each fund) $10.00
Class M Shares:
Net Assets (Issued and outstanding
100 shares each fund) $1,000
Net asset value and redemption
price per share ($1,000/100
shares each fund) $10.00
Maximum offering price per share
(100/96.5 of $10.00 each fund) $10.36
See Notes to Financial Statements
<PAGE>
Pilgrim America Masters Series, Inc.
Statements of Assets and Liabilities
June 16, 1995 LargeCap
Value Fund
ASSETS:
Cash $33,000
Deferred Organization Expenses
(Note 2) 125,000
Total Assets 158,000
LIABILITIES:
Accrued Organization Expenses
(Note 2) 125,000
Total Assets 125,000
NET ASSETS $33,000
Net Assets Consisting Primarily
of Paid in Capital are as Follows:
Class A Shares:
Net Assets (Issued and outstanding
3,200 shares) $31,000
Net Assets (Issued and outstanding
3,100 shares each fund)
Net asset value and redemption $10.00
price per share ($32,000/3,200
shares; 31,000/3,100 shares;
$31,000/3,100 shares)
Maximum offering price per share
(100/94.25 of $10.00) $10.61
Class B Shares:
Net Assets (Issued and outstanding
100 shares each fund) $1,000
Net assets value and redemption
price per share ($1,000/100
shares each fund) $10.00
Class M Shares:
Net Assets (Issued and outstanding
100 shares each fund) $1,000
Net asset value and redemption
price per share ($1,000/100
shares each fund) $10.00
Maximum offering price per share
(100/96.5 of $10.00 each fund) $10.36
See Notes to Financial Statements
