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 October 30, 1996
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 October 30, 1996,
as supplemented February 29, 1996 ("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
Page
Organization of Pilgrim America Masters Series, Inc.......... 1
Management of the Funds...................................... 1
Supplemental Description of Investments...................... 9
Supplemental Investment Techniques........................... 11
Supplemental Discussion of Risks Associated With the
Funds' Investment Policies and Investment Techniques....... 11
Investment Restrictions...................................... 16
Portfolio Transactions....................................... 18
Additional Purchase and Redemption Information............... 19
Determination of Share Price................................. 24
Shareholder Services and Privileges.......................... 25
Distributions................................................ 27
Tax Considerations........................................... 27
Shareholder Information...................................... 32
Calculation of Performance Data.............................. 32
General Information.......................................... 34
Financial Statements......................................... 35
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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.
Al Burton, 2300 Coldwater Canyon, Beverly Hills, California 90210. (Age
68.) Director. President of Al Burton Productions, for more than the last five
years. Formerly, 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 55.) Director. President, South Beach Capital Markets Advisory
Corporation (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.
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*Robert W. Stallings, Two Renaissance Square, 12th Floor, 40 North Central
Avenue, Phoenix, AZ 85004. (Age 47.) Director and President. Chairman, Chief
Executive Officer and President of Pilgrim America Group, Inc. ("Pilgrim America
Group") and a director of Pilgrim America Securities, Inc. and Pilgrim America
Investments, Inc. (since December 1994). Chairman, Chief Executive Officer and
President of Pilgrim America Bank and Thrift Fund, Inc., Pilgrim Government
Securities Income Fund, Inc., Pilgrim America Investment Funds, Inc. and Pilgrim
America 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 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 compensation of Directors
by the Masters Series and other funds managed by the Investment Manager for the
ten months ended 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.
<TABLE>
<CAPTION>
Compensation Table
<S> <C> <C> <C> <C>
Pension or Total
Retirement Compensation
Benefits Estimated From
Aggregate Accrued Annual Registrant
Compensation As Part of Benefits and Fund
from Fund Upon Complex Paid
Name of Person, Position Registrant Expenses Retirement to Directors
Mary A. Baldwin*, Director................... $252 N/A N/A $23,800
(5 boards)
Al Burton*, Director......................... $252 N/A N/A $23,800
(5 boards)
Bruce S. Foerster*, Director................ $252 N/A N/A $23,900
(5 boards)
Jock Patton*, Director .................... $252 N/A N/A $22,400
(5 boards)
Robert W. Stallings**, Director and Chairman. $0 N/A N/A $0
(5 boards)
<FN>
* 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.
</FN>
</TABLE>
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Officers.
James R. Reis, Executive Vice President
Two Renaissance Square, 12th Floor, 40 North Central Avenue, Phoenix, AZ 85004.
(Age 39.) 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 January
1995) of Pilgrim America Securities, Inc. Executive Vice President of Pilgrim
Government Securities Income Fund, Inc., Pilgrim America Investment Funds, Inc.,
Pilgrim America Prime Rate Trust, and Pilgrim America Bank and Thrift Fund 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).
Stanley Vyner, Executive Vice President
Two Renaissance Square, 40 North Central Avenue, Suite 1200, Phoenix, Arizona
85004. (Age 47.) Mr. Vyner has served as President and Chief Executive Officer
for Pilgrim America Investments, Inc. since August, 1996, Executive Vice
President of Pilgrim America Group since August, 1996, and as Executive Vice
President of Pilgrim America Bank and Thrift Fund, Inc., Pilgrim America
Investment Funds, Inc., and Pilgrim Government Securities Income Fund, Inc.
since July, 1996. He served as Chief Executive Officer of HSBC Asset Management
Americas, Inc. until December, 1995, and prior to that was the Chief Executive
Officer of HSBC Life Assurance Co., the largest provider of retirement services
in Hong Kong, where Mr. Vyner worked for nearly 11 years. An actuary by
profession, Mr. Vyner earned his Honors Degree in Economics from Edinburgh
University, UK. He is a Fellow of the Faculty of Actuaries.
James M. Hennessy, Senior Vice President and Secretary Two Renaissance
Square, 12th Floor, 40 North Central Avenue, Phoenix, AZ 85004. (Age 47.) 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 America Prime Rate Trust, and Pilgrim America Bank and Thrift Fund 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).
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 38.) 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 America Bank and
Thrift Fund, Inc., Pilgrim America Investment Funds, Inc. and Pilgrim America
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.
Principal Shareholders. As of September 30, 1996, the Directors and officers of
Masters Series as a group owned 2.73% of the outstanding Class A shares of
MidCap Value Fund and 2.33% of the outstanding Class A shares of LargeCap Value
Fund. As of September 30, 1996, to the knowledge of management, no person owned
beneficially or of record more than 5% of the outstanding shares of any class of
the Funds, except as
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follows. With respect to Asia-Pacific Equity Fund, Continental Grain Company,
277 Park Avenue, New York, New York 10172-0003, owned 12.15% of the Class A
shares. With respect to MidCap Value Fund, Express America Holdings Corporation
("Express America"), Two Renaissance Square, Suite 1200, 40 North Central
Avenue, Phoenix, Arizona 85004-4424, owned 13.99% of the Class A shares; Merrill
Lynch Pierce Fenner & Smith Inc. ("Merrill Lynch"), P.O. Box 45288,
Jacksonville, Florida 32232-5295, owned 5.67% of the Class B shares; and
Painewebber, P.O. Box 3321, Weehawken, New Jersey 07087-9154, owned 5.11% of the
Class M shares. With respect to LargeCap Value Fund, Express America owned
25.73% of the Class A shares; Merrill Lynch, P.O. Box 45288, Jacksonville,
Florida 32232-5296, owned of record 12.84% of the Class B shares; and
Painewebber, P.O. Box 5371, Weehawken, New Jersey 07087-5154, owned 6.12% of the
Class M 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). As of October 30, 1996, the
Investment Manager had assets under management of approximately $1.8 billion.
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 is a wholly-owned subsidiary of Pilgrim America Group,
which itself is a wholly-owned subsidiary of Express America, a Delaware
corporation, 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. On May 16, 1991, Express America acquired a now
discontinued mortgage banking operation from the Resolution Trust Corporation
("RTC") following a competitive bidding process. On December 8, 1995, the RTC
filed a complaint in the United States District Court of Arizona against Express
America, its Chief Executive Officer, who is also Chairman and an officer of the
Funds, its Chief Financial Officer, who is also an officer of the Funds, and
others, including Smith Barney, Harris Upham & Co., Incorporated and Rauscher
Pierce Refsnes, Inc. The RTC's complaint alleges various irregularities in the
bidding process and the closing of the aquisition. The RTC has asked for at
least $20 million in actual damages and at least $60 million in punitive damages
from all defendants. Express America and the officers have advised the Funds
that they believe they have meritorious defenses to the claims brought by the
RTC, and that the litigation is unlikely to have a material adverse effect on
the operations of the Investment Manager.
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
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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. For the fiscal period of September 1,
1995 (commencement of operations) to June 30, 1996, Asia-Pacific Equity Fund,
MidCap Value Fund, and LargeCap Value Fund paid management fees to the
Investment Manager of $169,861, $19,762, and $18,405, respectively.
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 2.50% of the first $30
million of the Fund's average daily net assets, 2.00% of the next $70 million of
the Fund's average net assets and 1.50% 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. For the
fiscal period of September 1, 1995 (commencement of operations) to June 30,
1996, Asia-Pacific Equity Fund, MidCap Value Fund, and LargeCap Value Fund paid
management fees to the Investment Manager of approximately $41,900, $4,700, and
$3,600, respectively.
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.
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
$36 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
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during the month. For the fiscal period of September 1, 1995 (commencement of
operations) to June 30, 1996, the Investment Manager paid portfolio management
fees to HSBC of $62,403.
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 22 years in the investment business.
Cramer Rosenthal McGlynn, Inc. manages approximately $2.4 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. For the fiscal
period of September 1, 1995 (commencement of operations) to June 30, 1996, the
Investment Manager paid portfolio management fees to CRM of $125,000. Accounts
managed by Cramer Rosenthal McGlynn, Inc. own in the aggregate approximately
13.9% 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.
Ark manages approximately $21.4 billion, including $11.3 billion in largecap
value portfolios, for more than 200 individual and institutional clients, with a
minimum account size of $50 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. For the fiscal period of September 1, 1995 (commencement of operations)
to June 30, 1996, the Investment Manager paid portfolio management fees to Ark
of $4,996.
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
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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.
For the fiscal period of September 1, 1995 (commencement of operations) to June
30, 1996, total commissions allowed to other dealers under the Funds'
underwriting arrangements were approximately $836,554 for Asia-Pacific Equity
Fund, $90,542 for MidCap Value Fund, and $70,285 for Large Cap Value Fund. For
that same period, the Distributor retained approximately $28,873 or
approximately 3.3% of the total commissions assessed on shares of Asia-Pacific
Equity Fund, approximately $27,485 or approximately 23.3% of total commissions
assessed on shares of MidCap Value Fund, and approximately $70,285 or
approximately 27.8% of total commissions assessed on shares of LargeCap Value
Fund.
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.
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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.
Total distribution expenses incurred by the Distributor for the costs of
promotion and distribution of each Fund's Class A, B, and M shares for the
fiscal period September 1, 1995 to June 30, 1996 were as follows:
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<TABLE>
<S> <C> <C> <C>
Asia-Pacific Equity Fund Class A Class B Class M
Advertising................ $ 32,993 $ 23,061 $ 11,141
Printing................... 116,974 81,763 39,500
Salaries & Commissions..... 282,053 197,150 95,243
Broker Servicing........... 140,951 98,522 47,596
Miscellaneous.............. 70,666 49,394 23,862
MidCap Value Fund
Advertising................ $ 19,419 $ 9,901 $ 4,277
Printing................... 68,850 35,104 15,164
Salaries & Commissions..... 164,875 84,063 36,312
Broker Servicing........... 82,961 42,299 18,272
Miscellaneous.............. 34,955 17,822 7,698
LargeCap Value Fund
Advertising................ $ 24,943 $ 3,235 $ 5,419
Printing................... 88,433 11,471 19,214
Salaries & Commissions..... 212,091 27,511 46,081
Broker Servicing........... 106,558 13,822 23,152
Miscellaneous.............. 43,329 5,620 9,414
</TABLE>
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
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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 cash
and/or liquid assets in an amount equal to the amount of its when-issued and
delayed-delivery commitments which will be "marked to market" daily.
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<PAGE>
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
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<PAGE>
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.
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<PAGE>
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.
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<PAGE>
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.
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<PAGE>
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
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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:
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(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).
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(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
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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.
The Funds place no restrictions on portfolio turnover. 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. The annual rate of the Funds' portfolio turnover during the
fiscal year ended June 30, 1996 was 15% for Asia-Pacific Equity Fund, 60% for
MidCap Value Fund, and 59% for LargeCap Value Fund.
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
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<PAGE>
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
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<PAGE>
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 may be 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 America 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 at Pilgrim America Group, 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
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investor or to the investor's order. If within 10 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. If the
proceeds from a total redemption are inadequate, the investor will be liable to
the Distributor for the difference. 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 and authorizes the Transfer Agent or Sub-Transfer Agent to receive
and redeem shares and pay the proceeds as directed by the Distributor. 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.
If at any time prior to or after completion of the Letter of Intent the investor
wishes to cancel the Letter of Intent, the investor must notify the Distributor
in writing. If, prior to the completion of the Letter of Intent, the investor
requests the Distributor to liquidate all shares held by the investor, the
Letter of Intent will be terminated automatically. Under either of these
situations, the total purchased may be less than the amount specified in the
Letter of Intent. If so, the Distributor will redeem at NAV to remit to the
Distributor and the appropriate authorized dealer an amount equal to the
difference between the dollar amount of the sales charge actually paid and the
amount of the sales charge that would have been paid on the total purchases if
made at one time.
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
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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.
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<PAGE>
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.
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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. (This fee
is in addition to the normal Custodian charges paid by the Funds.) The annual
contract maintenance fee may be waived from time to time. 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.
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Telephone Redemption and Exchange Privileges. As discussed in the Prospectus,
the telephone redemption and exchange privileges are available for all
shareholder accounts; however, retirement accounts may not utilize the telephone
redemption privilege. The telephone privileges may be modified or terminated at
any time. The privileges are subject to the conditions and provisions set forth
below and in the Prospectus.
1. Telephone redemption and/or exchange instructions received in
good order before the pricing of a Fund on any day on which the
New York Stock Exchange is open for business (a "Business Day"),
but not later than 4:00 p.m. eastern time, will be processed at
that day's closing net asset value. For each exchange, the
shareholder's account may be charged an exchange fee. There is no
fee for telephone redemption; however, redemptions of Class A and
Class B shares may be subject to a contingent deferred sales
charge (See "Redemption of Shares" in the Prospectus).
2. Telephone redemption and/or exchange instructions should be
made by dialing 1-800- 992-0180.
3. Pilgrim America Group will not permit exchanges in violation
of any of the terms and conditions set forth in the Funds'
Prospectus or herein.
4. Telephone redemption requests must meet the following
conditions to be accepted by Pilgrim America Group:
(a) Proceeds of the redemption may be directly deposited
into a predetermined bank account, or mailed to the current
address on the registration. This address cannot reflect any
change within the previous sixty (60) days.
(b) Certain account information will need to be provided for
verification purposes before the redemption will be
executed.
(c) Only one telephone redemption (where proceeds are being
mailed to the address of record) can be processed with in a
30 day period.
(d) The maximum amount which can be liquidated and sent to
the address of record at any one time is $50,000.
(e) The minimum amount which can be liquidated and sent to a
predetermined bank account is $5,000.
5. If the exchange involves the establishment of a new account,
the dollar amount being exchanged must at least equal the minimum
investment requirement of the Pilgrim America Fund being
acquired.
6. Any new account established through the exchange privilege
will have the same account information and options except as
stated in the Prospectus.
7. Certificated shares cannot be redeemed or exchanged by
telephone but must be forwarded to Pilgrim America and deposited
into your account before any transaction may be processed.
8. If a portion of the shares to be exchanged are held in escrow
in connection with a Letter of Intent, the smallest number of
full shares of the Pilgrim America Fund to be purchased on the
exchange having the same aggregate net asset value as the shares
being exchanged shall be
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substituted in the escrow account. Shares held in escrow may not
be redeemed until the Letter of Intent has expired and/or the
appropriate adjustments have been made to the account.
9. Shares may not be exchanged and/or redeemed unless an exchange
and/or redemption privilege is offered pursuant to the Funds'
then-current prospectus.
10. Proceeds of a redemption may be delayed up to 15 days or
longer until the check used to purchase the shares being redeemed
has been paid by the bank upon which it was drawn.
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.
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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.
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
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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
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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
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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.
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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)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).
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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:
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.
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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.
The average total return for each class of shares of each for the period of
September 1, 1995 (commencement of operations) to June 30, 1996 is as follows:
Asia-Pacific MidCap LargeCap
Equity Fund Value Fund Value Fund
Class A - 2.20% 13.55% 12.69%
Class B - 1.80% 14.80% 13.90%
Class M - 0.27% 15.65% 14.92%
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 statement audited by independent
certified public accountants.
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FINANCIAL STATEMENTS
The financial statements for the fiscal year ended June 30, 1996, are
incorporated herein by reference, from the Funds' Annual Report to Shareholders
dated June 30, 1996. Copies of the Funds' Annual Report may be obtained without
charge by contacting Masters Series at Two Renaissance Square, Suite 1200, 40
North Central Avenue, Phoenix, Arizona 84005, (800) 331-1080.
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