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MasterWorks Funds Inc. (formerly Stagecoach Inc.) (the "Company") is an
open-end, management investment company. This Prospectus contains information
about five of the Company's funds -- the LIFEPATH FUNDS (collectively, the
"Funds" or the "LifePath Funds").
EACH FUND INVESTS ALL OF ITS ASSETS IN A SEPARATE PORTFOLIO (EACH, A "MASTER
PORTFOLIO") OF MASTER INVESTMENT PORTFOLIO ("MIP"), AN OPEN-END, MANAGEMENT
INVESTMENT COMPANY, RATHER THAN IN A PORTFOLIO OF SECURITIES AND, AS SUCH, MAY
BE CONSIDERED A FEEDER FUND IN A MASTER/FEEDER STRUCTURE. EACH MASTER PORTFOLIO
HAS THE SAME INVESTMENT OBJECTIVE AS THE FUND BEARING THE CORRESPONDING NAME.
THEREFORE, EACH FUND'S INVESTMENT EXPERIENCE CORRESPONDS DIRECTLY WITH THE
RELEVANT MASTER PORTFOLIO'S INVESTMENT EXPERIENCE.
Please read this Prospectus before investing and retain it for future
reference. It sets forth concisely the information about the Funds and the
Master Portfolios that an investor should know before investing. A Statement of
Additional Information ("SAI") dated June 28, 1996 describing the Funds has been
filed with the Securities and Exchange Commission ("SEC") and is incorporated by
reference. The SAI is available without charge by calling the Company at
1-800-776-0179 or by writing the Company at the address printed on the back of
the Prospectus.
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AS WITH ALL MUTUAL FUNDS, THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED
BY THE SECURITIES AND EXCHANGE COMMISSION, ANY STATE SECURITIES COMMISSION OR
ANY OTHER REGULATORY AUTHORITY, NOR HAVE ANY OF THESE AUTHORITIES PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
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FUND SHARES ARE NOT DEPOSITS OR OTHER OBLIGATIONS OF, OR ISSUED, ENDORSED OR
GUARANTEED BY, BZW BARCLAYS GLOBAL INVESTORS, N.A. OR ANY OF ITS AFFILIATES.
SUCH SHARES ARE NOT INSURED BY THE U.S. GOVERNMENT, THE FEDERAL DEPOSIT
INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER GOVERNMENT AGENCY.
AN INVESTMENT IN A FUND INVOLVES CERTAIN INVESTMENT RISKS, INCLUDING POSSIBLE
LOSS OF PRINCIPAL.
MASTERWORKS FUNDS INC.
LIFEPATH 2000 FUND
LIFEPATH 2010 FUND
LIFEPATH 2020 FUND
LIFEPATH 2030 FUND
LIFEPATH 2040 FUND
HOW THESE FUNDS WORK
The five LifePath Funds represent a family of funds with different strategies
for investing toward future goals. The numbers in the Funds' names are target
dates; the nearer its target date the more conservatively each Fund invests.
Over time, each LifePath Fund generally will reduce its investment in stocks and
increase its investment in bonds and money market instruments.
PROSPECTUS
JUNE 28, 1996
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Each LifePath Fund invests in the corresponding LifePath Master Portfolio,
which invests in a wide range of U.S. and foreign equity and debt securities and
money market instruments. Investors are encouraged to select a particular
LifePath Fund based on the decade of their anticipated retirement or when they
anticipate beginning to withdraw substantial portions of their investment.
- LIFEPATH 2000 FUND is managed for investors planning to retire (or begin
to withdraw substantial portions of their investment) approximately in the year
2000.
- LIFEPATH 2010 FUND is managed for investors planning to retire (or begin
to withdraw substantial portions of their investment) approximately in the year
2010.
- LIFEPATH 2020 FUND is managed for investors planning to retire (or begin
to withdraw substantial portions of their investment) approximately in the year
2020.
- LIFEPATH 2030 FUND is managed for investors planning to retire (or begin
to withdraw substantial portions of their investment) approximately in the year
2030.
- LIFEPATH 2040 FUND is managed for investors planning to retire (or begin
to withdraw substantial portions of their investment) approximately in the year
2040.
Shares of each Fund are sold to qualified investors without a sales charge.
Investors can invest, reinvest or redeem Fund Shares at any time without charge
or penalty imposed by the Fund.
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BZW BARCLAYS GLOBAL FUND ADVISORS ("BGFA") SERVES AS INVESTMENT ADVISER TO THE
MASTER PORTFOLIOS. BGFA AND ITS AFFILIATES PROVIDE OTHER SERVICES TO THE
FUNDS AND MASTER PORTFOLIOS FOR WHICH THEY MAY BE COMPENSATED. STEPHENS
INC. ("STEPHENS"), WHICH IS NOT AFFILIATED WITH THE ADVISER OR ANY
AFFILIATE THEREOF, SERVES AS THE COMPANY'S ADMINISTRATOR AND AS
DISTRIBUTOR OF EACH FUND'S SHARES.
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Prospectus Summary....................................... i
Summary of Fund Expenses................................. 1
Financial Highlights..................................... 3
Description of the Funds................................. 6
Risk Factors........................................... 8
Management of the Funds.................................. 22
How to Buy Shares........................................ 27
How to Redeem Shares..................................... 30
Exchange Privilege....................................... 34
Share Value.............................................. 34
Dividends and Distributions.............................. 35
Federal Income Tax Information........................... 35
General Information...................................... 37
APPENDIX
--------
Additional Investment Policies........................... A-1
</TABLE>
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PROSPECTUS SUMMARY
The following summary provides investors with basic information about the
Funds. For more information, please refer specifically to the identified
Prospectus sections and generally to the Prospectus and SAI.
Q. WHO CAN INVEST IN THE FUNDS?
A. Shares of the Funds are offered primarily to a select group of investors.
These include:
- Participants in employee benefit plans ("Benefit Plans"), including
retirement plans, that have appointed one of the Company's Shareholder
Servicing Agents as plan trustee, plan administrator or other agent, or
whose plan trustee, plan administrator or other agent has a servicing
arrangement with a Shareholder Servicing Agent that permits investments in
Fund shares, and individuals who invest pursuant to an agreement between a
Benefit Plan and a Shareholder Servicing Agent.
- Individuals using proceeds that are being rolled over directly from a
qualified Benefit Plan to an Individual Retirement Account ("IRA")
pursuant to arrangements between the sponsor or other agent of the
qualified Benefit Plan and a Shareholder Servicing Agent.
- Foundations, corporations and other business entities that have a
servicing arrangement with one of the Company's Shareholder Servicing
Agents that permits investments in Fund shares, and persons who invest
pursuant to an agreement between such an entity and a Shareholder
Servicing Agent.
- Individuals, other than those described above, who invest at least $1
million in the Fund pursuant to an account arrangement with a Shareholder
Servicing Agent.
See "How To Buy Shares."
Q. WHAT ARE SOME OF THE POTENTIAL RISKS ASSOCIATED WITH AN INVESTMENT IN THE
FUNDS?
A. Investments in the Funds (and the Master Portfolios) are not bank deposits
or obligations of BZW Barclays Global Investors, N.A. ("BGI") and are not
insured by the Federal Deposit Insurance Corporation ("FDIC"). Investments
in the Funds are not insured or guaranteed against loss of principal.
Therefore, investors should be prepared to accept some risk with the money
invested in the Funds. The portfolio equity securities held by each Master
Portfolio are subject to
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equity-market risk. Equity market risk is the possibility that common stock
prices will decline over short or even extended periods. The U.S. stock
market will experience periods when stock prices rise and periods when
stock prices decline. Debt instruments held by a Master Portfolio are
subject to interest-rate risk. Interest-rate risk is the risk that
increases in market interest rates may adversely affect the value of
certain debt instruments in which the Master Portfolios may invest. The
value of such debt instruments generally changes inversely to changes in
market interest rates. The Master Portfolios also may engage in certain
futures contract transactions which have other risks associated with them.
As with all mutual funds, there can be no assurance that the Funds will
achieve their respective investment objectives.
See "Risk Factors" and "Appendix -- Additional Investment Policies."
Q. HOW DO I INVEST IN THE FUNDS?
A. Shares of the Funds can be purchased by establishing an account arrangement
with a designated Shareholder Servicing Agent. Shares may be purchased at
net asset value on any day the New York Stock Exchange ("NYSE") is open for
regular business (a "Business Day").
To invest in the Funds contact a Shareholder Servicing Agent to receive
information and an Account Application. An Account Application must be
completed and signed to open an account.
See "How to Buy Shares."
Q. WHO MANAGES MY INVESTMENTS?
A. BZW Barclays Global Fund Advisors ("BGFA"), as the investment adviser to the
Master Portfolios, manages the investments of each Master Portfolio. The
Company has not retained the services of a separate investment adviser for
the Funds because each Fund invests all of its assets in the corresponding
Master Portfolio. As of March 31, 1996, BGFA and its affiliates provided
investment advisory services for over $284 billion of assets.
See "Management of the Funds."
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Q. WHAT ARE THE FEES FOR INVESTING?
A. Unlike certain other mutual funds which charge sales loads or other
transaction fees, the Funds do not impose shareholder transaction fees on
the purchase, redemption or exchange of their shares. Shareholder Servicing
Agents, in accordance with the terms of their customer account
arrangements, may charge additional fees for maintaining customer accounts.
See "Management of the Funds."
Q. HOW ARE THE FUNDS' INVESTMENTS VALUED?
A. The price per share or "net asset value" of each Fund is based on the net
asset value of interests in the corresponding Master Portfolio. The net
asset value of interests in a Master Portfolio is based on the total value
of the portfolio securities owned by the Master Portfolio (plus cash and
other assets net of liabilities) and the number of outstanding interests in
the Master Portfolio. A new net asset value for each Fund and Master
Portfolio is calculated on each Business Day.
See "Share Value."
Q. DO THE FUNDS PAY DIVIDENDS?
A. Each Fund intends to pay quarterly dividends consisting of substantially all
of its net investment income and annual distributions consisting of
substantially all of its net realized capital gains. All dividends and
distributions are automatically reinvested at net asset value in shares of
the Fund paying the dividend or distribution, unless payment in cash is
requested and your arrangement with a Shareholder Servicing Agent permits
the processing of cash payments. Each reinvestment increases the total
number of shares held by the investor. See "Dividends and Distributions."
Q. ARE EXCHANGES TO OTHER FUNDS PERMITTED?
A. Yes. The exchange privilege enables an investor to exchange Fund shares for
shares of another fund offered by MasterWorks Funds provided such shares
are offered for sale in the investor's state of residence. See "Exchange
Privilege."
Q. HOW DO I REDEEM SHARES?
A. Shares of the Funds may be redeemed at net asset value without the
imposition of a sales charge or redemption fee on any Business Day by
letter or by telephone (unless you decline telephone privileges). See
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"How to Redeem Shares." For more information contact Stephens or your
Shareholder Servicing Agent.
Q. WHAT ARE DERIVATIVES AND DO THE FUNDS AND MASTER PORTFOLIOS USE THEM?
A. Some of the permissible investments described throughout this Prospectus are
considered "derivative" securities because their values are derived, at
least in part, from the prices of other securities or specified assets,
indices or rates. The futures contracts and options on futures contracts
that the Master Portfolios may purchase are considered derivatives. The
Master Portfolios may purchase or sell these contracts or options as
substitutes for comparable market positions in the underlying securities.
Certain of the floating- and variable-rate instruments that the Master
Portfolios may purchase can also be considered derivatives. Some
derivatives may be more sensitive than direct securities to changes in
interest rates or sudden market moves. Some derivatives also may be
susceptible to fluctuations in yield or value due to their structure or
contract terms.
Q. WHAT STEPS DO THE FUNDS AND MASTER PORTFOLIOS TAKE TO CONTROL
DERIVATIVES-RELATED RISKS?
A. BGFA, as investment adviser to the Master Portfolios, uses a variety of
internal risk management procedures to ensure that derivatives use is
consistent with both the Master Portfolios' and the Funds' investment
objectives, does not expose either the Master Portfolios or the Funds to
undue risks and is closely monitored. These procedures include providing
periodic reports to the Boards of Trustees and Directors concerning the use
of derivatives. Also, cash maintained by the Master Portfolios for
short-term liquidity needs (e.g., to meet anticipated redemption requests)
will, as a general matter, only be invested in U.S. Treasury bills, shares
of other mutual funds and repurchase agreements. The use of derivatives is
also subject to broadly applicable investment policies. For example, the
Master Portfolios may not invest more than a specified percentage of their
assets in "illiquid securities," including those derivatives that do not
have active secondary markets. In addition, the Master Portfolios may not
use derivatives without establishing adequate "cover" in compliance with
SEC rules limiting the use of leverage.
See "Appendix -- Additional Investment Policies."
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SUMMARY OF FUND EXPENSES
<TABLE>
<CAPTION>
LIFEPATH LIFEPATH LIFEPATH LIFEPATH LIFEPATH
2000 2010 2020 2030 2040
FUND FUND FUND FUND FUND
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average
daily net assets):
MIP Management Fees(1)......... .55% .55% .55% .55% .55%
Other Expenses
Shareholder Servicing Fees... .20 .20 .20 .20 .20
Miscellaneous Expenses....... .20 .20 .20 .20 .20
Total Other Expenses........... .40% .40% .40% .40% .40%
---- ---- ---- ---- ----
TOTAL FUND OPERATING
EXPENSES..................... .95% .95% .95% .95% .95%
</TABLE>
EXAMPLE OF EXPENSES
An investor would pay the following expenses on a $1,000 investment in a
Fund, assuming (1) 5% annual return and (2) redemption at the end of each time
period:
<TABLE>
<CAPTION>
LIFEPATH LIFEPATH LIFEPATH LIFEPATH LIFEPATH
2000 2010 2020 2030 2040
FUND FUND FUND FUND FUND
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
1 YEAR................ $ 10 $ 10 $ 10 $ 10 $ 10
3 YEARS............... $ 30 $ 30 $ 30 $ 30 $ 30
5 YEARS............... $ 53 $ 53 $ 53 $ 53 $ 53
10 YEARS............... $117 $117 $117 $117 $117
</TABLE>
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(1) A portion of these fees is covered by a "defensive" Rule 12b-1 Plan of
Distribution that does not result in additional expenses to the Funds or
Master Portfolios. (See "Management of the Funds -- MIP 12b-1 Plan" for
further information.)
- --------------------------------------------------------------------------------
THE AMOUNTS LISTED IN THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION
OF PAST OR FUTURE EXPENSES; ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE
SHOWN ABOVE. MOREOVER, WHILE THE EXAMPLE ASSUMES A 5% ANNUAL RETURN, EACH FUND'S
ACTUAL PERFORMANCE WILL VARY AND MAY RESULT IN AN ACTUAL RETURN GREATER OR LESS
THAN 5%.
- --------------------------------------------------------------------------------
All of the above figures are based on the actual expenses for the fiscal
year ended February 29, 1996 of the Institutional Class shares of the LifePath
Funds of Stagecoach Trust, an open-end investment company whose series also
invest in the Master Portfolios. The Funds were established to supersede the
Institutional Class shares of Stagecoach Trust and the offering of the
Institutional Class Shares was terminated as of the Funds' commencement of
operations.
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The purpose of the foregoing tables is to assist investors in understanding
the various costs and expenses borne by a Fund and a Master Portfolio. The fee
table reflects expenses at both the Fund and Master Portfolio levels. The
information in the foregoing tables does not reflect any fee waivers or expense
reimbursement arrangements that may be in effect.
With regard to the combined fees and expenses of the Funds and Master
Portfolios, the Company's Board of Directors has considered whether the various
costs and benefits of investing each Fund's assets in the corresponding Master
Portfolio rather than directly in a portfolio of securities would be more or
less than if the Fund invested in portfolio securities directly. The Company's
Board of Directors believes that the aggregate per share expenses of a Fund and
its corresponding Master Portfolio will be less than or approximately equal to
the expenses such Fund would incur if it directly acquired and managed the type
of securities held by its corresponding Master Portfolio. See "Management of the
Funds" for more complete descriptions of the various costs and expenses
applicable to investors in each of the Funds.
Other mutual funds may invest in the Master Portfolios. The expenses and,
accordingly, the investment returns of such other mutual funds may differ from
those of the Funds. Information about other investment options in the Master
Portfolios may be obtained by calling Stephens at 1-800-643-9691.
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FINANCIAL HIGHLIGHTS
The financial information presented on the following pages is for
informational purposes only and should not be considered as a projection of the
future performance of the Funds. The Funds have been established to supersede
the Institutional Class shares of the LifePath Funds of Stagecoach Trust, which
are no longer being offered. The operation of the Fund is substantially similar
to the operation of the Institutional Class shares of the LifePath Funds of
Stagecoach Trust.
The information has been derived from the Financial Highlights in the
financial statements of the Institutional Class shares of the LifePath Funds of
Stagecoach Trust for the fiscal year ended February 29, 1996. The financial
statements are incorporated by reference into the SAI for the Funds. The
financial statements for the fiscal year ended February 29, 1996 have been
audited by KPMG Peat Marwick LLP, independent auditors, whose report on
Stagecoach Trust, dated April 12, 1996 is also incorporated by reference into
the SAI. The information on the following pages should be read in conjunction
with the annual financial statements and notes thereto of the LifePath Funds of
Stagecoach Trust for the fiscal year ended February 29, 1996. The SAI has been
incorporated by reference into this Prospectus.
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FOR AN INSTITUTIONAL CLASS SHARE OUTSTANDING
<TABLE>
<CAPTION>
LIFEPATH
LIFEPATH 2000 FUND LIFEPATH 2010 FUND 2020 FUND
-------------------------- ------------------------- ------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
FEBRUARY 29, FEBRUARY 28, FEBRUARY FEBRUARY 28, FEBRUARY 29,
1996 1995 29, 1996 1995 1996
------------ ------------ ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, beginning
of period................ $ 9.94 $ 10.00 $ 10.02 $ 10.00 $ 10.17
-------- -------- ------- -------- --------
Income from investment
operations:
Net investment income.... 0.42 0.35 0.34 0.33 0.29
Net realized and
unrealized gain/(loss)
on investments......... 0.86 (0.12) 1.60 0.01 2.03
-------- -------- ------- -------- --------
Total from investment
operations............... 1.28 0.23 1.94 0.34 2.32
Less distributions:
Dividends from net
investment income...... (0.42) (0.28) (0.35) (0.27) (0.30)
Distributions from net
realized capital
gains.................. (0.13) (0.01) (0.14) (0.05) (0.21)
-------- -------- ------- -------- --------
Total Distributions....... (0.55) (0.29) (0.49) (0.32) (0.51)
-------- -------- ------- -------- --------
Net Asset Value, end of
period................... $ 10.67 $ 9.94 $ 11.47 $ 10.02 $ 11.98
======== ======== ======= ======== ========
Total Return (not
annualized).............. 13.19% 2.38% 19.69% 3.53% 23.18%
Ratios/Supplemental Data:
Net assets, end of period
(000).................. $ 17,262 $ 7,499 $34,458 $ 13,028 $ 40,570
Number of shares
outstanding, end of
period (000)........... 1,618 754 3,004 1,300 3,385
Ratios to average net
assets (annualized)(1):
Ratio of expenses to
average net assets..... 0.95% 0.95% 0.95% 0.95% 0.95%
Ratio of net investment
income to average net
assets................. 4.23% 4.89% 3.27% 4.61% 2.68%
Portfolio Turnover(2)..... 84% 17% 39% 24% 49%
</TABLE>
(Continued)
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<TABLE>
<CAPTION>
LIFEPATH
2020 FUND LIFEPATH 2030 FUND LIFEPATH 2040 FUND
------------ -------------------------- --------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
FEBRUARY 28, FEBRUARY 29, FEBRUARY 28, FEBRUARY 29, FEBRUARY 28,
1995 1996 1995 1996 1995
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, beginning
of period................ $ 10.00 $ 10.18 $10.00 $ 10.37 $10.00
-------- -------- ------ -------- ------
Income from investment
operations:
Net investment income.... 0.30 0.23 0.29 0.17 0.20
Net realized and
unrealized gain/(loss)
on investments......... 0.12 2.47 0.14 2.84 0.34
-------- -------- ------ -------- ------
Total from investment
operations............... 0.42 2.70 0.43 3.01 0.54
Less distributions:
Dividends from net
investment income...... (0.25) (0.24) (0.25) (0.18) (0.17)
Distributions from net
realized capital
gains.................. 0.00 (0.27) 0.00 (0.34) 0.00
-------- -------- ------ -------- ------
Total Distributions....... (0.25) (0.51) (0.25) (0.52) (0.17)
-------- -------- ------ -------- ------
Net Asset Value, end of
period................... $ 10.17 $ 12.37 $10.18 $ 12.86 $10.37
======== ======== ====== ======== ======
Total Return (not
annualized).............. 4.39% 26.88% 4.42% 29.32% 5.55%
Ratios/Supplemental Data:
Net assets, end of period
(000).................. $ 16,618 $ 25,447 $9,682 $ 33,386 $9,976
Number of shares
outstanding, end of
period (000)........... 1,634 2,058 951 2,596 962
Ratios to average net
assets (annualized)(1):
Ratio of expenses to
average net assets..... 0.95% 0.95% 0.95% 0.95% 0.95%
Ratio of net investment
income to average net
assets................. 3.88% 2.15% 3.59% 1.53% 2.61%
Portfolio Turnover(2)..... 28% 39% 40% 29% 5%
</TABLE>
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(1) These ratios include income and expenses charged to the Master Portfolio.
(2) The portfolio turnover rate reflects activity by the Master Portfolio. For
the fiscal year ended February 28, 1995, this information was audited by
other auditors.
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DESCRIPTION OF THE FUNDS
GENERAL
The Company is a "series fund," which is a mutual fund divided into
separate portfolios. Each portfolio is treated as a separate entity for certain
matters under the Investment Company Act of 1940, as amended (the "1940 Act"),
and for other purposes, and a shareholder of one portfolio is not deemed to be a
shareholder of any other portfolio. Each LifePath Fund is comprised of one class
of shares. By this Prospectus, five of the Company's portfolios are being
offered -- the LifePath 2000 Fund, LifePath 2010 Fund, LifePath 2020 Fund,
LifePath 2030 Fund and LifePath 2040 Fund, each of which is diversified. The
Company currently offers seven other portfolios and may, from time to time,
establish other portfolios. See "General Information."
MASTER/FEEDER STRUCTURE
Each Fund is a feeder fund in a master/feeder structure, which means it
invests all of its assets in a separate Master Portfolio of MIP with the same
investment objective as such Fund. See "Investment Objectives" and "Management
Policies" below. MIP is organized as a trust under the laws of the State of
Delaware. See "Management of the Funds." In addition to selling its interests to
a Fund, each Master Portfolio may sell its interests to certain other mutual
funds or other qualified investors. Information regarding additional options, if
any, for investment in interests of the Master Portfolio is available from
Stephens and may be obtained by calling 1-800-643-9691. The expenses and,
correspondingly, the returns of other investment options in MIP are expected to
differ from those of the Funds.
The Company's Board of Directors believes that, if other investors invest
their assets in a Master Portfolio of MIP, certain economic efficiencies may be
realized with respect to such Master Portfolio. For example, fixed expenses that
otherwise would have been borne solely by a Fund would be spread across a larger
asset base provided by more than one fund investing in a Master Portfolio. Each
Fund investing in a Master Portfolio is liable for its proportionate share of
the obligations of the Master Portfolio. However, the risk of a Fund incurring
financial loss on account of such liability is limited to circumstances in which
both inadequate insurance exists and the Master Portfolio itself is unable to
meet its obligations. Accordingly, the Company's Board of Directors believes
that the Funds and their shareholders will not be adversely affected by reason
of investing the Funds' assets in a Master Portfolio. However, if a mutual fund
or other investor withdraws its investment from a Master Portfolio, the economic
6
<PAGE> 15
efficiencies (e.g., spreading fixed expenses across a larger asset base) that
the Company's Board believes should be available through investment in the
Master Portfolio may not be fully achieved or maintained. In addition, given the
relatively novel nature of the master/feeder structure, accounting and
operational difficulties could occur. See "Management of the Funds" for a
description of the Funds' and Master Portfolios' management and expenses.
Each Master Portfolio's investment objective and other fundamental
policies, which are the same as those of the Fund bearing the corresponding
name, cannot be changed without approval by the holders of a majority (as
defined in the 1940 Act) of such Master Portfolio's outstanding voting
interests. Whenever a Fund, as a Master Portfolio interestholder, is requested
to vote on matters pertaining to any fundamental policy of such Master
Portfolio, the Fund will hold a meeting of its shareholders to consider such
matters and such Fund will cast its votes in proportion to the votes received
from Fund shareholders. A Fund will vote Master Portfolio interests for which it
receives no voting instructions in the same proportion as the votes received
from Fund shareholders. In addition, certain policies of the Master Portfolio
which are non-fundamental could be changed by vote of a majority of MIP's
Trustees without a vote of interestholders. If a Master Portfolio's investment
objective or policies are changed, the Fund investing in that Master Portfolio
could subsequently change its objective or policies to correspond to those of
the Master Portfolio or the Fund could redeem its Master Portfolio interests and
either seek a new investment company with a matching objective in which to
invest or retain its own investment adviser to manage its portfolio in
accordance with its objective. In the latter case, the Fund's inability to find
a substitute investment company in which to invest or equivalent management
services could adversely affect shareholders' investments in that Fund. Each
Fund's investment objective and other fundamental policies cannot be changed
without approval by the holders of a majority (as defined in the 1940 Act) of
that Fund's outstanding voting shares. A Fund will provide shareholders with 30
days' written notice prior to the implementation of any change in the investment
objective of that Fund or Master Portfolio, to the extent possible.
Information on the Funds' and Master Portfolios' investment objectives,
policies and restrictions is included under "The Funds -- Investment Objectives
and Policies" and "Appendix -- Additional Investment Policies" in this
Prospectus and "Investment Restrictions" and "Additional Permitted Investment
Activities" in the SAI. Additional Information regarding officers and
directors/trustees is included in the Fund's SAI under "Management."
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<PAGE> 16
RISK FACTORS
The net asset value and investment return of each LifePath Fund and
LifePath Master Portfolio are expected to fluctuate and are neither insured nor
guaranteed. To the extent that each LifePath Master Portfolio holds both equity
and fixed-income securities, it is subject to equity-market risk, as well as
credit- and interest-rate risks. Equity-market risk is the risk that common
stock prices will fluctuate or decline over short or even extended periods of
time. Credit risk is the risk that the issuer of a debt instrument is unable,
due to financial constraints, to make timely payments on its outstanding
obligations. Interest-rate risk is the risk that increases in market interest
rates may adversely affect the value of the debt instruments in which a Master
Portfolio invests and hence the value of an investment in the Master Portfolio.
The value of debt instruments held by a Master Portfolio generally changes
inversely to changes in market interest rates. Investments in foreign securities
can expose the Master Portfolio to currency exchange risks and other potentially
adverse consequences associated with investing in securities markets that are
not as developed or efficient as those in the United States. Certain investment
techniques that may be used by the LifePath Master Portfolios, such as investing
in stock index options, futures contracts and interest-rate swaps, present
special risk considerations. See "Appendix -- Investment Techniques." As with
all mutual funds, there can be no assurance that each Fund or Master Portfolio
will achieve its investment objective. This summary of risk factors is qualified
by reference to more detailed descriptions of the risks associated with an
investment in the Funds, as set forth under "Risk Considerations" below.
INVESTMENT OBJECTIVES
Each LifePath Fund seeks to provide long-term investors with an asset
allocation strategy designed to maximize assets for retirement or for other
purposes consistent with the quantitatively measured risk investors, on average,
may be willing to accept given their investment time horizons. Specifically:
- LifePath 2000 Fund is managed for investors planning to retire (or begin
to withdraw substantial portions of their investment) approximately in the year
2000.
- LifePath 2010 Fund is managed for investors planning to retire (or begin
to withdraw substantial portions of their investment) approximately in the year
2010.
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<PAGE> 17
- LifePath 2020 Fund is managed for investors planning to retire (or begin
to withdraw substantial portions of their investment) approximately in the year
2020.
-LifePath 2030 Fund is managed for investors planning to retire (or begin
to withdraw substantial portions of their investment) approximately in the year
2030.
- LifePath 2040 Fund is managed for investors planning to retire (or begin
to withdraw substantial portions of their investment) approximately in the year
2040.
The differences in objectives and policies among the Master Portfolios
determine the types of portfolio securities in which each Master Portfolio
invests and can be expected to affect the degree of risk to which each Master
Portfolio and, therefore, the corresponding Fund, is subject and the performance
of each Master Portfolio and Fund.
ABOUT THE FUNDS
Each Fund invests all of its assets in the Master Portfolio bearing the
corresponding name, which has the same investment objective as such Fund. A Fund
may withdraw its investment in the relevant Master Portfolio at any time,
provided that the Company's Board of Directors determines that it is in the best
interests of the Fund to do so. Upon any such withdrawal, the Company's Board of
Directors would consider what action should be taken, including investing all
such Fund's assets in another pooled investment entity having the same
investment objective as the Fund, or retaining an investment adviser to manage
such Fund's assets in accordance with the policies described below.
Since the investment characteristics of each Fund correspond directly with
those of the Master Portfolio bearing the corresponding name, the following is a
discussion of the management policies used by each Master Portfolio.
The LifePath Master Portfolios are a diversified series of asset allocation
funds designed for long-term investors. The LifePath Master Portfolios follow an
asset allocation strategy among three broad investment classes: equity and debt
securities of issuers located throughout the world and cash in the form of money
market instruments. Each LifePath Master Portfolio differs in the weighting
assigned to each investment class and, since the later-dated Master Portfolios
tend to invest a greater portion of their assets in equity securities, the
later-dated Master Portfolios generally bear more risk than the earlier-dated
Master Portfolios. The later-dated Master Portfolios generally have an
expectation of greater total return.
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<PAGE> 18
Thus, the investment class weightings of the LifePath 2040 Master Portfolio
initially might be 100%, 0% and 0% among equity securities, debt securities and
cash, respectively, while the weightings of the LifePath 2000 Master Portfolio
initially might be 25%, 50% and 25%, respectively. Over the years, each LifePath
Master Portfolio is managed more conservatively, on the premise that individuals
investing for retirement desire to reduce investment risk in their retirement
accounts as they age. The difference in such investment class weightings is
based on the statistically determined risk that such investors, on average, may
be willing to accept given their investment time horizons in an effort to
maximize assets in anticipation of retirement or for other purposes.
Investors are encouraged to invest in a particular LifePath Fund based on
the decade of their anticipated retirement or when they anticipate beginning to
withdraw substantial portions of their accounts. For example, the LifePath 2000
Fund is designed for investors in their 50s and 60s who plan to retire (or begin
to withdraw substantial portions of their investment) in approximately 2000; the
LifePath 2010 Fund is designed for investors in their 40s and 50s who plan to
retire (or begin to withdraw as described above) in approximately 2010; and so
on. In addition, when making their investment decisions, investors could
consider evaluating their own risk profiles, recognizing, for example, that the
LifePath 2040 Fund is designed for investors with a high tolerance for risk
while the LifePath 2000 Fund is designed for investors with a low tolerance for
risk.
To manage the LifePath Master Portfolio, the Adviser employs a proprietary
investment model (the "Model") that analyzes extensive financial and economic
data, including risk correlation and expected return statistics, to recommend
the portfolio allocation among the investment classes described below. At its
simplest, for each point in time, the Model recommends a portfolio allocation
designed to maximize total return for each LifePath Master Portfolio based on
each such LifePath Master Portfolio's evolving risk profile. As a result, while
each LifePath Master Portfolio invests in substantially the same securities
within an investment class, the amount of each LifePath Master Portfolio's
aggregate assets invested in a particular investment class, and thus in
particular securities, differs, but the relative percentage that a particular
security comprises within an investment class ordinarily remains substantially
the same. As of
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<PAGE> 19
June 1, 1996 asset allocations in the LifePath Master Portfolios were
approximately as follows:
<TABLE>
<CAPTION>
LIFEPATH LIFEPATH LIFEPATH LIFEPATH LIFEPATH
2000 2010 2020 2030 2040
MASTER MASTER MASTER MASTER MASTER
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Equity
Securities ......
Domestic ........ 17% 39% 53% 63% 75%
International ... 5% 11% 15% 19% 20%
Debt Securities ... 77% 49% 31% 17% 4%
Cash .............. 1% 1% 1% 1% 1%
</TABLE>
The relative weightings for each LifePath Master Portfolio of the various
investment classes are expected to change over time, with the LifePath 2040
Master Portfolio adopting in the 2030s characteristics similar to the LifePath
2000 Master Portfolio today. BGFA may in the future refine the Model, or the
financial and economic data analyzed by the Model, in ways that could result in
changes to recommended allocations.
MANAGEMENT POLICIES
LifePath Master Portfolios. The LifePath Model contains both "strategic"
and "tactical" components, with the strategic component weighted more heavily
than the tactical component. The strategic component of the Model evaluates the
risk that investors, on average, may be willing to accept given their investment
time horizons. The strategic component thus determines the changing investment
risk level of each LifePath Master Portfolio as time passes. The tactical
component of the Model, on the other hand, addresses short-term market
conditions. The tactical component thus adjusts the amount of investment risk
taken by each LifePath Master Portfolio without regard to time horizon, but
rather in consideration of the relative risk-adjusted short-term attractiveness
of various asset classes.
Through the strategic and tactical components, the asset allocation
strategy contemplates shifts, which may be frequent, among a wide range of U.S.
and foreign investments and market sectors. Each LifePath Master Portfolio may
invest up to approximately 20% of the value of its total assets in foreign
securities that are not publicly traded in the United States. Rather than
choosing specific securities, the Model selects indices representing segments of
the global equity and debt markets and invests to create market exposure to
these market segments by purchasing represen-
11
<PAGE> 20
tative samples of securities comprising the indices in an attempt to replicate
their performance. From time to time, other indices may be selected in addition
to, or as a substitute for, any of the indices listed herein and market exposure
may be broadened. Investors will be notified of any such change. Although the
LifePath Funds are not true "index" funds, they may be considered
"index-allocation funds."
The Model has broad latitude to select the class of investments and the
particular securities within a class in which each LifePath Master Portfolio
invests. The LifePath Master Portfolios are not managed as balanced portfolios
and are not required to maintain a portion of their investments in each of the
permitted investment categories at all times. Until a LifePath Master Portfolio
attains an asset level of approximately $100 to $150 million, the Model will
allocate assets across fewer of the investment categories identified below than
it otherwise would. As a LifePath Master Portfolio approaches this minimum asset
level, the Model will add investment categories from among those identified
below, thereby approaching the desired investment mix over time. The portfolio
of investments of each LifePath Master Portfolio is compared from time to time
to the Model's recommended allocation. Recommended reallocations are implemented
subject to BGFA's assessment of current economic conditions and investment
opportunities. BGFA may change from time to time the criteria and methods it
uses to implement the recommendations of the Model. Recommended reallocations
are implemented in accordance with trading policies designed to take advantage
of market opportunities and reduce transaction costs. The asset allocation mix
selected by the Model is a primary determinant in the respective LifePath Master
Portfolio's investment performance.
BGFA manages other portfolios which also invest in accordance with the
Model. The performance of each of those other portfolios is likely to vary from
the performance of each LifePath Master Portfolio and corresponding LifePath
Fund. Such variation in performance is primarily due to different equilibrium
asset-mix assumptions used for the various portfolios, timing differences in the
implementation of the Model's recommendations and differences in expenses and
liquidity requirements. The overall management of each LifePath Master Portfolio
is based on the recommendation of the Model, and no person is primarily
responsible for recommending the mix of asset classes in each Master Portfolio
or the mix of securities within the asset classes. Decisions relating to the
Model are made by BGFA's investment committee.
Each LifePath Master Portfolio may invest in up to 17 asset classes,
including 10 stock classes, 6 bond classes and a money market class. Each
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<PAGE> 21
LifePath Master Portfolio invests in the classes of investments described below.
EQUITY SECURITIES -- The LifePath Master Portfolios seek U.S. equity
market exposure through the following indices of common stocks:
- The S&P/BARRA Value Stock Index (consisting of primarily large-
capitalization U.S. stocks with lower-than-average price/book ratios).
- The S&P/BARRA Growth Stock Index (consisting of primarily
large-capitalization U.S. stocks with higher-than-average price/book
ratios).
- The Intermediate Capitalization Value Stock Index (consisting of
primarily medium-capitalization U.S. stocks with lower-than-average
price/book ratios).
- The Intermediate Capitalization Growth Stock Index (consisting of
primarily medium-capitalization U.S. stocks with higher-than-average
price/book ratios).
- The Intermediate Capitalization Utility Stock Index (consisting of
primarily medium-capitalization U.S. utility stocks).
- The Micro Capitalization Market Index (consisting of primarily
small-capitalization U.S. stocks).
- The Small Capitalization Value Stock Index (consisting of primarily
small-capitalization U.S. stocks with lower-than-average price/book
ratios).
The Small Capitalization Growth Stock Index (consisting of primarily
small-capitalization U.S. stocks with higher-than-average price/book
ratios).
The LifePath Master Portfolios seek foreign equity market exposure
through the following indices of foreign equity securities:
- The Morgan Stanley Capital International (MSCI) Japan Index (consisting
of primarily large-capitalization Japanese stocks).
- The Morgan Stanley Capital International Europe, Australia, Far East
Index (MSCI EAFE) Ex-Japan Index (consisting of primarily
large-capitalization foreign stocks, excluding Japanese stocks).
In addition, each LifePath Master Portfolio may invest in other common
stocks, preferred stocks and convertible securities, including
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<PAGE> 22
those in the form of American, European and Continental Depositary
Receipts, as well as warrants to purchase such securities, and investment
company securities. See "Appendix--Portfolio Securities."
DEBT SECURITIES -- The LifePath Master Portfolios seek U.S. debt
market exposure through the following indices of U.S. debt securities:
- The Lehman Brothers Long-Term Government Bond Index (consisting of all
U.S. Government bonds with maturities of at least ten years).
- The Lehman Brothers Intermediate-Term Government Bond Index (consisting
of all U.S. Government bonds with maturities of less than ten years and
greater than one year).
- The Lehman Brothers Long-Term Corporate Bond Index (consisting of all
U.S. investment-grade corporate bonds with maturities of at least ten
years).
- The Lehman Brothers Intermediate-Term Corporate Bond Index (consisting of
all U.S. investment-grade corporate bonds with maturities of less than
ten years and greater than one year).
- The Lehman Brothers Mortgage-Backed Securities Index (consisting of all
fixed-coupon mortgage pass-throughs issued by the Federal National
Mortgage Association, Government National Mortgage Association and
Federal Home Loan Mortgage Corporation with maturities greater than one
year).
The LifePath Master Portfolios seek foreign debt market exposure through
the following index of foreign debt securities:
- The Salomon Brothers Non-U.S. World Government Bond Index (consisting of
foreign government bonds with maturities of greater than one year).
Each U.S. and foreign debt security is expected to be part of an issuance
with a minimum outstanding amount at the time of purchase of approximately $50
million and $100 million, respectively. Each security in which a LifePath Master
Portfolio invests must be rated at least "Baa" by Moody's Investors Service,
Inc. ("Moody's"), or "BBB" by Standard & Poor's Corporation ("S&P"), Fitch
Investors Service, Inc. ("Fitch") or Duff & Phelps, Inc. ("Duff") or, if
unrated, deemed to be of comparable quality by the Adviser in accordance with
procedures approved by MIP's Board of Trustees. See "Risk
Considerations--Fixed-Income Securities" below, and "Appendix" in the Statement
of Additional Information.
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<PAGE> 23
MONEY MARKET INSTRUMENTS -- The money market instrument portion of the
portfolio of each Master Portfolio generally is invested in high-quality money
market instruments, including U.S. Government obligations, obligations of
domestic and foreign banks, short-term corporate debt instruments and repurchase
agreements. See "Appendix" below for a more complete description of the money
market instruments in which each Master Portfolio may invest.
INVESTMENT TECHNIQUES -- Each LifePath Master Portfolio also may lend its
portfolio securities and enter into transactions in certain derivatives, each of
which involves risk.
Derivatives are financial instruments whose values are derived, at least in
part, from the prices of other securities or specified assets, indices or rates.
The futures contracts and options on futures contracts that each Master
Portfolio may purchase are considered derivatives. Each Master Portfolio may use
some derivatives as part of its short-term liquidity holdings and/or as
substitutes for comparable market positions in the underlying securities. Also,
asset-backed securities issued or guaranteed by U.S. Government agencies or
instrumentalities and certain floating- and variable-rate instruments can be
considered derivatives. Some derivatives may be more sensitive than direct
securities to changes in interest rates or sudden market moves. Some derivatives
also may be susceptible to fluctuations in yield or value due to their structure
or contract terms.
BGFA uses a variety of internal risk management procedures to ensure that
derivatives use is consistent with each Master Portfolio's investment objective,
does not expose a Master Portfolio or, indirectly, a corresponding Fund to undue
risks and is closely monitored. BGFA provides periodic reports to the Board of
Trustees or Board of Directors, as the case may be, concerning the use of
derivatives. Derivatives use also is subject to broadly applicable investment
policies. For example, in no case may a Master Portfolio invest more than 15% of
the current value of its assets in "illiquid securities," including derivatives
without active secondary markets, nor may a Master Portfolio use derivatives to
create leverage without establishing adequate "cover" in compliance with
Securities and Exchange Commission leverage rules. For more information, see
"Risk Considerations" below, and "Appendix -- Investment Techniques."
CERTAIN FUNDAMENTAL POLICIES
Each Fund and Master Portfolio may (i) borrow money to the extent permitted
under the 1940 Act; (ii) invest up to 5% of its total assets in the obligations
of any single issuer, except that up to 25% of the value of the total assets of
such Fund or Master Portfolio may be invested, and
15
<PAGE> 24
obligations issued or guaranteed by the U.S. Government, its agencies or
instrumentalities may be purchased, without regard to any such limitation; and
(iii) invest up to 25% of the value of its total assets in the securities of
issuers in a particular industry or group of closely related industries,
provided there is no limitation on the purchase of obligations issued or
guaranteed by the U.S. Government, its agencies or instrumentalities. Each Fund,
however, may invest all of its assets in another registered investment company
without violation of these fundamental policies on diversification. This
paragraph describes fundamental policies that cannot be changed as to a Fund or
Master Portfolio without approval by the holders of a majority (as defined in
the 1940 Act) of the outstanding voting securities of such Fund or Master
Portfolio, as the case may be. See "Investment Objectives
and Management Policies -- Investment Restrictions" in the Statement of
Additional Information.
CERTAIN ADDITIONAL NON-FUNDAMENTAL POLICIES
Each Fund and Master Portfolio may (i) purchase securities of any company
having less than three years' continuous operation (including operations of any
predecessors) if such purchase does not cause the value of its investments in
all such companies to exceed 5% of the value of its total assets; (ii) pledge,
hypothecate, mortgage or otherwise encumber its assets, but only to secure
permitted borrowings; and (iii) invest up to 15% of the value of its net assets
in repurchase agreements providing for settlement in more than seven days after
notice and in other illiquid securities. Although each LifePath Fund and
LifePath Master Portfolio reserves the right to invest up to 15% of the value of
its net assets in illiquid securities, including repurchase agreements providing
for settlement in more than seven days after notice, as long as such Fund's
shares are registered for sale in a state that imposes a lower limit on the
percentage of a fund's assets that may be so invested, such LifePath Fund and
LifePath Master Portfolio will comply with the lower limit. Each LifePath Fund
currently is limited to investing up to 10% of the value of its net assets in
such securities due to limits applicable in several states. See "Investment
Objectives and Management Policies -- Investment Restrictions" in the Statement
of Additional Information.
RISK CONSIDERATIONS
GENERAL -- Since the investment characteristics and, therefore, investment
risks directly associated with such characteristics of each LifePath Fund
correspond to those of the Master Portfolio in which such Fund invests, the
following is a discussion of the risks associated with an investment in the
Master Portfolio.
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<PAGE> 25
The net asset value per share of each LifePath Fund is not fixed and should
be expected to fluctuate.
INVESTMENT TECHNIQUES -- Each LifePath Master Portfolio may engage in
various investment techniques the use of which involves greater risk than that
incurred by other funds with similar investment objectives. See
"Appendix -- Investment Techniques." Using these techniques may affect the
degree to which a LifePath Master Portfolio's net asset value fluctuates.
EQUITY SECURITIES -- Investors should be aware that equity securities
fluctuate in value, often based on factors unrelated to the value of the issuer
of the securities, and that fluctuations can be pronounced. Changes in the value
of a LifePath Master Portfolio's portfolio securities result in changes in the
value of such LifePath Master Portfolio's shares and thus the LifePath Master
Portfolio's performance.
The securities of the smaller companies in which each LifePath Master
Portfolio may invest may be subject to more abrupt or erratic market movements
than larger, more-established companies, both because the securities typically
are traded in lower volume and because the issuers typically are subject to a
greater degree of changes in earnings and prospects.
FIXED-INCOME SECURITIES -- Investors should be aware that even though
interest-bearing securities are investments which promise a stable stream of
income, the prices of such securities are inversely affected by changes in
interest rates and, therefore, are subject to the risk of market price
fluctuations. Long-term securities are affected to a greater extent by interest
rates than shorter-term securities. The values of fixed-income securities also
may be affected by changes in the credit rating or financial condition of the
issuing entities. Once the rating of a portfolio security has been changed to a
rating below investment grade, the particular LifePath Master Portfolio
considers all circumstances deemed relevant in determining whether to continue
to hold the security. Certain securities that may be purchased by the LifePath
Master Portfolio, such as those rated "Baa" by Moody's and "BBB" by S&P, Fitch
and Duff, may be subject to such risk with respect to the issuing entity and to
greater market fluctuations than certain lower yielding, higher rated
fixed-income securities. Securities which are rated "Baa" by Moody's are
considered medium-grade obligations; they are neither highly protected nor
poorly secured, and are considered by Moody's to have speculative
characteristics. Securities rated "BBB" by S&P are regarded as having adequate
capacity to pay interest and repay principal, and, while such debt securities
ordinarily exhibit adequate protection parameters, adverse economic conditions
or changing
17
<PAGE> 26
circumstances are more likely to lead to a weakened capacity to pay interest and
repay principal for securities in this category than in higher rated categories.
Securities rated "BBB" by Fitch are considered investment grade and of
satisfactory credit quality; however, adverse changes in economic conditions and
circumstances are more likely to have an adverse impact on these securities and,
therefore, impair timely payment. Securities rated "BBB" by Duff have below
average protection factors but nonetheless are considered sufficient for prudent
investment. If a security held by a LifePath Master Portfolio is downgraded to a
rating below investment grade, such Master Portfolio may continue to hold the
security until such time as BGFA determines it to be advantageous for the
LifePath Master Portfolio to sell the security. If such a policy would cause a
LifePath Master Portfolio to have 5% or more of its net assets invested in
securities that have been downgraded below investment grade, the Master
Portfolio promptly would seek to dispose of such securities in an orderly
manner. See "Appendix -- Portfolio Securities -- Ratings" and "Appendix" in the
Statement of Additional Information.
FOREIGN SECURITIES -- Foreign securities markets generally are not as
developed or efficient as those in the United States. Securities of some foreign
issuers are less liquid and more volatile than securities of comparable U.S.
issuers. Similarly, volume and liquidity in most foreign securities markets are
less than in the United States, and, at times, price volatility can be greater
than in the United States. In addition, there may be less publicly available
information about a non-U.S. issuer, and non-U.S. issuers generally are not
subject to uniform accounting and financial reporting standards, practices and
requirements comparable to those applicable to U.S. issuers. See
"Appendix -- Portfolio Securities -- Bank Obligations."
Because evidences of ownership of such securities usually are held outside
the United States, each Master Portfolio will be subject to additional risks
which include possible adverse political and economic developments, possible
seizure or nationalization of foreign deposits and possible adoption of
governmental restrictions which might adversely affect the payment of principal
and interest on the foreign securities or might restrict the payment of
principal and interest to investors located outside the country of the issuers,
whether from currency blockage or otherwise. Custodial expenses for a portfolio
of non-U.S. securities generally are higher than for a portfolio of U.S.
securities.
Since the LifePath Master Portfolios may purchase foreign securities in
currencies of foreign countries, the value of these assets as measured in U.S.
dollars may be affected favorably or unfavorably by changes in
18
<PAGE> 27
currency rates and exchange control regulations. Some currency exchange costs
generally are incurred when a LifePath Master Portfolio changes investments from
one country to another.
Furthermore, some of these securities may be subject to brokerage or stamp
taxes levied by foreign governments, which have the effect of increasing the
cost of such investment and reducing the realized gain or increasing the
realized loss on such securities at the time of sale. Income received by a
Master Portfolio from sources within foreign countries may be reduced by
withholding and other taxes imposed by such countries. Tax conventions between
certain countries and the United States, however, may reduce or eliminate such
taxes. All such taxes paid by a Master Portfolio reduce the net income available
to its corresponding Fund for distribution to the Fund's shareholders.
FOREIGN CURRENCY EXCHANGE -- Currency exchange rates may fluctuate
significantly over short periods of time. They generally are determined by the
forces of supply and demand in the foreign exchange markets and the relative
merits of investments in different countries, actual or perceived changes in
interest rates and other complex factors, as seen from an international
perspective. Currency exchange rates also can be affected unpredictably by the
intervention of U.S. or foreign governments or central banks, or by the failure
to intervene, or by currency controls or political developments in the United
States or abroad. The LifePath Master Portfolios intend to engage in foreign
currency transactions to maintain the same foreign currency exposure as the
relevant foreign securities index through which the Master Portfolios seek
foreign equity market exposure, but not as part of a defensive strategy to
protect against fluctuations in exchange rates.
Foreign currency transactions may occur on a spot (i.e., cash) basis at the
rate prevailing in the currency exchange market or on a forward basis. A forward
currency exchange contract involves an obligation to purchase or sell a specific
currency at a set price on a future date which must be more than two days from
the date of the contract. The forward foreign currency market offers less
protection against default than is available when trading currencies on an
exchange, since a forward currency contract is not guaranteed by an exchange or
clearinghouse. Therefore, a default on a forward currency contract could deprive
a LifePath Master Portfolio of unrealized profits or force such Master Portfolio
to cover its commitments for purchase or resale, if any, at the current market
price.
Foreign Futures Transactions -- Unlike trading on domestic futures
exchanges, trading on foreign futures exchanges is not regulated by the
Commodity Futures Trading Commission (the "CFTC") and generally is
19
<PAGE> 28
subject to greater risks than trading on domestic exchanges. For example, some
foreign exchanges are principal markets so that no common clearing facility
exists and an investor may look only to the broker for performance of the
contract. BGFA, however, considers on an ongoing basis the creditworthiness of
such counterparties. In addition, any profits that a LifePath Master Portfolio
might realize in trading could be eliminated by adverse changes in the exchange
rate; adverse exchange rate changes also could cause a Master Portfolio to incur
losses. Transactions on foreign exchanges may include both futures contracts
which are traded on domestic exchanges and those which are not. Such
transactions may also be subject to withholding and other taxes imposed by
foreign governments.
Other Investment Considerations -- Asset allocation and modeling strategies
are employed by BGFA for other investment companies and accounts advised or
sub-advised by BGFA. If these strategies indicate particular securities should
be purchased or sold, at the same time, by a LifePath Master Portfolio and one
or more of these investment companies or accounts, available investments or
opportunities for sales will be allocated equitably to each by BGFA. In some
cases, this procedure may adversely affect the size of the position obtained for
or disposed of by a LifePath Master Portfolio or the price paid or received by
such LifePath Master Portfolio.
Under normal market conditions, the portfolio turnover rate for each
LifePath Master Portfolio is not expected to exceed 100%. A portfolio turnover
rate of 100% would occur, for example, if all of a LifePath Master Portfolio's
securities were replaced within one year. Higher portfolio turnover rates are
likely to result in comparatively greater brokerage commissions. In addition,
short-term gains realized from portfolio transactions are taxable to
shareholders as ordinary income. Portfolio turnover will not be a limiting
factor in making investment decisions.
PERFORMANCE
For purposes of advertising, performance of the LifePath Funds may be
calculated on the basis of average annual total return and/or cumulative total
return of shares. Average annual total return of shares is calculated pursuant
to a standardized formula which assumes that an investment in shares of a Fund
was purchased with an initial payment of $1,000 and that the investment was
redeemed at the end of a stated period of time, after giving effect to the
reinvestment of dividends and distributions during the period. The return of
shares is expressed as a percentage rate which, if applied on a compounded
annual basis, would result in the redeemable value of the investment in shares
at the end of the period. Advertisements
20
<PAGE> 29
of the performance of shares of a LifePath Fund include the Fund's average
annual total return of shares for one, five and ten year periods, or for shorter
time periods depending upon the length of time during which such Fund has
operated.
Cumulative total return of shares is computed on a per share basis and
assumes the reinvestment of dividends and distributions. Cumulative total return
of shares generally is expressed as a percentage rate which is calculated by
combining the income and principal changes for a specified period and dividing
by the net asset value per share at the beginning of the period. Advertisements
may include the percentage rate of total return of shares or may include the
value of a hypothetical investment in shares at the end of the period which
assumes the application of the percentage rate of total return.
Performance may vary from time to time, and past results are not
necessarily representative of future results. Investors should remember that
performance is a function of the type and quality of portfolio securities held
by the Master Portfolio in which the Fund invests and is affected by operating
expenses. Performance information, such as that described above, may not provide
a basis for comparison with other investments or other investment companies
using a different method of calculating performance.
Additional information about the performance of each Fund will be contained
in the Annual Report for each Fund. The Annual Reports may be obtained by
calling the Company at 1-800-776-0179.
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<PAGE> 30
MANAGEMENT OF THE FUNDS
GENERAL -- The Company has not retained the services of an investment
adviser because each Fund's assets are invested in a Master Portfolio that has
retained investment advisory services (see "Master Portfolio Investment Adviser"
below). Each LifePath Fund bears a pro rata portion of the fees paid by the
corresponding Master Portfolio.
BOARD OF DIRECTORS -- The business and affairs of the Company are managed
under the direction of its Board of Directors and in conformity with Maryland
Law. The Company's Directors are also MIP's Trustees. The Company's Directors
also serve as the Trustees of Stagecoach Trust, another open-end investment
company whose LifePath Fund series are wholly invested in the Master Portfolios.
The Company's Board, including a majority of the Directors who are not
"interested persons" (as that term is defined in the 1940 Act) of the Company,
has adopted procedures to address potential conflicts of interest that may arise
as a result of the structure of the Boards. Additional information regarding the
Officers and Directors of the Company and the Officers and Trustees of MIP is
included in the SAI under "Management."
MASTER PORTFOLIO INVESTMENT ADVISER -- BGFA serves as investment adviser to
each of the LifePath 2000, LifePath 2010, LifePath 2020, LifePath 2030 and
LifePath 2040 Master Portfolios of MIP. Pursuant to an Investment Advisory
Contract with each Master Portfolio, BGFA provides investment guidance and
policy direction in connection with the management of each Master Portfolio's
assets, subject to the overall authority of MIP's Board of Trustees and in
conformity with Delaware law and the stated policies of such Master Portfolio.
BGFA was created by the reorganization of Wells Fargo Nikko Investment Advisors
("WFNIA"), the former sub-adviser to each Master Portfolio, with and into an
affiliate of Wells Fargo Institutional Trust Company, N.A. ("WFITC"). BGFA is an
indirect subsidiary of Barclays Bank PLC and is located at 45 Fremont Street,
San Francisco, California 94105. As of March 31, 1996, BGFA and its affiliates
provided investment advisory services for over $284 billion of assets. MIP has
agreed to pay to BGFA a monthly fee at the annual rate of 0.55% of each LifePath
Master Portfolio's average daily net assets as compensation for its advisory
services. For the period beginning January 1, 1996 and ended February 29, 1996,
MIP, on behalf of each Master Portfolio, actually paid BGFA an amount equal to
0.55% of each Master Portfolio's average daily net assets as compensation for
its advisory services.
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Prior to January 1, 1996, Wells Fargo Bank N.A. ("Wells Fargo Bank"), a
wholly owned subsidiary of Wells Fargo & Company located at 420 Montgomery
Street, San Francisco, California 94105, served as each Master Portfolio's
investment adviser. Pursuant to an Investment Advisory Agreement with MIP, Wells
Fargo Bank provided investment guidance and policy direction in connection with
the management of each Master Portfolio's assets, subject to the supervision of
MIP's Board of Trustees and in conformity with Delaware law and the stated
policies of such Master Portfolio. Wells Fargo Bank was entitled to receive a
monthly fee at the annual rate of 0.55% of each LifePath Master Portfolio's
average daily net assets as compensation for its advisory services. For the
period beginning March 1, 1995 and ended December 31, 1995, MIP, on behalf of
each Master Portfolio, actually paid an amount equal to 0.55% of each such
Master Portfolio's average daily net assets to Wells Fargo Bank for advisory
services.
Prior to January 1, 1996, Wells Fargo Bank engaged WFNIA, located at 45
Fremont Street, San Francisco, California 94105, to provide sub-investment
advisory services to each Master Portfolio. WFNIA was a general partnership
owned 50% by a wholly owned subsidiary of Wells Fargo Bank and 50% by a
subsidiary of The Nikko Securities Co., Ltd. Pursuant to a Sub-Investment
Advisory Agreement, WFNIA, subject to the supervision and approval of Wells
Fargo Bank, provided investment advisory assistance and the day-to-day
management of each Master Portfolio's assets. WFNIA was entitled to receive from
Wells Fargo Bank a monthly fee at the annual rate of 0.40% of each LifePath
Master Portfolio's average daily net assets for its sub-advisory services. For
the period beginning March 1, 1995 and ended December 31, 1995, Wells Fargo Bank
actually paid WFNIA an amount equal to 0.40% of the average daily net assets of
each LifePath Master Portfolio. The LifePath Master Portfolios no longer retain
a sub-investment adviser.
BGFA, Barclays and their affiliates deal, trade and invest for their own
account in the types of securities in which a Master Portfolio may invest and
may have deposit, loan and commercial banking relationships with the issuers of
securities purchased by a Master Portfolio. BGFA has informed MIP that in making
investment decisions the Adviser does not obtain or use material inside
information in its possession.
Morrison & Foerster LLP, counsel to the Company and MIP and special counsel
to BGFA, has advised the Company, MIP and BGFA that BGFA and its affiliates may
perform the services contemplated by the Investment Advisory Contracts and this
prospectus without violation of the Glass-Stegall Act. Such counsel has pointed
out, however, that there
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are no controlling judicial or administrative interpretations of, or decisions
related to, present federal or state statutes, including the Glass-Stegall Act,
and relating to the permissible activities of banks and their subsidiaries and
affiliates, as well as future changes in such statutes, regulations and judicial
or administrative decisions or interpretations, could prevent such entities from
continuing to perform, in whole or in part, such services. If any such entity
were prohibited from performing any such services, it is expected that new
agreements would be proposed or entered into with another entity or entities
qualified to perform such services.
ADMINISTRATOR AND DISTRIBUTOR -- Stephens, located at 111 Center Street,
Little Rock, Arkansas 72201, serves as the Company's administrator pursuant to
an Administration Agreement with the Company. Under the Administration
Agreement, Stephens generally supervises all aspects of the operation of the
Company other than providing investment advice, subject to the overall authority
of the Board of Directors. The administrative services provided to the LifePath
Funds also include coordination of the other services provided to the LifePath
Funds, compilation of information for reports to the Securities and Exchange
Commission and state securities commissions, preparation of proxy statements and
shareholder reports, and general supervision of data compilation in connection
with preparing periodic reports to the Company's Board of Directors and
officers. Stephens also furnishes office space and certain facilities to conduct
the Company's business and compensates the Company's Directors, officers and
employees who are affiliated with Stephens. In addition, except as noted below,
Stephens has assumed all ordinary expenses incurred by a LifePath Fund other
than the fees payable by such Fund pursuant to the Company's various service
contracts. For providing administrative services to the Company, the Company has
agreed to pay Stephens a monthly fee at the annual rate of 0.10% of each
LifePath Fund's average daily net assets.
Stephens also serves as the Company's principal underwriter within the
meaning of the 1940 Act and as distributor of each Fund's shares pursuant to a
Distribution Agreement with the Company. The Distribution Agreement provides
that Stephens acts as agent for the Company for the sale of Fund shares and may
enter into Selling Agreements with Selling Agents that wish to make available
shares of the Funds to their respective customers.
Financial institutions acting as Selling Agents, Shareholder Servicing
Agents, or in certain other capacities may be required to register as dealers
pursuant to applicable state securities laws which may differ from federal law
and any interpretations expressed herein.
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Stephens is a full service broker/dealer and investment advisory firm.
Stephens and its predecessor have been providing securities and investment
services for more than 60 years, including discretionary portfolio management
services since 1983. Stephens currently manages investment portfolios for
pension and profit sharing plans, individual investors, foundations, insurance
companies and university endowments.
CUSTODIAN AND TRANSFER AGENT -- BZW Barclays Global Investors, N.A. ("BGI")
currently acts as custodian to each Fund and Master Portfolio. The principal
business address of BGI is 45 Fremont Street, San Francisco, California 94105.
BGI is not entitled to receive compensation for its custodial services so long
as BGFA is entitled to receive compensation for providing investment advisory
services to the LifePath Master Portfolios. BGI was formerly known as Wells
Fargo Institutional Trust Company, N.A. ("WFITC") and is a subsidiary of BZW
Barclays Global Investors Holdings Inc.
Prior to January 1, 1996, WFITC served as custodian of each Master
Portfolio. WFITC, which was previously a wholly owned subsidiary of WFNIA, was
located at 45 Fremont Street, San Francisco, California 94105.
Wells Fargo Bank serves as the Company's and MIP's transfer and dividend
disbursing agent (the "Transfer Agent"). The Company has agreed to pay Wells
Fargo Bank, which provides transfer agency services at 525 Market Street, San
Francisco, California 94105, a monthly fee at the annual rate of 0.10% of each
Fund's average daily net assets for transfer agency services. MIP pays no
additional fee for transfer and dividend disbursing agency services.
SHAREHOLDER SERVICING PLAN -- The Company has adopted a Shareholder
Servicing Plan pursuant to which it may enter into Shareholder Servicing
Agreements with certain financial institutions, securities dealers and other
industry professionals (collectively, "Shareholder Servicing Agents") for the
provision of certain services to Fund shareholders. The services provided may
include personal services relating to shareholder accounts, such as answering
shareholder inquiries regarding the Funds, providing reports and other
information, and providing services related to the maintenance of shareholder
accounts. For the services provided pursuant to a Shareholder Servicing
Agreement, the Company may pay each Shareholder Servicing Agent a monthly fee at
the annual rate of up to 0.20% of the average daily value of each LifePath
Fund's shares beneficially owned by customers of the Shareholder Servicing
Agent. The fee payable for such services is intended to be a "service fee" as
defined in Article III,
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Section 26 of the National Association of Securities Dealers, Inc.'s Rules of
Fair Practice.
A Shareholder Servicing Agent also may impose certain conditions on its
customers, subject to the terms of this Prospectus, in addition to or different
from those imposed by the Company, such as requiring a minimum initial
investment or payment of a separate fee for additional services. Each
Shareholder Servicing Agent is required to agree to disclose any fees it may
directly charge its customers who are Fund shareholders and to notify them in
writing at least 30 days before it imposes any transaction fees.
MIP 12B-1 PLAN -- MIP's Board of Trustees has adopted, on behalf of each
Master Portfolio, a "defensive" distribution plan under Section 12(b) of the
1940 Act and Rule 12b-1 thereunder (the "Plan"). The Plan does not result in any
additional expenses being borne by a Master Portfolio or a Fund. The Plan was
adopted by a majority of MIP's Board of Trustees (including a majority of those
Trustees who are not "interested persons" of MIP as defined in the 1940 Act) on
October 10, 1995. The Plan was intended as a precaution designed to address the
possibility that certain ongoing payments by Barclays to Wells Fargo Bank in
connection with the sale of WFNIA may be characterized as indirect payments by
each Master Portfolio to finance activities primarily intended to result in the
sale of interests in such Master Portfolio. The Plan provides that if any
portion of a Master Portfolio's advisory fees (up to 0.25% of the average daily
net assets of each Master Portfolio on an annual basis) were deemed to
constitute an indirect payment for activities that are primarily intended to
result in the sale of interests in a Master Portfolio, such payment would be
authorized pursuant to the Plan.
EXPENSES -- Under the Administration Agreement, Stephens has agreed to
assume the operating expenses of each LifePath Fund and a pro rata share of the
operating expenses of each LifePath Master Portfolio, except for extraordinary
expenses and those fees and expenses payable pursuant to the various service
contracts described above which are borne by the Company and those expenses
specifically assumed by the Adviser under its contracts with the Funds. The
initial term of the Administration Agreement extends to October 25, 1996;
thereafter it continues for successive one-year periods, subject to approval by
the Company's Board of Directors.
Stephens has not assumed the following operating expenses of the LifePath
Master Portfolios: advisory fees, interest, brokerage fees, 12b-1 fees and
commissions, if any, costs of independent pricing services and any extraordinary
expenses.
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Stephens has not assumed the following operating expenses of the LifePath
Funds: administration fees, Shareholder Servicing Agent fees, Transfer Agent
fees and expenses and any extraordinary expenses.
HOW TO BUY SHARES
WHO MAY INVEST -- Only the following types of investors are eligible to
invest in the Funds:
- Participants in Benefit Plans ("Plan Participants"), including retirement
plans, that have appointed one of the Company's Shareholder Servicing
Agents as plan trustee, plan administrator or other agent, or whose plan
trustee, plan administrator or other agent has a servicing arrangement
with a Shareholder Servicing Agent that permits investments in the Funds,
and Plan Participants who invest pursuant to an agreement between such a
Benefit Plan and a Shareholder Servicing Agent.
- Individuals using proceeds which are being rolled over directly from a
qualified Benefit Plan to an Individual Retirement Account ("IRA")
pursuant to arrangements between the sponsor or other agent of the
qualified Benefit Plan and a Shareholder Servicing Agent.
- Foundations, corporations and other business entities that have a
servicing arrangement with one of the Company's Shareholder Servicing
Agents that permits investments in the Funds and persons who invest
pursuant to an agreement between such an entity and a Shareholder
Servicing Agent.
- Individuals, other than those described above, who invest at least $1
million in a Fund pursuant to an account arrangement with a Shareholder
Servicing Agent ("Qualified Buyers").
Eligible Investors may purchase Fund shares in one of the several ways
described below. For more information or additional forms, call 1-800-776-0179.
The Company or Stephens may make the Prospectus available in an electronic
format. Upon receipt of a request by an investor or the investor's
representative, the Company or Stephens will transmit or cause to be transmitted
promptly, without charge, a paper copy of the electronic Prospectus.
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MINIMUM INVESTMENT AMOUNT
In most cases, investors in Fund shares are not required to establish or
maintain a minimum investment amount. However, Qualified Buyers are required to
make an initial investment in Fund shares of at least $1 million (although this
requirement may be waived under certain conditions). All investments in a Fund's
shares are subject to a determination by the Company that the investment
instructions are complete. If shares are purchased by a check which does not
clear, the Company reserves the right to cancel the purchase and hold the
investor responsible for any losses or fees incurred. The Company reserves the
right in its sole discretion to suspend the availability of any Fund's shares
and to reject any purchase requests. Certificates for Fund shares are not
issued. Shareholder Servicing Agents may establish investment amount and account
balance requirements different from those of the Funds and may charge fees in
addition to those charged by the Fund.
GENERAL
Shares of each Fund may be purchased on any day the New York Stock Exchange
("NYSE") is open for business (a "Business Day") at the net asset value per
share next determined after an order in proper form is received by the Transfer
Agent. Purchase orders that are received by the Transfer Agent before the close
of regular trading on the NYSE are executed on the same day. Orders received by
the Transfer Agent after the close of regular trading on the NYSE are executed
on the next Business Day. The investor's Shareholder Servicing Agent is
responsible for the prompt transmission of the investor's purchase order to the
Transfer Agent on the investor's behalf. Under certain circumstances, a
Shareholder Servicing Agent may establish an earlier deadline for receipt of
orders or an investor's order transmitted to a Shareholder Servicing Agent may
not be received by the Transfer Agent on the same day.
Federal regulations require that an investor provide a valid taxpayer
identification number ("TIN"), which is usually the investor's social security
number or employer identification number, upon opening or reopening an account.
See "Dividends, Distributions and Taxes" for further information concerning this
requirement. Failure to furnish a social security number or a certified TIN to
the Company could subject the investor to penalties imposed by the IRS.
BENEFIT PLANS
Shares of each Fund are offered to Benefit Plans that have appointed one of
the Company's Shareholder Servicing Agents as plan trustee, plan
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administrator or other agent, or whose plan trustee, plan administrator or other
agent has a servicing arrangement with a Shareholder Servicing Agent that
permits investments in the Funds. Benefit Plans include 401(k) plans and other
plans qualified under Section 401(a) of the Internal Revenue Code of 1986, as
amended (the "Code"), health and welfare plans and executive deferred
compensation plans. For additional information about Benefit Plans that may be
eligible to invest in Fund shares, prospective investors should contact a
Shareholder Servicing Agent.
Fund investments by participants in 401(k) plans are typically made by
payroll deductions arranged between participants and their employers.
Participants in the MasterWorks program are included in this group. Participants
also may make direct contributions to their accounts in special circumstances
such as the transfer of a rollover amount from another 401(k) plan or from a
rollover IRA. Investors should contact their employer's benefits department for
more information about contribution methods.
Plan Participants who have established an account with a Shareholder
Servicing Agent may purchase Fund shares in accordance with their account
arrangements with such Shareholder Servicing Agent. The Shareholder Servicing
Agent is responsible for the prompt transmission of purchase orders. Shareholder
Servicing Agents may charge additional fees for maintaining customer accounts
other than those charged by the Funds.
IRAS, KEOGHS AND OTHER INDIVIDUAL RETIREMENT PLANS
An investor may be entitled to invest in a Fund's shares through a tax-
deferred retirement plan. In addition to offering investments through IRA
rollovers, a Shareholder Servicing Agent may offer other types of tax-deferred
or tax-advantaged plans, including a Keogh retirement plan for self-employed
professional persons, sole proprietors and partnerships. Investors should
contact a Shareholder Servicing Agent for materials describing available plans
and their benefits, provisions and fees.
Application materials for opening an IRA rollover, Keogh plan or other
individual retirement plan can be obtained from a Shareholder Servicing Agent.
Completed retirement plan applications should be returned to the investor's
Shareholder Servicing Agent for approval and processing. If an investor's
retirement plan application is incomplete or improperly filled out, there may be
a delay before the Fund account is opened.
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PURCHASES BY QUALIFIED BUYERS AND ELIGIBLE INDIVIDUAL AND
CORPORATE INVESTORS
Qualified Buyers and eligible individual or corporate investors may open a
Fund account through a Shareholder Servicing Agent with whom they have an
existing account arrangement. An Account Application must be completed to open a
Fund account. Account Applications may be obtained by contacting a Shareholder
Servicing Agent or by calling 1-800-776-0179. Shareholder Servicing Agents may
transmit purchase orders to the Transfer Agent on behalf of investors, including
purchase orders for which payment is to be made by wire or by transfer from an
Approved Bank designated in an investor's Account Application ("Approved Bank
Account").
Qualified Buyers and eligible individual or corporate investors may
purchase Fund shares by wire by instructing the wiring bank to transmit the
specified amount in federal funds to:
Wells Fargo Bank, N.A.
San Francisco, California
Bank Routing Number: 121000248
Wire Purchase Account Number: 4068-000587
Attention: MasterWorks Funds Inc. (Name of Fund)
Account Name(s): (name(s) in which to be registered)
Account Number: (if investing into an existing account)
Share purchases are effected at the net asset value next determined after
the Account Application is received and accepted. The Shareholder Servicing
Agent is responsible for the prompt transmission of purchase orders to the
Transfer Agent.
Additional Purchases
A Qualified Buyer or other eligible individual or corporate investor may
make additional purchases by contacting their Shareholder Servicing Agent or by
instructing the Fund's Transfer Agent to debit an Approved Bank Account by wire
by using the procedures described under "Initial Purchases by Wire" above.
HOW TO REDEEM SHARES
GENERAL
Investors may redeem all or a portion of their shares on any Business Day
without any charge by the Company. The redemption price of the shares is the
next determined net asset value of shares of the relevant Fund calculated after
the Company has received a redemption request in proper form. Redemption
proceeds may be more or less than the amount invested
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depending on the relevant Fund's net asset value of shares at the time of
purchase and redemption. The redemption of Fund shares is ordinarily treated as
a sale or exchange for federal income tax purposes and, therefore, a redeeming
shareholder may recognize a taxable gain or loss.
The Company remits redemption proceeds from a Fund within seven days after
a redemption order is received in proper form, absent extraordinary
circumstances. Such extraordinary circumstances could include a period during
which an emergency exists as a result of which (a) disposal by the Master
Portfolio in which such Fund invests of securities owned by the Master Portfolio
is not reasonably practicable or (b) it is not reasonably practicable for the
Fund or the relevant Master Portfolio fairly to determine the value of its net
assets, or a period during which the SEC by order permits deferral of
redemptions for the protection of Fund shareholders. In addition, the Company
may defer payment of a shareholder's redemption until reasonably satisfied that
such shareholder's investments made by check have been collected (which can take
up to ten days from the purchase date). Payment of redemption proceeds may be
made in portfolio securities, subject to regulation by some state securities
commissions.
Telephone redemption or exchange privileges are made available to
shareholders automatically upon opening an account, unless the shareholder
specifically declines the privileges. These privileges authorize the Transfer
Agent to act on telephone instructions from any person representing himself or
herself to be the investor and reasonably believed by the Transfer Agent to be
genuine. The Company requires the Transfer Agent to employ reasonable
procedures, such as requiring a form of personal identification, to confirm that
instructions are genuine and, if it does not follow such procedures, the Company
or the Transfer Agent may be liable for any losses due to unauthorized or
fraudulent instructions. Neither the Company nor the Transfer Agent will be
liable for following telephone instructions reasonably believed to be genuine.
During times of drastic economic or market conditions investors may
experience difficulty in contacting the Transfer Agent by telephone to request a
redemption or exchange of Fund shares. In such cases, investors should consider
using the other redemption procedures made available to such investors. Use of
these other redemption procedures may result in the investor's redemption
request being processed at a later time than it would have been if telephone
redemption had been used. During the delay, a LifePath Fund's net asset value
may fluctuate.
Redemption orders that are received by the Transfer Agent before the close
of trading on the NYSE generally are executed at the net asset value determined
as of the close of regular trading on the NYSE on that day.
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Redemption orders that are received by the Transfer Agent after the close of
trading on the NYSE are executed on the next Business Day. The investor's
Shareholder Servicing Agent is responsible for the prompt transmission of
redemption orders to the Fund on the investor's behalf. Under certain
circumstances, a Shareholder Servicing Agent may establish an earlier deadline
for receipt of orders or an investor's order transmitted to a Shareholder
Servicing Agent may not be received by the Transfer Agent on the same day.
Unless the investor has made other arrangements with the Shareholder
Servicing Agent and the Transfer Agent has been informed of such arrangements,
proceeds of a redemption order made through the investor's Shareholder Servicing
Agent are credited to the investor's Approved Bank Account. If no such account
is designated, a check for the proceeds is mailed to the investor's address of
record or, if such address is no longer valid, the proceeds are credited to the
investor's account with the investor's Shareholder Servicing Agent.
BENEFIT PLANS, IRAS, KEOGHS AND OTHER INDIVIDUAL
RETIREMENT PLANS
Investors in these types of plans are subject to restrictions on
withdrawing their money under the Code. Each type of plan has established
withdrawal procedures that are disclosed to investors at the time of purchase.
Investors may obtain more information by contacting their employer and/or their
Shareholder Servicing Agent. The redemption procedures outlined in the remainder
of this section do not apply to investors in Benefit Plans or retirement plans.
Investors in these types of plans should contact their Shareholder Servicing
Agent regarding redemption procedures applicable to them.
REDEMPTIONS BY QUALIFIED BUYERS AND ELIGIBLE INDIVIDUAL AND
CORPORATE INVESTORS
Redemptions by Mail
1. Write a letter of instruction. Indicate the dollar amount or number of
Fund shares to be redeemed, the Fund account number and TIN (where applicable).
2. Sign the letter in exactly the same way the account is registered. If
there is more than one owner of the shares, all owners must sign.
Unless other instructions are given in proper form, a check for the
redemption proceeds is sent to the investor's address of record.
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Expedited Redemptions by Letter and Telephone
An individual or corporate investor may request an expedited redemption of
Fund shares by letter, in which case the investor's receipt of redemption
proceeds, but not the Fund's receipt of the investor's redemption request, would
be expedited. Telephone redemption or exchange privileges are made available to
an investor automatically upon the opening of an account unless the investor
declines the privilege. The investor also may request an expedited redemption of
Fund shares by telephone on any Business Day, in which case both the investor's
receipt of redemption proceeds and the Fund's receipt of the investor's
redemption request would be expedited.
Investors may request expedited redemption by telephone by calling the
Transfer Agent at 1-800-776-0179.
Investors may request expedited redemption by mailing an expedited
redemption request to the Transfer Agent at the mailing address set forth under
"How to Buy Shares -- Initial Purchases by Wire."
Upon request, proceeds of expedited redemptions are wired or credited to
the investor's Approved Bank Account designated in the Account Application. The
Company reserves the right to impose a charge for wiring redemption proceeds.
When proceeds of an investor's expedited redemption are to be paid to someone
else, to an address other than that of record, or to an account with an approved
bank that the investor has not predesignated in the Account Application, the
expedited redemption request must be made by letter and the signature(s) on the
letter must be guaranteed, regardless of the amount of the redemption. If the
individual or corporate investor's expedited redemption request is received by
the Transfer Agent on a Business Day, the investor's redemption proceeds are
transmitted to the investor's Approved Bank Account on the next Business Day
(assuming the investor's investment check has cleared as described above),
absent extraordinary circumstances. Such extraordinary circumstances could
include those described above as potentially delaying redemptions, and also
could include situations involving an unusually heavy volume of wire transfer
orders on a national or regional basis or communication or transmittal delays
that could cause a brief delay in the wiring or crediting of funds.
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EXCHANGE PRIVILEGE
The exchange privilege enables an investor to purchase, in exchange for
shares of a Fund, shares of another fund offered by the Company in the
investor's state of residence. Before undertaking an exchange into another fund,
investors should obtain and review a copy of the current prospectus of the fund
into which the exchange is being made. A prospectus may be obtained by calling
MasterWorks Funds at 1-800-776-0179.
Shares are exchanged at the next determined net asset value. No fees are
currently charged to shareholders directly in connection with exchanges,
although the Company reserves the right, upon not less than 60 days' written
notice, to charge shareholders a nominal exchange fee in accordance with rules
promulgated by the SEC. The Company reserves the right to limit the number of
times shares may be exchanged and to reject in whole or in part any exchange
request into a Fund when management believes that such action would be in the
best interests of such Fund's other shareholders, such as when management
believes such action would be appropriate to protect the Funds against
disruptions in portfolio management resulting from frequent transactions by
those seeking to time market fluctuations. Any such rejection is made by
management on a prospective basis only, upon notice to the shareholder given not
later than 10 days following such shareholder's most recent exchange. The
exchange privilege may be modified or terminated at any time upon 60 days'
written notice to shareholders.
The exchange of shares of one Fund's for shares of another is treated for
federal income tax purposes as a sale of the shares relinquished in the exchange
by the shareholder and, therefore, an exchanging shareholder may recognize a
taxable gain or loss.
SHARE VALUE
The value of a share of each Fund is its "net asset value," or NAV. NAV is
computed by adding the value of the Fund's portfolio investments (i.e., the
value of its investments in the Master Portfolio) plus cash and other assets,
deducting liabilities (including the fees payable to the various service
providers) and then dividing the result by the number of Fund shares
outstanding. Each Fund's NAV is expected to fluctuate daily.
The Funds are open for business each Business Day, which is a day on which
the NYSE is open for trading. Currently, the weekdays on which the NYSE is
closed are: New Year's Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day. Each Fund's NAV
is calculated each Business Day as of the
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close of regular trading on the NYSE (currently 4:00 p.m., Eastern Standard
Time).
Each Fund's investments in the corresponding Master Portfolio is valued at
the NAV of the Master Portfolio's shares. Each Master Portfolio calculates the
NAV of its shares on the same days and at the same time as the corresponding
Fund. Except for debt obligations with remaining maturities of 60 days or less,
which are valued at amortized cost, each Master Portfolio's other assets are
valued at current market prices, or if such prices are not readily available, at
fair value as determined in good faith in accordance with guidelines approved by
the Master Trust's Board of Trustees. Prices used for such valuations may be
provided by independent pricing services. For further information regarding the
methods employed in valuing the Master Portfolios' investments, see
"Determination of Net Asset Value" in the SAI.
DIVIDENDS AND DISTRIBUTIONS
The Funds declare and pay quarterly dividends of substantially all of their
net investment income. The Funds distribute any net realized capital gains at
least annually. All dividends and distributions are automatically reinvested at
net asset value in shares of the Fund paying such dividend or distribution,
unless payment in cash is requested and your arrangement with a Shareholder
Servicing Agent permits the processing of cash payments. Each reinvestment
increases the total number of shares held by a shareholder.
Dividends and capital gain distributions have the effect of reducing the
NAV per share by the amount distributed on the payment date. Although a dividend
or distribution paid to an investor on newly issued shares shortly after
purchase would represent, in substance, a return of capital, the dividend or
distribution may consist of net investment income or net realized capital gain
and, accordingly, would be taxable to the investor.
FEDERAL INCOME TAX INFORMATION
GENERAL
Each Fund intends to qualify as a regulated investment company under
Subchapter M of the Code as long as such qualification is in the best interest
of the Fund's shareholders. The Funds will be treated as separate entities for
federal income tax purposes and thus the provisions of the Code applicable to
regulated investment companies will be applied to the Funds and every other fund
separately, rather than to the Company as a whole. In
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addition, net capital gains, net investment income, and operating expenses will
be determined separately for each Fund. By complying with the applicable
provisions of the Code, each Fund will not be subject to federal income tax with
respect to its net investment income and net realized capital gains distributed
to its shareholders.
Each Fund seeks to qualify as a regulated investment company by investing
all of its assets in the corresponding Master Portfolio. Each Master Portfolio
will be treated as a non-publicly traded partnership rather than as a regulated
investment company or a corporation under the Code, and as such, shall not be
subject to federal income tax. As a non-publicly traded partnership, any
interest, dividends, gains and losses of each Master Portfolio are deemed to be
"passed through" to its corresponding Fund in proportion to that Fund's
ownership interest in the Master Portfolio. If a Master Portfolio were to accrue
but not distribute any interest, dividends or gains, its corresponding Fund
would be deemed to have realized and recognized its allocable share of such
income, regardless of whether or not such income has been distributed by the
Master Portfolio. However, each Master Portfolio seeks to minimize recognition
by a Fund and other investors of interest, dividends or gains without a
corresponding distribution.
The Company may be required to withhold, subject to certain exemptions, at
a rate of 31% ("backup withholding") on dividends, capital gain distributions,
and redemption proceeds (including proceeds from exchanges) paid or credited to
an individual Fund shareholder, unless a shareholder certifies that the TIN
provided is correct and that the shareholder is not subject to backup
withholding, or the IRS notifies the Company that the shareholder's TIN is
incorrect or the shareholder is subject to backup withholding. Such tax withheld
does not constitute an additional tax imposed on the shareholder, and may be
claimed as a tax payment on the shareholder's federal income tax return.
TAXABLE INVESTORS
The Funds intend to distribute all of their net investment income and net
realized capital gains (if any) each taxable year. Distributions from net
investment income (including net short-term capital gains and excluding net
tax-exempt income) will be taxable as ordinary income to shareholders who are
not currently exempt from federal income taxes. Whether a shareholder takes
dividend payments and capital gain distributions in cash or has them
automatically reinvested in Fund shares, the shareholder will ordinarily be
taxed. Corporate shareholders of the Funds will be eligible for the
dividends-received deduction on the dividends paid by the Funds to the
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extent the Funds' income is derived from certain dividends received from
domestic corporations, as long as the corporate shareholder holds the Fund
shares upon which the eligible dividend was paid for at least 46 days.
The Funds, or the Transfer Agent on their behalf, will regularly inform
shareholders of the amount and nature of the Funds' dividends and capital gain
distributions. Investors should keep all statements they receive to assist in
recordkeeping.
BENEFIT PLAN INVESTORS
As a general matter, benefit plans, their sponsors and their participants
are not subject to federal income taxes at the time of receipt of net investment
income and capital gain distributions.
However, such tax-exempt investors may be subject to tax on certain
unrelated taxable income which could arise, for example, when such investors
acquire shares in the Fund through the use of leverage. Tax-exempt investors
should consult their tax advisors regarding the Unrelated Business Taxable
Income Rules.
The foregoing is a brief discussion of certain federal income tax
considerations. Further information is contained in the SAI. All investors
should consult their individual tax advisors with respect to their particular
tax situations as well as the state and local tax status of investments in
shares of the Funds.
GENERAL INFORMATION
DESCRIPTION OF THE COMPANY
Each Fund is a series of the Company. The Company was organized as a
Maryland corporation on October 15, 1992, and currently offers the following
series: the Asset Allocation, Bond Index, Growth Stock, Money Market,
Short-Intermediate Term, S&P 500 Stock, U.S. Treasury Allocation, LifePath 2000,
LifePath 2010, LifePath 2020, LifePath 2030 and LifePath 2040 Funds. All of the
Company's existing series, except the Money Market Fund, are feeder funds in
master/feeder structures. Each LifePath Fund of the Company offers one class of
shares and each share has one vote. The Company's principal office is located at
111 Center Street, Little Rock, Arkansas 72201.
The Board of Directors of the Company supervises the Funds' activities and
monitors the Funds' contractual arrangements with various service providers.
Additional information about the Directors and officers of the
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Company is included in the Funds' SAI under "Management." A Fund may withdraw
its investment in a Master Portfolio only if the Board of Directors of the
Company determines that it is in the best interests of the Fund and its
shareholders to do so. Upon any such withdrawal, the Board of Directors of the
Company would consider what action might be taken, including the investment of
all the assets of the Fund in another pooled investment entity having the same
investment objective as the Fund or the hiring of an investment adviser to
manage the Fund's assets in accordance with the investment policies described
above with respect to the Master Portfolio. Although the Company is not required
to hold regular annual shareholder meetings, occasional annual or special
meetings may be required for purposes such as electing or removing Directors,
approving advisory contracts and changing a Fund's investment objective or
fundamental investment policies.
BGFA has granted the Company a non-exclusive license to use the name
"LifePath." If the license agreement is terminated, the Company, at BGFA's
request, will cease using the "LifePath" name.
VOTING
All shares of the Company have equal voting rights and will be voted in the
aggregate, rather than by fund, unless otherwise required by law (such as when a
matter affects only one fund). Shareholders of the Funds are entitled to one
vote for each share owned and fractional votes for fractional shares owned.
Depending on the terms of a particular Benefit Plan and the matter being
submitted to a vote, a sponsor may request direction from individual
participants regarding a shareholder vote. In addition, whenever a Fund is
requested to vote on matters pertaining to a Master Portfolio, the Company will
hold a meeting of the Fund's shareholders and will cast its vote as instructed
by Fund shareholders. The directors of the Company will vote shares for which
they receive no voting instructions in the same proportion as the shares for
which they do receive voting instructions. A more detailed description of the
voting rights and attributes of the shares is contained in the "Capital Stock"
section of the SAI.
INDEPENDENT AUDITORS
KPMG Peat Marwick LLP, Three Embarcadero Center, San Francisco, California
94111, serves as independent auditors for the Company.
LEGAL COUNSEL
Morrison & Foerster LLP, 2000 Pennsylvania Avenue, N.W., Washington, D.C.
20006, serves as counsel to the Company.
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INFORMATION ON THE FUNDS
The Company provides annual and semi-annual reports to all shareholders.
The annual reports contain audited financial statements and other information
about the Funds including additional information on performance. Shareholders
may obtain a copy of the Company's most recent annual report without charge by
phoning 1-800-776-0179.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND IN THE
COMPANY'S OFFICIAL SALES LITERATURE IN CONNECTION WITH THE OFFER OF THE FUNDS'
SHARES AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER IN ANY STATE IN WHICH, OR TO ANY PERSON TO WHOM, SUCH
OFFERING MAY NOT LAWFULLY BE MADE.
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APPENDIX
PORTFOLIO SECURITIES
To the extent set forth in this Prospectus, each Fund through its
investment in the corresponding Master Portfolio may invest in the securities
described below.
U.S. GOVERNMENT OBLIGATIONS -- U.S. Government obligations include
securities issued or guaranteed as to principal and interest by the U.S.
Government and supported by the full faith and credit of the U.S. Treasury. U.S.
Treasury obligations differ mainly in the length of their maturity. Treasury
bills, the most frequently issued marketable government securities, have a
maturity of up to one year and are issued on a discount basis. U.S. Government
obligations also include securities issued or guaranteed by federal agencies or
instrumentalities, including government-sponsored enterprises. Some obligations
of agencies or instrumentalities of the U.S. Government are supported by the
full faith and credit of the United States or U.S. Treasury guarantees; others,
by the right of the issuer or guarantor to borrow from the U.S. Treasury; still
others by the discretionary authority of the U.S. Government to purchase certain
obligations of the agency or instrumentality; and others, only by the credit of
the agency or instrumentality issuing the obligation. In the case of obligations
not backed by the full faith and credit of the United States, the investor must
look principally to the agency or instrumentality issuing or guaranteeing the
obligation for ultimate repayment, which agency or instrumentality may be
privately owned. There can be no assurance that the U.S. Government would
provide financial support to its agencies or instrumentalities (including
government-sponsored agencies) where it is not obligated to do so. In addition,
U.S. Government obligations are subject to fluctuations in market value due to
fluctuations in market interest rates. As a general matter, the value of debt
instruments, including U.S. Government obligations, declines when market
interest rates increase and rises when market interest rates decrease. Certain
types of U.S. Government obligations are subject to fluctuations in yield or
value due to their structure or contract terms.
FOREIGN GOVERNMENT OBLIGATIONS; SECURITIES OF SUPRANATIONAL
ENTITIES -- Each Master Portfolio, through its investment in money market
instruments, may invest in obligations issued or guaranteed by one or more
foreign governments or any of their political subdivisions, agencies or
instrumentalities that are determined by the Adviser to be of comparable quality
to the other obligations in which such Master Portfolio may invest. Such
securities also include debt obligations of supranational entities.
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Supranational entities include international organizations designated or
supported by governmental entities to promote economic reconstruction or
development and international banking institutions and related government
agencies. Examples include the International Bank for Reconstruction and
Development (the World Bank), the European Coal and Steel Community, the Asian
Development Bank and the InterAmerican Development Bank. The percentage of a
Master Portfolio's assets invested in securities issued by foreign governments
varies depending on the relative yields of such securities, the economic and
financial markets of the countries in which the investments are made and the
interest rate climate of such countries.
BANK OBLIGATIONS -- Each Master Portfolio may invest in bank obligations,
including certificates of deposit, time deposits, bankers' acceptances and other
short-term obligations of domestic banks, foreign subsidiaries of domestic
banks, foreign branches of domestic banks, and domestic and foreign branches of
foreign banks, domestic savings and loan associations and other banking
institutions. With respect to such securities issued by foreign branches of
domestic banks, foreign subsidiaries of domestic banks, and domestic and foreign
branches of foreign banks, a Master Portfolio may be subject to additional
investment risks that are different in some respects from those incurred by a
fund which invests only in debt obligations of U.S. domestic issuers. Such risks
include possible future political and economic developments, the possible
imposition of foreign withholding taxes on interest income payable on the
securities, the possible establishment of exchange controls or the adoption of
other foreign governmental restrictions which might adversely affect the payment
of principal and interest on these securities and the possible seizure or
nationalization of foreign deposits.
Certificates of deposit are negotiable certificates evidencing the
obligation of a bank to repay funds deposited with it for a specified period of
time.
Time deposits are non-negotiable deposits maintained in a banking
institution for a specified period of time at a stated interest rate. Time
deposits which may be held by a Master Portfolio will not benefit from insurance
from the Bank Insurance Fund or the Savings Association Insurance Fund
administered by the FDIC.
Bankers' acceptances are credit instruments evidencing the obligation of a
bank to pay a draft drawn on it by a customer. These instruments reflect the
obligation both of the bank and of the drawer to pay the face amount of the
instrument upon maturity. The other short-term obligations
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may include uninsured, direct obligations, bearing fixed, floating or variable
interest rates.
COMMERCIAL PAPER AND OTHER SHORT-TERM CORPORATE OBLIGATIONS -- Each Master
Portfolio may invest in commercial paper, which consists of short-term,
unsecured promissory notes issued to finance short-term credit needs. The
commercial paper purchased by a LifePath Master Portfolio consists only of
direct obligations which, at the time of their purchase, are (a) rated not lower
than Prime-1 by Moody's, A-1 by S&P, F-1 by Fitch or Duff-1 by Duff, (b) issued
by companies having an outstanding unsecured debt issue currently rated not
lower than Aa3 by Moody's or AA- by S&P, Fitch or Duff, or (c) if unrated,
determined by BGFA to be of comparable quality to those rated obligations which
may be purchased by such Master Portfolio.
REPURCHASE AGREEMENTS -- Each Master Portfolio may enter into repurchase
agreements wherein the seller of a security to a Master Portfolio agrees to
repurchase that security from such Master Portfolio at a mutually agreed-upon
time and price. MIP's custodian will have custody of, and will hold in a
segregated account, securities acquired by a Master Portfolio under a repurchase
agreement. Repurchase agreements are considered by the staff of the Securities
and Exchange Commission to be loans by the Master Portfolio entering into them.
In an attempt to reduce the risk of incurring a loss on a repurchase agreement,
each Master Portfolio enters into repurchase agreements only with federally
regulated or insured banks or primary government securities dealers reporting to
the Federal Reserve Bank of New York or their affiliates, or, under certain
circumstances, banks with total assets in excess of $5 billion or domestic
broker/dealers with total equity capital in excess of $100 million, with respect
to securities of the type in which such Master Portfolio may invest or
government securities regardless of their remaining maturities, and requires
that additional securities be deposited with it if the value of the securities
purchased should decrease below repurchase price. The Adviser monitors on an
ongoing basis the value of the collateral to assure that it always equals or
exceeds the repurchase price. Certain costs may be incurred by a Master
Portfolio in connection with the sale of the securities if the seller does not
repurchase them in accordance with the repurchase agreement. In addition, if
bankruptcy proceedings are commenced with respect to the seller of the
securities, disposition of the securities by a Master Portfolio may be delayed
or limited. Each Master Portfolio considers on an ongoing basis the
creditworthiness of the institutions with which it enters into repurchase
agreements.
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UNREGISTERED NOTES -- Each Master Portfolio may purchase unsecured
promissory notes ("Notes") which are not readily marketable and have not been
registered under the Securities Act of 1933, as amended (the "1933 Act"),
provided such investments are consistent with such Master Portfolio's goal. No
Master Portfolio invests more than 15% of the value of its net assets in Notes
and in other illiquid securities.
FLOATING- AND VARIABLE-RATE OBLIGATIONS -- Each Master Portfolio may
purchase floating- and variable-rate demand notes and bonds, which are
obligations ordinarily having stated maturities in excess of 13 months, but
which permit the holder to demand payment of principal at any time or at
specified intervals not exceeding 13 months. Variable-rate demand notes include
master demand notes which are obligations that permit a Master Portfolio to
invest fluctuating amounts, which may change daily without penalty, pursuant to
direct arrangements between the Master Portfolio, as lender, and the borrower.
The interest rates on these notes fluctuate from time to time. The issuer of
such obligations ordinarily has a corresponding right, after a given period, to
prepay in its discretion the outstanding principal amount of the obligations
plus accrued interest upon a specified number of days' notice to the holders of
such obligations. The interest rate on a floating-rate demand obligation is
based on a known lending rate, such as a bank's prime rate, and is adjusted
automatically each time such rate is adjusted. The interest rate on a
variable-rate demand obligation is adjusted automatically at specified
intervals. Frequently, such obligations are secured by letters of credit or
other credit support arrangements provided by banks. Because these obligations
are direct lending arrangements between the lender and borrower, it is not
contemplated that such instruments generally will be traded. There generally is
no established secondary market for these obligations, although they are
redeemable at face value. Accordingly, where these obligations are not secured
by letters of credit or other credit support arrangements, the Master
Portfolio's right to redeem is dependent on the ability of the borrower to pay
principal and interest on demand. Such obligations frequently are not rated by
credit rating agencies and each Master Portfolio may invest in obligations which
are not so rated only if the Adviser determines that at the time of investment
the obligations are of comparable quality to the other obligations in which such
Master Portfolio may invest. The Adviser, on behalf of each Master Portfolio,
considers on an ongoing basis the creditworthiness of the issuers of the
floating- and variable-rate demand obligations in such Master Portfolio's
portfolio. No Master Portfolio invests more than 15% of the value of its net
assets in illiquid securities including floating- or variable-rate demand
obligations whose demand feature is not exercisable
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within seven days. Such obligations will be treated as liquid, provided that an
active secondary market exists.
PARTICIPATION INTERESTS -- Each Master Portfolio may purchase from
financial institutions participation interests in securities in which such
Master Portfolio may invest. A participation interest gives the Master Portfolio
an undivided interest in the security in the proportion that the Master
Portfolio's participation interest bears to the total principal amount of the
security. These instruments may have fixed, floating or variable rates of
interest. If the participation interest is unrated, or has been given a rating
below that which is permissible for purchase by the Master Portfolio, the
participation interest must be backed by an irrevocable letter of credit or
guarantee of a bank, or the payment obligation otherwise must be collateralized
by U.S. Government obligations, or, in the case of unrated participation
interests, the Adviser must have determined that the instrument is of comparable
quality to those instruments in which such Master Portfolio may invest. Prior to
a Master Portfolio's purchase of any such instrument backed by a letter of
credit or guarantee of a bank, the Adviser evaluates the creditworthiness of the
bank, considering all factors which it deems relevant, which generally may
include review of the bank's cash flow; level of short-term debt; leverage;
capitalization; the quality and depth of management; profitability; return on
assets; and economic factors relative to the banking industry. For certain
participation interests, the Master Portfolio has the right to demand payment,
on not more than seven days' notice, for all or any part of the Master
Portfolio's participation interest in the security, plus accrued interest. As to
these instruments, each Master Portfolio intends to exercise its right to demand
payment only upon a default under the terms of the security, as needed to
provide liquidity to meet redemptions, or to maintain or improve the quality of
its investment portfolio.
MORTGAGE-RELATED SECURITIES -- Each LifePath Master Portfolio may invest in
mortgage-related securities ("MBSs"), which are securities representing
interests in a pool of loans secured by mortgages. The resulting cash flow from
these mortgages is used to pay principal and interest on the securities. MBSs
are assembled for sale to investors by various government-sponsored enterprises
such as the Federal National Mortgage Association ("FNMA") and the Federal Home
Loan Mortgage Corporation ("FHLMC") or are guaranteed by such governmental
agencies as the Government National Mortgage Association ("GNMA"). Regardless of
the type of guarantee, all MBSs are subject to interest rate risk (i.e.,
exposure to loss due to changes in interest rates).
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GNMA MBSs include GNMA Mortgage Pass-Through Certificates ("Ginnie Maes")
which are guaranteed as to the full and timely payment of principal and interest
by GNMA and such guarantee is backed by the authority of GNMA to borrow funds
from the U.S. Treasury to make payments under its guarantee. GNMA is a
wholly-owned U.S. Government corporation within the Department of Housing and
Urban Development and, as such, GNMA obligations are general obligations of the
United States and are backed by the full faith and credit of the federal
government. In contrast, MBSs issued by FNMA include FNMA Guaranteed Mortgage
Pass-Through Certificates ("Fannie Maes") which are solely the obligations of
FNMA and are neither backed by nor entitled to the full faith and credit of the
federal government. FNMA is a government-sponsored enterprise which is also a
private corporation whose stock trades on the NYSE. Fannie Maes are guaranteed
as to timely payment of principal and interest by FNMA. MBSs issued by FHLMC
include FHLMC Mortgage Participation Certificates ("Freddie Macs" or "PCs").
FHLMC is a government-sponsored enterprise whose MBSs are solely obligations of
FHLMC. Therefore, Freddie Macs are not guaranteed by the United States or by any
Federal Home Loan Bank and do not constitute a debt or obligation of the United
States or of any Federal Home Loan Bank. FHLMC guarantees timely payment of
interest, but only ultimate payment of principal due under the obligations it
issues. FHLMC may, under certain circumstances, remit the guaranteed payment of
principal at any time after default on an underlying mortgage, but in no event
later than one year after the guarantee becomes payable.
AMERICAN, EUROPEAN AND CONTINENTAL DEPOSITORY RECEIPTS -- Each LifePath
Master Portfolio's assets may be invested in the securities of foreign issuers
in the form of American Depository Receipts ("ADRs") and European Depository
Receipts ("EDRs"). These securities may not necessarily be denominated in the
same currency as the securities into which they may be converted. ADRs are
receipts typically issued by a United States bank or trust company which
evidence ownership of underlying securities issued by a foreign corporation.
EDRs, which are sometimes referred to as Continental Depository Receipts
("CDRs"), are receipts issued in Europe typically by non-United States banks and
trust companies that evidence ownership of either foreign or domestic
securities. Generally, ADRs in registered form are designed for use in the
United States securities markets and EDRs and CDRs in bearer form are designed
for use in Europe. Each LifePath Master Portfolio may invest in ADRs, EDRs and
CDRs through "sponsored" or "unsponsored" facilities. A sponsored facility is
established jointly by the issuer of the underlying security and a depository,
whereas a depository may establish an unsponsored facility
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without participation by the issuer of the deposited security. Holders of
unsponsored depository receipts generally bear all the costs of such facilities
and the depository of an unsponsored facility frequently is under no obligation
to distribute shareholder communications received from the issuer of the
deposited security or to pass through voting rights to the holders of such
receipts in respect of the deposited securities.
CONVERTIBLE SECURITIES -- Each LifePath Master Portfolio may purchase
fixed-income convertible securities, such as bonds or preferred stock, which may
be converted at a stated price within a specified period of time into a
specified number of shares of common stock of the same or a different issuer.
Convertible securities are senior to common stock in a corporation's capital
structure, but usually are subordinated to non-convertible debt securities.
While providing a fixed-income stream (generally higher in yield than the income
from a common stock but lower than that afforded by a non-convertible debt
security), a convertible security also affords an investor the opportunity,
through its conversion feature, to participate in the capital appreciation of
the common stock into which it is convertible.
In general, the market value of a convertible security is the higher of its
"investment value" (i.e., its value as a fixed-income security) or its
"conversion value" (i.e., the value of the underlying shares of common stock if
the security is converted). As a fixed-income security, the market value of a
convertible security generally increases when interest rates decline and
generally decreases when interest rates rise. However, the price of a
convertible security also is influenced by the market value of the security's
underlying common stock. Thus, the price of a convertible security generally
increases as the market value of the underlying stock increases, and generally
decreases as the market value of the underlying stock declines. Investments in
convertible securities generally entail less risk than investments in the common
stock of the same issuer.
WARRANTS -- Each LifePath Master Portfolio may invest generally up to 5% of
its net assets at the time of purchase in warrants, except that this limitation
does not apply to warrants acquired in units or attached to securities. A
warrant is an instrument issued by a corporation which gives the holder the
right to subscribe to a specified amount of the corporation's capital stock at a
set price for a specified period of time. The prices of warrants do not
necessarily correlate with the prices of the underlying securities.
ILLIQUID SECURITIES -- Each Master Portfolio may invest up to 15% of the
value of its total net assets in securities as to which a liquid trading market
does not exist, provided such investments are consistent with its
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investment objective. Such securities may include securities that are not
readily marketable, such as certain securities that are subject to legal or
contractual restrictions on resale, participation interests that are not subject
to the demand feature described above, floating- and variable-rate demand
obligations as to which the Master Portfolio cannot exercise the related demand
feature described above on not more than seven days' notice and as to which
there is no secondary market and repurchase agreements providing for settlement
in more than seven days after notice. Disposing of illiquid securities generally
will involve additional costs and require additional time. However, if a
substantial market of qualified institutional investors develops pursuant to
Rule 144A under the 1933 Act for certain of these securities held by a Master
Portfolio, such Master Portfolio intends to treat such securities as liquid
securities in accordance with procedures approved by MIP's Board of Trustees.
Because it is not possible to predict with assurance how the market for
restricted securities pursuant to Rule 144A will develop, MIP's Board of
Trustees has directed the Adviser to monitor carefully each Master Portfolio's
investments in such securities with particular regard to trading activity,
availability of reliable price information and other relevant information. To
the extent that for a period of time, qualified institutional investors cease
purchasing such restricted securities pursuant to Rule 144A, a Master
Portfolio's investing in such securities may have the effect of increasing the
level of illiquidity in such Master Portfolio's portfolio during such period.
INVESTMENT COMPANY SECURITIES -- Each Master Portfolio may invest in
securities issued by other open-end management investment companies which
principally invest in securities of the type in which such Master Portfolio
invests. Under the 1940 Act, a Master Portfolio's investment in such securities
currently is limited to, subject to certain exceptions, (i) 3% of the total
voting stock of any one investment company, (ii) 5% of such Master Portfolio's
total net assets with respect to any one investment company and (iii) 10% of
such Master Portfolio's total net assets in the aggregate. Investments in the
securities of other investment companies involve duplication of advisory fees
and certain other expenses.
RATINGS -- The ratings of Moody's, S&P, Fitch and Duff represent their
opinions as to the quality of the obligations which they undertake to rate. It
should be emphasized, however, that ratings are relative and subjective and,
although ratings may be useful in evaluating the safety of interest and
principal payments, they do not evaluate the market value risk of such
obligations. Therefore, although these ratings may be an initial criterion for
selection of portfolio investments, the Adviser also evaluates such obligations
and the ability of their issuers to pay interest and principal. Each Master
Portfolio relies on the Adviser's judgment, analysis
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and experience in evaluating the creditworthiness of an issuer. In this
evaluation, the Adviser takes into consideration, among other things, the
issuer's financial resources, its sensitivity to economic conditions and trends,
the quality of the issuer's management and regulatory matters. It also is
possible that a rating agency might not timely change the rating on a particular
issue to reflect subsequent events. See "Description of the Funds -- Risk
Considerations -- Fixed-Income Securities."
INVESTMENT TECHNIQUES
STOCK INDEX OPTIONS -- Each LifePath Master Portfolio may purchase and
write (i.e., sell) put and call options on stock indices as a substitute for
comparable market positions in the underlying securities. A stock index
fluctuates with changes in the market values of the stocks included in the
index. The aggregate premiums paid on all options purchased may not exceed 20%
of a LifePath Master Portfolio's total assets and the value of options written
or purchased may not exceed 10% of the value of a LifePath Master Portfolio's
total assets.
The effectiveness of purchasing or writing stock index options depends upon
the extent to which price movements in the LifePath Master Portfolio's portfolio
correlate with price movements of the stock index selected. Because the value of
an index option depends upon movements in the level of the index rather than the
price of a particular stock, whether a LifePath Master Portfolio realizes a gain
or loss from purchasing or writing options on an index depends upon movements in
the level of stock prices in the stock market generally or, in the case of
certain indices, in an industry or market segment, rather than movements in the
price of a particular stock.
When a LifePath Master Portfolio writes an option on a stock index, such
LifePath Master Portfolio places in a segregated account with MIP's custodian
cash or liquid securities in an amount at least equal to the market value of the
underlying stock index and maintains the account while the option is open or
otherwise covers the transaction.
FUTURES TRANSACTIONS -- IN GENERAL -- None of the LifePath Master
Portfolios will be a commodity pool. To the extent permitted by applicable
regulations, each LifePath Master Portfolio is permitted to use futures as a
substitute for a comparable market position in the underlying securities.
A futures contract involves a firm agreement to buy or sell a commodity or
financial instrument at a particular price on a specified future date. Futures
contracts are traded on exchanges, where the exchange serves as the ultimate
counterparty for all contracts. Consequently, the only credit
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risk on futures contracts is the creditworthiness of the exchange. Futures
contracts are, however, subject to market risk (i.e., exposure to adverse price
changes).
Each LifePath Master Portfolio may trade futures contracts and may purchase
and write options on futures contracts in U.S. domestic markets, such as the
Chicago Board of Trade and the International Monetary Market of the Chicago
Mercantile Exchange, or, to the extent permitted under applicable law, on
exchanges located outside the United States, such as the London International
Financial Futures Exchange, the Deutscher Aktienindex and the Sydney Futures
Exchange Limited. See "Description of the Funds -- Risk
Considerations -- Foreign Futures Transactions."
Each LifePath Master Portfolio's futures transactions must constitute
permissible transactions pursuant to regulations promulgated by the CFTC. In
addition, a LifePath Master Portfolio may not engage in futures transactions if
the sum of the amount of initial margin deposits and premiums paid for unexpired
options on futures contracts, other than those contracts entered into for bona
fide hedging purposes, would exceed 5% of the liquidation value of the Master
Portfolio's assets, after taking into account unrealized profits and unrealized
losses on such contracts; provided, however, that in the case of an option that
is in-the-money at the time of purchase, the in-the-money amount may be excluded
in calculating this 5% liquidation limit. Pursuant to regulations and/or
published positions of the Securities and Exchange Commission, a LifePath Master
Portfolio may be required to segregate cash, U.S. Government obligations or
other high quality money market instruments in connection with its futures
transactions in an amount generally equal to the entire value of the underlying
commitment.
Initially, when purchasing or selling futures contracts a LifePath Master
Portfolio is required to deposit with the MIP's custodian in the broker's name
an amount of cash or cash equivalents up to approximately 10% of the contract
amount. This amount is subject to change by the exchange or board of trade on
which the contract is traded. Members of such exchange or board of trade may
impose their own higher requirements. This amount is known as "initial margin"
and is in the nature of a performance bond or good faith deposit on the contract
which is returned to the LifePath Master Portfolio upon termination of the
futures position, assuming all contractual obligations have been satisfied.
Subsequent payments to and from the broker, known as "variation margin," are
made daily as the price of the index or securities underlying the futures
contract fluctuates, making the long and short positions in the futures contract
more or less valuable, a process known as "marking-to-market." At any time
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prior to the expiration of a futures contract, the LifePath Master Portfolio may
elect to close the position by taking an opposite position, at the then-
prevailing price, thereby terminating its existing position in the contract.
Although each LifePath Master Portfolio may purchase or sell futures
contracts only if there is an active market for such contracts, no assurance can
be given that a liquid market will exist for any particular contract at any
particular time. Many futures exchanges and boards of trade limit the amount of
fluctuation permitted in futures contract prices during a single trading day.
Once the daily limit has been reached in a particular contract, no trades may be
made that day at a price beyond that limit or trading may be suspended for
specified periods during the trading day. Futures contract prices could move to
the limit for several consecutive trading days with little or no trading,
thereby preventing prompt liquidation of futures positions and potentially
subjecting the relevant LifePath Master Portfolio to substantial losses. If it
is not possible, or the LifePath Master Portfolio determines not to close a
futures position in anticipation of adverse price movements, it will be required
to make daily cash payments of variation margin.
An option on a futures contract gives the purchaser the right, in return
for the premium paid, to assume a position in a futures contract (a long
position if the option is a call and a short position if the option is a put) at
a specified exercise price at any time during the option exercise period. The
writer (i.e., seller) of the option is required upon exercise to assume an
offsetting futures position (a short position if the option is a call and a long
position if the option is a put). Upon exercise of the option, the assumption of
offsetting futures positions by both the writer and the holder of the option
will be accompanied by delivery of the accumulated cash balance in the writer's
futures margin account in the amount by which the market price of the futures
contract, at exercise, exceeds (in the case of a call) or is less than (in the
case of a put) the exercise price of the option on the futures contract.
STOCK INDEX FUTURES AND OPTIONS ON STOCK INDEX FUTURES -- Each LifePath
Master Portfolio may purchase and sell stock index futures contracts and options
on stock index futures contracts.
A stock index future obligates the seller to deliver (and the purchaser to
take), effectively, an amount of cash equal to a specific dollar amount times
the difference between the value of a specific stock index at the close of the
last trading day of the contract and the price at which the agreement is made.
No physical delivery of the underlying stocks in the index is made. With respect
to stock indices that are permitted investments, each LifePath Master Portfolio
intends to purchase and sell futures contracts on
A-11
<PAGE> 59
the stock index for which it can obtain the best price with consideration also
given to liquidity.
Interest Rate Futures Contracts and Options on Interest Rate Futures
Contracts -- Each LifePath Master Portfolio may invest in interest rate futures
contracts and options on interest rate futures contracts as a substitute for a
comparable market position in the underlying securities.
Each LifePath Master Portfolio also may write options on interest rate
futures contracts as part of closing purchase transactions to terminate its
options positions. No assurance can be given that such closing transactions can
be effected or concerning the degree of correlation between price movements in
the options on interest rate futures and price movements in the LifePath Master
Portfolio's portfolio securities which are the subject of the transaction.
INTEREST RATE AND INDEX SWAPS -- Each LifePath Master Portfolio may enter
into interest rate and index swaps in pursuit of its investment objective.
Interest rate swaps involve the exchange by a LifePath Master Portfolio with
another party of their respective commitments to pay or receive interest (for
example, an exchange of floating-rate payments for fixed-rate payments). Index
swaps involve the exchange by a LifePath Master Portfolio with another party of
cash flows based upon the performance of an index or a portion of an index
(usually including dividends or income). In each case, the exchange commitments
can involve payments to be made in the same currency or in different currencies.
Each LifePath Master Portfolio usually enters into swaps on a net basis. In
so doing, only the net difference of the payment obligations is exchanged
between the counterparties. If a LifePath Master Portfolio enters into a swap,
it maintains a segregated account in an amount equivalent to the gross value of
its payment obligations unless the contract provides otherwise. If the other
party to such a transaction defaults on a swap, the Master Portfolio has
contractual remedies pursuant to the agreements related to the transaction. In
such a case, the LifePath Master Portfolio's risk of loss consists of the net
amount of payments that the LifePath Master Portfolio contractually is entitled
to receive.
The use of interest rate and index swaps is a highly specialized activity
which involves investment techniques different from those associated with
ordinary portfolio security transactions. There is no limit, except as provided
below, on the amount of swap transactions that may be entered into by a Master
Portfolio. These transactions generally do not involve the delivery of
securities or other underlying assets or principal. Accordingly, the risk of
loss with respect to swaps generally is limited to the net amount
A-12
<PAGE> 60
of payments that the LifePath Master Portfolio is contractually entitled to
receive. No LifePath Master Portfolio invests more than 15% of the value of its
net assets in swaps that are illiquid, and in other illiquid securities.
FOREIGN CURRENCY TRANSACTIONS -- Each LifePath Master Portfolio may engage
in currency exchange transactions either on a spot (i.e., cash) basis at the
rate prevailing in the currency exchange market, or by entering into forward
contracts to purchase or sell currencies. A forward currency exchange contract
involves an obligation between two parties to exchange a specific currency at a
set price on a future date, which must be more than two days from the date of
the contract. These contracts are entered into in the interbank market conducted
directly between currency traders (typically commercial banks or other financial
institutions) and their customers.
Each LifePath Master Portfolio may combine forward currency exchange
contracts with investments in securities denominated in other currencies.
Each LifePath Master Portfolio also may maintain short positions in forward
currency exchange transactions, which would involve the Master Portfolio
agreeing to exchange an amount of a currency it did not currently own for
another currency at a future date in anticipation of a decline in the value of
the currency sold relative to the currency such Master Portfolio contracted to
receive in the exchange.
LENDING PORTFOLIO SECURITIES -- From time to time, each Master Portfolio
may lend securities from its portfolio to brokers, dealers and other financial
institutions needing to borrow securities to complete certain transactions. Such
loans may not exceed one-third of the value of the relevant Master Portfolio's
total assets. In connection with such loans, each Master Portfolio receives
collateral consisting of cash, U.S. Government obligations or other high-quality
debt instruments which will be maintained at all times in an amount equal to at
least 100% of the current market value of the loaned securities. Each Master
Portfolio can increase its income through the investment of such collateral.
Each Master Portfolio continues to be entitled to receive payments in amounts
equal to the dividends, interest and other distributions payable on the loaned
security and receives interest on the amount of the loan. Such loans are
terminable at any time upon specified notice. A Master Portfolio might
experience risk of loss if the institution with which it has engaged in a
portfolio loan transaction breaches its agreement with such Master Portfolio.
FORWARD COMMITMENTS -- Each Master Portfolio may purchase securities on a
when-issued or forward commitment basis, which means
A-13
<PAGE> 61
that the price is fixed at the time of commitment but delivery and payment
ordinarily take place a number of days after the date of the commitment to
purchase. A Master Portfolio makes commitments to purchase such securities only
with the intention of actually acquiring the securities, but the Master
Portfolio may sell these securities before the settlement date if it is deemed
advisable. The Master Portfolio will not accrue income in respect of a security
purchased on a forward commitment basis prior to its stated delivery date.
Securities purchased on a when-issued or forward commitment basis and
certain other securities held in the Master Portfolio's portfolio are subject to
changes in value (both generally changing in the same way, i.e., appreciating
when interest rates decline and depreciating when interest rates rise) based
upon the public's perception of the creditworthiness of the issuer and changes,
real or anticipated, in the level of interest rates. Securities purchased on a
when-issued or forward commitment basis may expose the relevant Master Portfolio
to risk because they may experience such fluctuations prior to their actual
delivery. Purchasing securities on a when-issued or forward commitment basis can
involve the additional risk that the yield available in the market when the
delivery takes place actually may be higher than that obtained in the
transaction itself. A segregated account of each Master Portfolio consisting of
cash, U.S. Government obligations or other high quality liquid debt securities
at least equal at all times to the amount of the when-issued or forward
commitments is established and maintained at MIP's custodian bank. Purchasing
securities on a forward commitment basis when a Master Portfolio is fully or
almost fully invested may result in greater potential fluctuation in the value
of such Master Portfolio's total net assets and its net asset value per share.
BORROWING MONEY -- As a fundamental policy, each Master Portfolio is
permitted to borrow to the extent permitted under the 1940 Act. However, each
Master Portfolio currently intends to borrow money only for temporary or
emergency (not leveraging) purposes, in an amount up to one-third of the value
of its total net assets (including the amount borrowed) valued at the lesser of
cost or market, less liabilities (not including the amount borrowed) at the time
the borrowing is made. While borrowings exceed 5% of a Master Portfolio's total
net assets, such Master Portfolio will not make any investments.
A-14
<PAGE> 62
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A-15
<PAGE> 63
SPONSOR, DISTRIBUTOR AND ADMINISTRATOR
Stephens Inc.
Little Rock, Arkansas
INVESTMENT ADVISER
BZW Barclays Global Fund Advisors
San Francisco, California
CUSTODIAN
BZW Barclays Global Investors, N.A.
San Francisco, California
TRANSFER AGENT AND DIVIDEND DISBURSING AGENT
Wells Fargo Bank, N.A.
San Francisco, California
LEGAL COUNSEL
Morrison & Foerster LLP
Washington, D.C.
INDEPENDENT AUDITORS
KPMG Peat Marwick LLP
San Francisco, California
For more information about the Funds write or call:
MASTERWORKS FUNDS INC.
c/o Wells Fargo Bank, N.A. -- Transfer Agent
525 Market Street
San Francisco, California 94105
1-800-776-0179
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION, ANY STATE SECURITIES COMMISSION OR ANY OTHER REGULATORY
AUTHORITY, NOR HAVE ANY OF THE FOREGOING AUTHORITIES PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
MWLP.pros. 6/96
<PAGE> 64
MASTERWORKS Funds Inc.
c/o Wells Fargo Bank, N.A.
Transfer Agent
420 Montgomery Street
San Francisco, CA 94163
LWLP.Pros 6/96
<PAGE> 65
MasterWorks Funds Inc. (formerly Stagecoach Inc.) (the "Company") is an
open-end, management investment company. This Prospectus contains information
about one of the Company's funds -- the MONEY MARKET FUND (the "Fund"). The Fund
seeks to provide investors with a high level of income, while preserving capital
and liquidity, by investing in high quality, short-term securities.
Please read this Prospectus before investing and retain it for future
reference. It sets forth concisely the information about the Fund that an
investor should know before investing. A Statement of Additional Information
("SAI") dated June 28, 1996 describing the Fund has been filed with the
Securities and Exchange Commission ("SEC") and is incorporated by reference. The
SAI is available without charge by calling the Company at 1-800-776-0179 or by
writing the Company at the address printed on the back of the Prospectus.
---------------------
AS WITH ALL MUTUAL FUNDS, THESE SECURITIES HAVE NOT BEEN APPROVED OR
DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION, ANY STATE SECURITIES
COMMISSION OR ANY OTHER REGULATORY AUTHORITY, NOR HAVE ANY OF THESE AUTHORITIES
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
---------------------
FUND SHARES ARE NOT DEPOSITS OR OTHER OBLIGATIONS OF, OR ISSUED, ENDORSED OR
GUARANTEED BY, BZW BARCLAYS GLOBAL INVESTORS, N.A. OR ANY OF ITS AFFILIATES.
SUCH SHARES ARE NOT INSURED BY THE U.S. GOVERNMENT, THE FEDERAL DEPOSIT
INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER GOVERNMENT AGENCY.
AN INVESTMENT IN THE FUND INVOLVES CERTAIN INVESTMENT RISKS, INCLUDING POSSIBLE
LOSS OF PRINCIPAL.
MASTERWORKS FUNDS INC.
MONEY MARKET
FUND
HOW THIS FUND WORKS
The Fund invests in short-term instruments issued by banks, corporations, and
the U.S. government and its agencies. These instruments include certificates of
deposit and U.S. Treasury bills. The Fund's investments are expected to present
minimal risks because of their relatively short maturities and the high credit
quality (financial strength) of the issuers.
PROSPECTUS
JUNE 28, 1996
<PAGE> 66
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Prospectus Summary....................................... i
Summary of Fund Expenses................................. 1
Explanation of the Tables................................ 1
Financial Highlights..................................... 2
The Fund................................................. 3
Management of the Fund................................... 5
How to Buy Shares........................................ 8
How to Redeem Shares..................................... 11
Exchange Privilege....................................... 15
Share Value.............................................. 15
Dividends and Distributions.............................. 16
Federal Income Tax Information........................... 16
General Information...................................... 18
APPENDIX
--------
Additional Investment Policies........................... A-1
</TABLE>
<PAGE> 67
PROSPECTUS SUMMARY
The following summary provides investors with basic information about the
Fund. For more information, please refer specifically to the identified
Prospectus sections and generally to the Prospectus and SAI.
Q. WHO CAN INVEST IN THE FUND?
A. Shares of the Fund are offered primarily to a select group of investors.
These include:
- Participants in employee benefit plans ("Benefit Plans"), including
retirement plans, that have appointed one of the Company's Selling Agents
as plan trustee, plan administrator or other agent, or whose plan trustee,
plan administrator or other agent has an arrangement with a Selling Agent
that permits investments in Fund shares, and individuals who invest
pursuant to an agreement between a Benefit Plan and a Selling Agent.
- Individuals using proceeds that are being rolled over directly from a
qualified Benefit Plan to an Individual Retirement Account ("IRA")
pursuant to arrangements between the sponsor or other agent of the
qualified Benefit Plan and a Selling Agent.
- Foundations, corporations and other business entities that have a
servicing arrangement with one of the Company's Selling Agents that
permits investments in Fund shares, and persons who invest pursuant to an
agreement between such an entity and a Selling Agent.
- Individuals, other than those described above, who invest at least $1
million in the Fund pursuant to an account arrangement with a Selling
Agent.
See "How to Buy Shares."
Q. WHAT ARE SOME OF THE KEY FEATURES OF THE FUND?
A. The Fund seeks to provide investors with a high level of income, while
preserving capital and liquidity, by investing in high-quality, short-term
securities. These securities include obligations of the U.S. Government, its
agencies and instrumentalities (including government-sponsored enterprises),
high-quality debt obligations, such as corporate debt, certain obligations
of U.S. banks and certain repurchase agreements. The Fund seeks to maintain
a net asset value of $1.00 per share; however, there is no assurance that
this will be achieved. See "The Fund -- Investment Objective and Policies"
and "Appendix -- Additional Investment Policies."
i
<PAGE> 68
Q. WHAT ARE SOME OF THE POTENTIAL RISKS ASSOCIATED WITH AN INVESTMENT IN THE
FUND?
A. Investments in the Fund are not bank deposits or obligations of BZW Barclays
Global Investors, N.A. ("BGI") and are not insured by the Federal Deposit
Insurance Corporation ("FDIC"). An investment in the Fund is not insured or
guaranteed against loss of principal. Therefore, investors should be willing
to accept some risk with the money invested in the Fund. Although the Fund
seeks to maintain a stable net asset value of $1.00 per share, there is no
assurance that it will be able to do so. As with all mutual funds, there can
be no assurance that the Fund will achieve its investment objective. See
"The Fund -- Investment Objective and Policies" and "Appendix -- Additional
Investment Policies."
Q. HOW DO I INVEST IN THE FUND?
A. Shares of the Fund can be purchased by establishing an account arrangement
with a designated Selling Agent. Shares may be purchased at net asset value
on any day the New York Stock Exchange ("NYSE") and the Transfer Agent are
open for regular business (a "Business Day").
To invest in the Fund, contact a Selling Agent to receive information and
an Account Application. An Account Application must be completed and signed
to open an account.
See "How to Buy Shares."
Q. WHO MANAGES MY INVESTMENTS?
A. The Fund is managed by BZW Barclays Global Fund Advisors ("BGFA"). Wells
Fargo Bank, N.A. ("Wells Fargo") serves as sub-adviser to the Fund and
provides investment advice to BGFA. As of March 31, 1996, BGFA and its
affiliates provided investment advisory services for over $284 billion of
assets. See "Management of the Fund."
Q. WHAT ARE THE FEES FOR INVESTING?
A. Unlike certain other mutual funds which charge sales loads or other
transaction fees, the Fund does not impose shareholder transaction fees on
the purchase, redemption or exchange of its shares. Selling Agents, in
accordance with the terms of their customer account arrangements, may
charge additional fees for maintaining customer accounts. See "Management
of the Fund."
ii
<PAGE> 69
Q. HOW ARE THE FUND'S INVESTMENTS VALUED?
A. The price per share or "net asset value" of the Fund is based on the total
value of the portfolio securities owned by the Fund (plus cash and other
assets net of liabilities) and the number of Fund shares outstanding. A new
net asset value is calculated on each Business Day.
Although the Fund expects to maintain a $1.00 net asset value share price,
there can be no assurance that this will be achieved. See "Share Value."
Q. DOES THE FUND PAY DIVIDENDS?
A. Dividends from net investment income are declared daily, paid monthly and
automatically reinvested in additional Fund shares at net asset value
unless payment in cash is requested and your arrangement with a Selling
Agent permits the processing of cash payments. Each reinvestment increases
the total number of shares held by the shareholder. Any capital gains are
distributed at least annually. See "Dividends and Distributions."
Q. ARE EXCHANGES TO OTHER FUNDS PERMITTED?
A. Yes. The exchange privilege enables an investor to exchange Fund shares for
shares of another fund offered by MasterWorks Funds provided such shares
are offered for sale in the investor's state of residence. See "Exchange
Privilege."
Q. HOW DO I REDEEM MY SHARES?
A. Shares of the Fund may be redeemed at net asset value without the imposition
of a sales charge or redemption fee on any Business Day by letter or by
telephone (unless you decline telephone privileges). See "How to Redeem
Shares." For more information contact Stephens or your Selling Agent.
iii
<PAGE> 70
SUMMARY OF FUND EXPENSES
<TABLE>
<S> <C> <C>
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average daily net assets):
Management Fees....................................................... 0.35%
Other Expenses (after waivers and reimbursements)1.................... 0.10%
----
TOTAL FUND OPERATING EXPENSES (after waivers and reimbursements)2..... 0.45%
</TABLE>
- ---------------
1 Other Expenses (before waivers and reimbursements) would be 0.15%.
2 Total Fund Operating Expenses (before waivers and reimbursements) would be
0.50%.
EXAMPLE OF EXPENSES
An investor would pay the following expenses on a $1,000 investment, assuming
(1) a 5% annual return and (2) redemption at the end of each time period:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
$5 $14 $25 $ 57
</TABLE>
EXPLANATION OF THE TABLES
The purpose of the foregoing tables is to assist an investor in
understanding the various fees and expenses that an investor in the Fund will
bear directly or indirectly. The following provides a general explanation of the
information provided in the table.
ANNUAL FUND OPERATING EXPENSES are based on amounts incurred during the
most recent fiscal year, restated to reflect voluntary fee waivers and expense
reimbursements that will continue to reduce expenses during the current fiscal
year. BGFA and Stephens each may elect, in its sole discretion, to waive or
reimburse all or a portion of its respective fees charged to, or expenses paid
by, the Fund. Any waivers or reimbursements would reduce the Fund's total
expenses. For more complete descriptions of the various costs and expenses you
can expect to incur as an investor in the Fund, please see "Management of the
Fund."
EXAMPLE OF EXPENSES is a hypothetical example which illustrates the
expenses associated with a $1,000 investment in the Fund over stated periods,
based on the expenses in the table above and an assumed annual rate of return of
5%. This annual rate of return should not be considered an indication of actual
or expected Fund performance. In addition, the Example of Expenses should not be
considered a representation of past or future expenses; actual expenses and
returns may be greater or less than those shown above.
1
<PAGE> 71
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING AS SHOWN)
The following information has been derived from the Financial Highlights
included in the Fund's financial statements for the fiscal year ended February
29, 1996. The financial statements are incorporated by reference into the Fund's
SAI and have been audited by KPMG Peat Marwick LLP, independent auditors, whose
report thereon also is incorporated by reference into the SAI. This information
should be read in conjunction with the financial statements and the notes
thereto. The SAI has been incorporated by reference into this Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED PERIOD ENDED
FEBRUARY 29, FEBRUARY 28, FEBRUARY 28,
1996 1995 1994*
------------ ------------ ------------
<S> <C> <C> <C>
Net Asset Value, beginning of period............... $ 1.00 $ 1.00 $ 1.00
Income from investment operations:
Net investment income............................. 0.05 0.04 0.02
Net realized and unrealized gain (loss) on
investments..................................... 0.00 0.00 0.00
-------- -------- --------
Total from investment operations................... 0.05 0.04 0.02
Less distributions:
Dividends from net investment income.............. (0.05) (0.04) (0.02)
Distributions from net realized gains............. 0.00 0.00 0.00
-------- -------- --------
Total distributions................................ (0.05) (0.04) (0.02)
-------- -------- --------
Net Asset Value, end of period..................... $ 1.00 $ 1.00 $ 1.00
======== ======== ========
Total return (not annualized)...................... 5.60% 4.40% 1.81%
Ratios/supplemental data:
Net assets, end of period (000)................... $156,852 $147,269 $ 81,649
Number of shares outstanding, end of period
(000)........................................... 156,910 147,280 81,648
Ratios to average net assets (annualized):
Ratio of expenses to average net assets(1)........ 0.45% 0.45% 0.49%
Ratio of net investment income to average net
assets(2)....................................... 5.44% 4.44% 2.77%
(1) Ratio of expenses to average net assets prior
to waived fees and reimbursed expenses......... 0.49% 0.57% 0.50%
(2) Ratio of net investment income to average net
assets prior to waived fees and reimbursed
expenses....................................... 5.40% 4.32% 2.76%
</TABLE>
- ---------------
* The Fund commenced operations on July 2, 1993.
2
<PAGE> 72
THE FUND
INVESTMENT OBJECTIVE AND POLICIES
The Fund seeks to provide investors with a high level of income, while
preserving capital and liquidity, by investing in high-quality, short-term
securities. The Fund, which is a diversified portfolio, invests its assets only
in U.S. dollar-denominated, high-quality money market instruments, and may
engage in certain other investment activities as described in this Prospectus.
Permitted investments include U.S. Government short-term obligations,
obligations of domestic and foreign banks, commercial paper, corporate notes and
repurchase agreements. A more complete description of these investments and
investment activities is contained in "Appendix -- Additional Investment
Policies."
LIMITING INVESTMENT RISKS
The Fund, under the Investment Company Act of 1940 (the "1940 Act") must
comply with certain investment criteria, each of which is designed to provide
liquidity, reduce risk and allow the Fund to maintain a stable net asset value
of $1.00 per share. Of course, the Fund cannot guarantee a $1.00 share price.
The Fund's dollar-weighted average portfolio maturity must not exceed 90 days.
Any security that the Fund purchases must have a remaining maturity of not more
than thirteen months. In addition, any security that the Fund purchases must
present minimal credit risks and be of eligible quality (i.e., be rated in the
top two rating categories by the required number of nationally recognized
statistical rating organizations or, if unrated, determined to be of comparable
quality to such rated securities). These determinations are made by BGFA and
Wells Fargo, as the Fund's investment adviser and sub-adviser, respectively,
under guidelines adopted by the Company's Board of Directors, although in
certain cases, the 1940 Act requires the Directors to approve or ratify
purchases of the Fund's securities.
The Fund seeks to reduce risk by investing its assets in securities of
various issuers. As such, the Fund is considered to be diversified for purposes
of the 1940 Act.
Since its inception, the Fund has emphasized safety of principal and high
credit quality. In particular, the internal investment policies of the Fund's
investment adviser, BGFA, have always prohibited the purchase for the Fund of
many types of floating-rate derivative securities that are considered
potentially volatile.
3
<PAGE> 73
The following types of derivative securities ARE NOT permitted investments
for the Fund:
- capped floaters (on which interest is not paid when market rates move
above a certain level);
- leveraged floaters (whose interest rate reset provisions are based on a
formula that magnifies changes in interest rates);
- range floaters (which do not pay any interest if market interest rates
move outside of a specified range);
- dual index floaters (whose interest rate reset provisions are tied to
more than one index so that a change in the relationship between these
indices may result in the value of the instrument falling below face
value); and
- inverse floaters (which reset in the opposite direction of their index).
Additionally, the Fund may not invest in securities whose interest rate
reset provisions are tied to an index that materially lags short-term interest
rates, such as Cost of Funds Index ("COFI") floaters. The Fund may only invest
in floating-rate securities that bear interest at a rate that resets quarterly
or more frequently, and that resets based on changes in standard money market
rate indices such as U.S. Government Treasury bills, London Interbank Offered
Rate, the prime rate, published commercial paper rates, federal funds rates,
Public Securities Associates ("PSA") floaters or JJ Kenney index floaters.
PERFORMANCE
The Fund's performance may be advertised in terms of current yield or
effective yield. These performance figures are based on historical results and
are not intended to indicate future performance. The Fund's current yield refers
to the income generated by an investment in the Fund over a seven- or thirty-day
period, expressed as an annual percentage rate. The effective yield is
calculated similarly, but assumes that the income earned from an investment is
reinvested. The Fund's effective yield is slightly higher than the current yield
because of the compounding effect of the assumed reinvestment of income earned.
Performance may vary from time to time, and past results are not
necessarily representative of future results. Investors should remember that
performance is a function of the type and quality of securities held by the Fund
and is affected by operating expenses. Performance information, such as that
described above, may not provide a basis for comparison with other
4
<PAGE> 74
investments or other investment companies using a different method of
calculating performance.
Additional information about the performance of the Fund is contained in
the Annual Report for the Fund. The Annual Report may be obtained by calling the
Company at 1-800-776-0179.
MANAGEMENT OF THE FUND
BOARD OF DIRECTORS -- The business and affairs of the Company are managed
under the direction of its Board of Directors and in conformity with Maryland
law. Additional information regarding the Officers and Directors of the Company
is included in the SAI under "Management."
INVESTMENT ADVISER -- BGFA serves as investment adviser to the Fund.
Pursuant to an Investment Advisory Contract with the Fund, BGFA provides
investment guidance and policy direction in connection with the management of
the Fund's assets, subject to the overall authority of the Company's Board of
Directors and in accordance with the Fund's investment objective and policies.
BGFA was created by the reorganization of Wells Fargo Nikko Investment
Advisors ("WFNIA"), a former affiliate of Wells Fargo, with and into an
affiliate of Wells Fargo Institutional Trust Company, N.A. ("WFITC"). BGFA is an
indirect subsidiary of Barclays Bank PLC and is located at 45 Fremont Street,
San Francisco, California 94105. As of March 31, 1996, BGFA and its affiliates
provided investment advisory services for over $284 billion of assets. The
Company has agreed to pay BGFA a monthly fee at the annual rate of 0.35% of the
Fund's average daily net assets as compensation for its advisory services. For
the period beginning January 1, 1996 and ended February 29, 1996, the Fund
actually paid BGFA an amount equal to an annual rate of 0.35% of the Fund's
average daily net assets as compensation for its advisory services.
Prior to January 1, 1996, Wells Fargo, a wholly owned subsidiary of Wells
Fargo & Company located at 420 Montgomery Street, San Francisco, California
94105, served as the Fund's investment adviser. Pursuant to an Investment
Advisory Agreement with the Fund, Wells Fargo provided investment guidance and
policy direction in connection with the management of the Fund's assets, subject
to the supervision of the Company's Board of Directors. Prior to January 1,
1996, Wells Fargo was entitled to receive monthly fees at the annual rate of
0.35% of the Fund's average daily net assets as compensation for its advisory
services. For the period beginning March 1, 1995 and ended December 31, 1995,
the Fund actually paid
5
<PAGE> 75
an amount equal to an annual rate of 0.35% of the Fund's average daily net
assets to Wells Fargo as compensation for its advisory services.
The Fund is sub-advised by Wells Fargo pursuant to a Sub-Advisory Contract
dated January 1, 1996. The Sub-Advisory Contract provides that Wells Fargo shall
furnish to the Fund investment guidance and policy direction in connection with
the daily portfolio management of the Fund. The same Wells Fargo investment
professionals that previously managed the investment portfolio of the Fund will
continue, subject to the overall supervision of BGFA, to invest the Fund's
assets and manage the Fund's investment portfolio. Wells Fargo is entitled to
receive from BGFA an amount equal to 0.05% of the average daily net assets of
the Fund as compensation for its sub-advisory services. For the period beginning
January 1, 1996 and ended February 29, 1996, BGFA actually paid to Wells Fargo
an amount equal to an annual rate of 0.05% of the Fund's average daily net
assets as compensation for its sub-advisory services.
Morrison and Foerster LLP, counsel to the Company and MIP and special
counsel to BGFA and Wells Fargo, has advised the Company, MIP, BGFA and Wells
Fargo that BGFA, Wells Fargo and their affiliates may perform the services
contemplated by the Investment Advisory Contract and this Prospectus without
violation of the Glass-Steagall Act. Such counsel has pointed out, however, that
there are no controlling judicial or administrative interpretations or decisions
and that future judicial or administrative interpretations of, or decisions
relating to, present federal or state statutes, including the Glass-Steagall
Act, and relating to the permissible activities of banks and their subsidiaries
or affiliates, as well as future changes in such statutes, regulations and
judicial or administrative decisions or interpretations, could prevent such
entities from continuing to perform, in whole or in part, such services. If any
such entity were prohibited from performing any such services, it is expected
that new agreements would be proposed or entered into with another entity or
entities qualified to perform such services.
CUSTODIAN AND TRANSFER AGENT -- BZW Barclays Global Investors, N.A. ("BGI")
currently acts as the Fund's custodian. The principal business address of BGI is
45 Fremont Street, San Francisco, California 94105. BGI is not entitled to
receive compensation for its custodial services so long as BGFA is entitled to
receive compensation for providing investment advisory services to the Fund. BGI
was formerly known as WFITC and is a subsidiary of BZW Barclays Global Investors
Holdings Inc.
Wells Fargo is the Company's transfer and dividend disbursing agent. The
Company has agreed to pay Wells Fargo a monthly fee at the annual rate of 0.03%
of the Fund's average daily net assets for transfer agency
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services. The principal business address of Wells Fargo is 525 Market Street,
San Francisco, California 94105. Prior to January 1, 1996 and the subsequent
transfer of custodial functions to BGI, Wells Fargo served as the Fund's
custodian.
SPONSOR, ADMINISTRATOR AND DISTRIBUTOR
Stephens is the Fund's sponsor and administrator, and distributes the
Fund's shares. Stephens is a full service broker/dealer and investment advisory
firm located at 111 Center Street, Little Rock, Arkansas 72201. Stephens and its
predecessor have been providing securities and investment services for more than
60 years. Additionally, it has been providing discretionary portfolio management
services since 1983. Stephens currently manages investment portfolios for
pension and profit sharing plans, individual investors, foundations, insurance
companies and university endowments.
Subject to the overall supervision of the Company's Board of Directors,
Stephens provides the Fund with administrative services, including general
supervision of the Fund's non-investment operations, coordination of the other
services provided to the Fund, compilation of information for reports to the SEC
and the state securities commissions, preparation of proxy statements and
shareholder reports, and general supervision of data compilation in connection
with preparing periodic reports to the Company's Directors and officers.
Stephens also furnishes office space and certain facilities to conduct the
Fund's business, and compensates the Company's Directors, officers and employees
who are affiliated with Stephens. In addition, except as outlined below,
Stephens will be responsible for paying all expenses incurred by the Fund other
than the fees payable to BGFA. For these services, Stephens is entitled to a
monthly fee at the annual rate of 0.05% of the Fund's average daily net assets.
For the year ended February 29, 1996, the Company paid a fee at the annual rate
of 0.05% of the Fund's average daily net assets to Stephens for its services as
administrator to the Fund.
Stephens, as the principal underwriter of the Fund within the meaning of
the 1940 Act, has entered into a Distribution Agreement with the Company
pursuant to which Stephens has the responsibility for distributing Fund shares.
The Distribution Agreement provides that Stephens shall act as agent for the
Fund for the sale of its shares, and may enter into Selling Agreements with
selling agents that wish to make available Fund shares to their respective
customers ("Selling Agents"). BGI presently acts as a Selling Agent, but does
not receive any fee from the Fund for such activities.
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FUND EXPENSES
Except for extraordinary expenses and brokerage and other expenses
connected with execution of portfolio transactions which are borne by the Fund
and the fees payable to BGFA under its agreements with the Fund, Stephens will
bear all costs of the Fund's and the Company's operations.
HOW TO BUY SHARES
WHO MAY INVEST
Only the following types of investors are eligible to invest in Fund
shares:
- Participants in Benefit Plans ("Plan Participants"), including retirement
plans, that have appointed one of the Company's Selling Agents as plan
trustee, plan administrator or other agent, or whose plan trustee, plan
administrator or other agent has an arrangement with a Selling Agent that
permits investments in Fund shares, and Plan Participants who invest
pursuant to an agreement between such a Benefit Plan and a Shareholder
Servicing Agent.
- Individuals using proceeds that are being rolled over directly from a
qualified Benefit Plan to an Individual Retirement Account ("IRA")
pursuant to arrangements between the sponsor or other agent of the
qualified Benefit Plan and a Selling Agent.
- Foundations, corporations and other business entities that have a
servicing arrangement with one of the Company's Selling Agents that
permits investments in Fund shares, and persons who invest pursuant to an
agreement between such an entity and a Selling Agent.
- Individuals, other than those described above, who invest at least $1
million in the Fund pursuant to an account arrangement with a Selling
Agent ("Qualified Buyers").
Eligible investors may purchase Fund shares in one of the several ways
described below. For more information or additional forms, call 1-800-776-0179.
The Company or Stephens may make this Prospectus available in an electronic
format. Upon receipt of a request by an investor or the investor's
representative, the Company or Stephens will transmit or cause to be transmitted
promptly, without charge, a paper copy of the electronic Prospectus.
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MINIMUM INVESTMENT AMOUNT
In most cases, investors in Fund shares are not required to establish or
maintain a minimum investment amount. However, Qualified Buyers are required to
make an initial investment in Fund shares of at least $1 million (although this
requirement may be waived under certain conditions). All investments in Fund
shares are subject to a determination by the Company that the investment
instructions are complete. If shares are purchased by a check that does not
clear, the Company reserves the right to cancel the purchase and hold the
investor responsible for any losses or fees incurred. The Company reserves the
right in its sole discretion to suspend the availability of the Fund's shares
and to reject any purchase requests. Certificates for Fund shares are not
issued. Selling Agents may establish investment amount and account balance
requirements different from those of the Funds and may charge fees in addition
to those charged by the Fund.
GENERAL
Shares of the Fund may be purchased on any Business Day at the net asset
value per share next determined after an order in proper form is received by the
Transfer Agent. Purchase orders that are received by the Transfer Agent before
the close of regular trading on the NYSE (currently 4:00 p.m., Eastern Standard
Time) are executed on the same day. Orders received by the Transfer Agent after
the close of regular trading on the NYSE are executed on the next Business Day.
The investor's Selling Agent is responsible for the prompt transmission of the
investor's purchase order to the Transfer Agent on the investor's behalf. Under
certain circumstances, a Selling Agent may establish an earlier deadline for
receipt of orders, or an investor's order transmitted to a Selling Agent may not
be received by the Transfer Agent on the same day.
Federal regulations require that an investor provide a valid taxpayer
identification number ("TIN"), which is usually the investor's social security
number or employee identification number, upon opening or reopening an account.
See "Dividends and Distributions" for further information concerning this
requirement. Failure to furnish a valid TIN to the Company could subject the
investor to penalties imposed by the Internal Revenue Service ("IRS").
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BENEFIT PLANS
Shares of the Fund are offered to Benefit Plans that have appointed one of
the Fund's Selling Agents as plan trustee, plan administrator or other agent, or
whose plan trustee, plan administrator or other agent has a servicing
arrangement with a Selling Agent that permits investments in Fund shares.
Benefit Plans include 401(k) plans and plans qualified under Section 401(a) of
the Internal Revenue Code of 1986, as amended (the "Code"), health and welfare
plans and executive deferred compensation plans. For additional information
about Benefit Plans that may be eligible to invest in Fund shares, prospective
investors should contact a Selling Agent.
Fund investments by participants in 401(k) plans are typically made by
payroll deductions arranged between participants and their employers.
Participants in the MasterWorks 401(k) program are included in this group.
Participants also may make direct contributions to their accounts in special
circumstances such as the transfer of a rollover amount from another 401(k) plan
or from a rollover IRA. Investors should contact their employer's benefits
department for more information about contribution methods.
Plan Participants who have established an account with a Shareholder
Servicing Agent may purchase Fund shares in accordance with their account
arrangements with such Shareholder Servicing Agent. The Shareholder Servicing
Agent is responsible for the prompt transmission of purchase orders. Shareholder
Servicing Agents may charge additional fees for maintaining customer accounts
other than those charged by the Fund.
IRAS, KEOGHS AND OTHER INDIVIDUAL RETIREMENT PLANS
An investor may be entitled to invest in shares of the Fund through a
tax-deferred retirement plan. In addition to offering investments in Fund shares
through IRA rollovers, a Selling Agent may offer other types of tax-deferred or
tax-advantaged plans, including a Keogh retirement plan for self-employed
professional persons, sole proprietors and partnerships. Contact a Selling Agent
for materials describing plans available through it, and their benefits,
provisions and fees.
Application materials for opening an IRA rollover, Keogh retirement plan or
other individual retirement plan can be obtained from a Selling Agent. Completed
retirement plan applications should be returned to the investor's Selling Agent
for approval and processing. If a retirement plan application is incomplete or
improperly filled out, there may be a delay before the Fund account is opened.
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PURCHASES BY QUALIFIED BUYERS AND ELIGIBLE INDIVIDUAL AND
CORPORATE INVESTORS
Qualified Buyers and eligible individual or corporate investors may open a
Fund account through a Selling Agent with whom they have an existing account
arrangement. An Account Application must be completed to open a Fund account.
Account Applications may be obtained by contacting a Selling Agent or by calling
1-800-776-0179. Selling Agents may transmit purchase orders to the Transfer
Agent on behalf of investors, including purchase orders for which payment is to
be made by wire or by transfer from an Approved Bank designated in an investor's
Account Application ("Approved Bank Account").
Qualified Buyers and eligible individual or corporate investors may
purchase Fund shares by wire by instructing the wiring bank to transmit the
specified amount in federal funds to:
Wells Fargo Bank, N.A.
San Francisco, California
Bank Routing Number: 121000248
Wire Purchase Account Number: 4068-000587
Attention: MasterWorks Funds (Name of Fund)
Account Name(s): (name(s) in which to be registered)
Account Number: (if investing into an existing account)
Share purchases are effected at the net asset value next determined after
the Account Application is received and accepted. The Selling Agent is
responsible for the prompt transmission of purchase orders to the Transfer
Agent.
Additional Purchases
A Qualified Buyer or other individual and corporate investor may make
additional purchases by contacting their Selling Agent or by instructing the
Fund's Transfer Agent to debit a designated Approved Bank Account by wire by
using the procedures described under "Initial Purchases by Wire" above.
HOW TO REDEEM SHARES
GENERAL
Investors may redeem all or a portion of their Fund shares on any Business
Day without any charge by the Company. The redemption price of the shares is the
next determined net asset value of the Fund calculated after the Company has
received a redemption request in proper form.
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Redemption proceeds may be more or less than the amount invested depending on
the Fund's net asset value at the time of purchase and redemption. The
redemption of Fund shares is ordinarily treated as a sale or exchange for
federal income tax purposes and, therefore, a redeeming shareholder may
recognize a taxable gain or loss.
The Company generally remits redemption proceeds from the Fund within seven
days after a redemption order is received in proper form, absent extraordinary
circumstances. Such extraordinary circumstances could include a period during
which an emergency exists as a result of which (a) disposal of securities owned
by the Fund is not reasonably practicable or (b) it is not reasonably
practicable for the Fund fairly to determine the value of its net assets, or a
period during which the SEC by order permits deferral of redemptions for the
protection of Fund shareholders. In addition, the Company may defer payment of a
shareholder's redemption until reasonably satisfied that such shareholder's
investments made by check have been collected (which can take up to ten days
from the purchase date). Payment of redemption proceeds may be made in portfolio
securities, subject to regulation by some state securities commissions.
Telephone redemption or exchange privileges are made available to
shareholders automatically upon opening an account (unless the shareholder
specifically declines the privileges). These privileges authorize the Transfer
Agent to act on telephone instructions from any person representing himself or
herself to be the investor and reasonably believed by the Transfer Agent to be
genuine. The Company requires the Transfer Agent to employ reasonable
procedures, such as requiring a form of personal identification, to confirm that
instructions are genuine and, if it does not follow such procedures, the Company
and the Transfer Agent may be liable for any losses due to unauthorized or
fraudulent instructions. Neither the Company nor the Transfer Agent will be
liable for following telephone instructions reasonably believed to be genuine.
During times of drastic economic or market conditions, investors may
experience difficulty in contacting the Transfer Agent by telephone to request a
redemption or exchange of Fund shares. In such cases, investors should consider
using the other redemption procedures made available to such investors. Use of
these other redemption procedures may result in the investor's redemption
request being processed at a later time than it would have been if telephone
redemption had been used. During the delay, the Fund's net asset value may
fluctuate.
Redemption orders that are received by the Transfer Agent before the close
of regular trading on the NYSE (currently 4:00 p.m., Eastern Standard Time),
will be executed at the net asset value determined as of
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the close of regular trading on the NYSE on that day. Redemption orders that are
received by the Transfer Agent after the close of regular trading on the floor
of the NYSE will be executed on the next Business Day. The investor's Selling
Agent is responsible for the prompt transmission of redemption orders to the
Fund on the investor's behalf. Under certain circumstances, a Selling Agent may
establish an earlier deadline for receipt of orders, or an investor's order
transmitted to a Selling Agent may not be received by the Transfer Agent on the
same day.
Unless the investor has made other arrangements with an appropriate Selling
Agent, and the Transfer Agent has been informed of such arrangements, proceeds
of a redemption order made by the investor through a Selling Agent are credited
to the investor's Approved Bank Account. If no such account is designated, a
check for the proceeds is mailed to the investor's address of record or, if such
address is no longer valid, the proceeds are credited to the investor's account
with the investor's Selling Agent.
BENEFIT PLANS, IRAS, KEOGHS AND OTHER INDIVIDUAL
RETIREMENT PLANS
Investors in these types of plans are subject to restrictions on
withdrawing their money under the Code. Each type of plan has established
procedures for withdrawals, which are disclosed to investors at the time of
purchase. Investors may obtain more information by contacting their employer
and/or their Selling Agent. The redemption procedures outlined in the remainder
of this section do not apply to investors in Benefit Plans or retirement plans.
Investors in these types of plans should contact their Selling Agent regarding
redemption procedures applicable to them.
REDEMPTIONS BY QUALIFIED BUYERS AND ELIGIBLE INDIVIDUAL AND
CORPORATE INVESTORS
Redemptions by Mail
1. Write a letter of instruction. Indicate the dollar amount or number of
Fund shares to be redeemed, the Fund account number and TIN (where applicable).
2. Sign the letter in exactly the same way the account is registered. If
there is more than one owner of the shares, all owners must sign.
Unless other instructions are given in proper form, a check for the
redemption proceeds is sent to the investor's address of record.
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Expedited Redemptions by Letter and Telephone
An individual and corporate investor may request an expedited redemption of
Fund shares by letter, in which case the investor's receipt of redemption
proceeds, but not the Fund's receipt of the investor's redemption request, would
be expedited. Telephone redemption and exchange privileges are made available to
an investor automatically upon the opening of an account unless the investor
declines such privileges. The investor also may request an expedited redemption
of Fund shares by telephone on any Business Day, in which case both the
investor's receipt of redemption proceeds and the Fund's receipt of the
investor's redemption request would be expedited.
Investors may request expedited redemption by telephone by calling the
Transfer Agent at 1-800-776-0179.
Investors may request expedited redemption by mailing an expedited
redemption request to the Transfer Agent at the mailing address set forth under
"How to Buy Shares -- Initial Purchases by Wire."
Upon request, proceeds of expedited redemptions are wired or credited to an
Approved Bank Account. The Company reserves the right to impose a charge for
wiring redemption proceeds. When proceeds of an individual and corporate
investor's expedited redemption are to be paid to someone else, to an address
other than that of record, or to an account with an approved bank that the
investor has not predesignated in his or her Account Application, the expedited
redemption request must be made by letter and the signature(s) on the letter
must be guaranteed in the manner discussed above, regardless of the amount of
the redemption. If the investor's expedited redemption request is received by
the Transfer Agent on a Business Day, the investor's redemption proceeds are
transmitted to the investor's Approved Bank Account on the next Business Day
(assuming the investor's investment check has cleared as described above),
absent extraordinary circumstances. Such extraordinary circumstances could
include those described above as potentially delaying redemptions, and also
could include situations involving an unusually heavy volume of wire transfer
orders on a national or regional basis or communication or transmittal delays
that could cause a brief delay in the wiring or crediting of funds.
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EXCHANGE PRIVILEGE
The exchange privilege enables an investor to purchase in exchange for
shares of the Fund, shares of a fund offered by the Company in the investor's
state of residence. Before undertaking an exchange into another fund, investors
should obtain and review a copy of the current prospectus of the fund into which
the exchange is being made. A prospectus may be obtained by calling MasterWorks
Funds at 1-800-776-0179
Shares are exchanged at the next determined net asset value. No fees are
currently charged to shareholders directly in connection with exchanges,
although the Company reserves the right, upon not less than 60 days' written
notice, to charge shareholders a nominal exchange fee in accordance with rules
promulgated by the SEC. The Company reserves the right to limit the number of
times shares may be exchanged and to reject in whole or in part any exchange
request into a fund when management believes that such action would be in the
best interests of such fund's other shareholders, such as when management
believes such action would be appropriate to protect such fund against
disruptions in portfolio management resulting from frequent transactions by
those seeking to time market fluctuations. Any such rejection is made by
management on a prospective basis only, upon notice to the shareholder given not
later than 10 days following such shareholder's most recent exchanges. The
exchange privilege may be modified or terminated at any time upon 60 days'
written notice to shareholders.
The exchange of shares of one fund for shares of another is treated for
federal income tax purposes as a sale of the shares relinquished in the exchange
by the shareholder and, therefore, an exchanging shareholder may recognize a
taxable gain or loss.
SHARE VALUE
The value of a share of each Fund is its "net asset value," or NAV. NAV is
computed by adding the value of the Fund's portfolio investments plus cash and
other assets, deducting liabilities, including the fees payable for advisory and
other services, and then dividing the result by the number of Fund shares
outstanding. As noted above, the Fund seeks to maintain a constant $1.00 NAV
share price, although there is no assurance that it will be able to do so.
The Fund is open for business each Business Day, which is a day on which
both the NYSE and the Transfer Agent are open for regular business. Currently,
the weekdays on which either the NYSE or the Transfer Agent are closed are: New
Year's Day, Presidents' Day, Good
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Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day, Christmas
Day, Veterans Day, Columbus Day (observed) and Martin Luther King, Jr. Day (each
a "Holiday"). The Fund's NAV is calculated each Business Day as of the close of
regular trading on the NYSE (currently 4:00 p.m., Eastern Standard Time).
The Fund's portfolio investments are valued on the basis of amortized cost.
This valuation method is based on the receipt of a steady rate of payment from
the date of purchase until maturity rather than actual changes in market value.
The Company's Board of Directors believes that this valuation method accurately
reflects fair value.
DIVIDENDS AND DISTRIBUTIONS
The Fund intends to declare dividends daily and pay dividends monthly.
Dividends and capital gain distributions are automatically reinvested in
additional Fund shares at net asset value. An investor begins earning dividends
on the day after the date such investor's purchase order for shares is effective
and continues to earn dividends through the date the investor redeems such
shares. Dividends for a Saturday, Sunday or Holiday are credited on the
preceding Business Day. If an investor redeems shares before the dividend
payment date, any dividends credited to such investor's account are paid on the
following dividend payment date. The Fund declares capital gain distributions
(if any) at least annually.
FEDERAL INCOME TAX INFORMATION
GENERAL
The Fund intends to qualify as a regulated investment company under
Subchapter M of the Code as long as such qualification is in the best interest
of the Fund's shareholders. The Fund will be treated as a separate entity for
federal income tax purposes and thus the provisions of the Code applicable to
regulated investment companies will be applied to the Fund and every other fund
separately, rather than to the Company as a whole. In addition, net realized
capital gains, net investment income, and operating expenses will be determined
separately for the Fund. By complying with the applicable provisions of the
Code, the Fund will not be subject to federal income taxes with respect to net
investment income and net realized capital gains distributed to its
shareholders.
The Company may be required to withhold, subject to certain exemptions, at
a rate of 31% ("backup withholding") on dividends, capital gain distributions,
and redemption proceeds (including proceeds from ex-
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<PAGE> 86
changes) paid or credited to an individual Fund shareholder, unless a
shareholder certifies that the TIN provided is correct and that the shareholder
is not subject to backup withholding, or the IRS notifies the Company that the
shareholder's TIN is incorrect or the shareholder is subject to backup
withholding. Such tax withheld does not constitute an additional tax imposed on
the shareholder, and may be claimed as a tax payment on the shareholder's
federal income tax return.
TAXABLE INVESTORS
The Fund intends to distribute all of its net investment income and net
realized capital gains (if any) each taxable year. Distributions from net
investment income (including net short-term capital gains and excluding net
tax-exempt income) will be taxable as ordinary income to shareholders who are
not currently exempt from federal income taxes. Whether a shareholder takes
dividend payments and capital gain distributions in cash or has them
automatically reinvested in Fund shares, the shareholder will ordinarily be
taxed. No part of the dividends and capital gain distributions paid to
shareholders of the Fund is expected to qualify for the dividends-received
deduction allowed to corporate shareholders.
The Fund, or the Transfer Agent on its behalf, will regularly inform
shareholders of the amount and nature of the Fund's dividends and capital gain
distributions. Investors should keep all statements they receive to assist in
recordkeeping.
BENEFIT PLAN INVESTORS
As a general matter, benefit plans, their sponsors and their participants
are not subject to federal income taxes at the time of receipt of net investment
income and capital gain distributions. However, such tax-exempt investors may be
subject to tax on certain unrelated taxable income which could arise, for
example, when such investors acquire shares in the Fund through the use of
leverage. Tax-exempt investors should consult their tax advisors regarding the
Unrelated Business Taxable Income rules.
The foregoing is a brief discussion of certain federal income tax
considerations. Further information is contained in the SAI. All investors
should consult their individual tax advisors with respect to their particular
tax situations as well as the state and local tax status of investments in
shares of the Fund.
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GENERAL INFORMATION
Although the Company is not required to hold regular annual shareholder
meetings, occasional annual or special meetings may be required for purposes
such as electing or removing Directors, approving advisory contracts and
changing the Fund's investment objective or fundamental investment policies.
DESCRIPTION OF THE COMPANY
The Fund is a series of the Company. The Company was organized as a
Maryland corporation on October 15, 1992, and currently offers the following
series: the Asset Allocation, Bond Index, Growth Stock, Money Market,
Short-Intermediate Term, S&P 500 Stock, U.S. Treasury Allocation, LifePath 2000,
LifePath 2010, LifePath 2020, LifePath 2030 and LifePath 2040 Funds. All of the
Company's existing series, except the Money Market Fund, are feeder funds in
master/feeder structures. The Company's principal office is located at 111
Center Street, Little Rock, Arkansas 72201.
VOTING
All shares of the Company have equal voting rights and will be voted in the
aggregate, rather than by fund, unless otherwise required by law (such as when a
matter affects only one fund). Shareholders of the Fund are entitled to one vote
for each share owned and fractional votes for fractional shares owned. Depending
on the terms of a particular Benefit Plan and the matter being submitted to a
vote, a sponsor may request direction from individual participants regarding a
shareholder vote. The Directors of the Company will vote shares for which they
receive no voting instructions in the same proportion as the shares for which
they do receive voting instructions. A more detailed description of the voting
rights and attributes of the shares is contained in the "Capital Stock" section
of the SAI.
INDEPENDENT AUDITORS
KPMG Peat Marwick LLP, Three Embarcadero Center, San Francisco, California
94111, serves as independent auditors for the Company.
LEGAL COUNSEL
Morrison & Foerster LLP, 2000 Pennsylvania Avenue, N.W., Washington, D.C.
20006, serves as counsel to the Company.
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INFORMATION ON THE FUND
The Company provides annual and semi-annual reports to all shareholders.
The annual reports contain audited financial statements and other information
about the Fund including additional information on performance. Shareholders may
obtain a copy of the Company's most recent annual report without charge by
phoning 1-800-776-0179.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND IN THE
COMPANY'S OFFICIAL SALES LITERATURE IN CONNECTION WITH THE OFFER OF THE FUND'S
SHARES AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER IN ANY STATE IN WHICH, OR TO ANY PERSON TO WHOM, SUCH
OFFERING MAY NOT LAWFULLY BE MADE.
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APPENDIX -- ADDITIONAL INVESTMENT POLICIES
The Fund may invest in the following types of money market instruments:
U.S. GOVERNMENT OBLIGATIONS -- The Fund may invest in various types of U.S.
Government obligations. U.S. Government obligations include securities issued or
guaranteed as to principal and interest by the U.S. Government and supported by
the full faith and credit of the U.S. Treasury. U.S. Treasury obligations differ
mainly in the length of their maturity. Treasury bills, the most frequently
issued marketable government securities, have a maturity of up to one year and
are issued on a discount basis. U.S. Government obligations also include
securities issued or guaranteed by federal agencies or instrumentalities,
including government-sponsored enterprises. Some obligations of such agencies or
instrumentalities of the U.S. Government are supported by the full faith and
credit of the United States or U.S. Treasury guarantees; others, by the right of
the issuer or guarantor to borrow from the U.S. Treasury; still others by the
discretionary authority of the U.S. Government to purchase certain obligations
of the agency or instrumentality; and others, only by the credit of the agency
or instrumentality issuing the obligation. In the case of obligations not backed
by the full faith and credit of the United States, the investor must look
principally to the agency or instrumentality issuing or guaranteeing the
obligation for ultimate repayment, which agency or instrumentality may be
privately owned. There can be no assurance that the U.S. Government would
provide financial support to its agencies or instrumentalities (including
government-sponsored agencies) where it is not obligated to do so. In addition,
U.S. Government obligations are subject to fluctuations in market value due to
fluctuations in market interest rates. As a general matter, the value of debt
instruments, including U.S. Government obligations, declines when market
interest rates increase and rises when market interest rates decrease. Certain
types of U.S. Government obligations are subject to fluctuations in yield or
value due to their structure or contract terms.
BANK OBLIGATIONS -- The Fund may invest in bank obligations which include,
but are not limited to, negotiable certificates of deposit ("CDs"), bankers'
acceptances and fixed time deposits. The Fund also may invest in other
obligations of domestic banks (including foreign branches) which have more than
$1 billion in total assets at the time of investment and are members of the
Federal Reserve System or are examined by the Comptroller of the Currency or
whose deposits are insured by the FDIC. The Fund also may invest in U.S.
dollar-denominated obligations of foreign banks (including U.S. branches) which
at the time of investment (i) have more
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than $10 billion, or the equivalent in other currencies, in total assets; and
(ii) are among the 75 largest foreign banks in the world as determined on the
basis of assets and (iii) in the opinion of the Fund's investment adviser, are
of an investment quality comparable with obligations of U.S. banks which may be
purchased by the Fund.
Fixed time deposits are obligations of U.S. banks, foreign branches of U.S.
banks or foreign banks which are payable at a stated maturity date and bear a
fixed rate of interest. Generally fixed time deposits may be withdrawn on demand
by the investor, but they may be subject to early withdrawal penalties which
vary depending upon market conditions and the remaining maturity of the
obligation. Although fixed time deposits do not have an established market,
there are no contractual restrictions on the Fund's right to transfer a
beneficial interest in the deposit to a third party. It is the policy of the
Fund not to invest in fixed time deposits subject to withdrawal penalties, other
than overnight deposits, or in repurchase agreements with more than seven days
to maturity or other illiquid securities, if more than 10% of the value of its
net assets would be so invested.
Obligations of foreign banks and foreign branches of U.S. banks involve
somewhat different investment risks from those affecting domestic obligations,
including the possibilities that liquidity could be impaired because of future
political and economic developments, that the obligations may be less marketable
than comparable obligations of U.S. banks, that a foreign jurisdiction might
impose withholding taxes on interest income payable on those obligations, that
foreign deposits may be seized or nationalized, that foreign governmental
restrictions (such as foreign exchange controls) may be adopted which might
adversely affect the payment of principal and interest on those obligations and
that the selection of those obligations may be more difficult because there may
be less publicly available information concerning foreign banks or the
accounting, auditing and financial reporting standards, practices and
requirements applicable to foreign banks may differ from those applicable to
U.S. banks. In that connection, foreign banks are not subject to examination by
any U.S. Government agency or instrumentality.
SHORT-TERM CORPORATE DEBT INSTRUMENTS -- The Fund may invest in commercial
paper (including variable amount master demand notes), which is short-term,
unsecured promissory notes issued by corporations to finance short-term credit
needs. Commercial paper is usually sold on a discount basis and has a maturity
at the time of issuance not exceeding nine months. Variable amount master demand
notes are demand obligations that permit the investment of fluctuating amounts
at varying market
A-2
<PAGE> 91
rates of interest pursuant to arrangements between the issuer and a commercial
bank acting as agent for the payees of such notes whereby both parties have the
right to vary the amount of the outstanding indebtedness on the notes.
The Fund also may invest in non-convertible corporate debt securities
(e.g., bonds and debentures) with no more than thirteen months remaining to
maturity at the date of settlement. Corporate debt securities with a remaining
maturity of less than one year tend to become extremely liquid and are traded as
money market securities.
The Fund may not invest in any securities issued by BGFA & Company or any
of its affiliates unless applicable regulatory exemptions, approvals or advisory
opinions have been obtained.
The commercial paper investments of the Fund at the time of purchase must
be rated "A-1" by Standard & Poor's Corporation ("S&P") or "Prime-1" by Moody's
Investors Service, Inc. ("Moody's") or, if not rated, must be of comparable
quality as determined by BGFA at its discretion. The other corporate debt
securities of the Fund at the time of purchase must be obligations of issuers
whose comparable short-term debt obligations would qualify for purchase by the
Fund.
REPURCHASE AGREEMENTS -- The Fund may enter into repurchase agreements
wherein the seller of a security to the Fund agrees to repurchase that security
from the Fund at a mutually agreed-upon time and price. This results in a fixed
rate of return insulated from market fluctuations during the period. The period
of maturity will not exceed seven days. The Fund may enter into repurchase
agreements only with respect to U.S. Government or government agency securities,
high-quality money market investments, and commercial paper. All repurchase
agreements are fully collateralized based on values that are marked to market
daily. While the maturities of the underlying securities in a repurchase
agreement transaction may be greater than one year, the term of any repurchase
agreement on behalf of the Fund will always be less than one year. If the seller
defaults and the value of the underlying securities has declined, the Fund may
incur a loss. In addition, if bankruptcy proceedings are commenced with respect
to the seller of the security, the Fund's disposition of the security may be
delayed pending court action. The Fund enters into repurchase agreements only
with registered broker/dealers, commercial banks and other financial
institutions that meet guidelines established by the Company's Board of
Directors and are not affiliated with the Fund's investment adviser or sub-
adviser. The Fund may participate in pooled repurchase agreement transactions
with other funds advised by BGFA.
A-3
<PAGE> 92
INVESTMENT POLICIES -- The Fund's investment objective, as set forth in the
first paragraph of "The Fund -- Investment Objective and Policies" section, is
fundamental; that is, it may not be changed without approval by the vote of the
holders of a majority of the Fund's outstanding voting securities, as described
under "Capital Stock" in the SAI. In addition, any fundamental investment policy
may not be changed without such shareholder approval. If the Company's Board of
Directors determines, however, that the Fund's investment objective can best be
achieved by a substantive change in a non-fundamental investment policy or
strategy, the Company's Board may make such change without shareholder approval
and will disclose any such material changes in the then-current prospectus.
As matters of fundamental policy, the Fund may: (i) borrow from banks up to
10% of the current value of its net assets only for temporary purposes in order
to meet redemptions, and these borrowings may be secured by the pledge of up to
10% of the current value of its net assets (but investments may not be purchased
while any such outstanding borrowing in excess of 5% of its net assets exists);
(ii) make loans of portfolio securities or other assets, however, as a matter of
current operating policy, the Fund does not loan its portfolio securities and
loans for purposes of this restriction will not include the purchase of fixed
time deposits, repurchase agreements, commercial paper and other short-term
obligations, and other types of debt instruments commonly sold in a public or
private offering; and (iii) may not invest 25% or more of its total assets
(i.e., concentrate) in any particular industry, excluding U.S. Government
obligations and obligations of domestic banks (for purposes of this restriction,
domestic bank obligations do not include obligations of foreign branches of U.S.
banks and obligations of U.S. branches of foreign banks).
As a matter of non-fundamental policy, the Fund may: (i) not purchase
securities of any issuer (except U.S. Government obligations, for certain
temporary purposes and for certain guarantees and unconditional puts) if as a
result more than 5% of the value of the Fund's total assets would be invested in
the securities of such issuer or the Fund would own more than 10% of the
outstanding voting securities of such issuer; and (ii) invest up to 10% of the
current value of its net assets in securities that are illiquid by virtue of the
absence of a readily available market or legal or contractual restrictions on
resale and fixed time deposits that are subject to withdrawal penalties and that
have maturities of more than seven days. With respect to paragraph (i), it may
be possible that the Company would own more than 10% of the outstanding voting
securities of an issuer. Disposing of illiquid or restricted securities may
involve additional costs and require additional time.
A-4
<PAGE> 93
INVESTMENT RATINGS
STANDARD & POOR'S RATING
BOND RATINGS -- Bonds rated "AAA" have the highest rating assigned by S&P
to a debt obligation. Capacity to pay interest and repay principal is extremely
strong. Bonds rated "AA" have a very strong capacity to pay interest and repay
principal and differ from the highest rated issues only in a small degree.
COMMERCIAL PAPER AND LOAN PARTICIPATION RATINGS -- Commercial paper and
loan participations with the greatest capacity for timely payment are rated "A"
by S&P. Issues within this category are further defined with designations "1,"
"2" and "3" to indicate the relative degree of safety; "A-1," the highest of the
three, indicates the degree of safety is very high.
MOODY'S INVESTORS SERVICE RATINGS
BOND RATINGS -- Bonds rated "Aaa" by Moody's are judged to be the best
quality. Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. Bonds rated "Aa" are judged to be of high
quality by all standards. They are rated lower than the best bonds because
margins of protection may not be as large or fluctuation of protective elements
may be of greater amplitude or there may be other elements present which make
the long-term risks appear somewhat larger than is the case with "Aaa"
securities.
COMMERCIAL PAPER AND LOAN PARTICIPATION RATINGS -- Moody's employs the
designations of "Prime-1," "Prime-2" and "Prime-3" to indicate the relative
capacity of the rated issuers or borrowers to repay punctually. "Prime-1" is the
highest rating assigned by Moody's. Issuers or makers of "Prime-1" obligations
must have a superior capacity for repayment of short-term promissory
obligations, and will normally be evidenced by leading market positions in well
established industries, high rates of return on funds employed, conservative
capitalization structures with moderate reliance on debt and ample asset
protection, broad margins in earnings coverage of fixed financial charges and
high internal cash generation, and well established access to a range of
financial markets and assured sources of alternate liquidity.
A-5
<PAGE> 94
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<PAGE> 95
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<PAGE> 96
SPONSOR, DISTRIBUTOR AND ADMINISTRATOR
Stephens Inc.
Little Rock, Arkansas
INVESTMENT ADVISER
BZW Barclays Global Fund Advisors
San Francisco, California
CUSTODIAN
BZW Barclays Global Investors, N.A.
San Francisco, California
TRANSFER AGENT AND DIVIDEND DISBURSING AGENT
Wells Fargo Bank, N.A.
San Francisco, California
LEGAL COUNSEL
Morrison & Foerster LLP
Washington, D.C.
INDEPENDENT AUDITORS
KPMG Peat Marwick LLP
San Francisco, California
For more information about the Funds write or call:
MASTERWORKS FUNDS INC.
c/o Wells Fargo Bank, N.A. -- Transfer Agent
420 Montgomery Street
San Francisco, California 94163
1-800-776-0179
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION, ANY STATE SECURITIES COMMISSION OR ANY OTHER
REGULATORY AUTHORITY, NOR HAVE ANY OF THE FOREGOING AUTHORITIES
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<PAGE> 97
MASTERWORKS Funds Inc.
c/o Wells Fargo Bank, N.A.
Transfer Agent
420 Montgomery Street
San Francisco, CA 94163
MWMM.pros 6/96
<PAGE> 98
MasterWorks Funds Inc. (formerly Stagecoach Inc.) (the "Company") is an
open-end, management investment company. This Prospectus contains information
about six of the Company's funds -- the ASSET ALLOCATION, BOND INDEX, GROWTH
STOCK, S&P 500 STOCK, SHORT-INTERMEDIATE TERM and U.S. TREASURY ALLOCATION FUNDS
(collectively the "Funds").
EACH FUND INVESTS ALL OF ITS ASSETS IN A CORRESPONDING MASTER PORTFOLIO
(EACH, A "MASTER PORTFOLIO") OF MASTER INVESTMENT PORTFOLIO OR MANAGED SERIES
INVESTMENT TRUST, EACH AN OPEN-END, MANAGEMENT INVESTMENT COMPANY, RATHER THAN
IN A PORTFOLIO OF SECURITIES. EACH MASTER PORTFOLIO HAS SUBSTANTIALLY THE SAME
INVESTMENT OBJECTIVE AS THE CORRESPONDING FUND.
Please read this Prospectus before investing and retain it for future
reference. It sets forth concisely the information about the Funds and the
Master Portfolios that an investor should know before investing. A Statement of
Additional Information ("SAI") dated June 28, 1996 containing additional
information about the Funds has been filed with the Securities and Exchange
Commission ("SEC") and is incorporated by reference. The SAI is available
without charge by calling the Company at 1-800-776-0179 or by writing the
Company at the address printed on the back of the Prospectus.
---------------------
AS WITH ALL MUTUAL FUNDS, THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED
BY THE SECURITIES AND EXCHANGE COMMISSION, ANY STATE SECURITIES COMMISSION OR
ANY OTHER REGULATORY AUTHORITY, NOR HAVE ANY OF THESE AUTHORITIES PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
---------------------
FUND SHARES ARE NOT DEPOSITS OR OTHER OBLIGATIONS OF, OR ISSUED, ENDORSED OR
GUARANTEED BY, BZW BARCLAYS GLOBAL INVESTORS, N.A. OR ANY OF ITS AFFILIATES.
SUCH SHARES ARE NOT INSURED BY THE U.S. GOVERNMENT, THE FEDERAL DEPOSIT
INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER GOVERNMENT AGENCY.
AN INVESTMENT IN A FUND INVOLVES CERTAIN INVESTMENT RISKS, INCLUDING POSSIBLE
LOSS OF PRINCIPAL.
MASTERWORKS FUNDS INC.
ASSET ALLOCATION FUND
BOND INDEX FUND
GROWTH STOCK FUND
S&P 500 STOCK FUND
SHORT-INTERMEDIATE TERM FUND
U.S. TREASURY ALLOCATION FUND
PROSPECTUS
JUNE 28, 1996
<PAGE> 99
Each Fund's investment experience corresponds directly with the respective
Master Portfolio's investment experience. Shares of the Master Portfolios may be
purchased only by other investment companies or other accredited investors.
References to a "Fund" are to the Fund or the corresponding Master Portfolio, as
the context requires.
HOW THESE FUNDS WORK
The ASSET ALLOCATION FUND invests in a mix of stocks (S&P 500 stocks),
bonds (long-term Treasury bonds), and high-quality money market instruments
(including certificates of deposit and Treasury bills) which the Fund manager
adjusts over time. Changes in the Fund's portfolio mix are based on the expected
returns of each asset class compared to the others.
The BOND INDEX FUND'S goal is to match the performance of the Lehman
Brothers Government/Corporate Bond Index by investing in many of the bonds found
in such Index. This Index includes most of the bonds issued by the U.S.
Treasury, U.S. government agencies, and high quality, investment grade bonds
issued by U.S. corporations. The Fund seeks to represent this portion of the
U.S. bond market by diversifying among a broad range of issuers and maturities.
The GROWTH STOCK FUND'S goal is to outperform the Standard & Poor's 500
Stock Index over periods of three to five years. The Fund manager pursues this
goal by investing approximately 60% of its portfolio in core holdings (held for
extended periods) and 40% in trading positions. Core holdings include stocks of
generally well-known or established companies with more stable long-term growth
prospects. Trading positions include newly issued stocks as well as shares of
smaller, more aggressive companies.
<PAGE> 100
The S&P 500 STOCK FUND is an index fund. It seeks to match the performance
of the S&P 500 Index by investing in a representative sample of the stocks found
in such Index. Because the S&P 500 Index includes 500 established companies of
different sizes and different sectors of the U.S. economy (industrial,
utilities, financial, and transportation), the Fund is broadly diversified. The
S&P 500 Index, a widely recognized benchmark for U.S. stocks, currently
represents about 75% of the value of all publicly traded common stocks in the
U.S.
The SHORT-INTERMEDIATE TERM FUND'S goal is to provide total returns higher
than those of the Lehman Brothers Intermediate Government/Corporate Bond Index.
It pursues this goal by diversifying among a broad range of securities with
short- to intermediate-term maturities (two to five years). These include U.S.
government and government agency bonds, U.S. corporate bonds, mortgage- and
asset-backed securities, and money market instruments.
The U.S. TREASURY ALLOCATION FUND seeks to achieve over the long term a
high level of total return consistent with reasonable risk by investing in a mix
of U.S. Treasury securities. Changes to the mix are determined by a model that
compares current and expected return and risk for certain maturity classes. The
fund manager changes the proportion of treasury bills to notes to bonds to seek
the optimal tradeoff of potential return and risk.
BZW BARCLAYS GLOBAL FUND ADVISORS ("BGFA") IS THE INVESTMENT ADVISER TO THE
MASTER PORTFOLIOS AND TOGETHER WITH ITS AFFILIATES PROVIDES OTHER SERVICES
TO THE MASTER PORTFOLIOS FOR WHICH IT IS COMPENSATED. STEPHENS INC.
("STEPHENS"), WHICH IS NOT AFFILIATED WITH BGFA, IS THE SPONSOR
AND ADMINISTRATOR AND SERVES AS THE DISTRIBUTOR FOR
THE COMPANY AND THE MASTER PORTFOLIOS.
<PAGE> 101
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Prospectus Summary.......................................... i
Summary of Fund Expenses.................................... 1
Explanation of Tables....................................... 2
Financial Highlights........................................ 4
The Funds................................................... 10
Management of the Funds..................................... 30
How to Buy Shares........................................... 37
How to Redeem Shares........................................ 40
Exchange Privilege.......................................... 44
Share Value................................................. 44
Dividends And Distributions................................. 45
Federal Income Tax Information.............................. 46
General Information......................................... 48
APPENDIX
--------
Additional Investment Policies.............................. A-1
</TABLE>
<PAGE> 102
PROSPECTUS SUMMARY
The following summary provides investors with basic information about the
Funds. For more information, please refer specifically to the identified
Prospectus sections and generally to the Prospectus and SAI.
Q. WHO CAN INVEST IN THE FUNDS?
A. Shares of the Funds are offered primarily to a select group of investors.
These include:
- Participants in employee benefit plans ("Benefit Plans"), including
retirement plans, that have appointed one of the Company's Shareholder
Servicing Agents as plan trustee, plan administrator or other agent, or
whose plan trustee, plan administrator or other agent has a servicing
arrangement with a Shareholder Servicing Agent that permits investments in
Fund shares, and individuals who invest pursuant to an agreement between a
Benefit Plan and a Shareholder Servicing Agent.
- Individuals using proceeds that are being rolled over directly from a
qualified Benefit Plan to an Individual Retirement Account ("IRA")
pursuant to arrangements between the sponsor or other agent of the
qualified Benefit Plan and a Shareholder Servicing Agent.
- Foundations, corporations and other business entities that have a
servicing arrangement with one of the Company's Shareholder Servicing
Agents that permits investments in Fund shares, and persons who invest
pursuant to an agreement between such an entity and a Shareholder
Servicing Agent.
- Individuals, other than those described above, who invest at least $1
million in a Fund pursuant to an account arrangement with a Shareholder
Servicing Agent.
See "How To Buy Shares."
Q. WHAT ARE SOME OF THE POTENTIAL RISKS ASSOCIATED WITH AN INVESTMENT IN THE
FUNDS?
A. Investments in the Funds (and the Master Portfolios) are not bank deposits
or obligations of BZW Barclays Global Investors, N.A. ("BGI") and are not
insured by the Federal Deposit Insurance Corporation ("FDIC"). Investments
in the Funds are not insured or guaranteed against loss of principal.
Therefore, investors should be prepared to accept some risk with the money
invested in the Funds. The
i
<PAGE> 103
portfolio equity securities held by each Master Portfolio are subject to
equity-market risk. Equity-market risk is the possibility that common stock
prices will decline over short or even extended periods. The U.S. stock
market will experience periods when stock prices rise and periods when
stock prices decline. Debt securities held by each Master Portfolio are
subject to interest-rate risk. Interest-rate risk is the risk that
increases in market interest rates may adversely affect the value of
certain of the debt instruments in which a Master Portfolio may invest. The
value of such debt instruments generally changes inversely to changes in
market interest rates. As with all mutual funds, there can be no assurance
that the Funds will achieve their respective investment objectives.
See "The Funds -- Investment Objective and Policies" and
"Appendix -- Additional Investment Policies."
Q. HOW DO I INVEST IN THE FUNDS?
A. Shares of the Funds can be purchased by establishing an account arrangement
with a designated Shareholder Servicing Agent. Shares may be purchased at
net asset value on any day the New York Stock Exchange ("NYSE") is open for
regular business (a "Business Day").
To invest in the Funds contact a Shareholder Servicing Agent to receive
information and an Account Application. An Account Application must be
completed and signed to open an account.
See "How to Buy Shares."
Q. WHO MANAGES MY INVESTMENTS?
A. BZW Barclays Global Fund Advisors ("BGFA"), as the investment adviser to the
Master Portfolios, manages the investments of each Master Portfolio. The
Company has not retained the services of a separate investment adviser for
the Funds because each Fund invests all of its assets in the corresponding
Master Portfolio. As of March 31, 1996, BGFA and its affiliates provided
investment advisory services for over $284 billion of assets.
See "Management of the Funds."
Q. WHAT ARE THE FEES FOR INVESTING?
A. Unlike certain other mutual funds which charge sales loads or other
transaction fees, the Funds do not impose shareholder transaction fees on
the purchase, redemption or exchange of their shares. Shareholder Servicing
Agents, in accordance with the terms of their customer account
arrangements, may charge additional fees for maintaining customer accounts.
See "Management of the Funds."
ii
<PAGE> 104
Q. HOW ARE THE FUNDS' INVESTMENTS VALUED?
A. The price per share or "net asset value" of each Fund is based on the net
asset value of interests in the corresponding Master Portfolio. The net
asset value of interests in a Master Portfolio is based on the total value
of the portfolio securities owned by the Master Portfolio (plus cash and
other assets net of liabilities) and the number of outstanding interests in
the Master Portfolio. A new net asset value for each Fund and Master
Portfolio is calculated on each Business Day.
See "Share Value."
Q. DO THE FUNDS PAY DIVIDENDS?
A. The Growth Stock Fund and the S&P 500 Stock Fund each intend to pay
quarterly dividends consisting of substantially all of their net investment
income and annual distributions consisting of substantially all of their
net realized capital gains. The Asset Allocation Fund, Bond Index Fund,
Short-Intermediate Term Fund and the U.S. Treasury Allocation Fund intend
to pay monthly dividends consisting of substantially all of their net
investment income and annual distributions consisting of substantially all
of their net realized capital gains. All dividends and distributions are
automatically reinvested at net asset value in shares of the Fund paying
the dividend or distribution, unless payment in cash is requested and your
arrangement with a Shareholder Servicing Agent permits the processing of
cash payments. Each reinvestment increases the total number of shares held
by the shareholder. See "Dividends and Distributions."
Q. ARE EXCHANGES TO OTHER FUNDS PERMITTED?
A. Yes. The exchange privilege enables an investor to exchange Fund shares for
shares of another fund offered by MasterWorks Funds provided such shares
are offered for sale in the investor's state of residence. See "Exchange
Privilege."
Q. HOW DO I REDEEM MY SHARES?
A. Shares of the Funds may be redeemed at net asset value without the
imposition of a sales charge or redemption fee on any Business Day by
letter or by telephone (unless you decline telephone privileges). See "How
to Redeem Shares." For more information contact Stephens or your
Shareholder Servicing Agent.
iii
<PAGE> 105
Q. WHAT ARE DERIVATIVES AND DO THE FUNDS AND THE MASTER PORTFOLIOS USE THEM?
A. Some of the permissible investments described throughout this Prospectus are
considered "derivative" securities because their values are derived, at
least in part, from the prices of other securities or specified assets,
indices or rates. The futures contracts and options on futures contracts
that the Master Portfolios may purchase are considered derivatives. The
Master Portfolios may purchase or sell these contracts or options as
substitutes for comparable market positions in the underlying securities.
Certain of the floating- and variable-rate instruments that the Master
Portfolios may purchase can also be considered derivatives. Some
derivatives may be more sensitive than direct securities to changes in
interest rates or sudden market moves. Some derivatives also may be
susceptible to fluctuations in yield or value due to their structure or
contract terms.
Q. WHAT STEPS DO THE FUNDS AND MASTER PORTFOLIOS TAKE TO CONTROL
DERIVATIVES-RELATED RISKS?
A. BGFA, as investment adviser to the Master Portfolios, uses a variety of
internal risk management procedures to ensure that derivatives use is
consistent with the Master Portfolios' and the Funds' investment
objectives, does not expose either the Master Portfolios or the Funds to
undue risks and is closely monitored. These procedures include providing
periodic reports to the Boards of Trustees and Directors concerning the use
of derivatives. Also, cash maintained by the Master Portfolios for
short-term liquidity needs (e.g., to meet anticipated redemption requests)
will, as a general matter, only be invested in U.S. Treasury bills, shares
of other mutual funds and repurchase agreements. The use of derivatives is
also subject to broadly applicable investment policies. For example, a
Master Portfolio may not invest more than a specified percentage of its
assets in "illiquid securities," including those derivatives that do not
have active secondary markets. In addition, the Master Portfolios may not
use derivatives without establishing adequate "cover" in compliance with
SEC rules limiting the use of leverage.
See "Appendix -- Additional Investment Policies."
iv
<PAGE> 106
SUMMARY OF FUND EXPENSES
ANNUAL FUND OPERATING EXPENSES
(AS A PERCENTAGE OF AVERAGE DAILY NET ASSETS)
<TABLE>
<CAPTION>
ASSET
ALLOCATION BOND INDEX GROWTH STOCK
FUND FUND FUND
----------- ----------- ------------
<S> <C> <C> <C>
Management Fees(1)............. 0.35% 0.07% 0.58%
Other Expenses.................
Shareholder Servicing Fees... 0.20% 0.07% 0.10%
Miscellaneous Expenses....... 0.20% 0.09% 0.08%
(after waivers and
reimbursements)(2)
Total Other Expenses........... 0.40% 0.16% 0.18%
(after waivers and
reimbursements)(3)
TOTAL FUND OPERATING
EXPENSES..................... 0.75% 0.23% 0.76%
(after waivers and
reimbursements)(4)
</TABLE>
<TABLE>
<CAPTION>
SHORT- U.S. TREASURY
S&P STOCK INTERMEDIATE ALLOCATION
FUND TERM FUND FUND
----------- ------------ -------------
<S> <C> <C> <C>
Management Fees(1)............. 0.05% 0.35% 0.30%
Other Expenses.................
Shareholder Servicing Fees... 0.07% 0.10% 0.20%
Miscellaneous Expenses....... 0.08% 0.20% 0.20%
(after waivers and
reimbursements)(2)
Total Other Expenses........... 0.15% 0.30% 0.40%
(after waivers and
reimbursements)(3)
TOTAL FUND OPERATING
EXPENSES..................... 0.20% 0.65% 0.70%
(after waivers and
reimbursements)(4)
</TABLE>
- ---------------
(1) Would be 0.08%, 0.60% and 0.45% (before waivers and reimbursements) for the
Bond Index, Growth Stock and Short-Intermediate Term Funds, respectively.
(2) Would be 0.38%, 0.16%, 0.14% and 0.89% (before waivers and reimbursements)
for the Bond Index, Growth Stock, S&P 500 Stock and Short-Intermediate Term
Funds, respectively.
1
<PAGE> 107
(3) Would be 0.45%, 0.26%, 0.21% and 0.99% (before waivers and reimbursements)
for the Bond Index, Growth Stock, S&P 500 Stock and Short-Intermediate Term
Funds, respectively.
(4) Would be 0.53%, 0.86%, 0.26% and 1.44% (before waivers and reimbursements)
for the Bond Index, Growth Stock, S&P 500 Stock and Short-Intermediate Term
Funds, respectively.
EXAMPLE OF EXPENSES
An investor would pay the following expenses on a $1,000 investment in a Fund,
assuming (1) a 5% annual return and (2) redemption at the end of each time
period:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
ASSET ALLOCATION FUND....... $8 $24 $42 $ 93
BOND INDEX FUND............. $2 $ 7 $13 $ 29
GROWTH STOCK FUND........... $8 $24 $42 $ 94
S&P 500 STOCK FUND.......... $2 $ 6 $11 $ 26
SHORT-INTERMEDIATE TERM
FUND...................... $7 $21 $36 $ 81
U.S. TREASURY ALLOCATION
FUND...................... $7 $22 $39 $ 87
</TABLE>
EXPLANATION OF TABLES
The purpose of the foregoing tables is to assist an investor in
understanding the various fees and expenses that an investor in the Funds will
bear directly or indirectly. The foregoing tables reflect expenses for each of
the Funds at both the Fund and the Master Portfolio levels. The tables do not
reflect any charges that may be imposed by Shareholder Servicing Agents or
Selling Agents, including BGFA, directly on customer accounts in connection with
an investment in the Funds. The following provides a general explanation of the
information provided in the table for each of the Funds.
ANNUAL FUND OPERATING EXPENSES are based on amounts incurred during the
most recent fiscal year, restated to reflect voluntary fee waivers and expense
reimbursements that will continue to reduce expenses during the current fiscal
year. BGFA and Stephens each, in its sole discretion, may waive or reimburse all
or a portion of its respective fees charged to, or expenses paid by, a Fund or
Master Portfolio. Any waivers or reimbursements would reduce a Fund's or Master
Portfolio's total expenses. For more complete descriptions of the various costs
and expenses you can
2
<PAGE> 108
expect to incur as an investor in the Funds, please see the Prospectus section
captioned "Management of the Funds."
EXAMPLE OF EXPENSES is a hypothetical example which illustrates the
expenses associated with a $1,000 investment in the Funds over stated periods,
based on the expenses in the table above and an assumed annual rate of return of
5%. This annual rate of return should not be considered an indication of actual
or expected Fund performance. In addition, the Example of Expenses should not be
considered a representation of past or future expenses; actual expenses and
returns may be greater or less than those shown above.
With regard to the combined fees and expenses of the Funds and the Master
Portfolios, the Company's Board of Directors has considered whether the various
costs and benefits of investing all of each Fund's assets in the corresponding
Master Portfolio rather than directly in a portfolio of securities would be more
or less than if the Fund invested in portfolio securities directly. The
Company's Board of Directors believes that the aggregate per share expenses of a
Fund and its corresponding Master Portfolio will be less than or approximately
equal to the expenses such Fund would incur if it directly acquired and managed
the type of securities held by its corresponding Master Portfolio. See
"Management of the Funds" for more complete descriptions of the various costs
and expenses applicable to investors in each of the Funds.
Other mutual funds may invest in the Master Portfolios. The expenses and,
accordingly, the investment returns of such other mutual funds may differ from
those of the Funds. Information about other investment options in the Master
Portfolios may be obtained by calling Stephens at 1-800-643-9691.
* * *
3
<PAGE> 109
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING AS SHOWN)
The following information has been derived from the Financial Highlights
included in the Funds' financial statements for the fiscal year ended February
29, 1996. The financial statements are incorporated by reference into the Funds'
SAI and have been audited by KPMG Peat Marwick LLP, independent auditors, whose
report thereon also is incorporated by reference into the SAI. This information
should be read in conjunction with the financial statements and the notes
thereto. The SAI has been incorporated by reference into this Prospectus.
ASSET ALLOCATION FUND
<TABLE>
<CAPTION>
YEAR YEAR PERIOD
ENDED ENDED ENDED
FEBRUARY 29, FEBRUARY 28, FEBRUARY 28,
1996 1995* 1994**
------------ ------------ ------------
<S> <C> <C> <C>
Net Asset Value, beginning of period.... $ 9.93 $ 10.19 $ 10.00
Income from investment operations:
Net investment income................. 0.40 0.44 0.23
Net realized and unrealized gain
(loss) on investments............... 1.90 (0.14) 0.28
-------- -------- --------
Total from investment operations........ 2.30 0.30 0.51
Less distributions:
Dividends from net investment
income.............................. (0.40) (0.44) (0.23)
Distributions from net realized
gains............................... 0.00 (0.12) (0.09)
-------- -------- --------
Total distributions..................... (0.40) (0.56) (0.32)
-------- -------- --------
Net Asset Value, end of period.......... $ 11.83 $ 9.93 $ 10.19
======== ======== ========
Total return (not annualized)........... 23.54% 3.28% 5.14%
Ratios/Supplemental data:
Net assets, end of period (000)....... $397,930 $293,696 $217,140
Number of shares outstanding, end of
period (000)........................ 33,634 29,585 21,303
Ratios to average net assets
(annualized):
Ratio of expenses to average net
assets(1)........................... 0.75% 0.75% 0.79%
Ratio of net investment income to
average net assets(2)............... 3.62% 4.62% 3.47%
Portfolio turnover...................... 40% 24%+ 33%
</TABLE>
<TABLE>
<S> <C> <C> <C>
- ---------------
(1) Ratio of expenses to average net
assets prior to waived fees and
reimbursed expenses................. N/A 0.76% 0.80%
(2) Ratio of net investment income to
average net assets prior to waived
fees and reimbursed expenses........ N/A 4.61% 3.46%
</TABLE>
* Beginning May 26, 1994 the Fund, pursuant to shareholder approval, was
reorganized and began investing in the corresponding Master Portfolio of MIP.
The financial information presented herein for periods beginning May 26, 1994
reflects the activity of, and expenses charged to, the Master Portfolio.
** The Fund commenced operations on July 2, 1993.
+ This rate is for the period from March 1, 1994 to May 25, 1994. As of May 26,
1994 the Fund invests all of its assets in the corresponding Master Portfolio
of MIP. The portfolio turnover rate for the period beginning May 26, 1994 and
ending February 28, 1995 was 23% and reflects activity by the Master
Portfolio which was audited by other auditors.
4
<PAGE> 110
BOND INDEX FUND
<TABLE>
<CAPTION>
YEAR YEAR PERIOD
ENDED ENDED ENDED
FEBRUARY 29, FEBRUARY 28, FEBRUARY 28,
1996 1995* 1994**
------------ ------------ ------------
<S> <C> <C> <C>
Net Asset Value, beginning of period.... $ 9.20 $ 9.76 $ 10.00
Income from investment operations:
Net investment income................. 0.64 0.64 0.38
Net realized and unrealized gain
(loss) on investments............... 0.46 (0.56) (0.24)
------- ------- -------
Total from investment operations........ 1.10 0.08 0.14
Less distributions:
Dividends from net investment
income.............................. (0.64) (0.64) (0.38)
Distributions from net realized
gains............................... 0.00 0.00 0.00
------- ------- -------
Total distributions..................... (0.64) (0.64) (0.38)
------- ------- -------
Net Asset Value, end of period.......... $ 9.66 $ 9.20 $ 9.76
======= ======= =======
Total return (not annualized)........... 12.17% 1.12% 1.38%
Ratios/Supplemental data:
Net assets, end of period (000)....... $ 58,090 $ 18,593 $ 14,899
Number of shares outstanding, end of
period (000)........................ 6,016 2,020 1,526
Ratios to average net assets
(annualized):
Ratio of expenses to average net
assets(1)........................... 0.23% 0.23% 0.31%
Ratio of net investment income to
average net assets(2)............... 6.67% 7.08% 5.88%
Portfolio turnover...................... 21% 14%+ 20%
</TABLE>
<TABLE>
<S> <C> <C> <C>
- ---------------
(1) Ratio of expenses to average net
assets prior to waived fees and
reimbursed expenses................. 0.53% 0.71% 0.32%
(2) Ratio of net investment income to
average net assets prior to waived
fees and reimbursed expenses........ 6.37% 6.61% 5.87%
</TABLE>
* Beginning May 26, 1994 the Fund was reorganized and began investing in the
corresponding Master Portfolio of MIP. The financial information presented
herein for periods beginning May 26, 1994 reflects the activity of, and
expenses charged to, the Master Portfolio.
** The Fund commenced operations on July 2, 1993.
+ This rate is for the period from March 1, 1994 to May 25, 1994. As of May 26,
1994 the Fund invests all of its assets in the corresponding Master Portfolio
of MIP. The portfolio turnover rate for the period beginning May 26, 1994 and
ending February 28, 1995 was 37% and reflects activity by the Master
Portfolio which was audited by other auditors.
5
<PAGE> 111
GROWTH STOCK FUND
<TABLE>
<CAPTION>
YEAR YEAR PERIOD
ENDED ENDED ENDED
FEBRUARY 29, FEBRUARY 28, FEBRUARY 28,
1996 1995* 1994**
------------ ------------ ------------
<S> <C> <C> <C>
Net Asset Value, beginning of period.... $ 11.64 $ 11.52 $ 10.00
Income from investment operations:
Net investment income (loss).......... (0.01) 0.00 (0.01)
Net realized and unrealized gain
(loss) on investments............... 4.82 0.19 1.86
-------- ------- -------
Total from investment operations........ 4.81 0.19 1.85
Less distributions:
Dividends from net investment
income.............................. (0.01) 0.00 0.00
Distributions from net realized
gains............................... (1.66) (0.07) (0.33)
-------- ------- -------
Total distributions..................... (1.67) (0.07) (0.33)
-------- ------- -------
Net Asset Value, end of period.......... $ (14.78) $ 11.64 $ 11.52
======== ======= =======
Total return (not annualized)........... 42.10% 1.70% 18.65%
Ratios/supplemental data:
Net assets, end of period (000)....... $178,584 $ 96,925 $ 45,443
-------- ------- -------
Number of shares outstanding, end of
period (000)........................ 12,084 8,330 3,945
Ratios to average net assets
(annualized):
Ratio of expenses to average net
assets(1)........................... 0.76% 0.76% 0.80%
Ratio of net investment income (loss)
to average net assets(2)............ (0.12%) (0.02%) (0.18%)
Portfolio turnover...................... 145% 27%+ 104%
- ---------------
(1) Ratio of expenses to average net
assets prior to waived fees and
reimbursed expenses................. 0.86% 0.87% 0.80%
(2) Ratio of net investment income
(loss) to average net assets prior
to waived fees and reimbursed
expenses............................ (0.22%) (0.12%) (0.18%)
</TABLE>
* Beginning May 26, 1994 the Fund was reorganized and began investing in the
corresponding Master Portfolio of MSIT. The financial information presented
herein for periods beginning May 26, 1994 reflects the activity of, and
expenses charged to, the Master Portfolio.
** The Fund commenced operations on July 2, 1993.
+ This rate is for the period from February 28, 1994 to May 25, 1994. As of May
26, 1994 the Fund invests all of its assets in the corresponding Master
Portfolio of MSIT. The portfolio turnover rate for the period beginning May
26, 1994 and ending February 28, 1995 was 93% and reflects activity by the
Master Portfolio which was audited by other auditors.
6
<PAGE> 112
S&P 500 STOCK FUND
<TABLE>
<CAPTION>
YEAR YEAR PERIOD
ENDED ENDED ENDED
FEBRUARY 29, FEBRUARY 28, FEBRUARY 28,
1996 1995* 1994**
------------ ------------ ------------
<S> <C> <C> <C>
Net Asset Value, beginning of period.... $ 10.83 $ 10.50 $ 10.00
Income from investment operations:
Net investment income................. 0.31 0.27 0.16
Net realized and unrealized gain
(loss) on investments............... 3.36 0.41 0.47
-------- -------- --------
Total from investment operations........ 3.67 0.68 0.63
Less distributions:
Dividends from net investment
income.............................. (0.30) (0.27) (0.12)
Distributions from net realized
gains............................... (0.18) (0.08) (0.01)
-------- -------- --------
Total distributions..................... (0.48) (0.35) (0.13)
-------- -------- --------
Net Asset Value, end of period.......... $ 14.02 $ 10.83 $ 10.50
======== ======== ========
Total return (not annualized)........... 34.35% 6.71% 6.30%
Ratios/supplemental data:
Net assets, end of period (000)....... $882,696 $448,776 $122,391
Number of shares outstanding, end of
period (000)........................ 62,951 41,427 11,653
Ratios to average net assets
(annualized):
Ratio of expenses to average net
assets(1)........................... 0.20% 0.21% 0.27%
Ratio of net investment income to
average net assets(2)............... 2.52% 2.93% 2.46%
Portfolio turnover...................... 2% 8%+ 4%
- ---------------
(1) Ratio of expenses to average net
assets prior to waived fees and
reimbursed expenses................. 0.26% 0.25% 0.28%
(2) Ratio of net investment income to
average net assets prior to waived
fees and reimbursed expenses........ 2.46% 2.88% 2.45%
</TABLE>
* Beginning May 26, 1994 the Fund was reorganized and began investing in the
corresponding Master Portfolio of MIP. The financial information presented
herein for periods beginning May 26, 1994 reflects the activity of, and
expenses charged to, the Master Portfolio.
** The Fund commenced operations on July 2, 1993.
+ This rate is for the period from March 1, 1994 to May 25, 1994. As of May 26,
1994 the Fund invests all of its assets in the corresponding Master Portfolio
of MIP. The portfolio turnover rate for the period beginning May 26, 1994 and
ending February 28, 1995 was 5% and reflects activity by the Master Portfolio
which was audited by other auditors.
7
<PAGE> 113
SHORT-INTERMEDIATE TERM FUND
<TABLE>
<CAPTION>
YEAR YEAR PERIOD
ENDED ENDED ENDED
FEBRUARY 29, FEBRUARY 28, FEBRUARY 28,
1996 1995* 1994**
------------ ------------ ------------
<S> <C> <C> <C>
Net Asset Value, beginning of period.... $ 9.15 $ 9.72 $10.00
------- ------- ------
Income from investment operations:
Net investment income................. 0.65 0.64 0.42
Net realized and unrealized (loss) on
investments......................... 0.25 (0.57) (0.28)
------- ------- ------
Total from investment operations........ 0.90 0.07 0.14
Less distributions:
Dividends from net investment
income.............................. (0.65) (0.64) (0.42)
Distributions from net realized
gains............................... 0.00 0.00 0.00
------- ------- ------
Total distributions..................... (0.65) (0.64) (0.42)
------- ------- ------
Net Asset Value, end of period.......... $ 9.40 $ 9.15 $ 9.72
======= ======= ======
Total return (not annualized)........... 10.07% 0.89% 1.42%
Ratios/supplemental data:
Net assets, end of period (000)....... $ 13,704 $ 14,298 $5,258
Number of shares outstanding, end of
period (000)........................ 1,458 1,562 541
Ratios to average net assets
(annualized):
Ratio of expenses to average net
assets(1)........................... 0.65% 0.65% 0.65%
Ratio of net investment income to
average net assets(2)............... 6.82% 7.07% 6.02%
Portfolio turnover...................... 105% 29%+ 277%
</TABLE>
<TABLE>
<S> <C> <C> <C>
- ---------------
(1) Ratio of expenses to average net
assets prior to waived fees and
reimbursed expenses................. 1.44% 1.41% 0.65%
(2) Ratio of net investment income to
average net assets prior to waived
fees and reimbursed expenses........ 6.03% 6.32% 6.02%
</TABLE>
* Beginning May 26, 1994 the Fund was reorganized and began investing in the
corresponding Master Portfolio of MSIT. The financial information presented
herein for periods beginning May 26, 1994 reflects the activity of, and
expenses charged to, the Master Portfolio.
** The Fund commenced operations on July 2, 1993.
+ This rate is for the period from February 28, 1994 to May 25, 1994. As of May
26, 1994 the Fund invests all of its assets in the corresponding Master
Portfolio of MSIT. The portfolio turnover rate for the period beginning May
26, 1994 and ending February 28, 1995 was 96% and reflects activity of the
Master Portfolio which was audited by other auditors.
8
<PAGE> 114
U.S. TREASURY ALLOCATION FUND
<TABLE>
<CAPTION>
YEAR YEAR PERIOD
ENDED ENDED ENDED
FEBRUARY 29, FEBRUARY 28, FEBRUARY 28,
1996 1995* 1994**
------------ ------------ ------------
<S> <C> <C> <C>
Net Asset Value, beginning of period.... $ 8.99 $ 9.67 $ 10.00
------- ------- -------
Income from investment operations:
Net investment income................. 0.51 0.59 0.39
Net realized and unrealized gain
(loss) on investments............... 0.36 (0.68) (0.05)
------- ------- -------
Total from investment operations...... 0.87 (0.09) 0.34
Less distributions:
Dividends from net investment
income.............................. (0.51) (0.59) (0.39)
Distributions from net realized
gains............................... 0.00 0.00 (0.20)
Distributions in excess of net
realized gains...................... 0.00 0.00 (0.08)
------- ------- -------
Total distributions..................... (0.51) (0.59) (0.67)
------- ------- -------
Net Asset Value, end of period.......... $ 9.35 $ 8.99 $ 9.67
======= ======= =======
Total return (not annualized)........... 9.89% (0.76%) 3.33%
Ratios/supplemental data:
Net assets, end of period (000)....... $ 51,632 $ 56,852 $ 58,216
Number of shares outstanding, end of
period (000)........................ 5,522 6,324 6,019
Ratios to average net assets
(annualized):
Ratio of expenses to average net
assets(1)........................... 0.70% 0.70% 0.78%
Ratio of net investment income to
average net assets(2)............... 5.47% 6.52% 5.79%
Portfolio turnover...................... 325% 43%+ 210%
- ---------------
(1) Ratio of expenses to average net
assets prior to waived fees and
reimbursed expenses................. N/A 0.72% 0.80%
(2) Ratio of net investment income to
average net assets prior to waived
fees and reimbursed expenses........ N/A 6.50% 5.77%
</TABLE>
* Beginning May 26, 1994 the Fund was reorganized and began investing in the
corresponding Master Portfolio of MIP. The financial information presented
herein for periods beginning May 26, 1994 reflects the activity of, and
expenses charged to, the Master Portfolio.
** The Fund commenced operations on July 2, 1993.
+ This rate is for the period from March 1, 1994, to May 25, 1994. As of May
26, 1994 the Fund invests all of its assets in the corresponding Master
Portfolio of MIP. The portfolio turnover rate for the period beginning May
26, 1994 and ending February 28, 1995 was 87% and reflects activity of the
Master Portfolio audited by other auditors.
9
<PAGE> 115
THE FUNDS
INVESTMENT OBJECTIVE AND POLICIES
The following is a summary of the investment objectives of the Funds:
ASSET ALLOCATION FUND
The Asset Allocation Fund seeks to achieve over the long term a high level
of total return, including net realized and unrealized capital gains and net
investment income, consistent with reasonable risk. This investment objective is
fundamental and cannot be changed without shareholder approval. The Asset
Allocation Fund seeks to achieve its investment objective by investing all of
its assets in the Asset Allocation Master Portfolio of Master Investment
Portfolio ("MIP"), which has substantially the same fundamental investment
objective as the Asset Allocation Fund.
The Asset Allocation Master Portfolio seeks to achieve its objective by
pursuing an asset allocation strategy. This strategy is based upon the premise
that certain asset classes from time to time are under- or over-valued by the
market relative to each other and that under-valued asset classes represent
relatively better long-term, risk-adjusted investment opportunities, and that
timely, low-cost shifts among common stocks, U.S. Treasury bonds and money
market instruments (as determined by their perceived relative over- or
under-valuation) can produce investment returns superior to investments in only
one such class. The Asset Allocation Fund is designed for investors with
investment horizons of five years or greater; it is not designed for investors
seeking short-term gains. There can be no assurance that the Asset Allocation
Fund and the Asset Allocation Master Portfolio will achieve their respective
investment objectives.
BGFA uses an investment model developed over the past 17 years (the "Asset
Allocation Model") to pursue the Asset Allocation Master Portfolio's asset
allocation strategy. The Asset Allocation Model is presently used as a basis for
managing several large employee benefit trust funds and other institutional
accounts and is proprietary to BGFA. The Asset Allocation Model analyzes
extensive financial data from numerous sources and regularly determines a
recommended portfolio allocation among common stocks, U.S. Treasury bonds and
money market instruments. The Asset Allocation Model has broad latitude in
selecting the class of investments and the particular securities within a class
in which the Asset Allocation Master Portfolio may invest. At any given time,
substantially all of the Asset Allocation Master Portfolio's assets may be
invested in a single asset
10
<PAGE> 116
class and the relative allocation among the asset classes may shift
significantly from time to time.
The Asset Allocation Master Portfolio's investments are compared from time
to time to the Asset Allocation Model's recommended allocation. Recommended
reallocations are implemented subject to BGFA's assessment of current economic
conditions and investment opportunities. BGFA may change from time to time the
criteria and methods it uses to implement the recommendations of the Asset
Allocation Model. Recommended reallocation is implemented in accordance with
trading policies designed to take advantage of market opportunities and reduce
transaction costs. The asset allocation mix selected by the Asset Allocation
Model is the primary determinant in the Asset Allocation Master Portfolio's
investment performance.
The overall management of the Asset Allocation Master Portfolio is based on
the recommendation of the Asset Allocation Model, and no person is primarily
responsible for recommending the mix of asset classes in the Asset Allocation
Master Portfolio or the mix of securities within the asset classes. Decisions
relating to the Asset Allocation Model are made by BGFA's investment committee.
The Asset Allocation Master Portfolio's assets are invested as follows:
Stock Investments. In making its stock investments, the Asset Allocation
Master Portfolio invests in substantially all of the common stocks which
comprise the Standard & Poor's 500 Composite Stock Price Index ("S&P 500
Index")(1) using, to the extent feasible, the same weighting used by that index.
The Asset Allocation Master Portfolio does not individually select common stocks
on the basis of traditional investment analysis.
U.S. Treasury Bonds. The Asset Allocation Master Portfolio invests in U.S.
Treasury bonds with remaining maturities of at least 20 years. Under normal
market conditions, the dollar-weighted average maturity of this
- ---------------
(1) S&P does not sponsor the Asset Allocation Fund or the Asset Allocation
Master Portfolio, nor is it affiliated in any way with BGFA, the Asset
Allocation Master Portfolio or the Asset Allocation Fund. "Standard &
Poor's(R)," "S&P(R)," "S&P 500(R)," and "Standard & Poor's 500(R)" are
trademarks of McGraw-Hill, Inc. and have been licensed for use by the Asset
Allocation Fund and the Asset Allocation Master Portfolio. The Asset
Allocation Fund and the Asset Allocation Master Portfolio are not
sponsored, endorsed, sold, or promoted by S&P and S&P makes no
representation or warranty, express or implied, regarding the advisability
of investing in the Asset Allocation Fund or the Asset Allocation Master
Portfolio.
11
<PAGE> 117
portion of the Asset Allocation Master Portfolio's investment portfolio is
expected to range between 22 and 28 years. The Asset Allocation Master Portfolio
invests this portion of its assets in an effort to replicate the total return
performance of the Lehman Brothers 20 Year Treasury Index which is composed of
U.S. Treasury securities with remaining maturities of 20 years or more.
Money Market Investments. The money market instruments held by the Asset
Allocation Master Portfolio generally consist of high-quality money market
instruments, including U.S. Government obligations, obligations of domestic and
foreign banks, short-term corporate debt instruments, repurchase agreements and
time deposits.
A more complete description of the Asset Allocation Master Portfolio's
investments and investment activities is contained in "Appendix -- Additional
Investment Policies."
BGFA manages other portfolios which also invest in accordance with the
Asset Allocation Model. The performance of each of those other portfolios is
likely to vary among themselves and from the performance of the Asset Allocation
Fund. Such variation in performance is primarily due to different equilibrium
asset mix assumptions used for the various portfolios, timing differences in the
implementation of the model's recommendations and differences in expenses and
liquidity requirements.
BOND INDEX FUND
The Bond Index Fund seeks to approximate as closely as practicable before
fees and expenses the total rate of return of the U.S. market for issued and
outstanding U.S. Government and high-grade corporate bonds as measured by the
Lehman Brothers Government/Corporate Bond Index ("LB Bond Index"). This
investment objective is fundamental and cannot be changed without shareholder
approval. The Bond Index Fund seeks to achieve its investment objective by
investing all of its assets in the Bond Index Master Portfolio of MIP, which has
substantially the same investment objective as the Bond Index Fund. The Bond
Index Master Portfolio seeks to achieve its objective by investing substantially
all of its assets in securities included in the LB Bond Index,(1) which is
composed of approximately 5,000 issues of fixed-income securities, including
U.S. Government securities and investment grade corporate bonds, each with an
outstanding market value of at least $25 million and a remaining maturity of
greater
- ---------------
(1) Lehman Brothers, Inc. does not sponsor the Bond Index Fund or the Bond Index
Master Portfolio, nor is it affiliated in any way with BGFA, the Bond Index
Fund or the Bond Index Master Portfolio.
12
<PAGE> 118
than one year. The Bond Index Master Portfolio invests in a sample of these
securities. The Bond Index Master Portfolio invests at least 65% of its total
assets in bonds and debentures. Securities are selected for investment by the
Bond Index Master Portfolio based on a mix of factors, such as the relative
proportion of such securities in the LB Bond Index, credit quality, issuer
sector, maturity structure, coupon rates and callability, as described below.
No attempt is made to manage the portfolio of the Bond Index Master
Portfolio using economic, financial and market analysis. The Bond Index Master
Portfolio is managed by determining which securities are to be purchased or sold
to replicate, to the extent feasible, the investment characteristics of the LB
Bond Index. Under normal market conditions, at least 90% of the value of the
Bond Index Master Portfolio's total assets are invested in securities
representing the LB Bond Index. The Bond Index Master Portfolio attempts to
achieve, in both rising and falling markets, a correlation of at least 95%
between the total return of its net assets before expenses and the total return
of the LB Bond Index. Perfect (100%) correlation would be achieved if the total
return of the Bond Index Master Portfolio's net assets increased or decreased
exactly as the total return of the LB Bond Index increased or decreased. The
Bond Index Master Portfolio's ability to match its investment performance to the
investment performance of the LB Bond Index may be affected by, among other
things, the Bond Index Master Portfolio's and the Bond Index Fund's expenses,
the amount of cash and cash equivalents held in the Bond Index Master
Portfolio's investment portfolio, the manner in which the total return of the LB
Bond Index is calculated, the size of the Bond Index Master Portfolio's
investment portfolio, and the timing, frequency and size of shareholder
purchases and redemptions. The Bond Index Master Portfolio uses cash flows from
shareholder purchase and redemption activity to maintain, to the extent
feasible, the similarity of its portfolio to the securities comprising such
Index. BGFA regularly monitors the Bond Index Master Portfolio's correlation to
the LB Bond Index and adjusts the portfolio of the Bond Index Master Portfolio
to the extent necessary to enable the Bond Index Master Portfolio to attempt to
achieve a correlation of at least 95% with the LB Bond Index. The Bond Index
Fund's performance corresponds directly to the investment experience of the Bond
Index Master Portfolio. Inclusion of a security in the LB Bond Index in no way
implies an opinion by the sponsor of the LB Bond Index as to its attractiveness
as an investment. In the future, subject to the approval of the Bond Index
Master Portfolio's interestholders, one or more indices for the Bond Index
Master Portfolio may be selected if such standard of
13
<PAGE> 119
comparison is deemed to be more representative of the performance of the
securities the Bond Index Master Portfolio seeks to replicate.
The Bond Index Master Portfolio does not hold all of the issues that
comprise the LB Bond Index because of the costs involved and the illiquidity of
certain of the securities which comprise such Index. Instead, the Bond Index
Master Portfolio attempts to hold a representative sample of the securities in
the LB Bond Index so that, in the aggregate, the investment characteristics of
the Bond Index Master Portfolio's investment portfolio resemble those of the LB
Bond Index. The Bond Index Master Portfolio uses a statistical process known as
"sampling" to construct its investment portfolio. This process is used with
respect to the Bond Index Master Portfolio to select issues to represent entire
"classes" or types of fixed-income securities in the Index. At the broadest
level, the Bond Index Master Portfolio seeks to hold securities reflecting the
two major classes of fixed-income securities in the LB Bond Index -- U.S.
Government obligations and investment-grade corporate debt securities. Such
classes are delineated further according to credit quality, issuer sector, term
to maturity, coupon rates and callability. The sampling techniques utilized by
the Bond Index Master Portfolio are expected to be an effective means of
approximating the investment performance of the LB Bond Index; however, the Bond
Index Master Portfolio is not expected to track the LB Bond Index with the same
degree of accuracy that complete replication of such Index would provide. Over
time, the portfolio composition of the Bond Index Master Portfolio will be
altered (or "rebalanced") to reflect changes in the characteristics of the
Index.
The Board of Trustees periodically reviews the Bond Index Master
Portfolio's investment performance before fees and expenses as compared to the
LB Bond Index. The Board reviews discrepancies in performance for
reasonableness, taking into account the size of the Bond Index Master
Portfolio's investment portfolio, and any corrective actions deemed necessary
will be taken to avert excessive discrepancies in the future. There can be no
assurance that the Bond Index Fund or the Bond Index Master Portfolio will
achieve its respective investment objective.
Index Funds, such as the Bond Index Fund and the Bond Index Master
Portfolio, seek to create a portfolio which substantially replicates the total
return of the securities comprising the applicable index. Index funds are not
managed through traditional methods of fund management, which typically involve
frequent changes in a portfolio of securities on the basis of economic,
financial and market analyses. Therefore, brokerage costs, transfer taxes and
certain other transaction costs for index funds may be lower than those incurred
by non-index, traditionally managed funds. The port-
14
<PAGE> 120
folio turnover rate of the Bond Index Master Portfolio generally is not expected
to exceed 100%.
The Bond Index Master Portfolio may invest some of its assets (no more than
10% of total assets under normal market conditions) in high quality money market
instruments, which include U.S. Government obligations, obligations of domestic
and foreign banks, repurchase agreements, commercial paper (including variable
amount master demand notes) and short-term corporate debt obligations. Such
investments are made on an ongoing basis to provide liquidity and, to a greater
extent on a temporary basis, when there is an unexpected or abnormal level of
investor purchases or redemptions of Bond Index Fund shares or when "defensive"
strategies are appropriate. In addition, the Bond Index Master Portfolio may
lend its portfolio securities and engage in interest rate futures and options
transactions, each of which involves risk. A more complete description of the
Bond Index Master Portfolio's investments and investment activities is contained
in "Appendix -- Additional Investment Policies."
GROWTH STOCK FUND
The Growth Stock Fund seeks above-average, long-term total return, with a
primary focus on capital appreciation. Current income is a secondary
consideration. This investment objective is fundamental and cannot be changed
without shareholder approval. The Growth Stock Fund seeks to achieve its
investment objective by investing all of its assets in the Growth Stock Master
Portfolio of Managed Series Investment Trust ("MSIT"), which has the same
fundamental investment objective as the Growth Stock Fund. The investment
objective of the Growth Stock Master Portfolio is to provide investors with
above-average long-term total return, with a primary focus on capital
appreciation. The Growth Stock Master Portfolio seeks to provide investors with
a rate of total return that, over a three to five year time horizon, exceeds
that of the S&P 500 Index(1) (before fees and expenses) over comparable periods
by investing in a diversified portfolio consisting primarily of growth-oriented
common stocks. The Growth Stock Master Portfolio is advised by BGFA and
sub-advised by Wells Fargo Bank, N.A. ("Wells Fargo Bank").
- ---------------
(1) Standard & Poor's Corporation ("S&P") does not sponsor the Growth Stock Fund
or the Growth Stock Master Portfolio nor is it affiliated in any way with
BGFA, Wells Fargo, the Growth Stock Fund or the Growth Stock Master Port-
folio. "Standard & Poor's", "S&P", "S&P 500", and "Standard & Poor's 500"
are trademarks of S&P.
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Since the investment characteristics of the Growth Stock Fund directly
correspond to those of the Growth Stock Master Portfolio, the discussion below
relates to the various investments of and techniques employed by the Growth
Stock Master Portfolio.
In pursuing its objective, the Growth Stock Master Portfolio invests
primarily in the common stocks of those growth-oriented, small- and medium-sized
corporations that the Growth Stock Master Portfolio's investment adviser
believes have potential for above-average, long-term capital appreciation. These
growth-oriented stocks typically have some or all of the following
characteristics:
- Low or no dividends
- Relatively small market capitalizations
- Less market liquidity
- Relatively short operating histories
- High debt-to-equity ratios
- Involvement in rapidly growing/changing industries and/or new
technologies
The Growth Stock Master Portfolio invests in a diversified portfolio of
growth-oriented common stocks and does not concentrate its investments in a
particular industry. Under normal market conditions, the Growth Stock Master
Portfolio's investment portfolio contains common stocks of at least 20
corporations in multiple industry groups, with the majority of these holdings
consisting of stocks of established growth companies, turnaround or acquisition
candidates, or larger capitalization companies that present one or more of the
above characteristics.
Additionally, the Growth Stock Master Portfolio may, from time to time,
acquire securities through initial public offerings, and may acquire and hold
common stocks of smaller and newer issuers, which are subject to the additional
risks described below. It is expected that no more than 40% of the Growth Stock
Master Portfolio's assets will be invested in these more aggressive securities
at one time.
As with any investment in securities, the value of, and income from, an
investment in the Growth Stock Fund can decrease as well as increase, depending
on a variety of factors that may affect the values and income generated by the
investments of the Growth Stock Master Portfolio, including general economic
conditions and market factors. Investments in smaller companies may offer
greater opportunities for capital appreciation than larger, more established
companies, but they also may involve greater
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risk. For example, smaller companies may have limited product lines, markets or
financial and management resources. From time to time, Wells Fargo may determine
that conditions in the securities markets make pursuing the Growth Stock Fund's
and Growth Stock Master Portfolio's basic investment strategy inconsistent with
the best interests of the Growth Stock Fund's and Growth Stock Master
Portfolio's investors. At such times, Wells Fargo may reduce the Growth Stock
Master Portfolio's exposure to the stock market in order to reduce fluctuations
in the value of the Growth Stock Master Portfolio's assets. The Growth Stock
Master Portfolio could invest up to 30% of its net assets in preferred stocks,
government obligations or in debt securities that are convertible into common
stock; it could also increase its investments in money market securities. At
most, 5% of the Growth Stock Master Portfolio's net assets will be invested in
convertible debt securities that are either rated below the four highest rating
categories by one or more nationally recognized statistical rating organizations
("NRSROs"), such as Moody's Investors Service, Inc. ("Moody's") or S&P, or
unrated securities determined by Wells Fargo to be of comparable quality.
Securities rated in the fourth highest rating category (i.e., rated "BBB" by S&P
or "Baa" by Moody's) are regarded by S&P as having an adequate capacity to pay
interest and repay principal, but changes in economic conditions or other
circumstances are more likely to lead to a weakened capacity to make such
repayments. Moody's considers such securities as having speculative
characteristics. For additional information relating to investments in below
investment grade securities see "Additional Permitted Investment
Activities -- Unrated, Downgraded and Below Investment Grade Investments" in the
SAI.
The Growth Stock Master Portfolio pursues an active-trading investment
strategy, and the length of time the Growth Stock Master Portfolio has held a
particular security is not generally a consideration in investment decisions.
Accordingly, the portfolio turnover rate of the Growth Stock Master Portfolio
may be higher than that of other growth stock funds that do not pursue an
active-trading investment strategy. Portfolio turnover generally involves some
expense to the Growth Stock Master Portfolio, including brokerage commissions or
dealer mark-ups, and other transaction costs on the sale of securities and the
reinvestment in other securities. The Growth Stock Fund bears a pro rata portion
of such transaction costs. Portfolio turnover also can generate short-term
capital gains tax consequences. The Growth Stock Master Portfolio does not
expect to have a portfolio turnover rate exceeding 200%. For additional
information relating to portfolio turnover see "Federal Income Tax Information"
in this Prospectus and "Portfolio Transactions" and "Federal Income Taxes" in
the SAI.
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Although the Growth Stock Master Portfolio holds a number of larger
capitalization stocks, under normal market conditions more than 50% of the
Growth Stock Master Portfolio's total assets are invested in companies with
small to medium capitalizations. The Growth Stock Master Portfolio invests
primarily in companies with a market capitalization of $50 million or greater,
but may invest in companies with a market capitalization under $50 million if
the investment adviser to the Growth Stock Master Portfolio believes such
investments to be in the best interests of the Growth Stock Master Portfolio.
The majority of the Growth Stock Master Portfolio's investments are currently in
companies with market capitalizations, at the time of acquisition, of up to $750
million. As a matter of strategy, the larger capitalized issues in the Growth
Stock Master Portfolio are generally "core" positions that the Growth Stock
Master Portfolio holds for relatively long periods of time.
Under ordinary market conditions, at least 65% of the value of the total
assets of the Growth Stock Master Portfolio are invested in common stocks that
are expected to have better-than-average prospects for capital appreciation.
The Growth Stock Master Portfolio may temporarily hold assets in cash or
make short-term investments to the extent appropriate to maintain adequate
liquidity for redemption requests or other cash management needs, or for
temporary defensive purposes. The short-term investments that the Growth Stock
Master Portfolio may purchase for liquidity purposes include U.S. Treasury
bills, shares of other mutual Growth Stock Funds and repurchase agreements (as
described below).
A more complete description of the Growth Stock Master Portfolio's
investments, investment activities, and investment restrictions is contained in
"Appendix -- Additional Investment Policies" and in the SAI.
Portfolio Manager -- Jonathan Hickman has been primarily responsible for
the day-to-day management of the Growth Stock Master Portfolio since its
inception. Mr. Hickman manages several Wells Fargo collective funds with the
same investment objective as the Master Portfolio, as well as equity and
balanced portfolios for individuals and employee benefit plans. He has over 10
years experience in the investment management field and is a member of Wells
Fargo's Equity Strategy Committee. He has a B.A. and an M.B.A. in finance from
Brigham Young University.
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S&P 500 STOCK FUND(1)
The S&P 500 Stock Fund seeks to approximate as closely as practicable
(before fees and expenses) the capitalization-weighted total rate of return of
that portion of the U.S. market for publicly traded common stocks composed of
the larger capitalized companies. This investment objective is fundamental and
cannot be changed without shareholder approval. The S&P 500 Stock Fund seeks to
achieve its investment objective by investing all of its assets in the S&P 500
Index Master Portfolio of MIP, which has substantially the same fundamental
investment objective as the S&P 500 Stock Fund. The S&P 500 Index Master
Portfolio seeks to achieve its objective by investing substantially all its
assets in the same stocks and in substantially the same percentages as the S&P
500 Index. The weightings of stocks in the S&P 500 Index are based on each
stock's relative total market capitalization; that is, its market price per
share times the number of shares outstanding.
No attempt is made to manage the portfolio of the S&P 500 Index Master
Portfolio using economic, financial and market analysis. The S&P 500 Index
Master Portfolio is managed by determining which securities are to be purchased
or sold to replicate, to the extent feasible, the investment characteristics of
the S&P 500 Index. Under normal market conditions, at least 90% of the value of
the S&P 500 Index Master Portfolio's total assets is invested in securities
comprising the S&P 500 Index. The S&P 500 Index Master Portfolio attempts to
achieve, in both rising and falling markets, a correlation of at least 95%
between the total return of its net assets before expenses and the total return
of the S&P 500 Index. Perfect (100%) correlation would be achieved if the total
return of the S&P 500 Index Master Portfolio's net assets increased or decreased
exactly as the total return of the S&P 500 Index increased or decreased.
- ---------------
(1) S&P does not sponsor the S&P 500 Stock Fund or the S&P 500 Index Master
Portfolio, nor is it affiliated in any way with BGFA, the S&P 500 Index
Master Portfolio or the S&P 500 Stock Fund. "Standard & Poor's(R),"
"S&P(R)," "S&P 500(R)," and "Standard & Poor's 500(R)" are trademarks of
McGraw-Hill, Inc. and have been licensed for use by the S&P 500 Stock Fund
and the S&P 500 Index Master Portfolio. The S&P 500 Stock Fund and the S&P
500 Index Master Portfolio are not sponsored, endorsed, sold, or promoted by
S&P and S&P makes no representation or warranty, express or implied,
regarding the advisability of investing in the S&P 500 Stock Fund and the
S&P 500 Index Master Portfolio. S&P's only relationship to the S&P 500 Stock
Fund and S&P 500 Index Master Portfolio is the licensing of certain
trademarks and trade names of S&P and of the S&P 500 Index to the Fund and
Master Portfolio. The S&P 500 Index is determined, composed and calculated
by S&P without regard to the Fund or Master Portfolio.
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The S&P 500 Index Master Portfolio's ability to match its investment performance
to the investment performance of the S&P 500 Index may be affected by, among
other things, the S&P 500 Stock Fund's and the S&P 500 Index Master Portfolio
expenses, the amount of cash and cash equivalents held by the S&P 500 Index
Master Portfolio's investment portfolio, the manner in which the total return of
the S&P 500 Index is calculated and the timing, frequency and size of
shareholder purchases and redemptions. The S&P 500 Index Master Portfolio uses
cash flows from shareholder purchase and redemption activity to maintain, to the
extent feasible, the similarity of its portfolio to the securities comprising
the S&P 500 Index. BGFA regularly monitors the S&P 500 Index Master Portfolio's,
correlation to the S&P 500 Index and adjusts the portfolio of the S&P 500 Index
Master Portfolio to the extent necessary to enable the S&P 500 Index Master
Portfolio to achieve a correlation of at least 95% with the S&P 500 Index. The
S&P 500 Stock Fund's performance will correspond directly to the experience of
the S&P 500 Index Master Portfolio. In the future, subject to the approval of
the S&P 500 Index Master Portfolio's interestholders, one or more indices for
the S&P 500 Index Master Portfolio may be selected if such standard of
comparison is deemed to be more representative of the performance of the
securities the S&P 500 Index Master Portfolio seeks to replicate.
In seeking to replicate the performance of the S&P 500 Index, the S&P 500
Index Master Portfolio also may engage in futures and options transactions and
other derivative securities transactions, and may lend its portfolio securities,
each of which involves risk. See "Appendix -- Additional Investment Policies."
The S&P 500 Index Master Portfolio attempts to be fully invested at all times in
securities comprising the S&P 500 Index and in futures and options.
The S&P 500 Index Master Portfolio may invest some of its assets (no more
than 10% of total assets under normal market conditions) in high-quality money
market instruments, which include U.S. Government obligations, obligations of
domestic and foreign banks, repurchase agreements, commercial paper (including
variable amount master demand notes) and short-term corporate debt obligations.
Such investments will be made on an ongoing basis to provide liquidity and, to a
greater extent, on a temporary basis, when there is an unexpected or abnormal
level of investor purchases or redemptions of S&P 500 Stock Fund shares or when
"defensive" strategies are appropriate. In addition, the S&P 500 Index Master
Portfolio may engage in securities lending to increase its income. A more
complete description of the S&P 500 Index Master Portfolio's investments and
investment activities is contained in "Appendix -- Additional Investment
Policies."
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SHORT-INTERMEDIATE TERM FUND
The Short-Intermediate Term Fund seeks to provide a total return, before
fees and expenses, exceeding that of the Lehman Brothers Intermediate
Government/Corporate Bond Index (the "LB Intermediate Bond Index").
Historically, the LB Intermediate Bond Index has outperformed short-term
investments such as Treasury bills and has generally experienced a positive
return on an annual basis. The Fund's investment objective is fundamental and
cannot be changed without shareholder approval. The Short-Intermediate Term Fund
seeks to achieve its investment objective by investing all of its assets in the
Short-Intermediate Term Master Portfolio of MSIT, which has the same fundamental
investment objective as the Short-Intermediate Term Fund. The investment
objective of the Short-Intermediate Term Master Portfolio is to provide
investors with a total return, before fees and expenses, exceeding that of the
LB Intermediate Bond Index. The Short-Intermediate Term Master Portfolio invests
in a mix of the following types of instruments: U.S. Treasury and agency debt
securities, corporate bonds, collateralized mortgage obligations and
mortgage-backed securities, other types of asset-backed securities, and money
market instruments such as commercial paper, bankers' acceptances, certificates
of deposits, fixed time deposits, repurchase agreements, and short-term debt of
the U.S. Government or its agencies. The Short-Intermediate Term Master
Portfolio is actively managed. Although its investment objective is related to
the performance of the LB Intermediate Bond Index, the Short-Intermediate Term
Master Portfolio does not attempt to replicate the portfolio composition of that
Index. The Short-Intermediate Term Master Portfolio may hold instruments with
different maturities, as well as certain investment securities -- such as
collateralized mortgage obligations and other asset-backed securities -- which
are not included in the Index. A more complete description of the securities
that may be purchased by the Short-Intermediate Term Master Portfolio is
contained in "Appendix -- Additional Investment Policies." As similar types of
securities are developed in the marketplace, they may be considered for
investment by the Short-Intermediate Term Master Portfolio, but the
Short-Intermediate Term Master Portfolio may not invest in such securities prior
to adding appropriate disclosure. The Short-Intermediate Term Master Portfolio
is advised by BGFA and sub-advised by Wells Fargo Bank.
Since the investment characteristics of the Short-Intermediate Term Fund
directly correspond to those of the Short-Intermediate Term Master Portfolio,
the discussion below relates to the various investments of and techniques
employed by the Short-Intermediate Term Master Portfolio.
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Under normal market conditions, the Short-Intermediate Term Master
Portfolio seeks to maintain an average weighted portfolio maturity generally in
the 2-to-5 year range. Under unusual market conditions, the Short-Intermediate
Term Master Portfolio may shorten or lengthen its average weighted portfolio
maturity beyond the 2-to-5 year range.
The LB Intermediate Bond Index consists of government (Treasury and agency)
and corporate debt obligations with remaining maturities between one and ten
years. Each issue is represented in the LB Intermediate Bond Index in proportion
to its outstanding market value. The exact composition of the LB Intermediate
Bond Index varies according to the characteristics of the securities outstanding
in the marketplace.
Only investment-grade securities are considered for investment. These
securities will be identified by their ratings according to one of two major
rating services, Standard & Poor's Corporation ("S&P") and Moody's Investors
Service, Inc. ("Moody's"). The rating systems employed by each service are
described in the Appendix to this Prospectus. Each service classifies securities
into broad categories starting with "investment grade" at the top and ranging
downward through more speculative classes, including so-called "junk bonds," to
securities that are virtually worthless. The "investment grade" category is
subdivided into four rating groups by both services. The four rating groups are
called "AAA"/"Aaa," "AA"/"Aa," "A"/"A," and "BBB"/"Baa" by S&P and Moody's,
respectively. Obligations with the lowest investment grade rating have
speculative characteristics, and changes in economic conditions or other
circumstances are more likely to lead to a weakened capacity to make principal
and interest payments than in the case of higher grade debt obligations. The
Short-Intermediate Term Master Portfolio may invest in securities of all four
rating groups; however, most of the Short-Intermediate Term Master Portfolio's
assets will be invested in securities that, at the time of purchase, are rated
in the third group or higher, denoted "A" or better by both rating services.
Asset-backed securities are further restricted to the top two rating groups at
time of purchase. Mortgage-related securities, which are issued or guaranteed by
U.S. Government agencies, are all currently considered to be in the highest
rating category. Subsequent to its purchase by the Short-Intermediate Term
Master Portfolio, an issue of securities may cease to be rated or its rating may
be reduced below the minimum rating required for purchase by the
Short-Intermediate Term Master Portfolio. Wells Fargo will consider such an
event in determining whether the Short-Intermediate Term Master Portfolio should
continue to hold the obligation. To the extent the Short-Intermediate Term
Master Portfolio continues to hold such obligations, it may be subject to
additional risk of default.
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In the marketplace it is generally the case that higher-risk securities
carry higher yields-to-maturity. That is, investors tend to demand higher
returns for securities with longer maturities or lower credit quality ratings
than for similar securities of shorter maturities or higher credit quality
ratings. The amount of increased return for increased risk, however, changes
from time to time. The Short-Intermediate Term Master Portfolio seeks to
emphasize those maturity segments or rating groups that appear to offer the most
favorable returns to their risks, within the maturity and quality ranges
described above.
The Short-Intermediate Term Master Portfolio may invest some of its assets
(no more than 10% of total assets under normal market conditions) in high
quality money market instruments, which include U.S. Government obligations,
obligations of domestic and foreign banks, repurchase agreements, commercial
paper (including variable amount master demand notes) and short-term corporate
debt obligations. Such investments are made on an ongoing basis to provide
liquidity and, to a greater extent on a temporary basis, when there is an
unexpected or abnormal level of investor purchases or redemptions of
Short-Intermediate Term Master Portfolio shares or when "defensive" strategies
are appropriate.
The portfolio turnover rate for the Short-Intermediate Term Master
Portfolio is not expected to exceed 300%. Portfolio turnover generally involves
some expense to the Short-Intermediate Term Master Portfolio, including
brokerage commissions or dealer mark-ups and other transaction costs on the sale
of securities and the reinvestment in other securities. The Short-Intermediate
Term Fund bears a pro rata portion of such transaction costs. Portfolio turnover
also can generate short-term capital gains tax consequences. For additional
information relating to portfolio turnover see "Federal Income Tax Information"
in this Prospectus and "Portfolio Transactions" and "Federal Income Taxes" in
the SAI.
Portfolio Managers -- Mr. Scott Smith has been co-manager of the portfolio
of the Short-Intermediate Term Master Portfolio since June of 1995. He joined
Wells Fargo Bank in 1988 as a taxable money market portfolio specialist. His
experience includes a position with a private money management firm with mutual
fund investment operations. Mr. Smith holds a B.A. degree from the University of
San Diego and is a chartered financial analyst.
Ms. Tamyra Thomas, who co-manages the portfolio of the Short-Intermediate
Term Master Portfolio with Mr. Smith, has been both manager and co-manager of
the portfolio of the Master Portfolio since its inception. Prior to joining
Wells Fargo Bank in 1988, Ms. Thomas was Vice
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President and Manager of the Investment Department of Valley Bank and Trust in
Utah. She holds a B.S. from the University of Utah.
U.S. TREASURY ALLOCATION FUND
The U.S. Treasury Allocation Fund seeks to achieve over the long term a
high level of total return, including net realized and unrealized capital gains
and net investment income, consistent with reasonable risk. This investment
objective is fundamental and cannot be changed without shareholder approval. The
U.S. Treasury Allocation Fund seeks to achieve its investment objective by
investing all of its assets in the U.S. Treasury Allocation Master Portfolio of
MIP, which has substantially the same fundamental investment objective as the
U.S. Treasury Allocation Fund. The U.S. Treasury Allocation Master Portfolio
seeks to achieve its objective by pursuing a strategy of allocating and
reallocating its investments among the following three maturity classes of U.S.
Treasury debt securities: long-term bonds, intermediate-term notes, and
short-term bills. That strategy is based upon the premise that those maturity
classes of debt securities from time to time are over- or under-valued relative
to each other by the market and that under-valued maturity classes represent
relatively better long-term investment opportunities, and that timely low
transaction cost shifts among such maturity classes (as determined by their
perceived relative over- or under-valuation) can produce superior long-term
investment returns. As a fundamental policy, under normal market conditions, the
U.S. Treasury Allocation Master Portfolio will have at least 65% of the value of
its total assets invested in U.S. Treasury bonds, notes and bills. The U.S.
Treasury Allocation Fund is designed for investors with investment horizons of
five years or greater; it is not designed for investors seeking short-term
gains. There can be no assurance that the U.S. Treasury Allocation Fund or the
U.S. Treasury Allocation Master Portfolio will achieve its respective investment
objective.
In determining the recommended portfolio mix, BGFA uses an investment model
(the "U.S. Treasury Allocation Model") which is presently used as a basis for
managing several large employee benefit funds and other institutional accounts.
The U.S. Treasury Allocation Model, which is proprietary to BGFA, analyzes risk,
correlation and expected return data and regularly determines a recommended
portfolio allocation among long-term U.S. Treasury bonds, intermediate-term U.S.
Treasury notes, and short-term U.S. Treasury bills. As further described in
"Appendix -- Additional Investment Policies," debt securities are subject to
fluctuations in market value due to fluctuations in market interest rates; the
values of such securities generally change inversely to changes in market
interest rates. Securities with longer maturities are generally more sensitive
to
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changes in interest rates than shorter-term debt securities. At any given time,
substantially all of the U.S. Treasury Allocation Master Portfolio's assets may
be invested in a single maturity class and the relative allocation among the
maturity classes may shift significantly from time to time.
The U.S. Treasury Allocation Master Portfolio's assets are invested and
reinvested in the following types of debt instruments:
Long-Term U.S. Treasury Bonds. The U.S. Treasury Allocation Master
Portfolio invests in U.S. Treasury bonds with remaining maturities of at least
20 years. Under normal market conditions, the dollar-weighted average maturity
of this portion of the U.S. Treasury Allocation Master Portfolio's investment
portfolio is expected to range between 22 and 28 years.
Intermediate-Term U.S. Treasury Notes. The U.S. Treasury Allocation Master
Portfolio invests in U.S. Treasury notes and other U.S. Treasury securities with
remaining maturities ranging from one to 20 years. Under normal market
conditions, the dollar-weighted average maturity of this portion of the U.S.
Treasury Allocation Master Portfolio's investment portfolio is expected to range
between three and seven years.
Short-Term U.S. Treasury Bills. The U.S. Treasury Allocation Master
Portfolio invests in U.S. Treasury bills with remaining maturities of one year
or less. Under normal market conditions, the dollar-weighted average maturity of
this portion of the U.S. Treasury Allocation Master Portfolio's investment
portfolio is expected to range between 30 and 90 days.
In addition, the U.S. Treasury Allocation Master Portfolio may hold money
market instruments for liquidity purposes, as described in
"Appendix -- Additional Investment Policies."
The U.S. Treasury Allocation Model is an optimization model which uses
statistical techniques to determine the relative allocation of the U.S. Treasury
Allocation Master Portfolio's assets among U.S. Treasury bonds, U.S. Treasury
notes, and U.S. Treasury bills. A key component of the U.S. Treasury Allocation
Model is a set of assumptions concerning expected risk and return and investor
attitudes toward risk, which are incorporated into the allocation decision. The
principal inputs of financial data to the model currently are (i) the current
yields on 91-day U.S. Treasury bills, 5-year U.S. Treasury notes, and 30-year
U.S. Treasury bonds; (ii) the expected statistical standard deviation in
investment return for each maturity class of fixed income security; and (iii)
the expected statistical correlation of investment return among the three
maturity classes of U.S. Treasury securities. Using this and other data, the
U.S. Treasury Allocation Model is run daily to determine the recommended
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allocation. Because the U.S. Treasury Allocation Master Portfolio may shift its
investment allocations among maturity classes significantly from time to time,
the performance of the U.S. Treasury Allocation Master Portfolio and the U.S.
Treasury Allocation Fund may differ from other U.S. Treasury allocation funds
which invest in one maturity class or from U.S. Treasury allocation funds with a
constant mix of maturity classes.
The Master Portfolio's investments are compared from time to time to the
U.S. Treasury Allocation Model's recommended allocation. Recommended
reallocations are implemented subject to BGFA's assessment of current economic
conditions and investment opportunities. BGFA may change from time to time the
criteria and methods it uses to implement the recommendations of the U.S.
Treasury Allocation Model. Recommended reallocation is implemented in accordance
with trading policies designed to take advantage of market opportunities and
reduce transaction costs. The asset allocation mix selected by the U.S. Treasury
Allocation Model is a primary determinant in the U.S. Treasury Allocation Master
Portfolio's investment performance.
Although the basic premises of the U.S. Treasury Allocation Model have not
changed in any substantial respect, various inputs to the U.S. Treasury
Allocation Model and the manner in which its recommendations are implemented
have changed over time, and the U.S. Treasury Allocation Model is subject to
such further changes as BGFA, from time to time, may implement in its
discretion. The overall management of the U.S. Treasury Allocation Master
Portfolio is based on the recommendation of the U.S. Treasury Allocation Model,
and no person is primarily responsible for recommending the mix of asset classes
in each Master Portfolio or the mix of securities within the asset classes.
Decisions relating to the U.S. Treasury Allocation Model are made by BGFA's
investment committee. A more complete description of the U.S. Treasury
Allocation Master Portfolio's investments and investment activities is contained
in "Appendix -- Additional Investment Policies."
BGFA manage other portfolios which also invest in accordance with the U.S.
Treasury Allocation Model. The performance of each of those other portfolios is
likely to vary among themselves and from the performance of the U.S. Treasury
Allocation Fund. Such variation in performance is primarily due to different
equilibrium asset mix assumptions used for the various portfolios, timing
differences in the implementation of the model's recommendations and differences
in expenses and liquidity requirements.
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MASTER/FEEDER STRUCTURE
Each Fund is a feeder fund in a master/feeder structure. Accordingly, each
Fund invests all of its assets in a corresponding Master Portfolio which has
substantially the same investment objective as the Fund. See "General
Information -- Description of the Company." In addition to selling its shares to
the corresponding Fund, each Master Portfolio may sell its shares to certain
other mutual funds or other accredited investors. Information regarding
additional options, if any, for investment in shares of the Master Portfolios is
available from Stephens and may be obtained by calling 1-800-643-9691. The
expenses and, correspondingly, the returns of other investment options in the
Master Portfolios may differ from those of the corresponding Funds.
The Company's Board of Directors believes that, if other investors invest
their assets in the Master Portfolios, certain economic efficiencies may be
realized with respect to the Master Portfolios. For example, fixed expenses that
otherwise would have been borne solely by a Fund would be spread across a larger
asset base provided by more than one fund investing in a Master Portfolio. Each
Fund investing in a Master Portfolio is liable for its proportionate share of
the obligations of the Master Portfolio. However, the risk of a Fund incurring
financial loss on account of such liability is limited to circumstances in which
both inadequate insurance exists and the Master Portfolio itself is unable to
meet its obligations. Accordingly, the Board believes that the Funds and their
shareholders will not be adversely affected by reason of investing the Funds'
assets in the corresponding Master Portfolio. However, if a mutual fund or other
investor withdraws its investment from a Master Portfolio, the economic
efficiencies (e.g., spreading fixed expenses across a larger asset base) that
the Company's Board believes should be available through investment in the
Master Portfolio may not be fully achieved or maintained. In addition, given the
relatively novel nature of the master/feeder structure, accounting and
operational difficulties could occur. See "Management of the Funds" for
additional description of the Funds' and Master Portfolios' management and
expenses.
Each Master Portfolio's investment objective and other fundamental
policies, which are substantially the same as those of the corresponding Fund,
cannot be changed without approval by the holders of a majority (as defined in
the Investment Company Act of 1940 (the "1940 Act")) of such Master Portfolio's
outstanding voting interests. Whenever a Fund, as a Master Portfolio
interestholder, is requested to vote on matters pertaining to any fundamental
policy of such Master Portfolio, the Fund will hold a meeting of its
shareholders to consider such matters and the Fund will cast
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its votes in proportion to the votes received from that Fund's shareholders. A
Fund will vote the corresponding Master Portfolio shares for which it receives
no voting instructions in the same proportion as the votes received from Fund
shareholders. In addition, certain policies of a Master Portfolio which are
non-fundamental can be changed by vote of a majority of its Board of Trustees
without a vote of interestholders. If a Master Portfolio's investment objective
or policies are changed, the corresponding Fund could subsequently change its
objective or policies to correspond to those of the Master Portfolio or the Fund
could redeem its Master Portfolio interests and either seek a new investment
company with a matching objective in which to invest or retain its own
investment adviser to manage its portfolio in accordance with its objective. In
the latter case, a Fund's inability to find a substitute investment company in
which to invest or equivalent management services could adversely affect
shareholders' investments in the Fund. Each Fund's investment objective and
other fundamental policies cannot be changed without approval by the holders of
a majority (as defined in the 1940 Act) of that Fund's outstanding voting
shares. Each Fund will provide shareholders with 30 days' written notice prior
to the implementation of any change in the investment objective of that Fund or
Master Portfolio, to the extent possible.
Information on the Funds' and Master Portfolios' investment objectives,
policies and restrictions is included under "The Funds -- Investment Objectives
and Policies" and Appendix -- Additional Investment Policies" in this Prospectus
and "Investment Restrictions" and "Additional Permitted Investment Activities"
in the SAI. Additional Information regarding officers and directors/trustees is
included in the Fund's SAI under "Management"
PERFORMANCE
For purposes of advertising, the performance of the Funds may be calculated
on the basis of average annual total return and/or cumulative total return of
shares. Average annual total return of shares is calculated pursuant to a
standardized formula which assumes that an investment in shares of a Fund was
purchased with an initial payment of $1,000 and that the investment was redeemed
at the end of a stated period of time, after giving effect to the reinvestment
of dividends and distributions during the period. The return of shares is
expressed as a percentage rate which, if applied on a compounded annual basis,
would result in the redeemable value of the investment in shares at the end of
the period. Advertisements of the performance of shares of a Fund include the
Fund's average annual total return of shares for one, five and ten year periods,
or for shorter time
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<PAGE> 134
periods depending upon the length of time during which such Fund has operated.
Cumulative total return of shares is computed on a per share basis and
assumes the reinvestment of dividends and distributions. Cumulative total return
of shares generally is expressed as a percentage rate which is calculated by
combining the income and principal charges for a specified period and dividing
by the net asset value per share at the beginning of the period. Advertisements
may include the percentage rate of total return of shares or may include the
value of a hypothetical investment in shares at the end of the period which
assumes the application of the percentage rate of total return.
The performance of the Bond Index, Short-Intermediate Term and U.S.
Treasury Allocation Funds may be advertised in terms of yield. The yield on
shares of these Funds is calculated by dividing each Fund's net investment
income per share earned during a specified period (usually 30 days) by its net
asset value per share on the last day of such period and annualizing the result.
Performance may vary from time to time, and past results are not
necessarily representative of future results. Investors should remember that
performance is a function of the type and quality of portfolio securities held
by the Master Portfolio in which the Fund invests and is affected by operating
expenses. Performance information, such as that described above, may not provide
a basis for comparison with other investments or other investment companies
using a different method of calculating performance.
Additional information about the performance of each Fund will be contained
in the Annual Report for each Fund. The Annual Reports may be obtained by
calling the Company at 1-800-776-0179.
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<PAGE> 135
MANAGEMENT OF THE FUNDS
GENERAL -- The Company has not retained the services of an investment
adviser because each Fund's assets are invested in a corresponding Master
Portfolio of Master Investment Portfolio ("MIP") or Managed Series Investment
Trust ("MSIT") that has retained investment advisory services (see "Master
Portfolio Investment Adviser" below). Each Fund bears a pro rata portion of the
fees paid by the corresponding Master Portfolio. Each Fund invests in a series
of either MIP or MSIT as follows:
<TABLE>
<CAPTION>
MASTER
FUND PORTFOLIO
----------------------------- -----------------------------
<S> <C>
Asset Allocation Fund........ Asset Allocation Master
Portfolio of MIP
Bond Index Fund.............. Bond Index Master Portfolio
of MIP
Growth Stock Fund............ Growth Stock Master Portfolio
of MSIT
Short-Intermediate Term Short-Intermediate Term
Fund....................... Master Portfolio of MSIT
S&P 500 Stock Fund........... S&P 500 Index Master
Portfolio of MIP
U.S. Treasury Allocation U.S. Treasury Allocation
Fund....................... Master Portfolio of MIP
</TABLE>
MIP is registered under the 1940 Act as an open-end management investment
company. MIP was organized on October 21, 1993 as a Delaware business trust.
MSIT is registered under the 1940 Act as an open-ended management investment
company. MSIT was organized as a Delaware business Trust on October 28, 1993.
BOARD OF DIRECTORS/TRUSTEES -- The business and affairs of the Company are
managed under the direction of its Board of Directors and in conformity with
Maryland law. The Company's Directors also serve as Trustees of MIP and MSIT.
Additional information regarding the Officers and Directors/Trustees of the
Company, MIP and MSIT is included in the SAI under "Management."
MASTER PORTFOLIO INVESTMENT ADVISER -- BGFA serves as investment adviser to
the Master Portfolios. Pursuant to an Investment Advisory Contract with each
Master Portfolio, BGFA provides investment guidance and policy direction in
connection with the management of each Master Portfolio's assets, subject to the
overall authority of the appropriate Board of Trustees and in conformity with
Delaware Law and the stated policies of such Master Portfolio. BGFA was created
by the reorganization of Wells
30
<PAGE> 136
Fargo Nikko Investment Advisors ("WFNIA"), the former sub-adviser to each MIP
Master Portfolio, with and into an affiliate of Wells Fargo Institutional Trust
Company, N.A. ("WFITC"). BGFA is an indirect subsidiary of Barclays Bank PLC and
is located at 45 Fremont Street, San Francisco, California 94105. As of March
31, 1996, BGFA and its affiliates provided investment advisory services for over
$284 billion of assets. For its advisory services to the Master Portfolios, BGFA
is contractually entitled to receive from each Master Portfolio monthly fees at
the following annual rates of the respective Master Portfolio's average daily
net assets:
<TABLE>
<CAPTION>
ANNUAL
ADVISORY
MASTER PORTFOLIO FEES
-------------------------------------------------- --------
<S> <C>
Asset Allocation Master Portfolio................. .35%
Bond Index Master Portfolio....................... .08%
Growth Stock Master Portfolio..................... .60%
S&P 500 Index Master Portfolio.................... .05%
Short-Intermediate Term Master Portfolio.......... .45%
U.S. Treasury Allocation Master Portfolio......... .30%
</TABLE>
The actual amount of advisory fees paid by each Master Portfolio, as a
percentage of each Fund's average daily net assets, is set forth in this
Prospectus under the heading "Summary of Fund Expenses." Additional information
concerning the advisory fees paid by each Master Portfolio is found in the
Funds' SAI under "Investment Adviser".
Prior to January 1, 1996, Wells Fargo Bank, a wholly owned subsidiary of
Wells Fargo & Company located at 420 Montgomery Street, San Francisco,
California 94105, served as each Master Portfolio's investment adviser. Wells
Fargo Bank provided investment guidance and policy direction in connection with
the management of each Master Portfolio's assets, subject to the supervision of
the appropriate Board of Trustees and in conformity with Delaware law and the
stated policies of the Master Portfolio. For its advisory services to the Master
Portfolios, Wells Fargo Bank, prior to January 1, 1996, was contractually
entitled to the same level of compensation as BGFA. For additional information
see "Investment Adviser" in the Funds' SAI.
Wells Fargo Bank currently serves as sub-investment adviser to the Growth
Stock and Short-Intermediate Term Master Portfolios. Wells Fargo Bank, subject
to the supervision and approval of BGFA, provides investment advisory assistance
and the day-to-day management of such Master Portfolio's assets. For providing
sub-advisory services to the Growth Stock and Short-Intermediate Term Master
Portfolios, Wells Fargo Bank is entitled to receive from BGFA monthly fees at
the annual
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<PAGE> 137
rate of 0.15% and 0.10% of the Growth Stock and Short-Intermediate Term Master
Portfolios' respective average daily net assets.
Wells Fargo Bank assumed its sub-advisory duties on January 1, 1996. For
the period beginning January 1, 1996 and ended February 29, 1996, Wells Fargo
Bank received monthly fees at the annual rate of 0.15% and 0.10% of the
respective average daily net assets of the Growth Stock and Short-Intermediate
Term Funds.
Prior to January 1, 1996, Wells Fargo Bank engaged WFNIA, located at 45
Fremont Street, San Francisco, California 94105, to provide sub-investment
advisory services to the Master Portfolio. WFNIA was a general partnership owned
50% by a wholly owned subsidiary of Wells Fargo Bank and 50% by a subsidiary of
The Nikko Securities Co., Ltd. Pursuant to a Sub-Investment Advisory Agreement,
WFNIA, subject to the supervision and approval of Wells Fargo Bank, provided
investment advisory assistance and the day-to-day management of the Master
Portfolio's assets. For its sub-advisory services to the Master Portfolios,
WFNIA, prior to January 1, 1996, was contractually entitled to receive from
Wells Fargo Bank monthly fees at the following annual rates of the respective
Master Portfolio's average daily net assets:
<TABLE>
<CAPTION>
ANNUAL
SUB-ADVISORY
MASTER PORTFOLIO FEES
----------------------------------------------- ------------
<S> <C>
Asset Allocation Master Portfolio.............. .20%
Bond Index Master Portfolio.................... .08%
S&P 500 Index Master Portfolio................. .04%
U.S. Treasury Allocation Master Portfolio...... .15%
</TABLE>
The Master Portfolios no longer retain a sub-investment adviser. Additional
information concerning the advisory and sub-advisory fees paid by the Master
Portfolios is found in the Funds' SAI under "Investment Adviser."
BGFA, Barclays and their affiliates deal, trade and invest for their own
account in the types of securities in which the Master Portfolios may invest and
may have deposit, loan and commercial banking relationships with the issuers of
securities purchased by the Master Portfolios. BGFA has informed the Master
Portfolios that in making investment decisions the Adviser does not obtain or
use material inside information in its possession.
Morrison and Foerster LLP, counsel to the Company, MIP and MSIT and special
counsel to BGFA and Wells Fargo Bank, has advised the Company, MIP, MSIT, BGFA
and Wells Fargo Bank that BGFA, Wells
32
<PAGE> 138
Fargo Bank and their affiliates may perform the services contemplated by the
Investment Advisory and Sub-Advisory Contracts and this Prospectus without
violation of the Glass-Steagall Act. Such counsel has pointed out, however, that
there are no controlling judicial or administrative interpretations or decisions
and that future judicial or administrative interpretations of, or decisions
relating to, present federal or state statutes, including the Glass-Steagall
Act, and relating to the permissible activities of banks and their subsidiaries
or affiliates, as well as future changes in such statutes, regulations and
judicial or administrative decisions or interpretations, could prevent such
entities from continuing to perform, in whole or in part, such services. If any
such entity were prohibited from performing any such services, it is expected
that new agreements would be proposed or entered into with another entity or
entities qualified to perform such services.
ADMINISTRATOR AND DISTRIBUTOR -- Stephens, located at 111 Center Street,
Little Rock, Arkansas 72201, serves as the Company's and the Master Portfolios,
administrator pursuant to separate Administration Agreements with the Company
and Master Portfolios. Under the Administration Agreement with the Company,
Stephens provides general supervision of the operation of the Company, other
than the provision of investment advice, subject to the overall authority of the
Board of Directors and in accordance with Maryland law. The administrative
services provided to the Fund also include coordination of the other services
provided to the Fund, compilation of information for reports to the SEC and
state securities commissions, preparation of proxy statements and shareholder
reports, and general supervision of data compilation in connection with
preparing periodic reports to the Company's Board of Directors and officers.
Stephens also furnishes office space and certain facilities to conduct the
Company's business, and compensates the Company's Directors, officers and
employees who are affiliated with Stephens. For providing administrative
services to the Funds, the Company has agreed to pay Stephens a monthly fee at
the following annual rates of such Fund's average daily net assets:
<TABLE>
<CAPTION>
ANNUAL
ADMINISTRATION
FUND FEE
--------------------------------------------- --------------
<S> <C>
Asset Allocation Fund........................ .10%
Bond Index Fund.............................. .05%
Growth Stock Fund............................ .05%
S&P 500 Stock Fund........................... .05%
Short-Intermediate Term Fund................. .05%
U.S. Treasury Allocation Fund................ .10%
</TABLE>
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<PAGE> 139
Stephens also serves as the Company's principal underwriter within the
meaning of the 1940 Act and as distributor of the Fund's shares pursuant to a
Distribution Agreement with the Company. The Distribution Agreement provides
that Stephens will act as agent for the Company for the sale of Fund shares and
may enter into Selling Agreements with selling agents that wish to make
available Fund shares to their respective customers ("Selling Agents"). BGI
presently acts as a Selling Agent, but does not receive any fee from the Fund
for such activities.
Stephens is a full service broker/dealer and investment advisory firm.
Stephens and its predecessor have been providing securities and investment
services for more than 60 years, including discretionary portfolio management
services since 1983. Stephens currently manages investment portfolios for
pension and profit sharing plans, individual investors, foundations, insurance
companies and university endowments.
CUSTODIAN AND TRANSFER AGENT -- BZW Barclays Global Investors, N.A. ("BGI")
currently acts as custodian to the Funds and the Master Portfolios. The
principal business address of BGI is 45 Fremont Street, San Francisco,
California 94105. BGI is not entitled to receive compensation for its custodial
services so long as BGFA is entitled to receive compensation for providing
investment advisory services to the Master Portfolios. BGI was formerly known as
Wells Fargo Institutional Trust Company, N.A. ("WFITC") and is a subsidiary of
BZW Barclays Global Investors Holdings Inc.
Wells Fargo Bank is the Company's Transfer and Dividend Disbursing Agent
(the "Transfer Agent"). The Company has agreed to pay Wells Fargo Bank, which
provides transfer agency services at 525 Market Street, San Francisco,
California 94105, a monthly fee at the following annual rate of such Fund's
average daily net assets for transfer agency services:
<TABLE>
<CAPTION>
ANNUAL
TRANSFER
AGENCY
FUND FEE
-------------------------------------------------- --------
<S> <C>
Asset Allocation Fund............................. .10%
Bond Index Fund................................... .03%
Growth Stock Fund................................. .03%
S&P 500 Stock Fund................................ .03%
Short-Intermediate Term Fund...................... .03%
U.S. Treasury Allocation Fund..................... .10%
</TABLE>
Prior to January 1, 1996 and the subsequent transfer of custodial functions
to BGI, Wells Fargo Bank served as the Funds' custodian.
34
<PAGE> 140
SHAREHOLDER SERVICING AGENT -- The Funds have adopted a Shareholder
Servicing Plan pursuant to which they have entered into a Shareholder Servicing
Agreement with BGI, and may enter into similar agreements with other entities
("Shareholder Servicing Agents"). Under such agreements, Shareholder Servicing
Agents agree, as agent for their customers, to be responsible for performing
shareholder liaison services, which include, without limitation, answering
customer inquiries regarding account status and history, and the manner in which
purchases, exchanges and redemptions of Fund shares may be effected, assisting
customers with investment plans, dividend options and account designations and
addresses, processing of purchase, redemption and exchange transactions,
providing periodic account statements showing account balances and integrating
such statements with those of other transactions and balances in the customer's
other accounts serviced by the Shareholder Servicing Agent or its affiliates,
arranging for bank wires, distributing various materials for the Company,
assisting in the establishment and maintenance of accounts in the Fund and
providing such other similar services as the Company or a customer may
reasonably request. For these services, a Shareholder Servicing Agent is
entitled to receive a fee, which may be paid periodically, determined by a
formula based upon the number of accounts serviced by the Shareholder Servicing
Agent during the period for which payment is being made, the level of activity
in such accounts during such period, and the expenses incurred by the
Shareholder Servicing Agent. In no event will such fees exceed, on an annualized
basis for the Funds' then-current fiscal year, the following percentage rate of
the average daily net assets of such Funds represented by shares owned during
the period for which payment is being made by investors with whom the
Shareholder Servicing Agent maintains a servicing relationship, or an amount
which equals the maximum amount payable to the Shareholder Servicing Agent under
applicable laws, regulations or rules, including the Rules of Fair Practice of
the National Association of Securities Dealers, Inc., whichever is less:
<TABLE>
<CAPTION>
ANNUAL
SHAREHOLDER
SERVICING
FUND FEE
------------------------------------------------ -----------
<S> <C>
Asset Allocation Fund........................... .20%
Bond Index Fund................................. .07%
Growth Stock Fund............................... .10%
S&P 500 Stock Fund.............................. .07%
Short-Intermediate Term Fund.................... .10%
U.S. Treasury Allocation Fund................... .20%
</TABLE>
35
<PAGE> 141
A Shareholder Servicing Agent may impose certain conditions on its
customers, subject to the terms of this Prospectus, in addition to or different
from those imposed by the Fund, such as requiring a higher minimum initial
investment or payment of a separate fee for additional services. Each
Shareholder Servicing Agent is required to agree to disclose any fees it may
directly charge its customers who are shareholders of the Funds and to notify
them in writing at least thirty days before it imposes any transaction fees.
EXPENSES -- As noted previously, from time to time BGFA and Stephens may
waive their respective fees in whole or in part. Any such waivers will reduce
the Funds' expenses and accordingly have a favorable impact on the Fund's yield
and total return. Except for the expenses borne by BGFA and Stephens, the
Company and the Master Portfolios will bear all costs of their respective
operations allocated to the Funds and the Master Portfolios.
Under the Administration Agreement, Stephens has agreed to assume the
operating expenses of the Asset Allocation Fund, Money Market Fund and U.S.
Treasury Allocation Fund, and a pro rata share of the operating expenses of the
corresponding Master Portfolios, except for extraordinary expenses and those
fees and expenses payable pursuant to the various service contracts described
above which will be borne by the Company and those expenses specifically assumed
by BGFA under its contracts with the Funds.
Stephens has not assumed the following operating expenses of the Asset
Allocation Master Portfolio, Money Market Master Portfolio and U.S. Treasury
Allocation Master Portfolio: advisory fees, interest, brokerage fees and
commissions, if any, costs of independent pricing services and any extraordinary
expenses.
Stephens has not assumed the following operating expenses of the Asset
Allocation Fund, Money Market Fund and U.S. Treasury Allocation Fund:
administration fees, Shareholder Servicing Agent fees, Transfer Agent fees and
expenses and any extraordinary expenses.
36
<PAGE> 142
HOW TO BUY SHARES
WHO MAY INVEST
Only the following types of investors are eligible to invest in shares of
the Funds:
- Participants in Benefit Plans ("Plan Participants"), including
retirement plans, that have appointed one of the Company's Shareholder
Servicing Agents as plan trustee, plan administrator or other agent, or
whose plan trustee, plan administrator or other agent has a servicing
arrangement with a Shareholder Servicing Agent that permits investments
in Fund shares, and Plan Participants who invest pursuant to an
agreement between such a Benefit Plan and a Shareholder Servicing Agent.
- Individuals using proceeds that are being rolled over directly from a
qualified Benefit Plan to an IRA pursuant to arrangements between the
sponsor or other agent of the qualified Benefit Plan and a Shareholder
Servicing Agent.
- Foundations, corporations and other business entities that have a
servicing arrangement with one of the Company's Shareholder Servicing
Agents that permits investments in Fund shares, and persons who invest
pursuant to an agreement between such an entity and a Shareholder
Servicing Agent.
- Individuals, other than those described above, who invest at least $1
million in a Fund pursuant to an account arrangement with a Shareholder
Servicing Agent ("Qualified Buyers").
Eligible investors may purchase Fund shares in one of the several ways
described below. For more information or additional forms, call 1-800-776-0179.
The Company or Stephens may make the Prospectus available in an electronic
format. Upon receipt of a request by an investor or the investor's
representative, the Company or Stephens will transmit or cause to be transmitted
promptly, without charge, a paper copy of the electronic Prospectus.
MINIMUM INVESTMENT AMOUNT
In most cases, investors in Fund shares are not required to establish or
maintain a minimum investment amount. However, Qualified Buyers are required to
make an initial investment in Fund shares of at least $1 million (although this
requirement may be waived under certain conditions). All investments in Fund
shares are subject to a determination by the Company
37
<PAGE> 143
that the investment instructions are complete. If shares are purchased by a
check that does not clear, the Company reserves the right to cancel the purchase
and hold the investor responsible for any losses or fees incurred. The Company
reserves the right in its sole discretion to suspend the availability of the
Fund's shares and to reject any purchase requests. Certificates for Fund shares
are not issued. Shareholder Servicing Agents may establish investment amount and
account balance requirements different from those of the Funds and may charge
fees in addition to those charged by the Fund.
GENERAL
Shares of the Funds may be purchased on any Business Day at the net asset
value per share next determined after an order in proper form is received by the
Transfer Agent. Purchase orders that are received by the Transfer Agent before
the close of regular trading on the NYSE (currently 4:00 p.m., Eastern Standard
Time) are executed on the same day. Orders received by the Transfer Agent after
the close of regular trading on the NYSE are executed on the next Business Day.
The investor's Shareholder Servicing Agent is responsible for the prompt
transmission of the investor's purchase order to the Transfer Agent on the
investor's behalf. Under certain circumstances, a Shareholder Servicing Agent
may establish an earlier deadline for receipt of orders or an investor's order
transmitted to a Shareholder Servicing Agent may not be received by the Transfer
Agent on the same day.
Federal regulations require that an investor provide a valid taxpayer
identification number ("TIN"), which is usually the investor's social security
number or employee identification number, upon opening or reopening an account.
See "Dividends and Distributions" for further information concerning this
requirement. Failure to furnish a valid TIN to the Company could subject the
investor to penalties imposed by the Internal Revenue Service ("IRS").
BENEFIT PLANS
Shares of the Funds are offered to Benefit Plans that have appointed one of
the Funds' Shareholder Servicing Agents as plan trustee, plan administrator or
other agent, or whose plan trustee, plan administrator or other agent has a
servicing arrangement with a Shareholder Servicing Agent that permits
investments in Fund shares. Benefit Plans include 401(k) plans and plans
qualified under Section 401(a) of the Internal Revenue Code of 1986, as amended
(the "Code"), health and welfare plans and executive deferred compensation
plans. For additional information
38
<PAGE> 144
about Benefit Plans that may be eligible to invest in Fund shares, prospective
investors should contact a Shareholder Servicing Agent.
Fund investments by participants in 401(k) plans are typically made by
payroll deductions arranged between participants and their employers.
Participants in the MasterWorks 401(k) program are included in this group.
Participants also may make direct contributions to their accounts in special
circumstances such as the transfer of a rollover amount from another 401(k) plan
or from a rollover IRA. Investors should contact their employer's benefits
department for more information about contribution methods.
Plan Participants who have established an account with a Shareholder
Servicing Agent may purchase Fund shares in accordance with their account
arrangements with such Shareholder Servicing Agent. The Shareholder Servicing
Agent is responsible for the prompt transmission of purchase orders. Shareholder
Servicing Agents may charge additional fees for maintaining customer accounts
other than those charged by the Funds.
IRAS, KEOGHS AND OTHER INDIVIDUAL RETIREMENT PLANS
An investor may be entitled to invest in shares of the Funds through a
tax-deferred retirement plan. In addition to offering investments in Fund shares
through IRA rollovers, a Shareholder Servicing Agent may offer other types of
tax-deferred or tax-advantaged plans, including a Keogh retirement plan for
self-employed professional persons, sole proprietors and partnerships. Contact a
Shareholder Servicing Agent for materials describing plans available through it,
and their benefits, provisions and fees.
Application materials for opening an IRA rollover, Keogh retirement plan or
other individual retirement plan can be obtained from a Shareholder Servicing
Agent. Completed retirement plan applications should be returned to the
investor's Shareholder Servicing Agent for approval and processing. If an
investor's retirement plan application is incomplete or improperly filled out,
there may be a delay before the Fund account is opened. Investors should consult
their Shareholder Servicing Agent.
PURCHASES BY QUALIFIED BUYERS AND ELIGIBLE INDIVIDUAL AND
CORPORATE INVESTORS
Qualified Buyers and eligible individual or corporate investors may open a
Fund account through a Shareholder Servicing Agent with whom they have an
existing account arrangement. An Account Application must be completed to open a
Fund account. Account Applications may be
39
<PAGE> 145
obtained by contacting a Shareholder Servicing Agent or by calling
1-800-776-0179. Shareholder Servicing Agents may transmit purchase orders to the
Transfer Agent on behalf of investors, including purchase orders for which
payment is to be made by wire or by transfer from an Approved Bank designated in
an investor's Account Application ("Approved Bank Account").
Qualified Buyers and eligible individual or corporate investors may
purchase Fund shares by wire by instructing the wiring bank to transmit the
specified amount in federal funds to:
Wells Fargo Bank, N.A.
San Francisco, California
Bank Routing Number: 121000248
Wire Purchase Account Number: 4068-000587
Attention: MasterWorks Funds Inc. (Name of Fund)
Account Name(s): (name(s) in which to be registered)
Account Number: (if investing into an existing account)
Share purchases are effected at the net asset value next determined after
the Account Application is received and accepted. The Shareholder Servicing
Agent is responsible for the prompt transmission of purchase orders to the
Transfer Agent.
Additional Purchases
A Qualified Buyer or other individual or corporate investor may make
additional purchases by contacting their Shareholder Servicing Agent or by
instructing the Funds' Transfer Agent to debit an Approved Bank Account, by wire
by using the procedures described under "Initial Purchases by Wire" above.
HOW TO REDEEM SHARES
GENERAL
Investors may redeem all or a portion of their Fund shares on any Business
Day without any charge by the Company. The redemption price of the shares is the
next determined net asset value of the Fund calculated after the Company has
received a redemption request in proper form. Redemption proceeds may be more or
less than the amount invested depending on the Fund's net asset value at the
time of purchase and redemption. The redemption of Fund shares is ordinarily
treated as a sale or exchange for federal income tax purposes and, therefore, a
redeeming shareholder may recognize a taxable gain or loss.
40
<PAGE> 146
The Company generally remits redemption proceeds from the Fund within seven
days after a redemption order is received in proper form, absent extraordinary
circumstances. Such extraordinary circumstances could include a period during
which an emergency exists as a result of which (a) disposal by the Master
Portfolio of securities owned by the Master Portfolio is not reasonably
practicable or (b) it is not reasonably practicable for the Fund fairly to
determine the value of its net assets, or a period during which the SEC by order
permits deferral of redemptions for the protection of Fund shareholders. In
addition, the Company may defer payment of a shareholder's redemption until
reasonably satisfied that such shareholder's investments made by check have been
collected (which can take up to ten days from the purchase date). Payment of
redemption proceeds may be made in portfolio securities, subject to regulation
by some state securities commissions.
Telephone redemption or exchange privileges are made available to
shareholders automatically upon opening an account (unless the shareholder
specifically declines the privileges). These privileges authorize the Transfer
Agent to act on telephone instructions from any person representing himself or
herself to be the investor and reasonably believed by the Transfer Agent to be
genuine. The Company requires the Transfer Agent to employ reasonable
procedures, such as requiring a form of personal identification, to confirm that
instructions are genuine and, if it does not follow such procedures, the Company
and the Transfer Agent may be liable for any losses due to unauthorized or
fraudulent instructions. Neither the Company nor the Transfer Agent will be
liable for following telephone instructions reasonably believed to be genuine.
During times of drastic economic or market conditions, investors may
experience difficulty in contacting the Transfer Agent by telephone to request a
redemption or exchange of Fund shares. In such cases, investors should consider
using the other redemption procedures made available to such investors. Use of
these other redemption procedures may result in the investor's redemption
request being processed at a later time than it would have been if telephone
redemption had been used. During the delay, the Fund's net asset value may
fluctuate.
Redemption orders that are received by the Transfer Agent before the close
of regular trading on the NYSE (currently 4:00 p.m., Eastern Standard Time),
will be executed at the net asset value determined as of the close of regular
trading on the NYSE on that day. Redemption orders that are received by the
Transfer Agent after the close of regular trading on the NYSE, will be executed
on the next Business Day. The investor's Shareholder Servicing Agent is
responsible for the prompt transmission of
41
<PAGE> 147
redemption orders to the Funds on the investor's behalf. Under certain
circumstances, a Shareholder Servicing Agent may establish an earlier deadline
for receipt of orders or an investor's order transmitted to a Shareholder
Servicing Agent may not be received by the Transfer Agent on the same day.
Unless the investor has made other arrangements with an appropriate
Shareholder Servicing Agent, and the Transfer Agent has been informed of such
arrangements, proceeds of a redemption order made by the investor through a
Shareholder Servicing Agent are credited to the investor's Approved Bank
Account. If no such account is designated, a check for the proceeds is mailed to
the investor's address of record or, if such address is no longer valid, the
proceeds are credited to the investor's account with the investor's Shareholder
Servicing Agent.
BENEFIT PLANS, IRAS, KEOGHS AND OTHER INDIVIDUAL RETIREMENT PLANS
Investors in these types of plans are subject to restrictions on
withdrawing their money under the Code. Each type of plan has established
procedures for withdrawals, which are disclosed to investors at the time of
purchase. Investors may obtain more information by contacting their employer
and/or their Shareholder Servicing Agent. The redemption procedures outlined in
the remainder of this section do not apply to investors in Benefit Plans or
retirement plans. Investors in these types of plans should contact their
Shareholder Servicing Agent regarding redemption procedures applicable to them.
REDEMPTIONS BY QUALIFIED BUYERS AND ELIGIBLE INDIVIDUAL AND
CORPORATE INVESTORS
Redemptions by Mail
1. Write a letter of instruction. Indicate the dollar amount or number of
Fund shares to be redeemed, the Fund account number and TIN (where applicable).
2. Sign the letter in exactly the same way the account is registered. If
there is more than one owner of the shares, all owners must sign.
Unless other instructions are given in proper form, a check for the
redemption proceeds is sent to the investor's address of record.
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Expedited Redemptions by Letter and Telephone
An individual or corporate investor may request an expedited redemption of
Fund shares by letter, in which case the investor's receipt of redemption
proceeds, but not the Fund's receipt of the investor's redemption request, would
be expedited. Telephone redemption and exchange privileges are made available to
an investor automatically upon the opening of an account unless the investor
declines the privilege. The investor also may request an expedited redemption of
Fund shares by telephone on any Business Day, in which case both the investor's
receipt of redemption proceeds and the Fund's receipt of the investor's
redemption request would be expedited.
Investors may request expedited redemption by telephone by calling the
Transfer Agent at 1-800-776-0179.
Investors may request expedited redemption by mailing an expedited
redemption request to the Transfer Agent at the mailing address set forth under
"How to Buy Shares -- Initial Purchases by Wire."
Upon request, proceeds of expedited redemptions are wired or credited to
the investor's Approved Bank Account. The Company reserves the right to impose a
charge for wiring redemption proceeds. When proceeds of an individual or
corporate investor's expedited redemption are to be paid to someone else, to an
address other than that of record, or to an account with an approved bank that
the investor has not predesignated in his or her Account Application, the
expedited redemption request must be made by letter and the signature(s) on the
letter must be guaranteed in the manner discussed above, regardless of the
amount of the redemption. If the investor's expedited redemption request is
received by the Transfer Agent on a Business Day, the investor's redemption
proceeds are transmitted to the investor's Approved Bank Account on the next
Business Day (assuming the investor's investment check has cleared as described
above), absent extraordinary circumstances. Such extraordinary circumstances
could include those described above as potentially delaying redemptions, and
also could include situations involving an unusually heavy volume of wire
transfer orders on a national or regional basis or communication or transmittal
delays that could cause a brief delay in the wiring or crediting of funds.
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EXCHANGE PRIVILEGE
The exchange privilege enables an investor to purchase, in exchange for
shares of a Fund, shares of another fund offered by the Company in the
investor's state of residence. Before undertaking an exchange into another fund,
investors should obtain and review a copy of the current prospectus of the fund
into which the exchange is being made. A prospectus may be obtained by calling
MasterWorks Funds at 1-800-776-0179.
Shares are exchanged at the next determined net asset value. No fees are
currently charged to shareholders directly in connection with exchanges,
although the Company reserves the right, upon not less than 60 days' written
notice, to charge shareholders a nominal exchange fee in accordance with rules
promulgated by the SEC. The Company reserves the right to limit the number of
times shares may be exchanged and to reject in whole or in part any exchange
request into a fund when management believes that such action would be in the
best interests of such fund's other shareholders, such as when management
believes such action would be appropriate to protect a Fund against disruptions
in portfolio management resulting from frequent transactions by those seeking to
time market fluctuations. Any such rejection is made by management on a
prospective basis only, upon notice to the shareholder given not later than 10
days following such shareholder's most recent exchange. The exchange privilege
may be modified or terminated at any time upon 60 days' written notice to
shareholders.
The exchange of shares of one fund for shares of another is treated for
federal income tax purposes as a sale of the shares relinquished in the exchange
by the shareholder and, therefore, an exchanging shareholder may recognize a
taxable gain or loss.
SHARE VALUE
The value of a share of each Fund is its "net asset value," or NAV. NAV is
computed by adding the value of the Fund's portfolio investments (i.e., the
value of its investments in the Master Portfolio) plus cash and other assets,
deducting liabilities (including the fees payable to the various service
providers) and then dividing the result by the number of Fund shares outstanding
for that Fund. The Fund's NAV is expected to fluctuate daily.
The Funds are open for business each Business Day, which is a day on which
the NYSE is open for trading. Currently, the weekdays on which the NYSE is
closed are: New Year's Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and
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Christmas Day. Each Fund's NAV is calculated each Business Day as of the close
of regular trading on the NYSE (currently 4:00 p.m., Eastern Standard Time).
Each Fund's investment in the corresponding Master Portfolio is valued at
the NAV of such Master Portfolio's shares. Each Master Portfolio calculates the
NAV of its shares on the same days and at the same time as the corresponding
Fund. Except for debt obligations with remaining maturities of 60 days or less,
which are valued at amortized cost, each Master Portfolio's other assets are
valued at current market prices, or if such prices are not readily available, at
fair value as determined in good faith in accordance with guidelines approved by
the appropriate Board of Trustees. Prices used for such valuations may be
provided by independent pricing services. For further information regarding the
methods employed in valuing the Master Portfolios' investments, see
"Determination of Net Asset Value" in the SAI.
DIVIDENDS AND DISTRIBUTIONS
The Growth Stock Fund and the S&P 500 Stock Fund each intend to pay
quarterly dividends consisting of substantially all of their net investment
income and annual distributions consisting of substantially all of their net
realized capital gains. The Asset Allocation Fund, Bond Index Fund,
Short-Intermediate Term Fund and the U.S. Treasury Allocation Fund intend to pay
monthly dividends consisting of substantially all of their net investment income
and annual distributions consisting of substantially all of their net realized
capital gains. All dividends and distributions are automatically reinvested at
net asset value in shares of the Fund paying such dividend or distribution,
unless payment in cash is requested and your arrangement with a Shareholder
Servicing Agent permits the processing of cash payments. Each reinvestment
increases the total number of shares held by a shareholder.
Dividends and capital gain distributions have the effect of reducing the
NAV per share by the amount distributed on the payment date. Although a dividend
or distribution paid to an investor on newly acquired shares shortly after
purchase would represent, in substance, a return of capital, the dividend or
distribution may consist of net investment income or net realized capital gain
and, accordingly, would be taxable to the investor. To the extent dividends and
distributions are reinvested, however, each shareholder receives additional Fund
shares equivalent in value to the reduction in NAV on shares owned by that
shareholder.
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FEDERAL INCOME TAX INFORMATION
GENERAL
Each Fund intends to qualify as a regulated investment company under
Subchapter M of the Code as long as such qualification is in the best interest
of the Fund's shareholders. The Funds will be treated as separate entities for
federal income tax purposes and thus the provisions of the Code applicable to
regulated investment companies will be applied to the Funds and every other fund
separately, rather than to the Company as a whole. In addition, net capital
gains, net investment income, and operating expenses will be determined
separately for each Fund. By complying with the applicable provisions of the
Code, the Funds will not be subject to federal income taxes with respect to net
investment income and net realized capital gains distributed to its
shareholders.
Each Fund seeks to qualify as a regulated investment company by investing
all of its assets in the corresponding Master Portfolio. Each Master Portfolio
will be treated as a non-publicly traded partnership rather than as a regulated
investment company or a corporation under the Code, and as such, shall not be
subject to federal income tax. As a non-publicly traded partnership, any
interest, dividends, gains and losses of the Master Portfolio are deemed to be
"passed through" to the corresponding Fund in proportion to the Fund's interest
in the Master Portfolio. If a Master Portfolio were to accrue but not distribute
any interest, dividends or gains, the corresponding Fund would be deemed to have
recognized its allocable share of such income, regardless of whether or not such
income has been distributed by the Master Portfolio. However, each Master
Portfolio seeks to minimize recognition by the corresponding Fund and other
investors of interest, dividends and gains without a corresponding distribution.
The Company may be required to withhold, subject to certain exemptions, at
a rate of 31% ("backup withholding") on dividends, capital gain distributions,
and redemption proceeds (including proceeds from exchanges) paid or credited to
an individual shareholder, unless a shareholder certifies that the TIN provided
is correct and that the shareholder is not subject to backup withholding, or the
IRS notifies the Fund that the shareholder's TIN is incorrect or the shareholder
is subject to backup withholding. Such tax withheld does not constitute an
additional tax imposed on the shareholder, and may be claimed as a tax payment
on the shareholder's federal income tax return. Non-resident aliens and other
foreign shareholders may be subject to U.S. withholding tax at rates up to 30%
on dividends and distributions paid.
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TAXABLE INVESTORS
The Funds intend to distribute all of their net investment income and net
realized capital gains (if any) each taxable year. Distributions from net
investment income (including net short-term capital gains and excluding net
tax-exempt income) will be taxable as ordinary income to shareholders who are
not currently exempt from federal income taxes. Whether a shareholder takes
dividend payments and capital gain distributions in cash or has them
automatically reinvested in Fund shares, the shareholder will ordinarily be
taxed. Corporate shareholders of the Funds will be eligible for the
dividends-received deduction on the dividends paid by the Funds to the extent
the Funds' income is derived from certain dividends received from domestic
corporations, as long as the corporate shareholder holds the Fund shares upon
which the eligible dividend was paid for at least 46 days.
The Funds, or the Transfer Agent on their behalf, will regularly inform
shareholders of the amount and nature of the Funds' dividends and capital gain
distributions. Investors should keep all statements they receive to assist in
recordkeeping.
BENEFIT PLAN INVESTORS
As a general matter, benefit plans, their sponsors and their participants
are not subject to federal income taxes at the time of receipt of net investment
income and capital gain distributions.
However, such tax-exempt investors may be subject to tax on certain
unrelated taxable income which could arise, for example, when such investors
acquire shares in the Fund through the use of leverage. Tax-exempt investors
should consult their tax advisors regarding the Unrelated Business Taxable
Income Rules.
The foregoing is a brief discussion of certain federal income tax
considerations. Further information is contained in the SAI. All investors
should consult their individual tax advisors with respect to their particular
tax situations as well as the state and local tax status of investments in
shares of the Funds.
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GENERAL INFORMATION
DESCRIPTION OF THE COMPANY
Each Fund is a series of the Company. The Company was organized as a
Maryland corporation on October 15, 1992, and currently offers the following
series: the Asset Allocation, Bond Index, Growth Stock, Money Market,
Short-Intermediate Term, S&P 500 Stock, U.S. Treasury Allocation, LifePath 2000,
LifePath 2010, LifePath 2020, LifePath 2030 and LifePath 2040 Funds. All of the
Company's existing series, except the Money Market Fund, are feeder funds in
master/feeder structures. Each Fund offers one class of shares and each share
has one vote. The Company's principal office is located at 111 Center Street,
Little Rock, Arkansas 72201.
The Board of Directors of the Company supervises the Funds' activities and
monitors their contractual arrangements with various service providers.
Additional information about the Directors and officers of the Company is
included in the Funds' SAI under "Management." A Fund may withdraw its
investments in a Master Portfolio only if the Board of Directors of the Company
determines that is in the best interests of the Fund and its shareholders to do
so. Upon any such withdrawal, the Board of Directors of the Company would
consider what action might be taken, including the investment of all the assets
of such Fund in another pooled investment entity having the same investment
objective as the Fund or the hiring of an investment adviser to manage the
Fund's assets in accordance with the investment policies described above with
respect to the Master Portfolio. Although the Company is not required to hold
regular annual shareholder meetings, occasional annual or special meetings may
be required for purposes such as electing or removing Directors, approving
advisory contracts and distribution plans and changing the Fund's investment
objectives or fundamental investment policies.
VOTING
All shares of the Company have equal voting rights and will be voted in the
aggregate, rather than by fund, unless otherwise required by law (such as when a
matter affects only one fund). Shareholders of the Funds are entitled to one
vote for each share owned and fractional votes for fractional shares owned.
Depending on the terms of a particular Benefit Plan and the matter being
submitted to a vote, a sponsor may request direction from individual
participants regarding a shareholder vote. In addition, whenever a Fund is
requested to vote on matters pertaining to a Master Portfolio, the Company will
hold a meeting of the Fund's shareholders and will cast its vote as instructed
by Fund shareholders. The directors of the Company will vote shares for which
they receive no voting instructions in the same
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proportion as the shares for which they do receive voting instructions. A more
detailed description of the voting rights and attributes of the shares is
contained in the "Capital Stock" section of the SAI.
INDEPENDENT AUDITORS
KPMG Peat Marwick LLP, Three Embarcadero Center, San Francisco, California
94111, serves as independent auditors for the Company.
LEGAL COUNSEL
Morrison & Foerster LLP, 2000 Pennsylvania Avenue, N.W., Washington, D.C.
20006, serves as counsel to the Company.
INFORMATION ON THE FUNDS
The Company provides annual and semi-annual reports to all shareholders.
The annual reports contain audited financial statements and other information
about the Funds including additional information on performance. Shareholders
may obtain a copy of the Company's most recent annual report without charge by
phoning 1-800-776-0179.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND IN THE
COMPANY'S OFFICIAL SALES LITERATURE IN CONNECTION WITH THE OFFER OF THE FUNDS'
SHARES AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER IN ANY STATE IN WHICH, OR TO ANY PERSON TO WHOM, SUCH
OFFERING MAY NOT LAWFULLY BE MADE.
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APPENDIX -- ADDITIONAL INVESTMENT POLICIES
PORTFOLIO SECURITIES
The Asset Allocation, Bond Index, S&P 500 Index and U.S. Treasury
Allocation Master Portfolios (the "MIP Master Portfolios") and the Growth Stock
and Short-Intermediate Term Master Portfolios ("the "MSIT Master Portfolios"),
subject to the terms of this Prospectus and the Funds' SAI, may invest in the
securities described below.
U.S. GOVERNMENT OBLIGATIONS -- Each Master Portfolio may invest in various
types of U.S. Government obligations. U.S. Government obligations include
securities issued or guaranteed as to principal and interest by the U.S.
Government and supported by the full faith and credit of the U.S. Treasury. U.S.
Treasury obligations differ mainly in the length of their maturity. Treasury
bills, the most frequently issued marketable government securities, have a
maturity of up to one year and are issued on a discount basis. U.S. Government
obligations also include securities issued or guaranteed by federal agencies or
instrumentalities, including government-sponsored enterprises. Some obligations
of such agencies or instrumentalities of the U.S. Government are supported by
the full faith and credit of the United States or U.S. Treasury guarantees;
others, by the right of the issuer or guarantor to borrow from the U.S.
Treasury; still others by the discretionary authority of the U.S. Government to
purchase certain obligations of the agency or instrumentality; and others, only
by the credit of the agency or instrumentality issuing the obligation. In the
case of obligations not backed by the full faith and credit of the United
States, the investor must look principally to the agency or instrumentality
issuing or guaranteeing the obligation for ultimate repayment, which agency or
instrumentality may be privately owned. There can be no assurance that the U.S.
Government would provide financial support to its agencies or instrumentalities
(including government-sponsored enterprises) where it is not obligated to do so.
In addition, U.S. government obligations are subject to fluctuations in market
value due to fluctuations in market interest rates. As a general matter, the
value of debt instruments, including U.S. Government obligations, declines when
market interest rates increase and rises when market interest rates decrease.
Certain types of U.S. Government obligations are subject to fluctuations in
yield or value due to their structure or contract terms.
FOREIGN GOVERNMENT OBLIGATIONS; SECURITIES OF SUPRANATIONAL
ENTITIES -- Each MIP Master Portfolio , through its investment in money market
instruments, may invest in obligations issued or guaranteed by one or more
foreign governments or any of their political subdivisions, agencies
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or instrumentalities that are determined by BGFA to be of comparable quality to
the other obligations in which such Master Portfolio may invest. Such securities
also include debt obligations of supranational entities. Supranational entities
include international organizations designated or supported by governmental
entities to promote economic reconstruction or development and international
banking institutions and related government agencies. Examples include the
International Bank for Reconstruction and Development (the World Bank), the
European Coal and Steel Community, the Asian Development Bank and the
InterAmerican Development Bank. The percentage of each Master Portfolio's assets
invested in securities issued by foreign governments will vary depending on the
relative yields of such securities, the economic and financial markets of the
countries in which the investments are made and the interest rate climate of
such countries. Investments in such securities may be subject to withholding and
other taxes imposed by foreign governments.
FOREIGN OBLIGATIONS -- The Growth Stock Master Portfolio may invest a
portion (less than 25%) of its total assets in high-quality, short-term (one
year or less) debt obligations of foreign branches of U.S. banks or U.S.
branches of foreign banks that are denominated in and pay interest in U.S.
dollars. Obligations of foreign banks and foreign branches of U.S. banks involve
somewhat different investment risks from those affecting obligations of U.S.
banks, including the possibilities that liquidity could be impaired because of
future political and economic developments, that the obligations may be less
marketable than comparable obligations of U.S. banks, that a foreign
jurisdiction might impose withholding taxes on interest income payable on those
obligations, that foreign deposits may be seized or nationalized, that foreign
governmental restrictions (such as foreign exchange controls) may be adopted
which might adversely affect the payment of principal and interest on those
obligations, and that the selection of those obligations may be more difficult
because there may be less publicly available information concerning foreign
banks, or the accounting, auditing and financial reporting standards, practices
and requirements applicable to foreign banks may differ from those applicable to
U.S. banks. In that connection, foreign banks are not subject to examination by
any U.S. Government agency or instrumentality. To the extent such securities of
foreign issuers are not listed on recognized domestic or foreign securities
exchanges they will be deemed to be illiquid investments.
BANK OBLIGATIONS -- Each Master Portfolio may invest in bank obligations,
including certificates of deposit, time deposits, bankers' acceptances and other
short-term obligations of domestic banks, foreign subsidiaries of domestic
banks, foreign branches of domestic banks, and domestic and foreign branches of
foreign banks, domestic savings and loan associa-
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tions and other banking institutions. With respect to such securities issued by
foreign branches of domestic banks, foreign subsidiaries of domestic banks, and
domestic and foreign branches of foreign banks, a Master Portfolio may be
subject to additional investment risks that are different in some respects from
those incurred by a fund which invests only in debt obligations of U.S. domestic
issuers. Such risks include possible future political and economic developments,
the possible imposition of foreign withholding taxes on interest income payable
on the securities, the possible establishment of exchange controls or the
adoption of other foreign governmental restrictions which might adversely affect
the payment of principal and interest on these securities and the possible
seizure or nationalization of foreign deposits.
Certificates of deposit are negotiable certificates evidencing the
obligation of a bank to repay funds deposited with it for a specified period of
time.
Time deposits are non-negotiable deposits maintained in a banking
institution for a specified period of time at a stated interest rate. Time
deposits which may be held by a Master Portfolio will not benefit from insurance
from the Bank Insurance Fund or the Savings Association Insurance Fund
administered by the Federal Deposit Insurance Corporation.
Bankers' acceptances are credit instruments evidencing the obligation of a
bank to pay a draft drawn on it by a customer. These instruments reflect the
obligation both of the bank and of the drawer to pay the face amount of the
instrument upon maturity. The other short-term obligations may include
uninsured, direct obligations, bearing fixed, floating- or variable-interest
rates.
COMMERCIAL PAPER AND SHORT-TERM CORPORATE DEBT INSTRUMENTS -- Each Master
Portfolio may invest in commercial paper (including variable amount master
demand notes), which consists of short-term, unsecured promissory notes issued
by corporations to finance short-term credit needs. Commercial paper is usually
sold on a discount basis and has a maturity at the time of issuance not
exceeding nine months. Variable amount master demand notes are demand
obligations that permit the investment of fluctuating amounts at varying market
rates of interest pursuant to arrangements between the issuer and a commercial
bank acting as agent for the payee of such notes whereby both parties have the
right to vary the amount of the outstanding indebtedness on the notes. The
investment adviser and/or sub/adviser to each Master Portfolio monitors on an
ongoing basis the ability of an issuer of a demand instrument to pay principal
and interest on demand and, pursuant to direction of the appro-
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priate Board of Trustees, determines the liquidity of those instruments which
have a demand feature that is not exercisable within seven days, provided an
active secondary market exists. Each Master Portfolio also may invest in
non-convertible corporate debt securities (e.g., bonds and debentures) with not
more than one year remaining to maturity at the date of settlement. A Master
Portfolio will invest only in such corporate bonds and debentures that are rated
at the time of purchase at least "Aa" by Moody's or "AA" by S&P. Subsequent to
its purchase by the Master Portfolio, an issue of securities may cease to be
rated or its rating may be reduced below the minimum rating required for
purchase by the Master Portfolio. The investment adviser and/or sub-adviser to
each Master Portfolio will consider such an event in determining whether the
Master Portfolio should continue to hold the obligation. To the extent the
Master Portfolio continues to hold such obligations, it may be subject to
additional risk of default.
The commercial paper investments of the Short-Intermediate Term Master
Portfolio at the time of purchase must be rated "A-1" by S&P or "Prime-1" by
Moody's or, if not rated, must be of comparable quality as determined by the
Master Portfolio's investment adviser or sub-adviser at its discretion.
Subsequent to its purchase by the Master Portfolio, an issue of securities may
cease to be rated or its rating may be reduced below the minimum rating required
for purchase by the Master Portfolio. The Master Portfolio's investment adviser
or sub-adviser will consider such an event in determining whether the Master
Portfolio should continue to hold the obligation. To the extent the Master
Portfolio continues to hold such obligations, it may be subject to additional
risk of default.
REPURCHASE AGREEMENTS -- Each Master Portfolio may enter into repurchase
agreements wherein the seller of a security to a Master Portfolio agrees to
repurchase that security from the Master Portfolio at a mutually-agreed upon
time and price. Each Master Portfolio's custodian has custody of, and holds in a
segregated account, securities acquired as collateral by such Master Portfolio
under a repurchase agreement. Repurchase agreements are considered by the staff
of the SEC to be loans by such Master Portfolio. In an attempt to reduce the
risk of incurring a loss on a repurchase agreement, the Master Portfolios enter
into repurchase agreements only with federally regulated or insured banks or
primary government securities dealers reporting to the Federal Reserve Bank of
New York or, under certain circumstances, banks with total assets in excess of
$5 billion or domestic broker/dealers with total equity capital in excess of
$100 million. Each Master Portfolio enters into repurchase agreements only with
respect to securities of the type in which such Master Portfolio may invest,
including government securities and mortgage-related securi-
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ties, regardless of their remaining maturities, and requires that additional
securities be deposited with the custodian if the value of the securities
purchased should decrease below the repurchase price. Each Master Portfolio's
adviser and/or sub-adviser monitors on an ongoing basis the value of the
collateral to assure that it always equals or exceeds the repurchase price.
Certain costs may be incurred by a Master Portfolio in connection with the sale
of the underlying securities if the seller does not repurchase them in
accordance with the repurchase agreement. In addition, if bankruptcy proceedings
are commenced with respect to the seller of the securities, disposition of the
securities by a Master Portfolio may be delayed or limited. Master Portfolio
considers on an ongoing basis the creditworthiness of the institutions with
which it enters into repurchase agreements. Each Master Portfolio may enter into
repurchase agreements only with registered broker/dealers commercial banks and
other financial institutions which meet guidelines established by the
appropriate Board of Trustees and are not affiliated with such Master
Portfolio's investment adviser or sub-adviser.
UNREGISTERED NOTES -- Each MIP Master Portfolio may purchase unsecured
promissory notes ("Notes") which are not readily marketable and have not been
registered under the 1933 Act, provided such investments are consistent with the
Master Portfolios' investment objective. A Master Portfolio will not invest more
than 15% of the value of its net assets in Notes and in other illiquid
securities.
FLOATING- AND VARIABLE-RATE OBLIGATIONS -- Each Master Portfolio may
purchase floating- and variable-rate demand notes and bonds, which are
obligations ordinarily having stated maturities in excess of thirteen months,
but which permit the holder to demand payment of principal at any time, or at
specified intervals not exceeding thirteen months. Variable-rate demand notes
include master demand notes which are obligations that permit a Master Portfolio
to invest fluctuating amounts, which may change daily without penalty, pursuant
to direct arrangements between the Master Portfolio, as lender, and the
borrower. The interest rates on these notes fluctuate from time to time. The
issuer of such obligations ordinarily has a corresponding right, after a given
period, to prepay in its discretion the outstanding principal amount of the
obligations plus accrued interest upon a specified number of days' notice to the
holders of such obligations. The interest rate on a floating-rate demand
obligation is based on a known lending rate, such as a bank's prime rate, and is
adjusted automatically each time such rate is adjusted. The interest rate on a
variable-rate demand obligation is adjusted automatically at specified
intervals. Frequently, such obligations are secured by letters of credit or
other credit support arrangements provided by banks. Because
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these obligations are direct lending arrangements between the lender and
borrower, it is not contemplated that such instruments generally will be traded,
and there generally is no established secondary market for these obligations,
although they are redeemable at face value. Accordingly, where these obligations
are not secured by letters of credit or other credit support arrangements, a
Master Portfolio's right to redeem is dependent on the ability of the borrower
to pay principal and interest on demand. Such obligations frequently are not
rated by credit rating agencies and a Master Portfolio may invest in obligations
which are not so rated only if the Master Portfolio's investment adviser or
sub-adviser determines that at the time of investment the obligations are of
comparable quality to the other obligations in which the Master Portfolio may
invest. Each Master Portfolio's investment adviser or sub-adviser considers on
an ongoing basis the creditworthiness of the issuers of the floating- and
variable-rate demand obligations in the Master Portfolio's portfolio. Each
Master Portfolio will not invest more than 15% of the value of its net assets in
floating- or variable-rate demand obligations as to which it cannot exercise the
demand feature on not more than seven days' notice if there is no secondary
market available for these obligations, and in other illiquid securities.
PARTICIPATION INTERESTS -- Each MIP Master Portfolio may purchase from
financial institutions participation interests in securities in which such
Master Portfolio may invest. A participation interest gives a Master Portfolio
an undivided interest in the security in the proportion that the Master
Portfolio's participation interest bears to the total principal amount of the
security. These instruments may have fixed, floating- or variable-rates of
interest. If the participation interest is unrated, or has been given a rating
below that which is permissible for purchase by the Master Portfolio, the
participation interest is backed by an irrevocable letter of credit or guarantee
of a bank, or the payment obligation otherwise is collateralized by U.S.
Government securities, or, in the case of unrated participation interests, BGFA
must have determined that the instrument is of comparable quality to those
instruments in which the Master Portfolio may invest. Prior to a Master
Portfolio's purchase of any such instrument backed by a letter of credit or
guarantee of a bank, BGFA evaluates the creditworthiness of the bank,
considering all factors which it deems relevant. This generally may include
review of the bank's cash flow, level of short-term debt, leverage,
capitalization, the quality and depth of management, profitability, return on
assets, and economic factors relative to the banking industry. For certain
participation interests, a Master Portfolio has the right to demand payment, on
not more than seven days' notice, for all or any part of such Master Portfolio's
participation interest in the security, plus accrued interest. As to these
instruments, each Master
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Portfolio intends to exercise its right to demand payment only upon a default
under the terms of the security, as needed to provide liquidity to meet
redemptions, or to maintain or improve the quality of its investment portfolio.
MORTGAGE-RELATED SECURITIES -- Each MIP Master Portfolio may enter into
repurchase agreements with respect to mortgage-related securities ("MBSs"),
representing interests in a pool of loans secured by mortgages. The resulting
cash flow from these mortgages is used to pay principal and interest on the
securities. MBSs are assembled for sale to investors by various
government-sponsored enterprises such as the Federal National Mortgage
Association ("FNMA") and the Federal Home Loan Mortgage Corporation ("FHLMC") or
are guaranteed by such governmental agencies as the Government National Mortgage
Association ("GNMA"). Regardless of the type of guarantee, all MBSs are subject
to interest rate risk (i.e., exposure to loss due to changes in interest rates).
GNMA MBSs include GNMA Mortgage Pass-Through Certificates (also known as
"Ginnie Maes") which are guaranteed as to the full and timely payment of
principal and interest by GNMA and such guarantee is backed by the authority of
GNMA to borrow funds from the U.S. Treasury to make payments under its
guarantee. GNMA is a wholly-owned U.S. Government corporation within the
Department of Housing and Urban Development. As such, GNMA securities are backed
by the full faith and credit of the federal government. MBSs issued by FNMA
include FNMA Guaranteed Mortgage Pass-Through Certificates (also known as
"Fannie Maes") which are solely the obligations of FNMA and are neither backed
by nor entitled to the full faith and credit of the federal government. FNMA is
a government-sponsored enterprise which is also a private corporation whose
stock trades on the NYSE. Fannie Maes are guaranteed as to timely payment of
principal and interest by FNMA. FHLMC MBSs include FHLMC Mortgage Participation
Certificates ("Freddie Macs" or "PCs"). FHLMC guarantees timely payment of
interest, but only ultimate payment of principal due under the obligations it
issues. Freddie Macs are not guaranteed by the United States or by any Federal
Home Loan Bank and do not constitute a debt or obligation of the United States
or of any Federal Home Loan Bank. FHLMC may, under certain circumstances, remit
the payment of principal at any time after default, but in no event later than
one year after the guarantee becomes payable.
WARRANTS -- Each MIP Master Portfolio may invest up to 5% of its net assets
at the time of purchase in warrants, except that this limitation does not apply
to warrants acquired in units or attached to securities. A warrant is an
instrument issued by a corporation which gives the holder the
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right to subscribe to a specified amount of the corporation's capital stock at a
set price for a specified period of time, usually with a stated maturity in
excess of one year. The prices of warrants do not necessarily correlate to the
prices of the underlying securities.
ILLIQUID SECURITIES -- Each MIP Master Portfolio may invest up to 15% of
the value of its net assets in securities as to which a liquid trading market
does not exist, provided such investments are consistent with its investment
objective. Such securities may include securities that are not readily
marketable, such as certain securities that are subject to legal or contractual
restrictions on resale, participation interests that are not subject to the
demand feature described above, floating- and variable-rate demand obligations
as to which the Master Portfolio cannot exercise the related demand feature
described above on not more than seven days' notice and as to which there is no
secondary market and repurchase agreements providing for settlement more than
seven days after notice. However, if a substantial market of qualified
institutional investors develops pursuant to Rule 144A under the 1933 Act, for
certain of these securities held by a Master Portfolio, the Master Portfolio
intends to treat such securities as liquid securities in accordance with
procedures approved by MIP's Board of Trustees. Because it is not possible to
predict with assurance how the market for restricted securities pursuant to Rule
144A will develop, the MIP's Board of Trustees has directed BGFA to monitor
carefully the MIP Master Portfolios' investments in such securities with
particular regard to trading activity, availability of reliable price
information and other relevant information. To the extent that qualified
institutional investors may periodically cease purchasing such restricted
securities pursuant to Rule 144A, a Master Portfolio's investing in such
securities may have the effect of increasing the level of illiquidity in the
Master Portfolio's portfolio during such period.
INVESTMENT COMPANY SECURITIES -- Each Master Portfolio may invest in
securities issued by other investment companies which principally invest in
securities of the type in which the Master Portfolio invests. Under the 1940
Act, a Master Portfolio's investment in such securities currently is limited to,
subject to certain exceptions, (i) 3% of the total voting stock of any one
investment company, (ii) 5% of the Master Portfolio's net assets with respect to
any one investment company and (iii) 10% of the Master Portfolio's net assets in
the aggregate. Investments in the securities of other investment companies
generally will involve duplication of advisory fees and certain other expenses
and BGFA will waive its advisory fees for that portion of a Master Portfolio's
assets so invested, except when such purchase is part of a plan of merger,
consolidation, reorganization or acquisition.
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STOCK INDEX OPTIONS -- The Asset Allocation Master Portfolio and S&P Index
Master Portfolio may purchase and write (i.e., sell) put and call options on
stock indices as a substitute for comparable market positions in the underlying
securities. A stock index fluctuates with changes in the market values of the
stocks included in the index. The aggregate premiums paid on all options
purchased may not exceed 20% of the Asset Allocation Master Portfolio's and S&P
500 Index Master Portfolio's individual total assets and the value of options
written or purchased may not exceed 10% of the value of the Asset Allocation
Master Portfolio's and S&P 500 Index Master Portfolio's individual total assets.
The effectiveness of purchasing or writing stock index options will depend
upon the extent to which price movements in the Asset Allocation Master
Portfolio and S&P 500 Index Master Portfolio's investment portfolio correlate
with price movements of the stock index selected. Because the value of an index
option depends upon movements in the level of the index rather than the price of
a particular stock, whether the Asset Allocation Master Portfolio and S&P 500
Index Master Portfolio will realize a gain or loss from purchasing or writing
stock index options depends upon movements in the level of stock prices in the
stock market generally or, in the case of certain indices, in an industry or
market segment, rather than movements in the price of a particular stock.
When the Asset Allocation Master Portfolio or S&P 500 Index Master
Portfolio writes an option on a stock index, the Index Master Portfolio will
place in a segregated account with its custodian cash or liquid securities in an
amount at least equal to the market value of the underlying stock index and will
maintain the account while the option is open or otherwise will cover the
transaction.
FUTURES TRANSACTIONS -- To the extent permitted by applicable regulations,
each MIP Master Portfolio is permitted to use futures as a substitute for a
comparable market position in the underlying securities. The Master Portfolios
will not be commodity pools.
A futures contract is an agreement between two parties, a buyer and a
seller, to exchange a particular commodity at a specific price on a specific
date in the future. Futures contracts are traded on exchanges, where the
exchange serves as the ultimate counterparty for all contracts. Consequently,
the only credit risk on futures contracts is the creditworthiness of the
exchange. Futures contracts are, however, subject to market risk (i.e., exposure
to adverse price changes).
The MIP Master Portfolios may trade futures contracts and options on
futures contracts in U.S. domestic markets, such as the Chicago Board
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of Trade and the International Monetary Market of the Chicago Mercantile
Exchange.
The Master Portfolios' futures transactions must constitute permissible
transactions pursuant to regulations promulgated by the CFTC. In addition, a
Master Portfolio may not engage in futures transactions if the sum of the amount
of initial margin deposits and premiums paid for unexpired options on futures
contracts, other than those contracts entered into for bona fide hedging
purposes, would exceed 5% of the liquidation value of the Master Portfolio's
assets, after taking into account unrealized profits and unrealized losses on
such contracts; provided, however, that in the case of an option on a futures
contract that is in-the-money at the time of purchase, the in-the-money amount
may be excluded in calculating the 5% liquidation limit. Pursuant to regulations
and/or published positions of the SEC, a Master Portfolio may be required to
segregate cash or high quality money market instruments in connection with its
futures transactions in an amount generally equal to the entire value of the
underlying security.
Initially, when purchasing or selling futures contracts each Master
Portfolio is required to deposit with the Master Portfolio's custodian in the
broker's name an amount of cash or cash equivalents up to approximately 10% of
the contract amount. This amount is subject to change by the exchange or board
of trade on which the contract is traded, and members of such exchange or board
of trade may impose their own higher requirements. This amount is known as
"initial margin" and is in the nature of a performance bond or good faith
deposit on the contract which is returned to the Master Portfolio upon
termination of the futures position, assuming all contractual obligations have
been satisfied. Subsequent payments, known as "variation margin," to and from
the broker will be made daily as the price of the index or securities underlying
the futures contract fluctuates, making the long and short positions in the
futures contract more or less valuable. At any time prior to the expiration of a
futures contract, the Master Portfolio may elect to close the position by taking
an opposite position, at the then prevailing price, thereby terminating its
existing position in the contract.
Although each Master Portfolio intends to purchase or sell futures
contracts only if there is an active market for such contracts, no assurance can
be given that a liquid market will exist for any particular contract at any
particular time. Many futures exchanges and boards of trade limit the amount of
fluctuation permitted in futures contract prices during a single trading day.
Once the daily limit has been reached in a particular contract, no trades may be
made that day at a price beyond that limit or trading may
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be suspended for specified periods during the trading day. Futures contract
prices could move to the limit for several consecutive trading days with little
or no trading, thereby preventing prompt liquidation of futures positions and
potentially subjecting the Master Portfolio to substantial losses. If it is not
possible to close, or the Master Portfolio determines not to close, a futures
position in anticipation of adverse price movements, it will be required to make
daily cash payments of variation margin.
An option on a futures contract gives the purchaser the right, in return
for the premium paid, to assume a position in a futures contract (a long
position if the option is a call and a short position if the option is a put) at
a specified exercise price at any time during the option exercise period. The
writer (i.e., seller) of the option is required upon exercise to assume an
offsetting futures position (a short position if the option is a call and a long
position if the option is a put). Upon exercise of the option, the assumption of
offsetting futures positions by both the writer and the holder of the option
will be accompanied by delivery of the accumulated cash balance in the writer's
futures margin account in the amount by which the market price of the futures
contract, at exercise, exceeds (in the case of a call) or is less than (in the
case of a put) the exercise price of the option on the futures contract.
STOCK INDEX FUTURES AND OPTIONS ON STOCK INDEX FUTURES -- The Asset
Allocation Master Portfolio and S&P 500 Index Master Portfolio may purchase and
sell stock index futures contracts and options on stock index futures contracts.
A stock index future obligates the seller to deliver (and the purchaser to
take), effectively, an amount of cash equal to a specific dollar amount times
the difference between the value of a specific stock index at the close of the
last trading day of the contract and the price at which the agreement is made.
No physical delivery of the underlying stocks in the index is made. With respect
to stock indices that are permitted investments, both the Asset Allocation
Master Portfolio and S&P 500 Index Master Portfolio intend to purchase and sell
futures contracts on the stock index for which it can obtain the best price with
consideration also given to liquidity.
BORROWING MONEY -- As a fundamental policy, each Master Portfolio is
permitted to borrow to the extent permitted under the 1940 Act. However, each
Master Portfolio currently intends to borrow money only for temporary or
emergency (not leveraging) purposes, and may borrow up to 33 1/3% of the value
of its total assets (including the amount borrowed) valued at the lesser of cost
or market, less liabilities (not including the amount borrowed) at the time the
borrowing is made. While borrowings
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exceed 5% of a Master Portfolio's total assets, the Master Portfolio will not
make any investments.
FORWARD COMMITMENTS AND WHEN-ISSUED SECURITIES -- Each Master Portfolio may
purchase securities on a when-issued or forward commitment basis, which means
that the price is fixed at the time of commitment, but delivery and payment
ordinarily take place a number of days (generally within 45) after the date of
the commitment to purchase. The Master Portfolios make commitments to purchase
such securities only with the intention of actually acquiring the securities,
but a Master Portfolio may sell these securities before the settlement date if
it is deemed advisable. The Master Portfolios will not accrue income in respect
of a security purchased on a forward commitment basis prior to its stated
delivery date. The Growth Stock and Short-Intermediate Term Master Portfolios do
not currently intend to invest more than 5% of their respective net assets in
when-issued securities.
Securities purchased on a when-issued or forward commitment basis and
certain other securities held in a Master Portfolio's investment portfolio are
subject to changes in value based upon the public's perception of the
creditworthiness of the issuer and changes, real or anticipated, in the level of
interest rates (i.e., appreciating when interest rates decline and depreciating
when interest rates rise). Securities purchased on a when-issued or forward
commitment basis may expose a Master Portfolio to risk because such securities
may experience price fluctuations prior to their actual delivery. Purchasing
securities on a when-issued or forward commitment basis can involve the
additional risk that the yield available in the market when the delivery takes
place actually may be higher than that obtained in the transaction itself. A
segregated account for each Portfolio consisting of cash or U.S. Government
securities or other high quality liquid debt securities in an amount at least
equal at all times to the amount of the when-issued or forward commitments is
established and maintained at the Master Portfolios' custodian bank. Purchasing
securities on a when-issued or forward commitment basis when the Master
Portfolio is fully or almost fully invested may result in greater potential
fluctuation in the value of the Master Portfolio's net assets and its NAV per
share.
INTEREST RATE FUTURES CONTRACTS AND OPTIONS ON INTEREST RATE FUTURES
CONTRACTS -- The Asset Allocation, Bond Index and U.S. Treasury Allocation
Master Portfolios may invest in interest rate futures contracts and options on
interest rate futures contracts as a substitute for a comparable market position
in the underlying securities.
The Asset Allocation Master, Bond Index and U.S. Treasury Allocation Master
Portfolios also may sell options on interest rate futures
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contracts as part of closing purchase transactions to terminate its options
positions. No assurance can be given that such closing transactions can be
effected or the degree of correlation between price movements in the options on
interest rate futures and price movements in the Master Portfolio investment
securities which are the subject of the transaction.
MONEY MARKET INSTRUMENTS AND TEMPORARY INVESTMENTS
The Growth Stock Master Portfolio may have temporary cash balances on
account of new purchases, dividends, interest and reserves for redemptions,
which the Master Portfolio may invest in the following high-quality money market
instruments: (i) short-term obligations issued or guaranteed by the U.S.
Government, its agencies or instrumentalities (including government-sponsored
enterprises); (ii) negotiable certificates of deposit ("CDs"), bankers'
acceptances, fixed time deposits and other obligations of domestic banks
(including foreign branches) that have more than $1 billion in total assets at
the time of investment and that are members of the Federal Reserve System or are
examined by the Comptroller of the Currency or whose deposits are insured by the
FDIC; (iii) commercial paper rated at the date of purchase "Prime-1" by Moody's
or "A-1+" or "A-1" by S&P, or, if unrated, of comparable quality as determined
by the Master Portfolio's investment adviser or sub-adviser; (iv)
non-convertible corporate debt securities (e.g., bonds and debentures) with
remaining maturities at the date of purchase of not more than one year that are
rated at least "Aa" by Moody's or "AA" by S&P; (v) repurchase agreements; and
(vi) short-term, U.S. dollar-denominated obligations of foreign banks (including
U.S. branches) that, at the time of investment (a) have more than $10 billion,
or the equivalent in other currencies, in total assets; (b) are among the 75
largest foreign banks in the world as determined on the basis of assets; and (c)
in the opinion of the Master portfolio's investment adviser or sub-adviser, are
of comparable quality to obligations of U.S. banks which may be purchased by the
Master Portfolio.
Each Master Portfolio also may invest in non-convertible corporate debt
securities (e.g., bonds and debentures) with not more than one year remaining to
maturity at the date of settlement. A Master Portfolio will invest only in such
corporate bonds and debentures that are rated at the time of purchase at least
"Aa" by Moody's or "AA" by S&P. Subsequent to its purchase by the Master
Portfolio, an issue of securities may cease to be rated or its rating may be
reduced below the minimum rating required for purchase by the Master Portfolio.
The investment adviser and/or sub-adviser to each Master Portfolio will consider
such an event in determining whether the Master Portfolio should continue to
hold the obligation. To
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the extent the Master Portfolio continues to hold such obligations, it may be
subject to additional risk of default.
The commercial paper investments of the Short-Intermediate Term Master
Portfolio at the time of the purchase must be rated "A-1" by S&P or "Prime-1" by
Moody's or, if not rated, must be of comparable quality as determined by the
Master Portfolio's investment adviser or sub-adviser at its discretion.
Subsequent to its purchase by the Master Portfolio, an issue of securities may
cease to be rated or its rating may be reduced below the minimum rating required
for purchase by the Master Portfolio. The Master Portfolio's investment adviser
or sub-adviser will consider such an event in determining whether the Master
Portfolio should continue to hold the obligation. To the extent the Master
Portfolio continues to hold such obligations, it may be subject to additional
risk of default.
OBLIGATIONS OF CORPORATIONS AND FOREIGN ENTITIES -- The Short-Intermediate
Term Master Portfolio may invest in debt securities issued by domestic
corporations, U.S. dollar-denominated debt securities issued by Canadian
corporations, Yankee bonds and supra-national obligations. Yankee bonds are U.S.
dollar-denominated obligations issued by foreign governments or companies.
Supra-national obligations are U.S. dollar-denominated obligations issued by
international entities such as the World Bank and the Inter-American Development
Bank.
SECURITIES BACKED BY MORTGAGES -- The Short-Intermediate Term Master
Portfolio may purchase Mortgage-Backed Securities ("MBSs"), which are
pass-through certificates representing interests in a pool of loans secured by
mortgages. The resulting cash flow from those mortgages is used to pay principal
and interest on the certificates. The MBSs in which the Master Portfolio may
invest are issued or guaranteed by the Government National Mortgage Association
("GNMA"), the Federal National Mortgage Association ("FNMA") or the Federal Home
Loan Mortgage Corporation ("FHLMC"). MBS investors receive monthly payments
based on a pro-rata share of interest and principal payments (and prepayments)
on the underlying mortgage pool, less GNMA's, FNMA's or FHLMC's fees and any
applicable loan servicing fees.
GNMA guarantees the full and timely payment of principal and interest on
GNMA certificates. The GNMA guarantee is backed by the authority of GNMA to
borrow funds from the U.S. Treasury to meet payment obligations arising from its
guarantee. Since GNMA is a wholly-owned U.S. Government corporation within the
Department of Housing and Urban Development, GNMA guarantees are also general
obligations of the United States and, as such, are backed by the full faith and
credit of the federal government. In contrast, MBSs issued by FNMA include FNMA
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Guaranteed Mortgage Pass-Through Certificates ("Fannie Maes") which are solely
the obligations of FNMA and are neither backed by, nor entitled to, the full
faith and credit of the federal government. FHLMC also is a government-sponsored
enterprise whose MBSs are solely obligations of FHLMC. Therefore, FHLMC MBSs are
not guaranteed by the federal government or by a Federal Home Loan Bank and do
not constitute a general obligation of the federal government or any Federal
Home Loan Bank. FHLMC guarantees timely payment of interest and ultimate payment
of principal due under the obligations it issues. However, because FNMA and
FHLMC are government-sponsored enterprises, their securities are generally
considered to be high quality investments that present minimal credit risks.
The mortgages underlying MBSs guaranteed by GNMA are fully insured or
guaranteed by the Federal Housing Administration, the Veterans Administration or
the Farmers Home Administration. Mortgages underlying MBSs issued by FNMA or
FHLMC are typically conventional residential mortgages which are not so insured
or guaranteed, but which conform to specific underwriting, size and maturity
standards.
The Master Portfolio also may invest up to 25% of its total assets in
collateralized mortgage obligations ("CMOs") issued or guaranteed by U.S.
Government instrumentalities (including government-sponsored enterprises) or
collateralized by U.S. Government obligations. In a CMO, a series of bonds or
certificates is issued in multiple classes. Each class is issued at a specified
coupon rate, with a stated maturity or final distribution date. The principal
and interest payments on the underlying mortgages in the collateral pool may be
allocated among the classes of CMOs in several ways. Typically, payments of
principal on the underlying mortgages, including any prepayments, are applied to
the classes in the order of their respective stated maturities or final
distribution dates, so that no payment of principal will be made on CMOs of one
class until all other classes having earlier stated maturities or final
distribution dates have been paid in full.
The Master Portfolio may purchase CMOs that are:
(1) collateralized by fixed rate or adjustable rate mortgages that are
guaranteed, as to payment of principal and interest, by a U.S. Government
agency or instrumentality (including a government-sponsored enterprise);
(2) directly guaranteed, as to payment of principal and interest by
the issuer, which guarantee is collateralized by U.S. Government
securities; or
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(3) collateralized by MBSs which are issued or guaranteed by the U.S.
Government, its agencies or instrumentalities (including
government-sponsored enterprises).
The coupon rate of one or more CMO classes may reset periodically based on
an index, such as the London Interbank Offered Rate ("LIBOR"). The interest
rates on the mortgages underlying the MBSs and the CMOs in which the Master
Portfolio may invest also may be adjustable. In this case, they generally are
readjusted at intervals of one year or less in response to changes in a
predetermined interest rate index. There are two main categories of indices:
those based on U.S. Treasury securities and those based on certain financial
aggregates, such as a cost-of-funds index or a moving average of mortgage rates.
Commonly utilized indices include the one-year and five-year constant maturity
Treasury note rates, the three-month Treasury bill rate, the 180-day Treasury
bill rate, rates on longer-term Treasury securities, the National Median Cost of
Funds, the one-month, three-month, six-month or one-year LIBOR, a published
prime rate, or commercial paper rates. Certain of these indices follow overall
market interest rates more closely than others.
The range of fluctuation of interest rates on certain adjustable rate
mortgages ("ARMs") may be limited by "caps" or "floors." A "cap" is a ceiling or
maximum interest rate over a mortgage note. A "floor" is a minimum interest rate
under a mortgage note. To the extent that the interest rates on the ARMs
underlying MBSs or CMOs cannot be adjusted in response to interest rate changes
due to the existence of such "caps" or "floors" on interest rate movements, the
MBSs or CMOs are likely to respond to changes in market rates more like fixed
rate securities. In other words, interest rate increases in excess of the caps
can be expected to cause the CMOs or MBSs backed by mortgages that have such
caps to decline in value to a greater extent than would be the case in the
absence of such caps. Conversely, interest rate decreases below the floors can
be expected to cause the CMOs or MBSs backed by mortgages that have such floors
to increase in value to a greater extent than would be the case in the absence
of such floors. The value of MBSs, CMOs and ARMs will fluctuate to the extent
interest rates on the underlying ARMs differ from prevailing market interest
rates during interim periods between interest rate reset dates. Accordingly,
holders of MBSs, CMOs or ARMs could experience some loss (or less gain than
otherwise might be achieved) if they sell these investments before the interest
rates on the underlying mortgages are adjusted to reflect prevailing market
interest rates.
Holders of CMOs and MBSs not only receive scheduled payments of principal
and interest, but also receive additional principal payments
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representing prepayments on the underlying mortgages. A certain level of
prepayments is factored into the price of most CMOs, since historical experience
shows that a certain percentage of mortgages will be repaid or refinanced before
maturity. When market interest rates change, however, prepayment behavior
changes. When market interest rates are high, homeowners tend to refinance less,
which slows the rate of prepayments. When market interest rates are low, the
rate of prepayments tends to accelerate. Lower market interest rates are a
positive influence on the value of a CMO, as they are on most fixed-rate
investments. At the same time, however, the risk that an investor will receive
more prepayments than anticipated and must therefore reinvest at lower
prevailing market rates is a negative influence on the CMO's value. The net
effect of falling interest rates on a CMO's price depends on the relationship
between interest rates and CMO prices which, in turn, depends on a number of
factors including whether or not the CMO was trading at a discount or a premium
before rates fell. Thus, it is possible for a move in interest rates to impact
different classes of the same CMO series differently. (See the discussion of
multiple classes, above.)
As a non-fundamental policy, the Master Portfolio will not invest in
"interest only" or "principal only" securities.
OTHER ASSET-BACKED SECURITIES -- The Short-Intermediate Term Master
Portfolio may invest in Asset-Backed Securities ("ABSs"), which are pass-through
securities representing ownership interests in a pool of loans, leases, or
installment contracts on personal property such as computers and automobiles
(but not real estate). They are similar to MBSs in that they represent an
undivided interest in a trust established to hold the assets. Investors receive
their pro rata share of payments of interest and principal on the assets of the
trust, less any servicing fees or interest margin paid to the sponsor of the
trust. ABS issuers include finance companies, equipment leasing companies and
banks. The life span of an ABS depends on the rate at which the underlying
obligations are paid down by the borrowers. Faster prepayments of the underlying
obligations will shorten the life of an ABS.
All ABSs in which the Master Portfolio may invest contain one or more forms
of credit enhancement, such as overcollateralization, recourse to the issuer,
third party guaranty, a reserve fund, or a senior/subordinated security
structure. The Master Portfolio will be protected against default risk, but not
market risk, to the extent of such credit enhancements.
The Master Portfolio will invest only in ABSs rated "AA" or higher at time
of purchase by Moody's or S&P. The Master Portfolio will not purchase
subordinated ABSs.
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The corporations issuing ABSs include finance companies, equipment leasing
companies and banks.
LENDING PORTFOLIO SECURITIES -- Each Master Portfolio may lend securities
from its portfolio to domestic brokers, dealers and financial institutions (but
not individuals) if cash, U.S. Government obligations or other liquid,
high-quality debt obligations equal to at least 100% of the current market value
of the securities loaned (including accrued interest thereon) plus the interest
payable to the Master Portfolio with respect to the loan, is maintained with the
Master Portfolio. In determining whether to lend a security to a particular
broker, dealer or financial institution, the Master Portfolio's investment
adviser or sub-adviser considers all relevant facts and circumstances, including
the size, creditworthiness and reputation of the broker, dealer, or financial
institution. Any loans of portfolio securities are fully collateralized and
marked to market daily. Any securities that a Master Portfolio receives as
collateral do not become part of the Master Portfolio's investment portfolio at
the time of the loan and, in the event of a default by the borrower, the Master
Portfolio, if permitted by law, disposes of such collateral except for such part
thereof that is a security in which the Master Portfolio is permitted to invest.
During the time securities are on loan, the borrower pays the Master Portfolio
any accrued income on those securities, and the Master Portfolio invests the
cash collateral in high-quality money market instruments and earns income or
receives an agreed-upon fee from a borrower that has delivered cash-equivalent
collateral. The securities acquired with such cash collateral are segregated as
discussed above. In the event that the borrower defaults on its obligation to
return borrowed securities, because of insolvency or otherwise, the Master
Portfolio could experience delays and costs in gaining access to the collateral
and could suffer a loss to the extent that the value of the collateral falls
below the market value of the securities borrowed. However, loans are made only
to borrowers deemed by the Master Portfolio's adviser or sub-adviser to be of
good standing and when, in its judgment, the income to be earned from the loan
justifies the attendant risks. A Master Portfolio does not lend securities
having a value that exceeds 33% of the current value of its total assets. Loans
of securities by the Master Portfolio are subject to termination at the Master
Portfolio's or the borrower's option. A Master Portfolio may pay reasonable
administrative and custodial fees in connection with a securities loan and may
pay a negotiated portion of the interest or fee earned with respect to the
collateral to the borrower or the placing broker. Borrowers and placing brokers
are not affiliated, directly or indirectly, with MIP, MSIT, BGFA, Wells Fargo or
Stephens.
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INVESTMENT POLICIES -- THE FUNDS
The investment objective of each Fund as set forth in the first sentence of
the section describing such Fund under the heading entitled "The
Funds -- Investment Objective and Policies", is fundamental; that is, it may not
be changed without approval by the vote of the holders of a majority of the
outstanding voting securities of such Fund as described under "Capital Stock" in
the SAI. In addition, any fundamental investment policy may not be changed
without shareholder approval. If the Board of Directors of the Company
determines, however, that the investment objective of a Fund can best be
achieved by a substantive change in a non-fundamental investment policy or
strategy, the Board may make such change without shareholder approval and will
disclose any such material changes in the then current prospectus.
As matters of fundamental policy, the Funds may: (i) not purchase
securities of any issuer (except U.S. Government obligations) if as a result,
with respect to 75% of its total assets, more than 5% of the value of a Fund's
total assets would be invested in the securities of such issuer or, with respect
to 100% of its total assets, a Fund would own more than 10% of the outstanding
voting securities of such issuer provided that this restriction shall not
prevent a Fund from investing all of its assets in the Master Portfolio's; (ii)
borrow from banks up to 20% of the current value of its net assets for temporary
purposes only in order to meet redemptions, and these borrowings may be secured
by the pledge of up to 20% of the current value of its net assets (but
investments may not be purchased while any such outstanding borrowing in excess
of 5% of its net assets exists); (iii) make loans of portfolio securities in
accordance with its investment policies; and (iv) not invest 25% or more of its
total assets (i.e., concentrate) in any particular industry, except that a Fund
will concentrate its assets in any one industry for the same period as does the
S&P 500 Index and except that a Fund may invest 25% or more of their assets in
U.S. Government obligations, provided that this restriction shall not prevent a
Fund from investing all of its assets in the corresponding Master Portfolio.
The Funds reserve the right to invest up to 15% of the current value of
their net assets in repurchase agreements having maturities of more than seven
days and other illiquid securities. However, as long as a Fund's shares are
registered for sale in a state that imposes a lower limit on the percentage of a
fund's assets that may be so invested, a Fund will comply with such lower limit.
The Fund's presently are limited to investing 10% of its net assets in such
securities due to limits applicable in several states. Disposing of illiquid or
restricted securities may involve additional costs and require additional time.
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INVESTMENT POLICIES -- THE MASTER PORTFOLIOS
CERTAIN FUNDAMENTAL POLICIES -- The Master Portfolios may (i) borrow from
banks up to 20% of the current value of their net assets for temporary purposes
only in order to meet redemptions, and these borrowings may be secured by the
pledge of up to 20% of the current value of their net assets (but investments
may not be purchased while any such outstanding borrowing in excess of 5% of
their net assets exists); (ii) invest up to 5% of its total assets in the
obligations of any single issuer, except that up to 25% of the value of the
total assets of the Master Portfolios may be invested and obligations issued or
guaranteed by the U.S. Government, its agencies or instrumentalities may be
purchased, without regard to any such limitation; and (iii) not invest 25% or
more of its total assets (i.e., concentrate) in any particular industry, except
that the S&P Index Master Portfolio will concentrate its assets in any one
industry for the same period as does the S&P 500 Index and except that the
Master Portfolios may invest 25% or more of their assets in U.S. Government
Obligations. This paragraph describes certain fundamental policies that cannot
be changed as to the Master Portfolios without approval by the holders of a
majority (as defined in the 1940 Act) of the Master Portfolios' outstanding
voting securities.
CERTAIN ADDITIONAL NON-FUNDAMENTAL POLICIES -- The Master Portfolios may
(i) purchase securities of any company having less than three years' continuous
operation (including operations of any predecessors) if such purchase does not
cause the value of its investments in all such companies to exceed 5% of the
value of each Master Portfolios' total assets; (ii) pledge, hypothecate,
mortgage or otherwise encumber its assets, but only to secure permitted
borrowings; and (iii) invest up to 15% of the value of their net assets in
repurchase agreements providing for settlement in more than seven days after
notice and in other illiquid securities.
INVESTMENT RATINGS
The following describes how three of the major rating agencies classify
their investment ratings. Ratings of debt securities represent the rating
agency's opinion regarding their quality, and are not a guarantee of quality.
Credit ratings attempt to evaluate the safety of principal and interest
payments, and do not evaluate the risks of fluctuations in market value.
Furthermore, rating agencies may fail to make timely changes in credit ratings
in response to subsequent events, so that an issuer's current financial
condition may be better or worse than the rating indicates. Subsequent to
purchase by a Master Portfolio, the rating of a debt security may be reduced
below the minimum rating required for initial purchase by
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<PAGE> 175
the Master Portfolio or the security may cease to be rated. BGFA will consider
either such event in determining whether a Master Portfolio should continue to
hold the security. In no event will a Master Portfolio hold more than 5% of its
net assets in debt securities rated below "BBB" by S&P or below "Baa" by Moody's
or in unrated low quality (below investment grade) debt securities. BGFA does
not make any representation that the investment ratings provided by such rating
agencies are accurate or complete.
STANDARD & POOR'S RATINGS
Bond Ratings. Bonds rated "AAA" have the highest rating assigned by S&P to
a debt obligation. Capacity to pay interest and repay principal is extremely
strong. Bonds rated "AA" have a very strong capacity to pay interest and repay
principal and differ from the highest rated issues only in a small degree. Bonds
rated "A" have a strong capacity to pay interest and repay principal although it
is somewhat more susceptible to the adverse effects of changes in circumstances
and economic conditions than debt in higher rated categories. Bonds rated "BBB"
by S&P are regarded as having an adequate capacity to pay interest and repay
principal. Whereas such bonds normally exhibit adequate protection parameters,
adverse economic conditions or changing circumstances are more likely to lead to
a weakened capacity to pay interest and repay principal for debt in this
category than in higher rated categories.
Commercial Paper Ratings. Commercial paper with the greatest capacity for
timely payment is rated "A" by S&P. Issues within this category are further
redefined with designations "1", "2" and "3" to indicate the relative degree of
safety; "A-1," the highest of the three, indicates the degree of safety is very
high.
MOODY'S INVESTORS SERVICE RATINGS
Bond Ratings. Bonds rated "Aaa" by Moody's are judged to be of the best
quality. Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. Bonds rated "Aa" are judged to be of high
quality by all standards. They are rated lower than the best bonds because
margins of protection may not be as large or fluctuation of protective elements
may be of greater amplitude or there may be other elements present which make
the long-term risks appear somewhat larger than is the case with "Aaa"
securities. Bonds that are rated "A" possess many favorable investment
attributes and are to be considered upper medium grade obligations. Factors
giving security to principal and interest are considered adequate, but elements
may be present which suggest a
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susceptibility to impairment sometime in the future. Bonds which are rated "Baa"
by Moody's are considered medium grade obligations, i.e., they are neither
highly protected nor poorly secured. Interest payments and principal security
appear adequate for the present, but certain protective elements may be lacking
or may be characteristically unreliable over longer periods of time. Such bonds
lack outstanding investment characteristics and, in fact, have speculative
characteristics as well.
Commercial Paper Ratings. Moody's employs the designations of "Prime-1,"
"Prime-2" and "Prime-3" to indicate the relative capacity of the rated issuers
to repay punctually. "Prime-1" is the highest commercial paper rating assigned
by Moody's. Issuers of "Prime-1" obligations must have a superior capacity for
repayment of short-term promissory obligations, and will normally be evidenced
by leading market positions in well established industries, high rates of return
on funds employed, conservative capitalization structures with moderate reliance
on debt and ample asset protection, broad margins in earnings coverage of fixed
financial charges and high internal cash generation, and well established access
to a range of financial markets and assured sources of alternate liquidity.
FITCH INVESTORS SERVICE RATINGS
Bond Ratings. Bonds rated "BBB" by Fitch are considered to be investment
grade and of satisfactory quality. The obligor's ability to pay interest and
repay principal is considered to be adequate. Adverse changes in economic
conditions and circumstances, however, are more likely to weaken this ability
than with bonds having higher ratings.
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SPONSOR, DISTRIBUTOR AND ADMINISTRATOR
Stephens Inc.
Little Rock, Arkansas
INVESTMENT ADVISER
BZW Barclays Global Fund Advisors
San Francisco, California
CUSTODIAN
BZW Barclays Global Investors, N.A.
San Francisco, California
TRANSFER AGENT AND DIVIDEND DISBURSING AGENT
Wells Fargo Bank, N.A.
San Francisco, California
LEGAL COUNSEL
Morrison & Foerster LLP
Washington, D.C.
INDEPENDENT AUDITORS
KPMG Peat Marwick LLP
San Francisco, California
For more information about the Fund write or call:
MASTERWORKS FUNDS INC.
c/o Wells Fargo Bank, N.A. -- Transfer Agent
420 Montgomery Street
San Francisco, California 94105
1-800-776-0179
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION, ANY STATE SECURITIES COMMISSION OR ANY OTHER REGULATORY
AUTHORITY, NOR HAVE ANY OF THE FOREGOING AUTHORITIES PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
MWLP.pros. 6/96
<PAGE> 178
MASTERWORKS Funds Inc.
c/o Wells Fargo Bank, N.A.
Transfer Agent
420 Montgomery Street
San Francisco, CA 94163
MWBIG.pros 6/96
<PAGE> 179
MASTERWORKS LIFEPATH(R) FUNDS
LIFEPATH 2000 FUND
LIFEPATH 2010 FUND
LIFEPATH 2020 FUND
LIFEPATH 2030 FUND
LIFEPATH 2040 FUND
PART B
MASTERWORKS FUNDS INC.
STATEMENT OF ADDITIONAL INFORMATION
June 28, 1996
MasterWorks Funds Inc. (formerly, "Stagecoach Inc." and
hereinafter, the "Company") is an open-end, series investment company. This
Statement of Additional Information ("SAI") is not a prospectus and should be
read in conjunction with the Company's current Prospectus, also dated June 28,
1996, describing the LifePath 2000, LifePath 2010, LifePath 2020, LifePath
2030, and LifePath 2040 Funds (the "LifePath Funds" or the "Funds").
Each LifePath Fund invests substantially all of its assets in a
separate Master Portfolio (or "LifePath Master Portfolio") of Master Investment
Portfolio ("MIP") having the same investment objective as the Fund. Therefore,
the investment experience of each Fund will be substantially identical to that
of its corresponding Master Portfolio. MIP is a "series fund," which is a
mutual fund divided into separate portfolios. BZW Barclays Global Fund
Advisors ("BGFA") serves as investment adviser to the corresponding Master
Portfolio of each LifePath Fund. Stephens Inc. serves as administrator and
distributor of each Fund's shares.
All terms used in this SAI that are defined in the prospectus have
the meanings assigned in the Prospectus. A copy of the Prospectus may be
obtained without charge by writing MasterWorks Funds Inc., c/o Wells Fargo
Bank, N.A. - Transfer Agent, 525 Market Street, San Francisco, CA 94105, or by
calling 1-800-776-0179. The Company's registration statement may be examined
at the office of the Securities and Exchange Commission ("SEC") in Washington,
D.C.
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
General Information and History . . . . . . . . . . . . . . . 3
Investment Objectives and Management Policies . . . . . . . . 3
Management . . . . . . . . . . . . . . . . . . . . . . . . . 10
Management Arrangements . . . . . . . . . . . . . . . . . . . 13
Purchase and Redemption of Shares . . . . . . . . . . . . . . 17
Determination of Net Asset Value . . . . . . . . . . . . . . 17
Dividends, Distributions and Taxes . . . . . . . . . . . . . 18
Capital Stock . . . . . . . . . . . . . . . . . . . . . . . . 22
Performance Information . . . . . . . . . . . . . . . . . . . 25
Portfolio Transactions . . . . . . . . . . . . . . . . . . . 27
Information About the Funds . . . . . . . . . . . . . . . . . 28
Counsel . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Independent Auditors . . . . . . . . . . . . . . . . . . . . 29
Financial Information . . . . . . . . . . . . . . . . . . . . 29
Appendix . . . . . . . . . . . . . . . . . . . . . . . . . . A-1
Financial Statements . . . . . . . . . . . . . . . . . . . . F-1
</TABLE>
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GENERAL INFORMATION AND HISTORY
The Company is a registered investment company which currently
offers twelve series, including the Funds. MIP is a registered investment
company consisting of nine series including the LifePath Master Portfolios.
Each Fund invests all of its assets in the corresponding Master Portfolio of
MIP (as illustrated below), which has the same investment objective as the
related Fund.
<TABLE>
<S> <C>
LifePath Fund Corresponding Master Portfolio
------------- ------------------------------
LifePath 2000 Fund LifePath 2000 Master Portfolio
LifePath 2010 Fund LifePath 2010 Master Portfolio
LifePath 2020 Fund LifePath 2020 Master Portfolio
LifePath 2030 Fund LifePath 2030 Master Portfolio
LifePath 2040 Fund LifePath 2040 Master Portfolio
</TABLE>
On or about December 30, 1993, the Company's Board of Directors
approved, primarily for marketing purposes, the change of its corporate name
from "WellsFunds Inc." to "Stagecoach Inc." On or about March 15, 1996, the
Company changed its corporate name from "Stagecoach Inc." to "MasterWorks Funds
Inc."
On or about December 1, 1995, the LifePath Funds were added to the
registration statement of Stagecoach Inc. with the filing of post-effective
amendment No. 11 on Form N-1A. The MasterWorks Funds Inc. LifePath Funds were
established to supersede the LifePath Institutional Class Shares of Stagecoach
Trust (another company in the Stagecoach Family of Funds). See "Performance
Information" in this SAI.
INVESTMENT OBJECTIVES AND MANAGEMENT POLICIES
Investment Objectives. The LifePath Master Portfolios consist of five asset
allocation funds, each of which is a diversified fund offered by MIP, an
open-end, management investment company. Organizations and other entities such
as the Funds that hold shares of beneficial interest of a Master Portfolio may
be referred to herein as "feeder funds."
The Master Portfolios seek to provide long-term investors in a
feeder fund with an asset allocation strategy designed to maximize assets
consistent with the quantitatively measured risk such investors, on average,
may be willing to accept given their investment time horizons. The Master
Portfolios invest in a wide range of U.S. and foreign equity and debt
securities and money market instruments. Each Master Portfolio is managed for
investors in a feeder fund planning to retire (or begin to withdraw substantial
portions of their investment) approximately in the year stated in the title of
the Fund in which they invest (e.g., investors in the LifePath 2000 Fund plan
to retire in the year 2000).
As with all mutual funds, there can be no assurance that the
investment objective of each Master Portfolio will be achieved. Each Master
Portfolio's investment objective cannot be
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changed without approval by the holders of a majority (as defined in the
Investment Company Act of 1940, as amended (the "1940 Act")) of such Master
Portfolio's outstanding voting shares.
Each Fund may withdraw its investment in the corresponding Master
Portfolio at any time, if the Board of Directors of the Company determines that
such action is in the best interests of the Fund and its shareholders. Upon
such withdrawal, the Company's Board of Directors would consider alternative
investments, including investing all of the Fund's assets in another investment
company with the same investment objective as the Fund or hiring an investment
adviser to manage the Fund's assets in accordance with the investment policies
and restrictions described in the Fund's Prospectus and this SAI.
BGFA serves as investment advisor to each Master Portfolio .
Prior to January 1, 1996, Wells Fargo Bank, N.A. ("Wells Fargo") served as each
Master Portfolio's investment adviser and Wells Fargo Nikko Investment Advisors
("WFNIA") served as each Master Portfolio's sub-investment adviser. BGFA was
created by the reorganization of WFNIA with and into an affiliate of Wells
Fargo Institutional Trust Company ("WFITC"), the Master Portfolios' custodian.
BGFA is now a subsidiary of WFITC which, effective January 1, 1996, changed its
name to BZW Barclays Global Investors, N.A. ("BGI"). Stephens serves as MIP's
administrator and as placement agent of each Master Portfolio's shares.
Portfolio Securities.
Bank Obligations. Domestic commercial banks organized under
federal law are supervised and examined by the Comptroller of the Currency and
are required to be members of the Federal Reserve System and to have their
deposits insured by the Federal Deposit Insurance Corporation (the "FDIC").
Domestic banks organized under state law are supervised and examined by state
banking authorities but are members of the Federal Reserve System only if they
elect to join. In addition, state banks whose certificates of deposit ("CDs")
may be purchased by each Master Portfolio are insured by the FDIC (although
such insurance may not be of material benefit to the Master Portfolio,
depending on the principal amount of the CDs of each bank held by the Master
Portfolio) and are subject to federal examination and to a substantial body of
federal law and regulation. As a result of federal or state laws and
regulations, domestic branches of domestic banks whose CDs may be purchased by
each Master Portfolio generally are required, among other things, to maintain
specified levels of reserves, are limited in the amounts which they can loan to
a single borrower and are subject to other regulations designed to promote
financial soundness. However, not all of such laws and regulations apply to
the foreign branches of domestic banks.
Obligations of foreign branches of domestic banks, foreign
subsidiaries of domestic banks and domestic and foreign branches of foreign
banks, such as CDs and time deposits ("TDs"), may be general obligations of the
parent banks in addition to the issuing branch, or may be limited by the terms
of a specific obligation and/or governmental regulation. Such obligations are
subject to different risks than are those of domestic banks. These risks
include foreign economic and political developments, foreign governmental
restrictions that may adversely affect payment of principal and interest on the
obligations, foreign exchange controls and foreign
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<PAGE> 183
withholding and other taxes on interest income. These foreign branches and
subsidiaries are not necessarily subject to the same or similar regulatory
requirements that apply to domestic banks, such as mandatory reserve
requirements, loan limitations, and accounting, auditing and financial record
keeping requirements. In addition, less information may be publicly available
about a foreign branch of a domestic bank or about a foreign bank than about a
domestic bank.
Obligations of U.S. branches of foreign banks may be general
obligations of the parent bank in addition to the issuing branch, or may be
limited by the terms of a specific obligation or by federal or state regulation
as well as governmental action in the country in which the foreign bank has its
head office. A domestic branch of a foreign bank with assets in excess of $1
billion may be subject to reserve requirements imposed by the Federal Reserve
System or by the state in which the branch is located if the branch is licensed
in that state.
In addition, federal branches licensed by the Comptroller of the
Currency and branches licensed by certain states ("State Branches") may be
required to: (1) pledge to the appropriate regulatory authority, by depositing
assets with a designated bank within the relevant state, a certain percentage
of their assets as fixed from time to time by such regulatory authority; and
(2) maintain assets within the relevant state in an amount equal to a specified
percentage of the aggregate amount of liabilities of the foreign bank payable
at or through all of its agencies or branches within the state. The deposits
of federal and State Branches generally must be insured by the FDIC if such
branches take deposits of less than $100,000.
In view of the foregoing factors associated with the purchase of
CDs and TDs issued by foreign branches of domestic banks, by foreign
subsidiaries of domestic banks, by foreign branches of foreign banks or by
domestic branches of foreign banks, BGFA carefully evaluates such investments
on a case-by-case basis.
Each Master Portfolio may purchase CDs issued by banks, savings
and loan associations and similar thrift institutions with less than $1 billion
in assets, provided that such institutions are members of the FDIC, and further
provided such Master Portfolio purchases any such CD in a principal amount of
not more than $100,000, which amount would be fully insured by the Bank
Insurance Fund or the Savings Association Insurance Fund administered by the
FDIC. Interest payments on such a CD are not insured by the FDIC. No Master
Portfolio will own more than one such CD per such issuer.
Management Policies.
Stock Index Options. Each LifePath Master Portfolio may purchase
and write put and call options on stock indices. Options on stock indices are
similar to options on stock except that (a) the expiration cycles of stock
index options are monthly, while those of stock options are currently
quarterly, and (b) the delivery requirements are different. Instead of giving
the right to take or make delivery of stock at a specified price, an option on
a stock index gives the holder the right to receive a cash "exercise settlement
amount" equal to (i) the amount, if any, by which the fixed exercise price of
the option exceeds (in the case of a put) or is less than (in the case of a
call) the closing value of the underlying index on the date of exercise,
multiplied by (ii) a fixed "index
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<PAGE> 184
multiplier." Receipt of this cash amount depends upon the closing level of the
stock index upon which the option is based being greater than (in the case of a
call) or less than (in the case of a put) the exercise price of the option.
The amount of cash received is equal to such difference between the closing
price of the index and the exercise price of the option expressed in dollars
multiplied by a specified multiplier. The writer of the option is obligated,
in return for the premium received, to make delivery of this amount. The
writer may offset a position in stock index options prior to expiration by
entering into a closing transaction on an exchange or the writer may let the
option expire unexercised.
Futures Contracts and Options on Futures Contracts. The LifePath
Master Portfolios may enter into futures contracts and may purchase and write
(i.e., sell) options thereon. Upon the exercise of an option on a futures
contract, the writer of the option delivers to the holder of the option the
futures position and the accumulated balance in the writer's futures margin
account, which represents the amount by which the market price of the futures
contract exceeds (in the case of a call) or is less than (in the case of a put)
the exercise price of the option on the futures contract. The potential loss
related to the purchase of options on futures contracts is limited to the
premium paid for the option (plus transaction costs). Because the value of the
option is fixed at the time of sale, there are no daily cash payments to
reflect changes in the value of the underlying contract; however, the value of
the option may change daily and that change would be reflected in the net asset
value of the relevant LifePath Master Portfolio.
Foreign Currency Transactions. If a LifePath Master Portfolio
enters into a foreign currency transaction or forward contract, such Master
Portfolio deposits, if required by applicable regulations, with MIP's custodian
cash or high-grade debt securities in a segregated account of the LifePath
Master Portfolio in an amount at least equal to the value of the LifePath
Master Portfolio's total assets committed to the consummation of the forward
contract. If the value of the securities placed in the segregated account
declines, additional cash or securities is placed in the account so that the
value of the account equals the amount of the LifePath Master Portfolio's
commitment with respect to the contract.
At or before the maturity of a forward contract, a LifePath Master
Portfolio either may sell a portfolio security and make delivery of the
currency, or may retain the security and offset its contractual obligation to
deliver the currency by purchasing a second contract pursuant to which such
Master Portfolio obtains, on the same maturity date, the same amount of the
currency which it is obligated to deliver. If the LifePath Master Portfolio
retains the portfolio security and engages in an offsetting transaction, such
Master Portfolio, at the time of execution of the offsetting transaction,
incurs a gain or a loss to the extent that movement has occurred in forward
contract prices. Should forward prices decline during the period between the
LifePath Master Portfolio's entering into a forward contract for the sale of a
currency and the date it enters into an offsetting contract for the purchase of
the currency, the Master Portfolio realizes a gain to the extent the price of
the currency it has agreed to sell exceeds the price of the currency it has
agreed to purchase. Should forward prices increase, the Master Portfolio
suffers a loss to the extent the price of the currency it has agreed to
purchase exceeds the price of the currency it has agreed to sell.
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The cost to a LifePath Master Portfolio of engaging in currency
transactions varies with factors such as the currency involved, the length of
the contract period and the market conditions then prevailing. Because
transactions in currency exchange usually are conducted on a principal basis,
no fees or commissions are involved. BGFA considers on an ongoing basis the
creditworthiness of the institutions with which a LifePath Master Portfolio
enters into foreign currency transactions. The use of forward currency
exchange contracts does not eliminate fluctuations in the underlying prices of
the securities, but it does establish a rate of exchange that can be achieved
in the future. If a devaluation generally is anticipated, the LifePath Master
Portfolio may not be able to contract to sell the currency at a price above the
devaluation level it anticipates.
The purchase of options on currency futures allows a LifePath
Master Portfolio, for the price of the premium it must pay for the option, to
decide whether or not to buy (in the case of a call option) or to sell (in the
case of a put option) a futures contract at a specified price at any time
during the period before the option expires.
Future Developments. Each LifePath Master Portfolio may take
advantage of opportunities in the areas of options and futures contracts and
options on futures contracts and any other derivative investments which are not
presently contemplated for use by such Master Portfolio or which are not
currently available but which may be developed, to the extent such
opportunities are both consistent with a LifePath Master Portfolio's investment
objective and legally permissible for the Master Portfolio. Before entering
into such transactions or making any such investment, a LifePath Master
Portfolio would provide appropriate disclosure in its prospectus or this SAI.
Lending Portfolio Securities. To a limited extent, each Master
Portfolio may lend its portfolio securities to brokers, dealers and other
financial institutions, provided it receives cash collateral which is
maintained at all times in an amount equal to at least 100% of the current
market value of the securities loaned. By lending its portfolio securities, a
Master Portfolio can increase its income through the investment of the cash
collateral or by receipt of a loan premium from the borrower. For purposes of
this policy, each Master Portfolio considers collateral consisting of U.S.
Government obligations or irrevocable letters of credit issued by banks whose
securities meet the standards for investment by such Master Portfolio to be the
equivalent of cash. From time to time, a Master Portfolio may return to the
borrower, or to a third party unaffiliated with MIP which is acting as a
"placing broker," a part of the interest earned from the investment of
collateral received in exchange for securities loaned.
The SEC currently requires that the following conditions must be
met whenever portfolio securities are loaned: (1) the Master Portfolio must
receive at least 100% cash collateral from the borrower; (2) the borrower must
increase such collateral whenever the market value of the securities loaned
rises above the level of such collateral; (3) the Master Portfolio must be able
to terminate the loan at any time; (4) the Master Portfolio must receive
reasonable interest on the loan, as well as any dividends, interest or other
distributions payable on the loaned securities, and any increase in market
value; (5) the Master Portfolio may pay only reasonable custodian fees in
connection with the loan; and (6) while voting rights on the loaned securities
may pass to the
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<PAGE> 186
borrower, MIP's Board of Trustees must terminate the loan and regain the right
to vote the securities if a material event adversely affecting the investment
occurs. These conditions may be subject to future modification.
Investment Restrictions. Each Fund and Master Portfolio has
adopted investment restrictions numbered 1 through 10 as fundamental policies.
These restrictions cannot be changed without approval by the holders of a
majority as defined in the 1940 Act of the outstanding voting securities of
such Fund or Master Portfolio, as the case may be. Whenever a Fund is
requested to vote on a fundamental policy of the corresponding Master Portfolio
in which it invests, such Fund holds a meeting of Fund shareholders and casts
its votes as instructed by such Fund's shareholders. Investment restrictions
numbered 11 through 20 are not fundamental policies and may be changed by vote
of a majority of the Trustees of MIP, or a majority of the Directors of the
Company, as the case may be, at any time. No Fund or Master Portfolio may:
1. Invest more than 5% of its assets in the obligations of any
single issuer, except that up to 25% of the value of its total assets may be
invested, and securities issued or guaranteed by the U.S. Government, or its
agencies or instrumentalities may be purchased, without regard to any such
limitation.
2. Hold more than 10% of the outstanding voting securities of
any single issuer. This Investment Restriction applies only with respect to
75% of its total assets.
3. Invest in commodities, except that each Fund or Master
Portfolio may purchase and sell (i.e., write) options, forward contracts,
futures contracts, including those relating to indices, and options on futures
contracts or indices.
4. Purchase, hold or deal in real estate, or oil, gas or other
mineral leases or exploration or development programs, but each Fund or Master
Portfolio may purchase and sell securities that are secured by real estate or
issued by companies that invest or deal in real estate.
5. Borrow money, except to the extent permitted under the 1940
Act. For purposes of this investment restriction, a Fund's or Master
Portfolio's entry into options, forward contracts, futures contracts, including
those relating to indices, and options on futures contracts or indices shall
not constitute borrowing to the extent certain segregated accounts are
established and maintained by the Master Portfolio as described in prospectus.
6. Make loans to others, except through the purchase of debt
obligations and the entry into repurchase agreements. However, each Fund or
Master Portfolio may lend its portfolio securities in an amount not to exceed
one- third of the value of its total assets. Any loans of portfolio securities
will be made according to guidelines established by the Securities and Exchange
Commission and the Board of Trustees of MIP or the Board of Directors of the
Company, as the case may be.
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7. Act as an underwriter of securities of other issuers,
except to the extent the Fund or Master Portfolio may be deemed an underwriter
under the Securities Act of 1933, as amended, by virtue of disposing of
portfolio securities.
8. Invest 25% or more of its total assets in the securities of
issuers in any particular industry or group of closely related industries,
except that, in the case of each Fund or Master Portfolio, there shall be no
limitation on the purchase of obligations issued or guaranteed by the U.S.
Government, its agencies or instrumentalities.
9. Issue any senior security (as such term is defined in
Section 18(f) of the 1940 Act), except to the extent the activities permitted
in Investment Restriction Nos. 3, 5, 12 and 13 may be deemed to give rise to a
senior security or as otherwise permitted under the rules and regulations or an
exemptive order of the Securities and Exchange Commission.
10. Purchase securities on margin, but each Fund or Master
Portfolio may make margin deposits in connection with transactions in options,
forward contracts, futures contracts, including those relating to indices, and
options on futures contracts or indices.
11. Invest in the securities of a company for the purpose of
exercising management or control, but each Fund or Master Portfolio will vote
the securities it owns in its portfolio as a shareholder in accordance with its
views.
12. Pledge, mortgage or hypothecate its assets, except to the
extent necessary to secure permitted borrowings and to the extent related to
the purchase of securities on a when-issued or forward commitment basis and the
deposit of assets in escrow in connection with writing covered put and call
options and collateral and initial or variation margin arrangements with
respect to options, forward contracts, futures contracts, including those
relating to indices, and options on futures contracts or indices.
13. Purchase, sell or write puts, calls or combinations
thereof, except as may be described in the Fund's or Master Portfolio's
offering documents.
14. Purchase securities of any company having less than three
years' continuous operations (including operations of any predecessors) if such
purchase would cause the value of its investments in all such companies to
exceed 5% of the value of its total assets.
15. Enter into repurchase agreements providing for settlement
in more than seven days after notice or purchase securities which are illiquid,
if, in the aggregate, more than 15% of the value of its net assets would be so
invested. Although each Fund and Master Portfolio reserves the right to invest
up to 15% of the value of its net assets in repurchase agreements providing for
settlement in more than seven days after notice and in other illiquid
securities, as long as such Fund's shares are registered for sale in a state
that imposes a lower limit on the percentage of a fund's assets that may be so
invested, such Fund and Master Portfolio will comply with the lower limit.
Each Fund and Master Portfolio currently is limited to investing up to 10% of
the value of its net assets in such securities due to limits applicable in
several states.
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<PAGE> 188
16. Purchase securities of other investment companies, except
to the extent permitted under the 1940 Act.
17. Purchase, hold or deal in real estate limited partnerships.
18. Purchase warrants that exceed 2% of the value of the Fund's
or the Master Portfolio's net assets, if those warrants are not listed on the
New York or American Stock Exchanges.
19. Purchase or retain securities of any issuer if the officers
or directors of the Company or the officers or trustees of MIP, its advisers or
managers owning beneficially more than one-half of one percent of the
securities of an issuer together own beneficially more than five percent of the
securities of that issuer.
20. Engage in any short sales other than short sales against
the box.
As a fundamental policy, each Fund may invest, notwithstanding any
other investment restriction (whether or not fundamental), all of its assets in
the securities of a single open-end management investment company with
substantially the same fundamental investment objectives, policies and
restrictions as such Fund.
If a percentage restriction is adhered to at the time of
investment, a later change in percentage resulting from a change in values or
assets, except with respect to compliance with Investment Restriction No. 5,
will not constitute a violation of such restriction.
The Company and MIP may make commitments more restrictive than the
restrictions listed above, so as to permit the sale of shares of a Fund in
certain states. Should the Company or MIP determine that a commitment is no
longer in the best interest of the Fund or Master Portfolio and its
shareholders, the Company or MIP reserves the right to revoke the commitment by
terminating the sale of such Fund's shares in the state involved.
MANAGEMENT
The following information supplements and should be read in
conjunction with the Prospectus section entitled "Management of the Funds".
Directors and officers of the Company, together with information as to their
principal business occupations during at least the last five years, are shown
below. The address of each, unless otherwise indicated, is 111 Center Street,
Little Rock, Arkansas 72201. Each Director who is deemed to be an "interested
person" of the Company, as defined in the 1940 Act, is indicated by an
asterisk.
10
<PAGE> 189
<TABLE>
<CAPTION>
Principal Occupations
Name, Address and Age Position During Past 5 Years
- --------------------- -------- -----------------------
<S> <C> <C>
Jack S. Euphrat, 74 Director Private Investor.
415 Walsh Road
Atherton, CA 94027
*R. Greg Feltus, 45 Director, Chairman Senior Vice President of Stephens; Manager of
and President Financial Services Group; President of Stephens
Insurance Services Inc.; Senior Vice President
of Stephens Sports Management Inc.; and
President of Investors Brokerage Insurance Inc.
Thomas S. Goho, 54 Director T.B. Rose Faculty Fellow - Business, Wake Forest
321 Beechcliff Court University, Calloway School of Business and
Winston-Salem, NC 27104 Accounting; Associate Professor of Finance of
the School of Business and Accounting at Wake
Forest University since 1983.
*Zoe Ann Hines, 47 Director Senior Vice President of Stephens and Director
of Brokerage Accounting; and Secretary of
Stephens Resource Management.
*W. Rodney Hughes, 70 Director Private Investor.
31 Dellwood Court
San Rafael, CA 94901
Robert M. Joses, 78 Director Private Investor.
47 Dowitcher Way
San Rafael, CA 94901
*J. Tucker Morse, 52 Director Private Investor; Real Estate Developer;
10 Legrae Street Chairman of Renaissance Properties Ltd.;
Charleston, SC 29401 President of Morse Investment Corporation; and
Co-Managing Partner of Main Street Ventures.
Richard H. Blank, Jr., 40 Chief Operating Associate of Financial Services Group of
Officer, Secretary Stephens; Director of Stephens Sports Management
and Treasurer Inc.; and Director of Capo Inc.
</TABLE>
11
<PAGE> 190
COMPENSATION TABLE
For the Fiscal Year Ended February 29, 1996
<TABLE>
<CAPTION>
Total Compensation
Aggregate Compensation from Registrant
Name and Position from Registrant and Fund Complex
- ----------------- ---------------------- ------------------
<S> <C> <C>
Jack S. Euphrat $10,000 $39,000
Director
*R. Greg Feltus 0 0
Director
Thomas S. Goho $10,000 $39,000
Director
*Zoe Ann Hines 0 0
Director
*W. Rodney Hughes $ 9,250 $36,250
Director
Robert M. Joses $ 9,750 $38,250
Director
*J. Tucker Morse $ 8,250 $33,000
Director
</TABLE>
Directors of the Company are compensated annually by the Company
and by all the registrants in the fund complex for their services as indicated
above and also are reimbursed for all out-of-pocket expenses relating to
attendance at board meetings. Each of the Directors and the Principal Officer
of the Company serves in the identical capacity as Directors/Trustees and/or
Principal Officer of Overland Express Funds, Inc. ("Overland"), Stagecoach
Funds, Inc. ("Stagecoach"), Stagecoach Trust, Master Investment Portfolio
("MIP"), Life & Annuity Trust, Master Investment Trust and Managed Series
Investment Trust ("MSIT"), each of which is a registered open-end management
investment company and each of which, prior to January 1, 1996 and the
reorganization of WFNIA was considered to be in the same "fund complex," as
such term is defined in Form N-1A under the 1940 Act, as the Company.
Effective January 1, 1996, MIP, MSIT and the Company are considered to be
members of the same fund complex and are no longer part of the same fund
complex as Stagecoach, Overland, Stagecoach Trust, Life & Annuity Trust and
Master Investment Trust. The Directors are compensated by other Companies and
Trusts within the fund complex for their services as Directors/Trustees to such
Companies and Trusts. Currently the Directors do not receive any retirement
benefits or deferred compensation
12
<PAGE> 191
from the Company or any other member of the fund complex. As of the date of
this SAI, the Directors and Principal Executive Officer of the Company as a
group, beneficially owned less than 1% of the outstanding shares of the
Company.
MANAGEMENT ARRANGEMENTS
Investment Advisory and Other Services. BGFA provides investment
advisory services to each Master Portfolio pursuant to separate Investment
Advisory Contracts (each, a "BGFA Advisory Contract") dated January 1, 1996
with MIP. As to each Master Portfolio, the applicable BGFA Advisory Contract
is subject to annual approval by (i) MIP's Board of Trustees or (ii) vote of a
majority (as defined in the 1940 Act) of the outstanding voting securities of
such Master Portfolio, provided that in either event the continuance also is
approved by a majority of MIP's Board of Trustees who are not "interested
persons" (as defined in the 1940 Act) of MIP or BGFA, by vote cast in person at
a meeting called for the purpose of voting on such approval. As to each Master
Portfolio, the applicable BGFA Advisory Contract is terminable without penalty,
on 60 days' written notice by MIP's Board of Trustees or by vote of the holders
of a majority of such Master Portfolio's shares, or, after the Reapproval Date,
on not less than 60 days' written notice, by BGFA. The applicable BGFA
Advisory Contract terminates automatically, as to the relevant Master
Portfolio, in the event of its assignment (as defined in the 1940 Act).
Prior to January 1, 1996, Wells Fargo provided investment advisory
services to each Master Portfolio pursuant to an Investment Advisory Agreement
(the "Advisory Agreement") with MIP dated February 25, 1994.
For the fiscal year ended February 28, 1995 and the period
beginning March 1, 1995 and ended December 31, 1995, the portion of advisory
fees paid to Wells Fargo by the corresponding Master Portfolio of each LifePath
Fund and the amount of such fees waived by Wells Fargo that is allocable to
each Fund is shown below. For the period beginning January 1, 1996 and ended
February 29, 1996, the portion of advisory fees paid to BGFA by the
corresponding Master Portfolio of each LifePath Fund and the amount of such
fees waived by BGFA that is allocable to each Fund is shown below:
<TABLE>
<CAPTION>
Fiscal Year 3/1/95- 1/1/96-
Ended 2/28/95 12/31/95 2/29/96
-------------------- -------------------- ------------------
Fees Fees Fees Fees Fees Fees
Master Portfolio Paid Waived Paid Waived Paid Waived
- ---------------- -------- ------ -------- ------ --------- ------
<S> <C> <C> <C> <C> <C> <C>
LifePath 2000 Master Portfolio $217,676 $ 0 $363,537 $ 0 $ 99,511 $ 0
LifePath 2010 Master Portfolio $158,218 $ 0 $312,434 $ 0 $ 86,919 $ 0
LifePath 2020 Master Portfolio $252,413 $ 0 $520,296 $ 0 $ 141,075 $ 0
LifePath 2030 Master Portfolio $156,397 $ 0 $343,850 $ 0 $ 93,240 $ 0
LifePath 2040 Master Portfolio $189,121 $ 0 $503,315 $ 0 $ 148,324 $ 0
</TABLE>
13
<PAGE> 192
Sub-Investment Advisory Agreement. Prior to January 1, 1996,
WFNIA provided sub-investment advisory services to each Master Portfolio
pursuant to a Sub-Investment Advisory Agreement (the "Sub-Advisory Agreement")
dated February 25, 1994 with Wells Fargo.
For the fiscal year ended February 28, 1995 and for the period
beginning March 1, 1995 and ended December 31, 1995, Wells Fargo paid to WFNIA
the following sub-advisory fees and WFNIA waived the amounts shown:
<TABLE>
<CAPTION>
Fiscal Year 3/1/95-
End 2/28/95 12/31/95
------------------------- ----------------------------
Master Portfolio Fees Paid Fees Waived Fees Paid Fees Waived
- ---------------- --------- ----------- --------- -----------
<S> <C> <C> <C> <C>
LifePath 2000 Master Portfolio $159,494 $ 0 $261,344 $ 0
LifePath 2010 Master Portfolio $115,647 $ 0 $224,903 $ 0
LifePath 2020 Master Portfolio $184,341 $ 0 $374,802 $ 0
LifePath 2030 Master Portfolio $114,426 $ 0 $247,703 $ 0
LifePath 2040 Master Portfolio $138,511 $ 0 $361,673 $ 0
</TABLE>
Administration Agreement. Stephens provides administrative
services to the Funds pursuant to an Administration Agreement dated February 1,
1994 as amended on October 10, 1995 (the "Administration Agreement"). Under
the Administration Agreement, Stephens provides as administrative services,
among other things: (i) general supervision of the operation of the Funds,
including coordination of the services performed by the investment adviser,
transfer and dividend disbursing agent, custodians, independent auditors and
legal counsel; (ii) general supervision of regulatory compliance matters,
including the compilation of information for documents such as reports to, and
filings with, the SEC and state securities commissions, and preparation of
proxy statements and shareholder reports for the Company; and (iii) general
supervision relative to the compilation of data required for the preparation of
periodic reports distributed to the Company's officers and Board of Directors.
Stephens also furnishes office space and certain facilities required for
conducting the business of the Funds together with all other administrative
services reasonably necessary for the operation of the Funds, other than those
services provided by the Company's transfer and dividend disbursing agent.
Stephens also pays the compensation of the Company's Directors, officers and
employees who are affiliated with Stephens.
Under the Administration Agreement, Stephens has agreed to assume
the operating expenses of each Fund and a pro rata share of the operating
expenses of each Master Portfolio, except for expenses in connection with
securities purchases, sales or other related transactions, extraordinary
expenses and fees and expenses payable pursuant to certain service contracts,
as described in the Prospectus. For its services as administrator, Stephens
receives fees at the annual rate of 0.10% of the average daily value of the net
assets of each Fund.
Under the administration agreement for the MasterWorks LifePath
Funds, Stephens receives fees at the annual rate of 0.10% of the average daily
net assets of each such Fund. For the fiscal years ended February 28, 1995,
and February 29, 1996, the LifePath Funds paid administrative fees to Stephens
as follows:
14
<PAGE> 193
<TABLE>
<CAPTION>
Fees Paid
---------
Fiscal Year Fiscal Year
Fund Ended 2/28/95 Ended 2/29/96
- ---- ------------- -------------
<S> <C> <C>
LifePath 2000 Fund $39,834 $ 84,548
LifePath 2010 Fund $28,945 $ 72,832
LifePath 2020 Fund $46,153 $120,505
LifePath 2030 Fund $28,565 $ 79,564
LifePath 2040 Fund $34,460 $118,468
</TABLE>
Distribution Agreement. Stephens acts as the exclusive
distributor of each Fund's shares pursuant to an Amended and Restated
Distribution Agreement (the "Distribution Agreement") with the Company with
respect to the Funds. Shares are sold on a continuous basis by Stephens as
agent, although Stephens is not obligated to sell any particular amount of
shares. No compensation is payable by the Company to Stephens for its
distribution services. The term and termination provisions of the Distribution
Agreement are substantially similar to those of the Agreement with the Adviser
discussed above. Under its former distribution agreement with Stagecoach
Trust, Stephens received fees at the annual rate of 0.10% of the average daily
net assets of the Retail Shares of each Stagecoach Trust LifePath Fund and did
not receive fees for its services from the Institutional Class Shares of such
Funds.
Shareholder Services Agreement. The Company has adopted
Shareholder Services Plans on behalf of each Fund. Pursuant to the Plans,
financial institutions (which may include Wells Fargo, its affiliates, and
affiliates of BGFA or BGI) may act as the shareholder servicing agent (an
"Agent") for each Fund pursuant to Shareholder Servicing Agreements. Such
Agent will agree to perform certain shareholder liaison services such as
answering shareholder inquiries regarding account status and history, and the
manner in which purchases, exchanges and redemptions of Fund shares may be
made. For its services as the Agent for the Funds, each Fund may pay Wells
Fargo fees at the annual rate of up to 0.20% of its average daily net assets.
Under the shareholder services agreement for the Stagecoach Trust
LifePath Funds, Wells Fargo was entitled to receive fees at the annual rate of
0.20% of the average daily net assets of each such Fund. For the fiscal year
ended February 29, 1996, the Funds paid shareholder services fees to Wells
Fargo as follows:
<TABLE>
<CAPTION>
Fund Fees Paid
---- ---------
<S> <C>
LifePath 2000 Fund $169,096
LifePath 2010 Fund $145,664
LifePath 2020 Fund $241,010
LifePath 2030 Fund $159,128
LifePath 2040 Fund $236,936
</TABLE>
15
<PAGE> 194
Custodian, Transfer and Dividend Disbursing Agent. BZW Barclays
Global Investors, N.A., ("BGI"), a wholly- owned subsidiary of BZW Barclays
Global Investors Holdings Inc. (formerly, The Nikko Building U.S.A., Inc.),
acts as custodian of each Fund's investments and will perform such functions at
45 Fremont Street, San Francisco, California, 94105. The custodian, among
other things, maintains a custody account or accounts in the name of the Funds,
receives and delivers all assets for the Funds upon purchase and upon sale or
maturity; collects and receives all income and other payments and distributions
on account of the assets of the Funds and pays all expenses of the Funds. The
custodian shall not be entitled to compensation for providing custody services
to the Funds pursuant to the Custody Agreement so long as BGFA receives fees
for providing investment advisory services to the Funds (or the Master
Portfolios in which they invest). If BGFA no longer receives compensation for
providing investment advisory services, the custodian shall be entitled to such
compensation as it may from time to time negotiate with the Company. For the
fiscal year ended February 29, 1996, the Funds did not pay custody fees.
Wells Fargo Bank provides share transfer and dividend disbursing
services for the Funds, including: processing and maintenance of shareholder
accounts; posting address changes and other file maintenance; posting all
transactions to shareholder files; preparing daily reconciliations of
shareholder processing to money movement instructions; issuing all checks,
stopping and replacing checks; performing certain of the Funds' other mailings;
maintaining and retrieving all required past history for shareholders and
provide research capabilities; reporting and remitting as necessary for state
escheat requirements. For its services as transfer and dividend disbursing
agent to each Fund, Wells Fargo Bank is entitled to an annual fee of 0.10% of
the average net assets of each Fund.
Under the transfer and dividend disbursing agent agreement for the
Stagecoach Trust LifePath Funds, Wells Fargo was entitled to receive fees at
the annual rate of 0.10% of the average daily net assets of each such Fund.
For the fiscal year ended February 29, 1996, the Funds paid to Wells Fargo
transfer and dividend disbursing agency fees as follows:
<TABLE>
<CAPTION>
Fund Fees Paid
---- ---------
<S> <C>
LifePath 2000 Fund $ 84,548
LifePath 2010 Fund $ 72,832
LifePath 2020 Fund $120,505
LifePath 2030 Fund $ 79,564
LifePath 2040 Fund $118,468
</TABLE>
Distribution Plan. MIP's Board of Trustees has adopted, on behalf
of each Master Portfolio, a "defensive" distribution plan under Section 12(b)
of the 1940 Act and Rule 12b-1 thereunder (the "Plan"). The Plan was adopted
by a majority of MIP's Board of Trustees (including a majority of those
Trustees who are not "interested persons" of MIP as defined in the 1940 Act )
on October 10, 1995. The Plan was intended as a precaution designed to address
the possibility that certain ongoing payments by Barclays to Wells Fargo in
connection with the sale of WFNIA may be characterized as indirect payments by
each Master Portfolio to finance
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<PAGE> 195
activities primarily intended to result in the sale of interests in such Master
Portfolio. The Plan provides that if any portion of a Master Portfolio's
advisory fees (up to 0.25% of the average daily net assets of each Master
Portfolio on an annual basis) were deemed to constitute an indirect payment for
activities that are primarily intended to result in the sale of interests in a
Master Portfolio such payment would be authorized pursuant to the Plan. The
Master Portfolio's do not currently pay any amounts pursuant to the Plan.
PURCHASE AND REDEMPTION OF SHARES
Terms of Purchase. The Company reserves the right to reject any
purchase order and to change the amount of the minimum investment and
subsequent purchases in the Funds.
Suspension of Redemptions. The right of redemption may be
suspended or the date of payment postponed (a) during any period when the New
York Stock Exchange ("NYSE") is closed (other than customary weekend and
holiday closing), (b) when trading in the markets a Master Portfolio normally
utilizes is restricted, or when an emergency exists as determined by the
Securities and Exchange Commission so that disposal of such Master Portfolio's
investments or determination of its net asset value is not reasonably
practicable, or (c) for such other periods as the Securities and Exchange
Commission by order may permit to protect the Fund's shareholders.
DETERMINATION OF NET ASSET VALUE
LifePath Master Portfolios. The securities of the LifePath Master
Portfolios, including covered call options written by a LifePath Master
Portfolio, are valued at the last sale price on the securities exchange or
national securities market on which such securities primarily are traded.
Securities not listed on an exchange or national securities market, or
securities in which there were no transactions, are valued at the most recent
bid prices. Portfolio securities which are traded primarily on foreign
securities exchanges generally are valued at the preceding closing values of
such securities on their respective exchanges, except that when an occurrence
subsequent to the time a value was so established is likely to have changed
such value, then the fair value of those securities is determined by
consideration of other factors by or under the direction of MIP's Board of
Trustees or its delegates. Short-term investments are carried at amortized
cost, which approximates market value. Any securities or other assets for
which recent market quotations are not readily available are valued at fair
value as determined in good faith by MIP's Board of Trustees.
Restricted securities, as well as securities or other assets for
which market quotations are not readily available, or are not valued by a
pricing service approved by MIP's Board of Trustees, are valued at fair value
as determined in good faith by or under the direction of MIP's Board of
Trustees or its delegates. MIP's Board of Trustees reviews the method of
valuation on a current basis. In making a good-faith valuation of restricted
securities, the following are generally considered: restricted securities that
are, or are convertible into, securities of the same class of securities for
which a public market exists usually are valued at market value less the same
17
<PAGE> 196
percentage discount at which such securities were purchased. This discount may
be revised periodically if the Adviser believes that the discount no longer
reflects the value of the restricted securities. Restricted securities not of
the same class as securities for which a public market exists usually are
valued initially at cost. Any subsequent adjustment from cost is based upon
considerations deemed relevant by or under the direction of MIP's Board of
Trustees or its delegates.
Any assets or liabilities initially expressed in terms of foreign
currency are translated into dollars using information provided by pricing
entities, such as Morgan Stanley Capital International or Gelderman Data
Service, or at a quoted market exchange rate as may be determined to be
appropriate by the Adviser. Forward currency contracts are valued at the
current cost of offsetting the contract. Because of the need to obtain prices
as of the close of trading on various exchanges throughout the world, the
calculation of net asset value does not take place contemporaneously with the
determination of prices of the foreign securities held by the LifePath Master
Portfolios. In addition, foreign securities held by a LifePath Master
Portfolio may be traded actively in securities markets which are open for
trading on days when the Master Portfolio does not determine its net asset
value. Accordingly, there may be occasions when a LifePath Master Portfolio
does not calculate its net asset value but when the value of such Master
Portfolio's portfolio securities is affected by such trading activity.
Fixed-income securities are valued each business day using
available market quotations or at fair value as determined by one or more
independent pricing services (collectively, the "Service") approved by MIP's
Board of Trustees. The Service may use available market quotations and employ
electronic data processing techniques and/or a matrix system to determine
valuations. The Service's procedures are reviewed by MIP's officers under the
general supervision of MIP's Board of Trustees.
Expenses and fees, including advisory fees, are accrued daily and
are taken into account for the purpose of determining the net asset value of
each LifePath Master Portfolio's shares.
New York Stock Exchange Closings. The holidays on which the NYSE
is closed currently are: New Year's Day, Presidents' Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
DIVIDENDS, DISTRIBUTIONS AND TAXES
Each Fund intends to qualify each year as a "regulated investment
company" under the Code so long as such qualification is in the best interests
of its shareholders. Such qualification requires, among other things, that (a)
at lest 90% of each Fund's annual gross income be derived from interest;
payments with respect to securities loans; dividends; and gains from the sale
or other disposition of securities, or foreign currencies, or other income
(including but not limited to gains from options, futures, or forward
contracts) derived with respect to each Fund's business of investing in such
securities or currencies; (b) each Fund generally derives less than 30% of its
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<PAGE> 197
gross income from gains from the sale or other disposition of securities,
options, futures or forward contracts held for less than three months; and (c)
each Fund diversifies its holdings so that, at the end of each quarter of the
taxable year, (i) at least 50% of the market value of each Fund's assets is
represented by cash, government securities and other securities limited in
respect of any one issuer to an amount not greater than 5% of each Fund's
assets and 10% of the outstanding voting securities of such issuer, and (ii)
not more than 25% of the value of its assets is invested in the securities of
any one issuer (other than U.S. Government securities and the securities of
other regulated investment companies), or of two or more issuers which the Fund
controls and which are determined to be engaged in the same or similar trades
or businesses or related trades or businesses.
For purposes of complying with these qualification requirements,
each Fund will be deemed to own a proportionate share of its corresponding
Master Portfolio's assets. As a regulated investment company, each Fund will
not be subject to federal income tax on its net investment income and net
capital gains distributed to its shareholders, provided that it distributes to
its shareholders at least 90% of its net investment income (including its net
tax-exempt income) earned in each year.
Generally, dividends and capital gain distributions are taxable to
shareholders when they are received. However, such dividends and distributions
declared payable as of a record date in October, November or December of any
calendar year are deemed under the Code to have been paid by the Fund and
received by the shareholder on December 31 of that calendar year if the
dividend is actually paid in the following January. Such dividends and
distributions will, accordingly, be taxable to the recipient shareholders in
the year in which the record date falls.
In addition, a 4% nondeductible excise tax will be imposed on each
Fund to the extent it does not meet certain minimum distribution requirements
by the end of each calendar year. Each Fund will either actually or be deemed
to distribute substantially all of its net investment income and net capital
gains and, thus, expects not to be subject to the excise tax.
Depending on the composition of a regulated investment company's
income, a portion of the dividends paid by the regulated investment company
from its net investment income may qualify for the dividends-received deduction
allowable to certain U.S. corporate shareholders. In general, dividend income
of the regulated investment company distributed to qualifying corporate
shareholders is eligible for the dividends-received deduction only to the
extent that (i) the regulated investment company's income consists of dividends
paid by U.S. corporations and (ii) the regulated investment company would have
been entitled to the dividends received deduction with respect to such dividend
income if the regulated investment company were not a regulated investment
company under the Code. A corporate shareholder of the Fund must hold the Fund
shares upon which the qualifying dividend is paid for at least 46 days to be
entitled to the dividends-received deduction. The Code also provides other
limitations with respect to the ability of a qualifying corporate shareholder
to claim the dividends-received deduction in connection with holding shares of
a regulated investment company.
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<PAGE> 198
Income received by each Fund from sources within foreign countries
may be subject to withholding and other taxes imposed by such countries. Tax
conventions between certain countries and the United States may reduce or
eliminate such taxes. Because not more than 50% of the value of the total
assets of any Fund is expected to consist of securities of foreign issuers, no
Fund will not be eligible to elect to "pass through" foreign tax credits to its
shareholders.
Ordinarily, gains and losses realized from portfolio transactions
are treated as capital gain or loss, except in certain cases including where a
Master Portfolio acquires a put or grants a call thereon. Gain recognized on
the disposition of a debt obligation (including tax-exempt obligations
purchased after April 30, 1993) purchased by the Master Portfolio at a market
discount (generally, at a price less than its principal amount) will generally
be treated as ordinary income to the extent of the portion of the market
discount which accrued during the period of time the Master Portfolio held the
debt obligation. Other gains or losses on the sale of securities will
generally be short-term capital gains or losses. To the extent that a Fund
recognizes long-term capital gains, such gains will be distributed at least
annually. Such distributions will be taxable to shareholders as long-term
capital gains, regardless of how long a shareholder has held Fund shares. Such
a distribution will be designated as capital gain distributions in a written
notice mailed by the Fund to shareholders not later than 60 days after the
close of the Fund's taxable year.
If a shareholder receives a designated capital gain distribution
on a Fund share and such Fund share is held for six months or less, then
(unless otherwise disallowed) any loss on the sale or exchange of that Fund
share will be treated as a long-term capital loss to the extent of the
designated capital gain distribution. In addition, any loss realized by a
shareholder upon the sale or redemption of Fund shares held less than six
months will be disallowed to the extent of any tax-exempt interest dividends
received by the shareholder thereon. These rules shall not apply to losses
incurred under a periodic redemption plan.
As of the printing of this SAI, the maximum individual tax rate
applicable to ordinary income is 39.6% (marginal rates may be higher for some
individuals due to phase out of exemptions and elimination of deductions); the
maximum individual tax rate applicable to net capital gains is 28%; and the
maximum corporate tax rate applicable to ordinary income and net capital gains
is 35% (however, to eliminate the benefit of lower marginal corporate income
tax rates, corporations which have taxable income in excess of $100,000 for a
taxable year will be required to pay an additional amount of income tax of up
to $11,750 and corporations which have taxable income in excess of $15,000,000
for a taxable year will be required to pay an additional amount of tax of up to
$100,000).
If a shareholder disposes of Fund shares with reinvestment rights
within 90 days of acquiring such shares and subsequently reacquires Fund shares
or shares of another regulated investment company with a reduced or eliminated
sales charge pursuant to the reinvestment rights, the sales charge incurred, if
any, to acquire the disposed shares (to the extent such previous sales charges
do not exceed the reduction or elimination of sales charges incurred on the
subsequent acquisition) shall not be taken into account for the purpose of
determining the amount of gain or loss on the initial disposition. To the
extent any sales charge is consequently not taken
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<PAGE> 199
into account, it will be treated as having been incurred in the subsequent
acquisition. In addition, any loss realized on a redemption or exchange of
shares of a Fund will be disallowed to the extent that substantially identical
shares are reacquired within the 61-day period beginning 30 days before and
ending 30 days after the shares are disposed of.
If an option granted by a Master Portfolio lapses or is terminated
through a closing transaction, such as a repurchase by such Master Portfolio of
the option from its holder, the Master Portfolio will realize a short-term
capital gain or loss, depending on whether the premium income is greater or
less than the amount paid by the Master Portfolio in the closing transaction.
Recognition of capital losses may be deferred if they result form a position
which is part of a tax "straddle," discussed below. If securities are sold by
a Master Portfolio pursuant to the exercise of a call option granted by it,
such Master Portfolio will add the premium received to the sale price of the
securities delivered in determining the amount of gain or loss on the sale. If
securities are purchased by a Master Portfolio pursuant to the exercise of a
put option granted by it, the Master Portfolio will subtract the premium
received from its cost basis in the securities purchased.
Under Section 1256 of the Code, gain or loss realized by a
regulated investment company from certain financial forward, futures and
options transactions is treated as 60% long-term capital gain (or loss) and 40%
short- term capital gain (or loss) and 40% short-term capital gain (or loss)
(the "60%/40% rule"). Gain or loss may arise upon the exercise or lapse of
such forward contracts, futures and options as well as from closing
transactions. In addition, any such forward contracts, futures or options
remaining unexercised at the end of the regulated investment company's taxable
year are treated as sold for their then fair market value, resulting in
additional gain or loss to the regulated investment company characterized in
the manner described above (the "marked-to-market rule"). Transactions that
qualify as designated hedges are excepted from the marked-to-market rule and
the 60%/40% rule.
All or a portion of the gain or loss from the disposition of
non-U.S. dollar denominated securities (including debt instruments, certain
financial forward, futures and option contracts, and certain preferred stock)
may be treated as ordinary income or loss under Section 988 of the Code
(relating to the taxation of foreign currency transactions). Furthermore, all
or a portion of the gain realized from engaging in "conversion transactions"
may be treated as ordinary income under Section 1258. Conversion transactions
are defined to include certain forward, futures, option and straddle
transactions, transactions marketed or sold to produce capital gains, or
transactions described in Treasury regulations to be issued in the future.
Offsetting positions held by a regulated investment company
involving certain financial forward, futures or option contracts may be
considered, for tax purposes, to constitute straddles. Straddles are defined
to include "offsetting positions" in actively traded personal property. The
tax treatment of straddles is governed by Section 1092 of the Code which, in
certain circumstances, overrides or modifies the provisions of Section 1256.
If a regulated investment company were treated as entering into
straddles by reason of its engaging in certain financial forward, futures or
option contracts, such straddles could be characterized as "mixed straddles" if
the futures, forwards, or options comprising a part of such
21
<PAGE> 200
straddles were governed by Section 1256. The regulated investment company may
make one or more elections with respect to mixed straddles, and, depending upon
which elections are made, if any, the tax consequences with respect to the
transaction may differ. Generally, to the extent the straddle rules apply to
positions established by the regulated investment company, losses realized by
the regulated investment company may be deferred to the extent of unrealized
gain in any offsetting positions. Moreover, as a result of the straddle and
the conversion transaction rules, short-term capital loss on straddle positions
may be recharacterized as long-term capital loss, and long-term capital gain
may be characterized as short-term capital gain or ordinary income.
Foreign Shareholders. Under the Code, distributions of net
investment income by a Fund to a nonresident alien individual, nonresident
alien fiduciary of a trust or estate, foreign corporation, or foreign
partnership (a "foreign shareholder") will be subject to U.S. withholding tax
(at a rate of 30% or a lower treaty rate). Withholding will not apply if a
dividend paid by a Fund to a foreign shareholder is "effectively connected"
with a U.S. trade or business, in which case the reporting and withholding
requirements applicable to U.S. citizens, U.S. residents or domestic
corporations will apply. Distributions of net long-term capital gains are not
subject to tax withholding, but in the case of a foreign shareholder who is a
nonresident alien individual, such distributions ordinarily will be subject to
U.S. withholding tax at a rate of 30% if the individual is physically present
in the U.S. for more than 182 days during the taxable year.
Other Matters. Investors should be aware that the investments to
be made by a Master Portfolio may involve sophisticated tax rules such as the
original issue discount and real estate mortgage investment conduit ("REMIC")
rules that would result in income or gain recognition by the Master Portfolio,
and its corresponding Fund, without corresponding cash receipts. Although the
Funds will seek to avoid significant noncash income, such noncash income could
be recognized by the Funds, in which case a Fund may distribute cash derived
from other sources in order to meet the minimum distribution requirements
described above.
CAPITAL STOCK
As of June 7, 1996, the shareholders identified below were known
by the Company to own 5% or more of the LifePath Fund's outstanding shares:
<TABLE>
<CAPTION>
NAME AND ADDRESS PERCENTAGE
NAME OF FUND OF SHAREHOLDER OF FUND
- ------------ --------------------- ------------
<S> <C> <C>
LifePath 2000 Fund Siemens Corp. Savings Plan 5.24%
State Street Bank and Trust Co.
P.O. Box 1992
Boston, MA 02105
</TABLE>
22
<PAGE> 201
<TABLE>
<S> <C> <C>
Payless/Thrifty Inc. 5.82%
401(k) Retirement Savings Plan
9276 S.W. Peyton Lane
Wilsonville, OR 97070
Wells Fargo & Co. 6.84%
Tax Advantage Plan
420 Montgomery, 11th Floor
San Francisco, CA 94104
McKee Foods Corp. 50.10%
Retirement Plan
10000 McKee Road
Collegedale, TN 37315
LifePath 2010 Fund Cosmair, Inc. 5.13%
Employee Retirement Savings Plan
159 Terminal Avenue
Clark, NJ 07066
Wells Fargo Bank 5.17%
Business Retirement Programs
420 Montgomery Street
San Francisco, CA 94104
MAC & Co. A/C 867-122 5.30%
P.O. Box 3198
Mutual Funds Operations
Pittsburgh, PA 15230-3198
Siemens Corp. Savings Plan 6.12%
State Street Bank & Trust Co.
P.O. Box 1992 - MS D5
Boston, MA 02105
Wells Fargo & Co. 6.63%
Tax Advantage Plan
420 Montgomery, 11th Floor
San Francisco, CA 94104
McKee Foods Corp. 38.40%
Retirement Plan
10000 McKee Road
Collegedale, TN 37316
</TABLE>
23
<PAGE> 202
<TABLE>
<S> <C> <C>
LifePath 2020 Fund AMSCO International 6.13%
Two Chatham Center
Suite 1100
Pittsburgh, PA 15219
Siemens Corp. Savings Plan 7.27%
State Street Bank & Trust Co.
P.O. Box 1992 - MS D5
Boston, MA 02105
Wells Fargo & Co. 8.16%
Tax Advantage Plan
420 Montgomery, 11th Floor
San Francisco, CA 94104
Cosmair, Inc. 8.24%
Employee Retirement Savings Plan
159 Terminal Avenue
Clark, NJ 07066
McKee Foods Corp. 34.69%
Retirement Plan
10000 McKee Road
Collegedale, TN 37316
LifePath 2030 Fund Cosmair, Inc. 11.58%
Employee Retirement Savings Plan
159 Terminal Avenue
Clark, NJ 07066
Siemens Corp. Savings Plan 13.58%
State Street Bank & Trust Co.
P.O. Box 1992 - MS D5
Boston, MA 02105
Wells Fargo & Co. 14.29%
Tax Advantage Plan
420 Montgomery, 11th Floor
San Francisco, CA 94104
McKee Foods Corp. 25.87%
Retirement Plan
10000 McKee Road
Collegedale, TN 37316
</TABLE>
24
<PAGE> 203
<TABLE>
<S> <C> <C>
LifePath 2040 Fund Wells Fargo Bank 8.09%
Business Retirement Programs
420 Montgomery Street
San Francisco, CA 94104
Cosmair, Inc. 9.26%
Employee Retirement Savings Plan
159 Terminal Avenue
Clark, NJ 07066
McKee Foods Corp. 10.43%
Retirement Plan
10000 McKee Road
Collegedale, TN 37316
Siemens Corp. Savings Plan 20.82%
State Street Bank & Trust Co.
P.O. Box 1992 - MS D5
Boston, MA 02105
Wells Fargo & Co. 24.71%
Tax Advantage Plan
420 Montgomery, 11th Floor
San Francisco, CA 94104
</TABLE>
PERFORMANCE INFORMATION
LifePath Funds. Average annual total return is calculated by
determining the ending redeemable value of an investment purchased with a
hypothetical $1,000 payment made at the beginning of the period (assuming the
reinvestment of dividends and distributions), dividing by the amount of the
initial investment, taking the "n"th root of the quotient (where "n" is the
number of years in the period) and subtracting 1 from the result.
Total return is calculated by subtracting the amount of the net
asset value per share at the beginning of a stated period from the net asset
value per share at the end of the period (after giving effect to the
reinvestment of dividends and distributions during the period), and dividing
the result by the net asset value per Share at the beginning of the period.
The performance listed below is the performance of the
Institutional Class of shares of Stagecoach Trust's LifePath Funds. It is
presented for informational purposes only, and should not be considered as a
projection of the future performance of the Funds. The Institutional Class
shares of Stagecoach Trust's LifePath Funds were substantially similar to the
Funds in operation.
25
<PAGE> 204
For the fiscal period from March 1, 1994 (commencement of
operations) to February 29, 1996, the average annual total returns on the
Institutional Class shares of Stagecoach Trust's LifePath Funds were as
follows:
<TABLE>
<S> <C>
LifePath 2000 Fund Institutional Class 7.65%
LifePath 2010 Fund Institutional Class 11.33%
LifePath 2020 Fund Institutional Class 13.40%
LifePath 2030 Fund Institutional Class 15.11%
LifePath 2040 Fund Institutional Class 16.85%
</TABLE>
For the fiscal period from March 1, 1994 (commencement of
operations) to February 29, 1996, the cumulative total returns on the
Institutional Class shares of Stagecoach Trust's LifePath Funds were as
follows:
<TABLE>
<S> <C>
LifePath 2000 Fund Institutional Class 15.88%
LifePath 2010 Fund Institutional Class 23.91%
LifePath 2020 Fund Institutional Class 28.59%
LifePath 2030 Fund Institutional Class 32.49%
LifePath 2040 Fund Institutional Class 36.50%
</TABLE>
For the fiscal period from March 1, 1995 to February 29, 1996, the
average annual total returns on the Institutional Class shares of Stagecoach
Trust's LifePath Funds were as follows:
<TABLE>
<S> <C>
LifePath 2000 Fund Institutional Class 13.19%
LifePath 2010 Fund Institutional Class 19.69%
LifePath 2020 Fund Institutional Class 23.18%
LifePath 2030 Fund Institutional Class 26.88%
LifePath 2040 Fund Institutional Class 29.32%
</TABLE>
From time to time, the Company may use, in advertisements and
other types of literature, information and statements: (1) describing the
Adviser, and its affiliates and predecessors, as one of the first investment
managers to advise investment accounts using asset allocation and index
strategies; (2) describing the Funds as one of the first mutual funds to offer
a flexible investment strategy designed to change over specific time horizons;
(3) describing the performance for the MasterWorks LifePath Funds; (4)
describing the level of assets under management by the Adviser; and (5)
describing the Adviser as managing in excess of $284 billion in assets as of
March 31, 1996 for Fortune 500 companies, governments and other institutions
around the world.
26
<PAGE> 205
PORTFOLIO TRANSACTIONS
General. The Adviser assumes general supervision over placing
orders on behalf of MIP for the purchase or sale of portfolio securities.
Allocation of brokerage transactions, including their frequency, is made in the
best judgment of Adviser and in a manner deemed fair and reasonable to
shareholders. In executing portfolio transactions and selecting brokers or
dealers, BGFA seeks to obtain the best overall terms available for each Master
Portfolio. In assessing the best overall terms available for any transaction,
BGFA considers factors deemed relevant, including the breadth of the market in
the security, the price of the security, the financial condition and execution
capability of the broker or dealer, and the reasonableness of the commission,
if any, both for the specific transaction and on a continuing basis. The
primary consideration is prompt execution of orders at the most favorable net
prices. Certain of the brokers or dealers with whom the Master Portfolios may
transact business offer commission rebates to the Master Portfolios. BGFA
considers such rebates in assessing the best overall terms available for any
transaction. The overall reasonableness of brokerage commissions paid is
evaluated by BGFA based upon its knowledge of available information as to the
general level of commissions paid by other institutional investors for
comparable services. While BGFA generally seeks reasonably competetive spreads
or commissions, the Master Portfolios will not necessarily be paying the lowest
spread or commnissions available. BGFA does not preference its orders to
brokers or dealers based on receipt of statistical or other research services.
Brokers also are selected because of their ability to handle
special executions such as are involved in large block trades or broad
distributions, provided the primary consideration is met. Portfolio turnover
may vary from year to year, as well as within a year. High turnover rates over
100% are likely to result in comparatively greater brokerage expenses.
Purchases and sales of fixed-income securities usually are
principal transactions. Portfolio securities ordinarily are purchased directly
from the issuer or from an underwriter or market maker. Usually no brokerage
commissions are paid by the Master Portfolios for such purchases and sales.
The prices paid to the underwriters of newly-issued securities usually include
a concession paid by the issuer to the underwriter, and purchases of securities
from market makers may include the spread between the bid and asked prices.
Brokerage Commissions. For the fiscal years ended February 28,
1995 and February 29, 1996, the corresponding Master Portfolio of each Fund
paid the dollar amounts of brokerage commissions indicated below. None of
these brokerage commissions were paid to affiliated brokers.
<TABLE>
<CAPTION>
Master Portfolio Commissions Paid
- ---------------- ----------------
1995 1996
---- ----
<S> <C> <C>
LifePath 2000 Master Portfolio $24,231 $71,608
LifePath 2010 Master Portfolio $28,830 $33,786
LifePath 2020 Master Portfolio $56,540 $29,666
LifePath 2030 Master Portfolio $37,890 $12,053
LifePath 2040 Master Portfolio $56,183 $ 8,311
</TABLE>
Securities of Regular Broker Dealers. As of February 29, 1996,
the corresponding Master Portfolio of each Fund owned securities of its
"regular brokers or dealers" or their parents, as defined in the 1940 Act, as
follows:
<TABLE>
<CAPTION>
Master Portfolio Broker/Dealer Amount
- ---------------- ------------- ------
<S> <C> <C>
LifePath 2000 CitiCorp $ 92,000
Lehman Brothers 30,000
Merrill Lynch & Co. 29,000
J.P. Morgan Securities 40,000
</TABLE>
27
<PAGE> 206
<TABLE>
<S> <C> <C>
LifePath 2010 CitiCorp $295,000
Lehman Brothers 25,000
Merrill Lynch & Co. 79,000
J.P. Morgan Securities 123,000
LifePath 2020 CitiCorp $549,000
Lehman Brothers 45,000
Merrill Lynch & Co. 170,000
J.P. Morgan Securities 255,000
LifePath 2030 CitiCorp $431,000
Lehman Brothers 40,000
Merrill Lynch & Co. 134,000
J.P. Morgan Securities 198,000
LifePath 2040 CitiCorp $784,000
Lehman Brothers 79,000
Merrill Lynch & Co. 213,000
J.P. Morgan Securities 319,000
</TABLE>
INFORMATION ABOUT THE FUNDS
Each Fund share has one vote and, when issued and paid for in
accordance with the terms of the offering, is fully paid and non-assessable.
Shares have no preemptive, subscription or conversion rights and are freely
transferable. Each share has identical voting rights with respect to the Fund
that issues it. Rule 18f-2 under the 1940 Act provides that any matter
required to be submitted under the provisions of the 1940 Act or applicable
state law or otherwise to the holders of the outstanding voting securities of
an investment company, such as the Company, will not be deemed to have been
effectively acted upon unless approved by the holders of a majority of the
outstanding shares of each Fund affected by such matter. Rule 18f-2 further
provides that a Fund shall be deemed to be affected by a matter unless it is
clear that the interests of such Fund in the matter are identical or that the
matter does not affect any interest of such Fund. However, the Rule exempts
the selection of independent auditors and the election of Directors from the
separate voting requirements of the Rule.
Each Fund sends annual and semi-annual financial statements to all
its shareholders of record.
COUNSEL
Morrison & Foerster LLP, 2000 Pennsylvania Avenue, NW, Suite 5500,
Washington, D.C. 20006-1812, as counsel for the Company, has rendered its
opinion as to certain legal matters
28
<PAGE> 207
regarding the due authorization and valid issuance of the shares being sold
pursuant to the Funds' Prospectus.
INDEPENDENT AUDITORS
KPMG Peat Marwick LLP has been selected to serve as independent
auditors for the Company. KPMG Peat Marwick LLP provides audit services, tax
return preparation and assistance and consultation in connection with review of
certain SEC filings. KPMG Peat Marwick LLP's address is Three Embarcadero
Center, San Francisco, California 94111.
FINANCIAL INFORMATION
The portfolio of investments, audited financial statements and
independent auditors' report for the fiscal year ended February 29, 1996 for
each LifePath Fund and corresponding LifePath Master Portfolio are hereby
incorporated by reference to the Stagecoach Trust Annual Reports, as filed with
the SEC on May 28, 1996. The portfolio of investments, audited financial
statements and independent auditors' report for the Funds are attached to all
SAIs delivered to shareholders or prospective shareholders.
29
<PAGE> 208
APPENDIX
Description of certain ratings assigned by Standard & Poor's
Corporation ("S&P"), Moody's Investors Service, Inc. ("Moody's"), Fitch
Investors Service, Inc. ("Fitch"), Duff & Phelps, Inc. ("Duff") and IBCA Inc.
and IBCA Limited ("IBCA"):
S&P
Bond Ratings
AAA
Bonds rated "AAA" have the highest rating assigned by S&P.
Capacity to pay interest and repay principal is extremely strong.
AA
Bonds rated "AA" have a very strong capacity to pay interest and
repay principal and differ from the highest rated issues only in small degree.
A
Bonds rated "A" have a strong capacity to pay interest and repay
principal although they are somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than obligations in higher
rated categories.
BBB
Bonds rated "BBB" are regarded as having an adequate capacity to
pay interest and repay principal. Whereas they normally exhibit adequate
protection parameters, adverse economic conditions or changing circumstances
are more likely to lead to a weakened capacity to pay interest and repay
principal for bonds in this category than for bonds in higher rated categories.
S&P's letter ratings may be modified by the addition of a plus
(+) or minus (-) sign designation, which is used to show relative standing
within the major rating categories, except in the "AAA" (Prime Grade) category.
Commercial Paper Rating
The designation "A-1" by S&P indicates that the degree of safety
regarding timely payment is either overwhelming or very strong. Those issues
determined to possess overwhelming safety characteristics are denoted with a
plus sign (+) designation. Capacity for timely payment on issues with an "A-2"
designation is strong. However, the relative degree of safety is not as high
as for issues designated "A-1".
A-1
<PAGE> 209
Moody's
Bond Ratings
Aaa
Bonds which are rated "Aaa" are judged to be of the best
quality. They carry the smallest degree of investment risk and are generally
referred to as "gilt edge." Interest payments are protected by a large or by
an exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of such issues.
Aa
Bonds which are rated "Aa" are judged to be of high quality by
all standards. Together with the Aaa group they comprise what generally are
known as high grade bonds. They are rated lower than the best bonds because
margins of protection may not be as large as in Aaa securities or fluctuation
of protective elements may be of greater amplitude or there may be other
elements present which make the long-term risks appear somewhat larger than in
Aaa securities.
A
Bonds which are rated "A" possess many favorable investment
attributes and are to be considered as upper medium grade obligations. Factors
giving security to principal and interest are considered adequate, but elements
may be present which suggest a susceptibility to impairment sometime in the
future.
Baa
Bonds which are rated "Baa" are considered as medium grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding
investment characteristics and in fact have speculative characteristics as
well.
Moody's applies the numerical modifiers "1", "2" and "3" to show
relative standing within the major rating categories, except in the "Aaa"
category. The modifier "1" indicates a ranking for the security in the higher
end of a rating category; the modifier "2" indicates a mid-range ranking; and
the modifier "3" indicates a ranking in the lower end of a rating category.
Commercial Paper Rating
The rating Prime-1 ("P-1") is the highest commercial paper
rating assigned by Moody's. Issuers of "P-1" paper must have a superior
capacity for repayment of short-term
A-2
<PAGE> 210
promissory obligations, and this ordinarily is evidenced by leading market
positions in well established industries, high rates of return on funds
employed, conservative capitalization structures with moderate reliance on debt
and ample asset protection, broad margins in earnings coverage of fixed
financial charges and high internal cash generation, and well established
access to a range of financial markets and assured sources of alternate
liquidity.
Issuers (or relating supporting institutions) rated Prime-2
("P-2") have a strong capacity for repayment of short-term promissory
obligations. This ordinarily is evidenced by many of the characteristics cited
above but to a lesser degree. Earnings trends and coverage ratios, while
sound, are more subject to variation. Capitalization characteristics, while
still appropriate, may be more affected by external conditions. Ample
alternate liquidity is maintained.
Fitch
Bond Ratings
The ratings represent Fitch's assessment of the issuer's ability
to meet the obligations of a specific debt issue or class of debt. The ratings
take into consideration special features of the issue, its relationship to
other obligations of the issuer, the current financial condition and operative
performance of the issuer and of any guarantor, as well as the political and
economic environment that might affect the issuer's future financial strength
and credit quality.
AAA
Bonds rated "AAA" are considered to be investment grade and of
the highest credit quality. The obligor has an exceptionally strong ability to
pay interest and repay principal, which is unlikely to be affected by
reasonably foreseeable events.
AA
Bonds rated "AA" are considered to be investment grade and of
very high credit quality. The obligor's ability to pay interest and repay
principal is very strong, although not quite as strong as bonds rated "AAA".
Because bonds rated in the "AAA" and "AA" categories are not significantly
vulnerable to foreseeable future developments, short- term debt of these
issuers is generally rated "F-1+".
A
Bonds rated "A" are considered to be investment grade and of
high credit quality. The obligor's ability to pay interest and repay principal
is considered to be strong, but may be more vulnerable to adverse changes in
economic conditions and circumstances than bonds with higher ratings.
A-3
<PAGE> 211
BBB
Bonds rated "BBB" are considered to be investment grade and of
satisfactory credit quality. The obligor's ability to pay interest and repay
principal is considered to be adequate. Adverse changes in economic conditions
and circumstances, however, are more likely to have an adverse impact on these
bonds and, therefore, impair timely payment. The likelihood that the ratings
of these bonds will fall below investment grade is higher than for bonds with
higher ratings.
Plus (+) and minus (-) signs are used with a rating symbol to
indicate the relative position of a credit within the rating category.
Short-Term Ratings
Fitch's short-term ratings apply to debt obligations that are
payable on demand or have original maturities of up to three years, including
commercial paper, certificates of deposit, medium-term notes, and municipal and
investment notes.
Although the credit analysis is similar to Fitch's bond rating
analysis, the short-term rating places greater emphasis than bond ratings on
the existence of liquidity necessary to meet the issuer's obligations in a
timely manner.
F-1+
Exceptionally Strong Credit Quality. Issues assigned this
rating are regarded as having the strongest degree of assurance for timely
payment.
F-1
Very Strong Credit Quality. Issues assigned this rating reflect
an assurance of timely payment only slightly less in degree than issues rated
"F-1+".
F-2
Good Credit Quality. Issues carrying this rating have a
satisfactory degree of assurance for timely payments, but the margin of safety
is not as great as the "F-1+" and "F-1" categories.
Duff
A-4
<PAGE> 212
Bond Ratings
AAA
Bonds rated "AAA" are considered highest credit quality. The
risk factors are negligible, being only slightly more than for risk-free U.S.
Treasury debt.
AA
Bonds rated "AA" are considered high credit quality. Protection
factors are strong. Risk is modest but may vary slightly from time to time
because of economic conditions.
A
Bonds rated "A" have protection factors which are average but
adequate. However, risk factors are more variable and greater in periods of
economic stress.
BBB
Bonds rated "BBB" are considered to have below average
protection factors but still considered sufficient for prudent investment.
Considerable variability in risk during economic cycles.
Plus (+) and minus (-) signs are used with a rating symbol
(except "AAA") to indicate the relative position of a credit within the rating
category.
Commercial Paper Rating
The rating "D-1" is the highest commercial paper rating assigned
by Duff. Paper rated "D-1" is regarded as having very high certainty of timely
payment with excellent liquidity factors which are supported by ample asset
protection. Risk factors are minor. Paper rated "D-2" is regarded as having
good certainty of timely payment, good access to capital markets and sound
liquidity factors and company fundamentals. Risk factors are small.
IBCA
Bond and Long-Term Ratings
Obligations rated "AAA" by IBCA have the lowest expectation of
investment risk. Capacity for timely repayment of principal and interest is
substantial, such that adverse changes in business, economic or financial
conditions are unlikely to increase investment risk significantly. Obligations
for which there is a very low expectation of investment risk are rated "AA" by
IBCA. Capacity for timely repayment of principal and interest is substantial.
Adverse changes in business, economic or financial conditions may increase
investment risk albeit not very significantly.
A-5
<PAGE> 213
Commercial Paper and Short-Term Ratings
The designation "A1" by IBCA indicates that the obligation is
supported by a very strong capacity for timely repayment. Those obligations
rated "A1+" are supported by the highest capacity for timely repayment.
Obligations rated "A2" are supported by a strong capacity for timely repayment,
although such capacity may be susceptible to adverse changes in business,
economic or financial conditions.
International and U.S. Bank Ratings
An IBCA bank rating represents IBCA's current assessment of the
strength of the bank and whether such bank would receive support should it
experience difficulties. In its assessment of a bank, IBCA uses a dual rating
system comprised of Legal Ratings and Individual Ratings. In addition, IBCA
assigns banks Long- and Short-Term Ratings as used in the corporate ratings
discussed above. Legal Ratings, which range in gradation from 1 through 5,
address the question of whether the bank would receive support provided by
central banks or interestholders if it experienced difficulties, and such
ratings are considered by IBCA to be a prime factor in its assessment of credit
risk. Individual Ratings, which range in gradations from A through E,
represent IBCA's assessment of a bank's economic merits and address the
question of how the bank would be viewed if it were entirely independent and
could not rely on support from state authorities or its owners.
A-6
<PAGE> 214
MASTERWORKS FUNDS INC.
Telephone: 1-800-776-0179
STATEMENT OF ADDITIONAL INFORMATION
Dated June 28, 1996
MONEY MARKET FUND
---------------------------
MasterWorks Funds Inc. (formerly, "Stagecoach Inc." and
hereinafter, the "Company") is an open-end, series investment company. This
Statement of Additional Information ("SAI") contains information about the
MONEY MARKET FUND (the "Fund"). The investment objective of the Fund is
described in its Prospectus. See "The Fund -- Investment Objective and
Policies."
This SAI is not a prospectus and should be read in conjunction
with the Fund's Prospectus, also dated June 28, 1996. All terms used in this
SAI that are defined in the Prospectus will have the meanings assigned in the
Prospectus. A copy of the Prospectus for the Fund may be obtained without
charge by writing Stephens Inc., the Company's sponsor, administrator and
distributor, at 111 Center Street, Little Rock, Arkansas 72201 or by calling
the Transfer Agent at 1-800-776-0179.
- ---------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Investment Restrictions . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Additional Permitted Investment Activities . . . . . . . . . . . . . . . . . . 4
Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Performance Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Determination of Net Asset Value . . . . . . . . . . . . . . . . . . . . . . . 14
Portfolio Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Federal Income Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Capital Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Counsel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Independent Auditors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Financial Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
SAI Appendix . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-1
Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-1
</TABLE>
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<PAGE> 215
INVESTMENT RESTRICTIONS
FUNDAMENTAL INVESTMENT RESTRICTIONS. The Fund is subject to the
following investment restrictions, all of which are fundamental policies.
The Fund may not:
(1) purchase the securities of issuers conducting their principal
business activity in the same industry if, immediately after the purchase and
as a result thereof, the value of the Fund's investments in that industry would
be 25% or more of the current value of the Fund's total assets, provided that
there is no limitation with respect to investments in (i) obligations of the
U.S. Government, its agencies or instrumentalities; (ii) obligations of
domestic banks (for the purpose of this exception, domestic bank obligations do
not include obligations of U.S. branches of foreign banks or obligations of
foreign branches of U.S. banks);
(2) purchase or sell real estate or real estate limited
partnerships (other than securities secured by real estate or interests therein
or securities issued by companies that invest in real estate or interests
therein);
(3) purchase commodities or commodity contracts (including
futures contracts), except that the Fund may purchase securities of an issuer
which invests or deals in commodities or commodity contracts;
(4) purchase interests, leases, or limited partnership
interests in oil, gas, or other mineral exploration or development programs;
(5) purchase securities on margin (except for short-term
credits necessary for the clearance of transactions and except for margin
payments in connection with options, futures and options on futures) or make
short sales of securities;
(6) underwrite securities of other issuers, except to the extent
that the purchase of permitted investments directly from the issuer thereof or
from an underwriter for an issuer and the later disposition of such securities
in accordance with the Fund's investment program may be deemed to be an
underwriting;
(7) make investments for the purpose of exercising control or
management;
(8) borrow money or issue senior securities as defined in the
1940 Act, except that the Money Market Fund may borrow from banks up to 10% of
the current value of its net assets for temporary purposes only in order to
meet redemptions, and these borrowings may be secured by the pledge of up to
10% of the current value of its net assets (but investments may not be
purchased while any such outstanding borrowing in excess of 5% of its net
assets exists);
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<PAGE> 216
(9) write, purchase or sell puts, calls, straddles, spreads,
warrants, options or any combination thereof, except that the Money Market Fund
may purchase securities with put rights in order to maintain liquidity;
(10) purchase securities of any issuer (except securities issued
or guaranteed by the U.S. Government, its agencies and instrumentalities) if,
as a result, with respect to 75% of its total assets, more than 5% of the value
of the Fund's total assets would be invested in the securities of any one
issuer or, with respect to 100% of its total assets the Fund's ownership would
be more than 10% of the outstanding voting securities of such issuer; or
(11) make loans, except that the Fund may purchase or hold debt
instruments or lend its portfolio securities in accordance with its investment
policies, and may enter into repurchase agreements.
NON-FUNDAMENTAL INVESTMENT RESTRICTIONS. The Fund is subject to
the following investment restrictions, all of which are non-fundamental
policies.
(1) The Money Market Fund may not:
(a) purchase or retain securities of any issuer if the
officers or Directors of the Company or its Investment Adviser owning
beneficially more than one-half of one percent (0.5%) of the securities of the
issuer together owned beneficially more than 5% of such securities;
(b) purchase securities of issuers who, with their
predecessors, have been in existence less than three years, unless the
securities are fully guaranteed or insured by the U.S. Government, a state,
commonwealth, possession, territory, the District of Columbia or by an entity
in existence at least three years, or the securities are backed by the assets
and revenues of any of the foregoing if, by reason thereof, the value of its
aggregate investments in such securities will exceed 5% of its total assets.
(2) The Money Market Fund reserves the right to invest up to
10% of the current value of its net assets in fixed time deposits that are
subject to withdrawal penalties and that have maturities of more than seven
days, repurchase agreements maturing in more than seven days or other illiquid
securities. However, as long as the Fund's shares are registered for sale in a
state that imposes a lower limit on the percentage of a fund's assets that may
be so invested, the Fund will comply with such lower limit. The Fund presently
is limited to investing 10% of its net asset in such securities due to limits
applicable in several states.
(3) The Money Market Fund may not purchase securities of
unseasoned issuers, including their predecessors, which have been in operation
for less than three years, and equity securities of issuers which are not
readily marketable if by reason thereof the value of the Fund's aggregate
investment in such classes of securities will exceed 5% of its total assets.
(4) The Money Market Fund, as provided in Rule 2a-7 under the
1940 Act, may only purchase "Eligible Securities" (as defined in Rule 2a-7) and
only if, immediately after such
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<PAGE> 217
purchase: the Fund would have no more than 5% of its total assets in "First
Tier Securities" (as defined in Rule 2a-7) of any one issuer, excluding
government securities and except as otherwise permitted for temporary purposes
and for certain guarantees and unconditional puts; the Money Market Fund would
own no more than 10% of the voting securities of any one issuer; the Fund would
have no more than 5% of its total assets in "Second Tier Securities" (as
defined in Rule 2a-7); and the Fund would have no more than the greater of $1
million or 1% of its total assets in Second Tier Securities of any one issuer.
(5) The Fund may invest in shares of other open-end, management
investment companies, subject to the limitations of Section 12(d)(1) of the
1940 Act, provided that any such purchases will be limited to temporary
investments in shares of unaffiliated investment companies and the Investment
Adviser will waive its advisory fees for that portion of the Fund's assets so
invested, except when such purchase is part of a plan of merger, consolidation,
reorganization or acquisition. The Fund does not intend to invest more than 5%
of its respective net assets in such securities during the coming year.
ADDITIONAL PERMITTED INVESTMENT ACTIVITIES
Unrated Investments. The Money Market Fund may purchase
instruments that are not rated if, in the opinion of Wells Fargo, such
obligations are of investment quality comparable to other rated investments
that are permitted for purchase by the Fund, if they are purchased in
accordance with the Fund's procedures adopted by the Company's Board of
Directors in accordance with Rule 2a-7 under the 1940 Act. Such procedures
require approval or ratification by the Directors of the purchase of unrated
securities. After purchase by the Money Market Fund, a security may cease to
be rated or its rating may be reduced below the minimum required for purchase
by the Fund. Neither event will require an immediate sale of such security by
the Money Market Fund provided that, when a security ceases to be rated, the
Company's Board of Directors determines that such security presents minimal
credit risks and, provided further that, when a security rating is downgraded
below the eligible quality for investment or no longer presents minimal credit
risks, the Board finds that the sale of such security would not be in the
Fund's shareholder's best interest. However, in no event will such securities
exceed 5% of the Fund's net assets. To the extent the ratings given by Moody's
or S&P may change as a result of changes in such organizations or their rating
systems, the Money Market Fund will attempt to use comparable ratings as
standards for investments in accordance with the investment policies contained
in the Prospectus and in this SAI. The ratings of Moody's and S&P are more
fully described in the SAI Appendix.
Letters of Credit. Certain of the debt obligations (including
certificates of participation, commercial paper and other short-term
obligations) which the Money Market Fund may purchase may be backed by an
unconditional and irrevocable letter of credit of a bank, savings and loan
association or insurance company which assumes the obligation for payment of
principal and interest in the event of default by the issuer. Only banks,
savings and loan associations and insurance companies which, in the opinion of
Wells Fargo, as sub-adviser, are of
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<PAGE> 218
comparable quality to issuers of other permitted investments of the Fund may be
used for letter of credit-backed investments.
Pass-Through Obligations. Certain of the debt obligations in
which the Money Market Fund may invest may be pass-through obligations that
represent an ownership interest in a pool of mortgages and the resultant cash
flow from those mortgages. Payments by homeowners on the loans in the pool
flow through to certificate holders in amounts sufficient to repay principal
and to pay interest at the pass-through rate. The stated maturities of
pass-through obligations may be shortened by unscheduled prepayments of
principal on the underlying mortgages. Therefore, it is not possible to
predict accurately the average maturity of a particular pass-through
obligation. Variations in the maturities of pass-through obligations will
affect the yield of any Fund investing in such obligations. Furthermore, as
with any debt obligation, fluctuations in interest rates will inversely affect
the market value of pass-through obligations.
Loans of Portfolio Securities. The Money Market Fund may lend
securities from its portfolio to brokers, dealers and financial institutions
(but not individuals) if cash, U.S. Government securities or other high-quality
debt obligations equal to at least 100% of the current market value of the
securities loaned (including accrued interest thereon) plus the interest
payable to the Fund with respect to the loan is maintained with the Fund. In
determining whether to lend a security to a particular broker, dealer or
financial institution, the Fund's Investment Adviser will consider all relevant
facts and circumstances, including the size, creditworthiness and reputation of
the broker, dealer, or financial institution. Any loans of portfolio
securities will be fully collateralized based on values that are marked to
market daily. The Fund will not enter into any portfolio security lending
arrangement having a duration of longer than one year. Any securities that the
Fund may receive as collateral will not become part of the Fund's portfolio at
the time of the loan and, in the event of a default by the borrower, the Fund
will, if permitted by law, dispose of such collateral except for such part
thereof that is a security in which the Fund is permitted to invest. During
the time securities are on loan, the borrower will pay the Fund any accrued
income on those securities, and the Fund may invest the cash collateral and
earn income or receive an agreed-upon fee from a borrower that has delivered
cash-equivalent collateral. The Money Market Fund will not lend securities
having a value that exceeds one-third of the current value of its total assets.
Loans of securities by the Fund will be subject to termination at the Fund's or
the borrower's option. The Fund may pay reasonable administrative and
custodial fees in connection with a securities loan and may pay a negotiated
portion of the interest or fee earned with respect to the collateral to the
borrower or the placing broker. Borrowers and placing brokers may not be
affiliated, directly or indirectly, with the Company, its Investment Adviser,
Sub-Adviser or its Distributor.
Foreign Obligations. Investments in foreign obligations involve
certain considerations that are not typically associated with investing in
domestic obligations. There may be less publicly available information about a
foreign issuer than about a domestic issuer. Foreign issuers also are not
generally subject to uniform accounting, auditing and financial reporting
standards or governmental supervision comparable to those applicable to
domestic issuers. In addition, with respect to certain foreign countries,
taxes may be withheld at the source under foreign income tax laws, and there is
a possibility of expropriation or confiscatory taxation, political or social
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<PAGE> 219
instability or diplomatic developments that could adversely affect investments
in, the liquidity of, and the ability to enforce contractual obligations with
respect to, securities of issuers located in those countries. The Fund may not
invest 25% or more of its assets in foreign obligations.
Obligations of foreign banks and foreign branches of U.S. banks
involve somewhat different investment risks from those affecting obligations of
U.S. banks, including the possibilities that liquidity could be impaired
because of future political and economic developments, that the obligations may
be less marketable than comparable obligations of U.S. banks, that a foreign
jurisdiction might impose withholding taxes on interest income payable on those
obligations, that foreign deposits may be seized or nationalized, that foreign
governmental restrictions (such as foreign exchange controls) may be adopted
which might adversely affect the payment of principal and interest on those
obligations and that the selection of those obligations may be more difficult
because there may be less publicly available information concerning foreign
banks or the accounting, auditing and financial reporting standards, practices
and requirements applicable to foreign banks may differ from those applicable
to U.S. banks. In that connection, foreign banks are not subject to
examination by any U.S. Government agency or instrumentality.
MANAGEMENT
Directors and Officers. The following information supplements and
should be read in conjunction with the Prospectus section entitled "Management
of the Fund." The principal occupations during the past five years of the
Directors and officers of the Company are listed below. The address of each,
unless otherwise indicated, is 111 Center Street, Little Rock, Arkansas 72201.
Directors deemed to be "interested persons" of the Company for purposes of the
1940 Act are indicated by an asterisk.
<TABLE>
<CAPTION>
Principal Occupations
Name, Address and Age Position During Past 5 Years
- --------------------- -------- ---------------------
<S> <C> <C>
Jack S. Euphrat, 74 Director Private Investor.
415 Walsh Road
Atherton, CA 94027.
*R. Greg Feltus, 45 Director, Senior Vice President
Chairman and of Stephens; Manager
President of Financial Services Group; President of Stephens
Insurance Services Inc.; Senior Vice President of Stephens
Sports Management Inc.; and President of Investors
Brokerage Insurance Inc.
</TABLE>
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<PAGE> 220
<TABLE>
<S> <C> <C>
Thomas S. Goho, 54 Director T.B. Rose Faculty Fellow - Business,
321 Beechcliff Court Wake Forest University
Winston-Salem, NC 27104 Calloway School of Business
and Accounting;
Associate Professor of the Finance of the
School of Business and Accounting at Wake Forest
University since 1983.
*Zoe Ann Hines, 47 Director Senior Vice President of Stephens and Director of
Brokerage Accounting; and Secretary of Stephens Resource
Management.
*W. Rodney Hughes, 70 Director Private Investor.
31 Dellwood Court
San Rafael, CA 94901
Robert M. Joses, 78 Director Private Investor.
47 Dowitcher Way
San Rafael, CA 94901
*J. Tucker Morse, 52 Director Private Investor; Real Estate
10 Legrae Street Developer; Chairman
Charleston, SC 29401 of Renaissance Properties Ltd.; President of Morse
Investment Corporation; and Co-Managing Partner of Main
Street Ventures.
Richard H. Blank, Jr., 40 Chief Associate of
Operating Financial Services
Officer, Group of Stephens;
Secretary and Director of Stephens
Treasurer Sports Management Inc.; and Director of Capo Inc.
</TABLE>
7
<PAGE> 221
COMPENSATION TABLE
For the Fiscal Year Ended February 29, 1996
<TABLE>
<CAPTION>
Total Compensation
Aggregate Compensation from Registrant
Name and Position from Registrant and Fund Complex
- ----------------- ---------------------- ------------------
<S> <C> <C>
Jack S. Euphrat $10,000 $39,000
Director
*R. Greg Feltus 0 0
Director
Thomas S. Goho $10,000 $39,000
Director
*Zoe Ann Hines 0 0
Director
*W. Rodney Hughes $ 9,250 $36,250
Director
Robert M. Joses $ 9,750 $38,250
Director
*J. Tucker Morse $ 8,250 $33,000
Director
</TABLE>
Directors of the Company are compensated annually by the Company
and by all the registrants in the fund complex for their services as indicated
above and also are reimbursed for all out-of-pocket expenses relating to
attendance at board meetings. Each of the Directors and Principal Officer of
the Company serves in the identical capacity as Directors/Trustees and
Principal Officer of Stagecoach Funds, Inc. ("Stagecoach"), Overland Express
Funds, Inc. ("Overland"), Stagecoach Trust, Master Investment Trust, Life &
Annuity Trust, Master Investment Portfolio ("MIP") and Managed Series
Investment Trust ("MSIT"), each of which is a registered open-end management
investment company and each of which, prior to January 1, 1996 and the
reorganization of WFNIA, was considered to be in the same "fund complex", as
such term is defined in Form N-1A under the 1940 Act, as the Company.
Effective January 1, 1996, the Company, MIP and MSIT are considered to be in
the same fund complex and are no longer part of the same fund complex as
Stagecoach, Overland, Stagecoach Trust, Master Investment Trust and Life &
Annuity Trust. The Directors are compensated by other Companies and Trusts
within the fund complex for their services as Directors/Trustees to such
Companies and Trusts. Currently the Directors do not receive any retirement
benefits or deferred compensation from the Company or any other member of the
fund complex.
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<PAGE> 222
As of the date of this SAI, Directors and officers of the Company
as a group beneficially owned less than 1% of the outstanding shares of the
Company.
Investment Advisory Agreement. BGFA provides investment advisory
services to the Fund pursuant to an Investment Advisory Contract dated January
1, 1996 with the Company. Pursuant to the Advisory Contract, BGFA furnishes
the Company's Board of Directors with periodic reports on the investment
strategy and performance of the Fund. For its advisory services to the Fund,
BGFA is entitled to receive a fee at the annual rate of 0.35% of the average
daily value of the Fund's net assets.
The Advisory Contract is subject to the annual approval by (i) the
Company's Board of Directors or (ii) vote of a majority (as defined in the 1940
Act) of the outstanding voting securities of the Fund, provided that in either
event the continuance also is approved by a majority of the Company's Board of
Directors who are not "interested persons" (as defined in the 1940 Act) of the
Company or BGFA, by vote cast in person at a meeting called for the purpose of
voting on such approval. The Advisory Contract is terminable without penalty,
on 60 days' written notice by the Company's Board of Directors or by vote of
the holders of a majority of the Funds shares, or, after the Reapproval Date,
on not less than 60 days' written notice, by BGFA. The Advisory Contract
terminates automatically in the event of its assignment (as defined in the 1940
Act).
Prior to January 1, 1996, Wells Fargo provided investment advisory
services to the Fund pursuant to an Investment Advisory Agreement (the
"Advisory Agreement"). The terms of the Advisory Agreement were identical in
all material respects, other than the identity of the parties, to the BGFA
Advisory Contract.
For the fiscal period beginning July 2, 1993 (commencement of
operations) and ended February 28, 1994, the fiscal year ended February 28,
1995 and the period beginning March 1, 1995 and ended December 31, 1995, the
Fund paid the following advisory fees to Wells Fargo and Wells Fargo waived the
indicated amounts. For the period beginning January 1, 1996 and ended February
29, 1996, the Fund paid the following advisory fees to BGFA and BGFA waived the
indicated amounts.
<TABLE>
<CAPTION>
7/2/93-2/28/94 3/1/94-2/28/95 3/1/95-12/31/95 1/1/96-2/29/96
Fees Fees Fees Fees Fees Fees Fees Fees
Paid Waived Paid Waived Paid Waived Paid Waived
-------- ------ -------- ------ -------- -------- -------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
$172,697 0 $371,199 0 $435,178 $51,320 $ 89,609 0
</TABLE>
Sub-Investment Advisory Agreement. BGFA has engaged Wells Fargo
to provide sub-investment advisory services pursuant to a Sub-Advisory Contract
dated January 1, 1996. The Sub-Advisory Contract provides that Wells Fargo
shall furnish to the Fund investment guidance and policy direction in
connection with the daily portfolio management of the Fund. Wells Fargo has
agreed to provide the Fund with among other things, money market security and
fixed-income research, analysis and statistical and economic data and
information concerning
9
<PAGE> 223
interest rate and security market trends, portfolio composition and credit
conditions. For its sub-advisory services to the Fund, Wells Fargo is entitled
to receive a fee at an annual rate of 0.05% of the average daily value of the
Fund's net assets.
The Sub-Advisory Contract is subject to annual approval by (i) the
Company's Board of Directors or (ii) vote of a majority (as defined in the 1940
Act) of the outstanding securities of the Fund, provided that in either event
the continuance also is approved by a majority of the Company's Board of
Directors who are not interested persons (as defined in the 1940 Act) of the
Fund or Wells Fargo, by vote cast in person at a meeting called for the purpose
of voting on such approval. The Sub-Advisory Contract is terminable without
penalty, on 60 days' written notice by the Company's Board of Directors or by
vote of the holders of a majority of the Fund's shares. The Sub-Advisory
Contract terminates automatically upon assignment (as defined in the 1940 Act).
For the period beginning January 1, 1996 and ended February 29,
1996, BGFA paid to Wells Fargo the sub- advisory fees indicated below and Wells
Fargo waived the indicated amount:
<TABLE>
<CAPTION>
Fees Paid Fees Waived
--------- -----------
<S> <C> <C>
Money Market Fund $12,801 $ 0
</TABLE>
Administration Agreement. The Company has retained Stephens as
administrator and distributor on behalf of the Fund. The Amended
Administration Agreement between Stephens and the Company on behalf of the Fund
states that Stephens shall provide as administrative services, among other
things: (i) general supervision of the operation of the Fund, including
coordination of the services performed by the Fund's investment adviser,
transfer and dividend disbursing agent, custodian, shareholder servicing
agent(s), independent auditors and legal counsel; (ii) general supervision of
regulatory compliance matters, including the compilation of information for
documents such as reports to, and filings with, the SEC and state securities
commissions; and preparation of proxy statements and shareholder reports for
the Fund; and (iii) general supervision relative to the compilation of data
required for the preparation of periodic reports distributed to the Company's
officers and Board of Directors. Stephens also furnishes office space and
certain facilities required for conducting the business of the Fund together
with those ordinary clerical and bookkeeping services that are not being
furnished by BGFA. Stephens also pays the compensation of the Company's
Directors, officers and employees who are affiliated with Stephens.
Furthermore, except as provided in the Company's Advisory Contract, the
Administrator shall bear substantially all costs of the Company's and the
Fund's operations. However, the Administrator shall not be required to bear
any cost or expense which a majority of the disinterested Directors of the
Company deem to be an extraordinary expense or brokerage or other expenses
connected with the execution of portfolio transactions.
For its administrative services to the Fund, Stephens is entitled
to receive a fee at the annual rate of 0.05% of the average daily value of the
Fund's net assets. For the fiscal period
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<PAGE> 224
beginning July 2, 1993 and ended February 28, 1994, and for the fiscal years
ended February 28, 1995 and February 29, 1996, the Fund paid the following
administrative fees to Stephens:
<TABLE>
<CAPTION>
Fees Paid
1994 1995 1996
------- ------- -------
<S> <C> <C> <C>
Money Market Fund $24,671 $58,429 $76,777
</TABLE>
The Advisory Contract and Administration Agreement for the Fund
provide that if, in any fiscal year, the total expenses of the Fund incurred
by, or allocated to, the Fund (excluding taxes, interest, brokerage commissions
and other portfolio transaction expenses, expenditures that are capitalized in
accordance with generally accepted accounting principles, extraordinary
expenses and the fees provided for in the Advisory Contract and the
Administration Agreement) exceed the most restrictive expense limitation
applicable to the Fund imposed by the securities laws or regulations of the
states in which the Fund's shares are registered for sale, Wells Fargo and
Stephens shall waive their fees proportionately under the Advisory Contract and
the Administration Agreement, respectively, for the Fund for the fiscal year to
the extent of the excess or reimburse the excess, but only to the extent of
their respective fees. The Advisory Contract and the Administration Agreement
for the Fund further provides that the Fund's total expenses shall be reviewed
monthly so that, to the extent the annualized expenses for such month exceed
the most restrictive applicable annual expense limitation, the monthly fees
under the contract and the agreement shall be reduced as necessary. The most
stringent applicable restriction limits these expenses for any fiscal year to
2.5% of the first $30 million of the Fund's average net assets, 2% of the next
$70 million of average net assets, and 1.5% of the average net assets in excess
of $100 million.
Distribution Agreement. Stephens acts as the exclusive
distributor of the Fund's shares pursuant to an Amended and Restated
Distribution Agreement (the "Distribution Agreement") with the Company. Shares
are sold on a continuous basis by Stephens as agent, although Stephens is not
obligated to sell any particular amount of shares. No compensation is payable
by the Company to Stephens for its distribution services. The term and
termination provisions of the Distribution Agreement are substantially similar
to those of the Agreement with the Adviser discussed above.
Custodian and Transfer and Dividend Disbursing Agent. BZW
Barclays Global Investors, N.A. ("BGI") has been retained to act as Custodian
for the Money Market Fund. The custodian, among other things, maintains a
custody account or accounts in the name of the Fund; receives and delivers all
assets for the Fund upon purchase and upon sale or maturity; collects and
receives all income and other payments and distributions on account of the
assets of the Fund and pays all expenses of the Fund. For its services as
custodian, BGI does not receive a fee from the Fund. For the period beginning
January 1, 1996 and ended February 29, 1996, the Fund did not pay any custody
fees to BGI.
11
<PAGE> 225
Prior to January 1, 1996, Wells Fargo served as custodian for the
Fund. For the period beginning March 1, 1995 and ended December 31, 1995, the
Fund paid $12,655 in custody fees to Wells Fargo. Wells Fargo has been
retained to act as the transfer and dividend disbursing agent for the Fund, and
receives for its services an asset-based fee from the Fund. For the fiscal
year ended February 29, 1996, the Company paid $76,777 in transfer and dividend
disbursing agency fees to Wells Fargo on behalf of the Fund.
Shareholder Servicing Plan. For the fiscal year ended February
29, 1996, the Fund did not pay any Shareholder Servicing Fees.
PERFORMANCE INFORMATION
Current yield for the Money Market Fund is calculated based on the
net changes, exclusive of capital changes, over seven-and/or thirty-day
periods, in the value of a hypothetical pre-existing account having as balance
of one share at the beginning of the period, subtracting a hypothetical charge
reflecting deductions from shareholder accounts, and dividing the difference by
the value of the account at the beginning of the base period to obtain the base
period return, and then multiplying the base period return by (365/7) with the
resulting yield figure carried to at least the nearest hundredth of one
percent.
The current yields of the Fund for the seven-day and thirty day
periods ended February 29, 1996 were 4.97% and 6.00%, respectively.
Effective yield for the Money Market Fund is calculated by
determining the net change exclusive of capital changes in the value of a
hypothetical pre-existing account having a balance of one share at the
beginning of the period, subtracting a hypothetical charge reflecting
deductions from shareholder accounts, and dividing the difference by the value
of the account at the beginning of the base period to obtain the base period
return, and then compounding the base period return by adding one, raising the
sum to a power equal to 365 divided by seven, and subtracting one from the
result.
The effective yield of the Fund for the seven-day period ended
February 29, 1996 was 5.09%.
Generally. The yield for the Fund fluctuates from time to time,
unlike bank deposits or other investments that pay a fixed yield for a stated
period of time, and does not provide a basis for determining future yields
since it is based on historical data. Yield is a function of portfolio
quality, composition, maturity and market conditions as well as the expenses
allocated to the Fund.
In addition, investors should recognize that changes in the net
asset values of shares of the Fund affect the yield of such Fund for any
specified period, and such changes should be considered together with the
Fund's yield in ascertaining the Fund's total return to shareholders for the
period. Yield information for the Fund may be useful in reviewing the
performance of
12
<PAGE> 226
such Fund and for providing a basis for comparison with investment
alternatives. The yield of a Fund, however, may not be comparable to the
yields from investment alternatives because of differences in the foregoing
variables and differences in the methods used to value portfolio securities,
compute expenses and calculate yield.
Performance Comparisons. From time to time, the Company may quote
the performance of the Fund in advertising and other types of literature as
compared to the performance of an S&P Index, the Dow Jones Industrial Average
or any other commonly quoted index of common stock prices. An S&P Index and
Dow Jones Industrial Average are unmanaged indices of selected common stock
prices.
From time to time, the Company may quote the Money Market Fund's
performance in advertising and other types of literature as compared to the
91-Day Treasury Bill Average (Federal Reserve), Lipper Money Market Fund
Average, Donoghue Taxable Money Market Fund Average, Salomon Three-Month
Treasury Bill Index, or Bank Averages, which are calculated from figures
supplied by the U.S. League of Savings Institutions based on effective annual
rates of interest on both passbook and certificate accounts. Savings accounts
offer a guaranteed return of principal and a fixed rate of interest. The
Fund's performance also may be compared to the Consumer Price Index, as
published by the U.S. Bureau of Labor Statistics, which is an established
measure of change over time in the prices of goods and services in major
expenditure groups.
In addition, the Company also may use, in advertisements and other
types of literature, information and statements: (1) showing that bank savings
accounts offer a guaranteed return of principal and a fixed rate of interest,
but no opportunity for capital growth; and (2) describing Wells Fargo, and its
affiliates and predecessors, as one of the first investment managers to advise
investment accounts using asset allocation and index strategies. The Company
also may include in advertising and other types of literature information and
other data from reports and studies prepared by the Tax Foundation, including
information regarding federal and state tax levels and the related "Tax Freedom
Day." The Company also may disclose in advertising and other types of sales
literature the level and categories of assets under management by the Fund's
investment adviser, sub-adviser or their affiliates.
The Fund's performance also may be compared to those of other
mutual funds having similar objectives. This comparative performance could be
expressed as a ranking prepared by Lipper Analytical Services, Inc., Donoghue's
Money Fund Report, including Donoghue's Taxable Money Market Fund Average or
Morningstar, Inc., independent services which monitor the performance of mutual
funds. The Fund's performance will be calculated by relating net asset value
per share at the beginning of a stated period to the net asset value of the
investment, assuming reinvestment of all gains distributions and dividends
paid, at the end of the period. Any such comparisons may be useful to
investors who wish to compare the Fund's past performance with that of its
competitors. Of course, past performance cannot be a guarantee of future
results.
Other Advertising Items. The Company also may discuss in
advertising and other types of literature that the Fund has been assigned a
rating by a nationally recognized statistical
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<PAGE> 227
rating organization ("NRSRO"), such as Standard & Poor's Corporation. Such
rating would assess the creditworthiness of the investments held by the Fund.
The assigned rating would not be a recommendation to purchase, sell or hold the
Fund's shares since the rating would not comment on the market price of the
Fund's shares or the suitability of the Fund for a particular investor. In
addition, the assigned rating would be subject to change, suspension or
withdrawal as a result of changes in, or unavailability of, information
relating to the Fund or its investments. The Company may compare the Fund's
performance with other investments which are assigned ratings by NRSROs. Any
such comparisons may be useful to investors who wish to compare the Fund's past
performance with other rated investments.
DETERMINATION OF NET ASSET VALUE
The Money Market Fund uses the amortized cost method to determine
the value of its portfolio securities pursuant to Rule 2a-7 under the 1940 Act.
The amortized cost method involves valuing a security at its cost and
amortizing any discount or premium over the period until maturity, regardless
of the impact of fluctuating interest rates on the market value of the
security. While this method provides certainty in valuation, it may result in
periods during which the value, as determined by amortized cost, is higher or
lower than the price that the Money Market Fund would receive if the security
were sold. During these periods the yield to a shareholder may differ somewhat
from that which could be obtained from a similar fund that uses a method of
valuation based upon market prices. Thus, during periods of declining interest
rates, if the use of the amortized cost method resulted in a lower value of the
Money Market Fund's portfolio on a particular day, a prospective investor in
the Money Market Fund would be able to obtain a somewhat higher yield than
would result from investment in a fund using solely market values, and existing
Money Market Fund shareholders would receive correspondingly less income. The
converse would apply during periods of rising interest rates.
Rule 2a-7 provides that in order to value its portfolio using the
amortized cost method, the Money Market Fund must maintain a dollar-weighted
average portfolio maturity of 90 days or less, purchase securities having
remaining maturities (as defined in Rule 2a-7) of thirteen months or less and
invest only in those high-quality securities that are determined by the Board
of Directors to present minimal credit risks. The maturity of an instrument is
generally deemed to be the period remaining until the date when the principal
amount thereof is due or the date on which the instrument is to be redeemed.
However, Rule 2a-7 provides that the maturity of an instrument may be deemed
shorter in the case of certain instruments, including certain variable- and
floating-rate instruments subject to demand features. Pursuant to the Rule,
the Board is required to establish procedures designed to stabilize, to the
extent reasonably possible, the Money Market Fund's price per share as computed
for the purpose of sales and redemptions at $1.00. Such procedures include
review of the Money Market Fund's portfolio holdings by the Board of Directors,
at such intervals as it may deem appropriate, to determine whether the Money
Market Fund's net asset value calculated by using available market quotations
deviates from the $1.00 per share based on amortized cost. The extent of any
deviation will be examined by the Board of Directors. If such deviation
exceeds 1/2 of 1%, the Board will promptly consider what action, if any, will
be initiated. In the event the Board determines that a deviation exists that
may
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result in material dilution or other unfair results to shareholders, the Board
will take such corrective action as it regards as necessary and appropriate,
including the sale of portfolio instruments prior to maturity to realize
capital gains or losses or to shorten average portfolio maturity, withholding
dividends or establishing a net asset value per share by using available market
quotations.
PORTFOLIO TRANSACTIONS
Generally. The Company has no obligation to deal with any dealer
or group of dealers in the execution of transactions in portfolio securities.
Subject to policies established by the Company's Board of Directors, Wells
Fargo, as sub-adviser, is responsible for the Fund's portfolio decisions and
the placing of portfolio transactions. In placing orders, it is the policy of
the Company to obtain the best overall terms for the Fund taking into account
the broker/dealer's general execution and operational facilities, the type of
transaction involved and other factors such as the broker/dealer's risk in
positioning the securities involved. While Wells Fargo, generally seeks
reasonably competitive spreads or commissions, the Fund will not necessarily be
paying the lowest spread or commission available.
In assessing the best overall terms available for any transaction,
Wells Fargo considers factors deemed relevant, including the breadth of the
market in the security, the price of the security, the financial condition and
execution capability of the broker or dealer, and the reasonableness of the
commission, if any, both for the specific transaction and on a continuing
basis. Wells Fargo may cause the Fund to pay a broker/dealer which furnishes
brokerage and research services a higher commission than that which might be
charged by another broke/dealer for effecting the same transaction, provided
that Wells Fargo determines in good faith that such commission is reasonable in
relation to the value of the brokerage and research services provided by such
broker/dealer, viewed in terms of either the particular transaction or the
overall responsibilities of Wells Fargo. Such brokerage and research services
might consist of reports and statistics relating to specific companies or
industries, general summaries of groups of stocks or bonds and their comparative
earnings and yields, or broad overviews of the stock, bond, and government
securities markets and the economy.
Supplementary research information so received is in addition to,
and not in lieu of, services required to be performed by Wells Fargo and does
not reduce the advisory fees payable by the Fund. The Board of Directors will
periodically review the commission paid by the Fund to consider whether the
commissions paid over representative periods of time appear to be reasonable in
relation to the benefits inuring to the Fund. It is possible that certain of the
supplementary research or other services received will primarily benefit one or
more other investment companies or other accounts for which investment
discretion is exercised. Conversely, the Fund may be the primary beneficiary of
the research or services received as a result of portfolio transactions effected
for such other account or investment company.
Under the 1940 Act, persons affiliated with the Company such as
Stephens, BGFA, Wells Fargo and their affiliates are prohibited from dealing
with the Company as a principal in the purchase and sale of securities unless
an exemptive order allowing such transactions is obtained from the SEC or an
exemption is otherwise available.
The Money Market Fund. Purchases and sales of securities usually
are principal transactions. Portfolio securities normally are purchased or
sold from or to dealers serving as market makers for the securities at a net
price. The Money Market Fund also purchases portfolio securities in
underwritten offerings and may purchase securities directly from the issuer.
Generally, taxable money market securities are traded on a net basis and do not
involve brokerage commissions. The cost of executing the portfolio
transactions consists primarily of dealer spreads and underwriting commissions.
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Portfolio Turnover. Because the portfolio of the Fund consists of
securities with relatively short-term maturities, the Fund expects to
experience high portfolio turnover. A high portfolio turnover rate should not
adversely affect the Money Market Fund, however, because portfolio transactions
ordinarily will be made directly with principals on a net basis, and,
consequently, the Fund usually will not incur excessive transaction costs.
Brokerage Commissions. For the fiscal years ended February 28,
1995 and February 29, 1996, the Fund did not pay any brokerage commissions.
Securities of Regular Broker/Dealers. As of February 29, 1996,
the Fund owned securities of its "regular brokers or dealers," or their
parents, as defined in the 1940 Act, as follows: $57,000 of Goldman Sachs & Co.
FEDERAL INCOME TAXES
The Money Market Fund prospectus describes generally the tax
treatment of distributions. This section of the SAI includes additional
information concerning federal income taxes.
Qualification as a "regulated investment company" under the Code
requires, among other things, that (a) at least 90% of the Fund's annual gross
income be derived from interest, payments with respect to securities loans,
dividends and gains from the sale or other disposition of securities or options
thereon; (b) the Fund derives less than 30% of its gross income from gains from
the sale or other disposition of securities or options thereon held for less
than three months; and (c) the Fund diversifies its holdings so that, at the
end of each quarter of the taxable year, (i) at least 50% of the market value
of the Fund's assets is represented by cash, government securities and other
securities limited in respect of any one issuer to an amount not greater than
5% of the Fund's assets and 10% of the outstanding voting securities of such
issuer, and (ii) not more than 25% of the value of its assets is invested in
the securities of any one issuer (other than U.S. Government securities and the
securities of other regulated investment companies), or of two or more issuers
which the Fund controls and which are determined to be engaged in the same or
similar trades or businesses or related trades or businesses. As a regulated
investment company, the Fund will not be subject to federal income tax on its
net investment income and net capital gains distributed to its shareholders,
provided that the Fund distributes to its shareholders at least 90% of its net
investment income (including its net tax- exempt income) earned in each year.
Generally, dividends and capital gain distributions are taxable to
shareholders when they are received. However, such dividends and distributions
declared payable as of a record date in October, November or December of any
calendar year are deemed under the Code to have been paid by the Fund and
received by the shareholders on December 31 of that calendar year if the
dividend and distributions are actually paid in the following January. Such
dividends and distributions will, accordingly, be taxable to the recipient
shareholders in the year in which the record date falls. In addition, a 4%
nondeductible excise tax will be imposed on the Fund to the
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<PAGE> 230
extent that it does not meet certain minimum distribution requirements by the
end of each calendar year. The Fund will either actually or be deemed to
distribute substantially all of its net investment income and net capital gains
by the end of each calendar year and, thus, expects not to be subject to the
excise tax.
Income and dividends received by the Fund from sources within
foreign countries may be subject to withholding and other taxes imposed by such
countries. Tax conventions between certain countries and the United States may
reduce or eliminate such taxes. Because not more than 50% of the value of the
total assets of the Fund is expected to consist of securities of foreign
issuers, the Fund will not be eligible to elect to "pass through" foreign tax
credits to shareholders.
Gains or losses on sales of portfolio securities by the Fund
generally will be long-term capital gains or losses if the securities have been
held by it for more than one year, except in certain cases including where the
Fund acquires a put or grants a call thereon. Gain recognized on the
disposition of a debt obligation (including tax-exempt obligations purchased
after April 30, 1993) purchased by the Fund at a market discount (generally, at
a price less than its principal amount) will generally be treated as ordinary
income to the extent of the portion of the market discount which accrued during
the period of time the Fund held the debt obligation. Other gains or losses on
the sale of securities will be short-term capital gains or losses. To the
extent that the Fund recognizes long-term capital gains, such gains will be
distributed at least annually. Such distributions will be taxable to
shareholders as long-term capital gains, regardless of how long a shareholder
has held Fund shares. Such a distribution will be designated as a capital gain
distribution in a written notice mailed by the Fund to shareholders not later
than 60 days after the close of the Fund's taxable year. If a shareholder
receives a designated capital gain distribution on a Fund share and such Fund
share is held for six months or less, then (unless otherwise disallowed) any
loss on the sale or exchange of that Fund share will be treated as a long-term
capital loss to the extent of the designated capital gain distribution. In
addition, any loss realized by a shareholder upon the sale or redemption of
Fund shares held less than six months will be disallowed to the extent of any
tax-exempt interest dividends received by the shareholder thereon. These rules
shall not apply to losses incurred under a periodic redemption plan.
As of the printing of this SAI, the maximum individual marginal
tax rate applicable to ordinary income is 39.6%; (marginal rates may be higher
for some individuals due to phase out of exemptions and elimination of
deductions), the maximum individual marginal tax rate applicable to net
realized capital gains is 28%; and the maximum corporate marginal tax rate
applicable to ordinary income and net realized capital gains is 35%. However,
to eliminate the benefit of lower marginal corporate income tax rates,
corporations which have taxable income greater than $100,000 for a taxable year
will be required to pay an additional amount of income tax of up to $11,750 and
corporations which have taxable income greater than $15,000,000 for a taxable
year will be required to pay an additional amount of income tax of up to
$100,000.
If a shareholder disposes of Fund shares with reinvestment rights
within 90 days of acquiring such shares, and subsequently reacquires Fund
shares or shares of another regulated investment company with a reduced or
eliminated sales charge pursuant to the reinvestment rights, the sales charge
incurred, if any, to acquire the disposed shares (to the extent such previous
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sales charges do not exceed the reduction or elimination of sales charges
incurred on the subsequent acquisition) shall not be taken into account for the
purpose of determining the amount of gain or loss on the initial disposition.
To the extent any sales charge is consequently not taken into account, it will
be treated as having been incurred in the subsequent acquisition. Also, any
loss realized on a redemption or exchange of shares of the Fund will be
disallowed to the extent shares are reacquired within the 60-day period
beginning 30 days before and ending 30 days after the shares are disposed of.
If, in the opinion of the Fund, ownership of its shares has or may
become concentrated to an extent that could cause the Fund to be deemed a
"personal holding company", the Fund may require the redemption of shares or
reject any order for the purchase of shares in an effort to prevent such
concentration.
Foreign Shareholders. Under the Code, distributions of net
investment income by the Fund to a nonresident alien individual, nonresident
alien fiduciary of a trust or estate, foreign corporation, or foreign
partnership (a "foreign shareholder") will be subject to U.S. withholding tax
(at a rate of 30% or a lower treaty rate). Withholding will not apply if a
dividend paid by the Fund to a foreign shareholder is "effectively connected"
with a U.S. trade or business, in which case the reporting and withholding
requirements applicable to U.S. citizens, U.S. residents or domestic
corporations will apply. Distributions of net long-term capital gains are not
subject to tax withholding, but in the case of a foreign shareholder who is a
nonresident alien individual, such distributions ordinarily will be subject to
U.S. withholding income tax at a rate of 30% if the individual is physically
present in the U.S. for more than 182 days during the taxable year.
Other Matters. Investors should be aware that the investments to
be made by the Fund may involve sophisticated tax rules such as the original
issue discount, and real estate mortgage investment conduit rules that would
result in income or gain recognition by the Fund without corresponding current
cash receipts. Although the Fund will seek to avoid significant noncash
income, such noncash income could be recognized by the Fund, in which case the
Fund may distribute cash derived from other sources in order to meet the
minimum distribution requirements described above.
CAPITAL STOCK
The Company, an open-end, management investment company, was
incorporated in Maryland on October 15, 1992. The authorized capital stock of
the Company consists of 10,000,000,000 shares having a par value of $.001 per
share. As of the date of this SAI, the Company's Board of Directors has
authorized the issuance of twelve series of shares, representing interests in
the following portfolios -- Short-Intermediate Term Fund, S&P 500 Stock Fund,
Growth Stock Fund, U.S. Treasury Allocation Fund, Bond Index Fund, Asset
Allocation Fund, Money Market Fund, LifePath 2000 Fund, LifePath 2010 Fund,
LifePath 2020 Fund, LifePath 2030 Fund, LifePath 2040 Fund -- and the Board of
Directors may, in the future, authorize the issuance of other series of capital
stock representing shares of additional investment portfolios.
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All shares of the Company have equal voting rights and will be
voted in the aggregate, and not by series, except where voting by a series is
required by law or where the matter involved only affects one series. For
example, a change in the Fund's fundamental investment policy would be voted
upon only by shareholders of the Fund. Additionally, approval of an advisory
contract is a matter to be determined separately by fund. Approval by the
shareholders of a fund is effective as to that fund whether or not sufficient
votes are received from the shareholders of the other investment portfolios to
approve the proposal as to those investment portfolios. As used in the Money
Market Fund's Prospectus and in this SAI, the term "majority," when referring
to approvals to be obtained from shareholders of the Fund, means the vote of
the lesser of (i) 67% of the shares of the Fund represented at a meeting if the
holders of more than 50% of the outstanding shares of the Fund are present in
person or by proxy, or (ii) more than 50% of the outstanding shares of the
Fund. The term "majority," when referring to the approvals to be obtained from
shareholders of the Company as a whole, means the vote of the lesser of (i) 67%
of the Company's shares represented at a meeting if the holders of more than
50% of the Company's outstanding shares are present in person or by proxy, or
(ii) more than 50% of the Company's outstanding shares. Shareholders are
entitled to one vote for each full share held and fractional votes for
fractional shares held.
The Company may dispense with an annual meeting of shareholders in
any year in which it is not required to elect Directors under the 1940 Act.
However, the Company has undertaken to hold a special meeting of its
shareholders for the purpose of voting on the question of removal of a Director
or Directors if requested in writing by the holders of at least 10% of the
Company's outstanding voting securities, and to assist in communicating with
other shareholders as required by Section 16(c) of the 1940 Act.
Each share of the Fund represents an equal proportional interest
in the Fund with each other share and is entitled to such dividends and
distributions out of the income earned on the assets belonging to the Fund as
are declared in the discretion of the Directors. In the event of the
liquidation or dissolution of the Company, shareholders of the Fund are
entitled to receive the assets attributable to the Fund that are available for
distribution, and a distribution of any general assets not attributable to a
particular investment portfolio that are available for distribution in such
manner and on such basis as the Directors in their sole discretion may
determine.
Shareholders are not entitled to any preemptive rights. All
shares, when issued, will be fully paid and non-assessable by the Company.
As of June 7, 1996, the shareholders identified below were known
by the Company to own 5% or more of the Fund's outstanding shares in the
following capacity:
<TABLE>
<S> <C>
Hubbell, Inc. Employee Savings & Investment Plan 9.7%
584 Derby Milford Road
Orange, CT 06477
Record
</TABLE>
19
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<TABLE>
<S> <C>
NASSCO Retirement Plans 6.5%
Harbor Drive & 28th Street
P.O. Box 85276
San Diego, CA 92166
Record
Jacobs Engineering Group 5.8%
401(K) Plus Saving Plan
281 South Lake Avenue
Pasadena, CT 91101
Record
Gerber Scientific, Inc. 5.4%
Max. Adv. Program
83 Gerber Road West
South Windsor, CT 06074
Record
Volt Information Sciences Inc., Savings Plan 5.0%
1221 Avenue of the Americas
47th Floor
New York, NY 10020
Record
</TABLE>
OTHER
The Registration Statement, including the Prospectus for the Money
Market Fund, the SAI and the exhibits filed therewith, may be examined at the
office of the SEC in Washington, D.C. Statements contained in the Prospectus
or the SAI as to the contents of any contract or other document referred to
herein or in the Prospectus are not necessarily complete, and, in each
instance, reference is made to the copy of such contract or other document
filed as an exhibit to the Registration Statement, each such statement being
qualified in all respects by such reference.
COUNSEL
Morrison & Foerster LLP, 2000 Pennsylvania Avenue, NW, Suite 5500,
Washington, D.C. 20006-1812, as counsel for the Company, has rendered its
opinion as to certain legal matters regarding the due authorization and valid
issuance of the shares being sold pursuant to the Fund's Prospectus.
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INDEPENDENT AUDITORS
KPMG Peat Marwick LLP, Three Embarcadero Center, San Francisco,
California 94111, has been selected as the independent auditors for the
Company. KPMG Peat Marwick LLP provides audit services, tax return preparation
and assistance and consultation in connection with review of certain SEC
filings.
FINANCIAL INFORMATION
The audited financial statements and independent auditors' report
for the fiscal year ended February 29, 1996 for the Money Market Fund are
hereby incorporated by reference to the MasterWorks Funds Inc. Annual Report,
as filed with the SEC on May 28, 1996. The portfolio of investments, audited
financial statements and independent auditors' report for the Fund is attached
to all SAIs delivered to shareholders or prospective shareholders.
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<PAGE> 235
SAI APPENDIX
The following is a description of the ratings given by Moody's and
S&P to corporate bonds and commercial paper.
Corporate Bonds
Moody's: The four highest ratings for corporate bonds are "Aaa,"
"Aa," "A" and "Baa." Bonds rated "Aaa" are judged to be of the "best quality"
and carry the smallest amount of investment risk. Bonds rated "Aa" are of
"high quality by all standards," but margins of protection or other elements
make long-term risks appear somewhat greater than "Aaa" rated bonds. Bonds
rated "A" possess many favorable investment attributes and are considered to be
upper medium grade obligations. Bonds rated "Baa" are considered to be medium
grade obligations; interest payments and principal security appear adequate for
the present but certain protective elements may be lacking or may be
characteristically unreliable over any great length of time. Such bonds have
speculative characteristics as well. Moody's applies numerical modifiers "1,"
"2" and "3" in each rating category from "Aa" through "Baa" in its rating
system. The modifier "1" indicates that the security ranks in the higher end
of its category; the modifier "2" indicates a mid-range ranking; and the
modifier "3" indicates that the issue ranks in the lower end.
S&P: The four highest ratings for corporate bonds are "AAA,"
"AA," "A" and "BBB." Bonds rated "AAA" have the highest ratings assigned by
S&P and have an extremely strong capacity to pay interest and repay principal.
Bonds rated "AA" have a "very strong capacity to pay interest and repay
principal" and differ "from the highest rated issued only in small degree."
Bonds rated "A" have a "strong capacity" to pay interest and repay principal,
but are "somewhat more susceptible" to adverse effects of changes in economic
conditions or other circumstances than bonds in higher rated categories. Bonds
rated "BBB" are regarded as having an "adequate capacity" to pay interest and
repay principal, but changes in economic conditions or other circumstances are
more likely to lead to a "weakened capacity" to make such repayments. The
ratings from "AA" to "BBB" may be modified by the addition of a plus or minus
sign to show relative standing within the category.
Corporate Commercial Paper
Moody's: The highest rating for corporate commercial paper is
"Prime-1." Issuers rated "Prime-1" have a "superior capacity for repayment of
short-term promissory obligations." Issuers rated "Prime-2" "have a strong
capacity for repayment of short-term promissory obligations," but earnings
trends, while sound, will be subject to more variation.
S&P: The "A-1" rating for corporate commercial paper indicates
that the "degree of safety regarding timely payment is either overwhelming or
very strong." Commercial paper with "overwhelming safety characteristics" will
be rated "A-1+." Commercial paper with a strong capacity for timely payments
on issues will be rated "A-2."
A-1
<PAGE> 236
MASTERWORKS FUNDS INC.
Telephone: 1-800-776-0179
STATEMENT OF ADDITIONAL INFORMATION
Dated June 28, 1996
ASSET ALLOCATION FUND
BOND INDEX FUND
GROWTH STOCK FUND
SHORT-INTERMEDIATE TERM FUND
S&P 500 STOCK FUND
U.S. TREASURY ALLOCATION FUND
MasterWorks Funds Inc. (formerly, Stagecoach Inc. and hereinafter,
the "Company") is an open-end, series investment company. This Statement of
Additional Information ("SAI") contains information about six funds of the
Company -- ASSET ALLOCATION FUND, BOND INDEX FUND, GROWTH STOCK FUND,
SHORT-INTERMEDIATE TERM FUND, S&P 500 STOCK FUND AND U.S. TREASURY ALLOCATION
FUND (each, a "Fund" and collectively, the "Funds"). Each of the
Short-Intermediate Term Fund and Growth Stock Fund seeks to achieve its
investment objective by investing all of its assets in the Short- Intermediate
Term Master Portfolio and Growth Stock Master Portfolio, (collectively, the
"MSIT Master Portfolios") respectively, of Managed Series Investment Trust
("MSIT"). Each of the Asset Allocation Fund, Bond Index Fund, S&P 500 Stock
Fund and U.S. Treasury Allocation Fund seeks to achieve its investment
objective by investing substantially all of its assets in the Asset Allocation
Master Portfolio, Bond Index Master Portfolio, S&P 500 Index Master Portfolio
and U.S. Treasury Allocation Master Portfolio (collectively, the "MIP Master
Portfolios", with the MSIT Master Portfolios, the "Master Portfolios"),
respectively, of Master Investment Portfolio ("MIP" and collectively with MSIT,
the "Trusts"). Each Master Portfolio has substantially the same investment
objective as its related Fund. Each Fund may withdraw its investment in the
corresponding Master Portfolio at any time, if the Board of Directors of the
Company determines that such action is in the best interests of the Fund and
its shareholders. Upon such withdrawal, the Company's Board of Directors would
consider alternative investments, including investing all of the Fund's assets
in another investment company with the same investment objective as the Fund or
hiring an investment adviser to manage the Fund's assets in accordance with the
investment policies and restrictions described in the Fund's Prospectus and
this SAI.
This SAI is not a prospectus and should be read in conjunction
with each Fund's Prospectus, also dated June 28, 1996. All terms used in this
SAI that are defined in the Prospectuses will have the meanings assigned in the
Prospectuses. A copy of the Prospectus for each Fund may be obtained without
charge by writing Stephens Inc., the Company's sponsor, administrator and
distributor, at 111 Center Street, Little Rock, Arkansas 72201 or by calling
the Transfer Agent at the telephone number indicated above.
1
<PAGE> 237
TABLE OF CONTENTS
<TABLE>
<S> <C>
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Investment Restrictions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Additional Permitted Investment Activities . . . . . . . . . . . . . . . . . . . 10
Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Performance Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Determination of Net Asset Value . . . . . . . . . . . . . . . . . . . . . . . . 30
Portfolio Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Federal Income Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
Capital Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
Counsel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
Independent Auditors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
Financial Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
SAI Appendix . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-1
Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-1
</TABLE>
2
<PAGE> 238
INTRODUCTION
MSIT is a registered investment company consisting of eight series
including the Growth Stock and Short- Intermediate Term Master Portfolios. MIP
is a registered investment company consisting of fourteen series including the
S&P 500 Index, Asset Allocation, Bond Index and U.S. Treasury Allocation Master
Portfolios. Each Fund invests all of its assets in the corresponding Master
Portfolio of the Trusts (as illustrated below), which has the same or
substantially the same investment objective as the related Fund.
<TABLE>
<CAPTION>
Fund Corresponding Series Trust
- ---- -------------------- -----
<S> <C> <C>
Asset Allocation Fund Asset Allocation Master Portfolio MIP
Bond Index Fund Bond Index Master Portfolio MIP
Growth Stock Fund Growth Stock Master Portfolio MSIT
S&P 500 Stock Fund S&P 500 Index Master Portfolio MIP
Short-Intermediate Term Fund Short-Intermediate Term Master Portfolio MSIT
U.S. Treasury Allocation Fund U.S. Treasury Allocation Master Portfolio MIP
</TABLE>
INVESTMENT RESTRICTIONS
The Funds are subject to the following investment restrictions,
all of which are fundamental policies.
The Funds may not:
(1) purchase the securities of issuers conducting their
principal business activity in the same industry if, immediately after the
purchase and as a result thereof, the value of any Fund's investments in that
industry would be 25% or more of the current value of such Fund's total assets,
provided that there is no limitation with respect to investments in (i)
obligations of the U.S. Government, its agencies or instrumentalities; (ii) in
the case of the S&P 500 Stock Fund, and the stock portion of the Asset
Allocation Fund, any industry in which the S&P 500 Index becomes concentrated
to the same degree during the same period (provided that, with respect to the
stock and money market portions of the Asset Allocation Fund, the Fund will be
concentrated as specified above only to the extent the percentage of its assets
invested in those categories of investments is sufficiently large that 25% or
more of its total assets would be invested in a single industry); (iii) in the
case of the Bond Index Fund, any industry in which the Lehman Brothers
Government/Corporate Bond Index (the "LB Bond Index") becomes concentrated to
the same degree during the same period; and (iv) in the case of the money
market portion of the Asset Allocation Fund, its money market instruments may
be concentrated in the banking industry (but will not do so unless the SEC
staff confirms that it does not object to the Fund reserving freedom of action
to concentrate investments in the banking industry); and
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provided further, that a Fund may invest all its assets in a diversified
open-end management investment company, or series thereof, with substantially
the same investment objective, policies and restrictions as such Fund, without
regard for the limitations set forth in this paragraph (1);
(2) purchase or sell real estate or real estate limited
partnerships (other than securities secured by real estate or interests therein
or securities issued by companies that invest in real estate or interests
therein);
(3) purchase commodities or commodity contracts (including
futures contracts), except that a Fund may purchase securities of an issuer
which invests or deals in commodities or commodity contracts, and except that
the U.S. Treasury Allocation Fund, S&P 500 Stock Fund, Asset Allocation Fund
and Bond Index Fund may enter into futures and options contracts in accordance
with their respective investment policies;
(4) purchase interests, leases, or limited partnership
interests in oil, gas, or other mineral exploration or development programs;
(5) purchase securities on margin (except for short-term
credits necessary for the clearance of transactions and except for margin
payments in connection with options, futures and options on futures) or make
short sales of securities;
(6) underwrite securities of other issuers, except to the
extent that the purchase of permitted investments directly from the issuer
thereof or from an underwriter for an issuer and the later disposition of such
securities in accordance with a Fund's investment program may be deemed to be
an underwriting and provided further, that the purchase by a Fund of securities
issued by a diversified, open-end management investment company, or a series
thereof, with substantially the same investment objective, policies and
restrictions as such Fund shall not constitute an underwriter for purposes of
this paragraph (6);
(7) make investments for the purpose of exercising control or
management; provided that a Fund may invest all its assets in a diversified,
open-end management investment company, or a series thereof, with substantially
the same investment objective, policies and restrictions as such Fund, without
regard to the limitations set forth in this paragraph (7);
(8) borrow money or issue senior securities as defined in the
1940 Act, except that each of the Short-Intermediate Term Fund, Growth Stock
Fund and Bond Index Fund may borrow from banks up to 10% of the current value
of its net assets for temporary purposes only in order to meet redemptions, and
these borrowings may be secured by the pledge of up to 10% of the current value
of its net assets (but investments may not be purchased while any such
outstanding borrowing in excess of 5% of its net assets exists), and except
that each of the Asset Allocation Fund, U.S. Treasury Allocation Fund and S&P
500 Stock Fund may borrow up to 20% of the current value of its net assets for
temporary purposes only in order to meet redemptions, and these borrowings may
be secured by the pledge of up to 20% of the current value of its net assets
(but investments may not be purchased while any such outstanding borrowing in
excess of 5% of its net assets exists);
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(9) write, purchase or sell puts, calls, straddles, spreads,
warrants, options or any combination thereof, except that the U.S. Treasury
Allocation Fund, S&P 500 Stock Fund, Asset Allocation Fund and Bond Index Fund
may enter into futures and options contracts in accordance with their
respective investment policies, and except that the Asset Allocation Fund and
Growth Stock Fund may purchase securities with put rights in order to maintain
liquidity, and except that the Short-Intermediate Term Fund, S&P 500 Stock Fund
and Growth Stock Fund may invest up to 5% of their net assets in warrants in
accordance with their investment policies stated below;
(10) purchase securities of any issuer (except securities issued
or guaranteed by the U.S. Government, its agencies and instrumentalities) if,
as a result, with respect to 75% of its total assets, more than 5% of the value
of a Fund's, total assets would be invested in the securities of any one issuer
or, with respect to 100% of its total assets a Fund's ownership would be more
than 10% of the outstanding voting securities of such issuer; provided that a
Fund may invest all its assets in a diversified, open-end management investment
company, or a series thereof, with substantially the same investment objective,
policies and restrictions as such Fund, without regard to the limitations set
forth in this paragraph (10); or
(11) make loans, except that each Fund may purchase or hold debt
instruments or lend their portfolio securities in accordance with their
investment policies, and may enter into repurchase agreements.
The Funds are subject to the following investment restrictions,
all of which are non-fundamental policies.
(1) None of the Funds may, unless required by their investment
strategy of replicating the composition of a published market index:
(a) purchase or retain securities of any issuer if the
officers or Directors of the Company or the investment adviser owning
beneficially more than one-half of one percent (0.5%) of the securities of the
issuer together owned beneficially more than 5% of such securities;
(b) purchase securities of issuers who, with their
predecessors, have been in existence less than three years, unless the
securities are fully guaranteed or insured by the U.S. Government, a state,
commonwealth, possession, territory, the District of Columbia or by an entity
in existence at least three years, or the securities are backed by the assets
and revenues of any of the foregoing if, by reason thereof, the value of its
aggregate investments in such securities will exceed 5% of its total assets,
provided that this restriction does not affect the Fund's ability to invest all
or a portion of their assets in the corresponding Master Portfolio of the
Trusts.
(2) The Funds reserve the right to invest up to 15% of the
current value of their net assets in fixed time deposits that are subject to
withdrawal penalties and that have maturities of more than seven days,
repurchase agreements maturing in more than seven days or other illiquid
securities. However, as long as a Fund's shares are registered for sale in a
state that imposes a lower limit on the percentage of a fund's assets that may
be so invested, the Funds will comply
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with such lower limit. The Funds presently are limited to investing 10% of
their net asset in such securities due to limits applicable in several states.
However, these limits should not prevent a Fund from investing all of its
assets in the corresponding Master Portfolio of the Trusts.
(3) The Funds may invest in shares of other open-end,
management investment companies, subject to the limitations of Section 12(d)(1)
of the 1940 Act, provided that any such purchases will be limited to temporary
investments in shares of unaffiliated investment companies and the Investment
Adviser will waive its advisory fees for that portion of the Master Portfolio's
assets so invested, except when such purchase is part of a plan of merger,
consolidation, reorganization or acquisition.
The MSIT Master Portfolios are subject to the following investment
restrictions, all of which are fundamental policies.
The MSIT Master Portfolios may not:
(1) purchase the securities of issuers conducting their
principal business activity in the same industry if, immediately after the
purchase and as a result thereof, the value of any MSIT Master Portfolio's
investments in that industry would be 25% or more of the current value of such
MSIT Master Portfolio total assets, provided that there is no limitation with
respect to investments in (i) obligations of the U.S. Government, its agencies
or instrumentalities;
(2) purchase or sell real estate or real estate limited
partnerships (other than securities secured by real estate or interests therein
or securities issued by companies that invest in real estate or interests
therein);
(3) purchase commodities or commodity contracts (including
futures contracts), except that a MSIT Master Portfolio may purchase securities
of an issuer which invests or deals in commodities or commodity contracts;
(4) purchase interests, leases, or limited partnership
interests in oil, gas, or other mineral exploration or development programs;
(5) purchase securities on margin (except for short-term
credits necessary for the clearance of transactions and except for margin
payments in connection with options, futures and options on futures) or make
short sales of securities;
(6) underwrite securities of other issuers, except to the
extent that the purchase of permitted investments directly from the issuer
thereof or from an underwriter for an issuer and the later disposition of such
securities in accordance with a MSIT Master Portfolio's investment program may
be deemed to be an underwriting;
(7) make investments for the purpose of exercising control or
management;
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(8) borrow money or issue senior securities as defined in the
1940 Act, except that each of MSIT Master Portfolios may borrow from banks up
to 10% of the current value of its net assets for temporary purposes only in
order to meet redemptions, and these borrowings may be secured by the pledge of
up to 10% of the current value of its net assets (but investments may not be
purchased while any such outstanding borrowing in excess of 5% of its net
assets exists);
(9) write, purchase or sell puts, calls, straddles, spreads,
warrants, options or any combination thereof, except that the Growth Stock
Master Portfolio may purchase securities with put rights in order to maintain
liquidity, and except that the MSIT Master Portfolios may invest up to 5% of
their net assets in warrants in accordance with their investment policies
stated below;
(10) purchase securities of any issuer (except securities issued
or guaranteed by the U.S. Government, its agencies and instrumentalities) if,
as a result, with respect to 75% of its total assets, more than 5% of the value
of a MSIT Master Portfolio's total assets would be invested in the securities
of any one issuer or, with respect to 100% of its total assets such MSIT Master
Portfolio's ownership would be more than 10% of the outstanding voting
securities of such issuer; or
(11) make loans, except that the MSIT Master Portfolios may
purchase or hold debt instruments or lend their portfolio securities in
accordance with their investment policies, and may enter into repurchase
agreements.
The MSIT Master Portfolios are subject to the following
non-fundamental policies.
(1) Neither of the MSIT Master Portfolios may:
(a) purchase or retain securities of any issuer if the
officers or Trustees of the Trust or the investment adviser owning beneficially
more than one-half of one percent (0.5%) of the securities of the issuer
together owned beneficially more than 5% of such securities;
(b) purchase securities of issuers who, with their
predecessors, have been in existence less than three years, unless the
securities are fully guaranteed or insured by the U.S. Government, a state,
commonwealth, possession, territory, the District of Columbia or by an entity
in existence at least three years, or the securities are backed by the assets
and revenues of any of the foregoing if, by reason thereof, the value of its
aggregate investments in such securities will exceed 5% of its total assets;
(2) The MSIT Master Portfolios reserve the right to invest up
to 15% of the current value of their net assets in fixed time deposits that are
subject to withdrawal penalties and that have maturities of more than seven
days, repurchase agreements maturing in more than seven days or other illiquid
securities. However, as long as a Fund's shares are registered for sale in a
state that imposes a lower limit on the percentage of a fund's assets that may
be so invested, each of the MSIT Master Portfolios will comply with such lower
limit. The MSIT Master Portfolios presently are limited to investing 10% of
their net asset in such securities due to limits applicable in several states.
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(3) The MSIT Master Portfolios may invest in shares of other
open-end, management investment companies, subject to the limitations of
Section 12(d)(1) of the 1940 Act, provided that any such purchases will be
limited to temporary investments in shares of unaffiliated investment companies
and the Investment Adviser will waive its advisory fees for that portion of the
MSIT Master Portfolio's assets so invested, except when such purchase is part
of a plan of merger, consolidation, reorganization or acquisition.
The MIP Master Portfolios are subject to the following investment
restrictions, all of which are fundamental policies.
None of the MIP Master Portfolios may:
(1) invest more than 5% of its assets in the obligations of any
single issuer, except that up to 25% of the value of its total assets may be
invested, and securities issued or guaranteed by the U.S. Government, or its
agencies or instrumentalities may be purchased, without regard to any such
limitation.
(2) hold more than 10% of the outstanding voting securities of
any single issuer. This Investment Restriction applies only with respect to
75% of its total assets.
(3) invest in commodities, except that each MIP Master
Portfolio may purchase and sell (i.e., write) options, forward contracts,
futures contracts, including those relating to indexes, and options on futures
contracts or indexes.
(4) purchase, hold or deal in real estate, or oil, gas or other
mineral leases or exploration or development programs, but each MIP Master
Portfolio may purchase and sell securities that are secured by real estate or
issued by companies that invest or deal in real estate.
(5) borrow money, except that the Bond Index Master Portfolio
may borrow from banks up to 10% of the current value of its net assets for
temporary purposes only in order to meet redemptions, and these borrowings may
be secured by the pledge of up to 10% of the current value of its net assets
(but investments may not be purchased while any such outstanding borrowing in
excess of 5% of its net assets exists), and except that each of the Asset
Allocation Master Portfolio, U.S. Treasury Allocation Master Portfolio and S&P
500 Index Master Portfolio may borrow up to 20% of the current value of its net
assets for temporary purposes only in order to meet redemptions, and these
borrowings may be secured by the pledge of up to 20% of the current value of
its net assets (but investments may not be purchased while any such outstanding
borrowing in excess of 5% of its net assets exists). For purposes of this
investment restriction, a MIP Master Portfolio's entry into options, forward
contracts, futures contracts, including those relating to indexes, and options
on futures contracts or indexes shall not constitute borrowing to the extent
certain segregated accounts are established and maintained by such MIP Master
Portfolio.
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(6) make loans to others, except through the purchase of debt
obligations and the entry into repurchase agreements. However, each MIP Master
Portfolio may lend its portfolio securities in an amount not to exceed
one-third of the value of its total assets. Any loans of portfolio securities
will be made according to guidelines established by the SEC and the Trusts
Board of Trustees.
(7) act as an underwriter of securities of other issuers,
except to the extent that the MIP Master Portfolios may be deemed an
underwriter under the Securities Act of 1933, as amended, by virtue of
disposing of portfolio securities.
(8) invest 25% or more of its total assets in the securities of
issuers in any particular industry or group of closely related industries
except that, in the case of each MIP Master Portfolio, there shall be no
limitation with respect to investments in (i) obligations of the U.S.
Government, its agencies or instrumentalities; (ii) in the case of the S&P 500
Index Master Portfolio, and the stock portion of the Asset Allocation Master
Portfolio, any industry in which the S&P 500 Index becomes concentrated to the
same degree during the same period (provided that, with respect to the stock
and money market portions of the Asset Allocation Master Portfolio, the Master
Portfolio will be concentrated as specified above only to the extent the
percentage of its assets invested in those categories of investments is
sufficiently large that 25% or more of its total assets would be invested in a
single industry); (iii) in the case of the Bond Index Master Portfolio, any
industry in which the Lehman Brothers Government/Corporate Bond Index (the "LB
Bond Index") becomes concentrated to the same degree during the same period;
and (iv) in the case of the money market portion of the Asset Allocation Master
Portfolio, its money market instruments may be concentrated in the banking
industry (but will not do so unless the SEC staff confirms that it does not
object to the Master Portfolio reserving freedom of action to concentrate
investments in the banking industry).
(9) issue any senior security (as such term is defined in
Section 18(f) of the 1940 Act), except to the extent the activities permitted
in the MIP Master Portfolios' fundamental policies (3) and (5) and
non-fundamental policies (2) and (3), may be deemed to give rise to a senior
security.
(10) purchase securities on margin, but each MIP Master
Portfolio may make margin deposits in connection with transactions in options,
forward contracts, futures contracts, including those related to indexes, and
options on futures contracts or indexes.
The MIP Master Portfolios are subject to the following
non-fundamental policies.
The MIP Master Portfolios may not:
(1) invest in the securities of a company for the purpose of
exercising management or control, but each MIP Master Portfolio will vote the
securities it owns in its portfolio as a shareholder in accordance with its
views.
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(2) pledge, mortgage or hypothecate its assets, except to the
extent necessary to secure permitted borrowings and to the extent related to
the purchase of securities on a when-issued or forward commitment basis and the
deposit of assets in escrow in connection with writing covered put and call
options and collateral and initial or variation margin arrangements with
respect to options, forward contracts, futures contracts, including those
relating to indexes, and options on futures contracts or indexes.
(3) purchase, sell or write puts, calls or combinations
thereof, except as may be described in the MIP Master Portfolios' offering
documents.
(4) purchase securities of any company having less than three
years' continuous operations (including operations of any predecessors) unless
the securities are fully guaranteed or insured by the U.S. Government, a state,
commonwealth, possession, territory, the District of Columbia or by an entity
in existence at least three years, or the securities are backed by the assets
and revenues of any of the foregoing if such purchase would cause the value of
its investments in all such companies to exceed 5% of the value of its total
assets.
(5) enter into repurchase agreements providing for settlement
in more than seven days after notice or purchase securities which are illiquid,
if, in the aggregate, more than 15% of the value of a MIP Master Portfolio's
net assets would be so invested.
(6) purchase securities of other investment companies, except
to the extent permitted under the 1940 Act.
(7) purchase or retain securities of any issuer if the officers
or Directors of the Company, the Trusts or the investment adviser owning
beneficially more than one-half of one percent (0.5%) of the securities of the
issuer together owned beneficially more than 5% of such securities.
If a percentage restriction is adhered to at the time of
investment, a later change in percentage resulting from a change in values or
assets will not constitute a violation of such restriction.
ADDITIONAL PERMITTED INVESTMENT ACTIVITIES
THE ASSET ALLOCATION MASTER PORTFOLIO AND THE U.S. TREASURY ALLOCATION MASTER
PORTFOLIO ONLY:
Asset Allocation Model. A key component of the Asset Allocation
Model is a set of assumptions concerning expected risk and return and investor
attitudes toward risk which are incorporated into the asset allocation
decision. The principal inputs of financial data to the Asset Allocation Model
for the Asset Allocation Master Portfolio currently are (i) consensus estimates
of the earnings, dividends and payout ratios on a broad cross-section of common
stocks as reported by independent financial reporting services which survey a
broad cross-section of Wall
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Street analysts; (ii) the estimated current yield to maturity on new long-term
corporate bonds rated "AA" by S&P; (iii) the present yield on money market
instruments; (iv) the historical statistical standard deviation in investment
return for each class of asset; and (v) the historical statistical correlation
of investment returns among the various asset classes in which the Asset
Allocation Master Portfolio invests.
U.S. Treasury Allocation Model. The principal inputs of the U.S.
Treasury Allocation Model for the U.S. Treasury Allocation Master Portfolio
currently are (i) the current yields on 91-day U.S. Treasury bills, 5-year U.S.
Treasury notes, and 30-year U.S. Treasury bonds; (ii) the expected statistical
standard deviation in investment return for each maturity class of fixed income
security; and (iii) the expected statistical correlation of investment return
among the three maturity classes of U.S. Treasury securities. Using this data,
the Asset Allocation Model is run daily by the sub-adviser to determine the
recommended asset allocation. The model's recommendations are presently made
in 10% increments.
ALL MASTER PORTFOLIOS:
Unrated, Downgraded and Below Investment Grade Investments. The
Master Portfolios may purchase instruments that are not rated if, in the
opinion of the adviser, BZW Barclays Global Fund Advisors ("BGFA"), such
obligations are of investment quality comparable to other rated investments
that are permitted to be purchased by such Master Portfolio. After purchase by
a Master Portfolio, a security may cease to be rated or its rating may be
reduced below the minimum required for purchase by such Master Portfolio.
Neither event will require a sale of such security by a Master Portfolio
provided that the amount of such securities held by a Master Portfolio does not
exceed 5% of the Master Portfolio's net assets. To the extent the ratings
given by Moody's or S&P may change as a result of changes in such organizations
or their rating systems, each Master Portfolio will attempt to use comparable
ratings as standards for investments in accordance with the investment policies
contained in its Prospectus and in this SAI. The ratings of Moody's and S&P
are more fully described in the SAI Appendix.
Because the Master Portfolios are not required to sell downgraded
securities, and because the Growth Stock Master Portfolio is permitted to
purchase securities that are rated below investment grade, or if unrated are of
comparable quality, each Master Portfolio could hold up to 5% of its net assets
in debt securities rated below "Baa" by Moody's or below "BBB" by S&P or if
unrated, low quality (below investment grade) securities.
Although they may offer higher yields than do higher rated
securities, low rated and unrated low quality debt securities generally involve
greater volatility of price and risk of principal and income, including the
possibility of default by, or bankruptcy of, the issuers of the securities. In
addition, the markets in which low rated and unrated low quality debt are
traded are more limited than those in which higher rated securities are traded.
The existence of limited markets for particular securities may diminish a
Master Portfolio's ability to sell the securities at fair value either to meet
redemption requests or to respond to changes in the economy or in the financial
markets and could adversely affect and cause fluctuations in the daily net
asset value of a Master Portfolio's shares.
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Adverse publicity and investor perceptions, whether or not based
on fundamental analysis, may decrease the values and liquidity of low rated or
unrated low quality debt securities, especially in a thinly traded market.
Analysis of the creditworthiness of issuers of low rated or unrated low quality
debt securities may be more complex than for issuers of higher rated
securities, and the ability of a Master Portfolio to achieve its investment
objective may, to the extent it holds low rated or unrated low quality debt
securities, be more dependent upon such creditworthiness analysis than would be
the case if the Master Portfolio held exclusively higher rated or higher
quality securities.
Low rated or unrated low quality debt securities may be more
susceptible to real or perceived adverse economic and competitive industry
conditions than investment grade securities. The prices of such debt
securities have been found to be less sensitive to interest rate changes than
higher rated or higher quality investments, but more sensitive to adverse
economic downturns or individual corporate developments. A projection of an
economic downturn or of a period of rising interest rates, for example, could
cause a decline in low rated or unrated low quality debt securities prices
because the advent of a recession could dramatically lessen the ability of a
highly leveraged company to make principal and interest payments on its debt
securities. If the issuer of the debt securities defaults, the Master
Portfolios may incur additional expenses to seek recovery.
Letters of Credit. Certain of the debt obligations (including
municipal securities, certificates of participation, commercial paper and other
short-term obligations) which the Master Portfolios may purchase may be backed
by an unconditional and irrevocable letter of credit of a bank, savings and
loan association or insurance company which assumes the obligation for payment
of principal and interest in the event of default by the issuer. Only banks,
savings and loan associations and insurance companies which, in the opinion of
BGFA, as investment adviser, are of comparable quality to issuers of other
permitted investments of such Master Portfolio may be used for letter of
credit-backed investments.
Pass-Through Obligations. Certain of the debt obligations in
which the Short-Intermediate Term Master Portfolio may invest may be
pass-through obligations that represent an ownership interest in a pool of
mortgages and the resultant cash flow from those mortgages. Payments by
homeowners on the loans in the pool flow through to certificate holders in
amounts sufficient to repay principal and to pay interest at the pass-through
rate. The stated maturities of pass-through obligations may be shortened by
unscheduled prepayments of principal on the underlying mortgages. Therefore,
it is not possible to predict accurately the average maturity of a particular
pass-through obligation. Variations in the maturities of pass-through
obligations will affect the yield of any Master Portfolio investing in such
obligations. Furthermore, as with any debt obligation, fluctuations in
interest rates will inversely affect the market value of pass-through
obligations. The Short-Intermediate Term Master Portfolio may invest in
pass-through obligations that are supported by the full faith and credit of the
U.S. Government (such as those issued by the Government National Mortgage
Association) or those that are guaranteed by an agency or instrumentality of
the U.S. Government or government-sponsored enterprise (such as the Federal
National Mortgage Association or the Federal Home Loan Mortgage Corporation) or
bonds collateralized by any of the foregoing.
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When-Issued Securities. Certain of the securities in which the
U.S. Treasury Allocation, Short- Intermediate Term, Bond Index, Growth Stock
and Asset Allocation Master Portfolios may invest will be purchased on a
when-issued basis, in which case delivery and payment normally take place
within 45 days after the date of the commitment to purchase. These Master
Portfolios only will make commitments to purchase securities on a when-issued
basis with the intention of actually acquiring the securities, but may sell
them before the settlement date if it is deemed advisable. When-issued
securities are subject to market fluctuation, and no income accrues to the
purchaser during the period prior to issuance. The purchase price and the
interest rate that will be received on debt securities are fixed at the time
the purchaser enters into the commitment. Purchasing a security on a
when-issued basis can involve a risk that the market price at the time of
delivery may be lower than the agreed-upon purchase price, in which case there
could be an unrealized loss at the time of delivery. None of the Master
Portfolios currently intend to invest more than 5% of its assets in when-issued
securities during the coming year. Each Master Portfolio will establish a
segregated account in which it will maintain cash or liquid, high-grade debt
securities in an amount at least equal in value to the Master Portfolio's
commitments to purchase when-issued securities. If the value of these assets
declines, the Master Portfolio will place additional liquid assets in the
account on a daily basis so that the value of the assets in the account is
equal to the amount of such commitments.
Loans of Portfolio Securities. The Master Portfolios may lend
securities from their portfolios to brokers, dealers and financial institutions
(but not individuals) if cash, U.S. Government securities or other high-quality
debt obligations equal to at least 100% of the current market value of the
securities loan (including accrued interest thereon) plus the interest payable
to such Master Portfolio with respect to the loan is maintained with the Master
Portfolio. In determining whether to lend a security to a particular broker,
dealer or financial institution, the Master Portfolio's Investment Adviser will
consider all relevant facts and circumstances, including the size,
creditworthiness and reputation of the broker, dealer, or financial
institution. Any loans of portfolio securities will be fully collateralized
based on values that are marked to market daily. The Master Portfolios will
not enter into any portfolio security lending arrangement having a duration of
longer than one year. Any securities that a Master Portfolio may receive as
collateral will not become part of the Master Portfolio's investment portfolio
at the time of the loan and, in the event of a default by the borrower, the
Master Portfolio will, if permitted by law, dispose of such collateral except
for such part thereof that is a security in which the Master Portfolio is
permitted to invest. During the time securities are on loan, the borrower will
pay the Master Portfolio any accrued income on those securities, and the Master
Portfolio may invest the cash collateral and earn income or receive an
agreed-upon fee from a borrower that has delivered cash-equivalent collateral.
None of the Master Portfolio will lend securities having a value that exceeds
one-third of the current value of its total assets. Loans of securities by any
of the Master Portfolios will be subject to termination at the Master
Portfolio's or the borrower's option. The Master Portfolio may pay reasonable
administrative and custodial fees in connection with a securities loan and may
pay a negotiated portion of the interest or fee earned with respect to the
collateral to the borrower or the placing broker. Borrowers and placing
brokers may not be affiliated, directly or indirectly, with the Company, BGFA,
Wells Fargo Bank, N.A. ("Wells Fargo") (the sub-adviser to certain of the
Master Portfolios) or the Distributor.
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<PAGE> 249
Foreign Obligations. Investments in foreign obligations involve
certain considerations that are not typically associated with investing in
domestic obligations. There may be less publicly available information about a
foreign issuer than about a domestic issuer. Foreign issuers also are not
generally subject to uniform accounting, auditing and financial reporting
standards or governmental supervision comparable to those applicable to
domestic issuers. In addition, with respect to certain foreign countries,
taxes may be withheld at the source under foreign income tax laws, and there is
a possibility of expropriation or confiscatory taxation, political or social
instability or diplomatic developments that could adversely affect investments
in, the liquidity of, and the ability to enforce contractual obligations with
respect to, securities of issuers located in those countries. None of the
Master Portfolios may invest 25% or more of its assets in foreign obligations.
Obligations of foreign banks and foreign branches of U.S. banks
involve somewhat different investment risks from those affecting obligations of
U.S. banks, including the possibilities that liquidity could be impaired
because of future political and economic developments, that the obligations may
be less marketable than comparable obligations of U.S. banks, that a foreign
jurisdiction might impose withholding taxes on interest income payable on those
obligations, that foreign deposits may be seized or nationalized, that foreign
governmental restrictions (such as foreign exchange controls) may be adopted
which might adversely affect the payment of principal and interest on those
obligations and that the selection of those obligations may be more difficult
because there may be less publicly available information concerning foreign
banks or the accounting, auditing and financial reporting standards, practices
and requirements applicable to foreign banks may differ from those applicable
to U.S. banks. In that connection, foreign banks are not subject to
examination by any U.S. Government agency or instrumentality.
Privately Issued Securities (Rule 144A). The Growth Stock Master
Portfolio may invest in privately issued securities which may be resold only in
accordance with Rule 144A under the Securities Act of 1933 ("Rule 144A
Securities"). Rule 144A Securities are restricted securities that are not
publicly traded. Accordingly, the liquidity of the market for specific Rule
144A Securities may vary. Wells Fargo, pursuant to guidelines established by
the Trust's Board of Trustees, will evaluate the liquidity characteristics of
each Rule 144A Security proposed for purchase by the Growth Stock Master
Portfolio on a case-by-case basis and will consider the following factors,
among others, in its evaluation: (1) the frequency of trades and quotes for
the Rule 144A Security; (2) the number of dealers willing to purchase or sell
the Rule 144A Security and the number of other potential purchasers; (3) dealer
undertakings to make a market in the Rule 144A Security; and (4) the nature of
the Rule 144A Security and the nature of the marketplace trades (e.g., the time
needed to dispose of the Rule 144A Security, the method of soliciting offers
and the mechanics of transfer). The Growth Stock Master Portfolio does not
intend to invest more than 5% of its net assets in Rule 144A Securities during
the coming year.
Futures Contracts. The S&P 500 Index, Bond Index, Asset
Allocation and U.S. Treasury Allocation Master Portfolios may use futures
contracts as a hedge against the effects of interest rate changes or changes in
the market value of the stocks comprising the index in which such Master
Portfolio invests. In managing their cash flows, these Master Portfolios also
may use
14
<PAGE> 250
futures contracts as a substitute for holding the designated securities
underlying the futures contract. A futures contract is an agreement between
two parties, a buyer and a seller, to exchange a particular commodity at a
specific price on a specific date in the future. At the time it enters into a
futures transaction, a Master Portfolio is required to make a performance
deposit (initial margin) of cash or liquid securities in a segregated account
in the name of the futures broker. Subsequent payments of "variation margin"
are then made on a daily basis, depending on the value of the futures position
which is continually "marked to market."
A Master Portfolio may engage only in futures contract
transactions involving (i) the sale of a futures contract (i.e., short
positions) to hedge the value of securities held by such Master Portfolio; (ii)
the purchase of a futures contract when such Master Portfolio hold a short
position having the same delivery month (i.e., a long position offsetting a
short position); or (iii) the purchase of a futures contract to permit the
Master Portfolio to, in effect, participate in the market for the designated
securities underlying the futures contract without actually owning such
designated securities. When a Master Portfolio purchases a futures contract,
it will create a segregated account consisting of cash or other liquid assets
in an amount equal to the total market value of such futures contract, less the
amount of initial margin for the contract.
If a Master Portfolio enters into a short position in a futures
contract as a hedge against anticipated adverse market movements and the market
then rises, the increase in the value of the hedged securities will be offset,
in whole or in part, by a loss on the futures contract. If instead a Master
Portfolio purchases a futures contract as a substitute for investing in the
designated underlying securities, a Master Portfolio experiences gains or
losses that correspond generally to gains or losses in the underlying
securities. The latter type of futures contract transactions permit a Master
Portfolio to experience the results of being fully invested in a particular
asset class, while maintaining the liquidity needed to manage cash flows into
or out of the Master Portfolio (e.g., from purchases and redemptions of Master
Portfolio shares). Under normal market conditions, futures contract positions
may be closed out on a daily basis. The Master Portfolio identified above
expect to apply a portion of their cash or cash equivalents maintained for
liquidity needs to such activities.
Transactions by a Master Portfolio in futures contracts involve
certain risks. One risk in employing futures contracts as a hedge against cash
market price volatility is the possibility that futures prices will correlate
imperfectly with the behavior of the prices of the securities in the Master
Portfolio's investment portfolio (the portfolio securities of the Bond Index
and U.S. Treasury Allocation Master Portfolios and the bond portion of the
Asset Allocation Master Portfolio will not be identical to the securities
underlying the futures contracts). Similarly, in employing futures contracts
as a substitute for purchasing the designated underlying securities, there is a
risk that the performance of the futures contract may correlate imperfectly
with the performance of the direct investments for which the futures contract
is a substitute. In addition, commodity exchanges generally limit the amount
of fluctuation permitted in futures contract prices during a single trading
day, and the existence of such limits may prevent the prompt liquidation of
futures positions in certain cases. Limits on price fluctuations are designed
to stabilize prices for the benefit of market participants; however, there
could be cases where the
15
<PAGE> 251
Master Portfolio could incur a larger loss due to the delay in trading than it
would have if no limit rules had been in effect.
In order to comply with undertakings made by the Master Portfolio
pursuant to Commodity Futures Trading Commission ("CFTC") Regulation 4.5, the
Master Portfolios will use futures and option contracts solely for bona fide
hedging purposes within the meaning and intent of CFTC Reg. 1.3(z); provided,
however, that in addition, with respect to positions in commodity futures or
commodity option contracts which do not come within the meaning and intent of
CFTC Reg. 1.3(z), the aggregate initial margin and premiums required to
establish such positions will not exceed five percent of the liquidation value
of the Master Portfolio' portfolio, after taking into account unrealized
profits and unrealized losses on any such contract it has entered into; and
provided further, that in the case of an option that is in-the-money at the
time of purchase, the in-the-money amount as defined in CFTC Reg. 190.01(x) may
be excluded in computing such five percent.
Investment in Warrants. The Short-Intermediate Term, S&P 500
Index and Growth Stock Master Portfolios may invest no more than 5% of each of
their net assets at the time of purchase in warrants (other than those that
have been acquired in units or attached to other securities), including not
more than 2% of each of their net assets in warrants which are not listed on
the New York or American Stock Exchange. Warrants represent rights to purchase
securities at a specific price valid for a specific period of time. The prices
of warrants do not necessarily correlate with the prices of the underlying
securities. The Short-Intermediate Term, S&P 500 Index and Growth Stock Master
Portfolios each may only purchase warrants on securities in which the
respective Master Portfolios may invest directly.
THE S&P 500 STOCK FUND AND S&P 500 INDEX MASTER PORTFOLIO:
Neither the Fund nor the Master Portfolio is sponsored, endorsed,
sold or promoted by Standard & Poor's ("S&P"). S&P makes no representation or
warranty, express or implied, to the Fund, the Master Portfolio or any member
of the public regarding the advisability of investing in securities generally
or in the Fund particularly or the ability of the S&P 500 Index to track
general stock market performance. S&P's only relationship to the Fund is the
licensing of certain trademarks and trade names of S&P and of the S&P 500 Index
which is determined, composed and calculated by S&P without regard to the Fund.
S&P has no obligation to take the needs of the Fund into consideration in
determining, composing or calculating the S&P 500 Index. S&P is not
responsible for and has not participated in the determination of the prices and
amount of the Fund's shares or the timing of the issuance or sale of the Fund's
shares or in the determination or calculation of the equation by which the
Fund's shares are to be converted into cash. S&P has no obligation or
liability in connection with the administration, marketing or trading of the
Fund's shares.
S&P does not guarantee the accuracy and/or the completeness of the
S&P 500 Index or any data included therein and S&P shall have no liability for
any errors, omissions, or interruptions therein. S&P makes no warranty,
express or implied, as to results to be obtained by the Fund, or any other
person or entity from the use of the S&P 500 Index or any data included
16
<PAGE> 252
therein. S&P makes no express or implied warranties, and expressly disclaims
all warranties of merchantability or fitness for a particular purpose or use
with respect to the S&P 500 index or any data included therein. Without
limiting any of the foregoing, in no event shall S&P have any liability for any
special, punitive, indirect, or consequential damages (including lost profits),
even if notified of the possibility of such damages.
MANAGEMENT
Directors and Officers. The following information supplements and
should be read in conjunction with the Prospectus section entitled "Management
of the Funds". The principal occupations during the past five years of the
Directors and Executive Officers of the Company are listed below. Each of the
Officers and Directors of the Company serve in the identical capacity as
Officers and Trustees of the Trusts. The address of each, unless otherwise
indicated, is 111 Center Street, Little Rock, Arkansas 72201. Directors
deemed to be "interested persons" of the Company for purposes of the 1940 Act
are indicated by an asterisk.
<TABLE>
<CAPTION>
Principal Occupations
Name, Address and Age Position During Past 5 Years
- --------------------- -------- ---------------------
<S> <C> <C>
Jack S. Euphrat, 74 Director Private Investor.
415 Walsh Road
Atherton, CA 94027.
*R. Greg Feltus, 45 Director, Senior Vice President
Chairman and of Stephens; Manager
President of Financial Services Group; President of
Stephens Insurance Services Inc.; Senior
Vice President of Stephens Sports
Management Inc.; and President of
Investors Brokerage Insurance Inc.
Thomas S. Goho, 54 Director T.B. Rose Faculty Fellow-Business,
321 Beechcliff Court Wake Forest University Calloway
Winston-Salem, NC 27104 School of Business and Accounting;
Associate Professor of Finance of the
School of Business and Accounting at
Wake Forest University since 1983.
*Zoe Ann Hines, 47 Director Senior Vice President of Stephens and
Director of Brokerage Accounting; and
Secretary of Stephens Resource
Management.
</TABLE>
17
<PAGE> 253
<TABLE>
<S> <C> <C>
*W. Rodney Hughes, 70 Director Private Investor.
31 Dellwood Court
San Rafael, CA 94901
Robert M. Joses, 78 Director Private Investor.
47 Dowitcher Way
San Rafael, CA 94901
*J. Tucker Morse, 52 Director Private Investor; Real Estate
10 Legrae Street Developer; Chairman
Charleston, SC 29401 of Renaissance Properties Ltd.;
President of Morse Investment
Corporation; and Co-Managing Partner
of Main Street Ventures.
Richard H. Blank, Jr., 40 Chief Associate of Financial Services
Operating Group of Stephens; Director of Stephens
Officer, Sports Management Inc.; and Director of
Secretary and Capo Inc.
Treasurer
</TABLE>
COMPENSATION TABLE
For the Fiscal Year Ended February 29, 1996
<TABLE>
<CAPTION>
Total Compensation
Aggregate Compensation from Registrant
Name and Position from Registrant and Fund Complex
- ----------------- ------------------------------ -------------------
<S> <C> <C>
Jack S. Euphrat $10,000 $39,000
Director
*R. Greg Feltus 0 0
Director
Thomas S. Goho $10,000 $39,000
Director
*Zoe Ann Hines 0 0
Director
*W. Rodney Hughes $ 9,250 $36,250
Director
</TABLE>
18
<PAGE> 254
<TABLE>
<S> <C> <C>
Robert M. Joses $ 9,750 $38,250
Director
*J. Tucker Morse $ 8,250 $33,000
Director
</TABLE>
Directors of the Company are compensated annually by the Company
and by all the registrants in the fund complex for their services as indicated
above and also are reimbursed for all out-of-pocket expenses relating to
attendance at board meetings. Each of the Directors and the Principal Officer
of the Company serves in the identical capacity as Directors/Trustees and/or
Principal Officer of Stagecoach Funds, Inc. ("Stagecoach"), Overland Express
Funds, Inc. ("Overland"), Stagecoach Trust, Master Investment Trust, Life &
Annuity Trust, Master Investment Portfolio ("MIP") and Managed Series
Investment Trust ("MSIT"), each of which is a registered open-end management
investment company and each of which, prior to January 1, 1996 and the
reorganization of WFNIA, was considered to be in the same "fund complex", as
such term is defined in Form N-1A under the 1940 Act, as the Company.
Effective January 1, 1996, the Company, MIP and MSIT are considered to be in
the same fund complex and are no longer part of the same fund complex as
Stagecoach, Overland, Stagecoach Trust, Master Investment Trust and Life &
Annuity Trust. The Directors are compensated by other Companies and Trusts
within the fund complex for their services as Directors/Trustees to such
Companies and Trusts. Currently the Directors do not receive any retirement
benefits or deferred compensation from the Company or any other member of the
fund complex.
As of the date of this SAI, Directors and officers of the Company
as a group beneficially owned less than 1% of the outstanding shares of the
Company.
Investment Adviser. Effective January 1, 1996, BGFA replaced
Wells Fargo as investment adviser to each of the Asset Allocation, Bond Index,
S & P 500 Index and U.S. Treasury Allocation Master Portfolios of MIP and to
each of the Growth Stock and Short-Intermediate Term Master Portfolios of MSIT.
BGFA was created by the reorganization of Wells Fargo Nikko Investment Advisors
("WFNIA"), the former sub-adviser to each Master Portfolio of MIP and former
affiliate of Wells Fargo, with and into a subsidiary of Wells Fargo
Institutional Trust Company, N.A. ("WFITC"), a former affiliate of Wells Fargo
and WFNIA. Pursuant to an Investment Advisory Contract with each Master
Portfolios, BGFA provides investment guidance and policy direction in
connection with the management of each Master Portfolios' assets. Pursuant to
the Advisory Contracts, BGFA furnishes to the Trusts' Boards of Trustees
periodic reports on the investment strategy and performance of each Master
Portfolio. The same WFNIA investment professionals that were previously
responsible for the day-to-day management of the investment portfolio of each
Master Portfolio of MIP will continue to manage each such Master Portfolios'
investment portfolio in accordance with the approach developed by WFNIA.
BGFA is entitled to receive monthly fees at the annual rate of
0.35%, 0.08%, 0.05%, 0.30%, 0.60% and 0.45% of the average daily net assets of
the Asset Allocation, Bond Index, S&P 500 Index, U.S. Treasury Allocation,
Growth Stock and Short-Intermediate Term Master Portfolios, respectively, as
compensation for its advisory services to such Master Portfolio.
19
<PAGE> 255
Effective January 1, 1996, each Master Portfolio of MIP no longer retained a
sub-investment adviser.
BGFA has agreed to provide to the Master Portfolios, among other
things, money market security and fixed- income research, analysis and
statistical and economic data and information concerning interest rate and
security market trends, portfolio composition, credit conditions and average
maturities of each Master Portfolio's investment portfolio.
Each Advisory Contract will continue in effect for more than two
years provided the continuance is approved annually (i) by the holders of a
majority of the respective Master Portfolio's outstanding voting securities or
by the Trusts' Boards of Trustees and (ii) by a majority of the Trustees of the
Trusts who are not parties to the Advisory Contract or "interested persons" (as
defined in the 1940 Act) of any such party. Each Advisory Contract may be
terminated on 60 days' written notice by either party and will terminate
automatically if assigned.
Also effective January 1, 1996, each Master Portfolio of MSIT,
pursuant to separate sub-investment advisory contracts with Wells Fargo,
retained Wells Fargo as its sub-investment adviser. Wells Fargo will be
responsible for the day-to-day portfolio management of each Master Portfolio of
MSIT. The same Wells Fargo investment professionals that previously managed
the investment portfolio of each Master Portfolio of MSIT will continue,
subject to the overall supervision of BGFA, to manage each such Master
Portfolio's investment portfolio. Wells Fargo is entitled to receive from BGFA
an amount equal to 0.15% and 0.10% of the average daily net assets of the
Growth Stock and Short-Intermediate Term Master Portfolios, respectively, as
compensation for its sub-advisory services. Subject to the direction of the
Trusts' Boards of Trustees and the overall supervision and control of BGFA and
the Trusts, Wells Fargo shall be responsible for investing and reinvesting
these Master Portfolio's assets. In this regard, Wells Fargo shall be
responsible for implementing and monitoring the performance of the investment
model employed with respect to each Master Portfolio, in accordance with the
investment objective, policies and restrictions set forth in the Prospectus,
and shall furnish to BGFA periodic reports on the investment activity and
performance of the Master Portfolios, and such additional reports and
information as BGFA and the Trusts' Boards of Trustees and officers shall
reasonably request.
The Advisory Contracts provide that the advisory fee is accrued
daily and paid monthly. Out of the fees that BGFA receives from the Growth
Stock and Short-Intermediate Term Master Portfolios, it pays Wells Fargo, for
its sub-advisory services a percentage of each of these Master Portfolio's
average daily net assets as agreed by BGFA and Wells Fargo. BGFA is compensated
for its custodial services to the Master Portfolio and the Funds out of the
advisory fee from each Master Portfolio.
For the period beginning July 2, 1993 (commencement of operations)
and ended February 28, 1994 and for the period beginning March 1, 1994 and
ended May 25, 1994, the Funds paid to Wells Fargo the advisory fees indicated
below and Wells Fargo waived the indicated amounts:
20
<PAGE> 256
<TABLE>
<CAPTION>
Period Ended Period Ended
2/28/94 5/25/94
Fees Fees Fees Fees
Fund Paid Waived Paid Waived
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Asset Allocation Fund $814,238 $8,531 $329,064 $ -0-
Bond Index Fund $ 14,477 $1,020 $ -0- $ 6,449
Growth Stock Fund $130,899 $ 128 $ 70,792 $ -0-
Short-Intermediate Term Fund $ 17,513 $ 97 $ -0- $ 7,590
S&P 500 Stock Fund $ 84,082 $7,219 $ 33,202 $ -0-
U.S. Treasury Allocation Fund $248,613 $4,432 $ 82,068 $ -0-
</TABLE>
For the period beginning May 26, 1994 (commencement of
master/feeder structure), and ended February 28, 1995, and the period beginning
March 1, 1995 and ended December 31, 1995, the corresponding Master Portfolio
of each Fund paid to Wells Fargo the advisory fees indicated below and Wells
Fargo waived the indicated amounts:
<TABLE>
<CAPTION>
Period Ended Period Ended
2/28/95 12/31/95
Fees Fees Fees Fees
Master Portfolio Paid Waived Paid Waived
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Asset Allocation Master Portfolio $666,053 $ -0- $997,003 $0
Bond Index Master Portfolio $ 34,581 $ 8,713 $ 91,365 $0
Growth Stock Master Portfolio $283,463 $16,451 $662,204 $0
Short-Intermediate Term
Master Portfolio $ 10,673 $16,510 $279,843 $0
S&P 500 Index Master Portfolio $138,830 $17,864 $ 47,460 $0
U.S. Treasury Allocation
Master Portfolio $128,994 $ -0- $152,657 $0
</TABLE>
For the period beginning March 1, 1995 and ended December 31,
1995, Wells Fargo Bank actually received an amount equal to 0.35%, 0.07%,
0.05%, 0.30%, 0.58% and 0.33% of the average daily net assets of the Asset
Allocation, Bond Index, S&P 500 Index, U.S. Treasury Allocation, Growth Stock
and Short-Intermediate Term Master Portfolios, respectively, as compensation
for its advisory services to such Master Portfolios.
For the period beginning January 1, 1996 and ended February 29,
1996, BGFA actually received an amount equal to 0.35%, 0.08%, 0.05%, 0.30%,
0.56% and 0.45% of the average daily net assets of the Asset Allocation, Bond
Index, S&P 500 Index, U.S. Treasury Allocation, Growth Stock and
Short-Intermediate Term Master Portfolios, respectively, as compensation for
its advisory services to such Master Portfolios.
For the period beginning January 1, 1996 and ended February 29,
1996 the corresponding Master Portfolio of each Fund paid to BGFA the advisory
fees indicated below and BGFA waived the indicated amounts:
21
<PAGE> 257
<TABLE>
<CAPTION>
Period Ended
2/29/96
Fees Fees
Master Portfolio Paid Waived
- -------------------------------------------------------------------------
<S> <C> <C>
Asset Allocation Master Portfolio $225,669 $0
Bond Index Master Portfolio $ 20,123 $0
Growth Stock Master Portfolio $164,817 $0
Short-Intermediate Term
Master Portfolio $ 73,598 $0
S&P 500 Index Master Portfolio $ 9,923 $0
U.S. Treasury Allocation
Master Portfolio $ 25,863 $0
</TABLE>
For the period beginning July 2, 1993 (commencement of operations)
and ended February 28, 1994 and for the period beginning March 1, 1994 and
ended May 25, 1994, Wells Fargo paid to WFNIA the following fees for
sub-advisory services provided to each Fund and WFNIA waived the indicated
amounts:
<TABLE>
<CAPTION>
Period Ended Period Ended
2/28/94 5/25/94
Fees Fees Fees Fees
Fund Paid Waived Paid Waived
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Asset Allocation Fund $205,478 $ -0- $86,119 $ -0-
Bond Index Fund $ 3,659 $ -0- $ 1,264 $ -0-
S&P 500 Stock Fund $ 28,227 $ -0- $13,586 $ -0-
U.S. Treasury Allocation Fund $ 39,495 $ -0- $13,257 $ -0-
</TABLE>
For the period beginning May 26, 1994 (commencement of
master/feeder structure) and ended February 28, 1995, and the period beginning
March 1, 1995 and ended December 31, 1995, Wells Fargo paid to WFNIA the
following sub-advisory fees for services provided to the corresponding Master
Portfolio of each Fund and WFNIA waived the indicated amounts:
<TABLE>
<CAPTION>
Period Ended Period Ended
2/28/95 12/31/95
Fees Fees Fees Fees
Master Portfolio Paid Waived Paid Waived
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Asset Allocation Master Portfolio $375,907 $ -0- $567,009 $ -0-
Bond Index Master Portfolio $ 39,197 $ -0- $ 72,919 $ -0-
S&P 500 Index Master Portfolio $117,651 $ -0- $224,069 $ -0-
U.S. Treasury Allocation Master Portfolio $ 64,439 $ -0- $ 75,895 $ -0-
</TABLE>
For the period beginning January 1, 1996 and ended February 29,
1996, BGFA paid to Wells Fargo the following sub-advisory fees for services
provided to the corresponding Master Portfolio of each Fund and Wells Fargo
waived the indicated amounts:
22
<PAGE> 258
<TABLE>
<CAPTION>
Period Ended
2/29/96
Fees Fees
Master Portfolio Paid Waived
- -----------------------------------------------------------------------------
<S> <C> <C>
Growth Stock Master Portfolio $41,297 $ -0-
Short-Intermediate Term Master Portfolio $12,801 $ -0-
</TABLE>
Administrator and Distributor. The Company has retained Stephens
as administrator on behalf of the Funds. In addition, the Trusts have retained
Stephens as administrator on behalf of the Master Portfolios. Under the
respective Administration Agreements between Stephens, the Company and the
Trusts, Stephens shall provide as administrative services, among other things:
(i) general supervision of the operation of the Funds and the Master
Portfolios, including coordination of the services performed by the investment
adviser and/or sub-adviser, transfer and dividend disbursing agent, custodian,
shareholder servicing agent(s), independent auditors and legal counsel; (ii)
general supervision of regulatory compliance matters, including the compilation
of information for documents such as reports to, and filings with, the SEC and
state securities commissions; and preparation of proxy statements and
shareholder reports for the Fund and the Master Portfolios; and (iii) general
supervision relative to the compilation of data required for the preparation of
periodic reports distributed to the Company's and Trusts' officers and Boards.
Stephens also furnishes office space and certain facilities required for
conducting the business of the Funds and the Master Portfolios together with
those ordinary clerical and bookkeeping services that are not being furnished
by BGFA. Stephens also pays the compensation of the Trusts' and the Company's
Directors/Trustees, officers and employees who are affiliated with Stephens.
Furthermore, except as provided in each of the Company's and Trusts' Advisory
Contracts, Custodian Contracts and Transfer Agency Contracts, the Administrator
shall bear substantially all costs of the Company's/Trusts' and the
Funds'/Master Portfolio's operations. However, the Administrator shall not be
required to bear any cost or expense which a majority of the disinterested
Directors/Trustees of the Company/Trusts deem to be an extraordinary expense.
Stephens also acts as the exclusive distributor of each Fund's
shares pursuant to an Amended and Restated Distribution Agreement (the
"Distribution Agreement") with the Company with respect to the Funds. Shares
are sold on a continuous basis by Stephens as agent, although Stephens is not
obligated to sell any particular amount of shares. No compensation is payable
by the Company to Stephens for its distribution services. The term and
termination provisions of the Distribution Agreement are substantially similar
to those of the Agreement with the Adviser discussed above.
For its services as administrator of the Bond Index, Growth Stock,
Short-Intermediate Term and S&P 500 Stock Funds and their corresponding Master
Portfolios, Stephens is entitled to receive a fee at the annual percentage rate
of 0.05% of each Fund's average daily net assets. For its services as
administrator of the Asset Allocation and U.S. Treasury Allocation Funds and
their corresponding Master Portfolios, Stephens is entitled to receive a fee at
the annual percentage rate of 0.10% of each Fund's average daily net assets.
With regard to the Asset Allocation Fund and Master Portfolio and the U.S.
Treasury Allocation Fund and Master
23
<PAGE> 259
Portfolio, Stephens will bear all costs of those Funds' and Master Portfolio's
operations and those costs of the Company allocated to those two Funds and
those assets of MIP allocated to those two Master Portfolios. However,
Stephens will not bear extraordinary expenses and brokerage and other expenses
connected with the execution of portfolio transactions by the Asset Allocation
and U.S. Treasury Allocation Master Portfolios, those fees payable under the
various service contracts described in the two Prospectuses and in this SAI and
those expenses borne by BGFA under its respective agreements with the Asset
Allocation and U.S. Treasury Allocation Funds and their corresponding Master
Portfolios. Further, extraordinary expenses of the Company or the Trusts are
allocated among all the Funds of the Company or Master Portfolios of the Trusts
in a manner proportionate to the net assets of each Fund or Master Portfolio on
a transactional basis, or on such basis as the Company's Board of Directors or
the Trusts' Board of Trustees deem fair and equitable.
For the period beginning July 2, 1993 (commencement of operations)
and ended February 28, 1994, and for the fiscal years ended February 28, 1995
and February 29, 1996, the Funds paid administrative fees to Stephens as
follows:
<TABLE>
<CAPTION>
Fund 1994 1995 1996
---- ---- ---- ----
<S> <C> <C> <C>
Asset Allocation Fund $63,288 $215,978 $349,680
Bond Index Fund $ 4,558 $ -0- $ 18,131
Growth Stock Fund $10,079 $ 30,409 $ 68,886
Short-Intermediate Term Fund $ 1,761 $ -0- $ 6,381
S&P 500 Stock Fund $35,111 $158,245 $331,823
U.S. Treasury Allocation Fund $19,465 $ 49,418 $ 59,609
</TABLE>
The Advisory Contracts and Administration Agreements for the Bond
Index, Growth Stock, Short-Intermediate Term and S&P 500 Stock Funds and their
corresponding Master Portfolios, respectively, provide that if, in any fiscal
year, the total expenses of a Fund (including the Master Portfolio in which it
invests) incurred by, or allocated to, the Fund and Master Portfolio (excluding
taxes, interest, brokerage commissions and other portfolio transaction
expenses, expenditures that are capitalized in accordance with generally
accepted accounting principles, extraordinary expenses and the fees provided
for in the Advisory Contract and the Administration Agreement) exceed the most
restrictive expense limitation applicable to the Fund imposed by the securities
laws or regulations of the states in which the Fund's shares are registered for
sale, BGFA and Stephens shall waive their fees proportionately under the
Advisory Contract and the Administration Agreement, respectively, for the
fiscal year to the extent of the excess or reimburse the excess, but only to
the extent of their respective fees. The Advisory Contract and the
Administration Agreement for each Fund and Master Portfolio, respectively,
further provide that the Fund's and Master Portfolio's total expenses shall be
reviewed monthly so that, to the extent the annualized expenses for such month
exceed the most restrictive applicable annual expense limitation, the monthly
fees under the contract and the agreement shall be reduced as necessary. The
most stringent applicable restriction limits these expenses for any fiscal year
to
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<PAGE> 260
2.5% of the first $30 million of the Fund's average net assets, 2% of the next
$70 million of average net assets, and 1.5% of the average net assets in excess
of $100 million.
Custodian and Transfer and Dividend Disbursing Agent. BZW
Barclays Global Investors, N.A. ("BGI") acts as Custodian to each Fund and
Master Portfolio. The Custodian, among other things, maintains a custody
account or accounts in the name of each Fund; receives and delivers all assets
for each Fund upon purchase and upon sale or maturity; collects and receives
all income and other payments and distributions on account of the assets of
each Fund and pays all expenses of each Fund. BGI is not entitled to receive
compensation for its services as custodian so long as BGFA is entitled to
receive fees for providing investment advisory services to the Master
Portfolio. For the fiscal year ended February 29, 1996, the Funds did not pay
any custody fees.
Wells Fargo has been retained to act as the Transfer and Dividend
Disbursing Agent for the Funds and the Master Portfolios, and is entitled to
receive an asset-based fee from each Fund and Master Portfolio for its
services.
Servicing Plan. As indicated in the Funds' Prospectuses, each of
the Funds has adopted a Shareholder Servicing Plan (each a "Servicing Plan" and
collectively the "Servicing Plans"). The Servicing Plans were adopted by the
Board of Directors on November 18, 1993, including a majority of the Directors
who were not "interested persons" (as defined in the 1940 Act) of any of the
Funds and who had no direct or indirect financial interest in the operations of
the Servicing Plan or any agreement related to the Servicing Plan (the
"Servicing Plan Qualified Directors").
Under each Servicing Plan and pursuant to each Servicing
Agreement, a Fund may pay one or more servicing agents, as compensation for
performing certain services, monthly fees at the annual rate of up to (1) 0.07%
of the average daily net assets of the S&P 500 Stock and Bond Index Funds, (2)
0.10% of the average daily net assets of the Short-Intermediate Term and Growth
Stock Funds and (3) 0.20% of the average daily net assets of the Asset
Allocation and U.S. Treasury Allocation Funds. Payments to a servicing agent
by a Fund will be based upon the average daily net assets of the shares of the
Fund owned of record by the servicing agent on behalf of customers, or by its
customers directly, during the period for which payment is made.
The Servicing Plans will continue in effect from year to year if
such continuance is approved by a majority vote of both the Directors of the
Company and the Servicing Plan Qualified Directors. The Servicing Agreement
may be terminated automatically if assigned, or may be terminated at any time
not more than 60 days' nor less than 30 day's after notice, by a vote of a
majority of the Disinterested Directors or by a vote of the majority of the
outstanding voting securities of the Shares of a Fund of the Company or the
affected Fund(s). The Servicing Plans may not be amended to increase
materially the amount payable thereunder without the approval of a majority of
the Company's Board of Directors, including a majority of the Disinterested
Directors cast at a meeting called for that specific purpose.
25
<PAGE> 261
The Servicing Plans require that the servicing agent shall provide
to the Treasurer of the Company, at least quarterly, a written report of the
amounts expended by the servicing agent (and purposes therefor) under each
Servicing Plan, and shall provide to the Company's Board of Directors such
information as may reasonably be necessary to an informed determination of
whether the Agreement shall be implemented or continued.
For the fiscal year ended February 29, 1996 the Funds paid
shareholder servicing fees as follows and the indicated amounts were waived:
<TABLE>
<CAPTION>
Fund Fees Paid Fees Waived
---- --------- -----------
<S> <C> <C>
Asset Allocation Fund $699,360 $ -0-
Bond Index Fund $ 25,383 $ 25,383
Growth Stock Fund $137,772 $ 75,120
Short-Intermediate Term Fund $ 12,762 $ 12,762
S&P 500 Stock Fund $464,553 $302,725
U.S. Treasury Allocation Fund $119,210 $ -0-
</TABLE>
PERFORMANCE INFORMATION
As indicated in their Prospectuses, the Funds may advertise
certain total return information computed in the manner described in their
Prospectuses. As and to the extent required by the SEC, an average annual
compound rate of return ("T") will be computed by using the value at the end of
a specified period ("ERV") of a hypothetical initial investment ("P") over a
period of years ("n") according to the following formula: P(1+T)n = ERV. In
addition, as indicated in their Prospectuses, the Funds, at times, also may
calculate total return based on net asset value per share (rather than the
public offering price) in which case the figures would not reflect the effect
of any sales charge that would have been paid by an investor, or based on the
assumption that a sales charge other than the maximum sales charge (reflecting
a Volume Discount) was assessed provided that total return data derived
pursuant to the calculation described above also are presented.
The average annual total returns on the Funds from July 2, 1993
(commencement of operations) to February 29, 1996 and for the fiscal year ended
February 29, 1996 were as follows:
<TABLE>
<CAPTION>
Commencement Fiscal
Through Year Ended
Fund 2/29/96 2/29/96
- ---- ------------ ----------
<S> <C> <C>
Asset Allocation Fund 11.67% 23.54%
Bond Index Fund 5.39% 12.17%
Growth Stock Fund 22.46% 42.10%
Short-Intermediate Term Fund 4.57% 10.07%
S&P 500 Stock Fund 17.15% 34.35%
U.S. Treasury Allocation Fund 4.59% 9.89%
</TABLE>
26
<PAGE> 262
The cumulative total returns on the Funds from July 2, 1993
(commencement of operations) to February 29, 1996 and for the fiscal year ended
February 29, 1996 were as follows:
<TABLE>
<CAPTION>
Commencement Fiscal
Through Year Ended
Fund 2/29/96 2/29/96
- ---- ------------ ----------
<S> <C> <C>
Asset Allocation Fund 34.16% 23.54%
Bond Index Fund 14.99% 12.17%
Growth Stock Fund 71.47% 42.10%
Short-Intermediate Term Fund 12.63% 10.07%
S&P 500 Stock Fund 52.40% 34.35%
U.S. Treasury Allocation Fund 12.69% 9.89%
</TABLE>
As indicated in their Prospectus, the U.S. Treasury Allocation,
Asset Allocation, Short-Intermediate Term and Bond Index Funds may advertise
certain yield information. As and to the extent required by the SEC, yield
will be calculated based on a 30-day (or one month) period, computed by
dividing the net investment income per share earned during the period by the
maximum offering price per share on the last day of the period, according to
the following formula: YIELD = 2[(((a-b)/cd)+1)6-1], where a = dividends and
interest earned during the period; b = expenses accrued for the period (net of
reimbursements); c = the average daily number of shares outstanding during the
period that were entitled to receive dividends; and d = the maximum offering
price per share on the last day of the period. The net investment income of a
Fund includes actual interest income, plus or minus amortized purchase discount
(which may include original issue discount) or premium, less accrued expenses.
Realized and unrealized gains and losses on portfolio securities are not
included in a Fund's net investment income. For purposes of sales literature,
yield also may be calculated on the basis of the net asset value per share
rather than public offering price, provided that the yield data derived
pursuant to the calculation described above also are presented.
The yields of the Funds for the 30-day period ended February 29,
1996 were as follows:
<TABLE>
<CAPTION>
Current
Fund Yield
---- -------
<S> <C>
Bond Index Fund 5.80%
Short-Intermediate Term Fund 5.34%
U.S. Treasury Allocation Fund 4.84%
</TABLE>
Generally. The yield for the Funds fluctuates from time to time,
unlike bank deposits or other investments that pay a fixed yield for a stated
period of time, and does not provide a basis for determining future yields
since it is based on historical data. Yield is a function of portfolio
quality, composition, maturity and market conditions as well as the expenses
allocated to the Fund.
27
<PAGE> 263
Yield information for a Fund may be useful in reviewing the
performance of the Fund and for providing a basis for comparison with
investment alternatives. A Fund's yield, however, may not be comparable to the
yields from investment alternatives because of differences in the foregoing
variables and differences in the methods used to value portfolio securities,
compute expenses and calculate yield.
In addition, investors should recognize that changes in the net
asset values of shares of a Fund affect the yield of such Fund for any
specified period, and such changes should be considered together with the
Fund's yield in ascertaining the Fund's total return to shareholders for the
period. Yield information for the Funds may be useful in reviewing the
performance of such Funds and for providing a basis for comparison with
investment alternatives. The yield of a Fund, however, may not be comparable
to the yields from investment alternatives because of differences in the
foregoing variables and differences in the methods used to value portfolio
securities, compute expenses and calculate yield.
Performance Comparisons. From time to time and only to the extent
the comparison is appropriate for a Fund, the Company may quote the performance
of a Fund in advertising and other types of literature as compared to the
performance of an S&P Index, the Dow Jones Industrial Average or any other
commonly quoted index of common stock prices. An S&P Index and the Dow Jones
Industrial Average are unmanaged indices of selected common stock prices.
The performance information for the Short-Intermediate Term Fund
and the Bond Index Fund also may be compared, in reports and promotional
literature, to the Consumer Price Index, the Salomon One Year Treasury
Benchmark Index, Ten Year U.S. Government Bond Average, S&P's Corporate Bond
Yield Averages, Schabacker Investment Management Indices, Salomon Brothers High
Grade Bond Index, Lipper General Bond Fund Average, Lipper Intermediate
Investment Grade Debt Fund Average, Lehman Brothers Government/Corporate Bond
Index, Lehman Brothers Intermediate Government/Corporate Bond Index, and Lehman
Brothers Long-Term High Quality Government/Corporate Bond Index. The
performance information for the Short-Intermediate Term Fund and the Bond Index
Fund also may be compared to the S&P Index, the Dow Jones Industrial Average,
the Lehman Brothers 20+ Treasury Index, the Lehman Brothers 5-7 Year Treasury
Index, Bank Averages (which is calculated from figures supplied by the U.S.
League of Savings Institutions based on effective annual rates of interest on
both passbook and certificate accounts), or to other indices of bonds, stocks,
or government securities, or by other services, companies, publications, or
persons who monitor mutual funds on overall performance or other criteria, but
not to money market mutual funds.
Performance information for the U.S. Treasury Allocation Fund,
Asset Allocation Fund, Growth Stock Fund and the S&P 500 Stock Fund may be
compared, in reports and promotional literature, to the S&P 500 Index, the
Wilshire 5000 Equity Index, the Lehman Brothers 20+ Treasury Index, Donoghue's
Money Fund Averages, the Lehman Brothers 5-7 Year Treasury Index, Lehman
Brothers Government Bond Index, Lehman Brothers Treasury Bond Index, Lipper
Balanced Fund Average, Lipper Growth Fund Average, Lipper Flexible Portfolio
28
<PAGE> 264
Fund Average, Lehman Brothers Intermediate Treasury Index, 91-Day Treasury Bill
Average, or other appropriate managed or unmanaged indices of the performance
of various types of investments, so that investors may compare a Fund's results
with those of indices widely regarded by investors as representative of the
security markets in general. Unmanaged indices may assume the reinvestment of
dividends, but generally do not reflect deductions for administrative and
management costs and expenses. Managed indices generally do reflect such
deductions.
The Company also may use the following information in
advertisements and other types of literature, only to the extent the
information is appropriate for a Fund: (i) the Consumer Price Index may be
used to assess the real rate of return from an investment in a Fund; (ii) other
government statistics, including, but not limited to, The Survey of Current
Business, may be used to illustrate investment attributes of a Fund or the
general economic, business, investment, or financial environment in which a
Fund operates; (iii) the effect of tax-deferred compounding on the investment
returns of a Fund, or on returns in general, may be illustrated by graphs,
charts, etc., where such graphs or charts would compare, at various points in
time, the return from an investment in a Fund (or returns in general) on a
tax-deferred basis (assuming reinvestment of capital gains and dividends and
assuming one or more tax rates) with the return on a taxable basis; and (iv)
the sectors or industries in which a Fund invests may be compared to relevant
indices of stocks or surveys (e.g., S&P Industry Surveys) to evaluate a Fund's
historical performance or current or potential value with respect to the
particular industry or sector.
In addition, the Company also may use, in advertisements and other
types of literature, information and statements: (1) showing that bank savings
accounts offer a guaranteed return of principal and a fixed rate of interest,
but no opportunity for capital growth; and (2) describing BGFA, and its
affiliates and predecessors, as one of the first investment managers to advise
investment accounts using asset allocation and index strategies. The Company
also may include in advertising and other types of literature information and
other data from reports and studies prepared by the Tax Foundation, including
information regarding federal and state tax levels and the related "Tax Freedom
Day." The Company also may disclose in advertising and other types of sales
literature the assets and categories of assets under management by the Master
Portfolios' investment adviser, sub-investment adviser or their affiliates.
A Fund's performance also may be compared to those of other mutual
funds having similar objectives. This comparative performance could be
expressed as a ranking prepared by Lipper Analytical Services, Inc., (including
the Lipper General Bond Fund Average, the Lipper Intermediate Investment Grade
Debt Fund Average, the Lipper Bond Fund Average, the Lipper Growth Fund
Average, the Lipper Flexible Fund Average), Donoghue's Money Fund Report,
including Donoghue's Taxable Money Market Fund Average or Morningstar, Inc.,
independent services which monitor the performance of mutual funds. A Fund's
performance will be calculated by relating net asset value per share at the
beginning of a stated period to the net asset value of the investment, assuming
reinvestment of all gains distributions and dividends paid, at the end of the
period. Any such comparisons may be useful to investors who wish to compare a
Fund's past performance with that of its competitors. Of course, past
performance cannot be a guarantee of future results.
29
<PAGE> 265
Other Advertising Items. From time to time, the Company also may
include in advertisements or other marketing materials a discussion of certain
of the objectives of the investment strategy of the Asset Allocation Fund and
the U.S. Treasury Allocation Fund and a comparison of this strategy with other
investment strategies. In particular, the responsiveness of these Funds to
changing market conditions may be discussed. For example, the Company may
describe the benefits derived by having BGFA, as investment adviser, or Wells
Fargo as sub-investment adviser, monitor and reallocate investments among the
three asset categories described in a Fund's Prospectus. The Company's
advertising or other marketing materials also might set forth illustrations
depicting examples of recommended allocations in different market conditions.
The Company also may discuss in advertising and other types of
literature that a Fund has been assigned a rating by a nationally recognized
statistical rating organization ("NRSRO"), such as Standard & Poor's
Corporation. Such rating would assess the creditworthiness of the investments
held by the Fund. The assigned rating would not be a recommendation to
purchase, sell or hold the Fund's shares since the rating would not comment on
the market price of the Fund's shares or the suitability of the Fund for a
particular investor. In addition, the assigned rating would be subject to
change, suspension or withdrawal as a result of changes in, or unavailability
of, information relating to the Fund or its investments. The Company may
compare a Fund's performance with other investments which are assigned ratings
by NRSROs. Any such comparisons may be useful to investors who wish to compare
a Fund's past performance with other rated investments. Of course past
performance cannot be a guarantee of future results. The Company also may
include from time to time, a reference to certain marketing approaches of the
Distributor, including, for example, a reference to a potential shareholder
being contacted by a selected broker or dealer. General mutual fund statistics
provided by the Investment Company Institute may also be used.
DETERMINATION OF NET ASSET VALUE
Net asset value per share for a Fund is determined on each day the
Fund is open for trading. Each Fund's investment in the corresponding Master
Portfolio of the Trusts are valued at the net asset value of such Master
Portfolio' shares.
Because the Master Portfolios are closed on certain days when the
NYSE is open for business, shareholders would not be able to redeem their
shares on certain days when there may be significant changes in the value of a
Master Portfolio's portfolio securities.
Master Portfolio securities for which market quotations are
available are valued at latest prices. Securities of a Master Portfolio for
which the primary market is a national securities exchange or the National
Association of Securities Dealers Automated Quotations National Market System
are valued at last sale prices. In the absence of any sale of such securities
on the valuation date and in the case of other securities, including U.S.
Government securities but excluding money market instruments maturing in 60
days or less, the valuations are based on latest quoted bid prices. Money
market instruments maturing in 60 days or less are valued at amortized cost
with cost being the value of the security on the preceding day (61st day).
Futures
30
<PAGE> 266
contracts will be marked to market daily at their respective settlement prices
determined by the relevant exchange. Options listed on a national exchange are
valued at the last sale price on the exchange on which they are traded at the
close of the NYSE, or, in the absence of any sale on the valuation date, at
latest quoted bid prices. Options not listed on a national exchange are valued
at latest quoted bid prices. Debt securities maturing in 60 days or less are
valued at amortized cost. In all cases, bid prices will be furnished by an
independent pricing service approved by the Boards of Trustees. Prices
provided by an independent pricing service may be determined without exclusive
reliance on quoted prices and may take into account appropriate factors such as
institutional-size trading in similar groups of securities, yield, quality,
coupon rate, maturity, type of issue, trading characteristics and other market
data. Securities held under a repurchase agreement will be valued at a price
equal to the amount of the cash investment at the time of valuation on the
valuation date. The market value of the underlying securities shall be
determined in accordance with the applicable procedures, as described above,
for the purpose of determining the adequacy of collateral. All other
securities and other assets of the Funds for which current market quotations
are not readily available are valued at fair value as determined in good faith
by MIP and MSIT Boards of Trustees and in accordance with procedures adopted by
the Trustees.
PORTFOLIO TRANSACTIONS
The Trusts have no obligation to deal with any dealer or group of
dealers in the execution of transactions in portfolio securities. Subject to
policies established by the Trusts' Boards of Trustees, BGFA as adviser, or
Wells Fargo as sub-adviser to certain of the Master Portfolios, is responsible
for each Master Portfolio's investment portfolio decisions and the placing of
portfolio transactions. In placing orders, it is the policy of the Trusts to
obtain the best overall terms taking into account the broker/dealer's general
execution and operational facilities, the type of transaction involved and
other factors such as the broker/dealer's risk in positioning the securities
involved.
Purchase and sale orders of the securities held by the Master
Portfolios may be combined with those of other accounts that BGFA manages, and
for which it has brokerage placement authority, in the interest of seeking the
best overall terms. When BGFA determines that a particular security should be
bought or sold for a Master Portfolio and other accounts managed by BGFA, BGFA
undertakes to allocate those transactions among the participants equitably.
31
<PAGE> 267
Under the 1940 Act, persons affiliated with the Trusts such as
Stephens, BGFA and, in some cases Wels Fargo and their affiliates are prohibited
from dealing with the Trusts as a principal in the purchase and sale of
securities unless an exemptive order allowing such transactions is obtained
from the SEC or an exemption is otherwise available.
Except in the case of equity securities purchased by the Asset
Allocation, S&P 500 Index and Growth Stock Master Portfolios, purchases and
sales of securities usually will be principal transactions. Portfolio
securities normally will be purchased or sold from or to dealers serving as
market makers for the securities at a net price. Each of the Master Portfolios
also will purchase portfolio securities in underwritten offerings and may
purchase securities directly from the issuer. Generally, money market
securities, adjustable rate mortgage securities ("ARMS") and collateralized
mortgage obligations ("CMOs") are traded on a net basis and do not involve
brokerage commissions. The cost of executing a Master Portfolio's investment
portfolio securities transactions will consist primarily of dealer spreads and
underwriting commissions.
Purchases and sales of equity securities on a securities exchange
are effected through brokers who charge a negotiated commission for their
services. Orders may be directed to any broker, including Stephens, to the
extent and in the manner permitted by applicable law. In the over-the-counter
market, securities are generally traded on a "net" basis with dealers acting as
principal for their own accounts without a stated commission, although the
price of the security usually includes a profit to the dealer. In underwritten
offerings, securities are purchased at a fixed price that includes an amount of
compensation to the underwriter, generally referred to as the underwriter's
concession or discount.
In placing orders for portfolio securities of these Master
Portfolios, BGFA and Wells Fargo are required to give primary consideration to
obtaining the most favorable price and efficient execution. This means that
BGFA and Wells Fargo seek to execute each transaction at a price and
commission, if any, that provide the most favorable total cost or proceeds
reasonably attainable in the circumstances. While BGFA and Wells Fargo
generally seek reasonably
32
<PAGE> 268
competitive spreads or commissions, the Master Portfolios will not necessarily
be paying the lowest spread or commission available. In executing portfolio
transactions and selecting brokers or dealers, BGFA and Wels Fargo each seeks
to obtain the best overall terms available for the transaction. In assessing
the best overall terms available for any transaction, BGFA and Wells Fargo
consider factors deemed relevant, including the breadth of the market in the
security, the price of the security, the financial condition and execution
capability of the broker or dealer, and the reasonableness of the commission,
if any, both for the specific transaction and on a continuing basis. Rates are
established pursuant to negotiations with the broker based on the quality and
quantity of execution services provided by the broker in the light of generally
prevailing rates. The allocation of orders among brokers and the commission
rates paid are reviewed periodically by the Boards of Trustees.
Wells Fargo as sub-adviser to the Growth Stock and
Short-Intermediate Term Master Portfolios, may, in circumstances in which two
or more broker/dealers are in a position to offer comparable results for a
Master Portfolios investment portfolio transactions, give preference to a
broker/dealer that has provided statistical or other research services to Wells
Fargo. By allocating transactions in this manner, Wells Fargo supplements its
research and analysis with the views and information of securities firms.
Information so received will be in addition to, and not in lieu of, the
services required to be performed by BGFA under the Advisory Contracts and
Wells Fargo under the Sub-Advisory Contracts, and the expenses charged to each
Master Portfolio will not necessarily be reduced as a result of the receipt of
this supplemental research information. Furthermore, research services
furnished by broker/dealers through which Wells Fargo places securities
transactions for a Fund may be used by Wells Fargo in servicing its other
accounts, and not all of these services may be used in connection with advising
the Master Portfolios. BGFA does not preference its orders to brokers or
dealers based on receipt of statistical or other research services.
Certain of the brokers or dealers with whom the Master Portfolios
may transact business offer commission rebates to the Master Portfolios. BGFA
considers such rebates in assessing the best overall terms available for any
transaction. The overall reasonableness of brokerage commissions paid is
evaluated by BGFA based upon its knowledge of available information as to the
general level of commission paid by other institutional investors for comparable
services.
Portfolio Turnover. The portfolio turnover rates for the U.S.
Treasury Allocation, Short-Intermediate Term, Bond Index, Asset Allocation, S&P
500 Index and Growth Stock Master Portfolios generally are not expected to
exceed 450%, 300%, 100%, 450%, 50% and 200%, respectively. The higher
portfolio turnover rates for the U.S. Treasury Allocation, Short-Intermediate
Term, Bond Index, Asset Allocation and Growth Stock Master Portfolios may
result in higher transaction (i.e., principal markup/markdown, brokerage, and
other transaction) costs. The portfolio turnover rate will not be a limiting
factor when BGFA or Wells Fargo deem portfolio changes appropriate.
Brokerage Commissions. For the fiscal years ended February 28,
1995 and February 29, 1996, the corresponding Master Portfolio of each Fund
paid the dollar amounts of brokerage commissions indicated below. None of
these brokerage commissions were paid to affiliated brokers.
<TABLE>
<CAPTION>
Commissions Paid
------------------------------
Master Portfolio 1995 1996
- ---------------- -------- --------
<S> <C> <C>
Asset Allocation Master Portfolio $ 14,321 $ 9,782
Bond Index Master Portfolio $ 0 $ 0
Growth Stock Master Portfolio $207,258 $355,046
S&P 500 Index Master Portfolio $244,742 $ 80,902
Short-Intermediate Term Master Portfolio $ 0 $ 0
U.S. Government Allocation Master Portfolio $ 0 $ 0
</TABLE>
Securities of Regular Broker/Dealers. As of February 29, 1996,
the corresponding Master Portfolio of each Fund owned securities of their
"regular brokers or dealers" or their parents, as defined in the 1940 Act, as
follows:
<TABLE>
<CAPTION>
Master Portfolio Broker/Dealer Amount
---------------- ------------- ------
<S> <C> <C>
Short-Intermediate Goldman Sachs & Co. $ 280,000
Term Master Portfolio
Growth Stock Master Goldman Sachs & Co. $3,734,000
Portfolio
Asset Allocation Merrill Lynch & Co. $ 501,000
Master Portfolio
J.P. Morgan & Co. $ 760,000
</TABLE>
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<PAGE> 269
FEDERAL INCOME TAXES
The Prospectus describes generally the tax treatment of
distributions by the Master Portfolios and the Funds. This section of the SAI
includes additional information concerning federal income taxes.
Qualification as a "regulated investment company" under the Code
requires, among other things, that (a) at least 90% of each Fund's annual gross
income be derived from interest, payments with respect to securities loans,
dividends and gains from the sale or other disposition of securities or options
thereon; (b) each Fund derives less than 30% of its gross income from gains
from the sale or other disposition of securities or options thereon held for
less than three months; and (c) each Fund diversifies its holdings so that, at
the end of each quarter of the taxable year, (i) at least 50% of the market
value of each Fund's assets is represented by cash, government securities and
other securities limited in respect of any one issuer to an amount not greater
than 5% of each Fund's assets and 10% of the outstanding voting securities of
such issuer, and (ii) not more than 25% of the value of its assets is invested
in the securities of any one issuer (other than U.S. Government securities and
the securities of other regulated investment companies), or of two or more
issuers which the Fund controls and which are determined to be engaged in the
same or similar trades or businesses or related trades or businesses. For
purposes of complying with these qualification requirements, each Fund will be
deemed to own a proportionate share of its corresponding Master Portfolio's
assets. As a regulated investment company, each Fund will not be subject to
federal income tax on its net investment income and net capital gains
distributed to its shareholders, provided that it distributes to its
shareholders at least 90% of its net investment income (including its net
tax-exempt income) earned in each year.
Generally, dividends and capital gain distributions are taxable to
shareholders when they are received. However, such dividends and distributions
declared payable as of a record date in October, November or December of any
calendar year are deemed under the Code to have been paid by the Fund and
received by the shareholders on December 31 of that calendar year if the
dividends and distributions are actually paid in the following January. Such
dividends and distributions will, accordingly, be taxable to the recipient
shareholders in the year in which the record date falls.
In addition, a 4% nondeductible excise tax will be imposed on each
Fund to the extent that it does not meet certain minimum distribution
requirements by the end of each calendar year. Each Fund will either actually
or be deemed to distribute substantially all of its net investment income and
net capital gains by the end of each calendar year and, thus, expects not to be
subject to the excise tax.
Income and dividends received by a Fund from sources within
foreign countries may be subject to withholding and other taxes imposed by such
countries. Tax conventions between certain countries and the United States may
reduce or eliminate such taxes. Because not more than 50% of the value of the
total assets of any Fund is expected to consist of securities of foreign
issuers, no Fund will be eligible to elect to "pass through" foreign tax
credits to shareholders.
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<PAGE> 270
Gains or losses on sales of portfolio securities by a Master
Portfolio generally will be long-term capital gains or losses if the securities
have been held by it for more than one year, except in certain cases including
where the Master Portfolio acquires a put or grants a call thereon. Gain
recognized on the disposition of a debt obligation (including tax-exempt
obligations purchased after April 30, 1993) purchased by the Master Portfolio
at a market discount (generally, at a price less than its principal amount)
will generally be treated as ordinary income to the extent of the portion of
the market discount which accrued during the period of time the Fund held the
debt obligation. Other gains or losses on the sale of securities will be
short-term capital gains or losses. To the extent that a Fund recognizes
long-term capital gains, such gains will be distributed at least annually.
Such distributions will be taxable to shareholders as long-term capital gains,
regardless of how long a shareholder has held Fund shares.
Such a distribution will be designated as a capital gain
distribution in a written notice mailed by the Fund to shareholders not later
than 60 days after the close of the Fund's taxable year.
If a shareholder receives a designated capital gain distribution
on a Fund share and such Fund share is held for six months or less, then
(unless otherwise disallowed) any loss on the sale or exchange of that Fund
share will be treated as a long-term capital loss to the extent of the
designated capital gain distribution. In addition, any loss realized by a
shareholder upon the sale or redemption of Fund shares held less than six
months will be disallowed to the extent of any tax-exempt interest dividends
received by the shareholder thereon. These rules shall not apply to losses
incurred under a periodic redemption plan.
As of the printing of this SAI, the maximum individual marginal
tax rate applicable to ordinary income is 39.6% (marginal rates may be higher
for some individuals due to phase out of exemptions and elimination of
deductions), the maximum individual marginal tax rate applicable to net
realized capital gains is 28% and the maximum corporate marginal tax rate
applicable to ordinary income and net realized capital gains is 35% (however,
to eliminate the benefit of lower marginal corporate income tax rates,
corporations which have taxable income greater than $100,000 for a taxable year
will be required to pay an additional amount of income tax of up to $11,750 and
corporations which have taxable income greater than $15,000,000 for a taxable
year will be required to pay an additional amount of income tax of up to
$100,000).
If a shareholder disposes of Fund shares with reinvestment rights
within 90 days of acquiring such shares, and subsequently reacquires Fund
shares or shares of another regulated investment company with a reduced or
eliminated sales charge pursuant to the reinvestment rights, the sales charge
incurred, if any, to acquire the disposed shares (to the extent such previous
sales charges do not exceed the reduction or elimination of sales charges
incurred on the subsequent acquisition) shall not be taken into account for the
purpose of determining the amount of gain or loss on the initial disposition.
To the extent any sales charge is consequently not taken into account, it will
be treated as having been incurred in the subsequent acquisition. Also, any
loss realized on a redemption or exchange of shares of a Fund will be
disallowed to the extent that substantially identical shares are reacquired
within the 61-day period beginning 30 days before and ending 30 days after the
shares are disposed of.
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If, in the opinion of a Fund, ownership of its shares has or may
become concentrated to an extent that could cause the Fund to be deemed a
"personal holding company," the Fund may require the redemption of shares or
reject any order for the purchase of shares in an effort to prevent such
concentration.
If an option granted by a Master Portfolio lapses or is terminated
through a closing transaction, such as a repurchase by the Master Portfolio of
the option from its holder, the Master Portfolio will realize a short-term
capital gain or loss, depending on whether the premium income is greater or
less than the amount paid by the Master Portfolio in the closing transaction.
Recognition of capital losses may be deferred if they result from a position
that is part of a tax "straddle," discussed below. If securities are sold by a
Master Portfolio pursuant to the exercise of a call option granted by it, such
Master Portfolio will add the premium received to the sale price of the
securities delivered in determining the amount of gain or loss on the sale. If
securities are purchased by the Master Portfolio pursuant to the exercise of a
put option granted by it, such Master Portfolio will subtract the premium
received from its cost basis in the securities purchased.
The amount of any gain or loss realized by a Master Portfolio on
closing out a futures contract will generally result in a realized capital gain
or loss for tax purposes. Futures contracts held at the end of each fiscal
year will be required to be "marked to market" for federal income tax purposes
(the "marked to market rule"), pursuant to Section 1256 of the Code. In this
regard, they will be deemed to have been sold at market value. Sixty percent
(60%) of any net gain or loss recognized on these deemed sales and sixty
percent (60%) of any net realized gain or loss from any actual sales, generally
will be treated as long-term capital gain or loss, and the remainder will be
treated as short-term capital gain or loss (the "60/40 rule"). Transactions
that qualify as designated hedges are expected from the marked to market rule
and the 60%/40% rule. Moreover, all or a portion of the gain realized from
engaging in "conversion transactions" may be treated as ordinary income under
Section 1258 of the Code. Finally, "currency transactions" may be subject to
Section 988 of the Code, under which foreign currency gains or losses would
generally be computed separately and treated as ordinary income or losses.
Each Master Portfolio will attempt to monitor Section 988 transactions to avoid
an adverse tax impact.
Offsetting positions held by a Master Portfolio involving certain
financial forward futures or option contracts may be considered, for tax
purposes, to constitute "straddles." Straddles are defined to include
"offsetting positions" in actively traded personal property. The tax treatment
of straddles is governed by Section 1092 of the Code which, in certain
circumstances, overrides or modifies the provisions of Section 1256. If a
Master Portfolio were treated as entering into straddles by reason of its
engaging in certain financial forward, futures or option contracts, such
straddles may be characterized as "mixed straddles" if the futures, forwards,
or options comprising a part of such straddles were governed by the applicable
provisions of Section 1256 of the Code. The Master Portfolio may make one or
more elections with respect to mixed straddles. Depending upon which election
is made, if any, the results with respect to the Master Portfolio may differ.
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Generally, to the extent the straddle rules apply to positions
established by the Master Portfolio, losses realized by the Master Portfolio
may be deferred to the extent of unrealized gain in any offsetting positions.
Moreover, as a result of the straddle and the conversion transaction rules,
short-term capital loss on straddle positions may be recharacterized as
long-term capital loss and long-term capital gain may be characterized as
short-term capital gain or ordinary income.
Foreign Shareholders. Under the Code, distributions of net
investment income by a Fund to a nonresident alien individual, nonresident
alien fiduciary of a trust or estate, foreign corporation, or foreign
partnership (a "foreign shareholder") will be subject to U.S. withholding tax
(at a rate of 30% or a lower treaty rate). Withholding will not apply if a
dividend paid by a Fund to a foreign shareholder is "effectively connected"
with a U.S. trade or business, in which case the reporting and withholding
requirements applicable to U.S. citizens, U.S. residents or domestic
corporations will apply. Distributions of net long-term capital gains are not
subject to tax withholding, but in the case of a foreign shareholder who is a
nonresident alien individual, such distributions ordinarily will be subject to
U.S. withholding tax at a rate of 30% if the individual is physically present
in the U.S. for more than 182 days during the taxable year.
Other Matters. Investors should be aware that the investments to
be made by a Master Portfolio may involve sophisticated tax rules such as the
original issue discount and real estate mortgage investment conduit ("REMIC")
rules that would result in income or gain recognition by the Master Portfolio,
and its corresponding Fund.
CAPITAL STOCK
The Company, an open-end, management investment company, was
incorporated in Maryland on October 15, 1992. The authorized capital stock of
the Company consists of 10,000,000,000 shares having a par value of $.001 per
share. As of the date of this SAI, the Company's Board of Directors has
authorized the issuance of fourteen series of shares, each representing
interests in the following portfolios -- the U.S. Treasury Allocation Fund,
Short-Intermediate Term Fund, Bond Index Fund, Asset Allocation Fund, Money
Market Fund, S&P 500 Stock Fund, LifePath 2000 Fund, LifePath 2010 Fund,
LifePath 2020 Fund, LifePath 2030 Fund, LifePath 2040 Fund and Growth Stock
Fund -- and the Board of Directors may, in the future, authorize the issuance
of other series of capital stock representing shares of additional investment
portfolios or funds.
All shares of the Company have equal voting rights and will be
voted in the aggregate, and not by series, except where voting by a series is
required by law or where the matter involved only affects one series. For
example, a change in a Fund's fundamental investment policy would be voted upon
only by shareholders of the Fund. Additionally, approval of an advisory
contract is a matter to be determined separately by fund. Approval by the
shareholders of a fund is effective as to that fund whether or not sufficient
votes are received from the shareholders of the other investment portfolios to
approve the proposal as to those investment portfolios. As used in the
Prospectus of each Fund and in this SAI, the term "majority," when referring to
approvals to be obtained from shareholders of the Fund, means the vote of the
lesser of (i) 67% of the shares of
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<PAGE> 273
the Fund represented at a meeting if the holders of more than 50% of the
outstanding shares of the Fund are present in person or by proxy, or (ii) more
than 50% of the outstanding shares of the Fund. The term "majority," when
referring to the approvals to be obtained from shareholders of the Company as a
whole, means the vote of the lesser of (i) 67% of the Company's shares
represented at a meeting if the holders of more than 50% of the Company's
outstanding shares are present in person or by proxy, or (ii) more than 50% of
the Company's outstanding shares. Shareholders are entitled to one vote for
each full share held and fractional votes for fractional shares held.
The Company may dispense with an annual meeting of shareholders in
any year in which it is not required to elect Directors under the 1940 Act.
However, the Company has undertaken to hold a special meeting of its
shareholders for the purpose of voting on the question of removal of a Director
or Directors if requested in writing by the holders of at least 10% of the
Company's outstanding voting securities, and to assist in communicating with
other shareholders as required by Section 16(c) of the 1940 Act.
Each share of a Fund represents an equal proportional interest in
the Fund with each other share and is entitled to such dividends and
distributions out of the income earned on the assets belonging to the Fund as
are declared in the discretion of the Directors. In the event of the
liquidation or dissolution of the Company, shareholders of a Fund are entitled
to receive the assets attributable to the Fund that are available for
distribution, and a distribution of any general assets not attributable to a
particular investment portfolio that are available for distribution in such
manner and on such basis as the Directors in their sole discretion may
determine.
Shareholders are not entitled to any preemptive rights. All
shares, when issued, will be fully paid and non-assessable by the Company.
MSIT and MIP are each open-end, series management investment
companies organized as Delaware business trusts. MSIT was organized on October
28, 1993. MIP was organized on October 21 1993. In accordance with Delaware
law and in connection with the tax treatment sought by the Trusts, each Trust's
Declaration of Trust provides that its investors would be personally
responsible for Trust liabilities and obligations, but only to the extent the
Trust property is insufficient to satisfy such liabilities and obligations.
The Declaration of Trust also provides that a Trust shall maintain appropriate
insurance (for example, fidelity bonding and errors and omissions insurance)
for the protection of the Trust, its investors, Trustees, officers, employees
and agents covering possible tort and other liabilities, and that investors
will be indemnified to the extent they are held liable for a disproportionate
share of Trust obligations. Thus, the risk of an investor incurring financial
loss on account of investor liability is limited to circumstances in which both
inadequate insurance existed and the Trust itself was unable to meet its
obligations.
The Declarations of Trust further provide that obligations of a
Trust are not binding upon its Trustees individually but only upon the property
of the Trust and that the Trustees will not be liable for any action or failure
to act, but nothing in the Declarations of Trust protects a Trustee against any
liability to which the Trustee would otherwise be subject by reason of willful
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misfeasance, bad faith, gross negligence, or reckless disregard of the duties
involved in the conduct of the Trustee's office.
The interests in each Master Portfolio of the Trusts have
substantially identical voting and other rights as those rights enumerated
above for shares of the Funds. The Trusts also intend to dispense with annual
meetings, but are required by Section 16(c) of the Act to hold a special
meeting and assist investor communications under the circumstances described
above with respect to a Company. Whenever a Fund is requested to vote on a
matter with respect to its Trust, the Fund will hold a meeting of Fund
shareholders and will cast its votes as instructed by such shareholders.
In a situation where a Fund does not receive instruction from
certain of its shareholders on how to vote the corresponding shares of a Trust,
such Fund will vote such shares in the same proportion as the shares for which
the Fund does receive voting instructions.
As of June 7, 1996, the shareholders identified below were known
by the Company to own 5% or more of the indicated Fund's outstanding shares in
the following capacity:
<TABLE>
<CAPTION>
NAME AND ADDRESS PERCENTAGE
NAME OF FUND OF SHAREHOLDER OF FUND
- ------------ --------------------- ------------
<S> <C> <C>
Asset Allocation Wells Fargo Bank 9.17%
Business Retirement Programs
420 Montgomery Street
San Francisco, CA 94104
Jacobs Engineering Group, Inc. 7.90%
401(k) Plus Savings Plan
251 South Lake Avenue
Pasadena, CA 91101-3063
Viking Freight System, Inc. 5.00%
Financial Security Plan
411 East Plumeria Drive
San Jose, CA 95134
Cosmair, Inc. 5.00%
Retirement Savings Plan
159 Terminal Avenue
Clark, N.J. 07066
</TABLE>
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<TABLE>
<S> <C> <C>
Bond Index Fund Emcon Shared Savings 5.11%
and Profit Sharing Plan
400 South El Camino Road
Suite 1200
San Mateo, CA 94402
Paracelsus Healthcare Corp. 6.86%
Retirement Savings Plan
155 North Lake Avenue, Suite 1100
Pasadena, CA 91101
Wyman-Gordon Co. Savings 8.20%
and Investment Plan
244 Worchester Street, Box 8001
North Grafton, MA 01536-8001
Barclays Bank PLC 8.85%
Thrift Savings Plan
222 Broadway
New York, NY 10038
Wells Fargo Bank 12.30%
Business Retirement Programs
Omnibus Account
420 Montgomery Street
San Francisco, CA 94104
Bankers Trust Company 13.30%
of CA N.A. as Trustee for
Pacificorp K Plus Employee
Savings and Stock
Ownership Plan
300 S Grand Avenue, 40th Floor
Los Angeles, CA 90071
State Street Bank & Trust Co. 22.89%
as Trustee for the American
Bar Association Members
State Street Collective Trust
1 Heritage Drive, #P5S
North Quincy, MA 02171
</TABLE>
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<TABLE>
<S> <C> <C>
Growth Stock Fund Wyman-Gordon Co. Savings 5.30%
and Investment Plan
2727 Lockheed Way
Carson City, NY 89706-0791
PMC, Inc. Employees 5.40%
Savings and Investment Plan
12243 Branford Street
Sun Valley, CA 91352
Jacobs Engineering Group, Inc. 9.71%
401(k) Plus Savings Plan
251 South Lake Avenue
Pasadena, CA 91101-3063
Hubbell Inc. Employee 10.30%
Savings and Investment Plan
584 Darby Milford Road
Orange, CT 06477-4024
CTC Illinois Trust Co. 14.07%
for Crowley Maritime Corp.
One Wall Street, 12th Floor
New York, NY 10286
Short-Intermediate Greater Media, Inc. 7.5%
Term Fund 401(k) Plan
P. O. Box 1059
Two Kennedy Boulevard
East Brunswick, NJ 08816
Dyno Nobel Inc. 8.6%
Retirement Plan
11th Floor Crossroads Tower
Salt Lake City, UT 84144
PMC, Inc. 9.4%
Employees Retirement Savings Plan
12243 Branford Street
Sun Valley, CA 91352
Paracelsus Healthcare Corp. 10.0%
Retirement Savings Plan
155 North Lake Avenue
Pasadena, CA 91101
</TABLE>
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<PAGE> 277
<TABLE>
<S> <C> <C>
Senior Flexonics, Inc. 10.1%
401(k) Profit Sharing Plan
300 E. Devon Avenue
Bertler, IL 60109
Marine Terminals Corp. 14.4%
Savings Growth Plan
600 Harrison Street
Suite 200
San Francisco, CA 94107
S&P 500 Stock Fund Bank of New York 6.87%
for Various Plans
One Wall Street
New York, NY 10286
Bankers Trust as Trustee 40.03%
for Betchel Master Trust
Benefit Plan
P.O. Box 1742
New York, NY 10008
U.S. Treasury Snap-on Tools Inc. 5.24%
Allocation Fund 401(k) Personal Savings Plan
2801 80th Street
Kenosha, WI 53141
Day International Inc. 5.48%
401(k) Savings Plan
333 West First Street, 7th Floor
Dayton, OH 45402
Yuasa-Exide, Inc. 5.67%
Salaried Retirement and
401(k) Plan
2400 Barnville road
Reading, PA 19612
Jacobs Engineering Group, Inc. 11.83%
401(k) Plus Savings Plan
251 South Lake Avenue
Pasadena, CA 91101-3063
</TABLE>
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<PAGE> 278
<TABLE>
<S> <C>
M.A. Hanna Company 15.23%
Capital Accumulation Plan
200 Public Square
Suite 3600
Cleveland, OH 44114-1860
</TABLE>
OTHER
The Registration Statement of the Trusts and the Company,
including the Prospectus for each Fund, the SAI and the exhibits filed
therewith, may be examined at the office of the SEC in Washington, D.C.
Statements contained in a Prospectus or the SAI as to the contents of any
contract or other document referred to herein or in a Prospectus are not
necessarily complete, and, in each instance, reference is made to the copy of
such contract or other document filed as an exhibit to the Registration
Statement, each such statement being qualified in all respects by such
reference.
COUNSEL
Morrison & Foerster LLP, 2000 Pennsylvania Avenue, NW, Suite 5500,
Washington, D.C. 20006-1812, as counsel for the Company, has rendered its
opinion as to certain legal matters regarding the due authorization and valid
issuance of the shares being sold pursuant to the Funds' Prospectus.
INDEPENDENT AUDITORS
KPMG Peat Marwick LLP has been selected as the independent auditor
for the Company and the Trusts. KPMG Peat Marwick LLP provides audit services,
tax return preparation and assistance and consultation in connection with
review of certain SEC filings. KPMG Peat Marwick LLP's address is Three
Embarcadero Center, San Francisco, California 94111.
FINANCIAL INFORMATION
The portfolio of investments, audited financial statements and
independent auditors' report for the fiscal year ended February 29, 1996 for
the Funds and corresponding Master Portfolios are hereby incorporated by
reference to the MasterWorks Funds Inc. Annual Report, as filed with the SEC on
May 28, 1996. The portfolio of investments, audited financial statements and
independent auditors' report for the Funds are attached to all SAIs delivered
to shareholders or prospective shareholders.
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<PAGE> 279
SAI APPENDIX
The following is a description of the ratings given by Moody's and
S&P to corporate bonds and commercial paper.
Corporate Bonds
Moody's: The four highest ratings for corporate bonds are "Aaa,"
"Aa," "A" and "Baa." Bonds rated "Aaa" are judged to be of the "best quality"
and carry the smallest amount of investment risk. Bonds rated "Aa" are of
"high quality by all standards," but margins of protection or other elements
make long-term risks appear somewhat greater than "Aaa" rated bonds. Bonds
rated "A" possess many favorable investment attributes and are considered to be
upper medium grade obligations. Bonds rated "Baa" are considered to be medium
grade obligations; interest payments and principal security appear adequate for
the present but certain protective elements may be lacking or may be
characteristically unreliable over any great length of time. Such bonds have
speculative characteristics as well. Moody's applies numerical modifiers "1,"
"2" and "3" in each rating category from "Aa" through "Baa" in its rating
system. The modifier "1" indicates that the security ranks in the higher end
of its category; the modifier "2" indicates a mid-range ranking; and the
modifier "3" indicates that the issue ranks in the lower end.
S&P: The four highest ratings for corporate bonds are "AAA,"
"AA," "A" and "BBB." Bonds rated "AAA" have the highest ratings assigned by
S&P and have an extremely strong capacity to pay interest and repay principal.
Bonds rated "AA" have a "very strong capacity to pay interest and repay
principal" and differ "from the highest rated issued only in small degree."
Bonds rated "A" have a "strong capacity" to pay interest and repay principal,
but are "somewhat more susceptible" to adverse effects of changes in economic
conditions or other circumstances than bonds in higher rated categories. Bonds
rated "BBB" are regarded as having an "adequate capacity" to pay interest and
repay principal, but changes in economic conditions or other circumstances are
more likely to lead to a "weakened capacity" to make such repayments. The
ratings from "AA" to "BBB" may be modified by the addition of a plus or minus
sign to show relative standing within the category.
Corporate Commercial Paper
Moody's: The highest rating for corporate commercial paper is
"Prime-1". Issuers rated "Prime-1" have a "superior capacity for repayment of
short-term promissory obligations." Issuers rated "Prime-2" "have a strong
capacity for repayment of short-term promissory obligations," but earnings
trends, while sound, will be subject to more variation.
S&P: The "A-1" rating for corporate commercial paper indicates
that the "degree of safety regarding timely payment is either overwhelming or
very strong." Commercial paper with "overwhelming safety characteristics" will
be rated "A-1+." Commercial paper with a strong capacity for timely payments
on issues will be rated "A-2."
A-1
