<PAGE>
As filed with the Securities and Exchange Commission
on June 30, 1998
Registration No. 33-54126; 811-7332
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------------------
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [ ]
Post-Effective Amendment No. 15 [X]
And
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [ ]
Amendment No. 19 [X]
(Check appropriate box or boxes)
________________________
MASTERWORKS FUNDS INC.
(formerly, Stagecoach Inc.)
(Exact Name of Registrant as specified in Charter)
111 Center Street
Little Rock, Arkansas 72201
(Address of Principal Executive Offices, including Zip Code)
Registrant's Telephone Number, including Area code: (800) 643-9691
Richard H. Blank, Jr.
c/o Stephens Inc.
111 Center Street
Little Rock, Arkansas 72201
(Name and Address of Agent for Service)
With a copy to:
Robert M. Kurucza, Esq.
Marco E. Adelfio, Esq.
Morrison & Foerster LLP
2000 Pennsylvania Avenue, N.W.
Washington, D.C. 20006
It is proposed that this filing will become effective (check appropriate box):
[X] Immediately upon filing pursuant [ ] on _________ pursuant
to Rule 485(b), or to Rule 485(b)
[ ] 60 days after filing pursuant [ ] on _________ pursuant
to Rule 485(a)(1), or to Rule 485(a)(1)
[ ] 75 days after filing pursuant [ ] on ___________pursuant
to Rule 485(a)(2), or to Rule 485(a)(2)
If appropriate, check the following box:
[ ] this post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
This Post-Effective Amendment to the Registrant's Registration Statement has
been executed by Master Investment Portfolio and Managed Series Investment Trust
(registered investment companies with separate series in which certain of the
Registrant's series invest substantially all of their assets) and their trustees
and principal officer.
<PAGE>
EXPLANATORY NOTE
----------------
This Post-Effective Amendment No. 15 (the "Amendment") to the
Registration Statement of MasterWorks Funds Inc. (the "Company") is being
filed to add to the Company's Registration Statement audited financial
statements and certain related financial information for the Company's Asset
Allocation, Bond Index, S&P 500 Stock, U.S. Treasury Allocation, Growth
Stock, Short-Intermediate Term, LifePath 2000, LifePath 2010, LifePath 2020,
LifePath 2030 and LifePath 2040 Funds and corresponding Master Portfolios,
and for the Company's Money Market Fund for the fiscal year ended February
28, 1998. This Amendment also makes certain other non-material changes to
the Registration Statement.
<PAGE>
Cross Reference Sheet
---------------------
MONEY MARKET FUND
-----------------
Form N-1A Item Number
- ---------------------
Part A Prospectus Captions
- ------ -------------------
1 Cover Page
2 Prospectus Summary; Summary of Fund Expenses
3 Financial Highlights
4 The Fund
Management of the Fund
General Information
Appendix - Additional Investment Policies
5 Prospectus Summary
Management of the Fund
6 Management of the Fund
Dividends and Distributions
Taxes
General Information
7 How to Buy Shares
Exchange Privilege
Share Value
8 How to Redeem Shares
9 Not Applicable
Part B Statement of Additional Information Captions
- ------ --------------------------------------------
10 Cover Page
11 Table of Contents
12 General Information
Other
13 Investment Restrictions
Additional Permitted Investment Activities
Appendix
14 Management
15 Management
16 Management
Independent Auditors
Counsel
17 Portfolio Transactions
18 Capital Stock
19 Determination of Net Asset Value
Purchase and Redemption of Shares
20 Taxes
21 Management
22 Performance Information
23 Financial Information
Part C General Information
- ------ -------------------
24-32 Information required to be included in Part C is set forth under the
appropriate Item, so numbered, in Part C of this Document.
<PAGE>
Cross Reference Sheet
---------------------
LIFEPATH 2000 FUND, LIFEPATH 2010 FUND,
---------------------------------------
LIFEPATH 2020 FUND, LIFEPATH 2030 FUND AND LIFEPATH 2040 FUND
-------------------------------------------------------------
Form N-1A Item Number
- ---------------------
Part A Prospectus Captions
- ------ -------------------
1 Cover Page
2 Prospectus Summary; Summary of Fund Expenses
3 Financial Highlights
4 Description of the Funds
Management of the Funds
General Information
Appendix - Additional Investment Policies
5 Prospectus Summary
Description of the Funds
Management of the Funds
6 Description of the Funds
Dividends and Distributions
General Information
Taxes
7 How to Buy Shares
Exchange Privilege
Share Value
8 How to Redeem Shares
9 Not Applicable
Part B Statement of Additional Information Captions
- ------ --------------------------------------------
10 Cover Page
11 Table of Contents
12 General Information
Other
13 Investment Objectives and Management Policies
Appendix
14 Management
15 Management
16 Management
Independent Auditors
Counsel
17 Portfolio Transactions
18 Capital Stock
19 Determination of Net Asset Value
Purchase and Redemption of Shares
20 Dividends, Distributions and Taxes
21 Management
22 Performance Information
23 Financial Information
Part C General Information
- ------ -------------------
24-32 Information required to be included in Part C is set forth under the
appropriate Item, so numbered, in Part C of this Document.
<PAGE>
Cross Reference Sheet
---------------------
ASSET ALLOCATION FUND, BOND INDEX FUND,
---------------------------------------
GROWTH STOCK FUND, S&P 500 STOCK FUND,
--------------------------------------
SHORT-INTERMEDIATE TERM FUND, AND
---------------------------------
U.S. TREASURY ALLOCATION FUND
-----------------------------
Form N-1A Item Number
- ---------------------
Part A Prospectus Captions
- ------ -------------------
1 Cover Page
2 Prospectus Summary; Summary of Fund Expenses
3 Financial Highlights
4 Management of the Funds
Appendix - Additional Investment Policies
5 Prospectus Summary
Management of the Funds
6 Management of the Funds
Dividends and Distributions
Taxes
7 How to Buy Shares
Exchange Privilege
Share Value
8 How to Redeem Shares
9 Not Applicable
Part B Statement of Additional Information Captions
- ------ --------------------------------------------
10 Cover Page
11 Table of Contents
12 General Information
Other
13 Investment Restrictions
Additional Permitted Investment Activities
Appendix
14 Management
15 Management
16 Management
Independent Auditors
Counsel
17 Portfolio Transactions
18 Capital Stock
19 Determination of Net Asset Value
Purchase and Redemption of Shares
20 Taxes
21 Management
22 Performance Information
23 Financial Information
Part C General Information
- ------ -------------------
24-32 Information required to be included in Part C is set forth under the
appropriate Item, so numbered, in Part C of this Document.
<PAGE>
MUTUAL FUND PROSPECTUS
June 30, 1998
[GRAPHIC APPEARS HERE]
LifePath(R) Funds
LifePath 2000(R)
LifePath 2010(R)
LifePath 2020(R)
LifePath 2030(R)
LifePath 2040(R)
Advised by Barclays Global Fund Advisors
Sponsored and distributed by Stephens Inc.,
Member NYSE/SIPC
MasterWorks(R) Funds
<PAGE>
MasterWorks Funds 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").
Please read this Prospectus before investing and retain it for future
reference. It sets forth concisely the information about the Funds that an
investor should know before investing. A Statement of Additional Information
("SAI") dated June 30, 1998 describing the Funds has been filed with the
Securities and Exchange Commission ("SEC") and is incorporated by reference
into this Prospectus. The SAI is available without charge by calling the
Company at 1-888-204-3956 or by writing the Company at the address printed on
the back of the Prospectus. The SAI and other Fund information is also
available on the SEC's Website (http://www.sec.gov).
----------------------
AS WITH ALL MUTUAL FUNDS, THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAP-
PROVED BY THE SECURITIES AND EXCHANGE COMMISSION, ANY STATE SECURITIES COMMIS-
SION 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, BARCLAYS GLOBAL INVESTORS, N.A., INVESTORS BANK & TRUST, CO. OR
ANY OF THEIR 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 THE 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 30, 1998
<PAGE>
Each Fund invests all of its assets in a separate series (each, a "Master
Portfolio") of Master Investment Portfolio ("MIP"), an open-end, management
investment company. Each Fund has the same investment objective as the corre-
sponding Master Portfolio and each Fund's investment experience corresponds
directly with the relevant Master Portfolio's investment experience. Refer-
ences to the investments, investment policies and risks of the Funds, unless
otherwise indicated, should be understood as references to the investments,
investment policies and risks of the corresponding Master Portfolio. Interests
in a Master Portfolio may be purchased only by investment companies or accred-
ited investors.
Each LifePath Fund invests in a wide range of U.S. and foreign equity and
debt securities and money market instruments. Investors are encouraged to se-
lect a particular LifePath Fund based on the decade of their anticipated re-
tirement 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.
----------------------
BARCLAYS GLOBAL FUND ADVISORS SERVES AS INVESTMENT ADVISER TO THE MASTER
PORTFOLIOS. BARCLAYS GLOBAL FUND ADVISORS AND ITS AFFILIATES PROVIDE OTHER
SERVICES TO THE FUNDS AND MASTER PORTFOLIOS FOR WHICH THEY MAY BE COMPEN-
SATED. STEPHENS INC., WHICH IS NOT AFFILIATED WITH THE ADVISER OR ANY AF-
FILIATE THEREOF, SERVES AS THE COMPANY'S CO-ADMINISTRATOR AND AS DISTRIB-
UTOR OF EACH FUND'S SHARES.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Prospectus Summary..................................................... 1
Summary of Fund Expenses............................................... 6
Financial Highlights................................................... 8
Description of the Funds............................................... 11
Management of the Funds................................................ 21
How to Buy Shares...................................................... 24
How to Redeem Shares................................................... 28
Exchange Privilege..................................................... 32
Share Value............................................................ 33
Dividends and Distributions............................................ 33
Taxes.................................................................. 34
General Information.................................................... 35
<CAPTION>
APPENDIX
--------
<S> <C>
Additional Investment Policies......................................... A-1
</TABLE>
<PAGE>
PROSPECTUS SUMMARY
The following summary provides investors with basic information about the
Funds. For more information, please refer specifically to the identified Pro-
spectus 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 re-
tirement plans, who 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 be-
tween a Benefit Plan and a Shareholder Servicing Agent.
. Investors using proceeds that are being rolled over directly from a
qualified Benefit Plan to an Individual Retirement Account ("IRA") pur-
suant to arrangements between the sponsor or other agent of the quali-
fied Benefit Plan and a Shareholder Servicing Agent, or who have estab-
lished a tax-deferred retirement plan with a Shareholder Servicing
Agent.
. Investors who have an account arrangement with one of the Company's
Shareholder Servicing Agents that permits investments in Fund shares.
. Investors who have made arrangements with Barclays Global Investors,
N.A. ("BGI") and invest at least $1 million.
See "How To Buy Shares."
Q. WHAT ARE SOME OF THE KEY FEATURES OF THE FUNDS?
A. Each LifePath Fund seeks to provide 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. The
LifePath Funds follow an asset allocation strategy among three broad in-
vestment classes: equity and debt securities of domestic and foreign is-
suers and cash in the form of money market instruments.
1
<PAGE>
The Funds contain both "strategic" and "tactical" components. The strate-
gic component evaluates the risk that investors, on average, may be will-
ing to accept given their investment time horizons. The tactical component
addresses short-term market conditions.
See "Description of the Funds -- Management Policies."
Q. WHAT HAPPENS TO THE LIFEPATH 2000 FUND WHEN IT REACHES ITS TARGET DATE?
A. The LifePath 2000 Fund will not terminate when it reaches its target date
on the first day of the year 2000. Instead, the Fund will enter its
"retirement phase" during which it will seek to maximize assets consistent
with the risk that an average investor in retirement may be willing to
accept. The Fund will continue to follow an asset allocation strategy
among three broad investment classes: equity and debt securities of
domestic and foreign issuers and cash in the form of money market
instruments. However, unlike the remaining LifePath Funds with target
dates, during its retirement phase a LifePath Fund will no longer reduce
its investment risk through time. Instead, the Fund is expected to have a
long-term average mix of approximately 20% equity securities, with the
remainder in debt securities and some cash. In the same manner as all
LifePath Funds, a Fund in its retirement phase will continue to employ a
tactical asset allocation component, which will alter the investment mix
to account for changing expected risks and opportunities. When other
LifePath Funds reach their target date, it is expected that they will be
combined with the retirement phase Fund under the same investment
strategy.
Q. WHAT ARE SOME OF THE POTENTIAL RISKS ASSOCIATED WITH AN INVESTMENT IN THE
FUNDS?
A. Investments in the Funds are not bank deposits or obligations of Barclays
Global Fund Advisors ("BGFA") or 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. When the value of the
portfolio securities in which the Funds invest declines, so does the value
of Fund shares. Therefore, investors should be prepared to accept some
risk with the money invested in the Funds.
2
<PAGE>
The portfolio equity securities held by each Fund 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
tends to be cyclical, with periods when stock prices generally rise and
periods when stock prices generally decline. Throughout the first six months
of 1998, the stock market, as measured by the S&P 500 Index and other
commonly used indices, was trading at or close to record levels. There can
be no guarantee that these levels will continue.
The portfolio debt instruments held by the Funds are subject to credit risk
and interest rate risk. Credit risk is the risk that issuers of the debt
instruments in which the Funds invest may default on the payment of
principal and/or interest. Interest rate risk is the risk that increases in
market interest rates may adversely affect the value of certain debt
instruments in which the Funds may invest. The value of the Funds' debt
instruments generally changes inversely to changes in market interest rates.
Debt securities with longer maturities, which tend to produce higher
yields, are subject to potentially greater price fluctuation than obliga-
tions with shorter maturities. Fluctuations in the market value of fixed
income securities can be reduced, but not eliminated, by variable-rate or
floating-rate features. In addition, some of the asset-backed securities
in which the Funds invest are subject to extension risk. This is the risk
that when interest rates rise, prepayments of the underlying obligations
slow, thereby lengthening the duration and potentially reducing the value
of these securities.
The Funds 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 "Description of the Funds -- Risk Considerations" and "Appendix -- Ad-
ditional Investment Policies."
Q. HOW DO I INVEST IN THE FUNDS?
A. Shares of the Funds can be purchased by establishing an account arrange-
ment with a designated Shareholder Servicing Agent. Shares may be pur-
chased at net asset value on any day the Funds are open for business (a
"Business Day"). The Funds are open for business Monday through Friday and
are closed on standard New York Stock Exchange ("NYSE") holidays.
3
<PAGE>
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. BGFA, as the investment adviser to the Master Portfolios, manages the in-
vestments of each Master Portfolio. The Company has not retained the serv-
ices of a separate investment adviser for the Funds because each Fund in-
vests all of its assets in the corresponding Master Portfolio. As of April
30, 1998, BGFA and its affiliates provided investment advisory services
for approximately $575 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 trans-
action 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 arrange-
ments, 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" ("NAV") 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 to-
tal 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 divi-
4
<PAGE>
dends and distributions are automatically reinvested at NAV 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 the Company 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 NAV without the imposition of a
sales charge or redemption fee on any Business Day by letter or by tele-
phone (provided you have completed the "Redemption by Telephone" portion
of your account application). For more information contact Stephens Inc.
("Stephens") or your Shareholder Servicing Agent.
See "How to Redeem Shares."
5
<PAGE>
SUMMARY OF FUND EXPENSES
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average daily net assets)
<TABLE>
<CAPTION>
LIFEPATH LIFEPATH LIFEPATH LIFEPATH LIFEPATH
2000 2010 2020 2030 2040
FUND FUND FUND FUND FUND
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Management Fees/1/................ .55% .55% .55% .55% .55%
Co-Administration Fees............ .40% .40% .40% .40% .40%
--- --- --- --- ---
TOTAL FUND OPERATING EXPENSES..... .95% .95% .95% .95% .95%
</TABLE>
- -----------
/1/A portion of these fees is covered by a "defensive" Rule 12b-1 Plan of Dis-
tribution that does not result in additional expenses to the Funds or Mas-
ter Portfolios. (See "Management of the Funds MIP 12b-1 Plan" for further
information.)
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>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
LifePath 2000 Fund.............................. $10 $30 $53 $117
LifePath 2010 Fund.............................. $10 $30 $53 $117
LifePath 2020 Fund.............................. $10 $30 $53 $117
LifePath 2030 Fund.............................. $10 $30 $53 $117
LifePath 2040 Fund.............................. $10 $30 $53 $117
</TABLE>
- -------------------------------------------------------------------------------
THE AMOUNTS LISTED IN THE EXAMPLE REPRESENT A HYPOTHETICAL ILLUSTRATION OF
THE EXPENSES ASSOCIATED WITH A $1,000 INVESTMENT OVER STATED PERIODS, BASED ON
THE EXPENSES IN THE ABOVE TABLE AND AN ASSUMED ANNUAL RATE OF RETURN OF 5%.
THIS ANNUAL RATE OF RETURN SHOULD NOT BE CONSIDERED AN INDICATION OF ACTUAL OR
EXPECTED PERFORMANCE OF A FUND NOR A REPRESENTATION OF PAST OR FUTURE EX-
PENSES; ACTUAL EXPENSES AND RETURNS MAY BE GREATER OR LESS THAN THOSE SHOWN.
- -------------------------------------------------------------------------------
EXPLANATION OF TABLES
The purpose of the foregoing tables is to assist investors in understanding
the various costs and expenses borne by a Fund and a Master
6
<PAGE>
Portfolio. The fee table reflects expenses at both the Fund and Master Portfo-
lio levels. The tables do not reflect any charges that may be imposed by
shareholder servicing agents or selling agents, including BGI, directly on
customer accounts in connection with an investment in a Fund. Long-term share-
holders of the Funds could pay more in sales charges than the economic equiva-
lent of the maximum front-end sales charges applicable to mutual funds sold by
members of the National Association of Securities Dealers, Inc. ("NASD").
Annual Fund Operating Expenses are based on contract amounts and reflect
each Fund's actual expenses for the fiscal year ended February 28, 1998. BGFA,
BGI and Stephens at their sole discretion may waive or reimburse all or a por-
tion of their respective fees charged to, or expenses paid by, a Fund or Mas-
ter Portfolio. Any waivers or reimbursements would reduce a Fund's or Master
Portfolio's total expenses and accordingly, have a favorable impact on its
performance. For more complete descriptions of the various costs and expenses
you can expect to incur as an investor in the Funds, please see "Management of
the Funds."
With regard to the combined fees and expenses of the Funds and Master Port-
folios, 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 man-
aged the type of securities held by its corresponding Master Portfolio. The
Company's Board of Directors believes that if other investors invest their as-
sets in the Master Portfolios, certain economic efficiencies may be realized
with respect to the Master Portfolios. For example, fixed expenses that other-
wise 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.
There can be no assurance that these economic efficiencies will be achieved.
Other mutual funds and accredited investors may invest in the Master Portfo-
lios. The expenses and, accordingly, the investment returns of such other mu-
tual funds may differ from those of the Funds. Information about other invest-
ment options in the Master Portfolios may be obtained by calling Stephens at
1-800-643-9691.
7
<PAGE>
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING AS SHOWN)
The following information has been derived from the Financial Highlights in-
cluded in the Funds' financial statements for the fiscal year ended February
28, 1998. The financial statements are incorporated by reference into the SAI
and have been audited by KPMG Peat Marwick LLP, independent auditors, whose
report thereon, dated April 3, 1998, also is incorporated by reference into
the SAI. The information should be read in conjunction with the financial
statements and notes thereto. The SAI has been incorporated by reference into
this Prospectus.
8
<PAGE>
<TABLE>
<CAPTION>
LIFEPATH 2000 LIFEPATH 2010 LIFEPATH 2020
FUND FUND FUND
------------------------- ------------------------- -------------
YEAR ENDED PERIOD ENDED YEAR ENDED PERIOD ENDED YEAR ENDED
FEBRUARY 28, FEBRUARY 28, FEBRUARY 28, FEBRUARY 28, FEBRUARY 28,
1998 1997(1) 1998 1997(1) 1998
------------ ------------ ------------ ------------ -------------
<S> <C> <C> <C> <C> <C>
Net Asset Value,
beginning of period.... $ 10.97 $ 10.55 $ 12.46 $ 11.44 $ 13.40
Income from investment
operations:
Net investment income... 0.46 0.39 0.40 0.33 0.33
Net realized and
unrealized gain on
investments............ 0.85 0.35 1.87 0.96 2.84
-------- ------- -------- ------- --------
Total from investment
operations............. 1.31 0.74 2.27 1.29 3.17
Less distributions:
From net investment
income................. (0.46) (0.32) (0.40) (0.27) (0.33)
From net realized
gains.................. (0.26) 0.00 (0.43) 0.00 (0.51)
-------- ------- -------- ------- --------
Total distributions..... (0.72) (0.32) (0.83) (0.27) (0.84)
-------- ------- -------- ------- --------
Net Asset Value, end of
period................. $ 11.56 $ 10.97 $ 13.90 $ 12.46 $ 15.73
======== ======= ======== ======= ========
Total return (not
annualized)............ 12.32% 7.00% 18.73% 11.98% 24.25%
Ratios/Supplemental
data:
Net assets, end of
period (000)........... $ 48,731 $46,578 $112,436 $87,204 $148,197
Number of shares
outstanding, end of
period (000)........... 4,216 4,245 8,086 7,000 9,424
Ratios to average
net assets
(annualized)(2):
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................. 4.06% 4.21% 3.09% 3.26% 2.28%
Portfolio Turnover(3)... 39% 108% 46% 73% 41%
Average Commission
Rate(4)................ $ 0.0300 $0.0401 $ 0.0304 $0.0404 $ 0.0300
</TABLE>
(Continued)
9
<PAGE>
<TABLE>
<CAPTION>
LIFEPATH 2020 LIFEPATH 2030 LIFEPATH 2040
FUND FUND FUND
------------- ------------------------- -------------------------
PERIOD ENDED YEAR ENDED PERIOD ENDED YEAR ENDED PERIOD ENDED
FEBRUARY 28, FEBRUARY 28, FEBRUARY 28, FEBRUARY 28, FEBRUARY 28,
1997(1) 1998 1997(1) 1998 1997(1)
------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net Asset Value,
beginning of period.... $ 11.97 $ 14.17 $ 12.39 $ 15.21 $ 12.91
Income from investment
operations:
Net investment income... 0.29 0.26 0.23 0.18 0.18
Net realized and
unrealized gain on
investments............ 1.40 3.65 1.79 4.41 2.27
-------- -------- ------- -------- -------
Total from investment
operations............. 1.69 3.91 2.02 4.59 2.45
Less distributions:
From net investment
income................. (0.24) (0.26) (0.20) (0.19) (0.15)
From net realized
gains.................. (0.02) (0.43) (0.04) (0.84) 0.00
-------- -------- ------- -------- -------
Total distributions..... (0.26) (0.69) (0.24) (1.03) (0.15)
-------- -------- ------- -------- -------
Net Asset Value, end of
period................. $ 13.40 $ 17.39 $ 14.17 $ 18.77 $ 15.21
======== ======== ======= ======== =======
Total return (not
annualized)............ 15.06% 28.22% 17.37% 30.95% 20.47%
Ratios/Supplemental
data:
Net assets, end of
period (000)........... $105,414 $ 95,309 $58,575 $126,601 $69,476
Number of shares
outstanding, end of
period (000)........... 7,868 5,481 4,135 6,744 4,569
Ratios to average
net assets
(annualized)(2):
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................. 2.57% 1.72% 2.05% 1.04% 1.46%
Portfolio Turnover(3)... 61% 27% 42% 34% 48%
Average Commission
Rate(4)................ $ 0.0451 $ 0.0302 $0.0364 $ 0.0248 $0.0351
</TABLE>
- --------------
(1) The Funds commenced operations on March 26, 1996.
(2) Ratios include expenses charged by the Master Portfolios.
(3) Portfolio turnover rate reflects activity by the Master Portfolios.
(4) The average commission rates shown reflect activity by the Master Portfo-
lio. For fiscal years beginning on or after September 1, 1995, a fund is
required to disclose its average commission rate per share for security
trades on which commissions are charged. This amount may vary depending
on, among other things, the mix of trades, trading practices and commis-
sion rate structures.
10
<PAGE>
DESCRIPTION OF THE FUNDS
GENERAL
Each LifePath Fund invests all of its assets in a separate Master Portfolio
of MIP with the same investment objective as the Fund. For simplicity, refer-
ences to the investments and investment policies and risks of the Funds, un-
less otherwise indicated, should be understood as references to the invest-
ments and investment policies and risks of the Master Portfolios.
INVESTMENT OBJECTIVES
Each LifePath Fund seeks to provide long-term investors with an asset allo-
cation strategy designed to maximize assets for retirement or for other pur-
poses consistent with the quantitatively measured risk that investors, on av-
erage, may be willing to accept given their investment time horizons. Specifi-
cally:
. 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.
The differences in objectives and policies among the Master Portfolios de-
termine the types of portfolio securities in which each Master Portfolio in-
vests and can be expected to affect the degree of risk to which each Master
Portfolio and, therefore, the corresponding Fund, is subject and the perfor-
mance of each Master Portfolio and Fund.
11
<PAGE>
ABOUT THE FUNDS
Investors are encouraged to invest in a particular LifePath Fund based on
the decade of anticipated retirement or when such investors anticipate begin-
ning to withdraw substantial portions of their account. 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 ap-
proximately 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 an investment deci-
sion, investors should evaluate their individual risk profile, 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. The LifePath Funds were the first mutual funds of
their kind to offer a flexible investment strategy designed to change over
specific time horizons.
The LifePath Funds follow an asset allocation strategy among three broad in-
vestment classes: equity securities and debt instruments of issuers located
throughout the world and cash in the form of money market instruments. Each
LifePath Fund invests varying percentages of its portfolio in equity securi-
ties, debt instruments and money market instruments. The later-dated Funds
tend to be more heavily invested in equity securities and generally bear more
risk than the earlier-dated Funds. The later-dated Funds generally have an ex-
pectation of greater total return. The investment class weightings of the
LifePath 2040 Fund at a given time might be 100%, 0% and 0% among equity secu-
rities, debt securities and cash, respectively, while the weightings of the
LifePath 2000 Fund might be 25%, 50% and 25%, respectively. These weightings
will change periodically. The difference in the investment class weightings is
based on the statistically determined risk that investors, on average, may be
willing to accept given their investment time horizons in an effort to maxi-
mize assets in anticipation of retirement or for other purposes. As each
LifePath Fund approaches its designated time horizon, it generally is managed
more conservatively, on the premise that individuals investing for retirement
desire to reduce investment risk in their retirement accounts as they age.
12
<PAGE>
As of June 1, 1998, asset allocations in the LifePath Funds were approxi-
mately as follows:
<TABLE>
<CAPTION>
LIFEPATH LIFEPATH LIFEPATH LIFEPATH LIFEPATH
2000 2010 2020 2030 2040
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Equity Securities
Domestic........................ 16.84% 36.74% 54.05% 65.13% 79.53%
International................... 5.26% 9.92% 14.45% 19.00% 19.76%
Debt Securities.................. 54.73% 44.51% 26.84% 13.36% 0.00%
Cash............................. 23.17% 8.83% 4.66% 2.51% 0.71%
</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
The LifePath Funds contain both "strategic" and "tactical" components, with
the strategic component weighted more heavily than the tactical component. The
strategic component of the Funds evaluates the risk that investors, on aver-
age, may be willing to accept given their investment time horizons. The stra-
tegic component thus determines the changing investment risk level of each
LifePath Fund as time passes. The tactical component addresses short-term mar-
ket conditions. The tactical component thus adjusts the amount of investment
risk taken by each LifePath Fund without regard to time horizon, but rather in
consideration of the relative risk-adjusted short-term attractiveness of vari-
ous asset classes.
The LifePath Funds may invest in a wide range of U.S. and foreign invest-
ments and market sectors and may shift their allocations among investments and
sectors from time to time. To manage the LifePath Funds, BGFA employs a pro-
prietary investment model (the "Model") that analyzes extensive financial and
economic data, including risk correlation and expected return statistics. The
Model selects indices representing segments of the global equity and debt mar-
kets and the Funds invest to create market exposure by purchasing representa-
tive samples of the indices in an attempt to replicate their performance.
13
<PAGE>
The Model has broad latitude to allocate the Funds' investments among equity
securities, debt securities and money market instruments. The LifePath Funds
are not managed as balanced portfolios and are not required to maintain a por-
tion of their investments in each of the permitted investment categories at
all times. Until a LifePath Fund 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 Fund ap-
proaches 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 Fund 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 Fund's investment performance.
BGFA manages other portfolios which also invest in accordance with the Mod-
el. The performance of each of those other portfolios is likely to vary from
the performance of LifePath Funds. Such variation in performance is primarily
due to different equilibrium asset-mix assumptions used for the various port-
folios, timing differences in the implementation of the Model's recommenda-
tions and differences in expenses and liquidity requirements. The overall man-
agement of each LifePath Fund is based on the recommendation of the Model, and
no person is primarily responsible for recommending the mix of asset classes
in each Fund or the mix of securities within the asset classes. Decisions re-
lating to the Model are made by BGFA's investment committee.
EQUITY SECURITIES -- The LifePath Funds seek U.S. equity market exposure
through investment in securities representative of the following indices of
common stocks:
. The S&P/BARRA Value Stock Index (consisting of primarily large-capital-
ization U.S. stocks with lower-than-average price/book ratios).
. The S&P/BARRA Growth Stock Index (consisting of primarily large-capital-
ization U.S. stocks with higher-than-average price/book ratios).
14
<PAGE>
. The Intermediate Capitalization Value Stock Index (consisting of primar-
ily medium-capitalization U.S. stocks with lower-than-average price/book
ratios).
. The Intermediate Capitalization Growth Stock Index (consisting of pri-
marily medium-capitalization U.S. stocks with higher-than-average
price/book ratios).
. The Intermediate Capitalization Utility Stock Index (consisting of pri-
marily 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 ra-
tios).
. The Small Capitalization Growth Stock Index (consisting of primarily
small-capitalization U.S. stocks with higher-than-average price/book ra-
tios).
The LifePath Funds seek foreign equity market exposure through investment in
foreign equity securities, American Depositary Receipts or European Depositary
Receipts of issuers whose securities are representative of the following indi-
ces 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 In-
dex (MSCI EAFE) Ex-Japan Index (consisting of primarily large-capital-
ization foreign stocks, excluding Japanese stocks).
The LifePath Funds also may seek U.S. and foreign equity market exposure
through investment in equity securities of U.S. and foreign issuers that are
not included in the indices listed above.
DEBT SECURITIES -- The LifePath Funds seek U.S. debt market exposure through
investment in securities representative of 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).
15
<PAGE>
. 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 Mort-
gage Association, Government National Mortgage Association and Federal
Home Loan Mortgage Corporation with maturities greater than one year).
The LifePath Funds seek foreign debt market exposure through investment in
securities representative of 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 Fund
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 Invest-
ors Service, Inc. ("Fitch") or Duff & Phelps, Inc. ("Duff") or, if unrated,
deemed to be of comparable quality by BGFA in accordance with procedures ap-
proved by MIP's Board of Trustees. See "Risk Considerations" below.
MONEY MARKET INSTRUMENTS -- The money market instrument portion of the port-
folio of each Fund generally is invested in high-quality money market instru-
ments, including U.S. Government obligations, obligations of domestic and for-
eign banks, short-term corporate debt instruments and repurchase agreements.
See "Appendix -- Additional Investment Policies" below for a more complete de-
scription of the money market instruments in which each Master Portfolio may
invest.
RISK CONSIDERATIONS
General
Since the investment characteristics and, therefore, investment risks di-
rectly associated with each LifePath Fund correspond to those of the Master
Portfolio in which such Fund invests, the following is a
16
<PAGE>
discussion of the risks associated with the investments of the Master Portfo-
lios. Once again, unless otherwise specified, references to the investment
policies and risks of a Fund also should be understood as references to the
investment policies and risks of the corresponding Master Portfolio.
The net asset value per share of each LifePath Fund is neither insured nor
guaranteed, is not fixed and should be expected to fluctuate.
Equity Securities
The stock investments of the LifePath Funds are subject to equity market
risk. Equity market risk is the possibility that common stock prices will
fluctuate or decline over short or even extended periods. The U.S. stock mar-
ket tends to be cyclical, with periods when stock prices generally rise and
periods when prices generally decline. Throughout the first six months of
1998, the stock market, as measured by the S&P 500 Index and other commonly
used indices, was trading at or close to record levels. There can be no guar-
antee that these performance levels will continue.
Debt Securities
The debt instruments in which the LifePath Funds invest are subject to
credit and interest rate risk. Credit risk is the risk that issuers of the
debt instruments in which the Funds invest may default on the payment of prin-
cipal and/or interest. Interest-rate risk is the risk that increases in market
interest rates may adversely affect the value of the debt instruments in which
the Funds invest. The value of the debt instruments generally changes in-
versely to market interest rates. Debt securities with longer maturities,
which tend to produce higher yields, are subject to potentially greater capi-
tal appreciation and depreciation than obligations with shorter maturities.
Changes in the financial strength of an issuer or changes in the ratings of
any particular security may also affect the value of these investments.
Although some of the Funds' portfolio securities are guaranteed by the U.S.
Government, its agencies or instrumentalities, such securities are subject to
interest rate risk and the market value of these securities, upon which the
Funds' daily net asset value is based, will fluctuate. No assurance can be
given that the U.S. Government would provide financial support to its agencies
or instrumentalities where it is not obligated to do so.
17
<PAGE>
Foreign Securities
The LifePath Funds may invest in debt obligations and equity securities of
foreign issuers and may invest in American Depositary Receipts ("ADRs") and
European Depositary Receipts ("EDRs") of such issuers. Investing in the secu-
rities of issuers in any foreign country, including through ADRs and EDRs, in-
volves special risks and considerations not typically associated with invest-
ing in U.S. companies. These include differences in accounting, auditing and
financial reporting standards; generally higher commission rates on foreign
portfolio transactions; the possibility of nationalization, expropriation or
confiscatory taxation; adverse changes in investment or exchange control regu-
lations (which may include suspension of the ability to transfer currency from
a country); and political, social and monetary or diplomatic developments that
could affect U.S. investments in foreign countries. Additionally, dispositions
of foreign securities and dividends and interest payable on those securities
may be subject to foreign taxes, including withholding taxes. Foreign securi-
ties often trade with less frequency and volume than domestic securities and,
therefore, may exhibit greater price volatility. Additional costs associated
with an investment in foreign securities may include higher custodial fees
than apply to domestic custodial arrangements and transaction costs of foreign
currency conversions. Changes in foreign exchange rates also will affect the
value of securities denominated or quoted in currencies other than the U.S.
dollar. A Fund's performance may be affected either unfavorably or favorably
by fluctuations in the relative rates of exchange between the currencies of
different nations, by exchange control regulations and by indigenous economic
and political developments.
Other Investment Considerations
Because the Funds may shift investment allocations significantly from time
to time, their performance may differ from funds which invest in one asset
class or from funds with a stable mix of assets. Further, shifts among asset
classes may result in relatively high turnover and transaction (i.e., broker-
age commission) costs. Portfolio turnover also can generate short-term capital
gains tax consequences. During those periods in which a high percentage of a
Fund's assets are invested in long-term bonds, the Fund's exposure to inter-
est-rate risk will be greater because the longer maturity of such securities
means they are generally more sensitive to changes in market interest rates
than short-term securities.
18
<PAGE>
Each LifePath Fund also may lend its portfolio securities and enter into
futures transactions, each of which involves risk. The futures contracts and
options on futures contracts that each Fund may purchase may be considered de-
rivatives. Derivatives are financial instruments whose values are derived, at
least in part, from the prices of other securities or specified assets, indi-
ces or rates. Certain of the floating- and variable-rate instruments that each
Fund may purchase may also be considered derivatives. Each Fund may use some
derivatives as part of its short-term liquidity holdings and/or as substitutes
for comparable market positions in the underlying securities. 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. A Fund may not use
derivatives to create leverage without establishing adequate "cover" in com-
pliance with SEC leverage rules.
Asset allocation and modeling strategies are employed by BGFA for other in-
vestment 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 Fund 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 Fund or the
price paid or received by such Fund.
Year 2000
Many computer software systems in use today cannot distinguish the Year 2000
from the Year 1900. Most of the services provided to the Funds depend on the
smooth functioning of computer systems. Any failure to adapt these systems in
time could hamper a Fund's operations and services. The Funds' principal serv-
ice providers have advised the Funds that they are working on necessary
changes to their systems and that they expect their systems to be adapted in
time. There can, of course, be no assurance of success. In addition, because
the Year 2000 issue affects virtually all organizations, the companies or en-
tities in which the Funds invest also could be adversely impacted by the Year
2000 issue. The extent of such impact cannot be predicted.
19
<PAGE>
PERFORMANCE
For purposes of advertising, performance of the LifePath Funds may be calcu-
lated on the basis of average annual total return and/or cumulative total re-
turn 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 re-
investment of dividends and distributions during the period. The return of
shares is expressed as a percentage rate which, if applied on a compounded an-
nual 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
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 as-
sumes 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. Advertise-
ments 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 figures are based on historical results and are not intended to
indicate future performance. 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 1-888-204-3956.
20
<PAGE>
MANAGEMENT OF THE FUNDS
GENERAL -- The Company has not retained the services of an investment ad-
viser because each Fund's assets are invested in a Master Portfolio that has
retained investment advisory services (see "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 in conformity with Maryland law.
The Company's Directors are also MIP's Trustees. Certain of the Company's Di-
rectors also serve as the Trustees of Stagecoach Trust, another open-end in-
vestment 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 Com-
pany, 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."
INVESTMENT ADVISER -- BGFA serves as investment adviser to each LifePath
Master Portfolio. BGFA provides investment guidance and policy direction in
connection with the management of each Master Portfolio's assets. BGFA is an
indirect subsidiary of Barclays Bank PLC ("Barclays") and is located at 45
Fremont Street, San Francisco, California 94105. As of April 30, 1998, BGFA
and its affiliates provided investment advisory services for approximately
$575 billion of assets. MIP has agreed to pay to BGFA a monthly fee at the an-
nual rate of 0.55% of each LifePath Master Portfolio's average daily net as-
sets as compensation for its advisory services. No advisory fees were waived
during the fiscal year ended February 28, 1998.
BGFA, Barclays and their affiliates deal, trade and invest for their own ac-
count 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 viola-
21
<PAGE>
tion of the Glass-Steagall Act. Such counsel has pointed out, however, that
there are no controlling judicial or administrative interpretations or deci-
sions and that future judicial or administrative interpretations of, or deci-
sions related to, present federal or state statutes, including the Glass-
Steagall Act, and regulations relating to the permissible activities of banks
and their subsidiaries and affiliates, as well as future changes in such stat-
utes, 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.
CO-ADMINISTRATORS -- Stephens and BGI are the Funds' co-administrators. Ste-
phens and BGI provide the Funds with administration services, including gen-
eral supervision of the Funds' non-investment operations, coordination of the
other services provided to the Funds, compilation of information for reports
to the SEC and the state securities commissions, preparation of proxy state-
ments and shareholder reports, and general supervision of data compilation in
connection with prepar ing periodic reports to the Company's directors and
officers. Stephens also furnishes office space and certain facilities to con-
duct the Funds' business, and compensates the Company's directors, officers
and employees who are affiliated with Stephens. In addition, except as out-
lined under "Expenses" below, Stephens and BGI will be responsible for paying
all expenses incurred by the Fund other than the fees payable to BGFA. For
these services, Stephens and BGI are entitled to a monthly fee, in the aggre-
gate, at the annual rate of 0.40% of each Fund's average daily net assets.
BGI has delegated certain of its duties as co-administrator to Investors
Bank & Trust Company ("IBT"). IBT, as sub-administrator, is compensated by BGI
for performing certain administration services. Prior to October 21, 1996,
Stephens was the Funds' sole administrator and received fees for services as
described in the SAI.
DISTRIBUTOR -- Stephens is the distributor for the Funds' 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, in-
cluding discretionary portfolio management services since 1983. Stephens cur-
rently manages investment portfolios for pension and profit sharing plans, in-
dividual investors, foundations, insurance companies and university endow-
ments.
22
<PAGE>
Stephens, as the Company's sponsor and the principal underwriter of the
Funds 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 Ste-
phens shall act as agent for the Funds 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"). Stephens does
not receive a fee for providing distribution services to the Funds. BGI pres-
ently acts as a Selling Agent, but does not receive any fee from the Funds for
such activities.
CUSTODIAN -- IBT currently acts as the Funds' custodian. The principal busi-
ness address of IBT is 200 Clarendon Street, Boston, Massachusetts 02116. IBT
is not entitled to receive compensation for its custodial services so long as
it is entitled to receive compensation for providing sub-administration serv-
ices to the Fund.
TRANSFER AND DIVIDEND DISBURSING AGENT -- IBT also acts as the Company's
transfer and dividend disbursing agent.
SHAREHOLDER SERVICING AGENTS -- The Funds have adopted a Shareholder Servic-
ing Plan pursuant to which they have entered into Shareholder Servicing Agree-
ments with BGI and may enter into similar agreements with other entities (col-
lectively, "Shareholder Servicing Agents") for the provision of certain serv-
ices to Fund shareholders. The services provided may include personal services
relating to shareholder accounts, such as answering shareholder inquiries,
providing reports and other information, and providing services related to the
maintenance of shareholder accounts. For these services, each Shareholder Ser-
vicing Agent is entitled to receive a monthly fee at the annual rate of up to
0.20% of the average daily value of each LifePath Fund 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 Conduct Rules
of the National Association of Securities Dealers, Inc., whichever is less.
Stephens and BGI as co-administrators have agreed to pay these shareholder
servicing fees out of the fees each receives for co-administration services.
23
<PAGE>
A Shareholder Servicing Agent also may impose certain conditions on its cus-
tomers, subject to the terms of this Prospectus, in addition to or different
from those imposed by the Company, such as requiring a minimum initial invest-
ment 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 a former affiliate of Wells Fargo
Bank may be characterized as indirect payments by each Master Portfolio to fi-
nance activities primarily intended to result in the sale of interests in such
Master Portfolio. The Plan provides that if any portion of a Master Portfo-
lio's advisory fees (up to 0.25% of the average daily net assets of each Mas-
ter Portfolio on an annual basis) were deemed to constitute an indirect pay-
ment for activities that are primarily intended to result in the sale of in-
terests in a Master Portfolio, such payment would be authorized pursuant to
the Plan.
EXPENSES -- Except for extraordinary expenses, brokerage and other expenses
connected with to the execution of portfolio transactions and certain other
expenses which are borne by the Funds, Stephens and BGI have agreed to bear
all costs of the Funds' and the Company's operations.
HOW TO BUY SHARES
WHO MAY INVEST
The following types of investors are eligible to invest in the Funds:
. Participants in Benefit Plans ("Plan Participants"), including retire-
ment plans, who have appointed one of the Company's Shareholder Servic-
ing Agents as plan trustee, plan administrator or other agent, or whose
plan trustee, plan administrator or other agent has a servicing arrange-
ment with a Shareholder Servicing
24
<PAGE>
Agent that permits investments in the Funds, and Plan Participants who
invest pursuant to an agreement between such a Benefit Plan and a Share-
holder Servicing Agent.
. Investors using proceeds which are being rolled over directly from a
qualified Benefit Plan to an Individual Retirement Account ("IRA") pur-
suant to arrangements between the sponsor or other agent of the quali-
fied Benefit Plan and a Shareholder Servicing Agent, or who have estab-
lished a tax-deferred retirement plan with a Shareholder Servicing
Agent.
. Investors who have an account arrangement with one of the Company's
Shareholder Servicing Agents that permits investments in Fund shares
("Qualified Buyers").
. Investors who have made arrangements with BGI and invest at least $1
million in a Fund ("Direct Buyers").
Eligible investors may purchase Fund shares in one of the several ways de-
scribed below. For more information or additional forms, call 1-888-204-3956.
The Company or Stephens may make the Prospectus available in an electronic for-
mat. 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, Direct 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 in-
vestor 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 is-
sued. 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 Funds.
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<PAGE>
GENERAL
Shares of each 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 1:00 p.m., Pacific
time) will be executed at the NAV determined as of the close of regular trad-
ing on the NYSE on that Business Day. Orders received by the Transfer Agent
after the close of regular trading on the NYSE are executed on the next Busi-
ness 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 iden-
tification number ("TIN"), which is usually the investor's social security
number or employer identification number, upon opening or reopening an ac-
count.
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 administrator
or other agent, or whose plan trustee, plan administrator or other agent has a
servicing arrangement with a Shareholder Servicing Agent that permits invest-
ments in the Funds. Benefit Plans include 401(k) plans and other plans quali-
fied 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 Ser-
vicing Agent.
Fund investments by participants in 401(k) plans are typically made by pay-
roll deductions arranged between participants and their employers. Partici-
pants 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
26
<PAGE>
should contact their employer's benefits department for more information about
contribution methods.
Plan Participants who have established an account with a Shareholder Servic-
ing Agent may purchase Fund shares in accordance with their account arrange-
ments 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-de-
ferred 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 con-
tact 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 indi-
vidual 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 re-
tirement 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
Qualified Buyers may open a Fund account and make additional purchases
through a Shareholder Servicing Agent with whom they have an account arrange-
ment. Shareholder Servicing Agents may transmit purchase orders to the Trans-
fer 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").
PURCHASES BY DIRECT BUYERS
Direct Buyers may open a Fund account by completing an Account Application.
Direct Buyers may purchase Fund shares by contacting the
27
<PAGE>
Transfer Agent, by instructing the Transfer Agent to debit an Approved Bank
Account or by wire.
TO PURCHASE FUND SHARES:
By Check: Initial and subsequent investments should be sent to MasterWorks
Funds, Inc., c/o Investors Bank and Trust Co., P.O. Box 9130, Mail Code MFD23,
Boston, MA 02117-9130.
By Wire: Investors establishing new accounts should telephone Investors Bank
& Trust Co., at 1-888-204-3956 prior to sending the bank wire.
Investors should instruct their bank to wire funds as follows:
Investors Bank & Trust Co.
ABA #011-001-438
Attn: Transfer Agent
Account #DDA 555555535
For Further Credit to: MasterWorks Funds, Inc.
Shareholder Account Name:
Shareholder Account Number:
IN-KIND PURCHASES
Payment for shares of a Fund may, at the discretion of BGFA as investment
adviser, be made in the form of securities that are permissible investments
for such Fund. Shares purchased in exchange for securities can not be redeemed
until the exchange transaction has settled. For further information, see "Pur-
chase and Redemption of Shares" in the SAI.
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 af-
ter the Company has received a redemption request in proper form. Redemption
proceeds may be more or less than the amount invested depending on the rele-
vant Fund's net asset value of shares at the time of purchase and redemption.
The Company generally remits redemption proceeds from a Fund within seven
days after a redemption order is received in proper form, absent extraordinary
circumstances. Such extraordinary circumstances
28
<PAGE>
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 to deter-
mine fairly 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.
Redemption orders that are received by the Transfer Agent before the close
of regular trading on the NYSE (currently 1:00 p.m., Pacific time) will be ex-
ecuted at the net asset value determined as of the close of regular trading on
the NYSE on that Business Day. 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 Transfer Agent on the in-
vestor'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 Trans-
fer Agent on the same day.
Unless the investor has made other arrangements with an appropriate Share-
holder Servicing Agent and the Transfer Agent has been informed of such ar-
rangements, proceeds of a redemption order made by the investor 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.
REDEMPTIONS BY 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 pro-
cedures 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 proce-
29
<PAGE>
dures 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 ap-
plicable to them.
REDEMPTIONS BY QUALIFIED BUYERS
Qualified Buyers should contact their Shareholder Servicing Agent regarding
redemption procedures applicable to them. The redemption procedures outlined
in the remainder of this section do not apply to Qualified Buyers.
REDEMPTIONS BY DIRECT BUYERS
Redemptions by Mail
1. Write a letter of instruction to the Transfer Agent. 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.
Written requests for redemptions should be mailed to MasterWorks Funds,
Inc., c/o Investors Bank and Trust Co., P.O. Box 9130, Mail Code MFD23, Bos-
ton, MA 02117-9130.
Unless other instructions are given in proper form, a check for the redemp-
tion proceeds is sent to the investor's address of record.
Redemptions by Telephone
Telephone redemption or exchange privileges are made available to Direct
Buyers who have completed the "Redemptions by Telephone" section of their
Fund's account application. 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 genu-
ine. The Company requires the Transfer Agent to employ reasonable procedures,
such as requiring a form of personal identification, to confirm that instruc-
tions 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 fraudu-
lent instruc -
30
<PAGE>
tions. Neither the Company nor the Transfer Agent will be liable for following
telephone instructions reasonably believed to be genuine.
If you have completed the Redemption by Telephone portion of a Fund's ac-
count application, you may redeem Fund shares on any Business Day by calling
the Transfer Agent at 1-888-204-3956 before the close of regular trading on
the NYSE, generally 4:00 p.m. Eastern Time.
During times of drastic economic or market conditions investors may experi-
ence difficulty in contacting the Transfer Agent by telephone to request a re-
demption 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 re-
quest being processed at a later time than it would have been if telephone re-
demption had been used. During the delay, a LifePath Fund's net asset value
may fluctuate.
Expedited Redemptions by Letter and Telephone
A Direct Buyer 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. Tele-
phone redemption and exchange privileges are made available to a Direct Buyer
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 re-
ceipt of redemption proceeds and the Fund's receipt of the investor's redemp-
tion request would be expedited.
Direct Buyers may request expedited redemption by calling the Transfer Agent
at 1-888-204-3956.
Direct Buyers may request expedited redemption by mailing an expedited re-
demption request to the Transfer Agent.
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 investor's expe-
dited 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
31
<PAGE>
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 extraor-
dinary circumstances could include those described above as potentially delay-
ing redemptions, and also could include situations involving an unusually
heavy volume of wire transfer orders on a national or regional basis or commu-
nication or transmittal delays that could cause a brief delay in the wiring or
crediting of funds.
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 invest-
or's state of residence. Before undertaking an exchange into another fund, in-
vestors 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
the Company at 1-888-204-3956.
Shares are exchanged at the next determined net asset value. No fees are
currently charged to shareholders directly in connection with exchanges, al-
though the Company reserves the right, upon not less than 60 days' written no-
tice, 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 be-
lieves 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.
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<PAGE>
SHARE VALUE
Shares of the Funds are sold on a continuous basis at the applicable offer-
ing price (net asset value per share) next determined after an order in proper
form is received by the Transfer Agent. Net asset value ("NAV") per share is
determined as of the close of regular trading on the NYSE (currently 1:00
p.m., Pacific time) each Business Day.
The NAV of a share of each Fund is the value of total net assets attribut-
able to such Fund divided by the number of outstanding shares of that Fund.
The value of the net assets is determined daily by adjusting the net assets at
the beginning of the day by the value of shareholder activity, net investment
income and net realized and unrealized gains or losses for that day. Net in-
vestment income is calculated each day as daily income less expenses. The NAV
of each Fund is expected to fluctuate daily and is expected to differ. 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 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
MIP'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 each Master Portfolio's investments, see "Determination of
Net Asset Value" in the SAI.
DIVIDENDS AND DISTRIBUTIONS
The Funds intend to declare and pay quarterly dividends of substantially all
of their net investment income. The Funds intend to distribute any net real-
ized capital gains at least annually, in all events in a manner consistent
with the provisions of the 1940 Act and the Internal Revenue Code. No Fund
will make distributions from net realized securities gains unless capital loss
carryovers, if any, have been utilized or have expired. All dividends and dis-
tributions 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.
33
<PAGE>
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 pur-
chase would represent, in substance, a return of capital, the dividend or dis-
tribution may consist of net investment income or net realized capital gain
and, accordingly, would be taxable to the investor.
TAXES
GENERAL
Distributions from a Fund's net investment income and net short-term capital
gains, if any, are designated as dividend distributions and taxable to the
Fund's shareholders as ordinary income. Distributions from a Fund's net capi-
tal gain (generally, the excess of net long-term capital gains over net short-
term capital loss) are designated as capital gain distributions and taxable to
the Fund's shareholders as net capital gain. Noncorporate shareholders may be
taxed on such gain at preferential rates. In general, your distributions will
be taxable when paid, whether you take such distributions in cash or have them
automatically reinvested in additional Fund shares. However, distributions de-
clared in October, November, and December and distributed by the following
January will be taxable as if they were paid by December 31. A portion of Fund
distributions made to corporate shareholders may qualify for the dividends-re-
ceived deduction in the hands of such shareholders.
Your redemptions (including redemptions in-kind) and exchanges of Fund
shares will ordinarily result in a taxable capital gain or loss, depending on
the amount you receive for your shares (or are deemed to receive in the case
of exchanges) and the cost of your shares. See "Federal Income Taxes -- Dispo-
sition of Fund Shares" in the SAIs.
If you buy shares of the Fund shortly before it distributes its annual
gains, your distribution from the Fund will, in effect, be a taxable return of
part of your investment. Similarly, if you buy shares of the Fund that holds
appreciated securities in its portfolio, you will receive a taxable return of
part of your investment if and when the Fund sells the appreciated securities
and realizes the gain. The Fund may have built up, or have the potential to
build up, high levels of unrealized appreciation.
Foreign shareholders may be subject to different tax treatment, including
withholding taxes. See "Federal Income Taxes -- Foreign Share-
34
<PAGE>
holders" in the SAIs. In certain circumstances, U.S. residents may also be
subject to withholding taxes. See "Federal Income Taxes -- Backup Withholding"
in the SAIs.
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 invest-
ment income and capital gain distributions.
However, such tax-exempt investors may be subject to tax on certain unre-
lated taxable income which could arise, for example, when such investors ac-
quire shares in the Fund through the use of leverage. Tax-exempt investors
should consult their tax advisors regarding the unrelated business taxable in-
come rules.
The foregoing discussion regarding taxes is based on tax laws which were in
effect as of the date of this Prospectus and summarizes only some of the im-
portant federal tax considerations generally affecting the Funds and their
shareholders. It is not intended as a substitute for care- ful tax planning;
you should consult your tax advisor with respect to your specific tax situa-
tion as well as with respect to foreign, state and local taxes. Further fed-
eral tax considerations are discussed in the SAI.
GENERAL INFORMATION
DESCRIPTION OF THE COMPANY
Each Fund is a series of the Company. The Company was organized as a Mary-
land corporation on October 15, 1992, and currently offers twelve series of
shares. 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 Company is in-
cluded in the Funds' SAI under "Management." Although the Company is not re-
quired to hold regular annual shareholder meetings, occasional annual or spe-
cial meetings may be required for purposes such as electing or removing Direc-
tors, approving advisory contracts and changing a Fund's investment objective
or fundamental investment policies.
35
<PAGE>
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 re-
quest, 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 sub-
mitted 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.
Whenever a Fund, as a Master Portfolio interestholder, is requested to vote
on any matter submitted to interestholders of such Master Portfolio, the Fund
will hold a meeting of its shareholders to consider such matters. The Fund
will cast its votes in proportion to the votes received from its shareholders.
Shares for which the Fund receives no voting instructions are voted in the
same proportion as the votes received from Fund shareholders. If a Master
Portfolio's investment objective or policies are changed, the corresponding
Fund may elect to change its objective or policies to correspond to those of
the Master Portfolio. The Fund may also elect to redeem its interests in the
Master Portfolio and either seek a new investment company with a matching ob-
jective in which to invest or retain its own investment adviser to manage the
Fund's portfolio in accordance with its objective. In the latter case, the
Fund's inability to find a substitute investment company in which to invest or
equivalent management services could adversely affect shareholders' invest-
ments in that Fund.
INDEPENDENT AUDITORS
KPMG Peat Marwick LLP, Three Embarcadero Center, San Francisco, California
94111, serves as independent auditors for the Company.
36
<PAGE>
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 1-888-204-3956.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRE-
SENTATIONS 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 OF-
FERING MAY NOT LAWFULLY BE MADE.
37
<PAGE>
APPENDIX -- ADDITIONAL INVESTMENT POLICIES
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. To avoid the need to refer to both the Funds and the Master Portfolios
in every instance, the following sections generally refer to the Funds only.
REFERENCES TO THE INVESTMENTS AND INVESTMENT POLICIES AND RISKS OF THE
LIFEPATH FUNDS, UNLESS OTHERWISE INDICATED, SHOULD BE UNDERSTOOD AS REFERENCES
TO THE INVESTMENTS AND INVESTMENT POLICIES AND RISKS OF THE CORRESPONDING MAS-
TER PORTFOLIOS.
U.S. GOVERNMENT OBLIGATIONS -- The LifePath Funds may invest in various
types of U.S. Government obligations. U.S. Government obligations include se-
curities issued or guaranteed as to principal and interest by the U.S. Govern-
ment, its agencies or instrumentalities. Payment of principal and interest on
U.S. Government obligations (i) may be backed by the full faith and credit of
the United States (as with U.S. Treasury obligations and GNMA certificates) or
(ii) may be backed solely by the issuing or guaranteeing agency or instrumen-
tality itself (as with FNMA notes). In the latter case, the investor must look
principally to the agency or instrumentality issuing or guaranteeing the obli-
gation for ultimate repayment, which agency or instrumentality may be pri-
vately owned. There can be no assurance that the U.S. Government would provide
financial support to its agencies or instrumentalities where it is not obli-
gated to do so. 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 struc-
ture or contract terms.
SECURITIES OF NON-U.S. ISSUERS -- The Funds may invest in certain securities
of non-U.S. issuers as discussed below.
Obligations of Foreign Governments, Supranational Entities and Banks -- Each
LifePath Fund may invest in U.S. dollar-denominated short-term obligations is-
sued or guaranteed by one or more foreign governments or any of their politi-
cal subdivisions, agencies or instrumentalities that are determined by BGFA to
be of comparable quality to the other obligations in which such Fund may in-
vest. The Funds may also invest in debt obligations of supranational entities.
Supranational entities include international organizations designated or sup-
ported by gov-
A-1
<PAGE>
ernmental entities to promote economic reconstruction or development and in-
ternational banking institutions and related government agencies. Examples in-
clude 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 Fund's assets in-
vested in obligations of foreign governments and supranational entities will
vary depending on the relative yields of such securities, the economic and fi-
nancial markets of the countries in which the investments are made and the in-
terest rate climate of such countries.
Each Fund may invest a portion of its total assets in high-quality, short-
term (one year or less) debt obligations of foreign branches of U.S. banks or
U.S. branches of foreign banks that are denominated in and pay interest in
U.S. dollars.
Foreign Equity Securities and Depositary Receipts -- Each LifePath Fund's
assets may be invested in equity securities of foreign issuers and American
Depositary Receipts ("ADRs") and European Depositary Receipts ("EDRs") of such
issuers.
ADRs and EDRs may not necessarily be denominated in the same currency as the
securities into which they may be converted. ADRs are receipts typically is-
sued by a United States bank or trust company which evidence ownership of un-
derlying securities issued by a foreign corporation. EDRs, which are sometimes
referred to as Continental Depositary Receipts ("CDRs"), are receipts issued
in Europe typically by non-United States banks and trust companies that evi-
dence 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
Fund 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 depositary, whereas a depositary may establish an
unsponsored facility without participation by the issuer of the deposited se-
curity. Holders of unsponsored depositary receipts generally bear all the
costs of such facilities and the depositary of an unsponsored facility fre-
quently is under no obligation to distribute shareholder communications re-
ceived 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.
FLOATING- AND VARIABLE-RATE OBLIGATIONS -- Each LifePath Fund may purchase
debt instruments with interest rates that are peri-
A-2
<PAGE>
odically adjusted at specified intervals or whenever a benchmark rate or index
changes. These adjustments generally limit the increase or decrease in the
amount of interest received on the debt instruments. Floating- and variable-
rate instruments are subject to interest-rate risk and credit risk.
MORTGAGE-RELATED SECURITIES -- Each LifePath Fund may invest in mortgage-re-
lated securities ("MBSs"), which are securities representing interests in a
pool of loans secured by mortgages. The resulting cash flow from these mort-
gages is used to pay principal and interest on the securities. MBSs are assem-
bled 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 prin-
cipal 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 guaran-
tee. GNMA is a wholly-owned U.S. Government corporation within the Department
of Housing and Urban Development and, as such, Ginnie Maes 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 prin-
cipal at any time after default on an underlying mortgage, but in no event
later than one year after the guarantee becomes payable.
A-3
<PAGE>
FUTURES CONTRACTS AND OPTIONS TRANSACTIONS -- Each LifePath Fund may use
futures as a substitute for a comparable market position in the underlying se-
curities.
A futures contract is an agreement between two parties, a buyer and a sell-
er, to exchange a particular commodity or financial statement at a specific
price on a specific date in the future. An option transaction generally in-
volves a right, which may or may not be exercised, to buy or sell a commodity
or financial instrument at a particular price on a specified future date.
Futures contracts and options are standardized and traded on exchanges, where
the exchange serves as the ultimate counterparty for all contracts. Conse-
quently, the primary credit risk on futures contracts is the creditworthiness
of the exchange. Futures contracts are subject to market risk (i.e., exposure
to adverse price changes).
Although each of the Funds 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 par-
ticular 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 a Fund to substantial losses. If it is not possible, or if a Fund
determines not to close a futures position in anticipation of adverse price
movements, the Fund will be required to make daily cash margin payments.
Stock Index Futures and Options on Stock Index Futures -- Each LifePath Fund
may invest in stock index futures and options on stock index futures as a sub-
stitute for a comparable market position in the underlying securities. A stock
index future obligates the seller to deliver (and the purchaser to take), ef-
fectively, an amount of cash equal to a specific dollar amount times the dif-
ference 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 Fund intends to purchase
and sell futures contracts on the stock index for which it can obtain the best
price with consideration also given to liquidity. There can be no assur-
A-4
<PAGE>
ance that a liquid market will exist at the time when a Fund seeks to close
out a futures contract or a futures option position. Lack of a liquid market
may prevent liquidation of an unfavorable position.
Interest-Rate Futures Contracts and Options on Interest-Rate Futures Con-
tracts -- Each LifePath Fund 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 Funds may also sell options
on interest-rate futures contracts as part of closing purchase transactions to
terminate their options positions. No assurance can be given that such closing
transactions can be effected or the degree of correlation between price move-
ments in the options on interest rate futures and price movements in the
Funds' portfolio securities which are the subject of the transaction.
Interest-Rate and Index Swaps -- Each LifePath Fund may enter into interest-
rate and index swaps in pursuit of their investment objectives. Interest-rate
swaps involve the exchange by a Fund with another party of their respective
commitments to pay or receive interest (for example, an exchange of floating-
rate payments on fixed-rate payments). Index swaps involve the exchange by a
Fund with another party of cash flows based upon the performance of an index
of securities or a portion of an index of securities that usually include div-
idends or income. In each case, the exchange commitments can involve payments
to be made in the same currency or in different currencies. A Fund will usu-
ally enter into swaps on a net basis. In so doing, the two payment streams are
netted out, with a Fund receiving or paying, as the case may be, only the net
amount of the two payments. If a Fund enters into a swap, it will maintain a
segregated account on a gross basis, unless the contract provides for a segre-
gated account on a net basis. If there is a default by the other party to such
a transaction, a Fund will have contractual remedies pursuant to the agree-
ments related to the transaction.
The use of interest-rate and index swaps is a highly specialized activity
which involves investment techniques and risks 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 Fund. 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 of payments that a
Fund is contractually obligated to make. There is also a risk of a default by
the other party to a swap, in which case a Fund may not receive net amount of
payments that a Fund contractually is entitled to receive.
A-5
<PAGE>
Foreign Currency and Futures Transactions -- 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 con-
tract. The forward foreign currency market offers less protection against de-
fault than is available when trading currencies on an exchange, since a for-
ward currency contract is not guaranteed by an exchange or clearinghouse.
Therefore, a default on a forward currency contract would deprive a LifePath
Fund of unrealized profits or force such Fund to cover its commitments for
purchase or resale, if any, at the current market price.
Each LifePath Fund may combine forward currency exchange contracts with in-
vestments in securities denominated in other currencies.
Each LifePath Fund also may maintain short positions in forward currency ex-
change transactions, which would involve the Fund 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 Fund contracted to receive in the exchange.
Unlike trading on domestic futures exchanges, trading on foreign futures ex-
changes is not regulated by the Commodity Futures Trading Commission (the
"CFTC") and generally is subject to greater risks than trading on domestic ex-
changes. 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 Fund might realize in trading could be eliminated by adverse changes
in the exchange rate; adverse exchange rate changes also could cause a Fund to
incur losses. Transactions on foreign exchanges may include both futures con-
tracts 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.
INVESTMENT COMPANY SECURITIES -- Each Master Portfolio may invest in securi-
ties issued by other investment companies which principally invest in securi-
ties 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, sub-
ject to certain exceptions, (i) 3% of the
A-6
<PAGE>
total voting stock of any one investment company, (ii) 5% of the Master Port-
folio'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 securi-
ties of other investment companies generally will involve duplication of advi-
sory fees and certain other expenses. The Master Portfolio may also purchase
shares of exchange listed closed-end funds.
ILLIQUID SECURITIES -- Each LifePath Fund 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 privately issued securities and other securities that are subject to legal
or contractual restrictions on resale, floating- and variable-rate demand
obligations as to which the Fund cannot exercise a demand feature 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.
SHORT-TERM INSTRUMENTS AND TEMPORARY INVESTMENTS -- Each LifePath Fund may
invest in the following high-quality money market instruments on an ongoing
basis to provide liquidity, for temporary purposes when there is an unexpected
level of shareholder purchases or redemptions or when "defensive" strategies
are appropriate: (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' ac-
ceptances, fixed time deposits and other obligations of domestic banks (in-
cluding 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 BGFA or Wells Fargo Bank; (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 have more than $10 billion, or the equivalent in other
currencies, in total assets and in the opinion of BGFA are of comparable qual-
ity to obligations of U.S. banks which may be purchased by the Fund.
A-7
<PAGE>
Bank Obligations -- Each Fund may invest in bank obligations, including cer-
tificates 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.
Certificates of deposit are negotiable certificates evidencing the obliga-
tion 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 institu-
tion for a specified period of time at a stated interest rate. Time deposits
which may be held by a Fund will not benefit from insurance from the Bank In-
surance 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 unin-
sured, direct obligations, bearing fixed, floating- or variable-interest
rates.
Commercial Paper and Short-Term Corporate Debt Instruments --Each Fund may
invest in commercial paper (including variable amount master demand notes),
which consists of short-term, unsecured promissory notes issued by corpora-
tions 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 pur-
suant 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 Fund monitors on an ongoing basis the ability of an
issuer of a demand instrument to pay principal and interest on demand.
Each Fund 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 Fund 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 Fund, an issue of securities
may cease to be rated or its
A-8
<PAGE>
rating may be reduced below the minimum rating required for purchase by the
Fund. The investment adviser and/or sub-adviser to each Fund will consider
such an event in determining whether the Fund should continue to hold the ob-
ligation. To the extent the Fund continues to hold such obligations, it may be
subject to additional risk of default.
Repurchase Agreements -- Each Fund may enter into repurchase agreements
wherein the seller of a security to a Fund agrees to repurchase that security
from the Fund at a mutually-agreed upon time and price. The period of maturity
is usually quite short, often overnight or a few days, although it may extend
over a number of months. A Fund may enter into repurchase agreements only with
respect to securities that could otherwise be purchased by the Fund, and all
repurchase transactions must be collateralized. A Fund may incur a loss on a
repurchase transaction if the seller defaults and the value of the underlying
collateral declines or is otherwise limited or if receipt of the security or
collateral is delayed. The Funds may participate in pooled repurchase agree-
ment transactions with other funds advised by BGFA.
FORWARD COMMITMENTS, WHEN-ISSUED PURCHASES AND DELAYED-DELIVERY TRANSAC-
TIONS -- Each Fund may purchase or sell securities on a when-issued or de-
layed-delivery basis and make contracts to purchase or sell securities for a
fixed price at a future date beyond customary settlement time. Securities pur-
chased or sold on a when-issued, delayed-delivery or forward commitment basis
involve a risk of loss if the value of the security to be purchased declines,
or the value of the security to be sold increases, before the settlement date.
Although a Fund will generally purchase securities with the intention of ac-
quiring them, a Fund may dispose of securities purchased on a when-issued, de-
layed-delivery or a forward commitment basis before settlement when deemed ap-
propriate by the adviser.
BORROWING MONEY -- As a fundamental policy, each Fund is permitted to borrow
to the extent permitted under the 1940 Act. However, each Fund currently in-
tends to borrow money only for temporary or emergency (not leveraging) purpos-
es, and may borrow up to one-third 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 exceed 5% of a Fund's total assets, the Fund will not make any new
investments.
LOANS OF PORTFOLIO SECURITIES -- Each Fund may lend securities from their
portfolios to brokers, dealers and financial institutions (but not individu-
als) in order to increase the return on such Fund's portfolio.
A-9
<PAGE>
The value of the loaned securities may not exceed one-third of a Fund's total
assets and loans of portfolio securities are fully collateralized based on
values that are marked-to-market daily. The Funds will not enter into any
portfolio security lending arrangement having a duration of longer than one
year. The principal risk of portfolio lending is potential default or insol-
vency of the borrower. In either of these cases, a Fund could experience de-
lays in recovering securities or collateral or could lose all or part of the
value of the loaned securities. The Funds may pay reasonable administrative
and custodial fees in connection with loans of portfolio securities and may
pay a portion of the interest or fee earned thereon the borrower or a placing
broker.
CONVERTIBLE SECURITIES -- Each LifePath Fund may purchase fixed-income con-
vertible 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 securi-
ties are senior to common stock in a corporation's capital structure, but usu-
ally 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 con-
vertible security also affords an investor the opportunity, through its con-
version 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 "con-
version 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 gen-
erally 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.
RATINGS -- The ratings of Moody's, S&P, Fitch and Duff represent their opin-
ions 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 prin-
cipal payments, they do not evaluate the market value risk of such obliga-
tions. Therefore, although these ratings may be
A-10
<PAGE>
SPONSOR, DISTRIBUTOR AND CO-ADMINISTRATOR
Stephens Inc.
Little Rock, Arkansas
CO-ADMINISTRATOR
Barclays Global Investors, N.A.
San Francisco, California
INVESTMENT ADVISER
Barclays Global Fund Advisors
San Francisco, California
CUSTODIAN, TRANSFER AGENT AND DIVIDEND DISBURSING AGENT
Investors Bank & Trust Company
Boston, Massachusetts
LEGAL COUNSEL
Morrison & Foerster LLP
Washington, D.C.
INDEPENDENT AUDITORS
KPMG Peat Marwick LLP
San Francisco, California
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 CRIMI-
NAL OFFENSE.
<PAGE>
MasterWorks(R) Funds
c/o Investors Bank and Trust Co.
200 Clarendon Street
Boston, MA 02116
<PAGE>
MUTUAL FUND PROSPECTUS
June 30, 1998
[GRAPHIC APPEARS HERE]
MONEY MARKET FUND
Advised by Barclays Global Fund Advisors
Sponsored and distributed by Stephens Inc.,
Member NYSE/SIPC
MasterWorks(R) Funds
<PAGE>
MasterWorks Funds 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 invest-
ors 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 refer-
ence. It sets forth concisely the information about the Fund that an investor
should know before investing. A Statement of Additional Information ("SAI")
dated June 30, 1998 describing the Fund has been filed with the Securities and
Exchange Commission ("SEC") and is incorporated by reference into this Pro-
spectus. The SAI is available without charge by calling the Company at 1-888-
204-3956 or by writing the Company at the address printed on the back of the
Prospectus. The SAI and other information is also available on the SEC's
website (http://www.sec.gov).
-------------------
AS WITH ALL MUTUAL FUNDS, THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAP-
PROVED BY THE SECURITIES AND EXCHANGE COMMISSION, ANY STATE SECURITIES COMMIS-
SION 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, BARCLAYS GLOBAL INVESTORS, N.A., INVESTORS BANK & TRUST CO. OR
ANY OF THEIR 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 THE 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.
-------------------
BARCLAYS GLOBAL FUND ADVISORS IS THE INVESTMENT ADVISER TO THE MONEY MARKET
FUND AND TOGETHER WITH ITS AFFILIATES AND WELLS FARGO BANK, N.A. PROVIDES
OTHER SERVICES TO THE FUND FOR WHICH IT IS COMPENSATED. STEPHENS INC., WHICH
IS NOT AFFILIATED WITH BARCLAYS GLOBAL FUND ADVISORS, IS THE SPONSOR AND CO-
ADMINISTRATOR AND SERVES AS THE DISTRIBUTOR FOR THE COMPANY.
PROSPECTUS
JUNE 30, 1998
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Prospectus Summary..................................................... 1
Summary of Fund Expenses............................................... 4
Explanation of the Tables.............................................. 4
Financial Highlights................................................... 5
The Fund............................................................... 6
Management of the Fund................................................. 9
How to Buy Shares...................................................... 12
How to Redeem Shares................................................... 15
Exchange Privilege..................................................... 19
Share Value............................................................ 19
Dividends and Distributions............................................ 20
Taxes.................................................................. 20
General Information.................................................... 21
<CAPTION>
APPENDIX
--------
<S> <C>
Additional Investment Policies......................................... A-1
</TABLE>
<PAGE>
PROSPECTUS SUMMARY
The following summary provides investors with basic information about the
Fund. For more information, please refer specifically to the identified Pro-
spectus 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 re-
tirement plans, who have appointed one of the Company's Selling Agents
as plan trustee, plan administrator or other agent, or whose plan trust-
ee, plan administrator or other agent has an arrangement with a Selling
Agent that permits investments in Fund shares, and individuals who in-
vest pursuant to an agreement between a Benefit Plan and a Selling
Agent.
. Investors using proceeds that are being rolled over directly from a
qualified Benefit Plan to an Individual Retirement Account ("IRA") pur-
suant to arrangements between the sponsor or other agent of the quali-
fied Benefit Plan and a Selling Agent, or who have established a tax-de-
ferred retirement plan with a Selling Agent.
. Investors who have an account arrangement with one of the Company's
Selling Agents that permits investments in Fund shares.
. Investors who have made arrangements with Barclays Global Investors,
N.A. ("BGI") and invest at least $1 million in the Fund.
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 enter-
prises), 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 -- Addi-
tional Investment Policies."
1
<PAGE>
Q. WHAT ARE SOME OF THE POTENTIAL RISKS ASSOCIATED WITH AN INVESTMENT IN THE
FUND?
A. An investment in the Fund is not a bank deposit or obligation of Barclays
Global Fund Advisors ("BGFA") or BGI and is not insured by the Federal De-
posit Insurance Corporation ("FDIC"). An investment in the Fund is not in-
sured or guaranteed against loss of principal. Therefore, investors should
be willing to accept some risk with the money invested in the Fund. Al-
though 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 in-
vestment objective.
See "The Fund -- Risk Considerations" and "Appendix -- Additional Invest-
ment 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 Fund is open for business (a "Business Day"). The
Fund is open for business Monday through Friday and is closed on New York
Stock Exchange ("NYSE") and federal bank holidays.
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 BGFA. Wells Fargo Bank, N.A. ("Wells Fargo Bank")
serves as sub-adviser to the Fund and provides investment advice to BGFA.
As of April 30, 1998, BGFA and its affiliates provided investment advisory
services for approximately $575 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 trans-
action fees, the Fund does not impose shareholder transaction
2
<PAGE>
fees on the purchase, redemption or exchange of its shares. Selling
Agents, in accordance with the terms of their customer account arrange-
ments, may charge additional fees for maintaining customer accounts.
See "Management of the Fund."
Q. HOW ARE THE FUND'S INVESTMENTS VALUED?
A. The price per share or "net asset value" ("NAV") of the Fund is based on
the value of the Fund's total assets (net of liabilities) divided by the
number of Fund shares outstanding. The Fund's investments are valued on
the basis of the amortized cost method, which assumes receipt of a steady
rate of payment until maturity rather than actual changes in market value.
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 NAV 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 the Company, 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 Fund may be redeemed at NAV without the imposition of a
sales charge or redemption fee on any Business Day by letter or by tele-
phone (provided you have completed the "Redemption by Telephone" portion
of your account application). For more information, contact your Selling
Agent.
See "How to Redeem Shares."
3
<PAGE>
SUMMARY OF FUND EXPENSES
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average daily net assets)
<TABLE>
<S> <C>
Management Fees........................................................... 0.35%
Co-Administration Fees.................................................... 0.10%
----
TOTAL FUND OPERATING EXPENSES............................................. 0.45%
</TABLE>
EXAMPLE OF EXPENSES
An investor would pay the following expenses on a $1,000 investment, assum-
ing (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>
$5 $14 $25 $57
</TABLE>
EXPLANATION OF THE TABLES
The purpose of the foregoing tables is to assist an investor in understand-
ing the various fees and expenses that an investor in the Fund will pay di-
rectly or indirectly. The tables do not reflect any charges that may be im-
posed by Selling Agents directly on customer accounts in connection with an
investment in the Fund. The following provides a general explanation of the
information provided in the tables.
ANNUAL FUND OPERATING EXPENSES reflect the level of ongoing fees expected to
be in effect during the current fiscal year. "Management Fees" reflect the
amounts paid for such services during the most recently completed fiscal year.
"Co-Administration Fees" reflect the contractual level of such fees currently
payable by the Fund. BGFA, BGI and Stephens each may elect, in its sole dis-
cretion, 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, see "Manage-
ment of the Fund."
EXAMPLE OF EXPENSES is a hypothetical illustration of the expenses associ-
ated 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 ex-
pected 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.
4
<PAGE>
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING AS SHOWN)
The following information has been derived from the Financial Highlights in-
cluded in the Fund's financial statements for the fiscal year ended February
28, 1998. The financial statements are incorporated by reference into the
Fund's SAI and have been audited by KPMG Peat Marwick LLP, independent audi-
tors, whose report thereon dated April 3, 1998, also is incorporated by refer-
ence into the SAI. This information should be read in conjunction with the fi-
nancial statements and the notes thereto. The SAI has been incorporated by
reference into this Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED PERIOD ENDED
FEBRUARY 28, FEBRUARY 28, FEBRUARY 29, FEBRUARY 28, FEBRUARY 28,
1998 1997 1996 1995 1994*
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net Asset Value,
beginning of period..... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
Income from investment
operations:
Net investment income.. 0.05 0.05 0.05 0.04 0.02
Net realized and
unrealized gain on
investments............ 0.00 0.00 0.00 0.00 0.00
-------- -------- -------- -------- -------
Total from investment
operations.............. 0.05 0.05 0.05 0.04 0.02
Less distributions:
From net investment
income................. (0.05) (0.05) (0.05) (0.04) (0.02)
From net realized
gains.................. 0.00 0.00 0.00 0.00 0.00
-------- -------- -------- -------- -------
Total distributions..... (0.05) (0.05) (0.05) (0.04) (0.02)
-------- -------- -------- -------- -------
Net Asset Value, end of
period.................. $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======== ======== ======== ======== =======
Total return (not
annualized)............. 5.35% 5.10% 5.60% 4.40% 1.81%
Ratios/Supplemental
data:
Net assets, end of
period (000)........... $180,375 $177,046 $156,852 $147,269 $81,649
Number of shares
outstanding, end of
period (000)........... 180,437 177,103 156,910 147,280 81,648
Ratios to average net
assets (annualized):
Ratio of expenses to
average net assets(1).. 0.45% 0.45% 0.45% 0.45% 0.49%
Ratio of net investment
income to average net
assets(2).............. 5.23% 4.96% 5.44% 4.44% 2.77%
(1) Ratio of expenses to
average net assets
prior to waived fees
and reimbursed
expenses............ N/A 0.48% 0.49% 0.57% 0.50%
(2) Ratio of net
investment income to
average net assets
prior to waived fees
and reimbursed
expenses............ N/A 4.93% 5.40% 4.32% 2.76%
</TABLE>
- ----
* The Fund commenced operations on July 2, 1993.
5
<PAGE>
THE FUND
INVESTMENT OBJECTIVE AND POLICIES
The Fund seeks to provide investors with a high level of income, while pre-
serving capital and liquidity, by investing in high-quality, short-term secu-
rities. 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. Per-
mitted investments include U.S. Government short-term obligations, obligations
of domestic and foreign banks, commercial paper, corporate notes and repur-
chase agreements. A more complete description of these investments and invest-
ment activities is contained in "Appendix -- Additional Investment Policies."
RISK CONSIDERATIONS
General
Investments in the Fund are not bank deposits and are not insured or guaran-
teed against loss of principal. 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 is no assurance the Fund will achieve
its investment objective. Pursuant to the Investment Company Act of 1940, as
amended (the "1940 Act"), the Fund must comply with certain investment crite-
ria designed to provide liquidity, reduce risk and allow the Fund to maintain
a stable net asset value of $1.00 per share. 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 by the Fund of
many types of floating-rate instruments commonly referred to as derivatives
that are considered to be potentially volatile.
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);
6
<PAGE>
. 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 re-
set provisions are tied to an index that materially lags short-term interest
rates, such as Cost of Funds Index 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 floaters or JJ Kenney index floaters.
Year 2000
Many computer software systems in use today cannot distinguish the Year 2000
from the Year 1900. Most of the services provided to the Fund depend on the
smooth functioning of computer systems. Any failure to adapt these systems in
time could hamper the Fund's operations and services. The Fund's principal
service providers have advised the Fund that they are working on necessary
changes to their systems and that they expect their systems to be adapted in
time. There can, of course, be no assurance of success. In addition, because
the Year 2000 issue affects virtually all organizations, the companies or en-
tities in which the Fund invests also could be adversely impacted by the Year
2000 issue. The extent of such impact cannot be predicted.
PERFORMANCE
The Fund's performance may be advertised in terms of current yield or effec-
tive 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 at net asset value. The Fund's effective yield is slightly higher
than the current yield because of the compounding effect of the assumed rein-
vestment of income earned.
7
<PAGE>
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 de-
scribed above, may not provide a basis for comparison with other investments
or other investment companies using a different method of calculating perfor-
mance.
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 1-888-204-3956.
8
<PAGE>
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 Com-
pany is included in the SAI under "Management."
INVESTMENT ADVISER -- BGFA serves as investment adviser to the Fund. BGFA
provides investment guidance and policy direction in connection with the man-
agement of the Fund's assets. BGFA is a direct subsidiary of BGI (which, in
turn, is an indirect subsidiary of Barclays Bank PLC) and is located at 45
Fremont Street, San Francisco, California 94105. As of April 30, 1998, BGFA
and its affiliates provided investment advisory services for approximately
$575 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 serv-
ices. Wells Fargo Bank serves as sub-adviser to the Fund and, subject to the
supervision and approval of BGFA, furnishes investment guidance and policy di-
rection in connection with the daily portfolio management of the Fund. Wells
Fargo Bank 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 fiscal year ended February 28, 1998, no advisory or sub-ad-
visory fees were waived.
Wells Fargo & Company, the parent company of Wells Fargo Bank, has signed a
definitive agreement to merge with Norwest Corporation. The proposed merger is
subject to certain regulatory approvals and must be approved by shareholders
of both holding companies. The merger is expected to close in the second half
of 1998. The combined company will be called Wells Fargo & Company. Wells
Fargo Bank has advised the Funds that the merger will not reduce the level or
quality of advisory and other services provided by Wells Fargo Bank to the
Funds.
At a special meeting held on June 11, 1998, the Company's Board of Directors
approved a plan to reorganize the Fund from its current stand-alone structure
to a master/feeder structure (the "Reorganization"). Shareholders of record on
the record date of June 19, 1998 will be asked to approve the Reorganization
via a proxy solicitation. If the Reorganization is approved, the Fund will in-
vest all of its assets in the Money Market Master Portfolio (the "Master Port-
folio") of Master Investment Portfolio, another open-end management investment
company ("MIP"). The Master Portfolio will have the same investment objective
and will invest in the same kinds of securities as the Fund. The Master
9
<PAGE>
Portfolio will retain BGFA, the investment adviser to the Fund, to manage its
assets. The advisory fee level will be 0.10% of average net assets per annum,
compared to the current level of 0.35%. The aggregate administrative fee will
be 0.35% of average daily net assets per annum, compared to the current level
of 0.10%. The Reorganization is not expected to result in an increase in over-
all fee levels. After the Reorganization, BGFA will no longer engage an in-
vestment sub-adviser, but instead will manage the Master Portfolio's assets
itself. In the same proxy solicitation used for the Reorganization, sharehold-
ers will be asked to approve amendments to a fundamental investment policy of
the Fund in order to allow the Master Portfolio to invest in certain obliga-
tions of foreign branches of U.S. Banks and domestic branches of foreign banks
without regard to the Fund's current 25% limitation. If approved by sharehold-
ers, the Reorganization would occur on or about August 29, 1998.
Morrison & Foerster LLP, counsel to the Company and special counsel to BGFA
and Wells Fargo Bank, has advised the Company, BGFA, and Wells Fargo Bank that
BGFA, Wells Fargo Bank, and their affiliates may perform the services contem-
plated by the Investment Advisory Contract, the Sub-Investment Advisory Con-
tract, 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 admin-
istrative interpretations of, or decisions relating to, present federal or
state statutes, including the Glass-Steagall Act, and regulations relating to
the permissible activities of banks and their subsidiaries or affiliates, as
well as future changes in such statutes, regulations and judicial or adminis-
trative decisions or interpretations, could prevent such entities from contin-
uing 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 agree-
ments would be proposed or entered into with another entity or entities quali-
fied to perform such services.
CO-ADMINISTRATORS -- Stephens Inc. ("Stephens") and BGI are the Fund's co-
administrators. Stephens and BGI provide the Fund with administration servic-
es, including general supervision of the Fund's non-investment operations, co-
ordination of the other services provided to the Fund, compilation of informa-
tion 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 di-
rectors and offi- cers. Stephens also furnishes office space and certain fa-
cilities to conduct the Fund's business, and compensates the Company's direc-
tors, officers and employees who are affiliated with Stephens. In addition,
10
<PAGE>
except as outlined below under "Expenses," Stephens and BGI will be
responsible for paying all expenses incurred by the Fund other than the fees
payable to BGFA. For these services, Stephens and BGI are entitled to a
monthly fee, in the aggregate, at the annual rate of 0.10% of the Fund's aver-
age daily net assets.
BGI has delegated certain of its duties as co-administrator to Investors
Bank & Trust Company ("IBT"). IBT, as sub-administrator, is compensated by BGI
for performing certain administration services. Prior to October 21, 1996,
Stephens was the Fund's sole administrator and received fees for its services
as described in the SAI.
DISTRIBUTOR -- Stephens is the distributor for 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. Ad-
ditionally, 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. Stephens, as the Company's sponsor and the princi-
pal 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").
Stephens does not receive a fee for providing distribution services to the
Fund. BGI presently acts as a Selling Agent, but does not receive any fee from
the Fund for such activities.
CUSTODIAN -- IBT currently acts as the Fund's custodian. The principal busi-
ness address of IBT is 200 Clarendon Street, Boston, Massachusetts 02116. IBT
is not entitled to receive compensation for its custodial services so long as
it is entitled to receive compensation for providing sub-administration serv-
ices to the Fund.
TRANSFER AND DIVIDEND DISBURSING AGENT -- IBT also acts as the Company's
transfer and dividend disbursing agent.
EXPENSES -- Except for advisory fees, extraordinary expenses, brokerage and
other expenses connected to the execution of portfolio transactions and cer-
tain other expenses which are borne by the Fund, Stephens and BGI have agreed
to bear all costs of the Fund's and the Company's operations.
11
<PAGE>
HOW TO BUY SHARES
WHO MAY INVEST
The following types of investors are eligible to invest in Fund shares:
. Participants in Benefit Plans ("Plan Participants"), including retire-
ment plans, who 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 Sell-
ing Agent.
. Investors using proceeds that are being rolled over directly from a
qualified Benefit Plan to an Individual Retirement Account ("IRA") pur-
suant to arrangements between the sponsor or other agent of the quali-
fied Benefit Plan and a Selling Agent.
. Investors who have an account arrangement with one of the Company's
Selling Agents that permits investments in Fund shares ("Qualified Buy-
ers").
. Investors who have made arrangements with BGI and invest at least $1
million in the Fund ("Direct Buyers").
Eligible investors may purchase Fund shares in one of the several ways de-
scribed below. For more information or additional forms, call 1-888-204-3596.
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 representa-
tive, the Company or Stephens will transmit or cause to be transmitted prompt-
ly, 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, Direct 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 in-
vestor responsible
12
<PAGE>
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 1:00 p.m., Pacific
time) will be executed at the NAV determined as of the close of regular trad-
ing on the NYSE on that Business Day. Orders received by the Transfer Agent
after the close of regular trading on the NYSE are executed on the next Busi-
ness Day. The investor's Selling Agent is responsible for the prompt transmis-
sion 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 Sell-
ing Agent may not be received by the Transfer Agent on the same day.
Federal regulations require that an investor provide a valid taxpayer iden-
tification number ("TIN"), which is usually the investor's social security
number or employee identification number, upon opening or reopening an ac-
count.
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 ar-
rangement with a Selling Agent that permits investments in Fund shares. Bene-
fit 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 pay-
roll deductions arranged between participants and their employers. Partici-
pants in the MasterWorks 401(k) program are included in this
13
<PAGE>
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 Selling Agent may
purchase Fund shares in accordance with their account arrangements with such
Selling Agent. The Selling Agent is responsible for the prompt transmission of
purchase orders. Selling 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. Com-
pleted retirement plan applications should be returned to the investor's Sell-
ing Agent for approval and processing. If a retirement plan application is in-
complete or improperly filled out, there may be a delay before the Fund ac-
count is opened. Investors should consult their Selling Agent.
PURCHASES BY QUALIFIED BUYERS
Qualified Buyers may open a Fund account and make additional purchases
through a Selling Agent with whom they have an account arrangement. Selling
Agents may transmit purchase orders to the Transfer Agent on behalf of invest-
ors, 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").
14
<PAGE>
PURCHASES BY DIRECT BUYERS
Direct Buyers may open a Fund account by completing an Account Application.
Direct Buyers may purchase Fund shares by contacting the Transfer Agent, by
instructing the Transfer Agent to debit an Approved Bank Account or by wire.
TO PURCHASE FUND SHARES:
By Check: Initial and subsequent investments should be sent to MasterWorks
Funds, Inc., c/o Investors Bank and Trust Co., P.O. Box 9130, Mail Code MFD23,
Boston, MA 02117-9130.
By Wire: Investors establishing new accounts should telephone Investors Bank
& Trust Co., at 1-888-204-3956 prior to sending the bank wire.
Investors should instruct their bank to wire funds as follows:
Investors Bank & Trust Co.
ABA #011-001-438
Attn: Transfer Agent
Account #DDA 555555535
For Further Credit to: MasterWorks Funds, Inc.
Shareholder Account Name:
Shareholder Account Number:
IN-KIND PURCHASES
Payment for shares of the Fund may, at the discretion of BGFA as investment
adviser, be made in the form of securities that are permissible investments
for such Fund. Shares purchased in exchange for securities can not be redeemed
until the exchange transaction has settled. For further information, see "Pur-
chase and Redemption of Shares" in the SAI.
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. Although the Fund seeks to
maintain a $1.00 net asset value per share, redemption proceeds may be more or
less than that amount.
15
<PAGE>
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 to determine fairly 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 portfo-
lio securities.
Redemption orders that are received by the Transfer Agent before the close
of regular trading on the NYSE (currently 1:00 p.m., Pacific time), will be
executed at the net asset value determined as of the close of regular trading
on the NYSE on that Business 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 Selling Agent is responsible for the
prompt transmission of redemption orders to the Transfer Agent on the invest-
or'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 the investor's 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.
REDEMPTIONS BY 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. Invest-
ors may obtain more information by contacting their employer and/or their
Selling Agent. The redemption procedures outlined
16
<PAGE>
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 Sell-
ing Agent regarding redemption procedures applicable to them.
REDEMPTIONS BY QUALIFIED BUYERS
Qualified Buyers should contact their Selling Agent regarding redemption
procedures applicable to them. The redemption procedures outlined in the re-
mainder of this section do not apply to Qualified Buyers.
REDEMPTIONS BY DIRECT BUYERS
Redemptions by Mail
1. Write a letter of instruction to the Transfer Agent. 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.
Written requests for redemptions should be mailed to MasterWorks Funds,
Inc., c/o Investors Bank and Trust Co., P.O. Box 9130, Mail Code MFD23, Bos-
ton, MA 02117-9130.
Unless other instructions are given in proper form, a check for the redemp-
tion proceeds is sent to the investor's address of record.
Redemptions by Telephone
Telephone redemption or exchange privileges are made available to Direct
Buyers who have completed the "Redemption by Telephone" section when opening
their Fund account. 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 Trans-
fer Agent may be liable for any losses due to unauthorized or fraudulent in-
structions. Neither the Company nor the Transfer Agent will be liable for fol-
lowing telephone instructions reasonably believed to be genuine.
17
<PAGE>
If you have completed the Redemption by Telephone portion of a Fund's ac-
count application, you may redeem Fund shares on any Business Day by calling
the Transfer Agent at 1-888-204-3956 before the close of regular trading on
the NYSE, generally 4:00p.m. Eastern Time.
During times of drastic economic or market conditions, investors may experi-
ence difficulty in contacting the Transfer Agent by telephone to request a re-
demption 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 re-
quest being processed at a later time than it would have been if telephone re-
demption had been used. During the delay, the Fund's net asset value may fluc-
tuate.
Expedited Redemptions by Letter and Telephone
A Direct Buyer 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. Tele-
phone redemption and exchange privileges are made available to a Direct Buyer
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 re-
ceipt of redemption proceeds and the Fund's receipt of the investor's redemp-
tion request would be expedited.
Direct Buyers may request expedited redemption by telephone by calling the
Transfer Agent at 1-888-204-3956.
Direct Buyers may request expedited redemption by mailing an expedited re-
demption request to the Transfer Agent.
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 in-
vestor'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 in-
vestor 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, regardless of the amount of the redemption. If the invest-
or's expedited redemption request is received by the Transfer Agent on a Busi-
ness Day, the
18
<PAGE>
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 extraor-
dinary circumstances could include those described above as potentially delay-
ing redemptions, and also could include situations involving an unusually
heavy volume of wire transfer orders on a national or regional basis or commu-
nication or transmittal delays that could cause a brief delay in the wiring or
crediting of funds.
EXCHANGE PRIVILEGE
The exchange privilege enables an investor to exchange for shares of the
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 read 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 1-888-204-3956.
Shares are exchanged at the next determined net asset value. No fees are
currently charged to shareholders directly in connection with exchanges, al-
though the Company reserves the right, upon not less than 60 days' written no-
tice, 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 be-
lieves 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 exchanges. The exchange privi-
lege may be modified or terminated at any time upon 60 days' written notice to
shareholders.
SHARE VALUE
Shares of the Fund are sold on a continuous basis at the applicable offering
price (net asset value per share) next determined after an order in proper
form is received by the Transfer Agent. Net asset value ("NAV") is determined
each Business Day as of the close of regular trading on the NYSE (currently,
1:00 p.m. Pacific time). On any day the
19
<PAGE>
trading markets for both U.S. Government securities and money market instru-
ments close early, the NAV calculation time and the dividend, purchase and re-
demption cut-off times for the Fund may be earlier than 1:00 p.m. (Pacific
time).
The NAV of a share of the Fund is calculated by dividing the value of total
assets, less liabilities, by the number of outstanding shares. All expenses
are accrued daily and taken into account for the purposes of calculating NAV.
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 val-
ue. The Company's Board of Directors believes that this valuation method accu-
rately reflects fair value. As noted above, the Fund seeks to maintain a con-
stant $1.00 NAV share price, although there can be no assurance that it will
be able to do so. For further information regarding the methods employed in
valuing the Fund's investments, see "Determination of Net Asset Value" in the
SAI.
DIVIDENDS AND DISTRIBUTIONS
The Fund intends to declare dividends daily and pay dividends monthly. 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 in-
vestor's account are paid on the following dividend payment date. The Fund de-
clares and distributes capital gains (if any) at least annually. Dividends and
capital gain distributions are automatically reinvested in additional Fund
shares at net asset value.
TAXES
GENERAL
Distributions from the Fund's net investment income and net short-term capi-
tal gains, if any, are designated as dividend distributions and taxable to the
Fund's shareholders as ordinary income. Distributions from the Fund's net
long-term capital gains are designated as capital gain distributions and tax-
able to the Fund's shareholders as long-term capital gains. Noncorporate
shareholders may be taxed on such gain at preferential rates. In general, your
distributions will be taxable when
20
<PAGE>
paid, whether you take such distributions in cash or have them automatically
reinvested in additional Fund shares. However, distributions declared in Octo-
ber, November and December, and distributed by the following January will be
taxable as if they were paid by December 31.
Your redemptions (including redemptions in-kind) and exchanges of Fund
shares will ordinarily result in a taxable capital gain or loss, depending on
the amount you receive for your shares (or are deemed to receive in the case
of exchanges) and the cost of your shares. See "Taxes --Disposition of Fund
Shares" in the SAI.
Foreign shareholders may be subject to different tax treatment, including
withholding taxes. See "Federal Income Taxes -- Foreign Shareholders" in the
SAI. In certain circumstances, U.S. residents may also be subject to withhold-
ing taxes. See "Taxes -- Backup Withholding" in the SAI.
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 invest-
ment income and capital gain distributions.
However, such tax-exempt investors may be subject to tax on certain unre-
lated taxable income which could arise, for example, when such investors ac-
quire shares in the Fund through the use of leverage. Tax-exempt investors
should consult their tax advisors regarding the Unrelated Business Taxable In-
come Rules.
The foregoing discussion regarding taxes is based on tax laws which were in
effect as of the date of this Prospectus and summarizes only some of the im-
portant federal tax considerations generally affecting the Fund and its share-
holders. It is not intended as a substitute for careful tax planning; you
should consult your tax advisor with respect to your specific tax situation as
well as with respect to foreign, state and local taxes. Further federal tax
considerations are discussed in the SAI.
GENERAL INFORMATION
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 twelve series of shares.
The Company's principal office is located at 111 Center Street, Little Rock,
Arkansas 72201.
21
<PAGE>
The Board of Directors of the Company supervises the Fund's activities and
monitors the Fund's contractual arrangements with various service providers.
Additional information about the Directors and Officers of the Company is in-
cluded in the Fund's SAI under "Management." Although the Company is not re-
quired to hold regular annual shareholder meetings, occasional annual or spe-
cial meetings may be required for purposes such as electing and removing Di-
rectors, approving advisory contracts, and changing the Fund's investment ob-
jective 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 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 sub-
mitted 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 descrip-
tion 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 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 1-888-204-3956.
22
<PAGE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRE-
SENTATIONS 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 OF-
FERING MAY NOT LAWFULLY BE MADE.
23
<PAGE>
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, its agen-
cies or instrumentalities. Payment of principal and interest on U.S. Govern-
ment obligations (i) may be backed by the full faith and credit of the United
States (as with U.S. Treasury obligations and GNMA certificates) or (ii) may
be backed solely by the issuing or guaranteeing agency or instrumentality it-
self (as with FNMA notes). In the latter case, the investor must look princi-
pally 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 finan-
cial support to its agencies or instrumentalities where it is not obligated to
do so. As a general matter, the value of debt instruments, including U.S. Gov-
ernment obligations, declines when market interest rates increase and rises
when market interest rates decrease. Certain types of U.S. Government obliga-
tions 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 high-quality
short-term 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.
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 de-
mand 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 bene-
ficial 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.
A-1
<PAGE>
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 market-
able than comparable obligations of U.S. banks, that a foreign jurisdiction
might impose withholding taxes on interest income payable on those obliga-
tions, that foreign deposits may be seized or nationalized, that foreign gov-
ernmental 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 examina-
tion by any U.S. Government agency or instrumentality.
COMMERCIAL PAPER AND SHORT-TERM CORPORATE DEBT INSTRUMENTS -- The Fund may
invest in commercial paper (including variable amount master demand notes),
which consists of short-term, unsecured promissory notes issued by corpora-
tions 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 pur-
suant 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 Fund monitors on an ongoing basis the ability of an
issuer of a demand instrument to pay principal and interest on demand.
The Fund also may invest in non-convertible corporate debt securities (e.g.,
bonds and debentures) with not more than thirteen months remaining to maturity
at the date of settlement. The Fund 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 Fund, an issue of securities
may cease to be rated or its rating may be reduced below the minimum rating
required for purchase by the Fund. The investment adviser and/or sub-adviser
to the Fund will consider such an event in determining whether the Fund should
continue to hold the obligation. To the extent the Fund continues to hold such
obligations, it may be subject to additional risk of default.
A-2
<PAGE>
REPURCHASE AGREEMENTS -- The Fund may enter into repurchase agreements
wherein the seller of a security to the Fund agrees to repurchase that secu-
rity from the Fund at a mutually-agreed upon time and price. The period of ma-
turity is usually quite short, often overnight or a few days, although it may
extend over a number of months. The Fund may enter into repurchase agreements
only with respect to securities that could otherwise be purchased by the Fund,
and all repurchase transactions must be collateralized. The Fund may incur a
loss on a repurchase transaction if the seller defaults and the value of the
underlying collateral declines or is otherwise limited or if receipt of the
security or collateral is delayed. The Fund may participate in pooled repur-
chase agreement transactions with other funds advised by BGFA.
LETTERS OF CREDIT -- Certain of the debt obligations, certificates of par-
ticipation, commercial paper and other short-term obligations which the Fund
and is permitted to 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. Letter of credit-backed investments must, in
the opinion of Wells Fargo Bank, as sub-adviser, be of investment quality com-
parable to other permitted investments of the Fund.
OTHER INVESTMENT COMPANIES -- The Fund may invest in shares of other open-
end investment companies that invest exclusively in high-quality short-term
securities subject. The Fund may also purchase shares of exchange listed
closed-end funds.
MUNICIPAL OBLIGATIONS -- The Fund may invest in municipal obligations. Mu-
nicipal bonds generally have a maturity at the time of issuance of up to 40
years. Medium-term municipal notes are generally issued in anticipation of the
receipt of tax funds, of the proceeds of bond placements, or of other reve-
nues. The ability of an issuer to make payments on notes is therefore espe-
cially dependent on such tax receipts, proceeds from bond sales or other reve-
nues, as the case may be. Municipal commercial paper is a debt obligation with
a stated maturity of 270 days or less that is issued to finance seasonal work-
ing capital needs or as short-term financing in anticipation of longer-term
debt.
The Fund will invest in the following municipal obligations with remaining
maturities not exceeding 13 months:
(i) long-term municipal bonds rated at the date of purchase "Aa" or bet-
ter by Moody's or "AA" or better by S&P;
A-3
<PAGE>
(ii) municipal notes rated at the date of purchase "MIG1" or "MIG2" (or
"VMIG1" or "VMIG2" in the case of an issue having a variable rate with a
demand feature) by Moody's or "SP-1+" "SP-1" or "SP-2" by S&P; and
(iii) short-term municipal commercial paper rated at the date of pur-
chase "P-1" by Moody's or "A-1+", or "A-1" or "A-2" by S&P.
FLOATING- AND VARIABLE-RATE OBLIGATIONS -- The Fund may purchase debt in-
struments with interest rates that are periodically adjusted at specified in-
tervals or whenever a benchmark rate or index changes. The floating- and vari-
able-rate instruments that the Fund may purchase include certificates of par-
ticipation in such instruments. These adjustments generally limit the increase
or decrease in the amount of interest received on the debt instruments. Float-
ing- and variable-rate instruments are subject to interest-rate risk and
credit risk.
ILLIQUID SECURITIES -- The Fund may invest in securities not registered un-
der the 1933 Act and other securities subject to legal or other restrictions
on resale. Because such securities may be less liquid than other investments,
they may be difficult to sell promptly at an acceptable price. Delay or diffi-
culty in selling securities may result in a loss or be costly to the Fund.
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 major-
ity 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 or-
der 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
A-4
<PAGE>
borrowing in excess of 5% of its net assets exists); (ii) make loans of port-
folio 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, re-
purchase agreements, commercial paper and other short-term obligations, and
other types of debt instruments commonly sold in a public or private offering;
and (iii) 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 secu-
rities of any issuer (except U.S. Government obligations, for certain tempo-
rary purposes and for certain guarantees and unconditional puts) if as a re-
sult 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 out-
standing 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.
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.
A-5
<PAGE>
MOODY'S INVESTORS SERVICE RATINGS
BOND RATINGS -- Bonds rated "Aaa" by Moody's are judged to be the best qual-
ity. 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 ele-
ments 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 des-
ignations of "Prime-1," "Prime-2" and "Prime-3" to indicate the relative ca-
pacity 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 obliga-
tions, and will normally be evidenced by leading market positions in well es-
tablished industries, high rates of return on funds employed, conservative
capitalization structures with moderate reliance on debt and ample asset pro-
tection, broad margins in earnings coverage of fixed financial charges and
high internal cash generation, and well established access to a range of fi-
nancial markets and assured sources of alternate liquidity.
A-6
<PAGE>
SPONSOR, DISTRIBUTOR AND CO-ADMINISTRATOR
Stephens Inc.
Little Rock, Arkansas
CO-ADMINISTRATOR
Barclays Global Investors, N.A.
San Francisco, CA
INVESTMENT ADVISER
Barclays Global Fund Advisors
San Francisco, California
CUSTODIAN
Investors Bank & Trust Company
Boston, Massachusetts
TRANSFER AGENT AND DIVIDEND DISBURSING AGENT
Investors Bank & Trust Company
Boston, Massachusetts
LEGAL COUNSEL
Morrison & Foerster LLP
Washington, D.C.
INDEPENDENT AUDITORS
KPMG Peat Marwick LLP
San Francisco, California
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>
MasterWorks(R) Funds
c/o Investors Bank and Trust Co.
200 Clarendon Street
Boston, MA 02116
<PAGE>
MUTUAL FUND PROSPECTUS
June 30, 1998
[GRAPHIC APPEARS HERE]
ASSET ALLOCATION FUND
BOND INDEX FUND
S&P 500 STOCK FUND
US TREASURY ALLOCATION FUND
Advised by Barclays Global Fund Advisors
Sponsored and distributed by Stephens Inc.,
Member NYSE/SIPC
MasterWorks(R) Funds
<PAGE>
MasterWorks Funds Inc. (the "Company") is an open-end, management invest-
ment company. This Prospectus contains information about four of the Company's
funds -- the ASSET ALLOCATION, BOND INDEX, S&P 500 STOCK and U.S. TREASURY AL-
LOCATION FUNDS (collectively the "Funds").
Please read this Prospectus before investing and retain it for future refer-
ence. It sets forth concisely the information about the Funds that an investor
should know before investing. A Statement of Additional Information ("SAI")
dated June 30, 1998 containing additional information about the Funds has been
filed with the Securities and Exchange Commission ("SEC") and is incorporated
by reference into this Prospectus. The SAI is available without charge by
calling the Company at 1-888-204-3956 or by writing the Company at the address
printed on the back of the Prospectus. The SAI and other Fund information is
also available on the SEC's website (http://www.sec.gov).
--------------------
AS WITH ALL MUTUAL FUNDS, THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAP-
PROVED BY THE SECURITIES AND EXCHANGE COMMISSION, ANY STATE SECURITIES COMMIS-
SION 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, BARCLAYS GLOBAL INVESTORS, N.A., INVESTORS BANK & TRUST CO., OR
ANY OF THEIR 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 IN VOLVES CERTAIN INVESTMENT
RISKS, INCLUDING POSSIBLE LOSS OF PRINCIPAL.
MASTERWORKS FUNDS INC.
ASSET ALLOCATION FUND
BOND INDEX FUND
S&P 500 STOCK FUND
U.S. TREASURY
ALLOCATION FUND
PROSPECTUS
JUNE 30, 1998
<PAGE>
HOW THE FUNDS WORK
Each Fund invests all of its assets in a corresponding Master Portfolio
(each, a "Master Portfolio") of Master Investment Portfolio ("MIP"), an open-
end, management investment company, rather than in a portfolio of securities.
Each Fund has substantially the same investment objective as the corresponding
Master Portfolio and each Fund's investment experience corresponds directly
with the respective Master Portfolio's investment experience. Interests in a
Master Portfolio may be purchased only by other investment companies or other
accredited investors. References to a "Fund" are to the Fund or its corre-
sponding Master Portfolio as the context requires.
. The ASSET ALLOCATION FUND invests in a mix of stocks included in the Stan-
dard & Poor's 500 Stock Index (the "S&P 500 Index"), U.S. Treasury bonds, and
high-quality money market instruments (including certificates of deposit and
Treasury bills). The allocation of investments in the Fund's portfolio among
these asset classes is based on the expected risk and returns of each asset
class as compared to the other asset classes.
. The BOND INDEX FUND seeks 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 S&P 500 STOCK FUND is an index fund. The Fund seeks to match the per-
formance of the S&P 500 Index by investing in a representative sample of the
stocks found in such Index. 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 Fund is broadly diversified since the S&P
500 Index includes 500 established companies representing different sectors of
the U.S. economy (industrial, utilities, financial, and transportation) and
the Fund invests in a representative sample of the Index.
<PAGE>
. 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, including long-term U.S. Treasury bonds, in-
termediate-term U.S. Treasury notes, and short-term U.S. Treasury bills. The
allocation of investments in the Fund's portfolio among each class of U.S.
Treasury securities is based on the expected risk and return of each asset
class as compared to the other asset classes.
----------------------
BARCLAYS GLOBAL FUND ADVISORS IS THE INVESTMENT ADVISER TO THE MASTER PORTFO-
LIOS AND TOGETHER WITH ITS AFFILIATES PROVIDES OTHER SERVICES TO THE FUNDS
AND MASTER PORTFOLIOS FOR WHICH IT IS COMPENSATED. STEPHENS INC., WHICH IS
NOT AFFILIATED WITH BARCLAYS GLOBAL FUND ADVISORS, IS THE SPONSOR AND CO-
ADMINISTRATOR AND SERVES AS THE DISTRIBUTOR FOR THE COMPANY.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Prospectus Summary..................................................... 1
Summary of Fund Expenses............................................... 5
Explanation of Tables.................................................. 5
Financial Highlights................................................... 7
The Funds.............................................................. 12
Management of the Funds................................................ 26
How to Buy Shares...................................................... 30
How to Redeem Shares................................................... 34
Exchange Privilege..................................................... 37
Share Value............................................................ 38
Dividends And Distributions............................................ 38
Taxes.................................................................. 39
General Information.................................................... 40
<CAPTION>
APPENDIX
--------
<S> <C>
Additional Investment Policies......................................... A-1
</TABLE>
<PAGE>
PROSPECTUS SUMMARY
The following summary provides investors with basic information about the
Funds. For more information, please refer specifically to the identified Pro-
spectus 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 re-
tirement 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 be-
tween a Benefit Plan and a Shareholder Servicing Agent.
. Investors using proceeds that are being rolled over directly from a
qualified Benefit Plan to an Individual Retirement Account ("IRA") pur-
suant to arrangements between the sponsor or other agent of the quali-
fied Benefit Plan and a Shareholder Servicing Agent, or who have estab-
lished a tax-deferred retirement plan with a Shareholder Servicing
Agent.
. Investors that have a servicing arrangement with one of the Company's
Shareholder Servicing Agents that permits investments in Fund shares.
. Investors who have a servicing arrangement with Barclays Global Invest-
ors, N.A. ("BGI") and invest at least $1 million in a Fund.
See "How To Buy Shares."
Q. WHAT ARE SOME OF THE POTENTIAL RISKS ASSOCIATED WITH AN INVESTMENT IN THE
FUNDS?
A. Investments in a Fund are not bank deposits or obligations of Barclays
Global Fund Advisors ("BGFA") or BGI, are not insured by the Federal De-
posit Insurance Corporation ("FDIC"). Investments in the Funds are not in-
sured or guaranteed against loss of principal. When the value of the port-
folio securities in which the Funds invest declines, so does the value of
your Fund shares. Therefore, investors should be prepared to accept some
risk with the money you invest in the Funds.
1
<PAGE>
The stock investments of the Funds are subject to equity market risk. Eq-
uity market risk is the possibility that common stock prices will fluctu-
ate or decline over short or even extended periods. The U.S. stock market
tends to be cyclical, with periods when stock prices generally rise and
periods when prices generally decline. Throughout the first six months of
1998, the stock market, as measured by the S&P 500 Index and other com-
monly used indices, was trading at or close to record levels. There can be
no guarantee that these performance levels will continue.
The portfolio debt instruments of the Funds are subject to credit and in-
terest rate risk. Credit risk is the risk that issuers of the debt instru-
ments in which the Funds invest may default on the payment of principal
and/or interest. Interest-rate risk is the risk that increases in market
interest rates may adversely affect the value of the debt instruments in
which the Funds invest. The value of the Funds' portfolio debt instruments
generally changes inversely to market interest rates. Debt securities with
longer maturities, which tend to produce higher yields, are subject to po-
tentially greater price fluctuation than obligations with shorter maturi-
ties. Fluctuations in the market value of fixed income securities can be
reduced, but not eliminated, by variable rate or floating rate features.
Because the Asset Allocation and U.S. Treasury Allocation Funds may shift
their investment allocations significantly from time to time, each Fund's
performance may differ from funds which invest in one asset class or from
funds with a stable mix of assets. Further, shifts among asset classes may
result in relatively high turnover and transaction costs. Portfolio turn-
over also can generate short-term capital gains tax consequences. During
those periods in which a high percentage of each Fund's portfolio is in-
vested in long-term bonds, the Fund's exposure to interest-rate risk will
be greater because the longer maturity of such securities means they are
generally more sensitive to changes in market interest rates than shorter-
term securities.
As with all mutual funds, there is no assurance that a Fund will achieve
its investment objective.
See "The Funds -- Risk Considerations" and "Appendix -- Additional Invest-
ment Policies."
Q.HOW DO I INVEST IN THE FUNDS?
A. Shares of the Funds can be purchased by establishing an account arrange-
ment with a designated Shareholder Servicing Agent.
2
<PAGE>
Shares may be purchased at "net asset value" ("NAV") on any day the Fund
is open for business (a "Business Day"). The Funds are open for business
Monday through Friday and are closed on standard New York Stock Exchange
("NYSE") holidays.
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. BGFA, as the investment adviser to the Master Portfolios, manages the in-
vestments of each Master Portfolio. The Company has not retained the serv-
ices of a separate investment adviser for the Funds because each Fund in-
vests all of its assets in the corresponding Master Portfolio. As of April
30, 1998, BGFA and its affiliates provided investment advisory services
for approximately $575 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 trans-
action 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 arrange-
ments, 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 NAV of each Fund is based on the NAV of interests
in the corresponding Master Portfolio. The NAV 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) di-
vided by the number of outstanding interests in the Master Portfolio. A
new NAV for each Fund and Master Portfolio is calculated on each Business
Day.
See "Share Value."
3
<PAGE>
Q.DO THE FUNDS PAY DIVIDENDS?
A. The S&P 500 Stock 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. The As-
set Allocation Fund, Bond Index 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 sub-
stantially all of their net realized capital gains. All dividends and dis-
tributions are automatically reinvested at NAV in shares of the Fund pay-
ing 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 the Company 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 NAV without the imposition of a
sales charge or redemption fee on any Business Day by letter or by tele-
phone (provided you have completed the "Redemption by Telephone" portion
of your account application). For more information contact Stephens Inc.
("Stephens") or your Shareholder Servicing Agent.
See "How to Redeem Shares."
4
<PAGE>
SUMMARY OF FUND EXPENSES
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average daily net assets)
<TABLE>
<CAPTION>
ASSET
ALLOCATION BOND INDEX
FUND FUND
---------- -------------
<S> <C> <C>
Management Fees........................................ 0.35% 0.08%
Co-Administration Fees................................. 0.40% 0.15%
---- ----
TOTAL FUND OPERATING EXPENSES.......................... 0.75% 0.23%
<CAPTION>
U.S. TREASURY
S&P 500 ALLOCATION
STOCK FUND FUND
---------- -------------
<S> <C> <C>
Management Fees........................................ 0.05% 0.30%
Co-Administration Fees................................. 0.15% 0.40%
---- ----
TOTAL FUND OPERATING EXPENSES.......................... 0.20% 0.70%
</TABLE>
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
S&P 500 Stock Fund.............................. $ 2 $ 6 $11 $26
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 understand-
ing the various fees and expenses that an investor in the Funds will pay di-
rectly 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 re-
flect any charges that may be imposed by Shareholder Servicing Agents or Sell-
ing 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 reflect the level of ongoing fees expected to
be in effect during the current fiscal year. "Management Fees" reflects the
amounts paid for such services during the most recently completed fiscal year.
"Co-Administration Fees" reflects the contractual level of such fees currently
payable by each Fund. BGFA, BGI
5
<PAGE>
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 Mas-
ter Portfolio. Any waivers or reimbursements would reduce a Fund's total ex-
penses and have a favorable impact on its performance. For more complete de-
scriptions of the various costs and expenses you can expect to incur as an in-
vestor in the Funds, please see the Prospectus section captioned "Management
of the Funds."
EXAMPLE OF EXPENSES is a hypothetical illustration of the expenses associ-
ated 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 ex-
pected 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 vari-
ous costs and benefits of investing all of each Fund's assets in the corre-
sponding Master Portfolio rather than directly in a portfolio of securities
would be more or less than if the Fund invested in portfolio securities di-
rectly. 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 ac-
quired and managed the type of securities held by its corresponding Master
Portfolio. 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 ex-
penses 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 Mas-
ter Portfolio. There can be no assurance that these economic efficiencies will
be achieved. 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 and accredited investors may invest in the Master Portfo-
lios. The expenses and, accordingly, the investment returns of such other mu-
tual funds may differ from those of the Funds. Information about other invest-
ment options in the Master Portfolios may be obtained by calling Stephens at
1-800-643-9691.
* * *
6
<PAGE>
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING AS SHOWN)
The following information has been derived from the Financial Highlights in-
cluded in the Funds' financial statements for the fiscal year ended February
28, 1998. The financial statements are incorporated by reference into the
Funds' SAI and have been audited by KPMG Peat Marwick LLP, independent audi-
tors, whose report thereon dated April 3, 1998, also is incorporated by refer-
ence into the SAI. This information should be read in conjunction with the fi-
nancial statements and the notes thereto. The SAI has been incorporated by
reference into this Prospectus.
7
<PAGE>
ASSET ALLOCATION FUND
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED PERIOD ENDED
FEBRUARY 28, FEBRUARY 28, FEBRUARY 29, FEBRUARY 28, FEBRUARY 28,
1998 1997 1996 1995 1994(1)
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
NAV, beginning of
period.................. $ 12.12 $ 11.83 $ 9.93 $ 10.19 $ 10.00
Income from investment
operations:
Net investment income... 0.44 0.47 0.40 0.44 0.23
Net realized and
unrealized gain (loss)
on investments.......... 2.68 1.02 1.90 (0.14) 0.28
-------- -------- -------- -------- --------
Total from investment
operations.............. 3.12 1.49 2.30 0.30 0.51
Less distributions:
From net investment
income.................. (0.44) (0.47) (0.40) (0.44) (0.23)
From net realized
gains................... (1.30) (0.73) 0.00 (0.12) (0.09)
-------- -------- -------- -------- --------
Total distributions..... (1.74) (1.20) (0.40) (0.56) (0.32)
-------- -------- -------- -------- --------
NAV, end of period...... $ 13.50 $ 12.12 $ 11.83 $ 9.93 $ 10.19
======== ======== ======== ======== ========
Total return (not
annualized)............. 27.10% 13.09% 23.54% 3.28% 5.14%
Ratios/Supplemental
data:
Net assets, end of
period (000)............ $534,746 $431,585 $397,930 $293,696 $217,140
Number of shares
outstanding, end of
period (000) ........... 39,601 35,613 33,634 29,585 21,303
Ratios to average net
assets (2)..............
Ratio of expenses to
average net assets...... 0.75% 0.75% 0.75% 0.75% 0.79%
Ratio of net investment
income to average net
assets.................. 3.37% 3.95% 3.62% 4.62% 3.47%
Portfolio turnover
rate.................... 57% 43% 40% 24%+ 33%
Average commission rate
paid++.................. 0.0260% $ 0.0335 -- -- --
Ratio of expenses to
average net assets prior
to waived fees and
reimbursed expenses..... N/A N/A N/A 0.76% 0.80%
Ratio of net investment
income to average net
assets prior to waived
fees and reimbursed
expenses................ N/A N/A N/A 4.61% 3.46%
</TABLE>
- ----
(1) The Fund commenced operations on July 2, 1993.
(2) Ratios include expenses charged by the Master Portfolios.
+ On May 26, 1994 the Fund was reorganized and began investing all of its
assets in the corresponding Master Portfolio of MIP. This rate is for the
period from March 1, 1994 to May 25, 1994. The portfolio turnover rate for
the period beginning May 26, 1994 and ending February 28, 1995 was 23% and
reflects activity by the Master Port folio which was audited by other au-
ditors. The portfolio turnover rates for the fiscal year ended February
29, 1996 and thereafter reflect activity by the Master Portfolio.
++ The average commission rate paid reflects activity by the Master Portfo-
lio. For fiscal years beginning on or after September 1, 1995, a fund is
required to disclose its average commission rate per share for security
trades on which commissions are charged. This amount may vary depending
on, among other things, the mix of trades, trading practices and commis-
sion rate structures.
8
<PAGE>
BOND INDEX FUND
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED PERIOD ENDED
FEBRUARY 28, FEBRUARY 28, FEBRUARY 29, FEBRUARY 28, FEBRUARY 28,
1998 1997 1996 1995 1994(1)
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
NAV, beginning of
period.................. $ 9.43 $ 9.66 $ 9.20 $ 9.76 $ 10.00
Income from investment
operations:
Net investment income... 0.64 0.63 0.64 0.64 0.38
Net realized and
unrealized gain (loss)
on investments.......... 0.30 (0.23) 0.46 (0.56) (0.24)
------- -------- ------- ------- -------
Total from investment
operations.............. 0.94 0.40 1.10 0.08 0.14
Less distributions:
From net investment
income.................. (0.64) (0.63) (0.64) (0.64) (0.38)
From net realized
gains................... 0.00 0.00 0.00 0.00 0.00
------- -------- ------- ------- -------
Total distributions..... (0.64) (0.63) (0.64) (0.64) (0.38)
------- -------- ------- ------- -------
NAV, end of period...... $ 9.73 $ 9.43 $ 9.66 $ 9.20 $ 9.76
======= ======== ======= ======= =======
Total return (not
annualized)............. 10.36% 4.32% 12.17% 1.12% 1.38%
Ratios/Supplemental
data:
Net assets, end of
period (000)............ $93,776 $129,469 $58,090 $18,593 $14,899
Number of shares
outstanding, end of
period (000)............ 9,639 13,736 6,016 2,020 1,526
Ratios to average net
assets (annualized)(2)
Ratio of expenses to
average net assets...... 0.23% 0.23% 0.23% 0.23% 0.31%
Ratio of net investment
income to average net
assets.................. 6.66% 6.69% 6.67% 7.08% 5.88%
Portfolio turnover...... 59% 39% 21% 14%+ 20%
Ratio of expenses to
average net assets prior
to waived fees and
reimbursed expenses..... N/A 0.32% 0.53% 0.71% 0.32%
Ratio of net investment
income to average net
assets prior to waived
fees and reimbursed
expenses................ N/A 6.60% 6.37% 6.61% 5.87%
</TABLE>
- ----
(1) The Fund commenced operations on July 2, 1993.
(2) Ratios include expenses charged by the Master Portfolios.
+ On May 26, 1994 the Fund was reorganized and began investing all of its
assets in the corresponding Master Portfolio of MIP. This rate is for the
period from March 1, 1994 to May 25, 1994. 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 audi-
tors. The portfolio turnover rates for the fiscal year ended February 29,
1996 and thereafter reflect activity by the Master Portfolio.
9
<PAGE>
S&P 500 STOCK FUND
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED PERIOD ENDED
FEBRUARY 28, FEBRUARY 28, FEBRUARY 29, FEBRUARY 28, FEBRUARY 28,
1998 1997 1996 1995 1994 (1)
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
NAV, beginning of
period.................. $ 17.03 $ 14.02 $ 10.83 $ 10.50 $ 10.00
Income from investment
operations:
Net investment income... 0.33 0.32 0.31 0.27 0.16
Net realized and
unrealized gain (loss)
on investments.......... 5.46 3.23 3.36 0.41 0.47
---------- ---------- -------- -------- --------
Total from investment
operations.............. 5.79 3.55 3.67 0.68 0.63
Less distributions:
From net investment
income.................. (0.33) (0.32) (0.30) (0.27) (0.12)
From net realized
gains................... (0.41) (0.22) (0.18) (0.08) (0.01)
---------- ---------- -------- -------- --------
Total distributions..... (0.74) (0.54) (0.48) (0.35) (0.13)
---------- ---------- -------- -------- --------
NAV, end of period...... $ 22.08 $ 17.03 $ 14.02 $ 10.83 $ 10.50
========== ========== ======== ======== ========
Total return (not
annualized)............. 34.62% 25.82% 34.35% 6.71% 6.30%
Ratios/supplemental
data:
Net assets, end of
period (000)............ $2,292,433 $1,423,024 $882,696 $448,776 $122,391
Number of shares
outstanding, end of
period (000)............ 103,804 83,551 62,951 41,427 11,653
Ratios to average net
assets (annualized)(2)
Ratio of expenses to
average net assets...... 0.20% 0.20% 0.20% 0.21% 0.27%
Ratio of net investment
income to average net
assets.................. 1.73% 2.15% 2.52% 2.93% 2.46%
Portfolio turnover
rate.................... 6% 4% 2% 8%+ 4%
Average commission rate
paid ++................. 0.0319 $ 0.0625 -- -- --
Ratio of expenses to
average net assets prior
to waived fees and
reimbursed expenses..... N/A 0.22% 0.26% 0.25% 0.28%
Ratio of net investment
income to average net
assets prior to waived
fees and reimbursed
expenses................ N/A 2.13% 2.46% 2.88% 2.45%
</TABLE>
- ----
(1) The Fund commenced operations on July 2, 1993.
(2) Ratios include expenses charged by the Master Portfolios.
+ On May 26, 1994 the Fund was reorganized and began investing all of its
assets in the corresponding Master Portfolio of MIP. This rate is for the
period from March 1, 1994 to May 25, 1994. 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 audi-
tors. The portfolio turnover rates for the fiscal years ending February
29, 1996 and thereafter reflect activity by the Master Portfolio.
++ The average commission rate paid reflects activity by the Master Portfo-
lio. For fiscal years beginning on or after September 1, 1995, a fund is
required to disclose its average commission rate per share for security
trades on which commissions are charged. This amount may vary depending
on, among other things, the mix of trades, trading practices and commis-
sion rate structures.
10
<PAGE>
U.S. TREASURY ALLOCATION FUND
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED PERIOD ENDED
FEBRUARY 28, FEBRUARY 28, FEBRUARY 29, FEBRUARY 28, FEBRUARY 28,
1998 1997 1996 1995 1994(1)
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
NAV, beginning of
period.................. $ 9.24 $ 9.35 $ 8.99 $ 9.67 $ 10.00
Income from investment
operations:
Net investment income... 0.55 0.56 0.51 0.59 0.39
Net realized and
unrealized gain (loss)
on investments.......... 0.19 (0.11) 0.36 (0.68) (0.05)
------- ------- ------- ------- -------
Total from investment
operations.............. 0.74 0.45 0.87 (0.09) 0.34
Less distributions:
From net investment
income.................. (0.55) (0.56) (0.51) (0.59) (0.39)
From net realized
gains................... (0.03) 0.00 0.00 0.00 (0.20)
In excess of net
realized gains.......... 0.00 0.00 0.00 0.00 (0.08)
------- ------- ------- ------- -------
Total distributions..... (0.58) (0.56) (0.51) (0.59) (0.67)
------- ------- ------- ------- -------
NAV, end of period...... $ 9.40 $ 9.24 $ 9.35 $ 8.99 $ 9.67
======= ======= ======= ======= =======
Total return (not
annualized)............. 8.18% 4.99% 9.89% (0.76)% 3.33%
Ratios/Supplemental
data:
Net assets, end of
period (000)............ $47,241 $47,542 $51,632 $56,852 $58,216
Number of shares
outstanding, end of
period (000)............ 5,026 5,147 5,522 6,324 6,019
Ratios to average net
assets (annualized)(2)..
Ratio of expenses to
average net assets...... 0.70% 0.70% 0.70% 0.70% 0.78%
Ratio of net investment
income to average net
assets.................. 5.89% 6.03% 5.47% 6.52% 5.79%
Portfolio turnover...... 76% 196% 325% 43%+ 210%
Ratio of expenses to
average net assets prior
to waived fees and
reimbursed expenses..... N/A 0.71% N/A 0.72% 0.80%
Ratio of net investment
income to average net
assets prior to waived
fees and reimbursed
expenses................ N/A 6.02% N/A 6.50% 5.77%
</TABLE>
- ----
(1) The Fund commenced operations on July 2, 1993.
(2) Ratios include expenses charged by the Master Portfolios.
+ On May 26, 1994 the Fund was reorganized and began investing all of its
assets in the corresponding Master Portfolio of MIP. This rate is for the
period from March 1, 1994, to May 25, 1994. 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 which was audited by other
auditors. The portfolio turnover rates for the fiscal years ending Febru-
ary 29, 1996 and thereafter reflect activity by the Master Portfolio.
11
<PAGE>
THE FUNDS
INVESTMENT OBJECTIVE AND POLICIES
The following is a summary of the investment objectives and policies 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 MIP, which has substan-
tially the same fundamental investment objective as the Asset Allocation Fund.
The Asset Allocation Master Portfolio seeks to achieve its objective by pur-
suing 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 maintaining a static al-
location. 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.
BGFA uses an investment model developed in 1973 (the "Asset Allocation Mod-
el") to pursue the Asset Allocation Master Portfolio's asset allocation strat-
egy. The Asset Allocation Model is presently used as a basis for managing sev-
eral large employee benefit trust funds and other institutional accounts and
is proprietary to BGFA. The Asset Allocation Model analyzes extensive finan-
cial data from numerous sources and regularly determines a recommended portfo-
lio allocation among common stocks, U.S. Treasury bonds and money market in-
struments. The Asset Allocation Model has broad latitude in selecting the
class of investments in which the Asset Allocation Master Portfolio may in-
vest. At any given time, substantially all of the Asset Allocation Master
Portfolio's assets may be invested in a single asset class and the relative
allocation among the asset classes may shift significantly from time to time.
12
<PAGE>
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 Al-
location 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 commit-
tee.
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 com-
prise the S&P 500 Index/1/ using, to the extent feasible, the same weighting
used by that index. The Asset Allocation Master Portfolio does not individu-
ally 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. The Asset Allo-
cation Master Portfolio invests this portion of its assets
- -----------
/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 Al-
location 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 As-
set Allocation Fund and the Asset Allocation Master Portfolio. The Asset
Allocation Fund and the Asset Allocation Master Portfolio are not spon-
sored, 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.
13
<PAGE>
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 re-
maining maturities of 20 years or more.
Money Market Investments. The money market instruments held by the Asset Al-
location Master Portfolio generally consist of high-quality money market in-
struments, 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 in-
vestments and investment activities is contained in "Appendix -- Additional
Investment Policies."
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 in-
vestment objective is fundamental and cannot be changed without shareholder
approval. The Bond Index Fund seeks to achieve its investment objective by in-
vesting 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 substan-
tially all of its assets in securities included in the LB Bond Index/2/, which
is composed of approximately 5,000 issues of fixed-income securities, includ-
ing 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 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 invest-
ment 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 Portfo-
lio using economic, financial or market analysis. The Bond
- -----------
/2/ Lehman Brothers, Inc. does not sponsor the Bond Index Fund or the Bond In-
dex Master Portfolio, nor is it affiliated in any way with BGFA, the Bond
Index Fund or the Bond Index Master Portfolio.
14
<PAGE>
Index Master Portfolio is managed by determining which securities are to be
purchased or sold to replicate, to the extent feasible, the investment charac-
teristics 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 at-
tempts 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 in-
creased 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 In-
dex 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 com-
prising 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 Port-
folio to attempt to achieve a correlation of at least 95% with the LB Bond In-
dex. 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 ap-
proval of the Bond Index Master Portfolio's interestholders, one or more indi-
ces for the Bond Index Master Portfolio may be selected if such standard of
comparison is deemed to be more representative of the performance of the secu-
rities the Bond Index Master Portfolio seeks to replicate.
The Bond Index Master Portfolio does not hold all of the issues that com-
prise 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
15
<PAGE>
Master Portfolio uses a statistical process known as "stratified 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 clas-
ses of fixed-income securities in the LB Bond Index -- U.S. Government obliga-
tions and investment-grade corporate debt securities. Such classes are deline-
ated further according to credit quality, issuer sector, term to maturity,
coupon rates and callability. The sampling techniques utilized by the Bond In-
dex Master Portfolio are expected to be an effective means of approximating
the investment performance of the LB Bond Index; however, the Bond Index Mas-
ter 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 of MIP 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 reasonable-
ness, taking into account the size of the Bond Index Master Portfolio's in-
vestment 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 re-
spective investment objective.
Index funds, such as the Bond Index Fund and the Bond Index Master Portfo-
lio, seek to create a portfolio which substantially replicates the total re-
turn of the securities comprising the applicable index. Index funds are not
managed through traditional methods of fund management, which typically in-
volve 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 in-
curred by non-index, traditionally managed funds. The portfolio 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 mar-
ket instruments, which include U.S. Government obligations, obligations of do-
mestic and foreign banks, repurchase agreements,
16
<PAGE>
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 ad-
dition, the Bond Index Master Portfolio may lend its portfolio securities and
engage in interest rate futures and options transactions, each of which in-
volves risk. A more complete description of the Bond Index Master Portfolio's
investments and investment activities is contained in "Appendix -- Additional
Investment Policies."
S&P 500 STOCK FUND/3/
The S&P 500 Stock Fund seeks to approximate as closely as practicable (be-
fore 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 fundamen-
tal investment objective as the Fund. The 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.
- -----------
/3/ 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. "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 Mas-
ter Portfolio. The S&P 500 Stock Fund and the S&P 500 Index Master Portfo-
lio 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 Port-
folio. 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.
17
<PAGE>
No attempt is made to manage the portfolio of the S&P 500 Index Master Port-
folio using economic, financial or market analysis. The Master Portfolio is
managed by determining which securities are to be purchased or sold to repli-
cate, 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 Master
Portfolio's total assets is invested in securities comprising the S&P 500 In-
dex. 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. Per-
fect (100%) correlation would be achieved if the total return of the Master
Portfolio's net assets increased or decreased exactly as the total return of
the S&P 500 Index increased or decreased. The 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 Fund's and Master Portfo-
lio's expenses, the amount of cash and cash equivalents held by the 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 of both the Fund and the Master Portfolio. The S&P
500 Index Master Portfolio uses cash flows from shareholder purchase and re-
demption activity to maintain, to the extent feasible, the similarity of its
portfolio to the securities comprising the S&P 500 Index. BGFA regularly moni-
tors the S&P 500 Index Master Portfolio's, correlation to the S&P 500 Index
and adjusts the portfolio of the Master Portfolio to the extent necessary 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 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 securi-
ties, each of which involves risk. Generally, the Master Portfolio attempts to
be fully invested at all times in securities comprising the S&P 500 Index and
in futures and options on stock index futures.
The S&P 500 Index Master Portfolio may invest up to 10% of its assets in
high-quality money market instruments to provide liquidity. See "Appendix-Ad-
ditional Invest Policies."
18
<PAGE>
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 objec-
tive is fundamental and cannot be changed without shareholder approval. The
U.S. Treasury Allocation Fund seeks to achieve its investment objective by in-
vesting 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 real-
locating its investments among the following three maturity classes of U.S.
Treasury debt securities: long-term bonds, intermediate-term notes and bonds,
and short-term bills. That strategy is based upon the premise that those matu-
rity 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 Al-
location 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 ac-
counts. The U.S. Treasury Allocation Model, which is proprietary to BGFA, ana-
lyzes risk, correlation and expected return data and regularly determines a
recommended portfolio allocation among long-term U.S. Treasury bonds, interme-
diate-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 changes in interest rates than shorter-term
19
<PAGE>
debt securities. At any given time, substantially all of the U.S. Treasury Al-
location 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 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.
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 10 years.
Short-Term U.S. Treasury Bills. The U.S. Treasury Allocation Master Portfo-
lio invests in U.S. Treasury bills with remaining maturities of one year or
less.
In addition, the U.S. Treasury Allocation Master Portfolio may hold money
market instruments for liquidity purposes, as described in "Appendix -- Addi-
tional Investment Policies."
The U.S. Treasury Allocation Model is an optimization model which uses sta-
tistical 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 Alloca-
tion Model is a set of assumptions concerning expected risk and return and in-
vestor attitudes toward risk, which are incorporated into the allocation deci-
sion. The principal inputs of financial data to the model currently are (i)
the current yields on 90-day U.S. Treasury bills, 6-year U.S. Treasury notes,
and 30-year U.S. Treasury bonds; (ii) the expected statistical standard devia-
tion in investment re turn for each maturity class of fixed income securities;
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
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
20
<PAGE>
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 accor-
dance 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 Allo-
cation 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 Allo-
cation 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 per-
son 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 Portfo-
lio's investments and investment activities is contained in "Appendix -- Addi-
tional Investment Policies."
RISK CONSIDERATIONS
General
Since the investment characteristics and, therefore, investment risks di-
rectly associated with such characteristics of each Fund correspond to those
of the Master Portfolio in which such Fund invests, the following is a discus-
sion of the risks associated with the investments of the Master Portfolios.
Once again, unless otherwise specified, references to the investment policies
and risks of a Fund also should be understood as references to the investment
policies and risks of the corresponding Master Portfolio.
21
<PAGE>
The NAV per share of each class of a Fund is neither insured nor guaranteed,
is not fixed and should be expected to fluctuate.
Equity Securities
The stock investments of the Funds are subject to equity market risk. Equity
market risk is the possibility that common stock prices will fluctuate or de-
cline over short or even extended periods. The U.S. stock market tends to be
cyclical, with periods when stock prices generally rise and periods when
prices generally decline. Throughout the first six months of 1998, the stock
market, as measured by the S&P 500 Index and other commonly used indices, was
trading at or close to record levels. There can be no guarantee that these
performance levels will continue.
Debt Securities
The debt instruments in which the Funds invest are subject to credit and in-
terest rate risk. Credit risk is the risk that issuers of the debt instruments
in which the Funds invest may default on the payment of principal and/or in-
terest. Interest-rate risk is the risk that increases in market interest rates
may adversely affect the value of the debt instruments in which the Funds in-
vest. The value of the debt instruments generally changes inversely to market
interest rates. Debt securities with longer maturities, which tend to produce
higher yields, are subject to potentially greater capital appreciation and de-
preciation than obligations with shorter maturities. Changes in the financial
strength of an issuer or changes in the ratings of any particular security may
also affect the value of these investments.
Although some of the Funds' securities are guaranteed by the U.S. Govern-
ment, its agencies or instrumentalities, such securities are sub ject to in-
terest rate risk and the market value of these securities, upon which the
Funds' daily NAV is based, will fluctuate. No assurance can be given that the
U.S. Government would provide financial support to its agencies or instrumen-
talities where it is not obligated to do so.
Foreign Securities
Investing in the securities of issuers in any foreign country, including
through American Depository Receipts ("ADRs"), European Depository Receipts
("EDRs") and similar securities, involves special risks and considerations not
typically associated with investing in U.S. companies.
22
<PAGE>
These include differences in accounting, auditing and financial reporting
standards; generally higher commission rates on foreign portfolio transac-
tions; the possibility of nationalization, expropriation or confiscatory taxa-
tion; adverse changes in investment or exchange control regulations (which may
include suspension of the ability to transfer currency from a country); and
political, social and monetary or diplomatic developments that could affect
U.S. investments in foreign countries. Additionally, dispositions of foreign
securities and dividends and interest payable on those securities may be sub-
ject to foreign taxes, including withholding taxes. Foreign securities often
trade with less frequency and volume than domestic securities and, therefore,
may exhibit greater price volatility. Additional costs associated with an in-
vestment in foreign securities may include higher custodial fees than apply to
domestic custodial arrangements and transaction costs of foreign currency con-
versions. Changes in foreign exchange rates also will affect the value of se-
curities denominated or quoted in currencies other than the U.S. dollar. A
Fund's performance may be affected either unfavorably or favorably by fluctua-
tions in the relative rates of exchange between the currencies of different
nations, by exchange control regulations and by indigenous economic and polit-
ical developments.
Other Investment Considerations
Because the Funds may shift investment allocations significantly from time
to time, their performance may differ from funds which invest in one asset
class or from funds with a stable mix of assets. Further, shifts among asset
classes may result in relatively high turnover and transaction (i.e., broker-
age commission) costs. Portfolio turnover also can generate short-term capital
gains tax consequences. During those periods in which a higher percentage of
certain Funds' assets are invested in long-term bonds, those Master Portfo-
lios' exposure to interest-rate risk will be greater because the longer matu-
rity of such securities means they are generally more sensitive to changes in
market interest rates than short-term securities.
The Asset Allocation, Bond Index and U.S. Treasury Allocation Funds may en-
ter into futures transactions, each of which involves risk. The futures con-
tracts and options on futures contracts that these Funds may purchase may be
considered derivatives. Certain of the floating-and-variable-rate instruments
that each Fund may purchase also may be considered derivatives. Derivatives
are financial instruments whose values are derived, at least in part, from the
prices of other securities or specified assets, indices or rates. Each Fund
may use some derivatives
23
<PAGE>
as part of its short-term liquidity holdings and/or substitutes for comparable
market positions in the underlying securities. 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. A Fund may not use derivatives
to create leverage without establishing adequate "cover" in compliance with
SEC leverage rules.
Asset allocation and modeling strategies are employed by BGFA for other in-
vestment 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 Fund and one or more of these investment companies or ac-
counts, available investments or opportunities for sales will be allocated eq-
uitably to each by BGFA. In some cases, this procedure may adversely affect
the size of the position obtained for or disposed of by a Fund or the price
paid or received by such Fund.
Year 2000
Many computer software systems in use today cannot distinguish the Year 2000
from the Year 1900. Most of the services provided to the Funds depend on the
smooth functioning of computer systems. Any failure to adapt these systems in
time could hamper a Fund's operations and services. The Funds' principal serv-
ice providers have advised the Funds that they are working on necessary
changes to their systems and that they expect their systems to be adapted in
time. There can, of course, be no assurance of success. In addition, because
the Year 2000 issue affects virtually all organizations, the companies or en-
tities in which the Funds invest also could be adversely impacted by the Year
2000 issue. The extent of such impact cannot be predicted.
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 re-
deemed at the end of a stated period of time, after giving effect to the rein-
vestment of dividends and distributions during the period. The return of
shares is expressed as a percentage rate which, if applied on a compounded an-
nual basis, would result in the redeemable value of the investment in shares
at the end of
24
<PAGE>
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 peri-
ods, 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 as-
sumes 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 NAV per share at the beginning of the period. Advertisements may in-
clude 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 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 speci-
fied period (usually 30 days) by its NAV per share on the last day of such pe-
riod and annualizing the result.
Performance figures are based on historical results and are not intended to
indicate future performance. 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 is contained in
the Annual Report which may be obtained by calling the Company at 1-888-204-
3956.
25
<PAGE>
MANAGEMENT OF THE FUNDS
GENERAL -- The Company has not retained the services of an investment ad-
viser because each Fund's assets are invested in a corresponding Master Port-
folio of MIP that has retained investment advisory services (see "Master Port-
folio 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 MIP as follows:
<TABLE>
<CAPTION>
MASTER
FUND PORTFOLIO
---- ---------
<C> <S>
Asset Allocation Fund.......... Asset Allocation Master Portfolio of MIP
Bond Index Fund................ Bond Index Master Portfolio of MIP
S&P 500 Stock Fund............. S&P 500 Index Master Portfolio of MIP
U.S. Treasury Allocation Fund.. U.S. Treasury Allocation 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.
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 also serve as Trustees of MIP. Additional infor-
mation regarding the Officers and Directors/Trustees of the Company, MIP is
included in the SAI under "Management."
INVESTMENT ADVISER -- BGFA serves as investment adviser to the Master Port-
folios. BGFA provides investment guidance and policy direction in connection
with the management of each Master Portfolio's assets. BGFA is an indirect
subsidiary of Barclays Bank PLC ("Barclays") and is located at 45 Fremont
Street, San Francisco, California 94105. As of April 30, 1998, BGFA and its
affiliates provided investment advisory services for approximately $575 bil-
lion 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%
S&P 500 Index Master Portfolio...................................... .05%
U.S. Treasury Allocation Master Portfolio........................... .30%
</TABLE>
26
<PAGE>
BGFA, Barclays and their affiliates deal, trade and invest for their own ac-
count 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 & Foerster LLP, counsel to the Company, 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 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 inter-
pretations 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 inter-
pretations, 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 en-
tered into with another entity or entities qualified to perform such services.
CO-ADMINISTRATORS -- Stephens and BGI are the Fund's co-administrators. Ste-
phens and BGI provide the Funds with administrative services, including gen-
eral supervision of the Funds' non-investment operations, coordination of the
other services provided to the Funds, compilation of information for reports
to the SEC and the state securities commissions, preparation of proxy state-
ments and shareholder reports, and general supervision of data compilation in
connection with preparing periodic reports to the Company's directors and of-
ficers. Stephens also furnishes office space and certain facilities to conduct
the Funds' business, and compensates the Company's directors, officers and em-
ployees who are affiliated with Stephens. In addition, except as outlined be-
low under "Expenses", Stephens and BGI will be responsible for paying all ex-
penses incurred by the Funds other than the fees payable to BGFA. For these
services, Stephens and BGI are entitled to a monthly fee, in the aggregate, at
the annual rate of each Fund's average daily net assets as shown below:
27
<PAGE>
<TABLE>
<CAPTION>
ANNUAL
CO-ADMINISTRATION
FUND FEE
---- -----------------
<S> <C>
Asset Allocation Fund...................................... 0.40%
Bond Index Fund............................................ 0.15%
S&P 500 Stock Fund......................................... 0.15%
U.S. Treasury Allocation Fund.............................. 0.40%
</TABLE>
BGI has delegated certain of its duties as co-administrator to Investors
Bank & Trust Company ("IBT"). IBT, as sub-administrator, is compensated by BGI
for performing certain administration services. Prior to October 21, 1996,
Stephens was the Funds' sole administrator and received fees for its services
as described in the SAI.
DISTRIBUTOR -- Stephens is the distributor for the Funds shares. Stephens is
a full service broker/dealer and investment advisory firm located at 111 Cen-
ter Street, Little Rock, Arkansas 72201. Stephens and its predecessor have
been providing securities and investment services for more than 60 years. Ad-
ditionally, 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. Stephens, as the Company's sponsor and the princi-
pal underwriter of the Funds 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 Funds for the sale of their
shares, and may enter into Selling Agreements with selling agents that wish to
make available Fund shares to their respective customers ("Selling Agents").
Stephens does not receive a fee for providing distribution services to the
Funds. BGI presently acts as a Selling Agent, but does not receive any fee
from the Funds for such activities.
CUSTODIAN -- IBT currently acts as the Funds' custodian. The principal busi-
ness address of IBT is 200 Clarendon Street, Boston, Massachusetts 02111. IBT
is not entitled to receive compensation for its custodial services so long as
it is entitled to receive compensation for providing sub-administration serv-
ices to the Funds.
TRANSFER AND DIVIDEND DISBURSING AGENT -- IBT also acts as the Company's
transfer and dividend disbursing agent.
28
<PAGE>
SHAREHOLDER SERVICING AGENTS -- The Funds have adopted a Shareholder Servic-
ing 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") for the provision of certain services to the
Funds. The services provided may include personal services relating to share-
holder accounts, such as answering shareholder inquiries, providing reports
and other information, and providing services related to the maintenance of
shareholder accounts. For these services, each Shareholder Servicing Agent is
entitled to receive a monthly fee equal to the percentage rate listed below of
the average daily net assets of such Fund represented by shares owned during
the period for which payment is being made by investors with whom the Share-
holder Servicing Agent maintains a servicing relationship, or an amount which
equals the maximum amount payable to the Shareholder Servicing Agent under ap-
plicable laws, regulations or rules, including the Conduct Rules of the Na-
tional Association of Securities Dealers, Inc., whichever is less. Stephens
and BGI as co-administrators have agreed to pay these shareholder servicing
fees out of the fees each receives for co-administration services.
<TABLE>
<CAPTION>
ANNUAL
SHAREHOLDER
SERVICING
FUND FEE
---- -----------
<S> <C>
Asset Allocation Fund............................................ .20%
Bond Index Fund.................................................. .07%
S&P 500 Stock Fund............................................... .07%
U.S. Treasury Allocation Fund.................................... .20%
</TABLE>
A Shareholder Servicing Agent may impose certain conditions on its custom-
ers, 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 invest-
ment 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 -- Except for extraordinary expenses, brokerage and other expenses
connected with the execution of portfolio transactions and certain other ex-
penses which are borne by the Funds, Stephens and BGI have agreed to bear all
costs of the Funds' and the Company's operations.
29
<PAGE>
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 retire-
ment plans, who have appointed one of the Company's Shareholder Servic-
ing Agents as plan trustee, plan administrator or other agent, or whose
plan trustee, plan administrator or other agent has a servicing arrange-
ment with a Shareholder Servicing Agent that permits investments in Fund
shares, and Plan Participants who invest pursuant to an agreement be-
tween such a Benefit Plan and a Shareholder Servicing Agent.
. Investors 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.
. Investors who have a servicing arrangement with one of the Company's
Shareholder Servicing Agents that permits investments in Fund shares
("Qualified Buyers").
. Investors who have a servicing arrangement with BGI and invest at least
$1 million in a Fund ("Direct Buyers").
Eligible investors may purchase Fund shares in one of the several ways de-
scribed below. For more information or additional forms, call 1-888-204-3956.
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 representa-
tive, the Company or Stephens will transmit or cause to be transmitted prompt-
ly, 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, Direct 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
30
<PAGE>
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 a Fund's shares and to reject any purchase re-
quests. Certificates for Fund shares are not issued. Shareholder Servicing
Agents may establish investment amount and account balance requirements dif-
ferent 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 NAV per
share next determined after an order in proper form is received by the Trans-
fer Agent. Purchase orders that are received by the Transfer Agent before the
close of regular trading on the NYSE (currently 1:00 p.m., Pacific time) will
be executed at the NAV determined as of the close of regular trading on the
NYSE on that Business 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 in-
vestor'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 Trans-
fer Agent on the same day at the NAV determined as of the close of regular
trading on the NYSE on that Business Day.
Federal regulations require that an investor provide a valid taxpayer iden-
tification number ("TIN"), which is usually the investor's social security
number or employee identification number, upon opening or reopening an ac-
count.
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 com-
pensation plans. For additional information about Benefit Plans that may be
eligible to invest in Fund
31
<PAGE>
shares, prospective investors should contact a Shareholder Servicing Agent.
Fund investments by participants in 401(k) plans are typically made by pay-
roll deductions arranged between participants and their employers. Partici-
pants in the MasterWorks 401(k) program are included in this group. Partici-
pants also may make direct contributions to their accounts in special circum-
stances 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 de-
partment for more information about contribution methods.
Plan Participants who have established an account with a Shareholder Servic-
ing Agent may purchase Fund shares in accordance with their account arrange-
ments 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 in-
vestor's Shareholder Servicing Agent for approval and processing. If an in-
vestor's retirement plan application is incomplete or improperly filled out,
there may be a delay before the Fund account is opened. Investors should con-
sult their Shareholder Servicing Agent.
PURCHASES BY QUALIFIED BUYERS
Qualified Buyers may open a Fund account and make additional purchases
through a Shareholder Servicing Agent with whom they have
32
<PAGE>
an account arrangement. Shareholder Servicing Agents may transmit purchase or-
ders 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").
PURCHASES BY DIRECT BUYERS
Direct Buyers may open a Fund account by completing an Account Application.
Direct Buyers may purchase Fund shares by contacting the Transfer Agent, by
instructing the Transfer Agent to debit an Approved Bank Account or by wire.
TO PURCHASE FUND SHARES:
By Check: Initial and subsequent investments should be sent to MasterWorks
Funds, Inc., c/o Investors Bank and Trust Co., P.O. Box 9130, Mail Code MFD23,
Boston, MA 02117-9130.
By Wire: Investors establishing new accounts should telephone Investors Bank
& Trust Co., at 1-888-204-3956 prior to sending the bank wire.
Investors should instruct their bank to wire funds as follows:
Investors Bank & Trust Co.
ABA #011-001-438
Attn: Transfer Agent
Account #DDA 555555535
For Further Credit to: MasterWorks Funds, Inc.
Shareholder Account Name:
Shareholder Account Number:
IN-KIND PURCHASES
Payment for shares of a Fund may, at the discretion of BGFA as investment
adviser, be made in the form of securities that are permissible investments
for such Fund. Shares purchased in exchange for securities can not be redeemed
until the exchange transaction has settled. For further information, see "Pur-
chase and Redemption of Shares" in the SAI.
33
<PAGE>
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 NAV 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 NAV at the time of purchase
and redemption.
The Company generally 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 Portfo-
lio is not reasonably practicable or (b) it is not reasonably practicable for
the Fund or the relevant Master Portfolio to determine fairly the value of its
net assets, or a period during which the SEC by order permits deferral of re-
demptions 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 pro-
ceeds may be made in portfolio securities, subject to regulation by some state
securities commissions.
Redemption orders that are received by the Transfer Agent before the close
of regular trading on the NYSE (currently 1:00 p.m., Pacific time), will be
executed at the NAV determined as of the close of regular trading on the NYSE
on that Business 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 redemption orders to the Funds on the invest-
or'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 Trans-
fer Agent on the same day.
Unless the investor has made other arrangements with an appropriate Share-
holder Servicing Agent, and the Transfer Agent has been informed of such ar-
rangements, proceeds of a redemption order made by the investor through the
investor's Shareholder Servicing Agent are
34
<PAGE>
credited to the investor's Approved Bank Account. If no such account is desig-
nated, 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 in-
vestor's account with the investor's Shareholder Servicing Agent.
REDEMPTIONS BY 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. Invest-
ors may obtain more information by contacting their employer and/or their
Shareholder Servicing Agent. The redemption procedures outlined in the remain-
der of this section do not apply to investors in Benefit Plans or retirement
plans. Investors in these types of plans should contact their Shareholder Ser-
vicing Agent regarding redemption procedures applicable to them.
REDEMPTIONS BY QUALIFIED BUYERS
Qualified Buyers should contact their Shareholder Servicing Agent regarding
redemption procedures applicable to them. The redemption procedures outlined
in the remainder of this section do not apply to Qualified Buyers.
REDEMPTIONS BY DIRECT BUYERS
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 ap-
plicable).
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.
Written requests for redemptions should be mailed to MasterWorks Funds,
Inc., c/o Investors Bank and Trust Co., P.O. Box 9130, Mail Code MFD23, Bos-
ton, MA 02117-9130.
Unless other instructions are given in proper form, a check for the redemp-
tion proceeds is sent to the investor's address of record.
35
<PAGE>
Redemptions by Telephone
Telephone redemption or exchange privileges are made available to Direct
Buyers who have completed the "Redemption by Telephone" section when opening
an account. These privileges authorize the Transfer Agent to act on telephone
instructions from any person representing himself or herself to be the in-
vestor and reasonably believed by the Transfer Agent to be genuine. The Com-
pany requires the Transfer Agent to employ reasonable procedures, such as re-
quiring a form of personal identification, to confirm that instructions are
genuine and, if it does not follow such procedures, the Company and the Trans-
fer Agent may be liable for any losses due to unauthorized or fraudulent in-
structions. Neither the Company nor the Transfer Agent will be liable for fol-
lowing telephone instructions reasonably believed to be genuine.
If you have completed the Redemption by Telephone portion of a Fund's ac-
count application, you may redeem Fund shares on any Business Day by calling
the Transfer Agent at 1-888-204-3956 before the close of regular trading on
the NYSE, generally 4:00p.m. Eastern Time.
During times of drastic economic or market conditions, investors may experi-
ence difficulty in contacting the Transfer Agent by telephone to request a re-
demption 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 re-
quest being processed at a later time than it would have been if telephone re-
demption had been used. During the delay, the Fund's NAV may fluctuate.
Expedited Redemptions by Letter and Telephone
A Direct Buyer 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. Tele-
phone redemption and exchange privileges are made available to an investor au-
tomatically 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 re-
ceipt of redemption proceeds and the Fund's receipt of the investor's redemp-
tion request would be expedited.
36
<PAGE>
Direct Buyers may request expedited redemption by telephone by calling the
Transfer Agent at 1-800-776-0179.
Direct Buyers may request expedited redemption by mailing an expedited re-
demption request to the Transfer Agent.
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 cor-
porate 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 ex-
pedited 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 de-
scribed above), absent extraordinary circumstances. Such extraordinary circum-
stances could include those described above as potentially delaying redemp-
tions, 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.
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 invest-
or's state of residence. Before undertaking an exchange into another fund, in-
vestors should obtain and read a copy of the current prospectus of the fund
into which the exchange is being made. A prospectus may be obtained by calling
the Company at 1-888-204-3956.
Shares are exchanged at the next determined NAV. 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 promul-
gated 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 in-
terests of such
37
<PAGE>
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 fluctua-
tions. 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.
SHARE VALUE
Shares of each Fund are sold on a continuous basis at the applicable offer-
ing price next determined after an order in proper form is received by the
Transfer Agent. NAV per share is determined each Business Day as of the close
of regular trading on the NYSE (currently 1:00 p.m., Pacific time).
The NAV of a share of each Fund is the value of total net assets attribut-
able to such Fund divided by the number of outstanding shares of that Fund.
The value of the net assets is determined daily by adjusting the net assets at
the beginning of the day by the value of shareholder activity, net investment
income and net realized and unrealized gains or losses for that day. Net in-
vestment income is calculated each day as daily income less expenses. The NAV
of each Fund is expected to fluctuate daily and is expected to differ. 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 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 pro-
vided by independent pricing services. For further information regarding the
methods employed in valuing each Master Portfolio's investments, see "Determi-
nation of Net Asset Value" in the SAI.
DIVIDENDS AND DISTRIBUTIONS
The S&P 500 Stock Fund intends to pay quarterly dividends consisting of sub-
stantially all of its net investment income and annual distributions consist-
ing of substantially all of its net realized capital gains.
38
<PAGE>
The Asset Allocation Fund, Bond Index 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 auto-
matically reinvested at NAV in shares of the Fund paying such dividend or dis-
tribution, unless payment in cash is requested and your arrangement with a
Shareholder Servicing Agent permits the processing of cash payments.
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.
TAXES
GENERAL
Distributions from a Fund's net investment income and net short-term capital
gains, if any, are designated as dividend distributions and taxable to the
Fund's shareholders as ordinary income. Distributions from a Fund's net capi-
tal gain (generally, the excess of net long-term capital gains over net short-
term capital loss) are designated as capital gain distributions and taxable to
the Fund's shareholders as net capital gain. Noncorporate shareholders may be
taxed on such gain at preferential rates. In general, your distributions will
be taxable when paid, whether you take such distributions in cash or have them
automatically reinvested in additional Fund shares. However, distributions de-
clared in October, November, and December and distributed by the following
January will be taxable as if they were paid by December 31. A portion of Fund
distributions to corporate shareholders may qualify for the dividends-received
deduction in the hands of such shareholders.
Your redemptions (including redemptions in-kind) and exchanges of Fund
shares will ordinarily result in a taxable capital gain or loss, depending on
the amount you receive for your shares (or are deemed to receive in the case
of exchanges) and the cost of your shares. See "Federal Income Taxes -- Dispo-
sition of Fund Shares" in the SAIs.
If you buy shares of a Fund shortly before it distributes its annual gains,
your distribution from the Fund will, in effect, be a taxable return of part
of your investment. Similarly, if you buy shares of a Fund that
39
<PAGE>
holds appreciated securities in its portfolio, you will receive a taxable re-
turn of part of your investment if and when the Fund sells the appreciated se-
curities and realizes the gain. Some of the Funds have built up, or have the
potential to build up, high levels of unrealized appreciation.
Foreign shareholders may be subject to different tax treatment, including
withholding taxes. See "Federal Income Taxes -- Foreign Shareholders" in the
SAIs. In certain circumstances, U.S. residents may also be subject to with-
holding taxes. See "Federal Income Taxes -- Backup Withholding" in the SAIs.
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 dividend and
capital gain distributions.
However, such tax-exempt investors may be subject to tax on certain unre-
lated taxable income which could arise, for example, when such investors ac-
quire shares in the Fund through the use of leverage. Tax-exempt investors
should consult their tax advisors regarding the nrelated business taxable in-
come rules.
The foregoing discussion regarding taxes is based on tax laws which were in
effect as of the date of this Prospectus and summarizes only some of the im-
portant federal tax considerations generally affecting the Funds and their
shareholders. It is not intended as a substitute for careful tax planning; you
should consult your tax advisor with respect to your specific tax situation as
well as with respect to foreign, state and local taxes. Further federal tax
considerations are discussed in the SAI.
GENERAL INFORMATION
DESCRIPTION OF THE COMPANY
Each Fund is a series of the Company. The Company was organized as a Mary-
land corporation on October 15, 1992 and currently offers twelve series of
shares. 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. Addi-
tional information about the Directors and officers of the Company is included
in the Funds' SAI under "Management." Although
40
<PAGE>
the Company is not required to hold regular annual shareholder meetings, occa-
sional annual or special meetings may be required for purposes such as elect-
ing or removing Directors, approving advisory contracts and distribution plans
and changing a Fund's investment objectives or fundamental investment poli-
cies.
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 sub-
mitted 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.
Whenever a Fund, as a Master Portfolio interestholder, is requested to vote
on any matter submitted to interestholders of such Master Portfolio, the Fund
will hold a meeting of its shareholders to consider such matters. The Fund
will cast its votes in proportion to the votes received from its shareholders.
Shares for which the Fund receives no voting instructions are voted in the
same proportion as the votes received from the other Fund shareholders. If a
Master Portfolio's investment objective or policies are changed, the corre-
sponding Fund may elect to change its objective or policies to correspond to
those of the Master Portfolio. The Fund may also elect to redeem its interests
in the Master Portfolio and either seek a new investment company with a match-
ing objective in which to invest or retain its own investment adviser to man-
age the Fund's portfolio in accordance with its objective. In the latter case,
the Fund's inability to find a substitute investment company in which to in-
vest or equivalent management services could adversely affect shareholders'
investments in the Fund.
INDEPENDENT AUDITORS
KPMG Peat Marwick LLP, Three Embarcadero Center, San Francisco, California
94111, serves as independent auditors for the Company.
41
<PAGE>
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 1-888-204-3956.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRE-
SENTATIONS 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 OF-
FERING MAY NOT LAWFULLY BE MADE.
42
<PAGE>
APPENDIX -- ADDITIONAL INVESTMENT POLICIES
FUND INVESTMENTS
Set forth below is a description of certain investments and additional in-
vestment policies for each Fund, except as otherwise indicated. REFERENCES TO
THE INVESTMENTS AND INVESTMENT POLICIES AND RESTRICTIONS OF A FUND, UNLESS
OTHERWISE INDICATED, SHOULD BE UNDERSTOOD AS REFERENCES TO THE INVESTMENTS AND
INVESTMENT POLICIES AND RESTRICTIONS OF THE CORRESPONDING MASTER PORTFOLIO.
U.S. GOVERNMENT OBLIGATIONS -- The Funds 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, its agen-
cies or instrumentalities. Payment of principal and interest on U.S. Govern-
ment obligations (i) may be backed by the full faith and credit of the United
States (as with U.S. Treasury obligations and GNMA certificates) or (ii) may
be backed solely by the issuing or guaranteeing agency or instrumentality it-
self (as with FNMA notes). In the latter case, the investor must look princi-
pally 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 finan-
cial support to its agencies or instrumentalities where it is not obligated to
do so. As a general matter, the value of debt instruments, including U.S. Gov-
ernment obligations, declines when market interest rates increase and rises
when market interest rates decrease. Certain types of U.S. Government obliga-
tions are subject to fluctuations in yield or value due to their structure or
contract terms.
SECURITIES OF NON-U.S. ISSUERS -- The Funds may invest in certain securities
of non-U.S. issuers as discussed below.
Obligations of Foreign Governments, Banks and Corporations -- Each Fund may
invest in U.S. dollar-denominated short-term obligations issued or guaranteed
by one or more foreign governments or any of their political subdivisions,
agencies or instrumentalities that are determined by BGFA to be of comparable
quality to the other obligations in which such Fund may invest. The Funds may
also invest in debt obligations of supranational entities. Supranational enti-
ties include international organizations designated or supported by governmen-
tal entities to promote economic reconstruction or development and interna-
tional banking institutions and related government agencies. Examples
A-1
<PAGE>
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 Fund's assets in-
vested in obligations of foreign governments and supranational entities will
vary depending on the relative yields of such securities, the economic and fi-
nancial markets of the countries in which the investments are made and the in-
terest rate climate of such countries.
Each Fund may invest a portion of its total assets in high-quality, short-
term (one year or less) debt obligations of foreign branches of U.S. banks or
U.S. branches of foreign banks that are denominated in and pay interest in
U.S. dollars. The Funds also may invest in U.S. dollar-denominated debt obli-
gations issued by foreign corporations.
FLOATING- AND VARIABLE-RATE OBLIGATIONS -- The Funds may purchase debt in-
struments with interest rates that are periodically adjusted at specified in-
tervals or whenever a benchmark rate or index changes. These adjustments gen-
erally limit the increase or decrease in the amount of interest received on
the debt instruments. Floating- and variable-rate instruments are subject to
interest-rate risk and credit risk.
BONDS -- Certain of the debt instruments purchased by the Asset Allocation,
Bond Index and U.S. Treasury Allocation Funds may be bonds. A bond is an in-
terest-bearing security issued by a company or governmental unit. The issuer
of a bond has a contractual obligation to pay interest at a stated rate on
specific dates and to repay principal (the bond's face value) periodically or
on a specified maturity date. An issuer may have the right to redeem or "call"
a bond before maturity, in which case the investor may have to reinvest the
proceeds at lower market rates. Most bonds bear interest income at a "coupon"
rate that is fixed for the life of the bond. The value of a fixed rate bond
usually rises when market interest rates fall, and falls when market interest
rates rise. Accordingly, a fixed rate bond's yield (income as a percent of the
bond's current value) may differ from its coupon rate as its value rises or
falls.
Other types of bonds bear income at an interest rate that is adjusted peri-
odically. Because of their adjustable interest rates, the value of "floating-
rate" or "variable-rate" bonds fluctuates much less in response to market in-
terest rate movements than the value of fixed rate bonds. Also, the Funds may
treat some of these bonds as having a shorter maturity for purposes of calcu-
lating the weighted average ma-
A-2
<PAGE>
turity of their investment portfolios. Bonds may be senior or subordinated ob-
ligations. Senior obligations generally have the first claim on a corpora-
tion's earnings and assets and, in the event of liquidation, are paid before
subordinated debt. Bonds may be unsecured (backed only by the issuer's general
creditworthiness) or secured (also backed by specified collateral).
FUTURES CONTRACTS AND OPTIONS TRANSACTIONS -- The Asset Allocation, Bond In-
dex, S&P 500 Stock and U.S. Treasury Allocation Funds may use futures as a
substitute for a comparable market position in the underlying securities.
A futures contract is an agreement between two parties, a buyer and a sell-
er, to exchange a particular commodity or financial statement at a specific
price on a specific date in the future. An option transaction generally in-
volves a right, which may or may not be exercised, to buy or sell a commodity
or financial instrument at a particular price on a specified future date.
Futures contracts and options are standardized and traded on exchanges, where
the exchange serves as the ultimate counterparty for all contracts. Conse-
quently, the primary credit risk on futures contracts is the creditworthiness
of the exchange. Futures contracts are subject to market risk (i.e., exposure
to adverse price changes).
Although each of the indicated Funds intends to purchase or sell futures
contracts only if there is an active market for such contracts, no assurance
can be given that a liquid market will exist for any particular contract at
any particular time. Many futures exchanges and boards of trade limit the
amount of fluctuation permitted in futures contract prices during a single
trading day. Once the daily limit has been reached in a particular contract,
no trades may be made that day at a price beyond that limit or trading may be
suspended for specified periods during the trading day. Futures contract
prices could move to the limit for several consecutive trading days with lit-
tle or no trading, thereby preventing prompt liquidation of futures positions
and potentially subjecting a Fund to substantial losses. If it is not possi-
ble, or if a Fund determines not to close a futures position in anticipation
of adverse price movements, the Fund will be required to make daily cash pay-
ments on variation margin.
Stock Index Futures and Options on Stock Index Futures -- The S&P 500 Stock
and Asset Allocation Funds may invest in stock index futures and options on
stock index futures as a substitute for a comparable market position in the
underlying securities. A stock index future
A-3
<PAGE>
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 deliv-
ery of the underlying stocks in the index is made. With respect to stock indi-
ces that are permitted investments, each Fund intends to purchase and sell
futures contracts on the stock index for which it can obtain the best price
with consideration also given to liquidity. There can be no assurance that a
liquid market will exist at the time when a Fund seeks to close out a futures
contract or a futures option position. Lack of a liquid market may prevent
liquidation of an unfavorable position.
Interest-Rate Futures Contracts and Options on Interest-Rate Futures Con-
tracts -- The Asset Allocation, Bond Index and U.S. Treasury Allocation Funds
may invest in interest-rate futures contracts and options on interest-rate
futures contracts as a substitute for a comparable market position in the un-
derlying securities. The Funds may also sell options on interest-rate futures
contracts as part of closing purchase transactions to terminate their options
positions. No assurance can be given that such closing transactions can be ef-
fected or the degree of correlation between price movements in the options on
interest rate futures and price movements in the Funds' portfolio securities
which are the subject of the transaction.
Interest-Rate Futures Contracts and Options on Interest-Rate Futures Con-
tracts -- The Asset Allocation, Bond Index and U.S. Treasury Allocation Funds
may invest in interest-rate futures contracts and options on interest-rate
futures contracts as a substitute for a comparable market position in the un-
derlying securities. The Funds may also sell options on interest-rate futures
contracts as part of closing purchase transactions to terminate their options
positions. No assurance can be given that such closing transactions can be ef-
fected or the degree of correlation between price movements in the options on
interest rate futures and price movements in the Funds' portfolio securities
which are the subject of the transaction.
Interest-Rate and Index Swaps -- The Asset Allocation, Bond Index and U.S.
Treasury Allocation Funds may enter into interest-rate and index swaps in pur-
suit of their investment objectives. Interest-rate swaps involve the exchange
by a Fund with another party of their respective commitments to pay or receive
interest (for example, an exchange of floating-rate payments on fixed-rate
payments). Index swaps
A-4
<PAGE>
involve the exchange by a Fund with another party of cash flows based upon the
performance of an index of securities or a portion of an index of securities
that usually include dividends or income. In each case, the exchange commit-
ments can involve payments to be made in the same currency or in different
currencies. A Fund will usually enter into swaps on a net basis. In so doing,
the two payment streams are netted out, with a Fund receiving or paying, as
the case may be, only the net amount of the two payments. If a Fund enters
into a swap, it will maintain a segregated account on a gross basis, unless
the contract provides for a segregated account on a net basis. If there is a
default by the other party to such a transaction, a Fund will have contractual
remedies pursuant to the agreements related to the transaction.
The use of interest-rate and index swaps is a highly specialized activity
which involves investment techniques and risks 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 Fund. 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 of payments that a
Fund is contractually obligated to make. There is also a risk of a default by
the other party to a swap, in which case a Fund may not receive net amount of
payments that a Fund contractually is entitled to receive.
INVESTMENT COMPANY SECURITIES -- Each Master Portfolio may invest in securi-
ties issued by other investment companies which principally invest in securi-
ties 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, sub-
ject to certain exceptions, (i) 3% of the total voting stock of any one in-
vestment 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 ex-
penses. The Master Portfolios may also purchase shares of exchange listed
closed-end funds.
ILLIQUID SECURITIES -- Each Fund 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
A-5
<PAGE>
contractual restrictions on resale, participation interests that are not sub-
ject to the demand feature described above, floating- and variable-rate demand
obligations as to which the Master Portfolio cannot exercise the related de-
mand 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.
SHORT-TERM INSTRUMENTS AND TEMPORARY INVESTMENTS
The Funds may invest in high-quality money market instruments on an ongoing
basis to provide liquidity, for temporary purposes when there is an unexpected
level of shareholder purchases or redemptions or when "defensive" strategies
are appropriate. The instruments in which the Funds may invest include: (i)
short-term obligations issued or guaranteed by the U.S. Government, its agen-
cies 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 Comp-
troller of the Currency or whose deposits are insured by the FDIC; (iii) com-
mercial 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 BGFA ;
(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 agree-
ments; and (vi) short-term, U.S. dollar-denominated obligations of foreign
banks (including U.S. branches) that, at the time of investment have more than
$10 billion, or the equivalent in other currencies, in total assets and in the
opinion of BGFA are of comparable quality to obligations of U.S. banks which
may be purchased by the Master Portfolio.
Bank Obligations -- Each Fund may invest in bank obligations, including cer-
tificates 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.
Certificates of deposit are negotiable certificates evidencing the obliga-
tion of a bank to repay funds deposited with it for a specified period of
time.
A-6
<PAGE>
Time deposits are non-negotiable deposits maintained in a banking institu-
tion for a specified period of time at a stated interest rate. Time deposits
which may be held by a Fund will not benefit from insurance from the Bank In-
surance 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 may include unin-
sured, direct obligations, bearing fixed, floating- or variable-interest
rates.
Commercial Paper and Short-Term Corporate Debt Instruments -- Each Fund may
invest in commercial paper (including variable amount master demand notes),
which consists of short-term, unsecured promissory notes issued by corpora-
tions 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 pur-
suant 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 Fund monitors on an ongoing basis the ability of an
issuer of a demand instrument to pay principal and interest on demand.
Each Fund 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 Fund 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 Fund, an issue of securities
may cease to be rated or its rating may be reduced below the minimum rating
required for purchase by the Fund. The investment adviser and/or sub-adviser
to each Fund will consider such an event in determining whether the Fund
should continue to hold the obligation. To the extent the Fund continues to
hold such obligations, it may be subject to additional risk of default.
Repurchase Agreements -- Each Fund may enter into repurchase agreements
wherein the seller of a security to a Fund agrees to repurchase that security
from the Fund at a mutually-agreed upon time and price. The period of maturity
is usually quite short, often overnight or a
A-7
<PAGE>
few days, although it may extend over a number of months. A Fund may enter
into repurchase agreements only with respect to securities that could other-
wise be purchased by the Fund, and all repurchase transactions must be collat-
eralized. A Fund may incur a loss on a repurchase transaction if the seller
defaults and the value of the underlying collateral declines or is otherwise
limited or if receipt of the security or collateral is delayed. The Funds may
participate in pooled repurchase agreement transactions with other funds ad-
vised by BGFA. See "Additional Permitted Investment Activities" in the SAI for
additional information.
FORWARD COMMITMENTS, WHEN-ISSUED PURCHASES AND DELAYED-DELIVERY TRANSACTIONS
- -- Each Fund may purchase or sell securities on a when-issued or delayed-de-
livery basis and make contracts to purchase or sell securities for a fixed
price at a future date beyond customary settlement time. Securities purchased
or sold on a when-issued, delayed-delivery or forward commitment basis involve
a risk of loss if the value of the security to be purchased declines, or the
value of the security to be sold increases, before the settlement date. Al-
though a Fund will generally purchase securities with the intention of acquir-
ing them, a Fund may dispose of securities purchased on a when-issued, de-
layed-delivery or a forward commitment basis before settlement when deemed ap-
propriate by the adviser.
BORROWING MONEY -- As a fundamental policy, each Fund is permitted to borrow
to the extent permitted under the 1940 Act. However, each Fund currently in-
tends to borrow money only for temporary or emergency (not leveraging) purpos-
es, and may borrow up to one-third 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 exceed 5% of a Fund's total assets, the Fund will not make any in-
vestments.
LOANS OF PORTFOLIO SECURITIES -- Each Fund may lend securities from their
portfolios to brokers, dealers and financial institutions (but not individu-
als) in order to increase the return on such Fund's portfolio. The value of
the loaned securities may not exceed one-third of a Fund's total assets and
loans of portfolio securities are fully collateralized based on values that
are marked-to-market daily. The Funds will not enter into any portfolio secu-
rity lending arrangement having a duration of longer than one year. The prin-
cipal risk of portfolio lending is potential default or insolvency of the bor-
rower. In either of these cases, a Fund could experience delays in recovering
securities or collateral or could
A-8
<PAGE>
lose all or part of the value of the loaned securities. The Funds may pay rea-
sonable administrative and custodial fees in connection with loans of portfo-
lio securities and may pay a portion of the interest or fee earned thereon the
borrower or a placing broker. See "Additional Permitted Investment Activities"
in the SAI for additional information.
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 -- In-
vestment 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 out-
standing 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 deter-
mines, 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, a Fund 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 its 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 se-
curities of such issuer provided that this restriction shall not prevent a
Fund from investing all of its assets in its corresponding Master Portfolio;
(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 securi-
ties in accordance with its investment policies; and (iv) not invest 25% or
more of its total assets (i.e., concentrate) in any particular industry, ex-
cept 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 its 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
A-9
<PAGE>
than seven days and other illiquid securities. Disposing of illiquid or re-
stricted securities may involve additional costs and require additional time.
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 sub-
sequent events, so that an issuer's current financial condition may be better
or worse than the rating indicates. Subsequent to purchase by a Master Portfo-
lio, the rating of a debt security may be reduced below the minimum rating re-
quired for initial purchase by the Master Portfolio or the security may cease
to be rated. BGFA will consider either such event in determining whether a Mas-
ter 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 invest-
ment grade) debt securities. BGFA does not make any representation that the in-
vestment 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 al-
though 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 in-
terest and repay principal. Whereas such bonds normally exhibit adequate pro-
tection 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 cate-
A-10
<PAGE>
gory 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 de-
gree 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 be-
cause 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 ele-
ments may be present which suggest a 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. In-
terest payments and principal security appear adequate for the present, but
certain protective elements may be lacking or may be characteristically unre-
liable 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 re-
turn on funds employed, conservative capitalization structures with moderate
reliance on debt and ample asset protection, broad margins in earnings cover-
age of fixed financial charges and high internal cash generation, and well es-
tablished access to a range of financial markets and assured sources of alter-
nate 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
A-11
<PAGE>
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.
A-12
<PAGE>
SPONSOR, DISTRIBUTOR AND ADMINISTRATOR
Stephens Inc.
Little Rock, Arkansas
INVESTMENT ADVISER
Barclays Global Fund Advisors
San Francisco, California
CUSTODIAN
Investors Bank & Trust Company
Boston, Massachusetts
TRANSFER AGENT AND DIVIDEND DISBURSING AGENT
Investors Bank & Trust Company
Boston, Massachusetts
LEGAL COUNSEL
Morrison & Foerster LLP
Washington, D.C.
INDEPENDENT AUDITORS
KPMG Peat Marwick LLP
San Francisco, California
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 CRIMI-
NAL OFFENSE.
<PAGE>
MasterWorks* Funds
c/o Investors Bank & Trust Co.
200 Clarendon Street
Boston, MA 02116
<PAGE>
MUTUAL FUND PROSPECTUS
June 30, 1998
[GRAPHIC APPEARS HERE]
GROWTH STOCK FUND
SHORT-INTERMEDIATE TERM FUND
Advised by Barclays Global Fund Advisors
Sponsored and distributed by Stephens Inc.,
Member NYSE/SIPC
MasterWorks(R) Funds
<PAGE>
MasterWorks Funds Inc. (the "Company") is an open-end, management investment
company. This Prospectus contains information about two of the Company's funds
the GROWTH STOCK AND SHORT-INTERMEDIATE-TERM FUNDS (collectively the Funds).
Please read this Prospectus before investing and retain it for future
reference. It sets forth concisely the information about the Funds that an
investor should know before investing. A Statement of Additional Information
("SAI") dated June 30, 1998 containing additional information about the Funds
has been filed with the Securities and Exchange Commission ("SEC") and is
incorporated by reference into this Prospectus. The SAI is available without
charge by calling the Company at 1-888-204-3956 or by writing the Company at
the address printed on the back of the Prospectus. The SAI and other Fund
information is also on the SECs website (http://www.sec.gov).
----------------------
AS WITH ALL MUTUAL FUNDS, THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAP-
PROVED BY THE SECURITIES AND EXCHANGE COMMISSION, ANY STATE SECURITIES COMMIS-
SION 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, BARCLAYS GLOBAL INVESTORS, N.A., INVESTORS BANK & TRUST CO. OR
ANY OF THEIR 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.
GROWTH STOCK FUND
SHORT-INTERMEDIATE TERM FUND
PROSPECTUS
JUNE 30, 1998
<PAGE>
HOW THE FUNDS WORK
Each Fund invests all of its assets in a corresponding Master Portfolio
(each, a "Master Portfolio") of Managed Series Investment Trust ("MSIT"), each
an open-end, management investment company, rather than in a portfolio of se-
curities. Each Fund has substantially the same investment objective as the
corresponding Master Portfolio and each Fund's investment experience corre-
sponds directly with the respective Master Portfolio's investment experience.
Interests in a Master Portfolio may be purchased only by other investment com-
panies or other accredited investors. References to a Fund are to the Fund or
its corresponding Master Portfolio as the context requires.
. THE GROWTH STOCK FUND seeks to outperform the S&P 500 Index over periods
of three to five years. The Fund invests primarily in common stocks of growth-
oriented, small- and medium-sized corporations.
. THE SHORT-INTERMEDIATE TERM FUND seeks to provide total returns higher
than those of the Lehman Brothers Intermediate Government/ Corporate Bond In-
dex. It pursues this goal by investing in a broad range of securities with
short- to intermediate-term maturities (two to five years) including U.S. gov-
ernment obligations, corporate bonds, mortgage- and asset-backed securities,
and money market instruments.
----------------------
BARCLAYS GLOBAL FUND ADVISORS IS THE INVESTMENT ADVISER TO THE MASTER PORTFO-
LIOS AND TOGETHER WITH ITS AFFILIATES PROVIDES OTHER SERVICES TO THE FUNDS
AND MASTER PORTFOLIOS FOR WHICH IT IS COMPENSATED. STEPHENS INC., WHICH IS
NOT AFFILIATED WITH BARCLAYS GLOBAL FUND ADVISORS, IS THE SPONSOR AND CO-
ADMINISTRATOR AND SERVES AS THE DISTRIBUTOR FOR THE COMPANY.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Prospectus Summary..................................................... 1
Summary of Fund Expenses............................................... 5
Explanation of Tables.................................................. 6
Financial Highlights................................................... 8
The Funds.............................................................. 11
Management of the Funds................................................ 21
How to Buy Shares...................................................... 25
How to Redeem Shares................................................... 29
Exchange Privilege..................................................... 32
Share Value............................................................ 33
Dividends and Distributions............................................ 34
Taxes.................................................................. 34
General Information.................................................... 35
<CAPTION>
APPENDIX
--------
<S> <C>
Additional Investment Policies......................................... A-1
</TABLE>
<PAGE>
PROSPECTUS SUMMARY
The following summary provides investors with basic information about the
Funds. For more information, please refer specifically to the identified Pro-
spectus 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 re-
tirement 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 be-
tween a Benefit Plan and a Shareholder Servicing Agent .
. Investors using proceeds that are being rolled over directly from a
qualified Benefit Plan to an Individual Retirement Account ("IRA") pur-
suant to arrangements between the sponsor or other agent of the quali-
fied Benefit Plan and a Shareholder Servicing Agent, or who have estab-
lished a tax-deferred retirement plan with a Shareholder Servicing
Agent.
. Investors who have a servicing arrangement with one of the Company's
Shareholder Servicing Agents that permits investments in Fund shares.
. Investors who have a servicing arrangement with Barclays Global Invest-
ors, N.A. ("BGI") and invest at least $1 million in a Fund.
See "How To Buy Shares."
Q. WHAT ARE SOME OF THE POTENTIAL RISKS ASSOCIATED WITH AN INVESTMENT IN THE
FUNDS?
A. Investments in a Fund are not bank deposits or obligations of Barclays
Global Fund Advisors ("BGFA") or 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. When the value of the
portfolio securities in which the Funds invest declines, so does the value
of your Fund shares. Therefore, you should be prepared to accept some risk
with the money you invest in the Funds.
1
<PAGE>
The stock investments of the Funds are subject to equity market risk. Eq-
uity market risk is the possibility that common stock prices will fluctu-
ate or decline over short or even extended periods. The U.S. stock market
tends to be cyclical, with periods when stock prices generally rise and
periods when prices generally decline. Throughout the first six months of
1998, the stock market, as measured by the S&P 500 Index and other com-
monly used indices, was trading at or close to record levels. There can be
no guarantee that these performance levels will continue.
The portfolio debt instruments of the Funds are subject to credit and in-
terest rate risk. Credit risk is the risk that issuers of the debt instru-
ments in which the Funds invest may default on the payment of principal
and/or interest. Interest-rate risk is the risk that increases in market
interest rates may adversely affect the value of the debt instruments in
which the Funds invest. The value of the Funds portfolio debt instruments
generally changes inversely to market interest rates. Debt securities with
longer maturities, which tend to produce higher yields, are subject to po-
tentially greater price fluctuation than obligations with shorter maturi-
ties. Fluctuations in the market value of fixed income securities can be
reduced, but not eliminated, by variable rate or floating rate features.
In addition, some of the asset-backed securities in which the Short-Inter-
mediate Term Fund may invest are subject to extension risk. This is the
risk that when interest rates rise, prepayments of the underlying obliga-
tions slow, thereby lengthening the duration and potentially reducing the
value of these securities.
The Growth Stock Fund may invest a significant portion of its assets in
the securities of smaller and newer issuers. Investments in such companies
may present opportunities for capital appreciation because of high poten-
tial earnings growth. However, such investments may present greater risks
than investments in larger-size companies with more established operating
histories, diverse product lines and financial capacity. Securities of
small and new companies generally trade less frequently or in limited vol-
ume, or only in the over-the-counter market or on a regional securities
exchange. As a result, the prices of such securities may be more volatile
than those of larger, more established companies and, as a group, these
securities may suffer more severe price declines during periods of gener-
ally declining equity prices.
As with all mutual funds, there is no assurance that a Fund will achieve
its investment objective.
2
<PAGE>
See "The Funds--Risk Considerations" 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 arrange-
ment with a designated Shareholder Servicing Agent. Shares may be pur-
chased at net asset value ("NAV") on any day the Fund is open for business
(a "Business Day"). The Funds are open for business Monday through Friday
and are closed on standard New York Stock Exchange ("NYSE") holidays.
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. BGFA, as the investment adviser to the Master Portfolios, manages the in-
vestments of each Master Portfolio. The Company has not retained the serv-
ices of a separate investment adviser for the Funds because each Fund in-
vests all of its assets in the corresponding Master Portfolio. As of April
30, 1998, BGFA and its affiliates provided investment advisory services
for approximately $575 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 trans-
action 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 arrange-
ments, 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 NAV of each Fund is based on the NAV of interests
in the corresponding Master Portfolio. The NAV of interests in a Master
Portfolio is based on the total value of the portfolio
3
<PAGE>
securities owned by the Master Portfolio (plus cash and other assets, net
of liabilities) divided by the number of outstanding interests in the Mas-
ter Portfolio. A new NAV 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 intends to pay quarterly dividends consisting of
substantially all of their net investment income and annual distributions
consisting of substantially all of its net realized capital gains. The
Short-Intermediate Term Fund intends to pay monthly 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 NAV 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 the Company 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 NAV without the imposition of a
sales charge or redemption fee on any Business Day by letter or by tele-
phone (provided you have completed the "Redemption by Telephone" portion
of your account application). For more information contact Stephens Inc.
("Stephens") or your Shareholder Servicing Agent.
See "How to Redeem Shares."
4
<PAGE>
SUMMARY OF FUND EXPENSES
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average daily net assets)
<TABLE>
<CAPTION>
GROWTH STOCK
FUND
------------
<S> <C>
Management Fees (after waivers and reimbursements)/1/......... 0.58%
Co-Administration Fees........................................ 0.18%
-----
TOTAL FUND OPERATING EXPENSES (after waivers and
reimbursements)/2/.......................................... 0.76%
<CAPTION>
SHORT-
INTERMEDIATE
TERM FUND
------------
<S> <C>
Management Fees............................................... 0.45%
Co-Administration Fees........................................ 0.18%
-----
TOTAL FUND OPERATING
EXPENSES.................................................... 0.63%
</TABLE>
- -----------
/1/ Management Fees (before waivers and reimbursements) would be 0.60% for the
Growth Stock Fund.
/2/ Total Fund Operating Expenses (before waivers and reimbursements) would be
0.78% for the Growth Stock Fund.
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 pe-
riod:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
Growth Stock Fund............................... $ 8 $24 $42 $94
Short-Intermediate Term Fund.................... $ 6 $20 $35 $79
</TABLE>
5
<PAGE>
EXPLANATION OF TABLES
The purpose of the foregoing tables is to assist an investor in understand-
ing the various fees and expenses that an investor in the Funds will pay di-
rectly 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 re-
flect any charges that may be imposed by Shareholder Servicing Agents or Sell-
ing 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 reflect the level of ongoing fees expected to
be in effect during the current fiscal year. Management Fees reflects the
amounts paid for such services during the most recently completed fiscal year.
Co-Administration Fees reflects the contractual level of such fees currently
payable by each Fund. BGFA, BGI and Stephens each, in its sole discretion, may
waive or reimburse all or a portion of its respective fees charged to, or ex-
penses paid by, a Fund or Master Portfolio. Any waivers or reimbursements
would reduce a Fund's total expenses and have a favorable impact on its per-
formance. For more complete descriptions of the various costs and expenses you
can 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 illustration of the expenses associ-
ated 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 ex-
pected 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 vari-
ous costs and benefits of investing all of each Fund's assets in the corre-
sponding Master Portfolio rather than directly in a portfolio of securities
would be more or less than if the Fund invested in portfolio securities di-
rectly. 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 ac-
quired and managed the type of securities held by its corresponding Master
Portfolio. The Company's Board of
6
<PAGE>
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. There can be no assurance
that these economic efficiencies will be achieved. See "Management of the
Funds" for more complete descriptions of the various costs and expenses appli-
cable to investors in each of the Funds.
Other mutual funds and accredited investors may invest in the Master Portfo-
lios. The expenses and, accordingly, the investment returns of such other mu-
tual funds may differ from those of the Funds. Information about other invest-
ment options in the Master Portfolios may be obtained by calling Stephens at
1-800-643-9691.
***
7
<PAGE>
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING AS SHOWN)
The following information has been derived from the Financial Highlights in-
cluded in the Funds' financial statements for the fiscal year ended February
28, 1998. The financial statements are incorporated by reference into the
Funds' SAI and have been audited by KPMG Peat Marwick LLP, independent audi-
tors, whose report thereon dated April 3, 1998, also is incorporated by refer-
ence into the SAI. This information should be read in conjunction with the fi-
nancial statements and the notes thereto. The SAI has been incorporated by
reference into this Prospectus.
8
<PAGE>
GROWTH STOCK FUND
<TABLE>
<CAPTION>
YEAR YEAR YEAR YEAR PERIOD
ENDED ENDED ENDED ENDED ENDED
FEBRUARY 28, FEBRUARY 28, FEBRUARY 29, FEBRUARY 28, FEBRUARY 28,
1998 1997 1996 1995 1994(1)
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
NAV, beginning of
period................. $ 14.07 $ 14.78 $ 11.64 $ 11.52 $ 10.00
Income from investment
operations:
Net investment income
(loss)................. (0.04) (0.06) (0.01) 0.00 (0.01)
Net realized and
unrealized gain (loss)
on investments......... 2.96 (0.43) 4.82 0.19 1.86
Total from investment
operations............. 2.92 (0.49) 4.81 0.19 1.85
Less distributions:
From net investment
income................. 0.00 0.00 (0.01) 0.00 0.00
From net realized
gains.................. (1.25) (0.22) (1.66) (0.07) (0.33)
-------- -------- -------- ------- -------
Total distributions..... (1.25) (0.22) (1.67) (0.07) (0.33)
-------- -------- -------- ------- -------
NAV, end of period...... $ 15.74 $ 14.07 $ 14.78 $ 11.64 $ 11.52
======== ======== ======== ======= =======
Total return (not
annualized)............ 21.61% (3.46)% 42.10% 1.70% 18.65%
Ratios/supplemental
data:
Net assets, end of
period (000)........... $237,014 $213,218 $178,584 $96,925 $45,443
Number of shares
outstanding, end of
period (000)........... 15,061 15,156 12,084 8,330 3,945
Ratios to average net
assets (annualized)(2)
Ratio of expenses to
average net assets..... 0.76% 0.76% 0.76% 0.76% 0.80%
Ratio of net investment
income (loss) to
average net assets..... (0.28)% (0.41)% (0.12)% (0.02)% (0.18)%
Portfolio turnover
rate................... 129% 129% 145% 27%+ 104%
Average commission rate
paid++................. $ 0.0604 $ 0.0777 -- -- --
Ratio of expenses to
average net assets
prior to waived fees
and reimbursed
expenses............... 0.78% 0.81% 0.86% 0.87% 0.80%
Ratio of net investment
income (loss) to
average net assets
prior to waived fees
and reimbursed
expenses............... (0.30)% (0.46%) (0.22%) (0.12%) (0.18%)
</TABLE>
- -----------
(1) The Fund commenced operations on July 2, 1993.
(2) Ratios include expenses charged by the Master Portfolios.
+ On May 26, 1994 the Fund was reorganized and began investing all of its
assets in the corresponding Master Portfolio of MSIT. This rate is for the
period from February 28, 1994 to May 25, 1994. The portfolio turnover rate
for the period beginning May 26, 1994 and ended February 28, 1995 was 93%
and reflects activity by the Master Portfolio which was audited by other
auditors. The portfolio turnover rates for the fiscal years ending Febru-
ary 29, 1996 and thereafter reflect activity by the Master Portfolio.
++ The average commission rate paid reflects activity by the Master Portfo-
lio. For fiscal years beginning on or after September 1, 1995, a fund is
required to disclose its average commission rate per share for security
trades on which commissions are charged. This amount may vary depending
on, among other things, the mix of trades, trading practices and commis-
sion rate structures.
9
<PAGE>
SHORT-INTERMEDIATE TERM FUND
<TABLE>
<CAPTION>
YEAR YEAR YEAR YEAR PERIOD
ENDED ENDED ENDED ENDED ENDED
FEBRUARY 28, FEBRUARY 28, FEBRUARY 29, FEBRUARY 28, FEBRUARY 28,
1998 1997 1996 1995 1994(1)
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
NAV, beginning of
period................. $ 9.19 $ 9.40 $ 9.15 $ 9.72 $10.00
Income from investment
operations:
Net investment income... 0.60 0.60 0.65 0.64 0.42
Net realized and
unrealized (loss) on
investments............ 0.16 (0.21) 0.25 (0.57) (0.28)
Total from investment
operations............. 0.76 0.39 0.90 0.07 0.14
Less distributions:
From net investment
income ................ (0.60) (0.60) (0.65) (0.64) (0.42)
From net realized
gains.................. 0.00 0.00 0.00 0.00 0.00
------- ------- ------- ------- ------
Total distributions..... (0.60) (0.60) (0.65) (0.64) (0.42)
------- ------- ------- ------- ------
NAV, end of period ..... $ 9.35 $ 9.19 $ 9.40 $ 9.15 $ 9.72
======= ======= ======= ======= ======
Total return (not
annualized)............ 8.51% 4.29% 10.07% 0.89% 1.42%
Ratios/supplemental
data:
Net assets, end of
period (000)........... $10,829 $13,054 $13,704 $14,298 $5,258
Number of shares
outstanding, end of
period (000)........... 1,159 1,420 1,458 1,562 541
Ratios to average net
assets (annualized)(2)
Ratio of expenses to
average net assets..... 0.63% 0.65% 0.65% 0.65% 0.65%
Ratio of net investment
income to average net
assets................. 6.40% 6.48% 6.82% 7.07% 6.02%
Portfolio turnover...... 77% 62% 105% 29%+ 277%
Ratio of expenses to
average net assets
prior to waived fees
and reimbursed
expenses............... N/A 1.29% 1.44% 1.41% 0.65%
Ratio of net investment
income to average net
assets prior to waived
fees and reimbursed
expenses............... N/A 5.84% 6.03% 6.32% 6.02%
</TABLE>
- -----------
(1) The Fund commenced operations on July 2, 1993.
(2) Ratios include expenses charged by the Master Portfolios.
+ On May 26, 1994 the Fund was reorganized and began investing all of its as-
sets in the corresponding Master Portfolio of MSIT. This rate is for the
period from February 28, 1994 to May 25, 1994. 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. The portfolio turnover rates for the fiscal years ending February
29, 1996 and thereafter reflect activity by the Master Portfolio.
10
<PAGE>
THE FUNDS
INVESTMENT OBJECTIVE AND POLICIES
The following is a summary of the investment objectives and policies of the
Funds.
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 consider-
ation. 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 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 pri-
mary 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").
Since the investment characteristics of the Growth Stock Fund directly cor-
respond 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.
The Growth Stock Master Portfolio invests primarily in common stocks that
Wells Fargo Bank, as sub-adviser, believes have better-than-average prospects
for appreciation. Under normal market conditions, the
- --------------
/1/ S&P does not sponsor the Growth Stock Fund or the Growth Stock Master
Portfolio, nor is it affiliated in any way with BGFA, the Growth Stock
Master Portfolio or the Growth 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 Growth Stock Fund
and the Growth Stock Master Portfolio. The Growth Stock Fund and the
Growth Stock Master Portfolio are not sponsored, endorsed, sold, or pro-
moted by S&P and S&P makes no representation or warranty, express or im-
plied, regarding the advisability of investing in the Growth Stock Fund or
the Growth Stock Master Portfolio.
11
<PAGE>
Master Portfolio will hold at least 20 common stock issues spread across mul-
tiple industry groups, with the majority of these holdings consisting of es-
tablished growth companies, turnaround or acquisition candidates, or attrac-
tive larger capitalization companies. The Master Portfolio also may invest up
to 25% of its assets in American Depositary Receipts ("ADRs") and similar in-
struments and may invest up to 15% of its assets in equity securities of com-
panies in emerging or less developed markets. The stock issues held by the
Master Portfolio may have some of the following characteristics: low or no
dividends; smaller market capitalizations; less market liquidity; relatively
short operating histories; aggressive capitalization structures (including
high debt levels); and involvement in rapidly growing/changing industries
and/or new technologies.
Additionally, it is expected that the 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. It is expected that no more than
40% of the Master Portfolio's assets will be invested in these highly aggres-
sive issues at one time.
Though the Master Portfolio will hold a number of larger capitalization
stocks, under normal market conditions more than 50% of the Master Portfolio's
total assets will be invested in companies whose market capitalizations at the
time of acquisition are within the capitalization range of companies listed on
the S&P Small Cap 600 Index. As of May 1998, the capitalization range for the
S&P Small Cap 600 was from $40 million to $3.7 billion. The capitalization
range for the S&P Small Cap 600 Index is expected to change frequently. The
Master Portfolio may invest in companies with a market capitalization under
$40 million if the investment adviser to the Master Portfolio believes such
investments to be in the best interest of the Master Portfolio.
Under ordinary market conditions, at least 65% of the value of the total as-
sets of the Master Portfolio will be invested in common stocks and in securi-
ties which are convertible into common stocks that Wells Fargo Bank, as sub-
adviser, believes have better-than-average prospects for appreciation. The
Master Portfolio also may invest in convertible debt securities. At most, 5%
of the Master Portfolio's net assets will be invested in convertible debt se-
curities that are either not rated in the four highest rating categories by
one or more nationally recognized statistical rating organizations ("NRSROs"),
such as Moody's Investor Service, Inc. ("Moody's") or Standard & Poor's Rating
Group ("S&P"), or unrated securities determined by Wells Fargo Bank to be of
comparable quality.
12
<PAGE>
From time to time, when the adviser or sub-adviser determines that market
conditions make pursuing the Master Portfolio's basic investment strategy in-
consistent with the best interests of the Master Portfolio's investors, the
Fund may use temporary alternative strategies, primarily designed to reduce
fluctuations in the value of the Master Portfolio's assets. In implementing
these temporary "defensive" strategies, the Master Portfolio may invest in
preferred stock or investment-grade debt securities that are convertible into
common stock and in money market instruments. Generally, these temporary "de-
fensive" investments will not exceed 30% of the Master Portfolio's total as-
sets.
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 ac-
tive-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. For additional information relating to
portfolio turnover see "Taxes" in this Prospectus and "Portfolio Transactions"
and "Taxes" in the SAI.
A more complete description of the Growth Stock Master Portfolio's invest-
ments, investment activities, and investment restrictions is contained in "Ap-
pendix -- Additional Investment Policies" and in the SAI.
Portfolio Manager -- Mr. Jon Hickman assumed primary responsibility as lead
manager of the Growth Stock Master Portfolio in February, 1998. Mr. Hickman
has over sixteen years' experience in the investment management field. He
joined Wells Fargo Bank in 1986 managing equity and balanced portfolios for
individuals and employee benefit plans. He is a senior member of Wells Fargo
Bank's Equity Strategy Committee. Mr. Hickman has a B.A. and an M.B.A. in fi-
nance from Brigham Young University.
Mr. Thomas Zeifang, has also been responsible for the day-to-day management
of the Growth Stock Master Portfolio since June, 1997. Mr. Zeifang joined
Wells Fargo Bank in the summer of 1995 and is primarily responsible for pro-
viding fundamental equity analysis. Mr Zeifang was an analyst at Fleet Invest-
ment Advisors from 1992 to 1995 and prior to 1992 worked for three years as an
assistant portfolio manager at Marine
13
<PAGE>
Midland Bank. Mr. Zeifang holds a B.B.A. in finance from Saint Bonaventure
University, an M.B.A. in finance and business policy from the William E. Simon
School of Business Administration, and is a Chartered Financial Analyst.
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"). The LB In-
termediate Bond Index consists of government (Treasury and agency) and corpo-
rate 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 outstand-
ing in the marketplace.
Historically, the LB Intermediate Bond Index has outperformed short-term in-
vestments such as Treasury bills and has generally experienced a positive re-
turn 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 in-
vestment objective of the Short-Intermediate Term Master Portfolio is to pro-
vide investors with a total return, before fees and expenses, exceeding that
of the LB Intermediate Bond Index. The Short-Intermediate Term Master Portfo-
lio 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, cer-
tificates 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 re-
lated to the performance of the LB Intermediate Bond Index, the Short-Interme-
diate Term Master Portfolio does not attempt to replicate the portfolio compo-
sition of that Index. The Short-Intermediate Term Master Portfolio may hold
instruments with different maturities, as well as certain investment securi-
ties -- such as collateralized mortgage obligations and other asset-backed se-
curities -- which are not included in the Index. A more complete description
of the securities that may be purchased by
14
<PAGE>
the Short-Intermediate Term Master Portfolio is contained in "Appendix-- Addi-
tional Investment Policies." As similar types of securities are developed in
the marketplace, they may be considered for investment by the Short-Intermedi-
ate 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 di-
rectly correspond to those of the Short-Intermediate Term Master Portfolio,
the discussion below relates to the various investments of and techniques em-
ployed by the Short-Intermediate Term Master Portfolio.
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. In the case of mortgage-related, asset-backed and similar se-
curities, the Portfolio uses the security's average life in calculating the
Portfolio's average maturity. Under unusual market conditions, the Short-In-
termediate Term Master Portfolio may shorten or lengthen its average weighted
portfolio maturity.
Only investment-grade securities are considered for investment. These secu-
rities will be identified by their ratings according to one of two major rat-
ing services, S&P and Moody's. The rating systems employed by each service are
described in the Appendix to this Prospectus. Each service classifies securi-
ties 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 rat-
ing 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.
15
<PAGE>
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-Intermedi-
ate Term Master Portfolio. Wells Fargo will consider such an event in deter-
mining whether the Short-Intermediate Term Master Portfolio should continue to
hold the obligation. To the extent the Short-Intermediate Term Master Portfo-
lio continues to hold such obligations, it may be subject to additional risk
of default.
In the marketplace it is generally the case that higher-risk securities
carry higher yields-to-maturity. That is, investors tend to demand higher re-
turns 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 em-
phasize those maturity segments or rating groups that appear to offer the most
favorable returns to their risks, within the maturity and quality ranges de-
scribed 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 li-
quidity and, to a greater extent on a temporary basis, when there is an unex-
pected or abnormal level of investor purchases or redemptions of Short-Inter-
mediate Term Master Portfolio shares or when "defensive" strategies are appro-
priate.
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 capi-
tal gains tax consequences. For additional information relating to portfolio
turnover see "Federal Income Tax Information" in this Prospectus and "Portfo-
lio 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
16
<PAGE>
1995. Mr. Smith 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.
from the University of San Diego and is a chartered financial analyst.
Mr. Paul Single has been co-manager for the day-to-day management of the
portfolio of the Short-Intermediate Term Master Portfolio since February,
1998. Mr. Single has managed taxable bond portfolios for over a decade, and
has specific expertise in mortgage-backed securities. Prior to joining Wells
Fargo Bank, in early 1988, he was a senior portfolio manager for Benham Capi-
tal Management Group. Mr. Single received his B.S. from Springfield
College.
RISK CONSIDERATIONS
General
Since the investment characteristics and, therefore, investment risks di-
rectly associated with such characteristics of each Fund correspond to those
of the Master Portfolio in which such Fund invests, the following is a discus-
sion of the risks associated with the investments of the Master Portfolios.
Once again, unless otherwise specified, references to the investment policies
and risks of a Fund also should be understood as references to the investment
policies and risks of the corresponding Master Portfolio.
The NAV per share of the Fund is neither insured nor guaranteed, is not
fixed and should be expected to fluctuate.
Equity Securities
The stock investments of the Funds are subject to equity market risk. Equity
market risk is the possibility that common stock prices will fluctuate or de-
cline over short or even extended periods. The U.S. stock market tends to be
cyclical, with periods when stock prices generally rise and periods when
prices generally decline. Throughout the first six months of 1998, the stock
market, as measured by the S&P 500 Index and other commonly used indices, was
trading at or close to record levels. There can be no guarantee that these
performance levels will continue.
17
<PAGE>
Debt Securities
The debt instruments in which the Funds invest are subject to credit and in-
terest rate risk. Credit risk is the risk that issuers of the debt instruments
in which the Funds invest may default on the payment of principal and/or in-
terest. Interest-rate risk is the risk that increases in market interest rates
may adversely affect the value of the debt instruments in which the Funds in-
vest. The value of the debt instruments generally changes inversely to market
interest rates. Debt securities with longer maturities, which tend to produce
higher yields, are subject to potentially greater capital appreciation and de-
preciation than obligations with shorter maturities. Changes in the financial
strength of an issuer or changes in the ratings of any particular security may
also affect the value of these investments. In addition, some of the asset-
backed securities in which the Short-Intermediate Term Fund may invest are
subject to extension risk. This is the risk that when interest rates rise,
prepayments of the underlying obligations slow, thereby lengthening the dura-
tion and potentially reducing the value of these securities.
Although some of the Funds' securities are guaranteed by the U.S. Govern-
ment, its agencies or instrumentalities, such securities are subject to inter-
est rate risk and the market value of these securities, upon which the Funds'
daily NAV is based, will fluctuate. No assurance can be given that the U.S.
Government would provide financial support to its agencies or instrumentali-
ties where it is not obligated to do so.
Foreign Securities
Investing in the securities of issuers in any foreign country, including
through American Depository Receipts ("ADRs"), European Depository Receipts
("EDRs") and similar securities, involves special risks and considerations not
typically associated with investing in U.S. companies. These include differ-
ences in accounting, auditing and financial reporting standards; generally
higher commission rates on foreign portfolio transactions; the possibility of
nationalization, expropriation or confiscatory taxation; adverse changes in
investment or exchange control regulations (which may include suspension of
the ability to transfer currency from a country); and political, social and
monetary or diplomatic developments that could affect U.S. investments in for-
eign countries. Additionally, dispositions of foreign securities and dividends
and interest payable on those securities may be subject to foreign taxes, in-
cluding withholding taxes. Foreign securities often trade with less frequency
and volume than domestic securities and, therefore, may exhibit greater
18
<PAGE>
price volatility. Additional costs associated with an investment in foreign
securities may include higher custodial fees than apply to domestic custodial
arrangements and transaction costs of foreign currency conversions. Changes in
foreign exchange rates also will affect the value of securities denominated or
quoted in currencies other than the U.S. dollar. A Fund's performance may be
affected either unfavorably or favorably by fluctuations in the relative rates
of exchange between the currencies of different nations, by exchange control
regulations and by indigenous economic and political developments.
Other Investment Considerations
The Short-Intermediate Term Fund may enter into futures transactions, each
of which involves risk. The futures contracts and options on futures contracts
that this Fund may purchase may be considered derivatives. Certain of the
floating- and variable-rate instruments that this Fund may purchase also may
be considered derivatives. Derivatives are financial instruments whose values
are derived, at least in part, from the prices of other securities or speci-
fied assets, indices or rates. The Short-Intermediate Term Fund may use some
derivatives as part of its short-term liquidity holdings and/or as substitutes
for comparable market positions in the underlying securities. 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. The Short-Interme-
diate Term Fund may not use derivatives to create leverage without establish-
ing adequate "cover" in compliance with SEC leverage rules.
The Growth Stock Fund may invest a significant portion of its assets in the
securities of smaller and newer issues. Investments in such companies may
present opportunities for capital appreciation because of high potential earn-
ings growth. However, such investments may present greater risks than invest-
ments in larger-size companies with more established operating histories, di-
verse product lines and financial capacity. Securities of small and new compa-
nies generally trade less frequently or in limited volume, or only in the
over-the-counter market or on a regional securities exchange. As a result, the
prices of such securities may be more volatile than those of larger, more es-
tablished companies and, as a group, these securities may suffer more severe
price declines during periods of generally declining equity prices.
19
<PAGE>
Year 2000
Many computer software systems in use today cannot distinguish the Year 2000
from the Year 1900. Most of the services provided to the Funds depend on the
smooth functioning of computer systems. Any failure to adapt these systems in
time could hamper a Fund's operations and services. The Funds' principal serv-
ice providers have advised the Funds that they are working on necessary
changes to their systems and that they expect their systems to be adapted in
time. There can, of course, be no assurance of success. In addition, because
the Year 2000 issue affects virtually all organizations, the companies or en-
tities in which the Funds invest also could be adversely impacted by the Year
2000 issue. The extent of such impact cannot be predicted.
PERFORMANCE
Cumulative total return of shares is computed on a per share basis and as-
sumes 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 NAV per share at the beginning of the period. Advertisements may in-
clude 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 Short-Intermediate Term Fund may be advertised in
terms of yield. The yield on shares of these Funds is calculated by dividing
the Fund's net investment income per share earned during a specified period
(usually 30 days) by its NAV per share on the last day of such period and
annualizing the result.
Performance figures are based on historical results and are not intended to
indicate future performance. 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 is contained in
the Annual Report which may be obtained by calling the Company at 1-888-204-
3956.
20
<PAGE>
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
MSIT that has retained investment advisory services (see "Master Portfolio In-
vestment 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 MSIT
as follows:
<TABLE>
<CAPTION>
MASTER
FUND PORTFOLIO
---- ---------
<C> <S>
Growth Stock Fund...... Growth Stock Master Portfolio of MSIT
Short-Intermediate Term
Fund................. Short-Intermediate Term Master Portfolio of MSIT
</TABLE>
MSIT is registered under the 1940 Act as an open-end management investment
company. MSIT was organized as a Delaware business trust on October 28, 1993.
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 also serve as Trustees of MSIT. Additional infor-
mation regarding the Officers and Directors/Trustees of the Company and MSIT
is included in the SAI under "Management."
INVESTMENT ADVISER -- BGFA serves as investment adviser to the Master Port-
folios. BGFA provides investment guidance and policy direction in connection
with the management of each Master Portfolio's assets. BGFA is an indirect
subsidiary of Barclays Bank PLC ("Barclays") and is located at 45 Fremont
Street, San Francisco, California 94105. As of April 30, 1998, BGFA and its
affiliates provided investment advisory services for approximately $575 bil-
lion of assets.
For its advisory services to the Master Portfolios, BGFA is contractually en-
titled to receive from each Master Portfolio monthly fees at the following an-
nual rates of the respective Master Portfolio's average daily net assets:
<TABLE>
<CAPTION>
ANNUAL
ADVISORY
MASTER PORTFOLIO FEES
---------------- --------
<S> <C>
Growth Stock Master Portfolio....................................... .60%
Short-Intermediate Term Master Portfolio............................ .45%
</TABLE>
21
<PAGE>
The actual amount of advisory fees paid by each Master Portfolio, as a per-
centage of each Fund's average daily net assets, is set forth in this Prospec-
tus under the heading "Summary of Fund Expenses-Management Fees." Additional
information concerning the advisory fees paid by each Master Portfolio is
found in the Funds' SAI under "Investment Adviser".
Wells Fargo Bank currently serves as sub-adviser to each Master Portfolio.
Wells Fargo Bank, subject to the supervision and approval of BGFA, provides
investment advisory assistance and the day-to-day management of such Master
Portfolios' assets. For providing sub-advisory services to the Master Portfo-
lios, Wells Fargo Bank is entitled to receive from BGFA monthly fees at the
annual rate of 0.15% and 0.10% of the Growth Stock and Short-Intermediate Term
Master Portfolios' respective average daily net assets. For the fiscal year
ended February 28, 1998, 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.
Wells Fargo & Company, the parent company of Wells Fargo Bank, has signed a
definitive agreement to merge with Norwest Corporation. The proposed merger is
subject to certain regulatory approvals and must be approved by shareholders
of both holding companies. The merger is expected to close in the second half
of 1998. The combined company will be called Wells Fargo & Company. Wells
Fargo Bank has advised the Funds that the merger will not reduce the level or
quality of advisory and other services provided by Wells Fargo Bank to the
Funds.
BGFA, Barclays and their affiliates deal, trade and invest for their own ac-
count 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 & Foerster LLP, counsel to the Company and MSIT and special counsel
to BGFA and Wells Fargo Bank, has advised the Company, MSIT, BGFA and Wells
Fargo Bank that BGFA, Wells 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 adminis-
trative
22
<PAGE>
interpretations or decisions and that future judicial or administrative inter-
pretations 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 inter-
pretations, 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 en-
tered into with another entity or entities qualified to perform such
services.
CO-ADMINISTRATORS -- Stephens and BGI are the Funds' co-administrators. Ste-
phens and BGI provide the Funds with administrative services, including gen-
eral supervision of the Funds' non-investment operations, coordination of the
other services provided to the Funds, compilation of information for reports
to the SEC and the state securities commissions, preparation of proxy state-
ments and shareholder reports, and general supervision of data compilation in
connection with preparing periodic reports to the Company's directors and of-
ficers. Stephens also furnishes office space and certain facilities to conduct
the Funds' business, and compensates the Company's directors, officers and em-
ployees who are affiliated with Stephens. In addition, except as outlined be-
low under "Expenses", Stephens and BGI will be responsible for paying all ex-
penses incurred by the Funds other than the fees payable to BGFA. For these
services, Stephens and BGI are entitled to a monthly fee, in the aggregate, at
the annual rate of each Fund's average daily net assets as shown below:
<TABLE>
<CAPTION>
ANNUAL
CO-ADMINISTRATION
FUND FEE
---- -----------------
<S> <C>
Growth Stock Fund.......................................... 0.18%
Short-Intermediate Term Fund............................... 0.18%
</TABLE>
BGI has delegated certain of its duties as co-administrator to Investors
Bank & Trust Company ("IBT"). IBT, as sub-administrator, is compensated by BGI
for performing certain administration services. Prior to October 21, 1996,
Stephens was the Funds' sole administrator and received fees for its services
as described in the SAI.
DISTRIBUTOR -- Stephens is the distributor for the Funds shares. Stephens is
a full service broker/dealer and investment advisory firm located at 111 Cen-
ter Street, Little Rock, Arkansas 72201. Stephens and its predecessor have
been providing securities and investment services
23
<PAGE>
for more than 60 years. Additionally, it has been providing discretionary
portfolio management services since 1983. Stephens currently manages invest-
ment portfolios for pension and profit sharing plans, individual investors,
foundations, insurance companies and university endowments. Stephens, as the
Company's sponsor and the principal underwriter of the Funds within the mean-
ing of the 1940 Act, has entered into a Distribution Agreement with the Com-
pany pursuant to which Stephens has the responsibility for distributing Fund
shares. The Distribution Agreement provides that Stephens shall act as agent
for the Funds for the sale of their shares, and may enter into Selling Agree-
ments with selling agents that wish to make available Fund shares to their re-
spective customers ("Selling Agents"). Stephens does not receive a fee for
providing distribution services to the Funds. BGI presently acts as a Selling
Agent, but does not receive any fee from the Funds for such activities.
CUSTODIAN -- IBT currently acts as the Funds' custodian. The principal busi-
ness address of IBT is 200 Clarendon Street, Boston, Massachusetts 02111. IBT
is not entitled to receive compensation for its custodial services so long as
it is entitled to receive compensation for providing sub-administration serv-
ices to the Funds.
TRANSFER AND DIVIDEND DISBURSING AGENT -- IBT also acts as the Company's
transfer and dividend disbursing agent.
SHAREHOLDER SERVICING AGENTS -- The Funds have adopted a Shareholder Servic-
ing 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") for the provision of certain services to the
Funds. The services provided may include personal services relating to share-
holder accounts, such as answering shareholder inquiries, providing reports
and other information, and providing services related to the maintenance of
shareholder accounts. For these services, each Shareholder Servicing Agent is
entitled to receive a monthly fee equal to the percentage rate listed below of
the average daily net assets of such Fund represented by shares owned during
the period for which payment is being made by investors with whom the Share-
holder Servicing Agent maintains a servicing relationship, or an amount which
equals the maximum amount payable to the Shareholder Servicing Agent under ap-
plicable laws, regulations or rules, including the Conduct Rules of the Na-
tional Association of Securities Dealers, Inc., whichever is less. Stephens
and BGI as co-administrators have agreed to pay these shareholder servicing
fees out of the fees each receives for co-administration services.
24
<PAGE>
<TABLE>
<CAPTION>
ANNUAL
SHAREHOLDER
SERVICING
FUND FEE
---- -----------
<S> <C>
Growth Stock Fund................................................ .10%
Short-Intermediate Term Fund..................................... .10%
</TABLE>
A Shareholder Servicing Agent may impose certain conditions on its custom-
ers, 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 invest-
ment 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 -- Except for extraordinary expenses, brokerage and other expenses
connected with the execution of portfolio transactions and certain other ex-
penses which are borne by the Funds, Stephens and BGI have agreed to bear all
costs of the Funds' and the Company's operations.
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 retire-
ment plans, who have appointed one of the Company's Shareholder Servic-
ing Agents as plan trustee, plan administrator or other agent, or whose
plan trustee, plan administrator or other agent has a servicing arrange-
ment with a Shareholder Servicing Agent that permits investments in Fund
shares, and Plan Participants who invest pursuant to an agreement be-
tween such a Benefit Plan and a Shareholder Servicing Agent.
. Investors 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.
. Investors who have a servicing arrangement with one of the Company's
Shareholder Servicing Agents that permits investments in Fund shares
("Qualified Buyers").
25
<PAGE>
. Investors who have a servicing arrangement with BGI and invest at least
$1 million in a Fund ("Direct Buyers").
Eligible investors may purchase Fund shares in one of the several ways de-
scribed below. For more information or additional forms, call 1-888-204-3956.
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 representa-
tive, the Company or Stephens will transmit or cause to be transmitted prompt-
ly, 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, Direct 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 in-
vestor responsible for any losses or fees incurred. The Company reserves the
right in its sole discretion to suspend the availability of a Fund's shares
and to reject any purchase requests. Certificates for Fund shares are not is-
sued. 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 NAV per
share next determined after an order in proper form is received by the Trans-
fer Agent. Purchase orders that are received by the Transfer Agent before the
close of regular trading on the NYSE (currently 1:00 p.m., Pacific time) will
be executed at the NAV determined as of the close of regular trading on the
NYSE on that Business 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 in-
vestor'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 Trans-
fer Agent on the same day.
26
<PAGE>
Federal regulations require that an investor provide a valid taxpayer iden-
tification number ("TIN"), which is usually the investor's social security
number or employee identification number, upon opening or reopening an ac-
count.
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 invest-
ments 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 Shareholder Servicing
Agent.
Fund investments by participants in 401(k) plans are typically made by pay-
roll deductions arranged between participants and their employers. Partici-
pants in the MasterWorks 401(k) program are included in this group. Partici-
pants also may make direct contributions to their accounts in special circum-
stances 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 de-
partment for more information about contribution methods.
Plan Participants who have established an account with a Shareholder Servic-
ing Agent may purchase Fund shares in accordance with their account arrange-
ments 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.
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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 in-
vestor's Shareholder Servicing Agent for approval and processing. If an in-
vestor's retirement plan application is incomplete or improperly filled out,
there may be a delay before the Fund account is opened. Investors should con-
sult their Shareholder Servicing Agent.
PURCHASES BY QUALIFIED BUYERS
Qualified Buyers may open a Fund account and make additional purchases
through a Shareholder Servicing Agent with whom they have an account arrange-
ment. Shareholder Servicing Agents may transmit purchase orders to the Trans-
fer 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").
PURCHASES BY DIRECT BUYERS
Direct Buyers may open a Fund account by completing an Account Application.
Direct Buyers may purchase Fund shares by contacting the Transfer Agent, by
instructing the Transfer Agent to debit an Approved Bank Account or by wire.
TO PURCHASE FUND SHARES
By Check: Initial and subsequent investments should be sent to MasterWorks
Funds, Inc., c/o Investors Bank and Trust Co., P.O. Box 9130, Mail Code MFD23,
Boston, MA 02117-9130.
By Wire: Investors establishing new accounts should telephone Investors Bank
& Trust Co., at 1-888-204-3956 prior to sending the bank wire.
Investors should instruct their bank to wire funds as follows:
Investors Bank & Trust Co.
ABA #011-001-438
Attn: Transfer Agent
Account #DDA 555555535
For Further Credit to: MasterWorks Funds, Inc.
Shareholder Account Name:
Shareholder Account Number:
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IN-KIND PURCHASES
Payment for shares of a Fund may, at the discretion of BGFA as investment
adviser, be made in the form of securities that are permissible investments
for such Fund. Shares purchased in exchange for securities can not be redeemed
until the exchange transaction has settled. For further information, see "Pur-
chase and Redemption of Shares" in the SAI.
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 NAV 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 NAV at the time of purchase
and redemption.
The Company generally 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 Portfo-
lio is not reasonably practicable or (b) it is not reasonably practicable for
the Fund or the relevant Master Portfolio to determine fairly the value of its
net assets, or a period during which the SEC by order permits deferral of re-
demptions 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 pro-
ceeds may be made in portfolio securities.
Redemption orders that are received by the Transfer Agent before the close
of regular trading on the NYSE (currently 1:00 p.m., Pacific time), will be
executed at the NAV determined as of the close of regular trading on the NYSE
on that Business 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 redemption orders to the Funds on the invest-
or's behalf. Under certain
29
<PAGE>
circumstances, a Shareholder Servicing Agent may establish an earlier deadline
for receipt of orders or an investor's order transmitted to a Shareholder Ser-
vicing Agent may not be received by the Transfer Agent on the same day.
Unless the investor has made other arrangements with an appropriate Share-
holder Servicing Agent, and the Transfer Agent has been informed of such ar-
rangements, proceeds of a redemption order made by the investor 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.
REDEMPTIONS BY 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. Invest-
ors may obtain more information by contacting their employer and/or their
Shareholder Servicing Agent. The redemption procedures outlined in the remain-
der of this section do not apply to investors in Benefit Plans or retirement
plans. Investors in these types of plans should contact their Shareholder Ser-
vicing Agent regarding redemption procedures applicable to them.
REDEMPTIONS BY QUALIFIED BUYERS
Qualified Buyers should contact their Shareholder Servicing Agent regarding
redemption procedures applicable to them. The redemption procedures outlined
in the remainder of this section do not apply to Qualified Buyers.
REDEMPTIONS BY DIRECT BUYERS
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 applica-
ble).
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.
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<PAGE>
Written requests for redemptions should be mailed to MasterWorks Funds,
Inc., c/o Investors Bank and Trust Co., P.O. Box 9130, Mail Code MFD23, Bos-
ton, MA 02117-9130.
Unless other instructions are given in proper form, a check for the redemp-
tion proceeds is sent to the investor's address of record.
Redemptions by Telephone
Telephone redemption or exchange privileges are made available to Direct
Buyers who have completed the "Redemptions by Telephone" section of their
Fund's account application. 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 genu-
ine. The Company requires the Transfer Agent to employ reasonable procedures,
such as requiring a form of personal identification, to confirm that instruc-
tions 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 fraudu-
lent instructions. Neither the Company nor the Transfer Agent will be liable
for following telephone instructions reasonably believed to be genuine.
If you have completed the Redemption by Telephone portion of a Fund's ac-
count application, you may redeem Fund shares on any Business Day by calling
the Transfer Agent at 1-888-204-3956 before the close of regular trading on
the NYSE, generally 4:00p.m. Eastern Time.
During times of drastic economic or market conditions, investors may experi-
ence difficulty in contacting the Transfer Agent by telephone to request a re-
demption 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 re-
quest being processed at a later time than it would have been if telephone re-
demption had been used. During the delay, the Fund's NAV may fluctuate.
Expedited Redemptions by Letter and Telephone
A Direct Buyer 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. Tele-
phone redemption and exchange privileges are made available to an investor au-
tomatically upon the opening of an
31
<PAGE>
account unless the investor declines the privilege. The investor also may re-
quest 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.
Direct Buyers may request expedited redemption by telephone by calling the
Transfer Agent at 1-888-204-3956.
Direct Buyers may request expedited redemption by mailing an expedited re-
demption request to the Transfer Agent.
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 cor-
porate 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 ex-
pedited 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 de-
scribed above), absent extraordinary circumstances. Such extraordinary circum-
stances could include those described above as potentially delaying redemp-
tions, 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.
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 invest-
or's state of residence. Before undertaking an exchange into another fund, in-
vestors should obtain and read a copy of the current prospectus of the fund
into which the exchange is being made. A prospectus may be obtained by calling
the Company at 1-888-204-3956.
Shares are exchanged at the next determined NAV. No fees are currently
charged to shareholders directly in connection with exchanges,
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<PAGE>
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 be-
lieves 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.
SHARE VALUE
Shares of each Fund are sold on a continuous basis at the applicable offer-
ing price next determined after an order in proper form is received by the
Transfer Agent. NAV per share is determined each Business Day as of the close
of regular trading on the NYSE (currently 1:00 p.m., Pacific time).
The NAV of a share of each Fund is the value of total net assets attribut-
able to such Fund divided by the number of outstanding shares of that Fund.
The value of the net assets is determined daily by adjusting the net assets at
the beginning of the day by the value of shareholder activity, net investment
income and net realized and unrealized gains or losses for that day. Net in-
vestment income is calculated each day as daily income less expenses. The NAV
of each Fund is expected to fluctuate daily and is expected to differ. 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 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 pro-
vided by independent pricing services. For further information regarding the
methods employed in valuing each Master Portfolio's investments, see "Determi-
nation of Net Asset Value" in the SAI.
33
<PAGE>
DIVIDENDS AND DISTRIBUTIONS
The Growth Stock Fund intends to pay quarterly dividends consisting of sub-
stantially all of its net investment income and annual distributions consist-
ing of substantially all of its net realized capital gains. The Short-Interme-
diate Term Fund intends to pay monthly dividends consisting of substantially
all of its net investment income and annual distributions consisting of sub-
stantially all of its net realized capital gains. All dividends and distribu-
tions are automatically reinvested at NAV in shares of the Fund paying such
dividend or distribution, unless payment in cash is requested and your ar-
rangement with a Shareholder Servicing Agent permits the processing of cash
payments.
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.
TAXES
GENERAL
Distributions from a Fund's net investment income and net short-term capital
gains, if any, are designated as dividend distributions and taxable to the
Fund's shareholders as ordinary income. Distributions from a Fund's net capi-
tal gain (generally, the excess of net long-term capital gains over net short-
term capital loss) are designated as capital gain distributions and taxable to
the Fund's shareholders as net capital gains. Noncorporate shareholders may be
taxed on such gain at preferential rates. In general, your distributions will
be taxable when paid, whether you take such distributions in cash or have them
automatically reinvested in additional Fund shares. However, distributions de-
clared in October, November, and December and distributed by the following
January will be taxable as if they were paid by December 31. A portion of the
Growth Stock Fund's distributions to corporate shareholders may qualify for
the dividends-received deduction in the hands of such shareholders. Distribu-
tions from the Short-Intermediate Term Fund are not expected to qualify for
this deduction.
Your redemptions (including redemptions in-kind) and exchanges of Fund
shares will ordinarily result in a taxable capital gain or loss,
34
<PAGE>
depending on the amount you receive for your shares (or are deemed to receive
in the case of exchanges) and the cost of your shares. See "Federal Income
Taxes -- Disposition of Fund Shares" in the SAIs.
If you buy shares of a Fund shortly before it distributes its annual gains,
your distribution from the Fund will, in effect, be a taxable return of part
of your investment. Similarly, if you buy shares of a Fund that holds appreci-
ated securities in its portfolio, you will receive a taxable return of part of
your investment if and when the Fund sells the appreciated securities and re-
alizes the gain. Some of the Funds have built up, or have the potential to
build up, high levels of unrealized appreciation.
Foreign shareholders may be subject to different tax treatment, including
withholding taxes. See "Federal Income Taxes -- Foreign Shareholders" in the
SAIs. In certain circumstances, U.S. residents may also be subject to with-
holding taxes. See "Federal Income Taxes -- Backup Withholding" in the SAIs.
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 invest-
ment income and capital gain distributions.
However, such tax-exempt investors may be subject to tax on certain unre-
lated taxable income which could arise, for example, when such investors ac-
quire shares in the Fund through the use of leverage. Tax-exempt investors
should consult their tax advisors regarding the unrelated business taxable in-
come rules.
The foregoing discussion regarding taxes is based on tax laws which were in
effect as of the date of this Prospectus and summarizes only some of the im-
portant federal tax considerations generally affecting the Funds and their
shareholders. It is not intended as a substitute for careful tax planning; you
should consult your tax advisor with respect to your specific tax situation as
well as with respect to foreign, state and local taxes. Further federal tax
considerations are discussed in the SAI.
GENERAL INFORMATION
DESCRIPTION OF THE COMPANY
Each Fund is a series of the Company. The Company was organized as a Mary-
land corporation on October 15, 1992 and currently offers
35
<PAGE>
twelve series of shares. The Company's principal office is located at 111 Cen-
ter 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. Addi-
tional information about the Directors and officers of the Company is included
in the Funds' SAI under "Management." Although the Company is not required to
hold regular annual shareholder meetings, occasional annual or special meet-
ings may be required for purposes such as electing or removing Directors, ap-
proving advisory contracts and distribution plans and changing a Fund's in-
vestment 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 sub-
mitted 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.
Whenever a Fund, as a Master Portfolio interestholder, is requested to vote
on any matter submitted to interestholders of such Master Portfolio, the Fund
will hold a meeting of its shareholders to consider such matters. The Fund
will cast its votes in proportion to the votes received from its shareholders.
Shares for which the Fund receives no voting instructions are voted in the
same proportion as the votes received from the other Fund shareholders. If a
Master Portfolio's investment objective or policies are changed, the corre-
sponding Fund may elect to change its objective or policies to correspond to
those of the Master Portfolio. The Fund may also elect to redeem its interests
in the Master Portfolio and either seek a new investment company with a match-
ing objective in which to invest or retain its own investment adviser to man-
age the
36
<PAGE>
Fund's portfolio in accordance with its objective. In the latter case, the
Fund's inability to find a substitute investment company in which to invest or
equivalent management services could adversely affect shareholders' invest-
ments in the Fund.
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 1-888-204-3956.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRE-
SENTATIONS 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 OF-
FERING MAY NOT LAWFULLY BE MADE.
37
<PAGE>
APPENDIX -- ADDITIONAL INVESTMENT POLICIES
FUND INVESTMENTS
Set forth below is a description of certain investments and additional in-
vestment policies for each Fund, except as otherwise indicated. REFERENCES TO
THE INVESTMENTS AND INVESTMENT POLICIES AND RESTRICTIONS OF A FUND, UNLESS
OTHERWISE INDICATED, SHOULD BE UNDERSTOOD AS REFERENCES TO THE INVESTMENTS AND
INVESTMENT POLICIES AND RESTRICTIONS OF THE CORRESPONDING MASTER PORTFOLIO.
U.S. GOVERNMENT OBLIGATIONS -- The Funds 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, its agen-
cies or instrumentalities. Payment of principal and interest on U.S. Govern-
ment obligations (i) may be backed by the full faith and credit of the United
States (as with U.S. Treasury obligations and GNMA certificates) or (ii) may
be backed solely by the issuing or guaranteeing agency or instrumentality it-
self (as with FNMA notes). In the latter case, the investor must look princi-
pally 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 finan-
cial support to its agencies or instrumentalities where it is not obligated to
do so. As a general matter, the value of debt instruments, including U.S. Gov-
ernment obligations, declines when market interest rates increase and rises
when market interest rates decrease. Certain types of U.S. Government obliga-
tions are subject to fluctuations in yield or value due to their structure or
contract terms.
SECURITIES OF NON-U.S. ISSUERS -- The Funds may invest in certain securities
of non-U.S. issuers as discussed below.
Obligations of Foreign Governments, Banks and Corporations -- Each Fund may
invest in U.S. dollar-denominated short-term obligations issued or guaranteed
by one or more foreign governments or any of their political subdivisions,
agencies or instrumentalities that are determined by BGFA to be of comparable
quality to the other obligations in which such Fund may invest. The Funds may
also invest in debt obligations of supranational entities. Supranational enti-
ties include international organizations designated or supported by governmen-
tal entities to promote economic reconstruction or development and interna-
tional banking institutions and related government agencies. Examples include
the International Bank for Reconstruction and Development
A-1
<PAGE>
(the World Bank), the European Coal and Steel Community, the Asian Development
Bank and the InterAmerican Development Bank. The percentage of each Fund's as-
sets invested in obligations of foreign governments and supranational entities
will vary depending on the relative yields of such securities, the economic
and financial markets of the countries in which the investments are made and
the interest rate climate of such countries.
The Short-Intermediate Term Fund may invest up to 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. The Short-Intermediate Term Fund may in-
vest in debt securities issued by domestic corporations, U.S. dollar-denomi-
nated debt securities issued by Canadian corporations, or Yankee bonds. Yankee
bonds are U.S. dollar-denominated obligations issued by foreign governments or
companies.
Emerging Market Securities -- The Growth Stock Fund may invest up to 15% of
its assets in equity securities of companies in "emerging markets." The Fund
considers countries with emerging markets to include the following: (i) coun-
tries with an emerging stock market as defined by the International Finance
Corporation; (ii) countries with low- to middle-income economies according to
the International Bank for Reconstruction and Development (more commonly re-
ferred to as the World Bank); and (iii) countries listed in World Bank publi-
cations as developing. The adviser may invest in those emerging markets that
have a relatively low gross national product per capita, compared to the
world's major economies, and which exhibit potential for rapid economic
growth. The adviser believes that investment in equity securities for emerging
market issuers offers significant potential for long-term capital apprecia-
tion.
Equity securities of emerging market issuers may include common stock, pre-
ferred stocks (including convertible preferred stocks) and warrants; bonds,
notes and debentures convertible into common or preferred stock; equity inter-
ests in foreign investment funds or trusts and real estate investment trust
securities. The Fund also may invest in American Depositary Receipts, European
Depositary Receipts, Continental Depositary Receipts, Global Depositary Re-
ceipts, International Depositary Receipts and similar instruments of such is-
suers.
Emerging market countries include, but are not limited to: Argentina, Bra-
zil, Chile, China, the Czech Republic, Columbia, Ecuador, Greece, Hong Kong,
Indonesia, India, Malaysia, Mexico, the Philippines,
A-2
<PAGE>
Poland, Portugal, Peru, Russia, Singapore, South Africa, Thailand, Taiwan and
Turkey. A company is considered in a country, market or region if it conducts
its principal business activities there, namely, if it derives a significant
portion (at least 50%) of its revenues or profits from goods produced or sold,
investments made, or services performed therein or has at least 50% of its as-
sets situated in such country, market or region.
American Depositary Receipts and Similar Instruments-The Growth Stock Fund
may invest in foreign securities through American Depositary Receipts
("ADRs"), Canadian Depositary Receipts ("CDRs"), European Depositary Receipts
("EDRs"), International Depositary Receipts ("IDRs") and Global Depositary Re-
ceipts ("GDRs") or other similar securities convertible into securities of
foreign issuers. These securities may not necessarily be denominated in the
same currency as the securities into which they may be converted. ADRs (spon-
sored or unsponsored) are receipts typically issued by a U.S. bank or trust
company and traded on a U.S. stock exchange, and CDRs are receipts typically
issued by a Canadian bank or trust company that evidence ownership of under-
lying foreign securities. Issuers of unsponsored ADRs are not contractually
obligated to disclose material information in the U.S. and, therefore, such
information may not correlate to the market value of the unsponsored ADR. EDRs
and IDRs are receipts typically issued by European banks and trust companies,
and GDRs are receipts issued by either a U.S. or non-U.S. banking institution,
that evidence ownership of the underlying foreign securities. Generally, ADRs
in registered form are designed for use in U.S. securities markets and EDRs
and IDRs in bearer form are designed primarily for use in Europe. The Fund may
invest up to 25% of its assets in these types of securities.
FLOATING- AND VARIABLE-RATE OBLIGATIONS-The Funds may purchase debt instru-
ments with interest rates that are periodically adjusted at specified inter-
vals or whenever a benchmark rate or index changes. These adjustments gener-
ally limit the increase or decrease in the amount of interest received on the
debt instruments. Floating- and variable-rate instruments are subject to in-
terest-rate risk and credit risk.
BONDS -- Certain of the debt instruments purchased by the Short-Intermediate
Term Fund may be bonds. A bond is an interest-bearing security issued by a
company or governmental unit. The issuer of a bond has a contractual obliga-
tion to pay interest at a stated rate on specific dates and to repay principal
(the bond's face value) periodically or on a
A-3
<PAGE>
specified maturity date. An issuer may have the right to redeem or "call" a
bond before maturity, in which case the investor may have to reinvest the pro-
ceeds at lower market rates. Most bonds bear interest income at a "coupon"
rate that is fixed for the life of the bond. The value of a fixed rate bond
usually rises when market interest rates fall, and falls when market interest
rates rise. Accordingly, a fixed rate bond's yield (income as a percent of the
bond's current value) may differ from its coupon rate as its value rises or
falls.
Other types of bonds bear income at an interest rate that is adjusted peri-
odically. Because of their adjustable interest rates, the value of "floating-
rate" or "variable-rate" bonds fluctuates much less in response to market in-
terest rate movements than the value of fixed rate bonds. Also, the Funds may
treat some of these bonds as having a shorter maturity for purposes of calcu-
lating the weighted average maturity of their investment portfolios. Bonds may
be senior or subordinated obligations. Senior obligations generally have the
first claim on a corporation's earnings and assets and, in the event of liqui-
dation, are paid before subordinated debt. Bonds may be unsecured (backed only
by the issuer's general creditworthiness) or secured (also backed by specified
collateral).
ASSET-BACKED SECURITIES -- The Short-Intermediate Term Fund may invest in
mortgage-related securities. Mortgage pass-through securities are securities
representing interests in "pools" of mortgages in which payments of both in-
terest and principal on the securities are made monthly, in effect "passing
through" monthly payments made by the individual borrowers on the residential
mortgage loans which underlie the securities (net of fees paid to the issuer
or guarantor of the securities). Early repayment of principal on mortgage
pass-through securities (arising from prepayments of principal due to sale of
the underlying property, refinancing, or foreclosure, net of fees and costs
which may be incurred) may expose the Fund to a lower rate of return upon re-
investment of principal. Also, if a security subject to prepayment has been
purchased at a premium, in the event of prepayment the value of the premium
would be lost. Like other fixed-income securities, when interest rates rise,
the value of a mortgage-related security generally will decline; however, when
interest rates decline, the value of mortgage-related securities with prepay-
ment features may not increase as much as other fixed-income securities. Pay-
ment of principal and interest on some mortgage pass-through securities (but
not the market value of the securities themselves) may be guaranteed by the
full faith and credit of the U.S. Government or its agencies or instrumentali-
ties. Mortgage pass-
A-4
<PAGE>
through securities created by non-government issuers (such as commercial
banks, savings and loan institutions, private mortgage insurance companies,
mortgage bankers and other secondary market issuers) may be supported by vari-
ous forms of insurance or guarantees, including individual loan, title, pool
and hazard insurance, and letters of credit, which may be issued by governmen-
tal entities, private insurers or the mortgage poolers.
The Fund may invest up to 25% of its total assets in investment grade col-
lateralized mortgage obligations ("CMOs"). CMOs are structured into multiple
classes, with each class bearing a different stated maturity. Payments of
principal, including prepayments, are first returned to investors holding the
shortest maturity class; investors holding the longer maturity classes receive
principal only after the first class has been retired. The Fund 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;
(2) directly guaranteed, as to payment of principal and interest by the
issuer, which guarantee is collateralized by U.S. Government securities;
or
(3) collateralized by mortgage-backed securities issued or guaranteed by
the U.S. Government, its agencies or instrumentalities.
The Short-Intermediate Term Fund may invest in asset-backed securities,
which are unrelated to mortgage loans. These asset-backed securities may con-
sist of undivided fractional interests in pools of consumer loans or receiv-
ables held in trust. Examples include certificates for automobile receivables
(CARS) and credit card receivables (CARDS). Payments of principal and interest
on these asset-backed securities are "passed through" on a monthly or other
periodic basis to certificate holders and are typically supported by some form
of credit enhancement, such as a letter of credit, surety bond, limited guar-
anty, or subordination. The extent of credit enhancement varies, but usually
amounts to only a fraction of the asset-backed security's par value until ex-
hausted. Ultimately, asset-backed securities are dependent upon payment of the
consumer loans or receivables by individuals, and the certificate holder fre-
quently has no recourse to the entity that originated the loans or receiv-
ables. The actual maturity and realized yield will vary based upon the prepay-
ment experience of the underlying asset pool and prevailing interest rates at
the time of prepayment. Asset-backed securities are relatively new in -
A-5
<PAGE>
struments and may be subject to greater risk of default during periods of eco-
nomic downturn than other instruments. Also, the secondary market for certain
asset-backed securities may not be as liquid as the market for other types of
securities, which could result in a Fund experiencing difficulty in valuing or
liquidating such securities.
OPTIONS TRANSACTIONS -- The Growth Stock Fund may invest in call and put op-
tions on a specific security. The Fund may invest up to 15% of its assets,
represented by the premium paid, in the purchase of call and put options in
respect of specific securities (or groups of "baskets" of specific securi-
ties). The purchaser of an option risks a total loss of the premium paid for
the option if the price of the underlying security does not increase or de-
crease sufficiently to justify exercise. The seller of an option, on the other
hand, will recognize the premium as income if the option expires unrecognized
but foregoes any capital appreciation in excess of the exercise price in the
case of a call option and may be required to pay a price in excess of current
market value in the case of a put option. The Fund may engage in unlisted
over-the-counter options with broker/dealers deemed creditworthy by the advis-
er. Closing transactions for such options are usually effected directly with
the same broker/dealer that effected the original option transaction. A Fund
bears the risk that the broker/dealer will fail to meet its obligations. There
is no assurance that a liquid secondary trading market exists for closing out
an unlisted option position. Furthermore, unlisted options are not subject to
the protections afforded purchasers of listed options by the Options Clearing
Corporation, which performs the obligations of its members who fail to perform
in connection with the purchase or sale of options.
INVESTMENT COMPANY SECURITIES -- Each Master Portfolio may invest in securi-
ties issued by other investment companies which principally invest in securi-
ties 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, sub-
ject to certain exceptions, (i) 3% of the total voting stock of any one in-
vestment 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 ex-
penses. The Master Portfolios may also purchase shares of exchange listed
closed-end funds.
ILLIQUID SECURITIES -- Each Fund may invest up to 15% of the value of its
net assets in securities as to which a liquid trading market
A-6
<PAGE>
does not exist, provided such investments are consistent with its investment
objective. Such securities may include securities that are not readily market-
able, such as certain securities that are subject to legal or contractual re-
strictions on resale, participation interests that are not subject to the de-
mand 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.
CONVERTIBLE SECURITIES -- The Growth Stock Fund may invest in convertible
securities that provide current income and are issued by companies with the
characteristics described above for the Fund and that have a strong earnings
and credit record. The Fund may purchase convertible securities that are
fixed-income debt securities or preferred stocks, and which may be converted
at a stated price within a specific period of time into a certain quantity of
the common stock of the same issuer. Convertible securities, while usually
subordinate to similar nonconvertible securities, are senior to common stocks
in an issuer's capital structure. Convertible securities offer flexibility by
providing the investor with a steady income stream (which generally yield a
lower amount than similar nonconvertible securities and a higher amount than
common stocks) as well as the opportunity to take advantage of increases in
the price of the issuer's common stock through the conversion feature. Fluctu-
ations in the convertible security's price can reflect changes in the market
value of the common stock or changes in market interest rates. At most, 5% of
the Fund's net assets will be invested, at the time of purchase, in convert-
ible securities that are not rated in the four highest rating categories by
one or more NRSROs, such as Moody's or S&P, or unrated but determined by BGFA
or Wells Fargo Bank to be of comparable quality.
CORPORATE REORGANIZATIONS
The Growth Stock Fund may invest in securities for which a tender or ex-
change offer has been made or announced, and in securities of companies for
which a merger, consolidation, liquidation or similar reorganization proposal
has been announced if, in the judgment of BGFA or Wells Fargo Bank, there is a
reasonable prospect of capital appreciation significantly greater than the
added portfolio turnover expenses inherent in the short term nature of such
transactions. The principal risk associated with such investments is that such
offers or proposals may not be consummated within the time and under the terms
contemplated
A-7
<PAGE>
at the time of the investment, in which case, unless such offers or proposals
are replaced by equivalent or increased offers or proposals which are consum-
mated, the Funds may sustain a loss.
SHORT-TERM INSTRUMENTS AND TEMPORARY INVESTMENTS
The Funds may invest in high-quality money market instruments on an ongoing
basis to provide liquidity, for temporary purposes when there is an unexpected
level of shareholder purchases or redemptions or when "defensive" strategies
are appropriate. The instruments in which the Funds may invest include: (i)
short-term obligations issued or guaranteed by the U.S. Government, its agen-
cies 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 Comp-
troller of the Currency or whose deposits are insured by the FDIC; (iii) com-
mercial 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 BGFA or
Wells Fargo Bank; (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) re-
purchase agreements; and (vi) short-term, U.S. dollar-denominated obligations
of foreign banks (including U.S. branches) that, at the time of investment
have more than $10 billion, or the equivalent in other currencies, in total
assets and in the opinion of BGFA or Wells Fargo Bank are of comparable qual-
ity to obligations of U.S. banks which may be purchased by the Master Portfo-
lio.
Bank Obligations -- Each Fund may invest in bank obligations, including cer-
tificates 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.
Certificates of deposit are negotiable certificates evidencing the obliga-
tion 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 institu-
tion for a specified period of time at a stated interest rate. Time
A-8
<PAGE>
deposits which may be held by a Fund 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 may include unin-
sured, direct obligations, bearing fixed, floating- or variable-interest
rates.
Commercial Paper and Short-Term Corporate Debt InstrumentS -- Each Fund may
invest in commercial paper (including variable amount master demand notes),
which consists of short-term, unsecured promissory notes issued by corpora-
tions 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 pur-
suant 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 Fund monitors on an ongoing basis the ability of an
issuer of a demand instrument to pay principal and interest on demand.
Each Fund 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 Fund 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 Fund, an issue of securities
may cease to be rated or its rating may be reduced below the minimum rating
required for purchase by the Fund. The investment adviser and/or sub-adviser
to each Fund will consider such an event in determining whether the Fund
should continue to hold the obligation. To the extent the Fund continues to
hold such obligations, it may be subject to additional risk of default.
Repurchase Agreements -- Each Fund may enter into repurchase agreements
wherein the seller of a security to a Fund agrees to repurchase that security
from the Fund at a mutually-agreed upon time and price. The period of maturity
is usually quite short, often overnight or a few days, although it may extend
over a number of months. A Fund may enter into repurchase agreements only with
respect to securities that
A-9
<PAGE>
could otherwise be purchased by the Fund, and all repurchase transactions must
be collateralized. A Fund may incur a loss on a repurchase transaction if the
seller defaults and the value of the underlying collateral declines or is oth-
erwise limited or if receipt of the security or collateral is delayed. The
Funds may participate in pooled repurchase agreement transactions with other
funds advised by BGFA or Wells Fargo Bank. See "Additional Permitted Invest-
ment Activities" in the SAI for additional information.
FORWARD COMMITMENTS, WHEN-ISSUED PURCHASES AND DELAYED-DELIVERY TRANSACTIONS
- -- Each Fund may purchase or sell securities on a when-issued or delayed-de-
livery basis and make contracts to purchase or sell securities for a fixed
price at a future date beyond customary settlement time. Securities purchased
or sold on a when-issued, delayed-delivery or forward commitment basis involve
a risk of loss if the value of the security to be purchased declines, or the
value of the security to be sold increases, before the settlement date. Al-
though a Fund will generally purchase securities with the intention of acquir-
ing them, a Fund may dispose of securities purchased on a when-issued, de-
layed-delivery or a forward commitment basis before settlement when deemed ap-
propriate by the adviser.
BORROWING MONEY -- As a fundamental policy, each Fund is permitted to borrow
to the extent permitted under the 1940 Act. However, each Fund currently in-
tends to borrow money only for temporary or emergency (not leveraging) purpos-
es, and may borrow up to one-third 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. When
borrowings exceed 5% of a Fund's total assets, the Fund will not make any in-
vestments.
LOANS OF PORTFOLIO SECURITIES -- Each Fund may lend securities from their
portfolios to brokers, dealers and financial institutions (but not individu-
als) in order to increase the return on such Fund's portfolio. The value of
the loaned securities may not exceed one-third of a Fund's total assets and
loans of portfolio securities are fully collateralized based on values that
are marked-to-market daily. The Funds will not enter into any portfolio secu-
rity lending arrangement having a duration of longer than one year. The prin-
cipal risk of portfolio lending is potential default or insolvency of the bor-
rower. In either of these cases, a Fund could experience delays in recovering
securities or collateral or could lose all or part of the value of the loaned
securities. The Funds may pay reasonable administrative and custodial fees in
connection with loans of
A-10
<PAGE>
portfolio securities and may pay a portion of the interest or fee earned
thereon the borrower or a placing broker. See "Additional Permitted Investment
Activities" in the SAI for additional information.
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 -- In-
vestment 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 out-
standing 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 deter-
mines, 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, a Fund 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 its 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 se-
curities of such issuer provided that this restriction shall not prevent a
Fund from investing all of its assets in its corresponding Master Portfolio;
(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 securi-
ties in accordance with its investment policies; and (iv) not invest 25% or
more of its total assets (i.e., concentrate) in any particular industry, ex-
cept 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 its assets in U.S. Government obligations, provided that this restriction
shall not prevent a Fund from investing all of its assets in its 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. Disposing of illiquid or restricted secu-
rities may involve additional costs and require additional time.
A-11
<PAGE>
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 pay-
ments, and do not evaluate the risks of fluctuations in market value. Further-
more, rating agencies may fail to make timely changes in credit ratings in re-
sponse 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 mini-
mum rating required for initial purchase by the Master Portfolio or the secu-
rity may cease to be rated. BGFA will consider either such event in determin-
ing 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 se-
curities 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 rep-
resentation 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 al-
though 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 prin-
cipal 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.
A-12
<PAGE>
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 be-
cause 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 ele-
ments may be present which suggest a 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. In-
terest payments and principal security appear adequate for the present, but
certain protective elements may be lacking or may be characteristically unre-
liable 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 re-
turn on funds employed, conservative capitalization structures with moderate
reliance on debt and ample asset protection, broad margins in earnings cover-
age of fixed financial charges and high internal cash generation, and well es-
tablished access to a range of financial markets and assured sources of alter-
nate 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 con-
ditions and circumstances, however, are more likely to weaken this ability
than with bonds having higher ratings.
A-13
<PAGE>
SPONSOR, DISTRIBUTOR AND ADMINISTRATOR
Stephens Inc.
Little Rock, Arkansas
INVESTMENT ADVISER
Barclays Global Fund Advisors
San Francisco, California
CUSTODIAN
Investors Bank & Trust Company
Boston, Massachusetts
TRANSFER AGENT AND DIVIDEND DISBURSING AGENT
Investors Bank & Trust Company
Boston, Massachusetts
LEGAL COUNSEL
Morrison & Foerster LLP
Washington, D.C.
INDEPENDENT AUDITORS
KPMG Peat Marwick LLP
San Francisco, California
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 CRIMI-
NAL OFFENSE.
<PAGE>
MasterWorks(R) Funds
c/o Investors Bank and Trust Co.
200 Clarendon Street
Boston, MA 02116
<PAGE>
MASTERWORKS LIFEPATH(R) FUNDS
MASTERWORKS FUNDS INC.
STATEMENT OF ADDITIONAL INFORMATION
LIFEPATH 2000 FUND
LIFEPATH 2010 FUND
LIFEPATH 2020 FUND
LIFEPATH 2030 FUND
LIFEPATH 2040 FUND
June 30, 1998
MasterWorks Funds Inc. (the "Company") is an open-end, management investment
company. This Statement of Additional Information ("SAI") contains additional
information about the Company's LifePath 2000, LifePath 2010, LifePath 2020,
LifePath 2030, and LifePath 2040 Funds (the "LifePath Funds" or the
"Funds").
Each LifePath Fund invests all of its assets in a separate portfolio (each a
"Master Portfolio") of Master Investment Portfolio ("MIP") having the same
investment objective as the Fund. Therefore, the investment experience of each
Fund will correspond directly with the relevant Master Portfolio's investment
experience. MIP is an open-end, series investment company. Barclays Global
Fund Advisors ("BGFA") serves as investment adviser to the corresponding Master
Portfolio of each LifePath Fund. References to the investments, investment
policies and risks of the Funds unless otherwise indicated, should be understood
as references to the investments, investment policies and risks of the
corresponding Master Portfolios.
This SAI is not a prospectus and should be read in conjunction with the Funds'
current Prospectus, also dated June 30, 1998. 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 Investors Bank & Trust Co., -- Transfer Agent, P.O. Box 9130,
Mail Code MFD23, Boston, MA 02117-9130, or by calling 1-888-204-3956.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
---------
<S> <C>
General Information.................................................................................. 1
Investment Objectives and Management Policies........................................................ 1
Management........................................................................................... 8
Purchase and Redemption of Shares.................................................................... 14
Determination of Net Asset Value..................................................................... 15
Dividends, Distributions and Taxes................................................................... 16
Performance Information.............................................................................. 20
Portfolio Transactions............................................................................... 21
Capital Stock........................................................................................ 24
Other................................................................................................ 27
Counsel.............................................................................................. 27
Independent Auditors................................................................................. 27
Financial Information................................................................................ 27
Appendix............................................................................................. A-1
Financial Statements................................................................................. F-1
</TABLE>
i
<PAGE>
GENERAL INFORMATION
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 shown below),
which has the same investment objective as the related Fund.
<TABLE>
<CAPTION>
LIFEPATH FUND CORRESPONDING MASTER PORTFOLIO
------------------- ------------------------------
<S> <C>
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 the Company 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 investment 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.
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 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.
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 its shareholders and casts its votes as instructed
by its 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. The Funds and Master Portfolios may not:
1
<PAGE>
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.
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.
2
<PAGE>
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.
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.
As a matter of general operating policy, each Fund and Master Portfolio may
invest up to 20% of the value of its total assets in foreign securities that are
not publicly traded in the United States.
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.
PORTFOLIO SECURITIES.
Bank Obligations. Each LifePath Master Portfolio may invest in bank
----------------
obligations, including certificates of deposit, time deposits and other short-
term obligations of domestic banks, obligations of foreign branches of domestic
banks and obligations of domestic and foreign branches of foreign banks.
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
3
<PAGE>
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 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.
Futures Contracts. 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 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
4
<PAGE>
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 permits 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 LifePath 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. 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 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's 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.
Foreign Currency Transactions. 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 Funds intend to engage in foreign currency
transactions to maintain the same foreign currency exposure as the relevant
foreign securities index through which the Funds seek foreign equity market
exposure, but not as part of a defensive strategy to protect against
fluctuations in exchange rates. 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.
5
<PAGE>
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.
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 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.
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.
6
<PAGE>
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.
Fixed-Income Obligations -- Investors should be aware that even though
------------------------
interest-bearing obligations 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 obligations are affected to a greater extent by interest
rates than shorter-term obligations. The values of fixed-income obligations 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 obligations 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. Obligations
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 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. Obligations
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 obligations and, therefore,
impair timely payment. Obligations 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
obligation until such time as BGFA determines it to be advantageous for the
LifePath Master Portfolio to sell the obligation. If such a policy would cause a
LifePath Master Portfolio to have 5% or more of its net assets invested in
obligations that have been downgraded below investment grade, the Master
Portfolio promptly would seek to dispose of such obligations in an orderly
manner.
Repurchase Agreements. Each Master Portfolio may engage in a repurchase
----------------------
agreement with respect to any security in which it is authorized to invest,
although the underlying security may mature in more than thirteen months. The
Master Portfolio may enter into repurchase agreements wherein the seller of a
security to the Master Portfolio agrees to repurchase that security from the
Master Portfolio at a mutually agreed-upon time and price that involves the
acquisition by the Master Portfolio of an underlying debt instrument, subject to
the seller's obligation to repurchase, and the Master Portfolio's obligation to
resell, the instrument at a fixed price usually not more than one week after its
purchase. The Master Portfolio's custodian has custody of, and holds in a
segregated account, securities acquired as collateral by the Master Portfolio
under a repurchase agreement. Repurchase agreements are considered by the staff
of the SEC to be loans by the Master Portfolio. The Master Portfolio may enter
into repurchase agreements only with respect to securities of the type in which
it may invest, including government securities and mortgage-related securities,
regardless of their remaining maturities, and requires that additional
securities be deposited with the custodian if the value of the securities
purchased should decrease below resale price. BGFA 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 the 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 the Master Portfolio may be delayed
or limited. While it does not presently appear possible to eliminate all risks
from these transactions (particularly the possibility of a decline in the market
value of the underlying securities, as well as delay and costs to the Master
Portfolio in connection with insolvency proceedings), it is the policy of the
Master Portfolio to limit repurchase agreements to selected creditworthy
securities dealers or domestic banks or other recognized financial institutions.
The Master Portfolio considers on an ongoing basis the creditworthiness of the
institutions with which it enters into repurchase agreements. Repurchase
agreements are considered to be loans by a Master Portfolio under the 1940
Act.
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
7
<PAGE>
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
prepare 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 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 within seven days.
Such obligations may be treated as liquid, provided that an active secondary
market exists.
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 the last five years, are shown below. The address of
each, unless otherwise indicated, is 111 Center Street, Little Rock, Arkansas
72201. Directors who are deemed to be an "interested person" of the Company, as
defined in 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, 75 Director Private Investor.
415 Walsh Road
Atherton, CA 94027
*R. Greg Feltus, 46 Director, Chairman Executive Vice President of Stephens Inc.;
and President President of Stephens Insurance Services Inc.;
Senior Vice President of Stephens Sports
Management Inc.; and President of Investors
Brokerage Insurance Inc.
Thomas S. Goho, 55 Director Associate Professor of Finance, Calloway School of
P.O. Box 7285 Business and Accounting at Wake Forest University since
Reynolda Station 1982.
Winston-Salem, NC 27104
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
Principal Occupations
Name, Address and Age Position During Past 5 Years
- ------------------------------ --------------------- ----------------------------------------------------------
<S> <C> <C>
*W. Rodney Hughes, 71 Director Private Investor.
31 Dellwood Court
San Rafael, CA 94901
*J. Tucker Morse, 53 Director Chairman of Home Account Network, Inc.; Real Estate
4 Beaufain Street Developer; 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., 41 Chief Operating Vice President of Stephens Inc.; Director of
Officer, Secretary Stephens Sports Management Inc.; and Director
and Treasurer of Capo Inc.
</TABLE>
COMPENSATION TABLE
For the Fiscal Year Ended February 28, 1998
<TABLE>
<CAPTION>
Total Compensation
Aggregate Compensation FROM REGISTRANT
Name and Position from Registrant and Fund Complex
- ----------------- ----------------------- ---------------------------
<S> <C> <C>
Jack S. Euphrat $11,250 $11,250
Director
*R. Greg Feltus 0 0
Director
Thomas S. Goho $11,250 $11,250
Director
*Zoe Ann Hines/1/ 0 0
Director
*W. Rodney Hughes $11,000 $11,000
Director
Robert M. Joses/2/ $ 1,000 $ 1,000
Director
*J. Tucker Morse $11,000 $11,000
Director
</TABLE>
- ---------------
/1/ Zoe Ann Hines retired as of January 28, 1998.
/2/ Robert M. Joses retired as of December 31, 1997.
9
<PAGE>
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. The Company, Master Investment Portfolio and Managed Series
Investment Trust are considered to be members of the same fund complex, as such
term is defined in Form N-1A under the 1940 Act (the "BGFA Fund Complex" ).
Stagecoach Funds, Inc., Stagecoach Trust and Life & Annuity Trust together form
a separate fund complex (the "Wells Fargo Fund Complex"). Prior to December 15,
1997, the Wells Fargo Fund Complex also included Overland Express Funds, Inc.
and Master Investment Trust. On that date, Overland Express Funds, Inc. was
consolidated with and into Stagecoach Funds, Inc. and Master Investment Trust
was dissolved. Each of the Directors and Officers of the Company serves in the
identical capacity as Directors/Trustees and Officers of each registered open-
end management investment company in both the Wells Fargo and BGFA Fund
Complexes. The Directors are compensated by other companies and trusts within a
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 each 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.
MASTER/FEEDER STRUCTURE. Each LifePath Fund seeks to achieve its investment
objective by investing all of its assets into the corresponding LifePath Master
Portfolio of MIP. The Funds and other entities investing in a Master Portfolio
are each liable for all obligations of such 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 existed and MIP itself is
unable to meet its obligations. Accordingly, the Company's Board of Directors
believes that neither a Fund nor its shareholders will be adversely affected by
investing Fund assets in a Master Portfolio. However, if a mutual fund or other
investor withdraws its investment from such Master Portfolio, the economic
efficiencies (e.g., spreading fixed expenses among a larger asset base) that the
Company's Board believes may be available through investment in the Master
Portfolio may not be fully achieved. In addition, given the relative novelty of
the master/feeder structure, accounting or operational difficulties, although
unlikely, could arise. See "Management of the Funds" in the Prospectus for
additional description of the Fund's and Master Portfolios' expenses and
management.
A Fund may withdraw its investment in a Master Portfolio only if the Company's
Board of Directors determines that such action is in the best interests of such
Fund and its shareholders. Upon any such withdrawal, the Company's Board would
consider alternative investments, including investing all of the Fund's assets
in another investment company with the same investment objective as the Fund or
hiring an investment adviser to manage the Fund's assets in accordance with the
investment policies described below with respect to the Master Portfolio.
The investment objective and other fundamental policies of a Master Portfolio
cannot be changed without approval by the holders of a majority (as defined in
the 1940 Act) of the Master Portfolio's outstanding interests. See "Investment
Objectives and Policies" in the Prospectus. Whenever a Fund, as an
interestholder of the corresponding Master Portfolio, is requested to vote on
any matter submitted to interestholders of the Master Portfolio, the Fund will
hold a meeting of its shareholders to consider such matters. The Fund will cast
its votes in proportion to the votes received from its shareholders. Shares for
which the Fund receives no voting instructions will be voted in the same
proportion as the votes received from the other Fund shareholders.
Certain policies of the Master Portfolio which are non-fundamental may be
changed by vote of a majority of MIP's Trustees without interestholder approval.
If the Master Portfolio's investment objective or fundamental or non-fundamental
policies are changed, the Fund may elect to change its objective or policies to
correspond to those of the Master Portfolio. A Fund also may elect to redeem its
interests in the corresponding Master Portfolio and either seek a new investment
company with a matching objective in which to invest or retain its own
investment adviser to manage the Fund's portfolio in accordance with its
objective. In the latter case, 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. The Funds will provide
shareholders with 30 days' written notice prior to the implementation of any
change in the investment objective of the Fund or the Master Portfolio, to the
extent possible. See "Investment Objectives and Policies" in the Prospectus for
additional information regarding the Fund's and the Master Portfolio's
investment objectives and policies.
10
<PAGE>
Investment Adviser. BGFA provides investment advisory services to each Master
------------------
Portfolio pursuant to separate Investment Advisory Contracts (each, a "BGFA
Advisory Contract") with MIP. Pursuant to the Advisory Contracts, BGFA furnishes
to the Trust's Board of Trustees periodic reports on the investment strategy and
performance of each Master Portfolio. 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.
BGFA is entitled to receive monthly fees at the annual rate of 0.55% of each
Master Portfolio's average daily net assets as compensation for its advisory
services to such Master Portfolio.
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, 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 Bank, N.A. ("Wells Fargo") provided
investment advisory services to each Master Portfolio pursuant to an Investment
Advisory Agreement with MIP.
For the period beginning March 1, 1995 and ended December 31, 1995, the
advisory fees paid to Wells Fargo by the corresponding Master Portfolio of each
LifePath Fund is shown below, without waivers.
<TABLE>
<CAPTION>
3/1/95 - 12/31/95
MASTER PORTFOLIO FEES PAID
- ------------------------------ ----------------------
<S> <C>
LifePath 2000 Master Portfolio $363,599
LifePath 2010 Master Portfolio $312,512
LifePath 2020 Master Portfolio $520,362
LifePath 2030 Master Portfolio $343,916
LifePath 2040 Master Portfolio $503,384
</TABLE>
For the period beginning January 1, 1996 and ended February 29, 1996, and for
the fiscal years ended February 28, 1997 and February 28, 1998, the advisory
fees paid to BGFA by the corresponding Master Portfolio of each LifePath Fund is
shown below, without waivers.
<TABLE>
<CAPTION>
1/1/96 - 2/29/96 FYE 2/28/97 FYE 2/28/97
MASTER PORTFOLIO FEES PAID FEES PAID FEES PAID
- ------------------------------ ----------------------- --------------------- -------------------
<S> <C> <C> <C>
LifePath 2000 Master Portfolio $ 99,511 $ 689,347 $ 656,142
LifePath 2010 Master Portfolio $ 86,919 $ 757,505 $1,018,984
LifePath 2020 Master Portfolio $ 141,075 $1,149,160 $1,572,634
LifePath 2030 Master Portfolio $ 93,240 $ 714,647 $1,048,151
LifePath 2040 Master Portfolio $ 148,324 $1,154,330 $1,767,632
</TABLE>
Investment Sub-Adviser. Prior to January 1, 1996, WFNIA provided
----------------------
investment sub-advisory services to each Master Portfolio pursuant to an
Investment Sub-Advisory Agreement with Wells Fargo.
11
<PAGE>
For the period beginning March 1, 1995 and ended December 31, 1995, Wells
Fargo paid to WFNIA the following sub-advisory fees shown below, without
waivers:
<TABLE>
<CAPTION>
3/1/95 - 12/31/95
MASTER PORTFOLIO FEES PAID
- ------------------------------ --------------------
<S> <C>
LifePath 2000 Master Portfolio $261,344
LifePath 2010 Master Portfolio $224,903
LifePath 2020 Master Portfolio $374,802
LifePath 2030 Master Portfolio $247,703
LifePath 2040 Master Portfolio $361,673
</TABLE>
Co-Administrators. The Company has engaged Stephens Inc. ("Stephens") and
-----------------
Barclays Global Investors, N.A. ("BGI") to provide certain administration
services to the Funds. Pursuant to a Co-Administration Agreement with the
Company, Stephens and BGI provide 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.
In addition, except for advisory fees, extraordinary expenses, brokerage and
other expenses connected to the execution of portfolio transactions and certain
expenses which are borne by the LifePath Funds, Stephens and BGI have agreed to
bear all costs of the Funds' and the Company's operations including, but not
limited to, transfer and dividend disbursing agency fees, shareholder servicing
fees, and expenses of printing and preparing prospectuses, SAIs and other Fund
materials. For providing such services, Stephens and BGI are entitled to a fee
of 0.40% of each Fund's average daily net assets. Effective October 21, 1996,
BGI contracted with Investors Bank & Trust Company ("IBT") to provide certain
sub-administration services. Prior to October 21, 1996, Stephens served as sole
administrator to the Funds.
For the fiscal period beginning March 26, 1996 (commencement of operations)
and ended February 28, 1997, the LifePath Funds paid the following
administration and co-administration fees to Stephens:
<TABLE>
<CAPTION>
FUND 3/26/96-2/28/97
- -------------- ----------------
<S> <C>
LifePath 2000 Fund $ 48,666
LifePath 2010 Fund $ 90,007
LifePath 2020 Fund $109,730
LifePath 2030 Fund $ 58,134
LifePath 2040 Fund $ 62,981
</TABLE>
12
<PAGE>
For the period beginning October 21, 1996 and ended February 28, 1997, the
LifePath Funds paid the following co-administration fees to BGI:
<TABLE>
FUND 10/21/96 - 2/28/97
- ---- -------------------
<S> <C>
LifePath 2000 Fund $28,780
LifePath 2010 Fund $55,628
LifePath 2020 Fund $64,702
LifePath 2030 Fund $36,321
LifePath 2040 Fund $48,300
</TABLE>
For the fiscal year ended February 28, 1998, the Funds paid co-administration
fees jointly to Stephens and BGI as follows:
<TABLE>
<CAPTION>
FUND FYE 2/28/98
- ---- -----------
<S> <C>
LifePath 2000 Fund $183,550
LifePath 2010 Fund $388,764
LifePath 2020 Fund $502,717
LifePath 2030 Fund $293,010
LifePath 2040 Fund $372,862
</TABLE>
Distributor. 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 on behalf of 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.
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 BGFA to Wells Fargo 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. The
Master Portfolio's do not currently pay any amounts pursuant to the Plan.
Shareholder Services Plan. The Company has adopted a Shareholder Services Plan
-------------------------
on behalf of the Funds. Pursuant to the Plan, 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.
13
<PAGE>
For the fiscal period beginning March 26, 1996 and ended February 28, 1997,/1/
the Funds paid shareholder services fees to Wells Fargo as follows:
<TABLE>
<CAPTION>
FUND FEES PAID
- ---- ---------
<S> <C>
LifePath 2000 Fund $36,660
LifePath 2010 Fund $66,315
LifePath 2020 Fund $82,842
LifePath 2030 Fund $40,826
LifePath 2040 Fund $50,114
</TABLE>
- ---------------
/1/ Beginning October 21, 1996, shareholder servicing fees were paid out of co-
administration fees.
Custodian. IBT, concurrent with its appointment as sub-administrator for the
---------
Funds on October 21, 1996, also has been retained as custodian of each Fund's
investments, and performs such services at 200 Clarendon Street, Boston,
Massachusetts 02116. 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. IBT shall not be entitled to
compensation for providing custody services to the Funds pursuant to the Custody
Agreement so long as it receives fees from BGI for providing sub-administration
services to the Funds. Prior to October 21, 1996, BGI served as the Fund's
custodian and was not entitled to receive a fee.
Transfer and Dividend Disbursing Agent. IBT has been retained as the transfer
--------------------------------------
and dividend disbursing agent for the Funds. For its services as transfer and
dividend disbursing agent to the Funds, IBT is entitled to receive an annual
maintenance fee computed on the basis of the number of shareholder accounts that
it maintains for the Funds and to be reimbursed for out-of-pocket expenses or
advances incurred by it in performing its obligations under the agreement. The
annual maintenance fee is paid as follows:
<TABLE>
<CAPTION>
ANNUAL FEE
--------------------------
<S> <C>
Up to 200 accounts* $6,000 per feeder/class
From 201 to 250 accounts $8,500 per feeder/class
Over 250 accounts $10,000 per feeder/class
</TABLE>
_______________
* Defined as each account that is set up for an individual or plan sponsor on
a Fund by Fund basis.
In addition, the agreement contemplates that IBT will be reimbursed for other
expenses incurred by it at the request or with the written consent of the Funds,
including, without limitation, any equipment or supplies which the Company
specifically orders or requires IBT to order.
Prior to March 2, 1998, Wells Fargo Bank served as transfer and dividend
disbursing agent to the Funds, and was entitled to receive a monthly fee at an
annual rate of 0.10% of the average daily net assets of each Fund for such
services.
PURCHASE AND REDEMPTION OF SHARES
Terms of Purchase. The Funds are generally open Monday through Friday and are
-----------------
closed on weekends and NYSE holidays. The holidays on which the NYSE is closed
currently are: New Year's Day, Martin Luther King, Jr.'s, Birthday, Presidents'
Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day
and Christmas Day. 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.
14
<PAGE>
Payment for shares of a LifePath Fund may, at the discretion of the adviser,
be made in the form of securities that are permissible investments for the Fund
and must meet the investment objective, policies and limitations of the Fund as
described in the Prospectus. In connection with an in-kind securities payment,
a Fund may require, among other things, that the securities (i) be valued on the
day of purchase in accordance with the pricing methods used by the Fund; (ii)
are accompanied by satisfactory assurance that the Fund will have good and
marketable title to such securities received by it; (iii) are not subject to any
restrictions upon resale by the Fund; (iv) be in proper form for transfer to the
Fund; (v) are accompanied by adequate information concerning the basis and other
tax matters relating to the securities. All dividends, interest, subscription
or other rights pertaining to such securities shall become the property of the
Fund engaged in the in-kind purchase transaction and must be delivered to such
Fund by the investor upon receipt from the issuer. Securities acquired through
an in-kind purchase will be acquired for investment and not for immediate
resale. Shares purchased in exchange for securities generally cannot be
redeemed until the transfer has settled. Each Fund immediately will transfer to
its corresponding Master Portfolio any and all securities received by it in
connection with an in-kind purchase transaction, in exchange for interests in
such Master Portfolio.
Suspension of Redemptions. Under the 1940 Act, a Fund may suspend the right
-------------------------
of redemption or postpone the date of payment upon redemption for any period
during which the NYSE is closed (other than customary weekend and holiday
closings, or during which trading is restricted, or during which as determined
by the SEC by rule or regulation) an emergency exists as a result of which
disposal or valuation of portfolio securities is not reasonably practicable, or
for such periods as the SEC may permit.
The Company may suspend redemption rights or postpone redemption payments for
such periods as are permitted under the 1940 Act. The Company also may redeem
shares involuntarily or make payment for redemption in securities or other
property if it appears appropriate to do so in light of the Company's
responsibilities under the 1940 Act.
In addition, the Company may redeem shares involuntarily to reimburse a Fund
for any losses sustained by reason of the failure of a shareholder to make full
payment for shares purchased or to collect any charge relating to a transaction
effected for the benefit of a shareholder which is applicable to shares of a
Fund as provided from time to time in the Prospectus.
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 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
15
<PAGE>
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.
DIVIDENDS, DISTRIBUTIONS AND TAXES
The following information supplements and should be read in conjunction with
the Prospectus section entitled "Taxes." The Prospectus describes generally the
tax treatment of distributions by the Funds. This section of the SAI includes
additional information concerning income taxes.
General. The Company intends to qualify each Fund as a regulated investment
-------
company under Subchapter M of the Internal Revenue Code of 1986, as amended (the
"Code"), as long as such qualification is in the best interest of the Fund's
shareholders. Each Fund will be treated as a separate entity for tax purposes
and thus the provisions of the Code applicable to regulated investment companies
will generally be applied individually to each Fund, rather than to the Company
as a whole. Accordingly, net capital gain, net investment income, and operating
expenses will be determined separately for each Fund. As a regulated investment
company, each Fund will not be taxed on its net investment income and capital
gains distributed to its shareholders.
Qualification as a regulated investment company under the Code requires, among
other things, that (a) each Fund derive at least 90% of its annual gross income
from dividends, interest, certain payments with respect to securities loans,
gains from the sale or other disposition of stock or securities or foreign
currencies (to the extent such currency gains are directly related to the
regulated investment company's principal business of investing in stock or
securities) and other income (including but not limited to gains from options,
futures or forward contracts) derived with respect to its business of investing
in such stock, securities or currencies; and (b) each Fund diversify 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 obligations and the securities of other regulated investment
companies), or in two or more issuers which the Fund controls and which are
determined to be engaged in the same or similar trades or businesses.
The Funds must also distribute or be deemed to distribute to their
shareholders at least 90% of their net investment income(which, for this purpose
includes net short-term capital gains) earned in each taxable year. In general,
these distributions must actually or be deemed to be made in the taxable year.
However, in certain
16
<PAGE>
circumstances, such distributions may be made in the 12 months following the
taxable year. The Funds intend to pay out substantially all of their net
investment income and net realized capital gains (if any) for each year.
In addition, a regulated investment company must, in general, derive less than
30% of its gross income for a taxable year from the sale or other disposition of
securities or options thereon held for less than three months. However, this
restriction has been repealed with respect to a regulated investment company's
taxable years beginning after August 5, 1997.
Each Fund seeks to qualify as a regulated investment company by investing
substantially all of its assets in a Master Portfolio. Under the Code, each
Master Portfolio will be treated as a non-publicly traded partnership rather
than as a regulated investment company or a corporation. As a non-publicly
traded partnership, any interest, dividends, gains and losses of the Master
Portfolio shall be deemed to have been "passed through" to the corresponding
Fund (and the Master Portfolio's other investors) in proportion to each Fund's
ownership interest in the Master Portfolio. Therefore, to the extent that a
Master Portfolio were to accrue but not distribute any interest, dividends or
gains, the corresponding Fund would be deemed to have realized and recognized
its proportionate share of interest, dividends or gains without receipt of any
corresponding distribution. However, each Master Portfolio will seek to
minimize recognition by its investors (such as a Fund) of interest, dividends,
gains or losses without a corresponding distribution.
Excise Tax. A 4% nondeductible excise tax will be imposed on each Fund (other
----------
than to the extent of its tax-exempt interest income) to the extent it does not
meet certain minimum distribution requirements by the end of each calendar year.
Each Fund intends to 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.
Taxation of Master Portfolio Investments. Except as otherwise provided
----------------------------------------
herein, gains and losses realized by a Master Portfolio on the sale of portfolio
securities generally will be capital gains and losses. Such gains and losses
ordinarily will be long-term capital gains and losses if the securities have
been held by the Master Portfolio for more than one year at the time of
disposition of the securities.
Gains recognized on the disposition of a debt obligation (including tax-exempt
obligations purchased after April 30, 1993) purchased by a Master Portfolio at a
market discount (generally at a price less than its principal amount) will be
treated as ordinary income to the extent of the portion of market discount which
accrued, but was not previously recognized pursuant to an available election,
during the term the Master Portfolio held the debt obligation.
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. Some realized capital
losses may be deferred if they result from a position which is part of a
"straddle," discussed below. If securities are sold by a Master Portfolio
pursuant to the exercise of a call option granted by it, the 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.
Under Section 1256 of the Code, a Master Portfolio will be required to "mark
to market" its positions in "Section 1256 contracts," which generally include
regulated futures contracts and listed non-equity options. In this regard,
Section 1256 contracts will be deemed to have been sold at market value. Under
Section 1256 of the Code, sixty percent (60%) of any net gain or loss realized
on all dispositions of Section 1256 contracts, including deemed dispositions
under the mark-to-market regime, will generally be treated as long-term capital
gain or loss, and the remaining forty percent (40%) will be treated as short-
term capital gain or loss. Transactions that qualify as designated hedges are
excepted from the mark-to-market and 60%/40% rules.
Under Section 988 of the Code, a Master Portfolio will generally recognize
ordinary income or loss to the extent gain or loss realized on the disposition
of portfolio securities is attributable to changes in foreign currency exchange
rates. In addition, gain or loss realized on the disposition of a foreign
currency forward contract, futures contract,
17
<PAGE>
option or similar financial instrument, or of foreign currency itself, will
generally be treated as ordinary income or loss. The Master Portfolios will
attempt to monitor Section 988 transactions, where applicable, to avoid adverse
federal income tax impact to the Funds and their shareholders.
Offsetting positions held by a regulated investment company involving certain
financial forward, futures or options 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 of the Code,
described above. If a regulated investment company were treated as entering
into "straddles" by 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 straddles were governed
by Section 1256 of the Code. The regulated investment company 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 regulated investment company
may differ. Generally, to the extent the straddle rules apply to positions
established by a 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.
If a Master Portfolio enters into a "constructive sale" of any appreciated
position in stock, a partnership interest, or certain debt instruments, the
Master Portfolio must recognize gain (but not loss) with respect to that
position. For this purpose, a constructive sale occurs when the Master
Portfolio enters into one of the following transactions with respect to the same
or substantially identical property: (i) a short sale; (ii) an offsetting
notional principal contract; (iii) a futures or forward contract, or (iv) other
transactions identified in future Treasury Regulations.
If a Master Portfolio purchases shares in a "passive foreign investment
company" ("PFIC"), the Master Portfolio may be subject to federal income tax and
an interest charge imposed by the Internal Revenue Service ("IRS") upon certain
distributions from the PFIC or the Master Portfolio's disposition of its PFIC
shares. If the Master Portfolio invests in a PFIC, the Master Portfolio intends
to make an available election to mark-to-market its interest in PFIC shares.
Under the election, the Master Portfolio will be treated as recognizing at the
end of each taxable year the difference, if any, between the fair market value
of its interest in the PFIC shares and its basis in such shares. In some
circumstances, the recognition of loss may be suspended. The Master Portfolio
will adjust its basis in the PFIC shares by the amount of income (or loss)
recognized. Although such income (or loss) will be taxable to the Master
Portfolio as ordinary income (or loss) notwithstanding any distributions by the
PFIC, the Master Portfolio will not be subject to federal income tax or the
interest charge with respect to its interest in the PFIC, if it makes the
available election.
Foreign Taxes. Income and dividends received by a Fund (through a Master
-------------
Portfolio) from foreign securities and gains realized by the Fund on the
disposition of foreign securities may be subject to withholding and other taxes
imposed by foreign countries. Tax conventions between certain countries and the
United States may reduce or eliminate such taxes. Although in some
circumstances a regulated investment company can elect to "pass through" foreign
tax credits to its shareholders, the Funds do not expect to be eligible to make
such an election.
Capital Gain Distributions. Distributions which are designated by a Fund as
--------------------------
capital gain distributions will be taxed to shareholders as long-term capital
gain (to the extent such dividends do not exceed the Fund's actual net capital
gain for the taxable year), regardless of how long a shareholder has held Fund
shares. Such distributions will be designated as capital gain distributions in
a written notice mailed by the Fund to its shareholders not later than 60 days
after the close of the Fund's taxable year.
The Taxpayer Relief Act of 1997 (the "1997 Act") created several new
categories of capital gains applicable to noncorporate taxpayers. Under prior
law, noncorporate taxpayers generally were taxed at a maximum rate of 28% on
net capital gain (generally, the excess of net long-term capital gain over net
short-term capital loss). Noncorporate taxpayers generally are now taxed at a
maximum rate of 20% on net capital gain
18
<PAGE>
attributable to gains realized on the sale of property held for greater than 18
months, and a maximum rate of 28% on net capital gain attributable to gain
realized on the sale of property held for greater than one year and not more
than 18 months, and a maximum rate of 25% for certain gains attributable to the
sale of real property. The 1997 Act retains the treatment of short term capital
gain or loss (generally, gain or loss attributable to capital assets held for 1
year or less) and did not affect the taxation of capital gains in the hands of
corporate taxpayers.
Under the 1997 Act, the Treasury is authorized to issue regulations for
application of the reduced capital gains tax rates to pass-through entities,
including regulated investment companies, such as the Funds. The IRS has
published a notice applicable to pass-through entities until regulations are
promulgated. Pursuant to the notice, each Fund is permitted (but not required)
to designate the portion of its capital gain distributions, if any, to which the
28%, 25% and 20% rates described in the preceding paragraph apply, based on the
net amount of each class of capital gain realized by the Fund determined as if
the Fund is a noncorporate taxpayer. Noncorporate shareholders of the Funds may
therefore qualify for the reduced rate of tax on capital gain distributions paid
by the Funds.
Disposition of Fund Shares. A disposition of Fund shares pursuant to
--------------------------
redemption (including a redemption in-kind) or exchanges ordinarily will result
in a taxable capital gain or loss, depending on the amount received for the
shares (or are deemed to receive in the case of an exchange) and the cost of the
shares.
If a shareholder exchanges or otherwise disposes of Fund shares within 90 days
of having acquired such shares and if, as a result of having acquired those
shares, the shareholder subsequently pays a reduced sales charge on a new
purchase of shares of the Fund or a different regulated investment company, the
sales charge previously incurred acquiring the Fund's shares shall not be taken
into account (to the extent such previous sales charges do not exceed the
reduction in sales charges on the new purchase) for the purpose of determining
the amount of gain or loss on the disposition, but will be treated as having
been incurred in the acquisition of such other shares. Also, any loss realized
on a redemption or exchange of shares of the Fund will be disallowed to the
extent that substantially identical shares are acquired within the 61-day period
beginning 30 days before and ending 30 days after the shares are disposed
of.
If a shareholder receives a designated capital gain distribution (to be
treated by the shareholder as long-term capital gain) with respect to any 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 long-term capital loss to the extent of the designated capital gain
distribution. This loss disallowance rule does not apply to losses realized
under a periodic redemption plan.
Federal Income Tax Rates. As of the printing of this SAI, the maximum
------------------------
individual tax rate applicable to ordinary income is 39.6% (marginal tax rates
may be higher for some individuals to reduce or eliminate the benefit of
exemptions and deductions); the maximum individual marginal tax rate applicable
to net capital gain is 28% (however, see "Capital Gain Distributions" above);
and the maximum corporate tax rate applicable to ordinary income and net capital
gain is 35% (marginal tax rates may be higher for some corporations to reduce or
eliminate the benefit of lower marginal income tax rates). Obviously, the
amount of tax payable by any taxpayer will be affected by a combination of tax
laws covering, for example, deductions, credits, deferrals, exemptions, sources
of income and other matters.
Backup Withholding. 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 and redemptions in-kind) paid or credited to an individual Fund
shareholder, unless the shareholder certifies that his or her taxpayer
identification number ("TIN"), which usually is his or her social security
number, provided to the Company 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 that the shareholder is subject to backup
withholding. Such tax withheld does not constitute any additional tax imposed
on the shareholder, and may be claimed as a credit against the shareholder's
federal income tax liability, if any, or otherwise will be refundable. An
investor must provide a valid TIN to the Company upon opening or reopening an
account. Failure to furnish a valid TIN to the Company could also subject the
investor to penalties imposed by the IRS. Foreign shareholders of the Funds
(described below) generally are not subject to backup withholding.
19
<PAGE>
Corporate Shareholders. Corporate shareholders of the Funds may be eligible
----------------------
for the dividends-received deduction on dividends distributed out of a Fund's
net investment income attributable to dividends received from domestic
corporations, which, if received directly by the corporate shareholder, would
qualify for such deduction. A distribution by a Fund attributable to dividends
of a domestic corporation will only qualify for the dividends-received deduction
if (i) the corporate shareholder generally holds the Fund shares upon which the
distribution is made for at least 46 days during the 90 day period beginning 45
days prior to the date upon which the shareholder becomes entitled to the
distribution; and (ii) the Fund generally holds the shares of the domestic
corporation producing the dividend income for at least 46 days during the 90 day
period beginning 45 days prior to the date upon which the Fund becomes entitled
to such dividend income.
Foreign Shareholders. Under the Code, distributions of net investment income
--------------------
by a Fund to a nonresident alien individual, foreign trust (i.e., trust which a
U.S. court is able to exercise primary supervision over administration of that
trust and one or more U.S. persons have authority to control substantial
decisions of that trust), foreign estate (i.e., the income of which is not
subject to U.S. tax regardless of source), foreign corporation, or foreign
partnership (a "foreign shareholder") will be subject to federal income tax
withholding (at a rate of 30% or a lower treaty rate, if applicable).
Withholding will not apply if a dividend distribution paid by a Fund to a
foreign shareholder is "effectively connected" with a U.S. trade or business
(or, if an income tax treaty applies, is attributable to a U.S. permanent
establishment of the foreign shareholder), in which case the reporting and
withholding requirements applicable to U.S. residents will apply. Distributions
of net capital gain generally are not subject to federal income tax
withholding.
New Regulations. On October 6, 1997, the Treasury Department issued new
---------------
regulations (the "New Regulations") which make certain modifications to the
backup withholding, U.S. income tax withholding and information reporting rules
applicable to foreign shareholders. The New Regulations generally will be
effective for payments made after December 31, 1999, subject to certain
transition rules. Among other things, the New Regulations will permit the Funds
to estimate the portion of their distributions paid to foreign shareholders
which is subject to federal income tax withholding. Prospective investors are
urged to consult their own tax advisors regarding the application to them of the
New Regulations.
Other Matters. Investors should be aware that the investments to be made by a
-------------
Fund may involve sophisticated tax rules that may result in income or gain
recognition by the Fund without corresponding current cash receipts. Although
the Funds will seek to avoid significant noncash income, such noncash income
could be recognized by a Fund, in which case the Fund may distribute cash
derived from other sources in order to meet the minimum distribution
requirements described above.
The foregoing discussion and the discussions in the Prospectus applicable to
each shareholder address only some of the federal income tax considerations
generally affecting investments in a Fund. Each investor is urged to consult
his or her tax advisor regarding specific questions as to federal, state, local
and foreign taxes.
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 LifePath Funds are successors to the assets of the Institutional Class
shares of the Stagecoach Trust LifePath Funds (the "Predecessor Funds"), which
commenced operations on March 1, 1994. The performance information
20
<PAGE>
shown below for periods prior to March 26, 1996, the Company's LifePath Funds'
commencement of operations, reflects the performance of the Predecessor
Funds.
For the fiscal year ended February 28, 1998 and the fiscal period from March
1, 1994 (commencement of operations) to February 28, 1998, the average annual
total returns on the LifePath Funds were as follows:
<TABLE>
<CAPTION>
3/1/94-2/28/98 FYE 2/28/98
-------------- -----------
<S> <C> <C>
LifePath 2000 8.63% 12.32%
LifePath 2010 13.30% 18.73%
LifePath 2020 16.45% 24.25%
LifePath 2030 18.84% 28.22%
LifePath 2040 21.15% 30.95%
</TABLE>
For the fiscal period from March 1, 1994 to February 28, 1998, the cumulative
total returns on the LifePath Funds were as follows:
<TABLE>
<CAPTION>
3/1/94-2/28/98
--------------
<S> <C>
LifePath 2000 39.26%
LifePath 2010 64.76%
LifePath 2020 83.83%
LifePath 2030 99.38%
LifePath 2040 115.34%
</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 Advisers as
managing approximately $575 billion in assets as of April 30, 1998 for Fortune
500 companies, governments and other institutions around the world.
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 and may compare the performance of a Fund to the performance
of various indices and investments for which reliable performance data is
available. The performance of a Fund may be compared in advertising and other
literature to averages, performance rankings and other information prepared by
recognized mutual fund statistical services.
PORTFOLIO TRANSACTIONS
Since each Fund invests all of its assets in a corresponding Master Portfolio
of MIP, set forth below is a description of the Master Portfolios' policies
governing portfolio securities transactions.
Purchases and sales of equity securities on a securities exchange usually are
effected through brokers who charge a negotiated commission for their services.
Commission rates are established pursuant to negotiations with the broker based
on the quality and quantity of execution services provided by the broker in
light of generally prevailing rates. Orders may be directed to any broker
including, to the extent and in the manner permitted by applicable law, Stephens
or Barclays Global Investors Services. 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.
Purchases of debt securities generally are principal transactions. Debt
securities normally are purchased or sold from or to dealers serving as market
makers for the securities at a net price. Debt securities may also be purchased
in underwritten offerings or directly from an issuer. Generally debt obligations
are traded on a net basis and do not involve brokerage commissions. The cost of
executing transactions in debt securities consists primarily of dealer spreads
and
21
<PAGE>
underwriting commissions. Under the 1940 Act, persons affiliated with MIP are
prohibited from dealing with MIP as a principal in the purchase and sale of
portfolio securities unless an exemptive order allowing such transactions is
obtained from the Commission or an exemption is otherwise available. The Master
Portfolios may purchase securities from underwriting syndicates of which
Stephens or BGFA is a member under certain conditions in accordance with the
provisions of a rule adopted under the 1940 Act and in compliance with
procedures adopted by MIP's Board of Trustees.
MIP 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 MIP's Board of Trustees, BGFA, as adviser, is responsible for the
Master Portfolio's investment decisions and the placing of portfolio
transactions. In placing orders, it is MIP's policy to obtain the best overall
terms taking into account the dealer's general execution and operational
facilities, the type of transaction involved and other factors such as the
dealer's risk in positioning the securities involved. BGFA generally seeks
reasonably competitive spreads or commissions.
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. As a result, a
Master Portfolio may pay a broker/dealer which furnishes brokerage services a
higher commission than that which might be charged by another broker/dealer for
effecting the same transaction, provided that such commission is determined to
be reasonable in relation to the value of the brokerage services provided by
such broker/dealer. Certain of the broker/dealers with whom the Master
Portfolios may transact business may offer commission rebates to the Master
Portfolios. BGFA considers such rebates in assessing the best overall terms
available for any transaction. MIP's Board of Trustees will periodically review
the commissions paid by the Master Portfolios to consider whether the
commissions paid over representative periods of time appear to be reasonable in
relation to the benefits inuring to the Master Portfolios.
Under Section 28(e) of the Securities Exchange Act of 1934, an adviser shall
not be "deemed to have acted unlawfully or to have breached its fiduciary duty"
solely because under certain circumstances it has caused the account to pay a
higher commission than the lowest available. To obtain the benefit of Section
28(e), an adviser must make a good faith determination that the commissions paid
are "reasonable in relation to the value of the brokerage and research services
provided . . . viewed in terms of either that particular transaction or its
overall responsibilities with respect to the accounts as to which it exercises
investment discretion and that the services provided by a broker provide an
adviser with lawful and appropriate assistance in the performance of its
investment decision-making responsibilities." Accordingly, the price to a Master
Portfolio in any transaction may be less favorable than that available from
another broker/dealer if the difference is reasonably justified by other aspects
of the portfolio execution services offered.
Brokerage Commissions. For the fiscal years ended February 29, 1996, February
---------------------
28, 1997 and February 28, 1998, 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
FYE 2/29/96 FYE 2/28/97 FYE 2/28/98
------------------ ------------------ ------------------
<S> <C> <C> <C>
LifePath 2000 Master Portfolio $ 8,311 $ 3,639 $ 9,361
LifePath 2010 Master Portfolio $12,053 $ 8,837 $15,306
LifePath 2020 Master Portfolio $29,666 $12,383 $29,153
LifePath 2030 Master Portfolio $33,786 $ 6,927 $28,908
LifePath 2040 Master Portfolio $71,608 $28,047 $94,717
</TABLE>
22
<PAGE>
Securities of Regular Broker Dealers. As of February 28, 1998, 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>
LIFEPATH 2000 MASTER
--------------------
<S> <C>
GOLDMAN SACHS $ 5,000,000
J.P. MORGAN 41,347
LEHMAN BROS HOLDINGS 31,531
MERRILL LYNCH 37,928
MORGAN STANLEY 68,590
LIFEPATH 2010 MASTER
--------------------
GOLDMAN SACHS $ 9,000,000
J.P. MORGAN 189,288
LEHMAN BROS HOLDINGS 50,450
MERRILL LYNCH 198,514
MORGAN STANLEY 328,681
LIFEPATH 2020 MASTER
--------------------
GOLDMAN SACHS $14,000,000
J.P. MORGAN 426,854
LEHMAN BROS HOLDINGS 126,125
MERRILL LYNCH 475,032
MORGAN STANLEY 752,033
LIFEPATH 2030 MASTER
--------------------
GOLDMAN SACHS $ 9,000,000
J.P. MORGAN 362,085
LEHMAN BROS HOLDINGS 132,431
MERRILL LYNCH 407,477
MORGAN STANLEY 650,094
LIFEPATH 2040 MASTER
--------------------
GOLDMAN SACHS $15,000,000
J.P. MORGAN 609,091
LEHMAN BROS HOLDINGS 182,881
MERRILL LYNCH 687,859
MORGAN STANLEY 1,606,436
</TABLE>
23
<PAGE>
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 12,100,000,000 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. 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 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.
MIP is an open-end, series management investment companies organized as
Delaware business trust on October 21, 1993. In accordance with Delaware law and
in connection with the tax treatment sought by MIP, MIP's Declaration of Trust
provides that its investors would be personally responsible for Trust
liabilities and obligations, but only to the extent MIP's property is
insufficient to satisfy such liabilities and obligations. The Declaration of
Trust also provides that MIP shall maintain appropriate insurance (for example,
fidelity bonding and errors and omissions insurance) for the protection of MIP,
its investors, Trustees, officers, employees and agents covering possible tort
and other liabilities, and that investors will be indemnified to the extent they
are held liable for a disproportionate share of MIP obligations. Thus, the risk
of an investor incurring financial loss on account of investor liability is
limited to circumstances in which both inadequate insurance existed and MIP
itself was unable to meet its obligations.
The Declaration of Trust further provides that obligations of MIP are not
binding upon its Trustees individually but only upon the property of 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
24
<PAGE>
subject by reason of willful misfeasance, bad faith, gross negligence, or
reckless disregard of the duties involved in the conduct of the Trustee's
office.
The interests in each Master Portfolio of MIP have substantially identical
voting and other rights as those rights enumerated above for shares of the
Funds. MIP also intends 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
MIP, 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 MIP, such Fund will vote
such shares in the same proportion as the shares for which the Fund does receive
voting instructions.
As of May 30, 1998, the shareholders identified below were known by the
Company to own 5% or more of the LifePath Fund's outstanding shares in the
following capacity:
<TABLE>
<CAPTION>
NAME AND ADDRESS PERCENTAGE NATURE OF
NAME OF FUND OF SHAREHOLDER OF FUND OWNERSHIP
- ------------------ ------------------------------------------ ---------------- ---------------
<S> <C> <C> <C>
LifePath 2000 Fund Merrill Lynch Trust Co. FSB 82.64% Record
FBO Various 401 K Plans
P.O. Box 62000
San Francisco, CA 94162
Siemens Corp. Savings Plan 7.85% Record
Bankers Trust Company TR
P.O. Box 1992 MS D5
Boston, MA 02105
LifePath 2010 Fund Merrill Lynch Trust Co. FSB 70.17% Record
FBO Various 401 K Plans
P.O. Box 62000
San Francisco, CA 94162
Wachovia Bank NA 6.21% Record
P.O. Box 3073
301 N. Main Street
Winston Salem, NC 27150
Siemens Corp. Savings Plan 5.23% Record
Bankers Trust Company TR
P.O. Box 1992 MS D5
Boston, MA 02105
Bankers Trust Co. of CA NA TEEE 5.06% Record
FBO Pacificorp K Plus Employee
Savings & Stock Ownership Plan
300 S. Grand Avenue, 40th Floor
Los Angeles, CA 90071
LifePath 2020 Fund Merrill Lynch Trust Co. FSB 70.67% Record
FBO Various 401 K Plans
P.O. Box 62000
San Francisco, CA 94162
</TABLE>
25
<PAGE>
<TABLE>
<CAPTION>
NAME AND ADDRESS PERCENTAGE NATURE OF
NAME OF FUND OF SHAREHOLDER OF FUND OWNERSHIP
- ------------ ---------------- ----------- ---------
<S> <C> <C> <C>
LifePath 2020 Fund Siemens Corp. Savings Plan 7.05% Record
Bankers Trust Company TR
P.O. Box 1992 MS D5
Boston, MA 02105
IFTC as Trustee 6.87% Record
Custodian for Retirement Plan
801 Pennsylvania
Kansas City, MO 64105
LifePath 2030 Fund Merrill Lynch Trust Co. FSB 70.81% Record
FBO Various 401 K Plans
P.O. Box 62000
San Francisco, CA 94162
Siemens Corp. Savings Plan 9.09% Record
Bankers Trust Company TR
P.O. Box 1992 MS D5
Boston, MA 02105
LifePath 2040 Fund Merrill Lynch Trust Co. FSB 65.20% Record
FBO Various 401 K Plans
P.O. Box 62000
San Francisco, CA 94162
Siemens Corp. Savings Plan 14.60% Record
Bankers Trust Company TR
P.O. Box 1992 MS D5
Boston, MA 02105
Bankers Trust Co. of CA NA TEEE 6.63% Record
FBO Pacificorp K Plus Employee
Savings & Stock Ownership Plan
300 S. Grand Avenue, 40th Floor
Los Angeles, CA 90071
Wells Fargo Bank FBO 5.88% Record
Business Retirement Programs
Omnibus Act
MF MAC 9139-027
P.O. Box 9800
Calabasas, CA 91372
</TABLE>
For purposes of the 1940 Act, any person who owns directly or through one or
more controlled companies more than 25% of the voting securities of a company is
presumed to "control" such company. Accordingly, to the extent that a
shareholder identified in the foregoing table is identified as the beneficial
holder of more than 25% of a Fund, or is identified as the holder of record of
more than 25% of a Fund and has voting and/or investment powers, it may be
presumed to control such Fund.
26
<PAGE>
OTHER
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.
The Registration Statement, including the Prospectus for the LifePath Funds,
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.
The Funds send 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 regarding the due authorization and valid issuance of the
shares being sold pursuant to the Funds' Prospectus.
INDEPENDENT AUDITORS
KPMG Peat Marwick LLP, Three Embarcadero Center, San Francisco, California
94111, 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.
FINANCIAL INFORMATION
The audited financial statements, including the portfolio of investments, and
independent auditors' report for the fiscal period ended February 28, 1998 for
each LifePath Fund and corresponding LifePath Master Portfolio are hereby
incorporated by reference to the MasterWorks Funds, Inc. Annual Report, as filed
with the SEC on May 1, 1998. The audited financial statements are attached to
all SAIs delivered to shareholders or prospective shareholders.
27
<PAGE>
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".
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.
A-1
<PAGE>
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 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.
A-2
<PAGE>
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.
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.
A-3
<PAGE>
DUFF
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.
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.
A-4
<PAGE>
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-5
<PAGE>
MASTERWORKS FUNDS INC.
STATEMENT OF ADDITIONAL INFORMATION
MONEY MARKET FUND
JUNE 30, 1998
_______________________
MasterWorks Funds Inc. (the "Company") is an open-end, management investment
company. This Statement of Additional Information ("SAI") contains additional
information about the Company's 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
current Prospectus, also dated June 30, 1998. 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 may be obtained without charge by writing MasterWorks
Funds Inc., c/o Investors Bank & Trust Co., -- Transfer Agent, P.O. Box 9130,
Mail Code MFD23, Boston, MA 02117-9130, or by calling 1-888-204-3956.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
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<S> <C>
General Information................................................................. 1
Investment Restrictions............................................................. 1
Additional Permitted Investment Activities.......................................... 3
Management.......................................................................... 7
Performance Information............................................................. 12
Determination of Net Asset Value.................................................... 14
Purchase and Redemption of Shares................................................... 15
Portfolio Transactions.............................................................. 16
Taxes............................................................................... 18
Capital Stock....................................................................... 22
Other............................................................................... 23
Counsel............................................................................. 23
Independent Auditors................................................................ 23
Financial Information............................................................... 23
SAI Appendix........................................................................ A-1
Financial Statements................................................................ F-1
</TABLE>
i
<PAGE>
GENERAL INFORMATION
The Company is a registered investment company which currently offers twelve
series, including the Fund. 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."
INVESTMENT RESTRICTIONS
FUNDAMENTAL INVESTMENT RESTRICTIONS. The Fund is subject to the following
investment restrictions, all of which are fundamental policies.
The Money Market 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;
1
<PAGE>
(8) borrow money or issue senior securities as defined in the Investment
Company Act of 1940 (the "1940 Act"), except that the 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);
(9) write, purchase or sell puts, calls, straddles, spreads, warrants, options
or any combination thereof, except that the 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 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 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.
2
<PAGE>
(3) The 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 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 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 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.
ADDITIONAL PERMITTED INVESTMENT ACTIVITIES
General. The assets of the Fund consist only of obligations maturing within
--------
thirteen months from the date of acquisition (as determined in accordance with
the regulations of the SEC), and the dollar-weighted average maturity of the
Fund may not exceed 90 days. The securities in which the Fund may invest will
not yield as high a level of current income as may be achieved from securities
with less liquidity and less safety. There can be no assurance that the Fund's
investment objective will be realized as described in the Fund's
Prospectus.
Unrated Investments. The Fund may purchase instruments that are not rated if,
-------------------
in the opinion of Wells Fargo Bank, N.A. ("Wells Fargo Bank"), as sub-adviser,
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 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 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 Investor Service, Inc. ("Moody's") or
3
<PAGE>
Standard & Poors Corporation ("S&P") may change as a result of changes in such
organizations or their rating systems, the 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.
Pass-Through Obligations. Certain of the debt obligations in which the 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 Fund may lend its securities to brokers,
-----------------------------
dealers and financial institutions, provided (1) the loan is secured
continuously by collateral consisting of cash, U.S. Treasury securities, or
other U.S. Government securities or a letter of credit which is marked to market
daily to ensure that each loan is fully collateralized at all times; (2) the
Fund may at any time call the loan and obtain the return of the securities
loaned within five business days; (3) the Fund will receive any interest or
dividends paid on the securities loaned; and (4) the aggregate market value of
securities loaned will not at any time exceed one-third of the total assets of
the Fund. The Fund may earn income in connection with securities loans either
through the reinvestment of the cash collateral or the payment of fees by the
borrower. The Fund does not currently intend to lend its portfolio
securities.
Repurchase Agreements. The Fund may engage in a repurchase agreement with
----------------------
respect to any security in which it is authorized to invest, although the
underlying security may mature in more than thirteen months. 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 that involves the acquisition by the Fund of an underlying debt
instrument, subject to the seller's obligation to repurchase, and the Fund's
obligation to resell, the instrument at a fixed price usually not more than one
week after its purchase. The Fund's custodian has custody of, and holds in a
segregated account, securities acquired as collateral by the Fund under a
repurchase agreement. Repurchase agreements are considered by the staff of the
SEC to be loans by the Fund. The Fund may enter into repurchase agreements only
with respect to securities of the type in which it may invest, including
government securities and mortgage-related securities, regardless of their
remaining maturities, and requires that additional securities be deposited with
the custodian if the value of the securities purchased should decrease below
resale price. Wells Fargo Bank 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 the Fund 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
the Fund may be delayed or
4
<PAGE>
limited. While it does not presently appear possible to eliminate all risks from
these transactions (particularly the possibility of a decline in the market
value of the underlying securities, as well as delay and costs to the Fund in
connection with insolvency proceedings), it is the policy of the Fund to limit
repurchase agreements to selected creditworthy securities dealers or domestic
banks or other recognized financial institutions. The Fund considers on an
ongoing basis the creditworthiness of the institutions with which it enters into
repurchase agreements. Repurchase agreements are considered to be loans by a
Fund under the 1940 Act.
Floating- and Variable-Rate Obligations. The Fund may purchase floating- and
----------------------------------------
variable-rate obligations as described in the Prospectus. The Fund 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 that are obligations that permit the Fund to invest
fluctuating amounts, which may change daily without penalty, pursuant to direct
arrangements between the Fund, 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, and there generally is no established
secondary market for these obligations, although they are redeemable at face
value. Accordingly, where these obligations are not secured by letters of
credit or other credit support arrangements, the Fund's right to redeem is
dependent on the ability of the borrower to pay principal and interest on
demand. Such obligations frequently are not rated by credit rating agencies and
the Fund may invest in obligations which are not so rated only if Wells Fargo
Bank determines that at the time of investment the obligations are of comparable
quality to the other obligations in which the Fund may invest. Wells Fargo Bank,
on behalf of the Fund, considers on an ongoing basis the creditworthiness of the
issuers of the floating- and variable-rate demand obligations in the Fund's
portfolio. The Fund will not invest more than 10% of the value of its total net
assets in floating- or variable-rate demand obligations whose demand feature is
not exercisable within seven days. Such obligations may be treated as liquid,
provided that an active secondary market exists.
Forward Commitments, When-Issued Purchases and Delayed-Delivery Transactions.
----------------------------------------------------------------------------
The Fund may purchase securities on a when-issued or forward commitment
(sometimes called a delayed-delivery) basis, which means 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. The Fund will make
commitments to purchase such securities only with the intention of actually
acquiring the securities, but the Fund may sell these securities before the
settlement date if it is
5
<PAGE>
deemed advisable. The Fund 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 Fund's investment 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 Fund 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 the Fund consisting of cash or 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 will be established and
maintained at the Fund's custodian bank. Purchasing securities on a forward
commitment basis when the Fund is fully or almost fully invested may result in
greater potential fluctuation in the value of the Fund's total net assets and
its net asset value per share. In addition, because the Fund will set aside
cash and other high quality liquid debt securities as described above, the
liquidity of the Fund's investment portfolio may decrease as the proportion of
securities in the Fund's portfolio purchased on a when-issued or forward
commitment basis increases.
The value of the securities underlying a when-issued purchase or a forward
commitment to purchase securities, and any subsequent fluctuations in their
value, is taken into account when determining the Fund's net asset value
starting on the day the Fund agrees to purchase the securities. The Fund does
not earn interest on the securities it has committed to purchase until they are
paid for and delivered on the settlement date. When the Fund makes a forward
commitment to sell securities it owns, the proceeds to be received upon
settlement are included in the Fund's assets, and fluctuations in the value of
the underlying securities are not reflected in the Fund's net asset value as
long as the commitment remains in effect.
Rule 144A. It is possible that unregistered securities, purchased by the Fund
----------
in reliance upon Rule 144A under the Securities Act of 1933, could have the
effect of increasing the level of the Fund's illiquidity to the extent that
qualified institutional buyers become, for a period, uninterested in purchasing
these securities.
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,
6
<PAGE>
and the ability to enforce contractual obligations with respect to, securities
of issuers located in those countries. The Fund may invest up to 25% 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; the obligations may be less
marketable than comparable obligations of U.S. banks; a foreign jurisdiction
might impose withholding taxes on interest income payable on those obligations;
foreign deposits may be seized or nationalized; foreign governmental
restrictions (such as foreign exchange controls) may be adopted which might
adversely affect the payment of principal and interest on those obligations; and
the selection of those obligations may be more difficult because there may be
less publicly available information concerning foreign banks. In addition, the
accounting, auditing and financial reporting standards, practices and
requirements applicable to foreign banks may differ from those applicable to
U.S. banks. In that connection, foreign banks are not subject to examination by
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." Directors and officers of the Company, together with information as to
their principal business occupations during the last five years, are shown
below. The address of each, unless otherwise indicated, is 111 Center Street,
Little Rock, Arkansas 72201. Directors who are deemed to be an "interested
person" of the Company, as defined in 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, 75 Director Private Investor.
415 Walsh Road
Atherton, CA 94027
*R. Greg Feltus, 46 Director, Executive Vice President of Stephens Inc.;
Chairman and President of Stephens Insurance Services Inc.;
President Senior Vice President of Stephens Sports Management Inc.;
and President of Investors Brokerage Insurance Inc.
Thomas S. Goho, 55 Director Associate Professor of Finance
P.O. Box 7285 Calloway School of Business and Accounting at
Reynolda Station Wake Forest University since 1982.
Winston-Salem, NC 27109
*W. Rodney Hughes, 71 Director Private Investor.
31 Dellwood Court
San Rafael, CA 94901
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
Principal Occupations
Name, Address and Age Position During Past 5 Years
- --------------------- -------- ---------------------
<S> <C> <C>
*J. Tucker Morse, 53 Director Chairman of Home Account Network, Inc.;
4 Beaufain Street Real Estate Developer;
Charleston, SC 29401 Chairman of Renaissance Properties Ltd.;
President of Morse Investment Corporation;
and Co-Managing Partner of Main Street Ventures
Richard H. Blank, Jr., 41 Chief Vice President of Stephens Inc.;
Operating Director of Stephens Sports Management Inc.;
Officer, and Director of Capo Inc.
Secretary and
Treasurer
</TABLE>
COMPENSATION TABLE
For the Fiscal Year Ended February 28, 1998
<TABLE>
<CAPTION>
Aggregate Total Compensation
Compensation from Registrant
Name and Position from Registrant and Fund Complex
- ----------------- --------------- ----------------
<S> <C> <C>
Jack S. Euphrat $11,250 $11,250
Director
*R. Greg Feltus
Director 0 0
Thomas S. Goho
Director $11,250 $11,250
*Zoe Ann Hines/1/
Director 0 0
*W. Rodney Hughes
Director $11,000 $11,000
Robert M. Joses/2/
Director $ 1,000 $ 1,000
*J. Tucker Morse
Director $11,000 $11,000
</TABLE>
- ---------------
/1/ Zoe Ann Hines retired as of January 28, 1998.
/2/ Robert M. Joses retired as of December 31, 1997.
8
<PAGE>
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. The Company, Master Investment Portfolio and Managed Series
Investment Trust together form a separate "fund complex", as such term is
defined in Form N-1A under the 1940 Act (the "BGFA Fund Complex" ). Stagecoach
Funds, Inc., Stagecoach Trust and Life & Annuity Trust are considered to be
members of the same fund complex (the "Wells Fargo Fund Complex"). Prior to
December 15, 1997, the Wells Fargo Fund Complex also included Overland Express
Funds, Inc. and Master Investment Trust. On that date, Overland Express Funds,
Inc. was consolidated with and into Stagecoach Funds, Inc., and Master
Investment Trust was dissolved. Each of the Directors and Officers of the
Company serves in the identical capacity as Directors/Trustees and Officers of
each registered open-end management investment company in both the Wells Fargo
and BGFA Fund Complexes. The Directors are compensated by other companies and
trusts within a 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 each
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. BGFA provides investment advisory services to the Fund
------------------
pursuant to an Investment Advisory Contract 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 Fund's average daily net assets.
For the period beginning January 1, 1996 and ended February 29, 1996, and
for the fiscal years ended February 28, 1997 and February 28, 1998, the Fund
paid advisory fees to BGFA, without waivers:
<TABLE>
1/1/96 - 2/29/96 FYE 2/28/97 FYE 2/28/98
Fees Paid Fees Paid Fees Paid
--------- --------- ---------
<S> <C> <C> <C>
Money Market Fund $89,609 $570,332 $630,279
</TABLE>
Prior to January 1, 1996, Wells Fargo Bank provided investment advisory
services to the Fund pursuant to an Investment Advisory Agreement, the terms of
which were identical in all material respects, other than the identity of the
parties, to the BGFA Advisory Contract.
For the fiscal year ended February 28, 1995 and for the period beginning March
1, 1995 and ended December 31, 1995, the Fund paid advisory fees to Wells Fargo
Bank and Wells Fargo Bank waived advisory fees as follows:
<TABLE>
FYE 2/28/95 3/1/95 - 12/31/95
Fees Paid Fees Waived Fees Paid Fees Waived
--------- ----------- --------- -----------
<S> <C> <C> <C> <C>
Money Market Fund $371,199 0 $435,178 $51,320
</TABLE>
9
<PAGE>
Investment Sub-Adviser. BGFA has engaged Wells Fargo Bank to provide
----------------------
investment sub-advisory services pursuant to a Sub-Advisory Contract. The Sub-
Advisory Contract provides that Wells Fargo Bank shall furnish to the Fund
investment guidance and policy direction in connection with the daily portfolio
management of the Fund. Wells Fargo Bank 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 interest rate and
security market trends, portfolio composition and credit conditions. For its
sub-advisory services to the Fund, Wells Fargo Bank is entitled to receive a fee
at an annual rate of 0.05% of the Fund's average daily net assets.
For the period beginning January 1, 1996 and ended February 29, 1996, and for
the fiscal years ended February 28, 1997 and February 28, 1998, BGFA paid to
Wells Fargo Bank the sub-advisory fees indicated below, without waivers:
<TABLE>
1/1/96-2/29/96 FYE 2/28/97 FYE 2/28/98
FEES PAID FEES PAID FEES PAID
--------- --------- ---------
<S> <C> <C> <C>
Money Market Fund $12,801 $80,773 $90,190
</TABLE>
The Advisory and Sub-Advisory Contracts are 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 Contracts are 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, or, after the Reapproval
Date, on not less than 60 days' written notice, by BGFA. The Contracts terminate
automatically in the event of an assignment (as defined in the 1940 Act).
Co-Administrators. The Company has engaged Stephens Inc. ("Stephens") and
-----------------
Barclays Global Investors, N.A. ("BGI") to provide certain administration
services to the Fund. Pursuant to a Co-Administration Agreement with the
Company, Stephens and BGI provide as administration services, among other
things: (i) general supervision of the operation of the Company and the Fund,
including coordination of the services performed by the investment adviser, sub-
adviser, transfer and dividend disbursing agent, custodian, 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 all other administrative services that are
not being furnished by the Fund's investment adviser. Stephens also pays the
compensation of the Company's Directors, officers and employees who are
affiliated with Stephens.
10
<PAGE>
In addition, except for advisory fees, extraordinary expenses, brokerage and
other expenses connected to the execution of portfolio transactions and certain
expenses which are borne by the Fund, Stephens and BGI have agreed to bear all
costs of the Fund's and the Company's operations. For providing such services,
Stephens and BGI are entitled to a fee of 0.10% of the Fund's average daily net
assets. Effective October 21, 1996, BGI contracted with Investors Bank & Trust
Company ("IBT") to provide certain sub-administrative services. Prior to
October 21, 1996, Stephens served as sole administrator to the Fund.
For the fiscal years ended February 29, 1996, February 28, 1997, and February
28, 1998, the Fund paid the following administration fees:
<TABLE>
<CAPTION>
FYE 2/29/96 FYE 2/28/97 FYE 2/28/98
----------- ----------- -----------
<S> <C> <C> <C>
Money Market Fund $76,777 $111,048(1) $179,427(2)
</TABLE>
_______________
(1) This amount includes $75,738 paid to Stephens during the fiscal year and
$35,310 paid to BGI under the Co-Administration Agreement during the period
from October 21, 1996 to February 28, 1997.
(2) For this period all co-administration fees were paid jointly to Stephens and
BGI.
Distributor. 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. IBT, concurrent with its appointment as sub-administrator for the
---------
Fund on October 21, 1996, also has been retained to act as Custodian for the
Fund and performs such services at 200 Clarendon Street, Boston, Massachusetts
02116. 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 and collects and receives all income and
other payments and distributions on account of the assets of the Fund. IBT shall
not be entitled to compensation for providing custody services to the Fund
pursuant to the Custody Agreement so long as it receives compensation from BGI
for providing sub-administration services to the Company, on behalf of the Fund.
Prior to October 21, 1996, BGI served as the Fund's custodian and was not
entitled to receive a fee. Prior to January 1, 1996, Wells Fargo Bank served as
the Fund's custodian. For the period beginning January 1, 1996 and ended
February 29, 1996, and for the fiscal year ended February 28, 1997, the Fund did
not pay any custody fees.
Transfer and Dividend Disbursing Agent. IBT has been retained to act as the
--------------------------------------
transfer and dividend disbursing agent for the Fund and performs such services
at 200 Clarendon Street, Boston, MA 02111. For its services as transfer and
dividend disbursing agent to the Fund, IBT is
11
<PAGE>
entitled to receive an annual maintenance fee computed on the basis of the
number of shareholder accounts that it maintains for the Fund and to be
reimbursed for out-of-pocket expenses or advances incurred by it in performing
its obligations under the agreement. The annual maintenance fee is paid as
follows:
ANNUAL FEE
------------------------------
Up to 200 accounts* $6,000 per feeder/class
From 201 to 250 accounts $8,500 per feeder/class
Over 250 accounts $10,000 per feeder/class
_______________
* Defined as each account that is set up for an individual or plan sponsor
on a fund by fund basis.
In addition, the agreement contemplates that IBT will be reimbursed for other
expenses incurred by it at the request or with the written consent of the Fund,
including, without limitation, any equipment or supplies which the Company
specifically orders or requires IBT to order.
Prior to March 2, 1998, Wells Fargo Bank served as transfer and dividend
disbursing agent to the Fund, and was entitled to receive a monthly fee at an
annual rate of 0.05% of the average daily net assets of each Fund for such
services.
PERFORMANCE INFORMATION
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.
Current yield for the Fund is calculated based on the net changes, exclusive
of capital changes, over a seven day and/or thirty day period, 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
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
for the Fund for the seven-day and thirty day periods ended February 28, 1998
were 5.24% and 5.27%, 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
12
<PAGE>
subtracting one from the result. The effective yield for the Fund for the seven-
day period ended February 28, 1998 was 5.38%.
In addition, investors should recognize that changes in the net asset values
of shares of the Money Market Fund affect the yield 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 may be useful in reviewing the Fund's performance and for providing
a basis for comparison with investment alternatives. The yield of the 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 the Fund, the Company may quote the performance of
the Fund in advertising and other types of literature and may compare the
performance of the Fund to the performance of various indices and investments
for which reliable performance data is available. The performance of the Fund
may be compared in advertising and other literature to averages, performance
rankings and other information prepared by recognized mutual fund statistical
services.
From time to time, the Company may quote the 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 Bank, 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
13
<PAGE>
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 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 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 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
14
<PAGE>
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 Fund's portfolio
holdings by the Board of Directors, at such intervals as it may deem
appropriate, to determine whether the 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 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.
PURCHASE AND REDEMPTION OF SHARES
Terms of Purchase. The Money Market Fund is generally open Monday through
-----------------
Friday and closed on weekends, NYSE holidays and federal bank holidays. The
holidays on which the Fund is closed currently are: New Year's Day, Martin
Luther King, Jr.'s, Birthday, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Veterans Day, Columbus Day, Labor Day, Thanksgiving Day and
Christmas Day. 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.
Payment for shares of the Money Market Fund may, at the discretion of the
adviser, be made in the form of securities that are permissible investments for
the Fund and must meet the investment objective, policies and limitations of the
Fund as described in the Prospectus. In connection with an in-kind securities
payment, a Fund may require, among other things, that the securities (i) be
valued on the day of purchase in accordance with the pricing methods used by the
Fund; (ii) are accompanied by satisfactory assurance that the Fund will have
good and marketable title to such securities received by it; (iii) are not
subject to any restrictions upon resale by the Fund; (iv) be in proper form for
transfer to the Fund; (v) are accompanied by adequate information concerning the
basis and other tax matters relating to the securities. All dividends,
interest, subscription or other rights pertaining to such securities shall
become the property of the Fund engaged in the in-kind purchase transaction and
must be delivered to the Fund by the investor upon receipt from the issuer.
Securities acquired through an in-kind purchase will be acquired for investment
and not for immediate resale. Shares purchased in exchange for securities
generally cannot be redeemed until the transfer has settled.
Suspension of Redemptions. Under the 1940 Act, a Fund may suspend the right
-------------------------
of redemption or postpone the date of payment upon redemption for any period
during which the NYSE is closed (other than customary weekend and holiday
closings, or during which trading is restricted, or during which as determined
by the SEC by rule or regulation) an emergency exists as a result of which
disposal or valuation of portfolio securities is not reasonably practicable, or
for such periods as the SEC may permit.
15
<PAGE>
The Company may suspend redemption rights or postpone redemption payments for
such periods as are permitted under the 1940 Act. The Company also may redeem
shares involuntarily or make payment for redemption in securities or other
property if it appears appropriate to do so in light of the Company's
responsibilities under the 1940 Act.
In addition, the Company may redeem shares involuntarily to reimburse the Fund
for any losses sustained by reason of the failure of a shareholder to make full
payment for shares purchased or to collect any charge relating to a transaction
effected for the benefit of a shareholder which is applicable to shares of the
Fund as provided from time to time in the Prospectus.
PORTFOLIO TRANSACTIONS
Purchases and sales of debt securities generally are principal transactions.
Debt securities normally are purchased or sold from or to dealers serving as
market makers for the securities at a net price. Debt securities also may be
purchased in underwritten offerings and may be purchased directly from the
issuer. Generally, U.S. Government Obligations, municipal obligations and
taxable money market securities are traded on a net basis and do not involve
brokerage commissions. The cost of executing transactions in debt securities
consists primarily of dealer spreads and underwriting commissions. Under the
1940 Act, persons affiliated with the Company 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 Fund may purchase municipal or other
obligations from underwriting syndicates of which Stephens, BGFA or Wells Fargo
Bank is a member under certain conditions in accordance with the provisions of a
rule adopted under the 1940 Act and in compliance with procedures adopted by the
Board of Directors.
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 and BGFA, Wells Fargo Bank is
responsible for the Fund's investment decisions and the placing of portfolio
transactions. In placing orders, it is the policy of the Company to obtain the
best overall terms taking into account the dealer's general execution and
operational facilities, the type of transaction involved and other factors such
as the dealer's risk in positioning the securities involved. While Wells Fargo
Bank 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
Bank 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
Bank 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 broker/dealer for effecting the same transaction, provided that Wells
Fargo Bank determines in good faith that such commission is reasonable in
relation to the value of the brokerage and research services
16
<PAGE>
provided by such broker/dealer, viewed in terms of either the particular
transaction or the overall responsibilities of Wells Fargo Bank. 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 BGFA and Wells Fargo Bank and does
not reduce the advisory fees payable by the Fund. The Board of Directors will
periodically review the commissions 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 Wells Fargo Bank
exercises investment discretion. 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 Section 28(e) of the Securities Exchange Act of 1934, an adviser shall
not be "deemed to have acted unlawfully or to have breached its fiduciary duty"
solely because under certain circumstances it has caused the account to pay a
higher commission than the lowest available. To obtain the benefit of Section
28(e), an adviser must make a good faith determination that the commissions paid
are "reasonable in relation to the value of the brokerage and research services
provided . . . viewed in terms of either that particular transaction or its
overall responsibilities with respect to the accounts as to which it exercises
investment discretion and that the services provided by a broker provide an
adviser with lawful and appropriate assistance in the performance of its
investment decision-making responsibilities." Accordingly, the price to the Fund
in any transaction may be less favorable than that available from another
broker/dealer if the difference is reasonably justified by other aspects of the
portfolio execution services offered.
Broker/dealers utilized by Wells Fargo Bank may furnish statistical, research
and other information or services which are deemed by Wells Fargo Bank to be
beneficial to the Fund's investment programs. Research services received from
brokers supplement Wells Fargo Bank's own research and may include the following
types of information: statistical and background information on industry groups
and individual companies; forecasts and interpretations with respect to U.S. and
foreign economies, securities, markets, specific industry groups and individual
companies; information on political developments; portfolio management
strategies; performance information on securities and information concerning
prices of securities; and information supplied by specialized services to Wells
Fargo Bank and to the Company's Directors with respect to the performance,
investment activities and fees and expenses of other mutual funds. Such
information may be communicated electronically, orally or in written form.
Research services may also include the providing of equipment used to
communicate research information, the arranging of meetings with management of
companies and the providing of access to consultants who supply research
information.
The outside research assistance is useful to Wells Fargo Bank since the
brokers utilized by Wells Fargo Bank as a group tend to follow a broader
universe of securities and other matters than the
17
<PAGE>
staff of Wells Fargo Bank can follow. In addition, this research provides Wells
Fargo Bank with a diverse perspective on financial markets. Research services
which are provided to Wells Fargo Bank by brokers are available for the benefit
of all accounts managed or advised by Wells Fargo Bank. It is the opinion of
Wells Fargo Bank that this material is beneficial in supplementing their
research and analysis; and, therefore, it may benefit the Fund by improving the
quality of Wells Fargo's investment advice.
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 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.
Securities of Regular Broker/Dealers. As of February 28, 1998 the Fund owned
------------------------------------
no securities of its "regular brokers or dealers" or their parents, as defined
in the 1940 Act.
TAXES
The following information supplements and should be read in conjunction with
the Prospectus section entitled "Taxes." The Prospectus describes generally the
tax treatment of distributions by the Fund. This section of the SAI includes
additional information concerning income taxes.
General. The Company intends to qualify the Fund as a regulated investment
-------
company under Subchapter M of the Internal Revenue Code of 1986, as amended (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 tax purposes
and thus the provisions of the Code applicable to regulated investment companies
will generally be applied individually to the Fund, rather than to the Company
as a whole. Accordingly, net capital gain, net investment income, and operating
expenses will be determined separately for the Fund. As a regulated investment
company, the Fund will not be taxed on its net investment income and net
realized capital gains distributed to its shareholders.
Qualification as a regulated investment company under the Code requires, among
other things, that (a) the Fund derive at least 90% of its annual gross income
from dividends, interest, certain payments with respect to securities loans,
gains from the sale or other disposition of stock or securities or foreign
currencies (to the extent such currency gains are directly related to the
regulated investment company's principal business of investing in stock or
securities) and other income (including but not limited to gains from options,
futures or forward contracts) derived with respect to its business of investing
in such stock, securities or currencies; and (b) the Fund diversify 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
obligations and the securities of other regulated investment companies), or in
two or more issuers
18
<PAGE>
which the Fund controls and which are determined to be engaged in the same or
similar trades or businesses.
The Fund must also distribute or be deemed to distribute to its shareholders
at least 90% of its net investment income(which, for this purpose includes net
short-term capital gains) earned in each taxable year. In general, these
distributions must actually or be deemed to be made in the taxable year.
However, in certain circumstances, such distributions may be made in the 12
months following the taxable year. The Fund intends to pay out substantially
all of its net investment income for each year.
In addition, a regulated investment company must, in general, derive less than
30% of its gross income for a taxable year from the sale or other disposition of
securities or options thereon held for less than three months. However, this
restriction has been repealed with respect to a regulated investment company's
taxable years beginning after August 5, 1997.
Excise Tax. A 4% nondeductible excise tax will be imposed on the Fund (other
----------
than to the extent of its tax-exempt interest income) to the extent it does not
meet certain minimum distribution requirements by the end of each calendar year.
The Fund intends to actually or be deemed to distribute substantially all of its
net investment income and net realized capital gains by the end of each calendar
year and, thus, expects not to be subject to the excise tax.
Taxation of Fund Investments. Except as otherwise provided herein, gains and
----------------------------
losses realized by the Fund on the sale of portfolio securities generally will
be capital gains and losses. Such gains and losses ordinarily will be long-term
capital gains and losses if the securities have been held by the Fund for more
than one year at the time of disposition of the securities.
Gains 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 be treated
as ordinary income to the extent of the portion of market discount which
accrued, but was not previously recognized pursuant to an available election,
during the term the Fund held the debt obligation.
If the Fund enters into a "constructive sale" of any appreciated position in
stock, a partnership interest, or certain debt instruments, the Fund must
recognize gain (but not loss) with respect to that position. For this purpose,
a constructive sale occurs when the Fund enters into one of the following
transactions with respect to the same or substantially identical property: (i) a
short sale; (ii) an offsetting notional principal contract; (iii) a futures or
forward contract, or (iv) other transactions identified in future Treasury
Regulations.
Capital Gain Distributions. Distributions which are designated by the Fund as
--------------------------
capital gain distributions will be taxed to shareholders as long-term capital
gain (to the extent such dividends do not exceed the Fund's actual net capital
gain for the taxable year), regardless of how long a shareholder has held Fund
shares. Such distributions will be designated as capital gain distributions in
a written notice mailed by the Fund to its shareholders not later than 60 days
after the close of the Fund's taxable year.
19
<PAGE>
The Taxpayer Relief Act of 1997 (the "1997 Act") created several new
categories of capital gains applicable to noncorporate taxpayers. Under prior
law, noncorporate taxpayers generally were taxed at a maximum rate of 28% on
net capital gain (generally, the excess of net long-term capital gain over net
short-term capital loss). Noncorporate taxpayers generally are now taxed at a
maximum rate of 20% on net capital gain attributable to gains realized on the
sale of property held for greater than 18 months, and a maximum rate of 28% on
net capital gain attributable to gain realized on the sale of property held for
greater than one year and not more than 18 months, and a maximum rate of 25% for
certain gains attributable to the sale of real property. The 1997 Act retains
the treatment of short term capital gain or loss (generally, gain or loss
attributable to capital assets held for 1 year or less) and did not affect the
taxation of capital gains in the hands of corporate taxpayers.
Under the 1997 Act, the Treasury is authorized to issue regulations for
application of the reduced capital gains tax rates to pass-through entities,
including regulated investment companies, such as the Fund. The IRS has
published a notice applicable to pass-through entities until regulations are
promulgated. Pursuant to the notice, the Fund is permitted (but not required)
to designate the portion of its capital gain distributions, if any, to which the
28%, 25% and 20% rates described in the preceding paragraph apply, based on the
net amount of each class of capital gain realized by the Fund determined as if
the Fund is a noncorporate taxpayer. Noncorporate shareholders of the Fund may
therefore qualify for the reduced rate of tax on any capital gain distributions
paid by the Fund.
Disposition of Fund Shares. A disposition of Fund shares pursuant to
--------------------------
redemption (including a redemption in-kind) or exchanges ordinarily will result
in a taxable capital gain or loss, depending on the amount received for the
shares (or are deemed to receive in the case of an exchange) and the cost of the
shares.
If a shareholder exchanges or otherwise disposes of Fund shares within 90 days
of having acquired such shares and if, as a result of having acquired those
shares, the shareholder subsequently pays a reduced sales charge on a new
purchase of shares of the Fund or a different regulated investment company, the
sales charge previously incurred acquiring the Fund's shares shall not be taken
into account (to the extent such previous sales charges do not exceed the
reduction in sales charges on the new purchase) for the purpose of determining
the amount of gain or loss on the disposition, but will be treated as having
been incurred in the acquisition of such other shares. Also, any loss realized
on a redemption or exchange of shares of the Fund will be disallowed to the
extent that substantially identical shares are acquired within the 61-day period
beginning 30 days before and ending 30 days after the shares are disposed
of.
If a shareholder receives a designated capital gain distribution (to be
treated by the shareholder as long-term capital gain) with respect to any 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 long-term capital loss to the extent of the designated capital gain
distribution. This loss disallowance rule does not apply to losses realized
under a periodic redemption plan.
20
<PAGE>
Federal Income Tax Rates. As of the printing of this SAI, the maximum
------------------------
individual tax rate applicable to ordinary income is 39.6% (marginal tax rates
may be higher for some individuals to reduce or eliminate the benefit of
exemptions and deductions); the maximum individual marginal tax rate applicable
to net capital gain is 28% (however, see "Capital Gain Distributions" above);
and the maximum corporate tax rate applicable to ordinary income and net capital
gain is 35% (marginal tax rates may be higher for some corporations to reduce or
eliminate the benefit of lower marginal income tax rates). Obviously, the
amount of tax payable by any taxpayer will be affected by a combination of tax
laws covering, for example, deductions, credits, deferrals, exemptions, sources
of income and other matters.
Backup Withholding. 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 and redemptions in-kind) paid or credited to an individual Fund
shareholder, unless the shareholder certifies that his or her taxpayer
identification number ("TIN"), which usually is his or her social security
number, provided to the Company 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 that the shareholder is subject to backup
withholding. Such tax withheld does not constitute any additional tax imposed
on the shareholder, and may be claimed as a credit against the shareholder's
federal income tax liability, if any, or otherwise will be refundable. An
investor must provide a valid TIN to the Company upon opening or reopening an
account. Failure to furnish a valid TIN to the Company could also subject the
investor to penalties imposed by the IRS. Foreign shareholders of the Fund
(described below) generally are not subject to backup withholding.
Foreign Shareholders. Under the Code, distributions of net investment income
--------------------
by the Fund to a nonresident alien individual, foreign trust (i.e., trust which
a U.S. court is able to exercise primary supervision over administration of that
trust and one or more U.S. persons have authority to control substantial
decisions of that trust), foreign estate (i.e., the income of which is not
subject to U.S. tax regardless of source), foreign corporation, or foreign
partnership (a "foreign shareholder") will be subject to federal income tax
withholding (at a rate of 30% or a lower treaty rate, if applicable).
Withholding will not apply if a dividend distribution paid by the Fund to a
foreign shareholder is "effectively connected" with a U.S. trade or business
(or, if an income tax treaty applies, is attributable to a U.S. permanent
establishment of the foreign shareholder), in which case the reporting and
withholding requirements applicable to U.S. residents will apply. Distributions
of net capital gain generally are not subject to federal income tax
withholding.
New Regulations. On October 6, 1997, the Treasury Department issued new
---------------
regulations (the "New Regulations") which make certain modifications to the
backup withholding, U.S. income tax withholding and information reporting rules
applicable to foreign shareholders. The New Regulations generally will be
effective for payments made after December 31, 1999, subject to certain
transition rules. Among other things, the New Regulations will permit the Fund
to estimate the portion of its distributions paid to foreign shareholders which
is subject to federal
21
<PAGE>
income tax withholding. Prospective investors are urged to consult their own tax
advisors regarding the application to them of the New Regulations.
Other Matters. Investors should be aware that the investments to be made by
-------------
the Fund may involve sophisticated tax rules that may 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.
The foregoing discussion and the discussions in the Prospectus applicable to
each shareholder address only some of the federal income tax considerations
generally affecting investments in a Fund. Each investor is urged to consult
his or her tax advisor regarding specific questions as to federal, state, local
and foreign taxes.
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 12,100,000,000 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. The Board of Directors may, in the future,
authorize the issuance of other series of capital stock representing shares of
additional investment portfolios.
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
22
<PAGE>
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 May 30, 1998, Merrill Lynch Trust Co. FSB, FBO Various 401(K) Plans,
P.O. Box 62000, San Francisco, CA 94162, was the record owner of approximately
97.09% of the outstanding voting securities of the Money Market Fund, and may be
presumed to "control" the Fund as that term is defined in the 1940 Act.
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.
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.
23
<PAGE>
FINANCIAL INFORMATION
The audited financial statements, including the portfolio of investments and
independent auditors' report for the fiscal year ended February 28, 1998 for the
Fund are hereby incorporated by reference to the MasterWorks Funds Inc. Annual
Report, as filed with the SEC on May 1, 1998. The audited financial statements
are attached to all SAIs delivered to shareholders or prospective
shareholders.
24
<PAGE>
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."
<PAGE>
MASTERWORKS FUNDS INC.
STATEMENT OF ADDITIONAL INFORMATION
ASSET ALLOCATION FUND
BOND INDEX FUND
S&P 500 STOCK FUND
U.S. TREASURY ALLOCATION FUND
JUNE 30, 1998
MasterWorks Funds Inc. ("Company") is an open-end, management investment
company. This Statement of Additional Information ("SAI") contains information
about four funds of the Company -- ASSET ALLOCATION FUND, BOND INDEX FUND, S&P
500 STOCK FUND AND U.S. TREASURY ALLOCATION FUND (each, a "Fund" and
collectively, the "Funds").
Each of the Asset Allocation, Bond Index, S&P 500 Stock and U.S. Treasury
Allocation Funds seeks to achieve its investment objective by investing
substantially all of its assets in the Asset Allocation, Bond Index, S&P 500
Index and U.S. Treasury Allocation Master Portfolios (collectively, the "Master
Portfolios"), respectively, of Master Investment Portfolio ("MIP," at times the
"Trust"). Barclays Global Fund Advisors ("BGFA") serves as investment advisor to
the corresponding Master Portfolios. References to the investments, investment
policies and risks of the Funds unless otherwise indicated, should be understood
as references to the investments, investment policies and risks of the
corresponding Master Portfolios.
This SAI is not a prospectus and should be read in conjunction with the Funds'
current Prospectus, also dated June 30, 1998. 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 may be obtained without charge by writing MasterWorks
Funds Inc., c/o Investors Bank & Trust Co., -- Transfer Agent, P.O. Box 9130,
Mail Code MFD23, Boston, MA 02117-9130, or by calling 1-888-204-3956.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
General Information.................................................. 1
Investment Restrictions.............................................. 1
Additional Permitted Investment Activities........................... 6
Management........................................................... 11
Purchase and Redemption of Shares.................................... 18
Determination of Net Asset Value..................................... 19
Taxes................................................................ 20
Performance Information.............................................. 26
Portfolio Transactions............................................... 29
Capital Stock........................................................ 32
Other................................................................ 34
Counsel.............................................................. 35
Independent Auditors................................................. 35
Financial Information................................................ 35
SAI Appendix......................................................... A-1
Financial Statements................................................. F-1
</TABLE>
<PAGE>
GENERAL INFORMATION
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 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 MASTER PORTFOLIO
------------------------------------- ----------------------------------------------------
<S> <C>
Asset Allocation Fund Asset Allocation Master Portfolio
Bond Index Fund Bond Index Master Portfolio
S&P 500 Stock Fund S&P 500 Index Master Portfolio
U.S. Treasury Allocation Fund U.S. Treasury Allocation 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."
INVESTMENT RESTRICTIONS
Each Fund and Master Portfolio has adopted investment policies which may be
fundamental or non-fundamental. Fundamental policies cannot be changed without
approval by the holders of a majority (as defined in the Investment Company Act
of 1940, as amended (the "1940 Act")) of the outstanding voting securities of
such Fund or Master Portfolio, as the case may be. Non-fundamental policies may
be changed without shareholder approval by vote of a majority of the Directors
of the Company or the Trustees of the Trusts, as the case may be, at any time.
FUNDAMENTAL 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 provided further, that a Fund may invest all its assets in a diversified
open-end management investment company, or series thereof, with substantially
1
<PAGE>
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 Funds 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 the 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, U.S. Treasury Allocation and S&P 500 Stock Funds
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);
(9) write, purchase or sell puts, calls, straddles, spreads, warrants, options
or any combination thereof, except that each Fund may enter into futures and
options contracts in accordance with their respective investment policies, and
except that the Asset Allocation Fund may purchase securities with put rights in
order to maintain liquidity, and except that the S&P 500 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
2
<PAGE>
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.
NON-FUNDAMENTAL INVESTMENT RESTRICTIONS. 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 its assets in the
corresponding Master Portfolio of MIP.
(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.
(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. However, these limits should not prevent a Fund
from investing all of its assets in the corresponding Master Portfolios of the
Trust.
The Master Portfolios to the Funds are subject to the following investment
restrictions.
FUNDAMENTAL INVESTMENT RESTRICTIONS. The Master Portfolios are subject to the
following investment restrictions, all of which are fundamental policies.
The Master Portfolios may not:
(1) invest more than 5% of its assets in the obligations of any single issuer,
except that up to 25% of the value of its total assets may be invested, and
securities issued or guaranteed by the U.S. Government, or its agencies or
instrumentalities may be purchased, without regard to any such limitation.
3
<PAGE>
(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 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 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, U.S. Treasury
Allocation and S&P 500 Index Master Portfolios 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 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 Master Portfolio.
(6) make loans to others, except through the purchase of debt obligations and
the entry into repurchase agreements. However, each 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 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 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).
4
<PAGE>
(9) issue any senior security (as such term is defined in Section 18(f) of the
1940 Act), except to the extent the activities permitted in the Master
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 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.
NON-FUNDAMENTAL INVESTMENT RESTRICTIONS. The Master Portfolios are subject to
the following non-fundamental policies.
The Master Portfolios may not:
(1) invest in the securities of a company for the purpose of exercising
management or control, but each Master Portfolio will vote the securities it
owns in its portfolio as a shareholder in accordance with its views.
(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 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 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.
5
<PAGE>
ADDITIONAL PERMITTED INVESTMENT ACTIVITIES
THE ASSET ALLOCATION AND THE U.S. TREASURY ALLOCATION MASTER PORTFOLIOS 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 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 U.S.
Treasury 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:
Repurchase Agreements. Each Master Portfolio may engage in a repurchase
---------------------
agreement with respect to any security in which it is authorized to invest,
although the underlying security may mature in more than thirteen months. The
Master Portfolio may enter into repurchase agreements wherein the seller of a
security to the Master Portfolio agrees to repurchase that security from the
Master Portfolio Fund at a mutually agreed-upon time and price that involves the
acquisition by the Master Portfolio of an underlying debt instrument, subject to
the seller's obligation to repurchase, and the Master Portfolio's obligation to
resell, the instrument at a fixed price usually not more than one week after its
purchase. The Master Portfolio's custodian has custody of, and holds in a
segregated account, securities acquired as collateral by the Master Portfolio
under a repurchase agreement. Repurchase agreements are considered by the staff
of the SEC to be loans by the Master Portfolio. The Master Portfolio may enter
into repurchase agreements only with respect to securities of the type in which
it may invest, including government securities and mortgage-related securities,
regardless of their remaining maturities, and requires that additional
securities be deposited with the custodian if the value of the securities
purchased should decrease below resale price. BGFA 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 the 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 the Master Portfolio may be delayed
or limited. While it does not presently appear possible to eliminate all risks
from these transactions (particularly the possibility of a decline in the market
value of the underlying securities, as well as delay and costs to the Master
Portfolio in connection with insolvency proceedings), it is the policy of the
Master Portfolio to limit repurchase agreements to selected creditworthy
securities dealers or domestic banks or other recognized financial institutions.
The Master Portfolio considers on an ongoing basis the
6
<PAGE>
creditworthiness of the institutions with which it enters into repurchase
agreements. Repurchase agreements are considered to be loans by a Master
Portfolio under the 1940 Act.
Floating- and Variable-Rate Obligations. Each Master Portfolio may purchase
---------------------------------------
floating- and variable-rate obligations as described in the Prospectus. The
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 that are obligations that permit
the Master Portfolio to invest fluctuating amounts, which may change daily
without penalty, pursuant to direct arrangements between the Master Portfolio,
as lender, and the borrower. 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,
and there generally is no established secondary market for these obligations,
although they are redeemable at face value. Accordingly, where these
obligations are not secured by letters of credit or other credit support
arrangements, the Master Portfolio's right to redeem is dependent on the ability
of the borrower to pay principal and interest on demand. Such obligations
frequently are not rated by credit rating agencies and the Master Portfolio Fund
may invest in obligations which are not so rated only if BGFA determines that at
the time of investment the obligations are of comparable quality to the other
obligations in which the Master Portfolio may invest. BGFA, on behalf of the
Master Portfolio , considers on an ongoing basis the creditworthiness of the
issuers of the floating- and variable-rate demand obligations in the Master
Portfolio 's portfolio. The Master Portfolio will not invest more than 10% of
the value of its total net assets in floating- or variable-rate demand
obligations whose demand feature is not exercisable within seven days. Such
obligations may be treated as liquid, provided that an active secondary market
exists.
Unrated, Downgraded and Below Investment Grade Investments. The Master
----------------------------------------------------------
Portfolios may purchase instruments that are not rated if, in the opinion of the
adviser, BGFA, such obligation is 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.
The Master Portfolios are not required to sell downgraded securities, and 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,
7
<PAGE>
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.
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.
When-Issued Securities. Certain of the securities in which the U.S. Treasury
----------------------
Allocation, Bond Index, 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.
8
<PAGE>
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 Portfolios 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, or the Distributor.
Futures Contracts. The Funds' 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 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 permits a Master Portfolio to experience
the results of being
9
<PAGE>
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 Portfolios 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 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's 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 S&P 500 Index Master Portfolio may invest up to 5%
----------------------
of 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. 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. The S&P 500 Index Master Portfolio may only purchase
warrants on securities in which the Master Portfolio 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
10
<PAGE>
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 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". Directors and officers of the Company, together with information as to
their principal business occupations during the last five years, are shown
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 who are deemed to be an "interested person" of the Company, as defined
in 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, 75 Director Private Investor.
415 Walsh Road
Atherton, CA 94027
*R. Greg Feltus, 46 Director, Executive Vice President of Stephens Inc.;
Chairman and President of Stephens Insurance Services
President Inc.; Senior Vice President of Stephens
Sports Management Inc.; and President of
Investors Brokerage Insurance Inc.
Thomas S. Goho, 55 Director Associate Professor of Finance, Calloway
P.O. Box 7285 School of Business and Accounting
Reynolda Station Wake Forest University, since 1982.
Winston-Salem, NC 27109
*W. Rodney Hughes, 71 Director Private Investor.
31 Dellwood Court
San Rafael, CA 94901
*J. Tucker Morse, 53 Director Chairman of Home Account Network, Inc.;
4 Beaufain Street Real Estate Developer; Chairman
Charleston, SC 29401 of Renaissance Properties Ltd.;
President of Morse Investment
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS
NAME, ADDRESS AND AGE POSITION DURING PAST 5 YEARS
- ----------------------------------- ----------------------- ---------------------------------------------
<S> <C> <C>
Corporation; and Co-Managing Partner
of Main Street Ventures.
Richard H. Blank, Jr., 41 Chief Vice President of Stephens Inc.;
Operating Director of Stephens Sports
Officer, Management Inc.; and Director of
Secretary and Capo Inc.
Treasurer
</TABLE>
COMPENSATION TABLE
For the Fiscal Year Ended February 28, 1998
<TABLE>
<CAPTION>
TOTAL COMPENSATION
AGGREGATE COMPENSATION FROM REGISTRANT
NAME AND POSITION FROM REGISTRANT AND FUND COMPLEX
- ----------------------------------- ------------------------------ ------------------------------
<S> <C> <C>
Jack S. Euphrat
Director $11,250 $11,250
*R. Greg Feltus
Director 0 0
Thomas S. Goho
Director $11,250 $11,250
*Zoe Ann Hines/1/
Director 0 0
*W. Rodney Hughes
Director $11,000 $11,000
Robert M. Joses/2/
Director $ 1,000 $ 1,000
*J. Tucker Morse
Director $11,000 $11,000
</TABLE>
________________
/1/ Zoe Ann Hines retired as of January 28, 1998.
/2/ Robert M. Joses retired as of December 31, 1997.
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. The Company, MIP and MSIT are considered to be members of the
same fund complex, as such term is defined in Form N-1A under the 1940 Act (the
"BGFA Fund Complex"). Stagecoach Funds, Inc., Stagecoach Trust and Life &
Annuity Trust together form a separate fund complex (the "Wells Fargo Fund
Complex"). Prior to December 15, 1997, the Wells Fargo Fund Complex also
included Overland Express Funds, Inc. and Master Investment Trust. On that
date, Overland Express Funds, Inc. was consolidated with and into Stagecoach
Funds, Inc. and Master Investment Trust was dissolved. Each of the Directors
and the Officers of the Company serves in the identical capacity as
Directors/Trustees and Officers of each registered open-end management
investment
12
<PAGE>
company in both the BGFA and Wells Fargo Fund Complexes. 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 each 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.
Master/Feeder Structure. Each Fund seeks to achieve its investment objective
-----------------------
by investing all of its assets into the corresponding Master Portfolio of MIP.
The Funds and other entities investing in a Master Portfolio are each liable for
all obligations of such 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 existed and the Trust itself is unable to meet its
obligations. Accordingly, the Company's Board of Directors believes that neither
a Fund nor its shareholders will be adversely affected by investing Fund assets
in a Master Portfolio. However, if a mutual fund or other investor withdraws its
investment from such Master Portfolio, the economic efficiencies (e.g.,
spreading fixed expenses among a larger asset base) that the Company's Board
believes may be available through investment in the Master Portfolio may not be
fully achieved. In addition, given the relative novelty of the master/feeder
structure, accounting or operational difficulties, although unlikely, could
arise. See "Management of the Funds" in the Prospectus for additional
description of the Funds' and Master Portfolios' expenses and management.
A Fund may withdraw its investment in a Master Portfolio only if the Company's
Board of Directors determines that such action is in the best interests of such
Fund and its shareholders. Upon any such withdrawal, the Company's Board would
consider alternative investments, including investing all of the Fund's assets
in another investment company with the same investment objective as the Fund or
hiring an investment adviser to manage the Fund's assets in accordance with the
investment policies described below with respect to its corresponding Master
Portfolio.
The investment objective and other fundamental policies of a Master Portfolio
cannot be changed without approval by the holders of a majority (as defined in
the 1940 Act) of the Master Portfolio's outstanding interests. See "Investment
Objectives and Policies" in the Prospectus. Whenever a Fund, as an
interestholder of the corresponding Master Portfolio, is requested to vote on
any matter submitted to interestholders of such Master Portfolio, the Fund will
hold a meeting of its shareholders to consider such matters. The Fund will cast
its votes in proportion to the votes received from its shareholders. Shares for
which a Fund receives no voting instructions will be voted in the same
proportion as the votes received from the other Fund shareholders.
Certain policies of a Master Portfolio which are non-fundamental may be
changed by vote of a majority of the MIP's Trustees without interestholder
approval. If a Master Portfolio's investment objective or fundamental or non-
fundamental policies are changed, the Fund may elect to change its objective or
policies to correspond to those of the Master Portfolio. A Fund also may elect
to redeem its interests in the corresponding Master Portfolio and either seek a
new investment company with a matching objective in which to invest or retain
its own investment adviser to manage the Fund's portfolio in accordance with its
objective. In the latter case, 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. A Fund will provide
shareholders with 30 days' written notice prior to the implementation of any
change in the investment objective of such Fund or the corresponding Master
Portfolio, to the extent possible. See "Investment Objectives and Policies" in
the Prospectus for additional information regarding the Funds' and the Master
Portfolios' investment objectives and policies.
13
<PAGE>
Investment Adviser. 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 Portfolios' assets. Pursuant to
the Advisory Contracts, BGFA furnishes to the Trust's Board of Trustees periodic
reports on the investment strategy and performance of each Master Portfolio.
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.
BGFA is entitled to receive monthly fees at the annual rate of 0.35%, 0.08%,
0.05% and 0.30% of the average daily net assets of the Asset Allocation, Bond
Index, S&P 500 Index, and U.S. Treasury Allocation Portfolios, respectively, as
compensation for its advisory services to such Master 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
Trust's Board of Trustees and (ii) by a majority of the Trustees of the Trust
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.
The Advisory Contracts provide that the advisory fee is accrued daily and paid
monthly. 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 March 1, 1995 and ended December 31, 1995, the
corresponding Master Portfolio of each Fund paid to Wells Fargo Bank the
advisory fees indicated below, without waivers:
<TABLE>
<CAPTION>
3/1/95 - 12/31/95
MASTER PORTFOLIO FEES PAID
------------------------------- -----------------
<S> <C>
Asset Allocation Master Portfolio $ 997,003
Bond Index Master Portfolio $ 91,365
S&P 500 Index Master Portfolio $ 47,460
U.S. Treasury Allocation Master Portfolio $ 152,657
</TABLE>
For the period beginning January 1, 1996 and ended February 29, 1996 and for
the fiscal years ended February 28, 1997 and February 28, 1998, the
corresponding Master Portfolio of each Fund paid to BGFA the advisory fees
indicated below, without waivers:
<TABLE>
<CAPTION>
1/1/96 - 2/29/96 FYE 2/28/97 FYE 2/28/98
MASTER PORTFOLIO FEES PAID FEES PAID FEES PAID
- -------------------------------------------------------------------- ----------------- ----------- -----------
<S> <C> <C> <C>
Asset Allocation Master Portfolio $ 225,669 $1,153,951 $1,616,380
Bond Index Master Portfolio $ 20,123 $ 147,204 $ 147,755
S&P 500 Index Master Portfolio $ 9,923 $ 577,637 $ 939,051
U.S. Treasury Allocation Master Portfolio $ 25,863 $ 148,606 $ 136,672
</TABLE>
Investment Sub-Adviser. Effective January 1, 1996, the Master Portfolios no
----------------------
longer retained Wells Fargo Nikko Investment Adviser ("WFNIA") as investment
sub-adviser.
14
<PAGE>
For the period March 1, 1995 and ended December 31, 1995, Wells Fargo Bank
paid to WFNIA the following sub-advisory fees for services provided to the
corresponding Master Portfolio of each Fund, without waivers:
<TABLE>
<CAPTION>
3/1/95 - 12/31/95
MASTER PORTFOLIO FEES PAID
- ----------------------------------------------------- ------------------------
<S> <C>
Asset Allocation Master Portfolio $ 567,009
Bond Index Master Portfolio $ 72,919
S&P 500 Index Master Portfolio $ 224,069
U.S. Treasury Allocation Master Portfolio $ 75,895
</TABLE>
Co-Administrators. The Company has engaged Stephens Inc. ("Stephens") and
-----------------
Barclays Global Investors, N.A. ("BGI") to provide certain administration
services to the Funds. Pursuant to a Co-Administration Agreement with the
Company, Stephens and BGI provide as administration 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, custodian, shareholder servicing agent, independent
auditors and legal counsel; (ii) general supervision of regulatory compliance
matters, including the compilation of information for documents such as
reports to, and filings with, the SEC and state securities commissions, and
preparation of proxy statements and shareholder reports for the Funds; 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 Company together with
those ordinary clerical and bookkeeping services that are not being furnished
by the Fund's investment adviser. Stephens also pays the compensation of the
Company's Directors, officers and employees who are affiliated with
Stephens.
In addition, except for advisory fees, extraordinary expenses, brokerage and
other expenses connected to the execution of portfolio transactions and certain
expenses which are borne by the Funds, Stephens and BGI have agreed to bear all
costs of the Funds' and the Company's operations including, but not limited to,
transfer and dividend disbursing agency fees, shareholder servicing fees and
expenses of preparing and printing prospectuses, SAIs and other Fund materials.
For providing such services, Stephens and BGI are entitled to 0.15% of the
average daily net assets of each of the Bond Index and S&P 500 Index Funds; and
0.40% of the average daily net assets of each of the Asset Allocation and U.S.
Treasury Allocation Funds. Effective October 21, 1996, BGI contracted with
Investors Bank & Trust Company ("IBT") to provide certain sub-administration
services. Prior to October 21, 1996, Stephens served as sole administrator to
the Funds.
15
<PAGE>
For the fiscal years ended February 29, 1996 and February 28, 1997, the Funds
paid administration and co-administration fees to Stephens as follows:
<TABLE>
<CAPTION>
FUND FYE 2/29/96 FYE 2/28/97
- ---------------------------------------- ------------------------ --------------------
<S> <C> <C>
Asset Allocation Fund $349,680 $572,552
Bond Index Fund $ 18,131 $ 60,713
S&P 500 Stock Fund $331,823 $713,041
U.S. Treasury Allocation Fund $ 59,609 $ 73,610
</TABLE>
For the period beginning October 21, 1996 and ended February 28, 1997, the
Funds paid co-administration fees to BGI as follows:
<TABLE>
<CAPTION>
FUND 10/21/96 - 2/28/97
- ------------------------------------ -------------------
<S> <C>
Asset Allocation Fund $ 337,801
Bond Index Fund $ 32,155
S&P 500 Stock Fund $ 289,821
U.S. Treasury Allocation Fund $ 35,547
</TABLE>
For the fiscal year ended February 28, 1998, the Funds paid co-administration
fees jointly to Stephens and BGI as follows:
<TABLE>
<CAPTION>
FUND FYE 2/28/98
- --------------------------------------- -------------------
<S> <C>
Asset Allocation Fund $ 1,844,243
Bond Index Fund $ 158,187
S&P 500 Stock Fund $ 2,698,151
U.S. Treasury Allocation Fund $ 182,037
</TABLE>
Distributor. 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 on behalf of 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.
Shareholder Servicing Plan. Each of the Funds has adopted a Shareholder
--------------------------
Servicing Plan (each a "Servicing Plan" and collectively the "Servicing Plans").
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 0.07% of the average daily
net assets of the S&P 500 Stock and Bond Index Funds, and 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.
16
<PAGE>
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 28, 1997/1/ the Funds paid shareholder
servicing fees as follows and the indicated amounts were waived:
<TABLE>
<CAPTION>
FEES FEES
FUND PAID WAIVED
- --------------------------------------------- ---------------------- ------------------
<S> <C> <C>
Asset Allocation Fund $555,606 $ 0
Bond Index Fund $ 31,663 $ 31,663
S&P 500 Stock Fund $454,547 $287,325
U.S. Treasury Allocation Fund $ 48,458 $ 0
</TABLE>
________________
/1/ Beginning October 21, 1996, shareholder servicing fees were paid out of co-
administration fees.
Custodian. IBT, concurrent with its appointment as sub-administrator for the
---------
Funds on October 21, 1996, also has been retained as custodian to each Fund and
Master Portfolio and performs such services at 200 Clarendon Street, Boston,
Massachusetts 02116. 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. IBT is not entitled to receive
compensation for its services as custodian so long as it is entitled to receive
fees from BGI for providing sub-administration services to the Funds. Prior to
October 21, 1996, BGI served as custodian to the Funds and was not entitled to
receive a fee. For the fiscal year ended February 28, 1998, the Funds did not
pay any custody fees.
Transfer and Dividend Disbursing Agent. IBT has been retained to act as the
--------------------------------------
transfer and dividend disbursing agent for the Funds. For its services as
transfer and dividend disbursing agent to the Fund, IBT is entitled to receive
an annual maintenance fee computed on the basis of the number of shareholder
accounts that it maintains for the Funds and to be reimbursed for out-of-pocket
expenses or advances incurred by it in performing its obligations under the
agreement. The annual maintenance fee is paid as follows:
<TABLE>
<CAPTION>
ANNUAL FEE
--------------------------
<S> <C>
Up to 200 accounts* $6,000 per feeder/class
From 201 to 250 accounts $8,500 per feeder/class
Over 250 accounts $10,000 per feeder/class
</TABLE>
_______________
* Defined as each account that is set up for an individual or plan sponsor on
a fund by fund basis.
In addition, the agreement contemplates that IBT will be reimbursed for
other expenses incurred by it at the request or with the written consent of the
Funds, including, without limitation, any equipment or supplies which the
Company specifically orders or requires IBT to order.
Prior to March 2, 1998, Wells Fargo Bank served as transfer and dividend
disbursing agent to the Funds, and was entitled to receive a monthly fee at an
annual rate of 0.10% of the average daily net assets
17
<PAGE>
of the Asset Allocation and U.S. Treasury Allocation Funds and 0.03% of the
average daily net assets of each of the Bond Index and S&P 500 Stock Funds for
such services.
PURCHASE AND REDEMPTION OF SHARES
Terms of Purchase. The Funds are generally open Monday through Friday and are
-----------------
closed on weekends and NYSE holidays. The holidays on which the NYSE is closed
currently are: New Year's Day, Martin Luther King, Jr.'s. Birthday, Presidents'
Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day
and Christmas Day. 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.
Payment for shares of a Fund may, at the discretion of the adviser, be made in
the form of securities that are permissible investments for the Fund and must
meet the investment objective, policies and limitations of the Fund as described
in the Prospectus. In connection with an in-kind securities payment, a Fund may
require, among other things, that the securities (i) be valued on the day of
purchase in accordance with the pricing methods used by the Fund; (ii) are
accompanied by satisfactory assurance that the Fund will have good and
marketable title to such securities received by it; (iii) are not subject to any
restrictions upon resale by the Fund; (iv) be in proper form for transfer to the
Fund; (v) are accompanied by adequate information concerning the basis and other
tax matters relating to the securities. All dividends, interest, subscription
or other rights pertaining to such securities shall become the property of the
Fund engaged in the in-kind purchase transaction and must be delivered to such
Fund by the investor upon receipt from the issuer. Securities acquired through
an in-kind purchase will be acquired for investment and not for immediate
resale. Shares purchased in exchange for securities generally cannot be
redeemed until the transfer has settled. Each Fund immediately will transfer to
its corresponding Master Portfolio any and all securities received by it in
connection with an in-kind purchase transaction, in exchange for interests in
such Master Portfolio.
Suspension of Redemptions. Under the 1940 Act, a Fund may suspend the right
-------------------------
of redemption or postpone the date of payment upon redemption for any period
during which the NYSE is closed (other than customary weekend and holiday
closings, or during which trading is restricted, or during which as determined
by the SEC by rule or regulation) an emergency exists as a result of which
disposal or valuation of portfolio securities is not reasonably practicable, or
for such periods as the SEC may permit.
The Company may suspend redemption rights or postpone redemption payments for
such periods as are permitted under the 1940 Act. The Company also may redeem
shares involuntarily or make payment for redemption in securities or other
property if it appears appropriate to do so in light of the Company's
responsibilities under the 1940 Act.
In addition, the Company may redeem shares involuntarily to reimburse a Fund
for any losses sustained by reason of the failure of a shareholder to make full
payment for shares purchased or to collect any charge relating to a transaction
effected for the benefit of a shareholder which is applicable to shares of a
Fund as provided from time to time in the Prospectus.
DETERMINATION OF NET ASSET VALUE
18
<PAGE>
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 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 Board 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's Board of Trustees and in accordance with
procedures adopted by the Trustees.
TAXES
The following information supplements and should be read in conjunction
with the Prospectus section entitled "Taxes." The Prospectus describes
generally the tax treatment of distributions by the Funds. This section of the
SAI includes additional information concerning income taxes.
General. The Company intends to qualify each Fund as a regulated
-------
investment company under Subchapter M of the Internal Revenue Code of 1986, as
amended (the "Code"), as long as such qualification is in the best interest of
the Fund's shareholders. Each Fund will be treated as a separate entity for tax
purposes and thus the provisions of the Code applicable to regulated investment
companies will generally be applied individually to each Fund, rather than to
the Company as a whole. Accordingly, net capital gain, net investment income,
and operating expenses will be determined separately for each Fund. As a
regulated investment company, each Fund will not be taxed on its net investment
income and capital gains distributed to its shareholders.
Qualification as a regulated investment company under the Code requires,
among other things, that (a) each Fund derive at least 90% of its annual gross
income from dividends, interest, certain
19
<PAGE>
payments with respect to securities loans, gains from the sale or other
disposition of stock or securities or foreign currencies (to the extent such
currency gains are directly related to the regulated investment company's
principal business of investing in stock or securities) and other income
(including but not limited to gains from options, futures or forward contracts)
derived with respect to its business of investing in such stock, securities or
currencies; and (b) the Fund diversify 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 obligations and the securities of
other regulated investment companies), or in two or more issuers which the Fund
controls and which are determined to be engaged in the same or similar trades or
businesses.
The Funds must also distribute or be deemed to distribute to their
shareholders at least 90% of their net investment income(which, for this purpose
includes net short-term capital gains) earned in each taxable year. In general,
these distributions must actually or be deemed to be made in the taxable year.
However, in certain circumstances, such distributions may be made in the 12
months following the taxable year. The Funds intend to pay out substantially
all of their net investment income and net realized capital gains (if any) for
each year.
In addition, a regulated investment company must, in general, derive less
than 30% of its gross income for a taxable year from the sale or other
disposition of securities or options thereon held for less than three months.
However, this restriction has been repealed with respect to a regulated
investment company's taxable years beginning after August 5, 1997.
Each Fund seeks to qualify as a regulated investment company by investing
substantially all of its assets in a Master Portfolio. Under the Code, each
Master Portfolio will be treated as a non-publicly traded partnership rather
than as a regulated investment company or a corporation. As a non-publicly
traded partnership, any interest, dividends, gains and losses of the Master
Portfolio shall be deemed to have been "passed through" to the corresponding
Fund (and the Master Portfolio's other investors) in proportion to each Fund's
ownership interest in the Master Portfolio. Therefore, to the extent that a
Master Portfolio were to accrue but not distribute any interest, dividends or
gains, the corresponding Fund would be deemed to have realized and recognized
its proportionate share of interest, dividends or gains without receipt of any
corresponding distribution. However, each Master Portfolio will seek to
minimize recognition by its investors (such as a Fund) of interest, dividends,
gains or losses without a corresponding distribution.
Excise Tax. A 4% nondeductible excise tax will be imposed on each Fund
----------
(other than to the extent of its tax-exempt interest income) to the extent it
does not meet certain minimum distribution requirements by the end of each
calendar year. Each Fund intends to 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.
Taxation of Master Portfolio Investments. Except as otherwise provided
----------------------------------------
herein, gains and losses realized by a Master Portfolio on the sale of portfolio
securities generally will be capital gains and losses. Such gains and losses
ordinarily will be long-term capital gains and losses if the securities have
been held by the Master Portfolio for more than one year at the time of
disposition of the securities.
20
<PAGE>
Gains recognized on the disposition of a debt obligation (including tax-
exempt obligations purchased after April 30, 1993) purchased by a Master
Portfolio at a market discount (generally at a price less than its principal
amount) will be treated as ordinary income to the extent of the portion of
market discount which accrued, but was not previously recognized pursuant to an
available election, during the term the Master Portfolio held the debt
obligation.
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. Some
realized capital losses may be deferred if they result from a position which is
part of a "straddle," discussed below. If securities are sold by a Master
Portfolio pursuant to the exercise of a call option granted by it, the 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.
Under Section 1256 of the Code, a Master Portfolio will be required to
"mark to market" its positions in "Section 1256 contracts," which generally
include regulated futures contracts and listed non-equity options. In this
regard, Section 1256 contracts will be deemed to have been sold at market value.
Under Section 1256 of the Code, sixty percent (60%) of any net gain or loss
realized on all dispositions of Section 1256 contracts, including deemed
dispositions under the mark-to-market regime, will generally be treated as long-
term capital gain or loss, and the remaining forty percent (40%) will be treated
as short-term capital gain or loss. Transactions that qualify as designated
hedges are excepted from the mark-to-market and 60%/40% rules.
Under Section 988 of the Code, a Master Portfolio will generally recognize
ordinary income or loss to the extent gain or loss realized on the disposition
of portfolio securities is attributable to changes in foreign currency exchange
rates. In addition, gain or loss realized on the disposition of a foreign
currency forward contract, futures contract, option or similar financial
instrument, or of foreign currency itself, will generally be treated as ordinary
income or loss. The Master Portfolios will attempt to monitor Section 988
transactions, where applicable, to avoid adverse federal income tax impact to
the Funds and their shareholders.
Offsetting positions held by a regulated investment company involving
certain financial forward, futures or options 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 of the Code,
described above. If a regulated investment company were treated as entering
into "straddles" by 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 straddles were governed
by Section 1256 of the Code. The regulated investment company 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 regulated investment company
may differ. Generally, to the extent the straddle rules apply to positions
established by a 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.
21
<PAGE>
If a Master Portfolio enters into a "constructive sale" of any appreciated
position in stock, a partnership interest, or certain debt instruments, the
Master Portfolio must recognize gain (but not loss) with respect to that
position. For this purpose, a constructive sale occurs when the Master
Portfolio enters into one of the following transactions with respect to the same
or substantially identical property: (i) a short sale; (ii) an offsetting
notional principal contract; (iii) a futures or forward contract, or (iv) other
transactions identified in future Treasury Regulations.
If a Master Portfolio purchases shares in a "passive foreign investment
company" ("PFIC"), the Master Portfolio may be subject to federal income tax and
an interest charge imposed by the Internal Revenue Service ("IRS") upon certain
distributions from the PFIC or the Master Portfolio's disposition of its PFIC
shares. If the Master Portfolio invests in a PFIC, the Master Portfolio intends
to make an available election to mark-to-market its interest in PFIC shares.
Under the election, the Master Portfolio will be treated as recognizing at the
end of each taxable year the difference, if any, between the fair market value
of its interest in the PFIC shares and its basis in such shares. In some
circumstances, the recognition of loss may be suspended. The Master Portfolio
will adjust its basis in the PFIC shares by the amount of income (or loss)
recognized. Although such income (or loss) will be taxable to the Master
Portfolio as ordinary income (or loss) notwithstanding any distributions by the
PFIC, the Master Portfolio will not be subject to federal income tax or the
interest charge with respect to its interest in the PFIC, if it makes the
available election.
Foreign Taxes. Income and dividends received by a Fund (through a Master
-------------
Portfolio) from foreign securities and gains realized by the Fund on the
disposition of foreign securities may be subject to withholding and other taxes
imposed by foreign countries. Tax conventions between certain countries and the
United States may reduce or eliminate such taxes. Although in some
circumstances a regulated investment company can elect to "pass through" foreign
tax credits to its shareholders, the Funds do not expect to be eligible to make
such an election.
Capital Gain Distributions. Distributions which are designated by a Fund
--------------------------
as capital gain distributions will be taxed to shareholders as long-term capital
gain (to the extent such dividends do not exceed the Fund's actual net capital
gain for the taxable year), regardless of how long a shareholder has held Fund
shares. Such distributions will be designated as capital gain distributions in
a written notice mailed by the Fund to its shareholders not later than 60 days
after the close of the Fund's taxable year.
The Taxpayer Relief Act of 1997 (the "1997 Act") created several new
categories of capital gains applicable to noncorporate taxpayers. Under prior
law, noncorporate taxpayers generally were taxed at a maximum rate of 28% on
net capital gain (generally, the excess of net long-term capital gain over net
short-term capital loss). Noncorporate taxpayers generally are now taxed at a
maximum rate of 20% on net capital gain attributable to gains realized on the
sale of property held for greater than 18 months, and a maximum rate of 28% on
net capital gain attributable to gain realized on the sale of property held for
greater than one year and not more than 18 months, and a maximum rate of 25% for
certain gains attributable to the sale of real property. The 1997 Act retains
the treatment of short term capital gain or loss (generally, gain or loss
attributable to capital assets held for 1 year or less) and did not affect the
taxation of capital gains in the hands of corporate taxpayers.
Under the 1997 Act, the Treasury is authorized to issue regulations for
application of the reduced capital gains tax rates to pass-through entities,
including regulated investment companies, such as the Funds. The IRS has
published a notice applicable to pass-through entities until regulations are
promulgated. Pursuant to the notice, each Fund is permitted (but not required)
to designate the portion of its capital gain distributions, if any, to which the
28%, 25% and 20% rates described in the preceding
22
<PAGE>
paragraph apply, based on the net amount of each class of capital gain realized
by the Fund determined as if the Fund is a noncorporate taxpayer. Noncorporate
shareholders of the Funds may therefore qualify for the reduced rate of tax on
capital gain distributions paid by the Funds.
Disposition of Fund Shares. A disposition of Fund shares pursuant to
--------------------------
redemption (including a redemption in-kind) or exchanges ordinarily will result
in a taxable capital gain or loss, depending on the amount received for the
shares (or are deemed to receive in the case of an exchange) and the cost of the
shares.
If a shareholder exchanges or otherwise disposes of Fund shares within 90
days of having acquired such shares and if, as a result of having acquired those
shares, the shareholder subsequently pays a reduced sales charge on a new
purchase of shares of the Fund or a different regulated investment company, the
sales charge previously incurred acquiring the Fund's shares shall not be taken
into account (to the extent such previous sales charges do not exceed the
reduction in sales charges on the new purchase) for the purpose of determining
the amount of gain or loss on the disposition, but will be treated as having
been incurred in the acquisition of such other shares. Also, any loss realized
on a redemption or exchange of shares of the Fund will be disallowed to the
extent that substantially identical shares are acquired within the 61-day period
beginning 30 days before and ending 30 days after the shares are disposed
of.
If a shareholder receives a designated capital gain distribution (to be
treated by the shareholder as long-term capital gain) with respect to any 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 long-term capital loss to the extent of the designated capital gain
distribution. This loss disallowance rule does not apply to losses realized
under a periodic redemption plan.
Federal Income Tax Rates. As of the printing of this SAI, the maximum
------------------------
individual tax rate applicable to ordinary income is 39.6% (marginal tax rates
may be higher for some individuals to reduce or eliminate the benefit of
exemptions and deductions); the maximum individual marginal tax rate applicable
to net capital gain is 28% (however, see "Capital Gain Distributions" above);
and the maximum corporate tax rate applicable to ordinary income and net capital
gain is 35% (marginal tax rates may be higher for some corporations to reduce or
eliminate the benefit of lower marginal income tax rates). Obviously, the
amount of tax payable by any taxpayer will be affected by a combination of tax
laws covering, for example, deductions, credits, deferrals, exemptions, sources
of income and other matters.
Backup Withholding. 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 and redemptions in-kind) paid or credited to an individual Fund
shareholder, unless the shareholder certifies that his or her taxpayer
identification number ("TIN"), which usually is his or her social security
number, provided to the Company 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 that the shareholder is subject to backup
withholding. Such tax withheld does not constitute any additional tax imposed
on the shareholder, and may be claimed as a credit against the shareholder's
federal income tax liability, if any, or otherwise will be refundable. An
investor must provide a valid TIN to the Company upon opening or reopening an
account. Failure to furnish a valid TIN to the Company could also subject the
investor to penalties imposed by the IRS. Foreign shareholders of the Funds
(described below) generally are not subject to backup withholding.
23
<PAGE>
Corporate Shareholders. Corporate shareholders of the Funds may be
----------------------
eligible for the dividends-received deduction on dividends distributed out of a
Fund's net investment income attributable to dividends received from domestic
corporations, which, if received directly by the corporate shareholder, would
qualify for such deduction. A distribution by a Fund attributable to dividends
of a domestic corporation will only qualify for the dividends-received deduction
if (i) the corporate shareholder generally holds the Fund shares upon which the
distribution is made for at least 46 days during the 90 day period beginning 45
days prior to the date upon which the shareholder becomes entitled to the
distribution; and (ii) the Fund generally holds the shares of the domestic
corporation producing the dividend income for at least 46 days during the 90 day
period beginning 45 days prior to the date upon which the Fund becomes entitled
to such dividend income.
Foreign Shareholders. Under the Code, distributions of net investment
--------------------
income by a Fund to a nonresident alien individual, foreign trust (i.e., trust
which a U.S. court is able to exercise primary supervision over administration
of that trust and one or more U.S. persons have authority to control substantial
decisions of that trust), foreign estate (i.e., the income of which is not
subject to U.S. tax regardless of source), foreign corporation, or foreign
partnership (a "foreign shareholder") will be subject to federal income tax
withholding (at a rate of 30% or a lower treaty rate, if applicable).
Withholding will not apply if a dividend distribution paid by a Fund to a
foreign shareholder is "effectively connected" with a U.S. trade or business
(or, if an income tax treaty applies, is attributable to a U.S. permanent
establishment of the foreign shareholder), in which case the reporting and
withholding requirements applicable to U.S. residents will apply. Distributions
of net capital gain generally are not subject to federal income tax
withholding.
New Regulations. On October 6, 1997, the Treasury Department issued new
---------------
regulations (the "New Regulations") which make certain modifications to the
backup withholding, U.S. income tax withholding and information reporting rules
applicable to foreign shareholders. The New Regulations generally will be
effective for payments made after December 31, 1999, subject to certain
transition rules. Among other things, the New Regulations will permit the Funds
to estimate the portion of their distributions paid to foreign shareholders
which is subject to federal income tax withholding. Prospective investors are
urged to consult their own tax advisors regarding the application to them of the
New Regulations.
Other Matters. Investors should be aware that the investments to be made
-------------
by a Fund may involve sophisticated tax rules that may result in income or gain
recognition by the Fund without corresponding current cash receipts. Although
the Funds will seek to avoid significant noncash income, such noncash income
could be recognized by a Fund, in which case the Fund may distribute cash
derived from other sources in order to meet the minimum distribution
requirements described above.
The foregoing discussion and the discussions in the Prospectus applicable
to each shareholder address only some of the federal income tax considerations
generally affecting investments in a Fund. Each investor is urged to consult
his or her tax advisor regarding specific questions as to federal, state, local
and foreign taxes.
PERFORMANCE INFORMATION
As indicated in the Prospectus, the Funds may advertise certain total return
information computed in the manner described in the Prospectus. 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
24
<PAGE>
("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 the Prospectus, 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 28, 1998 and for the fiscal year ended February 28,
1998 were as follows:
<TABLE>
<CAPTION>
COMMENCEMENT
THROUGH
FUND 2/28/98 FYE 2/28/98
- ------------------------------------ ------- -----------------
<S> <C> <C>
Asset Allocation Fund 15.13% 27.10%
Bond Index Fund 6.20% 10.36%
S&P 500 Stock Fund 22.56% 34.62%
U.S. Treasury Allocation Fund 5.43% 8.18%
</TABLE>
The cumulative total returns on the Funds from July 2, 1993 (commencement of
operations) to February 28, 1998 were as follows:
<TABLE>
<CAPTION>
COMMENCEMENT
THROUGH
FUND 2/28/98
- ------------------------------ -------
<S> <C>
Asset Allocation Fund 92.85%
Bond Index Fund 32.38%
S&P 500 Stock Fund 158.14%
U.S. Treasury Allocation Fund 27.98%
</TABLE>
As indicated in the Prospectus, the U.S. Treasury Allocation, Asset
Allocation, 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 28, 1998 were as
follows:
<TABLE>
<CAPTION>
CURRENT
FUND YIELD
- ----------------------------- -----------------
<S> <C>
Bond Index Fund 5.74%
U.S. Treasury Allocation Fund 4.61%
</TABLE>
25
<PAGE>
Generally. The yield for a 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.
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 and may compare the
performance of a Fund to the performance of various indices and investments for
which reliable performance data is available. The performance of a Fund may be
compared in advertising and other literature to averages, performance rankings
and other information prepared by recognized mutual fund statistical services.
The performance information for 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 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, 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 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
26
<PAGE>
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.
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, 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
27
<PAGE>
& 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.
PORTFOLIO TRANSACTIONS
Since each Fund invests all of its assets in a corresponding Master Portfolio
of MIP, set forth below is a description of the Master Portfolios' policies
governing portfolio securities transactions.
Purchases and sales of equity securities on a securities exchange usually are
effected through brokers who charge a negotiated commission for their services.
Commission rates are established pursuant to negotiations with the broker based
on the quality and quantity of execution services provided by the broker in
light of generally prevailing rates. Orders may be directed to any broker
including, to the extent and in the manner permitted by applicable law, Stephens
or Barclays Global Investors Services. 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.
Purchases of debt securities generally are principal transactions. Debt
securities normally are purchased or sold from or to dealers serving as market
makers for the securities at a net price. Debt securities also may be purchased
in underwritten offerings or directly from an issuer. Generally debt obligations
are traded on a net basis and do not involve brokerage commissions. The cost of
executing transactions in debt securities consists primarily of dealer spreads
and underwriting commissions.
Under the 1940 Act, persons affiliated with a Master Portfolio are prohibited
from dealing with the Master Portfolio as a principal in the purchase and sale
of portfolio securities unless an exemptive order allowing such transactions is
obtained from the Commission or an exemption is otherwise available. A Master
Portfolio may purchase securities from underwriting syndicates of which Stephens
is a member under certain conditions in accordance with the provisions of a rule
adopted under the 1940 Act and in compliance with procedures adopted by MIP's
Board of Trustees.
A Master Portfolio has no obligation to deal with any dealer or group of
dealers in the execution of transactions in portfolio securities. Subject to
policies established by the Board of Trustees, BGFA is responsible for each
Master Portfolio's investment decisions and the placing of portfolio
transactions. In placing orders, it is the policy of each Master Portfolio to
obtain the best overall terms taking into account the dealer's general execution
and operational facilities, the type of transaction involved and other factors
such as the dealer's risk in positioning the securities involved. BGFA generally
seeks reasonably competitive spreads or commissions.
28
<PAGE>
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. 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. BGFA may cause
the Asset Allocation and S&P 500 Index Master Portfolios to pay a broker/dealer
which furnishes brokerage and research services a higher commission than that
which might be charged by another broker/dealer for effecting the same
transaction, provided that BGFA 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 BGFA. 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 BGFA and does not reduce the
advisory fees payable by the Master Portfolio. MIP's Board of Trustees will
periodically review the commissions paid by the Master Portfolio to consider
whether the commissions paid over representative periods of time appear to be
reasonable in relation to the benefits inuring to the Master Portfolio. 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 BGFA exercises investment discretion. Conversely, the Master Portfolio
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 Section 28(e) of the Securities Exchange Act of 1934, an adviser shall
not be "deemed to have acted unlawfully or to have breached its fiduciary duty"
solely because under certain circumstances it has caused the account to pay a
higher commission than the lowest available. To obtain the benefit of Section
28(e), an adviser must make a good faith determination that the commissions paid
are "reasonable in relation to the value of the brokerage and research services
provided . . . viewed in terms of either that particular transaction or its
overall responsibilities with respect to the accounts as to which it exercises
investment discretion and that the services provided by a broker provide an
adviser with lawful and appropriate assistance in the performance of its
investment decision-making responsibilities." Accordingly, the price to the
Master Portfolio in any transaction may be less favorable than that available
from another broker/dealer if the difference is reasonably justified by other
aspects of the portfolio execution services offered.
Broker/dealers utilized by BGFA may furnish statistical, research and other
information or services which are deemed by BGFA to be beneficial to the Asset
Allocation and S&P 500 Stock Master Portfolios' investment programs. Research
services received from brokers supplement BGFA's own research and may include
the following types of information: statistical and background information on
industry groups and individual companies; forecasts and interpretations with
respect to U.S. and foreign economies, securities, markets, specific industry
groups and individual companies; information on political developments;
portfolio management strategies; performance information on securities and
information concerning prices of securities; and information supplied by
specialized services to BGFA and to MIP's Trustees with respect to the
performance, investment activities and fees and expenses of other mutual funds.
Such information may be communicated electronically, orally or in written form.
Research services may also include the providing of equipment used to
communicate research information, the arranging of meetings with management of
companies and the providing of access to consultants who supply research
information.
29
<PAGE>
The outside research assistance is useful to BGFA since the brokers utilized
by BGFA as a group tend to follow a broader universe of securities and other
matters than the staff of BGFA can follow. In addition, this research provides
BGFA with a diverse perspective on financial markets. Research services which
are provided to BGFA by brokers are available for the benefit of all accounts
managed or advised by BGFA. It is the opinion of BGFA that this material is
beneficial in supplementing its research and analysis; and, therefore, it may
benefit the Asset Allocation and S&P 500 Stock Master Portfolios by improving
the quality of BGFA's investment advice.
Portfolio Turnover. The portfolio turnover rates for the U.S. Treasury
------------------
Allocation, Bond Index, Asset Allocation and S&P 500 Index Master Portfolios
generally are not expected to exceed 450%, 100%, 450% and 50%, respectively. The
higher portfolio turnover rates for the U.S. Treasury Allocation, Bond Index and
Asset Allocation 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 deem portfolio
changes appropriate.
Brokerage Commissions. For the fiscal years ended February 29, 1996, February
---------------------
28, 1997 and February 28, 1998, 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 FYE 2/29/96 FYE 2/28/97 FYE 2/28/98
- -------------------------------------------------------------- ----------------- ------------------ -----------------
<S> <C> <C> <C>
Asset Allocation Master Portfolio $ 9,782 $28,606 $ 11,933
Bond Index Master Portfolio $ 0 $ 0 $ 0
S&P 500 Index Master Portfolio $80,902 $69,826 $112,100
U.S. Treasury Allocation Master Portfolio $ 0 $ 0 $ 0
</TABLE>
Securities of Regular Broker/Dealers. As of February 28, 1998, 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>
Asset Allocation Master Portfolio Goldman Sachs & Co. $21,000,000
J.P. Morgan $ 999,259
Bond Index Master Portfolio Goldman Sachs & Co. $ 3,000,000
Lehman Bros., Inc. $ 539,406
Salomon Inc. $ 1,010,214
S&P 500 Index Master Portfolio Goldman Sachs & Co. $19,000,000
J.P. Morgan $ 5,565,474
Lehman Bros. Holdings $ 1,763,606
Morgan Stanley $10,841,222
U.S. Treasury Allocation Master Portfolio Goldman Sachs & Co. $ 2,000,000
</TABLE>
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 12,100,000,000 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. The Board of Directors may, in the future,
authorize
30
<PAGE>
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 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.
MIP is an open-end, series management investment companies organized as a
Delaware business trust. MIP was organized on October 21 1993. In accordance
with Delaware law and in connection with the tax treatment sought by MIP, MIP's
Declaration of Trust provides that its investors would be personally responsible
for Trust liabilities and obligations, but only to the extent MIP's property is
insufficient to satisfy such liabilities and obligations. The Declaration of
Trust also provides that MIP 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 MIP itself was unable to meet its obligations.
31
<PAGE>
The Declaration of Trust further provides that obligations of MIP 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 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 MIP have substantially identical
voting and other rights as those rights enumerated above for shares of the
Funds. MIP also intends 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
Master Portfolio, 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 Master Portfolio, such
Fund will vote such shares in the same proportion as the shares for which the
Fund does receive voting instructions.
As of June 1, 1998, 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 NATURE OF
NAME OF FUND OF SHAREHOLDER OF FUND OWNERSHIP
- ---------------------- -------------------------------------------------- ----------------------- ----------------------
<S> <C> <C> <C>
Asset Allocation Merrill Lynch Trust Co FSB 86.97% Record
FBO Various 401 K Plans
P.O. Box 62000
San Francisco, CA 94162
Bond Index Fund Merrill Lynch Trust Co FSB 39.18% Record
FBO Various 401 K Plans
P.O. Box 62000
San Francisco, CA 94162
State Street Bank & Trust Co TEEE 36.13% Record
FBO American Bar Association Members
State Street Collective Trust
1 Heritage Drive, #2PS
North Quincy, MA 02171
Wells Fargo Bank FBO 14.17% Record
Business Retirement Programs Omnibus Act
MF MAC 9139-027
P.O. Box 9800
Calabasas, CA 91372
</TABLE>
32
<PAGE>
<TABLE>
<CAPTION>
NAME AND ADDRESS PERCENTAGE NATURE OF
NAME OF FUND OF SHAREHOLDER OF FUND OWNERSHIP
- ---------------------- -------------------------------------------------- ----------------------- ----------------------
<S> <C> <C> <C>
S&P 500 Stock Bankers Trust Co TR 38.97% Record
FBO Betchel Master Trust for Qualified
Employee Benefit Plan
P.O. Box 1742
New York, NY 10008
Merrill Lynch Trust Co FSB 32.18% Record
FBO Various 401 K Plans
P.O. Box 62000
San Francisco, CA 94162
U.S. Treasury Merrill Lynch Trust Co FSB 96.33% Record
Allocation Fund FBO Various 401 K Plans
P.O. Box 62000
San Francisco, CA 94162
</TABLE>
For purposes of the 1940 Act, any person who owns directly or through one or
more controlled companies more than 25% of the voting securities of a company is
presumed to "control" such company. Accordingly, to the extent that a
shareholder identified in the foregoing table is identified as the beneficial
holder of more than 25% of a Fund, or is identified as the holder of record of
more than 25% of a Fund and has voting and/or investment powers, it may be
presume to control such Fund.
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.
33
<PAGE>
FINANCIAL INFORMATION
The audited financial statements, including the portfolio of investments, and
independent auditors' report for the fiscal year ended February 28, 1998 for the
Asset Allocation, Bond Index, S&P 500 Stock and U.S. Treasury Allocation Funds
and corresponding Master Portfolios are hereby incorporated by reference to the
MasterWorks Funds Inc. Annual Report, as filed with the SEC on May 1, 1998. The
audited financial statements are attached to all SAIs delivered to shareholders
or prospective shareholders.
34
<PAGE>
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."
35
<PAGE>
MASTERWORKS FUNDS INC.
STATEMENT OF ADDITIONAL INFORMATION
GROWTH STOCK FUND
SHORT-INTERMEDIATE TERM FUND
JUNE 30, 1998
MasterWorks Funds Inc. ("Company") is an open-end, management investment
company. This Statement of Additional Information ("SAI") contains information
about two of the Company's funds-- GROWTH STOCK AND SHORT-INTERMEDIATE TERM
FUNDS, (each, a "Fund" and collectively, the "Funds").
Each of the Short-Intermediate Term and Growth Stock Funds seeks to achieve
its investment objective by investing all of its assets in the
Short-Intermediate Term and Growth Stock Master Portfolios (collectively, the
"Master Portfolios") respectively, of Managed Series Investment Trust ("MSIT" at
times, the "Trust"). Barclays Global Fund Advisors ("BGFA") serves as investment
advisor to the corresponding Master Portfolios and Wells Fargo Bank, N.A.
("Wells Fargo Bank") serves as sub-adviser to the Growth Stock and
Short-Intermediate Term Master Portfolios. References to the investments,
investment policies and risks of the Funds unless otherwise indicated, should be
understood as references to the investments, investment policies and risks of
the corresponding Master Portfolios.
This SAI is not a prospectus and should be read in conjunction with the
Funds' current Prospectus, also dated June 30, 1998. 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 may be obtained without charge by writing
MasterWorks Funds Inc., c/o Investors Bank & Trust Co., -- Transfer Agent,
P.O. Box 9130, Mail Code MFD23, Boston, MA 02117-9130, or by calling 1-888-204-
3956.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C>
General Information................................................ 1
Investment Restrictions............................................ 1
Additional Permitted Investment Activities......................... 5
Management......................................................... 9
Purchase and Redemption of Shares.................................. 15
Determination of Net Asset Value................................... 16
Taxes.............................................................. 17
Performance Information............................................ 23
Portfolio Transactions............................................. 26
Capital Stock...................................................... 28
Other.............................................................. 31
Counsel............................................................ 31
Independent Auditors............................................... 31
Financial Information.............................................. 31
SAI Appendix....................................................... A-1
Financial Statements............................................... F-1
</TABLE>
GENERAL INFORMATION
The Company is a registered investment company which currently offers twelve
series, including the Funds. MSIT is a registered investment company consisting
of the Growth Stock and Short-Intermediate Term 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 MASTER PORTFOLIO
---- ------------------------------
<S> <C>
Growth Stock Fund Growth Stock Master Portfolio
Short-Intermediate Term Fund Short-Intermediate Term 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."
INVESTMENT RESTRICTIONS
Each Fund and Master Portfolio has adopted investment policies which may be
fundamental or non-fundamental. Fundamental policies cannot be changed without
approval by the holders of a majority (as defined in the Investment Company Act
of 1940, as amended (the "1940 Act")) of the outstanding voting securities of
such Fund or Master Portfolio, as the case may be. Non-fundamental policies may
be changed without shareholder approval by vote of a majority of the Directors
of the Company or the Trustees of the Trusts, as the case may be, at any time.
FUNDAMENTAL INVESTMENT RESTRICTIONS. The Funds are subject to the following
investment restrictions, all of which are fundamental policies.
i
<PAGE>
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 obligations of the U.S. Government,
its agencies or instrumentalities, and 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;
(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
Growth Stock Fund may enter into futures and options contracts in accordance
with its 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 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);
(9) write, purchase or sell puts, calls, straddles, spreads, warrants,
options or any combination thereof, except that the Growth Stock Fund may enter
into futures and options contracts in accordance with its respective investment
policies, and except that the Growth Stock Fund may purchase securities with put
rights in order to maintain liquidity, and except that both Funds may invest up
to 5% of their net assets in warrants in accordance with their investment
policies stated below;
1
<PAGE>
(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.
NON-FUNDAMENTAL INVESTMENT RESTRICTIONS. The Funds are subject to the
following investment restrictions, all of which are non-fundamental policies.
(1) The Funds may not, 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 its assets in
the corresponding Master Portfolio of MSIT.
(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, this limit should
not prevent a Fund from investing all of its assets in the corresponding Master
Portfolio of MSIT.
(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.
FUNDAMENTAL INVESTMENT RESTRICTIONS. The Master Portfolios are subject to
the following investment restrictions, all of which are fundamental
policies.
The 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 a Master Portfolio's investments in that industry would be
25% or more of the current value of such Master Portfolio'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;
2
<PAGE>
(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 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 Master Portfolio'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 each 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);
(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 each Master Portfolio may invest up to 5% of its 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
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 Master Portfolio's
ownership would be more than 10% of the outstanding voting securities of such
issuer; or
(11) make loans, except that the 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.
NON-FUNDAMENTAL INVESTMENT RESTRICTIONS. The Master Portfolios are subject
to the following non-fundamental policies.
(1) The Master Portfolios may not:
(a) purchase or retain securities of any issuer if the officers or
Trustees of MSIT 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;
3
<PAGE>
(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) Each Master Portfolio reserves the right to invest up to 15% 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.
(3) Each Master Portfolio may invest in shares of other open-end, management
investment companies, subject to the limitations of Section 12(d)(1) of the 1940
Act, 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.
ADDITIONAL PERMITTED INVESTMENT ACTIVITIES
Repurchase Agreements. Each Master Portfolio may engage in a repurchase
agreement with respect to any security in which it is authorized to invest,
although the underlying security may mature in more than thirteen months. A
Master Portfolio may enter into repurchase agreements wherein the seller of a
security to the Master Portfolio agrees to repurchase that security from the
Master Portfolio at a mutually agreed-upon time and price that involves the
acquisition by the Master Portfolio of an underlying debt instrument, subject to
the seller's obligation to repurchase, and the Master Portfolio's obligation to
resell, the instrument at a fixed price usually not more than one week after its
purchase. The Master Portfolio's custodian has custody of, and holds in a
segregated account, securities acquired as collateral by the Master Portfolio
under a repurchase agreement. Repurchase agreements are considered by the staff
of the SEC to be loans by the Master Portfolio. A Master Portfolio may enter
into repurchase agreements only with respect to securities of the type in which
it may invest, including government securities and mortgage-related securities,
regardless of their remaining maturities, and requires that additional
securities be deposited with the custodian if the value of the securities
purchased should decrease below resale price. Wells Fargo Bank 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 the 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. While it does not presently appear possible to eliminate all
risks from these transactions (particularly the possibility of a decline in the
market value of the underlying securities, as well as delay and costs to a
Master Portfolio in connection with insolvency proceedings), it is the policy of
each Master Portfolio to limit repurchase agreements to selected creditworthy
securities dealers or domestic banks or other recognized financial institutions.
Each Master Portfolio considers on an ongoing basis the creditworthiness of the
institutions with which it enters into repurchase agreements. Repurchase
agreements are considered to be loans by a Master Portfolio under the 1940
Act.
Floating- and Variable-Rate Obligations. Each Master Portfolio may
purchase floating- and variable-rate obligations as described in the Prospectus.
A 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
4
<PAGE>
specified intervals not exceeding thirteen months. Variable rate
demand notes include master demand notes that 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, 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 Wells Fargo Bank determines that at the time of investment the
obligations are of comparable quality to the other obligations in which the
Master Portfolio may invest. Wells Fargo Bank, 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 a Master Portfolio's
portfolio. A Master Portfolio will not invest more than 10% of the value of its
total net assets in floating- or variable-rate demand obligations whose demand
feature is not exercisable within seven days. Such obligations may be treated as
liquid, provided that an active secondary market exists.
Unrated, Downgraded and Below Investment Grade Investments. A Master
----------------------------------------------------------
Portfolio may purchase instruments that are not rated if, in the opinion of the
adviser, BGFA, such obligation is 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
5
<PAGE>
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.
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 a Master Portfolio 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.
When-Issued Securities. Certain of the securities in which the 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. The Master Portfolios only will make commitments to
purchase securities on a when-issued basis with the intention of actually
acquiring the securities, but may
6
<PAGE>
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. The Master Portfolios currently do not
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, a 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. The Master Portfolios will not lend
securities having a value that exceeds one-third of the current value of its
total assets. Loans of securities by a Master Portfolio will be 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 may not be affiliated, directly or indirectly,
with the Company, BGFA, Wells Fargo Bank (the sub-adviser to the Master
Portfolios) or the Distributor.
Investment in Warrants. Each Master Portfolio may invest up to 5% of its 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. 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. Each Master Portfolio may only purchase warrants on
securities in which it may invest directly.
7
<PAGE>
MANAGEMENT
Directors and Officers. 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 the last five years, are shown
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 who are deemed to be an "interested person" of the Company, as defined
in 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, 75 Director Private Investor.
415 Walsh Road
Atherton, CA 94027
*R. Greg Feltus, 46 Director, Executive Vice President of Stephens Inc.;
Chairman and President of Stephens Insurance Services
President Inc.; Senior Vice President of Stephens
Sports Management Inc.; and President of
Investors Brokerage Insurance Inc.
Thomas S. Goho, 55 Director Associate Professor of Finance, Calloway
P.O. Box 7285 School of Business and Accounting
Reynolda Station Wake Forest University, since 1982.
Winston-Salem, NC 27109
*W. Rodney Hughes, 71 Director Private Investor.
31 Dellwood Court
San Rafael, CA 94901
*J. Tucker Morse, 53 Director Chairman of Home Account Network, Inc.;
4 Beaufain Street Real Estate 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., 41 Chief Vice President of Stephens Inc.;
Operating Director of Stephens Sports
Officer, Management Inc.; and Director of
Secretary and Capo Inc.
Treasurer
</TABLE>
8
<PAGE>
COMPENSATION TABLE
For the Fiscal Year Ended February 28, 1998
<TABLE>
<CAPTION>
TOTAL COMPENSATION
AGGREGATE COMPENSATION FROM REGISTRANT
NAME AND POSITION FROM REGISTRANT AND FUND COMPLEX
- ----------------- ---------------------- ------------------
<S> <C> <C>
Jack S. Euphrat $ 11,250 $ 11,250
Director
*R. Greg Feltus 0 0
Director
Thomas S. Goho $ 11,250 $ 11,250
Director
*Zoe Ann Hines/1/ 0 0
Director
*W. Rodney Hughes $ 11,000 $ 11,000
Director
Robert M. Joses/2/ $ 1,000 $ 1,000
Director
*J. Tucker Morse $ 11,000 $ 11,000
Director
- ---------------
/1/ Zoe Ann Hines retired as of January 28, 1998.
/2/ Robert M. Joses retired as of December 31, 1997.
</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. The Company, Master Investment Portfolio and MSIT are considered
to be members of the same fund complex, as such term is defined in Form N-1A
under the 1940 Act (the "BGFA Fund Complex"). Stagecoach Funds, Inc., Stagecoach
Trust and Life & Annuity Trust together form a separate fund complex (the "Wells
Fargo Fund Complex"). Prior to December 15, 1997, the Wells Fargo Fund Complex
also included Overland Express Funds, Inc. and Master Investment Trust. On that
date, Overland Express Funds, Inc. was consolidated with and into Stagecoach
Funds, Inc. and Master Investment Trust was dissolved. Each of the Directors and
the Officers of the Company serves in the identical capacity as
Directors/Trustees and Officers of each registered open-end management
investment company in both the BGFA and Wells Fargo Fund Complexes. 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 each 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.
Master/Feeder Structure. Each Fund seeks to achieve its investment objective
-----------------------
by investing all of its assets into the corresponding Master Portfolio of MSIT.
The Funds and other entities investing in a Master Portfolio are each liable for
all obligations of such 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 existed and the Trust itself is unable to meet its
obligations. Accordingly, the Company's Board of Directors
9
<PAGE>
believes that neither a Fund nor its shareholders will be adversely affected by
investing Fund assets in a Master Portfolio. However, if a mutual fund or other
investor withdraws its investment from such Master Portfolio, the economic
efficiencies (e.g., spreading fixed expenses among a larger asset base) that the
Company's Board believes may be available through investment in the Master
Portfolio may not be fully achieved. In addition, given the relative novelty of
the master/feeder structure, accounting or operational difficulties, although
unlikely, could arise. See "Management of the Funds" in the Prospectus for
additional description of the Funds' and Master Portfolios' expenses and
management.
A Fund may withdraw its investment in a Master Portfolio only if the
Company's Board of Directors determines that such action is in the best
interests of such Fund and its shareholders. Upon any such withdrawal, the
Company's Board would consider alternative investments, including investing all
of the Fund's assets in another investment company with the same investment
objective as the Fund or hiring an investment adviser to manage the Fund's
assets in accordance with the investment policies described below with respect
to its corresponding Master Portfolio.
The investment objective and other fundamental policies of a Master
Portfolio cannot be changed without approval by the holders of a majority (as
defined in the 1940 Act) of the Master Portfolio's outstanding interests. See
"Investment Objectives and Policies" in the Prospectus. Whenever a Fund, as an
interestholder of the corresponding Master Portfolio, is requested to vote on
any matter submitted to interestholders of such Master Portfolio, the Fund will
hold a meeting of its shareholders to consider such matters. The Fund will cast
its votes in proportion to the votes received from its shareholders. Shares for
which a Fund receives no voting instructions will be voted in the same
proportion as the votes received from the other Fund shareholders.
Certain policies of a Master Portfolio which are non-fundamental may be
changed by vote of a majority of the Trust's Trustees without interestholder
approval. If a Master Portfolio's investment objective or fundamental or
non-fundamental policies are changed, the Fund may elect to change its objective
or policies to correspond to those of the Master Portfolio. A Fund also may
elect to redeem its interests in the corresponding Master Portfolio and either
seek a new investment company with a matching objective in which to invest or
retain its own investment adviser to manage the Fund's portfolio in accordance
with its objective. In the latter case, 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. A Fund will provide
shareholders with 30 days' written notice prior to the implementation of any
change in the investment objective of such Fund or the corresponding Master
Portfolio, to the extent possible. See "Investment Objectives and Policies" in
the Prospectus for additional information regarding the Funds' and the Master
Portfolios' investment objectives and policies.
Investment Adviser. 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. Pursuant to
the Advisory Contracts, BGFA furnishes to the Trust's Board of Trustees periodic
reports on the investment strategy and performance of each Master Portfolio.
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.
BGFA is entitled to receive monthly fees at the annual rate of 0.60% and
0.45% of the average daily net assets of the Growth Stock and Short-Intermediate
Term Master Portfolios, respectively, as compensation for its advisory services
to such Master Portfolio.
10
<PAGE>
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
Trust's Board of Trustees and (ii) by a majority of the Trustees of the Trust
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.
The Advisory Contracts provide that the advisory fee is accrued daily and
paid monthly. Out of the fees that BGFA receives from the Master Portfolios, it
pays Wells Fargo Bank, for its sub-advisory services, a percentage of each
Master Portfolio's average daily net assets as agreed by BGFA and Wells Fargo
Bank. 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 March 1, 1995 and ended December 31, 1995, the
corresponding Master Portfolio of each Fund paid to Wells Fargo Bank the
advisory fees indicated below, without waivers:
<TABLE>
<CAPTION>
3/1/95 - 12/31/95
MASTER PORTFOLIO FEES PAID
---------------- -----------------
<S> <C>
Growth Stock Master Portfolio $ 662,204
Short-Intermediate Term Master Portfolio $ 47,460
</TABLE>
For the period beginning January 1, 1996 and ended February 29, 1996 and for
the fiscal year ended February 28, 1997, the corresponding Master Portfolio of
each Fund paid to BGFA the advisory fees indicated below, without
waivers:
<TABLE>
<CAPTION>
1/1/96 - 2/29/96 FYE 2/28/97
MASTER PORTFOLIO FEES PAID FEES PAID
---------------- --------- ---------
<S> <C>
Growth Stock Master Portfolio $ 164,817 $1,334,600
Short-Intermediate Term Master Portfolio $ 9,923 $ 58,891
</TABLE>
For the fiscal year ended February 28, 1998, the corresponding Master
Portfolio of each Fund paid to BGFA the advisory fees indicated below and BGFA
waived the indicated amounts:
<TABLE>
<CAPTION>
FYE 2/28/98
MASTER PORTFOLIO FEES PAID FEES WAIVED
---------------- --------- -----------
<S> <C>
Growth Stock Master Portfolio $1,309,435 $ 45,153
Short-Intermediate Term Master Portfolio $ 50,170 $ 0
</TABLE>
Investment Sub-Adviser. Effective January 1, 1996, the Master Portfolios,
----------------------
pursuant to separate investment sub-advisory contracts with Wells Fargo Bank,
retained Wells Fargo Bank as its investment sub-adviser. Wells Fargo Bank is
responsible for the day-to-day portfolio management of each MSIT Master
Portfolio. The same Wells Fargo Bank investment professionals that previously
managed the investment portfolio of each MSIT Master Portfolio will continue,
subject to the overall supervision of BGFA, to manage each such Master
Portfolio's investment portfolio. Subject to the direction of the Trust's Board
of Trustees and the overall supervision and control of BGFA and the Trust, Wells
Fargo Bank is responsible for investing and reinvesting each Master Portfolio's
assets. In this regard, Wells Fargo Bank is 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 furnishes to BGFA periodic reports
on the investment activity and performance of the Master Portfolios, and such
additional reports and information as BGFA and the Trust's Board of Trustees and
officers shall reasonably request. Wells Fargo Bank is entitled to receive
11
<PAGE>
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.
For the period beginning January 1, 1996 and ended February 29, 1996, and
for the fiscal years ended February 28, 1997 and February 28, 1998, BGFA paid to
Wells Fargo Bank the following sub-advisory fees for services provided to the
corresponding Master Portfolio of each Fund, without waivers:
<TABLE>
<CAPTION>
1/1/96 - 2/29/96 FYE 2/28/97 FYE 2/28/98
MASTER PORTFOLIO FEES PAID FEES PAID FEES PAID
- ---------------- ---------------- ----------- -----------
<S> <C> <C> <C>
Growth Stock Master Portfolio $41,297 $332,700 $337,502
Short-Intermediate Term Master Portfolio $12,801 $ 13,020 $ 11,102
</TABLE>
Co-Administrators. The Company has engaged Stephens Inc. ("Stephens") and
-----------------
Barclays Global Investors, N.A. ("BGI") to provide certain administration
services to the Funds. Pursuant to a Co-Administration Agreement with the
Company, Stephens and BGI provide as administration 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, custodian, shareholder servicing agent, independent
auditors and legal counsel; (ii) general supervision of regulatory compliance
matters, including the compilation of information for documents such as reports
to, and filings with, the SEC and state securities commissions, and preparation
of proxy statements and shareholder reports for the Funds; 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 Company together with those ordinary clerical and
bookkeeping services that are not being furnished by the Fund's investment
adviser. Stephens also pays the compensation of the Company's Directors,
officers and employees who are affiliated with Stephens.
In addition, except for advisory fees, extraordinary expenses, brokerage and
other expenses connected to the execution of portfolio transactions and certain
expenses which are borne by the Funds, Stephens and BGI have agreed to bear all
costs of the Funds' and the Company's operations including, but not limited to,
transfer and dividend disbursing agency fees, shareholder servicing fees, and
expenses of printing and preparing prospectuses, SAIs and other Fund materials.
For providing such services, Stephens and BGI, in the aggregate, are entitled to
0.18% of the average daily net assets of each of the Growth Stock and
Short-Intermediate Term Funds. Effective October 21, 1996, BGI contracted with
Investors Bank & Trust Company ("IBT") to provide certain sub-administration
services. Prior to October 21, 1996, Stephens served as sole administrator to
the Funds.
For the fiscal years ended February 29, 1996 and February 28, 1997, the
Funds paid administration and co-administration fees to Stephens as
follows:
<TABLE>
<CAPTION>
FUND FYE 2/29/96 FYE 2/28/97
---- ----------- -----------
<S> <C> <C>
Growth Stock Fund $ 68,886 $149,995
Short-Intermediate Term Fund $ 6,381 $ 8,685
</TABLE>
For the period beginning October 21, 1996 and ended February 28, 1997, the
Funds paid co-administration fees to BGI as follows:
12
<PAGE>
<TABLE>
<CAPTION>
FUND 10/21/96 - 2/28/97
---- ------------------
<S> <C>
Growth Stock Fund $69,346
Short-Intermediate Term Fund $ 3,817
</TABLE>
For the fiscal year ended February 28, 1998, the Funds paid
co-administration fees jointly to Stephens and BGI as follows:
<TABLE>
<CAPTION>
FUND FYE 2/28/98
---- -----------
<S> <C>
Growth Stock $405,996
Short-Intermediate $ 20,045
</TABLE>
Distributor. 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 on behalf of 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.
Shareholder Servicing Plan. Each of the Funds has adopted a Shareholder
--------------------------
Servicing Plan (each a "Servicing Plan" and collectively the "Servicing Plans").
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 0.10% of the average daily
net assets of the Short-Intermediate Term and Growth Stock 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.
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 28, 1997,/1/ the Funds paid shareholder
servicing fees as follows and the indicated amounts were waived:
<TABLE>
<CAPTION>
FEES FEES
FUND PAID WAIVED
---- ---- ------
<S> <C> <C>
Growth Stock Fund $139,134 $112,482
Short-Intermediate Term Fund $ 8,448 $ 8,448
</TABLE>
- ---------------
/1/ Beginning October 21, 1996, shareholder servicing fees were paid out of
co-administration fees.
13
<PAGE>
Custodian. IBT, concurrent with its appointment as sub-administrator for the
---------
Funds on October 21, 1996, also has been retained as custodian to each Fund and
Master Portfolio and performs such services at 200 Clarendon Street, Boston,
Massachusetts 02116. 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. IBT is not entitled to receive
compensation for its services as custodian so long as it is entitled to receive
fees from BGI for providing sub-administration services to the Funds. Prior to
October 21, 1996, BGI served as custodian to the Funds and was not entitled to
receive a fee. For the fiscal year ended February 28, 1998, the Funds did not
pay any custody fees.
Transfer and Dividend Disbursing Agent. IBT has been retained to act as the
--------------------------------------
transfer and dividend disbursing agent for the Funds. For its services as
transfer and dividend disbursing agent to the Fund, IBT is entitled to receive
an annual maintenance fee computed on the basis of the number of shareholder
accounts that it maintains for the Funds and to be reimbursed for out-of-pocket
expenses or advances incurred by it in performing its obligations under the
agreement. The annual maintenance fee is paid as follows:
<TABLE>
<CAPTION>
ANNUAL FEE
----------
<S> <C>
Up to 200 accounts* $6,000 per feeder/class
From 201 to 250 accounts $8,500 per feeder/class
Over 250 accounts $10,000 per feeder/class
</TABLE>
- ---------------
* Defined as each account that is set up for an individual or plan sponsor on
a fund by fund basis.
In addition, the agreement contemplates that IBT will be reimbursed for
other expenses incurred by it at the request or with the written consent of the
Funds, including, without limitation, any equipment or supplies which the
Company specifically orders or requires IBT to order.
Prior to March 2, 1998, Wells Fargo Bank served as transfer and
dividend disbursing agent to the Funds, and was entitled to receive a monthly
fee at an annual rate of 0.03% of the average daily net assets of each Fund for
such services.
PURCHASE AND REDEMPTION OF SHARES
Terms of Purchase. The Funds are generally open Monday through Friday and
-----------------
are closed on weekends and NYSE holidays. The holidays on which the NYSE is
closed currently are: New Year's Day, Martin Luther King, Jr.'s. Birthday,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day. 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.
Payment for shares of a Fund may, at the discretion of the adviser, be made
in the form of securities that are permissible investments for the Fund and must
meet the investment objective, policies and limitations of the Fund as described
in the Prospectus. In connection with an in-kind securities payment, a Fund may
require, among other things, that the securities (i) be valued on the day of
purchase in accordance with the pricing methods used by the Fund; (ii) are
accompanied by satisfactory assurance that the Fund will have good and
marketable title to such securities received by it; (iii) are not subject to
14
<PAGE>
any restrictions upon resale by the Fund; (iv) be in proper form for transfer to
the Fund; (v) are accompanied by adequate information concerning the basis and
other tax matters relating to the securities. All dividends, interest,
subscription or other rights pertaining to such securities shall become the
property of the Fund engaged in the in-kind purchase transaction and must be
delivered to such Fund by the investor upon receipt from the issuer. Securities
acquired through an in-kind purchase will be acquired for investment and not for
immediate resale. Shares purchased in exchange for securities generally cannot
be redeemed until the transfer has settled. Each Fund immediately will transfer
to its corresponding Master Portfolio any and all securities received by it in
connection with an in-kind purchase transaction, in exchange for interests in
such Master Portfolio.
Suspension of Redemptions. Under the 1940 Act, a Fund may suspend the right
-------------------------
of redemption or postpone the date of payment upon redemption for any period
during which the NYSE is closed (other than customary weekend and holiday
closings, or during which trading is restricted, or during which as determined
by the SEC by rule or regulation) an emergency exists as a result of which
disposal or valuation of portfolio securities is not reasonably practicable, or
for such periods as the SEC may permit.
The Company may suspend redemption rights or postpone redemption payments
for such periods as are permitted under the 1940 Act. The Company also may
redeem shares involuntarily or make payment for redemption in securities or
other property if it appears appropriate to do so in light of the Company's
responsibilities under the 1940 Act.
In addition, the Company may redeem shares involuntarily to reimburse a Fund
for any losses sustained by reason of the failure of a shareholder to make full
payment for shares purchased or to collect any charge relating to a transaction
effected for the benefit of a shareholder which is applicable to shares of a
Fund as provided from time to time in the Prospectus.
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 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
15
<PAGE>
cases, bid prices will be furnished by an independent pricing service approved
by the Board 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 MSIT's Board of Trustees and in accordance with
procedures adopted by the Trustees.
TAXES
The following information supplements and should be read in conjunction with
the Prospectus section entitled "Taxes." The Prospectus describes generally the
tax treatment of distributions by the Funds. This section of the SAI includes
additional information concerning income taxes.
General. The Company intends to qualify each Fund as a regulated investment
company under Subchapter M of the Internal Revenue Code of 1986, as amended (the
"Code"), as long as such qualification is in the best interest of the Fund's
shareholders. Each Fund will be treated as a separate entity for tax purposes
and thus the provisions of the Code applicable to regulated investment companies
will generally be applied individually to each Fund, rather than to the Company
as a whole. Accordingly, net capital gain, net investment income, and operating
expenses will be determined separately for each Fund. As a regulated investment
company, each Fund will not be taxed on its net investment income and capital
gains distributed to its shareholders.
Qualification as a regulated investment company under the Code requires,
among other things, that (a) each Fund derive at least 90% of its annual gross
income from dividends, interest, certain payments with respect to securities
loans, gains from the sale or other disposition of stock or securities or
foreign currencies (to the extent such currency gains are directly related to
the regulated investment company's principal business of investing in stock or
securities) and other income (including but not limited to gains from options,
futures or forward contracts) derived with respect to its business of investing
in such stock, securities or currencies; and (b) each Fund diversify 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 obligations and the securities of other regulated investment
companies), or in two or more issuers which the Fund controls and which are
determined to be engaged in the same or similar trades or businesses.
The Funds must also distribute or be deemed to distribute to their
shareholders at least 90% of their net investment income(which, for this purpose
includes net short-term capital gains) earned in each taxable year. In general,
these distributions must actually or be deemed to be made in the taxable year.
However, in certain circumstances, such distributions may be made in the 12
months following the taxable year. The Funds intend to pay out substantially all
of their net investment income and net realized capital gains (if any) for each
year.
16
<PAGE>
In addition, a regulated investment company must, in general, derive less
than 30% of its gross income for a taxable year from the sale or other
disposition of securities or options thereon held for less than three months.
However, this restriction has been repealed with respect to a regulated
investment company's taxable years beginning after August 5, 1997.
Each Fund seeks to qualify as a regulated investment company by investing
substantially all of its assets in a Master Portfolio. Under the Code, each
Master Portfolio will be treated as a non-publicly traded partnership rather
than as a regulated investment company or a corporation. As a non-publicly
traded partnership, any interest, dividends, gains and losses of the Master
Portfolio shall be deemed to have been "passed through" to the corresponding
Fund (and the Master Portfolio's other investors) in proportion to each Fund's
ownership interest in the Master Portfolio. Therefore, to the extent that a
Master Portfolio were to accrue but not distribute any interest, dividends or
gains, the corresponding Fund would be deemed to have realized and recognized
its proportionate share of interest, dividends or gains without receipt of any
corresponding distribution. However, each Master Portfolio will seek to minimize
recognition by its investors (such as a Fund) of interest, dividends, gains or
losses without a corresponding distribution.
Excise Tax. A 4% nondeductible excise tax will be imposed on each Fund
(other than to the extent of its tax-exempt interest income) to the extent it
does not meet certain minimum distribution requirements by the end of each
calendar year. Each Fund intends to 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.
Taxation of Master Portfolio Investments. Except as otherwise provided
herein, gains and losses realized by a Master Portfolio on the sale of portfolio
securities generally will be capital gains and losses. Such gains and losses
ordinarily will be long-term capital gains and losses if the securities have
been held by the Master Portfolio for more than one year at the time of
disposition of the securities.
Gains recognized on the disposition of a debt obligation (including
tax-exempt obligations purchased after April 30, 1993) purchased by a Master
Portfolio at a market discount (generally at a price less than its principal
amount) will be treated as ordinary income to the extent of the portion of
market discount which accrued, but was not previously recognized pursuant to an
available election, during the term the Master Portfolio held the debt
obligation.
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. Some realized capital
losses may be deferred if they result from a position which is part of a
"straddle," discussed below. If securities are sold by a Master Portfolio
pursuant to the exercise of a call option granted by it, the 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.
Under Section 1256 of the Code, a Master Portfolio will be required to "mark
to market" its positions in "Section 1256 contracts," which generally include
regulated futures contracts and listed non-equity options. In this regard,
Section 1256 contracts will be deemed to have been sold at market value. Under
Section 1256 of the Code, sixty percent (60%) of any net gain or loss realized
on all dispositions of Section 1256 contracts, including deemed dispositions
under the mark-to-market regime, will generally be treated as long-term capital
gain or loss, and the remaining forty percent (40%) will be treated as
17
<PAGE>
short-term capital gain or loss. Transactions that qualify as designated hedges
are excepted from the mark-to-market and 60%/40% rules.
Under Section 988 of the Code, a Master Portfolio will generally recognize
ordinary income or loss to the extent gain or loss realized on the disposition
of portfolio securities is attributable to changes in foreign currency exchange
rates. In addition, gain or loss realized on the disposition of a foreign
currency forward contract, futures contract, option or similar financial
instrument, or of foreign currency itself, will generally be treated as ordinary
income or loss. The Master Portfolios will attempt to monitor Section 988
transactions, where applicable, to avoid adverse federal income tax impact to
the Funds and their shareholders.
Offsetting positions held by a regulated investment company involving
certain financial forward, futures or options 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 of the Code,
described above. If a regulated investment company were treated as entering into
"straddles" by 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 straddles were governed
by Section 1256 of the Code. The regulated investment company 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 regulated investment company
may differ. Generally, to the extent the straddle rules apply to positions
established by a 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.
If a Master Portfolio enters into a "constructive sale" of any appreciated
position in stock, a partnership interest, or certain debt instruments, the
Master Portfolio must recognize gain (but not loss) with respect to that
position. For this purpose, a constructive sale occurs when the Master Portfolio
enters into one of the following transactions with respect to the same or
substantially identical property: (i) a short sale; (ii) an offsetting notional
principal contract; (iii) a futures or forward contract, or (iv) other
transactions identified in future Treasury Regulations.
If a Master Portfolio purchases shares in a "passive foreign investment
company" ("PFIC"), the Master Portfolio may be subject to federal income tax and
an interest charge imposed by the Internal Revenue Service ("IRS") upon certain
distributions from the PFIC or the Master Portfolio's disposition of its PFIC
shares. If the Master Portfolio invests in a PFIC, the Master Portfolio intends
to make an available election to mark-to-market its interest in PFIC shares.
Under the election, the Master Portfolio will be treated as recognizing at the
end of each taxable year the difference, if any, between the fair market value
of its interest in the PFIC shares and its basis in such shares. In some
circumstances, the recognition of loss may be suspended. The Master Portfolio
will adjust its basis in the PFIC shares by the amount of income (or loss)
recognized. Although such income (or loss) will be taxable to the Master
Portfolio as ordinary income (or loss) notwithstanding any distributions by the
PFIC, the Master Portfolio will not be subject to federal income tax or the
interest charge with respect to its interest in the PFIC, if it makes the
available election.
Foreign Taxes. Income and dividends received by a Fund (through a Master
Portfolio) from foreign securities and gains realized by the Fund on the
disposition of foreign securities may be subject to
18
<PAGE>
withholding and other taxes imposed by foreign countries. Tax conventions
between certain countries and the United States may reduce or eliminate such
taxes. Although in some circumstances a regulated investment company can elect
to "pass through" foreign tax credits to its shareholders, the Funds do not
expect to be eligible to make such an election.
Capital Gain Distributions. Distributions which are designated by a Fund as
capital gain distributions will be taxed to shareholders as long-term capital
gain (to the extent such dividends do not exceed the Fund's actual net capital
gain for the taxable year), regardless of how long a shareholder has held Fund
shares. Such distributions will be designated as capital gain distributions in a
written notice mailed by the Fund to its shareholders not later than 60 days
after the close of the Fund's taxable year.
The Taxpayer Relief Act of 1997 (the "1997 Act") created several new
categories of capital gains applicable to noncorporate taxpayers. Under prior
law, noncorporate taxpayers generally were taxed at a maximum rate of 28% on net
capital gain (generally, the excess of net long-term capital gain over net
short-term capital loss). Noncorporate taxpayers generally are now taxed at a
maximum rate of 20% on net capital gain attributable to gains realized on the
sale of property held for greater than 18 months, and a maximum rate of 28% on
net capital gain attributable to gain realized on the sale of property held for
greater than one year and not more than 18 months, and a maximum rate of 25% for
certain gains attributable to the sale of real property. The 1997 Act retains
the treatment of short term capital gain or loss (generally, gain or loss
attributable to capital assets held for 1 year or less) and did not affect the
taxation of capital gains in the hands of corporate taxpayers.
Under the 1997 Act, the Treasury is authorized to issue regulations for
application of the reduced capital gains tax rates to pass-through entities,
including regulated investment companies, such as the Funds. The IRS has
published a notice applicable to pass-through entities until regulations are
promulgated. Pursuant to the notice, each Fund is permitted (but not required)
to designate the portion of its capital gain distributions, if any, to which the
28%, 25% and 20% rates described in the preceding paragraph apply, based on the
net amount of each class of capital gain realized by the Fund determined as if
the Fund is a noncorporate taxpayer. Noncorporate shareholders of the Funds may
therefore qualify for the reduced rate of tax on capital gain distributions paid
by the Funds.
Disposition of Fund Shares. A disposition of Fund shares pursuant to
redemption (including a redemption in-kind) or exchanges ordinarily will result
in a taxable capital gain or loss, depending on the amount received for the
shares (or are deemed to receive in the case of an exchange) and the cost of the
shares.
If a shareholder exchanges or otherwise disposes of Fund shares within 90
days of having acquired such shares and if, as a result of having acquired those
shares, the shareholder subsequently pays a reduced sales charge on a new
purchase of shares of the Fund or a different regulated investment company, the
sales charge previously incurred acquiring the Fund's shares shall not be taken
into account (to the extent such previous sales charges do not exceed the
reduction in sales charges on the new purchase) for the purpose of determining
the amount of gain or loss on the disposition, but will be treated as having
been incurred in the acquisition of such other shares. Also, any loss realized
on a redemption or exchange of shares of the Fund will be disallowed to the
extent that substantially identical shares are acquired within the 61-day period
beginning 30 days before and ending 30 days after the shares are disposed
of.
If a shareholder receives a designated capital gain distribution (to be
treated by the shareholder as long-term capital gain) with respect to any Fund
share and such Fund share is held for six months or less,
19
<PAGE>
then (unless otherwise disallowed) any loss on the sale or exchange of that Fund
share will be treated as long-term capital loss to the extent of the designated
capital gain distribution. This loss disallowance rule does not apply to losses
realized under a periodic redemption plan.
Federal Income Tax Rates. As of the printing of this SAI, the maximum
individual tax rate applicable to ordinary income is 39.6% (marginal tax rates
may be higher for some individuals to reduce or eliminate the benefit of
exemptions and deductions); the maximum individual marginal tax rate applicable
to net capital gain is 28% (however, see "Capital Gain Distributions" above);
and the maximum corporate tax rate applicable to ordinary income and net capital
gain is 35% (marginal tax rates may be higher for some corporations to reduce or
eliminate the benefit of lower marginal income tax rates). Obviously, the amount
of tax payable by any taxpayer will be affected by a combination of tax laws
covering, for example, deductions, credits, deferrals, exemptions, sources of
income and other matters.
Backup Withholding. 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 and redemptions in-kind) paid or credited to an individual Fund
shareholder, unless the shareholder certifies that his or her taxpayer
identification number ("TIN"), which usually is his or her social security
number, provided to the Company 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 that the shareholder is subject to backup
withholding. Such tax withheld does not constitute any additional tax imposed on
the shareholder, and may be claimed as a credit against the shareholder's
federal income tax liability, if any, or otherwise will be refundable. An
investor must provide a valid TIN to the Company upon opening or reopening an
account. Failure to furnish a valid TIN to the Company could also subject the
investor to penalties imposed by the IRS. Foreign shareholders of the Funds
(described below) generally are not subject to backup withholding.
Corporate Shareholders. Corporate shareholders of the Funds may be eligible
for the dividends-received deduction on dividends distributed out of a Fund's
net investment income attributable to dividends received from domestic
corporations, which, if received directly by the corporate shareholder, would
qualify for such deduction. A distribution by a Fund attributable to dividends
of a domestic corporation will only qualify for the dividends-received deduction
if (i) the corporate shareholder generally holds the Fund shares upon which the
distribution is made for at least 46 days during the 90 day period beginning 45
days prior to the date upon which the shareholder becomes entitled to the
distribution; and (ii) the Fund generally holds the shares of the domestic
corporation producing the dividend income for at least 46 days during the 90 day
period beginning 45 days prior to the date upon which the Fund becomes entitled
to such dividend income.
Foreign Shareholders. Under the Code, distributions of net investment income
by a Fund to a nonresident alien individual, foreign trust (i.e., trust which a
U.S. court is able to exercise primary supervision over administration of that
trust and one or more U.S. persons have authority to control substantial
decisions of that trust), foreign estate (i.e., the income of which is not
subject to U.S. tax regardless of source), foreign corporation, or foreign
partnership (a "foreign shareholder") will be subject to federal income tax
withholding (at a rate of 30% or a lower treaty rate, if applicable).
Withholding will not apply if a dividend distribution paid by a Fund to a
foreign shareholder is "effectively connected" with a U.S. trade or business
(or, if an income tax treaty applies, is attributable to a U.S. permanent
establishment of the foreign shareholder), in which case the reporting and
withholding requirements applicable to U.S. residents will apply. Distributions
of net capital gain generally are not subject to federal income tax
withholding.
20
<PAGE>
New Regulations. On October 6, 1997, the Treasury Department issued new
regulations (the "New Regulations") which make certain modifications to the
backup withholding, U.S. income tax withholding and information reporting rules
applicable to foreign shareholders. The New Regulations generally will be
effective for payments made after December 31, 1999, subject to certain
transition rules. Among other things, the New Regulations will permit the Funds
to estimate the portion of their distributions paid to foreign shareholders
which is subject to federal income tax withholding. Prospective investors are
urged to consult their own tax advisors regarding the application to them of the
New Regulations.
Other Matters. Investors should be aware that the investments to be made by
a Fund may involve sophisticated tax rules that may result in income or gain
recognition by the Fund without corresponding current cash receipts. Although
the Funds will seek to avoid significant noncash income, such noncash income
could be recognized by a Fund, in which case the Fund may distribute cash
derived from other sources in order to meet the minimum distribution
requirements described above.
The foregoing discussion and the discussions in the Prospectus applicable to
each shareholder address only some of the federal income tax considerations
generally affecting investments in a Fund. Each investor is urged to consult his
or her tax advisor regarding specific questions as to federal, state, local and
foreign taxes.
PERFORMANCE INFORMATION
As indicated in the Prospectus, the Funds may advertise certain total return
information computed in the manner described in the Prospectus. 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 the
Prospectus, 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 28, 1998 and for the fiscal year ended February 28, 1998
were as follows:
<TABLE>
<CAPTION>
COMMENCEMENT
THROUGH
FUND 2/28/98 FYE 2/28/98
- ---- ------- -----------
<S> <C> <C>
Growth Stock Fund 16.20% 21.61%
Short-Intermediate Term Fund 5.34% 8.51%
</TABLE>
The cumulative total returns on the Funds from July 2, 1993 (commencement of
operations) to February 28, 1998 were as follows:
COMMENCEMENT
THROUGH
FUND 2/28/98
- ---- ------------
Growth Stock Fund 101.30%
Short-Intermediate Term Fund 27.46%
21
<PAGE>
As indicated in the Prospectus the Short-Intermediate Term Fund 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 yield of the Short-Intermediate Term Fund for the 30-day period ended
February 28, 1998 was 5.65%.
Generally. The yield for a 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.
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 and may compare the
performance of a Fund to the performance of various indices and investments for
which reliable performance data is available. The performance of a Fund may be
compared in advertising and other literature to averages, performance rankings
and other information prepared by recognized mutual fund statistical services.
The performance information for the Short-Intermediate Term 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
22
<PAGE>
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 Growth 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 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
23
<PAGE>
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.
Other Advertising Items. The Company 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.
PORTFOLIO TRANSACTIONS
Since each Fund invests all of its assets in a corresponding Master
Portfolio of MSIT, set forth below is a description of the Master Portfolios'
policies governing portfolio securities transactions.
Purchases and sales of equity securities on a securities exchange usually
are effected through brokers who charge a negotiated commission for their
services. Commission rates are established pursuant to negotiations with the
broker based on the quality and quantity of execution services provided by the
broker in light of generally prevailing rates. Orders may be directed to any
broker including, to the extent and in the manner permitted by applicable law,
Stephens, Barclays Global Investors Services or Wells Fargo Securities Inc. 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.
Purchases of debt securities generally are principal transactions. Debt
securities normally are purchased or sold from or to dealers serving as market
makers for the securities at a net price. Debt securities also may be purchased
in underwritten offerings or directly from an issuer. Generally debt obligations
are traded on a net basis and do not involve brokerage commissions. The cost of
executing transactions in debt securities consists primarily of dealer spreads
and underwriting commissions.
Under the 1940 Act, persons affiliated with a Master Portfolio are
prohibited from dealing with the Master Portfolio as a principal in the purchase
and sale of portfolio securities unless an exemptive order allowing such
transactions is obtained from the Commission or an exemption is otherwise
available. A Master Portfolio may purchase securities from underwriting
syndicates of which Stephens or Wells Fargo
24
<PAGE>
Bank is a member under certain conditions in accordance with the provisions of a
rule adopted under the 1940 Act and in compliance with procedures adopted by
MSIT's Board of Trustees.
A Master Portfolio has no obligation to deal with any dealer or group of
dealers in the execution of transactions in portfolio securities. Subject to
policies established by Board of Trustees, BGFA and Wells Fargo Bank are
responsible for each Master Portfolio's investment decisions and the placing of
portfolio transactions. In placing orders, it is the policy of each Master
Portfolio to obtain the best overall terms taking into account the dealer's
general execution and operational facilities, the type of transaction involved
and other factors such as the dealer's risk in positioning the securities
involved. BGFA and Wells Fargo Bank generally seek reasonably competitive
spreads or commissions.
In assessing the best overall terms available for any transaction, BGFA and
Wells Fargo Bank each 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.
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. Wells
Fargo Bank may cause the Master Portfolios to pay a broker/dealer which
furnishes brokerage and research services a higher commission than that which
might be charged by another broker/dealer for effecting the same transaction,
provided that Wells Fargo Bank 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 Bank. 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 Bank and does not
reduce the advisory fees payable by the Master Portfolio. MSIT's Board of
Trustees will periodically review the commissions paid by the Master Portfolio
to consider whether the commissions paid over representative periods of time
appear to be reasonable in relation to the benefits inuring to the Master
Portfolio. 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 Wells Fargo Bank exercises investment discretion.
Conversely, the Master Portfolio 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 Section 28(e) of the Securities Exchange Act of 1934, an adviser shall
not be "deemed to have acted unlawfully or to have breached its fiduciary duty"
solely because under certain circumstances it has caused the account to pay a
higher commission than the lowest available. To obtain the benefit of Section
28(e), an adviser must make a good faith determination that the commissions paid
are "reasonable in relation to the value of the brokerage and research services
provided . . . viewed in terms of either that particular transaction or its
overall responsibilities with respect to the accounts as to which it exercises
investment discretion and that the services provided by a broker provide an
adviser with lawful and appropriate assistance in the performance of its
investment decision-making responsibilities." Accordingly, the price to the
Master Portfolio in any transaction may be less favorable than that available
from another broker/dealer if the difference is reasonably justified by other
aspects of the portfolio execution services offered.
Broker/dealers utilized by Wells Fargo Bank may furnish statistical,
research and other information or services which are deemed by Wells Fargo Bank
to be beneficial to each Master Portfolio's investment
25
<PAGE>
program. Research services received from brokers supplement Wells Fargo Bank's
own research and may include the following types of information: statistical and
background information on industry groups and individual companies; forecasts
and interpretations with respect to U.S. and foreign economies, securities,
markets, specific industry groups and individual companies; information on
political developments; portfolio management strategies; performance information
on securities and information concerning prices of securities; and information
supplied by specialized services to Wells Fargo Bank and to MSIT's Trustees with
respect to the performance, investment activities and fees and expenses of other
mutual funds. Such information may be communicated electronically, orally or in
written form. Research services may also include the providing of equipment used
to communicate research information, the arranging of meetings with management
of companies and the providing of access to consultants who supply research
information.
The outside research assistance is useful to Wells Fargo Bank since the
brokers utilized by Wells Fargo Bank as a group tend to follow a broader
universe of securities and other matters than the staff of Wells Fargo Bank can
follow. In addition, this research provides Wells Fargo Bank with a diverse
perspective on financial markets. Research services which are provided to Wells
Fargo Bank by brokers are available for the benefit of all accounts managed or
advised by Wells Fargo Bank. It is the opinion of Wells Fargo Bank that this
material is beneficial in supplementing its research and analysis; and,
therefore, it may benefit the Master Portfolios by improving the quality of
Wells Fargo Bank's investment advice.
Portfolio Turnover. The portfolio turnover rates for the Short-Intermediate
------------------
Term and Growth Stock Master Portfolios generally are not expected to exceed
300% and 200%, respectively. The high portfolio turnover rates for the 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 Bank deem portfolio changes
appropriate.
Brokerage Commissions. For the fiscal years ended February 29, 1996,
---------------------
February 28, 1997 and February 28, 1998, 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
---------------- ----------------
FYE 2/29/96 FYE 2/28/97 FYE 2/28/98
----------- ----------- -----------
<S> <C> <C> <C>
Growth Stock Master Portfolio $355,046 $394,483 $494,115
Short-Intermediate Term Master $ 0 $ 0 $ 0
Portfolio
</TABLE>
Securities of Regular Broker/Dealers. As of February 28, 1998, the
------------------------------------
corresponding Master Portfolio of each Fund did not own any securities of its
"regular brokers or dealers" or their parents, as defined in the 1940 Act.
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 12,100,000,000 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. 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.
26
<PAGE>
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 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 is an open-end, series management investment companies organized as a
Delaware business trust. MSIT was organized on October 28, 1993. In accordance
with Delaware law and in connection with the tax treatment sought by the MSIT,
MSIT's Declaration of Trust provides that its investors would be personally
responsible for Trust liabilities and obligations, but only to the extent MSIT's
property is insufficient to satisfy such liabilities and obligations. The
Declaration of Trust also provides that MSIT 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 MSIT itself was unable to meet its
obligations.
The Declaration of Trust further provides that obligations of MSIT 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
27
<PAGE>
the Trustee would otherwise be subject by reason of willful misfeasance, bad
faith, gross negligence, or reckless disregard of the duties involved in the
conduct of the Trustee's office.
The interests in each Master Portfolio of MSIT have substantially identical
voting and other rights as those rights enumerated above for shares of the
Funds. MSIT also intends to dispense with annual meetings, but is 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
Master Portfolio, 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 Master Portfolio, such
Fund will vote such shares in the same proportion as the shares for which the
Fund does receive voting instructions.
As of June 1, 1998, 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 NATURE OF
NAME OF FUND OF SHAREHOLDER OF FUND OWNERSHIP
- ------------ ---------------- ---------- ---------
<S> <C> <C> <C>
Growth Stock Fund Merrill Lynch Trust Co FSB 83.03% Record
FBO Various 401 K Plans
P.O. Box 62000
San Francisco, CA 94162
Fidelity Investments Institutional 9.33% Record
Operations Co. (FIIOC) as agent for certain
employee benefit plans
100 Magellan Way KWIC
Covington, KY 41015
Short-Intermediate Merrill Lynch Trust Co FSB 70.78% Record
Term Fund FBO Various 401 K Plans
P.O. Box 62000
San Francisco, CA 94162
Merrill Lynch Pierce Fenner & Smith 26.38% Record
For the sole benefit of its customers 4800 Deer Lake
Drive, East, 3rd Floor Jacksonville, FL 32246
</TABLE>
For purposes of the 1940 Act, any person who owns directly or through one or
more controlled companies more than 25% of the voting securities of a company is
presumed to "control" such company. Accordingly, to the extent that a
shareholder identified in the foregoing table is identified as the beneficial
holder of more than 25% of a Fund, or is identified as the holder of record of
more than 25% of a Fund and has voting and/or investment powers, it may be
presume to control such Fund.
28
<PAGE>
OTHER
The Registration Statement of MSIT 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 audited financial statements, including the portfolio of investments,
and independent auditors' report for the fiscal year ended February 28, 1998 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 1, 1998. The audited financial statements are attached to all SAIs delivered
to shareholders or prospective shareholders.
29
<PAGE>
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."
30
<PAGE>
MASTERWORKS FUNDS INC.
FILE NO. 33-54126; 811-7332
PART C
OTHER INFORMATION
Item 24. Financial Statements and Exhibits.
---------------------------------
(a) Financial Statements:
The portfolio of investments, audited financial statements and
independent auditors' report for the fiscal year ended February 28, 1998 for
the Asset Allocation, Bond Index, Growth Stock, LifePath 2000, LifePath 2010,
LifePath 2020, LifePath 2030, LifePath 2040, Money Market, Short-Intermediate
Term, S&P 500 Stock and U.S. Treasury Allocation Funds are hereby
incorporated by reference to the Company's Annual Report, as filed with the
SEC on May 1, 1998.
The portfolio of investments, audited financial statements and
independent auditors' report for the fiscal year ended February 28, 1998 for
the Asset Allocation, Bond Index, LifePath 2000, LifePath 2010, LifePath
2020, LifePath 2030, LifePath 2040, S&P 500 Index and U.S. Treasury
Allocation Master Portfolios of Master Investment Portfolio ("MIP"), and for
the Growth Stock and Short-Intermediate Term Master Portfolios of Managed
Series Investment Trust ("MSIT") are hereby incorporated by reference to the
Company's Annual Report, as filed with the SEC on May 1, 1998.
(b) Exhibits:
<TABLE>
<CAPTION>
Exhibit
Number Description
------ -----------
<S> <C>
1 - Restated Articles of Incorporation dated October 31, 1995,
incorporated by reference to Post-Effective Amendment No.
11, filed December 1, 1995.
2 - By-Laws, incorporated by reference to Post-Effective Amendment No. 8, filed June 27, 1995.
3 - Not applicable
4 - Not applicable
5(a)(i) - Investment Advisory Contract with Barclays Global Fund
Advisors on behalf of the Money Market Fund, dated January
1, 1996, incorporated by reference to Post-Effective
Amendment No. 13, filed June 28, 1996.
</TABLE>
C-1
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description
------ -----------
<S> <C>
5(a)(ii) - Sub-Advisory Contract by and among Barclays Global
Fund Advisors and Wells Fargo Bank, N.A. on behalf of the
Money Market Fund dated January 1, 1996, incorporated by
reference to Post-Effective Amendment No. 13, filed June
28, 1996.
6 - Amended and Restated Distribution Agreement with
Stephens Inc. on behalf of the Funds, dated February 16,
1996, incorporated by reference to Post-Effective Amendment
No. 13, filed June 28, 1996.
7 - Not applicable.
8 - Custody Agreement with Investors Bank & Trust
Company on behalf of the Funds, dated October 21, 1996,
incorporated by reference to Post-Effective Amendment No.
14, filed June 30, 1997.
9(a) - Transfer Agency and Service Agreement with Investors Bank &
Trust Company on behalf of the Funds, dated February 27,
1998, filed herewith.
9(b) - Shareholder Servicing Plan and Form of Shareholder
Servicing Agreement for the Growth, Growth Stock, Short-
Intermediate Term, Asset Allocation, U.S. Treasury
Allocation, Bond Index, S&P 500 Stock and Money Market
Funds, filed herewith.
9(b)(i) - Shareholder Servicing Plan and Form of
Shareholder Servicing Agreement for the LifePath 2000,
LifePath 2010, LifePath 2020, LifePath 2030 and LifePath
2040 Funds, incorporated by reference to Post-Effective
Amendment No. 11, filed December 1, 1995.
9(c)(i) - Co-Administration Agreement with Stephens Inc. and Barclays
Global Investors, N.A. on behalf of the Funds, dated
October 21, 1996, incorporated by reference to Post-
Effective Amendment No. 14, filed June 30, 1997 (previously
listed as exhibit 5(b)(i)).
9(c)(ii) - Sub-Administration Agreement by and among Barclays Global
Investors, N.A. and Investors Bank & Trust Company on
behalf of the Funds, dated October 21, 1996, incorporated
by reference to Post-Effective Amendment No. 14, filed June
30, 1997 (previously listed as exhibit 5(b)(ii)).
9(d) - Service Agreement with Merrill Lynch, Pierce, Fenner &
Smith Incorporated on behalf of the Funds, dated December
31, 1997, filed herewith.
9(e) - Financial Services Agreement with Merrill Lynch, Pierce,
Fenner & Smith Incorporated on behalf of the Funds, dated
December 31, 1997, filed herewith.
10 - Opinion and Consent of Counsel, filed herewith.
11 - Consent of Independent Auditors, filed herewith.
12 - Not applicable
13 - Not applicable
</TABLE>
C-2
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description
------ -----------
<S> <C>
14 - Not applicable
15 - Not applicable
16 - Not applicable
17 - See Exhibit 27
18 - Not applicable
19 - Powers of Attorney for Jack S. Euphrat, R. Greg Feltus,
Thomas S. Goho, Zoe Ann Hines, W. Rodney Hughes, Robert M.
Joses and J. Tucker Morse, incorporated by reference to
Post-Effective Amendment No. 14, filed June 30, 1997.
27.1 - Financial Data Schedule for the Asset Allocation Fund,
filed herewith.
27.2 - Financial Data Schedule for the Bond Index Fund,
filed herewith.
27.3 - Financial Data Schedule for the Growth Stock Fund,
filed herewith.
27.4 - Financial Data Schedule for the Money Market Fund,
filed herewith.
27.5 - Financial Data Schedule for the S&P 500 Stock Fund,
filed herewith.
27.6 - Financial Data Schedule for the Short-Intermediate
Term Fund, filed herewith.
27.7 - Financial Data Schedule for the U.S. Treasury Allocation
Fund, filed herewith.
27.9 - Financial Data Schedule for the LifePath 2000 Fund,
filed herewith.
27.10 - Financial Data Schedule for the LifePath 2010 Fund,
filed herewith.
27.11 - Financial Data Schedule for the LifePath 2020 Fund,
filed herewith.
27.12 - Financial Data Schedule for the LifePath 2030 Fund,
filed herewith.
27.13 - Financial Data Schedule for the LifePath 2040 Fund,
filed herewith.
</TABLE>
C-3
<PAGE>
Item 25. Persons Controlled by or under
Common Control with Registrant
------------------------------
As of June 1, 1998, each Fund owned the following percentages of the
outstanding beneficial interests of the corresponding Master Portfolios of MIP
or MSIT. As such, each Fund could be considered a controlling person of the
corresponding Master Portfolio for purposes of the 1940 Act.
<TABLE>
<CAPTION>
Corresponding Percentage
Fund Master Portfolio of beneficial
- ---- ---------------- interests held
--------------
<S> <C> <C>
LifePath 2000 Fund LifePath 2000 Master Portfolio (MIP) 43.13%
LifePath 2010 Fund LifePath 2010 Master Portfolio (MIP) 54.90%
LifePath 2020 Fund LifePath 2020 Master Portfolio (MIP) 45.87%
LifePath 2030 Fund LifePath 2030 Master Portfolio (MIP) 41.10%
LifePath 2040 Fund LifePath 2040 Master Portfolio (MIP) 32.68%
Asset Allocation Fund Asset Allocation Master Portfolio (MIP) 99.99%
Bond Index Fund Bond Index Master Portfolio (MIP) 99.99%
S&P 500 Stock Fund S&P 500 Index Master Portfolio (MIP) 88.41%
U.S. Treasury Allocation Fund U.S. Treasury Allocation Master Portfolio (MIP) 99.99%
Growth Stock Fund Growth Stock Master Portfolio (MSIT) 99.99%
Short-Intermediate Term Fund Short-Intermediate Term Master Portfolio (MSIT) 99.99%
</TABLE>
Item 26. Number of Holders of Securities.
-------------------------------
As of June 1, 1998, the number of record holders of each class of
securities of the Registrant for the following funds were as follows:
<TABLE>
<CAPTION>
Number of
Title of Class Record Holders
- -------------- --------------
<S> <C>
Asset Allocation Fund 14
Bond Index Fund 18
Growth Stock Fund 8
LifePath 2000 Fund 11
LifePath 2010 Fund 12
LifePath 2020 Fund 12
LifePath 2030 Fund 12
LifePath 2040 Fund 11
Money Market Fund 5
Short-Intermediate Term Fund 5
S&P 500 Stock Fund 66
U.S. Treasury Allocation Fund 8
</TABLE>
C-4
<PAGE>
Item 27. Indemnification.
---------------
The following paragraphs of Article VIII of the Registrant's Articles
of Incorporation provide:
(h) The Corporation shall indemnify (1) its Directors and
officers, whether serving the Corporation or at its request any other
entity, to the full extent required or permitted by the General Laws of
the State of Maryland now or hereafter in force, including the advance of
expenses under the procedures and to the full extent permitted by law, and
(2) its other employees and agents to such extent as shall be authorized
by the Board of Directors or the Corporation's By-Laws and be permitted by
law. The foregoing rights of indemnification shall not be exclusive of
any other rights to which those seeking indemnification may be entitled.
The Board of Directors may take such action as is necessary to carry out
these indemnification provisions and is expressly empowered to adopt,
approve and amend from time to time such By-Laws, resolutions or contracts
implementing such provisions or such further indemnification arrangements
as may be permitted by law. No amendment of these Articles of
Incorporation of the Corporation shall limit or eliminate the right to
indemnification provided hereunder with respect to acts or omissions
occurring prior to such amendment or repeal. Nothing contained herein
shall be construed to authorize the Corporation to indemnify any Director
or officer of the Corporation against any liability to the Corporation or
to any holders of securities of the Corporation to which he is subject by
reason of willful misfeasance, bad faith, gross negligence, or reckless
disregard of the duties involved in the conduct of his office. Any
indemnification by the Corporation shall be consistent with the
requirements of law, including the 1940 Act.
(i) To the fullest extent permitted by Maryland statutory and
decisional law and the 1940 Act, as amended or interpreted, no Director or
officer of the Corporation shall be personally liable to the Corporation
or its stockholders for money damages; provided, however, that nothing
herein shall be construed to protect any Director or officer of the
Corporation against any liability to which such Director or officer would
otherwise be subject by reason of willful misfeasance, bad faith, gross
negligence, or reckless disregard of the duties involved in the conduct of
his office. No amendment, modification or repeal of this Article VIII
shall adversely affect any right or protection of a Director or officer
that exists at the time of such amendment, modification or repeal.
C-5
<PAGE>
Item 28. Business and Other Connections
of Investment Adviser.
------------------------------
The Funds, other than the Money Market Fund, currently do not retain an
investment adviser. The corresponding MIP Master Portfolios to the LifePath
2000, LifePath 2010, LifePath 2020, LifePath 2030, LifePath 2040, Asset
Allocation, Bond Index, S&P 500 Stock and U.S. Treasury Allocation Funds are
advised by Barclays Global Fund Advisors ("BGFA"), a wholly-owned subsidiary of
Barclays Global Investors, N.A. ("BGI", formerly, Wells Fargo Institutional
Trust Company). The Money Market Fund and the corresponding MSIT Master
Portfolios to the Growth Stock and Short-Intermediate Term Funds are advised by
BGFA and sub-advised by Wells Fargo Bank, N.A. ("Wells Fargo Bank"), a wholly-
owned subsidiary of Wells Fargo & Company.
BGFA's business is that of a registered investment adviser to certain
open-end, management investment companies and various other institutional
investors. Wells Fargo Bank's business is that of a national banking
association with respect to which it conducts a variety of commercial banking
and trust activities, including acting as investment adviser and/or sub-adviser
to certain open-end management investment companies and various other
institutional investors.
The directors and officers of BGFA consist primarily of persons who
during the past two years have been active in the investment management business
of the former sub-adviser to the Registrant, Wells Fargo Nikko Investment
Advisors ("WFNIA") and, in some cases, the service business of BGI. Each of the
directors and executive officers of BGFA will also have substantial
responsibilities as directors and/or officers of BGI. To the knowledge of the
Registrant, except as set forth below, none of the directors or executive
officers of BGFA is or has been at any time during the past two fiscal years
engaged in any other business, profession, vocation or employment of a
substantial nature.
<TABLE>
<CAPTION>
Name and Position Principal Business(es) During at
at BGFA Least the Last Two Fiscal Years
- ------- --------------------------------
<S> <C>
Frederick L.A. Grauer Director of BGFA and Co-Chairman and Director of BGI
Director 45 Fremont Street, San Francisco, CA 94105
Patricia Dunn Director of BGFA and C-Chairman and Director of BGI
Director 45 Fremont Street, San Francisco, CA 94105
Lawrence G. Tint Chairman of the Board of Directors of BGFA
Chairman and Director and Chief Executive Officer of BGI
45 Fremont Street, San Francisco, CA 94105
</TABLE>
C-6
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
Geoffrey Fletcher Chief Financial Officer of BGFA and BGI since May 1997
Chief Financial Officer 45 Fremont Street, San Francisco, CA 94105
Managing Director and Principal Accounting Officer at
Bankers Trust Company from 1988 - 1997
505 Market Street, San Francisco, CA 94105
</TABLE>
To the knowledge of Registrant, none of the directors or executive
officers of Wells Fargo Bank, except those set forth below, is or has been at
any time during the past two fiscal years engaged in any other business,
profession, vocation or employment of a substantial nature, except that certain
executive officers also hold various positions with and engage in business for
Wells Fargo & Company. Set forth below are the names and principal businesses of
the directors and executive officers of Wells Fargo Bank who are or during the
past two fiscal years have been engaged in any other business, profession,
vocation or employment of a substantial nature for their own account or in the
capacity of director, officer, employee, partner or trustee. All the directors
of Wells Fargo Bank also serve as directors of Wells Fargo & Company.
<TABLE>
<CAPTION>
Name and Position Principal Business(es) and Address(es)
at Wells Fargo Bank During at Least the Last Two Fiscal Years
- ------------------- -----------------------------------------
<S> <C>
H. Jesse Arnelle Senior Partner of Arnelle, Hastie, McGee, Willis & Greene
Director 455 Market Street
San Francisco, CA 94105
Director of Armstrong World Industries, Inc.
5037 Patata Street
South Gate, CA 90280
Director of Eastman Chemical Corporation
12805 Busch Place
Santa Fe Springs, CA 90670
Director of FPL Group, Inc.
700 Universe Blvd.
P.O. Box 14000
North Palm Beach, FL 33408
Michael R. Bowlin Chairman of the Board of Directors, Chief Executive Officer,
Director Chief Operating Officer and President of
Atlantic Richfield Co. (ARCO)
Highway 150
Santa Paula, CA 93060
Edward Carson Chairman of the Board and Chief Executive Officer of
Director First Interstate Bancorp
633 West Fifth Street
Los Angeles, CA 90071
Director of Aztar Corporation
2390 East Camelback Road Suite 400
Phoenix, AZ 85016
</TABLE>
C-7
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
Director of Castle & Cook, Inc.
10900 Wilshire Blvd.
Los Angeles, CA 90024
Director of Terra Industries, Inc.
1321 Mount Pisgah Road
Walnut Creek, CA 94596
William S. Davilla President (Emeritus) and a Director of
Director The Vons Companies, Inc.
618 Michillinda Ave.
Arcadia, CA 91007
Director of Pacific Gas & Electric Company
788 Taylorville Road
Grass Valley, CA 95949
Rayburn S. Dezember Director of CalMat Co.
Director 3200 San Fernando Road
Los Angeles, CA 90065
Director of Tejon Ranch Company
P.O. Box 1000
Lebec, CA 93243
Director of The Bakersfield Californian
1707 I Street
P.O. Box 440
Bakersfield, CA 93302
Trustee of Whittier College
13406 East Philadelphia Ave.
P.O. Box 634
Whittier, CA 90608
Paul Hazen Chairman of the Board of Directors of
Chairman of the Board of Wells Fargo & Company
Directors 420 Montgomery Street
San Francisco, CA 94105
Director of Phelps Dodge Corporation
2600 North Central Ave.
Phoenix, AZ 85004
Director of Safeway, Inc.
4th and Jackson Streets
Oakland, CA 94660
Robert K. Jaedicke Professor (Emeritus) of Accounting
Director Graduate School of Business at Stanford University
MBA Admissions Office
Stanford, CA 94305
</TABLE>
C-8
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
Director of Bailard Biehl & Kaiser
Real Estate Investment Trust, Inc.
2755 Campus Dr.
San Mateo, CA 94403
Director of Boise Cascade Corporation
1111 West Jefferson Street
P.O. Box 50
Boise, ID 83728
Director of California Water Service Company
1720 North First Street
San Jose, CA 95112
Director of Enron Corporation
1400 Smith Street
Houston, TX 77002
Director of GenCorp, Inc.
175 Ghent Road
Fairlawn, OH 44333
Director of Homestake Mining Company
650 California Street
San Francisco, CA 94108
Thomas L. Lee Chairman and Chief Executive Officer of
Director The Newhall Land and Farming Company
10302 Avenue 7 1-2
Firebaugh, CA 93622
Director of Calmat Co.
501 El Charro Road
Pleasanton, CA 94588
Director of First Interstate Bancorp
633 West Fifth Street
Los Angeles, CA 90071
Ellen Newman President of Ellen Newman Associates
Director 323 Geary Street
Suite 507
San Francisco, CA 94102
Chair (Emeritus) of the Board of Trustees
University of California at San Francisco Foundation
250 Executive Park Blvd.
Suite 2000
San Francisco, CA 94143
Director of the California Chamber of Commerce
1201 K Street 12th Floor
Sacremento, CA 95814
</TABLE>
C-9
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
Philip J. Quigley Chairman, President and Chief Executive Officer of
Director Pacific Telesis Group
130 Kearney Street Rm. 3700
San Francisco, CA 94108
Carl E. Reichardt Director of Columbia/HCA Healthcare Corporation
Director One Park Plaza
Nashville, TN 37203
Director of Ford Motor Company
The American Road
Dearborn, MI 48121
Director of Newhall Management Corporation
23823 Valencia Blvd.
Valencia, CA 91355
Director of Pacific Gas and Electric Company
77 Beale Street
San Francisco, CA 94105
Retired Chairman of the Board of Directors
and Chief Executive Officer of Wells Fargo & Company
420 Montgomery Street
San Francisco, CA 94105
Donald B. Rice President and Chief Executive Officer of Teledyne, Inc.
Director 2049 Century Park East
Los Angeles, CA 90067
Retired Secretary of the Air Force
Director of Vulcan Materials Company
One MetroPlex Drive
Birmingham, AL 35209
Richard J. Stegemeier Chairman (Emeritus) of Unocal Corp
Director 44141 Yucca Avenue
Lancaster, CA 93534
Director of Foundation Health Corporation
166 4th
Fort Irwin, CA 92310
Director of Halliburton Company
3600 Lincoln Plaza
500 North Alcard Street
Dallas, TX 75201
Director of Northrop Grumman Corp.
1840 Century Park East
Los Angeles, CA 90067
</TABLE>
C-10
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
Director of Outboard Marine Corporation
100 SeaHorse Drive
Waukegan, IL 60085
Director of Pacific Enterprises
555 West Fifth Street
Suite 2900
Los Angeles, CA 90031
Director of First Interstate Bancorp
633 West Fifth Street
Los Angeles, CA 90071
Susan G. Swenson President and Chief Executive Officer of Cellular One
Director 651 Gateway Blvd.
San Francisco, CA 94080
David M. Tellep Retired Chairman of the Board and Chief Executive Officer of
Director Martin Lockheed Corp
6801 Rockledge Drive
Bethesda, MD 20817
Director of Edison International
and Southern California Edison Company
2244 Walnut Grove Ave.
Rosemead, CA 91770
Director of First Interstate
633 West Fifth Street
Los Angeles, CA 90071
Chang-Lin Tien Chancellor of the University of California at Berkeley
Director Berkeley, CA 94720
Director of Raychem Corporation
300 Constitution Drive
Menlo Park, CA 94025
John A. Young President, Chief Executive Officer and Director
Director of Hewlett-Packard Company
3000 Hanover Street
Palo Alto, CA 9434
Director of Chevron Corporation
225 Bush Street
San Francisco, CA 94104
Director of Lucent Technologies
25 John Glenn Drive
Amherst, NY 14228
Director of Novell, Inc.
11300 West Olympic Blvd.
Los Angeles, CA 90064
</TABLE>
C-11
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
Director of Shaman Pharmaceuticals Inc.
213 East Grand Ave. South
San Francisco, CA 94080
William F. Zuendt Director of Wells Fargo & Company
President 420 Montgomery Street
San Francisco, CA 94105
Director of 3Com Corporation
5400 Bayfront Plaza
P.O. Box 58145
Santa Clara, CA 95052
Director of the California Chamber of Commerce
</TABLE>
Prior to January 1, 1996, WFNIA served as sub-adviser to the Asset
Allocation, U.S. Treasury Allocation, Bond Index and S&P 500 Stock Funds, and as
adviser or sub-adviser to various other open-end management investment
companies. For additional information, see "Management of the Funds" in the
Prospectuses and "Management" in the Statements of Additional Information. For
information as to the business, profession, vocation or employment of a
substantial nature of each of the officers and management committees of WFNIA,
reference is made to WFNIA's Form ADV and Schedules A and D filed under the
Investment Advisers Act of 1940, SEC File No. 801-36479, incorporated herein by
reference.
Item 29. Principal Underwriters.
----------------------
(a) Stephens Inc., distributor for the Registrant, does not presently
act as investment adviser for any other registered investment companies, but
does act as principal underwriter for MasterWorks Funds Inc., Stagecoach Funds,
Inc., Stagecoach Trust, Nations Fund, Inc., Nations Fund Trust, Nations Fund
Portfolios, Inc., Nations LifeGoal Funds, Inc. and Nations Institutional
Reserves, and is the exclusive placement agent for Life & Annuity Trust, Managed
Series Investment Trust and Master Investment Portfolio, all of which are
registered open-end management investment companies.
(b) Information with respect to each director and officer of the
principal underwriter is incorporated by reference to Form ADV and Schedules A
and D filed by Stephens Inc. with the Securities and Exchange Commission
pursuant to The Investment Advisers Act of 1940 (SEC File No. 501-15510).
(c) Not applicable.
C-12
<PAGE>
Item 30. Location of Accounts and Records.
--------------------------------
(a) The Registrant maintains accounts, books and other documents required
by Section 31(a) of the Investment Company Act of 1940 and the rules thereunder
(collectively, "Records") at the offices of Stephens Inc., 111 Center Street,
Little Rock, Arkansas 72201.
(b) BGFA and BGI maintain all Records relating to their services as
adviser and co-administrator, respectively, at 45 Fremont Street, San Francisco,
California 94105.
(c) Wells Fargo Bank maintains all Records relating to its services as
sub-adviser and, for the period prior to January 1, 1996, as investment adviser
and custodian and transfer and dividend disbursing agent at 525 Market Street,
San Francisco, California 94105.
(d) Stephens maintains all Records relating to its services as sponsor,
co- administrator and distributor at 111 Center Street, Little Rock, Arkansas
72201.
(e) IBT maintains all Records relating to its services as sub-
administrator and custodian at 89 South Street, Boston, Massachusetts 02111.
Item 31. Management Services.
-------------------
Other than as set forth under the caption "Management of the Fund(s)"
in the Prospectuses constituting Part A of this Registration Statement and
"Management" in the Statements of Additional Information constituting Part B of
this Registration Statement, the Registrant is not a party to any management-
related service contract.
Item 32. Undertakings.
------------
(a) Not Applicable
(b) Not Applicable
(c) Insofar as indemnification for liability arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the provisions set forth above in response
to Item 27, or otherwise, the Registrant has been advised that in the opinion of
the Securities and Exchange Commission such indemnification is against public
policy as expressed in such Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a
C-13
<PAGE>
court of appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the Act and will be governed by the
final adjudication of such issue.
(d) Registrant undertakes 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 Investment Company Act of 1940.
(e) Registrant undertakes to furnish each person to whom a prospectus
is delivered with a copy of its most current annual report to shareholders, upon
request and without charge.
C-14
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all of
the requirements for effectiveness of this Amendment to its Registration
Statement pursuant to Rule 485(b) under the Securities Act of 1933 and has duly
caused this Registration Statement on Form N-1A to be signed on its behalf by
the undersigned, thereto duly authorized, in the City of Little Rock, State of
Arkansas on the 29th day of June, 1998.
MASTERWORKS FUNDS INC.
By /s/ Richard H. Blank, Jr.
-------------------------
(Richard H. Blank, Jr.)
Secretary and Treasurer
(Principal Financial Officer)
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement on Form N-1A has been signed below by the following
persons in the capacities and on the date indicated:
Signature Title
--------- -----
* Director, Chairman and President
------------------------- (Principal Executive Officer)
(R. Greg Feltus)
/s/ Richard H. Blank, Jr. Secretary and Treasurer
------------------------- (Principal Financial Officer)
(Richard H. Blank, Jr.)
* Director
-------------------------
(Jack S. Euphrat)
* Director
-------------------------
(Thomas S. Goho)
* Director
-------------------------
(W. Rodney Hughes)
* Director
-------------------------
(J. Tucker Morse)
*By: /s/ Richard H. Blank, Jr.
-------------------------
Richard H. Blank, Jr.
As Attorney-in-Fact
June 29, 1998
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all of
the requirements for effectiveness of this Amendment to the Registration
Statement pursuant to Rule 485(b) under the Securities Act of 1933 and has duly
caused this Registration Statement on Form N-1A to be signed on its behalf by
the undersigned, thereto duly authorized, in the City of Little Rock, State of
Arkansas on the 29th day of June, 1998.
MASTER INVESTMENT PORTFOLIO
By /s/ Richard H. Blank, Jr.
-------------------------
(Richard H. Blank, Jr.)
Secretary and Treasurer
(Principal Financial Officer)
Signature Title
--------- -----
* Trustee, Chairman and President
------------------------- (Principal Executive Officer)
(R. Greg Feltus)
/s/ Richard H. Blank, Jr. Secretary and Treasurer
------------------------- (Principal Financial Officer)
(Richard H. Blank, Jr.)
* Trustee
-------------------------
(Jack S. Euphrat)
* Trustee
-------------------------
(Thomas S. Goho)
* Trustee
-------------------------
(W. Rodney Hughes)
* Trustee
-------------------------
(J. Tucker Morse)
*By: /s/ Richard H. Blank, Jr.
-------------------------
Richard H. Blank, Jr.
As Attorney-in-Fact
June 29, 1998
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all of
the requirements for effectiveness of this Amendment to the Registration
Statement pursuant to Rule 485(b) under the Securities Act of 1933 and has duly
caused this Registration Statement on Form N-1A to be signed on its behalf by
the undersigned, thereto duly authorized, in the City of Little Rock, State of
Arkansas on the 29th day of June, 1998.
MANAGED SERIES INVESTMENT TRUST
By /s/ Richard H. Blank, Jr.
-------------------------
(Richard H. Blank, Jr.)
Secretary and Treasurer
(Principal Financial Officer)
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement on Form N-1A has been signed below by the following
persons in the capacities and on the date indicated:
Signature Title
--------- -----
* Trustee, Chairman and President
------------------------- (Principal Executive Officer)
(R. Greg Feltus)
/s/ Richard H. Blank, Jr. Secretary and Treasurer
------------------------- (Principal Financial Officer)
(Richard H. Blank, Jr.)
* Trustee
-------------------------
(Jack S. Euphrat)
* Trustee
-------------------------
(Thomas S. Goho)
* Trustee
-------------------------
(W. Rodney Hughes)
* Trustee
-------------------------
(J. Tucker Morse)
*By: /s/ Richard H. Blank, Jr.
-------------------------
Richard H. Blank, Jr.
As Attorney-in-Fact
June 29, 1998
<PAGE>
MASTERWORKS FUNDS INC.
SEC FILE NOS. 33-54126; 811-7332
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Number DESCRIPTION
<S> <C>
EX-27.1 * Financial Data Schedule for the Asset Allocation Fund
EX-27.2 * Financial Data Schedule for the Bond Index Fund
EX-27.3 * Financial Data Schedule for the Growth Stock Fund
EX-27.4 * Financial Data Schedule for the Money Market Fund
EX-27.5 * Financial Data Schedule for the S&P 500 Stock Fund
EX-27.6 * Financial Data Schedule for the Short-Intermediate Term Fund
EX-27.7 * Financial Data Schedule for the U.S. Treasury Allocation Fund
EX-27.9 * Financial Data Schedule for the LifePath 2000 Fund
EX-27.10 * Financial Data Schedule for the LifePath 2010 Fund
EX-27.11 * Financial Data Schedule for the LifePath 2020 Fund
EX-27.12 * Financial Data Schedule for the LifePath 2030 Fund
EX-27.13 * Financial Data Schedule for the LifePath 2040 Fund
EX-99.B9(a) * Transfer Agency and Service Agreement
EX-99.B9(b) * Shareholder Servicing Plan and Form of Shareholder Servicing
Agreement
EX-99.B9(d) * Service Agreement
EX-99.B9(e) * Financial Services Agreement
EX-99.B10 * Opinion and Consent of Counsel - Morrison & Foerster LLP
EX-99.B11 * Consent of Independent Auditors - KPMG Peat Marwick LLP
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<CIK> 0000893818
<NAME> MASTERWORKS FUNDS INC.
<SERIES>
<NUMBER> 1
<NAME> ASSET ALLOCATION FUND
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> FEB-28-1998
<PERIOD-START> MAR-01-1997
<PERIOD-END> FEB-28-1998
<INVESTMENTS-AT-COST> 0
<INVESTMENTS-AT-VALUE> 535,136,731
<RECEIVABLES> (584,565)
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 535,721,296
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 975,154
<TOTAL-LIABILITIES> 975,154
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 415,451,237
<SHARES-COMMON-STOCK> 39,600,736
<SHARES-COMMON-PRIOR> 35,613,051
<ACCUMULATED-NII-CURRENT> 11,633
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 8,277,532
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 111,005,740
<NET-ASSETS> 534,746,142
<DIVIDEND-INCOME> 4,137,500
<INTEREST-INCOME> 14,861,341
<OTHER-INCOME> 0
<EXPENSES-NET> 3,460,623
<NET-INVESTMENT-INCOME> 15,538,218
<REALIZED-GAINS-CURRENT> 43,346,185
<APPREC-INCREASE-CURRENT> 54,041,438
<NET-CHANGE-FROM-OPS> 112,925,841
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 15,569,560
<DISTRIBUTIONS-OF-GAINS> 45,241,548
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 11,061,652
<NUMBER-OF-SHARES-REDEEMED> 11,869,232
<SHARES-REINVESTED> 4,795,265
<NET-CHANGE-IN-ASSETS> 103,161,039
<ACCUMULATED-NII-PRIOR> 42,975
<ACCUMULATED-GAINS-PRIOR> 10,172,895
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 3,460,623
<AVERAGE-NET-ASSETS> 462,612,976
<PER-SHARE-NAV-BEGIN> 12
<PER-SHARE-NII> 0
<PER-SHARE-GAIN-APPREC> 3
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 1
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 14
<EXPENSE-RATIO> 1
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<CIK> 0000893818
<NAME> MASTERWORKS FUNDS INC.
<SERIES>
<NUMBER> 2
<NAME> BOND INDEX FUND
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> FEB-28-1998
<PERIOD-START> MAR-01-1997
<PERIOD-END> FEB-28-1998
<INVESTMENTS-AT-COST> 0
<INVESTMENTS-AT-VALUE> 93,234,121
<RECEIVABLES> 1,025,614
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 94,259,735
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 483,313
<TOTAL-LIABILITIES> 483,313
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 93,769,238
<SHARES-COMMON-STOCK> 9,639,098
<SHARES-COMMON-PRIOR> 13,735,863
<ACCUMULATED-NII-CURRENT> 27,854
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (157,705)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 137,035
<NET-ASSETS> 93,776,422
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 7,263,140
<OTHER-INCOME> 0
<EXPENSES-NET> 243,446
<NET-INVESTMENT-INCOME> 7,019,694
<REALIZED-GAINS-CURRENT> 835,418
<APPREC-INCREASE-CURRENT> 1,840,981
<NET-CHANGE-FROM-OPS> 9,696,093
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 7,045,500
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 4,679,516
<NUMBER-OF-SHARES-REDEEMED> 9,514,575
<SHARES-REINVESTED> 738,294
<NET-CHANGE-IN-ASSETS> (35,692,807)
<ACCUMULATED-NII-PRIOR> 53,660
<ACCUMULATED-GAINS-PRIOR> (993,123)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 243,446
<AVERAGE-NET-ASSETS> 105,648,821
<PER-SHARE-NAV-BEGIN> 9
<PER-SHARE-NII> 1
<PER-SHARE-GAIN-APPREC> 0
<PER-SHARE-DIVIDEND> 1
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10
<EXPENSE-RATIO> 0
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<CIK> 0000893818
<NAME> MASTERWORKS FUNDS INC.
<SERIES>
<NUMBER> 3
<NAME> GROWTH STOCK FUND
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> FEB-28-1998
<PERIOD-START> MAR-01-1997
<PERIOD-END> FEB-28-1998
<INVESTMENTS-AT-COST> 0
<INVESTMENTS-AT-VALUE> 237,048,752
<RECEIVABLES> 638,211
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 237,686,963
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 672,974
<TOTAL-LIABILITIES> 672,974
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 187,823,025
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<NAME> MASTERWORKS FUNDS INC.
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<NAME> LIFEPATH 2030 FUND
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<GROSS-EXPENSE> 696,597
<AVERAGE-NET-ASSETS> 73,555,591
<PER-SHARE-NAV-BEGIN> 14
<PER-SHARE-NII> 0
<PER-SHARE-GAIN-APPREC> 4
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 17
<EXPENSE-RATIO> 1
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<CIK> 0000893818
<NAME> MASTERWORKS FUNDS INC.
<SERIES>
<NUMBER> 13
<NAME> LIFEPATH 2040 FUND
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> FEB-28-1998
<PERIOD-START> MAR-01-1997
<PERIOD-END> FEB-28-1998
<INVESTMENTS-AT-COST> 0
<INVESTMENTS-AT-VALUE> 126,022,880
<RECEIVABLES> 844,240
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 126,867,120
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 265,779
<TOTAL-LIABILITIES> 265,779
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 100,227,073
<SHARES-COMMON-STOCK> 6,743,840
<SHARES-COMMON-PRIOR> 4,569,011
<ACCUMULATED-NII-CURRENT> 112,871
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 1,242,392
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 25,019,005
<NET-ASSETS> 126,601,341
<DIVIDEND-INCOME> 1,485,113
<INTEREST-INCOME> 372,092
<OTHER-INCOME> 0
<EXPENSES-NET> 886,484
<NET-INVESTMENT-INCOME> 970,721
<REALIZED-GAINS-CURRENT> 5,450,601
<APPREC-INCREASE-CURRENT> 18,871,946
<NET-CHANGE-FROM-OPS> 25,293,268
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 981,497
<DISTRIBUTIONS-OF-GAINS> 5,040,363
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 4,987,356
<NUMBER-OF-SHARES-REDEEMED> 3,168,342
<SHARES-REINVESTED> 355,815
<NET-CHANGE-IN-ASSETS> 57,125,836
<ACCUMULATED-NII-PRIOR> 123,647
<ACCUMULATED-GAINS-PRIOR> 832,154
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 886,484
<AVERAGE-NET-ASSETS> 93,627,015
<PER-SHARE-NAV-BEGIN> 15
<PER-SHARE-NII> 0
<PER-SHARE-GAIN-APPREC> 4
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 1
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 19
<EXPENSE-RATIO> 1
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<PAGE>
EXHIBIT 99B9(A)
TRANSFER AGENCY AND SERVICE AGREEMENT
AGREEMENT made as of the 27th day of February, 1998 by and between
MASTERWORKS FUNDS INC., a corporation organized under the laws of Maryland (the
"Company"), and INVESTORS BANK & TRUST COMPANY, a Massachusetts trust company
(the "Bank").
WHEREAS, the Company desires to appoint the Bank as its transfer agent,
dividend disbursing agent and agent in connection with certain other activities,
and the Bank desires to accept such appointment;
WHEREAS, the Bank is duly registered as a transfer agent as provided in
Section 17A(c) of the Securities Exchange Act of 1934, as amended (the "1934
Act");
WHEREAS, the Company is authorized to issue shares in separate series, with
each such series representing interests in a separate portfolio of securities
and other assets;
WHEREAS, the Company has offered shares in each of the series and classes
listed on Appendix A hereto (such series and classes, together with all other
series and classes subsequently established by the Company and made subject to
this Agreement in accordance with Section 17, being herein referred to as the
"Fund(s)");
NOW, THEREFORE, in consideration of the mutual covenants herein set forth,
the Company and the Bank agree as follows:
1. Terms of Appointment.
--------------------
Subject to the terms and conditions set forth in this Agreement, the
Company on behalf of the Funds hereby employs and appoints the Bank to act, and
the Bank agrees to act, as transfer agent for each of the Fund(s) authorized and
issued shares of common stock ("Shares"), dividend disbursing agent and agent in
connection with any accumulation, open-account or similar plans provided to the
shareholders of the Company("Shareholders") and set out in the currently
effective prospectus and statement of additional information, as each may be
amended from time to time, (the "Prospectus") of the Company, including without
limitation any periodic investment plan or periodic withdrawal program. For
purposes of this Agreement, Shareholder shall refer to a record holder of
Shares.
2. Definitions. Whenever used herein, the terms listed below will have the
-----------
following meaning:
2.1 Authorized Company Person. Authorized Company Person will mean any of
-------------------------
the persons duly authorized to give Proper Instructions or otherwise act on
behalf of the Company by appropriate resolution of its Board of Directors. Each
Authorized Company Person shall be set forth in a certificate as required by
Section 4 hereof.
2.2 Other Authorized Person. Other Authorized Person will mean:
-----------------------
(a) Any of the persons duly authorized to give Proper Instructions or
otherwise act on behalf of one or more of the third-party administrators,
institutional investors or other parties listed on a schedule provided by the
Company to the Bank from time to time (the "Providers") by appropriate
resolution of their respective governing bodies; or
<PAGE>
(b) Any shareholder of record of a Fund who has delivered to the Bank
a signature guarantee.
Each person authorized to give Proper Instructions on behalf of a Provider
hereunder shall be set forth in a certificate as required by Section 4 hereof.
2.3 Board. Board will mean the Board of Directors of the Company.
-----
2.4 Proper Instructions. Proper Instructions shall mean (i) instructions
-------------------
regarding the purchase or sale of the authorized and issued shares of the Funds'
common stock ("Shares"), and payments and deliveries in connection therewith,
given by an Authorized Company Person or Other Authorized Person, as the case
may be, such instructions to be given in such form and manner as the Bank and
the Company shall agree upon from time to time; (ii) instructions from an Other
Authorized Person with respect to payments, checks, wire transfers and
shareholder account information as to the shareholder accounts over which such
Provider has authority; and (iii) instructions (which may be continuing
instructions) regarding other matters signed or initialed by an Authorized
Company Person. With regard only to purchases and sales of Shares, oral
instructions will be considered Proper Instructions if the Bank reasonably
believes them to have been given by an Authorized Company Person or Other
Authorized Person. The Company or the Other Authorized Person, as the case may
be, shall cause all oral instructions to be promptly confirmed in writing. The
Bank shall act upon and comply with any subsequent Proper Instruction which
modifies a prior instruction and the sole obligation of the Bank with respect to
any follow-up or confirmatory instruction shall be to make reasonable efforts to
detect any discrepancy between the original instruction and such confirmation
and to report such discrepancy to the Company or a Provider, as the case may be.
The Company shall be responsible, at the Company's expense, for taking any
action, including any reprocessing, necessary to correct any such discrepancy or
error, and to the extent such action requires the Bank to act, the Company shall
give the Bank specific Proper Instructions as to the action required. Upon
receipt by the Bank of a certificate of an Authorized Company Person as to the
authorization by the Board accompanied by a detailed description of procedures
approved by the Company, Proper Instructions may include communication effected
directly between electro-mechanical or electronic devices provided that the
Board and the Bank agree in writing that such procedures afford adequate
safeguards for the Fund's assets.
3. Duties of the Bank
3.1 The Bank agrees that it will perform the following services:
(a) In connection with the procedures established from time to time
by agreement between the Company and the Bank, the Bank shall:
(i) Receive for acceptance from the Company and the Providers
orders for the purchase of Shares and promptly deliver payment and appropriate
documentation therefor to the custodian of the Company appointed by the Board
of Directors of the Company (the "Custodian");
(ii) Pursuant to purchase orders received from the Company
and the Providers, issue the appropriate number of Shares and hold such Shares
in the appropriate Shareholder Account;
(iii) Receive for acceptance from the Company and the Providers
redemption requests and redemption directions and deliver the appropriate
documentation therefor to the Custodian;
(iv) At the appropriate time as and when it receives monies
paid to it by the Custodian with respect to any redemption, pay over or cause
to be paid over in the appropriate manner such monies as instructed by the
Redeeming Shareholders;
2
<PAGE>
(v) Effect exchanges, account registration changes and transfers of
Shares by the registered owners thereof upon receipt of appropriate
instructions;
(vi) Prepare and transmit payments for dividends and distributions
declared by the Company on behalf of a Fund;
(vii) Create and maintain all necessary records including those
specified in Article 10 hereof, in accordance with all applicable laws, rules
and regulations, including but not limited to records required by Section
31(a) of the Investment Company Act of 1940, as amended (the "1940 Act") and
the rules thereunder, records required by Section 17A of the 1934 Act and the
rules thereunder and those records pertaining to the various functions
performed by it hereunder. All records shall be available for inspection and
use by the Company. Where applicable, such records shall be maintained by the
Bank for the periods and in the places required by Rule 31a-2 under the 1940
Act;
(viii) Make available during regular business hours all records and
other data created and maintained pursuant to this Agreement for reasonable
audit and inspection by the Company, or any person retained by the Company.
Upon reasonable notice by the Company, the Bank shall make available during
regular business hours its facilities and premises employed in connection with
its performance of this Agreement for reasonable visitation by the Company, or
any person retained by the Company;
(ix) Record the issuance of Shares of the Company and maintain,
pursuant to Rule 17Ad-10(e) under the 1934 Act, a record of the total number
of Shares of the Company which are authorized, based upon data provided to it
by the Company and issued and outstanding. The Bank shall also provide the
Company on a regular basis with the total number of Shares which are
authorized and issued and outstanding and shall have no obligation, when
recording the issuance of Shares, to monitor the issuance of such Shares or to
take cognizance of any laws relating to the issue or sale of such Shares,
which functions shall be the sole responsibility of the Company.
(b) In addition to and not in lieu of the services set forth in the above
paragraph (a) or in any Schedule hereto, the Bank shall: (i) perform all of
the customary services of a transfer agent, dividend disbursing agent and, as
relevant, agent in connection with accumulation, open-account or similar plans
(including without limitation any periodic investment plan or periodic
withdrawal program); including but not limited to maintaining all Shareholder
accounts, preparing Shareholder meeting lists, withholding taxes on all
accounts, including nonresident alien accounts, preparing and filing U.S.
Treasury Department Forms 1099 and other appropriate forms required by federal
authorities with respect to dividends and distributions for all Shareholders,
preparing and mailing confirmation forms and statements of account to
Shareholders for all purchases and redemptions of Shares and other confirmable
transactions in Shareholder accounts, monitoring, reporting and remitting as
directed by appropriate authorities for state escheat, tax lien and similar
purposes, responding to Shareholder telephone calls and Shareholder
correspondence, preparing and mailing activity statements for Shareholders,
and providing Shareholder account information; and (ii) provide a system which
will enable the Company to monitor the total number of shares sold in each
State. The Company shall (i) identify to the Bank in writing those
transactions and assets to be treated as exempt from blue sky reporting for
each State and (ii) verify the establishment of transactions for each State on
the system prior to activation and thereafter monitor the daily activity for
each State. The responsibility of the Bank for a Fund's blue sky state
registration status is solely limited to the initial establishment of
transactions subject to blue sky compliance by such Fund(s) and the reporting
of such transactions to the Fund(s) as provided above.
3
<PAGE>
(c) Additionally, the Bank shall utilize a system to identify all
share transactions which involve purchase and redemption orders that are
processed at a time other than the time of the computation of net asset value
per share next computed after receipt of such orders, and shall compute the net
effect upon the Fund(s) of such transactions so identified on a daily and
cumulative basis.
4. Certification as to Authorized Persons. The Secretary or Assistant Secretary
--------------------------------------
of the Company and each Provider will at all times maintain on file with the
Bank his or her certification to the Bank, in such form as may be acceptable to
the Bank, of the names and signatures of the Authorized Company Persons and
Other Authorized Persons acting on behalf of such Provider, it being
understood that upon the occurrence of any change in the information set forth
in the most recent certification on file (including without limitation any
person named in the most recent certification who is no longer an Authorized
Company Person or Other Authorized Person as designated therein), the
Secretary or Assistant Secretary of the Company and each Provider will sign a
new or amended certification setting forth the change and the new, additional
or omitted names or signatures. The Bank will be entitled to rely and act upon
any certificate given to it by the Company or a Provider, as the case may be,
which has been signed by Authorized Company Persons or Other Authorized
Persons, as the case may be, named in the most recent certification received
by the Bank.
5. Sale of Company Shares.
----------------------
5.1 Whenever a Fund shall sell or cause to be sold any Shares of such
Fund, it shall deliver or cause to be delivered to the Bank a document duly
specifying: (i) the name of the Fund whose Shares were sold; (ii) the trade
date; (iii) the amount of money to be delivered to the Custodian for the sale
of such Shares and specifically allocated to such Fund; and (iv) in the case
of a new account, a new account application or sufficient information to
establish an account.
5.2 The Bank will, upon receipt by it of a check, wire transfer or other
payment identified by it as an investment in Shares of one of the Funds and
drawn or endorsed to the Bank as agent for, or identified as being for the
account of, one of the Funds, promptly deposit such check or other payment to
the appropriate account postings necessary to reflect the investment. The Bank
will notify the Company, or its designee, and the Custodian of all purchases and
related account adjustments.
5.3 Under written procedures as established by mutual agreement between
the Company and the Bank, the Bank shall issue to the purchaser or its
authorized agent such Shares, computed to the nearest three decimal points, as
he is entitled to receive, based on the appropriate net asset value of the
Funds' Shares, determined in accordance with the prospectus and any applicable
federal law or regulation. In issuing Shares to a purchaser or its authorized
agent, the Bank shall be entitled to rely upon the latest directions, if any,
previously received by the Bank from the purchaser or its authorized agent
concerning the delivery of such Shares.
5.4 The Bank shall not be required to issue any Shares of the Company
where it has received a written instruction from the Company or written
notification from any appropriate federal or state authority that the sale of
the Shares of the Fund(s) in question has been suspended or discontinued, and
the Bank shall be entitled to rely upon such written instructions or written
notification.
5.5 Upon the issuance of any Shares of any Fund(s) in accordance with the
foregoing provisions of this Section, the Bank shall not be responsible for the
payment of any original issue or other taxes, if any, required to be paid by the
Company in connection with such issuance.
4
<PAGE>
5.6 The Bank may establish such additional rules and regulations governing
the transfer or registration of Shares as it may deem advisable and consistent
with such rules and regulations generally adopted by Transfer agents, or with
the written consent of the Company, any other rules and regulations.
6. Returned Checks. In the event that any check or other order for the transfer
---------------
of money is returned unpaid for any reason, the Bank will take such steps as the
Bank may, in its discretion, deem appropriate to protect the Company from
financial loss or as the Company or its designee may instruct. Provided that the
standard procedures, as agreed upon in writing from time to time, between the
Company and the Bank, regarding purchases and redemptions of Shares, are adhered
to by the Bank, the Bank shall not be liable for any loss suffered by a Fund as
a result of returned or unpaid purchase or redemption transactions. Legal or
other expenses incurred to collect amounts owed to a Fund as a consequence of
returned or unpaid purchase or redemption transactions shall be an expense of
that Fund.
7. Redemptions. Shares of any Fund may be redeemed in accordance with the
-----------
procedures set forth in the Prospectus of the Company and the Bank will duly
process all redemption requests.
8. Transfers and Exchanges. The Bank is authorized to review and process
-----------------------
transfers of Shares of each Fund, exchanges between Funds on the records of the
Funds maintained by the Bank, and exchanges between the Company and any other
entity as may be permitted by the Prospectus of the Company. If Shares to be
transferred are represented by outstanding certificates, the Bank will, upon
surrender to it of the certificates in proper form for transfer, and upon
cancellation thereof, countersign and issue new certificates for a like number
of Shares and deliver the same. If the Shares to be transferred are not
represented by outstanding certificates, the Bank will, upon an order therefor
by or on behalf of the registered holder thereof in proper form, credit the same
to the transferee on its books. If Shares are to be exchanged for Shares of
another Fund, the Bank will process such exchange in the same manner as a
redemption and sale of Shares, except that it may in its discretion waive
requirements for information and documentation.
9. Right to Seek Assurances. The Bank reserves the right to refuse to transfer
------------------------
or redeem Shares until it is satisfied that the requested transfer or redemption
is legally authorized, and it shall incur no liability for the refusal, in good
faith, to make transfers or redemptions which the Bank, it its judgment, deems
improper or unauthorized, or until it is satisfied that there is no basis for
any claims adverse to such transfer or redemption. The Bank may, in effecting
transfers, rely upon the provisions of the Uniform Act for the Simplification of
Fiduciary Security Transfers or the Uniform Commercial Code, as the same may
be amended from time to time, which in the opinion of legal counsel for the
Company or the Bank's own legal counsel, do not require certain documents in
connection with the transfer or redemption of Shares of any Fund, and the
Company shall indemnify the Bank for any act done or omitted by it in compliance
with such laws or in reliance upon opinions of counsel of the Company or of the
Bank.
10. Distributions.
-------------
10.1 The Company will promptly notify the Bank of the declaration of any
dividend or distribution. The Company shall furnish to the Bank a resolution of
the Board of Directors of the Company certified by the Secretary (a
"Certificate"): (i) authorizing the declaration of dividends on a specified
periodic basis and authorizing the Bank to rely on Proper Instructions provided
by an Authorized Company Person specifying the date of the declaration of such
dividend or distribution, the date of payment thereof, the record date as of
which Shareholders entitled to payment shall be determined and the amount
payable per share to Shareholders of record as of such record date and the total
amount payable to the Bank on the payment date; or (ii) setting forth the date
of the declaration of any dividend or distribution by
5
<PAGE>
a Fund, the date of payment thereof, the record date as of which Shareholders
entitled to payment shall be determined, and the amount payable per share to
the Shareholders of record as of that date and the total amount payable to the
Bank on the Payment date.
10.2 The Bank, on behalf of the Company, shall instruct the Custodian to
place in a dividend disbursing account funds equal to the cash amount of any
dividend or distribution to be paid out. The Bank will calculate, prepare and
mail checks to (at the address as it appears on the records of the Bank), or
(where appropriate) credit such dividend or distribution to the account of, Fund
Shareholders, and maintain and safeguard all underlying records.
10.3 The Bank will replace lost checks at its discretion and in conformity
with regular business practices.
10.4 The Bank will maintain all records necessary to reflect the crediting
of dividends which are reinvested in Shares of the Company, including without
limitation daily dividends.
10.5 The Bank shall not be liable for any improper payments made in
accordance with a resolution of the Board of Directors of the Company.
10.6 If the Bank shall not receive from the Custodian sufficient cash to
make payment to all Shareholders of the Company as of the record date, the Bank
shall, upon notifying the Company, withhold payment to all Shareholders of
record as of the record date until such sufficient cash is provided to the Bank
and shall not be liable for any claim arising out of such withholding.
11. Other Duties. In addition to the duties expressly provided for herein, the
------------
Bank shall perform such other duties and functions and shall be paid such
amounts therefor as may from time to time be agreed to in writing.
12. Taxes. It is understood that the Bank shall file such appropriate
-----
information returns concerning the payment of dividends and capital gain
distributions and tax withholding with the proper Federal, State and local
authorities as are required by law to be filed by the Company and shall withhold
such sums as are required to be withheld by applicable law.
13. Books and Records.
-----------------
13.1 The Bank shall maintain confidential records showing for each
Shareholder's account the following: (i) names, addresses and tax identification
numbers; (ii) numbers of Shares held; (iii) historical information (as available
from prior transfer agents) regarding the account of each Shareholder, including
dividends paid and date and price of all transactions on a Shareholder's
account; (iv) any stop or restraining order placed against a Shareholder's
account; (v) information with respect to withholdings; (vi) any capital gain or
dividend reinvestment order plan application, dividend address and
correspondence relating to the current maintenance of a Shareholder's account;
(vii) certificate numbers and denominations for any Shareholders holding
certificates; (viii) any information required in order for the Bank to perform
the calculations contemplated or required by this Agreement; and (ix) such other
information and data as may be required by applicable law.
13.2 Any records required to be maintained by Rule 31a-1 under the 1940
Act will be preserved for the periods prescribed in Rule 31a-2 under the 1940
Act. Such records may be inspected by the Company during regular business hours
upon reasonable notice. The Bank may, at its option at any
6
<PAGE>
time, and shall forthwith upon the Company's demand, turn over to the Company
and cease to retain in the Bank's files, records and documents created and
maintained by the Bank in performance of its service or for its protection. At
the end of the six-year retention period, such documents will either be turned
over to the Company, or destroyed in accordance with the Company's
authorization.
13.3 Written procedures applicable to the services to be performed
hereunder may be established from time to time by agreement between the Fund(s)
and the Bank. The Bank shall have the right to utilize any shareholder
accounting and recordkeeping system which, in its opinion, qualifies to perform
any services to be performed hereunder. The Bank shall keep records relating to
the services performed hereunder in accordance with the requirements of this
Agreement, in the form and manner as it may deem advisable.
14. Fees and Expenses.
-----------------
14.1 For performance by the Bank pursuant to this Agreement, the Fund(s)
agree to pay the Bank an annual maintenance fee as set out in the initial fee
schedule attached as Appendix B hereto. Such fees and out-of-pocket expenses and
advances identified under Section 14.2 below may be changed from time to time by
mutual written agreement between the Fund(s) and the Bank.
14.2 In addition to the fee paid under Section 14.1 above, the Fund(s)
agree to reimburse the Bank for out-of-pocket expenses or advances incurred by
the Bank in performing its obligations under this Agreement for the items set
out in the fee schedule attached as Appendix B hereto. In addition, any other
expenses incurred by the Bank at the request or with the written consent of the
Fund(s) including, without limitation, any equipment or supplies which the
Company specifically orders or requires the Bank to purchase, will be reimbursed
by the Fund(s).
14.3 Advances by the Bank. The Bank may, in its sole discretion, advance
--------------------
funds on behalf of a Fund to make any payment permitted by this Agreement upon
receipt of any proper authorization or Proper Instruction required by this
Agreement for such payments by the Fund. Should such a payment or payments, with
advanced funds, result in an overdraft (due to insufficiencies of the Fund's
account with the Bank, or for any other reason) this Agreement deems any such
overdraft or related indebtedness a loan made by the Bank to the Fund payable on
demand. Such overdraft shall bear interest at the current rate charged by the
Bank for such loans. The Fund agrees that the Bank shall have a continuing lien
and security interest to the extent of any overdraft or indebtedness, in and to
any property at any time held by it for the Fund's benefit or in which the Fund
has an interest and which is then in the Bank's possession or control (or in the
possession or control of any third party acting on the Bank's behalf). The Fund
authorizes the Bank, in the Bank's sole discretion, at any time to charge any
overdraft or indebtedness, together with interest due thereon, against any
balance of account standing to the credit of the Fund on the Bank's books.
14.4 The Fund(s) agree to pay all fees and reimbursable expenses within
thirty days following the mailing of the respective billing notice. Postage for
mailing of dividends, proxies, Fund reports and other mailings to all
shareholder accounts shall be advanced to the Bank by the Fund(s) at least seven
(7) days prior to the mailing date of such materials. Any waiver or extension by
the Bank of the thirty and seven day time periods enumerated in this section
14.4 shall not constitute a dismissal of any monies due under this Agreement nor
shall such waiver or extension apply to any future monies due to the Bank
hereunder.
7
<PAGE>
15. Representations and Warranties of the Bank.
------------------------------------------
The Bank represents and warrants to the Company that:
15.1 It is a trust company duly organized and existing and in good
standing under the laws of the Commonwealth of Massachusetts.
15.2 It is empowered under applicable laws and by its charter and by-laws
to enter into and perform this Agreement.
15.3 All requisite corporate proceedings have been taken to authorize it
to enter into and perform this Agreement.
15.4 It has and will continue to have access to the necessary facilities,
equipment, computer systems and personnel to perform its duties and obligations
under this Agreement, including, but not limited to, reasonable back-up and data
recover facilities, equipment, computer systems and personnel.
15.5 It will perform its duties and obligations under this Agreement
without: (a) any failure of its computer systems properly to record, store,
process, calculate or present calendar dates falling on and after, and time
spans including, January 1, 2000 as a result of the occurrence, or use of data
containing, such date; (b) any failure of its computer systems to calculate any
information dependent on or relating to dates on or after January 1, 2000; or
(c) any loss of functionality or performance with respect to the maintenance of
records or processing of data containing dates falling on or after January 1,
2000 ((a), (b), and (c) above shall be referred to as "Y2K Failures").
Notwithstanding the above, the Bank shall not be liable for any Y2K Failures
caused by Y2K Failures in a third party system with which the Bank interfaces or
from which the Bank receives data in connection with the performance of its
duties hereunder.
16. Representations and Warranties of the Company.
---------------------------------------------
The Company represents and warrants to the Bank that:
16.1 It is a corporation duly organized and existing and in good standing
under the laws of the State of its incorporation as set forth in the preamble
hereto.
16.2 It is empowered under applicable laws and by its charter documents
and by-laws to enter into and perform this Agreement.
16.3 All proceedings require by said charter documents and by-laws have
been taken to authorize it to enter into and perform this Agreement.
16.4 It is a open-end investment company registered under the 1940 Act.
16.5 A registration statement on Form N-1A (including a prospectus and
statement of additional information) under the Securities Act of 1933 and the
1940 Act is currently effective and will remain effective, and appropriate state
securities law filings have been made and will continue to be made, with respect
to all Shares of the Company being offered for sale.
16.6 When Shares are hereafter issued in accordance with the terms of the
Prospectus, such Shares shall be validly issued, fully paid and nonassessable by
the Fund(s).
8
<PAGE>
17. Indemnification.
---------------
17.1 Notwithstanding anything in this Agreement to the contrary, in no
event shall the Bank or any of its officers, directors, employees or agents
(collectively, the "Indemnified Parties") by liable to the Company, any Fund,
any Provider, or any third party, and the Company and each Fund shall indemnify
and hold the Bank and the Indemnified Parties harmless from and against any and
all loss, damage, liability, actions, suits, claims, costs and expenses,
including legal fees, (a "Claim") arising as a result of any act or omission of
the Bank or any Indemnified Party under this Agreement, except for any Claim
resulting solely from the negligence, willful misfeasance or bad faith of the
Bank or any Indemnified Party. Without limiting the foregoing, neither Bank nor
the Indemnified Parties shall be liable for, and the Bank and the Indemnified
Parties shall be indemnified against, any Claim arising as a result of:
(a) Any actions taken or omitted to be taken by the Bank or its
agents or subcontractors in good faith in reliance on, or use by the Bank or
its agents or subcontractors of, information, records and documents which (i)
are received by the Bank or its agents or subcontractors and furnished to such
party by or on behalf of the Fund(s), (ii) have been prepared and/or
maintained by the Fund(s) or any other person or firm on behalf of the
Fund(s), or (iii) were received by the Bank or its agents or subcontractors
from a prior transfer agent.
(b) Any action taken or omitted to be taken by the Bank in good faith
reliance upon any then effective law, act, regulation (a "Regulation") or
interpretation of a Regulation even though such Regulation may thereafter have
been altered, changed, amended or repealed.
(c) The Fund(s)' refusal or failure to comply with the terms of this
Agreement, or which arise out of the Funds' lack of good faith, negligence or
willful misconduct or which arise out of the breach of any representation or
warranty of the Fund(s) hereunder.
(d) The reliance on, or the carrying out by the Bank or its agents or
subcontractors of any Proper Instructions in accordance with the terms thereof.
(e) The offer or sale of Shares by the Company in violation of (i)
any requirement under the federal securities laws or regulations; (ii) any
requirement under the securities laws or regulations of any state; or (iii)
any stop order or other determination or ruling by any federal or state agency
with respect to the offer or sale of such Shares.
17.2 The Bank shall indemnify and hold the Fund(s) harmless from and
against any and all losses, damages, costs, charges, legal fees, payments,
expenses and liability arising out of or attributed to any action or failure or
omission to act by the Bank as a result of the Bank's lack of good faith,
negligence, willful misconduct, knowing violation of law or fraud.
17.3 At any time the Bank may apply to any officer of the Company for
instructions, and may consult with legal counsel of the Bank or the Company with
respect to any matter arising in connection with the services to be performed by
the Bank under this Agreement, and the Bank and its agents or subcontractors
shall not be liable and shall be indemnified by the Company for any action taken
or omitted by it in reliance upon such instructions or upon the opinion of such
counsel except for a knowing violation of law. The Bank, its agents and
subcontractors shall be protected and indemnified in acting upon any paper or
document furnished by or on behalf of the Fund(s), including any information
furnished by Provider(s), reasonably believed to be genuine and to have been
signed by the proper person or persons and
9
<PAGE>
within the scope of their authority, or upon any instruction, information,
data, records or documents provided to the Bank or its agents or
subcontractors by machine readable input, telex, CRT data entry or other
similar means authorized by the Fund(s), and the Bank, its agents and
subcontractors shall not be held to have notice of any change of authority of
any person, until receipt of written notice thereof from the Fund(s). The
Bank, its agents and subcontractors shall also be protected and indemnified in
recognizing stock certificates which are reasonably believed to bear the
proper manual or facsimile signatures of an officer of the Company, and one
proper countersignature of any former transfer agent or registrar, or of a co-
transfer agent or co-registrar.
17.4 In the event either party is unable to perform its obligations under
the terms of this Agreement because of acts of God, strikes, interruption of
electrical power or other utilities, equipment or transmission failure or damage
reasonably beyond its control, or other causes reasonably beyond its control,
such party shall not be liable to the other for any damages resulting from such
failure to perform or otherwise form such causes.
17.5 Neither party to this Agreement shall be liable to the other party
for special, incidental or consequential damages, even if the other party has
been advised of the possibility of such damages, under any provision of this
Agreement or for any act or failure to act hereunder as contemplated by this
Agreement.
17.6 In order that the indemnification provisions contained in this
Article 14 shall apply, upon the assertion of a claim for which either party may
be required to indemnify the other, the party seeking the indemnification shall
promptly notify the other party of such assertion, and shall keep the other
party advised with respect to all developments concerning such claim. The party
seeking indemnification shall give the indemnifying party full and complete
authority, information and assistance to defend such claim or proceeding, and
the indemnifying party shall have, at its option, sole control of the defense of
such claim or proceeding and all negotiations for its compromise or settlement.
The party seeking indemnification shall in no case confess any claim or make any
compromise in any case in which the other party may be required to indemnify it
except with the other party's prior written consent, which consent shall not be
unreasonably withheld.
18. Covenants of the Company and the Bank.
-------------------------------------
18.1 The Company shall promptly furnish or cause to be furnished to the
Bank the following:
(a) A certified copy of the resolution of the Directors of the
Company authorizing the appointment of the Bank and the execution and delivery
of this Agreement.
(b) A copy of the charter documents and by-laws of the Company and
all amendments thereto.
(c) Copies of each vote of the Board designating authorized persons
to give instructions to the Bank, and a certificate providing specimen
signatures for such authorized persons.
(d) Certificates as to any change in any officer or Director of the
Company.
(e) Copies of each vote of the governing body of the Provider(s)
designating authorized persons to give instructions to the Bank, and a
certificate providing specimen signatures for such authorized persons.
10
<PAGE>
(f) Certificates as to any change in any officer or Director of the
Provider(s).
(g) If applicable a specimen of the certificate of Shares in each
Fund of the Company in the form approved by the Directors, with a certificate
as to such approval.
(h) All account application forms and other documents relating to
shareholder accounts or relating to any plan, program or service offered by the
Company.
(i) A list of all Shareholders of the Fund(s) with the name,
address and tax identification number of each Shareholder, and the number of
Shares of the Fund(s) held by each, certificate numbers and denominations (if
any certificates have been issued), lists of any account against which stops
have been placed, together with the reasons for said stops, and the number of
Shares redeemed by the Fund(s).
(j) An opinion of counsel for the Company with respect to the
validity of the Shares and the status of such Shares under the Securities Act
of 1933.
(k) Copies of the Fund(s) registration statement on Form N1A (if
applicable) as amended and declared effective by the Securities and Exchange
Commission and all post-effective amendments thereto.
(l) Such other certificates, documents or opinions as the Bank may
deem necessary or appropriate for the Bank in the proper performance of its
duties hereunder.
18.2 The Bank hereby agrees to establish and maintain facilities and
procedures reasonably acceptable to the Company for safekeeping of stock
certificates, check forms and facsimile signature imprinting devices, if any;
and for the preparation or use, and for keeping of account of, such
certificates, forms and devices.
18.3 The Bank agrees that all records prepared or maintained by the Bank
pursuant to Section 31 of the 1940 Act and the Rules thereunder and relating to
the services to be performed by the Bank hereunder are the confidential property
of the Company and will be preserved, maintained and made available in
accordance with such Section and Rules, and will be surrendered to the Company
on and in accordance with its request.
18.4 The Bank and the Company agree that all books, records, information
and data pertaining to the business of the other party which are exchanged or
received pursuant to the negotiation or the carrying out of this Agreement shall
remain confidential, and shall not be voluntarily disclosed to any other person,
except as may be required by law.
18.5 In case of any requests or demands for the inspection of the
Shareholder records of the Company, the Bank will endeavor to notify the Company
and to secure instructions from an authorized officer of the Company as to such
request or demand. The Bank reserves the right, however, to exhibit the
Shareholder records to any person whenever it is advised by its counsel that it
may be subject to enforcement or other action by any court or regulator, body
for the failure to exhibit the Shareholder records to such person.
11
<PAGE>
19. Term of Agreement.
-----------------
19.1 Termination of Agreement. The initial term of this Agreement shall be
------------------------
two years commencing upon the date hereof (the "Initial Term"), unless earlier
terminated as provided herein. After the expiration of the Initial Term, the
term of this Agreement shall automatically renew for successive one-year terms
(each a "Renewal Term") unless notice of non-renewal is delivered by the non-
renewing party to the other party no later than ninety days prior to the
expiration of the Initial Term or any Renewal Term, as the case may be.
(a) Either party hereto may terminate this Agreement prior to the
expiration of the Initial Term in the event that the other party violates any
material provision of this Agreement, provided that the non-violating party
gives written notice of such violation to the violating party and the violating
party does not cure such violation within ninety days of receipt of such notice.
(b) Either party may terminate this Agreement during any Renewal
Term upon ninety days written notice to the other party. Any termination
pursuant to this paragraph 16.1(b) shall be effective upon expiration of
such ninety days, provided, however, that the effective date of such
termination may be postponed to a date not more than one hundred twenty days
after delivery of the written notice: (i) at the request of the Bank, in order
to prepare for the transfer by the Bank of its duties hereunder; or (ii) at
the request of the Fund, in order to give the Fund an opportunity to make
suitable arrangements for a successor transfer agent.
19.2 Should the Company exercise its right to terminate, all out-of-pocket
expenses associated with the movement of records and material will be borne by
the Company. Additionally, the Bank reserves the right to recover from the
Company any other reasonable expenses associated with such termination.
20. Additional Funds. In the event that the Company establishes one or more
----------------
series or classes of Shares in addition to the series listed on Appendix A
----------
hereto with respect to which it desires to have the Bank render services as
transfer agents under the terms hereof, it shall so notify the Bank in writing,
and, unless the Bank declines in writing to provide such services, such series
of Shares shall become a Fund hereunder and Appendix A shall be appropriately
----------
amended.
21. Assignment.
----------
21.1 Except as provided in Section 18.3 below, neither this Agreement nor
any rights or obligations hereunder may be assigned by either party without the
written consent of the other party.
21.2 This Agreement shall inure to the benefit of and be binding upon the
parties and their respective successors and permitted assigns.
21.3 The Bank, may without further consent on the part of the Company,
subcontract for the performance of any of the services to be provided hereunder
to third parties, including any affiliate of the Bank, provided that the Bank
shall remain liable hereunder for any acts or omissions of any subcontractor as
if performed by the Bank.
22. Amendment. This Agreement may be amended or modified only by a written
---------
agreement executed by both parties.
12
<PAGE>
23. Governing Law. This Agreement shall be construed and the provisions thereof
-------------
interpreted under and in accordance with the laws of the Commonwealth of
Massachusetts, without regard to its conflict of laws provisions.
24. Merger of Agreement and Severability.
------------------------------------
24.1 This Agreement constitutes the entire agreement between the parties
hereto with respect to the matters addresses hereby, and supersedes any prior
agreement with respect to the subject hereof whether oral or written.
24.2 In the event any provision of this Agreement shall be held
unenforceable or invalid for any reason, the remainder of the Agreement shall
remain in full force and effect.
24.3 This Agreement may be executed in any number of counterparts, each of
which shall be deemed to be an original; but such counterparts shall together,
constitute only one instrument.
25. Notices. Any notice or other instrument in writing authorized or required
-------
by this Agreement to be given to either party hereto will be sufficiently given
if addressed to such party and delivered, via registered U.S. Mail or facsimile
with written confirmation via registered U.S. Mail, to it at its office at the
address set forth below, namely:
For the Company or the Fund(s):
MasterWorks Funds Inc.
111 Center Street
Little Rock, AR 72201
Attention: Richard H. Blank, Jr.
With a copy to:
Barclays Global Investors
45 Fremont Street
San Francisco, CA 94105
Attention: Legal Department
For the Bank:
Investors Bank and Trust Company
200 Clarendon Street, P.O. Box 9130
Boston, Massachusetts 02117-9130
Attention: Andrew M. Nesvet, Director, Client Management
With a copy to: John E. Henry, General Counsel
13
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed in their names and on their behalf under their seals by and through
their duly authorized officers, as of the day and the year first above written.
MASTERWORKS FUNDS INC.
By: /s/ Richard H. Blank, Jr.
________________________________
Name: Richard H. Blank, Jr.
Title: Sec
INVESTORS BANK & TRUST COMPANY
By: /s/ Andrew M. Nesvet
________________________________
Name: Andrew M. Nesvet
Title: Director, Client Management
14
<PAGE>
Appendices
----------
Appendix A Funds
Appendix B Fee Schedule
15
<PAGE>
MasterWorks Funds Inc.
Appendix A
List of Funds
LifePath 2000 Fund
LifePath 2010 Fund
LifePath 2020 Fund
LifePath 2030 Fund
LifePath 2040 Fund
Asset Allocation Fund
Bond Index Fund
Growth Stock Fund
Money Market Fund
Short-Intermediate Term Fund
S & P 500 Index Fund
U.S. Treasury Allocation Fund
Note: There is presently one class of shares for each of the Funds noted above.
Dated: _______________________
16
<PAGE>
APPENDIX B
BARCLAYS GLOBAL INVESTORS
MASTERWORKS FUNDS INC.
TRANSFER AGENCY FEE SCHEDULE
December 10, 1997
INSTITUTIONAL TRANSFER AGENCY
A. Transfer Agency
---------------
* The following fees apply to the 12 existing MasterWorks feeders/classes
for which we are transfer agent. This fee does not include enhancements
or customized reporting (see below). Since the funds are institutional,
we assume all subscriptions and redemptions will be transferred by wire
and can be recorded on a net basis.
Annual Fee
----------
Up to 200 accounts* $6,000 per feeder/class
From 201 to 250 accounts $8,500 per feeder/class
Over 250 accounts $10,000 per feeder/class
* Defined as each account that is set-up for an individual or plan sponsor on a
fund by fund basis.
MISCELLANEOUS
A. Out-of-Pocket
-------------
* These charges consist of:
-Printing, Delivery & Postage -Wires ($5.00 in, $7.00 out)
-Transfer Agency Forms & Supplies -Ad Hoc Reporting
-Legal Expenses -Returned Checks
-Customized Systems Development/Reporting/Statements
B. SYSTEMS
-------
* The details of any systems work will be determined after a thorough
business analysis. System's work will be billed on a time and material
basis. This would include an automated conversion of current balances
and account history (to the extent required) from the current provider
and establishing any systems/communications interfaces with current or
future plan record keepers.
17
<PAGE>
C. LEGAL EXPENSES
--------------
* Investors Bank will charge the funds for any legal costs/expenses
associated with materially changing the Bank's standard transfer agency
agreement.
D. OTHER
-----
* This fee schedule assumes that the existing Stagecoach LifePath classes
related to Schwab will be terminated prior to converting to IBT. If this
is not the case, the above pre feeder/class charges will apply to these
classes as an incremental charge for as long as the classes are active.
18
<PAGE>
EXHIBIT 99.B9(b)
SHAREHOLDER SERVICING PLAN
MASTERWORKS FUNDS
Section 1. Each of the proper officers of MasterWorks Funds Inc.
(formerly Stagecoach Inc.) (the "Company") is authorized to execute and deliver,
in the name and on behalf of the Company, written agreements ("Agreements"),
duly approved by the Company's Board of Directors, with broker/dealers, banks
and other financial institutions that are dealers of record or holders of record
or which have a servicing relationship with the beneficial owners of Shares
("Servicing Agents") in the Company's fund's listed on Schedule I (each a
"Fund", collectively the "Funds"). Pursuant to such Agreements, Servicing
Agents shall provide support services as set forth therein to their clients who
beneficially own Shares of a Fund in consideration of a fee, computed monthly in
the manner set forth in the Fund's then current prospectus, at annual rates as
set forth in Schedule I. The Company's distributor, administrator and adviser
and their respective affiliates are eligible to become Servicing Agents and to
receive fees under this Servicing Plan. All expenses incurred by a Fund in
connection with the Agreements and the implementation of this Servicing Plan
shall be borne entirely by the holders of the Shares of the Fund.
Section 2. The Company's administrator shall monitor the arrangements
pertaining to the Company's Agreements with Servicing Agents. The Company's
administrator shall not, however, be obligated by this Servicing Plan to
recommend, and the Company shall not be obligated to execute, any Agreement with
any qualifying Servicing Agents.
Section 3. So long as this Servicing Plan is in effect, the Company's
administrator shall provide to the Company's Board of Directors, and the
Directors shall review, at least quarterly, a written report of the amounts
expended pursuant to this Servicing Plan and the purposes for which such
expenditures were made.
Section 4. Unless sooner terminated, this Servicing Plan (and each
related agreement) shall continue in effect for a period of one year from its
date of execution and shall continue thereafter for successive annual periods,
provided that such continuance is specifically approved at least annually by a
majority of the Board of Directors, including
<PAGE>
a majority of the Directors who are not "interested persons," as defined in
the Investment Company Act of 1940, of the Company and have no direct or
indirect financial interest in the operation of this Servicing Plan or in any
Agreement related to this Servicing Plan (the "Disinterested Directors") cast
in person at a meeting called for the purpose of voting on such approval.
Section 5. This Servicing Plan may be amended at any time with respect to
the Funds by the Company's Board of Directors, provided that any material
amendment of the terms of this Servicing Plan (including a material increase of
the fee payable hereunder) shall become effective only upon the approvals set
forth in Section 4.
Section 6. This Servicing Plan is terminable at any time with respect to
the Funds by vote of a majority of the Disinterested Directors.
Section 7. While this Servicing Plan is in effect, the selection and
nomination of the Disinterested Directors shall be committed to the discretion
of such Disinterested Directors.
Section 8. Notwithstanding anything herein to the contrary, the Funds
shall not be obligated to make any payments under this Plan that exceed the
maximum amounts payable under Rule 28 of the Conduct Rules of the National
Association of Securities Dealers, Inc.
Section 9. The Company will preserve copies of this Servicing Plan,
Agreements, and any written reports regarding this Servicing Plan presented to
the Board of Directors for a period of not less than six years.
Dated: February 1, 1994
<PAGE>
SCHEDULE 1
LIST OF FUNDS
FUNDS FEES
Growth Fund ................................................... .10%
Growth Stock Fund ............................................. .10%
Short-Intermediate Term Fund .................................. .10%
Asset Allocation Fund ......................................... .20%
U.S. Treasury Allocation Fund ................................. .20%
Bond Index Fund ............................................... .07%
S&P 500 Stock Fund ............................................ .07%
Money Market Fund ............................................. .10%
Dated: February 1, 1994
As Amended: October 29, 1997 to include the Money Market Fund.
<PAGE>
FORM OF SHAREHOLDER SERVICING AGREEMENT
MasterWorks Funds Inc.
111 Center Street
Little Rock, Arkansas 72201
Gentlemen:
We wish to enter into this Shareholder Servicing Agreement with you
concerning the provision of certain services to shareholders of each series
named on Schedule 1 hereto, as such Schedule may be revised from time to time
(each, a "Fund"), of MasterWorks Funds Inc. (the "Company"). The terms and
conditions of this Agreement are as follows:
1. We agree to provide certain services to the shareholders of each Fund
which services may include providing personal services relating to shareholder
accounts, such as answering shareholder inquiries regarding the Fund and
providing reports and other information, and providing services related to the
maintenance of shareholder accounts.
2. We will act solely as agent for, upon the order of, and for the
account of, the shareholders for whom we are providing the services described
herein.
3. We will provide such office space and equipment, telephone facilities
and personnel (which may be any part of the space, equipment and facilities
currently used in our business, or any personnel employed by us) as may be
reasonably necessary or beneficial in order to provide such services
contemplated hereunder.
4. We will not nor will any of our officers, employees or agents make
any representations concerning the Company or the Funds except those contained
in the Funds' then-current prospectus and statement of additional information,
copies of which will be supplied to us by the Company, or in such supplemental
literature or advertising as may be authorized by the Company in writing.
5. For all purposes of this Agreement, we will be deemed to be an
independent contractor, and will have no authority to act as agent for the
Company in any manner or in any respect. We agree and do release, indemnify and
hold the Company harmless from and against any and all direct or indirect
liabilities or losses resulting from requests, directions, actions or inactions
of or by us or our officers, employees or agents regarding our responsibilities
hereunder for the purchase, redemption, transfer, or registration of Fund shares
by or on behalf of the holders of such shares. We and our employees, upon
request, will be available during normal business hours to consult with
1
<PAGE>
the Company or its designees concerning the performance of our
responsibilities under this Agreement.
6. In consideration of the services and facilities provided by us
hereunder, the Company agrees to pay us and we will accept as full payment
therefor, a fee at the annual rate set forth opposite each Fund's name on
Schedule 1 hereto, based on the average daily net asset value of the outstanding
Fund shares as to which we provide the services described herein, which fee will
be computed daily and payable monthly. For purposes of determining the fees
payable under this Section 6, the average daily net asset value of such
outstanding shares will be computed in the manner specified in the Company's
registration statement (as the same is in effect from time to time) in
connection with the computation of the net asset value of the relevant Funds for
purposes of purchases and redemptions. The Company, in its discretion and
without notice, may suspend or withdraw the sale of Fund shares.
7. Any person authorized to direct the disposition of monies paid or
payable by the Company pursuant to this Agreement will provide to the Company's
Board, at least quarterly, a written report of the amounts so expended and the
purposes for which such expenditures were made. In addition, we will furnish
the Company or its designees with such information as a Fund or its designees
may reasonably request (including, without limitation, periodic certifications
confirming the provision of the services described herein), and will otherwise
cooperate with the Company or its designees (including, without limitation, any
auditors designated by the Company), in connection with the preparation of
reports to the Company's Board concerning this Agreement and the monies paid or
payable pursuant hereto, as well as any other reports or filings that may be
required by law. We will promptly report to the Company any potential or
existing conflicts with respect to the investments of our customers in the
Funds.
8. The Company may enter into some similar Shareholder Servicing
Agreements with any other person or persons without our consent.
9. We represent, warrant and agree that: (i) in no event will any of the
services provided by us hereunder be primarily intended to result in the sale of
any shares issued by the Company; (ii) the compensation payable to us hereunder,
together with any other compensation payable to us by our clients in connection
with the investment of their assets in Fund shares, will be disclosed by us to
our clients, will be authorized by our clients and will not result in an
excessive or unreasonable fee to us; and (iii) we will not engage in activities
pursuant to this Agreement which constitute acting as a broker or dealer under
state law.
10. This Agreement will become effective on the date a fully executed
copy of this Agreement is received by the Company or its designee and accepted
and agreed to. Unless sooner terminated, this Agreement will continue until the
first anniversary of its effective date and thereafter will continue
automatically for successive annual periods
2
<PAGE>
ending on the anniversary of its effective date, provided such continuance is
specifically approved at least annually by the Company in the manner described
in Section 13.
11. All notices and other communications will be duly given if mailed,
telegraphed, telexed or transmitted by similar telecommunications device to the
appropriate address shown above, or to such other address as either party shall
so provide the other.
12. This Agreement shall be construed in accordance with the internal
laws of the State of California without giving effect to principles of conflict
of interest.
13. This Agreement is subject to annual approval by vote of a majority
of (i) the Company's Board and (ii) the Directors who are not "interested
persons" (as defined in the Investment Company Act of 1940, as amended) of the
Company or us, by vote cast in person at a meeting called for the purpose of
voting such approval. This Agreement is terminable without penalty, on 10 days'
notice, by the Company's Board, or, on not less than 90 days' notice, by us.
This Agreement will terminate automatically in the event of its assignment (as
defined in the Act).
14. This contract has been executed on behalf of the Company by the
undersigned officer of the Company in his capacity as an officer of the Company.
The obligations of this contract shall only be binding upon the assets and
property of the relevant Fund, as provided for in the Company's Articles of
Incorporation, and shall not be binding upon any Director, officer or
shareholder of the Company or Fund individually.
3
<PAGE>
If you agree to be legally bound by the provisions of this Agreement,
please sign a copy of this letter where indicated below and promptly return it
to us.
Very truly yours,
[SHAREHOLDER SERVICING AGENT]
By:
____________________________________
Name:
__________________________________
Title:
__________________________________
By:
____________________________________
Name:
__________________________________
Title:
__________________________________
Accepted and agreed to:
MASTERWORKS FUNDS INC.
By:
____________________________________
Name:
__________________________________
Title:
__________________________________
Dated:
__________________________________
4
<PAGE>
SCHEDULE 1
----------
Annual Fee as a
Percentage of Average
Name of Fund Daily Net Assets
-------------------- ---------------------
Growth Fund............................. .10%
Growth Stock Fund....................... .10%
Short-Intermediate Term Fund............ .10%
Asset Allocation Fund................... .20%
U.S. Treasury Allocation Fund........... .20%
Bond Index Fund......................... .07%
S&P 500 Stock Fund...................... .07%
Money Market Fund....................... .10%
5
<PAGE>
EXHIBIT 99B9(D)
Merrill Lynch, Pierce, Fenner & Smith Incorporated
800 Scudders Mill Road
Plainsboro, New Jersey 08536
SERVICE AGREEMENT
-----------------
Ladies and Gentlemen:
You have invited us to provide certain services to our clients that own
shares of the open-end investment companies listed on Schedule A hereto, as
amended from time to time in accordance with paragraph 10 (d) hereunder
(hereinafter collectively referred to as the "Funds" or, individually, as the
"Fund"), for which you are the distributor on the following terms:
1. PURCHASES OF FUND SHARES FOR SALE TO CUSTOMERS
----------------------------------------------
(a) We agree that all purchases of fund shares by us shall be made only on
behalf of our customers, or for our own bona fide investment.
(b) We agree to effect purchases for our customers subject to minimum
investment requirements applicable to each order and at the applicable public
offering price described in the prospectus and statement of additional
information of such Fund in effect on the date of the sale (the prospectus and
statement of additional information as of any such sale date or of any
applicable redemption or repurchase date being sometimes referred to together
herein as the "then current prospectus"), provided, however, that it is
understood that we assume no responsibility or liability for the determination
of such price.
<PAGE>
(c) We shall not withhold placing orders received from our customers so as
to profit ourself as a result of such withholding (e.g., by a change in the net
asset value from that used in determining the public offering price to our
customers).
(d) We understand that all orders are subject to acceptance or rejection by
you or the Fund in the sole discretion of either. No conditional order will be
accepted by the Fund on any basis other than a definite price. The handling of
orders by the parties shall be subject to such procedures as may be mutually
agreed upon from time to time.
(e) Payment for Fund shares purchased by us shall be made on the settlement
date specified in your confirmation by New York Clearing House Funds or by
Federal Funds wire. If such payment is not received by you, you reserve the
right, without notice, either to cancel the sale, or, at your option, to sell
the shares ordered back to such Fund, and in either case, you may hold us
responsible for any direct loss suffered by you or by such Fund resulting from
our failure to make payment as aforesaid.
2. SELLING PROCEDURES/SALES MATERIALS
----------------------------------
(a) "Sales Material," as used herein, shall include, without limitation,
promotional materials, sales literature, advertisements, press releases,
announcements, circulars, research reports, market letters, performance reports
or summaries, form letters, posters, signs and other similar materials, whether
in print, hypertext, video, audio or other media, and any items derived from the
2
<PAGE>
foregoing, and including sales materials intended for wholesale use (i.e.,
broker/dealer use only) or retail use.
(b) We shall not make any representation concerning the Funds or their
securities except those contained in the then current prospectus or any Sales
Materials furnished by you relating to the Funds. (We assume no responsibility
or liability for representations contained in any of such documents.) You agree
to notify us in writing at the address specified in paragraph (c) of any change
to the prospectus or statement of additional information of each Fund,
specifying such change, at least 10 days before making such change, provided
that if such notice is not reasonably practicable, you may provide us with the
required notice within such other period as is reasonable under the
circumstances, but, in any event, not later than concurrently with such change.
(c) You agree to supply to us at your expense additional copies of the
prospectus, statement of additional information, shareholder materials, periodic
reports and proxy statements for each of the Funds and any printed supplemental
material in reasonable quantities upon request. We agree to deliver copies of
the above materials to customers and potential customers in accordance with
applicable law and the rules of the Securities and Exchange Commission ("SEC").
Further, you agree to provide to our Mutual Funds Marketing Department (the
"Marketing Department") copies of the most recent amended or supplemented
prospectus and statement of additional information of each Fund, and such other
SEC filing as we may request, in reasonable quantities upon our request. Such
materials shall be mailed to us at Merrill
3
<PAGE>
Lynch Mutual Funds Marketing, Attention: Mutual Funds Administration, 800
Scudders Mill Road, Plainsboro, New Jersey 08536.
(d) You agree not to distribute any Sales Materials (other than copies of
the then current prospectus) to any of our employees or sales offices unless the
distribution of such materials has been approved in writing by our Marketing
Department in accordance with written procedures (as amended from time to time)
distributed by the Marketing Department. In approving such materials for
distribution within our offices or through our sales offices to our customers,
we assume no responsibility or liability for the representations or any
omissions contained in any Sales Materials furnished by you nor for
representations or any omissions contained in the prospectus or statement of
additional information relating to the Fund.
(e) With the exception of (i) listings of product offerings; (ii) materials
in the public domain (e.g., magazine articles and trade publications); and (iii)
materials used by us on an internal basis only, we agree not to furnish or cause
to be furnished to any third parties or to display publicly or publish any Sales
Materials, except such Sales Materials relating to the Fund as may be
distributed to us by you (as authorized for use by you) or approved in writing
for distribution by you upon our request.
3. REDEMPTION/REPURCHASE/TRANSFER OF FUND SHARES AND EXCHANGES
-----------------------------------------------------------
(a) If we effect a redemption on behalf of customers, we agree to pay such
customers not less than the applicable redemption price (i.e., the next
4
<PAGE>
determined net asset value minus any applicable sales charges or redemption
fees) determined as set forth in the then current prospectus of the Fund,
provided, however, that it is understood that we assume no responsibility or
liability for the determination of such price.
(b) We shall not withhold placing redemption or repurchase orders received
from our customers so as to profit ourself as a result of such withholding
(e.g., by a change in the net asset value from that used in determining the
public offering price to our customers).
(c) Redemption and repurchase orders are subject to such procedures as may
be mutually agreed upon from time to time, provided that any order placed by us
regarding the redemption or repurchase of Fund shares is subject to timely
receipt by you or the Fund's transfer of all required documents.
(d) Where shares of a Fund are held in the name of our customer directly at
the Fund's transfer agent with us listed as the broker-dealer of record, and the
customer requests that such shares be transferred to the name of Merrill Lynch,
Pierce, Fenner & Smith Incorporated ("Merrill Lynch") as nominee, you undertake
to provide to us as soon as is practicable the account history in connection
with processing a transfer request.
(e) Exchanges of shares between Funds will be effected in the manner and
subject to the restrictions and charges described in the then current
prospectuses of the relevant Funds. The handling of exchanges will be further
subject to such other procedures as may be mutually agreed upon from time to
time.
5
<PAGE>
(f) You understand and agree that this is a limited dealer agreement
intended to allow the purchase and sale of shares of particular Funds held in
individual retirement accounts with respect to which we (or one of our
affiliates became or has become custodian pursuant to the Purchase and
Assumption Agreement, dated as of August 29, 1997, between us and Barclays
Global Investors, N.A. (It is understood and agreed by the parties hereto that
a liquidation of a Fund position in such an individual retirement account in
connection with the above-described transaction and a concurrent repurchase of
the same position in a Merrill Lynch IRA (as defined below) required to effect
the transfer of the shareholders assets to a Merrill Lynch IRA will be
considered to be a qualifying purchase and sale hereunder.). In addition, it
is understood and agreed that the purchase and selling privileges hereunder
will not allow shareholders to transfer shares of the Funds into an individual
retirement account with respect to which we or one of our affiliates acts as
custodian (a "Merrill Lynch IRA") from a retirement plan covered under the
Special Purpose Shareholder Servicing Agreement between and among Merrill
Lynch, Pierce, Fenner & Smith Incorporated, Masterworks Funds, Inc. and
Barclays Global Investor N.A. You further understand and agree that we will
not promote the sale of the Funds to clients who are not shareholders of the
Fund described in the first sentence of this section. However, we will service
such shareholders and you agree to compensate us for such services and our
sale of Fund shares in accordance with the terms otherwise provided in this
Agreement. You agree to conduct your business with us in a manner that is
consistent with the limitations
6
<PAGE>
stated above and understand and agree that you may not promote the sale of your
products in our offices or to our employees. In addition, you understand and
agree that you may not represent that we are a dealer or promoter of the Funds
in any manner that is inconsistent with the terms of this Agreement.
4. PRICING ERRORS
--------------
You agree to notify us promptly or to cause the relevant Fund to notify us
promptly whenever an error is made in the pricing of shares of a Fund and to
indemnify us and hold us harmless against any and all losses, claims, damages,
liabilities or expenses (including, but not limited to, any losses suffered by
our clients and any additional costs and expenses related to the price
correction, such as research costs, expenses related to developing computer
software specifically for the price correction, processing overtime and notices
to customers) to which we may become subject insofar as any such loss, claim,
damage, liability or expense arises out of or is based on any error or alleged
error made in the pricing of shares of a Fund. Payment shall be made by you
promptly upon receipt of a bill from us stating the costs of the price
correction and the expenses related thereto.
5. COMPENSATION
------------
We acknowledge that we are fully compensated pursuant to the separate
Financial Services Agreement between us and [you or the Funds or the Fund
Manager (as defined in the Financial Services Agreement)] and that you are not
obligated to pay us any compensation pursuant to this Agreement.
7
<PAGE>
6. NASD MEMBERSHIP
---------------
(a) We are registered and/or licensed as a broker and/or dealer under the
federal and applicable state laws. We represent and warrant to you that we are a
member of the National Association of Securities Dealers, Inc. (the "NASD").
(b) We agree to notify you immediately if we cease to be registered or
licensed as a broker or dealer or fail to be a member in good standing of the
NASD.
(c) We agree to abide by the rules and regulations of the NASD, including,
without limitation, Rule 2830 of the NASD Conduct Rules.
7. COMPLIANCE WITH REGULATORY REQUIREMENTS
---------------------------------------
You represent and warrant to us the following:
(a) Each Fund has filed a registration statement (a "Registration
Statement") with the SEC relating to its shares under the Securities Act of 1933
(the "1933 Act") on Form N-1A, including a prospectus and a statement of
additional information. The Registration Statement (including the prospectus and
the statement of additional information) conforms in all respects to the
requirements of the 1933 Act, the 1940 Act and the rules thereunder.
(b) To the extent required by law, each Fund is registered and its shares
are qualified for sale in all states and other jurisdictions in the United
States unless we are notified in writing to the contrary. We may rely solely on
such representation in selling the shares, but you assume no responsibility or
8
<PAGE>
obligation as to our right as a broker-dealer to sell shares of the Funds in any
state or jurisdiction. Upon receipt of written notice from you, that a Fund's
registration or qualification in a jurisdiction has terminated or that the Fund
otherwise wishes us to cease accepting purchase orders for shares of a Fund in
such jurisdiction, we shall promptly cease accepting purchase orders for shares
of such Fund in accordance with such notification.
(c) The then current prospectus for each of the Funds contains such
disclosure with respect to fees paid and charges imposed by the Funds in
connection with the sale of the Fund shares as is necessary to comply with the
rules and regulations of the NASD, including, without limitation, disclosure of
all compensation from the Funds of the type described in paragraph 5 hereof as
required by Rule 2830 of the NASD Conduct Rules. Such fees and charges will be
in compliance with the rules and regulations of the NASD, including, without
limitation, Rule 2830 of the NASD Conduct Rules.
(d) Each investment adviser of each Fund is registered as an investment
adviser under the Investment Advisers Act of 1940 or is exempt from such
registration, and in any state where registration is required.
(e) The Registration Statement (including the prospectus and statement of
additional information) and any Sales Materials relating to the Fund provided by
you to us do not contain an untrue statement of a material fact or omit to state
a material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances in which they were made, not
misleading.
9
<PAGE>
(f) All Sales Materials will comply in all material respects with the
rules and regulations of the SEC, the NASD and any states having such rules
and regulations and will be filed with the NASD or SEC and the relevant states
as required by the rules and regulations of the NASD, the SEC and such states,
respectively.
(g) You are registered and/or licensed as a broker and/or dealer under
federal and applicable state laws and are a member of the NASD. You agree to
notify us immediately if you cease to be registered or licensed as a broker or
dealer or fail to be a member in good standing of the NASD.
(h) The foregoing representations and warranties will be true and correct
at all times during the term of this Agreement (with references to the
Registration Statement throughout this Agreement being deemed to refer to the
Registration Statement in effect at the time such reference is made and to the
then current prospectus of the Fund).
8. INDEMNIFICATION
---------------
(a) You agree to indemnify us (for the purposes of this Section 8, "us" and
"we" shall mean Merrill Lynch, the officers, directors and employees of Merrill
Lynch, and any person who is or may be deemed to be a controlling person of
Merrill Lynch) and hold us harmless against any and all losses, claims, damages,
liabilities or expenses (including the reasonable costs of investigation and
attorney's fees and expenses as such expenses are incurred by us in any action
or proceeding between the parties hereto or between us and any third
10
<PAGE>
party) to which we may become subject under the 1933 Act, the 1940 Act, or
otherwise, insofar as any such loss, claim, damage, liability or expense (or
actions with respect thereto) arises out of or is based on any untrue statement
of a material fact or alleged untrue statement of a material fact contained in
any Registration Statement of the Fund (including any prospectus or statement of
additional information which is part of any such Registration Statement) or any
amendment or supplement thereto or in any Sales Material relating to the Fund
provided to us by you (whether or not we have approved the use of such Sales
Materials), or arises out of or is based on the omission or the alleged omission
to state therein a material fact required to be stated therein or necessary to
make the statements therein not misleading. This indemnity agreement will be in
addition to any liability which you may otherwise have. No indemnity by you
hereunder shall apply in respect of any prospectus, statement of additional
information or Sales Materials used at a time not authorized under the 1933 Act
or the regulations adopted thereunder, or at a time or in a fashion not
authorized for use by you, provided in each case that you have informed us in
writing that there is no such authorization.
(b) If we seek indemnity under this Section we shall, promptly after
receipt of notice of commencement of any action, suit or proceeding against us,
give written notice of the commencement of such action, suit or proceeding to
you, but the omission so to notify you shall not relieve you from any such
obligation you may otherwise have. In case such notice of any such action shall
be so given, you shall be entitled to participate at your own expense in the
11
<PAGE>
defense, or, if you so elect, to assume the defense of such action, in which
event such defense shall be conducted by counsel (satisfactory to us) chosen by
you; provided, however, that you shall not have the right to assume the defense
of any action in which the named parties (including any implied parties) include
both you and us and in which counsel to either of us has advised that there may
be legal defenses available to us which are different from or in addition to
those available to you. If you do not elect to assume the defense of such action
and in cases where separate counsel is retained because of the availability of
different defenses, you will reimburse us for the reasonable fees and expenses
of any counsel retained by us. Payment (other than the reimbursement of our
legal and other related fees and expenses, which will be payable to us upon your
receipt of our bill related thereto) shall be made upon any final determination
of liability resulting from such claim or misstatement or omission by a court,
panel of arbitrators, administrative agency or self-regulatory organization, or
upon any settlement of any dispute, the subject of which involves such a claim.
In any action in which you have elected to assume the defense, we shall bear the
fees and expenses of any additional counsel we retain, unless either of us has
retained separate counsel because there are legal defenses available to one of
us which are different from or in addition to those available to the other of
us, in which case you shall bear the fees and expenses of our counsel as well.
(c) This Section 8 shall survive the termination of this Agreement.
12
<PAGE>
9. TERMINATION
-----------
Either party hereto may cancel this Agreement upon 30 days' prior written
notice to the other. Except as set forth in Section 10(d), this Agreement shall
be in substitution of any prior agreement between us regarding the distribution
of these shares.
10. MISCELLANEOUS
-------------
(a) We are not acting as underwriter or principal for Fund shares under
this Agreement, and that we are in no way responsible for the manner of your
performance or for any of your acts or omissions in connection therewith. We are
a limited purpose agent of the Funds only and act only on behalf of our
customers. Nothing shall constitute us as a syndicate, association, joint
venture, partnership, unincorporated business, or other separate entity or
otherwise partners with you.
(b) We acknowledge and agree that each Fund reserves the right in its
discretion and you reserve the right, in your discretion and without notice to
us, subject to applicable law, to suspend sales or redemptions or to withdraw
the offering of shares of the Fund.
(c) All communication shall be sent to us at our offices at Merrill Lynch
Mutual Funds Marketing, Attention: Mutual Funds Administration, 800 Scudders
Mill Road, Plainsboro, New Jersey 08536 and to you at the address you have
provided at the end of this Agreement. Notice shall be deemed to have been given
on the date it was either delivered personally to the other party or
13
<PAGE>
any officer or member thereof or was either received by express delivery or
telecopy (with receipt) by the other party at his or her address specified in
this Agreement. Either party may change the address to which communications to
it shall be sent by giving notice thereof in accordance with this provision.
(d) This Agreement may be amended only by mutual agreement of the parties
in writing; provided however, that any amendment to Schedule A of this Agreement
to add additional Fund(s) shall be deemed effective and part of this Agreement
upon the first day of sale by us of any shares of such Fund(s).
(e) This Agreement shall become effective as of the date when it is
executed and dated by you below. This Agreement shall be governed by the laws of
the State of New York.
14
<PAGE>
(f) If a dispute arises between us and you with respect to this
Agreement which the parties are unable to resolve themselves, it shall be
settled by arbitration in accordance with the then existing NASD Code of
Arbitration Procedure (the "NASD Code"). The parties agree, that to the extent
permitted by the NASD Code, the arbitrator(s) shall be selected from the
securities industry.
Merrill Lynch, Pierce, Fenner & Smith Incorporated
By: /s/ Robert W. Dineen
____________________________
(Authorized Signature)
Robert W. Dineen
____________________________
Name
First Vice President
____________________________
Title
Accepted:
Stephens Inc.
By: /s/ Richard H. Blank
______________________________
Richard H. Blank, Jr.
______________________________
Name
______________________________
Title
Address: 111 Center Street
__________________________
Little Rock, AR 72201
__________________________
Date: December 31, 1997
____________________________
15
<PAGE>
SCHEDULE A
FUNDS
- -----
MasterWorks Funds, Inc. LifePath 2000 Fund
MasterWorks Funds, Inc. LifePath 2010 Fund
MasterWorks Funds, Inc. LifePath 2020 Fund
MasterWorks Funds, Inc. LifePath 2030 Fund
MasterWorks Funds, Inc. LifePath 2040 Fund
MasterWorks Funds, Inc. Asset Allocation Fund
MasterWorks Funds, Inc. Bond Index Fund
MasterWorks Funds, Inc. Growth Stock Fund
MasterWorks Funds, Inc. Money Market Fund
MasterWorks Funds, Inc. S&P 500 Index Fund
MasterWorks Funds, Inc. Short-Intermediate Term Fund
MasterWorks Funds, Inc. U.S. Treasury Allocation Fund
<PAGE>
EXHIBIT 99B9(E)
FINANCIAL SERVICES AGREEMENT
AGREEMENT made as of December 31, 1997 by and between Masterworks Funds,
Inc. ("Masterworks") and Merrill Lynch, Pierce, Fenner & Smith Incorporated
("MLPF&S").
WITNESSETH:
WHEREAS, each of the investment companies listed on Schedule A hereto as
such Schedule may be amended from time to time (collectively, the "Funds," and
each a "Fund") is an investment company registered under the Investment Company
Act of 1940, as amended; and
WHEREAS, MLPF&S, a broker-dealer registered under the Securities Exchange
Act of 1934, as amended, has entered into an agreement with Stephens Inc., as
Distributor of the Funds, pursuant to which it sells shares of the Funds to
certain customers with IRA Accounts; and
WHEREAS, for the convenience of its customers MLPF&S is the record owner of
such shares and maintains an omnibus account with each of the Funds which
represents the aggregate number of shares held by such customers at any given
time; and
WHEREAS, MLPF&S tracks the beneficial ownership of such shares and
distributes dividends, and shareholder information and performs other services
for its customers' benefit as set forth on Exhibit 1;
WHEREAS, the Funds receive a direct benefit from MLPF&S performing the
Services that they would otherwise perform, or have performed, on behalf of such
customers.
NOW, THEREFORE, in consideration of the premises and mutual covenants
hereinafter contained, each party hereto agrees, as follows:
1. MLPF&S agrees to perform the Services specified in Exhibit I hereto (the
"Services") for the benefit of the shareholders of the Funds maintaining shares
of any of such Funds in brokerage accounts with MLPF&S and whose shares are
included in the omnibus account referred to above (each a "Customer" and
collectively, the "Customers"). MLPF&S shall comply with applicable federal
securities laws in connection with the provision of the Services hereunder.
2. MLPF&S agrees that it will maintain and preserve all records as required
by law to be maintained and preserved in connection with providing the Services,
and will otherwise comply with all laws, rules, and regulations applicable to
the Services.
1
<PAGE>
3. Upon request of the Masterworks, MLPF&S will provide access to our
facilities and records related to the Services to the Fund and its legal and
audit representatives to review the quality of the Services, and to respond to
requests of the board of directors of Masterworks, a governmental body, self-
regulatory organization or a shareholder. Notwithstanding this provision, it is
understood and agreed that the names and addressees of MLPF&S customers
(including the Customers) are the exclusive property of MLPF&S and that such
customer information will not be provided to the Funds and their representatives
pursuant to this Agreement. All costs and expenses incurred by MLPF&S in
providing access to the Fund and its representatives shall be paid by
Masterworks.
4. Masterworks agrees that it and its representatives given access to
MLPF&S' facilities and/or records in accordance with Paragraph 3 hereto shall
treat all records and any information obtained in connection with access to our
facilities as confidential and shall not disclose information contained therein
except as permitted under Paragraph 3. All such records and information
maintained by MLPF&S and its affiliates in connection with this Agreement are
the exclusive property of MLPF&S and shall remain so notwithstanding any release
thereof in accordance with the terms of this Agreement. No person having access
to such records or information may use such records or information to solicit,
directly or indirectly, any customer of MLPF&S for any purpose. The provisions
of Paragraphs 3 and 4 shall survive the termination of this Agreement.
5. In consideration of the Services provided hereunder, Masterworks shall
pay to MLPF&S the amounts set forth in Schedule B hereto. If for any reason, any
fees or other payments to be made by Masterworks to MLPF&S under this Agreement
are not paid by Masterworks within 30 days of Masterworks receipt of a bill
therefore, Barclay Global Investors, Inc. ("BGI") agrees to pay such fees and/or
other payments to MLPF&S immediately upon receipt of a bill therefor.
6. MLPF&S shall indemnify and hold harmless Masterworks from and against
any and all losses that it may incur (including, without limitation, reasonable
attorneys' fees and expenses) arising out of or related to the non-performance
of MLPF&S of its responsibilities under this Agreement, except to the extent any
such losses are caused, or contributed to, by Masterworks.
7. (a) Masterworks shall indemnify and hold harmless MLPF&S from any and
all losses that it may incur (including, without limitation, reasonable
attorneys' fees and expenses) that are related to the non-performance of
Masterworks of its responsibilities under this Agreement, except to the extent
any such losses are caused, or contributed to by MLPF&S.
(b) BGI shall indemnify and hold harmless MLPF&S from any and all
losses that it may incur (including, without limitation, reasonable attorneys'
fees and expenses) that are related to the non-performance of BGI of its
responsibilities under
2
<PAGE>
this Agreement, except to the extent any such losses are caused, or contributed
to by MLPF&S.
(c) The provisions of Paragraphs 6 and 7 shall survive the
termination of this Agreement.
8. This Agreement may be terminated, without penalty, at any time by
MLPF&S or Masterworks in whole, or in part with respect to one or more of the
Funds, upon 30 days written notice to the other party. Upon termination, subject
to Section 5, Masterworks shall pay such compensation as shall be due and owing
to MLPF&S as of the date of such termination.
9. This Agreement, including its Exhibits and Schedules, constitutes the
entire agreement between the parties with respect to the matters dealt with
herein, and supersedes any previous agreements and documents with respect to
such matters.
10. All communications under this Agreement shall be written and sent to
us at our offices at 4800 Deerlake Drive East, Jacksonville, Florida 32246,
Attention: President, and Masterworks or BGI at the address provided at the end
of this Agreement. Notice shall be deemed to have been given on the date it was
delivered personally to the other party or any officer or was either received by
express delivery or telecopy (with receipt) by the other party at its address
specified in this Agreement. Either party may change the address to which
communications to it shall be sent by giving notice thereof in accordance with
this provision.
11. This Agreement may be amended only by mutual agreement of the parties
in writing; provided however, that any amendment to Schedule A of this Agreement
to add additional Fund(s) shall be deemed effective and part of this Agreement
upon the day of the first sale by MLPF&S of any shares of such Fund(s).
12. The rights and obligations of the parties hereunder may not be
assigned without the prior written consent of the non-assigning party.
Notwithstanding the forgoing, it is expressly understood and agreed that Merrill
Lynch Financial Data Services, Inc. ("FDS") and any successor to FDS may perform
any of the Services hereunder pursuant to the request of MLPF&S.
13. This Agreement shall be governed by laws of the State of New York
without giving affect to provisions relating to conflict of laws.
3
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Agreement as of the date first above written.
MERRILL LYNCH, PIERCE, FENNER
& SMITH INCORPORATED
By: /s/ Robert W. Dineen
______________________________
Print Name: Robert W. Dineen
_______________________
Title: First Vice President
____________________________
MASTERWORKS FUNDS, INC. Address for Notice:
By: /s/ Richard H. Blank, Jr. 111 Center Street
____________________________ __________________________
Print Name: Richard H. Blank, Jr. Little Rock, AR 72201
____________________ __________________________
Title: Sec.
_________________________ __________________________
SOLELY FOR THE PURPOSES OF SECTIONS 5 AND 7(B):
Barclays Global Investors, Inc. Address for Notes:
By: /s/ James R. Sollars
____________________________ __________________________
Print Name: James R. Sollars
_____________________ __________________________
Title: Principal
_________________________ __________________________
By: /s/ Thomas H. Christofferson
____________________________ __________________________
Print Name:Thomas H. Christofferson
_____________________ __________________________
Title: Managing Director
_________________________ __________________________
4
<PAGE>
EXHIBIT 1
Pursuant to the Agreement by and among the parties hereto, MLPF&S shall
perform the following Services:
1. Maintain separate records for each Customer with respect to each of the
Funds held by such Customer, which records shall reflect shares purchased and
redeemed and share balances. MLPF&S shall maintain an omnibus account for each
Fund with the transfer agent of the Funds representing the position of such
Customers and such account shall be in the name of MLPF&S or its nominee as the
record owner of the shares owned by such Customers.
2. Transmit to the Funds purchase and redemption orders on behalf of
Customers. Disburse or credit to Customers all proceeds of redemptions of shares
of each of the Funds and all dividends and other distributions not reinvested in
shares of each of the Funds.
3. Prepare and transmit to Customers periodic account statements showing
the total number of shares owned by them as of the statement closing date,
purchases and redemptions of Fund shares by the customer during the period
covered by the statement and the dividends and other distributions paid to the
customer during the statement period (whether paid in cash or reinvested in Fund
shares).
4. Transmit to MLPF&S customers proxy materials, reports and other
information required to be sent to shareholders under the federal securities
laws received by MLPF&S from any of the Funds. Upon request of a Fund, MLPF&S
will transmit to Customers fund communications deemed by the Fund, through its
Board of Directors or other similar governing body, to be material to
shareholders of the Fund. In the event MLPF&S were to mail any Fund materials,
reports, prospectuses and other information to Customers/shareholders of any
Fund who are MLPF&S customers pursuant to this paragraph, Masterworks agrees to
reimburse MLPF&S or cause the Fund to reimburse MLPF&S for all out-of-pocket
expenses, including, without limitation, reasonable clerical expenses incurred
in connection with the distribution of such materials using rates and guidelines
set forth in Rule 451.90 of the New York Stock Exchange Inc.
5. Provide to the Funds such periodic reports as shall reasonably be
concluded to be necessary to enable each of the Funds and its distributor to
comply with State Blue Sky requirements.
6. Retail account support and relationship management.
5
<PAGE>
SCHEDULE A
FUNDS
- -----
MasterWorks Funds, Inc. LifePath 2000 Fund
MasterWorks Funds, Inc. LifePath 2010 Fund
MasterWorks Funds, Inc. LifePath 2020 Fund
MasterWorks Funds, Inc. LifePath 2030 Fund
MasterWorks Funds, Inc. LifePath 2040 Fund
MasterWorks Funds, Inc. Asset Allocation Fund
MasterWorks Funds, Inc. Bond Index Fund
MasterWorks Funds, Inc. Growth Stock Fund
MasterWorks Funds, Inc. Money Market Fund
MasterWorks Funds, Inc. S&P 500 Index Fund
MasterWorks Funds, Inc. Short-Intermediate Term Fund
MasterWorks Funds, Inc. U.S. Treasury Allocation Fund
<PAGE>
SCHEDULE B
1. In consideration of the Services, Fund Manager agrees to pay MLPF&S an annual
fee equal to (i) 10 basis points on net assets of Funds held in ERISA Accounts
at MLPF&S in the MFA Program or any other programs requiring equalization under
ERISA and (ii) the following basis points per fund on all other net assets of
the Funds held in accounts at MLPF&S:
FUND BASIS POINTS
- ---- ------------
MasterWorks Funds, Inc. LifePath 2000 Fund .20%
MasterWorks Funds, Inc. LifePath 2010 Fund .20%
MasterWorks Funds, Inc. LifePath 2020 Fund .20%
MasterWorks Funds, Inc. LifePath 2030 Fund .20%
MasterWorks Funds, Inc. LifePath 2040 Fund .20%
MasterWorks Funds, Inc. Asset Allocation Fund .20%
MasterWorks Funds, Inc. Bond Index Fund .07%
MasterWorks Funds, Inc. Growth Stock Fund .10%
MasterWorks Funds, Inc. Money Market Fund .10%
MasterWorks Funds, Inc. S&P 500 Index Fund .07%
MasterWorks Funds, Inc. Short-Intermediate Term Fund .10%
MasterWorks Funds, Inc. U.S. Treasury Allocation Fund .20%
Such amounts shall be paid immediately upon receipt of a bill therefor by
Federal funds wire to the account specified by MLPF&S.
2. In addition to fees set forth above, Fund Manager shall pay, or cause to be
paid, to MLPF&S amounts due pursuant to Paragraph 3 of the Agreement and
Paragraph 4 of Exhibit I of this Agreement. Such amounts shall be paid
immediately upon receipt of a bill therefore by Federal funds wire to the
account specified by MLPF&S.
6
<PAGE>
EXHIBIT 99.B10
[MORRISON & FOERSTER LLP LETTERHEAD]
June 30, 1998
MasterWorks Funds Inc.
111 Center Street
Little Rock, AR 72201
Re: Shares of Common Stock of MasterWorks Funds Inc.
------------------------------------------------
Ladies/Gentlemen:
We refer to Post-Effective Amendment No. 15 and Amendment No. 19 to the
Registration Statement on Form N-1A (SEC File Nos. 33-54126 and 811-7332) (the
"Registration Statement") of MasterWorks Funds Inc. (the "Company") relating to
the registration of an indefinite number of shares of common stock of the
Company (collectively, the "Shares").
We have been requested by the Company to furnish this opinion as Exhibit 10
to the Registration Statement.
We have examined documents relating to the organization of the Company and
its series and the authorization and issuance of shares of its series. We have
also verified with the Company's transfer agent the maximum number of shares
issued by the Company during the fiscal year ended February 28, 1998.
Based upon and subject to the foregoing, we are of the opinion that:
The issuance and sale of the Shares by the Company has been duly and
validly authorized by all appropriate corporate action, and assuming delivery by
sale or in accord with the Company's dividend reinvestment plan in accordance
with the description set forth in the Funds' current prospectuses, the Shares
will be validly issued, fully paid and nonassessable by the Company.
We consent to the inclusion of this opinion as an exhibit to the
Registration Statement.
In addition, we hereby consent to the description of advice rendered by our
firm under the heading "Management of the Fund(s)" in the Prospectuses and to
the use of our name and to the reference to our firm under the caption "Counsel"
in the Statements of Additional Information, which are included as part of this
Registration Statement.
Very truly yours,
/s/ MORRISON & FOERSTER LLP
MORRISON & FOERSTER LLP
<PAGE>
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
MasterWorks Funds Inc.
The Board of Trustees
Master Investment Portfolio
The Board of Trustees
Managed Series Investment Trust:
We consent to the use of our report dated April 3, 1998 for MasterWorks Funds
Inc. (comprising respectively, Asset Allocation Fund, Bond Index Fund, Growth
Stock Fund, LifePath 2000 Fund, LifePath 2010 Fund, LifePath 2020 Fund, LifePath
2030 Fund, LifePath 2040 Fund, Money Market Fund, S&P 500 Stock Fund,
Short-Intermediate Term Fund and U.S. Treasury Allocation Fund) incorporated by
reference herein.
We also consent to the use of our report dated April 3, 1998 for Master
Investment Portfolio (comprising respectively, Asset Allocation Master
Portfolio, Bond Index Master Portfolio, LifePath 2000 Master Portfolio, LifePath
2010 Master Portfolio, LifePath 2020 Master Portfolio, LifePath 2030 Master
Portfolio, LifePath 2040 Master Portfolio, S&P 500 Index Master Portfolio, and
U.S. Treasury Allocation Master Portfolio) incorporated by reference herein.
We also consent to the use of our report dated April 3, 1998 for Managed Series
Investment Trust (comprising respectively, Growth Stock Master Portfolio and
Short-Intermediate Term Master Portfolio) incorporated by reference herein.
We also consent to the reference to our Firm under the headings "Financial
Highlights" and "Independent Auditors" in the prospectuses and "Independent
Auditors" in the Statements of Additional Information.
/s/ KPMG Peat Marwick LLP
San Francisco, California
June 29, 1998
