<PAGE>
COMBINED PROSPECTUS/PROXY STATEMENT
OCTOBER 26, 1998
_______________________________________
Acquisition and Assumption of: All of the Assets and Liabilities of the
Short-Intermediate Term Fund (the "S-I Term Fund") of MasterWorks Funds Inc.
("MasterWorks")
In Exchange for: Class A Shares of the Short-Intermediate U.S. Government
Income Fund (the "Government Fund") of Stagecoach Funds, Inc. ("Stagecoach")
______________________________________
<TABLE>
<S> <C>
STAGECOACH FUNDS, INC. MASTERWORKS FUNDS INC.
c/o Stagecoach Shareholder Services 111 Center Street
Wells Fargo Bank, N.A. Little Rock, Arkansas 72201
P.O. Box 7066 Telephone: 1-888-204-3956
San Francisco, CA 94120-7066
1-800-222-8222
</TABLE>
Stagecoach is an open-end, management investment company. This Combined
Prospectus/Proxy Statement is being furnished to shareholders of the S-I Term
Fund of MasterWorks in connection with the solicitation of proxies by the Board
of Directors of MasterWorks, for a special meeting of Shareholders of the S-I
Term Fund (the "Special Meeting") to be held at the principal office of
MasterWorks, 111 Center Street, Little Rock, Arkansas 72201, on Tuesday,
November 24, 1998 beginning at 11:00 a.m. (Central time).
This Combined Prospectus/Proxy Statement, which should be retained for
future reference, sets forth concisely the information about the Government Fund
that prospective investors, including shareholders of the S-I Term Fund, should
know before investing. Additional information is contained in a separate
Statement of Additional Information, dated October 26, 1998, which has been
filed with the Securities and Exchange Commission (the "SEC") and is available
without charge by calling MasterWorks at 1-888-204-3956 or Stagecoach toll-free
at 1-800-222-8222.
The Prospectus for the S-I Term Fund is incorporated by reference in this
Combined Prospectus/Proxy Statement and is available without charge by calling
MasterWorks at 1-888-204-3956. The Prospectus for the Government Fund is
incorporated by reference and accompanies this Combined Prospectus/Proxy
Statement.
1
<PAGE>
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SEC, ANY STATE
SECURITIES COMMISSION OR ANY OTHER REGULATORY AUTHORITY, NOR HAVE ANY OF THESE
AUTHORITIES PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
SHARES OF STAGECOACH ARE NOT DEPOSITS OR OTHER OBLIGATIONS OF, OR ISSUED,
ENDORSED OR GUARANTEED BY, WELLS FARGO BANK, N.A., WELLS CAPITAL MANAGEMENT, OR
ANY OF THEIR AFFILIATES. SUCH SHARES ARE NOT INSURED OR GUARANTEED 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 RISKS,
INCLUDING POSSIBLE LOSS OF PRINCIPAL.
WELLS FARGO BANK, N.A., IS THE INVESTMENT ADVISER AND PROVIDES OTHER SERVICES TO
STAGECOACH FOR WHICH IT IS COMPENSATED. STEPHENS INC., WHICH IS NOT AFFILIATED
WITH WELLS FARGO BANK, N.A., IS THE CO-ADMINISTRATOR AND SERVES AS THE
DISTRIBUTOR FOR STAGECOACH.
2
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
I. SYNOPSIS - Item 3.................................................................. 1
. Comparison of Fees and Expenses.................................................... 3
II. COMPARISON OF THE FUNDS - Items 5 and 6............................................ 4
. Comparison of Investment Objectives, Policies and Restrictions..................... 4
. Comparison of Advisory and Other Service Arrangements and Fees..................... 7
. Comparison of Purchase and Redemption Procedures and Other Considerations.......... 8
. Comparison of Performance.......................................................... 9
. Risk Considerations................................................................ 10
III. DESCRIPTION OF THE CONSOLIDATION PLAN - Item 4 .................................... 11
. Board Consideration - Item 4(a).................................................... 12
. Reasons for the Consolidation - Item 4(a)(3)....................................... 12
. Federal Income Tax Consequences - Item 4(a)(4)..................................... 13
. Capitalization - Item (4)(b)....................................................... 14
IV. ADDITIONAL INFORMATION ABOUT THE FUNDS - Items 5 and 6, continued.................. 14
. Organization of MasterWorks and Stagecoach......................................... 14
. Portfolio Managers................................................................. 14
. Substantial Shareholders........................................................... 15
. Additional Information - Items 5(e), 5(f) and 6(b)(1).............................. 16
. The remainder of Items 5(a) and 6(a) are incorporated by reference to each
Fund's Prospectus.
. Item 5A of Form N-1A is incorporated by reference to S-I Term Fund's Annual Report.
See Exhibit B for Government Fund.
. Items 5(b), 5(c), 5(d), 6(c) and 6(d) are not applicable.
V. VOTING INFORMATION - Item 7........................................................ 16
. Approval and Consummation of the Proposed Transaction............................... 16
. Solicitation of Proxies and Payment of Expenses.................................... 17
VI. INTEREST OF CERTAIN PERSONS AND EXPERTS - Item 8................................... N/A
VII. ADDITIONAL INFORMATION REQUIRED FOR REOFFERING BY PERSONS
DEEMED TO BE UNDERWRITERS - Item 9................................................. N/A
VIII. MISCELLANEOUS...................................................................... 18
. Other Business..................................................................... 18
. Future Shareholder Proposals....................................................... 18
EXHIBIT A - AGREEMENT AND PLAN OF CONSOLIDATION
EXHIBIT B - MANAGEMENT'S DISCUSSION OF GOVERNMENT FUND PERFORMANCE
</TABLE>
i
<PAGE>
MASTERWORKS FUNDS INC.
111 CENTER STREET
LITTLE ROCK, ARKANSAS 72201
_________________________________________________
SPECIAL MEETING OF SHAREHOLDERS
SHORT-INTERMEDIATE TERM FUND
TO BE HELD ON NOVEMBER 24, 1998
-----------------------------------------
I. SYNOPSIS
The following synopsis provides important information about the proposed
Consolidation. Before signing and returning the enclosed proxy ballot, you
should read this Combined Prospectus/Proxy Statement, including the Agreement
and Plan of Consolidation (Exhibit A), the performance information about the
Government Fund (Exhibit B), and the Government Fund's Prospectus.
The Funds. Each Fund is a series of an open-end, management investment
---------
company organized as a Maryland corporation. The Government Fund retains its own
investment adviser and invests directly in a portfolio of securities. Unlike
the Government Fund, the S-I Term Fund does not retain its own investment
adviser, but instead invests all of its assets in a series of another investment
company that may not be purchased by the general public - the Short-Intermediate
Term Master Portfolio (the "Master Portfolio"), a series of Managed Series
Investment Trust ("MSIT"). MSIT is an open-end, management investment company
organized as a Delaware business trust. The Master Portfolio has the same
investment objective and policies as the S-I Term Fund and invests directly in a
portfolio of securities. The S-I Term Fund pays its pro rata share of the
Master Portfolio's advisory fees.
Proposed Consolidation. At meetings held on September 2, 1998, the
----------------------
Boards of Directors of MasterWorks and Stagecoach (collectively, the "Boards"),
including the Directors who are not "interested persons" of MasterWorks or
Stagecoach (the "Independent Directors") within the meaning of the Investment
Company Act of 1940 (the "1940 Act"), approved an Agreement and Plan of
Consolidation (the "Consolidation Plan" or "Plan"). The Consolidation Plan
provides for the (i) in-kind redemption by the S-I Term Fund of its interest in
the Master Portfolio; (ii) transfer of all the assets of S-I Term Fund to the
Government Fund in exchange for Class A shares of the Government Fund; (iii)
assumption by the Government Fund of all the liabilities of the S-I Term Fund;
and (iv) distribution of the Class A shares of the Government Fund to
shareholders of S-I Term Fund (the "Consolidation"). The aggregate net asset
value of the Class A shares of the Government Fund issued in the Consolidation
will be equal to the net value of the assets and liabilities transferred by the
S-I Term Fund.
As a result of the Consolidation, each holder of S-I Term Fund shares
will receive that number of full and fractional Class A shares of the Government
Fund equal in net asset value at the close of business on the date of the
exchange to the net asset value of such holder's shares of the S-I Term Fund.
The Consolidation will be effected at net asset value without the imposition of
any sales charges.
The Board of each Fund has determined that (i) the interests of existing
shareholders of the Fund would not be diluted as a result of the Consolidation
and (ii) the Consolidation would be in the best interests of the Fund and its
shareholders. Each Fund's Board recommends approval of the Consolidation.
Approval of the Consolidation Plan and the Consolidation by the S-I Term Fund
will require the affirmative vote of the holders of a majority of the
outstanding shares of the S-I Term Fund. The Funds will bear the expenses
incurred in connection with the Consolidation.
The Consolidation is expected to occur shortly after its approval by
shareholders of the S-I Term Fund. Either Board, however, may terminate the
Consolidation Plan in its entirety at any time prior to the closing of the
Consolidation.
Tax Consequences of the Consolidation. In the opinion of Morrison &
-------------------------------------
Foerster LLP, the Consolidation should be treated as a reorganization within the
meaning of section 368(a)(1) of the Internal Revenue Code of 1986, as amended
(the "Code"). Under this treatment, the Government Fund, the S-I Term Fund and
shareholders of the S-I Term Fund would not recognize gain or loss as a result
of the Consolidation. At Closing, it will be determined whether the transaction
will take effect under either subsection (C) or (D) of Section 368(a)(1) of the
Code. For a further discussion of tax matters, see "Federal Income Tax
Consequences" at page 15, below.
Management of the Funds. The investment adviser to the Government Fund
-----------------------
is Wells Fargo Bank, N.A. ("Wells Fargo Bank"). Wells Fargo Bank and
Stagecoach have retained Wells Capital Management, Inc. ("WCM") to act as
investment sub-adviser to the Government Fund.
Barclays Global Fund Advisors ("BGFA") serves as investment adviser to
the Master Portfolio. BGFA and MSIT have retained Wells Fargo Bank to serve as
investment sub-adviser to the Master Portfolio. The S-I Term Fund does not
retain an investment adviser because it invests all of its assets in the Master
Portfolio. The S-I Term Fund bears its pro rata share of the Master
Portfolio's advisory fees.
Advisory, Distribution and Other Fees; Expense Ratios. The Government
-----------------------------------------------------
Fund has higher investment advisory fees and a higher expense ratio than the S-I
Term Fund. In addition, the Government Fund, unlike the S-I Term Fund, pays
distribution or Rule 12b-1 fees.
Dividends and Distributions. Both Funds pay monthly dividends from net
---------------------------
investment income and distribute capital gains, if any, at least annually. Each
Fund allows shareholders to reinvest the dividends in the Fund or receive cash
payments.
Purchases, Redemptions and Exchanges. Each Fund offers its shares on
------------------------------------
business days at the public offering price or net asset value next determined
after receipt of a purchase order in proper form. However, Class A shares of
the Government Fund, unlike shares of the S-I Term Fund, have an initial sales
charge. There are several methods of reducing the initial sales charge on
Class A shares of the Government Fund. In some cases, such as in connection with
certain retirement benefit or pension accounts, the sales charge is waived
entirely. Both Funds permit redemptions of shares on business days at the net
asset value next determined after receipt of a redemption request in proper
form.
Both Funds have exchange privileges. Class A shareholders of the
Government Fund may exchange their shares for shares of other series of
Stagecoach and certain other Classes of such series, whereas the S-I Term Fund
shareholders may exchange their shares only for shares of other single class
series of MasterWorks.
Investment Objectives and Policies and Risk Factors. The investment
---------------------------------------------------
objectives and policies of the Funds are generally similar. The Funds'
investment objectives are listed below.
<TABLE>
<CAPTION>
S-I TERM FUND GOVERNMENT FUND
- ------------------------------------------------------------------------------------------
<S> <C>
OBJECTIVE: Seeks to provide a total OBJECTIVE: Seeks to provide investors with
return, before fees and expenses, current income while preserving capital, by
exceeding that of the Lehman Brothers investing primarily in a portfolio
Intermediate Government/Corporate Bond consisting of short- to intermediate term
Index. securities issued or guaranteed by the U.S.
Government, its agencies and
instrumentalities.
- ------------------------------------------------------------------------------------------
</TABLE>
The S-I Term Fund pursues its objective by investing all of its assets in
the Master Portfolio, which has the same investment objective and policies as
the Fund. The Master Portfolio invests directly in a portfolio of securities.
The Government Fund invests directly in a portfolio of securities and is not
part of a master-feeder structure.
The risks of investing in the S-I Term Fund are somewhat similar to those
of investing in the Government Fund. Both Funds invest (the S-I Term Fund
invests through the Master Portfolio) in a mix of U.S. Government obligations,
corporate bonds and other securities. Both Funds have an investment policy of
maintaining, under normal market conditions, a weighted average portfolio
maturity of between 2 and 5 years.
There are certain differences in the risks of the Funds' investments. In
general, the S-I Term Fund is a slightly riskier investment than the
Government Fund because the S-I Term Fund has more flexibility to invest in
non-government obligations. The Government Fund must invest at least 65% of
its net assets in U.S. Government obligations or repurchase agreements
collateralized by U.S. Government obligations. The S-I Term Fund has no such
restriction and can invest a greater portion of its portfolio in corporate
bonds than the Government Fund. The corporate bonds the Funds may purchase are
"investment grade" i.e., rated in the top four investment categories by a
Nationally Recognized Statistical Rating Organization ("NRSRO").
The S-I Term Fund is the only feeder fund of the Master Portfolio and
owns 99.99% of all the Master Portfolio's interests. The pro rata fees paid to
the Master Portfolio would be the same if incurred directly by the S-I Term
Fund. Consequently, the risks and expenses of investing in the S-I Term Fund
would be virtually unchanged if the Fund were not part of a master-feeder
structure. Therefore, when comparing the Funds, the master-feeder structure of
the S-I Term Fund is of little significance. If the Consolidation is approved,
said structure will be dissolved. The dissolution of the master-feeder
structure does not require separate shareholder approval and is expected to
occur as part of the proposed Consolidation.
There are other differences between the Funds in terms of investment
strategies, as well as differences in fees and expenses, which are described in
detail below. In deciding whether to approve the Consolidation, you should
consider the differences between the investment objectives and policies of the
Funds as discussed under "Comparison of Investment Objectives, Policies and
Restrictions" below and in the prospectuses offering shares of the Funds.
1
<PAGE>
COMPARISON OF FEES AND EXPENSES
The following comparison is based on current information for the S-I Term
and Government Funds, restated to reflect voluntary fee waivers and expense
reimbursements that are expected to continue during the current fiscal year.
There can be no assurances that the waivers or reimbursements will continue
after the end of the current fiscal year.
SHAREHOLDER TRANSACTION EXPENSES
<TABLE>
<CAPTION>
PRO FORMA
GOVERNMENT (AFTER
S-I TERM FUND CONSOLIDATION)
FUND CLASS A CLASS A
-------------- -------------- ------------------
<S> <C> <C> <C>
Maximum Sales Load Imposed on Purchases
(as a percentage of offering price) None 3.00% 3.00%
</TABLE>
2
<PAGE>
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average daily net assets)
<TABLE>
<CAPTION>
PRO FORMA
GOVERNMENT (AFTER
S-I TERM FUND CONSOLIDATION)
FUND CLASS A CLASS A
--------------- -------------- ------------------
<S> <C> <C> <C>
Management Fees 0.45%* 0.40%/1/ 0.40%/1/
Distribution Fees 0.00% 0.05% 0.05%
Other Expenses 0.18% 0.51%/2/ 0.51%/2/
----- ----- -----
TOTAL FUND OPERATING EXPENSES 0.63% 0.96%/3/ 0.96%/3/
</TABLE>
_____________________________
* The S-I Term Fund bears its pro rata share of management fees paid by the
Master Portfolio.
/1/ Before waivers or reimbursements, Management fees would be 0.50%.
/2/ Before waivers or reimbursements, Other Expenses would be 0.76%.
/3/ Before waivers or reimbursements, Total Fund Operating Expenses would be
1.31%.
Annual Fund operating expenses for the Funds are based on amounts
incurred during the most recent fiscal year. In the case of the Government Fund,
these amounts are restated to reflect voluntary fee waivers and expense
reimbursements that are expected to continue during the current fiscal year.
There can be no assurances that waivers or reimbursements will continue. In the
case of the Government Fund, long-term shareholders could pay more in overall
sales charges than the economic equivalent of the maximum front-end sales charge
applicable to mutual funds sold by members of the National Association of
Securities Dealers, Inc. (the "NASD").
With respect to the S-I Term Fund, Stephens Inc. ("Stephens") and
Barclays Global Investors, N.A. ("BGI") have agreed to assume all of the
ordinary operating expenses of the Fund (other than investment advisory fees,
portfolio transaction expenses and administrative fees). There is no similar
arrangement in place for the Government Fund, which means that, absent voluntary
fee waivers or expense reimbursements, the Government Fund bears all of its own
ordinary (as well as extraordinary) operating expenses.
Example of Expenses: You would pay the following expenses on a $1,000
-------------------
investment in shares of the specified fund, assuming (A) a 5% annual return and
(B) redemption at the end of each time period indicated:
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
<S> <C> <C> <C> <C>
S-I Term Fund $ 6 $20 $35 $ 79
Government Fund - Class A $40 $60 $81 $144
Pro Forma $40 $60 $81 $144
</TABLE>
II. COMPARISON OF THE FUNDS
COMPARISON OF INVESTMENT OBJECTIVES, POLICIES AND RESTRICTIONS
The investment objective, policies and restrictions of the S-I Term Fund
are generally similar to those of the Government Fund. The investment objective
of each Fund
3
<PAGE>
is fundamental and may not be changed without shareholder approval. Below is a
table comparing the investment objectives and key policies of the Funds.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
S-I TERM FUND GOVERNMENT FUND
- -----------------------------------------------------------------------------------------------------
<S> <C>
OBJECTIVE: Seeks to provide a total return, OBJECTIVE: Seeks to provide investors with
before fees and expenses, exceeding that of the current income while preserving capital, by
Lehman Brothers Intermediate investing primarily in a portfolio consisting of
Government/Corporate Bond Index. short- to intermediate term securities issued or
guaranteed by the U.S. Government, its agencies
and instrumentalities.
- -----------------------------------------------------------------------------------------------------
IN PURSUING ITS OBJECTIVE: The Fund invests in IN PURSUING ITS OBJECTIVE: The Fund invests
a mix of U.S. Treasury and agency debt primarily in U.S. Government obligations,
securities, investment grade corporate bonds, including Treasuries, CMOs, mortgage- and
CMOs, mortgage- and asset-backed securities and asset-backed securities and money market
money market instruments. instruments. The Fund also may invest in
investment grade corporate bonds.
<CAPTION>
- -----------------------------------------------------------------------------------------------------
S-I TERM FUND GOVERNMENT FUND
KEY INVESTMENT POLICIES: KEY INVESTMENT POLICIES:
- -----------------------------------------------------------------------------------------------------
<S> <C>
. no minimum % of investments in U.S. . at least 65% of investments in U.S. Government
Government obligations or any other particular obligations or repurchase agreements
category of debt securities collateralized by U.S. Government obligations
. only investment-grade securities are . maximum of 5% of total assets in securities
considered for investment; no requirement to downgraded below investment grade after purchase
sell securities subsequently downgraded
. avg. weighted maturity: 2-5 years . avg. weighted maturity: 2-5 years
- -----------------------------------------------------------------------------------------------------
</TABLE>
The S-I Term Fund
-----------------
Since the investment objectives, policies and strategies of the S-I Term
Fund directly correspond to those of its Master Portfolio, the discussion below
relates to the various investments of and techniques employed by the Master
Portfolio.
Under normal market conditions, the 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 securities, the Master
Portfolio uses the security's average life in calculating the Master Portfolio's
average maturity. Under
4
<PAGE>
unusual market conditions, the Master Portfolio may shorten or lengthen its
average weighted portfolio maturity.
Only investment-grade securities are considered for investment. These
securities will be identified by their ratings according to one of two major
rating services, S&P and Moody's. Each service classifies securities into broad
categories starting with "investment grade" at the top and ranging downward
through more speculative classes, including so-called "junk bonds," to
securities that are virtually worthless. The "investment grade" category is
subdivided into four rating groups by both services. The four rating groups are
called "AAA"/"Aaa," "AA"/"Aa," "A"/"A," and "BBB"/"Baa" by S&P and Moody's,
respectively. Obligations with the lowest investment grade rating have
speculative characteristics, and changes in economic conditions or other
circumstances are more likely to lead to a weakened capacity to make principal
and interest payments than in the case of higher grade debt obligations. The
Master Portfolio may invest in securities of all four rating groups; however,
most of the Master Portfolio's assets will be invested in securities that, at
the time of purchase, are rated in the third group or higher, denoted "A" or
better by both rating services. Asset-backed securities are further restricted
to the top two rating groups at time of purchase. Mortgage-related securities,
which are issued or guaranteed by U.S. Government agencies, are all currently
considered to be in the highest rating category. Subsequent to its purchase by
the Master Portfolio, an issue of securities may cease to be rated or its rating
may be reduced below the minimum rating required for purchase by the Master
Portfolio. Wells Fargo Bank, N.A. ("Wells Fargo Bank") will consider such an
event in determining whether the Master Portfolio should continue to hold the
obligation. To the extent the Master Portfolio continues to hold such
obligations, it may be subject to additional risk of default.
The Master Portfolio seeks to emphasize those maturity segments or rating
groups that appear to offer the most favorable returns to their risks, within
the maturity and quality ranges described above.
The Master Portfolio may invest some of its assets (no more than 10% of
total assets under normal market conditions) in high quality money market
instruments, which include U.S. Government obligations, obligations of domestic
and foreign banks, repurchase agreements, commercial paper (including variable
amount master demand notes) and short-term corporate debt obligations. Such
investments are made on an ongoing basis to provide liquidity and, to a greater
extent on a temporary basis, when there is an unexpected or abnormal level of
investor purchases or redemptions of Master Portfolio's shares or when
"defensive" strategies are appropriate.
5
<PAGE>
The Government Fund
-------------------
Wells Fargo Bank, as the Government Fund's investment adviser, actively
manages a diversified portfolio consisting primarily of short-to-intermediate-
term U.S. Government obligations. The Government Fund may invest in securities
of any maturity. Under ordinary circumstances, the Government Fund expects to
maintain a dollar-weighted average maturity of between 2 and 5 years. The
Government Fund seeks to preserve capital by shortening average maturity when
interest rates are expected to increase and to increase total return by
lengthening maturity when interest rates are expected to fall.
Under normal market conditions, the Government Fund invests at least 65%
of total assets in U.S. Government obligations or repurchase agreements
collateralized by U.S. Government obligations. The Government Fund also may
invest: (i) in investment grade corporate debt securities, including
asset-backed securities; (ii) up to 25% of its total assets in
dollar-denominated debt of U.S. branches of foreign banks or foreign branches of
U.S. banks; (iii) in adjustable-rate mortgage securities and adjustable portions
of collateralized mortgage obligations; and (iv) in stripped Treasury
securities. The Government Fund may hold no more than 5% of its total assets in
securities downgraded below investment grade after being acquired.
The Government Fund may temporarily hold assets in cash or in money market
instruments, including U.S. Government obligations, shares of other mutual funds
and repurchase agreements, or make other short-term investments, either to
maintain liquidity or for short-term defensive purposes when the adviser
believes it is in the best interest of shareholders to do so. In addition, the
Government Fund may invest in forward currency exchange contracts to try to
reduce currency exchange risks and from foreign securities investments.
COMPARISON OF ADVISORY AND OTHER SERVICE ARRANGEMENTS AND FEES
<TABLE>
<CAPTION>
OVERVIEW
--------
<S> <C> <C>
S-I Term Fund Government Fund
--------------------------------------- ----------------------------
Investment Adviser BGFA (to the Master Portfolio) Wells Fargo Bank
Sub-Adviser Wells Fargo Bank WCM
(to the Master Portfolio)
Distributor Stephens Stephens
Administrator Stephens, BGI (Co-Administrators) Wells Fargo Bank
Co-Administrator Stephens, BGI (Co-Administrators) Stephens
Custodian Investors Bank & Trust ("IBT") Wells Fargo Bank
Fund Accountant IBT Wells Fargo Bank
Transfer Agent IBT Wells Fargo Bank
Independent Auditors KPMG Peat Marwick LLP KPMG Peat Marwick LLP
</TABLE>
6
<PAGE>
Investment Advisory Services. BGFA provides investment advisory services
----------------------------
to the Master Portfolio and the maximum advisory fee payable by the Master
Portfolio is a monthly fee at an annual rate of 0.45% of the Master Portfolio's
average daily net assets. BGFA provides investment guidance and policy direction
in connection with the management of the Master Portfolio's assets. BGFA 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.
Wells Fargo Bank serves as investment sub-adviser to the Master Portfolio and is
entitled to receive from BGFA monthly fees at the annual rate of 0.10% of the
Master Portfolio's average daily net assets.
Wells Fargo Bank provides investment advisory services to the Government
Fund and the maximum advisory fee payable by the Government Fund is a monthly
fee at an annual rate of 0.50% of the Fund's average daily net assets. WCM is
the investment sub-adviser for the Government Fund. For providing sub-advisory
services to the Government Fund, WCM is entitled to receive from Wells Fargo
Bank a monthly fee at an annual rate of: 0.15% of the Fund's average daily net
assets up to the first $400 million, 0.125% of the next $400 million, and 0.10%
of all assets over $800 million. WCM is entitled to receive from Wells Fargo
Bank a minimum annual sub-advisory fee of $120,000. As of August 1, 1998, Wells
Fargo Bank and its affiliates managed over $63 billion in assets and WCM
provided investment advisory services for over $32 billion in assets.
For the fiscal year ended February 28, 1998, after waivers and
reimbursements, the Master Portfolio paid advisory fees at the annual rate of
0.45% of its average daily net assets. For the fiscal year ended June 30,
1998, after waivers and reimbursements, the Government Fund paid advisory fees
at the annual rate of 0.40% of its average daily net assets.
Wells Fargo & Company/Norwest Merger -- 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 fourth quarter of 1998. The combined company
will be called Wells Fargo & Company. Wells Fargo Bank has advised the Boards
of Stagecoach and MasterWorks that the merger will not reduce the level or
quality of advisory and other services it and WCM provide to the Funds.
Administrative Services. Stephens and BGI are the S-I Term Fund's co-
-----------------------
administrators. Stephens and BGI provide the S-I Term Fund with administrative
services, including, among other things, general supervision of the Fund's non-
investment operations, preparation of proxy statements and shareholder reports
and general supervision of data completion in connection with preparing periodic
reports to the Board of Directors
7
<PAGE>
and officers of MasterWorks. Stephens and BGI have agreed to assume all of the
ordinary operating expenses of the S-I Term Fund (other than investment advisory
fees, portfolio transaction expenses and administrative fees). For these
services and the assumption of expenses, Stephens and BGI are entitled to a
monthly fee, in the aggregate, at the annual rate of 0.18% of the S-I Term
Fund's average daily net assets. Wells Fargo Bank and Stephens are the
Government Fund's administrator and co-administrator, respectively, and are
entitled to receive monthly fees at annual rates of 0.03% and 0.04%,
respectively, of the Fund's assets for providing these services.
Distribution and Shareholder Servicing Arrangements. Shares of the S-I
---------------------------------------------------
Term Fund and the Government Fund are distributed by Stephens, a full service
broker-dealer, pursuant to a distribution agreement. Pursuant to Rule 12b-1
under the 1940 Act, Stagecoach has adopted a Distribution Plan on behalf of the
Class A shares of the Government Fund (the "Distribution Plan"). The
Distribution Plan allows the Government Fund to pay up to 0.05% of its average
daily net assets annually for the reimbursement of actual expenses incurred for
distribution and shareholder services ("Rule 12b-1 fees"). There are no
Rule 12b-1 fees or front-end sales charges associated with an investment in the
S-I Term Fund.
The Directors of MasterWorks and Stagecoach also have approved
Shareholder Servicing Plans for the S-I Term Fund and Government Fund (the
"Servicing Plans"), respectively, pursuant to which they have entered into
Shareholder Servicing Agreements. For these services, the S-I Term Fund and the
Government Fund may pay a monthly fee equal to 0.10% and 0.30%, respectively, 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 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 NASD, whichever
is less. For the fiscal years ended February 28, 1998 and June 30, 1998, the S-I
Term Fund and the Government Fund, respectively, paid shareholder servicing
fees, after waivers and reimbursements, as follows:
<TABLE>
<CAPTION>
ANNUAL SHAREHOLDER SERVICING FEE
--------------------------------
<S> <C>
S-I Term Fund 0.10%*
Government Fund 0.30%
</TABLE>
________________________
*Stephens and BGI have agreed to pay these shareholder servicing fees out of the
fees they receive for co-administration services.
8
<PAGE>
COMPARISON OF PURCHASE AND REDEMPTION PROCEDURES AND OTHER CONSIDERATIONS
Sales Loads: The single class shares of the S-I Term Fund do not have a
------------
sales load. The Class A shares of the Government Fund have a front-end sales
load of 3.00%. The sales load is reduced in connection with certain volume
purchases and is waived under certain other circumstances, such as in connection
with certain retirement, benefit and pension plans. There are no sales charges
on reinvested distributions.
Minimum Investments: The S-I Term Fund requires a minimum investment
-------------------
amount of $1 million from direct buyers, although the requirement may be waived
under certain circumstances. The Government Fund requires a minimum investment
of $1,000 from direct buyers and additional investments in the Fund must be at
least $100. Both Funds typically waive the minimum in connection with
retirement, benefit and pension plans.
Purchases: Both Funds' shares may be purchased by mail, by wire or by
----------
phone, directly from the Fund, through a brokerage account with an approved
selling or shareholder servicing agent, through certain retirement, benefit and
pension plans, or through certain packaged investment products. Both Funds
process requests at net asset value on the same day if the request is proper and
received before 1 p.m. on a business day. In addition, Class A shares of the
Government Fund may be purchased or redeemed monthly through various automated
programs such as the AutoSaver and Systematic Withdrawal Plans and other
dividend reinvestment and payment plans. Shareholder servicing agents with
Approved Bank Accounts may transmit orders for S-I Term Fund shares on behalf of
qualified buyers through the transfer agent.
Redemptions: Investors may redeem their shares free of charge on any
-----------
business day by mail or telephone. Redemption proceeds are calculated at the
next determined net asset value after a proper request is received, and are
remitted generally within seven days. Benefit, pension, retirement and similar
plan investors usually have separate established withdrawal procedures.
Proceeds may be sent by check or credited to a designated account for certain
investors. There is a $5,000 minimum redemption request for wiring redemptions
to an ACH linked bank account for the Government Fund.
Exchanges: Exchanges between the single class of shares of the S-I Term
---------
Fund and single class shares of other MasterWorks Funds are at the next
determined net asset value and there are no fees for exchanging. The Class A
shares of the Government Fund similarly may be exchanged for Class A shares of
other Stagecoach Funds, but will pay a sales load differential where such shares
are exchanged for Class A shares with a higher front-end sales load. Exchanges
also are permitted between Class A shares and certain other classes of shares of
Stagecoach Funds.
Dividends and Distributions: Both Funds pay monthly dividends from net
---------------------------
investment income and distribute capital gains, if any, at least annually. Each
Fund allows shareholders to reinvest the dividends in the Fund or receive cash
payments. In addition, the Government Fund offers the option to automatically
invest dividends in shares of other Stagecoach Funds. There is no sales or other
charge for either Fund in connection with the reinvestment of dividends or
distributions.
9
<PAGE>
COMPARISON OF PERFORMANCE
<TABLE>
<CAPTION>
AVERAGE ANNUAL RETURN AS OF 6/30/98 -- EXCLUDING SALES CHARGES
- ----------------------------------------------------------------------------------------------
Stagecoach
MasterWorks Government Fund
S-I Term Fund Benchmark/1/ Class A Shares Benchmark/2/
- ------------- ------------ --------------- ------------
<S> <C> <C> <C>
YTD 3.04% 3.47% YTD 2.93% 3.39%
1 yr. 8.15% 8.54% 1 yr. 7.53% 8.42%
3 yr. 6.35% 6.91% 3 yr. 6.22% 6.71%
- ----------------------------------------------------------------------------------------------
</TABLE>
_____________________
/1/ Lehman Brothers Intermediate Government/Corporate Bond Index. The Index
has an average weighted maturity of one to ten years and includes both
government and corporate bonds.
/2/ The Lehman Brothers Treasury Note Index is an unmanaged index of U.S.
Treasury 2-10 year notes.
10
<PAGE>
Yield for the Period Ended June 30, 1998*
----------------------------------------
Fund Thirty-Day Yield
---- ----------------
After Waiver Before Waiver
------------ -------------
S-I Term Fund N/A 5.47%
Government Fund - Class A 5.55% 5.26%
______________________
* The amounts shown above reflect all front-end sales charges for the Government
Fund. "After waiver" figures reflect any waived fees or reimbursed expenses
throughout the period.
Additional information regarding the performance of the Government Fund
is contained in Exhibit B to this Combined Prospectus/Proxy Statement.
RISK CONSIDERATIONS
Each Fund is subject to credit risk and interest rate risk on investments
in debt securities. Credit risk is the possibility that an issuer of a security
will be unable to make interest payments or repay principal. Interest rate risk
is the possibility that interest rates may increase and reduce the resale value
of securities in a Fund's portfolio. Interest rate increases usually result in a
decrease in the value of debt securities. Each Fund maintains an average
weighted portfolio maturity of 2 - 5 years, resulting in similar exposure to
interest rate risk.
The Government Fund invests primarily in obligations of the U.S.
Government, its agencies and instrumentalities, which are subject to interest
rate risk, but have low credit risk. Some U.S. Government obligations are
backed by the full faith and credit of the United States, while others are only
backed by the agency or instrumentality that issues or guarantees the
instrument. The U.S. Government does not guarantee the market value or current
yield of its obligations.
The S-I Term Fund invests, through the Master Portfolio, in a mix of U.S.
Government obligations and in corporate bonds that are rated in the top four
rating categories by an NRSRO. A portion of the Government Fund's assets also
is generally invested in corporate bonds. Corporate bonds expose investors to
greater credit risk than U.S. Government obligations and are generally higher
yielding. The table below provides a snapshot of the portfolio composition of
the Funds. The S-I Term Fund generally invests a larger portion of its assets
in corporate bonds, exposing it, on average, to greater credit risk than the
Government Fund.
The following table compares the investment allocations of the Funds as
of June 30, 1998.
11
<PAGE>
<TABLE>
<CAPTION>
PORTFOLIO DIVERSIFICATION AS OF 6/30/98:
- ------------------------------------------------------------------------------------------
MASTERWORKS S-I TERM FUND (SINGLE CLASS) STAGECOACH GOVERNMENT FUND (CLASS A)
- ------------------------------------------------------------------------------------------
<S> <C>
U.S. Treasury Bonds 10% U.S. Treasury Bonds 2%
U.S. Treasury Notes 32% U.S. Treasury Notes 16%
U.S. Government agencies 9% U.S. Government agencies 45%
*Corporate Bonds 49% Corporate Bonds 32%
Foreign Issuer Bonds 0% Foreign Issuer Bonds 2%
Cash 0% Cash 3%
- ------------------------------------------------------------------------------------------
</TABLE>
Additional Risk Considerations
------------------------------
The Funds may only purchase investment grade securities, but each may
hold securities in its portfolio that have been downgraded below investment
grade after purchase. The Government Fund has a policy of holding no more than
5% of its total assets in such securities, while the S-1 Term Fund has no such
limitation. As of June 30, 1998, neither Fund held any securities that were
below investment grade. Non-investment grade securities may be more
sensitive to economic conditions and have higher interest rate and credit
risk.
The S-I Term Fund may enter into futures transactions, and each Fund may
invest in certain floating- and variable-rate securities. Some of these and
other portfolio securities may be considered derivatives, which may be more
sensitive than direct securities to changes in interest rates and sudden market
moves. The Government Fund may invest in Stripped Treasury Securities, which
may have greater interest rate risk than traditional government securities with
identical credit ratings. Neither Fund intends to have more than 5% of its net
assets invested in derivatives at any given time.
Each Fund may invest up to 25% of its assets in high-quality, U.S. dollar
denominated obligations of foreign branches of U.S. banks and U.S. branches of
foreign banks.
Market risk is the risk that the value of a bond or other security will
be reduced by market activity. By investing to a greater extent in corporate
bonds, the S-I Term Fund has greater market risk exposure than the Government
Fund. Counter party risk is the risk that the other party in a repurchase
agreement or other transaction will not fulfill its contract obligation. Both
Funds invest in repurchase agreements. In addition, some of the asset-backed
securities in which the Funds invest are subject to extension risk, which 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.
* * * *
Because the investment objective, policies, strategies and restrictions
of the S-I Term Fund and the Government Fund are generally similar, the overall
level of investment risk should not materially change as a result of the
Consolidation. For a more complete description of the Government Fund's and the
S-I Term Fund's investment policies and restrictions, see "The Funds" in each
Fund's Prospectus and "Additional Permitted
12
<PAGE>
Investments" in each Fund's Statement of Additional Information. In view of
the fact that the assets of the S-I Term Fund amount to less than 10% of the
assets of the Government Fund, in addition to the fact that the Funds invest
in similar securities, it is not anticipated that any material portfolio
realignment or divestiture of securities will be necessary subsequent to the
Closing. Changes to the schedule of investments resulting from the
Consolidation, if any, are expected to be de minimis.
III. DESCRIPTION OF THE CONSOLIDATION PLAN
The Plan provides that all of the assets of the S-I Term Fund as of the
Closing Date will be transferred to the Government Fund, and that the Government
Fund will assume all of the liabilities of the S-I Term Fund, in exchange for
Class A shares of the Government Fund. The "Closing Date" is expected to be on
or about December 4, 1998. A copy of the Plan is attached as Exhibit A to this
Combined Prospectus/Proxy Statement.
Promptly after the Closing Date, the S-I Term Fund will distribute the
shares of the Government Fund received to the S-I Term Fund's shareholders of
record as of the close of business on the Closing Date. The shares of the
Government Fund that will be issued for distribution to the S-I Term Fund's
shareholders will be equal in value to the shares of the S-I Term Fund held as
of the Closing Date. MasterWorks will then take all necessary steps to
terminate the qualification, registration and classification of the S-I Term
Fund. All issued and outstanding shares of the S-I Term Fund will be cancelled
on the S-I Term Fund's books. Shares of the Government Fund will be represented
only by book entries; no share certificates will be issued unless expressly
requested in writing. Certificates are not issued for fractional shares. All
remaining organizational expenses of the S-I Term Fund will be offset against
the original shares of such Fund prior to the Consolidation.
The consummation of the proposed Consolidation is subject to the
satisfaction of a number of conditions set forth in the Plan, including approval
by the shareholders of the S-I Term Fund. The S-I Term Fund may waive certain
conditions at any time before or after approval of the Plan by the shareholders.
The Plan also may be terminated and the Consolidation abandoned at any time by
the mutual written consent of MasterWorks and Stagecoach or by either party if
any of the conditions precedent to the Closing are not satisfied. The
Consolidation also is subject to the condition, which cannot be waived, of
obtaining an opinion of counsel to the effect that the Consolidation constitutes
a tax-free reorganization for federal income tax purposes.
Shareholders of the S-I Term Fund will have no dissenters' rights or
appraisal rights. All shareholders of the S-I Term Fund as of the Closing Date,
including those that vote against the approval of the Plan and those that do not
vote, will receive shares of the Government Fund if the Consolidation is
approved. All shareholders of the S-I Term Fund have the right at any time up
to the business day preceding the Closing Date to redeem their shares at net
asset value according to the procedures set forth in the S-I Term Fund's
Prospectus. In addition, up until the business day preceding the Closing Date,
shareholders
13
<PAGE>
of the S-I Term Fund may exchange their shares for shares of other funds in the
MasterWorks Family of Funds, in accordance with the exchange privilege described
in the S-I Term Fund's Prospectus.
BOARD CONSIDERATION
The business and affairs of MasterWorks and Stagecoach are managed under
the direction of their respective Boards of Directors. The Boards of Directors
of MasterWorks and Stagecoach each unanimously voted to approve the
Consolidation Plan at a meeting held on September 2, 1998. In reviewing the
proposed Consolidation, the Boards of MasterWorks and Stagecoach considered the
potential impact of the Consolidation on each Fund's shareholders. The Boards
considered, among other things: (i) the terms and conditions of the Plan,
including those intended to avoid the dilution of shareholder interests; (ii)
the potential marketing and shareholder benefits obtained by having a combined
fund; (iii) the similarity of the investment objectives and significant policies
and restrictions of the Funds; (iv) the historical investment performance of the
Funds; (v) the historical and projected investment advisory fee rates and
operating expenses of the Funds; (vi) the identity of the organizations that
provide investment advisory and certain other services to the Funds, and the
terms on which these services are provided; and (vii) the prospects for long-
term viability of the Funds.
Based upon their evaluation of these factors, and in light of their
fiduciary duties under federal and state law, the Boards of MasterWorks and
Stagecoach have determined that the proposed Consolidation is in the best
interests of the shareholders of the respective Funds and that the interests of
the shareholders of the respective Funds will not be diluted as a result of the
Consolidation. MASTERWORKS' BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT
SHAREHOLDERS VOTE FOR THE PLAN OF CONSOLIDATION.
---
REASONS FOR THE CONSOLIDATION
The primary reason for the proposed Consolidation is to allow S-I Term
Fund investors to transfer their investment into a fund that has greater
prospects for long-term viability. As of June 30, 1998, the S-I Term Fund had
only $11 million in net assets; the Government Fund had approximately $136
million in net assets. Management of MasterWorks believes that consolidating the
S-I Term Fund into a fund that has generally compatible investment objectives
and policies and greater prospects for continued growth, is a better alternative
than liquidation of the S-I Term Fund.
Combining the S-I Term Fund into a larger, more viable fund is intended to
provide various benefits to shareholders of the S-I Term Fund. For example,
higher asset levels should benefit portfolio management by permitting larger
individual portfolio investments (in quantities that may result in reduced
transaction costs and/or more favorable pricing) and by providing the
opportunity for greater portfolio diversity.
14
<PAGE>
Currently, the fees and expenses of the Government Fund are higher, on
both a before-waiver and after-waiver basis than those of the S-I Term Fund.
Nonetheless, your Board of Directors believes that the proposed Consolidation
will likely benefit S-I Term Fund shareholders for all of the reasons described
here. One fee difference is that the Government Fund has a Rule 12b-1
distribution plan, which has been used to pay for distribution-related
activities that have contributed to the increase in this Fund's assets. Another
difference is that BGI and Stephens have agreed to assume all of the ordinary
operating expenses of the S-I Term Fund (other than investment advisory fees,
portfolio transaction expenses and administrative fees), which, given the very
small size of the S-I Term Fund, requires BGI and Stephens, in effect, to
subsidize the S-I Term Fund's ongoing operations. There is no similar
arrangement in place for the Government Fund. See "Comparison of Fees and
Expenses" at page 2, above.
In short, management of MasterWorks believes that the proposed
Consolidation should provide S-I Term Fund shareholders with an investment
vehicle that has compatible investment objectives and policies and greater
prospects for long-term viability and continued growth.
FEDERAL INCOME TAX CONSEQUENCES
The S-I Term Fund and the Government Fund each qualifies as a separate
"regulated investment company" under the Internal Revenue Code of 1986, as
amended (the "Code"). Accordingly, the Funds have been, and expect to continue
to be, relieved of federal income tax liability.
As a condition to the Consolidation, MasterWorks and Stagecoach must
receive a favorable opinion from Morrison & Foerster LLP, counsel to MasterWorks
and Stagecoach, substantially to the effect that, for federal income tax
purposes, (a) the Consolidation will constitute a "reorganization" within the
meaning of Section 368(a)(1) of the Code (sub-item (C) or (D) to be determined
at closing), and the Government Fund and S-I Term Fund will each be a "party to
a reorganization," within the meaning of Section 368(b) of the Code, with
respect to the Consolidation; (b) no gain or loss will be recognized by the S-I
Term Fund as a result of the Consolidation; (c) no gain or loss will be
recognized by the Government Fund as a result of the Consolidation; (d) no gain
or loss will be recognized by the shareholders of the S-I Term Fund on the
distribution to them by the S-I Term Fund of shares of the Government Fund in
exchange for their shares of the S-I Term Fund; (e) the basis of the Government
Fund shares received by each shareholder of the S-I Term Fund will be the same
as the basis of the shareholder's S-I Term Fund shares immediately prior to the
Consolidation; (f) the basis of the Fund Assets received by the Government Fund
will be the same as the basis of such Fund Assets in the hands of the S-I Term
Fund immediately prior the Consolidation; (g) a shareholder's holding period for
Government Fund shares will be determined by including the period for which the
shareholder held the shares of the S-I Term Fund exchanged therefor, provided
that the shareholder held such shares of the S-I Term Fund as a capital asset;
(h) the holding period of the Government Fund with respect to the Fund Assets
will include the period for which such Fund Assets were held by
15
<PAGE>
the S-I Term Fund; and (i) the Government Fund will succeed to the tax
attributes of the S-I Term Fund described in Section 381(c) of the Code. The tax
attributes carried over to the Government Fund may include unused capital losses
of the S-I Term Fund. However, the use of such losses by the Government Fund may
be limited under several provisions of the Code.
Neither MasterWorks nor Stagecoach intends to seek a private letter ruling
from the Internal Revenue Service ("IRS") with respect to the tax effects of the
Consolidation. The opinion of Morrison & Foerster LLP with respect to the tax
consequences of the Consolidation is not binding on the IRS and does not
preclude the IRS from adopting a contrary position. Shareholders should consult
their own advisers concerning the potential tax consequences of the
Consolidation to them, including any applicable foreign, state and local income
tax consequences.
CAPITALIZATION
The following table shows the capitalization of each Fund as of June 30,
1998, and on a pro forma basis as of June 30, 1998 after giving effect to the
Consolidation:
<TABLE>
<CAPTION>
GOVERNMENT PRO FORMA
S-I TERM FUND COMBINED
FUND CLASS A SHARES CLASS A SHARES
----------- --------------- --------------
<S> <C> <C> <C>
Net assets $10,568,179 $38,148,574* $48,716,753
Net asset value per share $ 9.35 $ 9.97 $ 9.97
Shares outstanding 1,130,818 3,824,728 4,884,280
Shares authorized 300 Million 500 million 500 million
</TABLE>
___________________
*Total Net Assets for the Government Fund, including all share classes, was
$135,808,583 as of June 30, 1998.
The Government Fund's financial highlights can be found in its Prospectus,
which accompanies and is incorporated by reference into this Combined
Prospectus/Proxy Statement. The Government Fund's financial statements are
incorporated by reference in the Statement of Additional Information to this
Combined Prospectus/Proxy Statement.
IV. ADDITIONAL INFORMATION ABOUT THE FUNDS
ORGANIZATION OF MASTERWORKS AND STAGECOACH
Both MasterWorks and Stagecoach are registered as open-end management
investment companies under the 1940 Act. MasterWorks currently consists of 12
series of shares and Stagecoach currently offers over 30 separate funds.
16
<PAGE>
MasterWorks and Stagecoach each is organized as a Maryland Corporation
and is subject to the provisions of its respective Articles of Incorporation and
By-Laws. MasterWorks was incorporated on October 15, 1992. Stagecoach was
incorporated on September 9, 1991. Shares of each Fund have a par value of
$.001 per share. The Government Fund consists of 1.5 billion shares (500
million per class). Shares of each Fund are entitled to one vote for each full
share held and fractional votes for fractional shares held, and will vote in the
aggregate and not by portfolio or class except as otherwise required by law.
Shares of the Funds have no preemptive rights and have only such conversion and
exchange rights as the Board of Directors of MasterWorks or the Board of
Directors of Stagecoach, respectively, may grant in their discretion. When
issued for payment as described in their respective prospectuses, each Fund's
shares are fully paid and non-assessable.
Each share of the S-I Term Fund and each Class A Share of the Government
Fund represents an equal proportionate interest in the Fund with other shares of
the same class. Each share is entitled to cash dividends and distributions
earned on such shares as may be declared in the discretion of the Board of
Directors. Shares of each class of the Government Fund bear a pro rata portion
of all operating expenses paid by the Fund, except that certain expenses
relating to class-specific services (such as distribution and shareholder
servicing fees) may be allocated to a particular class.
PORTFOLIO MANAGERS -- GOVERNMENT FUND
Mr. Jeff Weaver assumed responsibility as a portfolio co-manager for the
day-to-day management of the portfolio of the Government Fund as of July 16,
1996. Mr. Weaver joined Wells Fargo Bank in February of 1994, after three years
as a short-term fixed income trader and portfolio manager in the investment
management group of Bankers Trust Company in New York. He holds a B.A. in
economics from the University of Colorado and is a chartered financial analyst.
Ms. Madeleine Gish assumed responsibility as a portfolio co-manager for
the day-to-day management of the portfolio of the Government Fund as of July 16,
1996. Ms. Gish joined Wells Fargo Bank in 1989 as the portfolio coordinator for
the Mutual Funds Division and played an integral part in the rapid growth of the
Overland Express Funds. Since joining the fixed-income group in 1992, Ms. Gish
has assisted in the research and trading for various portfolios and is currently
managing taxable liquidity portfolios. She holds a B.S. in Business
Administration from the University of Kansas and is a chartered financial
analyst.
SUBSTANTIAL SHAREHOLDERS
As of June 1, 1998,* the shareholders identified below were known by
MasterWorks to own 5% or more of the S-I Term Fund's outstanding shares in the
following capacity:
<TABLE>
<CAPTION>
PERCENTAGE
NAME OF FUND NAME AND ADDRESS OF SHAREHOLDER TYPE OF OWNERSHIP OF FUND
------------ ------------------------------- ----------------- -------
<S> <C> <C> <C>
S-I Term Fund Merrill Lynch Trust Co. FSB Record 70.78%
FBO Various 401K Plans
P.O. Box 62000
San Francisco, CA 94162
Merrill Lynch Pierce Fenner & Smith Record 26.38%
For the sole benefit of its customers
4800 Deer Lake Drive, East, 3rd Floor
Jacksonville, FL 32246
</TABLE>
_____________
*As of the close of business on June 1, 1998, the officers and Directors of
MasterWorks as a group beneficially owned less than 1% of the outstanding shares
of MasterWorks Funds.
As of June 30, 1998,* the shareholders identified below were known by
Stagecoach to own 5% or more of the Government Fund's outstanding shares in the
following capacity:
17
<PAGE>
<TABLE>
<CAPTION>
TYPE OF PERCENTAGE PERCENTAGE
NAME OF FUND NAME AND ADDRESS OF SHAREHOLDER OWNERSHIP OF CLASS OF FUND
------------ ------------------------------- --------- -------- -------
<S> <C> <C> <C> <C>
Government Fund Wells Fargo Bank TTEE Institutional 6.28% 4.20%
Choicemaster Class Record
P.O. Box 9800 Holder
Calabassas, CA 91372-0800
Dim & Co. Institutional 25.41% 16.98%
Attn: MF Dept. A88-4 Class Record
P.O. Box 9800 Holder
Calabassas, CA 91372-0800
Virg & Co. Institutional 34.22% 22.87%
Attn: MF Dept. A88-4 Class Record
P.O. Box 9800 Holder
Calabassas, CA 91372-0800
Hep & Co. Institutional 31.71% 21.20%
Attn: MF Dept. A88-4 Class Record
P.O. Box 9800 MAC 9139-027 Holder
Calabassas, CA 91372
Wells Fargo Bank Class A Record 24.16% 6.69%
FBO Retirement Plans Omnibus Holder
P.O. Box 63015
Calabassas, CA 94163
Virg & Co. Class A Record 13.83% 3.83%
Attn: MF Dept. A88-4 Holder
P.O. Box 9800 MAC 9139-027
Calabassas, CA 91372-0800
</TABLE>
____________
*As of the close of business on June 30, 1998, the officers and Directors of
Stagecoach as a group beneficially owned less than 1% of the outstanding shares
of Stagecoach Funds.
ADDITIONAL INFORMATION
MasterWorks and Stagecoach are subject to certain informational
requirements of the Securities Exchange Act of 1934, as amended (the "1934
Act"), and the 1940 Act, and in accordance therewith each files reports, proxy
materials and other information with the SEC. Such reports, proxy materials and
other information may be inspected and copied at the public reference
facilities of the SEC at 450 Fifth Street, N.W., Washington, D.C. 20549 and at
certain regional offices. Copies of such materials can be obtained from the
Public Reference Branch, Office of Consumer Affairs and Information Services,
Securities and Exchange Commission, 450 Fifth Street, N.W., Washington, D.C.
20549, at prescribed rates.
18
<PAGE>
V. VOTING INFORMATION
APPROVAL AND CONSUMMATION OF THE PROPOSED TRANSACTION
Only shareholders of record at the close of business on October 9, 1998,
will be entitled to vote at the Special Meeting. On that date, 1,153,033.682 S-
I Term Fund shares were outstanding and entitled to be voted. The date of the
first mailing of this Combined Prospectus/Proxy Statement to shareholders is
approximately October 26, 1998.
Shareholders holding more than one-third of the outstanding shares of the
S-I Term Fund at the close of business on the Record Date will be deemed
sufficient to constitute a quorum for the transaction of business at the Special
Meeting. Pursuant to Maryland law, the affirmative vote of the holders of a
majority of the outstanding voting securities of the S-I Term Fund is required
for approval of the Plan. If the S-I Term Fund's shareholders do not approve
the proposed Consolidation, MasterWorks' Board of Directors will consider what
other alternatives would be in the shareholders' best interests, including
possibly, approving a Plan of Liquidation.
Any proxy which is properly executed and received in time to be voted at
the Special Meeting will be counted in determining whether a quorum is present
and will be voted in accordance with the instructions marked thereon. In the
absence of any instructions, such proxy will be voted in favor of the Plan. Any
shareholder giving a proxy may revoke it at any time before it is exercised (i)
by submitting to MasterWorks a written notice of revocation, (ii) by submitting
to MasterWorks a subsequently executed proxy or (iii) by attending the Special
Meeting and voting in person. Abstentions and "broker non-votes" (i.e., proxies
from brokers or nominees indicating that such persons have not received
instructions from the beneficial owners or other persons entitled to vote shares
as to a particular matter with respect to which the brokers or nominees do not
have discretionary power to vote) will not be counted for or against any proxy
to which they relate, but will be counted for purposes of determining whether a
quorum is present and will be counted as votes present at the Special Meeting.
For this reason, abstentions and broker non-votes will have the effect of a vote
against the proposal.
The duly appointed Proxies may, in their discretion, vote upon such other
matters as properly may come before the Special Meeting or any adjournment(s)
thereof, including any proposal to adjourn a meeting at which a quorum is
present to permit the continued solicitation of proxies in favor of the
Consolidation. Any such adjournment(s) will require the affirmative vote of a
majority of the shares present in person or by proxy at the session of the
Special Meeting to be adjourned. In case any such adjournment is proposed, the
duly appointed Proxies will vote those proxies which they are entitled to vote
for the Plan in favor of adjournment, and will vote those proxies required to be
voted against the Plan against adjournment.
19
<PAGE>
SOLICITATION OF PROXIES AND PAYMENT OF EXPENSES
It is expected that the solicitation of proxies will be primarily by
mail. Officers and agents of MasterWorks and Stagecoach also may solicit
proxies by telephone, telegraph or personal interview. Shareholders may vote by
(1) mail, by marking, signing, dating and returning the enclosed Proxy Ballot in
the enclosed postage-paid envelope; (2) telephone, by calling Shareholder
Communications Corp. ("SCC") toll-free at 1-800-733-8481, EXT. 448 FROM 6:00
A.M. TO 8:00 P.M. PACIFIC TIME; or (3) telefacsimile, by marking, signing,
dating and faxing the enclosed Proxy Ballot to SCC AT 1-800-733-1885. SCC has
been retained by MasterWorks to assist in both the tabulation and solicitation
of proxy votes for the Consolidation.
The cost of soliciting proxies for the Special Meeting, consisting
principally of printing and mailing expenses, together with the costs of the
proxy soliciting services provided by SCC, will be borne jointly by the Funds
and is estimated to be approximately $1,500. Proxies will be solicited in the
initial, and any supplemental, solicitation by mail and may be solicited in
person, by telephone, telegraph, telefacsimile or other electronic means by
officers of MasterWorks, personnel of BGFA or Stephens, or an agent of
MasterWorks, such as SCC.
VIII. MISCELLANEOUS
OTHER BUSINESS
The Board of Directors of MasterWorks knows of no other business to
be brought before the Special Meeting. However, if any other matters come
before the Special Meeting, including any proposal to adjourn the meeting to
permit the continued solicitation of proxies in favor of the Consolidation, it
is their intention that proxies which do not contain specific restrictions to
the contrary will be voted on such matters in accordance with the judgment of
the persons named in the enclosed Proxy Ballot.
FUTURE SHAREHOLDER PROPOSALS
Pursuant to rules adopted by the SEC under the 1934 Act, investors may
request inclusion in the Board's proxy statement for shareholder meetings
certain proposals for action which they intend to introduce at such meeting.
Any shareholder proposals must be presented a reasonable time before the proxy
materials for the next meeting are sent to shareholders. The submission of a
proposal does not guarantee its inclusion in MasterWorks's proxy statement and
is subject to limitations under the 1934 Act. Because MasterWorks does not
hold regular meetings of shareholders, no anticipated date of the next meeting
can be provided.
20
<PAGE>
EXHIBIT A
AGREEMENT AND
PLAN OF
CONSOLIDATION
FOR THE
SHORT-INTERMEDIATE TERM FUND
OF MASTERWORKS FUNDS INC.
AND THE
SHORT-INTERMEDIATE U.S. GOVERNMENT INCOME FUND
OF STAGECOACH FUNDS, INC.
OCTOBER 26, 1998
<PAGE>
This AGREEMENT AND PLAN OF CONSOLIDATION (the "Plan") is made as of this
----
[_____] day of October, 1998, by and among MasterWorks Funds Inc.
("MasterWorks"), a Maryland corporation, for itself and on behalf of the Short-
-----------
Intermediate Term Fund (the "S-I Term Fund"), Managed Series Investment Trust
-------------
("MSIT"), a Delaware business trust, for itself and on behalf of the Short-
----
Intermediate Term Master Portfolio (the "Global Master Portfolio") in which
-----------------------
the S-I Term Fund invests, and Stagecoach Funds, Inc. ("Stagecoach"), a Maryland
----------
corporation, for itself and on behalf of the Short-Intermediate U.S. Government
Income Fund (the "Government Fund").
---------------
WHEREAS, each of MasterWorks, MSIT and Stagecoach is an open-end management
investment company registered with the Securities and Exchange Commission (the
"SEC") under the Investment Company Act of 1940, as amended (the "1940 Act");
--- --------
and
WHEREAS, the S-I Term Fund pursues its investment objective by investing
substantially all of its assets in the S-I Term Master Portfolio and the
Government Fund pursues its investment objective by investing directly in a
portfolio of securities; and
WHEREAS, the parties desire that the assets and liabilities of the S-I Term
Fund be conveyed to, and be acquired and assumed by, the Government Fund, in
exchange for shares of equal value of the Government Fund which shall thereafter
promptly be distributed to the shareholders of the S-I Term Fund in connection
with its liquidation as described in this Plan (the "Consolidation"); and
-------------
WHEREAS, the parties intend that the Consolidation qualify as a
"reorganization," within the meaning of Section 368(a) of the Internal Revenue
Code of 1986, as amended (the "Code"), and that Government Fund and S-I Term
----
Fund will each be a "party to a reorganization," within the meaning of Section
368(b) of the Code, with respect to the Consolidation;
NOW, THEREFORE, in accordance with the terms and conditions described
herein, the S-I Term Fund and the Government Fund shall be consolidated as
follows:
1. Conveyance of Assets of S-I Term Fund.
-------------------------------------
(a) At the Effective Time of the Consolidation (as defined in Section
9), all assets of every kind, and all interests, rights, privileges and powers
of the S-I Term Fund, subject to all liabilities of the S-I Term Fund existing
as of the Effective Time of the Consolidation (the "Fund Assets"), shall be
-----------
transferred and conveyed by the S-I Term Fund to the Government Fund and shall
be accepted and assumed by the Government Fund, as more particularly set forth
in this Plan, such that at and after the Effective Time of the Consolidation:
(i) all assets of the S-I Term Fund shall become and be the assets of the
Government Fund; and (ii) all liabilities of the S-I Term Fund shall attach to
the Government Fund, enforceable against the Government Fund to the same extent
as if initially incurred by it.
1
<PAGE>
(b) It is understood and agreed that the Fund Assets shall include all
property and assets of any nature whatsoever, including, without limitation, all
cash, cash equivalents, securities, claims (whether absolute or contingent,
known or unknown, accrued or unaccrued) and receivables (including dividend and
interest receivables) owned by the S-I Term Fund, and any deferred or prepaid
expenses shown as an asset on the S-I Term Fund's books and that the liabilities
of the S-I Term Fund shall include all liabilities, whether known or unknown,
accrued or unaccrued, absolute or contingent, in all cases, existing at the
Effective Time of the Consolidation.
(c) It is understood and agreed that the S-I Term Master Portfolio will
liquidate the S-I Term Fund's interest in the S-I Term Master Portfolio through
an in-kind redemption, effective at or before the Effective Time of
Consolidation, so that the Fund Assets will consist primarily of the portfolio
securities held by the S-I Term Master Portfolio immediately before the
Effective Time of the Consolidation.
(d) At least fifteen (15) business days prior to the Closing Date, (as
defined in Section 9), the S-I Term Master Portfolio will provide to the
Government Fund, a schedule of its securities and other assets and known
liabilities. It is understood and agreed that the S-I Term Master Portfolio may
sell any of the securities or other assets shown on the list of assets prior to
the Effective Time of the Consolidation but will not, without the prior approval
of the Government Fund, acquire any additional securities other than securities
which the Government Fund is permitted to purchase in accordance with its stated
investment objective and policies. At least ten (10) business days prior to the
Closing Date, the Government Fund will advise the S-I Term Master Portfolio of
any investments of the S-I Term Master Portfolio shown on such schedule which
the Government Fund would not be permitted to hold, pursuant to its stated
investment objective and policies or otherwise. The S-I Term Master Portfolio,
if requested by the Government Fund, will dispose of any such securities prior
to the Closing Date to the extent practicable and consistent with applicable
legal requirements. In addition, if it is determined that the portfolios of the
S-I Term Master Portfolio and the Government Fund, when aggregated, would
contain investments exceeding certain percentage limitations applicable to the
Government Fund, the S-I Term Master Portfolio, if requested by the Government
Fund, will dispose of a sufficient amount of such investments as may be
necessary to avoid violating such limitations as of the Effective Time of the
Consolidation.
(e) The Fund Assets shall be transferred and conveyed to the Government
Fund on the following basis:
(1) In exchange for the transfer of the Fund Assets, the Government
Fund shall simultaneously issue to the S-I Term Fund at the Effective Time of
the Consolidation full and fractional Class A Shares of Common Stock of
the Government Fund having an aggregate net asset value equal to the net
value of the Fund Assets so conveyed, all determined as provided in this
Plan. In this regard, the number of full
2
<PAGE>
and fractional shares of the Government Fund delivered to the S-I Term Fund
shall be determined by dividing the value of the Fund Assets, computed in the
manner and as of the time and date set forth in this Plan, by the net asset
value of one Government Fund Class A Share, computed in the manner and as of
the time and date set forth in this Plan.
(2) The net asset value of shares to be delivered by the Government
Fund, and the net value of the Fund Assets to be conveyed by the S-I Term
Fund, shall, in each case, be determined as of the Valuation Time as defined
in Section 3. The net asset value of Class A Shares of the Government Fund
shall be computed in accordance with its then current valuation procedures.
In determining the value of the Fund Assets, each security to be included in
the Fund Assets shall be priced in accordance with the Government Fund's then
current valuation procedures.
2. Liquidation of S-I Term Fund. At the Effective Time of the
----------------------------
Consolidation, the S-I Term Fund shall make a liquidating distribution to its
shareholders as follows: Shareholders of record of the S-I Term Fund shall be
credited with full and fractional shares of the Class A Shares of common stock
that are issued by the Government Fund in connection with the Consolidation
corresponding to the S-I Term Fund shares that are held of record by the
shareholder at the Effective Time of the Consolidation. Each such shareholder
also shall have the right to receive any unpaid dividends or other distributions
which were declared before the Effective Time of the Consolidation with respect
to the S-I Term Fund shares that are held of record by the shareholder at the
Effective Time of the Consolidation, and Stagecoach shall record on its books
the ownership of the respective Government Fund shares by such shareholders.
All of the issued and outstanding shares of the S-I Term Fund at the Effective
Time of the Consolidation shall be redeemed and canceled on the books of
MasterWorks at such time. As soon as reasonably possible after the Effective
Time of the Consolidation, MasterWorks shall wind up the affairs of the S-I Term
Fund and shall file any final regulatory reports, including but not limited to
any Form N-SAR and Rule 24f-2 filings, with respect to the S-I Term Fund, and
also shall take all other steps as are necessary and proper to effect the
termination or declassification of the S-I Term Fund in accordance with all
applicable laws.
3. Valuation Time. The "Valuation Time" shall be the time as of which
--------------- --------------
the net asset value of shares of each of the S-I Term Fund and the Government
Fund is determined pursuant to the Government Fund's valuation procedures on the
Closing Date or such earlier or later time as may be mutually agreed to in
writing by the parties hereto.
4. Certain Representations, Warranties and Agreements of MasterWorks.
-----------------------------------------------------------------
MasterWorks, on behalf of itself and, where appropriate, the S-I Term Fund,
represents and warrants to, and agrees with, Stagecoach and MSIT as follows;
such representations, warranties and agreements being made on behalf of the S-I
Term Fund on a several (and not joint, or joint and several) basis:
3
<PAGE>
(a) MasterWorks is a corporation, duly created, validly existing and in
good standing under the laws of the State of Maryland. MasterWorks is registered
with the SEC as an open-end management investment company under the 1940 Act,
and such registration is in full force and effect.
(b) MasterWorks has the power to own all of its properties and assets
and to consummate the transactions contemplated herein, and has all necessary
federal, state and local authorizations to carry on its business as now being
conducted and to consummate the transactions contemplated by this Plan.
(c) This Plan has been duly authorized by the Board of Directors of
MasterWorks, and executed and delivered by duly authorized officers of
MasterWorks, and represents a valid and binding contract, enforceable in
accordance with its terms, subject as to enforcement to bankruptcy, insolvency,
reorganization, arrangement, moratorium, and other similar laws of general
applicability relating to or affecting creditors' rights and to general equity
principles. The execution and delivery of this Plan does not, and, subject to
the approval of shareholders referred to in Section 7, the consummation of the
transactions contemplated by this Plan will not, violate MasterWorks's Amended
and Restated Articles of Incorporation or By-Laws or any material agreement or
arrangement to which it is a party or by which it is bound.
(d) The S-I Term Fund has elected to qualify and has qualified as a
regulated investment company under Part I of Subchapter M of Subtitle A, Chapter
1, of the Code, as of and since its first taxable year; has been a regulated
investment company under such Part of the Code at all times since the end of its
first taxable year when it so qualified; and qualifies and shall continue to
qualify as a regulated investment company for its taxable year ending upon its
liquidation.
(e) MasterWorks has valued, and will continue to value, the portfolio
securities and other assets of the S-I Term Fund in accordance with applicable
legal requirements.
(f) The proxy materials included within the Form N-14 Registration
Statement (the "N-14 Registration Statement") from its effective date with the
---------------------------
SEC, through the time of the shareholders meeting referred to in Section 7 and
the Effective Time of the Consolidation, insofar as they relate to MasterWorks,
(i) shall comply in all material respects with the applicable provisions of the
Securities Act of 1933, as amended (the "1933 Act"), the Securities Exchange Act
--------
of 1934, as amended (the "1934 Act") and the 1940 Act, the rules and regulations
--------
thereunder, and state securities laws, and (ii) shall not contain any untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements made therein not misleading.
(g) All of the issued and outstanding shares of the S-I Term Fund have
been validly issued and are fully paid and non-assessable, and were offered for
sale and
4
<PAGE>
sold in conformity with the registration requirements of all applicable federal
and state securities laws.
(h) MasterWorks shall operate the business of the S-I Term Fund in the
ordinary course between the date hereof and the Effective Time of the
Consolidation, it being agreed that such ordinary course of business will
include the declaration and payment of customary dividends and distributions and
any other dividends and distributions deemed advisable in anticipation of the
Consolidation.
(i) At the Effective Time of the Consolidation, the S-I Term Fund will
have good and marketable title to the Fund Assets and full right, power and
authority to assign, deliver and otherwise transfer such assets.
(j) At the Effective Time of the Consolidation, all federal and other
tax returns and reports of the S-I Term Fund required by law to have been filed
by such time shall have been filed, and all federal and other taxes shall have
been paid so far as due, or provision shall have been made for the payment
thereof and, to the knowledge of S-I Term Fund, no such return or report shall
be currently under audit and no assessment shall have been asserted with respect
to such returns or reports.
5. Certain Representations, Warranties and Agreements of MSIT. MSIT,
----------------------------------------------------------
on behalf of itself and, where appropriate, the S-I Term Master Portfolio,
represents and warrants to, and agrees with, MasterWorks and Stagecoach as
follows; such representations, warranties and agreements being made on behalf of
the S-I Term Master Portfolio on a several (and not joint, or joint and several)
basis:
(a) MSIT is a business trust, duly created, validly existing and in
good standing under the laws of the State of Delaware. MSIT is registered with
the SEC as an open-end management investment company under the 1940 Act, and
such registration is in full force and effect.
(b) MSIT has the power to own all of its properties and assets and to
consummate the transactions contemplated herein, and has all necessary federal,
state and local authorizations to carry on its business as now being conducted
and to consummate the transactions contemplated by this Plan.
(c) This Plan has been duly authorized by the Board of Trustees of
MSIT, and executed and delivered by duly authorized officers of MSIT, and
represents a valid and binding contract, enforceable in accordance with its
terms, subject as to enforcement to bankruptcy, insolvency, reorganization,
arrangement, moratorium, and other similar laws of general applicability
relating to or affecting creditors' rights and to general equity principles. The
execution and delivery of this Plan does not, and, subject to the approval of
shareholders referred to in Section 7, the consummation of the transactions
contemplated by this Plan will not, violate MSIT's Amended and Restated
Agreement and Declaration of Trust or By-Laws or any material agreement or
arrangement to which it is a party or by which it is bound.
5
<PAGE>
(d) MSIT has qualified the S-I Term Master Portfolio as a partnership
under the Code as of and since Master Portfolio's inception; Master Portfolio
has been a partnership under the Code at all times since its inception; and
Master Portfolio qualifies and shall continue to qualify as a partnership for
all taxable years ending on or after the Effective Time of the Consolidation.
(e) MSIT has valued, and will continue to value, the portfolio
securities and other assets of the Master Portfolio in accordance with
applicable legal requirements.
(f) The proxy materials included within the N-14 Registration Statement
from its effective date with the SEC, through the time of the shareholders
meeting referred to in Section 7 and the Effective Time of the Consolidation,
insofar as they relate to MSIT, (i) shall comply in all material respects with
the applicable provisions of the 1933 Act, the 1934 Act and the 1940 Act, the
rules and regulations thereunder, and state securities laws, and (ii) shall not
contain any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements made therein
not misleading.
(g) All of the issued and outstanding interests in the Master
Portfolio have been validly issued and are fully paid and non-assessable, and
were offered for sale and sold in conformity with the registration requirements
of all applicable federal and state securities laws, or available exemptions
thereto.
(h) MSIT shall operate the business of the Master Portfolio in
the ordinary course between the date hereof and the Effective Time of the
Consolidation. It is understood that such ordinary course of business will
include the declaration and payment of customary dividends and distributions and
any other dividends and distributions deemed advisable in anticipation of the
Consolidation.
6. Certain Representations, Warranties and Agreements of Stagecoach.
----------------------------------------------------------------
Stagecoach, on behalf of itself and where appropriate, the Government Fund,
represents and warrants to, and agrees with MasterWorks and MSIT as follows;
such representations, warranties and agreements being made on behalf of the
Government Fund on a several (and not joint, or joint and several) basis:
(a) Stagecoach is a corporation duly created, validly existing and in
good standing under the laws of the State of Maryland. Stagecoach is registered
with the SEC as an open-end management investment company under the 1940 Act and
such registration is in full force and effect.
(b) Stagecoach has the power to own all of its properties and assets
and to consummate the transactions contemplated herein, and has all necessary
federal, state and local authorizations to carry on its business as now being
conducted and to consummate the transactions contemplated by this Plan.
6
<PAGE>
(c) This Plan has been duly authorized by the Board of Directors of
Stagecoach, and executed and delivered by duly authorized officers of
Stagecoach, and represents a valid and binding contract, enforceable in
accordance with its terms, subject as to enforcement to bankruptcy, insolvency,
reorganization, arrangement, moratorium and other similar laws of general
applicability relating to or affecting creditors' rights and to general equity
principles. The execution and delivery of this Plan does not, and the
consummation of the transactions contemplated by this Plan will not, violate the
Amended and Restated Articles of Incorporation or By-Laws of Stagecoach or any
material agreement or arrangement to which it is a party or by which it is
bound.
(d) The Government Fund has elected to qualify and has qualified as a
regulated investment company under Part I of Subchapter M of Subtitle A, Chapter
1, of the Code, as of and since its first taxable year; has been a regulated
investment company under such Part of the Code at all times since the end of its
first taxable year when it so qualified; and qualifies and shall continue to
qualify as a regulated investment company for its current taxable year.
(e) Stagecoach has valued, and will continue to value, the portfolio
securities and other assets of the Government Fund in accordance with applicable
legal requirements.
(f) The N-14 Registration Statement, including the proxy materials
contained therein, from its effective date with the SEC through the time of the
shareholders meeting referred to in Section 7 and at the Effective Time of the
Consolidation, insofar as it relates to Stagecoach, the Government Fund, the
core portfolio in which the Government Fund invests, or the Class A Shares of
the Government Fund to be issued pursuant thereto (i) shall comply in all
material respects with the applicable provisions of the 1933 Act, the 1934 Act
and the 1940 Act, the rules and regulations thereunder, and state securities
laws, and (ii) shall not contain any untrue statement of a material fact or omit
to state a material fact required to be stated therein or necessary to make the
statements made therein not misleading.
(g) The shares of the Government Fund to be issued and delivered to the
S-I Term Fund for the account of the shareholders of the S-I Term Fund, pursuant
to the terms hereof, shall have been duly authorized as of the Effective Time of
the Consolidation and, when so issued and delivered, shall be duly and validly
issued, fully paid and non-assessable, and no shareholder of the Government Fund
shall have any preemptive right of subscription or purchase in respect thereto.
(h) All of the issued and outstanding shares of the Government Fund
have been validly issued and are fully paid and non-assessable, and were offered
for sale and sold in conformity with the registration requirements of all
applicable federal and state securities laws.
7
<PAGE>
(i) Stagecoach shall operate the business of the Government Fund in the
ordinary course between the date hereof and the Effective Time of the
Consolidation. It is understood that such ordinary course of business will
include the declaration and payment of customary dividends and distributions and
any other dividends and distributions deemed advisable in anticipation of the
Consolidation.
(j) At the Effective Time of the Consolidation, all federal and other
tax returns and reports of the Government Fund required by law to have been
filed by such time shall have been filed, and all federal and other taxes shall
have been paid so far as due, or provision shall have been made for the payment
thereof and, to the knowledge of Government Fund, no such return or report
shall be currently under audit and no assessment shall have been asserted with
respect to such returns or reports.
7. Shareholder Action. As soon as practicable after the effective date
------------------
of the N-14 Registration Statement MasterWorks shall hold meeting(s) of the
shareholders of the S-I Term Fund for the purpose of considering and voting
upon:
(a) approval of this Plan and the Consolidation contemplated hereby;
and
(b) such other matters as may be determined by the Board of Directors
of MasterWorks.
8. Regulatory Filings. As soon as practicable, Stagecoach shall file
------------------
an N-14 Registration Statement, which shall include all proxy materials required
in connection with the S-I Term Fund shareholder approval referenced in Section
7, with the SEC, and, where required, with appropriate state securities
regulatory authorities.
9. Closing Date, Effective Time of the Consolidation. The "Closing
------------------------------------------------- -------
Date" shall be December 4, 1998, or such earlier or later date as may be
- ----
mutually agreed in writing by the parties hereto. Delivery of the Fund Assets
and the shares of the Government Fund to be issued pursuant to Section 1 and the
liquidation of the S-I Term Fund pursuant to Section 2 shall occur on the day
following the Closing Date, whether or not such day is a business day, or on
such other date, and at such place and time, as may be mutually agreed in
writing, by the parties hereto. The date and time at which such actions are
taken are referred to herein as the "Effective Time of the Consolidation." To
-----------------------------------
the extent any Fund Assets are, for any reason, not transferred at the Effective
Time of the Consolidation, MasterWorks shall cause such Fund Assets to be
transferred in accordance with this Plan at the earliest practicable date
thereafter.
10. Conditions to MasterWorks and MSIT Obligations. The obligations of
----------------------------------------------
MasterWorks and MSIT hereunder shall be subject to the following conditions
precedent:
(a) This Plan and the Consolidation shall have been approved by the
Board of Directors of Stagecoach and by a majority of the shareholders of the
S-I Term Fund in the manner required by applicable law and this Plan.
8
<PAGE>
(b) All representations and warranties of Stagecoach made in this Plan
shall be true and correct in all material respects as if made at and as of the
Valuation Time and the Effective Time of the Consolidation.
(c) Stagecoach shall have delivered to MasterWorks a certificate
executed in its name by its President or Vice President and its Treasurer or
Assistant Treasurer, in a form reasonably satisfactory to MasterWorks and dated
as of the Closing Date, substantially to the effect that the representations and
warranties of Stagecoach in this Plan are true and correct at and as of the
Valuation Time and that, to the best of its knowledge, the Fund Assets include
only assets which the Government Fund may properly acquire under its investment
objectives, policies and limitations and may otherwise be lawfully acquired by
the Government Fund.
(d) MasterWorks shall have received an opinion of Morrison & Foerster
LLP, as counsel to Stagecoach, in a form reasonably satisfactory to MasterWorks
and dated as of the Closing Date, substantially to the effect that (i)
Stagecoach is a corporation duly established and validly existing under the laws
of the State of Maryland; (ii) the shares of the Government Fund to be delivered
to the S-I Term Fund as provided for by this Plan are duly authorized and upon
delivery will be validly issued, fully paid and non-assessable by Stagecoach;
(iii) this Plan has been duly authorized, executed and delivered by Stagecoach,
and represents a legal, valid and binding contract, enforceable in accordance
with its terms, subject to the effect of bankruptcy, insolvency, moratorium,
fraudulent conveyance and similar laws relating to or affecting creditors'
rights generally and court decisions with respect thereto, and such counsel
shall express no opinion with respect to the application of equitable principles
in any proceeding whether at law or in equity; (iv) the execution and delivery
of this Plan did not, and the consummation of the transactions contemplated by
this Plan will not, violate the Amended and Restated Articles of Incorporation
or By-Laws of Stagecoach or any material contract known to such counsel to which
Stagecoach is a party or by which it is bound; and (v) no consent, approval,
notice, authorization or order of any court or governmental authority is
required for the consummation by Stagecoach of the transactions contemplated by
this Plan, except such as have been obtained under the 1933 Act, the 1934 Act,
the 1940 Act, the rules and regulations under those Acts and such as may be
required by state securities laws or such as may be required subsequent to the
Effective Time of the Consolidation. Such opinion may rely on the opinion of
other counsel to the extent set forth in such opinion, provided such other
counsel is reasonably acceptable to MasterWorks.
(e) MasterWorks shall have received an opinion of Morrison & Foerster
LLP addressed to Stagecoach and MasterWorks in a form reasonably satisfactory to
them, and dated as of the Closing Date, with respect to the matters specified in
Subsection 11(h).
(f) MasterWorks shall have received a memorandum addressed to
Stagecoach and MasterWorks, in a form reasonably satisfactory to them, prepared
by Stephens, or another person approved by the parties, concerning the
compliance by
9
<PAGE>
Stagecoach with applicable notice or filing requirements of state securities
laws in connection with the offering and issuance of shares pursuant to this
Plan.
(g) The N-14 Registration Statement shall have become effective under
the 1933 Act and no stop order suspending the effectiveness shall have been
instituted, or to the knowledge of Stagecoach, contemplated by the SEC.
(h) No action, suit or other proceeding shall be threatened or pending
before any court or governmental agency in which it is sought to restrain or
prohibit, or obtain damages or other relief in connection with, this Plan or the
transactions contemplated herein.
(i) The SEC shall not have issued any unfavorable advisory report under
Section 25(b) of the 1940 Act nor instituted any proceeding seeking to enjoin
consummation of the transactions contemplated by this Plan under Section 25(c)
of the 1940 Act.
(j) Stagecoach shall have performed and complied in all material
respects with each of its agreements and covenants required by this Plan to be
performed or complied with by it prior to or at the Valuation Time and the
Effective Time of the Consolidation.
(k) MasterWorks shall have received from Stagecoach a duly executed
instrument whereby the Government Fund assumes all of the liabilities of the S-I
Term Fund.
(l) MasterWorks shall have received a letter from KPMG Peat Marwick LLP
addressed to Stagecoach and MasterWorks in form reasonably satisfactory to them,
and dated the Closing Date, to the effect that on the basis of limited
procedures as agreed to by Stagecoach and MasterWorks and described in such
letter (but not an examination in accordance with generally accepted auditing
standards) (i) nothing came to their attention that caused them to believe that
the unaudited pro forma financial statements included in the N-14 Registration
Statement do not comply as to form in all material respects with the applicable
accounting requirements of Rule 11-02 of Regulation S-X or that the pro forma
adjustments have not properly been applied to the historical amounts in the
compilation of those amounts, (ii) the data used in the calculation of the
current and pro forma expense ratios of the Stagecoach Fund appearing in the
N-14 Registration Statement and Consolidation Proxy Materials agree with
underlying accounting records of the Government Fund or to written estimates
provided by officers of Stagecoach having responsibility for financial and
reporting matters and were found to be mathematically correct, and (iii) the
information relating to the Government Fund appearing in the N-14 Registration
Statement that is expressed in dollars or percentages of dollars has been
obtained from the accounting records of the Government Fund or from schedules
prepared by officers of Stagecoach having responsibility for financial and
reporting matters and such information is in agreement with such records,
schedules or computations made therefrom.
10
<PAGE>
11. Stagecoach Conditions. The obligations of Stagecoach hereunder
---------------------
shall be subject to the following conditions precedent:
(a) This Plan and the Consolidation shall have been approved by the
Board of Trustees of MSIT, the Board of Directors of MasterWorks and by a
majority of the shareholders of the S-I Term Fund in the manner required by
applicable law and this Plan.
(b) MSIT shall have delivered to Stagecoach a statement of assets and
liabilities of the S-I Term Master Portfolio, showing the tax costs of such
securities by lot and the holding periods of such securities, as of the
Valuation Time, certified by the Treasurer or Assistant Treasurer of MSIT as
having been prepared in accordance with generally accepted accounting principles
consistently applied.
(c) MasterWorks shall have duly executed and delivered to Stagecoach
such bills of sale, assignments, certificates and other instruments of transfer
("Transfer Documents") as Stagecoach may deem necessary or desirable to transfer
--------------------
all of the S-I Term Fund's right, title and interest in and to the Fund Assets.
(d) All representations and warranties of MasterWorks and MSIT made in
this Plan shall be true and correct in all material respects as if made at and
as of the Valuation Time and the Effective Time of the Consolidation.
(e) MasterWorks shall have delivered to Stagecoach a certificate
executed in its name by its President or Vice President and its Treasurer or
Assistant Treasurer, in a form reasonably satisfactory to Stagecoach and dated
as of the Closing Date, to the effect that the representations and warranties of
the MasterWorks in this Plan are true and correct at and as of the Valuation
Time.
(f) Stagecoach shall have received an opinion of Morrison & Foerster
LLP, as counsel to MasterWorks, in a form reasonably satisfactory to Stagecoach
and dated the Closing Date, substantially to the effect that (i) MasterWorks is
a corporation duly established and validly existing under the laws of the State
of Maryland; (ii) this Plan and the Transfer Documents have been duly
authorized, executed and delivered by MasterWorks and represent legal, valid and
binding contracts, enforceable in accordance with their terms, subject to the
effect of bankruptcy, insolvency, moratorium, fraudulent conveyance and similar
laws relating to or affecting creditors' rights generally and court decisions
with respect thereto, and such counsel shall express no opinion with respect to
the application of equitable principles in any proceeding, whether at law or in
equity; (iii) the execution and delivery of this Plan did not, and the
consummation of the transactions contemplated by this Plan will not, violate the
Amended and Restated Articles of Incorporation or By-Laws of MasterWorks or any
material contract known to such counsel to which MasterWorks is a party or by
which it is bound; (iv) the only Plan shareholder approvals required with
respect to the consummation of the transactions contemplated by this Plan are
the approval of a majority of the shareholders of the S-I
11
<PAGE>
Term Fund; and (v) no consent, approval, authorization or order of any court or
governmental authority is required for the consummation by MasterWorks of the
transactions contemplated by this Plan, except such as have been obtained under
the 1933 Act, the 1934 Act, the 1940 Act, the rules and regulations under those
Acts and such as may be required under the state securities laws or such as may
be required subsequent to the Effective Time of the Consolidation. Such opinion
may rely on the opinion of other counsel to the extent set forth in such
opinion, provided such other counsel is reasonably acceptable to Stagecoach.
(g) Stagecoach shall have received an opinion of Morrison & Foerster
LLP, as counsel to MSIT, in a form reasonably satisfactory to Stagecoach and
dated the Closing Date, substantially to the effect that (i) MSIT is a business
trust duly established and validly existing under the laws of the State of
Delaware; (ii) this Plan has been duly authorized, executed and delivered by
MSIT and represents a legal, valid and binding contract, enforceable in
accordance with its terms, subject to the effect of bankruptcy, insolvency,
moratorium, fraudulent conveyance and similar laws relating to or affecting
creditors' rights generally and court decisions with respect thereto, and such
counsel shall express no opinion with respect to the application of equitable
principles in any proceeding, whether at law or in equity; (iii) the execution
and delivery of this Plan did not, and the consummation of the transactions
contemplated by this Plan will not, violate the Amended and Restated Agreement
and Declaration of Trust or By-Laws of MSIT or any material contract known to
such counsel to which MSIT is a party or by which it is bound; and (iv) no
consent, approval, authorization or order of any court or governmental authority
is required for the consummation by MSIT of the transactions contemplated by
this Plan, except such as have been obtained under the 1933 Act, the 1934 Act,
the 1940 Act, the rules and regulations under those Acts and such as may be
required under the state securities laws or such as may be required subsequent
to the Effective Time of the Consolidation. Such opinion may rely on the opinion
of other counsel to the extent set forth in such opinion, provided such other
counsel is reasonably acceptable to Stagecoach.
(h) Stagecoach shall have received an opinion of Morrison & Foerster
LLP addressed to Stagecoach and Masterworks in a form reasonably satisfactory to
them, and dated the Closing Date, substantially to the effect that, based upon
reasonable representations made in certificates provided by Stagecoach and
Masterworks, their affiliates and/or principal shareholders, and facts and
assumptions set forth in such opinion, for federal income tax purposes (i) the
Consolidation will constitute a "reorganization" within the meaning of Section
368(a), of the Code and the Government Fund and S-I Term Fund will each be a
"party to a reorganization," within the meaning of Section 368(b) of the Code,
with respect to the Consolidation; (ii) in accordance with Sections 361(a),
361(c)(1) and 357(a) of the Code, no gain or loss will be recognized by the S-I
Term Fund as a result of the Consolidation; (iii) in accordance with Section
1032(a) of the Code, no gain or loss will be recognized by the Government Fund
as a result of the Consolidation; (iv) in accordance with Section 354(a)(1) of
the Code, no gain or loss will be recognized by the shareholders of the S-I Term
Fund on the distribution to them by the S-I Term Fund of shares of the
Government Fund in exchange for their shares of the S-I Term Fund; (v) in
accordance
12
<PAGE>
with Section 358(a)(1) of the Code, the basis of the Government Fund shares
received by each shareholder of the S-I Term Fund will be the same as the basis
of the shareholder's S-I Term Fund shares immediately prior to the
Consolidation; (vi) in accordance with Section 362(b) of the Code, the basis of
the Fund Assets received by the Government Fund will be the same as the basis of
such Fund Assets in the hands of the S-I Term Fund immediately prior the
Consolidation; (vii) in accordance with Section 1223(1) of the Code, a
shareholder's holding period for Government Fund shares will be determined by
including the period for which the shareholder held the shares of the S-I Term
Fund exchanged therefor, provided that the shareholder held such shares of the
S-I Term Fund as a capital asset; (viii) in accordance with Section 1223(2) of
the Code, the holding period of the Government Fund with respect to the Fund
Assets will include the period for which such Fund Assets were held by the S-I
Term Fund; and (ix) in accordance with Section 381(a) of the Code, the
Government Fund will succeed to the tax attributes of the S-I Term Fund
described in Section 381(c) of the Code.
(i) The Fund Assets to be transferred to the Government Fund under this
Plan shall include no assets which the Government Fund may not properly acquire
pursuant to its investment objectives, policies or restrictions or may not
otherwise lawfully acquire.
(j) The N-14 Registration Statement shall have become effective under
the 1933 Act and no stop order suspending such effectiveness shall have been
instituted or, to the knowledge of Stagecoach, contemplated by the SEC.
(k) No action, suit or other proceeding shall be threatened or pending
before any court or governmental agency in which it is sought to restrain or
prohibit or obtain damages or other relief in connection with this Plan or the
transactions contemplated herein.
(l) The SEC shall not have issued any unfavorable advisory report under
Section 25(b) of the 1940 Act nor instituted any proceeding seeking to enjoin
consummation of the transactions contemplated by this Plan under Section 25(c)
of the 1940 Act.
(m) MasterWorks and MSIT shall have performed and complied in all
material respects with each of their respective agreements and covenants
required by this Plan to be performed or complied with by them prior to or at
the Valuation Time and the Effective Time of the Consolidation.
(n) Prior to the Valuation Time, S-I Term Fund shall have declared a
dividend or dividends, with a record date and ex-dividend date prior to the
Valuation Time, which, together with all previous dividends, shall have the
effect of distributing to its shareholders all of its net investment company
taxable income (as defined in the Code and computed without regard to any
deduction for dividends paid), if any, for all taxable periods or years ending
on or before the Effective Time of the Consolidation, and all of
13
<PAGE>
its net capital gain, if any, realized in taxable periods or years ending on or
before the Effective Time of the Consolidation.
12. Survival of Representations and Warranties. The representations and
------------------------------------------
warranties of Stagecoach set forth in this Plan shall survive the delivery of
the Fund Assets to the Government Fund and the issuance of the shares of the
Government Fund at the Effective Time of the Consolidation.
13. Termination of Plan. This Plan may be terminated by a party at or,
-------------------
in the case of Subsection 13(c), below, at any time prior to, the Effective Time
of the Consolidation by a vote of a majority of its Board of Directors/Trustees
as provided below:
(a) By MasterWorks or MSIT if the conditions set forth in Section 10
are not satisfied as specified in said Section;
(b) By Stagecoach if the conditions set forth in Section 11 are not
satisfied as specified in said Section;
(c) By mutual consent of the parties.
14. Governing Law. This Plan and the transactions contemplated hereby
-------------
shall be governed, construed and enforced in accordance with the laws of the
State of Maryland, except to the extent preempted by federal law.
15. Brokerage Fees and Expenses.
---------------------------
(a) Each of MasterWorks, MSIT and Stagecoach represents and warrants
that there are no brokers or finders entitled to receive any payments in
connection with Consolidation.
(b) Each of the S-I Term Fund, the S-I Term Master Portfolio and the
Government Fund shall be liable for its own expenses incurred in connection with
entering into and carrying out the provisions of this Plan, whether or not the
Consolidation is consummated.
16. Scope of Responsibilities. The parties hereto agree that the
-------------------------
responsibilities of MasterWorks, MSIT and Stagecoach under this Plan, shall not
be binding on any of the Directors or Trustees, shareholders, officers, agents
or employees of any of them and that, insofar as such responsibilities are
created on behalf of the S-I Term Fund, the S-I Term Master Portfolio and the
Government Fund, bind only the assets and property of the S-I Term Fund, the S-I
Term Master Portfolio and the Government Fund, respectively, and not the other
assets or property of MasterWorks, MSIT and Stagecoach.
14
<PAGE>
EXHIBIT B
This Exhibit reproduces in its entirety the discussion of Fund performance
for Class A shares from the Government Fund's June 30, 1998, Annual Report. The
discussion reviews some of the factors that affected the Fund's performance
during this fiscal year and shows the performance of the Fund for various
periods. The discussion has not been updated to reflect events occurring after
June 30, 1998.
SHORT-INTERMEDIATE U.S. GOVERNMENT INCOME FUND
The Stagecoach Short-Intermediate U.S. Government Income Fund (the "Fund")
seeks to provide investors with current income while preserving capital by
investing primarily in a portfolio consisting of short- to intermediate-term
securities issued or guaranteed by the U.S. government, its agencies or
instrumentalities. Targeting bonds within this range helps to maximize the
Fund's income potential by investing in short- to intermediate-bonds with an
average maturity between two and five years.
Please note that we have changed the Fund's fiscal year-end to June 30 from
March 31. We have made this change to improve our reporting process. This
change will not impact the performance or objective of your investment. Because
of the new year-end, this report is the second annual report we have sent you
over the last three months. Our discussions will focus on the most recent
period, although we may also comment on longer-term performance.
On June 12, 1998, the Stagecoach Intermediate Bond Fund was merged into the
Stagecoach Short-Intermediate U.S. Government Income Fund. The investment
objective and the investment policies for the Short-Intermediate U.S. Government
Income Fund did not change. However, the consolidation of the two funds did
create Class B shares for the Short-Intermediate U.S. Government Income Fund.
The Fund is managed by Madeline Gish, who leads the taxable short-duration
team. Her eight-year investment career includes specialization in managing
short-duration taxable portfolios and taxable money market mutual funds.
PERFORMANCE SUMMARY
During the three-month reporting period, the Stagecoach Short-Intermediate
U.S. Government Income Fund's Class A net asset value increased from $9.95 on
March 31, 1998, to $9.97 on June 30, 1998. The Fund distributed $0.13 per share
in dividend income and no capital gains were distributed during this period.
Keep in mind that past distributions are not predictive of future trends as
distributions will vary based on Fund portfolio earnings.
The Fund's distribution rate was 5.22% for Class A shares, based on an
annualization of June's monthly dividend of $0.045 per share and the maximum
offering price of $10.28 on June 30, 1998.
PORTFOLIO DATA/1/ (as of June 30 1998)
- ------------------------------------------------------------------------------
Number of Issues 51
Portfolio Turnover Ratio 12%
Weighted Average Coupon 6.87%
Weighted Average Maturity 4.91 years
Average Credit Quality AA1
1
<PAGE>
Class A Class B
------- -------
NAV $9.97 $9.97
Distribution Rate 5.22% 5.01%
SEC Yield 5.55% 5.10%
/1/Please refer to important disclosures at the end of the Strategic Outlook
section.
For the three-month period ended June 30, 1998, the Class A shares of the
Short-Intermediate U.S. Government Income Fund returned 1.54%, excluding sales
charges. For the same time period, the Fund's Institutional Class returned
1.56%. Overall, we remained very competitive with our benchmark, the Lehman
Brothers Treasury Note Index, which returned 1.54% in the same period. The
competitive performance of the Fund was due to several steps taken to implement
our total return strategy. We decreased our mortgage exposure to decrease
exposure to interest rate risk for the Fund. This was a result of the current
interest rate environment, where we've seen an increased prepayment risk in the
mortgage-backed securities sector as prepayment occurred when homeowners
refinanced out of their existing mortgages into ones with lower interest rates.
In addition, we maintained our exposure to higher yielding bonds, particularly
corporate bonds. Keep in mind that past performance is no guarantee of future
results.
PORTFOLIO REVIEW
The Fund is managed with a total return strategy that attempts to balance
reasonable risk with competitive income and capital appreciation. Investment
quality, maturity and duration are carefully examined as the Fund's managers
employ a top-down approach. This approach involves analysis of historical
interest rate shifts in an attempt to predict changes in Federal Reserve policy,
which would ultimately affect the strategy of the Fund.
As of June 30, 1998, the Fund held 45% of the portfolio in federal agency
securities. This allocation helped to maintain a degree of stability and credit
quality for the Fund. Some of these securities are backed by the full faith and
credit of the United States, which has never defaulted on interest or principal
payments. As with all mutual funds, the Fund is guaranteed neither by the U.S.
Government nor any of its agencies.
With 32% of the portfolio invested in corporate bonds on June 30, 1998, we
attempted to gain potential income and capital appreciation by maintaining a
high level of corporate exposure. On a similar note, we slightly lowered our
exposure to mortgage-backed securities due to the increased prepayment risk
associated with the flat interest rate environment.
To maintain liquidity, we held 16% of the portfolio in U.S. Treasury notes
at the end of the three month reporting period. In this interest rate
environment, we determined it prudent to use these liquid assets to alter the
Fund's duration. This strategy allowed the Fund to capture increased current
income while preserving capital.
PORTFOLIO ALLOCATION (AS OF JUNE 30, 1998)
- ----------------------------------------------------------------------------
INVESTMENTS % OF PORTFOLIO
Cash 3%
Corporate Bonds 32%
Federal Agencies 45%
Foreign Bonds 2%
Treasury Bonds 2%
Treasury Notes 16%
2
<PAGE>
The majority of the securities in the top ten holdings were acquired during
the Fund's growth phase and contributed to its growth. Some are higher yielding
corporate bonds that contribute to the Fund's income level. Overall, these bonds
have longer durations, which helps to maximize the Fund's income potential but
also increases the Fund's volatility in a changing interest rate environment.
Assets in the Short-Intermediate U.S. Government Income Fund increased due
to its consolidation with the Intermediate Bond Fund, which added over $57.7
million in assets. The number of issues in the Fund also grew from 28 bonds and
notes on March 31, 1998 to 51 on June 30, 1998. The additional assets have been
diversified according to the investment policies of the Fund, and should provide
current income for the portfolio.
TOP 10 HOLDINGS (AS OF JUNE 30, 1998)
---------------------------------------------------------------
NAME/COUPON % OF PORTFOLIO
FHLB, 5.53% 5.9%
Pacific Gas & Electric, 7.88% 3.9%
FHLMC, 6.79% 3.9%
FHLMC, 7.01% 3.8%
First Bank Corp., 6.40% 3.8%
FNMA, 6.16% 3.8%
U.S. T-Note, 5.88% 3.8%
FNMA, 6.18% 3.7%
U.S. T-Note, 5.88% 3.6%
U.S. T-Note, 7.88% 3.3%
STRATEGIC OUTLOOK
The nation's economy continues to be healthy but we believe that it may
weaken over time. The Asian crisis may cause further effects such as increasing
the strength of the U.S. dollar and slowing inflation. Given these views, we do
not feel that the Federal Reserve Board will raise interest rates in the near
future. We feel that long-term interest rates may drift lower and short-term
rates will remain stable.
Based on this outlook, we intend to position the Fund with a longer
duration to capture the potential for income and capital appreciation. Our
management team has extensive experience in the bond market, enabling us to
respond quickly to economic conditions and market events. We will continue to
watch the events in Asia and monitor the region's impact on corporate
profitability. This will help us remain sensitive to the performance of the
Fund's corporate bond holdings. While we intend to maintain our corporate bond
exposure, we may decrease it slightly if the U.S. economy is expected to
experience a dramatic slowdown as a result of the events overseas. As always,
we will continue our focus on providing investors with current income and
preservation of capital.
/1/ The formula used to calculate the SEC yield is described in detail in the
Fund's statement of additional information and is designed to standardize the
yield calculations so that all mutual fund companies with the same or similar
portfolios use a uniform method to obtain yield figures for their non-money
market advertisements. SEC yields include the actual amount of interest earned
adjusted by any gain or loss realized due to the return of principal, less
expenses and the maximum offering price calculated on a 30-day month-end basis.
3
<PAGE>
The distribution rate is based on the actual distributions made by the Fund.
The distribution rate is calculated by annualizing the Fund's most recent income
dividend and dividing that figure by the applicable current public offering
price.
Past performance is no guarantee of future results.
SHORT-INTERMEDIATE U.S. GOVERNMENT INCOME FUND
GROWTH OF A $10,000 INVESTMENT
Class A shares
[PERFORMANCE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
SC SHORT INT'D U.S. GOV'T INCOME - A LEHMAN BROTHERS U.S. TREASURY NOTE INDEX
------------------------------------ ----------------------------------------
<S> <C> <C>
Oct-93 $9,700 $10,000
Nov-93 $9,715 $9,950
Dec-93 $9,745 $9,991
Jan-94 $9,807 $10,090
Feb-94 $9,748 $9,948
Mar-94 $9,695 $9,804
Apr-94 $9,661 $9,741
May-94 $9,689 $9,748
Jun-94 $9,697 $9,750
Jul-94 $9,756 $9,877
Aug-94 $9,753 $9,906
Sep-94 $9,632 $9,824
Oct-94 $9,626 $9,827
Nov-94 $9,570 $9,782
Dec-94 $9,608 $9,813
Jan-95 $9,759 $9,973
Feb-95 $9,937 $10,163
Mar-95 $9,988 $10,219
Apr-95 $10,074 $10,337
May-95 $10,300 $10,629
Jun-95 $10,361 $10,699
Jul-95 $10,364 $10,704
Aug-95 $10,434 $10,790
Sep-95 $10,495 $10,862
Oct-95 $10,597 $10,983
Nov-95 $10,710 $11,117
Dec-95 $10,825 $11,228
Jan-96 $10,919 $11,325
Feb-96 $10,825 $11,204
Mar-96 $10,762 $11,149
Apr-96 $10,720 $11,117
May-96 $10,695 $11,111
Jun-96 $10,796 $11,221
Jul-96 $10,825 $11,255
Aug-96 $10,823 $11,269
Sep-96 $10,971 $11,414
Oct-96 $11,108 $11,600
</TABLE>
4
<PAGE>
<TABLE>
<S> <C> <C>
Nov-96 $11,265 $11,739
Dec-96 $11,216 $11,675
Jan-97 $11,288 $11,719
Feb-97 $11,327 $11,736
Mar-97 $11,253 $11,667
Apr-97 $11,382 $11,798
May-97 $11,456 $11,890
Jun-97 $11,549 $11,991
Jul-97 $11,764 $12,215
Aug-97 $11,707 $12,166
Sep-97 $11,825 $12,299
Oct-97 $11,950 $12,443
Nov-97 $11,970 $12,471
Dec-97 $12,065 $12,573
Jan-98 $12,229 $12,742
Feb-98 $12,204 $12,725
Mar-98 $12,230 $12,764
Apr-98 $12,284 $12,824
May-98 $12,376 $12,912
Jun-98 $12,419 $12,999
</TABLE>
The accompanying chart compares the performance of the Stagecoach Short-
Intermediate U.S. Government Income Fund Class A shares since inception with the
Lehman Brothers Treasury Note Index. The chart assumes a hypothetical $10,000
initial investment in Class A shares, reflects all operating expenses and
assumes the maximum initial sales charge of 3.00%. The Lehman Brothers Treasury
Note Index is an unmanaged index of U.S. Treasury 2-10 year notes. The Fund is
a professionally managed mutual fund. The index presented here does not incur
expenses and is not available directly for investment. Had this Index incurred
operating expenses, its performance would have been lower.
AVERAGE ANNUAL RETURNS (as of June 30, 1998)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
Excluding Sales Charge Including Sales Charge
- -------------------------------------------------------------------------------------------------------------------------------
Since Since 10/27/93
Year-to- 1-Year 3-Year 10/27/93 Year-to- 1-Year 3-Year Inception
date Inception date
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Class A 2.93 7.53 6.22 5.44 (0.18) 4.32 5.17 4.75
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Average annual returns represent the average annual change in value of an
investment over the indicated periods assuming reinvestment of dividends and
capital gains distributions. Investment return and principal value of an
investment will fluctuate so that an investor's shares, when redeemed, may be
worth more or less than their original cost. Figures quoted represent past
performance, which is no guarantee of future results. The Fund's manager has
voluntarily waived all or a portion of its management fees or assumed
responsibility for other expenses, which reduces operating expenses and
increases total return to shareholders. Without these reductions the Fund's
returns would have been lower. There is no guarantee that these reductions will
continue. For Class A shares, the maximum front-end sales charge is 3.00%.
5
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
DATED OCTOBER 26, 1998
MASTERWORKS FUNDS INC.
111 Center Street
Little Rock, Arkansas 72201
1-888-204-3956
STAGECOACH FUNDS, INC.
111 Center Street
Little Rock, Arkansas 72201
1-800-222-8222
NOVEMBER 24, 1998 SPECIAL MEETING OF
SHAREHOLDERS OF THE SHORT-INTERMEDIATE TERM FUND
This Statement of Additional Information sets forth certain additional
information about MasterWorks Funds Inc. ("MasterWorks") and MasterWork's Short-
Intermediate Term Fund (the "S-I Term Fund") and Stagecoach Funds, Inc.
("Stagecoach") and Stagecoach's Short-Intermediate U.S. Government Income Fund
(the "Government Fund"). This Statement of Additional Information is not a
prospectus but should be read in conjunction with the Combined
Proxy/Prospectus, also dated October 26, 1998, for the Special Meeting of
Shareholders of the S-I Fund to be held on November 24, 1998. Copies of the
Combined Proxy/Prospectus may be obtained at no charge by calling 1-888-204-
3956 or writing MasterWorks at the address above.
Unless otherwise indicated, capitalized terms used herein and not
otherwise defined have the same meanings as are given to them in the Combined
Proxy/Prospectus. The Combined Proxy/Prospectus and this Statement of Additional
Information are sometimes referred to together as the "Voting Materials."
INCORPORATION OF DOCUMENTS BY REFERENCE
IN THIS STATEMENT OF ADDITIONAL INFORMATION
Further information about the S-I Term Fund and the Government Fund
(together, the "Funds") is contained in other documents previously filed with
the Securities and Exchange Commission (the "SEC"). The following documents are
incorporated herein by reference:
Further information about the S-I Term Fund is contained in and
incorporated by reference to the S-I Term Fund's statement of additional
information, dated June 30, 1998.
1
<PAGE>
Further information about the Government Fund is contained in and incorporated
by reference to the Government Fund's statement of additional information, dated
August 1, 1998.
The audited financial statements and financial highlights for the S-I
Term Fund of MasterWorks and the corresponding Master Portfolio of Managed
Series Investment Trust contained in the Annual Report for the fiscal year
ended February 28, 1998, are hereby incorporated by reference to the Fund's and
Master Portfolio's Annual Report for such period, as filed with the SEC on May
1, 1998.
The audited financial statements and financial highlights for the
Government Fund contained in the Annual Reports for the fiscal period ended
June 30, 1998, are hereby incorporated by reference to the Fund's Annual Report
for such period, as filed with the SEC on September 4, 1998.
2
<PAGE>
NOTE REGARDING PRO FORMA FINANCIAL INFORMATION
The total assets of the Government Fund as of August 31, 1998, were
$134,840,288. The total assets of the S-I Term Fund as of August 31, 1998
were $10,883,231.
Item 14(a)(2) of Form N-14 provides that the pro forma financial
statements required by Rule 11-01 of Regulation S-X need not be prepared if the
net asset value of the company being acquired does not exceed ten percent of the
registrant's net asset value, both of which are measured as of a specified date
within thirty days prior to the date of filing of this registration statement.
Therefore, pro forma financial information is not included in this
registration statement. This registration statement incorporates the audited
financial statements of each Fund by reference to its most recently filed annual
report.
3
