<PAGE> 1
STAGECOACH FUNDS, INC.
Telephone: (800) 222-8222
STATEMENT OF ADDITIONAL INFORMATION
DATED SEPTEMBER 6, 1996
SMALL CAP FUND
CLASS A AND CLASS B
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Stagecoach Funds, Inc. (the "Company") is an open-end, series
investment company. This Statement of Additional Information ("SAI") contains
information about one of the Company's series -- the SMALL CAP FUND (the
"Fund"). The Fund offers three classes of shares -- Class A Shares, Class B
Shares and Institutional Class shares. This SAI relates only to the Class A
Shares and Class B Shares of the Fund. The investment objective of the Fund is
described in the Prospectus under the heading "Investment Objective and
Policies." The Fund seeks to achieve its investment objective by investing all
of its assets in the Small Cap Master Portfolio (at times, the "Master
Portfolio") of Master Investment Trust (the "Trust"), which has the same
investment objective as the Fund. The Fund may withdraw its investment in the
Small Cap Master Portfolio at any time, if the Board of Directors of the
Company determines that such action is in the best interests of the Fund and
its shareholders. Upon such withdrawal, the Company's Board would consider
alternative investments, including investing all of the Fund's assets in
another investment company with the same investment objective as the Fund or
hiring an investment adviser to manage the Fund's assets in accordance with the
investment policies and restrictions described in the Prospectus and below with
respect to the Trust.
This SAI is not a prospectus and should be read in conjunction
with the Fund's Prospectus, dated September 6, 1996. All terms used in this
SAI that are defined in the Prospectus will have the meanings assigned in the
Prospectus. A copy of the Prospectus may be obtained without charge by writing
Stephens Inc., the Company's sponsor, administrator and distributor, at 111
Center Street, Little Rock, Arkansas 72201, or calling the Transfer Agent at
the telephone number indicated above.
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<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Investment Restrictions . . . . . . . . . . . . . . . . . . . . . . . . 1
Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Distribution Plans . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Servicing Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Performance Calculations . . . . . . . . . . . . . . . . . . . . . . . 9
Determination of Net Asset Value . . . . . . . . . . . . . . . . . . . 13
Additional Purchase and Redemption Information. . . . . . . . . . . . . 13
Portfolio Transactions . . . . . . . . . . . . . . . . . . . . . . . . 14
Federal Income Tax . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Capital Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Independent Auditors . . . . . . . . . . . . . . . . . . . . . . . . . 21
Financial Information . . . . . . . . . . . . . . . . . . . . . . . . . 22
Appendix . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-1
Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . F-1
</TABLE>
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INVESTMENT RESTRICTIONS
The following information supplements and should be read in
conjunction with the section in the Prospectus entitled "Investment Objective
and Policies."
FUNDAMENTAL INVESTMENT RESTRICTIONS. The Fund and the Master
Portfolio are subject to the following investment restrictions, all of which
are fundamental policies. These restrictions cannot be changed, as to either
the Fund or the Master Portfolio, without approval by the holders of a majority
(as defined by the 1940 Act) of the outstanding voting securities of the Fund
or the Master Portfolio, as appropriate. Whenever the Fund is requested to
vote on a fundamental policy of the Master Portfolio, the Fund will hold a
meeting of Fund shareholders and it will cast its votes as instructed by such
shareholders.
Neither the Fund nor the Master Portfolio may:
(1) purchase the securities of issuers conducting their
principal business activity in the same industry if, immediately after the
purchase and as a result thereof, the value of the Fund's investments in that
industry would equal or exceed 25% of the current value of the Fund's total
assets, provided that there is no limitation with respect to investments in
securities issued or guaranteed by the United States Government, its agencies
or instrumentalities; and provided further, that the Fund may invest all its
assets in a diversified, open-end management investment company, or a series
thereof, with substantially the same investment objective, policies and
restrictions as such Fund, without regard to the limitations set forth in this
paragraph (1);
(2) purchase or sell real estate (other than securities secured
by real estate or interests therein or securities issued by companies that
invest in real estate or interests therein, including mortgage passthrough
securities), commodities or commodity contracts or interests in oil, gas, or
other mineral exploration or development programs;
(3) purchase securities on margin (except for short-term
credits necessary for the clearance of transactions) or make short sales of
securities;
(4) underwrite securities of other issuers, except to the
extent that the purchase of permitted investments directly from the issuer
thereof or from an underwriter for an issuer and the later disposition of such
securities in accordance with the Fund's investment program may be deemed to be
an underwriting; and provided further, that the purchase by the Fund of
securities issued by a diversified, open-end management investment company, or
a series thereof, with substantially the same investment objective, policies
and restrictions as such Fund shall not constitute an underwriting for purposes
of this paragraph (4);
(5) make investments for the purpose of exercising control or
management; provided that the Fund may invest all its assets in a diversified,
open-end management company, or a series thereof, with substantially the same
investment objective, policies
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and restrictions as such Fund, without regard to the limitations set forth in
this paragraph (5);
(6) issue senior securities, except that the Fund may borrow
from banks up to 10% of the current value of its net assets for temporary
purposes only in order to meet redemptions, and these borrowings may be secured
by the pledge of up to 10% of the current value of its net assets (but
investments may not be purchased while any such outstanding borrowings exceed
5% of its net assets);
(7) make loans of portfolio securities having a value that
exceeds 33 1/3% of the current value of its total assets, provided that, this
restriction does not apply to the purchase of fixed time deposits, repurchase
agreements, commercial paper and other types of debt instruments commonly sold
in a public or private offering; nor
(8) purchase securities of any issuer (except securities issued
or guaranteed by the U.S. Government, its agencies or instrumentalities) if, as
a result, with respect to 75% of its total assets, more than 5% of the value of
its total assets would be invested in the securities of any one issuer or, with
respect to 100% of its total assets, the Fund's ownership would be more than
10% of the outstanding voting securities of such issuer, provided that the Fund
may invest all its assets in a diversified, open-end management investment
company, or a series thereof, with substantially the same investment objective,
policies and restrictions as such Fund, without regard to the limitations set
forth in this paragraph (8).
NON-FUNDAMENTAL INVESTMENT RESTRICTIONS. The Fund and the Master
Portfolio are subject to the following investment restrictions, all of which
are non-fundamental policies. These restrictions may be changed by a vote of a
majority of the Directors of the Company or the Trustees of the Trust, as the
case may be, at any time.
Neither the Fund nor the Master Portfolio may:
(1) purchase or retain securities of any issuer if the officers
or directors of the Fund or its Investment Adviser owning beneficially more
than one-half of one percent (0.5%) of the securities of the issuer together
own beneficially more than 5% of such securities;
(2) purchase or sell real estate limited partnership interests;
(3) invest in securities of issuers who, with their
predecessors, have been in existence less than three years, unless the
securities are fully guaranteed or insured by the U.S. Government if, by reason
thereof, the value of its aggregate investment in such securities will exceed
5% of its total assets;
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(4) purchase securities of any issuer (except securities issued
or guaranteed by the U.S. Government, its agencies or instrumentalities) if, as
a result, more than 5% of the value of the Fund's total assets would be
invested in the securities of any one issuer;
(5) invest more than 15% of the Fund's net assets in illiquid
securities. For this purpose, illiquid securities include, among others, (a)
securities that are illiquid by virtue of the absence of a readily available
market or legal or contractual restrictions on resale, (b) fixed time deposits
that are subject to withdrawal penalties and that have maturities of more than
seven days, and (c) repurchase agreements not terminable within seven days;
(6) In addition, as a matter of non-fundamental policy, the
Fund may invest in shares of other open-end, management investment companies,
subject to the limitations of Section 12(d)(1) of the Act, provided that any
such purchases will be limited to temporary investments in shares of
unaffiliated investment companies and the Investment Adviser will waive its
advisory fees for that portion of the Fund's assets so invested, except when
such purchase is part of a plan of merger, consolidation, reorganization or
acquisition; nor
(7) Invest more than 25% of their respective net assets in
securities of foreign governmental and foreign private issues that are
denominated in and pay interest in U.S. dollars.
Notwithstanding any other investment policy or limitation (whether
or not fundamental), the Fund may invest all of its assets in the securities of
a single open-end management investment company with substantially the same
fundamental investment objective, policies and limitations as the Fund. A
decision to so invest all of its assets may, depending on the circumstances
applicable at the time, require approval of shareholders.
MANAGEMENT
The following information supplements and should be read in
conjunction with the section in the prospectus entitled "Management of the
Fund." The principal occupations during the past five years of the Directors
and principal executive Officer of the Company are listed below. The address
of each, unless otherwise indicated, is 111 Center Street, Little Rock,
Arkansas 72201. Directors deemed to be "interested persons" of the Company
for purposes of the 1940 Act are indicated by an asterisk.
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<TABLE>
<CAPTION>
Principal Occupations
Name, Age and Address Position During Past 5 Years
- --------------------- -------- ---------------------
<S> <C> <C>
Jack S. Euphrat, 74 Director Private Investor.
415 Walsh Road
Atherton, CA 94027.
*R. Greg Feltus, 45 Director, Senior Vice President
Chairman and of Stephens; Manager
President of Financial Services
Group; President of
Stephens
Insurance Services
Inc.; Senior Vice
President of Stephens
Sports Management
Inc.; and President of
Investor Brokerage
Insurance Inc.
Thomas S. Goho, 54 Director T.B. Rose Faculty
321 Beechcliff Court Fellow-Business,
Winston-Salem, NC 27104 Wake Forest University
Calloway School, of
Business and Accountancy;
Associate Professor of
Finance of the School of
Business and Accounting at
Wake Forest University
since 1983.
*Zoe Ann Hines, 47 Director Senior Vice President
of Stephens and
Director of Brokerage
Accounting; and
Secretary of Stephens
Resource
Management.
*W. Rodney Hughes, 70 Director Private Investor.
31 Dellwood Court
San Rafael, CA 94901
Robert M. Joses, 78 Director Private Investor.
47 Dowitcher Way
San Rafael, CA 94901
</TABLE>
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<TABLE>
<S> <C> <C>
*J. Tucker Morse, 52 Director Private Investor;
10 Legrae Street Real Estate Developer;
Charleston, SC 29401 Chairman of Renaissance
Properties Ltd.;
President of Morse
Investment Corporation;
and Co-Managing Partner of
Main Street Ventures.
Richard H. Blank, Jr., 40 Chief Associate of
Operating Financial Services
Officer, Group of Stephens;
Secretary and Director of Stephens
Treasurer Sports Management
Inc.; and Director of
Capo Inc.
</TABLE>
COMPENSATION TABLE
For the Year Ended December 31, 1995
<TABLE>
<CAPTION>
Total Compensation
Aggregate Compensation from Registrant
Name and Position from Registrant and Fund Complex
- ----------------- ---------------------- ------------------
<S> <C> <C>
Jack S. Euphrat $10,188 $39,750
Director
*R. Greg Feltus 0 0
Director
Thomas S. Goho 10,188 39,750
Director
*Zoe Ann Hines 0 0
Director
*W. Rodney Hughes 9,438 37,000
Director
Robert M. Joses 9,938 39,000
Director
</TABLE>
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<TABLE>
<S> <C> <C>
*J. Tucker Morse 8,313 33,250
Director
</TABLE>
Directors of the Company are compensated annually by the Company and
by all the registrants in the fund complex for their services as indicated
above and also are reimbursed for all out-of-pocket expenses relating to
attendance at board meetings. Each of the Directors and Officers of the
Company serves in the identical capacity as directors and officers of Overland
Express Funds, Inc. and MasterWorks Funds Inc. (formerly, Stagecoach Inc.), and
as trustees and/or officers of Stagecoach Trust, Master Investment Portfolio,
Life & Annuity Trust, Master Investment Trust and Managed Series Investment
Trust, each of which is a registered open-end management investment company and
each of which, prior to January 1, 1996 and the reorganization of Wells Fargo
Nikko Investment Advisors, a former affiliate of Wells Fargo, was considered to
be in the same "fund complex," as such term is defined in Form N-1A under the
1940 Act, as the Company. Effective January 1, 1996, the Company, Overland
Express Funds, Inc., Stagecoach Trust, Life & Annuity Trust and Master
Investment Trust are considered to be members of the same fund complex and are
no longer part of the same fund complex as MasterWorks Funds Inc., Master
Investment Portfolio and Managed Series Investment Trust. The Directors are
compensated by other companies and trusts within the fund complex for their
services as directors/trustees to such companies and trusts. Currently the
Directors do not receive any retirement benefits or deferred compensation from
the Company or any other member of the fund complex.
As of the date of this SAI, Directors and Officers of the Company
as a group beneficially owned less than 1% of the outstanding shares of the
Company.
Investment Adviser. The Fund has not engaged an investment
adviser. The Master Portfolio (which has the same investment objective as the
Fund, and in which the Fund invests all its assets) is advised by Wells Fargo.
The Advisory Contract provides that Wells Fargo shall furnish to the Master
Portfolio investment guidance and policy direction in connection with the daily
portfolio management of the Master Portfolio. Pursuant to the Advisory
Contract, Wells Fargo furnishes to the Board of Trustees of the Trust periodic
reports on the investment strategy and performance of the Master Portfolio.
For its services as investment adviser to the Master Portfolio, Wells Fargo is
entitled to receive a monthly fee at the annual rate of 0.60% of the Master
Portfolio's average daily net assets.
Wells Fargo has agreed to provide to the Master Portfolio, among
other things, money market security and fixed-income research, analysis and
statistical and economic data and information concerning interest rate and
security market trends, portfolio composition, credit conditions and average
maturities of the Master Portfolio.
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The Advisory Contract will continue in effect for more than two
years provided the continuance is approved annually (i) by the holders of a
majority of the Master Portfolio's outstanding voting securities or by the
Trust's Board of Trustees and (ii) by a majority of the Trustees of the Trust
who are not parties to the Advisory Contract or "interested persons" (as
defined in the Act) of any such party. The Advisory Contract may be terminated
on 60 days' written notice by either party and will terminate automatically if
assigned.
Administrator and Distributor. The Company has retained Stephens
as administrator and distributor on behalf of the Fund. In addition, the Trust
has retained Stephens as administrator on behalf of the Master Portfolio.
Under the respective Administration Agreements with the Company and the Trust,
Stephens furnishes the Company and the Trust with office facilities, together
with those ordinary clerical and bookkeeping services that are not furnished by
Wells Fargo. Stephens also has entered into a Distribution Agreement with the
Company pursuant to which Stephens has the responsibility of distributing
shares of the Fund. For its services as administration to the Fund, Stephens
is entitled to receive a monthly fee at the annual rate of 0.05% of the Fund's
average daily net assets.
Custodian and Transfer and Dividend Disbursing Agent. Wells Fargo
has been retained to act as custodian and transfer and dividend disbursing
agent for the Fund and the Master Portfolio. The custodian, among other
things, maintains a custody account or accounts in the name of the Fund and the
Master Portfolio, receives and delivers all assets for the Fund and the Master
Portfolio upon purchase and upon sale or maturity, collects and receives all
income and other payments and distributions on account of the assets of the
Fund and the Master Portfolio and pays all expenses of the Fund and the Master
Portfolio. For its services as custodian, Wells Fargo is entitled to receive
fees as follows: a net asset charge at the annual rate of 0.0167%, payable
monthly, plus specified transaction charges. Wells Fargo also will provide
portfolio accounting services under the Custody Agreement as follows: a monthly
base fee of $2,000 plus a net asset fee at the annual rate of 0.070% of the
first $50,000,000 of the Fund's average daily net assets, 0.045% of the next
$50,000,000, and 0.020% of the average daily net assets in excess of
$100,000,000.
For its services as transfer and dividend disbursing agent for the
Fund, Wells Fargo is entitled to receive monthly payments at the annual rate of
0.07% of the Fund's average daily net assets.
Collective Investment Fund Management Fees. Prior to September
__, 1996, Wells Fargo provided management and administrative services to the
Collective Investment Fund. For these services Wells Fargo charged fees at an
annual rate of 0.75% of the Collective Investment Fund's average net assets.
Wells Fargo was also entitled to be reimbursed by the Collective Investment
Fund for expenses incurred on its behalf, excluding costs incurred in
establishing and organizing the Fund. The Collective Investment Fund was
entitled to pay up to 0.10% of its net assets for "Audit Expenses."
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There were no sales charges. The Collective Investment Fund paid all brokerage
commissions incurred on its portfolio transactions.
DISTRIBUTION PLANS
The following information supplements and should be read in
conjunction with the Prospectus section entitled "Distribution Plans." As
indicated in the Prospectus, the Fund, on behalf of each of its classes of
shares, has adopted a Plan under Section 12(b) of the Act and Rule 12b-1
thereunder (the "Rule"). Each Plan was adopted by a majority of the directors
who were not "interested persons" (as defined in the Act) of the Fund and who
had no direct or indirect financial interest in the operation of the Plans or
in any agreement related to the Plans (the "Qualified Directors").
Under the Distribution Agreement for the Class A Shares, Stephens
is entitled to receive from the Fund, as reimbursement for all or part of the
cost of preparing and printing prospectuses and other promotional materials and
of delivering prospectuses and those materials to prospective shareholders and
as reimbursement for other distribution-related services, a fee computed on a
monthly basis at an annual rate of up to 0.10% of the average daily net assets
of the Class A Shares of the Fund.
Under the Distribution Agreement for the Class B Shares, Stephens
is entitled to receive from the Fund as compensation for distribution-related
services provided or as reimbursement for distribution-related expenses
incurred, a monthly fee at an annual rate of up to 0.75% of the average daily
net assets of the Class B Shares of the Fund.
Each Plan will continue in effect from year to year if its
continuance is approved by a majority vote of both the directors of the Company
and the Qualified Directors. Agreements related to the Plans also must be
approved by such vote of the directors and the Qualified Directors. Such
agreements will terminate automatically if assigned, and may be terminated at
any time, without payment of any penalty, by a vote of a majority of the
outstanding voting securities of the Fund. The Plans may not be amended to
increase materially the amounts payable thereunder without the approval of a
majority of the outstanding voting securities of the Fund, and no material
amendment to a Plan may be made except by a majority of both the directors of
the Company and the Qualified Directors.
The Plans require that the Treasurer of the Fund shall provide to
the directors, and the directors shall review, at least quarterly, a written
report of the amounts expended (and purposes therefore) under such Plan. The
Rule also requires that the selection and nomination of directors who are not
"interested persons" of the Company be made by such disinterested directors.
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SERVICING PLAN
The Company's Board of Directors, on behalf of the Fund, adopted a
Servicing Plan ("Servicing Plan") on August __, 1996, with respect to each
class of the Fund's shares. The Servicing Plan was approved by a majority of
the Directors who were not "interested persons" (as defined in the Act) of the
Fund and who had no direct or indirect financial interest in the operation of
the Servicing Plan or in any agreement related to the Servicing Plan (the
"Servicing Plan Non-Interested Directors").
Under the Servicing Plan and pursuant to the shareholder servicing
agreements for the Class A or B Shares, the Fund may pay one or more servicing
agents, as compensation for performing certain services, a fee at an annual
rate of up to 0.25% of the average daily net assets of the Fund's Class A or B
Shares attributable to the servicing agent's customers. The actual fee payable
to servicing agents is determined, within such limits, from time to time by
mutual agreement between the Company and each servicing agent and will not
exceed the maximum service fees payable by mutual funds sold by members of the
NASD under the NASD Rules of Fair Practice.
Each Servicing Plan continues in effect from year to year if such
continuance is approved by a majority vote of both the Directors of the Company
and the Servicing Plan Non-Interested Directors. Any form of servicing
agreement related to the Servicing Plan also must be approved by such vote of
the Directors and the Servicing Plan Non-Interested Directors. Servicing
agreements may be terminated at any time, without payment of any penalty, by
vote of a majority of the Servicing Plan Non-Interested Directors. No material
amendment to the Servicing Plans may be made except by a majority of both the
Directors of the Company and the Servicing Plan Non-Interested Directors.
Each Servicing Plan requires that the administrator shall provide
to the Directors, and the Directors shall review, at least quarterly, a written
report of the amounts expended (and purposes therefor) under the Servicing
Plan.
PERFORMANCE CALCULATIONS
The following information supplements and should be read in
conjunction with the sections in the Prospectus entitled "Investing in the Fund
- -- Share Value" and "How the Fund Works -- Performance."
As indicated in the Prospectus, the Fund may advertise certain
total return information for a class of shares, computed in the manner
described in the Prospectus. As and to the extent required by the Commission,
an average annual compound rate of return ("T") will be computed by using the
redeemable value at the end of a specified period ("ERV") of a hypothetical
initial investment in a class of shares ("P") over a period of years ("n")
according to the following formula: P(1+T)n = ERV. In addition, as indicated
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<PAGE> 12
in the Prospectus, the Fund also may, at times, calculate total return for a
class of shares based on net asset value per share (rather than the public
offering price), in which case the figures would not reflect the effect of any
sales charges that would have been paid by an investor, or would be based on
the assumption that a sales charge other than the maximum sales charge
(reflecting a Volume Discount) was assessed, provided that total return data
derived pursuant to the calculation described above also are presented.
In addition to the above performance information, the Fund may
also advertise the cumulative total return of a class. The cumulative total
return for such periods is based on the overall percentage change in value of a
hypothetical investment in a class of shares, assuming all dividends and
capital gain distributions are reinvested in shares of that class, without
reflecting the effect of any sales charge that would be paid by an investor,
and is not annualized.
Performance information may be advertised for non-standardized
periods, including year-to-date and other periods less than a year.
The total return information presented below and advertised by the
Fund for the period prior to September 6, 1996, the date the Fund commenced
operations, is based upon the prior performance of the Collective Investment
Fund. The performance information is adjusted to reflect each class' current
level of operating expenses.
Average Annual Total Return*
<TABLE>
<CAPTION>
Commencement of Commencement
Operations to Year Ended of Operations to
Class 12/31/95 12/31/95 8/31/96
----- --------------- ---------- ----------------
<S> <C> <C> <C>
A 57.90% 61.45% 47.88%
B 61.55% 64.93% 49.88%
</TABLE>
_____________________
*Reflects the performance of the Collective Investment Fund adjusted to reflect
the current level of expenses and up-front or contingent deferred sales
charges applicable to each class of shares.
Cumulative Total Return*
<TABLE>
<CAPTION>
Commencement of Commencement of Eight-Month
Operations to Operations to Period Ended
Class 12/31/95 8/31/96 8/31/96
----- --------------- --------------- ------------
<S> <C> <C> <C>
A 70.39% 104.87% 14.83%
B 75.00% 110.00% 16.77%
</TABLE>
_____________________
*Reflects the performance of the Collective Investment Fund adjusted to reflect
the current level of expenses and up- front or contingent deferred sales
charges applicable to each class of shares.
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From time to time and only to the extent the comparison is
appropriate for a class of shares of the Fund, the Company may quote the
performance or price-earning ratio of a class of shares of the Fund in
advertising and other types of literature as compared to the performance of the
1-Year Treasury Bill Rate, the S&P Index, the Dow Jones Industrial Average, the
Lehman Brothers 20+ Years Treasury Index, the Lehman Brothers 5-7 Year Treasury
Index, Donoghue's Money Fund Averages, Real Estate Investment Averages (as
reported by the National Association of Real Estate Investment Trusts), Gold
Investment Averages (provided by the World Gold Council), Bank Averages (which
is calculated from figures supplied by the U.S. League of Savings Institutions
based on effective annual rates of interest on both passbook and certificate
accounts), average annualized certificate of deposit rates (from the Federal
Reserve G-13 Statistical Releases or the Bank Rate Monitor), the Salomon One
Year Treasury Benchmark Index, the Consumer Price Index (as published by the
U.S. Bureau of Labor Statistics), Ten Year U.S. Government Bond Average, S&P's
Corporate Bond Yield Averages, Schabacter Investment Management Indices,
Salomon Brothers High Grade Bond Index, Lehman Brothers Long-Term High Quality
Government/Corporate Bond Index, other managed or unmanaged indices or
performance data of bonds, stocks or government securities (including data
provided by Ibbotson Associates), or by other services, companies, publications
or persons who monitor mutual funds on overall performance or other criteria.
The S&P Index and the Dow Jones Industrial Average are unmanaged indices of
selected common stock prices. The performance of a class of shares of the Fund
also may be compared to the performance of other mutual funds having similar
objectives. This comparative performance could be expressed as a ranking
prepared by Lipper Analytical Services, Inc., CDA Investment Technologies,
Inc., Bloomberg Financial Markets or Morningstar, Inc., independent services
which monitor the performance of mutual funds. The performance of a class of
shares of the Fund will be calculated by relating net asset value per share at
the beginning of a stated period to the net asset value of the investment,
assuming reinvestment of all gains distributions and dividends paid, at the end
of the period. Any such comparisons may be useful to investors who wish to
compare the class' past performance with that of its competitors. Of course,
past performance cannot be a guarantee of future results. The Company also may
include, from time to time, a reference to certain marketing approaches of the
Distributor, including, for example, a reference to a potential shareholder
being contacted by a selected broker or dealer. General mutual fund statistics
provided by the Investment Company Institute may also be used.
In addition, the Company also may use, in advertisements and other
types of literature, information and statements: (1) showing that bank savings
accounts offer a guaranteed return of principal and a fixed rate of interest,
but no opportunity for capital growth; and (2) describing Wells Fargo, and its
affiliates and predecessors, as one of the first investment managers to advise
investment accounts using asset allocation and index strategies. The Company
also may include in advertising and other types of literature information and
other data from reports and studies prepared by the Tax Foundation, including
information regarding federal and state tax levels and the related "Tax Freedom
Day."
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<PAGE> 14
The Company also may use the following information in
advertisements and other types of literature, only to the extent the
information is appropriate for a class of shares of the Fund: (i) the Consumer
Price Index may be used to assess the real rate of return from an investment in
a class of shares of the Fund; (ii) other government statistics, including, but
not limited to, The Survey of Current Business, may be used to illustrate
investment attributes of a class of shares of the Fund or the general economic,
business, investment, or financial environment in which the Fund operates;
(iii) the effect of tax-deferred compounding on the investment returns of a
class of shares of the Fund, or on returns in general, may be illustrated by
graphs, charts, etc., where such graphs or charts would compare, at various
points in time, the return from an investment in a class of shares of the Fund
(or returns in general) on a tax-deferred basis (assuming reinvestment of
capital gains and dividends and assuming one or more tax rates) with the return
on a taxable basis; and (iv) the sectors or industries in which the Fund
invests may be compared to relevant indices of stocks or surveys (e.g., S&P
Industry Surveys) to evaluate the historical performance or current or
potential value of a class of shares of the Fund with respect to the particular
industry or sector.
From time to time the Company may reprint, reference or otherwise
use material from magazines, newsletters, newspapers and books including, but
not limited to the Wall Street Journal, Money Magazine, Barrons, Kiplingers,
Business Week, Fortune, Forbes, the San Francisco Chronicle, the San Jose
Mercury News, The New York Times, the Los Angeles Times, the Boston Globe, the
Washington Post, the Chicago Sun-Times, Investor Business Daily, Worth, Bank
Investor, American Banker, Smart Money, the 100 Best Mutual Funds (Adams
Publishing), Morningstar or Value Line.
The Company may also disclose in advertising and other types of
literature, information and statements the distribution rate on the shares of
each class of the Fund. Distribution rate is the amount determined by dividing
the dollar amount per share of the most recent dividend by the most recent NAV
per share.
The Company also may discuss in advertising and other types of
literature that the Fund has been assigned a rating by an NRSRO, such as S&P or
Moody's. Such rating would assess the creditworthiness of the investments held
by the Fund. The assigned rating would not be a recommendation to purchase,
sell or hold the Fund's shares since the rating would not comment on the market
price of the Fund's shares or the suitability of the Fund for a particular
investor. In addition, the assigned rating would be subject to change,
suspension or withdrawal as a result of changes in, or the unavailability of,
information relating to the Fund or its investments. The Company may compare
the performance of the Fund with other investments that are assigned ratings by
the NRSROs. Any such comparisons may be useful to investors who wish to
compare the Fund's past performance with other rated investments.
The Company also may disclose, in advertising and other types of
literature, information and statements that the Company's investment adviser,
Wells Fargo, is listed in Nelson Publications' ("Nelson's") "Top 20"
performance rankings as published in the
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1994 edition of "America's Best Money Managers." The Nelson survey ranks the
performance of money managers in over 30 asset/style categories and is based on
analysis of performance composites and surveys of institutional money managers.
The Company may also disclose in advertising and other types of sales literature
the assets and categories of assets under management by the Company's investment
adviser and the total amount of assets under management by Wells Fargo
Investment Management Group ("IMG") or the amount of assets and mutual fund
assets managed by Wells Fargo Bank. As of December 31, 1995, IMG had $30.1
billion in assets under management. As of June 30, 1996, Wells Fargo Bank and
its affiliates provided investment advisory services for approximately $56
billion of assets of individuals, trusts, estates and institutions and $17
billion of mutual fund assets.
The Company may disclose in advertising and other types of literature
that investors can open and maintain Sweep Accounts over the Internet or
through other electronic channels (collectively, "Electronic Channels"). Such
advertising and other literature may discuss the investment options available
to investors, including the types of accounts and any applicable fees. Such
advertising and other literature may disclose that Wells Fargo Bank is the
first major bank to offer an on-line application for a mutual fund account that
can be filled out completely through Electronic Channels. Advertising and other
literature may disclose that Wells Fargo Bank may maintain Web sites, pages or
other information sites accessible through Electronic Channels (an "Information
Site") and may describe the contents and features of the Information Site and
instruct investors on how to access the Information Site and open a Sweep
Account. Advertising and other literature may also disclose the procedures
employed by Wells Fargo Bank to secure information provided by investors,
including disclosure and discussion of the tools and services for accessing
Electronic Channels. Such advertising or other literature may include
discussions of the advantages of establishing and maintaining a Sweep Account
through Electronic Channels and testimonials from Wells Fargo Bank customers or
employees and may also include descriptions of locations where product
demonstrations may occur. The Company may also disclose the ranking of Wells
Fargo Bank as one of the largest money managers in the United States.
DETERMINATION OF NET ASSET VALUE
The following information supplements and should be read in conjunction
with the Prospectus section entitled "Investing in the Fund." Net asset value
per share for each class of the Fund and net asset value per unit of the Master
Portfolio are each determined by Wells Fargo on each day the Exchange is open
for trading as of the close of regular trading on the Exchange, which is
currently 1:00 p.m. Pacific time.
Securities of the Master Portfolio for which market quotations are
available are valued at latest prices. Any security for which the primary
market is an exchange is valued at the last sale price on such exchange on the
day of valuation or, if there was no sale on such day, the latest bid price
quoted on such day. In the case of other securities, including U.S. Government
securities but excluding money market instruments maturing in 60 days or less,
the valuations are based on latest quoted bid prices. Money market instruments
maturing in 60 days or less are valued at amortized cost. The assets of the
Master Portfolio other than money market instruments maturing in 60 days or
less are valued at latest quoted bid prices. Prices may be furnished by a
reputable independent pricing service approved by the Board of Trustees. Prices
provided by an independent pricing service may be determined without exclusive
reliance on quoted prices and may take into account appropriate factors such as
institutional-size trading in similar groups of securities, yield, quality,
coupon rate, maturity, type of issue, trading characteristics and other market
data. All other securities and other assets of the Master Portfolio for which
current market quotations are not readily available are valued at fair value as
determined in good faith by the Trust's Trustees and in accordance with
procedures adopted by the Trustees.
Expenses and fees, including advisory fees are accrued daily and are
taken into account for the purpose of determining the net asset value of the
Master Portfolio's interests and the Fund's shares.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
Payment for shares may, in the discretion of the adviser, be made in
the form of securities that are permissible investments for the Funds as
described in the Prospectuses. For further information about this form of
payment please contact Stephens. In
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connection with an in-kind securities payment, the Funds will require, among
other things, that the securities be valued on the day of purchase in
accordance with the pricing methods used by a Fund and that such Fund receives
satisfactory assurances that (i) it will have good and marketable title to the
securities received by it; (ii) that the securities are in proper form for
transfer to the Fund; and (iii) adequate information will be provided
concerning the basis and other matters relating to the securities.
Under the 1940 Act, the Funds may suspend the right of redemption or
postpone the date of payment upon redemption for any period during which the
NYSE is closed (other than customary weekend and holiday closings, or during
which trading is restricted, or during which as determined by the SEC by rule
or regulation) an emergency exists as a result of which disposal or valuation
of portfolio securities is not reasonably practicable, or for such periods as
the SEC may permit.
The Company may suspend redemption rights or postpone redemption
payments for such periods as are permitted under the 1940 Act. The Company may
also redeem shares involuntarily or make payment for redemption in securities
or other property if it appears appropriate to do so in light of the Company's
responsibilities under the 1940 Act.
In addition, the Company may redeem shares involuntarily to reimburse
the Funds for any losses sustained by reason of the failure of a shareholders
to make full payment for shares purchased or to collect any charge relating to
a transaction effected for the benefit of a shareholder which is applicable to
shares of a Fund as provided from time to time in the Prospectus.
PORTFOLIO TRANSACTIONS
Purchases and sales of securities by the Master Portfolio are
usually principal transactions. Portfolio securities normally are purchased or
sold from or to dealers serving as market makers for the securities at a net
price. The Master Portfolio also may purchase portfolio securities in
underwritten offerings and may purchase securities directly from the issuer.
The cost of executing the Master Portfolio's portfolio securities transactions
consists primarily of dealer spreads and underwriting commissions. Under the
1940 Act, persons affiliated with the Trust are prohibited from dealing with
the Trust as a principal in the purchase and sale of securities unless an
exemptive order or other relief allowing such transactions is obtained from the
SEC or an exemption is otherwise available. The Master Portfolio may purchase
securities from underwriting syndicates of which Stephens or Wells Fargo is a
member under certain conditions in accordance with the provisions of a rule
adopted under the 1940 Act and in compliance with procedures adopted by the
Board of Trustees.
The Trust has no obligation to deal with any dealer or group of
dealers in the execution of transactions in portfolio securities. Subject to
policies established by the Trust's Board of Trustees, Wells Fargo is
responsible for the Master Portfolio decisions
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<PAGE> 17
and the placing of portfolio transactions. In placing orders, it is the policy
of the Trust to obtain the best overall terms taking into account the
dealer's general execution and operational facilities, the type of transaction
involved and other factors such as the dealer's risk in positioning the
securities involved. While Wells Fargo generally seeks reasonably competitive
spreads or commissions, the Master Portfolio will not necessarily be paying the
lowest spread or commission available.
In assessing the best overall terms available for any transaction,
Wells Fargo Bank considers factors deemed relevant, including the breadth of
the market in the security, the price of the security, the financial condition
and execution capability of the broker or dealer, and the reasonableness of the
commission, if any, both for the specific transaction and on a continuing
basis. Wells Fargo Bank may cause the Master Portfolio to pay a broker/dealer
which furnishes brokerage and research services a higher commission than that
which might be charged by another broker/dealer for effecting the same
transaction, provided that Wells Fargo Bank determines in good faith that such
commission is reasonable in relation to the value of the brokerage and research
services provided by such broker/dealer, viewed in terms of either the
particular transaction or the overall responsibilities of Wells Fargo Bank.
Such brokerage and research services might consist of reports and statistics
relating to specific companies or industries, general summaries of groups of
stocks or bonds and their comparative earnings and yields, or broad overviews
of the stock, bond, and government securities markets and the economy.
Supplementary research information so received is in addition to,
and not in lieu of, services required to be performed by Wells Fargo Bank and
does not reduce the advisory fees payable by the Master Portfolio. The Board
of Trustees will periodically review the commissions paid by the Master
Portfolio to consider whether the commissions paid over representative periods
of time appear to be reasonable in relation to the benefits inuring to the
Master Portfolio. It is possible that certain of the supplementary research
or other services received will primarily benefit one or more other investment
companies or other accounts for which investment discretion is exercised.
Conversely, the Master Portfolio may be the primary beneficiary of the research
or services received as a result of portfolio transactions effected for such
other account or investment company.
Under Section 28(e) of the Securities Exchange Act of 1934, an
adviser shall not be "deemed to have acted unlawfully or to have breached its
fiduciary duty" solely because under certain circumstances it has caused the
account to pay a higher commission than the lowest available. To obtain the
benefit of Section 28(e), an adviser must make a good faith determination that
the commissions paid are "reasonable in relation to the value of the brokerage
and research services provided . . . viewed in terms of either that particular
transaction or its overall responsibilities with respect to the accounts as to
which it exercises investment discretion and that the services provided by a
broker provide an adviser with lawful and appropriate assistance in the
performance of its investment decision-making responsibilities." Accordingly,
the price to the Master Portfolio in any transaction may be less favorable
than that available from another broker/dealer if the difference is reasonably
justified by other aspects of the portfolio execution services offered.
Broker/dealers utilized by Wells Fargo Bank may furnish
statistical, research and other information or services which are deemed by
Wells Fargo Bank to be beneficial to the Master Portfolio's investment
programs. Research services received from brokers supplement Wells Fargo
Bank's own research and may include the following types of information:
statistical and background information on industry groups and individual
companies; forecasts and interpretations with respect to U.S. and foreign
economies, securities, markets, specific industry groups and individual
companies; information on political developments; portfolio management
strategies; performance information on securities and information concerning
prices of securities; and information supplied by specialized services to Wells
Fargo Bank and to the Trust's Trustees with respect to the performance,
investment activities and fees and expenses of other mutual Funds. Such
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<PAGE> 18
information may be communicated electronically, orally or in written form.
Research services may also include the providing of equipment used to
communicate research information, the arranging of meetings with management of
companies and the providing of access to consultants who supply research
information.
The outside research assistance is useful to Wells Fargo Bank
since the brokers utilized by Wells Fargo Bank as a group tend to follow a
broader universe of securities and other matters than the staff of Wells Fargo
Bank can follow. In addition, this research provides Wells Fargo Bank with a
diverse perspective on financial markets. Research services which are provided
to Wells Fargo Bank by brokers are available for the benefit of all accounts
managed or advised by Wells Fargo Bank. It is the opinion of Wells Fargo Bank
that this material is beneficial in supplementing their research and analysis;
and, therefore, it may benefit the Master Portfolio by improving the quality
of Wells Fargo Bank's investment advice. The advisory fees paid by the Master
Portfolio are not reduced because Wells Fargo Bank receives such services.
Portfolio Turnover. Portfolio turnover generally involves some
expenses to the Master Portfolio, including brokerage commissions or dealer
mark-ups and other transactions costs on the sale of securities and the
reinvestment in other securities. A high portfolio turnover rate should not
result in the Master Portfolio paying substantially more brokerage commissions,
since most transactions in government securities and municipal securities are
effected on a principal basis. Portfolio turnover also can generate short-term
capital gains tax consequences. The portfolio turnover rate will not be a
limiting factor when Wells Fargo deems portfolio changes appropriate.
FEDERAL INCOME TAX
The following information supplements and should be read in
conjunction with the Prospectus sections entitled "Dividends" and "Taxes." The
Prospectus describes generally the tax treatment of distributions by the
Company. This section of the SAI includes additional information concerning
federal income tax.
Qualification of the Fund as a regulated investment company under
the Code requires, among other things, that (i) the Fund derive (a) at least
90% of its annual gross income from interest, payments with respect to
securities loans, dividends and gains from the sale or other disposition of
securities or options thereon; (ii) the Fund derive less than 30% of its gross
income from gains from the sale or other disposition of securities or options
thereon held for less than three months; and (iii) the Fund diversify its
holdings so that, at the end of each quarter of the taxable year, (a) at least
50% of the market value of the Fund's assets is represented by cash, government
securities and other securities limited in respect of any one issuer to an
amount not greater than 5% of the Fund's assets and 10% of the outstanding
voting securities of such issuer, and (b) not more than 25% of the value of the
Fund's assets is invested in the securities of any one issuer (other than U.S.
Government securities or the securities of other regulated investment
companies), or in
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<PAGE> 19
two or more issuers which the Fund controls and which are engaged in the same
or similar trades or businesses. As a regulated investment company, the Fund
will not be subject to federal income tax on its net investment income and net
capital gains distributed to its shareholders, provided that it distributes to
its stockholders at least 90% of the sum of its net investment income and net
tax-exempt income earned in each year.
A 4% nondeductible excise tax will be imposed on the Fund to the
extent it does not meet certain minimum distribution requirements by the end of
each calendar year. For this purpose, any income or gain retained by the Fund
that is subject to income tax will be considered to have been distributed by
year-end. In addition, dividends and distributions declared payable as of a
record date in October, November or December of any calendar year are deemed
under the Code to have been distributed by the Fund and received by the
shareholders on December 31 of that calendar year if the dividend is actually
paid no later than January 31 of the following year. Such dividends will,
accordingly, be subject to income tax for the year in which the record date
falls. The Fund intends to distribute substantially all of its net investment
income and net capital gains and, thus, expects to avoid the excise tax.
Income and dividends received by the Fund from sources within
foreign countries may be subject to withholding and other taxes (generally at
rates from 10% to 40%) imposed by such countries. Tax conventions between
certain countries and the United States may reduce or eliminate such taxes.
Because the Fund does not expect to hold more than 50% of the value of its
total assets in securities of foreign issuers, the Fund does not expect to be
eligible to elect to "pass through" foreign tax credits to shareholders.
The Master Portfolio will be treated as a non-publicly traded
partnership rather than as a regulated investment company or a corporation
under the Code. As a non-publicly traded partnership under the Code, any
interest, dividends and gains or losses of the Master Portfolio will be deemed
to have been "passed through" to the Fund and other investors in the Master
Portfolio, regardless of whether such interest, dividends or gains have been
distributed by the Master Portfolio or losses have been realized by the Fund
and other investors. Therefore, to the extent the Master Portfolio were to
accrue but not distribute any interest, dividends or gains, or accrue losses,
the Fund would be deemed to have realized and recognized its proportionate
share of interest, dividends, gains or losses without receipt of any
corresponding distribution. However, the Trust will seek to minimize
recognition by investors of interest, dividends, gains or losses without a
corresponding distribution.
Gains or losses on sales of portfolio securities by the Master
Portfolio will be long-term capital gains or losses if the securities have been
held by it for more than one year, except in certain cases including the case
where the Master Portfolio acquires a put or writes a call thereon. Other
gains or losses on the sale of securities will be short-term capital gains or
losses. To the extent that the Fund recognizes long-term capital gains, such
gains will be distributed at least annually. Such distributions will be
taxable to shareholders as long-term capital gains, regardless of how long a
shareholder has held
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<PAGE> 20
Fund shares. Such distributions will be designated as capital gain
distributions in a written notice mailed by the Fund to shareholders not later
than 60 days after the close of the Fund's taxable year. If a shareholder
receives such a designated capital gain distribution (to be treated by the
shareholder as a long-term capital gain) with respect to any Fund share and
such Fund share is held for six months or less, then (unless otherwise
disallowed) any loss on the sale or exchange of that Fund share will be treated
as a long-term capital loss to the extent of the designated capital gain
distribution. Gain recognized on the disposition of a debt obligation
(including tax-exempt obligations purchased after April 30, 1993) purchased by
the Master Portfolio at a market discount (generally, at a price less than its
principal amount) will be treated as ordinary income to the extent such accrued
market discount had not been previously included as taxable income during the
period of time the Master Portfolio held the debt obligation.
As of the printing of this SAI, the maximum individual tax rate
applicable to ordinary income is 39.6% (effective rates may be higher for some
individuals due to phase out of exemptions and eliminations of deductions); the
maximum individual marginal tax rate applicable to net capital gains is 28%;
and the maximum marginal corporate tax rate applicable to ordinary income and
net capital gains is 35% (except that to eliminate the benefit of lower
marginal corporate income tax rates, corporations which have taxable income in
excess of $100,000 for a taxable year will be required to pay an additional
amount of income tax up to $11,750 on taxable income exceeding $100,000 in a
taxable year and corporations which have taxable income in excess of
$15,000,000 for a taxable year will be required to pay an additional tax of up
to $100,000). Naturally, the amount of tax payable by an individual or
corporation will be affected by a combination of tax laws covering, for
example, deductions, credits, deferrals, exemptions, sources of income and
other matters.
If a shareholder exchanges or otherwise disposes of shares of the
Fund within 90 days of having acquired such shares and if, as a result of
having acquired those shares, the shareholder subsequently pays a reduced sales
charge for shares of the Fund or of a different fund, the sales charge
previously incurred in acquiring the Fund's shares shall not be taken into
account (to the extent such previous sales charges do not exceed the reduction
in sales charges) for the purpose of determining the amount of gain or loss on
the exchange, but will be treated as having been incurred in the acquisition of
such other shares.
Also, any loss realized on a redemption or exchange of shares of
the Fund will be disallowed to the extent that substantially identical shares
are reacquired within the 61-day period beginning 30 days before and ending 30
days after the shares are disposed of.
If, in the opinion of the Company, ownership of its shares has or
may become concentrated to an extent that could cause the Company to be deemed
a personal holding company within the meaning of the Code, the Company may
require the redemption of shares or reject any order for the purchase of shares
in an effort to prevent such concentration.
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Foreign Shareholders. Under the Code, distributions of net
investment income by the Fund to a nonresident alien individual, nonresident
alien fiduciary of a trust or estate, foreign corporation, or foreign
partnership (a "foreign shareholder") will be subject to U.S. withholding tax
(at a rate of 30% or a lower treaty rate). Withholding will not apply if a
dividend paid by the Fund to a foreign shareholder is "effectively connected"
with a U.S. trade or business, in which case the reporting and withholding
requirements applicable to U.S. citizens, U.S. residents or domestic
corporations will apply. Distributions of net long-term capital gains are not
subject to tax withholding, but in the case of a foreign shareholder who is a
nonresident alien individual, such distributions ordinarily will be subject to
U.S. income tax at a rate of 30% if the individual is physically present in the
U.S. for more than 182 days during the taxable year.
Other Matters. Investors should be aware that the investments to
be made by the Master Portfolio may involve sophisticated tax rules such as
marked to market rules that would result in income or gain recognition by the
Master Portfolio without corresponding current cash receipts. Although the
Master Portfolio will seek to avoid significant noncash income, such noncash
income could be recognized by the Master Portfolio, in which case the Master
Portfolio may distribute cash derived from other sources in order to meet the
minimum distribution requirements described above.
CAPITAL STOCK
The following information supplements and should be read in
conjunction with the section in the Prospectus entitled "The Fund, the Master
Portfolio and Management."
The Company, an open-end management investment company, was
incorporated in Maryland on September 9, 1991. The authorized capital stock of
the Company consists of 48,000,000,000 shares having a par value of $.001 per
share. As of the date of this SAI, the Company's Board of Directors has
authorized the issuance of twenty-four series of shares, each representing an
interest in one of the Company's funds -- the Aggressive Growth, Arizona
Tax-Free, Asset Allocation, Balanced, California Tax-Free Bond, California
Tax-Free Income, California Tax-Free Money Market Mutual, Corporate Stock,
Diversified Income, Equity Value, Ginnie Mae, Government Money Market Mutual,
Growth and Income, Intermediate Bond, Money Market Mutual, Money Market Trust,
National Tax-Free, National Tax-Free Money Market Mutual, Oregon Tax-Free,
Prime Money Market Mutual, Short-Intermediate U.S. Government Income, Small
Cap, Treasury Money Market Mutual and U.S. Government Allocation Funds -- and
the Board of Directors may, in the future, authorize the issuance of other
series of capital stock representing shares of additional investment
portfolios.
The Fund is comprised of three classes of shares, Class A Shares,
Class B Shares and Institutional Class shares. With respect to matters that
affect one class but not another, shareholders vote as a class; for example,
the approval of a Plan. Subject to the
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foregoing, on any matter submitted to a vote of shareholders, all shares then
entitled to vote will be voted separately by portfolio unless otherwise
required by the Act, in which case all shares will be voted in the aggregate.
For example, a change in the Fund's fundamental investment policies would be
voted upon only by shareholders of the Fund and not shareholders of the
Company's other investment portfolios. Additionally, approval of an advisory
contract is a matter to be determined separately by the Fund. Approval by the
shareholders of one portfolio is effective as to that portfolio whether or not
sufficient votes are received from the shareholders of the other portfolios to
approve the proposal as to those portfolios. As used in the Prospectus and in
this Statement of Additional Information, the term "majority," when referring
to approvals to be obtained from shareholders of a class of the Fund, means the
vote of the lesser of (i) 67% of the shares of such class of the Fund
represented at a meeting if the holders of more than 50% of the outstanding
shares of such class of the Fund are present in person or by proxy, or (ii)
more than 50% of the outstanding shares of such class of the Fund. The term
"majority," when referring to the approvals to be obtained from shareholders of
the Company as a whole, means the vote of the lesser of (i) 67% of the
Company's shares represented at a meeting if the holders of more than 50% of
the Company's outstanding shares are present in person or by proxy, or (ii)
more than 50% of the Company's outstanding shares. Shareholders are entitled
to one vote for each full share held and fractional votes for fractional shares
held.
The Company may dispense with annual meetings of shareholders in
any year in which it is not required to elect directors under the Act.
However, the Company undertakes to hold a special meeting of its shareholders
for the purpose of voting on the question of removal of a director or directors
if requested in writing of the holders of at least 10% of the Company's
outstanding voting securities, and to assist in communicating with other
shareholders as required by Section 16(c) of the Act.
Each share of a class of the Fund represents an equal proportional
interest in the Fund with each other share of the same class and is entitled to
such dividends and distributions out of the income earned on the assets
belonging to the Fund as are declared in the discretion of the Directors. In
the event of the liquidation or dissolution of the Company, shareholders of the
Fund are entitled to receive the assets attributable to the Fund that are
available for distribution, and a distribution of any general assets not
attributable to the Fund that are available for distribution in such manner and
on such basis as the Directors in their sole discretion may determine.
Shareholders are not entitled to any preemptive rights. All
shares, when issued, will be fully paid and non-assessable by the Company.
The Trust is a business trust organized under the laws of
Delaware. In accordance with Delaware law and in connection with the tax
treatment sought by the Trust, the Trust's Declaration of Trust provides that
its investors would be personally responsible for Trust liabilities and
obligations, but only to the extent the Trust property is insufficient to
satisfy such liabilities and obligations. The Declaration of Trust also
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provides that the Trust shall maintain appropriate insurance (for example,
fidelity bonding and errors and omissions insurance) for the protection of the
Trust, its investors, Trustees, officers, employees and agents covering
possible tort and other liabilities, and that investors will be indemnified to
the extent they are held liable for a disproportionate share of Trust
obligations. Thus, the risk of an investor incurring financial loss on account
of investor liability is limited to circumstances in which both inadequate
insurance existed and the Trust itself was unable to meet its obligations.
The Declaration of Trust further provides that obligations of the
Trust are not binding upon the Trustees individually but only upon the property
of the Trust and that the Trustees will not be liable for any action or failure
to act. However, nothing in the Declaration of Trust protects a Trustee
against any liability to which the Trustee would otherwise be subject by reason
of willful misfeasance, bad faith, gross negligence, or reckless disregard of
the duties involved in the conduct of the Trustee's office.
The interests in the Master Portfolio have substantially identical
voting and other rights as those rights enumerated above for Fund shares. The
Trust also intends to dispense with annual meetings, but will hold a special
meeting and assist investor communications under the circumstances described
above with respect to the Company in accord with provisions under Section 16(c)
of the Act. Whenever the Fund is requested to vote on a matter with respect to
the Master Portfolio, the Fund will hold a meeting of Fund shareholders and
will cast its votes as instructed by such shareholders. In a situation where
the Fund does not receive instruction from certain of its shareholders on how
to vote the corresponding shares of the Master Portfolio, the Fund will vote
such shares in the same proportion as the shares for which the Fund does
receive voting instructions.
As of September 6, 1996, Stephens owned approximately 99% of the
outstanding Class A and B Shares of the Fund and such could be considered a
"control person" of the Fund for purposes of the 1940 Act. However, upon
commencement of the initial public offering of the Fund's shares, it is
expected that Stephens will own a significantly smaller percentage of the
Fund's outstanding voting securities and will no longer be considered a control
person of the Fund.
OTHER
The Registration Statements of the Trust and the Company,
including the Fund's Prospectus, the SAI and the exhibits filed therewith, may
be examined at the office of the Commission in Washington, D.C. Statements
contained in the Prospectus or the SAI as to the contents of any contract or
other document referred to herein or in the Prospectus are not necessarily
complete, and, in each instance, reference is made to the copy of such contract
or other document filed as an exhibit to the Registration Statement, each such
statement being qualified in all respects by such reference.
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INDEPENDENT AUDITORS
KPMG Peat Marwick LLP has been selected as the independent
auditors for the Company and the Trust. KPMG Peat Marwick LLP provides audit
services, tax return preparation and assistance and consultation in connection
with review of certain Securities & Exchange Commission filings. KPMG Peat
Marwick LLP's address is Three Embarcadero Center, San Francisco, California
94111.
FINANCIAL INFORMATION
The portfolio of investments, audited financial statements and
independent auditors' reports for the Company's other Funds are contained in
the Company's Annual Report which is available by calling 1-800-222-8222.
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SAI APPENDIX
The following is a description of the ratings given by Moody's and
S&P to corporate bonds and commercial paper.
Corporate Bonds
Moody's: The four highest ratings for corporate bonds are "Aaa,"
"Aa," "A" and "Baa." Bonds rated "Aaa" are judged to be of the "best quality"
and carry the smallest amount of investment risk. Bonds rated "Aa" are of
"high quality by all standards," but margins of protection or other elements
make long-term risks appear somewhat greater than "Aaa" rated bonds. Bonds
rated "A" possess many favorable investment attributes and are considered to be
upper medium grade obligations. Bonds rated "Baa" are considered to be medium
grade obligations; interest payments and principal security appear adequate for
the present but certain protective elements may be lacking or may be
characteristically unreliable over any great length of time. Such bonds have
speculative characteristics as well. Moody's applies numerical modifiers: 1,
2 and 3 in each rating category from "Aa" through "Baa" in its rating system.
The modifier 1 indicates that the security ranks in the higher end of its
category; the modifier 2 indicates a mid-range ranking; and the modifier 3
indicates that the issue ranks in the lower end.
S&P: The four highest ratings for corporate bonds are "AAA,"
"AA," "A" and "BBB." Bonds rated "AAA" have the highest ratings assigned by
S&P and have an extremely strong capacity to pay interest and repay principal.
Bonds rated "AA" have a "very strong capacity to pay interest and repay
principal" and differ "from the highest rated issued only in small degree."
Bonds rated "A" have a "strong capacity" to pay interest and repay principal,
but are "somewhat more susceptible" to adverse effects of changes in economic
conditions or other circumstances than bonds in higher rated categories. Bonds
rated "BBB" are regarded as having an "adequate capacity" to pay interest and
repay principal, but changes in economic conditions or other circumstances are
more likely to lead to a "weakened capacity" to make such repayments. The
ratings from "AA" to "BBB" may be modified by the addition of a plus or minus
sign to show relative standing within the category.
Corporate Commercial Paper
Moody's: The highest rating for corporate commercial paper is
"P-1" (Prime-1). Issuers rated "P-1" have a "superior capacity for repayment
of short-term promissory obligations." Issuers rated "P-2" (Prime-2) "have a
strong capacity for repayment of short-term promissory obligations," but
earnings trends, while sound, will be subject to more variation.
S&P: The "A-1" rating for corporate commercial paper indicates
that the "degree of safety regarding timely payment is either overwhelming or
very strong."
1
<PAGE> 26
Commercial paper with "overwhelming safety characteristics" will be rated
"A-1+." Commercial paper with a strong capacity for timely payments on issues
will be rated "A-2."
2
<PAGE> 27
STAGECOACH FUNDS, INC.
Telephone: (800) 222-8222
STATEMENT OF ADDITIONAL INFORMATION
Dated September 6, 1996
SMALL CAP FUND
INSTITUTIONAL CLASS
--------------------------------------
Stagecoach Funds, Inc. (the "Company") is an open-end, series
investment company. This Statement of Additional Information ("SAI") contains
information about one of the Company's series -- the SMALL CAP FUND (the
"Fund"). This SAI relates only to the Institutional Class Shares offered by
the Fund. The investment objective of the Fund is described in the Prospectus
under the heading "Investment Objective and Policies." The Fund seeks to
achieve its investment objective by investing all of its assets in the Small
Cap Master Portfolio (at times, the "Master Portfolio") of Master Investment
Trust (the "Trust"), which has the same investment objective as the Fund. The
Fund may withdraw its investment in the Small Cap Master Portfolio at any time.
This SAI is not a prospectus and should be read in conjunction with the
Fund's Prospectus, dated September 6, 1996. All terms used in this SAI that are
defined in the Prospectus have the meanings assigned in the Prospectus. A copy
of the Prospectus may be obtained without charge by writing Stephens Inc., the
Company's sponsor, administrator and distributor, at 111 Center Street, Little
Rock, Arkansas 72201, or calling the Transfer Agent at the telephone number
indicated above.
--------------------------------------
<PAGE> 28
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Investment Restrictions . . . . . . . . . . . . . . . . . . . . . . . 1
Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Servicing Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Performance Calculations . . . . . . . . . . . . . . . . . . . . . . 8
Determination of Net Asset Value . . . . . . . . . . . . . . . . . . 12
Additional Purchase and Redemption Information . . . . . . . . . . . 12
Portfolio Transactions . . . . . . . . . . . . . . . . . . . . . . . 13
Federal Income Tax . . . . . . . . . . . . . . . . . . . . . . . . . 15
Capital Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Independent Auditors . . . . . . . . . . . . . . . . . . . . . . . . 21
Financial Information . . . . . . . . . . . . . . . . . . . . . . . . 21
Appendix . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-1
Financial Statements . . . . . . . . . . . . . . . . . . . . . . . F-1
</TABLE>
i
<PAGE> 29
INVESTMENT RESTRICTIONS
The following information supplements and should be read in conjunction
with the section in the Prospectus entitled "Investment Objective and
Policies."
FUNDAMENTAL INVESTMENT RESTRICTIONS. The Fund and the Master Portfolio
are subject to the following investment restrictions, all of which are
fundamental policies. These restrictions cannot be changed, as to either the
Fund or the Master Portfolio, without approval by the holders of a majority (as
defined by the 1940 Act) of the outstanding voting securities of the Fund or
the Master Portfolio, as appropriate. Whenever the Fund is requested to vote
on a fundamental policy of the Master Portfolio, the Fund will hold a meeting
of Fund shareholders and it will cast its votes as instructed by such
shareholders.
Neither the Fund nor the Master Portfolio may:
(1) purchase the securities of issuers conducting their principal
business activity in the same industry if, immediately after the purchase and
as a result thereof, the value of the Fund's investments in that industry would
equal or exceed 25% of the current value of the Fund's total assets, provided
that there is no limitation with respect to investments in securities issued or
guaranteed by the United States Government, its agencies or instrumentalities;
and provided further, that the Fund may invest all its assets in a diversified,
open-end management investment company, or a series thereof, with substantially
the same investment objective, policies and restrictions as such Fund, without
regard to the limitations set forth in this paragraph (1);
(2) purchase or sell real estate (other than securities secured by real
estate or interests therein or securities issued by companies that invest in
real estate or interests therein, including mortgage passthrough securities),
commodities or commodity contracts or interests in oil, gas, or other mineral
exploration or development programs;
(3) purchase securities on margin (except for short-term credits
necessary for the clearance of transactions) or make short sales of securities;
(4) underwrite securities of other issuers, except to the extent that
the purchase of permitted investments directly from the issuer thereof or from
an underwriter for an issuer and the later disposition of such securities in
accordance with the Fund's investment program may be deemed to be an
underwriting; and provided further, that the purchase by the Fund of securities
issued by a diversified, open-end management investment company, or a series
thereof, with substantially the same investment objective, policies and
restrictions as such Fund shall not constitute an underwriting for purposes of
this paragraph (4);
(5) make investments for the purpose of exercising control or
management; provided that the Fund may invest all its assets in a diversified,
open-end management company, or a series thereof, with substantially the same
investment objective, policies
1
<PAGE> 30
and restrictions as such Fund, without regard to the limitations set forth in
this paragraph (5);
(6) issue senior securities, except that the Fund may borrow from banks
up to 10% of the current value of its net assets for temporary purposes only in
order to meet redemptions, and these borrowings may be secured by the pledge of
up to 10% of the current value of its net assets (but investments may not be
purchased while any such outstanding borrowings exceed 5% of its net assets);
(7) make loans of portfolio securities having a value that exceeds 33
1/3% of the current value of its total assets, provided that, this restriction
does not apply to the purchase of fixed time deposits, repurchase agreements,
commercial paper and other types of debt instruments commonly sold in a public
or private offering; nor
(8) purchase securities of any issuer (except securities issued or
guaranteed by the U.S. Government, its agencies or instrumentalities) if, as a
result, with respect to 75% of its total assets, more than 5% of the value of
its total assets would be invested in the securities of any one issuer or, with
respect to 100% of its total assets, the Fund's ownership would be more than
10% of the outstanding voting securities of such issuer, provided that the Fund
may invest all its assets in a diversified, open-end management investment
company, or a series thereof, with substantially the same investment objective,
policies and restrictions as such Fund, without regard to the limitations set
forth in this paragraph (8).
NON-FUNDAMENTAL INVESTMENT RESTRICTIONS. The Fund and the Master
Portfolio are subject to the following investment restrictions, all of which
are non-fundamental policies. These restrictions may be changed by a vote of a
majority of the Directors of the Company or the Trustees of the Trust, as the
case may be, at any time.
Neither the Fund nor the Master Portfolio may:
(1) purchase or retain securities of any issuer if the officers or
directors of the Fund or its Investment Adviser owning beneficially more than
one-half of one percent (0.5%) of the securities of the issuer together own
beneficially more than 5% of such securities;
(2) purchase or sell real estate limited partnership interests;
(3) invest in securities of issuers who, with their predecessors, have
been in existence less than three years, unless the securities are fully
guaranteed or insured by the U.S. Government if, by reason thereof, the value
of its aggregate investment in such securities will exceed 5% of its total
assets;
2
<PAGE> 31
(4) purchase securities of any issuer (except securities issued or
guaranteed by the U.S. Government, its agencies or instrumentalities) if, as a
result, more than 5% of the value of the Fund's total assets would be invested
in the securities of any one issuer;
(5) invest more than 15% of the Fund's net assets in illiquid
securities. For this purpose, illiquid securities include, among others, (a)
securities that are illiquid by virtue of the absence of a readily available
market or legal or contractual restrictions on resale, (b) fixed time deposits
that are subject to withdrawal penalties and that have maturities of more than
seven days, and (c) repurchase agreements not terminable within seven days;
(6) In addition, as a matter of non-fundamental policy, the Fund may
invest in shares of other open-end, management investment companies, subject to
the limitations of Section 12(d)(1) of the Act, provided that any such
purchases will be limited to temporary investments in shares of unaffiliated
investment companies and the Investment Adviser will waive its advisory fees
for that portion of the Fund's assets so invested, except when such purchase is
part of a plan of merger, consolidation, reorganization or acquisition; nor
(7) Invest more than 25% of their respective net assets in securities
of foreign governmental and foreign private issues that are denominated in and
pay interest in U.S. dollars.
Notwithstanding any other investment policy or limitation (whether or
not fundamental), the Fund may invest all of its assets in the securities of a
single open-end management investment company with substantially the same
fundamental investment objective, policies and limitations as the Fund. A
decision to so invest all of its assets may, depending on the circumstances
applicable at the time, require approval of shareholders.
MANAGEMENT
The following information supplements and should be read in
conjunction with the section in the prospectus entitled "Management of the
Fund." The principal occupations during the past five years of the Directors
and principal executive Officer of the Company are listed below. The address
of each, unless otherwise indicated, is 111 Center Street, Little Rock,
Arkansas 72201. Directors deemed to be "interested persons" of the Company
for purposes of the 1940 Act are indicated by an asterisk.
3
<PAGE> 32
<TABLE>
<CAPTION>
Principal Occupations
Name, Age and Address Position During Past 5 Years
- --------------------- -------- ---------------------
<S> <C> <C>
Jack S. Euphrat, 74 Director Private Investor.
415 Walsh Road
Atherton, CA 94027.
*R. Greg Feltus, 45 Director, Senior Vice President
Chairman and of Stephens; Manager
President of Financial Services
Group; President of
Stephens
Insurance Services
Inc.; Senior Vice
President of Stephens
Sports Management
Inc.; and President of
Investor Brokerage
Insurance Inc.
Thomas S. Goho, 54 Director T.B. Rose Faculty
321 Beechcliff Court Fellow-Business,
Winston-Salem, NC 27104 Wake Forest University
Calloway School, of
Business and Accountancy;
Associate Professor of
Finance of the School of
Business and Accounting at
Wake Forest University
since 1983.
*Zoe Ann Hines, 47 Director Senior Vice President
of Stephens and
Director of Brokerage
Accounting; and
Secretary of Stephens
Resource
Management.
*W. Rodney Hughes, 70 Director Private Investor.
31 Dellwood Court
San Rafael, CA 94901
Robert M. Joses, 78 Director Private Investor.
47 Dowitcher Way
San Rafael, CA 94901
</TABLE>
4
<PAGE> 33
<TABLE>
<S> <C> <C>
*J. Tucker Morse, 52 Director Private Investor;
10 Legrae Street Real Estate Developer;
Charleston, SC 29401 Chairman of Renaissance
Properties Ltd.;
President of Morse
Investment Corporation;
and Co-Managing Partner of
Main Street Ventures.
Richard H. Blank, Jr., 40 Chief Associate of
Operating Financial Services
Officer, Group of Stephens;
Secretary and Director of Stephens
Treasurer Sports Management
Inc.; and Director of
Capo Inc.
</TABLE>
COMPENSATION TABLE
For the Year Ended December 31, 1995
<TABLE>
<CAPTION>
Total Compensation
Aggregate Compensation from Registrant
Name and Position from Registrant and Fund Complex
- ----------------- ---------------------- ------------------
<S> <C> <C>
Jack S. Euphrat $10,188 $39,750
Director
*R. Greg Feltus 0 0
Director
Thomas S. Goho 10,188 39,750
Director
*Zoe Ann Hines 0 0
Director
*W. Rodney Hughes 9,438 37,000
Director
Robert M. Joses 9,938 39,000
Director
</TABLE>
5
<PAGE> 34
<TABLE>
<S> <C> <C>
*J. Tucker Morse 8,313 33,250
Director
</TABLE>
Directors of the Company are compensated annually by the Company and
by all the registrants in the fund complex for their services as indicated
above and also are reimbursed for all out-of-pocket expenses relating to
attendance at board meetings. Each of the Directors and Officers of the
Company serves in the identical capacity as directors and officers of Overland
Express Funds, Inc. and MasterWorks Funds Inc. (formerly, Stagecoach Inc.), and
as trustees and/or officers of Stagecoach Trust, Master Investment Portfolio,
Life & Annuity Trust, Master Investment Trust and Managed Series Investment
Trust, each of which is a registered open-end management investment company and
each of which, prior to January 1, 1996 and the reorganization of Wells Fargo
Nikko Investment Advisors, a former affiliate of Wells Fargo, was considered to
be in the same "fund complex," as such term is defined in Form N-1A under the
1940 Act, as the Company. Effective January 1, 1996, the Company, Overland
Express Funds, Inc., Stagecoach Trust, Life & Annuity Trust and Master
Investment Trust are considered to be members of the same fund complex and are
no longer part of the same fund complex as MasterWorks Funds Inc., Master
Investment Portfolio and Managed Series Investment Trust. The Directors are
compensated by other companies and trusts within the fund complex for their
services as directors/trustees to such companies and trusts. Currently the
Directors do not receive any retirement benefits or deferred compensation from
the Company or any other member of the fund complex.
As of the date of this SAI, Directors and Officers of the Company
as a group beneficially owned less than 1% of the outstanding shares of the
Company.
Investment Adviser. The Fund has not engaged an investment adviser.
The Master Portfolio (which has the same investment objective as the Fund, and
in which the Fund invests all its assets) is advised by Wells Fargo. The
Advisory Contract provides that Wells Fargo shall furnish to the Master
Portfolio investment guidance and policy direction in connection with the daily
portfolio management of the Master Portfolio. Pursuant to the Advisory
Contract, Wells Fargo furnishes to the Board of Trustees of the Trust periodic
reports on the investment strategy and performance of the Master Portfolio.
For its services as investment adviser to the Master Portfolio, Wells Fargo is
entitled to receive a monthly fee at the annual rate of 0.60% of the Master
Portfolio's average daily net assets.
Wells Fargo has agreed to provide to the Master Portfolio, among other
things, money market security and fixed-income research, analysis and
statistical and economic data and information concerning interest rate and
security market trends, portfolio composition, credit conditions and average
maturities of the Master Portfolio.
The Advisory Contract will continue in effect for more than two years
provided the continuance is approved annually (i) by the holders of a majority
of the Master Portfolio's outstanding voting securities or by the Trust's Board
of Trustees and (ii) by a majority of the Trustees of the Trust who are not
parties to the Advisory Contract or "interested persons" (as defined in the
Act) of any such party. The Advisory Contract may
6
<PAGE> 35
be terminated on 60 days' written notice by either party and will terminate
automatically if assigned.
Administrator and Distributor. The Company has retained Stephens as
administrator and distributor on behalf of the Fund. In addition, the Trust
has retained Stephens as administrator on behalf of the Master Portfolio.
Under the respective Administration Agreements with the Company and the Trust,
Stephens furnishes the Company and the Trust with office facilities, together
with those ordinary clerical and bookkeeping services that are not furnished by
Wells Fargo. Stephens also has entered into a Distribution Agreement with the
Company pursuant to which Stephens has the responsibility of distributing
shares of the Fund. For its services as administration to the Fund, Stephens
is entitled to receive a monthly fee at the annual rate of 0.05% of the Fund's
average daily net assets.
Custodian and Transfer and Dividend Disbursing Agent. Wells Fargo has
been retained to act as custodian and transfer and dividend disbursing agent
for the Fund and the Master Portfolio. The custodian, among other things,
maintains a custody account or accounts in the name of the Fund and the Master
Portfolio, receives and delivers all assets for the Fund and the Master
Portfolio upon purchase and upon sale or maturity, collects and receives all
income and other payments and distributions on account of the assets of the
Fund and the Master Portfolio and pays all expenses of the Fund and the Master
Portfolio. For its services as custodian, Wells Fargo is entitled to receive
fees as follows: a net asset charge at the annual rate of 0.0167%, payable
monthly, plus specified transaction charges. Wells Fargo also will provide
portfolio accounting services under the Custody Agreement as follows: a monthly
base fee of $2,000 plus a net asset fee at the annual rate of 0.070% of the
first $50,000,000 of the Fund's average daily net assets, 0.045% of the next
$50,000,000, and 0.020% of the average daily net assets in excess of
$100,000,000.
For its services as transfer and dividend disbursing agent for the
Fund, Wells Fargo is entitled to receive monthly payments at the annual rate of
0.07% of the Fund's average daily net assets.
Collective Investment Fund Management Fees. Prior to September 6,
1996, Wells Fargo provided management and administrative services to the
Collective Investment Fund. For these services Wells Fargo charged fees at an
annual rate of 0.75% of the Collective Investment Fund's average net assets.
Wells Fargo was also entitled to be reimbursed by the Collective Investment
Fund for expenses incurred on its behalf, excluding costs incurred in
establishing and organizing the Fund. The Collective Investment Fund was
entitled to pay up to 0.10% of its net assets for "Audit Expenses." There
were no sales charges. The Collective Investment Fund paid all brokerage
commissions incurred on its portfolio transactions.
7
<PAGE> 36
SERVICING PLAN
The Company's Board of Directors, on behalf of the Fund, adopted a
Servicing Plan ("Servicing Plan") on August 28 and 29, 1996, with respect to
each class of the Fund's shares. The Servicing Plan was approved by a majority
of the Directors who were not "interested persons" (as defined in the Act) of
the Fund and who had no direct or indirect financial interest in the operation
of the Servicing Plan or in any agreement related to the Servicing Plan (the
"Servicing Plan Non-Interested Directors").
Under the Servicing Plan and pursuant to the shareholder servicing
agreements for the Institutional Class Shares, the Fund may pay one or more
servicing agents, as compensation for performing certain services, a fee at an
annual rate of up to 0.25% of the average daily net assets of the Fund's
Institutional Class Shares attributable to the servicing agent's customers.
The actual fee payable to servicing agents is determined, within such limits,
from time to time by mutual agreement between the Company and each servicing
agent and will not exceed the maximum service fees payable by mutual funds sold
by members of the NASD under the NASD Rules of Fair Practice.
Each Servicing Plan continues in effect from year to year if such
continuance is approved by a majority vote of both the Directors of the Company
and the Servicing Plan Non-Interested Directors. Any form of servicing
agreement related to the Servicing Plan also must be approved by such vote of
the Directors and the Servicing Plan Non-Interested Directors. Servicing
agreements may be terminated at any time, without payment of any penalty, by
vote of a majority of the Servicing Plan Non-Interested Directors. No material
amendment to the Servicing Plans may be made except by a majority of both the
Directors of the Company and the Servicing Plan Non-Interested Directors.
Each Servicing Plan requires that the administrator shall provide to the
Directors, and the Directors shall review, at least quarterly, a written report
of the amounts expended (and purposes therefor) under the Servicing Plan.
PERFORMANCE CALCULATIONS
The following information supplements and should be read in conjunction
with the sections in the Prospectus entitled "Investing in the Fund -- Share
Value" and "How the Fund Works -- Performance."
As indicated in the Prospectus, the Fund may advertise certain total
return information for a class of shares, computed in the manner described in
the Prospectus. As and to the extent required by the Commission, an average
annual compound rate of return ("T") will be computed by using the redeemable
value at the end of a specified period ("ERV") of a hypothetical initial
investment in a class of shares ("P") over a period of years ("n") according to
the following formula: P(1+T)n = ERV. In addition, as indicated
8
<PAGE> 37
in the Prospectus, the Fund also may, at times, calculate total return for a
class of shares based on net asset value per share (rather than the public
offering price), in which case the figures would not reflect the effect of any
sales charges that would have been paid by an investor, or would be based on
the assumption that a sales charge other than the maximum sales charge
(reflecting a Volume Discount) was assessed, provided that total return data
derived pursuant to the calculation described above also are presented.
In addition to the above performance information, the Fund may also
advertise the cumulative total return of a class. The cumulative total return
for such periods is based on the overall percentage change in value of a
hypothetical investment in a class of shares, assuming all dividends and
capital gain distributions are reinvested in shares of that class, without
reflecting the effect of any sales charge that would be paid by an investor,
and is not annualized.
Performance information may be advertised for non-standardized periods,
including year-to-date and other periods less than a year.
The total return information for the Institutional Class Shares
presented below and advertised by the Fund for the period prior to September
6, 1996, the date the Fund commenced operations, is based upon the prior
performance of the Collective Investment Fund. The performance information is
adjusted to reflect the current level of operating expenses applicable to the
Institutional Class Shares.
Average Annual Total Return
<TABLE>
<CAPTION>
Commencement of Commencement of
Operations to Year Ended Operations to
12/31/95 12/31/95 8/31/96
--------------- ---------- ---------------
<S> <C> <C>
64.79% 69.60% 52.17%
</TABLE>
- -------------------------
Cumulative Total Return
<TABLE>
<CAPTION>
Commencement of Commencement of Eight-Month
Operations to Operations to Period Ended
12/31/95 8/31/96 8/31/96
--------------- --------------- ------------
<S> <C> <C>
79.10% 115.90% 20.55%
</TABLE>
- -------------------------
9
<PAGE> 38
From time to time and only to the extent the comparison is appropriate
for a class of shares of the Fund, the Company may quote the performance or
price-earning ratio of a class of shares of the Fund in advertising and other
types of literature as compared to the performance of the 1-Year Treasury Bill
Rate, the S&P Index, the Dow Jones Industrial Average, the Lehman Brothers 20+
Years Treasury Index, the Lehman Brothers 5-7 Year Treasury Index, Donoghue's
Money Fund Averages, Real Estate Investment Averages (as reported by the
National Association of Real Estate Investment Trusts), Gold Investment
Averages (provided by the World Gold Council), Bank Averages (which is
calculated from figures supplied by the U.S. League of Savings Institutions
based on effective annual rates of interest on both passbook and certificate
accounts), average annualized certificate of deposit rates (from the Federal
Reserve G-13 Statistical Releases or the Bank Rate Monitor), the Salomon One
Year Treasury Benchmark Index, the Consumer Price Index (as published by the
U.S. Bureau of Labor Statistics), Ten Year U.S. Government Bond Average, S&P's
Corporate Bond Yield Averages, Schabacter Investment Management Indices,
Salomon Brothers High Grade Bond Index, Lehman Brothers Long-Term High Quality
Government/Corporate Bond Index, other managed or unmanaged indices or
performance data of bonds, stocks or government securities (including data
provided by Ibbotson Associates), or by other services, companies, publications
or persons who monitor mutual funds on overall performance or other criteria.
The S&P Index and the Dow Jones Industrial Average are unmanaged indices of
selected common stock prices. The performance of a class of shares of the Fund
also may be compared to the performance of other mutual funds having similar
objectives. This comparative performance could be expressed as a ranking
prepared by Lipper Analytical Services, Inc., CDA Investment Technologies,
Inc., Bloomberg Financial Markets or Morningstar, Inc., independent services
which monitor the performance of mutual funds. The performance of a class of
shares of the Fund will be calculated by relating net asset value per share at
the beginning of a stated period to the net asset value of the investment,
assuming reinvestment of all gains distributions and dividends paid, at the end
of the period. Any such comparisons may be useful to investors who wish to
compare the class' past performance with that of its competitors. Of course,
past performance cannot be a guarantee of future results. The Company also may
include, from time to time, a reference to certain marketing approaches of the
Distributor, including, for example, a reference to a potential shareholder
being contacted by a selected broker or dealer. General mutual fund statistics
provided by the Investment Company Institute may also be used.
In addition, the Company also may use, in advertisements and other
types of literature, information and statements: (1) showing that bank savings
accounts offer a guaranteed return of principal and a fixed rate of interest,
but no opportunity for capital growth; and (2) describing Wells Fargo, and its
affiliates and predecessors, as one of the first investment managers to advise
investment accounts using asset allocation and index strategies. The Company
also may include in advertising and other types of literature information and
other data from reports and studies prepared by the Tax Foundation, including
information regarding federal and state tax levels and the related "Tax Freedom
Day."
10
<PAGE> 39
The Company also may use the following information in advertisements
and other types of literature, only to the extent the information is
appropriate for a class of shares of the Fund: (i) the Consumer Price Index
may be used to assess the real rate of return from an investment in a class of
shares of the Fund; (ii) other government statistics, including, but not
limited to, The Survey of Current Business, may be used to illustrate
investment attributes of a class of shares of the Fund or the general economic,
business, investment, or financial environment in which the Fund operates;
(iii) the effect of tax-deferred compounding on the investment returns of a
class of shares of the Fund, or on returns in general, may be illustrated by
graphs, charts, etc., where such graphs or charts would compare, at various
points in time, the return from an investment in a class of shares of the Fund
(or returns in general) on a tax-deferred basis (assuming reinvestment of
capital gains and dividends and assuming one or more tax rates) with the return
on a taxable basis; and (iv) the sectors or industries in which the Fund
invests may be compared to relevant indices of stocks or surveys (e.g., S&P
Industry Surveys) to evaluate the historical performance or current or
potential value of a class of shares of the Fund with respect to the particular
industry or sector.
From time to time the Company may reprint, reference or otherwise use
material from magazines, newsletters, newspapers and books including, but not
limited to the Wall Street Journal, Money Magazine, Barrons, Kiplingers,
Business Week, Fortune, Forbes, the San Francisco Chronicle, the San Jose
Mercury News, The New York Times, the Los Angeles Times, the Boston Globe, the
Washington Post, the Chicago Sun-Times, Investor Business Daily, Worth, Bank
Investor, American Banker, Smart Money, the 100 Best Mutual Funds (Adams
Publishing), Morningstar or Value Line.
The Company may also disclose in advertising and other types of
literature, information and statements the distribution rate on the shares of
each class of the Fund. Distribution rate is the amount determined by dividing
the dollar amount per share of the most recent dividend by the most recent NAV
per share.
The Company also may discuss in advertising and other types of
literature that the Fund has been assigned a rating by an NRSRO, such as S&P
or Moody's. Such rating would assess the creditworthiness of the investments
held by the Fund. The assigned rating would not be a recommendation to
purchase, sell or hold the Fund's shares since the rating would not comment on
the market price of the Fund's shares or the suitability of the Fund for a
particular investor. In addition, the assigned rating would be subject to
change, suspension or withdrawal as a result of changes in, or the
unavailability of, information relating to the Fund or its investments. The
Company may compare the performance of the Fund with other investments that are
assigned ratings by the NRSROs. Any such comparisons may be useful to
investors who wish to compare the Fund's past performance with other rated
investments.
The Company also may disclose, in advertising and other types of
literature, information and statements that the Company's investment adviser,
Wells Fargo, is listed in Nelson Publications' ("Nelson's") "Top 20"
performance rankings as published in the
11
<PAGE> 40
1994 edition of "America's Best Money Managers." The Nelson survey ranks the
performance of money managers in over 30 asset/style categories and is based on
analysis of performance composites and surveys of institutional money managers.
The Company may also disclose in advertising and other types of sales literature
the assets and categories of assets under management by the Company's investment
adviser and the total amount of assets under management by Wells Fargo
Investment Management Group ("IMG"). As of December 31, 1995, IMG had $30.1
billion in assets under management. The Company also may disclose in advertising
and other types of sales literature the amount of assets and mutual fund assets
managed by Wells Fargo Bank. As of June 30, 1996, Wells Fargo Bank and its
affiliates provided investment Advisory services for approximately $56 billion
of assets of individuals, trusts, estates and institutions and $17 billion of
mutual fund assets.
The Company may disclose in advertising and other types of literature
that investors can open and maintain Sweep Accounts over the Internet or
through other electronic channels (collectively, "Electronic Channels"). Such
advertising and other literature may discuss the investment options available
to investors, including the types of accounts and any applicable fees. Such
advertising and other literature may disclose that Wells Fargo Bank is the
first major bank to offer an on-line application for a mutual fund account that
can be filled out completely through Electronic Channels. Advertising and other
literature may disclose that Wells Fargo Bank may maintain Web sites, pages or
other information sites accessible through Electronic Channels (an "Information
Site") and may describe the contents and features of the Information Site and
instruct investors on how to access the Information Site and open a Sweep
Account. Advertising and other literature may also disclose the procedures
employed by Wells Fargo Bank to secure information provided by investors,
including disclosure and discussion of the tools and services for accessing
Electronic Channels. Such advertising or other literature may include
discussions of the advantages of establishing and maintaining a Sweep Account
through Electronic Channels and testimonials from Wells Fargo Bank customers or
employees and may also include descriptions of locations where product
demonstrations may occur. The Company may also disclose the ranking of Wells
Fargo Bank as one of the largest money managers in the United States.
DETERMINATION OF NET ASSET VALUE
The following information supplements and should be read in conjunction
with the Prospectus section entitled "Investing in the Fund." Net asset value
per share for each class of the Fund and net asset value per unit of the Master
Portfolio are each determined by Wells Fargo on each day the Exchange is open
for trading as of the close of regular trading on the Exchange, which is
currently 1:00 p.m. Pacific time.
Securities of the Master Portfolio for which market quotations are
available are valued at latest prices. Any security for which the primary
market is an exchange is valued at the last sale price on such exchange on the
day of valuation or, if there was no sale on such day, the latest bid price
quoted on such day. In the case of other securities, including U.S. Government
securities but excluding money market instruments maturing in 60 days or less,
the valuations are based on latest quoted bid prices. Money market instruments
maturing in 60 days or less are valued at amortized cost. The assets of the
Master Portfolio other than money market instruments maturing in 60 days or
less are valued at latest quoted bid prices. Prices may be furnished by a
reputable independent pricing service approved by the Board of Trustees.
Prices provided by an independent pricing service may be determined without
exclusive reliance on quoted prices and may take into account appropriate
factors such as institutional-size trading in similar groups of securities,
yield, quality, coupon rate, maturity, type of issue, trading characteristics
and other market data. All other securities and other assets of the Master
Portfolio for which current market quotations are not readily available are
valued at fair value as determined in good faith by the Trust's Trustees and in
accordance with procedures adopted by the Trustees.
Expenses and fees, including advisory fees are accrued daily and are
taken into account for the purpose of determining the net asset value of the
Master Portfolio's interests and the Fund's shares.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
Payment for shares may, in the discretion of the adviser, be made in the
form of securities that are permissible investments for the Funds as described
in the Prospectus. For further information about this form of payment please
contact Stephens. In
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<PAGE> 41
connection with an in-kind securities payment, the Funds will require, among
other things, that the securities be valued on the day of purchase in
accordance with the pricing methods used by a Fund and that such Fund receives
satisfactory assurances that (i) it will have good and marketable title to the
securities received by it; (ii) that the securities are in proper form for
transfer to the Fund; and (iii) adequate information will be provided
concerning the basis and other matters relating to the securities.
Under the 1940 Act, the Funds may suspend the right of redemption or
postpone the date of payment upon redemption for any period during which the
NYSE is closed (other than customary weekend and holiday closings, or during
which trading is restricted, or during which as determined by the SEC by rule
or regulation) an emergency exists as a result of which disposal or valuation
of portfolio securities is not reasonably practicable, or for such periods as
the SEC may permit.
The Company may suspend redemption rights or postpone redemption
payments for such periods as are permitted under the 1940 Act. The Company may
also redeem shares involuntarily or make payment for redemption in securities
or other property if it appears appropriate to do so in light of the Company's
responsibilities under the 1940 Act.
In addition, the Company may redeem shares involuntarily to reimburse
the Funds for any losses sustained by reason of the failure of a shareholders
to make full payment for shares purchased or to collect any charge relating to
a transaction effected for the benefit of a shareholder which is applicable to
shares of a Fund as provided from time to time in the Prospectus.
PORTFOLIO TRANSACTIONS
Purchases and sales of securities by the Master Portfolio are usually
principal transactions. Portfolio securities normally are purchased or sold
from or to dealers serving as market makers for the securities at a net price.
The Master Portfolio also may purchase portfolio securities in underwritten
offerings and may purchase securities directly from the issuer. The cost of
executing the Master Portfolio's portfolio securities transactions consists
primarily of dealer spreads and underwriting commissions. Under the 1940 Act,
persons affiliated with the Trust are prohibited from dealing with the Trust as
a principal in the purchase and sale of securities unless an exemptive order or
other relief allowing such transactions is obtained from the SEC or an
exemption is otherwise available. The Master Portfolio may purchase securities
from underwriting syndicates of which Stephens or Wells Fargo is a member under
certain conditions in accordance with the provisions of a rule adopted under
the 1940 Act and in compliance with procedures adopted by the Board of
Trustees.
The Trust has no obligation to deal with any dealer or group of dealers
in the execution of transactions in portfolio securities. Subject to policies
established by the Trust's Board of Trustees, Wells Fargo is responsible for
the Master Portfolio decisions and the placing of portfolio transactions. In
placing orders, it is the policy of the Trust
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<PAGE> 42
to obtain the best overall terms taking into account the dealer's general
execution and operational facilities, the type of transaction involved and
other factors such as the dealer's risk in positioning the securities involved.
While Wells Fargo generally seeks reasonably competitive spreads or
commissions, the Master Portfolio will not necessarily be paying the lowest
spread or commission available.
In assessing the best overall terms available for any transaction,
Wells Fargo Bank considers factors deemed relevant, including the breadth of
the market in the security, the price of the security, the financial condition
and execution capability of the broker or dealer, and the reasonableness of the
commission, if any, both for the specific transaction and on a continuing
basis. Wells Fargo Bank may cause the Master Portfolio to pay a broker/dealer
which furnishes brokerage and research services a higher commission than that
which might be charged by another broker/dealer for effecting the same
transaction, provided that Wells Fargo Bank determines in good faith that such
commission is reasonable in relation to the value of the brokerage and research
services provided by such broker/dealer, viewed in terms of either the
particular transaction or the overall responsibilities of Wells Fargo Bank.
Such brokerage and research services might consist of reports and statistics
relating to specific companies or industries, general summaries of groups of
stocks or bonds and their comparative earnings and yields, or broad overviews
of the stock, bond, and government securities markets and the economy.
Supplementary research information so received is in addition to, and
not in lieu of, services required to be performed by Wells Fargo Bank and does
not reduce the advisory fees payable by the Master Portfolio. The Board of
Trustees will periodically review the commissions paid by the Master Portfolio
to consider whether the commissions paid over representative periods of time
appear to be reasonable in relation to the benefits inuring to the Master
Portfolio. It is possible that certain of the supplementary research or other
services received will primarily benefit one or more other investment companies
or other accounts for which investment discretion is exercised. Conversely,
the Master Portfolio may be the primary beneficiary of the research or services
received as a result of portfolio transactions effected for such other account
or investment company.
Under Section 28(e) of the Securities Exchange Act of 1934, an adviser
shall not be "deemed to have acted unlawfully or to have breached its fiduciary
duty" solely because under certain circumstances it has caused the account to
pay a higher commission than the lowest available. To obtain the benefit of
Section 28(e), an adviser must make a good faith determination that the
commissions paid are "reasonable in relation to the value of the brokerage and
research services provided. . . viewed in terms of either that particular
transaction or its overall responsibilities with respect to the accounts as to
which it exercises investment discretion and that the services provided by a
broker provide an adviser with lawful and appropriate assistance in the
performance of its investment decision-making responsibilities." Accordingly,
the price to the Master Portfolio in any transaction may be less favorable than
that available from another broker/dealer if the difference is reasonably
justified by other aspects of the portfolio execution services offered.
Broker/dealers utilized by Wells Fargo Bank may furnish statistical,
research and other information or services which are deemed by Wells Fargo Bank
to be beneficial to the Master Portfolio's investment programs. Research
services received from brokers supplement Wells Fargo Bank's own research and
may include the following types of information: statistical and background
information on industry groups and individual companies; forecasts and
interpretations with respect to U.S. and foreign economies, securities,
markets, specific industry groups and individual companies; information on
political developments; portfolio management strategies; performance
information on securities and information concerning prices of securities; and
information supplied by specialized services to Wells Fargo Bank and to the
Trust's Trustees with respect to the performance, investment activities and
fees and expenses of other mutual Funds. Such information may be communicated
electronically, orally or in written form. Research
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<PAGE> 43
services may also include the providing of equipment used to communicate
research information, the arranging of meetings with management of companies
and the providing of access to consultants who supply research information.
The outside research assistance is useful to Wells Fargo Bank since the
brokers utilized by Wells Fargo Bank as a group tend to follow a broader
universe of securities and other matters than the staff of Wells Fargo Bank can
follow. In addition, this research provides Wells Fargo Bank with a diverse
perspective on financial markets. Research services which are provided to
Wells Fargo Bank by brokers are available for the benefit of all accounts
managed or advised by Wells Fargo Bank. It is the opinion of Wells Fargo Bank
that this material is beneficial in supplementing their research and analysis;
and, therefore, it may benefit the Master Portfolio by improving the quality
of Wells Fargo Bank's investment advice. The advisory fees paid by the Master
Portfolio are not reduced because Wells Fargo Bank receives such services.
Portfolio Turnover. Portfolio turnover generally involves some
expenses to the Master Portfolio, including brokerage commissions or dealer
mark-ups and other transactions costs on the sale of securities and the
reinvestment in other securities. A high portfolio turnover rate should not
result in the Master Portfolio paying substantially more brokerage commissions,
since most transactions in government securities and municipal securities are
effected on a principal basis. Portfolio turnover also can generate short-term
capital gains tax consequences. The portfolio turnover rate will not be a
limiting factor when Wells Fargo deems portfolio changes appropriate.
FEDERAL INCOME TAX
The following information supplements and should be read in conjunction
with the Prospectus sections entitled "Dividends" and "Taxes." The Prospectus
describes generally the tax treatment of distributions by the Company. This
section of the SAI includes additional information concerning federal income
tax.
Qualification of the Fund as a regulated investment company under the
Code requires, among other things, that (i) the Fund derive (a) at least 90% of
its annual gross income from interest, payments with respect to securities
loans, dividends and gains from the sale or other disposition of securities or
options thereon; (ii) the Fund derive less than 30% of its gross income from
gains from the sale or other disposition of securities or options thereon held
for less than three months; and (iii) the Fund diversify its holdings so that,
at the end of each quarter of the taxable year, (a) at least 50% of the market
value of the Fund's assets is represented by cash, government securities and
other securities limited in respect of any one issuer to an amount not greater
than 5% of the Fund's assets and 10% of the outstanding voting securities of
such issuer, and (b) not more than 25% of the value of the Fund's assets is
invested in the securities of any one issuer (other than U.S. Government
securities or the securities of other regulated investment companies), or in
two or more issuers which the Fund controls and which are engaged in the same
or similar
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<PAGE> 44
trades or businesses. As a regulated investment company, the Fund will not be
subject to federal income tax on its net investment income and net capital
gains distributed to its shareholders, provided that it distributes to its
stockholders at least 90% of the sum of its net investment income and net
tax-exempt income earned in each year.
A 4% nondeductible excise tax will be imposed on the Fund to the extent
it does not meet certain minimum distribution requirements by the end of each
calendar year. For this purpose, any income or gain retained by the Fund that
is subject to income tax will be considered to have been distributed by
year-end. In addition, dividends and distributions declared payable as of a
record date in October, November or December of any calendar year are deemed
under the Code to have been distributed by the Fund and received by the
shareholders on December 31 of that calendar year if the dividend is actually
paid no later than January 31 of the following year. Such dividends will,
accordingly, be subject to income tax for the year in which the record date
falls. The Fund intends to distribute substantially all of its net investment
income and net capital gains and, thus, expects to avoid the excise tax.
Income and dividends received by the Fund from sources within foreign
countries may be subject to withholding and other taxes (generally at rates
from 10% to 40%) imposed by such countries. Tax conventions between certain
countries and the United States may reduce or eliminate such taxes. Because
the Fund does not expect to hold more than 50% of the value of its total assets
in securities of foreign issuers, the Fund does not expect to be eligible to
elect to "pass through" foreign tax credits to shareholders.
The Master Portfolio will be treated as a non-publicly traded
partnership rather than as a regulated investment company or a corporation
under the Code. As a non-publicly traded partnership under the Code, any
interest, dividends and gains or losses of the Master Portfolio will be deemed
to have been "passed through" to the Fund and other investors in the Master
Portfolio, regardless of whether such interest, dividends or gains have been
distributed by the Master Portfolio or losses have been realized by the Fund
and other investors. Therefore, to the extent the Master Portfolio were to
accrue but not distribute any interest, dividends or gains, or accrue losses,
the Fund would be deemed to have realized and recognized its proportionate
share of interest, dividends, gains or losses without receipt of any
corresponding distribution. However, the Trust will seek to minimize
recognition by investors of interest, dividends, gains or losses without a
corresponding distribution.
Gains or losses on sales of portfolio securities by the Master
Portfolio will be long-term capital gains or losses if the securities have been
held by it for more than one year, except in certain cases including the case
where the Master Portfolio acquires a put or writes a call thereon. Other
gains or losses on the sale of securities will be short-term capital gains or
losses. To the extent that the Fund recognizes long-term capital gains, such
gains will be distributed at least annually. Such distributions will be
taxable to shareholders as long-term capital gains, regardless of how long a
shareholder has held Fund shares. Such distributions will be designated as
capital gain distributions in a written
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<PAGE> 45
notice mailed by the Fund to shareholders not later than 60 days after the
close of the Fund's taxable year. If a shareholder receives such a designated
capital gain distribution (to be treated by the shareholder as a long-term
capital gain) with respect to any Fund share and such Fund share is held for
six months or less, then (unless otherwise disallowed) any loss on the sale or
exchange of that Fund share will be treated as a long-term capital loss to the
extent of the designated capital gain distribution. Gain recognized on the
disposition of a debt obligation (including tax-exempt obligations purchased
after April 30, 1993) purchased by the Master Portfolio at a market discount
(generally, at a price less than its principal amount) will be treated as
ordinary income to the extent such accrued market discount had not been
previously included as taxable income during the period of time the Master
Portfolio held the debt obligation.
As of the printing of this SAI, the maximum individual tax rate
applicable to ordinary income is 39.6% (effective rates may be higher for some
individuals due to phase out of exemptions and eliminations of deductions); the
maximum individual marginal tax rate applicable to net capital gains is 28%;
and the maximum marginal corporate tax rate applicable to ordinary income and
net capital gains is 35% (except that to eliminate the benefit of lower
marginal corporate income tax rates, corporations which have taxable income in
excess of $100,000 for a taxable year will be required to pay an additional
amount of income tax up to $11,750 on taxable income exceeding $100,000 in a
taxable year and corporations which have taxable income in excess of
$15,000,000 for a taxable year will be required to pay an additional tax of up
to $100,000). Naturally, the amount of tax payable by an individual or
corporation will be affected by a combination of tax laws covering, for
example, deductions, credits, deferrals, exemptions, sources of income and
other matters.
If a shareholder exchanges or otherwise disposes of shares of the Fund
within 90 days of having acquired such shares and if, as a result of having
acquired those shares, the shareholder subsequently pays a reduced sales charge
for shares of the Fund or of a different fund, the sales charge previously
incurred in acquiring the Fund's shares shall not be taken into account (to the
extent such previous sales charges do not exceed the reduction in sales
charges) for the purpose of determining the amount of gain or loss on the
exchange, but will be treated as having been incurred in the acquisition of
such other shares.
Also, any loss realized on a redemption or exchange of shares of the
Fund will be disallowed to the extent that substantially identical shares are
reacquired within the 61-day period beginning 30 days before and ending 30 days
after the shares are disposed of.
If, in the opinion of the Company, ownership of its shares has or may
become concentrated to an extent that could cause the Company to be deemed a
personal holding company within the meaning of the Code, the Company may
require the redemption of shares or reject any order for the purchase of shares
in an effort to prevent such concentration.
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Foreign Shareholders. Under the Code, distributions of net investment
income by the Fund to a nonresident alien individual, nonresident alien
fiduciary of a trust or estate, foreign corporation, or foreign partnership (a
"foreign shareholder") will be subject to U.S. withholding tax (at a rate of
30% or a lower treaty rate). Withholding will not apply if a dividend paid by
the Fund to a foreign shareholder is "effectively connected" with a U.S. trade
or business, in which case the reporting and withholding requirements
applicable to U.S. citizens, U.S. residents or domestic corporations will
apply. Distributions of net long-term capital gains are not subject to tax
withholding, but in the case of a foreign shareholder who is a nonresident
alien individual, such distributions ordinarily will be subject to U.S. income
tax at a rate of 30% if the individual is physically present in the U.S. for
more than 182 days during the taxable year.
Other Matters. Investors should be aware that the investments to be
made by the Master Portfolio may involve sophisticated tax rules such as marked
to market rules that would result in income or gain recognition by the Master
Portfolio without corresponding current cash receipts. Although the Master
Portfolio will seek to avoid significant noncash income, such noncash income
could be recognized by the Master Portfolio, in which case the Master Portfolio
may distribute cash derived from other sources in order to meet the minimum
distribution requirements described above.
CAPITAL STOCK
The following information supplements and should be read in conjunction
with the section in the Prospectus entitled "The Fund, the Master Portfolio and
Management."
The Company, an open-end management investment company, was
incorporated in Maryland on September 9, 1991. The authorized capital stock of
the Company consists of 48,000,000,000 shares having a par value of $.001 per
share. As of the date of this SAI, the Company's Board of Directors has
authorized the issuance of twenty-four series of shares, each representing an
interest in one of the following funds -- the Aggressive Growth, Arizona
Tax-Free, Asset Allocation, Balanced, California Tax-Free Bond, California
Tax-Free Income, California Tax- Free Money Market Mutual, Corporate Stock,
Diversified Income, Equity Value, Ginnie Mae, Government Money Market Mutual,
Growth and Income, Intermediate Bond, Money Market Mutual, Money Market Trust,
National Tax-Free, National Tax-Free Money Market Mutual, Oregon Tax-Free,
Prime Money Market Mutual, Short-Intermediate U.S. Government Income, Small
Cap, Treasury Money Market Mutual and U.S. Government Allocation Funds -- and
the Board of Directors may, in the future, authorize the issuance of other
series of capital stock representing shares of additional investment
portfolios.
The Fund is comprised of three classes of shares, Class A Shares, Class
B Shares and Institutional Class shares. With respect to matters that affect
one class but not another, shareholders vote as a class; for example, the
approval of a Plan. Subject to the foregoing, on any matter submitted to a
vote of shareholders, all shares then entitled to
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<PAGE> 47
vote will be voted separately by portfolio unless otherwise required by the
Act, in which case all shares will be voted in the aggregate. For example, a
change in the Fund's fundamental investment policies would be voted upon only
by shareholders of the Fund and not shareholders of the Company's other
investment portfolios. Additionally, approval of an advisory contract is a
matter to be determined separately by the Fund. Approval by the shareholders
of one portfolio is effective as to that portfolio whether or not sufficient
votes are received from the shareholders of the other portfolios to approve the
proposal as to those portfolios. As used in the Prospectus and in this
Statement of Additional Information, the term "majority," when referring to
approvals to be obtained from shareholders of a class of the Fund, means the
vote of the lesser of (i) 67% of the shares of such class of the Fund
represented at a meeting if the holders of more than 50% of the outstanding
shares of such class of the Fund are present in person or by proxy, or (ii)
more than 50% of the outstanding shares of such class of the Fund. The term
"majority," when referring to the approvals to be obtained from shareholders of
the Company as a whole, means the vote of the lesser of (i) 67% of the
Company's shares represented at a meeting if the holders of more than 50% of
the Company's outstanding shares are present in person or by proxy, or (ii)
more than 50% of the Company's outstanding shares. Shareholders are entitled
to one vote for each full share held and fractional votes for fractional shares
held.
The Company may dispense with annual meetings of shareholders in any
year in which it is not required to elect directors under the Act. However,
the Company undertakes to hold a special meeting of its shareholders for the
purpose of voting on the question of removal of a director or directors if
requested in writing of the holders of at least 10% of the Company's
outstanding voting securities, and to assist in communicating with other
shareholders as required by Section 16(c) of the Act.
Each share of a class of the Fund represents an equal proportional
interest in the Fund with each other share of the same class and is entitled to
such dividends and distributions out of the income earned on the assets
belonging to the Fund as are declared in the discretion of the Directors. In
the event of the liquidation or dissolution of the Company, shareholders of the
Fund are entitled to receive the assets attributable to the Fund that are
available for distribution, and a distribution of any general assets not
attributable to the Fund that are available for distribution in such manner and
on such basis as the Directors in their sole discretion may determine.
Shareholders are not entitled to any preemptive rights. All shares,
when issued, will be fully paid and non-assessable by the Company.
The Trust is a business trust organized under the laws of Delaware. In
accordance with Delaware law and in connection with the tax treatment sought by
the Trust, the Trust's Declaration of Trust provides that its investors would
be personally responsible for Trust liabilities and obligations, but only to
the extent the Trust property is insufficient to satisfy such liabilities and
obligations. The Declaration of Trust also provides that the Trust shall
maintain appropriate insurance (for example, fidelity bonding
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and errors and omissions insurance) for the protection of the Trust,
its investors, Trustees, officers, employees and agents covering
possible tort and other liabilities, and that investors will be
indemnified to the extent they are held liable for a disproportionate
share of Trust obligations. Thus, the risk of an investor incurring
financial loss on account of investor liability is limited to
circumstances in which both inadequate insurance existed and the Trust itself
was unable to meet its obligations.
The Declaration of Trust further provides that obligations of the Trust
are not binding upon the Trustees individually but only upon the property of
the Trust and that the Trustees will not be liable for any action or failure to
act. However, nothing in the Declaration of Trust protects a Trustee against
any liability to which the Trustee would otherwise be subject by reason of
willful misfeasance, bad faith, gross negligence, or reckless disregard of the
duties involved in the conduct of the Trustee's office.
The interests in the Master Portfolio have substantially identical
voting and other rights as those rights enumerated above for Fund shares. The
Trust also intends to dispense with annual meetings, but will hold a special
meeting and assist investor communications under the circumstances described
above with respect to the Company in accord with provisions under Section 16(c)
of the Act. Whenever the Fund is requested to vote on a matter with respect to
the Master Portfolio, the Fund will hold a meeting of Fund shareholders and
will cast its votes as instructed by such shareholders. In a situation where
the Fund does not receive instruction from certain of its shareholders on how
to vote the corresponding shares of the Master Portfolio, the Fund will vote
such shares in the same proportion as the shares for which the Fund does
receive voting instructions.
As of September 6, 1996, Stephens owned approximately 99% of the
outstanding Institutional Class Shares of the Fund and such could be considered
a "control person" of the Fund for purposes of the 1940 Act. However, upon
commencement of the initial public offering of the Fund's shares, it is
expected that Stephens will own a significantly smaller percentage of the
Fund's outstanding voting securities and will no longer be considered a control
person of the Fund.
OTHER
The Registration Statements of the Trust and the Company, including the
Fund's Prospectus, the SAI and the exhibits filed therewith, may be examined at
the office of the Commission in Washington, D.C. Statements contained in the
Prospectus or the SAI as to the contents of any contract or other document
referred to herein or in the Prospectus are not necessarily complete, and, in
each instance, reference is made to the copy of such contract or other document
filed as an exhibit to the Registration Statement, each such statement being
qualified in all respects by such reference.
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INDEPENDENT AUDITORS
KPMG Peat Marwick LLP has been selected as the independent auditors for
the Company and the Trust. KPMG Peat Marwick LLP provides audit services, tax
return preparation and assistance and consultation in connection with review of
certain Securities & Exchange Commission filings. KPMG Peat Marwick LLP's
address is Three Embarcadero Center, San Francisco, California 94111.
FINANCIAL INFORMATION
The portfolio of investments, audited financial statements and
independent auditors' reports for the Company's other Funds are contained in
the Company's Annual Reports which are available by calling 1-800-222-8222.
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SAI APPENDIX
The following is a description of the ratings given by Moody's and S&P
to corporate bonds and commercial paper.
Corporate Bonds
Moody's: The four highest ratings for corporate bonds are "Aaa," "Aa,"
"A" and "Baa." Bonds rated "Aaa" are judged to be of the "best quality" and
carry the smallest amount of investment risk. Bonds rated "Aa" are of "high
quality by all standards," but margins of protection or other elements make
long-term risks appear somewhat greater than "Aaa" rated bonds. Bonds rated
"A" possess many favorable investment attributes and are considered to be upper
medium grade obligations. Bonds rated "Baa" are considered to be medium grade
obligations; interest payments and principal security appear adequate for the
present but certain protective elements may be lacking or may be
characteristically unreliable over any great length of time. Such bonds have
speculative characteristics as well. Moody's applies numerical modifiers: 1,
2 and 3 in each rating category from "Aa" through "Baa" in its rating system.
The modifier 1 indicates that the security ranks in the higher end of its
category; the modifier 2 indicates a mid-range ranking; and the modifier 3
indicates that the issue ranks in the lower end.
S&P: The four highest ratings for corporate bonds are "AAA," "AA," "A"
and "BBB." Bonds rated "AAA" have the highest ratings assigned by S&P and have
an extremely strong capacity to pay interest and repay principal. Bonds rated
"AA" have a "very strong capacity to pay interest and repay principal" and
differ "from the highest rated issued only in small degree." Bonds rated "A"
have a "strong capacity" to pay interest and repay principal, but are "somewhat
more susceptible" to adverse effects of changes in economic conditions or other
circumstances than bonds in higher rated categories. Bonds rated "BBB" are
regarded as having an "adequate capacity" to pay interest and repay principal,
but changes in economic conditions or other circumstances are more likely to
lead to a "weakened capacity" to make such repayments. The ratings from "AA"
to "BBB" may be modified by the addition of a plus or minus sign to show
relative standing within the category.
Corporate Commercial Paper
Moody's: The highest rating for corporate commercial paper is "P-1"
(Prime-1). Issuers rated "P-1" have a "superior capacity for repayment of
short-term promissory obligations." Issuers rated "P-2" (Prime-2) "have a
strong capacity for repayment of short-term promissory obligations," but
earnings trends, while sound, will be subject to more variation.
S&P: The "A-1" rating for corporate commercial paper indicates that
the "degree of safety regarding timely payment is either overwhelming or very
strong." Commercial paper with "overwhelming safety characteristics" will be
rated "A-1+."
A-1
<PAGE> 51
Commercial paper with a strong capacity for timely payments on issues will be
rated "A-2."
A-2
