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STAGECOACH FUNDS, INC.
Telephone: 1-800-222-8222
STATEMENT OF ADDITIONAL INFORMATION
DATED April 1, 1996
NATIONAL TAX-FREE MONEY MARKET MUTUAL FUND
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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 funds in the Stagecoach Family of Funds -- the
NATIONAL TAX-FREE MONEY MARKET MUTUAL FUND (the "Fund"). The Fund seeks to
achieve its investment objective by investing all of its assets in the Tax-Free
Money Market Master Portfolio (the "Master Portfolio") of Master Investment
Trust (the "Master Trust"). The Master Portfolio has the same investment
objective as the Fund.
The Fund may withdraw its investment in the Master Portfolio at
any time if the Board of Directors of the Company determines that such action
is in the best interests of the Fund and its shareholders. Upon such
withdrawal, the Company's Board of Directors would consider alternative
investments, including investing all of the Fund's assets in another investment
company with the same investment objective as the Fund or hiring an investment
adviser to manage the Fund's assets in accordance with the investment policies
and restrictions described in the Fund's then current Prospectus and SAI.
This SAI is not a prospectus and should be read in conjunction
with the Fund's Prospectus, also dated April 1, 1996. All terms used in this
SAI that are defined in the Fund's Prospectus have the meanings assigned in
such 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 by calling Wells Fargo Bank,
N.A. ("Wells Fargo Bank") at 1-800-222-8222.
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TABLE OF CONTENTS
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<TABLE>
<CAPTION>
Page
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<S> <C>
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . 3
Investment Restrictions . . . . . . . . . . . . . . . . . . . 3
Additional Permitted Investment
Activities . . . . . . . . . . . . . . . . . . . . . . . . 6
Management . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Distribution Plan . . . . . . . . . . . . . . . . . . . . . . 13
Calculation of Yield and Total Return . . . . . . . . . . . . 14
Determination of Net Asset Value . . . . . . . . . . . . . . . 17
Portfolio Transactions . . . . . . . . . . . . . . . . . . . . 18
Federal Income Taxes . . . . . . . . . . . . . . . . . . . . . 19
Capital Stock . . . . . . . . . . . . . . . . . . . . . . . . 23
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Independent Auditors . . . . . . . . . . . . . . . . . . . . . 25
Financial Information . . . . . . . . . . . . . . . . . . . . 26
SAI Appendix . . . . . . . . . . . . . . . . . . . . . . . . . A-1
</TABLE>
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INTRODUCTION
The Master Trust is a registered, open-end, management investment
company. The Master Trust is a "series fund," which is a mutual fund divided
into separate portfolios. The Master Trust currently offers eight diversified
portfolios: the Asset Allocation, Capital Appreciation, Cash Investment Trust,
Corporate Stock, Short-Term Municipal Income Short-Term Government-Corporate
Income, Tax-Free Money Market and U.S. Government Allocation Master Portfolios.
The Fund invests substantially all of its assets in the Tax-Free Money Market
Master Portfolio, which has the same investment objective as the Fund.
INVESTMENT RESTRICTIONS
The Fund and the Master Portfolio are subject to the following
investment restrictions, all of which are fundamental policies.
The Fund and the Master Portfolio may not:
(1) purchase the securities of issuers conducting their principal
business activity in the same industry if, immediately after the purchase and
as a result thereof, the value of the Fund's or the Master Portfolio's
investments in that industry would be 25% or more of the current value of the
Fund's or the Master Portfolio's total assets, provided that there is no
limitation with respect to investments in (i) municipal securities (for the
purpose of this restriction, private activity bonds and notes shall not be
deemed municipal securities if the payment of principal and interest on such
bonds or notes is the ultimate responsibility of non-governmental entities);
(ii) obligations of the U.S. Government, its agencies or instrumentalities
(including government-sponsored enterprises); and (iii) the obligations of
domestic banks (for the purpose of this restriction, domestic bank obligations
do not include obligations of U.S. branches of foreign banks or obligations of
foreign branches of U.S. banks); and further provided that this investment
restriction does not affect the Fund's ability to invest all or a portion of
its assets in the Master Portfolio;
(2) purchase or sell real estate or real estate limited
partnerships (other than municipal obligations or other securities secured by
real estate or interests therein or securities issued by companies that invest
in real estate or interests therein), commodities or commodity contracts
(including futures contracts) except that the Fund and Master Portfolio may
purchase securities of an issuer which invests or deals in commodities and
commodity contracts and except that the Fund and Master Portfolio may enter
into futures and options contracts in accordance with their respective
investment policies;
(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 municipal securities or other 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
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or Master Portfolio's investment program (including the Fund's investments in
the Master Portfolio) may be deemed to be an underwriting;
(5) make investments for the purpose of exercising control or
management, provided that this restriction does not affect the Fund's ability
to invest all or a portion of its assets in the Master Portfolio;
(6) issue senior securities, except that the Fund and Master
Portfolio may each borrow from banks up to 10% of the current value of its net
assets for temporary purposes only in order to meet redemptions, and these
borrowings may be secured by the pledge of up to 10% of the current value of
its net assets (but investments may not be purchased while any such outstanding
borrowing in excess of 5% of its net assets exists);
(7) write, purchase or sell puts, calls, warrants, options or any
combination thereof, except that the Fund and Master Portfolio may purchase
securities with put rights in order to maintain liquidity;
(8) purchase securities of any issuer (except securities issued
or guaranteed by the U.S. Government, its agencies and instrumentalities,
including government-sponsored enterprises) if, as a result, with respect to
75% of its total assets, more than 5% of the value of the Fund's or Master
Portfolio's total assets would be invested in the securities of any one issuer
or, with respect to 100% of its total assets the Fund's or Master Portfolio's
ownership would be more than 10% of the outstanding voting securities of such
issuer, provided that this restriction does not affect the Fund's ability to
invest all or a portion of its assets in the Master Portfolio; or
(9) make loans, except that the Fund and Master Portfolio may
each purchase or hold debt instruments, lend its portfolio securities or enter
into repurchase agreement transactions in accordance with its investment
policies; loans for purposes of this restriction will not include the Fund's
purchase of interests in the Master Portfolio.
With regard to fundamental investment restriction number (1)
above, the Fund and Master Portfolio intend to reserve freedom of action to
have in excess of 25% of the value of the respective total assets invested in
obligations of the banking industry. Regarding this fundamental concentration
policy, the Fund or Master Portfolio may hold in excess of 25% of the value of
the assets in obligations of the banking industry to the extent that the Fund
or Master Portfolio holds obligations with such credit enhancements as letters
of credit issued by domestic bank issuers, which will be considered to be
obligations of domestic banks. The SEC staff's position is that the exclusion
with respect to banks may only be applied to domestic banks. For this purpose,
the staff also takes the position that U.S. branches of foreign banks and
foreign branches of domestic banks may, if certain conditions are met, be
treated as "domestic banks". The Company and Trust currently intend to
consider only obligations of "domestic banks" to be within the exclusion with
respect to bank obligations.
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Fundamental investment restriction number (8), above, is less
restrictive than Rule 2a-7 of the 1940 Act. Nonetheless, it is the operating
policy of the Fund and the Master Portfolio to comply with Rule 2a-7's
diversification requirements.
The Fund and the Master Portfolio are subject to the following
non-fundamental policies.
Neither the Fund nor the Master Portfolio may:
(1) purchase or retain securities of any issuer if the Officers
or Directors/Trustees of the Company, the Master Trust or the 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 interests, leases, or limited partnership interests
in oil, gas, or other mineral exploration or development programs;
(3) purchase securities of issuers who, with their predecessors,
have been in existence less than three years, unless the securities are fully
guaranteed or insured by the U.S. Government, a state, commonwealth,
possession, territory, the District of Columbia or by an entity in existence at
least three years, or the securities are backed by the assets and revenues of
any of the foregoing if, by reason thereof, the value of its aggregate
investments in such securities will exceed 5% of its total assets, provided
that this restriction does not affect the Fund's ability to invest all or a
portion of its assets in the Master Portfolio; and
(4) purchase securities of unseasoned issuers, including their
predecessors, which have been in operation for less than three years, and
equity securities of issuers which are not readily marketable if, by reason
thereof, the value of the Fund's or Master Portfolio's aggregate investment in
such classes of securities will exceed 5% of its total assets.
The Fund and the Master Portfolio may each invest in shares of
other open-end, management investment companies, subject to the limitations of
Section 12(d)(1) of the 1940 Act, provided that any such purchases will be
limited to temporary investments in shares of unaffiliated investment
companies. However, the investment adviser will waive its advisory fees for
that portion of the Fund's or the Master Portfolio's assets so invested, except
when such purchase is part of a plan of merger, consolidation, reorganization
or acquisition. In addition, these unaffiliated investment companies must have
a fundamental investment policy of investing at least 80% of their net assets
in obligations that are exempt from federal income taxes and are not subject to
the federal alternative minimum tax. However, the above restrictions do not
affect the Fund's ability to invest all or a portion of its assets in the
Master Portfolio.
In addition, the Fund and the Master Portfolio each reserves the
right to invest up to 10% of the current value of its net assets in fixed time
deposits that are subject to withdrawal penalties and that have maturities of
more than seven days, repurchase agreements maturing in more than seven days,
illiquid securities and restricted securities. However, as long as the Fund's
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shares are registered for sale in a state that imposes a lower limit on the
percentage of a fund's assets that may be so invested, the Fund and the Master
Portfolio will comply with such lower limit. The Fund presently is limited to
investing 10% of its net assets in such securities due to limits applicable in
several states.
Furthermore, the Fund and the Master Portfolio may not purchase or
sell real estate limited partnership interests. The Fund and the Master
Portfolio do not currently intend to make loans of their portfolio securities.
ADDITIONAL PERMITTED INVESTMENT ACTIVITIES
Unrated and Downgraded Investments. The Master Portfolio may
purchase instruments that are not rated if, in the opinion of Wells Fargo
Bank, such obligations are of comparable quality to other rated investments
that are permitted to be purchased by the Master Portfolio. The Master
Portfolio may purchase unrated instruments only if they are purchased in
accordance with the Master Portfolio's procedures adopted by the Master Trust's
Board of Trustees in accordance with Rule 2a-7 under the 1940 Act. After
purchase by the Master Portfolio, a security may cease to be rated or its
rating may be reduced below the minimum required for purchase by the Master
Portfolio. In the event that a portfolio security ceases to be an "Eligible
Security" or no longer "presents minimal credit risks", immediate sale of such
security is not required, provided that the Board of Trustees has determined
that disposal of the portfolio security would not be in the best interests of
the Master Portfolio. To the extent the ratings given by Moody's or S&P may
change as a result of changes in such organizations or their rating systems,
the Master Portfolio will attempt to use comparable ratings as standards for
investments in accordance with the investment policies contained in its Part A
and in this SAI. The ratings of Moody's and S&P are more fully described in
the SAI Appendix.
Letters of Credit. Certain of the debt obligations (including
municipal securities, certificates of participation, commercial paper and other
short-term obligations) which the Master Portfolio may purchase may be backed
by an unconditional and irrevocable letter of credit of a bank, savings and
loan association or insurance company which assumes the obligation for payment
of principal and interest in the event of default by the issuer. Only banks,
savings and loan associations and insurance companies which, in the opinion of
Wells Fargo Bank, are of comparable quality to issuers of other permitted
investments of the Master Portfolio may be used for letter of credit-backed
investments, provided that the Master Trust's Board of Trustees approves or
ratifies such investments.
Loans of Portfolio Securities. The Master Portfolio may lend
securities from its portfolio to brokers, dealers and financial institutions
(but not individuals) if cash, U.S. Government obligations or other
high-quality debt obligations equal to at least 100% of the current market
value of the securities loaned (including accrued interest thereon) plus the
interest payable to the Master Portfolio with respect to the loan is maintained
with the Master Portfolio. In determining whether or not to lend a security to
a particular broker, dealer or financial institution, the Master Portfolio's
investment adviser considers all relevant facts and
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circumstances, including the size, creditworthiness and reputation of the
broker, dealer, or financial institution. Any loans of portfolio securities
are fully collateralized based on values that are marked to market daily. The
Master Portfolio will not enter into any portfolio security lending arrangement
having a duration longer than one year. Any securities that the Master
Portfolio receives as collateral do not become part of the Master Portfolio's
portfolio at the time of the loan and, in the event of a default by the
borrower, the Master Portfolio will, if permitted by law, dispose of such
collateral except for such part thereof that is a security in which the Master
Portfolio is permitted to invest. During the time securities are on loan, the
borrower will pay the Master Portfolio any accrued income on those securities,
and the Master Portfolio may invest the cash collateral and earn additional
income or receive an agreed-upon fee from a borrower that has delivered
cash-equivalent collateral. The Master Portfolio will not lend securities
having a value that exceeds one-third of the current value of its total assets.
Loans of securities by the Master Portfolio are subject to termination at the
Master Portfolio's or the borrower's option. The Master Portfolio may pay
reasonable administrative and custodial fees in connection with a securities
loan and may pay a negotiated portion of the interest or fee earned with
respect to the collateral to the borrower or the placing broker. Borrowers and
placing brokers are not permitted to be affiliated, directly or indirectly,
with the Master Trust, the Company, the investment adviser, or the distributor.
Foreign Obligations. Investments in foreign obligations involve
certain considerations that are not typically associated with investing in
domestic obligations. There may be less publicly available information about a
foreign issuer than about a domestic issuer. Foreign issuers also are not
generally subject to uniform accounting, auditing and financial reporting
standards or governmental supervision comparable to those applicable to
domestic issuers. In addition, with respect to certain foreign countries,
taxes may be withheld at the source under foreign income tax laws, and there is
a possibility of expropriation or confiscatory taxation, political or social
instability or diplomatic developments that could adversely affect investments
in, the liquidity of, and the ability to enforce contractual obligations with
respect to, securities of issuers located in those countries. The Master
Portfolio may not invest 25% or more of its assets in foreign obligations.
Obligations of foreign banks and foreign branches of U.S. banks
involve somewhat different investment risks from those affecting obligations of
U.S. banks, including the possibilities that liquidity could be impaired
because of future political and economic developments, that the obligations may
be less marketable than comparable obligations of U.S. banks, that a foreign
jurisdiction might impose withholding taxes on interest income payable on those
obligations, that foreign deposits may be seized or nationalized, that foreign
governmental restrictions (such as foreign exchange controls) may be adopted
which might adversely affect the payment of principal and interest on those
obligations and that the selection of those obligations may be more difficult
because there may be less publicly available information concerning foreign
banks or the accounting, auditing and financial reporting standards, practices
and requirements applicable to foreign banks may differ from those applicable
to U.S. banks. In that connection, foreign banks are not subject to
examination by any U.S. Government agency or instrumentality.
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Municipal Bonds. The Master Portfolio may invest in municipal
bonds. The two principal classifications of municipal bonds are "general
obligation" and "revenue" bonds. Municipal bonds are debt obligations issued
to obtain funds for various public purposes, including the construction of a
wide range of public facilities such as bridges, highways, housing, hospitals,
mass transportation, schools, streets, and water and sewer works. Other
purposes for which municipal bonds may be issued include the refunding of
outstanding obligations and obtaining funds for general operating expenses or
to loan to other public institutions and facilities. Industrial development
bonds are a specific type of revenue bond backed by the credit and security of
a private user. Certain types of industrial development bonds are issued by or
on behalf of public authorities to obtain funds to provide privately-operated
housing facilities, sports facilities, convention or trade show facilities,
airport, mass transit, port or parking facilities, air or water pollution
control facilities and certain local facilities for water supply, gas,
electricity, or sewage or solid waste disposal. The Master Portfolio may not
invest 25% or more of its assets in industrial development bonds. Assessment
bonds, wherein a specially created district or project area levies a tax
(generally on its taxable property) to pay for an improvement or project may be
considered a variant of either category. There are, of course, other
variations in the types of municipal bonds, both within a particular
classification and between classifications, depending on numerous factors.
Municipal Notes. Municipal notes include, but are not limited to,
tax anticipation notes ("TANs"), bond anticipation notes ("BANs"), revenue
anticipation notes ("RANs") and construction loan notes. Notes sold as interim
financing in anticipation of collection of taxes, a bond sale or receipt of
other revenues are usually general obligations of the issuer.
TANs. Uncertainty concerning a municipal issuer's capacity to
raise taxes as a result of such things as a decline in its tax base or a rise
in delinquencies could adversely affect the issuer's ability to meet its
obligations on outstanding TANs. Furthermore, some municipal issuers mix
various tax proceeds into a general fund that is used to meet obligations other
than those of the outstanding TANs. Use of such a general fund to meet various
obligations could affect the likelihood of making payments on TANs.
BANs. The ability of a municipal issuer to meet its obligations
on its BANs is primarily dependent on the issuer's adequate access to the
longer term municipal bond market and the likelihood that the proceeds of such
bond sales will be used to pay the principal of, and interest on, BANs.
RANs. A decline in the receipt of certain revenues, such as
anticipated revenues from another level of government, could adversely affect
an issuer's ability to meet its obligations on outstanding RANs. In addition,
the possibility that the revenues would, when received, be used to meet other
obligations could affect the ability of the issuer to pay the principal of, and
interest on, RANs.
The values of outstanding municipal securities vary as a result of
changing market evaluations of the ability of their issuers to meet the
interest and principal payments (i.e., credit risk). Such values also change
in response to changes in the interest rates payable on new issues
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of municipal securities (i.e., market risk). Should such interest rates rise,
the values of outstanding securities, including those held in the Master
Portfolio's portfolio, will decline and (if purchased at par value) sell at a
discount. If interest rates fall, the values of outstanding securities will
generally increase and (if purchased at par value) would sell at a premium.
Changes in the value of municipal securities held in the Master Portfolio's
portfolio arising from these or other factors will cause changes in the net
asset value per share of the Master Portfolio.
MANAGEMENT
The following information supplements and should be read in
conjunction with the section in the Prospectus entitled "The Fund and
Management." 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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Principal Occupations
Name, Address and Age Position During Past 5 Years
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Jack S. Euphrat, 73 Director Private Investor.
415 Walsh Road
Atherton, CA 94027.
*R. Greg Feltus, 44 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.
</TABLE>
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<TABLE>
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Thomas S. Goho, 53 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, 46 Director Senior Vice President
of Stephens and
Director of Brokerage
Accounting; and
Secretary of Stephens
Resource
Management.
*W. Rodney Hughes, 69 Director Private Investor.
31 Dellwood Court
San Rafael, CA 94901
Robert M. Joses, 77 Director Private Investor.
47 Dowitcher Way
San Rafael, CA 94901
*J. Tucker Morse, 51 Director Private Investor; Real Estate
10 Legrae Street Developer; Chairman
Charleston, SC 29401 of Renaissance
Properties Ltd.;
President of Morse
Investment
Corporation; and Co-
Managing Partner of
Main Street Ventures.
Richard H. Blank, Jr., 39 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>
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COMPENSATION TABLE
For the Fiscal Year Ended December 31, 1995
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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
*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 Officers and Directors of Overland
Express Funds, Inc. and Stagecoach Inc., and as Trustees and/or Officer 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 is
considered to be in the same "fund complex," as such term is defined in Form
N-1A under the 1940 Act, as the Company. The Directors are compensated by
other Companies and Trusts within the fund complex for their services as
Directors/Trustees to such Companies and Trusts. Currently the Directors do
not receive any retirement benefits or deferred compensation from the Company
or any other member of the fund complex.
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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 is advised by Wells Fargo Bank pursuant to an
Investment Advisory Contract approved by the Board of Trustees of the Master
Trust. The Investment Advisory Contract for the Master Portfolio provides that
Wells Fargo Bank 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 Investment Advisory Contract, Wells Fargo
Bank also furnishes to the Master Trust's Board of Trustees periodic reports on
the investment strategy and performance of the Master Portfolio.
Wells Fargo Bank 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's portfolio.
The Investment 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
Master Trust's Board of Trustees and (ii) by a majority of the Trustees of the
Master Trust who are not parties to the Investment Advisory Contract or
"interested persons" (as defined in the 1940 Act) of any such party. The
Investment 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
Master Trust has retained Stephens as administrator on behalf of the Master
Portfolio. Under the respective Administration Agreements between Stephens and
the Company and the Master Trust, Stephens shall provide as administrative
services, among other things: (i) general supervision of the Fund's and the
Master Portfolio's operations, including coordination of the services performed
by the investment adviser (in the case of the Master Portfolio), transfer
agent, custodian, shareholder servicing agent(s), independent auditors and
legal counsel, regulatory compliance, including the compilation of information
for documents such as reports to, and filings with, the SEC and state
securities commissions; and preparation of proxy statements and shareholder
reports for the Fund and the Master Portfolio; and (ii) general supervision
relative to the compilation of data required for the preparation of periodic
reports distributed to the Company's and Master Trust's Officers, Directors and
Trustees. Stephens also furnishes office space and certain facilities required
for conducting the Fund's and the Master Portfolio's business together with
those ordinary clerical and bookkeeping services that are not being furnished
by Wells Fargo Bank. Stephens also pays the compensation of the Master Trust's
and Company's Directors/Trustees, Officers and employees who are affiliated
with Stephens.
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The Investment Advisory Contract and Administration Agreements for
the Master Portfolio or the Fund, respectively, provide that if, in any fiscal
year, the total expenses of the Fund (including expenses relating to the Master
Portfolio) incurred by, or allocated to, the Fund and the Master Portfolio
(excluding taxes, interest, brokerage commissions and other portfolio
transaction expenses, expenditures that are capitalized in accordance with
generally accepted accounting principles, extraordinary expenses and amounts
accrued or paid under the Distribution Plan, but including the fees provided
for in the Investment Advisory Contract and the Administration Agreements)
exceed the most restrictive expense limitation applicable to the Fund imposed
by the securities laws or regulations of the states in which the Fund's shares
are registered for sale, Wells Fargo Bank and Stephens shall waive their fees
proportionately under the Investment Advisory Contract and the Administration
Agreements, respectively, for the fiscal year to the extent of the excess or
reimburse the excess, but only to the extent of their respective fees. The
Investment Advisory Contract and the Administration Agreements for the Master
Portfolio and the Fund, respectively, further provide that the Master
Portfolio's and the Fund's total expenses shall be reviewed monthly so that, to
the extent the annualized expenses for such month exceed the most restrictive
applicable annual expense limitation, the monthly fees under the contract and
the agreement shall be reduced as necessary. The most stringent applicable
restriction limits these expenses for any fiscal year to 2.5% of the first $30
million of the Fund's average net assets, 2% of the next $70 million of average
net assets, and 1.5% of the average net assets in excess of $100 million.
Custodian And Transfer and Dividend Disbursing Agent. Wells Fargo
Bank has been retained to act as custodian for both the Fund and the Master
Portfolio. The custodian, among other things, maintains separate custody
accounts in the names 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. Wells Fargo Bank is
not entitled to receive a fee for its services as transfer and dividend
disbursing agent and custodian for both the Fund and the Master Portfolio.
DISTRIBUTION PLAN
The Fund has adopted a Distribution Plan (the "Distribution Plan")
under Section 12(b) of the 1940 Act and Rule 12b-1 thereunder. The
Distribution Plan for the Fund was adopted by the Company's Board of Directors
on October 10, 1995, including a majority of Directors who were not "interested
persons" (as defined in the 1940 Act) of the Fund and who had no direct or
indirect financial interest in the operation of the Distribution Plan (the
"Qualified Directors").
The Distribution Plan permits the Fund to pay Stephens, for
distribution-related activities provided and related expenses incurred, a
monthly fee at the annual rate of up to 0.05% of the average daily net assets
of the Fund. The Distribution Plan authorizes Stephens to compensate
broker/dealers or financial institutions that have entered into Selling Group
Agreements with Stephens for distribution-related series.
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The Distribution 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 Qualified Directors. Any Agreements related to the
Distribution Plan also must be approved by such vote of the Directors and the
Qualified Directors. Such Agreements 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 Distribution
Plan 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 the Distribution Plan may be made except by
a majority of both the Directors of the Company and the Qualified Directors.
The Distribution Plan requires the Company to provide to the
Directors, and the Directors to review, at least quarterly, a written report of
the amounts expended (and purposes therefor) under the Distribution Plan and
any related agreements. 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.
CALCULATION OF YIELD AND TOTAL RETURN
The Fund may advertise certain yield information. Yield for the
Fund is calculated based on the net changes, exclusive of capital changes, over
a seven- or thirty-day period, in the value of a hypothetical pre-existing
account having a balance of one share at the beginning of the period,
subtracting a hypothetical charge reflecting deductions from shareholder
accounts, and dividing the difference by the value of the account at the
beginning of the base period to obtain the base period return, and then
multiplying the base period return by (365/7 or 365/30, as applicable) with the
resulting yield figure carried to at least the nearest hundredth of one
percent.
Tax-equivalent yield for the Fund is computed by dividing that
portion of the yield of the Fund which is tax-exempt by one minus a stated
income tax rate and then adding the product to that portion, if any, of the
Fund's yield that is not tax-exempt.
Effective yield and effective tax-equivalent yield for the Fund
are calculated by determining the net change, or tax-equivalent assumed net
change, exclusive of capital changes, in the value of a hypothetical
pre-existing account having a balance of one share at the beginning of the
period, subtracting a hypothetical charge reflecting deductions from
shareholder accounts, and dividing the difference by the value of the account
at the beginning of the base period to obtain the base period return, and then
compounding the base period return by adding one, raising the sum to a power
equal to 365 divided by seven or thirty, as applicable, and subtracting one
from the result.
The yield for the Fund fluctuates from time to time, unlike bank
deposits or other investments that pay a fixed yield for a stated period of
time, and does not provide a basis for determining future yields since it is
based on historical data. Yield is a function of portfolio
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<PAGE> 15
quality, composition, maturity and market conditions as well as the expenses
allocated to the Fund.
In addition, investors should recognize that changes in the net
asset value of shares of the Fund will affect the Fund's yield for any
specified period, and such changes should be considered together with the
Fund's yield in ascertaining the Fund's total return to shareholders for the
period. Yield information for the Fund may be useful in reviewing the
performance of the Fund and for providing a basis for comparison with
investment alternatives. The Fund's yield, however, may not be comparable to
the yields from investment alternatives because of differences in the foregoing
variables and differences in the methods used to value portfolio securities,
compute expenses and calculate yield.
Performance Comparisons. From time to time and only to the extent
the comparison is appropriate for the Fund, the Company may quote the Fund's
performance or price-earning ratio in advertising and other types of literature
as compared to the performance of the 91-Day Treasury Bill Average (Federal
Reserve), Lipper Money Market Fund Average, Donoghue Taxable Money Market Fund
Average, Salomon Three-Month Treasury Bill Index, Bank Averages (which are
calculated from figures supplied by the U.S. League of Savings Institutions
based on effective annual rates of interest on both passbook and certificate
accounts), Dow Jones Industrial Average, Lehman Brothers 20+ Treasury Index,
Lehman Brother 5-7 Year Treasury Index, Real Estate Investment Averages (as
reported by the National Association of Real Estate Investment Trusts), Gold
Investment Averages (provided by the World Gold Council), the Consumer Price
Index (as published by the U.S. Bureau of Labor Statistics and which is an
established measure of change over time in the prices of goods and services in
major expenditure groups), 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), other managed or unmanaged
indices or performance data of bonds, municipal securities, 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 Fund's performance 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.
(including the Lipper General Bond Fund Average, the Lipper Intermediate
Investment Grade Debt Fund Average, the Lipper Bond Fund Average, the Lipper
Growth Fund Average, the Lipper Flexible Fund Average), Donoghue's Money Fund
Report, including Donoghue's Taxable Money Market Fund Average, Morningstar,
Inc., or other independent services which monitor the performance of mutual
funds. The Fund's performance will be calculated by relating net asset value
per share at the beginning of a stated period to the net asset value of the
investment, assuming reinvestment of all gains distributions and dividends
paid, at the end of the period. Any such comparisons may be useful to
investors who wish to compare the Fund's past performance with that of its
competitors. Of course, past performance
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<PAGE> 16
cannot be a guarantee of future results. The Company also may include in
advertisements and other types of literature references to certain marketing
approaches of the Distributor and may also refer to general mutual fund
statistics provided by the Investment Company Institute.
The Company also may use the following information in
advertisements and other types of literature, only to the extent the
information is appropriate for the Fund: (i) the Consumer Price Index may be
used to assess the real rate of return from an investment in the Fund; (ii)
other government statistics, including, but not limited to, The Survey of
Current Business, may be used to illustrate investment attributes 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 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 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 Fund's historical performance or current or potential value
with respect to the particular industry or sector.
The Company also may use, in advertisements and other types of
literature, information and statements: (1) showing that bank savings accounts
offer a guaranteed return of principal and a fixed rate of interest, but no
opportunity for capital growth; and (2) describing Wells Fargo Bank, and its
affiliates and predecessors, as some of the first investment managers to advise
investment accounts using asset allocation and index strategies. The Company
also may include in advertising and other types of literature information and
other data from reports and studies prepared by the Tax Foundation, including
information regarding federal and state tax levels and the related "Tax Freedom
Day." The Company also may disclose in sales literature the assets and
categories of assets under management by the Fund's or Master Portfolio's
investment adviser and its affiliates. The Company may also disclose in
advertising and other types of sales literature the assets and categories of
assets under management by a fund's investment adviser or sub-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 discuss in advertisements and other types of
literature that the Fund has been assigned a rating by a nationally recognized
statistical rating organization ("NRSRO"), such as Standard & Poors
Corporation. Such rating would assess the creditworthiness of the investments
held by the Fund. The assigned rating would not be a recommendation to
purchase, sell or hold the Fund's shares since the rating would not comment on
the market price of the Fund's shares or the suitability of the Fund for a
particular investor. In addition, the assigned rating would be subject to
change, suspension or withdrawal as a result of changes in, or unavailability
of, information relating to the Fund or its investments. The Company may
compare the Fund's performance with other investments which are assigned
ratings by NRSROs. Any such comparisons may be useful to investors who wish to
compare the Fund's past performance with other rated investments.
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<PAGE> 17
The Company also may discuss in advertisements and other types of
literature the features, terms and conditions of Wells Fargo Bank accounts
through which investments in the Fund may be made via a "sweep" arrangement,
including, without limitation, through investments in a Managed Sweep Account,
National Tax-Free Money Market Checking Account or National Tax-Free Money
Market Access Account (collectively, the "Sweep Accounts"). Such
advertisements and other literature may include, without limitation,
discussions of such terms and conditions as the minimum deposit required to
open a Sweep Account, a description of the yield earned on shares of the Fund
through a Sweep Account, a description of any monthly or other service charge
on a Sweep Account and any minimum required balance to waive such service
charges, any overdraft protection plan offered in connection with a Sweep
Account, a description of any express transfer or "AutoSaver" plan offered in
connection with a Sweep Account, a description of any automated teller machine
("ATM") or check privileges offered in connection with a Sweep Account and any
other terms, conditions, features or plans offered in connection with a Sweep
Account. Such advertising or other literature may also include a discussion of
the advantages of establishing and maintaining a Sweep Account, and may include
statements from customers as to the reasons why such customers have established
and maintained a Sweep Account.
DETERMINATION OF NET ASSET VALUE
Net asset value per share of the Fund is determined by the
Custodian on each day the Fund is open for trading. The Fund's investments in
the Master Portfolio are valued at the net asset value of the Master
Portfolio's shares.
As indicated in the Fund's Prospectus, the Master Portfolio uses
the amortized cost method to determine the value of its portfolio securities
pursuant to Rule 2a-7 under the 1940 Act. The amortized cost method involves
valuing a security at its cost and amortizing any discount or premium over the
period until maturity, regardless of the impact of fluctuating interest rates
on the market value of the security. While this method provides certainty in
valuation, it may result in periods during which the value, as determined by
amortized cost, is higher or lower than the price that the Master Portfolio
would receive if the security were sold. During these periods the yield to a
shareholder may differ somewhat from that which could be obtained from a
similar fund that uses a method of valuation based upon market prices. Thus,
during periods of declining interest rates, if the use of the amortized cost
method resulted in a lower value of the Master Portfolio's portfolio on a
particular day, a prospective investor in the Master Portfolio would be able to
obtain a somewhat higher yield than would result from investment in a fund
using solely market values, and existing Master Portfolio shareholders would
receive correspondingly less income. The converse would apply during periods
of rising interest rates.
Rule 2a-7 provides that in order to value its portfolio using the
amortized cost method, the Master Portfolio must maintain a dollar-weighted
average portfolio maturity of 90 days or less, purchase securities having
remaining maturities (as defined in Rule 2a-7) of thirteen months or less and
invest only in those high-quality securities that are determined by the
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<PAGE> 18
Master Trust's Board of Trustees to present minimal credit risks. The maturity
of an instrument is generally deemed to be the period remaining until the date
when the principal amount thereof is due or the date on which the instrument is
to be redeemed. However, Rule 2a-7 provides that the maturity of an instrument
may be deemed shorter in the case of certain instruments, including certain
variable- and floating-rate instruments subject to demand features. Pursuant
to the Rule, the Master Trust's Board of Trustees is required to establish
procedures designed to stabilize, to the extent reasonably possible, the Master
Portfolio's price per share as computed for the purpose of sales and
redemptions at $1.00. Such procedures include review of the Master Portfolio's
portfolio holdings by the Master Trust's Board of Trustees, at such intervals
as it may deem appropriate, to determine whether or not the Master Portfolio's
net asset value calculated by using available market quotations deviates from
$1.00 per share based on amortized cost. The extent of any deviation will be
examined by said Board of Trustees. If such deviation exceeds 1/2 of 1%, said
Board will promptly consider what action, if any, will be initiated. In the
event the Board determines that a deviation exists that may result in material
dilution or other unfair results to investors or existing shareholders, the
Board will take such corrective action as it regards as necessary and
appropriate, including the sale of portfolio instruments prior to maturity to
realize capital gains or losses or to shorten average portfolio maturity,
withholding dividends or establishing a net asset value per share by using
available market quotations.
PORTFOLIO TRANSACTIONS
The Master 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 Master Trust's Board of Trustees, Wells
Fargo Bank is responsible for the Master Portfolio's portfolio decisions and
the placing of portfolio transactions. In placing orders, it is the policy of
the Master Trust to obtain the best results taking into account the dealer's
general execution and operational facilities, the type of transaction involved
and other factors such as the dealer's risk in positioning the securities
involved. While Wells Fargo Bank generally seeks reasonably competitive
spreads or commissions, the Master Portfolio will not necessarily be paying the
lowest spread or commission available.
Purchase and sale orders of the securities held by the Master
Portfolio may be combined with those of other accounts that Wells Fargo Bank
manages, and for which it has brokerage placement authority, in the interest of
seeking the most favorable overall net results. When Wells Fargo Bank
determines that a particular security should be bought or sold for the Master
Portfolio and other accounts managed by Wells Fargo Bank, Wells Fargo Bank
undertakes to allocate those transactions among the participants equitably.
Purchases and sales of securities usually will be principal
transactions. Portfolio securities normally will be purchased or sold from or
to dealers serving as market makers for the securities at a net price. The
Master Portfolio also purchases portfolio securities in underwritten offerings
and may purchase securities directly from the issuer. Generally, municipal
obligations, taxable money market securities, adjustable rate mortgage
securities and collateralized mortgage obligations are traded on a net basis
and do not involve brokerage commissions. The cost of
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<PAGE> 19
executing the Master Portfolio's portfolio securities transactions consists
primarily of dealer spreads and underwriting commissions. Under the 1940 Act,
persons affiliated with the Master Portfolio are prohibited from dealing with
the Master Portfolio as a principal in the purchase and sale of securities
unless an exemptive order allowing such transactions is obtained from the SEC
or an exemption is otherwise available.
The Master Portfolio may purchase municipal obligations from
underwriting syndicates of which Stephens or Wells Fargo Bank is a member under
certain conditions in accordance with the provisions of a rule adopted under
the 1940 Act and in compliance with procedures adopted by the Master Trust's
Board of Trustees.
Wells Fargo Bank, as the Master Portfolio's investment adviser,
may, in circumstances in which two or more dealers are in a position to offer
comparable results for a Master Portfolio transaction, give preference to a
dealer that has provided statistical or other research services to Wells Fargo
Bank. By allocating transactions in this manner, Wells Fargo Bank is able to
supplement its research and analysis with the views and information of
securities firms. Information so received will be in addition to, and not in
lieu of, the services required to be performed by Wells Fargo Bank under the
Investment Advisory Contracts, and the expenses of Wells Fargo Bank will not
necessarily be reduced as a result of the receipt of this supplemental research
information. Furthermore, research services furnished by dealers through which
Wells Fargo Bank places securities transactions for the Master Portfolio may be
used by Wells Fargo Bank in servicing its other accounts, and not all of these
services may be used by Wells Fargo Bank in connection with advising the Master
Portfolio.
Portfolio Turnover. Because the Master Portfolio's portfolio
consists of securities with relatively short-term maturities, the Master
Portfolio can expect to experience high portfolio turnover. A high portfolio
turnover rate should not adversely affect the Master Portfolio (or the Fund),
however, because portfolio transactions ordinarily will be made directly with
principals on a net basis and, consequently, the Master Portfolio (and,
accordingly, the Fund) usually will not incur excessive transaction costs.
FEDERAL INCOME TAXES
The Prospectus describes generally the tax treatment of
distributions by the Master Portfolio and the Fund. This section of the SAI
includes additional information concerning federal income taxes.
Qualification as a "regulated investment company" under the
Internal Revenue Code of 1986, as amended, (the "Code") requires, among other
things, that (a) at least 90% of the Fund's annual gross income be derived from
interest, payments with respect to securities loans, dividends and gains from
the sale or other disposition of securities or options thereon; (b) the Fund
derives less than 30% of its gross income from gains from the sale or other
disposition of securities or options thereon held for less than three months;
and (c) the Fund diversifies its holdings so that, at the end of each quarter
of the taxable year, (i) at least 50% of the market
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<PAGE> 20
value of the Fund's assets is represented by cash, government securities and
other securities limited in respect of any one issuer to an amount not greater
than 5% of the Fund's assets and 10% of the outstanding voting securities of
such issuer, and (ii) not more than 25% of the value of its assets is invested
in the securities of any one issuer (other than U.S. Government obligations and
the securities of other regulated investment companies), or of two or more
issuers which the Fund controls and which are determined to be engaged in the
same or similar trades or businesses or related trades or businesses. For
purposes of complying with these qualification requirements, the Fund will
"look through" to the Master Portfolio's investments. 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 shareholders at least 90% of its net
investment income and tax-exempt income earned in each year.
Generally, dividends and distributions of capital gains are
taxable to shareholders when they are received. However, dividends and
distributions of capital gains declared payable as of a record date in October,
November or December of any calendar year are deemed under the Code to have
been received by the shareholders on December 31 of that calendar year if the
dividend is actually paid in the following January. Such dividends will,
accordingly, be taxable to the recipient shareholders in the year in which the
record date falls.
In addition, a 4% nondeductible excise tax will be imposed on the
Fund (other than to the extent of the Fund's tax-exempt income) to the extent
it does not meet certain minimum distribution requirements by the end of each
calendar year. The Fund will either distribute, or be deemed to distribute,
all of its net investment income and net capital gains, by the end of each
calendar year and, thus, expects not to be subject to the excise tax.
Income and dividends received by the Fund from sources within
foreign countries may be subject to withholding and other taxes imposed by such
countries. Tax conventions between certain countries and the United States may
reduce or eliminate such taxes. Because not more than 50% of the value of the
total assets of the Fund is expected to consist of securities of foreign
issuers, the Fund will not be eligible to elect to "pass through" foreign tax
credits to shareholders.
It is expected that the net income of the Fund will be a positive
amount at the time of each determination thereof. If, however, the Fund's net
income determined at any time is a negative amount (which could occur, for
instance, upon non-payment of interest and/or principal by an issuer of a
security held by the Master Portfolio), the Fund would, pursuant to a decision
of the Board of Directors as provided by SEC rules, first offset the negative
amount with respect to each shareholder account from the dividends declared
during the month with respect to each such account. If, and to the extent
that, such negative amount exceeds such declared dividends at the end of the
month, the Fund will reduce the number of its outstanding shares by treating
each shareholder as having been redeemed from the Fund that number of full and
fractional shares in the account of such shareholder which represents the
shareholder's proportion of the amount of such excess. Each shareholder will
be deemed to have agreed to such redemption in these circumstances by investing
in the Fund.
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Although dividends will be declared daily based on each day's
earnings, for federal income tax purposes the Fund's earnings and profits will
be determined at the end of each taxable year and will be allocated pro rata
over the entire year. For federal income tax purposes, only amounts paid out
of earnings and profits will qualify as dividends. Thus, if during a taxable
year the Fund's declared dividends (as declared daily throughout the year)
exceed the Fund's net income (as determined at the end of the year), only that
portion of the year's distributions which equals the year's earnings and
profits will be deemed to have constituted a dividend. If during the year, the
Fund had reduced the number of shares, as described above, due to such a
shortfall, shareholders who had redeemed shares prior to such reduction could
be deemed to have realized a capital gain to the extent of the reduction, while
shareholders redeeming shares after the reduction could be deemed to have
realized a capital loss to the extent of the reduction. It is expected that
the Fund's net income, on an annual basis, will equal the dividends declared
during the year.
Gains or losses on sales of portfolio securities by the Master
Portfolio will generally be long-term capital gains or losses except in certain
cases where the Master Portfolio acquires a put thereon. Gain recognized on
the disposition of a debt obligation (including, tax-exempt obligations
purchased after April 30, 1993) purchased by the Master Portfolio at a market
discount (generally at a price less than its principal amount) will be treated
as ordinary income to the extent of the portion of the market discount which
accrued during the period of time the Master Portfolio held the debt
obligation. Market discount earned on tax-exempt obligations will qualify as
tax-exempt income. To the extent that the Master Portfolio, and thereby the
Fund, recognizes long-term capital gains, such gains will be distributed at
least annually, and these 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 notice mailed by the Fund to shareholder not later than 60 days after
the close of the Fund's taxable year.
If a shareholder receives a designated capital gain distribution
with respect to a Fund share and such Fund share is held for six months or
less, then (unless otherwise disallowed) any loss on the sale or exchange of
that Fund share will be treated as a long-term capital loss to the extent of
the designated capital gain distribution thereon. In addition, any loss
realized by a shareholder upon the sale or redemption of Fund shares held less
than six months is disallowed to the extent of any tax-exempt interest
dividends received by the shareholder-thereon. These rules shall not apply,
however, to losses incurred under a periodic redemption plan.
As of the printing of this SAI, the maximum individual tax rate
applicable to ordinary income is 39.6% (marginal rates may be higher for some
individuals due to phase out of exemptions and elimination of deductions), the
maximum individual rate applicable to net realized capital gains is 28% and the
maximum corporate tax rate applicable to ordinary income and net realized
capital gains is 35%.
However, to eliminate the benefit of lower marginal corporate
income tax rates, corporations which have taxable income in excess of $100,000
for a taxable year will be required to pay an additional amount of income tax
of up to $11,750 and corporations which have taxable
21
<PAGE> 22
income in excess of $15,000,000 for a taxable year will be required to pay an
additional amount of income tax of up to $100,000.
Any loss realized on a redemption or exchange of shares of the
Fund will be disallowed to the extent shares are reacquired within the 61-day
period beginning 30 days before and ending 30 days after the shares are
disposed of. In addition, if a shareholder exchanges or otherwise disposes of
Fund shares within 90 days of having acquired such shares, and if, as a result
of having acquired those shares, the shareholder subsequently pays a reduced
sales charge for shares of the Fund, or of a different fund, the sales charge
previously incurred acquiring the Fund's shares shall not be taken into account
(to the extent such previous sales charges do not exceed the reduction in sales
charges) 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.
If, in the opinion of the Fund, ownership of its shares has or may
become concentrated to an extent that could cause the Fund to be deemed a
personal holding company within the meaning of the Code, the Fund may require
the redemption of shares or reject any order for the purchase of shares in an
effort to prevent such concentration.
Foreign Shareholders. Under the Code, distributions of net
investment income by the Fund to a nonresident alien individual, non-resident
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. resident 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.
Special Tax Considerations -- Federal. The portion of total
dividends paid by the Fund with respect to any taxable year that qualifies for
exclusion from gross income ("exempt-interest dividends") will be the same for
all shareholders receiving dividends during such year. In order for the Fund
to pay exempt-interest dividends during any taxable year, at the close of each
fiscal quarter at least 50% of the aggregate value of the Fund's assets must
consist of tax-exempt securities. The exemption of interest income derived
from investments in tax-exempt obligations for federal income tax purposes may
not result in a similar exemption under the laws of a particular state or local
taxing authority. Not later than 60 days after the close of its taxable year,
the Fund will notify its shareholders of the portion of the dividends paid with
respect to such taxable year which constitutes exempt-interest dividends. The
aggregate amount of dividends so designated cannot exceed the excess of the
amount of interest excludable from gross income under Section 103 of the Code
received by the Fund during the taxable year over any amounts disallowed as
deductions under Sections 265 and 171(a)(2) of the Code.
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<PAGE> 23
Shareholders who may be "substantial users" (or related persons of
substantial users) with respect to municipal securities held by the Fund should
consult their tax advisers to determine whether exempt-interest dividends paid
by the Fund with respect to such obligations retain their federal and
California tax exclusions.
Long-term and/or short-term capital gain distributions will not
constitute exempt-interest dividends and will be taxed as capital gains and
ordinary income dividends, respectively. Moreover, interest on indebtedness
incurred by a shareholder to purchase or carry shares of the Fund is not
deductible for personal income tax purposes to the extent the shareholder
receives exempt-interest dividends during his or her taxable year.
Exempt-interest dividends will be tax exempt for purposes of personal income
tax.
Other Matters. Fund shares would not be suitable for tax-exempt
institutions and may not be suitable for retirement plans qualified under
Section 401 of the Code, H.R. 10 plans and IRAs since such plans and accounts
are generally tax-exempt and, therefore, would not benefit from the exempt
status of dividends from the Fund. Such dividends would be ultimately taxable
to the beneficiaries when distributed to them.
CAPITAL STOCK
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 17,000,000,000 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 thirteen series of shares, each representing an
interest in one portfolio -- the Aggressive Growth Fund, the Asset Allocation
Fund, California Tax-Free Bond Fund, the California Tax-Free Income Fund, the
California Tax-Free Money Market Mutual Fund, the Corporate Stock Fund, the
Diversified Income Fund, the Ginnie Mae Fund, the Growth and Income Fund, the
Money Market Mutual Fund, the National Tax-Free Money Market Mutual Fund, the
Short-Intermediate U.S. Government Income Fund, and the U.S. Government
Allocation Fund. The Board of Directors may, in the future, authorize the
issuance of other series of capital stock representing shares of additional
investment portfolios or funds.
All shares of the Fund have equal voting rights and will be voted
in the aggregate, and not by series, except where voting by series is required
by law or where the matter involved only affects one series. For example, a
change in the Fund's fundamental investment policy would be voted upon only by
shareholders of the Fund. Additionally, approval of an advisory contract is a
matter to be determined separately by Fund. As used in the Fund's Prospectus
and in this SAI, the term "majority," when referring to approvals to be
obtained from shareholders of the Fund, means the vote of the lesser of (i) 67%
of the shares of the Fund represented at a meeting if the holders of more than
50% of the outstanding shares of the Fund are present in person or by proxy, or
(ii) more than 50% of the outstanding shares of the Fund. The term "majority,"
when referring to the approvals to be obtained from shareholders of the Company
as a whole, means the vote of the lesser of (i) 67% of the Company's shares
represented at a meeting if the holders of
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<PAGE> 24
more than 50% of the Company's outstanding shares are present in person or by
proxy, or (ii) more than 50% of the Company's outstanding shares. Shareholders
are entitled to one vote for each full share held and fractional votes for
fractional shares held.
The Company may dispense with an annual meeting of shareholders in
any year in which it is not required to elect Directors under the 1940 Act.
However, the Company has undertaken to hold a special meeting of its
shareholders for the purpose of voting on the question of removal of a Director
or Directors if requested in writing by the holders of at least 10% of the
Company's outstanding voting securities, and to assist in communicating with
other shareholders as required by Section 16(c) of the 1940 Act.
Each share of the Fund represents an equal proportional interest
in the Fund with each other share and is entitled to such dividends and
distributions out of the income earned on the assets belonging to the Fund as
are declared in the discretion of the Directors. In the event of the
liquidation or dissolution of the Company, shareholders of the Fund are
entitled to receive the assets attributable to the Fund that are available for
distribution, and a distribution of any general assets not attributable to a
particular investment portfolio that are available for distribution in such
manner and on such basis as the Directors in their sole discretion may
determine.
Shareholders are not entitled to any preemptive rights. All
shares, when issued, will be fully paid and non-assessable by the Company.
The Master Trust, a no-load, diversified, open-end management
investment company, was organized as a Delaware business trust on August 15,
1991. In accordance with Delaware law and in connection with the tax
treatment sought by the Master Trust, the Master Trust's Declaration of Trust
provides that its investors would be personally responsible for Master Trust
liabilities and obligations, but only to the extent the Master Trust's property
is insufficient to satisfy such liabilities and obligations. The Declaration
of Trust also provides that the Master Trust shall maintain appropriate
insurance (for example, fidelity bonding and errors and omissions insurance)
for the protection of the Master 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 Master 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 exists and the Master Trust
itself is unable to meet its obligations.
The Declaration of Trust further provides that obligations of the
Master Trust are not binding upon the Trustees individually but only upon the
property of the Master Trust and that the Trustees will not be liable for any
action or failure to act, but 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 shares of the
Fund. The Master Trust also intends to
24
<PAGE> 25
dispense with annual meetings, but is required by Section 16(c) of the Act to
hold a special meeting and assist investor communications under the
circumstances described above with respect to the Company. 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 April 1, 1996, the shareholder identified below was known by
the Company to own 25% or more of the Fund's outstanding shares:
<TABLE>
<CAPTION>
Name and Address Percentage Capacity
Name of Fund of Shareholder of Fund Owned
- ------------ --------------------- ---------- --------
<S> <C> <C> <C>
National Tax-Free Stephens Inc. 100% Record
Money Market 111 Center Street
Mutual Fund Little Rock, AR 72201
</TABLE>
Upon commencement of the public offering of the Funds shares, and
thereafter, it is anticipated that Stephens Inc. will own a significantly
smaller percentage of the Fund's shares and will no longer be considered a
controlling person.
OTHER
The Registration Statements of the Company and the Master Trust,
including the Fund's Prospectus, the SAI and the exhibits filed therewith, may
be examined at the office of the SEC in Washington, D.C. Statements contained
in the Prospectus or the SAI as to the contents of any contract or other
document referred to herein or in the Prospectus are not necessarily complete,
and, in each instance, reference is made to the copy of such contract or other
document filed as an exhibit to the Registration Statements, each such
statement being qualified in all respects by such reference.
INDEPENDENT AUDITORS
KPMG Peat Marwick LLP have been selected as the independent
auditors for the Company and the Master Trust. KPMG Peat Marwick LLP provides
audit services, tax return preparation and assistance and consultation in
connection with review of certain SEC filings. KPMG Peat Marwick LLP's address
is Three Embarcadero Center, San Francisco, California 94111.
25
<PAGE> 26
FINANCIAL INFORMATION
The portfolio of investments, audited financial statements and
independent auditors' report contained in the Company's Annual Report for the
year ended December 31, 1995, as filed with the SEC on March 8, 1996 are hereby
incorporated by reference into this SAI. The Company's Annual Report and the
SAI will be sent free of charge to any shareholder who requests these documents.
26
<PAGE> 27
SAI APPENDIX
The following is a description of the ratings given by Moody's and
S&P to corporate and municipal bonds, municipal notes, and corporate and
municipal commercial paper.
Corporate and Municipal Bonds
Moody's: The four highest ratings for corporate and municipal
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 also
applies numerical modifiers in its rating system: 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 and municipal 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.
Municipal Notes
Moody's: The highest ratings for state and municipal short-term
obligations are "MIG 1," "MIG 2," and "MIG 3" (or "VMIG 1," "VMIG 2" and "VMIG
3" in the case of an issue having a variable rate demand feature). Notes rated
"MIG 1" or "VMIG 1" are judged to be of the "best quality." Notes rated "MIG
2" or "VMIG 2" are of "high quality," with margins of protections "ample
although not as large as in the preceding group." Notes rated "MIG 3" or "VMIG
3" are of "favorable quality," with all security elements accounted for, but
lacking the strength of the preceding grades.
A-1
<PAGE> 28
S&P: The "SP-1" rating reflects a "very strong or strong capacity
to pay principal and interest." Notes issued with "overwhelming safety
characteristics" will be rated "SP-1+." The "SP-2" rating reflects a
"satisfactory capacity" to pay principal and interest.
Corporate and Municipal Commercial Paper
Moody's: The highest rating for corporate and municipal
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 and municipal commercial
paper indicates that the "degree of safety regarding timely payment is either
overwhelming or very strong." Commercial paper with "overwhelming safety
characteristics" will be rated "A-1+." Commercial paper with a strong capacity
for timely payments on issues will be rated "A-2."
Corporate Notes
S&P: The two highest ratings for corporate notes are "SP-1" and
"SP-2." The "SP-1" rating reflects a "very strong or strong capacity to pay
principal and interest." Notes issued with "overwhelming safety
characteristics" will be rated "SP-1+." The "SP-2" rating reflects a
"satisfactory capacity" to pay principal and interest.
A-2
