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As filed with the Securities and Exchange Commission
on June 27, 1995
Registration No. 811-08140
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_______________
FORM N-1A
AMENDMENT NO. 2 TO
REGISTRATION STATEMENT
UNDER
THE INVESTMENT COMPANY ACT OF 1940
MANAGED SERIES INVESTMENT TRUST
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
111 Center Street, Little Rock, Arkansas 72201
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE)
_______________________________________
Registrant's Telephone Number, including Area Code:
(800) 643-9691
Richard H. Blank, Jr.
c/o Stephens Inc.
111 Center Street
Little Rock, Arkansas 72201
(NAME AND ADDRESS OF AGENT FOR SERVICE)
WITH A COPY TO:
Robert M. Kurucza, Esq.
Marco E. Adelfio, Esq.
Morrison & Foerster
2000 Pennsylvania Avenue, N.W., Suite 5500
Washington, D.C. 20006-1812
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EXPLANATORY NOTE
This amendment relates to the Growth Stock Master Series and
Short-Intermediate Term Master Series (the "Master Series") of Managed Series
Investment Trust. This amendment includes the annual update of all audited
financial information pertaining to the Master Series. This amendment does not
effect the registration statement for the Growth and Income Master Series,
Tax-Free Intermediate Income Master Series, Tax-Free Money Market Master
Series, California Tax-Free Intermediate Income Master Series, California
Tax-Free Money Market Master Series and California Tax-Free Short-Term Income
Master Series.
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MANAGED SERIES INVESTMENT TRUST
PART A
June 28, 1995
Responses to Items 1 through 3 have been omitted pursuant to
paragraph F.4. of the General Instructions to Form N-1A.
ITEM 4. GENERAL DESCRIPTION OF REGISTRANT.
Managed Series Investment Trust ("Trust") is a no-load,
diversified, open-end series investment company which was
organized as a business trust under the laws of Delaware on
October 28, 1993. The Trust is currently comprised of eight
series: the Tax-Free Intermediate Income Master Series, the
Tax-Free Money Market Master Series, the California Tax-Free
Intermediate Income Master Series, the California Tax-Free
Short-Term Income Master Series, the California Tax-Free Money
Market Master Series, the Growth and Income Master Series, the
Growth Stock Master Series and the Short-Intermediate Term Master
Series (each a "Master Series"). As of the date of this Part A,
only the Growth Stock Master Series and Short-Intermediate Term
Master Series had commenced operations. Beneficial interests in
the Master Series of the Trust are issued solely in private
placement transactions that do not involve any "public offering"
within the meaning of Section 4(2) of the Securities Act of 1933,
as amended (the "1933 Act"). Investments in the Series of the
Trust may only be made by registered broker/dealers or by
investment companies, insurance company separate accounts, common
or commingled trust funds, group trusts or other "accredited
investors" within the meaning of Regulation D under the 1933 Act.
This registration statement does not constitute an offer to
sell, or the solicitation of an offer to buy, any security within
the meaning of the 1933 Act.
On June 21, 1995, Wells Fargo & Co. and The Nikko Securities
Co., Ltd. signed a definitive agreement to sell their joint
venture interest in Wells Fargo Nikko Investment Advisers
("WFNIA") to Barclays PLC of the U.K. As part of the sale,
Barclays also will acquire Wells Fargo Bank's MasterWorks
division, which includes the Growth Stock Master Series and the
Short-Intermediate Term Master Series. The sale, which is
subject to the approval of appropriate regulatory authorities, is
expected to close in the fourth quarter of 1995.
Barclays is the second largest clearing bank in the U.K.
with $259 billion in total assets. Barclays has announced its
intention to combine WFNIA with the quantitative group of BZW
Asset Management ("BZWAM"), its international asset management
arm. BZWAM is the largest quantitative fund manager in Europe, with
approximately $32 billion of quantitative funds under management,
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as of March 31, 1995. The BZW Division of Barclays, of which
BZWAM forms a part, is the investment banking arm of
Barclays and offers a full range of investment banking, capital
markets and asset management services.
It is anticipated that a special meeting of shareholders of
the Growth Stock Master Series and Short-Intermediate Term Master
Series will be convened to consider a change in the structure of
said Master Series, which will become effective only upon the
sale of the MasterWorks division. Subject to the approval of
the Trust's Board of Trustees it is not contemplated that the
proposed change in structure will change the investment objective
or overall investment strategy of either Master Series.
The investment objective of the TAX-FREE INTERMEDIATE INCOME
MASTER SERIES is to provide investors with a high level of income
exempt from federal income taxes, while preserving capital. The
Master Series seeks to achieve its investment objective by
investing primarily in intermediate-term, investment grade
municipal securities. Intermediate-term securities are
securities issued with remaining maturities of 2 to 10 years.
The Master Series also may invest in unrated municipal securities
that are determined by Wells Fargo Bank, N.A. ("Wells Fargo"),
as investment adviser, to be of comparable quality to municipal
securities that are rated investment grade. Investment grade is
a term used to describe securities suitable for purchase by
prudent investors. Standard & Poor's Corporation ("S&P"), a
nationally recognized statistical rating organization ("NRSRO"),
designates its top four bond ratings as investment grade: AAA,
AA, A and BBB. Moody's Investors Service, Inc. ("Moody's") is
also an NRSRO and designates its top four bond ratings as
investment grade: Aaa, Aa, A and Baa. A description of the
relevant ratings is contained in the Appendix to the Statement of
Additional Information (the "SAI") for the Master Series.
The investment objective of the TAX-FREE MONEY MARKET MASTER
SERIES is to provide investors with a high level of income exempt
from federal income taxes, while preserving capital and
liquidity. The Master Series seeks to achieve its investment
objective by investing in high-quality, U.S. dollar denominated
money market instruments, primarily municipal obligations, with
remaining maturities not exceeding 13 months.
The investment objective of the CALIFORNIA TAX-FREE
INTERMEDIATE INCOME MASTER SERIES is to provide investors with a
high level of income exempt from federal income taxes and
California personal income taxes, while preserving capital. The
Master Series seeks to achieve its investment objective by
investing in intermediate-term, investment grade municipal
securities. The Master Series also may invest in unrated
municipal securities that are determined by Wells Fargo, as
investment adviser, to be of comparable quality to municipal
securities that are rated investment grade.
The investment objective of the CALIFORNIA TAX-FREE
SHORT-TERM INCOME MASTER SERIES is to provide investors with a
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high level of income exempt from federal income taxes and
California personal income taxes, while preserving capital. The
Master Series seeks to achieve its investment objective by
investing in short-term, investment grade municipal securities.
Short-term securities include those securities issued with an
average weighted maturity of 3 years or less. The Master Series
also may invest in unrated municipal securities that are
determined by Wells Fargo, as investment adviser, to be of
comparable quality to municipal securities that are rated
investment grade. A description of the relevant ratings is
contained in the Appendix to the SAI for the Master Series.
The investment objective of the CALIFORNIA TAX-FREE MONEY
MARKET MASTER SERIES is to provide investors with a high level of
income exempt from federal income taxes and California personal
income taxes, while preserving capital and liquidity. The Master
Series seeks to achieve its investment objective by investing in
high-quality, U.S. dollar-denominated money market instruments,
primarily municipal obligations with remaining maturities not
exceeding 13 months.
The investment objective of the GROWTH AND INCOME MASTER
SERIES is to provide investors with a high level of current
income and to achieve long-term capital appreciation. The Master
Series seeks to achieve this investment objective by investing
primarily in common stocks, preferred stocks and debt securities
that are convertible into common stocks. Under normal market
conditions, the Master Series will invest at least 65% of its
total assets in common stocks and securities which are
convertible into common stocks and at least 65% of its total
assets in income-producing securities. Up to 20% of the Master
Series' assets may be invested in securities of foreign issuers.
The investment objective of the GROWTH STOCK MASTER SERIES is
to provide investors with above-average long-term total return,
with a primary focus on capital appreciation. Current income is
a secondary consideration. The Master Series seeks to provide
investors with a rate of total return that, over a three to five
year time horizon, exceeds that of the S&P 500 Index (before fees
and expenses) over comparable periods by investing in a
diversified portfolio consisting primarily of growth-oriented
common stocks.
The investment objective of the SHORT-INTERMEDIATE TERM
MASTER SERIES is to provide investors with a total return, before
fees and expenses, exceeding that of the Lehman Brothers
Intermediate Government/Corporate Bond Index ("LB Intermediate
Bond Index"). The Master Series seeks to achieve its investment
objective by investing in a mix of the following types of
securities: U.S. Treasury and agency debt securities, corporate
bonds, collateralized mortgage obligations and mortgage-backed
securities, other types of asset-backed securities and money
market instruments.
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INVESTMENT POLICIES RELATING TO THE TAX-FREE INTERMEDIATE INCOME
MASTER SERIES AND THE TAX-FREE MONEY MARKET MASTER SERIES:
Wells Fargo, as investment adviser to the Tax-Free
Intermediate Income Master Series and the Tax-Free Money Market
Master Series, will pursue the objectives of the such Master
Series by investing (under normal market conditions)
substantially all of the assets of each Master Series in the
following types of municipal obligations that pay interest which
is exempt from federal income tax: Bonds, notes and commercial
paper issued by or on behalf of states, territories, and
possessions of the United States, the District of Columbia, and
their political subdivisions, agencies, instrumentalities and
authorities, the interest on which, in the opinion of counsel to
the issuer or bond counsel, is exempt from federal income tax.
These municipal obligations and the taxable investments described
below may bear interest at rates that are not fixed ("floating
and variable rate instruments").
Each such Master Series may temporarily invest some of its
assets in cash reserves or certain high-quality, taxable money
market instruments, or may engage in other investment activities.
Each Master Series may elect to invest temporarily up to 20% of
its net assets in certain permitted taxable investments, which
include cash reserves, U.S. Government obligations, obligations
of domestic banks, commercial paper, taxable municipal
obligations and repurchase agreements. The Tax-Free Intermediate
Income Master Series may make loans of portfolio securities. The
Tax-Free Money Market Master Series also may invest in
obligations of foreign banks and foreign securities. Such
temporary investments would most likely be made when there is an
unexpected or abnormal level of investor purchases or redemptions
of shares of a Master Series or because of unusual market
conditions. The income from these temporary investments and
investment activities may be subject to federal income taxes.
However, as stated above, Wells Fargo seeks to invest
substantially all of the Master Series' assets in securities
exempt from such taxes. A more complete description of tax-free
municipal obligations, taxable money market instruments and other
investment activities is contained in the "Appendix -- Additional
Investment Policies."
As a matter of fundamental policy, at least 80% of the net
assets of each Master Series are invested (under normal market
conditions) in municipal obligations that pay interest which is
exempt from federal income taxes and is not subject to the
federal alternative minimum tax. In addition, under normal
market conditions, at least 65% of the total assets of the Tax-
Free Intermediate Income Master Series are invested in
intermediate-term municipal securities.
At least 65% of the total assets of each Master Series are
invested (under normal market conditions) in municipal
obligations that pay interest which is exempt from federal income
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taxes. However, as a matter of general operating policy, each
Master Series seeks to have substantially all of its assets
invested in such municipal obligations. The Master Series'
investment adviser may rely either on the opinion of counsel to
the issuer of the municipal obligations or on Internal Revenue
Service ("IRS") rulings regarding the tax treatment of these
obligations. In addition, each Master Series may invest 25% or
more of its assets in municipal obligations that are related in
such a way that an economic, business or political development or
change affecting one such obligation would also affect the other
obligations; for example, a Master Series may own different
municipal obligations which pay interest based on the revenues of
similar types of projects.
It is anticipated that the portfolio turnover rate for the
Tax-Free Intermediate Income Master Series will not normally
exceed 100% in any year. A high portfolio turnover rate should
not result in the Master Series paying substantially more
brokerage commissions, since most transactions in municipal
securities are effected on a principal basis.
INVESTMENT POLICIES RELATING TO THE CALIFORNIA TAX-FREE
INTERMEDIATE INCOME MASTER SERIES, THE CALIFORNIA TAX-FREE
SHORT-TERM INCOME MASTER SERIES AND THE CALIFORNIA TAX-FREE MONEY
MARKET MASTER SERIES:
Wells Fargo, as investment adviser to the Master Series, will
pursue the objectives of such Master Series by investing (under
normal market conditions) substantially all of the assets of each
Master Series in the following types of municipal obligations
that pay interest which is exempt from both federal income tax
and California personal income tax: Bonds, notes and commercial
paper issued by or on behalf of the State of California, its
cities, municipalities, political subdivisions and other public
authorities. These municipal obligations and the taxable
investments described below may bear interest at rates that are
not fixed ("floating and variable rate instruments").
Each Master Series may temporarily invest some of its assets
in cash reserves or certain high-quality, taxable money market
instruments, or may engage in other investment activities. Each
Master Series may elect to invest temporarily up to 20% of its
net assets in certain permitted taxable investments, which
include cash reserves, U.S. Government obligations, obligations
of domestic banks, commercial paper, taxable municipal
obligations, and repurchase agreements. The California Tax-Free
Intermediate Income Master Series and California Tax-Free
Short-Term Income Master Series may make loans of portfolio
securities. The California Tax-Free Money Market Master Series
also may invest in obligations of foreign banks and foreign
securities. Such temporary investments would most likely be made
when there is an unexpected or abnormal level of investor
purchases or redemptions of shares of a Master Series or because
of unusual market conditions. The income from these temporary
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investments and investment activities may be subject to federal
income taxes and California personal income taxes. However, as
stated above, Wells Fargo seeks to invest substantially all of
the assets of each Master Series in securities exempt from such
taxes. A more complete description of tax-free municipal
obligations, taxable money market instruments, and other
investment activities is contained in the "Appendix -- Additional
Investment Policies" and in the SAI for the Master Series.
As a matter of fundamental policy, at least 80% of the net
assets of each Master Series are invested (under normal market
conditions) in municipal obligations that pay interest which is
exempt from federal income taxes and not subject to the federal
alternative minimum tax. In addition, under normal market
conditions, at least 65% of the total assets of the California
Tax-Free Intermediate Income Master Series and of the California
Tax-Free Short-Term Income Master Series are invested in
intermediate- and short-term municipal securities, respectively.
At least 65% of the total assets of each Master Series are
invested (under normal market conditions) in municipal
obligations that pay interest which is exempt from California
personal income taxes. However, as a matter of general operating
policy, each Master Series seeks to have substantially all of its
assets invested in such municipal obligations. The investment
adviser to the Master Series may rely either on the opinion of
counsel to the issuer of the municipal obligations or on IRS
rulings regarding the tax treatment of these obligations. In
addition, each Master Series may invest 25% or more of its assets
in California municipal obligations that are related in such a
way that an economic, business or political development or change
affecting one such obligation would also affect the other
obligations; for example, a Master Series may own different
municipal obligations which pay interest based on the revenues of
similar types of projects.
It is anticipated that the portfolio turnover rates for the
California Tax-Free Intermediate Income Master Series and the
California Tax-Free Short-Term Income Master Series will not
normally exceed 100% in any year. A high portfolio turnover rate
should not result in the Master Series paying substantially more
brokerage commissions, since most transactions in municipal
securities are effected on a principal basis.
LIMITING INVESTMENT RISKS -- As noted above and discussed further
in the section captioned "Appendix -- Additional Investment
Policies," some of the securities purchased by the Tax-Free
Intermediate Income Master Series, the California Tax-Free
Intermediate Income Master Series and the California Tax-Free
Short-Term Income Master Series may be rated in the lowest
investment grade category (i.e., rated BBB by S&P or Baa by
Moody's). These securities are regarded by S&P as having an
adequate capacity to pay interest and repay principal, but
changes in economic conditions or other circumstances are more
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likely to lead to a weakened capacity to make such repayments.
Moody's considers such securities as having speculative
characteristics.
The Tax-Free Money Market Master Series and the California
Tax-Free Money Market Master Series, under the Investment Company
Act of 1940 (the "1940 Act"), must comply with certain investment
criteria designed to provide liquidity, reduce risk and allow the
Master Series to maintain a stable net asset value of $1.00 per
share. Of course, the Master Series cannot guarantee a $1.00
share price. The Master Series' dollar-weighted average
portfolio maturity must not exceed 90 days. Any security that
the Master Series purchases must have a remaining maturity of not
more than 13 months. In addition, any security that the Master
Series purchases must present minimal credit risks and be high-
quality (i.e., be rated in the top two rating categories by the
required number of NRSROs or, if unrated, determined to be of
comparable quality to such rated securities). These
determinations are made by Wells Fargo, as the Master Series'
investment adviser, under guidelines adopted by the Trust's Board
of Trustees.
Since the California Tax-Free Intermediate Income Master
Series, the California Tax-Free Short-Term Income Master Series
and the California Tax-Free Money Market Master Series will
invest primarily in securities issued by California and its
agencies and municipalities, events in California will be more
likely to affect the Master Series' investments. While each
Master Series will seek to reduce risk by investing its assets in
securities of various issuers, the Master Series will be
considered to be non-diversified for purposes of the 1940 Act.
However, the Master Series will comply with Internal Revenue Code
of 1986, as amended (the "Code") diversification requirements, as
described in the "Appendix -- Additional Investment Policies".
Recently, lower than anticipated tax revenues in California
and a cash shortage have created uncertainty about the state's
ability to meet anticipated expenditures during the current
fiscal year. In addition, during 1992 one NRSRO downgraded the
rating assigned to certain of the state's debt obligations from
its second highest rating to its third highest rating. The
investment adviser to the Master Series does not anticipate that
the downgrade of these securities will adversely affect any
Master Series' efforts to meet its investment objective, since
the California Tax-Free Intermediate Income Master Series and the
California Tax-Free Short-Term Income Master Series may invest in
securities rated in the top four rating categories (i.e.,
investment grade) and the downgrade did not impact any of the
securities that may be purchased by the California Tax-Free Money
Market Master Series. However, any further rating downgrade of
the state's debt obligations may impact the availability of
securities that meet the Master Series' investment policies and
restrictions. The investment adviser to the Master Series will
continue to monitor and evaluate the investments of each Master
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Series in light of the events in California and each Master
Series' investment objective and investment policies. The rating
agencies also continue to monitor events in the state and the
state and local governments' responses to budget shortfalls. See
"Special Considerations Affecting California Municipal
Securities" in the SAI for the Master Series.
INVESTMENT POLICIES RELATING TO THE GROWTH AND INCOME MASTER
SERIES:
The Growth and Income Master Series will invest in common
stocks of issuers that exhibit a strong earnings growth trend and
that are believed by the Master Series' investment adviser to
have above-average prospects for future earnings growth. The
Master Series will maintain a portfolio of common stocks
diversified among industries and companies. The Master Series
may invest in common stocks of large companies (i.e., those
companies with more than $750 million in market capitalization)
which Wells Fargo believes offer the potential for long-term
earnings growth or above-average dividend yield. Emphasis may be
placed on common stocks which are trading at low price-to-earning
ratios, either relative to the overall market or to the
security's historic price-to-earnings relationship, and on common
stocks of issuers that have historically paid above-average
dividends. Some investments also may be made in common stocks of
medium and smaller sized companies (i.e., those companies with at
least $250 million, but less than $750 million in capitalization)
which may have the potential to generate high levels of future
revenue and earnings growth and where the investment opportunity
may not be fully reflected in the price of the securities.
However, investment in medium and smaller sized companies may
involve greater risks than investments in larger companies.
The Master Series intends to invest less than 50% of its
assets in the securities of medium and smaller sized companies
and the remainder in securities of larger sized companies.
However, the actual percentages may vary according to changes in
market conditions and the judgment by Wells Fargo as how best to
achieve the Master Series' investment objective.
The Growth and Income Master Series will invest in
convertible securities that provide current income and are issued
by companies with the characteristics described above and that
have a strong earnings and credit record. The Master Series may
purchase convertible securities that are fixed-income debt
securities or preferred stocks, and which may be converted at a
stated price within a specified period of time into a certain
quantity of the common stock of the same issuer. Convertible
securities, while usually subordinated to similar nonconvertible
securities, are senior to common stocks in an issuer's capital
structure. Convertible securities offer flexibility by providing
the investor with a steady income stream (generally yielding a
lower amount than similar nonconvertible securities and a higher
amount than common stocks) as well as the opportunity to take
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advantage of increases in the price of the issuer's common stock
through the conversion feature. Fluctuations in the convertible
security's price tend to correlate with changes in the market
value of the common stock. At most, 5% of the net assets of the
Master Series will be invested in convertible securities that are
not either rated in the four highest rating categories by one or
more NRSROs, such as Moody's or S&P, or unrated but determined by
Wells Fargo to be of comparable quality. Convertible securities
in the fourth highest category have speculative characteristics
and changes in economic conditions or other circumstances are
more likely to lead to a weakened capacity to make principal and
interest payments than in the case of higher grade debt
obligations.
Under ordinary market conditions, at least 65% of the value
of the total assets of the Growth and Income Master Series will
be invested in common stocks and securities which are convertible
into common stocks. From time to time, for temporary defensive
purposes, the Master Series may retain cash or invest in money
market instruments, as described below.
The Growth and Income Master Series may invest some of its
assets (no more than 10% of total assets under normal market
conditions) in high quality money market instruments, which
include U.S. Government obligations, obligations of domestic and
foreign banks, repurchase agreements, commercial paper (including
floating and variable rate instruments) and short-term corporate
debt obligations. Such investments will be made on an ongoing
basis to provide liquidity and, to a greater extent on a
temporary basis, when there is an unexpected or abnormal level of
investor purchases or redemptions of Master Series shares or when
"defensive" strategies are appropriate.
It is anticipated that the portfolio turnover rate for the
Growth and Income Master Series will not normally exceed 100% in
any year.
INVESTMENT POLICIES RELATING TO THE GROWTH STOCK MASTER SERIES:
The Master Series invests primarily in the common stocks of
those growth-oriented, small- and medium-sized corporations that
the Master Series' investment adviser believes have potential for
above-average, long-term capital appreciation. These growth-
oriented stocks typically have some or all of the following
characteristics:
- Low or no dividends
- Relatively small market capitalizations
- Less market liquidity
- Relatively short operating histories
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- High debt-to-equity ratios
- Involvement in rapidly growing/changing industries
and/or new technologies
The Master Series invests in a diversified portfolio of
growth-oriented common stocks and does not concentrate its
investments in a particular industry. Under normal market
conditions, the Master Series' portfolio contains common stocks
of at least 20 corporations in multiple industry groups, with the
majority of these holdings consisting of stocks of established
growth companies, turnaround or acquisition candidates, or larger
capitalization companies that present one or more of the above
characteristics.
Additionally, the Master Series may, from time to time,
acquire securities through initial public offerings, and may
acquire and hold common stocks of smaller and newer issuers,
which are subject to the additional risks described below. It is
expected that no more than 40% of the Master Series' assets will
be invested in these more aggressive securities at one time.
Investments in smaller companies may offer greater
opportunities for capital appreciation than larger, more
established companies, but they also may involve greater risk.
For example, smaller companies may have limited product lines,
markets or financial and management resources. From time to
time, Wells Fargo may determine that conditions in the securities
markets make pursuing the Master Series' basic investment
strategy inconsistent with the best interests of the Master
Series' investors. At such times, Wells Fargo may reduce the
Master Series' exposure to the stock market in order to reduce
fluctuations in the value of the Master Series' assets. The
Master Series could invest up to 30% of its net assets in
preferred stocks, government obligations or in debt securities
that are convertible into common stock; it could also increase
its investments in money market securities. At most, 5% of the
Master Series' net assets are invested in convertible debt
securities that are either rated below the four highest rating
categories by one or more nationally recognized statistical
rating organizations ("NRSROs"), such as Moody's Investors
Service, Inc. ("Moody's") or S&P, or unrated securities
determined by Wells Fargo to be of comparable quality.
Securities rated in the fourth highest rating category (i.e.,
rated BBB by S&P or Baa by Moody's) are regarded by S&P as having
an adequate capacity to pay interest and repay principal, but
changes in economic conditions or other circumstances are more
likely to lead to a weakened capacity to make such repayments.
Moody's considers such securities as having speculative
characteristics.
The Master Series pursues an active-trading investment
strategy, and the length of time the Master Series has held a
particular security is not generally a consideration in
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investment decisions. Accordingly, the Master Series' portfolio
turnover rate may be higher than that of other funds that do not
pursue an active-trading investment strategy. Portfolio turnover
generally involves some expense to the Master Series, including
brokerage commissions or dealer mark-ups, and other transaction
costs on the sale of securities and the reinvestment in other
securities. Portfolio turnover also can generate short-term
capital gains tax consequences. The Master Series does not
expect to have a portfolio turnover rate exceeding 200%.
Although the Master Series holds a number of larger
capitalization stocks, under normal market conditions more than
50% of the Master Series' total assets are invested in companies
with smaller to medium capitalizations. The Master Series
invests primarily in companies with a market capitalization of
$50 million or greater, but may invest in companies with a market
capitalization under $50 million if the investment adviser to the
Master Series believes such investments to be in the best
interests of the Master Series. The majority of the Master
Series' investments are currently in companies with market
capitalizations, at the time of acquisition, of up to
$750 million. As a matter of strategy, the larger capitalized
issues in the Master Series are generally "core" positions that
the Master Series may hold for relatively long periods of time.
Under ordinary market conditions, at least 65% of the value
of the total assets of the Master Series will be invested in
common stocks that are expected by Wells Fargo to have better-
than-average prospects for capital appreciation.
The Master Series may temporarily hold assets in cash or make
short-term investments to the extent appropriate to maintain
adequate liquidity for redemption requests or other cash
management needs, or for temporary defensive purposes. The
short-term investments that the Master Series may purchase for
liquidity purposes include U.S. Treasury bills, shares of other
mutual funds and repurchase agreements (as described below).
INVESTMENT POLICIES RELATING TO THE SHORT-INTERMEDIATE TERM
MASTER SERIES:
The Master Series seeks to maintain an overall average
weighted portfolio maturity generally in the 2-to-5 year range.
Under normal market conditions, the Master Series will invest at
least 65% of its total assets in securities having an average
weighted portfolio maturity in the 2-to-5 year range. Under
unusual market conditions, the Master Series may shorten or
lengthen its average weighted portfolio maturity beyond the 2-to-
5 year range.
The LB Intermediate Bond Index consists of government
(Treasury and agency) and corporate debt obligations with
remaining maturities between one and ten years. Each issue is
represented in the LB Intermediate Bond Index in proportion to
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its outstanding market value. The exact composition of the LB
Intermediate Bond Index varies according to the characteristics
of the securities outstanding in the marketplace.
Only investment-grade securities are considered for
investment. These securities are identified by their ratings
according to one of two major rating services, S&P and Moody's
Investors Service, Inc. ("Moody's"). The rating systems employed
by each service are described in the Appendix to this Prospectus.
Each service classifies securities into broad categories starting
with "investment grade" at the top and ranging downward through
more speculative classes, including so-called "junk bonds," to
securities that are virtually worthless. The "investment grade"
category is subdivided into four rating groups by both services.
The four rating groups are called "AAA"/"Aaa," "AA"/"Aa," "A/A,"
and "BBB"/"Baa" by S&P and Moody's, respectively. Obligations
with the lowest investment grade rating have speculative
characteristics, and changes in economic conditions or other
circumstances are more likely to lead to a weakened capacity to
make principal and interest payments than in the case of higher
grade debt obligations. The Master Series may invest in
securities of all four rating groups; however, most of the Master
Series' assets are invested in securities that, at the time of
purchase, are rated in the third group or higher, denoted "A" or
better by both rating services. Asset-backed securities are
further restricted to the top two rating groups at time of
purchase. Mortgage-related securities which are issued or
guaranteed by U.S. Government agencies are all currently
considered to be in the highest rating category. Subsequent to
its purchase by the Master Series, an issue of securities may
cease to be rated or its rating may be reduced below the minimum
rating required for purchase by the Master Series. Wells Fargo
considers such an event in determining whether the Master Series
should continue to hold the obligation. To the extent the Master
Series continues to hold such obligations, it may be subject to
additional risk of default.
In the marketplace it is generally the case that higher-risk
securities carry higher yields-to-maturity. That is, investors
tend to demand higher returns for securities with longer
maturities or lower credit quality rating than for similar
securities of shorter maturities or higher credit quality
ratings. The amount of increased return for increased risk,
however, changes from time to time. The Master Series seeks to
emphasize those maturity segments or rating groups that appear to
offer the most favorable returns to their risks, within the
maturity and quality ranges described above.
The Master Series may invest some of its assets (no more than
10% of total assets under normal market conditions) in high
quality money market instruments, which include U.S. Government
obligations, obligations of domestic and foreign banks,
repurchase agreements, commercial paper (including variable
amount master demand notes) and short-term corporate debt
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obligations. Such investments are made on an ongoing basis to
provide liquidity and, to a greater extent on a temporary basis,
when there is an unexpected or abnormal level of investor
purchases or redemptions of Master Series shares or when
"defensive" strategies are appropriate.
The portfolio turnover rate for the Master Series is not
expected to exceed 300%. Portfolio turnover generally involves
some expense to the Master Series, including brokerage
commissions or dealer mark-ups and other transaction costs on the
sale of securities and the reinvestment in other securities.
Portfolio turnover also can generate short-term capital gains tax
consequences.
ITEM 5. MANAGEMENT OF THE TRUST.
The Trust's Board of Trustees provides broad supervision over
the affairs of the Trust and its Master Series.
The Trust has retained the services of Wells Fargo as
investment adviser to the Master Series of the Trust, and
Stephens Inc. ("Stephens") as sponsor, distributor and
administrator. The Board of Trustees of the Trust is responsible
for the general management of the Trust and supervising the
actions of Wells Fargo and Stephens in these capacities.
INVESTMENT ADVISER
Pursuant to Advisory Contracts, the Master Series are advised
by Wells Fargo, 420 Montgomery Street, San Francisco, California
94105, a wholly owned subsidiary of Wells Fargo & Company. Wells
Fargo also has been retained to act as the Master Series'
Custodian and Transfer and Dividend Disbursing Agent, and
performs the agency activities at 525 Market Street, San
Francisco, California 94105. Wells Fargo, one of the ten largest
banks in the United States, was founded in 1852 and is the oldest
bank in the western United States. As of March 31, 1995, various
divisions and affiliates of Wells Fargo provided investment
advisory services for approximately $196 billion of assets of
individuals, trusts, estates and institutions. Currently, Wells
Fargo is the investment adviser to six other registered
investment companies.
The Advisory Contracts provide that Wells Fargo shall furnish
to each Master Series investment guidance and policy direction in
connection with the daily portfolio management of such Master
Series. Pursuant to the Advisory Contracts, Wells Fargo
furnishes to the Board of Trustees of the Trust periodic reports
on the investment strategy and performance of the Master Series.
Purchase and sale orders of the securities held by the Master
Series may be combined with those of other accounts that Wells
Fargo manages or advises, and for which it has brokerage
placement authority, in the interest of seeking the most
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favorable overall net results. When Wells Fargo determines that
a particular security should be bought or sold for the Master
Series and other accounts managed by Wells Fargo, Wells Fargo
undertakes to allocate those transactions among the participants
equitably. From time to time, a Master Series, to the extent
consistent with its investment objective, policies and
restrictions, may invest in securities of companies with which
Wells Fargo has a lending relationship.
For its services under the Advisory Contracts with the Master
Series, Wells Fargo is entitled to a monthly advisory fee at the
annual rate of 0.50% of the average daily net assets of the Tax-
Free Intermediate Income Master Series, the California Tax-Free
Intermediate Income Master Series and the California Tax-Free
Short-Term Income Master Series; 0.45% of the average daily net
assets of the Tax-Free Money Market Master Series, the California
Tax-Free Money Market Master Series and the Short-Intermediate
Term Master Series; and 0.60% of the average daily net assets of
the Growth and Income Master Series and the Growth Stock Master
Series. From time to time, Wells Fargo may waive such fees in
whole or in part. Any such waiver will reduce expenses of a
Master Series and, accordingly, have a favorable impact on the
yield of such Master Series.
For the period from May 26, 1994 to February 28, 1995, the
Growth Stock Master Series and the Short-Intermediate Term Master
Series paid a fee at the annual rate of 0.56% and 0.18%,
respectively, of their average daily net assets to Wells Fargo
for its services as investment adviser.
Morrison & Foerster, special counsel to Wells Fargo and the
Trust, have advised Wells Fargo and the Trust that Wells Fargo
should be able to perform the services contemplated by the
Advisory Contracts, the Agency Agreement and the Custody
Agreement without violation of the Glass-Steagall Act. Such
counsel have pointed out, however, that there are no controlling
judicial or administrative interpretations or decisions and that
future judicial or administrative interpretations of, or
decisions relating to, present federal or state statutes and
regulations relating to the permissible activities of banks and
their subsidiaries or affiliates, as well as future changes in
federal or state statutes and regulations and judicial or
administrative decisions or interpretations thereof, could
prevent Wells Fargo from continuing to perform, in whole or in
part, such services. If Wells Fargo were prohibited from
performing any of such services, it is expected that new
agreements would be proposed or entered into with another entity
or entities qualified to perform such services.
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PORTFOLIO MANAGERS
THE TAX-FREE INTERMEDIATE INCOME MASTER SERIES
Mary J. Sebrell has been the principal portfolio manager of the
Master Series since the Master Series' inception. Ms. Sebrell
has managed municipal bond portfolios at Wells Fargo for 13
years; her total municipal investment experience exceeds 20
years. Prior to joining Wells Fargo, she worked at John Nuveen
and Company, a firm specializing in municipal investments. She
holds a B.A. from Washburn University and is a member of the
National Federation of Municipal Analysts.
THE CALIFORNIA TAX-FREE INTERMEDIATE INCOME MASTER SERIES AND
THE CALIFORNIA TAX-FREE SHORT-TERM INCOME MASTER SERIES
David Klug has been the principal portfolio manager to each of
the Master Series since the Master Series' inception. Mr. Klug
has managed municipal bond portfolios for Wells Fargo for over
nine years. Prior to joining Wells Fargo, he managed the
municipal bond portfolio for a major property and casualty
insurance company. His investment experience exceeds 20 years
and includes all aspects of tax-exempt fixed income investments.
He holds an M.B.A. from the University of Chicago and is a member
of The National Federation of Municipal Analysts and its
California Chapter.
THE GROWTH AND INCOME MASTER SERIES
Robert W. Bisell has been responsible for the day-to-day
management of the portfolio of the Master Series since its
inception. Mr. Bisell joined Wells Fargo at the time of the
merger with Crocker Bank and has been with the combined
organization for over 20 years. Prior to joining Wells Fargo
Bank, he was a vice president and investment counsel with M. H.
Edie Investment Counseling, where he managed institutional and
high-net-worth portfolios. Mr. Bisell holds a finance degree
from the University of Virginia. He is a chartered financial
analyst and a member of the Los Angeles Society of Financial
Analysts.
Allen Wisniewski also has been primarily responsible for the
Master Series since its inception. Mr. Wisniewski joined Wells
Fargo in April 1987 with the acquisition of Bank of America's
consumer trust services, where he was a portfolio manager. He
received his B.A. degree and M.B.A. degree in economics and
finance from the University of California at Los Angeles. He is
responsible for managing approximately $500 million in assets for
Wells Fargo, including equity and balanced accounts for high net
worth individuals and pensions. He is a member of the Los
Angeles Society of Financial Analysts.
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THE GROWTH STOCK MASTER SERIES
Jonathan Hickman has been primarily responsible for the day-to-
day management of the portfolio of the Master Series since its
inception. Mr. Hickman manages several Wells Fargo collective
funds with the same investment objective as the Master Series, as
well as equity and balanced portfolios for individuals and
employee benefit plans. He has approximately 10 years experience
in the investment management field and is a member of Wells
Fargo's Equity Strategy Committee. He has a B.A. and an M.B.A.
in finance from Brigham Young University.
THE SHORT-INTERMEDIATE TERM MASTER SERIES
Mr. Scott Smith has been co-manager of the portfolio of the
Master Series since June 28, 1995. He joined Wells Fargo in
1988 as a taxable money market portfolio specialist. His
experience includes a position with a private money management
firm with mutual fund investment operations. Mr. Smith holds a
B.A. degree from the University of San Diego and is a chartered
financial analyst.
Ms. Tamyra Thomas, who co-manages the portfolio of the Master
Series with Mr. Smith, has been both manager and co-manager of
the portfolio of the Master Series since its inception. Prior to
joining Wells Fargo in 1988, Ms. Thomas was Vice President and
Manager of the Investment Department of Valley Bank and Trust in
Utah. She holds a B.S. from the University of Utah.
SPONSOR, ADMINISTRATOR AND DISTRIBUTOR
Stephens, located at 111 Center Street, Little Rock, Arkansas
72201, has entered into an agreement with the Trust under which
Stephens acts as administrator for the Master Series of the
Trust. Stephens does not receive a fee from the Trust for
providing administrative services to the Master Series.
The Administration Agreement with the Trust states that
Stephens shall provide as administrative services, among other
things: (i) general supervision of the operation of the Master
Series, including coordination of the services performed by the
investment adviser, transfer agent, custodian, independent
accountants and legal counsel; regulatory compliance, including
the compilation of information for documents such as reports to,
and filings with, the Securities and Exchange Commission ("SEC")
and any state securities commissions; and preparation of proxy
statements and investor reports for the Trust; and (ii) general
supervision relative to the compilation of data required for the
preparation of periodic reports distributed to the Trust's
officers and Board of Trustees. Stephens also furnishes office
space and certain facilities required for conducting the business
of the Trust and pays the compensation of the trustees, officers
and employees of the Trust who are affiliated with Stephens.
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Stephens is a full service broker/dealer and investment
advisory firm. Stephens and its predecessor have been providing
securities and investment services for more than 60 years,
including discretionary portfolio management services since 1983.
Stephens currently manages investment portfolios for pension and
profit sharing plans, individual investors, foundations,
insurance companies and university endowments. The Trust will
not purchase securities from Stephens, Wells Fargo, or their
respective affiliates, as principal, without an exemptive order
from the SEC.
__________________
The Advisory Contracts for each Master Series provide that
if, in any fiscal year, the total aggregate expenses of a series
incurred by, or allocated to, such Master Series and other
investment companies investing in the Master Series (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 any
distribution plan) exceed the most restrictive expense limitation
applicable to such investment companies imposed by the securities
laws or regulations of the states in which such investment
companies' shares are registered for sale, Wells Fargo shall
waive their fees under the Advisory Contracts for the fiscal year
to the extent of the excess, or reimburse the excess, but only to
the extent of their fees. The Advisory Contracts further provide
that the 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 Advisory Contracts shall be reduced as necessary.
The most stringent applicable state restriction for investment
companies limits these expenses for any fiscal year to 2.50% of
the first $30 million of an investment company's average net
assets, 2.0% of the next $70 million of average net assets and
1.50% of the average net assets in excess of $100 million.
Except for the expenses borne by Stephens and Wells Fargo,
each Master Series bears all costs of its operations.
ITEM 6. CAPITAL STOCK AND OTHER SECURITIES.
ORGANIZATION AND INTERESTS
The Trust is organized as a trust under the laws of the State
of Delaware. Investors in the Trust are each liable for all
obligations of the Trust. However, the risk of an investor
incurring financial loss on account of such liability is limited
to circumstances in which both inadequate insurance exists and
the Trust itself is unable to meet its obligations.
The Trust's Declaration of Trust permits the Board of
Trustees to issue beneficial interests in series of the Trust,
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and to permit investors to increase or decrease their interest in
the series of the Trust. The Trust has no intention to hold
annual meetings of investors, but will hold special meetings of
investors when, in the judgment of the Trustees, it is necessary
or desirable to submit matters for an investor vote. Investors
holding 10% or more of the shares outstanding and entitled to
vote are entitled to call a meeting of investors for purposes of
voting on removal of a Trustee or Trustees of the Trust.
Each investor is entitled to a vote in proportion to the
amount of the investor's investment in the Trust. Interests in a
Master Series of the Trust may not be transferred, but an
investor may withdraw all or any portion of its investment at any
time at net asset value. All interests in a Master Series of the
Trust, when issued, will be fully paid and nonassessable, and
investors have no preemptive rights. A more detailed statement
of the rights of investors is contained in the SAI.
As of June 19, 1995, the Growth Stock Fund and the Short-
Intermediate Term Fund of Stagecoach Inc., 111 Center Street, Little
Rock, Arkansas 72201, owned approximately 100% of the voting
securities of the Growth Stock Master Series and approximately 100%
of the voting securitites of the Short-Intermediate Master Series,
respectively, and each Fund could be considered a controlling
person under the 1940 Act of the corresponding Master Series.
MASTER SERIES SHARES ARE NOT DEPOSITS OR OTHER OBLIGATIONS
OF, OR ISSUED, ENDORSED OR GUARANTEED BY, WELLS FARGO OR ANY OF
ITS AFFILIATES. SUCH SHARES ARE NOT INSURED BY THE U.S.
GOVERNMENT, THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE
FEDERAL RESERVE BOARD OR ANY OTHER GOVERNMENT AGENCY. AN
INVESTMENT IN THE MASTER SERIES INVOLVES CERTAIN RISKS, INCLUDING
THE POSSIBLE LOSS OF PRINCIPAL.
DIVIDENDS AND DISTRIBUTIONS
The net investment income of a Master Series generally will
be declared and paid as a dividend daily to all investors of
record as of 12:00 noon (New York time), with respect to the
Tax-Free Money Market Master Series and the California Tax-Free
Money Market Master Series and to all investors of record as of
4:00 p.m. (New York time) with respect to the Tax-Free
Intermediate Income Master Series, the California Tax-Free
Intermediate Income Master Series, the California Tax-Free Short-
Term Income Master Series, the Growth and Income Master Series,
the Growth Stock Master Series and the Short-Intermediate Term
Master Series. Net investment income for a Saturday, Sunday or
Holiday (as defined below) will be declared as a dividend to
investors of record as of 12:00 noon (New York time) on the
previous business day with respect to the Tax-Free Money Market
Master Series and the California Tax-Free Money Market Master
Series and at 4:00 p.m. (New York time) with respect to the
Tax-Free Intermediate Income Master Series, the California
Tax-Free Intermediate Income Master Series, the California
Tax-Free Short-Term Income Master Series, the Growth and Income
Master Series, the Growth Stock Master Series and the Short-
Intermediate Term Master Series. All the net investment income
of a Master Series of the Trust so determined is allocated pro
rata among the investors in such Master Series of the Trust at
the time of such determination.
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Dividends and capital gain distributions, if any, paid by a
Master Series of the Trust will be reinvested in the investor's
interest in such Master Series of the Trust at net asset value
and credited to the investor's account on the payment date.
TAXES
Based upon the anticipated method of operation of each Master
Series of the Trust, the Trust believes that each Master Series
will qualify for federal income tax purposes as a partnership.
The Trust therefore believes that each Master Series will not be
subject to any federal income tax on its income and net capital
gains (if any). However, each investor in a Master Series of the
Trust will be taxable on its distributive share of such Master
Series of the Trust's ordinary income and capital gain, if any,
in determining its federal income tax liability. The
determination of such share will be made in accordance with the
Code and regulations promulgated thereunder.
It is intended that each Master Series' assets, income and
distributions will be managed in such a way that a regulated
investment company investing in such Master Series will be able
to satisfy the requirements of Subchapter M of the Code, assuming
that the investment company invested all of its assets in such
Master Series.
__________________
Investor inquiries should be directed to the Managed Series
Investment Trust, 111 Center Street, Little Rock, Arkansas 72201.
ITEM 7. PURCHASE OF SECURITIES.
Interests in a Master Series of the Trust may be purchased on
any day such Master Series of the Trust is open. The Tax-Free
Intermediate Income Master Series, the California Tax-Free
Intermediate Income Master Series, the California Tax-Free
Short-Term Income Master Series, the Growth and Income Master
Series, the Growth Stock Master Series and the Short-Intermediate
Term Master Series (collectively, the "Non-Money Market Master
Series") are open for business each day the New York Stock
Exchange ("NYSE") is open for trading ("NYSE Business Day"). The
Tax-Free Money Market Master Series and the California Tax-Free
Money Market Master Series (collectively, the "Money Market
Master Series") are open for business on the same days that Wells
Fargo as transfer agent (the "Transfer Agent") is open ("Bank
Business Day"). Currently, the only NYSE Business Days that are
not also Bank Business Days are Martin Luther King, Jr. Day
(observed), Columbus Day (observed) and Veterans Day.
The Trust is a no-load, diversified, open-end series
investment company which was organized as a business trust under
the laws of Delaware on October 28, 1993. Beneficial interests
in a Master Series of the Trust are issued solely in private
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placement transactions that do not involve any "public offering"
within the meaning of Section 4(2) of the 1933 Act. Investments
in a Master Series of the Trust may only be made by registered
broker/dealers or by investment companies, insurance company
separate accounts, common or commingled trust funds, group trusts
or similar organizations or entities that are "accredited
investors" within the meaning of Regulation D under the 1933 Act.
This registration statement does not constitute an offer to sell,
or the solicitation of an offer to buy, any "security" within the
meaning of the 1933 Act.
There is no minimum initial or subsequent purchase amount in
a Master Series of the Trust. The Trust on behalf of its Master
Series reserves the right to reject any purchase order. If
accepted by a Master Series of the Trust, investments in such
Master Series may be made in exchange for securities which are
eligible for acquisition by such Master Series as described in
this Part A. All dividends, interest, subscription, or other
rights pertaining to such securities shall become the property of
such Master Series and must be delivered to such Master Series by
the investor upon receipt from the issuer.
A Master Series will not accept securities in exchange for
interests unless: (1) such securities are, at the time of the
exchange, eligible for purchase by such Master Series; (2) the
investor represents and agrees that all securities offered to be
exchanged are not subject to any restrictions upon their sale by
such Master Series under the 1933 Act or under the laws of the
country in which the principal market for such securities exists,
or otherwise; (3) the value of any such security (except U.S.
Government securities) being exchanged together with any other
securities of the same issuer owned by a Master Series will not
exceed 5% of the net assets of such Master Series immediately
after the transaction; and (4) such securities are consistent
with the Master Series' investment objective and policies, as
applied by Wells Fargo.
Interests in a Master Series are offered continuously at the
net asset value next determined after a purchase order is
effective without a sales load. Purchase orders for interests in
a Money Market Master Series will be effected by 12:00 noon (New
York time) on any Bank Business Day. Purchase orders for
interests in a Non-Money Market Master Series will be effected by
4:00 p.m. (New York time) on any NYSE Business Day.
Each investor in a Master Series may add to or reduce its
investment in such Master Series on each Bank Business Day with
respect to a Money Market Master Series and on each NYSE Business
Day with respect to a Non-Money Market Master Series. As of
12:00 noon (New York time) on each such Bank Business Day, with
respect to a Money Market Master Series, and at 4:00 p.m. (New
York time) with respect to a Non-Money Market Master Series, the
value of each investor's beneficial interest in a Master Series
will be determined by multiplying the net asset value of such
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Master Series by the percentage, effective for that day, that
represents that investor's share of the aggregate beneficial
interests in a Master Series. Any additions or withdrawals,
which are to be effected on that day, will then be effected. The
investor's percentage of the aggregate beneficial interests in a
Master Series will then be re-computed as the percentage equal to
the fraction (i) the numerator of which is the value of such
investor's investment in a Master Series as of 12:00 noon (New
York time) with respect to a Money Market Master Series and at
4:00 p.m. (New York time) with respect to a Non-Money Market
Master Series on such day plus or minus, as the case may be, the
amount of any additions to or withdrawals from the investor's
investment in a Master Series effected on such day, and (ii) the
denominator of which is the aggregate net asset value of such
Master Series as of 12:00 noon (New York time) with respect to a
Money Market Master Series and at 4:00 p.m. (New York time) with
respect to a Non-Money Market Master Series on such day plus or
minus, as the case may be, the amount of the net additions to or
withdrawals from the aggregate investments in such Master Series
by all investors in a Master Series. The percentage so
determined will then be applied to determine the value of the
investor's interest in a Master Series as of 12:00 noon (New York
time) with respect to a Money Market Master Series and at
4:00 p.m. (New York time) with respect to a Non-Money Market
Master Series on the following Bank Business Day with respect to
a Money Market Master Series and on the following NYSE Business
Day with respect to a Non-Money Market Master Series.
By investing in the Trust, an investor appoints the Transfer
Agent, as agent, to establish an open account to which all
investments will be credited, together with any dividends and
capital gain distributions that are paid in additional interests
in the Trust.
DETERMINATION OF NET ASSET VALUE
The net asset value of a Money Market Master Series is
determined on each Bank Business Day. The net asset value of a
Non-Money Market Master Series is determined on each NYSE
Business Day. It is anticipated that the net asset value of an
interest in a Money Market Master Series will remain stable at
$1.00 per share, although no assurance can be given that each
Money Market Master Series will be able to do so on a continuing
basis.
Each Money Market Master Series uses the amortized cost
method to value its portfolio securities. 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.
Except for debt obligations with remaining maturities of
60 days or less, which are valued at amortized cost, the other
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assets of each of the Non-Money Market Master Series are valued
at current market prices, or, if such prices are not readily
available, at fair value as determined in good faith in
accordance with guidelines approved by the Trust's Board of
Trustees. Prices used for such valuations may be provided by
independent pricing services.
The exclusive placement agent for the Trust is Stephens.
Stephens receives no additional compensation for serving as
placement agent for the Trust.
ITEM 8. REDEMPTION OR REPURCHASE.
An investor in a Master Series may withdraw all or a portion
of its investment at any time at the net asset value next
determined after a withdrawal request in proper form is furnished
by the investor to such Master Series. The Master Series make no
charge for redemption transactions. The proceeds of a withdrawal
will be paid by the Master Series in federal funds normally on
the following Bank Business Day with respect to a Money Market
Master Series and on the following NYSE Business Day, with
respect to a Non-Money Market Master Series, after the withdrawal
is effected, but in any event within seven days. At a Master
Series' option, payment of redemption proceeds may be made in
securities, subject to regulation by some state securities
commissions. Investments in a Master Series may not be
transferred.
The right of any investor to receive payment with respect to
any withdrawal may be suspended or the payment of the withdrawal
proceeds postponed during any period in which the NYSE is closed
(other than weekends or Holidays) or trading on the NYSE is
restricted, or, to the extent otherwise permitted by the 1940
Act, if an emergency exists.
ITEM 9. PENDING LEGAL PROCEEDINGS.
Not applicable.
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APPENDIX -- ADDITIONAL INVESTMENT POLICIES
The following describes certain instruments in which the
Master Series of the Trust may invest.
MUNICIPAL SECURITIES
The two principal classifications of municipal securities are
"general obligation" securities and "revenue" securities.
General obligation securities are secured by the issuer's pledge
of its full faith, credit, and taxing power for the payment of
principal and interest. Revenue securities are payable only from
the revenues derived from a particular facility or class of
facilities or, in some cases, from the proceeds of a special
excise tax or other specific revenue source such as the user of
the facility being financed. Private activity bonds held by a
Master Series are in most cases revenue securities and are not
payable from the unrestricted revenues of the issuer.
Consequently, the credit quality of private activity bonds is
usually directly related to the credit standing of the corporate
user of the facility involved.
Municipal securities may include "moral obligation" bonds,
which are normally issued by special purpose public authorities.
If the issuer of moral obligation bonds is unable to meet its
debt service obligations from current revenues, it may draw on a
reserve fund, the restoration of which is a moral commitment but
not a legal obligation of the state or municipality which created
the issuer.
Municipal securities may include variable- or floating-rate
instruments issued by industrial development authorities and
other governmental entities. While there may not be an active
secondary market with respect to a particular instrument
purchased by a Master Series, a Master Series may demand payment
of the principal and accrued interest on the instrument or may
resell it to a third party as specified in the instruments. The
absence of an active secondary market, however, could make it
difficult for a Master Series to dispose of the instrument if the
issuer defaulted on its payment obligation or during periods a
Master Series is not entitled to exercise its demand rights, and
such Master Series could, for these or other reasons, suffer a
loss.
Some of these instruments may be unrated. With respect to
the Tax-Free Money Market Master Series and the California
Tax-Free Money Market Master Series, unrated instruments may be
purchased provided such instruments are determined by Wells
Fargo, in accordance with guidelines established by the Trust's
Board of Trustees, to be of comparable quality at the time of
purchase to instruments rated "high quality" by any major rating
service. Unrated instruments may be purchased by the Tax-Free
Intermediate Income Master Series, the California Tax-Free
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Intermediate Income Master Series and the California Tax-Free
Short-Term Income Master Series provided such instruments are
determined by Wells Fargo, in accordance with guidelines
established by the Trust's Board of Trustees, to be of comparable
quality at the time of purchase to instruments rated "investment
grade" by any major rating service. An issuer's obligation to
pay the principal of the note may be backed by an unconditional
bank letter or line of credit, guarantee, or commitment to lend.
Municipal securities also may include participations in
privately arranged loans to municipal borrowers, some of which
may be referred to as "municipal leases", and units of
participation in trusts holding pools of tax-exempt leases. Such
loans in most cases are not backed by the taxing authority of the
issuers and may have limited marketability or may be marketable
only by virtue of a provision requiring repayment following
demand by the lender. Such loans made by a Master Series may
have a demand provision permitting the Master Series to require
payment within seven days. Participations in such loans,
however, may not have such a demand provision and may not be
otherwise marketable. Municipal participation interests may be
purchased from financial institutions, and give the purchaser an
undivided interest in one or more underlying municipal security.
To the extent these securities are illiquid, they will be subject
to each Master Series' limitation on investments in illiquid
securities. As it deems appropriate, Wells Fargo will establish
procedures to monitor the credit standing of each such municipal
borrower, including its ability to meet contractual payment
obligations.
In addition, a Master Series may acquire "stand-by
commitments" from banks or broker/dealers with respect to
municipal securities held in its portfolios. Under a stand-by
commitment, a dealer would agree to purchase at a Master Series'
option specified municipal securities at a specified price. A
Master Series will acquire stand-by commitments solely to
facilitate portfolio liquidity and without intending to exercise
its rights thereunder for trading purposes.
SPECIFIC CONSIDERATIONS FOR THE CALIFORNIA TAX-FREE INTERMEDIATE
INCOME MASTER SERIES, THE CALIFORNIA TAX-FREE SHORT-TERM INCOME
MASTER SERIES AND THE CALIFORNIA TAX-FREE MONEY MARKET MASTER
SERIES
The California Tax-Free Intermediate Income Master Series and
the California Tax-Free Short-Term Income Master Series will
invest in municipal bonds rated at the date of purchase "Baa" or
better by Moody's or "BBB" or better by S&P, or unrated bonds
that are considered by Wells Fargo, as investment adviser, to be
of comparable quality. Bonds rated at the minimum permitted
level have speculative characteristics and are more likely than
higher rated bonds to have a weakened capacity to pay principal
and interest in times of adverse economic conditions; all are
considered investment grade. The California Tax-Free Money
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Market Master Series will invest in municipal bonds rated at the
date of purchase "MIG 1" or "MIG 2", or, if no short-term rating
is available, "Aa" or better by Moody's or "AA" or better by S&P.
Municipal bonds generally have a maturity at the time of issuance
of up to forty years.
The California Tax-Free Intermediate Income Master Series and
the California Tax-Free Short-Term Income Master Series will
invest in municipal notes rated at the date of purchase "MIG 2"
(or "VMIG 2" in the case of an issue having a variable rate with
a demand feature) or better by Moody's or "SP-2" or better by
S&P, or unrated notes that are considered by Wells Fargo, as
investment adviser, to be of comparable quality. The California
Tax-Free Money Market Master Series will invest in municipal
notes rated at the date of purchase "MIG 1" or "MIG 2" (or "VMIG
1" or "VMIG 2" in the case of an issue having a variable rate
with a demand feature) by Moody's or "SP-1+" or "SP-1" by S&P.
Municipal notes generally have maturities at the time of issuance
of three years or less. Municipal notes are generally issued in
anticipation of the receipt of tax funds, of the proceeds of bond
placements, or of other revenues. The ability of an issuer to
make payments on notes is therefore especially dependent on such
tax receipts, proceeds from bond sales or other revenues, as the
case may be.
The California Tax-Free Intermediate Income Master Series and
the California Tax-Free Short-Term Income Master Series will
invest in municipal commercial paper rated at the date of
purchase "P-1" or "P-2" by Moody's or "A-1+," "A-1" or "A-2" by
S&P, or unrated commercial paper that is considered by Wells
Fargo, as investment adviser, to be of comparable quality. The
California Tax-Free Money Market Master Series will invest in
municipal commercial paper rated at the date of purchase "P-1" by
Moody's or "A-1+" or "A-1" by S&P. Municipal commercial paper is
a debt obligation with a stated maturity of 270 days or less that
is issued to finance seasonal working capital needs or as short-
term financing in anticipation of longer-term debt.
The California Tax-Free Money Market Master Series will only
invest in Municipal Securities with maturities not exceeding
thirteen months.
In the event a security purchased by either the California
Tax-Free Intermediate Income Master Series or the California Tax-
Free Short-Term Income Master Series is downgraded below
investment grade, these Master Series may retain such security,
although the Master Series may not have more than 5% of their
assets invested in securities rated below investment grade at any
time. A description of the ratings is contained in the Appendix
to the SAI.
From time to time, each Master Series may invest 25% or more
of the current value of its total assets in certain "private
activity bonds," such as pollution control bonds; provided,
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however, that such investments will be made only to the extent
they are consistent with the Master Series' fundamental policy of
investing, under normal circumstances, at least 80% of their net
assets in municipal obligations that are exempt from federal
income taxes and not subject to the federal alternative minimum
tax, and provided further that the California Tax-Free
Intermediate Income Master Series and the California Tax-Free
Short-Term Income Master Series may not invest 25% or more of
their assets in industrial development bonds.
For a further discussion of factors affecting purchases of
municipal obligations by the Master Series, see "Special
Considerations Affecting California Municipal Obligations" in the
SAI for the Master Series.
TAXABLE INVESTMENTS
Pending the investment of proceeds from the sale of shares of
the Master Series or proceeds from sales of portfolio securities
or in anticipation of redemptions or to maintain a "defensive"
posture when, in the opinion of Wells Fargo, as investment
adviser, it is advisable to do so because of market conditions,
the Tax-Free Intermediate Income Master Series, the Tax-Free
Money Market Master Series, the California Tax-Free Intermediate
Income Master Series, the California Tax-Free Short-Term Income
Master Series and the California Tax-Free Money Market Master
Series ("Tax-Free Master Series") may elect to invest temporarily
up to 20% of the current value of its respective net assets in
cash reserves, or in the following taxable high-quality money
market instruments: (i) U.S. Government obligations; (ii)
negotiable certificates of deposit, bankers' acceptance and fixed
time deposits and other obligations of domestic banks (including
foreign branches) that have more than $1 billion in total assets
at the time of investment and are members of the Federal Reserve
System or are examined by the Comptroller of the Currency or
whose deposits are insured by the FDIC; (iii) commercial paper
rated at the date of purchase "P-1" by Moody's or "A-1+" or "A-1"
by S&P; (iv) certain repurchase agreements; and (v) high-quality
municipal obligations, the income from which may or may not be
exempt from federal income taxes.
Moreover, the Money Market Master Series may invest
temporarily more than 20% of their total assets in such
securities and in high-quality, short-term municipal obligations
the interest on which is not exempt from federal income taxes to
maintain a temporary defensive posture or in an effort to improve
after-tax yield to the Master Series' shareholders when, in the
opinion of Wells Fargo, as investment adviser, it is advisable to
do so because of unusual market conditions.
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U.S. GOVERNMENT OBLIGATIONS
The Growth Stock Master Series and the Short-Intermediate
Term Master Series may invest in various types of U.S. Government
obligations with remaining maturities of up to one year. U.S.
Government obligations include securities issued or guaranteed as
to principal and interest by the U.S. Government and supported by
the full faith and credit of the U.S. Treasury. U.S. Treasury
obligations differ mainly in the length of their maturity.
Treasury bills, the most frequently issued marketable government
securities, have a maturity of up to one year and are issued on a
discount basis. U.S. Government obligations also include
securities issued or guaranteed by federal agencies or
instrumentalities, including government-sponsored enterprises.
Some obligations of such agencies or instrumentalities of the
U.S. Government are supported by the full faith and credit of the
United States or U.S. Treasury guarantees; others, by the right
of the issuer or guarantor to borrow from the U.S. Treasury;
still others by the discretionary authority of the U.S.
Government to purchase certain obligations of the agency or
instrumentality; and others, only by the credit of the agency or
instrumentality issuing the obligation. In the case of
obligations not backed by the full faith and credit of the United
States, the investor must look principally to the agency or
instrumentality issuing or guaranteeing the obligation for
ultimate repayment, which agency or instrumentality may be
privately owned. There can be no assurance that the U.S.
Government would provide financial support to its agencies or
instrumentalities (including government-sponsored enterprises)
where it is not obligated to do so. In addition, U.S. Government
obligations are subject to fluctuations in market value due to
fluctuations in market interest rates. As a general matter, the
value of debt instruments, including U.S. Government obligations,
declines when market interest rates increase and rises when
market interest rates decrease. Certain types of U.S. Government
obligations are subject to fluctuations in yield or value due to
their structure or contract terms.
SHORT-TERM CORPORATE DEBT INSTRUMENTS
The Growth Stock Master Series may invest in commercial paper
(including variable-amount master demand notes), which is short-
term, unsecured promissory notes issued by corporations to
finance short-term credit needs. Commercial paper is usually
sold on a discount basis and has a maturity at the time of
issuance not exceeding nine months. Variable amount master
demand notes are demand obligations that permit the investment of
fluctuating amounts at varying market rates of interest pursuant
to arrangements between the issuer and a commercial bank acting
as agent for the payee of such notes whereby both parties have
the right to vary the amount of the outstanding indebtedness on
the notes. Wells Fargo, as investment adviser, will monitor on
an ongoing basis the ability of an issuer of a demand instrument
to pay principal and interest on demand. Wells Fargo, pursuant
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to the direction of the Trust's Board of Trustees, will determine
the liquidity of those instruments which have a demand feature
that is not exercisable within seven days, provided an active
secondary market exists.
The Growth Stock Master Series also may invest in non-
convertible corporate debt securities (e.g., bonds and
debentures) with not more than one year remaining to maturity at
the date of settlement. The Master Series will invest only in
such corporate bonds and debentures that are rated at the time of
purchase at least "Aa" by Moody's or "AA" by S&P. Subsequent to
its purchase by the Master Series, an issue of securities may
cease to be rated or its rating may be reduced below the minimum
rating required for purchase by the Master Series. Wells Fargo
will consider such an event in determining whether the Master
Series should continue to hold the obligation. To the extent the
Master Series continues to hold such obligations, it may be
subject to additional risk of default.
The Master Series also may invest in non-convertible
corporate debt securities (e.g., bonds and debentures) with not
more than one year remaining to maturity at the date of
settlement. The Master Series will invest only in such corporate
bonds and debentures that are rated at the time of purchase at
least "Aa" by Moody's or "AA" by S&P. Subsequent to its purchase
by the Master Series, an issue of securities may cease to be
rated or its rating may be reduced below the minimum rating
required for purchase by the Master Series. Wells Fargo will
consider such an event in determining whether the Master Series
should continue to hold the obligation. To the extent the Master
Series continues to hold such obligations, it may be subject to
additional risk of default.
WHEN-ISSUED SECURITIES
Certain of the securities in which the Tax-Free Intermediate
Income Master Series, the California Tax-Free Intermediate Income
Master Series, the California Tax-Free Short-Term Income Master
Series, the Growth and Income Master Series, the Growth Stock
Master Series and the Short-Intermediate Term Master Series
invest will be purchased on a when-issued basis, in which case
delivery and payment normally take place within 45 days after the
date of the commitment to purchase. The Master Series makes
commitments to purchase securities on a when-issued basis only
with the intention of actually acquiring the securities, but may
sell such securities before the settlement date if it is deemed
advisable. When-issued securities are subject to market
fluctuation, and no income accrues to the purchaser during the
period prior to issuance. The purchase price and the interest
rate that will be received on debt securities are fixed at the
time the purchaser enters into the commitment. Purchasing a
security on a when-issued basis can involve a risk that the
market price at the time of delivery may be lower than the
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agreed-upon purchase price, in which case there could be an
unrealized loss at the time of delivery.
The Tax-Free Intermediate Income Master Series, the
California Tax-Free Intermediate Income Master Series, the
California Tax-Free Short-Term Income Master Series, the Growth
and Income Master Series, the Growth Stock Master Series and the
Short-Intermediate Term Master Series segregate cash,
U.S. Government obligations or other high-quality debt
instruments in an amount at least equal in value to their
commitments to purchase when-issued securities. If the value of
these assets declines, the Master Series segregate additional
liquid assets on a daily basis so that the value of the
segregated assets is equal to the amount of such commitments.
The Master Series do not currently intend to invest more than 5%
of their net assets in when-issued securities during the coming
year.
FLOATING- AND VARIABLE-RATE INSTRUMENTS
Certain of the debt instruments that the Master Series may
purchase bear interest at rates that are not fixed, but vary
with, for example, changes in specified market rates or indices
or at specified intervals. These instruments typically have a
maturity of more than one year but may carry a demand feature
that would permit the holder to tender them back to the issuer at
par value prior to maturity. The floating- and variable-rate
instruments that the Master Series may purchase include
certificates of participation in such obligations purchased from
banks. With regard to the Tax-Free Master Series, Wells Fargo,
as investment adviser may rely upon either the opinion of counsel
or IRS rulings regarding the tax-exempt status of these
certificates.
Wells Fargo, as investment adviser to the Master Series,
monitors on an ongoing basis the ability of an issuer of a demand
instrument to pay principal and interest on demand. Events
affecting the ability of the issuer of a demand instrument to
make payment when due may occur between the time a Master Series
elects to demand payment and the time payment is due, thereby
affecting such Master Series' ability to obtain payment at par.
The investment adviser, in accordance with the guidelines
established by the Trust's Board of Trustees, determines the
liquidity of those instruments which have a demand feature that
is not exercisable within seven days, provided that an active
secondary market exists.
The Money Market Master Series may, in accordance with SEC
rules, account for these instruments as maturing at the next
interest rate readjustment date or the date at which the Master
Series may tender the instrument back to the issuer, whichever is
later. The Money Market Master Series may invest in floating-
and variable-rate obligations even if they carry stated
maturities in excess of thirteen months, upon compliance with
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certain conditions of the SEC, in which case such obligations
will be treated in accordance with these conditions as having
maturities not exceeding thirteen months.
REPURCHASE AGREEMENTS
The Master Series may enter into repurchase agreements
wherein the seller of a security to a Master Series agrees to
repurchase that security from such Master Series at a mutually
agreed-upon time and price. This results in a fixed rate of
return insulated from market fluctuations during this period.
The period of maturity is usually quite short, often overnight or
a few days, although it may extend over a number of months. The
Master Series may enter into repurchase agreements only with
respect to obligations that could otherwise be purchased by the
participating Master Series. All repurchase agreements are fully
collateralized based on values that are marked to market daily.
The maturities of the underlying securities in a repurchase
agreement transaction may be greater than one year. The term of
any repurchase agreement on behalf of the Tax-Free Money Market
Master Series and the California Tax-Free Money Market Master
Series will always be less than thirteen months. If the seller
defaults and the value of the underlying securities has declined,
the participating Master Series may incur a loss. In addition,
if bankruptcy proceedings are commenced with respect to the
seller of the security, the participating Master Series'
disposition of the security may be delayed or limited. The
Master Series will enter into repurchase agreements only with
registered broker/dealers and commercial banks that meet
guidelines established by the Board of Trustees of the Trust and
that are not affiliated with Wells Fargo, the Master Series'
investment adviser. The Master Series may enter into pooled
repurchase agreement transactions with other funds advised by
Wells Fargo.
FOREIGN OBLIGATIONS
The Money Market Master Series and the Growth Stock Master
Series may invest up to 25% of their total assets in high-
quality, short-term (one year or less) debt obligations of
foreign branches of U.S. banks or U.S. branches of foreign banks
that are denominated in and pay interest in U.S. dollars. The
Growth and Income Master Series may invest a portion (generally
no more than 20%) in securities of foreign governments and
private issuers that are denominated in and pay interest in U.S.
dollars. Obligations of foreign banks and foreign branches of
U.S. banks involve somewhat different investment risks from those
affecting obligations of U.S. banks, including the possibilities
that liquidity could be impaired because of future political and
economic developments, that the obligations may be less
marketable than comparable obligations of U.S. banks, that a
foreign jurisdiction might impose withholding taxes on interest
income payable on those obligations, that foreign deposits may be
seized or nationalized, that foreign governmental restrictions
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(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. Foreign banks are not subject to examination by any
U.S. Government agency or instrumentality. To the extent such
securities of foreign issuers are not listed on recognized
domestic or foreign securities exchanges they will be deemed to
be illiquid investments.
LOANS OF PORTFOLIO SECURITIES
The Non-Money Market Master Series may lend securities from
their portfolios to domestic brokers, dealers and financial
institutions (but not individuals) if cash, U.S. Government
obligations or other liquid high-quality debt obligations equal
to at least 100% of the current market value of the securities
loaned (including accrued interest thereon) plus the interest
payable to the Master Series with respect to the loan, is
maintained with such Master Series. In determining whether to
lend a security to the particular broker, dealer or financial
institution, the Master Series' investment adviser considers all
relevant facts and circumstances, including the size,
creditworthiness and reputation of the broker, dealer or
financial institution. Any loans of portfolio securities are
fully collateralized based on values that are marked to market
daily. Any securities that the Master Series receives as
collateral do not become part of such Master Series portfolio at
the time of the loan and, in the event of a default by the
borrower, the Master Series, if permitted by law, will dispose of
such collateral except for such part thereof that is a security
in which such Master Series is permitted to invest. During the
time securities are on loan, the borrower pays the Master Series
any accrued income on those securities, and the Master Series may
invest the cash collateral in high-quality money market
instruments and earn additional income or receive an agreed-upon
fee from a borrower that has delivered cash-equivalent
collateral. The securities acquired with such collateral will be
segregated as discussed above.
In the event that the borrower defaults on its obligation to
return borrowed securities, because of insolvency or otherwise,
the Master Series could experience delays and costs in gaining
access to the collateral and could suffer a loss to the extent
that the value of the collateral falls below the market value of
the securities borrowed. However, loans are made only to
borrowers deemed by Wells Fargo to be of good standing and when,
in its judgment, the income to be earned from the loan justifies
the attendant risks. The Master Series do not lend securities
having a value that exceeds 50% of the current value of their
respective total assets. Loans of securities by the Master
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Series are subject to termination at the Master Series' or the
borrower's option. The Master Series may pay reasonable
administrative and custodial fees in connection with a securities
loan and may pay a negotiated portion of the interest or fee
earned with respect to the collateral to the borrower or the
placing broker. Borrowers and placing brokers may not be
affiliated, directly or indirectly, with the Trust, the
investment adviser, or the distributor.
MONEY MARKET INSTRUMENTS AND TEMPORARY INVESTMENTS
The Growth and Income Master Series and the Growth Stock
Master Series (collectively the "Master Series") may have
temporary cash balances on account of new purchases, dividends,
interest and reserves for redemptions, which the Master Series
may invest in the following high-quality money market
instruments: (i) short-term obligations issued or guaranteed by
the U.S. Government, its agencies or instrumentalities;
(ii) negotiable certificates of deposit ("CDs"), bankers'
acceptances, fixed time deposits and other obligations of
domestic banks (including foreign branches) that have more than
$1 billion in total assets at the time of investment and that are
members of the Federal Reserve System or are examined by the
Comptroller of the Currency or whose deposits are insured by the
FDIC; (iii) commercial paper rated at the date of purchase
"Prime-1" by Moody's or "A-1+" or "A-1" by S&P, or, if unrated,
of comparable quality as determined by Wells Fargo in its sole
discretion as investment adviser; (iv) non-convertible corporate
debt securities (e.g., bonds and debentures) with remaining
maturities at the date of purchase of no more than one year that
are rated at least "Aa" by Moody's or "AA" by S&P; (v) repurchase
agreements; and (vi) short-term, U.S. dollar-denominated
obligations of foreign banks (including U.S. branches) that, at
the time of investment: (a) have more than $10 billion, or the
equivalent in other currencies, in total assets; (b) are among
the 75 largest foreign banks in the world as determined on the
basis of assets; and (c) in the opinion of Wells Fargo, as
investment adviser, are of comparable quality to obligations of
U.S. banks which may be purchased by the Master Series.
OBLIGATIONS OF CORPORATIONS AND FOREIGN ENTITIES
The Short-Intermediate Term Master Series may invest in debt
securities issued by domestic corporations, U.S. dollar-
denominated debt securities issued by Canadian corporations,
Yankee bonds and supra-national obligations. Yankee bonds are
U.S. dollar-denominated obligations issued by foreign governments
or companies. Supra-national obligations are U.S. dollar-
denominated obligations issued by international entities such as
the World Bank and the Inter-American Development Bank.
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SECURITIES BACKED BY MORTGAGES
The Short-Intermediate Term Master Series may purchase
Mortgage-Backed Securities ("MBSs"), which are pass-through
certificates representing interests in a pool of loans secured by
mortgages. The resulting cash flow from those mortgages is used
to pay principal and interest on the certificates. The MBSs in
which the Master Series may invest are issued or guaranteed by
the Government National Mortgage Association ("GNMA"), the
Federal National Mortgage Association ("FNMA") or the Federal
Home Loan Mortgage Corporation ("FHLMC"). MBS investors receive
monthly payments based on a pro-rata share of interest and
principal payments (and prepayments) on the underlying mortgage
pool, less GNMA's, FNMA's or FHLMC's fees and any applicable loan
servicing fees.
GNMA guarantees the full and timely payment of principal and
interest on GNMA certificates. The GNMA guarantee is backed by
the authority of GNMA to borrow funds from the U.S. Treasury to
meet payment obligations arising from its guarantee. Since GNMA
is a wholly-owned U.S. Government corporation within the Department
of Housing and Urban Development, GNMA guarantees are also
general obligations of the United States and, as such, are backed
by the full faith and credit of the federal government. In
contrast, MBSs issued by FNMA include FNMA Guaranteed Mortgage
Pass-Through Certificates ("Fannie Maes") which are solely the
obligations of FNMA and are neither backed by, nor entitled to,
the full faith and credit of the United States. FHLMC also is a
government-sponsored enterprise whose MBSs are solely obligations
of FHLMC. Therefore, FHLMC MBSs are not guaranteed by the United
States or by a Federal Home Loan Bank and do not constitute a
general obligation of the United States or any Federal Home Loan
Bank. FHLMC guarantees timely payment of interest and ultimate
payment of principal due under the obligations it issues.
However, because FNMA and FHLMC are government-sponsored
enterprises, their securities are considered to be high quality
investments that present minimal credit risks.
The mortgages underlying MBSs guaranteed by GNMA are fully
insured or guaranteed by the Federal Housing Administration, the
Veterans Administration or the Farmers Home Administration.
Mortgages underlying MBSs issued by FNMA or FHLMC are typically
conventional residential mortgages which are not so insured or
guaranteed, but which conform to specific underwriting, size and
maturity standards.
The Master Series also may invest up to 25% of its total
assets in collateralized mortgage obligations ("CMOs") issued or
guaranteed by U.S. Government instrumentalities (including
government-sponsored enterprises) or collateralized by U.S.
Government obligations. In a CMO, a series of bonds or
certificates is issued in multiple classes. Each class is issued
at a specified coupon rate with a stated maturity or final
distribution date. The principal and interest payments in the
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collateral pool may be allocated among the classes of CMOs in
several ways. Typically, payments of principal, including any
prepayments, on the underlying mortgages are applied to the
classes in the order of their respective stated maturities or
final distribution dates, so that no payment of principal will be
made on CMOs of one class until all CMOs of other classes having
earlier stated maturities or final distribution dates have been
paid in full.
The Master Series may purchase CMOs that are:
(1) collateralized by fixed rate or adjustable rate mortgages
that are guaranteed, as to payment of principal and interest, by
a U.S. Government agency or instrumentality (including a
government-sponsored enterprise);
(2) directly guaranteed, as to payment of principal and
interest, by the issuer, which guarantee is collateralized by
U.S. Government securities; or
(3) collateralized by MBSs which are issued or guaranteed by
the U.S. Government, its agencies or instrumentalities (including
government-sponsored enterprises).
The coupon rate of one or more CMO classes may reset
periodically based on an index, such as the London Interbank
Offered Rate ("LIBOR"). The interest rates on the mortgages
underlying the MBSs and the CMOs in which the Master Series may
invest may be adjustable. In this case, they generally are
readjusted at intervals of one year or less in response to
changes in a predetermined interest rate index. There are two
main categories of indices: those based on U.S. Treasury
securities and those based on certain financial aggregates, such
as a cost-of-funds index or a moving average of mortgage rates.
Commonly utilized indices include the one-year and five-year
constant maturity Treasury note rates, the three- month Treasury
bill rate, the 180-day Treasury bill rate, rates on longer-term
Treasury securities, the National Median Cost of Funds, the one-
month, three-month, six-month or one-year LIBOR, a published
prime rate, or commercial paper rates. Certain of these indices
follow overall market interest rates more closely than others.
The range of fluctuation of interest rates on certain
adjustable rate mortgages ("ARMs") may be limited by "caps" or
"floors." A "cap" is a ceiling or maximum interest rate under a
mortgage note. A "floor" is a minimum interest rate under a
mortgage note. To the extent that the interest rates on the ARMs
underlying MBSs or CMOs cannot be adjusted in response to
interest rate changes due to the existence of "caps" or "floors"
on interest rate movements, the MBSs or CMOs are likely to
respond to changes in market rates more like fixed rate
securities. In other words, interest rate increases in excess of
such caps can be expected to cause the CMOs or MBSs backed by
mortgages that have such caps to decline in value to a greater
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extent than would be the case in the absence of such caps.
Conversely, interest rate decreases below such floors can be
expected to cause the CMOs or MBSs backed by mortgages that have
such floors to increase in value to a greater extent than would
be the case in the absence of such floors. The value of MBSs,
CMOs and ARMs will fluctuate to the extent interest rates on the
underlying ARMs differ from prevailing market interest rates
during interim periods between interest rate reset dates.
Accordingly, holders of MBSs, CMOs or ARMs could experience some
loss (or less gain than otherwise might be achieved) if they sell
these investments before the interest rates on the underlying
mortgages are adjusted to reflect prevailing market interest
rates.
The holders of CMOs and MBSs not only receive scheduled
payments of principal and interest, but also receive additional
principal payments representing prepayments on the underlying
mortgages. A certain level of prepayments is factored into the
price of most CMOs, since historical experience shows that a
certain percentage of mortgages will be repaid or refinanced
before maturity. When market interest rates change, however,
prepayment behavior changes. When market interest rates are
high, homeowners tend to refinance less, which slows the rate of
prepayments. When market interest rates are low, the rate of
prepayments tends to accelerate. Lower market interest rates are
a positive influence on the value of a CMO, as they are on any
fixed-rate investments. At the same time, however, the risk that
an investor will receive more prepayments than anticipated and
must therefore reinvest at lower prevailing market rates is a
negative influence on the CMO's value. The net effect of falling
interest rates on a CMO's price depends on the relationship
between interest rates and CMO prices which, in turn, depends on
a number of factors including whether the CMO was trading at a
discount or a premium before rates fell. Thus, it is possible
for a move in interest rates to impact different classes of the
same CMO series differently. (See the discussion of multiple
classes, above.)
As a non-fundamental policy, the Master Series will not
invest in "interest only" or "principal only" securities.
OTHER ASSET-BACKED SECURITIES
The Short-Intermediate Term Master Series may invest in
Asset-Backed Securities ("ABSs"), which are pass-through
securities representing ownership interests in a pool of loans,
leases, or installment contracts on personal property such as
computers and automobiles (but not real estate). They are
similar to MBSs in that they represent an undivided interest in a
trust established to hold the assets. Investors receive their
pro rata share of payments of interest and principal on the
assets of the trust, less any servicing fees or interest margin
paid to the sponsor of the trust. ABS issuers include finance
companies, equipment leasing companies and banks. The life span
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of an ABS depends on the rate at which the underlying obligations
are paid down by the borrowers. Faster prepayments of the
underlying obligations will shorten the life of an ABS.
All ABSs in which the Master Series may invest have one or
more forms of credit enhancement, such as overcollateralization,
recourse to issuer, third party guaranty, a reserve fund, or a
senior/subordinated security structure. The Master Series is
protected against default risk, but not market risk, to the
extent of such credit enhancements.
The Master Series invests only in ABSs rated "AA" or higher
by S&P, or "Aa" or higher by Moody's at the time of purchase.
The Master Series does not purchase subordinated ABSs.
BANK OBLIGATIONS
The Short-Intermediate Term Master Series may invest in bank
obligations, including, but not limited to, negotiable
certificates of deposits ("CDs"), bankers' acceptances and fixed
time deposits, subject to its fundamental policy of not investing
25% or more of its total assets in any particular industry. The
Master Series limits its investments in U.S. bank obligations to
obligations of U.S. banks (including foreign branches) which have
more than $1 billion in total assets at the time of investment
and are members of the Federal Reserve System or are examined by
the Comptroller of the Currency or whose deposits are insured by
the Federal Deposit Insurance Corporation ("FDIC"). The Master
Series limits its investments in foreign bank obligations to U.S.
dollar denominated obligations of foreign banks which at the time
of investment (i) have more than $10 billion, or the equivalent
in other currencies, in total assets and (ii) in the opinion of
the Master Series' investment manager, are of an investment
quality comparable with obligations of U.S. banks which may be
purchased by the Master Series.
Fixed time deposits are obligations of foreign branches of
U.S. banks or foreign banks which are payable at a stated
maturity date and bear a fixed rate of interest. Generally fixed
time deposits may be withdrawn on demand by the investor, but
they may be subject to early withdrawal penalties which vary
depending upon market conditions and the remaining maturity of
the obligation. Although fixed time deposits do not have a
market, there are no contractual restrictions on the Master
Series' right to transfer a beneficial interest in the deposit to
a third party.
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
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income payable on those obligations, that foreign deposits may be
seized or nationalized, that foreign governmental restrictions
(such as foreign exchange controls) may be adopted which might
adversely affect the payment of principal and interest on those
obligations and that the selection of those obligations may be
more difficult because there may be less publicly available
information concerning foreign banks or the accounting, auditing
and financial reporting standards, practices and requirements
applicable to foreign banks may differ from those applicable to
U.S. banks. In that connection, foreign banks are not subject to
examination by any U.S. Government agency or instrumentality.
SHORT-TERM CORPORATE DEBT INSTRUMENTS
The Short-Intermediate Term Master Series may invest in
commercial paper (including variable amount master demand notes),
which is short-term, unsecured promissory notes issued by
corporations to finance short-term credit needs. Commercial
paper is usually sold on a discount basis and has a maturity at
the time of issuance not exceeding nine months. Variable amount
master demand notes are demand obligations that permit the
investment of fluctuating amounts at varying market rates of
interest pursuant to arrangements between the issuer and a
commercial bank acting as agent for the payees of such notes
whereby both parties have the right to vary the amount of the
outstanding indebtedness on the notes.
The Master Series may also invest in non-convertible
corporate debt securities (e.g., bonds and debentures) with not
more than one year remaining to maturity at the date of
settlement. Corporate debt securities with a remaining maturity
of less than one year tend to become extremely liquid and are
traded as money market securities.
The commercial paper investments of the Master Series at the
time of the purchase must be rated "A-1" by S&P or "Prime-1" by
Moody's or, if not rated, must be of comparable quality as
determined by Wells Fargo at its discretion. Subsequent to its
purchase by the Master Series, an issue of securities may cease
to be rated or its rating may be reduced below the minimum rating
required for purchase by the Master Series. Wells Fargo will
consider such an event in determining whether the Master Series
should continue to hold the obligation. To the extent the Master
Series continues to hold such obligations, it may be subject to
additional risk of default.
INVESTMENT POLICIES
As matters of fundamental policy (i) the Tax-Free Master
Series may borrow from banks up to 10% of the current value of
their respective net assets only for temporary purposes in order
to meet redemptions, and these borrowings may be secured by the
pledge of up to 10% of the current value of their respective net
assets (but investments may not be purchased while any such
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<PAGE> 40
outstanding borrowing in excess of 5% of its net assets exists);
(ii) the Money Market Master Series may not make loans of
portfolio securities or other assets, except that loans for
purposes of this restriction will not include the purchase of
fixed time deposits, repurchase agreements, commercial paper and
other short-term obligations, and other types of debt instruments
commonly sold in a public or private offering; and (iii) the Tax-
Free Master Series may not purchase the securities of issuers
conducting their principal business activity in the same industry
if, immediately after the purchase and as a result thereof, the
value of a Master Series' investments in that industry would be
25% or more of the current value of such Master Series' total
assets, provided that there is no limitation with respect to
investments in (a) municipal securities (for the purpose of this
restriction, private activity bonds shall not be deemed municipal
securities if the payments of principal and interest on such
bonds is the ultimate responsibility of non-governmental users),
(b) U.S. Government obligations, and (c) with respect to the
Money Market Master Series only, certain obligations of domestic
banks.
In addition, as a matter of fundamental policy, the Growth
and Income Master Series, the Growth Stock Master Series and the
Short-Intermediate Term Master Series may: (i) not purchase
securities of any issuer (except U.S. Government obligations) if
as a result, with respect to 75% of its total assets, more than
5% of the value of the Master Series' total assets would be
invested in the securities of such issuer or, with respect to
100% of its total assets, the Master Series would own more than
10% of the outstanding voting securities of such issuer; (ii)
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); (iii) make loans of portfolio securities
in accordance with its investment policies; and (iv) not invest
25% or more of its total assets (i.e., concentrate) in any
particular industry, except that the Master Series may invest 25%
or more of its assets in U.S. Government obligations. With
respect to paragraph (i), it may be possible that the Trust would
own more than 10% of the outstanding voting securities of an
issuer.
As a matter of non-fundamental policy, the Money Market
Master Series may invest up to 10%, and the Non-Money Market
Master Series may invest up to 15%, of the current value of each
Master Series' net assets in repurchase agreements having
maturities of more than seven days, illiquid securities, fixed
time deposits that are subject to withdrawal penalties and that
have maturities of more than seven days, and restricted
securities (which are securities that must be registered under
the Securities Act of 1933 before they may be offered or sold to
the public), unless a state imposes a lower limit.
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For purposes of complying with the Code, the California Tax-
Free Intermediate Income Master Series, the California Tax-Free
Short-Term Income Master Series and the California Tax-Free Money
Market Master Series will diversify their holdings so that, at
the end of each quarter of the taxable year, (i) at least 50% of
the market value of each Master Series' assets is represented by
cash, U.S. Government obligations and other securities limited in
respect of any one issuer to an amount not greater than 5% of the
Master Series' 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 taxpayer controls and which are determined to
be engaged in the same or similar trades or businesses or related
trades or businesses. With respect to paragraph (i), it may be
possible that the Trust would own more than 10% of the
outstanding voting securities of an issuer. In addition, at
least 65% of the each such Master Series' total assets are
invested (under normal market conditions) in municipal
obligations that pay interest which is exempt from California
personal income taxes. However, as a matter of general operating
policy, the Master Series seek to have substantially all of their
assets invested in such municipal obligations.
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<PAGE> 42
MANAGED SERIES INVESTMENT TRUST
TELEPHONE: 1-800-643-9691
STATEMENT OF ADDITIONAL INFORMATION -- PART B
JUNE 28, 1995
__________________________________
ITEM 10. COVER PAGE.
Managed Series Investment Trust ("Trust") is a
registered, open-end, management investment company. This
Statement of Additional Information is not a prospectus and
should be read in conjunction with the Trust's Part A, dated
June 28, 1995. All terms used in this Part B that are defined in
Part A will have the meanings assigned in Part A. A copy of
Part A may be obtained without charge by writing Stephens Inc.
("Stephens"), the Trust's sponsor, administrator and distributor,
at 111 Center Street, Little Rock, Arkansas 72201, or by calling
Stephens at the telephone number indicated above.
The Registration Statement of the Trust, including the
Trust's Part A, the Part B and the exhibits filed therewith, may
be examined at the office of the Securities and Exchange
Commission ("SEC") in Washington, D.C. Statements contained in
the Trust's Part A or the SAI as to the contents of any contract
or other document referred to herein or in the Part A 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 these Registration Statements, each such statement being
qualified in all respects by such reference.
ITEM 11. TABLE OF CONTENTS.
<TABLE>
<CAPTION>
Page
----
<S> <C>
Item 12. General Information and History................. 2
Item 13. Investment Objective and Policies............... 2
Item 14. Management of the Trust......................... 30
Item 15. Control Persons and Principal Holders
of Securities................................... 33
Item 16. Investment Advisory and Other Services.......... 34
Item 17. Brokerage Allocation and Other
Practices....................................... 36
Item 18. Capital Stock and Other Securities.............. 37
Item 19. Purchase, Redemption and Pricing of
Securities...................................... 39
Item 20. Tax Status...................................... 41
Item 21. Underwriters.................................... 42
Item 22. Calculation of Performance Data................. 42
Item 23. Financial Information........................... 42
Appendix ....................................... 43
</TABLE>
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<PAGE> 43
ITEM 12. GENERAL INFORMATION AND HISTORY.
Not applicable.
ITEM 13. INVESTMENT OBJECTIVES AND POLICIES.
The Tax-Free Money Market Master Series and the
California Tax-Free Money Market Master Series are sometimes
collectively referred to hereafter as the "Money Market Master
Series." The Tax-Free Intermediate Income Master Series,
California Tax-Free Intermediate Income Master Series, California
Tax-Free Short-Term Income Master Series, Growth and Income
Master Series, Growth Stock Master Series and the Short-
Intermediate Term Master Series are sometimes collectively
referred to hereafter as the "Non-Money Market Master Series."
The California Tax-Free Intermediate Income Master Series, the
California Tax-Free Short-Term Income Master Series, the
California Tax-Free Money Market Master Series, the Tax-Free
Intermediate Income Master Series, the Tax-Free Money Market
Master Series and the Growth and Income Master Series are
sometimes collectively referred to hereafter as "Master
Series A".
INVESTMENT RESTRICTIONS
The Master Series A are subject to the following
investment restrictions, all of which are fundamental policies.
The Master Series A 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
Series' investments in that industry would be 25% or more of the
current value of such Series' 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
payments of principal and interest on such bonds or notes is the
ultimate responsibility of non-governmental issuers),
(ii) obligations of the United States Government, its agencies or
instrumentalities, and (iii) with respect to the Tax-Free Money
Market Series and the California Tax-Free Money Market Series,
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);
(2) purchase or sell real estate or real estate limited
partnerships (other than municipal obligations and 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 a Series may purchase securities
B-2
<PAGE> 44
of an issuer which invests or deals in commodities and commodity
contracts and except that the Non-Money Market Series 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
with regard to all the Series, and except for margin payments in
connection with options, futures and options on futures with
regard to the Non-Money Market Series) 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 Series' investment program may
be deemed to be an underwriting;
(5) make investments for the purpose of exercising
control or management;
(6) issue senior securities, except that each Series
may borrow from banks up to 10% of the current value of its
respective 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, options or any
combination thereof, and the Money Market Series also may not
write, purchase or sell warrants, except that all Series may
purchase securities with put rights in order to maintain
liquidity; or
(8) with respect to the Tax-Free Intermediate Income
Series, Tax-Free Money Market Series and Growth and Income
Series, purchase securities of any issuer (except securities
issued or guaranteed by the U.S. Government, its agencies and
instrumentalities) if, as a result, with respect to 75% of its
total assets, more than 5% of the value of the Series' total
assets would be invested in the securities of any one issuer or,
with respect to 100% of its total assets the Series' ownership
would be more than 10% of the outstanding voting securities of
such issuer.
In addition, the Money Market Master Series may not make
loans of portfolio securities or other assets, except that loans
for purposes of this restriction will not include the purchase of
fixed time deposits, repurchase agreements, commercial paper and
other short-term obligations, and other types of debt instruments
commonly sold in public or private offerings.
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<PAGE> 45
The Master Series A are subject to the following
non-fundamental policies.
The Master Series A may not:
(1) purchase or retain securities of any issuer if the
officers or Trustees of the Trust or the investment adviser
owning beneficially more than one-half of one percent (0.5%) of
the securities of the issuer together owned beneficially more
than 5% of such securities;
(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; 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 such
Series' aggregate investment in such classes of securities will
exceed 5% of its total assets.
In addition, the Series reserve the right to invest up
to 15%, in the case of the Money Market Master Series up to 10%,
of the current value of their net assets in fixed time deposits
that are subject to withdrawal penalties and that have maturities
of more than seven days, repurchase agreements maturing in more
than seven days or other illiquid securities. However, as long
as the shares of an investment company investing in the Series
are registered for sale in a state that imposes a lower limit on
the percentage of an investment company's assets that may be so
invested, the relevant Series will comply with such lower limit.
Furthermore, the Money Market Master Series may not
purchase or sell real estate limited partnership interests.
The Short-Intermediate Term Master Series and the Growth
Stock Master Series are subject to the following investment
restrictions, all of which are fundamental policies.
The Short-Intermediate Term Master Series and the Growth
Stock Master Series may not:
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<PAGE> 46
(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
Short-Intermediate Term Master Series' or the Growth Stock Master
Series' investments in that industry would be 25% or more of the
current value of the Short-Intermediate Term Master Series' or
the Growth Stock Master Series' total assets, provided that there
is no limitation with respect to investments in (i) obligations
of the U.S. Government, its agencies or instrumentalities;
(2) purchase or sell real estate or real estate limited
partnerships (other than securities secured by real estate or
interests therein or securities issued by companies that invest
in real estate or interests therein);
(3) purchase commodities or commodity contracts
(including futures contracts), except that the Short-Intermediate
Master Series and the Growth Stock Master Series may purchase
securities of an issuer which invests or deals in commodities or
commodity contracts;
(4) purchase interests, leases, or limited partnership
interests in oil, gas, or other mineral exploration or
development programs;
(5) purchase securities on margin (except for short-
term credits necessary for the clearance of transactions and
except for margin payments in connection with options, futures
and options on futures) or make short sales of securities;
(6) underwrite securities of other issuers, except to
the extent that the purchase of permitted investments directly
from the issuer thereof or from an underwriter for an issuer and
the later disposition of such securities in accordance with the
Short-Intermediate Term Master Series' or the Growth Stock Master
Series' investment program may be deemed to be an underwriting;
(7) make investments for the purpose of exercising
control or management;
(8) borrow money or issue senior securities as defined
in the 1940 Act, except that each of the Short-Intermediate Term
Master Series and Growth Stock Master Series may borrow from
banks up to 10% of the current value of its net assets for
temporary purposes only in order to meet redemptions, and these
borrowings may be secured by the pledge of up to 10% of the
current value of its net assets (but investments may not be
purchased while any such outstanding borrowing in excess of 5% of
its net assets exists);
(9) write, purchase or sell puts, calls, straddles,
spreads, warrants, options or any combination thereof, except
that the Growth Stock Master Series may purchase securities with
put rights in order to maintain liquidity, and except that the
B-5
<PAGE> 47
Short-Intermediate Term Master Series and Growth Stock Master
Series may invest up to 5% of their net assets in warrants in
accordance with their investment policies stated below;
(10) purchase securities of any issuer (except
securities issued or guaranteed by the U.S. Government, its
agencies and instrumentalities) if, as a result, with respect to
75% of its total assets, more than 5% of the value of the
Short-Intermediate Term Master Series' and the Growth Stock
Master Series' total assets would be invested in the securities
of any one issuer or, with respect to 100% of its total assets
the Short-Intermediate Term Master Series' and the Growth Stock
Master Series' ownership would be more than 10% of the
outstanding voting securities of such issuer; or
(11) make loans, except that the Short-Intermediate Term
Master Series and the Growth Stock Master Series may purchase or
hold debt instruments or lend its portfolio securities in
accordance with its investment policies, and may enter into
repurchase agreements.
The Short-Intermediate Term Master Series and the Growth
Stock Master Series are subject to the following non-fundamental
policies.
(1) Neither the Short-Intermediate Term Master Series
nor the Growth Stock Master Series may:
(a) purchase or retain securities of any issuer if
the officers or Trustees of the Trust or the investment adviser
owning beneficially more than one-half of one percent (0.5%) of
the securities of the issuer together owned beneficially more
than 5% of such securities;
(b) purchase securities of issuers who, with their
predecessors, have been in existence less than three years,
unless the securities are fully guaranteed or insured by the U.S.
Government, a state, commonwealth, possession, territory, the
District of Columbia or by an entity in existence at least three
years, or the securities are backed by the assets and revenues of
any of the foregoing if, by reason thereof, the value of its
aggregate investments in such securities will exceed 5% of its
total assets;
(2) The Short-Intermediate Term Master Series and the
Growth Stock Master Series reserve the right to invest up to 15%
of the current value of their net assets in fixed time deposits
that are subject to withdrawal penalties and that have maturities
of more than seven days, repurchase agreements maturing in more
than seven days or other illiquid securities. However, as long
as a feeder Fund's shares are registered for sale in a state that
imposes a lower limit on the percentage of a fund's assets that
may be so invested, the Short-Intermediate Term Master Series and
the Growth Stock Master Series will comply with such lower limit.
B-6
<PAGE> 48
The Short-Intermediate Term Master Series and the Growth Stock
Master Series presently are limited to investing 10% of their net
asset in such securities due to limits applicable in several
states; and
(3) The Short-Intermediate Term Master Series and the
Growth Stock Master Series may invest in shares of other open-
end, management investment companies, subject to the limitations
of Section 12(d)(1) of the 1940 Act, provided that any such
purchases will be limited to temporary investments in shares of
unaffiliated investment companies and the Investment Adviser will
waive its advisory fees for that portion of the Short-
Intermediate Term Master Series' or the Growth Stock Master
Series' assets so invested, except when such purchase is part of
a plan of merger, consolidation, reorganization or acquisition.
ADDITIONAL PERMITTED INVESTMENT ACTIVITIES
Unrated, Downgraded and Below Investment Grade
Investments. The Master Series may purchase instruments that are
not rated if, in the opinion of Wells Fargo, such obligations are
of investment quality comparable to other rated investments that
are permitted to be purchased by such Master Series. After
purchase by a Master Series, a security may cease to be rated or
its rating may be reduced below the minimum required for purchase
by such Master Series. Neither event will require a sale of such
security by such Master Series. However, in no event will such
securities exceed 5% of the Master Series' net assets. To the
extent the ratings given by Moody's or S&P may change as a result
of changes in such organizations or their rating systems, each
Master Series will attempt to use comparable ratings as standards
for investments in accordance with the investment policies
contained in its Prospectus and in this SAI. The ratings of
Moody's and S&P are more fully described in the SAI Appendix.
Because the Master Series are not required to sell
downgraded securities, and because the Growth Stock Master Series
is permitted to purchase securities that are rated below
investment grade or if unrated are of comparable quality, the
Master Series could hold up to 5% of their net assets in debt
securities rated below "Baa" by Moody's or below "BBB" by S&P or
if unrated, low quality (below investment grade) securities. The
Master Series may hold such securities even though none of the
Master Series except the Growth Stock Master Series are permitted
to purchase such securities.
Although they may offer higher yields than do higher
rated securities, low rated and unrated low credit quality debt
securities generally involve greater volatility of price and risk
of principal and income, including the possibility of default by,
or bankruptcy of, the issuers of the securities. In addition,
the markets in which low rated and unrated low credit quality
debt are traded are more limited than those in which higher rated
B-7
<PAGE> 49
securities are traded. The existence of limited markets for
particular securities may diminish a Master Series' ability to
sell the securities at fair value either to meet redemption
requests or to respond to changes in the economy or in the
financial markets and could adversely affect and cause
fluctuations in the daily net asset value of a Master Series'
shares.
Adverse publicity and investor perceptions, whether or
not based on fundamental analysis, may decrease the values and
liquidity of low rated or unrated low quality debt securities,
especially in a thinly traded market. Analysis of the
creditworthiness of issuers of low rated or unrated low quality
debt securities may be more complex than for issuers of higher
rated securities, and the ability of a Master Series to achieve
its investment objective may, to the extent it holds low rated or
unrated low quality debt securities, be more dependent upon such
creditworthiness analysis than would be the case if the Master
Series held exclusively higher rated or higher quality
securities.
Low rated or unrated low quality debt securities may be
more susceptible to real or perceived adverse economic and
competitive industry conditions than investment grade securities.
The prices of such debt securities have been found to be less
sensitive to interest rate changes than higher rated or higher
quality investments, but more sensitive to adverse economic
downturns or individual corporate developments. A projection of
an economic downturn or of a period of rising interest rates, for
example, could cause a decline in low rated or unrated low
quality debt securities prices because the advent of a recession
could dramatically lessen the ability of a highly leveraged
company to make principal and interest payments on its debt
securities. If the issuer of the debt securities defaults, the
Master Series may incur additional expenses to seek recovery.
Letters of Credit. Certain of the debt obligations
(including municipal securities, certificates of participation,
commercial paper and other short-term obligations) which the
Master Series 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, are of comparable
quality to issuers of other permitted investments of each such
Master Series may be used for letter of credit-backed
investments, provided that, in the case of the Money Market
Master Series, the Trust's Board approves or ratifies such
investments.
Pass-Through Obligations. Certain of the debt
obligations which the Non-Money Market Master Series may purchase
may be pass-through obligations that represent an ownership
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interest in a pool of mortgages and the resultant cash flow from
those mortgages. Payments by homeowners on the loans in the pool
flow through to certificate holders in amounts sufficient to
repay principal and to pay interest at the pass-through rate.
The stated maturities of pass-through obligations may be
shortened by unscheduled prepayments of principal on the
underlying mortgages. Therefore, it is not possible to predict
accurately the average maturity of a particular pass-through
obligation. Variations in the maturities of pass-through
obligations will affect the yield of the Master Series investing
in such obligation. Furthermore, as with any debt obligation,
fluctuations in interest rates will inversely affect the market
value of pass-through obligations. The Non-Money Market Master
Series may invest in pass-through obligations that are supported
by the full faith and credit of the U.S. Government (such as
those issued by the Government National Mortgage Association) or
those that are guaranteed by an agency or instrumentality of the
U.S. Government or government sponsored enterprise (such as the
Federal National Mortgage Association or the Federal Home Loan
Mortgage Corporation) or bonds collateralized by any of the
foregoing.
When-Issued Securities. Certain of the securities in
which the Short-Intermediate Term Master Series and Growth Stock
Master Series may invest are purchased on a when-issued basis, in
which case delivery and payment normally take place within
45 days after the date of the commitment to purchase. The
Short-Intermediate Term Master Series and Growth Stock Master
Series make commitments to purchase securities on a when-issued
basis only with the intention of actually acquiring the
securities, but may sell them before the settlement date if it is
deemed advisable. When-issued securities are subject to market
fluctuation, and no income accrues to the purchaser during the
period prior to issuance. The purchase price and the interest
rate received on debt securities are fixed at the time the
purchaser enters into the commitment. Purchasing a security on a
when-issued basis can involve a risk that the market price at the
time of delivery may be lower than the agreed-upon purchase
price, in which case there could be an unrealized loss at the
time of delivery. None of the Master Series currently intends to
invest more than 5% of its assets in when-issued securities
during the coming year. Each Master Series establishes a
segregated account in which it maintains cash or liquid, high-
grade debt securities in an amount at least equal in value to the
Master Series' commitments to purchase when-issued securities.
If the value of these assets declines, the Master Series will
place additional liquid assets in the account on a daily basis so
that the value of the assets in the account is equal to the
amount of such commitments.
Loans of Portfolio Securities. All Master Series may
lend securities from their portfolios to brokers, dealers and
financial institutions (but not individuals) if cash, U.S.
Government securities or other high-quality debt obligations
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<PAGE> 51
equal to at least 100% of the current market value of the
securities loaned (including accrued interest thereon) plus the
interest payable to such Master Series with respect to the loan
is maintained with the Master Series. In determining whether or
not to lend a security to a particular broker, dealer or
financial institution, the Master Series' Investment Adviser
considers all relevant facts and circumstances, including the
size, creditworthiness and reputation of the broker, dealer, or
financial institution. Any loans of portfolio securities are
fully collateralized based on values that are marked to market
daily. The Master Series do not enter into any portfolio
security lending arrangement having a duration longer than one
year. Any securities that a Master Series receives as collateral
do not become part of the Master Series' portfolio at the time of
the loan and, in the event of a default by the borrower, the
Master Series will, if permitted by law, dispose of such
collateral except for such part thereof that is a security in
which the Master Series is permitted to invest. During the time
securities are on loan, the borrower will pay the Master Series
any accrued income on those securities, and the Master Series may
invest the cash collateral and earn income or receive an agreed-
upon fee from a borrower that has delivered cash-equivalent
collateral. None of the Master Series will lend securities
having a value that exceeds 50% of the current value of its total
assets. Loans of securities by any of the Master Series are
subject to termination at the Master Series' or the borrower's
option. The Master Series 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 Trusts, 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, interest may be withheld at the source
under foreign income tax laws, and there is a possibility of
expropriation of confiscatory taxation, political or social
instability or diplomatic developments that could adversely
affect investments in, the liquidity of, and the ability to
enforce contractual obligations with respect to, securities of
issuers located in those countries. None of the Master Series
may invest 25% or more of its assets in foreign obligations.
Obligations of foreign banks and foreign branches of
U.S. banks involve somewhat different investment risks from those
affecting obligations of U.S. banks, including the possibilities
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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.
Convertible Securities (Lower Rated Securities)
Subject to the limitations described in Part A, the Growth and
Income Master Series may invest in convertible securities that
are not rated in one of the four highest rating categories by a
nationally recognized statistical ratings organization ("NRSRO")
or unrated but determined by Wells Fargo to be of comparable
quality such lower rated securities. The yields on such lower
rated securities, which include securities also known as junk
bonds, generally are higher than the yields available on higher-
rated securities. However, investments in lower rated securities
and comparable unrated securities generally involve greater
volatility of price and risk of loss of income and principal,
including the probability of default by or bankruptcy of the
issuers of such securities. Lower rated securities and
comparable unrated securities (a) will likely have some quality
and protective characteristics that, in the judgment of the
rating organization, are outweighed by large uncertainties or
major risk exposures to adverse conditions and (b) are
predominantly speculative with respect to the issuer's capacity
to pay interest and repay principal in accordance with the terms
of the obligation. Accordingly, it is possible that these types
of factors could, in certain instances, reduce the value of
securities held in the Master Series' portfolio, with a
commensurate effect on the value of its shares. Therefore, an
investment in the Growth and Income Master Series should not be
considered as a complete investment program and may not be
appropriate for all investors.
While the market values of lower rated securities and
comparable unrated securities tend to react less to fluctuations
in interest rate levels than the market values of higher-rated
securities, the market values of certain lower rated securities
and comparable unrated securities also tend to be more sensitive
to individual corporate developments and changes in economic
conditions than higher-rated securities. In addition, lower
rated securities and comparable unrated securities generally
present a higher degree of credit risk. Issuers of lower rated
securities and comparable unrated securities often are highly
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leveraged and may not have more traditional methods of financing
available to them so that their ability to service their debt
obligations during an economic downturn or during sustained
periods of rising interest rates may be impaired. The risk of
loss due to default by such issuers is significantly greater
because lower rated securities and comparable unrated securities
generally are unsecured and frequently are subordinated to the
prior payment of senior indebtedness. The Master Series may
incur additional expenses to the extent that it is required to
seek recovery upon a default in the payment of principal or
interest on its portfolio holdings. The existence of limited
markets for lower rated securities and comparable unrated
securities may diminish the Master Series' ability to (a) obtain
accurate market quotations for purposes of valuing such
securities and calculating its net asset value and (b) sell the
securities at fair value either to meet redemption requests or to
respond to changes in the economy or in financial markets.
Certain lower rated debt securities and comparable
unrated securities frequently have call or buy-back features that
permit their issuers to call or repurchase the securities from
their holders, such as the Master Series. If an issuer exercises
these rights during periods of declining interest rates, the
Master Series may have to replace the security with a lower
yielding security, thus resulting in a decreased return to the
Master Series.
The market for certain lower rated securities and
comparable unrated securities is relatively new and has not
weathered a major economic recession. The effect that such a
recession might have on such securities is not known. Any such
recession, however, could disrupt severely the market for such
securities and adversely affect the value of such securities.
Any such economic downturn also could adversely affect the
ability of the issuers of such securities to repay principal and
pay interest thereon.
Privately Issued Securities (Rule 144A). The Growth and
Income Master Series and the Growth Stock Master Series may
invest in privately issued securities which may be resold only in
accordance with Rule 144A under the Securities Act of 1933
("Rule 144A Securities"). Rule 144A Securities are restricted
securities that are not publicly traded. Accordingly, the
liquidity of the market for specific Rule 144A Securities may
vary. Wells Fargo, pursuant to guidelines established by the
Trust's Board of Trustees, evaluates the liquidity
characteristics of each Rule 144A Security proposed for purchase
by the Master Series on a case-by-case basis and considers the
following factors, among others, in its evaluation: (1) the
frequency of trades and quotes for the Rule 144A Security;
(2) the number of dealers willing to purchase or sell the
Rule 144A Security and the number of other potential purchasers;
(3) dealer undertakings to make a market in the Rule 144A
Security; and (4) the nature of the Rule 144A Security and the
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nature of the marketplace trades (e.g., the time needed to
dispose of the Rule 144A Security, the method of soliciting
offers and the mechanics of transfer). The Growth and Income
Master Series and the Growth Stock Master Series do not intend to
invest more than 5% of their net assets in Rule 144A Securities
during the coming year.
Municipal Bonds. The Master Series may invest in
municipal bonds. As discussed in Part A, 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 Series (except for the Growth
and Income Master Series) may not invest 25% or more of their
respective 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. An uncertainty in a municipal issuer's capacity
to raise taxes as a result of 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.
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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 will 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 will change in response to
changes in the interest rates payable on new issues of municipal
securities (i.e., market risk). Should such interest rates rise,
the value of outstanding securities, including those held in a
Master Series' portfolio, will decline and (if purchased at par
value) they would sell at a discount. If interests rates fall,
the value of outstanding securities will generally increase and
(if purchased at par value) they would sell at a premium.
Changes in the value of municipal securities held in a Master
Series' portfolio arising from these or other factors will cause
changes in the net asset value per share of the Master Series.
Investments in Warrants. The Non-Money Market Master
Series may invest up to 5% of their net assets at the time of
purchase in warrants (other than those that have been acquired in
units or attached to other securities), and not more than 2% of
their net assets in warrants which are not listed on the New York
or American Stock Exchange. Warrants represent rights to
purchase securities at a specific price valid for a specific
period of time. The prices of warrants do not necessarily
correlate with the prices of the underlying securities. The
Master Series only may purchase warrants on securities in which
the Master Series may invest directly.
SPECIAL CONSIDERATIONS AFFECTING
CALIFORNIA MUNICIPAL OBLIGATIONS
Certain debt obligations held by the California Tax-Free
Intermediate Income Master Series, the California Tax-Free
Short-Term Income Master Series and the California Tax-Free Money
Market Master Series ("California Tax-Free Master Series") may be
obligations of issuers which rely in whole or in substantial part
on California state revenues for the continuance of their
operations and the payment of their obligations. The extent to
which the California Legislature will continue to appropriate a
portion of the state's general funds to counties, cities and
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their various entities, is not entirely certain. To the extent
local entities do not receive money from the state to pay for
their operations and services, their ability to pay debt service
on obligations held by these Master Series may be impaired.
Certain California constitutional amendments,
legislative measures, executive orders, administrative
regulations, and voter initiatives, as discussed below, could
adversely affect the market values and marketability of, or
result in default of, existing obligations, including obligations
that may be held by the California Tax-Free Master Series.
Obligations of the state or local governments may also be
affected by budgetary pressures affecting the State and economic
conditions in the State. Interest income to the California
Tax-Free Master Series could also be adversely affected. The
following highlights only some of the more significant financial
trends and problems, and is based on information drawn from
official statements and prospectuses relating to securities
offerings of the State of California, its agencies or
instrumentalities, as available on the date of this SAI. Wells
Fargo has not independently verified any of the information
contained in such official statements and other publicly
available documents, but is not aware of any fact which would
render such information inaccurate.
CONSTITUTIONAL LIMITATIONS ON TAXES AND APPROPRIATIONS:
LIMITATION ON TAXES. Certain obligations held by the California
Tax-Free Master Series may be obligations of issuers that rely in
whole or in part, directly or indirectly, on ad valorem property
taxes as a source of revenue. The taxing powers of California
local governments and districts are limited by Article XIIIA of
the California Constitution, enacted by the voters in 1978 and
commonly known as "Proposition 13." Briefly, Article XIIIA
limits to 1% of full cash value the rate of ad valorem property
taxes on real property and generally restricts the reassessment
of property to 25% per year, except upon new construction or
change of ownership (subject to a number of exemptions). Taxing
entities may, however, raise ad valorem taxes above the 1% limit
to pay debt service on voter-approved bond indebtedness.
Under Article XIIIA, the basic 1% ad valorem tax levy is
applied against the assessed value of property as of the owner's
date of acquisition (or as of March 1, 1975 if acquired earlier),
subject to certain adjustments. This system has resulted in
widely varying amounts of tax on similarly situated properties.
Several lawsuits were filed challenging the acquisition-based
assessment system of Proposition 13, but on June 18, 1992, the
U.S. Supreme Court announced a decision upholding Proposition 13.
Article XIIIA prohibits local governments from raising
revenues through ad valorem property taxes above the 1%, and
requires voters of any government unit to give 2/3 approval to
levy any "special tax." However, court decisions allowed non-
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voter-approved levy of "general taxes" which were not dedicated
to a specific use. In response to these decisions, the voters of
the State in 1986 adopted an initiative statute which imposed
significant new limits on the ability of local entities to raise
or levy general taxes, except by receiving majority local voter
approval. Significant elements of this initiative, "Proposition
62," have been overturned in recent court cases, but efforts may
continue to further restrict the ability of local government
agencies to levy or raise taxes.
APPROPRIATIONS LIMITS. The State is subject to an
annual appropriations limit imposed by Article XIIIB of the State
Constitution (the "Appropriations Limit"). Article XIIIB
prohibits the State from spending "appropriations subject to
limitation" in excess of the Appropriations Limit. Article
XIIIB, originally adopted in 1979, was modified substantially by
Propositions 98 and 111 in 1988 and 1990, respectively,
"Appropriations subject to limitation," with respect to the
State, are authorizations to spend "proceeds of taxes," which
consist of tax revenues, and certain other funds, including
proceeds from regulatory licenses, user charges or other fees to
the extent that such proceeds exceed "the cost reasonably borne
by that entity in providing the regulation, product or service,"
but "proceeds of taxes" exclude most State subventions to local
governments, tax refunds and some benefit payments such as
unemployment insurance. No limit is imposed on appropriations of
funds which are not "proceeds of taxes," such as reasonable user
charges or fees, and certain other non-tax funds.
Among the expenditures not included in the Article XIIIB
appropriations limit are: (1) the debt service cost of bonds
issued or authorized prior to January 1, 1979, or subsequently
authorized by the voters; (2) appropriations arising from certain
emergencies declared by the Governor; (3) appropriations for
certain capital outlay projects; and (4) appropriations by the
State of post-1989 increases in gasoline taxes and vehicle weight
fees.
The appropriations limit for each year is adjusted
annually to reflect changes in cost of living and population, and
any transfers of service responsibilities between government
units. The definitions for such adjustments were liberalized by
Proposition 111 to more closely follow growth in the State's
economy. For the 1990-91 fiscal year, each unit of government
has recalculated its appropriations limit by taking the actual
1986-87 limit and applying the Proposition 111 annual adjustments
forward to 1990-91. This was expected to raise the limit in most
cases.
Proposition 98 changed State funding of public education
below the university level and the operation of the State
Appropriations Limit, primarily by guaranteeing K-14 schools
(kindergarten through twelfth plus two-year community colleges) a
minimum share of General Fund Revenues. Proposition 98, as
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modified by Proposition 111, guarantees K-14 schools the greater
amount as calculated under three different tests. This
guaranteed amount can be suspended for a one-year period through
a two-thirds vote of both houses of the State Legislature, with
the Governor's concurrence. In the fall of 1989, such a
suspension was enacted to avoid having 40.3 percent of revenues
generated by a special supplemental sales tax enacted for
earthquake relief go to K-14 schools. Proposition 98 also
contains provisions transferring certain State tax revenues in
excess of the Article XIIIB limit to K-14 schools.
Under Proposition 111, "excess" revenues are measured
over a two-year cycle. With respect to local governments, excess
revenues must be returned by a revision of tax rates or fee
schedules within the two subsequent fiscal years. The
appropriations limit for a local government may be overridden by
referendum under certain conditions for up to four years at a
time. With respect to the State, 50% of any excess revenues is
to be distributed to K-14 schools and the other 50% is to be
refunded to taxpayers.
In the years immediately following enactment, very few
California governmental entities operated near their
appropriations limit; in the mid-to-late 1980's, however, many
entities were at or approaching their limit. Many local entities
have successfully sought voter approval for four-year waivers of
the limit and, under Proposition 111, may elect among different
measures of population in setting the limit. During FY 1986-87,
State receipts from proceeds of taxes exceeded its appropriations
limit by $1.138 billion, which was returned to taxpayers. Since
that time, appropriations subject to limitation were under the
State limit.
The 1991-92 Budget Act appropriated $18.5 billion for
K-14 schools. During the course of the fiscal year, revenues
proved to be substantially below expectations. By the time the
Governor's Budget was introduced in January, 1992, it became
clear that per capita growth in the General Fund revenues for
1991-92 would be smaller than the growth in State per capita
personal income and the Governor's Budget therefore reflected a
reduction in Proposition 98 funding in 1991-92.
In response to the changing revenue situation and to
fully fund the Proposition 98 guarantee in both the 1991-92 and
1992-93 Fiscal Years without exceeding it, the Legislature
enacted several bills as part of the 1992-93 budget package which
responded to the fiscal crisis in education funding. In Fiscal
Year 1991-92, Proposition 98 appropriations for K-14 schools were
reduced by $1.083 billion. In order to not adversely impact cash
received by school districts, however, a short-term loan was
appropriated from the non-Proposition 98 State General Fund. The
Legislature then appropriated $16.6 billion to K-14 schools for
1992-93 (the minimum guaranteed by Proposition 98), but
designated $1.083 billion of this amount to "repay" the prior
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year loan, thereby reducing cash outlays in 1992-93 by that
amount.
In addition to reducing the 1991-92 Fiscal Year
appropriations for K-14 schools by $1.083 billion and converting
that amount to a loan (the "inter-year adjustment"), Chapter 703,
Statutes of 1992 also made an adjustment based on the additional
$1.2 billion of local property taxes that were shifted to schools
and community colleges. Additionally, Chapter 703 contained a
provision that if an appellate court should determine that one of
the tests used for the recalculation or the inter-year adjustment
is unconstitutional, unenforceable or invalid, Proposition 98
would be suspended for the 1992-93 Fiscal Year, with the result
that K-14 schools would receive the amount intended by the 1992-
93 Budget Act compromise.
The State Controller stated in October 1992 that,
because of a drafting error in Chapter 703, he could not
implement the $1.083 billion reduction of the 1992-93 school
funding appropriation, which was part of the inter-year
adjustment. The Legislature ultimately enacted corrective
legislation as part of the 1993-94 Budget package to implement
the $1.083 billion inter-year adjustment as originally intended.
To date, three actions have been brought concerning that law.
The effect of the corrective legislation on these actions has not
been determined.
In the 1992-93 Budget Act, a new loan of $732 million
was made to K-12 schools in order to maintain per-average daily
attendance ("ADA") funding at the same level as 1991-92, at
$4,187. An additional loan of $241 million was made to community
college districts. These loans are to be repaid from future
Proposition 98 entitlements. Including both State and Local
funds, and adjusting for the loans and repayments, on a cash
basis, total Proposition 98 K-12 funding in 1992-93 increased to
$21.5 billion, 2.4 percent more than the amount in 1991-92 ($21.0
billion).
Based on revised State tax revenues and estimated
decreased reported pupil enrollment, the 1993-94 Budget Act
projects that the 1992-93 Proposition 98 Budget Act
appropriations of $16.6 billion exceed a revised minimum
guarantee by $313 million. As a result, the 1993-94 Budget Act
reverts $25 million in 1992-93 appropriations to the General
Fund. Limiting the reversion to this amount ensures that per ADA
funding for general purposes will remain at the prior year level.
The 1993-94 Budget Act also designates $98 million on 1992-93
appropriations toward satisfying prior year's guarantee levels,
an obligation that resulted primarily from updating State Tax
revenues for 1991-92, and designates $190 million as a loan
repayable from 1993-94 funding.
The 1993-94 Budget Act projects the Proposition 98
minimum funding level at $13.5 billion. This amount also takes
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into account increased property taxes transferred to school
districts from other local governments. Legislation accompanying
the 1993-94 Budget Act provides a new loan of $609 million to
K-12 schools in order to maintain per ADA funding at $4,187 and a
loan of $178 million to community colleges. These loans have
been combined with the K-14 1992-93 loans into one loan totalling
$1.760 billion. Repayment of this loan would be from future
years' Proposition 98 entitlements, and would be conditioned on
maintaining current funding levels per pupil for K-14 schools.
In the spring of 1991, the Richmond Unified School
District ("RUSD") Board of Directors attempted to end classes six
weeks early because of a fiscal crisis. In response to lawsuits,
a lower court judge, in a case called Butt v. State of
California, ordered the State, over objections from the Governor,
to provide funding to allow the school year to be completed, and
an emergency loan was arranged by the State Controller. On
appeal, the California Supreme Court in late December 1992 upheld
the lower court's action, ruling that the State Constitution's
guarantee of public education required the State to ensure a full
year's education in all school districts. The Court, however,
overturned a portion of the original order relating to the source
of funds for RUSD's emergency loan; the decision leaves unclear
just where the State must find funds to make any future loans of
this kind.
OBLIGATIONS OF THE STATE OF CALIFORNIA. As of
February 1, 1993, the State had approximately $17.0 billion of
general obligation bonds outstanding and $8.6 billion remained
authorized but unissued. In addition, at June 30, 1992, the
State had lease-purchase obligations, payable from the State's
General Fund, of approximately $2.9 billion. The State issued
approximately $4 billion of general obligation bonds in calendar
year 1991, and $3 billion in 1992. This is expected to decline
further in 1993 and 1994. Of the State's outstanding general
obligation debt, approximately 28% is presently self-liquidating
(for which program revenues are anticipated to be sufficient to
reimburse the General Fund for debt service payments). In
FY 1991-92, debt service on general obligation bonds and lease-
purchase debt was approximately 3.2% of General Fund revenues.
The State has paid the principal of and interest on its general
obligations bonds, lease-purchase debt, and short-term
obligations when due.
ECONOMY. California's economy is the largest among the
50 states and one of the largest in the world. The State's
population grew by 26% in the 1980s and, at over 31 million, it
now represents 12.3% of the total United States population.
Total personal income in the State, at an estimated $645 billion
in 1993, accounts for about 13% of all personal income in the
nation. Total employment is almost 14 million, the majority of
which is in the service, trade, and manufacturing sectors.
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Since the start of the 1990-91 Fiscal Year, the State
has faced the worst economic, fiscal and budget conditions since
the 1930s. Construction, manufacturing (especially aerospace),
exports and financial services, among others, have all been
severely affected. Job losses have been the worst of any post-
war recession. Employment levels are expected to stabilize by
late 1993 before net employment starts to increase, and pre-
recession job levels are not expected to be reached for several
more years. Unemployment reached 10 percent in November 1992 and
is expected to remain above 9 percent through 1993 and 1994.
According to the Department of Finance, recovery from the
recession in California is not expected in meaningful terms until
late 1993 or 1994, notwithstanding signs of recovery elsewhere in
the nation.
The recession has seriously affected State tax revenues.
It has also caused increased expenditures for health and welfare
programs. The State has also been facing a structural imbalance
in its budget with the largest programs supported by the General
Fund -- K-12 schools and community colleges, health and welfare,
and corrections -- growing at rates higher than the growth rates
for the principal revenue sources of the General Fund. As a
result, the State has experienced recurring budget deficits. The
Controller reports that expenditures exceeded revenues for four
of the five fiscal years ending with 1991-92. Revenues and
expenditures were essentially equal in 1992-93, but the original
budget for that year projected revenues exceeding expenditures by
$2.6 billion. By June 30, 1993, according to the Department of
Finance, the State's Reserve for Economic Uncertainties had a
deficit, on a budget basis, of approximately $2.8 billion.
A further consequence of the large budget imbalances
over the last three fiscal years has been that the State depleted
its available cash resources and has had to use a series of
external borrowings to meet its cash needs.
The 1993-94 Budget Act is projected to have $40.6
billion of General Fund revenues and transfers and $38.5 billion
of budgeted expenditures.
As a result of the deterioration in the State's budget
and cash situation in fiscal years 1991-92 and 1992-93, the
rating agencies reduced the State's credit ratings. Between
October 1991 and October 1992 the rating on the State's general
obligation bonds was reduced by S&P from "AAA" to "A+" and by
Moody's from "AAA" to "AA."
The Department of Finance Bulletins for July, August,
and September, 1993 reported that California entered the fourth
year of recession in June, 1993 with few signs of any sustained
turnaround in the economy, which remains sluggish. In the year
from August, 1992 to August, 1993, an estimated 173,000 more jobs
had been lost, principally in manufacturing. A small gain in
nonfarm employment in July, 1993 was offset by a larger loss of
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22,000 jobs in August, 1993. Unemployment has risen in the last
few months to 9.0 percent in August. Changes in the rate have
been primarily due to changes in the labor force; actual jobs and
job-seekers declined in August, 1993. This was consistent with a
report issued by the Department of Finance indicating that
California suffered a net loss of 150,000 residents to other
states in the last fiscal year; overall population still grew due
to births and foreign immigration. Both residential and
nonresidential real estate construction remained in a sustained
slump, and were, in May, 1993 both at or close to the lowest
levels since the start of the recession.
Finally, the Department of Finance noted that California
would be hit hard by the latest round of federal military base
closings and force realignments, which will be implemented over
the remaining years of the decade. California was estimated to
have 22 percent of the nation's defense spending, but might
suffer 25-30 percent of the defense spending cuts over the next
five years. The Department also estimates that the recent
federal Budget Reconciliation Act will have a disproportionate
and negative impact on California. California would suffer 19.5
percent of the outlay reductions, which rely heavily on defense
budget cuts, and the State, with many high income taxpayers, will
pay nearly 14.5 percent of the tax increases, compared to 12
percent of the nation's population.
RECENT STATE FINANCIAL RESULTS. The principal sources
of State General Fund revenues in 1991-92 were the California
personal income tax (42% of total revenues), the sales tax (39%),
bank and corporation taxes (11%), and the gross premium tax on
insurance (3%). The State maintains a Special Fund for Economic
Uncertainties (the "SFEU"), derived from General Fund revenues,
as a reserve to meet cash needs of the General Fund, but which is
required to be replenished as soon as sufficient revenues are
available. Year-end balances in the SFEU are included for
financial reporting purposes in the General Fund balance.
Inter-fund borrowing has been used for many years to
meet temporary imbalances of receipts and disbursements in the
General Fund. As of June 30, 1993, there were outstanding loans
in the aggregate principal amount of $43 million to the General
Fund from the Special Fund for Economic Uncertainties, and
outstanding loans in the aggregate principal amount of $3.016
billion to the General Fund from the Special Funds. On June 30,
1993, the General Fund also had been supplemented with the
proceeds of the sale of $2.0 billion of revenue anticipation
warrants on June 23, 1993. Inter-fund borrowing is also
permitted from certain other Special Funds under specified
circumstances.
In the years following enactment of the federal Tax
Reform Act of 1986, and conforming changes to the State's tax
laws, the State experienced a series of fiscal years in which
revenue came in significantly higher or lower than original
B-21
<PAGE> 63
estimates. The 1989-90 Fiscal Year ended with revenues below
estimate, so that the State's budget reserve (the SFEU) was fully
depleted by June 30, 1990. In approaching the 1990-91 Fiscal
Year budget, the Governor stated that a structural imbalance
existed in the budget. The largest General Fund programs -- K-14
education, health, welfare and corrections -- were increasing
faster than the revenue base, driven by the State's rapid
population increases in the mid to late 1980's. The Governor
estimated that a $3.6 billion gap needed to be closed in order to
fund all State programs at their legislated levels (including
costs of living adjustments, or "COLAs"), and to restore a $1.3
billion budget reserve. The Governor called for structural
changes to programs in order to close this budget gap.
The 1990-91 Budget Act closed the budget gap with a
combination of revenue increases, structural program changes,
expenditure reductions, and one-time deferrals and adjustments.
As enacted, the Governor estimated there would be a balance in
the SFEU at June 30, 1991 of approximately $1.3 billion.
However, it became evident shortly after the fiscal year began
that revenues were coming in substantially lower than estimated,
as the State and national economies were affected by the
recession which began in summer 1990, and by the Persian Gulf
crisis. It was eventually determined that revenues in all major
categories (except insurance taxes) were lower than receipts in
the 1989-90 Fiscal Year, the first such year-to-year decline
since the 1930s.
Although the new Administration, which took office in
January 1991, announced substantially reduced revenue projections
in the January 1991 Governor's Budget, the weaknesses of the
economy resulted in actual receipts in the second half of the
1990-91 Fiscal Year falling well below even those projections.
In addition, expenditures for health and welfare programs were
higher than originally budgeted, consistent with the ongoing
recession. As a result of these factors, the General Fund ended
the 1990-91 Fiscal Year with a large deficit.
The 1991-92 Budget Act projected General Fund
expenditures of $43.4 billion and Special Fund expenditures of
$10.6 billion. The Department of Finance estimated that there
would be a balance in the SFEU on June 30, 1992 of $1.2 billion.
An estimated $14.3 billion "budget gap" was closed through a
combination of temporary and permanent changes in laws and one-
time budget adjustments. The major features of the budget
compromise were: program funding reductions totaling $5.1
billion; a total of $5.1 billion of increased State tax revenues;
savings of $2.1 billion by returning certain health and welfare
programs to counties; and additional miscellaneous savings or
revenue gains and one-time accounting charges totaling $2.0
billion.
The 1991-92 Budget Act was based on economic forecasts
showing recovery from the recession would begin in summer or fall
B-22
<PAGE> 64
of 1991, but revenues lagged behind projections from the start of
the 1991-92 Fiscal Year. By the time the Governor's Budget for
1992-93 was prepared in late 1991, it was evident that the
recession had been much more severe in the State than was thought
earlier, and that it was continuing longer than anticipated. As
a result, revenues for the 1991-92 Fiscal Year were much lower
than originally estimated and expenditures were higher,
particularly in health and welfare programs.
As a result of the revenue shortfalls accumulating for
the previous two fiscal years, the Controller in April, 1992
indicated that cash resources (including borrowing from Special
Funds) would not be sufficient to meet all General Fund
obligations due on June 30 and July 1, 1992. On June 25, 1992,
the Controller issued $475 million of 1992 Revenue Anticipation
Warrants (the "1992 Warrants") in order to provide funds to cover
all necessary payments from the General Fund at the end of the
1991-92 Fiscal Year and on July 1, 1992. The 1992 Warrants were
paid on July 24, 1992. In addition to the 1992 Warrants, the
Controller reported that as of June 30, 1992, the General Fund
had borrowed $1.336 billion from the SFEU and $4.699 billion from
other Special Funds, using all but about $183 million of
borrowable cash resources.
By the time the 1992-93 Governors Budget was presented
in January 1992, it was evident the recession was much deeper
than earlier anticipated. To balance the proposed budget,
program reductions totalling $4.365 billion and revenue and
transfer increases of $872 million were proposed for the 1991-92
and 1992-93 Fiscal Years. Economic performance in the State
continued to be sluggish after the 1992-93 Governor's Budget was
prepared. By the time of the May Revision, issued on May 20,
1992, the Administration estimated that the 1992-93 Budget needed
to address a gap of about $7.9 billion, much of which was needed
to repay the accumulated budget deficits of the previous two
years.
The severity of the budget crisis led to a long delay in
adopting the budget. With the failure to adopt a budget by
July 1, 1992, which would allow the State to carry out its normal
annual cash flow borrowing, the Controller was forced to issue
registered warrants to pay a variety of obligations representing
prior years' or continuing appropriations, and mandates from
court orders. Available funds were used to make
constitutionally-mandated payments, such as debt service on bonds
and revenue anticipation warrants. Between July 1 and
September 4, 1992 the Controller issued a total of approximately
$3.8 billion of registered warrants. After that date, all
remaining outstanding registered warrants (about $2.9 billion)
were called for redemption from proceeds of the issuance of 1992
Interim Notes after the budget was adopted.
From July 1, 1992 until the Budget Act was signed on
September 2, 1992 many State vendors went unpaid for services
B-23
<PAGE> 65
rendered or supplies delivered during this period. Certain
obligations, such as employee salaries, welfare payments, school
apportionments, debt service and (until August 14 only) Medi-Cal
reimbursements, were paid (although in many cases with registered
warrants) based on continuing or special appropriations, or court
orders. The level of these payments was consistent with, and
reflected in, the 1992-93 Budget Act. State employees filed suit
against the State alleging that payment of their salaries with
registered warrants violated federal labor laws.
The 1992-93 Budget Act provided for expenditures of
$57.4 billion and consisted of General Fund expenditures of $40.8
billion and Special Fund and Bond Fund expenditures of $16.6
billion. The Department of Finance estimated in September, 1992
that there would be a balance in the SFEU of $28 million on
June 30, 1993. Following enactment of the 1992-93 Budget Act,
the State immediately undertook its regular cash flow borrowing
program for the 1992-93 Fiscal Year.
The $7.9 billion budget gap was closed through use of
some increased revenues and transfers, but primarily with
expenditure cuts. The principal reductions were in health and
welfare, K-12 schools and community colleges, state aid to local
governments, higher education (partially offset by increased
student fees), and various other programs. In addition, funds
were transferred from special funds, collections of State
revenues were accelerated, and other adjustments were made.
After the 1992-93 Budget Act was enacted and as
confirmed in the Governor's Budget proposal for 1993-94, released
on January 8, 1993, it became evident that economic conditions in
the State were not beginning to improve in the second half of
1992, as assumed by the Department of Finance's May 1992 economic
estimates, which underlay the 1992-93 Budget Act. This was
exacerbated by enactment of an initiative measure in November,
1992 which repealed a sales tax for certain candy, snack foods
and bottled water, reducing revenues by about $300 million for a
full fiscal year ($200 million in 1992-93). The January
Governor's budget projected a $2.1 billion budget deficit at
June 30, 1993 (compared to the 1992-93 Budget Act projection of a
$28 million balance).
On May 20, 1993, the Department of Finance released its
May Revision to the January Governor's Budget (the "May
Revision"), updating revenue and expenditure projections and
proposals for the 1992-93 and 1993-94 fiscal years. The May
Revision projected that the General Fund would end the fiscal
year on June 30, 1993 with an accumulated budget deficit of about
$2.8 billion, and a negative fund balance of about $2.2 billion
(the difference being certain reserves for encumbrances and
school funding costs). The Governor projected revenues for 1992-
93 of $41.0 billion, $1.0 billion less than in the 1991-92 fiscal
year. On the expenditure side, the continued recession increased
health and welfare costs above the original Budget Act
B-24
<PAGE> 66
projections. Also, property tax receipts at the local level were
less than projected, so that the State will not get the full $1.3
billion benefit from the property tax shift enacted in the Budget
Act. Overall, the May Revision projected total General Fund
expenditures of $41.1 billion for the 1992-93 fiscal year, about
$300 million higher than the Budget Act and $2.2 billion less
than Fiscal Year 1991-92.
The January Governor's Budget had projected that,
because of severely reduced revenues, the State would face a cash
flow shortfall in May 1993, necessitating additional external
borrowing. The State met this cash flow need by issuing $3.0
billion of revenue anticipation notes on April 26, 1993, which
matured on June 24, 1993. On June 23, 1993, the State also
issued the 1993 Revenue Anticipation Warrants, which mature on
December 23, 1993, in the principal amount of $2.0 billion to
meet cash flow requirements for the end of the 1992-93 Fiscal
Year and the start of the 1993-94 Fiscal Year.
The 1993-94 Fiscal Year represents the third consecutive
year the Governor and the Legislature were faced with a very
difficult environment, requiring revenue actions and expenditure
cuts totalling multiple billions of dollars to produce a balanced
budget. The Governor's Budget introduced on January 8, 1993
proposed General Fund expenditures of $37.3 billion, with
projected revenues of $39.9 billion. It also proposed Special
Fund expenditures of $12.4 billion and Special Fund Revenues of
$12.1 billion. To balance the budget in the face of declining
revenues, the Governor proposed a series of revenue shifts from
local government, reliance on increased federal aid, and
reductions in state spending.
The May Revision indicated that the revenue projections
of the January Budget Proposal were tracking well, with the full
year 1992-93 about $80 million higher than the January
projection. Personal income tax revenue was higher than
projected, sales tax was close to target, and bank and
corporation taxes were lagging behind projections. The May
Revision projected the State would have an accumulated deficit of
about $2.75 billion by June 30, 1993. The Governor proposed to
eliminate this deficit over an 18-month period. He also agreed
to retain the 0.5 percent sales tax scheduled to expire June 30,
1993 for a six-month period, dedicated to local public safety
purposes, with a November election to determine a permanent
extension. Unlike previous years, the Governor's Budget and May
Revision did not calculate a "gap" to be closed, but rather set
forth revenue and expenditure forecasts and proposals designed to
produce a balanced budget.
The 1993-94 Budget Act was signed by the Governor on
June 30, 1993, along with implementing legislation. The Governor
vetoed about $71 million in spending. With enactment of the
Budget Act, the State is proceeding with its regular cash flow
borrowing program for the fiscal year, which includes issuance of
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<PAGE> 67
approximately $2 billion of revenue anticipation notes. This act
is predicated on General Fund revenues and transfers estimated at
$40.6 billion, about $700 million higher than the January
Governor's Budget, but still about $400 million below 1992-93
(and the second consecutive year of actual decline). The
principal reasons for declining revenue are the continued weak
economy and the expiration (or repeal) of three fiscal steps
taken in 1991 -- a half cent temporary sales tax, a deferral of
operating loss carry forwards, and repeal by initiative of a
sales tax on candy and snack foods. The 1993-94 Budget Act also
assumes Special Fund revenues of $11.9 billion, an increase of
2.9 percent over 1992-93.
The 1993-94 Budget Act includes General Fund
expenditures of $38.5 billion (a 6.3 percent reduction from
projected 1992-93 expenditures of $41.1 billion), in order to
keep a balanced budget within the available revenues. The Budget
also includes Special Fund expenditures of $12.1 billion, a 4.2
percent increase.
The 1993-94 Budget Act contains no General Fund
tax/revenue increases other than a two-year suspension of the
renters' tax credit. The Administration continues to predict
that population growth in the 1990's will keep upward pressure on
major State programs, such as K-14 education, health and welfare
and corrections, outstripping projected revenue growth in an
economy only very slowly emerging from a deep recession.
The September 1993 Bulletin of the Department of Finance
reports that General Fund revenues in August, 1993 were $79
million, or about 2.6 percent, above updated May Revision
estimates, but about $65 million of this was apparently due to an
administrative problem in refunds which will appear next month.
July and August 1993 combined revenues were $86 million or 1.7
percent above projections, with all three major tax sources
tracking projections well. August, 1993 sales tax receipts were
10.5% above projections, offsetting weak results in June and
July. The Department of Finance continues to report, however,
that economic activity in the State remains sluggish. The
Department of Finance also reports that the State will only
receive approximately $450 million in aid from the Federal
Government to offset the health and welfare costs associated with
foreign immigrants living in the State, substantially less than
the $692 million contemplated by the 1993-94 Budget Act.
On June 2, 1993, the Commission on State Finance
("COSF") issued its Quarterly General Fund Forecast, which
assessed the Governor's May Revision. The COSF report projected
stagnant economic conditions through 1994, and agreed generally
with the Governor's economic projections, although the COSF
showed slightly lower growth than the Governor in some State
economic factors. The COSF projects about $700 million lower
revenues in 1993-94 than the May Revision, principally because
the COSF believes most of the increase in personal income taxes
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<PAGE> 68
seen late in 1992-93 came from a one-time income shift, rather
than reflecting a permanent base of greater tax revenues. The
COSF also shows other major taxes (and local property taxes) a
little weaker than the May Revision, with a resulting increase in
expenditures to make up the property tax shortfall for school
financing. Altogether, COSF projects in its "Primary Forecast"
that the fund balance at June 30, 1994 would be over $800 million
less than the May Revision forecast.
The COSF report includes two alternative forecasts based
on either continued recession, or stronger recovery. The
pessimistic forecast is $1.5 billion worse at June 30, 1994 than
the Primary Forecast, and the optimistic forecast is about $1.5
billion better.
OBLIGATIONS OF OTHER ISSUERS.
STATE ASSISTANCE. Property tax revenues received by
local governments declined more than 50% following passage of
Proposition 13. Subsequently, the California Legislature enacted
measures to provide for the redistribution of the State's General
Fund surplus to local agencies; the reallocation of certain State
revenues to local agencies; and the assumption of certain
governmental functions by the State to assist municipal issuers
to raise revenues. Total local assistance from the State's
General Fund totaled approximately $33.0 billion in FY 1991-92
(about 75% of General Fund expenditures) and has been budgeted at
$31.1 billion for FY 1992-93, including the effect of
implementing reductions in certain aid programs. To reduce State
General Fund support for school districts, the 1992-93 Budget Act
caused local governments to transfer $1.3 billion of property tax
revenues to school districts, representing loss of almost half
the post-Proposition 13 "bailout" aid. The Governor has proposed
in his 1993-94 Budget that local governments transfer a further
$2.5 billion of property taxes to school districts, with the
possibility that they could raise taxes at the local level to
make up some of the shortfall.
To the extent the State should be constrained by its
Article XIIIB appropriations limit, or its obligation to conform
to Proposition 98, or other considerations, the absolute level,
or the rate of growth, of State assistance to local governments
may continue to be reduced. Any such reductions in State aid
could compound the serious fiscal constraints already experienced
by many local governments, particularly counties. At least one
rural county (Butte) publicly announced that it might enter
bankruptcy proceedings in August 1990, although such plans were
put off after the Governor approved legislation to provide
additional funds for the county. Other counties have also
indicated that their budgetary condition is extremely grave. A
school district (Richmond Unified) recently filed for protection
under bankruptcy laws, but the petition was later dismissed;
other school districts have indicated financial stress, although
none has threatened bankruptcy.
B-27
<PAGE> 69
ASSESSMENT BONDS. Municipal obligations which are
assessment bonds or Mello-Roos bonds may be adversely affected by
a general decline in real estate values or a slow-down in real
estate sales activity. In many cases, such bonds are secured by
land which is undeveloped at the time of issuance but anticipated
to be developed within a few years after issuance. In the event
of such reduction or slowdown, such development may not occur or
may be delayed, thereby increasing the risk of a default on the
bonds. Because the special assessments or taxes securing these
bonds are not the personal liability of the owners of the
property assessed, the lien on the property is the only security
for the bonds. Moreover, in most cases the issuer of these bonds
is not required to make payments on the bonds in the event of
delinquency in the payment of assessments or taxes, except for
amounts, if any, in a reserve fund established for the bonds.
CALIFORNIA LONG-TERM LEASE OBLIGATIONS. Certain
California long-term lease obligations, though typically payable
from the general fund of the municipality, are subject to
"abatement" in the event the facility being leased is unavailable
for beneficial use and occupancy by the municipality during the
term of the lease. Abatement is not a default, and there may be
no remedies available to the holders of the certificates
evidencing the lease obligation in the event abatement occurs.
The most common causes of abatement are failure to complete
construction of the facility before the end of the period during
which lease payments have been capitalized and uninsured casualty
losses to the facility (e.g., due to earthquake). In the event
abatement occurs with respect to a lease obligation, lease
payments may be interrupted (if all available insurance proceeds
and reserves are exhausted) and the certificates may not paid
when due.
Several years ago, the Richmond Unified School District
("RUSD") entered into a lease transaction in which certain
existing properties of the RUSD were sold and leased back in
order to obtain funds to cover operating deficits. Following a
fiscal crisis in which the RUSD's finances were taken over by a
State receiver (including a brief period under bankruptcy court
protection), the RUSD failed to make rental payments on this
lease, resulting in a lawsuit by the Trustee for the Certificate
of Participation holder, in which the State was named defendant
(on the grounds that it controlled the RUSD's finances). One of
the defenses raised in answer to this lawsuit was the invalidity
of the original lease transaction. The trial court has upheld
the validity of the RUSD's lease but an appeal has been filed by
the State. Any ultimate judgment against the Trustee may have
implications for lease transactions of a similar nature by other
California entities.
OTHER CONSIDERATIONS. The repayment of Industrial
Development Securities secured by real property may be affected
by California laws limiting foreclosure rights of creditors.
Health Care and Hospital Securities may be affected by changes in
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<PAGE> 70
State regulations governing cost reimbursements to health care
providers under Medi-Cal (the State's Medicaid program),
including risks related to the policy of awarding exclusive
contracts to certain hospitals.
Limitations on ad valorem property taxes may
particularly affect "tax allocation" bonds issued by California
redevelopment agencies. Such bonds are secured solely by the
increase in assessed valuation of a redevelopment project area
after the start of redevelopment activity. In the event that
assessed values in the redevelopment project decline (for
example, because of a major natural disaster such as an
earthquake), the tax increment revenue may be insufficient to
make principal and interest payments on those bonds. Both
Moody's and S&P suspended ratings on California tax allocation
bonds after the enactment of Articles XIIIA and XIIIB, and only
resumed such ratings on a selective basis.
Proposition 87, approved by California voters in 1988,
requires that all revenues produced by a tax rate increase go
directly to the taxing entity which increased such tax to repay
that entity's general obligation indebtedness. As a result,
redevelopment agencies (which, typically, are the Issuers of Tax
Allocation Securities) no longer receive an increase in tax
increment when taxes on property in the project area are
increased to repay voter-approved bonded indebtedness.
Substantially all of California is within an active
geologic region subject to major seismic activity. Any
California Municipal Obligation in the California Tax-Free Master
Series could be affected by an interruption of revenues because
of damaged facilities or, consequently, income tax deductions for
casualty losses or property tax assessment reductions.
Compensatory financial assistance could be constrained by the
inability of (i) an issuer to have obtained earthquake insurance
coverage at reasonable rates; (ii) an insurer to perform on its
contracts of insurance in the event of widespread losses; or
(iii) the federal or State government to appropriate sufficient
funds within their respective budget limitations.
The October 1989 Northern California earthquake is
estimated to have resulted in a $2 billion (0.3%) reduction in
personal income statewide, but wage effects were minor and
largely offset by reconstruction activity. The federal
government has committed approximately $3.5 billion to earthquake
relief, and, shortly after the event, the California Legislature
enacted, in special session, a temporary increase in the sales
tax rate to finance relief efforts. The earthquake was not
expected to materially affect California's economy.
Because of the complex nature of Articles XIIIA and
XIIIB of the California Constitution (described briefly above),
the ambiguities and possible inconsistencies in their terms, and
the impossibility of predicting future appropriations or changes
B-29
<PAGE> 71
in population and the cost of living, and the probability of
continuing legal challenges, it is not currently possible to
determine fully the impact of Article XIIIA or Article XIIIB, or
the outcome of any pending litigation with respect to those
provisions on California obligations in the California Tax-Free
Master Series or on the ability of the State or local governments
to pay debt service on such obligations. Legislation has been or
may be introduced (either in the Legislature or by initiative)
which would modify existing taxes or other revenue-raising
measures or which either would further limit or, alternatively
would increase the abilities of state and local governments to
impose new taxes or increase existing taxes. It is not presently
possible to predict the extent to which any such legislation will
be enacted, or if enacted, how it would affect California
municipal obligations. It is also not presently possible to
predict the extent of future allocations of state revenues to
local governments or the abilities of state or local governments
to pay the interest on, or repay the principal of, such
California municipal obligations in light of future fiscal
circumstances.
* * *
The taxable securities market is a broader and more
liquid market with a greater number of investors, issuers and
market makers than the market for municipal securities. The more
limited marketability of municipal securities may make it
difficult in certain circumstances to dispose of large
investments advantageously.
ITEM 14. MANAGEMENT OF THE TRUST.
The principal occupations during the past five years of
the Trustees and executive officers of the Trust are listed
below. Each of the Officers and Trustees of the Trust serve in
the identical capacity as Officers and Directors of Stagecoach
Inc. The address of each, unless otherwise indicated, is
111 Center Street, Little Rock, Arkansas 72201. Trustees deemed
to be "interested persons" of the Trust for purposes of the 1940
Act are indicated by an asterisk.
<TABLE>
<CAPTION>
Principal Occupations
Name, Address and Age Position During Past 5 Years
- --------------------- -------- ---------------------
<S> <C> <C>
Jack S. Euphrat, 73 Trustee Private Investor.
415 Walsh Road
Atherton, CA 94027.
*R. Greg Feltus, 44 Trustee, Senior Vice President
Chairman and of Stephens; Manager
President of Financial Services
Group; President of
Stephens Insurance
</TABLE>
B-30
<PAGE> 72
<TABLE>
<S> <C> <C>
Services Inc.; Senior
Vice President of
Stephens Sports
Management Inc.; and
President of
Investors Brokerage
Insurance Inc.
Thomas S. Goho, 53 Trustee Associate Professor
321 Beechcliff Court of Finance of the
Winston-Salem, NC 27104 School of Business
and Accounting at
Wake Forest
University since
1983. Financial
Planner and President
of Piedmont Financial
Planning since 1983.
*Zoe Ann Hines, 46 Trustee Senior Vice President
of Stephens and
Director of Brokerage
Accounting; and
Secretary of Stephens
Resource Management.
*W. Rodney Hughes, 69 Trustee Private Investor.
31 Dellwood Court
San Rafael, CA 94901
Robert M. Joses, 77 Trustee Private Investor.
47 Dowitcher Way
San Rafael, CA 94901
*J. Tucker Morse, 51 Trustee 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.
Larry W. Bowden, 41 Vice President Vice President of
Stephens and
</TABLE>
B-31
<PAGE> 73
<TABLE>
<S> <C> <C>
Assistant Manager of
Financial Services
Group; Senior Vice
President of Stephens
Insurance Services
Inc.
Ellen M. Gray, 65 Vice President Senior Vice President
of Stephens and
Director of Investors
Brokerage Insurance
Inc. Prior thereto,
Senior Vice President
of Eppler, Guerin &
Turner, Inc.
E. Curtis Jeffries, 38 Vice President Associate of
-- Marketing Financial Services
Group of Stephens.
Prior thereto,
Account Supervisor of
Brooks-Pollard Co.
Jane G. Johnson, 41 Vice President Associate of
Financial Services
Group of Stephens.
Michael W. Nolte, 34 Assistant Associate of
Secretary Financial Services
Group of Stephens.
Ann Bonsteel, 32 Assistant Associate of
Secretary Financial Services
Group of Stephens.
</TABLE>
B-32
<PAGE> 74
COMPENSATION TABLE
<TABLE>
<CAPTION>
Total Compensation
Aggregate Compensation from Registrant
Name and Position from Registrant and Fund Complex
- ----------------- ---------------------- ------------------
<S> <C> <C>
Jack S. Euphrat $0 $34,188
Trustee
*R. Greg Feltus 0 0
Trustee
Thomas S. Goho 0 34,188
Trustee
*Zoe Ann Hines 0 0
Trustee
*W. Rodney Hughes 0 32,188
Trustee
Robert M. Joses 0 34,188
Trustee
*J. Tucker Morse 0 32,188
Trustee
</TABLE>
Trustees of the Trust who are not officers or employees
of Stephens or Wells Fargo are not compensated by the Trust for
their services but are reimbursed for all out-of-pocket expenses
relating to attendance at board meetings. Trustees who are
affiliated with Stephens or Wells Fargo also do not receive
compensation from the Trust and also are reimbursed for all
out-of-pocket expenses relating to attendance at board meetings.
Each of the officers and Trustees of the Trust serves in the
identical capacity as officers and Directors of Overland Express
Funds, Inc., Stagecoach Funds, Inc. and Stagecoach Inc., and as
Trustees and/or Officers of Stagecoach Trust, Master Investment
Portfolio, Master Investment Trust and Life & Annuity Trust, each
of which are registered open-end management investment companies
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
Trust. The Trustees are compensated by other Companies and
Trusts within the fund complex for their services as
directors/trustees to such Companies and Trusts. Currently, the
Trustees do not receive any compensation from the Trust (although
they are reimbursed for out-of-pocket expenses) and do not
receive any retirement benefits or deferred compensation from the
Trust or fund complex.
ITEM 15. CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES.
As of June 19, 1995, the Growth Stock Fund and the
Short-Intermediate Term Fund of Stagecoach Inc., 111 Center
B-33
<PAGE> 75
Street, Little Rock, Arkansas 72201, owned approximately 100% of
the voting securities of the Growth Stock Master Series and
approximately 100% of the voting securities of the Short-
Intermediate Master Series, respectively, and each Fund could be
considered a controlling person under the 1940 Act of the
corresponding master series.
ITEM 16. INVESTMENT ADVISORY AND OTHER SERVICES.
INVESTMENT ADVISER
The Master Series of the Trust are advised by Wells
Fargo. The Advisory Contracts provide that Wells Fargo shall
furnish to the Master Series investment guidance and policy
direction in connection with the daily portfolio management of
each Master Series. Pursuant to the Advisory Contracts, Wells
Fargo furnishes to the Board of Trustees of the Trust periodic
reports on the investment strategy and performance of the Master
Series.
Wells Fargo has agreed to provide to the Master Series,
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 investments of the California Tax-Free Intermediate Income
Master Series, California Tax-Free Short-Term Income Master
Series and the Tax-Free Intermediate Income Master Series.
Each Advisory Contract will continue in effect for more
than two years provided the continuance is approved annually
(i) by the holders of a majority of the respective Master Series'
outstanding voting securities or by the Board of Trustees of the
Trust and (ii) by a majority of the Trustees of the Trust who are
not parties to the Advisory Contract or "interested persons" (as
defined in the 1940 Act) of any such party. The Advisory
Contracts may be terminated on 60 days' written notice by either
party and will terminate automatically if assigned.
For the fiscal period from May 26, 1994 (commencement of
operations) to February 28, 1995, the Master Series paid to Wells
Fargo the advisory fees indicated below and Wells Fargo waived
the indicated amounts:
<TABLE>
<CAPTION>
Fees
Fees Paid Waived/Reimbursed
--------- -----------------
<S> <C> <C>
Short-Intermediate Term $ 10,673 $16,510
Master Series
Growth Stock Master Series $283,463 $16,451
</TABLE>
Morrison & Foerster, counsel to the Trust and special
counsel to Wells Fargo, has advised Wells Fargo and the Trust
that Wells Fargo should be able to perform the services
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<PAGE> 76
contemplated by the Advisory Contracts, the Agency Agreement and
the Custody Agreement without violation of the Glass-Steagall
Act. Such counsel have pointed out, however, that there are no
controlling judicial or administrative interpretations or
decisions and that future judicial or administrative
interpretations of, or decisions relating to, present federal or
state statutes and regulations relating to the permissible
activities of banks and their subsidiaries or affiliates, as well
as future changes in federal or state statutes and regulations
and judicial or administrative decisions or interpretations
thereof, could prevent Wells Fargo from continuing to perform, in
whole or in part, such services. If Wells Fargo were prohibited
from performing any of such services, it is expected that new
agreements would be proposed or entered into with another entity
or entities qualified to perform such services.
ADMINISTRATOR
The Trust has retained Stephens as administrator on
behalf of the Trust. Under the Administration Agreement with the
Trust, Stephens, in connection therewith, furnishes the Trust
with office facilities, together with those ordinary clerical and
bookkeeping services that are not being furnished by Wells Fargo.
For the fiscal period from May 26, 1994 (commencement of
operations) to February 28, 1995, the Master Series did not pay
any administrative fees to Wells Fargo.
CUSTODIAN AND TRANSFER AND DIVIDEND DISBURSING AGENT
Wells Fargo has been retained to act as Custodian and
Transfer and Dividend Disbursing Agent for the Trust. The
Custodian, among other things, maintains a custody account or
accounts in the name of the Trust; receives and delivers all
assets for the Trust upon purchase and upon sale or maturity;
collects and receives all income and other payments and
distributions on account of the assets of the Trust and pays all
expenses of the Trust. Wells Fargo is compensated for its
services as Custodian under the Advisory Contracts for the Master
Series. For its services as Transfer and Dividend Disbursing
Agent, Wells Fargo receives a base fee and per-account fees from
the corresponding Funds of Stagecoach Inc.
INDEPENDENT AUDITORS
KPMG Peat Marwick LLP has been selected as the
independent auditors for the 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.
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<PAGE> 77
ITEM 17. BROKERAGE ALLOCATION AND OTHER PRACTICES.
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 Series'
portfolio decisions and the placing of portfolio transactions.
In placing orders, it is the policy of the 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 generally seeks
reasonably competitive spreads or commissions, the Master Series
will not necessarily be paying the lowest spread or commission
available.
Purchase and sale orders of the securities held by the
Master Series may be combined with those of other accounts that
Wells Fargo manages, and for which it has brokerage placement
authority, in the interest of seeking the most favorable overall
net results. When Wells Fargo determines that a particular
security should be bought or sold for a Master Series and other
accounts managed by Wells Fargo, Wells Fargo undertakes to
allocate those transactions among the participants equitably.
Except for the Growth and Income Master Series and
Growth Stock Master Series, 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
Series also will purchase portfolio securities in underwritten
offerings and may purchase securities directly from the issuer.
Generally, municipal obligations, taxable money market securities
adjustable rate mortgage securities ("ARMS") and collateralized
mortgage obligations ("CMOs") are traded on a net basis and do
not involve brokerage commissions. The cost of executing a
Master Series' portfolio securities transactions will consist
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 allowing such
transactions is obtained from the SEC or an exemption is
otherwise available.
The Master Series may purchase municipal obligations
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 Trust's Board of Trustees.
Wells Fargo, as the investment adviser of each Master
Series, may, in circumstances in which two or more dealers are in
a position to offer comparable results for a Master Series
portfolio transaction, give preference to a dealer that has
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<PAGE> 78
provided statistical or other research services to Wells Fargo.
By allocating transactions in this manner, Wells Fargo 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 under the Advisory Contracts, and the
expenses of Wells Fargo 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 places securities transactions for each Master Series
may be used by Wells Fargo in servicing its other accounts, and
not all of these services may be used by Wells Fargo in
connection with advising such Master Series.
On February 28, 1995, the Master Series owned securities
of their "regular brokers or dealers" or their parents, as
defined in the 1940 Act, as follows: Growth Stock Master Series
and Short-Intermediate Term Master Series owned $5,419,000 and
$958,000, respectively, of Goldman Sachs & Co.
Portfolio Turnover. The portfolio turnover rates for
the California Tax-Free Intermediate Income Master Series, the
California Tax-Free Short-Term Income Master Series, the Growth
and Income Master Series and the Tax-Free Intermediate Income
Master Series generally is not expected to exceed 100%. The
portfolio turnover rate for the Short-Intermediate Term Master
Series and the Growth Stock Master Series are generally not
expected to exceed 300% and 200% respectively. The higher
portfolio turnover rates for the Short-Intermediate Term Master
Series and the Growth Stock Master Series may result in higher
transaction (i.e. principal markup/markdown, brokerage and other
transaction) costs. The portfolio turnover rate of a Master
Series will not be a limiting factor when Wells Fargo deems
portfolio changes appropriate.
Because the portfolios of the the Money Market Master
Series consist of securities with relatively short-term
maturities, such Master Series can expect to experience high
portfolio turnovers. A high portfolio turnover rate should not
adversely affect such Master Series, however, because portfolio
transactions ordinarily will be made directly with principals on
a net basis and, consequently, the Money Market Master Series
usually will not incur brokerage expenses.
ITEM 18. CAPITAL STOCK AND OTHER SECURITIES.
The Trust is a business trust organized under the laws
of Delaware on October 28, 1993. 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
B-37
<PAGE> 79
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, 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.
All shares of a Master Series 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 a
Master Series' fundamental investment policy would be voted upon
only by shareholders of the Master Series involved.
Additionally, approval of an advisory contract is a matter to be
determined separately by Master Series. Approval by the
shareholders of one Master Series is effective as to that Master
Series whether or not sufficient votes are received from the
shareholders of the other investment portfolios to approve the
proposal as to those investment portfolios. As used in Part A
and in this SAI, the term "majority," when referring to approvals
to be obtained from shareholders of a Master Series, means the
vote of the lesser of (i) 67% of the shares of the Master Series
represented at a meeting if the holders of more than 50% of the
outstanding shares of the Master Series are present in person or
by proxy, or (ii) more than 50% of the outstanding shares of the
Master Series. The term "majority," when referring to the
approvals to be obtained from shareholders of the Trust as a
whole, means the vote of the lesser of (i) 67% of the Trust's
shares represented at a meeting if the holders of more than 50%
of the Trust's outstanding shares are present in person or by
proxy, or (ii) more than 50% of the Trust's outstanding shares.
Shareholders are entitled to one vote for each full share held
and fractional votes for fractional shares held.
The Trust may dispense with an annual meeting of
shareholders in any year in which it is not required to elect
Trustees under the 1940 Act. However, the Trust has undertaken
to hold a special meeting of its shareholders for the purpose of
voting on the question of removal of a Trustee or Trustees if
requested in writing by the holders of at least 10% of the
Trust's outstanding voting securities, and to assist in
B-38
<PAGE> 80
communicating with other shareholders as required by
Section 16(c) of the 1940 Act.
The Trust may enter into a merger or consolidation, or
sell all or substantially all of its assets, if approved by the
vote of two-thirds of its investors (with the vote of each being
in proportion to their respective percentages of the beneficial
interests in the Trust), except that if the Trustees of the Trust
recommend such sale of assets, the approval by vote of a majority
of the investors (with the vote of each being in proportion to
their respective percentages of the beneficial interests in the
Trust) will be sufficient. The Trust may also be terminated
(i) upon liquidation and distribution of its assets, if approved
by the vote of two-thirds of its investors (with the vote of each
being in proportion to the amount of their investment) or (ii) by
the Trustees of the Trust by written notice to its investors. In
the event of the liquidation or dissolution of the Trust,
investors are entitled to receive their pro rata share of all
assets available for distribution.
ITEM 19. PURCHASE, REDEMPTION AND PRICING OF SECURITIES.
Beneficial interests in the Trust are issued solely in
private placement transactions that do not involve any "public
offering" within the meaning of Section 4(2) of the Securities
Act of 1933, as amended (the "1933 Act"). Investments in the
Trust may only be made by registered broker/dealers or by
investment companies, insurance company separate accounts, common
or commingled trust funds, group trusts or similar organizations
or entities that are "accredited investors" within the meaning of
Regulation D under the 1933 Act. This registration statement
does not constitute an offer to sell, or the solicitation of an
offer to buy, any "security" within the meaning of the 1933 Act.
Net asset value of the Master Series of the Trust is
determined by the Custodian of the Trust on each day the relevant
Master Series is open.
As indicated in Part A, Trust uses the amortized cost
method to determine the value of the portfolio securities of the
Money Market Master Series 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 such Master Series would receive if the
security were sold. During these periods the yield to investors
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
such Master Series' portfolio on a particular day, a prospective
B-39
<PAGE> 81
investor in the Master Series would be able to obtain a somewhat
higher yield than would result from investment in a fund using
solely market values, and existing Master Series investors 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 Series 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
Eligible Securities determined by the 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 Board is required to establish procedures designed to
stabilize, to the extent reasonably possible, the Master Series'
net asset value. Such procedures include review of the Master
Series' holdings by the Board of Trustees, at such intervals as
it may deem appropriate, to determine whether the Master Series'
net asset value calculated by using available market quotations
deviates within 1/2 of the 1% of the value based on amortized
cost. The extent of any deviation will be examined by the Board
of Trustees. If such deviation exceeds 1/2 of 1%, the Board will
promptly consider what action, if any, will be initiated. In the
event the Board determines that a deviation exists that may
result in material dilution or other unfair results to investors,
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 by using available market
quotations.
Securities held by the Non-Money Market Master Series
for which market quotations are available are valued at latest
prices. Securities of a Non-Money Market Master Series for which
the primary market is a national securities exchange or the
National Association of Securities Dealers Automated Quotations
National Market System are valued at last sale prices. In the
absence of any sale of such securities on the valuation date and
in the case of other securities, including U.S. Government
securities but excluding money market instruments maturing in
60 days or less, the valuations are based on latest quoted bid
prices. Money market instruments maturing in 60 days or less are
valued at amortized cost, with cost being the value of the
security on the preceding day (61st day). Futures contracts will
be marked to market daily at their respective settlement prices
determined by the relevant exchange. Options listed on a
national exchange are valued at the last sale price on the
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<PAGE> 82
exchange on which they are traded at the close of the NYSE, or,
in the absence of any sale on the valuation date, at latest
quoted bid prices. Options not listed on a national exchange are
valued at latest quoted bid prices. Debt securities maturing in
60 days or less are valued at amortized cost. In all cases, bid
prices will be furnished by an independent pricing service
approved by the Board of Trustees. Prices provided by an
independent pricing service may be determined without exclusive
reliance on quoted prices and may take into account appropriate
factors such as institutional-size trading in similar groups of
securities, yield, quality, coupon rate, maturity, type of issue,
trading characteristics and other market data. Securities held
under a repurchase agreement will be valued at a price equal to
the amount of the cash investment at the time of valuation on the
valuation date. The market value of the underlying securities
shall be determined in accordance with the applicable procedures,
as described above, for the purpose of determining the adequacy
of collateral. All other securities and other assets of the
Non-Money Market Master Series 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.
ITEM 20. TAX STATUS.
Under the current method of operation of the Trust, the
Trust is intended to qualify as a partnership under the Internal
Revenue Code of 1986, as amended (the "Code"). However, each
investor in the Trust will be taxable on its share (as determined
in accordance with the governing instruments of the Trust) of the
Trust's ordinary income and capital gain in determining the
investor's income tax liability. The determination of such share
will be made in accordance with the Code and regulations
promulgated thereunder. The Trust's taxable year-end is
February 28.
The Trust's assets, income and distributions are managed
in such a way that a regulated investment company investing in
the Trust will be able to satisfy the requirements of
Subchapter M of the Code, assuming that the investment company
invested all of its assets in the Trust. The Trust is treated as
a non-publicly traded partnership rather than 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 Trust will be deemed to have
been "passed through" to investors in the Trust, regardless of
whether such interest, dividends or gains have been distributed
by the Trust or losses have been realized by the investors.
Accordingly, if the Trust were to accrue but not distribute any
interest, dividends or gains, an investor 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 seeks to minimize recognition
B-41
<PAGE> 83
by investors of interest, dividends, gains or losses without a
corresponding distribution.
Investors' capital accounts will be adjusted on a daily
basis to reflect additional investments or withdrawals and any
increase or decrease in net asset value. For purposes of
determining fair market value of the assets of the Money Market
Master Series, the Trust will use the amortized cost method of
valuation under Rule 2a-7 under the 1940 Act.
ITEM 21. UNDERWRITERS.
The distributor and exclusive placement agent for the
Trust is Stephens, which receives no additional compensation for
serving in this capacity. Registered broker/dealers and
investment companies, insurance company separate accounts, common
and commingled trust funds, group trusts and similar
organizations and entities which constitute accredited investors,
as defined in the regulations adopted under the 1933 Act, may
continuously invest in the Trust.
ITEM 22. CALCULATIONS OF PERFORMANCE DATA.
Not applicable.
ITEM 23. FINANCIAL INFORMATION.
KPMG Peat Marwick LLP has been selected as the
independent auditor to the Trust. KPMG Peat Marwick LLP provides
audit services, tax return preparation and assistance and
consultation in connection with the review of certain SEC
filings. KPMG Peat Marwick LLP's address is Three Embarcadero
Center, San Francisco, California 94111. The audited financial
statements for the Short-Intermediate Term Master Series and
Growth Stock Master Series are incorporated in this Part B by
reference to the financial statements contained in post-effective
amendment No. 8 to the Registration Statement on form N-1A of
Stagecoach Inc. as filed with the SEC on or about June 27, 1995.
B-42
<PAGE> 84
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 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 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
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<PAGE> 85
"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.
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.
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<PAGE> 86
MANAGED SERIES INVESTMENT TRUST
FILE NO. 811-8140
PART C
OTHER INFORMATION
Item 24. Financial Statements and Exhibits.
(a) Financial Statements:
(1) The following audited Financial Statements for the
Growth Stock Master Series and Short-Intermediate
Term Master Series are included in Part B, Item 23
by incorporation by reference to the Registration
Statement on Form N-1A filed on or about June 27,
1995 of Stagecoach Inc.
Portfolio of Investments -- February 28, 1995
Statements of Assets and Liabilities --
February 28, 1995
Statement of Operations for the year ended
February 28, 1995
Statement of Changes in Net Assets for the
year ended February 28, 1995
Financial Highlights for the year ended
February 28, 1995
Notes to Financial Highlights -- February 28,
1995
(b) Exhibits:
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<S> <C>
1 - Declaration of Trust Incorporated by
reference to the Registration
Statement on Form N-1A filed
November 8, 1993.
2 - By-Laws Incorporated by reference to
the Registration Statement on Form
N-1A filed November 8, 1993.
3 - Not Applicable
</TABLE>
C-1
<PAGE> 87
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<S> <C>
4 - Form of Certificate of Beneficial
Interest Incorporated by reference to
the Registration Statement on Form
N-1A filed November 8, 1993.
5(a) - Form of Advisory Contract between
Wells Fargo Bank, N.A. and the Growth
and Income Series Incorporated by
reference to the Registration
Statement on Form N-1A filed
November 8, 1993.
(b) - Form of Advisory Contract between
Wells Fargo Bank, N.A. and the
Tax-Free Intermediate Income Series
Incorporated by reference to the
Registration Statement on Form N-1A
filed November 8, 1993.
(c) - Form of Advisory Contract between
Wells Fargo Bank, N.A. and California
Tax-Free Intermediate Income Series
Incorporated by reference to the
Registration Statement on Form N-1A
filed November 8, 1993.
(d) - Form of Advisory Contract between
Wells Fargo Bank, N.A. and California
Tax-Free Short-Term Income Series
Incorporated by reference to the
Registration Statement on Form N-1A
filed November 8, 1993.
(e) - Form of Advisory Contract between
Wells Fargo Bank, N.A. and Tax-Free
Money Market Series Incorporated by
reference to the Registration
Statement on Form N-1A filed
November 8, 1993.
(f) - Form of Advisory Contract between
Wells Fargo Bank, N.A. and California
Tax-Free Money Market Series
Incorporated by reference to the
Registration Statement on Form N-1A
filed November 8, 1993.
</TABLE>
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<PAGE> 88
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<S> <C>
(g) - Investment Advisory Agreement between
Wells Fargo Bank, N.A. and Growth
Stock Master Series dated March 1,
1994, filed herewith.
(h) - Investment Advisory Agreement between
Wells Fargo Bank, N.A. and Short-
Intermediate Term Master Series dated
March 1, 1994, filed herewith.
(i) - Form of Administration Agreement with
Stephens Inc. on behalf of all the
Series Incorporated by reference to the
Registration Statement on Form N-1A
filed November 8, 1993.
6 - Form of Placement Agent Agreement with
Stephens Inc. Incorporated by reference
to the Registration Statement on Form
N-1A filed November 8, 1993.
7 - Not Applicable
8 - Form of Custody Agreement with Wells
Fargo Bank, N.A. Incorporated by
reference to the Registration
Statement on Form N-1A filed
November 8, 1993.
9 - Form of Agency Agreement with Wells
Fargo Bank, N.A. Incorporated by
reference to the Registration
Statement on Form N-1A filed
November 8, 1993.
10 - Not Applicable
11 - Consent of Auditors, filed herewith
12 - Not Applicable
13 - Investment Letter, filed herewith
14 - Not Applicable
15 - Not Applicable
</TABLE>
C-3
<PAGE> 89
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<S> <C>
16 - Not Applicable
27(a) - Financial Data Schedule - Growth Stock
Master Series, filed herewith
27(b) - Financial Data Schedule - Short-
Intermediate Term Master Series, filed
herewith
</TABLE>
Item 25. Persons Controlled by or under Common Control with
Registrant.
No person is controlled by or under common control
with Registrant.
Item 26. Number of Holders of Securities.
As of June 16, 1995, the number of record holders
of the Registrant were as follows:
Title of Class Number of Record Holders
Growth and Income Master Series 1
Tax-Free Intermediate Income
Master Series 0
California Tax-Free Intermediate
Income Master Series 0
California Tax-Free Short-Term
Income Master Series 0
Tax-Free Money Market Master 0
Series
California Tax-Free Money Market
Master Series 0
Growth Stock Master Series 2
Short-Intermediate Term Master 2
Series
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<PAGE> 90
Item 27. Indemnification.
Article V of the Registrant's Declaration of Trust
limits the liability and, in certain instances, provides for
mandatory indemnification of the Registrant's trustees,
officers, employees, agents and holders of beneficial interests
in the Trust. In addition, the Trustees are empowered under
Section 3.9 of the Registrant's Declaration of Trust to obtain
such insurance policies as they deem necessary.
Item 28. Business and Other Connections
of Investment Adviser.
Wells Fargo Bank, N.A. ("Wells Fargo"), a wholly owned
subsidiary of Wells Fargo & Company, serves as investment
adviser to the Registrant and to several other registered open-
end management investment companies. Wells Fargo's business is
that of a national banking association with respect to which it
conducts a variety of commercial banking and trust activities.
To the knowledge of Registrant, none of the directors
or executive officers of Wells Fargo, except those set forth
below, is or has been at any time during the past two fiscal
years engaged in any other business, profession, vocation or
employment of a substantial nature, except that certain
executive officers also hold various positions with and engage
in business for Wells Fargo & Company. Set forth below are the
names and principal businesses of the directors and executive
officers of Wells Fargo who are or during the past two fiscal
years have been engaged in any other business, profession,
vocation or employment of a substantial nature for their own
account or in the capacity of director, officer, employee,
partner or trustee. All the directors of Wells Fargo also
serve as directors of Wells Fargo & Company.
<TABLE>
<CAPTION>
Principal Business(es) During at
Name Position(s) Least the Last Two Fiscal Years
- ---- ----------- --------------------------------
<S> <C> <C>
H. Jesse Arnelle Director Senior Partner of Arnelle &
Hastie, Director of FPL Group,
Inc.
William R. Breuner Director General Partner in Breuner
Associates, Breuner Properties and
Breuner-Pevarnick Real Estate
Developers. Vice Chairman of the
California State Railroad Museum
Foundation. Retired Chairman of
the Board of Directors of John
Breuner Co.
</TABLE>
C-5
<PAGE> 91
<TABLE>
<CAPTION>
Principal Business(es) During at
Name Position(s) Least the Last Two Fiscal Years
- ---- ----------- --------------------------------
<S> <C> <C>
Williams S. Davila Director President and Director of The Vons
Companies, Inc. Officer of
Western Assoc. of Food Chains.
Rayburn S. Dezember Director Former Chairman of Central Pacific
Corp. Director of CalMat Co.,
Tejon Ranch Co., Turner Casting
Inc., The Bakersfield Californian
and Kern County Economic Develop-
ment Corp. Chairman of the Board
of Trustees of Whittier College.
Paul Hazen Chairman of Chairman of the Board of Directors
the Board of of Wells Fargo & Company.
Directors Director of Pacific Telesis Group,
Phelps Dodge Corp. and Safeway
Inc.
Robert K. Jaedicke Director Accounting Professor and Dean
Emeritus of Graduate School of
Business, Stanford University.
Director of Homestake Mining Co.,
California Water Service Company,
Boise Cascade Corp., Enron Corp.
and GenCorp, Inc.
Paul A. Miller Director Chairman of the Executive
Committee and Director of Pacific
Enterprises. Trustee of Mutual
Life Insurance Company of New
York. Director of Newhall
Management Corporation. Trustee
of University of Southern
California.
Ellen M. Newman Director President of Ellen Newman
Associates. Chair of Board of
Trustees of University of
California, San Francisco,
Foundation. Director of American
Conservatory Theatre and
California Chamber of Commerce.
Philip J. Quigley Director Chairman and Chief Executive
Officer of Pacific Telesis Group
</TABLE>
C-6
<PAGE> 92
<TABLE>
<CAPTION>
Principal Business(es) During at
Name Position(s) Least the Last Two Fiscal Years
- ---- ----------- --------------------------------
<S> <C> <C>
Carl E. Reichardt Director Director of Ford Motor Company,
Hospital Corporation America,
HCA-Hospital Corp. of America,
Pacific Gas and Electric Company
and Newhall Management
Corporation.
Donald B. Rice Director President and Chief Operating
Officer, Teledyne, Inc.
Susan G. Swenson Director President and Chief Operating
Officer of Cellular One.
Chang-Lin Tien Director Chancellor of University of
California at Berkley.
John A. Young Director Retired President, Director and
Chief Executive Officer of
Hewlett-Packard Company. Director
of Chevron Corporation.
William F. Zuendt President President of Wells Fargo &
Company. Director of 3Com
Corporation and MasterCard
International
</TABLE>
Item 29. Principal Underwriters.
(a) Stephens Inc., the distributor for the Registrant,
does not presently act as investment adviser for any other
registered investment companies, but does act a principal
underwriter for the Overland Express Funds, Inc., Stagecoach
Funds, Inc., Stagecoach Inc., Stagecoach Trust, Nations Fund,
Inc. and Nations Fund Trust and is the exclusive placement agent
for Master Investment Trust and Master Investment Portfolio, all
of which are registered open-end management investment
companies, and has acted as principal underwriter for the Liberty
Term Trust, Inc. and the Nations Government Income Term Trust
2003, Inc., closed-end management investment companies.
(b) Information with respect to each director and
officer of the principal underwriter is incorporated by reference
to Form ADV and Schedules A and D filed by Stephens Inc. with the
Securities and Exchange Commission pursuant to The Investment
Advisers Act of 1940 (file No. 501-15510).
C-7
<PAGE> 93
(c) Not applicable.
Item 30. Location of Accounts and Records.
All accounts, books and other documents required to be
maintained by Section 31(a) of the Investment Company Act of 1940
and the Rules thereunder are maintained at one or more of the
following offices: Managed Series Investment Trust maintains
those accounts, books and other documents required by Rule 31a-
1(b)(4) and (d), and Rule 31a-2(a)(3) and (c) at 111 Center
Street, Little Rock, Arkansas 72201; Wells Fargo maintains all
other accounts, books or other documents required by Rules 31a-1,
31a-2 and 31a-3 at 525 Market Street, San Francisco, California
94163; and copies of most of such documents also are maintained by
Managed Series Investment Trust.
Item 31. Management Services.
Other than as set forth under the captions "Item 5.
Management of the Fund" in the Prospectus constituting Part A of
this Registration Statement and "Item 16. Investment Advisory and
Other Services" in the Statement of Additional Information
constituting Part B of this Registration Statement, Registrant is
not a party to any management-related service contract.
Item 32. Undertakings.
(a) Not applicable.
(b) Not applicable.
(c) Registrant undertakes to hold a special meeting of
its shareholders for the purpose of voting on the
question of removal of a trustee or trustees if
requested in writing by the holders of at least 10%
of Managed Series Investment Trust's outstanding
voting securities, and to assist in communicating
with other shareholders as required by Section 16(c)
of the Investment Company Act of 1940.
C-8
<PAGE> 94
SIGNATURES
Pursuant to the requirements of the Investment
Company Act of 1940, the Registrant has duly caused this
Amendment No. 2 to the Registration Statement on Form N-1A
to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Little Rock, State of
Arkansas on the 26th day of June, 1995.
MANAGED SERIES INVESTMENT TRUST
By: /s/ Richard H. Blank, Jr.
------------------------------
Name: Richard H. Blank, Jr.
Title: Secretary and Treasurer
(Principal Financial
Officer)
<PAGE> 95
MANAGED SERIES INVESTMENT TRUST -- FILE NO. 811-8140
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940
EXHIBIT INDEX
<TABLE>
<CAPTION>
Sequential
Exhibit Number Description Page No.
- -------------- ----------- ----------
<S> <C> <C>
99.B5(g) Investment Advisory
Agreement between Wells
Fargo Bank, N.A. and Growth
Stock Master Series
99.B5(h) Investment Advisory
Agreement between Wells
Fargo Bank, N.A. and Short-
Intermediate Term Master
Series
99.B11 Consent of Auditors
99.B13 Investment Letter
27.1 Financial Data Schedule for
the Growth Stock Master
Series
27.2 Financial Data Schedule for
the Short-Intermediate Term
Master Series
</TABLE>
<PAGE> 1
EXHIBIT 99.B5(g)
INVESTMENT ADVISORY AGREEMENT
GROWTH STOCK MASTER SERIES
MANAGED SERIES INVESTMENT TRUST
111 Center Street
Little Rock, Arkansas 72201
March 1, 1994
Wells Fargo Bank, N.A.
525 Market Street
San Francisco, California 94163
Dear Sirs:
This will confirm the agreement between Managed Series Investment
Trust, a Delaware business trust (the "Trust"), on behalf of the GROWTH STOCK
MASTER SERIES (the "Master Series") and Wells Fargo Bank, N.A. (the "Adviser")
as follows:
1. The Trust is a registered open-end management investment company
currently consisting of eight investment portfolios, but which may from time to
time consist of a greater or lesser number of investment portfolios. The Trust
proposes to engage in the business of investing and reinvesting the assets of
the Master Series in the manner and in accordance with the investment objective
and restrictions specified in the Trust's Registration Statement, as amended
from time to time (the "Registration Statement"), filed by the Trust under the
Investment Company Act of 1940 (the "1940 Act"). Copies of the documents
referred to in the preceding sentence have been furnished to the Adviser. Any
amendments to those documents shall be furnished to the Adviser promptly.
2. The Trust is engaging the Adviser to manage the investing and
reinvesting of the assets of the Master Series and to provide the advisory
services specified elsewhere in this contract, subject to the overall
supervision of the Board of Trustees of the Trust. Pursuant to an
administration agreement between the Trust and Stephens Inc. (the
"Administrator") on behalf of the Master Series, the Trust has engaged the
Administrator to provide the administrative services specified therein.
3. (a) The Adviser shall make investments for the account of the Master
Series in accordance with the
1
<PAGE> 2
Adviser's best judgment and consistent with the investment objective and
restrictions set forth in the Trust's Registration Statement, the 1940 Act and
the provisions of the Internal Revenue Code relating to regulated investment
companies, subject to policy decisions adopted by the Trust's Board of
Trustees. The Adviser shall advise the Trust's officers and Board of Trustees,
at such times as the Trust's Board of Trustees may specify, of investments made
for the Master Series and shall, when requested by the Trust's officers or
Board of Trustees, supply the reasons for making particular investments.
(b) The Adviser shall provide to the Trust investment guidance and
policy direction in connection with its daily management of the Master Series'
portfolio, including oral and written research, analysis, advice, statistical
and economic data and information and judgments, and shall furnish to the
Trust's Board of Trustees periodic reports on the investment strategy and
performance of the Master Series and such additional reports and information as
the Trust's Board of Trustees and officers shall reasonably request.
(c) The Adviser shall pay the costs of printing and distributing
all materials relating to the Master Series prepared by it, or prepared at its
request, other than such costs relating to proxy statements, prospectuses,
reports for holders of beneficial interests ("Interests") of the Master Series
("Holders") and other materials distributed to existing or prospective Holders
on behalf of the Master Series.
(d) The Adviser shall, at its expense, employ or associate with
itself such persons as the Adviser believes appropriate to assist it in
performing its obligations under this contract.
4. Except as provided in each of the Trust's advisory contracts and
administration agreement, the Trust shall bear all costs of its operations,
including the compensation of its trustees who are not affiliated with the
Adviser, the Administrator or any of their affiliates; advisory and
administration fees; governmental fees; interest charges; taxes; fees and
expenses of its independent auditors, legal counsel, transfer agent and
dividend disbursing agent; expenses of redeeming Interests; expenses of
preparing and printing Interest certificates, prospectuses (except the expense
of printing and mailing prospectuses used for promotional purposes), Holders'
reports, notices, proxy statements and reports to regulatory agencies; travel
expenses of trustees, officers and employees; office
2
<PAGE> 3
supplies; insurance premiums and certain expenses relating to insurance
coverage; trade association membership dues; brokerage and other expenses
connected with the execution of portfolio securities transactions; fees and
expenses of any custodian, including those for keeping books and accounts and
calculating the net asset value per Interest of the Master Series; expenses of
Holders' meetings; expenses relating to the issuance, registration and
qualification of Interests of the Master Series; pricing services, if any;
organizational expenses; and any extraordinary expenses. Expenses attributable
to one or more, but not all of the Master Series are charged against the assets
of the relevant Master Series. General expenses of the Master Series are
allocated among the Master Series in a manner proportionate to the net assets
of the Master Series, on a transactional basis or on such other basis as the
Board of Trustees deems equitable.
5. The Adviser shall give the Trust the benefit of the Adviser's best
judgment and efforts in rendering services under this contract. As an
inducement to the Adviser's undertaking to render these services, the Trust
agrees that the Adviser shall not be liable under this contract for any mistake
in judgment or in any other event whatsoever except for lack of good faith,
provided that nothing in this contract shall be deemed to protect or purport to
protect the Adviser against any liability to the Trust or its Holders to which
the Adviser would otherwise be subject by reason of willful misfeasance, bad
faith or gross negligence in the performance of the Adviser's duties under this
contract or by reason of reckless disregard of its obligations and duties
hereunder.
6. In consideration of the services to be rendered by the Adviser
under this contract, the Trust shall pay the Adviser a fee on the first
business day of each month, at the annual rate of 0.60% of the average daily
value (as determined on the day that such value is determined for the Master
Series at the time set forth in the Registration Statement for determining net
asset value per Interest) of the Master Series' net assets during the preceding
month. If the fee payable to the Adviser pursuant to this paragraph 6 begins to
accrue after the beginning of any month or if this contract terminates before
the end of any month, the fee for the period from the effective date to the end
of that month or from the beginning of that month to the termination date,
respectively, shall be prorated according to the proportion that the period
bears to the full month in which the effectiveness or termination occurs. For
purposes of calculating each such monthly fee, the value of the Master Series'
net assets shall be computed in the manner specified
3
<PAGE> 4
in the Registration Statement and the Trust's Declaration of Trust for the
computation of the value of the Master Series' net assets in connection with
the determination of the net asset value of Master Series Interests.
7. If in any fiscal year the total expenses incurred by, or allocated
to, the Master Series excluding taxes, interest, brokerage commissions and
other portfolio transaction expenses, other expenditures that are capitalized
in accordance with generally accepted accounting principles and extraordinary
expenses of the Master Series, but including the fees provided for in paragraph
6, exceed the most restrictive expense limitation applicable to the Master
Series imposed by state securities laws or regulations thereunder, as these
limitations may be raised or lowered from time to time, the Adviser shall waive
or reimburse a pro rata portion of its fees hereunder.
8. This contract shall become effective on its execution date and
shall thereafter continue in effect, provided that this contract shall continue
in effect for a period of more than two years from the date hereof only so long
as the continuance is specifically approved at least annually (a) by the vote
of a majority of the Master Series' outstanding voting securities (as defined
in the 1940 Act) or by the Trust's Board of Trustees and (b) by the vote, cast
in person at a meeting called for the purpose, of a majority of the Trust's
trustees who are not parties to this contract or "interested persons" (as
defined in the 1940 Act) of any such party. This contract may be terminated at
any time by the Trust, without the payment of any penalty, by a vote of a
majority of the Master Series' outstanding voting securities (as defined in the
1940 Act) or by a vote of a majority of the Trust's entire Board of Trustees on
60 days' written notice to the Adviser or by the Adviser, at any time after the
second anniversary of the effective date of this contract, on 60 days' written
notice to the Trust. This contract shall terminate automatically in the event
of its assignment (as defined in the 1940 Act).
9. Except to the extent necessary to perform the Adviser's
obligations under this contract, nothing herein shall be deemed to limit or
restrict the right of the Adviser, or any affiliate of the Adviser, or any
employee of the Adviser, to engage in any other business or to devote time and
attention to the management or other aspects of any other business, whether of
a similar or dissimilar nature, or to render services of any kind to any other
corporation, firm, individual or association.
4
<PAGE> 5
10. This contract shall be governed by and construed in accordance
with the laws of the State of California.
11. This agreement has been executed on behalf of the Trust by the
undersigned officer of the Trust in his capacity as an officer of the Trust.
The obligations of this agreement shall only be binding upon the assets and
property of the relevant Master Series, as provided for in the Trust's
Agreement and Declaration of Trust, and shall not be binding upon any trustee,
officer or shareholder of the Trust or Master Series individually.
5
<PAGE> 6
If the foregoing correctly sets forth the agreement between the Trust
and the Adviser, please so indicate by signing and returning to the Trust the
enclosed copy hereof.
Very truly yours,
MANAGED SERIES INVESTMENT TRUST
on behalf of the Growth Stock
Master Series
By: /s/Richard H. Blank, Jr.
----------------------------
Name: Richard H. Blank, Jr.
-------------------------
Title: Chief Operating Officer
------------------------
ACCEPTED as of the date
set forth above:
WELLS FARGO BANK, N.A.
By: /s/Robert Chlebowski
----------------------------
Name: Robert Chlebowski
--------------------------
Title: Senior Vice President
-------------------------
By: /s/Michael J. Niedermeyer
----------------------------
Name: Michael J. Niedermeyer
--------------------------
Title: Executive Vice President
-------------------------
6
<PAGE> 1
EXHIBIT 99.B5(h)
INVESTMENT ADVISORY AGREEMENT
SHORT-INTERMEDIATE TERM MASTER SERIES
MANAGED SERIES INVESTMENT TRUST
111 Center Street
Little Rock, Arkansas 72201
March 1, 1994
Wells Fargo Bank, N.A.
525 Market Street
San Francisco, California 94163
Dear Sirs:
This will confirm the agreement between Managed Series Investment
Trust, a Delaware business trust (the "Trust"), on behalf of the
SHORT-INTERMEDIATE TERM MASTER SERIES (the "Master Series") and Wells Fargo
Bank, N.A. (the "Adviser") as follows:
1. The Trust is a registered open-end management investment company
currently consisting of eight investment portfolios, but which may from time to
time consist of a greater or lesser number of investment portfolios. The Trust
proposes to engage in the business of investing and reinvesting the assets of
the Master Series in the manner and in accordance with the investment objective
and restrictions specified in the Trust's Registration Statement, as amended
from time to time (the "Registration Statement"), filed by the Trust under the
Investment Company Act of 1940 (the "1940 Act"). Copies of the documents
referred to in the preceding sentence have been furnished to the Adviser. Any
amendments to those documents shall be furnished to the Adviser promptly.
2. The Trust is engaging the Adviser to manage the investing and
reinvesting of the assets of the Master Series and to provide the advisory
services specified elsewhere in this contract, subject to the overall
supervision of the Board of Trustees of the Trust. Pursuant to an
administration agreement between the Trust and Stephens Inc. (the
"Administrator") on behalf of the Master Series, the Trust has engaged the
Administrator to provide the administrative services specified therein.
3. (a) The Adviser shall make investments for the account of the Master
Series in accordance with the
1
<PAGE> 2
Adviser's best judgment and consistent with the investment objective and
restrictions set forth in the Trust's Registration Statement, the 1940 Act and
the provisions of the Internal Revenue Code relating to regulated investment
companies, subject to policy decisions adopted by the Trust's Board of
Trustees. The Adviser shall advise the Trust's officers and Board of Trustees,
at such times as the Trust's Board of Trustees may specify, of investments made
for the Master Series and shall, when requested by the Trust's officers or
Board of Trustees, supply the reasons for making particular investments.
(b) The Adviser shall provide to the Trust investment guidance
and policy direction in connection with its daily management of the Master
Series' portfolio, including oral and written research, analysis, advice,
statistical and economic data and information and judgments, and shall furnish
to the Trust's Board of Trustees periodic reports on the investment strategy
and performance of the Master Series and such additional reports and
information as the Trust's Board of Trustees and officers shall reasonably
request.
(c) The Adviser shall pay the costs of printing and distributing
all materials relating to the Master Series prepared by it, or prepared at its
request, other than such costs relating to proxy statements, prospectuses,
reports for holders of beneficial interests ("Interests") of the Master Series
("Holders") and other materials distributed to existing or prospective Holders
on behalf of the Master Series.
(d) The Adviser shall, at its expense, employ or associate with
itself such persons as the Adviser believes appropriate to assist it in
performing its obligations under this contract.
4. Except as provided in each of the Trust's advisory contracts and
administration agreement, the Trust shall bear all costs of its operations,
including the compensation of its trustees who are not affiliated with the
Adviser, the Administrator or any of their affiliates; advisory and
administration fees; governmental fees; interest charges; taxes; fees and
expenses of its independent auditors, legal counsel, transfer agent and
dividend disbursing agent; expenses of redeeming Interests; expenses of
preparing and printing Interest certificates, prospectuses (except the expense
of printing and mailing prospectuses used for promotional purposes), Holders'
reports, notices, proxy statements and reports to regulatory agencies; travel
expenses of trustees, officers and employees; office
2
<PAGE> 3
supplies; insurance premiums and certain expenses relating to insurance
coverage; trade association membership dues; brokerage and other expenses
connected with the execution of portfolio securities transactions; fees and
expenses of any custodian, including those for keeping books and accounts and
calculating the net asset value per Interest of the Master Series; expenses of
Holders' meetings; expenses relating to the issuance, registration and
qualification of Interests of the Master Series; pricing services, if any;
organizational expenses; and any extraordinary expenses. Expenses attributable
to one or more, but not all of the Master Series are charged against the assets
of the relevant Master Series. General expenses of the Master Series are
allocated among the Master Series in a manner proportionate to the net assets
of the Master Series, on a transactional basis or on such other basis as the
Board of Trustees deems equitable.
5. The Adviser shall give the Trust the benefit of the Adviser's best
judgment and efforts in rendering services under this contract. As an
inducement to the Adviser's undertaking to render these services, the Trust
agrees that the Adviser shall not be liable under this contract for any mistake
in judgment or in any other event whatsoever except for lack of good faith,
provided that nothing in this contract shall be deemed to protect or purport to
protect the Adviser against any liability to the Trust or its Holders to which
the Adviser would otherwise be subject by reason of willful misfeasance, bad
faith or gross negligence in the performance of the Adviser's duties under this
contract or by reason of reckless disregard of its obligations and duties
hereunder.
6. In consideration of the services to be rendered by the Adviser
under this contract, the Trust shall pay the Adviser a fee on the first
business day of each month, at the annual rate of 0.45% of the average daily
value (as determined on the day that such value is determined for the Master
Series at the time set forth in the Registration Statement for determining net
asset value per Interest) of the Master Series' net assets during the preceding
month. If the fee payable to the Adviser pursuant to this paragraph 6 begins to
accrue after the beginning of any month or if this contract terminates before
the end of any month, the fee for the period from the effective date to the end
of that month or from the beginning of that month to the termination date,
respectively, shall be prorated according to the proportion that the period
bears to the full month in which the effectiveness or termination occurs. For
purposes of calculating each such monthly fee, the value of the Master Series'
net assets shall be computed in the manner specified
3
<PAGE> 4
in the Registration Statement and the Trust's Declaration of Trust for the
computation of the value of the Master Series' net assets in connection with
the determination of the net asset value of Master Series Interests.
7. If in any fiscal year the total expenses incurred by, or allocated
to, the Master Series excluding taxes, interest, brokerage commissions and
other portfolio transaction expenses, other expenditures that are capitalized
in accordance with generally accepted accounting principles and extraordinary
expenses of the Master Series, but including the fees provided for in paragraph
6, exceed the most restrictive expense limitation applicable to the Master
Series imposed by state securities laws or regulations thereunder, as these
limitations may be raised or lowered from time to time, the Adviser shall waive
or reimburse a pro rata portion of its fees hereunder.
8. This contract shall become effective on its execution date and
shall thereafter continue in effect, provided that this contract shall continue
in effect for a period of more than two years from the date hereof only so long
as the continuance is specifically approved at least annually (a) by the vote
of a majority of the Master Series' outstanding voting securities (as defined
in the 1940 Act) or by the Trust's Board of Trustees and (b) by the vote, cast
in person at a meeting called for the purpose, of a majority of the Trust's
trustees who are not parties to this contract or "interested persons" (as
defined in the 1940 Act) of any such party. This contract may be terminated at
any time by the Trust, without the payment of any penalty, by a vote of a
majority of the Master Series' outstanding voting securities (as defined in the
1940 Act) or by a vote of a majority of the Trust's entire Board of Trustees on
60 days' written notice to the Adviser or by the Adviser, at any time after the
second anniversary of the effective date of this contract, on 60 days' written
notice to the Trust. This contract shall terminate automatically in the event
of its assignment (as defined in the 1940 Act).
9. Except to the extent necessary to perform the Adviser's
obligations under this contract, nothing herein shall be deemed to limit or
restrict the right of the Adviser, or any affiliate of the Adviser, or any
employee of the Adviser, to engage in any other business or to devote time and
attention to the management or other aspects of any other business, whether of
a similar or dissimilar nature, or to render services of any kind to any other
corporation, firm, individual or association.
4
<PAGE> 5
10. This contract shall be governed by and construed in accordance
with the laws of the State of California.
11. This agreement has been executed on behalf of the Trust by the
undersigned officer of the Trust in his capacity as an officer of the Trust.
The obligations of this agreement shall only be binding upon the assets and
property of the relevant Master Series, as provided for in the Trust's
Agreement and Declaration of Trust, and shall not be binding upon any trustee,
officer or shareholder of the Trust or Master Series individually.
5
<PAGE> 6
If the foregoing correctly sets forth the agreement between the Trust
and the Adviser, please so indicate by signing and returning to the Trust the
enclosed copy hereof.
Very truly yours,
MANAGED SERIES INVESTMENT TRUST
on behalf of the Short-Intermediate
Term Master Series
By: /s/Richard H. Blank, Jr.
-----------------------------
Name: Richard H. Blank, Jr.
---------------------------
Title: Chief Operating Officer
--------------------------
ACCEPTED as of the date
set forth above:
WELLS FARGO BANK, N.A.
By: /s/Robert Chlebowski
-----------------------------
Name: Robert Chlebowski
---------------------------
Title: Senior Vice President
--------------------------
By: /s/Michael J. Niedermeyer
-----------------------------
Name: Michael J. Niedermeyer
---------------------------
Title: Executive Vice President
--------------------------
6
<PAGE> 1
EXHIBIT 99.B11
INDEPENDENT AUDITORS' CONSENT
The Board of Trustees
Managed Series Investment Trust
We consent to incorporation by reference in the
Managed Series Investment Trust Amendment No. 2 to the
Registration Statement Number 811-08140 on Form N-1A under
the Investment Company Act of 1940 of our reports dated
April 14, 1995 on the financial statements and financial
highlights of the Growth Stock Master Series and Short-
Intermediate Term Master Series (two of the series
constituting Managed Series Investment Trust) (the "Funds")
as of February 28, 1995, and for the period from May 26,
1994 (commencement of operations) to February 28, 1995,
which reports have been included in the Statements of
Additional Information of each of the aforementioned Funds.
We also consent to the reference to our firm under the
headings "Financial Highlights" in the prospectuses and
"Independent Auditors" in the Statements of Additional
Information incorporated by reference into the prospectuses.
San Francisco, California /s/KPMG Peat Marwick LLP
June 27, 1995
<PAGE> 1
EXHIBIT 99.B13
May 26, 1994
Managed Series Investment Trust
111 Center Street
Little Rock, Arkansas 72201
Gentlemen:
With respect to our purchase from you of $100,029.84
in shares of beneficial interest in Managed Series Investment
Trust (the "Trust"), consisting of $100,010 in shares of the
Growth and Income Master Series, $10.52 in shares of the
Growth Stock Master Series and $9.32 in shares of the Short-
Intermediate Term Master Series, we hereby advise you that we
are purchasing such shares with no intention to dispose of
such shares either through resale to others or redemption by
the Trust.
Very truly yours,
STEPHENS INC.
By: /s/ Richard H. Blank, Jr.
--------------------------
Richard H. Blank, Jr.
Vice President
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000914609
<NAME> MANAGED SERIES INVESTMENT TRUST
<SERIES>
<NUMBER> 2
<NAME> GROWTH STOCK MASTER SERIES
<S> <C>
<PERIOD-TYPE> 10-MOS
<FISCAL-YEAR-END> FEB-28-1995
<PERIOD-START> MAY-26-1994
<PERIOD-END> FEB-28-1995
<INVESTMENTS-AT-COST> 92,196,798
<INVESTMENTS-AT-VALUE> 97,570,358
<RECEIVABLES> 1,921,391
<ASSETS-OTHER> 8,615
<OTHER-ITEMS-ASSETS> 997
<TOTAL-ASSETS> 99,501,360
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<TABLE> <S> <C>
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<CIK> 0000914609
<NAME> MANAGED SERIES INVESTMENT TRUST
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<NAME> SHORT-INTERMEDIATE TERM MASTER SERIES
<S> <C>
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