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OVERLAND EXPRESS FUNDS, INC.
ASSET ALLOCATION FUND
SUPPLEMENT DATED JANUARY 2, 1996
TO PROSPECTUS DATED MAY 1, 1995,
AS PREVIOUSLY SUPPLEMENTED, AND
STATEMENT OF ADDITIONAL INFORMATION
DATED MAY 1, 1995
Effective January 1, 1996, BZW Barclays Global Fund Advisors ("BGFA")
replaced Wells Fargo Nikko Investment Advisors ("WFNIA") as sub-investment
adviser to the Asset Allocation Fund (the "Fund") of Overland Express Funds,
Inc. BGFA was created by the reorganization of WFNIA with and into an
affiliate of Wells Fargo Institutional Trust Company, N.A. ("WFITC"). Pursuant
to a Sub-Advisory Contract with the Fund and subject to the overall supervision
of Wells Fargo Bank, the Fund's investment adviser, BGFA is responsible for the
day-to-day portfolio management of the Fund. BGFA will continue to employ
substantially the same personnel and will continue to use the computer-based
investment model developed and previously used by WFNIA to determine the
recommended mix of assets in the Fund's portfolio. BGFA is entitled to receive
from Wells Fargo an annual fee of $60,000 and monthly fees at the annual rate
of 0.20% of the Fund's average daily net assets as compensation for its
sub-advisory services. BGFA is an indirect subsidiary of Barclays Bank PLC and
is located at 45 Fremont Street, San Francisco, CA 94105. As of January 1,
1996, BGFA and its affiliates provide investment advisory services for over
$220 billion of assets under management. As of January 1, 1996, Wells Fargo
Bank provides investment advisory services for approximately $33 billion of
assets.
Effective January 1, 1996, WFITC, due to a change in control of its
outstanding voting securities, became a wholly owned subsidiary of BZW Barclays
Global Investors Holdings Inc. (formerly, The Nikko Building U.S.A., Inc.) and
WFITC was renamed BZW Barclays Global Investors, N.A. ("BGI"). BGI currently
acts as the Fund's custodian. BGFA is a subsidiary of BGI. BGI will not be
entitled to receive compensation for its services to the Fund so long as BGFA
is entitled to receive fees for providing investment advisory services to the
Fund. The principal business address of BGI is 45 Fremont Street, San
Francisco, California 94105.
The Prospectus and Statement of Additional Information describing the
Fund are hereby amended accordingly.
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OVERLAND EXPRESS FUNDS, INC.
Telephone: (800) 552-9612
STATEMENT OF ADDITIONAL INFORMATION DATED MAY 1, 1995
ASSET ALLOCATION FUND
U.S. GOVERNMENT INCOME FUND
CALIFORNIA TAX-FREE BOND FUND
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Overland Express Funds, Inc. is a professionally managed,
open-end, series investment company. This Statement of Additional Information
("Statement of Additional Information") contains information about three of the
Company's investment portfolios -- the ASSET ALLOCATION FUND, the U.S.
GOVERNMENT INCOME FUND (formerly the Special Income Fund) and the CALIFORNIA
TAX-FREE BOND FUND (each, a "Fund" and collectively, the "Funds"). Each Fund
offers two classes of shares -- Class A Shares and Class D Shares. The Funds
formerly offered only Class A Shares, which were not designated as a class.
This Statement of Additional Information relates to both such classes of shares
of each Fund. The investment objective of each Fund is described in the
Prospectus section entitled "Investment Objectives and Policies."
This Statement of Additional Information is not a prospectus and
should be read in conjunction with each Fund's Prospectus, dated May 1, 1995,
as supplemented from time to time. All terms used in this Statement of
Additional Information that are defined in a Fund's Prospectus will have the
meanings assigned in such Prospectus. A copy of the Prospectus for each Fund
may be obtained without charge by writing Stephens Inc., the Company's sponsor,
administrator and distributor, at 111 Center Street, Little Rock, Arkansas
72201 or by calling the Transfer Agent at the telephone number indicated above.
-----------------------------
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
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<S> <C>
Investment Restrictions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Additional Permitted Investment
Activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Special Factors Affecting the
California Tax-Free Bond Fund . . . . . . . . . . . . . . . . . . . . . . . . . 12
Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Distribution Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Servicing Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Calculation of Yield and Total Return . . . . . . . . . . . . . . . . . . . . . . 22
Determination of Net Asset Value . . . . . . . . . . . . . . . . . . . . . . . . 28
Portfolio Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Federal Income Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Capital Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
Custodian and Transfer and Dividend
Disbursing Agent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
Independent Auditors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
Financial Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
Appendix . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-1
Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-1
</TABLE>
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INVESTMENT RESTRICTIONS
The Funds are subject to the following investment restrictions,
all of which are fundamental policies:
None of the Funds may:
(1) purchase the securities of issuers conducting their
principal business activity in the same industry if, immediately after the
purchase and as a result thereof, the value of any Fund's investments in that
industry would exceed 25% of the current value of such Fund's total assets,
provided that there is no limitation with respect to investments in (i)
municipal securities (for the purpose of this restriction, private activity
bonds and notes shall not be deemed municipal securities if the 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, (iii) in the case of the Asset Allocation
Fund, any industry in which the S&P Index becomes concentrated to the same
degree during the same period, (iv) securities that are exempt from personal
income taxes of the State of California, and (v) the obligations of domestic
banks;
(2) purchase or sell real estate (other than municipal
obligations or other securities secured by real estate or interests therein or
securities issued by companies that invest in real estate or interests
therein), commodities or commodity contracts; except that the U.S. Government
Income Fund may enter into interest rate futures contracts and may write call
options and purchase call and put options on interest rate futures contracts;
(3) 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;
(4) underwrite securities of other issuers, except to the
extent that the purchase of municipal securities or other permitted investments
directly from the issuer thereof or from an underwriter for an issuer and the
later disposition of such securities in accordance with the Fund's investment
program may be deemed to be an underwriting;
(5) invest more than 10% of the current value of its net assets
in repurchase agreements maturing in more than seven days, 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, and illiquid
securities;
(6) make investments for the purpose of exercising control or
management;
(7) issue senior securities, except that each Fund may borrow
from banks up to 10% of the current value of its net assets for temporary
purposes only in order to meet
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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 borrowing exists); or
(8) invest more than 10% of the current value of its net assets
in fixed time deposits that are subject to withdrawal penalties and that have
maturities of more than seven days.
In addition, the Asset Allocation Fund may not write, purchase or
sell puts, calls, warrants or options or any combination thereof, except that
such Fund may purchase securities with put rights in order to maintain
liquidity.
None of the Funds may, as to 75% of its total assets, purchase
securities of any issuer (except securities issued or guaranteed by the U.S.
Government, its agencies and instrumentalities) if, as a result, more than 5%
of the value of its total assets would be invested in the securities of any one
issuer or, with respect to 100% of its assets, the Fund's ownership would be
more than 10% of the outstanding voting securities of such issuer.
The Funds are subject to the following non-fundamental policies:
(1) None of the Funds will purchase or retain securities of any
issuer if the officers or directors of the Fund or its Investment Adviser
owning beneficially more than one-half of one percent (0.5%) of the securities
of the issuer together owned beneficially more than 5% of such securities.
(2) The Funds may not purchase interests, leases, or limited
partnership interests in oil, gas, or other mineral exploration or development
programs.
(3) None of the Funds will invest in securities of issuers who,
with their predecessors, have been in existence less than three years, unless
the securities are fully guaranteed or insured by the U.S. Government, 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.
(4) Each of the Funds may invest in shares of other open-end,
management investment companies, subject to the limitations of Section 12(d)(1)
of the Act, provided that any such purchases will be limited to temporary
investments in shares of unaffiliated investment companies and the Investment
Adviser will waive its advisory fees for that portion of the Fund's assets so
invested, except when such purchase is part of a plan of merger, consolidation,
reorganization or acquisition.
(5) The Asset Allocation Fund will not purchase securities of
unseasoned issuers, including their predecessors, which have been in operation
for less than three years, and equity securities of issuers which are not
readily marketable if by reason thereof the value of such Fund's aggregate
investment in such classes of securities will exceed 5% of its total assets.
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(6) The U.S. Government Income Fund will not purchase puts,
calls, straddles, spreads or any combination thereof.
(7) The U.S. Government Income Fund will not invest any part of
its total assets in commodities or commodity futures contracts, provided that
such Fund may enter into interest rate futures contracts and may write call
options and purchase call and put options on interest rate futures contracts
that are "covered" (i.e., the Fund maintains segregated liquid assets in an
amount at least equal to the value to the Fund's obligations and marks to
market daily such collateral).
(8) None of the Funds may purchase or sell real estate limited
partnership interests.
ADDITIONAL PERMITTED INVESTMENT ACTIVITIES
Unrated Investments. Each of the Asset Allocation Fund and the
California Tax-Free Bond Fund may purchase instruments that are not rated if,
in the opinion of Wells Fargo Bank, such obligations are of investment quality
comparable to other rated investments that are permitted to be purchased by
such Fund. After purchase by a Fund, a security may cease to be rated or its
rating may be reduced below the minimum required for purchase by such Fund.
Neither event will require a sale of such security by such Fund. 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 Fund will attempt to use comparable
ratings as standards for investments in accordance with the investment policies
contained in such Fund's Prospectus and in this Statement of Additional
Information. The ratings of Moody's and S&P are more fully described in the
Appendix to this Statement of Additional Information.
Letters of Credit. The Asset Allocation Fund and the California
Tax-Free Bond Fund may purchase debt obligations, including municipal
securities, certificates of participation, commercial paper and other
short-term obligations, backed by an irrevocable letter of credit of a bank,
savings and loan association or insurance company which assumes the obligation
for payment of principal and interest in the event of default by the issuer.
Only banks, savings and loan associations and insurance companies which, in the
opinion of Wells Fargo Bank, are of investment quality comparable to other
permitted investments of such Fund may be used for letter of credit-backed
investments.
Pass-Through Obligations. The U.S. Government Income Fund and the
California Tax-Free Bond Fund may invest in pass-through obligations that
represent an ownership interest in a pool of mortgages and the resultant cash
flow from those mortgages. Payments by homeowners on the loans in the pool
flow through to certificate holders in amounts sufficient to repay principal
and to pay interest at the pass-through rate. The stated maturities of
pass-through obligations may be shortened by unscheduled prepayments of
principal on the underlying mortgages. Therefore, it is not possible to
predict accurately the average maturity of a particular pass-through
obligation. Variations in the maturities of pass-through obligations will
affect the yield of the U.S. Government Income Fund and the California Tax-
Free Bond Fund. Furthermore, as with any debt obligation, fluctuations in
interest rates will inversely affect the
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market value of pass-through obligations. The U.S. Government Income Fund and
the California Tax-Free Bond Fund 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 (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. Each Fund may purchase securities 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. However, none of
the Funds intends to invest more than 5% of its net assets in when-issued
securities during the coming year. The Funds only will make commitments to
purchase securities on a when-issued basis with the intention of actually
acquiring the securities, but may sell them before the settlement date if it is
deemed advisable. When-issued securities are subject to market fluctuation,
and no income accrues to the purchaser during the period prior to issuance.
The purchase price and the interest rate that will be received on debt
securities are fixed at the time the purchaser enters into the commitment.
Purchasing a security on a when-issued basis can involve a risk that the market
price at the time of delivery may be lower than the agreed-upon purchase price,
in which case there could be an unrealized loss at the time of delivery.
Each Fund will establish a segregated account in which it will
maintain cash, U.S. Government obligations and other high-quality debt
instruments in an amount at least equal in value to the Fund's commitments to
purchase when- issued securities. If the value of these assets declines, the
Fund 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.
Municipal Bonds. The California Tax-Free Bond Fund and the Asset
Allocation Fund may invest in municipal bonds. As discussed in the Prospectus,
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. 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.
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Municipal Notes. The California Tax-Free Bond Fund and the Asset
Allocation Fund may invest in 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 such things as a decline in its tax base or a rise in
delinquencies could adversely affect the issuer's ability to meet its
obligations on outstanding TANs. Furthermore, some municipal issuers mix
various tax proceeds into a general fund that is used to meet obligations other
than those of the outstanding TANs. Use of such a general fund to meet various
obligations could affect the likelihood of making payments on TANs.
BANs. The ability of a municipal issuer to meet its obligations
on its BANs is primarily dependent on the issuer's adequate access to the
longer term municipal bond market and the likelihood that the proceeds of such
bond sales will be used to pay the principal of, and interest on, BANs.
RANs. A decline in the receipt of certain revenues, such as
anticipated revenues from another level of government, could adversely affect
an issuer's ability to meet its obligations on outstanding RANs. In addition,
the possibility that the revenues would, when received, be used to meet other
obligations could affect the ability of the issuer to pay the principal of, and
interest on, RANs.
The values of outstanding municipal securities 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 will also
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
values of outstanding securities, including those held in the Fund's portfolio,
will decline and (if purchased at par value) they would sell at a discount. If
interests rates fall, the values 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 the Fund's portfolio arising from
these or other factors will cause changes in the net asset value per share of
the Fund.
The Funds indicated below may engage in the following investment
activities although none has a present intention to do so:
Interest Rate Futures Contracts and Options Thereon. The U.S.
Government Income Fund may use interest rate futures contracts ("futures
contracts") principally as a hedge against the effects of interest rate
changes. A futures contract is an agreement to purchase or sell a specified
amount of designated debt securities for a set price at a specified future
time. At the time it enters into a futures transaction, the U.S. Government
Income Fund is required to make a performance deposit (initial margin) of cash
or liquid securities with its custodian in a segregated account in the name of
the futures broker. Subsequent payments of "variation margin" are then
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made on a daily basis, depending on the value of the futures position which is
continually "marked to market."
The U.S. Government Income Fund may engage only in interest rate
futures contract transactions involving (i) the sale of the designated debt
securities underlying the futures contract (i.e., short positions) to hedge the
value of securities held by the U.S. Government Income Fund; (ii) the purchase
of the designated debt securities underlying the futures contract when the U.S.
Government Income Funds holds a short position having the same delivery month
(i.e., a long position offsetting a short position); or (iii) activities that
are incidental to the U.S. Government Income Fund's activities in the cash
market in which the U.S. Government Income Fund has determined to invest. If
the market moves favorably after the U.S. Government Income Fund enters into an
interest rate futures contract as a hedge against anticipated adverse market
movements, the benefits from such favorable market movements on the value of
the securities so hedged will be offset in whole or in part, by a loss on the
futures contract.
The U.S. Government Income Fund may engage in a futures contract
sale to maintain the income advantage from continued holding of a long-term
security while endeavoring to avoid part or all of the loss in market value
that would otherwise accompany a decline in long-term security prices. If,
however, securities prices rise, the U.S. Government Income Fund would realize
a loss in closing out its futures contract sales that would offset any
increases in prices of the long-term securities it holds.
An option on a futures contract gives the purchaser the right, but
not the obligation, in return for the premium paid, to assume (in the case of a
call) or sell (in the case of a put) a position in a specified underlying
futures contract (which position may be a long or short position) at a
specified exercise price at any time during the option exercise period.
Sellers of options on future contracts, like buyers and sellers of futures
contracts, make an initial performance deposit and are subject to calls for
variation margin.
Transactions by the U.S. Government Income Fund in futures
contracts and options thereon involve certain risks. One risk in employing
futures contracts and options thereon to protect against cash market price
volatility is the possibility that futures prices will correlate imperfectly
with the behavior of the prices of the securities in the U.S. Government Income
Fund's portfolio (the portfolio securities will not be identical to the debt
instruments underlying the futures contracts). In addition, commodity
exchanges generally limit the amount of fluctuation permitted in futures
contract and option prices during a single trading day, and the existence of
such limits may prevent the prompt liquidation of futures and option positions
in certain cases. Inability to liquidate positions in a timely manner could
result in the U.S. Government Income Fund incurring larger losses than would
otherwise be the case.
The U.S. Government Income Fund will not enter into interest rate
futures contracts and options thereon for which the aggregate initial margin
and premiums exceed 5% of the fair market value of its assets, after taking
into account unrealized profits and unrealized losses on any such contracts it
has entered into; provided, however, that the "in-the-money" amount of an
option that was in-the-money at the time of purchase will be excluded in
computing such 5%.
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The U.S. Government Income Fund may enter into futures contracts
and may purchase call and put options on futures contracts that are traded on
U.S. commodity exchanges and write call options on such futures contracts.
Investment in Bond Options by the U.S. Government Income Fund.
The U.S. Government Income Fund may purchase put and call options and write
covered put and call options on securities in which such Fund may invest
directly and that are traded on registered domestic securities exchanges or
that result from separate, privately negotiated transactions with primary U.S.
Government securities dealers recognized by the Board of Governors of the
Federal Reserve System (i.e., over-the-counter ("OTC") options). The writer of
a call option, who receives a premium, has the obligation, upon exercise, to
deliver the underlying security against payment of the exercise price during
the option period. The writer of a put, who receives a premium, has the
obligation to buy the underlying security, upon exercise, at the exercise price
during the option period.
The U.S. Government Income Fund may write put and call options on
bonds only if they are "covered," and such options must remain "covered" as
long as the Fund is obligated as a writer. A call option is covered if the
U.S. Government Income Fund owns the underlying security covered by the call
or has an absolute and immediate right to acquire that security without
additional cash consideration (or for additional cash consideration if the
underlying security is held in a segregated account by its custodian) upon
conversion or exchange of other securities held in its portfolio. A put option
is covered if the U.S. Government Income Fund maintains cash, U.S. Treasury
bills or other high grade short-term obligations with a value equal to the
exercise price in a segregated account with its custodian.
The principal reason for writing put and call options is to
attempt to realize, through the receipt of premiums, a greater current return
than would be realized on the underlying securities alone. In return for the
premium received for a call option, the U.S. Government Income Fund foregoes
the opportunity for profit from a price increase in the underlying security
above the exercise price so long as the option remains open, but retains the
risk of loss should the price of the security decline. In return for the
premium received for a put option, the U.S. Government Income Fund assumes the
risk that the price of the underlying security will decline below the exercise
price, in which case the put would be exercised and the Fund would suffer a
loss. The U.S. Government Income Fund may purchase put options in an effort to
protect the value of a security it owns against a possible decline in market
value.
Writing of options involves the risk that there will be no market
in which to effect a closing transaction. An exchange-traded option may be
closed out only on an exchange that provides a secondary market for an option
of the same series. OTC options are not generally terminable at the option of
the writer and may be closed out only by negotiation with the holder. There is
also no assurance that a liquid secondary market on an exchange will exist. In
addition, because OTC options are issued in privately negotiated transactions
exempt from registration under the Securities Act of 1933, there is no
assurance that the U.S. Government Income Fund will succeed in negotiating a
closing out of a particular OTC option at any particular time. If the
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U.S. Government Income Fund as covered call option writer is unable to effect a
closing purchase transaction in the secondary market or otherwise, it will not
be able to sell the underlying security until the option expires or it delivers
the underlying security upon exercise.
The staff of the Commission has taken the position that purchased
options not traded on registered domestic securities exchanges and the assets
used as cover for written options not traded on such exchanges are generally
illiquid securities. However, the staff has also opined that, to the extent a
mutual fund sells an OTC option to a primary dealer that it considers
creditworthy and contracts with such primary dealer to establish a formula
price at which the fund would have the absolute right to repurchase the option,
the fund would only be required to treat as illiquid the portion of the assets
used to cover such option equal to the formula price minus the amount by which
the option is "in-the-money." Pending resolution of the issue, the U.S.
Government Income Fund will treat such options and, except to the extent
permitted through the procedure described in the preceding sentence, assets as
subject to such Fund's limitation on investments in securities that are not
readily marketable.
Additional Limitations on Interest Rate Futures and Related
Options. In order to comply with undertakings made by the U.S. Government
Income Fund pursuant to Commodity Futures Trading Commission ("CFTC")
Regulation 4.5, the U.S. Government Income Fund will use interest rate futures
and option contracts solely for bona fide hedging purposes within the meaning
and intent of CFTC Reg. 1.3(z)(1); provided, however, that with respect to each
long position in an interest rate futures or option contract that will be used
as part of a portfolio management strategy and that is incidental to the U.S.
Government Income Fund's activities in the underlying cash market but would not
come within the meaning and intent of Reg. 1.3(z)(1), the "underlying commodity
value" (the size of the contract multiplied by its current settlement price) of
each such long position will not at any time exceed the sum of:
(1) The value of short-term United States debt obligations or
other United States dollar-denominated high quality
short-term money market instruments and cash set aside in
an identifiable manner, plus any funds deposited as margin
on such contract;
(2) Unrealized appreciation on the contract held at the broker;
and
(3) Cash proceeds from existing investments due in not more
than 30 days.
Investment in Warrants. The U.S. Government Income Fund and the
California Tax-Free Bond Fund each may invest no more than 5% of its net assets
at the time of purchase in warrants (other than those that have been acquired
in units or attached to other securities), and not more than 2% of its 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 U.S. Government
Income Fund and the California Tax-Free Bond Fund each may only purchase
warrants on securities in which the Fund may invest directly.
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SPECIAL FACTORS AFFECTING THE
CALIFORNIA TAX-FREE BOND FUND
Certain debt obligations held by the California Tax-Free Bond Fund
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 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 the Fund may be impaired.
Certain of the municipal securities in which the California
Tax-Free Bond Fund may invest may be obligations of California issuers that
rely in whole or in part, directly or indirectly, on ad valorem real property
taxes as a source of revenue. The California Constitution limits the powers of
municipalities to impose and collect ad valorem taxes on real property, which,
in turn, restricts the ability of municipalities to service their debt
obligations from such taxes.
For example, Article XIIIA of the California Constitution, as
amended, limits ad valorem real property taxes to 1% of the full cash value of
the property, defined as the county tax assessor's valuation as of March 1,
1975, plus adjustments not to exceed 2% per year, adjustments upon purchase,
change of ownership or new construction after that date, and certain other
adjustments. Article XIIIB provides that state and local government
appropriations from certain revenue sources each year may not exceed the
"appropriations limit" related to such revenue sources set forth for the fiscal
year 1978-79, with certain adjustments made for changes in the cost of living
and population and certain limited exemptions. Because of the complex nature
of Articles XIIIA and XIIIB, ambiguities and possible inconsistencies in their
terms, the existence of litigation challenging these provisions and the
impossibility of predicting future appropriations and changes in population and
cost of living, it is not possible to determine the impact of Article XIIIA or
Article XIIIB or any implementing or related legislation on the municipal
obligations in the California Tax-Free Bond Fund or the ability of state or
local government to pay the interest on, or repay the principal of, such
municipal obligations.
Certain debt obligations held by the Fund may be obligations
payable solely from lease payments on real or personal property leased to the
state, cities, counties or their various public entities. California law
provides that a lessor may not be required to make payments during any period
that it is denied use and occupancy of the property in proportion to such loss.
Moreover, the lessor only agrees to appropriate funding for lease payments in
its annual budget for each fiscal year. In case of a default under the lease,
the only remedy available against the lessor is that of reletting the property;
no acceleration of lease payments is permitted. Each of these factors presents
a risk that the lease financing obligations held by the Fund would not be paid
in a timely manner.
Certain debt obligations held by the California Tax-Free Bond Fund
may be obligations which are payable solely from the revenues of health care
institutions. The method of
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<PAGE> 13
reimbursement for indigent care, California's selective contracting with health
care providers for such care and selective contracting by health insurers for
care of its beneficiaries now in effect under California and federal law may
adversely affect these revenues and, consequently, payment on those debt
obligations.
There can be no assurance that general economic difficulties or
the financial circumstances of California or its towns and cities will not
adversely affect the market value of California municipal securities or the
ability of obligors to continue to make payments on such securities.
* * *
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.
MANAGEMENT
Directors and Officers. The principal occupations during the past
five years of the directors and executive officers of the Company are listed
below. The address of each, unless otherwise indicated, is 111 Center Street,
Little Rock, Arkansas 72201. Directors deemed to be "interested persons" of
the Company for purposes of the Act are indicated by an asterisk.
JACK S. EUPHRAT, Director - 415 Walsh Road, Atherton, California 94027.
Private Investor.
*R. GREG FELTUS, Director, Chairman and President. Senior Vice President of
Stephens Inc.; Manager of the Financial Services Group; President of
Stephens Insurance Services Inc.; Senior Vice President of Stephens
Sports Management Inc.; and President of Investors Brokerage Insurance Inc.
THOMAS S. GOHO, Director - 321 Beechcliff Court, Winston- Salem, North Carolina
27104. Associate Professor of Finance of the School of Business and
Accounting at Wake Forest University since 1983. Planner and President of
Piedmont Financial Planning since 1983.
*ZOE ANN HINES, Director. Senior Vice President of Stephens Inc. and Director
of Brokerage Accounting; and Secretary of Stephens Resource Management.
*W. RODNEY HUGHES, Director - 31 Dellwood Court, San Rafael, California 94901.
Private Investor.
ROBERT M. JOSES, Director - 47 Dowitcher Way, San Rafael, California 94901.
Private Investor.
12
<PAGE> 14
*J. TUCKER MORSE, Director - 10 Legrae Street, Charleston, South Carolina
29401. Principal occupation is real estate development. Chairman of
Renaissance Properties Ltd.; President of Morse Investment Corporation; and
Co-Managing Partner of Main Street Ventures.
RICHARD H. BLANK, JR., Chief Operating Officer, Secretary and Treasurer. Vice
President of Stephens Inc.; Director of Stephens Sports Management Inc.;
and Director of Capo Inc.
LARRY W. BOWDEN, Vice President. Vice President of Stephens Inc.; Managing
Director of Financial Services Group of Stephens Inc.; Senior Vice
President of Stephens Insurance Services Inc.
ELLEN M. GRAY, Vice President. Senior Vice President of Stephens Inc. and
Director of Investors Brokerage Insurance Inc. Prior thereto, Senior Vice
President of Eppler, Guerin & Turner, Inc.
E. CURTIS JEFFRIES, Vice President - Marketing. Vice President of Stephens
Inc.
JANE G. JOHNSON, Vice President. Associate of Financial Services Group of
Stephens Inc.
MIKE NOLTE, Assistant Secretary. Associate of Financial Services Group of
Stephens Inc.
ANN BONSTEEL, Assistant Secretary. Associate of Financial Services Group of
Stephens Inc.
COMPENSATION TABLE
<TABLE>
<CAPTION>
Total Compensation
Aggregate Compensation from Registrant
Name and Position from Registrant and Fund Complex
- ----------------- ---------------------- ------------------
<S> <C> <C>
Jack S. Euphrat $8,500 $34,188
Director
*R. Greg Feltus 0 0
Director
Thomas S. Goho 8,500 34,188
Director
*Zoe Ann Hines 0 0
Director
*W. Rodney Hughes 8,500 32,188
Director
</TABLE>
13
<PAGE> 15
<TABLE>
<S> <C> <C>
Robert M. Joses 8,500 34,188
Director
*J. Tucker Morse 8,500 32,188
Director
</TABLE>
Directors of the Company are compensated by the Company for their
services as indicated above and also are reimbursed for all out-of-pocket
expenses relating to attendance at board meetings. Each of the officers,
except for Mr. Jeffries, and Directors of the Company serves in the identical
capacity as officers and Directors of Overland Express Funds, Inc. and
Stagecoach Inc., and as Trustees and/or Officers of Stagecoach Trust, Master
Investment Portfolio, Life & Annuity Trust, Master Investment Trust and Managed
Series Investment 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
Company. The Directors are compensated by other Companies and Trusts within
the fund complex for their services as Directors/Trustees to such Companies and
Trusts. Currently the Directors do not receive any retirement benefits or
deferred compensation from the Company or any other member of the fund complex.
As of the date of this Statement of Additional Information,
Directors and officers of the Company as a group beneficially owned less than
1% of the outstanding shares of the Company.
Investment Adviser. Each of the Funds is advised by Wells Fargo
Bank. The Amended Advisory Contract of the Asset Allocation Fund and the
Advisory Contracts of the other Funds (collectively, the "Advisory Contracts")
provide that Wells Fargo Bank shall furnish to the Funds investment guidance
and policy direction in connection with the daily portfolio management of each
Fund. Pursuant to the Advisory Contracts, Wells Fargo Bank furnishes to the
Board of Directors periodic reports on the investment strategy and performance
of each Fund.
Wells Fargo Bank has agreed to provide to the Funds, 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, in the
case of the U.S. Government Income Fund and the California Tax-Free Bond Fund,
average maturities of the portfolios of each of those Funds.
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 Fund's outstanding voting securities or by the
Company's Board of Directors and (ii) by a majority of the directors of the
Company who are not parties to the Advisory Contract or "interested persons"
(as defined in the Act) of any such party. Each Advisory Contract may be
terminated on 60 days' written notice by either party and will terminate
automatically if assigned.
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<PAGE> 16
Wells Fargo Nikko Investment Advisors ("WFNIA") serves as
Sub-Investment Adviser to the Asset Allocation Fund pursuant to a Sub-Advisory
Contract (the "Sub-Advisory Contract") between the Fund, Wells Fargo Bank and
WFNIA. Subject to the direction of the Company's Board of Directors and the
overall supervision and control of Wells Fargo Bank and the Company, WFNIA
makes recommendations regarding the investment and reinvestment of the Fund's
assets. WFNIA is responsible for implementing and monitoring the performance
of the asset allocation model employed with respect to the Fund in accordance
with the investment objectives, policies and restrictions set forth in the
Fund's Prospectus. WFNIA will furnish to Wells Fargo Bank periodic reports on
the investment activity and performance of the Fund and will also furnish such
additional reports and information as Wells Fargo Bank and the Company's Board
of Directors and officers may reasonably request.
For the years ended December 31, 1994, 1993 and 1992, the Asset
Allocation Fund paid $424,899, $350,046, and $161,265, respectively, to Wells
Fargo Bank for investment advisory fees. Wells Fargo Bank did not waive any
advisory fees payable by the Asset Allocation Fund during 1994. Wells Fargo
Bank waived $305 and $125,864 in advisory fees during 1993 and 1992,
respectively. For the fiscal years ended December 31, 1994, 1993 and 1992, the
U.S. Government Income Fund paid $230,619, $39,319 and $70,522, respectively,
to Wells Fargo Bank for investment advisory fees after waivers of $28,872,
$201,104 and $69,078 with respect to each of those periods. For the fiscal
years ended December 31, 1994, 1993 and 1992, the California Tax-Free Bond Fund
paid $896,680, $1,475,001 and $1,345,719, respectively, in investment advisory
fees to Wells Fargo Bank after waivers of $748,655, $423,693 and $425,940 with
respect to each of those periods.
Wells Fargo Bank serves as Transfer and Dividend Disbursing Agent
for the Funds and also serves as the Custodian for the U.S. Government Income
Fund and the California Tax-Free Bond Fund. Wells Fargo Institutional Trust
Company, N.A. ("WFITC") serves as Custodian for the Asset Allocation Fund. See
the section entitled "Custodian and Transfer and Dividend Disbursing Agent" in
the Prospectus for each Fund.
Morrison & Foerster, special counsel to Wells Fargo Bank, has
advised Wells Fargo Bank and the Company that Wells Fargo Bank should be able
to perform the services contemplated by the Advisory Contracts, the Agency
Agreement, the Custodian Agreements, and the Prospectus, without violation of
the Glass-Steagall Act. Such counsel has pointed out, however, that there are
no controlling judicial or administrative interpretations or decisions and that
future judicial or administrative 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
Bank from continuing to perform, in whole or in part, such services. If Wells
Fargo Bank were prohibited from performing any of such services, it is expected
that new agreements would be entered into with another entity or entities
qualified to perform such services.
Administrator and Distributor. The Company has retained Stephens
as administrator and distributor on behalf of each of its Funds. Stephens, in
connection with the Administration
15
<PAGE> 17
Agreements with the Company, furnishes the Company with office facilities,
together with those ordinary clerical and bookkeeping services that are not
being furnished by Wells Fargo Bank. Stephens also has entered into
Distribution Agreements with the Company pursuant to which it has the
responsibility of distributing Class A Shares and Class D Shares of the Funds.
For the fiscal years ended December 31, 1994, 1993 and 1992, the
Asset Allocation Fund's administrative fees totaled $66,524, $49,481 and
$41,014, respectively. For the same periods, the U.S. Government Income Fund's
administrative fees totalled $51,898, $48,438 and $0 respectively, and the
California Tax-Free Bond Fund's administrative fees totaled $431,734, $483,479
and $0, respectively.
For the fiscal years ended December 31, 1994, 1993 and 1992, the
aggregate dollar amount of underwriting commissions (front-end sales loads and
CDSCs, if any) paid to Stephens was $1,408,759, $3,604,377 and $680,625,
respectively; Stephens retained $1,351,388, $3,457,989 and $550,407,
respectively, of such commissions. Wells Fargo Securities Inc., an affiliated
broker-dealer of the Company, or its registered representatives, received
$57,371, $146,388 and $130,218, of such commissions for the fiscal years ended
December 31, 1994, 1993, and 1992.
DISTRIBUTION PLANS
As indicated in the Prospectus, each of the Funds, on behalf of
each of its classes of shares, has adopted a Plan under Section 12(b) of the
Act and Rule 12b-1 thereunder (the "Rule"). The Plans for the classes of
shares of the Asset Allocation Fund, the U.S. Government Income Fund and the
California Tax-Free Bond Fund were adopted by the Board of Directors; a
majority of the directors who were not "interested persons" (as defined in the
Act) of the Funds and who had no direct or indirect financial interest in the
operation of the Plan or in any agreement related to the Plan (the "Qualified
Directors") adopted the Plans.
Under the Plans for the U.S. Government Income Fund and the
California Tax-Free Bond Fund, each of the classes of shares of these Funds may
defray all or part of the cost of preparing and printing prospectuses and other
promotional materials and of delivering prospectuses and those materials to
prospective shareholders of the Fund by paying on an annual basis up to the
greater of $100,000 or 0.05% of the Fund's average daily net assets. These
Plans provide only for the reimbursement of actual expenses.
Under the Plan for the Asset Allocation Fund, this Fund may pay
the Distributor, as compensation for distribution-related services, a monthly
fee at an annual rate of up 0.75% of the Fund's average daily net assets
attributable to the Class A Shares and up to 0.50% of the Fund's average daily
net assets attributable to the Class D Shares. The actual fee payable to the
Distributor shall, within such limits, be determined from time to time by
mutual agreement between the Company and the Distributor and will not exceed
the maximum sales charges payable by mutual funds sold by members of the
National Association of Securities Dealers, Inc. ("NASD") under the NASD Rules
of Fair Practice. The Distributor may enter into selling
16
<PAGE> 18
agreements with one or more selling agents under which such agents may receive
compensation for distribution-related services from the Distributor, including,
but not limited to, commissions or other payments to such agents based on the
average daily net assets of Asset Allocation Fund shares attributable to them.
The Distributor may retain any portion of the total distribution fee payable
under the Plan to compensate it for the distribution-related services provided
by it or to reimburse it for other distribution-related expenses.
Each Plan will continue in effect from year to year if such
continuance is approved by a majority vote of both the directors of the Company
and the Qualified Directors. Agreements related to the Plans also must be
approved by such vote of the directors and the Qualified Directors. Such
agreements will terminate automatically if assigned, and may be terminated at
any time, without payment of any penalty, by a vote of a majority of the
outstanding voting securities of the proper Fund. No Plan may be amended to
increase materially the amounts payable thereunder without the approval of a
majority of the outstanding voting securities of the proper Fund, and no
material amendment to a Plan may be made except by a majority of both the
directors of the Company and the Qualified Directors.
Each Plan requires that the Treasurer of the Fund shall provide to
the directors, and the directors shall review, at least quarterly, a written
report of the amounts expended (and purposes therefor) under the Plan. The
Rule also requires that the selection and nomination of directors who are not
"interested persons" of the Company be made by such disinterested directors.
For the fiscal year ended December 31, 1994, the Class A Shares of
the Asset Allocation Fund, the U.S. Government Income Fund and the California
Tax-Free Bond Fund incurred $125,161, $22,458 and $161,701 in fees,
respectively, under the Plans and the related Distribution Agreements and $0,
$0, and $0 of such fees, respectively, were waived. For the fiscal year ended
December 31, 1994, the Class D Shares of the Asset Allocation Fund, the U.S.
Government Income Fund and the California Tax-Free Bond Fund incurred $81,793,
$34,908 and $41,656 in fees, respectively, under the Plans and the related
Distribution Agreements and $0, $0, and $0 of such fees, respectively, were
waived.
SERVICING PLAN
As indicated in the Prospectus of each Fund, each of the Funds has
adopted a Servicing Plan (each, a "Servicing Plan" and collectively, the
"Servicing Plans") with respect to its Class D Shares. The Board of Directors
adopted the Servicing Plans on April 29, 1993. The Board of Directors included
a majority of the Directors who were not "interested persons" (as defined in
the 1940 Act) of any of the Funds and who had no direct or indirect financial
interest in the operation of the Servicing Plan or in any agreement related to
the Servicing Plan (the "Servicing Plan Qualified Directors").
Under each Servicing Plan and pursuant to the Servicing
Agreements, the Fund may pay one or more servicing agents, as compensation for
performing certain services, a fee at an
17
<PAGE> 19
annual rate of up to 0.25% of the average daily net assets of the Fund
attributable to its Class D Shares. The actual fee payable to servicing agents
is determined, within such limit, from time to time by mutual agreement between
the Company and each servicing agent and will not exceed the maximum service
fees payable by mutual funds sold by members of the NASD under the NASD Rules
of Fair Practice.
The Servicing Plans will continue in effect from year to year if
such continuance is approved by a majority vote of both the Directors of the
Company and the Servicing Plan Qualified Directors. Any form of Servicing
Agreement related to the Servicing Plans also must be approved by such vote of
the Directors and the Servicing Plan Qualified Directors. Servicing Agreements
will terminate automatically if assigned, and may be terminated at any time,
without payment of any penalty, by a vote of a majority of the outstanding
Class D Shares of each of the Funds. The Servicing Plans may not be amended to
increase materially the amount payable thereunder without the approval of a
majority of the outstanding Class D Shares of each Fund, and no material
amendment to the Servicing Plans may be made except by a majority of both the
Directors of the Company and the Qualified Directors.
The Servicing Plans require that the Treasurer of the Company
shall provide to the Directors, and the Directors shall review, at least
quarterly, a written report of the amounts expended (and purposes therefor)
under each of the Servicing Plans.
For the period from date of inception of the Class D Shares to
December 31, 1993, the Asset Allocation Fund, U.S. Government Income Fund and
California Tax-Free Bond Fund paid $6,483, $4,801, and $5,691, respectively, in
servicing fees pursuant to the Servicing Plans. For the fiscal year ended
December 31, 1994, the Asset Allocation Fund, U.S. Government Income Fund and
California Tax-Free Bond Fund paid $28,377, $17,454 and $20,828 in servicing
fees, respectively, pursuant to the Servicing Plans for the Class D Shares.
CALCULATION OF YIELD AND TOTAL RETURN
As indicated in the Prospectus, the Funds may advertise certain
total return information for a class of shares computed in the manner described
in the Prospectus. As and to the extent required by the Commission, an average
annual compound rate of return ("T") will be computed by using the value at the
end of a specified period ("ERV") of a hypothetical initial investment in a
class of shares ("P") over a period of years ("n") according to the following
formula: P(1+T)n = ERV. In addition, as indicated in the Prospectus, the
Funds may also, at times, calculate total return for a class of shares based on
net asset value per share (rather than the public offering price), in which
case the figures would not reflect the effect of any sales charges that would
have been paid by an investor, or based on the assumption that a sales charge
other than the maximum sales charge (reflecting a Volume Discount) was
assessed, provided that total return data derived pursuant to the calculation
described above also are presented.
The average annual total return on the Class A Shares of the Asset
Allocation Fund for the period since inception (April 7, 1988) to December 31,
1994, assuming a 4.50% sales load,
18
<PAGE> 20
was 8.26%. The average annual total return for the same period, assuming no
sales load, was 9.00%. The average annual total return for the five-year
period ended December 31, 1994, assuming a 4.50% sales load, was 8.18%. The
average annual total return for the same period, assuming no sales load was
9.19%. The average annual total return for the fiscal year ended December 31,
1994, assuming a 4.50% sales load was -5.15%. The average annual total return
for the same period, assuming no sales load, was -0.68%. The average annual
total return on the Class D Shares of the Asset Allocation Fund since inception
(July 1, 1993) to December 31, 1994, was 2.07%. The average annual total
return on the Class D Shares for the one year ended December 31, 1994, was
- -2.22% assuming payment of the 1% CDSC.
The average annual total return on the Class A Shares of the U.S.
Government Income Fund for the period since inception of the predecessor fund
(April 7, 1988) to December 31, 1994 assuming a 4.50% sales load, was 7.69%.
The average annual total return for the same period, assuming no sales load,
was 8.42%. The average annual total return for the five-year period ended
December 31, 1994, assuming a 4.50% sales load, was 6.82%. The average annual
total return for the same period, assuming no sales load, was 7.81%. The
average annual total return for the one year ended December 31, 1994, assuming
a 4.50% sales load, was -9.08%. The average annual total return for the same
period, assuming no sales load, was -4.81%. The average annual total return on
the Class D Shares of the U.S. Government Income Fund since inception (July 1,
1993) to December 31, 1994, was -2.23%. The average annual total return on the
Class D Shares for the fiscal year ended December 31, 1994, was -6.33%,
assuming payment of the 1% CDSC.
The average annual total return on the Class A Shares of the
California Tax-Free Bond Fund for the period since inception (October 6, 1988)
to December 31, 1994, assuming a 4.50% sales load, was 6.90%. The average
annual total return for the same period, assuming no sales load, was 7.69%.
The average annual total return for the five-year period ended December 31,
1994, assuming a 4.50% sales load, was 5.98%. The average annual total return
for the same period, assuming no sales load, was 6.97%. The average annual
total return for the one year ended December 31, 1994, assuming a 4.50% sales
load, was -8.63%. The average annual total return for the same period,
assuming no sales load, was -4.32%. The average annual total return on Class D
Shares of the California Tax-Free Bond Fund since inception (July 1, 1993) to
December 31, 1994, was -0.85%. The average annual total return for the one
year ended December 31, 1994, was -5.00%.
As indicated in the Prospectus, the U.S. Government Income Fund
and the California Tax-Free Bond Fund may advertise certain yield information
for a class of shares. As and to the extent required by the Commission, yield
for a class of shares will be calculated based on a 30-day (or one month)
period, computed by dividing the net investment income per share of a class of
shares earned during the period by the maximum offering price per share of a
class of shares on the last day of the period, according to the following
formula: YIELD = 2[((a-b:-cd)+1)6-1], where a = dividends and interest earned
during the period; b = expenses accrued for the period (net of reimbursements);
c = the average daily number of shares of a class of shares outstanding during
the period that were entitled to receive dividends; and d = the maximum
offering price per share of a class of shares on the last day of the period.
The net investment income of a class of
19
<PAGE> 21
shares of either Fund includes actual interest income, plus or minus amortized
purchase discount (which may include original issue discount) or premium, less
accrued expenses. Realized and unrealized gains and losses on portfolio
securities are not included in net investment income. For purposes of sales
literature, yield also may be calculated on the basis of the net asset value
per share rather than the public offering price, provided that the yield data
derived pursuant to the calculation described above also are presented.
The yields on the Class A Shares of the U.S. Government Income
Fund and the California Tax-Free Bond Fund for the 30-day period ended December
31, 1994, assuming a 4.50% sales load, were 6.38% and 5.81%, respectively. The
yields for the same period, assuming no sales load, were 6.69% and 6.09%,
respectively. The yields on the Class D Shares of the U.S. Government Income
Fund and the California Tax-Free Bond Fund for the 30-day period ended December
31, 1994, were 6.33% and 6.07%, respectively.
The tax-equivalent yield for a class of shares of the California
Tax-Free Bond Fund also will be computed by dividing that portion of the yield
for a class of shares which is tax-exempt by one minus a stated income tax rate
and adding the product to that portion, if any, of the yield of such class that
is not tax-exempt. The tax equivalent yield on the Class A Shares of the
California Tax-Free Bond Fund for the 30-day period ended December 31, 1994
(assuming a 4.50% sales load and a 42.4% assumed federal and state tax rate)
was 10.09%. Assuming no sales load (and a 42.4% assumed federal and state tax
rate), the tax-equivalent yield of such class of shares for the 30-day period
ended December 31, 1994 was 10.50%. The tax-equivalent yield on the Class D
Shares for the 30-day period ended December 31, 1994 (assuming a 42.4% assumed
federal and state tax rate) was 10.54%.
The yields for the classes of shares of the U.S. Government Income
Fund and the California Tax-Free Bond Fund will fluctuate from time to time,
unlike bank deposits or other investments that pay a fixed yield for a stated
period of time, and do not provide a basis for determining future yields since
they are based on historical data. Yield is a function of portfolio quality,
composition, maturity and market conditions as well as the expenses allocated
to a particular class of shares.
In addition, investors should recognize that changes in the net
asset values of shares of the U.S. Government Income Fund and the California
Tax-Free Bond Fund will affect the yield of the respective class of shares for
any specified period, and such changes should be considered together with such
class' yield in ascertaining such class' total return to shareholders for the
period. Yield information for a class of shares may be useful in reviewing the
performance of the Fund and for providing a basis for comparison with
investment alternatives. The yield of a class of shares, however, may not be
comparable to the yields from investment alternatives because of differences in
the foregoing variables and differences in the methods used to value portfolio
securities, compute expenses and calculate yield.
From time to time and only to the extent the comparison is
appropriate for a class of shares of a Fund, the Company may quote the
performance or price-earning ratio of a class of shares of a Fund in
advertising and other types of literature as compared to the performance of the
20
<PAGE> 22
1-Year Treasury Bill Rate, S&P Index, the Dow Jones Industrial Average, the
Lehman Brothers 20+ Treasury Index, the Lehman Brothers 5-7 Year Treasury
Index, Donoghue's Money Fund Averages, Real Estate Investment Averages (as
reported by the National Association of Real Estate Investment Trusts), Gold
Investment Averages (provided by the World Gold Council), Bank Averages (which
is calculated from figures supplied by the U.S. League of Savings Institutions
based on effective annual rates of interest on both passbook and certificate
accounts), average annualized certificate of deposit rates (from the Federal
Reserve G-13 Statistical Releases or the Bank Rate Monitor), the Salomon One
Year Treasury Benchmark Index, the Consumer Price Index (as published by the
U.S. Bureau of Labor Statistics), Ten Year U.S. Government Bond Average, S&P's
Corporate Bond Yield Averages, Schabacter Investment Management Indices,
Salomon Brothers High Grade Bond Index, Lehman Brothers Long-Term High Quality
Government/Corporate Bond Index, other managed or unmanaged indices or
performance data of bonds, stocks or government securities (including data
provided by Ibbotson Associates), or by other services, companies, publications
or persons who monitor mutual funds on overall performance or other criteria.
The S&P Index and the Dow Jones Industrial Average are unmanaged indices of
selected common stock prices. The performance of a class of shares of a Fund
also may be compared to those of other mutual funds having similar objectives.
This comparative performance could be expressed as a ranking prepared by Lipper
Analytical Services, Inc., CDA Investment Technologies, Inc., Bloomberg
Financial Markets or Morningstar, Inc., independent services which monitor the
performance of mutual funds. The performance of a class of shares of a Fund
will be calculated by relating net asset value per share at the beginning of a
stated period to the net asset value of the investment, assuming reinvestment
of all gains distributions and dividends paid, at the end of the period. Any
such comparisons may be useful to investors who wish to compare the class' past
performance with that of its competitors. Of course, past performance cannot
be a guarantee of future results. The Company also may include, from time to
time, a reference to certain marketing approaches of the Distributor,
including, for example, a reference to a potential shareholder being contacted
by a selected broker or dealer. General mutual fund statistics provided by the
Investment Company Institute may also be used.
In addition, the Company also may use, in advertisements and other
types of literature, information and statements: (1) showing that bank savings
accounts offer a guaranteed return of principal and a fixed rate of interest,
but no opportunity for capital growth; and (2) describing Wells Fargo Bank, and
its affiliates and predecessors, as one of the first investment managers to
advise investment accounts using asset allocation and index strategies. The
Company also may include in advertising and other types of literature
information and other data from reports and studies prepared by the Tax
Foundation, including information regarding federal and state tax levels and
the related "Tax Freedom Day."
The Company also may use the following information in
advertisements and other types of literature, only to the extent the
information is appropriate for a class of shares of a Fund: (i) the Consumer
Price Index may be used to assess the real rate of return from an investment in
a class of shares of a Fund; (ii) other government statistics, including, but
not limited to, The Survey of Current Business, may be used to illustrate
investment attributes of a class of shares of a Fund or the general economic,
business, investment, or financial environment in which a Fund operates; (iii)
the effect of tax-deferred compounding on the investment returns of a class of
21
<PAGE> 23
shares of a Fund, or on returns in general, may be illustrated by graphs,
charts, etc., where such graphs or charts would compare, at various points in
time, the return from an investment in a class of shares of a Fund (or returns
in general) on a tax-deferred basis (assuming reinvestment of capital gains and
dividends and assuming one or more tax rates) with the return on a taxable
basis; and (iv) the sectors or industries in which a Fund invests may be
compared to relevant indices of stocks or surveys (e.g., S&P Industry Surveys)
to evaluate the historical performance or current or potential value of a class
of shares of a Fund with respect to the particular industry or sector.
In addition, performance information for a class of shares of the
Asset Allocation Fund may be compared, in reports and promotional literature,
to the S&P 500 Index, the Wilshire 5000 Equity Index, the Lehman Brothers 20+
Treasury Index, Donoghue's Money Fund Averages, the Lehman Brothers 5-7 Year
Treasury Index, or other appropriate managed or unmanaged indices of the
performance of various types of investments, so that investors may compare the
results of a class of shares of the Fund with those of indices widely regarded
by investors as representative of the security markets in general. Unmanaged
indices may assume the reinvestment of dividends, but generally do not reflect
deductions for administrative and management costs and expenses. Managed
indices generally do reflect such deductions.
From time to time, the Company also may include in advertisements
or other marketing materials a discussion of certain of the objectives of the
Asset Allocation Fund's investment strategy and a comparison of this strategy
with other investment strategies. In particular, the responsiveness of the
Fund to changing market conditions may be discussed. For example, the Company
may describe the benefits derived by having Wells Fargo Bank, as Investment
Adviser, monitor and reallocate investments among the three asset categories
described above and in the Prospectus. The Company's advertising or other
marketing materials also might set forth illustrations depicting examples of
recommended allocations in different market conditions. It may state, for
example, that when the model indicates that stocks represent a better value
than bonds or money market instruments, the Asset Allocation Fund might consist
of 70% stocks, 25% bonds and 5% money market instruments and that when the
model indicates that bonds represent a better value than stocks or money market
instruments, the balance of assets might shift to 60% bonds, 20% stocks and 20%
money market instruments.
The Company also may include, from time to time, a reference to
certain marketing approaches of the Distributor, including, for example, a
reference to a potential shareholder being contacted by a selected broker or
dealer.
The Company also may discuss in advertising and other types of
literature that one of the Funds has been assigned a rating by a nationally
recognized statistical rating organization ("NRSRO"), such as Moody's Investors
Service, Inc. ("Moody's") and Standard & Poor's Corporation ("S&P"). Such
rating would assess the creditworthiness of the investments held by the Fund.
The assigned rating would not be a recommendation to purchase, sell or hold the
Fund's shares since the rating would not comment on the market price of the
Fund's shares or the suitability of the Fund for a particular investor. In
addition, the assigned rating would be subject to change, suspension or
withdrawal as a result of changes in, or unavailability of, information
relating to the Fund or its investments. The Company may compare the
performance of a class of
22
<PAGE> 24
shares of a Fund with other investments which are assigned ratings by NRSROs.
Any such comparisons may be useful to investors who wish to compare a class'
past performance with other rated investments.
The Company also may disclose in advertising and other types of
literature, information and statements that the Company's investment adviser,
Wells Fargo Bank, is listed in Nelson Publications' ("Nelson's") "Top 20"
performance rankings as published in the 1994 edition of "America's Best Money
Managers." The Nelson survey ranks the performance of money managers in over
30 asset/style categories and is based on analysis of performance composites
and surveys of institutional money managers. The Company may also disclose in
advertising and other types of sales literature the assets and other categories
of assets under management by the Company's investment adviser.
DETERMINATION OF NET ASSET VALUE
Net asset value per share for each class of a Fund is determined
by Wells Fargo Bank on each day the Exchange is open for trading.
Securities of the Funds for which market quotations are available
are valued at latest prices. Securities of the Asset Allocation Fund 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.
The assets of the U.S. Government Income Fund and the California Tax-Free Bond
Fund, other than debt securities maturing in 60 days or less, are valued at
latest quoted bid prices. Futures contracts and options listed on a national
exchange are valued at the last sale price on the exchange on which they are
traded at the close of the Exchange, 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 a reputable independent pricing service approved by the Board of
Directors. Prices provided by an independent pricing service may be determined
without exclusive reliance on quoted prices and may take into account
appropriate factors such as institutional-size trading in similar groups of
securities, yield, quality, coupon rate, maturity, type of issue, trading
characteristics and other market data. All other securities and other assets
of the Funds for which current market quotations are not readily available are
valued at fair value as determined in good faith by the Company's Directors and
in accordance with procedures adopted by the Directors.
23
<PAGE> 25
PORTFOLIO TRANSACTIONS
The Company has no obligation to deal with any dealer or group of
dealers in the execution of transactions in portfolio securities. Subject to
policies established by the Company's Board of Directors, Wells Fargo Bank is
responsible for each Fund's portfolio decisions and the placing of portfolio
transactions. In placing orders, it is the policy of the Company to obtain the
best results taking into account the dealer's general execution and operational
facilities, the type of transaction involved and other factors such as the
dealer's risk in positioning the securities involved. While Wells Fargo Bank
generally seeks reasonably competitive spreads or commissions, the Funds will
not necessarily be paying the lowest spread or commission available.
Except in the case of equity securities purchased by the Asset
Allocation Fund, 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. Each of
the Funds also will purchase portfolio securities in underwritten offerings and
may purchase securities directly from the issuer. Generally, municipal
obligations and taxable money market securities are traded on a net basis and
do not involve brokerage commissions. The cost of executing a Fund's portfolio
securities transactions will consist primarily of dealer spreads and
underwriting commissions. Under the Act, persons affiliated with the Company
are prohibited from dealing with the Company as a principal in the purchase and
sale of securities unless an exemptive order allowing such transactions is
obtained from the Commission or an exemption is otherwise available. The Fund
may purchase securities from underwriting syndicates of which Stephens or Wells
Fargo Bank is a member under certain conditions in accordance with the
provisions of a rule adopted under the Act and in compliance with procedures
adopted by the Board of Directors.
Wells Fargo Bank, as the Investment Adviser of each of the Funds,
may, in circumstances in which two or more dealers are in a position to offer
comparable results for a Fund portfolio transaction, give preference to a
dealer that has provided statistical or other research services to Wells Fargo
Bank. By allocating transactions in this manner, Wells Fargo Bank is able to
supplement its research and analysis with the views and information of
securities firms. Information so received will be in addition to, and not in
lieu of, the services required to be performed by Wells Fargo Bank under the
Advisory Contracts, and the expenses of Wells Fargo Bank will not necessarily
be reduced as a result of the receipt of this supplemental research
information. Furthermore, research services furnished by dealers through which
Wells Fargo Bank places securities transactions for a Fund may be used by Wells
Fargo Bank in servicing its other accounts, and not all of these services may
be used by Wells Fargo Bank in connection with advising the Funds.
Asset Allocation Fund. Purchases and sales of equity securities
on a securities exchange are effected through brokers who charge a negotiated
commission for their services. Orders may be directed to any broker including,
to the extent and in the manner permitted by applicable law, Stephens or Wells
Fargo Securities Inc. In the over-the- counter market, securities are
generally traded on a "net" basis with dealers acting as principal for their
own accounts without a stated commission, although the price of the security
usually includes a profit to the
24
<PAGE> 26
dealer. In underwritten offerings, securities are purchased at a fixed price
that includes an amount of compensation to the underwriter, generally referred
to as the underwriter's concession or discount. The Asset Allocation Fund will
not deal with Stephens, Wells Fargo Bank or their affiliates in any transaction
in which any of them acts as principal without an exemptive order from the
Commission.
In placing orders for portfolio securities of the Asset Allocation
Fund, Wells Fargo Bank is required to give primary consideration to obtaining
the most favorable price and efficient execution. This means that Wells Fargo
Bank will seek to execute each transaction at a price and commission, if any,
that provide the most favorable total cost or proceeds reasonably attainable in
the circumstances. While Wells Fargo Bank will generally seek reasonably
competitive spreads or commissions, the Asset Allocation Fund will not
necessarily be paying the lowest spread or commission available. Commission
rates are established pursuant to negotiations with the broker based on the
quality and quantity of execution services provided by the broker in the light
of generally prevailing rates. The allocation of orders among brokers and the
commission rates paid are reviewed periodically by the Board of Directors.
For the fiscal year ended December 31, 1994, the Asset Allocation
Fund paid brokerage commissions in the amount of $5,600.37.
On December 31, 1994, the Asset Allocation Fund did not own any
securities of its "regular brokers or dealers," as that term is defined in the
Act, or their parents.
On December 31, 1994, the California Tax-Free Bond Fund did not
own any securities of its "regular brokers or dealers," as defined in the Act,
or their parents.
On December 31, 1994, the U.S. Government Income Fund owned
securities of its "regular brokers or dealers," as defined in the Act, or their
parents as follows: $694,000 of Goldman Sachs & Co.
Portfolio Turnover. The portfolio turnover rate is not a limiting
factor when Wells Fargo Bank deems portfolio changes appropriate.
FEDERAL INCOME TAXES
The Prospectus describes generally the tax treatment of
distributions by the Company. This section of the Statement of Additional
Information includes additional information concerning federal income taxes.
Qualification as a regulated investment company under the Code
requires, among other things, that (a) at least 90% of each Fund's annual gross
income be derived from interest, payments with respect to securities loans,
dividends and gains from the sale or other disposition of securities or options
thereon; (b) each Fund derives less than 30% of its gross income from gains
from the sale or other disposition of securities or options thereon held for
less than three months; and (c) each Fund diversifies its holdings so that, at
the end of each quarter of the taxable year,
25
<PAGE> 27
(i) at least 50% of the market value of the Fund's assets is represented by
cash, government securities and other securities limited in respect of any one
issuer to an amount not greater than 5% of the Fund's assets and 10% of the
outstanding voting securities of such issuer, and (ii) not more than 25% of the
value of its assets is invested in the securities of any one issuer (other than
U.S. Government securities 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. As regulated investment companies, the Funds will not be
subject to federal income tax on their net investment income and net capital
gains distributed to their shareholders, provided that they distribute to their
stockholders at least 90% of the sum of their net investment income and net
tax- exempt income earned in each year.
A 4% nondeductible excise tax will be imposed on each Fund to the
extent it does not meet certain minimum distribution requirements by the end of
each calendar year. This excise tax will not apply to tax-exempt income of the
California Tax-Free Bond Fund. For this purpose, any income or gain retained
by a Fund that is subject to income tax will be considered to have been
distributed by year-end. In addition, dividends and distributions of taxable
income declared payable as of a record date in October, November or December of
any calendar year are deemed under the Code to have been received by the
shareholders on December 31 of that calendar year if the dividend is actually
paid in the following January. Such dividends will, accordingly, be subject to
income tax for the year in which the record date falls. Each Fund intends to
distribute substantially all of its net investment income and net capital gains
and, thus, expects not to be subject to the excise tax.
Income and dividends received by the Asset Allocation Fund or the
U.S. Government Income Fund from sources within foreign countries may be
subject to withholding and other taxes (generally at rates from 10% to 40%)
imposed by such countries. Tax conventions between certain countries and the
United States may reduce or eliminate such taxes. Because not more than 50% of
the value of the total assets of any Fund is expected to consist of securities
of foreign issuers, no Fund will be eligible to elect to "pass through" foreign
tax credits to shareholders.
Gains or losses on sales of portfolio securities by a Fund
generally will be long-term capital gains or losses if the securities have been
held by it for more than one year, except in certain cases including where a
Fund acquires a put or writes a call thereon. Other gains or losses on the
sale of securities will be short-term capital gains or losses. To the extent
that a Fund recognizes long-term capital gains, such gains will be distributed
at least annually. Such distributions will be taxable to shareholders as
long-term capital gains, regardless of how long a shareholder has held Fund
shares. Such distributions will be designated as a capital gains distribution
in a written notice mailed by the Fund to shareholders not later than 60 days
after the close of the Fund's taxable year. Gain recognized on the disposition
of a debt obligation (including tax-exempt obligations purchased after April
30, 1993) purchased by the Fund at a market discount (generally, at a price
less than its principal amount) will be treated as ordinary income to the
extent such accrued market discount had not been previously included as taxable
income during the period of time the Fund held the debt obligation.
26
<PAGE> 28
As of the printing of this Statement of Additional Information,
the maximum individual tax rate applicable to ordinary income is 39.60%; the
maximum individual tax rate applicable to net capital gains is 28%; and the
maximum corporate tax rate applicable to ordinary income and net capital gains
is 35% (however, to eliminate the benefit of lower marginal corporate income
tax rates, corporations which have taxable income in excess of $100,000 for a
taxable year will be required to pay an additional amount of income tax of up
to $11,750 and corporations which have taxable income tax of up to $15,000,000
for a taxable year will be required to pay an additional amount of tax of up to
$100,000). Generally, the amount of tax payable by an individual or
corporation will be affected by a combination of tax laws covering, for
example, deductions, credits, deferrals, exemptions, sources of income and
other matters.
If a shareholder exchanges or otherwise disposes of shares of the
Fund within 90 days of having acquired such shares, and if, as a result of
having acquired those shares, the shareholder subsequently pays a reduced sales
charge for shares of the Fund, or of a different fund, the sales charge
previously incurred acquiring the Fund's shares shall not be taken into account
(to the extent such previous sales charges do not exceed the reduction in sales
charges) for the purpose of determining the amount of gain or loss on the
exchange, but will be treated as having been incurred in the acquisition of
such other shares.
Also, any loss realized on a redemption or exchange of shares of a
Fund will be disallowed to the extent shares are reacquired within the 61-day
period beginning 30 days before and ending 30 days after the shares are
disposed of.
If an option written by the Fund lapses or is terminated through a
closing transaction, such as a repurchase by the Fund of the option from its
holder, the Fund will realize a short-term capital gain or loss, depending on
whether the premium income is greater or less than the amount paid by the Fund
in the closing transaction. Some realized capital losses may be deferred if
they result from a position that is part of a tax straddle.
If securities are sold by a Fund pursuant to the exercise of a
call option written by it, such Fund will add the premium received to the sale
price of the securities delivered in determining the amount of gain or loss on
the sale. If securities are purchased by the Fund pursuant to the exercise of
a put option written by it, such Fund will subtract the premium received from
its cost basis in the securities purchased. The requirement that each Fund
derive less than 30% of its gross income from gains from the sale of securities
held for less than three months may limit the Fund's ability to write options.
The amount of any gain or loss realized by a Fund on closing out a
futures contract will generally result in a realized capital gain or loss for
tax purposes. Some realized capital losses may be deferred if they result from
a position that is part of a tax straddle. Futures contracts held at the end
of each fiscal year will be required to be "marked to market" for federal
income tax purposes. In this regard, they will be deemed to have been sold at
market value. Sixty percent (60%) of any net gain or loss recognized on these
deemed sales and sixty percent (60%) of any net realized gain or loss from any
actual sales, will be treated as long-term capital gain or loss, and the
remainder will be treated as short-term capital gain or loss. Transactions
that qualify as
27
<PAGE> 29
designated hedges are excepted from the marked to market rule and the "60%/40%"
rule. Currency transactions may be subject to Section 988 of the Code, under
which foreign currency gains or losses would generally be computed separately
and treated as ordinary income or losses. The Fund will attempt to monitor
Section 988 transactions to avoid an adverse tax impact.
If, in the opinion of the Company, ownership of its shares has or
may become concentrated to an extent that could cause the Company to be deemed
a personal holding company within the meaning of the Code, the Company may
require the redemption of shares or reject any order for the purchase of shares
in an effort to prevent such concentration.
Foreign Shareholders. Under the Code, distributions of net
investment income by a Fund to a nonresident alien individual, nonresident
alien fiduciary of a trust or estate, foreign corporation, or foreign
partnership (a "foreign shareholder") will be subject to U.S. withholding tax
(at a rate of 30% or a lower treaty rate). Withholding will not apply if a
dividend paid by a Fund to a foreign shareholder is "effectively connected"
with a U.S. trade or business, in which case the reporting and withholding
requirements applicable to U.S. citizens or domestic corporations will apply.
Distributions of net long-term capital gains are not subject to tax
withholding, but in the case of a foreign shareholder who is a nonresident
alien individual, such distributions ordinarily will be subject to U.S. income
tax at a rate of 30% if the individual is physically present in the U.S. for
more than 182 days during the taxable year.
Other Matters. Investors should be aware that the investments to
be made by the Funds may involve sophisticated tax rules such as the original
issue discount, marked to market and real estate mortgage investment conduit
("REMIC") rules that would result in income or gain recognition by the Funds
without corresponding current cash receipts. Although the Funds will seek to
avoid significant noncash income, such noncash income could be recognized by
the Funds, in which case a Fund may distribute cash derived from other sources
in order to meet the minimum distribution requirements described above.
Special Tax Considerations for the California Tax-Free Bond Fund.
Federal -- The portion of total dividends paid by the California
Tax-Free Bond Fund with respect to any taxable year that qualifies for
exclusion from gross income ("exempt-interest dividends") will be the same for
all shareholders receiving dividends during such year. In order for the
California Tax-Free Bond Fund to pay exempt- interest dividends during any
taxable year, at the close of each fiscal quarter at least 50% of the aggregate
value of the California Tax-Free Bond Fund assets must consist of tax-exempt
securities. Not later than 60 days after the close of its taxable year, the
California Tax-Free Bond Fund will notify each shareholder of the portion of
the dividends paid with respect to such taxable year which constitutes
exempt-interest dividends. The aggregate amount of dividends so designated
cannot exceed the excess of the amount of interest excludable from gross income
under Section 103 of the Code received by such Fund during the taxable year
over any amounts disallowed as deductions under Sections 265 and 171(a)(2) of
the Code. In addition, market discount earned on tax-exempt obligations will
not qualify as tax-exempt income.
28
<PAGE> 30
The Code treats interest on private activity bonds, as defined
therein, as an item of tax preference subject to an alternative minimum tax
("AMT") on individuals and corporations at the applicable tax rates. As of the
printing of the Statement of Additional Information, individuals are subject to
an AMT at a maximum rate of 28% and corporations at a rate of 20%. In addition
to tax-exempt interest on private activity bonds, other "tax preference items"
and "adjustments" which must be considered when calculating the AMT are state
and local taxes and the so-called bargain element of incentive stock options
(the difference between the exercise price and the stock's trading price when
the options are exercised). Shareholders will not be permitted to deduct any
of their share of Fund expenses in computing alternative minimum taxable
income. With respect to corporate shareholders of the Fund, all interest on
municipal bonds and other tax-exempt obligations, including exempt-interest
dividends paid by the Fund, is included in adjusted current earnings in
calculating federal alternative minimum taxable income, and may also affect
corporate federal "environmental tax" liability.
In addition, any loss realized by a shareholder upon the sale or
redemption of shares of a Fund held less than six months is disallowed to the
extent of any exempt-interest dividends received by the shareholder.
Shareholders who may be "substantial users" (or related persons of
substantial users) with respect to municipal securities held by the California
Tax-Free Bond Fund should consult their tax advisers to determine whether
exempt-interest dividends and California exempt-interest dividends (as defined
below) paid by the Fund with respect to such obligations retain their federal
and California tax exclusions. In this connection, the rules regarding the
possible unavailability of exempt dividend treatment to substantial users are
similar for federal and California state tax purposes.
California -- Moreover, if at the close of each quarter of the
California Tax-Free Bond Fund's taxable year, at least 50% of the value of its
total assets consists of obligations the interest on which, if such obligations
were held by an individual, would be exempt from California personal income tax
(under either the laws of California or of the United States), the Fund will be
entitled to pay dividends to its shareholders which will be exempt from
California personal income tax (hereinafter referred to as "California
exempt-interest dividends"). Under normal market conditions, the California
Tax-Free Bond Fund will invest primarily in municipal securities of the State
of California, its cities, municipalities and other political authorities. The
California Tax-Free Bond Fund intends to qualify under the above requirements
so that it can pay California exempt-interest dividends.
Not later than 60 days after the close of its taxable year, the
California Tax-Free Bond Fund will notify each shareholder of the portion of
the dividends paid which constitutes California exempt-interest dividends with
respect to such taxable year. The total amount of California exempt-interest
dividends paid by the California Tax-Free Bond Fund to all of its shareholders
with respect to any taxable year cannot exceed the amount of interest received
by the Fund during such year on California municipal securities and other
obligations the interest on which is tax exempt, less any expenses allocable to
such tax exempt income. Dividends paid by the California
29
<PAGE> 31
Tax-Free Bond Fund in excess of this limitation will be treated as ordinary
dividends subject to California personal income tax at ordinary rates.
Long-term and/or short-term capital gain distributions will not
constitute California exempt-interest dividends and will be taxed as capital
gains or ordinary dividends, respectively. Moreover, interest on indebtedness
incurred by a shareholder to purchase or carry California Tax-Free Bond Fund
shares is not deductible for California personal income tax purposes to the
extent the shareholder receives California exempt-interest dividends during his
or her taxable year. Exempt-interest dividends will be tax exempt for purposes
of the California personal income tax. For corporate shareholders, dividends
will be subject to the corporate franchise taxes in California.
Other Matters. Shares of the California Tax-Free Bond Fund would
not be suitable for tax-exempt institutions and may not be suitable for
retirement plans qualified under Section 401 of the Code, H.R. 10 plans and
IRAs since such plans and accounts are generally tax-exempt and, therefore,
would not benefit from the exempt status of dividends from such Fund. Such
dividends would be ultimately taxable to the beneficiaries when distributed to
them.
CAPITAL STOCK
Each of the Funds is comprised of two classes of shares, Class A
Shares and Class D Shares. With respect to matters that affect one class but
not another, the shareholders vote as a class; for example, the approval of a
Plan. Subject to the foregoing, on any matter submitted to a vote of
shareholders, all shares then entitled to vote will be voted separately by Fund
or portfolio unless otherwise required by the Act, in which case all shares
will be voted in the aggregate. For example, a change in a Fund's fundamental
investment policies would be voted upon only by shareholders of the Fund
involved. Additionally, approval of the advisory contract is a matter to be
determined separately by Fund or portfolio. Approval by the shareholders of
one Fund or portfolio is effective as to that Fund or portfolio whether or not
sufficient votes are received from the shareholders of the other Funds or
portfolios to approve the proposal as to those Funds or portfolios. As used in
the Prospectus and in this Statement of Additional Information, the term
"majority," when referring to approvals to be obtained from shareholders of a
class of shares of a Fund means the vote of the lesser of (i) 67% of the shares
of a class of shares represented at a meeting if the holders of more than 50%
of the outstanding shares of such class are present in person or by proxy, or
(ii) more than 50% of the outstanding class of shares. The term "majority,"
when referring to the approvals to be obtained from shareholders of the Company
as a whole means the vote of the lesser of (i) 67% of the Company's shares
represented at a meeting if the holders of more than 50% of the Company's
outstanding shares are present in person or by proxy, or (ii) more than 50% of
the Company's outstanding shares. Shareholders are entitled to one vote for
each full share held and fractional votes for fractional shares held.
The Company may dispense with annual meetings of shareholders in
any year in which it is not required to elect directors under the Act.
However, the Company undertakes to hold a special meeting of its shareholders
for the purpose of voting on the question of removal of a
30
<PAGE> 32
director or directors if requested in writing by the holders of at least 10% of
the Company's outstanding voting securities, and to assist in communicating
with other shareholders as required by Section 16(c) of the Act.
Each share of a class of a Fund or portfolio represents an equal
proportional interest in that Fund or portfolio with each other share of the
same class and is entitled to such dividends and distributions out of the
income earned on the assets belonging to that Fund or portfolio as are declared
in the discretion of the Directors. In the event of the liquidation or
dissolution of the Company, shareholders of a Fund or portfolio are entitled to
receive the assets attributable to that Fund or portfolio that are available
for distribution, and a distribution of any general assets not attributable to
a particular Fund or portfolio that are available for distribution in such
manner and on such basis as the Directors in their sole discretion may
determine.
Shareholders are not entitled to any preemptive rights. All
shares, when issued, will be fully paid and non-assessable by the Company.
As of April 13, 1995, the shareholders identified below were known
by the Company to own the percentage indicated below of outstanding Class A
Shares of the Funds in the following capacity:
<TABLE>
<CAPTION>
Name and Address Percentage
Name of Fund of Shareholder of Class Capacity
------------ -------------- -------- --------
<S> <C> <C> <C>
Asset Allocation Fund
Class A Shares Stephens Inc. 7.39% Record
- --------------------- For Exclusive Benefit
of Customers
P.O. Box 34127
Little Rock, AR 72203
Asset Allocation Fund
Class D Shares Merrill Lynch Pierce 16.01% Record
- --------------------- Fenner & Smith Inc.
Trade House Account
Attn: Book Entry
P. O. Box 30561
New Brunswick, NJ 08989
Stephens Inc. 10.73% Record
For Exclusive Benefit
of Customers
P. O. Box 34127
Little Rock, AR 72203
</TABLE>
31
<PAGE> 33
<TABLE>
<S> <C> <C> <C>
U.S. Government
Income Fund
Class D Shares Merrill Lynch Pierce 19.74% Record
- --------------- Fenner & Smith Inc.
Trade House Account
Attn: Book Entry
P. O. Box 30561
New Brunswick, NJ 08989
Sisters of St. Francis 6.60% Record
Attn: Sis. Virginia Spiegel
609 South Convert Road
Aston, PA 19014
Rocky Mountain Lions Eye 7.04% Record
Institute Foundation, Inc.
c/o Harold Hein
7087 Parfet Street
Arvada, CO 80004
Northern Itasca Health 5.70% Record
Care Center
P.O. Box 258
Bigfork, MN 56628
Principal Financial 6.92% Record
Cust FBO
KO KMART Fund
P.O. Box 508
Dallas, TX 75221
California Tax-Free
Bond Fund
Class D Shares Merrill Lynch Pierce 33.21% Record
- -------------------- Fenner & Smith Inc.
Trade House Account
Attn: Book Entry
P. O. Box 30561
New Brunswick, NJ 08989
Stephens Inc. 34.74% Record
For Exclusive Benefit
of Customers
P. O. Box 34127
Little Rock, AR 72203
</TABLE>
32
<PAGE> 34
OTHER
The Registration Statement, including the Prospectus, the
Statement of Additional Information and the exhibits filed therewith, may be
examined at the office of the Commission in Washington, D.C. Statements
contained in the Prospectus or the Statement of Additional Information as to
the contents of any contract or other document referred to herein or in the
Prospectus are not necessarily complete, and, in each instance, reference is
made to the copy of such contract or other document filed as an exhibit to the
Registration Statement, each such statement being qualified in all respects by
such reference. The Annual Report for the year ended December 31, 1994 will be
sent free of charge to any shareholder who requests the Annual Report.
CUSTODIAN AND TRANSFER AND
DIVIDEND DISBURSING AGENT
Wells Fargo Bank has been retained to act as Transfer and Dividend
Disbursing Agent for the Funds and as Custodian for the U.S. Government Income
Fund and the California Tax-Free Bond Fund. WFITC acts as Custodian for the
Asset Allocation Fund. The Custodian, among other things, maintains a custody
account or accounts in the name of each Fund; receives and delivers all assets
for each Fund upon purchase and upon sale or maturity; collects and receives
all income and other payments and distributions on account of the assets of
each Fund and pays all expenses of each Fund. For their services as Custodian
to the Funds, Wells Fargo Bank and WFITC each receive an asset-based fee and
transaction charges. For its services as transfer and dividend disbursing
agent to the Funds, Wells Fargo Bank receives a base fee and per-account fees.
INDEPENDENT AUDITORS
KPMG Peat Marwick LLP has been selected as the independent
auditors for the Company. KPMG Peat Marwick LLP provides audit services, tax
return preparation and assistance and consultation in connection with review of
certain Securities and Exchange Commission filings. The address of KPMG Peat
Marwick LLP is Three Embarcadero Center, San Francisco, California 94111.
FINANCIAL INFORMATION
The audited financial statements and portfolio of investments
contained in the Company's Annual Report for the most recent fiscal year are
hereby incorporated by reference in this Statement of Additional Information.
The Annual Report will be sent free of charge with this
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Statement of Additional Information to any shareholder who requests the
Statement of Additional Information.
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APPENDIX
The following is a description of the ratings given by Moody's and
S&P to corporate and municipal bonds, corporate and municipal commercial paper
and municipal notes.
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.
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."
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Municipal Notes
Moody's: The highest ratings for state and municipal short-term
obligations are "MIG 1," "MIG 2," and "MIG 3" (or "VMIG 1," "VMIG 2" and "VMIG
3" in the case of an issue having a variable rate demand feature). Notes rated
"MIG 1" or "VMIG 1" are judged to be of the "best quality." Notes rated "MIG
2" or "VMIG 2" are of "high quality," with margins of protections "ample
although not as large as in the preceding group." Notes rated "MIG 3" or "VMIG
3" are of "favorable quality," with all security elements accounted for, but
lacking the strength of the preceding grades.
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.
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