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STAGECOACH FUNDS, INC.
Telephone: 1-800-222-8222
STATEMENT OF ADDITIONAL INFORMATION
DATED JUNE 3, 1996
INSTITUTIONAL CLASS SHARES
CALIFORNIA TAX-FREE BOND FUND
CALIFORNIA TAX-FREE INCOME FUND
GINNIE MAE FUND
GROWTH AND INCOME FUND
MONEY MARKET MUTUAL FUND
SHORT-INTERMEDIATE U.S. GOVERNMENT INCOME FUND
__________________________________
Stagecoach Funds, Inc. (the "Company") is an open-end, series investment
company. This Statement of Additional Information ("SAI") contains information
about Institutional Class shares in six funds of the Stagecoach Family of Funds
- -- the CALIFORNIA TAX-FREE BOND FUND (the "Bond Fund"), the CALIFORNIA TAX-FREE
INCOME FUND (the "Income Fund"), the GINNIE MAE FUND, the GROWTH AND INCOME
FUND (the "Growth Fund"), the MONEY MARKET MUTUAL FUND and the
SHORT-INTERMEDIATE U.S. GOVERNMENT INCOME FUND (the "Government Income Fund")
(each a "Fund" and collectively, the "Funds"). The investment objective of
each Fund is described in its respective Prospectus under "How the Fund(s)
Work(s) -- Investment Objective(s) and Policies."
This SAI is not a prospectus and should be read in conjunction with each
Fund's Prospectus. All terms used in this SAI that are defined in the Funds'
Prospectuses have the meanings assigned in the respective Prospectus. A copy
of the Funds' Prospectuses may be obtained free of charge by writing Stephens,
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>
<S> <C>
Investment Restrictions ......................... 3
Additional Permitted Investment Activities ...... 7
Special Considerations Affecting
California Municipal Obligations ................ 13
Management ...................................... 14
Performance Calculations ........................ 20
Determination of Net Asset Value ................ 23
Portfolio Transactions .......................... 24
Fund Expenses............................ ....... 26
Additional Purchase and Redemption Information .. 26
Federal Income Taxes ............................ 27
Capital Stock ................................... 32
Other ........................................... 33
Independent Auditors ............................ 33
Financial Information ........................... 34
SAI Appendix .................................... A-1
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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 a Fund's investments in that industry would
be 25% or more of the current value of the Fund's total assets, provided that
there is no limitation with respect to investments in (i) obligations of the
U.S. Government, its agencies or instrumentalities ("U.S. Government
obligations"), and (ii) with respect only to the Bond and Income Funds,
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), and (iii) with respect to the Money Market Mutual
Fund, the obligations of domestic banks (for the purpose of this restriction,
domestic bank obligations do not include obligations of U.S. branches of
foreign banks or obligations of foreign branches of U.S. banks);
(2) underwrite securities of other issuers, except to the extent that the
purchase of permitted investments (which includes municipal securities for the
Bond and Income Fund) directly from the issuer thereof or from an underwriter
for an issuer and the later disposition of such securities in accordance with a
Fund's investment program may be deemed to be an underwriting; and
(3) make investments for the purpose of exercising control or management.
THE GINNIE MAE, GOVERNMENT INCOME AND GROWTH FUNDS MAY NOT:
(1) purchase interests, leases, or limited partnership interests in oil,
gas, or other mineral exploration or development programs;
(2) purchase or sell real estate or real estate limited partnerships
(other than securities secured by real estate or interests therein or
securities issued by companies that invest in real estate or interests
therein);
(3) purchase commodities or commodity contracts (including futures
contracts), except that the Funds may purchase securities of an issuer which
invests or deals in commodities or commodity contracts;
(4) purchase securities on margin (except for short-term credits necessary
for the clearance of transactions and, with respect to the Ginnie Mae and
Growth Funds, except for
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margin payments in connection with options, futures and options on futures) or
make short sales of securities; and
(5) purchase securities of any issuer (except U.S. Government obligations)
if, with respect to 100% of the Ginnie Mae and Growth Funds' total assets, and
only 75% of the Government Income Fund's total assets, as a result, more than
5% of the value of a Fund's total assets would be invested in the securities of
any one issuer or with respect to 100% of each Fund's total assets the Fund's
ownership would be more than 10% of the outstanding voting securities of such
issuer.
THE BOND, INCOME AND MONEY MARKET MUTUAL FUNDS MAY NOT:
(1) purchase securities on margin (except for short-term credits necessary
for the clearance of transactions, except with regard to the Bond Fund, for
margin payments in connection with options, futures and options on futures) or
make short sales of securities;
(2) write, purchase or sell puts, calls, options or any combination
thereof, and with regard to the Money Market Mutual Fund write, purchase or
sell warrants, except that all Funds may purchase securities with put rights in
order to maintain liquidity;
(3) issue senior securities, except that a Fund may borrow from banks up
to 10% of the current value of its net assets for temporary purposes only in
order to meet redemptions, and these borrowings may be secured by the pledge of
up to 10% of the current value of the Fund's net assets (but investments may
not be purchased while any such outstanding borrowings exceed 5% of its net
assets); and
(4) purchase or sell real estate or real estate limited partnerships
(other than municipal obligations with respect to the Bond Fund and the Income
Fund, or other than money market securities with respect to the Money Market
Mutual Fund, or with respect to each Fund other securities secured by real
estate or interests therein or securities issued by companies that invest in
real estate or interests therein), commodities or commodity contracts
(including futures contracts);
THE GINNIE MAE AND GROWTH FUNDS MAY NOT:
(1) write, purchase or sell puts, calls, straddles, spreads, warrants,
options or any combination thereof, and except that the Growth Fund may
purchase securities with put rights in order to maintain liquidity, and may
invest up to 5% of its net assets in warrants in accordance with its investment
policies as stated below; and
(2) issue senior securities, except that the Growth Fund may borrow from
banks up to 10% of the current value of its net assets for temporary purposes
only in order to meet redemptions, and these borrowings may be secured by the
pledge of up to 10% of the current value of the Fund's net assets (but
investments may not be purchased while any such outstanding borrowings exceed
5% of its net assets), and except that the Ginnie Mae Fund may borrow up to
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20% of the current value of the Fund's net assets for temporary purposes only
in order to meet redemptions, and these borrowings may be secured by the pledge
of up to 20% of the current value of the Fund's net assets (but investments may
not be purchased by the Fund while any such outstanding borrowings exceed 5% of
the Fund's net assets).
THE GOVERNMENT INCOME FUND MAY NOT:
(1) write, purchase or sell straddles, spreads, warrants, or any
combination thereof;
(2) borrow money or issue senior securities as defined in the Investment
Company Act of 1940 (the "1940 Act"), except that the Fund may borrow from
banks up to 10% of the current value of its net assets for temporary purposes
only in order to meet redemptions, and these borrowings may be secured by the
pledge of up to 10% of the current value of the Fund's net assets (but
investments may not be purchased while any such outstanding borrowings exceed
5% of its net assets), except that the Fund may issue multiple classes of
shares in accordance with applicable laws, rules, regulations or orders; and
(3) make loans, except that the Fund may purchase or hold debt instruments
or lend its portfolio securities in accordance with its investment policies,
and may enter into repurchase agreements.
THE INCOME AND MONEY MARKET MUTUAL FUNDS MAY NOT:
(1) make loans of portfolio securities, (with regard to the Income Fund,
having a value that exceeds 50% of the current value of its total assets), or
other assets with regard to the Money Market Mutual Fund, provided that, for
purposes of this restriction, loans will not include the purchase of fixed time
deposits, repurchase agreements, commercial paper and other short-term
obligations, and other types of debt instruments commonly sold in public or
private offerings.
With respect to loans of portfolio securities, the Funds do not intend to
engage in securities loans during the current year. If a Fund were to engage
in securities loans, the Fund would do so in compliance with SEC guidelines
applicable to these transactions, including limiting all loans to a value not
exceeding one third of the current value of its total assets.
The Funds are subject to the following non-fundamental policies; that is,
they may be changed by a majority vote of the Board of Directors without
shareholder approval:
NONE OF THE FUNDS MAY:
(1) purchase or retain securities of any issuer if the Officers or
Directors of the Company or the investment adviser owning beneficially more
than one-half of one percent (0.5%) of the securities of the issuer together
own beneficially more than 5% of such securities; and
(2) purchase securities of issuers who, with their predecessors, have
been in existence less than three years, unless the securities are fully
guaranteed or insured by the U.S. Government,
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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.
THE BOND, MONEY MARKET MUTUAL, INCOME, GINNIE MAE AND GROWTH FUNDS MAY
NOT:
(1) 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.
THE BOND, MONEY MARKET MUTUAL AND INCOME FUNDS MAY NOT:
(1) purchase interests, leases, or limited partnership interests in oil,
gas, or other mineral exploration or development programs; and
(2) invest more than 10% of the current value of its net assets in
repurchase agreements maturing in more than seven days or other illiquid
securities (including restricted securities), with respect to the Bond Fund.
The Money Market Mutual Fund may not invest more than 10% of the current value
of its net assets that are illiquid by virtue of the absence of a readily
available market or legal or contractual restriction on resale and fixed time
deposits that are subject to withdrawal penalties and that have maturities of
more than seven days. The Income Fund may not invest more than 15% of its net
assets in illiquid securities. For this purpose, illiquid securities include,
among others (a) securities that are illiquid by virtue of the absence of a
readily available market or legal or contractual restrictions on resale, (b)
fixed time deposits that are subject to withdrawal penalties and that have
maturities of more than seven days, (c) repurchase agreements not terminable
within seven days.
THE INCOME FUND MAY NOT:
(1) invest more than 15% of its net assets in illiquid securities. For
this purpose, illiquid securities include, among others, (a) securities that
are illiquid by virtue of the absence of a readily available market or legal or
contractual restrictions on resale, (b) fixed time deposits that are subject to
withdrawal penalties and that have maturities of more than seven days, and (c)
repurchase agreements not terminable within seven days; and
(2) invest more than 5% of its assets at the time of purchase in warrants
and not more than 2% of its net assets in warrants that are not listed on the
New York or American Stock Exchange.
In addition, the Government Income Fund reserves the right to invest up to
15% 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
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days, repurchase agreements maturing in more than seven days or other illiquid
securities. However, as long as the Fund's shares are registered for sale in a
state that imposes a lower limit on the percentage of a fund's assets that may
be so invested, the Fund will comply with such lower limit. The fund presently
is limited to investing 10% of its net assets in such securities due to limits
applicable in several states.
The Money Market Mutual Fund may not purchase or sell real estate limited
partnership interests.
The Growth and Ginnie Mae Fund may not invest more than 10% of the current
value of its net assets in repurchase agreements maturing in more than seven
days or other illiquid securities (including restricted securities).
In addition, as provided in Rule 2a-7 under the 1940 Act, the Money Market
Mutual Fund may only purchase "Eligible Securities" (as defined in Rule 2a-7)
and only if, immediately after such purchase: the Money Market Mutual Fund
would have no more than 5% of its total assets in "First Tier Securities" (as
defined in Rule 2a-7) of any one issuer, excluding government securities and
except as otherwise permitted for temporary purposes and for certain guarantees
and unconditional puts; the Money Market Mutual Fund would own no more than 10%
of the voting securities of any one issuer; the Money Market Mutual Fund would
have no more than 5% of its total assets in "Second Tier Securities" (as
defined in Rule 2a-7); and the Money Market Mutual Fund would have no more than
the greater of $1 million or 1% of its total assets in Second Tier Securities
of any one issuer.
Further, all 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 1940 Act, provided that any such purchases will be limited to temporary
investments in shares of unaffiliated investment companies that have a
fundamental investment policy of investing at least 80% of their net assets in
obligations that are exempt from federal income taxes and are not subject to
the federal alternative minimum tax. The Funds' investment adviser will waive
its advisory fees, however, for that portion of the Funds' assets so invested,
except when such purchase is part of a plan of merger, consolidation,
reorganization or acquisition.
Notwithstanding any other investment policy or limitation (whether or not
fundamental), the Income Fund may invest all of its assets in the securities of
a single, open-end management investment company with substantially the same
fundamental investment objective, policies and limitations as the Fund.
ADDITIONAL PERMITTED INVESTMENT ACTIVITIES
Unrated Investments. The Bond, Growth, Income, Ginnie Mae and Money
Market Mutual Funds may purchase instruments that are notrated if, in the
opinion of Wells Fargo Bank, such obligations are of comparable quality to
other rated investments that are permitted to be purchased by the Funds,
provided that the Money Market Mutual Fund may do so subject to the provisions
and restrictions of Rule 2a-7 under the 1940 Act. After purchase by a Fund, a
security
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may cease to be rated or its rating may be reduced below the minimum required
for purchase by such Fund. Neither event will require an immediate sale of
such security by the Fund, provided that with respect to the Money Market
Mutual Fund, when a security ceases to be rated, the Company's Board of
Directors determines that such security presents minimal credit risks and
provided further that, when a security is downgraded below the eligible quality
for investment or no longer presents minimal credit risks, the Board finds that
the sale of such security would not be in the Fund's best interests. 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 the Funds' Prospectuses and in this SAI. The
ratings of Moody's and S&P are more fully described in the SAI Appendix.
Letters of Credit. For the Bond, Income, Ginnie Mae, Growth and Money
Market Mutual Funds, certain of the debt obligations (including municipal
securities, certificates of participation, commercial paper and other
short-term obligations) that the Funds may purchase may be backed by an
unconditional and irrevocable letter of credit of a bank, savings and loan
association or insurance company that 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 that, in the opinion of
Wells Fargo Bank, are of comparable quality to issuers of other permitted
investments of each Fund may be used for letter of credit-backed investments.
Pass-Through Obligations. The Bond, Ginnie Mae, Government Income, and
Income Funds may purchase 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 a Fund.
Furthermore, as with any debt obligation, fluctuations in interest rates will
inversely affect the market value of pass-through obligations. Each 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. The Bond, Government Income, Ginnie Mae, Growth,
and Income Funds may invest in securities that are purchased on a when-issued
basis, in which case delivery and payment normally take place within 45 days
after the date of the commitment to purchase (120 days for the Growth Fund and
Ginnie Mae Fund). The Bond, Growth and Government Income Funds do not intend
to invest more than 5% of their net assets in such securities during the coming
year. Each Fund currently will only 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.
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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, or other high-quality debt instruments in an
amount at least equal in value to its commitments to purchase when-issued
securities. If the value of these assets declines, a 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.
Loans of Portfolio Securities. The Ginnie Mae and Growth Funds may lend
securities from its portfolios to brokers, dealers and financial institutions
(but not individuals) if cash, U.S. Government securities or other high-quality
debt obligations equal to at least 100% of the current market value of the
securities loan (including accrued interest thereon) plus the interest payable
to the Fund with respect to the loan is maintained with a Fund. In determining
whether to lend a security to a particular broker, dealer or financial
institution, the Fund's investment adviser will consider all relevant facts and
circumstances, including the creditworthiness of the broker, dealer, or
financial institution. Any loans of portfolio securities will be fully
collateralized based on values that are marked-to-market daily. The Fund will
not enter into any portfolio security lending arrangement having a duration of
longer than one year. Any securities that the Fund may receive as collateral
will not become part of the Fund's portfolio at the time of the loan and, in
the event of a default by the borrower, the Fund will, if permitted by law,
dispose of such collateral except for such part thereof that is a security in
which the Fund is permitted to invest. During the time securities are on loan,
the borrower will pay the Fund any accrued income on those securities, and the
Fund may invest the cash collateral and earn additional income or receive an
agreed-upon fee from a borrower that has delivered cash-equivalent collateral.
The Fund will not lend securities having a value that exceeds one-third of the
current value of its total assets. Loans of securities by the Fund will be
subject to termination at the Fund's or the borrower's option. The Fund may
pay reasonable administrative and custodial fees in connection with a
securities loan and may pay a negotiated portion of the interest or fee earned
with respect to the collateral to the borrower or the placing broker.
Borrowers and placing brokers may not be affiliated, directly or indirectly,
with the Company, its Investment Adviser, or its Distributor. The Ginnie Mae
Fund currently intends to limit the practice of lending portfolio securities to
no more than 5% of its net assets during the coming year.
Foreign Obligations. For the Ginnie Mae and Growth Funds, investments in
foreign obligations involve certain considerations that are not typically
associated with investing in domestic obligations. There may be less publicly
available information about a foreign issuer than about a domestic issuer.
Foreign issuers also are not generally subject to uniform accounting, auditing
and financial reporting standards or governmental supervision comparable to
those applicable to domestic issuers. In addition, with respect to certain
foreign countries, taxes may be withheld at the source under foreign income tax
laws, and there is a possibility of expropriation or confiscatory taxation,
political or social instability or diplomatic developments that could adversely
affect investments in, the liquidity of, and the ability to enforce contractual
obligations
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with respect to, securities of issuers located in those countries. While the
Growth Fund currently does not intend to invest more than 10% of its assets in
foreign obligations, it may invest 25% or more of its assets in foreign
obligations. The Ginnie Mae Fund does not intend to invest in foreign
obligations during the coming year.
Convertible Securities (Lower Rated Securities) Subject to the
limitations described in its Prospectus, the Ginnie Mae and Growth Funds may
invest in convertible securities that are not rated in one of the four highest
rating categories by a nationally recognized statistical rating organization
(NRSRO). The yields on such lower rated securities, which include securities
also known as junk bonds, generally are higher than the yields available on
higher-rated securities. However, investments in lower rated securities and
comparable unrated securities generally involve greater volatility of price and
risk of loss of income and principal, including the probability of default by
or bankruptcy of the issuers of such securities. Lower rated securities and
comparable unrated securities (a) will likely have some quality and protective
characteristics that, in the judgment of the rating organization, are
outweighed by large uncertainties or major risk exposures to adverse conditions
and (b) are predominantly speculative with respect to the issuer's capacity to
pay interest and repay principal in accordance with the terms of the
obligation. Accordingly, it is possible that these types of factors could, in
certain instances, reduce the value of securities held in the Fund's portfolio,
with a commensurate effect on the value of the Fund's shares. Therefore, an
investment in the Fund should not be considered as a complete investment
program and may not be appropriate for all investors.
While the market values of lower rated securities and comparable unrated
securities tend to react less to fluctuations in interest rate levels than the
market values of higher-rated securities, the market values of certain lower
rated securities and comparable unrated securities also tend to be more
sensitive to individual corporate developments and changes in economic
conditions than higher-rated securities. In addition, lower rated securities
and comparable unrated securities generally present a higher degree of credit
risk. Issuers of lower rated securities and comparable unrated securities
often are highly leveraged and may not have more traditional methods of
financing available to them so that their ability to service their debt
obligations during an economic downturn or during sustained periods of rising
interest rates may be impaired. The risk of loss due to default by such
issuers is significantly greater because lower rated securities and comparable
unrated securities generally are unsecured and frequently are subordinated to
the prior payment of senior indebtedness. The Fund may incur additional
expenses to the extent that it is required to seek recovery upon a default in
the payment of principal or interest on its portfolio holdings. The existence
of limited markets for lower rated securities and comparable unrated securities
may diminish the Fund's ability to (a) obtain accurate market quotations for
purposes of valuing such securities and calculating net asset value and (b)
sell the securities at fair value either to meet redemption requests or to
respond to changes in the economy or in financial markets.
Certain lower rated debt securities and comparable unrated securities
frequently have call or buy-back features that permit their issuers to call or
repurchase the securities from their holders, such as the Fund. If an issuer
exercises these rights during periods of declining interest
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rates, the Fund may have to replace the security with a lower yielding
security, thus resulting in a decreased return to the Fund.
The market for certain lower rated securities and comparable unrated
securities is relatively new and has not weathered a major economic recession.
The effect that such a recession might have on such securities is not known.
Any such recession, however, could disrupt severely the market for such
securities and adversely affect the value of such securities. Any such
economic downturn also could adversely affect the ability of the issuers of
such securities to repay principal and pay interest thereon.
Privately Issued Securities (Rule 144A). The Growth Fund may invest in
privately issued securities which may be resold only in accordance with Rule
144A under the Securities Act of 1933 ("Rule 144A Securities"). Rule 144A
Securities are restricted securities and will not be publicly traded.
Accordingly, the liquidity of the market for specific Rule 144A Securities may
vary. The Company's investment adviser, pursuant to guidelines established by
the Board of Directors of the Company will evaluate the liquidity
characteristics of each Rule 144A Security proposed for purchase by the Fund on
a case-by-case basis and will consider the following factors, among others, in
their evaluation: (1) the frequency of trades and quotes for the Rule 144A
Security; (2) the number of dealers willing to purchase or sell the Rule 144A
Security and the number of other potential purchasers; (3) dealer undertakings
to make a market in the Rule 144A Security; and (4) the nature of the Rule 144A
Security and the nature of the marketplace trades (e.g., the time needed to
dispose of the Rule 144A Security, the method of soliciting offers and the
mechanics of transfer). The Fund does not intend to invest more than 5% of its
net assets in Rule 144A Securities during the coming year.
Municipal Bonds. The Bond and Income Funds 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. Neither Fund may
invest 25% or more of its assets in industrial development bonds. Assessment
bonds, wherein a specially created district or project area levies a tax
(generally on its taxable property) to pay for an improvement or project may be
considered a variant of either category. There are, of course, other
variations in the types of municipal bonds, both within a particular
classification and between classifications, depending on numerous factors.
Some of these bonds may be considered private activity bonds for federal income
tax purposes.
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Municipal Notes. The Bond and Income Funds may invest in municipal notes
which 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 also will
change in response to changes in the interest rates payable on new issues of
municipal securities (i.e., market risk). Should such interest rates rise, the
values of outstanding securities, including those held in a Fund's portfolio,
will decline and (if purchased at par value) sell at a discount. If interests
rates fall, the values of outstanding securities will generally increase and
(if purchased at par value) 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.
Investments in Warrants. Although they have no present intention to do
so, the Bond, Income and Growth Funds may each invest up to 5% of their net
assets at the time of purchase in warrants (other than those that have been
acquired in units or attached to other securities), and not more than 2% of 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. Each Fund may only
purchase warrants on securities in which the Fund may invest directly.
-12-
<PAGE> 13
SPECIAL CONSIDERATIONS AFFECTING
CALIFORNIA MUNICIPAL OBLIGATIONS
Certain debt obligations held by the Income Fund and the 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 these Funds may be
impaired.
Certain of the municipal obligations in which the Funds 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
respective 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 Funds 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 Funds 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 a Fund would not be paid in a
timely manner.
Certain debt obligations held by the Funds may be obligations payable
solely from the revenues of health care institutions. The method of
reimbursement for indigent care, California's selective contracting with health
care providers for such care and selective contracting by health
-13-
<PAGE> 14
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
The following information supplements and should be read in conjunction
with the corresponding sections in the Prospectuses. The principal occupations
during the past five years of the Directors and principal executive Officer of
the Company are listed below. The address of each, unless otherwise indicated,
is 111 Center Street, Little Rock, Arkansas 72201. Directors deemed to be
"interested persons" of the Company for purposes of the 1940 Act are indicated
by an asterisk.
<TABLE>
<S> <C> <C>
Principal Occupations
Name, Address and Age Position During Past 5 Years
- ------------------------- ------------- --------------------------------------
Jack S. Euphrat, 74 Director Private Investor.
415 Walsh Road
Atherton, CA 94027.
*R. Greg Feltus, 45 Director, Senior Vice President
Chairman and of Stephens; Manager
President of Financial Services
Group; President of
Stephens
Insurance Services
Inc.; Senior Vice
President of Stephens
Sports Management
Inc.; and President of
Investor Brokerage
Insurance Inc.
</TABLE>
-14-
<PAGE> 15
<TABLE>
<S> <C> <C>
Thomas S. Goho, 54 Director T.B. Rose Faculty
321 Beechcliff Court Fellow-Business,
Winston-Salem, NC 27104 Wake Forest University
Calloway School of
Business and
Accounting; Associate Professor of
Finance of the School of Business and
Accounting at Wake Forest University
since 1983.
*Zoe Ann Hines, 47 Director Senior Vice President
of Stephens and
Director of Brokerage
Accounting; and
Secretary of Stephens
Resource
Management.
W. Rodney Hughes, 70 Director Private Investor.
31 Dellwood Court
San Rafael, CA 94901
Robert M. Joses, 78 Director Private Investor.
47 Dowitcher Way
San Rafael, CA 94901
*J. Tucker Morse, 52 Director Private Investor; Real Estate
10 Legrae Street Developer; Chairman
Charleston, SC 29401 of Renaissance
Properties Ltd.;
President of Morse
Investment
Corporation; and Co-
Managing Partner of
Main Street Ventures.
Richard H. Blank, Jr., 40 Chief Associate of
Operating Financial Services
Officer, Group of Stephens;
Secretary and Director of Stephens
Treasurer Sports Management
Inc.; and Director of
Capo Inc.
</TABLE>
-15-
<PAGE> 16
COMPENSATION TABLE
For the Fiscal Year Ended December 31, 1995
<TABLE>
<S> <C> <C>
Total Compensation
Aggregate Compensation from Registrant
Name and Position from Registrant and Fund Complex
----------------- ---------------------- ------------------
Jack S. Euphrat $10,188 $39,750
Director
*R. Greg Feltus 0 0
Director
Thomas S. Goho 10,188 39,750
Director
*Zoe Ann Hines 0 0
Director
*W. Rodney Hughes 9,438 37,000
Director
Robert M. Joses 9,938 39,000
Director
*J. Tucker Morse 8,313 33,250
Director
</TABLE>
Directors of the Company are compensated annually by the Company and by
all the registrants in the fund complex for their services as indicated above
and also are reimbursed for all out-of-pocket expenses relating to attendance
at board meetings. Each of the Directors and Principal Officer of the Company
serves in the identical capacity as Directors/Trustees and Principal Officer of
MasterWorks Funds Inc. (formerly, Stagecoach Inc.), Overland Express Funds,
Inc. ("Overland"), Stagecoach Trust, Master Investment Trust, Life & Annuity
Trust, Master Investment Portfolio ("MIP") and Managed Series Investment Trust
("MSIT"), each of which is a registered open-end management investment company
and each of which, prior to January 1, 1996 and the reorganization of WFNIA,
was considered to be in the same "fund complex", as such term is defined in
Form N-1A under the 1940 Act, as the Company. Effective January 1, 1996,
MasterWorks, MIP and MSIT are considered to be in the same fund complex
and are no longer part of the same fund complex as the Company, Overland,
Stagecoach Trust, Master Investment Trust and Life & Annuity Trust. The
Directors are compensated by other Companies and Trusts within the fund complex
for their services as Directors/Trustees to such
-16-
<PAGE> 17
Companies and Trusts. Currently the Directors do not receive any retirement
benefits or deferred compensation from the Company or any other member of the
fund complex.
As of the date of this SAI, Directors and officers of the Company as a
group beneficially owned less than 1% of the outstanding shares of the Company.
Investment Adviser. The Funds are advised by Wells Fargo Bank pursuant to
Advisory Contracts that provide for Wells Fargo Bank to furnish to the Funds
investment guidance and policy direction in connection with the daily portfolio
management of the Funds. Pursuant to the Advisory Contracts, Wells Fargo Bank
furnishes to the Company's Board of Directors periodic reports on the
investment strategy and performance of each Fund.
Wells Fargo Bank has agreed to provide each Fund with, among other things,
money market and fixed-income research, analysis and statistical and economic
data and information concerning interest rate and security market trends,
portfolio composition, credit conditions and average maturities of each Fund's
portfolio.
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 1940 Act) of any such party. The Advisory Contracts may be terminated on
60 days' written notice by either party and will terminate automatically if
assigned.
For the years ended December 31, 1993, 1994 and 1995, the Funds paid to
Wells Fargo Bank the advisory fees indicated below and Wells Fargo Bank waived
the indicated amounts:
<TABLE>
<CAPTION>
1993 1994 1995
FEES FEES FEES FEES FEES FEES
FUND PAID WAIVED PAID WAIVED PAID WAIVED
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
California Tax-Free
Bond Fund $2,157,487 $ 0 $ 368,134 $1,728,107 $ 1,542,893 $ 0
California Tax-Free
Income Fund $ 38,402 $122,967 $ 0 $ 279,496 $ 236,632 $31,013
Ginnie Mae Fund $ 888,174 $437,110 $1,185,036 $ 0 $ 840,112 $ 0
Growth and Income
Fund $ 443,874 $ 0 $ 587,977 $ 0 $ 754,149 $ 0
Money Market Mutual
Fund $1,285,690 $ 0 $2,073,686 $2,008,946 $12,729,506 $ 0
Short-Intermediate
U.S. Gov't Income
Fund $ 0 $ 3,704 $ 0 $ 58,270 $ 56,387 $ 60,241
</TABLE>
-17-
<PAGE> 18
Administrator and Distributor. The Company has retained Stephens as
administrator and distributor on behalf of the Funds. Each Administration
Agreement between Stephens and the Company states that Stephens shall provide
as administrative services, among other things: (i) general supervision of the
operation of each Fund, including coordination of the services performed by the
Fund's investment adviser, transfer agent, custodian, shareholder servicing
agent(s), independent auditors and legal counsel, regulatory compliance,
including the compilation of information for documents such as reports to, and
filings with, the SEC and state securities commissions; and preparation of
proxy statements and shareholder reports for the Fund; and (ii) general
supervision relative to the compilation of data required for the preparation of
periodic reports distributed to the Company's Officers and Board of Directors.
Stephens also furnishes office space and certain facilities required for
conducting the business of the Funds together with those ordinary clerical and
bookkeeping services that are not being furnished by Wells Fargo Bank.
Stephens also pays the compensation of the Company's Directors, Officers and
employees who are affiliated with Stephens.
For the years ended December 31, 1993, 1994 and 1995, the net amounts paid
by the Funds for administrative fees to Stephens were as follows:
<TABLE>
<CAPTION>
FUND 1993 1994 1995
- -------------------------------------------------------------------------
<S> <C> <C> <C>
California Tax-Free Bond Fund $130,939 $126,570 $ 93,013
California Tax-Free Income Fund $ 9,912 -0- $ 16,793
Ginnie Mae Fund $ 81,058 $ 71,842 $ 50,407
Growth and Income Fund $ 26,644 $ 35,279 $ 45,249
Money Market Mutual Fund $ 96,535 $306,209 $954,713
Short-Intermediate U.S. Government
Fund $ 3,522 $ 3,522 $ 6,998
</TABLE>
The Advisory Contract and Administration Agreement for each Fund provide
that if, in any fiscal year, the total expenses of a Fund incurred by, or
allocated to, the Fund (excluding taxes, interest, brokerage commissions and
other portfolio transaction expenses, expenditures that are capitalized in
accordance with generally accepted accounting principles, extraordinary
expenses and amounts accrued or paid under a Plan but including the fees
provided for in the Advisory Contract and a Administration Agreement) exceed the
most restrictive expense limitation applicable to the Fund imposed by the
securities laws or regulations of the states in which the Fund's shares are
registered for sale, Wells Fargo Bank and Stephens will waive their fees
proportionately under the Advisory Contract and the Administration Agreement,
respectively, for each Fund for the fiscal year to the extent of the excess or
reimburse the excess, but only to the extent of their respective fees. The
Advisory Contract and the Administration Agreement for each Fund further provide
that the respective Fund's total expenses shall be
-18-
<PAGE> 19
reviewed monthly so that, to the extent the annualized expenses for such month
exceed the most restrictive applicable annual expense limitation, the monthly
fees under the contract and the agreement shall be reduced as necessary. The
most stringent applicable restriction limits these expenses for any fiscal year
to 2.50% of the first $30 million of the Fund's average net assets, 2.00% of the
next $70 million of average net assets, and 1.50% of the average net assets in
excess of $100 million.
Shareholder Servicing Agent. As discussed in the Funds' prospectuses
under the heading "Institutions and Shareholder Servicing Agents", the Company
may enter into shareholder servicing agreements on behalf of each Fund's
Institutional Class shares with Wells Fargo Bank.
Custodian and Transfer and Dividend Disbursing Agent. Wells Fargo Bank
has been retained to act as custodian and transfer and dividend disbursing
agent for each 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 its services as custodian,
Wells Fargo Bank receives an asset-based fee and transaction charges from each
Fund; and for its services as transfer and dividend disbursing agent, it
receives a base fee and per-account fees from each Fund.
For the year ended December 31, 1995, the Funds paid custody fees to Wells
Fargo Bank as follows:
<TABLE>
<CAPTION>
FUND 1995
-------------------------------------------------------
<S> <C>
California Tax-Free Bond Fund $-0-
California Tax-Free Income Fund $-0-
Ginnie Mae Fund $-0-
Growth and Income Fund $15,578
Money Market Mutual Fund $-0-
Short-Intermediate U.S. Government Income Fund $-0-
</TABLE>
For the year ended December 31, 1995, the Funds paid transfer and dividend
disbursing agency fees to Wells Fargo Bank or its affiliates as follows:
<TABLE>
FUND 1995
--------------------------------------------------------
<S> <C>
California Tax-Free Bond Fund $-0-
California Tax-Free Income Fund $-0-
Ginnie Mae Fund $-0-
Growth and Income Fund $160,168
Money Market Mutual Fund $-0-
Short-Intermediate U.S. Government Income Fund $-0-
</TABLE>
-19-
<PAGE> 20
PERFORMANCE CALCULATIONS
As indicated in the Prospectuses, performance information for the Funds'
Institutional Class shares may be presented from time to time. Average annual
compound rate of return ("T") is computed by using the redeemable value at the
end of a specified period ("ERV") of a hypothetical initial investment in a
Class of shares ("P") over a period of years ("n") according to the following
formula: P(1+T)(to the nth power) = ERV.
Cumulative total returns on each Fund's Institutional Class shares may
also be presented from time to time. Cumulative total return is computed on a
per share basis and assumes the reinvestment of dividends and distributions.
Cumulative total return of shares generally is expressed as a percentage rate
calculated by combining the income and principal changes for a specified period
and dividing by the net asset value per share at the beginning of the period.
Advertisements may include the percentage rate of total return of shares or may
include the value of a hypothetical investment in shares at the end of the
period which assumes the application of the percentage rate of total return.
As indicated in their Prospectuses, the yield of each Fund's Institutional
Class shares may also be presented from time to time. Yield is calculated
based on a 30-day (or one month) period, by dividing the net investment income
per share of the Institutional Class shares of a Fund earned during the period
by the net asset value price per share of such Class on the last day of the
period, according to the following formula: YIELD = 2[((a-b/cd)+1)(to the 6th
power)-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 outstanding during the period that were entitled to receive
dividends; and d = the maximum offering price per share on the last day of the
period. The net investment income of a Fund's Institutional Class shares
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. Tax-equivalent yield for each Fund is
computed by dividing that portion of the yield of the Fund that is tax exempt
by one minus a stated income tax rate and adding the product to that portion,
if any, of the yield of the Fund that is not tax exempt. For purposes of sales
literature, a distribution rate of the Institutional Class shares also may be
presented provided that the yield data derived pursuant to the calculation
described above also are presented.
Effective yield and effective tax-equivalent yield for each Fund are
calculated by determining the net change, or tax-equivalent assumed net change,
exclusive of capital changes, in the value of a hypothetical pre-existing
account having a balance of one share at the beginning of the period,
subtracting a hypothetical charge reflecting deductions from shareholder
accounts, and dividing the difference by the value of the account at the
beginning of the base period to obtain the base period return, and then
compounding the base period return by adding one, raising the sum to a power
equal to 365 divided by 30, and subtracting one from the result.
-20-
<PAGE> 21
Fund performance information will fluctuate from time to time, unlike bank
deposits or other investments that pay a fixed yield for a stated period of
time, and does not provide a basis for determining future yields since it is
based on historical data. Yield, total return and other performance
calculations are a function of portfolio quality, composition, maturity and
market conditions as well as the expenses allocated to a Fund and its
Institutional Class shares.
Yield and total return information for a Fund or Class of shares in a Fund
may be useful in reviewing the performance of such Fund or Class of shares and
for providing a basis for comparison with investment alternatives. The yields
and total returns, however, may not be comparable to the yields or total
returns 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. In addition, investors should recognize
that changes in the net asset value of shares of a Class of the Funds will
affect the yield of each such Class for any specified period, and such changes
should be considered together with the yield in ascertaining the total return
to shareholders of a Class of shares for the period.
From time to time and only to the extent the comparison is appropriate for
a Fund or a Class of shares, the Company may quote the performance or
price-earning ratio of a Fund or Class in advertising and other types of
literature as compared to the performance of the 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 World Gold Council), Bank
Averages (which are calculated from figures supplied by the U.S. League of
Savings Institutions based on effective annual rates of interest on both
passbook and certificate accounts), average annualized certificate of deposit
rates (from the Federal Reserve G-13 Statistical Releases or the Bank Rate
Monitor), the Salomon One Year Treasury Benchmark Index, the Consumer Price
Index (as published by the U.S. Bureau of Labor Statistics), other managed or
unmanaged indices or performance data of bonds, municipal securities, stocks or
government securities (including data provided by Ibbotson Associates), or by
other services, companies, publications or persons who monitor mutual funds on
overall performance or other criteria. The S&P Index and the Dow Jones
Industrial Average are unmanaged indices of selected common stock prices. The
performance of a Class 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.
Any such comparisons may be useful to investors who wish to compare past
performance of the Funds with that of 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.
-21-
<PAGE> 22
The Company also may disclose in sales literature, information and
statements on the distribution rate of the shares of a class of the Funds.
Distribution rate, which may be annualized, is the amount determined by
dividing the dollar amount per share of each class of the most recent dividend
by the most recent NAV or maximum offering price per share as of a date
specified in the sales literature. Distribution rate will be accompanied by
the standard 30-day yield as required by the SEC.
The Company also may use the following information in advertisements and
other types of literature, only to the extent the information is appropriate
for the Fund: (i) the Consumer Price Index may be used to assess the real rate
of return from an investment in 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 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 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 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 a Fund's historical performance or current or
potential value with respect to the particular industry or sector.
From time to time, the Funds may use the following statements, or
variations thereof, in advertisements and other promotional materials: "Wells
Fargo Bank, as a Shareholder Servicing Agent for the Stagecoach Funds, provides
various services to its customers that are also shareholders of the Funds.
These services may include access to Stagecoach Funds' account information
through Automated Teller Machines (ATMs), the placement of purchase and
redemption requests for shares of the Funds through ATMs and the availability
of combined Wells Fargo Bank and Stagecoach Funds account statements." The
Company may also disclose in advertising and other types of sales literature
the assets and categories of assets under management by its investment adviser
or sub-adviser and the total amount of assets under management by Wells Fargo
Investment Management Group ("IMG"). As of January 1, 1996, IMG had $30.1
billion in assets under management.
DETERMINATION OF NET ASSET VALUE
The assets of the Bond Fund, other than debt securities maturing in 60
days or less, 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 Bond Fund for which current market quotations are not readily
-22-
<PAGE> 23
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.
For the Government Income and Growth Funds, securities for which market
quotations are available are valued at latest prices. Securities of a 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.
Futures contracts will be marked to market daily at their respective settlement
prices determined by the relevant exchange. These prices are not necessarily
final closing prices, but are intended to represent prices prevailing during
the final 30 seconds of the trading day. 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 NYSE, or, in the absence of any sale on the valuation date, at
latest quoted bid prices. Options not listed on a national exchange are valued
at latest quoted bid prices. Debt securities maturing in 60 days or less are
valued at amortized cost. In all cases, bid prices will be furnished by 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.
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 the Funds' 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 do not
necessarily pay the lowest spread or commission available.
Purchase and sale orders of the securities held by the Funds may be
combined with those of other accounts that Wells Fargo Bank manages, and for
which it has brokerage placement authority, in the interest of seeking the most
favorable overall net results. When Wells Fargo Bank determines that a
particular security should be bought or sold for a Fund and other accounts
managed by Wells Fargo Bank, Wells Fargo Bank undertakes to allocate those
transactions among the participants equitably.
-23-
<PAGE> 24
Except in the case of equity securities purchased by the Growth Fund,
purchases and sales of securities usually are principal transactions.
Portfolio securities normally are purchased or sold from or to dealers serving
as market makers for the securities at a net price. The Funds also purchase
portfolio securities in underwritten offerings and may purchase securities
directly from the issuer. Generally, the obligations in which the Funds invest
are traded on a net basis and do not involve brokerage commissions. The cost
of executing a Fund's portfolio securities transactions consists primarily of
dealer spreads and underwriting commissions. Under the 1940 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 SEC or an exemption is
otherwise available.
The Bond and Income Funds may purchase municipal obligations from
underwriting syndicates of which Stephens, Wells Fargo Bank or their affiliates
is a member under certain conditions in accordance with the provisions of a
rule adopted under the 1940 Act and in compliance with procedures adopted by
the Board of Directors.
For the Growth 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 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.
No Fund will 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 SEC or unless an exemption is otherwise available.
In placing orders for portfolio securities of the Growth 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 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.
Wells Fargo Bank, as the Funds' investment adviser, 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
-24-
<PAGE> 25
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 each 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 such Fund.
Brokerage Commissions. For the years ended December 31, 1993, 1994 and
1995 the Funds paid the following for brokerage commissions:
<TABLE>
<CAPTION>
FUND 1993 1994 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
California Tax-Free Bond Fund
California Tax-Free Income Fund $0 $0 $0
Short-Intermediate U.S. $0 $0 $0
Government Income Fund $0 $0 $0
Growth and Income Fund $347,779 $407,643 $607,442
Money Market Mutual Fund $0 $0 $0
Ginnie Mae Fund $0 $0 $0
</TABLE>
Securities of Regular Broker/Dealers. As of December 31, 1995, each of
the Funds owned securities of its "regular brokers or dealers" or their parents
as defined in the Act, as follows:
<TABLE>
<CAPTION>
FUND AMOUNT REGULAR BROKER/DEALER
- --------------------------------------------------------------------------------
<S> <C> <C>
California Tax-Free Income Fund
California Tax-Free Bond Fund $0 N/A
Short-Intermediate U.S. $0 N/A
Government Income Fund $1,119,000 Goldman Sachs & Co.
Growth and Income Fund $1,998,000 Goldman Sachs & Co.
Money Market Mutual Fund $0 N/A
Ginnie Mae Fund $ 587,000 Goldman Sachs & Co.
</TABLE>
Portfolio Turnover. For the Government Income Fund, portfolio turnover
generally involves some expenses to the Fund, including brokerage commissions
or dealer mark-ups and other transaction costs on the sale of securities and
the reinvestment in other securities. Portfolio turnover can generate
short-term capital gain tax consequences. The portfolio turnover rate for the
Fund generally is not expected to exceed 100%. For the Bond Fund and the
Income Fund, the portfolio turnover rate for the Funds generally is not
expected to exceed 300%. For the
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<PAGE> 26
Money Market Mutual Fund, because the portfolios of the Fund consist of
securities with relatively short-term maturities, the Fund can expect to
experience high portfolio turnover rates. The higher portfolio rates of the
Ginnie Mae Fund should not adversely affect it because portfolio transactions
are made directly with principals on a net basis and, consequently, the Fund
usually does not incur brokerage expenses. For the Funds, the portfolio turnover
rate is not a limiting factor when Wells Fargo Bank deems portfolio changes
appropriate.
FUND EXPENSES
Except for the expenses borne by Wells Fargo Bank and Stephens, each Fund
bears all costs of its operations, including a pro rata portion of the fees and
expenses of its independent auditors, legal counsel, transfer agent and
dividend disbursing agent; the compensation of the Company's Directors who are
not affiliated with Stephens or Wells Fargo Bank or any of their affiliates;
advisory and administration fees; interest charges; taxes; expenses of
redeeming shares; expenses of preparing and printing prospectuses (except the
expense of printing and mailing prospectuses used for promotional purposes),
shareholders' reports, notices, proxy statements and reports to regulatory
agencies; insurance premiums and certain expenses relating to insurance
coverage; trade association membership dues; brokerage and other expenses
connected with the execution of portfolio transactions; fees and expenses of
its custodian, including those for keeping books and accounts and calculating
the NAV per share of a class of shares of a Fund; expenses of shareholders'
meetings; expenses relating to the issuance, registration and qualification of
a Fund's shares; pricing services, and any extraordinary expenses. Expenses
attributable to a Fund are charged against the Fund's assets, and expenses of a
class (such as shareholder servicing or distribution fees or other
class-specific expenses or expenses paid pursuant to a Plan) are charged
against the assets of the class. General expenses of the Company are allocated
among all of the funds of the Company, including each Fund, in a manner
proportionate to the net assets of each Fund, on a transactional basis, or on
such other basis as the Company's Board of Directors deems equitable.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
Payment for shares may, in the discretion of the adviser, be made in the
form of securities that are permissible investments for the Funds as described
in the Prospectus(es). Forfurther information about this form of payment please
contact Stephens. In connection with an in-kind securities payment, the Funds
will require, among other things, that the securities be valued on the day of
purchase in accordance with the pricing methods used by such Fund and that such
Fund receives satisfactory assurances that (i) it will have good and marketable
title to the securities received by it; (ii) that the securities are in proper
form for transfer to the Fund; and (iii) adequate information will be provided
concerning the basis and other matters relating to the securities.
Under the 1940 Act, the Fund may suspend the right of redemption or
postpone the date of payment upon redemption for any period during which the
NYSE is closed (other than
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<PAGE> 27
customary weekend and holiday closings, or during which trading is restricted,
or during which as determined by the SEC by rule or regulation) an emergency
exists as a result of which disposal or valuation of portfolio securities is not
reasonably practicable, or for such periods as the SEC may permit.
The Company may suspend redemption rights or postpone redemption payments
for such periods as are permitted under the 1940 Act. The Company may also
redeem shares involuntarily or make payment for redemption in securities or
other property if it appears appropriate to do so in light of the Company's
responsibilities under the 1940 Act.
In addition, the Company may redeem shares involuntarily to reimburse the
Funds for any losses sustained by reason of the failure of a shareholders to
make full payment for shares purchased or to collect any charge relating to a
transaction effected for the benefit of a shareholder which is applicable to
shares of a Fund as provided from time to time in the Prospectus.
FEDERAL INCOME TAXES
The Prospectuses describe generally the tax treatment of distributions by
the Funds. This section of the SAI includes additional information concerning
federal income taxes.
Qualification as a "regulated investment company" under Subchapter M of
the Internal Revenue Code of 1986, as amended (the "Code"), requires, among
other things, that (a) at least 90% of a 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) a 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) a Fund diversifies its holdings so that, at the end of each quarter of
the taxable year, (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 Fund
controls and which are determined to be engaged in the same or similar trades or
businesses or related trades or businesses. As a regulated investment company,
each Fund will not be subject to federal income tax on its net investment income
and net realized capital gains distributed to its shareholders, provided, among
other things, that it distributes to its stockholders at least 90% of its net
investment income and tax-exempt income earned in each year.
In addition, in order to qualify under the Code to pay exempt-interest
dividends, the Bond Fund and Income Fund intend that at least 50% of the value
of their respective total assets at the close of each quarter of a taxable year
will consist of obligations the interest on which is exempt from federal income
tax. The portion of total dividends paid by a Fund with respect to any taxable
year that constitutes tax-exempt-interest dividends will be the same for all
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<PAGE> 28
shareholders receiving dividends during such year. The exemption of interest
income derived from investments in tax-exempt obligations for federal income
tax purposes may not result in a similar exemption under the laws of a
particular state or local taxing authority. However, see "California Tax
Issues" below.
Although the Funds' dividends will be declared daily based on each day's
earnings, for federal income tax purposes, the Funds' earnings and profits will
be determined at the end of each taxable year and will be allocated pro rata
over the entire year. For federal tax purposes, only amounts paid out of
earnings and profits will qualify as dividends. Thus, if during a taxable
year, the Fund's declared dividends (as declared daily throughout the year)
exceed the Fund's net income (as determined at the end of the year), only that
portion of the year's distributions which equals the year's earnings and
profits will be deemed to have constituted a dividend. It is expected that the
Fund's net income, on an annual basis, will equal the dividends declared during
the year.
Generally, dividends and distributions of capital gain are taxable to
shareholders when paid. However, dividends and distributions declared payable
in October, November or December and made payable to shareholders of record in
such a month are treated as paid and are thereby taxable as of December 31,
provided that such dividends or distributions are actually paid no later than
January 31 of the following year.
In addition, a 4% nondeductible excise tax will be imposed on each Fund
(other than to the extent of the Fund's tax-exempt income) to the extent it
does not meet certain minimum distribution requirements by the end of each
calendar year. Each Fund will either distribute, or be deemed to distribute,
all of its net investment income and net realized capital gains by the end of
the calendar year and, thus, expects not to be subject to the excise tax.
Income and dividends received by a Fund from sources within foreign
countries may be subject to withholding and other taxes (generally at rates of
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, each Fund will not be eligible to
elect to "pass through" foreign tax credits to shareholders.
For the Income Fund and the Bond Fund, gains or losses on sales of
portfolio securities by each Fund will generally be long-term capital gains or
losses if the securities have been held by it for more than one year, except in
certain cases where a Fund acquires a put thereon. Gain recognized on the
disposition of a debt obligation (including tax-exempt obligations purchased
after April 30, 1993) purchased by a Fund at a market discount (generally, at a
price less than its principal amount) will be treated as ordinary income to the
extent of the portion of the market discount which accrued during the period of
time the Fund held the debt obligation. 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
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<PAGE> 29
as a capital gain distributions in a written notice mailed by the Fund to the
shareholders not later than 60 days after the close of the Fund's taxable year.
For the Government Income and Growth Funds, gains or losses on sales of
portfolio securities by a Fund will generally be long-term capital gains or
losses if the securities have been held by it for more than one year. 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 gain 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.
If a shareholder receives such a designated capital gain distribution (to be
treated by the shareholder as a long-term capital gain) with respect to any
Fund share and such Fund share is held for six months or less, then (unless
otherwise disallowed) any loss on the sale or exchange of that Fund share will
be treated as a long-term capital loss to the extent of the designated capital
gains distribution. Gain recognized on the disposition of a debt obligation
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 of the
portion of the market discount which accrued during the period of time the Fund
held the debt obligation.
For a Fund, if a shareholder receives such a designated capital gain
distribution (to be treated by the shareholder as a long-term capital gain)
with respect to any Fund share and such Fund share is held for six months or
less, then (unless otherwise disallowed) any loss on the sale or exchange of
that Fund share will be treated as a long-term capital loss to the extent of
the designated and capital gain distribution. In addition, any loss realized
by a shareholder upon the sale or redemption of Fund shares held less than six
months is disallowed to the extent of any exempt-interest dividends received
thereon by the shareholder. These rules shall not apply, however, to losses
incurred under a periodic redemption plan.
As of the printing of this SAI, the maximum individual marginal tax rate
applicable to ordinary income is 39.60% (marginal rates may be higher for some
individuals due to the phase-out of exemptions and elimination of deductions),
the maximum individual rate applicable to net realized capital gains is 28.00%;
and the maximum corporate tax rate applicable to ordinary income and net
realized capital gains is 35.00%. 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 tax of up to $11,750 and corporations which have taxable income in
excess of $15,000,000 for a taxable year will be required to pay an additional
amount of income tax of up to $100,000.
Corporate shareholders of the Growth Fund may be eligible for the
dividends-received deduction on the dividends paid out of the Fund's net
investment income attributable to dividends received from domestic corporations
which, if received directly, would qualify for such deduction. In order to
qualify for the dividends-received deduction, a corporate shareholder must hold
the Fund shares paying the dividends upon which the deduction is based for at
least 46 days.
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<PAGE> 30
Also, any loss realized on a redemption or exchange of shares of a Fund
will be disallowed to the extent that substantially identical shares are
reacquired within the 61-day period beginning 30 days before and ending 30 days
after the shares are disposed of.
If, in the opinion of the Fund, ownership of its shares has or may become
concentrated to an extent that could cause the Fund to be deemed a personal
holding company within the meaning of the Code, the Fund may require the
redemption of shares or reject any order for the purchase of shares in an
effort to prevent such concentration.
Foreign Shareholders. Under the Code, distributions of net investment
income by each 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, U.S. residents or domestic corporations will apply.
Distributions of net long-term capital gains are not subject to tax
withholding, but in the case of a foreign shareholder who is a nonresident
alien individual, such distributions ordinarily will be subject to U.S. income
tax at a rate of 30% if the individual is physically present in the U.S. for
more than 182 days during the taxable year.
Other Matters. Investors should be aware that the investments to be made
by the 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 a Fund
without corresponding current cash receipts. Although each Fund will seek to
avoid significant noncash income, such noncash income could be recognized by a
Fund, in which case a Fund may distribute cash derived from other sources in
order to meet the minimum distribution requirements described above.
It is expected that the net income of each Fund will be a positive amount
at the time of each determination thereof. If, however, the net income of a
Fund determined at any time is a negative amount (which could occur, for
instance, upon nonpayment of interest and/or principal by an issuer of a
security held by the Fund), a Fund would, pursuant to SEC rules, first offset
the negative amount with respect to each shareholder account from the dividends
declared during the month with respect to each such account. If, and to the
extent that, such negative amount exceeds such declared dividends at the end of
the month, a Fund will reduce the number of its outstanding shares by treating
each shareholder as having contributed to the capital of the Fund that number of
full and fractional shares in the account of such shareholder which represents
the shareholder's proportion of the amount of such excess. Each shareholder
will be deemed to have agreed to such contribution in these circumstances by
investing in a Fund.
Special Tax Considerations for the Bond and Income Funds
Federal -- The Funds do not expect to earn any significant investment
company taxable income. If the Funds do earn any taxable income, such income,
when distributed, will be taxable to shareholders. Not later than 60 days
after the close of its taxable year, each Fund will notify its
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<PAGE> 31
shareholders of the portion of the dividends paid with respect to such taxable
year which constitutes 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.
Shareholders who may be "substantial users" (or related persons of
substantial users) with respect to municipal securities held by the Funds
should consult their tax advisors to determine whether exempt-interest
dividends and California exempt-interest dividends (as defined below) paid by a
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.
Interest on indebtedness incurred or continued to purchase or carry shares
of the Funds will not be deductible to the extent that the Funds' distributions
are exempt from federal and California income tax.
California Tax Issues -- Each Fund expects to be exempt from tax in
California on the same basis as under Subchapter M of the Code as described
above. Moreover, if at the close of each quarter of the Company's taxable
year, at least 50% of the value of a Fund's 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 that will be exempt from California personal
income tax (hereinafter referred to as "California exempt-interest dividends").
Under normal market conditions, the Funds will invest primarily in municipal
securities of the State of California, its cities, municipalities and other
political authorities. The Funds intend to qualify under the above
requirements so that they can pay California exempt-interest dividends.
Not later than 60 days after the close of its taxable year, each Fund will
notify its shareholders 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 each 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 or expenditures (including any expenditures attributable to the
acquisition of securities of other investment companies). Dividends paid by
each 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 and
ordinary income dividends, respectively. Moreover, interest on indebtedness
incurred by a shareholder to purchase or carry shares of a Fund 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-
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<PAGE> 32
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 Bond Fund and the Income 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
The Company, an open-end, management investment company, was incorporated
in Maryland on September 9, 1991. The authorized capital stock of the Company
consists of 15,000,000,000 shares having a par value of $.001 per share. As of
the date of this SAI, the Company's Board of Directors has authorized the
issuance of the following funds: Aggressive Growth, Asset Allocation,
California Tax-Free Bond, California Tax-Free Income, California Tax-Free Money
Market Mutual, Corporate Stock, Diversified Income, Ginnie Mae, Growth and
Income, Money Market Mutual, National Tax-Free Money Market Mutual,
Short-Intermediate U.S. Government Income and U.S. Government Allocation Funds
- -- and the Board of Directors may, in the future, authorize the issuance of
other funds representing shares of additional investment portfolios.
The Funds are authorized to issue other classes of shares, subject to a
front-end sales charge and, in some cases, subject to a contingent deferred
sales charge, that are offered to retail investors, and another class that is
offered to qualified business investors who purchase such shares through
certain non-interest bearing transaction accounts offered by Wells Fargo Bank.
The Bond, Ginnie Mae, Growth and Money Market Mutual Funds are comprised of
three classes of shares and the Government Income and Income Funds are
comprised of two classes of shares. Each class of shares represents an equal
proportionate interest in a Fund with other shares of the same class.
Shareholders of each class bear their pro rata portion of the Fund's operating
expenses except for certain class-specific expenses (e.g., any state securities
registration fees, shareholder servicing fees or distribution fees that may be
paid under Rule 12b-1) that are allocated to a particular class. With respect
to matters affecting one class, but not another, shareholders of each Fund vote
as a class. For example, approval of a distribution plan is voted on only by
members of the class affected by the plan. Subject to the foregoing, all
shares of a Fund have equal voting rights. In situations where voting by
series (fund) is required by law or where the matter involved affects only one
series, shares of each Fund vote by series. For example, a change in a Fund's
fundamental investment policy would be voted upon by only shareholders of the
Fund involved. Additionally, approval of an advisory contract is a matter to
be determined separately by a Fund. Approval by the shareholders of one Fund
is effective as to that Fund whether or not sufficient votes are received from
the shareholders of other series to approve the proposal as to those series.
As used in the Prospectuses and in this SAI, the term "majority", when
referring to approvals to be obtained from shareholders means the vote of the
lesser of (i) 67% of the shares of the Fund, or the respective class of the
Fund, depending on the
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<PAGE> 33
context, represented at a meeting if the holders of more than 50% of the
outstanding shares of the Fund, or of such class of the Fund, are present in
person or by proxy, or (ii) more than 50% of the outstanding shares of such
Fund, or of the respective class of the Fund. Shareholders are entitled to one
vote for each full share held and fractional votes for fractional shares held.
The Company is not required to hold annual meetings of shareholders and
may dispense with a special meeting of shareholders in any year in which it is
not required to elect Directors under the 1940 Act.
Each Fund share represents an equal proportional interest in the Fund with
every other share and is entitled to such dividends and distributions out of
the income earned on the assets belonging to the Fund as are declared in the
discretion of the Directors. In the event of the liquidation or dissolution of
the Company, shareholders of a Fund are entitled to receive the assets
attributable to the Fund that are available for distribution, and a
distribution of any general assets not attributable to a particular investment
portfolio that are available for distribution in such manner and on such basis
as the Directors in their sole discretion may determine.
Shareholders are not entitled to any preemptive rights. All shares, when
issued for the consideration described in the applicable Prospectus, will be
fully paid and non-assessable by the Company.
As of April 1, 1996, no shareholders were known by the Company to own 5%
or more of the outstanding Class A Shares of the Funds.
OTHER
The Registration Statement, including the Prospectuses, the SAI and the
exhibits filed therewith, may be examined at the office of the SEC in
Washington, D.C. Statements contained in the Prospectuses or the SAI as to the
contents of any contract or other document 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.
INDEPENDENT AUDITORS
KPMG Peat Marwick LLP has been selected as the independent auditor for the
Company. KPMG Peat Marwick LLP provides audit services, tax return preparation
and assistance and consultation in connection with review of certain SEC
filings. KPMG Peat Marwick LLP's address is Three Embarcadero Center, San
Francisco, California 94111.
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<PAGE> 34
FINANCIAL INFORMATION
The portfolio of investments, audited financial statements and independent
auditors' report contained in the Company's Annual Report for the most recent
fiscal year will be sent free of charge with this SAI to any shareholder who
requests the SAI.
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<PAGE> 35
SAI APPENDIX
The following is a description of the ratings given by Moody's and S&P to
corporate and municipal bonds, municipal notes, and corporate and municipal
commercial paper.
Corporate and Municipal Bonds
Moody's: The four highest ratings for corporate and municipal bonds are
"Aaa," "Aa," "A" and "Baa." Bonds rated "Aaa" are judged to be of the "best
quality" and carry the smallest amount of investment risk. Bonds rated "Aa"
are of "high quality by all standards," but margins of protection or other
elements make long-term risks appear somewhat greater than "Aaa" rated bonds.
Bonds rated "A" possess many favorable investment attributes and are considered
to be upper medium grade obligations. Bonds rated "Baa" are considered to be
medium grade obligations; interest payments and principal security appear
adequate for the present, but certain protective elements may be lacking or may
be characteristically unreliable over any great length of time. Such bonds
have speculative characteristics as well. Moody's applies numerical modifiers:
1, 2 and 3 in each rating category from "Aa" through "Baa" in its rating
system. The modifier 1 indicates that the security ranks in the higher end of
its category; the modifier 2 indicates a mid-range ranking; and the modifier 3
indicates that the issue ranks in the lower end.
S&P: The four highest ratings for corporate and municipal bonds are
"AAA," "AA," "A" and "BBB." Bonds rated "AAA" have the highest ratings
assigned by S&P and have an extremely strong capacity to pay interest and repay
principal. Bonds rated "AA" have a "very strong capacity to pay interest and
repay principal" and differ "from the highest rated issued only in small
degree." Bonds rated "A" have a "strong capacity" to pay interest and repay
principal, but are "somewhat more susceptible" to adverse effects of changes in
economic conditions or other circumstances than bonds in higher rated
categories. Bonds rated "BBB" are regarded as having an "adequate capacity" to
pay interest and repay principal, but changes in economic conditions or other
circumstances are more likely to lead to a "weakened capacity" to make such
repayments. The ratings from "AA" to "BBB" may be modified by the addition of
a plus or minus sign to show relative standing within the category.
Municipal Notes
Moody's: The highest ratings for state and municipal short-term
obligations are "MIG 1," "MIG 2," and "MIG 3" (or "VMIG 1," "VMIG 2" and "VMIG
3" in the case of an issue having a variable rate demand feature). Notes rated
"MIG 1" or "VMIG 1" are judged to be of the "best quality." Notes rated "MIG
2" or "VMIG 2" are of "high quality," with margins of protections "ample
although not as large as in the preceding group." Notes rated "MIG 3" or "VMIG
3" are of "favorable quality," with all security elements accounted for, but
lacking the strength of the preceding grades.
A-1
<PAGE> 36
S&P: The "SP-1" rating reflects a "very strong or strong capacity to pay
principal and interest." Notes issued with "overwhelming safety
characteristics" will be rated "SP-1+." The "SP-2" rating reflects a
"satisfactory capacity" to pay principal and interest.
Corporate and Municipal Commercial Paper
Moody's: The highest rating for corporate and municipal commercial paper
is "Prime-1". Issuers rated "Prime-1" have a "superior capacity for repayment
of short-term promissory obligations." Issuers rated "Prime-2" "have a strong
capacity for repayment of short-term promissory obligations," but earnings
trends, while sound, will be subject to more variation.
S&P: The "A-1" rating for corporate and municipal commercial paper
indicates that the "degree of safety regarding timely payment is either
overwhelming or very strong." Commercial paper with "overwhelming safety
characteristics" will be rated "A-1+." Commercial paper with a strong capacity
for timely payments on issues will be rated "A-2."
Corporate Notes
S&P: The two highest ratings for corporate notes are "SP-1" and "SP-2."
The "SP-1" rating reflects a "very strong or strong capacity to pay principal
and interest." Notes issued with "overwhelming safety characteristics" will be
rated "SP-1+." The "SP-2" rating reflects a "satisfactory capacity" to pay
principal and interest.
A-2
