<PAGE> 1
STAGECOACH FUNDS, INC.
Telephone: 1-800-222-8222
STATEMENT OF ADDITIONAL INFORMATION
DATED APRIL 1, 1996
MONEY MARKET MUTUAL FUND
CALIFORNIA TAX-FREE BOND FUND
CALIFORNIA TAX-FREE MONEY MARKET MUTUAL FUND
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Stagecoach Funds, Inc. (the "Company") is an open-end investment
company. This Statement of Additional Information ("SAI") contains information
about three of the funds in the Stagecoach Family of Funds -- the MONEY MARKET
MUTUAL FUND, the CALIFORNIA TAX-FREE BOND FUND (the "Bond Fund") and the
CALIFORNIA TAX-FREE MONEY MARKET MUTUAL FUND (each a "Fund" and collectively,
the "Funds"; the Money Market Mutual Fund and California Tax-Free Money Market
Mutual Fund are, collectively, the "Money Market Mutual Funds"). The Bond Fund
offers two classes of shares -- Class A and Class B Shares. It formerly
offered only Class A Shares which were not designated as a class. The Money
Market Mutual Fund offers two classes of shares -- Class A and Class S Shares.
This SAI relates to both Classes of the Bond Fund and the Money Market Mutual
Fund and to the shares of the California Tax-Free Money Market Mutual Fund.
The investment objective of each Fund is described in its respective Prospectus
under "How the Funds Work -- Investment Objectives and Policies."
This SAI is not a prospectus and should be read in conjunction
with each Fund's current Prospectus. All terms used in this SAI that are
defined in the Prospectus for each Fund will have the meanings assigned in that
Fund's Prospectus. A copy of the Prospectus for each Fund may be obtained
without charge by writing Stephens Inc., the Company's sponsor, administrator
and distributor, at 111 Center Street, Little Rock, Arkansas 72201 or 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 . . . . . . . . . . . . . 5
Special Considerations Affecting
California Municipal Obligations . . . . . . . . . . . . . . . . . 8
Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Distribution Plan . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Calculation of Yield and Total Return . . . . . . . . . . . . . . . . 17
Determination of Net Asset Value . . . . . . . . . . . . . . . . . . 22
Portfolio Transactions . . . . . . . . . . . . . . . . . . . . . . . 24
Fund Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Federal Income Taxes . . . . . . . . . . . . . . . . . . . . . . . . 26
Capital Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
Independent Auditors . . . . . . . . . . . . . . . . . . . . . . . . 32
Financial Information . . . . . . . . . . . . . . . . . . . . . . . . 32
SAI Appendix . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-1
Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . F-1
</TABLE>
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INVESTMENT RESTRICTIONS
The Funds are subject to the following investment restrictions,
all of which are fundamental policies.
None of the Funds may:
(1) purchase the securities of issuers conducting their principal
business activity in the same industry if, immediately after the purchase and
as a result thereof, the value of such Fund's investments in that industry
would be 25% or more of the current value of such Fund's total assets, provided
that there is no limitation with respect to investments in (i) municipal
securities (for the purpose of this restriction, private activity bonds and
notes shall not be deemed municipal securities if the payments of principal and
interest on such bonds or notes is the ultimate responsibility of
non-governmental issuers), with respect to the California Tax-Free Bond Fund
and the California Tax-Free Money Market Mutual Fund, (ii) obligations of the
United States Government, its agencies or instrumentalities, and (iii) with
respect to the Money Market Mutual Fund and the California Tax-Free 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) purchase or sell real estate or real estate limited
partnerships (other than municipal obligations with respect to the California
Tax-Free Bond Fund and the California Tax-Free Money Market Mutual Fund, or
other than money market securities with respect to the Money Market Mutual
Fund, or other securities secured by real estate or interests therein or
securities issued by companies that invest in real estate or interests
therein), commodities or commodity contracts (including futures contracts);
(3) purchase securities on margin (except for short-term credits
necessary for the clearance of transactions with regard to all the Funds and
except for margin payments in connection with options, futures and options on
futures with regard to the California Tax-Free Bond Fund and the California
Tax-Free Money Market Mutual Fund) or make short sales of securities;
(4) underwrite securities of other issuers, except to the extent
that the purchase of municipal securities or other permitted investments
directly from the issuer thereof or from an underwriter for an issuer and the
later disposition of such securities in accordance with the Fund's investment
program may be deemed to be an underwriting;
(5) make investments for the purpose of exercising control or
management;
(6) 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 its net assets
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(but investments may not be purchased while any such outstanding borrowings
exceed 5% of its net assets); or
(7) write, purchase or sell puts, calls, options or any
combination thereof, and the California Tax-Free Money Market Mutual Fund and
Money Market Mutual Fund also may not write, purchase or sell warrants, except
that all Funds may purchase securities with put rights in order to maintain
liquidity.
In addition, neither the California Tax-Free Money Market Mutual
Fund nor the Money Market Mutual Fund may make loans of portfolio securities or
other assets, except that loans for purposes of this restriction will not
include the purchase of fixed time deposits, repurchase agreements, commercial
paper and other short-term obligations, and other types of debt instruments
commonly sold in public or private offerings.
The Funds are subject to the following non-fundamental policies:
(1) The Funds may not 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 owned beneficially more than 5% of such securities.
(2) The Funds may not purchase interests, leases, or limited
partnership interests in oil, gas, or other mineral exploration or development
programs.
(3) The Money Market Mutual Fund may not purchase or sell real
estate limited partnership interests.
(4) The Funds may not purchase securities of issuers who, with
their predecessors, have been in existence less than three years, unless the
securities are fully guaranteed or insured by the U.S. Government, a state,
commonwealth, possession, territory, the District of Columbia or by an entity
in existence at least three years, or the securities are backed by the assets
and revenues of any of the foregoing if, by reason thereof, the value of its
aggregate investments in such securities will exceed 5% of its total assets.
(5) The Funds may not purchase securities of unseasoned
issuers, including their predecessors, which have been in operation for less
than three years, and equity securities of issuers which are not readily
marketable if by reason thereof the value of such Fund's aggregate investment
in such classes of securities will exceed 5% of its total assets.
(6) The California Tax-Free Bond Fund and the California
Tax-Free Money Market Mutual Fund may not invest more than 10% of the current
value of their net assets in repurchase agreements maturing in more than seven
days or other illiquid securities (including restricted securities). The Money
Market Mutual Fund may not invest more than 10% of the current value of its net
assets in securities that are illiquid by virtue of the absence of a readily
available market
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or legal or contractual restrictions on resale and fixed time deposits that are
subject to withdrawal penalties and that have maturities of more than seven
days.
In addition, 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. However, the
Fund's investment adviser will waive its advisory fees for that portion of the
Fund's assets so invested, except when such purchase is part of a plan of
merger, consolidation, reorganization or acquisition. In the case of the
California Tax-Free Bond Fund and the California Tax-Free Money Market Mutual
Fund these unaffiliated investment companies must have a fundamental investment
policy of investing at least 80% of their net assets in obligations that are
exempt from federal income taxes and are not subject to the federal alternative
minimum tax.
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.
ADDITIONAL PERMITTED INVESTMENT ACTIVITIES
Unrated Investments. The Funds may purchase instruments that are
not rated if, in the opinion of Wells Fargo Bank, such obligations are of
comparable quality to other rated investments that are permitted to be
purchased by such Fund. After purchase by a Fund, a security may cease to be
rated or its rating may be reduced below the minimum required for purchase by
such Fund. Neither event will require a sale of such security by the Fund,
provided that, with respect to the California Tax-Free Money Market Mutual Fund
and 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 rating 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 such
Funds' best interest. 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 Prospectus of the
Fund and in this SAI. The ratings of Moody's and S&P are more fully described
in the SAI Appendix.
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Letters of Credit. Certain of the debt obligations (including
municipal securities, certificates of participation, commercial paper and other
short-term obligations) which 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 which assumes the obligation for payment of
principal and interest in the event of default by the issuer. Only banks,
savings and loan associations and insurance companies which, in the opinion of
Wells Fargo Bank, are of comparable quality to issuers of other permitted
investments of each such Fund may be used for letter of credit-backed
investments, provided that, in the case of the California Tax-Free Money Market
Mutual Fund, the Company's Board approves or ratifies such investments.
Pass-Through Obligations. Certain of the debt obligations which
the California Tax-Free Bond Fund may purchase may be pass-through obligations
that represent an ownership interest in a pool of mortgages and the resultant
cash flow from those mortgages. Payments by homeowners on the loans in the
pool flow through to certificate holders in amounts sufficient to repay
principal and to pay interest at the pass-through rate. The stated maturities
of pass-through obligations may be shortened by unscheduled prepayments of
principal on the underlying mortgages. Therefore, it is not possible to
predict accurately the average maturity of a particular pass-through
obligation. Variations in the maturities of pass-through obligations will
affect the yield of the Fund. Furthermore, as with any debt obligation,
fluctuations in interest rates will inversely affect the market value of
pass-through obligations. The 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. Certain of the securities in which the
California Tax-Free Bond Fund and the California Tax-Free Money Market Mutual
Fund may invest will be purchased on a when-issued basis, in which case
delivery and payment normally take place within 45 days after the date of the
commitment to purchase. However, the California Tax-Free Money Market Mutual
Fund has no present intention to invest in when-issued securities and the
California Tax-Free Bond Fund does not intend to invest more than 5% of its
net assets in such securities during the coming year. The Funds 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. 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 their respective
commitments to purchase when-issued securities. If the value of these
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assets declines, the Fund will place additional liquid assets in the account on
a daily basis so that the value of the assets in the account is equal to the
amount of such commitments.
Municipal Bonds. The California Tax-Free Bond Fund and the
California Tax-Free Money Market Mutual Fund may invest in municipal bonds. As
discussed in the Prospectus of each Fund, the two principal classifications of
municipal bonds are "general obligation" and "revenue" bonds. Municipal bonds
are debt obligations issued to obtain funds for various public purposes,
including the construction of a wide range of public facilities such as
bridges, highways, housing, hospitals, mass transportation, schools, streets,
and water and sewer works. Other purposes for which municipal bonds may be
issued include the refunding of outstanding obligations and obtaining funds for
general operating expenses or to loan to other public institutions and
facilities. Industrial development bonds are a specific type of revenue bond
backed by the credit and security of a private user. Certain types of
industrial development bonds are issued by or on behalf of public authorities
to obtain funds to provide privately-operated housing facilities, sports
facilities, convention or trade show facilities, airport, mass transit, port or
parking facilities, air or water pollution control facilities and certain local
facilities for water supply, gas, electricity, or sewage or solid waste
disposal. The California Tax-Free Bond Fund may not invest 25% or more of its
assets in industrial development bonds. Assessment bonds, wherein a specially
created district or project area levies a tax (generally on its taxable
property) to pay for an improvement or project may be considered a variant of
either category. There are, of course, other variations in the types of
municipal bonds, both within a particular classification and between
classifications, depending on numerous factors.
Municipal Notes. Municipal notes include, but are not limited to,
tax anticipation notes ("TANs"), bond anticipation notes ("BANs"), revenue
anticipation notes ("RANs") and construction loan notes. Notes sold as interim
financing in anticipation of collection of taxes, a bond sale or receipt of
other revenues are usually general obligations of the issuer.
TANs. 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.
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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 it has no present intention to
do so, the California Tax-Free Bond Fund may invest up to 5% of its net assets
at the time of purchase in warrants (other than those that have been acquired
in units or attached to other securities), and not more than 2% of its net
assets in warrants which are not listed on the New York or American Stock
Exchange. Warrants represent rights to purchase securities at a specific price
valid for a specific period of time. The prices of warrants do not necessarily
correlate with the prices of the underlying securities. The California
Tax-Free Bond Fund may only purchase warrants on securities in which the Fund
may invest directly.
SPECIAL CONSIDERATIONS AFFECTING
CALIFORNIA MUNICIPAL OBLIGATIONS
Certain debt obligations held by the California Tax-Free Bond Fund
and the California Tax-Free Money Market Mutual 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 California
Tax-Free Bond Fund and the California Tax-Free Money Market Mutual Fund may
invest may be obligations of California issuers that rely in whole or in part,
directly or indirectly, on ad valorem real property taxes as a source of
revenue. The California Constitution limits the powers of municipalities to
impose and collect ad valorem taxes on real property, which, in turn, restricts
the ability of municipalities to service their debt obligations from such
taxes.
For example, Article XIIIA of the California Constitution, as
amended, limits ad valorem real property taxes to 1% of the full cash value of
the property, defined as the county tax assessor's valuation as of March 1,
1975, plus adjustments not to exceed 2% per year, adjustments upon purchase,
change of ownership or new construction after that date, and certain other
adjustments. Article XIIIB provides that state and local government
appropriations from
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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 Fund or the ability of state or local government to pay the interest on,
or repay the principal of, such municipal obligations.
Certain debt obligations held by the California Tax-Free Bond Fund
may be obligations payable solely from lease payments on real or personal
property leased to the state, cities, counties or their various public
entities. California law provides that a lessor may not be required to make
payments during any period that it is denied use and occupancy of the property
in proportion to such loss. Moreover, the lessor only agrees to appropriate
funding for lease payments in its annual budget for each fiscal year. In case
of a default under the lease, the only remedy available against the lessor is
that of reletting the property; no acceleration of lease payments is permitted.
Each of these factors presents a risk that the lease financing obligations held
by the California Tax-Free Bond Fund would not be paid in a timely manner.
Certain debt obligations held by the California Tax-Free Bond Fund
may be obligations which are payable solely from the revenues of health care
institutions. The method of reimbursement for indigent care, California's
selective contracting with health care providers for such care and selective
contracting by health insurers for care of its beneficiaries now in effect
under California and federal law may adversely affect these revenues and,
consequently, payment on those debt obligations.
There can be no assurance that general economic difficulties or
the financial circumstances of California or its towns and cities will not
adversely affect the market value of California municipal securities or the
ability of obligors to continue to make payments on such securities.
* * *
The taxable securities market is a broader and more liquid market
with a greater number of investors, issuers and market makers than the market
for municipal securities. The more limited marketability of municipal
securities may make it difficult in certain circumstances to dispose of large
investments advantageously.
MANAGEMENT
The following information supplements and should be read in
conjunction with the corresponding sections in the Prospectus. The principal
occupations during the past five years of the Directors and principal executive
Officer of the Company are listed below. The address of
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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>
<CAPTION>
Principal Occupations
Name, Address and Age Position During Past 5 Years
- --------------------- -------- ---------------------
<S> <C> <C>
Jack S. Euphrat, 73 Director Private Investor.
415 Walsh Road
Atherton, CA 94027.
*R. Greg Feltus, 44 Director, Senior Vice President of
Chairman and Stephens; Manager of Financial
President Services Group; President of
Stephens Insurance Services Inc.;
Senior Vice President of Stephens
Sports Management Inc.; and
President of Investor Brokerage
Insurance Inc.
Thomas S. Goho, 53 Director T.B. Rose Faculty
321 Beechcliff Court Fellow-Business,
Winston-Salem, NC 27104 Wake Forest University
Calloway School of Business and
Accountancy; Associate Professor
of Finance of the School of
Business and Accounting at Wake
Forest University since 1983.
*Zoe Ann Hines, 46 Director Senior Vice President of Stephens
and Director of Brokerage
Accounting; and Secretary of
Stephens Resource Management.
</TABLE>
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<TABLE>
<S> <C> <C>
*W. Rodney Hughes, 69 Director Private Investor.
31 Dellwood Court
San Rafael, CA 94901
Robert M. Joses, 77 Director Private Investor.
47 Dowitcher Way
San Rafael, CA 94901
*J. Tucker Morse, 51 Director Private Investor; Real Estate
10 Legrae Street Developer; Chairman of
Charleston, SC 29401 Renaissance Properties Ltd.;
President of Morse Investment
Corporation; and Co-Managing
Partner of Main Street Ventures.
Richard H. Blank, Jr., 39 Chief Associate of Financial Services
Operating Group of Stephens; Director of
Officer, Stephens Sports Management Inc.;
Secretary and and Director of Capo Inc.
Treasurer
</TABLE>
COMPENSATION TABLE
For the Year Ended December 31, 1995
<TABLE>
<CAPTION>
Total Compensation
Aggregate Compensation from Registrant
Name and Position from Registrant and Fund Complex
<S> <C> <C>
Jack S. Euphrat $10,188 $39,750
Director
*R. Greg Feltus 0 0
Director
Thomas S. Goho 10,188 39,750
Director
</TABLE>
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<TABLE>
<S> <C> <C>
*Zoe Ann Hines 0 0
Director
*W. Rodney Hughes 9,438 37,000
Director
Robert M. Joses 9,938 39,000
Director
*J. Tucker Morse 8,313 33,250
Director
</TABLE>
Directors of the Company are compensated annually by the Company
and by all the registrants in the fund complex for their services as indicated
above and also are reimbursed for all out-of-pocket expenses relating to
attendance at board meetings. Each of the Directors and Officers of the
Company serves in the identical capacity as Officers and Directors of Overland
Express Funds, Inc. and Stagecoach Inc., and as Trustees and/or Officers of
Stagecoach Trust, Master Investment Portfolio, Life & Annuity Trust, Master
Investment Trust and Managed Series Investment Trust, each of which is a
registered open-end management investment company and each of which is
considered to be in the same "fund complex," as such term is defined in Form
N-1A under the 1940 Act, as the Company. The Directors are compensated by
other Companies and Trusts within the fund complex for their services as
Directors/Trustees to such Companies and Trusts. Currently the Directors do
not receive any retirement benefits or deferred compensation from the Company
or any other member of the fund complex.
As of the date of this 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 approved by the Board of Directors on October
22, 1991, and by the initial shareholder of each Fund on December 2, 1991. The
Advisory Contract for each Fund provides that Wells Fargo Bank shall furnish to
the Fund investment guidance and policy direction in connection with the daily
portfolio management of the Fund. 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 to each Fund with, among
other things, money market security and fixed-income research, analysis and
statistical and economic data and information concerning interest rate and
security market trends, portfolio composition, credit conditions and average
maturities of 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"
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(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 $2,157,487 -0- $368,134 $1,728,107 $1,542,893 -0-
California Tax-Free $3,406,799 $458,784 $304,857 $3,809,902 $4,867,523 -0-
Money Market
Mutual
Money Market Mutual $1,285,690 -0- $2,073,686 $2,008,946 $12,729,506 -0-
</TABLE>
Administrator and Distributor. The Company has retained Stephens
as administrator and distributor on behalf of the Funds. Each Administration
Agreement between Stephens and the Fund 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 public accountants 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 Fund 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 fiscal years ended December 31, 1993, 1994 and 1995, the
Funds paid administrative fees to Stephens as follows:
<TABLE>
<CAPTION>
FUND 1993 1994 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
California Tax-Free Bond Fund $130,939 $126,570 $93,013
California Money Market Mutual Fund $232,585 $247,666 $292,095
Money Market Mutual Fund $96,535 $306,209 $954,713
</TABLE>
The Advisory Contract and Administration Agreement for each Fund
provide that if, in any fiscal year, the total expenses of the Fund incurred
by, or allocated to, the Fund (excluding
13
<PAGE> 14
taxes, interest, brokerage commissions and other portfolio transaction
expenses, expenditures that are capitalized in accordance with generally
accepted accounting principles, extraordinary expenses and amounts accrued or
paid under the Plan but including the fees provided for in the Advisory
Contract and the 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 shall 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 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 each Fund's
prospectus under the heading "Shareholder Servicing Agent," the Funds have
entered into shareholder servicing agreements with Wells Fargo Bank. The
dollar amount of shareholder servicing fees paid by each of the Funds to Wells
Fargo Bank or its affiliates for the fiscal year ended December 31, 1995 was as
follows:
<TABLE>
<CAPTION>
FUND 1995
- --------------------------------------------------------------------------------
<S> <C>
California Tax-Free Bond Fund $59,642
California Tax-Free Money Market Mutual Fund $522,756
Money Market Mutual Fund $8,542,616
</TABLE>
Custodian and Transfer and Dividend 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 did not pay any custody fees or transfer or dividend disbursing
agency fees to Wells Fargo Bank.
Underwriting Commissions. For the fiscal years ended December 31,
1993 and 1994, the Company's distributor retained $26,215,173 and $5,415,227,
respectively in underwriting commissions (front-end sales loads and CDSCs, if
any) in connection with the purchase or
14
<PAGE> 15
redemption of each Fund's shares. For the fiscal years ended December 31, 1993
and 1994, Wells Fargo Securities Inc. ("WFSI"), an affiliated broker-dealer of
the Company, and its registered representatives received $378,895 and $904,274,
respectively, in underwriting commissions in connection with the purchase or
redemption of each Fund's shares.
For the year ended December 31, 1995, the aggregate amount of
underwriting commissions on sales/redemptions of the Company's shares was
$1,584,545. Stephens retained $1,251,311 of such commissions. WFSI and its
registered representatives retained $333,234 of such commissions.
DISTRIBUTION PLAN
Each of the Funds has adopted a distribution plan (a "Plan") under
Section 12(b) of the 1940 Act and Rule 12b-1 thereunder as described in each
Fund's Prospectus. The Plans for the shares of the California Tax-Free Money
Market Mutual Fund, the Class A Shares of the Money Market Mutual Fund and the
Class A Shares of the California Tax-Free Bond Fund were adopted by the
Company's Board of Directors, including a majority of the Directors who were
not "interested persons" (as defined in the 1940 Act) of the respective Fund
and who had no direct or indirect financial interest in the operation of the
Plans or in any agreement related to the Plans (the "Qualified Directors") on
October 22, 1991, and were approved by the initial shareholder of the
respective Funds on December 2, 1991. The Plan for the Class B Shares of the
Bond Fund was adopted by the Board of Directors, including a majority of
Qualified Directors, on July 27, 1994.
Under the Plans in effect for the shares of the California
Tax-Free Money Market Mutual Fund, the Class A Shares of the Bond Fund and the
Class A Shares of the Money Market Mutual Fund, each Fund may defray all or
part of the cost of preparing and printing prospectuses and other promotional
materials and of delivering prospectuses and those materials to prospective
Fund shareholders by paying on an annual basis up to 0.05% of the respective
Fund's average daily net assets or average daily net assets attributable to
Class A Shares, as the case may be. The Plans for the California Tax-Free
Money Market Mutual Fund and the Class A Shares of the Bond Fund and Money
Market Mutual Fund provide only for reimbursement of actual expenses. Under
the Plans for the Class B Shares of the Bond Fund and Class S Shares of the
Money Market Mutual Fund the Funds may defray all or part of the cost of
preparing and printing prospectuses and other promotional materials and of
delivering prospectuses and those materials to prospective Fund shareholders by
paying on an annual basis up to 0.70% of the average daily net assets of Class
B Shares and up to 0.75% of the average daily net assets of the Class S Shares,
respectively. The Class B Plan and Class S Plan provide for reimbursement of
actual expenses and payment of compensation to the Distributor and Selling
Agents for sales support services. In addition, each Plan contemplates that to
the extent any fees payable pursuant to a Shareholder Servicing Agreement are
deemed to be for distribution-related services, rather than shareholder
services, such payments are approved and payable pursuant to such Plan.
Each Plan will continue in effect from year to year if such
continuance is approved by a majority vote of both the Directors of the Company
and the Qualified Directors. Any Agreements related to the Plans also must be
approved by the majority vote of the Directors and
15
<PAGE> 16
the Qualified Directors. Such Agreements will terminate automatically if
assigned, and may, in the case of the California Tax-Free Money Market Mutual
Fund, be terminated at any time, without payment of any penalty, by a vote of a
majority of the outstanding voting securities of the respective Fund. In the
case of the Bond Fund and Money Market Mutual Fund, such agreements may be
terminated at any time without penalty by a vote of a majority of the
outstanding voting securities of the respective Class of such Fund affected by
the Agreement. The Plans may not be amended to increase materially the amounts
payable thereunder, in the case of the California Tax-Free Money Market Mutual
Fund, without the approval of a majority of the outstanding voting securities
of the respective Fund and in the case of the Bond Fund and Money Market Mutual
Fund, without the approval of a majority of the outstanding securities of the
respective Class of such Fund affected by the proposed increase. No material
amendment to the Plans may be made except by the approval of a majority of both
the Directors of the Company and the Qualified Directors.
Each Plan requires that the Treasurer of the Company shall provide
to the Directors, and the Directors shall review, at least quarterly, a written
report of the amounts expended (and purposes therefor) under the Plan. The
Rule also requires that the selection and nomination of Directors who are not
"interested persons" of the Company be made by such disinterested Directors.
For the year ended December 31, 1995, the Funds' distributor
received the following amounts of 12b-1 fees for the specified purposes set
forth below under each Fund's Plan.
<TABLE>
<CAPTION>
PRINTING & COMPENSATION
MAILING MARKETING TO
FUND TOTAL PROSPECTUS BROCHURES UNDERWRITERS
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
California Tax-Free Bond
Class A $110,033 $24,390 $85,643 N/A
Class B $82,030 N/A N/A $82,030
California Tax-Free
Money Market Mutual
$326,122 $132,394 $193,728 N/A
Money Market Mutual
Class A $332,859 $122,263 $210,596 -0-
Class S $2,215,338 N/A N/A $2,215,338
</TABLE>
For the year ended December 31, 1995, WFSI and its registered
representatives received no compensation under each Fund's Plans.
16
<PAGE> 17
CALCULATION OF YIELD AND TOTAL RETURN
As indicated in its Prospectus, the California Tax-Free Bond Fund
may advertise, with respect to Class A and Class B Shares, certain total return
information computed in the manner described in its Prospectus. As and to the
extent required by the SEC, an average annual compound rate of return ("T")
will be computed by using the redeemable value at the end of a specified period
("ERV") of a hypothetical initial investment in a Class of shares ("P") over a
period of years ("n") according to the following formula: P(1+T)n = ERV. In
addition, as indicated in its Prospectus, the California Tax-Free Bond Fund, at
times, also may calculate total return based on net asset value per share of
Class A or Class B Shares (rather than the public offering price), in which
case the figures would not reflect the effect of any sales charges that would
have been paid by an investor, or based on the assumption that a sales charge
other than the maximum sales charge (reflecting a Volume Discount) was
assessed, provided that total return data derived pursuant to the calculation
described above also are presented.
The average annual total return of the Class A Shares of the Bond
Fund from inception (January 1, 1992) to December 31, 1995, assuming a 4.50%
sales charge, was 7.09%. The average annual total return for the same period,
assuming no sales charge, was 8.33%. The average annual total return for the
Class A Shares of the Bond Fund for the year ended December 31, 1995, assuming
the maximum 4.50% sales charge, was 12.96%. The average annual total return of
such shares for the same period, assuming no sales charge, was 18.24%. The
average annual total return for the Class B Shares of the Bond Fund for the
year ended December 31, 1995, assuming the maximum CDSC, was 14.72%. The
average annual total return for the Class B Shares of the Bond Fund for the
year ended December 31, 1995, assuming no sales charge, was 17.72%.
The California Tax-Free Bond Fund may advertise cumulative total
return on its Class A and Class B Shares. 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 which is 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.
The cumulative total return of the Class A Shares of the Bond
Fund from inception (January 1, 1992) to December 31, 1995, assuming a 4.50%
sales charge, was 31.53%. The cumulative total return on the Class A Shares
for the same period, assuming no sales charge, was 37.71%.
As indicated in its Prospectus, the California Tax-Free Bond Fund
also may advertise certain yield information with respect to each Class of
shares. As and to the extent required by the SEC, yield is calculated based on
a 30-day (or one month) period, computed by dividing the net investment income
per share of the respective Class of the Fund earned during the period by the
maximum offering price per share of such Class on the last day of the period,
according to the
17
<PAGE> 18
following formula: YIELD = 2[((a-b/cd)+1)6-1], where a = dividends and
interest earned during the period; b = expenses accrued for the period (net of
reimbursements); c = the average daily number of shares 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
the California Tax-Free Bond Fund includes actual interest income, plus or
minus amortized purchase discount (which may include original issue discount)
or premium, less accrued expenses. Realized and unrealized gains and losses on
portfolio securities are not included in the California Tax-Free Bond Fund's
net investment income. For purposes of sales literature, yield on each Class
of shares of the Bond Fund also may be calculated on the basis of the net asset
value per share rather than the public offering price, provided that the yield
data derived pursuant to the calculation described above also are presented.
The yield for the Class A Shares of the Bond Fund for the 30-day
period ended December 31, 1995, assuming the maximum 4.50% sales charge, was
4.54%. The yield on such shares during the same period, assuming no sales
charge, was 4.75%. The yield for the Class B Shares of the Bond Fund for the
thirty-day period ended December 31, 1995, assuming no CDSC was 4.09%.
The tax-equivalent yield for each Class of shares of the
California Tax-Free Bond Fund is also computed by dividing that portion of the
yield of the Fund which is tax-exempt by one minus a stated income tax rate and
adding the product to that portion, if any, of the yield of the Fund that is
not tax-exempt.
The tax-equivalent yield of the Class A Shares of the Bond Fund
for the 30-day period ended December 31, 1995, assuming the maximum 4.50% sales
charge, was 7.88% (based on a 42.40% assumed federal and state tax rate). The
tax-equivalent yield for such shares during the same period, assuming no sales
charge and the same tax rate, was 8.25%. The tax-equivalent yield for Class B
shares during the same period, assuming no CDSC and the same tax rate, was
7.10%.
Yield for the California Tax-Free Money Market Mutual Fund is
calculated based on the net changes, exclusive of capital changes, over a
seven-day period, in the value of a hypothetical pre-existing account having a
balance of one share at the beginning of the period, subtracting a hypothetical
charge reflecting deductions from shareholder accounts, and dividing the
difference by the value of the account at the beginning of the base period to
obtain the base period return, and then multiplying the base period return by
(365/7) with the resulting yield figure carried to at least the nearest
hundredth of one percent. Tax-equivalent yield for the California Tax-Free
Money Market Mutual Fund is computed by dividing that portion of the yield of
the Fund which is tax-exempt by one minus a stated income tax rate and adding
the product to that portion, if any, of the yield of the Fund that is not
tax-exempt. The California Tax-Free Money Market Mutual Fund's yield and
tax-equivalent yield for the seven-day period ended December 31, 1995, were
3.81% and (based on a 42.40% assumed federal and state tax rate) 6.61%,
respectively.
18
<PAGE> 19
Effective yield and effective tax-equivalent yield for the
California Tax-Free Money Market Mutual Fund are calculated by determining the
net change, or tax-equivalent assumed net change, exclusive of capital changes,
in the value of a hypothetical pre-existing account having a balance of one
share at the beginning of the period, subtracting a hypothetical charge
reflecting deductions from shareholder accounts, and dividing the difference by
the value of the account at the beginning of the base period to obtain the base
period return, and then compounding the base period return by adding one,
raising the sum to a power equal to 365 divided by seven, and subtracting one
from the result. The California Tax-Free Money Market Mutual Fund's effective
yield and effective tax-equivalent yield for the seven-day period ended
December 31, 1995, were 3.88% and (based on a 42.40% assumed federal and state
tax rate) 6.74% respectively.
In addition, as indicated in its Prospectus, the Money Market
Mutual Fund may advertise certain yield information with respect to each Class
of shares. Current yield with respect to each Class of shares of the Money
Market Mutual Fund will be calculated based on the net changes, exclusive of
capital changes, over a seven-day period, in the value of a hypothetical
pre-existing account having a balance of one share at the beginning of the
period, subtracting a hypothetical charge reflecting deductions from
shareholder accounts, and dividing the difference by the value of the account
at the beginning of the base period to obtain the base period return, and then
multiplying the base period return by (365/7) with the resulting yield figure
carried to at least the nearest hundredth of one percent. The yield for the
Class A Shares of the Money Market Mutual Fund for the seven-day period ended
December 31, 1995 was 4.98%. The yield for the Class S Shares of the Money
Market Mutual Fund for the seven-day period ended December 31, 1995 was 4.30%.
The yield for the California Tax-Free Money Market Mutual Fund and
each Class of the Bond Fund and Money Market Mutual Fund will fluctuate from
time to time, unlike bank deposits or other investments that pay a fixed yield
for a stated period of time, and does not provide a basis for determining
future yields since it is based on historical data. Yield is a function of
portfolio quality, composition, maturity and market conditions as well as the
expenses allocated to the Fund.
Yield 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 yield of a
Fund and the yield of a Class of shares in a Fund, however, may not be
comparable to the yields from investment alternatives because of differences in
the foregoing variables and differences in the methods used to value portfolio
securities, compute expenses and calculate yield.
In addition, investors should recognize that changes in the net
asset value of shares of each Class of the California Tax-Free Bond Fund and
Money Market Mutual Fund will affect the yield of each such Class for any
specified period, and such changes should be considered together with the yield
of each Class in ascertaining the total return to shareholders of each Class of
shares for the period. Yield information for the Funds and each Class may be
useful in reviewing the performance of the Funds and each Class and for
providing a basis for comparison with investment alternatives. The yield of a
Fund and the yield of each Class, however, may not be
19
<PAGE> 20
comparable to the yields from investment alternatives because of differences in
the foregoing variables and differences in the methods used to value portfolio
securities, compute expenses and calculate yield.
From time to time and only to the extent the comparison is
appropriate for a 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 the California Tax-Free Money Market Mutual Fund or of each
Class of the Bond Fund and Money Market Mutual Fund also may be compared to
those of other mutual funds having similar objectives. This comparative
performance could be expressed as a ranking prepared by Lipper Analytical
Services, Inc., CDA Investment Technologies, Inc., Bloomberg Financial Markets
or Morningstar, Inc., independent services which monitor the performance of
mutual funds. The California Tax-Free Bond Fund's and the Money Market Mutual
Funds' performance will be calculated by relating net asset value per share at
the beginning of a stated period to the net asset value of the investment,
assuming reinvestment of all gains distributions and dividends paid, at the end
of the period. The California Tax-Free Money Market Mutual Fund's and the
Money Market Mutual Fund's comparative performance will be based on a
comparison of yields, as described above, or total return, as reported by
Lipper, Survey Publications, Donoghue or Morningstar, Inc.
Any such comparisons may be useful to investors who wish to
compare past performance of the California Tax-Free Money Market Mutual Fund
or of each Class of the Bond Fund and Money Market Mutual Fund 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.
The Company also may disclose in sales literature, information and
statements the distribution rate on the shares of each class of the California
Tax-Free Bond Fund. 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
20
<PAGE> 21
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.
In addition, the Company also may use, in advertisements and other
types of literature, information and statements: (1) showing that bank savings
accounts offer a guaranteed return of principal and a fixed rate of interest,
but no opportunity for capital growth; and (2) describing Wells Fargo Bank,
and its affiliates and predecessors, as one of the first investment managers to
advise investment accounts using asset allocation and index strategies. The
Company also may include in advertising and other types of literature
information and other data from reports and studies prepared by the Tax
Foundation, including information regarding federal and state tax levels and
the related "Tax Freedom Day."
The Company may discuss in advertising, and other types of sales
literature, information and statements, relative rankings of performance, asset
level, fee level and risk level published in books, magazines, newsletters and
newspapers including, but not limited to, the Wall Street Journal, Money
Magazine, Barrons, Kiplingers, Business Week, Fortune, Forbes, Worth, Bank
Investor, Mutual Funds Magazine, American Banker, Smart Money, Morningstar,
Investor Business Daily, Value Line, The 100 Best Mutual Funds, The Boston
Globe, The Chicago Sun-Times, The Los Angeles Times, The New York Times, The
San Jose Mercury News, The San Francisco Chronicle and The Washington Post.
The Company also may discuss in advertising and other types of
literature that a Fund has been assigned a rating by a nationally recognized
statistical rating organization ("NRSRO"), such as Standard & Poor's
Corporation. Such rating would assess the creditworthiness of the investments
held by the Fund. The assigned rating would not be a recommendation to
purchase, sell or hold the Fund's shares since the rating would not comment on
the market price of the Fund's shares or the suitability of the Fund for a
particular investor. In addition, the assigned rating would be subject to
change, suspension or withdrawal as a result of changes in, or unavailability
of, information relating to the Fund or its investments. The Company may
compare the Fund's performance with other investments which are assigned
ratings by NRSROs. Any such
21
<PAGE> 22
comparisons may be useful to investors who wish to compare the Fund's past
performance with other rated investments.
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 the Company's
investment adviser. The Company may also disclose in advertising and other
types of sales literature the assets and categories of assets under management
by a fund's investment adviser or sub-adviser and the total amount of assets
under management by Wells Fargo Investment Management Group. As of December
31, 1995, IMG had $30.1 billion in assets under management. The Company may
disclose in advertising, statements and other literature the amount of assets
and mutual fund assets managed by Wells Fargo Bank. As of April 1, 1996,
Wells Fargo Bank provided investment advisory services for approximately $56
billion of assets of individuals, trusts, estates and institutions and $17
billion of mutual fund assets.
The Company also may discuss in advertising and other types of
literature the features, terms and conditions of Wells Fargo Bank accounts
through which investments in the Money Market Mutual Funds may be made via a
"sweep" arrangement, including, without limitation, the Managed Sweep Account,
Money Market Checking Account, California Tax-Free Money Market Checking
Account, Money Market Access Account and California Tax-Free Money Market
Access Account (collectively, the "Sweep Accounts"). Such advertisements and
other literature may include, without limitation, discussions of such terms and
conditions as the minimum deposit required to open a Sweep Account, a
description of the yield earned on shares of the Money Market Mutual Funds
through a Sweep Account, a description of any monthly or other service charge
on a Sweep Account and any minimum required balance to waive such service
charges, any overdraft protection plan offered in connection with a Sweep
Account, a description of any ATM or check privileges offered in connection
with a Sweep Account and any other terms, conditions, features or plans offered
in connection with a Sweep Account. Such advertising or other literature may
also include a discussion of the advantages of establishing and maintaining a
Sweep Account, and may include statements from customers as to the reasons why
such customers have established and maintained a Sweep Account.
DETERMINATION OF NET ASSET VALUE
Net asset value per share for the California Tax-Free Money Market
Mutual Fund and for each Class of the Bond Fund and Money Market Mutual Fund is
determined by the Custodian on each Business Day, as described in the
Prospectus for each Fund.
22
<PAGE> 23
The assets of the California Tax-Free 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 California Tax-Free Bond Fund 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.
As indicated under "Investing In The Funds -- Share Price" in the
Prospectus of the California Tax-Free Money Market Mutual Fund and the Money
Market Mutual Fund, each Fund uses the amortized cost method to determine the
value of its portfolio securities pursuant to Rule 2a-7 under the 1940 Act.
The amortized cost method involves valuing a security at its cost and
amortizing any discount or premium over the period until maturity, regardless
of the impact of fluctuating interest rates on the market value of the
security. While this method provides certainty in valuation, it may result in
periods during which the value, as determined by amortized cost, is higher or
lower than the price that the California Tax-Free Money Market Mutual Fund or
the Money Market Mutual Fund would receive if the security were sold. During
these periods the yield to a shareholder may differ somewhat from that which
could be obtained from a similar fund that uses a method of valuation based
upon market prices. Thus, during periods of declining interest rates, if the
use of the amortized cost method resulted in a lower value of the California
Tax-Free Money Market Mutual Fund's or the Money Market Mutual Fund's portfolio
on a particular day, a prospective investor in the Fund would be able to obtain
a somewhat higher yield than would result from investment in a fund using
solely market values, and existing Fund shareholders would receive
correspondingly less income. The converse would apply during periods of rising
interest rates.
Rule 2a-7 provides that in order to value its portfolio using the
amortized cost method, a Fund must maintain a dollar-weighted average portfolio
maturity of 90 days or less, purchase securities having remaining maturities
(as defined in Rule 2a-7) of thirteen months or less and invest only in those
high-quality securities that are determined by the Board of Directors to
present minimal credit risks. The maturity of an instrument is generally
deemed to be the period remaining until the date when the principal amount
thereof is due or the date on which the instrument is to be redeemed. However,
Rule 2a-7 provides that the maturity of an instrument may be deemed shorter in
the case of certain instruments, including certain variable and floating rate
instruments subject to demand features. Pursuant to the Rule, the Board is
required to establish procedures designed to stabilize, to the extent
reasonably possible, a Fund's price per share as computed for the purpose of
sales and redemptions at $1.00. Such procedures include review of the Fund's
portfolio holdings by the Board of Directors, at such intervals as it may deem
appropriate, to determine whether the Fund's net asset value calculated by
using available market quotations deviates from $1.00 per share based on
amortized cost. The extent of any deviation will be examined by the Board of
Directors. If such deviation exceeds 1/2 of 1%, the Board will promptly
consider what action, if any, will be initiated. In the event the Board
determines that a
23
<PAGE> 24
deviation exists that may result in material dilution or other unfair results
to investors or existing shareholders, the Board will take such corrective
action as it regards as necessary and appropriate, including the sale of
portfolio instruments prior to maturity to realize capital gains or losses or
to shorten average portfolio maturity, withholding dividends or establishing a
net asset value per share by using available market quotations.
PORTFOLIO TRANSACTIONS
The 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 will
not necessarily be paying 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.
Purchases and sales of securities usually will be principal
transactions. Portfolio securities normally will be purchased or sold from or
to dealers serving as market makers for the securities at a net price. The
Funds also will purchase portfolio securities in underwritten offerings and may
purchase securities directly from the issuer. Generally, municipal obligations
and taxable money market securities are traded on a net basis and do not
involve brokerage commissions. The cost of executing a Fund's portfolio
securities transactions will consist primarily of dealer spreads and
underwriting commissions. Under the 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 Funds may purchase municipal obligations from underwriting
syndicates of which Stephens or Wells Fargo Bank is a member under certain
conditions in accordance with the provisions of a rule adopted under the 1940
Act and in compliance with procedures adopted by the Board of Directors.
Wells Fargo Bank, as the investment adviser of each Fund, 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
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supplement its research and analysis with the views and information of
securities firms. Information so received will be in addition to, and not in
lieu of, the services required to be performed by Wells Fargo Bank under the
Advisory Contracts, and the expenses of Wells Fargo Bank will not necessarily
be reduced as a result of the receipt of this supplemental research
information. Furthermore, research services furnished by dealers through which
Wells Fargo Bank places securities transactions for 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 Commission. The Funds did not pay any brokerage
commissions on portfolio transactions for the year ended December 31, 1995.
Securities of Regular Broker/Dealers. As of December 31, 1995,
neither the California Tax-Free Bond Fund and California Tax-Free Money Market
Mutual Fund owned any securities of their respective "regular brokers or
dealers" or their parents, as defined in the Act. As of December 31, 1995, the
Money Market Mutual Fund owned securities of its "regular brokers or dealers",
or their parents, as defined in the Act, as follows: $125,955,000 of Goldman
Sachs & Co. debt securities.
Portfolio Turnover. The portfolio turnover rate for the
California Tax-Free Bond Fund generally is not expected to exceed 300%. The
portfolio turnover rate is not a limiting factor when Wells Fargo Bank deems
portfolio changes appropriate. Because the portfolios of the California
Tax-Free Money Market Mutual Fund and the Money Market Mutual Fund consist of
securities with relatively short-term maturities, such Funds can expect to
experience high portfolio turnovers. A high portfolio turnover rate should not
adversely affect such Funds, however, because portfolio transactions ordinarily
will be made directly with principals on a net basis and, consequently, the
Funds usually will not incur brokerage expenses.
FUND EXPENSES
Except for the expenses borne by Wells Fargo Bank and Stephens,
the Company bears all costs of its operations, including the compensation of
its Directors who are not affiliated with Stephens or Wells Fargo Bank or any
of their affiliates; advisory, shareholder servicing and administration fees;
payments pursuant to any Plan; interest charges; taxes; fees and expenses of
its independent accountants, legal counsel, transfer agent and dividend
disbursing agent; expenses of redeeming shares; expenses of preparing and
printing prospectuses (except the expense of printing and mailing prospectuses
used for promotional purposes, unless otherwise payable pursuant to a Plan),
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 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 a Fund
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<PAGE> 26
assets. General expenses of the Company are allocated among all of the funds
of the Company, including a 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.
FEDERAL INCOME TAXES
The Prospectus describes 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 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 capital gains distributed to its shareholders,
provided 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 California Tax-Free Money Market Mutual Fund and
California Tax-Free Bond 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
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.
Generally, dividends and distributions of capital gains are
taxable to shareholders when they are received. However, dividends and
distributions of capital gains declared payable as of a record date in October,
November or December of any calendar year are deemed under the Code to have
been received by the shareholders on December 31 of that calendar year if the
dividend is actually paid in the following January. Such dividends will,
accordingly, be taxable to the recipient shareholders in the year in which the
record date falls. In addition, a 4% nondeductible excise tax will be imposed
on each Fund (other than to the extent of the Fund's tax-exempt
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<PAGE> 27
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 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 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. Gains or losses on sales of portfolio securities by
each Fund will generally be long-term capital gains or losses if the securities
sold have been held by it for more than one year, except in certain cases where
the 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 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. Other gains or losses on the sale of securities will
be short-term capital gains or losses. To the extent that a Fund recognizes
long-term capital gains, such gains will be distributed at least annually.
Such distributions will be taxable to shareholders as long-term capital gains,
regardless of how long a shareholder has held Fund shares. Such distributions
will be designated as a capital gains 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.
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.
If a shareholder exchanges or otherwise disposes of shares of a
Fund within 90 days of having acquired such shares, and if, as a result of
having acquired those shares, the shareholder
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<PAGE> 28
subsequently pays a reduced sales charge for shares of the Fund, or of a
different fund, the sales charge previously incurred acquiring the Fund's
shares shall not be taken into account (to the extent such previous sales
charges do not exceed the reduction in sales charges) for the purpose of
determining the amount of gain or loss on the exchange, but will be treated as
having been incurred in the acquisition of such other shares.
Also, any loss realized on a redemption or exchange of shares of a
Fund will be disallowed to the extent 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 California Tax-Free Bond Fund may involve sophisticated tax
rules such as the original issue discount, marked to market and real estate
mortgage investment conduit ("REMIC") rules that would result in income or gain
recognition by the Fund without corresponding current cash receipts. Although
the California Tax-Free Bond Fund will seek to avoid significant noncash
income, such noncash income could be recognized by the Fund, in which case the
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 of the Money Market
Mutual Funds will be a positive amount at the time of each determination
thereof. If, however, the net income of a Money Market Mutual 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 a
Money Market Mutual Fund), a Money Market Mutual 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 Money Market Mutual Fund will
reduce the number of its outstanding shares by treating each shareholder as
having contributed to the capital of the Money Market Mutual Fund that number
of full and fractional shares in the
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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 Money Market Mutual
Fund.
Although dividends will be declared daily with respect to each of
the Funds based on the Fund's daily earnings, for federal income tax purposes,
the Fund's earnings and profits will be determined at the end of each taxable
year and will be allocated pro rata over the entire year. For federal income
tax purposes, only amounts paid out of earnings and profits will qualify as
dividends. Thus, if during a taxable year the Fund's declared dividends (as
declared daily throughout the year) exceed the Fund's net income (as determined
at the end of the year), only that portion of the year's distributions which
equals the year's earnings and profits will be deemed to have constituted a
dividend. If during the year, the Fund had reduced the number of shares, as
described above, due to such a shortfall, shareholders who had redeemed shares
prior to such reduction could be deemed to have realized a capital gain to the
extent of the reduction, while shareholders redeeming shares after the
reduction could be deemed to have realized a capital loss to the extent of the
reduction. It is expected that the Fund's net income, on an annual basis, will
equal the dividends declared during the year.
Special Tax Considerations for the California Tax-Free Bond Fund and the
California Tax-Free Money Market Mutual Fund.
Federal -- The California Tax-Free Bond Fund and the California
Tax-Free Money Market Mutual Fund 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
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 advisers to determine whether exempt-interest
dividends and California exempt-interest dividends (as defined below) paid by
the Funds 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 -- The Funds expect 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 respective Fund's
taxable year, at least 50% of the value of its total assets
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<PAGE> 30
consists of obligations the interest on which, if such obligations were held by
an individual, would be exempt from California personal income tax (under
either the laws of California or of the United States), the Fund will be
entitled to pay dividends to its shareholders which will be exempt from
California personal income tax (hereinafter referred to as "California
exempt-interest dividends"). Under normal market conditions, the 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-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 Funds 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 10,000,000,000 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 twelve series of shares, each representing an
interest in one portfolio -- the Asset Allocation Fund, the California Tax-Free
Bond Fund, the California Tax-Free Income Fund, the California Tax-Free Money
Market Mutual Fund, the Corporate Stock Fund, the Diversified Income Fund, the
Ginnie Mae Fund, the Growth and Income Fund, the Money Market Mutual Fund, the
Short-Intermediate U.S. Government Income Fund, the U.S. Government Allocation
Fund and the Variable Rate Government Fund --
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and the Board of Directors may, in the future, authorize the issuance of other
series of capital stock representing shares of additional investment portfolios
or funds.
The Bond Fund and the Money Market Mutual Fund are comprised of
two Classes of shares, Class A Shares and Class B Shares, and Class A Shares
and Class S Shares, respectively. With respect to matters affecting one Class,
but not another, shareholders of each of the Bond Fund and Money Market Mutual
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 is required by law or where the matter involved only affects one series,
shares of each Fund will be voted by series. For example, a change in a Fund's
fundamental investment policy would be voted upon only by shareholders of the
Fund involved. Additionally, approval of an advisory contract is a matter to
be determined separately by 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 the other investment portfolios to approve the proposal as to
those investment portfolios. As used in the Prospectus of the Bond Fund and
Money Market Mutual Fund, and in this SAI, the term "majority," when referring
to approvals to be obtained from shareholders of a Class of shares of each of
the Funds means the vote of the lesser of (i) 67% of the shares of the
respective Class of the Fund represented at a meeting if the holders of more
than 50% of the outstanding shares of such Class of the Fund are present in
person or by proxy, or (ii) more than 50% of the outstanding shares of such
Class of the Fund. As used in the Prospectus of each Fund and in this SAI, the
term "majority," when referring to approvals to be obtained from shareholders
of a Fund, means the vote of the lesser of (i) 67% of the shares of a Fund
represented at a meeting if the holders of more than 50% of the outstanding
shares of the Fund are present in person or by proxy, or (ii) more than 50% of
the outstanding shares of a Fund. The term "majority," when referring to the
approvals to be obtained from shareholders of the Company as a whole, means the
vote of the lesser of (i) 67% of the Company's shares represented at a meeting
if the holders of more than 50% of the Company's outstanding shares are present
in person or by proxy, or (ii) more than 50% of the Company's outstanding
shares. Shareholders are entitled to one vote for each full share held and
fractional votes for fractional shares held.
The Company may dispense with an annual meeting of shareholders in
any year in which it is not required to elect Directors under the 1940 Act.
However, the Company has undertaken to hold a special meeting of its
shareholders for the purpose of voting on the question of removal of a Director
or Directors if requested in writing by the holders of at least 10% of the
Company's outstanding voting securities, and to assist in communicating with
other shareholders as required by Section 16(c) of the 1940 Act.
Each share of a Fund represents an equal proportional interest in
the Fund with each other share and is entitled to such dividends and
distributions out of the income earned on the assets belonging to the Fund as
are declared in the discretion of the Directors. In the event of the
liquidation or dissolution of the Company, shareholders of 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.
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Shareholders are not entitled to any preemptive rights. All
shares, when issued, will be fully paid and non-assessable by the Company.
As of February 29, 1996, no shareholders were known by the Company
to own 5% or more of the outstanding Class A Shares or Class B Shares of the
Funds.
OTHER
The Registration Statement, including the Prospectus of each Fund,
the SAI and the exhibits filed therewith, may be examined at the office of the
SEC in Washington, D.C. Statements contained in the Prospectus or the SAI of
each Fund 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.
FINANCIAL INFORMATION
The portfolio of investments, audited financial statements and
independent auditors' report for the California Tax-Free Money Market Mutual
Fund and Money Market Mutual Fund contained in the Company's Annual Report for
the year ended December 31, 1995, as filed with the SEC on March 8, 1996, are
hereby incorporated by reference into this SAI. The portfolio of investments,
audited financial statements and independent auditors' report for the year
ended December 31, 1995 for the California Tax-Free Bond Fund contained in
Post-Effective Amendment No. 21 to the Company's Registration Statement, as
filed with the SEC on February 29, 1996, are hereby incorporated by reference
into this SAI. The portfolio of investments, audited financial statements and
independent auditors' report for the Funds are attached to all SAIs delivered
to current or prospective shareholders.
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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
A-1
<PAGE> 34
"VMIG 3" are of "favorable quality," with all security elements accounted for,
but lacking the strength of the preceding grades.
S&P: The "SP-1" rating reflects a "very strong or strong capacity
to pay principal and interest." Notes issued with "overwhelming safety
characteristics" will be rated "SP-1+." The "SP-2" rating reflects a
"satisfactory capacity" to pay principal and interest.
Corporate and Municipal Commercial Paper
Moody's: The highest rating for corporate and municipal
commercial paper is "P-1" (Prime-1). Issuers rated "P-1" have a "superior
capacity for repayment of short-term promissory obligations." Issuers rated
"P-2" (Prime- 2) "have a strong capacity for repayment of short-term promissory
obligations," but earnings trends, while sound, will be subject to more
variation.
S&P: The "A-1" rating for corporate and municipal commercial
paper indicates that the "degree of safety regarding timely payment is either
overwhelming or very strong." Commercial paper with "overwhelming safety
characteristics" will be rated "A-1+." Commercial paper with a strong capacity
for timely payments on issues will be rated "A-2."
Corporate Notes
S&P: The two highest ratings for corporate notes are "SP-1" and
"SP-2." The "SP-1" rating reflects a "very strong or strong capacity to pay
principal and interest." Notes issued with "overwhelming safety
characteristics" will be rated "SP-1+." The "SP-2" rating reflects a
"satisfactory capacity" to pay principal and interest.
A-2
