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LOGO
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PROSPECTUS
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CALIFORNIA TAX-FREE MONEY MARKET TRUST
MARCH 19, 1997
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STAGECOACH FUNDS(R)
CALIFORNIA TAX-FREE MONEY MARKET TRUST
Stagecoach Funds, Inc. (the "Company") is an open-end management investment
company. This Prospectus contains information about one fund of the Stagecoach
Family of Funds -- the CALIFORNIA TAX-FREE MONEY MARKET TRUST (the "Fund").
The CALIFORNIA TAX-FREE MONEY MARKET TRUST seeks to obtain a high level of
income exempt from federal income tax and California personal income tax, while
preserving capital and liquidity, by investing in high-quality, short-term U.S.
dollar-denominated money market instruments, primarily municipal obligations.
AN INVESTMENT IN THE FUND IS NEITHER INSURED NOR GUARANTEED BY THE U.S.
GOVERNMENT. THERE CAN BE NO ASSURANCE THAT THE FUND WILL BE ABLE TO MAINTAIN A
CONSTANT $1.00 NET ASSET VALUE PER SHARE.
Please read this Prospectus before investing and retain it for future
reference. It is designed to provide you with important information and to help
you decide if the Fund's goals match your own. A Statement of Additional
Information ("SAI"), dated March 19, 1997, containing additional information
about the Fund has been filed with the Securities and Exchange Commission
("SEC") and is incorporated by reference into this Prospectus. The SAI is
available without charge by writing to Stagecoach Funds, Inc., c/o Stagecoach
Shareholder Services, Wells Fargo Bank, N.A., P.O. Box 7066, San Francisco, CA
94120-7066 or by calling 800-260-5969.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, ANY STATE SECURITIES COMMISSION OR ANY OTHER REGULATORY
AUTHORITY, NOR HAVE ANY OF THESE AUTHORITIES PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
FUND SHARES ARE NOT DEPOSITS OR OTHER OBLIGATIONS OF, OR ISSUED, ENDORSED OR
GUARANTEED BY, WELLS FARGO BANK, N.A. ("WELLS FARGO BANK") OR ANY OF ITS
AFFILIATES. SUCH SHARES ARE NOT INSURED OR GUARANTEED BY THE U.S. GOVERNMENT,
THE FEDERAL DEPOSIT INSURANCE CORPORATION ("FDIC"), THE FEDERAL RESERVE BOARD OR
ANY OTHER GOVERNMENTAL AGENCY. AN INVESTMENT IN THE FUND INVOLVES CERTAIN RISKS,
INCLUDING POSSIBLE LOSS OF PRINCIPAL.
WELLS FARGO BANK IS THE INVESTMENT ADVISER AND ADMINISTRATOR AND PROVIDES THE
FUND WITH CERTAIN OTHER SERVICES FOR WHICH IT IS COMPENSATED. STEPHENS INC.
("STEPHENS"), WHICH IS NOT AFFILIATED WITH WELLS FARGO BANK, IS THE FUND'S
SPONSOR, CO-ADMINISTRATOR AND DISTRIBUTOR.
PROSPECTUS DATED MARCH 19, 1997
PROSPECTUS
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TABLE OF CONTENTS
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PROSPECTUS SUMMARY 1
SUMMARY OF FUND EXPENSES 3
EXPLANATION OF TABLES 4
HOW THE FUND WORKS 4
THE FUND AND MANAGEMENT 9
INVESTING IN THE FUND 10
DIVIDEND AND CAPITAL GAIN DISTRIBUTIONS 12
HOW TO REDEEM SHARES 12
MANAGEMENT AND SERVICING FEES 13
TAXES 16
PROSPECTUS APPENDIX - ADDITIONAL INVESTMENT POLICIES A-1
PROSPECTUS
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PROSPECTUS SUMMARY
The Fund provides investors with a convenient way to invest in a portfolio of
securities selected and supervised by professional management. The following
provides summary information about the Fund. For more information, please refer
specifically to the identified Prospectus sections and generally to the Fund's
Prospectus and SAI.
Q. WHAT IS THE FUND'S INVESTMENT OBJECTIVE?
A. The Fund seeks to obtain a high level of income exempt from federal income
tax and California personal income tax, while preserving capital and
liquidity, by investing in high-quality, U.S. dollar-denominated money market
instruments, primarily municipal obligations. Under normal market conditions,
substantially all of the Fund's assets will be invested in municipal
obligations that are exempt from federal income tax and California personal
income tax. See "How the Fund Works -- Investment Objective and Policies" and
"Prospectus Appendix -- Additional Investment Policies" for further
information on investments.
Q. WHAT ARE SOME OF THE POTENTIAL RISKS ASSOCIATED WITH THIS TYPE OF INVESTMENT?
A. Investments in the Fund are not bank deposits or obligations of Wells Fargo
Bank and are not insured by the FDIC, nor are they insured or guaranteed
against loss of principal. Therefore, investors should be willing to accept
some risk with money invested in the Fund. Although the Fund seeks to
maintain a stable net asset value of $1.00 per share, there is no assurance
that it will be able to do so. Since substantially all the Fund's assets are
invested in securities issued by California, its agencies and municipalities,
events in California are more likely to affect the Fund's investments. Also,
the Fund is nondiversified, which means that its assets may be invested among
fewer issuers and therefore the value of its assets may be subject to greater
impact by events affecting one of its investments. The Fund may not achieve
as high a level of current income as other mutual funds that do not limit
their investment to the high credit quality instruments in which the Fund
invests. As with all mutual funds, there can be no assurance that the Fund
will achieve its investment objective. See "How the Funds Work -- Risk
Factors" and "Additional Permitted Investment Activities" in the SAI for
further information about the Funds' investments and related risks.
Q. WHO MANAGES MY INVESTMENTS?
A. Wells Fargo Bank, as the Fund's investment adviser, manages the Fund's
investments. Wells Fargo Bank also provides the Fund with administration,
transfer agency, dividend disbursing agency, and custodial services. In
addition, Wells Fargo Bank is a shareholder servicing agent and a selling
agent for the Fund. See
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"The Fund and Management" and "Management and Servicing Fees" for further
information.
Q. HOW DO I INVEST?
A. Qualified investors may invest by purchasing Fund shares at the net asset
value per share without a sales charge ("NAV"). Qualified investors include
customers ("Customers") who maintain qualified accounts with the trust
division of Wells Fargo Bank or an affiliate of Wells Fargo Bank (a "Bank").
Customers may include individuals, trusts, partnerships and corporations.
Purchases are effected through the Customer's account with a Bank under the
terms of the Customer's account agreement with the Bank. Investors wishing to
purchase Fund shares should contact their account representatives. See
"Investing in the Fund" for additional information.
Q. HOW WILL I RECEIVE DIVIDEND AND ANY CAPITAL GAIN DISTRIBUTIONS?
A. Dividends are declared daily and distributed monthly, and any capital gains
are distributed at least annually. All distributions are automatically
reinvested in additional shares of the Fund at NAV. Shareholders also may
elect to receive distributions in cash. See "Dividend and Capital Gain
Distributions" for additional information.
Q. HOW MAY I REDEEM SHARES?
A. You may redeem your shares at NAV, without charge by the Company. Fund shares
held by a Bank on behalf of its Customers must be redeemed under the terms of
the Customer's account agreement with the Bank. Banks are responsible for
transmitting redemption requests to the Company and crediting their
Customers' accounts. The Company reserves the right to impose charges for
wiring redemption proceeds. See "Investing in the Fund -- Redemption of
Shares."
PROSPECTUS 2
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SUMMARY OF FUND EXPENSES
SHAREHOLDER TRANSACTION EXPENSES
<TABLE>
<S> <C>
Maximum Sales Charge Imposed on Purchases (as a
percentage of offering price)........................ None
Maximum Sales Charge on Reinvested Distributions....... None
Maximum Sales Charge on Redemptions.................... None
Exchange Fees.......................................... None
</TABLE>
ANNUAL FUND OPERATING EXPENSES
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
<TABLE>
<S> <C>
Management Fee (after waivers or reimbursements)(1).... 0.00%
Rule 12b-1 Fee(2)...................................... 0.00%
Other Expenses (after waivers or reimbursements)(3).... 0.20%
TOTAL FUND OPERATING EXPENSES (after waivers or
reimbursements)(4)................................... 0.20%
</TABLE>
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(1) Management Fees (before waivers or reimbursements) would be 0.50%.
(2) The Fund has adopted a defensive distribution plan under Rule 12b-1 of the
Investment Company Act of 1940, which does not result in any added expenses
to the Fund.
(3) Other Expenses (before waivers or reimbursements) would be 0.57%.
(4) Total Fund Operating Expenses (before waivers or reimbursements) would be
1.07%.
Note: The table does not reflect any charges that may be imposed by Wells Fargo
Bank or another Bank directly on certain customer accounts in connection
with an investment in the Fund.
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EXAMPLE OF EXPENSES
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
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<S> <C> <C> <C> <C>
You would pay the following
expenses on a $1,000 investment in
the Fund, assuming a 5% annual
return and redemption at the end of
each time period indicated:
California Tax-Free Money
Market Trust................... $2 $6 $11 $26
</TABLE>
EXPLANATION OF TABLES
The purpose of the above tables is to help a shareholder understand the
various costs and expenses that an investor in the Fund will pay directly or
indirectly.
SHAREHOLDER TRANSACTION EXPENSES are charges incurred when an investor buys or
sells Fund shares. Fund shares are sold with no shareholder transaction expenses
imposed by the Company. However, the Company reserves the right to impose a
charge for wiring redemption proceeds.
ANNUAL FUND OPERATING EXPENSES for Fund shares are based on applicable
contract amounts restated to reflect voluntary fee waivers and expense
reimbursements that are expected to continue to reduce expenses during the
Company's current year, except that "Other Expenses" is based on estimated
amounts for the current year. Any waivers or reimbursements would reduce the
Fund's total expenses. There can be no assurance that waivers or reimbursements
will continue. For more complete descriptions of the various costs and expenses
you can expect to incur as an investor in the Fund, please see "Management and
Servicing Fees."
EXAMPLE OF EXPENSES is a hypothetical illustration of the expenses associated
with a $1,000 investment over stated periods, based on the expenses in the above
tables and an assumed annual rate of return of 5%. The rate of return should not
be considered an indication of actual or expected performance of the Fund nor a
representation of past or future expenses; actual expenses and returns may be
greater or lesser than those shown.
HOW THE FUND WORKS
INVESTMENT OBJECTIVE AND POLICIES
Set forth below is a description of the investment objectives and related
policies of the Fund.
PROSPECTUS 4
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The Fund seeks to obtain a high level of income exempt from federal income tax
and California personal income tax, while preserving capital and liquidity, by
investing in high-quality, short-term U.S. dollar-denominated money market
instruments, primarily municipal obligations. This investment objective is
fundamental and cannot be changed without shareholder approval. There can be no
assurance that the Fund will achieve its investment objective. Wells Fargo Bank,
as investment adviser to the Fund, pursues the Fund's objective by investing
(under normal market conditions) substantially all of the Fund's assets in the
following types of municipal obligations that pay interest which is exempt from
both federal income tax and California personal income tax: bonds, notes, and
commercial paper issued by or on behalf of the State of California, its cities,
municipalities, political subdivisions and other public authorities. The Fund
also may invest in obligations issued by the U.S. Virgin Islands, Puerto Rico
and Guam, the interest on which also is exempt from federal income tax and
California personal income tax.
The Fund seeks to maintain a net asset value of $1.00 per share. Its assets
consist only of obligations with remaining maturities (as defined by the SEC) of
397 days (13 months) or less at the date of acquisition as determined in
accordance with Rule 2a-7 under the 1940 Act and the dollar-weighted average
maturity of the Fund's investments is 90 days or less.
As a matter of fundamental policy, at least 80% of the Fund's net assets are
invested (under normal market conditions) in municipal obligations that pay
interest which is exempt from federal income tax and not subject to the federal
alternative minimum tax (or in other open-end tax-free money market funds with a
similar fundamental policy). At least 80% of the Fund's total assets are
invested (under normal market conditions) in municipal obligations that pay
interest which is exempt from California personal income tax. The Fund's
investment adviser may rely either on the opinion of counsel to the issuer of
the municipal obligations or bond counsel regarding the tax treatment of these
obligations. In addition, the Fund may invest 25% or more of its assets in
California municipal obligations that are related in such a way that an
economic, business or political development or change affecting one such
obligation would also affect the other obligations; for example, the Fund may
own different municipal obligations which pay interest based on the revenues of
similar types of projects. For additional descriptions of the types of
securities and investment practices used by the Fund, see "Risk Factors" and
"Prospectus Appendix -- Additional Investment Policies" in this Prospectus and
"Investment Restrictions" and "Additional Permitted Investment Activities" in
the SAI.
The Fund may temporarily invest some of its assets in certain high-quality,
taxable money market instruments or may engage in certain other investment
activities as described in this Prospectus. The Fund may elect to invest
temporarily up to 20% of its net assets in certain permitted taxable
investments, which include cash reserves, U.S.
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Government obligations, obligations of domestic and foreign banks, foreign
securities, rated commercial paper, taxable municipal obligations and repurchase
agreements. Such temporary investments would most likely be made when there is
an unexpected or abnormal level of investor purchases or redemptions of Fund
shares or because of unusual market conditions. The income from these temporary
investments and investment activities may be subject to federal income tax and
California personal income tax. However, as stated above, Wells Fargo Bank seeks
to invest substantially all of the Fund's assets in securities exempt from
federal income tax and California personal income tax. A more complete
description of the Funds' investments and investment objectives is contained in
"Prospectus Appendix -- Additional Investment Policies" and the SAI.
RISK FACTORS
Investments in the Fund are not bank deposits or obligations of Wells Fargo
Bank and are not insured by the FDIC, nor are they insured or guaranteed against
loss of principal. Therefore, investors should be willing to accept some risk
with money invested in the Fund. Although the Fund seeks to maintain a stable
net asset value of $1.00 per share, there is no assurance that it will be able
to do so. The Fund may not achieve as high a level of current income as other
mutual funds that do not limit their investment to the high credit quality
instruments in which the Fund invests. The Fund may invest in illiquid
securities (including certain restricted securities) which may be difficult to
sell promptly at an acceptable price. Certain restricted securities may be
subject to legal restrictions on resale. Delay or difficulty in selling
securities may result in a loss or be costly to a Fund. As with all mutual
funds, there can be no assurance that the Fund will achieve its investment
objective.
The Fund, under the 1940 Act, must comply with certain investment criteria
designed to provide liquidity, reduce risk, and allow the Fund to maintain a
stable net asset value of $1.00 per share. Of course, the Fund cannot guarantee
a $1.00 share price. The Fund's dollar-weighted average portfolio maturity must
not exceed 90 days. Any security that the Fund purchases must have a remaining
maturity of not more than 397 days. In addition, any security that the Fund
purchases must present minimal credit risks and be of high quality (i.e., be
rated in the top two rating categories by the requisite NRSROs or, if unrated,
determined to be of comparable quality to such rated securities). These
determinations are made by Wells Fargo Bank, as the Fund's investment adviser,
under guidelines adopted by the Company's Board of Directors.
The portfolio debt instruments of the Fund are subject to credit and
interest-rate risk. Credit risk is the risk that issuers of the debt instruments
in which the Fund invests may default on the payment of principal and/or
interest. Interest-rate risk is the risk that increases in market interest rates
may adversely affect the value of the debt instruments in which the Fund invests
and hence the value of your investment in the Fund.
PROSPECTUS 6
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The Fund seeks to reduce risk by investing its assets in securities of various
issuers. In addition, the Fund emphasizes safety of principal and high credit
quality. In particular, the internal investment policies of the Fund's
investment adviser, Wells Fargo Bank, prohibit the purchase for the Fund of many
types of floating-rate derivative securities that are considered potentially
volatile. The following types of derivative securities ARE NOT permitted
investments for the Fund:
- capped floaters (on which interest is not paid when market rates move above
a certain level);
- leveraged floaters (whose interest rate reset provisions are based on a
formula that magnifies changes in interest rates);
- range floaters (which do not pay any interest if market interest rates move
outside of a specified range);
- dual index floaters (whose interest rate reset provisions are tied to more
than one index so that a change in the relationship between these indices
may result in the value of the instrument falling below face value); and
- inverse floaters (which reset in the opposite direction of their index).
Additionally, the Fund may not invest in securities whose interest rate reset
provisions are tied to an index that materially lags short-term interest rates,
such as Cost of Funds Index ("COFI") floaters. The Fund may only invest in
floating-rate securities that bear interest at a rate that resets quarterly or
more frequently and that resets based on changes in standard money market rate
indices such as U.S. Treasury bills, London Interbank Offered Rate or LIBOR, the
prime rate, published commercial paper rates, federal funds rates, Public
Securities Associates ("PSA") floaters or JJ Kenney index floaters.
Since the Fund invests primarily in securities issued by California and its
agencies and municipalities, events in California are more likely to affect the
Fund's investments. While the Fund seeks to reduce risk by investing its assets
in securities of various issuers, the Fund is considered to be nondiversified
for purposes of the 1940 Act. However, the Fund will comply with the Internal
Revenue Code of 1986, as amended from time to time (the "Code"), diversification
requirements, as described in the "Prospectus Appendix -- Additional Investment
Policies" section below.
California experienced recurring budget deficits for four of its five fiscal
years ended June 30, 1992, caused by lower than anticipated tax revenues and
increased expenditures for certain programs. The budget deficits of the early
1990's depleted the state's available cash resources, and the state had to use a
series of external borrowings to meet its cash needs. As a consequence, between
1991 and 1994, three of the agencies rating California's long-term debt lowered
their rating of the state's general obligation bonds between. In particular, on
July 15, 1994, Moody's Investors Service lowered its rating from "Aa" to "A1,"
Standard & Poor's Ratings Group lowered its rating from "A+"
7 PROSPECTUS
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to "A" and termed its outlook as "stable," and Fitch Investors Service lowered
its rating from "AA" to "A." Such downgrading may impair issuers of California
municipal obligations from paying interest on or repaying the principal of such
California municipal obligations. Although further downgrading and other factors
may impact the availability of securities that meet the Fund's investment
policies and restrictions, California has had operating surpluses for its past
four fiscal years ended June 30, 1996 and has forecast a balanced 1996-1997
fiscal year budget. On July 30, 1996, Standard & Poors upgraded its rating of
California municipal obligations back to "A+," reflecting California's economic
improvement. However, the rating agencies continue to monitor events in the
state and the state and local governments' responses to budget shortfalls. The
Fund's investment adviser continues to monitor and evaluate the Fund's
investments in light of events in California and the Fund's investment objective
and investment policies. See "Special Considerations Affecting California
Municipal Obligations" in the SAI.
PERFORMANCE
The performance of the Fund may be advertised from time to time in terms of
current yield, effective yield, and average annual total return. In addition,
the Fund's performance may be advertised in terms of tax-equivalent yield or
effective tax-equivalent yield. Performance figures are based on historical
results and are not intended to indicate future performance.
Yield refers to the income generated by an investment in the Fund over a
specified period (usually 7 days), expressed as an annual percentage rate.
Effective yield is calculated similarly but assumes reinvestment of the income
earned from the Fund. Because of the effects of compounding, effective yields
are slightly higher than yields. The tax-equivalent and effective tax-equivalent
yields assume that a stated income tax rate has been applied to determine the
tax-equivalent figures. Application of a stated income-tax rate results in
higher yield and effective yield figures.
Average annual total return is based on the overall dollar or percentage
change of an investment in the Fund and assumes the investment is at NAV and all
dividends and distributions are also reinvested at NAV in shares of the Fund.
In addition to presenting these standardized performance calculations, at
times, the Fund may also present non-standard performance figures, such as
yields and effective yields for a 30-day period or, in sales literature,
distribution rates.
Additional performance information is contained in the SAI under "Performance
Calculations" and in the Annual Report, which are available upon request without
charge by calling the Company at 1-800-260-5969 or by writing the Company at the
address shown on the front cover of the Prospectus.
PROSPECTUS 8
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THE FUND AND MANAGEMENT
The Fund is one fund in the Stagecoach Family of Funds. The Company was
organized as a Maryland corporation on September 9, 1991 and currently offers
shares of twenty-four other Funds. For information on another fund, please call
Stagecoach Shareholder Services at 1-800-260-5969 or write the Company at the
address shown on the inside front cover of the Prospectus.
The Company's Board of Directors supervises the funds' activities and monitors
their contractual arrangements with various service providers. Although the
Company is not required to hold annual shareholder meetings, special meetings
may be required for purposes such as electing or removing Directors, approving
advisory contracts and changing a fund's investment objective or fundamental
investment policies. All shares of the Company have equal voting rights and are
voted in the aggregate, rather than by series or class, unless otherwise
required by law (such as when the voting matter affects only one series or
class). A shareholder of record of the Fund is entitled to one vote for each
share owned and fractional votes for fractional shares owned. A more detailed
description of the voting rights and attributes of the shares is contained in
the "Capital Stock" section of the SAI.
MANAGEMENT
Wells Fargo Bank serves as the Fund's investment adviser, administrator,
transfer and dividend disbursing agent and custodian. In addition, Wells Fargo
Bank serves as a shareholder servicing agent and as a selling agent for the
Fund. Wells Fargo Bank, one of the largest banks in the United States, was
founded in 1852 and is the oldest bank in the western United States. As of
December 31, 1996, Wells Fargo Bank provided investment advisory services for
approximately $54 billion of assets of individuals, trusts, estates and
institutions. Wells Fargo Bank also serves as the investment adviser or sub-
adviser to other separately managed series of the Company, and to five other
registered, open-end, management investment companies which consist of several
separately managed investment portfolios. Wells Fargo Bank, a wholly owned
subsidiary of Wells Fargo & Company, is located at 420 Montgomery Street, San
Francisco, California 94104.
---------------
Morrison & Foerster LLP, counsel to the Company and special counsel to Wells
Fargo Bank has advised the Company and Wells Fargo Bank that Wells Fargo Bank
and its affiliates may perform the services contemplated by the Advisory
Contract and this Prospectus without violation of the Glass-Steagall Act. Such
counsel has pointed out, however, that there are no controlling judicial or
administrative interpretations or decisions and that future judicial or
administrative interpretations of, or decisions relating to, present federal or
state statutes, including the Glass-Steagall Act, and
9 PROSPECTUS
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regulations relating to the permissible activities of banks and their
subsidiaries or affiliates, as well as future changes in such statutes,
regulations and judicial or administrative decisions or interpretations, could
prevent such entities from continuing to perform, in whole or in part, such
services. If any such entity were prohibited from performing any such services,
it is expected that new agreements would be proposed or entered into with
another entity or entities qualified to perform such services.
INVESTING IN THE FUND
SHARE VALUE
The price of a Fund share is its "net asset value" or NAV. The NAV of shares
of the Fund is computed by adding the value of its portfolio investments plus
cash and other assets, deducting liabilities and then dividing the result by the
number of Fund shares outstanding. All expenses, including fees paid to the
investment adviser and co-administrators, are accrued daily and taken into
account for the purposes of computing NAV, which is expected to fluctuate daily.
As noted above, the Fund seeks to maintain a constant $1.00 NAV share price,
although there is no assurance that it will be able to do so.
Fund shares may be purchased on any day the Fund is open (a "Business Day").
The Fund is open Monday through Friday and is closed on weekends and federal
bank holidays. On any day the trading markets for both U.S. government
securities and money market instruments close early, the Fund will close early.
On these days, the NAV calculation time and the dividend, purchase and
redemption cut-off times discussed below may be earlier than 12:00 Noon (Pacific
time).
Wells Fargo Bank calculates the Fund's NAV as of 12:00 Noon (Pacific time)
each Business Day. All transaction orders are processed at the NAV next
determined after the order is received.
The Fund's portfolio investments are valued on the basis of amortized cost.
This valuation method is based on the receipt of a steady rate of payment from
the date of purchase until maturity rather than actual changes in market value.
The Company's Board of Directors believes that this valuation method accurately
reflects fair value.
HOW TO BUY SHARES
Shares of the Fund are sold without a sales load on a continuous basis to
Customers who maintain qualified accounts with the trust division of a Bank.
Customers may include individuals, trusts, partnerships and corporations. All
share purchases are effected through a Customer's account at a Bank through
procedures established in connection with the requirements of the account, and
confirmations of share purchases
PROSPECTUS 10
<PAGE> 14
and redemptions are sent to the Bank involved. A Bank (or its nominee) is
normally the holder of record of Fund shares acting on behalf of its Customers
and reflects its Customers beneficial ownership of shares in the account
statements provided to its Customers. The exercise of voting rights and the
delivery to Customers of shareholder communications from the Fund is governed by
a Customer's account agreement with a Bank. Investors wishing to purchase shares
of the Fund should contact their account representatives or call 1-800-260-5969.
Purchase orders for shares in the Fund must be received by the Fund by 12:00
Noon (Pacific time) on a Business Day. Payment for such shares must also be made
in federal funds or other funds immediately available to the Custodian no later
than 12:00 Noon (Pacific time) on the same Business Day that the purchase order
is received. Orders for the purchase of shares are executed at the NAV per share
(the "public offering price") next determined after receipt of both an order and
payment in proper order. The Fund has no minimum initial or subsequent
investment requirement, although a Bank may impose certain minimum Customer
account requirements.
The Bank is responsible for transmitting orders for purchases by Customers and
delivering required funds on a timely basis. If funds are not received within
the period described above, the order will be canceled, notice thereof will be
given, and the Bank will be responsible for any loss to the Fund or its
shareholders. A Bank may charge certain account fees depending on the type of
account the investor has established. Payment for shares of the Fund may, in the
discretion of the investment adviser, be made in the form of securities that are
permissible investments for the Fund. For further information see "Additional
Purchase and Redemption Information" in the SAI.
The Company reserves the right to reject any purchase order or to suspend
sales at any time. Payment for orders that are not received will be returned
after prompt inquiry. The issuance of shares is recorded on the books of the
Fund, and share certificates are not issued.
Shares of a tax-free fund such as the Fund may not be suitable investments for
tax-exempt institutions or tax-deferred retirement plans, since such investors
would not benefit from the exempt status of the Funds' dividends. For additional
information on tax-deferred accounts, please contact a shareholder servicing
agent or selling agent or call 1-800-260-5969. In addition, Fund shares are not
available in all states.
STATEMENTS AND REPORTS
If a Bank is the recordholder for an investor's account, the Bank sends the
investor a monthly account statement after the end of each month in which there
has been a transaction that affects the share balance or Fund account
registration. Every January, you will be provided a statement with tax
information for the previous year to assist you in
11 PROSPECTUS
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tax return preparation. At least twice a year, investors receive financial
statements from the Fund.
DIVIDEND AND CAPITAL GAIN DISTRIBUTIONS
Dividends from net investment income are declared daily payable to
shareholders of record as of 12:00 Noon (Pacific time). If your purchase order
is received before 12:00 Noon on any Business Day, you begin earning dividends
on the day your purchase order is effective and continue to earn dividends
through the day prior to the date you redeem such shares. Dividends for a
Saturday, Sunday or Holiday are credited on the preceding Business Day. If you
redeem shares before a dividend payment date, any dividends credited to you are
paid on the following dividend payment date unless you have redeemed all of the
shares in your account, in which case you receive your accrued dividends
together with your redemption proceeds. The Fund distributes any capital gains
at least annually. The Fund does not make distributions from net realized
securities gains unless capital loss carryovers, if any, have been utilized or
have expired.
Dividends declared in a month generally are distributed on the last Business
Day of that month. All distributions are reinvested automatically in additional
shares of the Fund at NAV or, at the option of the investor, paid in cash.
Distributions from net realized securities gains are declared and distributed
once a year, but the Fund may make distributions on a more frequent basis. In
all cases, distributions will be made in a manner that is consistent with the
provisions of the 1940 Act.
HOW TO REDEEM SHARES
Redemption requests are effected at the NAV per share next determined after
receipt of a redemption request in good order by the Company. Shares held by a
Bank on behalf of its Customers must be redeemed in accordance with instructions
and limitations pertaining to the Customer's accounts at the Bank. The Bank is
responsible for transmitting redemption requests to the Company and crediting
its Customers' accounts with the redemption proceeds on a timely basis. The
redemption proceeds for Fund shares normally are wired to the redeeming Bank the
following Business Day after receipt of the request by the Company. The Company
reserves the right to delay the wiring of redemption proceeds for up to seven
days after it receives a redemption order if, in the judgment of the investment
adviser, an earlier payment could adversely affect the Fund or unless the SEC
permits a longer period under extraordinary circumstances. Such extraordinary
circumstances could include a period during which an emergency exists as a
result of which (a) disposal by the Fund of securities owned by it is not
PROSPECTUS 12
<PAGE> 16
reasonably practicable or (b) it is not reasonably practicable for the Fund to
fairly determine the value of its net assets, or a period during which the SEC
by order permits deferral of redemptions for the protection of security holders
of a Fund.
To be accepted by the Company, a letter requesting redemption must include:
(i) the Fund's name and account registration from which the shares are being
redeemed; (ii) the account number; (iii) the amount to be redeemed; (iv) the
signatures of all registered owners; and (v) a signature guarantee by any
eligible guarantor institution. An "eligible guarantor institution" includes a
commercial bank that is an FDIC member, a trust company, a member firm of a
domestic stock exchange, a savings association, or a credit union that is
authorized by its charter to provide a signature guarantee. Signature guarantees
by notaries public are not acceptable. Further documentation may be requested
from corporations, administrators, executors, personal representatives, trustees
or custodians.
All redemptions of Fund shares are made in cash, except that the commitment to
redeem shares in cash extends only to redemption requests made by an investor
during any 90-day period of up to the lesser of $250,000 or 1% of the NAV of the
Fund at the beginning of such period. This commitment is irrevocable without the
prior approval of the SEC. In the case of redemption requests by investors in
excess of such amounts, the Board of Directors reserves the right to have the
Fund make payment, in whole or in part, in securities or other assets, in case
of an emergency or any time a cash distribution would impair the liquidity of
the Fund to the detriment of the existing shareholders. In this event, the
securities would be valued in the same manner as the Fund's securities are
valued. If the recipient were to sell such securities, the investor might incur
brokerage charges.
MANAGEMENT AND SERVICING FEES
INVESTMENT ADVISER
Subject to the overall supervision of the Company's Board of Directors, Wells
Fargo Bank, as the Fund's investment adviser, provides investment guidance and
policy direction in connection with the management of the Fund's assets. Wells
Fargo Bank also furnishes the Board of Directors with periodic reports on the
Fund's investment strategies and performance. For these services, Wells Fargo
Bank is entitled to a monthly investment advisory fee at the annual rate of
0.50% of the Fund's average daily net assets, and may waive such fee in whole or
in part. Any such waiver will reduce the Fund's expenses and, accordingly, have
a favorable impact on the Fund's yield. From time to time, the Fund, consistent
with its investment objective, policies and restrictions, may invest in
securities of companies with which Wells Fargo Bank has a lending relationship.
13 PROSPECTUS
<PAGE> 17
CUSTODIAN AND TRANSFER AND DIVIDEND DISBURSING AGENT
Wells Fargo Bank also serves as the Fund's custodian and transfer and dividend
disbursing agent. Under the Custody Agreement, the Fund may, at times, borrow
money from Wells Fargo Bank as needed to satisfy temporary liquidity needs.
Wells Fargo Bank charges interest on such overdrafts at a rate determined
pursuant to the Fund's Custody Agreement. Wells Fargo Bank performs its
custodial and transfer and dividend disbursing agency services at 525 Market
Street, San Francisco, California 94105.
SHAREHOLDER SERVICING AGENTS
The Fund has entered into a servicing plan and related shareholder servicing
agreement with Wells Fargo Bank and may enter into similar agreements with other
Banks ("Shareholder Servicing Agents"). Under such agreements, Shareholder
Servicing Agents (including Wells Fargo Bank) agree, as agents for their
customers, to provide shareholder administrative and liaison servicing with
respect to Fund shares, which include, without limitation, aggregating and
transmitting shareholder orders for purchases, exchanges and redemptions;
maintaining shareholder accounts and records; and providing such other related
services as the Company or a shareholder may reasonably request. For these
services, a Shareholder Servicing Agent is entitled to receive a fee at the
annual rate of up to 0.20% of the average daily net assets attributable to the
shares owned of record or beneficially by investors with whom the Shareholder
Servicing Agent maintains a servicing relationship. In no case shall payments
exceed any maximum amount that may be deemed applicable under applicable laws,
regulations or rules, including the Conduct Rules of the National Association of
Securities Dealers ("NASD Rules").
A Shareholder Servicing Agent also may impose certain conditions and/or fees
on its customers, subject to the terms of this Prospectus, in addition to or
different from those imposed by the Fund, such as requiring a higher minimum
initial investment or payment of a separate fee for additional services. Each
Shareholder Servicing Agent has agreed to disclose any fees it may directly
charge its customers who are shareholders of the Fund and to notify them in
writing at least 30 days before it imposes any transaction fees.
ADMINISTRATOR AND CO-ADMINISTRATOR
Subject to the overall supervision of the Company's Board of Directors, Wells
Fargo Bank as Administrator and Stephens as Co-Administrator, provide the Fund
with administrative services, including general supervision of the Fund's
operation, coordination of the other services provided to the Fund, compilation
of information for reports to the SEC and the state securities commissions,
preparation of proxy statements and shareholder reports, and general supervision
of data compilation in connection with preparing periodic reports to the
Company's Directors and officers. Wells Fargo
PROSPECTUS 14
<PAGE> 18
Bank and Stephens also furnish office space and certain facilities to conduct
the Fund's business, and Stephens compensates the Company's Directors and
officers who are affiliated with Stephens. For these administrative services,
Wells Fargo Bank and Stephens are entitled to receive a monthly fee at the
annual rate of 0.04% and 0.02%, respectively, of the Fund's average daily net
assets. Wells Fargo Bank and Stephens may delegate certain of their respective
administrative duties to sub-administrators.
SPONSOR AND DISTRIBUTOR
Stephens is the Company's sponsor and co-administrator and distributes the
Fund's shares. Stephens is a full service broker/dealer and investment advisory
firm located at 111 Center Street, Little Rock, Arkansas 72201. Stephens and its
predecessor have been providing securities and investment services for more than
60 years. Additionally, they have been providing discretionary portfolio
management services since 1983. Stephens currently manages investment portfolios
for pension and profit-sharing plans, individual investors, foundations,
insurance companies and university endowments.
Stephens, as the principal underwriter of the Fund within the meaning of the
1940 Act, has entered into a Distribution Agreement with the Company under which
Stephens acts as agent for the Fund for the sale of its shares and may enter
into selling agreements with other agents ("Selling Agents") that wish to make
available shares of the Fund to their respective customers.
Stephens has established a non-cash compensation program, pursuant to which
broker/dealers or financial institutions that sell shares of the Company's funds
may earn additional compensation in the form of trips to sales seminars or
vacation destinations, tickets to sporting events, theater or other
entertainment, opportunities to participate in golf or other outings and gift
certificates for meals or merchandise.
Financial institutions acting as Shareholder Servicing Agents or Selling
Agents, or in certain other capacities, may be required to register as dealers
pursuant to applicable state securities laws which may differ from federal law
and any interpretations expressed herein.
DEFENSIVE 12B-1 PLAN
The Fund has entered into a "defensive" Distribution Plan under Rule 12b-1 of
the 1940 Act (the "Plan"). The Plan reflects that, to the extent any fees paid
pursuant to the Servicing Plan are deemed to be "primarily intended to result in
the sale of shares" of the Fund, such fees are approved pursuant to the Plan.
The Plan will not result in any separate payment of fees by the Fund.
FUND EXPENSES
From time to time, Wells Fargo Bank and Stephens may waive their respective
fees in whole or in part and reimburse expenses payable to others. Any such
waivers or
15 PROSPECTUS
<PAGE> 19
reimbursements will reduce the Fund's expenses and, accordingly, have a
favorable impact on the Fund's performance. Except for the expenses borne by
Wells Fargo Bank and Stephens, each fund of the Company bears all costs of its
operations, including its pro rata portion of Company expenses such as fees and
expenses of its independent auditors, legal counsel, and compensation of the
Company's directors who are not affiliated with the adviser, administrator, or
any of their affiliates; advisory, transfer agency, custody and administration
fees; and any extraordinary expenses. Expenses attributable to each fund or
class are charged against the assets of the fund or class. General expenses of
the Company are allocated among all of the funds of the Company 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.
TAXES
Dividends distributed from the Fund's net interest income from tax-exempt
securities will not be subject to federal income taxes. Such dividends also will
be exempt from California personal income tax to the extent such dividends are
attributable to instruments that pay interest which would be exempt from
California personal income taxes, if such instruments were held directly by an
individual. Dividends attributable to the Fund's interest income from taxable
securities, short-term capital gains if any and capital gain distributions will
be taxable when paid, whether you take such distributions in cash or have them
automatically reinvested in additional Fund shares. However, such distributions
declared in October, November, and December and distributed by the following
January will be taxable as if they were paid by December 31.
Your redemptions (including redemptions in-kind) and exchanges of Fund shares
may result in a taxable capital gain or loss, depending on the amount you
receive for your shares (or are deemed to receive in the case of exchanges) and
the cost of your shares. See "Federal Income Taxes -- Disposition of Fund
Shares" in the SAI.
Foreign shareholders may be subject to different tax treatment, including
withholding taxes. See "Federal Income Taxes -- Foreign Shareholders" in the
SAIs. In certain circumstances, U.S. residents may also be subject to
withholding taxes. See "Federal Income Taxes -- Backup Withholding" in the SAI.
The foregoing discussion regarding taxes is based on tax laws which were in
effect as of the date of this Prospectus and summarizes only some of the
important federal and California tax considerations generally affecting the Fund
and its shareholders. It is not intended as a substitute for careful tax
planning; you should consult your tax advisor with respect to your specific tax
situation as well as with respect to foreign, state and local taxes. Additional
tax considerations, including the federal alternative minimum tax, are discussed
in the SAI.
PROSPECTUS 16
<PAGE> 20
PROSPECTUS APPENDIX --
ADDITIONAL INVESTMENT POLICIES
FUND INVESTMENTS
The Fund may invest in the following municipal obligations with remaining
maturities not exceeding thirteen months:
(i) long-term municipal bonds rated at the date of purchase "MIG 1" or "MIG
2" or, if no medium- or short-term rating is available, "Aa" or better
by Moody's or "AA" or better by S&P;
(ii) medium-term municipal notes rated at the date of purchase "MIG 1" or
"MIG 2" (or "VMIG 1" or "VMIG 2" in the case of an issue having a
variable rate with a demand feature) by Moody's or "SP-1+" or "SP-1" by
S&P; and
(iii) short-term municipal commercial paper rated at the date of purchase
"P-1" by Moody's or "A-1+" or "A1+" by S&P.
Pending the investment of proceeds from the sale of Fund shares or proceeds
from sales of portfolio securities or in anticipation of redemptions or to
maintain a "defensive" posture when, in the opinion of Wells Fargo Bank, as
investment adviser, it is advisable to do so because of market conditions, the
Fund may elect to invest temporarily up to 20% of the current value of its total
assets in cash reserves or the following taxable high-quality money market
instruments:
(i) U.S. Government obligations;
(ii) bank instruments;
(iii) rated commercial paper;
(iv) repurchase agreements;
(v) foreign bank obligations;
(vi) high-quality municipal obligations, the income from which may or may not
be exempt from federal income taxes; and
(vii) certain securities issued by other investment companies.
Moreover, the Fund may invest temporarily more than 20% of its total assets in
such securities and in high-quality, short-term municipal obligations the
interest on which is not exempt from federal income taxes to maintain a
temporary defensive posture or in an effort to improve after-tax yield to the
Fund's shareholders when, in the opinion of
A- 1 PROSPECTUS
<PAGE> 21
Wells Fargo Bank, as investment adviser, it is advisable to do so because of
unusual market conditions.
Municipal Obligations
Subject to the maturity and other restrictions of Rule 2a-7, the Fund may
invest in Municipal Obligations. Municipal bonds generally have a maturity at
the time of issuance of up to 40 years. Medium-term municipal notes are
generally issued in anticipation of the receipt of tax funds, of the proceeds of
bond placements, or of other revenues. The ability of an issuer to make payments
on notes is therefore especially dependent on such tax receipts, proceeds from
bond sales or other revenues, as the case may be. Municipal commercial paper is
a debt obligation with a stated maturity of 270 days or less that is issued to
finance seasonal working capital needs or as short-term financing in
anticipation of longer-term debt. From time to time, the Fund may invest 25% or
more of the current value of its total assets in certain "private activity
bonds," such as pollution control bonds; provided, however, that such
investments will be made only to the extent they are consistent with the Fund's
fundamental policy of investing, under normal circumstances, at least 80% of its
net assets in municipal obligations that are exempt from federal income tax and
not subject to the federal alternative minimum tax.
The Fund will invest in the following municipal obligations with remaining
maturities not exceeding 13 months:
(i) long-term municipal bonds rated at the date of purchase "Aa" or better
by Moody's or "AA" or better by S&P;
(ii) municipal notes rated at the date of purchase "MIG 1" or "MIG 2" (or
"VMIG 1" or "VMIG 2" in the case of an issue having a variable rate with
a demand feature) by Moody's or "SP-1+" "SP-1" or "SP-2" by S&P; and
(iii) short-term municipal commercial paper rated at the date of purchase
"P-1" by Moody's or "A-1+", or "A-1" or "A-2" by S&P.
For a further discussion of factors affecting purchases of municipal
obligations by the Fund, see "Special Considerations Affecting California
Municipal Obligations" in the SAI.
U.S. Government Obligations
The Fund may invest in obligations issued or guaranteed by the U.S.
Government, its agencies or instrumentalities ("U.S. Government Obligations").
Payment of principal and interest on U.S. Government Obligations (i) may be
backed by the full faith and credit of the United States ( as with U.S. Treasury
bills and GNMA certificates) or (ii) may be backed solely by the issuing or
guaranteeing agency or instrumentality itself (as with FNMA notes). In the
latter case investors must look principally to the agency or
PROSPECTUS A- 2
<PAGE> 22
instrumentality issuing or guaranteeing the obligation for ultimate repayment,
which agency or instrumentality may be privately owned. There can be no
assurance that the U.S. Government will provide financial support to its
agencies or instrumentalities where it is not obligated to do so. In addition,
U.S. Government Obligations are subject to fluctuations in market value due to
fluctuations in market interest rates. As a general matter, the value of debt
instruments, including U.S. Government Obligations, declines when market
interest rates increase and rises when market interest rates decrease. Certain
types of U.S. Government Obligations are subject to fluctuations in yield or
value due to their structure or contract terms.
Custodial Receipts for Treasury Securities
The Fund may purchase participations in trusts that hold U.S. Treasury
securities (such as TIGRs and CATS) or other obligations where the trust
participations evidence ownership in either the future interest payments or the
future principal payments on the obligations. These participations are normally
issued at a discount to their "face value," and can exhibit greater price
volatility than ordinary debt securities because of the way in which their
principal and interest are returned to investors. Investments by the Fund in
such participations will not exceed 5% of the value of the Fund's total assets.
Other Investment Companies
The Fund may invest in shares of other open-end, management investment
companies provided that any such investments will be limited to temporary
investments in shares of money market funds of unaffiliated investment
companies. Wells Fargo Bank 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. The Fund also may purchase
shares of exchange-listed, closed-end funds.
Floating- and Variable-Rate Instruments
The Fund may purchase debt instruments with interest rates that are
periodically adjusted at specified intervals or whenever a benchmark rate or
index changes. These adjustments generally limit the increase or decrease in the
amount of interest received on the debt instruments. The floating- and
variable-rate instruments that the Fund may purchase include certificates of
participation in such instruments. Floating- and variable-rate instruments are
subject to interest-rate risk and credit risk.
Repurchase Agreements
The Fund may enter into repurchase transactions in which the seller of a
security to the Fund agrees to repurchase that security from the Fund a mutually
agreed-upon time and price. The period of maturity is usually quite short, often
overnight or a few days, although it may extend over a number of months. The
Fund may enter into repurchase
A- 3 PROSPECTUS
<PAGE> 23
agreements only with respect to securities that could otherwise be purchased by
the Fund, and all repurchase transactions must be collateralized. The Fund may
incur a loss on a repurchase transaction if the seller defaults and the value of
the underlying collateral declines or is otherwise limited or if receipt of the
security or collateral is delayed. The Fund may participate in pooled repurchase
agreement transactions with other funds advised by Wells Fargo Bank.
Letters of Credit
Certain of the debt obligations, certificates of participation, commercial
paper and other short-term obligations which the Fund is permitted to 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.
Letter of credit-backed investments must, in the opinion of Wells Fargo Bank, be
of investment quality comparable to other permitted investments of the Fund.
Foreign Obligations
The Fund may invest up to 20% of its assets in high-quality, short-term debt
obligations of foreign branches of U.S. banks or U.S. branches of foreign banks
that are denominated in and pay interest in U.S. dollars. Investments in foreign
obligations involve certain considerations that are not typically associated
with investing in domestic obligations. There may be less publicly available
information about a foreign issuer than about a domestic issuer. Foreign issuers
also are not subject to the same uniform accounting, auditing and financial
reporting standards or governmental supervision as domestic issuers. In
addition, with respect to certain foreign countries, taxes may be withheld at
the source under foreign income tax laws, and there is a possibility of
expropriation or confiscatory taxation, political or social instability or
diplomatic developments that could adversely affect investments in, the
liquidity of, and the ability to enforce contractual obligations with respect
to, securities of issuers located in those countries.
Taxable Investments
Pending the investment of proceeds from the sale of shares of the Fund or
proceeds from sales of portfolio securities or in anticipation of redemptions or
to maintain a "defensive" posture when, in the opinion of Wells Fargo Bank, as
investment adviser, it is advisable to do so because of market conditions, the
Fund may elect to invest temporarily up to 20% of the current value of its net
assets in cash reserves including the following taxable high-quality money
market instruments: (i) U.S. Government obligations; (ii) negotiable
certificates of deposit, bankers' acceptances and fixed time deposits and other
obligations of domestic banks (including foreign branches) that
PROSPECTUS A- 4
<PAGE> 24
have more than $1 billion in total assets at the time of investment and are
members of the Federal Reserve System or are examined by the Comptroller of the
Currency or whose deposits are insured by the FDIC; (iii) commercial paper rated
at the date of purchase "P-1" by Moody's or "A-1+" or "A-1" by S&P; (iv) certain
repurchase agreements; and (v) high-quality municipal obligations, the income
from which may or may not be exempt from federal income taxes.
Moreover, the Fund may invest temporarily more than 20% of its total assets in
such securities and in high-quality, short-term municipal obligations the
interest on which is not exempt from federal income taxes to maintain a
temporary defensive posture or in an effort to improve after-tax yield to the
Fund's shareholders when, in the opinion of Wells Fargo Bank, as investment
adviser, it is advisable to do so because of unusual market conditions.
Illiquid Securities
Certain securities may be sold only pursuant to certain legal restrictions,
and may be difficult to sell. The Fund may not hold more than 10% of the value
of its net assets in securities that are illiquid or such lower percentage as
may be required by the states in which the Fund sells its shares. Repurchase
agreements and time deposits that do not provide for payment to the Fund within
seven days after notice, guaranteed investment contracts and some commercial
paper issued in reliance upon the exemption in Section 4(2) of the Securities
Act of 1933, as amended (the "1933 Act") (other than variable amount master
demand notes with maturities of nine months or less), are subject to the
limitation on illiquid securities. In addition, interests in privately arranged
loans may be subject to this limitation.
If otherwise consistent with its investment objective and policies, the Fund
may purchase securities which are not registered under the 1933 Act but which
can be sold to "qualified institutional buyers" in accordance with Rule 144A
under the 1933 Act. Any such security will not be considered illiquid so long as
it is determined by the Company's Board of Directors, acting under guidelines
approved and monitored by the Company's Board, that an adequate trading market
exists for that security.
INVESTMENT POLICIES AND RESTRICTIONS
The Fund's investment objective, as set forth in the "How the Funds Work --
Investment Objective and Policies" section, is fundamental. Accordingly, such
investment objective and policies may not be changed without approval by the
vote of the holders of a majority of the Fund's outstanding voting securities,
as described under "Capital Stock" in the SAI. In addition, any fundamental
investment policy may not be changed without such shareholder approval. If the
Company's Board of Directors determines, however, that the Fund's investment
objective can best be achieved by a substantive change in a nonfundamental
investment policy or strategy, the Company's
A- 5 PROSPECTUS
<PAGE> 25
Board may make such a change without shareholder approval and will disclose any
such material changes in the then-current prospectus.
As matters of fundamental policy, the Fund may: (i) borrow from banks up to
10% of the current value of its net assets only for temporary purposes in order
to meet redemptions, and these borrowings may be secured by the pledge of up to
10% of the current value of its net assets (but investments may not be purchased
by the Fund while any such outstanding borrowing in excess of 5% of the net
assets exists); (ii) not make loans of portfolio securities or other assets,
except that loans for purposes of this restriction will not include the purchase
of fixed time deposits, repurchase agreements, commercial paper and other
short-term obligations, and other types of debt instruments commonly sold in a
public or private offering; and (iii) not invest more than 25% of its assets
(i.e., concentrate) in any particular industry, excluding, (a) investments in
municipal securities by the Fund (for the purpose of this restriction, private
activity bonds shall not be deemed municipal securities if the payments of
principal and interest on such bonds is the ultimate responsibility of
nongovernmental users), (b) U.S. Government obligations, and (c) obligations of
domestic banks (for purposes of this restriction, domestic bank obligations do
not include obligations of foreign branches of U.S. banks and obligations of
U.S. branches of foreign banks).
As matters of nonfundamental policy: The Fund may not invest more than 10% of
the current value of its net assets in repurchase agreements having maturities
of more than seven days, illiquid securities and fixed time deposits that are
subject to withdrawal penalties and that have maturities of more than seven
days. It may be possible that the Company would own more than 10% of the
outstanding voting securities of an issuer.
For purposes of complying with the Code, the Fund will diversify 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, U.S. Government
obligations and other securities limited in respect of any one issuer to an
amount not greater than 5% of the Fund's assets and 10% of the outstanding
voting securities of such issuer, and (ii) not more than 25% of the value of its
assets is invested in the securities of any one issuer (other than U.S.
Government obligations and the securities of other regulated investment
companies), or of two or more issuers which the taxpayer controls and which are
determined to be engaged in the same or similar trades or businesses or related
trades or businesses.
In addition, at least 65% of the Fund's total assets are invested (under
normal market conditions) in municipal obligations that pay interest that is
exempt from California personal income tax. However, as a matter of general
operating policy, the Fund seeks to have substantially all of its assets
invested in such municipal obligations.
PROSPECTUS A- 6
<PAGE> 26
LOGO
P.O. Box 7066
San Francisco, CA 94120-7066
STAGECOACH MONEY MARKET FUNDS:
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
- are NOT FDIC insured
- are NOT deposits or obligations of Wells Fargo Bank
- are NOT guaranteed by Wells Fargo Bank
- involve investment risk, including possible loss of
principal
- seek to maintain a stable net asset value of $1.00 per LOGO
share, however, there can be no assurance that a fund
will meet this goal. Yields will vary with market
conditions.
</TABLE>
LOGO
Printed on Recycled Paper [SC 0218 (3/97)]
<PAGE> 27
STAGECOACH FUNDS, INC.
Telephone: 1-800-260-5969
STATEMENT OF ADDITIONAL INFORMATION
Dated March 19, 1997
CALIFORNIA TAX-FREE MONEY MARKET TRUST
----------------------------------
Stagecoach Funds, Inc. (the "Company") is an open-end, series
investment company. This Statement of Additional Information ("SAI") contains
information about one fund in the Stagecoach Family of funds -- the CALIFORNIA
TAX-FREE MONEY MARKET TRUST (the "Fund"). The Fund offers a single class of
shares. The investment objective of the Fund is described in its prospectus
under "How the Fund Works -- Investment Objective and Policies."
This SAI is not a prospectus and should be read in conjunction
with the Fund's Prospectus dated March 19, 1997. All terms used in this SAI
that are defined in the Prospectus will have the meanings assigned in the
Prospectus. A copy of the Prospectus may be obtained without charge by writing
Stephens Inc. ("Stephens"), the Company's sponsor, co-administrator and
distributor, at 111 Center Street, Little Rock, Arkansas 72201 or calling the
Transfer Agent at the telephone number indicated above.
----------------------------------
<PAGE> 28
TABLE OF CONTENTS
<TABLE>
<S> <C>
Investment Restrictions . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Additional Permitted Investment Activities . . . . . . . . . . . . . . . . . 5
Special Considerations Affecting
California Municipal Obligations . . . . . . . . . . . . . . . . . . . . . 7
Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Servicing Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Performance Calculations . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Determination of Net Asset Value . . . . . . . . . . . . . . . . . . . . . . 19
Additional Purchase and Redemption Information . . . . . . . . . . . . . . . 20
Portfolio Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Fund Expenses............................ . . . . . . . . . . . . . . . . . . 23
Federal Income Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Capital Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Independent Auditors . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Financial Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
SAI Appendix . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-1
Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-1
</TABLE>
2
<PAGE> 29
INVESTMENT RESTRICTIONS
The Fund is subject to the following investment restrictions, all
of which are fundamental policies.
The Fund may not:
(1) purchase the securities of issuers conducting their principal
business activity in the same industry if, immediately after the purchase and
as a result thereof, the value of the Fund's investments in that industry would
be 25% or more of the current value of the Fund's total assets, provided that
there is no limitation with respect to investments in (i) municipal securities
(for the purpose of this restriction, private activity bonds and notes shall
not be deemed municipal securities if the payments of principal and interest on
such bonds or notes is the ultimate responsibility of non-governmental
issuers), (ii) obligations of the United States Government, its agencies or
instrumentalities, and (iii) 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 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 and except for margin payments in
connection with options, futures and options on futures) or make short sales of
securities;
(4) underwrite securities of other issuers, except to the extent
that the purchase of municipal securities or other permitted investments
directly from the issuer thereof or from an underwriter for an issuer and the
later disposition of such securities in accordance with the Fund's investment
program may be deemed to be an underwriting;
(5) make investments for the purpose of exercising control or
management;
(6) issue senior securities, except that the Fund may borrow from
banks up to 10% of the current value of its net assets for temporary purposes
only in order to meet redemptions, and these borrowings may be secured by the
pledge of up to 10% of the current value of its net assets (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, warrants or any
combination thereof, except that the Fund may purchase securities with put
rights in order to maintain liquidity.
In addition, the Fund may not make loans of portfolio securities
or other assets, except that loans for purposes of this restriction will not
include the purchase of fixed time
3
<PAGE> 30
deposits, repurchase agreements, commercial paper and other short-term
obligations, and other types of debt instruments commonly sold in public or
private offerings.
The Fund is subject to the following non-fundamental policies:
The Fund may not:
(1) purchase or retain securities of any issuer if the officers
or Directors of the Company or the investment adviser owning beneficially more
than one-half of one percent (0.5%) of the securities of the issuer together
owned beneficially more than 5% of such securities.
(2) purchase interests, leases, or limited partnership interests
in oil, gas, or other mineral exploration or development programs.
(3) purchase securities of issuers who, with their predecessors,
have been in existence less than three years, unless the securities are fully
guaranteed or insured by the U.S. Government, a state, commonwealth,
possession, territory, the District of Columbia or by an entity in existence at
least three years, or the securities are backed by the assets and revenues of
any of the foregoing if, by reason thereof, the value of its aggregate
investments in such securities will exceed 5% of its total assets.
(4) purchase equity securities of issuers which are not readily
marketable if by reason thereof the value of the Fund's aggregate investment in
such classes of securities will exceed 5% of its total assets.
(5) invest more than 10% of the current value of its net assets
in repurchase agreements maturing in more than seven days or other illiquid
securities (including restricted securities).
In addition, the Fund 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. 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 Fund
may only purchase "Eligible Securities" (as defined in Rule 2a-7) and only if,
immediately after such purchase: the 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 Fund
would own no more than 10% of the voting securities of any one issuer; the Fund
would have no more than 5%
4
<PAGE> 31
of its total assets in "Second Tier Securities" (as defined in Rule 2a-7); and
the 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 Fund may purchase instruments that are
not rated if, in the opinion of Wells Fargo Bank, such obligations are of
comparable quality to other rated investments that are permitted to be
purchased by the Fund. The Fund may purchase unrated instruments only if they
are purchased in accordance with the procedures of the Fund adopted by the
Company's Board of Directors in accordance with Rule 2a-7 under the 1940 Act.
After purchase by the Fund, a security may cease to be rated or its rating may
be reduced below the minimum required for purchase by the Fund. Neither event
will require a sale of such security by the Fund, provided that 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 the Fund's 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, the Fund will attempt to use comparable ratings as
standards for investments in accordance with the investment policies contained
in the Fund's Prospectus and in this SAI. The ratings of Moody's and S&P are
more fully described in the SAI Appendix.
Letters of Credit. Certain of the debt obligations (including
municipal securities, certificates of participation, commercial paper and other
short-term obligations) which the Fund may purchase may be backed by an
unconditional and irrevocable letter of credit of a bank, savings and loan
association or insurance company which assumes the obligation for payment of
principal and interest in the event of default by the issuer. Only banks,
savings and loan associations and insurance companies which, in the opinion of
Wells Fargo Bank, are of comparable quality to issuers of other permitted
investments of the Fund may be used for letter of credit-backed investments,
provided that the Company's Board approves or ratifies such investments.
When-Issued Securities. Certain of the securities in which the
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 Fund has no present intention to invest
in when-issued securities during the coming year. The Fund 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
5
<PAGE> 32
may be lower than the agreed-upon purchase price, in which case there could be
an unrealized loss at the time of delivery.
The 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 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 Fund may invest in municipal bonds. As
discussed in the Fund's Prospectus, the two principal classifications of
municipal bonds are "general obligation" and "revenue" bonds. Municipal bonds
are debt obligations issued to obtain Fund 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 Fund 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 Fund to provide privately-operated housing facilities, sports
facilities, convention or trade show facilities, airport, mass transit, port or
parking facilities, air or water pollution control facilities and certain local
facilities for water supply, gas, electricity, or sewage or solid waste
disposal. Assessment bonds, wherein a specially created district or project
area levies a tax (generally on its taxable property) to pay for an improvement
or project may be considered a variant of either category. There are, of
course, other variations in the types of municipal bonds, both within a
particular classification and between classifications, depending on numerous
factors.
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.
6
<PAGE> 33
RANs. A decline in the receipt of certain revenues, such as
anticipated revenues from another level of government, could adversely affect
an issuer's ability to meet its obligations on outstanding RANs. In addition,
the possibility that the revenues would, when received, be used to meet other
obligations could affect the ability of the issuer to pay the principal of, and
interest on, RANs.
The values of outstanding municipal securities will vary as a
result of changing market evaluations of the ability of their issuers to meet
the interest and principal payments (i.e., credit risk). Such values also will
change in response to changes in the interest rates payable on new issues of
municipal securities (i.e., market risk). Should such interest rates rise, the
values of outstanding securities, including those held in the 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.
SPECIAL CONSIDERATIONS AFFECTING
CALIFORNIA MUNICIPAL OBLIGATIONS
Certain California constitutional amendments, legislative measures,
executive orders, civil actions and voter initiatives, as well as the general
financial condition of the state, could adversely affect the ability of issuers
of California municipal obligations to pay interest and principal on such
obligations. The following information constitutes only a brief summary, does
not purport to be a complete description, and is based on information drawn
from official statements relating to securities offerings of the State of
California and various local agencies, available as of the date of this SAI.
While the Company has not independently verified such information, it has no
reason to believe that such information is incorrect in any material respect.
The California Economy and General Information. From mid-1990 to
late 1993, the State suffered a recession with the worst economic, fiscal and
budget conditions since the 1930s. Construction, manufacturing (particularly
related to defense), exports and financial services, among others, were all
severely affected. Job losses had been the worst of any post-war recession.
Unemployment reached 10.1% in January 1994, but fell sharply to 7.7% in October
and November 1994, reflecting the state's recovery from the recession.
The recession seriously affected California tax revenues, which
basically mirror economic conditions. It also caused increased expenditures
for health and welfare programs. In addition, the state has been facing a
structural imbalance in its budget with the largest programs supported by the
General Fund (e.g., K-12 schools and community colleges--also known as "K-14
schools," health and welfare, and corrections) growing at rates higher than the
growth rates for the principal revenue sources of the General Fund. As a
result, the state experienced recurring budget deficits in the late 1980s and
early 1990s. The state's Controller reported that expenditures exceeded
revenues for four of the five fiscal years ending with 1991-92. Moreover,
7
<PAGE> 34
California accumulated and sustained a budget deficit in its Special Fund for
Economic Uncertainties ("SFEU") approaching $2.8 billion at its peak at June
30, 1993.
The accumulated budget deficits during the early 1990's, together
with expenditures for school funding which are not reflected in the state's
budget, and reduction of available internal borrowable funds, combined to
significantly deplete the state's cash resources to pay its ongoing expenses.
In order to meet its cash needs, the state has had to rely for several years on
a series of external borrowings, including borrowings past the end of a fiscal
year. Such borrowings are expected to continue in future fiscal years. To
meet its cash flow needs in the 1995-96 fiscal year, California issued $2
billion of revenue anticipation warrants which matured on June 28, 1996.
Because of the state's deteriorating budget and cash situation, the rating
agencies reduced the state's credit ratings between October 1991 and July 1994.
Moody's Investors Service lowered its rating from "Aa" to "A1," Standard &
Poor's Ratings Group lowered its rating from "AAA" to "A" and termed its
outlook as "stable," and Fitch Investors Service lowered its rating from "AA"
to "A."
However, since the start of 1994, California's economy has been
recovering steadily. Employment has grown in excess of 500,000 during 1994 and
1995, and is expected to continue to grow in 1996. Because of the improving
economy and the California's fiscal austerity, the state has had operating
surpluses for its past four consecutive fiscal years through 1996-97 and has
forecast a balanced 1996-97 fiscal year budget. In addition, the SFEU was
projected to have a small negative balance of approximately $70 million as of
June 30, 1996, all but eliminating the accumulated budget deficit of the early
1990's, and a modest reserve of $305 million, as of June 30, 1997. For these
and other reasons, Standard & Poors upgraded its rating of California municipal
obligations back to "A+" on July 30, 1996.
Local Governments. On December 6, 1994, Orange County, California
became the largest municipality in the United States to file for protection
under the Federal Bankruptcy laws. The filing stemmed from approximately $1.7
billion in losses suffered by the county's investment pool because of
investments in high risk "derivative" securities. In September 1995,
California's legislature approved legislation permitting the county to use for
bankruptcy recovery $820 million over 20 years in sales taxes previously
earmarked for highways, transit, and development. In June 1996, the county
completed an $880 million bond offering secured by real property owned by the
county. In June 1996, the county emerged from bankruptcy.
On January 17, 1994, an earthquake of the magnitude of an estimated
6.8 on the Richter Scale struck Los Angeles County, California causing
significant damage to public and private structures and facilities. While
county residents and businesses suffered losses totaling in the billions of
dollars, the overall effect of the earthquake on the county's and California's
economy is not expected to be serious. However, Los Angeles County is
experiencing financial difficulty due in part to the severe operating deficits
for the county's health care system. In August 1995, the credit rating of the
county's long term bonds was downgraded for the third time since 1992.
Although the county has received federal and state assistance, it is still
facing a potential budget gap of approximately $1 billion in the 1996-97 fiscal
year. Even though state has no existing obligations with respect to either
Orange County or Los Angeles County, the
8
<PAGE> 35
state may be required to intervene and provide funding if the counties cannot
maintain certain programs because of insufficient resources.
State Finances. The moneys of California are segregated into the
General Fund and approximately 600 Special Funds. The General Fund consists of
the revenues received by the state's Treasury and not required by law to be
credited to any other fund, as well as earnings from state moneys not allocable
to another fund. The General Fund is the principal operating fund for the
majority of governmental activities and is the depository of most major revenue
sources of the state. The General Fund may be expended as the result of
appropriation measures by California's Legislature and approved by the
Governor, as well as appropriations pursuant to various constitutional
authorizations and initiative statutes.
The SFEU is funded with General Fund revenues and was established
to protect California from unforeseen revenue reductions and/or unanticipated
expenditure increases. Amounts in the SFEU may be transferred by the state's
Controller to meet cash needs of the General Fund. The Controller is required
to return moneys so transferred without payment of interest as soon as there
are sufficient moneys in the General Fund. Any appropriation made from the
SFEU is deemed an appropriation from the General Fund, for budgeting and
accounting purposes. For year-end reporting purposes, the Controller is
required to add the balance in the SFEU to the balance in the General Fund so
as to show the total moneys then available for General Fund purposes.
Inter-fund borrowing has been used for several years to meet
temporary imbalances of receipts and disbursements in the General Fund. As of
June 30, 1996, the General Fund had outstanding loans from the SFEU and other
Special Funds of approximately $1.5 billion.
Changes in California Constitutional and Other Laws. In 1978,
California voters approved an amendment to the California Constitution known as
"Proposition 13," which added Article XIIIA to the California Constitution.
Article XIIIA limits ad valorem taxes on real property and restricts the
ability of taxing authorities to increase real property taxes. However,
legislation passed subsequent to Proposition 13 provided for the redistribution
of California's General Fund surplus to local agencies, the reallocation of
revenues to local agencies and the assumption of certain local obligations by
the state so as to assist California municipal issuers to raise revenue to pay
their bond obligations. It is unknown whether additional revenue
redistribution legislation will be enacted in the future and whether, if
enacted, such legislation will provide sufficient revenue for such California
issuers to pay their obligations. California is also subject to another
Constitutional Amendment, Article XIIIB, which may have an adverse impact on
California state and municipal issuers. Article XIIIB restricts the state from
spending certain appropriations in excess of an appropriation's limit imposed
for each state and local government entity. If revenues exceed such
appropriation's limit, such revenues must be returned either as revisions in
the tax rates or fee schedules.
In 1988, California voters approved "Proposition 98," which amended
Article XIIIB and Article XVI of the state's Constitution. Proposition 98 (as
modified by "Proposition 111," which was enacted in 1990), changed state
funding of public education below the university level
9
<PAGE> 36
and the operation of the state's appropriations limit, primarily by
guaranteeing K-14 schools a minimum share of General Fund revenues. In 1986,
California voters approved "Proposition 62," which provided in part that any
tax for general governmental purposes imposed by a local government be approved
by a two-thirds vote of the governmental entity's legislative body and by a
majority of its electorate and that any special tax imposed by a local
government be approved by a two-thirds vote of the electorate. In September
1995, the California Supreme Court upheld the constitutionality of Proposition
62, creating uncertainty as to the legality of certain local taxes enacted by
nonchartered cities in California without voter approval.
Other Information. Certain debt obligations held by the Fund may
be obligations payable solely from lease payments on real or personal property
leased to the state, cities, counties or their various public entities.
California law provides that a lessor may not be required to make payments
during any period that it is denied use and occupancy of the property in
proportion to such loss. Moreover, the lessor only agrees to appropriate
funding for lease payments in its annual budget for each fiscal year. In case
of a default under the lease, the only remedy available against the lessor is
that of reletting the property; no acceleration of lease payments is permitted.
Each of these factors presents a risk that the lease financing obligations held
by the Fund would not be paid in a timely manner.
Certain debt obligations held by the Fund may be obligations
payable solely from the revenues of health care institutions. The method of
reimbursement for indigent care, California's selective contracting with health
care providers for such care and selective contracting by health 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 section in the prospectus entitled "The Fund and
Management." The principal occupations during the past five years of the
Directors and principal executive Officer of the Company are listed below. The
address of each, unless otherwise indicated, is 111 Center Street, Little Rock,
10
<PAGE> 37
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, Age and Address Position During Past 5 Years
- --------------------- -------- ---------------------
<S> <C> <C>
Jack S. Euphrat, 74 Director Private Investor.
415 Walsh Road
Atherton, CA 94027.
*R. Greg Feltus, 45 Director, Senior Vice President
Chairman and of Stephens; Manager
President of Financial Services
Group; President of
Stephens
Insurance Services
Inc.; Senior Vice
President of Stephens
Sports Management
Inc.; and President of
Investor Brokerage
Insurance Inc.
Thomas S. Goho, 54 Director T.B. Rose Faculty
321 Beechcliff Court Fellow-Business,
Winston-Salem, NC 27104 Wake Forest University
Calloway School, of
Business and
Accountancy; Associate
Professor of Finance
of the School of Business
and Accounting at
Wake Forest University
since 1983.
Joseph N. Hankin, 55 Director President, Westchester
75 Grasslands Road Community College since
Valhalla, N.Y. 10595 1971; President of Hartford
Junior College from 1967 to
1971; Adjunct Professor of
Columbia University
Teachers College since
1976.
</TABLE>
11
<PAGE> 38
<TABLE>
<S> <C> <C>
*W. Rodney Hughes, 70 Director Private Investor.
31 Dellwood Court
San Rafael, CA 94901
Robert M. Joses, 78 Director Private Investor.
47 Dowitcher Way
San Rafael, CA 94901
*J. Tucker Morse, 52 Director Private Investor; Real Estate
10 Legrae Street Developer; Chairman
Charleston, SC 29401 of Renaissance
Properties Ltd.;
President of Morse
Investment
Corporation; and Co-
Managing Partner of
Main Street Ventures.
Richard H. Blank, Jr., 40 Chief Associate of
Operating Financial Services
Officer, Group of Stephens;
Secretary and Director of Stephens
Treasurer Sports Management
Inc.; and Director of
Capo Inc.
</TABLE>
12
<PAGE> 39
COMPENSATION TABLE
<TABLE>
<CAPTION>
Year Ended Period Ended
---------- -------------
December 31, 1995 September 30, 1996
------------------ ------------------
Aggregate Total Compensation Aggregate Total Compensation
Compensation from Registrant Compensation from Registrant
Name and Position from Registrant and Fund Complex from Registrant and Fund Complex
- ----------------- --------------- ------------------ --------------- ------------------
<S> <C> <C> <C> <C>
Jack S. Euphrat $10,188 $39,750 $9,750 $29,250
Director
*R. Greg Feltus $-0- $-0- $-0- $-0-
Director
Thomas S. Goho $10,188 $39,750 $9,750 $29,250
Director
Joseph N. Hankin N/A N/A $-0- $-0-
Director
*Zoe Ann Hines $-0- $-0- $-0- $-0-
Director (resigned
as of September 6,
1996)
*W. Rodney Hughes $ 9,438 $37,000 $8,250 $24,750
Director
Robert M. Joses $ 9,938 $39,000 $9,750 $29,250
Director
*J. Tucker Morse $ 8,313 $33,250 $8,250 $24,750
Director
</TABLE>
Directors of the Company are compensated annually by the Company
and by all the registrants in each fund complex they serve as indicated above
and also are reimbursed for all out-of-pocket expenses relating to attendance
at board meetings. The Company, Overland Express Funds, Inc., Stagecoach
Trust, Life & Annuity Trust and Master Investment Trust are considered to be
members of the same fund complex as such term is defined in Form N-1A under the
1940 Act (the "Wells Fargo Fund Complex"). MasterWorks Funds Inc., Master
Investment Portfolio, and Managed Series Investment Trust together form a
separate fund complex (the "BGFA Fund Complex"). Each of the Directors and
Officers of the Company serves in the identical capacity as
13
<PAGE> 40
directors and officers or as trustees and/or officers of each registered
open-end management investment company in both the Wells Fargo and BGFA Fund
Complexes, except for Joseph N. Hankin, who only serves the aforementioned
members of the Wells Fargo Fund Complex, and Zoe Ann Hines who, after September
6, 1996, only serves the aforementioned members of the BGFA Fund Complex. The
Directors are compensated by other companies and trusts within a 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 each 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 Fund is advised by Wells Fargo Bank
pursuant to an Advisory Contract. The Advisory Contract 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 Contract, Wells Fargo Bank furnishes to the Company's Board of
Directors periodic reports on the investment strategy and performance of the
Fund. Wells Fargo Bank has agreed to provide to the 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 the Fund's portfolio. Wells Fargo is entitled to receive a
monthly fee at the annual rate of 0.50% of the Fund's average daily net assets
for providing investment advisory services.
The 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 Fund's outstanding voting securities or by the Company's Board
of Directors and (ii) by a majority of the Directors of the Company who are not
parties to the Advisory Contract or "interested persons" (as defined in the
1940 Act) of any such party. The Advisory Contract may be terminated on 60
days' written notice by either party and will terminate automatically if
assigned.
ADMINISTRATOR AND CO-ADMINISTRATOR . The Company has retained
Wells Fargo Bank as Administrator and Stephens as Co-Administrator on behalf of
the Fund. The Administration Agreement between Wells Fargo and the Fund, and
the Co-Administration Agreement among Wells Fargo, Stephens and the Fund, state
that Wells Fargo and Stephens shall provide as administrative services, among
other things: (i) general supervision of the operation of the 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. Wells Fargo Bank
and Stephens also furnish office space and certain facilities required for
conducting the business of the Fund together with
14
<PAGE> 41
ordinary clerical and bookkeeping services. Stephens pays the compensation of
the Company's Directors, officers and employees who are affiliated with
Stephens. The Administrator and Co-Administrator are entitled to receive a
monthly fee of 0.04% and 0.02%, respectively, of the average daily net assets
of the Fund.
SPONSOR AND DISTRIBUTOR. As discussed in the Fund's prospectus
under the heading "Management and Servicing Fees," Stephens serves as the
Fund's sponsor and distributor.
SHAREHOLDER SERVICING AGENT. As discussed in the Fund's
prospectus under the heading "Shareholder Servicing Agent," the Fund has
entered into shareholder servicing agreements with Wells Fargo Bank. See
"Servicing Plan" in this SAI.
CUSTODIAN AND TRANSFER AND DIVIDEND DISBURSING AGENT. Wells
Fargo Bank has been retained to act as custodian and transfer and dividend
disbursing agent for the Fund, pursuant to a Custody Agreement and an Agency
Agreement with the Company on behalf of the Fund. The custodian, among other
things, maintains a custody account or accounts in the name of the Fund,
receives and delivers all assets for the Fund upon purchase and upon sale or
maturity, collects and receives all income and other payments and distributions
on account of the assets of the Fund and pays all expenses of the Fund. For
its services as custodian, Wells Fargo Bank is entitled to receive fees as
follows: a net asset charge at the annual rate of 0.0167%, payable monthly,
plus specified transaction charges. Wells Fargo Bank also will provide
portfolio accounting services under the Custody Agreement for a fee calculated
as follows: a monthly base fee of $2,000 plus a net asset fee at the annual
rate of 0.070% of the first $50,000,000 of a Fund's average daily net assets,
0.045% of the next $50,000,000, and 0.020% of the average daily net assets in
excess of $100,000,000.
For its services as transfer and dividend disbursing agent for the
Fund, Wells Fargo Bank is entitled to receive monthly payments at the annual
rate of 0.02% of the Fund's average daily net assets.
UNDERWRITING COMMISSIONS. The Fund does not charge any front-end
sales loads or contingent deferred sales charges in connection with the
purchase and redemption of its shares, and therefore pays no underwriting
commissions to the Distributor.
DEFENSIVE 12B-1 PLAN. The Fund has entered into a "defensive"
Distribution Plan under Rule 12b-1 of the 1940 Act (the "Plan"). The Plan
reflects that, to the extent any fees paid pursuant to the servicing plan are
deemed to be "primarily intended to result in the sale of shares" of the Fund,
such fees are approved pursuant to the Plan. The Plan will not result in any
separate payment of fees by the Fund.
SERVICING PLAN
As indicated in the prospectus, the Company's Board of Directors,
adopted a Servicing Plan ("Servicing Plan") and related form of Shareholder
Servicing Agreement on October 24, 1996, with respect to the Fund. The Board
of Directors included a majority of the Directors who were not
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<PAGE> 42
"interested persons" (as defined in the Act) of the Fund and who had no direct
or indirect financial interest in the operation of the Servicing Plan or in any
agreement related to the Servicing Plan (the "Servicing Plan Non-Interested
Directors").
Under the Servicing Plan and pursuant to the shareholder servicing
agreements, the Fund may pay one or more servicing agents, as compensation for
performing certain services, a fee at an annual rate of up to 0.20% of the
average daily net assets of the Fund's shares attributable to the servicing
agent's customers. The actual fee payable to servicing agents is determined,
within such limits, from time to time by mutual agreement between the Company
and each servicing agent and will not exceed the maximum service fees payable
by mutual funds sold by members of the NASD under the NASD Rules.
The Servicing Plan continues in effect from year to year if such
continuance is approved by a majority vote of both the Directors of the Company
and the Servicing Plan Non-Interested Directors. Any form of servicing
agreement related to the Servicing Plan also must be approved by such vote of
the Directors and the Servicing Plan Non-Interested Directors. Servicing
agreements may be terminated at any time, without payment of any penalty, by
vote of a majority of the Servicing Plan Non-Interested Directors. No material
amendment to the Servicing Plans may be made except by a majority of both the
Directors of the Company and the Servicing Plan Non-Interested Directors.
The Servicing Plan requires that the administrator 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 Servicing
Plan.
PERFORMANCE CALCULATIONS
The following information supplements and should be read in
conjunction with the sections in the Prospectus entitled "Determination of Net
Asset Value" and "Performance Data."
The Fund may, from time to time, include its yield or effective
yield in advertisements or reports to shareholders or prospective investors.
Yield for the 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 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.
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<PAGE> 43
Effective yield and effective tax-equivalent yield for the Fund
are calculated by determining the net change, or tax-equivalent assumed net
change, exclusive of capital changes, in the value of a hypothetical
pre-existing account having a balance of one share at the beginning of the
period, subtracting a hypothetical charge reflecting deductions from
shareholder accounts, and dividing the difference by the value of the account
at the beginning of the base period to obtain the base period return, and then
compounding the base period return by adding one, raising the sum to a power
equal to 365 divided by seven, and subtracting one from the result.
The yield for the 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 the Fund may be useful in reviewing the
performance of Fund shares and for providing a basis for comparison with
investment alternatives. The Fund's yield, however, may not be comparable to
the yields from investment alternatives because of differences in the foregoing
variables and differences in the methods used to value portfolio securities,
compute expenses and calculate yield.
From time to time and only to the extent the comparison is
appropriate, the Company may quote the performance or price-earning ratio of
the Fund 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 Fund 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 Fund also may be compared
to that of other mutual Fund 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 Fund. The Fund's performance will be calculated by relating net asset
value per share at the beginning of a stated period to the net asset value of
the investment, assuming reinvestment of all gains distributions and dividends
paid, at the end of the period. The 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.
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<PAGE> 44
Any such comparisons may be useful to investors who wish to
compare past performance of the 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 use the following information in
advertisements and other types of literature, only to the extent the
information is appropriate for the Fund: (i) the Consumer Price Index may be
used to assess the real rate of return from an investment in the Fund; (ii)
other government statistics, including, but not limited to, The Survey of
Current Business, may be used to illustrate investment attributes of the Fund
or the general economic, business, investment, or financial environment in
which the Fund operates; (iii) the effect of tax-deferred compounding on the
investment returns of the Fund, or on returns in general, may be illustrated by
graphs, charts, etc., where such graphs or charts would compare, at various
points in time, the return from an investment in 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 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 comparisons may be useful to investors who wish to
compare the Fund's past performance with other rated investments.
From time to time, the Fund may use the following statements, or
variations thereof, in advertisements and other promotional materials: "Wells
Fargo Bank, as a Shareholder
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<PAGE> 45
Servicing Agent for the Stagecoach Fund, provides various services to its
customers that are also shareholders of the Fund. These services may include
access to Stagecoach Fund's account information through Automated Teller
Machines (ATMs), the placement of purchase and redemption requests for shares
of the Fund through ATMs and the availability of combined Wells Fargo Bank and
Stagecoach Fund account statements." 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 and mutual fund assets managed by Wells Fargo Bank. As
of December 31, 1996, Wells Fargo Bank and its affiliates provided investment
Advisory services for approximately $54 billion of assets of individuals,
trusts, estates and institutions and $20 billion of mutual fund assets.
The Company may disclose in advertising and other types of
literature that investors can open and maintain Sweep Accounts over the
Internet or through other electronic channels (collectively, "Electronic
Channels"). Such advertising and other literature may discuss the investment
options available to investors, including the types of accounts and any
applicable fees. Such advertising and other literature may disclose that Wells
Fargo Bank is the first major bank to offer an on-line application for a mutual
fund account that can be filled out completely through Electronic Channels.
Advertising and other literature may disclose that Wells Fargo Bank may
maintain Web sites, pages or other information sites accessible through
Electronic Channels (an "Information Site") and may describe the contents and
features of the Information Site and instruct investors on how to access the
Information Site and open a Sweep Account. Advertising and other literature
may also disclose the procedures employed by Wells Fargo Bank to secure
information provided by investors, including disclosure and discussion of the
tools and services for accessing Electronic Channels. Such advertising or
other literature may include discussions of the advantages of establishing and
maintaining a Sweep Account through Electronic Channels and testimonials from
Wells Fargo Bank customers or employees and may also include descriptions of
locations where product demonstrations may occur. The Company may also
disclose the ranking of Wells Fargo Bank as one of the largest money managers
in the United States.
DETERMINATION OF NET ASSET VALUE
The following information supplements and should be read in
conjunction with the Prospectus section under "Purchase of Shares."
Expenses and fees, including advisory fees, are accrued daily and
are taken into account for the purpose of determining the net asset value of a
Fund's shares.
Net asset value per Fund share is determined by the Custodian on
each Business Day, as described in the Prospectus for the Fund.
As indicated under "Investing In The Fund -- Share Price" in the
Prospectus, the 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
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<PAGE> 46
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 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 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, the 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 has
established procedures designed to stabilize, to the extent reasonably
possible, the 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 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.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
Fund shares may be purchased on any day the Fund is open (a
"Business Day"). The Fund is open on any day that either the New York Stock
Exchange or Wells Fargo Bank is open. Currently the holidays observed by both
the New York Stock Exchange and Wells Fargo Bank are New Year's Day,
Presidents' Day, Martin Luther King's Birthday, Memorial Day, Independence Day,
Labor Day, Columbus Day, Veterans Day, Thanksgiving Day and Christmas Day
(each, a "Holiday"). When any Holiday falls on a weekend, the Fund typically
is closed on the weekday immediately before or after such Holiday.
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<PAGE> 47
Payment for shares may, in the discretion of the adviser, be made
in the form of securities that are permissible investments for the Fund as
described in the Prospectuses. For further information about this form of
payment please contact Stephens. In connection with an in-kind securities
payment, the Fund will require, among other things, that the securities be
valued on the day of purchase in accordance with the pricing methods used by
the Fund and that the Fund receives satisfactory assurances that (i) it will
have good and marketable title to the securities received by it; (ii) that the
securities are in proper form for transfer to the Fund; and (iii) adequate
information will be provided concerning the basis and other matters relating to
the securities.
Under the 1940 Act, the Fund may suspend the right of redemption
or postpone the date of payment upon redemption for any period during which the
NYSE is closed (other than customary weekend and holiday closings, or during
which trading is restricted, or during which as determined by the SEC by rule
or regulation) an emergency exists as a result of which disposal or valuation
of portfolio securities is not reasonably practicable, or for such periods as
the SEC may permit.
The Company may suspend redemption rights or postpone redemption
payments for such periods as are permitted under the 1940 Act. The Company may
also redeem shares involuntarily or make payment for redemption in securities
or other property if it appears appropriate to do so in light of the Company's
responsibilities under the 1940 Act.
In addition, the Company may redeem shares involuntarily to
reimburse the Fund for any losses sustained by reason of the failure of a
shareholders to make full payment for shares purchased or to collect any charge
relating to a transaction effected for the benefit of a shareholder which is
applicable to shares of the Fund as provided from time to time in the
Prospectus.
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 Fund's portfolio decisions and the placing of portfolio
transactions. In placing orders, it is the policy of the Company to obtain the
best results taking into account the dealer's general execution and operational
facilities, the type of transaction involved and other factors such as the
dealer's risk in positioning the securities involved. While Wells Fargo Bank
generally seeks reasonably competitive spreads or commissions, the Fund will
not necessarily be paying the lowest spread or commission available.
Purchase and sale orders of the securities held by the Fund may be
combined with those of other accounts that Wells Fargo Bank manages, and for
which it has brokerage placement authority, in the interest of seeking the most
favorable overall net results. When Wells Fargo Bank determines that a
particular security should be bought or sold for the Fund and other
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<PAGE> 48
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
Fund 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 Fund 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 to the Fund, may, in
circumstances in which two or more dealers are in a position to offer
comparable results for the Fund portfolio transaction, give preference to a
dealer that has provided statistical or other research services to Wells Fargo
Bank. By allocating transactions in this manner, Wells Fargo Bank is able to
supplement its research and analysis with the views and information of
securities firms. Information so received will be in addition to, and not in
lieu of, the services required to be performed by Wells Fargo Bank under the
Advisory Contracts, and the expenses of Wells Fargo Bank will not necessarily
be reduced as a result of the receipt of this supplemental research
information. Furthermore, research services furnished by dealers through which
Wells Fargo Bank places securities transactions for the Fund may be used by
Wells Fargo Bank in servicing its other accounts, and not all of these services
may be used by Wells Fargo Bank in connection with advising the Fund.
SECURITIES OF REGULAR BROKER/DEALERS. As of the date of this SAI,
the Fund owned no securities of its "regular brokers or dealers" or their
parents, as defined in the Act.
PORTFOLIO TURNOVER. Because the Fund's portfolio consists of
securities with relatively short-term maturities, the Fund can expect to
experience high portfolio turnovers. A high portfolio turnover rate should not
adversely affect the Fund, however, because portfolio transactions ordinarily
will be made directly with principals on a net basis and, consequently, the
Fund usually will not incur brokerage expenses.
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<PAGE> 49
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 the Fund; expenses of shareholders' meetings; expenses
relating to the issuance, registration and qualification of the Fund's shares;
pricing services, and any extraordinary expenses. Expenses attributable to the
Fund are charged against Fund assets. General expenses of the Company are
allocated among all of the funds of the Company, including the Fund, in a
manner proportionate to the net assets of the Fund, on a transactional basis,
or on such other basis as the Company's Board of Directors deems equitable.
FEDERAL INCOME TAXES
In General. The following information supplements and should be
read in conjunction with the Prospectus sections entitled "Dividend and Capital
Gain Distributions" and "Taxes." The Prospectus of the Fund describes
generally the tax treatment of distributions by the Fund. This section of the
SAI includes additional information concerning federal income taxes.
The Company intends to qualify the Fund as a regulated investment
company under Subchapter M of the Code as long as such qualification is in the
best interest of the Fund's shareholders. The Fund will be treated as a
separate entity for tax purposes and thus the provisions of the Code applicable
to regulated investment companies will generally be applied to the Fund, rather
than to the Company as a whole. In addition, net capital gains, net investment
income, and operating expenses will be determined separately for the Fund.
Qualification as a regulated investment company under the Code
requires, among other things, that (a) the Fund derive at least 90% of its
annual gross income from interest, payments with respect to securities loans,
dividends and gains from the sale or other disposition of securities or options
thereon; (b) the Fund derive less than 30% of its gross income from gains from
the sale or other disposition of securities or options thereon held for less
than three months; and (c) the Fund diversify 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.
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<PAGE> 50
Government securities and the securities of other regulated investment
companies), or in two or more issuers which the Fund controls and which are
determined to be engaged in the same or similar trades or businesses. As a
regulated investment company, the Fund will not be subject to federal income
tax on its net investment income and net capital gains distributed to its
shareholders, provided that it distributes to its shareholders at least 90% of
its net investment income, including net tax-exempt income, earned in each
year. The Fund intends to pay out substantially all of its net investment
income and net realized capital gains (if any) for each year.
A 4% nondeductible excise tax will be imposed on the Fund (other
than to the extent of the Fund's tax- exempt income) to the extent it does not
meet certain minimum distribution requirements by the end of each calendar
year. The Fund will either actually or be deemed to distribute all of its net
investment income and net capital gains by the end of each calendar year and,
thus, expects not to be subject to the excise tax.
Federal Income Tax Rates. As of the printing of this SAI, the
maximum individual tax rate applicable to ordinary income is 39.60% (marginal
rates may be higher for some individuals due to phase out of exemptions and
elimination of deductions); the maximum individual marginal tax rate applicable
to net capital gains is 28.00%; the maximum corporate tax rate applicable to
ordinary income and net capital gains is 35.00% (except that to eliminate the
benefit of lower marginal corporate income tax rates, corporations which have
taxable income in excess of $100,000 for a taxable year will be required to pay
an additional amount of income tax of up to $11,750 and corporations which have
taxable income in excess of $15,000,000 for a taxable year will be required to
pay an additional amount of tax of up to $100,000). Naturally, the amount of
tax payable by an individual or corporation will be affected by a combination
of tax laws covering, for example, deductions, credits, deferrals, exemptions,
sources of income and other matters.
Capital Gain Distributions. To the extent that the Fund
recognizes long-term capital gains, such gains will be distributed at least
annually and these distributions will be taxable to shareholders as long-term
capital gains, regardless of how long a shareholder has held Fund shares. Such
distributions will be designated as capital gain distributions in a written
notice mailed by the Fund to the shareholders not later than 60 days after the
close of the Fund's taxable year.
Other Distributions. Although dividends will be declared daily
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. It is expected that the Fund's net income, on an annual basis, will
equal the dividends declared during the year.
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<PAGE> 51
Disposition of Fund Shares. If a shareholder receives a
designated capital gain distribution (to be treated by the shareholder as a
long-term capital gain) with respect to any Fund share and such Fund share is
held for six months or less, then (unless otherwise disallowed) any loss on the
sale or exchange of that Fund share will be treated as a long-term capital loss
to the extent of the designated capital 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.
If a shareholder exchanges or otherwise disposes of Fund shares
within 90 days of having acquired such shares and if, as a result of having
acquired those shares, the shareholder subsequently pays a reduced sales charge
on a new purchase of shares of the Fund or of a different regulated investment
company, 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 on the new purchase) for the purpose of
determining the amount of gain or loss on the disposition, 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 the 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.
Taxation of Fund Investments. Gains or losses on sales of
portfolio securities by the Fund will generally be long-term capital gains or
losses if the securities have been held by it for more than one year, except in
certain cases such as where the Fund acquires a put or writes a call thereon.
Gains 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 market discount which
accrued during the period of time the Fund held the debt obligation. Other
gains or losses on the sale of portfolio securities will be short-term capital
gains or losses.
Foreign Shareholders. Under the Code, distributions of net
investment income by the 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 the Fund to a foreign shareholder is "effectively connected"
with a U.S. trade or business, in which case the reporting and withholding
requirements applicable to U.S. citizens, U.S. 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.
Backup Withholding. The Company may be required to withhold,
subject to certain exemptions, at a rate of 31% ("backup withholding") on
dividends, capital gain distributions, and redemption proceeds (including
proceeds from exchanges) paid or credited to an individual Fund
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<PAGE> 52
shareholder, unless a shareholder certifies that the Taxpayer Identification
Number ("TIN") provided is correct and that the shareholder is not subject to
backup withholding, or the IRS notifies the Company that the shareholder's TIN
is incorrect or the shareholder is subject to backup withholding. Such tax
withheld does not constitute any additional tax imposed on the shareholder, and
may be claimed as a tax payment on the shareholder's federal income tax return.
An investor must provide a valid TIN upon opening or reopening an account.
Failure to furnish a valid TIN to the Company could subject the investor to
penalties imposed by the IRS.
Special Tax Considerations for the Fund.
Federal -- The Fund intends that at least 50% of the value of
its total assets at the close of each quarter of its taxable years will consist
of obligations the interest on which is exempt from federal income tax, so that
they will qualify under the Code to pay "exempt-interest dividends." The
portion of total dividends paid by the Fund with respect to any taxable year
that constitutes exempt-interest dividends will be the same for all
shareholders receiving dividends during such year. Long-term and/or short-term
capital gain distributions will not constitute exempt-interest dividends and
will be taxed as capital gain or ordinary income dividends, respectively. 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" below.
Not later than 60 days after the close of its taxable year,
the Fund will notify its shareholders of the portion of the dividends paid with
respect to such taxable year which constitutes exempt-interest dividends. The
aggregate amount of dividends so designated cannot exceed the excess of the
amount of interest excludable from gross income under Section 103 of the Code
received by the Fund during the taxable year over any amounts disallowed as
deductions under Sections 265 and 171(a)(2) of the Code. Finally, interest on
indebtedness incurred to purchase or carry shares of the Fund will not be
deductible to the extent that the Fund's distributions are exempt from federal
income tax.
In addition, the federal alternative minimum tax ("AMT") rules
ensure that at least a minimum amount of tax is paid by taxpayers who obtain
significant benefit from certain tax deductions and exemptions. Some of these
deductions and exemptions have been designated "tax preference items" which
must be added back to taxable income for purposes of calculating AMT. Among
the tax preference items is tax-exempt interest from "private activity bonds"
issued after August 7, 1986. To the extent that the Fund invests in private
activity bonds, its shareholders who pay AMT will be required to report that
portion of Fund dividends attributable to income from the bonds as a tax
preference item in determining their AMT. Shareholders will be notified of the
tax status of distributions made by the Fund. Persons who may be "substantial
users" (or "related persons" of substantial users) of facilities financed by
private activity bonds should consult their tax advisors before purchasing
shares in the Fund. Furthermore, shareholders will not be permitted to deduct
any of their share of the Fund's expenses in computing their AMT. With respect
to a corporate shareholder of such Funds, exempt-interest dividends paid by a
Fund is included in the corporate shareholder's "adjusted current earnings" as
part of its AMT calculation, and may also affect its federal "environmental
tax" liability. As of the printing of
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this SAI, individuals are subject to an AMT at a maximum rate of 28% and
corporations at a maximum rate of 20%. Shareholders with questions or concerns
about AMT should consult their tax advisors.
Shares of the Fund would not be suitable for tax-exempt
institutions and may not be suitable for retirement plans qualified under
Section 401 of the Code, H.R. 10 plans and IRAs since such plans and accounts
are generally tax-exempt and, therefore, would not benefit from the exempt
status of dividends from the Fund. Such dividends would be ultimately taxable
to the beneficiaries when distributed to them.
California -- The Fund expects to be exempt from tax in California
on the same basis as under Subchapter M of the Code as described above.
Moreover, if at the close of each quarter of the Fund's taxable year, at least
50% of the value of its total assets consists of obligations the interest on
which, if such obligations were held by an individual, would be exempt from
California personal income tax (under either the laws of California or of the
United States), the Fund will be entitled to pay dividends to its shareholders
which will be exempt from California personal income tax (referred to herein as
"California exempt-interest dividends"). Under normal market conditions, the
Fund will invest primarily in municipal securities of the State of California,
its cities, municipalities and other political authorities so that it can pay
California exempt-interest dividends.
Not later than 60 days after the close of its taxable year, the
Fund will notify its shareholders of the portion of the dividends paid which
constitutes California exempt-interest dividends with respect to such taxable
year. The total amount of California exempt-interest dividends paid by the
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 the 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 the 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. Investors should be aware that the investments to
be made by the Fund may involve sophisticated tax rules that may result in
income or gain recognition by the Fund without corresponding current cash
receipts. Although the Fund will seek to avoid significant noncash income,
such noncash income could be recognized by the Fund, in which
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<PAGE> 54
case the Fund may distribute cash derived from other sources in order to meet
the minimum distribution requirements described above.
The foregoing discussion and the discussions in the Prospectus
address only some of the federal tax considerations generally affecting
investments in the Fund. Each investor is urged to consult his or her tax
advisor regarding specific questions as to federal, state or local taxes and
foreign taxes.
CAPITAL STOCK
The Fund is one of the Stagecoach Family of funds. The Company
was organized as a Maryland corporation on September 9, 1991 and currently
offers shares of twenty-four other funds.
The Fund offers one class of shares. Most of the Company's funds
are authorized to issue multiple classes of shares, one class generally subject
to a front-end sales charge and, in some cases, a class subject to a
contingent- deferred sales charge, that are offered to retail investors.
Certain of the Company's funds also are authorized to issue other classes of
shares, which are sold primarily to institutional investors. Each class of
shares in a fund represents an equal, proportionate interest in a fund with
other shares of the same class. Shareholders of each class bear their pro rata
portion of the fund's operating expenses, except for certain class-specific
expenses (e.g., any state securities registration fees, shareholder servicing
fees or distribution fees that may be paid under Rule 12b-1) that are allocated
to a particular class. Please contact Stagecoach Shareholder Services at
1-800-260-5969 if you would like additional information about other funds or
classes of shares offered.
In situations where voting by series is required by law or where
the matter involved only affects one series, shares of the 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 and this SAI, the term "majority," when
referring to approvals to be obtained from shareholders of the Fund, means the
vote of the lesser of (i) 67% of the shares of the Fund represented at a
meeting if the holders of more than 50% of the outstanding shares of the Fund
are present in person or by proxy, or (ii) more than 50% of the outstanding
shares of the Fund. The term "majority," when referring to the approvals to be
obtained from shareholders of the Company as a whole, means the vote of the
lesser of (i) 67% of the Company's shares represented at a meeting if the
holders of 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
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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 Fund share 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.
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 17, 1997, Stephens was the beneficial owner of 100%
of the outstanding voting securities of the Fund and, as such, could be
considered a "controlling person" of the Fund for purposes of the 1940 Act.
Upon commencement of the public offering of the Fund's shares it is expected
that Stephens will own a significantly smaller percentage of the Fund's shares
and will no longer be considered a controlling person.
OTHER
The Registration Statement, including the Prospectus of the 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
the 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' reports for the Company's other funds for the fiscal
period ended September 30, 1996 are hereby incorporated by reference to the
Company's Annual Report as filed with the SEC on or about November 9, 1996.
The Company's annual report may be obtained by calling 1-800-260-5969.
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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 "VMIG
3" are of "favorable quality," with all security elements accounted for, but
lacking the strength of the preceding grades.
A-1
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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
