<PAGE>
April 1, 1998
STAGECOACH FUNDS/R/
Stagecoach
Yield Funds
Prospectus
Corporate Please read this Prospectus and keep it for future
Bond Fund reference. It is designed to provide you with
important information and to help you decide if the
Strategic Fund's goals match your own.
Income Fund
These securities have not been approved or disapproved
by the U.S. Securities and Exchange Commission, any
Class A, Class B state securities commission or any other regulatory
and Class C 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.
Investment Advisor
and Administrator: Fund shares are NOT deposits or other obligations of,
or issued, endorsed or guaranteed by, Wells Fargo
Wells Fargo Bank Bank, N.A. ("Wells Fargo Bank"), or any of its
affiliates. Fund shares are NOT insured or guaranteed
Distributor and by the U.S. Government, the Federal Deposit Insurance
Co-Administrator: Corporation ("FDIC"), the Federal Reserve Board or any
other governmental agency. AN INVESTMENT IN A FUND
Stephens Inc. INVOLVES CERTAIN RISKS, INCLUDING POSSIBLE LOSS OF
PRINCIPAL.
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About This Prospectus
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What is a prospectus?
A prospectus provides you with the information you need in order to make an
informed investment decision. It describes how a Fund operates and invests its
assets and also contains fee and expense information.
What is different about this Prospectus?
We have written our Prospectus in "Plain English" and grouped some of the most
important Fund information together to make it easier to read and understand.
How is the Fund information organized?
After important summary information and the expense fee table, each Fund's
investment objective and certain characteristics are presented. The icons
below tell you where various types of information about a Fund can be found.
Important information you should look for:
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[LOGO OF Investment Objective and Investment Policies
ARROW]
What is the Fund trying to achieve? How do we intend to invest
your money? What makes a Fund different from the other Fund
offered in this Prospectus? Look for the arrow icon to find
out.
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[LOGO OF Permitted Investments
PERCENTAGE
SIGN] A summary of the Fund's key permitted investments and
practices.
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[LOGO OF Important Risk Factors
EXCLAMATION
POINT] What are key risk factors about this Fund? This will include
the factors described in "General Investment Risks" together
with any special risk factors for the Fund.
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[LOGO OF Additional Fund Facts
ADDITION
SIGN] Provides additional information about the Fund.
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Why is italicized print used throughout this Prospectus?
Words appearing in italicized print and highlighted in color are defined in
the Glossary.
What else do I need to understand these Funds?
The Funds have a Statement of Additional Information that supplements the
disclosures made in this Prospectus. You may also want to review the most
recent Annual or Semi-Annual Report. You can order copies of these documents
without charge by calling 1-800-222-8222. The Statement of Additional
Information and other information for the Funds is also available on the SEC's
website (http://www.sec.gov).
<PAGE>
Table of Contents
Key Information 4
Summary of Expenses 6
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The Funds Corporate Bond Fund 8
This section contains Strategic Income Fund 10
important information
about the individual General Investment Risks 12
Funds.
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Your Account A Choice of Share Classes 18
Turn to this section Reduced Sales Charges 21
for information on how
to open and maintain Your Account 24
your account, including
how to buy, sell and How to Buy Shares 26
exchange Fund shares.
Selling Shares 27
Exchanges 29
Additional Services and
Other Information 30
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Reference Organization and Management
of the Funds 34
Look here for details
on the organization Glossary 38
of the Funds and term
definitions.
<PAGE>
Key Information
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Summary of the Stagecoach Yield Funds
The Funds described in this Prospectus invest in debt securities and the
Strategic Income Fund also invests in income-producing equity securities. The
Funds seek to distribute monthly income and seek varying degrees of principal
stability. Each Fund has a different investment objective intended to meet
different investment needs. You should consider each Fund's objective,
investment practices, permitted investments and risks carefully before
investing in a Fund.
Should you consider investing in these Funds? Yes, if:
* you are looking to add an income investment to your portfolio;
* you are looking for monthly income; and
* you are willing to accept the risks of income investing, including the
risk that share prices may rise and fall.
You should not invest in these Funds if:
* you are looking for FDIC insurance coverage or guaranteed rates of return;
* you are unwilling to accept that you may lose money on your investment;
* you are unwilling to accept the risks of investing in the bond markets; or
* you are looking for returns characteristic of equity investments.
Who are "We"?
In this Prospectus, "We" generally means the Stagecoach Funds. "We" sometimes
refers to the Investment Advisor or other companies hired by the Fund to
perform services. The section on "Organization and Management of the Funds"
further explains how the Funds are organized.
Who are "You"?
In this Prospectus, "You" means the potential investor or the shareholder.
What are the "Funds"?
In this Prospectus, the "Funds" refers to the Stagecoach Funds listed on the
cover of this Prospectus. The "Funds" also may refer to other mutual funds
offered by Stagecoach Funds, Inc.
4 Stagecoach International Equity Fund Prospectus
<PAGE>
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Key Terms
The term "debt securities" used in this Prospectus refers to a broad variety
of fixed-income and variable-rate securities including bonds, bills, notes and
mortgage-backed securities. The term "instruments" is used to describe a
negotiable contract or promise to pay money, such as a Certificate of Deposit
or a Banker's Acceptance. The "Permitted Investments" for each Fund and
"Investment Practices and Risks" table describe some of the particular
instruments and securities used for each Fund.
Dividends
Our policy is to pay dividends monthly.
Stagecoach Yield Funds Prospectus 5
<PAGE>
<TABLE>
<CAPTION>
Yield Funds Summary of Expenses
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SHAREHOLDER TRANSACTION EXPENSES
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These tables are intended to help you understand the various costs and expenses you will pay as a
shareholder in a Fund. These tables do not reflect any charges that may be imposed by Wells Fargo
Bank or other institutions in connection with an account through which you hold Fund shares. See
"Organization and Management of the Funds" for more details.
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Corporate Bond Fund Strategic Income Fund
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Class A Class B Class C Class A Class B Class C
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<S> <C> <C> <C> <C> <C> <C>
Maximum sales charge on a purchase
(as a percentage of offering price) 4.50% None None 4.50% None None
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Maximum sales charge on reinvested
dividends None None None None None None
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Maximum sales charge on a:
Redemption during first year None 5.00% 1.00% None 5.00% 1.00%
Redemption after first year None 4.00% None None 4.00% None
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Exchange fees None None None None None None
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</TABLE>
<TABLE>
<CAPTION>
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ANNUAL FUND OPERATING EXPENSES (AS A PERCENTAGE OF AVERAGE NET ASSETS)
===================================================================================================
Expenses shown reflect contract amounts and estimates of Other expenses. Expenses shown "after
waivers and reimbursements" reflect fee waivers and reimbursements that may be discontinued
without prior notice. Long-term Class B and Class C shareholders may pay more than the
equivalent of the maximum front-end sales charge allowed by the National Association of
Securities Dealers, Inc.
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Corporate Bond Fund Strategic Income Fund
-----------------------------------------------------------
Class A Class B Class C Class A Class B Class C
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<S> <C> <C> <C> <C> <C> <C>
Rule 12b-1 fee 0.05% 0.75% 0.75% 0.05% 0.75% 0.75%
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Management fee 0.50% 0.50% 0.50% 0.60% 0.60% 0.60%
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Other expenses
(after waivers or reimbursements) 0.45% 0.50% 0.50% 0.50% 0.55% 0.55%
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Total Fund Operating Expenses
(after waivers or reimbursements) 1.00% 1.75% 1.75% 1.15% 1.90% 1.90%
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Other expenses
(before waivers or reimbursements) 0.75% 0.75% 0.75% 0.75% 0.75% 0.75%
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Total Fund Operating Expenses
(before waivers or reimbursements) 1.30% 2.00% 2.00% 1.40% 2.10% 2.10%
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</TABLE>
6 Stagecoach Yield Funds Prospectus
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<TABLE>
<CAPTION>
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EXAMPLE OF EXPENSES - THIS EXAMPLE IS NOT A REPRESENTATION OF PAST OR FUTURE EXPENSES, AND ACTUAL EXPENSES
MAY BE HIGHER OR LOWER THAN THOSE SHOWN.
===========================================================================================================
You would pay the following expenses on
a $1,000 investment assuming a 5%
annual return and that you redeem Corporate Bond Fund Strategic Income Fund
your shares at the end of each period. ----------------------------------------------------------------
Class A Class B Class C Class A Class B Class C
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<S> <C> <C> <C> <C> <C> <C>
1 Year $55 $68 $28 $56 $69 $29
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3 Years $75 $85 $55 $80 $90 $60
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<CAPTION>
===========================================================================================================
EXAMPLE OF EXPENSES - THIS EXAMPLE IS NOT A REPRESENTATION OF PAST OR FUTURE EXPENSES, AND ACTUAL EXPENSES
MAY BE HIGHER OR LOWER THAN THOSE SHOWN.
===========================================================================================================
You would pay the following expenses on
a $1,000 investment assuming a 5%
annual return and that you do not redeem Corporate Bond Fund Strategic Income Fund
your shares at the end of each period. ----------------------------------------------------------------
Class A Class B Class C Class A Class B Class C
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1 Year $55 $18 $18 $56 $19 $19
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3 Years $75 $55 $55 $80 $60 $60
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</TABLE>
Stagecoach Yield Funds Prospectus 7
<PAGE>
Corporate Bond Fund
(Commencement of Operations, April 1998)
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Portfolio Managers: Scott Smith (since 4/98)
Jacqueline Flippin (since 4/98)
Graham Allen (since 4/98)
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[LOGO OF Investment Objective
ARROW]
The Corporate Bond Fund seeks a high level of current income
consistent with prudent investment risk.
Investment Policies
We seek a high rate of current income by actively managing a
diversified portfolio consisting primarily of corporate debt
securities. When purchasing these securities we consider,
among other things, the yield differences for various
corporate sectors, and the current economic cycle's potential
effect on the various types of bonds. We may invest in
securities of any maturity. Under normal market conditions, we
expect to maintain a dollar-weighted average maturity for
portfolio securities of between 10 and 15 years. We also may
invest in U.S. Government obligations.
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[LOGO OF Permitted Investments
PERCENTAGE
SIGN] Under normal market conditions, we invest:
* at least 65% of our total assets in corporate debt securities;
* in U.S. Government obligations;
* no more than 25% of our total assets in debt securities that
are below investment grade; and
* no more than 25% of our total assets in securities of
foreign issuers.
We may temporarily hold assets in cash or money market
instruments, including U.S. Government obligations, shares of
other mutual funds and repurchase agreements, or make other
short-term investments; either to maintain liquidity or for
short-term purposes when we believe it is in the best
interests of shareholders to do so.
8 Stagecoach Yield Funds Prospectus
<PAGE>
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[LOGO OF Important Risk Factors
EXCLAMATION
POINT] You should consider both the General Investment Risks
beginning on page 12 and the specific risks listed below. They
are both important to your investment choice.
We may invest in securities regardless of their rating or in
securities that are unrated, or in default at the time of
purchase.
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[LOGO OF Additional Fund Facts
ADDITION
SIGN] For information on Fund fees and expenses, see "Summary of
Expenses" on page 6.
Stagecoach Yield Funds Prospectus 9
<PAGE>
Strategic Income Fund
(Commencement of Operations, June 1998)
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Portfolio Managers: Scott Smith (since 6/98)
Jacqueline Flippin (since 6/98)
Graham Allen (since 6/98)
Alan Wisniewski (since 6/98)
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[LOGO OF Investment Objective
ARROW]
The Strategic Income Fund seeks to maximize income while
maintaining prospects for capital appreciation.
Investment Policies
We actively manage a diversified portfolio of debt securities
and income-producing equity securities selected with
particular consideration for their potential to generate
current income. We shift assets between such debt and equity
securities based on our assessment of the potential income
available. We may buy debt securities that are below
investment grade (sometimes referred to as "junk bonds"), as
well as debt rated in the lower investment grade categories.
Our equity focus will be on securities issued by companies in
industries that tend to pay high ongoing dividends, such as
utilities. We may buy preferred stock and other convertible
securities, as well as common stock of any size company. Any
capital appreciation will come primarily from the income-
producing equity portion of the portfolio.
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[LOGO OF Permitted Investments
PERCENT
SIGN] Under normal market conditions, we invest:
* at least 25% of our total assets in corporate and government
bonds;
* up to 60% of our total assets in a wide range of income-
producing equity securities;
* less than 35% of our total assets in debt securities that
are below investment grade, including "high risk" securities;
* no more than 25% of our total assets in securities of
foreign issuers;
* in a wide range of income producing securities.
10 Stagecoach Yield Funds Prospectus
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We will generally invest in debt securities that are related
at least Caa by Moody's or CCC by S&P, or that are unrated but
deemed by the adviser to be of comparable quality. The average
credit quality of this portion of the portfolio is expected to
be "BB" as rated by Standard & Poor'strademark.
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[LOGO OF Important Risk Factors
EXCLAMATION
POINT] You should consider both the General Investment Risks listed
on page 12 and the specific risks listed below. They are both
important to your investment choice.
We may invest in debt securities that are in low or below
investment grade categories, or are unrated or in default at
the time of purchase. Such debt securities have a much greater
risk of default (or in the case of bonds currently in default,
of not returning principal) and are more volatile than higher-
rated securities of similar maturity.
Stocks of the smaller and medium-sized companies in which the
Fund may invest may be more volatile than larger company
stocks. Investments in foreign markets may also present
special risks, including currency, political, diplomatic,
regulatory and liquidity risks.
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[LOGO OF Additional Fund Facts
ADDITION
SIGN] Scott Smith and Jacqueline Flippin are the managers of the
income portion of the Fund, Alan Wisniewski is the manager of
the income-producing equity portion of the Fund, and Graham
Allen manages the international portion of the Fund. They
jointly determine the Fund's asset allocation.
For information on Fund fees and expenses, see "Summary of
Expenses" on page 6.
Stagecoach Yield Funds Prospectus 11
<PAGE>
General Investment Risks
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Understanding the risks involved in mutual fund investing will help you make an
informed decision that takes into account your tolerance and preferences. You
should carefully consider risks common to all mutual funds, including the
Stagecoach Funds. Chief among these risks are the following:
* Unlike bank deposits, such as CDs or savings accounts, mutual funds are
not insured by the FDIC.
* We cannot guarantee that we will meet our investment objectives.
* We do not guarantee the performance of a Fund, nor can we assure you that
the market value of your investment will not decline. We will not "make
good" any investment loss you may suffer, nor can anyone we contract with to
provide certain services for a Fund, such as selling agents or investment
advisors, offer or promise to make good any such losses.
* Share prices-and therefore the value of your investment-will increase and
decrease with changes in the value of the underlying securities and other
investments. This is referred to as volatility.
* Investing in any mutual fund, including those deemed conservative, involves
risk, including the possible loss of any money you invest.
* An investment in a single Fund, by itself, does not constitute a complete
investment plan.
The Funds invest in securities that involve particular kinds of risk.
* The Funds invest in debt instruments, such as notes and bonds, that are
subject to credit risk. Credit risk is the possibility that an issuer of a
security will be unable to make interest payments or repay principal.
Changes in the financial strength of an issuer or changes in the credit
rating of a security may affect its value.
* The Funds' debt instruments are also subject to interest rate risk.
Interest-rate risk is the possibility that interest rates may increase and
reduce the resale value of securities in a Fund's portfolio. Debt
instruments with longer maturities are generally more sensitive to interest
rate changes than those with shorter maturities. Changes in market interest
rates do not affect the rate payable on debt instruments held in a Fund,
unless the instrument has adjustable or variable rate features. Changes in
market interest rates may also extend or shorten the duration of certain
types of instruments, such as asset-backed securities, thereby affecting
their value and the return on your investment. Each Fund may continue to
hold debt instruments that cease to be rated by a nationally recognized
ratings organization or whose rating falls below the levels permitted for
such Fund,
12 Stagecoach Yield Funds Prospectus
<PAGE>
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provided Wells Fargo Bank continues to believe that holding the instrument
is in the best interest of the Fund. Unrated or downgraded securities may be
more susceptible to interest rate and credit risk than rated or higher-rated
securities.
* The Funds may invest a portion of their assets in U.S. Government
obligations. It is important to recognize that the U.S. Government does not
guarantee the market value or current yield of those obligations. Not all
U.S. Government obligations are backed by the full faith and credit of the
U.S. Treasury, and the U.S. Government's guarantee does not extend to the
Fund itself.
* The Funds also may invest a portion of their assets in GNMAs, FNMAs and
FHLMCs. Each are mortgage-backed securities representing partial ownership
of a pool of residential mortgage loans. A "pool" or group of such mortgages
is assembled and, after being approved by the issuing entity, is offered to
investors through securities dealers. Once approved by GNMA, a government
corporation within the U.S. Department of Housing and Urban Development, the
timely payment of interest and principal of a GNMA security is guaranteed by
the full faith and credit of the U.S. Government. FNMA and FHLMC are
federally chartered corporations supervised by the U.S. Government, acting
as government-sponsored enterprises. FNMA and FHLMC securities are not
direct obligations of the U.S. Treasury, and are supported by the credit of
FNMA or FHLMC only. FNMA guarantees timely payment of interest and principal
on its securities; FHLMC guarantees timely payment of interest and ultimate
payment of principal only.
* The Funds may enter into forward currency exchange contracts ("forward
contracts") to try to reduce currency exchange risks to the Funds from
foreign securities investments. A forward contract is an obligation to buy
or sell a specific currency for an agreed price at a future date which is
individually negotiated and privately traded by currency traders and their
customers.
* The Funds may also use certain derivative instruments, such as options or
futures contracts. The term "derivatives" covers a wide range of
investments, but in general it refers to any financial instrument whose
value is derived, at least in part, from the price of another security or a
specified index, asset or rate. Some derivatives may be more sensitive to
interest rate changes or market moves, and some may be susceptible to
changes in yields or values due to their structure or contract terms.
* The market value of lower rated, fixed-income securities and unrated
securities of comparable quality tends to reflect individual developments
Stagecoach Yield Funds Prospectus 13
<PAGE>
General Investment Risks
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affecting the issuer to a greater extent than the market value of higher
rated securities, which react primarily to fluctuations in the general level
of interest rates. Lower rated securities also tend to be more sensitive to
economic conditions than higher rated securities. These lower rated fixed-
income securities are considered by the rating agencies, on balance, to be
predominantly speculative with respect to the issuer's capacity to pay
interest and repay principal in accordance with the terms of the obligation
and generally involve more credit risk than securities in the higher rating
categories. Even securities rated triple B by S&P or by Moody's, ratings
which are considered investment grade, possess some speculative
characteristics.
* The Strategic Income Fund invests in income-producing equity securities that
are subject to equity market risk. This is the risk that stock prices will
fluctuate and can decline and reduce the value of the portfolio. Certain
types of stock and certain stocks selected for a Fund's portfolio may
underperform or decline in value more than the overall market. As of the
date of this Prospectus, the equity market, as measured by the S&P 500 Index
and other commonly used indexes, is trading at or close to record levels.
There can be no guarantee that these performance levels will continue.
* The Strategic Income Fund may invest in smaller companies, foreign companies
(including investments made through American Depository Receipts and similar
instruments), and in emerging markets that are subject to additional risks,
including less liquidity and greater volatility. The Fund's investment in
foreign and emerging markets may also be subject to special risks associated
with international trade, including currency, political, regulatory and
diplomatic risk.
What follows is a general list of the types of risks (some of which are also
described above) that may apply to a given Fund and a table showing some of the
additional investment practices that each Fund may use. Additional information
about these practices is available in the Statement of Additional Information.
Counter-Party Risk- The risk that the other party in a repurchase agreement or
other transaction will not fulfill its contract obligation.
Credit Risk- The risk that the issuer of a debt security will be unable to make
interest payments or repay principal on schedule. If an issuer does default, the
affected security could lose all of its value, or be renegotiated at a lower
interest rate or principal amount. Affected securities might also lose
liquidity. Credit risk also includes the risk that a party in a transaction may
not be able to complete the transaction as agreed.
14 Stagecoach Yield Funds Prospectus
<PAGE>
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Currency Risk- The risk that a change in the exchange rate between U.S. dollars
and a foreign currency may reduce the value of an investment made in a security
denominated in that foreign currency.
Diplomatic Risk- The risk that an adverse change in the diplomatic relations
between the United States and another country, or among other countries, might
reduce the value or liquidity of investments in either country.
Experience Risk- The risk presented by a new or innovative security. The risk is
that insufficient experience exists to forecast how the security's value might
be affected by various economic conditions.
Extension Risk- The risk that as interest rates rise, prepayments slow, thereby
lengthening the duration and potentially reducing the value of certain asset-
backed securities.
Information Risk- The risk that information about a security is either
unavailable, incomplete or is inaccurate.
Interest Rate Risk- The risk that changes in interest rates can reduce the value
of an existing security. Generally, when interest rates increase, the value of a
debt security decreases. The effect is usually more pronounced for securities
with longer dates to maturity.
Leverage Risk- The risk that a practice may increase a Fund's exposure to Market
Risk, Interest Rate Risk or other risks by, in effect, increasing assets
available for investment.
Liquidity Risk-The risk that a security cannot be sold, or cannot be sold
without adversely affecting its fair price.
Market Risk- The risk that the value of a stock, bond or other security will be
reduced by market activity. This is a basic risk associated with all securities.
Prepayment Risk- The risk that, as interest rates fall, homeowners will
refinance existing mortgages, causing mortgage-backed securities to have reduced
yields.
Political Risk- The risk that political actions, events or instability may be
unfavorable for investments made in a particular nation's or region's industry,
government or markets.
Regulatory Risk- The risk that changes in government regulations will adversely
affect the value of a security. Also the risk that an insufficiently regulated
market might permit inappropriate trading practices.
Stagecoach Yield Funds Prospectus 15
<PAGE>
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Investment Practice/Risk
The following table lists some of the additional investment practices
of the Funds, including some not disclosed in the Investment
Objectives and Investment Policies sections of the Prospectus. The
risks indicated after the description of the practice are NOT the only
potential risks associated with that practice, but are among the more
prominent. Market risk is assumed for each.
The Investment Objective described for each Fund is not fundamental
and may be changed without approval by vote of a majority of
shareholders.
Remember, each Fund is designed to meet different investment needs and
has a different investment objective and investment policies. Each
Fund engages in the investment practices described below to varying
degrees. In addition to the general risks discussed above, you should
carefully consider and evaluate any special risks that may apply to
investing in a particular Fund. See the "Important Risk Factors" in
the summary for each Fund. You should also see the Statement of
Additional Information for additional information about the investment
practices and risks particular to each Fund.
Investment practices and risk levels are carefully monitored. We
attempt to ensure that the risk exposure for each Fund remains within
the parameters of its objective.
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Corporate Strategic
Bond Income
================================================================================
INVESTMENT PRACTICE: RISK:
================================================================================
Floating and Variable Rate Debt
Interest Rate and * *
Instruments with interest rates that Credit Risk
are adjusted either on a schedule or when
an index or benchmark changes.
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Repurchase Agreements
A transaction in which the seller of a Credit and * *
security agrees to buy back a security at Counter-Party Risk
an agreed upon time and price, usually
with interest.
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Other Mutual Funds
The temporary investment in shares of Market Risk * *
another mutual fund. A pro rata portion
of the other fund's expenses, in addition
to the expenses paid by the Fund,
will be borne by Fund shareholders.
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Foreign Securities
Securities issued by a non-U.S. Information, * *
company or debt of a foreign Political,
government in the form of an Regulatory,
American Depository Receipt or Diplomatic
similar instrument. Limited Liquidity and
to 25% of assets. Currency Risk
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16 Stagecoach Yield Funds Prospectus
<PAGE>
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Corporate Strategic
Bond Income
================================================================================
INVESTMENT PRACTICE: RISK:
================================================================================
High Yield Securities
Fixed-income securities of lower Interest Rate * *
quality that produce generally higher rates and Credit Risk
of return. These securities tend to be
more sensitive to economic conditions
and during sustained periods of rising
interest rates, may experience interest
and/or principal defaults.
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Loan Participations
Debt obligations that represent a portion Credit Risk * *
of a larger loan made by a bank. Generally
sold without guarantee or recourse, some
participations sell at a discount because
of the borrower's credit problems. Limited
to 5% of total assets.
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Stripped Obligations
Securities that give ownership to either Interest Risk * *
future payments of interest or a future
payment of principal, but not both. These
securities tend to have greater interest
rate sensitivity than conventional debt
obligations. Each fund may invest up to
20% of assets in int erest-only obligations
or a combination thereof.
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ILLIQUID SECURITIES
A security that cannot be readily sold, Liquidity Risk * *
or cannot be readily sold without
negatively affecting its fair price.
Limited to 15% of t otal assets.
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Loans of Portfolio Securities
The practice of loaning securities to Credit, * *
brokers, dealers and financial institutions Leverage
to increase return on those securities. and
Loans may be made in accordance with Counter-Party
existing investment policies. Loans may Risk
not exceed 33 1/3% of assets.
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Forward Commitments, When-Issued Securities Interest Rate, * *
and Delayed Delivery Transactions Securities Leverage
bought or sold for delivery at a later Credit and
date or bought or sold for a fixed price Experience Risk
at a fixed date.
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Borrowing Policies
The ability to borrow an equivalent of Leverage Risk * *
10% of total assets from banks for temporary
purposes to meet shareholder redemptions.
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Asset-Backed Securities
Securities consisting of an undivided Interest Rate, * *
fractional interests in mortgages, pools Credit and
of consumer loans, such as car loans or Experience Risk
credit card debt, or receivables held
in trust.
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Stagecoach Yield Funds Prospectus 17
<PAGE>
A Choice of Share Classes
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After choosing a Fund, your next most important choice is which share class to
buy. The following classes of shares are available through this Prospectus:
* Class A Shares - with a front-end sales charge, volume reductions and lower
on-going expenses than Class B and Class C shares.
* Class B Shares - with a contingent deferred sales charge (CDSC) that
diminishes over time, and higher on-going expenses than Class A shares.
* Class C Shares - with a 1.00% contingent deferred sales charge (CDSC) on
redemptions made within one year of purchase, and higher on-going expenses
than Class A shares.
The choice between share classes is largely a matter of preference. You should
consider, among other things, the different fees and sales loads assessed on
each share class and the length of time you anticipate holding your investment.
If you prefer to pay sales charges up front, wish to avoid higher on-going
expenses, or, more importantly, you think you may qualify for volume discounts
based on the amount of your investment, then Class A shares may be the choice
for you.
You may prefer to see "every dollar working" from the moment you invest. If so,
then consider Class B or Class C shares. Please note that Class B shares convert
to Class A shares after six years to avoid the higher on-going expenses assessed
against Class B shares.
Class C shares are similar to Class B shares, with some important differences.
Unlike Class B shares, Class C shares do not convert to Class A shares. Subject
to regulatory limits, the higher on-going expenses will be assessed as long as
you hold the shares. The choice between Class B and C shares may depend on how
long you intend to hold Fund shares before redeeming them.
Please see the expenses listed for each Fund and the following load tables
before making your decision. You should also review the "Reduced Sales Charges"
section below. You may wish to discuss this choice with your financial
consultant.
Class A Share Charge Schedule
If you choose to buy Class A shares, you will pay the Public Offering Price
(POP), which is the Net Asset Value (NAV) plus the applicable sales charge.
Since sales charges are reduced for Class A share purchases above certain
18 Stagecoach Yield Funds Prospectus
<PAGE>
dollar amounts, known as "breakpoint levels", the POP is lower for these
purchases.
================================================================================
CLASS A SHARES ARE SUBJECT TO THE FOLLOWING CHARGE SCHEDULE:
================================================================================
FRONT-END SALES FRONT-END SALES DEALER ALLOWANCE
CHARGE AS % CHARGE AS % AS % OF
AMOUNT OF PUBLIC OF NET PUBLIC OFFERING
OF PURCHASE OFFERING PRICE AMOUNT INVESTED PRICE
- -------------------------------------------------------------------------------
Less than $50,000 4.50% 4.71% 4.00%
- -------------------------------------------------------------------------------
$50,000 to $99,999 4.00% 4.17% 3.55%
- -------------------------------------------------------------------------------
$100,000 to $249,999 3.50% 3.63% 3.125%
- -------------------------------------------------------------------------------
$250,000 to $499,999 2.50% 2.56% 2.00%
- -------------------------------------------------------------------------------
$500,000 to $999,999 2.00% 2.04% 1.75%
- -------------------------------------------------------------------------------
$1,000,000 and over/1/ 0.00% 0.00% 1.00%
- -------------------------------------------------------------------------------
/1/ We will assess Class A share purchases of $1,000,000 or more a 1.00% CDSC
if they are redeemed within one year from the date of purchase. Charges
are based on the lower of the NAV on the date of purchase or the date of
redemption.
Class B Share CDSC Schedule
If you choose Class B shares, you buy them at NAV and agree that if you redeem
your shares within six years of the purchase date, you will pay a contingent
deferred sales charge (CDSC) based on how long you have held your shares.
Certain exceptions apply (see "Class B and Class C Share CDSC Reductions" and
"Waivers for Certain Parties"). The CDSC schedule is as follows:
- -------------------------------------------------------------------------------
REDEMPTION WITHIN: 1 year 2 years 3 years 4 years 5 years 6 years
- -------------------------------------------------------------------------------
CDSC 5.00% 4.00% 3.00% 3.00% 2.00% 1.00%
- -------------------------------------------------------------------------------
The CDSC percentage you pay is based on the lower of the NAV on the date of the
original purchase, or the NAV on the date of redemption. The distributor pays
sales commissions of up to 4.00% of the purchase price of Class B shares to
selling agents at the time of the sale.
We always process partial redemptions so that the least expensive shares are
redeemed first in order to reduce your sales charges. After shares are held for
six years, the CDSC expires and the Class B shares are converted to Class A
shares to reduce your future on-going expenses.
Stagecoach Yield Funds Prospectus 19
<PAGE>
A Choice of Share Classes
- --------------------------------------------------------------------------------
Class C Share CDSC Schedule
If you choose Class C shares, you buy them at NAV and agree that if you redeem
your shares within one year of the purchase date, you will pay a contingent
deferred sales charge (CDSC) of 1.00%.
The CDSC percentage you pay is based on the lower of the NAV on the date of the
original purchase, or the NAV on the date of redemption. The distributor pays
sales commissions of up to 1.00% of the purchase price of Class C shares to
selling agents at the time of the sale.
We always process partial redemptions so that the least expensive shares are
redeemed first in order to reduce your sales charges. Class C shares do not
convert to Class A shares, and therefore continue to pay the higher on-going
expenses.
20 Stagecoach Yield Funds Prospectus
<PAGE>
Reduced Sales Charges
- --------------------------------------------------------------------------------
Generally, we offer more sales charge reductions for Class A shares than for
Class B and Class C shares, particularly if you intend to invest greater
amounts. You should consider whether you are eligible for any of these potential
reductions when you are deciding which share class to buy.
Class A Share Reductions:
* You pay no sales charges on Fund shares you buy with reinvested
distributions.
* You pay a lower sales charge if you are investing an amount over a breakpoint
level. See the "Class A Share Sales Charge Schedule" above.
* By signing a Letter of Intent (LOI), you pay a lower sales charge now in
exchange for promising to invest an amount over a specified breakpoint within
the next 13 months. We will hold in escrow shares equal to approximately 5%
of the amount you intend to buy. If you do not invest the amount specified in
the LOI before the expiration date, we will redeem enough escrowed shares to
pay the difference between the reduced sales load you paid and the sales load
you should have paid. Otherwise, we will release the escrowed shares when you
have invested the agreed amount.
* Rights of Accumulation (ROA) allow you to combine the amount you invest with
the total NAV of shares you own in other Stagecoach front-end load Funds in
order to reach breakpoint levels for a reduced load. We give you a discount
on the entire amount of the investment that puts you over the breakpoint
level.
* If you are reinvesting the proceeds of a Stagecoach Fund redemption for
shares on which you have already paid a front-end sales charge, you have 120
days to reinvest the proceeds of that redemption with no sales charge into a
Fund that charges the same or a lower front-end sales charge. If you use such
a redemption to purchase shares of a Fund with a higher front-end sales
charge, you will have to pay the difference between the lower and higher
charge.
* You may reinvest into a Stagecoach Fund with no sales charge a required
distribution from a pension, retirement, benefits, or similar plan for which
Wells Fargo Bank acts as trustee provided the distribution occurred within
the last 30 days.
If you believe you are eligible for any of these reductions, it is up to you to
ask the selling agent or the shareholder servicing agent for the reduction and
to provide appropriate proof of eligibility.
Stagecoach Yield Funds Prospectus 21
<PAGE>
Reduced Sales Charges
- --------------------------------------------------------------------------------
You, or your fiduciary or trustee, may also tell us to extend volume discounts,
including the reductions offered for rights of accumulation and letters of
intent, to include purchases made by:
* a family unit, consisting of a husband and wife and children under the age of
twenty-one or single trust estate;
* a trustee or fiduciary purchasing for a single fiduciary relationship; or
* the members of a "qualified group" which consists of a "Company" (as defined
in the 1940 Act), and related parties of such a "Company", which has been in
existence for at least six months and which has a primary purpose other than
acquiring Fund shares at a discount.
------------------------------------------------------------------------
How a Letter of Intent Can Save You Money!
If you plan to invest, for example, $100,000 in the Strategic Income
Fund in installments over the next year, by signing a letter of intent
you would pay only a 3.50% sales load on the entire purchase.
Otherwise, you might pay 4.50% on the first $50,000, then 4.00% on the
next $49,999!
------------------------------------------------------------------------
Class B and Class C Share CDSC Reductions
* You pay no CDSC on Fund shares you purchase with reinvested distributions.
* We waive the CDSC for all redemptions made because of scheduled or mandatory
distributions for certain retirement plans. (See your retirement plan
disclosure for details.)
* We waive the CDSC for redemptions made in the event of the shareholder's
death or for a disability suffered after purchasing shares. ("Disability" is
defined by the Internal Revenue Code of 1986.)
* We waive the CDSC for redemptions made at the direction of Stagecoach Funds,
Inc. in order to, for example, complete a merger or close an account whose
value has fallen below the minimum balance.
Waivers for Certain Parties
If you are eligible for certain waivers, we will sell you Class A shares so you
can avoid higher on-going expenses. The following people can buy Class A shares
at NAV:
* Current and retired employees, directors and officers of:
* Stagecoach Funds and its affiliates;
22 Stagecoach Yield Funds Prospectus
<PAGE>
- --------------------------------------------------------------------------------
* Wells Fargo Bank and its affiliates;
* Stephens Inc. and its affiliates; and
* Broker-Dealers who act as selling agents.
* The spouses of any of the above, as well as the grandparents, parents,
siblings, children, grandchildren, aunts, uncles, nieces, nephews, fathers-
in-law, mothers-in-law, brothers-in-law and sisters-in-law of either the
spouse or the current or retired employee, director or officer.
You may also buy Class A Fund shares at NAV if they are to be included in
certain retirement, benefits, pension or investment wrap accounts with whom
Stagecoach Funds has reached an agreement, or through an omnibus account
maintained with a Fund by a broker/dealer.
We reserve the right to enter into agreements that reduce or eliminate sales
charges for groups or classes of shareholders or for Fund shares included in
other investment plans such as "wrap accounts". If you own Fund shares as part
of another account or package such as an IRA or a sweep account, you must read
the directions governing that account. These directions may supersede the terms
and conditions discussed here.
If you acquire Class B shares through an exchange of Class B shares of another
Stagecoach Fund that you purchased prior to March 3, 1997, your CDSC is as
follows:
- --------------------------------------------------------------------------------
REDEMPTION WITHIN 1 year 2 years 3 years 4 years 5 years 6 years
- --------------------------------------------------------------------------------
CDSC 3.00% 2.00% 1.00% 1.00% 0.00% 0.00%
- --------------------------------------------------------------------------------
If you exchange Class B shares for Class B shares of another Fund, you will
retain the above CDSC schedule on your exchanged shares, but additional
purchases of the newly purchased Fund will age at the higher CDSC schedule.
Stagecoach Yield Funds Prospectus 23
<PAGE>
Your Account
- --------------------------------------------------------------------------------
This section tells you how to open an account and how to buy, sell or exchange
Fund shares once your account is open.
You can buy Fund shares:
* By opening an account directly with the Fund (simply complete and return a
Stagecoach Funds application with proper payment);
* Through a brokerage account with an approved selling agent; or
* Through certain retirement, benefits and pension plans, or through certain
packaged investment products (please see the providers of the plan for
instructions).
Minimum Investments:
* $1,000 per Fund minimum initial investment, or
* $100 per Fund minimum initial investment if you use the AutoSaver option.
* $100 per Fund for all investments after your first.
* We may waive the minimum for Funds you purchase through certain retirement,
benefit and pension plans, through certain packaged investment products, or
for certain classes of shareholders as permitted by the Securities and
Exchange Commission. Check the specific disclosure statements and
applications for the program through which you intend to invest. Important
Information:
Important Information:
* Read this prospectus carefully. Discuss any questions you have with your
selling agent. You may also ask for copies of the Statement of Additional
Information and Annual Report. Copies are available free of charge from your
selling agent or by calling 1-800-222-8222.
* We process requests to buy or sell shares each business day as of the close
of regular trading on the New York Stock Exchange, which is usually 1:00 PM
Pacific Time. Any request we receive in proper form before the close of
regular trading on the New York Stock Exchange is processed the same day.
Requests we receive after the close are processed the next business day.
* As with all mutual fund investments, the price you pay to purchase shares or
the price you receive when you redeem shares is not determined until after a
request has been received in proper form.
* We determine the Net Asset Value (NAV) of each class of the Funds' shares
each business day as of the close of regular trading on the New York Stock
Exchange. We determine the NAV by subtracting the Fund class' liabilities
from its total assets, and then dividing the result by the total number of
24 Stagecoach Yield Funds Prospectus
<PAGE>
- --------------------------------------------------------------------------------
outstanding shares of that class. Each Fund's assets are generally valued at
current market prices. See the Statement of Additional Information for
further disclosure.
* We will process all requests to buy and sell shares at the first NAV
calculated after the request in proper form is received.
* You may have to complete additional paperwork for certain types of account
registrations, such as a trust. Please speak to Stagecoach Investor Services
(1-800-222-8222) if you are investing directly with Stagecoach Funds, or
speak to your selling agent if you are buying shares through a brokerage
account.
* Once an account has been opened, you can add additional Funds under the same
registration without completing a new application.
* We reserve the right to cancel any purchase order or delay redemption if your
check does not clear.
Stagecoach Yield Funds Prospectus 25
<PAGE>
Your Account
- --------------------------------------------------------------------------------
How to Buy Shares
The following section explains how you can buy shares directly from Stagecoach
Funds. For Funds held through brokerage and other types of accounts, please
consult your selling agent.
================================================================================
BY MAIL
================================================================================
If You Are Buying Shares For The First Time:
- --------------------------------------------------------------------------------
Complete a Stagecoach Funds application. Be
sure to indicate the Fund name and the share
class into which you intend to invest.
- -------------------------------------------- Mail to:
Enclose a check for at least $1,000 made out Stagecoach Funds
in the full name and share class of the Fund. PO Box 7066
For example, "Stagecoach Income Fund, Class B". San Francisco, CA
94120-9201
- --------------------------------------------
You may start your account with $100 if you
elect the AutoSaver option on the
application.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
If You Are Buying Additional Shares:
- --------------------------------------------------------------------------------
Make a check payable to the full name and
share class of your Fund for at least $100. Mail to:
Be sure to write your account number on Stagecoach Funds
the check as well. PO Box 7066
- ------------------------------------------- San Francisco, CA
Enclose the payment stub/card from your 94120-9201
statement if available.
- --------------------------------------------------------------------------------
================================================================================
BY WIRE
================================================================================
If You Are Buying Shares For The First Time:
- --------------------------------------------------------------------------------
If you do not currently have an account,
complete a Stagecoach Funds application. Mail to:
You must wire at least $1,000. Be sure to Stagecoach Funds
indicate the Fund name and the share class PO Box 7066
into which you intend to invest. San Francisco, CA
- ------------------------------------------- 94120-9201
Mail the completed application.
- ------------------------------------------- Fax to:
You may also fax the completed application 1-415-546-0280
(with original to follow)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
If You Are Buying Additional Shares:
- --------------------------------------------------------------------------------
Instruct your wiring bank to transmit at
least $100 according to the instructions Wire to:
given to the right. Be sure to have the Wells Fargo Bank, N.A.
wiring bank include your current account San Francisco, California
number and the name your account is
registered in. Bank Routing Number:
- ------------------------------------------- 121000248
Wire Purchase Account Number:
4068-000587
Attention:
Stagecoach Funds (Name of Fund
and Share Class)
Account Name: (Registration
Name Indicated on Application)
--------------------------------------
26 Stagecoach Yield Funds Prospectus
<PAGE>
- --------------------------------------------------------------------------------
================================================================================
BY PHONE
================================================================================
If You Are Buying Shares For The First Time:
- --------------------------------------------------------------------------------
You can only make your first purchase of a
Fund by phone if you already have an
existing Stagecoach Account.
- -------------------------------------------
Call Investor Services and instruct the
representative to either: Call:
* transfer at least $1,000 from a linked 1-800-222-8222
settlement account, or
* exchange at least $1,000 worth of
shares from another Stagecoach Fund.
Please see "Exchanges" for special rules.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
If You Are Buying Additional Shares:
- --------------------------------------------------------------------------------
Call Investor Services and instruct the
representative to either:
* transfer at least $100 from a linked Call:
settlement account, or 1-800-222-8222
* exchange at least $100 worth of shares
from another Stagecoach Fund.
- --------------------------------------------------------------------------------
Selling Shares:
The following section explains how you can sell shares held directly through an
account with Stagecoach Funds by mail or by telephone. For Fund shares held
through brokerage and other types of accounts, please consult your Selling
Agent.
================================================================================
BY MAIL
================================================================================
Write a letter stating your account
registration, your account number,
the Fund you wish to redeem and the
dollar amount ($100 or more) of the
redemption you wish to receive (or write
"Full Redemption").
- -------------------------------------------
Make sure all the account owners sign
the request.
- ------------------------------------------- Mail to:
You may request that redemption proceeds be Stagecoach Funds
sent to you by check, by ACH transfer into PO Box 7066
a bank account, or by wire ($5,000 minimum). San Francisco, CA
Please call Investor Services regarding 94120-9201
requirements for linking bank accounts
or for wiring funds. We reserve the
right to charge a fee for wiring funds
although it is not currently our practice
to do so.
- -------------------------------------------
Signature Guarantees are required for
mailed redemption requests over $5,000.
You can get a signature guarantee at
financial institutions such as a bank or
brokerage house. We do not accept
notarized signatures.
- --------------------------------------------------------------------------------
Stagecoach Yield Funds Prospectus 27
<PAGE>
Your Account
- --------------------------------------------------------------------------------
================================================================================
BY PHONE
================================================================================
Call Investor Services to request a
redemption of at least $100.
Be prepared to provide your account number
and Taxpayer Identification Number.
- -------------------------------------------
Unless you have instructed us otherwise,
only one account owner needs to call in
redemption requests.
- -------------------------------------------
You may request that redemption proceeds be
sent to you by check, by transfer into an Call:
ACH-linked bank account, or by wire ($5,000 1-800-222-8222
minimum). Please call Investor Services
regarding requirements for linking bank
accounts or for wiring funds. We reserve
the right to charge a fee for wiring funds
although it is not currently our practice
to do so.
- -------------------------------------------
Telephone privileges are automatically made
available to you unless you specifically
decline them on your application or
subsequently in writing.
- -------------------------------------------
Phone privileges allow us to accept
transaction instructions by anyone
representing themselves as the
shareholder and who provides reasonable
confirmation of their identity, such as
providing the Taxpayer Identification Number
on the account. We will not be liable for
any losses incurred if we follow telephone
instructions we reasonably believe to be
genuine.
- --------------------------------------------------------------------------------
================================================================================
GENERAL NOTES FOR SELLING SHARES
================================================================================
We will process all requests to sell shares at the first NAV calculated after a
request in proper form is received. Requests received before the close of
trading on the New York Stock Exchange are processed the same business day.
- --------------------------------------------------------------------------------
Your redemptions are net of any applicable CDSC.
- --------------------------------------------------------------------------------
If you purchased shares through a packaged investment product or retirement
plan, read the directions for selling shares provided by the product or plan.
There maybe special requirements that supercede the directions in this
Prospectus.
- --------------------------------------------------------------------------------
We reserve the right to delay payment of a redemption for up to ten days so that
we may be reasonably certain that investments made by check have been collected.
Payments of redemptions also may be delayed under extraordinary circumstances or
as permitted by the Securities and Exchange Commission in order to protect
remaining shareholders. Payments of redemptions also may be delayed up to seven
days under normal circumstances, although it is not our policy to delay such
payments.
- --------------------------------------------------------------------------------
Generally, we pay redemption requests in cash, unless the redemption request is
for more than $250,000 or 1% of the net assets of the Fund by a single
shareholder over any ninety-day period. If a request for a redemption is over
these limits, it may be to the detriment of existing shareholders. Therefore,
we may pay all or part of the redemption in securities of equal value.
- --------------------------------------------------------------------------------
28 Stagecoach Yield Funds Prospectus
<PAGE>
Exchanges
- --------------------------------------------------------------------------------
Exchanges between Stagecoach Funds are two transactions: a sale of one Fund and
the purchase of another. In general, the same rules and procedures that apply to
sales and purchases apply to exchanges. There are, however, additional factors
you should keep in mind while making or considering an exchange:
* You should carefully read the Prospectus for the Fund into which you wish to
exchange.
* Every exchange involves selling Fund shares and that sale may produce a
capital gain or loss for federal income tax purposes.
* If you exchange between Class A shares, you will have to pay any difference
between a load you have already paid and the load you are subject to in the
new Fund (less the difference between any load already paid under the maximum
3% load schedule and the maximum 4.5% schedule).
* If you are making an initial investment into a new Fund through an exchange,
you must exchange at least the minimum first purchase amount of the Fund you
are redeeming, unless your balance has fallen below that amount due to market
conditions.
* Any exchange between Funds you already own must meet the minimum redemption
and subsequent purchase amounts for the Funds involved.
* If you are exchanging from a higher-load Fund to a lower or no-load Fund,
then back to the higher load, it is up to you to inform Stagecoach Funds that
you have already paid the higher load.
* Exchanges between Class B shares, between Class C shares or between either
Class B or Class C shares and a Stagecoach money market fund will not trigger
the CDSC. The new shares will continue to age according to their original
schedule while in the new Fund and will be charged the CDSC applicable to the
original shares upon redemption. This also applies to exchanges of Class A
shares that are subject to a CDSC.
* Exchanges from any share class to a money market fund can only be re-
exchanged for the original share class.
* In order to discourage excessive Fund transaction expenses that must be borne
by other shareholders, we reserve the right to limit or reject exchange
orders. Generally, we will notify you 60 days in advance of any changes in
your exchange privileges.
* You may make exchanges between like share classes. You may also exchange
between A, B or C share classes and non-institutional class shares of a money
market fund.
Stagecoach Yield Funds Prospectus 29
<PAGE>
Additional Services and Other Information
- --------------------------------------------------------------------------------
Automatic Programs:
These programs help you conveniently purchase or redeem shares each month:
* AutoSaver Plan - you need only specify an amount of at least $100 and a day
of the month. We will automatically transfer that amount from your linked
bank account each month to purchase additional shares. We will transfer the
amount on or about the day you specify, or on or about the 20th of each month
if you have not specified a day. Please call Investor Services at 1-800-222-
8222 if you wish to change or add linked accounts.
* Systematic Withdrawal Program - Stagecoach will automatically redeem enough
shares to equal a specified dollar amount of at least $100 on or about the
fifth business day prior to the end of each month and either send you the
proceeds by check or transfer it into your linked bank account. In order to
set up a Systematic Withdrawal Program, you:
* must have a Fund account valued at $10,000 or more;
* must have distributions reinvested; and
* may not simultaneously participate in an AutoSaver Plan.
It generally takes about ten days to set up either plan once we have received
your instructions. It generally takes about five days to change or cancel
participation in either plan. We automatically cancel your program if the linked
account you specified is closed.
Dividend and Capital Gain Distribution Options
You may choose to do any of the following:
* Automatic Reinvestment Option - Lets you buy new shares of the same class of
the Fund that generated the distributions. The new shares are purchased at
NAV generally on the day the income is paid. This option is automatically
assigned to your account unless you specify another plan.
* Fund Purchase Plan - Uses your distributions to buy shares at NAV of another
Stagecoach Fund of the same share class or a Money Fund. You must have
already satisfied the minimum investment requirements of the Fund into which
your distributions are being transferred in order to participate.
* Automatic Clearing House Option - Deposits your dividends and capital gains
into any bank account you link to your Fund account if it is part of the ACH
system. If your specified bank account is closed, we will reinvest your
distributions.
30 Stagecoach Yield Funds Prospectus
<PAGE>
- --------------------------------------------------------------------------------
* Check Payment Option - Allows you to receive checks for distributions mailed
to your address of record or to another name and address which you have
specified in written, signature guaranteed instructions. If checks remain
uncashed for six months or are undeliverable by the Post Office, we will
reinvest the distributions at the earliest date possible.
-----------------------------------------------------------------------
Two Things to Keep In Mind About Distributions
Remember, distributions have the effect of reducing the NAV per share
by the amount distributed. Also, distributions on new shares shortly
after purchase would be in effect a return of capital, although the
distribution may still be taxable to you.
-----------------------------------------------------------------------
Taxes
The following discussion regarding taxes is based on laws that were in effect as
of the date of this Prospectus. The discussion summarizes only some of the
important tax considerations that affect the Funds and you as a shareholder. It
is not intended as a substitute for careful tax planning. You should consult
your tax adviser about your specific tax situation. Federal income tax
considerations are discussed further in the Statement of Additional Information.
We will pass on to you at least annually net investment income and net short-
term capital gains earned by a Fund as dividend distributions. These are taxable
to you as ordinary income. A portion of such dividends may be excludable by
corporate shareholders.
We will pass on to you at least annually any net capital gains earned by a Fund
as a capital gain distribution. In general, these distributions will be taxable
to you as long-term capital gains and are taxable when paid. However,
distributions declared in October, November and December and distributed by the
following January will be taxable as if they were paid on December 31 of the
year in which they were declared. We will notify you annually as to the status
of your Fund distributions.
Your redemptions, including exchanges, will ordinarily result in a taxable
capital gain or loss, depending on the amount you receive for your shares and
the amount you paid for them. Foreign shareholders may be subject to different
tax treatment, including withholding. In certain circumstances, U.S.
shareholders may be subject to back-up withholding.
Stagecoach Yield Funds Prospectus 31
<PAGE>
Additional Services and Other Information
- --------------------------------------------------------------------------------
Share Class - This Prospectus contains information about Class A, Class B and
Class C shares. Call Stephens Inc. at 1-800-643-9691 for information on other
investment options in Stagecoach Funds.
Conversion of Class B shares - We will convert Class B shares into Class A
shares at the month end following the six-year anniversary of their original
purchase. This is done to avoid the higher on-going Rule 12b-1 fees assessed
Class B shares. The conversion is done at NAV and, since it is unlikely that
Class A and Class B shares of the same Fund will have the same NAV on a given
date, the conversion is on a dollar-value basis, not a share-for-share basis.
Minimum Account Value - Due to the expense involved in maintaining low-balance
accounts, we reserve the right to close accounts that have fallen below the
$1,000 minimum balance due to redemptions (as opposed to market conditions). You
will be given an opportunity to make additional investments to prevent account
closure before any action is taken.
Statements - We mail statements after any account activity, including
transactions, dividends or capital gains, and at year-end. We do not send
statements for Funds held in brokerage, retirement or other similar accounts.
You must check with the administrators of these accounts for statement policies.
The Fund will also send any necessary tax reporting documents in January, and
will send Annual and Semi-Annual Reports each year.
Dealer Concessions and Rule 12b-1 fees - Stephens Inc., as the Funds'
distributor, will pay the portion of the Class A share sales charge shown as the
Dealer Allowance to the selling agent, if any. Stephens Inc. also compensates
selling agents for the sale of Class B and Class C shares and is reimbursed
through Rule 12b-1 fees and contingent deferred sales charges. Selling agents
may receive different compensation for sales of Class A, Class B and Class C
shares of the same Fund.
Statement of Additional Information - Additional information about some of the
topics discussed in this Prospectus as well as details about performance
calculations, distribution plans, servicing plans, tax issues and other
important issues are available in the Statement of Additional Information for
each Fund. The Statement of Additional Information should be read along with
this Prospectus and may be obtained free of charge by calling Investor Services
at 1-800-222-8222.
Glass-Steagall Act - Morrison & Foerster LLP, counsel to the Funds and special
counsel to Wells Fargo Bank, has advised us and Wells Fargo Bank that
32 Stagecoach Yield Funds Prospectus
<PAGE>
- --------------------------------------------------------------------------------
Wells Fargo Bank and its affiliates may perform the services contemplated by the
Advisory Contracts and detailed in this Prospectus and the Statements of
Additional Information without violation of the Glass-Steagall Act. Counsel has
pointed out that future judicial or administrative decisions, or future federal
or state laws may prevent these entities from continuing in their roles.
Voting Rights - All shares of the Funds have equal voting rights and are voted
in the aggregate, rather than by series or class, unless the matter affects only
one series or class. A shareholder of record is entitled to one vote for each
share owned and fractional votes for each fractional share owned. For a detailed
description of voting rights, see the "Capital Stock" section of the Statement
of Additional Information.
Stagecoach Yield Funds Prospectus 33
<PAGE>
Organization and Management of the Funds
- --------------------------------------------------------------------------------
A number of different entities provide services to the Funds. This section shows
how the Funds are organized, the entities that perform different services, and
how they are compensated. Further information is available in the Statement of
Additional Information for each of the Funds.
About Stagecoach
Each Fund is one of over 30 Funds of Stagecoach Funds, Inc., an open-end
management investment company. Stagecoach was organized on September 9, 1991, as
a Maryland corporation.
The Board of Directors of Stagecoach supervises the Funds' activities and
approves the selection of various companies hired to manage the Funds'
operation. The major service providers are described in the diagram below. If
the Board believes that it is in the best interests of the shareholders it may
make a change in one of these companies.
We do not hold annual shareholder meetings. We may hold special shareholder
meetings to ask shareholders to vote on items such as electing or removing board
members, or amending fundamental investment strategies or policies.
================================================================================
SHAREHOLDERS
================================================================================
|
================================================================================
FINANCIAL SERVICES FIRMS AND SELLING AGENTS
================================================================================
Advise current and prospective shareholders on their Fund investments
- --------------------------------------------------------------------------------
|
================================================================================
TRANSFER AND
DISTRIBUTOR & DIVIDEND DISBURSING SHAREHOLDER
CO-ADMINISTRATOR ADMINISTRATOR AGENT SERVICING AGENTS
================================================================================
Stephens Inc. Wells Fargo Bank Wells Fargo Bank Various Agents
111 Center St. 525 Market St. 525 Market St.
Little Rock, AR San Francisco, CA San Francisco, CA
Markets the Fund, Manages the Fund's Maintains records Provide services
distributes business activities of shares and to customers
shares, and supervises the
manages the paying of dividends
Fund's business
activities
- --------------------------------------------------------------------------------
|
===============================================================================
INVESTMENT ADVISOR CUSTODIAN
===============================================================================
Wells Fargo Bank, 525 Market St., Wells Fargo Bank
San Francisco, CA 525 Market St. San Francisco, CA
Manages the Fund's investment Provides safekeeping for the Fund's
activities assets
- --------------------------------------------------------------------------------
|
================================================================================
BOARD OF DIRECTORS
- --------------------------------------------------------------------------------
Supervises the Fund's activities
- --------------------------------------------------------------------------------
34 Stagecoach Yield Funds Prospectus
<PAGE>
- -------------------------------------------------------------------------------
In the following sections, the percentages shown are the percentages of the
average daily net assets of each Fund class paid on an annual basis for the
services described. Statement of Additional Information has more detailed
information about the Investment Advisor and the other service providers and
plans described here.
The Investment Advisor
Wells Fargo Bank is the advisor for each of the Funds. Wells Fargo Bank, founded
in 1852, is the oldest bank in the Western United States and is one of the
largest banks in the United States. Wells Fargo Bank is a wholly owned
subsidiary of Wells Fargo & Company, a national bank holding company. As of
December 31, 1997, Wells Fargo Bank and its affiliates managed over $62 billion
in assets. For providing advisory services, Wells Fargo Bank receives .50% of
the Corporate Bond Fund's assets and .60% of the Strategic Income Fund's assets.
The Administrator
Wells Fargo Bank is the administrator of the Funds. Wells Fargo Bank is paid
.03% of each Fund's assets for these services.
The Distributor and Co-Administrator
Stephens Inc. is the Funds' distributor and co-administrator. Stephens Inc.
receives .04% of each Fund's assets for its role as co-administrator. Stephens
Inc. also receives all loads, CDSCs and distribution plan fees. It uses a
portion of these amounts to compensate selling agents for their role in
marketing the Funds' shares.
Stagecoach Yield Funds Prospectus 35
<PAGE>
Organization and Management of the Funds
- --------------------------------------------------------------------------------
Distribution Plan
We have adopted distribution plans for the Funds. These plans are used to pay
for distribution-related services including ongoing compensation to Selling
Agents. Each Fund may participate in joint distribution activities with other
Stagecoach Funds. The cost of these activities is generally allocated among the
Funds. Funds with higher assets levels pay a higher proportion of these costs.
The fees paid under these plans are as follows:
- --------------------------------------------------------------------------------
Class A Class B Class C
- --------------------------------------------------------------------------------
Corporate Bond Fund .05% .75% .75%
- --------------------------------------------------------------------------------
Strategic Income Fund .05% .75% .75%
- --------------------------------------------------------------------------------
Shareholder Servicing Plan
We have Shareholder Servicing Plans for each Fund class. We have agreements with
various shareholder servicing agents to process purchase and redemption
requests, to service shareholder accounts, and to provide other related
services.
For these services each Fund pays as follows:
- --------------------------------------------------------------------------------
Class A Class B Class C
- --------------------------------------------------------------------------------
Corporate Bond Fund .25% .25% .25%
- --------------------------------------------------------------------------------
Strategic Income Fund .25% .25% .25%
- --------------------------------------------------------------------------------
36 Stagecoach Yield Funds Prospectus
<PAGE>
- --------------------------------------------------------------------------------
Portfolio Managers
The following is a list of portfolio managers identified within the various
Funds' summaries. More detailed biographical information is available in the
Statement of Additional Information.
* Scott Smith, CFA
Senior Taxable Investment Specialist. He has been with Wells Fargo since
1988.
* Graham Allen
Joined Wells Fargo in January 1998. Worked for Bradford & Marzec, Inc. as an
International Portfolio Manager from August 1988 to January 1998 and worked
for Heron Financial Corp. as a High Yield Portfolio Manager from June 1985 to
August 1988.
* Alan Wisniewski
Member of Los Angeles Society of Financial Analysts. He has been with Wells
Fargo since 1987.
* Jaqueline Flippin
Joined Wells Fargo in January 1998, worked for McMorgan & Co. as a Portfolio
Manager from October 1994 to January 1998 and worked for Teachers Insurance
Annuity Association, College Retirement Equity Fund as a Portfolio Manager
from August 1986 to October 1994.
Stagecoach Yield Funds Prospectus 37
<PAGE>
Glossary
- --------------------------------------------------------------------------------
ACH
Refers to the "Automated Clearing House" system maintained by the Federal
Reserve Bank which allows banks to process checks, transfer funds and perform
other tasks.
Annual Report
A document that provides certain financial and other information for the most
recent reporting period and each Fund's portfolio of investments.
Asset-Backed Securities
Securities consisting of an undivided fractional interest in pools of consumer
loans, such as car loans or credit card debt, or receivables held in trust.
Below Investment Grade
Securities rated BBB or lower by S&P or Baa or lower by Moody's Investor
Services, or that may be unrated securities or securities considered to be "high
risk."
Business Day
Any day the New York Stock Exchange is open is a business day for the Fund.
Convertible Debt Securities
Bonds or notes that are exchangeable for equity securities at a set price on a
set date or at the election of the holder.
Current Income
Earnings in the form of dividends or interest as opposed to capital growth. See
also "Total Return".
Debt Securities
Generally, a promise to pay interest and repay principal by a single debtor or
group of single debtors sold as a security. The owner of the security is
entitled to receive any such payments. Examples include bonds and mortgage-
backed securities and can include securities in which the right to receive
interest and principal repayment have been sold separately.
Derivatives
Securities whose values are derived in part from the value of another security
or index. An example is a stock option.
Distributions
Dividends and/or capital gains paid by a Fund on its shares.
38 Stagecoach Yield Funds Prospectus
<PAGE>
- --------------------------------------------------------------------------------
Diversified
A diversified fund, as defined by the Investment Company Act, is one that
invests in cash, Government securities, other investment companies and no more
than 5% of its total assets in a single issuer. These policies must apply to 75%
of a Fund's total assets.
Dollar-Denominated
Securities issued by foreign banks, companies or governments in U.S. dollars.
FDIC
The Federal Deposit Insurance Corporation. This is the company that provides
federally sponsored insurance covering bank deposits such as savings accounts
and CDs. Mutual funds are not FDIC insured.
Illiquid Security
A security which cannot be readily sold or cannot be readily sold without
negatively affecting its fair price.
Investment-Grade Debt Security
A type of debt security rated in the top four investment categories by a
nationally recognized ratings organization such as Moody's or Standard & Poors.
Generally these are debt securities whose issuers are considered to have a
strong ability to pay interest and repay principal, although some investment-
grade debt securities may have some speculative characteristics.
Liquidity
The ability to readily sell a security at its fair price.
Moody's
One of the largest nationally recognized ratings organizations.
Nationally Recognized Rating Organization (NRRO)
A company that examines the ability of a bond issuer to meet its obligations and
which rates the bonds accordingly.
Net Asset Value (NAV)
The value of a single fund share. It is determined by adding together all of a
fund's assets, subtracting expenses and other liabilities, then dividing by the
total number of shares. The NAV is calculated separately for each class of the
Fund, and is determined as of the close of regular trading on each business day
the New York Stock Exchange is open, typically 1:00 p.m. Pacific Time.
Stagecoach Yield Funds Prospectus 39
<PAGE>
Glossary
- --------------------------------------------------------------------------------
Preservation of Capital
The attempt by a fund's manager to reduce drops in the net asset value of fund
shares in order to preserve the initial investment.
Principal Stability
The degree to which share prices for a fund remain steady. Money market funds
attempt to achieve the highest degree of principal stability by maintaining a
$1.00 per share net asset value. More aggressive funds may not consider
principal stability an objective.
Public Offering Price (POP)
The NAV with the sales load added.
Repurchase Agreement
An agreement between a buyer and seller of a security in which the seller agrees
to repurchase the security at an agreed upon price and time.
Selling Agent
A person who has an agreement with the Fund's distributor that allows them to
sell a Fund's shares.
Shareholder Servicing Agent
An entity appointed by the Fund to maintain shareholder accounts and records,
assist and provide information to shareholders or perform similar functions.
Signature Guarantee
A guarantee given by a financial institution that has verified the identity of
the maker of the signature.
S&P
One of the largest nationally recognized ratings organizations. Standard and
Poor's also publishes various indexes or lists of companies representative of
sectors of the U.S. economy.
Statement of Additional Information
A document that supplements the disclosures made in this Prospectus.
Taxpayer Identification Number
Usually the social security number for an individual or the Employer
Identification Number for a corporation.
40 Stagecoach Yield Funds Prospectus
<PAGE>
- -------------------------------------------------------------------------------
U.S. Government Obligations
Obligations issued or guaranteed by the U.S. Government, its agencies or
instrumentalities.
Weighted-Average Maturity
The average maturity for the debt securities in a portfolio on a dollar-for-
dollar basis.
Stagecoach Yield Funds Prospectus 41
<PAGE>
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<PAGE>
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<PAGE>
STAGECOACH FUNDS/R/
You may wish to review the following
documents:
Statement of Additional Information
supplements the disclosures made by this Prospectus. The Statement of Additional
Information has been filed with the SEC and is incorporated by reference into
this Prospectus and is legally part of this Prospectus.
Annual/Semi-Annual Report
provides certain financial and other important information for the most recent
reporting period and each Fund's portfolio of investments.
These are available free of
charge by calling
1-800-222-8222, or from
Stagecoach Funds
PO Box 7066
San Francisco, CA
94120-7066
========================================================================
STAGECOACH FUNDS:
------------------------------------------------------------------------
* are not insured by the FDIC
* are not obligations or deposits of Wells Fargo Bank, nor guaranteed
by the Bank
* involve investment risk, including possible loss of principal.
-----------------------------------------------------------------------
SC HY P (4/98)
<PAGE>
STAGECOACH FUNDS, INC.
Telephone: 1-800-222-8222
STATEMENT OF ADDITIONAL INFORMATION
Dated April 1, 1998
CORPORATE BOND FUND
STRATEGIC INCOME FUND
Class A, Class B and Class C
Stagecoach Funds, Inc. (the "Company") is an open-end, management
investment company. This Statement of Additional Information ("SAI") contains
additional information about two funds in the Stagecoach Family of Funds (each,
a "Fund" and collectively, the "Funds") - the Strategic Income and Corporate
Bond Funds. Each Fund offers Class A, Class B and Class C shares. This SAI
relates to the all such classes of shares.
This SAI is not a prospectus and should be read in conjunction with the
Funds' Prospectus, dated April 1, 1998. All terms used in this SAI that are
defined in the Prospectus have the meanings assigned in the Prospectus. A copy
of the Prospectus may be obtained without charge by calling 1-800-222-8222 or
writing to Stagecoach Funds, P.O. Box 7066, San Francisco, California 94120-
7066.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Investment Restrictions................................... 1
Additional Permitted Investment Activities................ 3
Risk Factors.............................................. 18
Management................................................ 24
Performance Calculations.................................. 30
Determination of Net Asset Value.......................... 34
Additional Purchase and Redemption Information............ 35
Portfolio Transactions.................................... 35
Fund Expenses............................................. 37
Federal Income Taxes...................................... 37
Capital Stock............................................. 42
Other..................................................... 44
Independent Auditors...................................... 44
Appendix.................................................. A-1
</TABLE>
i
<PAGE>
INVESTMENT RESTRICTIONS
Fundamental Investment Policies
-------------------------------
Each Fund has adopted the following investment restrictions, all of which
are fundamental policies; that is, they may not be changed without approval by
the vote of the holders of a majority (defined in the Investment Company Act of
1940, as amended (the "1940 Act")) of the outstanding voting securities of such
Fund.
The Corporate Bond and Strategic Income Funds may not:
(1) purchase or sell commodity contracts or invest in oil, gas or mineral
exploration or development programs, except that the Funds, to the extent
appropriate to its investment objective, may purchase publicly traded securities
of companies engaging in whole or in part in such activities, and provided that
the Funds may enter into futures contracts and related options;
(2) purchase or sell real estate, except that the Funds may purchase
securities of issuers that deal in real estate and may purchase securities that
are secured by interests in real estate;
(3) purchase securities of companies for the purpose of exercising control;
(4) act as an underwriter of securities within the meaning of the
Securities Act of 1933 (the "1933 Act") except insofar as the Funds might be
deemed to be an underwriter upon disposition of portfolio securities acquired
within the limitation on purchases of restricted securities and except to the
extent that the purchase of obligations directly from the issuer thereof in
accordance with the Funds' investment objective, policies and limitations may be
deemed to be underwriting;
(5) borrow money or issue senior securities, except that the Funds may
borrow from banks and enter into reverse repurchase agreements for temporary
purposes in amounts up to 10% of the value of the total assets at the time of
such borrowing; or mortgage, pledge or hypothecate any assets, except in
connection with any such borrowing and in amounts not in excess of the lesser of
the dollar amounts borrowed or 10% of the value of the Funds' total assets at
the time of such borrowing. The Funds will not purchase securities while their
borrowings (including reverse repurchase agreements) in excess of 5% of their
total assets are outstanding. Securities held in escrow or separate accounts in
connection with the Funds' investment practices described in this SAI or in its
Prospectus are not deemed to be pledged for purposes of this limitation;
1
<PAGE>
(6) purchase any securities that would cause 25% or more of the Funds'
total assets at the time of purchase to be invested in the securities of one or
more issuers conducting their principal business activities in the same
industry, provided that (a) there is no limitation with respect to obligations
issued or guaranteed by the U.S. Government, its agencies or instrumentalities;
(b) wholly owned finance companies will be considered to be in the industries of
their parents if their activities are primarily related to financing the
activities of the parents; and (c) utilities will be divided according to their
services, for example, gas, gas transmission, electric and gas, electric and
telephone will each be considered a separate industry;
(7) underwrite securities of other issuers, except to the extent that the
purchase of permitted investments directly from the issuer thereof or from an
underwriter for an issuer and the later disposition of such securities in
accordance with the Funds' investment program may be deemed to be an
underwriting.
Non-Fundamental Investment Policies
-----------------------------------
The Funds have adopted the following non-fundamental policies which may be
changed by a majority vote of the Board of Directors of the Company at any time
and without approval of such Funds' shareholders.
(1) Each 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.
Under the 1940 Act, a Funds' investment in such securities currently is limited
to, subject to certain exceptions, (i) 3%
2
<PAGE>
of the total voting stock of any one investment company, (ii) 5% of such Funds
net assets with respect to any one investment company, and (iii) 10% of such
Funds net assets with respect to any one investment company, and (iv) 10% of
such Funds net assets in the aggregate. Other investment companies in which the
Funds invest can be expected to charge fees for operating expenses, such as
investment advisory and administration fees, that would be in addition to those
charged by a Fund.
(2) Each Fund may not invest or hold more than 15% of its net assets in
illiquid securities. For this purpose, illiquid securities include, among
others, (a) securities that are illiquid by virtue of the absence of a readily
available market or legal or contractual restrictions on resale, (b) fixed time
deposits that are subject to withdrawal penalties and that have maturities of
more than seven days, and (c) repurchase agreements not terminable within seven
days.
(3) Each Fund may invest up to 25% of its net assets in debt obligations
and equity securities of foreign governmental and foreign private issuers that
are denominated in and pay interest in U.S. dollars.
(4) Each Fund may lend securities from its portfolio to brokers, dealers
and financial institutions, in amounts not to exceed (in the aggregate) one-
third of a Fund's total assets. Any such loans of portfolio securities will be
fully collateralized based on values that are marked to market daily. The Funds
will not enter into any portfolio security lending arrangement having a duration
of longer than one year.
ADDITIONAL PERMITTED INVESTMENT ACTIVITIES
Set forth below are descriptions of certain investments and additional
investment policies for the Funds.
Asset-Backed Securities
-----------------------
The Funds may invest in various types of asset-backed securities. Asset-
backed securities are securities that represent an interest in an underlying
security. The asset-backed securities in which the Funds invest may consist of
undivided fractional interests in pools of consumer loans or receivables held in
trust. Examples include certificates for automobile receivables (CARS) and
credit card receivables (CARDS). Payments of principal and interest on these
asset-backed securities are "passed through" on a monthly or other periodic
basis to certificate holders and are typically supported by some form of credit
enhancement, such as a letter of credit, surety bond, limited guaranty, or
subordination. The extent of credit enhancement varies, but usually amounts to
only a fraction of the asset-backed security's par value until exhausted.
Ultimately, asset-backed securities are dependent upon payment of the consumer
loans or receivables by individuals, and the certificate holder frequently has
no recourse to the entity that originated the loans or receivables. The actual
maturity and realized yield will vary based upon the prepayment experience of
the underlying asset pool and prevailing interest rates at the time of
prepayment. Asset-backed securities are relatively new instruments and may be
subject to greater risk of default during periods of economic downturn than
other instruments. Also, the secondary market for certain asset-backed
securities may not be as liquid as the market for other types of securities,
which could result in a
3
<PAGE>
Fund experiencing difficulty in valuing or liquidating such securities. The
Funds may also invest in securities backed by pools of mortgages. These
investments are described under the heading "Mortgage-Related Securities."
Bank Obligations
----------------
The Funds may invest in bank obligations, including certificates of
deposit, time deposits, bankers' acceptances and other short-term obligations of
domestic banks, foreign subsidiaries of domestic banks, foreign branches of
domestic banks, and domestic and foreign branches of foreign banks, domestic
savings and loan associations and other banking institutions. With respect to
such securities issued by foreign branches of domestic banks, foreign
subsidiaries of domestic banks, and domestic and foreign branches of foreign
banks, a Fund may be subject to additional investment risks that are different
in some respects from those incurred by a fund which invests only in debt
obligations of U.S. domestic issuers. Such risks include possible future
political and economic developments, the possible imposition of foreign
withholding taxes on interest income payable on the securities, the possible
establishment of exchange controls or the adoption of other foreign governmental
restrictions which might adversely affect the payment of principal and interest
on these securities and the possible seizure or nationalization of foreign
deposits. In addition, foreign branches of U.S. banks and foreign banks may be
subject to less stringent reserve requirements and to different accounting,
auditing, reporting and recordkeeping standards than those applicable to
domestic branches of U.S. banks.
Certificates of deposit are negotiable certificates evidencing the
obligation of a bank to repay funds deposited with it for a specified period of
time.
Time deposits are non-negotiable deposits maintained in a banking
institution for a specified period of time at a stated interest rate. Time
deposits which may be held by the Funds will not benefit from insurance from the
Bank Insurance Fund or the Savings Association Insurance Fund administered by
the Federal Deposit Insurance Corporation ("FDIC"). Bankers' acceptances are
credit instruments evidencing the obligation of a bank to pay a draft drawn on
it by a customer. These instruments reflect the obligation both of the bank and
of the drawer to pay the face amount of the instrument upon maturity. The other
short-term obligations may include uninsured, direct obligations, bearing fixed,
floating- or variable-interest rates.
Bonds
-----
Certain of the debt instruments purchased by the Funds may be bonds. The
Corporate Bond Fund invest no more than 25% in bonds that are below investment
grade. A bond is an interest-bearing security issued by a company or
governmental unit. The issuer of a bond has a contractual obligation to pay
interest at a stated rate on specific dates and to repay principal (the bond's
face value) periodically or on a specified maturity date. An issuer may have
the right to redeem or "call" a bond before maturity, in which case the investor
may have to reinvest the proceeds at lower market rates. Most bonds bear
interest income at a "coupon" rate that is fixed for the life of the bond. The
value of a fixed rate bond usually rises when market interest rates fall, and
falls when market interest rates rise. Accordingly, a fixed rate bond's yield
(income as a percent of the bond's current value) may differ from its coupon
rate as its value rises or falls.
4
<PAGE>
Other types of bonds bear income at an interest rate that is adjusted
periodically. Because of their adjustable interest rates, the value of
"floating-rate" or "variable-rate" bonds fluctuates much less in response to
market interest rate movements than the value of fixed rate bonds. Also, the
Funds may treat some of these bonds as having a shorter maturity for purposes of
calculating the weighted average maturity of their investment portfolios. Bonds
may be senior or subordinated obligations. Senior obligations generally have the
first claim on a corporation's earnings and assets and, in the event of
liquidation, are paid before subordinated debt. Bonds may be unsecured (backed
only by the issuer's general creditworthiness) or secured (also backed by
specified collateral).
Commercial Paper
----------------
The Funds may invest in commercial paper (including variable amount master
demand notes) which refers to short-term, unsecured promissory notes issued by
corporations to finance short-term credit needs. Commercial paper is usually
sold on a discount basis and has a maturity at the time of issuance not
exceeding nine months. Variable amount master demand notes are demand
obligations which permit the investment of fluctuating amounts at varying market
rates of interest pursuant to arrangements between the issuer and a commercial
bank acting as agent for the payee of such notes whereby both parties have the
right to vary the amount of the outstanding indebtedness on the notes.
Investments by the Funds in commercial paper (including variable rate demand
notes and variable rate master demand notes issued by domestic and foreign bank
holding companies, corporations and financial institutions, as well as similar
instruments issued by government agencies and instrumentalities) will consist of
issues that are rated in one of the two highest rating categories by a
Nationally Recognized Statistical Ratings Organization ("NRSRO") Commercial
paper may include variable- and floating-rate instruments.
Custodial Receipts for Treasury Securities
------------------------------------------
The Funds 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 Funds in
such participations will not exceed 5% of the value of the Funds' total assets.
Derivative Securities
---------------------
The Funds may invest in structured notes, bonds or other instruments with
interest rates that are determined by reference to changes in the value of other
interest rates, indices or financial reference to changes in the value of other
interest rates, indices or financial indicators ("References") or the relative
change in two or more References. The Funds may also hold derivative
instruments that have interest rates that re-set inversely to changing current
market rates and/or have embedded interest rate floors and caps that require the
issuer to pay an adjusted interest rate if market rates fall below or rise above
a specified rate. These instruments represent relatively recent innovations in
the bond markets, and the trading market for these instruments is less developed
than the markets for traditional types of debt instruments. It is uncertain how
these
5
<PAGE>
instruments will perform under different economic and interest-rate scenarios.
Because certain of these instruments are leveraged, their market values may be
more volatile than other types of bonds and may present greater potential for
capital gain or loss. The embedded option features of other derivative
instruments could limit the amount of appreciation a Fund can realize on its
investment, could cause a Fund to hold a security it might otherwise sell or
could force the sale of a security at inopportune times or for prices that do
not reflect current market value. The possibility of default by the issuer or
the issuer's credit provider may be greater for these structured and derivative
instruments than for other types of instruments. In some cases, it may be
difficult to determine the fair value of a structured or derivative instrument
because of a lack of reliable objective information and an established secondary
market for some instruments may not exist. As new types of derivative securities
are developed and offered to investors, the advisor will, consistent with the
Funds' investment objective, policies and quality standards, consider making
investments in such new types of derivative securities.
Floating- and Variable-Rate Obligations
---------------------------------------
The Funds may purchase floating- and variable-rate obligations. The Funds
may purchase floating- and variable-rate demand notes and bonds. Variable-rate
demand notes include master demand notes that are obligations that permit the
Funds to invest fluctuating amounts, which may change daily without penalty,
pursuant to direct arrangements between the Funds, as lender, and the borrower.
The interest rates on these notes may fluctuate from time to time. The issuer
of such obligations ordinarily has a corresponding right, after a given period,
to prepay in its discretion the outstanding principal amount of the obligations
plus accrued interest upon a specified number of days' notice to the holders of
such obligations. The interest rate on a floating-rate demand obligation is
based on a known lending rate, such as a bank's prime rate, and is adjusted
automatically each time such rate is adjusted. The interest rate on a variable-
rate demand obligation is adjusted automatically at specified intervals.
Frequently, such obligations are secured by letters of credit or other credit
support arrangements provided by banks. Because these obligations are direct
lending arrangements between the lender and borrower, it is not contemplated
that such instruments generally will be traded, and there generally is no
established secondary market for these obligations, although they are redeemable
at face value. Accordingly, where these obligations are not secured by letters
of credit or other credit support arrangements, a Funds' right to redeem is
dependent on the ability of the borrower to pay principal and interest on
demand. Such obligations frequently are not rated by credit rating agencies and
the Funds may invest in obligations which are not so rated only if Wells Fargo
Bank determines that at the time of investment the obligations are of comparable
quality to the other obligations in which such Fund may invest. Wells Fargo
Bank, on behalf of the Funds, considers on an ongoing basis the creditworthiness
of the issuers of the floating- and variable-rate demand obligations in such
Funds' portfolio. No Fund will invest more than 15% of the value of its total
net assets in floating- or variable-rate demand obligations whose demand feature
is not exercisable within seven days. Such obligations may be treated as
liquid, provided that an active secondary market exists.
6
<PAGE>
Foreign Obligations
-------------------
The Funds may invest up to 25% of their assets in high-quality, short-term
debt obligations of foreign branches of U.S. banks or U.S. branches of foreign
banks or other foreign government obligations 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 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.
Investment in foreign obligations involve certain considerations that are
not typically associated with investing in domestic obligations. There may be
less publicly available information about a foreign issuer than about a domestic
issuer. Foreign issuers also are not generally subject to uniform accounting,
auditing and financial reporting standards or governmental supervision
comparable to those applicable to domestic issuers. In addition, with respect
to certain foreign countries, taxes may be withheld at the source under foreign
income tax laws, and there is a possibility of expropriation or confiscatory
taxation, political or social instability or diplomatic developments that could
adversely affect investments in, the liquidity of, and the ability to enforce
contractual obligations with respect to, securities of issuers located in those
countries.
Foreign Securities
------------------
The Funds may invest in securities denominated in currencies other than the
U.S. dollar and may temporarily hold funds in bank deposits or other money
market investments denominated in foreign currencies. Therefore, the Funds may
be affected favorably or unfavorably by exchange control regulations or changes
in the exchange rate between such currencies and the dollar. Changes in foreign
currency exchange rates influence values within a Fund from the perspective of
U.S. investors. Changes in foreign currency exchange rates may also affect the
value of dividends and interest earned, gains and losses realized on the sale of
securities, and any net investment income and gains to be distributed to
shareholders by a Fund. The rate of exchange between the U.S. dollar and other
currencies is determined by the forces of supply and demand in the foreign
exchange markets. These forces are affected by the international balance of
payments and other economic and financial conditions, government intervention,
speculation and other factors.
Investments in foreign securities also involve certain inherent risks, such
as political or economic instability of the issuer or the country of issue, the
difficulty of predicting international trade patterns and the possibility of
imposition of exchange controls. Such securities may also be subject to greater
fluctuations in price than securities of domestic corporations. In addition,
there may be less publicly available information about a foreign company than
about a domestic
7
<PAGE>
company. Foreign companies generally are not subject to uniform accounting,
auditing and financial reporting standards comparable to those applicable to
domestic companies. Investments in foreign securities and forward contracts may
also be subject to withholding and other taxes imposed by foreign governments.
With respect to certain foreign countries, there is also a possibility of
expropriation or confiscatory taxation, or diplomatic developments which could
affect investments in those countries.
Forward Commitment, When-Issued and Delayed-Delivery Transactions
-----------------------------------------------------------------
Forward Currency Exchange Contracts. As stated in the Prospectus, the Funds
may enter into forward currency exchange contracts ("forward contracts") to
attempt to minimize the risk to the Funds from adverse changes in the
relationship between currencies or to enhance income. A forward contract is an
obligation to buy or sell a specific currency for an agreed price at a future
date which is individually negotiated and is privately traded by currency
traders and their customers. The Funds will either cover a position in such a
transaction or maintain, in a segregated account with their custodian bank, cash
or high-grade marketable (money market?) securities having an aggregate value
equal to the amount of any such commitment until payment is made.
The Funds may purchase or sell securities on a when-issued or delayed
delivery basis and make contracts to purchase or sell securities for a fixed
price at a future date beyond customary settlement time. Delivery and payment
on such transaction normally take place within 120 days after the date of the
commitment to purchase. Securities purchased or sold on a when-issued, delayed-
delivery or forward commitment basis involve a risk of loss if the value of the
security to be purchased declines, or the value of the security to be sold
increases, before the settlement date. Although the Funds will generally
purchase securities with the intention of acquiring them, the Funds may dispose
of securities purchased on a when-issued, delayed-delivery or a forward
commitment basis before settlement when deemed appropriate by the advisor.
Each Fund will establish a segregated account in which it will maintain
cash, U.S. Government obligations or other high-quality debt instruments in an
amount at least equal in value to the Funds' commitments to purchase when-issued
securities. If the value of these assets declines, the Funds 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.
Illiquid Securities
-------------------
The Funds may invest in securities not registered under the 1933 Act and
other securities subject to legal or other restrictions on resale. Because such
securities may be less liquid than other investments, they may be difficult to
sell promptly at an acceptable price. Delay or difficulty in selling securities
may result in a loss or be costly to the Funds. The Funds may invest up to 15%
of its net assets in illiquid securities.
Loans of Portfolio Securities
-----------------------------
The Funds may lend their portfolio securities to brokers, dealers and
financial institutions, provided: (1) the loan is secured continuously by
collateral consisting of U.S. Government securities or cash or letters of credit
maintained on a daily marked-to-market basis in an amount at least equal to the
current market value of the securities loaned; (2) the Funds may at any time
call the loan and obtain the return of the securities loaned within five
business days; (3) the Funds will receive any interest or dividends paid on the
loaned securities; and (4) the aggregate market value of securities loaned will
not at any time exceed one-third of the total assets of the Funds.
The Funds will earn income for lending their securities because cash
collateral pursuant to these loans will be invested in short-term money market
instruments. In connection with lending securities, the Funds may pay reasonable
finders, administrative and custodial fees. The Funds will
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<PAGE>
not enter into any security lending arrangement having a duration longer than
one year. Loans of securities involve a risk that the borrower may fail to
return the securities or may fail to provide additional collateral. In either
case, the Funds could experience delays in recovering securities or collateral
or could lose all or part of the value of the loaned securities. When the Funds
lends its securities, it continues to receive interest or dividends on the
securities loaned and may simultaneously earn interest on the collateral
received from the borrower or from the investment of cash collateral in readily
marketable, high-quality, short-term obligations. Although voting rights, or
rights to consent, attendant to securities on loan pass to the borrower, such
loans may be called at any time and will be called so that the securities may be
voted by the Funds if a material event affecting the investment is to occur. The
Funds may pay a portion of the interest or fee earned from securities lending to
a borrower or a placing broker. Borrowers and placing brokers may not be
affiliated, directly or indirectly with Wells Fargo Bank, Stephens or any of
their affiliates.
Mortgage-Related Securities
---------------------------
The Funds may invest in mortgage-related securities. Mortgage pass-through
securities are securities representing interests in "pools" of mortgages in
which payments of both interest and principal on the securities are made
monthly, in effect "passing through" monthly payments made by the individual
borrowers on the residential mortgage loans which underlie the securities (net
of fees paid to the issuer or guarantor of the securities). The stated
maturities of pass-through obligations may be shortened by unscheduled
prepayments of principal on the underlying mortgages. Therefore, it is not
possible to predict accurately the average maturity of a particular pass-through
obligation. Variations in the maturities of pass-through obligations will
affect the yield of the Funds. Early repayment of principal on mortgage pass-
through securities (arising from prepayments of principal due to sale of the
underlying property, refinancing, or foreclosure, net of fees and costs which
may be incurred) may expose a Fund to a lower rate of return upon reinvestment
of principal. Also, if a security subject to prepayment has been purchased at a
premium, in the event of prepayment the value of the premium would be lost. Like
other fixed-income securities, when interest rates rise, the value of a
mortgage-related security generally will decline; however, when interest rates
decline, the value of mortgage-related securities with prepayment features may
not increase as much as other fixed-income securities. Payment of principal and
interest on some mortgage pass-through securities (but not the market value of
the securities themselves) may be guaranteed by the full faith and credit of the
U.S. Government or its agencies or instrumentalities. Mortgage pass-through
securities created by non- government issuers (such as commercial banks, savings
and loan institutions, private mortgage insurance companies, mortgage bankers
and other secondary market issuers) may be supported by various forms of
insurance or guarantees, including individual loan, title, pool and hazard
insurance, and letters of credit, which may be issued by governmental entities,
private insurers or the mortgage poolers.
The Funds may also invest in investment grade Collateralized Mortgage
Obligations ("CMOs"). CMOs may be collateralized by whole mortgage loans but are
more typically collateralized by portfolios of mortgage pass-through securities
guaranteed by the Government National Mortgage Association ("GNMA"), the Federal
Home Loan Mortgage Corporation ("FHLMC") or the Federal National Mortgage
Association ("FNMA"). CMOs are structured into multiple classes, with each class
bearing a different stated maturity. Payments of principal, including
prepayments, are first returned to investors holding the shortest maturity
class; investors holding the longer maturity classes receive principal only
after the
9
<PAGE>
first class has been retired. As new types of mortgage-related securities are
developed and offered to investors, the Advisor will, consistent with the Funds'
investment objective, policies and quality standards, consider making
investments in such new types of mortgage-related securities.
Adjustable Rate Mortgages ("ARMs") and Collateralized Mortgage Obligations
("CMOs"). The Funds may invest in ARMs issued or guaranteed by the GNMA, FNMA or
the FHLMC. The full and timely payment of principal and interest on GNMA ARMs is
guaranteed by GNMA and backed by the full faith and credit of the U.S.
Government. FNMA also guarantees full and timely payment of both interest and
principal, while FHLMC guarantees full and timely payment of interest and
ultimate payment of principal. FNMA and FHLMC ARMs are not backed by the full
faith and credit of the United States. However, because FNMA and FHLMC are
government-sponsored enterprises, these securities are generally considered to
be high quality investments that present minimal credit risks. The yields
provided by these ARMs have historically exceeded the yields on other types of
U.S. Government securities with comparable maturities, although there can be no
assurance that this historical performance will continue.
The mortgages underlying ARMs guaranteed by GNMA are typically insured or
guaranteed by the Federal Housing Administration, the Veterans Administration or
the Farmers Home Administration, while those underlying ARMs issued by FNMA or
FHLMC are typically conventional residential mortgages which are not so insured
or guaranteed, but which conform to specific underwriting, size and maturity
standards.
In a CMO, a series of bonds or certificates is issued in multiple classes.
Each class of CMOs, often referred to as a "tranche," is issued at a specified
coupon rate and has a stated maturity or final distribution date. The principal
and interest payment on the underlying mortgages may be allocated among the
classes of CMOs in several ways. Typically, payments of principal, including any
prepayments, on the underlying mortgages are applied to the classes in the order
of their respective stated maturities or final distribution dates, so that no
payment of principal is made on CMOs of a class until all CMOs of other classes
having earlier stated maturities or final distribution dates have been paid in
full. One or more classes of CMOs may have coupon rates that reset periodically
based on an index, such as the London Interbank Offered Rate ("LIBOR").
The interest rates on the mortgages underlying the ARMs and some of the
CMOs in which the Funds may invest generally are readjusted at periodic
intervals ranging from one year or less to several years in response to changes
in a predetermined interest rate index. There are two main categories of
indices: those based on U.S. Treasury securities and those derived from a
calculated measure, such as a cost-of-funds index or a moving average of
mortgage rates. Commonly utilized indices include the one-year and five-year
constant maturity Treasury note rates, the three-month Treasury bill rate, the
180-day Treasury bill rate, rates on longer-term Treasury securities, the
National Median Cost of Funds, the one-month, three-month, six-month or one-year
LIBOR, a published prime rate or commercial paper rates. Certain of these
indices follow overall market interest rates more closely than others.
10
<PAGE>
Adjustable rate mortgages, an increasingly common form of residential
financing, generally have a specified maturity date. Most provide for
amortization of principal in a manner similar to fixed-rate mortgages, but have
interest rates that change in response to changes in a specified interest rate
index. The rate of interest due on such a mortgage is calculated by adding an
agreed-upon "margin" to the specified index, although there generally are
limitations or "caps" on interest rate movements in any given period or over the
life of the mortgage. To the extent that the interest rates on adjustable rate
mortgages cannot be adjusted in response to interest rate changes because of
interest rate caps, the ARMs or CMOs backed by such mortgages are likely to
respond to changes in market rates more like fixed rate securities. In other
words, interest rate increases in excess of such caps can be expected to cause
CMOs or ARMs backed by mortgages that have such caps to decline in value to a
greater extent than would be the case in the absence of such caps. Conversely,
interest rate decreases below interest rate floors can be expected to cause the
CMOs or ARMs backed by mortgages that have such floors to increase in value to a
greater extent than would be the case in the absence of such floors.
These adjustable rate features should reduce, but will not eliminate, price
fluctuations in such securities, particularly when market interest rates
fluctuate. Since the interest rates on mortgages typically are reset at most
annually and generally are subject to caps, it can be expected that the prices
of ARMs and CMOs backed by such mortgages will fluctuate to the extent
prevailing market interest rates are not reflected in the interest rates payable
on the underlying adjustable rate mortgages. In this regard, the net asset value
of the Funds' shares could fluctuate to the extent interest rates on underlying
mortgages differ from prevailing market interest rates during interim periods
between interest rate reset dates. Accordingly, investors could experience some
principal loss or less gain than might otherwise be achieved if they redeem
their shares of the Funds or if the Funds sells these portfolio securities
before the interest rates on the underlying mortgages are adjusted to reflect
prevailing market interest rates.
The holder of ARMs and certain CMOs receives not only monthly scheduled
payments of principal and interest, but also may receive unscheduled principal
payments representing prepayments on the underlying mortgages. Changes in market
interest rates and interest rate indexes can affect these prepayment rates,
thereby shortening or lengthening their duration, the holder therefore, may have
to reinvest the periodic payments and any unscheduled prepayments of principal
it receives at a rate of interest which is lower than the rate on the ARMs and
CMOs held by it.
CMOs backed by fixed rate mortgages share many of the rate, duration and
investment risks described above because of their contractual and investment
features and because of factors such as the prepayment rates on the underlying
fixed rate mortgages.
The Funds will not invest in CMOs that, at the time of purchase, are "high-
risk mortgage securities" as defined in the then current Federal Financial
Institutions Examination Council Supervisory Policy Statement on Securities
Activities (the "FFIEC Policy Statement"). Under the FFIEC Policy Statement, a
CMO qualifies as a "high-risk mortgage security" if it meets an Average Life
Test, an Average Life Sensitivity Test, or a Price Sensitivity Test. A CMO meets
the Average Life Test if it has an expected weighted average life greater than
10 years. A CMO meets the
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<PAGE>
Average Life Sensitivity Test if the expected weighted average life of the CMO
either (i) extends by more than 4 years, assuming an immediate and sustained
parallel shift in the yield curve of plus 300 basis points, or (ii) shortens by
more than 6 years, assuming an immediate and sustained parallel shift in the
yield curve of minus 300 basis points. A CMO meets the Price Sensitivity Test if
an immediate and sustained parallel shift in the yield curve of plus or minus
300 basis points would result in an estimated change in the price of the CMO of
more than 17 percent. Under the FFIEC Policy Statement, a CMO floating-rate debt
class, i.e., a CMO the rate of which adjusts at least annually on a one-for-one
basis with a conventional, widely used market interest rate index (such as the
London Interbank Offered Rate), will not be subject to the Average Life and
Average Life Sensitivity Tests if it bears a rate that is below the contractual
cap on the instrument.
Mortgage Participation Certificates. The Funds also may invest in the
following types of FHLMC mortgage pass-through securities. FHLMC issues two
types of mortgage pass-through securities: mortgage participation certificates
("PCs") and guaranteed mortgage certificates ("GMCs"). PCs resemble GNMA
certificates in that each PC represents a pro rata share of all interest and
principal payments made and owed on the underlying pool of mortgages. GMCs also
represent a pro rata interest in a pool of mortgages. These instruments,
however, pay interest semiannually and return principal once a year in
guaranteed minimum payments. These mortgage pass-through securities differ from
bonds in that principal is paid back by the borrower over the length of the loan
rather than returned in a lump sum at maturity. They are called "pass-through"
securities because both interest and principal payments, including prepayments,
are passed through to the holder of the security.
The payment of principal on the underlying mortgages may exceed the minimum
required by the schedule of payments for the mortgages. Such prepayments are
made at the option of the mortgagors for a wide variety of reasons reflecting
their individual circumstances. For example, mortgagors may speed up the rate at
which they prepay their mortgages when interest rates decline sufficiently to
encourage refinancing. The Funds, when such prepayments are passed through to
it, may be able to reinvest them only at a lower rate of interest. As a result,
if a Fund purchases such securities at a premium, a prepayment rate that is
faster than expected will reduce yield to maturity, while a prepayment rate that
is slower than expected will have the opposite effect of increasing yield to
maturity. Conversely, if a Fund purchased such securities at a discount, faster
than expected prepayments will increase, while slower than expected prepayments
will reduce, yield to maturity. Accelerated prepayments on securities purchased
by a Fund at a premium also impose a risk of loss of principal because the
premium may not have been fully amortized at the time the principal is repaid in
full. In choosing specific issues, Wells Fargo Bank, as investment advisor, will
have made assumptions about the likely speed of prepayment. Actual experience
may vary from this assumption resulting in a higher or lower investment return
than anticipated.
Other Investment Companies
--------------------------
The Funds may invest in shares of other open-end management investment
companies, up to the limits prescribed in Section 12(d) of the 1940 Act. Under
the 1940 Act, a Funds' investment in such securities currently is limited to,
subject to certain exceptions, (i) 3% of the total voting stock of any one
investment company, (ii) 5% of such Funds' net assets with respect
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<PAGE>
to any one investment company and (iii) 10% of such Funds' net assets in
aggregate. Other investment companies in which the Funds invest can be expected
to charge fees for operating expenses such as investment advisory and
administration fees, that would be in addition to those charged by the Funds.
Stripped Obligations
--------------------
The Funds may purchase Treasury receipts and other "stripped" securities
that evidence ownership in either the future interest payments or the future
principal payments on U.S. Government and other obligations. These
participations, which may be issued by the U.S. Government (or a U.S. Government
agency or instrumentality) or by private issuers such as banks and other
institutions, are issued at a discount to their "face value," and may include
stripped mortgage-backed securities ("SMBS"). Stripped securities, particularly,
SMBS, may exhibit greater price volatility than ordinary debt securities because
of the manner in which their principal and interest are returned to investors.
Temporary Investments
---------------------
The Funds may hold a certain portion of its assets in cash or short-term
investments in order to maintain adequate liquidity for redemption requests or
other cash management needs or for temporary defensive purposes during periods
of unusual market volatility. The short-term investments that the Funds may
purchase include, among other things, U.S. government obligations, shares of
other mutual funds, repurchase agreements, obligations of domestic banks and
short-term obligations of foreign banks, corporations and other entities. Some
of these short-term investments are described below.
Letters of Credit. Certain of the debt obligations (including certificates
of participation, commercial paper and other short-term obligations) which the
Funds may purchase may be backed by an unconditional and irrevocable letter of
credit of a bank, savings and loan association or insurance company which
assumes the obligation for payment of principal and interest in the event of
default by the issuer. Only banks, savings and loan associations and insurance
companies which, in the opinion of Wells Fargo Bank, are of comparable quality
to issuers of other permitted investments of such Fund may be used for letter of
credit-backed investments.
Repurchase Agreements. The Funds may enter into repurchase agreements,
wherein the seller of a security to the Funds agrees to repurchase that security
from the Funds at a mutually agreed upon time and price. The Funds may enter
into repurchase agreements only with respect to securities that could otherwise
be purchased by the Funds. All repurchase agreements will be fully
collateralized at 102% based on values that are marked to market daily. The
maturities of the underlying securities in a repurchase agreement transaction
may be greater than twelve months, although the maximum term of a repurchase
agreement will always be less than twelve months. If the seller defaults and
the value of the underlying securities has declined, the Funds may incur a loss.
In addition, if bankruptcy proceedings are commenced with respect to the seller
of the security, the Funds' disposition of the security may be delayed or
limited.
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<PAGE>
The Funds may not enter into a repurchase agreement with a maturity of more
than seven days, if, as a result, more than 15% of the market value of the
Funds' total net assets would be invested in repurchase agreements with
maturities of more than seven days, restricted securities and illiquid
securities. The Funds will only enter into repurchase agreements with primary
broker/dealers and commercial banks that meet guidelines established by the
Board of Directors and that are not affiliated with the investment advisor. The
Funds may participate in pooled repurchase agreement transactions with other
funds advised by Wells Fargo Bank.
Borrowing and Reverse Repurchase Agreements. The Funds intend to limit
their borrowings (including reverse repurchase agreements) during the current
fiscal year to not more than 10% of net assets. At the time a Fund enters into a
reverse repurchase agreement (an agreement under which a Fund sells their
portfolio securities and agrees to repurchase them at an agreed-upon date and
price), it will place in a segregated custodial account liquid assets such as
U.S. Government securities or other liquid high-grade debt securities having a
value equal to or greater than the repurchase price (including accrued interest)
and will subsequently monitor the account to ensure that such value is
maintained. Reverse repurchase agreements involve the risk that the market value
of the securities sold by the Funds may decline below the price at which the
Funds are obligated to repurchase the securities. Reverse repurchase agreements
are considered to be borrowings under the 1940 Act.
Lower Rated Securities
----------------------
Each Fund may invest up to 100% of its net assets in non-investment grade
bonds. These are commonly known as "junk bonds." Their default and other risks
are greater than those of higher rated securities. You should carefully
consider these risks before investing in a Fund.
Various investment services publish ratings of some of the types of
securities in which the Fund may invest. Higher yields are ordinarily available
from securities in the lower rating categories, such as securities rated Ba or
lower Moody's Investors Service, Inc. ("Moody's) or BB or lower by Standard &
Poor's Ratings Group ("S&P"), or from unrated securities deemed by
Advisors to be of comparable quality. These ratings represent the opinions of
the rating services with respect to the issuer's ability to pay interest and
repay principal. They do not purport to reflect the risk of fluctuations in
market value and are not absolute standards of quality. These ratings will be
considered in connection with the investment of the Fund's assets but will not
be a determining or limiting factor.
The Funds may invest in securities regardless of their rating or in
securities that are unrated, including up to 5% of their assets in securities
that are in default at the time of purchase. As an operating policy, however,
the Funds will generally invest in securities that are rated at least Caa by
Moody's or CCC by S&P, except for defaulted securities as noted below, or that
are unrated but of comparable quality as determined by the Advisor. Unrated
debt securities are not necessarily of lower quality than rated securities but
they may not be attractive to as many buyers.
The Funds may also buy debt securities of issuers that are not currently
paying interest, as well as issuers who are in default, and may keep an issue
that has defaulted. The Funds will buy
14
<PAGE>
defaulted debt securities if, in the opinion of Advisors, they may present an
opportunity for later price recovery, the issuer may resume interest payments,
or other advantageous developments appear likely in the near future. In general,
securities that default lose much of their value before the actual default so
that the security, and thus the net asset value of the Funds would be impacted
before the default. Defaulted debt securities may be illiquid and, as such,
will be part of the 15% limit discussed under "Illiquid Investments."
If the rating on an issue held in a Fund's portfolio is changed by the
rating service or the security goes into default, this event will be considered
by the Fund in its evaluation of the overall investment merits of that security
but will not generally result in an automatic sale of the security.
Rather than relying principally on the ratings assigned by rating services,
the investment analysis of securities being considered for the Income Fund's
portfolio may also include, among other things, consideration of relative values
based on such factors as anticipated cash flow, interest or dividend coverage,
asset coverage, earnings prospects, the experience and managerial strength of
the issuer, responsiveness to changes in interest rates and business conditions,
debt maturity schedules and borrowing requirements, and the issuer's changing
financial condition and the public recognition of such change.
Certain of the high yielding, fixed-income securities in which the Funds
may invest may be purchased at a discount. When held to maturity or retired,
these securities may include an element of capital gain. Capital losses may be
realized when securities purchased at a premium, that is, in excess of their
stated or par value, are held to maturity or are called or redeemed at a price
lower than their purchase price. Capital gains or losses also may be realized
upon the sale of securities.
Convertible Securities
----------------------
The Funds may invest in convertible securities. A convertible security is
generally a debt obligation or preferred stock that may be converted within a
specified period of time into a certain amount of common stock of the same or a
different user. A convertible security provides a fixed-income stream and the
opportunity, through its conversion feature, to participate in the capital
appreciation resulting from a market price advance in its underlying common
stock. As with a straight fixed-income security, a convertible security tends to
increase in market value when interest rates decline and decrease in value when
interest rates rise. Like a
15
<PAGE>
common stock, the value of a convertible security also tends to increase as the
market value of the underlying stock rises, and it tends to decrease as the
market value of the underlying stock declines. Because its value can be
influenced by both interest rate and market movements, a convertible security is
not as sensitive to interest rats as a similar fixed-income security, nor is it
as sensitive to changes in share price as its underlying stock.
A convertible security is usually issued either by an operating company or
by an investment bank. When issued by an operating company, a convertible
security tends to be senior to common stock, but subordinate to other types of
fixed-income securities issued by that company. When a convertible security
issued by an operating company is "converted," the operating company often
issues new stock to the holder of the convertible security but, if the parity
price of the convertible security is less than the call price, the operating
company may pay out cash instead of common stock. If the convertible security
is issued by an investment bank, the security is an obligation of and is
convertible through the issuing investment bank.
The issuer of a convertible security may be important in determining the
security's true value. This is because the holder of a convertible security
will have recourse only to the issuer. In addition, a convertible security may
be subject to redemption by the issuer, but only after a specified date and
under circumstances established at the time the security is issued.
While the Strategic Income Fund uses the same criteria to rate a
convertible debt security that it uses to rate a more conventional debt
security, a convertible preferred stock is treated like a preferred stock for
the Fund's financial reporting, credit rating, and investment limitation
purposes. A preferred stock is subordinated to all debt obligations in the event
of insolvency, and an issuer's failure to make a dividend payment is generally
not an event of default entitling the preferred shareholder to take action. A
preferred stock generally has no maturity date, so that its market value is
dependent on the issuer's business prospects for an indefinite period of time.
In addition, distributions from preferred stock are dividends, rather than
interest payments, and are usually treated as such for corporate tax
purposes.
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Unrated Investments
-------------------
The Funds may purchase instruments that are not rated if, in the opinion of
Wells Fargo Bank, such obligations are of investment quality comparable to other
rated investments that are permitted to be purchased by the Funds. After
purchase by the Funds, a security may cease to be rated or its rating may be
reduced below the minimum required for purchase by the Funds. Neither event
will require a sale of such security by the Funds. 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 Funds will attempt to use comparable ratings as
standards for investments in accordance with the investment policies contained
in the Prospectus and in this SAI. The ratings of Moody's and S&P are more
fully described in the Appendix.
U.S. Government Obligations
---------------------------
The Funds 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 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.
17
<PAGE>
Government Obligations are subject to fluctuations in yield or value due to
their structure or contract terms.
Nationally Recognized Statistical Ratings Organizations ("NRSROs")
------------------------------------------------------------------
The ratings of Moody's Investors Service, Inc., Standard & Poor's Ratings
Group, Division of McGraw Hill, Duff & Phelps Credit Rating Co., Fitch Investors
Service, Inc. Thomson Bank Watch and IBCA Inc. represent their opinions as to
the quality of debt securities. It should be emphasized, however, that ratings
are general and not absolute standards of quality, and debt securities with the
same maturity, interest rate and rating may have different yields while debt
securities of the same maturity and interest rate with different ratings may
have the same yield. Subsequent to purchase by the Funds, an issue of debt
securities may cease to be rated or its rating may be reduced below the minimum
rating required for purchase by the Funds. The advisor will consider such an
event in determining whether the Funds involved should continue to hold the
obligation.
The payment of principal and interest on debt securities purchased by the
Funds depends upon the ability of the issuers to meet their obligations. An
issuer's obligations under its debt securities are subject to the provisions of
bankruptcy, insolvency, and other laws affecting the rights and remedies of
creditors, such as the Federal Bankruptcy Code, and laws, if any, which may be
enacted by federal or state legislatures extending the time for payment of
principal or interest, or both, or imposing other constraints upon enforcement
of such obligations or, in the case of governmental entities, upon the ability
of such entities to levy taxes. The power or ability of an issuer to meet its
obligations for the payment of interest and principal of its debt securities may
be materially adversely affected by litigation or other conditions. Further, it
should also be, noted with respect to all municipal obligations issued after
August 15, 1986 (August 31, 1986 in the case of certain bonds), the issuer must
comply with certain rules formerly applicable only to "industrial development
bonds" which, if the issuer fails to observe them, could cause interest on the
municipal obligations to become taxable retroactive to the date of issue.
RISK FACTORS
Investments in the Funds are not bank deposits or obligations of Wells
Fargo Bank, are not insured by the FDIC and are not insured against loss of
principal. When the value of the securities that a Fund owns declines, so does
the value of your Fund shares. You should be prepared to accept some risk with
the money you invest in a Fund.
The portfolio debt instruments of the Funds may be subject to credit risk.
Credit risk is the risk that the issuers of securities in which a Fund invests
may default in 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 a Fund invests and hence the value of your
investment in a Fund.
The market value of a Fund's investments in fixed-income securities will
change in response to various factors, such as changes in market interest rates
and the relative financial strength of an issuer. During periods of falling
interest rates, the value of fixed-income securities
18
<PAGE>
generally rises. Conversely, during periods of rising interest rates, the value
of such securities generally declines. Debt securities with longer maturities,
which tend to produce higher yields, are subject to potentially greater price
fluctuation than obligations with shorter maturities. Fluctuations in the market
value of fixed-income securities can be reduced, but not eliminated, by variable
rate or floating rate features. In addition, some of the asset-backed securities
in which the Funds invest are subject to extension risk. This is the risk that
when interest rates rise, prepayments of the underlying obligations slow,
thereby lengthening the duration and potentially reducing the value of these
securities.
Although some of the Funds' portfolio securities are guaranteed by the U.S.
Government, its agencies or instrumentalities, such securities are subject to
interest rate risk and the market value of these securities, upon which the
Funds' daily net asset value are based, will fluctuate. No assurance can be
given that the U.S. Government would provide financial support to its agencies
or instrumentalities where it is not obligated to do so.
Although GNMA securities are guaranteed by the U.S. Government as to timely
payment of principal and interest and ARMs are guaranteed by the U.S.
Government, its agencies or instrumentalities (including government-sponsored
enterprises as noted above), the market value of these securities, upon which
the Funds' daily net asset value is based, will fluctuate. The Funds are
subject to interest-rate risk, that is, the risk that increases in interest
rates may adversely affect the value of the securities in which the Funds
invest, and hence the value of your investment in the Funds. The value of the
securities in which the Funds invests generally changes inversely to changes in
interest rates. However, the adjustable-rate feature of the mortgages underlying
the ARMs and the CMOs in which the Funds may invest should reduce, but will not
eliminate, price fluctuations in such securities, particularly during periods of
extreme fluctuations in market interest rates.
The full and timely payment of principal and interest on GNMA ARMs is
guaranteed by GNMA and backed by the full faith and credit of the U.S.
Government. FNMA also guarantees full and timely payment of both interest and
principal, while FHLMC guarantees full and timely payment of interest and
ultimate payment of principal. FNMA and FHLMC ARMs are not backed by the full
faith and credit of the U.S. Government. However, because FNMA and FHLMC are
government-sponsored enterprises, these securities are considered by some
investors to be high-quality investments that present minimal credit risks. The
yields provided by these ARMs have historically exceeded the yields on other
types of U.S. Government securities with comparable maturities. Of course, there
can be no assurance that this historical performance will continue or that the
Funds, which are diversified, will meet its investment objective.
Moreover, no assurance can be given that the U.S. Government would supply
financial support to U.S. Government-sponsored enterprises such as FNMA and
FHLMC in the event of a default in payment on the underlying mortgages which the
government- sponsored enterprise is unable to make good. Principal on the
mortgages underlying the mortgage pass-through securities in which the Funds may
invest may be prepaid in advance of maturity. Such prepayments tend to increase
when interest rates decline and may present a Fund with more principal to invest
at lower rates. The converse also tends to be the case.
19
<PAGE>
S&P and Moody's assign ratings based upon their judgment of the risk of
default (i.e., the risk that the issuer or guarantor may default in the payment
of principal and/or interest) of the securities underlying the CMOs. However,
investors should understand that most of the risk of these securities comes from
interest-rate risk (i.e., the risk that market interest rates may adversely
affect the value of the securities in which the Funds invests) and not from the
risk of default. CMOs may have significantly greater interest rate risk than
traditional government securities with identical ratings. The adjustable-rate
portions of CMOs have significantly less interest rate risk.
The Funds may invest in illiquid securities which may include certain
restricted securities. Illiquid securities 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 the Funds.
The advisor may use certain derivative investments or techniques, such as
investments in floating- and variable-rate instruments, structured notes and
certain U.S. Government obligations, to adjust the risk and return
characteristics of a Funds' portfolio. Derivatives are financial instruments
whose value is derived, at least in part, from the price of another security or
a specified asset, index or rate. Some derivatives may be more sensitive than
direct securities to changes in interest rates or sudden market moves. Some
derivatives also may be susceptible to fluctuations in yield or value due to
their structure or contract terms. If the Funds' advisor judges market
conditions incorrectly, the use of certain derivatives could result in a loss,
regardless of the advisor's intent in using the derivatives.
The Funds may invest up to 25% of their assets in "Yankee Bonds." Yankee
Bonds are U.S. dollar-denominated debt obligations issued in the U.S. by foreign
banks and corporations. Such investments may involve special risks and
considerations not typically associated with investing in U.S. companies. These
include differences in accounting, auditing and financial reporting standards;
generally higher commission rates on foreign portfolio transactions; the
possibility of nationalization, expropriation or confiscatory taxation; adverse
changes in investment or exchange control regulations (which may include
suspension of the ability to transfer currency from a country); and political
instability which could affect U.S. investments in foreign countries.
Additionally, dispositions of foreign securities and dividends and interest
payable on those securities may be subject to foreign taxes, including
withholding taxes. Foreign securities often trade with less frequency and
volume than domestic securities and, therefore, may exhibit greater price
volatility. The Funds' investments may be affected either unfavorably or
favorably by fluctuations in the relative rates of exchange between the
currencies of different nations, by exchange control regulations and by
indigenous economic and political developments.
Concentration. As market conditions change, it is conceivable that all of
the assets of the Strategic Income Fund could be invested in common stocks or,
conversely, in debt securities. It is a fundamental policy of the Fund that
concentration of investment in a single industry may not exceed 25% of the
Fund's total assets.
High Yielding, Fixed-Income Securities. Because of the Funds' policy of
investing in higher yielding, higher risk securities, an investment in a Fund is
accompanied by a higher
20
<PAGE>
degree of risk than is present with an investment in higher rated, lower
yielding securities. Accordingly, an investment in a Fund should not be
considered a complete investment program and should be carefully evaluated for
its appropriateness in light of your overall investment needs and goals. If you
are on a fixed income or retired, you should also consider the increased risk of
loss to principal that is present with an investment in higher risk securities
such as those in which the Funds invest.
The market value of lower rated, fixed-income securities and unrated
securities of comparable quality, commonly known as junk bonds, tends to reflect
individual developments affecting the issuer to a greater extent than the market
value of higher rated securities, which react primarily to fluctuations in the
general level of interest rates. Lower rated securities also tend to be more
sensitive to economic conditions than higher rated securities. These lower
rated fixed-income securities are considered by the rating agencies, on balance,
to be predominantly speculative with respect to the issuer's capacity to pay
interest and repay principal in accordance with the terms of the obligation and
will generally involve more credit risk than securities in the higher rating
categories. Even securities rated triple B by S&P or by Moody's, ratings which
are considered investment grade, possess some speculative characteristics.
Issuers of high yielding, fixed-income securities are often highly
leveraged and may not have more traditional methods of financing available to
them. Therefore, the risk associated with acquiring the securities of these
issuers is generally greater than is the case with higher rated securities. For
example, during an economic downturn or a sustained period of rising interest
rates, highly leveraged issuers of high yielding securities may experience
financial stress. During these periods, these issuers may not have sufficient
cash flow to meet their interest payment obligations. The issuer's ability to
service its debt obligations may also be adversely affected by specific
developments affecting the issuer, the issuer's inability to meet specific
projected business forecasts, or the unavailability of additional financing.
The risk of loss due to default by the issuer may be significantly greater for
the holders of high yielding securities because the securities are generally
unsecured and are often subordinated to other creditors of the issuer. Current
prices for defaulted bonds are generally significantly lower than their purchase
price, and a Fund may have unrealized losses on defaulted securities that are
reflected in the price of a Fund's shares. In general, securities that default
lose much of their value in the time period before the actual default so that
the Fund's net assets are impacted prior to the default. The Funds may retain
an issue that has defaulted because the issue may present an opportunity for
subsequent price recovery.
High yielding, fixed-income securities frequently have call or buy-back
features that permit an issuer to call or repurchase the securities from a Fund.
Although these securities are typically not callable for a period from three to
five years after their issuance, if a call was exercised by the issuer during
periods of declining interest rates, Advisors may find it necessary to replace
the securities with lower yielding securities, which could result in less net
investment income to a Fund. The premature disposition of a high yielding
security due to a call or buy-back feature, the deterioration of the issuer's
creditworthiness, or a default may also make it more difficult for a Fund to
manage the timing of its receipt of income, which may have tax implications. A
Fund may be required under the Code and U.S. Treasury regulations to accrue
21
<PAGE>
income for income tax purposes on any defaulted obligations and to distribute
the income to the Fund's shareholders even though the Fund is not currently
receiving interest or principal payments on these obligations. In order to
generate cash to satisfy any or all of these distribution requirements, a Fund
may be required to dispose of portfolio securities that it otherwise would have
continued to hold or to use cash flows from other sources such as the sale of
the Fund shares.
Each Fund may have difficulty disposing of certain high yielding securities
because there may be a thin trading market for a particular security at any
given time. The market for lower rated, fixed-income securities generally tends
to be concentrated among a smaller number of dealers than is the case for
securities that trade in a broader secondary retail market. Generally, buyers
of these securities are predominantly dealers and other institutional buyers,
rather than individuals. To the extent the secondary trading market for a
particular high yielding, fixed-income security does exist, it is generally not
as liquid as the secondary market for higher rated securities. Reduced
liquidity in the secondary market may have an adverse impact on market price and
the Fund's ability to dispose of particular issues, when necessary, to meet the
Fund's liquidity needs or in response to a specific economic event, such as a
deterioration in the creditworthiness of the issuer. Reduced liquidity in the
secondary market for certain securities may also make it more difficult for the
Fund to obtain market quotations based on actual trades for purposes of valuing
the Fund's portfolio. Current values for these high yield issues are obtained
from pricing services and/or a limited number of dealers and may be based upon
factors other that actual sales.
Each Fund is authorized to acquire high yielding, fixed-income securities
that are sold without registration under the federal securities laws and
therefore carry restrictions on resale. While many high yielding securities
have been sold with registration rights, covenants and penalty provisions for
delayed registration, if a Fund is required to sell restricted securities before
the securities have been registered, it may be deemed an underwriter of the
securities under the 1933 Act, which entails special responsibilities and
liabilities. The Funds may incur special costs in disposing of restricted
securities; however, the Funds will generally incur no costs when the issuer is
responsible for registering the securities.
Each Fund may acquire high yielding, fixed-income securities during an
initial underwriting. These securities involve special risks because they are
new issues. The Advisor will carefully review their credit and other
characteristics.
The high yield securities market is relatively new and much of its growth
prior to 1990 paralleled a long economic expansion. The recession that began in
1990 disrupted the market for high yielding securities and adversely affected
the value of outstanding securities and the ability of issuers of such
securities to meet their obligations. Although the economy has improved
considerably and high yielding securities have performed more consistently since
that time, there is no assurance that the adverse effects previously experienced
will not reoccur. For example, the highly publicized defaults of some high
yield issuers during 1989 and 1990 and concerns regarding a sluggish economy
that continued into 1993, depressed the prices for many of these
22
<PAGE>
securities. While market prices may be temporarily depressed due to these
factors, the ultimate price of any security will generally reflect the true
operating results of the issuer. Factors adversely impacting the market value of
high yielding securities will adversely impact a Fund's NAV. In addition, a Fund
may incur additional expenses to the extent it is required to seek recovery upon
a default in the payment of principal or interest on its portfolio holdings.
Each Fund will rely on the Advisors' judgment, analysis and experience in
evaluating the creditworthiness of an issuer. In this evaluation, the Advisor
will take into consideration, among other things, the issuer's financial
resources, its sensitivity to economic conditions and trends, its operating
history, the quality of the issuer's management and regulatory matters.
There is, of course, no assurance that the Funds will achieve their
investment objective or be successful in preventing or minimizing the risk of
loss that is inherent in investing in particular types of investment products.
23
<PAGE>
MANAGEMENT
The following information supplements, and should be read in conjunction
with, the section in the Prospectus entitled "Organization and Management of the
Funds." The principal occupations during the past five years of the Directors
and principal executive Officer of the Company are listed below. The address of
each, unless otherwise indicated, is 111 Center Street, Little Rock, Arkansas
72201. Directors deemed to be "interested persons" of the Company for purposes
of the 1940 Act are indicated by an asterisk.
<TABLE>
<CAPTION>
Principal Occupations
Name, Age and Address Position During Past 5 Years
- --------------------- -------- -------------------
<S> <C> <C>
Jack S. Euphrat, 75 Director Private Investor.
415 Walsh Road
Atherton, CA 94027
*R. Greg Feltus, 46 Director, Executive Vice President of Stephens Inc.;
Chairman and President of Stephens Insurance Services
President Inc.; Senior Vice President of Stephens
Sports Management Inc.; and President of
Investor Brokerage Insurance Inc.
Thomas S. Goho, 55 Director Associate Professor of Finance of the School
321 Beechcliff Court of Business and Accounting at Wake Forest
Winston-Salem, NC 27104 University since 1982.
Peter G. Gordon, 54 Director Chairman and Co-Founder of Crystal Geyser
Crystal Geyser Water Co. Water Company and President of Crystal
55 Francisco Street Geyser Roxane Water Company since 1977.
San Francisco, CA 94133
Joseph N. Hankin, 57 Director President of Westchester Community College
75 Grasslands Road since 1971; Adjunct Professor of Columbia
Valhalla, N.Y. 10595 University Teachers College since 1976.
*W. Rodney Hughes, 71 Director Private Investor.
31 Dellwood Court
San Rafael, CA 94901
*J. Tucker Morse, 53 Director Private Investor; Chairman of Home Account
4 Beaufain Street Network, Inc. Real Estate Developer; Chairman
Charleston, SC 29401 of Renaissance Properties Ltd.; President of
Morse Investment Corporation; and Co-Managing
Partner of Main Street Ventures.
</TABLE>
24
<PAGE>
<TABLE>
<CAPTION>
Principal Occupations
Name, Age and Address Position During Past 5 Years
- --------------------- -------- -------------------
<S> <C> <C>
Richard H. Blank, Jr., 41 Chief Operating Vice President of Stephens Inc.; Director
Officer, of Stephens Sports Management Inc.; and
Secretary and Director of Capo Inc.
Treasurer
</TABLE>
Compensation Table
Year Ended March 31, 1998
-------------------------
<TABLE>
<CAPTION>
Total Compensation
Aggregate Compensation from Registrant
Name and Position from Registrant and Fund Complex
----------------- --------------- ----------------
<S> <C> <C>
Jack S. Euphrat
Director $25,750 $34,500
R. Greg Feltus $ 0 $ 0
Director
Thomas S. Goho
Director $25,750 $34.500
Peter G. Gordon
Director $24,250 $30,500
Joseph N. Hankin $25,750 $34,500
Director
W. Rodney Hughes $25,250 $33,000
Director
Robert M. Joses $1,500 $4,000
Director
J. Tucker Morse
Director $25,250 $33,000
</TABLE>
As of January 1, 1998, Peter G. Gordon replaced Robert M. Joses on the
Board of Directors of the Wells Fargo Fund Complex.
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, Stagecoach Trust and Life & Annuity 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"). Overland Express
25
<PAGE>
Funds, Inc. and Master Investment Trust, two investment companies previously
advised by Wells Fargo Bank, were part of the Wells Fargo Fund Complex prior to
December 12, 1997. These companies are no longer part of 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 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 and Peter G. Gordon, who
only serve the aforementioned members of the Wells Fargo 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 Advisor. Wells Fargo Bank provides investment advisory services
------------------
to the Funds. As investment advisor, Wells Fargo Bank furnishes investment
guidance and policy direction in connection with the daily portfolio management
of the Funds. Wells Fargo Bank furnishes to the Company's Board of Directors
periodic reports on the investment strategy and performance of the Funds. Wells
Fargo Bank provides the Funds with, among other things, money market security
and fixed-income research, analysis and statistical and economic data and
information concerning interest rate and securities markets trends, portfolio
composition, and credit conditions.
As compensation for its advisory services, Well Fargo Bank is entitled to
receive a monthly fee at the annual rate indicated below of the Funds' average
daily net assets:
<TABLE>
<CAPTION>
Annual Rate
Fund (as percentage of net assets)
---- -----------------------------
<S> <C>
Corporate Bond Fund 0.50%
Strategic Income Fund 0.60%
</TABLE>
General. Each Funds' Advisory Contract will continue in effect for more
-------
than two years from the effective date provided the continuance is approved
annually (i) by the holders of a majority of the Funds' 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
26
<PAGE>
"interested persons" (as defined in the 1940 Act) of any such party. A Funds'
Advisory Contract may be terminated on 60 days written notice by either party
and will terminate automatically if assigned.
Portfolio Managers.
------------------
Mr. Scott Smith has been responsible, as a portfolio co-manager, for the
day-to-day management of the Corporate Bond Fund since April 1998. Mr. Smith
also will be responsible, as a portfolio co-manager, for the day-to-day
management of the Strategic Income Fund upon its commencement of operations in
June 1998. Mr. Smith joined Wells Fargo Bank in 1998 as a taxable money market
portfolio specialist. Currently, Mr. Smith holds the position of Senior Taxable
Investment Specialist with Wells Fargo Bank. His experience includes a position
with a private money management firm with mutual fund investment operations. Mr.
Smith holds a B.A. from the University of San Diego and is a chartered financial
analyst.
Ms. Jacqueline Flippin joined Wells Fargo Bank in January 1998 and has been
responsible, as a portfolio co-manager, for the day-to-day management of the
Corporate Bond Fund since April 1998. Ms. Flippin also will be responsible, as a
portfolio co-manager, for the day-to-day management of the Strategic Income
Fund upon its commencement of operations in June 1998. Ms. Flippin had worked
for McMorgan & Co. as a Portfolio Manager from October 1994 to January 1998 and
had worked for the Teachers Insurance Annuity Association, College Retirement
Equity Fund as a Portfolio Manager from August 1986 to October 1994. Ms.
Flippin received her B.A. from Northwestern University and her M.B.A. from New
York University.
Mr. Graham Allen joined Wells Fargo Bank in January 1998 and has been
responsible, as a portfolio co-manager, for the day-to-day management of the
Corporate Bond Fund since April 1998. Mr. Allen also will be responsible, as a
portfolio co-manager, for the day-to-day management of the Strategic Income Fund
upon its commencement of operations in June 1998. Prior to January 1998, Mr.
Allen had worked for Bradford & Marzec, Inc. as an International Portfolio
Manager since August 1988, and he had worked for Heron Financial Corp. as a
High Yield Portfolio Manager from June 1985 to August 1988. Educated in
England, Mr. Allen is a Fellow Chartered Accountant, a recognized UK
Accounting body.
Mr. Allen Wisniewski will be responsible, as co-manager, for the day-to-day
management of the portfolio of the Strategic Income Fund upon its commencement
of operations in June 1998. Mr. Wisniewski also is responsible for managing
equity and balanced accounts for high-net-worth individuals and pensions. Mr.
Wisniewski joined Wells Fargo Bank in April 1987 with the acquisition of Bank of
America's consumer trust services, where he was a portfolio manager. He received
his B.A. and M.B.A. in Economics and Finance from the University of California
at Los Angeles. He is a member of the Los Angeles Society of Financial
Analysis.
Administrator and Co-Administrator. The Company has retained Wells Fargo
----------------------------------
Bank as Administrator and Stephens Inc. ("Stephens") as Co-Administrator on
behalf of the Funds. Under the respective Administration and Co-Administration
Agreements among Wells Fargo Bank, Stephens and the Company, Wells Fargo Bank
and Stephens shall provide as administration services, among other things: (i)
general supervision of the Funds' operations, including coordination of the
services performed by the Funds' investment advisor, transfer agent, custodian,
shareholder servicing agent(s), independent auditors and legal counsel,
regulatory compliance, including the compilation of information for documents
such as reports to, and filings with, the SEC and state securities commissions;
and preparation of proxy statements and shareholder reports for the Funds; 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 Funds' business together with
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 0.03% and 0.04%, respectively, of the average daily net assets of
the Funds.
Distributor. Stephens (the "Distributor"), located at 111 Center Street,
-----------
Little Rock, Arkansas 72201, serves as Distributor for the Funds. Each Fund has
adopted distribution plan (a "Plan") under Section 12(b) of the 1940 Act and
Rule 12b-1 thereunder (the "Rule") for its shares. The Plans were adopted by the
Company's Board of Directors, including a majority of the Directors who were not
"interested persons" (as defined in the 1940 Act) of the Funds and who had no
direct or indirect financial interest in the operation of the Plans or in any
agreements related to the Plans (the "Non-Interested Directors").
27
<PAGE>
Under the Plans, and pursuant to the related Distribution Agreement, the
Funds may pay Stephens the amounts indicated below as compensation for
distribution-related services or as reimbursement for distribution-related
expenses. The fees are expressed as a percentage of the average daily net assets
attributable to each Class of the Funds.
<TABLE>
<CAPTION>
Fund Fee
---- ---
<S> <C>
Corporate Bond Fund
Class A 0.05%
Class B 0.75%
Class C 0.75%
Strategic Income Fund
Class A 0.05%
Class B 0.75%
Class C 0.75%
</TABLE>
The actual fee payable to the Distributor by each Fund for each Class is
determined, within such limits, from time to time by mutual agreement between
the Company and the Distributor and will not exceed the maximum sales charges
payable by mutual funds sold by members of the National Association of
Securities Dealers, Inc. ("NASD") under the Conduct Rules of the NASD. The
Distributor may enter into selling agreements with one or more selling agents
(which may include Wells Fargo Bank and its affiliates) under which such agents
may receive compensation for distribution-related services from the Distributor,
including, but not limited to, commissions or other payments to such agents
based on the average daily net assets of Fund shares attributable to their
customers. The Distributor may retain any portion of the total distribution fee
payable thereunder to compensate it for distribution-related services provided
by it or to reimburse it for other distribution-related expenses.
General. The Plans will continue in effect from year to year if such
-------
continuance is approved by a majority vote of both the Directors of the Company
and the Non-Interested Directors. Any Distribution Agreements related to the
Plans also must be approved by such vote of the Directors and the Non-Interested
Directors. Such Agreements will terminate automatically if assigned, and may be
terminated at any time, without payment of any penalty, by a vote of a majority
of the outstanding voting securities of the relevant class of the Funds or by
vote of a majority of the Non-Interested Directors on not more than 60 days
written notice. The Plans may not be amended to increase materially the amounts
payable thereunder without the approval of a majority of the outstanding voting
securities of the Funds, and no material amendment to the Plans may be made
except by a majority of both the Directors of the Company and the Non-Interested
Directors.
The Plans require that the Treasurer of the Company shall provide to the
Directors, and the Directors shall review, at least quarterly, a written report
of the amounts expended (and purposes therefor) under the Plans. Rule 12b-1
also requires that the selection and nomination of Directors who are not
"interested persons" of the Company be made by such disinterested Directors.
28
<PAGE>
Wells Fargo Bank, an interested person (as that term is defined in Section
2(a)(19) of the 1940 Act) of the Company, acts as a selling agent for the Funds'
shares pursuant to selling agreements with Stephens authorized under the Plans.
As a selling agent, Wells Fargo Bank has an indirect financial interest in the
operation of the Plans. The Board of Directors has concluded that the Plans are
reasonably likely to benefit the Funds and their shareholders because the Plans
authorizes the relationships with selling agents, including Wells Fargo Bank,
that have previously developed distribution channels and relationships with the
retail customers that the Funds are designed to serve. These relationships and
distribution channels are believed by the Board to provide potential for
increased Funds assets and ultimately corresponding economic efficiencies (i.e.,
lower per-share transaction costs and fixed expenses) that are generated by
increased assets under management.
Shareholder Servicing Agents. The Funds have approved a Servicing Plan and
----------------------------
have entered into related shareholder servicing agreements with financial
institutions, including Wells Fargo Bank, on behalf of each class of shares.
Under the agreements, Shareholder Servicing Agents (including Wells Fargo Bank)
agree to perform, as agents for their customers, administrative services, with
respect to Fund shares, which include 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 providing shareholder services, a
Servicing Agent is entitled to a fee from the Funds, on an annualized basis, of
the average daily net assets of the class of shares owned of record or
beneficially by the customers of the Servicing Agent during the period for which
payment is being made. The amounts payable under the Shareholder Servicing Plan
are shown below. The Servicing Plan and related forms of shareholder servicing
agreements were approved by the Company's Board of Directors and provide that
the Funds shall not be obligated to make any payments under such Plan or related
Agreements that exceed the maximum amounts payable under the Conduct Rules of
the NASD.
<TABLE>
<CAPTION>
Fund Fee
---- ---
<S> <C>
Corporate Bond Fund
Class A 0.25%
Class B 0.25%
Class C 0.25%
Strategic Income Fund
Class A
Class B 0.25%
Class C 0.25%
0.25%
</TABLE>
General. The Servicing Plan will continue in effect from year to year if
-------
such continuance is approved by a majority vote of the Directors of the Company,
including a majority of the Directors who are not "interested periods" (as
defined in the 1940 Act) of the Funds ("Non-Interested Directors"). Any form of
Servicing Agreement related to the Servicing Plan also must be approved by such
vote of the Directors and Non-Interested Directors. Servicing Agreements may be
terminated at any time, without payment of any penalty, by vote
29
<PAGE>
of a majority of the Board of Directors, including a majority of the Non-
Interested Directors. No material amendment to the Servicing Plan or related
Servicing Agreements may be made except by a majority of both the Directors of
the Company and the 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.
Custodian. Wells Fargo Bank acts as Custodian for the Funds. The
---------
Custodian, among other things, maintains a custody account or accounts in the
name of the Funds, receives and delivers all assets for the Funds upon purchase
and upon sale or maturity, collects and receives all income and other payments
and distributions on account of the assets of the Funds, and pays all expenses
of the Funds. 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 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 the Funds' 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.
Fund Accountant. Wells Fargo Bank acts as Fund Accountant for each Fund.
---------------
The Fund Accountant, among other things, computes net asset values on a daily
basis, and performance calculations on a regular basis and as requested by the
Funds. For providing such services, Wells Fargo Bank will be entitled to
receive from each Fund a monthly base fee of $2,000, plus a fee equal to an
annual rate of 0.070% of the first $50,000,000 of the 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.
Transfer and Dividend Disbursing Agent. Wells Fargo Bank acts as Transfer
--------------------------------------
and Dividend Disbursing Agent for the Funds. For providing such services, Wells
Fargo Bank is entitled to receive monthly payments at the annual rate of 0.14%
of the Funds' average daily net assets of each class of shares.
PERFORMANCE CALCULATIONS
The Funds may advertise certain yield and total return information.
Quotations of yield and total return reflect only the performance of a
hypothetical investment in a Fund or class of shares during the particular time
period shown. Yield and total return vary based on changes in the market
conditions and the level of a Fund's expenses, and no reported performance
figure should be considered an indication of performance which may be expected
in the future.
In connection with communicating its performance to current or prospective
shareholders, these figures may also be compared to the performance of other
mutual funds tracked by mutual fund rating services or to unmanaged indices
which may assume reinvestment of dividends but generally do not reflect
deductions for administrative and management costs.
Performance information for a Fund or Class of shares in a Fund may be
useful in reviewing the performance of such Fund or Class of shares and for
providing a basis for comparison with investment alternatives. The performance
of a Fund and the performance of a Class of shares in a Fund, however, may not
be comparable to the performance from investment alternatives because of
difference in the foregoing variables and differences in the methods used to
value portfolio securities, compute expenses and calculate performance.
Performance information may be advertised for non-standardized periods,
including year-to-date and other periods less than a year for the Funds.
Average Annual Total Return: The Funds may advertise certain total return
---------------------------
information. As and to the extent required by the SEC, an average annual
compound rate of return ("T") will be computed by using the redeemable value at
the end of a specified period ("ERV") of a hypothetical initial investment
("P") over a period of years ("n") according to the following formula:
P(1+T)/n/ = ERV.
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<PAGE>
Cumulative Total Return: In addition to the above performance information,
-----------------------
the Funds may also advertise the cumulative total return of the Fund. The
cumulative total return is based on the overall percentage change in value of a
hypothetical investment in the Funds, assuming all such Fund dividends and
capital gain distributions are reinvested, without reflecting the effect of any
sales charge that would be paid by an investor, and is not annualized.
Yield Calculations: The Funds may, from time to time, include their
------------------
yields and effective yields in advertisements or reports to shareholders or
prospective investors. Quotations of yield for the Funds are based on the
investment income per share earned during a particular seven-day or thirty-day
period, less expenses accrued during a period ("net investment income") and are
computed by dividing net investment income by the offering price per share on
the last date of the period, according to the following formula:
YIELD = 2[(a-b + 1)/6/-1]
---
Cd
where a = dividends and interest earned during the period; b = expenses
accrued for the period (net of reimbursements); c = the average daily number of
shares of each class outstanding during the period that were entitled to receive
dividends; and d = maximum offering price per share each class of shares on the
last day of the period.
Effective Yield: Effective yields for the funds are based on the change in
---------------
the value of a hypothetical investment (exclusive of capital changes) over a
particular thirty-day period, less a pro-rata share of each Fund's expenses
accrued over the period (the "base period"), and stated as a percentage of the
investment at the start of the base period (the "base period return"). The base
period return is then annualized multiplying by 365/30; with the resulting yield
figure carried to at least the nearest hundredth of one percent. "Effective
yield" for the Funds assumes that all dividends receiving during the period have
been reinvested. Calculation of "effective yield" begins with the same "base
period return" used in the calculation of yield, which is then annualized to
reflect weekly compounding pursuant to the following formula:
Effective Thirty-Day Yield = [(Base Period Return + 1)365/30]-1
Quotations of yield and total return reflect only the performance of a
hypothetical investment in a Fund or class of shares during the particular time
period shown. Yield and total return vary based on changes in the market
conditions and the level of a Fund's expenses, and no reported performance
figure should be considered an indication of performance which may be expected
in the future. In connection with communicating its yields or total return to
current or prospective shareholders, these figures may also be compared to the
performance of other mutual funds tracked by mutual fund rating services or to
unmanaged indices which may assume reinvestment of dividends but generally do
not reflect deductions for administrative and management costs.
The yields for each class of shares will fluctuate from time to time,
unlike bank deposits or other investments that pay a fixed yield for a stated
period of time, and do not provide a basis for determining future yields since
they are based on historical data. Yield is a function of portfolio quality,
composition, maturity and market conditions as well as the expenses allocated to
a Fund or to a particular class of a Fund.
In addition, investors should recognize that changes in the net asset
values of shares of each Class of each Fund will affect the yield of each such
Class for any specified period, and such changes should be considered together
with the yield of each Class in ascertaining the total return to shareholders
for the period. Yield information for each Class of shares of each Fund may be
useful in reviewing the Funds' performance and for providing a basis for
comparison with investment alternatives. The yield of each Class of the Funds,
however, may not be comparable to the yields from investment alternatives
because of differences in the foregoing variables and differences in the methods
used to value portfolio securities, compute expenses and calculate yield.
From time to time and only to the extent the comparison is appropriate for
a Class of shares of a Fund, the Company may quote the performance or price-
earning ratio of a Class of shares in advertising and other types of literature
as compared to the performance of the Morgan Stanley Capital International EAFE
(Europe, Australia, Far East) Index, Morgan Stanley Capital International EMF
(Emerging Markets Free) Index, Morgan Stanley Capital International EAFE/EMF
Index, Lipper International Equity Fund Index, 1-Year Treasury Bill Rate, S&P
Index, the Dow Jones Industrial Average, the Lehman Brothers 20+ Years Treasury
Index, the Lehman Brothers 5-7 Year Treasury Index, IBC/Donoghue's Money Fund
Averages, Real Estate Investment Averages (as reported by the National
Association of Real Estate Investment Trusts), Gold Investment Averages
(provided by the World Gold Council), Bank Averages (which is calculated from
figures supplied by the U.S. League of Savings Institutions based on effective
annual rates of interest on both passbook and certificate accounts), average
annualized certificate of deposit rates (from the Federal Reserve G-13
Statistical Releases or the Bank Rate Monitor), the Salomon One Year Treasury
Benchmark Index, the Consumer Price Index (as published by the U.S. Bureau of
Labor Statistics), Ten Year U.S. Government Bond Average, S&P's Corporate Bond
Yield Averages, Schabacter Investment Management Indices, Salomon Brothers
31
<PAGE>
High Grade Bond Index, Lehman Brothers Long-Term High Quality
Government/Corporate Bond Index, other managed or unmanaged indices or
performance data of bonds, municipal securities, stocks or government securities
(including data provided by Ibbotson Associates), or by other services,
companies, publications or persons who monitor mutual funds on overall
performance or other criteria. The S&P Index and the Dow Jones Industrial
Average are unmanaged indices of selected common stock prices. The performance
of a class of shares of a Fund also may be compared to the performance of other
mutual funds having similar objectives. This comparative performance could be
expressed as a ranking prepared by Lipper Analytical Services, Inc., CDA
Investment Technologies, Inc., Bloomberg Financial Markets or Morningstar, Inc.,
independent services which monitor the performance of mutual funds. The
performance of a Class of shares of a Fund will be calculated by relating net
asset value per share at the beginning of a stated period to the net asset value
of the investment, assuming reinvestment of all gains, distributions and
dividends paid, at the end of the period. The Fund's comparative performance
will be based on a companison of yields, as described above, or total return, as
reported by Lipper, Survey Publications, Donoghue or Morningstar, Inc.
Any such comparisons may be useful to investors who wish to compare the
past performance of the Fund or a Class of shares with that of its competitors.
Of course, past performance cannot be a guarantee of future results. The Company
also may include, from time to time, a reference to certain marketing approaches
of the Distributor, including, for example, a reference to a potential
shareholder being contacted by a selected broker or dealer. General mutual fund
statistics provided by the Investment Company Institute may also be used.
In addition, the Company also may use, in advertisements and other types of
literature, information and statements: (1) showing that bank savings accounts
offer a guaranteed return of principal and a fixed rate of interest, but no
opportunity for capital growth; and (2) describing Wells Fargo Bank, and its
affiliates and predecessors, as one of the first investment managers to advise
investment accounts using asset allocation and index strategies. The Company
also may include in advertising and other types of literature information and
other data from reports and studies prepared by the Tax Foundation, including
information regarding federal and state tax levels and the related "Tax Freedom
Day."
32
<PAGE>
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 Funds: (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 Funds or the general economic, business,
investment, or financial environment in which the Funds operates; (iii) the
effect of tax-deferred compounding on the investment returns of a Class of Fund
shares, or on returns in general, may be illustrated by graphs, charts, etc.,
where such graphs or charts would compare, at various points in time, the return
from an investment in a Class of Fund shares (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 the Fund invests may be compared to relevant
indices of stocks or surveys (e.g., S&P Industry Surveys) to evaluate the Funds'
historical performance or current or potential value with respect to the
particular industry or sector.
The Company also may discuss in advertising and other types of literature
that the Funds have been assigned a rating by an NRSRO, such as Standard &
Poor's Corporation. Such rating would assess the creditworthiness of the
investments held by the Funds. The assigned rating would not be a
recommendation to purchase, sell or hold the Funds' shares since the rating
would not comment on the market price of the Funds' shares or the suitability of
the Funds 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 Funds or its investments. The
Company may compare the Funds' performance with other investments which are
assigned ratings by NRSROs. Any such comparisons may be useful to investors who
wish to compare the Funds' past performance with other rated investments.
From time to time, the Funds may use the following statements, or
variations thereof, in advertisements and other promotional materials: "Wells
Fargo Bank, as a Shareholder Servicing Agent for the Stagecoach Funds, provides
various services to its customers that are also shareholders of the Funds.
These services may include access to Stagecoach Funds' account information
through Automated Teller Machines (ATMs), the placement of purchase and
redemption requests for shares of the Funds through ATMs and the availability of
combined Wells Fargo Bank and Stagecoach Funds account statements."
33
<PAGE>
The Company may disclose, in advertising and other types of literature,
information and statements that Wells Capital Management (formerly, "Wells Fargo
Investment Management"), a division of Wells Fargo Bank, is listed in the top
100 by Institutional Investor magazine in its July 1997 Survey "America's Top
300 Money Managers." This survey ranks money managers in several asset
categories. The Company may also disclose in advertising and other types of
sales literature the assets and categories of assets under management by the
Fund's investment advisor and the total amount of assets and mutual fund assets
managed by Wells Fargo Bank. As of December 31, 1997, Wells Fargo Bank and its
affiliates provided investment advisory services for approximately $62 billion
of assets of individuals, trusts, estates and institutions and $23 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
Net asset value per share for each class of each Fund is determined as of
the close of regular trading (currently 1:00 p.m., Pacific time) on each day the
New York Stock Exchange ("NYSE") is open for business. Expenses and fees,
including advisory fees, are accrued daily and are taken into account for the
purpose of determining the net asset value of the Funds' shares.
Securities of a Fund for which market quotations are available are valued
at latest prices. Any security for which the primary market is an exchange is
valued at the last sale price on such exchange on the day of valuation or, if
there was no sale on such day, the latest bid price quoted on such day. In the
case of other securities, including U.S. Government securities but excluding
money market instruments maturing in 60 days or less, the valuations are based
on latest quoted bid prices. Money market instruments and debt securities
maturing in 60 days or less are valued at amortized cost. The assets of a Fund,
other than money market instruments or debt securities maturing in 60 days or
less, are valued at latest quoted bid prices. Futures contracts will be marked
to market daily at their respective settlement prices determined by the relevant
exchange. Prices
34
<PAGE>
may be furnished by a reputable independent pricing service approved by the
Company's Board of Directors. Prices provided by an independent pricing service
may be determined without exclusive reliance on quoted prices and may take into
account appropriate factors such as institutional-size trading in similar groups
of securities, yield, quality, coupon rate, maturity, type of issue, trading
characteristics and other market data. All other securities and other assets of
a Fund for which current market quotations are not readily available are valued
at fair value as determined in good faith by the Company's Board of Directors
and in accordance with procedures adopted by the Directors.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
Shares may be purchased on any day the Funds are open for business. The
Funds are open for business each day the NYSE is open for trading (a "Business
Day"). Currently, the NYSE is closed on New Year's Day, Martin Luther King, Jr.
Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day (each a "Holiday"). When any Holiday falls on
a weekend, the NYSE typically is closed on the weekday immediately before or
after such Holiday.
Payment for shares may, in the discretion of the advisor, be made in the
form of securities that are permissible investments for the Funds. For further
information about this form of payment please contact Stephens. In connection
with an in-kind securities payment, the Funds will require, among other things,
that the securities be valued on the day of purchase in accordance with the
pricing methods used by the Funds and that the Funds 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
Funds; and (iii) adequate information will be provided concerning the basis and
other matters relating to the securities.
Under the 1940 Act, the Funds 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 also redeem shares involuntarily or make
payment for redemption in securities or other property if it appears appropriate
to do so in light of the Company's responsibilities under the 1940 Act. In
addition, the Company may redeem shares involuntarily to reimburse the Funds for
any losses sustained by reason of the failure of a shareholder 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
Funds 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 Funds' portfolio
35
<PAGE>
decisions and the placing of portfolio transactions. In placing orders, it is
the policy of the Company to obtain the best results taking into account the
dealer's general execution and operational facilities, the type of transaction
involved and other factors such as the dealer's risk in positioning the
securities involved. While Wells Fargo Bank generally seeks reasonably
competitive spreads or commissions, the Funds will not necessarily be paying the
lowest spread or commission available.
Purchases and sales of non-equity securities usually will be principal
transactions. Portfolio securities normally will be purchased or sold from or
to dealers serving as market makers for the securities at a net price. The
Funds also will purchase portfolio securities in underwritten offerings and may
purchase securities directly from the issuer. Generally, municipal obligations
and taxable money market securities are traded on a net basis and do not involve
brokerage commissions. The cost of executing a Funds' portfolio securities
transactions will consist primarily of dealer spreads and underwriting
commissions. Under the 1940 Act, persons affiliated with the Company are
prohibited from dealing with the Company as a principal in the purchase and sale
of securities unless an exemptive order allowing such transactions is obtained
from the SEC or an exemption is otherwise available. The Funds may purchase
securities from underwriting syndicates of which Stephens or Wells Fargo Bank is
a member under certain conditions in accordance with the provisions of a rule
adopted under the 1940 Act and in compliance with procedures adopted by the
Board of Directors.
Wells Fargo Bank, as the Investment Advisor of each of the Funds, may, in
circumstances in which two or more dealers are in a position to offer comparable
results for a Fund portfolio transaction, give preference to a dealer that has
provided statistical or other research services to Wells Fargo Bank. By
allocating transactions in this manner, Wells Fargo Bank is able to supplement
its research and analysis with the views and information of securities firms.
Information so received will be in addition to, and not in lieu of, the services
required to be performed by Wells Fargo Bank under the Advisory Contracts, and
the expenses of Wells Fargo Bank will not necessarily be reduced as a result of
the receipt of this supplemental research information. Furthermore, research
services furnished by dealers through which Wells Fargo Bank places securities
transactions for a Fund may be used by Wells Fargo Bank in servicing its other
accounts, and not all of these services may be used by Wells Fargo Bank in
connection with advising the Funds.
Portfolio Turnover. The portfolio turnover rate is not a limiting factor
------------------
when Wells Fargo Bank deems portfolio changes appropriate. Changes may be made
in the portfolios consistent with the investment objectives and policies of the
Funds whenever such changes are believed to be in the best interests of the
Funds and their shareholders. The portfolio turnover rate is calculated by
dividing the lesser of purchases or sales of portfolio securities by the average
monthly value of the Funds' portfolio securities. For purposes of this
calculation, portfolio securities exclude all securities having a maturity when
purchased of one year or less. Portfolio turnover generally involves some
expenses to the Funds, including brokerage commissions or dealer mark-ups and
other transaction costs on the sale of securities and the reinvestment in other
securities. Portfolio turnover also can generate short-term capital gain tax
consequences. Portfolio turnover rate is not a limiting factor when Wells Fargo
Bank deems portfolio changes appropriate.
36
<PAGE>
FUND EXPENSES
From time to time, Wells Fargo Bank and Stephens may waive fees from the
Funds in whole or in part. Any such waiver will reduce expenses and,
accordingly, have a favorable impact on a Funds' performance. 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 Funds;
expenses of shareholders' meetings; expenses relating to the issuance,
registration and qualification of the Funds' shares; pricing services,
organizational expenses and any extraordinary expenses. Expenses attributable to
the Funds are charged against Fund assets. General expenses of the Company are
allocated among all of the funds of the Company, including the Funds in a manner
proportionate to the net assets of each Fund, on a transactional basis, or on
such other basis as the Company's Board of Directors deems equitable.
FEDERAL INCOME TAXES
The following information supplements and should be read in conjunction
with the Prospectus section entitled "Taxes." The Prospectus describes
generally the tax treatment of distributions by the Funds. This section of the
SAI includes additional information concerning income taxes.
General. The Company intends to qualify each Fund as a regulated
-------
investment company under Subchapter M of the Internal Revenue Code of 1986, as
amended (the "Code"), as long as such qualification is in the best interest of
the Fund's shareholders. Each 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 separately to each Fund, rather than to the
Company as a whole. Accordingly, net capital gain, net investment income, and
operating expenses will be determined separately for each Fund. As a regulated
investment company, each Fund will not be taxed on its net investment income and
capital gains distributed to its shareholders.
Qualification as a regulated investment company under the Code requires,
among other things, that (a) each Fund derive at least 90% of its annual gross
income from dividends, interest, certain payments with respect to securities
loans, gains from the sale or other disposition of stock
37
<PAGE>
or securities or foreign currencies (to the extent such currency gains are
directly related to the regulated investment company's principal business of
investing in stock or securities) and other income (including but not limited to
gains from options, futures or forward contracts) derived with respect to its
business of investing in such stock, securities or currencies; and (b) 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. Government obligations 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.
The Funds must also distribute or be deemed to distribute to their
shareholders at least 90% of their net investment income earned in each taxable
year. In general, these distributions must actually or be deemed to be made in
the taxable year. However, in certain circumstances, such distributions may be
made in the 12 months following the taxable year. The Funds intend to pay out
substantially all of their net investment income and net realized capital gains
for each year.
In addition, a regulated investment company must, in general, derive less
than 30% of its gross income from the sale or other disposition of securities or
options thereon held for less than three months. However, this restriction has
been repealed with respect to a regulated investment company's taxable years
beginning after August 5, 1997.
Excise Tax. A 4% nondeductible excise tax will be imposed on each Fund
----------
(other than to the extent of its tax-exempt interest income) to the extent it
does not meet certain minimum distribution requirements by the end of each
calendar year. Each Fund intends to actually or be deemed to distribute
substantially 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.
Taxation of Fund Investments. Except as provided herein, gains and losses
----------------------------
on the sale of portfolio securities by a Fund will generally be capital gains
and losses. Such gains and losses will ordinarily be long-term capital gains
and losses if the securities have been held by the Fund for more than one year
at the time of disposition of the securities.
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, but was not previously recognized pursuant to an available election,
during the term the Fund held the debt obligation.
If a Fund enters into a "constructive sale" of any appreciated position in
stock, a partnership interest, or certain debt instruments, the Fund must
recognize gain (but not loss) with respect to that position. For this purpose,
a constructive sale occurs when the Fund enters into one of the
38
<PAGE>
following transactions with respect to the same or substantially identical
property: (i) a short sale; (ii) an offsetting notional principal contract; or
(iii) a futures or forward contract.
If an option granted by a Fund lapses or is terminated through a closing
transaction, such as a repurchase by the Fund of the option from its holder,
the Fund will realize a short-term capital gain or loss, depending on whether
the premium income is greater or less than the amount paid by the Fund in the
closing transaction. Some realized capital losses may be deferred if they result
from a position which is part of a "straddle," discussed below. If securities
are sold by a Fund pursuant to the exercise of a call option written by it, the
Fund will add the premium received to the sale price of the securities delivered
in determining the amount of gain or loss on the sale.
Under Section 1256 of the Code, a Fund will be required to "mark to market"
its positions in "Section 1256 contracts," which generally include regulated
futures contracts and listed nonequity options. In this regard, Section 1256
contracts will be deemed to have been sold at market value. Sixty percent (60%)
of any net gain or loss realized on all dispositions of Section 1256 contracts,
including deemed dispositions under the mark-to-market regime, will generally be
treated as long-term capital gain or loss and the remaining forty percent (40%)
will be treated as short-term capital gain or loss. Transactions that qualify as
designated hedges are excepted from the mark-to-market and 60%/40% rules.
(Technical corrects legislation has been proposed to conform the taxation of
Section 1256 contracts with new capital gains rates established by the Taxpayer
Relief Act of 1997, described below.
Under Section 988 of the Code, a Fund will generally recognize ordinary
income or loss to the extent gain or loss realized on the disposition of
portfolio securities is attributable to changes in foreign currency exchange
rates. In addition, gain or loss realized on the disposition of a foreign
currency forward contract, futures contract, option or similar financial
instrument, or of foreign currency itself, will generally be treated as ordinary
income or loss. The Funds will attempt to monitor Section 988 transactions,
where applicable, to avoid adverse tax impact.
Offsetting positions held by a regulated investment company involving
certain financial forward, futures or options contracts may be considered, for
tax purposes, to constitute "straddles." "Straddles" are defined to include
"offsetting positions" in actively traded personal property. The tax treatment
of "straddles" is governed by Section 1092 of the Code which, in certain
circumstances, overrides or modifies the provision of Section 1256. If a
regulated investment company were treated as entering into "straddles" by
engaging in certain financial forward, futures or options contracts, such
straddles could be characterized as "mixed straddles" if the futures, forwards,
or options comprising a part of such straddles were goverened by Section 1256 of
the Code. The regulated investment company may make one or more elections with
respect to "mixed straddles." Depending upon which election is made, if any, the
results with respect to the regulated investment company may differ. Generally,
to the extent the straddle rules apply to positions established by the regulated
investment company, losses realized by the regulated investment company may be
deferred to the extent of unrealized gain in any offsetting positions. Moreover,
as a result of the straddle and the conversion transactions rules, short-term
capital loss on straddle positions my be recharacterized as long-term capital
loss, and long-term capital gain may be characterized as short-term capital gain
or ordinary income.
Foreign Taxes. Income and dividends received by a Fund from sources within
-------------
foreign countries may be subject to withholding and other taxes imposed by such
countries. Tax conventions between certain countries and the United States may
reduce or eliminate such taxes. Although in some circumstances a regulated
investment company can elect to "pass through" foreign tax credits to its
shareholders, the Funds do not expect to be eligible to make such an election.
Capital Gain Distributions. Distributions which are designated by a Fund
--------------------------
as capital gain distributions will be taxed to shareholders as long-term capital
gain (to the extent such dividends do exceed the Fund's actual net capital gain
for the taxable year), 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 its shareholders not later than 60 days
after the close of the Fund's taxable year.
The Taxpayer Relief Act of 1997 (the "1997 Act") created several new
categories of capital gains applicable to noncorporate taxpayers. Under prior
law, noncorporate taxpayers were generally taxed at a maximum rate of 28% on net
capital gain (generally, the excess of net long-term capital gain over net
short-term capital loss). Noncorporate taxpayers are now generally taxed at a
maximum rate of 20% on net capital gain attributable to gains realized on the
sale of property held for greater than 18 months, and a maximum rate of 28% on
net capital gain attributable to gain realized on the sale of property held for
greater than one year and not more than 18 months. The 1997 Act retains the
treatment of short term capital gain or loss (generally, gain or loss
attributable to capital assets held for 1 year or less) and did not affect the
taxation of capital gains in the hands of corporate taxpayers.
Under the 1997 Act, the Treasury is authorized to issue regulations for
application of the reduced capital gains tax rates described in the preceding
paragraph to pass-through entities, including regulated investment companies,
such as the Funds. Until such regulations are issued, an IRS notice describes
the application of the reduced capital gains tax rates to pass-through entities.
In general, the IRS notice permits a Fund to designate all or a portion of its
capital gain distributions as 20% rate gain distribution, to be treated by
noncorporate shareholders as capital gain on the sale of property held or
greater than 18 months, or 28% rate gain distributions, to be treated by
noncorporate shareholders as capital gain on the sale of property held for more
than one year but less than 18 months. (If a Fund invests in real estate
investment trusts, a portion its distributions may be taxable to noncorporate
shareholders at a maximum 25% rate.) The amount designated by the Fund as a 20%
rate gain distribution cannot exceed its gain realized on the sale assets held
for greater than 18 months, and the amount designated as a 28% rate gain
distribution cannot exceed its gain realized on the sale of assets held for
greater than one year but less than 18 months.
Disposition of Fund Shares. A disposition of Fund shares pursuant to
--------------------------
redemption (including a redemption in-kind) or exchanges will ordinarily result
in a taxable capital gain or
39
<PAGE>
loss, depending on the amount received for the shares (or are deemed to receive
in the case of an exchange) and the cost of the shares.
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 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 acquired within the 61-day period
beginning 30 days before and ending 30 days after the shares are disposed of.
If a shareholder receives a designated capital gain distribution (to be
treated by the shareholder as 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 long-term capital loss to the extent of the designated capital gain
distribution. The foregoing loss disallowance rule does not apply to losses
realized under a periodic redemption plan.
Federal Income Tax Rates. As of the printing of this SAI, the maximum
------------------------
individual tax rate applicable to ordinary income is 39.6% (marginal tax rates
may be higher for some individuals to reduce or eliminate the benefit of
exemptions and deductions); the maximum individual marginal tax rate applicable
to net capital gain is 28% (however, see "Capital Gain Distributions" above);
and the maximum corporate tax rate applicable to ordinary income and net capital
gain is 35% (marginal tax rates may be higher for some corporations to reduce or
eliminate the benefit of lower marginal income tax rates). 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.
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 and redemptions in-kind) paid or credited to an individual Fund
shareholder, unless the 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 that 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 credit or refund 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. Foreign shareholders of the Funds
(described below) are generally not subject to backup withholding.
Corporate Shareholders. Corporate shareholders of the Funds may be
eligible for the dividends-received deduction on dividends distributed out of a
Fund's net investment income attributable to dividends received from domestic
corporations, which, if received directly by the corporate shareholder,would
qualify for such deduction. A Fund's distribution attributable to dividends of a
domestic corporation will only qualify for the dividends-received deduction if
(i) the corporate shareholder generally holds the Fund shares upon which the
distribution is made for at least 46 days during the 90 day period beginning 45
days prior to the date upon which the shareholder becomes entitled to the
distribution; and (ii) the Fund generally holds the shares of the domestic
corporation producing the dividend income for at least 46 days during the 90 day
period beginning 45 days prior to the date upon which the Fund becomes entitled
to the dividends.
40
<PAGE>
Foreign Shareholders. Under the Code, distributions of net investment
--------------------
income by a Fund to a nonresident alien individual, foreign trust (i.e., trust
which a U.S. court is able to exercise primary supervision over administration
of that trust and one or more U.S. persons have authority to control substantial
decisions of that trust), foreign estate (i.e., the income of which is not
subject to U.S. tax regardless of source), foreign corporation, or foreign
partnership (a "foreign shareholder") will be subject to U.S. income tax
withholding (at a rate of 30% or a lower treaty rate, if applicable).
Withholding will not apply if a dividend distribution paid by a Fund to a
foreign shareholder is "effectively connected" with a U.S. trade or business
(or, if an income tax treaty applies, is attributable to a U.S. permanent
establishment of the foreign shareholder), in which case the reporting and
withholding requirements applicable to U.S. residents will apply. Distributions
of net capital gain are generally not subject to U.S. income tax withholding.
New Regulations. On October 6, 1997, the Treasury Department issued new
---------------
regulations (the "New Regulations") which make certain modifications to the
backup withholding, U.S. income tax withholding and information reporting rules
applicable to foreign shareholders. The New Regulations generally will be
effective for payments made after December 31, 1998, subject to certain
transition rules. Among other things, the New Regulations will permit the Funds
to estimate the portion of their distributions qualifying as capital gain
distributions for purposes of determining the portion of such distributions paid
to foreign shareholders which will be subject to U.S. income tax withholding.
Prospective investors are urged to consult their own tax advisors regarding the
New Regulations.
Tax-Deferred Plans. The shares of the Funds are available for a variety of
------------------
tax-deferred retirement and other plans, including Individual Retirement
Accounts ("IRA"), Simplified Employee Pension Plans ("SEP-IRA"), Savings
Incentive Match Plans for Employees ("SIMPLE plans"), Roth IRAs, and Education
IRAs, which permit investors to defer some of their income from taxes.
Investors should contact their selling agents for details concerning retirement
plans.
Other Matters. Investors should be aware that the investments to be made
-------------
by a Fund may involve sophisticated tax rules that may result in income or gain
recognition by the Fund without corresponding current cash receipts. Although
the Funds will seek to avoid significant noncash income, such noncash income
could be recognized by a Fund, in which 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 applicable
to each shareholder address only some of the federal income tax considerations
generally affecting investments in a Fund. Each investor is urged to consult
his or her tax advisor regarding specific questions as to federal, state, local
and foreign taxes.
41
<PAGE>
CAPITAL STOCK
The Funds are two of the funds in the Stagecoach Family of Funds. The
Company was organized as a Maryland corporation on September 9, 1991, and
currently offers shares of over thirty funds.
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, classes 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 1-800-222-8222 if you would like additional information
about other funds or classes of shares offered.
With respect to matters affecting one class but not another, shareholders
vote as a class; for example, the approval of a Plan. Subject to the foregoing,
all shares of the Funds have equal voting rights and will be voted in the
aggregate, and not by series, except where voting by a series is required by law
or where the matter involved only affects one series. For example, a change in
a Funds' fundamental investment policy affects only one series and would be
voted upon only by shareholders of the Fund involved. Additionally, approval of
an advisory contract, since it affects only one Fund, is a matter to be
determined separately by Series. Approval by the shareholders of one Series is
effective as to that Series whether or not sufficient votes are received from
the shareholders of the other Series to approve the proposal as to those Series.
As used in the Prospectus and in this SAI, the term "majority," when
referring to approvals to be obtained from shareholders of a Class of shares of
a Fund, means the vote of the lesser of (i) 67% of the shares of the Class
represented at a meeting if the holders of more than 50% of the outstanding
shares of the Class are present in person or by proxy, or (ii) more than 50% of
the outstanding shares of the Class of a Fund. The term "majority," when
referring to approvals to be obtained from shareholders of a Fund, means the
vote of the lesser of (i) 67% of the shares of a Fund represented at a meeting
if the holders of more than 50% of the outstanding shares of a Fund are present
in person or by proxy, or (ii) more than 50% of the outstanding shares of a
Fund. The term "majority," when referring to the approvals to be obtained from
shareholders of the Company as a whole, means the vote of the lesser of (i) 67%
of the Company's shares represented at a meeting if the holders of more than 50%
of the Company's outstanding shares are present in person or by proxy, or (ii)
more than 50% of the Company's outstanding shares.
Shareholders are not entitled to any preemptive rights. All shares, when
issued, will be fully paid and non-assessable by the Company. 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.
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<PAGE>
Each share of a class of a Fund represents an equal proportional interest
in the Fund with each other share of the same class and is entitled to such
dividends and distributions out of the income earned on the assets belonging to
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 that Fund that are available for
distribution, and a distribution of any general assets not attributable to a
particular Fund or portfolio that are available for distribution in such manner
and on such basis as the Directors in their sole discretion may determine.
Set forth below, as of March 30, 1998, is the name, address and share
ownership of each person known by the Company to have beneficial or record
ownership of 5% or more of a class of a Fund or 5% or more of the voting
securities as a whole. Upon commencement of operations, Stephens is not expected
to be a controlling shareholder of each Fund. The term "N/A" is used for the
Strategic Income Fund because there were no shareholders in The Fund as of March
30, 1998.
5% OWNERSHIP AS OF MARCH 30, 1998
---------------------------------
<TABLE>
<CAPTION>
Type of Percentage Percentage
Fund Name and Address Ownership of Class of Portfolio
- ---- ---------------- --------- -------- ------------
<S> <C> <C> <C> <C>
CORPORATE Stephens Inc. Class A
BOND FUND 111 Center Street Record Holder 100% 33 1/3%
Little Rock, Ar 72201
Class B 100% 33 1/3%
Record Holder
Class C 100% 33 1/3%
Record Holder
STRATEGIC Stephens Inc. Class A N/A N/A
INCOME FUND 111 Center Street Record Holder
Little Rock, AR 72201
Class B N/A N/A
Record Holder
Class C N/A N/A
Record Holder
</TABLE>
For purposes of the 1940 Act, any person who owns directly or through one
or more controlled companies more than 25% of the voting securities of a company
is presumed to "control" such company. Accordingly, to the extent that a
shareholder identified in the foregoing table is identified as the beneficial
holder of more than 25% of a class (or Fund), or is identified as the holder of
record of more than 25% of a class (or Fund) and has voting and/or investment
powers, it may be presumed to control such class (or Fund).
43
<PAGE>
OTHER
The Company's Registration Statement, including the Prospectus and SAI for
the Fund, and the exhibits filed therewith, may be examined at the office of the
U.S. Securities and Exchange Commission in Washington, D.C. Statements contained
in the Prospectus or the SAI as to the contents of any contract or other
document referred to herein or in the Prospectus are not necessarily complete,
and, in each instance, reference is made to the copy of such contract or other
document filed as an exhibit to the Registration Statement, each such statement
being qualified in all respects by such reference.
INDEPENDENT AUDITORS
KPMG Peat Marwick LLP has been selected as the independent auditors for the
Company. KPMG Peat Marwick LLP provides audit services, tax return preparation
and assistance and consultation in connection with review of certain SEC
filings. KPMG Peat Marwick LLP's address is Three Embarcadero Center, San
Francisco, California 94111.
44
<PAGE>
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 Bonds
Moody's
-------
The nine ratings for corporate bonds are "Aaa," "Aa," "A," "Baa," "Ba,"
"B," "Caa," "Ca," and "C."
Aaa - Bonds rated "Aaa" are judged to be of the "best quality" and carry
the smallest amount of investment risk.
Aa - 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.
A - Bonds rated "A" possess many favorable investment attributes and are
considered to be upper medium grade obligations.
Baa - 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 lack outstanding
investment characteristics and in fact have speculative characteristics as well.
Ba - Bonds rated Ba are judged to have predominantly speculative elements
and their future cannot be considered well assured. Often the protection of
interest and principal payments is very moderate and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B - Bonds rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa - Bonds rated Caa are of poor standing. Such issues may be in default
or there may be present elements of danger with respect to principal or
interest.
Ca - Bonds rated Ca represent obligations which are speculative in a high
degree. Such issues are often in default or have other marked shortcomings.
C - Bonds rated C are the lowest rates class of bonds and can be regarded
as having extremely poor prospects of ever attaining any real investment
standing.
A-1
<PAGE>
NOTE: Moody's also applies numerical modifiers in its rating system: 1, 2
and 3 in each rating category from "Aa" through "B" 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 ten ratings for corporate and municipal bonds are "AAA," "AA," "A,"
"BBB," "BB," "B," "CCC," "CC," "C," and "D."
AAA - Bonds rated "AAA" have the "highest rating" assigned by S&P and have
"an extremely strong capacity" to pay interest and repay principal.
AA - Bonds rated "AA" have a "very strong capacity" to pay interest and
repay principal and "differ from the highest rated obligations only in small
degree."
A - 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.
BBB - Bonds rated "BBB" are regarded as having "adequate protection
parameters" 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.
BB, B, CCC, CC - Bonds rated BB, B, CCC and CC are regarded, on balance, as
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal in accordance with the terms of the obligations. BB
indicates the lowest degree of speculation and CC the highest degree of
speculation. While such bonds will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
C - Bonds rated C are typically subordinated debt to senior debt that is
assigned an actual or implied CCC - rating. The C rating may also reflect the
filing of a bankruptcy petition under circumstances where debt service payments
are continuing. The C1 rating is reserved for income bonds on which no interest
is being paid.
D - Debt rated D is in default and payment of interest and/or repayment of
principal is in arrears.
NOTE: 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.
Commercial Paper
Moody's: The highest rating for commercial paper is "P-1" (Prime-1).
Issuers rated "P-1" have a "superior ability for repayment of senior short-term
debt obligations."
A-2
<PAGE>
Issuers rated "P-2" (Prime-2) "have a strong capacity for repayment of senior
short-term debt obligations," but earnings trends, while sound, will be subject
to more variation.
S&P: The "A-1" rating for commercial paper is rated "in the highest
category" by S&P and "the obligor's capacity to meet its financial commitment on
the obligation is strong." The "A-1+" rating indicates that said capacity is
"extremely strong." The A-2 rating indicates that said capacity is
"satisfactory," but that corporate and municipal commercial paper rated "A-2" is
"more susceptible" to the adverse effects of changes in economic conditions or
other circumstances than commercial paper rated in higher rating categories.
A-3
