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STAGECOACH FUNDS, INC.
Telephone: 1-800-222-8222
STATEMENT OF ADDITIONAL INFORMATION
Dated December 15, 1997
as supplemented on February 24, 1998
ASSET ALLOCATION FUND
INDEX ALLOCATION FUND
U.S. GOVERNMENT ALLOCATION 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 three funds in the Stagecoach Family of Funds
(each, a "Fund" and collectively, the "Funds") -- the ASSET ALLOCATION, INDEX
ALLOCATION and U.S. GOVERNMENT ALLOCATION FUNDS. Each Fund offers Class A shares
and Class B shares. The Index Allocation Fund also offers Class C shares. This
SAI relates to all such classes of shares.
This SAI is not a prospectus and should be read in conjunction with the
Funds' Prospectus, dated December 15, 1997, as supplemented. All terms used in
this SAI that are defined in the Prospectus have the meaning 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, CA
94120-7066.
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TABLE OF CONTENTS
Page
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Historical Fund Information........................................... 1
Investment Restrictions............................................... 1
Investment Models..................................................... 5
Additional Permitted Investment Activities............................ 9
Risk Factors.......................................................... 20
Management............................................................ 22
Performance Calculations.............................................. 36
Determination of Net Asset Value...................................... 44
Additional Purchase and Redemption Information........................ 45
Portfolio Transactions................................................ 46
Fund Expenses......................................................... 48
Federal Income Taxes.................................................. 48
Capital Stock......................................................... 55
Other................................................................. 57
Independent Auditors.................................................. 57
Financial Information................................................. 58
Appendix.............................................................. A-1
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HISTORICAL FUND INFORMATION
The Company's Asset Allocation Fund commenced operations on January 2, 1992,
as successor to the Asset Allocation Fund of the Wells Fargo Investment Trust
for Retirement Programs. The predecessor fund's commencement of operations was
November 13, 1986. The Class B shares commenced operations on January 1, 1995.
The Company's U.S. Government Allocation Fund commenced operations on
January 2, 1992 as successor to the Fixed-Income Strategy Fund of the Wells
Fargo Investment Trust for Retirement Programs. The predecessor fund's
commencement of operations was March 31, 1987. The Class B shares commenced
operations on January 1, 1995.
The Company's Index Allocation Fund was originally organized on April 7,
1988 as the Asset Allocation Fund of Overland Express Funds, Inc. ("Overland"),
another open-end management investment company advised by Wells Fargo Bank. The
Asset Allocation Fund changed its name to the Index Allocation Fund on February
14, 1997. On July 23, 1997, the Boards of the Directors of the Company and
Overland approved an Agreement and Plan of Consolidation providing for, among
other things, the transfer of the assets and stated liabilities of the
predecessor Overland portfolio to the Fund. Prior to December 12, 1997, the
effective date of the consolidation of the Company and Overland (the
"Consolidation"), the Fund had only nominal assets. As a result of the
Consolidation, the Overland Index Allocation Fund was reorganized as the
Company's Index Allocation Fund on December 12, 1997, and shareholders of the
Overland Index Allocation Fund's Class A and Class D shares became Class A and
Class C shareholders, respectively, of the Company's Index Allocation Fund.
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 (as defined in the Investment Company Act
of 1940, as amended (the "1940 Act")) of the outstanding voting securities of
such Fund.
The Asset Allocation Fund and U.S. Government Allocation Fund may not:
(1) purchase the securities of issuers conducting their principal business
activity in the same industry if, immediately after the purchase and as a result
thereof, the value of any Fund's investments in that industry would be 25% or
more of the current value of its total assets, provided that there is no
limitation with respect to investments in (i) obligations of the United States
Government, its agencies or instrumentalities, (ii) in the case of the Asset
Allocation Fund, any industry in which the S&P 500 Index becomes
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concentrated to the same degree during the same period, and (iii) in the case of
the Asset Allocation Fund, money market instruments invested in the banking
industry and in obligations of the U.S. Government, its agencies or
instrumentalities (but the Fund will not do so unless the U.S. Securities and
Exchange Commission ("SEC") staff confirms that it does not object to the Fund
reserving freedom of action to concentrate investments in the banking industry);
and provided further, that each Fund may invest all of its assets in a
diversified, open-end management investment company, or a series thereof, with
substantially the same investment objective, policies and restrictions as such
Fund, without regard to the limitations set forth in this paragraph (1);
(2) purchase or sell real estate or real estate limited partnerships (other
than securities secured by real estate or interests therein or securities issued
by companies that invest in real estate or interests therein);
(3) purchase or sell commodities or commodity contracts; except that each
Fund may purchase and sell (i.e., write) options, forward contracts, futures
contracts, including those relating to indices, and options on futures contracts
or indices, and may participate in interest rate and index swaps;
(4) purchase interests, leases, or limited partnership interests in oil,
gas, or other mineral exploration or development programs;
(5) purchase securities on margin (except for short-term credits necessary
for the clearance of transactions and except for margin payments in connection
with transactions in options, forward contracts, futures contracts, including
those relating to indices, and options on futures contracts or indices) or make
short sales of securities;
(6) 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 a Fund's investment program may be deemed to be an underwriting;
and provided further, that the purchase by a Fund of securities issued by a
diversified, open-end management investment company, or a series thereof, with
substantially the same investment objective, policies and restrictions as such
Fund shall not constitute an underwriting for purposes of this paragraph (6);
(7) make investments for the purpose of exercising control or management;
(8) issue senior securities, except to the extent the activities permitted
in Investment Restrictions Nos. 3 and 5 may be deemed to give rise to a senior
security but do not violate the provisions of section 18 of the 1940 Act, and
except that each Fund may borrow from banks up to 20% of the current value of
each such Fund's net assets for temporary purposes only in order to meet
redemptions, and these borrowings may be secured by the pledge of up to 20% of
the current value of each such Fund's net assets
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(but investments may not be purchased by such Funds while any such outstanding
borrowings exceed 5% of the respective Fund's net assets);
(9) write, purchase or sell puts, calls, straddles, spreads, warrants,
options or any combination thereof, except that each Fund may engage in options
transactions to the extent permitted in Investment Restrictions Nos. 3 and 5,
and except that each Fund may purchase securities with put rights in order to
maintain liquidity; nor
(10) purchase securities of any issuer (except securities issued or
guaranteed by the U.S. Government, its agencies and instrumentalities) if, as a
result, more than 5% of the value of a Fund's total assets would be invested in
the securities of any one issuer or such Fund's ownership would be more than 10%
of the outstanding voting securities of such issuer, provided that a Fund may
invest all its assets in a diversified, open-end management investment company,
or a series thereof, with substantially the same investment objective, policies
and restrictions as such Fund, without regard to the limitations set forth in
this paragraph (10).
Each of the Asset Allocation and U.S. Government Allocation Funds may make
loans in accordance with its investment policies.
As a fundamental policy, each of the Asset Allocation and U.S. Government
Allocation Funds may invest, notwithstanding any other investment restrictions
(whether or not fundamental), all of its assets in the securities of a single
open-end, management investment company with substantially the same fundamental
investment objectives, policies and restrictions as such Fund. A decision to so
invest all of its assets may, depending on the circumstances applicable at the
time, require approval of shareholders.
The Index Allocation Fund may not:
(1) purchase the securities of issuers conducting their principal business
activity in the same industry if, immediately after the purchase and as a result
thereof, the value of the Fund's investments in that industry would exceed 25%
of the current value of its total assets, provided that there is no limitation
with respect to investments in (i) municipal securities (for the purpose of this
restriction, private activity bonds and notes shall not be deemed municipal
securities if the payments of principal and interest on such bonds or notes is
the ultimate responsibility of non-governmental issuers); (ii) obligations of
the United States Government, its agencies or instrumentalities; (iii) any
industry in which the S&P Index becomes concentrated to the same degree during
the same period; and (iv) the obligations of domestic banks;
(2) purchase or sell real estate (other than municipal obligations or other
securities secured by real estate or interests therein or securities issued by
companies that invest in real estate or interests therein), commodities or
commodity contracts; except that the Fund may purchase and sell (i.e., write)
options, forward contracts, futures contracts, including
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those relating to indices, and options on futures contracts or indices, and may
participate in interest rate swaps and index swaps;
(3) purchase securities on margin or make short sales of securities (except
for short-term credits necessary for the clearance of transactions and except
that the Fund may make margin payments in connection with transactions in
options, forward contracts, futures contracts, including those relating to
indices, and options on futures contracts or indices);
(4) underwrite securities of other issuers, except to the extent that the
purchase of municipal securities or other permitted investments directly from
the issuer thereof or from an underwriter for an issuer and the later
disposition of such securities in accordance with the Fund's investment program
may be deemed to be an underwriting;
(5) invest more than 10% of the current value of its net assets in
repurchase agreements maturing in more than seven days, restricted securities,
which are securities that must be registered under the Securities Act of 1933
before they may be offered or sold to the public, and illiquid securities;
(6) make investments for the purpose of exercising control or management;
(7) issue senior securities, except to the extent the activities of the
Fund permitted in Investment Restrictions Nos. 2 and 3 may be deemed to give
rise to a senior security but do not violate the provisions of section 18 of the
1940 Act, and except that the Fund may borrow from banks up to 10% of the
current value of its net assets for temporary purposes only in order to meet
redemptions, and these borrowings may be secured by the pledge of up to 10% of
the current value of its net assets (but investments may not be purchased while
any such borrowing exists); nor
(8) invest more than 10% of the current value of its net assets in fixed
time deposits that are subject to withdrawal penalties and that have maturities
of more than seven days.
In addition, the Fund may not write, purchase or sell puts, calls, warrants
or options or any combination thereof, except that the Fund may purchase
securities with put rights in order to maintain liquidity, and except that the
Fund may engage in options transactions to the extent permitted in Investment
Restrictions Nos. 2 and 3.
The Fund may not, as to 75% of its total assets, purchase securities of any
issuer (except securities issued or guaranteed by the U.S. Government, its
agencies and instrumentalities) if, as a result, more than 5% of the value of
its total assets would be invested in the securities of any one issuer or, with
respect to 100% of its assets, the Fund's ownership would be more than 10% of
the outstanding voting securities of such issuer.
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Non-Fundamental Investment Policies
-----------------------------------
Each Fund has 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 Fund's 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, the Fund's 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 the Fund's net assets with respect to any one
investment company, and (iii) 10% of the Fund's net assets in the aggregate.
Other investment companies in which the Fund invests 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 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 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.
INVESTMENT MODELS
This section contains supplemental information about the proprietary
investment model used by Barclays Global Fund Advisors ("BGFA") to manage each
Fund's portfolio.
Asset Allocation Model. BGFA compares the Asset Allocation Fund's
----------------------
investments daily to the Asset Allocation Model's recommended allocation. The
investment model recommends allocations among each asset class in 5% increments
only. Any recommended reallocation will be implemented in accordance with
trading policies that have been designed to take advantage of market
opportunities and to reduce transaction costs. Under current trading policies
employed by BGFA, recommended
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reallocations may be implemented promptly upon receipt of recommendations or may
not be acted upon for as long as two or three months thereafter depending on
factors such as the percentage change from previous recommendations and the
consistency of recommended reallocations over a period of time. In addition, the
Asset Allocation Fund generally will invest the net proceeds from the sale of
shares of the Fund and will liquidate existing Fund investments to meet net
redemption requirements in a manner that best allows the Fund's existing asset
allocation to follow that recommended by the Model. Notwithstanding any
recommendation of the Model to the contrary, the Asset Allocation Fund will
generally maintain at least that portion of its assets in money market
instruments reasonably considered necessary to meet redemption requirements. In
general, cash maintained for short-term liquidity needs is only invested in U.S.
Treasury bills, shares of other mutual funds and repurchase agreements. There is
no requirement that the Fund maintain positions in any particular asset class or
classes.
Wells Fargo Bank and BGFA manage other portfolios which also invest in
accordance with the Asset Allocation Model. The performance of each of those
other portfolios is likely to vary among themselves and from the performance of
the Fund. Such variation in performance is primarily due to different
equilibrium asset mix assumptions used for the various portfolios, timing
differences in the implementation of the model's recommendations and differences
in expenses and liquidity requirements.
There are 500 common stocks, including Wells Fargo & Company stock, which
make up the S&P 500 Index. Standard & Poor's Ratings Group ("S&P") occasionally
makes changes in the S&P 500 Index based on its criteria for inclusion of stocks
in the S&P 500 Index. The S&P 500 Index is market-capitalization-weighted so
that each stock in the S&P 500 Index represents its proportion of the total
market value of all stocks in the S&P 500 Index. In making its stock
investments, the policy of the Asset Allocation Fund is to invest its assets in
substantially the same stocks, and in substantially the same percentages, as the
S&P 500 Index, including Wells Fargo & Company stock.
A key component of the Asset Allocation Model is a set of assumptions
concerning expected risk and return and investor attitudes toward risk which are
incorporated into the asset allocation decision. The principal inputs of
financial data to the Asset Allocation Model currently are (i) consensus
estimates of the earnings, dividends and payout ratios on a broad cross-section
of common stocks as reported by independent financial reporting services which
survey a broad cross-section of Wall Street analysts, (ii) the estimated current
yield to maturity on new long-term corporate bonds rated "AA" by S&P, (iii) the
present yield on money market instruments, (iv) the historical statistical
standard deviation in investment return for each class of asset, and (v) the
historical statistical correlation of investment returns among the various asset
classes in which the Asset Allocation Fund invests. Using these data, the Asset
Allocation Model is run daily to determine the recommended asset allocation. The
model's recommendations are presently made in 5% increments.
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Although BGFA intends to use the Model as bases for its investment
decisions, BGFA may change from time to time the criteria and methods it uses to
implement the Model's recommendations if it believes such a change is desirable
for the Fund. Nevertheless, Wells Fargo Bank has continuing and exclusive
authority over the management of the Fund, the conduct of its affairs and the
disposition of the Funds' assets, and Wells Fargo Bank has the right to reject
BGFA's investment decisions for the Fund if Wells Fargo Bank determines that any
such decision is not consistent with the best interests of the Fund.
Index Allocation Model. BGFA compares the Index Allocation Fund's
----------------------
investments daily to the Index Allocation Model's recommended allocation. The
investment model recommends allocations among each asset class in 5% increments
only. Any recommended reallocation will be implemented in accordance with
trading policies that have been designed to take advantage of market
opportunities and to reduce transaction costs. Under current trading policies
employed by BGFA, recommended reallocations may be implemented promptly upon
receipt of recommendations or may not be acted upon for as long as two or three
months thereafter depending on factors such as the percentage change from
previous recommendations and the consistency of recommended reallocations over a
period of time. In addition, the Index Allocation Fund generally will invest the
net proceeds from the sale of shares of the Fund and will liquidate existing
Fund investments to meet net redemption requirements in a manner that best
allows the Fund's existing asset allocation to follow that recommended by the
Model. Notwithstanding any recommendation of the Model to the contrary, the
Index Allocation Fund will generally maintain at least that portion of its
assets in money market instruments reasonably considered necessary to meet
redemption requirements. In general, cash maintained for short-term liquidity
needs is only invested in U.S. Treasury bills, shares of other mutual funds and
repurchase agreements. There is no requirement that the Fund maintain positions
in any particular asset class or classes.
Wells Fargo Bank and BGFA manage other portfolios which also invest in
accordance with the Index Allocation Model. The performance of each of those
other portfolios is likely to vary among themselves and from the performance of
the Fund. Such variation in performance is primarily due to different
equilibrium asset mix assumptions used for the various portfolios, timing
differences in the implementation of the model's recommendations and differences
in expenses and liquidity requirements.
There are 500 common stocks, including Wells Fargo & Company stock, which
make up the S&P 500 Index. S&P occasionally makes changes in the S&P 500 Index
based on its criteria for inclusion of stocks in the S&P 500 Index. The S&P 500
Index is market-capitalization-weighted so that each stock in the S&P 500 Index
represents its proportion of the total market value of all stocks in the S&P 500
Index. In making its stock investments, the policy of the Index Allocation Fund
is to invest its assets in substantially the same stocks, and in substantially
the same percentages, as the S&P 500 Index, including Wells Fargo & Company
stock. The Lehman Brothers 20+ Treasury
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Bond Index (the "LBT Bond Index") is an unmanaged index comprised of U.S.
Treasury Securities with remaining maturities of twenty years or more. The
portion of the Fund's portfolio allocated to bonds is invested so as to
replicate the performance characteristics of the LBT Bond Index.
A key component of the Index Allocation Model is a set of assumptions
concerning expected risk and return and investor attitudes toward risk which are
incorporated into the index allocation decision. The principal inputs of
financial data to the Index Allocation Model currently are (i) consensus
estimates of the earnings, dividends and payout ratios on a broad cross-section
of common stocks as reported by independent financial reporting services which
survey a broad cross-section of Wall Street analysts, (ii) the estimated current
yield to maturity on new long-term corporate bonds rated "AA" by S&P, (iii) the
present yield on money market instruments, (iv) the historical statistical
standard deviation in investment return for each class of asset, and (v) the
historical statistical correlation of investment returns among the various asset
classes in which the Index Allocation Fund invests. Using these data, the Index
Allocation Model is run daily to determine the recommended asset allocation.
Although BGFA intends to use the Model as bases for its investment
decisions, BGFA may change from time to time the criteria and methods it uses to
implement the Model's recommendations if it believes such a change is desirable
for the Fund. Nevertheless, Wells Fargo Bank has continuing and exclusive
authority over the management of the Fund, the conduct of its affairs and the
disposition of the Funds' assets, and Wells Fargo Bank has the right to reject
BGFA's investment decisions for the Fund if Wells Fargo Bank determines that any
such decision is not consistent with the best interests of the Fund.
U.S. Government Allocation Model. BGFA compares the U.S. Government
--------------------------------
Allocation Fund's investments daily to the U.S. Government Allocation Model's
recommended allocation. The investment model recommends allocations among each
asset class in 5% increments only. Any recommended reallocation will be
implemented in accordance with trading policies that have been designed to take
advantage of market opportunities and to reduce transaction costs. Under current
trading policies employed by BGFA, recommended reallocations may be implemented
promptly upon receipt of recommendations or may not be acted upon for as long as
two to three months thereafter depending on factors such as the percentage
change from previous recommendations and the consistency of recommended
reallocations over a period of time. In addition, the U.S. Government Allocation
Fund generally will invest the net proceeds from the sale of shares of the Fund
and will liquidate existing Fund investments to meet net redemption requirements
in a manner that best allows the Fund's existing asset allocation to follow the
allocation recommended by the computer Model. Notwithstanding any recommendation
of the computer model to the contrary, the Fund will generally maintain at least
that portion of its assets in money market instruments reasonably considered
necessary to meet redemption requirements. In general, cash maintained for
short-term
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liquidity needs is only invested in U.S. Treasury bills, shares other mutual
funds and repurchase agreements. There is no requirement that the Fund maintain
positions in any particular asset class or classes.
BGFA manages other funds which invest in accordance with a substantially
similar version of the Model. The performance of each of those other funds is
likely to vary among themselves and from the performance of the U.S. Government
Allocation Fund. Such variation in performance is primarily due to timing
differences in the implementation of the Model's recommendations, differences in
expenses and liquidity requirements, and the ability of other funds to invest a
higher portion of their assets in short-term investments that may generate a
higher yield, but are not issued or guaranteed by the U.S. Government, its
agencies or instrumentalities.
A key component of the U.S. Government Allocation Model is a set of
assumptions concerning expected risk and return and investor attitudes toward
risk, which are incorporated into the allocation decision. The principal inputs
of financial data to the model currently are: (i) yields on 90-day U.S. Treasury
bills, 5-year U.S. Treasury notes and 30-year U.S. Treasury bonds; (ii) the
expected statistical standard deviation in investment returns for each class of
fixed income instrument; and (iii) the expected statistical correlation of
investment return among the various classes of fixed income instruments. Using
these and other data, the Model is run daily to determine the recommended
allocation. The Model's recommendations are presently implemented in 10%
increments. Because the Fund may shift its investment allocations significantly
from time to time, its performance may differ from funds which invest in one
asset class or from funds with a constant mix of assets.
Although BGFA intends to use the Model as bases for its investment
decisions, BGFA may change from time to time the criteria and methods it uses to
implement the Model's recommendations if it believes such a change is desirable
for the Fund. Nevertheless, Wells Fargo Bank has continuing and exclusive
authority over the management of the Fund, the conduct of its affairs and the
disposition of the Funds' assets, and Wells Fargo Bank has the right to reject
BGFA's investment decisions for the Fund if Wells Fargo Bank determines that any
such decision is not consistent with the best interests of the Fund.
ADDITIONAL PERMITTED INVESTMENT ACTIVITIES
Set forth below are descriptions of certain investments and additional
investment policies for the Funds.
Bonds
-----
The Funds may purchase U.S. Treasury bonds with maturities greater than 20
years. The bond portion of the portfolio of the Funds is generally managed to
attain an average
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maturity of between 22 and 28 years for the U.S. Treasury bonds held. This form
of debt instrument has been selected by BGFA because of the relatively low
transaction costs of buying and selling U.S. Treasury bonds and because of the
low default risk associated with such instruments.
Derivative Securities
---------------------
Some of the permissible investments described herein are considered
"derivative" securities because their value is derived, at least in part, from
the price of another security or a specified asset, index or rate. For example,
the futures contracts and options on futures contracts that the Funds may
purchase are considered derivatives. The Funds may only purchase or sell these
contracts or options as substitutes for comparable market positions in the
underlying securities. Also, asset-backed securities issued or guaranteed by
U.S. Government agencies or instrumentalities and certain floating- and
variable-rate instruments can be considered derivatives. 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. Wells Fargo Bank and BGFA use
a variety of internal risk management procedures to ensure that derivatives use
is consistent with a Fund's investment objective, does not expose the Fund to
undue risk and is closely monitored. These procedures include providing periodic
reports to the Board of Directors concerning the use of derivatives. Also, cash
maintained by the Index Allocation Fund for short-term liquidity needs (e.g., to
meet anticipated redemption requests) will, as a general matter, only be
invested in U.S. Treasury bills, shares of other mutual funds and repurchase
agreements. The use of derivatives by the Asset Allocation, Index Allocation and
U.S. Government Allocation Funds also is subject to broadly applicable
investment policies. For example, a Fund may not invest more than a specified
percentage of its assets in "illiquid securities," including those derivatives
that do not have active secondary markets. Nor may a Fund use certain
derivatives without establishing adequate "cover" in compliance with Securities
and Exchange Commission ("SEC") rules limiting the use of leverage.
Floating- and Variable-Rate Instruments
---------------------------------------
Certain of the debt instruments in which the Funds may invest bear interest
rates that are periodically adjusted at specified intervals or whenever a
benchmark rate or index change. These adjustments generally limit the increase
or decrease in the amount of interest received on debt instruments. The Fund
may purchase certificates of participation in pools of floating- and variable-
rate instruments from banks and other financial institutions. Wells Fargo Bank,
as investment advisor, monitors on an ongoing basis the ability of an issuer of
a demand instrument to pay principal and interest on demand. Events occurring
between the date a Fund elects to demand payment on a floating- or variable-rate
instrument and the date payment is due may affect the ability of the issuer of
the instrument to make payment when due, and unless such demand instrument
permits same-day settlement, such events may affect a Fund's ability to obtain
payment at par. Demand instruments whose demand
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feature is not exercisable within seven days may be treated as liquid, provided
that an active secondary market exists.
Foreign Obligations
-------------------
Each Fund may invest up to 25% of its assets in high-quality, short-term
debt obligations of foreign branches of U.S. banks or U.S. branches of foreign
banks that are denominated in and pay interest in U.S. dollars. Investments by
the Funds 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.
Forward Commitments, When-Issued Purchases and Delayed-Delivery
---------------------------------------------------------------
Transactions
------------
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. 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. Securities purchased on a when-issued or forward commitment basis may
expose the relevant Fund to risk because they may experience price fluctuations
prior to their actual delivery. Purchasing securities on a when-issued or
forward commitment basis can involve the additional risk that the yield
available in the market when the delivery takes place actually may be higher
than that obtained in the transaction itself.
The Funds will segregate cash, U.S. Government obligations or other
high-quality debt instruments in an amount at least equal in value to the Fund's
commitments to purchase when-issued securities. If the value of these assets
declines, the Funds will segregate additional liquid assets on a daily basis so
that the value of the segregated assets is equal to the amount of such
commitments.
Futures Contracts and Options Transactions
------------------------------------------
In General. The Funds may enter into and engage in futures contracts and
options transactions as discussed below. A futures transaction involves a firm
agreement to buy or
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sell a commodity or financial instrument at a particular price on a specified
future date, while an option transaction generally involves a right, which may
or may not be exercised, to buy or sell a commodity or financial instrument at a
particular price on a specified future date. Futures contracts and options are
standardized and exchange-traded, where the exchange serves as the ultimate
counterparty for all contracts. Consequently, the primary credit risk on futures
contracts is the creditworthiness of the exchange. Futures contracts, however,
are subject to market risk (i.e., exposure to adverse price changes).
Although the Funds intend to purchase or sell futures contracts only if
there is an active market for such contracts, no assurance can be given that a
liquid market will exist for any particular contract at any particular time.
Many futures exchanges and boards of trade limit the amount of fluctuation
permitted in futures contract prices during a single trading day. Once the daily
limit has been reached in a particular contract, no trades may be made that day
at a price beyond that limit or trading may be suspended for specified periods
during the trading day. Futures contract prices could move to the limit for
several consecutive trading days with little or no trading, thereby preventing
prompt liquidation of futures positions and potentially subjecting a Fund to
substantial losses. If it is not possible, or a Fund determines not to close a
futures position in anticipation of adverse price movements, the Fund will be
required to make daily cash payments of variation margin.
An option on a futures contract gives the purchaser the right, in return
for the premium paid, to assume a position in a futures contract (a long
position if the option is a call and a short position if the option is a put) at
a specified exercise price at any time during the option exercise period. The
writer (i.e., seller) of the option is required upon exercise to assume an
offsetting futures position (a short position if the option is a call and a long
position if the option is a put). Upon exercise of the option, the assumption of
offsetting futures positions by both the writer and the holder of the option
will be accompanied by delivery of the accumulated cash balance in the writer's
futures margin account in the amount by which the market price of the futures
contract, at exercise, exceeds (in the case of a call) or is less than (in the
case of a put) the exercise price of the option on the futures contract. The
potential loss related to the purchase of options on futures contracts is
limited to the premium paid for the option (plus transaction costs). Because the
value of the option is fixed at the time of sale, there are no daily cash
payments to reflect changes in the value of the underlying contract; however,
the value of the option may change daily, and that change would be reflected in
the net asset value of the relevant Fund.
The Funds may trade futures contracts and options on futures contracts in
U.S. domestic markets, such as the Chicago Board of Trade and the International
Monetary Market of the Chicago Mercantile Exchange. The Funds' futures
transactions must constitute permissible transactions pursuant to regulations
promulgated by the Commodity Futures Trading Commission ("CFTC"). In addition,
the Funds may not engage in futures transactions if the sum of the amount of
initial margin deposits and premiums paid for unexpired options on futures
contracts, other than those contracts entered into for bona fide hedging
purposes, would exceed 5% of the liquidation value of a Fund's assets, after
taking
12
<PAGE>
into account unrealized profits and unrealized losses on such contracts;
provided, however, that in the case of an option on a futures contract that is
in-the money at the time of purchase, the in-the money amount may be excluded in
calculating the 5% liquidation amount. Pursuant to regulations and/or published
positions of the SEC, a Fund may be required to segregate cash or high-quality
money-market instruments in connection with its futures transactions in an
amount generally equal to the entire value of the underlying security.
Initially, when purchasing or selling futures contracts a Fund will be
required to deposit with its custodian in the broker's name an amount of cash or
cash equivalents up to approximately 10% of the contract amount. This amount is
subject to change by the exchange or board of trade on which the contract is
traded, and members of such exchange or board of trade may impose their own
higher requirements. This amount is known as "initial margin" and is in the
nature of a performance bond or good faith deposit on the contract that is
returned to the Fund upon termination of the futures position, assuming all
contractual obligations have been satisfied. Subsequent payments, known as
"variation margin", to and from the broker will be made daily as the price of
the index or securities underlying the futures contract fluctuates, making the
long and short positions in the futures contract more or less valuable. At any
time prior to the expiration of a futures contract, a Fund may elect to close
the position by taking an opposite position, at the then prevailing price,
thereby terminating its existing position in the contract.
The Funds may engage in futures contracts sales to maintain the income
advantage from continued holding of a long-term security while endeavoring to
avoid part or all of the loss in market value that would otherwise accompany a
decline in long-term security prices. If, however, securities prices rise, a
Fund would realize a loss in closing out its futures contract sales that would
offset any increases in prices of the long-term securities they hold.
Another risk in employing futures contracts and options thereon to protect
against cash market price volatility is the possibility that futures prices will
correlate imperfectly with the behavior of the prices of the securities in such
portfolio (the portfolio securities will not be identical to the debt
instruments underlying the futures contracts).
Stock Index Options. The Funds may purchase and write (i.e., sell) put and
call options on stock indices only as a substitute for comparable market
positions in the underlying securities. The aggregate premiums paid on all
options purchased by a Fund may not exceed 20% of the Fund's total assets and
the value of the options written may not exceed 10% of the value of the Fund's
total assets.
A stock index fluctuates with changes of the market values of the stocks
included in the index. The effectiveness of purchasing or writing stock index
options will depend upon the extent to which price movements of the securities
in a Fund's portfolio correlate with price movements of the stock index
selected. Because the value of an index option depends upon movements in the
level of the index rather than the price of a particular stock, whether
13
<PAGE>
a Fund will realize a gain or loss from purchasing or writing stock index
options depends upon movements in the level of stock prices in the stock market
generally or, in the case of certain indices, in an industry or market segment,
rather than movements in the price of particular stock. When a Fund writes an
option on a stock index, such Fund will place in a segregated account with the
Fund's custodian cash or liquid securities in an amount at least equal to the
market value of the underlying stock index and will maintain the account while
the option is open or otherwise will cover the transaction.
Stock Index Futures and Options on Stock Index Futures. The Funds may
invest in stock index futures and options on stock index futures only as a
substitute for a comparable market position in the underlying securities. A
stock index future obligates the seller to deliver (and the purchaser to take),
effectively, an amount of cash equal to a specific dollar amount times the
difference between the value of a specific stock index at the close of the last
trading day of the contract and the price at which the agreement is made. No
physical delivery of the underlying stocks in the index is made. With respect to
stock indices that are permitted investments, each Fund intends to purchase and
sell futures contracts on the stock index for which it can obtain the best price
with consideration also given to liquidity.
Interest-Rate Futures Contracts and Options on Interest-Rate Futures
Contracts. The Funds may invest in interest-rate futures contracts and options
on interest-rate futures contracts as a substitute for a comparable market
position in the underlying securities. The Funds may also sell options on
interest-rate futures contracts as part of closing purchase transactions to
terminate its options positions. No assurance can be given that such closing
transactions can be effected or as to the degree of correlation between price
movements in the options on interest-rate futures and price movements in the
Funds' portfolio securities which are the subject of the transaction.
The Index Allocation Fund will not enter into interest rate futures
contracts and options thereon, for which the aggregate initial margin and
premiums exceed 5% of the fair market value of its assets, after taking into
account unrealized profits and unrealized losses on any such contracts into
which they have entered; provided, however, that the "in-the-money" amount of an
option that was in-the-money at the time of purchase will be excluded in
computing such 5%.
The Asset Allocation, Index Allocation and U.S. Government Allocation Funds
may take advantage of opportunities in the areas of options and futures
contracts and options on futures contracts and any other derivative investments
which are not presently contemplated for use by the Fund or which are not
currently available but which may be developed, to the extent such opportunities
are both consistent with each Fund's investment objective and legally
permissible for the Fund. Before entering into such transactions or making any
such investment, the Fund would provide appropriate disclosure in its Prospectus
or this SAI.
14
<PAGE>
Interest-Rate and Index Swaps. The Funds may enter into interest-rate and
index swaps in pursuit of its investment objectives. Interest-rate swaps involve
the exchange by a Fund with another party of their commitments to pay or receive
interest (for example, an exchange of floating-rate payments for fixed-rate
payments). Index swaps involve the exchange by the Fund with another party of
cash flows based upon the performance of an index of securities or a portion of
an index of securities that usually include dividends or income. In each case,
the exchange commitments can involve payments to be made in the same currency or
in different currencies. A Fund will usually enter into swaps on a net basis. In
so doing, the two payment streams are netted out, with the Fund receiving or
paying, as the case may be, only the net amount of the two payments. If the Fund
enters into a swap, it will maintain a segregated account on a gross basis,
unless the contract provides for a segregated account on a net basis. If there
is a default by the other party to such a transaction, the Fund will have
contractual remedies pursuant to the agreements related to the transaction.
The use of interest-rate and index swaps is a highly specialized activity
which involves investment techniques and risks different from those associated
with ordinary portfolio security transactions. There is no limit, except as
provided below, on the amount of swap transactions that may be entered into by
the Funds. These transactions generally do not involve the delivery of
securities or other underlying assets or principal. Accordingly, the risk of
loss with respect to swaps generally is limited to the net amount of payments
that the Fund is contractually obligated to make. There is also a risk of a
default by the other party to a swap, in which case a Fund may not receive net
amount of payments that such Fund contractually is entitled to receive. The
Funds may invest up to 10% of their net assets in interest-rate and index swaps.
Foreign Currency Transactions. The Asset Allocation and U.S. Government
Allocation Funds may enter into foreign currency transactions. When a Fund
enters into a foreign currency transaction or forward contract, such Fund
deposits, if required by applicable regulations, with the Fund's custodian cash
or high-grade debt securities in a segregated account an amount at least equal
to the value of the Fund's total assets committed to the consummation of the
forward contract. If the value of the securities placed in the segregated
account declines, additional cash or securities are placed in the account so
that the value of the account equals the amount of the Fund's commitment with
respect to the contract.
At or before the maturity of a forward contract, a Fund either may sell a
portfolio security and make delivery of the currency, or may retain the security
and offset its contractual obligation to deliver the currency by purchasing a
second contract pursuant to which such Fund obtains, on the same maturity date,
the same amount of the currency which it is obligated to deliver. If the Fund
retains the portfolio security and engages in an offsetting transaction, such
Fund, at the time of execution of the offsetting transaction, incurs a gain or a
loss to the extent that movement has occurred in forward contract prices.
Should forward prices decline during the period between the Fund's entering into
15
<PAGE>
a forward contract for the sale of a currency and the date it enters into an
offsetting contract for the purchase of the currency, the Fund will realize a
gain to the extent the price of the currency it has agreed to sell exceeds the
price of the currency it has agreed to purchase. Should forward prices
increase, the Fund will suffer a loss to the extent the price of the currency it
has agreed to purchase exceeds the price of the currency it has agreed to sell.
The cost to a Fund of engaging in currency transactions varies with factors
such as the currency involved, the length of the contract period and the market
conditions then prevailing. Because transactions in currency exchange usually
are conducted on a principal basis, no fees or commissions are involved. Wells
Fargo Bank or BGFA, as appropriate, considers on an ongoing basis the
creditworthiness of the institutions with which a Fund enters into foreign
currency transactions. The use of forward currency exchange contracts does not
eliminate fluctuations in the underlying prices of the securities, but it does
establish a rate of exchange that can be achieved in the future. If a
devaluation generally is anticipated, the Fund may not be able to contract to
sell the currency at a price above the devaluation level it anticipates.
The purchase of options on currency futures allows a Fund, for the price of
the premium it must pay for the option, to decide whether or not to buy (in the
case of a call option) or to sell (in the case of a put option) a futures
contract at a specified price at any time during the period before the option
expires.
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 a Fund. Each Fund may invest up to 15% of
its net assets in illiquid securities.
Loans of Portfolio Securities
-----------------------------
The Funds may lend securities from their portfolios to brokers, dealers and
financial institutions (but not individuals) if cash, U.S. Government
obligations or other high-quality debt instruments equal to at least 100% of the
current market value of the securities loan (including accrued interest thereon)
plus the interest payable to such Fund with respect to the loan is maintained
with the Fund. In determining whether to lend a security to a particular
broker, dealer or financial institution, Wells Fargo Bank or BGFA will consider
all relevant facts and circumstances, including the creditworthiness of the
broker, dealer, or financial institution. Any loans of portfolio securities
will be fully collateralized based on values that are marked to market daily.
The Funds will not enter into any portfolio security lending arrangement having
a duration of longer than one year. The principal risk of portfolio lending is
potential default or insolvency of the borrower. In either of these cases, a
Fund could experience delays in recovering securities or
16
<PAGE>
collateral or could lose all or part of the value of the loaned securities. Any
securities that a Fund may receive as collateral will not become part of the
Fund's portfolio at the time of the loan and, in the event of a default by the
borrower, the Fund will, if permitted by law, dispose of such collateral except
for such part thereof that is a security in which the Fund is permitted to
invest. During the time securities are on loan, the borrower will pay such Fund
any accrued income on those securities, and the Fund may invest the cash
collateral and earn additional income or receive an agreed-upon fee from a
borrower that has delivered cash-equivalent collateral. None of the Funds will
lend securities having a value that exceeds one-third of the current value of
its total assets. Loans of securities by any of the Funds will be subject to
termination at the Fund's or the borrower's option. The Funds may pay reasonable
administrative and custodial fees in connection with a securities loan and may
pay a negotiated portion of the interest or fee earned with respect to the
collateral to the borrower or the placing broker. Borrowers and placing brokers
may not be affiliated, directly or indirectly, with the Company, its Advisor, or
its Distributor.
Money Market Instruments and Temporary Investments
--------------------------------------------------
Each Fund may invest varying percentages of their assets in money market
instruments. In addition, the Funds may invest temporary cash balances in the
following high-quality money market instruments: (i) obligations issued or
guaranteed by the U.S. Government, its agencies or instrumentalities, including
government-sponsored enterprises ("U.S. Government obligations"); (ii)
negotiable certificates of deposit, bankers' acceptances and fixed time deposits
and other obligations of domestic banks (including foreign branches) that have
more than $ 1 billion in total assets at the time of investment and are members
of the Federal Reserve System or are examined by the Comptroller of the Currency
or whose deposits are insured by the FDIC; (iii) commercial paper rated at the
date of purchase "P-1" by Moody's Investors Service, Inc. ("Moody's") or "A-1+"
or "A-1" by S&P, or, if unrated, of comparable quality as determined by Wells
Fargo Bank, as investment advisor; (iv) nonconvertible corporate debt securities
(e.g., bonds and debentures) with remaining maturities at the date of purchase
of no more than one year that are rated at least "Aa" by Moody's or "AA" by S&P;
(v) repurchase agreements; and (vi) short-term, U.S. dollar-denominated
obligations of foreign banks (including U.S. branches) that at the time of
investment have more than $10 billion, or the equivalent in other currencies, in
total assets and in the opinion of Wells Fargo Bank, as investment advisor, are
of comparable quality to obligations of U.S. banks which may be purchased by a
Fund.
Letters of Credit. Certain of the debt obligations (including municipal
securities, certificates of participation, commercial paper and other short-
term obligations) which the Funds may purchase may be backed by an
unconditional and irrevocable letter of credit of a bank, savings and loan
association or insurance company which assumes the obligation for payment of
principal and interest in the event of default by the issuer. Only banks,
savings and loan associations and insurance companies which, in the opinion of
17
<PAGE>
Wells Fargo Bank or BGFA, are of comparable quality to issuers of other
permitted investments of such Fund may be used for letter of credit-backed
investments.
Repurchase Agreements. Each Fund may enter into repurchase agreements,
wherein the seller of a security to the Fund agrees to repurchase that security
from the Fund at a mutually agreed upon time and price. A Fund may enter into
repurchase agreements only with respect to securities that could otherwise be
purchased by the Fund. 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, a Fund may incur a loss. In addition, if
bankruptcy proceedings are commenced with respect to the seller of the security,
the Fund's disposition of the security may be delayed or limited.
Each Fund 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 such
Fund's total net assets would be invested in repurchase agreements with
maturities of more than seven days, restricted securities and illiquid
securities. A Fund 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.
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 Fund's 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 Fund's net assets with respect to any one
investment company and (iii) 10% of such Fund's 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.
Pass-Through Obligations
------------------------
The Funds may invest in pass-through obligations that are supported by the
full faith and credit of the U.S. Government (such as those issued by the
Government National Mortgage Association ("GNMA")) or those that are guaranteed
by an agency or instrumentality of the U.S. Government or government-sponsored
enterprise (such as the Federal National Mortgage Association ("FNMA") or the
Federal Home Loan Mortgage Corporation ("FHLMC")) or bonds collateralized by any
of the foregoing.
18
<PAGE>
Short-Term Corporate Debt Instruments
-------------------------------------
Each Fund 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 that 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.
The Funds also may invest in nonconvertible corporate debt securities
(e.g., bonds and debentures) with no more than one year remaining to maturity at
the date of settlement. The Funds will invest only in such corporate bonds and
debentures that are rated at the time of purchase at least "Aa" by Moody's or
"AA" by S&P.
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 such Fund. After
purchase by a Fund, a security may cease to be rated or its rating may be
reduced below the minimum required for purchase by such Fund. Neither event will
require a sale of such security by such Fund. To the extent the ratings given by
Moody's or S&P may change as a result of changes in such organizations or their
rating systems, each Fund will attempt to use comparable ratings as standards
for investments in accordance with the investment policies contained in its
Prospectus and in this SAI. The ratings of Moody's and S&P are more fully
described in the SAI 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
19
<PAGE>
market interest rates decrease. Certain types of U.S. Government Obligations are
subject to fluctuations in yield or value due to their structure or contract
terms.
Warrants
--------
The Funds each may invest in warrants (other than those that have been
acquired in units or attached to other securities). Warrants represent rights to
purchase securities at a specific price valid for a specific period of time. The
price of warrants do not necessarily correlate with the prices of the underlying
securities.
When-Issued Securities
----------------------
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 transactions 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 each Fund will generally
purchase securities with the intention of acquiring them, a Fund 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 segregate cash, U.S. Government obligations or other high-
quality debt instruments in an amount at least equal in value to such Fund's
commitments to purchase when-issued securities. If the value of these assets
declines, the Fund will segregate additional liquid assets on a daily basis so
that the value of the segregated assets is equal to the amount of such
commitments.
RISK FACTORS
Investments in a Fund are not bank deposits or obligations of Wells Fargo
Bank, are not insured by the Federal Deposit Insurance Corporation ("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 equity securities of each Fund are subject to equity market
risk. Equity market risk is the risk that stock prices will fluctuate or decline
over short or even extended periods. Throughout most of 1997, the stock market,
as measured by the S&P 500 Index and other commonly used indices, was trading at
or close to record levels. There can be no guarantee that these performance
levels will continue. The portfolio debt instruments of a Fund are subject to
credit and interest-rate risk. Credit risk is the risk that issuers of the debt
instruments in which a Fund invests may default on the payment of principal
and/or interest. Interest-rate risk is the risk that increases in market
interest rates
20
<PAGE>
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 investment in fixed-income securities will
change in response to various factors, such as changes in interest rates and the
relative financial strength of an issuer. During periods of falling interest
rates, the value of fixed-income securities 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 and floating rate
features.
Securities rated in the fourth highest rating category are regarded by S&P
as having an adequate capacity to pay interest and repay principal, but changes
in economic conditions or other circumstances are more likely to lead to a
weakened capacity to make such repayments. Moody's considers such securities as
having speculative characteristics. Subsequent to its purchase by a Fund, an
issue of securities may cease to be rated or its rating may be reduced below the
minimum rating required for purchase by a Fund. Securities rated below the
fourth highest rating category (sometimes called "junk bonds") are often
considered to be speculative and involve greater risk of default or price
changes due to changes in the issuer's credit-worthiness. The market prices of
these securities may fluctuate more than higher quality securities and may
decline significantly in periods of general economic difficulty.
Illiquid securities, which may include certain restricted 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 Fund.
The advisor may use certain derivative investments or techniques, such as
buying and selling options and futures contracts and entering into currency
exchange contracts or swap agreements, to adjust the risk and return
characteristics of the Fund's investments. 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, duration or value
due to their structure or contract terms. If the 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.
There is, of course, no assurance that a Fund will achieve its investment
objective or be successful in preventing or minimizing the risk of loss that is
inherent in investing in particular types of investment products.
21
<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 Inc.;
President 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, NY 10595 University Teachers College since 1976.
*W. Rodney Hughes, 71 Director Private Investor.
31 Dellwood Court
San Rafael, CA 94901
</TABLE>
22
<PAGE>
<TABLE>
<S> <C> <C>
*J. Tucker Morse, 53 Director Private Investor. Chairman of Home Account
4 Beaufain Street Network, Inc. Real Estate Developer;
Charleston, SC 29401 Chairman of Renaissance Properties Ltd.;
President of Morse Investment Corporation;
and Co-Managing Partner of Main Street
Ventures.
Richard H. Blank, Jr., 41 Chief Operating Vice President of Stephens Inc.; Director of
Officer, Stephens Sports Management Inc.; and
Secretary and Director of Capo Inc.
Treasurer
</TABLE>
Compensation Table
Year Ended March 31, 1997
-------------------------
<TABLE>
<CAPTION>
Total Compensation
Aggregate Compensation from Registrant
Name and Position from Registrant and Fund Complex
- ----------------- ---------------------- ------------------
<S> <C> <C>
Jack S. Euphrat $11,250 $33,750
Director
R. Greg Feltus $ 0 $ 0
Director
Thomas S. Goho $11,250 $33,750
Director
Joseph N. Hankin $ 8,750 $26,250
Director
W. Rodney Hughes $ 9,250 $27,750
Director
Robert M. Joses $11,250 $33,750
Director
J. Tucker Morse $ 9,250 $27,750
Director
</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
23
<PAGE>
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 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 each Fund. 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, Wells Fargo Bank is entitled to
receive a monthly fee at the annual rate, indicated below of each Fund's average
daily net assets:
24
<PAGE>
<TABLE>
<CAPTION>
Annual Rate
Fund (as percentage of net assets)
----- ----------------------------
<S> <C>
Asset Allocation 0.50% up to $250 million
0.40% not $250 million
0.30% over $500 million
Index Allocation 0.70% up to $500 million
0.60% over $500 million
U.S. Government Allocation 0.50% up to $250 million
0.40% next $250 million
0.30% over $500 million
</TABLE>
Asset Allocation and U.S. Government Allocation Funds. Prior to April 29,
-----------------------------------------------------
1996, the Funds each invested directly in a portfolio of securities and Wells
Fargo Bank provided investment advisory services directly to the Funds. On April
29, 1996, the Funds were converted to a "master/feeder structure" and began to
invest all of their respective assets in a corresponding Master Portfolio, with
an identical investment objective, of Master Investment Trust, another open-end
investment company. The Master Portfolios were advised by Wells Fargo Bank and
Wells Fargo Bank was entitled to receive the same level of advisory fees from
the Master Portfolios as it receives from the Funds. These Funds operated as
part of a master/feeder structure from April 29, 1996 to December 12, 1997, at
which time the master/feeder structure was dissolved.
Index Allocation Fund. Prior to the Consolidation, Wells Fargo Bank served
---------------------
as investment advisor to the Overland Index Allocation predecessor portfolio and
was entitled to receive the same level of advisory fees from the predecessor
portfolio as it now receives from the Index Allocation Fund.
For the period indicated below, the Funds paid to Wells Fargo Bank the
following advisory fees and Wells Fargo Bank waived the indicated amounts:
25
<PAGE>
<TABLE>
<CAPTION>
Six-Month
Period Ended
3/31/97*
------------
Fees Paid Fees Waived
--------- -----------
<S> <C> <C>
Asset Allocation $2,132,577 $ 0
U.S. Government Allocation $ 254,002 $ 0
Index Allocation N/A
</TABLE>
________________________
* For the Asset Allocation and U.S. Government Allocation Funds, these amounts
reflect amounts paid by the corresponding Master Portfolio.
For the periods indicated below, the Funds paid to Wells Fargo Bank the
following advisory fees. Wells Fargo Bank has not waived any advisory fees paid
by the Funds, the predecessor portfolio or Master Portfolios, except that during
1996 it waived $1,324 in advisory fees payable by the Index Allocation
predecessor portfolio.
<TABLE>
<CAPTION>
Nine-Month
Period Ended Year Ended Year Ended
Fund 9/30/96/1/ 12/31/95 12/31/94
- ---- ------------ ---------- ----------
<S> <C> <C> <C>
Asset Allocation $3,117,722 $3,814,364 $3,907,880
U.S. Government Allocation $ 539,657 $ 680,049 $1,034,079
Index Allocation/2/ $ 525,093 $ 424,416 $ 424,899
</TABLE>
_______________
/1/ For the Asset Allocation and U.S. Government Allocation Funds, these
amounts include both amounts paid by the Fund for the period from 1/1/96 to
4/28/96 and amounts paid by the corresponding Master Portfolio for the
period from 4/29/96 to 9/30/96.
/2/ These amounts reflect amounts paid by the Overland predecessor portfolio.
For 1996, these amounts are for the year ended December 31, 1996, the
predecessor portfolio's most recently completed fiscal year, and not the
period ended September 30, 1996.
General. Each Fund's 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 respective Fund's outstanding
voting securities or by the Company's Board of Directors and (ii) by a majority
of the Directors of the Company who are not parties to the Advisory Contract or
"interested persons" (as defined in the 1940 Act) of any such party. A Fund's
Advisory Contract may be terminated on 60 days' written notice by either party
and will terminate automatically if assigned.
INVESTMENT SUB-ADVISOR. Wells Fargo Bank has engaged BGFA to serve as
----------------------
Investment Sub-Advisor to each Fund. Subject to the direction of the Company's
Board of Directors and the overall supervision and control of Wells Fargo Bank
and the Company, BGFA makes recommendations regarding the investment and
reinvestment of the Funds'
26
<PAGE>
assets. BGFA is responsible for implementing and monitors the performance of the
proprietary investment models employed with respect to a Fund. BGFA furnishes to
Wells Fargo Bank periodic reports on the investment activity and performance of
the Funds. BGFA and also furnishes such additional reports and information as
Wells Fargo Bank and the Company's Board of Directors and officers may
reasonably request.
As compensation for its sub-advisory services, BGFA is entitled to receive
a monthly fee equal to an annual rate of 0.20% of the first $500 million of the
Asset Allocation and Index Allocation Funds' average daily net assets, 0.15% of
the next $500 million of the Funds' net assets, and 0.10% of net assets over $1
billion. As compensation for sub-advisory services for the U.S. Government
Allocation Fund, BGFA is entitled to receive a monthly fee equal to an annual
rate of 0.05% of the first $100 million of the U.S. Government Allocation Fund's
average daily net assets, 0.04% of the next $50 million of the Fund's net
assets, and 0.03% of net assets over $150 million. These fees may be paid by
Wells Fargo Bank or directly by the Fund. If the sub-advisory fee is paid
directly by the Fund, the compensation paid to Wells Fargo Bank for advisory
fees will be reduced accordingly.
The predecessor Master Portfolios were also sub-advised by BGFA, and from
October 30, 1997 to December 12, 1997, BGFA was entitled to receive the fees
described above. Prior to October 30, 1997, BGFA was entitled to receive a
monthly fee equal to an annual rate of 0.20% of the Asset Allocation and Index
Allocation Funds' average daily net assets, and 0.15% of the U.S. Government
Allocation Fund's average daily net assets plus an annual payment of $40,000.
BGFA was created by the reorganization of Wells Fargo Nikko Investment
Advisors ("WFNIA"), a former affiliate of Wells Fargo Bank, with and into an
affiliate of Wells Fargo Institutional Trust Company, N.A. Prior to January 1,
1996, WFNIA served as sub-advisor to the Funds and the predecessor portfolios
under substantially similar terms as are currently in effect.
For the period indicated below, the Funds paid to BGFA the following sub-
advisory fees, without waivers:
<TABLE>
<CAPTION>
Six-Month
Period Ended
Fund 3/31/97/*/
---- -----------
<S> <C>
Asset Allocation $52,443
U.S. Government Allocation $ 9,971
Index Allocation N/A
</TABLE>
________________________
/*/ For the Asset Allocation and U.S. Government Allocation Funds, these
amounts reflect amounts paid by the corresponding Master Portfolio.
27
<PAGE>
For the periods indicated below Wells Fargo Bank paid to BGFA/WFNIA the
sub-advisory fees indicated. No sub-advisory fees were waived during these
periods.
<TABLE>
<CAPTION>
Nine-Month
Period Ended Year Ended Year Ended
Fund 9/30/96/1/ 12/31/95 12/31/94
---- ---------- -------- --------
<S> <C> <C> <C>
Asset Allocation $ 1,714,245 $2,043,249 $2,106,980
U.S. Government Allocation $ 192,067 $ 244,478 $ 353,761
Index Allocation/2/ $ 210,226 $ 177,707 $ 424,899
</TABLE>
_______________
/1/ For the Asset Allocation and U.S. Government Allocation Funds, these
amounts include both amounts paid by the Fund for the period from 1/1/96
to 4/28/96 and amounts paid by the corresponding Master Portfolio for the
period from 4/29/96 to 9/30/96.
/2/ These amounts reflect amounts paid by the Overland predecessor portfolio.
For 1996, these amounts are for the year ended December 31, 1996, the
predecessor portfolio's most recently completed fiscal year, and not the
---
period ended September 30, 1996.
General. Each Fund's Sub-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 respective Fund's outstanding
voting securities or (ii) by the Company's Board of Directors, including a
majority of the Directors of the Company who are not parties to the Sub-Advisory
Contract or "interested persons" (as defined in the 1940 Act) of any such party.
A Fund's Sub-Advisory Contract may be terminated on 60 days written notice by
either party and will terminate automatically if assigned.
ADMINISTRATOR AND CO-ADMINISTRATOR. The Company has retained Wells Fargo
----------------------------------
Bank as Administrator and Stephens as Co-Administrator on behalf of each Fund.
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
each Fund's 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 each Fund; and (ii) general supervision
relative to the compilation of data required for the preparation of periodic
reports distributed to the Company's officers and Board of Directors. Wells
Fargo Bank and Stephens also furnish office space and certain facilities
required for conducting the 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
28
<PAGE>
receive a monthly fee of 0.03% and 0.04%, respectively, of the average daily net
assets of each Fund. Prior to February 1, 1998, the Administrator and Co-
Administrator were entitled to receive a monthly fee of 0.04% and 0.02%,
respectively, of the average daily net assets of each Fund. In connection with
the change in fees, the responsibility for performing various administration
services was shifted to the Co-Administrator.
Prior to February 1, 1997, Stephens served as sole Administrator to the
Funds. Stephens performed substantially the same services now provided by
Stephens and Wells Fargo Bank and was entitled to receive for its services a fee
of 0.05% of the Asset Allocation and U.S. Government Allocation Funds' average
daily net assets. Stephens was entitled to receive a monthly fee from the Index
Allocation predecessor portfolio at the annual rate of 0.10% of its average
daily net assets up to $200 million and 0.05% in excess of $200 million.
For the period indicated below, the Funds paid the following dollar amounts
to Wells Fargo Bank and Stephens for administration and co-administration fees:
<TABLE>
<CAPTION>
Six-Month
Period Ended
3/31/97
-------
Fund Total Wells Fargo Stephens
---- ----- ----------- --------
<S> <C> <C> <C>
Asset Allocation $232,506 $ 46,501 $186,005
Index Allocation/*/ $ 75,203 N/A $ 75,203
U.S. Government Allocation $ 18,865 $ 3,773 $ 15,092
</TABLE>
- --------------------
/*/ Indicates fees paid by or on behalf of the Overland predecessor portfolio
for the year ended December 31, 1996, the predecessor portfolio's most
recently completed fiscal year, and not the period ended March 31, 1997.
---
For the periods indicated below, the Funds and the predecessor portfolio
paid the following dollar amounts to Stephens for administration fees:
<TABLE>
<CAPTION>
Nine-Month
Period Ended Year Ended Year Ended
Fund 9/30/96 12/31/95 12/31/94
---- ------- -------- --------
<S> <C> <C> <C>
Asset Allocation $257,419 $306,436 $315,787
U.S. Government Allocation $ 32,354 $ 40,803 $ 62,168
Index Allocation $ 75,203/*/ $ 60,627 $ 66,524
</TABLE>
____________________
/*/ Indicates fees paid by or on behalf of the Overland predecessor portfolio
for the year ended December 31, 1996, the predecessor portfolio's most
recently completed fiscal year, and not the period ended September 30,
---
1996.
29
<PAGE>
DISTRIBUTOR. Stephens Inc. ("Stephens", the "Distributor"), located at 111
-----------
Center Street, Little Rock, Arkansas 72201, serves as Distributor for the Funds.
Each Fund has adopted a 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 agreement related to the Plans (the "Non-Interested
Directors").
Under the Plans, and pursuant to the related Distribution Agreement, the
Funds may pay Stephens the amounts 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.
<TABLE>
<CAPTION>
Fund Fee
---- ---
<S> <C>
Asset Allocation
Class B 0.70%
Index Allocation
Class A 0.25%
Class B 0.75%
Class C 0.75%
U.S. Government Allocation
Class B 0.70%
</TABLE>
The actual fee payable to the Distributor by the above-indicated Classes 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.
Under the Plans in effect for the Class A shares of the Asset Allocation
and U.S. Government Allocation Funds, each Fund may defray all or part of the
cost of preparing and printing prospectuses and other promotional materials and
of delivering prospectuses
30
<PAGE>
and promotional materials to prospective shareholders by paying on an annual
basis up to 0.05% of the respective Fund's average daily net assets attributable
to Class A shares. The Plans for the Class A shares of these Funds provide only
for the reimbursement of actual expenses.
For the six-month period ended March 31, 1997, the Asset Allocation and
U.S. Government Allocation Funds' Distributor received the following fees for
distribution-related services, as set forth below under each such Fund's Plan:
<TABLE>
<CAPTION>
Printing &
Mailing Marketing Compensation
Fund Total Prospectus Brochures to Dealers
---- ----- ---------- --------- ----------
<S> <C> <C> <C> <C>
Asset Allocation
Class A $ 59,745 $0 $59,745 N/A
Class B $275,600 N/A N/A $275,600
U.S. Government Allocation
Class A $ 6,166 $0 $ 6,166 N/A
Class B $ 24,275 N/A N/A $ 24,275
</TABLE>
For the nine-month period ended September 30, 1996, the Asset Allocation
and U.S. Government Allocation Funds' Distributor received the following fees
for distribution-related services, as set forth below under each such Fund's
Plan:
<TABLE>
<CAPTION>
Printing &
Mailing Marketing Compensation
Fund Total Prospectus Brochures to Dealers
---- ----- ---------- --------- ----------
<S> <C> <C> <C> <C>
Asset Allocation
Class A $154,937 $10,773 $144,164 N/A
Class B $255,252 N/A N/A $255,252
U.S. Government Allocation
Class A $ 11,912 $ 464 $ 11,448 N/A
Class B $ 27,524 N/A N/A $ 27,524
N/A
</TABLE>
For the year ended December 31, 1996, the Index Allocation predecessor
portfolio's Distributor received the following fees for distribution-related
services as set forth below under the Fund's Plan:
31
<PAGE>
<TABLE>
<CAPTION>
Printing &
Mailing Marketing Compensation to
Total Prospectus Brochures Underwriters
----- ----------- ---------- ---------------
<S> <C> <C> <C> <C>
Class A $137,481 N/A N/A $137,481
Class D $151,575 N/A N/A $151,575
</TABLE>
For the periods indicated above, WFSI and its registered representatives
received no compensation under the Distribution Plans.
General. Each Plan will continue in effect from year to year if such
-------
continuance is approved by a majority vote of both the Directors of the Company
and the Non-Interested Directors. Any Distribution Agreement related to the
Plans also must be approved by such vote of the Directors and the Non-Interested
Directors. Such Agreement will terminate automatically if assigned, and may be
terminated at any time, without payment of any penalty, by a vote of a majority
of outstanding voting securities of the relevant class of the Fund 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 requires that the Treasurer of the Company shall provide to the
Directors, and the Directors shall review, at least quarterly, a written report
of the amounts expended (and purposes therefor) under the Plans. The Rule also
requires that the selection and nomination of Directors who are not "interested
persons" of the Company be made by such disinterested Directors.
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
authorize 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 Fund assets and ultimately corresponding economic efficiencies (i.e.,
lower per-share transaction costs and fixed expenses) that are generated by
increased assets under management.
ADMINISTRATIVE SERVICING AGENT. The Index Allocation Fund has adopted a
------------------------------
Shareholder Administrative Servicing Plan (the "Administrative Servicing Plan")
on behalf
32
<PAGE>
of its Class A shares. Pursuant to the Administrative Servicing Plan, the Fund
may enter into Administrative Servicing Agreements with administrative servicing
agents (broker/dealers, banks and other financial institutions, which may
include Wells Fargo Bank and its affiliates) who are dealers/holders of record,
or that otherwise have a servicing relationship with the beneficial owners, of
the Fund's Class A shares. Administrative servicing agents agree to perform
shareholder administrative and liaison services which may include, among other
things, maintaining an omnibus account with the Fund, aggregating and
transmitting purchase, exchange and redemption orders from its customers,
answering customer inquiries regarding a shareholder's accounts in the Fund, and
providing such other services as the Company or a customer may reasonably
request. Administrative servicing agents are entitled to a fee which will not
exceed 0.25%, on an annualized basis, of the average daily net assets of the
Class A shares represented by the shares owned of record or beneficially by the
customers of the administrative servicing agent during the period for which
payment is being made. In no case shall shares be sold pursuant to the Class A
distribution plan while being sold pursuant to its Administrative Servicing
Plan.
The Administrative Servicing Plan will continue in effect from year to year
if such continuance is approved from year to year if such continuance is
approved by a majority vote of the Directors of the Company. Any form of
Servicing Agreement related to the plans also must be approved by such vote of
the Directors. Servicing Agreements will terminate automatically if assigned,
and may be terminated at any time, without payment of any penalty, by a vote of
a majority of the outstanding shares of the Class A shares of the fund. The
Administrative Servicing Plans may not be amended to increase materially the
amount payable thereunder without the approval of a majority of the outstanding
shares of the Class A shares of the Fund, and no other material amendment to the
Plan or related Administrative Servicing Agreements may be made except by a
majority of the Directors.
The Administrative 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 Plan.
SHAREHOLDER SERVICING AGENT. The Funds have approved Shareholder Servicing
---------------------------
Plans and have entered into related shareholder servicing agreements with
financial institutions, including Wells Fargo Bank on behalf of their classes of
shares, with the exception of Class A of the Index Allocation Fund which has an
Administrative Servicing Plan and Agreement. Under the agreements, Shareholder
Servicing Agents (including Wells Fargo Bank) agree to perform, as agents for
their customers, administration 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 to a shareholder may reasonably
request. For providing shareholder services, a Servicing Agent is entitled to a
fee from the applicable Fund, 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
33
<PAGE>
payable under the Shareholder Servicing Plans are shown below. The Servicing
Plans and related forms of shareholder servicing agreements were approved by the
Company's Board of Directors and provide that a Fund shall not be obligated to
make any payments under such Plans or related Agreements that exceed the maximum
amounts payable under the Conduct Rules of the NASD.
<TABLE>
<CAPTION>
Fund Fee
---- ---
<S> <C>
Asset Allocation
Class A 0.30%
Class B 0.30%
Index Allocation
Class B 0.25%
Class C 0.25%
U.S. Government Allocation
Class A 0.30%
Class B 0.30%
</TABLE>
For the period indicated below, the dollar amounts of shareholder servicing
fees (after waivers) paid by the Funds to Wells Fargo Bank or its affiliates
were as follows:
<TABLE>
<CAPTION>
Six-Month Nine-Month
Period Ended Period Ended
Fund 3/31/97 9/30/96
---- ------- -------
<S> <C> <C>
Asset Allocation Fund - Class A $1,648,234 $2,464,701
Asset Allocation Fund - Class B $ 118,374 $ 109,487
Index Allocation - Class C/*/ $ 50,525 N/A
U.S. Government Allocation Fund - Class A $ 76,579 $ 310,872
U.S. Government Allocation Fund - Class B $ 5,608 $ 12,608
</TABLE>
____________________
/*/ Reflects amounts paid by the Class D shares of the Overland predecessor
portfolio. This amount is for the year ended December 31, 1996, the
predecessor portfolio's most recently completed fiscal year, and not the
---
period ended March 31, 1997.
General. Each 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 persons" (as
defined in the 1940 Act) of the Funds ("Non-Interested Directors"). Any form of
Servicing Agreement related to a 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 of a majority of
the Board of Directors, including a majority of the Non-
34
<PAGE>
Interested Directors. No material amendment to the Servicing Plans or related
Servicing Agreements may be made except by a majority of both the Directors of
the Company and the Non-Interested Directors.
Each 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. Barclays Global Investors, N.A. ("BGI") acts as Custodian for
---------
each Fund. The Custodian, among other things, maintains a custody account or
accounts in the name of each Fund; receives and delivers all assets for each
Fund upon purchase and upon sale or maturity; collects and receives all income
and other payments and distributions on account of the assets of each Fund and
pays all expenses of each Fund. For its services as Custodian, BGI is not
entitled to receive compensation so long as its subsidiary, BGFA, is entitled to
receive fees for providing investment advisory services to the Fund. Prior to
the Consolidation, Wells Fargo Bank served as Custodian to the predecessor
portfolio.
For the six-month period ended March 31, 1997, and the nine-month period
ended September 30, 1996, the Asset Allocation and U.S. Government Allocation
Funds did not pay any custody fees. For the year ended December 31, 1996, the
Index Allocation predecessor portfolio did not pay any custody fees.
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.
For the six-month period ended March 31, 1997 and the nine-month period
ended September 30, 1996, the Funds did not pay any fund accounting fees.
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 each Fund's average daily net assets of each class of shares. Under the
prior transfer agency agreement, Wells Fargo Bank was entitled to receive a per
account fee plus transaction fees and out-of-pocket related costs with a minimum
of $3,000 per month per Fund, unless net assets of a Fund were under $20
million. For as long as a Fund's assets remained under $20 million, the Fund
was not charged any transfer agency fees.
For the periods indicated below, the Funds paid the following dollar
amounts in transfer and dividend disbursing agency fees, after waivers, to Wells
Fargo Bank:
35
<PAGE>
<TABLE>
<CAPTION>
Six-Month Nine-Month
Period Ended Period Ended
Fund 3/31/97 9/30/96
---- -------- -------
<S> <C> <C>
Asset Allocation Fund $ 0 $662,394
U.S. Government Allocation Fund $ 0 $ 77,292
Index Allocation Fund/*/ N/A $ 0
</TABLE>
_________________________
/*/ Indicates fees paid by or on behalf of the Overland predecessor portfolio
for the year ended December 31, 1996, the predecessor portfolio's most
recently completed fiscal year, and not the period ended March 31, 1997.
---
UNDERWRITING COMMISSIONS. For the six month period ended March 31, 1997,
------------------------
the aggregate dollar amount of underwriting commissions paid to Stephens on
sales/redemptions of the Company's shares was $2,296,243. Stephens retained
$241,806 of such commissions. WFSI and its registered representatives received
$1,719,000 and $335,437, respectively, of such commissions.
For the nine-month period ended September 30, 1996, the aggregate amount of
underwriting commissions paid to Stephens on sales/redemptions of the Company's
shares was $2,917,738. Stephens retained $198,664 of such commissions. WFSI
and its registered representatives received $2,583,027 and $136,047,
respectively, of such commissions.
For the year ended December 31, 1995, the aggregate amount of underwriting
commissions paid to Stephens on sales/redemptions of the Company's shares was
$1,251,311. Stephens retained $162,660 of such commissions. WFSI and its
registered representatives received $399,809 of such commissions.
For the year ended December 31, 1994, Stephens retained $5,415,227, in
underwriting commissions (front-end sales loads and CDSCs, if any) in connection
with the purchase or redemption of the Company's shares. For the year ended
December 31, 1994, Wells Fargo Securities Inc. ("WFSI"), an affiliated broker-
dealer of the Company, and its registered representatives received $904,274 in
underwriting commissions in connection with the purchase or redemption of the
Company's 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
36
<PAGE>
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 yield of a
Fund and the yield of a Class of shares in a Fund, however, may not be
comparable to the yields from investment alternatives because of differences in
the foregoing variables and differences in the methods used to value portfolio
securities, compute expenses and calculate yield.
Performance information may be advertised for non-standardized periods,
including year-to-date and other periods less than a year.
Performance shown or advertised for Class A shares of the Stagecoach Asset
Allocation Fund for periods prior to January 2, 1992, reflects performance of
the shares of the Asset Allocation Fund for the Wells Fargo Investment Trust for
Retirement Programs, a predecessor portfolio with the same investment objective
and policies as the Stagecoach Asset Allocation Fund. Performance shown or
advertised for Class B shares of the Stagecoach Fund for the period from January
2, 1992 to January 1, 1995, reflects performance of the Class A shares of the
Stagecoach Fund, adjusted to reflect Class B expenses. For periods prior to
January 2, 1992, Class B share performance reflects performance of the
predecessor portfolio, adjusted to reflect Class B expenses.
Performance shown or advertised for the Class A shares of the Stagecoach
Index Allocation Fund, reflects performance of the Class A shares of the
Overland Express Index Allocation Fund (the accounting survivor of a merger of
the Funds on December 12, 1997). Performance shown or advertised for the Class
C shares of the Stagecoach Fund reflects performance of the Class D shares of
the Overland Fund; for periods prior to July 1, 1993, Class C share performance
of the Stagecoach Fund reflects performance of the Class A shares of the
Overland Fund adjusted to reflect the sales charges and expenses of the Class C
shares. Performance shown or advertised for the Class B shares of the
Stagecoach Fund reflects performance of the Class D shares of the Overland Fund;
for periods prior to July 1, 1993, Class B share performance of the Stagecoach
Fund reflects performance of the Class A shares of the Overland Fund adjusted to
reflect sales charges and expenses of the Class B shares.
Performance shown or advertised for the Class A shares of the Stagecoach
U.S. Government Allocation Fund for periods prior to January 2, 1992, reflects
performance of the shares of the Fixed Income Strategy Fund of the Wells Fargo
Investment Trust for
37
<PAGE>
Retirement Programs, a predecessor portfolio with the same investment objective
and policies as the Stagecoach Fund. Performance shown or advertised for Class B
shares of the Stagecoach Fund for the period from January 2, 1992 to January 1,
1995, reflects performance of the Class A shares of the Stagecoach Fund,
adjusted to reflect Class B expenses. For periods prior to January 2, 1992,
performance shown or advertised for Class B shares of the Stagecoach Fund,
reflects performance of the predecessor portfolio, adjusted to reflect Class B
expenses.
AVERAGE ANNUAL TOTAL RETURN: Each Fund 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 in
shares of the Fund ("P") over a period of years ("n") according to the following
formula: P(1+T)n = ERV.
Average Annual Total Return for the Applicable Period Ended September 30,
- -------------------------------------------------------------------------
1997/1/
- -------
<TABLE>
<CAPTION>
Five Five
Inception/1/ Inception Year Year Three Year Three Year One Year
With No With No With No With
Sales Sales Sales Sales Sales Sales Sales
Fund Charge/2/ Charge Charge Charge Charge Charge Charge
---- --------- ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
Asset Allocation
Class A 11.84% 12.32% 12.81% 13.86% 17.49% 19.30% 17.89%
Class B 11.68% 11.68% 13.12% 13.32% 17.97% 18.58% 17.67%
Index Allocation
Class A 12.85% 13.41% 15.63% 16.71% 21.03% 22.89% 17.44%
Class B 12.66% 12.66% 15.77% 15.99% 21.38% 22.05% 17.05%
Class C 12.66% 12.66% 15.99% 15.99% 22.05% 22.05% 21.05%
U.S. Government
Allocation
Class A
Class B 7.47% 7.95% 5.62% 6.60% 5.85% 7.48% 3.02%
7.36% 7.36% 5.87% 6.10% 6.10% 6.81% 2.24%
<CAPTION>
One Year
No
Fund Sales Charge
---- ------------
<S> <C>
Asset Allocation
Class A 23.44%
Class B 22.67%
Index Allocation
Class A 23.02%
Class B 22.05%
Class C 22.05%
U.S. Government
Allocation
Class A 7.85%
Class B 7.24%
</TABLE>
____________________
/1/ Return calculations reflect the inclusion of front-end sales charges for
Class A shares and the maximum applicable contingent deferred sales charge
for Class B and Class C shares.
/2/ For purposes of showing performance information, the inception date of each
Fund is as follows: Asset Allocation - 11/13/86; U.S. Government Allocation
-3/31/87; Index Allocation - 4/7/88.
/3/ Performance shown is for the applicable period ended June 30, 1997.
CUMULATIVE TOTAL RETURN: In addition to the above performance information,
------------------------
the Funds may advertise the cumulative total return for one-month, three-month,
six-month and year-to-date periods. The cumulative total return for such
periods is based on the overall percentage change in value of a hypothetical
investment in the Fund, assuming all Fund
38
<PAGE>
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.
Cumulative Total Return for the Applicable Period Ended September 30, 1997/1/
-----------------------------------------------------------------------------
<TABLE>
<CAPTION>
Inception Inception Ten Year Ten Year Five Year Five Year Three Year
With No With No With No With
Sales Sales Sales Sales Sales Sales Sales
Fund Charge/2/ Charge Charge Charge Charge Charge Charge
---- --------- ------ ------ ------ ------ ------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
Asset
Allocation
Class A 237.79% 253.67% 232.71% 248.44% 82.73% 91.36% 62.17%
Class B 233.93% 233.93% 230.63% 230.63% 85.20% 86.86% 64.17%
Index
Allocation/3/
Class A 205.86% 220.24% N/A N/A 106.70% 116.52% 77.28%
Class B 201.19% 201.19% N/A N/A 107.96% 109.96% 78.81%
Class C 201.19% 201.19% N/A N/A 109.96% 109.96% 81.81%
U.S.
Government
Allocation 113.17% 123.19% 118.17% 128.44% 31.46% 37.64% 18.58%
Class A 110.74% 110.74% 116.37% 116.37% 33.02% 34.45% 19.45%
Class B
<CAPTION>
Three Year
No
Sales
Fund Charge
---- ------
<S> <C>
Asset
Allocation
Class A 69.78%
Class B 66.72%
Index
Allocation/3/
Class A 85.61%
Class B 81.81%
Class C 81.81%
U.S.
Government
Allocation 24.15%
Class A 21.86%
Class B
</TABLE>
____________________
/1/ Return calculations reflect the inclusion of front-end sales charges for
Class A shares and the maximum applicable contingent deferred sales charge
for Class B and Class C shares.
/2/ For purposes of showing performance information, the inception date of each
Fund is as follows: Asset Allocation - 11/13/86; U.S. Government Allocation
-3/31/87; Index Allocation - 4/7/88.
/3/ Performance shown is for the applicable period ended June 30, 1997.
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 any reimbursements), c = the average daily number
of shares
39
<PAGE>
outstanding during the period that were entitled to receive dividends, and d =
the maximum offering price per share on the last day of the period.
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 that 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 received 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.
Yield for the Applicable Period Ended September 30, 1997/*/
-----------------------------------------------------------
<TABLE>
<CAPTION>
Fund Thirty Day Yield
---- ----------------
<S> <C>
Asset Allocation 2.25%
Class A 1.84%
Class B
Index Allocation
Class A 1.42%
Class B 0.73%
Class C 0.73%
U.S. Government Allocation
Class A 4.05%
Class B 3.92%
</TABLE>
______________________
/*/ This figure reflects the maximum front-end sales load of 4.50% and the
maximum applicable CDSC.
The yield on each Class of the U.S. Government Allocation Fund will
fluctuate from time to time, unlike bank deposits or other investments that pay
a fixed yield for a stated period of time, and does not provide a basis for
determining future yields since it is based on historical data. Yield is a
function of portfolio quality, composition, maturity and market conditions as
well as the expenses allocated to the Fund.
In addition, investors should recognize that changes in the net asset
values of shares of each Class of the U.S. Government Allocation Fund will
affect the yield of each such Class for any specified period, and such changes
should be considered together with
40
<PAGE>
the yield of each Class in ascertaining the total return for the period to
shareholders of each Fund. Yield information for the Fund or each Class of
shares of the Fund, as the case may be, may be useful in reviewing the
performance of such Fund and for providing a basis for comparison with
investment alternatives. The yield of the Fund or each Class of a Fund, however,
may not be comparable to the yields from investment alternatives because of
differences in the foregoing variables and differences in the methods used to
value portfolio securities, compute expenses and calculate yield.
From time to time and only to the extent the comparison is appropriate for
a Fund or Class of shares, the Company may quote the performance or price-
earning ratio of a Fund or Class in advertising and other types of literature as
compared to the performance of the S&P Index, the Dow Jones Industrial Average,
the Lehman Brothers 20+ Treasury Index, the Lehman Brothers 5-7 Year Treasury
Index, Donoghue's Money Fund Averages, Real Estate Investment Averages (as
reported by the National Association of Real Estate Investment Trusts), Gold
Investment Averages (provided by 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), 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 Fund or Class of shares, as appropriate, also may be compared to those of
other mutual funds having similar objectives. This comparative performance
could be expressed as a ranking prepared by Lipper Analytical Services, Inc.,
CDA Investment Technologies, Inc., Bloomberg Financial Markets or Morningstar,
Inc., independent services which monitor the performance of mutual funds. The
Funds' performance will be calculated by relating net asset value per share at
the beginning of a stated period to the net asset value of the investment,
assuming reinvestment of all gains, distributions and dividends paid, at the end
of the period. The Funds' comparative performance will be based on a comparison
of yields, as described above, or total return, as reported by Lipper, Survey
Publications, Donoghue or Morningstar, Inc.
Any such comparisons may be useful to investors who wish to compare the
past performance of a Fund or 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.
41
<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
a Fund: (i) the Consumer Price Index may be used to assess the real rate of
return from an investment in a Fund; (ii) other government statistics,
including, but not limited to, The Survey of Current Business, may be used to
illustrate investment attributes of a Fund or the general economic, business,
investment, or financial environment in which a Fund operates; (iii) the effect
of tax-deferred compounding on the investment returns of a Fund or a Class of
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 Fund or Class of 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 a Fund invests may be compared to relevant
indices of stocks or surveys (e.g., S&P Industry Surveys) to evaluate a Fund's
historical performance or current or potential value with respect to the
particular industry or sector.
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."
From time to time, the Company also may include in advertisements or other
marketing materials a discussion of certain of the objectives of the investment
strategy of the Funds and a comparison of this strategy with other investment
strategies. In particular, the responsiveness of these Funds as to changing
market conditions may be discussed. For example, the Company may describe the
benefits derived by having Wells Fargo Bank monitor and reallocate investments
among the asset categories described in the Prospectus of each Fund and Fund.
The Company's advertising or other marketing material also might set forth
illustrations depicting examples of recommended allocations in different market
conditions. It may state, for example, that when the model indicates that
stocks represent a better value than bonds or money market instruments, the
Asset Allocation Fund or Index Allocation Fund might consist of 70% stocks, 25%
bonds and 5% money market instruments and that when the model indicates that
bonds represent a better value than stocks or money market instruments, the
balance of assets might shift to 60% bonds, 20% stocks and 20% money market
instruments.
The Company also may discuss in advertising and other types of literature
that a Fund has 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 Fund. The
42
<PAGE>
assigned rating would not be a recommendation to purchase, sell or hold the
Fund's shares since the rating would not comment on the market price of the
Fund's shares or the suitability of the Fund for a particular investor. In
addition, the assigned rating would be subject to change, suspension or
withdrawal as a result of changes in, or unavailability of, information relating
to the Fund or its investments. The Company may compare a Fund's performance
with other investments which are assigned ratings by NRSROs. Any such
comparisons may be useful to investors who wish to compare the Fund's past
performance with other rated investments.
From time to time, the Funds may use the following statements, or
variations thereof, in advertisements and other promotional materials: "Wells
Fargo Bank, as a Shareholder Servicing Agent for the Stagecoach Funds, provides
various services to its customers that are also shareholders of the Funds.
These services may include access to Stagecoach Funds' account information
through Automated Teller Machines ("ATMs"), the placement of purchase and
redemption requests for shares of the Funds through ATMs and the availability of
combined Wells Fargo Bank and Stagecoach Funds account statements."
The Company also 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 its
investment advisor or sub-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 also may disclose in sales literature the distribution rate on
the shares of each class of the Asset or Government Allocation Funds.
Distribution rate, which may be annualized, is the amount determined by dividing
the dollar amount per share of the most recent dividend by the most recent NAV
or maximum offering price per share as of a date specified in the sales
literature. Distribution rate will be accompanied by the standard 30-day yield
as required by the SEC.
The Company also may discuss in advertising and other types of literature
the features, terms and conditions of Wells Fargo Bank accounts through which
investments in the Funds may be made via a "sweep" arrangement, including,
without limitation, the Managed Sweep Account, Money Market Checking Account,
California Tax-Free Money Market Checking Account, Money Market Access Account
and California Tax-Free Money Market Access Account (collectively, the "Sweep
Accounts"). Such advertisements and other literature may include, without
limitation, discussions of such
43
<PAGE>
terms and conditions as the minimum deposit required to open a Sweep Account, a
description of the yield earned on shares of the Funds through a Sweep Account,
a description of any monthly or other service charge on a Sweep Account and any
minimum required balance to waive such service charges, any overdraft protection
plan offered in connection with a Sweep Account, a description of any ATM or
check privileges offered in connection with a Sweep Account and any other terms,
conditions, features or plans offered in connection with a Sweep Account. Such
advertising or other literature may also include a discussion of the advantages
of establishing and maintaining a Sweep Account, and may include statements from
customers as to the reasons why such customers have established and maintained a
Sweep Account.
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 the Funds 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.
44
<PAGE>
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 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 of the Funds 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 a Fund and that such Fund receives satisfactory
assurances that (i) it will have good and marketable title to the securities
received by it; (ii) that the securities are in proper form for transfer to the
Fund; and (iii) adequate information will be provided concerning the basis and
other matters relating to the securities.
Under the 1940 Act, the 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 Fund
45
<PAGE>
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
Fund as provided from time to time in the Prospectus.
PORTFOLIO TRANSACTIONS
The Company has no obligation to deal with any dealer or group of dealers
in the execution of transactions in portfolio securities. Subject to policies
established by the Company's Board of Directors, Wells Fargo Bank is responsible
for each Fund's portfolio decisions and the placing of portfolio transactions.
In placing orders, it is the policy of the Company to obtain the best results
taking into account the dealer's general execution and operational facilities,
the type of transaction involved and other factors such as the dealer's risk in
positioning the securities involved. While Wells Fargo Bank generally seeks
reasonably competitive spreads or commissions, the Funds will not necessarily be
paying the lowest spread or commission available.
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. Each of
the Funds also will purchase portfolio securities in underwritten offerings and
may purchase securities directly from the issuer. Generally, municipal
obligations and taxable money market securities are traded on a net basis and do
not involve brokerage commissions. The cost of executing a Fund's portfolio
securities transactions will consist primarily of dealer spreads and
underwriting commissions. Under the Act, persons affiliated with the Company
are prohibited from dealing with the Company as a principal in the purchase and
sale of securities unless an exemptive order allowing such transactions is
obtained from the SEC or an exemption is otherwise available. The Fund may
purchase securities from underwriting syndicates of which Stephens or Wells
Fargo Bank is a member under certain conditions in accordance with the
provisions of a rule adopted under the Act and in compliance with procedures
adopted by the Board of Directors.
Wells Fargo Bank, as the Investment Advisor to 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,
46
<PAGE>
and not all of these services may be used by Wells Fargo Bank in connection with
advising the Funds.
Asset Allocation and Index Allocation Funds. Purchases and sales of equity
-------------------------------------------
securities on a securities exchange are effected through brokers who charge a
negotiated commission for their services. Orders may be directed to any broker
including, to the extent and in the manner permitted by applicable law, Stephens
or Wells Fargo Securities Inc. In the over-the-counter market, securities are
generally traded on a "net" basis with dealers acting as principal for their own
accounts without a stated commission, although the price of the security usually
includes a profit to the dealer. In underwritten offerings, securities are
purchased at a fixed price that includes an amount of compensation to the
underwriter, generally referred to as the underwriter's concession or discount.
The Asset Allocation Fund will not deal with Stephens, Wells Fargo Bank or their
affiliates in any transaction in which any of them acts as principal without an
exemptive order from the Commission.
Brokerage Commissions. For the periods indicated below, the Funds paid the
---------------------
following amounts as brokerage commissions, none of which were paid to
affiliated brokers.
<TABLE>
<CAPTION>
Six-Month Nine-Month
Period Ended Year Ended Period Ended Year Ended Year Ended
Fund 3/31/97 12/31/96 9/30/96 12/31/95 12/31/94
- ---- ------- -------- ------- -------- --------
<S> <C> <C> <C> <C> <C>
Asset Allocation N/A N/A $6,561 $34,488 $99,002
Index Allocation N/A $2,317 N/A $ 0 $ 0
U.S. Government
Allocation N/A N/A $ 0 $ 0 $ 0
</TABLE>
Securities of Regular Broker/Dealers. As of March 31, 1997, neither the
------------------------------------
Asset Allocation Fund nor the U.S. Government Allocation Fund owned securities
of their "regular brokers or dealers" or their parents, as defined in the 1940
Act. The predecessor portfolio to the Index Allocation Fund did not own
securities of its "regular brokers or dealers" as of December 31, 1996.
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 Fund's 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
47
<PAGE>
generate short-term capital gain tax consequences. Portfolio turnover rate is
not a limiting factor when Wells Fargo Bank deems portfolio changes appropriate.
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 Fund's 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 a Fund; expenses of shareholders' meetings; expenses relating
to the issuance, registration and qualification of Fund shares; pricing
services, and any extraordinary expenses. Expenses attributable to a Fund are
charged against a Fund's assets. General expenses of the Company are allocated
among all of the funds of the Company, including a Fund, in a manner
proportionate to the net assets of each Fund, on a transactional basis, or on
such other basis as the Company's Board of Directors deems equitable.
FEDERAL INCOME TAXES
The 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 to each Fund, rather than to the Company as
a whole. In addition, net capital gain, net
48
<PAGE>
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 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
(if any) 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.
49
<PAGE>
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 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 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.
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 provisions of Section 1256. If a
regulated investment company were treated as entering into "straddles" by
engaging in certain financial forward, futures or option contracts, such
straddles could be characterized as "mixed straddles" if the futures, forwards,
or options comprising a part of such straddles were governed by Section 1256 of
the Code. The regulated investment company may make one or more elections with
respect to "mixed
50
<PAGE>
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 transaction rules, short-term capital loss on
straddle positions may be recharacterized as long-term capital loss, and long-
term capital gain may be characterized as short-term capital gain or ordinary
income.
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 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 a Fund purchases shares in a "passive foreign investment company"
("PFIC"), the Fund may be subject to federal income tax and an interest charge
imposed by the IRS upon certain distributions from the PFIC or the Fund's
disposition of its PFIC shares. If the Fund invests in a PFIC, the Fund intends
to make an available election to mark-to-market its interest in PFIC shares.
Under the election, the Fund will be treated as recognizing at the end of each
taxable year the difference, if any, between the fair market value of its
interest in the PFIC shares and its basis in such shares. In some
circumstances, the recognition of loss may be suspended. The Fund will adjust
its basis in the PFIC shares by the amount of income (or loss) recognized.
Although such income (or loss) will be taxable to the Fund as ordinary income
(or loss) notwithstanding any distributions by the PFIC, the Fund will not be
subject to federal income tax or the interest charge with respect to its
interest in the PFIC.
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.
51
<PAGE>
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 to pass-through entities,
including regulated investment companies, such as the Funds. The Internal
Revenue Service has published a notice describing temporary Regulations to be
issued pursuant to such authority, permitting the application of the reduced
capital gains tax rates to pass-through entities such as the Funds. Under the
Regulations to be issued, if a regulated investment company designates a
dividend as a capital gain dividend for a taxable year ending on or after May 7,
1997, then such regulated investment company may also designate the dividends as
one of two classes: a 20% rate gain distribution, or a 28% rate gain
distribution. Thus, noncorporate shareholders of the Funds may qualify for the
reduced rate of tax on capital gain dividends paid by the Funds, subject only to
the limitation as to the maximum amounts which may be designated in each class.
Such maximum amount for each class is determined by performing the computation
required by Section 1(h) of the Code as if the Fund were an individual whose
ordinary income is subject to a marginal rate of at least 28%.
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 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.
52
<PAGE>
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.
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.
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.
53
<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 will generally 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.
54
<PAGE>
CAPITAL STOCK
The Funds are three of the 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 a Fund 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 Fund's 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 such 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 the Fund. The term "majority," when
referring to approvals to be obtained from shareholders of the Fund, means the
vote of the lesser of (i) 67% of the shares of the Fund represented at a meeting
if the holders of more than 50% of the outstanding shares of the Fund are
present in person or by proxy, or (ii) more than 50% of the outstanding shares
of the Fund. The term "majority," when referring to the approvals to be
obtained from shareholders of the Company as a whole, means the vote of the
lesser of (i) 67% of the Company's shares represented at a meeting if the
holders of more than 50% of the Company's outstanding shares are present in
person or by proxy, or (ii) more than 50% of the Company's outstanding shares.
55
<PAGE>
Shareholders are not entitled to any preemptive rights or subscription.
All shares, when issued, will be fully paid and non-assessable by the Company
for the consideration described in the Prospectus.
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.
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 investment 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 November 30, 1997 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 of a Fund as a whole. The term "N/A" is used where a shareholder
holds 5% or more of a class, but less than 5% of a Fund as a whole. The
shareholders shown for the Index Allocation are the shareholders of the
predecessor portfolio as of November 30, 1997.
5% OWNERSHIP AS OF NOVEMBER 30, 1997
------------------------------------
<TABLE>
<CAPTION>
NAME AND CLASS; TYPE PERCENTAGE PERCENTAGE
FUND ADDRESS OF OWNERSHIP OF CLASS OF FUND
---- ------- ------------ -------- -------
<S> <C> <C> <C> <C>
ASSET ALLOCATION Wells Fargo Bank Class A 74.34% 66.60%
P.O. Box 63015 Beneficially Owned
San Francisco, CA 94163
INDEX Stephens Inc. for the Exclusive Class A 9.65% 6.92%
ALLOCATION Benefit of Customers Record Holder
Class A P.O. Box 34127
Little Rock, AR 72203
Merrill Lynch Pierce Fenner & Class A 10.67% 7.66%
Smith, Inc. Record Holder for Record Holder
Exclusive Benefit of Customers
Attn: Fund Administration
4800 Deer Lake East,
3rd Floor
Jacksonville, FL 32246
</TABLE>
56
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
Class C Merrill Lynch Pierce Fenner & Class C 35.65% 10.06%
Smith, Inc. for Exclusive Record Holder
Benefit of Customers
Attn: Fund Admin.
4800 Deer Lake East,
3rd Floor
Jacksonville, FL 32246
Stephens Inc. Class C 6.62% N/A
For Exclusive Benefit of Record Holder
Customers
P.O. Box 34127
Little Rock, AR 72203
U.S. GOVERNMENT Wells Fargo Bank Class A 51.90% 47.10%
ALLOCATION P.O. Box 63015 Beneficially Owned
San Francisco, CA 94163
</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).
OTHER
The Company's Registration Statement, including the Prospectus and SAI for
the Funds 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 serves 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.
57
<PAGE>
FINANCIAL INFORMATION
The portfolio of investments and unaudited financial statements for the
Asset Allocation and U.S. Government Allocation Funds and the Asset Allocation
and U.S. Government Allocation Master Portfolios for the six-month period ended
September 30, 1997, are hereby incorporated by reference to the Company's Semi-
Annual Reports as filed with the SEC on December 5, 1997.
The portfolio of investments and unaudited financial statements for the
Overland Index Allocation Fund, the predecessor portfolio to the Company's Index
Allocation Fund, for the six-month period ended June 30, 1997, are hereby
incorporated by reference to the Overland Semi-Annual Reports as filed with the
SEC on September 3, 1997.
The portfolio of investments, financial statements and independent
auditors' report for the Asset Allocation and U.S. Government Allocation Funds
and the Asset Allocation and U.S. Government Allocation Master Portfolios for
the year ended March 31, 1997, are hereby incorporated by reference to the
Company's Annual Reports as filed with the SEC on June 4, 1997.
The portfolio of investments, audited financial statements and independent
auditors' report for the Overland Index Allocation Fund for the year ended
December 31, 1996, are hereby incorporated by reference to the Overland Annual
Reports as filed with the SEC on March 11, 1997.
Annual and Semi-Annual Reports may be obtained by calling 1-800-222-8222.
58
<PAGE>
APPENDIX
The following is a description of the ratings given by Moody's and S&P to
corporate bonds and commercial paper.
A-1
<PAGE>
CORPORATE AND MUNICIPAL BONDS
Moody's: The four highest ratings for corporate and municipal bonds are
"Aaa," "Aa," "A" and "Baa." Bonds rated "Aaa" are judged to be of the "best
quality" and carry the smallest amount of investment risk. Bonds rated "Aa" are
of "high quality by all standards," but margins of protection or other elements
make long-term risks appear somewhat greater than "Aaa" rated bonds. Bonds rated
"A" possess many favorable investment attributes and are considered to be upper
medium grade obligations. Bonds rated "Baa" are considered to be medium grade
obligations; interest payments and principal security appear adequate for the
present, but certain protective elements may be lacking or may be
characteristically unreliable over any great length of time. Such bonds lack
outstanding investment characteristics and in fact have speculative
characteristics as well. Moody's applies numerical modifiers in its rating
system: 1, 2 and 3 in each rating category from "Aa" through "Baa" in its rating
system. The modifier 1 indicates that the security ranks in the higher end of
its category; the modifier 2 indicates a mid-range ranking; and the modifier 3
indicates that the issue ranks in the lower end.
S&P: The four highest ratings for corporate and municipal bonds are "AAA,"
"AA," "A" and "BBB." Bonds rated "AAA" have the "highest rating" assigned by S&P
and have "an extremely strong capacity" to pay interest and repay principal.
Bonds rated "AA" have a "very strong capacity" to pay interest and repay
principal and "differ from the highest rated obligations only in small degree."
Bonds rated "A" have a "strong capacity" to pay interest and repay principal,
but are "somewhat more susceptible" to adverse effects of changes in economic
conditions or other circumstances than bonds in higher rated categories. Bonds
rated "BBB" are regarded as having "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. The ratings from "AA" to "BBB" may be modified by the addition of a
plus or minus sign to show relative standing within the category.
CORPORATE AND MUNICIPAL NOTES
Moody's: The highest rating for state and municipal short-term obligations
are "MIG 1," "MIG 2," and "MIG 3" (or "VMIG 1," "VMIG 2" and "VMIG 3" in the
case of an issue having a variable rate demand feature). Notes rated "MIG 1" or
"VMIG 1" are judged to be of the "best quality." Notes rated "MIG 2" or "VMIG 2"
are of "high quality," with margins of protections "ample although not as large
as in the preceding group." Notes rated "MIG 3" or "VMIG 3" are of "favorable
quality," with all security elements accounted for, but lacking the strength of
the preceding grades.
A-2
<PAGE>
S&P: The two highest ratings for corporate, state and municipal notes are
"SP-1" and "SP-2." The "SP-1" rating reflects a "very strong or strong capacity
to pay principal and interest." Notes issued with "overwhelming safety
characteristics" will be rated "SP-1+." The "SP-2" rating reflects a
"satisfactory capacity" to pay principal and interest.
CORPORATE AND MUNICIPAL COMMERCIAL PAPER
Moody's: The highest rating for corporate, state and municipal commercial
paper is "P-1" (Prime-1). Issuers rated "P-1" have a "superior ability for
repayment of senior short-term debt obligations." 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 corporate, state and municipal 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
<PAGE>
STAGECOACH FUNDS, INC.
Telephone: 1-800-222-8222
STATEMENT OF ADDITIONAL INFORMATION
Dated December 15, 1997
as supplemented on February 24, 1998
BALANCED FUND
DIVERSIFIED EQUITY INCOME FUND
EQUITY VALUE FUND
GROWTH FUND
SMALL CAP FUND
STRATEGIC GROWTH 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 six funds in the Stagecoach Family of Funds (each,
a "Fund" and collectively, the "Funds") -- the BALANCED, DIVERSIFIED EQUITY
INCOME, EQUITY VALUE, GROWTH, SMALL CAP and STRATEGIC GROWTH FUNDS. Each Fund
offers Class A Shares and Class B Shares. The Small Cap and Strategic Growth
Funds also offer Class C shares. This SAI relates to all such classes of
shares.
This SAI is not a prospectus and should be read in conjunction with the
Funds' Prospectus, dated December 15, 1997, as supplemented. 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, CA
94120-7066.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Historical Fund Information................................. 1
Investment Restrictions..................................... 2
Additional Permitted Investment Activities.................. 8
Risk Factors................................................ 26
Management.................................................. 28
Performance Calculations.................................... 48
Determination of Net Asset Value............................ 55
Additional Purchase and Redemption Information.............. 56
Portfolio Transactions...................................... 56
Fund Expenses............................................... 59
Federal Income Taxes........................................ 60
Capital Stock............................................... 66
Other....................................................... 68
Independent Auditors........................................ 69
Financial Information....................................... 69
Appendix.................................................... A-1
</TABLE>
i
<PAGE>
HISTORICAL FUND INFORMATION
The Balanced and Equity Value Funds were originally organized on July 1,
1990 as the Pacifica Balanced and Equity Value Funds, investment portfolios of
Pacifica Funds Trust ("Pacifica"). On September 6, 1996, the Pacifica Balanced
Fund and Pacifica Equity Value Fund were reorganized as the Company's Balanced
Fund and Equity Value Fund, respectively.
The Diversified Equity Income Fund was originally organized as the
Company's Diversified Equity Income Fund. The Class A shares of the Fund
commenced operations on November 18, 1992. The Class B shares of the Fund
commenced operations on January 1, 1995. Prior to December 12, 1997, the Fund
was known as the "Diversified Equity Income Fund."
The Growth Fund commenced operations on January 1, 1992, as the successor
to the Select Stock Fund of the Wells Fargo Investment Trust for Retirement
Programs. The predecessor fund's date of inception was August 2, 1990. Prior
to December 12, 1997, the Growth Fund was known as the "Growth and Income Fund."
The Small Cap Fund commenced operations on September 16, 1996, as the
successor to the Small Capitalization Growth Fund for Employee Retirement Plans,
an unregistered bank collective investment Fund. The inception date of the
predecessor fund was November 1, 1994. From September 16, 1996 to December 12,
1997, the Fund invested all of its assets in a master portfolio with a
corresponding investment objective of Master Investment Trust, another
investment company, that, in turn, invested directly in a portfolio of
securities. The Fund currently invests directly in a portfolio of securities
and no longer invests in a master portfolio.
The Strategic Growth Fund commenced operations on March 5, 1996. Prior to
December 12, 1997, the Strategic Growth Fund was known as the "Aggressive Growth
Fund." On December 12, 1997, the Strategic Growth Fund of Overland Express
Funds, Inc. ("Overland"), another investment company advised by Wells Fargo
Bank, was reorganized with and into the Company's Strategic Growth Fund (the
"Consolidation"). For accounting purposes, the Overland Fund is considered the
survivor of the Consolidation. The Class A shares and the Class D shares of the
Overland Fund commenced operations on January 20, 1993 and July 1, 1993,
respectively. The Overland Fund did not offer Class B shares and for accounting
purposes the Class B shares are considered to have commenced operations on
December 12, 1997. The Overland Fund is sometimes referred to throughout this
SAI as the "predecessor portfolio" to the Company's Strategic Growth Fund.
1
<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 holders of a majority (as defined in the Investment Company Act of 1940, as
amended (the "1940 Act")) of the outstanding voting securities of such Fund.
The Balanced Fund and Equity Value Fund may not:
(1) borrow money or pledge or mortgage its assets, except that each Fund
may borrow from banks up to 10% of the current value of its total net assets for
temporary or emergency purposes and those borrowings may be secured by the
pledge of not more than 15% of the current value of its total net assets (but
investments may not be purchased by a Fund while any such borrowings exist);
(2) make loans, except loans of portfolio securities and except that a Fund
may enter into repurchase agreements with respect to its portfolio securities
and may purchase the types of debt instruments described in the Prospectus or
this SAI. Neither Fund will invest in repurchase agreements maturing in more
than seven days (unless subject to a demand feature) if any such investment,
together with any illiquid securities (including securities which are subject to
legal or contractual restrictions on resale) held by a Fund, exceeds 10% of the
value of its total assets;
(3) invest in companies for the purpose of exercising control or
management;
(4) knowingly purchase securities of other investment companies, except
(i) in connection with a merger, consolidation, acquisition, or reorganization;
and (ii) the Funds may invest up to 10% of their net assets in shares of other
investment companies;
(5) invest in real property (including limited partnership interests),
commodities, commodity contracts, or oil, gas and other mineral resource,
exploration, development, lease or arbitrage transactions;
(6) acquire securities subject to restrictions on disposition imposed by
the Securities Act of 1933, if, immediately after and as a result of such
acquisition, the value of such restricted securities and all other illiquid
securities held by a Fund would exceed 10% of the value of the Fund's total
assets;
(7) engage in the business of underwriting securities of other issuers,
except to the extent that the disposal of an investment position may technically
cause it to be considered an underwriter as that term is defined under the
Securities Act of 1933;
(8) sell securities short, except to the extent that a Fund
contemporaneously owns or has the right to acquire at no additional cost
securities identical to those sold short;
2
<PAGE>
(9) purchase securities on margin, except that a Fund may obtain such
short-term credits as may be necessary for the clearance of purchases and sales
of securities;
(10) mortgage, pledge, or hypothecate any of its assets, except as
described in fundamental investment policy (1);
(11) purchase or retain the securities of any issuer, if those individual
officers and Directors of the Company, its Advisor, the sponsor, or the
distributor, each owning beneficially more than 1/2 of 1% of the securities of
such issuer, together own more than 5% of the securities of such issuer;
(12) invest more than 5% of its net assets in warrants which are
unattached to securities, included within that amount, no more than 2% of the
value of a Fund's net assets, may be warrants that are not listed on the New
York or American Stock Exchanges;
(13) write, purchase or sell puts, calls or combinations thereof, except
that the Funds may purchase or sell puts and calls as otherwise described in the
Prospectus or this SAI; however, neither Fund will invest more than 5% of its
total assets in these classes of securities; nor
(14) invest more than 5% of the current value of its total assets in the
securities of companies that, including predecessors, have a record of less than
three years' continuous operation.
The Diversified Equity Income Fund may not:
(1) purchase the securities of issuers conducting their principal business
activity in the same industry if, immediately after the purchase and as a result
thereof, the value of the Fund's investments in that industry would equal or
exceed 25% of the current value of the Fund's total assets, provided that there
is no limitation with respect to investments in securities issued or guaranteed
by the United States Government, its agencies or instrumentalities;
(2) purchase or sell real estate (other than securities secured by real
estate or interests therein or securities issued by companies that invest in
real estate or interests therein), commodities or commodity contracts or
interests in oil, gas, or other mineral exploration or development programs;
(3) purchase securities on margin (except for short-term credits necessary
for the clearance of transactions) or make short sales of securities;
(4) 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 Fund's investment program may be deemed to be an
underwriting;
(5) make investments for the purpose of exercising control or management;
3
<PAGE>
(6) issue senior securities, except that the Fund may borrow from banks up
to 10% of the current value of its net assets for temporary purposes only in
order to meet redemptions, and these borrowings may be secured by the pledge of
up to 10% of the current value of its net assets, but investments may not be
purchased while any such outstanding borrowings exceed 5% of its net assets;
(7) purchase securities of any issuer (except securities issued or
guaranteed by the U.S. Government, its agencies and instrumentalities) if, as a
result, with respect to 75% of its total assets, more than 5% of the value of
its total assets would be invested in the securities of any one issuer or, with
respect to 100% of its total assets, the Fund would own more than 10% of the
outstanding voting securities of such issuer; nor
(8) write, purchase or sell puts, calls or options or any combination
thereof, except that the Fund may purchase securities with put rights in order
to maintain liquidity.
The Growth Fund may not:
(1) purchase the securities of issuers conducting their principal business
activity in the same industry if, immediately after the purchase and as a result
thereof, the value of the Fund's investments in that industry would be 25% or
more of the current value of the Fund's total assets, provided that there is no
limitation with respect to investments in obligations of the United States
Government, its agencies or instrumentalities;
(2) purchase or sell real estate or real estate limited partnerships
(other than securities secured by real estate or interests therein or securities
issued by companies that invest in real estate or interests therein);
(3) purchase commodities or commodity contracts (including futures
contracts), except that the Fund may purchase securities of an issuer which
invests or deals in commodities or commodity contracts;
(4) purchase interests, leases, or limited partnership interests in oil,
gas, or other mineral exploration or development programs;
(5) purchase securities on margin (except for short-term credits necessary
for the clearance of transactions and except for margin payments in connection
with options, futures and options on futures) or make short sales of securities;
(6) 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 Fund's investment program may be deemed to be an
underwriting;
(7) make investments for the purpose of exercising control or management;
4
<PAGE>
(8) issue senior securities, except the Fund may borrow from banks up to
10% of the current value of its net assets for temporary purposes only in order
to meet redemptions, and these borrowings may be secured by the pledge of up to
10% of the current value of Fund's net assets (but investments may not be
purchased by the Fund while any such outstanding borrowings exceed 5% of the
Fund's net assets);
(9) write, purchase or sell puts, calls, straddles, spreads, warrants,
options or any combination thereof, except that the Fund may purchase securities
with put rights in order to maintain liquidity and may invest up to 5% of its
net assets in warrants in accordance with its investment policies as stated
below; nor
(10) purchase securities of any issuer (except securities issued or
guaranteed by the U.S. Government, its agencies and instrumentalities) if, as a
result, more than 5% of the value of the Fund's total assets would be invested
in the securities of any one issuer or the Fund's ownership would be more than
10% of the outstanding voting securities of such issuer.
The Fund may make loans in accordance with its investment policies.
The Small Cap Fund may not:
(1) purchase the securities of issuers conducting their principal business
activity in the same industry if, immediately after the purchase and as a result
thereof, the value of the Fund's investments in that industry would equal or
exceed 25% of the current value of the Fund's total assets, provided that there
is no limitation with respect to investments in securities issued or guaranteed
by the United States Government, its agencies or instrumentalities; and provided
further, that the Fund may invest all its assets in a diversified, open-end
management investment company, or a series thereof, with substantially the same
investment objective, policies and restrictions as the Fund, without regard to
the limitations set forth in this paragraph (1);
(2) purchase or sell real estate (other than securities secured by real
estate or interests therein or securities issued by companies that invest in
real estate or interests therein, including mortgage pass through securities),
commodities or commodity contracts or interests in oil, gas, or other mineral
exploration or development programs;
(3) purchase securities on margin (except for short-term credits necessary
for the clearance of transactions) or make short sales of securities;
(4) 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 Fund's investment program may be deemed to be an
underwriting; and provided further, that the purchase by the Fund of securities
issued by a diversified, open-end management investment company, or a series
thereof, with substantially the same investment objective, policies and
restrictions as the Fund shall not constitute an underwriting for purposes of
this paragraph (4);
5
<PAGE>
(5) make investments for the purpose of exercising control or management;
provided that the Fund may invest all its assets in a diversified, open-end
management company, or a series thereof, with substantially the same investment
objective, policies and restrictions as the Fund, without regard to the
limitations set forth in this paragraph (5);
(6) issue senior securities, except that the Fund may borrow from banks up
to 10% of the current value of its net assets for temporary purposes only in
order to meet redemptions, and these borrowings may be secured by the pledge of
up to 10% of the current value of its net assets (but investments may not be
purchased while any such outstanding borrowings exceed 5% of its net assets);
(7) make loans of portfolio securities having a value that exceeds 33 1/3%
of the current value of its total assets, provided that, this restriction does
not apply to the purchase of fixed time deposits, repurchase agreements,
commercial paper and other types of debt instruments commonly sold in a public
or private offering; nor
(8) purchase securities of any issuer (except securities issued or
guaranteed by the U.S. Government, its agencies or instrumentalities) if, as a
result, with respect to 75% of its total assets, more than 5% of the value of
its total assets would be invested in the securities of any one issuer or, with
respect to 100% of its total assets, the Fund's ownership would be more than 10%
of the outstanding voting securities of such issuer, provided that the Fund may
invest all its assets in a diversified, open-end management investment company,
or a series thereof, with substantially the same investment objective, policies
and restrictions as such Fund, without regard to the limitations set forth in
this paragraph (8).
As a matter of non-fundamental policy, the Small Cap Fund will not hold in
its portfolio the securities of issuers whose market capitalization exceeds $2
billion for a period greater than 60 consecutive days. The Small Cap Fund will
sell any such securities in an orderly manner to obtain optimal value for the
securities.
The Strategic Growth Fund may not:
(1) purchase the securities of issuers conducting their principal business
activity in the same industry if, immediately after the purchase and as a result
thereof, the value of the Fund's investments in that industry would be 25% or
more of the current value of the Fund's total assets, provided that there is no
limitation with respect to investments in securities issued or guaranteed by the
U.S. Government, its agencies or instrumentalities; and provided further, that
the Fund may invest all its assets in a diversified, open-end management
investment company, or a series thereof, with substantially the same investment
objective, policies and restrictions as such Fund, without regard to the
limitations set forth in this paragraph (1);
(2) purchase or sell real estate or real estate limited partnerships
(other than securities secured by real estate or interests therein or securities
issued by companies that invest in real estate or interests therein),
commodities or commodity contracts, or interests in oil, gas, or other mineral
exploration or development programs;
6
<PAGE>
(3) purchase securities on margin (except for short-term credits necessary
for the clearance of transactions) or make short sales of securities;
(4) 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 Fund's investment program may be deemed to be an
underwriting; and provided further, that the purchase by the Fund of securities
issued by a diversified, open-end management investment company, or a series
thereof, with substantially the same investment objective, policies and
restrictions as such Fund shall not constitute an underwriting for purposes of
this paragraph (4);
(5) make investments for the purpose of exercising control or management,
provided that the Fund may invest all its assets in a diversified open-end
management company, or a series thereof, with substantially the same investment
objective, policies and restrictions as such Fund, without regard to the
limitations set forth in this paragraph (5);
(6) issue senior securities except that the Fund may borrow from banks up
to 10% of the current value of its net assets for temporary purposes only in
order to meet redemptions, and these borrowings may be secured by the pledge of
up to 10% of the current value of its net assets (but investments may not be
purchased while any such outstanding borrowings exceed 5% of its net assets);
(7) make loans of portfolio securities having a value that exceeds 50% of
the current value of its total assets, provided that, this restriction does not
apply to the purchase of fixed time deposits, repurchase agreements, commercial
paper and other types of debt instruments commonly sold in a public or private
offering; nor
(8) purchase securities of any issuer (except securities issued by the
U.S. Government, its agencies or instrumentalities ) if, as a result, with
respect to 75% of its total assets, more than 5% of the value of its total
assets would be invested in the securities of any one issuer or, with respect to
100% of its total assets, the Fund's ownership would be more than 10% of the
outstanding voting securities of such issuer, provided that the Fund may invest
all its assets in a diversified, open-end management investment company, or a
series thereof, with substantially the same investment objective, policies and
restrictions as such Fund, without regard to the limitations set forth in this
paragraph (8).
With respect to fundamental investment policy (7), the Fund does not intend
to loan its portfolio securities during the coming year.
Non-Fundamental Investment Policies
-----------------------------------
Each Fund has adopted the following non-fundamental policies which may be
changed by a vote of a majority of the Directors of the Company or at any time
without approval of such Fund's shareholders.
7
<PAGE>
(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 Fund's 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 Fund's net assets with respect to any one
investment company, and (iii) 10% of such Fund's 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% (10% for the Balanced
and Equity Value Funds), of the Fund's 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 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 each 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.
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
8
<PAGE>
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 a Fund 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.
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.
Convertible Securities (Lower Rated Securities)
-----------------------------------------------
The Funds may invest in convertible securities that are not rated in one of
the four highest rating categories by a Nationally Recognized Statistical
Ratings Organization ("NRSRO"). The yields on such lower rated securities,
which include securities also known as junk bonds, generally are higher than the
yields available on higher-rated securities. However, investments in lower
rated securities and comparable unrated securities generally involve greater
volatility of price and risk of loss of income and principal, including the
probability of default by or bankruptcy of the issuers of such securities.
Lower rated securities and comparable unrated securities (a) will likely have
some quality and protective characteristics that, in the judgment of the rating
organization, are outweighed by large uncertainties or major risk exposures to
adverse conditions and (b) are predominantly speculative with respect to the
issuer's capacity to pay interest and repay principal in accordance with the
terms of the obligation. Accordingly, it is possible that these types of
factors could, in certain instances, reduce the value of securities held in a
Fund's portfolio, with a commensurate effect on the value of the Fund's shares.
9
<PAGE>
While the market values of lower rated securities and comparable unrated
securities tend to react less to fluctuations in interest rate levels than the
market values of higher-rated securities, the market values of certain lower
rated securities and comparable unrated securities also tend to be more
sensitive to individual corporate developments and changes in economic
conditions than higher-rated securities. In addition, lower rated securities
and comparable unrated securities generally present a higher degree of credit
risk. Issuers of lower rated securities and comparable unrated securities often
are highly leveraged and may not have more traditional methods of financing
available to them so that their ability to service their debt obligations during
an economic downturn or during sustained periods of rising interest rates may be
impaired. The risk of loss due to default by such issuers is significantly
greater because lower rated securities and comparable unrated securities
generally are unsecured and frequently are subordinated to the prior payment of
senior indebtedness. The Funds may incur additional expenses to the extent that
it is required to seek recovery upon a default in the payment of principal or
interest on their portfolio holdings. The existence of limited markets for
lower rated securities and comparable unrated securities may diminish a Fund's
ability to (a) obtain accurate market quotations for purposes of valuing such
securities and calculating its net asset value and (b) sell the securities at
fair value either to meet redemption requests or to respond to changes in the
economy or in financial markets.
Certain lower rated debt securities and comparable unrated securities
frequently have call or buy-back features that permit their issuers to call or
repurchase the securities from their holders, such as a Fund. If an issuer
exercises these rights during periods of declining interest rates, a Fund may
have to replace the security with a lower yielding security, thus resulting in a
decreased return to the Fund.
The market for certain lower rated securities and comparable unrated
securities is relatively new and has not weathered a major economic recession.
The effect that such a recession might have on such securities is not known.
Any such recession, however, could disrupt severely the market for such
securities and adversely affect the value of such securities. Any such economic
downturn also could adversely affect the ability of the issuers of such
securities to repay principal and pay interest thereon.
The Funds may invest in convertible securities that provide current income
and are issued by companies with the characteristics described above for each
Fund and that have a strong earnings and credit record. The Funds may purchase
convertible securities that are fixed-income debt securities or preferred
stocks, and which may be converted at a stated price within a specified period
of time into a certain quantity of the common stock of the same issuer.
Convertible securities, while usually subordinate to similar nonconvertible
securities, are senior to common stocks in an issuer's capital structure.
Convertible securities offer flexibility by providing the investor with a steady
income stream (which generally yield a lower amount than similar nonconvertible
securities and a higher amount than common stocks) as well as the opportunity to
take advantage of increases in the price of the issuer's common stock through
the conversion feature. Fluctuations in the convertible security's price can
reflect changes in the market value of the common stock or changes in market
interest rates. At most, 5% of each Fund's net assets will be invested, at the
time of purchase, in convertible securities that are not rated in the four
highest
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rating categories by one or more NRSROs, such as Moody's Investors Service, Inc.
("Moody's") or Standard & Poor's Ratings Group ("S&P"), or unrated but
determined by the Advisor to be of comparable quality.
Corporate Reorganizations
-------------------------
The Funds may invest in securities for which a tender or exchange offer has
been made or announced, and in securities of companies for which a merger,
consolidation, liquidation or similar reorganization proposal has been announced
if, in the judgment of Wells Fargo Bank, there is a reasonable prospect of
capital appreciation significantly greater than the added portfolio turnover
expenses inherent in the short term nature of such transactions. The principal
risk associated with such investments is that such offers or proposals may not
be consummated within the time and under the terms contemplated at the time of
the investment, in which case, unless such offers or proposals are replaced by
equivalent or increased offers or proposals which are consummated, the Funds may
sustain a loss.
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 a Fund in such
participations will not exceed 5% of the value of that Fund's total assets.
Emerging Market Securities
--------------------------
The Diversified Equity Income, Growth, Small Cap and Strategic Growth Funds
each may invest up to 15% of its assets in equity securities of companies in
"emerging markets." The Funds consider countries with emerging markets to
include the following: (i) countries with an emerging stock market as defined by
the International Finance Corporation; (ii) countries with low- to middle-income
economies according to the International Bank for Reconstruction and Development
(more commonly referred to as the World Bank); and (iii) countries listed in
World Bank publications as developing. The Advisor may invest in those emerging
markets that have a relatively low gross national product per capita, compared
to the world's major economies, and which exhibit potential for rapid economic
growth. The Advisor believes that investment in equity securities of emerging
market issuers offers significant potential for long-term capital appreciation.
Equity securities of emerging market issuers may include common stock,
preferred stocks (including convertible preferred stocks) and warrants; bonds,
notes and debentures convertible into common or preferred stock; equity
interests in foreign investment funds or trusts and real estate investment trust
securities. The Funds may invest in American Depository Receipts ("ADRs"),
Canadian Depository Receipts ("CDRs"), European Depository Receipts ("EDRs"),
Global Depository Receipts ("GDRs") and International Depository Receipts
("IDRs") of such issuers.
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Emerging market countries include, but are not limited to: Argentina,
Brazil, Chile, China, the Czech Republic, Columbia, Ecuador, Greece, Hong Kong,
Indonesia, India, Malaysia, Mexico, the Philippines, Poland, Portugal, Peru,
Russia, Singapore, South Africa, Thailand, Taiwan and Turkey. A company is
considered in a country, market or region if it conducts its principal business
activities there, namely, if it derives a significant portion (at least 50%) of
its revenues or profits from goods produced or sold, investments made, or
services performed therein or has at least 50% of its assets situated in such
country, market or region.
There are special risks involved in investing in emerging-market countries.
Many investments in emerging markets can be considered speculative, and their
prices can be much more volatile than in the more developed nations of the
world. This difference reflects the greater uncertainties of investing in less
established markets and economies. The financial markets of emerging markets
countries are generally less well capitalized and thus securities of issuers
based in such countries may be less liquid. Most are heavily dependent on
international trade, and some are especially vulnerable to recessions in other
countries. Many of these countries are also sensitive to world commodity prices.
Some countries may still have obsolete financial systems, economic problems or
archaic legal systems. In addition, many of these nations are experiencing
political and social uncertainties.
Floating- and Variable-Rate Obligations
---------------------------------------
The Funds may purchase floating- and variable-rate obligations. Each Fund
may purchase floating- and variable-rate demand notes and bonds. Variable-rate
demand notes include master demand notes that are obligations that permit a Fund
to invest fluctuating amounts, which may change daily without penalty, pursuant
to direct arrangements between the Fund, 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 Fund's 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
each Fund 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 each Fund, considers on an ongoing basis the creditworthiness
of the issuers of the floating- and variable-rate demand obligations in such
Fund's 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
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<PAGE>
is not exercisable within seven days. Such obligations may be treated as
liquid, provided that an active secondary market exists. Floating- and
variable-rate instruments are subject to interest-rate risk and credit risk.
The floating- and variable-rate instruments that the Funds may purchase
include certificates of participation in such instruments.
The Balanced and Equity Value Funds may also hold floating- and variable-
rate 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 instruments will perform under different economic and
interest-rate scenarios. The market value of these instruments may be more
volatile than other types of debt instruments and may present greater potential
for capital-gain or loss. 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.
Foreign Obligations
-------------------
The Funds may invest in foreign securities through American Depository
Receipts ("ADRs"), Canadian Depository Receipts ("CDRs"), European Depository
Receipts ("EDRs"), International Depository Receipts ("IDRs") and Global
Depository Receipts ("GDRs") or other similar securities convertible into
securities of foreign issuers. These securities may not necessarily be
denominated in the same currency as the securities into which they may be
converted. ADRs (sponsored or unsponsored) are receipts typically issued by a
U.S. bank or trust company and traded on a U.S. stock exchange, and CDRs are
receipts typically issued by a Canadian bank or trust company that evidence
ownership of underlying foreign securities. Issuers of unsponsored ADRs are not
contractually obligated to disclose material information in the U.S. and,
therefore, such information may not correlate to the market value of the
unsponsored ADR. EDRs and IDRs are receipts typically issued by European banks
and trust companies, and GDRs are receipts issued by either a U.S. or non-U.S.
banking institution, that evidence ownership of the underlying foreign
securities. Generally, ADRs in registered form are designed for use in U.S.
securities markets and EDRs and IDRs in bearer form are designed primarily for
use in Europe. Each Fund may not invest 25% or more of its assets in foreign
obligations.
Investments in foreign securities involve certain considerations that are
not typically associated with investing in domestic securities. There may be
less publicly available information about a foreign issuer than about a domestic
issuer. Foreign issuers also are not generally subject to the same 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, social and monetary
instability or diplomatic developments that could adversely affect
13
<PAGE>
investments in, the liquidity of, and the ability to enforce contractual
obligations with respect to, securities of issuers located in those countries.
Foreign Currency Transactions
-----------------------------
The Equity Value and Balanced Funds may enter into foreign currency exchange
contracts in order to protect against uncertainty in the level of future foreign
exchange rates. A forward foreign currency exchange contract involves an
obligation to purchase or sell a specific currency at a future date, which may
be any fixed number of days from the date of the contract agreed upon by the
parties, at a price set at the time of the contract. These contracts are entered
into the interbank market conducted between currency traders (usually large
commercial banks) and their customers. Forward foreign currency exchange
contracts may be bought or sold to protect a Fund against a possible loss
resulting from an adverse change in the relationship between foreign currencies
and the U.S. dollar, or between foreign currencies. Although such contracts are
intended to minimize the risk of loss due to a decline in the value of the
hedged currency, at the same time, they tend to limit any potential gain which
might result should the value of such currency increase.
Because the Balanced and Equity Value 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, they 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 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 Commitments, When-Issued Purchases and Delayed-Delivery
---------------------------------------------------------------
Transactions
- ------------
Each Fund 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
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<PAGE>
settlement time. 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 each Fund will generally purchase
securities with the intention of acquiring them, a Fund may dispose of
securities purchased on a when-issued, delayed-delivery or a forward commitment
basis before settlement when deemed appropriate by the Advisor. Securities
purchased on a when-issued or forward commitment basis may expose the relevant
Fund to risk because they may experience such fluctuations prior to their actual
delivery. Purchasing securities on a when-issued or forward commitment basis can
involve the additional risk that the yield available in the market when the
delivery takes place actually may be higher than that obtained in the
transaction itself.
Each Fund will segregate cash, U.S. Government obligations or other high-
quality debt instruments in an amount at least equal in value to the Fund's
commitments to purchase when-issued securities. If the value of these assets
declines, the Fund will segregate additional liquid assets on a daily basis so
that the value of the segregated assets is equal to the amount of such
commitments.
Loans of Portfolio Securities
-----------------------------
Each Fund may lend its 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 Fund may at any time call
the loan and obtain the return of the securities loaned within five business
days; (3) the Fund 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 Fund.
A Fund will earn income for lending its securities because cash collateral
pursuant to these loans will be invested in short-term money market instruments.
In connection with lending securities, a Fund may pay reasonable finders,
administrative and custodial fees. A Fund will 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, a Fund could experience delays
in recovering securities or collateral or could lose all or part of the value of
the loaned securities. When a Fund 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 a Fund if a material
event affecting the investment is to occur. A Fund may pay a portion of the
interest or fees earned from securities lending to a borrower or placing broker.
Borrowers and placing brokers may not be affiliated, directly or indirectly,
with Wells Fargo Bank, Stephens Inc. or any of their affiliates.
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<PAGE>
Money Market Instruments and Temporary Investments
--------------------------------------------------
The Funds may invest in the following types of high quality money market
instruments that have remaining maturities not exceeding one year: (i) U.S.
Government obligations; (ii) negotiable certificates of deposit, bankers'
acceptances and fixed time deposits and other obligations of domestic banks
(including foreign branches) that have more than $1 billion in total assets at
the time of investment and are members of the Federal Reserve System or are
examined by the Comptroller of the Currency or whose deposits are insured by the
FDIC; (iii) commercial paper rated at the date of purchase "Prime-1" by Moody's
or "A-1" or "A-1--" by S&P, or, if unrated, of comparable quality as determined
by Wells Fargo Bank, as investment advisor; and (iv) repurchase agreements. The
Funds also may invest in short-term U.S. dollar-denominated obligations of
foreign banks (including U.S. branches) that at the time of investment: (i) have
more than $10 billion, or the equivalent in other currencies, in total assets;
(ii) are among the 75 largest foreign banks in the world as determined on the
basis of assets; (iii) have branches or agencies in the United States; and (iv)
in the opinion of Wells Fargo Bank, as investment advisor, are of comparable
quality to obligations of U.S. banks which may be purchased by the Funds.
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 the Fund may be used for letter of
credit-backed investments.
Repurchase Agreements. A Fund may enter into repurchase agreements, wherein
the seller of a security to the Fund agrees to repurchase that security from the
Fund at a mutually agreed upon time and price. A Fund may enter into repurchase
agreements only with respect to securities that could otherwise be purchased by
the Fund. 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, a Fund may incur a loss. In addition, if bankruptcy
proceedings are commenced with respect to the seller of the security, the Fund's
disposition of the security may be delayed or limited.
The Balanced and Equity Value Funds may not enter into a repurchase
agreement with a maturity of more than seven days, if, as a result, more than
10% of the market value of the respective Fund's total net assets would be
invested in repurchase agreements with maturities of more than seven days,
restricted securities and illiquid securities. The Diversified Equity Income,
Growth, Small Cap and Strategic Growth 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 respective Fund's total net assets would be
invested in repurchase agreements with maturities of more than seven days,
restricted securities and illiquid securities. A Fund will only enter into
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<PAGE>
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.
Mortgage-Related Securities
---------------------------
The Balanced and Diversified Equity Income 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). 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 Balanced Fund 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 first class has been
retired. As new types of mortgage-related securities are developed and offered
to investors, the advisor will, consistent with a Fund's investment objective,
policies and quality standards, consider making investments in such new types of
mortgage-related securities.
There are risks inherent in the purchase of mortgage-related securities. For
example, these securities are subject to a risk that default in payment will
occur on the underlying mortgages. In addition to default risk, these securities
are subject to the risk that prepayment on the underlying mortgages will occur
earlier or later or at a lessor or greater rate than expected. To the extent
that the advisor's assumptions about prepayments are inaccurate, these
securities may expose the Funds to significantly greater market risks than
expected.
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<PAGE>
Other Asset-Backed Securities
-----------------------------
The Balanced, Diversified Equity Income, Equity Value and Growth Funds may
purchase asset-backed securities unrelated to mortgage loans. These asset-backed
securities 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 Fund experiencing difficulty in valuing or
liquidating such securities.
Options Trading
---------------
The funds may purchase or sell options on individual securities or options
on indices of securities as described below. The purchaser of an option risks a
total loss of the premium paid for the option if the price of the underlying
security does not increase or decrease sufficiently to justify exercise. The
seller of an option, on the other hand, will recognize the premium as income if
the option expires unrecognized but foregoes any capital appreciation in excess
of the exercise price in the case of a call option and may be required to pay a
price in excess of current market value in the case of a put option.
Call and Put Options on Specific Securities. The Equity Value and Small Cap
Funds may invest in call and put options on a specific security. The Strategic
Growth Fund may invest up to 15% of its assets, represented by the premium paid,
in the purchase of call and put options in respect of specific securities (or
groups of "baskets" of specific securities). Each of the Balanced and Equity
Value Funds may purchase put and call options listed on a national securities
exchange and issued by the Options Clearing Corporation in an amount not
exceeding 5% of its net assets.
A call option gives the purchaser of the option the right to buy, and
obligates the writer to sell, an underlying security at the exercise price at
any time during the option period. Conversely, a put option gives the purchaser
of the option the right to sell, and obligates the writer to buy, an underlying
security at the exercise price at any time during the option period. Investments
by a Fund in off-exchange options will be treated as "illiquid" and therefore
subject to the Fund's policy of not investing more than 15% of its net assets in
illiquid securities.
The Balanced, Equity Value and Small Cap Funds may write covered call option
contracts and secured put options as Wells Fargo Bank deems appropriate. A
covered call option is a call
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<PAGE>
option for which the writer of the option owns the security covered by the
option. Covered call options written by a Fund expose the Fund during the term
of the option (i) to the possible loss of opportunity to realize appreciation in
the market price of the underlying security or (ii) to possible loss caused by
continued holding of a security which might otherwise have been sold to protect
against depreciation in the market price of the security. If a Fund writes a
secured put option, it assumes the risk of loss should the market value of the
underlying security decline below the exercise price of the option. The
aggregate value of the securities subject to options written by a Fund will not
exceed 25%. The use of covered call options and securities put options will not
be a primary investment technique of the Funds, and they are expected to be used
infrequently. If the advisor is incorrect in its forecast of market value or
other factors when writing the foregoing options, a Fund would be in a worse
position than it would have been had the foregoing investment techniques not
been used.
Each Fund may engage in unlisted over-the-counter options with
broker/dealers deemed creditworthy by the advisor. Closing transactions for such
options are usually effected directly with the same broker/dealer that effected
the original option transaction. A Fund bears the risk that the broker/dealer
will fail to meet its obligations. There is no assurance that a liquid secondary
trading market exists for closing out an unlisted option position. Furthermore,
unlisted options are not subject to the protections afforded purchasers of
listed options by the Options Clearing Corporation, which performs the
obligations of its members who fail to perform in connection with the purchase
or sale of options.
Each Fund may buy put and call options and write covered call and secured
put options. Options trading is a highly specialized activity which entails
greater than ordinary investment risk. Options may be more volatile than the
underlying instruments, and therefore, on a percentage basis, an investment in
options may be subject to greater fluctuation than an investment in the
underlying instruments themselves. Purchasing options is a specialized
investment technique that entails a substantial risk of a complete loss of the
amounts paid as premiums to the writer of the option.
The Funds may also write covered call and secured put options from time to
time as the advisor deems appropriate. By writing a covered call option, a Fund
forgoes the opportunity to profit from an increase in the market of the
underlying security above the exercise price except insofar as the premium
represents such a profit, and it is not able to sell the underlying security
until the option expires or is exercised or the Fund effects a closing purchase
transaction by purchasing an option of the same series. If a Fund writes a
secured put option, it assumes the risk of loss should the market value of the
underlying security decline below the exercise price of the option. If the
advisor is incorrect in its forecast of market value or other factors when
writing the foregoing options, the Fund would be in a worse position than it
would have been had the foregoing investment techniques not been used.
A call option for a particular security gives the purchaser of the option
the right to buy, and a writer the obligation to sell, the underlying security
at the stated exercise price at any time prior to the expiration of the option,
regardless of the market price of the security. The premium paid to the writer
is in consideration for undertaking the obligation under the option contract. A
put option for a particular security gives the purchaser the right to sell the
security at the stated exercise price at
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<PAGE>
any time prior to the expiration date of the option, regardless of the market
price of the security. Options on indices provide the holder with the right to
make or receive a cash settlement upon exercise of the option. With respect to
options on indices, the amount of the settlement equals the difference between
the closing price of the index at the time of exercise and the exercise price of
the option expressed in dollars, times a specified multiple.
The Funds will write call options only if they are "covered." In the case of
a call option on a security or currency, the option is "covered" if a Fund owns
the instrument underlying the call or has an absolute and immediate right to
acquire that instrument without additional cash consideration (or, if additional
cash consideration is required, cash, U.S. Government securities or other liquid
high grade debt obligations, in such amount are held in a segregated account by
the Fund's custodian) upon conversion or exchange of other securities held by
it. For a call option on an index, the option is covered if a Fund maintains
with its custodian a diversified portfolio of securities comprising the index or
liquid assets equal to the contract value. A call option is also covered if a
Fund holds a call on the same instrument or index as the call written where the
exercise price of the call held is (i) equal to or less than the exercise price
of the call written, or (ii) greater than the exercise price of the call written
provided the difference is maintained by the Fund in liquid assets in a
segregated account with its custodian. The Funds will write put options only if
they are "secured" by liquid assets maintained in a segregated account by the
Funds' custodian in an amount not less than the exercise price of the option at
all times during the option period.
A Fund's obligation to sell an instrument subject to a covered call option
written by it, or to purchase an instrument subject to a secured put option
written by it, may be terminated prior to the expiration date of the option by
the Fund's execution of a closing purchase transaction, which is effected by
purchasing on an exchange an option of the same series (i.e., same underlying
instrument, exercise price and expiration date) as the option previously
written. Such a purchase does not result in the ownership of an option. A
closing purchase transaction is ordinarily effected to realize a profit on an
outstanding option, to prevent an underlying instrument from being called, to
permit the sale of the underlying instrument or to permit the writing of a new
option containing different terms on such underlying instrument. The cost of
such a liquidation purchase plus transaction costs may be greater than the
premium received upon the original option, in which event the Fund will have
incurred a loss in the transaction. There is no assurance that a liquid
secondary market will exist for any particular option. An option writer, unable
to effect a closing purchase transaction, will not be able to sell the
underlying instrument (in the case of a covered call option) or liquidate the
segregated account (in the case of a secured put option) until the option
expires or the optioned instrument or currency is delivered upon exercise with
the result that the writer in such circumstances will be subject to the risk of
market decline or appreciation in the instrument during such period.
When a Fund purchases an option, the premium paid by it is recorded as an
asset of the Fund. When a Fund writes an option, an amount equal to the net
premium (the premium less the commission) received by a Fund is included in the
liability section of the Fund's statement of assets and liabilities as a
deferred credit. The amount of this asset or deferred credit will be
subsequently marked-to-market to reflect the current value of the option
purchased or written. The current value of the traded option is the last sale
price or, in the absence of a sale, the current bid price. If an
20
<PAGE>
option purchased by a Fund expires unexercised the Fund realizes a loss equal to
the premium paid. If a Fund enters into a closing sale transaction on an option
purchased by it, the Fund realizes a gain if the premium received by the Fund on
the closing transaction is more than the premium paid to purchase the option, or
a loss if it is less. If an option written by a Fund expires on the stipulated
expiration date or if a Fund enters into a closing purchase transaction, it
realizes a gain (or loss if the cost of a closing purchase transaction exceeds
the net premium received when the option is sold) and the deferred credit
related to such option is eliminated. If an option written by a Fund is
exercised, the proceeds of the sale are increased by the net premium originally
received and the Fund realizes a gain or loss.
There are several risks associated with transactions in options. For
example, there are significant differences between the securities, currency and
options markets that could result in an imperfect correlation between these
markets, causing a given transaction not to achieve its objectives. In addition,
a liquid secondary market for particular options, whether traded over-the-
counter or on an exchange, may be absent for reasons that include the following:
there may be insufficient trading interest in certain options; restrictions may
be imposed by an exchange on opening transactions or closing transactions or
both; trading halts, suspensions or other restrictions may be imposed with
respect to particular classes or series of options or underlying securities or
currencies; unusual or unforeseen circumstances may interrupt normal operations
on an exchange; the facilities of an exchange or the Options Clearing
Corporation may not be adequate at all times to handle current trading value;
or one or more exchanges could, for economic or other reasons, decide or be
compelled at some future date to discontinue the trading of options (or a
particular class or series of options), in which event the secondary market on
that exchange (or in that class or series of options) would cease to exist,
although outstanding options that had been issued by the Options Clearing
Corporation as a result of trades on that exchange would continue to be
exercisable in accordance with their terms. A Fund is likely to be unable to
control losses by closing its position where a liquid secondary market does not
exist. A decision as to whether, when and how to use options involves the
exercise of skill and judgment, and even a well-conceived transaction may be
unsuccessful to some degree because of market behavior or unexpected events.
The Small Cap and Strategic Growth Funds may purchase or sell options on
individual securities or options on indices of securities as described below.
The purchaser of an option risks a total loss of the premium paid for the option
if the price of the underlying security does not increase or decrease
sufficiently to justify exercise. The seller of an option, on the other hand,
will recognize the premium as income if the option expires unrecognized but
foregoes any capital appreciation in excess of the exercise price in the case of
a call option and may be required to pay a price in excess of current market
value in the case of a put option.
The Small Cap and Strategic Growth Funds may engage in unlisted over-the-
counter options with broker/dealers deemed creditworthy by the advisor. Closing
transactions for such options are usually effected directly with the same
broker/dealer that effected the original option transaction. A Fund bears the
risk that the broker/dealer will fail to meet its obligations. There is no
assurance that a liquid secondary trading market exists for closing out an
unlisted option position. Furthermore, unlisted options are not subject to the
protections afforded purchasers of listed options
21
<PAGE>
by the Options Clearing Corporation, which performs the obligations of its
members who fail to perform in connection with the purchase or sale of options.
Stock Index Options. The Funds may purchase call and put options and write
covered call options on stock indices listed on national securities exchanges or
traded in the over-the-counter market to the extent of 25% of the value of its
net assets.
The effectiveness of purchasing or writing stock index options will depend
upon the extent to which price movements in a Fund's investment portfolio
correlate with price movements of the stock index selected. Because the value of
a stock index option depends upon changes to the price of all stocks comprising
the index rather than the price of a particular stock, whether a Fund will
realize a gain or loss from the purchase or writing of options on an index
depends upon movements in the price of all stocks in the index, rather than
movements in the price of a particular stock. Accordingly, successful use by a
Fund of options on stock indexes will be subject to Wells Fargo Bank's ability
to correctly analyze movements in the direction of the stock market generally or
of particular industry or market segments.
Stock Index Futures Contracts and Options on Stock Index Futures Contracts.
The Funds may participate in stock index futures contracts and options on stock
index futures contracts. A futures transaction involves a firm agreement to buy
or sell a commodity or financial instrument at a particular price on a specified
future date, while an option transaction generally involves a right, which may
or may not be exercised, to buy or sell a commodity of financial instrument at a
particular price on a specified future date. Futures contracts and options are
standardized and exchange-traded, where the exchange serves as the ultimate
counterparty for all contracts. Consequently, the only credit risk on futures
contracts is the creditworthiness of the exchange. Futures contracts, however,
are subject to market risk (i.e., exposure to adverse price changes).
A stock index futures contract is an agreement in which one party agrees to
deliver to the other an amount of cash equal to a specific dollar amount
multiplied by the difference between the value of a specific stock index at the
close of the last trading day of the contract and the price at which the
agreement is made. As the aggregate market value of the stocks in the index
changes, the value of the index also changes. In the event that the index level
rises above the level at which the stock index futures contract was sold, the
seller of the stock index futures contract realizes a loss determined by the
difference between the two index levels at the time of expiration of the stock
index futures contract, and the purchaser realizes a gain in that amount. In the
event the index level falls below the level at which the stock index futures
contract was sold, the seller recognizes a gain determined by the difference
between the two index levels at the expiration of the stock index futures
contract, and the purchaser realizes a loss. Stock index futures contracts
expire on a fixed date, currently one to seven months from the date of the
contract, and are settled upon expiration of the contract.
Stock index futures contracts may be purchased to protect a Fund against an
increase in the prices of stocks that Fund intends to purchase. If a Fund is
unable to invest its cash (or cash equivalents) in stock in an orderly fashion,
a Fund may purchase a stock index futures contract to offset any increase in the
price of the stock. However, it is possible that the market may decline
22
<PAGE>
instead, resulting in a loss on the stock index futures contract. If Fund then
concludes not to invest in stock at that time, or if the price of the securities
to be purchased remains constant or increases, a Fund realizes a loss on the
stock index futures contract that is not offset by a reduction in the price of
securities purchased. The Funds also may buy or sell stock index futures
contracts to close out existing futures positions.
The Funds may also purchase put options on stock index futures contracts.
Sales of such options may also be made to close out an open option position. The
Funds may, for example, purchase a put option on a particular stock index
futures contract or stock index to protect against a decline in the value of the
common stocks it holds. If the stocks in the index decline in value, the put
should become more valuable and the Funds could sell it to offset losses in the
value of the common stocks. In this way, put options may be used to achieve the
same goals the Funds seek in selling futures contracts. A put option on a stock
index future gives the purchaser the right, in return for a premium paid, to
assume a short (i.e., the right to sell stock index futures) position in a stock
index futures contract at a specified exercise price ("strike price") at any
time during the period of the option. If the option is exercised by the holder
before the last trading date during the option period, the holder receives the
futures position, as well as any balance in the futures margin account. If an
option is exercised on the last trading day prior to the expiration date of the
option, the settlement is made entirely in cash in an amount equal to the
difference between the strike price and the closing level of the relevant index
on the expiration date.
Wells Fargo Bank expects that an increase or decrease in the index in
relation to the strike price level would normally correlate to an increase or
decrease (but not necessarily to the same extent) in the value of a Fund's
common stock portfolio against which the option was written. Thus, any loss in
the option transaction may be offset by an increase in the value of the common
stock portfolio to the extent changes in the index correlate to changes in the
value of that portfolio. The Funds may liquidate the put options they have
purchased by effecting a closing sale transaction rather than exercising the
option. This is accomplished by selling an option of the same series as the
option previously purchased. There is no guarantee that the Funds will be able
to effect the closing sale transaction. The Funds realize a gain from a closing
sale transaction if the price at which the transaction is effected exceeds the
premium paid to purchase the option and, if less, the Funds realize a loss.
The Funds may each invest in stock index futures in order to protect the
value of common stock investments or to maintain liquidity, provided not more
than 5% of a Fund's net assets are committed to such transactions. A stock index
future obligates the seller to deliver (and the purchaser to take), effectively,
an amount of cash equal to a specific dollar amount times the difference between
the value of a specific stock index at the close of the last trading day of the
contract and the price at which the agreement is made. No physical delivery of
the underlying stocks in the index is made. With respect to stock indices that
are permitted investments, the Funds intend to purchase and sell futures
contracts on the stock index for which it can obtain the best price with
consideration also given to liquidity. There can be no assurance that a liquid
market will exist at the time when a Fund seeks to close out a futures contract
or a futures option position. Lack of a liquid market may prevent liquidation of
an unfavorable position.
23
<PAGE>
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 Fund's 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 Fund's net assets with respect to any one
investment company and (iii) 10% of such Fund's 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.
Privately Issued Securities
---------------------------
The Funds may invest in privately issued securities, including those which
may be resold only in accordance with Rule 144A under the Securities Act of 1933
("Rule 144A Securities"). Rule 144A Securities are restricted securities that
are not publicly traded. Accordingly, the liquidity of the market for specific
Rule 144A Securities may vary. Delay or difficulty in selling such securities
may result in a loss to a Fund. Privately issued or Rule 144A securities that
are determined by the investment advisor to be "illiquid" are subject to the
Funds' policy of not investing more than 15% of its net assets in illiquid
securities. The investment advisor, under guidelines approved by Board of
Directors of the Company, will evaluate the liquidity characteristics of each
Rule 144A Security proposed for purchase by a Fund on a case-by-case basis and
will consider the following factors, among others, in their evaluation: (1) the
frequency of trades and quotes for the Rule 144A Security; (2) the number of
dealers willing to purchase or sell the Rule 144A Security and the number of
other potential purchasers; (3) dealer undertakings to make a market in the Rule
144A Security; and (4) the nature of the Rule 144A Security and the nature of
the marketplace trades (e.g., the time needed to dispose of the Rule 144A
Security, the method of soliciting offers and the mechanics of transfer).
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 such Fund. After
purchase by a Fund, a security may cease to be rated or its rating may be
reduced below the minimum required for purchase by the Fund. Neither event will
require a sale of such security by the Fund. To the extent the ratings given by
Moody's or S&P may change as a result of changes in such organizations or their
rating systems, a Fund will attempt to use comparable ratings as standards for
investments in accordance with the investment policies contained in its
Prospectus and in this SAI. The ratings of Moody's and S&P are more fully
described in the SAI 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
24
<PAGE>
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. Government obligations are subject to fluctuations in yield or
value due to their structure or contract terms.
Warrants
--------
The Funds may each invest up to 5% of its net assets at the time of purchase
in warrants (other than those that have been acquired in units or attached to
other securities), and not more than 2% of its net assets in warrants which are
not listed on the New York or American Stock Exchange. Warrants represent
rights to purchase securities at a specific price valid for a specific period of
time. The prices of warrants do not necessarily correlate with the prices of
the underlying securities. A Fund may only purchase warrants on securities in
which the Fund may invest directly.
Zero Coupon Bonds
-----------------
The Funds may invest in zero coupon bonds. Zero coupon bonds are securities
that make no periodic interest payments, but are instead sold at discounts from
face value. The buyer of such a bond receives the rate of return by the gradual
appreciation of the security, which is redeemed at face value on a specified
maturity date. Because zero coupon bonds bear no interest, they are more
sensitive to interest-rate changes and are therefore more volatile. When
interest rates rise, the discount to face value of the security deepens and the
securities decrease more rapidly in value, when interest rates fall, zero coupon
securities rise more rapidly in value because the bonds carry fixed interest
rates that become more attractive in a falling interest rate environment.
Nationally Recognized Statistical Ratings Organizations
-------------------------------------------------------
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 a Fund, an issue of debt
securities may cease to be rated or its rating may be reduced below the minimum
rating required for purchase by a Fund. The advisor will consider such an event
in determining whether the Fund involved should continue to hold the obligation.
25
<PAGE>
The payment of principal and interest on debt securities purchased by the
Balanced and Equity Value 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 a Fund 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 equity securities of each Fund are subject to equity market
risk. Equity market risk is the risk that stock prices will fluctuate or
decline over short or even extended periods. Throughout most of 1997, the stock
market, as measured by the S&P 500 Index and other commonly used indices, has
been trading at or close to record levels. There can be no guarantee that these
performance levels will continue. The portfolio debt instruments of a Fund are
subject to credit and interest-rate risk. Credit risk is the risk that issuers
of the debt instruments in which a Fund invests may default on the payment of
principal and/or interest. Interest-rate risk is the risk that increases in
market interest rates may adversely affect the value of the debt instruments in
which the Funds invest and hence the value of your investment in a Fund.
The market value of a Fund's investment 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 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 capital
appreciation and depreciation than obligations with shorter maturities.
Fluctuations in the market value of fixed-income securities can be reduced, but
not eliminated, by variable and floating-rate features.
Securities rated in the fourth highest rating category are regarded by S&P
as having an adequate capacity to pay interest and repay principal, but changes
in economic conditions or other circumstances are more likely to lead to a
weakened capacity to make such repayments. Moody's considers such securities as
having speculative characteristics. Subsequent to its purchase by the
26
<PAGE>
Fund, an issue of securities may cease to be rated or its rating may be reduced
below the minimum rating required for purchase by the Fund. The advisor will
consider such an event in determining whether a Fund should continue to hold the
obligation. Securities rated below the fourth highest rating category (sometimes
called "junk bonds") are often considered to be speculative and involve greater
risk of default or price changes due to changes in the issuer's credit-
worthiness. The market prices of these securities may fluctuate more than higher
quality securities and may decline significantly in periods of general economic
difficulty.
There may be some additional risks associated with investments in smaller
and/or newer companies because their shares tend to be less liquid than
securities of larger companies. Further, shares of small and new companies are
generally more sensitive to purchase and sale transactions and changes in the
issuer's financial condition and, therefore, the prices of such stocks may be
more volatile than those of larger company stocks and may be subject to more
abrupt price movements than securities of larger companies.
Investing in the securities of issuers in any foreign country, including
American Depository Receipts ("ADRs") and European Depository Receipts ("EDRs")
and similar securities, involves 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, social and monetary
or diplomatic developments that 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.
Additional costs associated with an investment in foreign securities may include
higher custodial fees than apply to domestic custodial arrangements and
transaction costs of foreign currency conversions. Changes in foreign exchange
rates also will affect the value of securities denominated or quoted in
currencies other than the U.S. dollar. A Fund's performance 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.
There are special risks involved in investing in emerging-market countries.
Many investments in emerging markets can be considered speculative, and their
prices can be much more volatile than in the more developed nations of the
world. This difference reflects the greater uncertainties of investing in less
established markets and economies. In addition, the financial markets of
emerging markets countries are generally less well capitalized and thus
securities of issuers based in such countries may be less liquid. Further, such
markets may be vulnerable to high inflation and interest rates. Most are
heavily dependent on international trade, and some are especially vulnerable to
recessions in other countries. Some of these countries are also sensitive to
world commodity prices and may be subject to political and social uncertainties.
27
<PAGE>
Illiquid securities, which may include certain restricted 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 a Fund.
The advisor may use certain derivative investments or techniques, such as
buying and selling options and futures contracts and entering into currency
exchange contracts or swap agreements, to adjust the risk and return
characteristics of a Fund's 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 a Fund's 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 pursue an active trading investment strategy, and the length of
time a Fund has held a particular security is not generally a consideration in
investment decisions. Accordingly, the portfolio turnover rate for the Funds may
be higher than that of other funds that do not pursue an active trading
investment strategy. Portfolio turnover generally involves some expense to a
Fund, including brokerage commissions or dealer mark-ups and other transaction
costs on the sale of securities and the reinvestment in other securities.
Portfolio turnover also can generate short-term capital gains tax consequences.
There is, of course, no assurance that a Fund will achieve its investment
objective or be successful in preventing or minimizing the risk of loss that is
inherent in investing in particular types of investment products.
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
</TABLE>
28
<PAGE>
<TABLE>
<S> <C> <C>
*R. Greg Feltus, 46 Director, Executive Vice President of Stephens Inc.;
Chairman and President of Stephens Insurance Services Inc.;
President 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 Geyser
55 Francisco Street 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, NY 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.
Richard H. Blank, Jr., 41 Chief Operating Vice President of Stephens Inc.; Director of
Officer, Stephens Sports Management Inc.; and Director
Secretary and of Capo Inc.
Treasurer
</TABLE>
29
<PAGE>
Compensation Table
Year Ended March 31, 1997
-------------------------
<TABLE>
<CAPTION>
Total Compensation
Aggregate Compensation from Registrant
Name and Position from Registrant and Fund Complex
- ----------------- ---------------------- -------------------
<S> <C> <C>
Jack S. Euphrat $11,250 $33,750
Director
R. Greg Feltus $ 0 $ 0
Director
Thomas S. Goho $11,250 $33,750
Director
Joseph N. Hankin $ 8,750 $26,250
Director
W. Rodney Hughes $ 9,250 $27,750
Director
Robert M. Joses $11,250 $33,750
Director
J. Tucker Morse $ 9,250 $27,750
Director
</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 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
30
<PAGE>
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 each Fund. 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, Wells Fargo Bank is entitled to
receive a monthly fee at the annual rates indicated below of each Fund's average
daily net assets:
<TABLE>
<CAPTION>
Annual Rate
Fund (as percentage of net assets)
---- ---------------------------
<S> <C>
Balanced 0.60%
Diversified Equity Income 0.50%
Equity Value 0.50%
Growth 0.50% up to $250 Mil.
0.40% next $250 Mil.
0.30% over $500 Mil.
Small Cap 0.60%
Strategic Growth 0.50%
</TABLE>
For the period indicated below, the Funds paid to Wells Fargo Bank the
following advisory fees and Wells Fargo Bank waived the indicated amounts:
31
<PAGE>
<TABLE>
<CAPTION>
Six-Month
Period Ended
3/31/97
--------
Fund Fees Paid Fees Waived
---- --------- -----------
<S> <C> <C>
Balanced $261,078 $30,456
Diversified Equity Income $443,468 $ 0
Equity Value $557,096 $ 0
Growth $782,529 $ 0
Small Cap $ 89,707 $ 0
Strategic Growth/*/ $733,756 $ 0
</TABLE>
____________________
/*/ Indicates fees paid by, or on behalf of, the Overland predecessor
portfolio for the year ended December 31, 1996, the predecessor
portfolio's most recently completed fiscal year.
Balanced and Equity Value Funds. Prior to March 18, 1994, the advisor for
-------------------------------
the predecessor portfolio to the Balanced and Equity Value Funds was San Diego
Financial Capital Management, Inc. ("San Diego Financial"), which was a wholly
owned subsidiary of San Diego Trust & Savings Bank ("San Diego Trust"), which in
turn was a wholly owned subsidiary of San Diego Financial Corporation ("SDFC").
On that date, SDFC merged into First Interstate Bancorp and San Diego Trust
merged into First Interstate Bank of California ("FICAL"). As a result of these
transactions, San Diego Financial became an indirect wholly-owned subsidiary of
FICAL. On January 12, 1995, San Diego Financial merged into First Interstate
Investment Services, Inc., a direct wholly-owned subsidiary of FICAL, which has
since changed its name to First Interstate Capital Management, Inc. ("FICM").
The Pacifica Balanced and Equity Value Funds were reorganized as the
Company's Balanced and Equity Value Funds on September 6, 1996. Prior to
September 6, 1996, Wells Fargo Investment Management, Inc. ("WFIM") and its
predecessor FICM served as advisor to the Pacifica Balanced and Equity Value
Funds. As of September 6, 1996, Wells Fargo Bank became the advisor to the
Company's Balanced and Equity Value Funds.
For the period begun October 1, 1995 and ended September 5, 1996, the
Pacifica predecessor portfolios paid to FICM/WFIM, and for the period begun
September 6, 1996 and ended September 30, 1996, the Funds paid to Wells Fargo
Bank the advisory fees indicated below and the indicated amounts were waived:
<TABLE>
<CAPTION>
Year Ended
9/30/96
----------
Fund Fees Paid Fees Waived
---- --------- -----------
<S> <C> <C>
Balanced $ 750,323 $4,608
Equity Value $1,378,145 $ 0
</TABLE>
32
<PAGE>
For the periods indicated below, the prior advisor was entitled to receive
advisory fees from the Pacifica Balanced and Equity Value Funds at the same
annual rates as those currently in effect. For such fiscal years, the prior
advisor was entitled to receive the advisory fees indicated below and the
indicated amounts were waived:
<TABLE>
<CAPTION>
Year Ended Year Ended
9/30/95 9/30/94
------- -------
Fund Fees Paid Fees Waived Fees Paid Fees Waived
---- --------- ----------- --------- -----------
<S> <C> <C> <C> <C>
Balanced $579,850 $0 $683,626 $0
Equity Value $992,870 $0 $953,400 $0
</TABLE>
Diversified Equity Income and Growth Funds. For the periods indicated
------------------------------------------
below, the Funds paid to Wells Fargo Bank the following advisory fees and Wells
Fargo Bank waived the indicated amounts:
<TABLE>
<CAPTION>
Nine-Month
Period Ended Year Ended Year Ended
9/30/96 12/31/95 12/31/94
-------- -------- --------
Fees Fees Fees Fees Fees Fees
Fund Paid Waived Paid Waived Paid Waived
---- ---- ------ ---- ------ ---- ------
<S> <C> <C> <C> <C> <C> <C>
Diversified Equity Income $415,025 $0 $312,512 $0 $192,033 $0
Growth $799,899 $0 $754,149 $0 $587,977 $0
</TABLE>
Small Cap Fund. Prior to September 16, 1996, Wells Fargo provided advisory
--------------
services to the Collective Investment Fund, the predecessor to the Small Cap
Fund. For these services Wells Fargo charged fees at an annual rate of 0.75% of
the Collective Investment Fund's average net assets. Wells Fargo was also
entitled to be reimbursed by the Collective Investment Fund for expenses
incurred on its behalf, excluding costs incurred in establishing and organizing
the Fund. The Collective Investment Fund was entitled to pay up to 0.10% of its
net assets for "Audit Expenses." There were no sales charges. The Collective
Investment Fund paid all brokerage commissions incurred on its portfolio
transactions.
Prior to December 12, 1997, the Small Cap Fund did not engage an investment
advisor because it invested all of its assets in a Master Portfolio (which had
the same investment objective as the Fund) that was advised by Wells Fargo Bank.
The Small Cap Fund invested in the Small Cap Master Portfolio. The terms of the
Master Portfolio's advisory contract were identical in all material respects to
the terms of the Fund's existing advisory contract.
For the period begun September 16, 1996 (the Small Cap Fund's commencement
of operations) and ended September 30, 1996, the Small Cap Master Portfolio paid
to Wells Fargo Bank $6,129 in advisory fees on behalf of the Small Cap Fund. No
fees were waived.
33
<PAGE>
Strategic Growth Fund. Immediately prior to the Consolidation, the
---------------------
Strategic Growth Fund did not engage an investment advisor because it invested
all of its assets in a Master Portfolio (which had the same investment objective
as the Fund) that was advised by Wells Fargo Bank. The terms of the Master
Portfolio's advisory contract were identical in all material respects to the
terms of the Fund's existing advisory contract. For the period from inception
(January 20, 1993) to February 20, 1996, the predecessor portfolio operated on a
stand-alone basis, did not participate in a master/feeder structure and retained
the services of Wells Fargo Bank as investment advisor for the Fund.
As discussed herein under "Historical Fund Information," on December 12,
1997, the Overland Strategic Growth Fund was reorganized with and into the Fund.
For financial reporting purposes the Overland Fund is considered the accounting
survivor of the reorganization and the Fund has adopted the financial statements
of the Overland Fund. Therefore, the information shown below concerning the
dollar amount of advisory (and other) fees paid shows the dollar amount of fees
paid by the Overland Fund.
For the year ended December 31, 1994, the Overland Fund incurred $197,689
in advisory fees payable to Wells Fargo Bank, and $9,550 of such fees were
waived. For the year ended December 31, 1995, the predecessor portfolio
incurred $302,821 in advisory fees payable to Wells Fargo Bank. For the period
beginning January 1, 1996 and ended February 20, 1996, the predecessor portfolio
incurred $59,742 in advisory fees payable to Wells Fargo Bank. For the period
begun February 20, 1996 and ended December 31, 1996, the Master Portfolio
incurred $674,014 in advisory fees payable to Wells Fargo Bank on behalf of the
Fund. Wells Fargo Bank did not waive advisory fees in 1995 and 1996.
General. Each Fund's 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 respective Fund's outstanding
voting securities or by the Company's Board of Directors and (ii) by a majority
of the Directors of the Company who are not parties to the Advisory Contract or
"interested persons" (as defined in the 1940 Act) of any such party. A Fund's
Advisory Contract may be terminated on 60 days' written notice by either party
and will terminate automatically if assigned.
PORTFOLIO MANAGERS. Mr. Allen Ayvazian, as co-manager, has been
------------------
responsible for the day-to-day management of the portfolio of the Growth Fund
since December 15, 1997. Mr. Ayvazian joined Wells Fargo Bank in 1989 and is
the Chair of the Equity Policy Committee.
Ms. Kelli Hill, as co-manager, has been responsible for the day-to-day
management of the portfolio of the Growth Fund since February 1, 1997. Ms. Hill
joined Wells Fargo Bank in 1987 and manages client portfolios. Prior to joining
Wells Fargo Bank, Ms. Hill worked as an institutional equity trader for E.F.
Hutton. Ms. Hill holds a B.A. from the University of Southern California in
International Relations and Economics and is working toward her chartered
financial analyst designation.
Mr. Rex Wardlaw, as co-manager, has been responsible for the day-to-day
management of the portfolios of the Balanced, Equity Value and Diversified
Equity Income Funds since
34
<PAGE>
February 1, 1997. Mr. Wardlaw joined Wells Fargo Bank in 1986 and has eight
years of investment experience. He is the Private Client Services investment
manager for the Portland office and is responsible for stock market research in
healthcare, basic industries and transportation sectors. He holds an M.B.A. from
the University of Oregon and a B.A. from Northwest Nazarene College. Mr. Wardlaw
is a chartered financial analyst and a member of the Portland Society of
Financial Analysts. He is also a member of the Association for Investment
management and Research and the American Association of Individual Investors.
Mr. Scott Smith assumed responsibility as a portfolio co-manager for the
day-to-day management of the Balanced Fund on February 1, 1998. Mr. Smith is
also responsible for the day-to-day management of the portfolio of the U.S.
Government Income Fund and the Intermediate Bond Fund. He joined Wells Fargo
Bank in 1988 as a taxable money market portfolio specialist. Currently, Mr.
Smith holds the position of liquidity management specialist/portfolio manager
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.
Mr. Allen Wisniewski has been responsible, as co-manager, for the day-to-
day management of the portfolio of the Diversified Equity Income Fund since
November 1992. Mr. Wisniewski is also responsible, as co-manager, for the day-
to-day management of the portfolio of the Equity Value Fund. He 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 Analysts.
Mr. Jon Hickman assumed responsibility as co-manager of the Small Cap Fund
in September 1996. Mr. Hickman had also co-managed the Small Capitalization
Growth Fund from November 1994 until the sale of its assets to the Small Cap
Master Portfolio in September 1996. Mr. Hickman also has been a co-manager of
the Strategic Growth Fund since January 1993. Mr. Hickman has over sixteen
years' experience in the investment management field. He joined Wells Fargo
Bank in 1986 managing equity and balanced portfolios for individuals and
employee benefit plans. He is a senior member of Wells Fargo Bank's Equity
Strategy Committee. Mr. Hickman has a B.A. and an M.B.A. in Finance from
Brigham Young University.
Mr. Kenneth Lee became a portfolio co-manager to the Small Cap Fund as of
June 18, 1997, and is responsible for providing fundamental security analysis
and portfolio management. Mr. Lee joined Wells Fargo Bank in 1993 and went from
Investment Operations to the Portfolio Management group in 1995. Prior to 1993,
he worked as an associate at Wells Fargo Nikko Investment Advisors and at Dean
Witter Reynolds (Morgan Stanley Dean Witter Discover) Mr. Lee has over 8 years
experience in the industry. He holds bachelor degrees in Economics and
Organizational Studies from the University of California at Davis
35
<PAGE>
Mr. Chris Greene joined Wells Fargo Bank on April 1, 1997, to work as
portfolio co-manager of the Strategic Growth Fund. Immediately prior to joining
Wells Fargo Bank, Mr. Greene worked for three years in the Mergers &
Acquisitions group for Hambrecht & Quist, an investment banking firm focusing on
growth companies. Before that, he worked for two years at GB Capital Management
and prior to that, he worked at Wood Island Associates, firms focusing on equity
and fixed-income securities. He has over five years experience in the industry.
Mr. Greene received his B.A. in Economics from Claremont McKenna College.
ADMINISTRATOR AND CO-ADMINISTRATOR. The Company has retained Wells Fargo
----------------------------------
Bank as Administrator and Stephens as Co-Administrator on behalf of each Fund.
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
each Fund's 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 U.S. Securities and Exchange Commission ("SEC") and state
securities commissions; and preparation of proxy statements and shareholder
reports for each Fund; and (ii) general supervision relative to the compilation
of data required for the preparation of periodic reports distributed to the
Company's officers and Board of Directors. Wells Fargo Bank and Stephens also
furnish office space and certain facilities required for conducting the 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 each Fund. Prior to February 1, 1998, the Administrator and Co-
Administrator received a monthly fee of 0.04% and 0.02%, respectively, of the
average daily net assets of each Fund. In connection with the change in fees,
the responsibility for performing various administration services was shifted to
the Co-Administrator.
Except as described below, prior to February 1, 1997, Stephens served as
sole Administrator and performed substantially the same services now provided by
Stephens and Wells Fargo Bank.
For the period indicated below, the Funds paid the following dollar amounts
to Wells Fargo Bank and Stephens for administration and co-administration fees:
36
<PAGE>
<TABLE>
<CAPTION>
Six-Month
Period Ended
3/31/97
------------
Fund Total Wells Fargo Stephens
---- ----- ----------- --------
<S> <C> <C> <C>
Balanced $ 25,743 $ 5,149 $ 20,594
Diversified Equity Income $ 36,085 $ 7,217 $ 28,868
Equity Value $ 59,479 $11,896 $ 47,583
Growth $ 64,992 $12,998 $ 51,994
Small Cap $ 8,027 $ 1,605 $ 6,422
Strategic Growth/*/ $211,420 N/A $211,420
</TABLE>
__________________
/*/ Indicates fees paid by, or on behalf of, the Overland predecessor
portfolio for the year ended December 31, 1996, the predecessor
portfolio's most recently completed fiscal year.
Balanced and Equity Value Funds. The Pacifica Balanced and Equity Value
-------------------------------
Funds were reorganized as the Company's Balanced and Equity Value Funds on
September 6, 1996. Prior to September 6, 1996, the Administrator, Furman Selz
LLC ("Furman Selz"), of the Pacifica Balanced and Equity predecessor portfolios
provided management and administration services necessary for the operation of
such Funds, pursuant to an Administrative Services Contract. For these services,
Furman Selz was entitled to receive a fee, payable monthly, at the annual rate
of 0.15% of the average daily net assets of the predecessors portfolios.
From September 6, 1996 to February 1, 1997, Stephens served as the Funds'
sole Administrator and was entitled to receive a fee, payable monthly, at the
annual rate of 0.05% of each Fund's average daily net assets. The following
table reflects administration fees paid by the Funds to Stephens for the period
begun September 6, 1996 and ended September 30, 1996. The table also reflects
the net administration fees paid to the respective former Administrators of the
predecessor portfolios for periods prior to September 6, 1996.
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
9/30/96/*/ 9/30/95 9/30/94
-------- ------- -------
Fees Fees Fees Fees Fees
Fund Paid Paid Waived Paid Waived
---- ---- ---- ------ ---- ------
<S> <C> <C> <C> <C> <C>
Balanced $130,709 $193,283 $19,328 $227,896 $22,808
Equity Value $240,273 $330,957 $33,096 $317,992 $31,972
</TABLE>
____________________
/*/ The amounts for the year ended September 30, 1996 reflect fees after
waivers.
Diversified Equity Income, Growth and Small Cap Funds. For the periods
-----------------------------------------------------
indicated below, the Funds paid the following dollar amounts of administration
fees to Stephens who, as sole Administrator during these periods, was entitled
to receive a fee, payable monthly, at the
37
<PAGE>
annual rate of 0.03% of the Diversified Equity Income Fund's average daily net
assets and 0.05% of the Growth and Small Cap Funds' average daily net assets:
<TABLE>
<CAPTION>
Nine-Month
Period Ended Year Ended Year Ended
Fund 9/30/96 12/31/95 12/31/94
---- -------- --------- ---------
<S> <C> <C> <C>
Diversified Equity Income $ 24,902 $ 18,751 $ 11,522
Growth $ 51,193 $ 45,249 $ 35,279
Small Cap/*/ $ 492/*/ N/A N/A
</TABLE>
____________________
/*/ The fees are for the period begun September 16, 1996 and ended September
30, 1996.
Strategic Growth Fund. Prior to February 1, 1997, Stephens served as sole
---------------------
Administrator to the predecessor portfolio. Stephens was entitled to receive a
fee, payable monthly, at the annual rate of 0.15% of the predecessor portfolio's
average daily net assets up to $200 million and 0.10% of the average daily net
assets in excess of $200 million.
For the periods indicated below, the predecessor portfolio paid the
following dollar amounts of administration fees to Stephens:
<TABLE>
<CAPTION>
Year Ended Year Ended
12/31/95 12/31/94
-------- --------
<S> <C>
$91,128 $62,623
</TABLE>
DISTRIBUTOR. Stephens Inc. ("Stephens", the "Distributor"), located at 111
-----------
Center Street, Little Rock, Arkansas 72201, serves as Distributor for the
Funds. Each Fund has adopted a 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 agreement related to the Plans (the "Non-Interested
Directors").
Under the Plans and pursuant to the related Distribution Agreement, the
indicated Funds pay Stephens the amounts listed 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.
38
<PAGE>
<TABLE>
<CAPTION>
Fund Fee
---- ---
<S> <C>
Balanced
Class A 0.10%
Class B 0.75%
Diversified Equity Income
Class B 0.70%
Equity Value
Class A 0.10%
Class B 0.75%
Growth
Class B 0.70%
Small Cap
Class A 0.10%
Class B 0.75%
Class C 0.75%
Strategic Growth
Class A 0.10%
Class B 0.75%
Class C 0.75%
</TABLE>
The actual fee payable to the Distributor by the above-indicated Funds and
Classes 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.
Under the Plans in effect for the Class A shares of the Diversified Equity
Income and Growth Funds, each Fund may defray all or part of the cost of
preparing and printing prospectuses and other promotional materials and of
delivering those prospectuses and promotional materials to prospective
shareholders by paying on an annual basis up to 0.05% of the respective Fund's
average daily net assets attributable to Class A shares. The Plans for the
Class A shares of these Funds provide only for reimbursement of actual expenses.
39
<PAGE>
For the six-month period ended March 31, 1997, the Fund's Distributor
received the following fees for distribution-related services, as set forth
below, under each Fund's Plan:
<TABLE>
<CAPTION>
Printing &
Mailing Marketing Compensation to
Fund Total Prospectus Brochures Underwriters
---- ----- ---------- --------- ------------
<S> <C> <C> <C> <C>
Balanced
Class A $ 5,405 $ 4,524 $ 881 N/A
Class B $ 229 N/A N/A $ 229
Diversified Equity Income
Class A $ 31,861 $25,347 $ 6,514 N/A
Class B $ 90,397 N/A N/A $ 90,397
Equity Value
Class A $ 4,136 $ 3,602 $ 534 N/A
Class B $ 2,211 N/A N/A $ 2,211
Growth
Class A $ 47,261 $29,481 $17,780 N/A
Class B $ 63,767 N/A N/A $ 63,767
Small Cap
Class A $ 2,429 $ 2,394 $ 34 N/A
Class B $ 3,285 N/A N/A $ 3,285
Strategic Growth/*/
Class A $219,637 N/A N/A $219,637
Class C $332,019 N/A N/A $332,019
</TABLE>
__________________
/*/ Indicates fees paid by the Overland predecessor portfolio for the year
ended December 31, 1996, the predecessor portfolio's most recently
completed fiscal year.
Balanced and Equity Value Funds. For the year ended September 30, 1996,
-------------------------------
the Balanced Fund paid $82,632 and the Equity Value Fund paid $58,241 to the
Distributor in distribution-related fees for expense reimbursement under each
Fund's Plan for Class A shares.
For the period begun September 6, 1996 and ended September 30, 1996, the
Distributor received no compensation from the Balanced and Equity Value Funds,
under each such Fund's Plan for Class B shares. Prior to September 6, 1996,
PFD, a subsidiary of Furman Selz, served as principal underwriter for the shares
of the predecessor portfolios. The figures above reflect amounts paid to PFD
through September 5, 1996 and amounts paid to Stephens for the period begun
September 6, 1996 and ended September 30, 1996.
40
<PAGE>
Under a distribution plan adopted for the Pacifica Balanced and Equity
Value Funds, Pacifica, on behalf of the Funds, paid directly or reimbursed PFD
monthly for costs and expenses of marketing their shares.
Diversified Equity Income, Growth and Small Cap Funds. For the period
-----------------------------------------------------
ended September 30, 1996, the Distributor received the following amounts of
distribution-related fees for the specified purposes set forth below under each
Plan.
<TABLE>
<CAPTION>
Printing &
Mailing Marketing Compensation to
Fund Total Prospectus Brochures Underwriters
---- ----- ---------- --------- ------------
<S> <C> <C> <C> <C>
Diversified Equity Income/1/
Class A $ 0 $ 0 $ 0 N/A
Class B $49,796 N/A N/A $49,796
Growth Fund/1/
Class A $35,064 $1,266 $33,798 N/A
Class B $43,495 N/A N/A $43,495
Small Cap/2/
Class A $ 2 $ 0 $ 2 N/A
Class B $ 0 N/A N/A $ 0
</TABLE>
____________________
/1/ Indicated amounts reflect fees paid for the nine-month period begun January
1, 1996 and ended September 30, 1996.
/2/ Indicated amounts reflect fees paid for the period begun September 16, 1996
and ended September 30, 1996.
For the period ended September 30, 1996, WFSI and its registered
representatives received no compensation under each Plan.
General. Each Plan will continue in effect from year to year if such
-------
continuance is approved by a majority vote of both the Directors of the Company
and the Non-Interested Directors. Any Distribution Agreement related to the
Plans also must be approved by such vote of the Directors and the Non-Interested
Directors. Such Agreement 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 Fund 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 Fund, 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 Company shall provide to the
Directors, and the Directors shall review, at least quarterly, a written report
of the amounts expended (and purposes
41
<PAGE>
therefor) under the Plans. The Rule also requires that the selection and
nomination of Directors who are not "interested persons" of the Company be made
by such disinterested Directors.
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
authorize 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 Fund 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 AGENT. The Balanced, Equity Value, Small Cap and
---------------------------
Strategic Growth Funds have approved Servicing Plans and have entered into
related Shareholder Servicing Agreements with financial institutions, including
Wells Fargo Bank, for both Class A and Class B shares. The Diversified Equity
Income and Growth Funds have entered into Shareholder Servicing Agreements for
both Class A and Class B shares and have approved Servicing Plans for their
Class B shares. The Small Cap and Strategic Growth Funds also have adopted
Servicing Plans and have entered into related Shareholder Servicing Agreements
for their Class C 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 applicable
Fund, 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 Plans and Agreements are shown below. The Servicing Plans
and related Shareholder Servicing Agreements were approved by the Company's
Board of Directors and provide that a Fund shall not be obligated to make any
payments under such Plans or related Agreements that exceed the maximum amounts
payable under the Conduct Rules of the NASD.
<TABLE>
<CAPTION>
Fund Fee
---- ---
<S> <C>
Balanced
Class A 0.25%
Class B 0.25%
Diversified Equity Income
Class A 0.30%
Class B 0.30%
</TABLE>
42
<PAGE>
<TABLE>
<CAPTION>
Fund Fee
---- ---
<S> <C>
Equity Value
Class A 0.25%
Class B 0.25%
Growth
Class A 0.30%
Class B 0.30%
Small Cap
Class A 0.25%
Class B 0.25%
Class C 0.25%
Strategic Growth
Class A 0.25%
Class B 0.25%
Class C 0.25%
</TABLE>
For the period indicated below, the dollar amounts of shareholder servicing
fees paid, after waivers, by the Funds to Wells Fargo Bank or its affiliates
were as follows:
<TABLE>
<CAPTION>
Six-Month
Period Ended
Fund 3/31/97
---- -------
<S> <C>
Balanced
Class A $ 41,580
Class B $ 79
Diversified Equity Income
Class A $227,203
Class B $ 38,878
Equity Value
Class A $ 24,608
Class B $ 736
Growth
Class A $426,074
Class B $ 27,329
</TABLE>
43
<PAGE>
<TABLE>
<CAPTION>
Six-Month
Period Ended
Fund 3/31/97
---- -------
<S> <C>
Small Cap
Class A $ 0
Class B $ 0
Strategic Growth/*/
Class C $110,673
</TABLE>
__________________
/*/ Indicates fees paid by the Overland predecessor portfolio on behalf of
Class D shares for the year ended December 31, 1996, the predecessor
portfolio's most recently completed fiscal year.
Balanced and Equity Value Funds. For the period begun October 1, 1995 and
-------------------------------
ended September 5, 1996, and under similar service agreements for the Pacifica
Balanced and Equity Value Funds, payments were made to First Intestate Bancorp.
For the period begun September 6, 1996 and ended September 30, 1996, shareholder
servicing fees, after waivers and reimbursements, were paid to Wells Fargo Bank
or its affiliates. The indicated classes of each Fund paid the following dollar
amounts in shareholder servicing fees for the year ended September 30, 1996:
<TABLE>
<CAPTION>
Year Ended
Fund 9/30/96
---- -------
<S> <C>
Balanced
Class A $ 76,743
Class B N/A
Equity Value
Class A $ 36,350
</TABLE>
Diversified Equity Income and Growth Funds. The dollar amount of
------------------------------------------
shareholder servicing fees paid by the Diversified Equity Income and Growth
Funds to Wells Fargo Bank or its affiliates for the period ended September 30,
1996 were as follows:
<TABLE>
<CAPTION>
Nine-Month
Period Ended
Fund 9/30/96
---- -------
<S> <C>
Diversified Equity Income $249,015
Growth $457,088
</TABLE>
Small Cap Fund. The Class A and B shares of the Small Cap Fund did not pay
--------------
any shareholder servicing fees to Wells Fargo Bank or its affiliates for the
period begun September 16, 1996 and ended September 30, 1996.
44
<PAGE>
General. Each 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 persons" (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 the Non-Interested Directors. Servicing Agreements
may be terminated at any time, without payment of any penalty, by a vote of a
majority of the Board of Directors, including a majority of the Non-Interested
Directors. No material amendment to the Servicing Plans or related Servicing
Agreements may be made except by a majority of both the Directors of the Company
and the Non-Interested Directors.
Each Servicing Plan requires that the Administrator 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
Servicing Plan.
CUSTODIAN. Wells Fargo Bank acts as Custodian for each Fund. The
---------
Custodian, among other things, maintains a custody account or accounts in the
name of each Fund, receives and delivers all assets for each Fund upon purchase
and upon sale or maturity, collects and receives all income and other payments
and distributions on account of the assets of each Fund and pays all expenses of
each Fund. For its services as Custodian, Wells Fargo Bank 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 Fund's average daily net assets, 0.045% of the next
$50,000,000, and 0.020% of the average daily net assets in excess of
$100,000,000.
For the six-month period ended March 31, 1997, the Funds paid the following
dollar amounts in custody fees, after waivers, to Wells Fargo Bank:
<TABLE>
<CAPTION>
Fund Custody Fees
- ---- ------------
<S> <C>
Balanced $ 0
Diversified Equity Income $ 0
Equity Value $ 0
Growth $28,876
Small Cap $ 0
Strategic Growth/*/ $32,162
</TABLE>
___________________
/*/ Indicates fees paid by, or on behalf of, the Overland predecessor portfolio
for the year ended December 31, 1996, the predecessor portfolio's most
recently completed fiscal year.
Balanced and Equity Value Funds. FICAL, located at 707 Wilshire Blvd., Los
-------------------------------
Angeles, California 90017, acted as Custodian to the Pacifica Balanced and
Equity Value Funds. FICAL was entitled to receive a fee from Pacifica, computed
daily and payable monthly, at the annual rate of 0.021% of the first $5 billion
in aggregate average daily net assets of the Funds; 0.0175% of the next $5
billion in aggregate average daily net assets of the Funds; and 0.015% of the
aggregate average daily net assets of the Funds in excess of $10 billion.
45
<PAGE>
For the period begun October 1, 1995 and ended September 5, 1996, the
custody fees paid to FICAL, and for the period begun September 6, 1996 and ended
September 30, 1996, the custody fees paid to Wells Fargo Bank were as follows:
<TABLE>
<CAPTION>
Year Ended
Fund 9/30/96
---- -------
<S> <C>
Balanced $ 0
Equity Value $40,035
</TABLE>
Diversified Equity Income, Growth and Small Cap Funds. For the period
-----------------------------------------------------
indicated below, the Diversified Equity Income, Growth and Small Cap Funds paid
the following dollar amounts in custody fees, without regard to Class, after
waivers, to Wells Fargo Bank:
<TABLE>
<CAPTION>
Nine-Month
Fund Period Ended
---- 9/30/96
-------
<S> <C>
Diversified Equity Income $ 0
Growth $17,963
Small Cap/*/ $ 0
</TABLE>
_______________
/*/ Indicated amount reflects fees paid for the period begun September 16, 1996
and ended September 30, 1996.
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 average daily net assets of each Fund's Class A and B shares.
For the six-month period ended March 31, 1997, the Funds paid the following
dollar amounts in transfer and dividend disbursing agency fees, without regard
to class and after waivers, to Wells Fargo Bank:
<TABLE>
<CAPTION>
Fund Transfer Agency Fees
---- --------------------
<S> <C>
Balanced $ 0
Diversified Equity Income $ 82,838
Equity Value $ 77,309
Growth $175,860
Small Cap $ 0
Strategic Growth/*/ $166,001
</TABLE>
46
<PAGE>
__________________
/*/ Indicates fees paid by the Overland predecessor portfolio for the
year ended December 31, 1996, the predecessor portfolio's most recently
completed fiscal year.
Balanced and Equity Value Funds. Under the prior transfer agency agreement
-------------------------------
for the Balanced and Equity Value Funds, Wells Fargo Bank was entitled to
receive monthly payments at the annual rate of 0.07% of the average daily net
assets of each Class of the Funds, as well as reimbursement for all reasonable
out-of-pocket expenses. Furman Selz acted as Transfer Agent for the Pacifica
predecessor portfolios. Pacifica compensated Furman Selz for providing personnel
and facilities to perform transfer agency related services for Pacifica at a
rate intended to represent the cost of providing such services.
Diversified Equity Income Fund. Under the prior transfer agency agreement
------------------------------
for the Diversified Equity Income Fund, Wells Fargo Bank was entitled to receive
a per account fee plus transaction fees and out-of-pocket related costs with a
minimum of $3,000 per month, unless net assets of the Fund were under $20
million. For as long as the Fund's assets remained under $20 million, the Fund
was not charged any transfer agency fees.
For the nine-month period ended September 30, 1996, the Diversified Equity
Income Fund paid $27,158, after waivers, in transfer and dividend disbursing
agency fees to Wells Fargo Bank or its affiliates.
Growth Fund. Under the prior transfer agency agreement for the Growth
-----------
Fund, Wells Fargo Bank was entitled to receive a per account fee plus
transaction fees and out-of-pocket related costs with a minimum of $3,000 per
month, unless net assets of the Fund were under $20 million. For as long as the
Fund's assets remained under $20 million, the Fund was not charged any transfer
agency fees.
For the nine-month period ended September 30, 1996, the Growth Fund paid
$217,737, without regard to class and after waivers, in transfer and dividend
disbursing agency fees to Wells Fargo Bank.
Small Cap Fund. Under the prior transfer agency agreement for the Small
--------------
Cap Fund, Wells Fargo Bank was entitled to receive monthly payments at the
annual rate of 0.07% of the Fund's average daily net assets of each class of the
Fund, as well as reimbursement for all reasonable out-of-pocket expenses.
For the period begun September 16, 1996 and ended September 30, 1996, the
Small Cap Fund paid to Wells Fargo Bank $617, without regard to Class and after
waivers, in transfer and dividend disbursing agency fees.
Strategic Growth Fund. Under the prior transfer agency agreement for the
---------------------
Strategic Growth Fund, Wells Fargo Bank was entitled to receive monthly payments
at the annual rate of 0.10% of the Fund's average daily net assets, regardless
of Class, as well as reimbursement for reasonable out-of-pocket expenses.
47
<PAGE>
UNDERWRITING COMMISSIONS. For the six-month period ended March 31, 1997,
------------------------
the aggregate dollar amount of underwriting commissions paid to Stephens on
sales/redemptions of the Company's shares was $2,296,243 and Stephens retained
241,806 of such commissions. WFSI and its registered representatives received
$1,719,000 and $335,437, respectively, of such commissions.
For the nine-month period ended September 30, 1996, the aggregate amount of
underwriting commissions paid to Stephens on sales/redemptions of the Company's
shares was $2,917,738. Stephens retained $198,664 of such commissions. WFSI
and its registered representatives retained $2,583,027 and $136,047,
respectively, of such commissions.
For the year ended December 31, 1995, the aggregate amount of underwriting
commissions paid to Stephens on sales/redemptions of the Company's shares was
$1,251,333. Stephens retained $162,660 of such commissions. WFSI and its
registered representatives received $399,809 of such commissions.
For the period begun October 1, 1995 and ended September 5, 1996 with
respect to the predecessor funds, the aggregate amount of underwriting
commissions on sales/redemptions of Pacifica's shares was $150,771. Pacifica
Funds Distributor Inc. ("PFD"), retained $18,139 and its registered
representatives retained $132,632 of such commissions.
For the year ended December 31, 1994, Stephens retained $5,415,227, in
underwriting commissions (front-end sales loads and CDSCs, if any) in connection
with the purchase or redemption of the Company's shares. For the year ended
December 31, 1994, Wells Fargo Securities Inc. ("WFSI"), an affiliated broker-
dealer of the Company, and its registered representatives received $904,274 in
underwriting commissions in connection with the purchase or redemption of the
Company's 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 yield of a
Fund and the yield of a Class of shares in a Fund, however, may not be
comparable to the yields from investment alternatives because of
48
<PAGE>
differences in the foregoing variables and differences in the methods used to
value portfolio securities, compute expenses and calculate yield.
Performance information may be advertised for non-standardized periods,
including year-to-date and other periods less than a year for the Funds.
Performance shown or advertised for the Class A shares of the Stagecoach
Balanced Fund for periods prior to September 6, 1996, reflects performance of
the Investor Class shares of the Pacifica Balanced Fund, a predecessor portfolio
with the same investment objective and policies as the Stagecoach Balanced Fund.
Performance shown or advertised for the Class B shares of the Stagecoach
Balanced Fund for periods prior to September 6, 1996, reflects performance of
the Investor Class shares of the predecessor portfolio adjusted to reflect Class
B expenses in effect on September 6, 1996.
Performance shown or advertised for the Class B shares of the Stagecoach
Diversified Equity Income Fund for periods prior to January 1, 1995, reflects
performance of the Class A shares of the Fund adjusted to reflect Class B
expenses in effect on January 1, 1995.
Performance shown or advertised for the Class A shares of the Stagecoach
Equity Value Fund for periods prior to September 6, 1996, reflects performance
of the Investor Class shares of the Pacifica Equity Value Fund, a predecessor
portfolio with the same investment objective and policies as the Stagecoach
Equity Value Fund. Performance shown or advertised for the Class B shares of
the Stagecoach Equity Value Fund for periods prior to September 6, 1996,
reflects performance of the Investor Class shares of the predecessor portfolio
adjusted to reflect Class B expenses in effect on September 6, 1996.
Performance shown or advertised for the Class A shares of the Stagecoach
Growth Fund for periods prior to January 1, 1992, reflects performance of the
shares of the Select Stock Fund of Wells Fargo Investment Trust for Retirement
Programs, a predecessor portfolio with the same investment objective and
policies as the Stagecoach Growth Fund. Performance shown or advertised for the
Class B shares of the Stagecoach Growth Fund for the period from January 1, 1992
to January 1, 1995, reflects performance of the Class A shares of such Fund
adjusted to reflect Class B expenses in effect on January 1, 1995. Performance
shown or advertised for the Class B shares of the Stagecoach Growth Fund for
periods prior to January 1, 1992, reflects performance of the shares of the
predecessor portfolio adjusted to reflect Class B expenses in effect on January
1, 1995.
Performance shown or advertised for the Class A shares of the Stagecoach
Small Cap Fund for periods prior to September 16, 1996, reflects performance of
the shares of the Small Capitalization Growth Fund for BRP Employment Retirement
Plans (an unregistered bank collective investment fund), a predecessor portfolio
with the same investment objective and policies as the Stagecoach Small Cap
Fund. Performance shown or advertised for the Class B shares of the Stagecoach
Small Cap Fund for periods prior to September 16, 1996, reflects performance of
the shares of the predecessor portfolio adjusted to reflect Class B expenses in
effect on September 16, 1996. Performance shown or advertised for the Class C
shares of the Stagecoach Small Cap Fund reflects the performance of the Class B
shares, which as discussed
49
<PAGE>
above, reflects performance of the shares of the predecessor portfolio for
periods prior to September 16, 1996, adjusted for Class B sales charges and
expenses.
Performance shown or advertised for the Class A shares of the Stagecoach
Strategic Growth Fund, reflects performance of the Class A shares of the
Overland Express Strategic Growth Fund (the accounting survivor of a merger of
the Funds on December 12, 1997). Performance shown for the Class B and Class C
shares of the Fund for the period from July 1, 1993 to December 12, 1997,
reflects performance of the Class D shares of the Overland Fund. For periods
prior to July 1, 1993, Class B share and Class C share performance reflects
performance of the Class A shares of the Overland Fund, adjusted to reflect the
expenses of the Class B or Class C shares, as applicable.
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") is 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.
Average Annual Total Return for the Applicable Period Ended September 30,
- -------------------------------------------------------------------------
1997/1/
- ----
<TABLE>
<CAPTION>
Five Three One
Inception/2/ Year Year Year
--------- ---- ---- ----
<S> <C> <C> <C> <C>
Balanced
Class A 11.76% 12.35% 13.42% 18.79%
Class B 11.82% 12.54% 13.96% 19.57%
Diversified Equity Income
Class A 16.15% N/A 20.24% 22.31%
Class B 16.37% N/A 21.05% 23.26%
Equity Value
Class A 15.82% 20.31% 22.28% 36.62%
Class B 15.91% 20.63% 23.06% 38.40%
Growth
Class A 15.57% 15.85% 21.29% 23.57%
Class B 15.74% 16.22% 22.13% 24.41%
Small Cap
Class A 38.80% N/A N/A 18.74%
Class B 39.99% N/A N/A 19.53%
Class C 40.53% N/A N/A 23.53%
</TABLE>
50
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
Strategic Growth/3/
Class A 22.90% N/A 24.69% 12.79%
Class B 22.64% N/A 25.06% 12.21%
Class C 22.83% N/A 25.69% 16.21%
</TABLE>
- ---------------
/1/ Return calculations reflect the inclusion of front-end sales charges for
Class A shares and the maximum applicable contingent deferred sales charge
for Class B and Class C shares.
/2/ For purposes of showing performance information, the inception date of each
Fund is as follows: Balanced - July 1, 1990; Diversified Equity Income -
November 18, 1992; Equity Value - July 1, 1990; Growth - August 2, 1990;
Small Cap - November 11, 1994; Strategic Growth - January 20, 1993. The
actual inception date of each Class may differ from the inception date of
the corresponding Fund.
/3/ Performance shown is for the applicable period ended June 30, 1997.
CUMULATIVE TOTAL RETURN: In addition to the above performance information,
-----------------------
each Fund may also advertise the cumulative total return of the Fund.
Cumulative total return is based on the overall percentage change in value of a
hypothetical investment in the Fund, assuming all 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.
Cumulative Total Return for the Applicable Period Ended September 30, 1997/1/
--------------------------------------------------------------------------
<TABLE>
<CAPTION>
Five Three
Inception/2/ Year Year
--------- ---- ----
<S> <C> <C> <C>
Balanced
Class A 123.89% 78.88% 45.89%
Class B 124.85% 80.50% 48.01%
Diversified Equity Income
Class A 107.48% N/A 73.85%
Class B 110.74% N/A 77.36%
Equity Value
Class A 190.01% 152.03% 82.85%
Class B 191.59% 155.48% 86.36%
</TABLE>
51
<PAGE>
<TABLE>
<S> <C> <C> <C>
Growth
Class A 182.18% 108.71% 78.43%
Class B 185.10% 112.02% 82.18%
Small Cap
Class A 160.21% N/A N/A
Class B 166.77% N/A N/A
Class C 169.77% N/A 23.53%
Strategic Growth/3/
Class A 163.98% N/A 93.87%
Class B 163.62% N/A 95.58%
Class C 165.62% N/A 98.58%
</TABLE>
- ---------------
/1/ Return calculations reflect the inclusion of front-end sales charges for
Class A shares and the maximum applicable contingent deferred sales charge
for Class B and Class C shares.
/2/ For purposes of showing performance information, the inception date of each
Fund is as follows: Balanced - July 1, 1990; Diversified Equity Income -
November 18, 1992; Equity Value - July 1, 1990; Growth - August 2, 1990;
Small Cap - November 11, 1994; Strategic Growth - January 20, 1993. The
actual inception date of each Class may differ from the inception date of
the corresponding Fund.
/3/ Performance shown is for the applicable period ended June 30, 1997.
From time to time and only to the extent the comparison is appropriate for
a Fund or a Class of shares, the Company may quote the performance or price-
earning ratio of a Fund or Class in advertising and other types of literature as
compared to the performance of the S&P Index, the Dow Jones Industrial Average,
the Lehman Brothers 20+ Treasury Index, the Lehman Brothers 5-7 Year Treasury
Index, Donoghue's Money Fund Averages, Real Estate Investment Averages (as
reported by the National Association of Real Estate Investment Trusts), Gold
Investment Averages (provided by World Gold Council), Bank Averages (which are
calculated from figures supplied by the U.S. League of Savings Institutions
based on effective annual rates of interest on both passbook and certificate
accounts), average annualized certificate of deposit rates (from the Federal
Reserve G-13 Statistical Releases or the Bank Rate Monitor), the Salomon One
Year Treasury Benchmark Index, the Consumer Price Index (as published by the
U.S. Bureau of Labor Statistics), other managed or unmanaged indices or
performance data of bonds, municipal securities, stocks or government securities
(including data provided by Ibbotson Associates), or by other services,
companies, publications or persons who monitor mutual funds on overall
performance or other criteria. The S&P Index and the Dow Jones Industrial
Average are unmanaged indices of selected common stock prices. The performance
of the Funds or a Class also may be compared to that 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
52
<PAGE>
Funds' performance will be calculated by relating net asset value per share at
the beginning of a stated period to the net asset value of the investment,
assuming reinvestment of all gains distributions and dividends paid, at the end
of the period. The Funds' comparative performance will be based on a comparison
of yields, as described above, or total return, as reported by Lipper, Survey
Publications, Donoghue or Morningstar, Inc.
Any such comparisons may be useful to investors who wish to compare past
performance of the Funds or a Class with that of competitors. Of course, past
performance cannot be a guarantee of future results. The Company also may
include, from time to time, a reference to certain marketing approaches of the
Distributor, including, for example, a reference to a potential shareholder
being contacted by a selected broker or dealer. General mutual fund statistics
provided by the Investment Company Institute may also be used.
The Company also may use the following information in advertisements and
other types of literature, only to the extent the information is appropriate for
the Fund: (i) the Consumer Price Index may be used to assess the real rate of
return from an investment in a Fund; (ii) other government statistics,
including, but not limited to, The Survey of Current Business, may be used to
illustrate investment attributes of a Fund or the general economic, business,
investment, or financial environment in which a Fund operates; (iii) the effect
of tax-deferred compounding on the investment returns of a Fund, or on returns
in general, may be illustrated by graphs, charts, etc., where such graphs or
charts would compare, at various points in time, the return from an investment
in a Fund (or returns in general) on a tax-deferred basis (assuming reinvestment
of capital gains and dividends and assuming one or more tax rates) with the
return on a taxable basis; and (iv) the sectors or industries in which a Fund
invests may be compared to relevant indices of stocks or surveys (e.g., S&P
Industry Surveys) to evaluate a Fund's historical performance or current or
potential value with respect to the particular industry or sector.
In addition, the Company also may use, in advertisements and other types of
literature, information and statements: (1) showing that bank savings accounts
offer a guaranteed return of principal and a fixed rate of interest, but no
opportunity for capital growth; and (2) describing Wells Fargo Bank, and its
affiliates and predecessors, as one of the first investment managers to advise
investment accounts using asset allocation and index strategies. The Company
also may include in advertising and other types of literature information and
other data from reports and studies prepared by the Tax Foundation, including
information regarding federal and state tax levels and the related "Tax Freedom
Day."
The Company also may discuss in advertising and other types of literature
that a Fund has 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 Fund. The assigned rating would not be a recommendation to
purchase, sell or hold the Fund's shares since the rating would not comment on
the market price of the Fund's shares or the suitability of the Fund for a
particular investor. In addition, the assigned rating would be subject to
change, suspension or withdrawal as a result of changes in, or unavailability
of, information relating to the Fund or its investments. The Company may
compare the Fund's performance with other investments which
53
<PAGE>
are assigned ratings by NRSROs. Any such comparisons may be useful to investors
who wish to compare the Fund's past performance with other rated investments.
From time to time, the Funds may use the following statements, or
variations thereof, in advertisements and other promotional materials: "Wells
Fargo Bank, as a Shareholder Servicing Agent for the Stagecoach Funds, provides
various services to its customers that are also shareholders of the Funds.
These services may include access to Stagecoach Funds' account information
through Automated Teller Machines (ATMs), the placement of purchase and
redemption requests for shares of the Funds through ATMs and the availability of
combined Wells Fargo Bank and Stagecoach Funds account statements."
The Company also 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
Company's investment adviser. The Company may also disclose in advertising and
other types of sales literature the assets and categories of assets under
management by a fund's investment adviser or sub-adviser and the total amount of
assets 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 individual, trusts, estates and
institutions and $23 billion of mutual fund assets.
The Company also may discuss in advertising and other types of literature
the features, terms and conditions of Wells Fargo Bank accounts through which
investments in the Funds may be made via a "sweep" arrangement, including,
without limitation, the Managed Sweep Account, Money Market Checking Account,
California Tax-Free Money Market Checking Account, Money Market Access Account
and California Tax-Free Money Market Access Account (collectively, the "Sweep
Accounts"). Such advertisements and other literature may include, without
limitation, discussions of such terms and conditions as the minimum deposit
required to open a Sweep Account, a description of the yield earned on shares of
the Funds through a Sweep Account, a description of any monthly or other service
charge on a Sweep Account and any minimum required balance to waive such service
charges, any overdraft protection plan offered in connection with a Sweep
Account, a description of any ATM or check privileges offered in connection with
a Sweep Account and any other terms, conditions, features or plans offered in
connection with a Sweep Account. Such advertising or other literature may also
include a discussion of the advantages of establishing and maintaining a Sweep
Account, and may include statements from customers as to the reasons why such
customers have established and maintained a Sweep Account.
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
54
<PAGE>
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 the Funds 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 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.
55
<PAGE>
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
Shares may be purchased on any day a Fund is open for business. Each Fund
is 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 Fund. 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 a Fund and that a Fund receives satisfactory assurances
that (i) it will have good and marketable title to the securities received by
it; (ii) that the securities are in proper form for transfer to the Fund; and
(iii) adequate information will be provided concerning the basis and other
matters relating to the securities.
Under the 1940 Act, the Fund may suspend the right of redemption or
postpone the date of payment upon redemption for any period during which the
NYSE is closed (other than customary weekend and holiday closings, or during
which trading is restricted, or during which as determined by the SEC by rule or
regulation) an emergency exists as a result of which disposal or valuation of
portfolio securities is not reasonably practicable, or for such periods as the
SEC may permit. The Company may suspend redemption rights or postpone
redemption payments for such periods as are permitted under the 1940 Act. The
Company may also redeem shares involuntarily or make payment for redemption in
securities or other property if it appears appropriate to do so in light of the
Company's responsibilities under the 1940 Act. In addition, the Company may
redeem shares involuntarily to reimburse the Fund for any losses sustained by
reason of the failure of a shareholders to make full payment for shares
purchased or to collect any charge relating to a transaction effected for the
benefit of a shareholder which is applicable to shares of the Fund as provided
from time to time in the Prospectus.
PORTFOLIO TRANSACTIONS
The Company has no obligation to deal with any dealer or group of dealers
in the execution of transactions in portfolio securities. Subject to policies
established by the Company's Board of Directors, Wells Fargo Bank is responsible
for each Fund's portfolio decisions and the placing of portfolio transactions.
In placing orders, it is the policy of the Company to obtain the best results
taking into account the dealer's general execution and operational facilities,
the type of transaction involved and other factors such as the dealer's risk in
positioning the securities involved. While Wells Fargo Bank generally seeks
reasonably competitive spreads or commissions, the Funds will not necessarily be
paying the lowest spread or commission available.
56
<PAGE>
Purchases and sales of equity securities on a securities exchange are
effected through brokers who charge a negotiated commission for their services.
Orders may be directed to any broker including, to the extent and in the manner
permitted by applicable law, Stephens or Wells Fargo Securities Inc. In the
over-the-counter market, securities are generally traded on a "net" basis with
dealers acting as principal for their own accounts without a stated commission,
although the price of the security usually includes a profit to the dealer. In
underwritten offerings, securities are purchased at a fixed price that includes
an amount of compensation to the underwriter, generally referred to as the
underwriter's concession or discount.
In placing orders for portfolio securities of a Fund, Wells Fargo Bank is
required to give primary consideration to obtaining the most favorable price and
efficient execution. This means that Wells Fargo Bank will seek to execute each
transaction at a price and commission, if any, that provide the most favorable
total cost or proceeds reasonably attainable in the circumstances. Commission
rates are established pursuant to negotiations with the broker based on the
quality and quantity of execution services provided by the broker in the light
of generally prevailing rates. The allocation of orders among brokers and the
commission rates paid are reviewed periodically by the Board of Directors.
Wells Fargo Bank, as the 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.
Balanced, Diversified Equity Income and Equity Value Funds. 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. Each Fund also will
purchase portfolio securities in underwritten offerings and may purchase
securities directly from the issuer. Generally, municipal obligations and
taxable money market securities are traded on a net basis and do not involve
brokerage commissions. The cost of executing a Fund's portfolio securities
transactions will consist primarily of dealer spreads and underwriting
commissions. Under the 1940 Act, persons affiliated with the Company are
prohibited from dealing with the Company as a principal in the purchase and sale
of securities unless an exemptive order allowing such transactions is obtained
from the Commission or an exemption is otherwise available. The Fund may
purchase securities from underwriting syndicates of which Stephens or Wells
Fargo Bank is a member under certain conditions in accordance with the
provisions of a rule adopted under the 1940 Act and in compliance with
procedures adopted by the Board of Directors.
57
<PAGE>
Brokerage Commissions. For the six-month period ended March 31, 1997, the
---------------------
Funds paid brokerage commissions as follows:
<TABLE>
<CAPTION>
Fund Commissions
---- -----------
<S> <C>
Balanced $ 91,032
Diversified Equity Income $329,703
Equity Value $282,027
Growth $466,282
Small Cap $ 34,324
Strategic Growth/*/ $ 27,405
</TABLE>
- ------------------
/*/ Indicates fees paid by, or on behalf of, the Overland predecessor
portfolio for the year ended December 31, 1996, the predecessor portfolio's
most recently completed fiscal year.
The predecessor portfolio to the Strategic Growth Fund paid brokerage
commissions as indicated below for the years ended December 31, 1995 and 1994.
The Diversified Equity Income and Growth Funds paid the following brokerage
commissions for the nine-month period ended September 30, 1996 and the years
ended December 31, 1995 and 1994:
<TABLE>
<CAPTION>
Nine-Month
Period Ended Year Ended Year Ended
Fund 9/30/96 12/31/95 12/31/94
---- -------- -------- --------
<S> <C> <C> <C>
Strategic Growth N/A $ 190,359 $ 171,356
Diversified Equity Income $267,469 $ 193,078 $ 134,777
Growth $531,052 $ 607,442 $ 407,643
</TABLE>
During the years ended September 30, 1996, 1995 and September 30, 1994, the
Equity Value and Balanced Funds paid the following amounts in brokerage
commissions:
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
Fund 9/30/96 9/30/95 9/30/94
---- ------- ------- -------
<S> <C> <C> <C>
Equity Value $575,504 $619,124 $247,218
Balanced $254,191 $197,751 $104,835
</TABLE>
During the time periods stated above, no brokerage commissions were paid by
the Funds to an affiliated broker.
For the period beginning September 16, 1996 and ended September 30, 1996,
the Small Cap Fund paid $1,856 for brokerage commissions.
58
<PAGE>
Securities of Regular Brokers or Dealers. As of March 31, 1997, each Fund
----------------------------------------
owned securities of its "regular brokers or dealers" or their parents as defined
in the Investment Company Act of 1940 as follows:
<TABLE>
<CAPTION>
Fund Broker/Dealer Amount
- ---- ------------- ------
<S> <C> <C>
Balanced Goldman Sachs & Co. $ 887,000
J.P. Morgan $1,127,000
Diversified Equity Income Goldman Sachs & Co. $4,715,000
J.P. Morgan $3,638,000
Equity Value Goldman Sachs & Co. $9,087,000
Growth Goldman Sachs & Co. $3,206,000
J.P. Morgan $7,792,000
Small Cap None None
Strategic Growth None None
</TABLE>
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 Fund's 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.
FUND EXPENSES
Except for the expenses borne by Wells Fargo Bank and Stephens, the Company
bears all costs of its operations, including the compensation of its Directors
who are not affiliated with Stephens or Wells Fargo Bank or any of their
affiliates; advisory, shareholder servicing and administration fees; payments
pursuant to any Plan; interest charges; taxes; fees and expenses of its
independent accountants, legal counsel, transfer agent and dividend disbursing
agent; expenses of redeeming shares; expenses of preparing and printing
prospectuses (except the expense of printing and mailing prospectuses used for
promotional purposes, unless otherwise payable pursuant to a Plan),
shareholders' reports, notices, proxy statements and reports to
59
<PAGE>
regulatory agencies; insurance premiums and certain expenses relating to
insurance coverage; trade association membership dues; brokerage and other
expenses connected with the execution of portfolio transactions; fees and
expenses of its custodian, including those for keeping books and accounts and
calculating the NAV per share of the Fund; expenses of shareholders' meetings;
expenses relating to the issuance, registration and qualification of the Fund's
shares; pricing services, and any extraordinary expenses. Expenses attributable
to the Fund are charged against Fund assets. General expenses of the Company are
allocated among all of the funds of the Company, including the Funds, in a
manner proportionate to the net assets of a Funds, 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 to each Fund, rather than to the Company as
a whole. In addition, 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 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
60
<PAGE>
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 (if any) 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 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 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.
61
<PAGE>
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 provisions of Section 1256. If a
regulated investment company were treated as entering into "straddles" by
engaging in certain financial forward, futures or option contracts, such
straddles could be characterized as "mixed straddles" if the futures, forwards,
or options comprising a part of such straddles were governed 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 transaction
rules, short-term capital loss on straddle positions may be recharacterized as
long-term capital loss, and long-term capital gain may be characterized as
short-term capital gain or ordinary income.
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 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 a Fund purchases shares in a "passive foreign investment company"
("PFIC"), the Fund may be subject to federal income tax and an interest charge
imposed by the IRS upon certain distributions from the PFIC or the Fund's
disposition of its PFIC shares. If the Fund invests in a PFIC, the Fund intends
to make an available election to mark-to-market its interest in PFIC shares.
Under the election, the Fund will be treated as recognizing at the end of each
taxable year the difference, if any, between the fair market value of its
interest in the PFIC shares and its basis in such shares. In some
circumstances, the recognition of loss may be suspended. The Fund will adjust
its basis in the PFIC shares by the amount of income (or loss) recognized.
Although such income (or loss) will be taxable to the Fund as ordinary income
(or loss) notwithstanding any distributions by the PFIC, the Fund will not be
subject to federal income tax or the interest charge with respect to its
interest in the PFIC.
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.
62
<PAGE>
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 to pass-through entities,
including regulated investment companies, such as the Funds. The Internal
Revenue Service has published a notice describing temporary Regulations to be
issued pursuant to such authority, permitting the application of the reduced
capital gains tax rates to pass-through entities such as the Funds. Under the
Regulations to be issued, if a regulated investment company designates a
dividend as a capital gain dividend for a taxable year ending on or after May 7,
1997, then such regulated investment company may also designate the dividends as
one of two classes: a 20% rate gain distribution, or a 28% rate gain
distribution. Thus, noncorporate shareholders of the Funds may qualify for the
reduced rate of tax on capital gain dividends paid by the Funds, subject only to
the limitation as to the maximum amounts which may be designated in each class.
Such maximum amount for each class is determined by performing the computation
required by Section 1(h) of the Code as if the Fund were an individual whose
ordinary income is subject to a marginal rate of at least 28%.
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 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
63
<PAGE>
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.
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.
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
64
<PAGE>
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.
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 will generally 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.
65
<PAGE>
CAPITAL STOCK
The Funds are six of the funds of the Stagecoach Family of Funds. The
Company was organized as a Maryland corporation on September 9, 1991 and
currently offers shares of over thirty other 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 that affect one class but not another, shareholders
vote as a class; for example, the approval of a Plan. Subject to the foregoing,
all shares of a Fund 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 only affects one Fund, is a matter to be
determined separately by each 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 the Fund,
means the vote of the lesser of (i) 67% of the shares of such class the Fund
represented at a meeting if the holders of more than 50% of the outstanding
shares such class of the Fund are present in person or by proxy, or (ii) more
than 50% of the outstanding shares of such class the Fund. The term "majority,"
when referring to the approvals to be obtained from shareholders of the Company
as a whole, means the vote of the lesser of (i) 67% of the Company's shares
represented at a meeting if the holders of more than 50% of the Company's
outstanding shares are present in person or by proxy, or (ii) more than 50% of
the Company's outstanding shares. Shareholders are entitled to one vote for
each full share held and fractional votes for fractional shares held.
Shareholders are not entitled to any preemptive rights. All shares, when
issued for the consideration described in the Prospectus, 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.
Each share of a class of a Fund represents an equal proportional interest
in a Fund with each other share in the same class and is entitled to such
dividends and distributions out of the
66
<PAGE>
income earned on the assets belonging to a Fund as are declared in the
discretion of the Directors. In the event of the liquidation or dissolution of
the Company, shareholders of a Fund are entitled to receive the assets
attributable to the relevant class of shares of the Fund that are available for
distribution, and a distribution of any general assets not attributable to a
particular investment portfolio that are available for distribution in such
manner and on such basis as the Directors in their sole discretion may
determine.
Set forth below as of November 30, 1997 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 of the Fund as a whole. The term "N/A" is used where a shareholder
holds 5% or more of a class, but less than 5% of a Fund as a whole.
5% OWNERSHIP AS OF NOVEMBER 30, 1997
<TABLE>
<CAPTION>
NAME AND CLASS; TYPE PERCENTAGE PERCENTAGE
FUND ADDRESS OF OWNERSHIP OF CLASS OF FUND
---- ------- ------------ -------- -------
<S> <C> <C> <C> <C>
STRATEGIC GROWTH FUND Wells Fargo Bank Class A 62.05% 43.90%
P.O. Box 63015 Beneficially Owned
San Francisco, CA 94163
Stephens Inc. Class A 9.57% 6.80%
111 Center Street Record Holder
Little Rock, AR 72201
BALANCED FUND Stephens Inc. Class A 61.71% 21.20%
111 Center Street Beneficially Owned
Little Rock , AR 72201
Stephens Inc. Class B 98.95% N/A
111 Center Street Beneficially Owned
Little Rock , AR 72201
EQUITY VALUE Stephens Inc. Class A 56.14% 4.90%
FUND 111 Center Street Beneficially Owned
Little Rock , AR 72201
Stephens Inc. Class B 9.51% N/A
P.O. Box 34127 Beneficially Owned for
Little Rock , AR 72201 Acct. 76809054
Stephens Inc. Class B 5.80% N/A
P.O. Box 34127 Beneficially Owned for
Little Rock , AR 72201 Acct. 76892939
Vladimir Sirota Class B 36.11% N/A
P.O. Box 46399 [Record Holder]
Los Angeles, CA 90046
Stephens Inc. Class B 5.45% N/A
P.O. Box 34127 Beneficially Owned for
Little Rock , AR 72201 Acct. 77190754
Stephens Inc. Class B 5.45% N/A
P.O. Box 34127 Beneficially Owned for
Little Rock , AR 72201 Acct. 77190768
</TABLE>
67
<PAGE>
<TABLE>
<CAPTION>
NAME AND CLASS; TYPE PERCENTAGE PERCENTAGE
FUND ADDRESS OF OWNERSHIP OF CLASS OF FUND
---- ------- ------------ -------- -------
<S> <C> <C> <C> <C>
Stephens Inc. Class B 10.97% N/A
P.O. Box 34127 Beneficially Owned for
Little Rock , AR 72201 Acct. 77539283
DIVERSIFIED EQUITY Wells Fargo Bank Class A 34.80% 29.40%
INCOME P.O. Box 63015 Beneficially Owned
San Francisco, CA 94163
GROWTH Wells Fargo Bank Class A 53.01% 46.20%
P.O. Box 63015 Beneficially Owned
San Francisco, CA 94163
SMALL CAP Wells Fargo Bank Institutional Class 93.49% 86.30%
420 Montgomery Street Record Holder
San Francisco, CA 94104
Wells Fargo Bank Class A 48.93% N/A
P.O. Box 63015 Beneficially Owned
San Francisco, CA 94163
Stephens Inc. Class A
111 Center Street Beneficially Owned 33.62% N/A
Little Rock, AR 72201
Stephens Inc. Class B
P.O. Box 34127 Beneficially Owned 5.90% N/A
Little Rock, AR 72203 Acct. 77586707
Stephens Inc. Class B
P.O. Box 34127 Beneficially Owned 11.71% N/A
Little Rock, AR 72203 Acct. 77478661
</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).
OTHER
The Company's Registration Statement, including the Prospectus and SAI for
the Funds and the exhibits filed therewith, may be examined at the office of the
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.
68
<PAGE>
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.
FINANCIAL INFORMATION
The portfolio of investments and unaudited financial statements for the
Balanced, Diversified Equity Income, Equity Value, Growth and Small Cap Funds
for the six-month period ended September 30, 1997 are hereby incorporated by
reference to the Company's Semi-Annual Reports as filed with the SEC on December
5, 1997.
The portfolio of investments and unaudited financial statements for the
Overland Strategic Growth Fund, the predecessor portfolio to the Company's
Strategic Growth Fund, for the six-month period ended June 30, 1997 are hereby
incorporated by reference to the Overland Semi-Annual Reports as filed with the
SEC on September 3, 1997.
The portfolio of investments, audited financial statements and independent
auditors' reports for the Balanced, Diversified Equity Income, Equity Value,
Growth and Small Cap Funds for the year ended March, 31, 1997 are hereby
incorporated by reference to the Company's Annual Report as filed with the SEC
on June 4, 1997.
The portfolio of investments, audited financial statements and independent
auditors' reports for the Overland Strategic Growth Fund, the predecessor
portfolio to the Company's Strategic Growth Fund for the year ended December 31,
1996 are hereby incorporated by reference to the Overland Annual Reports as
filed with the SEC on March 11, 1997.
The Company's Annual Reports may be obtained by calling 1-800-222-8222.
69
<PAGE>
APPENDIX
The following is a description of the ratings given by Moody's and S&P to
corporate bonds and commercial paper.
Corporate Bonds
- ---------------
Moody's: The four highest ratings for corporate bonds are "Aaa," "Aa," "A"
-------
and "Baa." Bonds rated "Aaa" are judged to be of the "best quality" and carry
the smallest amount of investment risk. Bonds rated "Aa" are of "high quality
by all standards," but margins of protection or other elements make long-term
risks appear somewhat greater than "Aaa" rated bonds. Bonds rated "A" possess
many favorable investment attributes and are considered to be upper medium grade
obligations. Bonds rated "Baa" are considered to be medium grade obligations;
interest payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds have speculative
characteristics as well. Moody's applies numerical modifiers: 1, 2 and 3 in each
rating category from "Aa" through "Baa" in its rating system. The modifier 1
indicates that the security ranks in the higher end of its category; the
modifier 2 indicates a mid-range ranking; and the modifier 3 indicates that the
issue ranks in the lower end.
S&P: The four highest ratings for corporate bonds are "AAA," "AA," "A" and
---
"BBB." Bonds rated "AAA" have the highest ratings assigned by S&P and have an
extremely strong capacity to pay interest and repay principal. Bonds rated "AA"
have a "very strong capacity to pay interest and repay principal" and differ
"from the highest rated issued only in small degree." Bonds rated "A" have a
"strong capacity" to pay interest and repay principal, but are "somewhat more
susceptible" to adverse effects of changes in economic conditions or other
circumstances than bonds in higher rated categories. Bonds rated "BBB" are
regarded as having an "adequate capacity" to pay interest and repay principal,
but changes in economic conditions or other circumstances are more likely to
lead to a "weakened capacity" to make such repayments. The ratings from "AA" to
"BBB" may be modified by the addition of a plus or minus sign to show relative
standing within the category.
Corporate Commercial Paper
- --------------------------
Moody's: The highest rating for corporate commercial paper is "P-1"
-------
(Prime-1). Issuers rated "P-1" have a "superior capacity for repayment of
short-term promissory obligations." Issuers rated "P-2" (Prime-2) "have a
strong capacity for repayment of short-term promissory obligations," but
earnings trends, while sound, will be subject to more variation.
S&P: The "A-1" rating for corporate commercial paper indicates that the
---
"degree of safety regarding timely payment is either overwhelming or very
strong." Commercial paper with "overwhelming safety characteristics" will be
rated "A-1+." Commercial paper with a strong capacity for timely payments on
issues will be rated "A-2."
A-1
<PAGE>
STAGECOACH FUNDS, INC.
Telephone: 1-800-222-8222
STATEMENT OF ADDITIONAL INFORMATION
Dated December 15, 1997
as supplemented on February 24, 1998
INTERMEDIATE BOND FUND
SHORT-INTERMEDIATE U.S. GOVERNMENT INCOME FUND
SHORT-TERM GOVERNMENT-CORPORATE INCOME FUND
U.S. GOVERNMENT INCOME FUND
VARIABLE RATE GOVERNMENT 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 five funds in the Stagecoach Family of Funds (each, a "Fund"
and collectively, the "Funds") -- the INTERMEDIATE BOND, SHORT-INTERMEDIATE U.S.
GOVERNMENT INCOME, SHORT-TERM GOVERNMENT-CORPORATE INCOME, U.S. GOVERNMENT
INCOME and VARIABLE RATE GOVERNMENT FUNDS. The Short-Intermediate U.S.
Government Income Fund and the Short-Term Government-Corporate Income Fund each
offer a single class of shares that is sometimes referred to in this SAI as the
"Class A shares." Each of the other Funds offers Class A shares. The
Intermediate Bond and U.S. Government Income Funds offer Class B shares and the
U.S. Government Income and Variable Rate Government Funds also offer Class C
shares. This SAI relates to all such classes of shares.
This SAI is not a prospectus and should be read in conjunction with the
Funds' Prospectus, dated December 15, 1997, as supplemented. 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 free of charge by calling
1-800-222-8222 or writing to Stagecoach Funds, P.O. Box 7066, San Francisco, CA
94120-7066.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Historical Fund Information................................................ 1
Investment Restrictions.................................................... 2
Additional Permitted Investment Activities................................. 8
Investment by Federal Credit Unions in the Variable Rate Government Fund... 19
Risk Factors............................................................... 19
Management................................................................. 21
Performance Calculations................................................... 37
Determination of Net Asset Value........................................... 45
Additional Purchase and Redemption Information............................. 46
Portfolio Transactions..................................................... 46
Fund Expenses.............................................................. 49
Federal Income Taxes....................................................... 49
Capital Stock.............................................................. 54
Other...................................................................... 57
Independent Auditors....................................................... 57
Financial Information...................................................... 57
Appendix................................................................... A-1
</TABLE>
i
<PAGE>
HISTORICAL FUND INFORMATION
The Intermediate Bond Fund commenced operations on June 1, 1988, as an
investment portfolio of Westcore Trust ("Westcore") under the name Bonds Plus
Fund. On October 1, 1995, the Fund was reorganized as the Pacifica Intermediate
Bond Fund, an investment portfolio of Pacifica Funds Trust ("Pacifica"). On
September 6, 1996, the Pacifica Intermediate Bond Fund was reorganized as the
Company's Intermediate Bond Fund.
The Short-Intermediate U.S. Government Income Fund commenced operations on
October 27, 1993, as a Fund of the Company.
The Company's Short-Term Government-Corporate Income Fund commenced
operations on September 19, 1994, as the Short-Term Government-Corporate Income
Fund of Overland Express Funds, Inc. ("Overland"), another investment company
advised by Wells Fargo Bank, N.A. ("Wells Fargo Bank"). On July 23, 1997, the
Boards of Directors of the Company and Overland approved an Agreement and Plan
of Consolidation providing for, among other things, the transfer of the assets
and stated liabilities of the predecessor Overland portfolio to the Fund. Prior
to December 12, 1997, the effective date of the consolidation of the Company and
Overland (the "Consolidation"), the Fund had only nominal assets. Prior to the
Consolidation, the Short-Term Government-Corporate Income predecessor portfolio
pursued its investment objective by investing all of its assets in a separate
Master Portfolio (a "Master Portfolio") of Master Investment Trust ("MIT") with
the same investment objective as the corresponding predecessor portfolio. The
Fund now invests directly in a portfolio of securities and does not invest in a
corresponding Master Portfolio.
The U.S. Government Income Fund commenced operations on January 1, 1992, as
the successor to the Ginnie Mae Fund of the Wells Fargo Investment Trust for
Retirement Programs, which commenced operations on January 3, 1991. On December
12, 1997, as part of the Consolidation, the U.S. Government Income Fund of
Overland was reorganized with and into the Company's U.S. Government Income
Fund. For accounting purposes, the Overland Fund is considered the survivor of
the Consolidation. The Class A shares of the Overland Fund commenced operations
on April 7, 1988. The Class D shares of the Overland Fund commenced operations
on July 1, 1993. The Overland Fund did not offer Class B shares and for
accounting purposes the Class B shares are considered to have commenced
operations on December 12, 1997. The Overland Fund is sometimes referred to
throughout this SAI as the "predecessor portfolio" to the Company's U.S.
Government Income Fund. Prior to December 12, 1997, the U.S. Government Income
Fund was known as the "Ginnie Mae Fund."
The Variable Rate Government Fund commenced operations on November 1, 1990,
as the Variable Rate Government Fund of Overland. On July 23, 1997, the Boards
of Directors of the Company and Overland approved an Agreement and Plan of
Consolidation providing for, among other things, the transfer of the assets and
stated liabilities of the predecessor Overland portfolio to the Fund. Prior to
December 12, 1997, the effective date of the Consolidation, the Fund had only
nominal assets. On December 12, 1997, the Class A and D shareholders of the
predecessor Overland portfolio became the Class A and C shareholders,
respectively, of the Company's Variable Rate Government Fund.
1
<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 (as defined in the Investment Company Act
of 1940, as amended (the "1940 Act")) of the outstanding voting securities of
such Fund.
The Intermediate Bond Fund may not:
(1) purchase or sell commodity contracts or invest in oil, gas or mineral
exploration or development programs, except that the Fund, 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 Fund may enter into futures contracts and related options;
(2) purchase or sell real estate, except that the Fund 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) acquire any other investment company or investment company securities
except in connection with a merger, consolidation, reorganization or acquisition
of assets or where otherwise permitted by the 1940 Act;
(5) act as an underwriter of securities within the meaning of the
Securities Act of 1933 (the "1933 Act") except insofar as the Fund 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 Fund's investment objective, policies and limitations may be
deemed to be underwriting;
(6) write or sell put options, call options, straddles, spreads, or any
combination thereof, except that the Fund may enter into transactions in options
on securities, futures contracts and options on futures contracts;
(7) borrow money or issue senior securities, except that the Fund 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 Fund's total assets at
the time of such borrowing. The Fund will not purchase securities while its
borrowings (including reverse repurchase agreements), in excess of 5% of its
total assets, are outstanding. Securities held in escrow or separate accounts in
connection with the Fund's investment practices described in this SAI or in the
Prospectus are not deemed to be pledged for purposes of this limitation;
(8) purchase securities of any one issuer (other than securities issued or
guaranteed by the U.S. Government, its agencies or instrumentalities) if,
immediately after such purchase, more than
2
<PAGE>
5% of the value of the Fund's total assets would be invested in the securities
of such issuer, or more than 10% of the issuer's outstanding voting securities
would be owned by the Fund or the Company, except that up to 25% of the value of
the Fund's total assets may be invested without regard to these limitations;
(9) purchase any securities that would cause 25% or more of the Fund's
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;
(10) make loans, except that the Fund may purchase and hold debt
instruments and enter into repurchase agreements in accordance with its
investment objective and policies and may lend portfolio securities in an amount
not exceeding 30% of its total assets; nor
(11) purchase securities on margin, make short sales of securities or
maintain a short position, except that (a) this investment limitation shall not
apply to the Fund's transactions in futures contracts and related options, and
(b) the Fund may obtain short-term credit as may be necessary for the clearance
of purchases and sales of portfolio securities.
The Short-Intermediate U.S. Government Fund may not:
(1) purchase the securities of issuers conducting their principal business
activity in the same industry if, immediately after the purchase and as a result
thereof, the value of the Fund's investments in that industry would be 25% or
more of the current value of the Fund's total assets, provided that there is no
limitation with respect to investments in U.S. Government Obligations;
(2) purchase or sell real estate or real estate limited partnerships (other
than securities secured by real estate or interests therein or securities issued
by companies that invest in real estate or interests therein);
(3) purchase commodities or commodity contracts (including futures
contracts), except that the Fund may purchase securities of an issuer which
invests or deals in commodities or commodity contracts;
(4) purchase interests, leases, or limited partnership interests in oil,
gas, or other mineral exploration or development programs;
(5) purchase securities on margin (except for short-term credits necessary
for the clearance of transactions) or make short sales of securities;
(6) 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 Fund's investment program may be deemed to be an
underwriting;
3
<PAGE>
(7) make investments for the purpose of exercising control or management;
(8) borrow money or issue senior securities, as defined in the 1940 Act,
except that the Fund may borrow from banks up to 10% of the current value of its
net assets for temporary purposes only in order to meet redemptions, and these
borrowings may be secured by the pledge of up to 10% of the current value of its
net assets (but investments may not be purchased while any such outstanding
borrowings exceed 5% of its net assets), and except that the Fund may issue
multiple Classes of shares in accordance with applicable laws, rules,
regulations or orders;
(9) write, purchase or sell straddles, spreads, warrants, or any
combination thereof;
(10) purchase securities of any issuer (except U.S. Government Obligations)
if, as a result, with respect to 75% of its total assets, more than 5% of the
value of the Fund's total assets would be invested in the securities of any one
issuer or, with respect to 100% of its total assets the Fund's ownership would
be more than 10% of the outstanding voting securities of such issuer; nor
(11) make loans, except that the Fund may purchase or hold debt instruments
or lend its portfolio securities in accordance with its investment policies, and
may enter into repurchase agreements.
The Short-Term Government-Corporate Income Fund may not:
(1) purchase the securities of issuers conducting their principal business
activity in the same industry if, immediately after the purchase and as a result
thereof, the value of the Fund's investments in that industry would exceed 25%
of the current value of the Fund's total assets, provided that there is no such
limitation with respect to: (a) investments in securities issued or guaranteed
by the U.S. Government, its agencies or instrumentalities; (b) municipal
securities (for the purpose of this restriction, private activity bonds and
notes shall not be deemed municipal securities if the payment of principal and
interest on such bonds or notes is the ultimate responsibility of non-
governmental issuers); and (c) investments by the Fund in securities issued by
registered investment companies;
(2) purchase or sell real estate (other than securities secured by real
estate or interests therein or securities issued by companies that invest in
real estate or interests therein), commodities or commodity contracts, or
interests in oil, gas, or other mineral exploration or development programs;
(3) purchase securities on margin (except for short-term credits necessary
for the clearance of transactions) or make short sales of securities;
(4) 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 Fund's investment program may be deemed to be an
underwriting;
(5) make investments for the purpose of exercising control or management;
4
<PAGE>
(6) purchase puts, calls, straddles, spreads, or any combination thereof,
except that the Fund may purchase securities with put rights in order to
maintain liquidity;
(7) issue senior securities, except that the Fund may borrow from banks up
to 10% of the current value of its net assets for temporary purposes only in
order to meet redemptions, and these borrowings may be secured by the pledge of
up to 10% of the current value of its net assets (but investments may not be
purchased by the Fund while any such outstanding borrowing in excess of 5% of
its net assets exists);
(8) purchase securities of any issuer (except securities issued or
guaranteed by the U.S. Government, its agencies and instrumentalities) if, as a
result, with respect to 75% of the total assets, more than 5% of the value of
the Fund's total assets would be invested in the securities of any one issuer or
the Fund would own more than 10% of the outstanding voting securities of such
issuer; nor
(9) lend its portfolio securities having a value that exceeds 50% of the
current value of their total assets, provided that, for purposes of this
restriction, the purchase of fixed time deposits, repurchase agreements,
commercial paper and other types of debt instruments commonly sold in a public
or private offering will not be subject to this restriction.
The U.S. Government Income Fund may not:
(1) purchase the securities of issuers conducting their principal business
activity in the same industry if, immediately after the purchase and as a result
thereof, the value of the Fund's investments in that industry would be 25% or
more of the current value of the Fund's total assets, provided that there is no
limitation with respect to investments in obligations of the U.S. Government,
its agencies or instrumentalities;
(2) purchase or sell real estate or real estate limited partnerships (other
than securities secured by real estate or interests therein or securities issued
by companies that invest in real estate or interests therein);
(3) purchase commodities or commodity contracts (including futures
contracts), except that the Fund may purchase securities of an issuer which
invests or deals in commodities or commodity contracts;
(4) purchase interests, leases, or limited partnership interests in oil,
gas, or other mineral exploration or development programs;
(5) purchase securities on margin (except for short-term credits necessary
for the clearance of transactions and except for margin payments in connection
with options, futures and options on futures) or make short sales of securities;
(6) 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 Fund's investment program may be deemed to be an
underwriting;
5
<PAGE>
(7) make investments for the purpose of exercising control or management;
(8) issue senior securities, except that the Fund may borrow up to 20% of
the current value of its net assets for temporary purposes only in order to meet
redemptions, and these borrowings may be secured by the pledge of up to 20% of
the current value of the Fund's net assets (but investments may not be purchased
by such Fund while any the outstanding borrowings exceed 5% of the Fund's net
assets);
(9) write, purchase or sell puts, calls, straddles, spreads, warrants,
options or any combination thereof; nor
(10) purchase securities of any issuer (except securities issued or
guaranteed by the U.S. Government, its agencies and instrumentalities) if, as a
result, more than 5% of the value of the Fund's total assets would be invested
in the securities of any one issuer or the Fund's ownership would be more than
10% of the outstanding voting securities of such issuer.
The Fund may make loans in accordance with its investment policies.
The Variable Rate Government Fund may not:
(1) purchase the securities of issuers conducting their principal business
activity in the same industry if, immediately after the purchase and as a result
thereof, the value of the Fund's investments in that industry would exceed 25%
of the current value of the Fund's total assets, provided that there is no
limitation with respect to investments in securities issued or guaranteed by the
U.S. Government, its agencies or instrumentalities;
(2) purchase or sell real estate (other than securities secured by real
estate or interests therein or securities issued by companies that invest in
real estate or interests therein), commodities or commodity contracts or
interests, in oil, gas, or other mineral exploration or development programs;
(3) purchase securities on margin (except for short-term credits necessary
for the clearance of transactions) or make short sales of securities;
(4) 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 Fund's investment program may be deemed to be an
underwriting;
(5) invest more than 10% of the current value of its net assets in
repurchase agreements maturing in more than seven days, restricted securities,
which are securities that must be registered under the 1933 Act before they may
be offered or sold to the public, and illiquid securities;
(6) make investments for the purpose of exercising control or management;
(7) purchase puts, calls, straddles, spreads, or any combination thereof,
except that the Fund may purchase securities with put rights in order to
maintain liquidity;
6
<PAGE>
(8) issue senior securities, except that the Fund may borrow from banks up
to 10% of the current value of its net assets for temporary purposes only in
order to meet redemptions, and these borrowings may be secured by the pledge of
up to 10% of the current value of its net assets (but investments may not be
purchased by the Fund while any such outstanding borrowing exists);
(9) invest more than 10% of the current value of its net assets in fixed
time deposits that are subject to withdrawal penalties and that have maturities
of more than seven days;
(10) purchase securities of any issuer (except securities issued or
guaranteed by the U.S. Government, its agencies and instrumentalities) if, as a
result, with respect to 75% of the total assets of the Fund, more than 5% of the
value of the Fund's total assets would be invested in the securities of any one
issuer or, with respect to 100% of the Fund's total assets, the Fund would own
more than 10% of the outstanding voting securities of such issuer; nor
(11) lend its portfolio securities having a value that exceeds 50% of the
current value of its total assets, provided that, for purposes of this
restriction, loans will not include the purchase of fixed time deposits,
repurchase agreements, commercial paper and other types of debt instruments
commonly sold in a public or private offering.
With respect to fundamental investment restriction (5), the Fund does not
intend to invest, during the coming year, in repurchase agreements maturing in
more than seven days, restricted securities, which are securities that must be
registered under the 1933 Act before they may be offered or sold to the public,
or illiquid securities. With respect to fundamental investment restriction (7),
the Fund does not intend to purchase, during the coming year, puts, calls,
straddles, spreads, or purchase securities with put rights in order to maintain
liquidity. With respect to fundamental investment restriction (9), the Fund does
not intend to invest, during the coming year, in fixed time deposits that are
subject to withdrawal penalties and that have maturities of more than seven
days.
Non-Fundamental Investment Policies
-----------------------------------
Each Fund has 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 Fund's 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.
Currently, under the 1940 Act, a Fund's investment in such securities is limited
to, subject to certain exceptions, (i) 3% of the total voting stock of any one
investment company, (ii) 5% of such Fund's net assets with respect to any one
investment company, and (iii) 10% of such Fund's 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% (10% for the Variable
Rate Government Fund) 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
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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 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 the Fund's total assets, and for the Intermediate Bond Fund, 30% of
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 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 Fund experiencing difficulty in
valuing or liquidating such 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
8
<PAGE>
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 a Fund 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. 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.
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
9
<PAGE>
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 Intermediate Bond Fund may purchase participations in trusts that hold
U.S. Treasury securities (such as TIGRs and CATS) or other obligations where the
trust participations evidence ownership in either the future interest payments
or the future principal payments on the obligations. These participations are
normally issued at a discount to their "face value," and can exhibit greater
price volatility than ordinary debt securities because of the way in which their
principal and interest are returned to investors. Investments by the Fund in
such participations will not exceed 5% of the value of the Fund's total assets.
Derivative Securities
---------------------
The Intermediate Bond and Short-Intermediate U.S. Government Income Funds
may invest in various instruments that may be considered "derivatives,"
including 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. These 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
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
Fund's investment objective, policies and quality standards, consider making
investments in such new types of derivative securities.
10
<PAGE>
Floating- and Variable-Rate Obligations
---------------------------------------
The Funds may purchase floating- and variable-rate obligations, 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 Fund's 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 Fund 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 each Fund, considers
on an ongoing basis the creditworthiness of the issuers of the floating- and
variable-rate demand obligations in such Fund's portfolio. No Fund will invest
more than 15% (10% for the U.S. Government Income and Variable Rate Government
Funds) 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.
Foreign Obligations
-------------------
Each Fund may invest up to 25% of its assets in high-quality, short-term
debt obligations of foreign branches of U.S. banks, U.S. branches of foreign
banks and short-term debt obligations of foreign governmental agencies 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
11
<PAGE>
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.
Forward Commitment, When-Issued and Delayed-Delivery Transactions
-----------------------------------------------------------------
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 each Fund will generally
purchase securities with the intention of acquiring them, a Fund may dispose of
securities purchased on a when-issued, delayed-delivery or a forward commitment
basis before settlement when deemed appropriate by the Advisor.
The Funds will establish a segregated account in which they will maintain
cash, U.S. Government obligations or other high-quality debt instruments in an
amount at least equal in value to each such Fund's commitments to purchase when-
issued securities. If the value of these assets declines, a Fund will place
additional liquid assets in the account on a daily basis so that the value of
the assets in the account is equal to the amount of such commitments.
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 a Fund. Each Fund may invest up to 15%
(10% for the U.S. Government Income and Variable Rate Government Funds) of its
net assets in illiquid securities.
Loans of Portfolio Securities
-----------------------------
Each Fund may lend its 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) such Fund may at any time
call the loan and obtain the return of the securities loaned within five
business days; (3) such Fund 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 (30% for the Intermediate Bond Fund) of the
total assets of a particular Fund.
A Fund will earn income for lending its securities because cash collateral
pursuant to these loans will be invested in short-term money market instruments.
In connection with lending
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<PAGE>
securities, a Fund may pay reasonable finders, administrative and custodial
fees. A Fund will 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, a Fund could experience delays in recovering
securities or collateral or could lose all or part of the value of the loaned
securities. When a Fund 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 a Fund if a material event affecting the investment
is to occur. A Fund 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 Fund. 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 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
13
<PAGE>
holding the longer maturity classes receive principal only after the first class
has been retired. As new types of mortgage-related securities are developed and
offered to investors, the Advisor will, consistent with the Fund's 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 Short-Intermediate U.S. Government Income Fund and the Variable
Rate Government Fund each 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 Short-Intermediate Government Income and Variable Rate Government
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.
Adjustable rate mortgages, a common form of residential financing, generally
have a specified maturity date. Most provide for amortization of principal in a
manner similar to fixed-rate
14
<PAGE>
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 ARMs. In this regard, the net asset value of a 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 a Fund 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 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
15
<PAGE>
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 U.S. Government Income Fund 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 Fund, 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 the 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 the 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 the 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 Fund's 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 Fund's net assets with respect to any one
investment company and (iii) 10% of such Fund's 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.
16
<PAGE>
Stripped Securities
-------------------
The Funds may purchase Treasury receipts and other "stripped" securities
that evidence ownership in either (i) future interest payments or (ii) future
principal payments. The stripped securities the Funds may purchase are issued
by the U.S. Government (or a U.S. Government agency or instrumentality) or by
private issuers such as banks, corporations and other institutions at a discount
to their face value. The Funds will not purchase stripped mortgage-backed
securities ("SMBS"). The stripped securities purchased by the Funds generally
are structured to make a lump-sum payment at maturity and do not make periodic
payments of principal or interest. Hence, the duration of these securities
tends to be longer and they are therefore more sensitive to interest rate
fluctuations than similar securities that offer periodic payments over time.
The stripped securities purchased by the Funds are not subject to prepayment or
extension risk.
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. Each Fund may enter into repurchase agreements,
wherein the seller of a security to a Fund agrees to repurchase that security
from a Fund at a mutually agreed upon time and price. A Fund may enter into
repurchase agreements only with respect to securities that could otherwise be
purchased by such Fund. 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, a Fund 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.
A Fund may not enter into a repurchase agreement with a maturity of more
than seven days, if, as a result, more than 15% (10% for the U.S. Government
Income and Variable Rate Government Funds) of the market value of such Fund's
total net assets would be invested in repurchase agreements with maturities of
more than seven days, restricted securities and illiquid
17
<PAGE>
securities. A Fund 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.
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 such Fund. After
purchase by a Fund, a security may cease to be rated or its rating may be
reduced below the minimum required for purchase by such Fund. Neither event
will require a sale of such security by such Fund. To the extent the ratings
given by Moody's Investors Service, Inc. ("Moody's") or Standard and Poor's
Ratings Group ("S&P") may change as a result of changes in such organizations or
their rating systems, each Fund will attempt to use comparable ratings as
standards for investments in accordance with the investment policies contained
in its Prospectus and in this SAI. The ratings of Moody's and S&P are more
fully described in the SAI 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. Government
Obligations are subject to fluctuations in yield or value due to their structure
or contract terms.
Nationally Recognized Statistical Ratings Organizations
-------------------------------------------------------
The ratings of Moody's, S&P, 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 Intermediate Bond Fund, 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 Fund. The Advisor will consider such an event in determining
whether the Fund involved should continue to hold the obligation.
18
<PAGE>
The payment of principal and interest on debt securities purchased by the
Fund 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.
INVESTMENT BY FEDERAL CREDIT UNIONS
IN THE VARIABLE RATE GOVERNMENT FUND
The Variable Rate Government Fund will invest only in investments that are
permissible for federal credit unions under the regulations of the National
Credit Union Administration ("NCUA"). Federal credit unions may invest in CMOs
that do constitute "high-risk mortgage securities" for purposes of the FFIEC
Policy Statement. The Fund will enter into repurchase transactions and cash
forward agreements (i.e., "when-issued" securities) only to the extent
permissible for federal credit unions. Specifically, the Fund will enter into
repurchase transactions only where the purchase price of the security obtained
in the transaction will be at or below the market price and either: (1) the
repurchase transaction will be with another financial institution or (2) the
Fund will take physical possession of the security or receive written
confirmation of the purchase and a custodial or safekeeping receipt from a third
party under a written bailment for hire contract, or be recorded as the owner of
the security through the Federal Reserve Book-Entry System. In addition, the
Fund will enter into a cash forward agreement to purchase a security only where:
(1) the period from the trade date to the settlement date does not exceed 120
days; (2) the Fund has written cash flow projections evidencing its ability to
purchase the security; and (3) the cash forward agreement is settled on a cash
basis at the settlement date.
RISK FACTORS
Investments in a Fund 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 a Fund 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.
19
<PAGE>
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 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 a Fund 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 a Fund 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
either Fund, which are diversified funds, 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.
20
<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 a Fund 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 a Fund.
Wells Fargo Bank 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 Fund's 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 Wells Fargo Bank judges market conditions
incorrectly, the use of certain derivatives could result in a loss, regardless
of Wells Fargo Bank'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.
A Fund's 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.
There is, of course, no assurance that a Fund will achieve its investment
objective or be successful in preventing or minimizing the risk of loss that is
inherent in investing in particular types of investment products.
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
21
<PAGE>
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 Inc.;
President 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 Geyser
55 Francisco Street 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, NY 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.
Richard H. Blank, Jr., 41 Chief Operating Vice President of Stephens Inc.; Director of
Officer, Stephens Sports Management Inc.; and Director
Secretary and of Capo Inc.
Treasurer
</TABLE>
22
<PAGE>
Compensation Table
Year Ended March 31, 1997
-------------------------
<TABLE>
<CAPTION>
Total Compensation
Aggregate Compensation from Registrant
Name and Position from Registrant and Fund Complex
----------------- --------------- ----------------
<S> <C> <C>
Jack S. Euphrat $11,250 $33,750
Director
R. Greg Feltus $ 0 $ 0
Director
Thomas S. Goho $11,250 $33,750
Director
Joseph N. Hankin $ 8,750 $26,250
Director
W. Rodney Hughes $ 9,250 $27,750
Director
Robert M. Joses $11,250 $33,750
Director
J. Tucker Morse $ 9,250 $27,750
Director
</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 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.
23
<PAGE>
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 each Fund. 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 rates indicated below of each Fund's average
daily net assets:
<TABLE>
<CAPTION>
Annual Rate
Fund (as percentage of net assets)
---- -----------------------------
<S> <C>
Intermediate Bond 0.50%
Short-Intermediate U.S. Government 0.50%
Short-Term Government-Corporate 0.50%
U.S. Government Income 0.50% up to $250 million
0.40% next $250 million
0.30% over $500 million
Variable Rate Government 0.50%
</TABLE>
For the period indicated below, the Funds paid to Wells Fargo Bank the
following advisory fees and Wells Fargo Bank waived the indicated amounts:
<TABLE>
<CAPTION>
Six-Month
Period Ended
3/31/97
----------
Fund Fees Paid Fees Waived
---- ---------- -----------
<S> <C> <C>
Intermediate Bond $ 51,418 $ 61,866
Short-Intermediate U.S. Government $ 134,529 $121,235
Short-Term Government-Corporate/*/ $ 0 $ 55,285
U.S. Government Income/*/ $ 167,516 $ 46,101
Variable Rate Government/*/ $2,696,450 $ 0
</TABLE>
_____________________
/*/ Indicates fees paid by, or on behalf of, the Overland predecessor portfolio
for the year ended December 31, 1996, the predecessor portfolio's most
recently completed fiscal year.
Intermediate Bond Fund. The Pacifica Intermediate Bond Fund was reorganized
----------------------
as the Company's Intermediate Bond Fund on September 6, 1996. Prior to September
6, 1996, Wells Fargo Investment Management, Inc. ("WFIM") and its predecessor,
First Interstate Capital
24
<PAGE>
Management, Inc. ("FICM") served as advisor to the Pacifica Intermediate Bond
Fund. As of September 6, 1996, Wells Fargo Bank became the advisor to the
Company's Intermediate Bond Fund.
For the fiscal year ended September 30, 1996, the Fund paid $227,965 in
advisory fees and $39,513 of advisory fees were waived. These amounts include
advisory fees paid by the predecessor portfolio to FICM/WFIM prior to September
6, 1996.
Prior to October 1, 1995, First Interstate Bank of Oregon, N.A. served as
advisor to the predecessor portfolio of the Intermediate Bond Fund. For the
four-month period ended September 30, 1995, and the years ended May 31, 1995,
and 1994, the prior advisors for the Fund were entitled to receive advisory fees
from the Fund at the same annual rates as those that were in effect for WFIM.
For the periods indicated below, the prior advisors were entitled to receive
the following amounts in advisory fees and did not waive or reimburse any
advisory fees. In 1995, the Fund changed its fiscal year from May 31 to
September 30.
<TABLE>
<CAPTION>
Four-Month
Period Ended Year Ended Year Ended
9/30/95 5/31/95 5/31/94
------------ ---------- ----------
<S> <C> <C>
$94,698 $275,948 $318,000
</TABLE>
Short-Intermediate U.S. Government Income Fund. For the nine-month period
----------------------------------------------
ended September 30, 1996, the Short-Intermediate U.S. Government Income Fund
paid $213,467 to Wells Fargo Bank for advisory fees. Wells Fargo Bank did not
waive any advisory fees.
Short-Term Government-Corporate Income Fund. Prior to the Consolidation,
-------------------------------------------
the Short-Term Government-Corporate predecessor portfolio invested all of its
assets into a corresponding Master Portfolio of MIT and did not retain an
investment advisor. Wells Fargo Bank served as investment advisor to the Master
Portfolio in which the predecessor portfolio invested and was entitled to
receive a monthly fee at the annual rate of 0.50% of the Master Portfolio's
average daily net assets.
U.S. Government Income Fund. As discussed herein under "Historical Fund
---------------------------
Information," on December 12, 1997 the Overland U.S. Government Income Fund was
consolidated with and into the Fund. For financial reporting purposes, the
Overland Fund is considered the accounting survivor of the Consolidation and the
Fund has adopted the financial statements of the Overland Fund. Therefore, the
information shown below concerning the dollar amount of advisory (and other)
fees paid shows the dollar amount of fees paid by the Overland Fund. Prior to
the Consolidation, Wells Fargo Bank served as the investment advisor to the
Overland Fund and was entitled to receive a monthly fee at the annual rate of
0.50% of the Fund's average daily net assets.
Variable Rate Government Fund. Wells Fargo Bank and Stephens have agreed
-----------------------------
to waive ten basis points (0.10%) of the fees charged to the Fund in connection
with the settlement of certain litigation involving the Fund. Prior to the
Consolidation, Wells Fargo Bank served as
25
<PAGE>
investment advisor to the Overland Fund and was entitled to receive a monthly
fee at the annual rate of 0.50% of the Fund's average daily net assets. As
discussed herein under "Historical Fund Information," on December 12, 1997 the
Overland Variable Rate Government Fund was consolidated with and into the Fund.
For financial reporting purposes the Overland Fund is considered the accounting
survivor of the Consolidation and the Fund has adopted the financial statements
of the Overland Fund. Therefore, the information shown below concerning the
dollar amount of advisory (and other) fees paid shows the dollar amount of fees
paid by the Overland Fund.
For the periods indicated below, the Short-Intermediate U.S. Government
Income, Short-Term Government Corporate Income, U.S. Government Income and
Variable Rate Government Funds paid to Wells Fargo Bank the following advisory
fees and Wells Fargo Bank waived the indicated amounts:
<TABLE>
<CAPTION>
Year Ended Year Ended
12/31/95 12/31/94
---------- ----------
Fees Fees Fees Fees
Fund Paid Waived Paid Waived
---- ---- ------ ---- ------
<S> <C> <C> <C> <C>
Short-Intermediate U.S. $ 56,387 $ 60,241 $ 0 $ 58,270
Government Income
Short-Term Government- $ 0 $ 11,944 $ 0 $ 131
Corporate Income/1/
U.S. Government Income/2/ $ 175,052 $ 13,667 $ 230,619 $ 28,872
Variable Rate Government/2/ $3,561,101 $554,480 $6,929,600 $1,622,859
</TABLE>
____________________
/1/ The Short-Term Government-Corporate Income Fund and Master Portfolio
commenced operations on September 19, 1994. The amounts shown were paid by
the Master Portfolio on behalf of the Fund.
/2/ Indicates fees paid by the Overland predecessor portfolios.
General. Each Fund's 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 respective Fund's outstanding
voting securities or by the Company's Board of Directors and (ii) by a majority
of the Directors of the Company who are not parties to the Advisory Contract or
"interested persons" (as defined in the 1940 Act) of any such party. A Fund's
Advisory Contract may be terminated on 60 days' written notice by either party
and will terminate automatically if assigned.
PORTFOLIO MANAGERS. Mr. Paul Single assumed responsibility for the day-to-
------------------
day management of the portfolio of the U.S. Government Income Fund on May 1,
1995. Mr. Single assumed responsibility as co-manager for the day-to-day
management of the Variable Rate Government Fund in November, 1990. Mr. Single
has managed taxable bond portfolios for over a decade, and has specific
expertise in mortgage-backed securities. Prior to joining Wells Fargo Bank, in
early 1988, he was a senior portfolio manager for Benham Capital Management
Group. Mr. Single received his B.S. from Springfield College.
Mr. Jeff Weaver assumed responsibility as a portfolio co-manager for the
day-to-day management of the portfolio of the Short-Term Government-Corporate
Income Fund and the
26
<PAGE>
Short-Intermediate U.S. Government Income Fund as of May 1, 1996 and July 16,
1996, respectively. Mr. Weaver joined Wells Fargo Bank in February of 1994,
after three years as a short-term fixed income trader and portfolio manager in
the investment management group of Bankers Trust Company in New York. He holds a
B.A. in economics from the University of Colorado and is a chartered financial
analyst candidate.
Ms. Madeline Gish assumed responsibility as a portfolio co-manager for the
day-to-day management of the portfolio of the Short-Intermediate U.S. Government
Income Fund and the Short-Term Government-Corporate Income Fund as of July 16,
1996. Ms. Gish joined Wells Fargo Bank in 1989 as the portfolio coordinator for
the Mutual Funds Division and played an integral part in the rapid growth of the
Overland Express Funds. Since joining the fixed-income group in 1992, Ms. Gish
has assisted in the research and trading for various portfolios and is currently
managing taxable liquidity portfolios. She holds a B.S. in Business
Administration from the University of Kansas and is a chartered financial
analyst.
Mr. Scott Smith assumed responsibility as a portfolio co-manager for the
day-to-day management of the Intermediate Bond Fund as of September 6, 1996, and
became sole manager of the Fund in February 1998. Mr. Smith, as co-manager, has
also been responsible for the day-to-day management of the portfolio of the U.S.
Government Income Fund since May 1, 1995 and the Variable Rate Government Fund
since October 1993. He joined Wells Fargo Bank in 1988 as a taxable money
market portfolio specialist. Currently, Mr. Smith holds the position of
liquidity management specialist/portfolio manager 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.
ADMINISTRATOR AND CO-ADMINISTRATOR. The Company has retained Wells Fargo
----------------------------------
Bank as Administrator and Stephens as Co-Administrator on behalf of each Fund.
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
each Fund's 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 U.S. Securities and Exchange Commission ("SEC") and state
securities commissions; and preparation of proxy statements and shareholder
reports for each Fund; and (ii) general supervision relative to the compilation
of data required for the preparation of periodic reports distributed to the
Company's officers and Board of Directors. Wells Fargo Bank and Stephens also
furnish office space and certain facilities required for conducting the 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 each Fund. Prior to February 1, 1998, the Administrator and Co-
Administrator received a monthly fee of 0.04% and 0.02%, respectively, of the
average daily net assets of each Fund. In connection with the change in fees,
the responsibility for performing various administration services was shifted to
the Co-Administrator.
27
<PAGE>
Except as described below, prior to February 1, 1997, Stephens served as the
sole Administrator and performed substantially the same services now provided by
Stephens and Wells Fargo Bank.
Intermediate Bond and Short-Intermediate U.S. Government Income Funds. For
---------------------------------------------------------------------
the period indicated below, the Intermediate Bond and Short-Intermediate U.S.
Government Income Funds paid the following dollar amounts to Wells Fargo Bank
and Stephens for administration and co-administration fees:
<TABLE>
<CAPTION>
Six-Month
Period Ended
3/31/97
-------
Fund Total Wells Fargo Stephens
---- ----- ----------- --------
<S> <C> <C> <C>
Intermediate Bond $12,053 $ 2,411 $ 9,642
Short-Intermediate U.S. Government Income $64,992 $ 51,994 $12,929
</TABLE>
Intermediate Bond Fund. The Pacifica Intermediate Bond Fund was reorganized
----------------------
as the Company's Intermediate Bond Fund on September 6, 1996. Prior to
September 6, 1996, the Administrator, Furman Selz LLC ("Furman Selz"), of the
Pacifica Intermediate Bond predecessor portfolio provided management and
administration services necessary for the operation of such Fund, pursuant to an
Administrative Services Contract. For these services, Furman Selz was entitled
to receive a fee, payable monthly, at the annual rate of 0.15% of the average
daily net assets of the predecessor portfolio.
For the year ended September 30, 1996, the Fund paid, after waivers, $55,482
for administration services. This amount reflects fees paid to Stephens, as
sole Administrator to the Fund, for the period begun September 6, 1996 and ended
September 30, 1996. During this time, Stephens was entitled to receive a fee,
payable monthly, at the annual rate of 0.05% of the Fund's average daily net
assets. The amount also reflects the net administration fees paid by the
predecessor portfolio to Furman Selz for the period begun October 1, 1995 and
ended September 5, 1996.
Prior to October 1, 1995, ALPS Mutual Funds Service, Inc. ("ALPS") served as
the Administrator for the predecessor portfolio of the Intermediate Bond Fund.
For its administration services, ALPS was entitled to receive the amounts
indicated below for the four-month period ended September 30, 1995, and the
years ended May 31, 1995, and May 31, 1994. ALPs did not waive any
administration fees during this period. During 1995, the Fund changed its
fiscal year-end from May 31 to September 30.
28
<PAGE>
<TABLE>
<CAPTION>
Four-Month
Period Ended Year Ended Year Ended
9/30/95 5/31/95 5/31/94
------------ ---------- ----------
<S> <C> <C>
$9,470 $ 27,595 $ 31,800
</TABLE>
Short-Intermediate U.S. Government Income Fund. For the periods indicated
----------------------------------------------
below, the Short-Intermediate U.S. Government Income Fund paid to Stephens the
following dollar amounts of administration fees. Stephens, as sole
Administrator for the years ended December 31, 1994, and 1995, and the nine-
month period September 30, 1996, was entitled to receive a fee, payable monthly,
at the annual rate of 0.03% of the Short-Intermediate U.S. Government Fund's
average daily net assets.
<TABLE>
<CAPTION>
Nine-Month
Period Ended Year Ended Year Ended
9/30/96 12/31/95 12/31/94
------- -------- --------
<S> <C> <C>
$12,808 $ 6,998 $ 3,522
</TABLE>
Short-Term Government-Corporate Income, U.S. Government Income and Variable
---------------------------------------------------------------------------
Rate Government Funds. Prior to the Consolidation of the Overland portfolios
- ---------------------
into the Stagecoach funds on December 12, 1997, Wells Fargo Bank and Stephens
served as Administrator and Co-Administrator, respectively, to the Overland
Short-Term Government-Corporate Income, U.S. Government Income and Variable Rate
Government predecessor portfolios under substantially similar terms to the
current Administration and Co-Administration Agreements with the Funds. Prior
to February 1, 1997, Stephens served as sole Administrator to the Overland
Short-Term Government-Corporate Income, U.S. Government Income and Variable Rate
Government predecessor portfolios and provided the predecessor portfolios with
essentially the same services described above. Stephens was entitled to receive
a monthly fee from the Short-Term Government-Corporate Income and Variable Rate
Government predecessor portfolios at the annual rate of 0.15% of each
predecessor portfolio's average daily net assets up to $200 million and 0.10% in
excess of $200 million. Stephens was entitled to receive a fee from the U.S.
Government Income Fund's predecessor portfolio at the annual rate of 0.10% of
the average daily net assets up to $200 million and 0.05% in excess of $200
million.
For the periods indicated below, the predecessor portfolios paid the
following dollar amounts to Stephens for administration fees:
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
12/31/96 12/31/95 12/31/94
---------- ---------- ----------
<S> <C> <C> <C>
Short-Term Government-Corporate $ 10,073 $ 3,560 $ 39/*/
U.S. Government Income $ 51,898 $ 37,744 $ 42,274
Variable Rate Government $ 400,616 $ 923,116 $1,810,492
</TABLE>
_____________________
/*/ Amount indicated reflects fees for the period begun September 19, 1994, and
ended December 31, 1994.
29
<PAGE>
DISTRIBUTOR. Stephens Inc. ("Stephens", the "Distributor"), located at 111
-----------
Center Street, Little Rock, Arkansas 72201, serves as the Distributor for the
Funds. Each Fund has adopted a 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 agreement related to the Plans (the "Non-Interested
Directors").
Under the Plans, and pursuant to the related Distribution Agreement, the
Funds may pay Stephens the amounts 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 or Fund.
<TABLE>
<CAPTION>
Fund Fee
---- ---
<S> <C>
Intermediate Bond
Class A 0.05%
Class B 0.75%
Short-Term Government-Corporate Income 0.25%
U.S. Government Income
Class B 0.70%
Class C 0.75%
Variable Rate Government
Class A 0.25%
Class C 0.50%
</TABLE>
The actual fee payable to the Distributor by the above-indicated Funds and
Classes 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.
Under the Plans in effect for the Class A shares of the Short-Intermediate
U.S. Government Income and the U.S. Government Income Funds, each Fund may
defray all or part of the cost of preparing and printing prospectuses and other
promotional materials and of delivering those prospectuses and promotional
materials to prospective shareholders by paying on an annual basis up to 0.05%
of the respective Fund's average daily net assets attributable to
30
<PAGE>
Class A shares. The Plans for the Class A shares of these Funds provide only for
reimbursement of actual expenses.
For the six-month period ended March 31, 1997, the Distributor to the
Intermediate Bond and Short-Intermediate U.S. Government Income Funds and the
Class B shares of the U.S. Government Income Fund received the following fees
for distribution-related services, as set forth below, under each Fund's Plan.
For the year ended December 31, 1996, the Distributor to the Overland
predecessor portfolios to the Short-Term Government-Corporate Income Fund, U.S.
Government Income Fund and the Variable Rate Government Fund received the
following fees for distribution-related services, as set forth below, under each
Fund's Plan. The predecessor portfolio to the U.S. Government Income Fund did
not offer Class B shares and therefore dollar amounts are not shown for the
Class B shares. WFSI and its registered representatives did not receive any
compensation under the Funds' Plans for the periods described above.
<TABLE>
<CAPTION>
Printing &
Mailing Marketing Compensation to
Fund Total Prospectus Brochures Underwriters
---- ----- ---------- --------- ------------
<S> <C> <C> <C> <C>
Intermediate Bond
Class A $ 4,961 $4,898 $ 63 N/A
Class B $ 805 N/A N/A $ 805
Short-Intermediate U.S.
Government Income
Class A $ 6,788 $5,537 $1,250 N/A
Short-Term Government- $ 27,719 N/A N/A $ 27,719
Corporate Income
U.S. Government Income
Class A $ 0 N/A N/A $ 0
Class C $ 11,986 N/A N/A $ 11,986
Variable Rate Government
Class A $1,330,313 N/A N/A $1,330,313
Class C $ 35,887 N/A N/A $ 35,887
</TABLE>
Intermediate Bond Fund. With regard to the Intermediate Bond Fund, for the
----------------------
year ended September 30, 1996, the Distributor did not receive any distribution-
related fees for Class A or B shares.
Prior to September 6, 1996, PFD, a subsidiary of Furman Selz, served as
principal underwriter for the shares of the Intermediate Bond predecessor
portfolio pursuant to a Distribution
31
<PAGE>
Contract as of October 1, 1995. Distribution fees were payable to PFD through
September 5, 1996 and to Stephens from September 6 to September 30, 1996.
Short-Intermediate U.S. Government Income Fund. For the nine-month period
----------------------------------------------
ended September 30, 1996, the Short-Intermediate U.S. Government Income Fund's
Distributor received the following amounts of distribution-related fees for the
specified purposes set forth below under the Fund's Plan.
<TABLE>
<CAPTION>
Printing &
Mailing Marketing Compensation to
Fund Total Prospectus Brochures Underwriters
---- ----- ---------- --------- ------------
<S> <C> <C> <C> <C>
Short-Intermediate U.S.
Government Income
Class A $0 $0 $0 N/A
</TABLE>
For the periods indicated above, WFSI and its registered representatives did
not receive any compensation under the Short-Intermediate U.S. Government Income
and U.S. Government Income Plans.
General. Each Plan will continue in effect from year to year if such
-------
continuance is approved by a majority vote of both the Directors of the Company
and the Non-Interested Directors. Any Distribution Agreement related to the
Plans also must be approved by such vote of the Directors and the Non-Interested
Directors. Such Agreement 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 Fund 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 Fund, 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. The Rule also
requires that the selection and nomination of Directors who are not "interested
persons" of the Company be made by such disinterested Directors.
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
authorize 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 Fund assets and ultimately corresponding economic efficiencies
32
<PAGE>
(i.e., lower per-share transaction costs and fixed expenses) that are generated
by increased assets under management.
ADMINISTRATIVE SERVICING AGENTS. The Short-Term Government Corporate Income
-------------------------------
and Variable Rate Government Funds have each adopted a Shareholder
Administrative Servicing Plan (the "Administrative Servicing Plan") on behalf of
their Class A shares. Pursuant to the Administrative Servicing Plan, these
Funds may enter into Administrative Servicing Agreements with administrative
servicing agents (broker/dealers, banks and other financial institutions, which
may include Wells Fargo Bank and its affiliates) who are dealers/holders of
record, or that otherwise have a servicing relationship with the beneficial
owners of the Funds' Class A shares. Administrative servicing agents agree to
perform shareholder administrative and liaison services which may include, among
other things, maintaining an omnibus account with the Fund, aggregating and
transmitting purchase, exchange and redemption orders from its customers,
answering customer inquiries regarding a shareholder's accounts in the Fund, and
providing such other services as the Company or a customer may reasonably
request. Administrative servicing agents are entitled to a fee which will not
exceed 0.25%, on an annualized basis, of the average daily net assets of the
class of the Class A shares owned of record or beneficially by the customers of
the administrative servicing agent during the period for which payment is being
made. In no case shall shares be sold pursuant to the Class A distribution plan
while being sold pursuant to its Administrative Servicing Plan.
The Administrative Servicing Plans will continue in effect from year to year
if such continuance is approved by a majority vote of the Directors of the
Company. Any form of Servicing Agreement related to the Plans also must be
approved by such vote of the Directors. Servicing Agreements will terminate
automatically if assigned, and may be terminated at any time, without payment of
any penalty, by a vote of a majority of the outstanding shares of the
appropriate class of a Fund. The Administrative Servicing Plans may not be
amended to increase materially the amount payable thereunder without the
approval of a majority of the outstanding shares of the appropriate class of
such Fund, and no other material amendment to the Plans or related
Administrative Servicing Agreements may be made except by a majority of the
Directors.
The Administrative Servicing Plans require 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 each of the
Plans.
SHAREHOLDER SERVICING AGENTS. The Intermediate Bond (Class A and B), U.S.
----------------------------
Government Income (Class B and C) and Variable Rate Government Funds (Class C)
have approved Servicing Plans and have entered into related shareholder
servicing agreements with financial institutions, including Wells Fargo Bank.
The Short-Intermediate Government Income Fund and U.S. Government Income (Class
A) Funds have entered into shareholder servicing agreements. Under the
agreements, Shareholder Servicing Agents (including Wells Fargo Bank) agree to
perform, as agents for their customers, administration 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 applicable Fund, on an annualized
basis, of the average daily net assets of the class of shares owned of record or
beneficially by the customers
33
<PAGE>
of the Servicing Agent during the period for which payment is being made. The
amounts payable under the Shareholder Servicing Plans are shown below. The
Servicing Plans and related forms of shareholder servicing agreements were
approved by the Company's Board of Directors and provide that a Fund shall not
be obligated to make any payments under such Plans or related Agreements that
exceed the maximum amounts payable under the Conduct Rules of the NASD.
<TABLE>
<CAPTION>
Fund Fee
---- ---
<S> <C>
Intermediate Bond
Class A 0.25%
Class B 0.25%
Short-Intermediate U.S. Government Income 0.30%
U.S. Government Income
Class A 0.30%
Class B 0.30%
Class C 0.25%
Variable Rate Government
Class A 0.25%
Class C 0.25%
</TABLE>
For the period indicated below, the dollar amounts of shareholder servicing
fees paid, after waivers, by the Funds to Wells Fargo Bank or its affiliates
were as follows:
<TABLE>
Six-Month
Period Ended
Fund 3/31/97
---- -------
<S> <C>
Intermediate Bond
Class A $ 2,697
Class B $ 271
Short-Intermediate U.S. Government Income $ 54,045
U.S. Government Income/*/
Class C $ 6,135
Variable Rate Government/*/
Class A
Class C $ 17,944
</TABLE>
- --------------------
/*/ Represents the amount paid by the Overland predecessor portfolio for the
year ended December 31, 1996, the predecessor portfolio's most recently
completed fiscal year. The predecessor portfolio to the U.S. Government
Income Fund did not offer Class B shares and did not have a Servicing Plan
in place for its Class A shares.
34
<PAGE>
Therefore, dollar amounts paid are not shown for the Class A and B shares of
the U.S. Government Income Fund.
Intermediate Bond Fund. For the period begun October 1, 1995 and ended
----------------------
September 5, 1996, and under similar service agreements, payments were made to
First Intestate Bancorp for the Intermediate Bond Fund. For the period begun
September 6, 1996 and ended September 30, 1996, shareholder servicing fees were
paid to Wells Fargo Bank or its affiliates. Class A shares of the Fund paid
$379 in shareholder servicing fees (after waivers and reimbursements) for the
year ended September 30, 1996. The Class B Shares of the Fund did not pay any
shareholder servicing fees for the same period.
Short-Intermediate U.S. Government Income Fund. The Short-Intermediate U.S.
----------------------------------------------
Government Income Fund paid $15,851, after waivers, in shareholder servicing
fees to Wells Fargo Bank or its affiliates for the nine-month period ended
September 30, 1996.
General. Each 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 a 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 of a majority of
the Board of Directors, including a majority of the Non-Interested Directors.
No material amendment to the Servicing Plans or related Servicing Agreements may
be made except by a majority of both the Directors of the Company and the Non-
Interested Directors.
Each 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 each Fund. The Custodian,
---------
among other things, maintains a custody account or accounts in the name of each
Fund, receives and delivers all assets for each Fund upon purchase and upon sale
or maturity, collects and receives all income and other payments and
distributions on account of the assets of each Fund, and pays all expenses of
each Fund. For its services as Custodian, Wells Fargo Bank 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 Fund's average daily net assets, 0.045% of the next
$50,000,000, and 0.020% of the average daily net assets in excess of
$100,000,000.
For the six-month period ended March 31, 1997, the Intermediate Bond and
Short-Intermediate U.S. Government Income Funds did not pay any custody fees.
For the year ended December 31, 1996, the Overland predecessor portfolios to
the Short-Term Government-Corporate, U.S. Government Income and Variable Rate
Government Funds did not pay any custody fees. Prior to the Consolidation, the
Short-Term Government Corporate Income Fund invested all of its assets in a
Master Portfolio with a corresponding investment objective. For the year ended
December 31, 1996, the Master Portfolio did not pay any custody
35
<PAGE>
fees. For the period ended September 30, 1996, the Short-Intermediate U.S.
Government Income Fund did not pay any custody fees.
Intermediate Bond Fund. FICAL, located at 707 Wilshire Blvd., Los Angeles,
----------------------
California 90017, acted as Custodian of the Pacifica Intermediate Bond Fund.
FICAL was entitled to receive a fee from Pacifica, computed daily and payable
monthly, at the annual rate of 0.021% of the first $5 billion in aggregate
average daily net assets of the Fund; 0.0175% of the next $5 billion in
aggregate average daily net assets of the Fund; and 0.015% of the aggregate
average daily net assets of the Fund in excess of $10 billion.
The predecessor portfolio to the Intermediate Bond Fund did not pay any
custody fees to FICAL for the period begun October 1, 1995 and ended September
5, 1996 and did not pay any custody fees to Wells Fargo Bank for the period
begun September 6, 1996 and ended September 30, 1996.
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 each Fund's average daily net assets of each class of shares.
For the six-month period ended March 31, 1997, the Funds paid the following
dollar amounts in transfer and dividend disbursing agency fees to Wells Fargo
Bank:
<TABLE>
<CAPTION>
Fund Transfer Agency Fees
---- --------------------
<S> <C>
Intermediate Bond $ 0
Short-Int. U.S. Govt. Income $ 0
Short-Term Govt.-Corp./*/ $ 0
U.S. Govt. Income/*/ $ 0
Variable Rate Govt./*/ $63,299
</TABLE>
____________________
/*/ Represents amounts paid by the Overland predecessor portfolio for the year
ended December 31, 1996, the predecessor portfolio's most recently completed
fiscal year.
Intermediate Bond Fund. Under the prior transfer agency agreement for the
----------------------
Intermediate Bond Fund, Wells Fargo Bank was entitled to receive monthly
payments at the annual rate of 0.07% of the average daily net assets of each
Class of the Funds, as well as reimbursement for all reasonable out-of-pocket
expenses. Furman Selz acted as Transfer Agent for the Intermediate Bond
predecessor portfolio. Pacifica compensated Furman Selz for providing personnel
and facilities to perform transfer agency related services for Pacifica at a
rate intended to represent the cost of providing such services.
Short-Intermediate U.S. Government Income and U.S. Government Income Funds.
--------------------------------------------------------------------------
Under the prior transfer agency agreement with the Short-Intermediate U.S.
Government Income Fund (Class A shares) and U.S. Government Income Fund (Class A
and C shares), Wells Fargo Bank was entitled to receive a per account fee plus
transaction fees and reimbursement of out-of-pocket expenses, with a minimum of
$3,000 per month per Fund, unless net assets of the Fund were under
36
<PAGE>
$20 million. For as long as a Fund's assets remained under $20 million, a Fund
was not charged any transfer agency fees.
Variable Rate Government and Short-Term Government-Corporate Income Funds.
-------------------------------------------------------------------------
Under a prior transfer agency agreement with the Variable Rate Government and
Short-Term Government-Corporate Income predecessor portfolios, Wells Fargo Bank
received a base fee and per-account fees from a Fund paid without regard to
class.
UNDERWRITING COMMISSIONS. For the six-month period ended March 31, 1997,
------------------------
the aggregate dollar amount of underwriting commissions paid to Stephens on
sales/redemptions of the Company's shares was $2,296,243 and Stephens retained
$241,806 of such commissions. WFSI and its registered representatives received
$1,719,000 and $335,437, respectively, of such commissions.
For the nine-month period ended September 30, 1996, the aggregate amount of
underwriting commissions paid to Stephens on sales/redemptions of the Company's
shares was $2,917,738. Stephens retained $198,664 of such commissions. WFSI and
its registered representatives received $2,583,027 and $136,047, respectively,
of such commissions.
For the year ended December 31, 1995, the aggregate amount of underwriting
commissions paid to Stephens on sales/redemptions of the Company's shares was
$1,251,311. Stephens retained $162,660 of such commissions. WFSI and its
registered representatives received $399,809 of such commissions.
For the year ended December 31, 1994, Stephens retained $5,415,227, in
underwriting commissions (front-end sales loads and CDSCs, if any) in connection
with the purchase or redemption of the Company's shares. For the year ended
December 31, 1994, Wells Fargo Securities Inc. ("WFSI"), an affiliated broker-
dealer of the Company, and its registered representatives received $904,274, in
underwriting commissions in connection with the purchase or redemption of
Company's 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
37
<PAGE>
alternatives because of differences 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.
Performance shown or advertised for the Class A shares of the Stagecoach
Intermediate Bond Fund for periods prior to September 6, 1996, reflects
performance of the Investor Class shares of the Pacifica Intermediate Bond Fund,
a predecessor portfolio with the same investment objective and policies as the
Stagecoach Intermediate Bond Fund. Performance shown or advertised for the
Class B shares of the Stagecoach Intermediate Bond Fund for periods prior to
September 6, 1996, reflects performance of the Investor Class shares of the
predecessor portfolio, adjusted to reflect Class B expenses in effect on
September 6, 1996.
Performance shown or advertised for the Stagecoach Short-Term Government-
Corporate Income Fund for periods prior to December 12, 1997 reflects,
performance of the shares of the Overland Short-Term Government-Corporate Income
Fund, a predecessor portfolio with the same investment objective and policies as
the Stagecoach Fund.
Performance shown or advertised for the Class A shares of the Stagecoach
U.S. Government Income Fund for periods prior to December 12, 1997, reflects
performance of the Class A shares of the Overland U.S. Government Income Fund
(the accounting survivor of a merger of the funds on December 12, 1997).
Performance shown or advertised for the Class B and Class C shares of the Fund
for the period from July 1, 1993 to December 12, 1997, reflects performance of
the Class D shares of the Overland Fund. For periods prior to July 1, 1993,
Class B share and Class C share performance reflects performance of the Class A
shares of the Overland Fund, adjusted to reflect the expenses of the Class B or
Class C shares, as applicable.
Performance shown or advertised for the Class A shares of the Stagecoach
Variable Rate Government Fund for periods prior to December 12, 1997, reflects
performance of the Class A shares of the Overland Express Variable Rate
Government Fund, a predecessor portfolio with the same investment objective and
policies as the Stagecoach Variable Rate Government Fund. Performance shown or
advertised for the Class C shares of the Stagecoach Fund for the period from
July 1, 1993 to December 12, 1997, reflects performance of the Class D shares of
the Overland Fund. For periods prior to July 1, 1993, Class C share performance
reflects performance of the Class A shares of the Overland Fund, adjusted to
reflect the expenses of the Class C shares.
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") is 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.
38
<PAGE>
Average Annual Total Return for the Applicable
----------------------------------------------
Period Ended June 30, 1997/1/
--------------------------
<TABLE>
<CAPTION>
Inception Inception Five Year Five Year Three Year Three Year One Year One Year
With No With No With No With No
Sales Sales Sales Sales Sales Sales Sales Sales
Fund Charge/2/ Charge Charge Charge Charge Charge Charge Charge
---- --------- ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S.
Government
Income
Class A 7.88% 8.42% 5.39% 6.37% 5.32% 6.94% 2.25% 7.06%
Class B 7.83% 7.83% 5.23% 5.23% 7.22% 7.22% 6.68% 7.68%
Class C 3.81% 3.81% N/A N/A 6.17% 6.17% 5.19% 6.19%
Variable Rate
Government
Class A 4.28% 4.76% 2.89% 3.51% 3.25% 4.31% 3.07% 6.30%
Class C 4.24% 4.24% 2.98% 2.98% 3.80% 3.80% 4.85% 5.85%
Short-Term
Gov.-Corp.
Income
Class A 4.63% 5.75% N/A N/A N/A N/A 2.89% 6.00%
</TABLE>
- -------------------
/1/ Return calculations, except as indicted, reflect the inclusion of front-end
sales charges for Class A shares and the maximum applicable contingent
deferred sales charge for Class B and Class C shares./
/2/ For purposes of showing performance information, the inception date of each
Fund is as follows: U.S. Government Income Fund - April 7, 1988; Variable
Rate Government-Fund - November 1, 1990; Short-Term Government-Corporate
Income Fund - September 19, 1994. The actual inception date of each class
may differ from the inception date of the corresponding Fund.
Average Annual Total Return for the Applicable Period Ended September 30,
-------------------------------------------------------------------------
1997/1/
-------
<TABLE>
<CAPTION>
Inception Inception Five Year Five Year Three Year Three Year One Year One Year
With No With No With No With No
Sales Sales Sales Sales Sales Sales Sales Sales
Fund Charge/2/ Charge Charge Charge Charge Charge Charge Charge
---- --------- ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Intermediate
Bond
Class A 7.59% 8.13% 4.70% 5.67% 6.24% 7.87% 2.70% 7.51%
Class B 7.22% 7.22% 4.45% 4.74% 5.98% 6.87% 1.13% 6.13%
Short-
Intermediate
U.S.
Government
Income
Class A 4.37% 5.19% N/A N/A 5.98% 7.08% 4.57% 7.79%
</TABLE>
39
<PAGE>
- -------------------
/1/ Return calculations, except as indicted, reflect the inclusion of front-end
sales charges for Class A shares and the maximum applicable contingent
deferred sales charge for Class B and Class C shares./
/2/ For purposes of showing performance information, the inception date of each
Fund is as follows: U.S. Government Income Fund - April 7, 1988; Variable
Rate Government-Fund - November 1, 1990; Short-Term Government-Corporate
Income Fund - September 19, 1994. The actual inception date of each class
may differ from the inception date of the corresponding Fund.
CUMULATIVE TOTAL RETURN. In addition to the above performance information,
-----------------------
each Fund may also advertise the cumulative total return of the Fund.
Cumulative total return is based on the overall percentage change in value of a
hypothetical investment in the Fund, assuming all 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.
Cumulative Total Return for the Applicable Period Ended June 30, 1997/1/
------------------------------------------------------------------------
<TABLE>
<CAPTION>
Inception Inception Five Year Five Year Three Year Three Year One Year One Year
With No With No With No With No
Sales Sales Sales Sales Sales Sales Sales Sales
Fund Charge/2/ Charge Charge Charge Charge Charge Charge Charge
---- --------- ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S.
Government
Income
Class A 101.72% 111.20% 30.04% 36.17% 16.82% 22.31% 2.25% 7.06%
Class B 22.92% 25.92% N/A N/A N/A N/A 3.03% 8.03%
Class C 16.14% 16.14% N/A N/A 19.66% 19.66% 5.19% 6.19%
Variable Rate
Government
Class A 32.23% 36.63% 15.30% 18.84% 10.07% 13.49% 3.07% 6.30%
Class C 31.86% 31.86% 15.80% 15.80% 11.82% 11.82% 4.85% 5.85%
Short-Term
Gov.-Corp.
Income
Class A 13.48% 16.88% N/A N/A N/A N/A 2.89% 6.00%
</TABLE>
- -------------------
/1/ Return calculations, except as indicted, reflect the inclusion of front-end
sales charges for Class A shares and the maximum applicable contingent
deferred sales charge for Class B and Class C shares./
/2/ For purposes of showing performance information, the inception date of each
Fund is as follows: U.S. Government Income Fund - April 7, 1988; Variable
Rate Government-Fund - November 1, 1990; Short-Term Government-Corporate
Income Fund - September 19, 1994. The actual inception date of each class
may differ from the inception date of the corresponding Fund.
40
<PAGE>
Cumulative Total Return for the Applicable Period Ended September 30, 1997/1/
--------------------------------------------------------------------------
<TABLE>
<CAPTION>
Inception Inception Five Year Five Year Three Year Three Year
With No With No With No
Fund Sales Charge/2/ Sales Charge Sales Charge Sales Charge Sales Charge Sales Charge
---- ------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Intermediate Bond
Class A 97.98% 107.36% 25.83% 31.78% 19.91% 25.52%
Class B 91.68% 91.68% 24.29% 26.06% 19.05% 22.06%
Short-Intermediate
U.S. Government
Income
Class A 18.25% 21.91% N/A N/A 19.03% 22.77%
</TABLE>
- -------------------
/1/ Return calculations, except as indicted, reflect the inclusion of front-end
sales charges for Class A shares and the maximum applicable contingent
deferred sales charge for Class B and Class C shares./
/2/ For purposes of showing performance information, the inception date of each
Fund is as follows: U.S. Government Income Fund - April 7, 1988; Variable
Rate Government-Fund - November 1, 1990; Short-Term Government-Corporate
Income Fund - September 19, 1994. The actual inception date of each class
may differ from the inception date of the corresponding Fund.
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 = the 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 that 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 received 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:
41
<PAGE>
Effective Thirty-Day Yield = [(Base Period Return +1)365/30]-1
Yield for the Applicable Period Ended June 30, 1997/1/
---------------------------------------------------
<TABLE>
<CAPTION>
Thirty-Day Yield
----------------
Fund After Waiver Before Waiver
---- ------------ -------------
<S> <C> <C>
Short-Term Government-
Corporate Income
Single Class 5.33% 3.57%
U.S. Government Income
Class A 5.82% 5.80%
Class C 5.35% 4.24%
Variable Rate Government
Class A 5.32% 5.04%
Class C 4.99% 4.47%
</TABLE>
____________________
/1/ The amounts shown above reflect all front-end sales charges and applicable
CDSCs. "After waiver" figures reflect any waived fees or reimbursed expenses
throughout the period.
Yield for the Applicable Period Ended September 30, 1997/1/
--------------------------------------------------------
<TABLE>
<CAPTION>
Thirty-Day Yield
----------------
Fund After Waiver Before Waiver
---- ------------ -------------
<S> <C> <C>
Intermediate Bond
Class A 5.57% 4.87%
Class B 5.12% 4.33%
Short-Intermediate U.S.
Government Income
Class A
5.66% 5.16%
</TABLE>
______________________
/1/ The amounts shown above reflect all front-end sales charges and applicable
CDSCs. "After waiver" figures reflect any waived fees or reimbursed expenses
throughout the period.
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
42
<PAGE>
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 a Fund will affect the yield of the respective class
of shares for any specified period, and such changes should be considered
together with such class' yield in ascertaining such class' total return to
shareholders for the period. Yield information for each class of shares may be
useful in reviewing the performance of the class of shares and for providing a
basis for comparison with investment alternatives. The yield of each class of
shares, however, may not be comparable to the yields from investment
alternatives because of differences in the foregoing variables and differences
in the methods used to value portfolio securities, compute expenses and
calculate yield.
From time to time and only to the extent the comparison is appropriate for a
Fund or a Class of shares, the Company may quote the performance or price-
earning ratio of a Fund or a Class of in advertising and other types of
literature as compared with the performance of the S&P Index, the Dow Jones
Industrial Average, the Lehman Brothers 20+ Treasury Index, the Lehman Brothers
5-7 Year Treasury Index, Donoghue's Money Fund Averages, Real Estate Investment
Averages (as reported by the National Association of Real Estate Investment
Trusts), Gold Investment Averages (provided by 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), 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 Fund or a class also may be compared to that 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 Funds'
performance will be calculated by relating net asset value per share of each
class at the beginning of a stated period to the net asset value of the
investment, assuming reinvestment of all gains distributions paid, at the end of
the period. The Funds' comparative performance will be based on a comparison of
yields, as described above, or total return, as reported by Lipper, Survey
Publications, Donoghue or Morningstar, Inc. of other mutual funds having similar
objectives.
Any such comparisons may be useful to investors who wish to compare the past
performance of each class of shares of a Fund with the performance of a Fund's
competitors. Of course, past performance cannot be a guarantee of future
results. The Company also may include, from time to time, a reference to certain
marketing approaches of the Distributor, including, for example, a reference to
a potential shareholder being contacted by a selected broker or dealer. General
mutual fund statistics provided by the Investment Company Institute may also be
used.
The Company also may use the following information in advertisements and
other types of literature, only to the extent the information is appropriate for
each class of shares of a Fund: (i) the
43
<PAGE>
Consumer Price Index may be used to assess the real rate of return from an
investment in each class of shares of a Fund; (ii) other government statistics,
including, but not limited to, The Survey of Current Business, may be used to
illustrate investment attributes of each class of shares of a Fund or the
general economic, business, investment, or financial environment in which a Fund
operates; (iii) the effect of tax-deferred compounding on the investment returns
of each class of shares of a Fund or on returns in general, may be illustrated
by graphs, charts, etc., where such graphs or charts would compare, at various
points in time, the return from an investment in each class of shares of the
Fund (or returns in general) on a tax-deferred basis (assuming reinvestment of
capital gains and dividends and assuming one or more tax rates) with the return
on a taxable basis; and (iv) the sectors or industries in which the Fund invests
may be compared to relevant indices of stocks or surveys (e.g., S&P Industry
Surveys) to evaluate the historical performance or current or potential value of
each class of shares of a Fund with respect to the particular industry or
sector.
The Company also may use, in advertisements and other types of literature,
information and statements: (1) showing that bank savings accounts offer a
guaranteed return of principal and a fixed rate of interest, but no opportunity
for capital growth; and (2) describing Wells Fargo Bank, and its affiliates and
predecessors, as one of the first investment managers to advise investment
accounts using asset allocation and index strategies. The Company also may
include in advertising and other types of literature information and other data
from reports and studies prepared by the Tax Foundation, including information
regarding federal and state tax levels and the related "Tax Freedom Day."
The Company also may discuss in advertising and other types of literature
that a Fund has been assigned a rating by an NRSRO, such as Standard Poor's
Corporation. Such rating would assess the creditworthiness of the investments
held by a Fund. The assigned rating would not be a recommendation to purchase,
sell or hold a Fund's shares since the rating would not comment on the market
price of a Fund's shares or the suitability of a Fund for a particular investor.
In addition, the assigned rating would be subject to change, suspension or
withdrawal as a result of changes in, or unavailability of, information relating
to a Fund or its investments. The Company may compare the performance of each
class of shares of a Fund with other investments which are assigned ratings by
NRSROs. Any such comparisons may be useful to investors who wish to compare each
class' past performance with other rated investments.
From time to time, a Fund may use the following statements, or variations
thereof, in advertisements and other promotional materials: "Wells Fargo Bank,
as a Shareholder Servicing Agent for the Stagecoach Funds, provides various
services to its customers that are also shareholders of the Funds. These
services may include access to Stagecoach Funds' account information through
Automated Teller Machines (ATMs), the placement of purchase and redemption
requests for shares of the Funds through ATMs and the availability of combined
Wells Fargo Bank and Stagecoach Funds account statements."
The Company also may disclose, in advertising and other types of literature,
information and statements that Wells Capital Management, Inc. (formerly, Wells
Fargo Investment Management) a subsidiary 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 also may disclose in advertising and other types of
sales literature the assets and categories of assets under management by the
44
<PAGE>
Company'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 the Funds 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 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
45
<PAGE>
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 a Fund is open for business. Each Fund
is 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 a Fund and that such Fund receives satisfactory
assurances that (i) it will have good and marketable title to the securities
received by it; (ii) that the securities are in proper form for transfer to the
Fund; and (iii) adequate information will be provided concerning the basis and
other matters relating to the securities.
Under the 1940 Act, the 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 Fund 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 a
Fund as provided from time to time in the Prospectus.
PORTFOLIO TRANSACTIONS
The Company has no obligation to deal with any dealer or group of dealers in
the execution of transactions in portfolio securities. Subject to policies
established by the Company's Board of Directors, Wells Fargo Bank is responsible
for each Fund's portfolio decisions and the placing of portfolio transactions.
In placing orders, it is the policy of the Company to obtain the best results
taking into account the dealer's general execution and operational facilities,
the type of transaction involved and other factors such as the dealer's risk in
positioning the securities involved. While Wells Fargo Bank generally seeks
reasonably competitive spreads or commissions, the Funds will not necessarily be
paying the lowest spread or commission available.
46
<PAGE>
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. Each of
the Funds also will purchase portfolio securities in underwritten offerings and
may purchase securities directly from the issuer. Generally, municipal
obligations and taxable money market securities are traded on a net basis and do
not involve brokerage commissions. The cost of executing a Fund's portfolio
securities transactions will consist primarily of dealer spreads and
underwriting commissions. Under the 1940 Act, persons affiliated with the
Company are prohibited from dealing with the Company as a principal in the
purchase and sale of securities unless an exemptive order allowing such
transactions is obtained from the SEC or an exemption is otherwise available.
The Fund may purchase 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.
Short-Term Government-Corporate Income Fund. Purchases and sales of equity
-------------------------------------------
securities on a securities exchange are effected through brokers who charge a
negotiated commission for their services. Orders may be directed to any broker
including, to the extent and in the manner permitted by applicable law, Stephens
or Wells Fargo Securities Inc. In the over-the-counter market, securities are
generally traded on a "net" basis with dealers acting as principal for their own
accounts without a stated commission, although the price of the security usually
includes a profit to the dealer. In underwritten offerings, securities are
purchased at a fixed price that includes an amount of compensation to the
underwriter, generally referred to as the underwriter's concession or discount.
In placing orders for portfolio securities of the Short-Term Government-
Corporate Income Fund, Wells Fargo Bank is required to give primary
consideration to obtaining the most favorable price and efficient execution.
This means that Wells Fargo Bank will seek to execute each transaction at a
price and commission, if any, that provide the most favorable total cost or
proceeds reasonably attainable in the circumstances. Commission rates are
established pursuant to negotiations with the broker based on the quality and
quantity of execution services provided
47
<PAGE>
by the broker in the light of generally prevailing rates. The allocation of
orders among brokers and the commission rates paid are reviewed periodically by
the Board of Directors.
Brokerage Commissions. For the six-month period ended March 31, 1997, the
---------------------
Intermediate Bond and Short-Intermediate U.S. Government Income Funds did not
pay any brokerage commissions.
For the years ended December 31, 1996, December 31, 1995, and December 31,
1994, the Short-Term Government-Corporate Income, U.S. Government Income and
Variable Rate Government predecessor portfolios and the Short-Term Government
Corporate Income Master Portfolio did not pay any brokerage commissions.
During the fiscal periods ended September 30, 1996, September 30, 1995, May
31, 1995, and May 31, 1994, the predecessor portfolio of the Intermediate Bond
Fund did not pay any brokerage commissions.
For the years ended December 31, 1994 and 1995, and the period ended
September 30, 1996, the Short-Intermediate U.S. Government Income Fund did not
pay any brokerage commissions.
Securities of Regular Broker/Dealers. As of March 31, 1997, each Fund owned
------------------------------------
securities (pooled repurchase agreements) of its "regular brokers or dealers" as
defined in the 1940 Act or their parents, as follows:
<TABLE>
<CAPTION>
Fund Brokers/Dealers Amount
---- --------------- ------
<S> <C> <C>
Intermediate Bond Fund Goldman Sachs & Co. $1,943,000
Short-Intermediate U.S. Government Goldman Sachs & Co. $1,211,000
Income Fund JP Morgan Securities $2,600,000
Short-Term Government-Corporate None None
Income Fund
U.S. Government Income Fund Goldman Sachs & Co. $ 839,000
Variable Rate Government Fund None None
</TABLE>
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 Fund's 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.
48
<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 Fund's 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 a Fund; expenses
of shareholders' meetings; expenses relating to the issuance, registration and
qualification of a Fund's shares; pricing services, organizational expenses and
any extraordinary expenses. Expenses attributable to the Fund are charged
against Fund assets. General expenses of the Company are allocated among all of
the funds of the Company, including the 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 to each Fund, rather than to the Company as
a whole. In addition, 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 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
49
<PAGE>
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
(if any) 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 a Fund at a
market discount (generally at a price less than its principal amount) will be
treated as ordinary income to the extent of the portion of market discount which
accrued, but was not previously recognized pursuant to an available election,
during the term a 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 a Fund enters into one of the 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.
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.
50
<PAGE>
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 a 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 a Fund to its shareholders not later than 60 days
after the close of a 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 to pass-through entities,
including regulated investment companies, such as the Funds. The Internal
Revenue Service has published a notice describing temporary Regulations to be
issued pursuant to such authority, permitting the application of the reduced
capital gains tax rates to pass-through entities such as the Funds. Under the
Regulations to be issued, if a regulated investment company designates a
dividend as a capital gain dividend for a taxable year ending on or after May 7,
1997, then such regulated investment company may also designate the dividends as
one of two classes: a 20% rate gain distribution, or a 28% rate gain
distribution. Thus, noncorporate shareholders of the Funds may qualify for the
reduced rate of tax on capital gain dividends paid by the Funds, subject only to
the limitation as to the maximum amounts which may be designated in each class.
Such maximum amount for each class is determined by performing the computation
required by Section 1(h) of the Code as if a Fund were an individual whose
ordinary income is subject to a marginal rate of at least 28%.
Other Distributions. Although dividends will be declared daily based on
-------------------
each Fund's daily earnings, for federal income tax purposes, a Fund's earnings
and profits will be determined at the end of each taxable year and will be
allocated pro rata over the entire year. For federal income tax purposes, only
amounts paid out of earnings and profits will qualify as dividends. Thus, if
during a taxable year a Fund's declared dividends (as declared daily throughout
the year) exceed a Fund's net income (as determined at the end of the year),
only that portion of the year's distributions which equals the year's earnings
and profits will be deemed to have constituted a dividend. It is expected that
each Fund's net income, on an annual basis, will equal the dividends declared
during the year.
51
<PAGE>
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 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 a 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.
52
<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 will generally 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 a 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 a 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.
53
<PAGE>
CAPITAL STOCK
The Funds are five 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 a Fund 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 Fund's 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 the Fund. The term "majority," when
referring to approvals to be obtained from shareholders of the Fund, means the
vote of the lesser of (i) 67% of the shares of the Fund represented at a meeting
if the holders of more than 50% of the outstanding shares of the Fund are
present in person or by proxy, or (ii) more than 50% of the outstanding shares
of the Fund. The term "majority," when referring to the approvals to be
obtained from shareholders of the Company as a whole, means the vote of the
lesser of (i) 67% of the Company's shares represented at a meeting if the
holders of more than 50% of the Company's outstanding shares are present in
person or by proxy, or (ii) more than 50% of the Company's outstanding shares.
Shareholders are 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.
54
<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 November 30, 1997, 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. The term "N/A" is used where a shareholder holds 5% or
more of a class, but less than 5% of a Fund as a whole. The shareholder shown
for the Variable Rate Government and Short-Term Government-Corporate Funds are
the shareholders of the predecessor portfolio as of November 30, 1997.
5% OWNERSHIP AS OF NOVEMBER 30, 1997
------------------------------------
<TABLE>
<CAPTION>
TYPE OF PERCENTAGE PERCENTAGE
FUND NAME AND ADDRESS OWNERSHIP OF CLASS OF PORTFOLIO
---- ---------------- --------- ----------- ------------
<S> <C> <C> <C> <C>
INTERMEDIATE BOND Stephens Inc. Class A 55.11% N/A
lll Center Street Beneficially Owned
Little Rock, AR 72201
N/A
D.S. Christopher / Class A 5.06%
Ruth Christopher (Trustees) Inasmuch Trust Record Holder
7995 Willowcreek Dr.
Beaumont, TX 77707 N/A
Stephens Inc.
P.O. Box 34127 Class B 9.41%
Little Rock, AR 72203 Beneficially Owned for N/A
Acct. 76888942
Stephens Inc.
P.O. Box 34127 Class B 9.35%
Little Rock, AR 72203 Beneficially Owned for N/A
Acct. 77085456
Stephens Inc.
P.O. Box 34127 Class B 5.60%
Little Rock, AR 72203 Beneficially Owned for N/A
Acct. 77138803
Vladimir Sirota
P.O. Box 46393 75.16%
Los Angeles, CA 90046
SHORT-INTERMEDIATE Wells Fargo Bank Class A 27.48% 9.60%
U.S. GOVERNMENT INCOME P.O. Box 63015 Beneficially Owned
San Francisco, CA 94163
Stephens Inc. Class A 14.06% 4.90%
111 Center Street Beneficially Owned
Little Rock, AR 72201
</TABLE>
55
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
SHORT-TERM GOVERNMENT Virginia & Co. Single Class 14.65% 14.65%
CORPORATE INCOME c/o Wells Fargo Bank Record Holder
Mutual Funds A-88-4
P.O. Box 9800
Calabassas, CA 91302
Hep & Co. Single Class 36.34% 36.34%
c/o Wells Fargo Bank Record Holder
P.O. Box 9800
Calabassas, CA 91302
Kimball Medical Center Foundation Single Class 12.82% 12.82%
600 River Avenue Record Holder
Lakewood, NJ 08701
Sanitary Fill Company Single Class 30.71% 30.71%
Attn: Treasury Dept. Record Holder
5 Thomas Mellon Circle, #304
San Francisco, CA 94134
U.S. GOVERNMENT INCOME Wells Fargo Bank Class A 33.25% 26.49%
P.O. Box 63015 Beneficially Owned
San Francisco, CA 94163
VARIABLE RATE San Berardino County Class A 10.88% 10.76%
GOVERNMENT 172 West 3rd St., First Floor Record Holder
San Bernardino, CA 92415
APCO Employees Credit Union Class A 25.20% 24.93%
1608 7th Ave. Record Holder
Birmingham, AL 35203
Merrill Lynch Pierce Fenner & Smith, Inc., Class C 25.93% 0.28%
for the Sole Benefit of its Customers Record Holder
Attn: Fund Admin.
4800 Deer Lake East, 3rd Floor
Jacksonville, FL 32246
City of Fairfax Minnesota Class C 6.22% 0.07%
City Clerk Record Holder
P.O. Box K
Fairfax, MN 55332
City of Waterville Class C 12.73% 0.14%
P.O. Box 9 Record Holder
Waterville, MN 56096
City of Renville Class C 5.28% 0.06%
Renvilla Nursing Home Record Holder
City Hall
329 North Main
Renville, MN 56284
City of Mountain Lake Class C 11.90% 0.13%
Mountain Lake City Hall Record Holder
Mountain Lake, MN 56159
Firstar Trust Co. Agent Class C 5.78% 0.06%
Firstar Bank of Minnesota Record Holder
Hendricks Community
Hospital Reserve Fund
P.O. Box 1787
Milwaukee, WI 53201
</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
56
<PAGE>
"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).
OTHER
The Company's Registration Statement, including the Prospectus and SAI for
the Funds 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.
FINANCIAL INFORMATION
The portfolio of investments and unaudited financial statements for the
Intermediate Bond and Short-Intermediate U.S. Government Income Funds for the
six-month period ended September 30, 1997, are hereby incorporated by reference
to the Company's Semi-Annual Reports as filed with the SEC on December 5, 1997.
The portfolio of investments and unaudited financial statements for the
Overland Variable Rate Government, Short-Term Government-Corporate Income and
U.S. Government Income Funds, the predecessor portfolios to the Company's
Variable Rate Government, Short-Term Government Corporate Income and U.S.
Government Income Funds, and the Short-Term Government-Corporate Master
Portfolio for the six-month period ended June 30, 1997, are hereby incorporated
by reference to the Overland Semi-Annual Reports as filed with the SEC on
September 3, 1997.
The portfolio of investments, audited financial statements and independent
auditors report for the Intermediate Bond and Short-Intermediate U.S. Government
Income Funds for the year ended March 31, 1997 are hereby incorporated by
reference to the Company's Annual Reports as filed with the SEC on June 4, 1997.
The portfolio of investments, audited financial statements and independent
auditors' reports for the Overland Variable Rate Government, Short-Term
Government-Corporate Income and U.S. Government Income Funds, the predecessor
portfolios to the Company's Variable Rate Government, Short-Term Government
Corporate Income and U.S. Government Income Funds, and the Short-Term
Government-Corporate Master Portfolio for the year ended December 31,
57
<PAGE>
1996 are hereby incorporated by reference to the Overland Annual Reports as
filed with the SEC on March 11, 1997.
Annual and Semi-Annual Reports may be obtained by calling 1-800-222-8222.
58
<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 four highest ratings for corporate bonds are "Aaa," "Aa," "A"
and "Baa." Bonds rated "Aaa" are judged to be of the "best quality" and carry
the smallest amount of investment risk. Bonds rated "Aa" are of "high quality by
all standards," but margins of protection or other elements make long-term risks
appear somewhat greater than "Aaa" rated bonds. Bonds rated "A" possess many
favorable investment attributes and are considered to be upper medium grade
obligations. Bonds rated "Baa" are considered to be medium grade obligations;
interest payments and principal security appear adequate for the present, but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well. Moody's
also applies numerical modifiers in its rating system: 1, 2 and 3 in each rating
category from "Aa" through "Baa" in its rating system. The modifier 1 indicates
that the security ranks in the higher end of its category; the modifier 2
indicates a mid-range ranking; and the modifier 3 indicates that the issue ranks
in the lower end.
S&P: The four highest ratings for corporate and municipal bonds are "AAA,"
"AA," "A" and "BBB." Bonds rated "AAA" have the "highest rating" assigned by S&P
and have "an extremely strong capacity" to pay interest and repay principal.
Bonds rated "AA" have a "very strong capacity" to pay interest and repay
principal and "differ from the highest rated obligations only in small degree."
Bonds rated "A" have a "strong capacity" to pay interest and repay principal,
but are "somewhat more susceptible" to adverse effects of changes in economic
conditions or other circumstances than bonds in higher rated categories. Bonds
rated "BBB" are regarded as having "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. 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." 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.
A-1
<PAGE>
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-2
<PAGE>
STAGECOACH FUNDS, INC.
Telephone: 1-800-222-8222
STATEMENT OF ADDITIONAL INFORMATION
Dated December 15, 1997
as supplemented on February 24, 1998
INTERNATIONAL EQUITY FUND
CLASS A, CLASS B AND INSTITUTIONAL CLASS
Stagecoach Funds, Inc. (the "Company") is an open-end, management investment
company. This Statement of Additional Information ("SAI") contains additional
information about a fund in the Stagecoach Family of Funds (the "Fund") -- the
INTERNATIONAL EQUITY FUND. This SAI relates to the Fund's Class A, Class B and
Institutional Class shares.
This SAI is not a Prospectus and should be read in conjunction with the
Fund's Prospectus, dated December 15, 1997, as supplemented. All terms used in
this SAI that are defined in the Fund's Prospectus have the meaning assigned in
such 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, CA 94120-7066.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Historical Fund Information...................... 1
Investment Restrictions.......................... 1
Additional Permitted Investment Activities....... 2
Risk Factors..................................... 15
Management....................................... 17
Performance Calculations......................... 24
Determination of Net Asset Value................. 27
Additional Purchase and Redemption Information... 28
Portfolio Transactions........................... 29
Fund Expenses.................................... 30
Federal Income Taxes............................. 31
Capital Stock.................................... 37
Other............................................ 38
Independent Auditors............................. 38
Financial Information............................ 38
Appendix......................................... A-1
</TABLE>
i
<PAGE>
HISTORICAL FUND INFORMATION
The International Equity Fund commenced operations on September 24, 1997.
INVESTMENT RESTRICTIONS
Fundamental Investment Policies
-------------------------------
The 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 (as defined in the Investment Company Act of
1940, as amended (the "1940 Act")) of the outstanding voting securities of the
Fund.
The Fund may not:
(1) purchase the securities of issuers conducting their principal business
activity in the same industry if, immediately after the purchase and as a result
thereof, the value of the Fund's investments in that industry would be 25% or
more of the current value of the Fund's total assets, provided that there is no
limitation with respect to investments in obligations of the United States
Government, its agencies or instrumentalities;
(2) issue senior securities, except as permitted by applicable law;
(3) purchase securities of any issuer (except securities issued or
guaranteed by the U.S. Government, its agencies and instrumentalities, including
government-sponsored enterprises) if, as a result, more than 5% of the value of
the Fund's total assets would be invested in the securities of any one issuer or
the Fund would hold more than 10% of the outstanding voting securities of such
issuer, except that up to 25% of the Fund's total assets may be invested without
regard to these limitations; nor
(4) borrow money, except as permitted by applicable law.
(5) purchase or sell real estate or real estate limited partnerships
(other than securities secured by real estate or interests therein or securities
issued by companies that invest in real estate or interests therein);
(6) underwrite securities of other issuers, except to the extent that the
purchase of securities directly from the issuer thereof or from an underwriter
for an issuer and the later disposition of such securities in accordance with
the Fund's investment program may be deemed to be an underwriting;
(7) make investments for the purpose of exercising control or management;
(8) make loans, except as permitted by applicable law;
1
<PAGE>
(9) purchase or sell commodities or commodities contracts, except that the
Fund may, on such conditions as may be set forth in the Fund's Prospectus and
this Statement of Additional Information, purchase, sell or enter into futures
contracts, foreign currency forward contracts, options on futures contracts,
foreign currency forward contracts, foreign currency options, or any interest
rate, securities-related or foreign currency-related hedging instrument, subject
to compliance with any applicable provisions of the federal securities or
commodities laws; nor
Non-Fundamental Investment Policies
-----------------------------------
The Fund has 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 shareholder approval.
(1) The Fund may invest in shares of other open-end management investment
companies, subject to the limitations of Section 12(d)(1) of the 1940 Act.
Under the 1940 Act, a Fund's 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 Fund's net assets with respect to any one
investment company, and (iii) 10% of such Fund's 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) The 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) The Fund may lend securities from its portfolio to brokers, dealers
and financial institutions, in amounts not to exceed (in the aggregate) one-
third of the Fund's total assets. Any such loans of portfolio securities will
be fully collateralized based on values that are marked to market daily. The
Fund will not enter into any portfolio security lending arrangement having a
duration of longer than one year.
The Fund does not invest in the following types of derivatives that
generally are considered to be potentially volatile: capped floaters, leveraged
floaters, range floaters, dual index floaters or inverse floaters.
Additionally, the Fund will not invest in securities whose interest rate reset
provisions materially lag short-term interest rates, such as Cost of Funds Index
Floaters or other derivative instruments the Fund considers to have the
potential for excessive volatility.
ADDITIONAL PERMITTED INVESTMENT ACTIVITIES
Set forth below are descriptions of certain investments and additional
investment policies for the Fund.
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Emerging Markets
----------------
The Fund may invest up to 25% of its assets in equity securities of
companies in "emerging markets." Emerging markets are those financial markets
associated with emerging market countries as considered by the International
Bank for Reconstruction and Development (more commonly referred to as the World
Bank), the International Finance Corporation, and the international financial
community. Wells Fargo Bank may invest in those emerging markets that have a
relatively low gross national product per capita, compared to the world's major
economies, and which exhibit potential for rapid economic growth. The Advisor
believes that investment in equity securities of emerging market issuers offers
significant potential for long-term capital appreciation.
There are special risks involved in investing in emerging market countries.
Many investments in emerging markets can be considered speculative, and their
prices can be much more volatile than in the more developed nations of the
world. This difference reflects the greater uncertainties of investing in less
established markets and economies. The financial markets of emerging markets
countries are generally less well capitalized and thus securities of issuers
based in such countries may be less liquid. Further, such markets may be
vulnerable to high inflation and interest rates. Most are heavily dependent on
international trade, and some are especially vulnerable to recessions in other
countries. Many of these countries are also sensitive to world commodity
prices. Some countries may still have obsolete financial systems, economic
problems or archaic legal systems. The currencies of certain emerging market
countries, and therefore the value of securities denominated in such currencies,
may be more volatile than currencies of developed countries. In addition, many
of these nations are experiencing political and social uncertainties.
Foreign Obligations and Securities
----------------------------------
The foreign securities in which the Fund may invest include common stocks,
preferred stocks, warrants, convertible securities and other securities of
issuers organized under the laws of countries other than the United States.
Such securities also include equity interests in foreign investment funds or
trusts, real estate investment trust securities and any other equity or equity-
related investment whether denominated in foreign currencies or U.S. dollars.
The Fund also may invest in foreign securities through American Depositary
Receipts ("ADRs"), Canadian Depositary Receipts ("CDRs"), European Depositary
Receipts ("EDRs"), International Depositary Receipts ("IDRs") and Global
Depositary Receipts ("GDRs") or other similar securities convertible into
securities of foreign issuers. These securities may not necessarily be
denominated in the same currency as the securities into which they may be
converted. ADRs (sponsored or unsponsored) are receipts typically issued by a
U.S. bank or trust company and traded on a U.S. stock exchange, and CDRs are
receipts typically issued by a Canadian bank or trust company that evidence
ownership of underlying foreign securities. Issuers of unsponsored ADRs are not
contractually obligated to disclose material information in the U.S. and,
therefore, such information may not correlate to the market value of the
unsponsored ADR. EDRs and IDRs are receipts typically issued by European banks
and trust companies, and GDRs are receipts issued
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<PAGE>
by either a U.S. or non-U.S. banking institution, that evidence ownership of the
underlying foreign securities. Generally, ADRs in registered form are designed
for use in U.S. securities markets and EDRs and IDRs in bearer form are designed
primarily for use in Europe.
In addition, for temporary defensive purposes, the Fund may invest in fixed
income securities of non-U.S. governmental and private issuers. Such
investments may include bonds, notes, debentures and other similar debt
securities, including convertible securities.
Investments in foreign obligations involve certain considerations that are
not typically associated with investing in domestic obligations. There may be
less publicly available information about a foreign issuer than about a domestic
issuer. Foreign issuers also are not generally subject to uniform accounting,
auditing and financial reporting standards or governmental supervision
comparable to those applicable to domestic issuers. In addition, with respect
to certain foreign countries, taxes may be withheld at the source under foreign
income tax laws, and there is a possibility of expropriation or confiscatory
taxation, political or social instability or diplomatic developments that could
adversely affect investments in, the liquidity of, and the ability to enforce
contractual obligations with respect to, securities of issuers located in those
countries.
From time to time, investments in other investment companies may be the most
effective available means by which the Fund may invest in securities of issuers
in certain countries. Investment in such investment companies may involve the
payment of management expenses and, in connection with some purchases, sales
loads, and payment of substantial premiums above the value of such companies'
portfolio securities. At the same time, the Fund would continue to pay its own
management fees and other expenses. The Fund may invest in these investment
funds and in registered investment companies subject to the provisions of the
Investment Company Act of 1940 ("1940 Act"). Such investment funds or
investment companies may be "passive foreign investment companies" (as described
in "Taxes" below) and may result in special federal income tax consequences.
Investment income on certain foreign securities in which the Fund may invest
may be subject to foreign withholding or other taxes that could reduce the
return on these securities. Tax treaties between the United States and foreign
countries, however, may reduce or eliminate the amount of foreign taxes to which
the Fund would be subject.
Foreign Currency Transactions
-----------------------------
The Fund's investments in foreign securities involve currency risks. The
U.S. dollar value of a foreign security tends to decrease when the value of the
U.S. dollar rises against the foreign currency in which the security is
denominated, and tends to increase when the value of the U.S. dollar falls
against such currency. To attempt to minimize risks to the Fund from adverse
changes in the relationship between the U.S. dollar and foreign currencies, the
Fund may engage in foreign currency transactions on a spot (i.e., cash) basis
and may purchase or sell forward foreign currency exchange contracts ("forward
contracts"). The Fund may also purchase and sell foreign currency futures
contracts (see "Purchase and Sale of Currency Futures Contracts"). A forward
contract is an obligation to purchase or sell a specific currency for an
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<PAGE>
agreed price at a future date that is individually negotiated and privately
traded by currency traders and their customers.
Forward contracts establish an exchange rate at a future date. These
contracts are transferable in the interbank market conducted directly between
currency traders (usually large commercial banks) and their customers. A
forward contract generally has no deposit requirement, and is traded at a net
price without commission. The Fund will direct its custodian, to the extent
required by applicable regulations, to segregate high grade liquid assets in an
amount at least equal to its obligations under each forward contract. Neither
spot transactions nor forward contracts eliminate fluctuations in the prices of
the Fund's portfolio securities or in foreign exchange rates, or prevent loss if
the prices of these securities should decline.
The Fund may enter into a forward contract, for example, when it enters into
a contract for the purchase or sale of a security denominated in a foreign
currency in order to "lock in" the U.S. dollar price of the security (a
"transaction hedge"). In addition, when Wells Fargo Bank believes that a
foreign currency may suffer a substantial decline against the U.S. dollar, it
may enter into a forward sale contract to sell an amount of that foreign
currency approximating the value of some or all of the Fund's securities
denominated in such foreign currency, or when Wells Fargo Bank believes that the
U.S. dollar may suffer a substantial decline against the foreign currency, it
may enter into a forward purchase contract to buy that foreign currency for a
fixed dollar amount (a "position hedge").
The Fund may, in the alternative, enter into a forward contract to sell a
different foreign currency for a fixed U.S. dollar amount where Wells Fargo Bank
believes that the U.S. dollar value of the currency to be sold pursuant to the
forward contract will fall whenever there is a decline in the U.S. dollar value
of the currency in which the fund securities are denominated (a "cross-hedge").
Foreign currency hedging transactions are an attempt to protect the Fund
against changes in foreign currency exchange rates between the trade and
settlement dates of specific securities transactions or changes in foreign
currency exchange rates that would adversely affect a portfolio position or an
anticipated portfolio position. Although these transactions tend to minimize
the risk of loss due to a decline in the value of the hedged currency, at the
same time they tend to limit any potential gain that might be realized should
the value of the hedged currency increase. The precise matching of the forward
contract amount and the value of the securities involved will not generally be
possible because the future value of these securities in foreign currencies will
change as a consequence of market movements in the value of those securities
between the date the forward contract is entered into and date it matures.
The Fund's custodian will, to the extent required by applicable regulations,
segregate cash, U.S. Government securities or other high-quality debt securities
having a value equal to the aggregate amount of the Fund's commitments under
forward contracts entered into with respect to position hedges and cross-hedges.
If the value of the segregated securities declines, additional cash or
securities will be segregated on a daily basis so that the value of the
segregated securities will equal the amount of the Fund's commitments with
respect to such contracts.
5
<PAGE>
The cost to the Fund of engaging in currency transactions varies with
factors such as the currency involved, the length of the contract period and the
market conditions then prevailing. Because transactions in currency exchange
usually are conducted on a principal basis, no fees or commissions are involved.
Wells Fargo Bank considers on an ongoing basis the creditworthiness of the
institutions with which the Fund enters into foreign currency transactions. The
use of forward currency exchange contracts does not eliminate fluctuations in
the underlying prices of the securities, but it does establish a rate of
exchange that can be achieved in the future. If a devaluation generally is
anticipated, the Fund may not be able to contract to sell the currency at a
price above the devaluation level it anticipates.
Foreign Currency Futures Contracts
----------------------------------
In General. A foreign currency futures contract is an agreement between two
parties for the future delivery of a specified currency at a specified time and
at a specified price. A "sale" of a futures contract means the contractual
obligation to deliver the currency at a specified price on a specified date, or
to make the cash settlement called for by the contract. Futures contracts have
been designed by exchanges which have been designated "contract markets" by the
Commodity Futures Trading Commission ("CFTC") and must be executed through a
brokerage firm, known as a futures commission merchant, which is a member of the
relevant contract market. Futures contracts trade on these markets, and the
exchanges, through their clearing organizations, guarantee that the contracts
will be performed as between the clearing members of the exchange.
While futures contracts based on currencies do provide for the delivery and
acceptance of a particular currency, such deliveries and acceptances are very
seldom made. Generally, a futures contract is terminated by entering into an
offsetting transaction. A Fund will incur brokerage fees when it purchases and
sells futures contracts. At the time such a purchase or sale is made, a Fund
must provide cash or money market securities as a deposit known as "margin." The
initial deposit required will vary, but may be as low as 2% or less of a
contract's face value. Daily thereafter, the futures contract is valued through
a process known as "marking to market," and a Fund that engages in futures
transactions may receive or be required to pay "variation margin" as the futures
contract becomes more or less valuable.
Purchase and Sale of Currency Futures Contracts. In order to hedge its
portfolio and to protect it against possible variations in foreign exchange
rates pending the settlement of securities transactions, the Fund may buy or
sell currency futures contracts. If a fall in exchange rates for a particular
currency is anticipated, the Fund may sell a currency futures contract as a
hedge. If it is anticipated that exchange rates will rise, a Fund may purchase
a currency futures contract to protect against an increase in the price of
securities denominated in a particular currency a Fund intends to purchase.
These futures contracts will be used only as a hedge against anticipated
currency rate changes.
A currency futures contract sale creates an obligation by a Fund, as seller,
to deliver the amount of currency called for in the contract at a specified
futures time for a special price. A currency futures contract purchase creates
an obligation by a Fund, as purchaser, to take delivery of an amount of currency
at a specified future time at a specified price. Although the terms of
6
<PAGE>
currency futures contracts specify actual delivery or receipt, in most instances
the contracts are closed out before the settlement date without the making or
taking of delivery of the currency. Closing out of a currency futures contract
is effected by entering into an offsetting purchase or sale transaction.
In connection with transactions in foreign currency futures, a Fund will be
required to deposit as "initial margin" an amount of cash or short-term
government securities equal to from 5% to 8% of the contract amount.
Thereafter, subsequent payments (referred to as "variation margin") are made to
and from the broker to reflect changes in the value of the futures contract.
Risk Factors Associated with Futures Transactions. The effective use of
futures strategies depends on, among other things, the Fund's ability to
terminate futures positions at times when Wells Fargo Bank deems it desirable to
do so. Although the Fund will not enter into a futures position unless Wells
Fargo Bank believes that a liquid secondary market exists for such future, there
is no assurance that the Fund will be able to effect closing transactions at any
particular time or at an acceptable price. The Fund generally expects that its
futures transactions will be conducted on recognized U.S. and foreign securities
and commodity exchanges.
Futures markets can be highly volatile and transactions of this type carry a
high risk of loss. Moreover, a relatively small adverse market movement with
respect to these transactions may result not only in loss of the original
investment but also in unquantifiable further loss exceeding any margin
deposited.
The use of futures involves the risk of imperfect correlation between
movements in futures prices and movements in the price of currencies which are
the subject of the hedge. The successful use of futures strategies also depends
on the ability of Wells Fargo Bank to correctly forecast interest rate
movements, currency rate movements and general stock market price movements.
In addition to the foregoing risk factors, the following sets forth certain
information regarding the potential risks associated with the Fund's futures
transactions.
Risk of Imperfect Correlation. The Fund's ability effectively to hedge
currency risk through transactions in foreign currency futures depends on the
degree to which movements in the value of the currency underlying such hedging
instrument correlate with movements in the value of the relevant securities held
by the Fund. If the values of the securities being hedged do not move in the
same amount or direction as the underlying currency, the hedging strategy for
the Fund might not be successful and the Fund could sustain losses on its
hedging transactions which would not be offset by gains on its portfolio. It is
also possible that there may be a negative correlation between the currency
underlying a futures contract and the portfolio securities being hedged, which
could result in losses both on the hedging transaction and the fund securities.
In such instances, the Fund's overall return could be less than if the hedging
transactions had not been undertaken.
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<PAGE>
Under certain extreme market conditions, it is possible that the Fund will
not be able to establish hedging positions, or that any hedging strategy adopted
will be insufficient to completely protect the Fund.
The Fund will purchase or sell futures contracts only if, in Wells Fargo
Bank's judgment, there is expected to be a sufficient degree of correlation
between movements in the value of such instruments and changes in the value of
the relevant portion of the Fund's portfolio for the hedge to be effective.
There can be no assurance that Wells Fargo Bank's judgment will be accurate.
Potential Lack of a Liquid Secondary Market. The ordinary spreads between
prices in the cash and futures markets, due to differences in the natures of
those markets, are subject to distortions. First, all participants in the
futures market are subject to initial deposit and variation margin requirements.
This could require a Fund to post additional cash or cash equivalents as the
value of the position fluctuates. Further, rather than meeting additional
variation margin requirements, investors may close futures contracts through
offsetting transactions which could distort the normal relationship between the
cash and futures markets. Second, the liquidity of the futures market may be
lacking. Prior to exercise or expiration, a futures position may be terminated
only by entering into a closing purchase or sale transaction, which requires a
secondary market on the exchange on which the position was originally
established. While the Fund will establish a futures position only if there
appears to be a liquid secondary market therefor, there can be no assurance that
such a market will exist for any particular futures contract at any specific
time. In such event, it may not be possible to close out a position held by the
Fund, which could require the Fund to purchase or sell the instrument underlying
the position, make or receive a cash settlement, or meet ongoing variation
margin requirements. The inability to close out futures positions also could
have an adverse impact on the Fund's ability effectively to hedge its
securities, or the relevant portion thereof.
The liquidity of a secondary market in a futures contract may be adversely
affected by "daily price fluctuation limits" established by the exchanges, which
limit the amount of fluctuation in the price of a contract during a single
trading day and prohibit trading beyond such limits once they have been reached.
The trading of futures contracts also is subject to the risk of trading halts,
suspensions, exchange or clearing house equipment failures, government
intervention, insolvency of the brokerage firm or clearing house or other
disruptions of normal trading activity, which could at times make it difficult
or impossible to liquidate existing positions or to recover excess variation
margin payments.
Trading and Position Limits. Each contract market on which futures
contracts are traded has established a number of limitations governing the
maximum number of positions which may be held by a trader, whether acting alone
or in concert with others. Wells Fargo Bank does not believe that these trading
and position limits will have an adverse impact on the hedging strategies
regarding the Fund's investments.
Regulations on the Use of Futures Contracts. Regulations of the CFTC
require that the Fund enter into transactions in futures contracts for hedging
purposes only, in order to assure that it is not deemed to be a "commodity pool"
under such regulations. In particular, CFTC
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<PAGE>
regulations require that all short futures positions be entered into for the
purpose of hedging the value of investment securities held by the Fund, and that
all long futures positions either constitute bona fide hedging transactions, as
defined in such regulations, or have a total value not in excess of an amount
determined by reference to certain cash and securities positions maintained for
the Fund, and accrued profits on such positions. In addition, the Fund may not
purchase or sell such instruments if, immediately thereafter, the sum of the
amount of initial margin deposits on its existing futures positions and premiums
paid for options on futures contracts would exceed 5% of the market value of the
Fund's total assets.
When the Fund purchases a futures contract, an amount of cash or cash
equivalents or high quality debt securities will be segregated with the Fund's
custodian so that the amount so segregated, plus the initial deposit and
variation margin held in the account of its broker, will at all times equal the
value of the futures contract, thereby insuring that the use of such futures is
unleveraged.
The Fund's ability to engage in the hedging transactions described herein
may be limited by the policies and concerns of various Federal and state
regulatory agencies. Such policies may be changed by vote of the Board of
Directors.
Wells Fargo Bank uses a variety of internal risk management procedures to
ensure that derivatives use is consistent with the Fund's investment objective,
does not expose the Fund to undue risk and is closely monitored. These
procedures include providing periodic reports to the Board of Directors
concerning the use of derivatives.
Forward Commitments, When-Issued Purchases and Delayed-Delivery Transactions
----------------------------------------------------------------------------
The Fund 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
normally take place on such transactions 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 Fund will generally
purchase securities with the intention of acquiring them, the Fund may dispose
of securities purchased on a when-issued, delayed-delivery or a forward
commitment basis before settlement when deemed appropriate by the advisor.
Securities purchased on a when-issued or forward commitment basis may expose the
relevant Fund to risk because they may experience price fluctuations prior to
their actual delivery. Purchasing securities on a when-issued or forward
commitment basis can involve the additional risk that the yield available in the
market when the delivery takes place actually may be higher than that obtained
in the transaction itself.
The Fund will segregate cash, U.S. Government obligations or other high-
quality debt instruments in an amount at least equal in value to the Fund's
commitments to purchase when-issued securities. If the value of these assets
declines, the Fund will segregate additional liquid assets on a daily basis so
that the value of the segregated assets is equal to the amount of such
commitments.
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<PAGE>
Foreign Fixed Income Securities
-------------------------------
The Fund may invest in foreign fixed income securities, including:
Foreign Private Debt. The Fund may invest in fixed income securities of
private issuers, provided that they are rated, at the time of investment, within
the top four rating categories by an NRSRO or determined to be of equivalent
quality by Wells Fargo Bank. Fixed income securities in which the Fund may
invest include, without limitation, corporate bonds, notes, debentures and other
similar corporate debt securities, including convertible securities. In
addition, such securities may or may not have warrants attached. For a
discussion of the risks associated with investing in foreign securities, see
"Risk Factors" in the Prospectus.
Foreign Sovereign Debt. The Fund may invest in debt securities or
obligations of foreign governments and their political subdivisions or agencies
("Sovereign Debt") provided that they are rated, at the time of investment,
within the top four rating categories by a Nationally Recognized Statistical
Ratings Organization ("NRSRO") or determined to be of equivalent quality by
Wells Fargo Bank. Investments in Sovereign Debt involves special risks. The
issuer of the debt or the governmental authorities that control the repayment of
the debt may be unable or unwilling to repay principal and/or interest when due
in accordance with the terms of such debt, and the Fund may have limited legal
recourse in the event of a default.
Sovereign Debt differs from debt obligations issued by private entities in
that, generally, remedies for defaults must be pursued in the courts of the
defaulting party. Legal recourse is therefore somewhat diminished. Political
conditions, especially a sovereign entity's willingness to meet the terms of its
debt obligations, are of considerable significance. Also, there can be no
assurance that the holders of commercial bank debt issued by the same sovereign
entity may not contest payments to the holders of Sovereign Debt in the event of
default under commercial bank loan agreements.
A sovereign debtor's willingness or ability to repay principal and interest
due in a timely manner may be affected by, among other factors, its cash flow
situation, the extent of its foreign reserves, the availability of sufficient
foreign exchange on the date a payment is due, the relative size of the debt
service burden to the economy as a whole, the sovereign debtor's policy toward
principal international lenders and the political constraints to which a
sovereign debtor may be subject. Increased protectionism on the part of a
country's trading partners, or political changes in those countries, could also
adversely affect its exports. Such events could diminish a country's trade
account surplus, if any, or the credit standing of a particular local government
or agency.
The occurrence of political, social or diplomatic changes in one or more of
the countries issuing Sovereign Debt could adversely affect the Fund's
investments. Political changes or a deterioration of a country's domestic
economy or balance of trade may affect the willingness of countries to service
their Sovereign Debt. While Wells Fargo Bank manages the Fund's portfolio in a
manner that is intended to minimize the exposure to such risks, there can be no
assurance that adverse political changes will not cause the Fund to suffer a
loss of interest or principal on any of its holdings.
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<PAGE>
Brady Bonds. The Fund may invest a portion of its assets in Brady Bonds,
which are securities created through the exchange of existing commercial bank
loans to sovereign entities for new obligations in connection with debt
restructurings. Brady Bonds may be collateralized or uncollateralized and are
issued in various currencies (primarily the U.S. dollar). Brady bonds are not
considered U.S. government securities.
U.S. dollar-denominated, collateralized Brady Bonds, which may be fixed rate
par bonds or floating rate discount bonds, are generally collateralized in full
as to principal by U.S. Treasury zero coupon bonds having the same maturity as
the Brady Bonds. Interest payments on these Brady Bonds generally are
collateralized on a one-year or longer rolling-forward basis by cash or
securities in an amount that, in the case of fixed rate bonds, is equal to at
least one year of interest payments or, in the case of floating rate bonds,
initially is equal to at least one year's interest payments based on the
applicable interest rate at that time and is adjusted at regular intervals
thereafter. Certain Brady Bonds are entitled to "value recovery payments" in
certain circumstances, which in effect constitute supplemental interest payments
but generally are not collateralized. Brady Bonds are often viewed as having
three or four valuation components: (i) the collateralized repayment of
principal at final maturity; (ii) the collateralized interest payments; (iii)
the uncollateralized interest payments; and (iv) any uncollateralized repayment
of principal at maturity (these uncollateralized amounts constitute the
"residual risk").
Brady Bonds involve various risk factors including the history of defaults
with respect to commercial bank loans by public and private entities of
countries issuing Brady Bonds. There can be no assurance that Brady Bonds in
which the Fund may invest will not be subject to restructuring arrangements or
to requests for new credit, which may cause the Fund to suffer a loss of
interest or principal on any of its holdings.
Hedging and Related Strategies
------------------------------
The Fund may attempt to protect the U.S. dollar equivalent value of one or
more of its investments (hedge) by purchasing and selling foreign currency
futures contracts and by purchasing and selling currencies on a spot (i.e.,
cash) or forward basis. Foreign currency futures contracts are bilateral
agreements pursuant to which one party agrees to make, and the other party
agrees to accept, delivery of a specified type of currency at a specified future
time and at a specified price. Although such futures contracts by their terms
call for actual delivery or acceptance of currency, in most cases the contracts
are closed out before the settlement date without the making or taking of
delivery. A forward currency contract involves an obligation to purchase or
sell a specific currency at a specified future date, which may be any fixed
number of days from the contract date agreed upon by the parties, at a price set
at the time the contract is entered into.
The Fund may enter into forward currency contracts for the purchase or sale
of a specified currency at a specified future date either with respect to
specific transactions or with respect to portfolio positions. For example, the
Fund may enter into a forward currency contract to sell an amount of a foreign
currency approximating the value of some or all of the Fund's securities
denominated in such currency. The Fund may use forward contracts in one
currency or a basket of currencies to hedge against fluctuations in the value of
another currency when Wells Fargo Bank
11
<PAGE>
anticipates there will be a correlation between the two and may use forward
currency contracts to shift the Fund's exposure to foreign currency fluctuations
from one country to another. The purpose of entering into these contracts is to
minimize the risk to the Fund from adverse changes in the relationship between
the U.S. dollar and foreign currencies.
Wells Fargo Bank might not employ any of the strategies described above, and
there can be no assurance that any strategy used will succeed. If Wells Fargo
incorrectly forecasts exchange rates, market values or other economic factors in
utilizing a strategy for the Fund, the Fund might have been in a better position
had it not hedged at all. The use of these strategies involves certain special
risks, including (1) the fact that skills needed to use hedging instruments are
different from those needed to select the Fund's securities, (2) possible
imperfect correlation, or even no correlation, between price movements of
hedging instruments and price movements of the investments being hedged, (3) the
fact that, while hedging strategies can reduce the risk of loss, they can also
reduce the opportunity for gain, or even result in losses, by offsetting
favorable price movements in hedged investments and (4) the possible inability
of the Fund to purchase or sell a portfolio security at a time that otherwise
would be favorable for it to do so, or the possible need for the Fund to sell a
portfolio security at a disadvantageous time, due to the need for the Fund to
maintain "cover" or to segregate securities in connection with hedging
transactions and the possible inability of a Fund to close out or to liquidate
its hedged position.
New financial products and risk management techniques continue to be
developed. The Fund may use these instruments and techniques to the extent
consistent with its investment objectives and regulatory and tax considerations.
Money Market Instruments
------------------------
The Fund may invest in the following types of high quality money market
instruments that have remaining maturities not exceeding one year: (i) U.S.
Government obligations; (ii) negotiable certificates of deposit, bankers'
acceptances and fixed time deposits and other obligations of domestic banks
(including foreign branches) that have more than $1 billion in total assets at
the time of investment and are members of the Federal Reserve System or are
examined by the Comptroller of the Currency or whose deposits are insured by the
Federal Deposit Insurance Corporation ("FDIC"); (iii) commercial paper rated at
the date of purchase "Prime-1" by Moody's Investor Service, Inc. ("Moody's") or
"A-1" or "A-1+" by Standard & Poor's Ratings Group ("S&P"), or, if unrated, of
comparable quality as determined by Wells Fargo Bank, as investment Advisor; and
(iv) repurchase agreements. The Fund also may invest in short-term U.S. dollar-
denominated obligations of foreign banks (including U.S. branches) that at the
time of investment: (i) have more than $10 billion, or the equivalent in other
currencies, in total assets; (ii) are among the 75 largest foreign banks in the
world as determined on the basis of assets; (iii) have branches or agencies in
the United States; and (iv) in the opinion of Wells Fargo Bank, as investment
Advisor, are of comparable quality to obligations of U.S. banks which may be
purchased by the Fund.
12
<PAGE>
Other Investment Companies
--------------------------
The Fund may invest in shares of other open-end, management investment
companies, up to the limits prescribed in Section 12(d) of the 1940 Act. Such
investments also include the securities of investment companies that are
designed to replicate the composition and performance of a particular index.
For example, World Equity Benchmark Shares (commonly known as "WEBS") are
exchange traded shares of open-end investment companies designed to replicate
the composition and performance of publicly traded issuers in particular foreign
countries. Investments in index baskets involve the same risks associated with
a direct investment in the types of securities included in the baskets. Other
investment companies in which the Fund invests 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 Fund.
Letters of Credit. Certain of the debt obligations (including certificates
of participation, commercial paper and other short-term obligations) which the
Fund may purchase may be backed by an unconditional and irrevocable letter of
credit of a bank, savings and loan association or insurance company which
assumes the obligation for payment of principal and interest in the event of
default by the issuer. Only banks, savings and loan associations and insurance
companies which, in the opinion of Wells Fargo Bank, are of comparable quality
to issuers of other permitted investments of the Fund may be used for letter of
credit-backed investments.
Repurchase Agreements. The Fund may enter into repurchase agreements,
wherein the seller of a security to the Fund agrees to repurchase that security
from the Fund at a mutually agreed upon time and price. The Fund may enter into
repurchase agreements only with respect to securities that could otherwise be
purchased by the Fund. 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 Fund may incur a loss. In addition, if
bankruptcy proceedings are commenced with respect to the seller of the security,
the Fund's disposition of the security may be delayed or limited.
The Fund 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
Fund's total net assets would be invested in repurchase agreements with
maturities of more than seven days, restricted securities and illiquid
securities. The Fund 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
Fund may participate in pooled repurchase agreement transactions with other
funds advised by Wells Fargo Bank.
Privately Issued Securities
---------------------------
The Fund may invest in privately issued securities, including those which
may be resold only in accordance with Rule 144A under the Securities Act of 1933
("Rule 144A Securities"). Rule 144A Securities are restricted securities that
are not publicly traded. Accordingly, the
13
<PAGE>
liquidity of the market for specific Rule 144A Securities may vary. Delay or
difficulty in selling such securities may result in a loss to a Fund. Privately
issued or Rule 144A Securities that are determined by the investment Advisor to
be "illiquid" are subject to each Fund's policy of not investing more than 15%
of its net assets in illiquid securities.
The Company's investment Advisor, pursuant to guidelines established by the
Board of Directors of the Company will evaluate the liquidity characteristics of
each Rule 144A Security proposed for purchase by the Fund on a case-by-case
basis and will consider the following factors, among others, in their
evaluation: (1) the frequency of trades and quotes for the Rule 144A Security;
(2) the number of dealers willing to purchase or sell the Rule 144A Security and
the number of other potential purchasers; (3) dealer undertakings to make a
market in the Rule 144A Security; and (4) the nature of the Rule 144A Security
and the nature of the marketplace trades (e.g., the time needed to dispose of
the Rule 144A Security, the method of soliciting offers and the mechanics of
transfer). The Fund does not intend to invest more than 15% of its net assets
in privately issued securities or Rule 144A Securities that may be considered
illiquid during the coming year.
Unrated and Downgraded Investments
----------------------------------
The Fund may purchase instruments that are not rated by an NRSRO 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
Fund. After purchase by the Fund, a security may cease to be rated or its
rating may be reduced below the minimum required for purchase by the Fund.
Neither event will require a sale of such security by the Fund. To the extent
the ratings given by an NRSRO, such as Moody's or S&P, change as a result of
changes in such organizations or their rating systems, the Fund will attempt to
use comparable ratings as standards for investments in accordance with the
investment policies contained in its Prospectus and in this SAI. The ratings of
Moody's and S&P are more fully described in the SAI Appendix.
U.S. Government Obligations
---------------------------
The Fund may invest in obligations issued or guaranteed by the U.S.
Government, its agencies or instrumentalities ("U.S. Government obligations").
Payment of principal and interest on U.S. Government obligations (i) may be
backed by the full faith and credit of the United States (as with U.S. Treasury
bills and Government National Mortgage Association ("GNMA") certificates) or
(ii) may be backed solely by the issuing or guaranteeing agency or
instrumentality itself (as with Federal National Mortgage Association ("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.
14
<PAGE>
Government obligations are subject to fluctuations in yield or value due to
their structure or contract terms.
Warrants
--------
The Fund may invest in warrants (other than those that have been acquired in
units or attached to other securities). Warrants represent rights to purchase
securities at a specific price valid for a specific period of time. The prices
of warrants do not necessarily correlate with the prices of the underlying
securities.
RISK FACTORS
Investments in the Fund 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 the 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 the Fund.
The Fund is intended for investors who are seeking long-term capital
appreciation and who are prepared to accept the risks associated with investing
in foreign securities markets. Foreign securities held by the Fund, including
for this purpose ADRs, GDRs and similar securities, involve special risks and
considerations not typically associated with investing in U.S. companies.
Foreign securities often trade with less frequency and volume than domestic
securities and, therefore, may exhibit greater price volatility. Changes in
foreign exchange rates also will affect the value of securities denominated or
quoted in currencies other than the U.S. dollar. The Fund's performance 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. Other risks
associated with foreign securities 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, social and monetary or diplomatic developments
that could affect U.S. investments in foreign countries. There may be less
publicly available information about a foreign company than about a U.S. company
and information that is available may be less reliable. Additionally,
dispositions of foreign securities and dividends and interest payable on those
securities may be subject to foreign taxes, including withholding taxes.
Additional costs associated with an investment in foreign securities may include
higher custodial fees than apply to domestic custodial arrangements and
transaction costs of foreign currency conversions. Transactions in foreign
securities may be subject to less efficient settlement practices. Moreover,
foreign securities trading practices, including those involving securities
settlement where Fund assets may be released prior to receipt of payment, may
expose a Fund to increased risk in the event of a failed trade or the insolvency
of a foreign broker-dealer. Finally, in the event of litigation relating to a
portfolio investment, the Fund may encounter substantial difficulties in
obtaining and enforcing judgments against non-U.S. resident individuals and
corporations.
15
<PAGE>
Investors should carefully consider the appropriateness of foreign investing in
light of their financial objectives and goals.
Because foreign securities ordinarily are denominated in currencies other
than the U.S. dollar (as are some securities of U.S. issuers), changes in
foreign currency exchange rates will affect the Fund's net asset value, the
value of dividends and interest earned, gains and losses realized on the sale of
securities and net investment income and capital gains, if any, to be
distributed to shareholders by the Fund. If the value of a foreign currency
rises against the U.S. dollar, the value of Fund assets denominated in that
currency will increase; correspondingly, if the value of a foreign currency
declines against the U.S. dollar, the value of Fund assets denominated in that
currency will decrease. The exchange rates between the U.S. dollar and other
currencies are determined by supply and demand in the currency exchange markets,
international balances of payments, speculation and other economic and political
conditions. In addition, some foreign currency values may be volatile and there
is the possibility of governmental controls on currency exchange or governmental
intervention in currency markets. Any of these factors could adversely affect
the Fund.
Further, there are special risks involved in investing in issuers in
emerging market countries. Many investments in emerging markets can be
considered speculative, and their prices can be much more volatile than in the
more developed nations of the world. This difference reflects the greater
uncertainties of investing in less established markets and economies. In
addition, the financial markets of emerging markets countries are generally less
well capitalized and thus securities of issuers based in such countries may be
less liquid. Further, such markets may be vulnerable to high inflation and
interest rates. Most emerging market countries are heavily dependent on
international trade, and some are especially vulnerable to recessions in other
countries. Some of these countries are also sensitive to world commodity prices
and may be subject to political and social uncertainties. The currencies of
certain emerging countries, and therefore the value of securities denominated in
such currencies, may be more volatile than currencies of developed countries.
In addition to the risks associated with investments in foreign securities,
the Fund's portfolio equity securities are subject to the risks commonly
associated with any investment in equity securities. For example, the portfolio
equity securities of the Fund are subject to equity market risk. Equity market
risk is the risk that stock prices will fluctuate or decline over short or
extended periods. Further, because the Fund may, under certain limited
circumstances, invest in debt securities, the portion of the Fund's portfolio so
invested will, generally, be subject to credit and interest-rate risk. Credit
risk is the risk that issuers of the debt instruments in which the Fund invests
may default on the payment of principal and/or interest. Interest-rate risk is
the risk that increases in market interest rates may adversely affect the value
of the debt instruments in which the Fund invests and hence the value of your
investment in the Fund. The market value of the Fund's investment in fixed-
income securities will change in response to changes in interest rates and the
relative financial strength of each issuer. During periods of falling interest
rates, the value of fixed-income securities 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 capital appreciation and
16
<PAGE>
depreciation than obligations with shorter maturities. changes in the financial
strength of an issuer or changes in the ratings of any particular security also
may affect the value of these investments. Fluctuations in the market value of
fixed-income securities subsequent to their acquisition will not affect cash
income from such securities but will be reflected in a Fund's net asset value.
Illiquid securities, which may include certain restricted 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 a Fund.
Wells Fargo Bank may use certain derivative investments or techniques, such
as buying and selling foreign currency futures contracts and entering into
forward foreign currency contracts, to adjust the risk and return
characteristics of the Fund's 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 Wells Fargo Bank judges market conditions
incorrectly, the use of certain derivatives could result in a loss, regardless
of its intent in using the derivatives.
There is, of course, no assurance that the Fund will achieve its investment
objective or be successful in preventing or minimizing the risk of loss that is
inherent in investing in particular types of investment products.
MANAGEMENT
The following information supplements, and should be read in conjunction
with, the section in the Prospectus entitled "Organization and Management of the
Fund." 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 Inc.;
President Senior Vice President of Stephens Sports
Management Inc.; and President of Investor
Brokerage Insurance Inc.
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
Principal Occupations
Name, Age and Address Position During Past 5 Years
- ------------------------------------- ------------------ -----------------------------------------------
<S> <C> <C>
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 Geyser
55 Francisco Street 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, NY 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.
Richard H. Blank, Jr., 41 Chief Operating Vice President of Stephens Inc.; Director of
Officer, Stephens Sports Management Inc.; and Director
Secretary and of Capo Inc.
Treasurer
</TABLE>
Compensation Table
Year Ended March 31, 1997
-------------------------
<TABLE>
<CAPTION>
Total Compensation
Aggregate Compensation from Registrant
Name and Position from Registrant and Fund Complex
- ----------------- ----------------------- ------------------
<S> <C> <C>
Jack S. Euphrat $11,250 $ 33,750
Director
R. Greg Feltus $ 0 $ 0
Director
Thomas S. Goho $11,250 $ 33,750
Director
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
Total Compensation
Aggregate Compensation from Registrant
Name and Position from Registrant and Fund Complex
- ----------------- ----------------------- ------------------
<S> <C> <C>
Joseph N. Hankin $ 8,750 $26,250
Director
W. Rodney Hughes $ 9,250 $27,750
Director
Robert M. Joses $11,250 $33,750
Director
J. Tucker Morse $ 9,250 $27,750
Director
</TABLE>
As of January 1, 1998, Peter G. Gordon replaced Robert M. Joses on the Board
of Directors of the Wells Fargo Fund Complexes.
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 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 Fund. As investment advisor, Wells Fargo Bank furnishes investment
guidance and policy direction in connection with the daily portfolio management
of the Fund. Wells Fargo Bank furnishes to the Company's Board of Directors
periodic reports on the investment strategy and performance of the Fund. Wells
Fargo Bank provides the Fund with, among other things, money market security and
fixed-income research, analysis and statistical and economic data and
19
<PAGE>
information concerning interest rate and securities markets trends, portfolio
composition, and credit conditions.
As compensation for its advisory services, Wells Fargo Bank is entitled to
receive a monthly fee at the annual rate of 1.00% of the Fund's average daily
net assets.
General. The Fund's 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 Fund's outstanding voting securities or
by the Company's Board of Directors and (ii) by a majority of the Directors of
the Company who are not parties to the Advisory Contract or "interested persons"
(as defined in the 1940 Act) of any such party. The Fund's Advisory Contract
may be terminated on 60 days' written notice by either party and will terminate
automatically if assigned.
PORTFOLIO MANAGERS. Ms. Katherine Schapiro is primarily responsible for
------------------
the day-to-day management of the Fund. She joined Wells Fargo Bank in August
1992. Ms. Schapiro directs international equity investment strategy for Wells
Fargo Bank and currently manages a number of international equity portfolios.
Ms. Schapiro also manages equity and balanced portfolios for institutions and
individuals through Wells Capital Management, a wholly-owned subsidiary of Wells
Fargo Bank, and serves on the Equity Strategy Committee. Prior to joining Wells
Fargo Bank, Ms. Schapiro was a vice president and fund manager for Newport
Pacific Management, an international investment advisory firm. Ms. Schapiro is
a graduate of Stanford University, is a chartered financial analyst and is on
the board of directors of the Security Analysts of San Francisco.
Ms. Stacey Ho is a co-manager of the Fund. Ms. Ho analyzes foreign equity
securities and manages other equity portfolios for Wells Fargo Bank and Wells
Capital Management as part of its International Equity-Style Team. Prior to
joining Wells Fargo Bank this year, Ms. Ho was a portfolio manager of
international equity funds at Clemente Capital Management. Ms. Ho was employed
by Clemente Capital Management from 1995 through late 1996. From 1990 to 1995,
Ms. Ho was employed by Edison International where her responsibilities included
managing a Japan equity portfolio, a U.S. equity portfolio, and the domestic
equity managers for Edison International's pension fund. Ms. Ho has a B.S. in
Civil Engineering from San Diego State University and an M.S. in Environmental
Engineering from Stanford University. She received her M.B.A. from UCLA. Ms.
Ho is currently working toward her chartered financial analyst designation.
ADMINISTRATOR AND CO-ADMINISTRATOR. The Company has retained Wells Fargo
----------------------------------
Bank as Administrator and Stephens as Co-Administrator on behalf of the Fund.
Under the 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
Fund's operations, including coordination of the services performed by the
Fund's 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 U.S. Securities
20
<PAGE>
and Exchange Commission ("SEC") and state securities commissions; and
preparation of proxy statements and shareholder reports for the Fund; and (ii)
general supervision relative to the compilation of data required for the
preparation of periodic reports distributed to the Company's officers and Board
of Directors. Wells Fargo Bank and Stephens also furnish office space and
certain facilities required for conducting the Fund's 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 0.06% and 0.04%, respectively, of the average daily net assets of
the Fund.
Wells Fargo Bank has delegated certain administration duties to Investors
Bank & Trust Company ("IBT") pursuant to a Sub-Administration Agreement with
IBT. Wells Fargo Bank remains fully liable for the performance of these
administration services. IBT is entitled to receive an annual base fee of
approximately $36,500, plus a net asset fee of at the annual rate of 0.05% of
the first $75 million of the Fund's average daily net assets, 0.025% of the next
$50 million, and 0.01% of assets above $125 million. Compensation is the
responsibility of Wells Fargo Bank, but can be made directly to IBT by the Fund,
in which case, the compensation paid to Wells Fargo Bank for administration
services will be reduced accordingly.
DISTRIBUTOR. Stephens Inc. ("Stephens", the "Distributor"), located at 111
-----------
Center Street, Little Rock, Arkansas 72201, serves as Distributor for the Fund.
The Fund has adopted a 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 agreement related to the Plans (the "Non-Interested
Directors").
Under the Plan, and pursuant to the related Distribution Agreement, the Fund
may pay Stephens on an annual basis up to 0.10% of the Fund's average daily net
assets attributable to Class A shares. Under the Plan in effect for the Class B
shares of the Fund, the Fund may pay to Stephens on an annual basis up to 0.75%
of the Fund's average daily net assets attributable to Class B shares. The
Plans for the Class A and Class B shares of the Fund provide for compensation of
distribution-related services or reimbursement for distribution-related
expenses.
The actual fee payable to the Distributor by the above-indicated Classes 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.
21
<PAGE>
General. Each Plan will continue in effect from year to year if such
-------
continuance is approved by a majority vote of both the Directors of the Company
and the non-interested Directors. Any Distribution Agreement related to the
Plans also must be approved by such vote of the Directors and the non-interested
Directors. Such Agreement will terminate automatically if assigned, and may be
terminated at any time, without payment of any penalty, by a vote of a majority
of outstanding voting securities of the relevant class of the Fund 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, 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 therefore) under the Plans. The Rule also
requires that the selection and nomination of Directors who are not "interested
persons" of the Company be made by such disinterested Directors.
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
authorize 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 Fund 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 AGENT. The Fund has entered into a shareholder
---------------------------
servicing agreement with Wells Fargo Bank and may enter into agreements with
other servicing agents. 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, and pursuant to a Shareholder Servicing Plan approved by
the Company's Board of Directors, including a majority of the non-interested
directors, a Servicing Agent is entitled to a fee of up to 0.25%, on an
annualized basis, of the average daily net assets of the Fund during the period
for which payment is being made. The Servicing Agreement was approved by the
Company's Board of Directors and provides that the Fund shall not be obligated
to make any payments under such Agreement that exceed the maximum amounts
payable under the Conduct Rules of the NASD.
22
<PAGE>
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 persons" (as
defined in the 1940 Act) of the Funds ("Non-Interested Directors"). Any form of
Servicing Agreement related to a Servicing Plan that materially differs from the
form of servicing agreement originally approved by the Board of Directors 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 of a majority of the Board of Directors, including a majority
of the Non-Interested Directors. No material amendment to the Servicing Plans
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 therefore) under the Servicing Plan.
CUSTODIAN. IBT acts as Custodian for the Fund. The Custodian, among other
---------
things, maintains a custody account or accounts in the name of the Fund,
receives and delivers all assets for the Fund upon purchase and upon sale or
maturity, collects and receives all income and other payments and distributions
on account of the assets of the Fund, and pays all expenses of the Fund. For
its services as Custodian, IBT is entitled to receive fees as follows: a net
asset charge at the annual rate of 0.0167%, payable monthly, plus specified
transaction charges. IBT 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 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.
FUND ACCOUNTANT. Wells Fargo Bank acts as Fund Accountant for the 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
Fund. For providing such services, Wells Fargo Bank will be entitled to receive
from the 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 Fund. For providing such services, Wells
Fargo Bank is entitled to receive monthly payments at the annual rate of 0.14%
of the Fund's average daily net assets attributable to Class A and B shares.
For its services as Transfer and Dividend Disbursing Agent for the Fund's
Institutional Class shares, Wells Fargo Bank is entitled to receive monthly
payments at the annual rate of 0.06% of the Fund's average daily net assets for
Institutional Class shares. For as long as the Fund's assets remain under $20
million, the Fund will not be charged any transfer agency fees.
UNDERWRITING COMMISSIONS. For the six-month period ended March 31, 1997,
------------------------
the aggregate amount of underwriting commissions paid to Stephens on
sales/redemptions of the
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<PAGE>
Company's shares was $2,296,243. Stephens retained $241,806 of such commissions.
WFSI and its registered representatives retained $1,719,000 and $335,437,
respectively, of such commissions.
PERFORMANCE CALCULATIONS
The Fund 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 in a Class of shares ("P") over a
period of years ("n") according to the following formula: P(1+T)n = ERV. In
addition, the Fund, at times, also may calculate total return based on net asset
value per share of each Class (rather than the public offering price), in which
case the figures would not reflect the effect of any sales charges that would
have been paid by an investor, or based on the assumption that a sales charge
other than the maximum sales charge (reflecting a Volume Discount) was assessed,
provided that total return data derived pursuant to the calculation described
above also are presented.
The Fund may advertise the cumulative total return on each class of shares.
Cumulative total return of shares is computed on a per share basis and assumes
the reinvestment of dividends and distributions. Cumulative total return of
shares generally is expressed as a percentage rate which is calculated by
combining the income and principal changes for a specified period and dividing
by the net asset value per share at the beginning of the period. Advertisements
may include the percentage rate of total return of shares or may include the
value of a hypothetical investment in shares at the end of the period which
assumes the application of the percentage rate of total return.
In addition to the above performance information, the Fund may also
advertise the cumulative total return for one-month, three-month, six-month, and
year-to-date periods. The cumulative total return for such periods is based on
the overall percentage change in value of a hypothetical investment in the Fund,
assuming all 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.
Investors should recognize that changes in the net asset values of shares of
each Class of the 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 for the period to shareholders.
Yield information for each Class of shares of the Fund may be useful in
reviewing the Fund's performance and for providing a basis for comparison with
investment alternatives. The yield of each Class of the Fund, however, may not
be comparable to the yields from investment alternatives because of differences
in the foregoing variables and differences in the methods used to value
portfolio securities, compute expenses and calculate yield.
From time to time and only to the extent the comparison is appropriate for a
Class of shares of the 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
24
<PAGE>
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 High
Grade Bond Index, Lehman Brothers Long-Term High Quality Government/Corporate
Bond Index, other managed or unmanaged indices or performance data of bonds,
stocks or government securities (including data provided by Ibbotson
Associates), or by other services, companies, publications or persons who
monitor mutual funds on overall performance or other criteria. The S&P Index and
the Dow Jones Industrial Average are unmanaged indices of selected common stock
prices. The performance of a class of shares of the 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 the Fund
will be calculated by relating net asset value per share at the beginning of a
stated period to the net asset value of the investment, assuming reinvestment of
all gains, distributions and dividends paid, at the end of the period. Any such
comparisons may be useful to investors who wish to compare the past performance
of a Class of shares of the Fund 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."
From time to time the Company may reprint, reference or otherwise use
material from magazines, newsletters, newspapers and books including, but not
limited to the Wall Street Journal, Money Magazine, Barrons, Kiplingers,
Business Week, Fortune, Forbes, the San Francisco Chronicle, the San Jose
Mercury News, The New York Times, the Los Angeles Times, the Boston Globe, the
Washington Post, the Chicago Sun-Times, Investor Business Daily,
25
<PAGE>
Worth, Bank Investor, American Banker, Smart Money, the 100 Best Mutual Funds
(Adams Publishing), Morningstar, Lipper Financial Data Services, or Value Line.
The Company also may disclose in sales literature, information, and
statements the distribution rate on the shares of each class of the Fund.
Distribution rate, which may be annualized, is the amount determined by dividing
the dollar amount per share of the most recent dividend by the most recent NAV
or maximum offering price per share as of a date specified in the sales
literature. Distribution rate will be accompanied by the standard 30-day yield
as required by the SEC.
The Company may also disclose in advertising and other types of literature,
information and statements the average credit quality of the Fund's portfolio,
or categories of investments therein, as of a specified date or period. Average
credit quality is calculated on a dollar weighted average basis based on ratings
assigned each issue or issuer, as the case may be, by S&P and/or Moody's. In
the event one rating agency does not rate the issue or issuer, as the case may
be, in the same tier as the other agency, the highest rating is used in the
calculation.
The Company also may use the following information in advertisements and
other types of literature, only to the extent the information is appropriate for
the Fund: (i) the Consumer Price Index may be used to assess the real rate of
return from an investment in the Fund; (ii) other government statistics,
including, but not limited to, The Survey of Current Business, may be used to
illustrate investment attributes of the Fund or the general economic, business,
investment, or financial environment in which the Fund operates; (iii) the
effect of tax-deferred compounding on the investment returns of 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 Fund's
historical performance or current or potential value with respect to the
particular industry or sector.
The Company also may include, from time to time, a reference to certain
marketing approaches of the Distributor, including, for example, a reference to
a potential shareholder being contacted by a selected broker or dealer.
The Company also may discuss in advertising and other types of literature
that the Fund has 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 Fund. The assigned rating would not be a recommendation to
purchase, sell or hold the Fund's shares since the rating would not comment on
the market price of the Fund's shares or the suitability of the Fund for a
particular investor. In addition, the assigned rating would be subject to
change, suspension or withdrawal as a result of changes in, or unavailability
of, information relating to the Fund or its investments. The Company may
compare the Fund's performance with other investments which
26
<PAGE>
are assigned ratings by NRSROs. Any such comparisons may be useful to investors
who wish to compare the Fund's past performance with other rated investments.
From time to time, the Fund may use the following statements, or variations
thereof, in advertisements and other promotional materials: "Wells Fargo Bank,
as a Shareholder Servicing Agent for the Stagecoach Funds, provides various
services to its customers that are also shareholders of the Funds. These
services may include access to Stagecoach Funds' account information through
Automated Teller Machines (ATMs), the placement of purchase and redemption
requests for shares of the Funds through ATMs and the availability of combined
Wells Fargo Bank and Stagecoach Funds account statements."
The Company may disclose, in advertising and other types of literature,
information and statements regarding performance and rankings of the investment
management services of Wells Fargo Bank. The Company may also disclose in
advertising and other types of sales literature the assets and categories of
assets under management 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 (except Institutional Class 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 the 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 Fund's shares.
27
<PAGE>
Securities that are listed on U.S. and foreign stock exchanges are valued at
the last sale price on the day the securities are valued or, lacking any sales
on such day, at the last available bid price. In cases where securities are
traded on more than one exchange, the securities are generally valued on the
exchange considered by Wells Fargo Bank as the primary market. Securities
traded in the over-the-counter ("OTC") market and listed on the Nasdaq Stock
Market ('Nasdaq') are valued at the last trade price on Nasdaq at 1:00 p.m.,
Pacific time; other OTC securities, and U.S. Government securities, are valued
at the last quoted bid price (other than short-term investments that mature in
60 days or less which are valued as described further below). To the extent
that the Fund holds lower rated corporate debt securities, it should be
recognized that judgment often plays a greater role than is the case with
respect to securities for which a broader range of dealer quotations and last-
sale information is available. All investments quoted in foreign currencies
will be valued daily in U.S. dollars on the basis of the foreign currency
exchange rate prevailing at the time such valuation is determined by the Fund's
custodian. Money market instruments maturing in 60 days or less are valued at
amortized cost. Futures contracts will be marked to market daily at their
respective settlement prices determined by the relevant exchange. These prices
are not necessarily final closing prices, but are intended to represent prices
prevailing during the final 30 seconds of the trading day. In all cases, bid
prices will be furnished by a reputable independent pricing service approved by
the Board of Directors. Prices provided by an independent pricing service may
be determined without exclusive reliance on quoted prices and may take into
account appropriate factors such as institutional-size trading in similar groups
of securities, yield, quality, coupon rate, maturity, type of issue, trading
characteristics and other market data. Securities and assets 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.
Foreign currency exchange rates are generally determined prior to the close
of regular trading on the NYSE. Occasionally events affecting the value of
foreign investments and such exchange rates occur between the time at which they
are determined and the close of trading on the NYSE, which events would not be
reflected in the computation of the Fund's net asset value on that day. If
events materially affecting the value of such investments or currency exchange
rates occur during such time period, the investments will be valued at their
fair value as determined in good faith by or under the direction of the Fund's
Board of Directors. The foreign currency exchange transactions of the Fund
conducted on a spot (i.e., cash) basis are valued at the spot rate for
purchasing or selling currency prevailing on the foreign exchange market. This
rate under normal market conditions differs from the prevailing exchange rate in
an amount generally less than one-tenth of one percent due to the costs of
converting from one currency to another.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
Shares of the Fund may be purchased on any day the Fund is open for
business. The Fund is 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.'s Day, Presidents' Day, Good Friday, Memorial Day, Independence
Day, Labor Day, Thanksgiving Day and Christmas Day (each a
28
<PAGE>
"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 Fund. For further
information about this form of payment please contact Stephens. In connection
with an in-kind securities payment, the Fund will require, among other things,
that the securities be valued on the day of purchase in accordance with the
pricing methods used by the Fund and that the Fund receives satisfactory
assurances that (i) it will have good and marketable title to the securities
received by it; (ii) that the securities are in proper form for transfer to the
Fund; and (iii) adequate information will be provided concerning the basis and
other matters relating to the securities.
Under the 1940 Act, the Fund may suspend the right of redemption or postpone
the date of payment upon redemption for any period during which the NYSE is
closed (other than customary weekend and holiday closings, or during which
trading is restricted, or during which as determined by the SEC by rule or
regulation) an emergency exists as a result of which disposal or valuation of
portfolio securities is not reasonably practicable, or for such periods as the
SEC may permit.
The Company may also redeem shares involuntarily or make payment for
redemption in securities or other property if it appears appropriate to do so in
light of the Company's responsibilities under the 1940 Act. In addition, the
Company may redeem shares involuntarily to reimburse the Fund for any losses
sustained by reason of the failure of a 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 Fund as
provided from time to time in the Prospectus.
PORTFOLIO TRANSACTIONS
The Company has no obligation to deal with any dealer or group of dealers in
the execution of transactions in portfolio securities. Subject to policies
established by the Company's Board of Directors, Wells Fargo Bank is responsible
for each Fund's portfolio decisions and the placing of portfolio transactions.
In placing orders, it is the policy of the Company to obtain the best results
taking into account the dealer's general execution and operational facilities,
the type of transaction involved and other factors such as the dealer's risk in
positioning the securities involved. While Wells Fargo Bank generally seeks
reasonably competitive spreads or commissions, the Funds will not necessarily be
paying the lowest spread or commission available.
Purchases and sales of equity securities on a securities exchange are
effected through brokers who charge a negotiated commission for their services.
Orders may be directed to any broker including, to the extent and in the manner
permitted by applicable law, Stephens or Wells Fargo Securities Inc. In the
over-the-counter market, securities are generally traded on a "net" basis with
dealers acting as principal for their own accounts without a stated commission,
although the price of the security usually includes a profit to the dealer. In
underwritten
29
<PAGE>
offerings, securities are purchased at a fixed price that includes an amount of
compensation to the underwriter, generally referred to as the underwriter's
concession or discount. The Fund will not deal with Stephens, Wells Fargo Bank
or their affiliates in any transaction in which any of them acts as principal
without an exemptive order from the Commission.
In placing orders for portfolio securities of the Fund, Wells Fargo Bank is
required to give primary consideration to obtaining the most favorable price and
efficient execution. This means that Wells Fargo Bank will seek to execute each
transaction at a price and commission, if any, that provide the most favorable
total cost or proceeds reasonably attainable in the circumstances. While Wells
Fargo Bank will generally seek reasonably competitive spreads or commissions,
the Asset Allocation Fund will not necessarily be paying the lowest spread or
commission available. Commission rates are established pursuant to negotiations
with the broker based on the quality and quantity of execution services provided
by the broker in the light of generally prevailing rates. The allocation of
orders among brokers and the commission rates paid are reviewed periodically by
the Board of Directors.
Wells Fargo Bank, as the Investment Advisor to 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 Fund's 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.
FUND EXPENSES
From time-to-time, Wells Fargo Bank and Stephens may waive fees from the
Fund in whole or in part. any such waiver will reduce expenses and,
accordingly, have a favorable
30
<PAGE>
impact on the Fund's 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 Fund; expenses of shareholders' meetings;
expenses relating to the issuance, registration and qualification of Fund
shares; pricing services, and any extraordinary expenses. Expenses attributable
to the Fund are charged against the Fund's assets. General expenses of the
Company are allocated among all of the funds of the Company, including the Fund,
in a manner proportionate to the net assets of the Fund, on a transactional
basis, or on such other basis as the Company's Board of Directors deems
equitable.
FEDERAL INCOME TAXES
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 Fund. This section of the
SAI includes additional information concerning income taxes.
General. The Company intends to qualify the 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. The Fund will be treated as a separate entity for tax purposes
and thus the provisions of the Code applicable to regulated investment companies
will generally be applied to the Fund, rather than to the Company as a whole.
In addition, net capital gain, net investment income, and operating expenses
will be determined separately for the Fund. As a regulated investment company,
the 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) the 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 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
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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 Fund must also distribute or be deemed to distribute to its
shareholders at least 90% of its 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 Fund intends to pay out
substantially all of its net investment income and net realized capital gains
(if any) 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 the 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. The 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 the 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 an option granted by the Fund lapses or is terminated through a closing
transaction, such as a repurchase by the Fund of the option from its holder, the
Fund will realize a short-term capital gain or loss, depending on whether the
premium income is greater or less than the amount paid by the Fund in the
closing transaction. Some realized capital losses may be deferred if they
result from a position which is part of a "straddle," discussed below. If
securities are sold by the 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, the Fund will be required to "mark to
market" its positions in "Section 1256 contracts," which generally include
regulated futures contracts and
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<PAGE>
listed 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.
Under Section 988 of the Code, the 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 Fund 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 provisions of Section 1256. If a
regulated investment company were treated as entering into "straddles" by
engaging in certain financial forward, futures or option contracts, such
straddles could be characterized as "mixed straddles" if the futures, forwards,
or options comprising a part of such straddles were governed 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 transaction
rules, short-term capital loss on straddle positions may be recharacterized as
long-term capital loss, and long-term capital gain may be characterized as
short-term capital gain or ordinary income.
If the 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 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 the Fund purchases shares in a "passive foreign investment company"
("PFIC"), the Fund may be subject to federal income tax and an interest charge
imposed by the IRS upon certain distributions from the PFIC or the Fund's
disposition of its PFIC shares. If the Fund invests in a PFIC, the Fund intends
to make an available election to mark-to-market its interest in PFIC shares.
Under the election, the Fund will be treated as recognizing at the end of each
taxable year the difference, if any, between the fair market value of its
interest in the PFIC shares and its basis in such shares. In some
circumstances, the recognition of loss may be suspended. The Fund will adjust
its basis in the PFIC shares by the amount of income (or loss) recognized.
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<PAGE>
Although such income (or loss) will be taxable to the Fund as ordinary income
(or loss) notwithstanding any distributions by the PFIC, the Fund will not be
subject to federal income tax or the interest charge with respect to its
interest in the PFIC.
Foreign Taxes. Income and dividends received by the 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. If more than 50% in value of a
regulated investment company's total assets at the close of its taxable year
consist of securities of non-U.S. corporations, the regulated investment company
will be eligible to file an election with the IRS pursuant to which the
regulated investment company may pass-through to its shareholders foreign taxes
paid by the regulated investment company, which may be claimed either as a
credit or deduction by the shareholders. The Fund expects to qualify for the
election. However, even if the Fund qualifies for the election, foreign taxes
will only pass-through to a Fund shareholder if (i) the shareholder holds the
Fund shares for at least 16 days during the 30 day period beginning 15 days
prior to the date upon which the shareholder becomes entitled to receive Fund
dividends corresponding with the pass-through of the foreign taxes paid by the
Fund, and (ii), with respect to foreign source dividends received by the Fund on
shares giving rise to foreign tax, the Fund holds the shares for 16 days during
the 30 day period beginning 15 days prior to the date upon which the Fund
becomes entitled to the dividend. The Fund will inform shareholders if it fails
to satisfy the holding requirement with respect to foreign source dividends that
would otherwise qualify for the pass-through of foreign taxes to its
shareholders.
Capital Gain Distributions. Distributions which are designated by the 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 to pass-through entities,
including regulated investment companies, such as the Fund. The Internal
Revenue Service has published a notice describing temporary Regulations to be
issued pursuant to such authority, permitting the application of the
34
<PAGE>
reduced capital gains tax rates to pass-through entities such as the Funds.
Under the Regulations to be issued, if a regulated investment company designates
a dividend as a capital gain dividend for a taxable year ending on or after May
7, 1997, then such regulated investment company may also designate the dividends
as one of two classes: a 20% rate gain distribution, or a 28% rate gain
distribution. Thus, noncorporate shareholders of the Funds may qualify for the
reduced rate of tax on capital gain dividends paid by the Funds, subject only to
the limitation as to the maximum amounts which may be designated in each class.
Such maximum amount for each class is determined by performing the computation
required by Section 1(h) of the Code as if the Fund were an individual whose
ordinary income is subject to a marginal rate of at least 28%.
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 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 a long-term capital gain) with respect to any Fund
share and such Fund share is held for six months or less, then (unless otherwise
disallowed) any loss on the sale or exchange of that Fund share will be treated
as a long-term capital loss to the extent of the designated capital gain
distribution. This 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
35
<PAGE>
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 Fund (described below) are
generally not subject to backup withholding.
Foreign Shareholders. Under the Code, distributions of net investment
--------------------
income by the 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 the 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 will generally be
effective for payments made after December 31, 1998, subject to certain
transition rules. Among other things, the New Regulations will permit the Fund
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 Fund 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 the Fund may involve sophisticated tax rules that may result in income or
gain recognition by the Fund without corresponding current cash receipts.
Although the Fund will seek to avoid significant noncash income, such noncash
income could be recognized by the Fund, in which case the Fund
36
<PAGE>
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 the Fund. Each investor is urged to consult
his or her tax advisor regarding specific questions as to federal, state, local
and foreign taxes.
CAPITAL STOCK
The Fund is one 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 the Fund represents an equal, proportionate
interest in the 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. Subject to the foregoing, all shares of the Fund 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 the Fund's 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.
The term "majority," when referring to approvals to be obtained from
shareholders of the Fund, means the vote of the lesser of (i) 67% of the shares
of the Fund represented at a meeting if the holders of more than 50% of the
outstanding shares of the Fund are present in person or by proxy, or (ii) more
than 50% of the outstanding shares of the Fund. The term "majority," when
referring to the approvals to be obtained from shareholders of the Company as a
whole, means the vote of the lesser of (i) 67% of the Company's shares
represented at a meeting if the holders of more than 50% of the Company's
outstanding shares are present in person or by proxy, or (ii) more than 50% of
the Company's outstanding shares. Shareholders are entitled to one vote for
each full share held and fractional votes for fractional shares held.
37
<PAGE>
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.
Each share of a class represents an equal proportional interest in the Fund
with each other share in 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 the Fund are entitled
to receive the assets attributable to the Fund that are available for
distribution, and a distribution of any general assets not attributable to a
particular investment portfolio that are available for distribution in such
manner and on such basis as the Directors in their sole discretion may
determine.
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 a Prospectus or the SAI as to the contents of any contract or other
document referred to herein or in a 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.
FINANCIAL INFORMATION
At least semi-annually, the Company will furnish the shareholders of the
Fund with financial statements for the Fund.
The Company's Annual and Semi-Annual Reports may be obtained by calling
1-800-222-8222.
38
<PAGE>
APPENDIX
The following is a description of the ratings given by Moody's and S&P to
corporate bonds and commercial paper.
Corporate Bonds
- ---------------
Moody's: The four highest ratings for corporate bonds are "Aaa," "Aa," "A"
-------
and "Baa." Bonds rated "Aaa" are judged to be of the "best quality" and carry
the smallest amount of investment risk. Bonds rated "Aa" are of "high quality
by all standards," but margins of protection or other elements make long-term
risks appear somewhat greater than "Aaa" rated bonds. Bonds rated "A" possess
many favorable investment attributes and are considered to be upper medium grade
obligations. Bonds rated "Baa" are considered to be medium grade obligations;
interest payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds have speculative
characteristics as well. Moody's applies numerical modifiers: 1, 2 and 3 in
each rating category from "Aa" through "Baa" in its rating system. The modifier
1 indicates that the security ranks in the higher end of its category; the
modifier 2 indicates a mid-range ranking; and the modifier 3 indicates that the
issue ranks in the lower end.
S&P: The four highest ratings for corporate bonds are "AAA," "AA," "A" and
---
"BBB." Bonds rated "AAA" have the highest ratings assigned by S&P and have an
extremely strong capacity to pay interest and repay principal. Bonds rated "AA"
have a "very strong capacity to pay interest and repay principal" and differ
"from the highest rated issued only in small degree." Bonds rated "A" have a
"strong capacity" to pay interest and repay principal, but are "somewhat more
susceptible" to adverse effects of changes in economic conditions or other
circumstances than bonds in higher rated categories. Bonds rated "BBB" are
regarded as having an "adequate capacity" to pay interest and repay principal,
but changes in economic conditions or other circumstances are more likely to
lead to a "weakened capacity" to make such repayments. The ratings from "AA" to
"BBB" may be modified by the addition of a plus or minus sign to show relative
standing within the category.
Corporate Commercial Paper
- --------------------------
Moody's: The highest rating for corporate commercial paper is "P-1" (Prime-
-------
1). Issuers rated "P-1" have a "superior capacity for repayment of short-term
promissory obligations." Issuers rated "P-2" (Prime-2) "have a strong capacity
for repayment of short-term promissory obligations," but earnings trends, while
sound, will be subject to more variation.
S&P: The "A-1" rating for corporate commercial paper indicates that the
---
"degree of safety regarding timely payment is either overwhelming or very
strong." Commercial paper with "overwhelming safety characteristics" will be
rated "A-1+." Commercial paper with a strong capacity for timely payments on
issues will be rated "A-2."
A-1
<PAGE>
STAGECOACH FUNDS, INC.
Telephone: 1-800-222-8222
STATEMENT OF ADDITIONAL INFORMATION
Dated December 15, 1997
as supplemented on February 24, 1998
CALIFORNIA TAX-FREE MONEY MARKET MUTUAL FUND
GOVERNMENT MONEY MARKET MUTUAL FUND
MONEY MARKET MUTUAL FUND
NATIONAL TAX-FREE MONEY MARKET MUTUAL FUND
TREASURY MONEY MARKET MUTUAL FUND
CLASS A SHARES
Stagecoach Funds, Inc. (the "Company") is an open-end, management
investment company. This Statement of Additional Information ("SAI") contains
additional information about five funds in the Stagecoach Family of Funds (each,
a "Fund" and collectively, the "Funds") -- the CALIFORNIA TAX-FREE MONEY MARKET
MUTUAL, GOVERNMENT MONEY MARKET MUTUAL, MONEY MARKET MUTUAL, NATIONAL TAX-FREE
MONEY MARKET MUTUAL, and TREASURY MONEY MARKET MUTUAL FUNDS. The California
Tax-Free Money Market Mutual Fund offers a single class of shares that are
sometimes referred to as "Class A shares." Each of the other Funds offers Class
A shares. This SAI relates to all such classes of shares.
This SAI is not a prospectus and should be read in conjunction with the
Funds' Prospectus, dated December 15, 1997, as supplemented. All terms used in
this SAI that are defined in the Prospectus will have the meanings assigned in
the Prospectus. A copy of the Prospectus may be obtained without charge by
calling the Transfer Agent at 1-800-222-8222 or writing to Stagecoach Funds,
P.O. Box 7066, San Francisco, CA 94120-7066.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Historical Fund Information......................................... 1
Investment Restrictions............................................. 1
Additional Permitted Investment Activities.......................... 7
Risk Factors........................................................ 16
Special Considerations Affecting California Municipal Obligations... 18
Management.......................................................... 22
Performance Calculations............................................ 35
Determination of Net Asset Value.................................... 40
Additional Purchase and Redemption Information...................... 42
Portfolio Transactions.............................................. 43
Fund Expenses....................................................... 44
Federal Income Taxes................................................ 45
Capital Stock....................................................... 51
Other............................................................... 53
Independent Auditors................................................ 54
Financial Information............................................... 54
Appendix............................................................ A-1
</TABLE>
i
<PAGE>
HISTORICAL FUND INFORMATION
The California Tax-Free Money Market Mutual Fund was originally organized as
a fund of the Company and commenced operations on July 1, 1992.
The Government Money Market Mutual Fund was originally organized as the
Pacifica Government Money Market Fund on April 26, 1988, as an investment
portfolio of Pacifica Funds Trust ("Pacifica"). On September 6, 1996, the
Pacifica Government Money Market Fund was reorganized as the Company's
Government Money Market Mutual Fund.
The Money Market Mutual Fund was originally organized as a fund of the
Company and commenced operations on July 1, 1992.
The National Tax-Free Money Market Mutual Fund was originally organized as a
fund of the Company and commenced operations on April 2, 1996.
The Treasury Money Market Mutual Fund commenced operations on October 1,
1985, as the Short-Term Government Fund of the Pacific American Funds. The
Treasury Money Market Mutual Fund operated as a portfolio of Pacific American
Fund through October 1, 1994, when it was reorganized as the Pacific American
U.S. Treasury Portfolio, a portfolio of Pacifica Funds Trust. In July 1995, the
Fund was renamed the Pacifica Treasury Money Market Fund. On September 6, 1996,
the Pacifica Treasury Money Market Fund was reorganized as the Company's
Treasury Money Market Mutual Fund.
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 (as defined in the Investment Company Act
of 1940, as amended (the "1940 Act")) of the outstanding voting securities of
such Fund.
The California Tax-Free Money Market Mutual Fund and Money Market Mutual Fund
may not:
(1) purchase the securities of issuers conducting their principal business
activity in the same industry if, immediately after the purchase and as a result
thereof, the value of such Fund's investments in that industry would be 25% or
more of the current value of such Fund's total assets, provided that there is no
limitation with respect to investments in (i) by the California Tax-Free Money
Market Mutual Fund in municipal securities (for the purpose of this restriction,
private activity bonds and notes shall not be deemed municipal securities if the
payments of principal and interest on such bonds or notes is the ultimate
responsibility of non-governmental issuers), (ii) with respect to both Funds,
the obligations of the U.S. Government, its agencies or instrumentalities, and
(iii) the obligations of domestic banks (for the purpose of this restriction,
1
<PAGE>
domestic bank obligations do not include obligations of U.S. branches of foreign
banks or obligations of foreign branches of U.S. banks);
(2) purchase or sell real estate or real estate limited partnerships
(other than municipal obligations with respect to the California Tax-Free Money
Market Mutual Fund, or other than money market securities with respect to the
Money Market Mutual Fund, or other securities secured by real estate or
interests therein or securities issued by companies that invest in real estate
or interests therein), commodities or commodity contracts (including futures
contracts);
(3) purchase securities on margin (except for short-term credits necessary
for the clearance of transactions with regard to both Funds and except for
margin payments in connection with options, futures and options on futures with
regard to the California Tax-Free Money Market Mutual Fund) or make short sales
of securities;
(4) underwrite securities of other issuers, except to the extent that the
purchase of municipal securities or other permitted investments directly from
the issuer thereof or from an underwriter for an issuer and the later
disposition of such securities in accordance with a Fund's investment program
may be deemed to be an underwriting;
(5) make investments for the purpose of exercising control or management;
(6) issue senior securities, except that each Fund may borrow from banks
up to 10% of the current value of its net assets for temporary purposes only in
order to meet redemptions, and these borrowings may be secured by the pledge of
up to 10% of the current value of its net assets (but investments may not be
purchased while any such outstanding borrowings exceed 5% of its net assets);
(7) write, purchase or sell puts, calls, options, warrants or any
combination thereof, except that the Funds may purchase securities with put
rights in order to maintain liquidity; nor
In addition, neither the California Tax-Free Money Market Mutual Fund nor
the Money Market Mutual Fund may make loans of portfolio securities or other
assets, except that loans for purposes of this restriction will not include the
purchase of fixed time deposits, repurchase agreements, commercial paper and
other short-term obligations, and other types of debt instruments commonly sold
in public or private offerings.
The Government Money Market Mutual Fund may not:
(1) invest more than 10% of the aggregate value of its total assets in
investments that are illiquid, or not readily marketable (including repurchase
agreements having maturities of more than seven calendar days, variable- and
floating-rate demand notes requiring receipt of principal note amount on more
than seven days notice and securities of foreign issuers that are not listed on
a recognized domestic or foreign securities exchange);
2
<PAGE>
(2) borrow money or pledge or mortgage its assets, except that the Fund
may borrow from banks up to 10% of the current value of its total net assets for
temporary or emergency purposes and those borrowings may be secured by the
pledge of not more than 15% of the current value of its total net assets (but
investments may not be purchased by the Fund while any such borrowings exist);
(3) make loans, except loans of portfolio securities and except that the
Fund may enter into repurchase agreements with respect to its portfolio
securities and may purchase the types of debt instruments described in the
Prospectuses or this SAI. The Fund may invest in repurchase agreements maturing
in more than seven days (unless subject to a demand feature) if any such
investment, together with any illiquid securities (including securities which
are subject to legal or contractual restrictions on resale) held by the Fund,
does not exceed 10% of the value of its total assets;
(4) invest in companies for the purpose of exercising control or
management;
(5) knowingly purchase securities of other investment companies, except in
connection with a merger, consolidation, acquisition, or reorganization, or
where otherwise permitted by the 1940 Act;
(6) invest in real property (including limited partnership interests),
commodities, commodity contracts, or oil, gas and other mineral resource,
exploration, development, lease or arbitrage transactions;
(7) acquire securities subject to restrictions on disposition imposed by
the Securities Act of 1933 (the "1933 Act"), if, immediately after and as a
result of such acquisition, the value of such restricted securities and all
other illiquid securities held by the Fund would exceed 10% of the value of the
Fund's total assets;
(8) engage in the business of underwriting securities of other issuers,
except to the extent that the disposal of an investment position may technically
cause it to be considered an underwriter as that term is defined under the 1933
Act;
(9) sell securities short, except to the extent that the Fund
contemporaneously owns or has the right to acquire at no additional cost
securities identical to those sold short;
(10) mortgage, pledge, or hypothecate any of its assets, except as
described in fundamental investment policy (2);
(11) purchase or retain the securities of any issuer, if those individual
officers and Directors of the Company, its Advisor, the sponsor, or the
distributor, each owning beneficially more than 1/2 of 1% of the securities of
such issuer, together own more than 5% of the securities of such issuer;
3
<PAGE>
(12) invest more than 5% of its net assets in warrants which are
unattached to securities, included within that amount, no more than 2% of the
value of the Fund's net assets, may be warrants that are not listed on the New
York or American Stock Exchanges; nor
(13) invest more than 5% of the current value of its total assets in the
securities of companies that, including predecessors, have a record of less than
three years' continuous operation.
The National Tax-Free Money Market Mutual Fund may not:
(1) purchase the securities of issuers conducting their principal business
activity in the same industry if, immediately after the purchase and as a result
thereof, the value of the Fund's investments in that industry would be 25% or
more of the current value of the Fund's total assets, provided that there is no
limitation with respect to investments in (i) municipal securities (for the
purpose of this restriction, private activity bonds and notes shall not be
deemed municipal securities if the payment of principal and interest on such
bonds or notes is the ultimate responsibility of non-governmental entities);
(ii) obligations of the U.S. Government, its agencies or instrumentalities
(including government-sponsored enterprises); and (iii) the obligations of
domestic banks (for the purpose of this restriction, domestic bank obligations
do not include obligations of U.S. branches of foreign banks or obligations of
foreign branches of U.S. banks);
(2) purchase or sell real estate or real estate limited partnerships
(other than municipal obligations or other securities secured by real estate or
interests therein or securities issued by companies that invest in real estate
or interests therein), commodities or commodity contracts (including futures
contracts) except that the Fund may purchase securities of an issuer which
invests or deals in commodities and commodity contracts and except that the Fund
may enter into futures and options contracts in accordance with its investment
policies;
(3) purchase securities on margin (except for short-term credits necessary
for the clearance of transactions), or make short sales of securities;
(4) underwrite securities of other issuers, except to the extent that the
purchase of municipal securities or other permitted investments directly from
the issuer thereof or from an underwriter for an issuer and the later
disposition of such securities in accordance with the Fund's investment program
may be deemed to be an underwriting;
(5) make investments for the purpose of exercising control or management;
(6) issue senior securities, except that the Fund may borrow from banks up
to 10% of the current value of its net assets for temporary purposes only in
order to meet redemptions, and these borrowings may be secured by the pledge of
up to 10% of the current value of its net assets (but investments may not be
purchased while any such outstanding borrowing in excess of 5% of its net assets
exists);
4
<PAGE>
(7) write, purchase or sell puts, calls, warrants, options or any
combination thereof, except that the Fund may purchase securities with put
rights in order to maintain liquidity;
(8) purchase securities of any issuer (except securities issued or
guaranteed by the U.S. Government, its agencies and instrumentalities, including
government-sponsored enterprises) if, as a result, with respect to 75% of its
total assets, more than 5% of the value of the Fund's total assets would be
invested in the securities of any one issuer or, with respect to 100% of its
total assets the Fund's ownership would be more than 10% of the outstanding
voting securities of such issuer; nor
(9) make loans, except that the Fund may purchase or hold debt
instruments, lend its portfolio securities or enter into repurchase agreement
transactions in accordance with its investment policies.
With regard to fundamental investment restriction number (1) above, the
Fund intends to reserve freedom of action to have in excess of 25% of the value
of the respective total assets invested in obligations of the banking industry.
Regarding this fundamental concentration policy, the Fund may hold in excess of
25% of the value of the assets in obligations of the banking industry to the
extent that the Fund holds obligations with such credit enhancements as letters
of credit issued by domestic bank issuers, which will be considered to be
obligations of domestic banks. The staff of the U.S. Securities and Exchange
Commission ("SEC") takes the position that the exclusion with respect to banks
may only be applied to domestic banks. For this purpose, the staff also takes
the position that U.S. branches of foreign banks and foreign branches of
domestic banks may, if certain conditions are met, be treated as "domestic
banks". The Company currently intends to consider only obligations of "domestic
banks" to be within the exclusion with respect to bank obligations.
Fundamental investment restriction number (8), above, is less restrictive
than Rule 2a-7 of the 1940 Act. Nonetheless, it is the operating policy of the
Fund to comply with the diversification requirements under Rule 2a-7.
The Treasury Money Market Mutual Fund may not:
(1) purchase common stocks and voting securities (including state,
municipal or industrial revenue bonds) except for securities of other investment
companies;
(2) borrow money or issue senior securities, except that the Fund may
borrow from banks or enter into reverse repurchase agreements for temporary
purposes in amounts up to one-third of the value of its total assets at the time
of such borrowing. The Fund will not purchase securities while its borrowings
(including reverse repurchase agreements) in excess of 5% of its total assets
are outstanding. As a matter of non-fundamental policy, the Fund intends to
limit its investments in reverse repurchase agreements to no more than 20% of
its total assets;
(3) mortgage, pledge, or hypothecate any assets, except in connection with
any such borrowing and in amounts not in excess of one-third of the value of the
Fund's total assets at the
5
<PAGE>
time of its borrowing. Securities held in escrow or separate accounts in
connection with the Fund's investment practices are not deemed to be pledged for
purposes of this investment restriction;
(4) purchase securities on margin, except for delayed delivery or when-
issued transactions or such short-term credits as are necessary for the
clearance of transactions; or make short sales of securities or, maintain a
short position;
(5) write put or call options;
(6) underwrite the securities of other issuers, except as the Fund may be
deemed to be an underwriter in connection with the purchase or sale of portfolio
instruments in accordance with its investment objective and portfolio management
policies;
(7) invest in companies for the purpose of exercising control;
(8) make loans, except that the Fund may purchase or hold debt instruments
in accordance with its investment objective and policies and may enter into
loans of portfolio securities and repurchase agreements;
(9) invest in securities of other investment companies, except as they may
be acquired as part of a merger, consolidation, acquisition of assets or where
otherwise permitted by the 1940 Act; nor
(10) lend its portfolio securities in excess of one-third of the value of
its total assets.
Non-Fundamental Investment Policies
-----------------------------------
Each Fund has 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 Fund's shareholders.
(1) Each Fund other than Government Money Market Mutual 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 Fund's
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 Fund's net assets with respect to any one investment company, and
(iii) 10% of such Fund's 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 10% 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
6
<PAGE>
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 securities of
foreign branches of U.S. banks and U.S. branches of foreign banks that are
denominated in and pay interest in U.S. dollars.
(4) Each Fund, except the California Tax-Free Money Market Mutual and
Money Market Mutual Funds, may lend securities from its portfolio to brokers,
dealers and financial institutions, in amounts not to exceed (in the aggregate)
one-third of such 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 Government Money Market Mutual may purchase asset-backed securities,
which are securities backed by installment contracts, credit-card receivables or
other assets. Asset-backed securities represent interests in "pools" of assets
in which payments of both interest and principal on the securities are made
monthly, thus in effect "passing through" monthly payments made by the
individual borrowers on the assets that underlie the securities, net of any fees
paid to the issuer or guarantor of the securities. The average life of asset-
backed securities varies with the maturities of the underlying instruments and
is likely to be substantially less than the original maturity of the assets
underlying the securities as a result of prepayments. For this and other
reasons, an asset-backed security's stated maturity may be shortened, and the
security's total return may be difficult to predict precisely.
Bank Obligations
----------------
The Funds, except the Treasury Money Market Mutual Fund, 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
7
<PAGE>
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 a Fund 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.
Commercial Paper
----------------
The Funds, except the Treasury Money Market Mutual Fund, may invest in
commercial paper. Commercial paper includes short-term unsecured promissory
notes, 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 taxable instruments issued by government
agencies and instrumentalities.
Floating- and Variable-Rate Obligations
---------------------------------------
The Funds may purchase floating- and variable-rate obligations. Each Fund
may purchase floating- and variable-rate demand notes and bonds. These
obligations may have stated maturities in excess of thirteen months, but they
permit the holder to demand payment of principal at any time, or at specified
intervals not exceeding thirteen months. Variable-rate demand notes include
master demand notes that are obligations that permit a Fund to invest
fluctuating amounts, which may change daily without penalty, pursuant to direct
arrangements between the Fund, 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
8
<PAGE>
at face value. Accordingly, where these obligations are not secured by letters
of credit or other credit support arrangements, a Fund's 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
each Fund 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 each Fund, considers on an ongoing basis the creditworthiness
of the issuers of the floating- and variable-rate demand obligations in such
Fund's portfolio. No Fund will invest more than 10% 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.
Foreign Obligations
-------------------
Each Fund, except the Treasury Money Market Mutual Fund, may invest up to
25% of its assets in high-quality, short-term (thirteen months or less) debt
obligations of foreign branches of U.S. banks or U.S. branches of foreign banks
that are denominated in and pay interest in U.S. dollars. Investments in
foreign obligations involve certain considerations that are not typically
associated with investing in domestic obligations. There may be less publicly
available information about a foreign issuer than about a domestic issuer.
Foreign issuers also are not subject to the same uniform accounting, auditing
and financial reporting standards or governmental supervision as domestic
issuers. In addition, with respect to certain foreign countries, taxes may be
withheld at the source under foreign income tax laws and there is a possibility
of expropriation or confiscatory taxation, political or social instability, or
diplomatic developments that could affect adversely investments in, the
liquidity of, and the ability to enforce contractual obligations with respect
to, securities of issuers located in those countries.
Forward Commitments, When-Issued Purchases and Delayed-Delivery
---------------------------------------------------------------
Transactions
------------
Each Fund 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. 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 each
Fund will generally purchase securities with the intention of acquiring them, a
Fund 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 segregate cash, U.S. Government obligations or other high-
quality debt instruments in an amount at least equal in value to the Fund's
commitments to purchase when-issued securities. If the value of these assets
declines, the Fund will segregate additional liquid assets on a daily basis so
that the value of the segregated assets is equal to the amount of such
commitments.
9
<PAGE>
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 a Fund. Each Fund may invest up to 10% of
its assets in illiquid securities.
Letters of Credit
-----------------
Certain of the debt obligations (including municipal securities,
certificates of participation, commercial paper and other short-term
obligations) which the Funds, except the Treasury Money Market Mutual Fund, may
purchase may be backed by an unconditional and irrevocable letter of credit of a
bank, savings and loan association or insurance company which assumes the
obligation for payment of principal and interest in the event of default by the
issuer. Only banks, savings and loan associations and insurance companies
which, in the opinion of Wells Fargo Bank, are of comparable quality to issuers
of other permitted investments of each such Fund may be used for letter of
credit-backed investments, in each case, the Company's Board approves or
ratifies such investments.
Loans of Portfolio Securities
-----------------------------
The Funds, except the California Tax-Free Money Market Mutual and Money
Market Mutual 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
(secured continuously by U.S. Treasury obligations only for the Treasury Money
Market Mutual Fund) 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 a particular
Fund, and will not exceed 20% of the total assets of the Treasury Money Market
Mutual Fund.
A Fund will earn income for lending its securities because cash collateral
pursuant to such 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. A Fund will 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, a Fund could experience delays
in recovering securities or collateral or could lose all or part of the value of
the loaned securities. When a Fund 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 a Fund if a material
event affecting the investment is to occur. A Fund may pay a portion of the
interest and fees earned from
10
<PAGE>
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-Backed Securities
--------------------------
The Government Money Market Mutual may invest in mortgage-backed
securities, including those representing an undivided ownership interest in a
pool of mortgages, such as certificates of the Government National Mortgage
Association ("GNMA") and the Federal Home Loan Mortgage Corporation ("FHLMC").
These certificates are in most cases pass-through instruments, through which the
holder receives a share of all interest and principal payments from the
mortgages underlying the certificate, net of certain fees. The average life of a
mortgage-backed security varies with the underlying mortgage instruments, which
generally have maximum maturities of 40 years. The average life is likely to be
substantially less than the original maturity of the mortgage pools underlying
the securities as the result of prepayments, mortgage refinancings or
foreclosure. Mortgage prepayment rates are affected by factors including the
level of interest rates, general economic conditions, the location and age of
the mortgage and other social and demographic conditions. Such prepayments are
passed through to the registered holder with the regular monthly payments of
principal and interest and have the effect of reducing future payments.
There are risks inherent in the purchase of mortgage-backed securities. For
example, these securities are subject to a risk that default in payment will
occur on the underlying mortgages. In addition to default risk, these securities
are subject to the risk that prepayment on the underlying mortgages will occur
earlier or later or at a lesser or greater rate than expected. To the extent
that Advisor's assumptions about prepayments are inaccurate, these securities
may expose the Funds, to significantly greater market risks than expected.
Municipal Bonds
---------------
The California Tax-Free Money Market Mutual and National Tax-Free Money
Market Mutual Funds may invest in municipal bonds. The two principal
classifications of municipal bonds are "general obligation" and "revenue" bonds.
Municipal bonds are debt obligations issued to obtain funds for various public
purposes, including the construction of a wide range of public facilities such
as bridges, highways, housing, hospitals, mass transportation, schools, streets,
and water and sewer works. Other purposes for which municipal bonds may be
issued include the refunding of outstanding obligations and obtaining funds for
general operating expenses or to loan to other public institutions and
facilities. Industrial development bonds are a specific type of revenue bond
backed by the credit and security of a private user. Certain types of
industrial development bonds are issued by or on behalf of public authorities to
obtain funds to provide privately-operated housing facilities, sports
facilities, convention or trade show facilities, airport, mass transit, port or
parking facilities, air or water pollution control facilities and certain local
facilities for water supply, gas, electricity, or sewage or solid waste
disposal. The Funds may not invest 20% or more of their respective assets in
industrial development bonds. Assessment bonds, wherein a specially created
district or project area levies a tax (generally on its taxable property) to pay
for an improvement or project may be considered a variant of either category.
There are, of course, other variations in the types of municipal bonds,
11
<PAGE>
both within a particular classification and between classifications, depending
on numerous factors.
From time to time, proposals have been introduced before Congress for the
purpose of restricting or eliminating the federal income tax exemption for
interest on municipal obligations. For example, under federal tax legislation
enacted in 1986, interest on certain private activity bonds must be included in
an investor's alternative minimum taxable income, and corporate investors must
treat all tax-exempt interest as an item of tax preference. Moreover, with
respect to California obligations, the California Tax-Free Money Market Mutual
Fund cannot predict what legislation, if any, may be proposed in the state
legislature regarding the state income tax status of interest on such
obligations, or which proposals, if any, might be enacted. Such proposals, while
pending or if enacted, might materially and adversely affect the availability of
municipal obligations generally, or California obligations, specifically, for
investment by a Fund and the liquidity and value of a Fund's portfolio. In such
an event, the Fund involved would re-evaluate its investment objective and
policies and consider possible changes in its structure or possible dissolution.
Opinions relating to the validity of municipal obligations and to the
exemption of interest thereon from federal income tax are rendered by bond
counsel to the respective issuers at the time of issuance. Neither the Funds nor
the Advisor will review the proceedings relating to the issuance of municipal
obligations or the basis for such opinions.
Certain of the municipal obligations held by a Fund may be insured as to
the timely payment of principal and interest. The insurance policies usually are
obtained by the issuer of the municipal obligation at the time of its original
issuance. In the event that the issuer defaults on interest or principal
payment, the insurer will be notified and will be required to make payment to
the bondholders. There is, however, no guarantee that the insurer will meet its
obligations. In addition, such insurance does not protect against market
fluctuations caused by changes in interest rates and other factors. The Tax-Free
Funds may, from time to time, invest more than 25% of their assets in municipal
obligations covered by insurance policies.
The values of outstanding municipal securities will vary as a result of
changing market evaluations of the ability of their issuers to meet the interest
and principal payments (i.e., credit risk). Such values also will change in
response to changes in the interest rates payable on new issues of municipal
securities (i.e., market risk). Should such interest rates rise, the values of
outstanding securities, including those held in a Fund's portfolio, will decline
and (if purchased at par value) sell at a discount. If interests rates fall,
the values of outstanding securities will generally increase and (if purchased
at par value) sell at a premium. Changes in the value of municipal securities
held in a Fund's portfolio arising from these or other factors will cause
changes in the net asset value per share.
Municipal Notes
---------------
The California Tax-Free Money Market Mutual and National Tax-Free Money
Market Mutual Funds may invest in municipal notes. Municipal notes include, but
are not limited to, tax anticipation notes ("TANs"), bond anticipation notes
("BANs"), revenue anticipation notes ("RANs") and construction loan notes.
Notes sold as interim financing in anticipation of
12
<PAGE>
collection of taxes, a bond sale or receipt of other revenues are usually
general obligations of the issuer.
TANs. An uncertainty in a municipal issuer's capacity to raise taxes as a
result of such events as a decline in its tax base or a rise in delinquencies
could adversely affect the issuer's ability to meet its obligations on
outstanding TANs. Furthermore, some municipal issuers mix various tax proceeds
into a general fund that is used to meet obligations other than those of the
outstanding TANs. Use of such a general fund to meet various obligations could
affect the likelihood of making payments on TANs.
BANs. The ability of a municipal issuer to meet its obligations on its
BANs is primarily dependent on the issuer's adequate access to the longer term
municipal bond market and the likelihood that the proceeds of such bond sales
will be used to pay the principal of, and interest on, BANs.
RANs. A decline in the receipt of certain revenues, such as anticipated
revenues from another level of government, could adversely affect an issuer's
ability to meet its obligations on outstanding RANs. In addition, the
possibility that the revenues would, when received, be used to meet other
obligations could affect the ability of the issuer to pay the principal of, and
interest on, RANs.
The values of outstanding municipal securities will vary as a result of
changing market evaluations of the ability of their issuers to meet the interest
and principal payments (i.e., credit risk). Such values also will change in
response to changes in the interest rates payable on new issues of municipal
securities (i.e., market risk). Should such interest rates rise, the values of
outstanding securities, including those held in a Fund's portfolio, will decline
and (if purchased at par value) sell at a discount. If interests rates fall,
the values of outstanding securities will generally increase and (if purchased
at par value) sell at a premium. Changes in the value of municipal securities
held in a Fund's portfolio arising from these or other factors will cause
changes in the net asset value per share of the Fund.
Other Investment Companies
--------------------------
The Funds, except the Government Money Market Mutual Fund, 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 Fund's
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 Fund's net assets with respect to any one investment company and
(iii) 10% of such Fund's 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.
Repurchase Agreements
---------------------
Each Fund may enter into repurchase agreements, wherein the seller of a
security to the Fund agrees to repurchase that security from the Fund at a
mutually agreed upon time and price. A
13
<PAGE>
Fund may enter into repurchase agreements only with respect to securities that
could otherwise be purchased by the Fund. 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, a Fund may
incur a loss. In addition, if bankruptcy proceedings are commenced with respect
to the seller of the security, the Fund's disposition of the security may be
delayed or limited.
Each Fund may not enter into a repurchase agreement with a maturity of more
than seven days, if, as a result, more than 10% of the market value of such
Fund's total net assets would be invested in repurchase agreements with
maturities of more than seven days, restricted securities and illiquid
securities. A Fund 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.
Taxable Investments
-------------------
The National Tax-Free Money Market Mutual and California Tax-Free Money
Market Mutual Funds may make certain taxable investments. Pending the
investment of proceeds from sales of portfolio securities or in anticipation of
redemptions or to maintain a "defensive" posture when, in the opinion of Wells
Fargo Bank, as investment Advisor, it is advisable to do so because of market
conditions, the National Tax-Free Money Market Mutual Fund may elect to invest
temporarily up to 20% of the current value of its net assets in cash reserves
including the following taxable high-quality money market instruments: (I) U.S.
Government obligations; (ii) negotiable certificates of deposit, bankers'
acceptances and fixed time deposits and other obligations of domestic banks
(including foreign branches) that have more than $1 billion in total assets at
the time of investment and are members of the Federal Reserve System or are
examined by the Comptroller of the Currency or whose deposits are insured by the
FDIC; (iii) commercial paper rated at the date of purchase "P-1" by Moody's
Investors Service, Inc. ("Moody's") or "A-1+" or "A-1" by Standard & Poor's
Ratings Group ("S&P"); (iv) certain repurchase agreements; and (v) high-quality
municipal obligations, the income from which may or may not be exempt from
federal income taxes.
Moreover, the National Tax-Free Money Market Mutual Fund may invest
temporarily more than 20% of its total assets in such securities and in high-
quality, short-term municipal obligations the interest on which is not exempt
from federal income taxes to maintain a temporary defensive posture or in an
effort to improve after-tax yield to the Fund's interestholders when, in the
opinion of Wells Fargo Bank, as investment Advisor, it is advisable to do so
because of unusual market conditions.
Unrated and Downgraded Investments
----------------------------------
The Funds, except the Treasury Money Market Mutual Fund, may purchase
instruments that are not rated if, in the opinion of Wells Fargo Bank the
investment advisor, such obligations
14
<PAGE>
are of comparable quality to other rated investments that are permitted to be
purchased by the Funds. The Funds may purchase unrated instruments only if they
are purchased in accordance with the Funds' procedures adopted by Company's
Board of Directors in accordance with Rule 2a-7 under the 1940 Act. After
purchase by a Fund, a security may cease to be rated or its rating may be
reduced below the minimum required for purchase by the Fund. In the event that a
portfolio security ceases to be an "Eligible Security" or no longer "presents
minimal credit risks," immediate sale of such security is not required, provided
that the Board of Directors has determined that disposal of the portfolio
security would not be in the best interests of the Fund. To the extent the
ratings given by Moody's or S&P may change as a result of changes in such
organizations or their rating systems, the Fund will attempt to use comparable
ratings as standards for investments in accordance with the investment policies.
The ratings of Moody's and S&P are more fully described in the Appendix.
U.S. Government and U.S. Treasury Obligations
---------------------------------------------
The Funds may invest in obligations of agencies and instrumentalities of
the U.S. Government ("U.S. Government obligations"). The Treasury Money Market
Mutual Fund may invest only in U.S. Government obligations issued or guaranteed
by the U.S. Treasury. 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. Government obligations are subject to fluctuations in yield or
value due to their structure or contract terms.
The Treasury Money Market Mutual Fund may invest only in obligations issued
or guaranteed by the U.S. Treasury such as bills, notes, bonds and certificates
of indebtedness, and in notes and repurchase agreements collateralized or
secured by such obligations ("U.S. Treasury obligations"). U.S. Treasury notes,
bills and bonds differ mainly in the length of their maturity. The U.S.
Treasury obligations in which the Fund invests may also include "U.S. Treasury
STRIPS," interests in U.S. Treasury obligations reflected in the Federal
Reserve-Book Entry System that represent ownership in either the future interest
payments or the future principal payments on the U.S. Treasury obligations.
U.S. Treasury Strips are "stripped securities." Stripped securities are issued
at a discount to their face value and may exhibit greater price volatility than
ordinary debt securities because of the manner in which their principal and
interest are paid to investors. The Treasury Money Market Mutual and Government
Money Market Mutual Funds may invest in U.S. Treasury STRIPS.
15
<PAGE>
The Funds may attempt to increase yields by trading to take advantage of
short-term market variations. This policy could result in high portfolio
turnover, which should not adversely affect the Funds since they do not
ordinarily pay brokerage commissions on the purchase of short-term debt
obligations.
Nationally Recognized Statistical Ratings Organizations ("NRSROs")
------------------------------------------------------------------
The ratings of Moody's, S&P, 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 a Fund, an
issue of debt securities may cease to be rated or its rating may be reduced
below the minimum rating required for purchase by a Fund. The Advisor will
consider such an event in determining whether the Fund 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 a Fund are not bank deposits or obligations of Wells Fargo
Bank, are not insured by the FDIC and are not insured or guaranteed against loss
of principal. Therefore, you should be willing to accept some risk with money
you invest in a Fund. Although the Funds seek to maintain a stable net asset
value of $1.00 per share, there is no assurance that they will be able to do so.
The Funds may not achieve as high a level of current income as other mutual
funds that do not limit their investment to the high credit quality instruments
in which the Funds invest. As with all mutual funds, there can be no assurance
that a Fund will achieve its investment objective.
The Funds, under the 1940 Act, must comply with certain investment criteria
designed to provide liquidity, reduce risk, and allow the Funds to maintain a
stable net asset value of $1.00 per share. The Funds' dollar-weighted average
portfolio maturity must not exceed 90 days. Any
16
<PAGE>
security that a Fund purchases must have a remaining maturity of not more than
397 days (13 months). In addition, any security that a Fund purchases must
present minimal credit risks and be of "high quality," or in the case of the
Treasury Money Market Mutual Fund, be of the "highest quality." "High quality"
means to be rated in the top two rating categories and "highest quality" means
to be rated only in the top rating category, by the requisite NRSROs or, if
unrated, determined to be of comparable quality to such rated securities by
Wells Fargo Bank, as the Funds' investment advisor, under guidelines adopted by
the Board of Directors of the Company.
Each Fund seeks to reduce risk by investing its assets in securities of
various issuers. As such, the Money Market Mutual Fund and the National Tax-
Free Money Market Mutual Fund are considered to be diversified for purposes of
the 1940 Act. In addition, the Funds emphasize safety of principal and high
credit quality. In particular, the internal investment policies of the
investment advisor prohibit the purchase of many types of floating-rate
derivative securities that are considered potentially volatile. The following
types of derivative securities ARE NOT permitted investments for the Funds:
. capped floaters (on which interest is not paid when market rates move
above a certain level);
. leveraged floaters (whose interest rate reset provisions are based on a
formula that magnifies changes in interest rates);
. range floaters (which do not pay any interest if market interest rates
move outside of a specified range);
. dual index floaters (whose interest rate reset provisions are tied to more
than one index so that a change in the relationship between these indices
may result in the value of the instrument falling below face value); and
. inverse floaters (which reset in the opposite direction of their index).
Additionally, the Funds may not invest in securities whose interest rate
reset provisions are tied to an index that materially lags short-term interest
rates, such as Cost of Funds Index floaters. The Funds may invest only in
variable or floating-rate securities that bear interest at a rate that resets
quarterly or more frequently and that resets based on changes in standard money
market rate indices such as U.S. Treasury bills, London Interbank Offered Rate
or LIBOR, the prime rate, published commercial paper rates, federal funds rates,
Public Securities Associates floaters or JJ Kenney index floaters.
The Treasury Money Market Mutual Fund restricts its investment to U.S.
Treasury obligations that meet all of the standards described above.
Obligations issued or guaranteed by the U.S. Treasury have historically involved
little risk of loss of principal if held to maturity. However, due to
fluctuations in interest rates, the market value of such obligations may vary
during the period
17
<PAGE>
a shareholder owns shares of the Fund. It should be noted that neither the
United States, nor any agency or instrumentality thereof, has guaranteed,
sponsored or approved the Fund or its shares.
The portfolio debt instruments of the Funds are subject to credit and
interest-rate risk. Credit risk is the risk that issuers of the debt instruments
in which the Funds invest may default on the payment of principal and/or
interest. Interest-rate risk is the risk that increases in market interest
rates may adversely affect the value of the debt instruments in which the Funds
invest and hence the value of your investment in a Fund.
Generally, securities in which the Funds invest will not earn as high a
yield as securities of longer maturity and/or of lesser quality that are more
subject to market volatility. Each Fund attempts to maintain the value of its
shares at a constant $1.00 per share, although there can be no assurance that a
Fund will always be able to do so.
Since the California Tax-Free Money Market Mutual Fund invests primarily in
securities issued by California and its agencies and municipalities, events in
California are more likely to affect the Fund's investments. While the
California Tax-Free Money Market Mutual Fund seeks to reduce risk by investing
its assets in securities of various issuers, the Fund is considered to be
nondiversified for purposes of the 1940 Act. However, the California Tax-Free
Money Market Mutual Fund will comply with the Internal Revenue Code of 1986, as
amended from time to time (the "Code"), diversification requirements.
SPECIAL CONSIDERATIONS AFFECTING
CALIFORNIA MUNICIPAL OBLIGATIONS
The concentration of the California Tax-Free Money Market Mutual Fund in
securities issued by governmental units of only one state exposes the Fund to
risks greater than those of a more diversified portfolio holding securities
issued by governmental units of different states and different regions of the
country.
Certain California constitutional amendments, legislative measures,
executive orders, civil actions and voter initiatives, as well as the general
financial condition of the state, could adversely affect the ability of issuers
of California municipal obligations to pay interest and principal on such
obligations. These developments, if they occur, could adversely affect the
performance of the California Tax-Free Money Market Mutual Fund since it invests
a significant portion of its assets in California municipal obligations. The
following information constitutes only a brief summary, does not purport to be a
complete description, and is based on information drawn from official statements
relating to securities offerings of the State of California and various local
agencies, available as of the date of this SAI. While the Company has not
independently verified such information, it has no reason to believe that such
information is incorrect in any material respect.
The California Economy and General Information. From mid-1990 to late
----------------------------------------------
1993, the State suffered a recession with the worst economic, fiscal and budget
conditions since the 1930s. Construction, manufacturing (particularly that
related to defense), exports and financial services,
18
<PAGE>
among others, were all severely affected. Job losses had been the worst of any
post-war recession. Unemployment reached 10.1% in January 1994, but fell sharply
to 7.7% in October and November 1994, reflecting the State's recovery from the
recession.
The recession seriously affected California tax revenues, which basically
mirror economic conditions. It also caused increased expenditures for health
and welfare programs. In addition, the State has been facing a structural
imbalance in its budget with the largest programs supported by the General Fund
(e.g., K-12 schools and community colleges--also known as "K-14 schools," health
and welfare, and corrections) growing at rates higher than the growth rates for
the principal revenue sources of the General Fund. As a result, the state
experienced recurring budget deficits in the late 1980s and early 1990s. The
state's Controller reported that expenditures exceeded revenues for four of the
five fiscal years ending with 1991-92. Moreover, California accumulated and
sustained a budget deficit in its Special Fund for Economic Uncertainties
("SFEU") approaching $2.8 billion at its peak on June 30, 1993.
The accumulated budget deficits during the early 1990's, together with
expenditures for school funding which are not reflected in the State's budget,
and reduction of available internal borrowable funds, combined to significantly
deplete the State's cash resources to pay its ongoing expenses. In order to
meet its cash needs, the State has had to rely for several years on a series of
external borrowings, including borrowings past the end of a fiscal year. Such
borrowings are expected to continue in future fiscal years. To meet its cash
flow needs in the 1995-96 fiscal year, California issued $2 billion of revenue
anticipation warrants which matured on June 28, 1996. Because of the State's
deteriorating budget and cash situation, the rating agencies reduced the state's
credit ratings between October 1991 and July 1994. Moody's lowered its rating
from "Aaa" to "A1," S&P lowered its rating from "AAA" to "A" and termed its
outlook as "stable," and Fitch Investors Service lowered its rating from "AAA"
to "A."
However, since the start of 1994, California's economy has been recovering
steadily. Employment has grown in excess of 500,000 during 1994 and 1995, and
400,000 additional jobs were created between the fourth quarter of 1996 and the
fourth quarter of 1997. Some analysts project this trend to continue through
the rest of the decade. Because of the improving economy and California's
fiscal austerity, the State has had operating surpluses for its past five
consecutive fiscal years through 1996-97. In addition, the SFEU is projected to
have a positive balance of approximately $553 million as of June 30, 1998.
Also, S&P upgraded its rating of California municipal obligations back to "A+"
on July 30, 1996.
Local Governments. On December 6, 1994, Orange County, California, became
-----------------
the largest municipality in the United States to file for protection under the
Federal Bankruptcy laws. The bankruptcy filing stemmed from approximately $1.7
billion in losses suffered by the county's investment pool because of
investments in high risk "derivative" securities. In September 1995,
California's legislature approved legislation permitting the county to use for
bankruptcy recovery $820 million over 20 years in sales taxes previously
earmarked for highways, transit, and development. In June 1996, the county
completed an $880 million bond offering secured by real property owned by the
county. In June 1996, the county emerged from bankruptcy. As of October 31,
1997, the county's investment rating by S&P was "B".
19
<PAGE>
On January 17, 1994, an earthquake of the magnitude of an estimated 6.8 on
the Richter Scale struck Los Angeles County, California, causing significant
damage to public and private structures and facilities. While county residents
and businesses suffered losses totaling in the billions of dollars, the overall
effect of the earthquake on the county's and California's economy is not
expected to be serious. However, Los Angeles County is experiencing financial
difficulty due in part to the severe operating deficits for the county's health
care system. In August 1995, the credit rating of the county's long-term bonds
was downgraded for the third time since 1992. Although the county has received
federal and state assistance, it is still facing a potential budget gap of
approximately $460 million in the 1997-98 fiscal year.
Even though the State has no existing obligations with respect to either
Orange County or Los Angeles County, the State may be required to intervene and
provide funding if the counties cannot maintain certain programs because of
insufficient resources.
State Finances. State tax revenues and other income are segregated into
--------------
the General Fund and approximately 600 Special Funds. The General Fund consists
of the revenues received by the State's Treasury and not required by law to be
credited to any other fund, as well as earnings from State moneys not allocable
to another fund. The General Fund is the principal operating fund for the
majority of governmental activities and is the depository of most major revenue
sources of the State. The General Fund may be expended as the result of
appropriation measures by California's Legislature approved by the Governor, as
well as appropriations pursuant to various constitutional authorizations and
initiative statutes.
The SFEU is funded with General Fund revenues and was established to
protect California from unforeseen revenue reductions and/or unanticipated
expenditure increases. Amounts in the SFEU may be transferred by the State's
Controller to meet cash needs of the General Fund. The Controller is required
to return moneys so transferred without payment of interest as soon as there are
sufficient moneys in the General Fund. Any appropriation made from the SFEU is
deemed, for budgeting and accounting purposes, an appropriation from the General
Fund. For year-end reporting purposes, the Controller is required to add the
balance in the SFEU to the balance in the General Fund to show the total moneys
then available for General Fund purposes.
Inter-fund borrowing has been used for several years to meet temporary
imbalances of receipts and disbursements in the General Fund. As of June 30,
1996, the General Fund had outstanding loans from the SFEU and other Special
Funds of approximately $1.5 billion.
Changes in California Constitutional and Other Laws. In 1978, California
---------------------------------------------------
voters approved an amendment to the California Constitution known as
"Proposition 13," which added Article XIIIA to the California Constitution.
Article XIIIA limits ad valorem taxes on real property and restricts the ability
of taxing authorities to increase real property taxes. However, legislation
passed subsequent to Proposition 13 provided for the redistribution of
California's General Fund surplus to local agencies, the reallocation of
revenues to local agencies and the assumption of certain local obligations by
the state to assist California municipal issuers to raise revenue to pay their
bond obligations. It is unknown whether additional revenue redistribution
20
<PAGE>
legislation will be enacted in the future and whether, if enacted, such
legislation will provide sufficient revenue for such California issuers to pay
their obligations. California is also subject to another Constitutional
Amendment, Article XIIIB, which may have an adverse impact on California state
and municipal issuers. Article XIIIB restricts the state from spending certain
appropriations in excess of an appropriation's limit imposed for each state and
local government entity. If revenues exceed such appropriation's limit, such
revenues must be returned either as revisions in the tax rates or fee schedules.
In 1988, California voters approved "Proposition 98," which amended Article
XIIIB and Article XVI of the State's Constitution. Proposition 98 (as modified
by "Proposition 111," which was enacted in 1990), changed state funding of
public education below the university level and the operation of the State's
appropriations limit, primarily by guaranteeing K-14 schools a minimum share of
General Fund revenues. In 1986, California voters approved "Proposition 62,"
which requires in part that any tax for general governmental purposes imposed by
a local government be approved by a two-thirds vote of the governmental entity's
legislative body and by a majority of its electorate, and that any special tax
imposed by a local government be approved by a two-thirds vote of the
electorate. In September 1995, the California Supreme Court upheld the
constitutionality of Proposition 62, creating uncertainty as to the legality of
certain local taxes enacted by nonchartered cities in California without voter
approval. In 1996, California voters approved "Proposition 218," which added
Articles XIIIC and XIIID to the State's Constitution. Proposition 218 generally
requires voter approval of most tax or fee increases by local governments and
curtails local government use of benefit assessments to fund certain property-
related services to finance infrastructure. Proposition 218 also limits the use
of special assessments or "property-related" fees to services or infrastructure
that confer a "special benefit" to specific property; police, fire and other
services are now deemed to benefit the public at large and, therefore, could not
be funded by special assessments. Finally, the amendments enable the voters to
use their initiative power to repeal previously-authorized taxes, assessments,
fees and charges. It remains to be seen what impact these Articles will have on
the ability of obligors to make payments on existing and future California
security obligations.
Other Information. Certain debt obligations held by the Funds may be
-----------------
obligations payable solely from lease payments on real or personal property
leased to the state, cities, counties or their various public entities.
California law provides that a lessor may not be required to make payments
during any period that it is denied use and occupancy of the property in
proportion to such loss. Moreover, the lessor only agrees to appropriate
funding for lease payments in its annual budget for each fiscal year. In case
of a default under the lease, the only remedy available against the lessor is
that of reletting the property; no acceleration of lease payments is permitted.
Each of these factors presents a risk that the lease financing obligations held
by a Fund would not be paid in a timely manner.
Certain debt obligations held by the Funds may be obligations payable
solely from the revenues of health care institutions. The method of
reimbursement for indigent care, California's selective contracting with health
care providers for such care and selective contracting by health insurers for
care of its beneficiaries now in effect under California and federal law may
adversely affect these revenues and, consequently, payment on those debt
obligations.
21
<PAGE>
There can be no assurance that general economic difficulties or the
financial circumstances of California or its towns and cities or its trading
partners in Asia, where California exports nearly half of $105 billion in total
exports, will not adversely affect the market value of California municipal
securities or the ability of obligors to continue to make payments on such
securities.
The taxable securities market is a broader and more liquid market with a
greater number of investors, issuers and market makers than the market for
municipal securities. The more limited marketability of municipal securities
may make it difficult in certain circumstances to dispose of large investments
advantageously.
MANAGEMENT
The following information supplements, and should be read in conjunction
with, the section in the Prospectus entitled "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 Occupation(s)
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 Inc.
President 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 Geyser
55 Francisco Street 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, NY 10595 University Teachers College since 1976.
</TABLE>
22
<PAGE>
<TABLE>
<CAPTION>
Principal Occupation(s)
Name, Age and Address Position During Past 5 Years
- --------------------- -------- -----------------------
<S> <C> <C>
*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.
Richard H. Blank, Jr., 41 Chief Operating Vice President of Stephens Inc.; Director of
Officer, Stephens Sports Management Inc.; and Director
Secretary and of Capo Inc.
Treasurer
</TABLE>
Compensation Table
Year Ended March 31, 1997
-------------------------
<TABLE>
<CAPTION>
Total Compensation
Aggregate Compensation from Registrant
Name and Position from Registrant and Fund Complex
- ----------------- --------------- ----------------
<S> <C> <C>
Jack S. Euphrat $11,250 $33,750
Director
R. Greg Feltus $ 0 $ 0
Director
Thomas S. Goho $11,250 $33,750
Director
Joseph N. Hankin $ 8,750 $26,250
Director
W. Rodney Hughes $ 9,250 $27,750
Director
Robert M. Joses $11,250 $33,750
Director
J. Tucker Morse $ 9,250 $27,750
Director
</TABLE>
23
<PAGE>
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 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 each Fund. 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, Wells Fargo Bank is entitled to
receive a monthly fee at the annual rates indicated below of each Fund's average
daily net assets:
<TABLE>
<CAPTION>
Annual Rate
Fund (as percentage of net assets)
- -------- -------------------------------
<S> <C>
California Tax-Free Money Market Mutual 0.50%
Government Money Market Mutual 0.25%
Money Market Mutual Fund 0.40%
National Tax-Free Money Market Mutual 0.30%
Treasury Money Market Mutual 0.25%
</TABLE>
24
<PAGE>
For the period indicated below, the Funds paid to Wells Fargo Bank the
following advisory fees and Wells Fargo Bank waived the indicated amounts:
<TABLE>
Six-Month
Period Ended
3/31/97
----------
Fund Fees Paid Fees Waived
---- --------- -----------
<S> <C> <C>
California Tax-Free Money Market Mutual $1,503,717 $1,687,408
Government Money Market Mutual $ 63,059 $ 10,775
Money Market Mutual $8,856,102 $ 979,244
National Tax-Free Money Market Mutual $ 19,989 $ 0
Treasury Money Market Mutual $1,518,347 $ 751,971
</TABLE>
California Tax-Free Money Market Mutual and Money Market Mutual Funds. For
---------------------------------------------------------------------
the periods indicated below, the Money Market Mutual and California Tax-Free
Money Market Mutual Funds paid to Wells Fargo Bank the following advisory fees
and Wells Fargo Bank waived the indicated amounts:
<TABLE>
Nine-Month
Period Ended Year Ended Year Ended
9/30/96 12/31/95 12/31/94
-------- ----------- ----------
Fees Fees Fees Fees Fees Fees
Fund Paid Waived Paid Waived Paid Waived
---- ---- ------ ---- ------ ---- ------
<S> <C> <C> <C> <C> <C> <C>
California Tax-Free $ 4,867,523 $0 $ 4,099,437 $0 $ 304,857 $3,809,902
Money Market Mutual
Money Market Mutual $12,729,506 $0 $11,593,678 $0 $2,073,686 $2,008,946
</TABLE>
Government Money Market Mutual and Treasury Money Market Mutual Funds.
---------------------------------------------------------------------
Prior to March 18, 1994, the Advisor for the predecessor portfolio to the
Government Money Market Mutual Fund was San Diego Financial Capital Management,
Inc. ("San Diego Financial"), which was a wholly owned subsidiary of San Diego
Trust & Savings Bank ("San Diego Trust"), which in turn was a wholly owned
subsidiary of San Diego Financial Corporation ("SDFC"). On that date, SDFC
merged into First Interstate Bancorp and San Diego Trust merged into First
Interstate Bank of California ("FICAL"). As a result of these transactions, San
Diego Financial became an indirect wholly-owned subsidiary of FICAL. On January
12, 1995, San Diego Financial merged into First Interstate Investment Services,
Inc., a direct wholly-owned subsidiary of FICAL, which has since changed its
name to First Interstate Capital Management, Inc.
The Pacifica Government Money Market and Treasury Money Market Funds were
reorganized as the Company's Government Money Market Mutual and Treasury Money
Market Mutual Funds on September 6, 1996. Prior to September 6, 1996, Wells
Fargo Investment Management, Inc. ("WFIM") and its predecessor, First Interstate
Capital Management, Inc.
25
<PAGE>
("FICM") served as Advisor to the Pacifica Government Money Market and Treasury
Money Market Funds. As of September 6, 1996, Wells Fargo Bank became the Advisor
to the Company's Government Money Market Mutual and Treasury Money Market Mutual
Funds.
For the fiscal year ended September 30, 1996, the Government Money Market
Mutual Fund paid advisory fees of $274,640 and no fees were waived. For the
same period, the Treasury Money Market Mutual Fund paid advisory fees of
$2,442,922 of which $2,073,426 were waived. These amounts include advisory fees
paid by the predecessor portfolios to FICM/WFIM for the period begun April 1,
1996 and ended September 5, 1996.
During the fiscal years ended September 30, 1995 and September 30, 1994,
the prior Advisor was entitled to receive advisory fees from the predecessor
portfolio of the Government Money Market Mutual Fund at the same annual rates as
those currently in effect. The prior Advisor was entitled to receive $383,269
in fees for the fiscal year ended September 30, 1995 and $442,842 in fees for
the fiscal year ended September 30, 1994. The investment Advisor did not waive
any fees during these periods.
For the periods indicated below, the advisory fees paid to the former
Advisor by the predecessor portfolio of the Treasury Money Market Mutual Fund
were as shown below. These amounts reflect voluntary fee waivers and expense
reimbursements by the Advisor. Prior to October 1, 1994, all of these fees
were, in turn, paid by the Advisor to its affiliates who served as investment
sub-Advisors during the periods indicated.
<TABLE>
Six-Month
Year Ended Period Ended Year Ended
9/30/95 9/30/94 3/31/94
----------- ------- -------
<S> <C> <C>
$1,160,424 $454,029 $900,919
</TABLE>
National Tax-Free Money Market Mutual Fund. Prior to the Consolidation, the
------------------------------------------
National Tax-Free Money Market Fund invested all of its assets into a
corresponding Master Portfolio of MIT and did not retain an investment Advisor.
Wells Fargo Bank served as investment Advisor to the Master Portfolio in which
the Fund invested and was entitled to receive a monthly fee at the annual rate
of 0.30% of the Master Portfolio's average daily net assets.
For the period begun April 2, 1996 (commencement of operations) and ended
September 30, 1996, the National Tax-Free Money Market Mutual Fund paid to Wells
Fargo Bank $76,987 in advisory fees, and $10,704 in advisory fees were waived
during this period.
General. Each Fund's 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 respective Fund's outstanding
voting securities or by the Company's Board of Directors and (ii) by a majority
of the Directors of the Company who are not parties to the Advisory Contract or
"interested persons" (as defined in the 1940 Act) of any such party. A
26
<PAGE>
Fund's Advisory Contract may be terminated on 60 days written notice by either
party and will terminate automatically if assigned.
ADMINISTRATOR AND CO-ADMINISTRATOR. The Company has retained Wells Fargo
----------------------------------
Bank as Administrator and Stephens as Co-Administrator on behalf of each Fund.
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
each Fund's 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 each Fund; and (ii) general supervision
relative to the compilation of data required for the preparation of periodic
reports distributed to the Company's officers and Board of Directors. Wells
Fargo Bank and Stephens also furnish office space and certain facilities
required for conducting the 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 each Fund.
Prior to February 1, 1998, the Administrator and Co-Administrator were entitled
to receive a monthly fee of 0.04% and 0.02%, respectively, of the average daily
net assets of each Fund. In connection with the change in fees, the
responsibility for performing various administration services was shifted to the
Co-Administrator.
Except as described below, prior to February 1, 1997, Stephens served as
sole Administrator and performed substantially the same services now provided by
Stephens and Wells Fargo Bank.
For the period indicated below, the Funds paid the following dollar amounts
to Wells Fargo Bank and Stephens for administration and co-administration fees:
<TABLE>
Six-Month
Period Ended
3/31/97
--------
Fund Total Wells Fargo Stephens
---- ----- ----------- --------
<S> <C> <C> <C>
California Tax-Free Money Market Mutual $253,836 $ 50,767 $203,069
Government Money Market Mutual $ 15,761 $ 3,152 $ 12,609
Money Market Mutual $980,282 $196,056 $784,226
National Tax-Free Money Market Mutual $ 3,744 $ 749 $ 2,995
Treasury Money Market Mutual $483,198 $ 96,640 $386,558
</TABLE>
California Tax-Free Money Market Mutual and Money Market Mutual Funds. For
---------------------------------------------------------------------
the nine-month period ended September 30, 1996 and the fiscal years ended
December 31, 1995 and 1994, the California Tax-Free Money Market Mutual and
Money Market Mutual Funds paid to Stephens the dollar amounts of administration
fees indicated below. Stephens, as sole
27
<PAGE>
Administrator during these periods, entitled to receive a monthly fee at the
annual rate of 0.03% of each Fund's average daily net assets.
<TABLE>
Nine-Month
Period Ended Year Ended Year Ended
Fund 9/30/96 12/31/95 12/31/94
- ------- -------- --------- ---------
<S> <C> <C> <C>
California Tax-Free Money Market Mutual $245,966 $ 292,095 $ 247,666
Money Market Mutual $872,577 $ 954,713 $ 306,209
</TABLE>
Government Money Market Mutual and Treasury Money Market Mutual Funds. The
---------------------------------------------------------------------
Pacifica Government Money Market and Treasury Money Market Funds were
reorganized as the Company's Government Money Market Mutual and Treasury Money
Market Mutual Funds on September 6, 1996. Prior to September 6, 1996, the
Administrator, Furman Selz LLC ("Furman Selz"), of the Pacifica predecessor
portfolios provided management and administration services necessary for the
operation of such Funds, pursuant to an Administrative Services Contract. For
these services, Furman Selz was entitled to receive a fee, payable monthly, at
the annual rate of 0.15% of the average daily net assets of the predecessor
portfolios.
The predecessor portfolio of the Treasury Money Market Mutual Fund was
administered through April 14, 1996 by the Dreyfus Corporation ("Dreyfus"), at
the annual rate of 0.10% of the Fund's average daily net assets.
The table below reflects the net amounts paid, and the amounts waived, for
administration services by the Funds to Stephens, as sole Administrator to the
Funds, for the period begun September 6, 1996 and ended September 30, 1996.
During this time, Stephens was entitled to receive a fee, payable monthly, at
the annual rate of 0.05% of each Fund's average daily net assets. The table
also reflects the net administration fees paid to the respective former
Administrators of the predecessor portfolios during the period begun October 1,
1995 and ended September 5, 1996. During the fiscal years ended September 30,
1995 and September 30, 1994, Furman Selz was entitled to receive administration
services fees and waived administration fees in the amounts indicated below.
During the fiscal years ended September 30, 1996, September 30, 1995 and the
six-month period ended September 30, 1994 and the administration fees paid to
the Dreyfus Corporation by the Treasury Money Market Mutual Fund are listed
below.
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
9/30/96 9/30/95 9/30/94
------- ------- -------
Fees Fees Fees Fees Fees Fees
Fund Paid Waived Paid Waived Paid Waived
---- ---- ------ ---- ------ ---- ------
<S> <C> <C> <C> <C> <C> <C>
Government Money Market $ 120,179 $0 $255,512 $25,550 $295,228 $29,523
Treasury Money Market $1,745,759 $0 $921,886 $ 0 $347,499/*/ $ 0
</TABLE>
____________________
/*/ The amount indicated reflects fees for the period of March 31, 1994 to
September 30, 1994.
28
<PAGE>
National Tax-Free Money Market Mutual Fund. For the period begun April 2,
------------------------------------------
1996 and ended September 30, 1996, Stephens served as sole Administrator to the
National Tax-Free Money Market Mutual Fund, and received $731 in administration
fees. Stephens was entitled to receive a monthly fee at the annual rate of 0.05%
of the Fund's average daily net assets for such services.
DISTRIBUTOR. Stephens Inc. ("Stephens", the "Distributor"), located at 111
-----------
Center Street, Little Rock, Arkansas 72201, serves as Distributor for the
Funds. Each Fund has adopted a 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 agreement related to the Plans (the "Non-Interested
Directors").
Under the Plans and pursuant to the related Distribution Agreement, the
Funds may pay Stephens the amounts listed below as compensation for
distribution-related services or as reimbursement for distribution-related
services. The fees are expressed as a percentage of the average daily net
assets attributable to each Class or Fund.
<TABLE>
<CAPTION>
Fund Fee
---- ---
<S> <C>
Government Money Market Mutual 0.05%
National Tax-Free Money Market Mutual 0.05%
Treasury Money Market Mutual 0.05%
</TABLE>
The actual fee payable to the Distributor by the above-indicated Funds 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.
Under the Plans in effect for the Class A shares of the California Tax-Free
Money Market Mutual and Money Market Mutual Funds, each Fund may defray all or
part of the cost of preparing and printing prospectuses and other promotional
materials and of delivering prospectuses and promotional materials to
prospective Fund shareholders by paying on an annual basis up to 0.05% of the
respective Fund's average daily net assets attributable to Class A shares. The
Plans for the Class A shares of the Funds provide only for reimbursement of
actual expenses.
29
<PAGE>
For the six-month period ended March 31, 1997, the Funds' Distributor
received the following fees for the distribution-related services, as set forth
below, under each Fund's Plan:
<TABLE>
<CAPTION>
Printing &
Mailing Marketing Compensation to
Fund Total Prospectus Brochures Underwriters
---- ----- ---------- --------- ------------
<S> <C> <C> <C> <C>
California Tax-Free
Money Market Mutual $155,752 $ 70,417 $ 85,335 N/A
Government Money
Market Mutual $ 5,810 $ 3,575 $ 2,235 N/A
Money Market Mutual $489,563 $222,858 $266,705 N/A
National Tax-Free
Money Market Mutual $ 3,823 $ 3,659 $ 165 N/A
Treasury Money Market
Mutual $ 5,013 $ 3,619 $ 1,395 N/A
</TABLE>
California Tax-Free Money Market Mutual and Money Market Mutual Funds: For
---------------------------------------------------------------------
the period ended September 30, 1996, the Funds' Distributor received the
following fees for distribution-related services, as set forth below, under each
Fund's Plan:
<TABLE>
<CAPTION>
Printing &
Mailing Marketing Compensation to
Fund Total Prospectus Brochures Underwriters
---- ----- ---------- --------- ------------
<S> <C> <C> <C> <C>
California Tax-Free
Money Market Mutual $188,355 $39,668 $148,687 N/A
Money Market Mutual
Class A $383,963 $24,454 $359,509 N/A
</TABLE>
Government Money Market Mutual and Treasury Money Market Mutual Funds. The
---------------------------------------------------------------------
Government Money Market Mutual and the Treasury Money Market Mutual Funds, for
the year ended September 30, 1996, paid the Distributor $29,161 for the
Government Money Market Mutual Fund and $13,064 for the Treasury Money Market
Mutual Fund of distribution-related fees for expense reimbursement under each
Fund's Plan for Class A shares.
Prior to September 6, 1996, PFD, a subsidiary of Furman Selz, served as
principal underwriter for the shares of the predecessor portfolios pursuant to a
Distribution Contract as of October 1, 1995. The figures in the table above
reflect amounts paid to PFD through September 5, 1996, and amounts paid to
Stephens from September 6 to September 30, 1996.
30
<PAGE>
Under a distribution plan adopted for the Government Money Market Mutual
and Treasury Money Market Mutual predecessor portfolios, Pacifica, on behalf of
the predecessor portfolios, paid directly or reimbursed PFD monthly for costs
and expenses of marketing their shares.
National Tax-Free Money Market Mutual Fund. For the period begun April 2,
------------------------------------------
1996 and ended September 30, 1996, the National Tax-Free Money Market Mutual
Fund's Distributor received $144 in distribution-related fees as reimbursement
for promotional materials.
For the periods indicated above, WFSI and its registered representatives
received no compensation under each Fund's Plan.
General. Each Plan will continue in effect from year to year if such
-------
continuance is approved by a majority vote of both the Directors of the Company
and the Non-Interested Directors. Any Distribution Agreement related to the
Plans also must be approved by such vote of the Directors and Non-Interested
Directors. Such Agreement 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 Fund 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 Fund, 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. The Rule also
requires that the selection and nomination of Directors who are not "interested
persons" of the Company be made by such disinterested Directors.
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
authorize 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 Fund 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 AGENT. The Funds have approved Servicing Plans and
---------------------------
have entered into related Shareholder Servicing Agreements with financial
institutions, including Wells
31
<PAGE>
Fargo Bank, on behalf of its Class A 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 applicable Fund, 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 Plans and Agreements are shown
below. The Servicing Plans and related Shareholder Servicing Agreements were
approved by the Company's Board of Directors and provide that a Fund shall not
be obligated to make any payments under such Plans or related Agreements that
exceed the maximum amounts payable under the Conduct Rules of the NASD.
<TABLE>
<CAPTION>
Fund Fee
---- ---
<S> <C>
California Tax-Free Money Market Mutual 0.30%
Government Money Market Mutual 0.25%
Money Market Mutual 0.30%
National Tax-Free Money Market Mutual 0.25%
Treasury Money Market Mutual 0.30%
</TABLE>
For the periods indicated below, the dollar amounts of shareholder
servicing fees paid by the Funds to Wells Fargo Bank or its affiliates were as
follows:
<TABLE>
<CAPTION>
Six-Month Nine-Month
Period Ended Period Ended
Fund 3/31/97 9/30/96
- ---- ------ -------
<S> <C> <C>
California Tax-Free Money Market Mutual $1,914,675 $ 344,032
Money Market Mutual $6,287,325 $7,594,481
Government Money Market Mutual $ 73,835 $ 155,369
National Tax-Free Money Market Mutual $ 0 $ 0
Treasury Money Market Mutual $ 68,907 $ 153,899
</TABLE>
Government Money Market Mutual and Treasury Money Market Mutual Funds. For
---------------------------------------------------------------------
the period begun October 1, 1995 and ended September 5, 1996, and under similar
service agreements, payments were made to First Interstate Bancorp for the
Government Money Market Mutual and Treasury Money Market Mutual Funds, except
that for the same period, and under similar service agreements with certain
institutions, including affiliates of FICM, payments were made to various
institutions for the Treasury Money Market Mutual Fund. For the period begun
September 6, 1996 and ended September 30, 1996, shareholder servicing fees were
paid to Wells Fargo Bank or its affiliates.
32
<PAGE>
General. Each 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 persons" (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 the Non-Interested Directors. Servicing Agreements may
be terminated at any time, without payment of any penalty, by vote of a majority
of the Board of Directors, including a majority of the Non-Interested Directors.
No material amendment to the Servicing Plans or related Servicing Agreements may
be made except by a majority of both the Directors of the Company and the Non-
Interested Directors.
Each 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 each Fund. The
---------
Custodian, among other things, maintains a custody account or accounts in the
name of each Fund, receives and delivers all assets for each Fund upon purchase
and upon sale or maturity, collects and receives all income and other payments
and distributions on account of the assets of each Fund, and pays all expenses
of each Fund. For its services as Custodian, Wells Fargo Bank receives a 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 a Fund's average daily net assets, 0.045% of the next
$50,000,000, and 0.020% of the average daily net assets in excess of
$100,000,000.
For the six-month period ended March 31, 1997, the Funds did not pay any
compensation for custody services to Wells Fargo Bank.
California Tax-Free Money Market Mutual, Money Market Mutual and National
-------------------------------------------------------------------------
Tax-Free Money Market Mutual Funds. For the nine-month period ended September
- ----------------------------------
30, 1996, the California Tax-Free Money Market Mutual, Money Market Mutual and
National Tax-Free Money Market Mutual Funds did not pay any custody fees to
Wells Fargo Bank.
Government Money Market Mutual and Treasury Money Market Mutual Funds.
---------------------------------------------------------------------
FICAL, located at 707 Wilshire Blvd., Los Angeles, California 90017, acted as
Custodian to the Pacifica Government Money Market and Treasury Money Market
Funds. FICAL was entitled to receive a fee from Pacifica, computed daily and
payable monthly, at the annual rate of 0.021% of the first $5 billion in
aggregate average daily net assets of the Funds; 0.0175% of the next $5 billion
in aggregate average daily net assets of the Funds; and 0.015% of the aggregate
average daily net assets of the Funds in excess of $10 billion.
For the period begun October 1, 1995 and ended September 5, 1996, the
custody fees paid to FICAL, and for the period begun September 6, 1996 and to
FICAL, and for the period begun September 6, 1996 and ended September 30, 1996,
the custody fees paid to Wells Fargo Bank were as follows:
33
<PAGE>
<TABLE>
<CAPTION>
Year Ended
Fund 9/30/96
---- -------
<S> <C>
Government Money Market Mutual $ 18,315
Treasury Money Market Mutual $252,183
</TABLE>
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 0.10%
of each Fund's average daily net assets of Class A shares.
For the six-month period ended March 31, 1997, the Funds did not pay any
compensation for transfer and dividend disbursing agency services to Wells Fargo
Bank.
For the nine-month period ended September 30, 1996, the Money Market
Mutual, California Tax-Free Money Market Mutual and National Tax-Free Money
Market Mutual Funds did not pay any compensation for transfer and dividend
disbursing agency services.
Government Money Market Mutual and Treasury Money Market Mutual Funds.
---------------------------------------------------------------------
Under the prior transfer agency agreement for the Government Money Market Mutual
Fund and the Treasury Money Market Mutual Fund, Wells Fargo Bank was entitled to
receive monthly payments at the annual rate of 0.07% of the average daily net
assets of the Class A shares of each such Fund, as well as reimbursement for all
reasonable out-of-pocket expenses. Furman Selz acted as Transfer Agent for the
predecessor portfolios. Pacifica compensated Furman Selz for providing
personnel and facilities to perform transfer agency related services for
Pacifica at a rate intended to represent the cost of providing such services.
Money Market Mutual and California Tax-Free Money Market Mutual Funds. For
---------------------------------------------------------------------
its services as Transfer and Dividend Disbursing Agent for the Money Market
Mutual and California Tax-Free Money Market Mutual Funds' Class A shares, Wells
Fargo Bank is entitled to receive monthly payments at the annual rate of 0.10%
of each Fund's average daily net assets for Class A shares. Under the prior
transfer agency agreement, Wells Fargo Bank was entitled to receive a per
account fee plus transaction fees and reimbursement of out-of-pocket expenses,
with a minimum of $3,000 per month per Fund, unless net assets of the Fund were
under $20 million. For as long as a Fund's assets remained under $20 million,
the Fund was not charged any transfer agency fees.
UNDERWRITING COMMISSIONS. The Funds do not assess any front-end sales
------------------------
loads or contingent deferred sales charges in connection with the purchase and
redemption of shares, and therefore pay no underwriting commissions to the
Distributor.
34
<PAGE>
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
differences 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.
Performance shown or advertised for the Class A shares of the Stagecoach
Government Money Market Mutual Fund for periods prior to September 6, 1996,
reflects performance of the Pacifica Government Money Market Fund, a predecessor
portfolio with the same investment objective and policies as the Stagecoach
Government Money Market Mutual Fund.
Performance shown or advertised for the Class A shares of the Stagecoach
Treasury, Money Market Mutual Fund for periods prior to September 6, 1996,
reflectes performance of the Service Class shares of the Pacifica Treasury Money
Market Fund, a predecessor portfolio with the same investment objective and
policies and the Stagecoach Treasury Money Market Mutual Fund.
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") is 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.
35
<PAGE>
Average Annual Total Return for the Applicable Period Ended September 30,
-------------------------------------------------------------------------
1997
- ----
<TABLE>
<CAPTION>
Five Three One
Fund Inception Year Year Year
---- --------- ---- ---- ----
<S> <C> <C> <C> <C>
California Tax-Free Money Market Mutual 2.63% 2.58% 2.97% 2.88%
Government Money Market Mutual 5.35% 4.15% 4.94% 4.79%
Money Market Mutual 4.14% 4.21% 5.01% 4.92%
National Tax-Free Money Market Mutual 2.93% N/A N/A 2.88%
Treasury Money Market Mutual 5.49% 4.18% 5.07% 4.98%
</TABLE>
CUMULATIVE TOTAL RETURN: In addition to the above performance information,
-----------------------
each Fund may also advertise the cumulative total return of the Fund.
Cumulative total return is based on the overall percentage change in value of a
hypothetical investment in the Fund, assuming all 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.
Cumulative Total Return for the Applicable Period Ended September 30, 1997
--------------------------------------------------------------------------
<TABLE>
<CAPTION>
Five Three
Fund Inception Year Year
---- --------- --- ---
<S> <C> <C> <C>
California Tax-Free Money Market Mutual 16.11% 13.61% 9.17%
Government Money Market Mutual 63.59% 22.56% 15.57%
Money Market Mutual 23.76% 22.89% 15.78%
National Tax-Free Money Market Mutual 4.43% N/A N/A
Treasury Money Market Mutual 89.86% 22.72% 15.99%
</TABLE>
YIELD CALCULATIONS: The Funds may, from time to time, include their
------------------
yields, tax-equivalent yields (if applicable) 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 any reimbursements), c = the average daily number
of shares outstanding during the period that were entitled to receive dividends,
and d = the maximum offering price per share on the last day of the period.
TAX-EQUIVALENT YIELD: Quotations of tax-equivalent yield for a Tax-Free
--------------------
Fund are calculated according the following formula:
36
<PAGE>
TAX EQUIVALENT YIELD = ( E ) + t
---
1 - p
E = Tax-exempt yield
p = stated income tax rate
t = taxable yield
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 seven-day (or thirty-day) period, less a pro-rata share of each
Fund's expenses accrued over that 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 365/7 (or
365/30 for thirty-day yield), with the resulting yield figure carried to at
least the nearest hundredth of one percent. "Effective yield" for the Funds
assumes that all dividends received 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 Seven-Day Yield = [(Base Period Return +1)365/7]-1.
Yield for the Applicable Period Ended September 30, 1997
--------------------------------------------------------
<TABLE>
<CAPTION> Seven-Day
Seven-Day Seven-Day Tax-Equivalent Thirty-Day
Seven-Day Effective Tax-Equivalent Effective Thirty-Day Tax-Equivalent
Fund Yield Yield Yield/1/ Yield/1/ Yield Yield/1/
---- ----- ----- ------- ------- ----- -------
<S> <C> <C> <C> <C> <C> <C>
California Tax-Free Money
Market Mutual 3.21% 3.26% 5.97% 6.06% 2.94% 5.47%
Government Money Market
Mutual 4.87% 4.99% N/A N/A 4.82% 8.97%
Money Market Mutual 4.97% 5.09% N/A N/A 4.96% 9.23%
National Tax-Free Money
Market Mutual 3.23% 3.28% 4.49% 4.56% 3.00% 4.17%
Treasury Money Market
Mutual 4.86% 4.98% N/A N/A 4.96% 9.23%
</TABLE>
- --------------------
/1/ Based on a combined state and federal income tax rate of 46.24%, except for
the National Tax-Free Money Market Mutual Fund which is based on a federal
tax rate of 28.00%.
From time to time and only to the extent the comparison is appropriate for
a Fund or a Class of shares, the Company may quote the performance or price-
earning ratio of a Fund or Class in advertising and other types of literature as
compared to the performance of the S&P Index, the Dow Jones Industrial Average,
the Lehman Brothers 20+ Treasury Index, the Lehman Brothers 5-7 Year Treasury
Index, Donoghue's Money Fund Averages, Real Estate Investment Averages (as
reported by the National Association of Real Estate Investment Trusts), Gold
Investment Averages (provided by World Gold Council), Bank Averages (which are
calculated from figures supplied by the U.S. League of Savings Institutions
based on effective annual rates of interest on both passbook and certificate
accounts), average annualized certificate of deposit rates (from the Federal
Reserve G-13 Statistical Releases or the Bank Rate Monitor), the
37
<PAGE>
Salomon One Year Treasury Benchmark Index, the Consumer Price Index (as
published by the U.S. Bureau of Labor Statistics), other managed or unmanaged
indices or performance data of bonds, municipal securities, stocks or government
securities (including data provided by Ibbotson Associates), or by other
services, companies, publications or persons who monitor mutual funds on overall
performance or other criteria. The S&P Index and the Dow Jones Industrial
Average are unmanaged indices of selected common stock prices. The performance
of the Funds or a Class also may be compared to that 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 Funds'
performance will be calculated by relating net asset value per share at the
beginning of a stated period to the net asset value of the investment, assuming
reinvestment of all gains distributions and dividends paid, at the end of the
period. The Funds' comparative performance will be based on a comparison of
yields, as described above, or total return, as reported by Lipper, Survey
Publications, Donoghue or Morningstar, Inc.
Any such comparisons may be useful to investors who wish to compare past
performance of the Funds or a Class with that of competitors. Of course, past
performance cannot be a guarantee of future results. The Company also may
include, from time to time, a reference to certain marketing approaches of the
Distributor, including, for example, a reference to a potential shareholder
being contacted by a selected broker or dealer. General mutual fund statistics
provided by the Investment Company Institute may also be used.
The Company also may use the following information in advertisements and
other types of literature, only to the extent the information is appropriate for
the Fund: (i) the Consumer Price Index may be used to assess the real rate of
return from an investment in a Fund; (ii) other government statistics,
including, but not limited to, The Survey of Current Business, may be used to
illustrate investment attributes of a Fund or the general economic, business,
investment, or financial environment in which a Fund operates; (iii) the effect
of tax-deferred compounding on the investment returns of a Fund, or on returns
in general, may be illustrated by graphs, charts, etc., where such graphs or
charts would compare, at various points in time, the return from an investment
in a Fund (or returns in general) on a tax-deferred basis (assuming reinvestment
of capital gains and dividends and assuming one or more tax rates) with the
return on a taxable basis; and (iv) the sectors or industries in which a Fund
invests may be compared to relevant indices of stocks or surveys (e.g., S&P
Industry Surveys) to evaluate a Fund's historical performance or current or
potential value with respect to the particular industry or sector.
In addition, the Company also may use, in advertisements and other types of
literature, information and statements: (1) showing that bank savings accounts
offer a guaranteed return of principal and a fixed rate of interest, but no
opportunity for capital growth; and (2) describing Wells Fargo Bank, and its
affiliates and predecessors, as one of the first investment managers to advise
investment accounts using asset allocation and index strategies. The Company
also may include in advertising and other types of literature information and
other data from reports and studies prepared by the Tax Foundation, including
information regarding federal and state tax levels and the related "Tax Freedom
Day."
38
<PAGE>
The Company also may discuss in advertising and other types of literature
that a Fund has 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 Fund. The assigned rating would not be a recommendation to
purchase, sell or hold the Fund's shares since the rating would not comment on
the market price of the Fund's shares or the suitability of the Fund for a
particular investor. In addition, the assigned rating would be subject to
change, suspension or withdrawal as a result of changes in, or unavailability
of, information relating to the Fund or its investments. The Company may
compare the Fund's performance with other investments which are assigned ratings
by NRSROs. Any such comparisons may be useful to investors who wish to compare
the Fund's past performance with other rated investments.
From time to time, the Funds may use the following statements, or
variations thereof, in advertisements and other promotional materials: "Wells
Fargo Bank, as a Shareholder Servicing Agent for the Stagecoach Funds, provides
various services to its customers that are also shareholders of the Funds.
These services may include access to Stagecoach Funds' account information
through Automated Teller Machines (ATMs), the placement of purchase and
redemption requests for shares of the Funds through ATMs and the availability of
combined Wells Fargo Bank and Stagecoach Funds account statements."
The Company also 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
Company'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 individual, trusts, estates and institutions and $23
billion of mutual fund assets.
The Company also may discuss in advertising and other types of literature
the features, terms and conditions of Wells Fargo Bank accounts through which
investments in the Funds may be made via a "sweep" arrangement, including,
without limitation, the Managed Sweep Account, Money Market Checking Account,
California Tax-Free Money Market Checking Account, Money Market Access Account
and California Tax-Free Money Market Access Account (collectively, the "Sweep
Accounts"). Such advertisements and other literature may include, without
limitation, discussions of such terms and conditions as the minimum deposit
required to open a Sweep Account, a description of the yield earned on shares of
the Funds through a Sweep Account, a description of any monthly or other service
charge on a Sweep Account and any minimum required balance to waive such service
charges, any overdraft protection plan offered in connection with a Sweep
Account, a description of any ATM or check privileges offered in connection with
a Sweep Account and any other terms, conditions, features or plans offered in
connection with a Sweep Account. Such advertising or other literature may also
include a discussion of the advantages of establishing and maintaining a Sweep
Account, and may include
39
<PAGE>
statements from customers as to the reasons why such customers have established
and maintained a Sweep Account.
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 the Class A shares of the Government Money
Market Mutual, Treasury Money Market Mutual and Money Market Mutual Funds is
determined as of 12:00 noon and 1:00 p.m. (Pacific time) on each day the New
York Stock Exchange ("NYSE") is open for business. Net asset value per share
for the Class A shares of the California Tax-Free Money Market Mutual and
National Tax-Free Money Market Mutual Funds is determined as of 9:00 a.m. and
1:00 p.m. (Pacific time) on each day the 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.
Each Fund uses the amortized cost method to determine the value of its
portfolio securities pursuant to Rule 2a-7 under the 1940 Act. The amortized
cost method involves valuing a security at its cost and amortizing any discount
or premium over the period until maturity, regardless of the impact of
fluctuating interest rates on the market value of the security. While this
method provides certainty in valuation, it may result in periods during which
the value, as determined by amortized cost, is higher or lower than the price
that the Funds would receive if the security were sold. During these periods
the yield to a shareholder may differ somewhat from that which could be obtained
from a similar fund that uses a method of valuation based upon market prices.
Thus, during periods of declining interest rates, if the use of the amortized
cost method resulted in a lower value of the Funds' portfolio on a particular
day, a prospective investor in the Funds would be able to obtain a somewhat
higher yield than would
40
<PAGE>
result from investment in a fund using solely market values, and existing Fund
shareholders would receive correspondingly less income. The converse would apply
during periods of rising interest rates.
Rule 2a-7 provides that in order to value its portfolio using the amortized
cost method, a Fund must maintain a dollar-weighted average portfolio maturity
of 90 days or less, purchase securities having remaining maturities (as defined
in Rule 2a-7) of thirteen months or less and invest only in those high-quality
securities that are determined by the Board of Directors to present minimal
credit risks. The maturity of an instrument is generally deemed to be the
period remaining until the date when the principal amount thereof is due or the
date on which the instrument is to be redeemed. However, Rule 2a-7 provides
that the maturity of an instrument may be deemed shorter in the case of certain
instruments, including certain variable and floating rate instruments subject to
demand features. Pursuant to Rule 2a-7, the Board is required to establish
procedures designed to stabilize, to the extent reasonably possible, a Fund's
price per share as computed for the purpose of sales and redemptions at $1.00.
Such procedures include review of the Fund's portfolio holdings by the Board of
Directors, at such intervals as it may deem appropriate, to determine whether
the Fund's net asset value calculated by using available market quotations
deviates from $1.00 per share based on amortized cost. The extent of any
deviation will be examined by the Board of Directors. If such deviation exceeds
1/2 of 1%, the Board will promptly consider what action, if any, will be
initiated. In the event the Board determines that a deviation exists that may
result in material dilution or other unfair results to investors or existing
shareholders, the Board will take such corrective action as it regards as
necessary and appropriate, including the sale of portfolio instruments prior to
maturity to realize capital gains or losses or to shorten average portfolio
maturity, withholding dividends or establishing a net asset value per share by
using available market quotations. It is the intention of the Funds to maintain
a per share net asset value of $1.00, but there can be no assurance that each
Fund will do so.
Instruments having variable or floating interest rates or demand features
may be deemed to have remaining maturities as follows: (a) a government security
with a variable rate of interest readjusted no less frequently than every
thirteen months may be deemed to have a maturity equal to the period remaining
until the next readjustment of the interest rate; (b) an instrument with a
variable rate of interest, the principal amount of which is scheduled on the
face of the instrument to be paid in thirteen months or less, may be deemed to
have a maturity equal to the period remaining until the next readjustment of the
interest rate; (c) an instrument with a variable rate of interest that is
subject to a demand feature may be deemed to have a maturity equal to the longer
of the period remaining until the next readjustment of the interest rate or the
period remaining until the principal amount can be recovered through demand; (d)
an instrument with a floating rate of interest that is subject to a demand
feature may be deemed to have a maturity equal to the period remaining until the
principal amount can be recovered through demand; and (e) a repurchase agreement
may be deemed to have a maturity equal to the period remaining until the date on
which the repurchase of the underlying securities is scheduled to occur or,
where no date is specified but the agreement is subject to demand, the notice
period applicable to a demand for the repurchase of the securities.
41
<PAGE>
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
Shares may be purchased on any day a Fund is open for business (a "Business
Day"). The Funds are open Monday through Friday and are closed on federal bank
holidays. Currently, those holidays are New Year's Day, President's Day, Martin
Luther King Jr. Day, Memorial Day, Independence Day, Labor Day, Columbus Day,
Veterans Day, Thanksgiving Day and Christmas Day.
Purchase orders for Class A shares of the Money Market Mutual, Government
Money Market Mutual and Treasury Money Market Mutual Funds received before 12:00
Noon (Pacific time) are processed at 12:00 Noon on that Business Day. Purchase
orders received after 12:00 Noon are processed at 12:00 Noon the next Business
Day. Purchase orders for shares of the California Tax-Free Money Market Mutual
and National Tax-Free Money Market Mutual Funds received before 9:00 a.m.
(Pacific time) are processed at 9:00 a.m. on that Business Day. Purchase orders
received after 9:00 a.m. are processed at 9:00 a.m. the next Business Day.
Transaction orders that are received prior to 1:00 p.m. through shareholder
servicing agents in connection with automated investment programs are processed
at 1:00 p.m. On any day the trading markets for both U.S. government securities
and money market instruments close early, the Funds will close early. On these
days, the NAV calculation time and the dividend, purchase and redemption cut-off
times for the Funds may be earlier than 12:00 Noon.
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 a Fund and that such Fund receives satisfactory
assurances that (i) it will have good and marketable title to the securities
received by it; (ii) that the securities are in proper form for transfer to the
Fund; and (iii) adequate information will be provided concerning the basis and
other matters relating to the securities.
Under the 1940 Act, the 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 shareholders to make full
payment for shares purchased or to collect any charge relating to a transaction
effected for the benefit of a shareholder which is applicable to shares of a
Fund.
42
<PAGE>
PORTFOLIO TRANSACTIONS
The Company has no obligation to deal with any dealer or group of dealers
in the execution of transactions in portfolio securities. Subject to policies
established by the Company's Board of Directors, Wells Fargo Bank is responsible
for each Fund's portfolio decisions and the placing of portfolio transactions.
In placing orders, it is the policy of the Company to obtain the best results
taking into account the dealer's general execution and operational facilities,
the type of transaction involved and other factors such as the dealer's risk in
positioning the securities involved. While Wells Fargo Bank generally seeks
reasonably competitive spreads or commissions, the Funds will not necessarily be
paying the lowest spread or commission available.
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. Each of
the Funds also will purchase portfolio securities in underwritten offerings and
may purchase securities directly from the issuer. Generally, municipal
obligations and taxable money market securities are traded on a net basis and do
not involve brokerage commissions. The cost of executing a Fund's portfolio
securities transactions will consist primarily of dealer spreads and
underwriting commissions. Under the 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 Commission 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.
Brokerage Commissions. The Funds did not pay any brokerage commissions on
---------------------
portfolio transactions for the nine-month period ended September 30, 1996 and
the six-month period ended March 31, 1997.
Securities of Regular Broker/Dealers. As of March 31, 1997, the Funds
------------------------------------
owned securities of their "regular brokers or dealers" or their parents, as
defined in the Act as follows:
43
<PAGE>
<TABLE>
<CAPTION>
Fund Broker/Dealers Amount
---- -------------- ------
<S> <C> <C>
California Tax-Free Money None None
Market Mutual
Money Market Mutual Fund Goldman Sachs & Co. $324,580,500
Merrill Lynch $244,186,473
J.P. Morgan Securities $ 56,309,000
Morgan Stanley $ 24,466,000
Government Money Market Goldman Sachs & Co. $ 8,280,000
Mutual Fund J.P. Morgan Securities $ 9,160,000
National Tax-Free Money None None
Market Mutual Fund
Treasury Money Market Goldman Sachs & Co. $172,575,000
Mutual Fund J.P. Morgan Securities $232,766,000
Morgan Stanley $156,530,000
</TABLE>
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 Fund's 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.
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 Fund's 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
44
<PAGE>
purposes, unless otherwise payable pursuant to a Plan), shareholders' reports,
notices, proxy statements and reports to regulatory agencies; insurance premiums
and certain expenses relating to insurance coverage; trade association
membership dues; brokerage and other expenses connected with the execution of
portfolio transactions; fees and expenses of its custodian, including those for
keeping books and accounts and calculating the NAV per share of a Fund; expenses
of shareholders' meetings; expenses relating to the issuance, registration and
qualification of a Fund's shares; pricing services, and any extraordinary
expenses. Expenses attributable to a Fund are charged against a Fund assets.
General expenses of the Company are allocated among all of the funds of the
Company, including a Fund, in a manner proportionate to the net assets of each
Fund, on a transactional basis, or on such other basis as the Company's Board of
Directors deems equitable.
FEDERAL INCOME TAXES
The 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 to each Fund, rather than to the Company as
a whole. In addition, 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 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.
45
<PAGE>
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
(if any) 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 Funds 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 Funds 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 Funds held the debt obligation.
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.
46
<PAGE>
Under the 1997 Act, the Treasury is authorized to issue regulations for
application of the reduced capital gains tax rates to pass-through entities,
including regulated investment companies, such as the Funds. The Internal
Revenue Service has published a notice describing temporary Regulations to be
issued pursuant to such authority, permitting the application of the reduced
capital gains tax rates to pass-through entities such as the Funds. Under the
Regulations to be issued, if a regulated investment company designates a
dividend as a capital gain dividend for a taxable year ending on or after May 7,
1997, then such regulated investment company may also designate the dividends as
one of two classes: a 20% rate gain distribution, or a 28% rate gain
distribution. Thus, noncorporate shareholders of the Funds may qualify for the
reduced rate of tax on capital gain dividends paid by the Funds, subject only to
the limitation as to the maximum amounts which may be designated in each class.
Such maximum amount for each class is determined by performing the computation
required by Section 1(h) of the Code as if the Fund were an individual whose
ordinary income is subject to a marginal rate of at least 28%.
Other Distributions. Although dividends will be declared daily based on
-------------------
each Fund's daily earnings, for federal income tax purposes, the Fund's earnings
and profits will be determined at the end of each taxable year and will be
allocated pro rata over the entire year. For federal income tax purposes, only
amounts paid out of earnings and profits will qualify as dividends. Thus, if
during a taxable year a Fund's declared dividends (as declared daily throughout
the year) exceed the Fund's net income (as determined at the end of the year),
only that portion of the year's distributions which equals the year's earnings
and profits will be deemed to have constituted a dividend. It is expected that
each Fund's net income, on an annual basis, will equal the dividends declared
during the year.
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 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. In addition, if a shareholder holds Fund shares for six months or
less, any loss on the
47
<PAGE>
sale or exchange of those shares will be disallowed to the extent of the amount
of exempt-interest dividends received with respect to the shares. The Treasury
Department is authorized to issue regulations reducing the six months holding
requirement to a period of not less than the greater of 31 days or the period
between regular dividend distributions where a Fund regularly distributes at
least 90% of its net tax-exempt interest, if any. No such regulations had been
issued as of the date of this SAI. The loss disallowance rules described in this
paragraph do 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.
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.
48
<PAGE>
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 will generally 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.
Special Tax Considerations for California Tax-Free Money Market Mutual Fund
---------------------------------------------------------------------------
and National Tax-Free Money Market Mutual Fund.
- ----------------------------------------------
General
The California Tax-Free Money Market Mutual Fund and National Tax-Free
Money Market Mutual Fund intend that at least 50% of the value of their total
assets at the close of each quarter of their taxable years will consist of
obligations, the interest on which is exempt from federal income tax, so that
they will qualify under the Code to pay "exempt-interest dividends." The
portion of total dividends paid by the Funds with respect to any taxable year
that constitutes exempt-interest dividends will be the same for all shareholders
receiving dividends during such year. Long-term and/or short-term capital gain
distributions will not constitute exempt-interest dividends and will be taxed as
capital gain or ordinary income dividends, respectively. The exemption of
interest income derived from investments in tax-exempt obligations for federal
income tax purposes may not result in a similar exemption under the laws of a
particular state or local taxing authority.
Not later than 60 days after the close of its taxable year, each Fund will
notify its shareholders of the portion of the dividends paid with respect to
such taxable year which constitutes exempt-interest dividends. The aggregate
amount of dividends so designated cannot exceed the excess of the amount of
interest excludable from gross income under Section 103 of the Code received by
a Fund during the taxable year over any amounts disallowed as deductions under
Sections 265 and 171(a)(2) of the Code. Interest on indebtedness incurred to
purchase or carry shares of a Fund will not be deductible to the extent that the
Fund's distributions are exempt from federal income tax.
In addition, the federal alternative minimum tax ("AMT") rules ensure that
at least a minimum amount of tax is paid by taxpayers who obtain significant
benefit from certain tax deductions and exemptions. Some of these deductions
and exemptions have been designated "tax preference items" which must be added
back to taxable income for purposes of calculating AMT. Among the tax
preference items is tax-exempt interest from "private activity bonds" issued
after August 7, 1986. To the extent that the California Tax-Free Money Market
Mutual Fund or National Tax-Free Money Market Mutual Fund invests in private
activity bonds, its shareholders who pay AMT will be required to report that
portion of Fund dividends attributable to income from the bonds as a tax
preference item in determining their AMT. Shareholders will be notified of the
49
<PAGE>
tax status of distributions made by the Funds. Persons who may be "substantial
users" (or "related persons" of substantial users) of facilities financed by
private activity bonds should consult their tax advisors before purchasing
California Tax-Free Money Market Mutual Fund or National Tax-Free Money Market
Mutual Fund shares. Furthermore, shareholders will not be permitted to deduct
any of their share of the Fund's expenses in computing their AMT. With respect
to a corporate shareholder of such Funds, exempt-interest dividends paid by a
Fund is included in the corporate shareholder's "adjusted current earnings" as
part of its AMT calculation, and may also affect its federal "environmental tax"
liability. As of the printing of this SAI, individuals are subject to an AMT at
a maximum rate of 28% and corporations at a maximum rate of 20%. Shareholders
with questions or concerns about AMT should consult their own tax advisors.
Shares of the California Tax-Free Money Market Mutual Fund or National Tax-
Free Money Market Mutual Fund would not be suitable for tax-exempt institutions
and may not be suitable for retirement plans qualified under Section 401 of the
Code, H.R. 10 plans and IRAs since such plans and accounts are generally tax-
exempt and, therefore, would not benefit from the exempt status of dividends
from such Funds. Such dividends would be ultimately taxable to the
beneficiaries when distributed to them.
California Tax-Free Money Market Mutual Fund
Individuals, trusts and estates resident in California will not be subject
to California personal income tax on dividends from the California Tax-Free
Money Market Mutual Fund that represent tax-exempt interest paid on municipal
obligations of the State of California, its political subdivisions, direct
obligations of the U.S. government and certain other issuers, including Puerto
Rico, Guam, and the U.S. Virgin Islands. Such individuals, trusts and estates
will be subject to California personal income tax on other distributions
received from the California Tax-Free Money Market Mutual Fund, including
distributions of interest on municipal obligations issued by other issuers and
all capital gains.
Except as noted above with respect to California personal income taxation
of individuals, trusts and estates resident in California, dividends and
distributions from the California Tax-Free Money Market Mutual Fund may be
taxable to investors under state or local law as dividend income even though all
or a portion of such distributions may be derived from interest on tax-exempt
obligations which, if realized directly, would be exempt from such income taxes.
Shareholders of the California Tax-Free Money Market Mutual Fund should
consult their own tax advisors about other state and local tax consequences of
their investments in the Fund, including consequences to California part-year
residents, which may be different than the federal income tax consequences of
such investments. The Company makes no representations as to California state
and local taxes that may be imposed on a corporate investor in the California
Tax-Free Money Market Mutual Fund and encourages such investors to consult with
their own tax advisors.
50
<PAGE>
National Tax-Free Money Market Mutual Fund
Investors are advised to consult their tax advisors concerning the
application of state and local taxes, which may have different consequences from
those under federal income tax law.
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.
CAPITAL STOCK
The Funds are five 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 that affect one class but not another, shareholders
vote as a class; for example, the approval of a Plan. Subject to the foregoing,
all shares of a Fund 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 Fund's 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 each 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.
51
<PAGE>
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 a Fund,
means the vote of the lesser of (i) 67% of the shares of such class of the Fund
represented at a meeting if the holders of more than 50% of the outstanding
shares of such Class Fund are present in person or by proxy, or (ii) more than
50% of the outstanding shares of such Class of the Fund. The term "majority,"
when referring to the approvals to be obtained from shareholders of the Company
as a whole, means the vote of the lesser of (i) 67% of the Company's shares
represented at a meeting if the holders of more than 50% of the Company's
outstanding shares are present in person or by proxy, or (ii) more than 50% of
the Company's outstanding shares.
Shareholders are entitled to one vote for each full share held and
fractional votes for fractional shares held. 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.
Each share of a class of a Fund represents an equal proportional interest
in the Fund with each other share in 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 or class
are entitled to receive the assets attributable to the Fund or class that are
available for distribution, and a distribution of any general assets not
attributable to a particular investment portfolio that are available for
distribution in such manner and on such basis as the Directors in their sole
discretion may determine.
Set forth below as of November 30, 1997 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 each Fund or 5% or more of the voting
securities of each Fund as a whole.
5% OWNERSHIP AS OF NOVEMBER 30, 1997
<TABLE>
<CAPTION>
NAME AND CLASS; TYPE PERCENTAGE PERCENTAGE
FUND ADDRESS OF OWNERSHIP OF CLASS OF FUND
---- ------- ------------ -------- -------
<S> <C> <C> <C> <C>
CALIFORNIA TAX-FREE Wells Fargo Bank Class A 89.39% 89.39%
MONEY MARKET MUTUAL P.O. Box 7066 Beneficially Owned
San Francisco, CA 94120
MONEY MARKET MUTUAL Wells Fargo Bank Class A 93.38% 80.46%
P.O. Box 7066 Beneficially Owned
San Francisco, CA 94120
</TABLE>
52
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
GOVERNMENT Wells Fargo Bank (Trustee) Class A 35.74% 35.74%
MONEY MARKET Choicemaster Record Holder
MUTUAL Attn: Mutual Funds A88-4
P.O. Box 9800
Calabasas, CA 91372
First Interstate Bank of California Class A 27.61% 27.61%
Attn: Fund Accounting ACM Desk Record Holder
26610 W. Agoura Road
Calabasas, CA 91302
Hare & Co. Class A 23.65% 23.65%
Bank of New York Record Holder
One Wall Street, Second Floor
Attn: STIF/Master Note
New York, NY 10005
Virg & Co. Class A 67.36% 1.65%
Attn: MF Dept. A88-4 Record Holder
P.O. Box 9800
Calabasas, CA 91372
Hare & Co. Class A 7.72% 0.19%
Bank of New York Record Holder
One Wall Street, Second Floor
Attn: STIF/Master Note
New York, NY 10005
NATIONAL TAX- Wells Fargo Bank Class A 83.01% 83.01%
FREE MONEY P.O. Box 7066 Beneficially Owned
MARKET MUTUAL Francisco, CA 94120
Stephens Inc. Class A 8.07% 8.07%
111 Center Street Record Holder
Little Rock, AR 72201
</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 or 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).
OTHER
The Company's Registration Statement, including the Prospectus and SAI
for the Funds 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.
53
<PAGE>
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.
FINANCIAL INFORMATION
The portfolio of investments and unaudited financial statements for the
six-month period ended September 30, 1997, are hereby incorporated by reference
to the Company's Semi-Annual Reports as filed with the SEC on December 5, 1997.
The portfolio of investments, audited financial statements and
independent auditors' report for the Funds for the fiscal period ended March 31,
1997 are hereby incorporated by reference to the Company's Annual Reports as
filed with the SEC on June 4, 1997.
Annual and Semi-Annual Reports may be obtained by calling 1-800-222-8222.
54
<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 and Municipal Bonds
- -----------------------------
Moody's: The four highest ratings for corporate and municipal bonds are
-------
"Aaa," "Aa," "A" and "Baa." Bonds rated "Aaa" are judged to be of the "best
quality" and carry the smallest amount of investment risk. Bonds rated "Aa" are
of "high quality by all standards," but margins of protection or other elements
make long-term risks appear somewhat greater than "Aaa" rated bonds. Bonds
rated "A" possess many favorable investment attributes and are considered to be
upper medium grade obligations. Bonds rated "Baa" are considered to be medium
grade obligations; interest payments and principal security appear adequate for
the present, but certain protective elements may be lacking or may be
characteristically unreliable over any great length of time. Such bonds have
speculative characteristics as well. Moody's applies numerical modifiers: 1, 2
and 3 in each rating category from "Aa" through "Baa" in its rating system. The
modifier 1 indicates that the security ranks in the higher end of its category;
the modifier 2 indicates a mid-range ranking; and the modifier 3 indicates that
the issue ranks in the lower end.
S&P: The four highest ratings for corporate and municipal bonds are
---
"AAA," "AA," "A" and "BBB." Bonds rated "AAA" have the highest ratings assigned
by S&P and have an extremely strong capacity to pay interest and repay
principal. Bonds rated "AA" have a "very strong capacity to pay interest and
repay principal" and differ "from the highest rated issued only in small
degree." Bonds rated "A" have a "strong capacity" to pay interest and repay
principal, but are "somewhat more susceptible" to adverse effects of changes in
economic conditions or other circumstances than bonds in higher rated
categories. Bonds rated "BBB" are regarded as having an "adequate capacity" to
pay interest and repay principal, but changes in economic conditions or other
circumstances are more likely to lead to a "weakened capacity" to make such
repayments. The ratings from "AA" to "BBB" may be modified by the addition of a
plus or minus sign to show relative standing within the category.
Municipal Notes
- ---------------
Moody's: The highest ratings for state and municipal short-term
-------
obligations are "MIG 1," "MIG 2," and "MIG 3" (or "VMIG 1," "VMIG 2" and "VMIG
3" in the case of an issue having a variable rate demand feature). Notes rated
"MIG 1" or "VMIG 1" are judged to be of the "best quality." Notes rated "MIG 2"
or "VMIG 2" are of "high quality," with margins of protections "ample although
not as large as in the preceding group." Notes rated "MIG 3" or "VMIG 3" are of
"favorable quality," with all security elements accounted for, but lacking the
strength of the preceding grades.
A-1
<PAGE>
S&P: The "SP-1" rating reflects a "very strong or strong capacity to pay
---
principal and interest." Notes issued with "overwhelming safety
characteristics" will be rated "SP-1+." The "SP-2" rating reflects a
"satisfactory capacity" to pay principal and interest.
Corporate and Municipal Commercial Paper
- ----------------------------------------
Moody's: The highest rating for corporate and municipal commercial paper
-------
is "P-1" (Prime-1). Issuers rated "P-1" have a "superior capacity for repayment
of short-term promissory obligations." Issuers rated "P-2" (Prime-2) "have a
strong capacity for repayment of short-term promissory obligations," but
earnings trends, while sound, will be subject to more variation.
S&P: The "A-1" rating for corporate and municipal commercial paper
---
indicates that the "degree of safety regarding timely payment is either
overwhelming or very strong." Commercial paper with "overwhelming safety
characteristics" will be rated "A-1+." Commercial paper with a strong capacity
for timely payments on issues will be rated "A-2."
Corporate Notes
- ---------------
S&P: The two highest ratings for corporate notes are "SP-1" and "SP-2."
---
The "SP-1" rating reflects a "very strong or strong capacity to pay principal
and interest." Notes issued with "overwhelming safety characteristics" will be
rated "SP-1+." The "SP-2" rating reflects a "satisfactory capacity" to pay
principal and interest.
A-2
<PAGE>
STAGECOACH FUNDS, INC.
Telephone: 1-800-222-8222
STATEMENT OF ADDITIONAL INFORMATION
Dated December 15, 1997
as supplemented on February 24, 1998
ARIZONA TAX-FREE FUND
CALIFORNIA TAX-FREE BOND FUND
CALIFORNIA TAX-FREE INCOME FUND
NATIONAL TAX-FREE FUND
OREGON TAX-FREE FUND
SHORT-TERM MUNICIPAL 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 six funds (each, a "Fund" and collectively, the
"Funds") in the Stagecoach Family of Funds -- the ARIZONA TAX-FREE, CALIFORNIA
TAX-FREE BOND, CALIFORNIA TAX-FREE INCOME, NATIONAL TAX-FREE, OREGON TAX-FREE
and SHORT-TERM MUNICIPAL INCOME FUNDS (sometimes, collectively, the "Tax-Free
Funds"). The Short-Term Municipal Income and California Tax-Free Income Funds
each offer a single class of shares that is sometimes referred to as the "Class
A shares." Each of the other Funds offers Class A and Class B shares. The
California Tax-Free Bond and National Tax-Free Funds also offer Class C shares.
This SAI relates to all such classes of shares.
This SAI is not a prospectus and should be read in conjunction with the
Funds" Prospectus, dated December 15, 1997, as supplemented. 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, CA
94120-7066.
<PAGE>
TABLE OF CONTENTS
Page
----
<TABLE>
<S> <C>
Historical Fund Information......................................... 1
Investment Restrictions............................................. 2
Additional Permitted Investment Activities.......................... 8
Risk Factors........................................................ 22
Special Considerations Affecting Arizona Municipal Obligations...... 24
Special Considerations Affecting California Municipal Obligations... 26
Special Considerations Affecting Oregon Municipal Obligations....... 29
Management.......................................................... 35
Performance Calculations............................................ 52
Determination of Net Asset Value.................................... 60
Additional Purchase and Redemption Information...................... 60
Portfolio Transactions.............................................. 61
Fund Expenses....................................................... 63
Federal Income Taxes................................................ 63
Capital Stock....................................................... 70
Other............................................................... 74
Independent Auditors................................................ 74
Financial Information............................................... 74
Appendix............................................................ A-1
</TABLE>
i
<PAGE>
HISTORICAL FUND INFORMATION
The California Tax-Free Bond and California Tax-Free Income Funds
(sometimes referred to as the "California Funds") were originally organized as
funds of the Company. The California Tax-Free Bond Fund commenced operations on
January 1, 1992 and the California Tax-Free Income Fund commenced operations on
November 18, 1992. On December 12, 1997, the California Tax-Free Bond Fund of
Overland Express Funds, Inc. ("Overland"), another investment company advised by
Wells Fargo Bank, was reorganized with and into the California Tax-Free Bond of
the Company (the "Consolidation"). For accounting purposes, the Overland Fund
is considered the survivor of the Consolidation. The Class A shares and the
Class D shares of the Overland Fund commenced operations on October 6, 1988 and
July 1, 1993, respectively. The Overland Fund is sometimes referred to
throughout this SAI as the "predecessor portfolio" to the Company's California
Tax-Free Bond Fund.
The Arizona Tax-Free, National Tax-Free and Oregon Tax-Free Funds were
originally organized as investment portfolios of Westcore Trust ("Westcore")
under the names Arizona Intermediate Tax-Free, Quality Tax-Exempt Income, and
Oregon Tax-Exempt Funds, respectively. On October 1, 1995, the Funds were
reorganized as the Pacifica Arizona Tax-Exempt Fund, Oregon Tax-Exempt Fund and
National Tax-Exempt Fund, investment portfolios of Pacifica Funds Trust
("Pacifica"). On September 6, 1996, the Arizona Tax-Exempt Fund, National Tax-
Exempt Fund and Oregon Tax-Exempt Fund of Pacifica were reorganized as the
Company's National Tax-Free Fund, Oregon Tax-Free Fund and Arizona Tax-Free
Fund, respectively.
The Company's Short-Term Municipal Income Fund was originally organized on
June 3, 1994, as the Short-Term Municipal Income Fund of Overland. The Overland
Fund is sometimes referred to herein as a "predecessor portfolio". On July 23,
1997, the Boards of the Directors of the Company and Overland approved an
Agreement and Plan of Consolidation providing for, among other things, the
transfer of the assets and stated liabilities of the predecessor Overland
portfolio to the Fund. Prior to December 12, 1997, the effective date of the
Consolidation, the Fund had only nominal assets. Prior to the Consolidation,
the Short-Term Municipal Income predecessor portfolio pursued its investment
objective by investing all of its assets in a separate Master Portfolio ("Master
Portfolio") of Master Investment Trust ("MIT") with the same investment
objective as the corresponding predecessor portfolio. The Fund now invests
directly in a portfolio of securities and does not invest in a corresponding
Master Portfolio.
1
<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 Arizona Tax-Free Fund, National Tax-Free Fund and Oregon Tax-Free Fund may
not:
(1) purchase or sell commodity contracts (including futures contracts with
respect to the Arizona Tax-Free and National Tax-Free Funds), or invest in oil,
gas or mineral exploration or development programs, except that each Fund, 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 Oregon Tax-Free Fund may enter into futures contracts and
related options;
(2) purchase or sell real estate, except that each Fund 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) acquire any other investment company or investment company security
except in connection with a merger, consolidation, reorganization or acquisition
of assets or where otherwise permitted by the 1940 Act;
(5) act as an underwriter of securities within the meaning of the
Securities Act of 1933 except insofar as a Fund 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
a Fund's investment objective, policies and limitations may be deemed to be
underwriting;
(6) write or sell put options, call options, straddles, spreads, or any
combination thereof, except that the Oregon Tax-Free Fund may enter into
transactions in futures contracts and related options;
(7) borrow money or issue senior securities, except that each Fund 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 a Fund's total assets at the
time of such borrowing. None of these Funds will purchase securities while its
borrowings (including reverse repurchase agreements) in excess of 5% of its
total assets are outstanding. Securities held in escrow or separate accounts in
connection with a Fund's investment practices described in this SAI or in its
Prospectus are not deemed to be pledged for purposes of this limitation;
2
<PAGE>
(8) purchase securities on margin, make short sales of securities or
maintain a short position, except that the Funds may obtain short-term credit as
may be necessary for the clearance of purchases and sales of portfolio
securities, and except that this limitation shall not apply to the Oregon Tax-
Free Fund's transactions in futures contracts and related options;
(9) invest less than 80% of its net assets in securities the interest on
which is exempt from federal income tax, except during periods of unusual market
conditions. For purposes of this investment limitation, securities the interest
on which is treated as a specific tax preference item under the federal
alternative minimum tax are considered taxable; nor
(10) make loans, except that each Fund may purchase and hold debt
instruments and enter into repurchase agreements in accordance with its
investment objective and policies and may lend portfolio securities in an amount
not exceeding 30% of its total assets.
The Arizona Tax-Free Fund may not:
(1) purchase securities of any one issuer if, immediately after such
purchase, more than 5% of the value of the Fund's total assets would be invested
in the securities of such issuer, or more than 10% of the issuer's outstanding
voting securities would be owned by the Fund, except that (a) up to 50% of the
value of the Fund's total assets may be invested without regard to these
limitations provided that no more than 25% of the value of the Fund's total
assets are invested in the securities of any one issuer and (b) these
limitations do not apply to securities issued or guaranteed by the U.S.
Government, its agencies or instrumentalities. For purposes of these
limitations, a security is considered to be issued by the governmental entity
(or entities) whose assets and revenues back the security, or, with respect to a
private activity bond that is backed only by the assets and revenues of a
nongovernmental user, such nongovernmental user. In certain circumstances, the
guarantor of a guaranteed security may also be considered to be an issuer in
connection with such guarantee, except that a guarantee of a security shall not
be deemed to be a security issued by the guarantor when the value of all
securities issued and guaranteed by the guarantor, and owned by the Fund, does
not exceed 10% of the value of the Fund's total assets; nor
(2) purchase any securities, except securities issued (as defined in the
preceding Investment Limitation) or guaranteed by the United States, any state,
territory or possession of the United States, the District of Columbia or any of
their authorities, agencies, instrumentalities or political subdivisions, which
would cause 25% or more of the value of the Fund's total assets at the time of
purchase to be invested in the securities of issuers conducting their principal
business activities in the same industry.
The National Tax-Free Fund may not:
(1) purchase securities of any one issuer if, immediately after such
purchase, more than 5% of the value of the Fund's total assets would be invested
in the securities of such issuer, or more than 10% of the issuer's outstanding
voting securities would be owned by the Fund, except that (a) up to 50% of the
value of the Fund's total assets may be invested without regard to these
limitations provided that no more than 25% of the value of the Fund's total
assets are invested in the securities of any one issuer and (b) these
limitations do not apply to securities issued or guaranteed by the
3
<PAGE>
U.S. Government, its agencies or instrumentalities. For purposes of these
limitations, a security is considered to be issued by the governmental entity
(or entities) whose assets and revenues back the security, or, with respect to a
private activity bond that is backed only by the assets and revenues of a
nongovernmental user, such nongovernmental user. In certain circumstances, the
guarantor of a guaranteed security may also be considered to be an issuer in
connection with such guarantee, except that a guarantee of a security shall not
be deemed to be a security issued by the guarantor when the value of all
securities issued and guaranteed by the guarantor, and owned by the Fund, does
not exceed 10% of the value of the Fund's total assets; nor
(2) purchase any securities that would cause 25% or more of the value of
its total assets at the time of purchase to be invested in municipal obligations
with similar characteristics (such as private activity bonds where the payment
of principal and interest is the ultimate responsibility of issuers in the same
industry, pollution control revenue bonds, housing finance agency bonds or
hospital bonds) or the securities of issuers conducting their principal business
activities in the same industry, provided that there is no limitation with
respect to obligations issued or guaranteed by the U.S. Government, the District
of Columbia, and their respective agencies, authorities, instrumentalities or
political subdivisions.
The Oregon Tax-Free Fund may not:
(1) purchase securities of any one issuer if, immediately after such
purchase, more than 5% of the value of the Fund's total assets would be invested
in the securities of such issuer, except that (a) up to 50% of the value of the
Fund's total assets may be invested without regard to this 5% limitation
provided that no more than 25% of the value of the Fund's total assets are
invested in the securities of any one issuer and (b) this 5% limitation does not
apply to securities issued or guaranteed by the U.S. Government, its agencies,
authorities, instrumentalities or political subdivisions. For purposes of this
limitation, a security is considered to be issued by the governmental entity (or
entities) whose assets and revenues back the security, or, with respect to a
private activity bond that is backed only by the assets and revenues of a
nongovernmental user, such nongovernmental user. In certain circumstances, the
guarantor of a guaranteed security may also be considered to be an issuer in
connection with such guarantee, except that a guarantee of a security shall not
be deemed to be a security issued by the guarantor when the value of all
securities issued and guaranteed by the guarantor, and owned by the Fund, does
not exceed 10% of the value of the Fund's total assets; nor
(2) purchase any securities, except securities issued (as defined in the
preceding Investment Limitation) or guaranteed by the United States, any state,
territory or possession of the United States, the District of Columbia or any of
their authorities, agencies, instrumentalities or political subdivisions, which
would cause 25% or more of the value of the Fund's total assets at the time of
purchase to be invested in the securities of issuers conducting their principal
business activities in the same industry.
The California Tax-Free Bond Fund may not:
(1) purchase the securities of issuers conducting their principal business
activity in the same industry if, immediately after the purchase and as a result
thereof, the value of the Fund's
4
<PAGE>
investments in that industry would be 25% or more of the current value of the
Fund's total assets, provided that there is no limitation with respect to
investments in (i) municipal securities (for the purpose of this restriction,
private activity bonds and notes shall not be deemed municipal securities if the
payments of principal and interest on such bonds or notes is the ultimate
responsibility of non-governmental issuers) and (ii) obligations of the United
States Government, its agencies or instrumentalities;
(2) purchase or sell real estate or real estate limited partnerships
(other than municipal obligations or other securities secured by real estate or
interests therein or securities issued by companies that invest in real estate
or interests therein), commodities or commodity contracts (including futures
contracts);
(3) purchase securities on margin (except for short-term credits necessary
for the clearance of transactions with regard to the Fund and except for margin
payments in connection with options, futures and options on futures or make
short sales of securities;
(4) underwrite securities of other issuers, except to the extent that the
purchase of municipal securities or other permitted investments directly from
the issuer thereof or from an underwriter for an issuer and the later
disposition of such securities in accordance with the Fund's investment program
may be deemed to be an underwriting;
(5) make investments for the purpose of exercising control or management;
(6) issue senior securities, except that the Fund may borrow from banks up
to 10% of the current value of its net assets for temporary purposes only in
order to meet redemptions, and these borrowings may be secured by the pledge of
up to 10% of the current value of its net assets (but investments may not be
purchased while any such outstanding borrowings exceed 5% of its net assets);
nor
(7) write, purchase or sell puts, calls, options or any combination
thereof, except that the Fund may purchase securities with put rights in order
to maintain liquidity.
The California Tax-Free Income Fund may not:
(1) purchase the securities of issuers conducting their principal business
activity in the same industry if, immediately after the purchase and as a result
thereof, the value of the Fund's investments in that industry would be 25% or
more of the current value of the Fund's total assets, provided that there is no
limitation with respect to investments in (i) municipal securities (for the
purpose of this restriction, private activity bonds and notes shall not be
deemed municipal securities if the payments of principal and interest on such
bonds or notes is the ultimate responsibility of non-governmental issuers), and
(ii) obligations of the United States Government, its agencies or
instrumentalities;
(2) purchase or sell real estate or real estate limited partnerships
(other than municipal obligations or other securities secured by real estate or
interests therein or securities issued by
5
<PAGE>
companies that invest in real estate or interests therein), commodities or
commodity contracts (including futures contracts);
(3) purchase securities on margin (except for short-term credits necessary
for the clearance of transactions) or make short sales of securities;
(4) underwrite securities of other issuers, except to the extent that the
purchase of municipal securities or other permitted investments directly from
the issuer thereof or from an underwriter for an issuer and the later
disposition of such securities in accordance with the Fund's investment program
may be deemed to be an underwriting;
(5) make investments for the purpose of exercising control or management;
(6) issue senior securities, except that the Fund may borrow from banks up
to 10% of the current value of its net assets for temporary purposes only in
order to meet redemptions, and these borrowings may be secured by the pledge of
up to 10% of the current value of its net assets, but investments may not be
purchased while any such outstanding borrowings exceed 5% of its net assets;
(7) write, purchase or sell puts, calls, options or any combination
thereof, except that the Fund may purchase securities with put rights in order
to maintain liquidity;
(8) make loans of portfolio securities having a value that exceeds 50% of
the current value of its total assets provided that, for purposes of this
restriction, loans will not include the purchase of fixed time deposits,
repurchase agreements, commercial paper and other types of debt instruments
commonly sold in a public or private offering.
The Short-Term Municipal Income Fund may not:
(1) purchase the securities of issuers conducting their principal business
activity in the same industry if, immediately after the purchase and as a result
thereof, the value of the Fund's investments in that industry would exceed 25%
of the current value of the Fund's total assets, provided that there is no
limitation with respect to: (a) investments in securities issued or guaranteed
by the U.S. Government, its agencies or instrumentalities; and (b) municipal
securities (for the purpose of this restriction, private activity bonds and
notes shall not be deemed municipal securities if the payment of principal and
interest on such bonds or notes is the ultimate responsibility of non-
governmental issuers); and provided further that there is no limitation with
respect to investments by the Fund in securities issued by registered investment
companies;
(2) purchase or sell real estate (other than securities secured by real
estate or interests therein or securities issued by companies that invest in
real estate or interests therein), commodities or commodity contracts, or
interests in oil, gas, or other mineral exploration or development programs;
(3) purchase securities on margin (except for short-term credits necessary
for the clearance of transactions) or make short sales of securities;
6
<PAGE>
(4) 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 Fund's investment program may be deemed to be an
underwriting;
(5) make investments for the purpose of exercising control or management;
(6) purchase puts, calls, straddles, spreads, or any combination thereof,
except that the Fund may purchase securities with put rights in order to
maintain liquidity;
(7) issue senior securities, except that the Fund may borrow from banks up
to 10% of the current value of its net assets for temporary purposes only in
order to meet redemptions, and these borrowings may be secured by the pledge of
up to 10% of the current value of its net assets (but investments may not be
purchased by the Fund while any such outstanding borrowing in excess of 5% of
its net assets exists);
(8) purchase securities of any issuer (except securities issued or
guaranteed by the U.S. Government, its agencies and instrumentalities) if, as a
result, with respect to 75% of the total assets, more than 5% of the value of
the Fund's total assets would be invested in the securities of any one issuer or
the Fund would own more than 10% of the outstanding voting securities of such
issuer; nor
(9) lend its portfolio securities having a value that exceeds 50% of the
current value of their total assets, provided that, for purposes of this
restriction, the purchase of fixed time deposits, repurchase agreements,
commercial paper and other types of debt instruments commonly sold in a public
or private offering will not be subject to this restriction. The Fund does not
intend to make loans of its portfolio securities during the coming year.
Non-Fundamental Investment Policies
-----------------------------------
Each Fund has 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 Fund's 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 Fund's 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 Fund's net assets with respect to any one
investment company, and (iii) 10% of such Fund's 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% 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
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<PAGE>
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 securities of
foreign governmental and foreign private issuers that are denominated in and pay
interest in U.S. dollars.
(4) The Arizona Tax-Free, National Tax-Free and Oregon Tax-Free Funds each
may lend securities from its portfolio to brokers, dealers and financial
institutions, in amounts not to exceed (in the aggregate) the value of 30% of
the Fund's total assets. The California Tax-Free Bond, California Tax-Free
Income and Short-Term Municipal Income Funds each may lend securities from its
portfolio to brokers, dealers and financial institutions, in amounts not to
exceed (in the aggregate) the value of one-third of the 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 purchase asset-backed securities, which are securities backed
by installment contracts, credit-card receivables or other assets. Asset-backed
securities represent interests in "pools" of assets in which payments of both
interest and principal on the securities are made monthly, thus in effect
"passing through" monthly payments made by the individual borrowers on the
assets that underlie the securities, net of any fees paid to the issuer or
guarantor of the securities. The average life of asset-backed securities varies
with the maturities of the underlying instruments and is likely to be
substantially less than the original maturity of the assets underlying the
securities as a result of prepayments. For this and other reasons, an asset-
backed security's stated maturity may be shortened, and the security's total
return may be difficult to predict precisely.
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
8
<PAGE>
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 a Fund 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. 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.
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).
The Short-Term Municipal Income Fund and California Tax-Free Income Fund may
invest in variable-rate instruments with a maximum final maturity of up to 30
years, provided the period remaining until the next readjustment of the
instrument's interest rate, or the period remaining until the principal amount
can be recovered through demand, is less than 5 years.
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<PAGE>
Commercial Paper
----------------
The Funds may invest in commercial paper. Commercial paper includes short-
term unsecured promissory notes, 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 taxable instruments
issued by government agencies and instrumentalities.
Other 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 of 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
issuers 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.
It is uncertain how these instruments will perform under different economic and
interest-rate scenarios. Because certain of these instruments are leveraged,
their market value 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 of
derivative instrument because of a lack of reliable objective information and an
established secondary market for some instruments may not exist.
Floating- and Variable-Rate Obligations
---------------------------------------
The Funds may purchase floating- and variable-rate obligations as described
in the Prospectuses. Each Fund may purchase floating- and variable-rate demand
notes and bonds. Variable-rate demand notes include master demand notes that
are obligations that permit a Fund to invest fluctuating amounts, which may
change daily without penalty, pursuant to direct arrangements between the Fund,
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
10
<PAGE>
they are redeemable at face value. Accordingly, where these obligations are not
secured by letters of credit or other credit support arrangements, a Fund's
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 each Fund 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 each Fund, considers on an ongoing basis the
creditworthiness of the issuers of the floating- and variable-rate demand
obligations in such Fund's 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.
Floating- and variable-rate demand instruments acquired by the Arizona,
National and Oregon Tax-Free Funds may include participations in municipal
obligations purchased from and owned by financial institutions, primarily banks.
Participation interests provide these Funds with a specified undivided interest
(up to 100%) in the underlying obligation and the right to demand payment of the
unpaid principal balance plus accrued interest on the participation interest
from the institution upon a specified number of days' notice, not to exceed
thirty days. Each participation interest is backed by an irrevocable letter of
credit or guarantee of a bank that the Advisor has determined meets the
prescribed quality standards for these Funds. The bank typically retains fees
out of the interest paid on the obligation for servicing the obligation,
providing the letter of credit and issuing the repurchase commitment.
Forward Commitments, When-Issued Purchases and Delayed-Delivery Transactions
----------------------------------------------------------------------------
Each Fund 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. 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 each
Fund will generally purchase securities with the intention of acquiring them, a
Fund may dispose of securities purchased on a when-issued, delayed-delivery or a
forward commitment basis before settlement when deemed appropriate by the
Advisor. Securities purchased on a when-issued or forward commitment basis may
expose the relevant Fund to risk because they may experience price fluctuations
prior to their actual delivery. Purchasing securities on a when-issued or
forward commitment basis can involve the additional risk that the yield
available in the market when the delivery takes place actually may be higher
than that obtained in the transaction itself.
Each Fund will segregate cash, U.S. Government obligations or other high-
quality debt instruments in an amount at least equal in value to the Fund's
commitments to purchase when-issued securities. If the value of these assets
declines, the Fund will segregate additional liquid assets on a daily basis so
that the value of the segregated assets is equal to the amount of such
commitments.
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<PAGE>
Illiquid Securities
-------------------
The Funds each will not knowingly invest more than 15% (10% for the
California Tax-Free Bond Fund) of the value of its net assets in securities that
are illiquid because of restrictions on transferability or other reasons.
Illiquid securities shall not include securities eligible for resale pursuant to
Rule 144A under the Securities Act of 1933 (the "1933 Act") that have been
determined to be liquid by the Advisor, pursuant to guidelines established by
the Company's Board of Directors, and commercial paper that is sold under
Section 4(2) of the 1933 Act.
Letters of Credit
-----------------
Certain of the debt obligations (including municipal securities,
certificates of participation, commercial paper and other short-term
obligations) which the Funds may purchase may be backed by an unconditional and
irrevocable letter of credit of a bank, savings and loan association or
insurance company which assumes the obligation for payment of principal and
interest in the event of default by the issuer. Only banks, savings and loan
associations and insurance companies which, in the opinion of Wells Fargo Bank,
are of comparable quality to issuers of other permitted investments of the Funds
may be used for letter of credit-backed investments.
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 a particular Fund.
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. 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, a Fund could experience delays in
recovering securities or collateral or could lose all or part of the value of
the loaned securities. When a Fund 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 a Fund if a material
event affecting the investment is to occur.
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<PAGE>
Municipal Obligations
---------------------
The Funds may invest in municipal obligations issued by governmental
entities to obtain funds for various public purposes. These purposes may
include the construction of a wide range of public facilities such as bridges,
highways, housing, hospitals, mass transportation, schools, streets and water
and sewer works. Other public purposes for which municipal obligations may be
issued include the refunding of outstanding obligations and obtaining funds for
general operating expenses or to loan to other public institutions and
facilities. Industrial development bonds are a specific type of revenue bond
backed by the credit and security of a private user. Certain types of
industrial development bonds are issued by or on behalf of public authorities to
obtain funds to provide privately-operated housing facilities, sports
facilities, convention or trade show facilities, airport, mass transit, port or
parking facilities, air or water pollution control facilities and certain local
facilities for water supply, gas, electricity, or sewage or solid waste
disposal. Assessment bonds, wherein a specially created district or project area
levies a tax (generally on its taxable property) to pay for an improvement or
project may be considered a variant of either category. There are, of course,
other variations in the types of municipal bonds, both within a particular
classification and between classifications, depending on numerous factors. Each
Fund, subject to its respective investment objective and policies, is not
limited with respect to which category of municipal bonds it may acquire. Some
or all of these bonds may be considered "private activity bonds" for federal
income tax purposes.
The two principal classifications of municipal obligations that may be held
by a Fund are "general obligation" securities and "revenue" securities. General
obligation securities are secured by the issuer's pledge of its full faith,
credit and taxing power for the payment of principal and interest. Revenue
securities are payable only from the revenues derived from a particular facility
or class of facilities or, in some cases, from the proceeds of a special excise
tax or other specific revenue source such as the issuer of the facility being
financed. A Fund's portfolio may also include "moral obligation" securities,
which are issued normally by special purpose public authorities. If the issuer
of moral obligation securities is unable to meet its debt service obligations
from current revenues, it may draw on a reserve fund, the restoration of which
is a moral commitment but not a legal obligation of the state or municipality
that created the issuer.
There are, of course, variations in the quality of municipal obligations
both within a particular classification and between classifications, and the
yields on municipal obligations depend upon a variety of factors, including
general money market conditions, the financial condition of the issuer, general
conditions of the municipal bond market, the size of a particular offering, the
maturity of the obligation and the rating of the issue.
Certain of the municipal obligations held by a Fund may be insured as to the
timely payment of principal and interest. The insurance policies usually are
obtained by the issuer of the municipal obligation at the time of its original
issuance. In the event that the issuer defaults on interest or principal
payment, the insurer will be notified and will be required to make payment to
the bondholders. There is, however, no guarantee that the insurer will meet its
obligations. In addition, such insurance does not protect against market
fluctuations caused by changes in interest
13
<PAGE>
rates and other factors. The Funds may, from time to time, invest more than 25%
of their assets in municipal obligations covered by insurance policies.
The values of outstanding municipal securities will vary as a result of
changing market evaluations of the ability of their issuers to meet the interest
and principal payments (i.e., credit risk). Such values also will change in
response to changes in the interest rates payable on new issues of municipal
securities (i.e., market risk). Should such interest rates rise, the values of
outstanding securities, including those held in a Fund's portfolio, will decline
and (if purchased at par value) sell at a discount. If interests rates fall,
the values of outstanding securities will generally increase and (if purchased
at par value) sell at a premium. Changes in the value of municipal securities
held in the Fund"s portfolio arising from these or other factors will cause
changes in the net asset value per share of the Fund.
Municipal securities may include variable- or floating-rate instruments
issued by industrial development authorities and other governmental entities.
While there may not be an active secondary market with respect to a particular
instrument purchased by a Fund, a Fund may demand payment of the principal and
accrued interest on the instrument or may resell it to a third party as
specified in the instruments. The absence of an active secondary market,
however, could make it difficult for a Fund to dispose of the instrument if the
issuer defaulted on its payment obligation or during periods the Fund is not
entitled to exercise its demand rights, and the Fund could, for these or other
reasons, suffer a loss.
Private activity bonds are issued to obtain funds to provide privately
operated housing facilities, pollution control facilities, convention or trade
show facilities, mass transit, airport, port or parking facilities and certain
local facilities for water supply, gas, electricity or sewage or solid waste
disposal. State and local governments are authorized in most states to issue
private activity bonds for such purposes in order to encourage corporations to
locate within their communities. Private activity bonds are in most cases
revenue securities and are not payable from the unrestricted revenues of the
issuer. Private activity bonds include industrial development bonds, which are
a specific type of revenue bond backed by the credit and security of a private
user. The credit quality of such bonds is usually directly related to the
credit standing of the corporate user of the facility involved. Private activity
bonds issued by or on behalf of public authorities to finance various privately
operated facilities are considered municipal obligations if the interest
received thereon is exempt from federal income tax but nevertheless subject to
the federal alternative minimum tax. Assessment bonds, wherein a specially
created district or project area levies a tax (generally on its taxable
property) to pay for an improvement or project may be considered a variant of
either category. There are, of course, other variations in the types of
municipal bonds, both within a particular classification and between
classifications, depending on numerous factors. Some or all of these bonds may
be considered "private activity bonds" for federal income tax purposes.
The Funds may also purchase short-term General Obligation Notes, Tax
Anticipation Notes ("TANS"), Bond Anticipation Notes ("BANs"), Revenue
Anticipation Notes ("RANs"), Tax-Exempt Commercial Paper, Construction Loan
Notes and other forms of short-term tax-exempt loans. Such instruments are
issued with a short-term maturity in anticipation of the receipt of tax
14
<PAGE>
funds, the proceeds of bond placements or other revenues, and are usually
general obligations of the issuer.
TANs. An uncertainty in a municipal issuer's capacity to raise taxes as a
result of such things as a decline in its tax base or a rise in delinquencies
could adversely affect the issuer's ability to meet its obligations on
outstanding TANs. Furthermore, some municipal issuers mix various tax proceeds
into a general fund that is used to meet obligations other than those of the
outstanding TANs. Use of such a general fund to meet various obligations could
affect the likelihood of making payments on TANs.
BANs. The ability of a municipal issuer to meet its obligations on its BANs
is primarily dependent on the issuer's adequate access to the longer term
municipal bond market and the likelihood that the proceeds of such bond sales
will be used to pay the principal of, and interest on, BANs.
RANs. A decline in the receipt of certain revenues, such as anticipated
revenues from another level of government, could adversely affect an issuer's
ability to meet its obligations on outstanding RANs. In addition, the
possibility that the revenues would, when received, be used to meet other
obligations could affect the ability of the issuer to pay the principal of, and
interest on, RANs.
Municipal Lease Obligations. The Funds may invest in municipal lease
obligations. The Advisor makes determinations concerning the liquidity of a
municipal lease obligation based on relevant factors. These factors may include,
among others: (1) the frequency of trades and quotes for the obligation; (2)
the number of dealers willing to purchase or sell the security and the number of
other potential buyers; (3) the willingness of dealers to undertake to make a
market in the security; and (4) the nature of the marketplace trades, including
the time needed to dispose of the security, the method of soliciting offers, and
the mechanics of transfer. In addition, the general credit quality of the
municipality and the essentiality to the municipality of the property covered by
the lease may be considered. In evaluating the credit quality of a municipal
lease obligation, the factors to be considered might include: (1) whether the
lease can be canceled; (2) what assurance there is that the assets represented
by the lease can be sold; (3) the strength of the lessee's general credit (e.g.,
its debt, administrative, economic, and financial characteristics); (4) the
likelihood that the municipality will discontinue appropriating funding for the
leased property because the property is no longer deemed essential to the
operations of the municipality (e.g., the potential for an "event of the
nonappropriation"); and (5) the legal recourse in the event of failure to
appropriate.
Certificates of Participation. The Funds may purchase municipal obligations
known as "certificates of participation" which represent undivided proportional
interests in lease payments by a governmental or nonprofit entity. The lease
payments and other rights under the lease provide for and secure the payments on
the certificates. Lease obligations may be limited by applicable municipal
charter provisions or the nature of the appropriation for the lease. In
particular, lease obligations may be subject to periodic appropriation. Lease
obligations also may be abated if the leased property is damaged or becomes
unsuitable for the lessee's purpose. If the entity does not appropriate funds
for future lease payments, the entity cannot be compelled to make such payments.
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Furthermore, a lease may or may not provide that the certificate trustee can
accelerate lease obligations upon default. If the trustee could not accelerate
lease obligations upon default, the trustee would only be able to enforce lease
payments as they became due. In the event of a default or failure of
appropriation, it is unlikely that the trustee would be able to obtain an
acceptable substitute source of payment. Certificates of participation are
generally subject to redemption by the issuing municipal entity under specified
circumstances. If a specified event occurs, a certificate is callable at par
either at any interest payment date or, in some cases, at any time. As a result,
certificates of participation are not as liquid or marketable as other types of
municipal obligations and are generally valued at par or less than par in the
open market.
Pass-Through Obligations. Certain of the debt obligations which the Funds
may purchase may be pass-through obligations that represent an ownership
interest in a pool of mortgages and the resultant cash flow from those
mortgages. Payments by homeowners on the loans in the pool flow through to
certificate holders in amounts sufficient to repay principal and to pay interest
at the pass-through rate. The stated maturities of pass-through obligations may
be shortened by unscheduled prepayments of principal on the underlying
mortgages. Therefore, it is not possible to predict accurately the average
maturity of a particular pass-through obligation. Variations in the maturities
of pass-through obligations will affect the yield of the Funds. Furthermore, as
with any debt obligation, fluctuations in interest rates will inversely affect
the market value of pass-through obligations. The Funds may invest in pass-
through obligations that are supported by the full faith and credit of the U.S.
Government (such as those issued by the Government National Mortgage
Association) or those that are guaranteed by an agency or instrumentality of the
U.S. Government (such as the Federal National Mortgage Association or the
Federal Home Loan Mortgage Corporation) or bonds collateralized by any of the
foregoing.
Opinions relating to the validity of municipal obligations and to the
exemption of interest thereon from regular federal income tax (and to the
exemption of interest from state personal income tax) are rendered by bond
counsel to the respective issuers at the time of issuance. Neither the Funds,
the Funds' investment Advisor nor their counsel will review the proceedings
relating to the issuance of municipal obligations or the bases for such
opinions.
For a further discussion of factors affecting purchases of municipal
obligations by the State Tax-Free Funds, see "Special Considerations Affecting
Arizona Municipal Securities," "Special Considerations Affecting California
Municipal Securities" and, "Special Considerations Affecting Oregon Municipal
Securities" in this SAI.
Stand-By Commitments. The Funds may acquire stand-by commitments with
respect to municipal obligations held by such Funds. Under a stand-by
commitment, a dealer or bank agrees to purchase from a Fund, at the Fund's
option, specified municipal obligations at a specified price. The amount payable
to a Fund upon its exercise of a stand-by commitment is normally (i) the Fund's
acquisition cost of the municipal obligations (excluding any accrued interest
that the Fund paid on their acquisition), less any amortized market premium plus
any amortized market or original issue discount during the period the Fund owned
the securities, plus (ii) all interest accrued on the securities since the last
interest payment date during that period. Stand-by commitments may be sold,
transferred or assigned by a Fund only with the underlying instrument.
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Each of the Funds expects that stand-by commitments will generally be
available without the payment of any direct or indirect consideration. However,
if necessary or advisable, a Fund may pay for a stand-by commitment either
separately in cash or by paying a higher price for portfolio securities which
are acquired subject to the commitment (thus reducing the yield to maturity
otherwise available for the same securities). Where a Fund pays any
consideration directly or indirectly for a stand-by commitment, its cost would
be reflected as unrealized depreciation for the period during which the
commitment was held by the Fund.
Each of the Funds intends to enter into stand-by commitments only with
dealers, banks and broker-dealers which, in the Advisor's opinion, present
minimal credit risks. Each Fund's reliance upon the credit of these dealers,
banks and broker-dealers will be secured by the value of the underlying
municipal obligations that are subject to the commitment. In evaluating the
creditworthiness of the issuer of a stand-by commitment, the Advisor will review
periodically the issuer's assets, liabilities, contingent claims and other
relevant financial information.
Each of these Funds intends to acquire stand-by commitments solely to
facilitate portfolio liquidity and does not intend to exercise its rights
thereunder for trading purposes. The acquisition of a stand-by commitment will
not affect the valuation or assumed maturity of the underlying municipal
obligations, which will continue to be valued in accordance with the ordinary
method of valuation employed by the Funds. Stand-by commitments acquired by a
Fund will be valued at zero in determining net asset value.
Tax Status. From time to time, proposals have been introduced before
Congress for the purpose of restricting or eliminating the federal income tax
exemption for interest on municipal obligations. For example, under federal tax
legislation enacted in 1986, interest on certain private activity bonds must be
included in an investor's alternative minimum taxable income, and corporate
investors must treat all tax-exempt interest as an item of tax preference.
Moreover, with respect to Arizona, California and Oregon obligations, the Funds
cannot predict what legislation, if any, may be proposed in the state
legislature regarding the state income tax status of interest on such
obligations, or which proposals, if any, might be enacted. Such proposals, while
pending or if enacted, might materially and adversely affect the availability of
municipal obligations generally, or Arizona, California and Oregon obligations,
specifically, for investment by a Fund and the liquidity and value of the Fund's
portfolio. In such an event, the Fund involved would re-evaluate its investment
objective and policies and consider possible changes in its structure or
possible dissolution.
Ratings of Municipal Securities. The Funds may invest in municipal bonds
rated at the date of purchase "Baa" or better by Moody's Investors Service, Inc.
("Moody's") or "BBB" or better by; Standard & Poor's Ratings Group ("S&P"), or
unrated bonds that are considered by the investment Advisor to be of comparable
quality. Bonds rated "Baa" and "BBB" have speculative characteristics and are
more likely than higher-rated bonds to have a weakened capacity to pay principal
and interest in times of adverse economic conditions; all are considered
investment grade. Municipal bonds generally have a maturity at the time of
issuance of up to 40 years.
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The highest rating assigned by S&P is "AAA" for state and municipal bonds,
"SP-1" for state and municipal notes, and "A-1" for state and municipal paper.
The highest rating assigned by Moody's is "Aaa," "MIG 1," and "Prime-1" for
state and municipal bonds, notes and commercial paper, respectively. These
instruments are judged to be the best quality and present minimal risks and a
strong capacity for repayment of principal and interest. If a municipal security
ceases to be rated or is downgraded below an investment grade rating after
purchase by the Fund, it may retain or dispose of such security. In any event,
the Short-Term Municipal Income Fund does not intend to purchase or retain any
municipal security that is rated below the top four rating categories by a
nationally recognized statistical rating organization ("NRSRO"), or, if unrated,
is considered by the investment Advisor to be of comparable quality. Securities
rated in the fourth highest category are considered to have speculative
characteristics. A description of ratings is contained in the Appendix to the
SAI.
The Funds may invest in municipal notes rated at the date of purchase "MIG
2" (or "VMIG 2" in the case of an issue having a variable rate with a demand
feature) or better by Moody's or "SP-2" or better by S&P, or unrated notes that
are considered by the investment Advisor to be of comparable quality. Municipal
notes generally have maturities at the time of issuance of three years or less.
Municipal notes are generally issued in anticipation of the receipt of tax
funds, of the proceeds of bond placements, of other revenues. The ability of an
issuer to make payments on notes is therefore especially dependent on such tax
receipts, proceeds from bond sales or other revenues, as the case may be.
The Funds may invest in municipal commercial paper rated at the date of
purchase "Prime-1" or "Prime-2" by Moody's or "A-1+," "A-1" or "A-2" by S&P, or
unrated commercial paper that is considered by the investment Advisor to be of
comparable quality. Municipal commercial paper is a debt obligation with a
stated maturity of 270 days or less that is issued to finance seasonal working
capital needs or as short-term financing in anticipation of longer-term debt.
In the event a security purchased by a Fund is downgraded below investment
grade, the Fund may retain such security, although the Fund may not have more
than 5% of its assets invested in securities rated below investment grade at any
time. A description of the ratings is contained in the Appendix to the Funds'
SAI.
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 Fund's 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 Fund's net assets with respect to any one
investment company and (iii) 10% of such Fund's 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.
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Taxable Investments
-------------------
Pending the investment of proceeds from the sale of shares of the Funds or
proceeds from sales of portfolio securities or in anticipation of redemptions or
to maintain a "defensive" posture when, in the opinion of Wells Fargo Bank, as
investment Advisor, it is advisable to do so because of market conditions, each
Fund may elect to invest temporarily up to 20% of the current value of its net
assets in cash reserves, in instruments that pay interest which is exempt from
federal income taxes, but not, from the State Tax-Free Funds, from a respective
state's personal income tax, or the following taxable high--quality money market
instruments: (i) U.S. Government obligations; (ii) negotiable certificates of
deposit, bankers' acceptance and fixed time deposits and other obligations of
domestic banks (including foreign branches) that have more than $1 billion in
total assets at the time of investment and are members of the Federal Reserve
System or are examined by the Comptroller of the Currency or whose deposits are
insured by the FDIC; (iii) commercial paper rated at the date of purchase
"Prime-1" by Moody's or "A-1+" or "A-1" by S&P; (iv) certain repurchase
agreements; and (v) high-quality municipal obligations, the income from which
may or may not be exempt from federal income taxes.
Such temporary investments would most likely be made for cash management
purposes or when there is an unexpected or abnormal level of investor purchases
or redemptions of shares of the Fund or because of unusual market conditions.
The income from these temporary investments and investment activities may be
subject to federal income taxes. However, as stated above, Wells Fargo Bank
seeks to invest substantially all of the Fund's assets in securities exempt from
such taxes.
Repurchase Agreements. The Funds may enter into repurchase agreements
wherein the seller of a security to the Fund agrees to repurchase that security
from the Fund at a mutually agreed-upon time and price that involves the
acquisition by a Fund of an underlying debt instrument, subject to the seller's
obligation to repurchase, and such Fund's obligation to resell, the instrument
at a fixed price usually not more than one week after its purchase. The Fund's
custodian has custody of, and holds in a segregated account, securities acquired
as collateral by a Fund under a repurchase agreement. Repurchase agreements are
considered by the staff of the Securities and Exchange Commission to be loans by
the Fund. The Funds may enter into repurchase agreements only with respect to
securities of the type in which such Fund may invest, including government
securities and mortgage-related securities, regardless of their remaining
maturities, and requires that additional securities be deposited with the
custodian if the value of the securities purchased should decrease below resale
price. Wells Fargo Bank monitors on an ongoing basis the value of the
collateral to assure that it always equals or exceeds the repurchase price.
Certain costs may be incurred by a Fund in connection with the sale of the
underlying securities if the seller does not repurchase them in accordance with
the repurchase agreement. In addition, if bankruptcy proceedings are commenced
with respect to the seller of the securities, disposition of the securities by a
Fund may be delayed or limited. While it does not presently appear possible to
eliminate all risks from these transactions (particularly the possibility of a
decline in the market value of the underlying securities, as well as delay and
costs to a Fund in connection with insolvency proceedings), it is the policy of
each Fund to limit repurchase agreements to selected creditworthy securities
dealers or domestic banks or other recognized
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financial institutions. Each Fund considers on an ongoing basis the
creditworthiness of the institutions with which it enters into repurchase
agreements.
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 the Fund sells
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 a Fund may decline below the price at which the Fund
is obligated to repurchase the securities. Reverse repurchase agreements are
considered to be borrowings under the 1940 Act.
Unrated Investments
-------------------
The Funds may purchase instruments that are not rated if, in the opinion of
Wells Fargo Bank, such obligations are of comparable quality to other rated
investments that are permitted to be purchased by such Fund. After purchase, a
security may cease to be rated or its rating may be reduced below the minimum
required for purchase by these 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 Fund's Prospectus and
in this SAI. The ratings of Moody's and S&P are more fully described in the SAI
Appendix.
U.S. Government Obligations
---------------------------
The Funds may invest in various types of U.S. Government obligations in
accordance with the policies described in each Fund's Prospectus. U.S.
Government obligations include securities issued or guaranteed as to principal
and interest by the U.S. Government and supported by the full faith and credit
of the U.S. Treasury. U.S. Treasury obligations differ mainly in the length of
their maturity. Treasury bills, the most frequently issued marketable
government securities, have a maturity of up to one year and are issued on a
discount basis. U.S. Government obligations also include securities issued or
guaranteed by federal agencies or instrumentalities, including government-
sponsored enterprises. Some obligations of such agencies or instrumentalities
of the U.S. Government are supported by the full faith and credit of the United
States or U.S. Treasury guarantees; others, by the right of the issuer or
guarantor to borrow from the U.S. Treasury; still others by the discretionary
authority of the U.S. Government to purchase certain obligations of the agency
or instrumentality; and others, only by the credit of the agency or
instrumentality issuing the obligation. In the case of obligations not backed
by the full faith and credit of the United States, the investor 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
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<PAGE>
would provide financial support to its agencies or instrumentalities (including
government-sponsored enterprises) where it is not obligated to do so. In
addition, U.S. Government obligations are subject to fluctuations in market
value due to fluctuations in market interest rates. As a general matter, the
value of debt instruments, including U.S. Government obligations, declines when
market interest rates increase and rises when market interest rates decrease.
Certain types of U.S. Government obligations are subject to fluctuations in
yield or value due to their structure or contract terms. The Funds may invest in
obligations issued or guaranteed by the U.S. Government, its agencies or
instrumentalities. Examples of the types of U.S. Government obligations that may
be held by the Funds include U.S. Treasury bonds, notes and bills and the
obligations of Federal Home Loan Banks, Federal Farm Credit Banks, Federal Land
Banks, the Federal Housing Administration, Farmers Home Administration, Export-
Import Bank of the United States, Small Business Administration, Government
National Mortgage Association, Federal National Mortgage Association, General
Services Administration, Student Loan Marketing Association, Central Bank for
Cooperatives, Federal Home Loan Mortgage Corporation, Federal Intermediate
Credit Banks and Maritime Administration.
Warrants
--------
Although they have no present intention to do so, the Funds may each invest
up to 5% of its net assets at the time of purchase in warrants (other than those
that have been acquired in units or attached to other securities), and not more
than 2% of its net assets in warrants which are not listed on the New York or
American Stock Exchange. Warrants represent rights to purchase securities at a
specific price valid for a specific period of time. The prices of warrants do
not necessarily correlate with the prices of the underlying securities. The
Funds may only purchase warrants on securities in which the Funds may invest
directly.
Nationally Recognized Statistical Ratings Organizations
-------------------------------------------------------
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 a Fund, an issue of debt
securities may cease to be rated or its rating may be reduced below the minimum
rating required for purchase by a Fund. The Advisor will consider such an event
in determining whether the Fund 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
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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 a Fund 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 a Fund may be subject to credit risk.
Credit risk is the risk that the issuers of securities in which the 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 each issuer. During periods of falling
interest rates, the value of fixed-income securities 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 is 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.
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 of the permissible investments described in this Prospectus, such as
floating- and variable-rate instruments, structured notes and certain U.S.
Government obligations, are considered derivatives. 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
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<PAGE>
contract terms. If a Fund's 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.
Illiquid securities, which may include certain restricted 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 a Fund.
Each Fund may invest 25% or more of its assets in municipal obligations that
are related in such a way that an economic, business or political development or
change affecting one such obligation would also affect the other obligations;
for example, a Fund may own different municipal obligations which pay interest
based on the revenues of similar types of projects. To the extent that such a
Fund's assets are concentrated in municipal obligations payable from revenues on
similar projects, the Fund will be subject to the peculiar risks presented by
such projects to a greater extent than it would be if the Fund's assets were not
so concentrated. Furthermore, for the Arizona Tax-Free, National Tax-Free and
Oregon Tax-Free Funds payment of municipal obligations of certain projects may
be secured by mortgages or deeds of trust. In the event of a default,
enforcement of the mortgages or deeds of trust will be subject to statutory
enforcement procedures and limitations, including rights of redemption and
limitations on obtaining deficiency judgments. In the event of a foreclosure,
collection of the proceeds of the foreclosure may be delayed and the amount of
proceeds from the foreclosure may not be sufficient to pay the principal of and
accrued interest on the defaulted municipal obligations.
Each state Fund is classified as non-diversified under the 1940 Act.
Investment return on a non-diversified portfolio typically is dependent upon the
performance of a smaller number of securities relative to the number held in a
diversified portfolio. Consequently, the change in value of any one security may
affect the overall value of a non-diversified portfolio more than it would a
diversified portfolio, and thereby subject the market-based net asset value per
share of the non-diversified portfolio to greater fluctuations. In addition, a
non-diversified portfolio may be more susceptible to economic, political and
regulatory developments than a diversified investment portfolio with a similar
objective may be.
The concentration of the state Funds in municipal obligations of particular
states raises additional considerations. Payment of the interest on and the
principal of these obligations is dependent upon the continuing ability of state
issuers and/or obligors of state, municipal and public authority debt
obligations to meet their obligations thereunder. Investors should consider the
greater risk inherent in a Fund's concentration in such obligations versus the
safety that comes with a less geographically concentrated investment portfolio
and should compare the yield available on a portfolio of state-specific issues
with the yield of a more diversified portfolio including issues of other states
before making an investment decision.
The state Funds have constitutional and/or statutory restrictions that
affect government revenues. Because of the nature of the various restrictions,
certain possible ambiguities and inconsistencies in their terms and the scope of
various exemptions and exceptions, as well as the impossibility of predicting
the level of future appropriations for state and local governmental entities, it
is not presently possible to determine the impact of these restrictions and
related
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<PAGE>
measures on the ability of governmental issuers in Oregon and Arizona to pay
interest or repay principal on their obligations. There have, however, been
certain adverse developments with respect to municipal obligations of
governmental issuers in these states over the past several years.
In addition to the risk of nonpayment of state and local governmental debt,
if such debt declines in quality and is downgraded by the NRSROs, it may become
ineligible for purchase by a Fund. Since there are a number of buyers of such
debt that may be similarly restricted, the supply of eligible securities could
become inadequate at certain times. Similarly, there is a relatively small
active market for Arizona Obligations, California Obligations and Oregon
Obligations and the market price of such bonds may therefore be volatile. If any
of the State Tax-Free Funds were forced to sell a large volume of Arizona
Obligations, California Obligations or Oregon Obligations for any reason, such
as to meet redemption requests for a large number of shares, there is a risk
that the large sale itself would adversely affect the value of such Fund's
portfolio.
There is, of course, no assurance that a Fund will achieve its investment
objective or be successful in preventing or minimizing the risk of loss that is
inherent in investing in particular types of investment products.
SPECIAL CONSIDERATIONS AFFECTING ARIZONA MUNICIPAL OBLIGATIONS
The concentration of the Arizona Tax-Free Fund in securities issued by
governmental units of only one state exposes the Fund to risks greater than
those of a more diversified portfolio holding securities issued by governmental
units of different states and different regions of the country.
Under its constitution, the State of Arizona is not permitted to issue
general obligation bonds secured by the full faith and credit of the State.
However, certain agencies and instrumentalities of the State are authorized to
issue bonds secured by revenues from specific projects and activities. The State
enters into certain lease transactions that are subject to annual renewal at the
option of the State. Local governmental units in the State are also authorized
to incur indebtedness. The major source of financing for such local government
indebtedness is an ad valorem property tax. In addition, in order to finance
public projects, local governments in the State can issue revenue bonds payable
from the revenues of a utility or enterprise or from the proceeds of an excise
tax, or assessment bonds payable from special assessments. Arizona local
governments have also financed public projects through leases which are subject
to annual appropriation at the option of the local government.
There is a statutory restriction on the amount of annual increases in taxes
that can be levied by the various taxing jurisdictions in the State without
voter approval. This restriction does not apply to taxes levied to pay general
obligation debt.
There are periodic attempts in the form of voter initiatives and legislative
proposals to further limit the amount of annual increases in taxes that can be
levied by the various taxing jurisdictions without voter approval, or to
restructure the State's revenue mix among sales, income, property and other
taxes. It is possible that if any such proposals were enacted, there would be
an adverse impact on State or local government financing. It is not possible to
predict whether any
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<PAGE>
such proposals will be enacted in the future or what would be their possible
impact on state or local government financing.
Arizona is required by law to maintain a balanced budget. To achieve this
objective, the State has, at various times in the past, utilized a combination
of spending reductions or reductions in the rate of growth in spending, and tax
increases. In recent years, the State's fiscal situation has improved even
while tax reduction measures have been enacted each year since 1992. In 1992,
Arizona voters passed a measure that requires a two-thirds vote of the
legislature to increase state revenue. Accordingly, it will be more difficult to
reverse tax reductions, which may adversely affect state fund balances and
fiscal conditions over time.
Arizona state government general fund revenue growth in fiscal year 1997 is
forecast to increase by 7.8% over fiscal year 1996. The 4.9% adjusted projected
increase in sales tax revenue, adjusted for reductions resulting from
legislative changes, reflects continued strong economic growth in the state.
With revenue growth outpacing increased expenditures, the state general fund is
projected to end fiscal year 1997 with a total general fund balance of
approximately $756 million. The amount of this balance is approximately 15.4%
of total general fund expenditures for fiscal year 1997. Included in the total
balance is a general fund ending balance of approximately $509 million, and a
budget stabilization ("rainy day") fund balance of approximately $247 million.
The total general fund balance at the end of fiscal year 1998 is projected to be
approximately $779 million.
Additionally, the 1997 legislature enacted a $110 million income tax
reduction package, in addition to a $200 million property tax reduction package
enacted in 1996, and an income tax reduction of $200 million enacted in 1995.
There may be additional legislative activity during 1998 in the area of tax
reform and school finance, and the 1998 general election ballot may include one
or more questions related to these issues and the State's tax structure
generally. The outcomes of any legislative actions or election issues of this
nature may adversely affect State fund balances and fiscal conditions.
Arizona has a diversified economic base that is not dependent on any single
industry. Principal economic sectors include services, manufacturing, mining,
tourism, and the military. Agriculture, which was at one time a major sector,
now plays a much smaller role in the State's economy. For several decades, the
population of the State has grown at a substantially higher rate than the
population of the United States. While the State's economy flourished during the
early 80's, a substantial amount of overbuilding occurred, adversely affecting
Arizona-based financial institutions, many of which were placed under the
control of the Resolution Trust Corporation. Spillover effects produced further
weakening in the State's economy. The Arizona economy has begun to grow again,
albeit at a slower pace than experienced before the real estate collapse. The
North American Free Trade Agreement is generally viewed as beneficial to the
State. However, current and proposed reductions in federal military
expenditures may adversely affect the Arizona economy.
25
<PAGE>
SPECIAL CONSIDERATIONS AFFECTING CALIFORNIA MUNICIPAL OBLIGATIONS
The concentration of the California Tax-Free Bond and California Tax-Free
Income Funds in securities issued by governmental units of only one state
exposes the Funds to risks greater than those of a more diversified portfolio
holding securities issued by governmental units of different states and
different regions of the country.
Certain California constitutional amendments, legislative measures,
executive orders, civil actions and voter initiatives, as well as the general
financial condition of the state, could adversely affect the ability of issuers
of California municipal obligations to pay interest and principal on such
obligations. The following information constitutes only a brief summary, does
not purport to be a complete description, and is based on information drawn from
official statements relating to securities offerings of the State of California
and various local agencies, available as of the date of this SAI. While the
Company has not independently verified such information, it has no reason to
believe that such information is incorrect in any material respect.
The California Economy and General Information. From mid-1990 to late
----------------------------------------------
1993, the state suffered a recession with the worst economic, fiscal and budget
conditions since the 1930s. Construction, manufacturing (particularly that
related to defense), exports and financial services, among others, were all
severely affected. Job losses had been the worst of any post-war recession.
Unemployment reached 10.1% in January 1994, but fell sharply to 7.7% in October
and November 1994, reflecting the state's recovery from the recession.
The recession seriously affected California tax revenues, which basically
mirror economic conditions. It also caused increased expenditures for health
and welfare programs. In addition, the state has been facing a structural
imbalance in its budget with the largest programs supported by the General Fund
(e.g., K-12 schools and community colleges-also known as "K-14 schools," health
and welfare, and corrections) growing at rates higher than the growth rates for
the principal revenue sources of the General Fund. As a result, the state
experienced recurring budget deficits in the late 1980s and early 1990s. The
state's Controller reported that expenditures exceeded revenues for four of the
five fiscal years ending with 1991-92. Moreover, California accumulated and
sustained a budget deficit in its Special Fund for Economic Uncertainties
("SFEU") approaching $2.8 billion at its peak on June 30, 1993.
The accumulated budget deficits during the early 1990's, together with
expenditures for school funding which are not reflected in the state's budget,
and reduction of available internal borrowable funds, combined to significantly
deplete the state's cash resources to pay its ongoing expenses. In order to
meet its cash needs, the state has had to rely for several years on a series of
external borrowings, including borrowings past the end of a fiscal year. Such
borrowings are expected to continue in future fiscal years. To meet its cash
flow needs in the 1995-96 fiscal year, California issued $2 billion of revenue
anticipation warrants which matured on June 28, 1996. Because of the state's
deteriorating budget and cash situation, the rating agencies reduced the state's
credit ratings between October 1991 and July 1994. Moody's Investors Service
lowered its rating from "Aaa" to "A1," Standard & Poor's Ratings Group lowered
its rating from
26
<PAGE>
"AAA" to "A" and termed its outlook as "stable," and Fitch Investors Service
lowered its rating from "AAA" to "A."
However, since the start of 1994, California's economy has been recovering
steadily. Employment has grown in excess of 500,000 during 1994 and 1995, and
400,000 additional jobs were created between the fourth quarter of 1996 and the
fourth quarter of 1997. Some analysts project this trend to continue through
the rest of the decade. Because of the improving economy and California's
fiscal austerity, the state has had operating surpluses for its past five
consecutive fiscal years through 1996-97. In addition, the SFEU is projected to
have a positive balance of approximately $553 million as of June 30, 1998.
Also, Standard & Poors upgraded its rating of California municipal obligations
back to "A+" on July 30, 1996.
Local Governments. On December 6, 1994, Orange County, California, became
-----------------
the largest municipality in the United States to file for protection under the
Federal Bankruptcy laws. The filing stemmed from approximately $1.7 billion in
losses suffered by the county's investment pool because of investments in high
risk "derivative" securities. In September 1995, California's legislature
approved legislation permitting the county to use for bankruptcy recovery $820
million over 20 years in sales taxes previously earmarked for highways, transit,
and development. In June 1996, the county completed an $880 million bond
offering secured by real property owned by the county. In June 1996, the county
emerged from bankruptcy. As of October 31, 1997, the county's investment rating
by Standard & Poors was "B".
On January 17, 1994, an earthquake of the magnitude of an estimated 6.8 on
the Richter Scale struck Los Angeles County, California, causing significant
damage to public and private structures and facilities. While county residents
and businesses suffered losses totaling in the billions of dollars, the overall
effect of the earthquake on the county's and California's economy is not
expected to be serious. However, Los Angeles County is experiencing financial
difficulty due in part to the severe operating deficits for the county's health
care system. In August 1995, the credit rating of the county's long-term bonds
was downgraded for the third time since 1992. Although the county has received
federal and state assistance, it is still facing a potential budget gap of
approximately $460 million in the 1997-98 fiscal year.
Even though the state has no existing obligations with respect to either
Orange County or Los Angeles County, the state may be required to intervene and
provide funding if the counties cannot maintain certain programs because of
insufficient resources.
State Finances. California tax revenues and other income are segregated
--------------
into the General Fund and approximately 600 Special Funds. The General Fund
consists of the revenues received by the state's Treasury and not required by
law to be credited to any other fund, as well as earnings from state moneys not
allocable to another fund. The General Fund is the principal operating fund for
the majority of governmental activities and is the depository of most major
revenue sources of the state. The General Fund may be expended as the result of
appropriation measures by California's Legislature approved by the Governor, as
well as appropriations pursuant to various constitutional authorizations and
initiative statutes.
27
<PAGE>
The SFEU is funded with General Fund revenues and was established to
protect California from unforeseen revenue reductions and/or unanticipated
expenditure increases. Amounts in the SFEU may be transferred by the state's
Controller to meet cash needs of the General Fund. The Controller is required
to return moneys so transferred without payment of interest as soon as there are
sufficient moneys in the General Fund. Any appropriation made from the SFEU is
deemed, for budgeting and accounting purposes, an appropriation from the General
Fund. For year-end reporting purposes, the Controller is required to add the
balance in the SFEU to the balance in the General Fund to show the total moneys
then available for General Fund purposes.
Inter-fund borrowing has been used for several years to meet temporary
imbalances of receipts and disbursements in the General Fund. As of June 30,
1996, the General Fund had outstanding loans from the SFEU and other Special
Funds of approximately $1.5 billion.
Changes in California Constitutional and Other Laws. In 1978, California
---------------------------------------------------
voters approved an amendment to the California Constitution known as
"Proposition 13," which added Article XIIIA to the California Constitution.
Article XIIIA limits ad valorem taxes on real property and restricts the ability
of taxing authorities to increase real property taxes. However, legislation
passed subsequent to Proposition 13 provided for the redistribution of
California's General Fund surplus to local agencies, the reallocation of
revenues to local agencies and the assumption of certain local obligations by
the state to assist California municipal issuers to raise revenue to pay their
bond obligations. It is unknown whether additional revenue redistribution
legislation will be enacted in the future and whether, if enacted, such
legislation will provide sufficient revenue for such California issuers to pay
their obligations. California is also subject to another Constitutional
Amendment, Article XIIIB, which may have an adverse impact on California state
and municipal issuers. Article XIIIB restricts the state from spending certain
appropriations in excess of an appropriation's limit imposed for each state and
local government entity. If revenues exceed such appropriation's limit, such
revenues must be returned either as revisions in the tax rates or fee schedules.
In 1988, California voters approved "Proposition 98," which amended Article
XIIIB and Article XVI of the state's Constitution. Proposition 98 (as modified
by "Proposition 111," which was enacted in 1990), changed state funding of
public education below the university level and the operation of the state's
appropriations limit, primarily by guaranteeing K-14 schools a minimum share of
General Fund revenues. In 1986, California voters approved "Proposition 62,"
which requires in part that any tax for general governmental purposes imposed by
a local government be approved by a two-thirds vote of the governmental entity's
legislative body and by a majority of its electorate, and that any special tax
imposed by a local government be approved by a two-thirds vote of the
electorate. In September 1995, the California Supreme Court upheld the
constitutionality of Proposition 62, creating uncertainty as to the legality of
certain local taxes enacted by nonchartered cities in California without voter
approval. In 1996, California voters approved "Proposition 218," which added
Articles XIIIC and XIIID to the state's Constitution. Proposition 218 generally
requires voter approval of most tax or fee increases by local governments and
curtails local government use of benefit assessments to fund certain property-
related services to finance infrastructure. Proposition 218 also limits the use
of
28
<PAGE>
special assessments or "property-related" fees to services or infrastructure
that confer a "special benefit" to specific property; police, fire and other
services are now deemed to benefit the public at large and, therefore, could not
be funded by special assessments. Finally, the amendments enable the voters to
use their initiative power to repeal previously-authorized taxes, assessments,
fees and charges. It remains to be seen what impact these Articles will have on
the ability of obligors to make payments on existing and future California
security obligations.
Other Information. Certain debt obligations held by the Funds may be
-----------------
obligations payable solely from lease payments on real or personal property
leased to the state, cities, counties or their various public entities.
California law provides that a lessor may not be required to make payments
during any period that it is denied use and occupancy of the property in
proportion to such loss. Moreover, the lessor only agrees to appropriate
funding for lease payments in its annual budget for each fiscal year. In case
of a default under the lease, the only remedy available against the lessor is
that of reletting the property; no acceleration of lease payments is permitted.
Each of these factors presents a risk that the lease financing obligations held
by a Fund would not be paid in a timely manner.
Certain debt obligations held by the Funds may be obligations payable
solely from the revenues of health care institutions. The method of
reimbursement for indigent care, California's selective contracting with health
care providers for such care and selective contracting by health insurers for
care of its beneficiaries now in effect under California and federal law may
adversely affect these revenues and, consequently, payment on those debt
obligations.
There can be no assurance that general economic difficulties or the
financial circumstances of California or its towns and cities or its trading
partners in Asia, where California exports nearly half of $105 billion in total
exports, will not adversely affect the market value of California municipal
securities or the ability of obligors to continue to make payments on such
securities.
* * *
The taxable securities market is a broader and more liquid market with a
greater number of investors, issuers and market makers than the market for
municipal securities. The more limited marketability of municipal securities
may make it difficult in certain circumstances to dispose of large investments
advantageously.
SPECIAL CONSIDERATIONS AFFECTING OREGON MUNICIPAL OBLIGATIONS
The concentration of the Oregon Tax-Free Fund in securities issued by
governmental units of only one state exposes the Fund to risks greater than
those of a more diversified portfolio holding securities issued by governmental
units of different states and different regions of the country.
State Bonds and Revenues. As of September 1, 1997, $3.27 billion (rounded)
------------------------
in general obligation bonds issued by the State of Oregon and its agencies were
outstanding, including $122.2 million (rounded) in general obligation bonds
supported by the budget for the State's general fund
29
<PAGE>
and $3.14 billion (rounded) of self-supporting general obligation bonds. The
State's self-supporting general obligation bonds include $2.39 billion (rounded)
of State veteran's bonds, which, in the event of poor economic conditions
resulting in an increased number of mortgage defaults, could cease to be self-
supporting. All of the existing and outstanding general obligation bonds of the
State have been issued under specific State constitutional provisions that
authorize the issuance of such bonds and provide authority for ad valorem
taxation to pay the principal of and interest on such bonds. With the exception
of the veteran's bonds, for which no more than two mills on each dollar
valuation may be levied to pay principal and interest, the authority of the
State to tax property for the payment of its general obligation bonds is
unlimited. Since at least 1950, the State has not imposed ad valorem tax for the
payment of any of its obligations because other revenues, including those
generated by the self-supporting bonds, have been sufficient.
In addition to general obligation bonds, various State statutes authorize
the issuance of State revenue bonds and certificates of participation. These
limited obligations of the State or its agencies or instrumentalities may be
payable from a specific project or source, including lease rentals. The State is
not authorized to impose ad valorem taxes on property for the payment of
principal and interest on these bonds, so they are more sensitive to changes in
the economy. There can be no assurance that future economic problems will not
adversely affect the market value of Oregon obligations held by the Fund or the
ability of the respective obligors (both private and governmental) to make
required payments on such obligations.
Oregon does not have a sales tax. As a result, State tax revenues are
particularly sensitive to economic recessions. The principal sources of State
tax revenues are personal income and corporate income taxes. In the
legislatively adopted budget for the 1997-99 biennium, approximately 97.0% of
the State's revenues for the 1997-99 biennium were projected to come from
combined income taxes, insurance taxes, gift and inheritance taxes, and
cigarette and tobacco taxes. Since 1983 State revenues have improved
substantially, and in recent years the State has granted tax refunds because of
budget surpluses, as required by statute. The State's September 1, 1997 economic
and revenue forecast predicts that State General Fund revenues for the 1997-99
biennium will exceed the legislatively approved budget forecast by approximately
$218.5 million (or 2.7%).
The Economy. The following is a summary of a portion of the September 1,
-----------
1997 quarterly Economic and Revenue Forecast prepared by the State as required
by ORS 291.342.
With the exception of California, the western states' economies have
performed very well throughout the 1990's. Nevada, Utah, Arizona, Idaho and
Oregon have consistently been among the fastest growing states in the country.
Over the past year, Washington and California have begun to grow much more
rapidly. Both states are now among the top ten in job growth in the nation,
joining Nevada, Arizona, Utah and Oregon.
Oregon's job growth has moderated in recent quarters but the level of
economic activity in the state remains vigorous. The State's manufacturing
industries are growing at an extremely rapid pace but the much larger service-
producing sectors have softened over the past two quarters. Large gains in
manufacturing earnings are pushing up to overall wages and personal income in
the State.
30
<PAGE>
A cooling off of the manufacturing and construction sectors should keep
Oregon's growth rate trending down. However, income gains already generated in
the State's booming manufacturing industries can be expected to translate into
increased job growth in the service-producing sectors during the second half of
the year. Oregon appears in good position to continue expanding faster than the
overall U.S. economy, although its rate of growth is expected to fall below
Washington and remain below Nevada and Utah.
Oregon's personal income growth is projected to rise 7.3 percent for 1997,
up slightly from 7.0 percent in 1996. Income growth is expected to slow to 6.1
percent in 1998 and 5.4 percent in 1999. Adjusting for inflation, personal
income is expected to rise 5.0 percent in 1997, 3.5 percent in 1998, and 2.6
percent in 1999. The nonfarm payroll employment growth rate is also expected to
trend down modestly. Following a 4.0 percent increase in 1996, employment is
projected to rise 3.6 percent in 1997 before slowing further to 2.7 percent in
1998 and 2.0 percent in 1999. Job growth is expected to exceed population
increases keeping Oregon's labor markets relatively tight. Population is
projected to increase 1.7 percent in 1997 and 1.6 percent in both 1998 and 1999.
Oregon's wage growth is expected to accelerate in 1997 for the fourth
consecutive year. Overall wages in all sectors are expected to rise 5.2 percent
in 1997, up from 4.5 percent in 1996 and 4.2 percent in 1995. During this
period, Oregon's wages have grown considerably faster than the national average.
In 1992, Oregon's average wages were $24,439, 88.9 percent of the U.S. average.
Overall average wages are projected to be $29,597 in 1997, 93.6 percent of the
national average.
Oregon is likely to remain a high-growth state over the next six years
though some convergence to the U.S. average is probable. The State and the
western region should continue to benefit from an expanding high technology
sector, growth in exports to Asia and Latin America, net in-migration from other
parts of the country, and immigration into the U.S.
Recent Environmental Developments. In 1991 and 1992, in response to
---------------------------------
concerns over diminishing salmon runs, three populations of Snake River salmon
were placed on the Endangered Species list. More recently, the National Marine
Fisheries Service and the U.S. Fish and Wildlife Service have commenced status
reviews of hundreds of additional salmon and trout populations in the Columbia
Basin and throughout Western Oregon. The Snake River salmon listings have
already had substantial economic impacts, primarily through increased
electricity rates and related impacts on rate-sensitive industries such as the
aluminum industry. Efforts to protect salmon and steelhead populations may
eventually affect a wide variety of industrial, recreational and land use
activities, with corresponding impacts on long-term economic growth; however,
the magnitude and extent of any future environmental action is impossible to
predict at this time. The State's economic forecasts do not address the
potential impact of endangered species problems on Oregon's economy.
Recent Developments Affecting Government Revenues. Ballot Measure 5.
-------------------------------------------------
Article XI, section 11b of the Oregon Constitution, adopted by Oregon's voters
in November 1990 ("Ballot Measure 5"), imposes an aggregate limit on the rate of
property taxes, including ad valorem taxes, that may be levied against any real
or personal property. The limit is subject to certain exceptions and is being
phased in over a five-year period. Beginning with the tax year that starts on
July 1,
31
<PAGE>
1996, the final year of the phase-in period, not more than $15 per $1,000 of
real market value can be levied against any piece of property. Of this amount,
$5 may be used for public education, and the remaining $10 may be used for
general governmental purposes.
The limitations of Ballot Measure 5 do not apply to taxes imposed to pay
the principal of and interest on bonded indebtedness authorized by a specific
provision of the State Constitution. Therefore, the ability of the State to levy
taxes to service its constitutionally authorized general obligation bonds is not
subject to the limit. In addition, because the State currently receives its
revenues from sources other than property taxes, Ballot Measure 5 has not
directly affected State revenues.
The tax limitations of Ballot Measure 5 do not apply to user fees,
licenses, excise or income taxes and incurred charges for local improvements.
Since 1990 local governments have begun to rely more heavily on such fees and
taxes to finance certain services and improvements.
Ballot Measure 5 has controlled the growth of local property tax revenues
since its adoption. Although the growth in local property valuations during the
period 1991 to 1997 has somewhat mitigated the potential impacts of Ballot
Measure 5, revenues of local government units in Oregon have generally been
adversely affected by the adoption of Ballot Measure 5. This appears to be
particularly true with respect to school district operating revenues.
Ballot Measure 5 required the State to replace a substantial portion of the
lost revenues of local school districts through the end of fiscal year 1995-96.
Although this obligation has now expired, the extent of revenue loss perceived
to have been incurred by local school districts indicates that the State may
continue to provide significant revenue relief to these governmental units. In
addition, the provisions of the initiative known as Ballot Measure 50, as
defined and discussed below, is expected to also result in the State making
further financial assistance available to certain units of local government as a
result of further restrictions and limitations placed upon the ability of units
of local government to generate revenues through Oregon's system of ad valorem
property taxation.
Ballot Measure 50. The 1997 Legislative Assembly referred to Oregon
-----------------
voters, and the voters approved at the May 20, 1997, special election, a
constitutional amendment ("Measure 50") that replaced the property tax
limitations imposed by a voter initiative approved at the November 5, 1996,
general election ("Measure 47"). Measure 50 repealed Measure 47 and replaced it
with new ad valorem property tax limitations similar to those which would have
been required to be enacted under Measure 47. Measure 50 limits the assessed
value for the tax year 1997-98 to its 1995-96 "real market value," less ten
percent. In implementing Measure 50, the Oregon Legislature also ordered a 17%
reduction in 1997-98 in operating tax levies (which amounts vary by government
entity). Thereafter, Measure 50 limits the valuation growth of property
assessments on each unit of property to three percent per year for future tax
years. Measure 50 preserves the general limitations on property tax rates of $5
per $1,000 for public education and $10 per $1,000 for all other governmental
services. Measure 50 also requires that any new property taxes be approved by a
majority of the voters in an election where at least 50% of eligible voters
participate, except in the instance of a general election in even numbered
years. In addition, Measure 50 requires voter
32
<PAGE>
approval of the use of fees, taxes, assessments or other charges as alternative
funding sources to make up for revenue reductions caused by the amended property
tax limits.
Units of local government that levy and collect property taxes are most
directly affected by Measure 50. The State does not levy or collect property
taxes, but relies instead on state income taxes as the main source of revenue
for the State's general fund. Therefore, Measure 50's main impact on the State
will likely be to increase pressure on the Legislative Assembly to use State
funds to replace revenues lost by local governments. Measure 50 requires the
Legislative Assembly to replace the estimated $428 million in revenues that the
public school system, including community colleges, is expected to lose in the
1997-99 biennium because of the property tax limitation. In this manner,
Measure 50 may influence the State budgeting process.
The Oregon Legislative Revenue Office has estimated that the total
reduction in property tax revenues collected by local governments under Measure
50 will be approximately $389 million for the tax year 1997-98 and approximately
$454 million for the tax year 1998-99. The first year of implementation is
presently underway with the initial local property tax bills subject to Measure
50 being distributed in late November 1997. Until local governments and county
tax assessors and collectors have significantly more practical experience with
implementing and administering the property tax system under the guidelines and
limitations of Measure 50 and its implementing legislation, the actual short
term and long term financial effects of Measure 50 on local governments will be
uncertain.
One lawsuit has been filed challenging the process by which Measure 50 was
referred from the legislature to the people for a vote as unconstitutional. The
lawsuit was voluntarily dismissed, but the plaintiff is expected to refile an
amended complaint. In addition, the Legislative Assembly has referred a
constitutional amendment to Oregon voters for the May 1998 ballot which, if
approved, would repeal Measure 50's requirement that new property taxes must be
approved either in an election where at least 50% of eligible voters have
participated or in a general election in an even numbered year.
The Initiative Process. The Oregon Constitution reserves to the people of
----------------------
the State initiative and referendum power pursuant to which measures designed to
amend the State Constitution or enact legislation, can be placed on the
statewide general election ballot for consideration by the voters. "Referendum"
generally means measures referred to the electors by a legislative body such as
the State Legislative Assembly or the governing body of a city, county or other
political subdivision, while "initiative" generally means a measure placed
before the voters as a result of a petition circulated by one or more private
citizens.
Any person may file a proposed initiative with the Oregon Secretary of
State's office. The Oregon Attorney General is required by law to draft a
proposed ballot title for the initiative, and interested parties may submit
comments on the legal sufficiency of the proposed ballot title and on whether
the proposed initiative complies with a "one subject only" rule for initiative
measures. After considering any public comments, the Attorney General must
either certify or revise the draft ballot title. In general, any elector who
timely submitted written comments on the draft ballot title may petition the
Oregon Supreme Court seeking a revision of the certified ballot title.
33
<PAGE>
To have an initiative placed on a general election ballot, the proponents
of the proposed initiative must submit to the Secretary of State initiative
petitions signed by the number of qualified voters equal to a specified
percentage of the total number of votes cast for all candidates for governor in
the most recent gubernatorial election. The initiative petition must be filed
with the Secretary of State not less than four months prior to the general
election at which the proposed measure is to be voted upon. State law permits
persons circulating initiative petition to pay money to persons obtaining
signatures for the petition.
Over the past decade Oregon has witnessed increasing activity in the number
of initiative petitions that have qualified for the statewide general election.
As of December 1, 1997, no initiatives had qualified to be placed on the
November 1998 general election ballot; however, a number of potential
initiatives are in some stage of the process towards attempting to qualify to be
placed on the November 1998 ballot. In recent years, a number of initiatives
involving the fiscal operations of the State were proposed and placed on the
ballot. Several of these initiatives have been approved by the voters and have
had or will have a significant impact on the fiscal operations of the State and
local governments. See "Recent Developments Affecting Government Revenues -
Ballot Measure 5 and Measure 50." Other initiatives, had they been approved by
the voters, also may have had significant impacts on the fiscal operations of
the State.
It is difficult to predict with certainty either the likelihood of a
proposed initiative measure obtaining the required number of valid initiative
petition signatures or the likelihood of an initiative that has acquired the
necessary number of valid signatures being approved by the voters. There can be
no assurance that additional initiatives that will have a material adverse
impact on the financial condition of the State or units of local government or
the State's or units of local government's ability to collect the revenues
required to repay their general obligation bonds, revenue bonds or other
obligations will not be proposed, placed on the ballot, or be approved by the
voters.
Judicial challenges seeking interpretations and clarifications of the scope
and application of Ballot Measure 5 continue to be filed. It is anticipated
that the passage of Measure 50 will also require substantial judicial
interpretation of its meaning and application. If it is judicially determined
that certain statutes adopted by the Oregon legislature to implement Ballot
Measure 5 or statutes adopted relating to Measure 50 do not adequately implement
the restrictions contained in that measure, local governments may have to seek
new funding sources for certain items which have been traditionally financed in
part through the issuance of voter approved ad valorem tax supported
indebtedness.
The Oregon Bond Market. There is a relatively small active market for
----------------------
municipal bonds of Oregon issuers other than the general obligations of the
State itself, and the market price of such other bonds may therefore be
volatile. If the Oregon Tax-Free Fund were forced to sell a large volume of
Oregon Obligations owned by it for any reason, such as to meet redemption
requests for a large number of its shares, there is a risk that the large sale
itself would adversely affect the value of the Oregon Tax-Free Fund's portfolio.
34
<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 Inc.;
President 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 Geyser
55 Francisco Street 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, NY 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>
35
<PAGE>
<TABLE>
<S> <C> <C>
Richard H. Blank, Jr., 41 Chief Operating Vice President of Stephens Inc.; Director of
Officer, Stephens Sports Management Inc.; and Director
Secretary and of Capo Inc.
Treasurer
</TABLE>
Compensation Table
Year Ended March 31, 1997
-------------------------
<TABLE>
<CAPTION>
Total Compensation
Aggregate Compensation from Registrant
Name and Position from Registrant and Fund Complex
- ----------------- ---------------------- -------------------
<S> <C> <C>
Jack S. Euphrat $11,250 $33,750
Director
R. Greg Feltus $ 0 $ 0
Director
Thomas S. Goho $11,250 $33,750
Director
Joseph N. Hankin $ 8,750 $26,250
Director
W. Rodney Hughes $ 9,250 $27,750
Director
Robert M. Joses $11,250 $33,750
Director
J. Tucker Morse $ 9,250 $27,750
Director
</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 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
36
<PAGE>
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 each Fund. 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 rates indicated below of each Fund's average
daily net assets:
<TABLE>
<CAPTION>
Annual Rate
Fund (as percentage of net assets)
---- ----------------------------
<S> <C>
Arizona Tax-Free 0.50%
California Tax-Free Bond 0.50%
California Tax-Free Income 0.50%
National Tax-Free 0.50%
Oregon Tax-Free 0.50%
Short-Term Municipal Income 0.50%
</TABLE>
For the period indicated below, the Funds paid to Wells Fargo Bank the
following advisory fees and Wells Fargo Bank waived the indicated amounts:
37
<PAGE>
<TABLE>
<CAPTION>
Six-Month
Period Ended
3/31/97
-----------
Fund Fees Paid Fees Waived
---- --------- -----------
<S> <C> <C>
Arizona Tax-Free $ 0 $ 52,838
California Tax-Free Bond/*/ $1,276,667 $ 0
California Tax-Free Income $ 67,449 $144,315
National Tax-Free $ 0 $ 30,284
Oregon Tax-Free $ 0 $102,775
Short-Term Municipal Income/*/ $ 0 $104,623
</TABLE>
- ---------------
/*/ Indicates fees paid by, or on behalf of, the Overland predecessor portfolio
for the year ended December 31, 1996, the predecessor portfolio's most
recently completed fiscal year.
Arizona Tax-Free, National Tax-Free and Oregon Tax-Free Funds. The
-------------------------------------------------------------
Pacifica Arizona Tax-Exempt, National Tax-Exempt and Oregon Tax-Exempt Funds
were reorganized as the Company's Arizona Tax-Free, National Tax-Free and Oregon
Tax-Free Funds on September 6, 1996. Prior to September 6, 1996, Wells Fargo
Investment Management, Inc. ("WFIM") and its predecessor, First Interstate
Capital Management, Inc. ("FICM") served as Advisor to the Pacifica Arizona Tax-
Exempt, National Tax-Exempt and Oregon Tax-Exempt Funds. As of September 6,
1996, Wells Fargo Bank became the Advisor to the Company's Arizona Tax-Free,
National Tax-Free and Oregon Tax-Free Funds.
For the period begun April 1, 1996 and ended September 5, 1996, the
Pacifica predecessor portfolios paid to WFIM, and for the period begun September
6, 1996 and ended September 30, 1996, the Funds paid to Wells Fargo Bank the
advisory fees indicated below and the indicated amounts were waived:
<TABLE>
<CAPTION>
Year Ended
9/30/96
--------
Fund Fees Paid Fees Waived
---- ---------- -----------
<S> <C> <C>
Arizona Tax-Free $ 22,457 $98,300
National Tax-Free $ 0 $67,463
Oregon Tax-Free $173,249 $57,377
</TABLE>
Prior to October 1, 1995, First Interstate Bank of Oregon, N.A. and First
Interstate Bank of Washington, N.A. served as co-Advisors to the predecessor
portfolio of the National Tax-Free Fund; First Interstate Bank of Oregon, N.A.
served as Advisor to the predecessor portfolio of the Oregon Tax-Free Fund; and
First Interstate Bank of Arizona, N.A. served as Advisor to the predecessor
portfolio of the Arizona Tax-Free Fund.
38
<PAGE>
For the periods indicated below, the prior Advisors were entitled to
receive the following amounts in advisory fees and waived reimbursed fees in the
indicated amounts. In 1995, the Funds changed their fiscal year from May 31 to
September 30.
<TABLE>
<CAPTION>
Four-Month
Period Ended Year Ended Year Ended
9/30/95 5/31/95 5/31/94
------------ ---------- ----------
Fees Fees Fees Fees Fees Fees
Fund Paid Waived Paid Waived Paid Waived
---- ---- ------ ----- ------ ---- ------
<S> <C> <C> <C> <C> <C> <C>
Arizona Tax-Free $41,159 $66,373 $124,904 $166,803 $128,905 $172,383
National Tax-Free $24,173 $68,667 $ 67,845 $145,244 $ 57,059 $141,590
Oregon Tax-Free $84,999 $43,995 $256,430 $ 84,770 $269,574 $104,948
</TABLE>
California Tax-Free Bond and California Tax-Free Income Funds. For the
-------------------------------------------------------------
periods indicated below, the California Funds paid to Wells Fargo Bank the
following advisory fees and Wells Fargo Bank waived the indicated amounts:
<TABLE>
<CAPTION>
Nine-Month
Period Ended Year Ended Year Ended
9/30/96 12/31/95 12/31/94
---------- ---------- --------
Fees Fees Fees Fees Fees Fees
Fund Paid Waived Paid Waived Paid Waived
---- ---- ------- ---- ------ ---- ------
<S> <C> <C> <C> <C> <C> <C>
California Tax-Free Bond* $1,276,667 $ 0 $1,165,967 $248,047 $896,680 $748,655
California Tax-Free Income $ 281,991 $18,321 $ 236,632 $ 31,013 $ 0 $279,496
</TABLE>
____________________
/*/ Indicates fees paid by the Overland predecessor portfolio. For 1996, the
amount shown is for the year ended December 31, 1996, the predecessor
portfolio's most recently completed fiscal year, and not/ the nine-month
period ended September 30, 1996.
Short-Term Municipal Income Fund. Prior to the Consolidation, the Overland
--------------------------------
Short-Term Municipal Income Fund invested all of its assets into a corresponding
Master Portfolio of MIT and did not retain an investment Advisor. Wells Fargo
Bank served as investment Advisor to the Master Portfolio which had the same
investment objective as the Fund and in which the predecessor portfolio invested
and was entitled to receive a monthly fee at the annual rate of 0.50% of the
predecessor portfolio's average daily net assets. The Short-Term Municipal
Income Master Portfolio commenced operations on June 3, 1994.
For the periods indicated below, the Master Portfolio paid to Wells Fargo
Bank the following advisory fees and Wells Fargo Bank waived the indicated
amounts:
<TABLE>
<CAPTION>
Six-Month
Year Ended Year Ended Period Ended
12/31/96 12/31/95 12/31/94
---------- ---------- ------------
Fees Fees Fees Fees Fees Fees
Paid Waived Paid Waived Paid Waived
---- ------ ---- ------ ---- ------
<S> <C> <C> <C> <C> <C>
$0 $104,623 $0 $62,512 $0 $7,879
</TABLE>
39
<PAGE>
General. Each Fund's 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 respective Fund's outstanding
voting securities or by the Company's Board of Directors and (ii) by a majority
of the Directors of the Company who are not parties to the Advisory Contract or
"interested persons" (as defined in the 1940 Act) of any such party. A Fund's
Advisory Contract may be terminated on 60 days' written notice by either party
and will terminate automatically if assigned.
PORTFOLIO MANAGERS. Mr. Stephen Galiani assumed sole responsibility for
------------------
the day-to-day portfolio management of the National Tax-Free Fund in July 1997.
Mr. Galiani is also responsible as co-manager of the Arizona Tax-Free and Oregon
Tax-Free Funds. Mr. Galiani joined Wells Capital Management in June of 1977 as
the Senior Portfolio Manager in charge of the municipal bond group. He came to
WCM from Qualivest Capital Management in Portland, Oregon, where he was the
Director of Fixed Income for two years. Prior to that, he served as President
and portfolio manager of his own investment advisory firm from 1990 to 1995.
Earlier affiliations included Keystone Custodian Funds, where he managed the
municipal bond team, and Eaton Vance Corporation. Mr. Galiani began his
investment career in 1975 after earning an M.B.A. from Boston University. He
holds a B.A. from Manhattan College.
Ms. Laura Milner assumed sole responsibility for the day-to-day management
of the California Tax-Free Income Fund on June 1, 1995. Ms. Milner had been a
co-manager of the California Tax-Free Income Fund since November 1992. Ms.
Milner is also co-manager of the California Tax-Free Bond Fund and the Short-
Term Municipal Income Fund. Ms. Milner's current position with Wells Fargo Bank
is Senior Tax-Exempt Specialist/Portfolio Manager. Her background includes over
seven years experience specializing in short- and long-term municipal securities
with Salomon Brothers. She is a member of the National Federation of Municipal
Analysts and its California chapter.
Mr. David Klug assumed sole responsibility for the day-to-day management of
the California Tax-Free Bond Fund on June 1, 1995, Mr. Klug had been a co-
manager of the California Tax-Free Bond Fund since January 1992. Mr. Klug is
also portfolio co-manager of the California Tax-Free Income Fund. Mr. Klug's
current position with Wells Fargo Bank is Senior Tax-Exempt Specialist/Portfolio
Manager. He has managed municipal bond portfolios for Wells Fargo Bank for over
nine years. Prior to joining Wells Fargo Bank, he managed the municipal bond
portfolio for a major property and casualty insurance company. Mr. Klug holds
an M.B.A. from the University of Chicago, and is a member of the National
Federation of Municipal Analyst and its California chapter.
Ms. Mary Gail Walton is also responsible for the day-to-day portfolio
management of the Arizona Tax-Free, National Tax-Free, Oregon Tax-Free Fund and
Short-Term Municipal Income Funds. Ms. Walton joined Wells Fargo Bank in 1996
from First Interstate Capital Management and has been portfolio co-manager of
the Funds since February 1, 1997. She had worked at First Interstate Bank since
1991 specializing in tax exempt portfolio management. She holds a B.A. from the
University of Washington and is a chartered financial analyst candidate.
40
<PAGE>
ADMINISTRATOR AND CO-ADMINISTRATOR. The Company has retained Wells Fargo
-----------------------------------
Bank as Administrator and Stephens as Co-Administrator on behalf of each Fund.
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
each Fund's 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 Securities and Exchange Commission ("SEC") and state
securities commissions; and preparation of proxy statements and shareholder
reports for each Fund; and (ii) general supervision relative to the compilation
of data required for the preparation of periodic reports distributed to the
Company's officers and Board of Directors. Wells Fargo Bank and Stephens also
furnish office space and certain facilities required for conducting the 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 each Fund. Prior to February 1, 1998, the Administrator and Co-
Administrator were entitled to receive a monthly fee of 0.04% and 0.02%,
respectively, of the average daily net assets of each Fund. In connection with
the change in fees, the responsibility for performing various administration
services was shifted to the Co-Administrator.
Except as described below, prior to February 1, 1997, Stephens served as
sole Administrator and performed substantially the same services now provided by
Stephens and Wells Fargo Bank.
For the period indicated below, the Funds paid the following dollar amounts
to Wells Fargo Bank and Stephens for administration and co-administration fees:
<TABLE>
<CAPTION>
Six-Month
Period Ended
3/31/97
-------
Fund Total Wells Fargo Stephens
---- ----- ----------- ---------
<S> <C> <C> <C>
Arizona Tax-Free $ 5,750 $1,150 $ 4,600
California Tax-Free Bond/*/ $357,423 N/A $357,423
California Tax-Free Income $ 16,307 $3,261 $ 13,046
National Tax-Free $ 3,222 $ 644 $ 2,578
Oregon Tax-Free $ 10,907 $2,181 $ 8,726
Short-Term Municipal Income/*/ $ 19,941 N/A $ 19,941
</TABLE>
____________________
/*/ Represents amounts paid by the Overland predecessor portfolio for the year
ended December 31, 1996, the predecessor portfolio's most recently
completed fiscal year, and not the period ended March 31, 1997.
41
<PAGE>
Arizona Tax-Free, National Tax-Free and Oregon Tax-Free Funds. The
-------------------------------------------------------------
Pacifica Arizona Tax-Exempt, National Tax-Exempt and Oregon Tax-Exempt Funds
were reorganized as the Company's Arizona Tax-Free, National Tax-Free and Oregon
Tax-Free Funds on September 6, 1996. Prior to September 6, 1996, the
Administrator, Furman Selz LLC ("Furman Selz"), of the Pacifica predecessor
portfolios provided management and administration services necessary for the
operation of such Funds, pursuant to an Administrative Services Contract. For
these services, Furman Selz was entitled to receive a fee, payable monthly, at
the annual rate of 0.15% of the average daily net assets of the predecessor
portfolios.
For the period begun September 6, 1996 and ended September 30, 1996, the
Funds paid to Stephens the dollar amounts of administration fees indicated
below. Stephens, as sole Administrator during this period, was entitled to
receive a monthly fee at the annual rate of 0.03% of each Fund's average daily
net assets. The amount also reflects the net administration fees paid, after
waivers, by the predecessor portfolio to Furman Selz for the period begun
October 1, 1995 and ended September 5, 1996.
<TABLE>
<CAPTION>
Year Ended
9/30/96
--------
Fund Fees Paid
---- ---------
<S> <C>
Arizona Tax-Free $ 24,636
National Tax-Free $ 14,138
Oregon Tax-Free $ 49,627
</TABLE>
Prior to October 1, 1995, ALPS Mutual Funds Service, Inc. ("ALPS") served
as the Administrator for the predecessor portfolios to the Arizona Tax-Free,
National Tax-Free and Oregon Tax-Free Funds. For its administration services,
ALPS was entitled to receive the dollar amounts indicated below for the periods
indicated in the table and waived the indicated amounts. In 1995, the Funds
changed their fiscal year-end from May 31 to September 30.
<TABLE>
<CAPTION>
Four-Month
Period Ended Year Ended Year Ended
9/30/95 5/31/95 5/31/94
------ ------- -------
Fees Fees Fees Fees Fees Fees
Fund Paid Waived Paid Waived Paid Waived
---- ---- ------ ---- ------ ---- ---------
<S> <C> <C> <C> <C> <C> <C>
Arizona Tax-Free $4,116 $ 0 $12,490 $ 0 $12,890 $ 0
National Tax-Free $2,417 $ 0 $ 6,785 $2,018 $ 5,706 $4,210
Oregon Tax-Free $8,500 $ 0 $25,643 $ 0 $26,957 $ 0
</TABLE>
California Tax-Free Bond and California Tax-Free Income Funds. Prior to
-------------------------------------------------------------
the Consolidation of the Overland portfolios into the Stagecoach funds on
December 12, 1997, Wells Fargo Bank and Stephens served as Administrator and Co-
Administrator, respectively, to the Overland California Tax-Free Bond and
California Tax-Free Income Funds. Prior to February 1,
42
<PAGE>
1997, Stephens served as sole Administrator to such Funds and was entitled to
receive a fee, payable monthly, at the annual rate of 0.03% of each such Fund's
average daily net assets.
For the periods indicated below, the predecessor portfolios paid the
following dollar amounts to Stephens for administration fees:
<TABLE>
<CAPTION>
Nine-Month
Period Ended Year Ended Year Ended
Fund 9/30/96 12/31/95 12/31/94
- ---- -------- -------- ---------
<S> <C> <C> <C>
California Tax-Free Bond/*/ $357,423 $ 384,015 $ 431,734
California Tax-Free Income $ 18,371 $ 16,793 $ 0
</TABLE>
____________________
/*/ Represents amounts paid by the Overland predecessor portfolio. For 1996,
the amount shown is for the year ended December 31, 1996, the predecessor
portfolio's most recently completed fiscal year, and not the nine-month
---
period ended September 30, 1996.
The Short-Term Municipal Income Fund. Prior to the Consolidation of the
------------------------------------
Overland portfolios into the Stagecoach Funds on December 12, 1997, Wells Fargo
Bank and Stephens served as Administrator and Co-Administrator, respectively, to
the Overland Short-Term Municipal Income predecessor portfolio under
substantially similar terms to the Administration and Co-Administration
Agreements with the Funds. Prior to February 1, 1997, Stephens served as sole
Administrator to the Overland Short-Term Municipal Income predecessor portfolio
and provided the predecessor portfolio with essentially the same services
described above. Stephens was entitled to receive a monthly fee from the
predecessor portfolio at the annual rate of 0.15% of the predecessor portfolio's
average daily net assets up to $200 million and 0.10% in excess of $200 million.
For the periods indicated below, the predecessor portfolio paid the
following dollar amount to Stephens for administration fees:
<TABLE>
<CAPTION>
Year Ended Year Ended Period Ended
12/31/96 12/31/95 12/31/94/*/
-------- --------- -----------
<S> <C> <C>
$19,941 $ 19,436 $ 2,497
____________________
</TABLE>
/*/ The Short-Term Municipal Income Fund commenced operations on June 3, 1994.
DISTRIBUTOR. Stephens Inc. ("Stephens", the "Distributor"), located at 111
-----------
Center Street, Little Rock, Arkansas 72201, serves as Distributor to the Funds.
Each Fund has adopted a distribution plan (a "Plan") under Section 12(b) of the
1940 Act and Rule 12b-1 thereunder (the "Rule") for each class of 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
43
<PAGE>
the 1940 Act) of the Funds and who had no direct or indirect financial interest
in the operation of the Plans or in any agreement related to the Plans (the
"Non-Interested Directors").
Under the Plans and pursuant to the related Distribution Agreement, the
Funds pay Stephens the amounts 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 or Fund.
<TABLE>
<CAPTION>
Fund Fee
---- ---
<S> <C>
Arizona Tax-Free
Class A 0.05%
Class B 0.75%
California Tax-Free Bond
Class B 0.70%
Class C 0.50%
National Tax-Free
Class A 0.05%
Class B 0.75%
Class C 0.50%
Oregon Tax-Free
Class A 0.05%
Class B 0.75%
Short-Term Municipal Income 0.25%
</TABLE>
The actual fee payable to the Distributor by the above-indicated Funds and
classes 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.
Under the Plans in effect for the Class A shares of the California Tax-Free
Bond and California Tax-Free Income Funds, each Fund may defray all or part of
the cost of preparing and printing prospectuses and other promotional materials
and of delivering those prospectuses and promotional materials to prospective
shareholders by paying on an annual basis up to 0.05% of
44
<PAGE>
the respective Fund's average daily net assets attributable to Class A shares.
The Plans for the Class A shares of the Funds provide only for reimbursement of
actual expenses.
For the six-month period ended March 31, 1997, the Funds' Distributor
received the following fees for distribution-related services, as set forth
below, under each Fund's Plan.
<TABLE>
<CAPTION>
Printing &
Mailing Marketing Compensation to
Fund Total Prospectus Brochures Underwriters
---- ----- ---------- --------- ------------
<S>
Arizona Tax-Free <C> <C> <C> <C>
Class A
Class B $ 4,235 $2,687 $1,548 N/A
$ 304 N/A N/A $ 304
California Tax-Free Bond/*/
Class A
Class C $ 0 N/A N/A $ 0
$33,376 N/A N/A $33,376
California Tax-Free Income
$27,275 N/A N/A $27,275
National Tax-Free
Class A
Class B $ 2,905 $2,780 $ 125 N/A
$ 125 N/A N/A $ 125
Oregon Tax-Free
Class A
Class B $ 3,213 $2,279 $ 934 N/A
$ 318 N/A N/A $ 381
Short-Term Municipal Income/*/
$54,276 N/A N/A $54,276
</TABLE>
____________________
/*/ Represents amount paid by the Overland predecessor portfolio for the year
ended December 31, 1996, the predecessor portfolio's most recently
completed fiscal year.
Arizona Tax-Free, National Tax-Free and Oregon Tax-Free Funds. For the
-------------------------------------------------------------
year ended September 30, 1996, the Funds' Distributor received the following
fees for expense reimbursement under each Fund's Plan for Class A shares:
<TABLE>
<CAPTION>
Fund Class Total
---- ----- -----
<S> <C> <C>
Arizona Tax-Free Class A $20,752
National Tax-Free Class A $ 146
Oregon Tax-Free Class A $ 1,013
</TABLE>
For the period begun September 6 and ended September 30, 1996, the
Distributor received compensation, for distribution-related services, in the
amount of $36.00 from the Arizona Tax-Free Fund, and no compensation from the
California Tax-Free Bond, National Tax-Free or Oregon Tax-Free Funds, under each
such Fund's Plan for Class B shares.
45
<PAGE>
Prior to September 6, 1996, PFD, a subsidiary of Furman Selz, served as
principal underwriter for the shares of the predecessor portfolios pursuant to a
Distribution Contract as of October 1, 1995. The figures in the table above
reflect amounts paid to PFD through September 5, 1996 and amounts paid to
Stephens from September 6 to September 30, 1996. Prior to October 1, 1995, ALPS
served as the Distributor to the predecessor portfolios of the Arizona, National
and Oregon Tax-Free Funds. ALPS was not entitled to any compensation for its
services as Distributor for these portfolios.
Under a distribution plan adopted for the predecessor portfolios' Investor
shares, PFD was entitled to be paid directly or reimbursed monthly in amounts
described in the Prospectuses for costs and expenses of marketing the Investor
shares of the predecessor portfolios of the Arizona, National and Oregon Tax-
Free Funds.
California Tax-Free Income Fund. For the nine-month period ended September
-------------------------------
30, 1996, the California Tax-Free Income Fund's Distributor received the
following amounts of distribution-related fees for the specified purposes set
forth below under the Fund's Plan:
<TABLE>
<CAPTION>
Printing &
Mailing Marketing Compensation
Fund Total Prospectus Brochures to Underwriters
---- ----- ---------- --------- ---------------
<S> <C> <C> <C> <C>
California Tax-Free Income $11,584 $55 $11,528 N/A
</TABLE>
General. Each plan will continue in effect from year to year if such
-------
continuance is approved by a majority vote of both the Directors of the Company
and the Non-Interested Directors. Any Distribution Agreement related to the
Plans also must be approved by such vote of the Directors and Non-Interested
Directors. Such Agreement 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 Fund 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 Fund, 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. The Rule also
requires that the selection and nomination of Directors who are not "interested
persons" of the Company be made by such disinterested Directors.
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
46
<PAGE>
that the Plans are reasonably likely to benefit the Funds and their shareholders
because the Plans authorize 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 Fund assets and ultimately corresponding
economic efficiencies (i.e., lower per-share transaction costs and fixed
expenses) that are generated by increased assets under management.
ADMINISTRATIVE SERVICING PLAN. The Short-Term Municipal Income Fund has
-----------------------------
adopted a Shareholder Administrative Servicing Plan (the "Administrative
Servicing Plan") on behalf of its shares. Pursuant to the Administrative
Servicing Plan, the Fund may enter into Administrative Servicing Agreements with
administrative servicing agents (broker/dealers, banks and other financial
institutions, which may include Wells Fargo Bank and its affiliates) who are
dealers/holders of record, or that otherwise have a servicing relationship with
the beneficial owners of the Fund's shares. Administrative servicing agents
agree to perform shareholder administrative and liaison services which may
include, among other things, maintaining an omnibus account with the Fund,
aggregating and transmitting purchase, exchange and redemption orders from its
customers, answering customer inquiries regarding a shareholder's accounts in
the Fund, and providing such other services as the Company or a customer may
reasonably request. Administrative servicing agents are entitled to a fee which
will not exceed 0.25%, 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
administrative servicing agent during the period for which payment is being
made. In no case shall shares be sold pursuant to the distribution plan while
being sold pursuant to the Administrative Servicing Plan.
The Administrative 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. Any form of Servicing Agreement related to the Plan also must be
approved by such vote of the Directors. Servicing Agreements will terminate
automatically if assigned, and may be terminated at any time, without payment of
any penalty, by a vote of a majority of the outstanding shares of the
appropriate Fund. The Administrative Servicing Plans may not be amended to
increase materially the amount payable thereunder without the approval of a
majority of the outstanding shares of the appropriate Fund, and no material
amendment to the Plans or related Administrative Servicing Agreements may be
made except by a majority of the Directors.
The Administrative 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 Plan.
SHAREHOLDER SERVICING AGENT. The Arizona Tax-Free, Oregon Tax-Free,
----------------------------
National Tax-Free, California Tax-Free Bond and California Tax-Free Income Funds
have approved Servicing Plans and have entered into related Shareholder
Servicing Agreements, on behalf of the Class A, Class B and Class C shares, with
financial institutions, including Wells Fargo Bank. 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
47
<PAGE>
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 applicable Fund, not to exceed 0.25% (and with respect to the California
Funds, not to exceed 0.25% for Class C and 0.30% for Classes A and B), 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 Servicing Plans and related
Shareholder Servicing Agreements were approved by the Company's Board of
Directors and provide that a Fund shall not be obligated to make any payments
under such Plans or related Agreements that exceed the maximum amounts payable
under the Conduct Rules of the NASD.
For the period indicated below, the dollar amounts of shareholder servicing
fees paid, after waivers, by the Funds to Wells Fargo Bank or its affiliates
were as follows:
<TABLE>
<CAPTION>
Six-Month Period
Fund Ended 3/31/97
---- -------------
<S> <C>
Arizona Tax-Free
Class A $ 0
Class B $ 0
California Tax-Free Bond*
Class C $ 16,686
California Tax-Free Income
Class A $115,476
National Tax-Free
Class A $ 0
Class B $ 0
Oregon Tax-Free
Class A $ 39,643
Class B $ 123
</TABLE>
____________________
/*/ Represents amounts paid by the Overland predecessor portfolio for the year
ended December 31, 1996, the predecessor portfolio's most recently
completed fiscal year.
Arizona Tax-Free, National Tax-Free and Oregon Tax-Free Funds. For the
-------------------------------------------------------------
period begun October 1, 1995 and ended September 5, 1996, and under similar
service agreements, payments were made to First Intestate Bancorp for the Funds
indicated below. For the period begun September 6, 1996 and ended September 30,
1996, shareholder servicing fees were paid to Wells
48
<PAGE>
Fargo Bank or its affiliates. The indicated classes of each Fund paid the
following dollar amounts of shareholder servicing fees, after waivers, for the
year ended September 30, 1996:
<TABLE>
<CAPTION>
Year Ended
Fund 9/30/96
---- -------
<S> <C>
Arizona Tax-Free
Class A $ 429
Class B N/A
National Tax-Free
Class A $ 0
Class B N/A
Class C
Oregon Tax-Free
Class A $49,136
Class B N/A
</TABLE>
California Tax-Free Income Fund. The California Tax-Free Income Fund did
-------------------------------
not pay any shareholder servicing fees to Wells Fargo Bank or its affiliates for
the nine-month period ended September 30, 1996.
General. Each Servicing Plan will continue in effect from year to year if
-------
such continuance is approved by a majority vote of both the Directors of the
Company, 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 the Non-Interested Directors. Servicing
Agreements may be terminated at any time, without payment of any penalty, by
vote of a majority of the Board of Directors, including a majority of the Non-
Interested Directors. No material amendment to the Servicing Plans or related
Servicing Agreements may be made except by a majority of both the Directors of
the Company and the Non-Interested Directors.
Each 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 each Fund. The
---------
Custodian, among other things, maintains a custody account or accounts in the
name of each Fund, receives and delivers all assets for each Fund upon purchase
and upon sale or maturity, collects and receives all income and other payments
and distributions on account of the assets of each Fund, and pays all expenses
of each Fund. For its services as Custodian, Wells Fargo Bank 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
49
<PAGE>
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 a Fund's average daily
net assets, 0.045% of the next $50,000,000, and 0.020% of the average daily net
assets in excess of $100,000,000.
For the six-month period ended March 31, 1997, the Funds paid the following
dollar amounts in custody fees, after waivers, to Wells Fargo Bank:
<TABLE>
<CAPTION>
Fund Custody Fees
---- ------------
<S> <C>
Arizona Tax-Free $0
California Tax-Free Bond/*/ $0
California Tax-Free Income $0
National Tax-Free $0
Oregon Tax-Free $0
Short-Term Municipal Income/*/ $0
</TABLE>
____________________
/*/ Represents amounts paid by the Overland predecessor portfolio for the year
ended December 31, 1996, the predecessor portfolio's most recently completed
fiscal year.
Arizona Tax-Free, National Tax-Free, Oregon Tax-Free and Short-Term
-------------------------------------------------------------------
Municipal Income Funds. FICAL, located at 707 Wilshire Blvd., Los Angeles,
- ----------------------
California 90017, acted as Custodian of the Pacifica Arizona Tax-Free, National
Tax-Free, Oregon Tax-Free and Short-Term Municipal Income Funds. FICAL was
entitled to receive a fee from Pacifica, computed daily and payable monthly, at
the annual rate of 0.021% of the first $5 billion in aggregate average daily net
assets of the Funds; 0.0175% of the next $5 billion in aggregate average daily
net assets of the Funds; and 0.015% of the aggregate average daily net assets of
the Funds in excess of $10 billion.
The predecessor portfolios to the Arizona Tax-Free, National Tax-Free and
Oregon Tax-Free Funds did not pay any custody fees, after waivers and
reimbursements, to FICAL for the period begun October 1, 1995 and ended
September 5, 1996, and did not pay any custody fees to Wells Fargo Bank for the
period begun September 6, 1996 and ended September 30, 1996.
California Tax-Free Income Fund. For the nine-month period ended September
-------------------------------
30, 1996, the California Tax-Free Income Fund did not pay any custody fees to
Wells Fargo Bank.
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 each Fund's average daily net assets of each class of shares.
For the six-month period ended March 31, 1997, the Funds paid the following
dollar amounts in transfer and dividend disbursing agency fees, without regard
to class and after waivers, to Wells Fargo Bank:
50
<PAGE>
<TABLE>
<CAPTION>
Fund Transfer Agency Fees
- ---- --------------------
<S> <C>
Arizona Tax-Free $0
California Tax-Free Bond/*/ $0
California Tax-Free Income $0
National Tax-Free $0
Oregon Tax-Free $0
Short-Term Municipal Income/*/ $0
</TABLE>
____________________
/*/ Represents amounts paid by the Overland predecessor portfolio for the year
ended December 31, 1996, the predecessor portfolio's most recently completed
fiscal year.
Arizona Tax-Free, National Tax-Free and Oregon Tax-Free Funds. Under the
-------------------------------------------------------------
prior transfer agency agreement for the Arizona Tax-Free, Oregon Tax-Free and
National Tax-Free Funds, Wells Fargo Bank was entitled to receive monthly
payments at the annual rate of 0.07% of the average daily net assets of each
Class of the New Funds, as well as reimbursement for all reasonable out-of-
pocket expenses. Furman Selz acted as Transfer Agent for the predecessor
portfolios. Pacifica compensated Furman Selz for providing personnel and
facilities to perform transfer agency-related services for Pacifica at a rate
intended to represent the cost of providing such services.
California Tax-Free Bond and California Tax-Free Income Funds. Under the
-------------------------------------------------------------
prior transfer agency agreement for the California Funds, Wells Fargo Bank was
entitled to receive a per account fee plus transaction fees and reimbursement of
out-of-pocket expenses with a minimum of $3,000 per month per Fund, unless net
assets of the Fund were under $20 million. For as long as a California Fund's
assets remained under $20 million, the Fund was not charged any transfer agency
fees. For the nine-month period ended September 30, 1996, the California Funds
did not pay any transfer and dividend disbursing agency fees.
The Short-Term Municipal Income Fund. Under a prior transfer agency
------------------------------------
agreement with the predecessor portfolio to the Short-Term Municipal Income
Fund, Wells Fargo Bank was entitled to receive a base fee and per-account fees.
For the year ended December 31, 1996, the predecessor portfolio did not pay any
transfer and dividend disbursing agency fees.
UNDERWRITING COMMISSIONS. For the six month period ended March 31, 1997,
------------------------
the aggregate dollar amount of underwriting commissions paid to Stephens on
sales/redemptions of the Company's shares was $2,296,243. Stephens retained
$241,806 of such commissions. WFSI and its registered representatives retained
$1,719,000 and $335,437, respectively, of such commissions.
For the nine-month period ended September 30, 1996, the aggregate amount of
underwriting commissions paid to Stephens on sales/redemptions of the Company's
shares was $2,917,738. Stephens retained $198,664 of such commissions. WFSI
and its registered representatives retained $2,583,027 and $136,047,
respectively, of such commissions.
For the period begun October 1, 1995 and ended September 5, 1996 with
respect to the predecessor portfolios to the Arizona Tax-Free, National Tax-Free
and Oregon Tax-Free Funds,
51
<PAGE>
the aggregate amount of underwriting commissions on sales/redemptions of
Pacifica's shares was $150,771. Pacifica Funds Distributor Inc. ("PFD"),
retained $18,139 and its registered representatives retained $132,632 of such
commissions.
For the year ended December 31, 1995, the aggregate amount of underwriting
commissions paid to Stephens on sales/redemptions of the Company's shares was
$1,251,311. Stephens retained $162,660 of such commissions. WFSI and its
registered representatives retained $399,809 of such commissions.
For the year ended December 31, 1994, Stephens retained $5,415,227, in
underwriting commissions (front-end sales loads and CDSCs, if any) in connection
with the purchase or redemption of Company's shares. For the year ended
December 31, 1994, Wells Fargo Securities Inc. ("WFSI"), an affiliated broker-
dealer of the Company, and its registered representatives received $904,274, in
underwriting commissions in connection with the purchase or redemption of
Company 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
differences 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.
Performance shown or advertised for the Class A shares of the Arizona Tax-
Free Fund for periods prior to September 6, 1996, reflects performance of the
Investor shares of the Pacifica Arizona Tax-Exempt Fund, a predecessor portfolio
with the same objective and policies as the Stagecoach Arizona Tax-Exempt Fund.
Performance shown or advertised for the Class B shares of the Stagecoach Arizona
Tax-Free Fund for periods prior to September 6, 1996, reflects performance of
the Investor shares of the predecessor portfolio adjusted to reflect Class B
expenses in effect on September 6.
52
<PAGE>
Performance shown or advertised for the Class A shares of the Oregon Tax-
Free Fund for periods prior to September 6, 1996, reflects performance of the
Investor shares of the Pacifica Oregon Tax-Exempt Fund, a predecessor portfolio
with the same objective and policies as the Stagecoach Oregon Tax-Exempt Fund.
Performance shown or advertised for the Class B shares of the Stagecoach Oregon
Tax-Free Fund for periods prior to September 6, 1996, reflects performance of
the Investor shares of the predecessor portfolio adjusted to reflect Class B
expenses in effect on September 6.
Performance shown or advertised for the Class A shares of the National Tax-
Free Fund for periods prior to September 6, 1996, reflects performance of the
Investor shares of the Pacifica National Tax-Exempt Fund, a predecessor
portfolio with the same objective and policies as the Stagecoach National Tax-
Exempt Fund. Performance shown or advertised for the Class B shares of the
Stagecoach National Tax-Free Fund for periods prior to September 6, 1996,
reflects performance of the Investor shares of the predecessor portfolio
adjusted to reflect Class B expenses in effect on September 6.
Performance shown or advertised for the Class A shares of the Stagecoach
California Tax-Free Bond Fund, reflects performance of the Class A shares of the
Overland Express California Tax-Free Bond Fund (the accounting survivor of a
merger of the Funds on December 12, 1997). Performance shown or advertised for
the Class C shares of the Stagecoach Fund reflects performance of the Class D
shares of the Overland Fund; for periods prior to July 1, 1993, Class C share
performance of the Stagecoach Fund reflects performance of the Class A shares of
the Overland Fund, adjusted to reflect the sales charges and expenses of the
Class C shares. Performance shown or advertised for the Class B shares for
periods prior to January 1, 1995, reflects performance of the Class D shares of
the Overland Fund, although for periods prior to July 1, 1993, Class B share
performance of the Stagecoach Fund reflects performance of the Class A shares of
the Overland Fund, adjusted to reflect the sales charges and expenses of the
Class B shares of the Class B shares of the Stagecoach Fund.
Performance shown or advertised for the Class A shares of the Stagecoach
Short-Term Municipal Income Fund reflects performance of the Class A shares of
the Overland Express Short-Term Municipal Income Fund, a predecessor portfolio
with the same investment objectives and policies as the Stagecoach Short-Term
Municipal Income Fund.
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") is 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.
53
<PAGE>
Average Annual Total Return for the Period Ended September 30, 1997/1/
-------------------------------------------------------------------
<TABLE>
<CAPTION>
Inception/2/ Inception Five Year Five Year Three Year Three Year One Year One Year
With No With No With No With No
Sales Sales Sales Sales Sales Sales Sales Sales
Fund Charge Charge Charge Charge Charge Charge Charge Charge
---- ------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Arizona
Tax-Free
Class A 5.81% 6.68% 5.29% 6.27% 5.48% 7.12% 3.79% 8.66%
Class B 5.39% 5.53% 4.78% 5.11% 4.97% 5.87% 2.15% 7.15%
California
Tax-Free Bond
Class A 7.73% 8.28% 6.20% 7.19% 6.50% 8.14% 4.02% 8.92%
Class B 7.54% 7.54% 6.08% 6.39% 6.47% 7.34% 3.11% 8.11%
Class C 7.54% 7.54% 6.39% 6.39% 7.34% 7.34% 7.11% 8.11%
California
Tax-Free Income
Class A 4.16% 4.81% N/A N/A 4.35% 5.41% 2.55% 5.75%
National
Tax-Free
Class A 4.74% 5.79% N/A N/A 5.72% 7.34% 3.69% 8.59%
Class B 4.27% 4.63% N/A N/A 5.06% 5.96% 1.13% 6.13%
Class C 4.63% 4.63% N/A N/A 5.96% 5.96% 5.13% 6.13%
Oregon
Tax-Free
Class A 6.67% 7.20% 5.26% 6.24% 6.08% 7.71% 3.26% 8.11%
Class B 6.40% 6.40% 5.07% 5.40% 5.90% 6.79% 1.98% 6.98%
Short-Term/3/
Municipal
Income
Class A 2.82% 3.81% N/A N/A 3.03% 4.05% 1.12% 4.18%
</TABLE>
/1/ Return calculations reflect the inclusion of front-end sales charges for
Class A shares and the maximum applicable contingent deferred sales charge
for Class B and Class C shares.
/2/ For purposes of showing performance information, the inception date of each
Fund is as follows: Arizona Tax-Free - March 1, 1992; California Tax-Free
Income - November 18, 1992; California Tax- Free Bond - October 6, 1988;
National Tax-Free - January 15, 1993; Oregon Tax-Free - June 1, 1988;
Short-Term Municipal Income - June 3, 1994.
/3/ Performance shown is for the applicable period ended June 30, 1997.
CUMULATIVE TOTAL RETURN: In addition to the above performance information,
-----------------------
each Fund may also advertise the cumulative total return of the Fund.
Cumulative total return is based on the overall percentage change in value of a
hypothetical investment in the Fund, assuming all 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.
54
<PAGE>
<TABLE>
<CAPTION>
Cumulative Total Return for the Year Ended September 30, 1997/1/
----------------------------------------------------------------
Inception Inception/2/ Five Year Five Year Three Year Three Year
With No With No With No
Sales Sales Sales Sales Sales Sales
Fund Charge Charge Charge Charge Charge Charge
---- ------ ------ ------ ------- ------ -------
<S> <C> <C> <C> <C> <C> <C>
Arizona
Tax-Free
Class A 37.04% 43.48% 29.40% 35.54% 17.37% 22.92%
Class B 34.06% 35.06% 26.31% 28.32% 17.67% 18.68%
California
Tax-Free
Bond
Class A 95.38% 104.56% 35.10% 41.50% 20.80% 26.45%
Class B 92.39% 92.39% 34.30% 36.30% 20.69% 23.69%
Class C 92.39% 92.39% 36.30% 36.30% 23.69% 23.69%
California
Tax-Free
Income
Class A 21.98% 25.26% N/A N/A 13.61% 17.14%
National
Tax-Free
Class A 24.14% 30.01% N/A N/A 18.15% 23.68%
Class B 21.53% 23.53% N/A N/A 19.95% 18.96%
Class C 23.53% 23.53% N/A N/A 18.96% 18.96%
Oregon
Tax-Free
Class A 82.69% 91.34% 29.23% 35.31% 19.37% 24.98%
Class B 78.44% 78.44% 28.04% 30.05% 18.76% 21.77%
Short-Term/3/
Municipal
Income
Class A 8.96% 12.23% N/A N/A 9.37% 12.66%
</TABLE>
/1/ Return calculations reflect the inclusion of front-end sales charges for
Class A shares and the maximum applicable contingent deferred sales charge
for Class B and Class C shares.
/2/ For purposes of showing performance information, the inception date of
each Fund is as follows: Arizona Tax-Free - March 1, 1992; California Tax-
Free Income - November 18, 1992; California Tax- Free Bond - October 6,
1988; National Tax-Free - January 15, 1993; Oregon Tax-Free - June 1,
1988; Short-Term Municipal Income - June 3, 1994.
/3/ Performance shown is for the applicable period ended June 30, 1997.
In addition to the above performance information, the Short-Term Municipal
Income Fund may also advertise the cumulative total return for one-month, three-
month, six-month and year-to-date periods. The cumulative total return for such
periods is based on the overall
55
<PAGE>
percentage change in value of a hypothetical investment in a Fund, assuming all
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, tax-equivalent yields (if applicable) and average annual total returns
in advertisements or reports to shareholders or prospective investors.
Quotations of yield for the Funds is based on the investment income per share
earned during a particular 30-day period, less expenses accrued during a period
("net investment income") and is computed by dividing net investment income by
the maximum offering price per share on the last day 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 any reimbursements), c = the average daily number
of shares outstanding during the period that were entitled to receive dividends,
and d = the maximum offering price per share on the last day of the period. The
net investment income of the and Funds includes actual interest income, plus or
minus amortized purchase discount (which may include original issue discount) or
premium, less accrued expenses. Realized and unrealized gains and losses on
portfolio securities are not included in the Funds' net investment income.
TAX-EQUIVALENT YIELD: Quotations of tax-equivalent yield for a Tax-Free
--------------------
Fund are calculated according the following formula:
TAX EQUIVALENT YIELD = ( E ) + t
---
1 - p
E = Tax-exempt yield
p = stated income tax rate
t = taxable yield
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 that 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 received 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.
56
<PAGE>
Yield for the Year Ended September 30, 1997/1/
-------------------------------------------
<TABLE>
<CAPTION>
Thirty-Day Tax-Equivalent
Thirty-Day Yield Yield/2/
-------------------------- -------------------------
After Before After Before
Fund Waiver Waiver Waiver Waiver
---- ------------ ----------- ------------ -----------
<S> <C> <C> <C> <C>
California Tax-Free Bond/3/
Class A 4.32% 4.26% 7.88% N/A
Class B 3.78% 3.30% 7.03% 6.14%
Class C 3.77% 3.67% 6.88% N/A
California Tax-Free Income
Class A 3.52% 2.78% 6.55% 5.17%
Arizona Tax-Free
Class A 3.22% 2.27% 5.65% 3.98%
Class B 2.66% 1.32% 4.67% 2.31%
Oregon Tax-Free
Class A 3.88% 3.16% 7.06% 5.75%
Class B 3.41% 1.67% 6.20% 3.04%
National Tax-Free
Class A 4.89% 4.57% 8.10% N/A
Class B N/A N/A N/A N/A
Class C 4.46% 4.02% 7.38% N/A
Short-Term Municipal Income/3/
Class A
3.63% 2.54% N/A N/A
</TABLE>
______________________
/1/ Return calculations reflect the inclusion of front-end sales charges for
Class A shares and the maximum applicable contingent deferred sales charge
for Class B and Class C shares. "After Waiver" figures reflect any waived
fees or reimbursed expenses throughout the period.
/2/ Based on a combined federal and state income tax rate of 46.24% for each of
the California Tax-Free Bond and California Tax-Free Income Funds, and
45.04% and 42.98% for the Oregon Tax-Free Fund and the Arizona Tax-Free
Fund, respectively, and a federal income tax rate of 39.60% for the
National Tax-Free Fund.
/3/ Represents performance of the Overland predecessor portfolio for the
applicable period ended June 30, 1997.
From time to time and only to the extent the comparison is appropriate for
a Fund or a Class of shares, the Company may quote the performance or price-
earning ratio of a Fund or Class in advertising and other types of literature as
compared with the performance of the S&P Index, the Dow Jones Industrial
Average, the Lehman Brothers 20+ Years Treasury Index, the Lehman Brothers 5-7
Year Treasury Index, Donoghue's Money Fund Averages, Real Estate Investment
Averages (as reported by the National Association of Real Estate Investment
Trusts), Gold Investment Averages (provided by the World Gold Council), Bank
Averages (which is calculated
57
<PAGE>
from figures supplied by the U.S. League of Savings Institutions based on
effective annual rates of interest on both passbook and certificate accounts),
average annualized certificate of deposit rates (from the Federal Reserve G-13
Statistical Releases or the Bank Rate Monitor), the Salomon One Year Treasury
Benchmark Index, the Consumer Price Index (as published by the U.S. Bureau of
Labor Statistics), other managed or unmanaged indices or performance data of
bonds, municipal securities, stocks or government securities (including data
provided by Ibbotson Associates), or by other services, companies, publications
or persons who monitor mutual funds on overall performance or other criteria.
The S&P Index and the Dow Jones Industrial Average are unmanaged indices of
selected common stock prices. The performance of a Fund or a class also may be
compared to that 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 Funds' performance will be calculated by
relating net asset value per share at the beginning of a stated period to the
net asset value of the investment, assuming reinvestment of all gains
distributions and dividends paid, at the end of the period. The Funds'
comparative performance will be based on a comparison of yields, as described
above, or total return, as reported by Lipper, Survey Publications, Donoghue or
Morningstar, Inc.
Any such comparisons may be useful to investors who wish to compare a
Fund's past performance with that of its competitors. Of course, past
performance cannot be a guarantee of future results. The Company also may
include, from time to time, a reference to certain marketing approaches of the
Distributor, including, for example, a reference to a potential shareholder
being contacted by a selected broker or dealer. General mutual fund statistics
provided by the Investment Company Institute may also be used.
The Company also may use the following information in advertisements and
other types of literature, only to the extent the information is appropriate for
a class of shares of a Fund: (i) the Consumer Price Index may be used to assess
the real rate of return from an investment in a class of shares of a Fund; (ii)
other government statistics, including, but not limited to, The Survey of
Current Business, may be used to illustrate investment attributes of a Fund or a
class of shares or the general economic, business, investment, or financial
environment in which the Fund operates; (iii) the effect of tax-deferred
compounding on the investment returns of a Fund or a class of 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 Fund or a class of 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 a Fund invests may be compared to relevant
indices of stocks or surveys (e.g., S&P Industry Surveys) to evaluate the
historical performance of the Fund or a class or current or potential value with
respect to the particular industry or sector.
In addition, the Company also may use, in advertisements and other types of
literature, information and statements: (1) showing that bank savings accounts
offer a guaranteed return of principal and a fixed rate of interest, but no
opportunity for capital growth; and (2) describing Wells Fargo Bank, and its
affiliates and predecessors, as one of the first investment managers to advise
58
<PAGE>
investment accounts using asset allocation and index strategies. The Company
also may include in advertising and other types of literature information and
other data from reports and studies prepared by the Tax Foundation, including
information regarding federal and state tax levels and the related "Tax Freedom
Day."
The Company also may discuss in advertising and other types of literature
that a Fund has been assigned a rating by an NRSRO, such as Standard & Poor's
Corporation. Such rating would assess the creditworthiness of the investments
held by a Fund. The assigned rating would not be a recommendation to purchase,
sell or hold a Fund's shares since the rating would not comment on the market
price of a Fund's shares or the suitability of a Fund for a particular investor.
In addition, the assigned rating would be subject to change, suspension or
withdrawal as a result of changes in, or unavailability of, information relating
to a Fund or its investments. The Company may compare a Fund's performance with
other investments that are assigned ratings by NRSROs. Any such comparisons may
be useful to investors who wish to compare a Fund's past performance with other
rated investments.
From time to time, the Funds may use the following statements, or
variations thereof, in advertisements and other promotional materials: "Wells
Fargo Bank, as a Shareholder Servicing Agent for the Stagecoach Funds, provides
various services to its customers that are also shareholders of the Funds.
These services may include access to Stagecoach Funds" account information
through Automated Teller Machines (ATMs), the placement of purchase and
redemption requests for shares of the Funds through ATMs and the availability of
combined Wells Fargo Bank and Stagecoach Funds account statements."
The Company also may disclose, in advertising and other types of
literature, information and statements that Wells Capital Management, Inc.
(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 Company's investment Advisor and the total amount of assets under
management 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
59
<PAGE>
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 the Funds 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 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. Each
Fund is 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.
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<PAGE>
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 a Fund and that such Fund receives satisfactory
assurances that (i) it will have good and marketable title to the securities
received by it; (ii) that the securities are in proper form for transfer to the
Fund; and (iii) adequate information will be provided concerning the basis and
other matters relating to the securities.
Under the 1940 Act, the 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 shareholders to make full payment
for shares purchased or to collect any charge relating to a transaction effected
for the benefit of a shareholder which is applicable to shares of a Fund as
provided from time to time in the Prospectus.
PORTFOLIO TRANSACTIONS
The Company has no obligation to deal with any dealer or group of dealers
in the execution of transactions in portfolio securities. Subject to policies
established by the Company's Board of Directors, Wells Fargo Bank is responsible
for each Fund's portfolio decisions and the placing of portfolio transactions.
In placing orders, it is the policy of the Company to obtain the best results
taking into account the dealer's general execution and operational facilities,
the type of transaction involved and other factors such as the dealer's risk in
positioning the securities involved. While Wells Fargo Bank generally seeks
reasonably competitive spreads or commissions, the Funds will not necessarily be
paying the lowest spread or commission available.
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. Each of the
Funds also will purchase portfolio securities in underwritten offerings and may
purchase securities directly from the issuer. Generally, municipal obligations
and taxable money market securities are traded on a net basis and do not involve
brokerage commissions. The cost of executing a Fund's portfolio securities
transactions will consist primarily of dealer spreads and underwriting
commissions. Under the Act, persons affiliated with the Company are prohibited
from dealing with the Company as a principal in the purchase and sale of
securities unless an exemptive order allowing such transactions is obtained from
the Commission or an exemption is otherwise available. The Funds may purchase
securities from underwriting syndicates of which Stephens or Wells Fargo Bank is
a member
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<PAGE>
under certain conditions in accordance with the provisions of a rule adopted
under the Act and in compliance with procedures adopted by the Board of
Directors.
Wells Fargo Bank, as the Investment 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.
Brokerage Commissions. For the six-month period ended March 31, 1997, the
----------------------
Funds did not pay any brokerage commissions.
For the year ended December 31, 1996, the Short-Term Municipal Income
predecessor portfolio and the Master Portfolio did not pay any brokerage
commissions.
During the nine-month period ended September 30, 1996 and the years ended
December 31, 1995 and 1994, the California Funds did not pay any brokerage
commissions on portfolio transactions.
During the fiscal periods ended September 30, 1996, September 30, 1995, May
31, 1995 and May 31, 1994, the predecessor portfolios of the Arizona, National
and Oregon Tax-Free Funds did not pay any brokerage commissions, because all of
their portfolio transactions occurred in the over-the-counter market.
Securities of Regular Broker/Dealers. As of March 31, 1997, the Funds
------------------------------------
owned securities of their "regular brokers or dealers" or their parents as
defined in the 1940 Act as follows.
<TABLE>
<CAPTION>
Fund Broker/Dealer Amount
- ---- ------------- ------
<S> <C> <C>
Arizona Tax-Free Goldman Sachs & Co. $762,919
Oregon Tax-Free Goldman Sachs & Co. $504,001
</TABLE>
Portfolio Turnover Rate. 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
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<PAGE>
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 Fund's
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 s
not a limiting factor when Wells Fargo Bank deems portfolio changes appropriate.
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 Fund expenses and,
accordingly, have a favorable impact on a Fund's 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 a Fund; expenses of shareholders' meetings; expenses relating
to the issuance, registration and qualification of a Fund's shares; pricing
services, and any extraordinary expenses. Expenses attributable to a Fund are
charged against a Fund assets. General expenses of the Company are allocated
among all of the funds of the Company, including a Fund, in a manner
proportionate to the net assets of each Fund, on a transactional basis, or on
such other basis as the Company's Board of Directors deems equitable.
FEDERAL INCOME TAXES
The 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 to each Fund, rather than to the Company as
a
63
<PAGE>
whole. In addition, 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 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
(if any) 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
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<PAGE>
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 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." 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.
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 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.
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 to pass-through entities,
including regulated investment companies, such as the Funds. The Internal
Revenue Service has published a notice describing temporary Regulations to be
issued pursuant to such authority, permitting the application of the reduced
capital gains tax rates to pass-through entities such as the Funds. Under the
Regulations to be issued, if a regulated investment company designates a
dividend as a capital gain dividend for a taxable year ending on or after May 7,
1997, then such regulated investment company may also designate the dividends as
one of two classes: a 20% rate gain distribution, or a 28% rate gain
distribution. Thus, noncorporate shareholders of the Funds may qualify for the
reduced rate of tax on capital gain dividends paid by the Funds, subject only to
the limitation as to the
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<PAGE>
maximum amounts which may be designated in each class. Such maximum amount for
each class is determined by performing the computation required by Section 1(h)
of the Code as if the Fund were an individual whose ordinary income is subject
to a marginal rate of at least 28%.
Other Distributions. Although dividends will be declared daily based on
-------------------
each Fund's daily earnings, for federal income tax purposes, the Fund's earnings
and profits will be determined at the end of each taxable year and will be
allocated pro rata over the entire year. For federal income tax purposes, only
amounts paid out of earnings and profits will qualify as dividends. Thus, if
during a taxable year a Fund's declared dividends (as declared daily throughout
the year) exceed the Fund's net income (as determined at the end of the year),
only that portion of the year's distributions which equals the year's earnings
and profits will be deemed to have constituted a dividend. It is expected that
each Fund's net income, on an annual basis, will equal the dividends declared
during the year.
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 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. In addition, if a shareholder holds Fund shares for six months or
less, any loss on the sale or exchange of those shares will be disallowed to the
extent of the amount of exempt-interest dividends received with respect to the
shares. The Treasury Department is authorized to issue regulations reducing the
six months holding requirement to a period of not less than the greater of 31
days or the period between regular dividend distributions where a Fund regularly
distributes at least 90% of its net tax-exempt interest, if any. No such
regulations had been issued as of the date of this SAI. The loss disallowance
rules described in this paragraph do 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
66
<PAGE>
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.
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 will generally 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.
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Special Tax Considerations.
--------------------------
All Funds
The Funds intend that at least 50% of the value of their total assets at
the close of each quarter of their taxable years will consist of obligations,
the interest on which is exempt from federal income tax, so that they will
qualify under the Code to pay "exempt-interest dividends." The portion of total
dividends paid by a Fund with respect to any taxable year that constitutes
exempt-interest dividends will be the same for all shareholders receiving
dividends during such year. Long-term and/or short-term capital gain
distributions will not constitute exempt-interest dividends and will be taxed as
capital gain or ordinary income dividends, respectively. The exemption of
interest income derived from investments in tax-exempt obligations for federal
income tax purposes may not result in a similar exemption under the laws of a
particular state or local taxing authority.
Not later than 60 days after the close of its taxable year, each Fund will
notify its shareholders of the portion of the dividends paid with respect to
such taxable year which constitutes exempt-interest dividends. The aggregate
amount of dividends so designated cannot exceed the excess of the amount of
interest excludable from gross income under Section 103 of the Code received by
the Fund during the taxable year over any amounts disallowed as deductions under
Sections 265 and 171(a)(2) of the Code. Interest on indebtedness incurred to
purchase or carry shares of a Fund will not be deductible to the extent that the
Fund's distributions are exempt from federal income tax.
In addition, the federal alternative minimum tax ("AMT") rules ensure that
at least a minimum amount of tax is paid by taxpayers who obtain significant
benefit from certain tax deductions and exemptions. Some of these deductions and
exemptions have been designated "tax preference items" which must be added back
to taxable income for purposes of calculating AMT. Among the tax preference
items is tax-exempt interest from "private activity bonds" issued after August
7, 1986. To the extent that a Fund invests in private activity bonds, its
shareholders who pay AMT will be required to report that portion of Fund
dividends attributable to income from the bonds as a tax preference item in
determining their AMT. Shareholders will be notified of the tax status of
distributions made by the Fund. Persons who may be "substantial users" (or
"related persons" of substantial users) of facilities financed by private
activity bonds should consult their tax advisors before purchasing Fund shares.
Furthermore, shareholders will not be permitted to deduct any of their share of
the Fund's expenses in computing their AMT. With respect to a corporate
shareholder of such Funds, exempt-interest dividends paid by a Fund is included
in the corporate shareholder's "adjusted current earnings" as part of its AMT
calculation, and may also affect its federal "environmental tax" liability. As
of the printing of this SAI, individuals are subject to an AMT at a maximum rate
of 28% and corporations at a maximum rate of 20%. Shareholders with questions or
concerns about AMT should consult their own tax advisors.
Shares of the Funds would not be suitable for tax-exempt institutions and
may not be suitable for retirement plans qualified under Section 401 of the
Code, H.R. 10 plans and IRAs since such plans and accounts are generally tax-
exempt and, therefore, would not benefit from
68
<PAGE>
the exempt status of dividends from such Funds. Such dividends would be
ultimately taxable to the beneficiaries when distributed to them.
Arizona Tax-Free Fund
Individuals, trusts and estates who are subject to Arizona income tax will
not be subject to such tax on dividends paid by the Arizona Tax-Free Fund, to
the extent that such dividends qualify as exempt-interest dividends of a
regulated investment company under Section 852(b)(5) of the Code and are
attributable to either (i) obligations of the State of Arizona or its political
subdivisions thereof or (ii) obligations issued by the governments of Guam,
Puerto Rico, or the Virgin Islands. In addition, dividends paid by the Arizona
Tax-Free Fund that are attributable to interest payments on direct obligations
of the U.S. government will not be subject to Arizona income tax to the extent
the Arizona Tax-Free Fund qualifies as a regulated investment company under
Subchapter M of the Code. Other distributions from the Arizona Tax-Free Fund,
however, such as distributions of short-term or long-term capital gains, will
generally not be exempt from Arizona income tax.
Because shares of the Arizona Tax-Free Fund are intangibles, they are not
subject to Arizona property tax. Shareholders of the Arizona Tax-Free Fund
should consult their tax advisors about other state and local tax consequences
of their investment in the Arizona Tax-Free Fund. The Company makes no
representations as to Arizona state and local taxes that may be imposed on a
corporate investor in the Arizona Tax-Free Fund and encourages such investors to
consult with their own tax advisors.
California Tax-Free Bond and California Tax-Free Income Funds
Individuals, trusts and estates resident in California will not be subject
to California personal income tax on dividends from the California Tax-Free Bond
Fund and California Tax-Free Income Fund that represent tax-exempt interest paid
on municipal obligations of the State of California, its political subdivisions,
direct obligations of the U.S. government and certain other issuers, including
Puerto Rico, Guam, and the U.S. Virgin Islands. Such individuals, trusts and
estates will be subject to California personal income tax on other distributions
received from the California Tax-Free Bond Fund and California Tax-Free Income
Fund, including distributions of interest on municipal obligations issued by
other issuers and all capital gains.
Except as noted above with respect to California personal income taxation
of individuals, trusts and estates resident in California, dividends and
distributions from the California Tax-Free Bond Fund and California Tax-Free
Income Fund may be taxable to investors under state or local law as dividend
income even though all or a portion of such distributions may be derived from
interest on tax-exempt obligations which, if realized directly, would be exempt
from such income taxes.
Shareholders of the California Tax-Free Bond Fund and California Tax-Free
Income Fund should consult their own tax advisors about other state and local
tax consequences of their investments in the California Tax-Free Bond Fund and
California Tax-Free Income Fund, such as consequences to California part-year
residents, which may be different than the federal income tax
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consequences of such investments. The Company makes no representations as to
California state and local taxes that may be imposed on a corporate investor in
the California Tax-Free Bond Fund or California Tax-Free Income Fund and
encourages such investors to consult with their own tax advisors.
Oregon Tax-Free Fund
So long as the Oregon Tax-Free Fund qualifies to be taxed as a separate
"regulated investment company" under the Code, individuals, trusts and estates
will not be subject to Oregon personal income tax on distributions from the
Oregon Tax-Free Fund that represent "exempt-interest dividends" of a regulated
investment company under the Code paid on municipal obligations of the State of
Oregon and its political subdivisions, the U.S. Virgin Islands, Puerto Rico and
Guam. Individuals, trusts and estates will be subject to Oregon personal income
tax on other types of distributions received from the Oregon Tax-Free Fund,
including distributions of interest on obligations issued by other issuers and
all long-term and short-term capital gains. Shares of the Oregon Tax-Free Fund
will not be subject to the Oregon property tax.
Shareholders of the Oregon Tax-Free Fund should consult their own tax
advisors about other state and local tax consequences of their investments in
the Oregon Tax-Free Fund, which may differ from the federal income tax
consequences of such investments. The Company makes no representations as to
Oregon state and local taxes that may be imposed on a corporate investor in the
Oregon Tax-Free Fund and encourages such investors to consult with their own tax
advisors.
National Tax-Free and Short-Term Municipal Income Funds
Investors are advised to consult their tax advisors concerning the
application of state and local taxes, which may have different consequences from
those under federal income tax law.
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.
CAPITAL STOCK
The Funds are six 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 other funds.
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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 that affect one class but not another, shareholders
vote as a class; for example, the approval of a Plan. Subject to the foregoing,
all shares of a Fund have equal voting rights and will be voted in the
aggregate, and not by series, except where voting by series is required by law
or where the matter involved only affects one series. For example, a change in
a Fund's 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 Fund, means the
vote of the lesser of (i) 67% of the shares of such class of the Fund
represented at a meeting if the holders of more than 50% of the outstanding
shares of such class of the Fund are present in person or by proxy, or (ii) more
than 50% of the outstanding shares of such class of the Fund. The term
"majority," when referring to the approvals to be obtained from shareholders of
the Company as a whole, means the vote of the lesser of (i) 67% of the Company's
shares represented at a meeting if the holders of more than 50% of the Company's
outstanding shares are present in person or by proxy, or (ii) more than 50% of
the Company's outstanding shares. Shareholders are entitled to one vote for
each full share held and fractional votes for fractional shares held.
The Company may dispense with an annual meeting of shareholders in any year
in which it is not required to elect directors under the 1940 Act.
Shares have no preemptive rights or subscription. All shares, when issued
for the consideration described in the Prospectus, are fully paid and non-
assessable by the Company.
Each share of a class of a Fund represents an equal proportional interest
in the Fund with each other share in 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 or class
are entitled to receive the assets attributable to the Fund or class that are
available for distribution, and a distribution of any general assets not
attributable to a particular investment portfolio that are
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available for distribution in such manner and on such basis as the Directors in
their sole discretion may determine.
Set forth below as of November 30, 1997 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 of a Fund as a whole. As of November 30, 1997, no shareholders were
known by the Company to own 5% or more of the outstanding Class A or B shares of
the California Funds.
5% OWNERSHIP AS OF NOVEMBER 30, 1997
<TABLE>
<CAPTION>
NAME AND CLASS; TYPE PERCENTAGE PERCENTAGE
FUND ADDRESS OF OWNERSHIP OF CLASS OF FUND
---- -------- ------------ ---------- ----------
<S> <C> <C> <C> <C>
ARIZONA TAX- Stephens Inc. Class A; 5.69% 1.58%
FREE FUND 111 Center Street Beneficially Owned for
Little Rock , AR 72201 Acct. 76382382
Donna Marie Brown Class A 5.34% 1.48%
P.O. Box 2450 Record Holder
Pine Top, AZ 85935
Stephens Inc. Class B 5.83% 0.33%
111 Center Street Beneficially Owned for
Little Rock , AR 72201 Acct. 77683831
Stephens Inc. Class B 6.49% 0.37%
111 Center Street Beneficially Owned for
Little Rock, AR 72201 Acct. 76452073
Stephens Inc. Class B 18.59% 1.06%
111 Center Street Beneficially Owned for
Little Rock, AR 72201 Acct. 74128096
Stephens Inc. Class B 14.65% 0.84%
111 Center Street Beneficially Owned for
Little Rock, AR 72201 Acct. 74135389
Stephens Inc. Class B 5.07% 0.29%
111 Center Street Beneficially Owned for
Little Rock, AR 72201 Acct. 74142573
Stephens Inc. Class B 5.12% 0.29%
111 Center Street Beneficially Owned for
Little Rock, AR 72201 Acct. 74245439
NATIONAL TAX- Stephens Inc. Class A 8.69% 3.02%
FREE FUND lll Center Street Beneficially Owned for
Little Rock, AR 72203 Acct. 74349069
Stephens Inc. Class A 7.42% 2.58%
111 Center Street Beneficially Owned for
Little Rock, AR 72203 Acct. 74327500
Stephens Inc. Class B 7.65% 0.68%
111 Center Street Beneficially Owned for
Little Rock, AR 72201 Acct. 75949932
</TABLE>
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<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
Stephens Inc. Class B 7.36% 0.66%
111 Center Street Beneficially Owned for
Little Rock, AR 72201 Acct. 75937750
Stephens Inc. Class B 5.65% 0.52%
111 Center Street Beneficially Owned for
Little Rock, AR 72201 Acct. 74178680
Stephens Inc. Class B 5.92% 0.53%
111 Center Street Beneficially Owned for
Little Rock, AR 72201 Acct. 74221787
Stephens Inc. Class B 5.37% 0.48%
111 Center Street Beneficially Owned for
Little Rock, AR 72201 Acct. 74239315
Stephens Inc. Class B 5.93% 0.53%
111 Center Street Beneficially Owned for
Little Rock, AR 72201 Acct. 74338438
Stephens Inc. Class B 7.67% 0.68%
111 Center Street Beneficially Owned for
Little Rock, AR 72201 Acct. 74381002
Stephens Inc. Class B 8.07% 0.72%
111 Center Street Beneficially Owned for
Little Rock, AR 72201 Acct. 77146978
Stephens Inc. Class B 17.63% 1.57%
111 Center Street Beneficially Owned for
Little Rock, AR 72201 Acct. 74433157
OREGON TAX- Stephens Inc. Class B 16.22% 1.11%
FREE FUND 111 Center Street Beneficially Owned for
Little Rock, AR 72201 Acct. 76893571
Stephens Inc. Class B 7.42% 0.51%
P.O. Box 34127 Beneficially Owned for
Little Rock, AR 72203 Acct. 76258900
Stephens Inc. Class B 6.15% 0.42%
P.O. Box 34127 Beneficially Owned for
Little Rock, AR 72203 Acct. 76369719
Stephens Inc. Class B 6.14% 0.42%
P.O. Box 34127 Beneficially Owned for
Little Rock, AR 72203 Acct. 76316882
Stephens Inc. Class B 12.28% 0.84%
P.O. Box 34127 Beneficially Owned for
Little Rock, AR 72203 Acct. 76232731
SHORT-TERM Hep & Co. Single Class 44.60% 44.60%
MUNICIPAL c/o Wells Fargo Bank Record Holder
INCOME FUND P.O. Box 9800
Calabasas, CA 91302
Herman & Raymond Single Class 22.26% 22.26%
Christensen Record Holder
801 American Street
San Carlos, CA 94070
JJ&W LLC Single Class 8.39% 8.39%
P.O. Box 5807 Record Holder
Redwood City, CA 94063
</TABLE>
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For purposes of the 1940 Act, any person who owns directly or through one
or more controlled companies more that 25% of the voting securities of a fund is
presumed to "control" such fund. 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
that 25% of a class (or Fund) and has voting and/or investment powers, it may be
presumed to control such class (or Fund).
OTHER
This 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 a 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 serves 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.
FINANCIAL INFORMATION
The portfolio of investments and unaudited financial statements for the
Arizona Tax-Free, California Tax-Free Income, National Tax-Free and Oregon Tax-
Free Funds for the six-month period ended September 30, 1997, are hereby
incorporated by reference to the Company's Semi-Annual Report as filed with the
SEC on December 5, 1997.
The portfolio of investments and unaudited financial statements for the
Overland California Tax-Free Bond, Short-Term Municipal Income Fund and Short-
Term Municipal Income Master Portfolio for the six month period ended June 30,
1997 are hereby incorporated by reference to the Overland Semi-Annual Reports as
filed with the SEC on September 3, 1997.
The portfolio of investments, audited financial statements and independent
auditors' report for the Arizona Tax-Free, California Tax-Free Income, National
Tax-Free and Oregon Tax-Free Funds for the fiscal year ended March 31, 1997 are
hereby incorporated by reference to the Company's Annual Reports as filed with
the SEC on June 4, 1997.
The portfolio of investments, audited financial statements and independent
auditors' report for the Overland California Tax-Free Bond Fund, Short-Term
Municipal Income Fund and Short-Term Municipal Income Master Portfolio for the
year ended December 31, 1996, are hereby
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<PAGE>
incorporated by reference to the Overland Annual Reports as filed with the SEC
on March 11, 1997.
Annual Reports may be obtained by calling 1-800-222-8222.
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APPENDIX
The following is a description of the ratings given by Moody's and S&P to
corporate and municipal bonds, municipal notes, and corporate and municipal
commercial paper.
Corporate and Municipal Bonds
Moody's: The four highest ratings for corporate and municipal bonds are
"Aaa," "Aa," "A" and "Baa." Bonds rated "Aaa" are judged to be of the "best
quality" and carry the smallest amount of investment risk. Bonds rated "Aa" are
of "high quality by all standards," but margins of protection or other elements
make long-term risks appear somewhat greater than "Aaa" rated bonds. Bonds
rated "A" possess many favorable investment attributes and are considered to be
upper medium grade obligations. Bonds rated "Baa" are considered to be medium
grade obligations; interest payments and principal security appear adequate for
the present, but certain protective elements may be lacking or may be
characteristically unreliable over any great length of time. Such bonds have
speculative characteristics as well. Moody's applies numerical modifiers: 1, 2
and 3 in each rating category from "Aa" through "Baa" in its rating system. The
modifier 1 indicates that the security ranks in the higher end of its category;
the modifier 2 indicates a mid-range ranking; and the modifier 3 indicates that
the issue ranks in the lower end.
S&P: The four highest ratings for corporate and municipal bonds are "AAA,"
"AA," "A" and "BBB." Bonds rated "AAA" have the highest ratings assigned by S&P
and have an extremely strong capacity to pay interest and repay principal.
Bonds rated "AA" have a "very strong capacity to pay interest and repay
principal" and differ "from the highest rated issued only in small degree."
Bonds rated "A" have a "strong capacity" to pay interest and repay principal,
but are "somewhat more susceptible" to adverse effects of changes in economic
conditions or other circumstances than bonds in higher rated categories. Bonds
rated "BBB" are regarded as having an "adequate capacity" to pay interest and
repay principal, but changes in economic conditions or other circumstances are
more likely to lead to a "weakened capacity" to make such repayments. The
ratings from "AA" to "BBB" may be modified by the addition of a plus or minus
sign to show relative standing within the category.
Municipal Notes
Moody's: The highest ratings for state and municipal short-term
obligations are "MIG 1," "MIG 2," and "MIG 3" (or "VMIG 1," "VMIG 2" and "VMIG
3" in the case of an issue having a variable rate demand feature). Notes rated
"MIG 1" or "VMIG 1" are judged to be of the "best quality." Notes rated "MIG 2"
or "VMIG 2" are of "high quality," with margins of protections "ample although
not as large as in the preceding group." Notes rated "MIG 3" or "VMIG 3" are of
"favorable quality," with all security elements accounted for, but lacking the
strength of the preceding grades.
A-1
<PAGE>
S&P: The "SP-1" rating reflects a "very strong or strong capacity to pay
principal and interest." Notes issued with "overwhelming safety
characteristics" will be rated "SP-1+." The "SP-2" rating reflects a
"satisfactory capacity" to pay principal and interest.
Corporate and Municipal Commercial Paper
Moody's: The highest rating for corporate and municipal commercial paper
is "P-1" (Prime-1). Issuers rated "P-1" have a "superior capacity for repayment
of short-term promissory obligations." Issuers rated "P-2" (Prime-2) "have a
strong capacity for repayment of short-term promissory obligations," but
earnings trends, while sound, will be subject to more variation.
S&P: The "A-1" rating for corporate and municipal commercial paper
indicates that the "degree of safety regarding timely payment is either
overwhelming or very strong." Commercial paper with "overwhelming safety
characteristics" will be rated "A-1+." Commercial paper with a strong capacity
for timely payments on issues will be rated "A-2."
A-2
