<PAGE>
As filed with the Securities and Exchange Commission
on May 1, 1998
Registration No. 33-42927; 811-6419
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------------------
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [ ]
Post-Effective Amendment No. 45 [X]
And
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [ ]
Amendment No. 46 [X]
(Check appropriate box or boxes)
________________________
STAGECOACH FUNDS, INC.
(Exact Name of Registrant as specified in Charter)
111 Center Street
Little Rock, Arkansas 72201
(Address of Principal Executive Offices, including Zip Code)
__________________________
Registrant's Telephone Number, including Area Code: (800) 643-9691
Richard H. Blank, Jr.
c/o Stephens Inc.
111 Center Street
Little Rock, Arkansas 72201
(Name and Address of Agent for Service)
With a copy to:
Robert M. Kurucza, Esq.
Marco E. Adelfio, Esq.
Morrison & Foerster LLP
2000 Pennsylvania Ave., N.W.
Washington, D.C. 20006
It is proposed that this filing will become effective (check appropriate box):
[X] Immediately upon filing pursuant [ ] on _________ pursuant
to Rule 485(b), or to Rule 485(b)
[ ] 60 days after filing pursuant [ ] on _________ pursuant
to Rule 485(a)(1), or to Rule 485(a)(1)
[ ] 75 days after filing pursuant [ ] on ___________pursuant
to Rule 485(a)(2), or to Rule 485(a)(2)
If appropriate, check the following box:
[ ] this post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
<PAGE>
EXPLANATORY NOTE
----------------
This Post-Effective Amendment No. 45 to the Registration Statement (the
"Amendment") of Stagecoach Funds, Inc. (the "Company") is being filed to add
to the Company's Registration Statement audited financial statements and
certain other financial information for the year ended December 31, 1997, for
the Retail and Institutional Class shares, as applicable, for the Company's
California Tax-Free Bond, Overland Express Sweep, Short-Term Government-
Corporate Income, Short-Term Municipal Income, U.S. Government Income and
Variable Rate Government Funds, described in prospectuses filed in Post-
Effective Amendment Nos. 37 and 41 to the Company's Registration Statement on
December 15, 1997 and January 29, 1998, respectively. The prospectuses in said
Post-Effective Amendment Nos. 37 and 41 describing the aforementioned Funds
are incorporated by reference to this filing. The updated financial
information therefor is provided herein in a "wrapper" format which will
become part of said prospectuses. In addition, this Amendment makes certain
non-material changes to the Retail and Institutional Class shares, as
applicable, of the Company's Arizona Tax-Free, California Tax-Free Bond,
California Tax-Free Income, Intermediate Bond, National Tax-Free, Oregon Tax-
Free, Overland Express Sweep, Short-Intermediate U.S. Government Income, Short-
Term Government-Corporate Income, Short-Term Municipal Income, U.S. Government
Income and Variable Rate Government Funds.
This Amendment does not affect the Registration Statement, prospectuses or
Statements of Additional Information for the Company's other Funds or classes.
<PAGE>
STAGECOACH FUNDS, INC.
----------------------
Cross Reference Sheet
---------------------
Form N-1A Item Number
- ---------------------
Part A Prospectus Captions
- ------ -------------------
1 Cover Page
2 Summary of Expenses
3 Financial Highlights
How to Read the Financial Highlights
4 General Investment Risks
Key Information
Organization and Management of the Funds
(Name of) Fund
5 Organization and Management of the Funds
Summary of Expenses
6 Additional Services and Other Information
7 Additional Services and Other Information
Exchanges
Your Account
8 Additional Services and Other Information
Exchanges
Your Account
9 Not Applicable
Part B Statement of Additional Information Captions
- ------ --------------------------------------------
10 Cover Page
11 Table of Contents
12 Historical Fund Information
13 Additional Permitted Investment Activities
Appendix
Investment Restrictions
Risk Factors
14 Management
15 Management
16 Fund Expenses
Independent Auditors
Management
17 Portfolio Transactions
18 Capital Stoock
Other
19 Additional Purchase and Redemption Information
Determination of Net Asset Value
20 Federal Income Taxes
21 Management
22 Performance Calculations
23 Financial Information
Part C Other Information
- ------ -----------------
24-32 Information required to be included in Part C is set forth under the
appropriate Item, so numbered, in Part C of this Document.
<PAGE>
STAGECOACH FUNDS/R/
May 1, 1998
Stagecoach
Income Funds
Prospectus
Wrapper
Class A This wrapper updates
Class B information in the
Class C December 15, 1997
Prospectus, including
Financial Highlights as
indicated and the Expense
Tables. Please keep this
update with your
prospectus.
<PAGE>
The tables below replace the Expense Information on pages 6-9 of the December
15, 1997 Prospectus for the Funds indicated. Said Prospectus is hereby
incorporated by reference.
<TABLE>
<CAPTION>
Income Retail Funds Summary of Expenses
- -----------------------------------------------------------------------------------------------------------------------------------
===================================================================================================================================
SHAREHOLDER TRANSACTION EXPENSES
====================================================================================================================================
These tables are intended to help you understand the various costs and expenses you will pay directly or indirectly as a shareholder
in the Fund. These tables do not reflect any charges that may be imposed by Wells Fargo Bank or other institutions in connection
with an account through which you hold Fund shares. See "Organization and Management of the Fund" for more details.
- ------------------------------------------------------------------------------------------------------------------------------------
S/T G-C Inc. U.S. Government Income Variable Rate Govt.
------------------------------------------------------------------------------------
Class A Class A Class B Class C Class A Class C
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Maximum sales charge on a purchase
(as a percentage of offering price). 3.00% 4.50% None None 3.00% None
- ------------------------------------------------------------------------------------------------------------------------------------
Maximum sales charge on reinvested dividends. None None None None None None
- ------------------------------------------------------------------------------------------------------------------------------------
Maximum sales charge imposed on a:
Redemption during first year None None 5.00% 1.00% None 1.00%
Redemption after first year None None 4.00% None None None
- ------------------------------------------------------------------------------------------------------------------------------------
Exchange fees None None None None None None
====================================================================================================================================
ANNUAL FUND OPERATING EXPENSES (AS A PERCENTAGE OF AVERAGE NET ASSETS)
====================================================================================================================================
Expenses shown "before waivers" are based on contract amounts while expenses shown "after waivers" represent amounts expected to be
incurred during the current fiscal year. Expense waivers are voluntary and may be discontinued without notice. Long-term
shareholders of Class B and Class C shares may pay more than the equivalent of the maximum front-end sales charge allowed by the
National Association of Securities Dealers.
- ------------------------------------------------------------------------------------------------------------------------------------
S/T G-C Inc. U.S. Government Income Variable Rate Govt.
------------------------------------------------------------------------------------
Class A Class A Class B Class C Class A Class C
- -----------------------------------------------------------------------------------------------------------------------------------
Rule 12b1Fee 0.25% 0.05% 0.70% 0.75% 0.25% 0.50%
- ------------------------------------------------------------------------------------------------------------------------------------
Management fee
after waivers or reimbursement) 0.00% 0.50% 0.50% 0.50% 0.41% 0.41%
- ------------------------------------------------------------------------------------------------------------------------------------
Other expenses
(after waivers or reimbursement) 0.16% 0.34% 0.39% 0.38% 0.16% 0.41%
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL FUND OPERATING EXPENSES
(after waivers or reimbursement) 0.41% 0.89% 1.59% 1.59% 0.78% 1.28%
- ------------------------------------------------------------------------------------------------------------------------------------
Management Fee
(before waivers or reimbursement) 0.50% 0.50% 0.50% 0.50% 0.50% 0.50%
- ------------------------------------------------------------------------------------------------------------------------------------
Other expenses
(before waivers or reimbursement) 1.17% 0.41% 0.67% 1.81% 0.34% 0.77%
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL FUND OPERATING EXPENSES
(before waivers or reimbursement) 1.92% 0.96% 1.87% 3.06% 1.09% 1.77%
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
====================================================================================================================================
EXAMPLES OF EXPENSES
====================================================================================================================================
You would pay the following expenses S/T G-C Inc. U.S. Government Income Variable Rate Govt.
on a $1,000 investment assuming a 5%
annual return, and that you redeem your ----------------------------------------------------------------------------------------
shares at the end of each period. Class A Class A Class B Class C Class A Class C
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1 Year $34 $54 $66 $26 $38 $23
- ------------------------------------------------------------------------------------------------------------------------------------
3 Years $43 $72 $80 $50 $54 $41
- ------------------------------------------------------------------------------------------------------------------------------------
5 Years $52 $92 $107 $87 $72 $70
- ------------------------------------------------------------------------------------------------------------------------------------
10 Years $80 $150 $152 $189 $124 $155
- ------------------------------------------------------------------------------------------------------------------------------------
You would pay the following expenses S/T G-C Inc. U.S. Government Income Variable Rate Govt.
on a $1,000 investment assuming a 5%
annual return, and that you do not redeem ----------------------------------------------------------------------------------------
your shares at the end of each period. Class A Class A Class B Class C Class A Class C
- ------------------------------------------------------------------------------------------------------------------------------------
1 Year $34 $54 $16 $16 $38 $13
- ------------------------------------------------------------------------------------------------------------------------------------
3 Years $43 $72 $50 $50 $54 $41
- ------------------------------------------------------------------------------------------------------------------------------------
5 Years $52 $92 $87 $87 $72 $70
- ------------------------------------------------------------------------------------------------------------------------------------
10 Years $80 $150 $152 $189 $124 $155
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
The table below replaces Pages 16 of the December 15, 1997 Prospectus.
Short-Term Government -
Corporate Income Fund Financial Highlights
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
====================================================================================
FOR SHARES OUTSTANDING
======================================================================================
CLASS A SHARE - COMMENCED
ON SEPTEMBER 19, 1994
-----------------------------------------------
Dec. 31, Dec. 31, Dec. 31, Dec. 31
For the period ended: 1997 1996 1995 1994
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net asset value, beginning of period $4.98 $5.02 $4.93 $5.00
- --------------------------------------------------------------------------------------
Income from investment operations:
Net investment income (loss) 0.29 0.28 0.30 0.08
Net realized and unrealized gain
(loss) on investments 0.00 (0.04) 0.09 (0.07)
- --------------------------------------------------------------------------------------
Total from investment operations 0.29 0.24 0.39 0.01
- --------------------------------------------------------------------------------------
Less distributions:
Dividends from net investment income (0.29) (0.28) (0.30) (0.08)
Distributions from net realized gain 0.00 0.00 0.00 0.00
- --------------------------------------------------------------------------------------
Total from distributions: (0.29) (0.28) (0.30) (0.08)
- --------------------------------------------------------------------------------------
Net asset value, end of period $4.98 $4.98 $5.02 $4.93
- --------------------------------------------------------------------------------------
Total Return/1/ 5.91% 4.83% 8.05% 0.28%
- --------------------------------------------------------------------------------------
Ratios/supplemental data:
Net assets, end of period (000s) $14,689 $14,023 $5,954 $96
- --------------------------------------------------------------------------------------
Ratios to average net assets
(annualized)
Ratio of expenses to average 0.39%/2/ 0.36%/4/ 0.30%/4/ 0.30%/4/
net assets
Ratio of net investment income to
average net assets 5.74%/2/ 5.47%/4/ 6.01%/4/ 5.77%/4/
- --------------------------------------------------------------------------------------
Portfolio turnover 223%/3/ 247%/5/ 227%/5/ 0%/5/
- --------------------------------------------------------------------------------------
Ratio of expenses to average net assets
prior to waived fees and reimbursed 1.92%/2/ 1.85%/4/ 6.79%/4/ 67.89%/4/
expenses
- --------------------------------------------------------------------------------------
Ratio of net investment income to
average net assets prior to waived 4.21%/2/ 3.98%/4/ (0.48)%/4/(61.82)%/4/
fees and reimbursed expenses
- --------------------------------------------------------------------------------------
======================================================================================
CLASS A SHARE CALANDER YEAR RETURNS 1997 1996 1995
======================================================================================
These returns reflect fee waivers and reimbursements, 5.91% 4.83% 8.05%
do not reflect sales loads and are not a guarantee of
future performance.
- --------------------------------------------------------------------------------------
</TABLE>
1 Total returns do not include any sales charges. Total returns for periods less
than one year are not annualized.
2 This ratio includes activity of the Master Portfolio for the period from
January 1, 1997 to December 12, 1997.
3 The portfolio turnover rate includes activity of the Master Portfolio from
January 1, 1997 to December 12, 1997.
4 The ratio includes income and expenses allocated from the Master Portfolio.
5 The portfolio turnover shown in the table is for the Master Portfolio.
<PAGE>
This page intentionally left blank
- ---------------------------------------------------
<PAGE>
The tables below replace Pages 24-25 of the December 15, 1997 Prospectus.
<TABLE>
<CAPTION>
U.S. Government Fund/1/ Financial Highlights
- -----------------------------------------------------------------------------------------------------------------------------------
====================================================================================================================================
FOR SHARES OUTSTANDING
====================================================================================================================================
CLASS A SHARES - COMMENCED
ON APRIL 7, 1988
----------------------------------------------------------------------------------
Dec. 31, Dec. 31, Dec. 31, Dec. 31, Dec. 31,
For Period Ended: 1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $10.65 $ 11.34 $10.16 $11.44 $11.11
- ------------------------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income (loss) 0.64 0.66 0.73 0.74 0.78
Net realized and unrealized gain
(loss) on investments 0.23 (0.69) 1.18 (1.28) 0.38
- ------------------------------------------------------------------------------------------------------------------------------------
Total from investment operations 0.87 (0.03) 1.91 (0.54) 1.16
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
Dividends from net investment income (0.64) (0.66) (0.73) (0.74) (0.78)
Distributions from net realized gain 0.00 0.00 0.00 0.00 (0.05)
- ------------------------------------------------------------------------------------------------------------------------------------
Total from distributions: (0.64) ( 0.66) (0.73) (0.74) (0.83)
Net Asset Value, end of period $10.88 $10.65 $11.34 $10.16 $11.44
- ------------------------------------------------------------------------------------------------------------------------------------
Total return/2/ 8.73% (0.11)% 19.32% (4.81)% 10.67%
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios/supplemental data:
Net assets, end of period (000s) $207,558 $77,239 $30,471 $35,838 $50,301
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios to average net assets
(annualized)
Ratio of expenses to average net assets 0.88% 0.89% 0.88% 0.76% 0.53%
Ratios of net investment income to
average net assets 6.01% 6.07% 6.79% 6.84% 6.79%
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover 306% 240% 95% 50% 115%
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to average net assets
prior to waived fees and reimbursed 0.96% 1.24% 1.24% 1.08% 1.01%
expenses
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income to
average net assets prior to waived fees 5.93% 5.72% 6.44% 6.52% 6.31%
and reimbursed expenses
- ------------------------------------------------------------------------------------------------------------------------------------
===================================================================================================================================
CLASS A SHARE CALENDAR YEAR RETURNS 1997 1996 1995 1994 1993
===================================================================================================================================
Returns for other share classes may vary due 8.73% 0.11% 19.32% -4.81% 10.67%
to different fees and expenses. These returns
reflect fee waivers and reimbursements, do
not reflect sales loads and are not a guarantee
of future performance.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
/1/ Periods prior to December 31, 1997 have been restated to give effect to the
conversion ratios applied in the consolidation of Overl and Express Funds,
Inc. and Stagecoach Fund, Inc.
/2/ Total returns do not include any sales charges. Total returns for periods
less than one year are not annualized.
<PAGE>
<TABLE>
<CAPTION>
CLASS A SHARES - COMMENCED
ON APRIL 7, 1988
- -----------------------------------------------------------------------------------------------------------------------------------
Dec. 30, Dec. 30, Dec. 30, Dec. 30, Dec. 30,
For Period Ended: 1992 1991 1990 1989 1988
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $11.54 $10.84 $10.75 $10.29 $10.52
- -----------------------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income (loss) 0.83 0.90 0.92 0.95 0.57
Net realized and unrealized gain
(loss) on investments (0.15) 0.95 0.11 0.53 (0.22)
- -----------------------------------------------------------------------------------------------------------------------------------
Total from investment operations 0.68 1.85 1.02 1.47 0.35
- -----------------------------------------------------------------------------------------------------------------------------------
Less distributions:
Dividends from net investment income (0.83) (0.90) (0.94) (0.95) (0.57)
Distributions from net realized gain (0.28) (0.24) 0.00 (0.06) (0.01)
- -----------------------------------------------------------------------------------------------------------------------------------
Total from distributions: (1.12) (1.15) (0.94) (1.01) (0.58)
Net Asset Value, end of period $11.11 $11.54 $10.84 $10.75 $10.29
- -----------------------------------------------------------------------------------------------------------------------------------
Total return/2/ 6.27% 18.08% 10.17% 14.82% 3.24%
- -----------------------------------------------------------------------------------------------------------------------------------
Ratios/supplemental data:
Net assets, end of period (000s) $40,883 $20,457 $11,116 $4,238 $3,264
- -----------------------------------------------------------------------------------------------------------------------------------
Ratios to average net assets 0.47% 0.00% 0.07% 0.54% 0.29%
(annualized)
Ratio of expenses to average net assets
Ratios of net investment income to
average net assets 6.26% 8.30% 8.65% 8.89% 7.88%
- -----------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover 128% 100% 4% 11% N/A
- -----------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to average net assets
prior to waived fees and reimbursed
expenses 1.13% 1.87% 2.72% 4.45% 7.31%
- -----------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income to
average net assets prior to waived fees
and reimbursed expenses 5.60% 6.43% 6.00% N/A N/A
- -----------------------------------------------------------------------------------------------------------------------------------
===================================================================================================================================
CLASS A SHARE CALENDAR YEAR RETURNS 1992 1991 1990 1989
===================================================================================================================================
Returns for other share classes may vary due 6.27% 18.08% 10.17% 14.82%
to different fees and expenses. These returns
reflect fee waivers and reimbursements, do
not reflect sales loads and are not a guarantee
of future performance.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
The table below replaces Pages 26-27 of the December 15, 1997 Prospectus.
U. S. Government Income Fund Financial Highlights
- ------------------------------------------------------------------------------------------------------------------------------------
For Shares Outstanding
====================================================================================================================================
CLASS B SHARES CLASS C SHARES -- COMMENCED
COMMENCED ON JULY 1, 1993 /1/
ON
DECEMBER 15,
1997
--------------------------------------------------------------------------------------------
For the period ended: Dec. 31, Dec. 31, Dec. 31, Dec. 31, Dec. 30, Dec. 30,
1997 1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period $10.72 $10.49 $11.17 $10.01 $11.26 $11.37
- ------------------------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income (loss) 0.03 0.55 0.58 0.64 0.65 0.32
Net realized and unrealized gain
(loss) on investments (0.02) 0.22 (0.68) 1.16 (1.25) (0.06)
- ------------------------------------------------------------------------------------------------------------------------------------
Total from investment operations 0.01 0.77 (0.10) 1.80 (0.60) 0.26
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
Dividends from net investment income (0.03) (0.55) (0.58) (0.64) (0.65) (0.32)
Distributions from net realized gain 0.00 0.00 0.00 0.00 0.00 (0.05)
- ------------------------------------------------------------------------------------------------------------------------------------
Total from distributions: (0.03) (0.55) (0.58) (0.64) (0.65) (0.37)
Net asset value, end of period $10.70 $10.71 $10.49 $11.17 $10.01 $11.26
- ------------------------------------------------------------------------------------------------------------------------------------
Total return/2/ 0.08% 7.56% (0.79)% 18.54% (5.45)% 2.25%
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios/supplemental data:
Net assets, end of period (000s) $26,401 $1,772 $2,290 $2,793 $3,722 $9,594
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios to average net assets
(annualized)
Ratio of expenses to average net
assets 1.58% 1.62% 1.62% 1.62% 1.37% 0.90%
Ratio of net investment income to
average net assets 5.75% 5.27% 5.50% 6.07% 6.14% 5.90%
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover 306% 306% 240% 95% 50% 115%
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to average net assets
prior to waived fees and reimbursed 1.87% 3.06% 3.39% 2.29% 1.87% 2.03%
expenses
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income to
average net assets prior to waived 5.46% 3.83% 3.73% 5.40% 5.64% 4.77%
fees and reimbursed expenses
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
/1/ Periods prior to December 31, 1997 have been restated to give effect to the
conversion ratios applied in the consolidation of Overland Express Funds,
Inc. and Stagecoach Funds, Inc.
/2/ Total returns do not include any sales charges. Total returns for periods
less than one year are not annualized.
<PAGE>
THIS PAGE INTENTIONALLY LEFT BLANK
- ----------------------------------
<PAGE>
The tables below replace Pages 30-31 of the December 15, 1997 Prospectus.
<TABLE>
<CAPTION>
Variable Rate Government Fund Financial Highlights
- -----------------------------------------------------------------------------------------------------------------------------------
CLASS A SHARES - COMMENCED
ON NOVEMBER 1, 1990
----------------------------------------------------------------------------------
Dec. 31, Dec. 31, Dec. 31, Dec. 31, Dec. 31,
For Period Ended: 1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $9.25 $9.35 $9.19 $9.99 $9.95
- ------------------------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income (loss) 0.51 0.50 0.53 0.43 0.44
Net realized and unrealized gain
(loss) on investments (0.02) (0.10) 0.16 (0.80) 0.04
- ------------------------------------------------------------------------------------------------------------------------------------
Total from investment operations 0.49 0.40 0.69 (0.37) 0.48
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
Dividends from net investment income (0.51) (0.46) (0.53) (0.43) (0.44)
Distributions from net realized gain 0.00 0.04 0.00 0.00 (0.00)
- ------------------------------------------------------------------------------------------------------------------------------------
Total from distributions: (0.51) ( 0.50) (0.53) (0.43) (0.44)
Net asset value, end of period $9.23 $9.25 $9.35 $9.19 $9.99
- ------------------------------------------------------------------------------------------------------------------------------------
Total return/1/ 5.43% 4.41% 7.69% (3.81)% 4.87%
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios/supplemental data:
Net assets, end of period (000s) $227,353 $393,948 $653,897 $215,546 $1,949,013
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios to average net assets
(annualized):
Ratios of expenses to average net assets 0.81% 0.88% 0.84% 0.79% 0.76%
Ratios of net investment income to
average net assets 5.55% 5.36% 5.71% 4.40% 4.37%
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover 92% 277% 317% 164% 201%
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to average net assets
prior to waived fees and reimbursed
expenses 1.09% 0.98% 0.96% 0.94% 0.95%
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income to
average net assets prior to waived fees 5.27% 5.26% 5.59% 4.25% 4.18%
and reimbursed expenses
- ------------------------------------------------------------------------------------------------------------------------------------
===================================================================================================================================
CLASS A SHARE CALENDAR RETURNS 1997 1996 1995 1994 1993
===================================================================================================================================
5.43% 4.41% 7.69% -3.81% 4.87%
</TABLE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
CLASS A SHARES - COMMENCED
ON NOVEMBER 1, 1990
--------------------------------------------------
Dec. 30, Dec. 30, Dec. 30,
For Period Ended: 1992 1991 1990
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net asset value, beginning of period $10.13 $10.12 $10.00
- ----------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income (loss) 0.59 0.78 0.08
Net realized and unrealized gain
(loss) on investments (0.18) 0.01 0.12
- ----------------------------------------------------------------------------------------------------
Total from investment operations 0.41 0.79 0.20
- ----------------------------------------------------------------------------------------------------
Less distributions:
Dividends from net investment income (0.59) (0.78) (0.08)
Distributions from net realized gain 0.00 0.00 0.00
- ----------------------------------------------------------------------------------------------------
Total from distributions: (0.59) ( 0.78) (0.08)
Net asset value, end of period $9.95 $10.13 $10.12
- ----------------------------------------------------------------------------------------------------
Total return/1/ 4.23% 8.60% 2.75%
- ----------------------------------------------------------------------------------------------------
Ratios/supplemental data:
Net assets, end of period (000s) $2,559,363 $566,840 $6,858
- ----------------------------------------------------------------------------------------------------
Ratios to average net assets
(annualized):
Ratios of expenses to average net assets 0.75% 0.50% 0.00%
Ratios of net investment income to
average net assets 5.62% 7.36% 4.93%
- ----------------------------------------------------------------------------------------------------
Portfolio turnover 197% 250% N/A
- ----------------------------------------------------------------------------------------------------
Ratio of expenses to average net assets
prior to waived fees and reimbursed
expenses 0.94% 1.08% 5.48%
- ----------------------------------------------------------------------------------------------------
Ratio of net investment income to
average net assets prior to waived fees 5.43% 6.78% (0.55)%
and reimbursed expenses
- ----------------------------------------------------------------------------------------------------
====================================================================================================
CLASS A SHARE CALENDAR RETURNS 1992 1991
====================================================================================================
Returns for other share classes may vary due to 4.23% 8.60%
different fees and expenses. These returns
reflect fee waivers and reimbursements, do not
reflect sales loads and are not a guarantee of
future performance.
/1/ Total returns do not include any sales charges. Total returns for periods
less than one year are not annualized.
</TABLE>
<PAGE>
The table below replaces Pages 30-31 of the December 15, 1997 Prospectus.
Variable Rate Government Fund Financial Highlights
- --------------------------------------------------------------------------------
================================================================================
FOR SHARES OUTSTANDING
================================================================================
<TABLE>
<CAPTION>
Class C Share - Commenced on July 1, 1993
-------------------------------------------------------------------
For Period Ended: Dec. 31, Dec. 31, Dec. 31, Dec. 31, Dec. 31,
1997 1996 1995 1994 1993
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, beginning of period $13.83 $13.97 $13.74 $14.93 $15.00
- -------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income (loss) 0.70 0.68 0.73 0.57 0.27
Net realized and unrealized gain
(loss) on investments 0.04 (0.14) 0.23 (1.19) (0.07)
- -------------------------------------------------------------------------------------------------------------------
Total from investment operations 0.74 0.54 0.96 (0.62) 0.20
- -------------------------------------------------------------------------------------------------------------------
Less distributions:
Dividends from net investment income (0.70) (0.63) (0.73) (0.57) (0.27)
Distributions from net realized gain 0.00 (0.05) 0.00 0.00 0.00
- -------------------------------------------------------------------------------------------------------------------
Total from distributions: (0.70) (0.68) (0.73) (0.57) (0.27)
Net asset value, end of period $13.87 $13.83 $13.97 $13.74 $14.93
- -------------------------------------------------------------------------------------------------------------------
Total Return/1/ 5.44% 3.95% 7.08% (4.25)% 1.32%
- -------------------------------------------------------------------------------------------------------------------
Ratios/supplemental data:
Net assets, end of period (000s) $4,458 $5,516 $7,730 $12,220 $11,319
- -------------------------------------------------------------------------------------------------------------------
Ratios to average net assets
(annualized)
Ratios of expenses to average net
assets 1.31% 1.38% 1.35% 1.29% 1.26%
Ratio of net investment income to
average net assets 5.05% 4.85% 5.23% 3.94% 3.41%
- -------------------------------------------------------------------------------------------------------------------
Portfolio turnover 92% 277% 317% 164% 201%
- -------------------------------------------------------------------------------------------------------------------
Ratio of expenses to average net assets
prior to waived fees and reimbursed
expenses 1.77% 1.67% 1.64% 1.55% 1.75%
- -------------------------------------------------------------------------------------------------------------------
Ratio of net investment income to
average net assets prior to waived fees
and reimbursed expenses 4.59% 4.56% 4.95% 3.68% 2.92%
- -------------------------------------------------------------------------------------------------------------------
/1/ Total returns do not include any sales charges. Total returns for periods less than one year are not
annualized.
</TABLE>
<PAGE>
Additional Updates:
- --------------------------------------------------------------------------------
The Short-Term Government Corporate Fund is closed to new investment except
for the reinvestment of the Fund's distributions, if any.
Effective February 1, 1998, Scott Smith replaces Tamyra Thomas as portfolio
manager for the Intermediate Bond Fund.
For Class A shares of the Variable Rate Government Fund and the Single Class
shares of the Short-Term Government-Corporate Income, the "Shareholder Servicing
Plan" section under "Organization and Management of the Funds" is clarified to
indicate that the Class A shares of these Funds have a Shareholder
Administrative Servicing Plan, and that where fees are paid pursuant to this
Plan, no fees are paid pursuant to any Distribution Plans applicable to these
shares.
Effective February 1, 1998, Wells Fargo Bank's compensation as Administrator
of the Funds is reduced to 0.03% and Stephens Inc.'s compensation as Co-
Administrator is increased to 0.04%. All references to these fees in the
Prospectuses and SAIs for the Funds, and the expense tables, shall be amended
to reflect these changes.
The following should be read in conjunction with, and, to the extent
inconsistent therewith, as superseding the section of the Prospectus entitled
"Additional Services and Other Information--Taxes." In general, all
distributions will be taxable to you when paid, regardless of whether they
are paid in cash or additional Fund shares. However, distributions declared in
October, November or December of one year and paid in January of the next
year are treated as if they were paid in the first year. Capital gain
distributions paid to noncorporate shareholders may qualify for taxation at
preferential rates.
Capital gain distributions, if any, will be made annually for each Fund.
<PAGE>
SC IC SUP (5/98)
<PAGE>
May 1, 1998
STAGECOACH FUNDS/R/
Stagecoach
Income Funds
Prospectus
Wrapper
Institutional Shares This wrapper updates information in the February 1,
1998 Prospectus, including Financial Highlights and
the Expense Tables as indicated. Please keep this
update with your prospectus.
<PAGE>
The table below replaces Expenses shown for U.S. Government Income Fund on Pages
6-7 of the February 1, 1998 Prospectus, which is hereby incorporated by
reference.
Income Institutional Funds Summary of Expenses
================================================================================
SHAREHOLDER TRANSACTION EXPENSES
================================================================================
These tables are intended to help you understand the various costs and expenses
you will pay directly or indirectly as a shareholder in the Fund. These tables
do not reflect any charges that may be imposed by Wells Fargo Bank or other
institutions in connection with an account through which you hold Fund shares.
See "Organization and Management of the Fund" for more details.
- --------------------------------------------------------------------------------
U.S. Government Income
-----------------------
Institutional
- --------------------------------------------------------------------------------
Maximum Sales charge on a purchase
(as a percentage of offering price). None
- --------------------------------------------------------------------------------
Maximum sales charge on reinvested
dividends. None
- --------------------------------------------------------------------------------
Maximum sales charge imposed on a:
Redemption during first year None
Redemption after first year None
- --------------------------------------------------------------------------------
Exchange Fees None
================================================================================
ANNUAL FUND OPERATING EXPENSES (AS A PERCENTAGE OF AVERAGE NET ASSETS)
================================================================================
Expenses shown "before waivers" are based on contract amounts while expenses
shown "after waivers" represent amounts expected to be incurred during the
current fiscal year. Expense waivers are voluntary and may be discontinued
without notice.
- --------------------------------------------------------------------------------
U.S. Government Income
----------------------
Institutional
- --------------------------------------------------------------------------------
Management Fee
(after waivers or reimbursement) 0.50%
- --------------------------------------------------------------------------------
Other expenses
(after waivers or reimbursement) 0.34%
- --------------------------------------------------------------------------------
Total Fund Operating Expenses
(after waivers or reimbursement) 0.84%
- --------------------------------------------------------------------------------
Management Fee
(before waivers or reimbursement) 0.50%
- --------------------------------------------------------------------------------
Other expenses
(before waivers or reimbursement) 0.66%
- --------------------------------------------------------------------------------
Total Fund Operating Expenses
(before waivers or reimbursement) 1.16%
================================================================================
EXAMPLES OF EXPENSES
================================================================================
You would pay the following expenses on a $1,000 investment assuming a 5%
annual return, and that you redeem your shares at the end of each period.
- --------------------------------------------------------------------------------
U.S. Government Income
----------------------
Institutional
- --------------------------------------------------------------------------------
1 Year $ 9
- --------------------------------------------------------------------------------
3 Years $ 27
- --------------------------------------------------------------------------------
5 Years $ 47
- --------------------------------------------------------------------------------
10 Years $ 104
- --------------------------------------------------------------------------------
<PAGE>
The table below replaces Page 18 of the February 1, 1998 Prospectus.
US Government Income Fund Financial Highlights
================================================================================
FOR SHARES OUTSTANDING
================================================================================
INSTITUTIONAL CLASS SHARES--COMMENCED
ON DECEMBER 15,1997
- --------------------------------------------------------------------------------
For the period ended: Dec. 31, 1997
- --------------------------------------------------------------------------------
Net asset value, beginning of period $15.73
- --------------------------------------------------------------------------------
Income from investment operations:
Net investment income (loss) 0.05
Net realized and unrealized gain (loss)
on investments (0.02)
- --------------------------------------------------------------------------------
Total from investment operations 0.03
- --------------------------------------------------------------------------------
Less distributions:
Dividends from net investment income (0.05)
Distributions from net realized gain 0.00
- --------------------------------------------------------------------------------
Total from distributions: (0.05)
- --------------------------------------------------------------------------------
Net asset value, end of period $15.71
- --------------------------------------------------------------------------------
Total return /1/ 0.18%
- --------------------------------------------------------------------------------
Ratios/supplemental data:
Net assets, end of period (000s) $7,255
- --------------------------------------------------------------------------------
Ratios to average net assets (annualized)
Ratios of expenses to average net assets 0.77%
Ratio of net investment income
to average net assets 6.58%
Portfolio turnover 306%
- --------------------------------------------------------------------------------
Ratio of expenses to average net assets
prior to waived fees and reimbursed
expenses 1.16%
- --------------------------------------------------------------------------------
Ratio of net investment income to
average net assets prior to waived fees
and reimbursed expenses 6.19%
- --------------------------------------------------------------------------------
================================================================================
INSTITUTIONAL SHARES CALENDAR-YEAR RETURNS
================================================================================
Returns for other share classes may vary due to
different fees and expenses. This return reflects 0.18%
fee waivers and reimbursements, does not reflect
sales loads, is not a guarantee of future
performance, and has not been audited.
- --------------------------------------------------------------------------------
/1/ Total returns do not include any sales charges. Total returns for periods
less than one year are not annualized.
The following should be read in conjunction with, and, to the extent
inconsistent therewith, as superseding the section of the Prospectus entitled
"Other Information--Taxes." In general, all distributions will be taxable to you
when paid, even though they are paid in additional Fund shares. However,
distributions declared in October, November or December of one year and paid in
January of the next year are treated as if they were paid in the first year.
Capital gain distributions paid to noncorporate shareholders may qualify for
taxation at preferential rates.
Capital gain distributions, if any, will be made annually for each Fund.
<PAGE>
SC ICI SUP (5/98)
<PAGE>
May 1, 1998
STAGECOACH FUNDS/R/
Stagecoach
Overland Express
Sweep Fund
Prospectus
Wrapper
This wrapper updates information in the February 1, 1998
Prospectus, including Financial Highlights and Expense Tables
as indicated. Please keep this update with your prospectus.
<PAGE>
The table below replaces page 5 of the February 1, 1998 Prospectus. Said
prospectus is hereby incorporated by reference.
Overland Express Sweep Fund Summary of Expenses
================================================================================
SHAREHOLDER TRANSACTION EXPENSES
================================================================================
These tables are intended to help you understand the various costs and expenses
you will pay directly or indirectly as a shareholder in the Fund. These tables
do not reflect any charges that may be imposed by Wells Fargo Bank or other
institutions in connection with an account through which you hold Fund shares.
See "Organization and Management of the Fund" for more details.
- --------------------------------------------------------------------------------
Overland Express Sweep
- --------------------------------------------------------------------------------
Maximum sales charge on a purchase
(as a percentage of offering price) None
- --------------------------------------------------------------------------------
Maximum sales charge on reinvested dividends None
- --------------------------------------------------------------------------------
Maximum sales charge imposed on redemption None
- --------------------------------------------------------------------------------
Exchange fees None
================================================================================
ANNUAL FUND OPERATING EXPENSES (AS A PERCENTAGE OF AVERAGE NET ASSETS)
================================================================================
Expenses shown "before waivers" are based on contract amounts while expenses
shown "after waivers" represent amounts expected to be incurred during the
current fiscal year. Expense waivers are voluntary and may be discontinued
without notice.
- --------------------------------------------------------------------------------
Overland Express Sweep
- --------------------------------------------------------------------------------
Rule 12b-1 fee 0.30%
- --------------------------------------------------------------------------------
Management fee
(after waivers or reimbursement) 0.45%
- --------------------------------------------------------------------------------
Other expenses
(after waivers or reimbursement) 0.49%
- --------------------------------------------------------------------------------
TOTAL FUND OPERATING EXPENSES
(after waivers or reimbursement) 1.24%
- --------------------------------------------------------------------------------
Management fee
(before waivers or reimbursement) 0.45%
- --------------------------------------------------------------------------------
Other expenses
(before waivers or reimbursement) 0.81%
- --------------------------------------------------------------------------------
TOTAL FUND OPERATING EXPENSES
(before waivers or reimbursement) 1.26%
================================================================================
EXAMPLES OF EXPENSES
================================================================================
You would pay the following expenses on a $1,000 investment assuming a 5%
annual return, and that you redeem your shares at the end of each period.
- --------------------------------------------------------------------------------
Overland Express Sweep
- --------------------------------------------------------------------------------
1 Year $ 13
- --------------------------------------------------------------------------------
3 Years $ 39
- --------------------------------------------------------------------------------
5 Years $ 68
- --------------------------------------------------------------------------------
10 Years $ 150
- --------------------------------------------------------------------------------
<PAGE>
<TABLE>
<CAPTION>
The table below replaces Page 8-9 of the February 1, 1998 Prospectus.
Overland Express Sweep Funds Financial Highlights
===============================================================================================================
FOR SHARES OUTSTANDING
===============================================================================================================
For the period ended: COMMENCED ON OCTOBER 1, 1991
-------------------------------------------------------------------------------
DEC. 31, DEC. 31, DEC. 31, DEC. 31, DEC. 31, DEC. 31, DEC. 31,
1997 1996 1995 1994 1993 1992 1991
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning
of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
- ---------------------------------------------------------------------------------------------------------------
Income from investment
operations:
Net investment income
(loss) 0.04 0.04 0.05 0.03 0.02 0.03 0.01
- ---------------------------------------------------------------------------------------------------------------
Net realized and
unrealized gain (loss)
on investments 0.00 0.00 0.00 0.00 0.00 0.00 0.00
- ---------------------------------------------------------------------------------------------------------------
Total from investment
operations 0.04 0.04 0.05 0.03 0.02 0.03 0.01
- ---------------------------------------------------------------------------------------------------------------
Less distributions:
Dividends from net
investment income (0.04) (0.04) (0.05) (0.03) (0.02) (0.03) (0.01)
- ---------------------------------------------------------------------------------------------------------------
Distributions from net
realized gain 0.00 0.00 0.00 0.00 0.00 0.00 0.00
- ---------------------------------------------------------------------------------------------------------------
Total from distributions: (0.04) (0.04) (0.05) (0.03) (0.02) (0.03) (0.01)
- ---------------------------------------------------------------------------------------------------------------
Net asset value, end of
period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
- ---------------------------------------------------------------------------------------------------------------
Total return 4.47% 4.29% 4.80% 3.11% 1.97% 2.31% 0.93%
- ---------------------------------------------------------------------------------------------------------------
Ratios/supplemental data:
Net assets, end of
period (000s) $2,956,090 $2,002,725 $1,209,183 $812,559 $528,072 $253,617 $14,010
- ---------------------------------------------------------------------------------------------------------------
Ratios to average net
assets (annualized)1:
Ratio of expenses to
average net assets/1/ 1.24% 1.24% 1.25% 1.25% 1.25% 1.24% 1.23%
- ---------------------------------------------------------------------------------------------------------------
Ratio of net investment
income to average
net assets/1/ 4.40% 4.20% 4.70% 2.92% 1.67% 2.20% 3.46%
- ---------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets
prior to waived
fees and reimbursed
expenses/1/ 1.26% 1.26% 1.28% 1.33% 1.31% 1.51% 6.92%
- ---------------------------------------------------------------------------------------------------------------
Ratio of net investment
income to average net
assets prior to waived fees
and reimbursed expenses/1/ 4.38% 4.18% 4.67% 2.84% 1.61% 1.93% (2.23)%
- ---------------------------------------------------------------------------------------------------------------
<CAPTION>
===============================================================================================================
CALENDAR-YEAR RETURNS 1997 1996 1995 1994 1993 1992 1991
===============================================================================================================
These returns reflect fee waivers
and reimbursements, and are not a 4.47% 4.29% 4.80% 3.11% 1.97% 2.31% 0.93%
guarantee of future performance.
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
/1/ Rations include activity of the Cash Investment Trust Master Portfolio prior
to December 15, 1997.
The following should be read in conjunction with, and, to the extent
inconsistent therewith, as superseding the section of the Prospectus entitled
"Other Information--Taxes." In general, all distributions will be taxable to you
when paid, even though they are paid in additional Fund shares. However,
distributions declared in October, November or December of one year and paid in
January of the next year are treated as if they were paid in the first year.
Corporate shareholders of the Fund are not expected to be able to exclude a
portion of distributions from their taxable income. As long as the Fund
continually maintains a $1,000 NAV, you ordinarily will not recognize taxable
gain or loss on the redemption of your Fund shares. Capital gain distributions,
if any, will be made annually for each Fund.
<PAGE>
SC OEX SUP (5/98)
<PAGE>
May 1, 1998
STAGECOACH FUNDS/R/
Stagecoach
Tax-Free Income Funds
Prospectus
Wrapper
Class A This wrapper updates information in the December 15, 1997
Class B Prospectus, including Financial Highlights and Expense Tables
Class C as indicated. Please keep this update with your Prospectus.
<PAGE>
The table below replaces the Expense Information on pages 6-9 of the December
15, 1997 Prospectus for the Funds indicated. Said Prospectus is hereby
incorporated by reference.
Tax Free Retail Funds Summary of Expenses
================================================================================
SHAREHOLDER TRANSACTION EXPENSES
================================================================================
These tables are intended to help you understand the various costs and expenses
you will pay directly or indirectly as a shareholder in the Fund. These tables
do not reflect any charges that may be imposed by Wells Fargo Bank or other
institutions in connection with an account through which you hold Fund shares.
See "Organization and Management of the Fund" for more details.
- --------------------------------------------------------------------------------
CA Tax Free Bond S/T Muni. Inc.
--------------------------------------
Class A Class B Class C Class A
- --------------------------------------------------------------------------------
Maximum sales charge on a purchase
(as a percentage of offering price). 4.50% None None 3.00%
- --------------------------------------------------------------------------------
Maximum sales charge on reinvested
dividends. None None None None
- --------------------------------------------------------------------------------
Maximum sales charge imposed on a:
Redemption during first year None 5.00% 1.00% None
Redemption after first year None 4.00% None None
- --------------------------------------------------------------------------------
Exchange fees None None None None
- --------------------------------------------------------------------------------
================================================================================
ANNUAL FUND OPERATING EXPENSES (AS A PERCENTAGE OF AVERAGE NET ASSETS)
================================================================================
Expenses shown "before waivers" are based on contract amounts while expenses
shown "after waivers" represent amounts expected to be incurred during the
current fiscal year. Expense waivers are voluntary and may be discontinued
without notice. Long-term shareholders of Class B and Class C shares may pay
more than the equivalent of the maximum front-end sales charge allowed by the
National Association of Securities Dealers.
- --------------------------------------------------------------------------------
CA Tax Free Bond S/T Muni. Inc.
--------------------------------------
Class A Class B Class C Class A
- --------------------------------------------------------------------------------
Rule 12b-1 fee 0.05% 0.70% 0.75% 0.25%
- --------------------------------------------------------------------------------
Management fee
(after waivers or reimbursement) 0.50% 0.50% 0.50% 0.00%
- --------------------------------------------------------------------------------
Other expenses
(after waivers or reimbursement) 0.20% 0.25% 0.20% 0.16%
- --------------------------------------------------------------------------------
Total fund operating expenses
(after waivers or reimbursement) 0.75% 1.45% 1.45% 0.41%
- --------------------------------------------------------------------------------
Management fee
(before waivers or reimbursement) 0.50% 0.50% 0.50% 0.50%
- --------------------------------------------------------------------------------
Other expenses
(before waivers or reimbursement) 0.34% 0.56% 0.38% 0.77%
- --------------------------------------------------------------------------------
Total fund operating expenses
(before waivers or reimbursement) 0.89% 1.76% 1.63% 1.52%
- --------------------------------------------------------------------------------
<PAGE>
================================================================================
EXAMPLES OF EXPENSES
================================================================================
CA Tax Free Bond S/T Muni. Inc.
- --------------------------------------------------------------------------------
You would pay the following expenses on
a $1,000 investment assuming a 5%
annual return, and that you redeem Class A Class B Class C Class A
your shares at the end of each period.
- --------------------------------------------------------------------------------
1 Year $ 52 $ 65 $ 25 $ 34
- --------------------------------------------------------------------------------
3 Years $ 68 $ 76 $ 46 $ 43
- --------------------------------------------------------------------------------
5 Years $ 85 $ 99 $ 79 $ 52
- --------------------------------------------------------------------------------
10 years $ 134 $ 136 $ 174 $ 80
- --------------------------------------------------------------------------------
CA Tax Free Bond S/T Muni. Inc.
- --------------------------------------------------------------------------------
You would pay the following expenses on
a $1,000 investment assuming a 5% Class A Class B Class C Class A
annual return, and that you do not redeem
your shares at the end of each period.
- --------------------------------------------------------------------------------
1 Year $ 52 $ 15 $ 15 $ 34
- --------------------------------------------------------------------------------
3 Years $ 68 $ 46 $ 46 $ 43
- --------------------------------------------------------------------------------
5 Years $ 85 $ 79 $ 79 $ 52
- --------------------------------------------------------------------------------
10 years $134 $136 $174 $ 80
- --------------------------------------------------------------------------------
<PAGE>
<TABLE>
<CAPTION>
The tables below replace pages 16-19 of the December 15, 1997 Prospectus.
California Tax Free Bond/1/ Financial Highlights
- ------------------------------------------------------------------------------------------------------------------------
========================================================================================================================
FOR SHARES OUTSTANDING
========================================================================================================================
For Period Ended: CLASS A SHARES-COMMENCED
ON OCTOBER 6, 1988
- ------------------------------------------------------------------------------------------------------------------------
Dec. 31, Dec. 31 Dec. 31, Dec. 31, Dec. 31, Dec. 31,
1997 1996 1995 1994 1993 1992
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning
of period $ 10.97 $ 11.34 $ 10.67 $ 12.00 $ 11.43 $ 11.23
- ------------------------------------------------------------------------------------------------------------------------
Income from investment
operations:
Net investment income
(loss) 0.54 0.57 0.63 0.67 0.66 0.71
Net realized and
unrealized gain
(loss) on investments 0.42 (0.13) 1.08 (1.18) 0.78 0.27
- ------------------------------------------------------------------------------------------------------------------------
Total from investment
operations 0.96 0.44 1.71 (0.51) 1.44 0.98
- ------------------------------------------------------------------------------------------------------------------------
Less Distributions:
Dividends from net
investment income (0.54) (0.57) (0.63) (0.67) (0.66) (0.71)
Distributions from
net realized gain (0.07) (0.24) (0.41) (0.15) (0.21) (0.07)
- ------------------------------------------------------------------------------------------------------------------------
Total from distributions (0.61) (0.81) (1.04) (0.82) (0.87) (0.78)
- ------------------------------------------------------------------------------------------------------------------------
Net Asset value, end of
period $ 11.32 $ 10.97 $ 11.34 $ 10.67 $ 12.00 $ 11.43
- ------------------------------------------------------------------------------------------------------------------------
Total return/2/ 9.16% 4.03% 16.38% (4.32)% 12.98% 9.01%
- ------------------------------------------------------------------------------------------------------------------------
Ratios/supplemental data:
Net assets, end of
period (000s) $509,844 $239,703 $268,352 $273,105 $361,779 $375,376
- ------------------------------------------------------------------------------------------------------------------------
Ratios to average net
assets (annualized):
Ratio of expenses to
average net assets 0.74% 0.71% % 0.58% 0.50% 0.69% 0.50%
Ratio of net
investment income to
average net assets 4.84% 5.08% % 5.59% 5.87% 5.54% 6.24%
- ------------------------------------------------------------------------------------------------------------------------
Portfolio turnover 12% 19% 38% 4% 10% 24%
- ------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets
prior to waived fees
and reimbursed
expenses 0.89% 0.82% % .78% 0.95% 0.85% 0.85%
- ------------------------------------------------------------------------------------------------------------------------
Ratio of net investment
income to average net
assets prior to
waived fees and
reimbursed expenses 4.69% 4.97% 5.39% 5.42% 5.38% 5.89%
- ------------------------------------------------------------------------------------------------------------------------
<CAPTION>
========================================================================================================================
CLASS A SHARES CALENDAR-YEAR
RETURNS 1997 1996 1995 1994 1993 1992
========================================================================================================================
Returns for other share classes 9.16% 4.03% 16.38% -4.32% 12.98% 9.01%
may vary due to different fees
and expenses. These returns
reflect fee waivers and
reimbursement, do not reflect
sales loads and are not a guarantee
of future performance.
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
/1/ Periods prior to December 31, 1997 have been restated to give effect to the
conversion ratios applied in the consolidation of Overland Express Funds,
Inc. and Stagecoach Funds, Inc.
/2/ Total returns do not include any sales charges. Total returns for periods
less than one year are not annualized.
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
Dec. 31, Dec. 31, Dec. 31, Dec. 31,
1991 1990 1989 1988
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net asset value, beginning
of period $ 10.75 $ 10.83 $ 10.49 $ 10.46
- ------------------------------------------------------------------------------------------------
Income from investment
operations:
Net investment income
(loss) 0.72 0.74 0.75 0.22
Net realized and
unrealized gain
(loss) on investments 0.48 (0.08) 0.34 0.03
- ------------------------------------------------------------------------------------------------
Total from investment
operations 1.20 0.66 (1.09) 0.25%
- ------------------------------------------------------------------------------------------------
Less Distributions:
Dividends from net
investment income (0.72) (0.74) (0.75) (0.22)
Distributions from
net realized gain 0.00 0.00 0.00 0.00
- ------------------------------------------------------------------------------------------------
Total from distributions (0.72) (0.74) (0.75) (0.22)
- ------------------------------------------------------------------------------------------------
Net Asset value, end of
period $ 11.23 $ 10.75 $ 10.83 $ 10.49
- ------------------------------------------------------------------------------------------------
Total return/2/ 11.62% 6.48% 10.73% 2.44
- ------------------------------------------------------------------------------------------------
Ratios/supplemental data:
Net assets, end of
period (000s) $332,845 $ 201,138 $70,412 $10,577
- ------------------------------------------------------------------------------------------------
Ratios to average net
assets (annualized):
Ratio of expenses to
average net assets 0.45% 0.29% 0.30% 0.08
Ratio of net
investment income to
average net assets 6.56% 6.97% 6.85% 6.61
- ------------------------------------------------------------------------------------------------
Portfolio turnover 8% 35% 26% N/A
- ------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets
prior to waived fees
and reimbursed
expenses 0.87% 0.95% 1.18% 4.07
- ------------------------------------------------------------------------------------------------
Ratio of net investment
income to average net
assets prior to
waived fees and
reimbursed expenses 6.14% 6.31% N/A N/A
- ------------------------------------------------------------------------------------------------
<CAPTION>
================================================================================================
1991 1990 1989
================================================================================================
11.62% 6.48% 10.73%
- ------------------------------------------------------------------------------------------------
</TABLE>
/1/ Periods prior to December 31, 1997 have been restated to give effect to the
conversion ratios applied in the consolidation of Overland Express Funds,
Inc. and Stagecoach Funds, Inc.
/2/ Total returns do not include any sales charges. Total returns for periods
less than one year are not annualized.
<PAGE>
The table below replace pages 16-19 of the December 15, 1997 Prospectus.
California Tax-Free Bond Fund Financial Highlights
==========================================================================
FOR SHARES OUTSTANDING
==========================================================================
CLASS B SHARES--COMMENCED ON
DECEMBER 15,1997
- --------------------------------------------------------------------------
For period ended: Dec. 31, 1997
- --------------------------------------------------------------------------
Net asset value, beginning of period $ 11.51
- --------------------------------------------------------------------------
Income from investment operations:
Net investment income (loss) 0.02
Net realized and unrealized gain (loss) on investments 0.03
- --------------------------------------------------------------------------
Total from investment operations 0.05
- --------------------------------------------------------------------------
Less distributions:
Dividends from net investment income (0.02)
Distributions from net realized gain 0.00
- --------------------------------------------------------------------------
Total from distributions: (0.02)
- --------------------------------------------------------------------------
Net asset value, end of period $ 11.54
- --------------------------------------------------------------------------
Total Return/1/ 0.45%
- --------------------------------------------------------------------------
Ratios/supplemental data:
Net assets, end of period (000s) $77,792
- --------------------------------------------------------------------------
Ratios to average net assets (annualized):
Ratio of expenses to average net assets 1.44%
Ratio of net investment income to average net assets 3.95%
- --------------------------------------------------------------------------
Portfolio turnover 12%
- --------------------------------------------------------------------------
Ratio of expenses to average net assets
prior to waived fees and reimbursed expenses 1.76%
- --------------------------------------------------------------------------
Ratio of net investment income to average
net assets prior to waived fees and reimbursed expenses 3.63%
- --------------------------------------------------------------------------
/1/ Total returns do not include any sales charges. Total returns for periods
less than one year are not annualized.
<PAGE>
<TABLE>
<CAPTION>
The table below replaces pages 16-19 of the December 15, 1997 Prospectus.
California Tax Free Bond Fund/1/ Financial Highlights
============================================================================================
FOR SHARES OUTSTANDING
============================================================================================
CLASS C SHARES--
COMMENCED ON JULY 1, 1993
----------------------------------------------
For Period Ended: Dec. 31, Dec. 31, Dec. 31, Dec. 31, Dec. 31,
1997 1996 1995 1994 1993
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $11.19 $11.57 $10.88 $ 12.24 $12.25
- --------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income (loss) 0.47 0.49 0.56 0.60 0.28
Net realized and unrealized gain (loss)
on investments 0.42 (0.13) 1.10 (1.20) 0.20
- --------------------------------------------------------------------------------------------
Total from investment operations 0.89 0.36 1.66 (0.60) 0.48
- --------------------------------------------------------------------------------------------
Less Distributions:
Dividends from net investment income (0.47) (0.49) (0.56) (0.60) (0.28)
Distributions from net realized gain (0.07) (0.25) (0.41) (0.16) (0.21)
- --------------------------------------------------------------------------------------------
Total from distributions: (0.54) (0.74) (0.97) (0.76) (0.49)
- --------------------------------------------------------------------------------------------
Net asset value, end of period $11.54 $11.19 $11.57 $ 10.88 $12.24
- --------------------------------------------------------------------------------------------
Total return/2/ 8.11% 3.24% 15.58% (5.00)% 3.92%
- --------------------------------------------------------------------------------------------
Ratios/supplemental data:
Net assets, end of period (000s) $5,860 $6,506 $7,063 $ 7,346 $7,641
- --------------------------------------------------------------------------------------------
Ratios to average net assets (annualized):
Ratio of expenses to average net assets 1.48% 1.46% 1.30% 1.20% 1.32%
Ratio of net investment income to
average net assets 4.19% 4.33% 4.87% 5.15% 4.50%
- --------------------------------------------------------------------------------------------
Portfolio turnover 12% 19% 38% 4% 10%
- --------------------------------------------------------------------------------------------
Ratio of expenses to average net assets
prior to waived fees and reimbursed
expenses 1.63% 1.59% 1.57% 1.82% 1.61%
- --------------------------------------------------------------------------------------------
Ratio of net investment income to
average net assets prior to waived fees
and reimbursed expenses 4.04% 4.20% 4.60% 4.53% 4.21%
- --------------------------------------------------------------------------------------------
</TABLE>
/1/ Periods prior to December 31, 1997 have been restated to give effect to the
conversion ratios applied in the consolidation of Overland Express Funds,
Inc. and Stagecoach Funds, Inc.
/2/ Total returns do not include any sales charges. Total returns for periods
less than one year are not annualized.
<PAGE>
<TABLE>
<CAPTION>
The table below replaces page 36 of the December 15, 1997 Prospectus.
Short-Term Municipal Income Fund Financial Highlights
============================================================================================
FOR SHARES OUTSTANDING
============================================================================================
CLASS A SHARES--
COMMENCED ON JUNE 3, 1994
----------------------------------------------
For Period Ended: Dec. 31, Dec. 31, Dec. 31, Dec. 31,
1997 1996 1995 1994
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net asset value, beginning of period $ 4.97 $ 4.99 $ 4.92 $ 5.00
- --------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income (loss) 0.19 0.20 0.22 0.09
Net realized and unrealized gain (loss)
on investments 0.01 (0.02) 0.07 (0.08)
- --------------------------------------------------------------------------------------------
Total from investment operations 0.20 0.18 0.29 (0.01)
- --------------------------------------------------------------------------------------------
Less Distributions:
Dividends from net investment income (0.19) (0.20) (0.22) (0.09)
Distributions from net realized gain 0.00 0.00 0.00 0.00
- --------------------------------------------------------------------------------------------
Total from distributions: (0.19) (0.20) (0.22) (0.09)
- --------------------------------------------------------------------------------------------
Net Asset value, end of period $ 4.98 $ 4.97 $ 4.99 $ 4.92
- --------------------------------------------------------------------------------------------
Total return/1/ 4.14% 3.62% 6.10% (0.13)%
- --------------------------------------------------------------------------------------------
Ratios/supplemental data:
Net assets, end of period (000s) $19,628 $ 26,714 $16,486 $11,778
- --------------------------------------------------------------------------------------------
Ratios to average net assets (annualized):
Ratio of expenses to average net assets 0.40%/2/ 0.40%/4/ 0.38%/4/ 0.27%
Ratio of net investment income to
average net assets 3.84%/2/ 3.95%/4/ 4.39%/4/ 3.67%
- --------------------------------------------------------------------------------------------
Portfolio turnover 67%/5/ 47%/5/ 46%/5/ 8%/5/
- --------------------------------------------------------------------------------------------
Ratio of expenses to average net assets
prior to waived fees and reimbursed
expenses 1.52%/2/ 1.43%/4/ 1.97%/4/ 1.98%/4/
- --------------------------------------------------------------------------------------------
Ratio of net investment income to
average net assets prior to waived fees
and reimbursed expenses (loss) 2.72%/2/ 2.92%/4/ 2.80%/4/ 1.96%/4/
- --------------------------------------------------------------------------------------------
<CAPTION>
============================================================================================
CLASS A SHARES CALENDAR-YEAR RETURNS
============================================================================================
These returns reflect fee waivers and reimbursements, 4.14 % 3.62% 6.10%
do not reflect sales loads and are not a guarantee of
future performance.
- --------------------------------------------------------------------------------------------
</TABLE>
/1/ Total returns do not include any sales charges. Total returns for periods
less than one year are not annualized.
/2/ This ratio includes activity of the Master Portfolio for the period from
January 1, 1997 to December 12, 1997.
/3/ The portfolio turnover rate includes activity of the Master Portfolio from
January 1, 1997 to December 12, 1997.
/4/ The ratio includes income and expenses allocated from the Master Portfolio.
/5/ The portfolio turnover shown in the table is for the Master Portfolio.
<PAGE>
The Short-Term Municipal Income Fund is closed to new investment except for the
reinvestment of the Fund's distributions, if any.
Effective February 1, 1998, all Funds may invest in municipal obligations rated
in the four highest credit categories as determined by nationally recognized
securities rating organizations.
For shares of the Short-Term Municipal Income Fund, the "Shareholder Servicing
Plan" section under "Organization and Management of the Funds" is clarified to
indicate that the Class A shares of this Fund has a Shareholder Administrative
Servicing Plan, and that where fees are paid pursuant to this Plan, no fees are
paid pursuant to any Distribution Plan applicable to these shares.
Effective February 1, 1998, Wells Fargo Bank's compensation as Administrator of
the Funds is reduced to 0.03% and Stephens Inc.'s compensation as Co-
Administrator is increased to 0.04%. All references to these fees in the
Prospectuses and SAIs for the Funds, and the expense tables, shall be amended to
reflect these changes.
The following should be read in conjunction with, and, to the extent
inconsistent therewith, as superseding the section of the Prospectus entitled
"Additional Services and Other Information-Taxes." In general, all distributions
(not exempt from tax) will be taxable to you when paid, regardless of whether
they are paid in cash or additional Fund shares. However, distributions declared
in October, November or December of one year and paid in January of the next
year are treated as if they were paid in the first year. Capital gain
distributions paid to noncorporate shareholders may qualify for taxation at
preferential rates.
Capital gain distributions, if any, will be made annually for each Fund.
<PAGE>
This page intentionally left blank
- --------------------------------------------------------------------------------
<PAGE>
This page intentionally left blank
- --------------------------------------------------------------------------------
<PAGE>
SC TF SUP (5/98)
<PAGE>
May 1, 1998
STAGECOACH FUNDS/R/
Stagecoach
Tax-Free Income Funds
Prospectus
Wrapper
Institutional Class This wrapper updates information in the February 1,
1998 Prospectus, including Financial Highlights and
Expense Tables as indicated. Please keep this update
with your prospectus.
<PAGE>
The table below replaces Expense Information on pages 6-7 of the February 1,
1998 Prospectus for the Fund indicated. Said Prospectus is hereby incorporated
by reference.
Tax Free Institutional Funds Summary of Expenses
================================================================================
SHAREHOLDER TRANSACTION EXPENSES
================================================================================
These tables are intended to help you understand the various costs and expenses
you will pay directly or indirectly as a shareholder in the Fund. These tables
do not reflect any charges that may be imposed by Wells Fargo Bank or other
institutions in connection with an account through which you hold Fund shares.
See "Organization and Management of the Fund" for more details.
- --------------------------------------------------------------------------------
CA Tax Free Bond
-------------------
Institutional
- --------------------------------------------------------------------------------
Maximum sales charge on a purchase
(as a percentage of offering price). None
- --------------------------------------------------------------------------------
Maximum sales charge on reinvested
dividends. None
- --------------------------------------------------------------------------------
Maximum sales charge imposed on
Redemption None
- --------------------------------------------------------------------------------
Exchange fees None
================================================================================
ANNUAL FUND OPERATING EXPENSE (AS A PERCENTAGE OF AVERAGE NET ASSETS)
================================================================================
Expenses shown "before waivers" are based on contract amounts while expenses
shown "after waivers" represent amounts expected to be incurred during the
current fiscal year. Expense waivers are voluntary and may be discontinued
without notice.
- --------------------------------------------------------------------------------
CA Tax Free Bond
------------------
Institutional
- --------------------------------------------------------------------------------
Management fee
(after waivers or reimbursement) 0.50%
- --------------------------------------------------------------------------------
Other expenses
(after waivers or reimbursement) 0.20%
- --------------------------------------------------------------------------------
TOTAL FUND OPERATING EXPENSES
(after waivers or reimbursement) 0.70%
- --------------------------------------------------------------------------------
Management fee
(before waivers or reimbursement) 0.50%
- --------------------------------------------------------------------------------
Other expenses
(before waivers or reimbursement) 0.42%
- --------------------------------------------------------------------------------
TOTAL FUND OPERATING EXPENSES
(before waivers or reimbursement) 0.92%
================================================================================
EXAMPLES OF EXPENSES
================================================================================
You would pay the following expenses on a $1,000 investment assuming a 5%
annual return, and that you redeem your shares at the end of each period.
- --------------------------------------------------------------------------------
CA Tax Free Bond
------------------
Institutional
- --------------------------------------------------------------------------------
1 Year $ 7
- --------------------------------------------------------------------------------
3 Years $ 22
- --------------------------------------------------------------------------------
l5 Years $ 39
- --------------------------------------------------------------------------------
10 Years $ 87
- --------------------------------------------------------------------------------
<PAGE>
The table below replaces Page 18 of the February 1, 1998 Prospectus.
California Tax-Free Bond Fund Financial Highlights
================================================================================
FOR SHARES OUTSTANDING
================================================================================
INSTITUTIONAL SHARES-- COMMENCED
ON DECEMBER 15,1997
- --------------------------------------------------------------------------------
For period ended: Dec. 31, 1997
- --------------------------------------------------------------------------------
Net asset value, beginning of period $ 11.32
- --------------------------------------------------------------------------------
Income from investment operations:
Net investment income (loss) 0.03
- --------------------------------------------------------------------------------
Net realized and unrealized gain (loss)
on investments 0.03
- --------------------------------------------------------------------------------
Total from investment operations 0.06
- --------------------------------------------------------------------------------
Less distributions:
Dividends from net investment income (0.03)
Distributions from net realized gain 0.00
- --------------------------------------------------------------------------------
Total from distributions: (0.03)
- --------------------------------------------------------------------------------
Net asset value, end of period $ 11.35
- --------------------------------------------------------------------------------
Total return/1/ 0.49%
- --------------------------------------------------------------------------------
Ratios/supplemental data:
Net assets, end of period (000s) $84,113
- --------------------------------------------------------------------------------
Ratios to average net assets (annualized)
Ratios of expenses to average net assets 0.63%
Ratio of net investment income to average net assets 4.79%
Portfolio turnover 12%
- --------------------------------------------------------------------------------
Ratio of expenses to average net assets prior to waived fees
and reimbursed expenses 0.92%
- --------------------------------------------------------------------------------
Ratio of net investment income to average net assets prior
to waived fees and reimbursed expenses 4.50%
- --------------------------------------------------------------------------------
================================================================================
INSTITUTIONAL SHARES CALENDAR-YEAR RETURNS
================================================================================
Returns for other share classes may vary due to different
fees and expenses. This return reflects fee waivers and 0.49%
reimbursements, does not reflect sales loads, is not a
guarantee of future performance and has not been audited.
- --------------------------------------------------------------------------------
/1/ Total returns do not include any sales charges. Total returns for periods
less than one year are not annualized.
The following should be read in conjunction with, and, to the extent
inconsistent therewith, as superseding the section of the Prospectus entitled
"Other Information-Taxes." In general, all distributions (not exempt from tax)
will be taxable to you when paid, even though they are paid in additional Fund
shares. However, distributions declared in October, November or December of one
year and paid in January of the next year are treated as if they were paid in
the first year. Capital gain distributions paid to noncorporate shareholders may
qualify for taxation at preferential rates. Capital gain distributions, if any,
will be made annually for each Fund.
<PAGE>
SC TFI SUP (5/98)
<PAGE>
STAGECOACH FUNDS, INC.
Telephone: 1-800-222-8222
STATEMENT OF ADDITIONAL INFORMATION
Dated May 1, 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 May 1, 1998. All terms used in this SAI that are
defined in the Prospectus have the meanings assigned in the Prospectus. A copy
of the Prospectus may be obtained 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>
<CAPTION>
TABLE OF CONTENTS
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 .......18
Risk Factors ...................................................................18
Management .....................................................................20
Performance Calculations........................................................39
Determination of Net Asset Value................................................49
Additional Purchase and Redemption Information..................................49
Portfolio Transactions..........................................................50
Fund Expenses...................................................................53
Federal Income Taxes............................................................53
Capital Stock...................................................................57
Other...........................................................................61
Independent Auditors............................................................62
Financial Information...........................................................62
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 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
2
<PAGE>
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;
(7) make investments for the purpose of exercising control or
management;
3
<PAGE>
(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;
(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;
4
<PAGE>
(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;
(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
5
<PAGE>
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;
(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;
6
<PAGE>
(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 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
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<PAGE>
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 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.
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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
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
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<PAGE>
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.
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
10
<PAGE>
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 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-
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<PAGE>
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 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
12
<PAGE>
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 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.
13
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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 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
14
<PAGE>
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 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,
15
<PAGE>
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.
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
16
<PAGE>
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
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 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
17
<PAGE>
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.
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
18
<PAGE>
risk that increases in market interest rates may adversely affect the value of
the debt instruments in which a Fund invests and hence the value of your
investment in a Fund.
The market value of a Fund's investments in fixed-income securities
will change in response to various factors, such as changes in market interest
rates and the relative financial strength of an issuer. During periods of
falling interest rates, the value of fixed-income securities 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.
19
<PAGE>
S&P and Moody's assign ratings based upon their judgment of the risk of
default (i.e., the risk that the issuer or guarantor may default in the payment
of principal and/or interest) of the securities underlying the CMOs. However,
investors should understand that most of the risk of these securities comes from
interest-rate risk (i.e., the risk that market interest rates may adversely
affect the value of the securities in which 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 Company are listed
below. The address of each, unless otherwise indicated, is 111 Center Street,
20
<PAGE>
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, Chairman Executive Vice President of Stephens Inc.;
and President President of Stephens Insurance Services Inc.;
Senior Vice President of Stephens Sports
Management Inc.; and President of Investor
Brokerage Insurance Inc.
Thomas S. Goho, 55 Director Associate Professor of Finance of the School of
321 Beechcliff Court Business and Accounting at Wake Forest University
Winston-Salem, NC 27104 since 1982.
Peter G. Gordon, 54 Director Chairman and Co-Founder of Crystal Geyser Water
Crystal Geyser Water Co. Company and President of Crystal Geyser Roxane
55 Francisco Street Water Company since 1977.
San Francisco, CA 94133
Joseph N. Hankin, 57 Director President of Westchester Community College since
75 Grasslands Road 1971; Adjunct Professor of Columbia University
Valhalla, NY 10595 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 of
Charleston, SC 29401 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, Secretary Stephens Sports Management Inc.; and Director of
and Treasurer Capo Inc.
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
Compensation Table
Year Ended March 31, 1998
-------------------------
Total Compensation
Aggregate Compensation from Registrant
Name and Position from Registrant and Fund Complex
----------------- ----------------------- --------------------
<S> <C> <C>
Jack S. Euphrat $25,750 $34,500
Director
R. Greg Feltus $ 0 $ 0
Director
Thomas S. Goho $25,750 $34,500
Director
Peter G. Gordon $24,250 $30,500
Director
Joseph N. Hankin $25,750 $34,500
Director
W. Rodney Hughes $25,250 $33,000
Director
Robert M. Joses $ 1,500 $ 4,000
Director
J. Tucker Morse $25,250 $33,000
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
22
<PAGE>
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, Well Fargo Bank is entitled
to receive a monthly fee at the annual rates indicated below of each Fund's
average daily net assets:
Annual Rate
Fund (as percentage of net assets)
---- -----------------------------
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%
For the period indicated below, the Funds paid to Wells Fargo Bank the
following advisory fees and Wells Fargo Bank waived the indicated amounts:
23
<PAGE>
<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 $ 58,935
U.S. Government Income* $ 469,051 $ 0
Variable Rate Government* $ 1,355,943 $294,181
</TABLE>
- ---------------------
* These amounts are for the year ended December 31, 1997. Prior to December
12, 1997, these amounts reflect fees paid by the corresponding Overland
predecessor portfolio.
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 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.
24
<PAGE>
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 periods
----------------------------------------------
indicated below, the Short-Intermediate U.S. Government Income Fund 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 Paid Fees Waived Fees Paid Fees Waived Fees Paid Fees Waived
--------- ----------- --------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C>
$213,467 $ 0 $56,387 $60,241 $ 0 $58,270
</TABLE>
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 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.
25
<PAGE>
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 predecessor portfolios to the
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
12/31/96 12/31/95
---------- -----------
Fees Fees Fees Fees
Fund Paid Waived Paid Waived
---- ---- ------ ---- ------
<S> <C> <C> <C> <C>
Short-Term Government-
Corporate Income/1/ $ 0 $ 55,285 $ 0 $ 11,944
U.S. Government Income $ 167,516 $ 46,101 $ 175,052 $ 13,667
Variable Rate Government $2,696,450 $ 0 $3,561,101 $554,480
</TABLE>
- --------------------
/1/ The amounts shown were paid by the Master Portfolio on behalf of the
Fund.
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
26
<PAGE>
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 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 Inc. ("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
27
<PAGE>
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 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 to Wells Fargo Bank and Stephens the following
dollar amounts 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>
Four-Month
Period Ended Year Ended Year Ended
------------- ---------- ----------
9/30/95 5/31/95 5/31/94
$9,470 $27,595 $31,800
Short-Intermediate U.S. Government Income Fund. For the periods
----------------------------------------------
indicated below, the Short-Intermediate U.S. Government Income Fund paid to
Stephens the dollar amounts in administration fees indicated below. 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.
Nine-Month
Period Ended Year Ended Year Ended
9/30/96 12/31/95 12/31/94
------------ ---------- ----------
$12,808 $ 6,998 $ 3,522
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 Funds paid to Stephens the dollar
amounts in administration fees indicated below. Prior to December 12, 1997,
these amounts reflect fees paid by the Overland predecessor portfolios.
29
<PAGE>
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
12/31/97 12/31/96 12/31/95
---------- ---------- ----------
<S> <C> <C> <C>
Short-Term Government-Corporate $ 11,020 $ 10,073 $ 3,560
U.S. Government Income $ 66,992 $ 51,898 $ 37,744
Variable Rate Government $ 282,517 $ 400,616 $ 923,116
</TABLE>
DISTRIBUTOR. 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 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 or Fund.
30
<PAGE>
Fund Fee
---- ---
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%
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 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 received
the fees listed below for distribution-related services, as set forth below,
under each Fund's Plan. For the year ended December 31, 1997, the Distributor to
the Short-Term Government-Corporate Income Fund, U.S. Government Income Fund and
the Variable Rate Government Fund received the fees listed below for
distribution-related services, as set forth below, under each Fund's Plan. Prior
to December 12, 1997, these amounts reflect fees paid by the Overland
predecessor portfolios. The predecessor portfolio to the U.S. Government Income
Fund did not offer Class B shares and therefore dollar amounts are not
31
<PAGE>
shown for the Class B shares.
<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- $ 29,818 N/A N/A $ 29,818
Corporate Income
U.S. Government Income
Class A $ 5,125 N/A N/A $ 5,125
Class C $ 9,564 N/A N/A $ 9,564
Variable Rate Government
Class A $ 813,311 N/A N/A $ 813,311
Class C $ 34,718 N/A N/A $ 26,720
</TABLE>
Wells Fargo Securities Inc. ("WFSI"), an affiliated broker-dealer of
the Company, and its registered representatives did not receive any compensation
under the Funds' Plans for the periods described above.
32
<PAGE>
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 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
33
<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 AGENT. 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.
For the year ended December 31, 1997, the Short-Term Government
Corporate Income Fund paid to Wells Fargo Bank or its affiliates $29,820 in
administrative servicing fees, after waivers. For the year ended December 31,
1997, the Variable Rate Government Fund paid to Wells Fargo Bank or its
affiliates $282,517 in administrative servicing fees, after waivers. Prior to
December 12, 1997, these amounts reflect fees paid by the Overland predecessor
portfolios.
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 class of a Fund. The Administrative Servicing Plan 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 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 each of the
Plan.
SHAREHOLDER SERVICING AGENT. The Intermediate Bond (Class A and B),
---------------------------
U.S. Government Income (Class B and C) and Variable Rate Government Funds (Class
C) have approved a Servicing Plan and have entered into related shareholder
servicing agreements with financial institutions, including
34
<PAGE>
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, 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 Plan are shown below. The Servicing Plan and related forms
of shareholder servicing agreements were approved by the Company's Board of
Directors and provide that 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.
Fund Fee
---- ---
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%
For the period indicated below, the dollar amounts of shareholder
servicing fees paid to Wells Fargo Bank or its affiliates by the Funds, after
waivers, were as follows:
Six-Month
Period Ended
Fund 3/31/97
---- -------------
Intermediate Bond
Class A $ 2,697
Class B $ 271
Short-Intermediate U.S. Government Income $54,045
35
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
U.S. Government Income*
Class C $ 4,680
Variable Rate Government*
Class A
Class C $ 17,359
</TABLE>
- --------------------
* These amounts are for the year ended December 31, 1997. Prior to December
12, 1997, these amounts reflect fees paid by the Overland predecessor
portfolio. 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. Therefore, no information is 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. The Servicing Plan will continue in effect from year to year
-------
if such continuance is approved by a majority vote of the Directors of the
Company, including a majority of the Directors who are not "interested periods"
(as defined in the 1940 Act) of the Funds ("Non-Interested Directors"). Any form
of Servicing Agreement related to the Servicing Plan also must be approved by
such vote of the Directors and Non-Interested Directors. Servicing Agreements
may be terminated at any time, without payment of any penalty, by vote of a
majority of the Board of Directors, including a majority of the Non-Interested
Directors. No material amendment to the Servicing Plan or related Servicing
Agreements may be made except by a majority of both the Directors of the Company
and the Non-Interested Directors.
The Servicing Plan requires that the Administrator shall provide to the
Directors, and the Directors shall review, at least quarterly, a written report
of the amounts expended (and purposes therefor) under the Servicing Plan.
CUSTODIAN. Wells Fargo Bank acts as Custodian for 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
36
<PAGE>
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 period ended September 30, 1996, the Short-Intermediate U.S.
Government Income Fund did not pay any custody fees.
For the year ended December 31, 1997, the Short-Term Government-
Corporate Income, U.S. Government Income and Variable Rate Government Funds did
not pay any custody fees. Prior to December 12, 1997, this amount reflects fees
paid by the Overland predecessor portfolios. 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, 1997, the Master Portfolio 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 to Wells
Fargo Bank the following dollar amounts in transfer and dividend disbursing
agency fees, without regard to class and after waivers:
37
<PAGE>
<TABLE>
<CAPTION>
Fund Transfer Agency Fees
---- --------------------
<S> <C>
Intermediate Bond $ 0
Short-Int. U.S. Govt. Income $ 0
Short-Term Govt.-Corp. Income* $ 0
U.S. Government Income* $126,491
Variable Rate Government* $ 0
</TABLE>
- --------------------
* This amount is for the year ended December 31, 1997. Prior to December 12,
1997, this amount reflects fees paid by the Overland predecessor
portfolio.
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
$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.
38
<PAGE>
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, WFSI, 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 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
39
<PAGE>
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.
40
<PAGE>
<TABLE>
<CAPTION>
Average Annual Total Return for the Applicable
Period Ended December 31, 1997/1/
-------------------------------
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>
Short-Term
Gov.-Corp.
Income
Class A 4.83% 5.77% N/A N/A 5.20% 6.26% 2.81% 5.91%
U.S.
Government
Income
Class A 8.10% 8.61% 5.44% 6.42% 7.35% 9.03% 3.80% 8.73%
Class B 7.90% 7.90% 5.30% 5.62% 7.49% 8.19% 3.82% 7.69%
Class C 7.89% 7.89% 5.60% 5.60% 8.15% 8.15% 6.79% 7.56%
Variable Rate
Government
Class A 4.27% 4.71% 3.01% 3.64% 4.78% 5.83% 2.23% 5.43%
Class C 4.26% 4.26% 3.22% 3.22% 5.48% 5.48% 4.44% 5.44%
</TABLE>
- -------------------
41
<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 ("CDSC") for Class B and Class C shares.
/2/ For purposes of showing performance information, the inception date of each
Fund and Class 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.
<TABLE>
<CAPTION>
Average Annual Total Return for the Applicable Period Ended September 30, 1997/1/
-------------------------------------------------------------------------------
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>
- -------------------
/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: Intermediate Bond Fund - June 1, 1988;
Short-Intermediate U.S. Government Income Fund - October 27, 1993. 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.
42
<PAGE>
<TABLE>
<CAPTION>
Cumulative Total Return for the Applicable Period Ended December 31, 1997/1/
----------------------------------------------------------------------------
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>
Short-Term
Gov.-Corp.
Income
Class A 16.79% 20.30% N/A N/A 16.42% 19.97% N/A N/A
U.S.
Government
Income
Class A 113.67% 123.71% 30.34% 36.51% 23.70% 29.59% N/A N/A
Class B 109.96% 109.96% 29.46% 31.46% 24.21% 26.64% N/A N/A
Class C 109.72% 109.72% 31.30% 31.30% 26.49% 26.49% N/A N/A
Variable Rate
Government
Class A 34.90% 39.08% 15.96% 19.58% 15.04% 18.55% N/A N/A
Class C 34.86% 34.86% 17.15% 17.15% 17.37% 17.37% N/A N/A
</TABLE>
- -------------------
/1/ Return calculations, except as indicted, reflect the inclusion of front-end
sales charges for Class A shares and the maximum applicable CDSC 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.
43
<PAGE>
<TABLE>
<CAPTION>
Cumulative Total Return for the Applicable Period Ended September 30, 1997/1/
---------------------------------------------------------------------------
Inception Inception Five Year Five Year Three Year Three Year
With No With No With No
Sales Sales Sales Sales Sales Sales
Fund Charge/2/ Charge Charge Charge Charge 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 CDSC for Class
B and Class C shares.
/2/ For purposes of showing performance information, the inception date of each
Fund is as follows: Intermediate Bond Fund - June 1, 1988;
Short-Intermediate U.S. Government Income Fund - October 27, 1993. The
actual inception date of each class may differ from the inception date of
the corresponding Fund.
44
<PAGE>
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:
Effective Thirty-Day Yield = [(Base Period Return +1)365/30]-1
<TABLE>
<CAPTION>
Yield for the Applicable Period Ended December 31, 1997/1/
----------------------------------------------------------
Thirty-Day Yield
-----------------
Fund After Waiver Before Waiver
---- ------------ -------------
<S> <C> <C>
Short-Term Government-
Corporate Income
Single Class 5.05% 3.53%
U.S. Government Income
Class A 5.82% 5.44%
Class C N/A N/A
Variable Rate Government
Class A 5.11% 4.75%
Class C 4.80% 4.46%
</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.
45
<PAGE>
<TABLE>
<CAPTION>
Yield for the Applicable Period Ended September 30, 1997/1/
-----------------------------------------------------------
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 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
46
<PAGE>
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.
Any such comparisons may be useful to investors who wish to compare
past performance of the Funds or a class of shares 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 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
47
<PAGE>
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 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.
48
<PAGE>
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 Fund securities, including U.S. Government
securities but excluding money market instruments and debt securities 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. 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. 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
49
<PAGE>
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.
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 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.
50
<PAGE>
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 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 Funds paid brokerage commissions as follows:
<TABLE>
<CAPTION>
Fund Commissions
---- -----------
<S> <C>
Intermediate Bond $ 0
Short-Intermediate U.S. Government Income $ 0
Short-Term Government-Corporate Income* $ 0
U.S. Government Income* $ 0
Variable Rate Government* $ 0
</TABLE>
- ---------------------
* This amount is for the year ended December 31, 1997. Prior to December 12,
1997, this amount reflects fees paid by the Overland predecessor
portfolio.
For the years ended December 31, 1996 and December 31, 1995, 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.
51
<PAGE>
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* Goldman Sachs & Co. $ 67,000
Income Fund
U.S. Government Income Fund* Goldman Sachs & Co. $1,045,000
Morgan Stanley $3,889,000
Variable Rate Government Fund* Goldman Sachs & Co. $2,023,000
JP Morgan Securities $ 234,000
HSBC Securities $ 354,000
</TABLE>
- ---------------
* As of December 31, 1997.
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.
52
<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
net asset value 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 separately to each Fund, rather than to the
Company as a whole. Accordingly, net capital gain, net investment income, and
operating expenses will be determined separately for each Fund. As a regulated
investment company, each Fund will not be taxed on its net investment income and
capital gains distributed to its shareholders.
Qualification as a regulated investment company under the Code
requires, among other things, that (a) each Fund derive at least 90% of its
annual gross income from dividends, interest, certain payments with respect to
securities loans, gains from the sale or other disposition of stock 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
53
<PAGE>
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 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
54
<PAGE>
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 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.
55
<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.
56
<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.
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.
57
<PAGE>
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.
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.
58
<PAGE>
Set forth below, as of April 1, 1998, is the name, address and share
ownership of each person known by the Company to have beneficial or record
ownership of 5% or more of a class of a Fund or 5% or more of the voting
securities as a whole. 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.
59
<PAGE>
<TABLE>
<CAPTION>
5% OWNERSHIP AS OF APRIL 1, 1998
--------------------------------
TYPE OF PERCENTAGE PERCENTAGE
FUND NAME AND ADDRESS OWNERSHIP OF CLASS OF PORTFOLIO
---- ---------------- ----------- ---------- ------------
<S> <C> <C> <C> <C>
INTERMEDIATE BOND Wells Fargo Bank Class A 8.04% N/A
FBO Retirement Plans Omnibus Beneficially Owned
P.O. Box 63015
San Francisco, CA 94163
Virg. & Co. Class A 44.20% 6.13%
c/o Wells Fargo Bank Record Holder
P.O. Box 9800 MAC 9139-027
Calabasas, CA 91372
SHORT-INTERMEDIATE Wells Fargo Bank Class A 27.20% 9.84%
U.S. GOVERNMENT FBO Retirement Plans Omnibus Beneficially Owned
INCOME P.O. Box 63015
San Francisco, CA 94163
SHORT-TERM Virginia & Co. Single Class 15.26% 15.26%
GOVERNMENT c/o Wells Fargo Bank Record Holder
CORPORATE INCOME Mutual Funds A-88-4
P.O. Box 9800
Calabassas, CA 91302
Hep & Co. Single Class 35.20% 35.20%
c/o Wells Fargo Bank Record Holder
P.O. Box 9800
Calabassas, CA 91302
Kimball Medical Center Foundation Single Class 12.50% 12.50%
600 River Avenue Record Holder
Lakewood, NJ 08701
Sanitary Fill Company Single Class 29.94% 29.94%
Attn: Treasury Dept. Record Holder
5 Thomas Mellon Circle, #304
San Francisco, CA 94134
U.S. GOVERNMENT Wells Fargo Bank Class A 18.43% 15.60%
INCOME FBO Retirement Plans Omnibus Beneficially Owned
P.O. Box 63015
San Francisco, CA 94163
Virg. & Co. Class A 6.82% 5.78%
c/o Wells Fargo Bank Beneficially Owned
P.O. Box 9800 MAC 9139-027
Calabasas, CA 91372
MLPF&S for the Sole Benefit of its Class C 32.26% N/A
Customers Beneficially Owned
Attn: Mutual Fund Administration
4800 Deer Lake Drive East, 3rd Floor
Jacksonville, FL 32246
Dean Witter Class C 10.85% N/A
P.O. Box 250 Church Street Station Beneficially Owned
New York, NY 10008-0250 for Robert K.
Halliday
Sisters of St. Francis Class C 9.94% N/A
Attn: Sister Marijane Hresko, OSF Beneficially Owned
809 South Convent Road
Aston, PA 19014
</TABLE>
60
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
VARIABLE RATE APCO Employees Credit Union Class A 16.53% 16.26%
GOVERNMENT 1608 7th Ave. Record Holder
Birmingham, AL 35203
MLPF&S for the Sole Benefit of it Class A 5.93% 5.84%
Customers Beneficially Owned
Attn: Mutual Fund Administration
4800 Deer Lake Drive East, 3rd Floor
Jacksonville, F: 32246
Mission Federal Credit Union Class A 5.61% 5.52%
P.O. Box 919023 Record Holder
San Diego, CA 92191
Merrill Lynch Pierce Fenner & Smith, Class C 25.77% N/A
Inc., for the Sole Benefit of its Record Holder
Customers
Attn: Fund Admin.
4800 Deer Lake East, 3rd Floor
Jacksonville, FL 32246
City of Fairfax Minnesota Class C 6.28% N/A
City Clerk Record Holder
P.O. Box K
Fairfax, MN 55332
City of Waterville Class C 13.06% N/A
P.O. Box 9 Record Holder
Waterville, MN 56096
City of Renville Class C 5.42% N/A
Renvilla Nursing Home Record Holder
City Hall
329 North Main
Renville, MN 56284
City of Mountain Lake Class C 12.20% N/A
Mountain Lake City Hall Record Holder
Mountain Lake, MN 56159
Firstar Trust Co. Agent Class C 5.82% N/A
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 "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,
61
<PAGE>
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, audited financial statements and
independent auditors' report for the Variable Rate Government, Short-Term
Government-Corporate Income and U.S. Government Income Funds for the year ended
December 31, 1997, are hereby incorporated by reference to the Annual Reports as
filed with the SEC on March 3, 1998.
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, 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.
Annual and Semi-Annual Reports may be obtained by calling
1-800-222-8222.
62
<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: 1-800-260-5969
STATEMENT OF ADDITIONAL INFORMATION
Dated May 1, 1998
INTERMEDIATE BOND FUND
SHORT-INTERMEDIATE U.S. GOVERNMENT INCOME FUND
U.S. GOVERNMENT INCOME FUND
INSTITUTIONAL CLASS
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 INTERMEDIATE BOND, SHORT-
INTERMEDIATE U.S. GOVERNMENT INCOME and U.S. GOVERNMENT INCOME FUNDS. This SAI
relates to the Institutional Class shares for each Fund.
This SAI is not a Prospectus and should be read in conjunction with the
Funds' Prospectus, dated May 1, 1998. All terms used in this SAI that are
defined in the Prospectus have the meanings assigned in the Prospectus. A copy
of the Prospectus may be obtained without charge by calling 1-800-260-5969 or
writing to Stagecoach Funds, P.O. Box 7066, San Francisco, CA
94120-7066.
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
Page
----
<S> <C>
Historical Fund Information............................................ 1
Investment Restrictions................................................ 1
Additional Permitted Investment Activities............................. 5
Risk Factors........................................................... 16
Management............................................................. 18
Performance Calculations............................................... 28
Determination of Net Asset Value....................................... 35
Additional Purchase and Redemption Information......................... 35
Portfolio Transactions................................................. 36
Fund Expenses.......................................................... 38
Federal Income Taxes................................................... 38
Capital Stock.......................................................... 43
Other.................................................................. 46
Independent Auditors................................................... 46
Financial Information.................................................. 46
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 Institutional Class shares of
the Short-Intermediate U.S. Government Income Fund commenced operations on
September 6, 1996.
The U.S. Government Income Fund commenced operations on January 1, 1992, as
the successor to the Ginnie Mae Fund of Wells Fargo Investment Trust for
Retirement Programs, which commenced operations on January 3, 1991. The
Institutional Class shares of the U.S. Government Income Fund commenced
operations on September 6, 1996. On July 23, 1997, the Boards of Directors of
the Company and Overland Express Funds, Inc. ("Overland"), another investment
company advised by Wells Fargo Bank, approved an Agreement and Plan of
Consolidation providing for, among other things, the reorganization of the U.S.
Government Income Fund of Overland with and into the Company's U.S. Government
Income Fund (the "Consolidation"). For accounting purposes, the Overland Fund
is considered the survivor of the Consolidation. The Overland Fund is sometimes
referred to throughout this SAI as the "predecessor portfolio" to the Company's
U.S. Government Income Fund. The Overland Fund did not offer Institutional
Class shares. For accounting purposes, the Institutional Class shares are
therefore considered a new class. Prior to December 12, 1997, the effective
date of the Consolidation of the Company and Overland, the Company's U.S.
Government Income Fund was known as the Ginnie Mae 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 (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;
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(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 (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 its
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 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.
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<PAGE>
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;
(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.
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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 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;
(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.
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<PAGE>
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% 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 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
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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 future
political and economic developments, the possible imposition of foreign
withholding taxes on interest income payable on the securities, the possible
establishment of exchange controls or the adoption of other foreign governmental
restrictions which might adversely affect the payment of principal and interest
on these securities and the possible seizure or nationalization of foreign
deposits. In addition, foreign branches of U.S. banks and foreign banks may be
subject to less stringent reserve requirements and to different accounting,
auditing, reporting and recordkeeping standards than those applicable to
domestic branches of U.S. banks.
Certificates of deposit are negotiable certificates evidencing the
obligation of a bank to repay funds deposited with it for a specified period of
time.
Time deposits are non-negotiable deposits maintained in a banking
institution for a specified period of time at a stated interest rate. Time
deposits which may be held by the 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.
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<PAGE>
Other types of bonds bear income at an interest rate that is adjusted
periodically. Because of their adjustable interest rates, the value of
"floating-rate" or "variable-rate" bonds fluctuates much less in response to
market interest rate movements than the value of fixed rate bonds. Also, the
Funds may treat some of these bonds as having a shorter maturity for purposes of
calculating the weighted average maturity of their investment portfolios. Bonds
may be senior or subordinated obligations. Senior obligations generally have the
first claim on a corporation's earnings and assets and, in the event of
liquidation, are paid before subordinated debt. Bonds may be unsecured (backed
only by the issuer's general creditworthiness) or secured (also backed by
specified collateral).
Commercial Paper
----------------
The Funds may invest in commercial paper (including variable amount master
demand notes) which refers to short-term, unsecured promissory notes issued by
corporations to finance short-term credit needs. Commercial paper is usually
sold on a discount basis and has a maturity at the time of issuance not
exceeding nine months. Variable amount master demand notes are demand
obligations which permit the investment of fluctuating amounts at varying market
rates of interest pursuant to arrangements between the issuer and a commercial
bank acting as agent for the payee of such notes whereby both parties have the
right to vary the amount of the outstanding indebtedness on the notes.
Investments by the Funds in commercial paper (including variable rate demand
notes and variable rate master demand notes issued by domestic and foreign bank
holding companies, corporations and financial institutions, as well as similar
instruments issued by government agencies and instrumentalities) will consist of
issues that are rated in one of the two highest rating categories by a 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
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<PAGE>
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.
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 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 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 the 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 Fund) 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
8
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standards or governmental supervision as domestic issuers. In addition, with
respect to certain foreign countries, taxes may be withheld at the source
under foreign tax laws, and there is a possibility of expropriation or
confiscatory taxation, political or social instability or diplomatic
developments that could adversely affect investments in, the liquidity of, and
the ability to enforce contractual obligations with respect to, securities of
issuers located in those countries.
Investment in foreign obligations involve certain considerations that are
not typically associated with investing in domestic obligations. There may be
less publicly available information about a foreign issuer than about a domestic
issuer. Foreign issuers also are not generally subject to uniform accounting,
auditing and financial reporting standards or governmental supervision
comparable to those applicable to domestic issuers. In addition, with respect
to certain foreign countries, taxes may be withheld at the source under foreign
income tax laws, and there is a possibility of expropriation or confiscatory
taxation, political or social instability or diplomatic developments that could
adversely affect investments in, the liquidity of, and the ability to enforce
contractual obligations with respect to, securities of issuers located in those
countries.
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 hold up to 15% (10%
for the U.S. Government Income Fund) 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
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<PAGE>
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 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 (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 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 Inc. 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
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<PAGE>
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 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 may invest in ARMs
issued or guaranteed by the GNMA, FNMA or 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 U.S. Government Income Fund 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, an increasingly common form of residential
financing, generally have a specified maturity date. Most provide for
amortization of principal in a manner similar to fixed-rate mortgages, but
11
<PAGE>
have interest rates that change in response to changes in a specified interest
rate index. The rate of interest due on such a mortgage is calculated by
adding an agreed-upon "margin" to the specified index, although there
generally are limitations or "caps" on interest rate movements in any given
period or over the life of the mortgage. To the extent that the interest rates
on adjustable rate mortgages cannot be adjusted in response to interest rate
changes because of interest rate caps, the ARMs or CMOs backed by such
mortgages are likely to respond to changes in market rates more like fixed
rate securities. In other words, interest rate increases in excess of such
caps can be expected to cause CMOs or ARMs backed by mortgages that have such
caps to decline in value to a greater extent than would be the case in the
absence of such caps. Conversely, interest rate decreases below interest rate
floors can be expected to cause the CMOs or ARMs backed by mortgages that have
such floors to increase in value to a greater extent than would be the case in
the absence of such floors.
These adjustable rate features should reduce, but will not eliminate, price
fluctuations in such securities, particularly when market interest rates
fluctuate. Since the interest rates on mortgages typically are reset at most
annually and generally are subject to caps, it can be expected that the prices
of ARMs and CMOs backed by such mortgages will fluctuate to the extent
prevailing market interest rates are not reflected in the interest rates payable
on the underlying adjustable rate mortgages. In this regard, the net asset value
of a Fund's 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 Fund 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 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.
12
<PAGE>
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.
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
13
<PAGE>
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 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.
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 Fund) 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.
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 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
Moody's Investors Service, Inc. ("Moody's") or Standard & Poor's Rating Group
("S&P") may
14
<PAGE>
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
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, 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.
The payment of principal and interest on debt securities purchased by a
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.
15
<PAGE>
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 also may be subject to credit and
interest rate risk. Credit risk is the risk that the issuers of securities in
which a Fund invests may default in the payment of principal and/or interest.
Interest rate risk is the risk that increases in market interest rates may
adversely affect the value of the debt instruments in which a Fund invests and
hence the value of your investment in a Fund.
The market value of a Fund's investments in fixed-income securities will
change in response to various factors, such as changes in market interest rates
and the relative financial strength of an issuer. During periods of falling
interest rates, the value of fixed-income securities 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
16
<PAGE>
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.
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 the advisor's intent in using the derivatives.
The Funds may invest up to 25% of their assets in "Yankee Bonds." Yankee
Bonds are U.S. dollar-denominated debt obligations issued in the U.S. by foreign
banks and corporations. Such investments may involve special risks and
considerations not typically associated with investing in U.S. companies. These
include differences in accounting, auditing and financial reporting standards;
generally higher commission rates on foreign portfolio transactions; the
possibility of nationalization, expropriation or confiscatory taxation; adverse
changes in investment or exchange control regulations (which may include
suspension of the ability to transfer currency from a country); and political
instability which could affect U.S. investments in foreign countries.
Additionally, dispositions of foreign securities and dividends and interest
payable on those securities may be subject to foreign taxes, including
withholding taxes. Foreign securities often trade with less frequency and volume
than domestic securities and, therefore, may exhibit greater price volatility.
The 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.
17
<PAGE>
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
*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
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
Principal Occupations
Name, Age and Address Position During Past 5 Years
- --------------------- -------- --------------------
<S> <C> <C>
*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>
<TABLE>
<CAPTION>
Compensation Table
Year Ended March 31, 1998
-------------------------
Total Compensation
Aggregate Compensation from Registrant
Name and Position from Registrant and Fund Complex
- ----------------- ----------------------- -------------------
<S> <C> <C>
Jack S. Euphrat $25,750 $34,500
Director
R. Greg Feltus $ 0 $ 0
Director
Thomas S. Goho $25,750 $34,500
Director
Peter G. Gordon $24,250 $30,500
Director
Joseph N. Hankin $25,750 $34,500
Director
W. Rodney Hughes $25,250 $33,000
Director
Robert M. Joses $ 1,500 $ 4,000
Director
J. Tucker Morse $25,250 $33,000
Director
</TABLE>
19
<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
15, 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, Well Fargo Bank is entitled to
receive a monthly fee at the annual rates indicated below of each Fund's average
daily net assets:
20
<PAGE>
<TABLE>
<CAPTION>
Annual Rate
Fund (as percentage of net assets)
---- -----------------------------
<S> <C>
Intermediate Bond 0.50%
Short-Intermediate U.S. Government Income 0.50%
U.S. Government Income 0.50% up to $250 million
0.40% next $250 million
0.30% over $500 million
</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 Income $134,529 $121,235
U.S. Government Income* $469,051 $ 0
</TABLE>
____________________
* These amounts are for the year ended December 31, 1997. Prior to December 12,
1997, these amounts reflect fees paid by the Overland predecessor
portfolio.
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 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 $277,965 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 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.
21
<PAGE>
<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 and U.S. Government Income Funds.
--------------------------------------------------------------------------
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.
For the periods indicated below, the Short-Intermediate U.S. Government
Income and U.S. Government Income 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>
Short-Int. U.S. Govt. Income $213,467 $ 0 $ 56,387 $60,241 $ 0 $58,270
U.S. Govt. Income* $167,516 $46,101 $840,112 $ 0 $230,619 $28,872
</TABLE>
____________________
* Indicates fees paid by the Overland predecessor portfolio. For 1996, this
amount is for the year ended December 31, 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. Paul Single assumed responsibility for the day-to-
------------------
day management of the portfolio of the U.S. Government Income Fund
22
<PAGE>
on May 1, 1995. 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-Intermediate U.S. Government
Income Fund as of July 16, 1996. 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 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 candidate.
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 the 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. 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 Inc. ("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
23
<PAGE>
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 0.04% and 0.02%,
respectively, of the average daily net assets of each Fund for performing
administration services. 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
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 Funds paid to Wells Fargo Bank and Stephens the
following dollar amounts 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 $19,910 $3,982 $15,928
</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 the 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 Intermediate
Bond 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 dollar
amounts indicated below for the periods indicated below. ALPs did not waive
24
<PAGE>
any administration fees during this period. In 1995, the Fund changed its 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
------------ -------- --------
<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
dollar amounts in administration fees indicated below. Stephens, as sole
Administrator for the years ended December 31, 1994, and 1995, and the nine-
month period ended 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>
U.S. Government 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 U.S. Government Income predecessor portfolio under substantially
similar terms to the current Administration and Co-Administration Agreements
with the Fund. Prior to February 1, 1997, Stephens served as sole Administrator
to the Overland U.S. Government Income predecessor portfolio and provided the
predecessor portfolio with essentially the same services described above.
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 U.S. Government Income Fund paid to
Stephens the dollar amounts in administration fees indicated below. Prior to
December 12, 1997, these amounts reflect fees paid by the Overland predecessor
portfolio.
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
12/31/97 12/31/96 12/31/95
--------- --------- ---------
<S> <C> <C>
$66,992 $ 51,898 $ 37,744
</TABLE>
25
<PAGE>
DISTRIBUTOR. Stephens (the "Distributor"), located at 111 Center Street,
-----------
Little Rock, Arkansas 72201, serves as the distributor for the Funds.
SHAREHOLDER SERVICING AGENT. The Funds have approved a Servicing Plan and
---------------------------
have entered into related Shareholder Servicing Agreements with financial
institutions, including Wells Fargo Bank, on behalf of the Institutional Class
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 to 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%, 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 Plan 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 Plan or related Agreements that
exceed the maximum amounts payable under the Conduct Rules of the National
Association of Securities Dealers, Inc. ("NASD").
For the period indicated below, the dollar amounts of shareholder servicing
fees paid to Wells Fargo Bank or its affiliates by the Institutional Class of
each Fund, after waivers, were as follows:
<TABLE>
<CAPTION>
Six-Month
Period Ended
Fund 3/31/97
----- ------------
<S> <C>
Intermediate Bond $ 53,672
Short-Intermediate U.S. Government Income $ 82,843
U.S. Government Income* $ 0
</TABLE>
____________________
* The Overland predecessor portfolio did not offer Institutional Class
shares.
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 Interstate 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.
Short-Intermediate U.S. Government Income Fund. The Short-Intermediate
----------------------------------------------
U.S. Government Income Fund did not pay any shareholder servicing fees to Wells
Fargo Bank or its affiliates for the period from its commencement of operations
on September 6, 1996 to September 30, 1996.
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
26
<PAGE>
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 Plan or related Servicing Agreements may be
made except by a majority of both the Directors of the Company and the Non-
Interested Directors.
The Servicing Plan requires that the Administrator shall provide to the
Directors, and the Directors shall review, at least quarterly, a written report
of the amounts expended (and purposes therefor) under the Servicing Plan.
CUSTODIAN. Wells Fargo Bank acts as Custodian for 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 to
Wells Fargo Bank.
For the year ended December 31, 1997, the U.S. Government Income Fund did
not pay any custody fees. Prior to December 12, 1997, this amount reflects fees
paid by the Overland predecessor portfolio.
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.
Short-Intermediate U.S. Government Income Fund. The Short-Intermediate
----------------------------------------------
U.S. Government Income Fund did not pay any custody fees for the period 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 0.06%
of each Fund's average daily net assets of the Institutional Class shares.
27
<PAGE>
For the six-month period ended March 31, 1997, the Funds paid to Wells
Fargo Bank the following dollar amounts in transfer and dividend disbursing
agency fees, without regard to Class and after waivers:
<TABLE>
<CAPTION>
Fund Transfer Agency Fees
- ---- --------------------
<S> <C>
Intermediate Bond $ 0
Short-Intermediate U.S. Government Income $ 0
U.S. Government Income* $126,491
</TABLE>
_______________
* This amount is for the year ended December 31, 1997. Prior to December 12,
1997, this amount reflects fees paid by the Overland predecessor
portfolio.
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 the
Institutional Class shares, 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 for the Short-Intermediate U.S.
Government Income and U.S. Government Income 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 Fund's assets
remained under $20 million, the Fund was not charged any transfer agency fees.
UNDERWRITING COMMISSIONS. Front-end sales loads and contingent-deferred
------------------------
sales charges are not assessed in connection with the purchase and redemption of
Institutional Class shares. Therefore no underwriting commissions were paid to
Stephens as the Funds' Distributor.
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.
28
<PAGE>
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 for the Funds.
Performance shown or advertised for the Institutional Class shares of the
Intermediate Bond Fund for periods prior to September 6, 1996, reflects the
performance of the Institutional Class shares of the Pacifica Intermediate Bond
Fund (10/95 to 9/96) and the Westcore Bonds Plus Fund (6/88 to 9/95).
Performance shown or advertised for the Institutional Class shares of the
Short-Intermediate U.S. Government Income Fund for periods prior to September 6,
1996, reflects the performance of such Fund's Class A shares (excluding sales
charges).
Performance shown or advertised for the Institutional Class shares of the
U.S. Government Income Fund for periods prior to December 12, 1997, reflects the
performance of the Class A shares (excluding sales charges) of the Overland
predecessor portfolio.
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>
Institutional Five Three One
Class Inception/2/ Year Year Year
------------- -------------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Intermediate Bond 8.14% 5.69% 7.90% 7.57%
Short-Intermediate U.S. Government Income 5.19% N/A 7.08% 7.89%
U.S. Government Income/3/ 8.61% 6.42% 9.01% 8.69%
</TABLE>
29
<PAGE>
_______________
/1/ For purposes of showing performance information, the inception date of each
Fund and Class is as follows: Intermediate Bond Fund - June 1, 1988; Short-
Intermediate U.S. Government Income Fund - October 27, 1993; U.S.
Government Income Fund - January 1,1992. The actual inception date of each
Class may differ from the inception date of the corresponding Fund.
/2/ For periods prior to September 6, 1996, performance figures for the
Institutional Class shares of the Intermediate Bond Fund reflect the
performance of the Institutional Class shares of such Fund's predecessor
portfolios. For periods prior to September 6, 1996, performance figures for
the Institutional Class shares of the Short-Intermediate U.S. Government
Income Fund reflect the performance of such Fund's Class A shares. For
periods prior to December 12, 1997, performance figures for the
Institutional Class shares of the U.S. Government Income Fund reflect the
performance of the Class A shares of the Overland predecessor
portfolio.
/3/ Performance shown is for the applicable period ended December 31,
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>
Institutional Five Three
Class Inception/2/ Year Year
------------- -------------- -------------- -------------
<S> <C> <C> <C>
Intermediate Bond 107.50% 31.87% 25.61%
Short-Intermediate U.S. Government Income 21.92% N/A 22.78%
U.S. Government Income/3/ 123.65% 36.47% 29.56%
</TABLE>
_______________
/1/ For purposes of showing performance information, the inception date of each
Fund and Class is as follows: Intermediate Bond Fund - June 1, 1988; Short-
Intermediate U.S. Government Income Fund - October 27, 1993; U.S.
Government Income Fund - January 1,1992. The actual inception date of each
Class may differ from the inception date of the corresponding Fund.
30
<PAGE>
/2/ For periods prior to September 6, 1996, performance figures for the
Institutional Class shares of the Intermediate Bond Fund reflect the
performance of the Institutional Class shares of such Fund's predecessor
portfolios. For periods prior to September 6, 1996, performance figures for
the Institutional Class shares of the Short-Intermediate U.S. Government
Income Fund reflect the performance of such Fund's Class A shares. For
periods prior to December 12, 1997, performance figures for the
Institutional Class shares of the U.S. Government Income Fund reflect the
performance of the Class A shares of the Overland predecessor
portfolio.
/3/ Performance shown is for the applicable period ended December 31,
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 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
31
<PAGE>
Yield for the Applicable Period Ended September 30, 1997
--------------------------------------------------------
<TABLE>
<CAPTION>
Thirty-Day Yield
--------------------------------------------
Fund After Waiver/1/ Before Waiver
---- -------------------- ----------------------
<S> <C> <C>
Intermediate Bond 5.89% 5.45%
Short-Intermediate U.S. Government Income 5.90% 5.49%
U.S. Government Income/2/ 6.26% 5.84%
</TABLE>
____________________
/1/ "After waiver" figures reflect any waived fees or reimbursed expenses
throughout the period.
/2/ Performance shown is for the applicable period ended December 31,
1997.
Quotations of yield and total return reflect only the performance of a
hypothetical investment in a Fund or class of shares during the particular time
period shown. Yield and total return vary based on changes in the market
conditions and the level of a Fund's expenses, and no reported performance
figure should be considered an indication of performance which may be expected
in the future. In connection with communicating its yields or total return to
current or prospective shareholders, these figures may also be compared to the
performance of other mutual funds tracked by mutual fund rating services or to
unmanaged indices which may assume reinvestment of dividends but generally do
not reflect deductions for administrative and management costs.
The yields for each class of shares will fluctuate from time to time,
unlike bank deposits or other investments that pay a fixed yield for a stated
period of time, and do not provide a basis for determining future yields since
they are based on historical data. Yield is a function of portfolio quality,
composition, maturity and market conditions as well as the expenses allocated to
a Fund or to a particular class of a Fund.
In addition, investors should recognize that changes in the net asset
values of shares of each class of 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 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
32
<PAGE>
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 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 of shares 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 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 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.
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
33
<PAGE>
prepared by the Tax Foundation, including information regarding federal and
state tax levels and the related "Tax Freedom Day."
The Company also may discuss in advertising and other types of literature
that a Fund has been assigned a rating by a nationally recognized statistical
rating organization ("NRSRO"), such as Standard & Poor's Corporation. Such
rating would assess the creditworthiness of the investments held by 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 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, 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 Company's investment advisor. The Company may also disclose
in advertising and other types of sales literature the assets and categories 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
34
<PAGE>
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 on each day the Funds (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 Fund securities, including U.S. Government securities but
excluding money market instruments and debt securities 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. 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 in accordance with procedures adopted by the Company's Board of
Directors.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
Shares of the Funds 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, President's 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.
35
<PAGE>
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.
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 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
36
<PAGE>
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
---------------------
Intermediate Bond and Short-Intermediate U.S. Government Income Funds did not
pay any brokerage commissions.
For the year ended December 31, 1997, the U.S. Government Income Fund did
not pay any brokerage commissions. Prior to December 12, 1997, this amount
reflects fees paid by the Overland predecessor portfolio.
For 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 period ended September 30, 1996 and the years ended December 31,
1995 and 1994, the Short-Intermediate U.S. Government Income Fund did not pay
any brokerage commissions.
For the years ended December 31, 1996 and December 31, 1995, the U.S.
Government Income predecessor portfolio 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
U.S. Government Income Fund* Goldman Sachs & Co. $1,045,000
Morgan Stanley $3,889,000
</TABLE>
_______________
* As of December 31, 1997.
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
37
<PAGE>
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 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
net asset value 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 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 Funds. This section of the
SAI includes additional information concerning income taxes.
General. The Company intends to qualify each Fund as a regulated
-------
investment company under Subchapter M of the Internal Revenue Code of 1986, as
amended (the "Code"), as long as such qualification is in the best interest of
the Fund's shareholders. Each Fund will be treated as a separate entity for tax
purposes and thus the provisions of the Code applicable to regulated investment
companies will generally be applied separately to each Fund, rather than to the
Company as a whole. Accordingly, net capital gain, net investment income, and
operating expenses will be determined separately for each Fund. As a regulated
investment company, each Fund will not be taxed on its net investment income and
capital gains distributed to its shareholders.
Qualification as a regulated investment company under the Code requires,
among other things, that (a) each Fund derive at least 90% of its annual gross
income from dividends, interest, certain payments with respect to securities
loans, gains from the sale or other disposition of stock or securities or
foreign currencies (to the extent such currency gains are directly related to
38
<PAGE>
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 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.
39
<PAGE>
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 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
40
<PAGE>
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 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
41
<PAGE>
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 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.
42
<PAGE>
CAPITAL STOCK
The Funds are three 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, one or more 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 1-800-260-5969 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
the 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.
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
43
<PAGE>
or dissolution of the Company, shareholders of the 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 April 1, 1998, is the name, address and share
ownership of each person known by the Company to have beneficial or record
ownership of 5% or more of the Institutional Class Shares 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 the Fund as a
whole.
5% OWNERSHIP AS OF APRIL 1, 1998
--------------------------------
<TABLE>
<CAPTION>
TYPE OF PERCENTAGE PERCENTAGE
FUND NAME AND ADDRESS OWNERSHIP OF CLASS OF PORTFOLIO
- --------------- ---------------------------------- ----------------- --------------- --------------
<S> <C> <C> <C> <C>
INTERMEDIATE VIRG. & CO. INSTITUTIONAL 47.32% 32.54%
BOND FUND ATTN: MF DEPT A88-4 CLASS
P.O. BOX 9800 RECORD HOLDER
CALABASAS, CA 91372
HEP & CO. INSTITUTIONAL 50.34% 34.62%
ATTN: MF DEPT A88-4 CLASS
P.O. BOX 9800 RECORD HOLDER
MAC 9139-027
CALABASAS, CA 91302
</TABLE>
44
<PAGE>
<TABLE>
<CAPTION>
TYPE OF PERCENTAGE PERCENTAGE
FUND NAME AND ADDRESS OWNERSHIP OF CLASS OF PORTFOLIO
- --------------- ---------------------------------- ----------------- --------------- --------------
<S> <C> <C> <C> <C>
SHORT-INTERMEDI WELLS FARGO BANK, TTEE INSTITUTIONAL 10.50% 6.70%
ATE U.S. CHOICEMASTER CLASS
GOVERNMENT P.O. BOX 9800 RECORD HOLDER
INCOME CALABASAS, CA 91372-0800
FUND
DIM & CO. INSTITUTIONAL 47.96% 30.62%
ATTN: MF DEPT. A88-4 CLASS
P.O. BOX 9800 RECORD HOLDER
CALABASAS, CA 91372-0800
VIRG & CO INSTITUTIONAL 23.59% 15.06%
ATTN: MF DEPT. A88-4 CLASS
P.O. BOX 9800 RECORD HOLDER
CALABASAS, CA 91372-0800
HEP & CO INSTITUTIONAL 14.61% 9.32%
ATTN: MF DEPT. A88-4 CLASS
P.O. BOX 9800 MAC 9139-027 RECORD HOLDER
CALABASAS, CA 91302
U.S. WELLS FARGO BANK, TTEE INSTITUTIONAL 5.04% N/A
GOVERNMENT FBO CHOICEMASTER CLASS
ICOME FUND ATTN: MUTUAL FUNDS BENEFICIALLY
P.O. BOX 9800 OWNED
CALABASAS, CA 91372-0800
</TABLE>
45
<PAGE>
<TABLE>
<CAPTION>
TYPE OF PERCENTAGE PERCENTAGE
FUND NAME AND ADDRESS OWNERSHIP OF CLASS OF PORTFOLIO
- --------------- ---------------------------------- ----------------- --------------- --------------
<S> <C> <C> <C> <C>
Dim & Co. Institutional 28.78% N/A
Attn: MF Dept. A88-4 Class
P.O. Box 9800 Record Holder
Calabasas, CA 91372-0800
Virg & Co 34.39% N/A
Attn: MF Dept. A88-4 Institutional
P.O. Box 9800 Class
Calabasas, CA 91372-0800 Record Holder
Hep & Co 10.63% N/A
Attn: MF Dept. A88-4
P.O. Box 9800 MAC 9139-027 Institutional
Calabasas, CA 91302 Class
Record Holder
</TABLE>
For purposes of the 1940 Act, any person who owns directly or through one
or more controlled companies more than 25% of the voting securities of a company
is presumed to "control" such company. Accordingly, to the extent that a
shareholder identified in the foregoing table is identified as the beneficial
holder of more than 25% of a class (or Fund), or is identified as the holder of
record of more than 25% of a class (or Fund) and has voting and/or investment
powers, it may be presumed to control such class (or Fund).
OTHER
The Company's Registration Statement, including the Prospectus and SAI for
the Fund and the exhibits filed therewith, may be examined at the office of the
U.S. Securities and Exchange Commission in Washington, D.C. Statements contained
in the Prospectus or the SAI as to the contents of any contract or other
document referred to herein or in the Prospectus are not necessarily complete,
and, in each instance, reference is made to the copy of such contract or other
document filed as an exhibit to the Registration Statement, each such statement
being qualified in all respects by such reference.
INDEPENDENT AUDITORS
KPMG Peat Marwick LLP has been selected as the independent auditor for the
Company. KPMG Peat Marwick LLP provides audit services, tax return preparation
and assistance and consultation in connection with review of certain SEC
filings. KPMG Peat Marwick LLP's address is Three Embarcadero Center, San
Francisco, California 94111.
FINANCIAL INFORMATION
The portfolio of investments, audited financial statements and independent
auditors' report for the U.S. Government Income Fund for the year ended December
31, 1997, are hereby incorporated by reference to the Annual Reports as filed
with the SEC on March 3, 1998.
46
<PAGE>
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, audited financial statements and independent
auditors report for the Intermediate Bond and Short-Intermediate U.S. Government
Income Funds for the six-month 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 1-800-260-5969.
47
<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-l
<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 May 1, 1998
OVERLAND EXPRESS SWEEP FUND
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
OVERLAND EXPRESS SWEEP FUND.
This SAI is not a Prospectus and should be read in conjunction with the Fund's
Prospectus, dated May 1, 1998. All terms used in this SAI that are defined in
the Prospectus have the meanings assigned in the Prospectus. A copy of the
Prospectus may be obtained without charge by calling 1-800-222-8222 or writing
to Stagecoach Funds, P.O. Box 7066, San Francisco, CA 94120-7066.
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
<S> <C>
Page
Historical Fund Information.......................................... 1
Investment Restrictions.............................................. 1
Additional Permitted Investment Activities........................... 3
Risk Factors......................................................... 5
Management........................................................... 6
Performance Calculations............................................. 14
Determination of Net Asset Value..................................... 19
Additional Purchase and Redemption Information....................... 20
Portfolio Transactions............................................... 21
Fund Expenses........................................................ 22
Federal Income Taxes................................................. 23
Capital Stock........................................................ 27
Other................................................................ 28
Independent Auditors................................................. 28
Financial Information................................................ 29
Appendix............................................................. A-1
</TABLE>
i
<PAGE>
HISTORICAL FUND INFORMATION
The Overland Express Sweep Fund was originally organized on October 1, 1991, as
the Overland Sweep Fund (the "predecessor portfolio") of Overland Express Funds,
Inc. ("Overland"), another open-end management investment company advised by
Wells Fargo Bank. 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 a newly created Fund of the Company named the
"Overland Express Sweep Fund." Prior to December 12, 1997, the effective date
of the Consolidation, the Company's Fund had only minimal assets and
liabilities. Upon completion of the Consolidation, the Company's Fund assumed
the assets and stated liabilities of the predecessor Overland portfolio. Prior
to the Consolidation, the predecessor portfolio pursued its investment objective
by investing all of its assets in the Cash Investment Trust Master Portfolio
(the "Master Portfolio") of Master Investment Trust ("MIT"). The Fund now
invests directly in a portfolio of securities and does not invest in a
corresponding Master Portfolio.
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 a
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 the
Fund.
The Overland Express Sweep 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 respective total assets, provided that there is no
limitation with respect to investments in (i) obligations of the United States
Government, its agencies or instrumentalities, and (ii) 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 partnership interests
(other than money market 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;
(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
1
<PAGE>
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 their respective 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 their respective net assets (but
investments may not be purchased while any such borrowing in excess of 5% of
their respective net assets exists);
(7) 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; nor
(8) make loans of portfolio securities or other assets, except that loans for
purposes of this restriction will not include the purchase of fixed time
deposits, repurchase agreements, commercial paper and other short-term
obligations, and other types of debt instruments commonly sold in a public or
private offering.
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 approval of the Fund's shareholders.
(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, 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) The Fund may not invest or hold more than 10% 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) The 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 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
2
<PAGE>
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.
ADDITIONAL PERMITTED INVESTMENT ACTIVITIES
Set forth below are descriptions of certain investments and additional
investment policies for the Fund.
Floating- and Variable-Rate Instruments
- ---------------------------------------
Certain of the debt instruments in which the Fund may invest may bear interest
rates that are periodically adjusted at specified intervals or whenever a
benchmark rate or index changes. These adjustments generally limit the increase
or decrease in the amount of interest received on the debt instruments. The
floating- and variable-rate instruments that the Fund may purchase include
certificates of participation in pools of floating- and variable-rate
instruments. Floating- and variable-rate instruments are subject to interest
rate risk and credit risk.
Foreign Obligations
- -------------------
The Fund may invest a portion of its assets (no more than 5%) in 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 accounting, auditing and financial
reporting standards or governmental supervision as domestic issuers. In
addition, with respect to certain foreign countries, taxes may be withheld at
the source under foreign income tax laws, and there is a possibility of
expropriation or confiscatory taxation, political or social instability or
diplomatic developments that could adversely affect investments in, the
liquidity of, and the ability to enforce contractual obligations with respect
to, securities of issuers located in those countries.
Illiquid Securities
- -------------------
The Fund may hold up to 10% of its assets in securities not registered under the
Securities Act of 1933 and other securities subject to legal or other
restrictions on resale. Because such securities may be less liquid than other
investments, they may be difficult to sell promptly at an acceptable price.
Delay or difficulty in selling securities may result in a loss or be costly to
the Fund.
Letters of Credit
- -----------------
Certain of the debt obligations, certificates of participation, commercial paper
and other short-term obligations in which the Fund is permitted to invest may be
backed by an unconditional and irrevocable letter of credit of a bank, savings
and loan association or insurance company that assumes the obligation for
payment of principal and interest in the event of default by the issuer. Letter
of credit-backed investments must, in the
3
<PAGE>
opinion of Wells Fargo Bank, be of investment quality comparable to other
permitted high-quality investments of the Fund.
Money Market Instruments
- ------------------------
Money market instruments consist of: (a) short-term securities issued or
guaranteed by the U.S. Government, its agencies or instrumentalities (including
government-sponsored enterprises) (U.S. Government obligations"); (b) negotiable
certificates of deposit, bankers' acceptances and fixed time deposits and other
short-term obligations of domestic banks (including foreign branches) that have
more than $1 billion in total assets at the time of the 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"); (c) commercial paper rated at the date of purchase "Prime-
1" by Moody's Investors Service, Inc. ("Moody's") or "A-1+" or "A-1" by Standard
& Poor's Ratings Group ("S&P"), or, if unrated, by comparable qualify as
determined by Wells Fargo Bank; (d) certain repurchase agreements; and (e)
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 largest
foreign banks in the world as determined on the basis of assets; and (iii) have
branches or agencies in the United States.
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. 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 aggregate. Other investment
companies in which the Fund 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 Fund.
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 period of maturity is usually quite short,
often overnight or a few days, although it may extend over a number of months.
The Fund may enter into repurchase agreements only with respect to U.S.
Government obligations and other securities that are permissible investments for
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. However, the term of any repurchase agreement on behalf of the Fund
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 10% of the market value of it's total net
assets would be invested in
4
<PAGE>
repurchase agreements with maturities of more than seven days, restricted
securities and/or illiquid securities. The Fund will enter into repurchase
agreements only with primary broker/dealers and commercial banks that meet
guidelines established by the Board of Directors of the Company and that are not
affiliated with Wells Fargo Bank. The Fund, subject to the conditions described
above, may participate in pooled repurchase agreement transactions with other
funds advised by Wells Fargo Bank.
Unrated Investments
- -------------------
The Fund may purchase instruments that are not rated if, in the opinion of Wells
Fargo Bank as investment Advisor, such obligations are of comparable quality to
other high-quality 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
requires an immediate 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, the Fund will attempt to use comparable
ratings as standards for investments in accordance with the investment policies
contained in the Prospectus and in this SAI. The ratings of Moody's and S&P are
more fully described in the Appendix to this SAI.
U.S. Government Obligations
- ---------------------------
U.S. Government obligations include securities issued or guaranteed by the U.S.
Government, its agencies or instrumentalities. Payment of principal and
interest on U.S. Government obligations may be backed by the full faith and
credit of the United States, as with Treasury bills, or may be backed solely by
the issuing or guaranteeing agency or instrumentality itself. In the latter
case investors must look principally to the agency or instrumentality itself.
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
increase rates increase and rises when market interest rates decrease. Certain
types of U.S. Government obligations are subject to fluctuations in yield,
duration or value due to their structure or contract terms.
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 or guaranteed against loss
of principal. Therefore, you should be willing to accept some risk with money
you invest in the Fund. Although the Fund seeks to maintain a stable net asset
value of $1.00 per share, there is no assurance that it will be able to do so.
As with all mutual funds, there is no assurance that the Fund will achieve its
investment objective.
5
<PAGE>
The Fund, under the 1940 Act, must comply with certain investment criteria
designed to provide liquidity, reduce risk and allow the Fund to maintain a
stable net asset value of $1.00 per share. The Fund seeks to reduce risk by
investing in securities of various issuers and will comply with 1940 Act and
Internal Revenue Code of 1986 (the "Code") diversification requirements.
Since its inception, the Fund has emphasized safety of principal and high credit
quality. In particular, the internal investment policies of the Fund's
investment policies of the Fund's investment advisor, Wells Fargo, have always
prohibited the purchase of many types of floating rate instruments commonly
referred to as "derivatives" that are considered potentially volatile. The
following types of derivative securities ARE NOT permitted investments for the
Fund:
* capped floaters (on which interest is not paid when market rates move
above a certain level);
* leveraged floaters (whose interest-rate reset provisions are based on
a formula that magnifies changes in interest rates);
* range floaters (which do not pay any interest if market interest
rates move outside of a specified range);
* dual index floaters (whose interest rate reset provisions are tied to
more than one index so that a change in the relationship between
these indices may result in the value of the instrument falling below
face value); and
* inverse floaters (which reset in the opposite direction of their
index).
Additionally, the Fund may not invest in securities whose interest rate reset
provisions are tied to an index that materially lags short-term interest rates,
such as Cost of Funds Index floaters. The Fund may only invest in floating rate
instruments that bear interest at a rate that resets quarterly or more
frequently, and which resets based on changes in standard money market rate
indices such as U.S. Treasury bills, London Interbank Offered Rate, the prime
rate, published commercial paper rates, federal funds rates, Public Securities
Associates floaters or JJ Kenney index floaters.
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.
6
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Principal Occupations
Name, Age and Address Position During Past 5 Years
- --------------------- -------- ---------------------
Jack S. Euphrat, 75
415 Walsh Road
Atherton, CA 94027 Director Private Investor.
*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 Associate Professor of Finance of the School
321 Beechcliff Court of Business and Accounting at Wake Forest
Winston-Salem, NC 27104 Director University since 1982.
Peter Gordon, 54
Crystal Geyser Water Co. Chairman and Co-Founder of Crystal Geyser
55 Francisco Street Water Company and President of Crystal Geyser
San Francisco, CA 94133 Director Roxane Water Company since 1977.
Joseph N. Hankin, 57 President of Westchester Community College
75 Grasslands Road since 1971; Adjunct Professor of Columbia
Valhalla, NY 10595 Director University Teachers College since 1976.
*W. Rodney Hughes, 71
31 Dellwood Court
San Rafael, CA 94901 Director Private Investor.
*J. Tucker Morse, 53 Private Investor; Chairman of Home Account
4 Beaufain Street Network, Inc. Real Estate Developer; Chairman
Charleston, SC 29401 Director 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>
7
<PAGE>
Compensation Table
Year Ended March 31, 1998
<TABLE>
<CAPTION>
Total Compensation
Aggregate Compensation from Registrant
Name and Position from Registrant and Fund Complex
----------------- ---------------------- -------------------
<S> <C> <C>
Jack S. Euphrat
Director $25,750 $34,500
R. Greg Feltus
Director $ 0 $ 0
Thomas S. Goho
Director $25,750 $34,500
Peter G. Gordon
Director $24,250 $30,500
Joseph N. Hankin
Director $25,750 $34,500
W. Rodney Hughes
Director $25,250 $33,000
Robert M. Joses
Director $ 1,500 $ 4,000
J. Tucker Morse
Director $25,250 $33,000
</TABLE>
As of January 1, 1998, Peter G. Gordon replaced Robert M. Joses on the Board of
Directors of the Wells Fargo Fund Complex.
Directors of the Company are compensated annually by the Company and by all the
registrants in each fund complex they serve as indicated above and also are
reimbursed for all out-of-pocket expenses relating to attendance at board
meetings. The Company, Stagecoach Trust and Life & Annuity Trust are considered
to be members of the same fund complex as such term is defined in Form N-1A
under the 1940 Act (the "Wells Fargo Fund Complex"). Overland Express
8
<PAGE>
Funds, Inc. and Master Investment Trust, two investment companies previously
advised by Wells Fargo Bank, were part of the Wells Fargo Fund Complex prior to
December 15, 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 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 0.45% of the Fund's average daily
net assets.
For the year ended December 31, 1997, the Fund paid to Wells Fargo Bank
$5,540,534 in advisory fees and Wells Fargo Bank did not waive any advisory
fees. Prior to December 12, 1997, this amount reflects fees paid by the
Overland predecessor portfolio.
Prior to the Consolidation, the predecessor portfolio invested all of its assets
in the 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 0.25% of the Master Portfolio's average daily net assets. 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:
9
<PAGE>
<TABLE>
<CAPTION>
Year Ended Year Ended
12/31/96 12/31/95
---------- ----------
Fees Paid Fees Waived Fees Paid Fees Waived
--------- ----------- --------- -----------
<S> <C> <C> <C>
$3,310,083 $0 $1,902,572 $255,082
</TABLE>
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 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 Inc. ("Stephens") as Co-Administrator on behalf of
the 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 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 Securities 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 0.03% and 0.04%,
respectively, of the average daily net assets of the Fund. Prior to February 1,
1998, the Administrator and Co-Administrator received 0.04% and 0.02%,
respectively, of the average daily net assets of each Fund for performing
administration services. In connection with the change in fees, the
responsibility for performing various administration services was shifted to the
Co-Administrator.
Prior to the Consolidation, Wells Fargo Bank and Stephens served as
Administrator and Co-Administrator, respectively, to the Overland predecessor
portfolio under substantially similar terms as those described above.
For the period indicated below, the Fund paid to Wells Fargo Bank and Stephens
the dollar amounts in administration and co-administration fees indicated below.
Prior to December 12, 1997, these amounts reflect fees paid by the Overland
predecessor portfolio.
10
<PAGE>
<TABLE>
<CAPTION>
Year Ended
12/31/97
-----------
Total Wells Fargo Stephens
---------- ----------- --------
<S> <C> <C>
$1,211,007 $242,201 $968,806
</TABLE>
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. Stephens was entitled to receive for its services a fee, payable
monthly, at the annual rate of 0.05% of the Fund's average daily net assets.
For the periods indicated below, the Overland predecessor portfolio paid the
following dollar amounts to Stephens for administration fees:
<TABLE>
<CAPTION>
Year Ended Year Ended
12/31/96 12/31/95
------------ ------------
<S> <C>
$317,668 $215,624
</TABLE>
Distributor. 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 Plan was 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 Fund and who had no
direct or indirect financial interest in the operation of the Plan or in any
agreement related to the Plan (the "Non-Interested Directors").
Under the Plan and pursuant to the Distribution Agreement, the Fund may pay
Stephens, as compensation for distribution-related services or as reimbursement
for distribution-related expenses, a monthly fee at the annual rate of up to
0.30% of the Fund's average daily net assets attributable to its shares.
The actual fee payable to the Distributor 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.
11
<PAGE>
Prior to the Consolidation, the predecessor portfolio had adopted a Distribution
Plan on behalf of its shares providing for payment to the Distributor of up to
0.55% of the predecessor portfolio's average daily net assets.
For the year ended December 31, 1997, the Fund's Distributor received the fees
indicated below for distribution-related services, as set forth below, under the
Fund's Plan. Prior to December 12, 1997, these amounts reflect fees paid by the
Overland predecessor portfolio.
<TABLE>
<CAPTION>
Compensation
Printing & Marketing to
Total Mailing Prospectus Brochures Underwriters
----- ------------------ --------- ------------
<S> <C> <C> <C>
$11,332,851 N/A N/A $11,326,189
</TABLE>
For the year ended December 31, 1997, Wells Fargo Securities, Inc. and its
registered representatives did not receive any compensation under the
Plan.
General. The 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 Plan 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 Fund's shares or by vote of a majority of
the Non-Interested Directors on not more than 60 days' written notice. The Plan
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 Plan may be made except by a majority of both the
Directors of the Company and the Non-Interested Directors.
The Plan requires that the Treasurer of the Company shall provide to the
Directors, and the Directors shall review, at least quarterly, a written report
of the amounts expended (and purposes therefor) under the Plan. The Rule also
requires that the selection and nomination of Directors who are not "interested
persons" of the Company be made by such disinterested Directors.
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 Fund
pursuant to selling agreements with Stephens authorized under the Plan. As a
selling agent, Wells Fargo Bank has an indirect financial interest in the
operation of the Plan. The Board of Directors has concluded that the Plan is
reasonably likely to benefit the Fund and its shareholders because the Plan
authorizes the relationships with selling agents, including Wells Fargo Bank,
that have previously developed distribution channels and relationships with the
customers that the Fund's shares 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.
12
<PAGE>
Shareholder Servicing Agent. The Fund has approved a Servicing Plan and has
entered into related Shareholder Servicing Agreements with financial
institutions, including Wells Fargo Bank, on behalf of its 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 Fund, not to exceed 0.30%, 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 Plan and related form of
shareholder servicing agreement were approved by the Company's Board of
Directors and provide that the Fund shall not be obligated to make any payments
under such Plan or related Agreements that exceed the maximum amounts payable
under the Conduct Rules of the NASD.
For the year ended December 31, 1997, the Fund paid to Wells Fargo Bank or its
affiliates $6,951,112 in shareholder servicing fees. Prior to December 12,
1997, this amount reflects fees paid by the Overland predecessor portfolio.
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 Fund ("Non-Interested Directors"). Any form of
Servicing Agreement related to the Servicing Plan also must be approved by such
vote of the Directors and Non-Interested Directors. Servicing Agreements may be
terminated at any time, without payment of any penalty, by vote of a majority of
the Board of Directors, including a majority of the Non-Interested Directors.
No material amendment to the Servicing Plan and related Servicing Agreement may
be made except by a majority of both the Directors of the Company and the Non-
Interested Directors.
The Servicing Plan requires that the Administrator shall provide to the
Directors, and the Directors shall review, at least quarterly, a written report
of the amounts expended (and purposes therefor) under the Servicing Plan.
Custodian. Wells Fargo Bank acts as Custodian for the Fund. The Custodian,
among other things, maintains a custody account or accounts in the name of the
Fund, receives and delivers all assets for the Fund upon purchase and upon sale
or maturity, collects and receives all income and other payments and
distributions on account of the assets of the Fund, and pays all expenses of the
Fund. For its services as Custodian, Wells Fargo Bank is entitled to receive
fees as follows: a net asset charge at the annual rate of 0.0167%, payable
monthly, plus specified transaction charges. Wells Fargo Bank also will provide
portfolio accounting services under the Custody Agreement 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.
13
<PAGE>
Prior to the Consolidation, Wells Fargo Bank served as Custodian to the
predecessor portfolio.
For the year ended December 31, 1996, the predecessor portfolio did not pay any
custody fees to Wells Fargo Bank. Prior to December 12, 1997, this amount
reflects fees paid by the Overland predecessor portfolio.
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 0.10%
of the Fund's average daily net assets.
Under a prior transfer agency agreement with the predecessor portfolio, Wells
Fargo Bank was entitled to receive a base fee and per-account fees.
For the year ended December 31, 1997, the Fund paid $510,100 in compensation for
transfer and dividend disbursing agency services to Wells Fargo Bank. Prior to
December 12, 1997, this amount reflects fees paid by the Overland predecessor
portfolio.
Underwriting Commissions. Front-end sales loads and contingent-deferred sales
charges are not assessed in connection with the purchase and redemption of the
Fund's shares. Therefore no underwriting commissions are paid to Stephens as
the Fund's Distributor.
PERFORMANCE CALCULATIONS
The Fund may advertise certain yield and total return information. Quotations
of yield and total return reflect only the performance of a hypothetical
investment in the Fund during the particular time period shown. Yield and total
return vary based on changes in the market conditions and the level of the
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 the Fund may be useful in reviewing the performance
of the Fund and for providing a basis for comparison with investment
alternatives. The performance of the 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 for the Funds.
14
<PAGE>
Performance information shown or advertised for the Fund for periods prior to
December 12, 1997, reflects the performance of the Overland predecessor
portfolio.
Total Return: 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") 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 December 31, 1997
- -----------------------------------------------------------------------------
<TABLE>
<CAPTION>
10/1/91 Five Three One
Inception Year Year Year
--------- ---- ----- ----
<S> <C> <C> <C> <C>
Overland Express Sweep Fund 3.54% 3.72% 4.52% 4.47%
</TABLE>
Cumulative Total Return: In addition to the above performance information,
the 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 December 31, 1997
- -------------------------------------------------------------------------
<TABLE>
<CAPTION>
10/1/91 Five Three
Inception Year Year
--------- ---- -----
<S> <C> <C> <C>
Overland Express Sweep Fund 24.29% 20.06% 14.19%
</TABLE>
Yield Calculations: The Fund may, from time to time, include its yields and
effective yields in advertisements or reports to shareholders or prospective
investors. Quotations of yield for the Fund 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.
15
<PAGE>
Effective Yield: Effective yields for the Fund 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 the 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 Fund
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:
<TABLE>
<CAPTION>
Effective Seven-Day Yield = [(Base Period Return +1)365/7]-1
Yield for the Applicable Period Ended December 31, 1997
Seven-Day
Seven-Day Effective
Yield Yield
--------- ---------
<S> <C> <C>
Overland Express Sweep Fund 4.58% 4.69%
</TABLE>
From time to time and only to the extent the comparison is appropriate for the
Fund, the Company may quote the performance or price-earning ratio of the Fund
in advertising and other types of literature as compared to the performance of
the S&P Index, the Dow Jones Industrial Average, the Lehman Brothers 20+
Treasury Index, the Lehman Brothers 5-7 Year Treasury Index, Donoghue's Money
Fund Averages, Real Estate Investment Averages (as reported by the National
Association of Real Estate Investment Trusts), Gold Investment Averages
(provided by World Gold Council), Bank Averages (which are calculated from
figures supplied by the U.S. League of Savings Institutions based on effective
annual rates of interest on both passbook and certificate accounts), average
annualized certificate of deposit rates (from the Federal Reserve G-13
Statistical Releases or the Bank Rate Monitor), the Salomon One Year Treasury
Benchmark Index, the Consumer Price Index (as published by the U.S. Bureau of
Labor Statistics), other managed or unmanaged indices or performance data of
bonds, municipal securities, stocks or government securities (including data
provided by Ibbotson Associates), or by other services, companies, publications
or persons who monitor mutual 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 Fund 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 Fund's performance will be calculated by relating net asset
value per share at the beginning of a stated period to the net asset value of
the investment, assuming reinvestment of all gains distributions and dividends
paid, at the
16
<PAGE>
end of the period. The Fund's comparative performance will be based on a
comparison of yields, as described above, or total return, as reported by
Lipper, Survey Publications, Donoghue or Morningstar, Inc.
Any such comparisons may be useful to investors who wish to compare past
performance of the Fund with that of competitors. Of course, past performance
cannot be a guarantee of future results. The Company also may include, from
time to time, a reference to certain marketing approaches of the Distributor,
including, for example, a reference to a potential shareholder being contacted
by a selected broker or dealer. General mutual fund statistics provided by the
Investment Company Institute may also be used.
The Company also may use the following information in advertisements and other
types of literature, only to the extent the information is appropriate for the
Fund: (i) the Consumer Price Index may be used to assess the real rate of
return from an investment in the Fund; (ii) other government statistics,
including, but not limited to, The Survey of Current Business, may be used to
illustrate investment attributes of a Fund or the general economic, business,
investment, or financial environment in which the Fund operates; (iii) the
effect of tax-deferred compounding on the investment returns of the Fund, or on
returns in general, may be illustrated by graphs, charts, etc., where such
graphs or charts would compare, at various points in time, the return from an
investment in 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 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
the Fund has been assigned a rating by a Nationally Recognized Statistical
Ratings Organization ("NRSRO"), such as Standard & Poor's Corporation. Such
rating would assess the creditworthiness of the investments held by the Fund.
The assigned rating would not be a recommendation to purchase, sell or hold the
Fund's shares since the rating would not comment on the market price of the
Fund's shares or the suitability of the Fund for a particular investor. In
addition, the assigned rating would be subject to change, suspension or
withdrawal as a result of changes in, or unavailability of, information relating
to the Fund or its investments. The Company may compare the Fund's performance
with other investments which are assigned ratings by NRSROs. Any such
comparisons may be
17
<PAGE>
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 Fund. 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. 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 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 individual, 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.
18
<PAGE>
DETERMINATION OF NET ASSET VALUE
Net asset value per share for the Fund is determined as of 9:00 a.m. and 1:00
p.m. (Pacific time) on each day the Fund 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.
The Fund uses the amortized cost method to determine the value of its portfolio
securities pursuant to Rule 2a-7 under the 1940 Act. The amortized cost method
involves valuing a security at its cost and amortizing any discount or premium
over the period until maturity, regardless of the impact of fluctuating interest
rates on the market value of the security. While this method provides certainty
in valuation, it may result in periods during which the value, as determined by
amortized cost, is higher or lower than the price that the Fund would receive if
the security were sold. During these periods the yield to a shareholder may
differ somewhat from that which could be obtained from a similar fund that uses
a method of valuation based upon market prices. Thus, during periods of
declining interest rates, if the use of the amortized cost method resulted in a
lower value of the Fund's portfolio on a particular day, a prospective investor
in the Fund would be able to obtain a somewhat higher yield than would result
from investment in a fund using solely market values, and existing Fund
shareholders would receive correspondingly less income. The converse would
apply during periods of rising interest rates.
Rule 2a-7 provides that in order to value its portfolio using the amortized cost
method, the Fund must maintain a dollar-weighted average portfolio maturity of
90 days or less, purchase securities having remaining maturities (as defined in
Rule 2a-7) of thirteen months or less and invest only in those high-quality
securities that are determined by the Board of Directors to present minimal
credit risks. The maturity of an instrument is generally deemed to be the
period remaining until the date when the principal amount thereof is due or the
date on which the instrument is to be redeemed. However, Rule 2a-7 provides
that the maturity of an instrument may be deemed shorter in the case of certain
instruments, including certain variable and floating rate instruments subject to
demand features. Pursuant to the Rule, the Board is required to establish
procedures designed to stabilize, to the extent reasonably possible, the Fund's
price per share as computed for the purpose of sales and redemptions at $1.00.
Such procedures include review of the Fund's portfolio holdings by the Board of
Directors, at such intervals as it may deem appropriate, to determine whether
the Fund's net asset value calculated by using available market quotations
deviates from $1.00 per share based on amortized cost. The extent of any
deviation will be examined by the Board of Directors. If such deviation exceeds
1/2 of 1%, the Board will promptly consider what action, if any, will be
initiated. In the event the Board determines that a deviation exists that may
result in material dilution or other unfair results to investors or existing
shareholders, the Board will take such corrective action as it regards as
necessary and appropriate, including the sale of portfolio instruments prior to
maturity to realize capital gains or losses or to shorten average portfolio
maturity, withholding dividends or establishing a net asset value per share by
using available market quotations. It is the intention of the Fund to maintain
a per share net asset value of $1.00, but there can be no assurance that the
Fund will do so.
19
<PAGE>
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.
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 New York Stock Exchange ("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 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.
20
<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 the Fund's portfolio decisions and the placing of portfolio transactions.
In placing orders, it is the policy of the Company to obtain the best results
taking into account the dealer's general execution and operational facilities,
the type of transaction involved and other factors such as the dealer's risk in
positioning the securities involved. While Wells Fargo Bank generally seeks
reasonably competitive spreads or commissions, the Fund will not necessarily be
paying the lowest spread or commission available.
Purchases and sales of non-equity securities usually will be principal
transactions. Portfolio securities normally will be purchased or sold from or
to dealers serving as market makers for the securities at a net price. The 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 the 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 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 Investment Advisor of the Fund, may, in circumstances in
which two or more dealers are in a position to offer comparable results for the
Fund portfolio transaction, give preference to a dealer that has provided
statistical or other research services to Wells Fargo Bank. By allocating
transactions in this manner, Wells Fargo Bank is able to supplement its research
and analysis with the views and information of securities firms. Information so
received will be in addition to, and not in lieu of, the services required to be
performed by Wells Fargo Bank under the Advisory Contracts, and the expenses of
Wells Fargo Bank will not necessarily be reduced as a result of the receipt of
this supplemental research information. Furthermore, research services
furnished by dealers through which Wells Fargo Bank places securities
transactions for the Fund may be used by Wells Fargo Bank in servicing its other
accounts, and not all of these services may be used by Wells Fargo Bank in
connection with advising the Fund.
Brokerage Commissions. For the year ended December 31, 1997, the Fund paid $0
in brokerage commissions. Prior to December 12, 1997, this amount reflects fees
paid by the Overland predecessor portfolio.
For the year ended December 31, 1996, the predecessor portfolio and the Master
Portfolio did not pay brokerage commissions.
21
<PAGE>
Securities of Regular Broker/Dealers. As of December 31, 1997, the Fund owned
- ------------------------------------
securities (pooled repurchase agreements) of its "regular brokers or dealers" or
their parents, as defined in the 1940 Act as follows:
<TABLE>
<CAPTION>
Broker/Dealers Amount
-------------- ------
<S> <C>
Goldman Sachs & Co. $337,717,806
Morgan Stanley $180,959,850
J.P. Morgan Securities $ 10,000,000
Merril Lynch $114,407,178
</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
Fund whenever such changes are believed to be in the best interests of the Fund
and its 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
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 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 the Fund's expenses and,
accordingly, have a favorable impact on it'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
auditors, 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 net asset value 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
22
<PAGE>
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 separately to the Fund, rather than to the Company as
a whole. Accordingly, 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 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 their 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
23
<PAGE>
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.
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 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
24
<PAGE>
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 the
- -------------------
Fund's daily earnings, for federal income tax purposes, the Fund's earnings and
profits will be determined at the end of each taxable year and will be allocated
pro rata over the entire year. For federal income tax purposes, only amounts
paid out of earnings and profits will qualify as dividends. Thus, if during a
taxable year the Fund's declared dividends (as declared daily throughout the
year) exceed the Fund's net income (as determined at the end of the year), only
that portion of the year's distributions which equals the year's earnings and
profits will be deemed to have constituted a dividend. It is expected that the
Fund's net income, on an annual basis, will equal the dividends declared during
the year.
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. 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
25
<PAGE>
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 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.
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
26
<PAGE>
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 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, one
or more 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.
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.
As used in the Prospectus and in this SAI, the term "majority," when referring
to approvals to be obtained from shareholders of the Fund, means the vote of the
lesser of (i) 67% of the shares of the Fund represented at a meeting if the
holders of more than 50% of the outstanding shares of the Fund are present in
person or by proxy, or (ii) more than 50% of the outstanding shares of the Fund.
The term "majority," when referring to the approvals to be obtained from
shareholders of the Company as a whole, means the vote of the lesser of (i) 67%
of the Company's shares represented at a meeting if the holders of more than 50%
of the Company's outstanding shares are present in person or by proxy, or (ii)
more than 50% of the Company's outstanding shares. Shareholders are entitled to
one vote for each full share held and fractional votes for fractional shares
held.
27
<PAGE>
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 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 the 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 that
are available for distribution in such manner and on such basis as the Directors
in their sole discretion may determine.
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.
Set forth below, as of April 1, 1998, is the name, address and share ownership
of each person known by the Company to have beneficial or record ownership of 5%
or more of the Fund. [TO BE UPDATED]
<TABLE>
<CAPTION>
5% OWNERSHIP AS OF APRIL 1, 1998
Class; Type Percentage
Fund Name and Address of Ownership of Fund
- ---- ---------------- ------------ ----------
<S> <C> <C> <C>
OVERLAND WFB-Wholesale Sweep Single Class 100.00%
EXPRESS SWEEP 3440 Walnut Avenue, Building B Record Holder
FUND Attn: Mimi Johnson, MAC 0247-018
Fremont, CA 94538-2210
</TABLE>
OTHER
The Company's Registration Statement, including the Prospectus and SAI for the
Fund and the exhibits filed therewith, may be examined at the office of the U.S.
Securities and Exchange Commission in Washington, D.C. Statements contained in
the Prospectus or the SAI as to the contents of any contract or other document
referred to herein or in the Prospectus are not necessarily complete, and, in
each instance, reference is made to the copy of such contract or other document
filed as an exhibit to the Registration Statement, each such statement being
qualified in all respects by such reference.
INDEPENDENT AUDITORS
KPMG Peat Marwick LLP has been selected as the independent auditors for the
Company. KPMG Peat Marwick LLP provides audit services, tax return preparation
and assistance and consultation in connection with review of certain SEC
filings. KPMG Peat Marwick LLP's address is Three Embarcadero Center, San
Francisco, California 94111.
28
<PAGE>
FINANCIAL INFORMATION
The portfolio of investments, unaudited financial statements and independent
auditors' report for the Fund for the year ended December 31, 1997, are hereby
incorporated by reference to the Annual Reports as filed with the SEC on March
3, 1998.
Annual and Semi-Annual Reports may be obtained by calling 1-800-222-8222.
29
<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 two highest ratings for corporate bonds are "Aaa" and "Aa." 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. Moody's applies numerical modifiers: 1, 2 and
3 in the "Aa" category 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 two highest ratings for corporate bonds are "AAA" and "AA." 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 obligations only in small degree." The ratings in the "AA"
category 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 corporate commercial paper is "P-1" (Prime-1).
Issuers rated "P-1" have a "superior ability for repayment of senior short-term
debt obligations."
S&P: The "A-1" rating for corporate 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-1
<PAGE>
STAGECOACH FUNDS, INC.
Telephone: 1-800-222-8222
STATEMENT OF ADDITIONAL INFORMATION
Dated May 1, 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 California Tax-Free Income and Short-Term Municipal 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 May 1, 1998, 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.
ii
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
Page
----
<S> <C>
Historical Fund Information....................................................... 1
Investment Restrictions........................................................... 1
Additional Permitted Investment Activities........................................ 7
Risk Factors...................................................................... 20
Special Considerations Affecting Arizona Municipal Obligations.................... 22
Special Considerations Affecting California Municipal Obligations................. 24
Special Considerations Affecting Oregon Municipal Obligations..................... 27
Management........................................................................ 33
Performance Calculations.......................................................... 51
Determination of Net Asset Value.................................................. 61
Additional Purchase and Redemption Information.................................... 61
Portfolio Transactions............................................................ 62
Fund Expenses..................................................................... 64
Federal Income Taxes.............................................................. 65
Capital Stock..................................................................... 72
Other ......................................................................... 77
Independent Auditors.............................................................. 77
Financial Information............................................................. 77
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.
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.
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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;
(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
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<PAGE>
(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 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
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<PAGE>
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 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;
4
<PAGE>
(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 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
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<PAGE>
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;
(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.
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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, 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 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
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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 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
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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.
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
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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 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.
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<PAGE>
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.
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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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 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
12
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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 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.
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<PAGE>
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.
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
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<PAGE>
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.
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.
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<PAGE>
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.
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 Ratings 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
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<PAGE>
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.
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
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<PAGE>
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 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
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<PAGE>
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 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 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.
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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 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.
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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 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
21
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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 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.
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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 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.
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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 "AAA" to "A" and termed its outlook as "stable," and Fitch
Investors Service lowered its rating from "AAA" to "A."
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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.
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
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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 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.
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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 December 1, 1997, $3.06 billion
------------------------
(rounded) in general obligation bonds issued by the State of Oregon and its
agencies were outstanding, including $119.8 million (rounded) in general
obligation bonds supported by the budget for the State's general fund and $2.94
billion (rounded) of self-supporting general obligation bonds. The State's
self-supporting general obligation bonds include $2.20 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
27
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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 December 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
$252.4 million (or approximately 3.0%).
The Economy. The following is a summary of a portion of the December
-----------
1, 1997 quarterly Economic and Revenue Forecast prepared by the State as
required by ORS 291.342.
Slowed by strikes in transportation services and health services,
Oregon's job growth rate dropped to its slowest pace in 5-1/2 years in the third
quarter of 1997. However, despite the weaker overall numbers, the state's high
technology and construction sectors continued to grow at impressive rates.
Although Oregon's outlook has changed little from the September
forecast, downside risks have clearly increased with volatility in worldwide
financial markets and the likelihood of slower growth in important Asian
markets. Nevertheless, a very likely scenario is a continuation of the modest
declaration that has taken place over the past year. Growth is expected to be
led by further expansion of the state's high technology manufacturing industries
and their suppliers along with additional gains in transportation equipment
manufacturing. Expansion of these manufacturing
28
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sectors is expected to translate into job creation in the service-producing
sectors. The construction sector is expected to level off after four years of
extremely rapid growth, thereby slowing the state's overall growth rate.
A pattern of slowing growth is expected for both personal income and
employment. Total non-farm wage and salary employment is projected to increase
3.5 percent for 1997 as a whole, down from 4.0 percent in 1996. Job growth is
expected to slow further to 2.6 percent in 1998. Personal income is expected to
grow a projected 6.7 percent for 1997 and 5.6 percent for 1998. Inflation-
adjusted income is expected to increase 3.7 percent in 1998, down from 4.9
percent in 1996 and a projected 4.6 percent in 1997. The state's population is
forecast to increase 1.6 percent in 1998, up slightly from an estimated 1.5
percent in 1997.
Instability among Asian economies is likely to impact Oregon's economy
for two reasons. First, Asian markets are important for many Oregon exporters.
Five of Oregon's top six export markets in 1996 were in Asia. They include Japan
(1st), South Korea (3rd), Singapore (4th), Hong Kong (5th) and Taiwan (6th). If
weakness spreads throughout the Asian economies, Oregon will be affected across
a broad spectrum of industries. Second, high technology industries have close
links with Asia both in terms of markets and production. The large presence of
high technology manufacturing, particularly semiconductor production, makes
Oregon more sensitive to slower growth in Asia than other states.
The Western states are expected by some analysts to continue to lead
the nation in economic growth into the next decade. Oregon should benefit from
the expanding markets and overall in-migration associated with a high growth
regional environment. Although Oregon's overall growth rate over the next seven
years is expected to be slightly less than the previous seven year period, the
outlook is highly favorable compared to most similar length periods in the
state's post-World War II history.
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
29
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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, 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
30
<PAGE>
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
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
31
<PAGE>
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.
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.
32
<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, Chairman Executive Vice President of Stephens Inc.;
and President President of Stephens Insurance Services Inc.;
Senior Vice President of Stephens Sports
Management Inc.; and President of Investor
Brokerage Insurance Inc.
Thomas S. Goho, 55 Director Associate Professor of Finance of the School of
321 Beechcliff Court Business and Accounting at Wake Forest University
Winston-Salem, NC 27104 since 1982.
Peter G. Gordon, 54 Director Chairman and Co-Founder of Crystal Geyser Water
Crystal Geyser Water Co. Company and President of Crystal Geyser Roxane
55 Francisco Street Water Company since 1977.
San Francisco, CA 94133
Joseph N. Hankin, 57 Director President of Westchester Community College since
75 Grasslands Road 1971; Adjunct Professor of Columbia University
Valhalla, NY 10595 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 of
Charleston, SC 29401 Renaissance Properties Ltd.; President of Morse
Investment Corporation; and Co-Managing Partner of
Main Street Ventures.
</TABLE>
33
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Richard H. Blank, Jr., 41 Chief Operating Vice President of Stephens Inc.; Director of
Officer, Secretary Stephens Sports Management Inc.; and Director of
and Treasurer Capo Inc.
</TABLE>
<TABLE>
<CAPTION>
Compensation Table
Year Ended March 31, 1998
-------------------------
Total Compensation
Aggregate Compensation from Registrant
Name and Position from Registrant and Fund Complex
----------------- ---------------------- -------------------
<S> <C> <C>
Jack S. Euphrat $25,750 $34,500
Director
R. Greg Feltus $ 0 $ 0
Director
Thomas S. Goho $25,750 $34,500
Director
Peter G. Gordon $24,250 $30,500
Director
Joseph N. Hankin $25,750 $34,500
Director
W. Rodney Hughes $25,250 $33,000
Director
Robert M. Joses $ 1,500 $ 4,000
Director
J. Tucker Morse $25,250 $33,000
Director
</TABLE>
34
<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, Well Fargo Bank is entitled
to receive a monthly fee at the annual rates indicated below of each Fund's
average daily net assets:
Annual Rate
Fund (as percentage of net assets)
---- ----------------------------
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%
For the period indicated below, the Funds paid to Wells Fargo Bank the
following advisory fees and Wells Fargo Bank waived the indicated amounts:
35
<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* $1,259,094 $ 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 $115,283
</TABLE>
- ---------------
* These amounts are for the year ended December 31, 1997. Prior to December
12, 1997, these amounts reflect fees paid by the Overland predecessor
portfolio.
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.
36
<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.
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
------------ ---------- -------------
<S> <C> <C> <C> <C> <C>
Fees Fees Fees Fees Fees Fees
Paid Waived Paid Waived Paid Waived
---- ------ ---- ------ ---- ------
$0 $104,623 $0 $62,512 $0 $7,879
</TABLE>
37
<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.
38
<PAGE>
ADMINISTRATOR AND CO-ADMINISTRATOR . The Company has retained Wells
Fargo Bank as Administrator and Stephens Inc. ("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 to Wells Fargo Bank and
Stephens the following dollar amounts for administration and co-administration
fees:
39
<PAGE>
<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* $217,623 $43,525 $174,098
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* $ 21,791 $ 4,358 $ 17,433
</TABLE>
- --------------------
* These amounts are for the year ended December 31, 1997. Prior to December
12, 1997, these amounts reflect fees paid by the Overland predecessor
portfolio.
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.
40
<PAGE>
<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, 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 Funds paid to Stephens the
following dollar amounts 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.
41
<PAGE>
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 to
Stephens the following dollar amount for administration fees:
Year Ended Year Ended Period Ended
12/31/96 12/31/95 12/31/94*
---------- ---------- ------------
$19,941 $19,436 $2,497
- --------------------
* The Short-Term Municipal Income Fund commenced operations on June 3, 1994.
DISTRIBUTOR. 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 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%
</TABLE>
42
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
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 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> <C> <C> <C> <C>
Arizona Tax-Free
Class A $ 4,235 $2,687 $1,548 N/A
Class B $ 304 N/A N/A $ 304
California Tax-Free Bond*
Class A $120,470 N/A N/A $120,470
Class C $ 30,313 N/A N/A $ 30,313
California Tax-Free Income $ 27,275 N/A N/A $ 27,275
</TABLE>
43
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
National Tax-Free
Class A $ 2,905 $2,780 $ 125 N/A
Class B $ 125 N/A N/A $ 125
Oregon Tax-Free
Class A $ 3,213 $2,279 $ 934 N/A
Class B $ 318 N/A N/A $ 381
Short-Term Municipal Income* $ 57,493 N/A N/A $ 57,493
</TABLE>
- --------
* These amounts are for the year ended December 31, 1997. Prior to December
12, 1997, these amounts reflect fees paid by the Overland predecessor
portfolio.
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.
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.
44
<PAGE>
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
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
45
<PAGE>
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.
For the year ended December 31, 1997, the Short-Term Municipal Income
Fund paid to Wells Fargo Bank or its affiliates $21,791 in administrative
servicing fees, after waivers. Prior to December 12, 1997, this amount reflects
fees paid by the Overland predecessor portfolio.
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 a Servicing Plan and have entered into related Shareholder
Servicing Agreements with financial institutions, including Wells Fargo Bank, on
behalf of the Class A, Class B and 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 Plan
and Agreements are shown below. The Servicing Plan 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 Plan
or related Agreements that exceed the maximum amounts payable under the Conduct
Rules of the NASD.
46
<PAGE>
<TABLE>
<CAPTION>
Fund Fee
---- ---
<S> <C>
Arizona Tax-Free
Class A 0.25%
Class B 0.25%
California Tax-Free Bond
Class A 0.30%
Class B 0.30%
Class C 0.25%
California Tax-Free Income 0.30%
National Tax-Free
Class A 0.25%
Class B 0.25%
Class C 0.25%
Oregon Tax-Free
Class A 0.25%
Class B 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
Fund Ended 3/31/97
---- ----------------
<S> <C>
Arizona Tax-Free
Class A $ 0
Class B $ 0
California Tax-Free Bond*
Class C $ 14,814
California Tax-Free Income
Class A $115,476
National Tax-Free
Class A $ 0
Class B $ 0
</TABLE>
47
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
Oregon Tax-Free
Class A $ 39,643
Class B $ 123
</TABLE>
- --------------------
* This amount is for the year ended December 31, 1997. Prior to December 12,
1997, this amount reflects fees paid by the Overland predecessor
portfolio.
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 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. The 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 Plan or related
Servicing Agreements may be made except by a majority of both the Directors of
the Company and the Non-Interested Directors.
48
<PAGE>
The Servicing Plan requires that the Administrator shall provide to the
Directors, and the Directors shall review, at least quarterly, a written report
of the amounts expended (and purposes therefor) under the Servicing Plan.
CUSTODIAN. Wells Fargo Bank acts as Custodian for 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 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 to Wells
Fargo Bank the following dollar amounts in custody fees, after waivers:
<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>
- ----------------
* This amount is for the fiscal year ended December 31, 1997. Prior to December
12, 1997, this amount reflects fees paid by the Overland predecessor portfolio.
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.
49
<PAGE>
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 to Wells
Fargo Bank the following dollar amounts in transfer and dividend disbursing
agency fees, without regard to class and after waivers:
<TABLE>
<CAPTION>
Fund Transfer Agency Fees
---- --------------------
<S> <C>
Arizona Tax-Free $ 0
California Tax-Free Bond* $105,688
California Tax-Free Income $ 0
National Tax-Free $ 0
Oregon Tax-Free $ 0
Short-Term Municipal Income* $ 0
</TABLE>
- --------------------
* This amount is for the year ended December 31, 1997. Prior to December 12,
1997, this amount reflects fees paid by the Overland predecessor portfolio.
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.
50
<PAGE>
Wells Fargo Securities Inc. ("WFSI"), an affiliated broker-dealer of the
Company, 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, 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, WFSI 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.
51
<PAGE>
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-Free 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.
Performance shown or advertised for the Class A shares of the
Stagecoach California Tax-Free Bond Fund for periods prior to December 12, 1997,
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 of the Stagecoach Fund 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 National
Tax-Free Fund for periods prior to September 6, 1996, reflects performance of
the Investor shares of the Pacifica National Tax-Free Fund, a predecessor
portfolio with the same objective and policies as the Stagecoach National
Tax-Free 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 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-Free
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.
52
<PAGE>
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>
<TABLE>
<CAPTION>
Average Annual Total Return for the Period Ended September 30, 1997/1/
---------------------------------------------------------------------
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/3/
Class A 7.81% 8.35% 6.42% 7.40% 8.08% 9.75% 4.29% 9.16%
Class B 7.61% 7.61% 6.27% 6.58% 8.18% 8.92% 4.07% 8.28%
Class C 7.59% 7.59% 6.55% 6.55% 8.86% 8.86% 7.27% 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%
</TABLE>
54
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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 3.04% 3.89% N/A N/A 3.57% 4.62% 1.09% 4.14%
</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. 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 December 31, 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.
55
<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/3/
Class A 100.56% 109.98% 36.51% 42.89% 26.24% 32.18%
Class B 97.05% 97.05% 35.53% 37.53% 26.62% 29.22%
Class C 96.75% 96.75% 37.32% 37.32% 29.02% 29.02%
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
</TABLE>
56
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Class A 11.31% 14.65% N/A N/A 11.11% 14.50%
</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 and Class 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.
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 December 31, 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 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
57
<PAGE>
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
<TABLE>
<CAPTION>
Yield for the Year Ended September 30, 1997/1/
----------------------------------------------
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 4.42% 4.04% 8.22% 7.51%
Class B 3.97% 3.59% 7.38% 6.68%
Class C N/A N/A N/A 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
3.80% 2.47% 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.
58
<PAGE>
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 Performance shown is for the applicable period ended December 31, 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 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
59
<PAGE>
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 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
60
<PAGE>
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 Fund securities, including U.S. Government
securities but excluding money market instruments and debt securities 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. 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. 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.
61
<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 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.
62
<PAGE>
Wells Fargo Bank, as 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.
Brokerage Commissions. For the six-month period ended March 31, 1997,
---------------------
the Funds paid brokerage commissions as follows:
<TABLE>
<CAPTION>
Fund Commissions
---- -----------
<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>
- ---------------
* This amount is for the year ended December 31, 1997. Prior to December 12,
1997, this amount reflects fees paid by the Overland predecessor
portfolio.
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.
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.
For the year ended December 31, 1996, the Short-Term Municipal Income
predecessor portfolio and the Master Portfolio did not pay any brokerage
commissions.
Securities of Regular Broker/Dealers. As of March 31, 1997, the Funds
------------------------------------
indicated below owned securities of their "regular brokers or dealers" or their
parents as defined in the 1940 Act as follows:
63
<PAGE>
<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>
As of December 31, 1997, the Funds indicated below 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>
California Tax-Free Bond N/A N/A
Short-Term Municipal Income N/A N/A
</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 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
net asset value per share of a Fund; expenses of shareholders' meetings;
expenses relating to the issuance, registration and qualification of a
64
<PAGE>
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 separately to each Fund, rather than to the
Company as a whole. Accordingly, net capital gain, net investment income, and
operating expenses will be determined separately for each Fund. As a regulated
investment company, each Fund will not be taxed on its net investment income and
capital gains distributed to its shareholders.
Qualification as a regulated investment company under the Code
requires, among other things, that (a) each Fund derive at least 90% of its
annual gross income from dividends, interest, certain payments with respect to
securities loans, gains from the sale or other disposition of stock 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.
65
<PAGE>
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." 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
66
<PAGE>
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%.
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.
67
<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. 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 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.
68
<PAGE>
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.
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
69
<PAGE>
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 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
70
<PAGE>
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
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.
71
<PAGE>
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.
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
72
<PAGE>
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 April 1, 1998 is the name, address and share
ownership of each person known by the Company to have beneficial or record
ownership of 5% or more of a class of a Fund or 5% or more of the voting
securities 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.
<TABLE>
<CAPTION>
5% OWNERSHIP AS OF APRIL 1, 1998
--------------------------------
NAME AND CLASS; TYPE PERCENTAGE PERCENTAGE
FUND ADDRESS OF OWNERSHIP OF CLASS OF FUND
---- -------- ------------ ---------- ----------
<S> <C> <C> <C> <C>
ARIZONA TAX- Hep & Co. Class A 5.72% N/A
FREE FUND c/o Wells Fargo Bank Record Holder
P.O. Box 9800
MAC 9139-027
Calabasas, CA 91327
Donna Marie Brown Class A 5.48% N/A
P.O. Box 2450 Record Holder
Pine Top, AZ 85935
CALIFORNIA MLPF&S for Sole Class B 32.14% N/A
TAX-FREE BOND Benefit of its Record Holder
FUND Customers
Attn: Mutula Fund
Admin.
4800 Deer Lake Drive
East 10.05% N/A
Jacksonville, FL 322
Dean Witter
P.O. Box 250
Church Street Station
New York, NY 10008
Dean Witter Class B 13.91% N/A
P.O. Box 250 Beneficially Owned
Church Street Station for
New York, NY Robert C. Bundy
10008-0250
Dean Witter Class B 5.03% N/A
P.O. Box 250 Beneficially Owned
Church Street Station for
New York, NY 10008 Owen Minton-Foster
Dean Witter Class B 7.23% N/A
P.O. Box 250 Beneficially Owned
Church Street Station for
New York, NY 10008 Walter J. Marshall
Dean Witter Class B 10.96% N/A
P.O. Box 250 Beneficially Owned
Church Street Station for
New York, NY 10008 Betty M. Richmond
Dean Witter Class B 5.03% N/A
P.O. Box 250 Benefically Owned
Church Street Station for Wells Fargo Bank
New York, NY 10008 Loan Collateral
</TABLE>
73
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
NATIONAL TAX- MLPF&S for the Soal Class A 10.25% 6.85%
FREE FUND Benefit of its Beneficially Owned
Customers
Attn: Mutual Fund
Administration
4800 Deer Lake Drive
EastJacksonville, FL Class A 5.03% N/A
32246 Beneficially Owned
for
Dean Witter Rupert H. Sendlein
P.O. Box 250 Church
Street 11.57% N/A
Station Class B
New York, NY Beneficially Owned
10008-0250 for
Darold E. Findley
Dean Witter
P.O. Box 250 Church
Street
Station
New York, NY
10008-0250
Dean Witter Class B 7.58% N/A
P.O. Box 250 Beneficially Owned
Church Street Station for
New York, NY 10008 Lorraine Reynolds
Dean Witter Class B 5.02% N/A
P.O. Box 250 Beneficially Owned
Church Street Station for
New York, NY 10008 Virginia A. Terrell
Dean Witter Class B 5.30% N/A
P.O. Box 250 Beneficially Owned
Church Street Station for
New York, NY 10008 Viola B. Wootton
MLPF&S for the Sole Class C 44.11% 8.02%
Benefit of its Beneficially Owned
Customers for
Attn: Mutual Fund
Administration
4800 Deer Lake Drive
East
Jacksonville, FL
32246
</TABLE>
74
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
NFSC FEBO Class C 7.49% N/A
2228 Swedish Drive Beneficially Owned
Clearwater, FL 34623 for
Lawerence E. Sirna
</TABLE>
75
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
OREGON TAX- Dean Witter Class B 7.25% N/A
FREE FUND P.O. Box 250 Church Beneficially Owned
Street for
Station Ke-Chang Peter HSU &
New York, NY Hsiu-Shun Hsu JTWoros
10008-0250 5.43% N/A
Class B
Dean Witter Beneficially Owned
P.O. Box 250 Church for
Street Joe Calcagno &
Station Adalgisa Calcagno 5.36 N/A
New York, NY
10008-0250 Class B
Beneficially Owned
Dean Witter for
P.O. Box 250 Church Gary E. Yarosevich &
Street Esther A. Yarosevich
Station
New York, NY
10008-0250
</TABLE>
76
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
SHORT-TERM Hep & Co. Single Class 34.50% 34.50%
MUNICIPAL INCOME c/o Wells Fargo Bank Record Holder
FUND P.O. Box 9800
Calabasas, CA 91302
Herman & Raymond Single Class 32.44% 32.44%
Christensen Record Holder
801 American Street
San Carlos, CA 94070
Dean Witter Single Class 7.76% 7.76%
P.O. Box 250 Church Benefically Owned for
Street Amy Lou Eckstrom
Station
New York, NY
10008-0250
</TABLE>
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, audited financial statements and
independent auditors' report for the California Tax-Free Bond and Short-Term
Municipal Income Funds for the year ended December 31, 1997 are hereby
incorporated by reference to the Annual Reports as filed with the SEC on March
3, 1998.
77
<PAGE>
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, 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.
Annual Reports may be obtained by calling 1-800-222-8222.
78
<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.
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.
A-1
<PAGE>
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
<PAGE>
STAGECOACH FUNDS, INC.
Telephone: 1-800-260-5969
STATEMENT OF ADDITIONAL INFORMATION
Dated May 1, 1998
ARIZONA TAX-FREE FUND
CALIFORNIA TAX-FREE BOND FUND
CALIFORNIA TAX-FREE INCOME FUND
NATIONAL TAX-FREE FUND
OREGON TAX-FREE FUND
INSTITUTIONAL CLASS
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 ARIZONA TAX-FREE, CALIFORNIA
TAX-FREE BOND, CALIFORNIA TAX-FREE INCOME, NATIONAL TAX-FREE and OREGON TAX-FREE
FUNDS (sometimes, collectively, the "Tax-Free Funds").
This SAI relates to the Institutional Class shares for each Fund.
This SAI is not a prospectus and should be read in conjunction with the
Funds' Prospectus, dated May 1, 1998. All terms used in this SAI that are
defined in the Prospectus have the meanings assigned in the Prospectus. A copy
of the Prospectus may be obtained without charge by calling 1-800-260-5969 or
writing to Stagecoach Funds, P.O. Box 7066, San Francisco, CA 94120-7066.
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<TABLE>
<CAPTION>
TABLE OF CONTENTS
Page
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<S> <C>
Historical Fund Information .................................................... 1
Investment Restrictions ........................................................ 1
Additional Permitted Investment Activities ..................................... 6
Risk Factors ................................................................... 19
Special Considerations Affecting Arizona Municipal Obligations ................. 21
Special Considerations Affecting California Municipal Obligations .............. 22
Special Considerations Affecting Oregon Municipal Obligations .................. 26
Management ..................................................................... 30
Performance Calculations ....................................................... 42
Determination of Net Asset Value ............................................... 48
Additional Purchase and Redemption Information ................................. 49
Portfolio Transactions ......................................................... 50
Fund Expenses .................................................................. 52
Federal Income Taxes ........................................................... 52
Capital Stock .................................................................. 59
Other .......................................................................... 61
Independent Auditors ........................................................... 61
Financial Information .......................................................... 62
Appendix ....................................................................... A-1
</TABLE>
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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
Fund of the Company (the "Consolidation"). For accounting purposes, the Overland
Fund is considered the survivor of the Consolidation. 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. The Funds commenced operations as
follows: Arizona Tax-Free - March 2, 1992; National Tax-Free - January 15, 1993;
Oregon Tax-Free - June 1, 1988. 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, Oregon Tax-Free and Arizona Tax-Free Funds.
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;
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(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;
(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
2
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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 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
3
<PAGE>
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 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.
4
<PAGE>
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 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.
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
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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 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
such Fund's total assets. The California Tax-Free Bond and California Tax-Free
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 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 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
6
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respect to such securities issued by foreign branches of domestic banks, foreign
subsidiaries of domestic banks, and domestic and foreign branches of foreign
banks, a Fund may be subject to additional investment risks that are different
in some respects from those incurred by a fund which invests only in debt
obligations of U.S. domestic issuers. Such risks include possible future
political and economic developments, the possible imposition of foreign
withholding taxes on interest income payable on the securities, the possible
establishment of exchange controls or the adoption of other foreign governmental
restrictions which might adversely affect the payment of principal and interest
on these securities and the possible seizure or nationalization of foreign
deposits. In addition, foreign branches of U.S. banks and foreign banks may be
subject to less stringent reserve requirements and to different accounting,
auditing, reporting and recordkeeping standards than those applicable to
domestic branches of U.S. banks.
Certificates of deposit are negotiable certificates evidencing the
obligation of a bank to repay funds deposited with it for a specified period of
time.
Time deposits are non-negotiable deposits maintained in a banking
institution for a specified period of time at a stated interest rate. Time
deposits which may be held by 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 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 remains until the principal amount can be recovered through demand, is
less than five years.
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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.
Derivative Securities
---------------------
The 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 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,
including 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
8
<PAGE>
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.
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
9
<PAGE>
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.
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,
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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 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 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
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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. Neither California Fund may invest 25% or
more of its assets in industrial development bonds. Assessment bonds, wherein a
specially created district or project area levies a tax (generally on its
taxable property) to pay for an improvement or project may be considered a
variant of either category. There are, of course, other variations in the types
of municipal bonds, both within a particular classification and between
classifications, depending on numerous factors. Some 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 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.
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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.
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.
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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.
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 the 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
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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.
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. 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
this SAI.
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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.
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 U.S. Securities and Exchange Commission ("SEC") 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 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.
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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.
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 Appendix.
U.S. Government Obligations
---------------------------
The Funds may invest in various types of U.S. Government obligations in
accordance with the policies described in the Funds' 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
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<PAGE>
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 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 ("NRSROs")
------------------------------------------------------------------
The ratings of Moody's Investors Service, Inc., Standard & Poor's
Ratings Group, Division of McGraw Hill, Duff & Phelps Credit Rating Co., Fitch
Investors Service, Inc. Thomson Bank Watch and IBCA Inc. represent their
opinions as to the quality of debt securities. It should be emphasized, however,
that ratings are general and not absolute standards of quality, and debt
securities with the same maturity, interest rate and rating may have different
yields while debt securities of the same maturity and interest rate with
different ratings may have the same yield. Subsequent to purchase by 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
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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 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 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.
19
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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 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
20
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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 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.
21
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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.
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.
22
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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 "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. This trend is projected 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
23
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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".
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.
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
24
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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 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.
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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 December 1, 1997, $3.06 billion
------------------------
(rounded) in general obligation bonds issued by the State of Oregon and its
agencies were outstanding, including $119.8 million (rounded) in general
obligation bonds supported by the budget for the State's general fund and $2.94
billion (rounded) of self-supporting general obligation bonds. The State's
self-supporting general obligation bonds include $2.20 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
26
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by statute. The State's December 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 $252.4 million (or
approximately 3.0%).
The Economy. The following is a summary of a portion of the December
-----------
1, 1997 quarterly Economic and Revenue Forecast prepared by the State as
required by ORS 291.342.
Slowed by strikes in transportation services and health services,
Oregon's job growth rate dropped to its slowest pace in 5-1/2 years in the third
quarter of 1997. However, despite the weaker overall numbers, the state's high
technology and construction sectors continued to grow at impressive rates.
Although Oregon's outlook has changed little from the September
forecast, downside risks have clearly increased with volatility in worldwide
financial markets and the likelihood of slower growth in important Asian
markets. Nevertheless, a very likely scenario is a continuation of the modest
declaration that has taken place over the past year. Growth is expected to be
led by further expansion of the state's high technology manufacturing industries
and their suppliers along with additional gains in transportation equipment
manufacturing. Expansion of these manufacturing sectors is expected to translate
into job creation in the service-producing sectors. The construction sector is
expected to level off after four years of extremely rapid growth, thereby
slowing the state's overall growth rate.
A pattern of slowing growth is expected for both personal income and
employment. Total non-farm wage and salary employment is projected to increase
3.5 percent for 1997 as a whole, down from 4.0 percent in 1996. Job growth is
expected to slow further to 2.6 percent in 1998. Personal income is expected to
grow a projected 6.7 percent for 1997 and 5.6 percent for 1998.
Inflation-adjusted income is expected to increase 3.7 percent in 1998, down from
4.9 percent in 1996 and a projected 4.6 percent in 1997. The state's population
is forecast to increase 1.6 percent in 1998, up slightly from an estimated 1.5
percent in 1997.
Instability among Asian economies is likely to impact Oregon's economy
for two reasons. First, Asian markets are important for many Oregon exporters.
Five of Oregon's top six export markets in 1996 were in Asia. They include Japan
(1st), South Korea (3rd), Singapore (4th), Hong Kong (5th) and Taiwan (6th). If
weakness spreads throughout the Asian economies, Oregon will be affected across
a broad spectrum of industries. Second, high technology industries have close
links with Asia both in terms of markets and production. The large presence of
high technology manufacturing, particularly semiconductor production, makes
Oregon more sensitive to slower growth in Asia than other states.
The Western states are expected by some analysts to continue to lead
the nation in economic growth into the next decade. Oregon should benefit from
the expanding markets and overall in-migration associated with a high growth
regional environment. Although Oregon's overall growth rate over the next seven
years is expected to be slightly less than the previous seven year period, the
outlook is highly favorable compared to most similar length periods in the
state's post-World War II history.
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,
27
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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, 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
28
<PAGE>
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
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
29
<PAGE>
who timely submitted written comments on the draft ballot title may petition the
Oregon Supreme Court seeking a revision of the certified ballot title.
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 or 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.
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
30
<PAGE>
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>
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, Chairman Executive Vice President of Stephens Inc.;
and President President of Stephens Insurance Services Inc.;
Senior Vice President of Stephens Sports
Management Inc.; and President of Investor
Brokerage Insurance Inc.
Thomas S. Goho, 55 Director Associate Professor of Finance of the School of
321 Beechcliff Court Business and Accounting at Wake Forest University
Winston-Salem, NC 27104 since 1982.
Peter G. Gordon, 54 Director Chairman and Co-Founder of Crystal Geyser Water
Crystal Geyser Water Co. Company and President of Crystal Geyser Roxane
55 Francisco Street Water Company since 1977.
San Francisco, CA 94133
Joseph N. Hankin, 57 Director President of Westchester Community College since
75 Grasslands Road 1971; Adjunct Professor of Columbia University
Valhalla, NY 10595 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 of
Charleston, SC 29401 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, Secretary Stephens Sports Management Inc.; and Director of
and Treasurer Capo Inc.
</TABLE>
31
<PAGE>
<TABLE>
<CAPTION>
Compensation Table
Year Ended March 31, 1998
Total Compensation
Aggregate Compensation from Registrant
Name and Position from Registrant and Fund Complex
----------------- ---------------------- -------------------
<S> <C> <C>
Jack S. Euphrat $25,750 $34,500
Director
R. Greg Feltus $ 0 $ 0
Director
Thomas S. Goho $25,750 $34,500
Director
Peter G. Gordon $24,250 $30,500
Director
Joseph N. Hankin $25,750 $34,500
Director
W. Rodney Hughes $25,250 $33,000
Director
Robert M. Joses $ 1,500 $ 4,000
Director
J. Tucker Morse $25,250 $33,000
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
32
<PAGE>
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:
Annual Rate
Fund (as percentage of net assets)
---- -----------------------------
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%
For the period indicated below, the Funds paid to Wells Fargo Bank the
following advisory fees and Wells Fargo Bank waived the indicated amounts:
33
<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* $1,259,094 $ 0
California Tax-Free Income $ 67,449 $ 144,315
National Tax-Free $ 0 $ 30,284
Oregon Tax-Free $ 0 $ 102,775
</TABLE>
- ---------------
* These amounts are for the year ended December 31, 1997. Prior to December
12, 1997, these amounts reflect fees paid by the Overland predecessor
portfolio.
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 predecessor
portfolios. 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
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:
Year Ended
9/30/96
-----------
Fund Fees Paid Fees Waived
---- --------- -----------
Arizona Tax-Free $ 22,457 $ 98,300
National Tax-Free $ 0 $ 67,463
Oregon Tax-Free $ 173,249 $ 57,377
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.
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.
34
<PAGE>
<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, or on behalf of, the Overland predecessor portfolio.
For 1996, the amount shown is for the year ended December 31, 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. 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 1997 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 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
35
<PAGE>
California Tax-Free Income Fund since November 1992. Ms. Milner is also co-
manager of the California Tax-Free Bond 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 and Oregon Tax-Free 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.
ADMINISTRATOR AND CO-ADMINISTRATOR . The Company has retained Wells
----------------------------------
Fargo Bank as Administrator and Stephens Inc. ("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 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 received 0.04% and 0.02%, respectively, of the average daily
net assets of each Fund for performing administration services. 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.
36
<PAGE>
For the period indicated below, the Funds paid to Wells Fargo Bank and
Stephens the following dollar amounts 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* $ 217,623 $ 43,525 $174,098
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
- ---------------
</TABLE>
* These amounts are for the year ended December 31, 1997. Prior to December
12, 1997, these amounts reflect fees paid by the Overland predecessor
portfolio.
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.
37
<PAGE>
Year Ended
9/30/96
-----------
Fund Fees Paid
---- ----------
Arizona Tax-Free $24,636
National Tax-Free $14,138
Oregon Tax-Free $49,627
Prior to October 1, 1995, ALPS Mutual Funds Service, Inc. ("ALPS")
served as the Administrator for the predecessor portfolios of 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 below and ALPS 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. Wells
-------------------------------------------------------------
Fargo Bank and Stephens currently serve as Administrator and Co-Administrator,
respectively, to the 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 Fund. Prior to February 1, 1997, Stephens
served as sole Administrator to both California 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 Funds paid to Stephens the
following dollar amounts 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.
38
<PAGE>
DISTRIBUTOR. Stephens (the "Distributor"), located at 111 Center
-----------
Street, Little Rock, Arkansas 72201, serves as the distributor to the Funds.
SHAREHOLDER SERVICING AGENT. The Funds have approved a Servicing Plan
---------------------------
and have entered into related Shareholder Servicing Agreements with financial
institutions, including Wells Fargo Bank, on behalf of the Institutional Class
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, not to 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 Servicing Agent during the period for which payment is being made. The
Servicing Plan 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 Plan or related Agreements that exceed the maximum
amounts payable under the Conduct Rules of the National Association of
Securities Dealers, Inc. ("NASD").
For the period indicated below, the dollar amounts of shareholder
servicing fees paid, after waivers, by the Institutional Class of each Fund to
Wells Fargo Bank or its affiliates were as follows:
Six-Month
Fund Period Ended
3/31/97
---- -------------
Arizona Tax-Free $ 0
California Tax-Free Bond* $127,063
California Tax-Free Income $ 9,816
National Tax Free $ 0
Oregon Tax-Free $ 10,085
- ------------------
* Represents amounts paid by the Institutional Class shares of the Stagecoach
Fund. The Overland predecessor portfolio did not offer Institutional Class
shares.
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 Interstate 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 Fargo Bank or its
affiliates. For the year ended September 30, 1996, the Institutional Class of
each Fund paid, after waivers, the following dollar amounts of shareholder
servicing fees:
Year Ended
Fund 9/30/96
---- -----------
Arizona Tax-Free $ 0
National Tax-Free $ 0
Oregon Tax-Free $1,295
39
<PAGE>
The 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. 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 the Servicing Plan also must be approved by
such vote of the Directors and Non-Interested Directors. Servicing Agreements
may be terminated at any time, without payment of any penalty, by vote of a
majority of the Board of Directors, including a majority of the Non-Interested
Directors. No material amendment to the Servicing Plan or related Servicing
Agreements may be made except by a majority of both the Directors of the Company
and the Non-Interested Directors.
The Servicing Plan requires that the Administrator shall provide to the
Directors, and the Directors shall review, at least quarterly, a written report
of the amounts expended (and purposes therefor) under the Servicing Plan.
CUSTODIAN. Wells Fargo Bank acts as Custodian for 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 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 to Wells
Fargo Bank the following dollar amounts in custody fees, after waivers:
<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
</TABLE>
- ---------------
* This amount is for the year ended December 31, 1997. Prior to December 12,
1997, this amount reflects fees paid by the Overland predecessor
portfolio.
40
<PAGE>
Arizona Tax-Free, National Tax-Free and Oregon Tax-Free Funds. FICAL,
-------------------------------------------------------------
located at 707 Wilshire Blvd., Los Angeles, California 90017, acted as Custodian
of the Pacifica Arizona Tax-Free, National Tax-Free and Oregon Tax-Free 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 to FICAL, after waivers
and reimbursements, 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 0.06% of each Fund's average daily net assets of the Institutional Class
shares.
For the six-month period ended March 31, 1997, the Funds paid to Wells
Fargo Bank the following dollar amounts in transfer and dividend disbursing
agency fees, without regard to class and after waivers:
<TABLE>
<CAPTION>
Fund Transfer Agency Fees
---- --------------------
<S> <C>
Arizona Tax-Free $ 0
California Tax-Free Bond* $105,688
California Tax-Free Income $ 0
National Tax-Free $ 0
Oregon Tax-Free $ 0
</TABLE>
- ---------------
* This amount is for the year ended December 31, 1997. Prior to December 12,
1997, this amount reflects fees paid by the Overland predecessor
portfolio.
Arizona Tax-Free, National Tax-Free and Oregon Tax-Free Funds. Under
-------------------------------------------------------------
the prior transfer agency agreement for the Arizona Tax-Free, National Tax-Free
and Oregon 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 the
Institutional Class shares of the 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
41
<PAGE>
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.
UNDERWRITING COMMISSIONS. Front-end sales loads and contingent deferred
------------------------
sales charges are not assessed in connection with the purchase and redemption of
Institutional Class shares. Therefore no underwriting commissions were paid to
Stephens as the Funds' Distributor.
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 for the Funds.
Performance shown or advertised for the Institutional Class shares of
the Arizona Tax-Free Fund for periods prior to September 6, 1996, reflects
performance of the Institutional Class shares and the Investor Class shares
(prior to October 1, 1995) of the Pacifica Arizona Tax-Exempt Fund, a
predecessor portfolio with the same objective and policies as the Stagecoach
Arizona Tax-Free Fund.
Performance shown or advertised for the Institutional Class shares of
the Stagecoach California Tax-Free Bond Fund for periods prior to December 15,
1997, reflects performance of the Class A shares of the Overland California
Tax-Free Fund (the accounting survivor of a merger of the Funds on December 12,
1997).
Performance shown or advertised for the Institutional Class shares of
the California Tax-Free Income Fund for periods prior to September 6, 1996,
reflects the performance of the Fund's Class A shares.
42
<PAGE>
Performance shown or advertised for the Institutional Class shares of
the National Tax-Free Fund for periods prior to September 6, 1996, reflects
performance of the Institutional Class shares and the Investor Class shares
(prior to October 1, 1995) of the Pacifica National Tax-Exempt Fund, a
predecessor portfolio with the same objective and policies as the Stagecoach
National Tax-Free Fund.
Performance shown or advertised for the Institutional Class shares of
the Oregon Tax-Free Fund for periods prior to September 6, 1996, reflects
performance of the Institutional Class shares and the Investor Class shares
(prior to October 1, 1995) of the Pacifica Oregon Tax-Exempt Fund, a predecessor
portfolio with the same objective and policies as the Stagecoach Oregon Tax-Free
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.
<TABLE>
<CAPTION>
Average Annual Total Return for the Applicable Period Ended September 30, 1997/1/
- ---------------------------------------------------------------------------------
Institutional Five Three One
Class Inception/2/ Year Year Year
------------- ------------ ---- ------ ----
<S> <C> <C> <C> <C>
Arizona Tax-Free 6.76% 6.36% 7.28% 8.98%
California Tax-Free Bond/3/ 8.35% 7.40% 9.75% 9.17%
California Tax-Free Income 4.81% N/A 5.41% 5.73%
National Tax-Free 5.77% N/A 7.32% 8.52%
Oregon Tax-Free 7.23% 6.30% 7.82% 8.32%
</TABLE>
- --------------------
/1/ For periods prior to September 6, 1996, performance figures for the
Institutional Class shares of the California Tax-Free Income Fund
reflect the performance of the Class A shares of such Fund. For periods
prior to September 6, 1996, performance figures for the Institutional
Class shares of the Arizona, Oregon, and National Tax-Free Funds
reflects the performance of such Funds' predecessor portfolios. The
performance figures for the Institutional Class shares of the
California Tax-Free Bond Fund reflect the performance of the Class A
shares of the Overland California Tax-Free Bond Fund (the accounting
survivor of the merger of the Stagecoach and Overland Funds on December
12, 1997). Institutional Class shares do not assess a sales charge.
/2/ For purposes of showing performance information, the inception date of
each Fund and Class is as follows: California Tax-Free Income -
November 18, 1992; Overland California Tax- Free Bond Class A October
6, 1988; Arizona Tax-Free - March 2, 1992; National Tax-Free - January
15, 1993; Oregon Tax-Free - June 1, 1988. The actual inception date of
each class may differ from the inception date of the corresponding
Fund.
43
<PAGE>
/3/ Performance shown is for the applicable period ended December 31,
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.
<TABLE>
<CAPTION>
Cumulative Total Return for the Applicable Period Ended September 30, 1997/1/
- -----------------------------------------------------------------------------
Institutional Five Three
Class Inception/2/ Year Year
-------------- ------------ ------- ------
<S> <C> <C> <C>
Arizona Tax-Free 44.11% 36.13% 23.46%
California Tax-Free Bond/3/ 109.99% 42.90% 32.19%
California Tax-Free Income 25.75% N/A 17.13%
National Tax-Free 29.94% N/A 23.61%
Oregon Tax-Free 91.90% 35.71% 25.34%
</TABLE>
- --------------------
/1/ For periods prior to September 6, 1996, performance figures for the
Institutional Class shares of the California Tax-Free Income Fund
reflect the performance of the Class A shares of such Fund. For periods
prior to September 6, 1996, performance figures for the Institutional
Class shares of the Arizona, Oregon, and National Tax-Free Funds
reflects the performance of such Funds' predecessor portfolios. The
performance figures for the Institutional Class shares of the
California Tax-Free Bond Fund reflect the performance of the Class A
shares of the Overland Express California Tax-Free Bond Fund (the
accounting survivor of the merger of the Stagecoach and Overland Funds
on December 12, 1997). Institutional Class shares do not assess a sales
charge.
/2/ For purposes of showing performance information, the inception date of
each Fund and Class is as follows: California Tax-Free Income -
November 18, 1992; Overland California Tax- Free Bond Class A October
6, 1988; Arizona Tax-Free - March 2, 1992; National Tax-Free - January
15, 1993; Oregon Tax-Free - June 1, 1988. 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 December 31,
1997.
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
44
<PAGE>
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:
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:
<TABLE>
<CAPTION>
Effective Thirty-Day Yield = [(Base Period Return +1)365/30]-1
Yield for the Applicable Period Ended September 30, 1997
--------------------------------------------------------
Thirty-Day Thirty-Day Tax-
Fund Yield Equivalent Yield
---- ------------ ----------------
<S> <C> <C>
Arizona Tax-Free 3.57% 6.26%
California Tax-Free Bond* 4.75% 8.84%
California Tax-Free Income 3.68% 6.85%
National Tax-Free 4.52% 6.28%
Oregon Tax-Free 4.26% 7.75%
</TABLE>
- --------------------
* The performance figures for the Institutional Class shares of the California
Tax-Free Bond Fund reflect the performance of the Class A shares of the
Overland Express California Tax-Free Bond Fund (the accounting survivor of
the merger of the Stagecoach and Overland Funds on December 12, 1997) for
the applicable period ended December 31, 1997.
45
<PAGE>
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 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 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 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 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
46
<PAGE>
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 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 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, 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 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,
47
<PAGE>
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 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 Fund securities, including U.S. Government
securities but excluding money market instruments and debt securities maturing
in 60 days or less, the valuations are based on latest quoted bid prices. Money
market instruments and debt securities
48
<PAGE>
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. 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 in accordance with procedures adopted by the Company's Board of
Directors.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
Shares of the Funds 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.
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.
49
<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 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.
Wells Fargo Bank, as 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.
Brokerage Commissions. For the six-month period ended March 31, 1997,
the Funds paid brokerage commissions as follows:
50
<PAGE>
<TABLE>
<CAPTION>
Fund Commissions
---- -----------
<S> <C>
Arizona Tax-Free $ 0
California Tax-Free Bond* $ 0
California Tax-Free Income $ 0
National Tax-Free $ 0
Oregon Tax-Free $ 0
</TABLE>
- ---------------
* This amount is for the year ended December 31, 1997. Prior to December 12,
1997, this amount reflects fees paid by the Overland predecessor
portfolio.
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.
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.
Securities of Regular Broker/Dealers. As of March 31, 1997, the Funds
------------------------------------
indicated below 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>
As of December 31, 1997, the California Tax-Free Bond Fund did not own
any securities of its "regular brokers or dealers" or their parents as defined
in the 1940 Act.
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 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.
51
<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 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
net asset value 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 separately to each Fund, rather than to the
Company as a whole. Accordingly, net capital gain, net investment income, and
operating expenses will be determined separately for each Fund. As a regulated
investment company, each Fund will not be taxed on its net investment income and
capital gains distributed to its shareholders.
Qualification as a regulated investment company under the Code
requires, among other things, that (a) each Fund derive at least 90% of its
annual gross income from dividends, interest, certain payments with respect to
securities loans, gains from the sale or other disposition of stock 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
52
<PAGE>
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 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.
53
<PAGE>
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 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.
54
<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 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 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
55
<PAGE>
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.
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
56
<PAGE>
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 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.
57
<PAGE>
California Tax-Free Bond Fund and California Tax-Free Income Fund
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
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 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.
58
<PAGE>
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 Funds will seek to avoid significant noncash income, such noncash
income could be recognized by the Fund, in which case the Fund may distribute
cash derived from other sources in order to meet the minimum distribution
requirements described above.
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 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 1-800-260-5969 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 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
59
<PAGE>
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 available for
distribution in such manner and on such basis as the Directors in their sole
discretion may determine.
Set forth below as of April 1, 1998 is the name, address and share
ownership of each person known by the Company to have beneficial or record
ownership of 5% or more of the Institutional Class shares 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 the Fund as a
whole.
<TABLE>
<CAPTION>
5% OWNERSHIP AS OF APRIL 1, 1998
--------------------------------
NAME AND CLASS; TYPE PERCENTAGE PERCENTAGE
FUND ADDRESS OF OWNERSHIP OF CLASS OF FUND
---- -------- ------------ ---------- ----------
<S> <C> <C> <C> <C>
ARIZONA TAX- Virg & Co. Institutional Class 97.21% 61.37%
FREE FUND Attn: MF Dept. A88-4 Record Holder
P. O. Box 9800
Calabasas, CA
91372-0800
CALIFORNIA Dim & Co. Institutional Class 78.34% 9.07%
TAX-FREE BOND FUND Attn: MF Dept. A88-4 Record Holder
P. O. Box 9800
Calabasas, CA
91372-0800
Hep & Co.
Attn: MF Dept. A88-4 Institutional Class 5.60% N/A
P. O. Box 9800 Record Holder
MAC 9139-027
Calabasas, CA 91302
CALIFORNIA Dim & Co. Institutional Class 65.38% 7.14%
TAX -FREE INCOME Attn: MF Dept A88-4 Record Holder
FUND P. O. Box 9800
Calabasas, CA
91372-0800
Institutional Class 27.72% N/A
Hep & Co. Record Holder
Attn: MF Dept. A88-4
P. O. Box 9800
MAC 9139-027
Calabasas, CA 91302
</TABLE>
60
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
NATIONAL TAX- Virg & Co. Institutional Class 53.10% 6.28%
FREE FUND Attn: MF Dept. A88-4 Record Holder
P. O. Box 9800
Calabasas, CA
91372-0800
Hep & Co. Institutional Class 44.01% 5.21%
Attn: MF Dept. A88-4 Record Holder
P. O. Box 9800
MAC 9139-027
Calabasas, CA 91302
OREGON Dim & Co. Institutional Class 12.24% N/A
TAX-FREE FUND Attn: MF Dept. A88-4 Record Holder
P. O. Box 9800
Calabasas, CA
91372-0800
Virg & Co. Institutional Class 52.45% 9.63%
Attn: MF Dept A88-4 Record Holder
P. O. Box 9800
Calabasas, CA
91372-0800
Hep & Co. Institutional Class 21.85% N/A
Attn: MF Dept. A88-4 Record Holder
P. O. Box 9800 MAC
9139-027
Calabasas, CA 91302
Dean Witter Institutional Class 9.23% N/A
P. O. Box 250 Beneficially Owned
Church Street Station for
New York, NY Flavel W. Temple and
10008-0250 Rachael Temple
</TABLE>
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
61
<PAGE>
in connection with review of certain SEC filings. KPMG Peat Marwick LLP's
address is Three Embarcadero Center, San Francisco, California 94111.
FINANCIAL INFORMATION
The portfolio of investments, audited financial statements and
independent auditors' report for the California Tax-Free Bond Fund for the year
ended December 31, 1997, are hereby incorporated by reference to the Annual
Reports as filed with the SEC on March 3, 1998.
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, 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 six-month 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
1-800-260-5969.
62
<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.
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.
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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."
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<PAGE>
STAGECOACH FUNDS, INC.
SEC Registration Nos. 33-42927; 811-6419
PART C
OTHER INFORMATION
Item 24. Financial Statements and Exhibits
---------------------------------
(a) Financial Statements:
--------------------
With respect to the California Tax-Free Bond, Index Allocation, Overland
Express Sweep, Short-Term Government-Corporate Income, Short-Term Municipal
Income, Strategic Growth, U.S. Government Income and Variable Rate Government
Funds, the portfolio of investments, audited financial statements and
independent auditors' report for the year ended December 31, 1997, are
incorporated in the respective statements of additional information for such
Funds by reference to the Company's Annual Reports, as filed with the SEC on
March 3, 1998.
With respect to the International Equity Fund, 4-6 month unaudited
financial statements for the period beginning September 24, 1997 (commencement
of operations) and ending March 9, 1998, are incorporated by reference to Post-
Effective Amendment No. 44 to the Company's Registration Statement, as filed
with the SEC on April 17, 1998.
With respect to the Arizona Tax-Free, Asset Allocation, Balanced,
California Tax-Free Bond, California Tax-Free Income, California Tax-Free Money
Market Mutual, Diversified Equity Income, Equity Index, Equity Value, Government
Money Market Mutual, Growth, Intermediate Bond, Money Market Mutual, Money
Market Trust, National Tax-Free, National Tax-Free Money Market Mutual, Oregon
Tax-Free, Prime Money Market Mutual, Short-Intermediate U.S. Government Income,
Small Cap, Strategic Growth, Treasury Money Market Mutual, U.S. Government
Allocation and U.S. Government Income Funds, the portfolio of investments,
unaudited financial statements and independent auditors' report for the fiscal
period ended September 30, 1997 are incorporated in the respective statements of
additional information for such Funds by reference to the Company's Semi-Annual
Reports, as filed with the SEC on December 5, 1997.
With respect to the Asset Allocation, Capital Appreciation, Corporate Stock,
Small Cap, Tax-Free Money Market and U.S. Government Allocation Master
Portfolios of Master Investment Trust ("MIT"), the portfolio of investments,
audited financial statements and independent auditors' report for the fiscal
period ended September 30, 1997 are incorporated in the respective statements of
additional information for such
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<PAGE>
Funds by reference to the Company's Semi-Annual Reports, as filed with the SEC
on December 5, 1997.
With respect to the Arizona Tax-Free, Asset Allocation, Balanced,
California Tax-Free Bond, California Tax-Free Income, California Tax-Free Money
Market Mutual, Diversified Equity Income, Equity Index, Equity Value, Government
Money Market Mutual, Growth, Intermediate Bond, Money Market Mutual, Money
Market Trust, National Tax-Free, National Tax-Free Money Market Mutual, Oregon
Tax-Free, Prime Money Market Mutual, Short-Intermediate U.S. Government Income,
Small Cap, Strategic Growth, Treasury Money Market Mutual, U.S. Government
Allocation and U.S. Government Income Funds, the portfolio of investments,
audited financial statements and independent auditors' report for the fiscal
period ended March 31, 1997 are incorporated in the respective statements of
additional information for such Funds by reference to the Company's Annual
Reports, as filed with the SEC on June 4, 1997.
With respect to the Asset Allocation, Capital Appreciation, Corporate
Stock, Small Cap, Tax-Free Money Market and U.S. Government Allocation Master
Portfolios of Master Investment Trust ("MIT"), the portfolio of investments,
audited financial statements and independent auditors' report for the fiscal
period ended March 31, 1997 are incorporated in the respective statements of
additional information for such Funds by reference to the Company's Annual
Reports as filed with the SEC on June 4, 1997.
With respect to the National Tax Free Money Market Trust, the financial
statements for such Fund will be incorporated by reference in its respective
statements of additional information when available.
With respect to the predecessor portfolios to the California Tax-Free Bond,
Index Allocation, Overland Express Sweep, Short-Term Government-Corporate
Income, Short-Term Municipal Income, Strategic Growth, U.S. Government Income
and Variable Rate Government Funds, the portfolio of investments and unaudited
financial statements for the six month period ended June 30, 1997 are hereby
incorporated by reference to the Semi-Annual Reports for Overland Express Funds,
Inc. ("Overland") (SEC File Nos. 33-16296; 811-8275) as filed with the SEC on
September 3, 1997.
With respect to the Cash Investment Trust, Short-Term Government-Corporate
Income and Short-Term Municipal Income Master Portfolios of MIT, the portfolio
of investments and unaudited financial statements for the six month period ended
June 30, 1997 are hereby incorporated by reference to the Semi-Annual Reports
for Overland as filed with the SEC on September 3, 1997.
With respect to the predecessor portfolios to the California Tax-Free Bond,
Index Allocation, Overland Express Sweep, Short-Term Government-Corporate
Income,
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<PAGE>
Short-term Municipal Income, Strategic Growth, U.S. Government Income and
Variable Rate Government Funds, the portfolio of investments, audited
financial statements and independent auditors' report 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.
With respect to the Cash Investment Trust, Short-Term Government-Corporate
Income and Short-Term Municipal Income Master Portfolios of MIT, the portfolio
of investments, audited financial statements and independent auditors' report
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.
(b) Exhibits:
--------
Exhibit
Number Description
- ------ -----------
1(a) - Amended and Restated Articles of Incorporation dated
November 22, 1995, incorporated by reference to Post-
Effective Amendment No. 17 to the Registration Statement,
filed November 29, 1995.
1(b) - Articles Supplementary, incorporated by reference to Post-
Effective Amendment No. 43 to the Registration Statement,
filed March 30, 1998.
2 - By-Laws, incorporated by reference to Post-Effective
Amendment No. 31 to the Registration Statement, filed May
15, 1997.
3 - Not Applicable
4 - Not Applicable
5(a)(i) - Advisory Contract with Wells Fargo Bank, N.A. on behalf of
the Asset Allocation Fund, incorporated by reference to
Post-Effective Amendment No. 2 to the Registration
Statement, filed April 17, 1992.
5(a)(ii) - Sub-Advisory Contract with Barclays Global Fund Advisors on
behalf of the Asset Allocation Fund, incorporated by
reference to Post-Effective Amendment No. 21 to the
Registration Statement, filed February 29, 1996.
5(b)(i) - Advisory Contract with Wells Fargo Bank, N.A. on behalf of
the U.S. Government Allocation Fund, incorporated by
reference to Post-Effective Amendment No. 2 to the
Registration Statement, filed April 17, 1992.
5(b)(ii) - Sub-Advisory Contract with Barclays Global Fund Advisors on
behalf of the U.S. Government Allocation Fund, incorporated
by reference to Post-Effective Amendment No. 21 to the
Registration Statement, filed February 29, 1996.
5(c) - Advisory Contract with Wells Fargo Bank, N.A. on behalf of
the California Tax-Free Money Market Mutual Fund,
incorporated by reference to Post-Effective Amendment No. 2
to the Registration Statement, filed April 17, 1992.
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<PAGE>
5(d) - Advisory Contract with Wells Fargo Bank, N.A. on behalf of
the California Tax-Free Bond Fund, incorporated by
reference to Post-Effective Amendment No. 2 to the
Registration Statement, filed April 17, 1992.
5(e) - Advisory Contract with Wells Fargo Bank, N.A. on behalf of
the Ginnie Mae Fund, incorporated by reference to Post-
Effective Amendment No. 2 to the Registration Statement,
filed April 17, 1992.
5(f) - Advisory Contract with Wells Fargo Bank, N.A. on behalf of
the Growth and Income Fund, incorporated by reference to
Post-Effective Amendment No. 2 to the Registration
Statement, filed April 17, 1992.
5(g)(i) - Advisory Contract with Wells Fargo Bank, N.A. on behalf of
the Corporate Stock Fund, incorporated by reference to Post-
Effective Amendment No. 2 to the Registration Statement,
filed April 17, 1992.
5(g)(ii) - Sub-Advisory Contract with Barclays Global Fund Advisors on
behalf of the Corporate Stock Fund, incorporated by
reference to Post-Effective Amendment No. 21 to the
Registration Statement, filed February 29, 1996.
5(h) - Advisory Contract with Wells Fargo Bank, N.A. on behalf of
the Money Market Mutual Fund, incorporated by reference to
Post-Effective Amendment No. 3 to the Registration
Statement, filed May 1, 1992.
5(i) - Advisory Contract with Wells Fargo Bank, N.A. on behalf of
the California Tax-Free Income Fund, incorporated by
reference to Post-Effective Amendment No. 4 to the
Registration Statement, filed September 10, 1992.
5(j) - Advisory Contract with Wells Fargo Bank, N.A. on behalf of
the Diversified Income Fund, incorporated by reference to
Post-Effective Amendment No. 17 to the Registration
Statement, filed November 29, 1995.
5(k) - Advisory Contract with Wells Fargo Bank, N.A. on behalf of
the Arizona Tax-Free Fund, incorporated by reference to
Post-Effective Amendment No. 30 to the Registration
Statement, filed January 31, 1997.
5(l) - Advisory Contract with Wells Fargo Bank, N.A. on behalf of
the Balanced Fund, incorporated by reference to Post-
Effective Amendment No. 30 to the Registration Statement,
filed January 31, 1997.
5(m) - Advisory Contract with Wells Fargo Bank, N.A. on behalf of
the Equity Value Fund, incorporated by reference to Post-
Effective Amendment No. 30 to the Registration Statement,
filed January 31, 1997.
5(n) - Advisory Contract with Wells Fargo Bank, N.A. on behalf of
the Government Money Market Mutual Fund, incorporated by
reference to Post-Effective Amendment No. 30 to the
Registration Statement, filed January 31, 1997.
5(o) - Advisory Contract with Wells Fargo Bank, N.A. on behalf of
the Intermediate Bond Fund, incorporated by reference to
Post-Effective Amendment No. 30 to the Registration
Statement, filed January 31, 1997.
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<PAGE>
5(p) - Advisory Contract with Wells Fargo Bank, N.A. on behalf of
the Money Market Trust Fund, incorporated by reference to
Post-Effective Amendment No. 30 to the Registration
Statement, filed January 31, 1997.
5(q) - Advisory Contract with Wells Fargo Bank, N.A. on behalf of
the National Tax-Free Fund, incorporated by reference to
Post-Effective Amendment No. 30 to the Registration
Statement, filed January 31, 1997.
5(r) - Advisory Contract with Wells Fargo Bank, N.A. on behalf of
the Oregon Tax-Free Fund, incorporated by reference to Post-
Effective Amendment No. 30 to the Registration Statement,
filed January 31, 1997.
5(s) - Advisory Contract with Wells Fargo Bank, N.A. on behalf of
the Prime Money Market Mutual Fund, incorporated by
reference to Post-Effective Amendment No. 30 to the
Registration Statement, filed January 31, 1997.
5(t) - Advisory Contract with Wells Fargo Bank, N.A. on behalf of
the Treasury Money Market Mutual Fund, incorporated by
reference to Post-Effective Amendment No. 30 to the
Registration Statement, filed January 31, 1997.
5(u) - Form of Advisory Contract with Wells Fargo Bank, N.A. on
behalf of the California Tax-Free Money Market Trust,
incorporated by reference to Post-Effective Amendment No.
28 to the Registration Statement, filed December 3, 1996.
5(v) - Form of Advisory Contract with Wells Fargo Bank, N.A. on
behalf of the National Tax-Free Money Market Trust,
incorporated by reference to Post-Effective Amendment No.
32 to the Registration Statement, filed May 30, 1997.
5(v)(i) - Form of Advisory Contract with Wells Fargo Bank, N.A. on
behalf of the Index Allocation, Short-Term Government-
Corporate Income, Short-Term Municipal Income, Overland
Express Sweep and Variable Rate Government Funds, filed
September 25, 1997.
5(v)(ii) - Form of Sub-Advisory Contract with Barclays Global Fund
Advisors on behalf of the Index Allocation Fund, filed
September 25, 1997.
5(w) - Form of Advisory Contract with Wells Fargo Bank, N.A. on
behalf of the International Equity Fund, incorporated by
reference to Post-Effective Amendment No. 32 to the
Registration Statement, filed May 30, 1997.
6(a) - Amended Distribution Agreement with Stephens Inc.,
incorporated by reference to Post-Effective Amendment No.
15 to the Registration Statement, filed May 1, 1995.
6(b) - Selling Agreement with Wells Fargo Bank, N.A. on behalf of
the Funds, incorporated by reference to Post-Effective
Amendment No. 2 to the Registration Statement, filed April
17, 1992.
7 - Not Applicable
8(a) - Custody Agreement with Wells Fargo Institutional Trust
Company, N.A. on behalf of the Asset Allocation Fund,
incorporated by reference to Post-Effective Amendment No. 2
to the Registration Statement, filed April 17, 1992.
C-5
<PAGE>
8(b) - Custody Agreement with Wells Fargo Institutional Trust
Company, N.A. on behalf of the U.S. Government Allocation
Fund, incorporated by reference to Post-Effective Amendment
No. 2 to the Registration Statement, filed April 17, 1992.
8(c) - Custody Agreement with Wells Fargo Institutional Trust
Company, N.A. on behalf of the Corporate Stock Fund,
incorporated by reference to Post-Effective Amendment No. 2
to the Registration Statement, filed April 17, 1992.
8(d) - Custody Agreement with Wells Fargo Bank, N.A. on behalf of
the California Tax-Free Money Market Mutual Fund,
incorporated by reference to Post-Effective Amendment No. 2
to the Registration Statement, filed April 17, 1992.
8(e) - Custody Agreement with Wells Fargo Bank, N.A. on behalf of
the California Tax-Free Bond Fund, incorporated by
reference to Post-Effective Amendment No. 2 to the
Registration Statement, filed April 17, 1992.
8(f) - Custody Agreement with Wells Fargo Bank, N.A. on behalf of
the Growth and Income Fund, incorporated by reference to
Post-Effective Amendment No. 2 to the Registration
Statement, filed April 17, 1992.
8(g) - Custody Agreement with Wells Fargo Bank, N.A. on behalf of
the Ginnie Mae Fund, incorporated by reference to Post-
Effective Amendment No. 2 to the Registration Statement,
filed April 17, 1992.
8(h) - Custody Agreement with Wells Fargo Bank, N.A. on behalf of
the Money Market Fund, incorporated by reference to Post-
Effective Amendment No. 3 to the Registration Statement,
filed May 1, 1992.
8(i) - Custody Agreement with Wells Fargo Bank, N.A. on behalf of
the California Tax-Free Income Fund, incorporated by
reference to Post-Effective Amendment No. 17 to the
Registration Statement, filed November 29, 1995.
8(j) - Custody Agreement with Wells Fargo Bank, N.A. on behalf of
the Diversified Income Fund, incorporated by reference to
Post-Effective Amendment No. 17 to the Registration
Statement, filed November 29, 1995.
8(k) - Custody Agreement with Wells Fargo Bank, N.A. on behalf of
the Short-Intermediate U.S. Government Income Fund,
incorporated by reference to Post-Effective Amendment No. 8
to the Registration Statement, filed February 10, 1994.
8(l) - Custody Agreement with Wells Fargo Bank, N.A. on behalf of
the National Tax-Free Money Market Mutual Fund,
incorporated by reference to Post-Effective Amendment No.
24 to the Registration Statement, filed April 29, 1996.
8(m) - Custody Agreement with Wells Fargo Bank, N.A. on behalf of
the Aggressive Growth Fund, incorporated by reference to
Post-Effective Amendment No. 20 to the Registration
Statement, filed February 28, 1996.
8(n) - Custody Agreement with Wells Fargo Bank on behalf of the
Arizona Tax-Free, Balanced, Equity Value, Government Money
Market Mutual, Index Allocation, Intermediate Bond, Money
Market Trust, National Tax-Free, Oregon Tax-Free,
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<PAGE>
Overland Express Sweep, Prime Money Market Mutual, Short-
Term Government-Corporate Income, Short-Term Municipal
Income, Treasury Money Market Mutual and Variable Rate
Government Funds, filed September 25, 1997.
9(a)(i) - Administration Agreement with Wells Fargo Bank, N.A. on
behalf of the Funds, incorporated by reference to Post-
Effective Amendment No. 33 to the Registration Statement,
filed August 5, 1997.
9(a)(ii) - Co-Administration Agreement with Wells Fargo Bank, N.A. and
Stephens Inc. on behalf of the Funds, incorporated by
reference to Post-Effective Amendment No. 33 to the
Registration Statement, filed August 5, 1997.
9(b) - Agency Agreement with Wells Fargo Bank, N.A. on behalf of
the Funds, incorporated by reference to Post-Effective
Amendment No. 32 to the Registration Statement, filed May
30, 1997.
9(c)(i) - Shareholder Servicing Agreement with Wells Fargo Bank, N.A.
on behalf of the California Tax-Free Money Market Mutual
Fund, incorporated by reference to Post-Effective Amendment
No. 2 to the Registration Statement, filed April 17, 1992.
9(c)(ii) - Shareholder Servicing Agreement with Wells Fargo Bank, N.A.
on behalf of the Corporate Stock Fund, incorporated by
reference to Post-Effective Amendment No. 2 to the
Registration Statement, filed April 17, 1992.
9(c)(iii) - Shareholder Servicing Agreement with Wells Fargo Bank, N.A.
on behalf of the Money Market Mutual Fund, incorporated by
reference to Post-Effective Amendment No. 3 to the
Registration Statement, filed May 1, 1992.
9(c)(iv) - Shareholder Servicing Agreement with Wells Fargo Bank, N.A.
on behalf of the California Tax-Free Income Fund,
incorporated by reference to Post-Effective Amendment No.
17 to the Registration Statement, filed November 29, 1995.
9(c)(v) - Shareholder Servicing Agreement with Wells Fargo Bank, N.A.
on behalf of the Short-Intermediate U.S. Government Income
Fund, incorporated by reference to Post-Effective Amendment
No. 8 to the Registration Statement, filed February 10,
1994.
9(c)(vi) - Shareholder Servicing Agreement with Wells Fargo Bank, N.A.
on behalf of the National Tax-Free Money Market Mutual
Fund, incorporated by reference to Post-Effective Amendment
No. 24 to the Registration Statement, filed April 29, 1996.
9(c)(vii) - Shareholder Servicing Agreement with Wells Fargo Bank, N.A.
on behalf of the Class B Shares of the Asset Allocation
Fund, incorporated by reference to Post-Effective Amendment
No. 15 to the Registration Statement, filed May 1, 1995.
9(c)(viii) - Shareholder Servicing Agreement with Wells Fargo Bank, N.A.
on behalf of the Class B Shares of the California Tax-Free
Bond Fund, incorporated by reference to Post-Effective
Amendment No. 15 to the Registration Statement, filed May
1, 1995.
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<PAGE>
9(c)(ix) - Shareholder Servicing Agreement with Wells Fargo Bank, N.A.
on behalf of the Class B Shares of the Diversified Income
Fund, incorporated by reference to Post-Effective Amendment
No. 15 to the Registration Statement, filed May 1, 1995.
9(c)(x) - Shareholder Servicing Agreement with Wells Fargo Bank, N.A.
on behalf of the Class B Shares of the Ginnie Mae Fund,
incorporated by reference to Post-Effective Amendment No.
15 to the Registration Statement, filed May 1, 1995.
9(c)(xi) - Shareholder Servicing Agreement with Wells Fargo Bank, N.A.
on behalf of the Class B Shares of the Growth and Income
Fund, incorporated by reference to Post-Effective Amendment
No. 15 to the Registration Statement, filed May 1, 1995.
9(c)(xii) - Shareholder Servicing Agreement with Wells Fargo Bank, N.A.
on behalf of the Class B Shares of the U.S. Government
Allocation Fund, incorporated by reference to Post-
Effective Amendment No. 15 to the Registration Statement,
filed May 1, 1995.
9(c)(xiii) - Shareholder Servicing Agreement with Wells Fargo Bank, N.A.
on behalf of the Class B Shares of the Aggressive Growth
Fund, incorporated by reference to Post-Effective Amendment
No. 20 to the Registration Statement, filed February 28,
1996.
9(c)(xiv) - Amended Shareholder Servicing Agreement with Wells Fargo
Bank, N.A. on behalf of the Class A Shares of the Asset
Allocation Fund, incorporated by reference to Post-
Effective Amendment No. 15 to the Registration Statement,
filed May 1, 1995.
9(c)(xv) - Amended Shareholder Servicing Agreement with Wells Fargo
Bank, N.A. on behalf of the Class A Shares of the
California Tax-Free Bond Fund, incorporated by reference to
Post-Effective Amendment No. 15 to the Registration
Statement, filed May 1, 1995.
9(c)(xvi) - Amended Shareholder Servicing Agreement with Wells Fargo
Bank, N.A. on behalf of the Class A Shares of the
Diversified Income Fund, incorporated by reference to Post-
Effective Amendment No. 15 to the Registration Statement,
filed May 1, 1995.
9(c)(xvii) - Amended Shareholder Servicing Agreement with Wells Fargo
Bank, N.A. on behalf of the Class A Shares of the Ginnie
Mae Fund, incorporated by reference to Post-Effective
Amendment No. 15 to the Registration Statement, filed May
1, 1995.
9(c)(xviii) - Amended Shareholder Servicing Agreement with Wells Fargo
Bank, N.A. on behalf of the Class A Shares of the Growth
and Income Fund, incorporated by reference to Post-
Effective Amendment No. 15 to the Registration Statement,
filed May 1, 1995.
9(c)(xix) - Amended Shareholder Servicing Agreement with Wells Fargo
Bank, N.A. on behalf of the Class A Shares of the U.S.
Government Allocation Fund, incorporated by reference to
Post-Effective Amendment No. 15 to the Registration
Statement, filed May 1, 1995.
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<PAGE>
9(c)(xx) - Shareholder Servicing Agreement with Wells Fargo Bank, N.A.
on behalf of the Class A Shares of the Aggressive Growth
Fund, incorporated by reference to Post-Effective Amendment
No. 20 to the Registration Statement, filed February 28,
1996.
9(d)(i) - Servicing Plan on behalf of the National Tax-Free Money
Market Mutual Fund, incorporated by reference to Post-
Effective Amendment No. 17 to the Registration Statement,
filed November 29, 1995.
9(d)(ii) - Servicing Plan on behalf of the Class B Shares of the Asset
Allocation Fund, incorporated by reference to Post-
Effective Amendment No. 15 to the Registration Statement,
filed May 1, 1995.
9(d)(iii) - Servicing Plan on behalf of the Class B Shares of the
California Tax-Free Bond Fund, incorporated by reference to
Post-Effective Amendment No. 15 to the Registration
Statement, filed May 1, 1995.
9(d)(iv) - Servicing Plan on behalf of the Class B Shares of the
Diversified Income Fund, incorporated by reference to Post-
Effective Amendment No. 15 to the Registration Statement,
filed May 1, 1995.
9(d)(v) - Servicing Plan on behalf of the Class B Shares of the
Ginnie Mae Fund, incorporated by reference to Post-
Effective Amendment No. 15 to the Registration Statement,
filed May 1, 1995.
9(d)(vi) - Servicing Plan on behalf of the Class B Shares of the
Growth and Income Fund, incorporated by reference to Post-
Effective Amendment No. 15 to the Registration Statement,
filed May 1, 1995.
9(d)(vii) - Servicing Plan on behalf of the Class B Shares of the U.S.
Government Allocation Fund, incorporated by reference to
Post-Effective Amendment No. 15 to the Registration
Statement, filed May 1, 1995.
9(d)(viii) - Servicing Plan on behalf of the Class A Shares of the
Aggressive Growth Fund, incorporated by reference to Post-
Effective Amendment No. 19 to the Registration Statement,
filed December 18, 1995.
9(d)(ix) - Servicing Plan on behalf of the Class B Shares of the
Aggressive Growth Fund, incorporated by reference to Post-
Effective Amendment No. 19 to the Registration Statement,
filed December 18, 1995.
9(d)(x) - Servicing Plan on behalf of the Class B shares of the Index
Allocation Fund, filed September 25, 1997.
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<PAGE>
9(e)(i) - Servicing Plan and Form of Shareholder Servicing Agreement
on behalf of the Class A Shares of the Arizona Tax-Free,
Balanced, Equity Value, Government Money Market Mutual,
Intermediate Bond, International Equity, National Tax-Free,
Oregon Tax-Free, Prime Money Market Mutual, Small Cap and
Treasury Money Market Mutual Funds, incorporated by
reference to Post-Effective Amendment No. 32 to the
Registration Statement, incorporated by reference to Post-
Effective Amendment No. 32 to the Registration Statement,
filed May 30, 1997.
9(e)(ii) - Servicing Plan and Form of Shareholder Servicing Agreement
on behalf of the Class B Shares of the Arizona Tax-Free,
Balanced, Equity Value, Intermediate Bond, International
Equity, National Tax-Free, Oregon Tax-Free and Small Cap
Funds, incorporated by reference to Post-Effective
Amendment No. 32 to the Registration Statement, filed May
30, 1997.
9(e)(iii) - Servicing Plan and Form of Shareholder Servicing Agreement
on behalf of the Institutional Class Shares of the
Aggressive Growth, Arizona Tax-Free, Balanced, California
Tax-Free Bond, California Tax-Free Income, Equity Value,
Ginnie Mae, Growth and Income, Intermediate Bond,
International Equity, Money Market Mutual, National Tax-
Free, Oregon Tax-Free, Prime Money Market Mutual, Short-
Intermediate Government, Small Cap and Treasury Money
Market Mutual Funds, incorporated by reference to Post-
Effective Amendment No. 32 to the Registration Statement,
filed May 30, 1997.
9(e)(iv) - Servicing Plan and Form of Shareholder Servicing Agreement
on behalf of the Service Class Shares of the Prime Money
Market Mutual and Treasury Money Market Mutual Funds,
incorporated by reference to Post-Effective Amendment No.
25 to the Registration Statement, filed June 17, 1996.
9(e)(v) - Servicing Plan and Form of Shareholder Servicing Agreement
on behalf of the Money Market Trust and California Tax-Free
Money Market Trust, incorporated by reference to Post-
Effective Amendment No. 28 to the Registration Statement,
filed December 3, 1996.
9(e)(vi) - Servicing Plan and Form of Shareholder Servicing Agreement
on behalf of the Class E Shares of the Treasury Money
Market Mutual Fund, incorporated by reference to Post-
Effective Amendment No. 19 to the Registration Statement,
filed January 23, 1997.
9(e)(vii) - Servicing Plan and Form of Shareholder Servicing Agreement
on behalf of the Administrative Class shares of the Prime
Money Market Mutual and Treasury Money Market Mutual Funds,
incorporated by reference to Post-Effective Amendment No.
33 to the Registration Statement, filed August 5, 1997.
9(e)(viii) - Servicing Plan and Form of Shareholder Servicing Agreement
on behalf of the Class C shares of the Aggressive Growth,
California Tax-Free Bond, Index Allocation, Ginnie Mae,
National Tax-Free Bond, Small Cap and Variable Rate
Government Funds, incorporated by reference to Post-
Effective Amendment No. 33 to the Registration Statement,
filed August 5, 1997.
9(e)(ix) - Servicing Plan and Form of Shareholder Servicing Agreement
on behalf of the Institutional Class shares of the National
Tax-Free Money Market Mutual Fund, incorporated by
reference to Post-Effective Amendment No. 33 to the
Registration Statement, filed August 5, 1997.
C-10
<PAGE>
9(f) - Shareholder Administrative Servicing Plan and Form of
Administrative Servicing Agreement on behalf of Class A
shares of Index Allocation and Variable Rate Government
Funds and shares of the Short-Term Government-Corporate
Income and Short-Term Municipal Income Funds, filed
September 25, 1997.
10 - Opinion and Consent of Counsel, filed herewith.
11 - Consent of Independent Auditor, filed herewith.
12 - Not Applicable
13 - Investment letter, incorporated by reference to Item 24(b)
of Pre-Effective Amendment No. 1 to the Registration
Statement, filed November 29, 1991.
14 - Not Applicable
15(a)(i) - Distribution Plan on behalf of the California Tax-Free
Money Market Mutual Fund, incorporated by reference to Post-
Effective Amendment No. 2 to the Registration Statement,
filed April 17, 1992.
15(a)(ii) - Distribution Plan on behalf of the Corporate Stock Fund,
incorporated by reference to Post-Effective Amendment No. 2
to the Registration Statement, filed April 17, 1992.
15(a)(iii) - Distribution Plan on behalf of the Money Market Mutual
Fund, incorporated by reference to Post-Effective Amendment
No. 3 to the Registration Statement, filed May 1, 1992.
15(a)(iv) - Distribution Plan on behalf of the California Tax-Free
Income Fund, incorporated by reference to Post-Effective
Amendment No. 4 to the Registration Statement, filed
September 10, 1992.
15(a)(v) - Distribution Plan on behalf of the Short-Intermediate U.S.
Government Income Fund, incorporated by reference to Post-
Effective Amendment No. 8 to the Registration Statement,
filed February 10, 1994.
15(a)(vi) - Amended Distribution Plan on behalf of the Class A Shares
of the Asset Allocation Fund, incorporated by reference to
Post-Effective Amendment No. 15 to the Registration
Statement, filed May 1, 1995.
15(a)(vii) - Amended Distribution Plan on behalf of the Class A Shares
of the California Tax-Free Bond Fund, incorporated by
reference to Post-Effective Amendment No. 15 to the
Registration Statement, filed May 1, 1995.
15(a)(viii) - Amended Distribution Plan on behalf of the Class A Shares
of the Diversified Income Fund, incorporated by reference
to Post-Effective Amendment No. 15 to the Registration
Statement, filed May 1, 1995.
15(a)(ix) - Amended Distribution Plan on behalf of the Class A Shares
of the Ginnie Mae Fund, incorporated by reference to Post-
Effective Amendment No. 15 to the Registration Statement,
filed May 1, 1995.
C-11
<PAGE>
15(a)(x) - Amended Distribution Plan on behalf of the Class A Shares
of the Growth and Income Fund, incorporated by reference to
Post-Effective Amendment No. 15 to the Registration
Statement, filed May 1, 1995.
15(a)(xi) - Amended Distribution Plan on behalf of the Class A Shares
of the U.S. Government Allocation Fund, incorporated by
reference to Post-Effective Amendment No. 15 to the
Registration Statement, filed May 1, 1995.
15(a)(xii) - Distribution Plan on behalf of the National Tax-Free Money
Market Mutual Fund, incorporated by reference to Post-
Effective Amendment No. 17 to the Registration Statement,
filed November 29, 1995.
15(a)(xiii) - Distribution Plan on behalf of the Class A Shares of the
Aggressive Growth Fund, incorporated by reference to Post-
Effective Amendment No. 19 to the Registration Statement,
filed December 18, 1995.
15(a)(xiv) - Distribution Plan on behalf of the California Tax-Free
Money Market Trust, incorporated by reference to Post-
Effective Amendment No. 28 to the Registration Statement,
filed December 3, 1996.
15(a)(xv) - Distribution Plan on behalf of the Class A Shares of the
Arizona Tax-Free, Balanced, Equity Value, Government Money
Market Mutual, Intermediate Bond, International Equity,
National Tax-Free, Oregon Tax-Free, Prime Money Market
Mutual, Small Cap and Treasury Money Market Mutual Funds,
incorporated by reference to Post-Effective Amendment No.
32, filed May 30, 1997.
15(a)(xvi) - Distribution Plan on behalf of the Class A shares of the
Index Allocation and Variable Rate Government Funds and
shares of the Short-Term Government-Corporate Income and
Short-Term Municipal Income Funds, filed September 25,
1997.
15(b)(i) - Distribution Plan on behalf of the Class B Shares of the
Asset Allocation Fund, incorporated by reference to Post-
Effective Amendment No. 15 to the Registration Statement,
filed May 1, 1995.
15(b)(ii) - Distribution Plan on behalf of the Class B Shares of the
California Tax-Free Bond Fund, incorporated by reference to
Post-Effective Amendment No. 15 to the Registration
Statement, filed May 1, 1995.
15(b)(iii) - Distribution Plan on behalf of the Class B Shares of the
Diversified Income Fund, incorporated by reference to Post-
Effective Amendment No. 15 to the Registration Statement,
filed May 1, 1995.
15(b)(iv) - Distribution Plan on behalf of the Class B Shares of the
Ginnie Mae Fund, incorporated by reference to Post-
Effective Amendment No. 15 to the Registration Statement,
filed May 1, 1995.
15(b)(v) - Distribution Plan on behalf of the Class B Shares of the
Growth and Income Fund, incorporated by reference to Post-
Effective Amendment No. 15 to the Registration Statement,
filed May 1, 1995.
15(b)(vi) - Distribution Plan on behalf of the Class B Shares of the
U.S. Government Allocation Fund, incorporated by reference
to Post-Effective Amendment No. 15 to the Registration
Statement, filed May 1, 1995.
C-12
<PAGE>
15(b)(vii) - Distribution Plan on behalf of the Class B Shares of the
Aggressive Growth Fund, incorporated by reference to Post-
Effective Amendment No. 19 to the Registration Statement,
filed December 18, 1995.
15(b)(viii) - Distribution Plan on behalf of the Class B Shares of the
Arizona Tax-Free, Balanced, Equity Value, Index Allocation,
Intermediate Bond, International Equity, National Tax-Free,
Oregon Tax-Free and Small Cap Funds, incorporated by
reference to Post-Effective Amendment No. 32 to the
Registration Statement, filed May 30, 1997.
15(c) - Distribution Plan on behalf of the Class C Shares of the
Aggressive Growth, California Tax-Free Bond, Index
Allocation, Ginnie Mae, National Tax-Free Bond, Small Cap
and Variable Rate Government Funds, incorporated by
reference to Post-Effective Amendment No. 33 to the
Registration Statement, filed August 5, 1997.
15(d) - Distribution Plan on behalf of the Overland Sweep Fund, filed
September 25, 1997.
15(e) - Distribution Plan on behalf of the Class E Shares of the
Treasury Money Market Mutual Fund, incorporated by
reference to Post-Effective Amendment No. 29, filed January
23, 1997.
16 - Schedules for Computation of Performance Data, incorporated
by reference to Post-Effective Amendment No. 15, filed May
1, 1995.
17 - See Exhibit 27.
18 - Rule 18f-3 Multi-Class Plan, as amended, incorporated by
reference to Post-Effective Amendment No. 33 to the
Registration Statement, filed August 5,1997.
19 - Powers of Attorney for R. Greg Feltus, Jack S. Euphrat,
Thomas S. Goho, Joseph N. Hankin, W. Rodney Hughes, Robert
M. Joses and J. Tucker Morse, incorporated by reference to
Post-Effective Amendment No. 32, filed May 30, 1997; Power
of Attorney for Peter G. Gordon, incorporated by reference
to Post-Effective Amendment No. 41, filed January 30,
1998.
27 - Financial Data Schedules for the Overland predecessor
portfolios for the period ended December 31, 1996,
incorporated by reference to the Form N-SAR filed February
9, 1997; Financial Data Schedules for the fiscal period
ended March 31, 1997, incorporated by reference to the Form
N-SAR, filed May 29, 1997.
Item 25. Persons Controlled by or under Common Control with Registrant
-------------------------------------------------------------
As of March 1, 1998 the Funds did not directly or indirectly control, and
were not under common control with, any other person or entity.
Item 26. Number of Holders of Securities
-------------------------------
As of February 28, 1998, the number of record holders of each class of
Securities of the Registrant was as follows:
C-13
<PAGE>
<TABLE>
<CAPTION>
Title of Class Number of Record Holders
-------------- ------------------------
Class A* Class B Class C Institutional
-------- ------- ------- -------------
Class
-----
<S> <C> <C> <C> <C>
Arizona Tax-Free Fund 185 33 N/A 6
Asset Allocation Fund 12,266 10,615 N/A N/A
Balanced Fund 1,657 509 N/A N/A
California Tax-Free Bond Fund 10,971 1,670 79 51
California Tax-Free Income Fund 3,069 N/A N/A 8
California Tax-Free Money Market Mutual Fund 8,120 N/A N/A N/A
California Tax-Free Money Market Trust 3 N/A N/A N/A
Diversified Equity Income Fund 12,587 3,688 N/A N/A
Equity Index Fund 2,078 N/A N/A N/A
Equity Value Fund 2,254 4,499 N/A 104
Government Money Market Fund 133 N/A N/A N/A
Growth Fund 13,384 3,663 N/A 30
Index Allocation Fund 1,427 111 1,065 N/A
International Equity Fund 1,086 2,436 N/A N/A
Intermediate Bond Fund 152 245 N/A 10
Money Market Mutual Fund 5,940 2** N/A N/A
Money Market Trust 5 N/A N/A N/A
National Tax-Free Fund 946 28 144 5
National Tax-Free Money Market Mutual Fund 51 N/A N/A N/A
National Tax-Free Money Market Trust 2 N/A N/A N/A
Oregon Tax-Free Fund 639 70 N/A 9
Overland Express Sweep Fund 4 N/A N/A N/A
Prime Money Market Mutual 361 347*** 696***** 74
Short-Intermediate U.S. Government Income Fund 729 N/A N/A 49
Short-Term Government-Corporate Income Fund 22 N/A N/A N/A
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Short-Term Municipal Income Fund 19 N/A N/A N/A
Small Cap Fund 731 1,569 130 13
Strategic Growth Fund 14,309 2,849 1,654 N/A
Treasury Money Market Mutual Fund 216 99*** 2**** 187
U.S. Government Allocation Fund 1,312 467 N/A N/A
U.S. Government Income Fund 10,948 823 80 67
Variable Rate Government 746 N/A 49 N/A
</TABLE>
* For purposes of this chart, shares of single class Funds are included
under the designation "Class A"
** Designates the number of Class S
recordholders.
*** Designates the number of Service Class recordholders.
**** Designates the number of Class E recordholders.
***** Designates the number of Administrative Class recordholders.
Item 27. Indemnification
---------------
The following paragraphs of Article VIII of the Registrant's Articles of
Incorporation provide:
(h) The Corporation shall indemnify (1) its Directors and Officers, whether
serving the Corporation or at its request any other entity, to the full extent
required or permitted by the General Laws of the State of Maryland now or
hereafter in force, including the advance of expenses under the procedures and
to the full extent permitted by law, and (2) its other employees and agents to
such extent as shall be authorized by the Board of Directors or the
Corporation's By-Laws and be permitted by law. The foregoing rights of
indemnification shall not be exclusive of any other rights to which those
seeking indemnification may be entitled. The Board of Directors may take such
action as is necessary to carry out these indemnification provisions and is
expressly empowered to adopt, approve and amend from time to time such By-
Laws, resolutions or contracts implementing such provisions or such further
indemnification arrangements as may be permitted by law. No amendment of these
Articles of Incorporation of the Corporation shall limit or eliminate the
right to indemnification provided hereunder with respect to acts or omissions
occurring prior to such amendment or repeal. Nothing contained herein shall be
construed to authorize the Corporation to indemnify any Director or officer of
the Corporation against any liability to the Corporation or to any holders of
securities of the Corporation to which he is subject by reason of willful
misfeasance, bad faith, gross negligence, or reckless disregard of the duties
involved in the conduct of his office. Any indemnification by the Corporation
shall be consistent with the requirements of law, including the 1940 Act.
(i) To the fullest extent permitted by Maryland statutory and decisional
law and the 1940 Act, as amended or interpreted, no Director or officer of the
Corporation shall be
C-15
<PAGE>
personally liable to the Corporation or its stockholders for money damages;
provided, however, that nothing herein shall be construed to protect any
Director or officer of the Corporation against any liability to which such
Director or officer would otherwise be subject by reason of willful
misfeasance, bad faith, gross negligence, or reckless disregard of the duties
involved in the conduct of his office. No amendment, modification or repeal of
this Article VIII shall adversely affect any right or protection of a Director
or officer that exists at the time of such amendment, modification or repeal.
Item 28. Business and Other Connections of Investment Advisor.
----------------------------------------------------
Wells Fargo Bank, N.A. ("Wells Fargo Bank"), a wholly owned subsidiary of
Wells Fargo & Company, currently serves as investment advisor to several of the
Registrant's investment portfolios and to certain other registered open-end
management investment companies. Wells Fargo Bank's business is that of a
national banking association with respect to which it conducts a variety of
commercial banking and trust activities.
To the knowledge of Registrant, none of the directors or executive officers
of Wells Fargo Bank, except those set forth below, is or has been at any time
during the past two fiscal years engaged in any other business, profession,
vocation or employment of a substantial nature, except that certain executive
officers also hold various positions with and engage in business for Wells Fargo
& Company. Set forth below are the names and principal businesses of the
directors and executive officers of Wells Fargo Bank who are or during the past
two fiscal years have been engaged in any other business, profession, vocation
or employment of a substantial nature for their own account or in the capacity
of director, officer, employee, partner or trustee. All the directors of Wells
Fargo Bank also serve as directors of Wells Fargo & Company.
Name and Position Principal Business(es) and Address(es)
at Wells Fargo Bank During at Least the Last Two Fiscal Years
- ------------------- -----------------------------------------
H. Jesse Arnelle Senior Partner of Arnelle, Hastie, McGee, Willis & Greene
Director 455 Market Street
San Francisco, CA 94105
Director of Armstrong World Industries, Inc.
5037 Patata Street
South Gate, CA 90280
Director of Eastman Chemical Corporation
12805 Busch Place
Santa Fe Springs, CA 90670
Director of FPL Group, Inc.
700 Universe Blvd.
P.O. Box 14000
North Palm Beach, FL 33408
C-16
<PAGE>
Michael R. Bowlin Chairman of the Board of Directors, Chief Executive
Director Officer, Chief Operating Officer and President of
Atlantic Richfield Co. (ARCO)
Highway 150
Santa Paula, CA 93060
Edward Carson Chairman of the Board and Chief Executive Officer of
Director First Interstate Bancorp
633 West Fifth Street
Los Angeles, CA 90071
Director of Aztar Corporation
2390 East Camelback Road Suite 400
Phoenix, AZ 85016
Director of Castle & Cook, Inc.
10900 Wilshire Blvd.
Los Angeles, CA 90024
Director of Terra Industries, Inc.
1321 Mount Pisgah Road
Walnut Creek, CA 94596
William S. Davilla President (Emeritus) and a Director of
Director The Vons Companies, Inc.
618 Michillinda Ave.
Arcadia, CA 91007
Director of Pacific Gas & Electric Company
788 Taylorville Road
Grass Valley, CA 95949
Rayburn S. Dezember Director of CalMat Co.
Director 3200 San Fernando Road
Los Angeles, CA 90065
Director of Tejon Ranch Company
P.O. Box 1000
Lebec, CA 93243
Director of The Bakersfield Californian
1707 I Street
P.O. Box 440
Bakersfield, CA 93302
Trustee of Whittier College
13406 East Philadelphia Ave.
P.O. Box 634
Whittier, CA 90608
C-17
<PAGE>
Paul Hazen Chairman of the Board of Directors of
Chairman of the Board Wells Fargo & Company
of Directors 420 Montgomery Street
San Francisco, CA 94105
Director of Phelps Dodge Corporation
2600 North Central Ave.
Phoenix, AZ 85004
Director of Safeway, Inc.
4th and Jackson Streets
Oakland, CA 94660
Robert K. Jaedicke Professor (Emeritus) of Accounting
Director Graduate School of Business at Stanford University
MBA Admissions Office
Stanford, CA 94305
Director of Bailard Biehl & Kaiser
Real Estate Investment Trust, Inc.
2755 Campus Dr.
San Mateo, CA 94403
Director of Boise Cascade Corporation
1111 West Jefferson Street
P.O. Box 50
Boise, ID 83728
Director of California Water Service Company
1720 North First Street
San Jose, CA 95112
Director of Enron Corporation
1400 Smith Street
Houston, TX 77002
Director of GenCorp, Inc.
175 Ghent Road
Fairlawn, OH 44333
Director of Homestake Mining Company
650 California Street
San Francisco, CA 94108
Thomas L. Lee Chairman and Chief Executive Officer of
Director The Newhall Land and Farming Company
10302 Avenue 7 1-2
Firebaugh, CA 93622
C-18
<PAGE>
Director of Calmat Co.
501 El Charro Road
Pleasanton, CA 94588
Director of First Interstate Bancorp
633 West Fifth Street
Los Angeles, CA 90071
Ellen Newman President of Ellen Newman Associates
Director 323 Geary Street
Suite 507
San Francisco, CA 94102
Chair (Emeritus) of the Board of Trustees
University of California at San Francisco Foundation
250 Executive Park Blvd.
Suite 2000
San Francisco, CA 94143
Director of the California Chamber of Commerce
1201 K Street
12th Floor
Sacremento, CA 95814
Philip J. Quigley Chairman, President and Chief Executive Officer of
Director Pacific Telesis Group
130 Kearney Street Rm. 3700
San Francisco, CA 94108
Carl E. Reichardt Director of Columbia/HCA Healthcare Corporation
Director One Park Plaza
Nashville, TN 37203
Director of Ford Motor Company
The American Road
Dearborn, MI 48121
Director of Newhall Management Corporation
23823 Valencia Blvd.
Valencia, CA 91355
Director of Pacific Gas and Electric Company
77 Beale Street
San Francisco, CA 94105
Retired Chairman of the Board of Directors
and Chief Executive Officer of Wells Fargo & Company
420 Montgomery Street
C-19
<PAGE>
San Francisco, CA 94105
Donald B. Rice President and Chief Executive Officer of Teledyne, Inc.
Director 2049 Century Park East
Los Angeles, CA 90067
Retired Secretary of the Air Force
Director of Vulcan Materials Company
One MetroPlex Drive
Birmingham, AL 35209
Richard J. Stegemeier Chairman (Emeritus) of Unocal Corp
Director 44141 Yucca Avenue
Lancaster, CA 93534
Director of Foundation Health Corporation
166 4th
Fort Irwin, CA 92310
Director of Halliburton Company
3600 Lincoln Plaza
500 North Alcard Street
Dallas, TX 75201
Director of Northrop Grumman Corp.
1840 Century Park East
Los Angeles, CA 90067
Director of Outboard Marine Corporation
100 SeaHorse Drive
Waukegan, IL 60085
Director of Pacific Enterprises
555 West Fifth Street
Suite 2900
Los Angeles, CA 90031
Director of First Interstate Bancorp
633 West Fifth Street
Los Angeles, CA 90071
Susan G. Swenson President and Chief Executive Officer of Cellular One
Director 651 Gateway Blvd.
San Francisco, CA 94080
David M. Tellep Retired Chairman of the Board and Chief Executive
Director Officer of Martin Lockheed Corp
6801 Rockledge Drive
C-20
<PAGE>
Bethesda, MD 20817
Director of Edison International
and Southern California Edison Company
2244 Walnut Grove Ave.
Rosemead, CA 91770
Director of First Interstate
633 West Fifth Street
Los Angeles, CA 90071
Chang-Lin Tien Chancellor of the University of California at Berkeley
Director
Director of Raychem Corporation
300 Constitution Drive
Menlo Park, CA 94025
John A. Young President, Chief Executive Officer and Director
Director of Hewlett-Packard Company
3000 Hanover Street
Palo Alto, CA 9434
Director of Chevron Corporation
225 Bush Street
San Francisco, CA 94104
Director of Lucent Technologies
25 John Glenn Drive
Amherst, NY 14228
Director of Novell, Inc.
11300 West Olympic Blvd.
Los Angeles, CA 90064
Director of Shaman Pharmaceuticals Inc.
213 East Grand Ave. South
San Francisco, CA 94080
William F. Zuendt President of Wells Fargo & Company
President 420 Montgomery Street
San Francisco, CA 94105
Director of 3Com Corporation
5400 Bayfront Plaza, P.O. Box 58145
Santa Clara, CA 95052
Director of the California Chamber of Commerce
C-21
<PAGE>
Prior to May 1, 1996, Barclays Global Fund Advisors ("BGFA"), a wholly-
owned subsidiary of Barclays Global Investors, N.A. ("BGI", formerly, Wells
Fargo Institutional Trust Company), served as sub-advisor to the Asset
Allocation, Corporate Stock and U.S. Government Allocation Funds of the Company
and to certain other open-end management investment companies. From May 1, 1996
to December 15, 1997 BGFA BGFA served as sub-advisor to the corresponding Asset
Allocation, U.S. Government Allocation and Corporate Stock Master Portfolios of
Master Investment Trust, in which such funds invested substantially all of their
assets. These Funds currently invest directly in a portfolio of securities and
no longer invest in the Master Portfolios. BGFA currently serves as sub-advisor
to these Funds.
The directors and officers of BGFA consist primarily of persons who during
the past two years have been active in the investment management business of
the former sub-advisor to the Registrant, Wells Fargo Nikko Investment Advisors
("WFNIA") and, in some cases, the service business of BGI. To the knowledge of
the Registrant, except as set forth below, none of the directors or executive
officers of BGFA is or has been at any time during the past two fiscal years
engaged in any other business, profession, vocation or employment of a
substantial nature.
<TABLE>
<CAPTION>
Name and Position Principal Business(es) During at
at BGFA Least the Last Two Fiscal Years
- ------- ---------------------------------
<S> <C>
Frederick L.A. Grauer Director of BGFA and Co-Chairman and Director of BGI
Director 45 Fremont Street, San Francisco, CA 94105
Patricia Dunn Director of BGFA and C-Chairman and Director of BGI
Director 45 Fremont Street, San Francisco, CA 94105
Lawrence G. Tint Chairman of the Board of Directors of BGFA
Chairman and Director and Chief Executive Officer of BGI
45 Fremont Street, San Francisco, CA 94105
Geoffrey Fletcher Chief Financial Officer of BGFA and BGI since May 1997
Chief Financial Officer 45 Fremont Street, San Francisco, CA 94105
Managing Director and Principal Accounting Officer at
Bankers Trust Company from 1988 - 1997
505 Market Street, San Francisco, CA 94105
</TABLE>
Prior to January 1, 1996 WFNIA served as sub-advisor to the Asset
Allocation, Corporate Stock and U.S. Government Allocation Funds of the Company
and as advisor or sub-advisor to various other open-end management investment
companies.
For additional information, "Organization and Management of the Fund(s)" in
the Prospectuses for the Funds as well as "Management" in the Statements of
Additional Information of such Funds. For information as to the business,
profession, vocation or employment of a substantial nature of each of the
officers and management committees of WFNIA, reference
C-22
<PAGE>
is made to WFNIA's Form ADV and Schedules A and D filed under the Investment
Advisors Act of 1940, File No. 801-36479, incorporated herein by reference.
Item 29. Principal Underwriters.
----------------------
(a) Stephens Inc., distributor for the Registrant, does not presently act
as investment advisor for any other registered investment companies, but does
act as principal underwriter for Life & Annuity Trust, MasterWorks Funds, Inc.
Stagecoach Trust, Nations Fund, Inc., Nations Fund Trust, Nations Fund
Portfolios, Inc., Nations LifeGoal Funds, Inc. and Nations Institutional
Reserves, and is the exclusive placement agent for Managed Series Investment
Trust and Master Investment Portfolio, all of which are registered open-end
management investment companies.
(b) Information with respect to each director and officer of the principal
underwriter is incorporated by reference to Form ADV and Schedules A and D filed
by Stephens Inc. with the Securities and Exchange Commission pursuant to the
Investment Advisors Act of 1940 (file No. 501-15510).
(c) Not applicable.
Item 30. Location of Accounts and Records.
--------------------------------
(a) The Registrant maintains accounts, books and other documents required
by Section 31(a) of the Investment Company Act of 1940 and the rules thereunder
(collectively, "Records") at the offices of Stephens Inc., 111 Center Street,
Little Rock, Arkansas 72201.
(b) Wells Fargo Bank maintains all Records relating to its services as
investment advisor, administrator and custodian and transfer and dividend
disbursing agent at 525 Market Street, San Francisco, California 94105.
(c) WFNIA and Wells Fargo Institutional Trust Company, N.A. maintain all
Records relating to their services as sub-advisor and custodian, respectively,
for the period prior to January 1, 1996, at 45 Fremont Street, San Francisco,
California 94105.
(d) BGFA and BGI maintain all Records relating to their services as sub-
advisor and custodian, respectively, for the period beginning January 1, 1996 at
45 Fremont Street, San Francisco, California 94105.
(e) Stephens maintains all Records relating to its services as sponsor, co-
administrator and distributor at 111 Center Street, Little Rock, Arkansas 72201.
Item 31. Management Services.
-------------------
Other than as set forth under the captions "Organization and Management of
the Fund(s)" in the Prospectuses for the Funds as well as "Management" in the
Statements of
C-23
<PAGE>
Additional Information of such Funds, the Registrant is not a party to any
management-related service contract.
Item 32. Undertakings.
------------
(a) Not applicable.
(b) Not applicable.
(c) Registrant undertakes to furnish each person to whom a prospectus
is delivered with a copy of its most current annual report to
shareholders, upon request and without charge.
(d) Insofar as indemnification for liability arising under the
Securities Act of 1933 may be permitted to directors, officers
and controlling persons of the Registrant pursuant to the
provisions set forth above in response to Item 27, or otherwise,
the registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is
against public policy as expressed in such Act and is, therefore,
unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of
any action, suit or proceeding) is asserted by such director,
officer or controlling person in connection with the securities
being registered, the registrant will, unless in the opinion of
its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question
whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final
adjudication of such issue.
C-24
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant certifies that it meets all of the
requirements for effectiveness of this Registration Statement pursuant to Rule
485(b) under the Securities Act of 1933 and has duly caused this Amendment to
its Registration Statement on Form N-1A to be signed on its behalf by the
undersigned, thereto duly authorized in the City of Little Rock, State of
Arkansas on the 30th day of April, 1998.
STAGECOACH FUNDS, INC.
By /s/ Richard H. Blank, Jr.
--------------------------------
Richard H. Blank, Jr.
Secretary and Treasurer
(Principal Financial Officer)
Pursuant to the requirements of the Securities Act of 1933, this
Amendment to its Registration Statement on Form N-1A has been signed below by
the following persons in the capacities and on the date indicated:
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
* Director, Chairman and President
- ----------------------------
(R. Greg Feltus) (Principal Executive Officer)
/s/Richard H. Blank, Jr. Secretary and Treasurer 4/30/98
- ----------------------------
(Richard H. Blank, Jr.) (Principal Financial Officer)
* Director
- ----------------------------
(Jack S. Euphrat)
* Director
- ----------------------------
(Thomas S. Goho)
* Director
- ----------------------------
(Peter G. Gordon)
* Director
- ----------------------------
(Joseph N. Hankin)
* Director
- ----------------------------
(W. Rodney Hughes)
* Director
- ----------------------------
(Tucker Morse)
*By /s/Richard H. Blank, Jr.
---------------------------
Richard H. Blank, Jr.
As Attorney-in-Fact
April 30, 1998
</TABLE>
<PAGE>
STAGECOACH FUNDS, INC.
FILE NOS. 33-42927; 811-6419
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Number Description
<S> <C>
EX-99.B10 Opinion and Consent of Counsel
EX-99.B11 Independent Auditor's Consent
</TABLE>
<PAGE>
[MORRISON & FOERSTER LLP LETTERHEAD]
May 1, 1998
Stagecoach Funds, Inc.
111 Center Street
Little Rock, Arkansas 72201
Re: Shares of Common Stock of
Stagecoach Funds, Inc.
--------------------------------
Ladies/Gentlemen:
We refer to Post-Effective Amendment No. 45 and Amendment No. 46 to the
Registration Statement on Form N-1A (SEC File Nos. 33-42927 and 811-6419) (the
"Registration Statement") of Stagecoach Funds, Inc. (the "Company") relating to
the registration of an indefinite number of shares of common stock of the
Arizona Tax-Free, California Tax-Free Bond, California Tax-Free Income,
Intermediate Bond, National Tax-Free, Oregon Tax-Free, Overland Express Sweep,
Short-Intermediate U.S. Government Income, Short-Term Government-Corporate
Income, Short-Term Municipal Income, U.S. Government Income and Variable Rate
Government Funds (the "Shares").
We have been requested by the Company to furnish this opinion as Exhibit
10 to the Registration Statement.
We have examined documents relating to the organization of the Company
and its series and the authorization and issuance of shares of its series. We
have also verified with the Company's transfer agent the maximum number of
shares issued by the Company through March 1, 1998.
Based upon and subject to the foregoing, we are of the opinion that:
The issuance and sale of the Shares by the Company has been duly and
validly authorized by all appropriate corporate action, and assuming delivery by
sale or in accord with the Company's dividend reinvestment plan in accordance
with the description set forth in the Funds' current prospectuses under the
Securities Act of 1933, as amended, the Shares will be legally issued, fully
paid and nonassessable by the Company.
We consent to the inclusion of this opinion as an exhibit to the
Registration Statement.
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In addition, we hereby consent to the use of our name and to the
reference to the description of advice rendered by our firm under the heading
"Additional Services and Other Information - Glass-Steagall Act" in the
Prospectuses, which are included as part of the Registration Statement.
Very truly yours,
/s/ MORRISON & FOERSTER LLP
MORRISON & FOERSTER LLP
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INDEPENDENT AUDITORS' CONSENT
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The Board of Directors and Shareholders
Stagecoach Funds, Inc.:
We consent to incorporation by reference in Stagecoach Funds Inc.'s
Post-Effective Amendment No. 45 to the Registration Statement Number 33-42927
on Form N-1A under the Securities Act of 1933 and Amendment No. 46 to the
Registration Statement Number 811-6419 on Form N-1A under the Investment Company
Act of 1940 of our reports dated February 6, 1998, on the financial statements
and financial highlights of the California Tax-Free Bond Fund, Overland Express
Sweep Fund, Short-Term Government-Corporate Income Fund, Short-Term Municipal
Income Fund, U.S. Government Income Fund and Variable Rate Government Fund (six
of the funds comprising Stagecoach Funds, Inc.) as of December 31, 1997, and for
the periods indicated therin, which reports have been incorporated by reference
into each statement of additional information.
We also consent to the reference to our Firm under the heading "How to Read the
Financial Highlights" in each prospectus and "Independent Auditors" in each
statement of additional information.
May 1, 1998 KPMG Peat Marwick LLP
