<PAGE> 1
PACIFIC HORIZON FUNDS, INC.
AGGRESSIVE GROWTH, ASSET ALLOCATION, BLUE CHIP,
CALIFORNIA TAX-EXEMPT BOND, CAPITAL INCOME,
CORPORATE BOND, FLEXIBLE BOND, NATIONAL MUNICIPAL BOND AND
U.S. GOVERNMENT SECURITIES FUNDS
SUPPLEMENT DATED DECEMBER 8, 1995
TO PROSPECTUSES DATED JULY 1, 1995
1a. With respect to the Asset Allocation Fund, the tables entitled "ANNUAL FUND
OPERATING EXPENSES" and "EXAMPLE" under the heading "EXPENSE SUMMARY" in the
Prospectus are amended and restated in their entirety as follows:
<TABLE>
<S> <C>
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Management Fees (after fee waivers) 0.09%
All Other Expenses (after expense
reimbursements) 1.16%
-----
Shareholder Service Payments 0.25%
Other Expenses (after expense
reimbursements) 0.91%
-----
Total Operating Expenses
(after fee waivers and expense
reimbursements) 1.25%
=====
</TABLE>
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
EXAMPLE: Assume the annual return is 5% and operating expenses are the same After 1 Year : $57
as those stated above. For every $1,000 you invest, here's how much you After 3 Years : $83
would have paid in total expenses if you closed your account after the number After 5 Years : $111
of years indicated: After 10 Years: $189
</TABLE>
Note: The preceding operating expenses and example should not be
considered a representation of future investment returns and operating expenses.
Actual investment returns and operating expenses may be more or less than those
shown.
- --------------------------------------------------------------------------------
1b. With respect to the Asset Allocation Fund, the fifth paragraph under the
heading "EXPENSE SUMMARY" in the Prospectus is amended and restated in its
entirety as follows:
As indicated in the table above, Management intends to waive fees and
reimburse certain Other Expenses on behalf of the Fund so that Total
Operating Expenses do not exceed 1.25%. Absent these fee waivers and
reimbursements, the Total Operating Expenses would be 3.82% of the Fund's
average daily net assets.
<PAGE> 2
2a. With respect to the Blue Chip Fund, the tables entitled "ANNUAL FUND
OPERATING EXPENSES" and "EXAMPLE" under the heading "EXPENSE SUMMARY" in the
Prospectus are amended and restated in their entirety as follows:
<TABLE>
<S> <C>
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Management Fees (after fee waivers) 0.15%
All Other Expenses (after expense
reimbursements) 1.15%
-----
Shareholder Service Payments 0.25%
Other Expenses (after expense
reimbursements) 0.90%
-----
Total Operating Expenses
(after fee waivers and expense
reimbursements) 1.30%
=====
</TABLE>
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
EXAMPLE: Assume the annual return is 5% and operating expenses are the same After 1 Year : $58
as those stated above. For every $1,000 you invest, here's how much you After 3 Years : $84
would have paid in total expenses if you closed your account after the number After 5 Years : $113
of years indicated: After 10 Years: $195
</TABLE>
Note: The preceding operating expenses and example should not be
considered a representation of future investment returns and operating expenses.
Actual investment returns and operating expenses may be more or less than those
shown.
- --------------------------------------------------------------------------------
2b. With respect to the Blue Chip Fund, the fifth paragraph under the heading
"EXPENSE SUMMARY" in the Prospectus is amended and restated in its entirety
as follows:
As indicated in the table above, Management intends to waive fees and
reimburse certain Other Expenses on behalf of the Fund so that Total
Operating Expenses do not exceed 1.30%. Absent these fee waivers and
reimbursements, the Total Operating Expenses would be 4.55% of the Fund's
average daily net assets.
Effective on December 11, 1995, the Prospectuses are revised as follows:
3. BISYS Fund Services Ohio, Inc., 3435 Stelzer Road, Columbus, Ohio
43219-3035, phone number 800-346-2087, will serve as transfer and dividend
disbursing agent for the Company's Aggressive Growth, Asset Allocation, Blue
Chip, California Tax-Exempt Bond, Capital Income, Corporate Bond, Flexible
Bond, National Municipal Bond and U.S. Government Securities Funds
(collectively, the "Funds" and individually, a "Fund").
4. An investor desiring to make an initial purchase of shares of a Fund by mail
should complete an Account Application and mail the Application and a check
payable to the appropriate Fund to the address on the Account Application.
All subsequent purchases of shares of a Fund made by mail should be
delivered to Pacific Horizon Funds, Inc., File No. 54634, Los Angeles,
California 90074-4634.
5. Initial and subsequent purchases and redemptions of shares of a Fund made in
person should be delivered to BISYS Fund Services Ohio, Inc., 3435 Stelzer
Road, Columbus, Ohio 43219-3035.
6. An investor desiring to make a subsequent purchase of shares of a Fund into
an already existing account by wire should contact the Fund's transfer agent
at 800-346-2087 for wiring instructions and request his or her bank to
transmit immediately available funds by wire for purchase of shares of a
Fund in the investor's name. The wire should include the investor's name and
fund account number. An investor should contact his or her bank for
information on remitting funds in this manner, including any charges imposed
by the bank for wiring funds. Initial purchases of shares into a new account
may not be made by wire.
2
<PAGE> 3
7. An investor desiring to redeem shares of a Fund by mail should deliver a
written request to the appropriate Fund, c/o Pacific Horizon Funds, Inc.,
P.O. Box 80221, Los Angeles, California 90080-9909.
8. To elect to receive dividend payments in cash, or to revoke such election,
an investor must do so in writing to the Transfer Agent at P.O. Box 80221,
Los Angeles, California 90080-9909.
9. The last sentence of the section below the heading "SHAREHOLDER GUIDE -- HOW
TO BUY SHARES -- HOW ARE SHARES PRICED?" in the Prospectus is restated in
its entirety to read as follows: "For price and yield information call (800)
346-2087."
10. The third sentence of the second paragraph below the heading "SHAREHOLDER
GUIDE -- HOW TO BUY SHARES -- WHAT PRICE WILL I RECEIVE WHEN I BUY SHARES?"
in the Prospectus is restated in its entirety to read as follows:
"Purchase orders received by a Service Organization in proper form by 4:00
p.m. Eastern time on a business day will be effected at the public offering
price calculated at 4:00 p.m. Eastern time on that day, if the Service
Organization transmits your order to the Transfer Agent by the end of the
Transfer Agent's business day."
11. Shares of Time Horizon Funds will not be included when determining reduced
sales loads under the rights of accumulation or letter of intent programs.
12. The following sentence, constituting the last sentence of the first
paragraph below the heading "SHAREHOLDER GUIDE -- HOW TO SELL SHARES -- HOW
QUICKLY CAN I RECEIVE MY REDEMPTION PROCEEDS?," is eliminated:
"If you purchase shares by wire, you must file an Account Application before
redemption requests can be honored."
13. Certificates for shares will not be issued.
14. The minimum initial investment in shares of a Fund is $200 for BankAmericard
holders with an appropriate award certificate from BankAmeriChoice Program.
15. With respect to each Fund except the California Tax-Exempt Bond Fund and the
National Municipal Bond Fund, the third and fourth exemptions contained in
the list of types of transactions exempt from the front-end sales load below
the heading "SHAREHOLDER GUIDE -- HOW TO BUY SHARES -- HOW ARE SHARES
PRICED? -- WHEN NO SALES LOAD IS APPLIED" in the Prospectus are amended and
restated in their entirety to read as follows:
- employer-sponsored employee pension or retirement plans making direct
investments in the Fund other than 403(b) plans; provided that 403(b)
plans invested in the Funds as of December 7, 1995 may continue to invest
on a no-load basis;
- any purchase of shares by an investment adviser regulated by federal or
state governmental authority when the investment adviser is purchasing
shares for its own account or for an account for which it is authorized to
make investment decisions (i.e., a discretionary account) other than
purchases for 403(b) plans; provided that investment advisers who have
invested 403(b) plans in the Funds on behalf of existing and new clients
as of December 7, 1995 may continue to invest on a no-load basis;
16. The sixth exemption (fourth exemption with respect to the California
Tax-Exempt Bond and National Municipal Bond Funds) contained in the list of
the types of transactions exempt from the front-end sales load below the
heading "SHAREHOLDER GUIDE -- HOW TO BUY SHARES -- HOW ARE SHARES
PRICED? -- WHEN NO SALES LOAD IS APPLIED" in the Prospectus is amended and
restated in its entirety to read as follows with respect to each Fund:
- any purchase of shares by clients of The Private Bank of Bank of America
Illinois or by Private Banking clients of Seattle-First National Bank or
by or on behalf of agency accounts administered by any bank or trust
company affiliate of Bank of America;
3
<PAGE> 4
17. The following exemption is added with respect to each Fund to the list of
individuals exempt from the front-end sales load below the heading
"SHAREHOLDER GUIDE -- HOW TO BUY SHARES -- HOW ARE SHARES PRICED? -- WHEN NO
SALES LOAD IS APPLIED" in the Prospectus:
- holders of the BankAmericard with an appropriate award certificate from
the BankAmeriChoice Program.
COPTASTKL95
4
<PAGE> 5
PACIFIC HORIZON FUNDS, INC.
PACIFIC HORIZON SHARES OF THE PRIME, TREASURY, GOVERNMENT,
TREASURY ONLY, TAX-EXEMPT MONEY AND CALIFORNIA TAX-EXEMPT
MONEY MARKET FUNDS
SUPPLEMENT DATED DECEMBER 8, 1995
TO PROSPECTUSES DATED JULY 1, 1995
Effective on December 11, 1995, the Prospectuses are revised as follows:
1. BISYS Fund Services Ohio, Inc., 3435 Stelzer Road, Columbus, Ohio 43219-3035,
phone number 800-346-2087, will serve as transfer and dividend disbursing
agent for the Pacific Horizon Shares ("Shares") of the Company's Prime,
Treasury, Government, Treasury Only, Tax-Exempt Money and California
Tax-Exempt Money Market Funds (collectively, the "Funds" and individually, a
"Fund").
2. An investor desiring to make an initial purchase of Shares of a Fund by mail
should complete an Account Application and mail the Application and a check
payable to the appropriate Fund to the address on the Account Application.
All subsequent purchases of Shares of a Fund made by mail should be delivered
to Pacific Horizon Funds, Inc., File No. 54634, Los Angeles, California
90074-4634.
3. Initial and subsequent purchases and redemptions of Shares of a Fund made in
person should be delivered to BISYS Fund Services Ohio, Inc., 3435 Stelzer
Road, Columbus, Ohio 43219-3035.
4. An investor desiring to make a subsequent purchase of Shares of a Fund into
an already existing account by wire should contact the Fund's transfer agent
at 800-346-2087 for wiring instructions and request his or her bank to
transmit immediately available funds by wire for purchase of Shares of a Fund
in the investor's name. The wire should include the investor's name and fund
account number. An investor should contact his or her bank for information on
remitting funds in this manner, including any charges imposed by the bank for
wiring funds. Initial purchases of Shares into a new account may not be made
by wire.
5. An investor desiring to redeem Shares of a Fund by mail should deliver a
written request to the appropriate Fund, c/o Pacific Horizon Funds, Inc.,
P.O. Box 80221, Los Angeles, California 90080-9909.
6. To elect to receive dividend payments in cash, or to revoke such election,
an investor must do so in writing to the Transfer Agent at P.O. Box 80221,
Los Angeles, California 90080-9909.
7. The last sentence of the fourth paragraph below the heading "PURCHASE OF
SHARES" in the Prospectus is restated in its entirety to read as follows:
"For price and yield information call (800) 346-2087."
8. The following sentence below the heading "REDEMPTION OF SHARES -- OTHER
REDEMPTION INFORMATION" in the Prospectus is eliminated:
"An investor having purchased shares by wire must have filed an Account
Application before any redemption requests can be honored."
9. Certificates for shares will not be issued.
10. The following is added with respect to the Prime Fund immediately below the
chart entitled "SHAREHOLDER TRANSACTION EXPENSES" under the heading "EXPENSE
SUMMARY" in the Prospectus:
"No contingent deferred sales load is charged, except that Pacific Horizon
Shares of the Prime Fund acquired through exchange of Class B shares offered
with a contingent deferred sales charge ("CDSC") of Time Horizon Funds (an
open-end investment company managed by Bank of America) will be subject to a
CDSC of up to a maximum of 5% upon redemption in accor-
<PAGE> 6
dance with the prospectus for the Time Horizon Funds."
11. The following is added with respect to the Prime Fund immediately below the
chart entitled "EXAMPLE" under the heading "EXPENSE SUMMARY" in the
Prospectus:
"The Example does not include deduction at redemption of a CDSC for shares
of the Prime Fund acquired through exchange of Class B shares of the Time
Horizon Funds."
12. The following two sentences are added with respect to the Prime Fund as the
fifth and sixth sentences under the heading "REDEMPTION OF SHARES" in the
Prospectus:
"Pacific Horizon Shares of the Prime Fund acquired through exchange of Class
B shares of the Time Horizon Funds are subject to a CDSC upon redemption in
accordance with the prospectus for the Time Horizon Funds. For purposes of
computing the CDSC, the length of time of ownership will be measured from
the date of the original purchase of Class B shares and will not include any
period of ownership of the Pacific Horizon Shares of the Prime Fund."
13. The sixth sentence of the section entitled "REDEMPTION OF SHARES -- CHECK
REDEMPTION" in the Prospectus is amended and restated in its entirety to
read as follows with respect to the Prime Fund:
"When a Check is presented to the Transfer Agent for payment, the Transfer
Agent, as the investor's agent, will cause the Fund to redeem a sufficient
number of the investor's shares to cover the amount of the Check and any
applicable CDSC with respect to the Prime Fund."
14. The following sentence below the heading "REDEMPTION OF SHARES -- CHECK
REDEMPTION" in the Prospectus is eliminated: "All cleared checks will be
returned to the investor on a monthly basis."
15. The ninth sentence of the section entitled "REDEMPTION OF SHARES -- CHECK
REDEMPTION" in the Prospectus is amended and restated in its entirety to
read as follows with respect to the Prime Fund:
"Because dividends accrue daily and because a CDSC may be applicable with
respect to the Prime Fund, checks should not be used to close an account."
16. The first sentence of the second paragraph of the section entitled
"REDEMPTION OF SHARES -- OTHER REDEMPTION INFORMATION" in the Prospectus is
amended and restated in its entirety to read as follows with respect to the
Prime Fund:
"The Fund imposes no charge when shares are redeemed unless Pacific Horizon
Shares of the Prime Fund have been acquired through exchange of Class B
shares of the Time Horizon Funds, in which case any applicable CDSC will be
charged in accordance with the prospectus for the Time Horizon Funds."
17. The following sentence is added as the last sentence of the second paragraph
of the section entitled "REDEMPTION OF SHARES -- OTHER REDEMPTION
INFORMATION" in the Prospectus with respect to the Prime Fund:
"A CDSC will not be imposed upon such involuntary redemptions with respect
to the Prime Fund."
18. The following sentence is added as the last sentence under the heading
"SHAREHOLDER SERVICES -- INDIVIDUAL RETIREMENT ACCOUNTS ("IRAS")" in the
Prospectus with respect to the Prime Fund:
"The CDSC with respect to shares of the Prime Fund acquired through exchange
of Class B shares of the Time Horizon Funds will not be charged on
redemptions made in connection with minimum required distributions from an
IRA due to the shareholders having reached age 70 1/2."
19. The first sentence of the section entitled "SHAREHOLDER
SERVICES -- EXCHANGES" in the Prospectus is amended and restated in its
entirety to read as follows with respect to the Prime Fund:
"The Exchange Privilege enables an investor to exchange Pacific Horizon
Shares of a Fund for:
2
<PAGE> 7
like shares in another portfolio of the Company, or like shares of any
investment portfolio of Time Horizon Funds, provided, however, (i) that
Pacific Horizon Shares of the Prime Fund acquired through an exchange of
Class B shares of an investment portfolio of Time Horizon Funds may only be
exchanged for Class B shares of an investment portfolio of Time Horizon
Funds and, (ii) that such other shares may be legally sold in the state of
an investor's residence."
20. The following is added immediately after the fourth sentence under the
heading "SHAREHOLDER SERVICES -- EXCHANGES" in the Prospectus with respect
to the Prime Fund:
"Class B shares of Time Horizon Funds offered with a CDSC may be exchanged
for Pacific Horizon Shares of the Prime Fund. Such exchange-acquired Pacific
Horizon Shares of the Prime Fund will be subject to a CDSC upon redemption
in accordance with the prospectus for the Time Horizon Funds. For purposes
of computing the CDSC, the length of time of ownership will be measured from
the date of the original purchase of Class B shares and will not include any
period of ownership of the Pacific Horizon Shares of the Prime Fund."
21. The following sentence is added as the last sentence of the section entitled
"SHAREHOLDER SERVICES -- AUTOMATIC WITHDRAWAL PLAN" in the Prospectus with
respect to the Prime Fund:
"Use of this Plan may be disadvantageous for shares of the Prime Fund
acquired through exchange of Class B shares due to the potential need to pay
a CDSC."
22. The following section is added immediately below the section entitled
"SHAREHOLDER SERVICES -- AUTOMATIC WITHDRAWAL PLAN" in the Prospectus with
respect to the Prime Fund:
"REINSTATEMENT PRIVILEGES. You may reinvest all or any portion of proceeds
received from the redemption of shares of the Prime Fund, which you had acquired
through exchanges of Class B shares of the Time Horizon Funds, within 90 days of
the redemption trade date. Such reinvestment must be made in Class B shares of
the Time Horizon Funds. Upon such a reinvestment, the distributor will credit to
an investor's account any contingent deferred sales charge imposed on any
redeemed shares. For purposes of computing the CDSC upon redemption of shares
reinvested through this Privilege, the length of time of ownership will be
measured from the date of the original purchase of Class B shares and will not
include any period of ownership of the Pacific Horizon Shares of the Prime Fund.
Shares so reinvested will be purchased at a price equal to the net asset value
next determined after the Transfer Agent receives a reinstatement request and
payment in proper form.
If an investor wishes to use this Privilege, he must submit a written request to
the Transfer Agent stating that he is eligible to use the Privilege. The
reinstatement request and payment must be received within 90 days of the trade
date of the redemption. Currently, there are no restrictions on the number of
times an investor may use this Privilege.
Generally, exercising the Reinstatement Privilege will not affect the character
of any gain or loss realized on redemption for federal income tax purposes.
However, if a redemption results in a loss, the reinstatement may result in the
loss being disallowed under IRS "wash sale" rules."
3
<PAGE> 8
COPTASTKMM95
4
<PAGE> 9
PACIFIC HORIZON FUNDS, INC.
HORIZON SERVICE SHARES OF THE PRIME, TREASURY, GOVERNMENT,
TREASURY ONLY, TAX-EXEMPT MONEY AND CALIFORNIA TAX-EXEMPT
MONEY MARKET FUNDS
SUPPLEMENT DATED DECEMBER 8, 1995
TO PROSPECTUSES DATED JULY 1, 1995
Effective on December 11, 1995, the Prospectuses are revised as follows:
1. BISYS Fund Services Ohio, Inc., 3435 Stelzer Road, Columbus, Ohio 43219-3035,
will serve as transfer and dividend disbursing agent for Horizon Service
Shares of the Prime, Treasury, Government, Treasury Only, Tax-Exempt Money
and California Tax-Exempt Money Market Funds (collectively, the "Funds").
2. Concord Financial Services, Inc. will no longer serve as sub-transfer agent
for certain Horizon Service Share accounts of the Funds.
COPTASTKIM95
<PAGE> 10
PROSPECTUS
JULY 1, 1995
PACIFIC HORIZON AGGRESSIVE GROWTH FUND
A series of shares of Pacific Horizon
Funds, Inc.
- --------------------------------------------------------------------------------
The PACIFIC HORIZON AGGRESSIVE GROWTH FUND (the "Fund") is a diversified mutual
fund whose investment objective is to maximize capital appreciation. In seeking
its investment objective, the Fund invests primarily in common stocks and
securities convertible into common stocks. Income received is incidental to the
Fund's objective of capital appreciation. The Fund is offered by Pacific Horizon
Funds, Inc. (the "Company"), an open-end, series management investment company.
Bank of America National Trust and Savings Association ("Bank of America" or the
"investment adviser") serves as the Fund's investment adviser. Based in San
Francisco, California, Bank of America and its affiliates have over $50 billion
under management, including over $10 billion in mutual funds.
The Fund may be suited for investors who seek long-term capital appreciation and
can assume above average investment risk.
This Prospectus describes concisely the information about the Fund and the
Company that you should know before investing. Please read it carefully and
retain it for future reference.
More information about the Fund is contained in a Statement of Additional
Information that has been filed with the Securities and Exchange Commission. To
obtain a free copy, call 800-332-3863. The Statement of Additional Information,
as it may be revised from time to time, is dated July 1, 1995 and is
incorporated by reference into this Prospectus.
- --------------------------------------------------------------------------------
Fund shares are not bank deposits or obligations of, or guaranteed or endorsed
by, Bank of America or any of its affiliates and are not federally insured by,
guaranteed by, obligations of or otherwise supported by the U.S. Government, the
Federal Deposit Insurance Corporation, the Federal Reserve Board or any other
governmental agency. Investment in the Fund involves investment risk, including
the possible loss of principal amount invested.
- --------------------------------------------------------------------------------
LIKE ALL MUTUAL FUNDS, THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR
HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
This Prospectus is part of a Registration Statement that has been filed with the
Securities and Exchange Commission in Washington, D.C. under the Securities Act
of 1933.
No person has been authorized to give any information or to make any
representations in connection with the offer of the Fund's shares, other than as
contained in this Prospectus and the Fund's official sales literature.
Therefore, other information and representations must not be relied upon as
having been authorized by the Fund. This Prospectus does not constitute an offer
in any State in which, or to any person to whom, such offering may not lawfully
be made.
- --------------------------------------------------------------------------------
<PAGE> 11
CONTENTS
<TABLE>
<S> <C> <C>
EXPENSE SUMMARY 2
FINANCIAL HIGHLIGHTS 3
FUND INVESTMENTS 4 INVESTMENT OBJECTIVE
4 TYPES OF INVESTMENTS
5 FUNDAMENTAL LIMITATIONS
5 OTHER INVESTMENT PRACTICES
SHAREHOLDER GUIDE 9 HOW TO BUY SHARES
9 What Is My Minimum Investment In The Fund?
9 How Are Shares Priced?
11 How Can I Buy Shares?
13 What Price Will I Receive When I Buy Shares?
14 What Else Should I Know To Make A Purchase?
14 HOW TO SELL SHARES
14 How Do I Redeem My Shares?
16 What NAV Will I Receive For Shares I Want To Sell?
16 What Kind of Paperwork Is Involved In Selling
Shares?
16 How Quickly Can I Receive My Redemption Proceeds?
16 Do I Have Any Reinstatement Privileges After I Have
Redeemed Shares?
16 DIVIDEND AND DISTRIBUTION POLICIES
SHAREHOLDER SERVICES 17 CAN I USE THE FUND IN MY RETIREMENT PLAN?
17 CAN I EXCHANGE MY INVESTMENT FROM ONE FUND TO
ANOTHER?
18 WHAT IS TELETRADE?
18 CAN I ARRANGE TO HAVE AUTOMATIC INVESTMENTS MADE ON
A REGULAR BASIS?
18 WHAT IS DOLLAR COST AVERAGING AND HOW CAN I
IMPLEMENT IT?
19 CAN I ARRANGE PERIODIC WITHDRAWALS?
19 CAN MY DIVIDENDS FROM THE FUND BE INVESTED IN OTHER
FUNDS?
19 IS THERE A SALARY DEDUCTION PLAN AVAILABLE?
THE BUSINESS OF THE FUND 20 FUND MANAGEMENT
20 Service Providers
21 TAX INFORMATION
22 MEASURING PERFORMANCE
23 DESCRIPTION OF SHARES
23 PLAN PAYMENTS
- ------------------------------------------------------------------------------------------------------------------------
DISTRIBUTOR: INVESTMENT ADVISER:
Concord Financial Group, Inc. Bank of America National Trust and Savings Association
125 West 55th Street 555 California Street
New York, NY 10019 San Francisco, CA 94104
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 12
EXPENSE SUMMARY
SHAREHOLDER TRANSACTION EXPENSES are charges you pay when buying or selling
shares of the Fund. ANNUAL FUND OPERATING EXPENSES are paid out of the Fund's
assets and include fees for portfolio management, maintenance of shareholder
accounts, general Fund administration, shareholder servicing, accounting and
other services.
At right is a summary of the shareholder transaction expenses imposed by the
Fund and its operating expenses expected to be incurred during the current
fiscal year. This information has been restated to assume current fees had been
in effect during the previous fiscal year. Actual expenses may vary. A
hypothetical example based on the summary is also shown.
<TABLE>
<S> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load Imposed on
Purchases (as a percentage of
offering price) 4.50%
Sales Load Imposed on Reinvested
Dividends None
Deferred Sales Load None
Redemption Fees None
Exchange Fee None
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Management Fees 0.90%
All Other Expenses 0.67%
------
Shareholder Service Payments 0.25%
Other Expenses 0.42%
-----
Total Operating Expenses 1.57%
------
------
</TABLE>
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
EXAMPLE: Assume the Fund's annual return is 5% and its operating expenses After 1 Year : $60
are the same as those stated above. For every $1,000 you invest, here's After 3 Years : $92
how much you would have paid in total expenses if you closed your account After 5 Years : $127
after the number of years indicated: After 10 Years: $223
</TABLE>
Note: The preceding operating expenses and example should not be considered a
representation of past or future investment returns and operating expenses.
Actual investment returns and operating expenses may be more or less than those
shown.
- --------------------------------------------------------------------------------
This expense information is provided to help you understand the expenses you
would bear either directly (as with transaction expenses) or indirectly (as with
annual operating expenses) as a Fund shareholder.
Management fees consist of:
- - an investment advisory fee payable at the annual rate of .60% of the Fund's
net assets; and
- - an administration fee payable at the annual rate of .30% of the Fund's net
assets.
For a further description of shareholder transaction expenses and the Fund's
operating expenses, see the sections entitled "Shareholder Guide" and "The
Business of the Fund" in this Prospectus.
2
<PAGE> 13
FINANCIAL HIGHLIGHTS
The table below shows certain information concerning the investment results for
the Fund for the periods indicated. The information for each of the five fiscal
years in the five year period ended February 28, 1995 has been audited by Price
Waterhouse LLP, the Fund's independent accountants, whose unqualified report on
the financial statements containing such information is incorporated by
reference in the Statement of Additional Information.
The financial statements for each of the four years in the period ended February
28, 1989, to which the financial highlights for those years relates, was audited
by other independent accountants whose report dated April 20, 1989 expressed an
unqualified opinion on such financial statements.
The Financial Highlights should be read in conjunction with the financial
statements and notes thereto and the unqualified report of the independent
accountants which are incorporated by reference in the Statement of Additional
Information. Further information about the performance of the Fund is available
in the annual report to shareholders. Both the Statement of Additional
Information and the annual report to shareholders may be obtained from the Fund
free of charge by calling 800-332-3863.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED
----------------------------------------------------------------
FEB. 28, FEB. 28, FEB. 28, FEB. 29, FEB. 28,
1995 1994 1993+ 1992 1991
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Net asset value per share, beginning
of period........................... $ 25.70 $ 24.68 $ 27.93 $ 22.51 $ 17.17
--------- --------- --------- --------- ---------
Income (loss) from Investment
Operations:
Net investment income (loss)........ (0.22) (0.37) (0.26) (0.15) (0.17)
Net realized and unrealized gain
(loss) on securities.............. (0.95) 3.02 (2.26) 9.21 6.33
--------- --------- --------- --------- ---------
Total income (loss) from investment
operations........................ (1.17) 2.65 (2.52) 9.06 6.16
--------- --------- --------- --------- ---------
Less Distributions:
Dividends from net investment
income............................ -- -- -- -- --
Distributions from net realized
gains on securities............... (3.92) (1.63) (0.73) (3.64) (0.82)
--------- --------- --------- --------- ---------
Total dividends and distributions.... (3.92) (1.63) (0.73) (3.64) (0.82)
--------- --------- --------- --------- ---------
Net change in net asset value per
share............................... (5.09) 1.02 (3.25) 5.42 5.34
--------- --------- --------- --------- ---------
Net asset value per share, end of
period.............................. $ 20.61 $ 25.70 $ 24.68 $ 27.93 $ 22.51
========= ========= ========= ========= =========
Total Return......................... (3.59)% 10.54% (8.76)% 41.11% 37.01%
Ratios/Supplemental Data:
Net assets, end of period (000)..... $ 131,879 $ 158,091 $ 159,517 $ 178,228 $ 107,421
Ratio of expenses to average net
assets............................ 1.46% 1.52% 1.49%++ 1.44%++ 1.55%++
Ratio of net investment income
(loss) to average net assets...... 1.04% 1.20% 1.15%++ 1.14%++ 0.85%++
Portfolio turnover rate............. 92% 43% 43% 73% 155%
</TABLE>
<TABLE>
<CAPTION>
FEB. 28, FEB. 28, FEB. 29, FEB. 28, FEB. 28,
1990 1989 1988 1987+++ 1986+++
----------- -------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Net asset value per share, beginning
of period...........................$ 14.49 $ 13.41 $ 17.67 $ 12.41 $ 8.96
----------- -------- ----------- ----------- -----------
Income (loss) from Investment
Operations:
Net investment income (loss)........ (0.17) (0.06) 0.08 0.01 0.01
Net realized and unrealized gain
(loss) on securities.............. 2.85 1.14 (3.37) (5.28) 3.47
----------- -------- ----------- ----------- -----------
Total income (loss) from investment
operations........................ 2.68 1.08 (3.29) 5.29 3.48
----------- -------- ----------- ----------- -----------
Less Distributions:
Dividends from net investment
income............................ -- -- (0.10) (0.03) (0.03)
Distributions from net realized
gains on securities............... -- -- (0.87) -- --
----------- -------- ----------- ----------- -----------
Total dividends and distributions.... -- -- (0.97) (0.03) (0.03)
----------- -------- ----------- ----------- -----------
Net change in net asset value per
share............................... 2.68 1.08 (4.26) 5.26 3.45
----------- -------- ----------- ----------- -----------
Net asset value per share, end of
period..............................$ 17.17 $ 14.49 $ 13.41 $ 17.67 $ 12.41
======= ======= ========= ========= =======
Total Return......................... 18.50% 8.05%++++ (18.42)%++++ 42.55%++++ 38.94%++++
Ratios/Supplemental Data:
Net assets, end of period (000).....$ 85,637 $ 91,487 $ 134,000 $ 169,489 $ 34,828
Ratio of expenses to average net
assets............................ 1.51%++ 1.28%++ 1.21%++ 1.20%++ 1.50%++
Ratio of net investment income
(loss) to average net assets...... 0.82%++ (0.30)%++ 0.55%++ 0.15%++ 0.57%++
Portfolio turnover rate............. 175% 276% 384% 250% 234%
</TABLE>
- ---------------
+ Security Pacific National Bank served as investment adviser through
April 21, 1992. Bank of America National Trust and Savings Association
served as investment adviser commencing April 22, 1992.
++ Net of fee waivers and expense reimbursements which had the effect of
decreasing the ratio of expenses to average net assets and increasing the
ratio of net investment income (loss) to average net assets by 0.02%,
0.03%, 0.09%, 0.01%, 0.26%, 0.12%, 0.22% and 0.22%, for the years ended
February 28, 1993, February 29, 1992, February 28, 1991, February 28,
1990, February 28, 1989, February 29, 1988, February 28, 1987 and
February 28, 1986, respectively.
+++ Restated to reflect a 2-for-1 stock split at close of business on February
27, 1987.
++++ Unaudited.
Note: The total return figures presented do not include the effect of the
maximum 4.50% sales charge.
3
<PAGE> 14
FUND INVESTMENTS
THE PACIFIC HORIZON AGGRESSIVE GROWTH FUND SEEKS LONG-TERM GROWTH OF CAPITAL.
ANY INCOME RECEIVED IS INCIDENTAL TO CAPITAL APPRECIATION. ITS PORTFOLIO
CONSISTS PRIMARILY OF COMMON STOCKS AND CONVERTIBLE SECURITIES OF ISSUERS FROM A
VARIETY OF INDUSTRIES THAT IT IS BELIEVED HAVE THE POTENTIAL FOR ABOVE-AVERAGE
GROWTH.
THE FUND IS APPROPRIATE FOR INVESTORS WHO WANT:
- - LONG-TERM ASSET GROWTH AND ARE WILLING TO ACCEPT STOCK MARKET VOLATILITY
- - TO PARTICIPATE IN A DIVERSIFIED PORTFOLIO OF COMPANIES WITH STRONG GROWTH
POTENTIAL
---------------------------------------------------------
INVESTMENT OBJECTIVE
THE INVESTMENT OBJECTIVE OF THE FUND IS TO MAXIMIZE CAPITAL APPRECIATION.
---------------------------------------------------------
TYPES OF INVESTMENTS
The Fund is a diversified portfolio comprised mainly of common stocks and
securities convertible into common stocks. Fund holdings will consist primarily
of common stocks of domestic companies, most of which will be
smaller-capitalized companies, that Bank of America expects will achieve
above-average growth in earnings and price. Smaller-capitalized companies
generally have limited product lines, markets and financial resources, and are
dependent upon a limited management group. As a result of the Fund's
investments, an investment in the Fund involves substantial risks (see "Risk
Factors" below). Although the Fund will strive to meet its investment objective,
there can be no assurance it will be able to do so.
While the Fund intends to invest primarily in common stock and securities
convertible into such stock, its policy is flexible as to the proportion of its
assets that will be invested in common stocks, and the proportion may be changed
without shareholder approval. How-ever, as a matter of fundamental policy, not
less than 65% of the Fund's total assets will be invested in equity securities
(except during temporary defensive periods).
During temporary defensive periods, or at other times subject to the limitation
above, the Fund may:
- - hold cash equivalents such as money market instruments, which include
short-term bank time deposits, certificates of deposit and bankers'
acceptances, commercial paper (which is unsecured promissory notes issued by
corporations) and obligations issued or guaranteed by the U.S. Government, its
agencies or instrumentalities (some of which may be subject to repurchase
agreements); and
- - invest in preferred stocks and other fixed-income corporate and U.S.
Government bonds with ratings of AA or better by a nationally recognized
statistical rating organization (or unrated bonds of comparable quality) that
cannot be converted into common stocks.
In addition, up to 20% of the Fund's total assets may be invested in securities
issued by foreign issuers. Such investments will be made either directly in such
issuers or indirectly through American Depository Receipts ("ADRs") or
closed-end investment companies. (Investments in closed-end investment companies
will not make up more than 10% of the Fund's total assets.)
The Fund may also purchase put and call options, write covered call options,
purchase and sell futures contracts and purchase futures options as described
below under "Other Investment Practices."
4
<PAGE> 15
FUNDAMENTAL LIMITATIONS
The Fund's investment objective may not be changed without a vote by the holders
of a majority of the Fund's outstanding shares. Policies requiring such a vote
to effect a change are known as "fundamental." A number of the Fund's other
fundamental investment limitations are summarized below.
1. Except for temporary defensive periods, the Fund will invest at least 65% of
its total assets in equity securities.
2. The Fund may not invest 25% or more of its total assets in one or more
issuers conducting their principal business activities in the same industry
(with certain exceptions).
3. The Fund may not issue senior securities or borrow money except for temporary
purposes in amounts up to 10% of its total assets at the time of such
borrowing. The Fund will not purchase securities if any borrowings are
outstanding.
4. The Fund may not make loans, although it may invest in debt securities, enter
into repurchase agreements and lend its portfolio securities to a limited
extent.
5. The Fund may not purchase securities on margin, make short sales of
securities or maintain a short position, although the Fund may engage in
transactions in futures contracts and related options.
6. The Fund may not invest more than 10% of its total assets in instruments that
the Board of Directors determines to be illiquid. Investors should note,
however, that certain securities that might otherwise be considered illiquid,
such as variable amount master demand notes with maturities of nine months or
less, as well as securities that are not registered under the federal
securities laws but for which the Board of Directors or Bank of America
(pursuant to guidelines adopted by the Board) has determined a liquid trading
market exists, are not subject to this 10% limitation.
7. The Fund may not purchase or sell commodity contracts, or invest in oil, gas
or mineral exploration or development programs (with certain exceptions,
including the ability to enter into futures contracts and related options).
* * *
A complete list of the Fund's fundamental investment limitations is set out in
full in the Statement of Additional Information.
OTHER INVESTMENT PRACTICES
MONEY MARKET SECURITIES. The money market instruments noted above, as well as
repurchase agreements and variable and floating rate instruments, may be
purchased by the Fund as long as such instruments are rated within the two
highest rating categories. Unrated instruments may also be purchased if they are
of comparable quality. Investments in variable and floating rate instruments
that have no active trading market and are not payable upon seven days' notice
will be subject to the percentage limitation on illiquid instruments described
above. During the current fiscal year, the Fund does not expect to invest more
than 5% of its total assets at any time in any particular type of money market
instrument.
OPTIONS TRANSACTIONS. The Fund may sell, or "write," covered call options and
may buy put and call options on particular securities or various stock indices.
In addition, in order to "hedge" against changes in currency exchange rates, the
Fund may acquire options relating to foreign currencies.
A call option for a particular security gives the purchaser of the option the
right to buy, and a writer the obligation to sell, the underlying security at
the stated exercise price at any time prior to the expiration of the option,
regardless of the market price of the security. The premium paid to the writer
is the consideration for undertaking the obligations under the option contract.
A put option for a particular security gives the purchaser the right to sell the
underlying security at the stated exercise price at any time prior to
5
<PAGE> 16
the expiration date of the option, regardless of the market price of the
security. In contrast to an option on a particular security, an option on a
stock index provides the holder with the right to receive or obligation to make
a cash settlement upon exercise of the option.
Options purchased by the Fund will not exceed 5% and options written by the Fund
will not exceed 25% of its net assets. All options will be listed on a national
securities exchange and issued by the Options Clearing Corporation.
Options trading is a highly specialized activity and carries greater than
ordinary investment risk. Purchasing options may result in the complete loss of
the amounts paid as premiums to the writer of the option. In writing a covered
call option, the Fund gives up the opportunity to profit from an increase in the
market price of the underlying security above the exercise price (except to the
extent the premium represents such a profit). Moreover, the Fund will not be
able to sell the underlying security on which a call option has been written
until the option expires or is exercised or the Fund closes out the option. In
addition, except to the extent that a call option written by the Fund on a
particular index is covered by an option on the same index purchased by the
Fund, movements in the index may cause the Fund to incur a loss. Such loss might
be lessened to the extent that the value of the securities held by the Fund
changed during the time the option was outstanding.
STOCK INDEX AND FOREIGN CURRENCY FUTURES. The Fund may purchase and sell stock
index and foreign currency futures contracts (and may purchase related options)
in an effort to "hedge" against changes in the value of securities that the Fund
holds in its portfolio or which it intends to purchase. Such changes could occur
as a result of market conditions or fluctuating currency exchange rates. These
transactions will only be entered when they are appropriate to reduce the risks
inherent in the management of the Fund.
The Fund may not purchase or sell a futures contract or purchase a related
option unless immediately after any such transaction the sum of the aggregate
amount of margin deposits on its existing futures positions and the amount of
premiums paid for related options does not exceed 5% of the Fund's total assets
(after taking into account certain technical adjustments).
More information regarding futures contracts and related options can be found in
Appendix B to the Statement of Additional Information.
SECURITIES LENDING. In order to earn additional income, the Fund may lend its
portfolio securities to broker-dealers that Bank of America considers to be of
good standing. If the broker-dealer should become bankrupt, however, the Fund
could experience delays in recovering its securities. A securities loan will
only be made when, in Bank of America's judgment, the possible reward from the
loan justifies the possible risks. In addition, such loans will not be made if,
as a result, the value of securities loaned by the Fund exceeds 30% of its total
assets. Securities loans will be fully collateralized.
BORROWINGS. The Fund may make limited borrowings and may enter into reverse
repurchase agreements (agreements under which the Fund sells portfolio
securities and agrees to buy them back later at an agreed-upon time and price)
for temporary purposes or to meet redemption requests. Borrowings magnify the
potential for gain or loss on amounts invested resulting in an increase in the
speculative character of the Fund's shares.
When the Fund enters into a reverse repurchase agreement, it places in a
separate custodial account either liquid assets or other liquid high grade debt
securities that have a value equal to or greater than the repurchase price
(including accrued interest). The account is then continuously monitored to make
sure that an appropriate value is maintained. Reverse repurchase agreements
involve the possible risk that the value of portfolio securities the Fund
relinquishes may decline below the price the Fund must pay when the transaction
closes.
6
<PAGE> 17
CLOSED-END INVESTMENT COMPANIES. The Fund may acquire shares of closed-end
investment companies, including companies that invest in foreign issuers,
subject to the requirements of applicable securities laws. Although these
closed-end companies may have policies that differ from the Fund's policies,
their management and other types of expenses will be similar to those borne by
the Fund. When the Fund invests in another investment company, it pays a pro
rata portion of that company's expenses. Such expenses are in addition to the
expenses the Fund pays in connection with its own operations.
DIVERSIFICATION. In compliance with current Securities and Exchange Commission
rules, the Fund intends to limit its investments in the securities of any single
issuer to no more than 5% of its total assets (measured at the time of
purchase), although up to 25% of its total assets may be invested without regard
to this limitation.
RISK FACTORS. Although investing in any mutual fund has certain inherent risks,
an investment in the Fund may have even greater risks than investments in most
other types of mutual funds. The Fund is not a complete investment program, and
it may not be appropriate for an investor if he or she cannot bear financially
the loss of at least a significant portion of his or her investment. The Fund's
net asset value per share is subject to rapid and substantial changes because
greater risk is assumed in seeking maximum growth. The securities of the smaller
companies which the Fund expects to emphasize may be subject to more abrupt or
erratic market movements than larger, more established companies, both because
the securities typically are traded in lower volume and because the issuers
typically are subject to a greater degree to changes in earnings and prospects.
Many of the securities which Bank of America believes would have the greatest
growth potential may be considered highly speculative. Additionally, such
securities may not be traded every day or in the volume typical of trading on a
national securities exchange. As a result, the disposition by the Fund of
portfolio securities, to meet redemptions or otherwise, may require the Fund to
sell these securities at a discount from market prices, to sell during periods
when such disposition is not desirable, or to make many small sales over a
lengthy period of time.
The Fund's investments in foreign securities, whether made directly or
indirectly, also involve certain inherent risks, including political or economic
instability of the issuer or the country of issue, the difficulty of predicting
international trade patterns, changes in foreign currency exchange rates and the
possibility of adverse changes in investment or exchange control regulations.
There is typically less publicly available information about a foreign company
than about a U.S. company. Moreover, these companies may be subject to less
stringent reserve, auditing and reporting requirements than their U.S.
counterparts. Additionally, foreign stock markets are generally not as developed
or efficient as those in the U.S., and in most foreign markets volume and
liquidity are less than in the U.S. Fixed commissions on foreign stock exchanges
are also generally higher than the negotiated commissions on U.S. exchanges, and
there is generally less government supervision and regulation of foreign stock
exchanges, brokers and companies than in the U.S. There is also the possibility
that foreign governments could expropriate assets or levy confiscatory taxes,
set limitations on the removal of assets or suffer adverse diplomatic
developments. Because of these and other factors, foreign securities acquired by
the Fund may be subject to greater price fluctuation than securities of U.S.
companies.
SPECIAL RISKS ASSOCIATED WITH OPTIONS. The Fund will only write options where
Bank of America believes a liquid secondary market will exist on a national
securities exchange for options of the same series, which would permit the Fund
to close out its option position. There is no assurance that a liquid secondary
market will exist on an exchange for a particular option or at any particular
time. In fact, for some options no secondary market on an exchange may exist at
all. If the Fund cannot close out an option, it will
7
<PAGE> 18
not be able to sell the securities underlying the option until the option
expires or is exercised.
Furthermore, the Fund's ability to engage in transactions in options may be
limited by IRS requirements on its gross income from certain securities,
including options and futures contracts, held by the Fund for less than three
months. Bank of America does not believe that transactions in options will
significantly affect the Fund's ability to comply with IRS requirements.
The times of day that options on particular securities are sold may not be the
same as those during which the securities themselves are traded, which means
that significant activity could occur in the markets for the underlying
securities that would not be reflected in the options markets.
PORTFOLIO TURNOVER. The Fund's investment practices, which involve an effort to
own stocks during periods of accelerating earnings growth and strong relative
price momentum, may result in portfolio turnover greater than that of other
mutual fund portfolios. Turnover may require payment of brokerage commissions,
impose other transaction costs and could increase substantially the amount of
income received by the Fund that constitutes taxable capital gains. To the
extent capital gains are realized, distributions from those gains may be
ordinary income for federal tax purposes (see "Tax Information"). Portfolio
turnover will not be a limiting factor in making investment decisions for the
Fund.
Investment decisions for the Fund are made independently from those for other
investment companies and accounts managed by Bank of America and its affiliated
entities. Such other investment companies and accounts may also invest in the
same securities as the Fund. When a purchase or sale of the same security is
made at substantially the same time on behalf of the Fund and another investment
company or account, available investments or opportunities for sales will be
equitably allocated pursuant to procedures of Bank of America. In some
instances, this investment procedure may adversely affect the price paid or
received by the Fund or the size of the position obtained or sold by the Fund.
In allocating purchase and sale orders for portfolio securities (involving the
payment of brokerage commissions or dealer concessions), Bank of America may
consider the sale of Fund shares by broker-dealers and other financial
institutions (including affiliates of Bank of America and the Fund's
distributor), provided it believes the quality of the transaction and the amount
of the commission are not less favorable than what they would be with any other
unaffiliated qualified firm.
8
<PAGE> 19
SHAREHOLDER GUIDE
THE FOLLOWING SECTION WILL PROVIDE YOU WITH ANSWERS TO SOME OF THE MOST OFTEN
ASKED QUESTIONS REGARDING BUYING AND SELLING THE FUND'S SHARES AND REGARDING THE
FUND'S DIVIDENDS.
HOW TO BUY SHARES
WHAT IS MY MINIMUM INVESTMENT IN THE FUND?
Generally, there is a minimum investment requirement of $500 for initial
purchases and $50 for subsequent purchases, although these amounts may be
altered in certain circumstances as shown below.
- ---------------------------------------------------------
INVESTMENT MINIMUMS
FOR SPECIFIC TYPES OF ACCOUNTS
<TABLE>
<CAPTION>
INITIAL SUBSEQUENT
INVESTMENT INVESTMENT
------- -------------
<S> <C> <C>
Regular Account $ 500* $50
Automatic Investment Plan $ 50 $50
IRAs, SEP-IRAs
(one participant) $ 500 No minimum
Spousal IRAs** $ 250 No minimum
SEP-IRAs
(more than one participant) $ 2,500 No minimum
</TABLE>
* The minimum investment is $100 for purchases made through Bank of America's
trust and agency accounts or a Service Organization (defined below) whose
clients have made aggregate minimum purchases of $1,000,000.
** A regular IRA must be opened first.
- ---------------------------------------------------------
HOW ARE SHARES PRICED?
Shares are purchased at their public offering price, which is based upon the
Fund's net asset value per share plus a front-end sales load. The Fund
calculates its net asset value ("NAV") as follows:
(Value of Fund Assets) - (Fund Liabilities)
NAV = -------------------------------------------------------
Number of Outstanding Shares
Net asset value is determined as of the end of regular trading hours on the New
York Stock Exchange (the "Exchange") (currently 4:00 p.m. Eastern time) on days
the Exchange is open.
The Fund's investments are valued at market value or, where market quotations
are not readily available, at fair value as determined in good faith by the
Funds pursuant to procedures adopted by the Board of Directors. Short-term
securities are valued at amortized cost, which approximates market value. For
further information about valuing Fund investments, see the Statement of
Additional Information. For voice recorded price and yield information call
(800) 227-1545.
SALES LOAD. The front-end sales load for the Fund begins at 4.50% and may
decrease as the amount you invest increases, as shown in the following chart:
- ---------------------------------------------------------
<TABLE>
<CAPTION>
DEALER'S
AS A % OF REALLOWANCE
-------------- AS A
NET % OF
AMOUNT OF OFFERING ASSET OFFERING
TRANSACTION PRICE VALUE PRICE*
------------------- ---- ---- ----
<S> <C> <C> <C>
Less than $100,000 4.50 4.71 4.00
$100,000 but less
than $250,000 3.75 3.90 3.35
$250,000 but less
than $500,000 2.50 2.56 2.20
$500,000 but less
than $750,000 2.00 2.04 1.75
$750,000 but less
than $3,000,000 1.00 1.01 0.90
$3,000,000 or more 0.00 0.00 0.00
</TABLE>
* Dealer's reallowance may be changed periodically.
From time to time, the Fund's distributor will make or allow additional
payments or promotional incentives in the form of cash or other compensation
such as trips to sales seminars, tickets to sporting and other entertainment
events and gifts of merchandise to firms that sell shares of the Fund.
- ---------------------------------------------------------
9
<PAGE> 20
WHEN NO SALES LOAD IS APPLIED. You pay no front-end sales load on the following
types of transactions:
- - reinvestment of dividends or distributions;
- - corporate/business retirement plans (such as 401k, 403b7, 457 and Keogh
accounts) sponsored by the Fund's administrator;
- - employer-sponsored employee pension or retirement plans making direct
investments in the Fund;
- - any purchase of shares by an investment adviser regulated by federal or state
governmental authority when the investment adviser is purchasing shares for
its own account or for an account for which it is authorized to make
investment decisions (i.e., a discretionary account);
- - accounts opened by a bank, trust company or thrift institution, acting as a
fiduciary, provided appropriate notification of such status is given at the
time of investment;
- - any purchase of shares by clients of The Private Bank of Bank of America or by
Private Banking clients of Seattle-First National Bank or by or on behalf of
agency accounts administered by any bank or trust company affiliate of Bank of
America;
- - any purchase of shares through a discount broker-dealer that imposes a
transaction charge with respect to such purchase, provided you were the
beneficial owner of shares of the Fund (or any other fund in the Pacific
Horizon Family of Funds) prior to July 1, 1992, so long as your account
remains open on the Company's books;
- - any purchase of shares, provided you were the beneficial owner of shares of
the Fund (or any other fund in the Pacific Horizon Family of Funds) before
April 20, 1987, so long as your account remains open on the Company's books;
- - any purchase of shares, provided you were the beneficial owner of shares of
Bunker Hill Income Securities, Inc. on the date of its reorganization into the
Pacific Horizon Corporate Bond Fund, so long as your account remains open on
the Company's books;
- - any purchase of shares pursuant to the Reinstatement Privilege described
below; and
- - any purchase of shares pursuant to the Directed Distribution Plan described
below.
Additionally, some individuals are not required to pay a front-end sales load
when purchasing Fund shares, including:
- - members of the Company's Board of Directors;
- - U.S. based employees and retirees (including employees who are U.S. citizens
but work abroad and retirees who are U.S. citizens but worked abroad) of Bank
of America or any of its affiliates, and their parents, spouses and minor
children, as well as members of the Board of Directors of Bank of America or
any of its affiliates;
- - registered representatives or full-time employees of broker-dealers having
agreements with the Fund's distributor pertaining to the sale of Fund shares
(and their spouses and minor children) to the extent permitted by such
organizations; and
- - former full-time employees (and retirees) of Security Pacific Corporation (or
any of its subsidiaries) and the surviving spouses and minor children of such
employees (and retirees), provided they were the beneficial owner of shares of
the Fund (or any other fund in the Pacific Horizon Family of Funds) prior to
July 1, 1992, so long as their account remains open on the Company's books.
RIGHTS OF ACCUMULATION. When buying shares in Pacific Horizon Funds, your
current aggregate investment determines the sales load that you pay. Your
current aggregate investment is the accumulated combination of your immediate
investment along with the shares that you beneficially own in any Pacific
Horizon Fund, or for like shares of any investment portfolio (a "Time Horizon
Fund") of Time Horizon Funds, an open-end investment company managed by an
affiliate of Bank of America, on which you paid a sales load (including
10
<PAGE> 21
shares that carry no sales load but were obtained through an exchange and can be
traced back to shares that were acquired with a sales load).
To qualify for a reduced sales load, you or your Service Organization (which is
an institution such as a bank or broker-dealer that has entered into a selling
and/or servicing agreement with the Fund's distributor) must notify the Fund's
transfer agent at the time of investment that a quantity discount is applicable.
Use of this service is subject to a check of appropriate records, after which
you will receive the lowest applicable sales charge. If you want to participate
you can so indicate on your Account Application or make a subsequent written
request to the Transfer Agent.
Example: Suppose you beneficially own shares of the Fund, the California
Tax-Exempt Bond Fund, the U.S. Government Securities Fund, the Capital Income
Fund and shares of the Company's money market funds that can be traced back to
the purchase of shares carrying a sales load (or any combination thereof) with
an aggregate current value of $90,000. If you subsequently purchase shares of
the Fund with a current value of $10,000, the load applicable to the subsequent
purchase would be reduced to 3.75% of the offering price.
LETTER OF INTENT. You may also obtain a reduced sales charge by means of a
written Letter of Intent, which expresses your non-binding commitment to invest
in an aggregate $100,000 or more in shares of any Pacific Horizon Fund or any
Time Horizon Fund within a period of 13 months, beginning up to 90 days prior to
the date of the Letter's execution. Shares purchased during that period count as
a credit toward completion of the Letter of Intent. Any investments you make
during the period receive the discounted sales load based on the full amount of
your investment commitment. When your commitment is fulfilled, an adjustment
will be made to reflect any reduced sales load applicable to shares purchased
during the 90-day period prior to the submission of your Letter of Intent.
While signing a Letter of Intent does not bind you to purchase, or the Company
or Time Horizon Funds to sell, the full amount indicated at the sales load in
effect at the time of signing, you must complete the intended purchase to obtain
the reduced sales load. When you sign a Letter of Intent, the Company or Time
Horizon Funds, as applicable, holds in escrow shares purchased by you in an
amount equal to 5% of the total amount of your commitment. After you fulfill the
terms of the Letter of Intent the escrow will be released.
If your aggregate investment exceeds the amount indicated in your Letter of
Intent, the escrow will be released. If your aggregate investment exceeds the
amount indicated in your Letter of Intent, it will be in the form of additional
shares credited to your account at the then current offering price applicable to
a single purchase of the total amount of the total purchase.
If your aggregate investment is less than the amount you committed, you will be
requested to remit an amount equal to the difference between the sales load
actually paid and the sales load applicable to the aggregate purchases actually
made. If such remittance is not received within 20 days, the Company will redeem
an appropriate number of shares held in escrow to realize the difference.
If you would like to participate, complete the Letter of Intent on your Account
Application. If you have any questions regarding the Letter of Intent, call
800-332-3863. Please read it carefully, as you will be bound by its terms.
HOW CAN I BUY SHARES?
The chart below provides more information regarding some of the different
methods for investing in the Fund.
11
<PAGE> 22
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------
TO BUY SHARES
OPENING AN ACCOUNT ADDING TO AN ACCOUNT
- --------------------------------------------------------------------------------------------------------
THROUGH BANK OF AMERICA, YOUR BROKER OR ANOTHER SERVICE ORGANIZATION
(ORDERS ARE NOT EFFECTIVE UNTIL RECEIVED BY THE FUND'S TRANSFER AGENT)
<S> <C> <C>
Contact them directly for Contact them directly for
instructions. instructions.
- --------------------------------------------------------------------------------------------------------
<CAPTION>
THROUGH THE DISTRIBUTOR
(IF YOU ARE OR WILL BE THE SHAREHOLDER OF RECORD ON THE COMPANY'S BOOKS)
<S> <C>
BY MAIL
Pacific Horizon Funds, Inc. Complete Account Application Mail all subsequent
c/o DST Systems, Inc. and mail it with a check investments to:
P.O. Box 419955 (payable to Pacific Horizon
Kansas City, MO 64141-6955 Aggressive Growth Fund) to Pacific Horizon Funds, Inc.
the address on the left. c/o DST Systems, Inc.
P.O. Box 419940
Kansas City, MO 64173-0298
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IN PERSON
DST Systems, Inc. Deliver Account Application Deliver your payment directly
811 Main and your payment directly to to the address on the left.
Kansas City, MO 64105-2005 the address on the left.
- --------------------------------------------------------------------------------------------------------
BY WIRE
United Missouri Bank of Instruct your bank to Instruct your bank to
Kansas City, N.A. transmit immediately transmit immediately
10th and Grand available funds, for purchase available funds as described
Kansas City, MO 64106 of Fund shares in your name. at left, except that the wire
ABA No. 1010-0069-5 should indicate that you are
Pacific Horizon Funds, Inc. Be sure to have your bank making a subsequent purchase
Aggressive Growth Fund indicate your name, address as opposed to opening a new
DDA #98-7037-107-3 and tax identification account.
number, the name of the Fund
and the fact that a new Be sure to include your name
account is being opened. and your Fund account number.
Consult your bank for information on remitting funds by wire
and any associated bank charges.
You may contact the Fund's transfer agent at 800-346-2087 for
further information regarding wiring instructions.
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</TABLE>
12
<PAGE> 23
<TABLE>
<CAPTION>
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OPENING AN ACCOUNT ADDING TO AN ACCOUNT
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
BY TELETRADE TeleTrade Privileges apply Purchases may be made in the
(a service permitting transfers automatically, although the minimum amount of $500 and
of money from your Privilege may not be used to the maximum amount of $50,000
checking, NOW or bank make an initial purchase. If per transaction as soon as
money market account) you do not wish to have appropriate information
TeleTrade Privileges you must regarding your bank account
indicate that fact on the has been established on your
Account Application or in a Fund account. This
subsequent written notice to information may be provided
the Fund's transfer agent. on the Account Application or
in a signature guaranteed
letter of instruction to the
Fund's transfer agent.
Signature guarantees are
discussed under "How to Sell
Shares."
Call 800-346-2087 to make
your purchase.
</TABLE>
You should refer to the section entitled "Shareholder Services"
for additional important information about the TeleTrade Privilege.
YOU MAY USE OTHER INVESTMENT OPTIONS, INCLUDING AUTOMATIC INVESTMENTS
AND EXCHANGES, TO INVEST IN YOUR FUND ACCOUNT.
PLEASE REFER TO THE SECTION ENTITLED "SHAREHOLDER SERVICES" FOR
MORE INFORMATION.
- -------------------------------------------------------------------------------
WHAT PRICE WILL I RECEIVE WHEN I BUY SHARES?
Your shares will be purchased at the Fund's public offering price calculated at
the next close of regular trading on the Exchange (currently 4:00 p.m. Eastern
time) after your purchase order is received in proper form by the Fund's
transfer agent, DST Systems, Inc. (the "Transfer Agent"), at its Kansas City
office.
If you purchase shares through Bank of America, your broker or another Service
Organization, the entity involved is responsible for transmitting your order and
required funds to the Transfer Agent on a timely basis in accordance with the
procedures in this Prospectus. Share purchases (and redemptions) executed
through Bank of America or a Service Organization are executed only on days on
which the particular institution and the Fund are open for business. Purchase
orders received by a Service Organization in proper form by 4:00 p.m. Eastern
time on a business day will be effected at the public offering price calculated
at 4:00 p.m. Eastern time on that day, if the Service Organization transmits
your order to the Transfer Agent by the end of its business day (normally 5:15
p.m. Eastern time). Except as provided in the following two sentences, if the
order is not received in proper form by a Service Organization by 4:00 p.m.
Eastern time or not received by the Transfer Agent by the close of its business
day, the order will be based upon the next determined purchase price. The
Company may from time to time in its sole discretion appoint one or more
entities as the Fund's agent to receive irrevocable purchase and redemption
orders and to transmit them on a net basis to the Transfer Agent. In these
instances orders received by the entity by 4:00 p.m. Eastern time on a business
day will be effected as of 4:00 p.m. Eastern time that day if
13
<PAGE> 24
the order is actually received by the Transfer Agent not later than the next
business morning accompanied by payment in federal funds.
WHAT ELSE SHOULD I KNOW TO MAKE A PURCHASE?
Federal regulations require you to provide a certified taxpayer identification
number upon opening or reopening an account.
If your check used for investment does not clear, a fee may be imposed by the
Transfer Agent. All payments should be in U.S. dollars and, to avoid fees and
delays, should be drawn only on U.S. banks. Please remember that the Company
reserves the right to reject any purchase order.
You should note that Bank of America, Service Organizations and registered
investment advisers may charge a separate fee or transaction charge to their
clients related to their investment in Fund shares. These fees could constitute
a substantial portion of smaller accounts and may not be in an investor's best
interest. Bank of America and Service Organizations may also impose minimum
customer account and other requirements in addition to those imposed by the
Fund. If you purchase or redeem shares directly from the Fund, you may do so
without incurring any charges other than those described in this Prospectus.
HOW TO SELL SHARES
HOW DO I REDEEM MY SHARES?
Pacific Horizon makes it easy to sell, or "redeem," shares. The Fund imposes no
charge when you redeem shares. The value of the shares you redeem may be more or
less than your cost, depending on the Fund's current net asset value.
If you purchased your shares through an account at Bank of America, your broker
or another Service Organization, you may redeem all or part of your shares in
accordance with the instructions pertaining to that account. If you are also the
shareholder of record on the Company's books, you may redeem shares in
accordance with the procedures described in the chart below as well
as those of your account. To use the redemption methods described below, you
must arrange with Bank of America or your Service Organization for delivery of
the required application(s) to the Transfer Agent.
14
<PAGE> 25
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------
TO SELL SHARES
THROUGH BANK OF AMERICA, YOUR BROKER OR ANOTHER SERVICE ORGANIZATION
(ORDERS ARE NOT EFFECTIVE UNTIL RECEIVED BY THE TRANSFER AGENT)
Contact them directly for instructions.
---------------------------------------------------------------------------------------------
THROUGH THE DISTRIBUTOR
(IF YOU ARE A SHAREHOLDER OF RECORD ON THE COMPANY'S BOOKS)
<S> <C>
BY MAIL
Pacific Horizon Send a signed, written request (each owner, including each
Aggressive Growth Fund joint owner, must sign) to the Transfer Agent.
c/o DST Systems, Inc.
P.O. Box 419955 If you hold stock certificates for the shares being
Kansas City, MO 64141-6955 redeemed, make sure to endorse them for transfer, have your
signature on them guaranteed by your bank or another
guarantor institution (as described in the section entitled
"What Kind of Paperwork Is Involved In Selling Shares?") and
include them with your request.
---------------------------------------------------------------------------------------------
IN PERSON
DST Systems, Inc.
811 Main Deliver your signed, written request (each owner, including
Kansas City, MO 64105-2005 each joint owner, must sign) and any certificates (endorsed
for transfer and signature guaranteed as described in the
section entitled "What Kind of Paperwork Is Involved In
Selling Shares?") to the address on the left.
---------------------------------------------------------------------------------------------
BY TELETRADE You may redeem Fund shares (minimum of $500 and maximum of
(a service permitting $50,000 per transaction) by telephone after appropriate
transfers of money to your information regarding your bank account has been established
checking, NOW or bank money on your Fund account. This information may be provided on
market account) the Account Application or in a signature guaranteed letter
of instruction to the Transfer Agent. Signature guarantees
are discussed in the section entitled "What Kind of
Paperwork Is Involved In Selling Shares?".
Redemption orders may be placed by calling 800-346-2087.
TeleTrade Privileges apply automatically unless you indicate
on the Account Application or in a subsequent written notice
to the Transfer Agent that you do not wish to have them.
You should refer to the section entitled "Shareholder
Services" for additional important information about the
TeleTrade Privilege.
</TABLE>
OTHER REDEMPTION OPTIONS, INCLUDING EXCHANGES AND AUTOMATIC
WITHDRAWALS, ARE ALSO AVAILABLE. PLEASE REFER TO THE SECTION
ENTITLED "SHAREHOLDER SERVICES" FOR MORE INFORMATION.
- --------------------------------------------------------------------------------
15
<PAGE> 26
WHAT NAV WILL I RECEIVE FOR SHARES
I WANT TO SELL?
Redemption orders are effected at the net asset value per share next determined
after receipt of the order in proper form by the Transfer Agent at its Kansas
City office. Although the Fund itself imposes no charge when shares are
redeemed, if you purchase shares through Bank of America or a Service
Organization, they may charge a fee for providing certain services in connection
with investments in Fund shares. The Company reserves the right to redeem
accounts (other than IRA and non-working spousal IRA accounts) involuntarily if,
after sixty days' written notice, the account's net asset value remains below a
$500 minimum balance.
WHAT KIND OF PAPERWORK IS INVOLVED
IN SELLING SHARES?
Redemption requests must be signed by each shareholder, including each joint
owner. Certain types of redemption requests as well as all endorsed share
certificates will need to include a signature guarantee. Signature guarantees
must accompany redemption requests for (i) an amount in excess of $50,000 per
day, (ii) any amount if the redemption proceeds are to be sent somewhere other
than the address of record on the Company's books or (iii) an amount of $50,000
or less if the address of record has not been on the Company's books for sixty
days.
You may obtain a signature guarantee from: (i) a bank which is a member of the
FDIC; (ii) a trust company; (iii) a member firm of a national securities
exchange; or; (iv) another eligible guarantor institution. Guarantees must be
signed by an authorized signatory of the guarantor institution and be
accompanied by the words "Signature Guaranteed." The Transfer Agent will not
accept guarantees from notaries public.
HOW QUICKLY CAN I RECEIVE MY
REDEMPTION PROCEEDS?
The Company will make payment for all shares redeemed after the Transfer Agent
receives a request in proper form, except as provided by the rules of the
Securities and Exchange Commission. If the shares to be redeemed have been
purchased by check or by TeleTrade, the Company will, upon clearance of the
purchase check or TeleTrade payment mail the redemption proceeds within seven
business days. This does not apply to situations where the Fund receives payment
in cash or immediately available funds for the purchase of shares. If you
purchase shares by wire, you must file an Account Application before redemption
requests can be honored.
Bank of America and the Service Organizations are responsible for transmitting
redemption orders and crediting their customers' accounts with redemption
proceeds on a timely basis.
DO I HAVE ANY REINSTATEMENT PRIVILEGES AFTER I HAVE REDEEMED SHARES?
You may reinvest all or any portion of your redemption proceeds in shares of the
Fund, or of another load fund of the Company or Time Horizon Funds, within 90
days of your redemption without paying a sales load. Shares so reinvested will
be purchased at a price equal to the net asset value next determined after the
Transfer Agent receives a reinstatement request and payment in proper form.
If you wish to use this Privilege, you must submit a written reinstatement
request to the Transfer Agent stating that you are eligible to use the
Privilege. The reinstatement request and payment must be received within 90 days
of the trade date of the redemption. Currently, there are no restrictions on the
number of times you may use this Privilege.
Generally, exercising the Reinstatement Privilege will not affect the character
of any gain or loss realized on redemption for federal income tax purposes.
However, if a redemption results in a loss, the reinstatement may result in the
loss being disallowed under IRS "wash sale" rules.
DIVIDEND AND DISTRIBUTION POLICIES
The Fund distributes its net income and net realized capital gains (if any) to
shareholders of record at least annually. You will automatically
16
<PAGE> 27
receive dividends and capital gain distributions in additional shares without a
sales load unless you: (i) elect in writing to receive payment in cash; or (ii)
elect to participate in the Directed Distribution Plan described in the section
entitled "Can My Dividends From the Fund Be Invested In Other Pacific Horizon
Funds?".
To elect to receive payment in cash, or to revoke such election, you must do so
in writing to the Transfer Agent at P.O. Box 419955, Kansas City, Missouri
64141-6955. The election or revocation will become effective with respect to
dividends paid after it is received by the Transfer Agent.
SHAREHOLDER SERVICES
PACIFIC HORIZON FUNDS PROVIDES A VARIETY OF WAYS TO MAKE MANAGING YOUR
INVESTMENTS MORE CONVENIENT.
Some or all of these services and privileges as well as others described in this
Prospectus may not be available for, or may have different conditions imposed on
them than as described in this Prospectus with respect to, certain clients of
Bank of America and particular Service Organizations. Consult these entities for
more information.
CAN I USE THE FUND IN MY
RETIREMENT PLAN?
The Company makes available Individual Retirement Accounts ("IRAs"), including
IRAs set up under a Simplified Employee Pension Plan ("SEP-IRAs") and IRA
"Rollover Accounts."
YOUR INVESTMENTS GROW TAX DEFERRED UNTIL WITHDRAWAL AT RETIREMENT AND IN MANY
CASES, THE INITIAL INVESTMENT IS TAX DEDUCTIBLE.
For details, contact the Fund's distributor at 800-332-3863. Investors should
also read the IRA Disclosure Statement and the Bank Custodial Agreement for
further details on eligibility, service fees and tax implications, and consult
their tax advisers.
CAN I EXCHANGE MY INVESTMENT FROM ONE FUND TO ANOTHER?
As a shareholder, you have the privilege of exchanging your shares for shares of
another Pacific Horizon Fund, or like shares of any Time Horizon Fund, provided
that such other shares that may be legally sold in your state of residence. NO
ADDITIONAL SALES LOAD WILL BE INCURRED WHEN EXCHANGING FUND SHARES PURCHASED
WITH A SALES LOAD FOR SHARES OF ANOTHER LOAD FUND OF THE COMPANY.
An investment in the Fund automatically entitles you to use this Privilege,
unless you indicate on the Account Application or in a subsequent letter to the
Transfer Agent that you do not wish to use this Privilege.
Fund shares being exchanged must have a current value of at least $500 and are
subject to the minimum initial investment requirements of the particular fund
into which the exchange is being made. You may obtain prospectuses regarding the
funds into which you wish to make an exchange from your Service Organization or
the Fund's distributor.
You may provide exchange instructions by telephone by calling the Transfer Agent
at 800-346-2087. (See the section entitled "What Is TeleTrade?" for a
description of the Company's policy regarding responsibility for telephone
instructions.) You may also send exchange instructions in writing by following
directions set forth above under "How to Sell Shares."
If you would like more information on making an exchange, please read the
Statement of Additional Information and consult your Service Organization or the
Fund's distributor.
The Fund reserves the right to reject any exchange request and the Exchange
Privilege may be modified or terminated at any time. At
17
<PAGE> 28
least 60 days' notice of any material modification to or termination of the
Exchange Privilege will be given to shareholders except where notice is not
required under the regulations of the Securities and Exchange Commission.
WHAT IS TELETRADE?
TELETRADE IS A SERVICE WHICH ALLOWS YOU TO AUTHORIZE ELECTRONIC TRANSFERS OF
MONEY TO PURCHASE SHARES IN OR REDEEM SHARES FROM AN ESTABLISHED FUND ACCOUNT.
THE SERVICE MAY BE USED LIKE AN "ELECTRONIC CHECK" TO MOVE MONEY BETWEEN AN
ACCOUNT AT A FINANCIAL INSTITUTION AND A FUND ACCOUNT WITH A SINGLE TELEPHONE
CALL.
Purchase and redemption proceeds with respect to TeleTrade transactions will be
transferred between your Fund account and the checking, NOW or bank money market
account designated by you. Only an account maintained at a domestic financial
institution that is an Automated Clearing House member may be so designated.
TeleTrade purchases will be effected at the public offering price next
determined after the Transfer Agent receives payment for the transaction.
Redemption proceeds will be on deposit in your account at your financial
institution generally two business days after the redemption request is received
by the transfer agent. You may also request receipt of your redemption proceeds
by check, which will be payable to the registered owners of your Fund account
and will be sent only to the address of record.
You should note that the Transfer Agent may act upon a telephone redemption
request (including a telephone wire redemption request) from any person
representing himself or herself to be you and reasonably believed by the
Transfer Agent to be genuine. Neither the Company nor any of its service
contractors will be liable for any loss or expense for acting upon telephone
instructions that are reasonably believed to be genuine. In attempting to
confirm that telephone instructions are genuine, the Company will use such
procedures as are considered reasonable. If you should experience difficulty in
contacting the Transfer Agent to place telephone redemptions (including
telephone wire redemptions), for example, because of unusual market activity,
you are urged to consider redeeming your shares by mail or in person.
The Company may modify the TeleTrade Privilege at any time or charge a service
fee upon notice to shareholders. No such fee currently is contemplated.
CAN I ARRANGE TO HAVE AUTOMATIC
INVESTMENTS MADE ON A REGULAR BASIS?
YOU MAY ARRANGE, THROUGH THE AUTOMATIC INVESTMENT PROGRAM, FOR SYSTEMATIC
INVESTMENTS IN YOUR FUND ACCOUNT IN AMOUNTS OF $50 OR MORE BY DIRECTLY DEBITING
YOUR ACCOUNT AT YOUR FINANCIAL INSTITUTION. At your option, your checking, NOW
or bank money market account designated by you will be debited in the specified
amount, and Fund shares will be purchased, once a month, on either the first or
fifteenth day, or twice a month, on both days. Only accounts maintained at a
domestic financial institution which permits automatic withdrawals and is an
Automated Clearing House member are eligible. The Automatic Investment Program
is one means by which you may use Dollar Cost Averaging in making investments.
WHAT IS DOLLAR COST AVERAGING AND HOW CAN I IMPLEMENT IT?
DOLLAR COST AVERAGING INVOLVES INVESTING A FIXED DOLLAR AMOUNT AT PREDETERMINED
INTERVALS. BECAUSE MORE SHARES ARE BOUGHT DURING PERIODS WITH LOWER SHARE PRICES
AND FEWER SHARES ARE BOUGHT WHEN THE PRICE IS HIGHER, YOUR AVERAGE COST PER
SHARE MAY BE REDUCED. You may also implement Dollar Cost Averaging on your own
initiative or through other entities.
In order to be effective, Dollar Cost Averaging should be followed on a
sustained, consistent basis. You should be aware, however, that shares bought
using Dollar Cost Averaging are made without regard to their price on the day of
investment or to market trends. In addition, while you may find Dollar Cost
Averaging to be beneficial, it will not prevent a loss if you
18
<PAGE> 29
ultimately redeem your shares at a price that is lower than their purchase
price.
To establish an Automatic Investment Account that uses the Dollar Cost Averaging
method, check the appropriate box and supply the necessary information on the
Account Application, or in a subsequent written request to the Transfer Agent.
You may cancel this Privilege or change the amount of purchase at any time by
mailing written notification to the Transfer Agent.
Notification will be effective three business days following receipt. The Fund
may modify or terminate this Privilege at any time or charge a service fee,
although no such fee currently is contemplated.
CAN I ARRANGE PERIODIC WITHDRAWALS?
IF YOU ARE A SHAREHOLDER WITH A FUND ACCOUNT VALUED AT $5,000 OR MORE, YOU MAY
WITHDRAW AMOUNTS IN MULTIPLES OF $50 FROM YOUR ACCOUNT ON A MONTHLY, QUARTERLY,
SEMI-ANNUAL OR ANNUAL BASIS THROUGH THE AUTOMATIC WITHDRAWAL PLAN.
At your option, monthly, quarterly, semi-annual or annual withdrawals will be
made on either the first or fifteenth day of the particular month selected. To
participate in this Plan, check the appropriate box and supply the necessary
information on the Account Application or subsequently send a signature
guaranteed written request to the Transfer Agent. Purchases of additional shares
concurrently with withdrawals are ordinarily not advantageous because of the
Fund's sales load.
CAN MY DIVIDENDS FROM THE FUND BE INVESTED IN OTHER FUNDS?
You may elect to have your dividends, capital gains distributions, or both
("distribution proceeds") received from a non-retirement Fund account
automatically invested in shares of any other investment portfolio of the
Company, or in like shares of any Time Horizon Fund, provided such shares are
held in a non-retirement account. To participate in this program, known as the
Directed Distribution Plan, check the appropriate box and supply the necessary
information on the Account Application or subsequently send a written request to
the Transfer Agent. Participants in the Directed Distribution Plan are subject
to the minimum investment requirements of the particular fund involved.
Investments will be made at a price equal to the net asset value of the
purchased shares next determined after receipt of the distribution proceeds by
the Transfer Agent.
There are no subsequent investment requirements for accounts to which
distribution proceeds are directed nor are service fees currently charged for
effecting these transactions.
IS THERE A SALARY DEDUCTION
PLAN AVAILABLE?
YOU MAY PURCHASE FUND SHARES BY HAVING PAYMENTS AUTOMATICALLY DEPOSITED INTO
YOUR FUND ACCOUNT (MINIMUM OF $50 AND MAXIMUM OF $50,000 PER TRANSACTION) IF YOU
RECEIVE A FEDERAL SALARY, SOCIAL SECURITY OR CERTAIN VETERAN'S, MILITARY OR
OTHER PAYMENTS FROM THE FEDERAL GOVERNMENT. Subject to these limitations, you
may deposit as much of your payments as you wish.
For instructions on how to enroll in this Direct Deposit Program, call the
Transfer Agent at 800-346-2087.
Note: Death or legal incapacity will terminate participation in the Program. You
may also choose at any time to terminate your participation by notifying the
appropriate federal agency in writing. Further, the Fund may terminate your
participation after serving 30 days' notice.
19
<PAGE> 30
THE BUSINESS OF THE FUND
FUND MANAGEMENT
The business affairs of the Company are managed under the general supervision of
the Board of Directors. Information about the Directors and officers of the
Company is included in the Statement of Additional Information under
"Management."
SERVICE PROVIDERS
---------------------
INVESTMENT ADVISER
Bank of America manages the investment portfolio of the Fund. Bank of America is
a subsidiary of BankAmerica Corporation, a registered bank holding company. Its
principal offices are located at 555 California Street, San Francisco,
California 94104.
Formed in 1904, Bank of America is a national banking association that provides
commercial banking and trust business through an extensive system of branches
across the western United States. Bank of America's principal banking affiliates
operate branches in ten U.S. states as well as corporate banking and business
credit offices in major U.S. cities and branches, corporate offices and
representative offices in 37 countries. Bank of America is the successor by
merger to Security Pacific National Bank ("Security Pacific"), which previously
served as investment adviser to the Company since it commenced operations.
In its advisory agreement with the Company, Bank of America has agreed to manage
the Fund's portfolio and to be responsible for, place orders for, and make
decisions with respect to, all purchases and sales of the Fund's securities.
Scott A. Billadeau, Portfolio Manager, will be primarily responsible for the
day-to-day investment activities of the Fund. Mr. Billadeau has been the Fund's
manager since November 1994 and has been associated with Bank of America since
1991. During his tenure, he has performed research and portfolio analysis for
the Fund and is also responsible for research and portfolio management of two of
Bank of America's commingled accounts, the EBT Aggressive Equity Fund and
Aggressive Equity Fund G.
For the services provided and expenses assumed under the advisory agreement,
Bank of America is entitled to receive a fee at the annual rate of .60% of the
Fund's net assets. This amount may be reduced pursuant to undertakings by Bank
of America. (See the information below regarding fee waivers.) During the fiscal
year ended February 28, 1995, the Fund paid Bank of America advisory fees at an
effective annual rate of .60% of the Fund's net assets.
In addition, Bank of America and its affiliates may be entitled to fees under
the Shareholder Service Plan as described under "Plan Payments" and may receive
fees charged directly to their customer accounts in connection with investments
in Fund shares.
ADMINISTRATOR
Concord Holding Corporation ("Concord") serves as Administrator for the Fund.
Concord is a wholly-owned subsidiary of The BISYS Group, Inc. Its offices are
located at 125 W. 55th Street, New York, New York 10019.
Under its agreement with the Company, Concord has agreed to: pay the costs of
maintaining the Company's offices; provide a facility to receive purchase and
redemption orders; provide statistical and research data, data processing
services, and clerical services; coordinate the preparation of reports to Fund
shareholders and reports to the Securities and Exchange Commission; prepare or
coordinate the preparation of tax returns; maintain the registration or
qualification of the Fund's shares for sale under state securities laws;
maintain the Fund's books and records, calculate
20
<PAGE> 31
the net asset value of the Fund's shares and calculate the dividends and capital
gains distributions paid to shareholders; and generally assist in all aspects of
the Fund's operations.
For its services as administrator, Concord is entitled to receive a fee from the
Fund at the annual rate of .30% of the Fund's average net assets. This amount
may be reduced pursuant to undertakings by Concord. (See the information below
regarding fee waivers.) During the fiscal year ended February 28, 1995 , the
Fund paid Concord administration fees at an effective annual rate of .30% of the
Fund's net assets. Under the authority granted in its administration agreement,
Concord has entered into an agreement with The Bank of New York whereby the bank
performs certain of the services listed above, such as calculating the net asset
value of the Fund's shares and dividends and capital gains distributions to
shareholders, and maintaining the Fund's books and records. The Fund bears all
fees and expenses charged by The Bank of New York for these services.
DISTRIBUTOR
The Fund's shares are sold on a continuous basis by the Concord Financial Group,
Inc. (the "Distributor"). The Distributor is a wholly-owned subsidiary of
Concord and is located at 125 W. 55th Street, New York, New York 10019.
CUSTODIAN AND TRANSFER AGENT
The Bank of New York is responsible for holding the investments purchased by the
Fund and is located at 90 Washington Street, New York, New York 10286. DST
Systems, Inc. maintains the account records of all shareholders in the Fund and
administers the distribution of income earned as a result of investing in the
Fund and is located at 811 Main, Kansas City, Missouri 64105-2005.
FEE WAIVERS
Expenses can be reduced by voluntary fee waivers and expense reimbursements by
Bank of America and other service providers as well as by certain expense
limitations imposed by state securities regulators. Periodically, during the
course of the Fund's fiscal year, Bank of America, Concord and/or the
Distributor may choose not to receive fee payments and/or may assume certain
Fund expenses. However, the service providers retain the ability to be
reimbursed for these amounts by the Fund prior to fiscal year end and, subject
to the expense limitations of certain states, to stop such fee waivers and
expense reimbursements at any time.
TAX INFORMATION
YOU WILL BE ADVISED AT LEAST ANNUALLY REGARDING THE FEDERAL INCOME TAX TREATMENT
OF DIVIDENDS AND DISTRIBUTIONS MADE TO YOU. YOU SHOULD SAVE YOUR ACCOUNT
STATEMENTS BECAUSE THEY CONTAIN INFORMATION YOU WILL NEED TO CALCULATE YOUR
CAPITAL GAINS OR LOSSES UPON YOUR ULTIMATE SALE OR EXCHANGE OF SHARES IN THE
FUND.
As with any investment, you should consider the tax implications of an
investment in the Fund. The following is only a brief summary of some of the
important tax considerations generally affecting the Fund and its shareholders.
Consult your tax adviser with specific reference to your own tax situation.
FEDERAL TAXES
During its most recent fiscal year, the Fund qualified as a "regulated
investment company" under the Internal Revenue Code of 1986, as amended (the
"Code"). As a result of this qualification, the Fund generally is not required
to pay Federal income taxes to the extent its earnings are distributed in
accordance with the Code. The Fund intends to continue to qualify for this
special tax treatment as long as it is in the best interest of its shareholders.
Distributions (whether received in cash or additional shares) of ordinary income
and/or excess of net short-term capital gain over net long-term capital loss are
taxable to the shareholder as ordinary income. (These distributions are eligible
for the dividends received deduction allowed to corporations to the extent of
the total qualifying
21
<PAGE> 32
dividends received by the Fund from domestic corporations for the taxable year.)
Any distribution you receive comprised of the excess of net long-term capital
gain over net short-term capital loss will be taxed as a long-term capital gain
no matter how long you have held Fund shares. (Such distributions are not
eligible for the dividends received deduction allowed to corporations.)
A dividend paid to a shareholder by the Fund in January of a particular year
will be deemed to have been received by the shareholder on December 31 of the
preceding year, if the dividend is declared and payable to shareholders of
record on a specified date in October, November or December of that preceding
year.
If you are considering buying shares of a Fund on or just before the record date
of a dividend, you should be aware that the amount of the forthcoming dividend
payment, although in effect a return of capital, will be taxable to you.
You may realize a taxable gain (or loss) upon redemption or exchange of Fund
shares, depending upon the tax basis of your shares and their price at the time
of such redemption or exchange. If you hold shares for six months or less and
during that time receive a capital gain dividend on those shares, any loss
recognized on the sale or exchange of those shares will be treated as a
long-term capital loss to the extent of the capital gain dividend. Generally,
you may include sales loads incurred in the purchase of Fund shares in your tax
basis when determining your gain (or loss) on a redemption or exchange of these
shares. However, if you exchange such shares for shares of another investment
portfolio of the Company within 90 days of the purchase and are able to reduce
the sales load on the new shares through the Exchange Privilege, the reduction
may not be included in the tax basis of your exchanged shares. It may be
included in the tax basis of the new shares.
STATE AND LOCAL TAXES
Because state and local taxes may be different than the federal taxes described
above, you should consult your tax adviser regarding these taxes.
MEASURING PERFORMANCE
THE FUND'S PERFORMANCE MAY BE QUOTED IN TERMS OF AVERAGE ANNUAL TOTAL RETURN AND
AGGREGATE TOTAL RETURN. PERFORMANCE INFORMATION IS HISTORICAL AND IS NOT
INTENDED TO INDICATE FUTURE RESULTS.
Average annual total return reflects the average annual percentage change in
value of an investment in the Fund over the period being measured, while
aggregate total return reflects the total percentage change in value over the
period being measured.
Periodically, the Fund's average annual total return and/or aggregate total
return for various periods may be quoted in advertisements or in communications
to shareholders. Both methods reflect the sales load charged by the Fund and
assume dividends and capital gain distributions made by the Fund during the
period are reinvested in Fund shares.
The Fund may also advertise total return data without reflecting the sales load
imposed on the purchase of Fund shares in accordance with the rules of the
Securities and Exchange Commission. Quotations that do not reflect the sales
load will, of course, be higher than quotations that do reflect sales loads.
The Fund may compare its total return to that of other mutual funds with similar
investment objectives and to stock and other relevant indices or to rankings
prepared by independent services or other financial or industry publications
that monitor mutual fund performance. For example, the Fund's total return may
be compared to data prepared by: Lipper Analytical Services, Inc.; Mutual Fund
Forecaster; Morningstar; Micropal; Wiesenberger Investment Companies Services;
or CDA Investment Technologies, Inc.
22
<PAGE> 33
Total return data as reported in national financial publications such as Money,
Forbes, Barron's, The Wall Street Journal and The New York Times, or in local or
regional publications, may also be used in comparing Fund performance. The
Fund's total return also may be compared to indices such as: the Dow Jones
Industrial Average; the Standard & Poor's 500 Stock Index; the Shearson Lehman
Bond Indexes; the Wilshire 5000 Equity Indexes; or the Consumer Price Index.
Since the Fund's performance will fluctuate, it should not be compared with bank
deposits, savings accounts and similar investments that often provide an agreed
or guaranteed fixed yield for a stated period of time. Performance is generally
a function of the kind and quality of the instruments in a portfolio, portfolio
maturity, operating expenses and market conditions. Not included in the Fund's
calculations of total return are fees charged by Bank of America and Service
Organizations directly to their customer accounts in connection with investments
in the Fund (e.g. account maintenance fees, compensating balance requirements or
fees based upon account transactions, assets or income).
DESCRIPTION OF SHARES
The Company is a Maryland corporation that was organized on October 27, 1982.
ABOUT THE COMPANY
THE COMPANY'S CHARTER AUTHORIZES THE BOARD OF DIRECTORS TO ISSUE UP TO TWO
HUNDRED BILLION FULL AND FRACTIONAL SHARES OF CAPITAL STOCK ($.001 PAR VALUE PER
SHARE) AND TO CLASSIFY AND RECLASSIFY ANY AUTHORIZED AND UNISSUED SHARES INTO
ONE OR MORE CLASSES OF SHARES.
The Board of Directors has authorized the issuance of: one billion shares of
Class D Common Stock representing interests in the Fund; and additional classes
of shares representing interests in other investment portfolios of the Company.
The Board of Directors may similarly classify or reclassify any class of shares
(including unissued Class D Common Stock) into one or more series. For more
information about the Company's other portfolios, contact the Company at the
telephone number listed on the inside cover page.
Shares representing interests in the Fund are entitled to participate in the
dividends and distributions declared by the Board of Directors and in the net
distributable assets of the Fund on liquidation. Fund shares have no preemptive
rights and only such conversion and exchange rights as the Board may grant in
its discretion. When issued for payment as described in this Prospectus, Fund
shares will be fully paid and nonassessable.
VOTING RIGHTS
SHAREHOLDERS ARE ENTITLED TO ONE VOTE FOR EACH FULL SHARE HELD AND FRACTIONAL
VOTES FOR FRACTIONAL SHARES HELD. Additionally, shareholders will vote in the
aggregate and not by class or series, except as required by law (or when
permitted by the Board of Directors). The Fund does not presently intend to hold
annual meetings of shareholders to elect directors or for other business unless
and until such time as less than a majority of the directors holding office has
been elected by the shareholders. At that time, the directors then in office
will call a shareholder meeting for the election of directors. Under certain
circumstances, however, shareholders have the right to call a shareholder
meeting to consider the removal of one or more directors. Such meetings will be
held when requested by the shareholders of 10% or more of the Company's
outstanding shares of common stock. The Fund will assist in shareholder
communications in such matters to the extent required by law and the Company's
undertaking with the Securities and Exchange Commission. Fund shares have
cumulative voting rights to the extent that may be required by applicable law.
PLAN PAYMENTS
THE COMPANY HAS ADOPTED A SHAREHOLDER SERVICE PLAN (THE "PLAN") FOR THE FUND
UNDER WHICH THE FUND PAYS THE DISTRIBUTOR FOR SHAREHOLDER SERVICING EXPENSES
RELATED TO FUND SHARES.
23
<PAGE> 34
Shareholder servicing expenses include expenses incurred in connection with
shareholder services provided by the Distributor and payments to Service
Organizations for support services for the beneficial owners of Fund shares,
such as: establishing and maintaining accounts and records relating to the
Service Organization's clients who invest in Fund shares; assisting those
clients in processing exchange and redemption requests and in changing dividend
options and account designations; and responding to inquiries from clients
concerning their investments.
Under the Plan, payments by the Fund for shareholder servicing expenses may not
exceed .25% (annualized) of the Fund's average daily net assets. Excluded from
this calculation, however, are all shares acquired via a transfer of assets from
trust and agency accounts at Bank of America. This amount may be reduced
pursuant to undertakings by the Distributor. During the fiscal year ended
February 28, 1995, the Fund made payments under the Plan at an effective annual
rate of .25% of the Fund's average net assets.
If in any month the Distributor is due more monies than are immediately payable
because of the percentage limitation described above, the unpaid amount is
"carried forward" from month to month while the Plan is in effect until such
time when it may be paid. However, any "carried forward" amounts will not be
payable beyond the fiscal year during which the amounts are accrued. No
interest, carrying or other finance charge is borne by the Fund with respect to
the amount "carried forward."
Banks may act as Service Organizations. The Glass-Steagall Act and other
applicable laws, among other things, prohibit banks from engaging in the
business of underwriting securities. If a bank were prohibited from acting as a
Service Organization, its shareholder clients would be permitted to remain
Company shareholders and alternative means for continuing the servicing of such
shareholders would be sought. In such event, changes in the operation of the
Company might occur and a shareholder serviced by such bank might no longer be
able to avail itself of the automatic investment or other services then being
provided by the bank. It is not expected that shareholders would suffer any
adverse financial consequences as a result of any of these occurrences. The
Company will obtain a representation from the Service Organizations (and from
Bank of America and Concord) that they are or will be licensed as dealers as
required by applicable law or will not engage in activities which would require
them to be so licensed.
24
<PAGE> 35
- --------------------------------------------------------------------------------
PACIFIC HORIZON MUTUAL FUNDS
BULK RATE
U.S. POSTAGE
PAID
NEW YORK, N.Y.
PERMIT NO. 8048
COPAGGR95P
<PAGE> 36
AGGRESSIVE GROWTH FUND
PROSPECTUS
July 1, 1995
NOT FDIC INSURED
<PAGE> 37
PROSPECTUS
JULY 1, 1995
PACIFIC HORIZON ASSET ALLOCATION FUND
A series of shares of Pacific Horizon
Funds, Inc.
- --------------------------------------------------------------------------------
The PACIFIC HORIZON ASSET ALLOCATION FUND (the "Fund") is a diversified mutual
fund whose investment objective is to obtain long-term growth from capital
appreciation and dividend and interest income. The Fund seeks to achieve its
objective by actively allocating investments among the three major asset
categories: bonds, equity securities and cash equivalents. The Fund is offered
by Pacific Horizon Funds, Inc. (the "Company"), an open-end, series management
investment company.
UNLIKE MOST OTHER INVESTMENT COMPANIES WHICH INVEST DIRECTLY IN PORTFOLIO
SECURITIES, THE FUND SEEKS TO ACHIEVE ITS INVESTMENT OBJECTIVE BY INVESTING ALL
OF ITS INVESTABLE ASSETS IN A FUND OF AN OPEN-END, MANAGEMENT INVESTMENT COMPANY
(THE "PORTFOLIO") HAVING THE SAME INVESTMENT OBJECTIVE AS THAT OF THE FUND. THE
FUND WILL PURCHASE SHARES OF THE PORTFOLIO AT NET ASSET VALUE. THE NET ASSET
VALUE OF THE FUND WILL RESPOND TO INCREASES AND DECREASES IN THE VALUE OF THE
PORTFOLIO'S SECURITIES. INVESTORS SHOULD CAREFULLY CONSIDER THIS INVESTMENT
APPROACH. SEE "OTHER INVESTMENT PRACTICES AND CONSIDERATIONS -- MASTER-FEEDER
STRUCTURE" ON PAGE 9 FOR ADDITIONAL INFORMATION REGARDING THIS STRUCTURE.
Bank of America National Trust and Savings Association ("Bank of America" or the
"investment adviser") serves as the Portfolio's investment adviser. Based in San
Francisco, California, Bank of America and its affiliates have over $50 billion
under management, including over $10 billion in mutual funds.
This Prospectus describes concisely the information about the Fund and the
Company that you should know before investing. Please read it carefully and
retain it for future reference.
More information about the Fund is contained in a Statement of Additional
Information that has been filed with the Securities and Exchange Commission. To
obtain a free copy, call 800-332-3863. The Statement of Additional Information,
as it may be revised from time to time, is dated July 1, 1995 and is
incorporated by reference into this Prospectus.
- --------------------------------------------------------------------------------
Fund shares are not bank deposits or obligations of, or guaranteed or endorsed
by, Bank of America or any of its affiliates and are not federally insured by,
guaranteed by, obligations of or otherwise supported by the U.S. Government, the
Federal Deposit Insurance Corporation, the Federal Reserve Board or any other
governmental agency. Investment in the Fund involves investment risk, including
the possible loss of principal.
- --------------------------------------------------------------------------------
LIKE ALL MUTUAL FUNDS, THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR
HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
This Prospectus is part of a Registration Statement that has been filed with the
Securities and Exchange Commission in Washington, D.C. under the Securities Act
of 1933.
No person has been authorized to give any information or to make any
representations in connection with the offer of the Fund's shares, other than as
contained in this Prospectus and the Fund's official sales literature.
Therefore, other information and representations must not be relied upon as
having been authorized by the Fund. This Prospectus does not constitute an offer
in any State in which, or to any person to whom, such offering may not lawfully
be made.
- --------------------------------------------------------------------------------
<PAGE> 38
CONTENTS
<TABLE>
<S> <C> <C>
EXPENSE SUMMARY 2
FINANCIAL HIGHLIGHTS 3
FUND INVESTMENTS 4 INVESTMENT OBJECTIVE
4 TYPES OF INVESTMENTS
5 FUNDAMENTAL LIMITATIONS
6 OTHER INVESTMENT PRACTICES AND CONSIDERATIONS
SHAREHOLDER GUIDE 11 HOW TO BUY SHARES
11 What Is My Minimum Investment In The Fund?
11 How Are Shares Priced?
13 How Can I Buy Shares?
15 What Price Will I Receive When I Buy Shares?
16 What Else Should I Know To Make A Purchase?
16 HOW TO SELL SHARES
16 How Do I Redeem My Shares?
18 What NAV Will I Receive For Shares I Want To Sell?
18 What Kind Of Paperwork Is Involved In Selling
Shares?
18 How Quickly Can I Receive My Redemption Proceeds?
19 Do I Have Any Reinstatement Privileges After I Have
Redeemed Shares?
19 DIVIDEND AND DISTRIBUTION POLICIES
SHAREHOLDER SERVICES 19 CAN I USE THE FUND IN MY RETIREMENT PLAN?
20 CAN I EXCHANGE MY INVESTMENT FROM ONE FUND TO
ANOTHER?
20 WHAT IS TELETRADE?
21 CAN I ARRANGE TO HAVE AUTOMATIC INVESTMENTS MADE ON
A REGULAR BASIS?
21 WHAT IS DOLLAR COST AVERAGING AND HOW CAN I
IMPLEMENT IT?
21 CAN I ARRANGE PERIODIC WITHDRAWALS?
21 CAN MY DIVIDENDS FROM THE FUND BE INVESTED IN OTHER
FUNDS?
22 IS THERE A SALARY DEDUCTION PLAN AVAILABLE?
THE BUSINESS OF THE FUND 22 FUND MANAGEMENT
22 Service Providers
24 TAX INFORMATION
25 MEASURING PERFORMANCE
26 DESCRIPTION OF SHARES
26 PLAN PAYMENTS
- ------------------------------------------------------------------------------------------------------------------------
DISTRIBUTOR: INVESTMENT ADVISER:
Concord Financial Group, Inc. Bank of America National Trust and Savings Association
125 West 55th Street 555 California Street
New York, NY 10019 San Francisco, CA 94104
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 39
EXPENSE SUMMARY
SHAREHOLDER TRANSACTION EXPENSES are charges you pay when buying or selling
shares of the Fund. ANNUAL FUND OPERATING EXPENSES include payments by the Fund
and payments by the Portfolio which are allocable to the Fund. Operating
expenses include fees for portfolio management, maintenance of shareholder
accounts, general administration, shareholder servicing, accounting and other
services.
At right is a summary of the shareholder transaction expenses imposed by the
Fund and its operating expenses (including the operating expenses of the
Portfolio which are allocable to the Fund) expected to be incurred during the
current fiscal year. This information has been restated to assume that current
fees had been in effect during the previous fiscal year. Actual expenses may
vary. A hypothetical example based on the summary is also shown.
<TABLE>
<S> <C>
SHAREHOLDER TRANSACTION EXPENSE
Maximum Sales Load Imposed on Purchases
(as a percentage of offering price) 4.50%
Sales Load Imposed on Reinvested Dividends None
Deferred Sales Load None
Redemption Fees None
Exchange Fee None
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Management Fees (After Fee Waivers) 0.09%
All Other Expenses (After Expense
Reimbursements) 0.71%
-----
Shareholder Service Payments
(After Fee Waivers) 0.00%
Other Expenses
(After Expense Reimbursements) 0.71%
-----
Total Operating Expenses
(After Fee Waivers and Expense
Reimbursements) 0.80%
=====
</TABLE>
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
EXAMPLE: Assume the annual return is 5% and operating expenses are the same After 1 Year : $53
as those stated above. For every $1,000 you invest, here's how much you After 3 Years : $69
would have paid in total expenses if you closed your account after the After 5 Years : $87
number of years indicated: After 10 Years: $139
</TABLE>
Note: The preceding operating expenses and example should not be considered a
representation of future investment returns and operating expenses. Actual
investment returns and operating expenses may be more or less than those shown.
- --------------------------------------------------------------------------------
This expense information is provided to help you understand the expenses you
would bear either directly (as with transaction expenses) or indirectly (as with
annual operating expenses) as a Fund shareholder.
Management fees (without waivers) consist of:
- - an investment advisory fee payable at the annual rate of 0.55% of the
Portfolio's average daily net assets; and
- - an administration fee payable at the annual rate of 0.15% of the Fund's
average daily net assets and 0.05% of the Portfolio's average daily net
assets.
Without fee waivers a shareholder service payment is made in the amount of 0.25%
of the Fund's average daily net assets. As indicated in the table above,
however, Management intends to waive fees and reimburse certain Other Expenses
on behalf of the Fund so that Total Operating Expenses do not exceed 0.80%.
Absent these fee waivers and reimbursements the estimated Total Operating
Expenses would be 3.82% of the Fund's average daily net assets.
For a further description of shareholder transaction expenses and the Fund's
operating expenses, see the sections entitled "Shareholder Guide," "The Business
of the Fund" and "Plan Payments" in this Prospectus.
The Board of Directors of the Company believes that the aggregate per share
expenses of the Fund and the Portfolio in which the Fund's assets are invested
will be less than or approximately equal to the expenses which the Fund would
incur if the Company retained the services of an investment adviser for the Fund
and the assets of the Fund were invested directly in the type of securities held
by the Portfolio. Further, the Directors believe that the shareholders of the
Fund will participate in the ownership of a larger portfolio of securities than
could be achieved directly by the Fund.
2
<PAGE> 40
FINANCIAL HIGHLIGHTS
The table below shows certain information concerning the investment results for
the Fund for the periods indicated. This information has been audited by Price
Waterhouse LLP, independent accountants, whose unqualified report on the
financial statements containing such information is incorporated by reference in
the Statement of Additional Information.
The Financial Highlights should be read in conjunction with the financial
statements and notes thereto and the unqualified report of independent
accountants which are incorporated by reference in the Statement of Additional
Information. Further information about the performance of the Fund is available
in the annual report to shareholders. Both the Statement of Additional
Information and the annual report to shareholders may be obtained from the Fund
free of charge by calling 800-332-3863.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE
PERIOD
JANUARY
18,
1994
(COMMENCEMENT
FOR THE OF
YEAR OPERATIONS)
ENDED THROUGH
FEBRUARY FEBRUARY
28, 1995 28, 1994
------- -------
<S> <C> <C>
Net asset value per share, beginning of period......... $ 14.84 $ 15.00
------- -------
Income from Investment Operations:
Net investment income................................ 0.48 0.03
Net realized and unrealized gain (loss) on
securities........................................ 0.24 (0.19)
------- -------
Total gain (loss) from investment operations......... 0.72 (0.16)
Less Dividends:
Dividends from net investment income................. (0.41) --
------- -------
Net change in net asset value.......................... 0.31 (0.16)
------- -------
Net asset value per share, end of period............... $ 15.15 $ 14.84
====== ======
Total Return++......................................... 5.03% (1.07)%
Ratios/supplemental data:
Net assets, end of period (000)...................... $ 5,694 $ 666
Ratio of expenses to average net assets*............. 0.00% 0.00%+
Ratio of net investment income to average net
assets*........................................... 4.25% 4.20%+
</TABLE>
- ---------------
* Reflects the Fund's proportionate share of the fee waivers and expense
reimbursements by the Portfolio's Investment Adviser and Administrator and
the Fund's Administrator and Distributor. Such fee waivers and expense
reimbursements had the effect of reducing the ratio of expenses to average
net assets and increasing the ratio of net investment income to average net
assets by 7.89% and 83.95% (annualized) for the periods ended February 28,
1995 and February 28, 1994, respectively.
+ Annualized.
++ The total returns listed are not annualized for the period ended February 28,
1994, and do not include the effect of the maximum 4.50% sales charge.
3
<PAGE> 41
FUND INVESTMENTS
THE PACIFIC HORIZON ASSET ALLOCATION FUND SEEKS LONG-TERM GROWTH FROM CAPITAL
APPRECIATION AND DIVIDEND AND INTEREST INCOME. THE FUND SEEKS TO ACHIEVE ITS
OBJECTIVE THROUGH A BALANCED APPROACH TO INVESTMENT USING BONDS, EQUITY
SECURITIES AND CASH EQUIVALENTS.
THE FUND MAY BE APPROPRIATE FOR INVESTORS WHO WANT:
- LONG-TERM CAPITAL APPRECIATION; AND
- CURRENT DIVIDEND AND INTEREST INCOME.
---------------------------------------------------------
INVESTMENT OBJECTIVE
THE OBJECTIVE OF THE FUND IS TO PROVIDE INVESTORS WITH LONG-TERM GROWTH FROM
CAPITAL APPRECIATION AND DIVIDEND AND INTEREST INCOME. THE FUND SEEKS TO ACHIEVE
ITS INVESTMENT OBJECTIVE BY INVESTING ALL OF ITS INVESTABLE ASSETS IN THE
PORTFOLIO. THE PORTFOLIO HAS THE SAME INVESTMENT OBJECTIVE AS THE FUND. WHILE
THE PORTFOLIO STRIVES TO ATTAIN ITS INVESTMENT OBJECTIVE, THERE CAN BE NO
ASSURANCE THAT IT WILL BE ABLE TO DO SO.
SINCE THE INVESTMENT CHARACTERISTICS OF THE FUND WILL CORRESPOND TO THOSE OF THE
PORTFOLIO, THE FOLLOWING IS A DISCUSSION OF THE VARIOUS INVESTMENTS OF AND
TECHNIQUES EMPLOYED BY THE PORTFOLIO.
---------------------------------------------------------
TYPES OF INVESTMENTS
IN GENERAL. The Portfolio is a diversified portfolio which will invest
substantially all of its assets through a balanced approach using bonds, equity
securities and cash equivalents.
Investments in equity securities will be limited to common stocks included in
either the Dow Jones Industrial Average or the Standard and Poor's 500 Index.
Bonds acquired by the Portfolio will be investment grade at the time of
purchase, and may include corporate and government obligations, mortgage-backed
securities and municipal securities. Investment grade bonds are bonds that are
rated in one of the four highest rating categories by a nationally recognized
statistical rating organization, i.e., BBB or better by Standard & Poor's
Ratings Group, Division of McGraw Hill ("S&P"), Duff & Phelps Credit Co. ("D&P")
or Fitch Investors Service, Inc. ("Fitch") or Baa or better by Moody's Investors
Service, Inc. ("Moody's"). While bonds with such ratings are regarded as having
adequate capacity to pay interest and repay principal, adverse economic
conditions or changing circumstances could lead to a weakened capacity to pay
interest and repay principal. Bonds with the lowest investment grade rating
(i.e., BBB or Baa) do not have outstanding investment characteristics and may
have speculative characteristics as well. Unrated securities will be purchased
only if Bank of America determines that they are of comparable quality to the
rated securities in which the Portfolio may invest. Under normal market
conditions at least 25% of the Portfolio's total assets will be invested in
fixed income senior securities.
Mortgage-backed securities, such as GNMA, FNMA and FHLMC securities, will be
guaranteed as to principal and interest, but not market value, by the U.S.
Government or one of its agencies or instrumentalities. The Portfolio will not
invest more than 35% of its net assets in mortgage-backed securities. There is
the risk that corporate bonds might be called by the issuer if the bond interest
rate is higher than currently prevailing interest rates. Similarly, a risk
associated with mortgage-backed securities is early paydown resulting from
refinancing of the underlying mortgages. The rate of such prepayments, and hence
the life of the security, will primarily be a function of current market rates.
In periods of falling interest rates, the rate of prepayments tends to
4
<PAGE> 42
increase. During such periods, the reinvestment of prepayment proceeds will
generally be at lower rates than the rates on the prepaid obligations.
The Portfolio may also invest, from time to time, in obligations issued by state
and local governmental issuers ("Municipal Securities"). The purchase of
Municipal Securities may be advantageous when, as a result of prevailing
economic, regulatory or other circumstances, the performance of such securities,
on a pre-tax basis, is comparable to that of corporate or U.S. Government
obligations. Dividends received by shareholders which are attributable to
interest income received from Municipal Securities generally will be subject to
Federal income tax.
The two principal classifications of Municipal Securities which may be held by
the Portfolio 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 user of the
facility being financed. Private activity bonds held by the Portfolio are in
most cases revenue securities and are not payable from the unrestricted revenues
of the issuer. Consequently, the credit quality of such private activity bonds
is usually directly related to the credit standing of the corporate user of the
facility involved.
The Portfolio may also include "moral obligation" securities, which are normally
issued 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 which created the
issuer.
The value of securities held by the Portfolio will vary with changes in interest
rates and market and economic conditions.
As used in this Prospectus, "cash equivalents" are the following short-term,
interest bearing instruments: obligations issued or guaranteed by the U.S.
Government, its agencies and instrumentalities, certificates of deposit,
bankers' acceptances, time deposits and other interest-bearing deposits issued
by domestic and foreign banks and foreign branches of U.S. banks, asset-backed
securities, foreign government securities and commercial paper issued by U.S.
and foreign issuers which is rated at the time of purchase at least Prime-2 by
Moody's or A-2 by S&P.
The Portfolio may also make other investments as described more fully below
under "Other Investment Practices and Considerations."
FUNDAMENTAL LIMITATIONS. The investment objective of the Fund and the Portfolio
may not be changed without a vote by the holders of a majority of the
outstanding shares of the Fund or of the outstanding interests of the Portfolio,
respectively. Policies requiring such a vote to effect a change are known as
"fundamental." A number of the other fundamental investment limitations are
summarized below. Neither the Fund nor the Portfolio may:
1. Purchase securities (except securities issued by the U.S. Government, its
agencies or instrumentalities) if, as a result, more than 5% of its total
assets will be invested in the securities of any one issuer or it would own
more than 10% of the voting securities of such issuer, except that up to 25%
of its total assets may be invested without regard to these limitations; and
provided that all of its assets may be invested in a diversified, open-end
management investment company, or a series thereof, with substantially the
same investment objectives, policies and restrictions without regard to the
limitations set forth in this paragraph;
2. Make loans to other persons except that it may make time or demand deposits
with banks, provided that time deposits shall not have an aggregate value in
excess of 10% of its net assets, and may purchase bonds, debentures or
similar obligations that are publicly distributed, may loan portfolio
securities not in excess of
5
<PAGE> 43
10% of the value of its total assets, and may enter into repurchase
agreements as long as repurchase agreements maturing in more than seven days
do not exceed 10% of the value of its total assets; or
3. Purchase or sell commodities contracts, except that it may purchase or sell
futures contracts on financial instruments, such as bank certificates of
deposit and U.S. Government securities, foreign currencies and stock indexes
and options on any such futures if such options are written by other persons
and if (i) the futures or options are listed on a national securities or
commodities exchange, (ii) the aggregate premiums paid on all such options
that are held at any time do not exceed 20% of its total net assets, and
(iii) the aggregate margin deposits required on all such futures or options
thereon held at any time do not exceed 5% of its total assets.
If a percentage restriction is satisfied at the time of investment, a later
increase or decrease in percentage resulting from a change in values will not
constitute a violation of that restriction.
A complete list of additional fundamental investment limitations is set out in
the Statement of Additional Information.
OTHER INVESTMENT PRACTICES AND
CONSIDERATIONS
FOREIGN SECURITIES. Subject to its investment objective and the policies stated
above, the Portfolio may invest in securities of foreign issuers that may or may
not be publicly traded in the United States, including Yankee bonds
(dollar-denominated bonds sold in the United States by non-U.S. issuers) and
Eurobonds (bonds issued in a country and sometimes a currency other than the
country of the issuer). It is currently the intention of the Portfolio to invest
no more than 25% of its net assets (at the time of purchase) in foreign
securities. The Portfolio may be subjected to additional risks associated with
the holding of property abroad such as future political and economic
developments, currency fluctuations, possible withholding of tax payments,
possible seizure or nationalization of foreign assets, possible establishment of
currency exchange control regulations or the adoption of other foreign
government restrictions that might adversely affect the payment of principal or
interest on foreign securities in the Portfolio, securities of some foreign
companies are less liquid, and their prices more volatile than domestic
companies, have less publicly available information about foreign companies, and
the fact that foreign companies are not generally subject to uniform accounting,
auditing and financial reporting standards, practices and requirements
comparable to those applicable to domestic companies.
OPTIONS. The Portfolio may purchase put and call options on listed securities
and stock indexes so long as the aggregate premiums paid for options does not
exceed 2% of the net assets of the Portfolio (this restriction does not apply to
options on futures contracts). Put options may be purchased in order to protect
the Portfolio's securities in expectation of a declining market and call options
may be purchased to benefit from anticipated price increases in the underlying
securities or index. The Portfolio may not write put options but may write fully
covered call options as long as the Portfolio remains fully covered throughout
the life of the option, either by owning the optioned securities or possessing a
call issued by another writer that is identical in all respects to the call
written by the Portfolio. For additional information relating to option trading
practices, including particular risks thereof, see the Statement of Additional
Information.
FUTURES. The Portfolio may purchase and sell both interest rate and stock index
futures contracts (as well as purchase related options) as a hedge against
changes resulting from market conditions in the values of the securities held by
the Portfolio or which it intends to purchase and where the transactions are
economically appropriate for the reduction of risks inherent in the ongoing
management of the Portfolio. The Portfolio may not purchase or sell an interest
rate or stock index futures contract or purchase a related option unless
immediately after any such transaction the
6
<PAGE> 44
sum of the aggregate amount of margin deposits on its existing futures positions
and the amount of premiums paid for related options does not exceed 5% of the
Portfolio's total assets (after taking into account certain technical
adjustments). For a more detailed description of futures contracts and options
and the costs and risks related to such instruments, see the Statement of
Additional Information.
VARIABLE RATE INSTRUMENTS. The Portfolio may invest in variable and floating
rate instruments, which may include master demand notes. Although payable on
demand by the Portfolio, master demand notes may not be marketable.
Consequently, the ability to redeem such notes may depend on the borrower's
ability to pay which will be continuously monitored by Bank of America. Such
notes will be purchased only from domestic corporations that either (a) are
rated Aa or better by Moody's or AA or better by S&P, (b) have commercial paper
rated at least Prime-2 by Moody's or A-2 by S&P, (c) are backed by a bank letter
of credit or (d) are determined by Bank of America to be of a quality comparable
to securities described in either clause (a) or (b).
INVESTMENT COMPANY SECURITIES. In connection with the management of its daily
cash position, the Portfolio may invest in securities issued by other investment
companies which invest in short-term debt securities and which seek to maintain
a $1.00 net asset value per share (i.e., "money market funds"). No more than 10%
of the value of the Portfolio's total assets will be invested in securities of
other investment companies, with no more than 5% invested in the securities of
any one investment company. As a shareholder of another investment company, the
Portfolio would bear, along with other shareholders, its pro rata portion of the
other investment company's expenses, including advisory fees.
REPURCHASE AGREEMENTS. The Portfolio may enter into repurchase agreements.
Under these agreements, the Portfolio will acquire securities from either a bank
which has a commercial paper rating of A-2 or better by S&P or Prime-2 or better
by Moody's or a registered broker-dealer, and the seller agrees to repurchase
them within a specified time at a fixed price (equal to the purchase price plus
interest). Repurchase agreements are considered to be loans under the Investment
Company Act of 1940 (the "1940 Act"). Repurchase agreements maturing in more
than seven days will not exceed 10% of the value of the total assets of the
Portfolio. Repurchase agreements will be entered into only for debt obligations
issued or guaranteed by the U.S. Government, its agencies or instrumentalities,
certificates of deposit, bankers' acceptances or commercial paper, and either
the Portfolio's custodian or its agent will have physical possession of the
securities or the securities will be transferred to the Portfolio's custodian,
by appropriate entry in the Federal Reserve Bank's records and, in either case,
will be maintained in a segregated account.
Bank of America will monitor the value of securities acquired under repurchase
agreements to ensure that the value of such securities will always equal or
exceed the repurchase price under the repurchase agreement. If the other party
to a repurchase agreement defaults, the Portfolio might incur a loss if the
value of the securities securing the repurchase agreement declines, and might
incur disposition costs in connection with liquidating the securities. In
addition, if bankruptcy proceedings are commenced with respect to the seller,
realization upon the securities by the Portfolio may be delayed or denied.
REVERSE REPURCHASE AGREEMENTS. The Portfolio may enter into reverse repurchase
agreements. Under these arrangements, the Portfolio will sell a security held by
the Portfolio to either a bank which has a commercial paper rating of A-2 or
better by S&P or Prime-2 or better by Moody's or a registered broker-dealer,
with an agreement to repurchase the security on an agreed date, price and
interest payment. Reverse repurchase agreements involve the possible risk that
the value of portfolio securities the Portfolio relinquishes may decline below
the price the Portfolio must pay when the transaction closes. Reverse repurchase
agreements are considered to be borrowings under the 1940 Act. Borrowings may
magnify the poten-
7
<PAGE> 45
tial for gain or loss on amounts invested resulting in an increase in the
speculative character of the Portfolio's outstanding shares.
SECURITIES LENDING. In order to earn additional income, the Portfolio may lend
its portfolio securities to broker-dealers that Bank of America considers to be
of good standing. Borrowers of portfolio securities may not be affiliated
directly or indirectly with the Company or the Portfolio. If the broker-dealer
should become bankrupt, however, the Portfolio could experience delays in
recovering its securities. A securities loan will only be made when, in Bank of
America's judgment, the possible reward from the loan justifies the possible
risks. In addition, such loans will not be made if, as a result, the value of
securities loaned by the Portfolio exceeds 10% of its total assets. Securities
loans will be fully collateralized.
ASSET-BACKED SECURITIES. The Portfolio may purchase asset-backed securities.
Asset-backed securities consist of undivided fractional interests in pools of
consumer loans (unrelated to mortgage loans) or receivables held in a trust.
Examples include certificates for automobile receivables (CARS) and credit card
receivables (CARDS). Payments of principal and interest on the loans or
receivables are passed through to certificate holders. Asset-backed securities
may be issued by either governmental or non-governmental entities. Payment on
asset-backed securities of private issuers is typically supported by some form
of credit enhancement, such as a letter of credit, surety bond, limited
guaranty, or subordination. The extent of credit enhancement varies, but usually
amounts to only a fraction of the asset-backed security's par value until
exhausted. Ultimately, asset-backed securities are dependent upon payment of the
consumer loans or receivables by individuals, and the certificate holder
frequently has no recourse to the entity that originated the loans or
receivables.
The underlying assets may be prepaid with the result of shortening the
certificates' weighted average life. Prepayment rates vary widely and may be
affected by changes in market interest rates. It is not possible to accurately
predict the average life of a particular pool of loans or receivables. The
proceeds of prepayments received by the Portfolio must be reinvested in
securities whose yields reflect interest rates prevailing at the time. Thus, the
Portfolio's ability to maintain a portfolio which includes high-yielding
asset-backed securities will be adversely affected to the extent reinvestments
are in lower yielding securities. The actual maturity and realized yield will
therefore vary based upon the prepayment experience of the underlying asset pool
and prevailing interest rates at the time of prepayment. Asset-backed securities
may be subject to greater risk of default during periods of economic downturn
than other instruments. Also, while the secondary market for asset-backed
securities is ordinarily quite liquid, in times of financial stress the
secondary market may not be as liquid as the market for other types of
securities, which could result in the Portfolio's experiencing difficulty in
valuing or liquidating such securities.
WHEN-ISSUED SECURITIES AND FORWARD COMMITMENTS. The Portfolio may purchase
securities on a "when-issued" basis and may purchase or sell securities on a
"forward commitment" basis. These transactions, which involve a commitment by
the Portfolio to purchase or sell particular securities with payment and
delivery taking place at a future date (perhaps one or two months later), permit
the Portfolio to lock-in a price or yield on a security, regardless of future
changes in interest rates. When-issued and forward commitment transactions
involve the risk that the price or yield obtained may be less favorable than the
price or yield available when the delivery takes place. The Portfolio will set
aside in a segregated account cash or liquid securities equal to the amount of
any when-issued or forward commitment transactions. The Portfolio's when-issued
purchases and forward commitments are not to exceed 25% of the value of the
Portfolio's total assets absent unusual market conditions. The Portfolio does
not intend to engage in when-issued purchases and forward commitments for
speculative purposes but only in furtherance of their investment objectives.
8
<PAGE> 46
SECURITIES ISSUED BY BANK OF AMERICA AND AFFILIATES. The Portfolio will not
invest in instruments or securities issued by Bank of America or any of its
affiliates.
PORTFOLIO TRANSACTIONS. Investment decisions for the Portfolio are made
independently from those for other investment companies and accounts managed by
Bank of America and its affiliated entities. Such other investment companies and
accounts may also invest in the same securities as the Portfolio. When a
purchase or sale of the same security is made at substantially the same time on
behalf of the Portfolio and another investment company or account, available
investments or opportunities for sales will be equitably allocated pursuant to
procedures of Bank of America. In some instances, this investment procedure may
adversely affect the price paid or received by the Portfolio or the size of the
position obtained or sold by the Portfolio.
In allocating purchase and sale orders for investment securities (involving the
payment of brokerage commissions or dealer concessions), Bank of America may
consider the sale of Fund shares by broker-dealers and other financial
institutions (including affiliates of Bank of America and the Fund's distributor
to the extent permitted by law), provided it believes the quality of the
transaction and the price to the Portfolio are not less favorable than what they
would be with any other qualified firm.
PORTFOLIO TURNOVER. The Portfolio's investment practices may result in
portfolio turnover greater than that of other mutual fund portfolios. Although
no commissions are paid on bond transactions, purchases and sales are at net
prices which reflect dealers' mark-ups and mark-downs, and a higher portfolio
turnover rate for bond investments will result in the payment of more dealer
mark-ups and mark-downs than would otherwise be the case. Higher rates of
turnover may require payment of brokerage commissions, impose other transaction
costs and could increase substantially the amount of income received by the
Portfolio that constitutes taxable capital gains. To the extent capital gains
are realized, distributions from those gains may be ordinary income for federal
tax purposes (see "Tax Information"). Portfolio turnover will not be a limiting
factor in making investment decisions for the Fund.
MASTER-FEEDER STRUCTURE. The Fund is an open-end investment portfolio that
seeks to achieve its investment objective by investing all of its investable
assets in the Portfolio, which has the same investment objective. The Fund may
withdraw its investment in the Portfolio at any time if the Board of Directors
of the Company determines that it is in the best interest of the Fund to do so.
Upon any such withdrawal, the Board of Directors would consider what action
might be taken, including the investment of all of the assets of the Fund in
another pooled investment entity having the same investment objective as the
Fund or the hiring of an investment adviser to manage the Fund's assets in
accordance with the investment policies described above with respect to the
Portfolio. See "Expense Summary," "Fund Investments" and "Fund Management" for a
description of this investment objective and the investment policies,
restrictions, management and expenses of the Fund and the Portfolio.
The Portfolio is a separate series of Master Investment Trust, Series I (the
"Master Trust"), which is organized as a business trust under the laws of
Delaware. The Fund and other entities that may invest in the Portfolio from time
to time (e.g., other investment companies and commingled trust funds) will each
be liable for all obligations of the Portfolio. However, the risk of the Fund's
incurring financial loss on account of such liability is limited to
circumstances in which both inadequate insurance exists and the Portfolio itself
is unable to meet its obligations. Accordingly, the Company's Board of Directors
believes that neither the Fund nor its shareholders will be adversely affected
by reason of the Fund's investing in the Portfolio. As stated above, the
investment objective of the Fund and the Portfolio is a fundamental policy and
may not be changed, in the case of the Fund, without the vote of its
shareholders or, in the case of the Portfolio, without the vote of its
interestholders. Whenever the Fund is requested
9
<PAGE> 47
to vote on matters pertaining to the investment objective or a fundamental
policy of the Portfolio, the Fund will hold a meeting of its shareholders and
will cast its vote in the same proportion as the votes cast by the Fund's
shareholders. The Fund will vote any shares for which it receives no voting
instructions in the same proportion as the shares for which it does receive
voting instructions. As with any mutual fund, other investors in the Portfolio
could control the results of voting at the Portfolio level in certain instances
(e.g., a change in fundamental policies by the Portfolio which was not approved
by the Fund's shareholders). This could result in the Fund's withdrawal of its
investment in the Portfolio, and in increased costs and expenses for the Fund.
Further, the withdrawal of other entities that may from time to time invest in
the Portfolio could have an adverse effect on the performance of the Portfolio
and the Fund, such as decreased economies of scale and increased per share
operating expenses. In addition, the total withdrawal by another investment
company as an investor in the Portfolio will cause the Portfolio to terminate
automatically in 120 days unless the Fund and any other investors in the
Portfolio unanimously agree to continue the business of the Portfolio.
As the Fund is required to submit such matters to a vote of its shareholders, it
will be required to incur the expenses of shareholder meetings in connection
with such withdrawals. If unanimous agreement is not reached to continue the
Portfolio, the Board of Directors of the Company would need to consider
alternative arrangements for the Fund, such as those described above. The policy
of the Fund, and other similar investment companies, to invest their investable
assets in trusts such as the Portfolio is a relatively recent development in the
mutual fund industry and, consequently, there is a lack of substantial
experience with the operation of this policy.
There may also be other investment companies through which you can invest in the
Portfolio which may have higher or lower fees and expenses than those of the
Fund and which may therefore have different performance results than the Fund.
Information concerning whether an investment in the Portfolio may be available
through another entity investing in the Portfolio may be obtained by calling
800-332-3863.
10
<PAGE> 48
SHAREHOLDER GUIDE
THE FOLLOWING SECTION WILL PROVIDE YOU WITH ANSWERS TO SOME OF THE MOST
OFTEN-ASKED QUESTIONS REGARDING BUYING AND SELLING THE FUND'S SHARES AND
REGARDING THE FUND'S DIVIDENDS
HOW TO BUY SHARES
WHAT IS MY MINIMUM INVESTMENT IN THE FUND?
Generally, there is a minimum investment requirement of $500 for initial
purchases and $50 for subsequent purchases, although these amounts may be
altered in certain circumstances as shown below.
- ---------------------------------------------------------
INVESTMENT MINIMUMS
FOR SPECIFIC TYPES OF ACCOUNTS
<TABLE>
<CAPTION>
INITIAL SUBSEQUENT
INVESTMENT INVESTMENT
------ ------------
<S> <C> <C>
Regular Account $ 500* $50
Automatic Investment Plan $ 50 $50
IRAs, SEP-IRAs
(one participant) $ 500 No minimum
Spousal IRAs** $ 250 No minimum
SEP-IRAs (more than
one participant) $2,500 No minimum
</TABLE>
* The minimum investment is $100 for purchases made through Bank of America's
trust and agency accounts or a Service Organization (defined below) whose
clients have made aggregate minimum purchases of $1,000,000.
** A regular IRA must be opened in conjunction with this account.
- ---------------------------------------------------------
HOW ARE SHARES PRICED?
Shares are purchased at their public offering price, which is based upon the
Fund's net asset value per share plus a front-end sales load. The Fund
calculates its net asset value ("NAV") as follows:
(Value of Fund Assets) - (Fund Liabilities)
NAV = -----------------------------------------------------------
Number of Outstanding Shares
Net asset value is determined as of the end of regular trading hours on the New
York Stock Exchange (the "Exchange") (currently 4:00 p.m. Eastern time) on days
the Exchange is open.
The Portfolio's investments are valued at market value or, where market
quotations are not readily available, at fair value as determined in good faith
by the Portfolio pursuant to procedures adopted by the Portfolio's Board of
Trustees. Short-term debt securities are valued at amortized cost, which
approximates market value. For further information about valuing securities, see
the Statement of Additional Information. For voice recorded price and yield
information call 800-227-1545.
SALES LOAD. The front-end sales load for the Fund begins at 4.50% and may
decrease as the amount you invest increases, as shown in the following chart:
- ---------------------------------------------------------
<TABLE>
<CAPTION>
DEALER'S
AS A % OF REALLOWANCE
------------ AS A
NET % OF
AMOUNT OF OFFERING ASSET OFFERING
TRANSACTION PRICE VALUE PRICE*
------------------- ---- ---- ----
<S> <C> <C> <C>
Less than $100,000 4.50 4.71 4.00
$100,000 but less
than $250,000 3.75 3.90 3.35
$250,000 but less
than $500,000 2.50 2.56 2.20
$500,000 but less
than $750,000 2.00 2.04 1.75
$750,000 but less
than $3,000,000 1.00 1.01 0.90
$3,000,000 or more 0.00 0.00 0.00
</TABLE>
* Dealer's reallowance may be changed periodically.
From time to time, the Fund's distributor will make or allow additional
payments or promotional incentives in the form of cash or other compensation
such as trips to sales seminars, tickets to sporting and other entertainment
events and gifts of merchandise to firms that sell shares of the Fund.
- ---------------------------------------------------------
WHEN NO SALES LOAD IS APPLIED. You pay no front-end sales load on the
following types of transactions:
- - reinvestment of dividends or distributions;
11
<PAGE> 49
- - corporate/business retirement plans (such as 401(k), 403(b)(7), 457 and Keogh
accounts) sponsored by the Fund's administrator;
- - employer-sponsored employee pension or retirement plans making direct
investments in the Fund;
- - any purchase of shares by an investment adviser regulated by federal or state
governmental authority when the investment adviser is purchasing shares for
its own account or for an account for which it is authorized to make
investment decisions (i.e., a discretionary account);
- - accounts opened by a bank, trust company or thrift institution, acting as a
fiduciary, provided appropriate notification of such status is given at the
time of investment;
- - any purchase of shares by clients of The Private Bank of Bank of America or by
Private Banking clients of Seattle-First National Bank or by or on behalf of
agency accounts administrated by any bank or trust company affiliate of Bank
of America;
- - any purchase of shares through a discount broker-dealer that imposes a
transaction charge with respect to such purchase, provided you were the
beneficial owner of shares of the Fund (or any other fund in the Pacific
Horizon Family of Funds) prior to July 1, 1992, so long as your account
remains open on the Company's books;
- - any purchase of shares, provided you were the beneficial owner of shares of
the Fund (or any other fund in the Pacific Horizon Family of Funds) before
April 20, 1987, so long as your account remains open on the Company's books;
- - any purchase of shares, provided you were the beneficial owner of shares of
Bunker Hill Income Securities, Inc. on the date of its reorganization into the
Pacific Horizon Corporate Bond Fund, so long as your account remains open on
the Company's books;
- - any purchase of shares pursuant to the Reinstatement Privilege described
below; and
- - any purchase of shares pursuant to the Directed Distribution Plan described
below.
Additionally, some individuals are not required to pay a front-end sales load
when purchasing Fund shares, including:
- - members of the Company's Board of Directors;
- - U.S. based employees and retirees (including employees who are U.S. citizens
but work abroad and retirees who are U.S. citizens but worked abroad) of Bank
of America or any of its affiliates, and their parents, spouses and minor
children, as well as members of the Board of Directors of Bank of America or
any of its affiliates;
- - registered representatives or full-time employees of broker-dealers having
agreements with the Fund's distributor pertaining to the sale of Fund shares
(and their spouses and minor children) to the extent permitted by such
organizations; and
- - former full-time employees (and retirees) of Security Pacific Corporation (or
any of its subsidiaries) and the surviving spouses and minor children of such
employees (and retirees), provided they were the beneficial owner of shares of
the Fund (or any other fund in the Pacific Horizon Family of Funds) prior to
July 1, 1992, so long as their account remains open on the Company's books.
RIGHTS OF ACCUMULATION. When buying shares in Pacific Horizon Funds, your
current aggregate investment determines the sales load that you pay. Your
current aggregate investment is the accumulated combination of your immediate
investment along with the shares that you beneficially own in any Pacific
Horizon Fund, or for like shares of any investment portfolio (a "Time Horizon
Fund") of Time Horizon Funds, an open-end investment company managed by an
affiliate of Bank of America, on which you paid a sales load (including shares
that carry no sales load but were obtained through an exchange and can be traced
back to shares that were acquired with a sales load).
12
<PAGE> 50
To qualify for a reduced sales load, you or your Service Organization (which is
an institution such as a bank or broker-dealer that has entered into a selling
and/or servicing agreement with the Fund's distributor) must notify the Fund's
transfer agent at the time of investment that a quantity discount is applicable.
Use of this service is subject to a check of appropriate records, after which
you will receive the lowest applicable sales charge. If you want to participate
you can so indicate on your Account Application or make a subsequent written
request to the Transfer Agent.
Example: Suppose you beneficially own shares of the Fund, the Pacific Horizon
California Tax-Exempt Bond Fund, the Pacific Horizon U.S. Government Securities
Fund, the Pacific Horizon Capital Income Fund and shares of the Company's money
market funds that can be traced back to the purchase of shares carrying a sales
load (or any combination thereof) with an aggregate current value of $90,000. If
you subsequently purchase shares of the Fund with a current value of $10,000,
the load applicable to the subsequent purchase would be reduced to 3.75% of the
offering price.
LETTER OF INTENT. You may also obtain a reduced sales charge by means of a
written Letter of Intent, which expresses your non-binding commitment to invest
in the aggregate $100,000 or more in shares of any Pacific Horizon Fund or any
Time Horizon Fund within a period of 13 months, beginning up to 90 days prior to
the date of the Letter's execution. Shares purchased during that period count as
a credit toward completion of the Letter of Intent. Any investments you make
during the period receive the discounted sales load based on the full amount of
your investment commitment. When your commitment is fulfilled, an adjustment
will be made to reflect any reduced sales load applicable to shares purchased
during the 90-day period prior to the submission of your Letter of Intent.
While signing a Letter of Intent does not bind you to purchase, or the Company
or Time Horizon Funds to sell, the full amount indicated at the sales load in
effect at the time of signing, you must complete the intended purchase to obtain
the reduced sales load. When you sign a Letter of Intent, the Company or Time
Horizon Funds, as applicable, holds in escrow shares purchased by you in an
amount equal to 5% of the total amount of your commitment. After you fulfill the
terms of the Letter of Intent, the escrow will be released.
If your aggregate investment exceeds the amount indicated in your Letter of
Intent, you will receive an adjustment which reflects the further reduced sales
load applicable to your excess investment. It will be in the form of additional
shares credited to your account at the then current offering price applicable to
a single purchase of the total amount of the total purchase.
If your aggregate investment is less than the amount you committed, you will be
requested to remit an amount equal to the difference between the sales load
actually paid and the sales load applicable to the aggregate purchases actually
made. If such remittance is not received within 20 days, the Transfer Agent will
redeem an appropriate number of shares held in escrow to realize the difference.
If you would like to participate, complete the Letter of Intent on your Account
Application. If you have any questions regarding the Letter of Intent, call
800-332-3863. Please read it carefully, as you will be bound by its terms.
HOW CAN I BUY SHARES?
The chart below provides more information regarding some of the different
methods for investing in the Fund.
13
<PAGE> 51
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
TO BUY SHARES
OPENING AN ACCOUNT ADDING TO AN ACCOUNT
- --------------------------------------------------------------------------------------------------------
THROUGH BANK OF AMERICA, YOUR BROKER OR ANOTHER SERVICE ORGANIZATION
(ORDERS ARE NOT EFFECTIVE UNTIL RECEIVED BY THE FUND'S TRANSFER AGENT)
<S> <C> <C>
Contact them directly for Contact them directly for
instructions. instructions.
<CAPTION>
THROUGH THE DISTRIBUTOR
(IF YOU ARE OR WILL BE THE SHAREHOLDER OF RECORD ON THE COMPANY'S BOOKS)
<S> <C>
BY MAIL
Pacific Horizon Funds, Inc. Complete Account Application Mail all subsequent
c/o DST Systems, Inc. and mail it with a check investments to:
P.O. Box 419955 (payable to Pacific Horizon
Kansas City, MO 64141-6955 Asset Allocation Fund) to the Pacific Horizon Funds, Inc.
address on the left. c/o DST Systems, Inc.
P.O. Box 419940
Kansas City, MO 64173-0298
- --------------------------------------------------------------------------------------------------------
IN PERSON
DST Systems, Inc. Deliver Account Application Deliver your payment directly
811 Main and your payment directly to to the address on the left.
Kansas City, MO 64105-2005 the address on the left.
- --------------------------------------------------------------------------------------------------------
BY WIRE
United Missouri Bank of Instruct your bank to Instruct your bank to
Kansas City, N.A. transmit immediately transmit immediately
10th and Grand available funds, for purchase available funds as described
Kansas City, MO 64106 of Fund shares in your name. at left, except that the wire
ABA No. 1010-0069-5 should indicate that you are
Pacific Horizon Funds, Inc. Be sure to have your bank making a subsequent purchase
Asset Allocation Fund indicate your name, address as opposed to opening a new
DDA #98-7037-107-3 and tax identification account.
number, the name of the Fund
and the fact that a new Be sure to include your name
account is being opened. and your Fund account number.
Consult your bank for information on remitting funds by wire
and any associated bank charges.
You may contact the Fund's transfer agent at 800-346-2087 for
further information regarding wiring instructions.
- --------------------------------------------------------------------------------------------------------
</TABLE>
14
<PAGE> 52
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
OPENING AN ACCOUNT ADDING TO AN ACCOUNT
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
BY TELETRADE TeleTrade Privileges apply Purchases may be made in the
(a service permitting transfers automatically, although the minimum amount of $500 and
of money from your Privilege may not be used to the maximum amount of $50,000
checking, NOW or bank make an initial purchase. If per transaction as soon as
money market account) you do not wish to have the appropriate information
TeleTrade Privileges, you regarding your bank account
must indicate that fact on has been established on your
the Account Application or in Fund account. This
a subsequent written notice information may be provided
to the Fund's transfer agent. on the Account Application or
in a signature guaranteed
letter of instruction to the
Transfer Agent. Signature
guarantees are discussed
under "How to Sell Shares."
Call 800-346-2087 to make
your purchase.
</TABLE>
You should refer to the "Shareholder Services" section
for additional important information about the TeleTrade Privilege.
YOU MAY USE OTHER INVESTMENT OPTIONS, INCLUDING AUTOMATIC INVESTMENTS
AND EXCHANGES, TO INVEST IN YOUR FUND ACCOUNT.
PLEASE REFER TO THE SECTION ENTITLED "SHAREHOLDER SERVICES"
FOR MORE INFORMATION.
- --------------------------------------------------------------------------------
WHAT PRICE WILL I RECEIVE WHEN I BUY SHARES?
Your shares will be purchased at the Fund's public offering price calculated at
the next close of regular trading on the Exchange (currently 4:00 p.m. Eastern
time) after your purchase order is received in proper form by the Fund's
transfer agent, DST Systems, Inc. (the "Transfer Agent"), at its Kansas City
office.
If you purchase shares through Bank of America, your broker or another Service
Organization, the entity involved is responsible for transmitting your order and
required funds to the Transfer Agent on a timely basis in accordance with the
procedures in this Prospectus. Share purchases (and redemptions) executed
through Bank of America or a Service Organization are executed only on days on
which the particular institution and the Fund are open for business. Purchase
orders received by a Service Organization in proper form by 4:00 p.m. Eastern
time on a business day will be effected at the public offering price calculated
at 4:00 p.m. Eastern time on that day, if the Service Organization transmits
your order to the Transfer Agent by the end of its business day (normally 5:15
p.m. Eastern time). Except as provided in the following two sentences, if the
order is not received in proper form by a Service Organization by 4:00 p.m.
Eastern time or not received by the Transfer Agent by the close of its business
day, the order will be based upon the next determined purchase price. The
Company may from time to time in its sole discretion appoint one or more
entities as the Fund's agent to receive irrevocable purchase and redemption
orders and to transmit them on a net basis to the Transfer Agent. In these
instances orders received by the entity by 4:00 p.m. Eastern time on a business
day will be effected as of 4:00 p.m. Eastern time that day if the order is
actually received by the Transfer Agent not later than the next business morning
accompanied by payment in federal funds.
15
<PAGE> 53
WHAT ELSE SHOULD I KNOW TO MAKE A PURCHASE?
Federal regulations require you to provide a certified taxpayer identification
number upon opening or reopening an account.
If your check used for investment does not clear, a fee may be imposed by the
Transfer Agent. All payments should be in U.S. dollars and, to avoid fees and
delays, should be drawn only on U.S. banks. Please remember that the Company
reserves the right to reject any purchase order.
You should note that Bank of America, Service Organizations and registered
investment advisers may charge a separate fee or transaction charge to their
clients for providing them with administrative services related to their
investment in Fund shares. These fees could constitute a substantial portion of
smaller accounts and may not be in an investor's best interest. Bank of America
and Service Organizations may also impose minimum customer account and other
requirements in addition to those imposed by the Fund. If you purchase or redeem
shares directly from the Fund, you may do so without incurring any charges other
than those described in this Prospectus.
HOW TO SELL SHARES
HOW DO I REDEEM MY SHARES?
Pacific Horizon Funds, Inc. makes it easy to sell, or "redeem," shares. The Fund
imposes no charge when you redeem shares. The value of the shares you redeem may
be more or less than your cost, depending on the Fund's current net asset value.
If you purchased your shares through an account at Bank of America, your Broker
or another Service Organization, you may redeem all or part of your shares in
accordance with the instructions pertaining to that account. If you are also the
shareholder of record on the Company's books, you may redeem shares in
accordance with the procedures described in the chart below as well as those of
your account. To use the redemption methods described below, you must arrange
with Bank of America or your Service Organization for delivery of the required
application(s) to the Transfer Agent.
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<TABLE>
<CAPTION>
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- -------------------------------------------------------------------------------------------------
TO SELL SHARES
THROUGH BANK OF AMERICA, YOUR BROKER OR ANOTHER SERVICE ORGANIZATION
(ORDERS ARE NOT EFFECTIVE UNTIL RECEIVED BY THE TRANSFER AGENT)
Contact them directly for instructions.
- -------------------------------------------------------------------------------------------------
THROUGH THE DISTRIBUTOR
(IF YOU ARE A SHAREHOLDER OF RECORD ON THE COMPANY'S BOOKS)
<S> <C>
BY MAIL
Pacific Horizon Send a signed, written request (each owner, including each
Asset Allocation Fund joint owner, must sign) to the Transfer Agent.
c/o DST Systems, Inc.
P.O. Box 419955 If you hold stock certificates for the shares being
Kansas City, MO 64141-6955 redeemed, make sure to endorse them for transfer, have your
signature on them guaranteed by your bank or another
guarantor institution (as described in the section entitled
"What Kind of Paperwork Is Involved in Selling Shares?") and
include them with your request.
- -------------------------------------------------------------------------------------------------
IN PERSON
DST Systems, Inc.
811 Main Deliver your signed, written request (each owner, including
Kansas City, MO 64105-2005 each joint owner, must sign) and any certificates (endorsed
for transfer and signature guaranteed as described in the
section entitled "What Kind of Paperwork Is Involved in
Selling Shares?") to the address on the left.
- -------------------------------------------------------------------------------------------------
BY WIRE
As soon as appropriate information regarding your bank
account has been established on your Fund account, you may
write, telephone or telegraph redemption requests to the
Transfer Agent, and redemption proceeds will be wired in
federal funds to the commercial bank you have specified.
Information regarding your bank account may be provided on
the Account Application or in a signature guaranteed letter
of instruction to the Transfer Agent. Signature guarantee
requirements are discussed below in the section entitled
"What Kind of Paperwork Is Involved in Selling Shares?".
Redemption proceeds will normally be wired the business day
after your request and any other necessary documents have
been received by the Transfer Agent.
Wire Privileges apply automatically unless you indicate on
the Account Application or in a subsequent written notice to
the Transfer Agent that you do not wish to have them.
Requests must be for at least $1,000 and may be subject to
limits on frequency and amounts.
Wire Privileges may be modified or suspended at any time,
and are not available for shares issued in certificate form.
Contact your bank for information on any charges imposed by
the bank in connection with receipt of redemptions by wire.
- -------------------------------------------------------------------------------------------------
</TABLE>
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<PAGE> 55
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------
TO SELL SHARES
<S> <C>
BY TELETRADE You may redeem Fund shares (minimum of $500 and maximum of
(a service permitting $50,000 per transaction) by telephone after appropriate
transfers of money to your information regarding your bank account has been established
checking, NOW or bank money on your Fund account. This information may be provided on
market account) the Account Application or in a signature guaranteed letter
of instruction to the Transfer Agent. Signature guarantee
requirements are discussed in the section entitled "What
Kind of Paperwork Is Involved in Selling Shares?".
Redemption orders may be placed by calling 800-346-2087.
TeleTrade Privileges apply automatically unless you indicate
on the Account Application or in a subsequent written notice
to the Transfer Agent that you do not wish to have them.
You should refer to the "Shareholder Services" section for
additional important information about the TeleTrade
Privilege.
OTHER REDEMPTION OPTIONS, INCLUDING EXCHANGES AND AUTOMATIC WITHDRAWALS, ARE ALSO
AVAILABLE. PLEASE REFER TO THE SECTION ENTITLED "SHAREHOLDER SERVICES" FOR MORE INFORMATION.
- -----------------------------------------------------------------------------------------------
</TABLE>
WHAT NAV WILL I RECEIVE FOR SHARES I WANT TO SELL?
Redemption orders are effected at the net asset value per share next determined
after receipt of the order in proper form by the Transfer Agent at its Kansas
City office. Although the Fund itself imposes no charge when shares are
redeemed, if you purchase shares through Bank of America or a Service
Organization, they may charge a fee for providing certain services in connection
with investments in Fund shares. The Company reserves the right to redeem
accounts (other than IRA and non-working spousal IRA accounts) involuntarily if,
after sixty days' written notice, the account's net asset value remains below a
$500 minimum balance.
WHAT KIND OF PAPERWORK IS INVOLVED
IN SELLING SHARES?
Redemption requests must be signed by each shareholder, including each joint
owner. Certain types of redemption requests as well as all endorsed share
certificates will need to include a signature guarantee. Signature guarantees
must accompany redemption requests for (i) an amount in excess of $50,000 per
day, (ii) any amount if the redemption proceeds are to be sent somewhere other
than the address of record on the Company's books, or (iii) an amount of $50,000
or less if the address of record has not been on the Company's books for sixty
days.
You may obtain a signature guarantee from: (i) a bank which is a member of the
FDIC; (ii) a trust company; (iii) a member firm of a national securities
exchange; or (iv) another eligible guarantor institution. Guarantees must be
signed by an authorized signatory of the guarantor institution and be
accompanied by the words "Signature Guaranteed." The Transfer Agent will not
accept guarantees from notaries public.
HOW QUICKLY CAN I RECEIVE MY
REDEMPTION PROCEEDS?
The Company will make payment for all shares redeemed after the Transfer Agent
receives a request in proper form, except as provided by the rules of the
Securities and Exchange Commission. If the shares to be redeemed have been
purchased by check or by TeleTrade, the Company will, upon the clearance of the
purchase check or TeleTrade payment, mail the redemption proceeds within seven
business days. This does not apply to situations where the Fund receives payment
in cash or immediately available funds for the purchase of shares. If you
purchase shares by wire,
18
<PAGE> 56
you must file an Account Application before redemption requests can be honored.
Bank of America and the Service Organizations are responsible for transmitting
redemption orders and crediting their customers' accounts with redemption
proceeds on a timely basis.
DO I HAVE ANY REINSTATEMENT PRIVILEGES AFTER I HAVE REDEEMED SHARES?
You may reinvest all or any portion of your redemption proceeds in shares of the
Fund, or of another load fund of the Company or Time Horizon Funds, within 90
days of your redemption trade date without paying a sales load. Shares so
reinvested will be purchased at a price equal to the net asset value next
determined after the Transfer Agent receives a reinstatement request and payment
in proper form.
If you wish to use this Privilege, you must submit a written reinstatement
request to the Transfer Agent stating that you are eligible to use the
Privilege. The reinstatement request and payment must be received within 90 days
of the trade date of the redemption. Currently, there are no restrictions on the
number of times you may use this Privilege.
Generally, exercising the Reinstatement Privilege will not affect the character
of any gain or loss realized on redemption for federal income tax purposes.
However, if a redemption results in a loss, the reinstatement may result in the
loss being disallowed under IRS "wash sale" rules.
DIVIDEND AND DISTRIBUTION POLICIES
Shareholders of the Fund are entitled to dividends arising from the net
investment income and net realized gains, if any, earned on investments in the
Portfolio which are allocable to the Fund. The Fund's net income is declared and
paid as a dividend on a quarterly basis and net realized capital gains (if any)
are distributed not more than twice each year. Dividends are paid within five
business days after quarter end.
You will automatically receive dividends and capital gain distributions in
additional shares without a sales load unless you: (i) elect in writing to
receive payment in cash; or (ii) elect to participate in the Directed
Distribution Plan described in the section entitled "Can My Dividends From The
Fund Be Invested In Other Pacific Horizon Funds?".
To elect to receive payment in cash, or to revoke such election, you must do so
in writing to the Transfer Agent at P.O. Box 419955, Kansas City, MO 64141-6955.
The election or revocation will become effective with respect to dividends paid
after it is received by the Transfer Agent.
SHAREHOLDER SERVICES
PACIFIC HORIZON FUNDS, INC. PROVIDES A VARIETY OF WAYS TO MAKE MANAGING YOUR
INVESTMENTS MORE CONVENIENT.
Some or all of the following services and privileges as well as others described
in this Prospectus may not be available for, or may have different conditions
imposed on them than as described in this Prospectus with respect to, certain
clients of Bank of America and particular Service Organizations. Consult these
entities for more information.
CAN I USE THE FUND IN MY RETIREMENT PLAN?
The Company makes available Individual Retirement Accounts ("IRAs"), including
IRAs set up under a Simplified Employee Pension Plan ("SEP-IRAs") and IRA
"Rollover Accounts."
YOUR INVESTMENTS GROW TAX DEFERRED UNTIL WITHDRAWAL AT RETIREMENT AND IN MANY
CASES THE INITIAL INVESTMENT IS TAX DEDUCTIBLE.
For details, contact the Fund's distributor at 800-332-3863. Investors should
also read the IRA Disclosure Statement and the Bank Custodial Agreement for
further details on eligibility, service fees and tax implications, and consult
their tax advisers.
19
<PAGE> 57
CAN I EXCHANGE MY INVESTMENT FROM ONE FUND TO ANOTHER?
As a shareholder, you have the privilege of exchanging your shares for shares of
another Pacific Horizon Fund, or like shares of any Time Horizon Fund, provided
that such other shares may be legally sold in your state of residence. NO
ADDITIONAL SALES LOAD WILL BE INCURRED WHEN EXCHANGING FUND SHARES PURCHASED
WITH A SALES LOAD FOR SHARES OF ANOTHER LOAD FUND OF THE COMPANY.
An investment in the Fund automatically entitles you to use this Privilege,
unless you indicate on the Account Application or in a subsequent letter to the
Transfer Agent that you do not wish to use this Privilege.
Fund shares being exchanged must have a current value of at least $500 and are
subject to the minimum initial investment requirements of the particular fund
into which the exchange is being made. You may obtain prospectuses regarding the
funds into which you wish to make an exchange from your Service Organization or
the Fund's distributor.
You may provide exchange instructions by telephone by calling the Transfer Agent
at 800-346-2087. (See the section below regarding TeleTrade for a description of
the Company's policy regarding responsibility for telephone instructions.) You
may also send exchange instructions in writing by following directions set forth
previously under "How to Sell Shares."
If you would like more information on making an exchange, please read the
Statement of Additional Information and consult your Service Organization or the
Fund's distributor.
The Fund reserves the right to reject any exchange request and the Exchange
Privilege may be modified or terminated at any time. At least 60 days' notice of
any material modification to or termination of the Exchange Privilege will be
given to shareholders except where notice is not required under the regulations
of the Securities and Exchange Commission.
WHAT IS TELETRADE?
TELETRADE IS A SERVICE WHICH ALLOWS YOU TO AUTHORIZE ELECTRONIC TRANSFERS OF
MONEY TO PURCHASE SHARES IN OR REDEEM SHARES FROM AN ESTABLISHED FUND ACCOUNT.
THE SERVICE MAY BE USED LIKE AN "ELECTRONIC CHECK" TO MOVE MONEY BETWEEN AN
ACCOUNT AT A FINANCIAL INSTITUTION AND A FUND ACCOUNT WITH A SINGLE TELEPHONE
CALL.
Purchase and redemption proceeds with respect to TeleTrade transactions will be
transferred between your Fund account and the checking, NOW or bank money market
account designated by you. Only an account maintained at a domestic financial
institution that is an Automated Clearing House member may be so designated.
TeleTrade purchases will be effected at the public offering price next
determined after the Transfer Agent receives payment for the transaction.
Redemption proceeds will be on deposit in your account at your financial
institution generally two business days after the redemption request is received
by the Transfer Agent. You may also request receipt of your redemption proceeds
by check, which will be payable to the registered owners of your Fund account
and will be sent only to the address of record.
You should note that the Transfer Agent may act upon a telephone redemption
request (including a telephone wire redemption request) from any person
representing himself or herself to be you and reasonably believed by the
Transfer Agent to be genuine. Neither the Company nor any of its service
contractors will be liable for any loss or expense in acting upon telephone
instructions that are reasonably believed to be genuine. In attempting to
confirm that telephone instructions are genuine, the Company will use such
procedures as are considered reasonable. If you should experience difficulty in
contacting the Transfer Agent to place telephone redemptions (including
telephone wire redemptions), for example because of unusual market activity, you
are urged to consider redeeming your shares by mail or in person.
The Company may modify the TeleTrade Privilege at any time or charge a service
fee upon notice to
20
<PAGE> 58
shareholders. No such fee currently is contemplated.
CAN I ARRANGE TO HAVE AUTOMATIC INVESTMENTS MADE ON A REGULAR BASIS?
YOU MAY ARRANGE, THROUGH THE AUTOMATIC INVESTMENT PROGRAM, FOR SYSTEMATIC
INVESTMENTS IN YOUR FUND ACCOUNT IN AMOUNTS OF $50 OR MORE BY DIRECTLY DEBITING
YOUR ACCOUNT AT YOUR FINANCIAL INSTITUTION. At your option, your checking, NOW
or bank money market account designated by you will be debited in the specified
amount, and Fund shares will be purchased, once a month, on either the first or
fifteenth day, or twice a month, on both days. Only accounts maintained at a
domestic financial institution which permits automatic withdrawals and is an
Automated Clearing House member are eligible. The Automatic Investment Program
is one means by which you may use Dollar Cost Averaging in making investments.
WHAT IS DOLLAR COST AVERAGING
AND HOW CAN I IMPLEMENT IT?
DOLLAR COST AVERAGING INVOLVES INVESTING A FIXED DOLLAR AMOUNT AT REGULAR
PREDETERMINED INTERVALS. BECAUSE MORE SHARES ARE BOUGHT DURING PERIODS WITH
LOWER SHARE PRICES AND FEWER SHARES ARE BOUGHT WHEN THE PRICE IS HIGHER, YOUR
AVERAGE COST PER SHARE MAY BE REDUCED. You may also implement Dollar Cost
Averaging on your own initiative or through other entities.
In order to be effective, Dollar Cost Averaging should be followed on a
sustained, consistent basis. You should be aware, however, that shares bought
using Dollar Cost Averaging are made without regard to their price on the day of
investment or to market trends. In addition, while you may find Dollar Cost
Averaging to be beneficial, it will not prevent a loss if you ultimately redeem
your shares at a price that is lower than their purchase price.
To establish an Automatic Investment Account that uses the Dollar Cost Averaging
method, check the appropriate box and supply the necessary information on the
Account Application or in a subsequent written request to the Transfer Agent.
You may cancel this Privilege or change the amount of purchase at any time by
mailing written notification to the Transfer Agent.
Notification will be effective three business days following receipt. The Fund
may modify or terminate this Privilege at any time or charge a service fee,
although no such fee currently is contemplated.
CAN I ARRANGE PERIODIC WITHDRAWALS?
IF YOU ARE A SHAREHOLDER WITH A FUND ACCOUNT VALUED AT $5,000 OR MORE, YOU MAY
WITHDRAW AMOUNTS IN MULTIPLES OF $50 FROM YOUR ACCOUNT ON A MONTHLY, QUARTERLY,
SEMI-ANNUAL OR ANNUAL BASIS THROUGH THE AUTOMATIC WITHDRAWAL PLAN.
At your option, monthly, quarterly, semi-annual and annual withdrawals will be
made on either the first or fifteenth day of the particular month selected. To
participate in this Plan, check the appropriate box and supply the necessary
information on the Account Application or in a subsequent signature guaranteed
written request to the Transfer Agent. Purchases of additional shares
concurrently with withdrawals are ordinarily not advantageous because of the
Fund's sales load.
CAN MY DIVIDENDS FROM THE FUND BE INVESTED IN OTHER FUNDS?
You may elect to have your dividends, capital gains distributions, or both
("distribution proceeds") received from a nonretirement Fund account
automatically invested in shares of any other investment portfolio of the
Company, or in like shares of any Time Horizon Fund, provided such shares are
held in a non-retirement account. To participate in this program, known as the
Directed Distribution Plan, check the appropriate box and supply the necessary
information on the Account Application or subsequently send a written request to
the Transfer Agent. Participants in the Directed Distribution Plan are subject
to the minimum initial investment requirements of the particular fund involved.
Investments will be made at a price equal to the net asset value of the
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<PAGE> 59
purchased shares next determined after receipt of the distribution proceeds by
the Transfer Agent.
There are no subsequent investment requirements for accounts to which
distribution proceeds are directed nor are service fees currently charged for
effecting these transactions.
IS THERE A SALARY DEDUCTION
PLAN AVAILABLE?
YOU MAY PURCHASE FUND SHARES BY HAVING PAYMENTS AUTOMATICALLY DEPOSITED INTO
YOUR FUND ACCOUNT (MINIMUM OF $50 AND MAXIMUM OF $50,000 PER TRANSACTION) IF YOU
RECEIVE A FEDERAL SALARY, SOCIAL SECURITY OR CERTAIN VETERAN'S, MILITARY OR
OTHER PAYMENTS FROM THE FEDERAL GOVERNMENT. Subject to these limitations, you
may deposit as much of your payments as you wish.
For instructions on how to enroll in this Direct Deposit Program, call the
Transfer Agent at 800-346-2087.
Note: Death or legal incapacity will terminate participation in the Program. You
may also choose at any time to terminate your participation by notifying the
appropriate federal agency in writing. Further, the Fund may terminate your
participation after 30 days' notice.
THE BUSINESS OF THE FUND
FUND MANAGEMENT
The business affairs of the Company are managed under the general supervision of
its Board of Directors. Information about the Directors and Officers of the
Company and about the Trustees and Officers of the Master Trust is included in
the Statement of Additional Information under "Management."
SERVICE PROVIDERS
-------------------
INVESTMENT ADVISER
Bank of America serves as Investment Adviser of the Portfolio. Bank of America
is a subsidiary of BankAmerica Corporation, a registered bank holding company.
Its principal offices are located at 555 California Street, San Francisco,
California 94104.
Formed in 1904, Bank of America is a national banking association that provides
commercial banking and trust business through an extensive system of branches
across the western United States. Bank of America's principal banking affiliates
operate branches in ten U.S. states as well as corporate banking and business
credit offices in major U.S. cities and branches, corporate offices and
representative offices in 37 countries.
In its advisory agreement, Bank of America has agreed to manage the Portfolio's
investments and to be responsible for, place orders for, and make decisions with
respect to, all purchases and sales of the Portfolio's securities. The agreement
also provides that Bank of America may, in its discretion, provide advisory
services through its own employees or employees of one or more of its affiliates
that are under the common control of Bank of America's parent, BankAmerica
Corporation, provided such employees are under the management of Bank of
America. Bank of America may also employ a sub-adviser provided Bank of America
remains fully responsible to the Portfolio for the acts and omissions of the
sub-adviser.
The Asset Allocation Committee of Bank of America's Global Investment Management
Division establishes general parameters for the selection of securities for the
Portfolio. Robert Pyles, Director of Research and Senior Portfolio Manager of
BofA Capital Management, Inc. (a wholly-owned subsidiary of Bank of America),
and Steven L. Vielhaber are primarily responsible for the selection of
particular securities for the equity and fixed-income portions, respectively, of
the Portfolio. Mr. Pyles has been the Fund's manager since November 1994 and has
been associated with Seattle-First National Bank, a wholly-owned
22
<PAGE> 60
subsidiary of Seafirst Corporation, which is controlled by BankAmerica
Corporation (both of which are bank holding companies), since 1976. Mr. Pyles
currently manages various common trust, employee benefit and individual accounts
for Bank of America. Mr. Vielhaber has been the Fund's manager since April 1994
and has been employed by Bank of America since 1993. Prior thereto, Mr.
Vielhaber had been Director of Fixed Income Marketing at Dimensional Fund
Advisors since 1990, and Vice President and Manager of Investments at Gibraltar
Savings from 1986 to 1990.
For the services provided and expenses assumed under the advisory agreement,
Bank of America is entitled to receive a fee at the annual rate of 0.55% of the
Portfolio's average daily net assets. This fee is higher than that paid by most
other investment companies but is comparable to the fees paid by other
investment companies with similar investment objectives and policies. This
amount may be reduced pursuant to undertakings by Bank of America. (See the
information below under "Fee Waivers"). During the fiscal year ended February
28, 1995, Bank of America waived its entire fee as investment advisor. In
addition, Bank of America and its affiliates may be entitled to fees under the
Shareholder Services Plan as described under "Plan Payments below," and may
receive fees charged directly to their accounts in connection with investments
in Fund shares.
ADMINISTRATOR
Concord Holding Corporation ("Concord") serves as Administrator of the Fund and
the Portfolio. Concord is a wholly-owned subsidiary of The BISYS Group, Inc. Its
offices are located at 125 W. 55th Street, New York, New York 10019.
Under its administration agreements with the Company and the Portfolio, Concord
has agreed to: pay the costs of maintaining the offices of the Company and the
Portfolio; provide a facility to receive purchase and redemption orders; provide
statistical and research data, data processing services and clerical services;
coordinate the preparation of reports to shareholders of the Fund,
interestholders of the Portfolio and the Securities and Exchange Commission;
prepare tax returns; maintain the registration or qualification of the Fund's
shares for sale under state securities laws; maintain books and records of the
Fund and the Portfolio; calculate the net asset value of the Fund and the
Portfolio and dividends and capital gains distributions to shareholders; serve
as dividend disbursing agent for the Portfolio; and generally assist in all
aspects of the operations of the Fund and the Portfolio.
For its services as administrator, Concord is entitled to receive an
administration fee from the Fund at the annual rate of 0.15% of the Fund's
average daily net assets and an administration fee from the Portfolio at the
annual rate of 0.05% of the Portfolio's average daily net assets. These amounts
may be reduced pursuant to undertakings by Concord. (See the information below
under "Fee Waivers"). During the fiscal year ended February 28, 1995, Concord
waived its entire fee as administrator for both the Fund and the Portfolio.
Pursuant to the authority granted in its administration agreements, Concord has
entered into agreements with PFPC, Inc. ("PFPC") under which PFPC, and an
off-shore affiliate of PFPC, perform certain of the services listed above, e.g.,
calculating the net asset value of the Fund and the Portfolio, calculating
dividends and capital gains distributions to shareholders, and maintaining the
books and records of the Fund and the Portfolio. The Fund and the Portfolio bear
all fees and expenses charged by PFPC for these services.
DISTRIBUTOR
The Fund's shares are sold on a continuous basis by Concord Financial Group,
Inc. (the "Distributor"). The Distributor is a wholly-owned subsidiary of
Concord and is located at 125 W. 55th Street, New York, New York 10019.
CUSTODIAN AND TRANSFER AGENT
PNC Bank, N.A., Broad and Chestnut Streets, Philadelphia, Pennsylvania, 19101
serves as the Custodian of the Fund and the Portfolio. DST Systems, Inc. is the
transfer and dividend disburs-
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<PAGE> 61
ing agent for the Fund and is located at 811 Main, Kansas City, MO 64105-2005.
FEE WAIVERS
Except as noted in this Prospectus, the service contractors bear all expenses in
connection with the performance of their services and the Fund and Portfolio
bear the expenses incurred in their operations. Expenses can be reduced by
voluntary fee waivers and expense reimbursements by Bank of America and other
service providers as well as by certain expense limitations imposed by state
securities regulators. Periodically, during the course of the Fund's fiscal
year, Bank of America, Concord and/or the Distributor may choose not to receive
fee payments and/or may assume certain Fund or Portfolio expenses. However, the
service providers retain the ability to be reimbursed for these amounts by the
Fund and Portfolio prior to fiscal year end and, subject to the expense
limitations of certain states, to stop such fee waivers and expense
reimbursements at any time. These waivers and reimbursements would increase the
Fund's yield when made but would decrease yields if the Fund were required to
reimburse a service provider.
TAX INFORMATION
YOU WILL BE ADVISED AT LEAST ANNUALLY REGARDING THE FEDERAL INCOME TAX TREATMENT
OF DIVIDENDS AND DISTRIBUTIONS MADE TO YOU. YOU SHOULD SAVE YOUR REGULAR ACCOUNT
STATEMENTS BECAUSE THEY CONTAIN INFORMATION YOU WILL NEED TO CALCULATE YOUR
CAPITAL GAINS OR LOSSES UPON YOUR ULTIMATE SALE OR EXCHANGE OF SHARES IN THE
FUND.
As with any investment, you should consider the tax implications of an
investment in the Fund. The following is only a brief summary of some of the
important tax considerations generally affecting the Fund and its shareholders.
Consult your tax adviser with specific reference to your own tax situation.
FEDERAL TAXES
During its most recent fiscal year the Fund qualified as a "regulated investment
company" under the Internal Revenue Code of 1986, as amended (the "Code"), and
Management intends that the Fund will so qualify in future years as long as such
qualification is in the best interest of the Fund's shareholders. As a result of
this qualification, the Fund generally is not required to pay federal income
taxes to the extent its earnings are distributed in accordance with the Code.
The Fund intends to qualify for this special tax treatment as long as it is in
the best interest of its shareholders. It is expected that the Portfolio will
not be subject to Federal income taxes. The Portfolio intends to qualify as a
partnership (or other pass-through entity) for federal income tax purposes. As
such, the Portfolio is not subject to tax and the Fund will be treated for
federal income tax purposes as recognizing its pro rata share of the Portfolio's
income and deductions, and owning its pro rata share of the Portfolio's assets.
The Fund's status as a regulated investment company is dependent on, among other
things, the Portfolio's continued qualification as a partnership (or other
pass-through entity) for federal income tax purposes.
Dividends (whether received in cash or additional shares) derived from ordinary
income and/or the excess of net short-term capital gain over net long-term
capital loss are taxable to you as ordinary income. The dividends received
deduction allowed to corporations will apply to such dividends to the extent of
the total qualifying dividends received by the Fund from domestic corporations
for the taxable year.
Any dividend you receive comprised of the excess of net long-term capital gain
over net short-term capital loss ("capital gain dividend") will be taxed as a
long-term capital gain no matter how long you have held Fund shares. Such
dividends are not eligible for the dividends received deduction allowed to
corporations.
A dividend paid to a you by the Fund in January of a particular year will be
deemed for tax purposes to have been received by you on December 31 of the
preceding year, if the dividend is declared and payable to shareholders of
record on a specified date in October, November or December of
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<PAGE> 62
that preceding year. If you are considering buying shares of the Fund on or just
before the record date of a dividend, you should be aware that the amount of the
forthcoming dividend payment, although in effect a return of capital, will be
taxable to you.
You may realize a taxable capital gain (or loss) upon redemption or exchange of
Fund shares, depending upon the tax basis of your shares and their price at the
time of such redemption or exchange. Generally, you may include sales loads
incurred in the purchase of Fund shares in your tax basis when determining your
gain (or loss) on a redemption, transfer or exchange of these shares. However,
if you exchange such shares for shares of another investment portfolio of the
Company within 90 days of the purchase and are able to reduce the sales load on
the new shares through the Exchange Privilege, the reduction may not be included
in the tax basis of your exchanged shares. It may be included in the tax basis
of the new shares. If you had Fund shares for six months or less and during that
time receive a capital gain dividend on those shares, any loss on the sale or
exchange of those shares will be treated as a long-term capital loss to the
extent of the capital gain dividend.
STATE AND LOCAL TAXES
You should consult your tax adviser regarding state and local tax consequences
which may differ from the federal tax consequences as described above.
MEASURING PERFORMANCE
THE FUND'S PERFORMANCE MAY BE QUOTED IN TERMS OF AVERAGE ANNUAL TOTAL RETURN,
AGGREGATE TOTAL RETURN AND YIELD. PERFORMANCE INFORMATION IS HISTORICAL AND IS
NOT INTENDED TO INDICATE FUTURE RESULTS.
Average annual total return reflects the average annual percentage change in
value of an investment in the Fund over the period being measured, while
aggregate total return reflects the total percentage change in value over the
period being measured. Yield measures the net income of the Fund over a
specified 30 day period.
Periodically, the Fund's total return (calculated on an average annual total
return and/or an aggregate total return basis for various periods) and yield may
be quoted in advertisements or in communications to shareholders. Both methods
of calculating total return reflect the sales load charged by the Fund and
assume dividends and capital gains distributions made by the Fund during the
period are reinvested in Fund shares.
The Fund may also advertise total return data without reflecting the sales load
imposed on the purchase of Fund shares in accordance with the rules of the
Securities and Exchange Commission. Quotations that do not reflect the sales
load will, of course, be higher than quotations that do reflect sales loads.
The Fund calculates its yield by dividing its net income per share (which may
differ from the net income per share used for accounting purposes) during a 30
day (or one month) period by the maximum offering price per share on the last
day of the measuring period, and then annualizing the result on a semi-annual
basis. The 30 day or one month measuring period will be identified along with
any yield quotation to which it relates.
The Fund may compare its total return and yield to that of other mutual funds
with similar investment objectives and to bond and other relevant indices or to
rankings prepared by independent services or other financial or industry
publications that monitor mutual fund performance.
For example, the Fund's total return may be compared to the Consumer Price Index
or to data prepared by: Lipper Analytical Services, Inc.; Donoghue's Money Fund
Report; Mutual Fund Forecaster; Morningstar; Micropal; Wiesenberger Investment
Companies Services; or CDA Investment Technologies, Inc.
Total return data as reported in national financial publications such as Money,
Forbes, Barron's, The Wall Street Journal and The New York Times, or in local or
regional publications, may also be used in comparing Fund performance. The
Fund's total return also may be compared to indices such as: the Dow Jones
Industrial Average; the Standard &
25
<PAGE> 63
Poor's 500 Stock Index; the Shearson Lehman Bond Indexes; the Wilshire 5000
Equity Indexes; or the Consumer Price Index.
Since the Fund's performance will fluctuate, it should not be compared with bank
deposits, savings accounts and similar investments that often provide an agreed
or guaranteed fixed yield for a stated period of time. Performance is generally
a function of the kind and quality of the instruments in a portfolio, portfolio
maturity, operating expenses and market conditions. Not included in the Fund's
calculations of total return and yield are fees charged by Bank of America and
Service Organizations directly to their customer accounts in connection with
investments in the Fund (e.g. account maintenance fees, compensating balance
requirements or fees based upon account transactions, assets or income).
DESCRIPTION OF SHARES
The Company is a Maryland corporation that was organized on October 27, 1982.
ABOUT THE COMPANY
THE COMPANY'S CHARTER AUTHORIZES THE BOARD OF DIRECTORS TO ISSUE UP TO TWO
HUNDRED BILLION FULL AND FRACTIONAL SHARES OF CAPITAL STOCK ($.001 PAR VALUE PER
SHARE) AND TO CLASSIFY AND RECLASSIFY ANY AUTHORIZED AND UNISSUED SHARES INTO
ONE OR MORE CLASSES OF SHARES.
The Board of Directors has authorized the issuance of 100 million shares of
Class O Common Stock representing interests in the Fund, and additional classes
of shares representing interests in other investment portfolios of the Company.
The Board of Directors may similarly classify or reclassify any class of shares
(including unissued Class O Common Stock) into one or more series. For more
information about the Company's other portfolios, contact the Company at the
telephone number listed on the inside cover page.
Shares representing interests in the Fund are entitled to participate in the
dividends and distributions declared by the Board of Directors and in the net
distributable assets of the Fund on liquidation. Fund shares have no preemptive
rights and only such conversion and exchange rights as the Board may grant in
its discretion. When issued for payment as described in this Prospectus, Fund
shares will be fully paid and non-assessable.
VOTING RIGHTS
SHAREHOLDERS ARE ENTITLED TO ONE VOTE FOR EACH FULL SHARE HELD AND FRACTIONAL
VOTES FOR FRACTIONAL SHARES HELD. Fund shares have cumulative voting rights to
the extent that may be required by applicable law. Additionally, shareholders
will vote in the aggregate and not by class or series, except as required by law
(or when permitted by the Board of Directors). The Fund does not presently
intend to hold annual meetings of shareholders to elect directors or for other
business unless and until such time as less than a majority of the directors
holding office has been elected by the shareholders. At that time, the directors
then in office will call a shareholders' meeting for the election of directors.
Under certain circumstances, however, shareholders have the right to call a
shareholder meeting to consider the removal of one or more directors. Such
meetings will be held when requested by the shareholders of 10% or more of the
Company's outstanding shares of common stock. The Fund will assist in
shareholder communications in such matters to the extent required by law and the
Company's undertaking with the Securities and Exchange Commission.
PLAN PAYMENTS
THE COMPANY HAS ADOPTED A SHAREHOLDER SERVICE PLAN (THE "PLAN") FOR THE FUND
UNDER WHICH THE FUND PAYS THE DISTRIBUTOR FOR SHAREHOLDER SERVICING EXPENSES
RELATED TO FUND SHARES.
Shareholder servicing expenses include expenses incurred in connection with
shareholder services provided by the Distributor and payments to Service
Organizations for support services for the beneficial owners of Fund shares,
such as: establishing and maintaining accounts and records relating to the
Service Organization's clients who invest in Fund shares; assisting those
clients in processing exchange and redemption requests and in changing dividend
options and account desig-
26
<PAGE> 64
nations; and responding to inquiries from clients concerning their investments.
Under the Plan, payments by the Fund for shareholder servicing expenses may not
exceed 0.25% (annualized) of the Fund's average daily net assets. Excluded from
this calculation, however, are all shares acquired via a transfer of assets from
trust and agency accounts at Bank of America. This amount may be reduced
pursuant to undertakings by the Distributor. During the fiscal year ended
February 28, 1995, the Distributor waived all payments under the Plan.
If in any month the Distributor is due more monies than are immediately payable
because of the percentage limitation described above, the unpaid amount is
"carried forward" from month to month while the Plan is in effect until such
time when it may be paid. However, any "carried forward" amounts will not be
payable beyond the fiscal year during which the amounts are accrued. No
interest, carrying or other finance charge is borne by the Fund with respect to
the amount "carried forward."
Banks may act as Service Organizations. The Glass-Steagall Act and other
applicable laws, among other things, prohibit banks from engaging in the
business of underwriting securities. If a bank were prohibited from acting as a
Service Organization, its shareholder clients would be permitted to remain
Company shareholders and alternative means for continuing the servicing of such
shareholders would be sought. In such event, changes in the operation of the
Company might occur and a shareholder serviced by such bank might no longer be
able to avail itself of the automatic investment or other services then being
provided by the bank. It is not expected that shareholders would suffer any
adverse financial consequences as a result of any of these occurrences.
The Company will obtain a representation from the Service Organizations (and
from Bank of America and Concord) that they are or will be licensed as dealers
as required by applicable law or will not engage in activities which would
require them to be so licensed.
27
<PAGE> 65
- --------------------------------------------------------------------------------
PACIFIC HORIZON MUTUAL FUNDS
COPAALL95P
<PAGE> 66
ASSET ALLOCATION FUND
PROSPECTUS
July 1, 1995
NOT FDIC INSURED
<PAGE> 67
PROSPECTUS
JULY 1, 1995
PACIFIC HORIZON BLUE CHIP FUND
A series of shares of Pacific
Horizon Funds, Inc.
- --------------------------------------------------------------------------------
The PACIFIC HORIZON BLUE CHIP FUND (the "Fund") is a diversified mutual fund
whose investment objective is long-term capital appreciation through investments
in blue chip stocks. The Fund is offered by Pacific Horizon Funds, Inc. (the
"Company"), an open-end, series management investment company.
UNLIKE MOST OTHER INVESTMENT COMPANIES WHICH INVEST DIRECTLY IN PORTFOLIO
SECURITIES, THE FUND SEEKS TO ACHIEVE ITS INVESTMENT OBJECTIVE BY INVESTING ALL
OF ITS INVESTABLE ASSETS IN A FUND OF AN OPEN-END, MANAGEMENT INVESTMENT COMPANY
(THE "PORTFOLIO") HAVING THE SAME INVESTMENT OBJECTIVE AS THAT OF THE FUND. THE
FUND WILL PURCHASE SHARES OF THE PORTFOLIO AT NET ASSET VALUE. THE NET ASSET
VALUE OF THE FUND WILL RESPOND TO INCREASES AND DECREASES IN THE VALUE OF THE
PORTFOLIO'S SECURITIES. INVESTORS SHOULD CAREFULLY CONSIDER THIS INVESTMENT
APPROACH. SEE "OTHER INVESTMENT PRACTICES AND CONSIDERATIONS -- MASTER-FEEDER
STRUCTURE" ON PAGE 8 FOR ADDITIONAL INFORMATION REGARDING THIS STRUCTURE.
Bank of America National Trust and Savings Association ("Bank of America" or the
"investment adviser") serves as the Portfolio's investment adviser. Based in San
Francisco, California, Bank of America and its affiliates have over $50 billion
under management, including over $10 billion in mutual funds.
This Prospectus describes concisely the information about the Fund and the
Company that you should know before investing. Please read it carefully and
retain it for future reference.
More information about the Fund is contained in a Statement of Additional
Information that has been filed with the Securities and Exchange Commission. To
obtain a free copy, call 800-332- 3863. The Statement of Additional Information,
as it may be revised from time to time, is dated July 1, 1995 and is
incorporated by reference into this Prospectus.
- --------------------------------------------------------------------------------
Fund shares are not bank deposits or obligations of, or guaranteed or endorsed
by, Bank of America or any of its affiliates and are not federally insured by,
guaranteed by, obligations of or otherwise supported by the U.S. Government, the
Federal Deposit Insurance Corporation, the Federal Reserve Board or any other
governmental agency. Investment in the Fund involves investment risk, including
the possible loss of principal.
- --------------------------------------------------------------------------------
LIKE ALL MUTUAL FUNDS, THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR
HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
This Prospectus is part of a Registration Statement that has been filed with the
Securities and Exchange Commission in Washington, D.C. under the Securities Act
of 1933.
No person has been authorized to give any information or to make any
representations in connection with the offer of the Fund's shares, other than as
contained in this Prospectus and the Fund's official sales literature.
Therefore, other information and representations must not be relied upon as
having been authorized by the Fund. This Prospectus does not constitute an offer
in any State in which, or to any person to whom, such offering may not lawfully
be made.
- --------------------------------------------------------------------------------
<PAGE> 68
CONTENTS
<TABLE>
<S> <C> <C>
EXPENSE SUMMARY 2
FINANCIAL HIGHLIGHTS 3
FUND INVESTMENTS 4 INVESTMENT OBJECTIVE
4 TYPES OF INVESTMENTS
4 FUNDAMENTAL LIMITATIONS
5 OTHER INVESTMENT PRACTICES AND CONSIDERATIONS
SHAREHOLDER GUIDE 9 HOW TO BUY SHARES
9 What Is My Minimum Investment In The Fund?
9 How Are Shares Priced?
12 How Can I Buy Shares?
14 What Price Will I Receive When I Buy Shares?
15 What Else Should I Know To Make A Purchase?
15 HOW TO SELL SHARES
15 How Do I Redeem My Shares?
17 What NAV Will I Receive For Shares I Want To Sell?
17 What Kind of Paperwork Is Involved In Selling Shares?
17 How Quickly Can I Receive My Redemption Proceeds?
18 Do I Have Any Reinstatement Privileges After I Have
Redeemed Shares?
18 DIVIDEND AND DISTRIBUTION POLICIES
SHAREHOLDER SERVICES 18 CAN I USE THE FUND IN MY RETIREMENT PLAN?
19 CAN I EXCHANGE MY INVESTMENT FROM ONE FUND TO
ANOTHER?
19 WHAT IS TELETRADE?
20 CAN I ARRANGE TO HAVE AUTOMATIC INVESTMENTS MADE ON
A REGULAR BASIS?
20 WHAT IS DOLLAR COST AVERAGING AND HOW CAN I
IMPLEMENT IT?
20 CAN I ARRANGE PERIODIC WITHDRAWALS?
20 CAN MY DIVIDENDS FROM THE FUND BE INVESTED IN OTHER
FUNDS?
21 IS THERE A SALARY DEDUCTION PLAN AVAILABLE?
THE BUSINESS OF THE FUND 21 FUND MANAGEMENT
21 Service Providers
23 TAX INFORMATION
24 MEASURING PERFORMANCE
24 DESCRIPTION OF SHARES
25 PLAN PAYMENTS
- ------------------------------------------------------------------------------------------------------------------------
DISTRIBUTOR: INVESTMENT ADVISER:
Concord Financial Group, Inc. Bank of America National Trust and Savings Association
125 West 55th Street 555 California Street
New York, NY 10019 San Francisco, CA 94104
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 69
EXPENSE SUMMARY
SHAREHOLDER TRANSACTION EXPENSES are charges you pay when buying or selling
shares of the Fund. ANNUAL FUND OPERATING EXPENSES include payments by the Fund
and payments by the Portfolio which are allocable to the Fund. Operating
expenses include fees for portfolio management, maintenance of shareholder
accounts, general administration, shareholder servicing, accounting and other
services.
At right is a summary of the shareholder transaction expenses imposed by the
Fund and its operating expenses (including the operating expenses of the
Portfolio which are allocable to the Fund) expected to be incurred during the
current fiscal year. This information has been restated to assume that current
fees had been in effect during the previous fiscal year. Actual expenses may
vary. A hypothetical example based on the summary is also shown.
<TABLE>
<S> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load Imposed on
Purchases (as a percentage of
offering price) 4.50%
Sales Load Imposed on Reinvested
Dividends None
Deferred Sales Load None
Redemption Fees None
Exchange Fee None
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Management Fees
(After Fee Waivers) 0.15%
All Other Expenses
(After Expense Reimbursements) 0.75%
------
Shareholder Service Payments
(After Fee Waivers) 0.00%
Other Expenses
(After Expense Reimbursements) 0.75%
Total Fund Operating Expenses -----
(After Fee Waivers and
Expense Reimbursements) 0.90%
=======
</TABLE>
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
EXAMPLE: Assume the annual return is 5% and operating expenses are the same as those After 1 Year : $54
stated above. For every $1,000 you invest, here's how much you would have paid in total After 3 Years : $72
expenses if you closed your account after the number of years indicated: After 5 Years : $93
After 10 Years: $151
</TABLE>
Note: The preceding operating expenses and example should not be considered a
representation of future investment returns and operating expenses. Actual
investment returns and operating expenses may be more or less than those shown.
- --------------------------------------------------------------------------------
This expense information is provided to help you understand the expenses you
would bear either directly (as with transaction expenses) or indirectly (as with
annual operating expenses) as a Fund shareholder.
Management fees (without waivers) consist of:
- - an investment advisory fee payable at the annual rate of 0.75% of the
Portfolio's average daily net assets; and
- - an administration fee payable at the annual rate of 0.15% of the Fund's
average daily net assets and 0.05% of the Portfolio's average daily net
assets.
Without fee waivers a shareholder service payment is made in the amount of 0.25%
of the Fund's average daily net assets. As indicated in the table above,
however, Management intends to waive fees and reimburse certain Other Expenses
on behalf of the Fund so that Total Operating Expenses do not exceed 0.90%.
Absent these fee waivers and reimbursements, the estimated Total Operating
Expenses would be 4.55% of the Fund's average daily net assets.
For a further description of shareholder transaction expenses and the Fund's
operating expenses, see the sections entitled "Shareholder Guide," "The Business
of the Fund" and "Plan Payments" in this Prospectus.
The Board of Directors of the Company believes that the aggregate per share
expenses of the Fund and the Portfolio in which the Fund's assets are invested
will be less than or approximately equal to the expenses which the Fund would
incur if the Company retained the services of an investment adviser for the Fund
and the assets of the Fund were invested directly in the type of securities held
by the Portfolio. Further, the Directors believe that the shareholders of the
Fund will participate in the ownership of a larger portfolio of securities than
could be achieved directly by the Fund.
2
<PAGE> 70
FINANCIAL HIGHLIGHTS
The table below shows certain information concerning the investment results for
the Fund for the periods indicated. The information has been audited by Price
Waterhouse LLP, independent accountants, whose unqualified report on the
financial statements containing such information is incorporated by reference in
the Statement of Additional Information.
The Financial Highlights should be read in conjunction with the financial
statements and notes thereto and the unqualified report of independent
accountants which are incorporated by reference in the Statement of Additional
Information. Further information about the performance of the Fund is available
in the annual report to shareholders. Both the Statement of Additional
Information and the annual report to shareholders may be obtained from the Fund
free of charge by calling 800-332-3863.
<TABLE>
<CAPTION>
FOR THE
PERIOD
JANUARY
13,
1994
(COMMENCEMENT
FOR THE OF
YEAR OPERATIONS)
ENDED THROUGH
FEBRUARY FEBRUARY
28, 1995 28, 1994
------- -------
<S> <C> <C>
Net asset value per share, beginning of period........ $ 14.97 $ 15.00
------- -------
Income From Investment Operations:
Net investment income............................... 0.31 0.02
Net realized and unrealized gain (loss) on
securities....................................... 0.80 (0.05)
------- -------
Total gain (loss) from investment operations........ 1.11 (0.03)
Less Dividends:
Dividends from net investment income................ (0.27) --
------- -------
Net change in net asset value......................... 0.84 (0.03)
------- -------
Net asset value per share, end of period.............. $ 15.81 $ 14.97
====== ======
Total Return*......................................... 7.60% (0.20)%
Ratios/Supplemental Data:
Net assets, end of period (000)..................... $ 6,002 $ 1,180
Ratio of expenses to average net assets**........... 0.00% 0.00%+
Ratio of net investment income to average**
net assets....................................... 2.46% 2.92%+
</TABLE>
- ---------------
* The total returns listed are not annualized for the period ended February 28,
1994, and do not include the effect of the maximum 4.50% sales charge.
** Reflects the Fund's proportionate share of the Portfolio's expenses, the
Portfolio's fee waivers and expense reimbursements by the Portfolio's
Investment Adviser and Administrator and fee waivers and expense
reimbursements by the Fund's Administrator and Distributor. Such fee waivers
and expense reimbursements had the effect of reducing the ratio of expenses
to average net assets and increasing the ratio of net investment income to
average net assets by 6.32% and 55.00% (annualized) for the periods ended
February 28, 1995 and February 28, 1994, respectively.
+ Annualized.
3
<PAGE> 71
FUND INVESTMENTS
THE PACIFIC HORIZON BLUE CHIP FUND SEEKS LONG-TERM CAPITAL APPRECIATION THROUGH
INVESTMENTS IN BLUE CHIP STOCKS. THE FUND MAY BE APPROPRIATE FOR INVESTORS WHO
WANT THE POTENTIAL FOR CAPITAL APPRECIATION OVER THE LONG-TERM.
---------------------------------------------------------
INVESTMENT OBJECTIVE
THE OBJECTIVE OF THE FUND IS TO PROVIDE INVESTORS WITH LONG-TERM CAPITAL
APPRECIATION THROUGH INVESTMENTS IN BLUE CHIP STOCKS. THE FUND SEEKS TO ACHIEVE
ITS INVESTMENT OBJECTIVE BY INVESTING ALL OF ITS INVESTABLE ASSETS IN THE
PORTFOLIO. THE PORTFOLIO HAS THE SAME INVESTMENT OBJECTIVE AS THE FUND. WHILE
THE PORTFOLIO STRIVES TO ATTAIN ITS INVESTMENT OBJECTIVE, THERE CAN BE NO
ASSURANCE THAT IT WILL BE ABLE TO DO SO.
SINCE THE INVESTMENT CHARACTERISTICS OF THE FUND WILL CORRESPOND TO THOSE OF THE
PORTFOLIO, THE FOLLOWING IS A DISCUSSION OF THE VARIOUS INVESTMENTS OF AND
TECHNIQUES EMPLOYED BY THE PORTFOLIO.
---------------------------------------------------------
TYPES OF INVESTMENTS
IN GENERAL. The Portfolio is a diversified portfolio which will invest
substantially all of its assets in stocks included in either the Dow Jones
Industrial Average or the Standard and Poor's 500 Index. The Portfolio will hold
approximately 100 stocks. The Portfolio expects that under normal market
conditions at least 80% of its assets will be invested in blue chip stocks and
the other 20% may be invested in cash equivalent securities.
Cash equivalents are the following short-term interest bearing instruments:
obligations issued or guaranteed by the U.S. Government, its agencies and
instrumentalities, certificates of deposit, bankers' acceptances, time deposits
and other interest-bearing deposits issued by domestic and foreign banks and
foreign branches of U.S. banks, foreign government securities, and commercial
paper issued by U.S. and foreign issuers which is rated at the time of purchase
at least Prime-2 by Moody's Investors Service, Inc. ("Moody's") or A-2 by
Standard & Poor's Ratings Group, Division of McGraw Hill ("S&P"), Duff & Phelps
Credit Co. ("D&P") and Fitch Investor Services, Inc. ("Fitch").
The Portfolio may also make other investments as described more fully below
under "Other Investment Practices and Considerations."
FUNDAMENTAL LIMITATIONS
The investment objective of the Fund and the Portfolio may not be changed
without a vote by the holders of a majority of the outstanding shares of the
Fund or of the outstanding interests of the Portfolio, respectively. Policies
requiring such a vote to effect a change are known as "fundamental." A number of
the other fundamental investment limitations are summarized below. Neither the
Fund nor the Portfolio may:
(1) Purchase securities (except securities issued by the U.S. Government, its
agencies or instrumentalities) if, as a result, more than 5% of its total
assets will be invested in the securities of any one issuer or it would own
more than 10% of the voting securities of such issuer, except that up to
25% of its total assets may be invested without regard to these
limitations; and provided that all of its assets may be invested in a
diversified, open-end management investment company, or a series thereof,
with substantially the same investment objectives, policies and
restrictions without regard to the limitations set forth in this paragraph;
(2) Make loans to other persons, except that it may make time or demand deposits
with banks, provided that time deposits shall not have an aggregate value
in excess of 10% of its net assets, and may purchase bonds, deben-
4
<PAGE> 72
tures or similar obligations that are publicly distributed, may loan
portfolio securities not in excess of 10% of the value of its total assets,
and may enter into repurchase agreements as long as repurchase agreements
maturing in more than seven days do not exceed 10% of the value of its
total assets; or
(3) Purchase or sell commodities contracts, except that it may purchase or sell
futures contracts on financial instruments, such as bank certificates of
deposit and U.S. Government securities, foreign currencies and stock
indexes and options on any such futures if such options are written by
other persons and if (i) the futures or options are listed on a national
securities or commodities exchange, (ii) the aggregate premiums paid on all
such options that are held at any time do not exceed 20% of its total net
assets, and (iii) the aggregate margin deposits required on all such
futures or options thereon held at any time do not exceed 5% of its total
assets.
If a percentage restriction is satisfied at the time of investment, a later
increase or decrease in percentage resulting from a change in values will not
constitute a violation of that restriction.
A list of additional fundamental investment limitations is set out in the
Statement of Additional Information.
OTHER INVESTMENT PRACTICES AND
CONSIDERATIONS
OPTIONS. The Portfolio may purchase put and call options on listed securities
and stock indexes so long as the aggregate premiums paid for options does not
exceed 2% of the net assets of the Portfolio (this restriction does not apply to
options on futures contracts). Put options may be purchased in order to protect
the Portfolio's securities in expectation of a declining market, and call
options may be purchased to benefit from anticipated price increases in the
underlying securities or index. The Portfolio may not write put options but may
write fully covered call options as long as the Portfolio remains fully covered
throughout the life of the option, either by owning the optioned securities or
possessing a call issued by another writer that is identical in all respects to
the call written by the Portfolio. For additional information relating to option
trading practices, including particular risks thereof, see the Statement of
Additional Information.
FUTURES. The Portfolio may purchase and sell stock index futures contracts (as
well as purchase related options) as a hedge against changes resulting from
market conditions in the values of the securities held by the Portfolio or which
it intends to purchase and where the transactions are economically appropriate
for the reduction of risks inherent in the ongoing management of the Portfolio.
A futures contract is a bilateral agreement pursuant to which two parties agree
to take or make delivery of an amount of cash equal to a specified dollar amount
times the difference between the value of a specified stock index (which assigns
relative values to the common stocks included in the index) at the close of the
last trading day of the contract and the price at which the futures contract is
originally struck. No physical delivery of the underlying securities is normally
made. The Portfolio may not purchase or sell futures contracts and purchase
related options unless immediately after any such transaction the aggregate
initial margin that is required to be posted by the Portfolio under the rules of
the exchange on which the futures contract (or futures option) is traded, plus
any premiums paid by the Portfolio on its open futures options positions, does
not exceed 5% of the Portfolio's total assets, after taking into account any
unrealized profits and losses on the Portfolio's open contracts and excluding
the amount that a futures option is "in-the-money" at the time of purchase. An
option to buy a futures contract is "in-the-money" if the then current purchase
price of the contract that is subject to the option is less than the exercise or
strike price; an option to sell a futures contract is "in-the-money" if the
exercise or strike price exceeds the then current purchase price of the contract
that is the subject of the option.
5
<PAGE> 73
Successful use of futures contracts by the Portfolio is subject to Bank of
America's ability to predict correctly movements in the direction of the stock
market. There are several risks in connection with the use of futures contracts
by the Portfolio as a hedging device. One risk arises because of the imperfect
correlation between movements in the price of the futures contract and movements
in the price of the securities which are the subject of the hedge. The price of
the futures contract may move more than or less than the price of the securities
being hedged. If the price of the futures contract moves less than the price of
the securities which are the subject of the hedge, the hedge will not be fully
effective but, if the price of the securities being hedged has moved in an
unfavorable direction, the Portfolio would be in a better position than if it
had not hedged at all. If the price of the securities being hedged has moved in
a favorable direction, this advantage will be partially offset by the loss on
the futures contract. If the price of the futures contract moves more than the
price of the hedged securities, the Portfolio involved will experience either a
loss or gain on the futures contract which will not be completely offset by
movements in the price of the securities which are the subject of the hedge. It
is also possible that, where the Portfolio has sold futures contracts to hedge
its portfolio against a decline in the market, the market may advance and the
value of securities held in the Portfolio may decline. If this occurred, the
Portfolio would lose money on the futures contract and also experience a decline
in value in its portfolio securities.
In addition to the possibility that there may be an imperfect correlation, or no
correlation at all, between movements in the futures contract and the securities
being hedged, the price of futures contracts may not correlate perfectly with
movement in the cash market due to certain market distortions. Due to the
possibility of price distortion in the futures market, and because of the
imperfect correlation between the movements in the cash market and movements in
the price of futures contracts, a correct forecast of general market trends by
Bank of America may still not result in a successful hedging transaction over a
short time frame.
Positions in futures contracts may be closed out only on an exchange which
provides a secondary market for such futures contracts. Although the Portfolio
intends to purchase or sell futures contracts only on exchanges where there
appear to be active secondary markets, there is no assurance that a liquid
secondary market on any exchange will exist for any particular contract or at
any particular time. In such event, it may not be possible to close a futures
investment position, and in the event of adverse price movements, the Portfolio
would continue to be required to make daily cash payments of variation margin.
The liquidity of a secondary market in a futures contract may in addition be
adversely affected by "daily price fluctuation limits" established by commodity
exchanges which limit the amount of fluctuation in a futures contract price
during a single trading day. Once the daily limit has been reached in the
contract, no trades may be entered into at a price beyond the limit, thus
preventing the liquidation of open futures positions.
For a more detailed description of futures contracts and options and the costs
and risks related to such instruments, see the Statement of Additional
Information.
SHORT-TERM OBLIGATIONS. Subject to the investment policies stated above, the
Portfolio may invest in short-term obligations such as variable and floating
rate instruments, including master demand notes. Although payable on demand by
the Portfolio, master demand notes may not be marketable. Consequently, the
ability to redeem such notes may depend on the borrower's ability to pay, which
will be continuously monitored by Bank of America. Such notes will be purchased
only from domestic corporations that either (a) are rated Aa or better by
Moody's or AA or better by S&P, (b) have commercial paper rated at least Prime-2
by Moody's or A-2 by S&P, (c) are backed by a bank letter of credit or (d) are
determined by Bank of America to be of a quality comparable to securities
described in either clause (a) or (b).
6
<PAGE> 74
INVESTMENT COMPANY SECURITIES. In connection with the management of its daily
cash position, the Portfolio may invest in securities issued by other investment
companies which invest in short-term debt securities and which seek to maintain
a $1.00 net asset value per share (i.e., "money market funds"). No more than 10%
of the value of the Portfolio's total assets will be invested in securities of
other investment companies, with no more than 5% invested in the securities of
any one investment company. As a shareholder of another investment company, the
Portfolio would bear, along with other shareholders, its pro rata portion of the
other investment company's expenses, including advisory fees.
REPURCHASE AGREEMENTS. The Portfolio may also enter into repurchase agreements.
Under these agreements, the Portfolio will acquire securities from either a bank
which has a commercial paper rating of A-2 or better by S&P or Prime-2 or better
by Moody's or a registered broker-dealer, and the seller agrees to repurchase
them within a specified time at a fixed price (equal to the purchase price plus
interest). Repurchase agreements are considered to be loans under the Investment
Company Act of 1940 (the "1940 Act"). Repurchase agreements maturing in more
than seven days will not exceed 10% of the value of the total assets of the
Portfolio. Repurchase agreements will be entered into only for debt obligations
issued or guaranteed by the U.S. Government, its agencies or instrumentalities,
certificates of deposit, bankers' acceptances or commercial paper, and either
the Portfolio's custodian or its agent will have physical possession of the
securities or the securities will be transferred to the Portfolio's custodian,
by appropriate entry in the Federal Reserve Bank's records and, in either case,
will be maintained in a segregated account.
Bank of America will monitor the value of securities acquired under repurchase
agreements to ensure that the value of such securities will always equal or
exceed the repurchase price under the repurchase agreement. If the other party
to a repurchase agreement defaults, the Portfolio might incur a loss if the
value of the securities securing the repurchase agreement declines, and might
incur disposition costs in connection with liquidating the securities. In
addition, if bankruptcy proceedings are commenced with respect to the seller,
realization upon the securities by the Portfolio may be delayed or denied.
REVERSE REPURCHASE AGREEMENTS. The Portfolio may enter into reverse repurchase
agreements. Under these arrangements, the Portfolio will sell a security held by
the Portfolio to either a bank which has a commercial paper rating of A-2 or
better by S&P or Prime-2 or better by Moody's or a registered broker-dealer,
with an agreement to repurchase the security on an agreed date, price and
interest payment. Reverse repurchase agreements involve the possible risk that
the value of portfolio securities the Portfolio relinquishes may decline below
the price the Portfolio must pay when the transaction closes. Reverse repurchase
agreements are considered to be borrowings under the 1940 Act. Borrowings may
magnify the potential for gain or loss on amounts invested resulting in an
increase in the speculative character of the Portfolio's outstanding shares.
SECURITIES LENDING. In order to earn additional income, the Portfolio may lend
its portfolio securities to broker-dealers that Bank of America considers to be
of good standing. Borrowers of portfolio securities may not be affiliated
directly or indirectly with the Company or the Portfolio. If the broker-dealer
should become bankrupt, however, the Portfolio could experience delays in
recovering its securities. A securities loan will only be made when, in Bank of
America's judgment, the possible reward from the loan justifies the possible
risks. In addition, such loans will not be made if, as a result, the value of
securities loaned by the Portfolio exceeds 10% of its total assets. Securities
loans will be fully collateralized.
PORTFOLIO TRANSACTIONS. Investment decisions for the Portfolio are made
independently from those for other investment companies and accounts managed by
Bank of America and its affiliated entities. Such other investment companies and
accounts may also invest in the same securities as the Portfolio. When a
purchase or sale of the
7
<PAGE> 75
same security is made at substantially the same time on behalf of the Portfolio
and another investment company or account, available investments or
opportunities for sales will be equitably allocated pursuant to procedures of
Bank of America. In some instances, this investment procedure may adversely
affect the price paid or received by the Portfolio or the size of the position
obtained or sold by the Portfolio.
In allocating purchase and sale orders for investment securities (involving the
payment of brokerage commissions or dealer concessions), Bank of America may
consider the sale of Fund shares by broker-dealers and other financial
institutions (including affiliates of Bank of America and the Fund's distributor
to the extent permitted by law), provided it believes the quality of the
transaction and the price to the Portfolio are not less favorable than what they
would be with any other qualified firm.
PORTFOLIO TURNOVER. Short-term capital gains realized from securities
transactions are taxable to shareholders as ordinary income. In addition, high
portfolio turnover rates can result in corresponding increases in brokerage
commissions and other transaction costs.
MASTER-FEEDER STRUCTURE. The Fund is an open-end investment portfolio that
seeks to achieve its investment objective by investing all of its investable
assets in the Portfolio which has the same investment objective. The Fund may
withdraw its investment in the Portfolio at any time if the Board of Directors
of the Company determines that it is in the best interest of the Fund to do so.
Upon such withdrawal, the Board of Directors would consider what action might be
taken, including the investment of all of the assets of the Fund in another
pooled investment entity having the same investment objective as the Fund or the
hiring of an investment adviser to manage the Fund's assets in accordance with
the investment policies described above with respect to the Portfolio. See
"Expense Summary," "Fund Investments" and "Fund Management" for a description of
this investment objective and the investment policies, restrictions, management
and expenses of the Fund and the Portfolio.
The Portfolio is a separate series of Master Investment Trust, Series I (the
"Master Trust"), which is organized as a business trust under the laws of
Delaware. The Fund and other entities that may invest in the Portfolio from time
to time (e.g., other investment companies and commingled trust funds) will each
be liable for all obligations of the Portfolio. However, the risk of the Fund's
incurring financial loss on account of such liability is limited to
circumstances in which both inadequate insurance exists and the Portfolio itself
is unable to meet its obligations. Accordingly, the Company's Board of Directors
believes that neither the Fund nor its shareholders will be adversely affected
by reason of the Fund's investing in the Portfolio. As stated above, the
investment objective of the Fund and the Portfolio is a fundamental policy and
may not be changed, in the case of the Fund, without the vote of its
shareholders or, in the case of the Portfolio, without the vote of its
interestholders. Whenever the Fund is requested to vote on matters pertaining to
the investment objective or a fundamental policy of the Portfolio, the Fund will
hold a meeting of its shareholders and will cast its vote in the same proportion
as the votes cast by the Fund's shareholders. The Fund will vote any shares for
which it receives no voting instructions in the same proportion as the shares
for which it does receive voting instructions. As with any mutual fund, other
investors in the Portfolio could control the results of voting at the Portfolio
level in certain instances (e.g. a change in fundamental policies by the
Portfolio which was not approved by the Fund's shareholders). This could result
in the Fund's withdrawal of its investment in the Portfolio, and in increased
costs and expenses for the Fund. Further, the withdrawal of other entities that
may from time to time invest in the Portfolio could have an adverse effect on
the performance of the Portfolio and the Fund, such as decreased economies of
scale and increased per share operating expenses. In addition, the total
withdrawal by another investment company as an investor in the Portfolio will
8
<PAGE> 76
cause the Portfolio to terminate automatically in 120 days unless the Fund and
any other investors in the Portfolio unanimously agree to continue the business
of the Portfolio.
As the Fund is required to submit such matters to a vote of its shareholders, it
will be required to incur the expenses of shareholder meetings in connection
with such withdrawals. If unanimous agreement is not reached to continue the
Portfolio, the Board of Directors of the Company would need to consider
alternative arrangements for the Fund, such as those described above. The policy
of the Fund, and other similar investment companies, to invest their investable
assets in trusts such as the Portfolio is a relatively recent development in the
mutual fund industry and, consequently, there is a lack of substantial
experience with the operation of this policy.
There may also be other investment companies through which you can invest in the
Portfolio which may have higher or lower fees and expenses than those of the
Fund and which may therefore have different performance results than the Fund.
Information concerning whether an investment in the Portfolio may be available
through another entity investing in the Portfolio may be obtained by calling
800-332-3863.
SHAREHOLDER GUIDE
THE FOLLOWING SECTION WILL PROVIDE YOU WITH ANSWERS TO SOME OF THE MOST
OFTEN-ASKED QUESTIONS REGARDING BUYING AND SELLING THE FUND'S SHARES AND
REGARDING THE FUND'S DIVIDENDS.
HOW TO BUY SHARES
WHAT IS MY MINIMUM INVESTMENT IN THE FUND?
Generally, there is a minimum investment requirement of $500 for initial
purchases and $50 for subsequent purchases, although these amounts may be
altered in certain circumstances as shown below.
- ---------------------------------------------------------
INVESTMENT MINIMUMS
FOR SPECIFIC TYPES OF ACCOUNTS
<TABLE>
<CAPTION>
INITIAL SUBSEQUENT
INVESTMENT INVESTMENT
------- -------------
<S> <C> <C>
Regular Account $ 500* $50
Automatic Investment Plan $ 50 $50
IRAs, SEP-IRAs
(one participant) $ 500 No minimum
Spousal IRAs** $ 250 No minimum
SEP-IRAs
(more than one
participant) $ 2,500 No minimum
</TABLE>
* The minimum investment is $100 for purchases made through Bank of America's
trust and agency accounts or a Service Organization (defined below) whose
clients have made aggregate minimum purchases of $1,000,000.
** A regular IRA must be opened in conjunction with this account.
- ---------------------------------------------------------
HOW ARE SHARES PRICED?
Shares are purchased at their public offering price, which is based upon the
Fund's net asset value per share plus a front-end sales load. The Fund
calculates its net asset value ("NAV") as follows:
(Value of Fund Assets) - (Fund Liabilities)
NAV = ----------------------------------------------------
Number of Outstanding Shares
Net asset value is determined as of the end of regular trading hours on the New
York Stock Exchange (the "Exchange") (currently 4:00 p.m. Eastern time) on days
the Exchange is open.
The Portfolio's investments are valued at market value or, where market
quotations are not readily available, at fair value as determined in good faith
by the Portfolio pursuant to procedures adopted by the Portfolio's Board of
Trustees. Short-term debt securities are valued at amortized cost, which
approximates market value. For further information about valuing securities, see
the Statement of Additional Information. For voice recorded price and yield
information call (800) 227-1545.
SALES LOAD. The front-end sales load for the Fund begins at 4.50% and may
decrease as the
9
<PAGE> 77
amount you invest increases, as shown in the following chart:
- ---------------------------------------------------------
<TABLE>
<CAPTION>
DEALER'S
AS A % OF REALLOWANCE
-------------- AS A
NET % OF
AMOUNT OF OFFERING ASSET OFFERING
TRANSACTION PRICE VALUE PRICE*
----------------- ---- ---- ----
<S> <C> <C> <C>
Less than
$100,000 4.50 4.71 4.00
$100,000 but less
than $250,000 3.75 3.90 3.35
$250,000 but less
than $500,000 2.50 2.56 2.20
$500,000 but less
than $750,000 2.00 2.04 1.75
$750,000 but less
than $3,000,000 1.00 1.01 0.90
$3,000,000 or
more 0.00 0.00 0.00
</TABLE>
* Dealer's reallowance may be changed periodically.
From time to time, the Fund's distributor will make or allow additional
payments or promotional incentives in the form of cash or other compensation
such as trips to sales seminars, tickets to sporting and other entertainment
events and gifts of merchandise to firms that sell shares of the Fund.
- ---------------------------------------------------------
WHEN NO SALES LOAD IS APPLIED. You pay no front-end sales load on the
following types of transactions:
- - reinvestment of dividends or distributions;
- - corporate/business retirement plans (such as 401(k), 403(b)(7), 457 and Keogh
accounts) sponsored by the Fund's administrator;
- - employer-sponsored employee pension or retirement plans making direct
investments in the Fund;
- - any purchase of shares by an investment adviser regulated by federal or state
governmental authority when the investment adviser is purchasing shares for
its own account or for an account for which it is authorized to make
investment decisions (i.e., a discretionary account);
- - accounts opened by a bank, trust company or thrift institution, acting as a
fiduciary, provided appropriate notification of such status is given at the
time of investment;
- - any purchase of shares by clients of The Private Bank of Bank of America or by
Private Banking clients of Seattle-First National Bank or by or on behalf of
agency accounts administrated by any bank or trust company affiliate of Bank
of America;
- - any purchase of shares through a discount broker-dealer that imposes a
transaction charge with respect to such purchase, provided you were the
beneficial owner of shares of the Fund (or any other fund in the Pacific
Horizon Family of Funds) prior to July 1, 1992, so long as your account
remains open on the Company's books;
- - any purchase of shares, provided you were the beneficial owner of shares of
the Fund (or any other fund in the Pacific Horizon Family of Funds) before
April 20, 1987, so long as your account remains open on the Company's books;
- - any purchase of shares, provided you were the beneficial owner of shares of
Bunker Hill Income Securities, Inc. on the date of its reorganization into the
Pacific Horizon Corporate Bond Fund, so long as your account remains open on
the Company's books;
- - any purchase of shares pursuant to the Reinstatement Privilege described
below; and
- - any purchase of shares pursuant to the Directed Distribution Plan described
below.
Additionally, some individuals are not required to pay a front-end sales load
when purchasing Fund shares, including:
- - members of the Company's Board of Directors;
- - U.S.-based employees and retirees (including employees who are U.S. citizens
but work abroad and retirees who are U.S. citizens but worked abroad) of Bank
of America or any of its affiliates, and their parents, spouses and minor
children, as well as members of the Board of
10
<PAGE> 78
Directors of Bank of America or any of its affiliates;
- - registered representatives or full-time employees of broker-dealers having
agreements with the Fund's distributor pertaining to the sale of Fund shares
(and their spouses and minor children) to the extent permitted by such
organizations; and
- - former full-time employees (and retirees) of Security Pacific Corporation (or
any of its subsidiaries) and the surviving spouses and minor children of such
employees (and retirees), provided they were the beneficial owner of shares of
the Fund (or any other fund in the Pacific Horizon Family of Funds) prior to
July 1, 1992, so long as their account remains open on the Company's books.
RIGHTS OF ACCUMULATION. When buying shares in Pacific Horizon Funds, your
current aggregate investment determines the sales load that you pay. Your
current aggregate investment is the accumulated combination of your immediate
investment along with the shares that you beneficially own in any Pacific
Horizon Fund, or for like shares of any investment portfolio (a "Time Horizon
Fund") of Time Horizon Funds, an open-end investment company managed by an
affiliate of Bank of America, on which you paid a sales load (including shares
that carry no sales load but were obtained through an exchange and can be traced
back to shares that were acquired with a sales load).
To qualify for a reduced sales load, you or your Service Organization (which is
an institution such as a bank or broker-dealer that has entered into a selling
and/or servicing agreement with the Fund's distributor) must notify the Fund's
transfer agent at the time of investment that a quantity discount is applicable.
Use of this service is subject to a check of appropriate records, after which
you will receive the lowest applicable sales charge. If you want to participate
you can so indicate on your Account Application or make a subsequent written
request to the Transfer Agent.
Example: Suppose you beneficially own shares of the Fund, the Pacific Horizon
California Tax-Exempt Bond Fund, the Pacific Horizon U.S. Government Securities
Fund, the Pacific Horizon Capital Income Fund and shares of the Company's money
market funds that can be traced back to the purchase of shares carrying a sales
load (or any combination thereof) with an aggregate current value of $90,000. If
you subsequently purchase shares of the Fund with a current value of $10,000,
the load applicable to the subsequent purchase would be reduced to 3.75% of the
offering price.
LETTER OF INTENT. You may also obtain a reduced sales charge by means of a
written Letter of Intent, which expresses your non-binding commitment to invest
in the aggregate $100,000 or more in shares of any Pacific Horizon Fund or any
Time Horizon Fund within a period of 13 months, beginning up to 90 days prior to
the date of the Letter's execution. Shares purchased during that period count as
a credit toward completion of the Letter of Intent. Any investments you make
during the period receive the discounted sales load based on the full amount of
your investment commitment. When your commitment is fulfilled, an adjustment
will be made to reflect any reduced sales load applicable to shares purchased
during the 90-day period prior to the submission of your Letter of Intent.
While signing a Letter of Intent does not bind you to purchase, or the Company
or Time Horizon Funds to sell, the full amount indicated at the sales load in
effect at the time of signing, you must complete the intended purchase to obtain
the reduced sales load. When you sign a Letter of Intent, the Company or Time
Horizon Funds, as applicable, holds in escrow shares purchased by you in an
amount equal to 5% of the total amount of your commitment. After you fulfill the
terms of the Letter of Intent, the escrow will be released.
If your aggregate investment exceeds the amount indicated in your Letter of
Intent, you will receive an adjustment which reflects the further reduced sales
load applicable to your excess investment. It will be in the form of additional
shares credited to your account at the then current offering price applicable to
a single purchase of the total amount of the total purchase.
If your aggregate investment is less than the amount you committed, you will be
requested to remit an amount equal to the difference between the sales load
actually paid and the sales load
11
<PAGE> 79
applicable to the aggregate purchases actually made. If such remittance is not
received within 20 days, the Transfer Agent will redeem an appropriate number of
shares held in escrow to realize the difference.
If you would like to participate, complete the Letter of Intent on your Account
Application. If you have any questions regarding the Letter of Intent, call
800-332-3863. Please read it carefully, as you will be bound by its terms.
HOW CAN I BUY SHARES?
The chart below provides more information regarding some of the different
methods for investing in the Fund.
12
<PAGE> 80
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------
TO BUY SHARES
OPENING AN ACCOUNT ADDING TO AN ACCOUNT
- --------------------------------------------------------------------------------------------------------
THROUGH BANK OF AMERICA, YOUR BROKER OR ANOTHER SERVICE ORGANIZATION
(ORDERS ARE NOT EFFECTIVE UNTIL RECEIVED BY THE FUND'S TRANSFER AGENT)
<S> <C> <C>
Contact them directly for Contact them directly for
instructions. instructions.
- --------------------------------------------------------------------------------------------------------
<CAPTION>
THROUGH THE DISTRIBUTOR
(IF YOU ARE OR WILL BE THE SHAREHOLDER OF RECORD ON THE COMPANY'S BOOKS)
<S> <C>
BY MAIL
Pacific Horizon Funds, Inc. Complete Account Application Mail all subsequent
c/o DST Systems, Inc. and mail it with a check investments to:
P.O. Box 419955 (payable to Pacific Horizon
Kansas City, MO 64141-6955 Blue Chip Fund) to the Pacific Horizon Funds, Inc.
address on the left. c/o DST Systems, Inc.
P.O. Box 419940
Kansas City, MO 64173-0298
- --------------------------------------------------------------------------------------------------------
IN PERSON
DST Systems, Inc. Deliver Account Application Deliver your payment directly
811 Main and your payment directly to to the address on the left.
Kansas City, MO 64105-2005 the address on the left.
- --------------------------------------------------------------------------------------------------------
BY WIRE
United Missouri Bank of Instruct your bank to Instruct your bank to
Kansas City, N.A. transmit immediately transmit immediately
10th and Grand available funds, for purchase available funds as described
Kansas City, MO 64106 of Fund shares in your name. at left, except that the wire
ABA No. 1010-0069-5 should indicate that you are
Pacific Horizon Funds, Inc. Be sure to have your bank making a subsequent purchase
Blue Chip Fund indicate your name, address as opposed to opening a new
DDA #98-7037-107-3 and tax identification account.
number, the name of the Fund
and the fact that a new Be sure to include your name
account is being opened. and your Fund account number.
Consult your bank for information on remitting funds by wire
and any associated bank charges.
You may contact the Fund's transfer agent at 800-346-2087 for
further information regarding wiring instructions.
- --------------------------------------------------------------------------------------------------------
</TABLE>
13
<PAGE> 81
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------
TO BUY SHARES
OPENING AN ACCOUNT ADDING TO AN ACCOUNT
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
BY TELETRADE TeleTrade Privileges apply Purchases may be made in the
(a service permitting transfers automatically, although the minimum amount of $500 and
of money from your Privilege may not be used to the maximum amount of $50,000
checking, NOW or bank make an initial purchase. If per transaction as soon as
money market account) you do not wish to have the appropriate information
TeleTrade Privileges you must regarding your bank account
indicate that fact on the has been established on your
Account Application or in a Fund account. This
subsequent written notice to information may be provided
the Fund's transfer agent. on the Account Application or
in a signature guaranteed
letter of instruction to the
Transfer Agent. Signature
guarantees are discussed
under "How to Sell Shares."
Call 800-346-2087 to make
your purchase.
</TABLE>
You should refer to the "Shareholder Services" section
for additional important information about the TeleTrade Privilege.
YOU MAY USE OTHER INVESTMENT OPTIONS, INCLUDING AUTOMATIC INVESTMENTS
AND EXCHANGES, TO INVEST IN YOUR FUND ACCOUNT.
PLEASE REFER TO THE SECTION ENTITLED "SHAREHOLDER SERVICES" FOR
MORE INFORMATION.
- --------------------------------------------------------------------------------
WHAT PRICE WILL I RECEIVE WHEN I BUY SHARES?
Your shares will be purchased at the Fund's public offering price calculated at
the next close of regular trading on the Exchange (currently 4:00 p.m. Eastern
time) after your purchase order is received in proper form by the Fund's
transfer agent, DST Systems, Inc. (the "Transfer Agent"), at its Kansas City
office.
If you purchase shares through Bank of America, your broker or another Service
Organization, the entity involved is responsible for transmitting your order and
required funds to the Transfer Agent on a timely basis in accordance with the
procedures in this Prospectus. Share purchases (and redemptions) executed
through Bank of America or a Service Organization are executed only on days on
which the particular institution and the Fund are open for business. Purchase
orders received by a Service Organization in proper form by 4:00 p.m. Eastern
time on a business day will be effected at the public offering price calculated
at 4:00 p.m. Eastern time on that day, if the Service Organization transmits
your order to the Transfer Agent by the end of its business day (normally 5:15
p.m. Eastern time). Except as provided in the following two sentences, if the
order is not received in proper form by a Service Organization by 4:00 p.m.
Eastern time or not received by the Transfer Agent by the close of its business
day, the order will be based upon the next determined purchase price. The
Company may from time to time in its sole discretion appoint one or more
entities as the Fund's agent to receive irrevocable purchase and redemption
orders and to transmit them on a net basis to the Transfer Agent. In these
instances orders received by the entity by
14
<PAGE> 82
4:00 p.m. Eastern time on a business day will be effected as of 4:00 p.m.
Eastern time that day if the order is actually received by the Transfer Agent
not later than the next business morning accompanied by payment in federal
funds.
WHAT ELSE SHOULD I KNOW TO MAKE A PURCHASE?
Federal regulations require you to provide a certified taxpayer identification
number upon opening or reopening your account.
If your check used for investment does not clear, a fee may be imposed by the
Transfer Agent. All payments should be in U.S. dollars and, to avoid fees and
delays, should be drawn only on U.S. banks. Please remember that the Company
reserves the right to reject any purchase order.
You should note that Bank of America, Service Organizations and registered
investment advisers may charge a separate fee or transaction charge to their
clients for providing them with administrative services related to their
investment in Fund shares. These fees could constitute a substantial portion of
smaller accounts and may not be in an investor's best interest. Bank of America
and Service Organizations may also impose minimum customer account and other
requirements in addition to those imposed by the Fund. If you purchase or redeem
shares directly from the Fund, you may do so without incurring any charges other
than those described in this Prospectus.
HOW TO SELL SHARES
HOW DO I REDEEM MY SHARES?
Pacific Horizon Funds, Inc. makes it easy to sell, or "redeem," shares. The Fund
imposes no charge when you redeem shares. The value of the shares you redeem may
be more or less than your cost, depending on the Fund's current net asset value.
If you purchased your shares through an account at Bank of America, your Broker
or another Service Organization, you may redeem all or part of your shares in
accordance with the instructions pertaining to that account. If you are also the
shareholder of record on the Company's books, you may redeem shares in
accordance with the procedures described in the chart below as well as those of
your account. To use the redemption methods described below, you must arrange
with Bank of America or your Service Organization for delivery of the required
application(s) to the Transfer Agent.
15
<PAGE> 83
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------
TO SELL SHARES
THROUGH BANK OF AMERICA, YOUR BROKER OR ANOTHER SERVICE ORGANIZATION
(ORDERS ARE NOT EFFECTIVE UNTIL RECEIVED BY THE TRANSFER AGENT)
Contact them directly for instructions.
---------------------------------------------------------------------------------------------
THROUGH THE DISTRIBUTOR
(IF YOU ARE A SHAREHOLDER OF RECORD ON THE COMPANY'S BOOKS)
<S> <C>
BY MAIL
Pacific Horizon Blue Chip Fund Send a signed, written request (each owner, including each
c/o DST Systems, Inc. joint owner, must sign) to the Transfer Agent.
P.O. Box 419955
Kansas City, MO 64141-6955 If you hold stock certificates for the shares being
redeemed, make sure to endorse them for transfer, have your
signature on them guaranteed by your bank or another
guarantor institution (as described in the section entitled
"What Kind Of Paperwork Is Involved In Selling Shares?") and
include them with your request.
---------------------------------------------------------------------------------------------
IN PERSON
DST Systems, Inc.
811 Main Deliver your signed, written request (each owner, including
Kansas City, MO 64105-2005 each joint owner, must sign) and any certificates (endorsed
for transfer and signature guaranteed as described in the
section entitled "What Kind Of Paperwork Is Involved In
Selling Shares?") to the address on the left.
---------------------------------------------------------------------------------------------
BY WIRE As soon as appropriate information regarding your bank
account has been established on your Fund account, you may
write, telephone or telegraph redemption requests to the
Transfer Agent, and redemption proceeds will be wired in
federal funds to the commercial bank you have specified.
Information regarding your bank account may be provided on
the Account Application or in a signature guaranteed letter
of instruction to the Transfer Agent. Signature guarantee
requirements are discussed in the section entitled "What
Kind Of Paperwork Is Involved In Selling Shares?".
Redemption proceeds will normally be wired the business day
after your request and any other necessary documents have
been received by the Transfer Agent.
Wire Privileges apply automatically unless you indicate on
the Account Application or in a subsequent written notice to
the Transfer Agent that you do not wish to have them.
Requests must be for at least $1,000 and may be subject to
limits on frequency and amount.
Wire Privileges may be modified or suspended at any time,
and are not available for shares issued in certificate form.
Contact your bank for information on any charges imposed by
the bank in connection with receipt of redemptions by wire.
---------------------------------------------------------------------------------------------
</TABLE>
16
<PAGE> 84
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------
TO SELL SHARES
<S> <C>
BY TELETRADE You may redeem Fund shares (minimum of $500 and maximum of
(a service permitting $50,000 per transaction) by telephone after appropriate
transfers of money to your information regarding your bank account has been established
checking, NOW or bank money on your Fund account. This information may be provided on
market account) the Account Application or in a signature guaranteed letter
of instruction to the Transfer Agent. Signature guarantee
requirements are discussed in the section entitled "What
Kind Of Paperwork Is Involved In Selling Shares?".
Redemption orders may be placed by calling 800-346-2087.
TeleTrade Privileges apply automatically unless you indicate
on the Account Application or in a subsequent written notice
to the Transfer Agent that you do not wish to have them.
You should refer to the "Shareholder Services" section for
additional important information about the TeleTrade
Privilege.
</TABLE>
OTHER REDEMPTION OPTIONS, INCLUDING EXCHANGES AND AUTOMATIC WITHDRAWALS,
ARE ALSO AVAILABLE. PLEASE REFER TO THE SECTION ENTITLED "SHAREHOLDER
SERVICES" FOR MORE INFORMATION.
- --------------------------------------------------------------------------------
WHAT NAV WILL I RECEIVE FOR SHARES I WANT
TO SELL?
Redemption orders are effected at the net asset value per share next determined
after receipt of the order in proper form by the Transfer Agent at its Kansas
City office. Although the Fund itself imposes no charge when shares are
redeemed, if you purchase shares through Bank of America or a Service
Organization, they may charge a fee for providing certain services in connection
with investments in Fund shares. The Company reserves the right to redeem
accounts (other than IRA and non-working spousal IRA accounts) involuntarily if,
after sixty days' written notice, the account's net asset value remains below a
$500 minimum balance.
WHAT KIND OF PAPERWORK IS INVOLVED IN
SELLING SHARES?
Redemption requests must be signed by each shareholder, including each joint
owner. Certain types of redemption requests as well as all endorsed share
certificates will need to include a signature guarantee. Signature guarantees
must accompany redemption requests for (i) an amount in excess of $50,000 per
day, (ii) any amount if the redemption proceeds are to be sent somewhere other
than the address of record on the Company's books, or (iii) an amount of $50,000
or less if the address of record has not been on the Company's books for sixty
days.
You may obtain a signature guarantee from: (i) a bank which is a member of the
FDIC; (ii) a trust company; (iii) a member firm of a national securities
exchange; or (iv) another eligible guarantor institution. Guarantees must be
signed by an authorized signatory of the guarantor institution and be
accompanied by the words "Signature Guaranteed." The Transfer Agent will not
accept guarantees from notaries public.
HOW QUICKLY CAN I RECEIVE MY REDEMPTION PROCEEDS?
The Company will make payment for all shares redeemed after the Transfer Agent
receives a request in proper form, except as provided by the rules of the
Securities and Exchange Commission. If the shares to be redeemed have been
purchased by check or by TeleTrade, the Company will, upon the clearance of the
purchase check or
17
<PAGE> 85
TeleTrade payment, mail the redemption proceeds within seven business days. This
does not apply to situations where the Fund receives payment in cash or
immediately available funds for the purchase of shares. If you purchase shares
by wire, you must file an Account Application before redemption requests can be
honored.
Bank of America and the Service Organizations are responsible for transmitting
redemption orders and crediting their customers' accounts with redemption
proceeds on a timely basis.
DO I HAVE ANY REINSTATEMENT PRIVILEGES AFTER I HAVE REDEEMED SHARES?
You may reinvest all or any portion of your redemption proceeds in shares of the
Fund, or of another load fund of the Company or Time Horizon Funds, within 90
days of your redemption trade date without paying a sales load. Shares so
reinvested will be purchased at a price equal to the net asset value next
determined after the Transfer Agent receives a reinstatement request and payment
in proper form.
If you wish to use this Privilege, you must submit a written reinstatement
request to the Transfer Agent stating that you are eligible to use the
Privilege. The reinstatement request and payment must be received within 90 days
of the trade date of the redemption. Currently, there are no restrictions on the
number of times you may use this Privilege.
Generally, exercising the Reinstatement Privilege will not affect the character
of any gain or loss realized on redemption for federal income tax purposes.
However, if a redemption results in a loss, the reinstatement may result in the
loss being disallowed under IRS "wash sale" rules.
DIVIDEND AND DISTRIBUTION POLICIES
Shareholders of the Fund are entitled to dividends arising from the net
investment income and net realized gains, if any, earned on investments in the
Portfolio which are allocable to the Fund. The Fund's net income is declared and
paid as a dividend on a quarterly basis and net realized capital gains (if any)
are distributed not more than twice each year. Dividends are paid within five
business days after quarter end.
You will automatically receive dividends and capital gain distributions in
additional shares without a sales load unless you: (i) elect in writing to
receive payment in cash; or (ii) elect to participate in the Directed
Distribution Plan described in the section entitled "Can My Dividends From The
Fund Be Invested In Other Pacific Horizon Funds?".
To elect to receive payment in cash, or to revoke such election, you must do so
in writing to the Transfer Agent at P.O. Box 419955, Kansas City, MO 64141-6955.
The election or revocation will become effective with respect to dividends paid
after it is received by the Transfer Agent.
SHAREHOLDER SERVICES
PACIFIC HORIZON FUNDS, INC. PROVIDES A VARIETY OF WAYS TO MAKE MANAGING YOUR
INVESTMENTS MORE CONVENIENT.
Some or all of the following services and privileges as well as others described
in this Prospectus may not be available for, or may have different conditions
imposed on them than as described in this Prospectus with respect to, certain
clients of Bank of America and particular Service Organizations. Consult these
entities for more information.
CAN I USE THE FUND IN MY RETIREMENT PLAN?
The Company makes available Individual Retirement Accounts ("IRAs"), including
IRAs set up under a Simplified Employee Pension Plan ("SEP-IRAs") and IRA
"Rollover Accounts."
YOUR INVESTMENTS GROW TAX DEFERRED UNTIL WITHDRAWAL AT RETIREMENT AND IN MANY
CASES THE INITIAL INVESTMENT IS TAX DEDUCTIBLE.
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<PAGE> 86
For details, contact the Fund's distributor at 800-332-3863. Investors should
also read the IRA Disclosure Statement and the Bank Custodial Agreement for
further details on eligibility, service fees and tax implications, and consult
their tax advisers.
CAN I EXCHANGE MY INVESTMENT FROM ONE FUND TO ANOTHER?
As a shareholder, you have the privilege of exchanging your shares for shares of
another Pacific Horizon Fund, or like shares of any Time Horizon Fund, provided
that such other shares may be legally sold in your state of residence. NO
ADDITIONAL SALES LOAD WILL BE INCURRED WHEN EXCHANGING FUND SHARES PURCHASED
WITH A SALES LOAD FOR SHARES OF ANOTHER LOAD FUND OF THE COMPANY.
An investment in the Fund automatically entitles you to use this Privilege,
unless you indicate on the Account Application or in a subsequent letter to the
Transfer Agent that you do not wish to use this Privilege.
Fund shares being exchanged must have a current value of at least $500 and are
subject to the minimum initial investment requirements of the particular fund
into which the exchange is being made. You may obtain prospectuses regarding the
funds into which you wish to make an exchange from your Service Organization or
the Fund's distributor.
You may provide exchange instructions by telephone by calling the Transfer Agent
at 800-346-2087. (See the section below regarding TeleTrade for a description of
the Company's policy regarding responsibility for telephone instructions.) You
may also send exchange instructions in writing by following directions set forth
previously under "How to Sell Shares."
If you would like more information on making an exchange, please read the
Statement of Additional Information and consult your Service Organization or the
Fund's distributor.
The Fund reserves the right to reject any exchange request and the Exchange
Privilege may be modified or terminated at any time. At least 60 days' notice of
any material modification to or termination of the Exchange Privilege will be
given to shareholders except where notice is not required under the regulations
of the Securities and Exchange Commission.
WHAT IS TELETRADE?
TELETRADE IS A SERVICE WHICH ALLOWS YOU TO AUTHORIZE ELECTRONIC TRANSFERS OF
MONEY TO PURCHASE SHARES IN OR REDEEM SHARES FROM AN ESTABLISHED FUND ACCOUNT.
THE SERVICE MAY BE USED LIKE AN "ELECTRONIC CHECK" TO MOVE MONEY BETWEEN AN
ACCOUNT AT A FINANCIAL INSTITUTION AND A FUND ACCOUNT WITH A SINGLE TELEPHONE
CALL.
Purchase and redemption proceeds with respect to TeleTrade transactions will be
transferred between your Fund account and the checking, NOW or bank money market
account designated by you. Only an account maintained at a domestic financial
institution that is an Automated Clearing House member may be so designated.
TeleTrade purchases will be effected at the public offering price next
determined after the Transfer Agent receives payment for the transaction.
Redemption proceeds will be on deposit in your account at your financial
institution generally two business days after the redemption request is received
by the Transfer Agent. You may also request receipt of your redemption proceeds
by check, which will be payable to the registered owners of your Fund account
and will be sent only to the address of record.
You should note that the Transfer Agent may act upon a telephone redemption
request (including a telephone wire redemption request) from any person
representing himself or herself to be you and reasonably believed by the
Transfer Agent to be genuine. Neither the Company nor any of its service
contractors will be liable for any loss or expense in acting upon telephone
instructions that are reasonably believed to be genuine. In attempting to
confirm that telephone instructions are genuine, the Company will use such
procedures as are considered reasonable. If you should experience difficulty in
contacting the Transfer Agent to place telephone redemptions (including
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<PAGE> 87
telephone wire redemption requests), for example because of unusual market
activity, you are urged to consider redeeming your shares by mail or in person.
The Company may modify the TeleTrade Privilege at any time or charge a service
fee upon notice to shareholders. No such fee currently is contemplated.
CAN I ARRANGE TO HAVE AUTOMATIC
INVESTMENTS MADE ON A REGULAR BASIS?
YOU MAY ARRANGE, THROUGH THE AUTOMATIC INVESTMENT PROGRAM, FOR SYSTEMATIC
INVESTMENTS IN YOUR FUND ACCOUNT IN AMOUNTS OF $50 OR MORE BY DIRECTLY DEBITING
YOUR ACCOUNT AT YOUR FINANCIAL INSTITUTION. At your option, your checking, NOW
or bank money market account designated by you will be debited in the specified
amount, and Fund shares will be purchased, once a month, on either the first or
fifteenth day, or twice a month, on both days. Only accounts maintained at a
domestic financial institution which permits automatic withdrawals and is an
Automated Clearing House member are eligible. The Automatic Investment Program
is one means by which you may use Dollar Cost Averaging in making investments.
WHAT IS DOLLAR COST AVERAGING AND HOW CAN I IMPLEMENT IT?
DOLLAR COST AVERAGING INVOLVES INVESTING A FIXED DOLLAR AMOUNT AT REGULAR
PREDETERMINED INTERVALS. BECAUSE MORE SHARES ARE BOUGHT DURING PERIODS WITH
LOWER SHARE PRICES AND FEWER SHARES ARE BOUGHT WHEN THE PRICE IS HIGHER, YOUR
AVERAGE COST PER SHARE MAY BE REDUCED. You may also implement Dollar Cost
Averaging on your own initiative or through other entities.
In order to be effective, Dollar Cost Averaging should be followed on a
sustained, consistent basis. You should be aware, however, that shares bought
using Dollar Cost Averaging are made without regard to their price on the day of
investment or to market trends. In addition, while you may find Dollar Cost
Averaging to be beneficial, it will not prevent a loss if you ultimately redeem
your shares at a price that is lower than their purchase price.
To establish an Automatic Investment Account that uses the Dollar Cost Averaging
method, check the appropriate box and supply the necessary information on the
Account Application or in a subsequent written request to the Transfer Agent.
You may cancel this Privilege or change the amount of purchase at any time by
mailing written notification to the Transfer Agent.
Notification will be effective three business days following receipt. The Fund
may modify or terminate this Privilege at any time or charge a service fee,
although no such fee currently is contemplated.
CAN I ARRANGE PERIODIC WITHDRAWALS?
IF YOU ARE A SHAREHOLDER WITH A FUND ACCOUNT VALUED AT $5,000 OR MORE, YOU MAY
WITHDRAW AMOUNTS IN MULTIPLES OF $50 FROM YOUR ACCOUNT ON A MONTHLY, QUARTERLY,
SEMI-ANNUAL OR ANNUAL BASIS THROUGH THE AUTOMATIC WITHDRAWAL PLAN.
At your option, monthly, quarterly, semi-annual and annual withdrawals will be
made on either the first or fifteenth day of the particular month selected. To
participate in this Plan, check the appropriate box and supply the necessary
information on the Account Application or in a subsequent signature guaranteed
written request to the Transfer Agent. Purchases of additional shares
concurrently with withdrawals are ordinarily not advantageous because of the
Fund's sales load.
CAN MY DIVIDENDS FROM THE FUND BE
INVESTED IN OTHER FUNDS?
You may elect to have your dividends, capital gains distributions, or both
("distribution proceeds") received from a non-retirement Fund account
automatically invested in shares of any other investment portfolio of the
Company, or in like shares of any Time Horizon Fund, provided such shares are
held in a non-retirement account. To participate in this program, known as the
Directed Distribution Plan, check the appropriate box and supply the necessary
information on the
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Account Application or subsequently send a written request to the Transfer
Agent. Participants in the Directed Distribution Plan are subject to the minimum
initial investment requirements of the particular fund involved. Investments
will be made at a price equal to the net asset value of the purchased shares
next determined after receipt of the distribution proceeds by the Transfer
Agent.
There are no subsequent investment requirements for accounts to which
distribution proceeds are directed nor are service fees currently charged for
effecting these transactions.
IS THERE A SALARY DEDUCTION PLAN
AVAILABLE?
YOU MAY PURCHASE FUND SHARES BY HAVING PAYMENTS AUTOMATICALLY DEPOSITED INTO
YOUR FUND ACCOUNT (MINIMUM OF $50 AND MAXIMUM OF $50,000 PER TRANSACTION) IF YOU
RECEIVE A FEDERAL SALARY, SOCIAL SECURITY OR CERTAIN VETERAN'S, MILITARY OR
OTHER PAYMENTS FROM THE FEDERAL GOVERNMENT. Subject to these limitations, you
may deposit as much of your payments as you wish.
For instructions on how to enroll in this Direct Deposit Program, call the
Transfer Agent at 800-346-2087.
Note: Death or legal incapacity will terminate participation in the Program. You
may also choose at any time to terminate your participation by notifying the
appropriate federal agency in writing. Further, the Fund may terminate your
participation after 30 days' notice.
THE BUSINESS OF THE FUND
FUND MANAGEMENT
The business affairs of the Company are managed under the general supervision of
its Board of Directors. Information about the Directors and Officers of the
Company and about the Trustees and Officers of the Master Trust is included in
the Statement of Additional Information under "Management."
SERVICE PROVIDERS
-------------------
INVESTMENT ADVISER
Bank of America serves as Investment Adviser of the Portfolio. Bank of America
is a subsidiary of BankAmerica Corporation, a registered bank holding company.
Its principal offices are located at 555 California Street, San Francisco,
California 94104.
Formed in 1904, Bank of America is a national banking association that provides
commercial banking and trust business through an extensive system of branches
across the western United States. Bank of America's principal banking affiliates
operate branches in ten U.S. states as well as corporate banking and business
credit offices in major U.S. cities and branches, corporate offices and
representative offices in 37 countries.
In its advisory agreement, Bank of America has agreed to manage the Portfolio's
investments and to be responsible for, place orders for, and make decisions with
respect to, all purchases and sales of the Portfolio's securities. The agreement
also provides that Bank of America may, in its discretion, provide advisory
services through its own employees or employees of one or more of its affiliates
that are under the common control of Bank of America's parent, BankAmerica
Corporation, provided such employees are under the management of Bank of
America. Bank of America may also employ a sub-adviser provided Bank of America
remains fully responsible to the Portfolio for the acts and omissions of the
sub-adviser.
Bank of America Illinois' Equity Management Team is responsible for the
day-to-day investment activities of the Portfolio. The team is headed by James
Miller, Executive Vice President and Chief Investment Officer of BofA Illinois
Investment Management (a wholly-owned subsidiary of Bank of
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America). Mr. Miller has been the Fund's manager since May 1995 and has been
associated with BofA Illinois Investment Management (and its predecessor
Continental Bank) since 1988. Mr. Miller is a Chartered Financial Analyst, a
member of the Association of Investment Management and Research, and a former
director of the Investment Analysts Society of Chicago.
For the services provided and expenses assumed under the advisory agreement,
Bank of America is entitled to receive a fee at the annual rate of 0.75% of the
Portfolio's average daily net assets. This fee is higher than that paid by most
other investment companies but is comparable to the fees paid by other
investment companies with similar investment objectives and policies. This
amount may be reduced pursuant to undertakings by Bank of America. (See the
information below under "Fee Waivers.") During the fiscal year ended February
28, 1995, Bank of America waived its entire fee as investment advisor. In
addition, Bank of America and its affiliates may be entitled to fees under the
Shareholder Services Plan as described under "Plan Payments," and may receive
fees charged directly to their accounts in connection with investments in Fund
shares.
ADMINISTRATOR
Concord Holding Corporation ("Concord") serves as Administrator of the Fund and
the Portfolio. Concord is a wholly owned subsidiary of The BISYS Group, Inc. Its
offices are located at 125 W. 55th Street, New York, New York 10019.
Under its administration agreements with the Company and the Portfolio, Concord
has agreed to: pay the costs of maintaining the offices of the Company and the
Portfolio; provide a facility to receive purchase and redemption orders; provide
statistical and research data, data processing services and clerical services;
coordinate the preparation of reports to shareholders of the Fund,
interestholders of the Portfolio and the Securities and Exchange Commission;
prepare tax returns; maintain the registration or qualification of the Fund's
shares for sale under state securities laws; maintain books and records of the
Fund and the Portfolio; calculate the net asset value of the Fund and the
Portfolio and dividends and capital gains distributions to shareholders; serve
as dividend disbursing agent for the Portfolio; and generally assist in all
aspects of the operations of the Fund and the Portfolio.
For its services as administrator, Concord is entitled to receive an
administration fee from the Fund at the annual rate of 0.15% of the Fund's
average daily net assets and an administration fee from the Portfolio at the
annual rate of 0.05% of the Portfolio's average daily net assets. These amounts
may be reduced pursuant to undertakings by Concord. (See the information below
under "Fee Waivers.") During the fiscal year ended February 28, 1995, Concord
waived its entire fee as administrator for both the Fund and the Portfolio.
Pursuant to the authority granted in its administration agreements, Concord has
entered into agreements with PFPC, Inc. ("PFPC") under which PFPC, and an
off-shore affiliate of PFPC, perform certain of the services listed above, e.g.,
calculating the net asset value of the Fund and the Portfolio, calculating
dividends and capital gains distributions to shareholders, and maintaining the
books and records of the Fund and the Portfolio. The Fund and the Portfolio bear
all fees and expenses charged by PFPC for these services.
DISTRIBUTOR
The Fund's shares are sold on a continuous basis by Concord Financial Group,
Inc. (the "Distributor"). The Distributor is a wholly-owned subsidiary of
Concord and is located at 125 W. 55th Street, New York, New York 10019.
CUSTODIAN AND TRANSFER AGENT
PNC Bank, N.A., Broad and Chestnut Streets, Philadelphia, Pennsylvania, 19101
serves as the Custodian of the Fund and the Portfolio. DST Systems, Inc. is the
transfer and dividend disbursing agent for the Fund and is located at 811 Main,
Kansas City, MO 64105-2005.
FEE WAIVERS
Except as noted in this Prospectus, the service contractors bear all expenses in
connection with
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the performance of their services and the Fund and Portfolio bear the expenses
incurred in their operations. Expenses can be reduced by voluntary fee waivers
and expense reimbursements by Bank of America and other service providers as
well as by certain expense limitations imposed by state securities regulators.
Periodically, during the course of the Fund's fiscal year, Bank of America,
Concord and/or the Distributor may choose not to receive fee payments and/or may
assume certain Fund or Portfolio expenses. However, the service providers retain
the ability to be reimbursed for these amounts by the Fund and Portfolio prior
to fiscal year end and, subject to the expense limitations of certain states, to
stop such fee waivers and expense reimbursements at any time.
TAX INFORMATION
YOU WILL BE ADVISED AT LEAST ANNUALLY REGARDING THE FEDERAL INCOME TAX TREATMENT
OF DIVIDENDS AND DISTRIBUTIONS MADE TO YOU. YOU SHOULD SAVE YOUR ACCOUNT
STATEMENTS BECAUSE THEY CONTAIN INFORMATION YOU WILL NEED TO CALCULATE YOUR
CAPITAL GAINS OR LOSSES UPON YOUR ULTIMATE SALE OR EXCHANGE OF SHARES IN THE
FUND.
As with any investment, you should consider the tax implications of an
investment in the Fund. The following is only a brief summary of some of the
important tax considerations generally affecting the Fund and its shareholders.
Consult your tax adviser with specific reference to your own tax situation.
FEDERAL TAXES
During its most recent fiscal year the Fund qualified as a "regulated investment
company" under the Internal Revenue Code of 1986, as amended (the "Code"), and
Management intends that the Fund will so qualify in future years as long as such
qualification is in the best interest of the Fund's shareholders. As a result of
this qualification, the Fund generally is not required to pay federal income
taxes to the extent its earnings are distributed in accordance with the Code.
The Fund intends to qualify for this special tax treatment as long as it is in
the best interest of its shareholders. It is expected that the Portfolio will
not be subject to federal income taxes. The Portfolio intends to qualify as a
partnership (or other pass-through entity) for federal income tax purposes. As
such, the Portfolio is not subject to tax and the Fund will be treated for
federal income tax purposes as recognizing its pro rata share of the Portfolio's
income and deductions, and owning its pro rata share of the Portfolio's assets.
The Fund's status as a regulated investment company is dependent on, among other
things, the Portfolio's continued qualification as a partnership (or other
pass-through entity) for federal income tax purposes.
Dividends (whether received in cash or additional shares) derived from ordinary
income and/or the excess of net short-term capital gain over net long-term
capital loss are taxable to you as ordinary income. The dividends received
deduction allowed to corporations will apply to such dividends to the extent of
the total qualifying dividends received by the Fund from domestic corporations
for the taxable year.
Any dividend you receive comprised of the excess of net long-term capital gain
over net short-term capital loss ("capital gain dividend") will be taxed as a
long-term capital gain no matter how long you have held Fund shares. Such
dividends are not eligible for the dividends received deduction allowed to
corporations.
A dividend paid to you by the Fund in January of a particular year will be
deemed for tax purposes to have been received by you on December 31 of the
preceding year, if the dividend is declared and payable to shareholders of
record on a specified date in October, November or December of that preceding
year. If you are considering buying shares of the Fund on or just before the
record date of a dividend, you should be aware that the amount of the
forthcoming dividend payment, although in effect a return of capital, will be
taxable to you.
You may realize a taxable capital gain (or loss) upon redemption or exchange of
Fund shares, depending upon the tax basis of your shares and their price at the
time of such redemption or exchange. Generally, you may include sales loads
incurred in the purchase of Fund shares in your
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<PAGE> 91
tax basis when determining your gain (or loss) on a redemption or exchange of
these shares. However, if you exchange such shares for shares of another
investment portfolio of the Company within 90 days of the purchase and are able
to reduce the sales load on the new shares through the Exchange Privilege, the
reduction may not be included in the tax basis of your exchanged shares. It may
be included in the tax basis of the new shares. If you had Fund shares for six
months or less and during that time receive a capital gain dividend on those
shares, any loss on the sale or exchange of those shares will be treated as a
long-term capital loss to the extent of the capital gain dividend.
STATE AND LOCAL TAXES
You should consult your tax adviser regarding state and local tax consequences
which may differ from the federal tax consequences as described above.
MEASURING PERFORMANCE
THE FUND'S PERFORMANCE MAY BE QUOTED IN TERMS OF AVERAGE ANNUAL TOTAL RETURN AND
AGGREGATE TOTAL RETURN. PERFORMANCE INFORMATION IS HISTORICAL AND IS NOT
INTENDED TO INDICATE FUTURE RESULTS.
Average annual total return reflects the average annual percentage change in
value of an investment in the Fund over the period being measured, while
aggregate total return reflects the total percentage change in value over the
period being measured.
Periodically, the Fund's total return (calculated on an average annual total
return and/or an aggregate total return basis for various periods) may be quoted
in advertisements or in communications to shareholders. Both methods of
calculating total return reflect the sales load charged by the Fund and assume
dividends and capital gains distributions made by the Fund during the period are
reinvested in Fund shares.
The Fund may also advertise total return data without reflecting the sales load
imposed on the purchase of Fund shares in accordance with the rules of the
Securities and Exchange Commission. Quotations that do not reflect the sales
load will, of course, be higher than quotations that do reflect sales loads.
The Fund may compare its total return to that of other mutual funds with similar
investment objectives and to stock and other relevant indices or to rankings
prepared by independent services or other financial or industry publications
that monitor mutual fund performance.
For example, the Fund's total return may be compared to the Consumer Price Index
or to data prepared by: Lipper Analytical Services, Inc.; Donoghue's Money Fund
Report; Mutual Fund Forecaster; Morningstar; Micropal; Wiesenberger Investment
Companies Services; or CDA Investment Technologies, Inc.
Total return data as reported in national financial publications such as Money,
Forbes, Barron's, The Wall Street Journal and The New York Times, or in local or
regional publications, may also be used in comparing Fund performance. The
Fund's total return also may be compared to indices such as: the Dow Jones
Industrial Average; the Standard & Poor's 500 Stock Index; the Shearson Lehman
Bond Indexes; the Wilshire 5000 Equity Indexes; or the Consumer Price Index.
Since the Fund's performance will fluctuate, it should not be compared with bank
deposits, savings accounts and similar investments that often provide an agreed
or guaranteed fixed yield for a stated period of time. Performance is generally
a function of the kind and quality of the instruments in a portfolio, portfolio
maturity, operating expenses and market conditions. Not included in the Fund's
calculations of total return are fees charged by Bank of America and Service
Organizations directly to their customer accounts in connection with investments
in the Fund (e.g. account maintenance fees, compensating balance requirements or
fees based upon account transactions, assets or income).
DESCRIPTION OF SHARES
The Company is a Maryland corporation that was organized on October 27, 1982.
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ABOUT THE COMPANY
THE COMPANY'S CHARTER AUTHORIZES THE BOARD OF DIRECTORS TO ISSUE UP TO TWO
HUNDRED BILLION FULL AND FRACTIONAL SHARES OF CAPITAL STOCK ($.001 PAR VALUE PER
SHARE) AND TO CLASSIFY AND RECLASSIFY ANY AUTHORIZED AND UNISSUED SHARES INTO
ONE OR MORE CLASSES OF SHARES.
The Board of Directors has authorized the issuance of 100 million shares of
Class N Common Stock representing interests in the Fund; and additional classes
of shares representing interests in other investment portfolios of the Company.
The Board of Directors may similarly classify or reclassify any class of shares
(including unissued Class N Common Stock) into one or more series. For more
information about the Company's other portfolios, contact the Company at the
telephone number listed on the inside cover page.
Shares representing interests in the Fund are entitled to participate in the
dividends and distributions declared by the Board of Directors and in the net
distributable assets of the Fund on liquidation. Fund shares have no preemptive
rights and only such conversion and exchange rights as the Board may grant in
its discretion. When issued for payment as described in this Prospectus, Fund
shares will be fully paid and non-assessable.
VOTING RIGHTS
SHAREHOLDERS ARE ENTITLED TO ONE VOTE FOR EACH FULL SHARE HELD AND FRACTIONAL
VOTES FOR FRACTIONAL SHARES HELD. Fund shares have cumulative voting rights to
the extent that may be required by applicable law. Additionally, shareholders
will vote in the aggregate and not by class or series, except as required by law
(or when permitted by the Board of Directors). The Fund does not presently
intend to hold annual meetings of shareholders to elect directors or for other
business unless and until such time as less than a majority of the directors
holding office has been elected by the shareholders. At that time, the directors
then in office will call a shareholders' meeting for the election of directors.
Under certain circumstances, however, shareholders have the right to call a
shareholder meeting to consider the removal of one or more directors. Such
meetings will be held when requested by the shareholders of 10% or more of the
Company's outstanding shares of common stock. The Fund will assist in
shareholder communications in such matters to the extent required by law and the
Company's undertaking with the Securities and Exchange Commission.
PLAN PAYMENTS
THE COMPANY HAS ADOPTED A SHAREHOLDER SERVICE PLAN (THE "PLAN") FOR THE FUND
UNDER WHICH THE FUND PAYS THE DISTRIBUTOR FOR SHAREHOLDER SERVICING EXPENSES
RELATED TO FUND SHARES.
Shareholder servicing expenses include expenses incurred in connection with
shareholder services provided by the Distributor and payments to Service
Organizations for support services for the beneficial owners of Fund shares,
such as: establishing and maintaining accounts and records relating to the
Service Organization's clients who invest in Fund shares; assisting those
clients in processing exchange and redemption requests and in changing dividend
options and account designations; and responding to inquiries from clients
concerning their investments.
Under the Plan, payments by the Fund for shareholder servicing expenses may not
exceed 0.25% (annualized) of the Fund's average daily net assets. Excluded from
this calculation, however, are all shares acquired via a transfer of assets from
trust and agency accounts at Bank of America. This amount may be reduced
pursuant to undertakings by the Distributor. During the fiscal year ended
February 28, 1995, the Distributor waived all payments under the Plan.
If in any month the Distributor is due more monies than are immediately payable
because of the percentage limitation described above, the unpaid amount is
"carried forward" from month to month while the Plan is in effect until such
time when it may be paid. However, any "carried forward" amounts will not be
payable beyond the fiscal year during which the amounts are accrued. No
interest, carrying or other finance charge is borne by the Fund with respect to
the amount "carried forward."
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Banks may act as Service Organizations. The Glass-Steagall Act and other
applicable laws, among other things, prohibit banks from engaging in the
business of underwriting securities. If a bank were prohibited from acting as a
Service Organization, its shareholder clients would be permitted to remain
Company shareholders and alternative means for continuing the servicing of such
shareholders would be sought. In such event, changes in the operation of the
Company might occur and a shareholder serviced by such bank might no longer be
able to avail itself of the automatic investment or other services then being
provided by the bank. It is not expected that shareholders would suffer any
adverse financial consequences as a result of any of these occurrences.
The Company will obtain a representation from the Service Organizations (and
from Bank of America and Concord) that they are or will be licensed as dealers
as required by applicable law or will not engage in activities which would
require them to be so licensed.
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- --------------------------------------------------------------------------------
PACIFIC HORIZON MUTUAL FUNDS
COPBLCP95P
<PAGE> 95
BLUE CHIP FUND
PROSPECTUS
July 1, 1995
NOT FDIC INSURED
<PAGE> 96
PROSPECTUS
JULY 1, 1995
PACIFIC HORIZON CORPORATE BOND FUND
A series of shares of Pacific Horizon
Funds, Inc.
- --------------------------------------------------------------------------------
The PACIFIC HORIZON CORPORATE BOND FUND (the "Fund") is a diversified mutual
fund whose investment objective is to provide investors with high current income
consistent with reasonable investment risk. The Fund seeks its objective through
investment primarily in a diversified portfolio of investment grade corporate
debt securities although it may invest a portion of its assets in other types of
securities and money market instruments. The Fund is offered by Pacific Horizon
Funds, Inc. (the "Company"), an open-end, series management investment company.
UNLIKE MOST OTHER INVESTMENT COMPANIES WHICH INVEST DIRECTLY IN PORTFOLIO
SECURITIES, THE FUND SEEKS TO ACHIEVE ITS INVESTMENT OBJECTIVE BY INVESTING ALL
ITS INVESTABLE ASSETS IN A FUND OF AN OPEN-END, MANAGEMENT INVESTMENT COMPANY
(THE "PORTFOLIO") HAVING THE SAME INVESTMENT OBJECTIVE AS THAT OF THE FUND. THE
FUND WILL PURCHASE SHARES OF THE PORTFOLIO AT NET ASSET VALUE. THE NET ASSET
VALUE OF THE FUND WILL RESPOND TO INCREASES AND DECREASES IN THE VALUE OF THE
PORTFOLIO'S SECURITIES. INVESTORS SHOULD CAREFULLY CONSIDER THIS INVESTMENT
APPROACH. SEE "OTHER INVESTMENT PRACTICES AND CONSIDERATIONS-- MASTER-FEEDER
STRUCTURE" ON PAGE 12 FOR ADDITIONAL INFORMATION REGARDING THIS STRUCTURE.
Bank of America National Trust and Savings Association ("Bank of America" or the
"investment advisor") serves as the Portfolio's investment adviser. Based in San
Francisco, California, Bank of America and its affiliates have over $50 billion
under management, including over $10 billion in mutual funds.
The Fund may be suited for investors looking for high current income who are
willing to accept some price and yield fluctuations.
This Prospectus describes concisely the information about the Fund and the
Company that you should know before investing. Please read it carefully and
retain it for future reference.
More information about the Fund is contained in a Statement of Additional
Information that has been filed with the Securities and Exchange Commission. To
obtain a free copy, call 800-332-3863. The Statement of Additional Information,
as it may be revised from time to time, is dated July 1, 1995 and is
incorporated by reference into this Prospectus.
- --------------------------------------------------------------------------------
Fund shares are not bank deposits or obligations of, or guaranteed or endorsed
by, Bank of America or any of its affiliates and are not federally insured by,
guaranteed by, obligations of or otherwise supported by the U.S. Government, the
Federal Deposit Insurance Corporation, the Federal Reserve Board or any other
governmental agency. Investment in the Fund involves investment risk, including
the possible loss of principal.
- --------------------------------------------------------------------------------
LIKE ALL MUTUAL FUNDS, THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR
HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
This Prospectus is part of a Registration Statement that has been filed with the
Securities and Exchange Commission in Washington, D.C. under the Securities Act
of 1933.
No person has been authorized to give any information or to make any
representations in connection with the offer of the Fund's shares, other than as
contained in this Prospectus and the Fund's official sales literature.
Therefore, other information and representations must not be relied upon as
having been authorized by the Fund. This Prospectus does not constitute an offer
in any State in which, or to any person to whom, such offering may not lawfully
be made.
- --------------------------------------------------------------------------------
<PAGE> 97
CONTENTS
<TABLE>
<S> <C> <C>
EXPENSE SUMMARY 2
FINANCIAL HIGHLIGHTS 4
FUND INVESTMENTS 5 INVESTMENT OBJECTIVE
5 TYPES OF INVESTMENTS
6 FUNDAMENTAL LIMITATIONS
8 OTHER INVESTMENT PRACTICES AND CONSIDERATIONS
SHAREHOLDER GUIDE 14 HOW TO BUY SHARES
14 What Is My Minimum Investment In The Fund?
14 How Are Shares Priced?
16 How Can I Buy Shares?
18 What Price Will I Receive When I Buy Shares?
19 What Else Should I Know To Make A Purchase?
19 HOW TO SELL SHARES
19 How Do I Redeem My Shares?
21 What NAV Will I Receive For Shares I Want To Sell?
22 What Kind of Paperwork Is Involved In Selling
Shares?
22 How Quickly Can I Receive My Redemption Proceeds?
22 Do I Have Any Reinstatement Privileges After I Have
Redeemed Shares?
22 DIVIDEND AND DISTRIBUTION POLICIES
SHAREHOLDER SERVICES 23 CAN I USE THE FUND IN MY RETIREMENT PLAN?
23 CAN I EXCHANGE MY INVESTMENT FROM ONE FUND TO
ANOTHER?
24 WHAT IS TELETRADE?
24 CAN I ARRANGE TO HAVE AUTOMATIC INVESTMENTS MADE ON
A REGULAR BASIS?
24 WHAT IS DOLLAR COST AVERAGING AND HOW CAN I
IMPLEMENT IT?
25 CAN I ARRANGE PERIODIC WITHDRAWALS?
25 CAN MY DIVIDENDS FROM THE FUND BE INVESTED IN OTHER
FUNDS?
25 IS THERE A SALARY DEDUCTION PLAN AVAILABLE?
THE BUSINESS OF THE FUND 25 FUND MANAGEMENT
26 Expenses
26 Service Providers
28 TAX INFORMATION
29 MEASURING PERFORMANCE
30 DESCRIPTION OF SHARES
30 PLAN PAYMENTS
APPENDIX A A-1
- ------------------------------------------------------------------------------------------------------------------------
DISTRIBUTOR: INVESTMENT ADVISER:
Concord Financial Group, Inc. Bank of America National Trust and Savings Association
125 West 55th Street 555 California Street
New York, NY 10019 San Francisco, CA 94104
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 98
EXPENSE SUMMARY
SHAREHOLDER TRANSACTION EXPENSES are charges you pay when buying or selling
shares of the Fund. ANNUAL FUND OPERATING EXPENSES include payments by the Fund
and payments by the Portfolio which are allocable to the Fund. Operating
expenses include fees for portfolio management, maintenance of shareholder
accounts, general administration, shareholder servicing, accounting and other
services.
At right is a summary of the shareholder transaction expenses imposed by the
Fund and its operating expenses (including the operating expenses of the
Portfolio which are allocable to the Fund) expected to be incurred during the
current fiscal year. This information has been restated to assume that current
fees had been in effect during the previous fiscal period. Actual expenses may
vary. A hypothetical example based on the summary is also shown. Expenses are
based upon expected costs for the Fund and Portfolio which will differ from the
historical costs of the Predecessor Fund as a result of the change in
organization from a closed-end to an open-end Fund.
<TABLE>
<S> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load Imposed on
Purchases (as a percentage of
offering price) 4.50%
Sales Load Imposed on Reinvested
Dividends None
Deferred Sales Load None
Redemption Fees None
Exchange Fee None
<CAPTION>
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
<S> <C>
Management Fees
(After Fee Waivers) 0.04%
All Other Expenses (After Expense
Reimbursements) 1.32%
------
Shareholder Service Payments 0.02%
(After Fee Waivers)
Other Expenses (After
Expense Reimbursements) 1.30%
Total Operating Expenses -----
(After Fee Waivers
and Expense
Reimbursements) 1.36%
======
</TABLE>
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
EXAMPLE: Assume the annual return is 5% and its operating expenses are the After 1 Year : $58
same as those stated above. For every $1,000 you invest, here's how much you After 3 Years : $86
would have paid in total expenses if you closed your account after the After 5 Years : $116
number of years indicated: After 10 Years: $201
</TABLE>
Note: The preceding operating expenses and example should not be considered a
representation of future investment returns and operating expenses. Actual
investment returns and operating expenses may be more or less than those shown.
- --------------------------------------------------------------------------------
This expense information is provided to help you understand the expenses you
would bear either directly (as with transaction expenses) or indirectly (as with
annual operating expenses) as a Fund shareholder.
Management fees (without waivers) consist of:
- - an investment advisory fee payable at the annual rate of 0.45% of the
Portfolio's average daily net assets; and
- - an administration fee payable at the annual rate of 0.15% of the Fund's
average daily net assets and 0.05% of the Portfolio's average daily net
assets.
Without fee waivers a shareholder service payment is made in the amount of 0.25%
of the Fund's average daily net assets. The summary and example reflect waivers
of a portion of the advisory, administration and shareholder service
2
<PAGE> 99
payments. Absent fee waivers total estimated operating expenses would be 2.20%
of the Fund's average daily net assets.
For a further description of shareholder transaction expenses and the Fund's
operating expenses, see the sections entitled "Shareholder Guide," "The Business
of the Fund" and "Plan Payments" in this Prospectus.
The Board of Directors of the Company believes that the aggregate per share
expenses of the Fund and the Portfolio in which the Fund's assets are invested
will be less than or approximately equal to the expenses which the Fund would
incur if the Company retained the services of an investment adviser for the Fund
and the assets of the Fund were invested directly in the type of securities held
by the Portfolio. There can be no assurance, however, that such will be the case
or that any economies of scale that might occur if other investors acquire
shares of the Portfolio will be realized, inasmuch as the Company is not aware
of any other potential investor in the Portfolio.
3
<PAGE> 100
FINANCIAL HIGHLIGHTS
The Fund commenced operations in 1973 as a diversified, closed-end management
investment company (that is, as an investment company with non-redeemable
shares) known as Bunker Hill Income Securities, Inc. (the "Predecessor Fund").
Following its initial public sale of common shares in 1973, the Predecessor Fund
did not regularly issue additional common shares except in connection with
dividend reinvestments. On April 25, 1994, the Predecessor Fund was reorganized
as a new open-end portfolio of the Company and, in connection with the
reorganization, all of the assets and liabilities of the Predecessor Fund were
transferred to the Portfolio. The Predecessor Fund received investment advisory
services from Bank of America.
The Financial Highlights table below shows certain financial information of the
Pacific Horizon Corporate Bond Fund. The information has been audited by Price
Waterhouse LLP, independent accountants, whose unqualified report on the
financial statements containing such information is incorporated by reference in
the Statement of Additional Information.
The Financial Highlights should be read in conjunction with the financial
statements and notes thereto and the unqualified report of independent
accountants thereon which are incorporated by reference in the Statement of
Additional Information. Further information about the performance of the Fund is
available in the annual report to shareholders. Both the Statement of Additional
Information and the annual report to shareholders may be obtained free of charge
by calling 800-332-3863.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30
------------------------------------------------------------------------------------------
FOR THE
PERIOD
10/1/94
THROUGH
2/28/95 1994* 1993++ 1992++ 1991++ 1990++ 1989++
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of
period........................ $ 14.86 $ 16.94 $ 16.12 $ 15.22 $ 14.79 $ 17.02 $ 17.56
-------- -------- -------- -------- -------- -------- --------
Income From Investment
Operations:
Net investment income......... 0.45.... 1.58 1.34 1.48 1.68 1.85 1.98
Net realized and unrealized
gain (loss) on investments.. 0.17 (2.06) 0.82 0.95 0.52 (2.15) (0.65)
-------- -------- -------- -------- -------- -------- --------
Total income (loss) from
investment operations....... 0.62 (0.48) 2.16 2.43 2.20 (0.30) 1.33
-------- -------- -------- -------- -------- -------- --------
Less Dividends and
Distributions:
Dividends from net investment
income...................... (0.45) (1.58) (1.34) (1.53) (1.77) (1.93) (1.87)
Dividends in excess of net
investment income........... -- (0.02) -- -- -- -- --
-------- -------- -------- -------- -------- -------- --------
Total Dividends and
Distributions:................ (0.45) (1.60) (1.34) (1.53) (1.77) (1.93) (1.87)
-------- -------- -------- -------- -------- -------- --------
Net change in net asset
value......................... 0.17 (2.08) 0.82 0.90 0.43 (2.23) (0.54)
-------- -------- -------- -------- -------- -------- --------
Net asset value, end of
period........................ $ 15.03 $ 14.86 $ 16.94 $ 16.12 $ 15.22 $ 14.79 $ 17.02
======== ======== ======== ======== ======== ======== ========
Total Return+................. 4.26% (2.29)% 7.05% 13.36% 36.64% (15.11)% 13.95%
Ratios/Supplemental Data:
Net assets, end of year....... $ 31,372 $ 33,046 $ 46,999 $ 44,642 $ 41,807 $ 40,528 $ 46,426
Ratio of expenses to average
net assets.................. 1.04** 0.91%** 1.02% 1.09% 1.09% 1.06% 1.05%
Ratio of net investment income
to average net assets....... 7.32%+++** 7.85%** 8.14% 9.42% 11.16% 11.65% 11.35%
Portfolio Turnover............ N/A N/A 154.34% 251.97% 54.79% 83.92% 88.48%
<CAPTION>
1988++ 1987++ 1986++ 1985++
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net asset value, beginning of
period........................ $ 17.56 $ 17.72 $ 16.85 $ 16.11
-------- -------- -------- --------
Income From Investment
Operations:
Net investment income......... 1.88 2.17 2.11 2.12
Net realized and unrealized
gain (loss) on investments.. 0.13 (0.17) 0.92 0.78
-------- -------- -------- --------
Total income (loss) from
investment operations....... 2.01 2.00 3.03 2.90
-------- -------- -------- --------
Less Dividends and
Distributions:
Dividends from net investment
income...................... (2.01) (2.16) (2.16) (2.16)
Dividends in excess of net
investment income........... -- -- -- --
-------- -------- -------- --------
Total Dividends and
Distributions:................ (2.01) (2.16) (2.16) (2.16)
-------- -------- -------- --------
Net change in net asset
value......................... 0.00 (0.16) 0.87 0.74
-------- -------- -------- --------
Net asset value, end of
period........................ $ 17.56 $ 17.56 $ 17.72 $ 16.85
======== ======== ======== ========
Total Return+................. 0.10% (6.03)% 37.57% 25.71%
Ratios/Supplemental Data:
Net assets, end of year....... $ 47,881 $ 47,561 $ 45,138 $ 42,957
Ratio of expenses to average
net assets.................. 1.02% 1.12% 0.93% 0.94%
Ratio of net investment income
to average net assets....... 10.63% 12.04% 11.79% 12.65%
Portfolio Turnover............ 133.29% 79.41% 112.80% 91.66%
</TABLE>
- ---------------
+ The total return figures do not include the effect of the maximum 4.50%
sales charge and are not annualized for the period October 1, 1994 through
February 28, 1995.
++ The financial highlights for the years ended September 30, 1985, 1986, 1987,
1988, 1989, 1990, 1991, 1992 and 1993 are for Bunker Hill Income Securities,
Inc., a closed-end fund.
* Includes the combined results of operations of Bunker Hill Income
Securities, Inc. and the Fund.
** Reflects the Fund's proportionate share of the Portfolio's expenses and fee
waivers and expense reimbursements by the Portfolio's Investment Advisor and
Administrator and the Fund's Administrator and Distributor. Such fee waivers
and expense reimbursements had the effect of reducing the ratio of expenses
to average net assets and increasing the ratio of net investment income to
average net assets by 0.90% (annualized) and 0.16% for the periods ended
February 28, 1995 and September 30, 1994, respectively.
+++ Annualized.
N/A Not applicable.
4
<PAGE> 101
FUND INVESTMENTS
THE PACIFIC HORIZON CORPORATE BOND FUND SEEKS HIGH CURRENT INCOME CONSISTENT
WITH REASONABLE INVESTMENT RISK. THE FUND SEEKS TO ACHIEVE ITS OBJECTIVE THROUGH
INVESTMENT PRIMARILY IN A DIVERSIFIED PORTFOLIO OF INVESTMENT GRADE CORPORATE
DEBT SECURITIES.
---------------------------------------------------------
INVESTMENT OBJECTIVE
THE OBJECTIVE OF THE FUND IS TO PROVIDE INVESTORS WITH HIGH CURRENT INCOME
CONSISTENT WITH REASONABLE INVESTMENT RISK. THE FUND SEEKS TO ACHIEVE ITS
INVESTMENT OBJECTIVE BY INVESTING ALL OF ITS INVESTABLE ASSETS IN THE PORTFOLIO.
THE PORTFOLIO HAS THE SAME INVESTMENT OBJECTIVE AS THE FUND. WHILE THE PORTFOLIO
STRIVES TO ATTAIN ITS INVESTMENT OBJECTIVE, THERE CAN BE NO ASSURANCE THAT IT
WILL BE ABLE TO DO SO. THE FUND MAY WITHDRAW ITS INVESTMENT IN THE PORTFOLIO AT
ANY TIME, IF THE BOARD OF DIRECTORS OF THE COMPANY DETERMINES THAT SUCH ACTION
IS IN THE BEST INTERESTS OF THE FUND. UPON ANY SUCH WITHDRAWAL, THE BOARD OF
DIRECTORS WOULD CONSIDER WHAT ACTION MIGHT BE TAKEN, INCLUDING THE INVESTMENT OF
ALL OF THE ASSETS OF THE FUND IN ANOTHER POOLED INVESTMENT ENTITY HAVING THE
SAME INVESTMENT OBJECTIVE AS THE FUND OR THE HIRING OF AN INVESTMENT ADVISER TO
MANAGE THE FUND'S ASSETS IN ACCORDANCE WITH THE INVESTMENT POLICIES DESCRIBED
BELOW WITH RESPECT TO THE PORTFOLIO.
SINCE THE INVESTMENT CHARACTERISTICS OF THE FUND WILL CORRESPOND TO THOSE OF THE
PORTFOLIO, THE FOLLOWING IS A DISCUSSION OF THE VARIOUS INVESTMENTS OF AND
TECHNIQUES EMPLOYED BY THE PORTFOLIO.
---------------------------------------------------------
TYPES OF INVESTMENTS
IN GENERAL. The Portfolio is a diversified portfolio which will invest
substantially all of its assets in investment grade corporate debt obligations
(at least 65% of total assets under normal circumstances) such as bonds,
debentures, notes and securities convertible into, or exchangeable for, or with
rights to purchase, common or preferred stocks. Investment grade debt securities
ordinarily carry lower rates of interest income than lower quality debt
securities with similar maturities. The securities obtained upon conversion of a
convertible security may be retained for a period of time pending their orderly
disposition.
The Portfolio may invest up to 20% of its total assets (determined at the time
of purchase) in debt obligations of foreign issuers, including Yankee bonds
(dollar-denominated bonds sold in the United States by non-U.S. issuers) and
Eurobonds (bonds issued in a country and sometimes a currency other than the
country of the issuer). The Portfolio may also hold a portion of its assets in
cash, money market instruments such as bank obligations (including certificates
of deposit, bankers' acceptances and time deposits issued by domestic and
foreign banks and foreign branches of U.S. banks that have total assets of more
than $2.5 billion and interest-bearing savings deposits in commercial banks in
amounts not exceeding 5% of its total assets) and commercial paper (commercial
paper must be rated at the time of purchase at least A-1 or A-2 by Standard &
Poor's Ratings Group, Division of McGraw Hill ("S&P"), Prime 1 or Prime 2 by
Moody's Investors Service, Inc. ("Moody's"), F-1+ or F-1 by Fitch Investors
Service, Inc. ("Fitch")) obligations issued or guaranteed by the U.S.
Government, its agencies or instrumentalities, asset-backed and mortgage-backed
securities, and bonds of supranational entities. Obligations of some of the U.S.
Government agencies and instrumentalities, such as the Small Business
Administration and the Maritime Administration, are backed by the full faith and
credit of the U.S.; others, like the Federal National Mortgage Association, are
backed by the discretionary
5
<PAGE> 102
authority of the U.S. Government to purchase the agency's obligations; and still
others, including the Student Loan Marketing Association, are backed solely by
the issuer's credit. There is no assurance that the U.S. Government would
support a U.S. Government-sponsored entity if it was not required to do so by
law.
The Portfolio will normally invest at least 75% of its total assets in
investment grade corporate securities and securities issued by the U.S.
Government, its agencies or instrumentalities. Investment grade securities are
securities rated at the time of purchase in the four highest ratings categories
by S&P or by Moody's, or if not rated, determined by Bank of America to be of
comparable quality to securities with such ratings. The four highest ratings
categories are AAA, AA, A and BBB by S&P and Fitch and Aaa, Aa, A and Baa by
Moody's. Bonds in the fourth category are more subject than those in the top
three categories to changes in economic or other conditions that could lead to a
weakened capacity to make payments of interest and principal. The Portfolio may
invest up to 25% of its total assets in lower quality, higher yielding
securities. Such securities are rated below investment grade, carry a higher
degree of risk and are considered to be speculative by S&P, Moody's or Fitch.
Debt securities will be rated at the time of purchase at least "B" by S&P,
Moody's or Fitch, or if unrated, will be determined by Bank of America to be of
comparable quality to securities with such ratings. Ratings are described more
fully in the Appendix to this Prospectus.
In the event that the rating of any security held by the Portfolio falls below
the required rating, the Portfolio will not be obligated to dispose of such
security and may continue to hold the obligation if, in the opinion of Bank of
America, such investment is considered appropriate under the circumstances.
The market value of debt securities and thus the Portfolio's net asset value per
share is expected to vary with changes in interest rates. The value of the
Portfolio's investments will normally fall when prevailing interest rates rise
and rise when interest rates fall. Interest rate fluctuations can be expected to
affect the Portfolio's earnings. In an effort to preserve the capital of the
Portfolio when interest rates are generally rising, Bank of America may shorten
the average weighted maturity of the securities in the Portfolio's investments.
Because the principal values of the securities with shorter maturities are less
affected by rising interest rates, a portfolio with a shorter average weighted
maturity will generally diminish less in value during such periods than a
portfolio with a longer average weighted maturity. Since securities with shorter
maturities, however, generally have a lower yield to maturity, the Portfolio's
current return based on its net asset value will generally be lower as a result
of such action than it would have been had such action not been taken.
FUNDAMENTAL LIMITATIONS. The investment objective of the Fund and the Portfolio
may not be changed without a vote by the holders of a majority of the
outstanding shares of the Fund or of the outstanding interests of the Portfolio,
respectively. Policies requiring such a vote to effect a change are known as
"fundamental." A number of the other fundamental investment limitations are
summarized below. Neither the Fund nor the Portfolio may:
1. Issue senior securities or borrow money except for temporary purposes in
amounts up to 10% of its total assets, or purchase securities if any
borrowings are outstanding;
2. Make loans, although it may invest in debt securities, enter into repurchase
agreements and lend its portfolio securities as discussed herein; or
3. Purchase securities on margin, make short sales of securities or maintain a
short position, although it may engage in transactions in futures contracts
and options.
* * *
A list of additional fundamental investment limitations is set out in full in
the Statement of Additional Information.
6
<PAGE> 103
ASSET-BACKED SECURITIES. The Portfolio may purchase asset-backed securities.
Asset-backed securities consist of undivided fractional interests in pools of
mortgages, consumer loans or receivables held in a trust. Examples include
mortgage-backed securities, certificates for automobile receivables (CARS) and
credit card receivables (CARDS). Payments of principal and interest on the
mortgages, loans or receivables are passed through to certificate holders.
Asset-backed securities may be issued by either governmental or non-governmental
entities. Payment on asset-backed securities of private issuers is typically
supported by some form of credit enhancement, such as a letter of credit, surety
bond, limited guaranty, or subordination. The extent of credit enhancement
varies, but usually amounts to only a fraction of the asset-backed security's
par value until exhausted. Ultimately, asset-backed securities are dependent
upon payment of the mortgages, consumer loans or receivables by individuals, and
the certificate holder frequently has no recourse to the entity that originated
the loans or receivables. All asset-backed securities purchased by the Portfolio
will either be issued or guaranteed by a U.S. Government entity or rated AAA by
S&P, Aaa by Moody's or have an equivalent rating from any other rating agency.
RISKS ASSOCIATED WITH HIGH YIELD/HIGH RISK SECURITIES, FOREIGN SECURITIES AND
ASSET-BACKED SECURITIES. There are particular risks associated with the high
yield/high risk securities that the Portfolio may hold, including (a) the
relative youth and growth of the market for such securities, (b) the sensitivity
of such securities to interest rate and economic changes, (c) the lower degree
of protection of principal and interest payments, (d) the relatively low trading
market liquidity for the securities, (e) the impact that legislation may have on
the high yield bond market (and, in turn, on the Portfolio's net asset value and
investment practices) and (f) the creditworthiness of the issuers of such
securities.
During an economic downturn or substantial period of rising interest rates,
highly leveraged issuers may experience financial stress which would negatively
affect their ability to meet their principal and interest payment obligations,
to meet projected business goals and to obtain additional financing. An economic
downturn could also disrupt the market for lower-rated bonds and negatively
affect the value of outstanding bonds and the ability of issuers to repay
principal and interest.
If the issuer of a lower-rated bond held by the Portfolio defaulted, the
Portfolio could incur additional expenses to seek recovery. Adverse publicity
and investor perceptions, whether or not they are based on fundamental analysis,
could also decrease the values and liquidity of lower-rated securities held by
the Portfolio, especially in a thinly traded market.
The Portfolio's investments in foreign securities, whether made directly or
indirectly, involve certain inherent risks, including political or economic
instability of the issuer or the country of issue, the difficulty of predicting
international trade patterns and changes in foreign currency exchange of rates
and the possibility of adverse clauses in investment or exchange control
regulations. There is typically less information publicly available about a
foreign company than about a U.S. company. Moreover, these companies may be
subject to less stringent reserve, auditing and reporting requirements than
their U.S. counterparts. Additionally, foreign markets are generally not as
developed or efficient as those in the U.S., and in most foreign markets volume
and liquidity are less than in the U.S. There is generally less government
supervision and regulation of foreign exchanges, brokers and companies than in
the U.S. There is also the possibility that foreign governments could
expropriate assets or levy confiscatory taxes, set limitations on the removal of
assets or suffer adverse diplomatic developments. Because of these and other
factors, foreign securities acquired by the Portfolio may be subject to greater
price fluctuation than securities of U.S. companies.
The underlying assets may be prepaid with the result of shortening the
certificates' weighted average life. Prepayment rates vary widely and
7
<PAGE> 104
may be affected by changes in market interest rates. It is not possible to
accurately predict the average life of a particular pool of mortgages, loans or
receivables. The proceeds of prepayments received by the Portfolio must be
reinvested in securities whose yields reflect interest rates prevailing at the
time. Thus, the Portfolio's ability to maintain a portfolio which includes
high-yielding asset-backed securities will be adversely affected to the extent
reinvestments are in lower yielding securities. The actual maturity and realized
yield will therefore vary based upon the prepayment experience of the underlying
asset pool and prevailing interest rates at the time of prepayment. Asset-backed
securities may be subject to greater risk of default during periods of economic
downturn than other instruments. Also, while the secondary market for
asset-backed securities is ordinarily quite liquid, in times of financial stress
the secondary market may not be as liquid as the market for other types of
securities, which could result in the Portfolio's experiencing difficulty in
valuing or liquidating such securities.
PARTICIPATIONS. The Portfolio may purchase from domestic financial institutions
participation interests in high quality debt securities. A participation
interest gives the Portfolio an undivided interest in the security in the
proportion that the Portfolio's participation interest bears to the total
principal amount of the security. Participation interests may have fixed,
floating or variable rates of interest, and will have remaining maturities of
thirteen months or less (as defined by the Securities and Exchange Commission).
The Portfolio intends only to purchase participations from an entity or
syndicate, and does not intend to serve as a co-lender in any participation. For
certain participation interests, the Portfolio will have the right to demand
payment, on not more than 30 days' notice, for all or any part of the
Portfolio's participation interest in the security, plus accrued interest. As to
these instruments, the Portfolio intends to exercise its right to demand payment
only upon a default under the terms of the security, as needed to provide
liquidity, or to maintain or improve the quality of its investment portfolio. It
is possible that a participation interest might be deemed to be an extension of
credit by the Portfolio to the issuing financial institution that is not a
direct interest in the credit of the obligor of the underlying security and is
not directly entitled to the protection of any collateral security provided by
such obligor. In such event, the ability of the Portfolio to obtain repayment
might depend on the issuing financial institution.
For temporary defensive purposes, or at times when Bank of America believes such
a position is warranted by uncertain or unusual market conditions, the Portfolio
may invest without limitation in securities issued or guaranteed by the U.S.
Government, its agencies and instrumentalities, money market securities and
cash. To the extent the Portfolio invests in such instruments, it will not be
invested in accordance with the investment policies designed for it to realize
its investment objective.
The Portfolio may also make other investments as described more fully below
under "Other Investment Practices and Considerations."
OTHER INVESTMENT PRACTICES AND CONSIDERATIONS
OPTIONS. The Portfolio may write covered put and call options and purchase put
and call options on U.S. or foreign securities that are traded on United States
and foreign securities exchanges and in over-the-counter markets.
Call options written by the Portfolio give the holder the right to buy the
underlying security from the Portfolio at a stated exercise price upon
exercising the option at any time prior to its expiration. A call option written
by the Portfolio is "covered" if the Portfolio owns or has an absolute right
(such as by conversion) to the underlying security covered by the call. A call
option is also covered if the Portfolio holds a call on the same security and in
the same principal amount as the call written and the exercise price of the call
held is (i) equal to or less than the exercise price of the call written, or
(ii) greater
8
<PAGE> 105
than the exercise price of the call written if the difference is maintained by
the Portfolio in cash, government securities or other high grade debt
obligations in a segregated account with its custodian.
Put options written by the Portfolio give the holder the right to sell the
underlying security to the Portfolio at a stated exercise price. A put option
written by the Portfolio is "covered" if the Portfolio maintains cash or high
grade debt obligations with a value equal to the exercise price in a segregated
account with its custodian, or holds a put on the same security and in the same
principal amount as the put written and the exercise price of the put held is
equal to or greater than the exercise price of the put written.
The premium paid by the purchaser of an option will generally reflect, among
other things, the relationship of the exercise price to the market price and
volatility of the underlying security, the remaining term of the option, supply
and demand, and current interest rates.
The risks of transactions in options on foreign exchanges are similar to the
risks of investing in foreign securities. In addition, a foreign exchange may
impose different exercise and settlement terms and procedures and margin
requirements than a U.S. exchange.
The Portfolio may purchase put options to hedge against a decline in the value
of its portfolio. By using put options in this way, the Portfolio will reduce
any profit it might otherwise have realized in the underlying security by the
amount of the premium paid for the put option plus transaction costs. The
Portfolio may purchase call options to hedge against an increase in the price of
securities that the Portfolio anticipates purchasing in the future. The premium
paid for the call option plus any transaction costs will reduce the benefit, if
any, realized by the Portfolio upon exercise of the option. Unless the price of
the underlying security rises sufficiently, the option may expire worthless to
the Portfolio.
The Portfolio's options transactions will be limited as follows: a) not more
than 5% of the total assets of the Portfolio may be invested in options; b) the
obligations of the Portfolio under put options written by the Portfolio may not
exceed 50% of the net assets of the Portfolio; and c) the aggregate premiums on
all options purchased by the Portfolio may not exceed 25% of the net assets of
the Portfolio.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS. The Portfolio may enter
into contracts for the purchase or sale for future delivery of fixed-income
securities, or contracts based on financial indices including any index of
United States government securities or foreign government securities ("futures
contracts") and may purchase and write put and call options to buy or sell
futures contracts ("options on futures contracts"). A "sale" of a futures
contract means the acquisition of a contractual obligation to deliver the
securities called for by the contract at a specified price on a specified date.
A "purchase" of a futures contract means the incurring of a contractual
obligation to acquire the securities called for by the contract at a specified
price on a specified date. The purchaser of a futures contract on an index
agrees to take or make delivery of an amount of cash equal to the difference
between a specified multiple of the value of the index on the expiration date of
the contract ("current contract value") and the price at which the contract was
originally struck. No physical delivery of the fixed-income securities
underlying the index is made. Options on futures contracts written or purchased
by the Portfolio may be traded on United States or foreign exchanges. These
investment techniques would be used to hedge against anticipated future changes
in interest or exchange rates which otherwise might either adversely affect the
value of the Portfolio's portfolio securities. The Portfolio may not purchase or
sell a futures contract or purchase a related option unless immediately after
any such transaction the sum of the aggregate amount of margin deposits on its
existing futures positions and the amount of premiums paid for related options
does not exceed 5% of the Portfolio's total assets (after taking into
9
<PAGE> 106
account certain technical adjustments). In order to prevent leverage in
connection with the purchase of futures contracts or call options thereon by the
Portfolio, an amount of cash, cash equivalents or liquid high grade debt
securities equal to the market value of the obligation under the futures
contracts (less any related margin deposits) will be maintained in a segregated
account with the custodian. Furthermore, the Portfolio's ability to engage in
options and futures transactions may be limited by tax considerations. More
information about futures contracts and related options may be found in Appendix
B to the Statement of Additional Information.
INTEREST RATE AND CURRENCY SWAPS. The Portfolio may enter into interest rate
and currency swaps for both hedging and non-hedging purposes. The Portfolio will
typically use interest rate swaps to shorten the effective duration of its
portfolio. An interest rate swap involves the exchange of the Fund with another
party of their respective rights to receive interest, e.g., an exchange of fixed
rate payments for floating rate payments. For example, if the Fund holds an
interest-paying security whose interest rate is reset once a year, it may swap
the right to receive interest at this fixed rate for the right to receive
interest at a rate that is reset daily. Such a swap position would offset
changes in the value of the underlying security because of subsequent changes in
interest rates. It would protect the Fund from a decline in the value of the
underlying security due to rising rates, but would also limit its ability to
benefit from falling interest rates. Currency swaps involve the exchange of
their respective rights to make or receive payments in specified currencies.
The Portfolio will only enter into interest rate swaps on a net basis, which
means that the two payment streams are netted out, with the Portfolio receiving
or paying, as the case may be, only the net amount of the two payments. Interest
rate swaps do not involve the delivery of securities, other underlying assets or
principal. Accordingly, the risk of loss with respect to interest rate swaps is
limited to the net amount of interest payments that the Portfolio is
contractually obligated to make. If the other party to an interest rate swap
defaults, the Portfolio's risk of loss consists of the net amount of interest
payments that the Portfolio is contractually entitled to receive. In contrast,
currency swaps usually involve the delivery of the entire principal value of one
designated currency in exchange for the other designated currency. Therefore,
the entire principal value of a currency swap is subject to the risk that the
other party to the swap will default on its contractual delivery obligations.
POTENTIAL RISKS OF OPTIONS, FUTURES AND SWAPS. The use of options, futures and
swaps is highly specialized activity which involves investment techniques and
risks different from those associated with customary investments. If Bank of
America should be incorrect in its forecasts of market values, interest rates or
currency exchange rates, the Portfolio may not achieve the anticipated benefits
of the techniques or may realize losses, and its investment performance may be
less favorable than if these strategies had not been used. The Portfolio's
ability to dispose of its positions in futures contracts and options will depend
on the availability of liquid markets in such instruments. Markets in options
and futures with respect to a number of fixed-income securities are relatively
new and still developing. If a secondary market does not exist with respect to
an option purchased or written by the Portfolio over-the-counter, it might not
be possible to effect a closing transaction in the option (i.e., dispose of the
option) with the result that (i) an option purchased by the Portfolio would have
to be exercised in order for the Portfolio to realize any profit and (ii) the
Portfolio may not be able to sell portfolio securities covering an option
written by the Portfolio until the option expires or it delivers the underlying
futures contract upon exercise. Therefore, no assurance can be given that the
Portfolio will be able to utilize these instruments effectively for the purposes
set forth above.
REPURCHASE AGREEMENTS. The Portfolio may buy securities subject to the seller's
agreement to repurchase them at an agreed upon time and
10
<PAGE> 107
price. These transactions are known as repurchase agreements. The Portfolio will
enter into repurchase agreements only with financial institutions (such as banks
and broker-dealers) deemed creditworthy by Bank of America, under guidelines
approved by the Portfolio's Board of Trustees. It is intended that such
agreements will not have maturities longer than 60 days. During the term of any
repurchase agreement the seller must maintain the value of the securities
subject to the agreement in an amount that is greater than the repurchase price.
Bank of America then continually monitors that value. Nonetheless, should the
seller default on its obligations under the agreement, the Portfolio would be
exposed to possible loss due to adverse market action or delays connected with
the disposition of the underlying obligations. Repurchase agreements are
considered to be loans under the Investment Company Act of 1940 (the "1940
Act").
REVERSE REPURCHASE AGREEMENTS. The Portfolio may borrow money for temporary
purposes by entering into transactions called reverse repurchase agreements.
Under these agreements the Portfolio sells portfolio securities to financial
institutions (such as banks and broker-dealers) and agrees to buy them back
later at an agreed upon time and price. When the Portfolio enters into a reverse
repurchase agreement, it places in a separate custodial account either liquid
assets or other high grade debt securities that have a value equal to or greater
than the repurchase price. The account is then continuously monitored by the
Bank of America to make sure that an appropriate value is maintained. Reverse
repurchase agreements involve the risk that the value of portfolio securities
the Portfolio relinquishes may decline below the price the Portfolio must pay
when the transaction closes. Reverse repurchase agreements are considered to be
borrowings by the Portfolio under the 1940 Act. Borrowings may magnify the
potential for gain or loss on amounts invested resulting in an increase in the
speculative character of the Portfolio's outstanding shares. The Portfolio will
only enter into reverse repurchase agreements to avoid the need to sell
portfolio securities to meet redemption requests during unfavorable market
conditions.
WHEN-ISSUED PURCHASES, FORWARD COMMITMENTS AND DELAYED SETTLEMENTS. The
Portfolio may purchase securities on a "when-issued" basis and purchase or sell
securities on a "forward commitment" basis. Additionally, the Portfolio may
purchase or sell securities on a "delayed settlement" basis. When-issued and
forward commitment transactions, which involve a commitment by the Portfolio to
purchase or sell particular securities with payment and delivery taking place at
a future date (perhaps one or two months later), permit the Portfolio to lock in
a price or yield on a security it owns or intends to purchase, regardless of
future changes in interest rates. Delayed settlement refers to a transaction in
the secondary market that will settle some time in the future. These
transactions involve the risk that the price or yield obtained may be less
favorable than the price or yield available when the delivery takes place. The
Portfolio will set aside in a segregated account cash or liquid securities equal
to the amount of any when-issued forward commitment or delayed settlement
transaction. When-issued purchases, forward commitments and delayed settlements
are not expected to exceed 25% of the value of the Portfolio's total assets
under normal circumstances. These transactions will not be entered into for
speculative purposes, but primarily in order to hedge against anticipated
changes in interest rates.
SECURITIES LENDING. In order to earn additional income, the Portfolio may lend
its portfolio securities to financial institutions (such as banks and brokers)
that Bank of America considers to be of good standing. If the financial
institution should become bankrupt, however, the Portfolio could experience
delays in recovering its securities. A securities loan will only be made when,
in the judgment of Bank of America, the possible reward from the loan justifies
the possible risks. In addition, such loans will not be made if, as a result,
the value of securities loaned by the
11
<PAGE> 108
Portfolio exceeds 30% of its total assets. Securities loans will be fully
collateralized.
ILLIQUID SECURITIES. The Portfolio will not invest more than 15% of the value
of its total assets (determined at the time of acquisition) in securities that
are illiquid. If, after the time of acquisition, events cause this limit to be
exceeded, the Portfolio will take steps to reduce the aggregate amount of
illiquid securities as soon as is reasonably practicable. The Portfolio intends
that investments in securities that are not registered under the Securities Act
of 1933 but may be purchased by institutional buyers under Rule 144A and for
which a liquid trading market exists as determined by the Board of Trustees of
the Portfolio or Bank of America (pursuant to guidelines adopted by the Board),
will not be subject to the Portfolio's 15% limitation on illiquid securities.
This investment practice could have the effect of increasing the level of
illiquidity in the Portfolio during any period that institutional buyers under
Rule 144A became uninterested in purchasing these restricted securities.
PORTFOLIO TRANSACTIONS. Investment decisions for the Portfolio are made
independently from those for other investment companies and accounts managed by
Bank of America and its affiliated entities. Such other investment companies and
accounts may also invest in the same securities as the Portfolio. When a
purchase or sale of the same security is made at substantially the same time on
behalf of the Portfolio and another investment company or account, available
investments or opportunities for sales will be equitably allocated pursuant to
procedures of Bank of America. In some instances, this investment procedure may
adversely affect the price paid or received by the Portfolio or the size of the
position obtained or sold by the Portfolio.
In allocating purchase and sale orders for investment securities (involving the
payment of brokerage commissions or dealer concessions), Bank of America may
consider the sale of Fund shares by broker-dealers and other financial
institutions (including affiliates of Bank of America and the Fund's distributor
to the extent permitted by law), provided it believes the quality of the
transaction and the price to the Portfolio are not less favorable than what they
would be with any other qualified firm.
PORTFOLIO TURNOVER. The Portfolio's investment practices may result in
portfolio turnover greater than that of other mutual fund portfolios. Turnover
may require payment of brokerage commissions, impose other transaction costs and
could increase substantially the amount of income received by the Portfolio that
constitutes taxable capital gains. To the extent capital gains are realized,
distributions from those gains may be ordinary income for federal tax purposes
(see "Tax Information"). The Portfolio's annual portfolio turnover rate is not
expected to exceed 300%, although portfolio turnover will not be a limiting
factor in making investment decisions.
MASTER-FEEDER STRUCTURE. The Fund is an open-end investment portfolio that
seeks to achieve its investment objective by investing all of its investable
assets in the Portfolio which has the same investment objective. The Fund may
withdraw its investment in the Portfolio at any time if the Board of Directors
of the Company determines that it is in the best interest of the Fund to do so.
Upon such withdrawal, the Board of Directors would consider what action might be
taken, including the investment of all of the assets of the Fund in another
pooled investment entity having the same investment objective as the Fund or the
hiring of an investment adviser to manage the Fund's assets in accordance with
the investment policies described above with respect to the Portfolio. See
"Expense Summary," "Fund Investments" and "Fund Management" for a description of
this investment objective and the investment policies, restrictions, management
and expenses of the Fund and the Portfolio.
The Portfolio is a separate series of Master Investment Trust, Series I (the
"Master Trust"), which is organized as a business trust under the laws of
Delaware. The Fund and other entities that may invest in the Portfolio from time
to time (e.g., other investment companies and commingled trust funds) will each
be liable for all
12
<PAGE> 109
obligations of the Portfolio. However, the risk of the Fund's incurring
financial loss on account of such liability is limited to circumstances in which
both inadequate insurance exists and the Portfolio itself is unable to meet its
obligations. Accordingly, the Company's Board of Directors believes that neither
the Fund nor its shareholders will be adversely affected by reason of the Fund's
investing in the Portfolio. As stated above, the investment objective of the
Fund and the Portfolio is a fundamental policy and may not be changed, in the
case of the Fund, without the vote of its shareholders or, in the case of the
Portfolio, without the vote of its interestholders. Whenever the Fund is
requested to vote on matters pertaining to the investment objective or a
fundamental policy of the Portfolio, the Fund will hold a meeting of its
shareholders and will cast its vote in the same proportion as the votes cast by
the Fund's shareholders. The Fund will vote any shares for which it receives no
voting instructions in the same proportion as the shares for which it does
receive voting instructions. As with any mutual fund, other investors in the
Portfolio could control the results of voting at the Portfolio level in certain
instances (e.g., a change in fundamental policies by the Portfolio which was not
approved by the Fund's shareholders). This could result in the Fund's withdrawal
of its investment in the Portfolio, and in increased costs and expenses for the
Fund. Further, the withdrawal of other entities that may from time to time
invest in the Portfolio could have an adverse effect on the performance of the
Portfolio and the Fund, such as decreased economies of scale and increased per
share operating expenses. In addition, the total withdrawal by another
investment company as an investor in the Portfolio will cause the Portfolio to
terminate automatically in 120 days unless the Fund and any other investors in
the Portfolio unanimously agree to continue the business of the Portfolio. As
the Fund is required to submit such matters to a vote of its shareholders, it
will be required to incur the expenses of shareholder meetings in connection
with such withdrawals. If unanimous agreement is not reached to continue the
Portfolio, the Board of Directors of the Company would need to consider
alternative arrangements for the Fund, such as those described above. The policy
of the Fund, and other similar investment companies, to invest their investable
assets in trusts such as the Portfolio is a relatively recent development in the
mutual fund industry and, consequently, there is a lack of substantial
experience with the operation of this policy.
There may also be other investment companies through which you can invest in the
Portfolio which may have higher or lower fees and expenses than those of the
Fund and which may therefore have different performance results than the Fund.
Information concerning whether an investment in the Portfolio may be available
through another entity investing in the Portfolio may be obtained by calling
800-332-3863.
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<PAGE> 110
SHAREHOLDER GUIDE
THE FOLLOWING SECTION WILL PROVIDE YOU WITH ANSWERS TO SOME OF THE MOST
OFTEN-ASKED QUESTIONS REGARDING BUYING AND SELLING THE FUND'S SHARES AND
REGARDING THE FUND'S DIVIDENDS.
HOW TO BUY SHARES
WHAT IS MY MINIMUM INVESTMENT IN THE FUND?
Generally, there is a minimum investment requirement of $500 for initial
purchases and $50 for subsequent purchases, although these amounts may be
altered in certain circumstances as shown below.
- ---------------------------------------------------------
INVESTMENT MINIMUMS
FOR SPECIFIC TYPES OF ACCOUNTS
<TABLE>
<CAPTION>
INITIAL SUBSEQUENT
INVESTMENT INVESTMENT
------- -------------
<S> <C> <C>
Regular Account $ 500* $50
Automatic Investment Plan $ 50 $50
IRAs, SEP-IRAs
(one participant) $ 500* No minimum
Spousal IRAs** $ 250 No minimum
SEP-IRAs
(more than one participant) $ 2,500 No minimum
</TABLE>
* The minimum investment is $100 for purchases made through Bank of America's
trust and agency accounts or a Service Organization (defined below) whose
clients have made aggregate minimum purchases of $1,000,000.
** A regular IRA must be opened in conjunction with this account.
- ---------------------------------------------------------
HOW ARE SHARES PRICED?
Shares are purchased at their public offering price, which is based upon the
Fund's net asset value per share plus a front-end sales load. The Fund
calculates its net asset value ("NAV") as follows:
(Value of Fund Assets) - (Fund Liabilities)
NAV = -------------------------------------------------------
Number of Outstanding Shares
Net asset value is determined as of the end of regular trading hours on the New
York Stock Exchange (the "Exchange") (currently 4:00 p.m. Eastern time) on days
the Exchange is open.
The Portfolio's investments are valued at market value or, where market
quotations are not readily available, at fair value as determined in good faith
by the Portfolio pursuant to procedures adopted by its Board of Trustees.
Short-term debt securities are valued at amortized cost, which approximates
market value. For further information about valuing securities, see the
Statement of Additional Information. For voice recorded price and yield
information, call (800) 227-1545.
SALES LOAD. The front-end sales load for the Fund begins at 4.50% and may
decrease as the amount you invest increases, as shown in the following chart:
- ---------------------------------------------------------
<TABLE>
<CAPTION>
DEALER'S
AS A % OF REALLOWANCE
-------------- AS A
NET % OF
AMOUNT OF OFFERING ASSET OFFERING
TRANSACTION PRICE VALUE PRICE*
------------------- ---- ---- ----
<S> <C> <C> <C>
Less than $100,000 4.50 4.71 4.00
$100,000 but less
than $250,000 3.75 3.90 3.35
$250,000 but less
than $500,000 2.50 2.56 2.20
$500,000 but less
than $750,000 2.00 2.04 1.75
$750,000 but less
than $3,000,000 1.00 1.01 0.90
$3,000,000 or more 0.00 0.00 0.00
</TABLE>
* Dealer's reallowance may be changed periodically.
From time to time, the Fund's distributor may make or allow additional
payments or promotional incentives in the form of cash or other compensation
such as trips to sales seminars, tickets to sporting and other entertainment
events and gifts of merchandise to firms that sell shares of the Fund.
- ---------------------------------------------------------
14
<PAGE> 111
WHEN NO SALES LOAD IS APPLIED. You pay no front-end sales load on the following
types of transactions:
- - reinvestment of dividends or distributions;
- - corporate/business retirement plans (such as 401k, 403b7, 457 and Keogh
accounts) sponsored by the Fund's administrator;
- - employer-sponsored employee pension or retirement plans making direct
investments in the Fund;
- - any purchase of shares by an investment adviser regulated by federal or state
governmental authority when the investment adviser is purchasing shares for
its own account or for an account for which it is authorized to make
investment decisions (i.e., a discretionary account);
- - accounts opened by a bank, trust company or thrift institution, acting as a
fiduciary, provided appropriate notification of such status is given at the
time of investment;
- - any purchase of shares by clients of The Private Bank of Bank of America or by
Private Banking clients of Seattle-First National Bank or by or on behalf of
agency accounts administered by any bank or trust company affiliate of Bank of
America;
- - any purchase of shares through a discount broker-dealer that imposes a
transaction charge with respect to such purchase, provided you were the
beneficial owner of shares of the Fund (or any other fund in the Pacific
Horizon Family of Funds) prior to July 1, 1992, so long as your account
remains open on the Company's books;
- - any purchase of shares, provided you were the beneficial owner of shares of
the Fund (or any other fund in the Pacific Horizon Family of Funds) before
April 20, 1987, so long as your account remains open on the Company's books;
- - any purchase of shares, provided you were the beneficial owner of shares of
Bunker Hill Income Securities, Inc. on the date of its reorganization into the
Fund, so long as your account remains open on the Company's books;
- - any purchase of shares pursuant to the Reinstatement Privilege described
below; and
- - any purchase of shares pursuant to the Directed Distribution Plan described
below.
Additionally, some individuals are not required to pay a front-end sales load
when purchasing Fund shares, including:
- - members of the Company's Board of Directors;
- - U.S. based employees and retirees (including employees who are U.S. citizens
but work abroad and retirees who are U.S. citizens but worked abroad) of Bank
of America or any of its affiliates, and their parents, spouses and minor
children, as well as members of the Board of Directors of Bank of America or
any of its affiliates;
- - registered representatives or full-time employees of broker-dealers having
agreements with the Fund's distributor pertaining to the sale of Fund shares
(and their spouses and minor children) to the extent permitted by such
organizations; and
- - former full-time employees (and retirees) of Security Pacific Corporation (or
any of its subsidiaries) and the surviving spouses and minor children of such
employees (and retirees), provided they were the beneficial owner of shares of
the Fund (or any other fund in the Pacific Horizon Family of Funds) prior to
July 1, 1992, so long as their account remains open on the Company's books.
RIGHTS OF ACCUMULATION. When buying shares in Pacific Horizon Funds, your
current aggregate investment determines the sales load that you pay. Your
current aggregate investment is the accumulated combination of your immediate
investment along with the shares that you beneficially own in any Pacific
Horizon Fund, or for like shares of any investment portfolio (a "Time Horizon
Fund") of Time Horizon Funds, an open-end investment company managed by an
15
<PAGE> 112
affiliate of Bank of America, on which you paid a sales load (including shares
that carry no sales load but were obtained through an exchange and can be traced
back to shares that were acquired with a sales load).
To qualify for a reduced sales load, you or your Service Organization (which is
an institution such as a bank or broker-dealer that has entered into a selling
and/or servicing agreement with the Fund's distributor) must notify the Fund's
transfer agent at the time of investment that a quantity discount is applicable.
Use of this service is subject to a check of appropriate records, after which
you will receive the lowest applicable sales charge. If you want to participate
you can so indicate on your Account Application or make a subsequent written
request to the Transfer Agent.
Example: Suppose you beneficially own shares of the Fund, the Pacific Horizon
California Tax-Exempt Bond Fund, the Pacific Horizon U.S. Government Securities
Fund, the Pacific Horizon Capital Income Fund and shares of the Company's money
market funds that can be traced back to the purchase of shares carrying a sales
load (or any combination thereof) with an aggregate current value of $90,000. If
you subsequently purchase shares of the Fund with a current value of $10,000,
the load applicable to the subsequent purchase would be reduced to 3.75% of the
offering price.
LETTER OF INTENT. You may also obtain a reduced sales charge by means of a
written Letter of Intent, which expresses your non-binding commitment to invest
in the aggregate $100,000 or more in shares of any Pacific Horizon Fund or any
Time Horizon Fund within a period of 13 months, beginning up to 90 days prior to
the date of the Letter's execution. Shares purchased during that period count as
a credit toward completion of the Letter of Intent. Any investments you make
during the period receive the discounted sales load based on the full amount of
your investment commitment. When your commitment is fulfilled, an adjustment
will be made to reflect any reduced sales load applicable to shares purchased
during the 90-day period prior to the submission of your Letter of Intent.
While signing a Letter of Intent does not bind you to purchase, or the Company
or Time Horizon Funds to sell, the full amount indicated at the sales load in
effect at the time of signing, you must complete the intended purchase to obtain
the reduced sales load. When you sign a Letter of Intent, the Company or Time
Horizon Funds, as applicable, holds in escrow shares purchased by you in an
amount equal to 5% of the total amount of your commitment. After you fulfill the
terms of the Letter of Intent, the escrow will be released.
If your aggregate investment exceeds the amount indicated in your Letter of
Intent, you will receive an adjustment which reflects the further reduced sales
load applicable to your excess investment. It will be in the form of additional
shares credited to your account at the then current offering price applicable to
a single purchase of the total amount of the total purchase.
If your aggregate investment is less than the amount you committed, you will be
requested to remit an amount equal to the difference between the sales load
actually paid and the sales load applicable to the aggregate purchases actually
made. If such remittance is not received within 20 days, the transfer agent will
redeem an appropriate number of shares held in escrow to realize the difference.
If you would like to participate, complete the Letter of Intent on your Account
Application. If you have any questions regarding the Letter of Intent, call
800-332-3863. Please read it carefully, as you will be bound by its terms.
HOW CAN I BUY SHARES?
The chart below provides more information regarding some of the different
methods for investing in the Fund.
16
<PAGE> 113
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------
TO BUY SHARES
OPENING AN ACCOUNT ADDING TO AN ACCOUNT
- --------------------------------------------------------------------------------------------------------
THROUGH BANK OF AMERICA, YOUR BROKER OR ANOTHER SERVICE ORGANIZATION
(ORDERS ARE NOT EFFECTIVE UNTIL RECEIVED BY THE FUND'S TRANSFER AGENT)
<S> <C> <C>
Contact them directly for Contact them directly for
instructions. instructions.
- --------------------------------------------------------------------------------------------------------
<CAPTION>
THROUGH THE DISTRIBUTOR
(IF YOU ARE OR WILL BE THE SHAREHOLDER OF RECORD ON THE COMPANY'S BOOKS)
<S> <C>
BY MAIL
Pacific Horizon Funds, Inc. Complete Account Application Mail all subsequent
c/o DST Systems, Inc. and mail it with a check investments to:
P.O. Box 419955 (payable to Pacific Horizon
Kansas City, MO 64141-6955 Corporate Bond Fund) to the Pacific Horizon Funds, Inc.
address on the left. c/o DST Systems, Inc.
P.O. Box 419940
Kansas City, MO 64173-0298
- --------------------------------------------------------------------------------------------------------
IN PERSON
DST Systems, Inc. Deliver Account Application Deliver your payment directly
811 Main and your payment directly to to the address on the left.
Kansas City, MO 64105-2005 the address on the left.
- --------------------------------------------------------------------------------------------------------
BY WIRE
United Missouri Bank of Instruct your bank to Instruct your bank to
Kansas City, N.A. transmit immediately transmit immediately
10th and Grand available funds, for purchase available funds as described
Kansas City, MO 64106 of Fund shares in your name. at left, except that the wire
ABA No. 1010-0069-5 should indicate that you are
Pacific Horizon Funds, Inc. Be sure to have your bank making a subsequent purchase
Corporate Bond Fund indicate your name, address as opposed to opening a new
DDA #98-7037-107-3 and tax identification account.
number, the name of the Fund
and the fact that a new Be sure to include your name
account is being opened. and your Fund account number.
Consult your bank for information on remitting funds by wire
and any associated bank charges.
You may contact the Fund's transfer agent at 800-346-2087 for
further information regarding wiring instructions.
- --------------------------------------------------------------------------------------------------------
</TABLE>
17
<PAGE> 114
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------
TO BUY SHARES
OPENING AN ACCOUNT ADDING TO AN ACCOUNT
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
BY TELETRADE TeleTrade Privileges apply Purchases may be made in the
(a service permitting transfers automatically, although the minimum amount of $500 and
of money from your Privilege may not be used to the maximum amount of $50,000
checking, NOW or bank make an initial purchase. If per transaction as soon as
money market account) you do not wish to have appropriate information
TeleTrade Privileges, you regarding your bank account
must indicate that fact on has been established on your
the Account Application or in Fund account. This
a subsequent written notice information may be provided
to the Fund's transfer agent. on the Account Application or
in a signature guaranteed
letter of instruction to the
Transfer Agent. Signature
guarantees are discussed
under "How to Sell Shares."
Call 800-346-2087 to make
your purchase.
</TABLE>
You should refer to the "Shareholder Services" section
for additional important information about the TeleTrade Privilege.
YOU MAY USE OTHER INVESTMENT OPTIONS, INCLUDING AUTOMATIC INVESTMENTS
AND EXCHANGES, TO INVEST IN YOUR FUND ACCOUNT.
PLEASE REFER TO THE SECTION ENTITLED "SHAREHOLDER SERVICES"
FOR MORE INFORMATION.
- -------------------------------------------------------------------------------
WHAT PRICE WILL I RECEIVE WHEN I BUY SHARES?
Your shares will be purchased at the Fund's public offering price calculated at
the next close of regular trading on the Exchange (currently 4:00 p.m. Eastern
time) after your purchase order is received in proper form by the Fund's
transfer agent, DST Systems, Inc. (the "Transfer Agent"), at its Kansas City
office.
If you purchase shares through Bank of America, your broker or another Service
Organization, the entity involved is responsible for transmitting your order and
required funds to the Transfer Agent on a timely basis in accordance with the
procedures in this Prospectus. Share purchases (and redemptions) executed
through Bank of America or a Service Organization are executed only on days on
which the particular institution and the Fund are open for business. Purchase
orders received by a Service Organization in proper form by 4:00 p.m. Eastern
time on a business day will be effected at the public offering price calculated
at 4:00 p.m. Eastern time on that day, if the Service Organization transmits
your order to the Transfer Agent by the end of its business day (normally 5:15
p.m. Eastern time). Except as provided in the following two sentences, if the
order is not received in proper form by a Service Organization by 4:00 p.m.
Eastern time or not received by the Transfer Agent by the close of its business
day, the order will be based upon the next determined purchase price. The
Company may from time to time in its sole discretion appoint one or more
entities as the Fund's agent to receive irrevocable purchase and redemption
orders and to transmit them on a net basis to the Transfer Agent. In these
instances orders received by the entity by 4:00 p.m. Eastern time on a business
day will be effected as of 4:00 p.m. Eastern time that day if the order is
actually received by the Transfer Agent not later than the next business
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<PAGE> 115
morning accompanied by payment in federal funds.
WHAT ELSE SHOULD I KNOW TO MAKE A PURCHASE?
Federal regulations require you to provide a certified Taxpayer Identification
Number upon opening or reopening your account.
If your check used for investment does not clear, a fee may be imposed by the
Transfer Agent. All payments should be in U.S. dollars and, to avoid fees and
delays, should be drawn only on U.S. banks. Please remember that the Company
reserves the right to reject any purchase order.
You should note that Bank of America, Service Organizations and registered
investment advisers may charge a separate fee or transaction charge to their
clients for providing them with administrative services related to their
investment in Fund shares. These fees could constitute a substantial portion of
smaller accounts and may not be in an investor's best interest. Bank of America
and Service Organizations may also impose minimum customer account and other
requirements in addition to those imposed by the Fund. If you purchase or redeem
shares directly from the Fund, you may do so without incurring any charges other
than those described in this Prospectus.
HOW TO SELL SHARES
HOW DO I REDEEM MY SHARES?
Pacific Horizon Funds, Inc. makes it easy to sell, or "redeem," shares. The Fund
imposes no charge when you redeem shares. The value of the shares you redeem may
be more or less than your cost, depending on the Fund's current net asset value.
If you purchased your shares through an account at Bank of America, your Broker
or another Service Organization, you may redeem all or part of your shares in
accordance with the instructions pertaining to that account. If you are also the
shareholder of record on the Company's books, you may redeem shares in
accordance with the procedures described in the chart below as well as those of
your account. To use the redemption methods described below, you must arrange
with Bank of America or your Service Organization for delivery of the required
application(s) to the Transfer Agent.
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<PAGE> 116
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------
TO SELL SHARES
THROUGH BANK OF AMERICA, YOUR BROKER OR ANOTHER SERVICE ORGANIZATION
(ORDERS ARE NOT EFFECTIVE UNTIL RECEIVED BY THE TRANSFER AGENT)
Contact them directly for instructions.
- ------------------------------------------------------------------------------------------------
THROUGH THE DISTRIBUTOR
(IF YOU ARE A SHAREHOLDER OF RECORD ON THE COMPANY'S BOOKS)
<S> <C>
BY MAIL
Pacific Horizon Send a signed, written request (each owner, including each
Corporate Bond Fund joint owner, must sign) to the Transfer Agent.
c/o DST Systems, Inc.
P.O. Box 419955 If you hold stock certificates for the shares being
Kansas City, MO 64141-6955 redeemed, make sure to endorse them for transfer, have your
signature on them guaranteed by your bank or another
guarantor institution (as described in the section entitled
"What Kind Of Paperwork Is Involved In Selling Shares?") and
include them with your request.
- ------------------------------------------------------------------------------------------------
IN PERSON
DST Systems, Inc.
811 Main Deliver your signed, written request (each owner, including
Kansas City, MO 64105-2005 each joint owner, must sign) and any certificates (endorsed
for transfer and signature guaranteed as described in the
section entitled "What Kind Of Paperwork Is Involved In
Selling Shares?") to the address on the left.
- ------------------------------------------------------------------------------------------------
BY WIRE As soon as appropriate information regarding your bank
account has been established on your Fund account, you may
write, telephone or telegraph redemption requests to the
Transfer Agent, and redemption proceeds will be wired in
federal funds to the commercial bank you have specified.
Information regarding your bank account may be provided on
the Account Application or in a signature guaranteed letter
of instruction to the Transfer Agent. Signature guarantee
requirements are discussed in the section entitled "What
Kind Of Paperwork Is Involved In Selling Shares?".
Redemption proceeds will normally be wired the business day
after your request and any other necessary documents have
been received by the Transfer Agent.
Wire Privileges apply automatically unless you indicate on
the Account Application or in a subsequent written notice to
the Transfer Agent that you do not wish to have them.
Requests must be for at least $1,000 and may be subject to
limits on frequency and amount.
Wire Privileges may be modified or suspended at any time,
and are not available for shares issued in certificate form.
Contact your bank for information on any charges imposed by
the bank in connection with receipt of redemptions by wire.
- ------------------------------------------------------------------------------------------------
</TABLE>
20
<PAGE> 117
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------
TO SELL SHARES
<S> <C>
BY CHECK You may write Redemption Checks ("Checks") payable to any
payee from your Fund account in the amount of $500 or more.
The Transfer Agent (as your agent) will redeem the necessary
number of shares to cover the Check when it is presented for
payment.
You will continue earning dividends on shares redeemed in
this manner until the Check actually clears the Transfer
Agent.
You may request this Privilege on an Account Application
that has been signed by the registered owner(s). A set of
Checks will then be sent to the registered owner(s) at the
address of record.
There is no charge for the use of Checks, although the
Transfer Agent will charge for any "stop payment" requests
made by you, or if a Check cannot be honored due to
insufficient or unavailable funds or for other valid
reasons.
Shares issued in certificate form may not be redeemed by
Check.
- ------------------------------------------------------------------------------------------------
BY TELETRADE You may redeem Fund shares (minimum of $500 and maximum of
(a service permitting $50,000 per transaction) by telephone after appropriate
transfers of money to your information regarding your bank account has been established
checking, NOW or bank money on your Fund account. This information may be provided on
market account) the Account Application or in a signature guaranteed letter
of instruction to the Transfer Agent. Signature guarantee
requirements are discussed in the section entitled "What
Kind of Paperwork Is Involved in Selling Shares?".
Redemption orders may be placed by calling 800-346-2087.
TeleTrade Privileges apply automatically unless you indicate
on the Account Application or in a subsequent written notice
to the Transfer Agent that you do not wish to have them.
You should refer to the "Shareholder Services" section for
additional important information about the TeleTrade
Privilege.
</TABLE>
OTHER REDEMPTION OPTIONS, INCLUDING EXCHANGES AND
AUTOMATIC WITHDRAWALS, ARE ALSO
AVAILABLE. PLEASE REFER TO THE SECTION ENTITLED "SHAREHOLDER SERVICES"
FOR MORE INFORMATION.
- --------------------------------------------------------------------------------
WHAT NAV WILL I RECEIVE FOR SHARES I WANT TO SELL?
Redemption orders are effected at the net asset value per share next determined
after receipt of the order in proper form by the Transfer Agent at its Kansas
City office. Although the Fund itself imposes no charge when shares are
redeemed, if you purchase shares through Bank of America or a Service
Organization, they may charge a fee for providing certain services in connection
with investments in Fund shares. The Company reserves the right to redeem
accounts (other than IRA and non-working spousal IRA accounts) involuntarily if,
after sixty days' written notice, the account's net asset value remains below a
$500 minimum balance.
21
<PAGE> 118
WHAT KIND OF PAPERWORK IS INVOLVED IN SELLING SHARES?
Redemption requests must be signed by each shareholder, including each joint
owner. Certain types of redemption requests as well as all endorsed share
certificates will need to include a signature guarantee. Signature guarantees
must accompany redemption requests for (i) an amount in excess of $50,000 per
day, (ii) any amount if the redemption proceeds are to be sent somewhere other
than the address of record on the Company's books or (iii) an amount of $50,000
or less if the address of record has not been on the Company's books for sixty
days.
You may obtain a signature guarantee from: (i) a bank which is a member of the
FDIC; (ii) a trust company; (iii) a member firm of a national securities
exchange; or (iv) another eligible guarantor institution. Guarantees must be
signed by an authorized signatory of the guarantor institution and be
accompanied by the words "Signature Guaranteed." The Transfer Agent will not
accept guarantees from notaries public.
HOW QUICKLY CAN I RECEIVE MY REDEMPTION PROCEEDS?
The Company will make payment for all shares redeemed after the Transfer Agent
receives a request in proper form, except as provided by the rules of the
Securities and Exchange Commission. If the shares to be redeemed have been
purchased by check or by TeleTrade, the Company will, upon the clearance of the
purchase check or TeleTrade payment, mail the redemption proceeds within seven
business days. This does not apply to situations where the Fund receives payment
in cash or immediately available funds for the purchase of shares. If you
purchase shares by wire, you must file an Account Application before redemption
requests can be honored.
Bank of America and the Service Organizations are responsible for transmitting
redemption orders and crediting their customers' accounts with redemption
proceeds on a timely basis.
DO I HAVE ANY REINSTATEMENT PRIVILEGES AFTER I HAVE REDEEMED SHARES?
You may reinvest all or any portion of your redemption proceeds in shares of the
Fund, or of another load fund of the Company or Time Horizon Funds, within 90
days of your redemption trade date without paying a sales load. Shares so
reinvested will be purchased at a price equal to the net asset value next
determined after the Transfer Agent receives a reinstatement request and payment
in proper form.
If you wish to use this Privilege, you must submit a written reinstatement
request to the Transfer Agent stating that you are eligible to use the
Privilege. The reinstatement request and payment must be received within 90 days
of the trade date of the redemption. Currently, there are no restrictions on the
number of times you may use this Privilege.
Generally, exercising the Reinstatement Privilege will not affect the character
of any gain or loss realized on redemptions for federal income tax purposes.
However, if a redemption results in a loss, the reinstatement may result in the
loss being disallowed under IRS "wash sale" rules.
DIVIDEND AND DISTRIBUTION POLICIES
Shareholders of the Fund are entitled to dividends and distributions arising
from the net investment income and net realized gains, if any, earned on
investments in the Portfolio which are allocable to the Fund. Dividends from the
Fund's net investment income are declared daily and paid within five business
days after the end of each month. Fund shares begin earning dividends the day
after payment in federal funds is received for such shares through the business
day such shares are redeemed. The Fund's net income and net capital gains (if
any) are declared and paid annually.
You will automatically receive dividends and capital gain distributions in
additional shares without a sales load unless you: (i) elect in writing to
receive payment in cash; or (ii) elect to participate in the Directed
Distribution Plan
22
<PAGE> 119
described in the section entitled "Can My Dividends From The Fund Be Invested In
Other Pacific Horizon Funds?".
To elect to receive payment in cash, or to revoke such election, you must do so
in writing to the Transfer Agent at P.O. Box 419955, Kansas City, Missouri
64141-6955. The election or revocation will become effective with respect to
dividends paid after it is received and processed by the Transfer Agent.
SHAREHOLDER SERVICES
PACIFIC HORIZON FUNDS PROVIDES A VARIETY OF WAYS TO MAKE MANAGING YOUR
INVESTMENTS MORE CONVENIENT.
Some or all of the following services and privileges as well as others described
in this Prospectus may not be available for, or may have different conditions
imposed on them than as described in this Prospectus with respect to certain
clients of Bank of America and particular Service Organizations. Consult these
entities for more information.
CAN I USE THE FUND IN MY RETIREMENT PLAN?
The Company makes available Individual Retirement Accounts ("IRAs"), including
IRAs set up under a Simplified Employee Pension Plan ("SEP-IRAs") and IRA
"Rollover Accounts."
YOUR INVESTMENTS GROW TAX DEFERRED UNTIL WITHDRAWAL AT RETIREMENT AND IN MANY
CASES THE INITIAL INVESTMENT IS TAX DEDUCTIBLE.
For details, contact the Distributor at 800-332-3863. Investors should also read
the IRA Disclosure Statement and the Bank Custodial Agreement for further
details on eligibility, service fees and tax implications, and consult their tax
advisers.
CAN I EXCHANGE MY INVESTMENT FROM ONE FUND TO ANOTHER?
As a shareholder, you have the privilege of exchanging your shares for shares of
another Pacific Horizon Fund, or like shares of any Time Horizon Fund, provided
that such other shares may be legally sold in your state of residence. NO
ADDITIONAL SALES LOAD WILL BE INCURRED WHEN EXCHANGING FUND SHARES PURCHASED
WITH A SALES LOAD FOR SHARES OF ANOTHER LOAD FUND OF THE COMPANY.
An investment in the Fund automatically entitles you to use this Privilege,
unless you indicate on the Account Application or in a subsequent letter to the
Transfer Agent that you do not wish to use this Privilege.
Fund shares being exchanged must have a current value of at least $500 and are
subject to the minimum initial investment requirements of the particular fund
into which the exchange is being made. You may obtain prospectuses regarding the
funds into which you wish to make an exchange from your Service Organization or
the Fund's distributor.
You may provide exchange instructions by telephone by calling the Transfer Agent
at 800-346-2087. (See the section below regarding TeleTrade for a description of
the Company's policy regarding responsibility for telephone instructions.) You
may also send exchange instructions in writing by following directions set forth
previously under "How to Sell Shares."
If you would like more information on making an exchange, please read the
Statement of Additional Information and consult your Service Organization or the
Fund's distributor.
The Fund reserves the right to reject any exchange request and the Exchange
Privilege may be modified or terminated at any time. At least 60 days' notice of
any material modification to or termination of the Exchange Privilege will be
given to shareholders except where notice is
23
<PAGE> 120
not required under the regulations of the Securities and Exchange Commission.
WHAT IS TELETRADE?
TELETRADE IS A SERVICE WHICH ALLOWS YOU TO AUTHORIZE ELECTRONIC TRANSFERS OF
MONEY TO PURCHASE SHARES IN OR REDEEM SHARES FROM AN ESTABLISHED FUND ACCOUNT.
THE SERVICE MAY BE USED LIKE AN "ELECTRONIC CHECK" TO MOVE MONEY BETWEEN AN
ACCOUNT AT A FINANCIAL INSTITUTION AND A FUND ACCOUNT WITH A SINGLE TELEPHONE
CALL.
Purchase and redemption proceeds with respect to TeleTrade transactions will be
transferred between your Fund account and the checking, NOW or bank money market
account designated by you. Only an account maintained at a domestic financial
institution that is an Automated Clearing House member may be so designated.
TeleTrade purchases will be effected at the public offering price next
determined after the Transfer Agent receives payment for the transaction.
Redemption proceeds will be on deposit in your account at your financial
institution generally two business days after the redemption request is received
by the Transfer Agent. You may also request receipt of your redemption proceeds
by check, which will be payable to the registered owners of your Fund account
and will be sent only to the address of record.
You should note that the Transfer Agent may act upon a telephone redemption
request (including a telephone wire redemption request) from any person
representing himself or herself to be you and reasonably believed by the
Transfer Agent to be genuine. Neither the Company nor any of its service
contractors will be liable for any loss or expense in acting upon telephone
instructions that are reasonably believed to be genuine. In attempting to
confirm that telephone instructions are genuine, the Company will use such
procedures as are considered reasonable. If you should experience difficulty in
contacting the Transfer Agent to place telephone redemptions (including
telephone wire redemptions), for example because of unusual market activity, you
are urged to consider redeeming your shares by mail or in person.
The Company may modify the TeleTrade Privilege at any time or charge a service
fee upon notice to shareholders. No such fee currently is contemplated.
CAN I ARRANGE TO HAVE AUTOMATIC
INVESTMENTS MADE ON A REGULAR BASIS?
YOU MAY ARRANGE, THROUGH THE AUTOMATIC INVESTMENT PROGRAM, FOR SYSTEMATIC
INVESTMENTS IN YOUR FUND ACCOUNT IN AMOUNTS OF $50 OR MORE BY DIRECTLY DEBITING
YOUR ACCOUNT AT YOUR FINANCIAL INSTITUTION. At your option, your checking, NOW
or bank money market account designated by you will be debited in the specified
amount, and Fund shares will be purchased, once a month, on either the first or
fifteenth day, or twice a month, on both days. Only accounts maintained at a
domestic financial institution which permits automatic withdrawals and is an
Automated Clearing House member are eligible. The Automatic Investment Program
is one means by which you may use Dollar Cost Averaging in making investments.
WHAT IS DOLLAR COST AVERAGING AND HOW CAN I IMPLEMENT IT?
DOLLAR COST AVERAGING INVOLVES INVESTING A FIXED DOLLAR AMOUNT AT REGULAR
PREDETERMINED INTERVALS. BECAUSE MORE SHARES ARE BOUGHT DURING PERIODS WITH
LOWER SHARE PRICES AND FEWER SHARES ARE BOUGHT WHEN THE PRICE IS HIGHER, YOUR
AVERAGE COST PER SHARE MAY BE REDUCED. You may also implement Dollar Cost
Averaging on your own initiative or through other entities.
In order to be effective, Dollar Cost Averaging should be followed on a
sustained, consistent basis. You should be aware, however, that shares bought
using Dollar Cost Averaging are made without regard to their price on the day of
investment or to market trends. In addition, while you may find Dollar Cost
Averaging to be beneficial, it will not prevent a loss if you ultimately redeem
your shares at a price that is lower than their purchase price.
24
<PAGE> 121
To establish an Automatic Investment Account that uses the Dollar Cost Averaging
method, check the appropriate box and supply the necessary information on the
Account Application or in a subsequent written request to the Transfer Agent.
You may cancel this Privilege or change the amount of purchase at any time by
mailing written notification to the Transfer Agent.
Notification will be effective three business days following receipt. The Fund
may modify or terminate this Privilege at any time or charge a service fee,
although no such fee currently is contemplated.
CAN I ARRANGE PERIODIC WITHDRAWALS?
IF YOU ARE A SHAREHOLDER WITH A FUND ACCOUNT VALUED AT $5,000 OR MORE, YOU MAY
WITHDRAW AMOUNTS IN MULTIPLES OF $50 FROM YOUR ACCOUNT ON A MONTHLY, QUARTERLY,
SEMI-ANNUAL OR ANNUAL BASIS THROUGH THE AUTOMATIC WITHDRAWAL PLAN.
At your option, monthly, quarterly, semi-annual and annual withdrawals will be
made on either the first or fifteenth day of the particular month selected. To
participate in this Plan, check the appropriate box and supply the necessary
information on the Account Application or in a subsequent signature guaranteed
written request to the Transfer Agent. Purchases of additional shares
concurrently with withdrawals are ordinarily not advantageous because of the
Fund's sales load.
CAN MY DIVIDENDS FROM THE FUND BE INVESTED IN OTHER FUNDS?
You may elect to have your dividends, capital gains distributions, or both
("distribution proceeds") received from a non-retirement Fund account
automatically invested in shares of any other investment portfolio of the
Company, or in like shares of any Time Horizon Fund, provided such shares are
held in a non-retirement account. To participate in this program, known as the
Directed Distribution Plan, check the appropriate box and supply the necessary
information on the Account Application or subsequently send a written request to
the Transfer Agent. Participants in the Directed Distribution Plan are subject
to the minimum initial investment requirements of the particular fund involved.
Investments will be made at a price equal to the net asset value of the
purchased shares next determined after receipt of the distribution proceeds by
the Transfer Agent.
There are no subsequent investment requirements for accounts to which
distribution proceeds are directed nor are service fees currently charged for
effecting these transactions.
IS THERE A SALARY DEDUCTION PLAN AVAILABLE?
YOU MAY PURCHASE FUND SHARES BY HAVING PAYMENTS AUTOMATICALLY DEPOSITED INTO
YOUR FUND ACCOUNT (MINIMUM OF $50 AND MAXIMUM OF $50,000 PER TRANSACTION) IF YOU
RECEIVE A FEDERAL SALARY, SOCIAL SECURITY OR CERTAIN VETERAN'S, MILITARY OR
OTHER PAYMENTS FROM THE FEDERAL GOVERNMENT. Subject to these limitations, you
may deposit as much of your payments as you wish.
For instructions on how to enroll in this Direct Deposit Program, call the
Transfer Agent at 800-346-2087.
THE BUSINESS OF THE FUND
FUND MANAGEMENT
The business affairs of the Company are managed under the general supervision of
its Board of Directors. Information about the Directors and Officers of the
Company and about the Trustees and Officers of the Master Trust is included in
25
<PAGE> 122
the Statement of Additional Information under "Management."
EXPENSES
Operating expenses borne by the Fund and the Portfolio include taxes, fees and
expenses of the directors, trustees and officers, administration, custodial and
transfer agency fees, certain insurance premiums, outside auditing and legal
expenses, cost of shareholder/interestholder reports and meetings and any
extraordinary expenses. Fund expenses also include Securities and Exchange
Commission fees, state securities qualification fees, cost of preparing and
printing prospectuses and statements of additional information for regulatory
purposes and for distribution to existing shareholders, and certain shareholder
servicing fees. Portfolio expenses include investment advisory fees. Except as
noted in this Prospectus, the service contractors bear all expenses in
connection with the performance of their services and the Fund and Portfolio
bear the expenses incurred in their operations.
SERVICE PROVIDERS
---------------------
INVESTMENT ADVISER
Bank of America serves as Investment Adviser of the Portfolio. Bank of America
is a subsidiary of BankAmerica Corporation, a registered bank holding company.
Its principal offices are located at 555 California Street, San Francisco,
California 94104.
Formed in 1904, Bank of America is a national banking association that provides
commercial banking and trust business through an extensive system of branches
across the western United States. Bank of America's principal banking affiliates
operate branches in ten U.S. states as well as corporate banking and business
credit offices in major U.S. cities and branches, corporate offices and
representative offices in 37 countries.
In its advisory agreement, Bank of America has agreed to manage the Portfolio's
investments and to be responsible for, place orders for, and make decisions with
respect to, all purchases and sales of the Portfolio's securities.
Steven L. Vielhaber, Vice President of Bank of America, is primarily responsible
for the day-to-day management of the investments of the Portfolio. Mr. Vielhaber
has been the Fund's manager since April 1994 and has been employed by Bank of
America since 1993. Prior thereto, Mr. Vielhaber had been Director of Fixed
Income Marketing at Dimensional Fund Advisors since 1990 and Vice President and
Manager of Investments at Gibraltar Savings from 1986 to 1990.
For the services provided and expenses assumed under the advisory agreement,
Bank of America is entitled to receive a fee at the annual rate of 0.45% of the
Portfolio's average daily net assets. This amount may be reduced pursuant to
undertakings by Bank of America. See the information below under "Fee Waivers."
Bank of America waived the entire advisory fee payable by the Portfolio for the
period April 25, 1994 (commencement of operations) through February 28, 1995. In
addition, Bank of America and its affiliates may be entitled to fees under the
Shareholder Services Plan as described under "Plan Payments," and may receive
fees charged directly to their accounts in connection with investments in Fund
shares.
Prior to its reorganization into the Fund, the Predecessor Fund was advised by
Security Pacific Investment Management, Inc. ("SPIM"), an affiliate of Bank of
America, until December 8, 1993 when SPIM transferred its rights and obligations
under its advisory agreement with the Predecessor Fund (the "Prior Agreement")
to Bank of America, which thereafter served as adviser to the Predecessor Fund.
The Prior Agreement provided that the adviser would receive a fee, computed
weekly and paid quarterly, based upon the average daily net assets of the
Predecessor Fund at the annual rate of 0.50% on the first $100 million in net
assets, and 0.35% with respect to the excess over $100 million.
26
<PAGE> 123
THE PREDECESSOR FUND
The Predecessor Fund bore investment advisory and administration fees during the
period October 1, 1993 to April 24, 1994 at the annual rate of 0.50% of the
Predecessor Fund's average daily net assets.
ADMINISTRATOR
Concord Holding Corporation ("Concord") serves as Administrator of the Fund and
the Portfolio. Concord is a wholly-owned subsidiary of The BISYS Group, Inc. Its
offices are located at 125 W. 55th Street, New York, New York 10019.
Under its administration agreements with the Company and the Portfolio, Concord
has agreed to: pay the costs of maintaining the offices of the Company and the
Portfolio; provide a facility to receive purchase and redemption orders; provide
statistical and research data, data processing services and clerical services;
coordinate the preparation of reports to shareholders of the Fund,
interestholders of the Portfolio and the Securities and Exchange Commission;
prepare tax returns; maintain the registration or qualification of the Fund's
shares for sale under state securities laws; maintain books and records of the
Fund and the Portfolio; calculate the net asset value of the Fund and the
Portfolio and dividends and capital gains distributions to shareholders; serve
as dividend disbursing agent for the Portfolio; and generally assist in all
aspects of the operations of the Fund and the Portfolio. (See the information
below under "Fee Waivers.")
For its services as administrator, Concord is entitled to receive an
administration fee from the Fund at the annual rate of 0.15% of the Fund's
average daily net assets and an administration fee from the Portfolio at the
annual rate of 0.05% of the Portfolio's average daily net assets. These amounts
may be reduced pursuant to undertakings by Concord. Concord waived the entire
administration fee payable by the Fund and the Portfolio for the period April
25, 1994 (commencement of operations) through February 28, 1995. See the
information below under "Fee Waivers."
Pursuant to the authority granted in its administration agreements, Concord has
entered into an agreement with PFPC, Inc. ("PFPC") under which PFPC, and an
off-shore affiliate of PFPC, perform certain of the services listed above, e.g.,
calculating the net asset value of the Fund and the Portfolio, calculating
dividends and capital gains distributions to shareholders, and maintaining the
books and records of the Fund and the Portfolio. The Fund and the Portfolio bear
all fees and expenses charged by PFPC for these services.
Pursuant to the Prior Agreement, the adviser was responsible for providing
administrative services to the Predecessor Fund. The cost of such services were
governed under the Prior Agreement. During the Predecessor Fund's last two
fiscal years, Concord provided certain administrative services to the
Predecessor Fund pursuant to a Sub-Administration Agreement with SPIM. For these
services, SPIM paid Concord a fee of 0.10% (annualized) of the average net
assets of the Predecessor Fund for the period October 1, 1993 to April 24, 1994.
This remuneration was borne by SPIM and not by the Predecessor Fund.
DISTRIBUTOR
The Fund's shares are sold on a continuous basis by Concord Financial Group,
Inc. (the "Distributor"). The Distributor is a wholly-owned subsidiary of
Concord and is located at 125 W. 55th Street, New York, New York 10019.
CUSTODIAN AND TRANSFER AGENT
PNC Bank, N.A., Broad and Chestnut Streets, Philadelphia, Pennsylvania, 19101
serves as the Custodian of the Fund and the Portfolio. DST Systems, Inc. is the
transfer and dividend disbursing agent for the Fund and is located at 811 Main,
Kansas City, MO 64105-2005.
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<PAGE> 124
FEE WAIVERS
Expenses can be reduced by voluntary fee waivers and expense reimbursements by
Bank of America and other service providers as well as by certain expense
limitations imposed by state securities regulators. Periodically, during the
course of the Fund's fiscal year, Bank of America, Concord and/or the
Distributor may choose not to receive fee payments and/or may assume certain
Fund or Portfolio expenses. However, the service providers retain the ability to
be reimbursed for these amounts by the Fund and Portfolio prior to fiscal year
end and, subject to the expense limitations of certain states, to stop such fee
waivers and expense reimbursements at any time.
TAX INFORMATION
YOU WILL BE ADVISED AT LEAST ANNUALLY REGARDING THE FEDERAL INCOME TAX TREATMENT
OF DIVIDENDS AND DISTRIBUTIONS MADE TO YOU. YOU SHOULD SAVE YOUR ACCOUNT
STATEMENTS BECAUSE THEY CONTAIN INFORMATION YOU WILL NEED TO CALCULATE YOUR
CAPITAL GAINS OR LOSSES UPON YOUR ULTIMATE SALE OR EXCHANGE OF SHARES IN THE
FUND.
As with any investment, you should consider the tax implications of an
investment in the Fund. The following is only a brief summary of some of the
important tax considerations generally affecting the Fund and its shareholders.
Consult your tax adviser with specific reference to your own tax situation.
FEDERAL TAXES
During its most recent fiscal period, the Fund qualified as a "regulated
investment company" under the Internal Revenue Code of 1986, as amended (the
"Code"), and Management intends that the Fund will qualify in future years as
long as such qualification is in the best interest of the Fund's shareholders.
As a result of this qualification, the Fund generally is not required to pay
federal income taxes to the extent its earnings are distributed in accordance
with the Code. It is expected that the Portfolio will not be subject to Federal
income taxes. The Portfolio intends to qualify as a partnership (or other pass-
through entity) for Federal income tax purposes. As such, the Portfolio is not
subject to tax and the Fund will be treated for Federal income tax purposes as
recognizing its pro rata share of the Portfolio's income and deductions and
owning its pro rata share of the Portfolio's assets. The Fund's status as a
regulated investment company is dependent on, among other things, the
Portfolio's continued qualification as a partnership (or other pass-through
entity) for Federal income tax purposes.
Distributions (whether received in cash or additional shares) of ordinary income
and/or excesses of net short-term capital gain over net long-term capital loss
are taxable to the shareholder as ordinary income. The Company expects that none
of the dividends paid by the Fund will qualify for the dividends-received
deduction for corporations.
Any distribution you receive comprised of the excess of net long-term capital
gain over net short-term capital loss will be taxed as a long-term capital gain
no matter how long you have held Fund shares.
A dividend paid to you by the Fund in January of a particular year will be
deemed to have been received by the shareholder on December 31 of the preceding
year, if the dividend is declared and payable to shareholders of record on a
specified date in October, November or December of that preceding year. If you
are considering buying shares of the Fund on or just before the record date of a
dividend, you should be aware that the amount of the forthcoming dividend
payment, although in effect a return of capital, will be taxable to you.
You may realize a taxable gain (or loss) upon redemption, transfer or exchange
of Fund shares, depending upon the tax basis of your shares and their price at
the time of such redemption or exchange. Generally, you may include sales loads
incurred in the purchase of Fund shares in your tax basis when determining your
gain (or loss) on a redemption or exchange of these shares.
28
<PAGE> 125
However, if you exchange such shares for shares of another investment portfolio
of the Company within 90 days of the purchase and are able to reduce the sales
load on the new shares through the Exchange Privilege, the reduction may not be
included in the tax basis of your exchanged shares. It may be included in the
tax basis of the new shares. If you had Fund shares for six months or less and
during that time receive a capital gain dividend on those shares, any loss on
the sale or exchange of those shares will be treated as a long-term capital loss
to the extent of the capital gain dividend.
Certain realized gains or losses on the sale or retirement of foreign bonds held
by the Portfolio, to the extent attributable to fluctuations in currency or
exchange rules, as well as other gains or losses attributable to exchange rate
fluctuations, are typically treated as ordinary income or loss. Such income or
loss may increase or decrease (or possibly eliminate) income available for
distribution. If, under the rules governing the tax treatment of foreign
currency gains and losses, income available for distribution is decreased or
eliminated, all or a portion of the dividends declared by the Fund may be
treated for Federal income tax purposes as a return of capital, or in some
circumstances, as capital gain. Generally, your tax basis in your Fund shares
will be reduced to the extent that an amount distributed to you is treated as a
return of capital.
STATE AND LOCAL TAXES
You should consult your tax adviser regarding state and local tax consequences
which may differ from the federal tax consequences as described above.
MEASURING PERFORMANCE
THE FUND'S PERFORMANCE MAY BE QUOTED IN TERMS OF AVERAGE ANNUAL TOTAL RETURN,
AGGREGATE TOTAL RETURN AND YIELD. PERFORMANCE INFORMATION IS HISTORICAL AND IS
NOT INTENDED TO INDICATE FUTURE RESULTS.
Average annual total return reflects the average annual percentage change in
value of an investment in the Fund over the period being measured, while
aggregate total return reflects the total percentage change in value over the
period being measured. Yield measures the net income of the Fund over a
specified 30 day period.
Periodically, the Fund's total return (calculated on an average annual total
return and/or an aggregate total return basis for various periods) and yield may
be quoted in advertisements or in communications to shareholders. Both methods
of calculating total return reflect the sales load charged by the Fund and
assume dividends and capital gains distributions made by the Fund during the
period are reinvested in Fund shares.
The Fund may also advertise total return data without reflecting the sales load
imposed on the purchase of Fund shares in accordance with the rules of the
Securities and Exchange Commission. Quotations that do not reflect the sales
load will, of course, be higher than quotations that do reflect sales loads.
The Fund calculates its yield by dividing its net income per share (which may
differ from the net income per share used for accounting purposes) during a 30
day (or one month) period by the maximum offering price per share on the last
day of the measuring period, and then annualizing the result on a semi-annual
basis. The 30 day or one month measuring period will be identified along with
any yield quotation to which it relates.
The Fund may compare its total return and yield to that of other mutual funds
with similar investment objectives and to bond and other relevant indices or to
rankings prepared by independent services or other financial or industry
publications that monitor mutual fund performance.
For example, the Fund's total return may be compared to the Consumer Price Index
or to data prepared by Lipper Analytical Services, Inc.; Donoghue's Money Fund
Report; Mutual Fund Forecaster; Morningstar; Micropal; Weisenberger Investment
Companies Services; or CDA Investment Technologies, Inc.
Total return data as reported in national financial publications such as Money,
Forbes, Barron's, The
29
<PAGE> 126
Wall Street Journal and The New York Times, or in local or regional
publications, may also be used in comparing Fund performance. The Fund's total
return also may be compared to indices such as the Dow Jones Industrial Average;
the Standard & Poor's 500 Stock Index; the Shearson Lehman Bond Indexes; the
Wilshire 5000 Equity Indexes; or the Consumer Price Index.
Since the Fund's performance will fluctuate, it should not be compared with bank
deposits, savings accounts and similar investments that often provide an agreed
or guaranteed fixed yield for a stated period of time. Performance is generally
a function of the kind and quality of the instruments in a portfolio, portfolio
maturity, operating expenses and market conditions. Not included in the Fund's
calculations of total return and yield are fees charged by Bank of America and
Service Organizations directly to their customer accounts in connection with
investments in the Fund (e.g., account maintenance fees, compensating balance
requirements or fees based upon account transactions, assets or income).
DESCRIPTION OF SHARES
The Company is a Maryland corporation that was organized on October 27, 1982.
ABOUT THE COMPANY
THE COMPANY'S CHARTER AUTHORIZES THE BOARD OF DIRECTORS TO ISSUE UP TO TWO
HUNDRED BILLION FULL AND FRACTIONAL SHARES OF CAPITAL STOCK ($.001 PAR VALUE PER
SHARE) AND TO CLASSIFY AND RECLASSIFY ANY AUTHORIZED AND UNISSUED SHARES INTO
ONE OR MORE CLASSES OF SHARES.
The Board of Directors has authorized the issuance of 100 million shares of
Class W Common Stock representing interests in the Fund and additional classes
of shares representing interests in other investment portfolios of the Company.
The Board of Directors may similarly classify or reclassify any class of shares
(including unissued Class W Common Stock) into one or more series. For more
information about the Company's other portfolios, contact the Company at the
telephone number listed on the inside cover page.
Shares representing interests in the Fund are entitled to participate in the
dividends and distributions declared by the Board of Directors and in the net
distributable assets of the Fund on liquidation. Fund shares have no preemptive
rights and only such conversion and exchange rights as the Board may grant in
its discretion. When issued for payment as described in this Prospectus, Fund
shares will be fully paid and non-assessable.
VOTING RIGHTS
SHAREHOLDERS ARE ENTITLED TO ONE VOTE FOR EACH FULL SHARE HELD AND FRACTIONAL
VOTES FOR FRACTIONAL SHARES HELD. Fund shares have cumulative voting rights to
the extent that may be required by applicable law. Additionally, shareholders
will vote in the aggregate and not by class or series, except as required by law
(or when permitted by the Board of Directors). The Fund does not presently
intend to hold annual meetings of shareholders to elect directors or for other
business unless and until such time as less than a majority of the directors
holding office has been elected by the shareholders. At that time, the directors
then in office will call a shareholders' meeting for the election of directors.
Under certain circumstances, however, shareholders have the right to call a
shareholder meeting to consider the removal of one or more directors. Such
meetings will be held when requested by the shareholders of 10% or more of the
Company's outstanding shares of common stock. The Fund will assist in
shareholder communications in such matters to the extent required by law and the
Company's undertaking with the Securities and Exchange Commission.
PLAN PAYMENTS
THE COMPANY HAS ADOPTED A SHAREHOLDER SERVICE PLAN (THE "PLAN") FOR THE FUND
UNDER WHICH THE FUND PAYS THE DISTRIBUTOR FOR SHAREHOLDER SERVICING EXPENSES
RELATED TO FUND SHARES.
30
<PAGE> 127
Shareholder servicing expenses include expenses incurred in connection with
shareholder services provided by the Distributor and payments to Service
Organizations for support services for the beneficial owners of Fund shares,
such as establishing and maintaining accounts and records relating to the
Service Organization's clients who invest in Fund shares; assisting those
clients in processing exchange and redemption requests and in changing dividend
options and account designations; and responding to inquiries from clients
concerning their investments.
Under the Plan, payments by the Fund for shareholder servicing expenses may not
exceed 0.25% (annualized) of the Fund's average daily net assets. Excluded from
this calculation, however, are all shares acquired via a transfer of assets from
trust and agency accounts at Bank of America. This amount may be reduced
pursuant to undertakings by the Distributor. During the period October 1, 1994
through February 28, 1995, the Distributor waived all shareholder service
payments under the Plan.
If in any month the Distributor is due more monies than are immediately payable
because of the percentage limitation described above, the unpaid amount is
"carried forward" from month to month while the Plan is in effect until such
time when it may be paid. However, any "carried forward" amounts will not be
payable beyond the fiscal year during which the amounts are accrued. No
interest, carrying or other finance charge is borne by the Fund with respect to
the amount "carried forward."
Banks may act as Service Organizations. The Glass-Steagall Act and other
applicable laws, among other things, prohibit banks from engaging in the
business of underwriting securities. If a bank were prohibited from acting as a
Service Organization, its shareholder clients would be permitted to remain
Company shareholders and alternative means for continuing the servicing of such
shareholders would be sought. In such event, changes in the operation of the
Company might occur and a shareholder serviced by such bank might no longer be
able to avail itself of the automatic investment or other services then being
provided by the bank. It is not expected that shareholders would suffer any
adverse financial consequences as a result of any of these occurrences.
The Company will obtain a representation from the Service Organizations (and
from Bank of America and Concord) that they are or will be licensed as dealers
as required by applicable law or will not engage in activities which would
require them to be so licensed.
31
<PAGE> 128
APPENDIX A
CORPORATE BOND RATINGS
Excerpts from Moody's description of its corporate bond ratings: Aaa--judged to
be the best quality, carry the smallest degree of investment risk and are
generally referred to as "gilt edged"; Aa--judged to be of high quality by all
standards; A--deemed to have many favorable investment attributes and considered
as upper medium grade obligations; Baa--considered as medium grade obligations,
i.e. they are neither highly protected nor poorly secured; Ba, B, Caa, Ca,
C--protection of interest and principal payments is questionable (Ba indicates
some speculative elements, B represents bonds that generally lack
characteristics of the desirable investment, Caa represents bonds which are in
poor standing, Ca represents a high degree of speculation and C represents the
lowest rated class of bonds); Caa, Ca and C bonds may be in default. Moody's
applies numerical modifiers 1, 2 and 3 in each generic classification from Aa to
B in its bond rating systems. The modifier 1 indicates that the security ranks
in the higher end of its generic rating category; the modifier 2 indicates a
mid-range ranking; and the modifier 3 indicates that the issue ranks at the
lower end of its generic rating category.
A Standard & Poor's corporate debt rating is a current assessment of the
creditworthiness of an obligor with respect to a specific obligation. Debt rated
"AAA" has the highest rating assigned by Standard & Poor's. Capacity to pay
interest and repay principal is considered to be extremely strong. Debt rated
"AA" is considered to have a very strong capacity to pay interest and to repay
principal and differs from the highest rated issues only in small degree. Debt
rated "A" is considered to have a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt of a higher rated
category. Debt rated "BBB" is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and to repay principal for
debt in this category than for higher rated categories. Debt rated "BB," "B,"
"CCC," "CC" or "C" is regarded, on balance, as predominately speculative with
respect to capacity to pay interest and repay principal in accordance with the
terms of the obligations. "BB" indicates the lowest degree of speculation and
"C" the highest degree of speculation. While such debt will likely have some
quality and protective characteristics, these are outweighed by large
uncertainties or major risk exposures to adverse conditions. Debt rated "C1" is
reserved for income bonds on which no interest is being paid. Debt rated "D" is
in default, and payment of interest and/or repayment of principal is in arrears.
The "D" rating also will be used upon the filing of a bankruptcy petition if
debt service payments are jeopardized. The ratings from "AA" to "CCC" may be
modified by the addition of a plus or minus sign to show relative standing
within the major rating categories.
Excerpts from Fitch's description of its corporate bond ratings:
"AAA"--considered to be investment grade and of the highest credit quality.
Capacity to pay interest and repay principal is considered to be exceptionally
strong; "AA"-- judged to be investment grade and of very high credit quality,
although the capacity to pay interest and repay principal is not quite as strong
as bonds rated "AAA"; "A"--deemed investment grade and of high credit quality,
although the capacity to pay interest and repay principal may be somewhat more
susceptible to the adverse changes in economic conditions and circumstances than
bonds with higher ratings; "BBB" is regarded as having satisfactory credit
quality with an adequate capacity to pay interest and repay principal although
adverse changes in economic conditions and circumstances are more likely to
impair timely payment than for higher rated categories; "BB," "B," "CCC," "CC,"
"C," "DDD," "DD," and "D"--regarded as specula-
A-1
<PAGE> 129
tive investments. The ratings "BB" to "C" represent the likelihood of timely
payment of principal and interest in accordance with the terms of obligation for
bond issues not in default. For defaulted bonds, the rating "DDD" to "D" is an
assessment of the ultimate recovery value through reorganization of liquidation.
The ratings from "AA" to "C" may be modified by the addition of a plus or minus
sign to show relative standing within the major rating categories.
COMMERCIAL PAPER RATINGS
A Standard & Poor's commercial paper rating is a current assessment of the
likelihood of timely payment of debt considered short-term in the relevant
market. The designation "A-1" indicates the degree of safety regarding timely
payment is considered to be strong. Those issues determined to possess extremely
strong safety characteristics are denoted with a plus (+) sign designation. The
designation "A-2" indicates the capacity for timely payment is satisfactory,
however, the relative degree of safety is not as high as for issues designated
"A-1." Moody's commercial paper ratings are opinions of the ability of issuers
to repay punctually promissory obligations not having an original maturity in
excess of 9 months. The rating "Prime-1" is the highest commercial paper rating
assigned by Moody's. Issuers rated "Prime-1" (or related supporting
institutions) are considered to have a superior capacity for repayment of
short-term promissory obligations. Issuers rated "Prime-2" (or related
supporting institutions) are considered to have a strong capacity for repayment
of short-term promissory obligations.
Fitch short-term ratings apply to debt obligations that are payable on demand or
have original maturities of up to three years. The designation "F-1" indicates
that the securities possess very strong credit quality. Those securities
determined to possess exceptionally strong credit quality are denoted with a
plus (+) sign designation. Securities rated "F-2" are considered to possess good
credit quality. Issues assigned this rating have a satisfactory degree of
assurance for timely payment.
UNRATED SECURITIES
Unrated securities are securities which have not been rated by a nationally
recognized statistical rating organization.
A-2
<PAGE> 130
- --------------------------------------------------------------------------------
PACIFIC HORIZON MUTUAL FUNDS
BULK RATE
U.S. POSTAGE
PAID
NEW YORK, N.Y.
PERMIT NO. 8048
COPCORP95P
<PAGE> 131
CORPORATE BOND FUND
PROSPECTUS
July 1, 1995
NOT FDIC INSURED
<PAGE> 132
PROSPECTUS
JULY 1, 1995
PACIFIC HORIZON FLEXIBLE BOND FUND
A series of shares of Pacific Horizon
Funds, Inc.
- --------------------------------------------------------------------------------
The PACIFIC HORIZON FLEXIBLE BOND FUND (the "Fund") is a diversified mutual fund
whose investment objective is to obtain interest income and capital appreciation
by investing in investment grade intermediate and longer term bonds, including
corporate and governmental fixed income obligations and mortgage-backed
securities. The Fund is offered by Pacific Horizon Funds, Inc. (the "Company"),
an open-end, series management investment company.
UNLIKE MOST OTHER INVESTMENT COMPANIES WHICH INVEST DIRECTLY IN PORTFOLIO
SECURITIES, THE FUND SEEKS TO ACHIEVE ITS INVESTMENT OBJECTIVE BY INVESTING ALL
OF ITS INVESTABLE ASSETS IN A FUND OF AN OPEN-END, MANAGEMENT INVESTMENT COMPANY
(THE "PORTFOLIO") HAVING THE SAME INVESTMENT OBJECTIVE AS THAT OF THE FUND. THE
FUND WILL PURCHASE SHARES OF THE PORTFOLIO AT NET ASSET VALUE. THE NET ASSET
VALUE OF THE FUND WILL RESPOND TO INCREASES AND DECREASES IN THE VALUE OF THE
PORTFOLIO'S SECURITIES. INVESTORS SHOULD CAREFULLY CONSIDER THIS INVESTMENT
APPROACH. SEE "OTHER INVESTMENT PRACTICES AND CONSIDERATIONS -- MASTER-FEEDER
STRUCTURE" ON PAGE 9 FOR ADDITIONAL INFORMATION REGARDING THIS STRUCTURE.
Bank of America National Trust and Savings Association ("Bank of America" or the
"investment adviser") serves as the Portfolio's investment adviser. Based in San
Francisco, California, Bank of America and its affiliates have over $50 billion
under management, including over $10 billion in mutual funds.
This Prospectus describes concisely the information about the Fund and the
Company that you should know before investing. Please read it carefully and
retain it for future reference.
More information about the Fund is contained in a Statement of Additional
Information that has been filed with the Securities and Exchange Commission. To
obtain a free copy, call 800-332-3863. The Statement of Additional Information,
as it may be revised from time to time, is dated July 1, 1995 and is
incorporated by reference into this Prospectus.
- --------------------------------------------------------------------------------
Fund shares are not bank deposits or obligations of, or guaranteed or endorsed
by, Bank of America or any of its affiliates and are not federally insured by,
guaranteed by, obligations of or otherwise supported by the U.S. Government, the
Federal Deposit Insurance Corporation, the Federal Reserve Board or any other
governmental agency. Investment in the Fund involves investment risk, including
the possible loss of principal.
- --------------------------------------------------------------------------------
LIKE ALL MUTUAL FUNDS, THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR
HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
This Prospectus is part of a Registration Statement that has been filed with the
Securities and Exchange Commission in Washington, D.C. under the Securities Act
of 1933.
No person has been authorized to give any information or to make any
representations in connection with the offer of the Fund's shares, other than as
contained in this Prospectus and the Fund's official sales literature.
Therefore, other information and representations must not be relied upon as
having been authorized by the Fund. This Prospectus does not constitute an offer
in any State in which, or to any person to whom, such offering may not lawfully
be made.
- --------------------------------------------------------------------------------
<PAGE> 133
CONTENTS
<TABLE>
<S> <C> <C>
EXPENSE SUMMARY 2
FINANCIAL HIGHLIGHTS 3
FUND INVESTMENTS 4 INVESTMENT OBJECTIVE
4 TYPES OF INVESTMENTS
5 FUNDAMENTAL LIMITATIONS
6 OTHER INVESTMENT PRACTICES AND CONSIDERATIONS
SHAREHOLDER GUIDE 11 HOW TO BUY SHARES
11 What Is My Minimum Investment In The Fund?
11 How Are Shares Priced?
13 How Can I Buy Shares?
15 What Price Will I Receive When I Buy Shares?
16 What Else Should I Know To Make A Purchase?
16 HOW TO SELL SHARES
16 How Do I Redeem My Shares?
18 What NAV Will I Receive For Shares I Want To Sell?
18 What Kind Of Paperwork Is Involved
In Selling Shares?
19 How Quickly Can I Receive My Redemption Proceeds?
19 Do I Have Any Reinstatement Privileges After I Have
Redeemed Shares?
19 DIVIDEND AND DISTRIBUTION POLICIES
SHAREHOLDER SERVICES 20 CAN I USE THE FUND IN MY RETIREMENT PLAN?
20 CAN I EXCHANGE MY INVESTMENT FROM ONE FUND TO
ANOTHER?
20 WHAT IS TELETRADE?
21 CAN I ARRANGE TO HAVE AUTOMATIC INVESTMENTS MADE ON
A REGULAR BASIS?
21 WHAT IS DOLLAR COST AVERAGING AND HOW CAN I
IMPLEMENT IT?
21 CAN I ARRANGE PERIODIC WITHDRAWALS?
22 CAN MY DIVIDENDS FROM THE FUND BE INVESTED
IN OTHER FUNDS?
22 IS THERE A SALARY DEDUCTION PLAN AVAILABLE?
THE BUSINESS OF THE FUND 23 FUND MANAGEMENT
23 Service Providers
24 TAX INFORMATION
25 MEASURING PERFORMANCE
26 DESCRIPTION OF SHARES
27 PLAN PAYMENTS
- ------------------------------------------------------------------------------------------------------------------------
DISTRIBUTOR: INVESTMENT ADVISER:
Concord Financial Group, Inc. Bank of America National Trust and Savings Association
125 West 55th Street 555 California Street
New York, NY 10019 San Francisco, CA 94104
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 134
EXPENSE SUMMARY
SHAREHOLDER TRANSACTION EXPENSES are charges you pay when buying or selling
shares of the Fund. ANNUAL FUND OPERATING EXPENSES include payments by the Fund
and payments by the Portfolio which are allocable to the Fund. Operating
expenses include fees for portfolio management, maintenance of shareholder
accounts, general administration, shareholder servicing, accounting and other
services.
At right is a summary of the shareholder transaction expenses imposed by the
Fund and its operating expenses (including the operating expenses of the
Portfolio which are allocable to the Fund) expected to be incurred during the
current fiscal year. This information has been restated to assume that current
fees had been in effect during the previous fiscal year. Actual expenses may
vary. A hypothetical example based on the summary is also shown.
<TABLE>
<S> <C>
SHAREHOLDER TRANSACTION EXPENSE
Maximum Sales Load Imposed on Purchases
(as a percentage of offering price) 4.50%
Sales Load Imposed on Reinvested Dividends None
Deferred Sales Load None
Redemption Fees None
Exchange Fee None
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Management Fees (After Fee Waivers) 0.00%
All Other Expenses (After Expense
Reimbursements) 0.70%
-----
Shareholder Service Payments
(After Fee Waivers) 0.00%
Other Expenses
(After Expense Reimbursements) 0.70%
Total Operating Expenses -----
(After Fee Waivers and Expense
Reimbursements) 0.70%
=====
</TABLE>
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
EXAMPLE: Assume the annual return is 5% and operating expenses are the same After 1 Year : $52
as those stated above. For every $1,000 you invest, here's how much you After 3 Years : $66
would have paid in total expenses if you closed your account after the After 5 Years : $82
number of years indicated: After 10 Years: $128
</TABLE>
Note: The preceding operating expenses and example should not be considered a
representation of future investment returns and operating expenses. Actual
investment returns and operating expenses may be more or less than those shown.
- --------------------------------------------------------------------------------
This expense information is provided to help you understand the expenses you
would bear either directly (as with transaction expenses) or indirectly (as with
annual operating expenses) as a Fund shareholder.
Management fees (without waivers) consist of:
- - an investment advisory fee payable at the annual rate of 0.45% of the
Portfolio's average daily net assets; and
- - an administration fee payable at the annual rate of 0.15% of the Fund's
average daily net assets and 0.05% of the Portfolio's average daily net
assets.
Without fee waivers a shareholder service payment is made in the amount of 0.25%
of the Fund's average daily net assets. As indicated in the table above,
however, Management intends to waive fees and reimburse certain Other Expenses
on behalf of the Fund so that Total Operating Expenses do not exceed 0.70%.
Absent these fee waivers and expense reimbursements, the estimated Total
Operating expenses would be 11.64% of the Fund's average daily net assets.
For a further description of shareholder transaction expenses and the Fund's
operating expenses, see the sections entitled "Shareholder Guide," "The Business
of the Fund" and "Plan Payments" in this Prospectus.
The Board of Directors of the Company believes that the aggregate per share
expenses of the Fund and the Portfolio in which the Fund's assets are invested
will be less than or approximately equal to the expenses which the Fund would
incur if the Company retained the services of an investment adviser for the Fund
and the assets of the Fund were invested directly in the type of securities held
by the Portfolio. Further, the Directors believe that the shareholders of the
Fund will participate in the ownership of a larger portfolio of securities than
could be achieved directly by the Fund.
2
<PAGE> 135
FINANCIAL HIGHLIGHTS
The table below shows certain information concerning the investment results for
the Fund for the periods indicated. The information has been audited by Price
Waterhouse LLP, independent accountants, whose unqualified report on the
financial statements containing such information is incorporated by reference in
the Statement of Additional Information.
The Financial Highlights should be read in conjunction with the financial
statements and notes thereto and the unqualified report of independent
accountants which are incorporated by reference in the Statement of Additional
Information. Further information about the performance of the Fund is available
in the annual report to shareholders. Both the Statement of Additional
Information and the annual report to shareholders may be obtained from the Fund
free of charge by calling 800-332-3863.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE
PERIOD
JANUARY
24,
1994
(COMMENCEMENT
FOR THE OF
YEAR OPERATIONS)
ENDED THROUGH
FEBRUARY FEBRUARY
28, 1995 28, 1994
------- -------
<S> <C> <C>
Net asset value per share, beginning of period....... $ 9.81 $ 10.00
------- -------
Income from Investment Operations:
Net investment income.............................. 0.59 0.08
Net realized and unrealized loss on securities..... (0.37) (0.19)
------- -------
Total income (loss) from investment operations..... 0.22 (0.11)
Less Dividends:
Dividends from net investment income............... (0.59) (0.08)
------- -------
Net change in net asset value........................ (0.37) (0.19)
------- -------
Net asset value per share, end of period............. $ 9.44 $ 9.81
====== ======
Total Return++....................................... 2.27% (1.10)%
Ratios/supplemental data:
Net assets, end of period (000).................... $ 1,964 $ 356
Ratio of expenses to average net assets*........... 0.00% 0.00%+
Ratio of net investment income to average net
assets*......................................... 6.43% 5.70%+
</TABLE>
- ---------------
* Reflects the Fund's proportionate share of the Portfolio's expenses and fee
waivers and expense reimbursements by the Portfolio's Investment Adviser and
Administrator and the Fund's Administrator and Distributor. Such fee waivers
and expense reimbursements had the effect of reducing the ratio of expenses
to average net assets and increasing the ratio of net investment income to
average net assets by 17.95% and 160.20% (annualized), for the periods ended
February 28, 1995 and February 28, 1994, respectively.
+ Annualized.
++ The total returns listed are not annualized for the period ended February 28,
1994, and do not include the effect of the maximum 4.50% sales charge.
3
<PAGE> 136
FUND INVESTMENTS
THE PACIFIC HORIZON FLEXIBLE BOND FUND SEEKS INTEREST INCOME AND CAPITAL
APPRECIATION. THE FUND SEEKS TO ACHIEVE ITS OBJECTIVE THROUGH INVESTMENT IN A
FLEXIBLE MIX OF VARIOUS INVESTMENT GRADE CORPORATE AND GOVERNMENT FIXED INCOME
SECURITIES, MORTGAGE-BACKED SECURITIES, MUNICIPAL SECURITIES AND CASH
EQUIVALENTS.
THE FUND MAY BE APPROPRIATE FOR INVESTORS WHO WANT:
- INTEREST INCOME FROM A DIVERSIFIED PORTFOLIO OF DEBT SECURITIES; AND
- CAPITAL APPRECIATION.
---------------------------------------------------------
INVESTMENT OBJECTIVE
THE OBJECTIVE OF THE FUND IS TO PROVIDE INVESTORS WITH INTEREST INCOME AND
CAPITAL APPRECIATION. THE FUND SEEKS TO ACHIEVE ITS INVESTMENT OBJECTIVE BY
INVESTING ALL OF ITS INVESTABLE ASSETS IN THE PORTFOLIO. THE PORTFOLIO HAS THE
SAME INVESTMENT OBJECTIVE AS THE FUND. WHILE THE PORTFOLIO STRIVES TO ATTAIN ITS
INVESTMENT OBJECTIVE, THERE CAN BE NO ASSURANCE THAT IT WILL BE ABLE TO DO SO.
SINCE THE INVESTMENT CHARACTERISTICS OF THE FUND WILL CORRESPOND TO THOSE OF THE
PORTFOLIO, THE FOLLOWING IS A DISCUSSION OF THE VARIOUS INVESTMENTS OF AND
TECHNIQUES EMPLOYED BY THE PORTFOLIO.
---------------------------------------------------------
TYPES OF INVESTMENTS
IN GENERAL. The Portfolio is a diversified portfolio which will invest
substantially all of its assets in investment grade intermediate and longer term
bonds, which consist of corporate and governmental fixed income obligations,
mortgage-backed securities, municipal securities and cash equivalents.
Investment grade bonds are bonds that are rated within the four highest rating
categories by a nationally recognized statistical rating organization, i.e. BBB
or better by Standard & Poor's Ratings Group, Division of McGraw Hill ("S&P"),
Duff & Phelps Credit Rating Co. ("D&P") or Fitch Investors Service, Inc.
("Fitch") or Baa or better by Moody's Investors Service, Inc. ("Moody's"). While
bonds with such ratings are regarded as having adequate capacity to pay interest
and repay principal, adverse economic conditions or changing circumstances could
lead to a weakened capacity to pay interest and repay principal. Bonds with the
lowest investment grade rating (i.e. BBB or Baa) do not have outstanding
investment characteristics and may have speculative characteristics as well.
Unrated securities will be purchased only if Bank of America determines that
they are of comparable quality to the rated securities in which the Portfolio
may invest. Corporate bonds will be diversified by investment in bonds issued by
different companies in different industries.
Mortgage-backed securities, such as GNMA, FNMA and FHLMC securities, will be
guaranteed as to principal and interest, but not market value, by the U.S.
Government or one of its agencies or instrumentalities. The Portfolio will not
invest more than 35% of its net assets in mortgage-backed securities. There is
the risk that corporate bonds might be called by the issuer if the bond interest
rate is higher than currently prevailing interest rates. Similarly, a risk
associated with mortgage-backed securities is early paydown resulting from
refinancing of the underlying mortgages. The rate of such prepayments, and hence
the life of the security, will primarily be a function of current market rates.
In periods of falling interest rates, the rate of prepayments tends to increase.
During such periods, the reinvestment of prepayment proceeds will generally be
at lower rates than the rates on the prepaid obligations.
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The Portfolio may also invest, from time to time, in obligations issued by state
and local governmental issuers ("Municipal Securities"). The purchase of
Municipal Securities may be advantageous when, as a result of prevailing
economic, regulatory or other circumstances, the performance of such securities,
on a pre-tax basis, is comparable to that of corporate or U.S. Government
obligations. Dividends received by shareholders which are attributable to
interest income received from Municipal Securities generally will be subject to
Federal income tax.
The two principal classifications of Municipal Securities which may be held by
the Portfolio 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 user of the
facility being financed. Private activity bonds held by the Portfolio are in
most cases revenue securities and are not payable from the unrestricted revenues
of the issuer. Consequently, the credit quality of such private activity bonds
is usually directly related to the credit standing of the corporate user of the
facility involved.
The Portfolio may also include "moral obligation" securities, which are normally
issued 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 which created the
issuer.
Interest income is expected to be the primary basis for investment return from
an investment in the Portfolio, and capital appreciation the secondary basis.
The Portfolio will attempt to achieve capital appreciation by moderate market
timing in response to anticipated interest rate changes. The Portfolio will also
attempt to take advantage of undervalued sectors while selling bonds in
overvalued sectors. However, since investments will normally consist of bonds
and mortgage-backed securities, the ability to achieve capital appreciation is
limited.
The value of the securities held in the Portfolio will tend to vary inversely
with changes in prevailing interest rates. When, in the evaluation of Bank of
America, there is a high probability that there will be a decline in the bond
market, up to 75% of the total assets of the Portfolio may be held in cash
equivalents as a temporary defensive strategy. To the extent that the Portfolio
invests in such instruments, it will not be invested in accordance with the
investment policies designed for it to realize its investment objective. Cash
equivalents are the following short-term, interest bearing instruments:
obligations issued or guaranteed by the U.S. Government, its agencies and
instrumentalities, certificates of deposit, bankers' acceptances, time deposits
and other interest-bearing deposits issued by domestic and foreign banks and
foreign branches of U.S. banks, asset-backed securities, foreign government
securities, and commercial paper issued by U.S. and foreign issuers which is
rated at the time of purchase at least Prime-2 by Moody's or A-2 by S&P.
The Portfolio may also make other investments as described more fully below
under "Other Investment Practices and Considerations."
FUNDAMENTAL LIMITATIONS. The investment objective of the Fund and the Portfolio
may not be changed without a vote by the holders of a majority of the
outstanding shares of the Fund or of the outstanding interests of the Portfolio,
respectively. Policies requiring such a vote to effect a change are known as
"fundamental." A number of the other fundamental investment limitations are
summarized below. Neither the Fund nor the Portfolio may:
1. Purchase securities (except securities issued by the U.S. Government, its
agencies or instrumentalities) if, as a result, more than 5% of its total
assets will be invested in the securities of any one issuer or it would own
more than 10% of the voting securities of such issuer, except that up to 25%
of its total assets may be in-
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vested without regard to these limitations; and provided that all of its
assets may be invested in a diversified, open-end management investment
company, or a series thereof, with substantially the same investment
objectives, policies and restrictions without regard to the limitations set
forth in this paragraph;
2. Make loans to other persons except that it may make time or demand deposits
with banks, provided that time deposits shall not have an aggregate value in
excess of 10% of its net assets, and may purchase bonds, debentures or
similar obligations that are publicly distributed, may loan portfolio
securities not in excess of 10% of the value of its total assets, and may
enter into repurchase agreements as long as repurchase agreements maturing in
more than seven days do not exceed 10% of the value of its total assets; or
3. Purchase or sell commodities contracts, except that it may purchase or sell
futures contracts on financial instruments, such as bank certificates of
deposit and U.S. Government securities, foreign currencies and stock indexes
and options on any such futures if such options are written by other persons
and if (i) the futures or options are listed on a national securities or
commodities exchange, (ii) the aggregate premiums paid on all such options
that are held at any time do not exceed 20% of its total net assets, and
(iii) the aggregate margin deposits required on all such futures or options
thereon held at any time do not exceed 5% of its total assets.
If a percentage restriction is satisfied at the time of investment, a later
increase or decrease in percentage resulting from a change in values will not
constitute a violation of that restriction.
A complete list of additional fundamental investment limitations is set out in
the Statement of Additional Information.
OTHER INVESTMENT PRACTICES AND
CONSIDERATIONS
FOREIGN SECURITIES. Subject to its investment objective and the policies stated
above, the Portfolio may invest in securities of foreign issuers that may or may
not be publicly traded in the United States, including Yankee bonds
(dollar-denominated bonds sold in the United States by non-U.S. issuers) and
Eurobonds (bonds issued in a country and sometimes a currency other than the
country of the issuer). It is currently the intention of the Portfolio to invest
no more than 25% of its net assets (at the time of purchase) in foreign
securities. The Portfolio may be subjected to additional risks associated with
the holding of property abroad such as future political and economic
developments, currency fluctuations, possible withholding of tax payments,
possible seizure or nationalization of foreign assets, possible establishment of
currency exchange control regulations or the adoption of other foreign
government restrictions that might adversely affect the payment of principal or
interest on foreign securities in the Portfolio, securities of some foreign
companies are less liquid, and their prices more volatile than domestic
companies, have less publicly available information about foreign companies, and
the fact that foreign companies are not generally subject to uniform accounting,
auditing and financial reporting standards, practices and requirements
comparable to those applicable to domestic companies.
OPTIONS. The Portfolio may purchase put and call options on listed securities
so long as the aggregate premiums paid for options does not exceed 2% of the net
assets of the Portfolio (this restriction does not apply to options on futures
contracts). Put options may be purchased in order to protect the Portfolio's
securities in expectation of a declining market, and call options may be
purchased to benefit from anticipated price increases in the underlying
securities or index. The Portfolio may not write put options but may write fully
covered call options as long as the Portfolio remains fully covered throughout
the life of the option, either by owning the optioned securities or
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possessing a call issued by another writer that is identical in all respects to
the call written by the Portfolio. For additional information relating to option
trading practices, including particular risks thereof, see the Statement of
Additional Information.
FUTURES. The Portfolio may purchase and sell interest rate futures contracts
(as well as purchase related options) as a hedge against changes resulting from
market conditions in the values of the securities held by the Portfolio or which
it intends to purchase and where the transactions are economically appropriate
for the reduction of risks inherent in the ongoing management of the Portfolio.
The Portfolio may not purchase or sell an interest rate futures contract or
purchase a related option unless immediately after any such transaction the sum
of the aggregate amount of margin deposits on its existing futures positions and
the amount of premiums paid for related options does not exceed 5% of the
Portfolio's total assets (after taking into account certain technical
adjustments). For a more detailed discussion of interest rate futures contracts
and options and the costs and risks related to such instruments, see the
Statement of Additional Information.
VARIABLE RATE INSTRUMENTS. The Portfolio may invest in variable and floating
rate instruments, which may include master demand notes. Although payable on
demand by the Portfolio, master demand notes may not be marketable.
Consequently, the ability to redeem such notes may depend on the borrower's
ability to pay which will be continuously monitored by Bank of America. Such
notes will be purchased only from domestic corporations that either (a) are
rated Aa or better by Moody's or AA or better by S&P, (b) have commercial paper
rated at least Prime-2 by Moody's or A-2 by S&P, (c) are backed by a bank letter
of credit or (d) are determined by Bank of America to be of a quality comparable
to securities described in either clause (a) or (b). INVESTMENT COMPANY
SECURITIES. In connection with the management of its daily cash position, the
Portfolio may invest in securities issued by other investment companies which
invest in short-term debt securities and which seek to maintain a $1.00 net
asset value per share (i.e., "money market funds"). No more than 10% of the
value of the Portfolio's total assets will be invested in securities of other
investment companies, with no more than 5% invested in the securities of any one
investment company. As a shareholder of another investment company, the
Portfolio would bear, along with other shareholders, its pro rata portion of the
other investment company's expenses, including advisory fees.
REPURCHASE AGREEMENTS. The Portfolio may enter into repurchase agreements.
Under these agreements, the Portfolio will acquire securities from either a bank
which has a commercial paper rating of A-2 or better by S&P or Prime-2 or better
by Moody's or a registered broker-dealer, and the seller agrees to repurchase
them within a specified time at a fixed price (equal to the purchase price plus
interest). Repurchase agreements are considered to be loans under the Investment
Company Act of 1940 (the "1940 Act"). Repurchase agreements maturing in more
than seven days will not exceed 10% of the value of the total assets of the
Portfolio. Repurchase agreements will be entered into only for debt obligations
issued or guaranteed by the U.S. Government, its agencies or instrumentalities,
certificates of deposit, bankers' acceptances or commercial paper, and either
the Portfolio's custodian or its agent will have physical possession of the
securities or the securities will be transferred to the Portfolio's custodian by
appropriate entry in the Federal Reserve Bank's records and, in either case,
will be maintained in a segregated account.
Bank of America will monitor the value of securities acquired under repurchase
agreements to ensure that the value of such securities will always equal or
exceed the repurchase price under the repurchase agreement. If the other party
to a repurchase agreement defaults, the Portfolio might incur a loss if the
value of the securities securing the repurchase agreement declines, and might
incur disposition costs in connection with liquidating the securities. In
addition, if bankruptcy proceedings are commenced with respect to the
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seller, realization upon the securities by the Portfolio may be delayed or
denied.
REVERSE REPURCHASE AGREEMENTS. The Portfolio may enter into reverse repurchase
agreements. Under these arrangements, the Portfolio will sell a security held by
the Portfolio to either a bank which has a commercial paper rating of A-2 or
better by S&P or Prime-2 or better by Moody's or a registered broker-dealer,
with an agreement to repurchase the security on an agreed date, price and
interest payment. Reverse repurchase agreements involve the possible risk that
the value of portfolio securities the Portfolio relinquishes may decline below
the price the Portfolio must pay when the transaction closes. Reverse repurchase
agreements are considered to be borrowings under the 1940 Act. Borrowings may
magnify the potential for gain or loss on amounts invested resulting in an
increase in the speculative character of the Portfolio's outstanding shares.
SECURITIES LENDING. In order to earn additional income, the Portfolio may lend
its portfolio securities to broker-dealers that Bank of America considers to be
of good standing. Borrowers of portfolio securities may not be affiliated
directly or indirectly with the Company or the Portfolio. If the broker-dealer
should become bankrupt, however, the Portfolio could experience delays in
recovering its securities. A securities loan will only be made when, in Bank of
America's judgment, the possible reward from the loan justifies the possible
risks. In addition, such loans will not be made if, as a result, the value of
securities loaned by the Portfolio exceeds 10% of its total assets. Securities
loans will be fully collateralized.
ASSET-BACKED SECURITIES. The Portfolio may purchase asset-backed securities.
Asset-backed securities consist of undivided fractional interests in pools of
consumer loans (unrelated to mortgage loans) or receivables held in a trust.
Examples include, certificates for automobile receivables (CARS) and credit card
receivables (CARDS). Payments of principal and interest on the loans or
receivables are passed through to certificate holders. Asset-backed securities
may be issued by either governmental or non-governmental entities. Payment on
asset-backed securities of private issuers is typically supported by some form
of credit enhancement, such as a letter of credit, surety bond, limited
guaranty, or subordination. The extent of credit enhancement varies, but usually
amounts to only a fraction of the asset-backed security's par value until
exhausted. Ultimately, asset-backed securities are dependent upon payment of the
consumer loans or receivables by individuals, and the certificate holder
frequently has no recourse to the entity that originated the loans or
receivables.
The underlying assets may be prepaid with the result of shortening the
certificates' weighted average life. Prepayment rates vary widely and may be
affected by changes in market interest rates. It is not possible to accurately
predict the average life of a particular pool of loans or receivables. The
proceeds of prepayments received by the Portfolio must be reinvested in
securities whose yields reflect interest rates prevailing at the time. Thus, the
Portfolio's ability to maintain a portfolio which includes high-yielding
asset-backed securities will be adversely affected to the extent reinvestments
are in lower yielding securities. The actual maturity and realized yield will
therefore vary based upon the prepayment experience of the underlying asset pool
and prevailing interest rates at the time of prepayment. Asset-backed securities
may be subject to greater risk of default during periods of economic downturn
than other instruments. Also, while the secondary market for asset-backed
securities is ordinarily quite liquid, in times of financial stress the
secondary market may not be as liquid as the market for other types of
securities, which could result in the Portfolio's experiencing difficulty in
valuing or liquidating such securities.
WHEN-ISSUED SECURITIES AND FORWARD COMMITMENTS. The Portfolio may purchase
securities on a "when-issued" basis and may purchase or sell securities on a
"forward commitment" basis. These transactions, which involve a commitment by
the Portfolio to purchase or sell particular securities with payment and
delivery taking place at a future date (perhaps one or two months later),
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permit the Portfolio to lock-in a price or yield on a security, regardless of
future changes in interest rates. When-issued and forward commitment
transactions involve the risk that the price or yield obtained may be less
favorable than the price or yield available when the delivery takes place. The
Portfolio will set aside in a segregated account cash or liquid securities equal
to the amount of any when-issued or forward commitment transactions. The
Portfolio's when-issued purchases and forward commitments are not to exceed 25%
of the value of the Portfolio's total assets absent unusual market conditions.
The Portfolio does not intend to engage in when-issued purchases and forward
commitments for speculative purposes but only in furtherance of their investment
objectives.
SECURITIES ISSUED BY BANK OF AMERICA AND AFFILIATES. The Portfolio will not
invest in instruments or securities issued by Bank of America or any of its
affiliates.
PORTFOLIO TRANSACTIONS. Investment decisions for the Portfolio are made
independently from those for other investment companies and accounts managed by
Bank of America and its affiliated entities. Such other investment companies and
accounts may also invest in the same securities as the Portfolio. When a
purchase or sale of the same security is made at substantially the same time on
behalf of the Portfolio and another investment company or account, available
investments or opportunities for sales will be equitably allocated pursuant to
procedures of Bank of America. In some instances, this investment procedure may
adversely affect the price paid or received by the Portfolio or the size of the
position obtained or sold by the Portfolio.
In allocating purchase and sale orders for investment securities (involving the
payment of brokerage commissions or dealer concessions), Bank of America may
consider the sale of Fund shares by broker-dealers and other financial
institutions (including affiliates of Bank of America and the Fund's distributor
to the extent permitted by law), provided it believes the quality of the
transaction and the price to the Portfolio are not less favorable than what they
would be with any other qualified firm.
PORTFOLIO TURNOVER. The Portfolio's investment practices may result in
portfolio turnover greater than that of other mutual fund portfolios. Although
no commissions are paid on bond transactions, purchases and sales are at net
prices which reflect dealers' mark-ups and mark-downs, and a higher portfolio
turnover rate for bond investments will result in the payment of more dealer
mark-ups and mark-downs than would otherwise be the case. Higher rates of
turnover may impose other transaction costs and could increase substantially the
amount of income received by the Portfolio that constitutes taxable capital
gains. To the extent capital gains are realized, distributions from those gains
may be ordinary income for federal tax purposes (see "Tax Information"). The
investment adviser will not consider portfolio turnover a limiting factor in
making investment decisions for the Portfolio consistent with its investment
objectives and policies.
MASTER-FEEDER STRUCTURE. The Fund is an open-end investment portfolio that
seeks to achieve its investment objective by investing all of its investable
assets in the Portfolio, which has the same investment objective. The Fund may
withdraw its investment in the Portfolio at any time if the Board of Directors
of the Company determines that it is in the best interest of the Fund to do so.
Upon any such withdrawal, the Board of Directors would consider what action
might be taken, including the investment of all of the assets of the Fund in
another pooled investment entity having the same investment objective as the
Fund or the hiring of an investment adviser to manage the Fund's assets in
accordance with the investment policies described above with respect to the
Portfolio. See "Expense Summary," "Fund Investments" and "Fund Management" for a
description of this investment objective and the investment policies,
restrictions, management and expenses of the Fund and the Portfolio.
The Portfolio is a separate series of Master Investment Trust, Series I (the
"Master Trust"), which is organized as a business trust under the laws of
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Delaware. The Fund and other entities that may invest in the Portfolio from time
to time (e.g., other investment companies and commingled trust funds) will each
be liable for all obligations of the Portfolio. However, the risk of the Fund's
incurring financial loss on account of such liability is limited to
circumstances in which both inadequate insurance exists and the Portfolio itself
is unable to meet its obligations. Accordingly, the Company's Board of Directors
believes that neither the Fund nor its shareholders will be adversely affected
by reason of the Fund's investing in the Portfolio. As stated above, the
investment objective of the Fund and the Portfolio is a fundamental policy and
may not be changed, in the case of the Fund, without the vote of its
shareholders or, in the case of the Portfolio, without the vote of its
interestholders. Whenever the Fund is requested to vote on matters pertaining to
the investment objective or a fundamental policy of the Portfolio, the Fund will
hold a meeting of its shareholders and will cast its vote in the same proportion
as the votes cast by the Fund's shareholders. The Fund will vote any shares for
which it receives no voting instructions in the same proportion as the shares
for which it does receive voting instructions. As with any mutual fund, other
investors in the Portfolio could control the results of voting at the Portfolio
level in certain instances (e.g. a change in fundamental policies by the
Portfolio which was not approved by the Fund's shareholders). This could result
in the Fund's withdrawal of its investment in the Portfolio, and in increased
costs and expenses for the Fund. Further, the withdrawal of other entities that
may from time to time invest in the Portfolio could have an adverse effect on
the performance of the Portfolio and the Fund, such as decreased economies of
scale and increased per share operating expenses. In addition, the total
withdrawal by another investment company as an investor in the Portfolio will
cause the Portfolio to terminate automatically in 120 days unless the Fund and
any other investors in the Portfolio unanimously agree to continue the business
of the Portfolio.
As the Fund is required to submit such matters to a vote of its shareholders, it
will be required to incur the expenses of shareholder meetings in connection
with such withdrawals. If unanimous agreement is not reached to continue the
Portfolio, the Board of Directors of the Company would need to consider
alternative arrangements for the Fund, such as those described above. The policy
of the Fund, and other similar investment companies, to invest their investable
assets in trusts such as the Portfolio is a relatively recent development in the
mutual fund industry and, consequently, there is a lack of substantial
experience with the operation of this policy.
There may also be other investment companies through which you can invest in the
Portfolio which may have higher or lower fees and expenses than those of the
Fund and which may therefore have different performance results than the Fund.
Information concerning whether an investment in the Portfolio may be available
through another entity investing in the Portfolio may be obtained by calling
800-332-3863.
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SHAREHOLDER GUIDE
THE FOLLOWING SECTION WILL PROVIDE YOU WITH ANSWERS TO SOME OF THE MOST
OFTEN-ASKED QUESTIONS REGARDING BUYING AND SELLING THE FUND'S SHARES AND
REGARDING THE FUND'S DIVIDENDS
HOW TO BUY SHARES
WHAT IS MY MINIMUM INVESTMENT IN THE FUND?
Generally, there is a minimum investment requirement of $500 for initial
purchases and $50 for subsequent purchases, although these amounts may be
altered in certain circumstances as shown below.
- ---------------------------------------------------------
INVESTMENT MINIMUMS
FOR SPECIFIC TYPES OF ACCOUNTS
<TABLE>
<CAPTION>
INITIAL SUBSEQUENT
INVESTMENT INVESTMENT
------- -------------
<S> <C> <C>
Regular Account $ 500* $50
Automatic Investment Plan $ 50 $50
IRAs, SEP-IRAs
(one participant) $ 500 No minimum
Spousal IRAs** $ 250 No minimum
SEP-IRAs (more than
one participant) $ 2,500 No minimum
</TABLE>
* The minimum investment is $100 for purchases made through Bank of America's
trust and agency accounts or a Service Organization (defined below) whose
clients have made aggregate minimum purchases of $1,000,000.
** A regular IRA must be opened in conjunction with this account.
- ---------------------------------------------------------
HOW ARE SHARES PRICED?
Shares are purchased at their public offering price, which is based upon the
Fund's net asset value per share plus a front-end sales load. The Fund
calculates its net asset value ("NAV") as follows:
(Value of Fund Assets) - (Fund Liabilities)
NAV = ---------------------------------------------------------
Number of Outstanding Shares
Net asset value is determined as of the end of regular trading hours on the New
York Stock Exchange (the "Exchange") (currently 4:00 p.m. Eastern time) on days
the Exchange is open.
The Portfolio's investments are valued at market value or, where market
quotations are not readily available, at fair value as determined in good faith
by the Portfolio pursuant to procedures adopted by the Portfolio's Board of
Trustees. Short-term debt securities are valued at amortized cost, which
approximates market value. For further information about valuing securities, see
the Statement of Additional Information. For voice recorded price and yield
information call (800) 227-1545.
SALES LOAD. The front-end sales load for the Fund begins at 4.50% and may
decrease as the amount you invest increases, as shown in the following chart:
- ---------------------------------------------------------
<TABLE>
<CAPTION>
DEALER'S
AS A % OF REALLOWANCE
------------ AS A
NET % OF
AMOUNT OF OFFERING ASSET OFFERING
TRANSACTION PRICE VALUE PRICE*
------------------- ---- ---- ----
<S> <C> <C> <C>
Less than $100,000 4.50 4.71 4.00
$100,000 but less
than $250,000 3.75 3.90 3.35
$250,000 but less
than $500,000 2.50 2.56 2.20
$500,000 but less
than $750,000 2.00 2.04 1.75
$750,000 but less
than $3,000,000 1.00 1.01 .90
$3,000,000 or more .00 .00 .00
</TABLE>
* Dealer's reallowance may be changed periodically.
From time to time, the Fund's distributor will make or allow additional
payments or promotional incentives in the form of cash or other compensation
such as trips to sales seminars, tickets to sporting and other entertainment
events and gifts of merchandise to firms that sell shares of the Fund.
- ---------------------------------------------------------
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WHEN NO SALES LOAD IS APPLIED. You pay no front-end sales load on the
following types of transactions:
- - reinvestment of dividends or distributions;
- - corporate/business retirement plans (such as 401(k), 403(b)(7), 457 and Keogh
accounts) sponsored by the Fund's administrator;
- - employer-sponsored employee pension or retirement plans making direct
investments in the Fund;
- - any purchase of shares by an investment adviser regulated by federal or state
governmental authority when the investment adviser is purchasing shares for
its own account or for an account for which it is authorized to make
investment decisions (i.e., a discretionary account);
- - accounts opened by a bank, trust company or thrift institution, acting as a
fiduciary, provided appropriate notification of such status is given at the
time of investment;
- - any purchase of shares by clients of The Private Bank of Bank of America or by
Private Banking clients of Seattle-First National Bank or by or on behalf of
agency accounts administrated by any bank or trust company affiliate of Bank
of America;
- - any purchase of shares through a discount broker-dealer that imposes a
transaction charge with respect to such purchase, provided you were the
beneficial owner of shares of the Fund (or any other fund in the Pacific
Horizon Family of Funds) prior to July 1, 1992, so long as your account
remains open on the Company's books;
- - any purchase of shares, provided you were the beneficial owner of shares of
the Fund (or any other fund in the Pacific Horizon Family of Funds) before
April 20, 1987, so long as your account remains open on the Company's books;
- - any purchase of shares, provided you were the beneficial owner of shares of
Bunker Hill Income Securities, Inc. on the date of its reorganization into the
Pacific Horizon Corporate Bond Fund, so long as your account remains open on
the Company's books;
- - any purchase of shares pursuant to the Reinstatement Privilege described
below; and
- - any purchase of shares pursuant to the Directed Distribution Plan described
below.
Additionally, some individuals are not required to pay a front-end sales load
when purchasing Fund shares, including:
- - members of the Company's Board of Directors;
- - U.S. based employees and retirees (including employees who are U.S. citizens
but work abroad and retirees who are U.S. citizens but worked abroad) of Bank
of America or any of its affiliates, and their parents, spouses and minor
children, as well as members of the Board of Directors of Bank of America or
any of its affiliates;
- - registered representatives or full-time employees of broker-dealers having
agreements with the Fund's distributor pertaining to the sale of Fund shares
(and their spouses and minor children) to the extent permitted by such
organizations; and
- - former full-time employees (and retirees) of Security Pacific Corporation (or
any of its subsidiaries) and the surviving spouses and minor children of such
employees (and retirees), provided they were the beneficial owner of shares of
the Fund (or any other fund in the Pacific Horizon Family of Funds) prior to
July 1, 1992, so long as their account remains open on the Company's books.
RIGHTS OF ACCUMULATION. When buying shares in Pacific Horizon Funds, your
current aggregate investment determines the sales load that you pay. Your
current aggregate investment is the accumulated combination of your immediate
investment along with the shares that you beneficially own in any Pacific
Horizon Fund, or for like shares of any investment portfolio (a "Time Horizon
Fund") of Time Horizon Funds, an open-end investment company managed by an
affiliate of Bank of America, on which you paid a sales load
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<PAGE> 145
(including shares that carry no sales load but were obtained through an
exchange and can be traced back to shares that were acquired with a sales load).
To qualify for a reduced sales load, you or your Service Organization (which is
an institution such as a bank or broker-dealer that has entered into a selling
and/or servicing agreement with the Fund's distributor) must notify the Fund's
transfer agent at the time of investment that a quantity discount is applicable.
Use of this service is subject to a check of appropriate records, after which
you will receive the lowest applicable sales charge. If you want to participate
you can so indicate on your Account Application or make a subsequent written
request to the Transfer Agent.
Example: Suppose you beneficially own shares of the Fund, the Pacific Horizon
California Tax-Exempt Bond Fund, the Pacific Horizon U.S. Government Securities
Fund, the Pacific Horizon Capital Income Fund and shares of the Company's money
market funds that can be traced back to the purchase of shares carrying a sales
load (or any combination thereof) with an aggregate current value of $90,000. If
you subsequently purchase shares of the Fund with a current value of $10,000,
the load applicable to the subsequent purchase would be reduced to 3.75% of the
offering price.
LETTER OF INTENT. You may also obtain a reduced sales charge by means of a
written Letter of Intent, which expresses your non-binding commitment to invest
in the aggregate $100,000 or more in shares of any Pacific Horizon Fund or any
Time Horizon Fund within a period of 13 months, beginning up to 90 days prior to
the date of the Letter's execution. Shares purchased during that period count as
a credit toward completion of the Letter of Intent. Any investments you make
during the period receive the discounted sales load based on the full amount of
your investment commitment. When your commitment is fulfilled, an adjustment
will be made to reflect any reduced sales load applicable to shares purchased
during the 90-day period prior to the submission of your Letter of Intent.
While signing a Letter of Intent does not bind you to purchase, or the Company
or Time Horizon Funds to sell, the full amount indicated at the sales load in
effect at the time of signing, you must complete the intended purchase to obtain
the reduced sales load. When you sign a Letter of Intent, the Company or Time
Horizon Funds, as applicable, holds in escrow shares purchased by you in an
amount equal to 5% of the total amount of your commitment. After you fulfill the
terms of the Letter of Intent, the escrow will be released.
If your aggregate investment exceeds the amount indicated in your Letter of
Intent, you will receive an adjustment which reflects the further reduced sales
load applicable to your excess investment. It will be in the form of additional
shares credited to your account at the then current offering price applicable to
a single purchase of the total amount of the total purchase.
If your aggregate investment is less than the amount you committed, you will be
requested to remit an amount equal to the difference between the sales load
actually paid and the sales load applicable to the aggregate purchases actually
made. If such remittance is not received within 20 days, the Transfer Agent will
redeem an appropriate number of shares held in escrow to realize the difference.
If you would like to participate, complete the Letter of Intent on your Account
Application. If you have any questions regarding the Letter of Intent, call
800-332-3863. Please read it carefully, as you will be bound by its terms.
HOW CAN I BUY SHARES?
The chart below provides more information regarding some of the different
methods for investing in the Fund.
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<PAGE> 146
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
TO BUY SHARES
OPENING AN ACCOUNT ADDING TO AN ACCOUNT
- --------------------------------------------------------------------------------------------------------
THROUGH BANK OF AMERICA, YOUR BROKER OR ANOTHER SERVICE ORGANIZATION
(ORDERS ARE NOT EFFECTIVE UNTIL RECEIVED BY THE FUND'S TRANSFER AGENT)
<S> <C> <C>
Contact them directly for Contact them directly for
instructions. instructions.
<CAPTION>
THROUGH THE DISTRIBUTOR
(IF YOU ARE OR WILL BE THE SHAREHOLDER OF RECORD ON THE COMPANY'S BOOKS)
<S> <C>
BY MAIL
Pacific Horizon Funds, Inc. Complete Account Application Mail all subsequent
c/o DST Systems, Inc. and mail it with a check investments to:
P.O. Box 419955 (payable to Pacific Horizon
Kansas City, MO 64141-6955 Flexible Bond Fund) to the Pacific Horizon Funds, Inc.
address on the left. c/o DST Systems, Inc.
P.O. Box 419940
Kansas City, MO 64173-0298
- --------------------------------------------------------------------------------------------------------
IN PERSON
DST Systems, Inc. Deliver Account Application Deliver your payment directly
811 Main and your payment directly to to the address on the left.
Kansas City, MO 64105-2005 the address on the left.
- --------------------------------------------------------------------------------------------------------
BY WIRE
United Missouri Bank of Instruct your bank to Instruct your bank to
Kansas City, N.A. transmit immediately transmit immediately
10th and Grand available funds, for purchase available funds as described
Kansas City, MO 64106 of Fund shares in your name. at left, except that the wire
ABA No. 1010-0069-5 should indicate that you are
Pacific Horizon Funds, Inc. Be sure to have your bank making a subsequent purchase
Flexible Bond Fund indicate your name, address as opposed to opening a new
DDA #98-7037-107-3 and tax identification account.
number, the name of the Fund
and the fact that a new Be sure to include your name
account is being opened. and your Fund account number.
Consult your bank for information on remitting funds by wire
and any associated bank charges.
You may contact the Fund's transfer agent at 800-346-2087 for
further information regarding wiring instructions.
</TABLE>
- --------------------------------------------------------------------------------
14
<PAGE> 147
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
OPENING AN ACCOUNT ADDING TO AN ACCOUNT
<S> <C> <C>
- --------------------------------------------------------------------------------------------------------
BY TELETRADE TeleTrade Privileges apply Purchases may be made in the
(a service permitting transfers automatically, although the minimum amount of $500 and
of money from your Privilege may not be used to the maximum amount of $50,000
checking, NOW or bank make an initial purchase. If per transaction as soon as
money market account) you do not wish to have appropriate information
TeleTrade Privileges, you regarding your bank account
must indicate that fact on has been established on your
the Account Application or in Fund account. This
a subsequent written notice information may be provided
to the Fund's transfer agent. on the Account Application or
in a signature guaranteed
letter of instruction to the
Transfer Agent. Signature
guarantees are discussed
under "How to Sell Shares."
Call 800-346-2087 to make
your purchase.
</TABLE>
You should refer to the "Shareholder Services" section
for additional important information about the TeleTrade Privilege.
YOU MAY USE OTHER INVESTMENT OPTIONS, INCLUDING AUTOMATIC INVESTMENTS
AND EXCHANGES, TO INVEST IN YOUR FUND ACCOUNT.
PLEASE REFER TO THE SECTION ENTITLED "SHAREHOLDER SERVICES" FOR
MORE INFORMATION.
- --------------------------------------------------------------------------------
WHAT PRICE WILL I RECEIVE WHEN I BUY SHARES?
Your shares will be purchased at the Fund's public offering price calculated at
the next close of regular trading on the Exchange (currently 4:00 p.m. Eastern
time) after your purchase order is received in proper form by the Fund's
transfer agent, DST Systems, Inc. (the "Transfer Agent"), at its Kansas City
office.
If you purchase shares through Bank of America, your broker or another Service
Organization, the entity involved is responsible for transmitting your order and
required funds to the Transfer Agent on a timely basis in accordance with the
procedures in this Prospectus. Share purchases (and redemptions) executed
through Bank of America or a Service Organization are executed only on days on
which the particular institution and the Fund are open for business. Purchase
orders received by a Service Organization in proper form by 4:00 p.m. Eastern
time on a business day will be effected at the public offering price calculated
at 4:00 p.m. Eastern time on that day, if the Service Organization transmits
your order to the Transfer Agent by the end of its business day (normally 5:15
p.m. Eastern time). Except as provided in the following two sentences, if the
order is not received in proper form by a Service Organization by 4:00 p.m.
Eastern time or not received by the Transfer Agent by the close of its business
day, the order will be based upon the next determined purchase price. The
Company may from time to time in its sole discretion appoint one or more
entities as the Fund's agent to receive irrevocable purchase and redemption
orders and to transmit them on a net basis to the Transfer Agent. In these
instances orders received by the entity by 4:00 p.m. Eastern time on a business
day will be effected as of 4:00 p.m. Eastern time that day if the order is
actually received by the Transfer Agent not later than the next business morning
accompanied by payment in federal funds.
15
<PAGE> 148
WHAT ELSE SHOULD I KNOW TO MAKE A PURCHASE?
Federal regulations require you to provide a certified taxpayer identification
number upon opening or reopening an account.
If your check used for investment does not clear, a fee may be imposed by the
Transfer Agent. All payments should be in U.S. dollars and, to avoid fees and
delays, should be drawn only on U.S. banks. Please remember that the Company
reserves the right to reject any purchase order.
You should note that Bank of America, Service Organizations and registered
investment advisers may charge a separate fee or transaction charge to their
clients related to their investment in Fund shares. These fees could constitute
a substantial portion of smaller accounts and may not be in an investor's best
interest. Bank of America and Service Organizations may also impose minimum
customer account and other requirements in addition to those imposed by the
Fund. If you purchase or redeem shares directly from the Fund, you may do so
without incurring any charges other than those described in this Prospectus.
HOW TO SELL SHARES
HOW DO I REDEEM MY SHARES?
Pacific Horizon Funds, Inc. makes it easy to sell, or "redeem," shares. The Fund
imposes no charge when you redeem shares. The value of the shares you redeem may
be more or less than your cost, depending on the Fund's current net asset value.
If you purchased your shares through an account at Bank of America, your Broker
or another Service Organization, you may redeem all or part of your shares in
accordance with the instructions pertaining to that account. If you are also the
shareholder of record on the Company's books, you may redeem shares in
accordance with the procedures described in the chart below as well as those of
your account. To use the redemption methods described below, you must arrange
with Bank of America or your Service Organization for delivery of the required
application(s) to the Transfer Agent.
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<PAGE> 149
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------
TO SELL SHARES
THROUGH BANK OF AMERICA, YOUR BROKER OR ANOTHER SERVICE ORGANIZATION
(ORDERS ARE NOT EFFECTIVE UNTIL RECEIVED BY THE TRANSFER AGENT)
Contact them directly for instructions.
- ------------------------------------------------------------------------------------------------
THROUGH THE DISTRIBUTOR
(IF YOU ARE A SHAREHOLDER OF RECORD ON THE COMPANY'S BOOKS)
<S> <C>
BY MAIL
Pacific Horizon Send a signed, written request (each owner, including each
Flexible Bond Fund joint owner, must sign) to the Transfer Agent.
c/o DST Systems, Inc.
P.O. Box 419955 If you hold stock certificates for the shares being
Kansas City, MO 64141-6955 redeemed, make sure to endorse them for transfer, have your
signature on them guaranteed by your bank or another
guarantor institution (as described in the section entitled
"What Kind Of Paperwork Is Involved In Selling Shares?") and
include them with your request.
- ------------------------------------------------------------------------------------------------
IN PERSON
DST Systems, Inc.
811 Main Deliver your signed, written request (each owner, including
Kansas City, MO 64105-2005 each joint owner, must sign) and any certificates (endorsed
for transfer and signature guaranteed as described in the
section entitled "What Kind Of Paperwork Is Involved In
Selling Shares?") to the address on the left.
- ------------------------------------------------------------------------------------------------
BY WIRE
As soon as appropriate information regarding your bank
account has been established on your Fund account, you may
write, telephone or telegraph redemption requests to the
Transfer Agent, and redemption proceeds will be wired in
federal funds to the commercial bank you have specified.
Information regarding your bank account may be provided on
the Account Application or in a signature guaranteed letter
of instruction to the Transfer Agent. Signature guarantee
requirements are discussed below in the section entitled
"What Kind Of Paperwork Is Involved In Selling Shares?".
Redemption proceeds will normally be wired the business day
after your request and any other necessary documents have
been received by the Transfer Agent.
Wire Privileges apply automatically unless you indicate on
the Account Application or in a subsequent written notice to
the Transfer Agent that you do not wish to have them.
Requests must be for at least $1,000 and may be subject to
limits on frequency and amounts.
Wire Privileges may be modified or suspended at any time,
and are not available for shares issued in certificate form.
Contact your bank for information on any charges imposed by
the bank in connection with receipt of redemptions by wire.
- ------------------------------------------------------------------------------------------------
</TABLE>
17
<PAGE> 150
- --------------------------------------------------------------------------------
TO SELL SHARES
<TABLE>
<S> <C>
BY CHECK You may write Redemption Checks ("Checks") payable to any
person out of your Fund account in the amount of $500 or
more. The Transfer Agent (as your agent) will redeem the
necessary number of shares to cover the Check when it is
presented for payment.
You will continue earning dividends on shares redeemed in
this manner until the Check actually clears the Transfer
Agent.
You may request this Privilege on an Account Application
that has been signed by the registered owner(s), and a set
of Checks will then be sent to the registered owner(s) at
the address of record.
There is no charge for the use of Checks, although the
Transfer Agent will charge for any "stop payment" requests
made by you, or if a Check cannot be honored due to
insufficient funds or for other valid reasons.
Shares issued in certificate form may not be redeemed by
Check.
</TABLE>
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
BY TELETRADE You may redeem Fund shares (minimum of $500 and maximum of
(a service permitting $50,000 per transaction) by telephone after appropriate
transfers of money to your information regarding your bank account has been established
checking, NOW or bank money on your Fund account. This information may be provided on
market account) the Account Application or in a signature guaranteed letter
of instruction to the Transfer Agent. Signature guarantee
requirements are discussed in the section entitled "What
Kind Of Paperwork Is Involved In Selling Shares?".
Redemption orders may be placed by calling 800-346-2087.
TeleTrade Privileges apply automatically unless you indicate
on the Account Application or in a subsequent written notice
to the Transfer Agent that you do not wish to have them.
You should refer to the "Shareholder Services" section for
additional important information about the TeleTrade
Privilege.
</TABLE>
OTHER REDEMPTION OPTIONS, INCLUDING EXCHANGES AND AUTOMATIC
WITHDRAWALS, ARE ALSO AVAILABLE. PLEASE REFER TO THE SECTION
ENTITLED "SHAREHOLDER SERVICES" FOR MORE INFORMATION.
- --------------------------------------------------------------------------------
WHAT NAV WILL I RECEIVE FOR SHARES I WANT TO SELL?
Redemption orders are effected at the net asset value per share next determined
after receipt of the order in proper form by the Transfer Agent at its Kansas
City office. Although the Fund itself imposes no charge when shares are
redeemed, if you purchase shares through Bank of America or a Service
Organization, they may charge a fee for providing certain services in connection
with investments in Fund shares. The Company reserves the right to redeem
accounts (other than IRA and non-working spousal IRA accounts) involuntarily if,
after sixty days' written notice, the account's net asset value remains below a
$500 minimum balance.
WHAT KIND OF PAPERWORK IS INVOLVED
IN SELLING SHARES?
Redemption requests must be signed by each shareholder, including each joint
owner. Certain types of redemption requests as well as all endorsed share
certificates will need to include a signature guarantee. Signature guarantees
must accompany redemption requests for (i) an amount in excess of $50,000 per
day, (ii) any amount if the redemption proceeds are to be sent somewhere other
than the address of record on the Company's books, or (iii) an amount of $50,000
18
<PAGE> 151
or less if the address of record has not been on the Company's books for sixty
days.
You may obtain a signature guarantee from: (i) a bank which is a member of the
FDIC; (ii) a trust company; (iii) a member firm of a national securities
exchange; or (iv) another eligible guarantor institution. Guarantees must be
signed by an authorized signatory of the guarantor institution and be
accompanied by the words "Signature Guaranteed." The Transfer Agent will not
accept guarantees from notaries public.
HOW QUICKLY CAN I RECEIVE MY
REDEMPTION PROCEEDS?
The Company will make payment for all shares redeemed after the Transfer Agent
receives a request in proper form, except as provided by the rules of the
Securities and Exchange Commission. If the shares to be redeemed have been
purchased by check or by TeleTrade, the Company will, upon the clearance of the
purchase check or TeleTrade payment, mail the redemption proceeds within seven
business days. This does not apply to situations where the Fund receives payment
in cash or immediately available funds for the purchase of shares. If you
purchase shares by wire, you must file an Account Application before redemption
requests can be honored.
Bank of America and the Service Organizations are responsible for transmitting
redemption orders and crediting their customers' accounts with redemption
proceeds on a timely basis.
DO I HAVE ANY REINSTATEMENT PRIVILEGES AFTER I HAVE REDEEMED SHARES?
You may reinvest all or any portion of your redemption proceeds in shares of the
Fund, or of another load fund of the Company or Time Horizon Funds, within 90
days of your redemption trade date without paying a sales load. Shares so
reinvested will be purchased at a price equal to the net asset value next
determined after the Transfer Agent receives a reinstatement request and payment
in proper form.
If you wish to use this Privilege, you must submit a written reinstatement
request to the Transfer Agent stating that you are eligible to use the
Privilege. The reinstatement request and payment must be received within 90 days
of the trade date of the redemption. Currently, there are no restrictions on the
number of times you may use this Privilege.
Generally, exercising the Reinstatement Privilege will not affect the character
of any gain or loss realized on redemption for federal income tax purposes.
However, if a redemption results in a loss, the reinstatement may result in the
loss being disallowed under IRS "wash sale" rules.
DIVIDEND AND DISTRIBUTION POLICIES
Shareholders of the Fund are entitled to dividends arising from the net
investment income and net realized gains, if any, earned on investments in the
Portfolio which are allocable to the Fund. Dividends from the Fund's net
investment income are declared daily and paid within five business days after
the end of each month. Fund shares begin earning dividends the day after payment
in federal funds is received for such shares through the business day such
shares are redeemed. The Fund's net realized gains (after reduction for capital
loss carryforwards, if any) are distributed at least annually.
You will automatically receive dividends and capital gain distributions in
additional shares without a sales load unless you: (i) elect in writing to
receive payment in cash; or (ii) elect to participate in the Directed
Distribution Plan described in the section entitled "Can My Dividends From The
Fund Be Invested In Other Pacific Horizon Funds?".
To elect to receive payment in cash, or to revoke such election, you must do so
in writing to the Transfer Agent at P.O. Box 419955, Kansas City, MO 64141-6955.
The election or revocation will become effective with respect to dividends paid
after it is received by the Transfer Agent.
19
<PAGE> 152
SHAREHOLDER SERVICES
PACIFIC HORIZON FUNDS PROVIDES A VARIETY OF WAYS TO MAKE MANAGING YOUR
INVESTMENTS MORE CONVENIENT.
Some or all of the following services and privileges as well as others described
in this Prospectus may not be available for, or may have different conditions
imposed on them than as described in this Prospectus with respect to, certain
clients of Bank of America and particular Service Organizations. Consult these
entities for more information.
CAN I USE THE FUND IN MY RETIREMENT PLAN?
The Company makes available Individual Retirement Accounts ("IRAs"), including
IRAs set up under a Simplified Employee Pension Plan ("SEP-IRAs") and IRA
"Rollover Accounts."
YOUR INVESTMENTS GROW TAX DEFERRED UNTIL WITHDRAWAL AT RETIREMENT AND IN MANY
CASES THE INITIAL INVESTMENT IS TAX DEDUCTIBLE.
For details, contact the Fund's distributor at 800-332-3863. Investors should
also read the IRA Disclosure Statement and the Bank Custodial Agreement for
further details on eligibility, service fees and tax implications, and consult
their tax advisers.
CAN I EXCHANGE MY INVESTMENT FROM ONE FUND TO ANOTHER?
As a shareholder, you have the privilege of exchanging your shares for shares of
another Pacific Horizon Fund, or like shares of any Time Horizon Fund, provided
that such other shares may be legally sold in your state of residence. NO
ADDITIONAL SALES LOAD WILL BE INCURRED WHEN EXCHANGING FUND SHARES PURCHASED
WITH A SALES LOAD FOR SHARES OF ANOTHER LOAD FUND OF THE COMPANY.
An investment in the Fund automatically entitles you to use this Privilege,
unless you indicate on the Account Application or in a subsequent letter to the
Transfer Agent that you do not wish to use this Privilege.
Fund shares being exchanged must have a current value of at least $500 and are
subject to the minimum initial investment requirements of the particular fund
into which the exchange is being made. You may obtain prospectuses regarding the
funds into which you wish to make an exchange from your Service Organization or
the Fund's distributor.
You may provide exchange instructions by telephone by calling the Transfer Agent
at 800-346-2087. (See the section below regarding TeleTrade for a description of
the Company's policy regarding responsibility for telephone instructions.) You
may also send exchange instructions in writing by following directions set forth
previously under "How to Sell Shares."
If you would like more information on making an exchange, please read the
Statement of Additional Information and consult your Service Organization or the
Fund's distributor.
The Fund reserves the right to reject any exchange request and the Exchange
Privilege may be modified or terminated at any time. At least 60 days' notice of
any material modification to or termination of the Exchange Privilege will be
given to shareholders except where notice is not required under the regulations
of the Securities and Exchange Commission.
WHAT IS TELETRADE?
TELETRADE IS A SERVICE WHICH ALLOWS YOU TO AUTHORIZE ELECTRONIC TRANSFERS OF
MONEY TO PURCHASE SHARES IN OR REDEEM SHARES FROM AN ESTABLISHED FUND ACCOUNT.
THE SERVICE MAY BE USED LIKE AN "ELECTRONIC CHECK" TO MOVE MONEY BETWEEN AN
ACCOUNT AT A FINANCIAL INSTITUTION AND A FUND ACCOUNT WITH A SINGLE TELEPHONE
CALL.
Purchase and redemption proceeds with respect to TeleTrade transactions will be
transferred between your Fund account and the checking, NOW or bank money market
account designated by you. Only an account maintained at a domes-
20
<PAGE> 153
tic financial institution that is an Automated Clearing House member may be so
designated. TeleTrade purchases will be effected at the public offering price
next determined after the Transfer Agent receives payment for the transaction.
Redemption proceeds will be on deposit in your account at your financial
institution generally two business days after the redemption request is received
by the Transfer Agent. You may also request receipt of your redemption proceeds
by check, which will be payable to the registered owners of your Fund account
and will be sent only to the address of record.
You should note that the Transfer Agent may act upon a telephone redemption
request (including a telephone wire redemption request) from any person
representing himself or herself to be you and reasonably believed by the
Transfer Agent to be genuine. Neither the Company nor any of its service
contractors will be liable for any loss or expense in acting upon telephone
instructions that are reasonably believed to be genuine. In attempting to
confirm that telephone instructions are genuine, the Company will use such
procedures as are considered reasonable. If you should experience difficulty in
contacting the Transfer Agent to place telephone redemptions (including
telephone wire redemptions), for example because of unusual market activity, you
are urged to consider redeeming your shares by mail or in person.
The Company may modify the TeleTrade Privilege at any time or charge a service
fee upon notice to shareholders. No such fee currently is contemplated.
CAN I ARRANGE TO HAVE AUTOMATIC
INVESTMENTS MADE ON A REGULAR BASIS?
YOU MAY ARRANGE, THROUGH THE AUTOMATIC INVESTMENT PROGRAM, FOR SYSTEMATIC
INVESTMENTS IN YOUR FUND ACCOUNT IN AMOUNTS OF $50 OR MORE BY DIRECTLY DEBITING
YOUR ACCOUNT AT YOUR FINANCIAL INSTITUTION. At your option, your checking, NOW
or bank money market account designated by you will be debited in the specified
amount, and Fund shares will be purchased, once a month, on either the first or
fifteenth day, or twice a month, on both days. Only accounts maintained at a
domestic financial institution which permits automatic withdrawals and is an
Automated Clearing House member are eligible. The Automatic Investment Program
is one means by which you may use Dollar Cost Averaging in making investments.
WHAT IS DOLLAR COST AVERAGING
AND HOW CAN I IMPLEMENT IT?
DOLLAR COST AVERAGING INVOLVES INVESTING A FIXED DOLLAR AMOUNT AT REGULAR
PREDETERMINED INTERVALS. BECAUSE MORE SHARES ARE BOUGHT DURING PERIODS WITH
LOWER SHARE PRICES AND FEWER SHARES ARE BOUGHT WHEN THE PRICE IS HIGHER, YOUR
AVERAGE COST PER SHARE MAY BE REDUCED. You may also implement Dollar Cost
Averaging on your own initiative or through other entities.
In order to be effective, Dollar Cost Averaging should be followed on a
sustained, consistent basis. You should be aware, however, that shares bought
using Dollar Cost Averaging are made without regard to their price on the day of
investment or to market trends. In addition, while you may find Dollar Cost
Averaging to be beneficial, it will not prevent a loss if you ultimately redeem
your shares at a price that is lower than their purchase price.
To establish an Automatic Investment Account that uses the Dollar Cost Averaging
method, check the appropriate box and supply the necessary information on the
Account Application or in a subsequent written request to the Transfer Agent.
You may cancel this privilege or change the amount of purchase at any time by
mailing written notification to the Transfer Agent.
Notification will be effective three business days following receipt. The Fund
may modify or terminate this Privilege at any time or charge a service fee,
although no such fee currently is contemplated.
CAN I ARRANGE PERIODIC WITHDRAWALS?
IF YOU ARE A SHAREHOLDER WITH A FUND ACCOUNT VALUED AT $5,000 OR MORE, YOU MAY
WITHDRAW
21
<PAGE> 154
AMOUNTS IN MULTIPLES OF $50 FROM YOUR ACCOUNT ON A MONTHLY, QUARTERLY,
SEMI-ANNUAL OR ANNUAL BASIS THROUGH THE AUTOMATIC WITHDRAWAL PLAN.
At your option, monthly, quarterly, semi-annual and annual withdrawals will be
made on either the first or fifteenth day of the particular month selected. To
participate in this Plan, check the appropriate box and supply the necessary
information on the Account Application or in a subsequent signature guaranteed
written request to the Transfer Agent. Purchases of additional shares
concurrently with withdrawals are ordinarily not advantageous because of the
Fund's sales load.
CAN MY DIVIDENDS FROM THE FUND
BE INVESTED IN OTHER FUNDS?
You may elect to have your dividends, capital gains distributions, or both
("distribution proceeds") received from a non-retirement Fund account
automatically invested in shares of any other investment portfolio of the
Company, or in like shares of any Time Horizon Fund, provided such shares are
held in a non-retirement account. To participate in this program, known as the
Directed Distribution Plan, check the appropriate box and supply the necessary
information on the Account Application or subsequently send a written request to
the Transfer Agent. Participants in the Directed Distribution Plan are subject
to the minimum initial investment requirements of the particular fund involved.
Investments will be made at a price equal to the net asset value of the
purchased shares next determined after receipt of the distribution proceeds by
the Transfer Agent.
There are no subsequent investment requirements for accounts to which
distribution proceeds are directed nor are service fees currently charged for
effecting these transactions.
IS THERE A SALARY DEDUCTION PLAN
AVAILABLE?
YOU MAY PURCHASE FUND SHARES BY HAVING PAYMENTS AUTOMATICALLY DEPOSITED INTO
YOUR FUND ACCOUNT (MINIMUM OF $50 AND MAXIMUM OF $50,000 PER TRANSACTION) IF YOU
RECEIVE A FEDERAL SALARY, SOCIAL SECURITY OR CERTAIN VETERAN'S, MILITARY OR
OTHER PAYMENTS FROM THE FEDERAL GOVERNMENT. Subject to these limitations, you
may deposit as much of your payments as you wish.
For instructions on how to enroll in this Direct Deposit Program, call the
Transfer Agent at 800-346-2087.
Note: Death or legal incapacity will terminate participation in the Program. You
may also choose at any time to terminate your participation by notifying the
appropriate federal agency in writing. Further, the Fund may terminate your
participation after 30 days' notice.
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<PAGE> 155
THE BUSINESS OF THE FUND
FUND MANAGEMENT
The business affairs of the Company are managed under the general supervision of
its Board of Directors. Information about the Directors and Officers of the
Company and about the Trustees and Officers of the Master Trust is included in
the Statement of Additional Information under "Management."
SERVICE PROVIDERS
-------------------
INVESTMENT ADVISER
Bank of America serves as Investment Adviser of the Portfolio. Bank of America
is a subsidiary of BankAmerica Corporation, a registered bank holding company.
Its principal offices are located at 555 California Street, San Francisco,
California 94104.
Formed in 1904, Bank of America is a national banking association that provides
commercial banking and trust business through an extensive system of branches
across the western United States. Bank of America's principal banking affiliates
operate branches in ten U.S. states as well as corporate banking and business
credit offices in major U.S. cities and branches, corporate offices and
representative offices in 37 countries.
In its advisory agreement, Bank of America has agreed to manage the Portfolio's
investments and to be responsible for, place orders for, and make decisions with
respect to, all purchases and sales of the Portfolio's securities. The agreement
also provides that Bank of America may, in its discretion, provide advisory
services through its own employees or employees of one or more of its affiliates
that are under the common control of Bank of America's parent, BankAmerica
Corporation, provided such employees are under the management of Bank of
America. Bank of America may also employ a sub-adviser provided Bank of America
remains fully responsible to the Portfolio for the acts and omissions of the
sub-adviser.
Steven L. Vielhaber is primarily responsible for the day-to-day management of
the investment assets of the Portfolio. Mr. Vielhaber has been the Fund's
manager since April 1994 and has been employed by Bank of America since 1993.
Prior thereto, Mr. Vielhaber had been Director of Fixed Income Marketing at
Dimensional Fund Advisors since 1990 and Vice President and Manager of
Investments at Gibraltar Savings from 1986 to 1990.
For the services provided and expenses assumed under the advisory agreement,
Bank of America is entitled to receive a fee at the annual rate of 0.45% of the
Portfolio's average daily net assets. This amount may be reduced pursuant to
undertakings by Bank of America. (See the information below under "Fee
Waivers.") During the fiscal year ended February 28, 1995, Bank of America
waived its entire fee as investment advisor. In addition, Bank of America and
its affiliates may be entitled to fees under the Shareholder Services Plan as
described under "Plan Payments," and may receive fees charged directly to their
accounts in connection with investments in Fund shares.
ADMINISTRATOR
Concord Holding Corporation ("Concord") serves as Administrator of the Fund and
the Portfolio. Concord is a wholly owned subsidiary of The BISYS Group, Inc. Its
offices are located at 125 W. 55th Street, New York, New York 10019.
Under its administration agreements with the Company and the Portfolio, Concord
has agreed to: pay the costs of maintaining the offices of the Company and the
Portfolio; provide a facility to receive purchase and redemption orders; provide
statistical and research data, data processing services and clerical services;
coordinate the preparation of reports to shareholders of the Fund,
interestholders of the Portfolio and the Securities and Exchange Commission;
prepare tax returns;
23
<PAGE> 156
maintain the registration or qualification of the Fund's shares for sale under
state securities laws; maintain books and records of the Fund and the Portfolio;
calculate the net asset value of the Fund and the Portfolio and dividends and
capital gains distributions to shareholders; serve as dividend disbursing agent
for the Portfolio; and generally assist in all aspects of the operations of the
Fund and the Portfolio.
For its services as administrator, Concord is entitled to receive an
administration fee from the Fund at the annual rate of 0.15% of the Fund's
average daily net assets and an administration fee from the Portfolio at the
annual rate of 0.05% of the Portfolio's average daily net assets. These amounts
may be reduced pursuant to undertakings by Concord. (See the information below
under "Fee Waivers.") During the fiscal year ended February 28, 1995, Concord
waived its entire fee as administrator for both the Fund and the Portfolio.
Pursuant to the authority granted in its administration agreements, Concord has
entered into agreements with PFPC, Inc. ("PFPC") under which PFPC, and an
off-shore affiliate of PFPC, perform certain of the services listed above, e.g.,
calculating the net asset value of the Fund and the Portfolio, calculating
dividends and capital gains distributions to shareholders, and maintaining the
books and records of the Fund and the Portfolio. The Fund and the Portfolio bear
all fees and expenses charged by PFPC for these services.
DISTRIBUTOR
The Fund's shares are sold on a continuous basis by Concord Financial Group,
Inc. (the "Distributor"). The Distributor is a wholly-owned subsidiary of
Concord and is located at 125 W. 55th Street, New York, New York 10019.
CUSTODIAN AND TRANSFER AGENT
PNC Bank, N.A., Broad and Chestnut Streets,
Philadelphia, Pennsylvania, 19101 serves as
the Custodian of the Fund and the Portfolio.
DST Systems, Inc. is the transfer and dividend
disbursing agent for the Fund and is located at 811 Main, Kansas City, MO
64105-2005.
FEE WAIVERS
Except as noted in this Prospectus, the service contractors bear all expenses in
connection with the performance of their services and the Fund and Portfolio
bear the expenses incurred in their operations. Expenses can be reduced by
voluntary fee waivers and expense reimbursements by Bank of America and other
service providers as well as by certain expense limitations imposed by state
securities regulators. Periodically, during the course of the Fund's fiscal
year, Bank of America, Concord and/or the Distributor may choose not to receive
fee payments and/or may assume certain Fund or Portfolio expenses. However, the
service providers retain the ability to be reimbursed for these amounts by the
Fund and Portfolio prior to fiscal year end and, subject to the expense
limitations of certain states, to stop such fee waivers and expense
reimbursements at any time. These waivers and reimbursements would increase the
Fund's yield when made but would decrease yields if the Fund were required to
reimburse a service provider.
TAX INFORMATION
YOU WILL BE ADVISED AT LEAST ANNUALLY REGARDING THE FEDERAL INCOME TAX TREATMENT
OF DIVIDENDS AND DISTRIBUTIONS MADE TO YOU. YOU SHOULD SAVE YOUR ACCOUNT
STATEMENTS BECAUSE THEY CONTAIN INFORMATION YOU WILL NEED TO CALCULATE YOUR
CAPITAL GAINS OR LOSSES UPON YOUR ULTIMATE SALE OR EXCHANGE OF SHARES IN THE
FUND.
As with any investment, you should consider the tax implications of an
investment in the Fund. The following is only a brief summary of some of the
important tax considerations generally affecting the Fund and its shareholders.
Consult your tax adviser with specific reference to your own tax situation.
FEDERAL TAXES
During its most recent fiscal year the Fund qualified as a "regulated investment
company" under
24
<PAGE> 157
the Internal Revenue Code of 1986, as amended (the "Code"), and Management
intends that the Fund will so qualify in future years as long as such
qualification is in the best interest of the Fund's shareholders. As a result of
this qualification, the Fund generally is not required to pay federal income
taxes to the extent its earnings are distributed in accordance with the Code.
The Fund intends to qualify for this special tax treatment as long as it is in
the best interest of its shareholders. It is expected that the Portfolio will
not be subject to Federal income taxes. The Portfolio intends to qualify as a
partnership (or other pass-through entity) for federal income tax purposes. As
such, the Portfolio is not subject to tax and the Fund will be treated for
federal income tax purposes as recognizing its pro rata share of the Portfolio's
income and deductions, and owning its pro rata share of the Portfolio's assets.
The Fund's status as a regulated investment company is dependent on, among other
things, the Portfolio's continued qualification as a partnership (or other pass-
through entity) for federal income tax purposes.
Dividends (whether received in cash or additional shares) derived from ordinary
income and/or the excess of net short-term capital gain over net long-term
capital loss are taxable to you as ordinary income. The Company expects that
none of the dividends paid by the Fund will qualify for the dividends-received
deduction for corporations.
Any dividend you receive comprised of the excess of net long-term capital gain
over net short-term capital loss ("capital gain dividend") will be taxed as a
long-term capital gain no matter how long you have held Fund shares.
A dividend paid to you by the Fund in January of a particular year will be
deemed for tax purposes to have been received by you on December 31 of the
preceding year, if the dividend was declared and payable to shareholders of
record on a specified date in October, November or December of that preceding
year. If you are considering buying shares of the Fund on or just before the
record date of a dividend, you should be aware that the amount of the
forthcoming dividend payment, although in effect a return of capital, will be
taxable to you.
You may realize a taxable capital gain (or loss) upon redemption or exchange of
Fund shares, depending upon the tax basis of your shares and their price at the
time of such redemption or exchange. Generally, you may include sales loads
incurred in the purchase of Fund shares in your tax basis when determining your
gain (or loss) on a redemption or exchange of these shares. However, if you
exchange such shares for shares of another investment portfolio of the Company
within 90 days of the purchase and are able to reduce the sales load on the new
shares through the Exchange Privilege, the reduction may not be included in the
tax basis of your exchanged shares. It may be included in the tax basis of the
new shares. If you had Fund shares for six months or less and during that time
receive a capital gain dividend on those shares, any loss on the sale or
exchange of those shares will be treated as a long-term capital loss to the
extent of the capital gain dividend.
STATE AND LOCAL TAXES
You should consult your tax adviser regarding state and local tax consequences
which may differ from the federal tax consequences as described above.
MEASURING PERFORMANCE
THE FUND'S PERFORMANCE MAY BE QUOTED IN TERMS OF AVERAGE ANNUAL TOTAL RETURN,
AGGREGATE TOTAL RETURN AND YIELD. PERFORMANCE INFORMATION IS HISTORICAL AND IS
NOT INTENDED TO INDICATE FUTURE RESULTS.
Average annual total return reflects the average annual percentage change in
value of an investment in the Fund over the period being measured, while
aggregate total return reflects the total percentage change in value over the
period being measured. Yield measures the net income of the Fund over a
specified 30 day period.
Periodically, the Fund's total return (calculated
on an average annual total return and/or an aggregate total return basis for
various periods) and yield may be quoted in advertisements or in
25
<PAGE> 158
communications to shareholders. Both methods of calculating total return reflect
the sales load charged by the Fund and assume dividends and capital gains
distributions made by the Fund during the period are reinvested in Fund shares.
The Fund may also advertise total return data without reflecting the sales load
imposed on the purchase of Fund shares in accordance with the rules of the
Securities and Exchange Commission. Quotations that do not reflect the sales
load will, of course, be higher than quotations that do reflect sales loads.
The Fund calculates its yield by dividing its net income per share (which may
differ from the net income per share used for accounting purposes) during a 30
day (or one month) period by the maximum offering price per share on the last
day of the measuring period, and then annualizing the result on a semi-annual
basis. The 30 day or one month measuring period will be identified along with
any yield quotation to which it relates.
The Fund may compare its total return and yield to that of other mutual funds
with similar investment objectives and to bond and other relevant indices or to
rankings prepared by independent services or other financial or industry
publications that monitor mutual fund performance.
For example, the Fund's total return may be compared to the Consumer Price Index
or to data prepared by: Lipper Analytical Services, Inc.; Mutual Fund
Forecaster; Morningstar; Micropal; Wiesenberger Investment Companies Services;
or CDA Investment Technologies, Inc.
Total return data as reported in national financial publications such as Money,
Forbes, Barron's, The Wall Street Journal and The New York Times, or in local or
regional publications, may also be used in comparing Fund performance. The
Fund's total return also may be compared to indices such as: the Dow Jones
Industrial Average; the Standard & Poor's 500 Stock Index; the Shearson Lehman
Bond Indexes; the Wilshire 5000 Equity Indexes; or the Consumer Price Index.
Since the Fund's performance will fluctuate, it should not be compared with bank
deposits, savings accounts and similar investments that often provide an agreed
or guaranteed fixed yield for a stated period of time. Performance is generally
a function of the kind and quality of the instruments in a portfolio, portfolio
maturity, operating expenses and market conditions. Not included in the Fund's
calculations of total return and yield are fees charged by Bank of America and
Service Organizations directly to their customer accounts in connection with
investments in the Fund (e.g. account maintenance fees, compensating balance
requirements or fees based upon account transactions, assets or income).
DESCRIPTION OF SHARES
The Company is a Maryland corporation that was organized on October 27, 1982.
ABOUT THE COMPANY
THE COMPANY'S CHARTER AUTHORIZES THE BOARD OF DIRECTORS TO ISSUE UP TO TWO
HUNDRED BILLION FULL AND FRACTIONAL SHARES OF CAPITAL STOCK ($.001 PAR VALUE PER
SHARE) AND TO CLASSIFY AND RECLASSIFY ANY AUTHORIZED AND UNISSUED SHARES INTO
ONE OR MORE CLASSES OF SHARES.
The Board of Directors has authorized the issuance of 100 million shares of
Class M Common Stock representing interests in the Fund, and additional classes
of shares representing interests in other investment portfolios of the Company.
The Board of Directors may similarly classify or reclassify any class of shares
(including unissued Class M Common Stock) into one or more series. For more
information about the Company's other portfolios, contact the Company at the
telephone number listed on the inside cover page.
Shares representing interests in the Fund are entitled to participate in the
dividends and distributions declared by the Board of Directors and in the net
distributable assets of the Fund on liquidation. Fund shares have no preemptive
rights and only such conversion and exchange rights as the Board may grant in
its discretion. When issued for payment as described in this Prospectus, Fund
shares will be fully paid and non-assessable.
26
<PAGE> 159
VOTING RIGHTS
SHAREHOLDERS ARE ENTITLED TO ONE VOTE FOR EACH FULL SHARE HELD AND FRACTIONAL
VOTES FOR FRACTIONAL SHARES HELD. Fund shares have cumulative voting rights to
the extent that may be required by applicable law. Additionally, shareholders
will vote in the aggregate and not by class or series, except as required by law
(or when permitted by the Board of Directors). The Fund does not presently
intend to hold annual meetings of shareholders to elect directors or for other
business unless and until such time as less than a majority of the directors
holding office has been elected by the shareholders. At that time, the directors
then in office will call a shareholders' meeting for the election of directors.
Under certain circumstances, however, shareholders have the right to call a
shareholder meeting to consider the removal of one or more directors. Such
meetings will be held when requested by the shareholders of 10% or more of the
Company's outstanding shares of common stock. The Fund will assist in
shareholder communications in such matters to the extent required by law and the
Company's undertaking with the Securities and Exchange Commission.
PLAN PAYMENTS
THE COMPANY HAS ADOPTED A SHAREHOLDER SERVICE PLAN (THE "PLAN") FOR THE FUND
UNDER WHICH THE FUND PAYS THE DISTRIBUTOR FOR SHAREHOLDER SERVICING EXPENSES
RELATED TO FUND SHARES.
Shareholder servicing expenses include expenses incurred in connection with
shareholder services provided by the Distributor and payments to Service
Organizations for support services for the beneficial owners of Fund shares,
such as: establishing and maintaining accounts and records relating to the
Service Organization's clients who invest in Fund shares; assisting those
clients in processing exchange and redemption requests and in changing dividend
options and account designations; and responding to inquiries from clients
concerning their investments.
Under the Plan, payments by the Fund for shareholder servicing expenses may not
exceed 0.25% (annualized) of the Fund's average daily net assets. Excluded from
this calculation, however, are all shares acquired via a transfer of assets from
trust and agency accounts at Bank of America. This amount may be reduced
pursuant to undertakings by the Distributor. During the fiscal year ended
February 28, 1995, the Distributor waived all payments under the Plan.
If in any month the Distributor is due more monies than are immediately payable
because of the percentage limitation described above, the unpaid amount is
"carried forward" from month to month while the Plan is in effect until such
time when it may be paid. However, any "carried forward" amounts will not be
payable beyond the fiscal year during which the amounts are accrued. No
interest, carrying or other finance charge is borne by the Fund with respect to
the amount "carried forward."
Banks may act as Service Organizations. The Glass-Steagall Act and other
applicable laws, among other things, prohibit banks from engaging in the
business of underwriting securities. If a bank were prohibited from acting as a
Service Organization, its shareholder clients would be permitted to remain
Company shareholders and alternative means for continuing the servicing of such
shareholders would be sought. In such event, changes in the operation of the
Company might occur and a shareholder serviced by such bank might no longer be
able to avail itself of the automatic investment or other services then being
provided by the bank. It is not expected that shareholders would suffer any
adverse financial consequences as a result of any of these occurrences.
The Company will obtain a representation from the Service Organizations (and
from Bank of America and Concord) that they are or will be licensed as dealers
as required by applicable law or will not engage in activities which would
require them to be so licensed.
27
<PAGE> 160
- --------------------------------------------------------------------------------
PACIFIC HORIZON MUTUAL FUNDS
COPFLXB95P
<PAGE> 161
FLEXIBLE BOND FUND
PROSPECTUS
July 1, 1995
NOT FDIC INSURED
<PAGE> 162
PROSPECTUS
JULY 1, 1995
PACIFIC HORIZON NATIONAL MUNICIPAL BOND FUND
A series of shares of Pacific Horizon Funds,
Inc.
- --------------------------------------------------------------------------------
The PACIFIC HORIZON NATIONAL MUNICIPAL BOND FUND (the "Fund") is a diversified
mutual fund whose investment objective is to provide investors with as high a
level of current interest income free of regular Federal income tax as is
consistent with prudent investment management and preservation of capital. The
Fund seeks to achieve its objective through investment primarily in a
diversified portfolio of investment grade municipal debt securities. The Fund is
offered by Pacific Horizon Funds, Inc. (the "Company"), an open-end, series
management investment company.
UNLIKE MOST OTHER INVESTMENT COMPANIES WHICH INVEST DIRECTLY IN PORTFOLIO
SECURITIES, THE FUND SEEKS TO ACHIEVE ITS INVESTMENT OBJECTIVE BY INVESTING ALL
OF ITS INVESTABLE ASSETS IN A FUND OF AN OPEN-END, MANAGEMENT INVESTMENT COMPANY
(THE "PORTFOLIO") HAVING THE SAME INVESTMENT OBJECTIVE AS THAT OF THE FUND. THE
FUND WILL PURCHASE SHARES OF THE PORTFOLIO AT NET ASSET VALUE. THE NET ASSET
VALUE OF THE FUND WILL RESPOND TO INCREASES AND DECREASES IN THE VALUE OF THE
PORTFOLIO'S SECURITIES. INVESTORS SHOULD CAREFULLY CONSIDER THIS INVESTMENT
APPROACH. SEE "OTHER INVESTMENT PRACTICES AND CONSIDERATIONS--MASTER-FEEDER
STRUCTURE" ON PAGE 10 FOR ADDITIONAL INFORMATION REGARDING THIS STRUCTURE.
Bank of America National Trust and Savings Association ("Bank of America" or the
"investment adviser") serves as the Portfolio's investment adviser. Based in San
Francisco, California, Bank of America and its affiliates have over $50 billion
under management, including over $10 billion in mutual funds.
This Prospectus describes concisely the information about the Fund and the
Company that you should know before investing. Please read it carefully and
retain it for future reference.
More information about the Fund is contained in a Statement of Additional
Information that has been filed with the Securities and Exchange Commission. To
obtain a free copy, call 800-332-3863. The Statement of Additional Information,
as it may be revised from time to time, is dated July 1, 1995 and is
incorporated by reference into this Prospectus.
- --------------------------------------------------------------------------------
Fund shares are not bank deposits or obligations of, or guaranteed or endorsed
by, Bank of America or any of its affiliates and are not federally insured by,
guaranteed by, obligations of or otherwise supported by the U.S. Government, the
Federal Deposit Insurance Corporation, the Federal Reserve Board or any other
governmental agency. Investment in the Fund involves investment risk, including
the possible loss of principal.
- --------------------------------------------------------------------------------
LIKE ALL MUTUAL FUNDS, THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR
HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
This Prospectus is part of a Registration Statement that has been filed with the
Securities and Exchange Commission in Washington, D.C. under the Securities Act
of 1933.
No person has been authorized to give any information or to make any
representations in connection with the offer of the Fund's shares, other than as
contained in this Prospectus and the Fund's official sales literature.
Therefore, other information and representations must not be relied upon as
having been authorized by the Fund. This Prospectus does not constitute an offer
in any State in which, or to any person to whom, such offering may not lawfully
be made.
- --------------------------------------------------------------------------------
<PAGE> 163
CONTENTS
<TABLE>
<S> <C> <C>
EXPENSE SUMMARY 2
FINANCIAL HIGHLIGHTS 3
FUND INVESTMENTS 4 INVESTMENT OBJECTIVE
4 TYPES OF INVESTMENTS
5 FUNDAMENTAL LIMITATIONS
6 OTHER INVESTMENT PRACTICES AND CONSIDERATIONS
SHAREHOLDER GUIDE 11 HOW TO BUY SHARES
11 What Is My Minimum Investment In The Fund?
11 How Are Shares Priced?
14 How Can I Buy Shares?
16 What Price Will I Receive When I Buy Shares?
17 What Else Should I Know To Make A Purchase?
17 HOW TO SELL SHARES
17 How Do I Redeem My Shares?
19 What NAV Will I Receive For Shares I Want To Sell?
19 What Kind of Paperwork Is Involved In Selling
Shares?
20 How Quickly Can I Receive My Redemption Proceeds?
20 Do I Have Any Reinstatement Privileges After I Have
Redeemed Shares?
20 DIVIDEND AND DISTRIBUTION POLICIES
SHAREHOLDER SERVICES 21 CAN I EXCHANGE MY INVESTMENT FROM ONE FUND TO
ANOTHER?
21 WHAT IS TELETRADE?
22 CAN I ARRANGE TO HAVE AUTOMATIC INVESTMENTS MADE ON
A REGULAR BASIS?
22 WHAT IS DOLLAR COST AVERAGING AND HOW CAN I
IMPLEMENT IT?
22 CAN I ARRANGE PERIODIC WITHDRAWALS?
23 CAN MY DIVIDENDS FROM THE FUND BE INVESTED IN OTHER
FUNDS?
23 IS THERE A SALARY DEDUCTION PLAN AVAILABLE?
THE BUSINESS OF THE FUND 23 FUND MANAGEMENT
23 Service Providers
25 TAX INFORMATION
26 MEASURING PERFORMANCE
27 DESCRIPTION OF SHARES
28 PLAN PAYMENTS
APPENDIX A A-1
- ------------------------------------------------------------------------------------------------------------------------
DISTRIBUTOR: INVESTMENT ADVISER:
Concord Financial Group, Inc. Bank of America National Trust and Savings Association
125 West 55th Street 555 California Street
New York, NY 10019 San Francisco, CA 94104
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 164
EXPENSE SUMMARY
SHAREHOLDER TRANSACTION EXPENSES are charges you pay when buying or selling
shares of the Fund. ANNUAL FUND OPERATING EXPENSES include payments by the Fund
and payments by the Portfolio which are allocable to the Fund. Operating
expenses include fees for portfolio management, maintenance of shareholder
accounts, general administration, shareholder servicing, accounting and other
services.
At right is a summary of the shareholder transaction expenses imposed by the
Fund and its operating expenses (including the operating expenses of the
Portfolio which are allocable to the Fund) expected to be incurred during the
current fiscal year. This information has been restated to assume that current
fees had been in effect during the previous fiscal year. Actual expenses may
vary. A hypothetical example based on the summary is also shown.
<TABLE>
<S> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load Imposed on Purchases
(as a percentage of offering price) 4.50%
Sales Load Imposed on Reinvested Dividends None
Deferred Sales Load None
Redemption Fees None
Exchange Fee None
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Management Fees (After Fee Waivers) 0.00%
All Other Expenses (After Expense
Reimbursements) 0.65%
-----
Shareholder Service Payments (After Fee
Waivers) 0.00%
Other Expenses (After Expense
Reimbursements) 0.65%
-----
Total Fund Operating Expenses (After Fee
Waivers and Expense Reimbursements) 0.65%
-----
-----
</TABLE>
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
EXAMPLE: Assume the annual return is 5% and operating expenses are the same as those After 1 Year : $51
stated above. For every $1,000 you invest, here's how much you would have paid in total After 3 Years : $65
expenses if you closed your account after the number of years indicated: After 5 Years : $82
After 10 Years: $122
</TABLE>
Note: The preceding operating expenses and example should not be considered a
representation of future investment returns and operating expenses. Actual
investment returns and operating expenses may be more or less than those shown.
- --------------------------------------------------------------------------------
This expense information is provided to help you understand the expenses you
would bear either directly (as with transaction expenses) or indirectly (as with
annual operating expenses) as a Fund shareholder.
Management fees (without waivers) consist of:
- - an investment advisory fee payable at the annual rate of 0.35% of the
Portfolio's average daily net assets; and
- - an administration fee payable at the annual rate of 0.15% of the Fund's
average daily net assets and 0.05% of the Portfolio's average daily net
assets.
Without fee waivers a shareholder service payment is made in the amount of 0.25%
of the Fund's average daily net assets. As indicated in the table above,
however, Management intends to waive fees and reimburse certain Other Expenses
on behalf of the Fund so that Total Operating Expenses do not exceed 0.65%.
Absent these fee waivers and reimbursements the estimated Total Operating
Expenses would be 17.46% of the Fund's average daily net assets.
For a further description of shareholder transaction expenses and the Fund's
operating expenses, see the sections entitled "Shareholder Guide," "The Business
of the Fund" and "Plan Payments" in this Prospectus.
The Board of Directors of the Company believes that the aggregate per share
expenses of the Fund and the Portfolio in which the Fund's assets are invested
will be less than or approximately equal to the expenses which the Fund would
incur if the Company retained the services of an investment adviser for the Fund
and the assets of the Fund were invested directly in the type of securities held
by the Portfolio. Further, the Directors believe that the shareholders of the
Fund will participate in the ownership of a larger portfolio of securities than
could be achieved directly by the Fund. There can be no assurance, however, that
such will be the case or that any economies of scale that might occur if other
investors acquire shares of the Portfolio will be realized, inasmuch as the
Company is not aware of any other potential investor in the Portfolio.
2
<PAGE> 165
FINANCIAL HIGHLIGHTS
The table below shows certain information concerning the investment results for
the Fund for the periods indicated. The information has been audited by Price
Waterhouse LLP, independent accountants, whose unqualified report on the
financial statements containing such information is incorporated by reference in
the Statement of Additional Information.
The Financial Highlights should be read in conjunction with the financial
statements and notes thereto and the unqualified report of the independent
accountants which are incorporated by reference in the Statement of Additional
Information. Further information about the performance of the Fund is available
in the annual report to shareholders. Both the Statement of Additional
Information and the annual report to shareholders may be obtained from the Fund
free of charge by calling 800-332-3863.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE
PERIOD
JANUARY
28,
1994
(COMMENCEMENT
FOR THE OF
YEAR OPERATIONS)
ENDED THROUGH
FEBRUARY FEBRUARY
28, 1995 28, 1994
------- -------
<S> <C> <C>
Net asset value per share, beginning of period.............. $ 9.89 $ 10.00
------- -------
Income from Investment Operations:
Net investment income..................................... 0.50 0.01
Net realized and unrealized loss on securities............ (0.25) (0.11)
------- -------
Total gain (loss) from investment operations.............. 0.25 (0.10)
Less dividends from net investment income................... (0.50) (0.01)
------- -------
Net change in net asset value............................... (0.25) (0.11)
------- -------
Net asset value per share, end of period.................... $ 9.64 $ 9.89
====== ======
Total Return++.............................................. 2.78% (1.00)%
Ratios/Supplemental Data:
Net assets, end of period (000)........................... $ 2,520 $ 733
Ratio of expenses to average net assets*.................. 0.00% 0.00%+
Ratio of net investment income to average net assets*..... 5.30% 1.15%+
</TABLE>
- ---------------
* Reflects the Fund's proportionate share of the Portfolio's expenses and fee
waivers and expense reimbursements by the Portfolio's Investment Adviser and
Administrator and the Fund's Administrator and Distributor. Such fee waivers
and expense reimbursements had the effect of reducing the ratio of expenses
to average net assets and increasing the ratio of net investment income to
average net assets by 17.46% and 170.99% (annualized) for the year ended
February 28, 1995 and the period ended February 28, 1994, respectively.
+ Annualized.
++ The total return listed does not include the effect of the maximum 4.50%
sales charge and for the period ended February 28, 1994 is not annualized.
3
<PAGE> 166
FUND INVESTMENTS
THE PACIFIC HORIZON NATIONAL MUNICIPAL BOND FUND SEEKS AS HIGH A LEVEL OF
CURRENT INTEREST INCOME FREE FROM FEDERAL INCOME TAX AS IS CONSISTENT WITH
PRUDENT INVESTMENT MANAGEMENT AND PRESERVATION OF CAPITAL. THE FUND SEEKS TO
ACHIEVE ITS OBJECTIVE THROUGH INVESTMENT PRIMARILY IN A DIVERSIFIED PORTFOLIO OF
INVESTMENT GRADE MUNICIPAL DEBT SECURITIES. INVESTMENT GRADE DEBT SECURITIES
ORDINARILY CARRY LOWER RATES OF INTEREST INCOME THAN LOWER QUALITY DEBT
SECURITIES WITH SIMILAR MATURITIES.
THE FUND MAY BE APPROPRIATE FOR INVESTORS WHO WANT A HIGH LEVEL OF CURRENT
INTEREST INCOME FREE FROM FEDERAL INCOME TAX.
---------------------------------------------------------
INVESTMENT OBJECTIVE
THE OBJECTIVE OF THE FUND IS TO PROVIDE INVESTORS WITH AS HIGH A LEVEL OF
CURRENT INTEREST INCOME FREE FROM FEDERAL INCOME TAX AS IS CONSISTENT WITH
PRUDENT INVESTMENT MANAGEMENT AND PRESERVATION OF CAPITAL. THE FUND SEEKS TO
ACHIEVE ITS INVESTMENT OBJECTIVE BY INVESTING ALL OF ITS INVESTABLE ASSETS IN
THE PORTFOLIO. THE PORTFOLIO HAS THE SAME INVESTMENT OBJECTIVE AS THE FUND.
WHILE THE PORTFOLIO STRIVES TO ATTAIN ITS INVESTMENT OBJECTIVE, THERE CAN BE NO
ASSURANCE THAT IT WILL BE ABLE TO DO SO.
SINCE THE INVESTMENT CHARACTERISTICS OF THE FUND WILL CORRESPOND TO THOSE OF THE
PORTFOLIO, THE FOLLOWING IS A DISCUSSION OF THE VARIOUS INVESTMENTS OF AND
TECHNIQUES EMPLOYED BY THE PORTFOLIO.
---------------------------------------------------------
TYPES OF INVESTMENTS
IN GENERAL. The Portfolio's assets will be primarily invested in debt
obligations (at least 80% of the Portfolio's total assets under normal market
conditions) issued by or on behalf of states, territories and possessions of the
United States, the District of Columbia and their respective authorities,
agencies, instrumentalities and political sub-divisions, the interest on which,
in the opinion of bond counsel to the issuer, is exempt from regular Federal
income tax ("Municipal Securities"). Under normal market conditions, it is
expected that at least 75% of the Portfolio's total assets will consist of
issues rated investment grade or better by Moody's Investors Service, Inc.
("Moody's"), Standard & Poor's Ratings Group, Division of McGraw Hill ("S&P"),
Duff & Phelps Credit Rating Co. ("D&P") or Fitch Investors Service, Inc.
("Fitch") at the time of purchase (that is, rated in one of the four highest
rating categories) or, if unrated, will be deemed by the Portfolio's investment
adviser to be of comparable quality. While securities rated in the fourth
highest rating category (i.e., rated Baa or BBB) are regarded as having an
adequate capacity to pay principal and interest, such securities lack
outstanding investment characteristics and in fact have speculative
characteristics as well. The Portfolio's assets may be invested in lower
quality, higher yielding Municipal Securities which are rated below investment
grade. Such securities carry a higher degree of risk and are considered to be
speculative by the major credit rating agencies. Lower quality, higher yielding
securities are commonly referred to as "junk bonds." See "High Yield, High Risk
Securities" below and "Description of Municipal Securities Ratings" in the
Appendix to this Prospectus. The Portfolio has no restrictions on the maturity
of Municipal Securities in which it may invest. Accordingly, the Portfolio seeks
to invest in Municipal Securities of such maturities which, in the judgment of
the investment adviser, will provide a high level of current income consistent
with prudent investment management, with consideration given to market
conditions. The Portfolio's average weighted maturity will vary in response to
varia-
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tions in comparative yields of differing maturities of instruments, in
accordance with the Portfolio's investment objective.
The Portfolio may hold uninvested cash reserves pending investment, during
temporary defensive periods, or if, in the opinion of the Portfolio's investment
adviser, suitable tax-exempt obligations are unavailable. In accordance with the
Portfolio's investment objective, investments may be made in taxable obligations
if, for example, suitable tax-exempt obligations are unavailable or if
acquisition of U.S. Government or other taxable securities is deemed appropriate
for temporary defensive purposes. Such taxable obligations may include
obligations issued or guaranteed by the U.S. Government, its agencies or
instrumentalities (some of which may be subject to repurchase agreements),
certificates of deposit and bankers' acceptances of selected banks, and
commercial paper rated within the two highest ratings assigned by a nationally
recognized statistical rating organization. These obligations are described
further in the Statement of Additional Information. To the extent that the
Portfolio invests in such instruments, it will not be invested in accordance
with the investment policies designed for it to realize its investment
objective. Income earned from these instruments is taxable and therefore is not
included in the dividends free from Federal income tax which the Fund will pay.
TYPES OF MUNICIPAL SECURITIES. The two principal classifications of Municipal
Securities which may be held by the Portfolio 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 user of the facility being financed. Private activity bonds
held by the Portfolio are in most cases revenue securities and are not payable
from the unrestricted revenues of the issuer. Consequently, the credit quality
of such private activity bonds is usually directly related to the credit
standing of the corporate user of the facility involved.
Opinions relating to the validity of Municipal Securities and to the exemption
of interest thereon from regular Federal income tax are rendered by bond counsel
to the respective issuers at the time of issuance. Neither the Portfolio nor its
investment adviser will review the proceedings relating to the issuance of
Municipal Securities or the basis for such opinions.
The Portfolio may also make other investments as described more fully below
under "Other Investment Practices and Considerations."
FUNDAMENTAL LIMITATIONS. The investment objective of the Fund and the Portfolio
may not be changed without a vote by the holders of a majority of the
outstanding shares of the Fund or of the outstanding interests of the Portfolio,
respectively. Policies requiring such a vote to effect a change are known as
"fundamental." A number of the other fundamental investment limitations are
summarized below. Neither the Fund nor the Portfolio may:
1. Purchase securities of any one issue (except securities issued by the U.S.
Government, its agencies or instrumentalities) if, immediately after and as a
result, more than 5% of its total assets will be invested in the securities
of such issuer, except that up to 25% of its total assets may be invested
without regard to this 5% limitation, and that all of the assets of the Fund
may be invested in the Portfolio or another investment company.
2. Make loans except that the Portfolio may purchase or hold debt instruments
and enter into repurchase agreements pursuant to its investment objective and
policies.
3. Borrow money except from banks or through reverse repurchase agreements to
meet redemptions and other temporary purposes in amounts of up to 25% of its
total assets at the time of such borrowing. The Portfolio will not
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<PAGE> 168
purchase securities while its borrowings (including reverse repurchase
agreements) are outstanding.
A list of additional fundamental investment limitations is set out in the
Statement of Additional Information.
OTHER INVESTMENT PRACTICES AND CONSIDERATIONS
VARIABLE RATE INSTRUMENTS. Municipal Securities purchased by the Portfolio may
include rated and unrated variable and floating rate tax-exempt instruments.
These obligations bear interest at rates which are not fixed, but that vary with
changes in specified market rates or indices on predesignated dates. Certain of
these obligations may carry a demand feature that permits the holder to tender
them back to the issuer at par value plus accrued interest, prior to maturity,
which amount may be more or less than the amount the Portfolio paid for them.
There may be no active secondary market with respect to a particular variable or
floating rate instrument. Nevertheless, the periodic readjustments of their
interest rates tend to assure that their value to the Portfolio will not deviate
from their par value as a result of changes in prevailing interest rates.
CUSTODIAL RECEIPTS AND PARTICIPATION INTERESTS. Securities acquired by the
Portfolio may be in the form of custodial receipts evidencing rights to receive
a specific future interest payment, principal payment or both on certain
Municipal Securities. Such obligations are held in custody by a bank on behalf
of holders of the receipts. These custodial receipts are known by various names,
including "Municipal Receipts," "Municipal Certificates of Accrual on Tax-Exempt
Securities" ("M-CATs") and "Municipal Zero-Coupon Receipts." The Portfolio may
also purchase from time to time participation interests in debt securities held
by trusts or financial institutions. A participation interest gives the
Portfolio an undivided interest in the security or securities involved.
Participation interests may have fixed, floating or variable rates of interest
(although the securities held by the issuer may have longer maturities). If a
participation interest is unrated, the investment adviser will have determined
that the interest is of comparable quality to those instruments in which the
Portfolio may invest pursuant to guidelines approved by the Portfolio's Board of
Trustees. For certain participation interests, the Portfolio will have the right
to demand payment, for all or any part of the Portfolio's participation
interest, plus accrued interest. As to these instruments, the Portfolio intends
to exercise its right to demand payment as needed to provide liquidity, to
maintain or improve the quality of its investment portfolio or upon a default
(if permitted under the terms of the instrument).
WHEN-ISSUED, FORWARD COMMITMENTS AND DELAYED SETTLEMENTS. The Portfolio may
purchase Municipal Securities on a "when issued" basis and may purchase or sell
Municipal Securities on a "forward commitment" basis. The Portfolio may also
purchase or sell Municipal Securities on a "delayed settlement" basis.
When-issued and forward commitment transactions, which involve a commitment by
the Portfolio to purchase or sell particular securities with payment and
delivery taking place at a future date (perhaps one or two months later), permit
the Portfolio to lock in a price or yield on a security it owns or intends to
purchase, regardless of future changes in interest rates. Delayed settlement
describes settlement of a securities transaction in the secondary market which
will occur sometime in the future. When-issued, forward commitment and delayed
settlement transactions involve the risk, however, that the yield or price
obtained in a transaction may be less favorable than the yield or price
available in the market when the securities delivery takes place. The Portfolio
will set aside in a segregated account cash or liquid securities equal to the
amount of any when-issued, forward commitment or delayed settlement
transactions. The Portfolio's forward commitments, when-issued purchases and
delayed settlements are not expected to exceed 25% of the value of its total
assets absent unusual market conditions. In the
6
<PAGE> 169
event its forward commitments, when-issued purchases and delayed settlements
ever exceeded 25% of the value of its assets, the Portfolio's liquidity and the
ability of the investment adviser to manage the Portfolio might be adversely
affected. The Portfolio does not intend to engage in these transactions for
speculative purposes but only in furtherance of its investment objective. The
market value of the securities underlying a when-issued purchase, forward
commitment to purchase securities, or a delayed settlement and any subsequent
fluctuations in their market value is taken into account when determining the
market value of the Portfolio starting on the day the Portfolio agrees to
purchase the securities. The Portfolio does not earn interest on the securities
it has committed to purchase until they are paid for and delivered on the
settlement date.
STAND-BY COMMITMENTS. In addition, the Portfolio may acquire "stand-by
commitments" with respect to Municipal Securities held in its portfolio. Under a
stand-by commitment, a dealer agrees to purchase at the Portfolio's option
specified Municipal Securities at a specified price. The Portfolio will acquire
stand-by commitments solely to facilitate portfolio liquidity and does not
intend to exercise its rights thereunder for trading purposes. The Portfolio
expects that "stand-by commitments" will generally be available without the
payment of any direct or indirect consideration. However, if necessary or
advisable, the Portfolio 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).
CALLABLE SECURITIES. The Portfolio may invest in callable municipal bonds.
Callable municipal bonds are municipal bonds which contain a provision in the
indenture permitting the issuer to redeem the bonds prior to their maturity
dates at a specified price which typically reflects a premium over the bonds'
original issue price. These bonds generally have call-protection (that is, a
period of time during which the bonds may not be called) which usually lasts for
7 to 10 years, after which time such bonds may be called away. An issuer may
generally be expected to call its bonds, or a portion of them, during periods of
relatively declining interest rates, when borrowings may be replaced at lower
rates than those obtained in prior years. If the proceeds of a bond called under
such circumstances are reinvested, the result may be a lower overall yield due
to lower current interest rates. If bonds are purchased at a premium, some or
all of that premium may not be recovered by bondholders, such as the Portfolio,
upon redemption, depending on the redemption price.
ZERO COUPON SECURITIES. The Portfolio may invest in zero coupon securities.
Zero coupon securities are debt obligations which do not entitle the holder to
any periodic payments of interest prior to maturity or a specified date when the
securities begin paying current interest (the "cash payment date") and therefore
are issued and traded at a discount from their face amounts or par value. Such
bonds carry an additional risk in that, unlike bonds which pay interest
throughout the period to maturity, the Portfolio will realize no cash until the
cash payment date and, if the issuer defaults, the Portfolio may obtain no
return at all on its investment. The Portfolio will be required to include in
income (or, with respect to Municipal Securities, in exempt-interest income)
daily portions of original issue discount accrued which will cause the Fund to
be required to make distributions of such amounts to shareholders annually, even
if no payment is received before the distribution date.
REPURCHASE AGREEMENTS. The Portfolio may agree to purchase securities from
financial institutions, such as banks and broker-dealers that are deemed
creditworthy by the investment adviser under guidelines approved by the
Portfolio's Board of Trustees, subject to the seller's agreement to repurchase
them at an agreed upon time and price ("repurchase agreements"). Repurchase
agreements maturing in more than seven
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<PAGE> 170
days will not exceed 15% of the value of the total assets of the Portfolio under
normal market conditions. Securities subject to repurchase agreements are held
either by a custodian, or in the Federal Reserve/Treasury Book-Entry System. The
seller under a repurchase agreement will be required to maintain the value of
the securities subject to the agreement in an amount that exceeds the repurchase
price, and such value will be continuously monitored by the investment adviser
on an ongoing basis. Default by the seller would, however, expose the Portfolio
to possible loss because of adverse market action or delay in connection with
the disposition of the underlying obligations. Repurchase agreements are
considered to be loans under the Investment Company Act of 1940 (the "1940
Act").
REVERSE REPURCHASE AGREEMENTS. The Portfolio may enter into reverse repurchase
agreements. At the time the Portfolio enters into a reverse repurchase agreement
(an agreement under which the Portfolio 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
continuously monitor the account to ensure that such value is maintained.
Reverse repurchase agreements involve the risk that the market value of the
securities sold by the Portfolio may decline below the price of the securities
the Portfolio is obligated to repurchase. Reverse repurchase agreements are
considered to be borrowings by the Portfolio under the 1940 Act. Borrowings may
magnify the potential for gain or loss on amounts invested resulting in an
increase in the speculative character of the Portfolio's outstanding shares.
FUTURES. The Portfolio may invest in futures contracts and options relating to
indices on municipal bonds as a hedge against changes in its other assets'
market values ("Municipal Bond Index Futures" or "Futures").
If the investment adviser expects interest rates to rise the Portfolio may sell
a futures contract or may sell a call option or purchase a put option on such
futures contract, as a hedge against a decrease in the value of the Portfolio.
If the investment adviser expects interest rates to decline, the Portfolio may
purchase a futures contract, or may purchase a call option or sell a put option
on such futures contract, to protect against an increase in the price of
securities which the Portfolio intends to purchase.
The Portfolio will limit its hedging transactions in futures contracts and
related options so that, immediately after any such transaction, the aggregate
initial margin that is required to be posted by the Portfolio under the rules of
the exchange on which the futures contract (or futures option) is traded, plus
any premiums paid by the Portfolio on its open futures options positions, does
not exceed 5% of the Portfolio's total assets, after taking into account any
unrealized profits and losses on the Portfolio's open futures contracts and
excluding the amount that a futures option is "in-the-money" at the time of
purchase. (An option to buy a futures contract is "in-the-money" if the then
current purchase price of the underlying futures contract exceeds the exercise
or strike price; an option to sell a futures contract is "in-the-money" if the
exercise or strike price exceeds the then current purchase price of the contract
that is the subject of the option.) For a more detailed discussion of futures
contracts and options and the cost and risks related to such instruments, see
Appendix B to the Statement of Additional Information.
ILLIQUID SECURITIES. The Portfolio will not knowingly invest more than 15% of
the value of its net assets in securities that are illiquid, including illiquid
variable and floating rate instruments that are not payable upon 7 days' notice
and do not have an active trading market.
RISK FACTORS AND SPECIAL CONSIDERATIONS. In seeking to achieve its investment
objective the Portfolio may invest, without limitation, in industrial
development bonds, which, although issued by industrial development authorities,
may be
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<PAGE> 171
backed only by the assets and revenues of the non-governmental users. Interest
on Municipal Securities that are private activity bonds, although exempt from
regular Federal income tax, may constitute an item of tax-preference for
purposes of the Federal alternative minimum tax. See "Tax Information." The
value of the Portfolio's securities will generally vary inversely with changes
in prevailing interest rates. Such values will also change in response to
changes in the interest rates payable on new issues of Municipal Securities.
Should such interest rates rise, the values of outstanding bonds, including
those held by the Portfolios will decline. If interest rates fall, the values of
outstanding bonds will generally increase. Changes in the value of the
Portfolio's securities arising from these or other factors will cause changes in
the net asset value per share of the Portfolio (and correspondingly, the Fund).
HIGH YIELD, HIGH RISK SECURITIES. Up to 25% of the Portfolio's total assets may
be invested in Municipal Securities rated below investment grade ("high yield,
high risk securities"). The Portfolio's investments in high yield, high risk
Municipal Securities have different risks than investments in securities that
are rated investment grade. The ratings of Moody's, S&P, D&P and Fitch evaluate
the safety of principal and interest payments, not market value risk, of debt
securities. Since credit rating agencies may fail to change the credit ratings
to reflect subsequent events on a timely basis, Bank of America will
continuously monitor the issuers of these securities held by the Portfolio to
determine if the issuers will have sufficient cash flow and profits to meet
required principal and interest payments. The Portfolio will not invest in any
security that has lower than a C rating. Securities rated Ba through C by
Moody's or BB through C by S&P, Fitch and Duff & Phelps are regarded, on
balance, as predominantly speculative with respect to capacity to pay interest
and repay principal in accordance with the terms of the obligations. The
Portfolio may retain a portfolio security whose rating has been changed if Bank
of America deems that retention of such security is warranted.
Particular risks associated with high yield, high-risk securities are (a) the
relative youth and growth of the market for such securities, (b) the sensitivity
of such securities to interest rate and economic changes, (c) the lower degree
of protection of principal and interest payments, (d) the relatively low trading
market liquidity for the securities, (e) the impact that legislation may have on
the high yield, high risk securities market (and, in turn, on the Portfolio's
and Fund's net asset value and investment practices), and (f) the
creditworthiness of the issuers of such securities. During an economic downturn
or substantial period of rising interest rates, highly leveraged issuers may
experience financial stress which would adversely affect their ability to
service their principal and interest payment obligations, to meet projected
goals, and to obtain additional financing. An economic downturn could also
disrupt the market for high yield, high risk securities and adversely affect the
value of outstanding securities and the ability of the issuers to repay
principal and interest. If the issuer of a high yield, high risk security held
by the Portfolio defaulted, the Portfolio could incur additional expenses to
seek recovery. Adverse publicity and investor perceptions, whether or not based
on fundamental analysis, may also decrease the values and liquidity of these
securities held by the Portfolio, especially in a thinly traded market.
PORTFOLIO TRANSACTIONS. Investment decisions for the Portfolio are made
independently from those for other investment companies and accounts managed by
Bank of America and its affiliated entities. Such other investment companies and
accounts may also invest in the same securities as the Portfolio. When a
purchase or sale of the same security is made at substantially the same time on
behalf of the Portfolio and another investment company or account, available
investments or opportunities for sales will be equitably allocated pursuant to
procedures of Bank of America. In some instances, this investment pro-
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<PAGE> 172
cedure may adversely affect the price paid or received by the Portfolio or the
size of the position obtained or sold by the Portfolio.
In allocating purchase and sale orders for investment securities (involving the
payment of brokerage commissions or dealer concessions), Bank of America may
consider the sale of Fund shares by broker-dealers and other financial
institutions (including affiliates of Bank of America and the Fund's distributor
to the extent permitted by law), provided it believes the quality of the
transaction and the price to the Portfolio are not less favorable than what they
would be with any other qualified firm.
PORTFOLIO TURNOVER. Portfolio turnover will not be a limiting factor in making
portfolio decisions. Portfolio turnover may impose transaction costs on the
Portfolio and may increase the proportion of the income received by the
Portfolio which constitutes taxable capital gains. To the extent capital gains
are realized, distributions by the Fund of its allocated share of such gains may
be income for ordinary Federal tax purposes. See "Tax Information." Although no
commissions are paid on bond transactions, purchases and sales are at net prices
which reflect dealers' mark-ups and mark-downs, and a higher portfolio turnover
rate for bond investments will result in the payment of more dealer mark-ups and
mark-downs then would otherwise be the case. For further information concerning
portfolio turnover, see the Statement of Additional Information.
MASTER-FEEDER STRUCTURE. The Fund is an open-end investment portfolio that
seeks to achieve its investment objective by investing all of its investable
assets in the Portfolio, which has the same investment objective. The Fund may
withdraw its investment in the Portfolio at any time if the Board of Directors
of the Company determines that it is in the best interest of the Fund to do so.
Upon any such withdrawal, the Board of Directors would consider what action
might be taken, including the investment of all of the assets of the Fund in
another pooled investment entity having the same investment objective as the
Fund or the hiring of an investment adviser to manage the Fund's assets in
accordance with the investment policies described above with respect to the
Portfolio. See "Expense Summary," "Fund Investments" and "Fund Management" for a
description of this investment objective and the investment policies,
restrictions, management and expenses of the Fund and the Portfolio.
The Portfolio is a separate series of Master Investment Trust, Series II (the
"Master Trust"), which is organized as a business trust under the laws of
Delaware. The Fund and other entities that may invest in the Portfolio from time
to time (e.g., other investment companies and commingled trust funds) will each
be liable for all obligations of the Portfolio. However, the risk of the Fund's
incurring financial loss on account of such liability is limited to
circumstances in which both inadequate insurance exists and the Portfolio itself
is unable to meet its obligations. Accordingly, the Company's Board of Directors
believes that neither the Fund nor its shareholders will be adversely affected
by reason of the Fund's investing in the Portfolio. As stated above, the
investment objective of the Fund and the Portfolio is a fundamental policy and
may not be changed, in the case of the Fund, without the vote of its
shareholders or, in the case of the Portfolio, without the vote of its
interestholders. Whenever the Fund is requested to vote on matters pertaining to
the investment objective or a fundamental policy of the Portfolio, the Fund will
hold a meeting of its shareholders and will cast its vote in the same proportion
as the votes cast by the Fund's shareholders. The Fund will vote any shares for
which it receives no voting instructions in the same proportion as the shares
for which it does receive voting instructions. As with any mutual fund, other
investors in the Portfolio could control the results of voting at the Portfolio
level in certain instances (e.g. a change in fundamental policies by the
Portfolio which was not approved by the Fund's shareholders). This could result
in the Fund's withdrawal of its investment in the Portfolio, and in increased
costs and expenses for the Fund. Further, the withdrawal of other entities that
may from time
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to time invest in the Portfolio could have an adverse effect on the performance
of the Portfolio and the Fund, such as decreased economies of scale and
increased per share operating expenses. In addition, the total withdrawal by
another investment company as an investor in the Portfolio will cause the
Portfolio to terminate automatically in 120 days unless the Fund and any other
investors in the Portfolio unanimously agree to continue the business of the
Portfolio. As the Fund is required to submit such matters to a vote of its
shareholders, it will be required to incur the expenses of shareholder meetings
in connection with such withdrawals. If unanimous agreement is not reached to
continue the Portfolio, the Board of Directors of the Company would need to
consider alternative arrangements for the Fund such as those described above.
The policy of the Fund, and other similar investment companies, to invest their
investable assets in trusts such as the Portfolio is a relatively recent
development in the mutual fund industry and, consequently, there is a lack of
substantial experience with the operation of this policy.
There may also be other investment companies through which you can invest in the
Portfolio which may have higher or lower fees and expenses than those of the
Fund and which may therefore have different performance results than the Fund.
Information concerning whether an investment in the Portfolio may be available
through another entity investing in the Portfolio may be obtained by calling
800-332-3863.
SHAREHOLDER GUIDE
THE FOLLOWING SECTION WILL PROVIDE YOU WITH ANSWERS TO SOME OF THE MOST
OFTEN-ASKED QUESTIONS REGARDING BUYING AND SELLING THE FUND'S SHARES AND
REGARDING THE FUND'S DIVIDENDS.
HOW TO BUY SHARES
WHAT IS MY MINIMUM INVESTMENT IN THE FUND?
Generally, there is a minimum investment requirement of $500 for initial
purchases and $50 for subsequent purchases, although these amounts may be
altered in certain circumstances as shown below.
- ---------------------------------------------------------
INVESTMENT MINIMUMS
FOR SPECIFIC TYPES OF ACCOUNTS
<TABLE>
<CAPTION>
INITIAL SUBSEQUENT
INVESTMENT INVESTMENT
---------- ----------
<S> <C> <C>
Regular Account $ 500* $ 50
Automatic Investment Plan $ 50 $ 50
</TABLE>
* The minimum investment is $100 for purchases made through Bank of America's
trust and agency accounts or a Service Organization (defined below) whose
clients have made aggregate minimum purchases of $1,000,000.
- ---------------------------------------------------------
HOW ARE SHARES PRICED?
Shares are purchased at their public offering price, which is based upon the
Fund's net asset value per share plus a front-end sales load. The Fund
calculates its net asset value ("NAV") as follows:
(Value of Fund Assets) - (Fund Liabilities)
NAV = -------------------------------------------------------
Number of Outstanding Shares
Net asset value is determined as of the end of regular trading hours on the New
York Stock Exchange (the "Exchange") (currently 4:00 p.m. Eastern time) on days
the Exchange is open.
The Portfolio's investments are valued at market value or, where market
quotations are not readily available, at fair value as determined in good faith
by the Portfolio pursuant to procedures adopted by the Portfolio's Board of
Trustees. Short-term debt securities are valued at amortized cost, which
approximates market value. For further information about valuing securities, see
the Statement of Additional Information. For voice recorded price and yield
information call (800) 227-1545.
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SALES LOAD. The front-end sales load for the Fund begins at 4.50% and may
decrease as the amount you invest increases, as shown in the following chart:
- ---------------------------------------------------------
<TABLE>
<CAPTION>
DEALER'S
AS A % OF REALLOWANCE
-------------- AS A
NET % OF
AMOUNT OF OFFERING ASSET OFFERING
TRANSACTION PRICE VALUE PRICE*
------------------- ---- ---- ----
<S> <C> <C> <C>
Less than $100,000 4.50 4.71 4.00
$100,000 but less
than $250,000 3.75 3.90 3.35
$250,000 but less
than $500,000 2.50 2.56 2.20
$500,000 but less
than $750,000 2.00 2.04 1.75
$750,000 but less
than $3,000,000 1.00 1.01 0.90
$3,000,000 or more 0.00 0.00 0.00
</TABLE>
* Dealer's reallowance may be changed periodically.
From time to time, the Fund's distributor will make or allow additional
payments or promotional incentives in the form of cash or other compensation
such as trips to sales seminars, tickets to sporting and other entertainment
events and gifts of merchandise to firms that sell shares of the Fund.
- ---------------------------------------------------------
WHEN NO SALES LOAD IS APPLIED. You pay no front-end sales load on the following
types of transactions:
- - reinvestment of dividends or distributions;
- - any purchase of shares by an investment adviser regulated by federal or state
governmental authority when the investment adviser is purchasing shares for
its own account or for an account for which it is authorized to make
investment decisions (i.e., a discretionary account);
- - accounts opened by a bank, trust company or thrift institution, acting as a
fiduciary, provided appropriate notification of such status is given at the
time of investment;
- - any purchase of shares by clients of The Private Bank of America or by Private
Banking clients of Seattle-First National Bank or by or on behalf of agency
accounts administered by any bank or trust company affiliate of Bank of
America;
- - any purchase of shares through a discount broker-dealer that imposes a
transaction charge with respect to such purchase, provided you were the
beneficial owner of shares of the Fund (or any other fund in the Pacific
Horizon Family of Funds) prior to July 1, 1992, so long as your account
remains open on the Company's books;
- - any purchase of shares, provided you were the beneficial owner of shares of
the Fund (or any other fund in the Pacific Horizon Family of Funds) before
April 20, 1987, so long as your account remains open on the Company's books;
- - any purchase of shares, provided you were the beneficial owner of shares of
Bunker Hill Income Securities, Inc. on the date of its reorganization into the
Pacific Horizon Corporate Bond Fund, so long as your account remains open on
the Company's books;
- - any purchase of shares pursuant to the Reinstatement Privilege described
below; and
- - any purchase of shares pursuant to the Directed Distribution Plan described
below.
Additionally, some individuals are not required to pay a front-end sales load
when purchasing Fund shares, including:
- - members of the Company's Board of Directors;
- - U.S. based employees and retirees (including employees who are U.S. citizens
but work abroad and retirees who are U.S. citizens but worked abroad) of Bank
of America or any of its affiliates, and their parents, spouses and minor
children, as well as members of the Board of Directors of Bank of America or
any of its affiliates;
- - registered representatives or full-time employees of broker-dealers having
agreements with the Fund's distributor pertaining to the sale of Fund shares
(and their spouses and minor children) to the extent permitted by such
organizations; and
- - former full-time employees (and retirees) of Security Pacific Corporation (or
any of its
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<PAGE> 175
subsidiaries) and the surviving spouses and minor children of such employees
(and retirees), provided they were the beneficial owner of shares of the Fund
(or any other fund in the Pacific Horizon Family of Funds) prior to July 1,
1992, so long as their account remains open on the Company's books.
RIGHTS OF ACCUMULATION. When buying shares in Pacific Horizon Funds, your
current aggregate investment determines the sales load that you pay. Your
current aggregate investment is the accumulated combination of your immediate
investment along with the shares that you beneficially own in any Pacific
Horizon Fund, or for like shares of any investment portfolio (a "Time Horizon
Fund") of Time Horizon Funds, an open-end investment company managed by an
affiliate of Bank of America, on which you paid a sales load (including shares
that carry no sales load but were obtained through an exchange and can be traced
back to shares that were acquired with a sales load).
To qualify for a reduced sales load, you or your Service Organization (which is
an institution such as a bank or broker-dealer that has entered into a selling
and/or servicing agreement with the Fund's distributor) must notify the Fund's
transfer agent at the time of investment that a quantity discount is applicable.
Use of this service is subject to a check of appropriate records, after which
you will receive the lowest applicable sales charge. If you want to participate
you can so indicate on your Account Application or make a subsequent written
request to the Transfer Agent.
Example: Suppose you beneficially own shares of the Fund, the Pacific Horizon
California Tax-Exempt Bond Fund, the Pacific Horizon U.S. Government Securities
Fund, the Pacific Horizon Capital Income Fund and shares of the Company's money
market funds that can be traced back to the purchase of shares carrying a sales
load (or any combination thereof) with an aggregate current value of $90,000. If
you subsequently purchase shares of the Fund with a current value of $10,000,
the load applicable to the subsequent purchase would be reduced to 3.75% of the
offering price.
LETTER OF INTENT. You may also obtain a reduced sales charge by means of a
written Letter of Intent, which expresses your non-binding commitment to invest
in the aggregate $100,000 or more in shares of any Pacific Horizon Fund or any
Time Horizon Fund within a period of 13 months, beginning up to 90 days prior to
the date of the Letter's execution. Shares purchased during that period count as
a credit toward completion of the Letter of Intent. Any investments you make
during the period receive the discounted sales load based on the full amount of
your investment commitment. When your commitment is fulfilled, an adjustment
will be made to reflect any reduced sales load applicable to shares purchased
during the 90-day period prior to the submission of your Letter of Intent.
While signing a Letter of Intent does not bind you to purchase, or the Company
or Time Horizon Funds to sell, the full amount indicated at the sales load in
effect at the time of signing, you must complete the intended purchase to obtain
the reduced sales load. When you sign a Letter of Intent, the Company or Time
Horizon Funds, as applicable, holds in escrow shares purchased by you in an
amount equal to 5% of the total amount of your commitment. After you fulfill the
terms of the Letter of Intent, the escrow will be released.
If your aggregate investment exceeds the amount indicated in your Letter of
Intent, you will receive an adjustment which reflects the further reduced sales
load applicable to your excess investment. It will be in the form of additional
shares credited to your account at the then current offering price applicable to
a single purchase of the total amount of the total purchase.
If your aggregate investment is less than the amount you committed, you will be
requested to remit an amount equal to the difference between the sales load
actually paid and the sales load applicable to the aggregate purchases actually
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<PAGE> 176
made. If such remittance is not received within 20 days, the Transfer Agent will
redeem an appropriate number of shares held in escrow to realize the difference.
If you would like to participate, complete the Letter of Intent on your Account
Application. If you have any questions regarding the Letter of Intent, call
800-332-3863. Please read it carefully, as you will be bound by its terms.
HOW CAN I BUY SHARES?
The chart below provides more information regarding some of the different
methods for investing in the Fund.
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<PAGE> 177
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------
TO BUY SHARES
OPENING AN ACCOUNT ADDING TO AN ACCOUNT
- --------------------------------------------------------------------------------------------------------
<CAPTION>
THROUGH BANK OF AMERICA, YOUR BROKER OR ANOTHER SERVICE ORGANIZATION
(ORDERS ARE NOT EFFECTIVE UNTIL RECEIVED BY THE FUND'S TRANSFER AGENT)
<S> <C> <C>
Contact them directly for Contact them directly for
instructions. instructions.
- --------------------------------------------------------------------------------------------------------
<CAPTION>
THROUGH THE DISTRIBUTOR
(IF YOU ARE OR WILL BE THE SHAREHOLDER OF RECORD ON THE COMPANY'S BOOKS)
<S> <C>
BY MAIL
Pacific Horizon Funds, Inc. Complete Account Application Mail all subsequent
c/o DST Systems, Inc. and mail it with a check investments to:
P.O. Box 419955 (payable to Pacific Horizon
Kansas City, MO 64141-6955 National Municipal Bond Fund) Pacific Horizon Funds, Inc.
to the address on the left. c/o DST Systems, Inc.
P.O. Box 419940
Kansas City, MO 64173-0298
- --------------------------------------------------------------------------------------------------------
IN PERSON
DST Systems, Inc. Deliver Account Application Deliver your payment directly
811 Main and your payment directly to to the address on the left.
Kansas City, MO 64105-2005 the address on the left.
- --------------------------------------------------------------------------------------------------------
BY WIRE
United Missouri Bank of Instruct your bank to Instruct your bank to
Kansas City, N.A. transmit immediately transmit immediately
10th and Grand available funds, for purchase available funds as described
Kansas City, MO 64106 of Fund shares in your name. at left, except that the wire
ABA No. 1010-0069-5 should indicate that you are
Pacific Horizon Funds, Inc. Be sure to have your bank making a subsequent purchase
National Municipal Bond Fund indicate your name, address as opposed to opening a new
DDA #98-7037-107-3 and tax identification account.
number, the name of the Fund
and the fact that a new Be sure to include your name
account is being opened. and your Fund account number.
Consult your bank for information on remitting funds by wire
and any associated bank charges.
You may contact the Fund's transfer agent at 800-346-2087 for
further information regarding wiring instructions.
- --------------------------------------------------------------------------------------------------------
</TABLE>
15
<PAGE> 178
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------
TO BUY SHARES
OPENING AN ACCOUNT ADDING TO AN ACCOUNT
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
BY TELETRADE TeleTrade Privileges apply Purchases may be made in the
(a service permitting transfers automatically, although the minimum amount of $500 and
of money from your Privilege may not be used to the maximum amount of $50,000
checking, NOW or bank make an initial purchase. If per transaction as soon as
money market account) you do not wish to have the appropriate information
TeleTrade Privileges you must regarding your bank account
indicate that fact on the has been established on your
Account Application or in a Fund account. This
subsequent written notice to information may be provided
the Fund's transfer agent. on the Account Application or
in a signature guaranteed
letter of instruction to the
Transfer Agent. Signature
guarantees are discussed
under "How to Sell Shares."
Call 800-346-2087 to make
your purchase.
</TABLE>
You should refer to the "Shareholder Services" section
for additional important information about the TeleTrade Privilege.
YOU MAY USE OTHER INVESTMENT OPTIONS, INCLUDING AUTOMATIC INVESTMENTS
AND EXCHANGES, TO INVEST IN YOUR FUND ACCOUNT.
PLEASE REFER TO THE SECTION ENTITLED "SHAREHOLDER SERVICES" FOR
MORE INFORMATION.
- --------------------------------------------------------------------------------
WHAT PRICE WILL I RECEIVE WHEN I BUY SHARES?
Your shares will be purchased at the Fund's public offering price calculated at
the next close of regular trading on the Exchange (currently 4:00 p.m. Eastern
time) after your purchase order is received in proper form by the Fund's
transfer agent, DST Systems, Inc. (the "Transfer Agent"), at its Kansas City
office.
If you purchase shares through Bank of America, your broker or another Service
Organization, the entity involved is responsible for transmitting your order and
required funds to the Transfer Agent on a timely basis in accordance with the
procedures in this Prospectus. Share purchases (and redemptions) executed
through Bank of America or a Service Organization are executed only on days on
which the particular institution and the Fund are open for business. Purchase
orders received by a Service Organization in proper form by 4:00 p.m. Eastern
time on a business day will be effected at the public offering price calculated
at 4:00 p.m. Eastern time on that day, if the Service Organization transmits
your order to the Transfer Agent by the end of its business day (normally 5:15
p.m. Eastern time). Except as provided in the following two sentences, if the
order is not received in proper form by a Service Organization by 4:00 p.m.
Eastern time or not received by the Transfer Agent by the close of its business
day, the order will be based upon the next determined purchase price. The
Company may from time to time in its sole discretion appoint one or more
entities as the Fund's agent to receive irrevocable purchase and redemption
orders and to transmit them on a net basis to the Transfer Agent. In
16
<PAGE> 179
these instances orders received by the entity by 4:00 p.m. Eastern time on a
business day will be effected as of 4:00 p.m. Eastern time that day if the order
is actually received by the Transfer Agent not later than the next business
morning accompanied by payment in federal funds.
WHAT ELSE SHOULD I KNOW TO MAKE A PURCHASE?
Federal regulations require you to provide a certified taxpayer identification
number upon opening or reopening an account.
If your check used for investment does not clear, a fee may be imposed by the
Transfer Agent. All payments should be in U.S. dollars and, to avoid fees and
delays, should be drawn only on U.S. banks. Please remember that the Company
reserves the right to reject any purchase order.
You should note that Bank of America, Service Organizations and registered
investment advisers may charge a separate fee or transaction charge to their
clients related to their investment in Fund shares. These fees could constitute
a substantial portion of smaller accounts and may not be in an investor's best
interest. Bank of America and Service Organizations may also impose minimum
customer account and other requirements in addition to those imposed by the
Fund. If you purchase or redeem shares directly from the Fund, you may do so
without incurring any charges other than those described in this Prospectus.
HOW TO SELL SHARES
HOW DO I REDEEM MY SHARES?
Pacific Horizon Funds, Inc. makes it easy to sell, or "redeem," shares. The Fund
imposes no charge when you redeem shares. The value of the shares you redeem may
be more or less than your cost, depending on the Fund's current net asset value.
If you purchased your shares through an account at Bank of America, your Broker
or another Service Organization, you may redeem all or part of your shares in
accordance with the instructions pertaining to that account. If you are also the
shareholder of record on the Company's books, you may redeem shares in
accordance with the procedures described in the chart below as well as those of
your account. To use the redemption methods described below, you must arrange
with Bank of America or your Service Organization for delivery of the required
application(s) to the Transfer Agent.
17
<PAGE> 180
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------
TO SELL SHARES
THROUGH BANK OF AMERICA, YOUR BROKER OR ANOTHER SERVICE ORGANIZATION
(ORDERS ARE NOT EFFECTIVE UNTIL RECEIVED BY THE TRANSFER AGENT)
Contact them directly for instructions.
---------------------------------------------------------------------------------------------
THROUGH THE DISTRIBUTOR
(IF YOU ARE A SHAREHOLDER OF RECORD ON THE COMPANY'S BOOKS)
<S> <C>
BY MAIL
Pacific Horizon National Send a signed, written request (each owner, including each
Municipal Bond Fund joint owner, must sign) to the Transfer Agent.
c/o DST Systems, Inc.
P.O. Box 419955 If you hold stock certificates for the shares being
Kansas City, MO 64141-6955 redeemed, make sure to endorse them for transfer, have your
signature on them guaranteed by your bank or another
guarantor institution (as described under "What Kind Of
Paperwork Is Involved In Selling Shares?") and include them
with your request.
---------------------------------------------------------------------------------------------
IN PERSON
DST Systems, Inc.
811 Main Deliver your signed, written request (each owner, including
Kansas City, MO 64105-2005 each joint owner, must sign) and any certificates (endorsed
for transfer and signature guaranteed as described under
"What Kind Of Paperwork Is Involved In Selling Shares?") to
the address on the left.
---------------------------------------------------------------------------------------------
BY WIRE As soon as appropriate information regarding your bank
account has been established on your Fund account, you may
write, telephone or telegraph redemption requests to the
Transfer Agent, and redemption proceeds will be wired in
federal funds to the commercial bank you have specified.
Information regarding your bank account may be provided on
the Account Application or in a signature guaranteed letter
of instruction to the Transfer Agent. Signature guarantee
requirements are discussed under "What Kind Of Paperwork Is
Involved In Selling Shares?".
Redemption proceeds will normally be wired the business day
after your request and any other necessary documents have
been received by the Transfer Agent.
Wire Privileges apply automatically unless you indicate on
the Account Application or in a subsequent written notice to
the Transfer Agent that you do not wish to have them.
Requests must be for at least $1,000 and may be subject to
limits on frequency and amount.
Wire Privileges may be modified or suspended at any time,
and are not available for shares issued in certificate form.
Contact your bank for information on any charges imposed by
the bank in connection with receipt of redemptions by wire.
---------------------------------------------------------------------------------------------
</TABLE>
18
<PAGE> 181
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------
TO SELL SHARES
<S> <C>
BY CHECK You may write Redemption Checks ("Checks") payable to any
person out of your Fund account in the amount of $500 or
more. The Transfer Agent (as your agent) will redeem the
necessary number of shares to cover the Check when it is
presented for payment.
You will continue earning dividends on shares redeemed in
this manner until the Check actually clears the Transfer
Agent.
You may request this Privilege on an Account Application
that has been signed by the registered owner(s), and a set
of Checks will then be sent to the registered owner(s) at
the address of record.
There is no charge for the use of Checks, although the
Transfer Agent will charge for any "stop payment" requests
made by you, or if a Check cannot be honored due to
insufficient funds or for other valid reasons.
Shares issued in certificate form may not be redeemed by
Check.
---------------------------------------------------------------------------------------------
BY TELETRADE You may redeem Fund shares (minimum of $500 and maximum of
(a service permitting $50,000 per transaction) by telephone after appropriate
transfers of money to your information regarding your bank account has been established
checking, NOW or bank money on your Fund account. This information may be provided on
market account) the Account Application or in a signature guaranteed letter
of instruction to the Transfer Agent. Signature guarantee
requirements are discussed under "What Kind Of Paperwork Is
Involved In Selling Shares?".
Redemption orders may be placed by calling 800-346-2087.
TeleTrade Privileges apply automatically unless you indicate
on the Account Application or in a subsequent written notice
to the Transfer Agent that you do not wish to have them.
You should refer to the "Shareholder Services" section for
additional important information about the TeleTrade
Privilege.
</TABLE>
OTHER REDEMPTION OPTIONS, INCLUDING EXCHANGES AND AUTOMATIC
WITHDRAWALS, ARE ALSO AVAILABLE. PLEASE REFER TO THE
SECTION ENTITLED "SHAREHOLDER SERVICES" FOR MORE INFORMATION.
- --------------------------------------------------------------------------------
WHAT NAV WILL I RECEIVE FOR SHARES
I WANT TO SELL?
Redemption orders are effected at the net asset value per share next determined
after receipt of the order in proper form by the Transfer Agent at its Kansas
City office. Although the Fund itself imposes no charge when shares are
redeemed, if you purchase shares through Bank of America or a Service
Organization, they may charge a fee for providing certain services in connection
with investments in Fund shares.
The Company reserves the right to redeem accounts involuntarily if, after sixty
days' written notice, the account's net asset value remains below a $500 minimum
balance.
WHAT KIND OF PAPERWORK IS INVOLVED
IN SELLING SHARES?
Redemption requests must be signed by each shareholder, including each joint
owner. Certain types of redemption requests as well as all endorsed share
certificates will need to include a
19
<PAGE> 182
signature guarantee. Signature guarantees must accompany redemption requests for
(i) an amount in excess of $50,000 per day, (ii) any amount if the redemption
proceeds are to be sent somewhere other than the address of record on the
Company's books, or (iii) an amount of $50,000 or less if the address of record
has not been on the Company's books for sixty days.
You may obtain a signature guarantee from: (i) a bank which is a member of the
FDIC; (ii) a trust company; (iii) a member firm of a national securities
exchange; or (iv) another eligible guarantor institution. Guarantees must be
signed by an authorized signatory of the guarantor institution and be
accompanied by the words "Signature Guaranteed." The Transfer Agent will not
accept guarantees from notaries public.
HOW QUICKLY CAN I RECEIVE MY
REDEMPTION PROCEEDS?
The Company will make payment for all shares redeemed after the Transfer Agent
receives a request in proper form, except as provided by the rules of the
Securities and Exchange Commission. If the shares to be redeemed have been
purchased by check or by TeleTrade, the Company will, upon the clearance of the
purchase check or TeleTrade payment, mail the redemption proceeds within seven
business days. This does not apply to situations where the Fund receives
payment in cash or immediately available funds for the purchase of shares. If
you purchase shares by wire, you must file an Account Application before
redemption requests can be honored.
Bank of America and the Service Organizations are responsible for transmitting
redemption orders and crediting their customers' accounts with redemption
proceeds on a timely basis.
DO I HAVE ANY REINSTATEMENT PRIVILEGES AFTER I HAVE REDEEMED SHARES?
You may reinvest all or any portion of your redemption proceeds in shares of the
Fund, or of another load fund of the Company or Time Horizon Funds, within 90
days of your redemption trade date without paying a sales load. Shares so
reinvested will be purchased at a price equal to the net asset value next
determined after the Transfer Agent receives a reinstatement request and payment
in proper form.
If you wish to use this Privilege, you must submit a written reinstatement
request to the Transfer Agent stating that you are eligible to use the
Privilege. The reinstatement request and payment must be received within 90 days
of the trade date of the redemption. Currently, there are no restrictions on the
number of times you may use this Privilege.
Generally, exercising the Reinstatement Privilege will not affect the character
of any gain or loss realized on redemption for federal income tax purposes.
However, if a redemption results in a loss, the reinstatement may result in the
loss being disallowed under IRS "wash sale" rules.
DIVIDEND AND DISTRIBUTION POLICIES
Shareholders of the Fund are entitled to dividends arising from the net
investment income and net realized gains, if any, earned on investments in the
Portfolio which are allocable to the Fund. Dividends from the Fund's net
investment income are declared daily and paid within five business days after
the end of each month. Fund shares begin earning dividends the day after payment
in federal funds is received for such shares through the business day such
shares are redeemed. The Fund's net realized gains (after reduction for capital
loss carryforwards, if any) are distributed at least annually.
You will automatically receive dividends and capital gain distributions in
additional shares without a sales load unless you: (i)elect in writing to
receive payment in cash; or (ii) elect to participate in the Directed
Distribution Plan described below under "Can My Dividends From The Fund Be
Invested In Other Pacific Horizon Funds?".
To elect to receive payment in cash, or to revoke such election, you must do so
in writing to the Transfer Agent at P.O. Box 419955, Kansas City, MO 64141-6955.
The election or revocation will become effective with respect to dividends paid
after it is received by the Transfer Agent.
20
<PAGE> 183
SHAREHOLDER SERVICES
PACIFIC HORIZON FUNDS, INC. PROVIDES A VARIETY OF WAYS TO MAKE MANAGING YOUR
INVESTMENTS MORE CONVENIENT.
Some or all of the following services and privileges as well as others described
in this Prospectus may not be available for, or may have different conditions
imposed on them than as described in this Prospectus with respect to, certain
clients of Bank of America and particular Service Organizations. Consult these
entities for more information.
CAN I EXCHANGE MY INVESTMENT FROM ONE FUND TO ANOTHER?
As a shareholder, you have the privilege of exchanging your shares for shares of
another Pacific Horizon Fund, or like shares of any Time Horizon Fund, provided
that such other shares may be legally sold in your state of residence. NO
ADDITIONAL SALES LOAD WILL BE INCURRED WHEN EXCHANGING FUND SHARES PURCHASED
WITH A SALES LOAD FOR SHARES OF ANOTHER LOAD FUND OF THE COMPANY.
An investment in the Fund automatically entitles you to use this Privilege,
unless you indicate on the Account Application or in a subsequent letter to the
Transfer Agent that you do not wish to use this Privilege.
Fund shares being exchanged must have a current value of at least $500 and are
subject to the minimum initial investment requirements of the particular fund
into which the exchange is being made. You may obtain prospectuses regarding the
funds into which you wish to make an exchange from your Service Organization or
the Fund's distributor.
You may provide exchange instructions by telephone by calling the Transfer Agent
at 800-346-2087. (See the section below entitled "What is TeleTrade" for a
description of the Company's policy regarding responsibility for telephone
instructions.) You may also send exchange instructions in writing by following
directions set forth previously under "How to Sell Shares."
If you would like more information on making an exchange, please read the
Statement of Additional Information and consult your Service Organization or the
Fund's distributor.
The Fund reserves the right to reject any exchange request and the Exchange
Privilege may be modified or terminated at any time. At least 60 days' notice of
any material modification to or termination of the Exchange Privilege will be
given to shareholders except where notice is not required under the regulations
of the Securities and Exchange Commission.
WHAT IS TELETRADE?
TELETRADE IS A SERVICE WHICH ALLOWS YOU TO AUTHORIZE ELECTRONIC TRANSFERS OF
MONEY TO PURCHASE SHARES IN OR REDEEM SHARES FROM AN ESTABLISHED FUND ACCOUNT.
THE SERVICE MAY BE USED LIKE AN "ELECTRONIC CHECK" TO MOVE MONEY BETWEEN AN
ACCOUNT AT A FINANCIAL INSTITUTION AND A FUND ACCOUNT WITH A SINGLE TELEPHONE
CALL.
Purchase and redemption proceeds with respect to TeleTrade transactions will be
transferred between your Fund account and the checking, NOW or bank money market
account designated by you. Only an account maintained at a domestic financial
institution that is an Automated Clearing House member may be so designated.
TeleTrade purchases will be effected at the public offering price next
determined after the Transfer Agent receives payment for the transaction.
Redemption proceeds will be on deposit in your account at your financial
institution generally two business days after the redemption request is received
by the Transfer Agent. You may also request receipt of your redemption proceeds
by check, which will be payable to the registered owners of your Fund account
and will be sent only to the address of record.
21
<PAGE> 184
You should note that the Transfer Agent may act upon a telephone redemption
request (including a telephone wire redemption request) from any person
representing himself or herself to be you and reasonably believed by the
Transfer Agent to be genuine. Neither the Company nor any of its service
contractors will be liable for any loss or expense in acting upon telephone
instructions that are reasonably believed to be genuine. In attempting to
confirm that telephone instructions are genuine, the Company will use such
procedures as are considered reasonable. If you should experience difficulty in
contacting the Transfer Agent to place telephone redemptions (including
telephone wire redemptions), for example because of unusual market activity, you
are urged to consider redeeming your shares by mail or in person.
The Company may modify the TeleTrade Privilege at any time or charge a service
fee upon notice to shareholders. No such fee currently is contemplated.
CAN I ARRANGE TO HAVE AUTOMATIC INVESTMENTS MADE ON A REGULAR BASIS?
YOU MAY ARRANGE, THROUGH THE AUTOMATIC INVESTMENT PROGRAM, FOR SYSTEMATIC
INVESTMENTS IN YOUR FUND ACCOUNT IN AMOUNTS OF $50 OR MORE BY DIRECTLY DEBITING
YOUR ACCOUNT AT YOUR FINANCIAL INSTITUTION. At your option, your checking, NOW
or bank money market account designated by you will be debited in the specified
amount, and Fund shares will be purchased, once a month, on either the first or
fifteenth day, or twice a month, on both days. Only accounts maintained at a
domestic financial institution which permits automatic withdrawals and is an
Automated Clearing House member are eligible. The Automatic Investment Program
is one means by which you may use Dollar Cost Averaging in making investments.
WHAT IS DOLLAR COST AVERAGING AND HOW CAN I IMPLEMENT IT?
DOLLAR COST AVERAGING INVOLVES INVESTING A FIXED DOLLAR AMOUNT AT REGULAR
PREDETERMINED INTERVALS. BECAUSE MORE SHARES ARE BOUGHT DURING PERIODS WITH
LOWER SHARE PRICES AND FEWER SHARES ARE BOUGHT WHEN THE PRICE IS HIGHER, YOUR
AVERAGE COST PER SHARE MAY BE REDUCED. You may also implement Dollar Cost
Averaging on your own initiative or through other entities.
In order to be effective, Dollar Cost Averaging should be followed on a
sustained, consistent basis. You should be aware, however, that shares bought
using Dollar Cost Averaging are made without regard to their price on the day of
investment or to market trends. In addition, while you may find Dollar Cost
Averaging to be beneficial, it will not prevent a loss if you ultimately redeem
your shares at a price that is lower than their purchase price.
To establish an Automatic Investment Account that uses the Dollar Cost Averaging
method, check the appropriate box and supply the necessary information on the
Account Application or in a subsequent written request to the Transfer Agent.
You may cancel this Privilege or change the amount of purchase at any time by
mailing written notification to the Transfer Agent.
Notification will be effective three business days following receipt. The Fund
may modify or terminate this Privilege at any time or charge a service fee,
although no such fee currently is contemplated.
CAN I ARRANGE PERIODIC WITHDRAWALS?
IF YOU ARE A SHAREHOLDER WITH A FUND ACCOUNT VALUED AT $5,000 OR MORE, YOU MAY
WITHDRAW AMOUNTS IN MULTIPLES OF $50 FROM YOUR ACCOUNT ON A MONTHLY, QUARTERLY,
SEMI-ANNUAL OR ANNUAL BASIS THROUGH THE AUTOMATIC WITHDRAWAL PLAN.
At your option, monthly, quarterly, semi-annual and annual withdrawals will be
made on either the first or fifteenth day of the particular month selected. To
participate in this Plan, check the appropriate box and supply the necessary
information on the Account Application or in a subsequent signature guaranteed
written request to the Transfer Agent. Purchases of additional shares
concurrently with withdrawals are ordinarily not advantageous because of the
Fund's sales load.
22
<PAGE> 185
CAN MY DIVIDENDS FROM THE FUND BE INVESTED IN OTHER FUNDS?
You may elect to have your dividends, capital gains distributions, or both
("distribution proceeds") received from a non-retirement Fund account
automatically invested in shares of any other investment portfolio of the
Company, or in like shares of any Time Horizon Fund, provided such shares are
held in a non-retirement account. To participate in this program, known as the
Directed Distribution Plan, check the appropriate box and supply the necessary
information on the Account Application or subsequently send a written request to
the Transfer Agent. Participants in the Directed Distribution Plan are subject
to the minimum initial investment requirements of the particular fund involved.
Investments will be made at a price equal to the net asset value of the
purchased shares next determined after receipt of the distribution proceeds by
the Transfer Agent.
There are no subsequent investment requirements for accounts to which
distribution proceeds are directed nor are service fees currently charged for
effecting these transactions.
IS THERE A SALARY DEDUCTION PLAN AVAILABLE?
YOU MAY PURCHASE FUND SHARES BY HAVING PAYMENTS AUTOMATICALLY DEPOSITED INTO
YOUR FUND ACCOUNT (MINIMUM OF $50 AND MAXIMUM OF $50,000 PER TRANSACTION) IF YOU
RECEIVE A FEDERAL SALARY, SOCIAL SECURITY OR CERTAIN VETERAN'S, MILITARY OR
OTHER PAYMENTS FROM THE FEDERAL GOVERNMENT. Subject to these limitations, you
may deposit as much of your payments as you wish.
For instructions on how to enroll in this Direct Deposit Program, call the
Transfer Agent at 800-346-2087.
Note: Death or legal incapacity will terminate participation in the Program. You
may also choose at any time to terminate your participation by notifying the
appropriate federal agency in writing. Further, the Fund may terminate your
participation after 30 days' notice.
THE BUSINESS OF THE FUND
FUND MANAGEMENT
The business affairs of the Company are managed under the general supervision of
its Board of Directors. Information about the Directors and Officers of the
Company and about the Trustees and Officers of the Master Trust is included in
the Statement of Additional Information under "Management."
SERVICE PROVIDERS
---------------------
INVESTMENT ADVISER
Bank of America serves as Investment Adviser of the Portfolio. Bank of America
is a subsidiary of BankAmerica Corporation, a registered bank holding company.
Its principal offices are located at 555 California Street, San Francisco,
California 94104.
Formed in 1904, Bank of America is a national banking association that provides
commercial banking and trust business through an extensive system of branches
across the western United States. Bank of America's principal banking affiliates
operate branches in ten U.S. states as well as corporate banking and business
credit offices in major U.S. cities and branches, corporate offices and
representative offices in 37 countries.
In its advisory agreement, Bank of America has agreed to manage the Portfolio's
investments and to be responsible for, place orders for, and make decisions with
respect to, all purchases and sales of the Portfolio's securities.
Kim Michalski, is the person primarily responsible for the day-to-day investment
management of the Portfolio. Ms. Michalski has been the Portfolio's manager
since its inception and has been
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<PAGE> 186
associated with Bank of America (and Security Pacific National Bank before its
merger with Bank of America) since 1983. Ms. Michalski's primary emphasis is in
tax-exempt securities, and she manages two mutual funds and two common trust
funds.
For the services provided and expenses assumed under the advisory agreement,
Bank of America is entitled to receive a fee at the annual rate of 0.35% of the
Portfolio's average daily net assets. This amount may be reduced pursuant to
undertakings by Bank of America. (See the information below under "Fee
Waivers"). During the fiscal year ended February 28, 1995, Bank of America
waived its entire fee as investment adviser to the Portfolio.
In addition, Bank of America and its affiliates may be entitled to fees under
the Shareholder Services Plan as described under "Plan Payments," and may
receive fees charged directly to their accounts in connection with investments
in Fund shares.
ADMINISTRATOR
Concord Holding Corporation ("Concord") serves as Administrator of the Fund and
the Portfolio. Concord is a wholly-owned subsidiary of The BISYS Group, Inc. Its
offices are located at 125 W. 55th Street, New York, New York 10019.
Under its administration agreements with the Company and the Portfolio, Concord
has agreed to: pay the costs of maintaining the offices of the Company and the
Portfolio; provide a facility to receive purchase and redemption orders; provide
statistical and research data, data processing services and clerical services;
coordinate the preparation of reports to shareholders of the Fund,
interestholders of the Portfolio and the Securities and Exchange Commission;
prepare tax returns; maintain the registration or qualification of the Fund's
shares for sale under state securities laws; maintain books and records of the
Fund and the Portfolio; calculate the net asset value of the Fund and the
Portfolio and dividends and capital gains distributions to shareholders; serve
as dividend disbursing agent for the Portfolio; and generally assist in all
aspects of the operations of the Fund and the Portfolio.
For its services as administrator, Concord is entitled to receive an
administration fee from the Fund at the annual rate of 0.15% of the Fund's
average daily net assets and an administration fee from the Portfolio at the
annual rate of 0.05% of the Portfolio's average daily net assets. This amount
may be reduced pursuant to undertakings by Concord. (See the information below
under "Fee Waivers"). During the fiscal year ended February 28, 1995, Concord
waived its entire fee as administrator for both the Fund and the Portfolio.
Pursuant to the authority granted in its administration agreements, Concord has
entered into agreements with PFPC, Inc. ("PFPC") under which PFPC performs
certain of the services listed above, e.g., calculating the net asset value of
the Fund and the Portfolio, calculating dividends and capital gains
distributions to shareholders, and maintaining the books and records of the Fund
and the Portfolio. The Fund and the Portfolio bear all fees and expenses charged
by PFPC for these services.
DISTRIBUTOR
The Fund's shares are sold on a continuous basis by Concord Financial Group,
Inc. (the "Distributor"). The Distributor is a wholly-owned subsidiary of
Concord and is located at 125 W. 55th Street, New York, New York 10019.
CUSTODIAN AND TRANSFER AGENT
PNC Bank, N.A., Broad and Chestnut Streets, Philadelphia, Pennsylvania, 19101
serves as the Custodian of the Fund and the Portfolio. DST Systems, Inc. is the
transfer and dividend disbursing agent of the Fund and is located at 811 Main,
Kansas City, MO 64105-2005.
FEE WAIVERS
Except as noted in this Prospectus, the service contractors bear all expenses in
connection with the performance of their services and the Fund and Portfolio
bear the expenses incurred in their operations. Expenses can be reduced by
volun-
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tary fee waivers and expense reimbursements by Bank of America and other service
providers as well as by certain expense limitations imposed by state securities
regulators. Periodically, during the course of the Fund's fiscal year, Bank of
America, Concord and/or the Distributor may choose not to receive fee payments
and/or may assume certain Fund or Portfolio expenses. However, the service
providers retain the ability to be reimbursed for these amounts by the Fund and
Portfolio prior to fiscal year end and, subject to the expense limitations of
certain states, to stop such fee waivers and expense reimbursements at any time.
These waivers and reimbursements would increase the Fund's yield when made but
would decrease yields if the Fund were required to reimburse a service provider.
TAX INFORMATION
YOU WILL BE ADVISED AT LEAST ANNUALLY REGARDING THE FEDERAL INCOME TAX TREATMENT
OF DIVIDENDS AND DISTRIBUTIONS MADE TO YOU. YOU SHOULD SAVE YOUR REGULAR ACCOUNT
STATEMENTS BECAUSE THEY CONTAIN INFORMATION YOU WILL NEED TO CALCULATE YOUR
CAPITAL GAINS OR LOSSES UPON YOUR ULTIMATE SALE OR EXCHANGE OF SHARES IN THE
FUND.
As with any investment, you should consider the tax implications of an
investment in the Fund. The following is only a brief summary of some of the
important tax considerations generally affecting the Fund and its shareholders.
Consult your tax adviser with specific reference to your own tax situation.
FEDERAL TAXES
During its most recent fiscal year the Fund qualified as a "regulated investment
company" under the Internal Revenue Code of 1986, as amended (the "Code"), and
Management intends that the Fund will so qualify in future years as long as such
qualification is in the best interest of the Fund's shareholders. As a result of
this qualification, the Fund is not required to pay Federal income taxes to the
extent its earnings are distributed in accordance with the Code. The Fund
intends to qualify for this special tax treatment as long as it is in the best
interest of its shareholders. It is expected that the Portfolio will not be
subject to Federal income taxes. The Portfolio intends to qualify as a
partnership (or other pass-through entity) for Federal income tax purposes. As
such, the Portfolio is not subject to tax and the Fund will be treated for
Federal income tax purposes as recognizing its pro rata share of the Portfolio's
income and deductions and owning its pro rata share of the Portfolio's assets.
The Fund's status as a regulated investment company is dependent on, among other
things, the Portfolio's continued qualification as a partnership (or other
pass-through entity) for Federal income tax purposes.
Dividends derived from interest on Municipal Securities ("exempt-interest
dividends") typically will not be subject to regular Federal income tax. To the
extent, if any, that dividends paid to you are derived from taxable interest,
futures transactions, gain attributable to market discount or the excess of net
short-term capital gain over net long-term capital gain, such dividends will be
subject to regular Federal income tax, whether or not the dividends are
reinvested. Any dividend you receive comprised of the excess of net long-term
capital gain over net short-term capital loss ("capital gain dividend") will be
taxable to you as a long-term capital gain no matter how long you have held Fund
shares.
The portion of dividends attributable to interest
on certain private activity bonds issued after August 7, 1986 must be included
by you as an item of tax preference for purposes of determining liability (if
any) for the Federal alternative minimum tax applicable to individuals and
corporations and the environmental tax applicable to corporations. Corporate
shareholders must also take exempt-interest dividends into account in
determining certain adjustments for Federal alternative minimum and
environmental tax purposes. Shareholders receiving Social Security benefits
should note that all exempt-interest dividends will be taken into account in
determining the taxability of such benefits.
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Additional tax information of relevance to shareholders with particular
interests, including investors who may be "substantial users" or "related
persons" with respect to Facilities financed by Municipal Securities, is
continued in the Statement of Additional Information.
You may realize a taxable capital gain (or loss) upon redemption or exchange of
Fund shares, depending upon the tax basis of your shares and their price at the
time of such redemption or exchange. Generally, you may include sales loads
incurred in the purchase of Fund shares in your tax basis when determining your
gain or loss on a redemption or exchange of these shares. However, if you
exchange such shares for shares of another investment portfolio of the Company
within 90 days of the purchase and are able to reduce the sales load on the new
shares through the Exchange Privilege, the reduction may not be included in the
tax basis of your exchanged shares. It may be included in the tax basis of the
new shares.
If you hold shares for six months or less and during that time receive an
exempt-interest dividend attributable to those shares, any loss realized on the
sale or exchange of those shares will be disallowed to the extent of the exempt-
interest dividend. If you hold shares for six months or less and during that
time receive a capital gain dividend on those shares, any loss realized on the
sale or exchange of those shares will be treated as long-term capital loss to
the extent of the capital gain dividend.
A percentage of interest on indebtedness incurred by you to purchase or carry
Fund shares, equal to the percentage of total non-capital gain dividends
distributed during your taxable year that are exempt-interest dividends, is not
deductible for Federal income tax purposes.
A dividend paid to you by the Fund in January of a particular year will be
deemed for tax purposes to have been received by you on December 31 of the
preceding year, if the dividend is declared and payable to shareholders of
record on a specified date in October, November or December of that preceding
year.
If you are considering buying shares of a Fund on or just before the record date
of a capital gain dividend, you should be aware that the amount of the
forthcoming dividend, although in effect a return of capital, will be taxable to
you.
STATE AND LOCAL TAXES
You should consult your tax adviser regarding state and local tax consequences
which may differ from the Federal tax consequences described above.
MEASURING PERFORMANCE
THE FUND'S PERFORMANCE MAY BE QUOTED IN TERMS OF AVERAGE ANNUAL TOTAL RETURN,
AGGREGATE TOTAL RETURN, YIELD AND TAX-EQUIVALENT YIELD. PERFORMANCE INFORMATION
IS HISTORICAL AND IS NOT INTENDED TO INDICATE FUTURE RESULTS.
Average annual total return reflects the average annual percentage change in
value of an investment in the Fund over the period being measured, while
aggregate total return reflects the total percentage change in value over the
period being measured. Yield measures the net income of the Fund over a
specified 30 day period. Tax-equivalent yield demonstrates the level of taxable
yield that would be necessary to produce an after-tax equivalent to a tax-free
yield.
Periodically, the Fund's total return (calculated on an average annual total
return and/or an aggregate total return basis for various periods) yield and
tax-equivalent yield may be quoted in advertisements or in communications to
shareholders. Both methods of calculating total return reflect the sales load
charged by the Fund and assume dividends and capital gains distributions made by
the Fund during the period are reinvested in Fund shares. The Fund may also
advertise total return data without reflecting the sales load imposed on the
purchase of Fund shares in accordance with the rules of the Securities and
Exchange Commission. Quotations that do not reflect the sales load will, of
course,
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be higher than quotations that do reflect sales loads.
The Fund calculates its yield by dividing its net income per share (which may
differ from the net income per share used for accounting purposes) during a 30
day (or one month) period by the maximum offering price per share on the last
day of the measuring period, and then annualizing the result on a semi-annual
basis. The 30 day or one month measuring period will be identified along with
any yield quotation to which it relates.
The Fund calculates its "tax equivalent yield" by increasing the Fund's yield
(calculated as described above) by the amount necessary to reflect the payment
of Federal income taxes at a stated rate. The tax-equivalent yield will always
be higher than the Fund's yield.
An investor in the Fund may find it particularly useful to compare the Fund's
tax-exempt yield and the equivalent yield from taxable investments. For an
investor in a low tax bracket, it may not be beneficial to invest in a
tax-exempt investment if a higher yield after taxes could be received from
taxable investment.
The Fund may compare its total return yield and tax-equivalent yield to that of
other mutual funds with similar investment objectives and to bond and other
relevant indices or to rankings prepared by independent services or other
financial or industry publications that monitor mutual fund performance.
For example, the Fund's total return may be compared to the Consumer Price Index
or to data prepared by: Lipper Analytical Services, Inc.; Donoghue's Money Fund
Report; Mutual Fund Forecaster; Morningstar; Micropal; Wiesenberger Investment
Companies Services; or CDA Investment Technologies, Inc. Total return data as
reported in national financial publications such as Money, Forbes, Barron's, The
Wall Street Journal and The New York Times, or in local or regional
publications, may also be used in comparing Fund performance. The Fund's total
return also may be compared to indices such as: the Dow Jones Industrial
Average; the Standard & Poor's 500 Stock Index; the Shearson Lehman Bond
Indexes; the Wilshire 5000 Equity Indexes; or the Consumer Price Index.
Since the Fund's performance will fluctuate, it should not be compared with bank
deposits, savings accounts and similar investments that often provide an agreed
or guaranteed fixed yield for a stated period of time. Performance is generally
a function of the kind and quality of the instruments in a portfolio, portfolio
maturity, operating expenses and market conditions. Not included in the Fund's
calculations of total return and yield are fees charged by Bank of America and
Service Organizations directly to their customer accounts in connection with
investments in the Fund (e.g. account maintenance fees, compensating balance
requirements or fees based upon account transactions, assets or income).
DESCRIPTION OF SHARES
The Company is a Maryland corporation that was organized on October 27, 1982.
ABOUT THE COMPANY
THE COMPANY'S CHARTER AUTHORIZES THE BOARD OF DIRECTORS TO ISSUE UP TO TWO
HUNDRED BILLION FULL AND FRACTIONAL SHARES OF CAPITAL STOCK ($.001 PAR VALUE PER
SHARE) AND TO CLASSIFY AND RECLASSIFY ANY AUTHORIZED AND UNISSUED SHARES INTO
ONE OR MORE CLASSES OF SHARES.
The Board of Directors has authorized the issuance of 100 million shares of
Class Q Common Stock representing interests in the Fund; and additional classes
of shares representing interests in other investment portfolios of the Company.
The Board of Directors may similarly classify or reclassify any class of shares
(including unissued Class Q Common Stock) into one or more series. For more
information about the Company's other
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portfolios, contact the Company at the telephone number listed on the inside
cover page.
Shares representing interests in the Fund are entitled to participate in the
dividends and distributions declared by the Board of Directors and in the net
distributable assets of the Fund on liquidation. Fund shares have no preemptive
rights and only such conversion and exchange rights as the Board may grant in
its discretion. When issued for payment as described in this Prospectus, Fund
shares will be fully paid and non-assessable.
VOTING RIGHTS
SHAREHOLDERS ARE ENTITLED TO ONE VOTE FOR EACH FULL SHARE HELD AND FRACTIONAL
VOTES FOR FRACTIONAL SHARES HELD. Fund shares have cumulative voting rights to
the extent that may be required by applicable law. Additionally, shareholders
will vote in the aggregate and not by class or series, except as required by law
(or when permitted by the Board of Directors). The Fund does not presently
intend to hold annual meetings of shareholders to elect directors or for other
business unless and until such time as less than a majority of the directors
holding office has been elected by the shareholders. At that time, the directors
then in office will call a shareholders' meeting for the election of directors.
Under certain circumstances, however, shareholders have the right to call a
shareholder meeting to consider the removal of one or more directors. Such
meetings will be held when requested by the shareholders of 10% or more of the
Company's outstanding shares of common stock. The Fund will assist in
shareholder communications in such matters to the extent required by law and the
Company's undertaking with the Securities and Exchange Commission.
PLAN PAYMENTS
THE COMPANY HAS ADOPTED A SHAREHOLDER SERVICE PLAN (THE "PLAN") FOR THE FUND
UNDER WHICH THE FUND PAYS THE DISTRIBUTOR FOR SHAREHOLDER SERVICING EXPENSES
RELATED TO FUND SHARES.
Shareholder servicing expenses include expenses incurred in connection with
shareholder services provided by the Distributor and payments to Service
Organizations for support services for the beneficial owners of Fund shares,
such as: establishing and maintaining accounts and records relating to the
Service Organization's clients who invest in Fund shares; assisting those
clients in processing exchange and redemption requests and in changing dividend
options and account designations; and responding to inquiries from clients
concerning their investments.
Under the Plan, payments by the Fund for shareholder servicing expenses may not
exceed 0.25% (annualized) of the Fund's average daily net assets. Excluded from
this calculation, however, are all shares acquired via a transfer of assets from
trust and agency accounts at Bank of America. This amount may be reduced
pursuant to undertakings by the Distributor. During the fiscal year ended
February 28, 1995, the Distributor waived all payments under the Plan.
If in any month the Distributor is due more monies than are immediately payable
because of the percentage limitation described above, the unpaid amount is
"carried forward" from month to month while the Plan is in effect until such
time when it may be paid. However, any "carried forward" amounts will not be
payable beyond the fiscal year during which the amounts are accrued. No
interest, carrying or other finance charge is borne by the Fund with respect to
the amount "carried forward."
Banks may act as Service Organizations. The Glass-Steagall Act and other
applicable laws, among other things, prohibit banks from engaging in the
business of underwriting securities. If a bank were prohibited from acting as a
Service Organization, its shareholder clients would be permitted to remain
Company shareholders and alternative means for continuing the servicing of such
shareholders would be sought. In such
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<PAGE> 191
event, changes in the operation of the Company might occur and a shareholder
serviced by such bank might no longer be able to avail itself of the automatic
investment or other services then being provided by the bank. It is not expected
that shareholders would suffer any adverse financial consequences as a result of
any of these occurrences.
The Company will obtain a representation from the Service Organizations (and
from Bank of America and Concord) that they are or will be licensed as dealers
as required by applicable law or will not engage in activities which would
require them to be so licensed.
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APPENDIX A
DESCRIPTION OF MUNICIPAL SECURITIES RATINGS
Excerpts from Moody's description of its municipal debt ratings: Aaa--judged to
be the best quality, carry the smallest degree of investment risk and are
generally referred to as "gilt edge"; Aa--judged to be of high quality by all
standards, A--deemed to have many favorable investment attributes and considered
as upper medium grade obligations; Baa--considered as medium grade obligations,
i.e. they are neither highly protected nor poorly secured; Ba, B, Caa, Ca,
C--protection of interest and principal payments is questionable (Ba indicates
some speculative elements, B represents bonds that generally lack
characteristics of the desirable investment, Caa represents bonds which are in
poor standing, Ca represents a high degree of speculation and C represents the
lowest rated class of bonds); Caa, Ca and C bonds may be in default. Moody's
applies numerical modifiers l, 2 and 3 in each generic classification from Aa to
B in its bond rating systems. The modifier 1 indicates that the security ranks
in the higher end of its generic rating category; the modifier 2 indicates a
mid-range ranking; and the modifier 3 indicates that the issue ranks at the
lower end of its generic rating category.
A Standard & Poor's municipal debt rating is a current assessment of the
creditworthiness of an obligor with respect to a specific obligation. Debt rated
"AAA" has the highest rating assigned by Standard & Poor's. Capacity to pay
interest and repay principal is considered to be extremely strong. Debt rated
"AA" is considered to have a very strong capacity to pay interest and to repay
principal and differs from the highest rated issues only in small degree. Debt
rated "A" is considered to have a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than a debt of a higher rated
category. Debt rated "BBB" is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and to repay principal for
debt in this category than for higher rated categories. Debt rated "BB," "B,"
"CCC," "CC" or "C" is regarded, on balance, as predominately speculative with
respect to capacity to pay interest and repay principal in accordance with the
terms of the obligations. "BB" indicates the lowest degree of speculation and
"C" the highest degree of speculation. While such debt will likely have some
quality and protective characteristics, these are outweighed by large
uncertainties or major risk exposures to adverse conditions. Debt rated "CI" is
reserved for income bonds on which no interest is being paid. Debt rated "D" is
in default, and payment of interest and/or repayment of principal is in arrears.
The ratings from "AA" to "CCC" may be modified by the addition of a plus or
minus sign to show relative standing within the major rating categories. Plus
(+) or minus (-) may modify the ratings "AA" through "CCC" to show relative
standing within the major rating categories. The rating "r" may be attached to
highlight derivative, hybrid and certain other obligations that S&P believes may
experience high volatility or high variability in expected returns due to non-
credit risks. Examples of such obligations are: securities whose principal or
interest return is indexed to equities, commodities, or currencies; certain
swaps and options; and interest only and principal only mortgage securities.
The following summarizes the ratings used by D&P for municipal debt. Debt rated
"AAA" is of the highest credit quality. The risk factors are considered to be
negligible, being only slightly more than for risk-free U.S. Treasury debt. Debt
rated "AA" is of high credit quality. Protection factors are strong. Risk is
modest but may vary slightly from time to time because of economic conditions.
Debt rated "A" has protection factors which are average but adequate. However,
risk factors are more variable and greater in periods of economic stress. Debt
rated "BBB" has below
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average protection factors but is still considered sufficient for prudent
investment. Considerable variability in risk is present during economic cycles.
Debt rated below "BBB" is considered to be below investment grade. Although
below investment grade, debt rated "BB" is deemed likely to meet obligations
when due. Debt rated "B" possesses the risk that obligations will not be met
when due. Debt rated "CCC" is well below investment grade and considerable
uncertainty exists as to timely payment of principal, interest or preferred
dividends. Debt rated "DD" represents defaulted obligations. To provide more
detailed indications of credit quality, the "AA," "A," "BBB," "BB" and "B"
ratings may be modified by the addition of a plus or minus sign to show relative
standing within these major categories.
The following summarizes the four highest ratings used by Fitch for municipal
debt:
"AAA"--Debt considered to be investment grade and of the highest
credit quality. The obligor has an exceptionally strong ability to pay
interest and repay principal, which is unlikely to be affected by
reasonably foreseeable events.
"AA"--Debt considered to be investment grade and of very high credit
quality. The obligor's ability to pay interest and repay principal is very
strong, although not quite as strong as debt rated "AAA." Because debt
rated in the "AAA" and "AA" categories is not significantly vulnerable to
foreseeable future developments, short-term debt of these issuers is
generally rated "F1+."
"A"--Debt considered to be investment grade and of high credit
quality. The obligor's ability to pay interest and repay principal is
considered to be strong, but may be more vulnerable to adverse changes in
economic conditions and circumstances than debt with higher ratings.
"BBB"--Debt considered to be investment grade and of satisfactory
credit quality. The obligor's ability to pay interest and repay principal
is considered to be adequate. Adverse changes in economic conditions and
circumstances, however, are more likely to have an adverse impact on this
debt, and therefore, impair timely payment. The likelihood that the ratings
of this debt will fall below investment grade is higher than for debt with
higher ratings.
The following summarizes the rating categories used by Fitch for debt rated
below investment grade:
"BB"--Debt is considered speculative. The obligor's ability to pay
interest and repay principal may be affected over time by adverse economic
changes. However, business and financial alternatives can be identified
which could assist the obligor in satisfying its debt service requirements.
"B"--Debt is considered highly speculative. While debt in this class
is currently meeting debt service requirements, the probability of
continued timely payment of principal and interest reflects the obligor's
limited margin of safety and the need for reasonable business and economic
activity throughout the life of the issue.
"CCC"--Debt has certain identifiable characteristics which, if not
remedied, may lead to default. The ability to meet obligations requires an
advantageous business and economic environment.
"CC"--Debt is minimally protected. Default on interest and/or
principal payments seems probable over time.
"C"--Debt is in imminent default in payment of interest or principal.
"DDD," "DD" and "D"--Debt is in default on interest and/or principal
payments. "DDD" represents the highest potential for recovery on this debt,
and "D" represents the lowest potential for such recovery.
To provide more detailed indications of credit quality, the Fitch ratings from
and including "AA"
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to "C" may be modified by the addition of a plus or minus sign to show relative
standing within these major rating categories.
Moody's ratings for state and municipal notes and other short-term loans are
designated Moody's Investment Grade (MIG) and for variable rate demand
obligations are designated Variable Moody's Investment Grade (VMIG). Such
ratings recognize the differences between short-term credit risk and long-term
risk. Excerpts from Moody's description of short-term notes: MIG-
1/VMIG-1--deemed to be of the best quality, enjoying strong protection by
established cash flows, superior liquidity support or demonstrated broad-based
access to the market for refinancing; MIG-2/VMIG-2--judged to be of high
quality, with margins of protection ample although not so large as in the
preceding group; MIG-3/VMIG-3--deemed to be of favorable quality, with all
security elements accounted for but lacking the undeniable strength of the
preceding grades; liquidity and cash flow protection may be narrow and market
access for refinancing is likely to be less well established;
MIG-4/VMIG-4--considered to be of adequate quality, carrying specific risk but
having protection commonly regarded as required of an investment security and
not distinctly or predominantly speculative. Excerpts from Standard & Poor's
ratings for municipal notes: SP-1--very strong or strong capacity to pay
principal and interest; those issues determined to possess overwhelming safety
characteristics are given a plus (+) designation; SP-2-- satisfactory capacity
to pay principal and interest; and SP-3--speculative capacity to pay principal
and interest.
The three highest rating categories of D&P for short-term municipal debt are
"D-1," "D-2" and "D-3." D&P employs three designations, "D-1+," "D-1" and
"D-1-," within the highest rating category. "D-1+" indicates highest certainty
of timely payment. Short-term liquidity, including internal operating factors
and/or access to alternative sources of funds, is judged to be "outstanding, and
safety is just below risk-free U.S. Treasury short-term obligations." "D-1"
indicates very high certainty of timely payment. Liquidity factors are excellent
and supported by good fundamental protection factors. Risk factors are
considered to be minor. "D-1-" indicates high certainty of timely payment.
Liquidity factors are strong and supported by good fundamental protection
factors. Risk factors are very small. "D-2" indicates good certainty of timely
payment. Liquidity factors and company fundamentals are sound. Although ongoing
funding needs may enlarge total financing requirements, access to capital
markets is good. Risk factors are small. "D-3" indicates satisfactory liquidity
and other protection factors qualify issue as to investment grade. Risk factors
are larger and subject to more variation. Nevertheless, timely payment is
expected. D&P may also rate shortterm municipal debt as "D-4" or "D-5." "D-4"
indicates speculative investment characteristics. "D-5" indicates that the
issuer has failed to meet scheduled principal and/or interest payments.
The following summarizes the rating categories used by Fitch for short-term
municipal obligations:
"F-1+" securities possess exceptionally strong credit quality. Issues
assigned this rating are regarded as having the strongest degree of
assurance for timely payment.
"F-1" securities possess very strong credit quality. Issues assigned
this rating reflect an assurance of timely payment only slightly less in
degree than issues rated "F-1+."
"F-2" securities possess good credit quality. Issues carrying this
rating have a satisfactory degree of assurance for timely payment, but the
margin of safety is not as great as the "F-1+" and "F-1" categories.
"F-3" securities possess fair credit quality. Issues assigned this
rating have characteristics suggesting that the degree of assurance for
timely payment is adequate; however, near-term adverse changes could cause
these securities to be rated below investment grade.
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"F-S" securities possess weak credit quality. Issues assigned this
rating have characteristics suggesting a minimal degree of assurance for
timely payment and are vulnerable to near-term adverse changes in financial
and economic conditions.
Issues assigned a "D" rating are in actual or imminent payment
default.
Fitch may also use the symbol "LOC" with its short-term ratings to
indicate that the rating is based upon a letter of credit issued by a
commercial bank.
COMMERCIAL PAPER RATINGS
A Standard & Poor's commercial paper rating is a current assessment of the
likelihood of timely payment of debt considered short-term in the relevant
market. The designation "A-1" indicates the degree of safety regarding timely
payment is considered to be strong. Those issues determined to possess extremely
strong safety characteristics are denoted with a plus (+) sign designation.
Capacity for timely payment of issues with the "A-2" designation is considered
to be satisfactory. However, the relative degree of safety is not as high as for
issues designated "A-1." Issues rated "A-3" have an adequate capacity for timely
payment. They are, however, more vulnerable to the adverse effects of changes
and circumstances than obligations carrying the higher designation. Issues rated
"B" are regarded as having only speculative capacity for timely payment. The
rating of "C" is assigned to short-term debt obligations with a doubtful
capacity for payment. Issues rated "D" are in payment default. The "D" rating
category is used when interest payments or principal payments are not made on
the due date, even if the applicable grace period has not expired, unless S&P
believes that such payment will be made during such grace period. Moody's
commercial paper ratings are opinions of the ability of issuers to repay
punctually promissory obligations not having an original maturity in excess of 9
months. The ratings "Prime-1" and "Prime-2" are the two highest commercial paper
ratings assigned by Moody's. Issuers rated "Prime-1" (or related supporting
institutions) are considered to have a superior capacity for repayment of
short-term promissory obligations. Issuers rated "Prime-2" (or related
supporting institutions) are considered to have a strong capacity for repayment
of short-term promissory obligations. Issuers rated "Prime-3" (or related
supporting institutions) have an acceptable capacity for repayment of short-term
promissory obligations. The effect of industry characteristics and market
composition may be more pronounced. Variability in earnings and profitability
may result in changes in the level of debt protection measurements and the
requirement for relatively high financial leverage. Adequate alternate liquidity
is maintained. D&P and Fitch each use the short-term municipal debt ratings
described above for commercial paper.
UNRATED SECURITIES
Unrated securities are securities which have not been rated by a nationally
recognized statistical rating organization.
A-4
<PAGE> 196
- --------------------------------------------------------------------------------
PACIFIC HORIZON MUTUAL FUNDS
COPNATB95P
<PAGE> 197
NATIONAL MUNICIPAL
BOND FUND
PROSPECTUS
July 1, 1995
NOT FDIC INSURED
<PAGE> 198
PROSPECTUS
JULY 1, 1995
PACIFIC HORIZON U.S. GOVERNMENT SECURITIES FUND
A series of shares of Pacific Horizon Funds, Inc.
- --------------------------------------------------------------------------------
The PACIFIC HORIZON U.S. GOVERNMENT SECURITIES FUND (the "Fund" or the
"investment adviser") is a mutual fund whose investment objective is to provide
investors with a high level of current income, consistent with preservation of
capital. In seeking its investment objective, the Fund invests principally in
instruments issued by the Government National Mortgage Association, although it
may invest a portion of its assets in other types of U.S. Government securities.
The Fund is a separate, diversified investment portfolio offered by Pacific
Horizon Funds, Inc. (the "Company"), an open-end, series management investment
company.
Bank of America National Trust and Savings Association ("Bank of America" or the
"investment adviser") serves as the Fund's investment adviser. Based in San
Francisco, California, Bank of America and its affiliates have over $50 billion
under management, including over $10 billion in mutual funds.
The Fund may be suited for investors who want to participate in a diversified
portfolio of U.S. Government securities and who are willing to accept some price
and yield variations.
This Prospectus describes concisely the information about the Fund and the
Company that you should know before investing. Please read it carefully and
retain it for future reference.
More information about the Fund is contained in a Statement of Additional
Information that has been filed with the Securities and Exchange Commission. To
obtain a free copy, call 800-332-3863. The Statement of Additional Information,
as it may be revised from time to time, is dated July 1, 1995 and is
incorporated by reference into this Prospectus.
- --------------------------------------------------------------------------------
Fund shares are not bank deposits or obligations of, or guaranteed or endorsed
by, Bank of America or any of its affiliates and are not federally insured by,
guaranteed by, obligations of or otherwise supported by the U.S. Government, the
Federal Deposit Insurance Corporation, the Federal Reserve Board or any other
governmental agency. Investment in the Fund involves investment risk, including
the possible loss of principal amount invested.
- --------------------------------------------------------------------------------
LIKE ALL MUTUAL FUNDS, THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR
HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
This Prospectus is part of a Registration Statement that has been filed with the
Securities and Exchange Commission in Washington, D.C. under the Securities Act
of 1933.
No person has been authorized to give any information or to make any
representations in connection with the offer of the Fund's shares, other than as
contained in this Prospectus and the Fund's official sales literature.
Therefore, other information and representations must not be relied upon as
having been authorized by the Fund. This Prospectus does not constitute an offer
in any State in which, or to any person to whom, such offering may not lawfully
be made.
- --------------------------------------------------------------------------------
<PAGE> 199
CONTENTS
<TABLE>
<S> <C> <C>
EXPENSE SUMMARY 2
FINANCIAL HIGHLIGHTS 3
FUND INVESTMENTS 4 INVESTMENT OBJECTIVE
4 TYPES OF INVESTMENTS
6 OTHER INVESTMENT PRACTICES
8 FUNDAMENTAL LIMITATIONS
SHAREHOLDER GUIDE 9 HOW TO BUY SHARES
9 What Is My Minimum Investment In The Fund?
9 How Are Shares Priced?
11 How Can I Buy Shares?
13 What Price Will I Receive When I Buy Shares?
14 What Else Should I Know To Make A Purchase?
14 HOW TO SELL SHARES
14 How Do I Redeem My Shares?
16 What NAV Will I Receive For Shares I Want To Sell?
16 What Kind Of Paperwork Is Involved In
Selling Shares?
17 How Quickly Can I Receive My Redemption Proceeds?
17 Do I Have Any Reinstatement Privileges After I Have
Redeemed Shares?
17 DIVIDEND AND DISTRIBUTION POLICIES
SHAREHOLDER SERVICES 18 CAN I USE THE FUND IN MY RETIREMENT PLAN?
18 CAN I EXCHANGE MY INVESTMENT FROM ONE FUND TO
ANOTHER?
18 WHAT IS TELETRADE?
19 CAN I ARRANGE TO HAVE AUTOMATIC INVESTMENTS MADE ON
A REGULAR BASIS?
19 WHAT IS DOLLAR COST AVERAGING AND HOW CAN I
IMPLEMENT IT?
20 CAN I ARRANGE PERIODIC WITHDRAWALS?
20 CAN MY DIVIDENDS FROM THE FUND BE INVESTED IN OTHER
FUNDS?
20 IS THERE A SALARY DEDUCTION PLAN AVAILABLE?
THE BUSINESS OF THE FUND 21 FUND MANAGEMENT
21 Service Providers
22 TAX INFORMATION
23 MEASURING PERFORMANCE
24 DESCRIPTION OF SHARES
25 PLAN PAYMENTS
- ------------------------------------------------------------------------------------------------------------------------
DISTRIBUTOR: INVESTMENT ADVISER:
Concord Financial Group, Inc. Bank of America National Trust and Savings Association
125 West 55th Street 555 California Street
New York, NY 10019 San Francisco, CA 94104
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 200
EXPENSE SUMMARY
SHAREHOLDER TRANSACTION EXPENSES are charges you pay when buying or selling
shares of the Fund. ANNUAL FUND OPERATING EXPENSES are paid out of the Fund's
assets and include fees for portfolio management, maintenance of shareholder
accounts, general Fund administration, shareholder servicing, accounting and
other services.
At right is a summary of the shareholder transaction expenses imposed by the
Fund and its operating expenses expected to be incurred during the current
fiscal year. This information has been restated to assume that current fees had
been in effect during the previous fiscal year. Actual expenses may vary. A
hypothetical example based on the summary is also shown.
<TABLE>
<S> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load Imposed on
Purchases (as a percentage of
offering price) 4.50%
Sales Load Imposed on Reinvested
Dividends None
Deferred Sales Load None
Redemption Fees None
Exchange Fee None
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Management Fees 0.55%
All Other Expenses 0.73%
------
Shareholder Service Payments 0.25%
Other Expenses 0.48%
-----
Total Fund Operating Expenses 1.28%
======
</TABLE>
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
EXAMPLE: Assume the Fund's annual return is 5% and its operating expenses After 1 Year : $57
are the same as those stated above. For every $1,000 you invest, here's After 3 Years : $84
how much you would have paid in total expenses if you closed your account After 5 Years : $112
after the number of years indicated: After 10 Years: $193
</TABLE>
Note: The preceding operating expenses and example should not be considered a
representation of past or future investment returns and operating expenses.
Actual investment returns and operating expenses may be more or less than those
shown.
- --------------------------------------------------------------------------------
This expense information is provided to help you understand the expenses you
would bear either directly (as with transaction expenses) or indirectly (as with
annual operating expenses) as a Fund shareholder.
Management fees consist of:
- - an investment advisory fee payable at the annual rate of .35% of the Fund's
net assets; and
- - an administration fee payable at the annual rate of .20% of the Fund's net
assets.
For a further description of shareholder transaction expenses and the Fund's
operating expenses, see the sections entitled "Shareholder Guide" and "The
Business of the Fund" in this Prospectus.
2
<PAGE> 201
FINANCIAL HIGHLIGHTS
The Fund commenced operations on January 7, 1988 as The Horizon Capital GNMA
Extra Fund (the "Predecessor Fund"), a separate portfolio of a Massachusetts
business trust called The Horizon Capital Funds. On January 1, 1989 the
Predecessor Fund changed its name to The Pacific Horizon GNMA Extra Fund and on
January 9, 1990 was reorganized as a portfolio of the Company. On June 28, 1991
the Fund changed its name to the Pacific Horizon U.S. Government Securities
Fund.
The table below shows certain financial highlights of the Predecessor Fund's
investment results for the periods ended on or prior to August 31, 1989, the
combined investment results of the Fund and the Predecessor Fund for the period
September 1, 1989 through February 28, 1990 and the Fund's investment
results for the five fiscal years in the five year period ended February 28,
1995. The information for the periods indicated was audited by Price Waterhouse
LLP, the independent accountants for both the Fund and the Predecessor Fund,
whose unqualified report on the financial statements containing such information
is incorporated by reference in the Statement of Additional Information. The
Financial Highlights should be read in conjunction with the financial statements
and notes thereto and the unqualified report of independent accountants which
are incorporated by reference in the Statement of Additional Information.
Further information about the performance of the Fund is available in the annual
report to shareholders. Both the Statement of Additional Information and the
annual report to shareholders may be obtained from the Fund free of charge by
calling 800-332-3863.
Selected data for a share of common stock outstanding throughout each of the
periods indicated:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED
---------------------------------------------------------------------
FEBRUARY FEBRUARY FEBRUARY FEBRUARY FEBRUARY
28, 28, 28, 29, 28,
1995 1994 1993 1992 1991
-------- --------- --------- --------- -------
<S> <C> <C> <C> <C> <C>
Net asset value per share,
beginning of period........ $ 9.85 $ 10.21 $ 10.22 $ 9.88 $ 9.59
-------- --------- --------- --------- -------
Income from Investment
Operations:
Net investment income...... 0.55 0.45 0.70 0.81 0.87
Net realized and unrealized
gain (loss) on
securities............... (0.54) (0.11) 0.37 0.37 0.29
-------- --------- --------- --------- -------
Total income from
investment operations.... 0.01 0.34 1.07 1.18 1.16
-------- --------- --------- --------- -------
Less Dividends and
Distributions:
Dividends from net
investment Income........ (0.52) (0.45) (0.70) (0.81) (0.87)
Distributions from net
realized gains on
securities............... -- (0.16) (0.38) (0.03) --
Tax return of capital...... (0.03) (0.09) -- -- --
-------- --------- --------- --------- -------
Total dividends and
distributions.............. (0.55) (0.70) (1.08) (0.84) (0.87)
-------- --------- --------- --------- -------
Net change in net asset
value per share............ (0.54) (0.36) (0.01) 0.34 0.29
-------- --------- --------- --------- -------
Net asset value per share,
end of period.............. $ 9.31 $ 9.85 $ 10.21 $ 10.22 $ 9.88
========= ========== ========== ========== =======
Total return++.............. 0.30% 3.40% 10.92% 12.45% 12.73%
Ratios/Supplemental Data:
Net assets, end of period
(000).................... $ 87,354 $ 157,984 $ 119,127 $ 100,444 $ 7,466
Ratio of expenses to
average net assets***.... 1.15% 0.96% 0.51% 0.37% 0.39%
Ratio of net investment
income to average net
assets***................ 5.57% 4.45% 6.80% 7.60% 8.88%
Portfolio turnover rate.... 189% 255% 252% 165% 80%
<CAPTION>
PERIOD YEAR PERIOD
ENDED ENDED ENDED
FEBRUARY 28, AUGUST 31, AUGUST 31,
1990** 1989 1988*
------------- ------------- -------------
<S> <C> <C> <C>
Net asset value per share,
beginning of period........$ 9.62 $ 9.50 $ 9.55
------ ------ ------
Income from Investment
Operations:
Net investment income...... 0.44 0.86 0.56
Net realized and unrealized
gain (loss) on
securities............... (0.03) 0.12 (0.05)
------ ------ ------
Total income from
investment operations.... 0.41 0.98 0.51
------ ------ ------
Less Dividends and
Distributions:
Dividends from net
investment Income........ (0.44) (0.86) (0.56)
Distributions from net
realized gains on
securities............... -- -- --
Tax return of capital...... -- -- --
------ ------ ------
Total dividends and
distributions.............. (0.44) (0.86) (0.56)
------ ------ ------
Net change in net asset
value per share............ (0.03) 0.12 (0.05)
------ ------ ------
Net asset value per share,
end of period..............$ 9.59 $ 9.62 $ 9.50
======= ======= =======
Total return++.............. 4.28%++++(a) 10.81%(a) 5.34%++++(a)
Ratios/Supplemental Data:
Net assets, end of period
(000)....................$ 3,562 $ 2,986 $ 1,784
Ratio of expenses to
average net assets***.... 0.51%+ 0.70% --
Ratio of net investment
income to average net
assets***................ 9.06%+ 9.02% 9.46%+
Portfolio turnover rate.... 4% 5% 1%
</TABLE>
- ---------------
* For the period January 7, 1988 (commencement of operations) through
August 31, 1988.
** For the period September 1, 1989 through February 28, 1990.
*** Net of fees waived and expenses reimbursed which had the effect of
reducing the ratio of expenses to average net assets and increasing the
ratio of net investment income to average net assets by 0.00%, 0.04%,
0.59%, 0.75%, 3.91%, 6.87% (annualized), 4.49% and 28.66% (annualized),
respectively.
+ Annualized.
++ The total return figures listed do not include the effect of the maximum
4.50% sales charge.
+++ Security Pacific National Bank served as investment adviser through
April 21, 1992. Bank of America National Trust and Savings Association
served as investment adviser commencing April 22, 1992.
++++ Not annualized.
(a) Unaudited.
3
<PAGE> 202
FUND INVESTMENTS
THE PACIFIC HORIZON U.S. GOVERNMENT SECURITIES FUND SEEKS HIGH CURRENT INCOME
WHILE AT THE SAME TIME ATTEMPTING TO MAINTAIN PRINCIPAL. THE FUND INVESTS MAINLY
IN CERTIFICATES ISSUED BY THE GOVERNMENT NATIONAL MORTGAGE ASSOCIATION ("GNMA"),
A U.S. GOVERNMENT CORPORATION WITHIN THE DEPARTMENT OF HOUSING AND URBAN
DEVELOPMENT.
The Fund is appropriate for investors who want:
- - income from U.S. Government securities to help meet today's expenses; and
- - relative stability of investment but are willing to accept some price and
yield variations.
---------------------------------------------------------
INVESTMENT OBJECTIVE
THE INVESTMENT OBJECTIVE OF THE FUND IS TO PROVIDE INVESTORS WITH A HIGH LEVEL
OF CURRENT INCOME, CONSISTENT WITH THE PRESERVATION OF CAPITAL.
---------------------------------------------------------
TYPES OF INVESTMENTS
IN GENERAL. Certificates issued by GNMA ("GNMA Certificates") are backed by the
full faith and credit of the U.S. Government. Securities like those included in
the Fund's portfolio have historically had a very low risk of loss of principal
if held to maturity. Due to changes in interest rates, however, the market value
of these securities and thus the Fund's net asset value per share is expected to
vary. The value of the Fund's portfolio will normally fall when prevailing
interest rates rise and rise when interest rates fall. Interest rate
fluctuations can be expected to affect the Fund's dividends. Although the Fund
strives to achieve its investment objective, there can be no assurance that it
will be able to do so.
As a fundamental policy, the Fund will at all times invest at least 65% of its
assets in GNMA Certificates. The rest of its assets will be invested in other
securities of the U.S. Government (and its agencies and instrumentalities) that
are backed by the full faith and credit of the Government, in GNMA Real Estate
Mortgage Investment Conduit Securities ("GNMA REMICs"), in options and futures
contracts and as described in "Other Investment Practices" below. Examples of
other types of U.S. Government obligations that the Fund may hold include U.S.
Treasury bills, notes and bonds, and obligations of the Small Business
Administration and the Maritime Administration.
Despite the fundamental policy described above, the Fund retains the ability at
any time for defensive purposes, or to maintain liquidity, to invest in U.S.
Government securities, commercial paper rated in the highest rating category at
the time of purchase by Standard & Poor's Ratings Group, Division of McGraw-Hill
("Standard & Poor's") or Moody's Investors Service, Inc. ("Moody's"), or money
market funds eligible for investment by national banks that invest in U.S.
Government agency securities. Investments in money market funds will be made
subject to the requirements of applicable securities laws, and will require the
Fund to pay its pro rata share of the advisory and other fees charged by the
money market fund in which it invests (which fees will be in addition to those
the Fund pays for its own operations). The Fund may also hold cash when Bank of
America determines such a defensive position is warranted in light of market
conditions.
GNMA CERTIFICATES. GNMA Certificates are mortgage-backed debt securities
representing fractional ownership of a pool of mortgage loans. They are issued
by lenders (such as savings and loan associations, commercial banks and mortgage
bankers) approved by the Federal Housing Administration which meet criteria
imposed by GNMA. The lender assembles a specified pool of mortgage loans, all of
which are insured by the
4
<PAGE> 203
Federal Housing Administration or the Farmers' Home Administration, and applies
to GNMA for approval of the pool. Upon approval, GNMA provides its commitment to
guarantee timely payment of principal and interest on the GNMA certificates
secured by the mortgage loans in the pool.
GNMA Certificates usually bear a nominal rate of interest equal to the effective
rate on the mortgage loans in the pool less .5%, which is the fee charged by the
issuer and GNMA. The Fund receives monthly payments of principal and interest
(less the fee mentioned above) from its investments in GNMA Certificates. The
actual yield on the Fund's investment, calculated by dividing the interest
payments by the purchase price for the GNMA Certificate, may differ
significantly from the nominal interest rate. This difference is due to:
- - variations of the lives of the mortgages in the pool; and
- - the impossibility of anticipating the effective interest rate at which future
principal payments might be reinvested.
GNMA Certificates have in the past provided higher yields than direct
investments in U.S. Treasury obligations, although there is no assurance they
will continue to do so in the future.
If mortgage loans in the pool are prepaid (because of either voluntary
prepayments, which are more likely during periods of falling interest rates, or
because of foreclosure), the principal payments are passed through to the
Certificate holders. Because of these prepayments, the life of a GNMA
Certificate may be substantially shorter than the time remaining until maturity
of the mortgages in the pool.
The Fund will normally reinvest amounts reserved from prepayments in other GNMA
Certificates. Depending on prevailing interest rates, the reinvestment may be at
higher or lower rates than the yield the Fund was receiving on the Certificate
that was prepaid. As a result, GNMA Certificates are not as effective at
"locking-in" high interest rates during periods of declining rates as are
typical non-callable fixed rate securities.
As opposed to bonds, where principal is normally returned in a lump sum at
maturity, the principal underlying a GNMA Certificate is paid back over the life
of the loan. The Fund will purchase GNMA Certificates known as "modified pass-
through" certificates, on which timely payment of principal and interest is
guaranteed. The Fund may also purchase "variable rate" GNMA Certificates, which
are backed by pools of variable rate mortgages, as well as other types of
Certificates that are backed by GNMA's guarantee.
GNMA REMICS. The Fund may invest in GNMA REMICs which are collateralized
mortgage obligations ("CMOs"). GNMA REMICs provide the holder with a specified
interest in the cash flow of a pool of underlying mortgages or other
mortgage-backed securities. GNMA REMICs are issued in multiple classes, each
with a specified fixed or floating interest rate and a final distribution date.
Although the relative payment rights of these classes can be structured in a
number of different ways, most often payments of principal are applied to the
GNMA REMIC classes in the order of their respective stated maturities. GNMA
REMICs can expose a Fund to more volatility and interest rate risk than other
types of asset-backed obligations.
OPTIONS TRANSACTIONS. The Fund may sell, or "write," covered call options on
securities it owns in order to obtain the premium for doing so, and may purchase
put options on securities as a hedging technique. Options written by the Fund
will not exceed 25% of its total assets (taken at market value on the date
written) and options purchased by the Fund will not exceed 5% of its total
assets.
Closing purchase transactions on previously written options may be entered into
by the Fund to realize a profit and/or to permit the Fund to write another
option on the underlying security. The Fund might write another option on the
underlying security in order to provide for a different exercise price or
expiration date. A
5
<PAGE> 204
profit or loss will be realized when an option is closed to the extent the cost
of the closing transaction is less or more, respectively, than the premium
received for writing the option.
When an option written by the Fund is exercised, the Fund will receive the
exercise price for the security as provided for in the option, but it loses the
opportunity to receive the price which it could have obtained for the security
in the open market (which will likely be higher than the exercise price of the
option).
Put options purchased by the Fund give it the right to sell the security
underlying the option at the price set forth in the option at any time prior to
the expiration of the option. The Fund may sell a put option prior to the time
the securities underlying the option are actually sold, which will result in a
gain or loss to the Fund depending on whether the amount received from the sale
is more or less than the premium and other transaction costs associated with the
option.
SPECIAL RISKS EXIST WITH RESPECT TO OPTIONS TRANSACTIONS BY THE FUND. For
example, the Fund may engage in transactions in options that are not traded on a
national securities exchange ("unlisted options"). Although the Fund will engage
in options transactions only with broker-dealers Bank of America deems
creditworthy, the Fund continues to bear the risk that such broker-dealers will
fail to meet their commitments under the option. In addition, the Fund will not
be able to sell the securities underlying an unlisted call option until the
option expires or is exercised or the Fund closes out the option. Investors
should note that unlisted options do not carry the same protections as those
listed by the Options Clearing Corporation, and that they are subject to the
restriction on illiquid instruments stated below.
Furthermore, the Fund's ability to engage in transactions in options may be
limited by IRS requirements that the Fund receive less than 30% of its gross
income from the sale or disposition of certain investments, including options
and futures contracts, held by the Fund for less than three months. Bank of
America does not believe that transactions in options will significantly affect
the Fund's ability to meet IRS requirements.
The times of day that options on particular securities are sold may not be the
same as those during which the securities themselves are traded, which means
that significant activity could occur in the markets for the underlying
securities that would not be reflected in the options markets. Because the
exchange market in U.S. Government securities options is relatively new, the
Fund cannot predict the amount of interest there may be in such options or
whether viable exchange markets will continue to exist.
FUTURES CONTRACTS AND RELATED OPTIONS. The Fund may enter into financial
futures contracts or purchase or sell options on such futures as a hedge against
anticipated interest rate fluctuations. Such fluctuations could have an effect
on securities that the Fund holds in its portfolio or intends to sell. The Fund
may not purchase or sell a futures contract (or related option) unless
immediately after any such transaction the sum of the aggregate amount of margin
deposits on its existing futures positions and the amount of premiums paid for
related options is 5% or less of its total assets (after taking into account
certain technical adjustments).
More information regarding futures contracts and related options can be found in
Appendix B to the Statement of Additional Information.
OTHER INVESTMENT PRACTICES
In pursuing its investment objective, the Fund also uses the following
investment techniques:
REPURCHASE AGREEMENTS. The Fund may buy securities subject to the seller's
agreement to repurchase them at an agreed upon time and price. These
transactions are known as repurchase agreements. The Fund will enter into
repurchase agreements only with financial institutions (such as banks and broker
dealers) deemed creditworthy by Bank of America, under guidelines approved by
the Company's Board of Directors. The Fund intends that such agreements will not
have maturities longer than
6
<PAGE> 205
60 days. During the term of any repurchase agreement the seller must maintain
the value (including accrued interest) of the securities subject to the
agreement in an amount that is greater than the repurchase price. Bank of
America then continually monitors that value. Nonetheless, should the seller
default on its obligations under the agreement, the Fund would be exposed to
possible loss due to adverse market action or delays connected with the
disposition of the underlying obligations. Repurchase agreements are considered
to be loans under the Investment Company Act of 1940 (the "1940 Act").
REVERSE REPURCHASE AGREEMENTS. The Fund may borrow money for temporary purposes
by entering into reverse repurchase agreements. Under these agreements the Fund
sells portfolio securities to financial institutions (such as banks and
broker-dealers) and agrees to buy them back later at an agreed upon time and
price. When the Fund enters into a reverse repurchase agreement, it places in a
separate custodial account either liquid assets or other high grade debt
securities that have a value equal to or greater than the repurchase price. The
account is then continuously monitored by Bank of America to make sure that an
appropriate value is maintained. Reverse repurchase agreements involve the risk
that the value of portfolio securities the Fund relinquishes may decline below
the price the Fund must pay when the transaction closes. Reverse repurchase
agreements are considered to be borrowings under the 1940 Act. Borrowings may
magnify the potential for gain or loss on amounts invested resulting in an
increase in the speculative character of the Fund's shares. The Fund will only
enter into reverse repurchase agreements to avoid the need to sell portfolio
securities to meet redemption requests during unfavorable market conditions.
WHEN-ISSUED PURCHASES, FORWARD COMMITMENTS AND DELAYED SETTLEMENTS. The Fund
may purchase securities on a "when-issued" basis and purchase or sell securities
on a "forward commitment" basis. Additionally, the Fund may purchase or sell
securities on a "delayed settlement" basis. When-issued and forward commitment
transactions, which involve a commitment by the Fund to purchase or sell
particular securities with payment and delivery taking place at a future date
(perhaps one or two months later), permit the Fund to "lock in" a price or yield
on a security it owns or intends to purchase, regardless of future changes in
interest rates. Delayed settlement describes a securities transaction in the
secondary market for which settlement will occur sometime in the future. These
transactions involve the risk that the price or yield obtained may be less
favorable than the price or yield available when the delivery takes place. When-
issued purchases, forward commitments and delayed settlements are not expected
to exceed 25% of the value of the Fund's total assets under normal
circumstances. These transactions will not be entered into for speculative
purposes, but only in furtherance of the Fund's investment objective.
SECURITIES LENDING. In order to earn additional income, the Fund may lend its
portfolio securities to financial institutions (such as banks and brokers) that
Bank of America considers to be of good standing. If the broker-dealer should
become bankrupt, however, the Fund could experience delays in recovering its
securities. A securities loan will only be made when, in Bank of America's
judgment, the possible reward from the loan justifies the possible risks. In
addition, such loans will not be made if, as a result, the value of securities
loaned by the Fund exceeds 30% of its total assets. Securities loans will be
fully collateralized.
PORTFOLIO TURNOVER. Investment decisions for the Fund are made independently
from those for other investment companies and accounts managed by Bank of
America and its affiliated entities. Such other investment companies and
accounts may also invest in the same securities as the Fund. When a purchase or
sale of the same security is made at substantially the same time on behalf of
the Fund and another investment company or account, available investments
7
<PAGE> 206
or opportunities for sales will be equitably allocated pursuant to procedures of
Bank of America. In some instances, this investment procedure may adversely
affect the price paid or received by the Fund or the size of the position
obtained or sold by the Fund.
In allocating purchase and sale orders for portfolio securities (involving the
payment of brokerage commissions or dealer concessions), Bank of America may
consider the sale of Fund shares by broker-dealers and other financial
institutions (including affiliates of Bank of America and the Fund's
distributor), provided it believes the quality of the transaction and the amount
of the commission are not less favorable than what they would be with any other
unaffiliated qualified firm.
The Fund's investment practices may result in portfolio turnover greater than
that of other mutual fund portfolios. Although no commissions are paid on bond
transactions, purchases and sales are at net prices which reflect dealers'
mark-ups and mark-downs, and a higher portfolio turnover rate for bond
investments will result in the payment of more dealer mark-ups and mark-downs
than would otherwise be the case. Higher rates of turnover may impose other
transaction costs and could increase substantially the amount of income received
by the Fund that constitutes taxable capital gains. To the extent capital gains
are realized, distributions from those gains may be ordinary income for federal
tax purposes (see "Tax Information").
FUNDAMENTAL LIMITATIONS. The Fund's investment objective may not be changed
without a vote by the holders of a majority of the Fund's outstanding shares.
Policies requiring such a vote to effect a change are known as "fundamental." A
number of the Fund's other fundamental investment limitations are summarized
below.
1. Under normal circumstances the Fund may not invest less than 65% of its total
assets in GNMA Certificates.
2. The Fund may not issue senior securities or borrow money except for temporary
purposes in amounts up to 10% of its total assets. Borrowing will occur only
to meet redemption requests, and not for investment leverage. The Fund will
not purchase securities if any borrowings are outstanding.
3. The Fund may not make loans, although it may invest in debt securities, enter
into repurchase agreements and lend its portfolio securities.
4. The Fund may not invest more than 10% of its total assets in certain illiquid
instruments.
5. With the exception of obligations issued or guaranteed by the U.S. Government
or its agencies, the Fund may not purchase securities of an issuer with an
operating history of less than three years.
* * *
A complete list of the Fund's fundamental investment limitations is set out in
full in the Statement of Additional Information.
8
<PAGE> 207
SHAREHOLDER GUIDE
THE FOLLOWING SECTION WILL PROVIDE YOU WITH ANSWERS TO SOME OF THE MOST
OFTEN-ASKED QUESTIONS REGARDING BUYING AND SELLING THE FUND'S SHARES AND
REGARDING THE FUND'S DIVIDENDS.
HOW TO BUY SHARES
WHAT IS MY MINIMUM INVESTMENT IN THE FUND?
Generally, there is a minimum investment requirement of $500 for initial
purchases and $50 for subsequent purchases, although these amounts may be
altered in certain circumstances as shown below.
- ---------------------------------------------------------
INVESTMENT MINIMUMS
FOR SPECIFIC TYPES OF ACCOUNTS
<TABLE>
<CAPTION>
INITIAL SUBSEQUENT
INVESTMENT INVESTMENT
------- -------------
<S> <C> <C>
Regular Account $ 500* $50
Automatic Investment Plan $ 50 $50
IRAs, SEP-IRAs
(one participant) $ 500 No minimum
Spousal IRAs** $ 250 No minimum
SEP-IRAs
(more than one participant) $ 2,500 No minimum
</TABLE>
* The minimum investment is $100 for purchases made through Bank of America's
trust and agency accounts or a Service Organization (defined below) whose
clients have made aggregate minimum purchases of $1,000,000.
** A regular IRA must be opened in conjunction with this account.
- ---------------------------------------------------------
HOW ARE SHARES PRICED?
Shares are purchased at their public offering price, which is based upon the
Fund's net asset value per share plus a front-end sales load. The Fund
calculates its net asset value (NAV) as follows:
(Value of Fund Assets) - (Fund Liabilities)
NAV = -------------------------------------------------------
Number of Outstanding Shares
Net asset value is determined as of the end of regular trading hours on the New
York Stock Exchange (the "Exchange") (currently 4:00 p.m. Eastern time) on days
the Exchange is open.
The Fund's investments are valued at market value or, where market quotations
are not readily available, at fair value as determined in good faith by the Fund
pursuant to procedures adopted by the Board of Directors. Short-term securities
are valued at amortized cost, which approximates market value. For further
information about valuing Fund investments, see the Statement of Additional
Information. For voice recorded price and yield information call (800) 227-1545.
SALES LOAD. The front-end sales load for the Fund begins at 4.50% and may
decrease as the amount you invest increases, as shown in the following chart:
- ---------------------------------------------------------
<TABLE>
<CAPTION>
DEALER'S
AS A % OF REALLOWANCE
-------------- AS A
NET % OF
AMOUNT OF OFFERING ASSET OFFERING
TRANSACTION PRICE VALUE PRICE*
------------------- ---- ---- ----
<S> <C> <C> <C>
Less than $100,000 4.50 4.71 4.00
$100,000 but less
than $250,000 3.75 3.90 3.35
$250,000 but less
than $500,000 2.50 2.56 2.20
$500,000 but less
than $750,000 2.00 2.04 1.75
$750,000 but less
than $3,000,000 1.00 1.01 0.90
$3,000,000 or more 0.00 0.00 0.00
</TABLE>
* Dealer's reallowance may be changed periodically.
From time to time, the Fund's distributor will make or allow additional
payments or promotional incentives in the form of cash or other compensation
such as trips to sales seminars, tickets to sporting and other entertainment
events and gifts of merchandise to firms that sell shares of the Fund.
- ---------------------------------------------------------
9
<PAGE> 208
WHEN NO SALES LOAD IS APPLIED. You pay no front-end sales load on the following
types of transactions:
- - reinvestment of dividends or distributions;
- - corporate/business retirement plans (such as 401k, 403b7, 457 and Keogh
accounts) sponsored by the Fund's administrator;
- - employer-sponsored employee pension or retirement plans making direct
investments in the Fund;
- - any purchase of shares by an investment adviser regulated by federal or state
governmental authority when the investment adviser is purchasing shares for
its own account or for an account for which it is authorized to make
investment decisions (i.e., a discretionary account);
- - accounts opened by a bank, trust company or thrift institution, acting as a
fiduciary, provided appropriate notification of such status is given at the
time of investment;
- - any purchase of shares by clients of The Private Bank of Bank of America or by
Private Banking clients of Seattle-First National Bank or by or on behalf of
agency accounts administered by any bank or trust company affiliate of Bank of
America;
- - any purchase of shares through a discount broker-dealer that imposes a
transaction charge with respect to such purchase, provided you were the
beneficial owner of shares of the Fund (or any other fund in the Pacific
Horizon Family of Funds) prior to July 1, 1992, so long as your account
remains open on the Company's books;
- - any purchase of shares, provided you were the beneficial owner of shares of
the Fund (or any other fund in the Pacific Horizon Family of Funds) before
April 20, 1987, so long as your account remains open on the Company's books;
- - any purchase of shares, provided you were the beneficial owner of shares of
Bunker Hill Income Securities, Inc. on the date of its reorganization into the
Pacific Horizon Corporate Bond Fund, so long as your account remains open on
the Company's books;
- - any purchase of shares pursuant to the Reinstatement Privilege described
below; and
- - any purchase of shares pursuant to the Directed Distribution Plan described
below.
Additionally, some individuals are not required to pay a front-end sales load
when purchasing Fund shares, including:
- - members of the Company's Board of Directors;
- - U.S. based employees and retirees (including employees who are U.S. citizens
but work abroad and retirees who are U.S. citizens but worked abroad) of Bank
of America or any of its affiliates, and their parents, spouses and minor
children, as well as members of the Board of Directors of Bank of America or
any of its affiliates;
- - registered representatives or full-time employees of broker-dealers having
agreements with the Fund's distributor pertaining to the sale of Fund shares
(and their spouses and minor children) to the extent permitted by such
organizations; and
- - former full-time employees (and retirees) of Security Pacific Corporation (or
any of its subsidiaries) and the surviving spouses and minor children of such
employees (and retirees), provided they were the beneficial owner of shares of
the Fund (or any other fund in the Pacific Horizon Family of Funds) prior to
July 1, 1992, so long as their account remains open on the Company's books.
RIGHTS OF ACCUMULATION. When buying shares in Pacific Horizon Funds, your
current aggregate investment determines the sales load that you pay. Your
current aggregate investment is the accumulated combination of your immediate
investment along with the shares that you beneficially own in any Pacific
Horizon Fund, or for like shares of any investment portfolio (a "Time Horizon
Fund") of Time Horizon Funds, an open-end investment company managed by an
affiliate of Bank of America, on which you paid a sales load (including shares
that carry no sales load but were obtained through an exchange and can be traced
back to shares that were acquired with a sales load).
To qualify for a reduced sales load, you or your Service Organization (which is
an institution
10
<PAGE> 209
such as a bank or broker-dealer that has entered into a selling and/or servicing
agreement with the Fund's distributor) must notify the Fund's transfer agent at
the time of investment that a quantity discount is applicable. Use of this
service is subject to a check of appropriate records, after which you will
receive the lowest applicable sales charge. If you want to participate you can
so indicate on your Account Application or make a subsequent written request to
the Transfer Agent.
Example: Suppose you beneficially own shares of the Fund, the Aggressive Growth
Fund, the California Tax-Exempt Bond Fund, the Capital Income Fund and shares of
the Company's money market funds that can be traced back to the purchase of
shares carrying a sales load (or any combination thereof) with an aggregate
current value of $90,000. If you subsequently purchase shares of the Fund with a
current value of $10,000, the load applicable to the subsequent purchase would
be reduced to 3.75% of the offering price.
LETTER OF INTENT. You may also obtain a reduced sales charge by means of a
written Letter of Intent, which expresses your non-binding commitment to invest
in an aggregate $100,000 or more in shares of any Pacific Horizon Fund or any
Time Horizon Fund within a period of 13 months, beginning up to 90 days prior to
the date of the Letter's execution. Shares purchased during that period count as
a credit toward completion of the Letter of Intent. Any investments you make
during the period receive the discounted sales load based on the full amount of
your investment commitment. When your commitment is fulfilled, an adjustment
will be made to reflect any reduced sales load applicable to shares purchased
during the 90-day period prior to the submission of your Letter of Intent.
While signing a Letter of Intent does not bind you to purchase, or the Company
or Time Horizon Funds to sell, the full amount indicated at the sales load in
effect at the time of signing, you must complete the intended purchase to obtain
the reduced sales load. When you sign a Letter of Intent, the Company or Time
Horizon Funds, as applicable, holds in escrow shares purchased by you in an
amount equal to 5% of the total amount of your commitment. After you fulfill the
terms of the Letter of Intent the escrow will be released.
If your aggregate investment exceeds the amount indicated in your Letter of
Intent, you will receive an adjustment which reflects the further reduced sales
load applicable to your excess investment. It will be in the form of additional
shares credited to your account at the then current offering price applicable to
a single purchase of the total amount of the total purchase.
If your aggregate investment is less than the amount you committed, you will be
requested to remit an amount equal to the difference between the sales load
actually paid and the sales load applicable to the aggregate purchases actually
made. If such remittance is not received within 20 days, the Transfer Agent will
redeem an appropriate number of shares held in escrow to realize the difference.
If you would like to participate, complete the Letter of Intent on your Account
Application. If you have any questions regarding the Letter of Intent, call
800-332-3863. Please read it carefully, as you will be bound by its terms.
HOW CAN I BUY SHARES?
The chart below provides more information regarding some of the different
methods for investing in the Fund.
11
<PAGE> 210
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------
TO BUY SHARES
OPENING AN ACCOUNT ADDING TO AN ACCOUNT
- --------------------------------------------------------------------------------------------------------
<CAPTION>
THROUGH BANK OF AMERICA, YOUR BROKER OR ANOTHER SERVICE ORGANIZATION
(ORDERS ARE NOT EFFECTIVE UNTIL RECEIVED BY THE FUND'S TRANSFER AGENT)
<S> <C> <C>
Contact them directly for Contact them directly for
instructions. instructions.
- --------------------------------------------------------------------------------------------------------
<Cap[tion>
THROUGH THE DISTRIBUTOR
(IF YOU ARE OR WILL BE THE SHAREHOLDER OF RECORD ON THE COMPANY'S BOOKS)
<S> <C>
BY MAIL
Pacific Horizon Funds, Inc. Complete Account Application Mail all subsequent
c/o DST Systems, Inc. and mail it with a check investments to:
P.O. Box 419955 (payable to Pacific Horizon
Kansas City, MO 64141-6955 U.S. Government Securities Pacific Horizon Funds, Inc.
Fund) to the address on the c/o DST Systems, Inc.
left. P.O. Box 419940
Kansas City, MO 64173-0298
- --------------------------------------------------------------------------------------------------------
IN PERSON
DST Systems, Inc. Deliver Account Application Deliver your payment directly
811 Main and your payment directly to to the address on the left.
Kansas City, MO 64105-2005 the address on the left.
- --------------------------------------------------------------------------------------------------------
BY WIRE
United Missouri Bank of Instruct your bank to Instruct your bank to
Kansas City, N.A. transmit immediately transmit immediately
10th and Grand available funds, for purchase available funds as described
Kansas City, MO 64106 of Fund shares in your name. at left, except that the wire
ABA No. 1010-0069-5 should indicate that you are
Pacific Horizon Funds, Inc. Be sure to have your bank making a subsequent purchase
U.S. Government Securities Fund indicate your name, address as opposed to opening a new
DDA #98-7037-107-3 and tax identification account.
number, the name of the Fund
and the fact that a new Be sure to include your name
account is being opened. and your Fund account number.
Consult your bank for information on remitting funds by wire
and any associated bank charges.
You may contact the Fund's transfer agent at 800-346-2087 for
further information regarding wiring instructions.
- --------------------------------------------------------------------------------------------------------
</TABLE>
12
<PAGE> 211
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------
OPENING AN ACCOUNT ADDING TO AN ACCOUNT
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
BY TELETRADE TeleTrade Privileges apply Purchase may be made in the
(a service permitting transfers automatically, although the minimum amount of $500 and
of money from your Privilege may not be used to the maximum amount of $50,000
checking, NOW or bank make an initial purchase. If per transaction as soon as
money market account) you do not wish to have appropriate information
TeleTrade Privileges, you regarding your bank account
must indicate that fact on has been established on your
the Account Application or in Fund account. This
a subsequent written notice information may be provided
to the Fund's transfer agent. on the Account Application or
in a signature guaranteed
letter of instruction to the
Fund's transfer agent.
Signature guarantees are
discussed under "How to Sell
Shares."
Call 800-346-2087 to make
your purchase.
</TABLE>
You should refer to the section entitled "Shareholder Services"
for additional important information about the TeleTrade Privilege.
YOU MAY USE OTHER INVESTMENT OPTIONS, INCLUDING AUTOMATIC INVESTMENTS
AND EXCHANGES, TO INVEST IN YOUR FUND ACCOUNT.
PLEASE REFER TO THE SECTION ENTITLED "SHAREHOLDER SERVICES"
FOR MORE INFORMATION.
- -------------------------------------------------------------------------------
WHAT PRICE WILL I RECEIVE WHEN I BUY SHARES?
Your shares will be purchased at the Fund's public offering price calculated at
the next close of regular trading on the Exchange (currently 4:00 p.m. Eastern
time) after your purchase order is received in proper form by the Fund's
transfer agent, DST Systems, Inc. (the "Transfer Agent"), at its Kansas City
office.
If you purchase shares through Bank of America, your broker or another Service
Organization, the entity involved is responsible for transmitting your order and
required funds to the Transfer Agent on a timely basis in accordance with the
procedures in this Prospectus. Share purchases (and redemptions) executed
through Bank of America or a Service Organization are executed only on days on
which the particular institution and the Fund are open for business. Purchase
orders received by a Service Organization in proper form by 4:00 p.m. Eastern
time on a business day will be effected at the public offering price calculated
at 4:00 p.m. Eastern time on that day, if the Service Organization transmits
your order to the Transfer Agent by the end of its business day (normally 5:15
p.m. Eastern time). Except as provided in the following two sentences, if the
order is not received in proper form by a Service Organization by 4:00 p.m.
Eastern time or not received by the Transfer Agent by the close of its business
day, the order will be based upon the next determined purchase price. The
Company may from time to time in its sole discretion appoint one or more
entities as the Fund's agent to receive irrevocable purchase and redemption
orders and to transmit them on a net basis to the Transfer Agent. In these
instances orders received by the entity by 4:00 p.m. Eastern time on a business
day will be effected as of 4:00 p.m. Eastern time that day if
13
<PAGE> 212
the order is actually received by the Transfer Agent not later than the next
business morning accompanied by payment in federal funds.
WHAT ELSE SHOULD I KNOW TO MAKE A PURCHASE?
Federal regulations require you to provide a certified taxpayer identification
number upon opening or reopening an account.
If your check for investment does not clear, a fee may be imposed by the
Transfer Agent. All payments should be in U.S. dollars and, to avoid fees and
delays, should be drawn only on U.S. banks. Please remember that the Company
reserves the right to reject any purchase order.
You should note that Bank of America, Service Organizations and registered
investment advisers may charge a separate fee or transaction charge to their
clients related to their investment in Fund shares. These fees could constitute
a substantial portion of smaller accounts and may not be in an investor's best
interest. Bank of America and Service Organizations may also impose minimum
customer account and other requirements in addition to those imposed by the
Fund. If you purchase or redeem shares directly from the Fund, you may do so
without incurring any charges other than those described in this Prospectus.
HOW TO SELL SHARES
HOW DO I REDEEM MY SHARES?
Pacific Horizon makes it easy to sell, or "redeem," shares. The Fund imposes no
charge when you redeem shares. The value of the shares you redeem may be more or
less than your cost, depending on the Fund's current net asset value.
If you purchased your shares through an account at Bank of America, your broker
or another Service Organization, you may redeem all or part of your shares in
accordance with the instructions pertaining to that account. If you are also the
shareholder of record on the Company's books, you may redeem shares in
accordance with the procedures described in the chart below as well as those of
your account. To use the redemption methods described below, you must arrange
with Bank of America or your Service Organization for delivery of the required
application(s) to the Transfer Agent.
14
<PAGE> 213
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
TO SELL SHARES
THROUGH BANK OF AMERICA, YOUR BROKER OR ANOTHER SERVICE ORGANIZATION
(ORDERS ARE NOT EFFECTIVE UNTIL RECEIVED BY THE TRANSFER AGENT)
Contact them directly for instructions.
- ------------------------------------------------------------------------------------------------
THROUGH THE DISTRIBUTOR
(IF YOU ARE A SHAREHOLDER OF RECORD ON THE COMPANY'S BOOKS)
<S> <C>
BY MAIL
Pacific Horizon U.S. Send a signed, written request (each owner, including each
Government Securities Fund joint owner, must sign) to the Transfer Agent.
c/o DST Systems, Inc.
P.O. Box 419955 If you hold stock certificates for the shares being
Kansas City, MO 64141-6955 redeemed, make sure to endorse them for transfer, have your
signature on them guaranteed by your bank or another
guarantor institution (as described in the section entitled
"What Kind of Paperwork Is Involved in Selling Shares?") and
include them with your request.
- ------------------------------------------------------------------------------------------------
IN PERSON
DST Systems, Inc.
811 Main Deliver your signed, written request (each owner, including
Kansas City, MO 64105-2005 each joint owner, must sign) and any certificates (endorsed
for transfer and signature guaranteed as described in the
section entitled "What Kind of Paperwork Is Involved in
Selling Shares?") to the address on the left.
- ------------------------------------------------------------------------------------------------
BY WIRE As soon as appropriate information regarding your bank
account has been established on your Fund account, you may
write, telephone or telegraph redemption requests to the
Transfer Agent, and redemption proceeds will be wired in
federal funds to the commercial bank you have specified.
Information regarding your bank account may be provided on
the Account Application or in a signature guaranteed letter
of instruction to the Transfer Agent. Signature guarantee
requirements are discussed in the section entitled "What
Kind of Paperwork Is Involved in Selling Shares?".
Redemption proceeds will normally be wired the business day
after your request and any other necessary documents have
been received by the Transfer Agent.
Wire Privileges apply automatically unless you indicate on
the Account Application or in a subsequent written notice to
the Transfer Agent that you do not wish to have them.
Requests must be for at least $1,000 and may be subject to
limits on frequency and amount.
Wire Privileges may be modified or suspended at any time,
and are not available for shares issued in certificate form.
Contact your bank for information on any charges imposed by
the bank in connection with receipt of redemptions by wire.
- ------------------------------------------------------------------------------------------------
</TABLE>
15
<PAGE> 214
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------
TO SELL SHARES
- ------------------------------------------------------------------------------------------------
<S> <C>
BY CHECK You may write Redemption Checks ("Checks") payable to any
person out of your Fund account in the amount of $500 or
more. The Transfer Agent (as your agent) will redeem the
necessary number of shares to cover the Check when it is
presented for payment.
You will continue earning dividends on shares redeemed in
this manner until the Check actually clears the Transfer
Agent.
You may request this Privilege on an Account Application
that has been signed by the registered owner(s), and a set
of Checks will then be sent to the registered owner(s) at
the address of record.
There is no charge for the use of Checks, although the
Transfer Agent will charge for any "stop payment" requests
made by you, or if a Check cannot be honored due to
insufficient funds or for other valid reasons.
Shares issued in certificate form may not be redeemed by
Check.
- ------------------------------------------------------------------------------------------------
BY TELETRADE You may redeem Fund shares (minimum of $500 and maximum of
(a service permitting $50,000 per transaction) by telephone after appropriate
transfers of money to your information regarding your bank account has been established
checking, NOW or bank money on your Fund account. This information may be provided on
market account) the Account Application or in a signature guaranteed letter
of instruction to the Transfer Agent. Signature guarantee
requirements are discussed in the section entitled "What
Kind of Paperwork Is Involved In Selling Shares?".
Redemption orders may be placed by calling 800-346-2087.
TeleTrade Privileges apply automatically unless you indicate
on the Account Application or in a subsequent written notice
to the Transfer Agent that you do not wish to have them.
You should refer to the Shareholder Services section for
additional important information about the TeleTrade
Privilege.
</TABLE>
OTHER REDEMPTION OPTIONS, INCLUDING EXCHANGES AND
AUTOMATIC WITHDRAWALS, ARE ALSO
AVAILABLE. PLEASE REFER TO THE SECTION ENTITLED
"SHAREHOLDER SERVICES" FOR MORE INFORMATION.
- --------------------------------------------------------------------------------
WHAT NAV WILL I RECEIVE FOR SHARES I WANT TO SELL?
Redemption orders are effected at the net asset value per share next determined
after receipt of the order in proper form by the Transfer Agent at its Kansas
City office. Although the Fund itself imposes no charge when shares are
redeemed, if you purchase shares through Bank of America or a Service
Organization, they may charge a fee for providing certain services in connection
with investments in Fund shares. The Company reserves the right to redeem
accounts (other than IRA and non-working spousal IRA accounts) involuntarily if,
after sixty days' written notice, the account's net asset value remains below a
$500 minimum balance.
WHAT KIND OF PAPERWORK IS INVOLVED IN SELLING SHARES?
Redemption requests must be signed by each shareholder, including each joint
owner. Certain types of redemption requests as well as all
16
<PAGE> 215
endorsed share certificates will need to include a signature guarantee.
Signature guarantees must accompany redemption requests for (i) an amount in
excess of $50,000 per day, (ii) any amount if the redemption proceeds are to be
sent somewhere other than the address of record on the Company's books or (iii)
an amount of $50,000 or less if the address of record has not been on the
Company's books for sixty days.
You may obtain a signature guarantee from: (i) a bank which is a member of the
FDIC; (ii) a trust company; (iii) a member firm of a national securities
exchange; or (iv) another eligible guarantor institution. Guarantees must be
signed by an authorized signatory of the guarantor institution and be
accompanied by the words "Signature Guaranteed." The Transfer Agent will not
accept guarantees from notaries public.
HOW QUICKLY CAN I RECEIVE MY REDEMPTION PROCEEDS?
The Company will make payment for all shares redeemed after the Transfer Agent
receives a request in proper form, except as provided by the rules of the
Securities and Exchange Commission. If the shares to be redeemed have been
purchased by check or by TeleTrade, the Company will, upon clearance of the
purchase check or TeleTrade payment, mail the redemption proceeds within seven
business days. This does not apply to situations where the Fund receives payment
in cash or immediately available funds for the purchase of shares. If you
purchase shares by wire, you must file an Account Application before redemption
requests can be honored.
Bank of America and the Service Organizations are responsible for transmitting
redemption orders and crediting their customers' accounts with redemption
proceeds on a timely basis.
DO I HAVE ANY REINSTATEMENT PRIVILEGES AFTER I HAVE REDEEMED SHARES?
You may reinvest all or any portion of your redemption proceeds in shares of the
Fund, or of another load fund of the Company or Time Horizon Funds, within 90
days of your redemption without paying a sales load. Shares so reinvested will
be purchased at a price equal to the net asset value next determined after the
Transfer Agent receives a reinstatement request and payment in proper form.
If you wish to use this Privilege, you must submit a written reinstatement
request to the Transfer Agent stating that you are eligible to use the
Privilege. The reinstatement request and payment must be received within 90 days
of the trade date of the redemption. Currently, there are no restrictions on the
number of times you may use this Privilege.
Generally, exercising the Reinstatement Privilege will not affect the character
of any gain or loss realized on redemption for federal income tax purposes.
However, if a redemption results in a loss, the reinstatement may result in the
loss being disallowed under IRS "wash sale" rules.
DIVIDEND AND DISTRIBUTION POLICIES
Dividends from the Fund's net investment income are declared daily and paid
within five business days after the end of each month. Fund shares begin earning
dividends the day after payment in federal funds is received for such shares
through the business day such shares are redeemed. The Fund's net realized gains
(after reduction for capital loss carryforwards), if any, are distributed at
least annually.
You will automatically receive dividends and capital gain distributions in
additional shares without a sales load unless you: (i) elect in writing to
receive payment in cash; or (ii) elect to participate in the Directed
Distribution Plan described in the section entitled "Can My Dividends From The
Fund Be Invested In Other Pacific Horizon Funds?".
To elect to receive payment in cash, or to revoke such election, you must do so
in writing to the Transfer Agent at P.O. Box 419955, Kansas City, Missouri
64141-6955. The election or revocation will become effective with respect to
dividends paid after it is received by the Transfer Agent.
17
<PAGE> 216
SHAREHOLDER SERVICES
PACIFIC HORIZON FUNDS PROVIDES A VARIETY OF WAYS TO MAKE MANAGING YOUR
INVESTMENTS MORE CONVENIENT.
Some or all of these services and privileges as well as others described in this
Prospectus may not be available for, or may have different conditions imposed on
them than as described in this Prospectus with respect to, certain clients of
Bank of America and particular Service Organizations. Consult these entities for
more information.
CAN I USE THE FUND IN MY RETIREMENT PLAN?
The Company makes available Individual Retirement Accounts ("IRAs"), including
IRAs set up under a Simplified Employee Pension Plan ("SEP-IRAs") and IRA
"Rollover Accounts."
YOUR INVESTMENTS GROW TAX DEFERRED UNTIL WITHDRAWAL AT RETIREMENT AND IN MANY
CASES, THE INITIAL INVESTMENT IS TAX DEDUCTIBLE.
For details, contact the Fund's distributor at 800-332-3863. Investors should
also read the IRA Disclosure Statement and the Bank Custodial Agreement for
further details on eligibility, service fees and tax implications, and consult
their tax advisers.
CAN I EXCHANGE MY INVESTMENT FROM ONE FUND TO ANOTHER?
As a shareholder, you have the privilege of exchanging your shares for shares of
another Pacific Horizon Fund, or like shares of any Time Horizon Fund, provided
that such other shares that may be legally sold in your state of residence. NO
ADDITIONAL SALES LOAD WILL BE INCURRED WHEN EXCHANGING FUND SHARES PURCHASED
WITH A SALES LOAD FOR SHARES OF ANOTHER LOAD FUND OF THE COMPANY.
An investment in the Fund automatically entitles you to use this Privilege,
unless you indicate on the Account Application or in a subsequent letter to the
Transfer Agent that you do not wish to use the Privilege.
Fund shares being exchanged must have a current value of at least $500 and are
subject to the minimum initial investment requirements of the particular fund
into which the exchange is being made. You may obtain prospectuses regarding the
funds into which you wish to make an exchange from your Service Organization or
the Fund's distributor.
You may provide exchange instructions by telephone by calling the Transfer Agent
at 800-346-2087. (See the section entitled "What Is TeleTrade?" for a
description of the Company's policy regarding responsibility for telephone
instructions.) You may also send exchange instructions in writing by following
directions set forth previously under "How to Sell Shares."
If you would like more information on making an exchange, please read the
Statement of Additional Information and consult your Service Organization or the
Fund's distributor.
The Fund reserves the right to reject any exchange request and the Exchange
Privilege may be modified or terminated at any time. At least 60 days' notice of
any material modification to or termination of the Exchange Privilege will be
given to shareholders except where notice is not required under the regulations
of the Securities and Exchange Commission.
WHAT IS TELETRADE?
TELETRADE IS A SERVICE WHICH ALLOWS YOU TO AUTHORIZE ELECTRONIC TRANSFERS OF
MONEY TO PURCHASE SHARES IN OR REDEEM SHARES FROM AN ESTABLISHED FUND ACCOUNT.
THE SERVICE MAY BE USED LIKE AN "ELECTRONIC CHECK" TO MOVE MONEY BETWEEN AN
ACCOUNT AT A FINANCIAL INSTITUTION AND A FUND ACCOUNT WITH A SINGLE TELEPHONE
CALL.
18
<PAGE> 217
Purchase and redemption proceeds with respect to TeleTrade transactions will be
transferred between your Fund account and the checking, NOW or bank money market
account designated by you. Only an account maintained at a domestic financial
institution that is an Automated Clearing House member may be so designated.
TeleTrade purchases will be effected at the public offering price next
determined after the Transfer Agent receives payment for the transaction.
Redemption proceeds will be on deposit in your account at your financial
institution generally two business days after the redemption request is received
by the Transfer Agent. You may also request receipt of your redemption proceeds
by check, which will only be payable to the registered owners of your Fund
account and will be sent only to the address of record.
You should note that the Transfer Agent may act upon a telephone redemption
request (including a telephone wire redemption request) from any person
representing himself or herself to be you and reasonably believed by the
Transfer Agent to be genuine. Neither the Company nor any of its service
contractors will be liable for any loss or expense for acting upon telephone
instructions that are reasonably believed to be genuine. In attempting to
confirm that telephone instructions are genuine, the Company will use such
procedures as are considered reasonable. If you should experience difficulty in
contacting the Transfer Agent to place telephone redemptions (including
telephone wire redemptions), for example because of unusual market activity, you
are urged to consider redeeming your shares by mail or in person.
The Company may modify the TeleTrade Privilege at any time or charge a service
fee upon notice to shareholders. No such fee currently is contemplated.
CAN I ARRANGE TO HAVE AUTOMATIC INVESTMENTS MADE ON A REGULAR BASIS?
YOU MAY ARRANGE, THROUGH THE AUTOMATIC INVESTMENT PROGRAM, FOR SYSTEMATIC
INVESTMENTS IN YOUR FUND ACCOUNT IN AMOUNTS OF $50 OR MORE BY DIRECTLY DEBITING
YOUR ACCOUNT AT YOUR FINANCIAL INSTITUTION. At your option, your checking, NOW
or bank money market account designated by you will be debited in the specified
amount, and Fund shares will be purchased, once a month, on either the first or
fifteenth day, or twice a month, on both days. Only accounts maintained at a
domestic financial institution which permits automatic withdrawals and is an
Automated Clearing House member are eligible. The Automatic Investment Program
is one means by which you may use Dollar Cost Averaging in making investments.
WHAT IS DOLLAR COST AVERAGING
AND HOW CAN I IMPLEMENT IT?
DOLLAR COST AVERAGING INVOLVES INVESTING A FIXED DOLLAR AMOUNT AT REGULAR
PREDETERMINED INTERVALS. BECAUSE MORE SHARES ARE BOUGHT DURING PERIODS WITH
LOWER SHARE PRICES AND FEWER SHARES ARE BOUGHT WHEN THE PRICE IS HIGHER, YOUR
AVERAGE COST PER SHARE MAY BE REDUCED. You may also implement Dollar Cost
Averaging on your own initiative or through other entities.
In order to be effective, Dollar Cost Averaging should be followed on a
sustained, consistent basis. You should be aware, however, that shares bought
using Dollar Cost Averaging are made without regard to their price on the day of
investment or to market trends. In addition, while you may find Dollar Cost
Averaging to be beneficial, it will not prevent a loss if you ultimately redeem
your shares at a price that is lower than their purchase price.
To establish an Automatic Investment Account that uses the Dollar Cost Averaging
method, check the appropriate box and supply the necessary information on the
Account Application or in a subsequent written request to the Transfer Agent.
You may cancel this Privilege or change the amount of purchase at any time by
mailing written notification to the Transfer Agent.
Notification will be effective three business days following receipt. The Fund
may modify or terminate this Privilege at any time or charge a service fee,
although no such fee currently is contemplated.
19
<PAGE> 218
CAN I ARRANGE PERIODIC WITHDRAWALS?
IF YOU ARE A SHAREHOLDER WITH A FUND ACCOUNT VALUED AT $5,000 OR MORE, YOU MAY
WITHDRAW AMOUNTS IN MULTIPLES OF $50 FROM YOUR ACCOUNT ON A MONTHLY, QUARTERLY,
SEMI-ANNUAL OR ANNUAL BASIS THROUGH THE AUTOMATIC WITHDRAWAL PLAN.
At your option, monthly, quarterly, semi-annual or annual withdrawals will be
made on either the first or fifteenth day of the particular month selected. To
participate in this Plan, check the appropriate box and supply the necessary
information on the Account Application or in a subsequent written request to the
Transfer Agent. Purchases of additional shares concurrently with withdrawals are
ordinarily not advantageous because of the Fund's sales load.
CAN MY DIVIDENDS FROM THE FUND BE
INVESTED IN OTHER FUNDS?
You may elect to have your dividends, capital gains distributions, or both
("distribution proceeds") received from a non-retirement Fund account
automatically invested in shares of any other investment portfolio of the
Company, or in like shares of any Time Horizon Fund, provided that such shares
are held in a non-retirement account. To participate in this program, known as
the Directed Distribution Plan, check the appropriate box and supply the
necessary information on the Account Application or subsequently send a written
request to the Transfer Agent. Participants in the Directed Distribution Plan
are subject to the minimum initial investment requirements of the particular
fund involved. Investments will be made at a price equal to the net asset value
of the purchased shares next determined after receipt of the distribution
proceeds by the Transfer Agent.
There are no subsequent investment requirements for accounts to which
distribution proceeds are directed nor are service fees currently charged for
effecting these transactions.
IS THERE A SALARY DEDUCTION PLAN AVAILABLE?
YOU MAY PURCHASE FUND SHARES BY HAVING PAYMENTS AUTOMATICALLY DEPOSITED INTO
YOUR FUND ACCOUNT (MINIMUM OF $50 AND MAXIMUM OF $50,000 PER TRANSACTION) IF YOU
RECEIVE A FEDERAL SALARY, SOCIAL SECURITY OR CERTAIN VETERAN'S, MILITARY OR
OTHER PAYMENTS FROM THE FEDERAL GOVERNMENT. Subject to these limitations, you
may deposit as much of your payments as you wish.
For instructions on how to enroll in this Direct Deposit Program, call the
Transfer Agent at 800-346-2087.
Note: Death or legal incapacity will terminate participation in the Program. You
may also choose at any time to terminate your participation by notifying the
appropriate federal agency in writing. Further, the Fund may terminate your
participation after serving 30 days' notice.
20
<PAGE> 219
THE BUSINESS OF THE FUND
FUND MANAGEMENT
The business affairs of the Company are managed under the general supervision of
the Board of Directors. Information about the Directors and officers of the
Company is included in the Statement of Additional Information under
"Management."
SERVICE PROVIDERS
---------------------
INVESTMENT ADVISER
Bank of America manages the investment portfolio of the Fund. Bank of America is
a subsidiary of BankAmerica Corporation, a registered bank holding company. Its
principal offices are located at 555 California Street, San Francisco,
California 94104.
Formed in 1904, Bank of America is a national banking association that provides
commercial banking and trust business through an extensive system of branches
across the western United States. Bank of America's principal banking affiliates
operate branches in ten U.S. states, as well as corporate banking and business
credit offices in major U.S. cities and branches, corporate offices and
representative offices in 37 countries. Bank of America is the successor by
merger to Security Pacific National Bank ("Security Pacific"), which previously
served as investment adviser to the Company since it commenced operations.
In its advisory agreement with the Company, Bank of America has agreed to manage
the Fund's portfolio and to be responsible for, place orders for and make
decisions with respect to, all purchases and sales of the Fund's securities.
The Fund's portfolio manager, Michael Kagawa, is the person primarily
responsible for the day-to-day management of the Fund's investment portfolio.
Mr. Kagawa has been the Fund's portfolio manager since March of 1992 and has
been associated with Bank of America (including Security Pacific) since 1989.
During that time he has had experience in portfolio and quantitative research,
as well as in computer programming. Prior to joining Security Pacific, Mr.
Kagawa supervised the International Department of Daiwa Bank Limited (Los
Angeles Agency) where he researched and developed computer software designed to
improve operating efficiencies.
For the services provided and expenses assumed under the advisory agreement,
Bank of America is entitled to receive a fee at the annual rate of .35% of the
Fund's net assets. This amount may be reduced pursuant to undertakings by Bank
of America. (See the information below regarding fee waivers.) During the fiscal
year ended February 28, 1995, the Fund paid advisory fees to Bank of America at
an effective annual rate of .35% of the Fund's net assets.
In addition, Bank of America and its affiliates may be entitled to fees under
the Shareholder Service Plan as described under "Plan Payments" and may receive
fees charged directly to their customer accounts in connection with investments
in Fund shares.
ADMINISTRATOR
Concord Holding Corporation ("Concord") serves as Administrator of the Fund.
Concord is a wholly-owned subsidiary of The BISYS Group, Inc. Its offices are
located at 125 W. 55th Street, New York, New York 10019.
Under its agreement with the Company, Concord has agreed to: pay the costs of
maintaining the Company's offices; provide a facility to receive purchase and
redemption orders; provide statistical and research data, data processing
services, and clerical services, coordinate the preparation of reports to Fund
shareholders and reports to the Securities and Exchange Commission; prepare
21
<PAGE> 220
or coordinate the preparation of tax returns; maintain the registration or
qualification of the Fund's shares for sale under state securities laws;
maintain the Fund's books and records, calculate the net asset value of the
Fund's shares and calculate the dividends and capital gains distributions paid
to shareholders; and generally assist in all aspects of the Fund's operations.
For its services as administrator, Concord is entitled to receive a fee from the
Fund at the annual rate of .20% of the Fund's average net assets. This amount
may be reduced pursuant to undertakings by Concord. (See the information below
regarding fee waivers.) During the fiscal year ended February 28, 1995, the Fund
paid Concord administration fees at an effective annual rate of 0.20% of the
Fund's net assets. Under the authority granted in its administration agreement,
Concord has entered into an agreement with The Bank of New York whereby the bank
performs certain of the services listed above, such as calculating the net asset
value of the Fund's shares and dividends and capital gains distributions to
shareholders, and maintaining the Fund's books and records. The Fund bears all
fees and expenses charged by The Bank of New York for these services.
DISTRIBUTOR
The Fund's shares are sold on a continuous basis by Concord Financial Group,
Inc. (the "Distributor"). The Distributor is a wholly-owned subsidiary of
Concord and is located at 125 W. 55th Street, New York, New York 10019.
CUSTODIAN AND TRANSFER AGENT
The Bank of New York is responsible for holding the investments purchased by the
Fund and is located at 90 Washington Street, New York, New York 10286. DST
Systems, Inc. maintains the account records of all shareholders in the Fund and
administers the distribution of income earned as a result of investing in the
Fund and is located at 811 Main, Kansas City, Missouri 64105-2005.
FEE WAIVERS
Expenses can be reduced by voluntary fee waivers and expense reimbursements by
Bank of America and other service providers as well as by certain expense
limitations imposed by state securities regulators. Periodically, during the
course of the Fund's fiscal year, Bank of America, Concord and/or the
Distributor may choose not to receive fee payments and/or may assume certain
Fund expenses. However, the service providers retain the ability to be
reimbursed for these amounts by the Fund prior to fiscal year end and subject to
the expense limitations of certain states, to stop such fee waivers and expense
reimbursements at any time. These waivers and reimbursements would increase the
Fund's yield when made but would decrease yields if the Fund were required to
reimburse a service provider.
TAX INFORMATION
YOU WILL BE ADVISED AT LEAST ANNUALLY REGARDING THE FEDERAL INCOME TAX TREATMENT
OF DIVIDENDS AND DISTRIBUTIONS MADE TO YOU. YOU SHOULD SAVE YOUR ACCOUNT
STATEMENTS BECAUSE THEY CONTAIN INFORMATION YOU WILL NEED TO CALCULATE YOUR
CAPITAL GAINS OR LOSSES UPON YOUR ULTIMATE SALE OR EXCHANGE OF SHARES IN THE
FUND.
As with any investment, you should consider the tax implications of an
investment in the Fund. The following is only a brief summary of some of the
important tax considerations generally affecting the Fund and its shareholders.
Consult your tax adviser with specific reference to your own tax situation.
FEDERAL TAXES
During its most recent fiscal year the Fund qualified as a "regulated investment
company" under the Internal Revenue Code of 1986, as amended (the "Code"). As a
result of this qualification, the Fund generally is not required to pay Federal
income taxes to the extent its earnings are distributed in accordance with the
Code. The Fund intends to continue to qualify
22
<PAGE> 221
for this special tax treatment as long as it is in the best interest of its
shareholders.
Distributions (whether received in cash or additional shares) of ordinary income
and/or excess of net short-term capital gain over net long-term capital loss are
taxable to the shareholder as ordinary income. (It is currently anticipated that
none of the Fund's distributions will qualify for the dividends received
deduction available to corporations.)
Any distribution you receive comprised of the excess of net long-term capital
gain over net short-term capital loss will be taxed as a long-term capital gain
no matter how long you have held Fund shares.
A dividend paid to a shareholder by the Fund in January of a particular year
will be deemed to have been received by the shareholder on December 31 of the
preceding year, if the dividend is declared and payable to shareholders of
record on a specified date in October, November or December of that preceding
year.
If you are considering buying shares of a Fund on or just before the record date
of a dividend, you should be aware that the amount of the forthcoming dividend
payment, although in effect a return of capital, will be taxable to you.
You may realize a taxable gain (or loss) upon redemption or exchange of Fund
shares, depending upon the tax basis of your shares and their price at the time
of such redemption or exchange. If you hold shares for six months or less and
during that time receive a capital gain dividend on those shares, any loss
recognized on the sale or exchange of those shares will be treated as long-term
capital loss to the extent of the capital gain dividend. Generally, you may
include sales loads incurred in the purchase of Fund shares in your tax basis
when determining your gain (or loss) on a redemption or exchange of these
shares. However, if you exchange such shares for shares of another investment
portfolio of the Company within 90 days of the purchase and are able to reduce
the sales load on the new shares through the Exchange Privilege, the reduction
may not be included in the tax basis of your exchanged shares. It may be
included in the tax basis of the new shares.
STATE AND LOCAL TAXES
A substantial portion of the dividends that you receive are derived from the
Fund's investments in U.S. Government obligations. These dividends may not be
entitled to the same exemptions from state and local taxes that would have been
available if you had purchased U.S. Government obligations directly. Because
state and local taxes may be different than the Federal taxes described above,
you should consult your tax adviser regarding these taxes.
MEASURING PERFORMANCE
THE FUND'S PERFORMANCE MAY BE QUOTED IN TERMS OF AVERAGE ANNUAL TOTAL RETURN,
AGGREGATE TOTAL RETURN AND YIELD. PERFORMANCE INFORMATION IS HISTORICAL AND IS
NOT INTENDED TO INDICATE FUTURE RESULTS.
Average annual total return reflects the average annual percentage change in
value of an investment in the Fund over the period being measured, while
aggregate total return reflects the total percentage change in value over the
period being measured. Yield measures the net income of the Fund over a
specified 30-day period.
Periodically, the Fund's total return (calculated on an average annual total
return and/or an aggregate total return basis for various periods) and yield may
be quoted in advertisements or in communications to shareholders. Both methods
of calculating total return reflect the sales load charged by the Fund and
assume dividends and capital gain distributions made by the Fund during the
period are reinvested in Fund shares.
The Fund may also advertise total return data without reflecting the sales load
imposed on the purchase of Fund shares in accordance with the rules of the
Securities and Exchange Commission. Quotations that do not reflect the sales
load will, of course, be higher than quotations that do reflect sales loads.
23
<PAGE> 222
The Fund calculates its yield by dividing its net income per share (which may
differ from the net income per share used for accounting purposes) during a 30
day (or one month) period by the maximum offering price per share on the last
day of the measuring period, and then annualizing the result on a semi-annual
basis. The 30 day or one month measuring period will be identified along with
any yield quotation to which it relates.
The Fund may compare its total return and yield to that of other mutual funds
with similar investment objectives and to bond and other relevant indices or to
rankings prepared by independent services or other financial or industry
publications that monitor mutual fund performance. For example, the Fund's total
return may be compared to the Consumer Price Index or to data prepared by:
Lipper Analytical Services, Inc.; Donoghue's Money Fund Report; Mutual Fund
Forecaster; Morningstar; Micropal; Wiesenberger Investment Companies Services;
or CDA Investment Technologies, Inc.
Total return data as reported in national financial publications such as Money,
Forbes, Barron's, The Wall Street Journal and The New York Times, or in local or
regional publications, may also be used in comparing Fund performance.
Since the Fund's performance will fluctuate, it should not be compared with bank
deposits, savings accounts and similar investments that often provide an agreed
or guaranteed fixed yield for a stated period of time. Performance is generally
a function of the kind and quality of the instruments in a portfolio, portfolio
maturity, operating expenses and market conditions. Not included in the Fund's
calculations of total return are fees charged by Bank of America and Service
Organizations directly to their customer accounts in connection with investments
in the Fund (e.g., account maintenance fees, compensating balance requirements
or fees based upon account transactions, assets or income).
DESCRIPTION OF SHARES
The Company is a Maryland corporation that was organized on October 27, 1982.
ABOUT THE COMPANY
THE COMPANY'S CHARTER AUTHORIZES THE BOARD OF DIRECTORS TO ISSUE UP TO TWO
HUNDRED BILLION FULL AND FRACTIONAL SHARES OF CAPITAL STOCK ($.001 PAR VALUE PER
SHARE) AND TO CLASSIFY AND RECLASSIFY ANY AUTHORIZED AND UNISSUED SHARES INTO
ONE OR MORE CLASSES OF SHARES.
The Board of Directors has authorized the issuance of two hundred fifty million
shares of Class E Common Stock representing interests in the Fund; and
additional classes of shares representing interests in other investment
portfolios of the Company. The Board of Directors may similarly classify or
reclassify any class of shares (including unissued Class E Common Stock) into
one or more series. For more information about the Company's other portfolios,
contact the Company at the telephone number listed on the inside cover page.
Shares representing interests in the Fund are entitled to participate in the
dividends and distributions declared by the Board of Directors and in the net
distributable assets of the Fund on liquidation. Fund shares have no preemptive
rights and only such conversion and exchange rights as the Board may grant in
its discretion. When issued for payment as described in this Prospectus, Fund
shares will be fully paid and non-assessable.
VOTING RIGHTS
SHAREHOLDERS ARE ENTITLED TO ONE VOTE FOR EACH FULL SHARE HELD AND FRACTIONAL
VOTES FOR FRACTIONAL SHARES HELD. Additionally, shareholders will vote in the
aggregate and not by class or series, except as required by law (or when
permitted by the Board of Directors). The Fund does not presently intend to hold
annual meetings of shareholders to elect directors or for other business unless
and until such time as less than a majority of the directors holding office has
been elected by the shareholders. At that time, the directors then in office
will call a shareholders' meeting for the election of directors. Under certain
circumstances, however, shareholders have the right to call a shareholder
meeting to
24
<PAGE> 223
consider the removal of one or more directors. Such meetings will be held when
requested by the shareholders of 10% or more of the Company's outstanding shares
of common stock. The Fund will assist in shareholder communications in such
matters to the extent required by law and the Company's undertaking with the
Securities and Exchange Commission. Fund shares have cumulative voting rights to
the extent that may be required by applicable law.
PLAN PAYMENTS
THE COMPANY HAS ADOPTED A SHAREHOLDER SERVICE PLAN (THE "PLAN") FOR THE FUND
UNDER WHICH THE FUND PAYS THE DISTRIBUTOR FOR SHAREHOLDER SERVICING EXPENSES
RELATED TO FUND SHARES.
Shareholder servicing expenses include expenses incurred in connection with the
shareholder services provided by the Distributor and payments to Service
Organizations for support services for the beneficial owners of Fund shares,
such as: establishing and maintaining accounts and records relating to the
Service Organization's clients who invest in Fund shares; assisting those
clients in processing exchange and redemption requests and in changing dividend
options and account designations; and responding to inquiries from clients
concerning their investments.
Under the Plan, payments by the Fund for shareholder servicing expenses may not
exceed .25% (annualized) of the Fund's average daily net assets. Excluded from
this calculation, however, are all shares acquired via a transfer of assets from
trust and agency accounts at Bank of America. This amount may be reduced
pursuant to undertakings by the Distributor. During the fiscal year ended
February 28, 1995, the Fund made payments under the Plan at an effective annual
rate of .25% of the Fund's average net assets.
If in any month the Distributor is due more monies than are immediately payable
because of the percentage limitation described above, the unpaid amount is
"carried forward" from month to month while the Plan is in effect until such
time when it may be paid. However, any "carried forward" amounts will not be
payable beyond the fiscal year during which the amounts are accrued. No
interest, carrying or other finance charge is borne by the Fund with respect to
the amount "carried forward."
Banks may act as Service Organizations. The Glass-Steagall Act and other
applicable laws, among other things, prohibit banks from engaging in the
business of underwriting securities. If a bank were prohibited from acting as a
Service Organization, its shareholder clients would be permitted to remain
Company shareholders and alternative means for continuing the servicing of such
shareholders would be sought. In such event, changes in the operation of the
Company might occur and a shareholder serviced by such bank might no longer be
able to avail itself of the automatic investment or other services then being
provided by the bank. It is not expected that shareholders would suffer any
adverse financial consequences as a result of any of these occurrences.
The Company will obtain a representation from the Service Organizations (and
from Bank of America and Concord) that they are or will be licensed as dealers
as required by applicable law or will not engage in activities which would
require them to be so licensed.
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<PAGE> 224
- --------------------------------------------------------------------------------
PACIFIC HORIZON MUTUAL FUNDS
BULK RATE
U.S. POSTAGE
PAID
NEW YORK, N.Y.
PERMIT NO. 8048
COPUSGV95P
<PAGE> 225
U.S. GOVERNMENT
SECURITIES FUND
PROSPECTUS
July 1, 1995
NOT FDIC INSURED
<PAGE> 226
PROSPECTUS
JULY 1, 1995
TAX-EXEMPT MONEY FUND
CALIFORNIA TAX-EXEMPT
MONEY MARKET FUND
(Investment Portfolios offered by Pacific Horizon Funds, Inc.)
- --------------------------------------------------------------------------------
THIS PROSPECTUS APPLIES TO THE PACIFIC HORIZON SHARES OF TWO NO-LOAD TAX-EXEMPT
INVESTMENT PORTFOLIOS OFFERED BY PACIFIC HORIZON FUNDS, INC. (THE
"COMPANY")--THE TAX-EXEMPT MONEY FUND AND THE CALIFORNIA TAX-EXEMPT MONEY MARKET
FUND (THE "FUNDS"). THE TAX-EXEMPT MONEY FUND IS A DIVERSIFIED INVESTMENT
PORTFOLIO AND THE CALIFORNIA TAX-EXEMPT MONEY MARKET FUND IS A NON-DIVERSIFIED
INVESTMENT PORTFOLIO. THE FUNDS ARE DESIGNED TO PROVIDE INVESTORS WITH DAILY
LIQUIDITY.
THE INVESTMENT OBJECTIVE OF THE TAX-EXEMPT MONEY FUND IS TO PROVIDE AS HIGH A
LEVEL OF CURRENT INTEREST INCOME EXEMPT FROM FEDERAL INCOME TAXES AS IS
CONSISTENT WITH RELATIVE STABILITY OF PRINCIPAL. THE INVESTMENT OBJECTIVE OF THE
CALIFORNIA TAX-EXEMPT MONEY MARKET FUND IS TO SEEK AS HIGH A LEVEL OF CURRENT
INTEREST INCOME FREE OF FEDERAL INCOME TAX AND CALIFORNIA STATE PERSONAL INCOME
TAX AS IS CONSISTENT WITH THE PRESERVATION OF CAPITAL AND RELATIVE STABILITY OF
PRINCIPAL. THE FUNDS SEEK TO ACHIEVE THEIR OBJECTIVES BY INVESTING PRIMARILY IN
U.S. DOLLAR-DENOMINATED OBLIGATIONS THE INTEREST ON WHICH IS EXEMPT FROM REGULAR
FEDERAL INCOME TAX, AND IN THE CASE OF THE CALIFORNIA TAX-EXEMPT MONEY MARKET
FUND, IS ALSO EXEMPT FROM TAXATION UNDER THE LAWS OR CONSTITUTION OF CALIFORNIA.
PORTFOLIO SECURITIES HELD BY EACH FUND HAVE REMAINING MATURITIES OF THIRTEEN
MONTHS OR LESS FROM THE DATE OF PURCHASE BY THE FUND. PORTFOLIO SECURITIES THAT
HAVE CERTAIN PUT OR DEMAND FEATURES EXERCISABLE BY A FUND WITHIN THIRTEEN MONTHS
AND SECURITIES HELD AS COLLATERAL FOR REPURCHASE AGREEMENTS MAY HAVE LONGER
MATURITIES.
BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION ("BANK OF AMERICA"), SAN
FRANCISCO, CALIFORNIA, ACTS AS INVESTMENT ADVISER TO THE FUNDS. SHARES OF EACH
FUND MAY BE PURCHASED OR REDEEMED AT ANY TIME WITHOUT CHARGE OR PENALTY IMPOSED
BY THE FUND. CONCORD FINANCIAL GROUP, INC. SPONSORS THE FUNDS AND ACTS AS THEIR
DISTRIBUTOR AND CONCORD HOLDING CORPORATION ACTS AS THEIR ADMINISTRATOR, NEITHER
OF WHICH IS AFFILIATED WITH BANK OF AMERICA.
This Prospectus sets forth certain information about the Funds that investors
should know before investing. It should be read and retained for future
reference. A Statement of Additional Information dated July 1, 1995(as it may
from time to time be revised), is incorporated herein by reference and discusses
certain subjects in this Prospectus further as well as other matters which may
be of interest to investors. A free copy of the Statement of Additional
Information may be obtained by calling 800-332-3863.
- --------------------------------------------------------------------------------
Shares of the Funds are not bank deposits or obligations of, or guaranteed or
endorsed by, Bank of America or any of its affiliates and are not federally
insured by, guaranteed by, obligations of or otherwise supported by the U.S.
Government, the Federal Deposit Insurance Corporation, the Federal Reserve Board
or any other governmental agency. Each Fund seeks to maintain its net asset
value per share at $1.00 for purposes of purchases and redemptions, although
there can be no assurance that it will be able to do so on a continuous basis.
Investment in the Funds involves investment risk, including the possible loss of
principal amount invested.
- --------------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
No person has been authorized to give any information or to make any
representations, other than those contained in this Prospectus and in the
Statement of Additional Information, in connection with the offering of the
Fund's shares and, if given or made, such information or representations must
not be relied upon as having been authorized by the Company or its distributor.
This prospectus does not constitute an offer by the fund or by the distributor
to sell, or a solicitation of any offer to buy, any of the securities offered
hereby in any jurisdiction to any person to whom it is unlawful for the fund or
the distributor to make such offer in such jurisdiction.
- --------------------------------------------------------------------------------
<PAGE> 227
CONTENTS
<TABLE>
<S> <C>
EXPENSE SUMMARY 2
FINANCIAL HIGHLIGHTS 3
INVESTMENT OBJECTIVES AND
POLICIES 5
MANAGEMENT OF THE FUNDS 12
PURCHASE OF SHARES 14
REDEMPTION OF SHARES 16
SHAREHOLDER SERVICES 18
DIVIDENDS, DISTRIBUTIONS
AND TAXES 20
DESCRIPTION OF SHARES 22
PERFORMANCE CALCULATIONS 23
- ------------------------------------------------------------------------------------------------------------------------
DISTRIBUTOR: INVESTMENT ADVISER:
Concord Financial Group, Inc. Bank of America National Trust and Savings Association
125 West 55th Street 555 California Street
New York, NY 10019 San Francisco, CA 94104
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 228
EXPENSE SUMMARY
The following table sets
forth certain information
regarding the shareholder
transaction expenses imposed
by each Fund and the annual
operating expenses of each
Fund incurred during its
last fiscal year with
respect to its Pacific
Horizon Shares. Actual
expenses may vary.
Hypothetical examples based
on the summary are also
shown.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------
CALIFORNIA
TAX- TAX-EXEMPT
EXEMPT MONEY
MONEY MARKET
------ ------
<S> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Sales Load Imposed on Purchases.............. None None
Sales Load Imposed on Reinvested Dividends... None None
Deferred Sales Load.......................... None None
Redemption Fees.............................. None None
Exchange Fee................................. None None
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Management Fees.............................. .20% .20%
All Other Expenses........................... .40% .42%
Special Management Services Fee After Fee
Waivers.................................... .32% .32%
Other Expenses............................... .08% .10%
Total Fund Operating Expenses................ .60% .62%
===== =====
- -------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1 3 5 10
EXAMPLE YEAR YEARS YEARS YEARS
--- ---- ---- ----
<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000 investment, assuming
(1) a 5% annual return and (2) redemption at the end of each time
period:
Tax-Exempt Money Fund............................................. $ 6 $ 19 $ 33 $ 75
California Tax-Exempt Money Market Fund........................... $ 6 $ 20 $ 35 $ 77
</TABLE>
- --------------------------------------------------------------------------------
The foregoing Expense Summary and Example are intended to assist investors in
Pacific Horizon Shares in understanding the various shareholder transaction and
operating expenses of each Fund that investors bear either directly or
indirectly. Without fee waivers and expense reimbursements, the Funds incur an
investment advisory fee and an administration fee, each payable at a maximum
annual rate of .10% of each Fund's average daily net asset value, and a special
management services fee payable at the annual rate of .32% of the average net
asset value of the Tax-Exempt Money Fund's Pacific Horizon Shares and .35% of
the average net assets of the California Tax-Exempt Money Market Fund's Pacific
Horizon Shares outstanding from time to time. However, as indicated in the above
Expense Summary and Example, the investment adviser and administrator anticipate
waiving a portion of their respective Special Management Services fees for the
California Tax-Exempt Money Market Fund in the aggregate amount of 0.03% of the
average daily net assets of the California Tax-Exempt Money Market Fund during
the current fiscal year. Absent such waivers, it is estimated that the total
operating expenses of Pacific Horizon Shares of the California Tax-Exempt Money
Market Fund would be .65%. Additionally, the investment adviser and
administrator may also voluntarily waive a portion of their respective fees or
reimburse expenses for each Fund from time to time. This voluntary waiver or
reimbursement may be modified or terminated at any time. For a further
description of the Funds' operating expenses, see "Management of the Funds" in
this Prospectus.
THE EXAMPLE SHOWN ABOVE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE INVESTMENT RETURN AND OPERATING EXPENSES. ACTUAL INVESTMENT RETURN AND
OPERATING EXPENSES MAY BE MORE OR LESS THAN THOSE SHOWN.
<PAGE> 229
FINANCIAL HIGHLIGHTS
The Tax-Exempt Fund commenced operations on July 10, 1987 as a separate
investment portfolio (the "Predecessor Tax-Exempt Fund") of The Horizon Funds, a
Massachusetts business trust. On January 19, 1990, the Predecessor Tax-Exempt
Fund was reorganized as the Tax-Exempt Money Fund of the Company and has
previously offered only two series of shares--Horizon Shares and Horizon Service
Shares. The Company first offered Pacific Horizon Shares of the Tax-Exempt Money
Fund on July 9, 1993.
The table below sets forth certain information concerning the investment results
for Pacific Horizon Shares of the Tax-Exempt Money Fund for the periods
indicated. The information contained in the Financial Highlights has been
audited by Price Waterhouse LLP, independent accountants of the Tax-Exempt Money
Fund, whose unqualified report on the financial statements containing such
information is incorporated by reference in the Statement of Additional
Information, which may be obtained upon request. The Financial Highlights should
be read in conjunction with the financial statements and notes thereto and the
unqualified report of the independent accountants which are incorporated by
reference in the Statement of Additional Information.
Selected Data for a Pacific Horizon Share Outstanding Throughout Each of the
Periods Indicated.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
TAX-EXEMPT MONEY
FUND
-------------------
YEAR PERIOD
ENDED ENDED
FEBRUARY FEBRUARY
28, 28,
1995 1994*
------ ------
<S> <C> <C>
PACIFIC HORIZON SHARES:
Net asset value per share, beginning of period....................... $ 1.00 $ 1.00
Income from Investment Operations:
Net investment income........................................... 0.0253 0.0124
Less Dividends:
Dividends from net investment income............................ (0.0253) (0.0124)
Net change in net asset value per share.............................. 0.0000 0.0000
Net asset value per share, end of period............................. $ 1.00 $ 1.00
========= =========
Total return......................................................... 2.56% 1.25%+++
Ratios/Supplemental Data:
Net assets, end of period (000)................................. $ 37,454 $ 49,648
Ratio of expenses to average net assets......................... 0.60% 0.60%+**
Ratio of net investment income to average net assets............ 2.47% 1.95%+**
</TABLE>
- ---------------
* For the period July 9, 1993 (initial offering date) through February 28,
1994.
** Net of fees waived by the Adviser and Administrator which had the effect of
reducing the ratio of expenses to average net assets and increasing the
ratio of net investment income to average net assets by 0.01% (annualized).
+ Annualized.
+++ Not Annualized.
3
<PAGE> 230
The table below sets forth certain information concerning the investment results
for Pacific Horizon Shares of the California Tax-Exempt Money Market Fund for
the periods indicated. The information contained in the Financial Highlights has
been audited by Price Waterhouse LLP, independent accountants of the California
Tax-Exempt Money Market Fund, whose unqualified report thereon insofar as it
relates to the five year period ended February 28, 1995 is incorporated by
reference in the Statement of Additional Information, which may be obtained upon
request. The Financial Highlights should be read in conjunction with the
financial statements and notes thereto and the unqualified report of the
independent accountants which are incorporated by reference in the Statement of
Additional Information.
Selected Data for a Pacific Horizon Share Outstanding Throughout Each of the
Periods Indicated.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CALIFORNIA TAX-EXEMPT MONEY MARKET FUND
--------------------------------------------------------------------------
YEAR ENDED PERIOD
------------------------------------------------------------- ENDED
FEBRUARY FEBRUARY FEBRUARY FEBRUARY FEBRUARY FEBRUARY
28, 28, 28, 29, 28, 28,
1995++ 1994++ 1993++ 1992 1991 1990*
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
PACIFIC HORIZON SHARES:
Net asset value per share, beginning of
period....................................... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
Income from Investment Operations:
Net investment income...................... 0.0249 0.0186 0.0224 0.0364 0.0495 0.0118
Net realized gain (loss) on securities..... (0.0001) 0.0002 (0.0002) 0.0000 (0.0001) 0.0000
--------- --------- --------- --------- --------- ---------
Total income from investment
operations........................... 0.0248 0.0188 0.0222 0.0364 0.0494 0.0118
Less Dividends:
Dividends from net investment income....... (0.0249) (0.0186) (0.0224) (0.0364) (0.0495) (0.0118)
--------- --------- --------- --------- --------- ---------
Net change in net asset value per share........ (0.0001) 0.0002 (0.0002) 0.0000 (0.0001) 0.0000
--------- --------- --------- --------- --------- ---------
Net asset value per share, end of period....... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
========= ========= ========= ========= ========= =========
Total return................................... 2.52% 1.88% 2.27% 3.70% 5.06% 1.18%+++
Ratios/supplemental data:
Net assets, end of period (000)............ $ 186,643 $ 203,724 $ 128,448 $ 107,424 $ 118,816 $ 51,380
Ratio of expenses to average net assets.... 0.62% 0.66%** 0.66%** 0.57%** 0.55%** 0.49%+**
Ratio of net investment income to average
net assets............................... 2.48% 1.86%** 2.21%** 3.62%** 4.81%** 5.10%+**
</TABLE>
- ---------------
* For the period December 6, 1989 (commencement of operations) through
February 28, 1990.
** Net of fee waivers and expense reimbursements by the Adviser and the
Administrator which had the effect of reducing the ratio of expenses to
average net assets and increasing the ratio of net investment income to
average net assets by 0.02%, 0.08%, 0.13% and 0.22% for the years ended
February 28, 1994, February 28, 1993, February 29, 1992 and February 28,
1991, respectively, and 0.49% (annualized) for the period ended February 28,
1990.
+ Annualized.
++ Security Pacific National Bank served as investment adviser through
April 21, 1992. Bank of America National Trust and Savings Association
served as investment adviser commencing April 22, 1992.
+++ Not annualized.
4
<PAGE> 231
INVESTMENT OBJECTIVES AND POLICIES
IN GENERAL
This section describes the investment objectives and policies of the Funds.
Assets of the Funds will be invested in dollar-denominated debt securities with
remaining maturities of thirteen months or less as defined by the Securities and
Exchange Commission (the "SEC"), and the dollar-weighted average portfolio
maturity of each Fund will not exceed 90 days. All securities acquired by the
Funds will be determined by the investment adviser, under guidelines established
by the Company's Board of Directors, to present minimal credit risks. Securities
acquired by the Tax-Exempt Money Fund will, under normal market conditions, be
"First Tier Securities," of the types described below. During temporary
defensive periods or if in the investment adviser's opinion suitable First Tier
Securities are not available for investment, however, the Tax-Exempt Money Fund
may also acquire "Eligible Securities" (as defined by the SEC) of the types
described below. Securities acquired by the California Tax-Exempt Money Market
Fund will be Eligible Securities. First Tier Securities consist of instruments
that are rated at the time of purchase in the top rating category by one (if
rated by only one) or more unaffiliated nationally recognized statistical rating
organizations ("NRSROs") including Standard and Poor's Ratings Group, Division
of McGraw Hill ("Standard and Poor's"), Moody's Investor Service, Inc.
("Moody's"), Duff & Phelps Credit Co. ("Duff and Phelps") or Fitch Investors
Service, Inc. ("Fitch") or issued by Issuers with such ratings. Eligible
Securities consist either of instruments that are rated at the time of purchase
in the top two ratings categories by one or more NRSROs, or are issued by
issuers with such ratings. The Appendix to the Statement of Additional
Information includes a description of the applicable NRSRO ratings. Unrated
instruments (including instruments with long-term but not short-term ratings)
purchased by a particular Fund will be of comparable quality to the rated
instruments that the Fund may purchase, as determined by the Funds' investment
adviser pursuant to guidelines approved by the Board of Directors.
TAX-EXEMPT MONEY FUND. The Tax-Exempt Money Fund's investment objective is to
provide as high a level of current interest income exempt from federal income
taxes as is consistent with relative stability of principal. The Fund invests
substantially all of its assets in a diversified portfolio of U.S.
dollar-denominated short-term obligations issued by or on behalf of states,
territories and possessions of the United States, the District of Columbia and
their political subdivisions, agencies, instrumentalities and authorities, the
interest on which, in the opinion of bond counsel to the issuer, is exempt from
regular federal income tax ("Municipal Securities"). Portfolio securities held
by the Fund have remaining maturities of thirteen months or less from the date
of purchase by the Fund. (Portfolio securities which have certain put or demand
features exercisable by the Fund within thirteen months or are subject to
repurchase agreements may have longer maturities.)
As a matter of fundamental policy, under normal market conditions at least 80%
of the Fund's total assets will be invested in Municipal Securities (other than
private activity bonds the interest on which is treated as a specific tax
preference item under the federal alternative minimum tax). The Fund may also
invest in taxable obligations and may hold uninvested cash reserves pending
investment, during temporary defensive periods or if, in the opinion of the
Fund's investment adviser, suitable tax-exempt obligations are not available.
Uninvested cash reserves will not earn income. Taxable obligations acquired by
the Fund will not exceed under normal market conditions 20% of the Fund's total
assets at the time of purchase. Such taxable obligations include obligations
issued or guaranteed by the U.S. Government, its agencies or instrumentalities
(some of which may be subject to repurchase agreements), certificates of deposit
and bankers'
5
<PAGE> 232
acceptances of selected banks and commercial paper. These obligations are
described further in the Statement of Additional Information.
CALIFORNIA TAX-EXEMPT MONEY MARKET FUND. The California Tax-Exempt Money Market
Fund's investment objective is to seek as high a level of current interest
income free of federal income tax and California state personal income tax as is
consistent with the preservation of capital and relative stability of principal.
The Fund's assets are primarily invested in Municipal Securities issued by or on
behalf of the State of California and other issuers. Municipal Securities
acquired by the Fund will generally have remaining maturities of thirteen months
or less.
As a matter of fundamental policy, under normal market conditions at least 80%
of the Fund's net assets will be invested in Municipal Securities the interest
on which is exempt from taxation under the California constitution or the laws
of California ("California Municipal Securities"). So long as at least 50% of
the Fund's total assets are invested in obligations the interest on which is
exempt from taxation by California ("California Exempt Securities," which
generally are limited to California Municipal Securities and certain U.S.
Government and U.S. Possession obligations) as of the end of each quarter,
dividends paid by the Fund which are derived from interest on California Exempt
Securities will be exempt from California state personal income tax; if this
policy is not achieved, no portion of the Fund's dividends will be exempt from
California state personal income tax. Dividends derived from interest on
Municipal Securities other than California Municipal Securities will be subject
to California state personal income tax. See "Dividends, Distributions and
Taxes."
The Fund may hold uninvested cash reserves pending investment, during temporary
defensive periods, or if, in the opinion of the Fund's investment adviser,
suitable tax-exempt obligations are unavailable. In accordance with the Fund's
investment objective, and subject to the Fund's fundamental policy that under
normal market conditions 80% of its net assets be invested in California
Municipal Securities, investments may be made in taxable obligations of up to
thirteen months in maturity if, for example, suitable tax-exempt obligations are
unavailable or if acquisition of U.S. Government or other taxable securities is
deemed appropriate for temporary defensive purposes. Such taxable obligations
will be limited to those that may be acquired by the Tax-Exempt Money Fund.
Under normal market conditions, the Fund anticipates that not more than 5% of
its net assets will be invested in any one category of taxable securities.
Additionally, the Fund will not invest more than 10% of its total assets in
securities that are illiquid because of the absence of a readily available
market or otherwise, including repurchase agreements providing for settlement
more than seven days after notice.
MUNICIPAL SECURITIES
The two principal classifications of Municipal Securities which may be held by
the Funds 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 user of the facility being
financed. Private activity bonds held by the Funds are in most cases revenue
securities and are not payable from the unrestricted revenues of the issuer.
Consequently, the credit quality of such private activity bonds is usually
directly related to the credit ratings of the users of the facility involved.
The Funds' portfolios may also include "moral obligation" securities, which are
normally issued 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
6
<PAGE> 233
of the state or municipality which created the issuer.
Municipal Securities include debt obligations issued by governmental entities to
obtain funds for various public purposes, including the construction of a wide
range of public facilities, the refunding of outstanding obligations, the
payment of general operating expenses and the extension of loans to public
institutions and facilities. In addition, certain types of private activity
bonds are issued by or on behalf of public authorities to finance various
privately-operated facilities. Such obligations are included within the term
Municipal Securities if the interest paid thereon is exempt from regular federal
income tax. Municipal Securities also include short-term tax anticipation notes,
bond anticipation notes, revenue anticipation notes and other forms of
short-term loan obligations. Such notes are issued with a short-term maturity in
anticipation of the receipt of tax funds, the proceeds of bond placements or
other revenues. The Funds may also purchase tax-exempt commercial paper.
Securities acquired by the Funds may be in the form of custodial receipts
evidencing rights to receive a specific future interest payment, principal
payment or both on certain Municipal Securities. Such obligations are held in
custody by a bank on behalf of holders of the receipts. These custodial receipts
are known by various names, including "Municipal Receipts," "Municipal
Certificates of Accrual on Tax-Exempt Securities" ("M-CATs") and "Municipal
Zero-Coupon Receipts." The Fund may also purchase from time to time
participation interests in debt securities held by trusts or financial
institutions. A participation interest gives a Fund an undivided interest in the
security or securities involved. Participation interests may have fixed,
floating or variable rates of interest, and will have remaining maturities of
thirteen months or less as determined in accordance with the regulations of the
Securities and Exchange Commission (although the securities held by the issuer
may have longer maturities). If a participation interest is unrated, the
investment adviser will have determined that the interest is of comparable
quality to those instruments in which the Fund involved may invest pursuant to
guidelines approved by the Company's Board of Directors. For certain
participation interests, the Fund involved will have the right to demand
payment, on not more than 30 days' notice, for all or any part of its
participation interest, plus accrued interest. As to these instruments, the
Funds intend to exercise their right to demand payment as needed to provide
liquidity, to maintain or improve the quality of their respective investment
portfolio or upon a default (if permitted under the terms of the instrument).
Opinions relating to the validity of Municipal Securities and to the exemption
of interest thereon from regular federal income tax (and, with respect to
California Municipal Securities, California state personal income tax) are
rendered by bond counsel to the respective issuers at the time of issuance.
Neither the Funds nor their investment adviser will review the proceedings
relating to the issuance of Municipal Securities or the basis for such opinions.
OTHER INVESTMENT PRACTICES
VARIABLE AND FLOATING RATE INSTRUMENTS. Securities purchased by the
Funds may include variable and floating rate instruments, which may have a
stated maturity in excess of the Funds' maturity limitations but which will, in
such event and except with respect to certain U.S. Government obligations
purchased by the Tax-Exempt Money Fund, permit the Fund involved to demand
payment of the principal of the instrument at least once every thirteen months
upon not more than thirty days' notice. Such instruments may include variable
amount master demand notes that permit the indebtedness thereunder to vary in
addition to providing for periodic adjustments in the interest rate. There may
be no active secondary market with respect to a particular variable or floating
rate instrument. Nevertheless, the periodic re-adjustments of their interest
rates tend to assure that their value to a Fund will approximate their par
value. Illiquid variable and floating rate
7
<PAGE> 234
instruments (instruments which are not payable within seven days upon demand and
do not have an active trading market) that are acquired by a Fund are subject to
the Fund's percentage limitations on illiquid investments. The creditworthiness
of the issuers of such instruments and their ability to repay principal and
interest will be continuously monitored by the Fund's investment adviser.
WHEN-ISSUED PURCHASES, FORWARD COMMITMENTS AND DELAYED SETTLEMENTS. The Funds
may purchase securities on a "when-issued" basis and may purchase or sell
securities on a "forward commitment" basis. The Funds may also purchase or sell
securities on a "delayed settlement" basis. When-issued and forward commitment
transactions, which involve a commitment by a Fund to purchase or sell
particular securities with payment and delivery taking place at a future date
(perhaps one or two months later), permit the Fund to lock in a price or yield
on a security it owns or intends to purchase, regardless of future changes in
interest rates. Delayed settlement describes a securities transaction in the
secondary market for which settlement will occur sometime in the future.
When-issued, forward commitment and delayed settlement transactions involve the
risk, however, that the yield or price obtained in a transaction may be less
favorable than the yield or price available in the market when the securities
delivery takes place. A Fund's forward commitments, when-issued purchases and
delayed settlements are not expected to exceed 25% of the value of its total
assets absent unusual market conditions. In the event its forward commitments,
when-issued purchases and delayed settlements ever exceeded 25% of the value of
its total assets, a Fund's liquidity and the ability of the investment adviser
to manage its portfolios might be adversely affected. The Funds do not intend to
engage in these transactions for speculative purposes but only in furtherance of
their respective investment objective.
STAND-BY COMMITMENTS. The Funds may acquire "stand-by commitments" with
respect to Municipal Securities held in their respective portfolios. Under a
stand-by commitment, a dealer agrees to purchase at a Fund's option specified
Municipal Securities at a specified price. The Funds will acquire stand-by
commitments solely to facilitate portfolio liquidity and do not intend to
exercise their rights thereunder for trading purposes. The California Tax-Exempt
Money Market Fund expects that "stand-by commitments" will generally be
available without the payment of any direct or indirect consideration. However,
if necessary or advisable, that 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).
REPURCHASE AGREEMENTS. The Funds may agree to purchase securities from
financial institutions, such as banks and broker-dealers as are deemed
creditworthy by the investment adviser under guidelines approved by the Board of
Directors, subject to the seller's agreement to purchase them at an agreed upon
time and price ("repurchase agreements"). Although the securities subject to a
repurchase agreement may bear maturities exceeding thirteen months, the Funds
intend only to enter into repurchase agreements having maturities not exceeding
60 days. Securities subject to repurchase agreements are held either by the
Company's custodian, or sub-custodian, or in the Federal Reserve/Treasury
Book-Entry System. The seller under a repurchase agreement will be required to
maintain the value of the securities subject to the agreement in an amount that
exceeds the repurchase price, and such value (including accrued interest) will
be continuously monitored by the investment adviser on an ongoing basis. Default
by the seller would, however, expose the Fund involved to possible loss because
of adverse market action or delay in connection with the disposition of the
underlying obligations. Repurchase agreements are considered to be loans under
the Investment Company Act of 1940.
8
<PAGE> 235
REVERSE REPURCHASE AGREEMENTS. The Funds may borrow monies for temporary
purposes by entering into reverse repurchase agreements in accordance with the
investment restrictions described below. Pursuant to such agreements, a Fund
would sell portfolio securities to financial institutions and agree to
repurchase them at an agreed upon date and price. At the time a Fund entered
into a reverse repurchase agreement, it would place in a segregated custodial
account liquid assets or high grade debt securities having a value equal to or
greater than the repurchase price and the investment adviser would continuously
monitor the account to ensure that the value is maintained. A Fund would only
enter into reverse repurchase agreements to avoid otherwise selling securities
during unfavorable market conditions to meet redemptions. Reverse repurchase
agreements involve the risk that the market value of the portfolio securities
sold by the Fund involved may decline below the price of the securities the Fund
is obligated to repurchase. Interest paid by a Fund in connection with a reverse
repurchase agreement will reduce the net investment income of the Fund. Reverse
repurchase agreements are considered to be borrowings under the Investment
Company Act of 1940. A Fund will not purchase securities while it has borrowings
(including reverse repurchase agreements) outstanding.
SPECIAL CONSIDERATIONS AND RISKS
In seeking to achieve their respective investment objectives the Funds may
invest in Municipal Securities that are private activity bonds the interest on
which, although exempt from regular federal income tax, may constitute an item
of tax preference for purposes of the federal alternative minimum tax. See
"Dividends, Distributions and Taxes." Investments in such securities, however,
will not exceed under normal market conditions 20% of a Fund's total assets when
added together with any taxable investments held by that Fund. Moreover,
although the Funds do not presently intend to do so on a regular basis, they may
invest more than 25% of their respective assets in Municipal Securities the
interest on which is paid solely from revenues of similar projects if such
investment is deemed necessary or appropriate by the Funds' investment adviser.
Additionally, although the Tax-Exempt Money Fund may invest more than 25% of its
assets in Municipal Securities the issuers of which are located in the same
state, it does not presently intend to do so on a regular basis other than
issuers located in California. To the extent a Fund's assets are concentrated in
Municipal Securities payable from revenues on similar projects or issued by
issuers located in the same state, the Fund will be subject to the peculiar
economic, political or business risks presented by the laws and economic
conditions relating to such states and projects to a greater extent than it
would be if its assets were not so concentrated.
The California Tax-Exempt Money Market Fund is classified as a non-diversified
investment company under the Investment Company Act of 1940. 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 similar
objectives may be.
The Funds' concentration in California Municipal Securities raises additional
considerations. Payment of the interest on and the principal of these
obligations is dependent upon the continuing ability of California 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 the 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
9
<PAGE> 236
of California issues with the yield of a more diversified portfolio
including non-California issues before making an investment decision.
Many of the Funds' Municipal Securities are likely to be obligations of
California governmental issuers which rely in whole or in part, directly or
indirectly, on real property taxes as a source of revenue. "Proposition
Thirteen" and similar California constitutional and statutory amendments and
initiatives in recent years have restricted the ability of California taxing
entities to increase real property tax revenues. Other initiative measures
approved by California voters in recent years, through limiting various other
taxes, have resulted in a substantial reduction in state revenues. Decreased
state revenues may result in reductions in allocations of state revenues to
local governments.
Because of the complex nature of the various initiatives mentioned above and
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 California governmental
entities, it is not presently possible to determine the impact of these
initiatives and related measures on the ability of California governmental
issuers to pay interest or repay principal on their obligations. There have,
however, been certain adverse developments with respect to Municipal Securities
of California governmental issuers over the past several years.
In addition to the various initiatives discussed above, economic factors such as
the reduction in defense spending, a decline in tourism and high levels of
unemployment have had an adverse impact on the economy of California. These
economic factors have reduced revenues to the state government at a time when
expenses of state government such as education costs, various welfare costs and
other expenses have been rising. Such economic factors have also adversely
impacted the ability of state and local California governmental entities to
repay debt.
In addition to the risk of nonpayment of state and local California governmental
debt, if such debt declines in quality and is downgraded by the NRSROs, it may
become ineligible for purchase by the Funds pursuant to current Securities and
Exchange Commission regulations. Since there are large numbers of buyers of such
debt that are similarly restricted, the supply of Eligible Securities (as
defined above) could become inadequate at certain times. A more detailed
description of special factors affecting investments in California Municipal
Securities, of which investors should be aware, is set forth in the Statement of
Additional Information.
INVESTMENT LIMITATIONS
The investment objective of each Fund is fundamental and may not be changed
without a vote of the holders of a majority of the particular Fund's outstanding
shares (as defined in the Investment Company Act of 1940). A Fund's policies may
be changed by the Company's Board of Directors without the affirmative vote of
the holders of a majority of such Fund's outstanding shares, except that the
following investment limitations may not be changed without such a vote of
shareholders. A description of certain other fundamental investment limitations
is contained in the Statement of Additional Information.
The Tax-Exempt Money Fund may not:
1. Under normal circumstances invest less than 80% of its total assets in
Municipal Securities (other than private activity bonds the interest on which
may be subject to the federal alternative minimum tax).
2. Purchase any securities which would cause 25% or more of the value of its
total assets at the time of such purchase to be invested in the securities of
one or more issuers conducting their principal business activities in the
same industry; provided, however that (a) there is no limitation with respect
to investments in Municipal Securities or obligations issued or guaranteed by
the Federal Government and its agencies and instrumen-
10
<PAGE> 237
talities; (b) although there is no limitation with respect to investments in
certificates of deposit and bankers' acceptances issued by domestic branches
of United States banks, no more than 10% of the total value of the Fund's
assets at the time of purchase may be invested in certificates of deposit and
bankers' acceptances issued by domestic branches of foreign banks and no more
than 25% of the total value of the Fund's assets at the time of purchase may
be invested in certificates of deposit and bankers' acceptances issued by
domestic branches of foreign banks and foreign branches of domestic banks;
(c) each utility service (such as gas, gas transmission, electric and
telephone service) will be considered a single industry for purposes of this
policy; and (d) 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 their parents.
3. Borrow money except from banks for temporary purposes and in amounts not in
excess of 10% of the value of the Fund's 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. (This borrowing provision is not for investment
leverage, but solely to facilitate management of the Fund's portfolio by
enabling the Fund to meet redemption requests when the liquidation of
portfolio securities is deemed to be disadvantageous or inconvenient. The
Fund will not purchase any securities while borrowings are outstanding.
Interest paid on borrowed funds will reduce the net investment income of the
Fund.)
4. Invest more than 10% of the value of its total assets in securities with
legal or contractual restrictions on resale (including repurchase agreements
with terms greater than seven days).
The California Tax-Exempt Money Market Fund may not:
1. Under normal market conditions invest less than 80% of its net assets in
California Municipal Securities.
2. Purchase the securities of any issuer if as a result 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 or
instrumentalities.
3. Borrow money or issue senior securities, except that the Fund may borrow from
banks or enter into reverse repurchase agreements to meet redemptions or for
other temporary purposes in amounts up to 10% of its 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 its total assets at the time of such
borrowing.
INVESTMENT DECISIONS
Investment decisions for each Fund are made independently from those for other
investment companies and accounts managed by Bank of America and its affiliated
entities. Such other investment companies and accounts may also invest in the
same securities as a Fund. When a purchase or sale of the same security is made
at substantially the same time on behalf of a Fund and another investment
company or account, available investments or opportunities for sales will be
allocated in a manner which Bank of America believes to be equitable. In some
instances, this investment procedure may adversely affect the price paid or
received by a Fund or the size of the position obtained or sold by the Fund.
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In addition, in allocating purchase and sale orders for portfolio securities
(involving the payment of brokerage commissions or dealer concessions), Bank of
America may take into account the sale of shares of a Fund by broker-dealers and
other financial institutions (including affiliates of Bank of America and the
Funds' distributor), provided Bank of America believes that the quality of the
transaction and the amount of the commission are not less favorable than what
they would be with any other unaffiliated qualified firm.
MANAGEMENT OF THE FUNDS
BOARD OF DIRECTORS. The business of the Company is managed under the direction
of its Board of Directors. Information about the Directors and officers of the
Company is included in the Statement of Additional Information.
INVESTMENT ADVISER. Bank of America serves as the Company's investment adviser.
Bank of America, with principal offices at 555 California Street, San Francisco,
California 94104, is a national banking association formed in 1904 which
provides commercial banking and trust business through an extensive system of
branches across the western United States. Bank of America's principal banking
affiliates operate branches in ten U.S. states as well as corporate banking and
business credit offices in major U.S. cities and branches, corporate offices and
representative offices in 37 countries. Bank of America is the successor by
merger to Security Pacific National Bank ("Security Pacific"), which previously
served as investment adviser to the Company since it commenced operations in
1984. Bank of America and its affiliates have over $50 billion under management,
including over $10 billion in mutual funds. Bank of America is a subsidiary of
BankAmerica Corporation, a registered bank holding company.
As investment adviser Bank of America manages the Funds' investments and is
responsible for all purchases and sales of the Funds' portfolio securities. For
its investment advisory services Bank of America is entitled to receive a fee
accrued daily and payable monthly at the following annual rates: .10% of the
first $3 billion of each Fund's net assets, plus .09% of the next $2 billion of
each Fund's net assets, plus .08% of each Fund's net assets over $5 billion. For
the fiscal year ended February 28, 1995, the Tax-Exempt Money Fund and the
California Tax-Exempt Money Market Fund paid Bank of America advisory fees at
the effective annual rate of .10% of their respective average daily net assets.
In addition, Bank of America is also entitled to fees under the Company's
Special Management Services Agreement described below and may receive fees
charged directly to its customers' accounts in connection with investments in
Fund shares.
ADMINISTRATOR. Concord Holding Corporation (the "Administrator")serves as the
Company's administrator and assists generally in supervising the Funds'
operations. The Administrator is a wholly-owned subsidiary of The BISYS Group,
Inc. Its offices are located at 125 West 55th Street, New York, New York 10019.
Under its Basic Administrative Services Agreement for the Funds, the
Administrator has agreed to: provide facilities, equipment and personnel to
carry out specified administrative services for the benefit of all series in the
Funds, including coordination of reports to shareholders and the Securities and
Exchange Commission; calculation of the net asset value of the Funds' shares and
dividends and capital gains distributions to shareholders; payment of the costs
of maintaining the Funds' offices; preparation of tax returns; provision of
internal legal and accounting compliance services; maintenance (or oversight of
the maintenance by others approved by the Board of Directors) of the Funds'
books and records; and the provision of various services for shareholders who
have made a minimum initial investment of at least $500,000, including the
provision of a facility to receive purchase and redemption orders for the
accounts of such shareholders.
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For its administrative services the Administrator is entitled to receive an
administration fee computed daily and payable monthly at the following annual
rates: .10% of the first $7 billion of each Fund's net assets, plus .09% of the
next $3 billion of each Fund's net assets, plus .08% of each Fund's net assets
over $10 billion. For the fiscal year ended February 28, 1995, the Tax-Exempt
Money Fund and the California Tax-Exempt Money Market Fund paid the
Administrator administration fees at the effective annual rates of .10% of their
respective average daily net assets.
Pursuant to the authority granted in its agreement with the Company, the
Administrator has entered into an agreement with The Bank of New York under
which the bank performs certain of the services listed above--e.g., calculating
the net asset value of the Funds' shares and dividends to shareholders and
maintaining the Funds' books and records. The Funds bear all fees and expenses
charged by The Bank of New York for these services.
SPECIAL MANAGEMENT SERVICES AGREEMENT. The Company has entered into a Special
Management Services Agreement with Bank of America and the Administrator with
respect to the Funds' Pacific Horizon Shares. Under the agreement, Bank of
America and the Administrator have agreed to develop and monitor the investor
programs that are offered from time to time in connection with such shares;
provide dedicated walk-in and telephone facilities to handle shareholder
inquiries and serve investor needs; develop and maintain specialized systems for
the automatic investments of customers of Bank of America, the Administrator and
selected broker/dealers; maintain the registration or qualification of Pacific
Horizon Shares for sale under state securities laws; assume the expense of
payments made to third parties for services provided in connection with the
investments of their customers in Pacific Horizon Shares; and provide various
services (such as the provision of a facility to receive purchase and redemption
orders) for shareholders who have made a minimum initial investment of less than
$500,000.
For the services provided and expenses assumed pursuant to the Special
Management Services Agreement, Bank of America (or Security Pacific prior to its
merger with Bank of America) and the Administrator are entitled to receive an
aggregate fee, computed daily and payable monthly, at the annual rates of .32%
and .35%, respectively, of the average daily net asset value of the outstanding
Pacific Horizon Shares of the Tax Exempt Money Fund and the California Tax-
Exempt Money Market Fund. However, as described in the section entitled "Expense
Summary," Bank of America and the Administrator have voluntarily agreed to waive
.03% of the Special Management Services fees with respect to Pacific Horizon
Shares of the California Tax-Exempt Money Market Fund. As stated below under
"Description of Shares," such fees are borne by the Funds' Pacific Horizon
Shares and are not paid with respect to the Funds' other series of shares. For
the fiscal year ended February 28, 1995, the Tax-Exempt Money Fund and the
California Tax-Exempt Money Market Fund paid aggregate fees pursuant to the
Special Management Services Agreement at the effective annual rates of .32% of
the average daily net assets of their respective Pacific Horizon Shares.
DISTRIBUTOR. Concord Financial Group, Inc. (the "Distributor") is the principal
underwriter and distributor for shares of the Fund. The Distributor is a
wholly-owned subsidiary of the Administrator organized to distribute shares of
mutual funds to institutional and retail investors. Its offices are located at
125 West 55th Street, New York, New York 10019.
The Distributor makes a continuous offering of the Funds' shares and bears the
costs and expenses of printing and distributing to selected dealers and
prospective investors copies of any prospectuses, statements of additional
information and annual and interim reports of the Funds (after such items have
been prepared and set in type by the Funds) that are used in connection with the
offering of shares, and the costs and expenses of preparing, printing and
distributing any other literature used by the Distributor or
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furnished by it for use by selected dealers in connection with the offering of
the Funds' shares for sale to the public.
CUSTODIAN AND TRANSFER AGENT. The Bank of New York, located at 90 Washington
Street, New York, New York 10286, serves as the Fund's custodian. DST Systems,
Inc. (the "Transfer Agent"), 811 Main, Kansas City, Missouri 64105-2005, serves
as the Funds' transfer agent and dividend disbursing agent. The Company has also
entered into a Cash Management and Related Services Agreement with The Bank of
New York pursuant to which The Bank of New York receives and disburses funds in
connection with the wire purchase and wire redemption of the Fund's shares.
FEE WAIVERS. Except as noted in this Prospectus and the Statement of Additional
Information, the Funds' contractors bear all expenses in connection with the
performance of their services, and the Funds bear the expenses incurred in their
operations. From time to time during the course of the Funds' fiscal year, Bank
of America and/or the Administrator may voluntarily not receive payment of fees
and/or assume certain expenses of a Fund, while retaining the ability to be
reimbursed by that Fund for such amounts prior to the end of the fiscal year
and, subject to the expense limitations of certain states, to stop such fee
waivers and expense reimbursements at any time. This will have the effect of
lowering the overall expense ratio of the Fund involved and of increasing such
Fund's yield to investors at the time such fees are not received or amounts are
assumed and of increasing the overall expense ratio of such Fund and of
decreasing yield to investors when such fees or amounts are reimbursed.
BANKING LAWS. Banking laws and regulations currently prohibit a bank holding
company registered under the Federal Bank Holding Company Act of 1986 or any
bank or non-bank affiliate thereof from sponsoring, organizing, controlling or
distributing the shares of a registered, open-end investment company
continuously engaged in the issuance of its shares, and prohibit banks generally
from underwriting securities, but such banking laws and regulations do not
prohibit such a holding company or affiliate or banks generally from acting as
investment adviser, administrator or custodian to such an investment company, or
from purchasing shares of such a company as agent for and upon the order of
customers. Bank of America is subject to such banking laws and regulations.
Bank of America believes it may perform the services for the Funds contemplated
by its agreements without violation of applicable banking laws or regulations.
It should be noted, however, that there have been no cases deciding whether bank
and non-bank subsidiaries of a registered bank holding company may perform
services comparable to those that are to be performed by Bank of America, and
future changes in either federal or state statutes and regulations relating to
permissible activities of banks and their subsidiaries or affiliates, as well as
future judicial or administrative decisions or interpretations of current and
future statutes and regulations, could prevent Bank of America from continuing
to perform such services for the Funds.
Should future legislative, judicial or administrative action prohibit or
restrict the activities of Bank of America in connection with the provision of
services on behalf of a Fund, such Fund might be required to alter materially or
discontinue its arrangements with Bank of America and change its method of
operations. It is not anticipated, however, that any change in such Fund's
method of operations would affect its net asset value per share or result in a
financial loss to any shareholder.
PURCHASE OF SHARES
Pacific Horizon Shares may be purchased directly from the Distributor, by
clients of Bank of America through their qualified trust and agency accounts, or
by clients of certain institutions such as banks or broker-dealers ("Service
Organizations") without a charge imposed by a Fund,
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although Bank of America and Service Organizations may charge a fee for
providing administrative services in connection with investments in Fund shares.
The minimum initial investment is $500, except for purchases through Bank of
America's trust and agency accounts or through a Service Organization whose
clients have made aggregate minimum purchases of $1,000,000, in which event the
minimum initial investment is $100, or as otherwise described below under
"Shareholder Services." The minimum subsequent investment is $50, except for
investments arising from automatic investment transactions on behalf of Bank of
America's trust and agency accounts, as to which there is no minimum. Bank of
America and Service Organizations may impose minimum customer account and other
requirements in addition to those imposed by the Funds. The Funds reserve the
right to reject any purchase order. Persons wishing to purchase shares through
their accounts at Bank of America or a Service Organization should contact such
entity directly for appropriate instructions. Other investors may purchase
shares in the manner described below.
An investor desiring to purchase shares by mail should complete an Account
Application and mail the Application and a check payable to "Pacific Horizon
[Name of specific Fund ]" to the Company, c/o DST Systems, Inc., P.O. Box
419955, Kansas City, Missouri 64141-6955. All subsequent payments should be
mailed to DST Systems, Inc., P.O. Box 419940, Kansas City, Missouri 64173-0298.
An investor desiring to purchase shares by wire should request his bank to
transmit immediately available funds by wire to The Bank of New York, ABA No.
021000018, Pacific Horizon Funds, Inc.-- California Tax-Exempt Money Market
Fund, DDA No. 8900052651, or Pacific Horizon Funds, Inc.--Tax-Exempt Money Fund,
No. 8900052562 for purchase of shares in the investor's name. It is important
that the wire include the investor's name, address, and tax identification
number, indicate whether a new account is being established or subsequent
payment is being made to an established account and indicate the name of the
Fund. If a subsequent payment is being made, the investor's Fund account number
should be included. An investor should contact his bank for information on
remitting funds in this manner, including any charges imposed by the bank for
wiring funds. Payments which are hand delivered must be delivered directly to
the Transfer Agent at 811 Main, Kansas City, Missouri 64105-2005.
A fee will be imposed by the Transfer Agent if any check used for investment in
an account does not clear. All payments should be in U.S. dollars. Purchase
orders in proper form are effected on a day on which both the Funds' custodian
and the New York Stock Exchange (the "Exchange") are open for business (a
"Business Day") at the net asset value per share next determined after receipt
by the Transfer Agent at its Kansas City office of both an order and federal
funds. Purchases will not be effected until payments made in other than federal
funds are converted to federal funds, which is ordinarily within two business
days of receipt. Purchase orders in proper form are effected upon receipt by the
Transfer Agent at its Kansas City office. If an order is received by the
Transfer Agent before 10:30 a.m. Eastern Time (with respect to the California
Tax-Exempt Money Market Fund), or 12:00 noon Eastern Time (with respect to the
Tax-Exempt Money Fund) on a business day and federal funds are received by 4:00
p.m. the same business day, shares will be purchased at the net asset value next
determined after receipt on that day. Otherwise, Fund shares will be purchased
at the net asset value next determined on the next business day. It is the
responsibility of Bank of America or the Service Organization involved to
transmit orders for purchases of shares by its customers to the Transfer Agent
and deliver required funds on a timely basis, in accordance with the procedures
stated above. Share purchases and redemptions executed through Bank of America
or a Service Organization are executed only on days on which the particular
institution and the Fund are open for business.
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Net asset value per share for each Fund is determined as of 12:00 noon Eastern
Time on each Business Day and is computed by dividing the value of a Fund's net
assets (i.e., the value of its assets less liabilities) by the total number of
its outstanding shares. Each Fund seeks to maintain a net asset value of $1.00
per share for purposes of purchases and redemptions and values its portfolio
securities on the basis of amortized cost (as described in the Statement of
Additional Information under "Purchase and Redemption of Shares"). There can be
no assurance that either Fund will be able to maintain a net asset value of
$1.00 per share. The net asset value per share for purposes of pricing purchase
and redemption orders for each Fund share is determined independently of that
for other portfolios of the Company. For voice recorded price and yield
information call (800) 227-1545.
Federal regulations require that each investor provide a certified Taxpayer
Identification Number upon opening or reopening an account. See the Fund's
Account Application for further information about this requirement.
The Company will obtain a representation from Service Organizations (as well as
from Bank of America and the Administrator) that they are or will be licensed as
dealers as required by applicable law or will not engage in activities which
would require them to be so licensed.
TELETRADE. Although the privilege may not be used to make an initial purchase,
an investment in Pacific Horizon Shares of a Fund automatically entitles an
investor to purchase shares of a Fund (minimum of $500 and maximum of $50,000
per transaction) without charge by telephone unless he indicates on the Account
Application or in a subsequent written notice to the Transfer Agent that he does
not wish to use the TeleTrade Privilege. Appropriate information concerning the
investor's bank must be provided in the Account Application or in a subsequent
signature guaranteed letter of instruction to the Transfer Agent before the
TeleTrade Privilege may be used. The proceeds will be transferred between the
checking, NOW or bank money market account designated in one of these documents
and the investor's Fund account. Only an account maintained at a domestic
financial institution which is an Automated Clearing House member may be so
designated. TeleTrade purchases are effected at the net asset value next
determined after receipt of payment by the Transfer Agent. The Fund may modify
this privilege at any time or charge a service fee upon notice to shareholders.
No such fee currently is contemplated.
An investor who has selected the TeleTrade Privilege may request TeleTrade
purchases by telephoning the Transfer Agent at (800) 346-2087. The TeleTrade
Privilege may not be available to certain clients of Bank of America or
particular institutional investors.
REDEMPTION OF SHARES
Investors whose shares are purchased through accounts at Bank of America or a
Service Organization may redeem all or part of their Pacific Horizon Shares in
accordance with the instructions pertaining to such accounts. If such investors
are also the shareholders of record of those accounts on the books of the
Transfer Agent, they may redeem shares in accordance with the procedures
described below under "Regular Redemption." Such investors wishing to use the
redemption methods described below must arrange with Bank of America or their
Service Organization for delivery of the required application(s) to the Transfer
Agent. Redemption orders are effected on a Business Day at the net asset value
per share next determined after receipt of the order by the Transfer Agent. It
is the responsibility of Bank of America or the Service Organization to transmit
the redemption order and credit its customer's account with the redemption
proceeds on a timely basis. Other investors may redeem all or part of their
shares in accordance with any of the following procedures.
REGULAR REDEMPTION. An investor may redeem shares in any amount by sending a
written request to the Tax-Exempt Money Fund or
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California Tax-Exempt Money Market Fund, c/o DST Systems, Inc., P.O. Box 419955,
Kansas City, Missouri 64141-6955. Redemption requests are effected upon receipt
by the Transfer Agent at its Kansas City office. Redemption requests delivered
to the Company other than by mail must be delivered to the offices of the
Transfer Agent at 811 Main, Kansas City, Missouri 64105-2005. Shares for which
certificates have been issued may not be redeemed unless the certificates have
been submitted to the Transfer Agent and endorsed for transfer.
Redemption requests must be signed by each shareholder, including each joint
owner on redemption requests for joint accounts. A redemption request for (i) an
amount in excess of $50,000 per day, (ii) any amount if the proceeds are to be
sent elsewhere than to the address of record, and (iii) an amount of $50,000 or
less if the address of record has not been on file with the Transfer Agent for a
period of sixty days, must be accompanied by a signature guarantee. The
guarantor of a signature must be a bank that is a member of the FDIC, a trust
company, a member firm of a national securities exchange or other eligible
guarantor institution. The Transfer Agent will not accept guarantees from
notaries public. Signatures on endorsed certificates submitted for redemption
must also be guaranteed. Guarantees must be signed by an authorized signatory of
the guarantor institution and "Signature Guaranteed" must appear with the
signature.
TELETRADE. An investor may redeem shares in the same manner and subject to the
same limitations as described under "Purchases of Shares--TeleTrade" above.
Redemption proceeds will be on deposit in the investor's account at a domestic
financial institution which is an Automated Clearing House member bank
ordinarily two business days after receipt of the redemption request. An
investor may also request that redemption proceeds be sent by check. Checks will
be sent only to the registered owner(s) and only to the address of record. An
investor who has selected the TeleTrade Privilege may request TeleTrade
redemptions by telephoning the Transfer Agent at (800) 346-2087. Shares issued
in certificate form are not eligible for this Privilege. Neither the Company nor
any of its service contractors will be liable for any loss or expense for acting
upon any telephone instructions that are reasonably believed to be genuine. In
attempting to confirm that telephone instructions are genuine, the Company will
use such procedures as are considered reasonable.
WIRE REDEMPTION. An investment in Pacific Horizon Shares of a Fund
automatically entitles an investor to redeem shares by wire unless he indicates
on the Account Application or in a subsequent signature guaranteed written
notice to the Transfer Agent that he does not wish to use this method of
redemption. Appropriate information concerning the investor's bank must be
provided in the Account Application or in a subsequent signature guaranteed
letter of instruction before shares may be redeemed by wire. An investor may
instruct the Transfer Agent to redeem shares in a Fund on written, telegraphic,
or telephone instructions from any person representing himself to be the
investor and believed by the Transfer Agent to be genuine. The responsibility of
the Transfer Agent and certain other parties for telephonic instructions is
discussed in the preceding paragraph. The proceeds of redemption will normally
be wired in federal funds to the commercial bank specified by the investor on
the Account Application. Redemption proceeds must be in an amount of at least
$1,000 and may be subject to limits as to frequency and overall amounts. Wire
redemptions may be terminated or modified by a Fund at any time. Shares issued
in certificate form are not eligible for wire redemption. An investor should
contact his bank for information on any charges imposed by the bank in
connection with the receipt of redemption proceeds by wire. During periods of
substantial economic or market change, telephone wire redemptions may be
difficult to implement. If an investor is unable to contact the Transfer Agent
by telephone, shares may also be redeemed by delivering the redemption request
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in person to the Transfer Agent or by mail as described above under "Regular
Redemption." For additional information concerning wire redemption, see the
Statement of Additional Information and the Fund's Account Application.
CHECK REDEMPTION. An investor may request on the Account Application that the
Company provide Redemption Checks ("Checks") drawn on his Fund. Checks will be
sent only to the registered owner(s) and only to the address of record. The
Account Application Form must be manually signed by the registered owner(s).
Checks may be made payable to the order of any person in the amount of $500 or
more. Dividends are earned until the Check clears the Transfer Agent. When a
Check is presented to the Transfer Agent for payment, the Transfer Agent, as the
investor's agent, will cause the investor's Fund to redeem a sufficient number
of the investor's shares to cover the amount of the Check. All cleared checks
will be returned to the investor on a monthly basis. There is no charge to the
investor for the use of the Checks; however, the Transfer Agent will impose a
charge for stopping payment of a Check upon the request of the investor, or if
the Transfer Agent cannot honor a Check due to insufficient funds or other valid
reason. Because dividends accrue daily, Checks should not be used to close an
account, as a small balance is likely to result. Shares for which stock
certificates have been issued may not be redeemed by Check.
OTHER REDEMPTION INFORMATION. The Funds will make payment for all shares
redeemed after receipt by the Transfer Agent of a request in proper form, except
as provided by the rules of the Securities and Exchange Commission. If the
shares to be redeemed have been purchased by check or TeleTrade, the Company
will, upon the clearance of purchase check or TeleTrade payment, mail the
redemption proceeds within seven business days. Where redemption is requested
other than by mail, shares purchased by check or by TeleTrade will not be
redeemed for a period of seven business days after their purchase. This
procedure does not apply to situations where a Fund receives payment in cash or
immediately available funds for the purchase of shares. During the period prior
to the time the shares are redeemed, dividends on such shares will accrue and be
payable, and an investor will be entitled to exercise all other rights of
beneficial ownership. An investor having purchased shares by wire must have
filed an Account Application before any redemption requests can be honored.
The Funds impose no charge when shares are redeemed. However, if shares have
been purchased through Bank of America or a Service Organization, Bank of
America or the Service Organization may charge a fee for providing
administrative services in connection with investments in shares. The Funds
reserve the right to redeem accounts involuntarily, upon sixty days' written
notice, if an account's net asset value falls below the $500 minimum balance.
SHAREHOLDER SERVICES
The services and privileges described under this heading may not be available to
certain clients of Bank of America and particular Service Organizations, and
Bank of America and some Service Organizations may impose conditions on their
clients which are different from those described in this Prospectus. You should
consult Bank of America or your Service Organization in this regard.
EXCHANGE PRIVILEGE. The Exchange Privilege enables an investor to exchange
Pacific Horizon Shares of a Fund for: like shares in another portfolio of the
Company, or like shares of any investment portfolio of Time Horizon Funds (an
open-end investment company managed by an affiliate of Bank of America) after it
has commenced operations, provided that such other shares may legally be sold in
the state of the investor's residence. An investment in Pacific Horizon Shares
of a Fund automatically entitles an investor to use this Privilege unless he has
indicated on the Account Application or in a subsequent written notice to the
Transfer Agent
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that he does not wish to have this Privilege. The shares that are exchanged must
have a current value of at least $500; furthermore, in establishing a new
account through use of this Privilege, the shares being exchanged must have a
value at least equal to the minimum initial investment required by the
particular portfolio into which the exchange is being made. Prospectuses for
portfolios of the Company (as well as prospectuses for investment portfolios of
Time Horizon Funds) into which an exchange is being made may be obtained from
the investor's Service Organization or the Distributor. A shareholder may
telephone instructions by calling the Transfer Agent at (800) 346-2087. See
"Redemption of Shares--TeleTrade" for a description of the Company's policy
regarding responsibility for telephone instructions. When shares of a Fund are
exchanged for shares of another portfolio in the Company (or for shares of an
investment portfolio of Time Horizon Funds) which are sold with a sales load,
the applicable sales load, if any, will be deducted. An investor desiring to use
the Exchange Privilege should read the Statement of Additional Information and
consult his or her Service Organization or the Distributor for further
information applicable to use of the Privilege. The Company reserves the right
to reject any exchange request and the Exchange Privilege may be modified or
terminated at any time upon notice to shareholders. At least 60 days' notice
will be given to shareholders of any material modification to or termination of
the Exchange Privilege except where notice is not required under the regulations
of the Securities and Exchange Commission.
AUTOMATIC INVESTMENT PROGRAM. The Automatic Investment Program permits an
investor to purchase Pacific Horizon Shares of a Fund (minimum $50 per
transaction) at regular intervals selected by the investor. Provided the
investor's financial institution allows automatic withdrawals, shares are
purchased by transferring funds from an investor's checking, bank money market
or NOW account designated by the investor. At the investor's option, the account
designated will be debited in the specified amount, and shares will be
purchased, once a month, on either the first or fifteenth day, or twice a month,
on both days. Only an account maintained at a domestic financial institution
which is an Automated Clearing House member may be so designated. The minimum
initial investment for investors establishing an Automatic Investment Account is
$50. To establish an Automatic Investment Account, an investor must check the
appropriate box and supply the necessary information on the Account Application
or subsequently file a written request with the Transfer Agent. An investor may
obtain the necessary applications from the Distributor. An investor may cancel
this Privilege or change the amount of purchase at any time by mailing written
notification to the Transfer Agent at P.O. Box 419955, Kansas City, Missouri
64141-6955 and notification will be effective three business days following
receipt. The Company may modify or terminate this privilege at any time or
charge a service fee, although no such fee currently is contemplated.
DIRECT DEPOSIT PROGRAM. If an investor receives federal salary, social
security, or certain veteran's, military or other payments from the federal
government, he is eligible for the Direct Deposit Program. With this Program, an
investor may purchase Pacific Horizon Shares of a Fund (minimum of $50 and
maximum of $50,000 per transaction) by having these payments automatically
deposited into his Fund account. An investor may deposit as much of such
payments as he elects. For instructions on how to enroll in the Direct Deposit
Program, an investor should call the Transfer Agent at (800) 346-2087. Death or
legal incapacity will terminate an investor's participation in the Program. An
investor may elect at any time to terminate his participation by notifying in
writing the appropriate federal agency. Further, the Company may terminate an
investor's participation upon 30 days' notice to the investor.
AUTOMATIC WITHDRAWAL PLAN. An investor having a $5,000 minimum account may
request withdrawal of a dollar amount in multiples of $50 on
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a monthly, quarterly, semi-annual or annual basis. At the investor's option,
monthly withdrawals will be made on either the first or fifteenth day of the
month and quarterly, semi-annual or annual withdrawals will be made on either
the first or fifteenth day of the month selected. To participate in the
automatic withdrawal plan, an investor must check the appropriate box and supply
the necessary information on the Account Application, which may be obtained from
the Distributor or subsequently file a signature guaranteed written request with
the Transfer Agent.
DIVIDENDS, DISTRIBUTIONS
AND TAXES
DIVIDENDS AND DISTRIBUTIONS. Shareholders of a Fund are entitled to dividends
and distributions arising from the net investment income and net realized gains,
if any, earned on the investments held by that Fund. Generally each Fund's net
income is declared daily as a dividend. Shares begin accruing dividends on the
day the purchase order for the shares is executed and continue to accrue
dividends through and including the day before the redemption order for the
shares is executed. Dividends are paid within five business days after the end
of each month. Although the Funds do not expect to realize net long-term capital
gains, any such capital gains as may be realized will be distributed no more
than twice a year after reduction for any available capital loss carry-forward.
Dividends applicable to Pacific Horizon Shares of a Fund are paid in the form of
additional full and fractional Pacific Horizon Shares of that Fund at the net
asset value of such shares on the payment date, unless the shareholder elects to
receive dividends in cash. Reinvested dividends receive the same tax treatment
as dividends paid in cash. Such election or any revocation thereof must be made
in writing to Pacific Horizon Funds, Inc., [Name of specific Fund], c/o DST
Systems, Inc., P.O. Box 419955, Kansas City, Missouri 64141-6955, and will
become effective with respect to dividends paid after its receipt by the
dividend disbursing agent.
TAXES. Management of the Company believes that each Fund qualified separately
for its last taxable year as a "regulated investment company" under the Internal
Revenue Code of 1986, as amended (the "Code"), and it is intended that each Fund
will continue to qualify as a regulated investment company as long as such
qualification is in the best interest of its shareholders. Such qualification
generally relieves a Fund of liability for federal income taxes, to the extent
its earnings are distributed in accordance with the Code. The policy of each
Fund is to pay to shareholders at least 90%, of its exempt-interest income net
of certain deductions, for each taxable year. Dividends derived from interest on
Municipal Securities (known as exempt-interest dividends) and paid to
shareholders typically will not be subject to regular federal income tax.
With respect to the California Tax-Exempt Money Market Fund, if, at the close of
each quarter of its taxable year, at least 50% of the value of the Fund's total
assets consists of California Exempt Securities and if the Fund qualifies as a
regulated investment company under the Code, then the Fund will be qualified to
pay dividends exempt from California state personal income tax to its
shareholders. If the Fund so qualifies, dividends derived from interest
attributable to California Exempt Securities will be exempt from California
state personal income tax. (Such treatment may not apply, however, to investors
who are "substantial users" or "related persons" with respect to facilities
financed by portfolio securities held by the California Tax-Exempt Money Market
Fund.) Any dividends paid to shareholders subject to California state franchise
tax or California state corporate income tax may be taxed as ordinary dividends
to such shareholders notwithstanding that all or a portion of such dividends are
exempt from California state personal income tax.
20
<PAGE> 247
Except as noted with respect to the California state personal income tax,
distributions of net investment income 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. Moreover, to the
extent, if any, that dividends paid to shareholders are derived from taxable
interest or from capital gains, such dividends will be subject to federal income
tax and California state personal income tax, whether or not such dividends are
reinvested.
The portion of dividends (if any) attributable to interest on certain private
activity bonds issued after August 7, 1986 must be included by shareholders as
an item of tax preference for purposes of determining liability (if any) for the
26% to 28% federal alternative minimum tax applicable to individuals and the 20%
federal alternative minimum tax and the environmental tax applicable to
corporations. Corporate shareholders must also take all exempt-interest
dividends into account in determining certain adjustments for federal
alternative minimum and environmental tax purposes. The environmental tax
applicable to corporations is imposed at the rate of .12% on the excess of the
corporation's modified federal alternative minimum taxable income over
$2,000,000. Shareholders receiving Social Security benefits should note that all
exempt-interest dividends will be taken into account in determining the tax
liability of such benefits.
Dividends declared in December of any year payable to shareholders of record on
a specified date in December will be deemed for federal tax purposes to have
been paid by a Fund and received by its shareholders on December 31, if such
dividends are paid during January of the following year.
OTHER STATE AND LOCAL TAXES. Investors are advised to consult their tax
advisers concerning the application of state and local taxes generally, which
may have different consequences from those of the federal income tax and, with
respect to the California Tax-Exempt Money Market Fund, the California state
personal income tax described above. Exempt-interest dividends generally will be
exempt from state and local taxes as well. However, except as noted with respect
to California state personal income tax, in some situations, dividends paid by
the Fund may be taxable to investors under state or local law as dividend income
even though all or a portion of such dividends may be derived from interest on
obligations that, if realized directly would be exempt from such taxes.
GENERAL. Shareholders will be advised at least annually as to the federal
income tax and, with respect to the California Tax-Exempt Money Market Fund, the
California state personal income tax consequences of dividends and distributions
made each year.
The foregoing is only a brief summary of some of the important tax
considerations generally affecting the Funds and their shareholders, and is
based on tax laws and regulations in effect as of the date of this Prospectus.
Such laws and regulations may be changed by legislative or administrative
action. Additional tax information of relevance to particular investors,
including investors who may be "substantial users" or "related persons" with
respect to facilities financed by Municipal Securities, is contained in the
Statement of Additional Information. Potential investors in the Funds should
consult their tax advisers with specific reference to their own tax situation.
21
<PAGE> 248
DESCRIPTION OF SHARES
The Company was organized on October 27, 1982 as a Maryland corporation, and is
registered under the Investment Company Act of 1940 as an open-end management
investment company. The Predecessor Tax-Exempt Fund originally commenced
operations on July 10, 1987 as a separate portfolio of The Horizon Funds. On
January 10, 1990 the Predecessor Tax-Exempt Fund was reorganized as the
Tax-Exempt Money Fund of the Company and prior to July 9, 1993 had offered only
two series of shares, Horizon Shares and Horizon Service Shares. On July 9,
1993, all assets and liabilities of the Company's Tax-Exempt Money Fund were
reorganized into the Tax-Exempt Money Fund as Pacific Horizon Shares. The
California Tax-Exempt Money Market Fund commenced operations on December 6, 1989
as a portfolio of the Company with a single series of shares, Pacific Horizon
Shares. On March 1, 1993 the California Tax-Exempt Money Market Fund also began
offering Horizon Shares. (Horizon Shares and Horizon Service Shares, which are
described in a separate prospectus available upon request, are sold to
institutions and may not be purchased by individuals directly.)
The Company's charter authorizes the Board of Directors to issue up to two
hundred billion full and fractional shares of capital stock, and to classify and
reclassify any authorized and unissued shares into one or more classes of
shares. The Board of Directors may similarly classify or reclassify any class of
shares into one or more series. Pursuant to such authority, the Board of
Directors has authorized the issuance of one billion, 500 million Pacific
Horizon Shares, three billion Horizon Shares and three billion Horizon Service
Shares representing interests in the Tax-Exempt Money Fund, and one billion
Pacific Horizon Shares and one billion Horizon Service Shares representing
interests in the California Tax-Exempt Money Market Fund. Horizon Service Shares
and Horizon Shares of the Tax-Exempt Money Market Fund and Horizon Service
Shares of the California Tax-Exempt Money Market Fund are described in a
separate Prospectus available from the Distributor at the telephone number on
the cover of this Prospectus. The Board of Directors has also authorized the
issuance of additional classes of shares and series of shares representing
interests in other investment portfolios of the Company, which are likewise
described in separate prospectuses available from the Distributor. This
Prospectus relates only to the Pacific Horizon Shares of the Funds and describes
only the investment objective, policies, operations and contracts relating to
such shares.
Each Pacific Horizon Share, Horizon Share and Horizon Service Share in a Fund
has a par value of $.001, and, except as noted below, is entitled to participate
equally in the dividends and distributions declared by the Board of Directors
with respect to such Fund and in the net distributable assets of such Fund on
liquidation. Holders of a Fund's Pacific Horizon Shares bear the fees described
in this Prospectus that are paid to Bank of America and the Administrator by the
Fund under the Company's Special Management Services Agreement for Pacific
Horizon Shares. Similarly, holders of a Fund's Horizon Service Shares bear the
fees described in the prospectus for such shares that are paid to Shareholder
Organizations by the Fund under the Company's Shareholder Services Plan. The
fees paid under the Shareholder Service Plan are for services provided by
institutional investors to their customers in connection with Horizon Service
Shares, and Shareholder Organizations do not receive similar fees with respect
to a Fund's Horizon Shares or Pacific Horizon Shares. As a result, at any given
time, the net yield on a Fund's Pacific Horizon Shares is expected to be
approximately .07% lower than the yield on the same Fund's Horizon Service
Shares and, with respect to the Tax-Exempt Money Fund, .32% lower than the yield
on that Fund's Horizon Shares. Standardized yield quotations will be computed
separately for each series of shares.
Shareholders are entitled to one vote for each full share held and fractional
votes for fractional
22
<PAGE> 249
shares held and will vote in the aggregate and not by class or series except as
required by law or when permitted by the Board of Directors. It is contemplated
that all shareholders of a Fund will vote together as a single class on matters
relating to the Fund's investment advisory agreement and on any change in its
fundamental investment limitations, and that only holders of Pacific Horizon
Shares of a Fund will be entitled to vote on matters submitted to a vote of
shareholders pertaining to the Fund's Special Management Services Agreement.
Fund shares have no preemptive rights and only such conversion and exchange
rights as the Board may grant at its discretion. When issued for payment as
described in this Prospectus, shares will be fully paid and non-assessable.
Certificates for shares will not be issued unless expressly requested in writing
and will not be issued for fractional shares.
The Company does not presently intend to hold annual meetings of shareholders
for the election of directors and other business unless and until such time as
less than a majority of the directors holding office have been elected by the
shareholders of the Company, at which time the directors then in office will
call a shareholders' meeting for the election of directors. Under certain
circumstances, however, shareholders have the right to call a meeting of
shareholders to consider the removal of one or more directors and such meetings
will be called when requested by the holders of record of 10% or more of the
Company's outstanding shares of common stock. To the extent required by law and
the Company's undertaking with the Securities and Exchange Commission, the
Company will assist in shareholder communications in such matters. Shares have
cumulative voting rights to the extent that may be required by applicable law.
PERFORMANCE CALCULATIONS
From time to time, a Fund may quote its "yield," "effective yield" and
"tax-equivalent yield" in advertisements or in communications to shareholders.
Each yield figure is based on historical earnings and is not intended to
indicate future performance. The "yield" of a Fund refers to the income
generated by an investment in the Fund over a seven-day period (which period
will be identified in the advertisement or report). This income is then
"annualized"--that is, the amount of income generated by the investment during
that week is assumed to be generated each week over a 52-week period and is
shown as a percentage of the investment. The "effective yield" of a Fund is
calculated similarly but, when annualized, the income earned by an investment in
the Fund is assumed to be reinvested. The "effective yield" will be slightly
higher than the "yield" because of the compounding effect of the assumed
reinvestment. A Fund's "tax-equivalent yield" shows the level of taxable yield
needed to produce an after-tax equivalent to the Fund's tax-free yield. This is
done by increasing the Fund's yield (calculated as above) by the amount
necessary to reflect the payment of federal, and in the case of the California
Tax-Exempt Money Market Fund, California income tax, at a stated tax rate. A
Fund's "tax-equivalent yield" will always be higher than its yield.
Additionally, the yields of a Fund may be compared to those of other mutual
funds with similar investment objectives and to other relevant indices or to
rankings prepared by independent services or other financial or industry
publications that monitor the performance of mutual funds. For example, the
Tax-Exempt Money Fund's yields may be compared to Donoghue's Money Fund Averages
and the California Tax-Exempt Money Market Fund's yields may be compared to
Donoghue's Tax-Free Money Fund Average, which are averages compiled by
Donoghue's Money Fund Report. Yield data as reported in national financial
publications, including Money, Forbes, Barron's, The Wall Street Journal and The
23
<PAGE> 250
New York Times, or in publications of a local or regional nature, may also be
used in comparing the yields of a Fund. A complete listing of the indices,
rankings and publications discussed above is contained in the Statement of
Additional Information.
Since yields fluctuate, yield data cannot necessarily be used to compare an
investment in shares of a Fund with bank deposits, savings accounts and similar
investment alternatives which often provide an agreed or guaranteed fixed yield
for a stated period of time. Shareholders should remember that yield is
generally a function of the kind and quality of the instruments held in a
portfolio, portfolio maturity, operating expenses and market conditions. Any
fees charged by Bank of America or other institutional investors directly to
their customer accounts in connection with investments in shares of a Fund
(which fees may include, for example, account maintenance fees, compensating
balance requirements or fees based upon account transactions, assets or income)
will not be included in the Fund's calculations of yield.
Shareholder inquiries should be addressed to the Distributor at the address or
telephone numbers stated on the inside cover page of this Prospectus.
24
<PAGE> 251
- --------------------------------------------------------------------------------
PACIFIC HORIZON MUTUAL FUNDS
COPTXMM95P
<PAGE> 252
TAX-EXEMPT MONEY FUND
CALIFORNIA TAX-EXEMPT
MONEY MARKET FUND
PROSPECTUS
July 1, 1995
NOT FDIC INSURED
<PAGE> 253
PROSPECTUS
JULY 1, 1995
Horizon Shares and
Horizon Service Shares of the
PRIME FUND
TREASURY FUND
GOVERNMENT FUND
TREASURY ONLY FUND
(Investment Portfolios Offered by Pacific
Horizon Funds, Inc.)
- --------------------------------------------------------------------------------
THIS PROSPECTUS APPLIES TO THE HORIZON SHARES AND HORIZON SERVICE SHARES OF FOUR
NO-LOAD DIVERSIFIED INVESTMENT PORTFOLIOS ("FUNDS"). HORIZON SHARES AND HORIZON
SERVICE SHARES MAY NOT BE PURCHASED BY INDIVIDUALS DIRECTLY, BUT INSTITUTIONAL
INVESTORS MAY PURCHASE SHARES FOR ACCOUNTS MAINTAINED BY INDIVIDUALS. THE FUNDS
ARE DESIGNED TO PROVIDE INSTITUTIONS WITH DAILY LIQUIDITY.
- - PRIME FUND INVESTS SUBSTANTIALLY ALL OF ITS ASSETS IN A DIVERSIFIED PORTFOLIO
OF U.S. DOLLAR-DENOMINATED "MONEY MARKET" INSTRUMENTS SUCH AS BANK
CERTIFICATES OF DEPOSIT AND BANKERS' ACCEPTANCES, COMMERCIAL PAPER AND
REPURCHASE AGREEMENTS, IN ADDITION TO OBLIGATIONS ISSUED OR GUARANTEED BY THE
U.S. GOVERNMENT, ITS AGENCIES OR INSTRUMENTALITIES.
- - TREASURY FUND INVESTS SOLELY IN DIRECT OBLIGATIONS ISSUED BY THE U.S. TREASURY
AND REPURCHASE AGREEMENTS RELATING TO SUCH TREASURY OBLIGATIONS.
- - GOVERNMENT FUND INVESTS IN SHORT-TERM DEBT OBLIGATIONS ISSUED OR GUARANTEED AS
TO INTEREST AND PRINCIPAL BY THE U.S. GOVERNMENT, ITS AGENCIES, AUTHORITIES OR
INSTRUMENTALITIES AND IN REPURCHASE AGREEMENTS WITH RESPECT TO SUCH
OBLIGATIONS.
- - TREASURY ONLY FUND INVESTS SOLELY IN OBLIGATIONS OF THE U.S. TREASURY.
PORTFOLIO SECURITIES HELD BY EACH FUND HAVE REMAINING MATURITIES OF THIRTEEN
MONTHS OR LESS FROM THE DATE OF PURCHASE BY THE FUND. PORTFOLIO SECURITIES WHICH
HAVE CERTAIN PUT OR DEMAND FEATURES EXERCISABLE BY A FUND WITHIN THIRTEEN MONTHS
(AS WELL AS CERTAIN U.S. GOVERNMENT OBLIGATIONS WITH FLOATING OR VARIABLE
INTEREST RATES) AND SECURITIES HELD AS COLLATERAL FOR REPURCHASE AGREEMENTS MAY
HAVE LONGER MATURITIES.
BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION ("BANK OF AMERICA") ACTS
AS INVESTMENT ADVISER TO THE FUNDS. THE COMPANY IS REGISTERED UNDER THE
INVESTMENT COMPANY ACT OF 1940 AS AN OPEN-END MANAGEMENT INVESTMENT COMPANY.
CONCORD FINANCIAL GROUP, INC. SPONSORS THE FUNDS AND ACTS AS THEIR DISTRIBUTOR
AND CONCORD HOLDING CORPORATION ACTS AS THEIR ADMINISTRATOR, NEITHER OF WHICH IS
AFFILIATED WITH BANK OF AMERICA.
THIS PROSPECTUS BRIEFLY SETS FORTH CERTAIN INFORMATION ABOUT THE FUNDS DESCRIBED
HEREIN THAT INVESTORS SHOULD KNOW BEFORE INVESTING. IT SHOULD BE READ AND
RETAINED FOR FUTURE REFERENCE. ADDITIONAL INFORMATION ABOUT THE FUNDS, CONTAINED
IN A STATEMENT OF ADDITIONAL INFORMATION DATED JULY 1, 1995, HAS BEEN FILED WITH
THE SECURITIES AND EXCHANGE COMMISSION AND IS AVAILABLE TO INVESTORS UPON
REQUEST AND WITHOUT CHARGE BY CALLING THE FUNDS' DISTRIBUTOR AT (800) 426-3863.
THE STATEMENT OF ADDITIONAL INFORMATION, AS IT MAY FROM TIME TO TIME BE REVISED,
IS INCORPORATED IN ITS ENTIRETY BY REFERENCE INTO THIS PROSPECTUS.
- --------------------------------------------------------------------------------
Shares of the Funds are not bank deposits or obligations of, or guaranteed or
endorsed by, Bank of America National Trust and Savings Association or any of
its affiliates and are not federally insured by, guaranteed by, obligations of
or otherwise supported by the U.S. Government, the Federal Deposit Insurance
Corporation, the Federal Reserve Board or any other governmental agency. Each
Fund seeks to maintain its net asset value per share at $1.00 for purposes of
purchases and redemptions, although there can be no assurance that it will be
able to do so on a continuous basis. Investment in the Funds involves investment
risk, including the possible loss of principal amount invested.
- --------------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
<PAGE> 254
CONTENTS
<TABLE>
<S> <C> <C>
SUMMARY 2
EXPENSE INFORMATION 5
FINANCIAL HIGHLIGHTS 7
INVESTMENT OBJECTIVES AND 16
POLICIES
COMMON INVESTMENT POLICIES 18
MANAGEMENT OF THE FUNDS 22
PURCHASE AND REDEMPTION OF SHARES 24
DIVIDENDS AND DISTRIBUTIONS 26
TAXES 26
DESCRIPTION OF SHARES 27
DISTRIBUTOR: INVESTMENT ADVISER:
Concord Financial Group, Inc. Bank of America National Trust and Savings Association
125 West 55th Street 555 California Street
New York, NY 10019 San Francisco, CA 94104
</TABLE>
<PAGE> 255
SUMMARY
The following summary is qualified in its entirety by reference to the more
detailed information included elsewhere in the Prospectus.
Horizon Shares and Horizon
Service Shares: Each of the Funds issues Horizon Shares and Horizon
Service Shares representing interests in its
respective investment portfolio. The Horizon Shares
and Horizon Service Shares of each Fund are identical
in all respects except that Horizon Service Shares
bear the fees paid by a Fund to institutional
investors ("Shareholder Organizations") for support
services they provide to the beneficial owners of
such shares. Such fees are paid at the annual rate of
.25% of the average daily net asset value of a Fund's
Horizon Service Shares. In addition, Horizon Service
Shares have certain exclusive voting rights on
matters relating to the Shareholder Services Plan
that has been adopted in connection with such
payments. See "Description of Shares."
Investment Objectives and
Policies: The investment objective of the Prime Fund and
Treasury Fund is to seek high current income and
stability of principal. The Prime Fund seeks to
achieve this objective by investing substantially all
of its assets in a diversified portfolio of U.S.
dollar-denominated "money market" instruments such as
bank certificates of deposit and bankers'
acceptances, commercial paper (including variable and
floating rate instruments) and repurchase agreements,
in addition to obligations issued or guaranteed by
the U.S. Government, its agencies or
instrumentalities. The Treasury Fund seeks to achieve
this objective by investing solely in direct
obligations issued by the U.S. Treasury and
repurchase agreements relating to such Treasury
obligations.
The investment objective of the Government Fund and
Treasury Only Fund is to provide liquidity and as
high a level of current income as is consistent with
the preservation of capital. The Government Fund
seeks to achieve this objective through investments
in short-term debt obligations issued or guaranteed
as to interest and principal by the U.S. Government,
its agencies, authorities or instrumentalities and in
repurchase agreements with respect to such
obligations. The Treasury Only Fund seeks to achieve
this objective through investments solely in
obligations of the U.S. Treasury.
Portfolio securities held by a Fund have remaining
maturities of thirteen months or less from the date
of purchase by the Fund. (Portfolio securities which
are subject to repurchase agreements or have certain
put or demand features exercisable by a Fund within
thirteen months may have longer maturities.)
There can be no assurance that the Funds will achieve
their investment objectives. The Funds' investments
are subject to certain investment risks including
default by the issuers of debt obligations
2
<PAGE> 256
and parties with which a Fund may have in accordance
with its investment policies entered into repurchase
and reverse repurchase transactions. In addition,
investments of the Prime Fund in foreign commercial
paper and in securities issued by foreign branches
of domestic banks or by foreign banks are subject to
investment risks that differ from debt obligations
of domestic issuers. The market value of the Funds'
portfolio securities will normally vary inversely
with prevailing interest rates. See "Investment
Objectives and Policies."
Net Asset Value: Each Fund seeks to maintain its net asset value per
share at $1.00, and values its portfolio securities
on the basis of amortized cost. The dollar weighted
average maturity of each Fund is 90 days or less. See
"Purchase and Redemption of Shares--Net Asset Value."
Investment Adviser: Bank of America National Trust and Savings
Association ("Bank of America") is the investment
adviser of each Fund. Bank of America is a national
banking association formed in 1904 which provides
commercial banking and trust business through an
extensive system of branches across the western
United States. Bank of America's principal banking
affiliates operate branches in ten U.S. states as
well as corporate banking and business credit offices
in major U.S. cities and branches, corporate offices
and representative offices in 37 countries. Bank of
America is the successor by merger to Security
Pacific National Bank ("Security Pacific"), which
previously served as investment adviser to the
Company since the commencement of its operations in
1984. Bank of America and its affiliates have over
$50 billion under management, including over $10
billion in mutual funds. See "Management of the
Funds."
Distributor and
Administrator: Concord Financial Group, Inc. (the "Distributor")
sponsors the Funds and acts as their distributor. The
Distributor is a wholly-owned subsidiary of Concord
Holding Corporation (the "Administrator"), which acts
as the Funds' administrator. The Administrator is a
wholly-owned subsidiary of The BISYS Group, Inc. See
"Management of the Funds--Administrator."
Advisory, Administration and
Distribution Fees: For their respective services Bank of America and the
Administrator each receive fees at the maximum annual
rate of .10% of each Fund's net assets. These fees
are subject to decrease as the net assets of the
respective Funds increase. No fee is payable by the
Funds to the Distributor for its distribution
services. See "Management of the Funds."
Investing in the Funds: Shares may be purchased by telephone or terminal
access order at the next determined net asset value
without a sales charge. Purchase orders for the Prime
Fund, Treasury Fund and Government Fund that are
received by the transfer agents before 2:30 p.m.
Eastern Time on a day on which both the Funds'
custodian and the New York Stock Exchange are open
for business (a "Business Day") will be executed
3
<PAGE> 257
as of 2:30 p.m. Eastern Time on such Business Day if
payment is received by 4:00 p.m. Eastern Time on
that day. Purchase orders for the Treasury Only Fund
that are received by the transfer agents before
11:30 a.m. Eastern Time on a Business Day are
executed at such time on the same day if payment is
received by 4:00 p.m. Eastern Time on such Business
Day. Payment for Fund shares may be made only
in Federal funds or other immediately available
funds.
Each Fund requires a minimum initial investment of
$500,000 for Horizon Shares and Horizon Service
Shares; there is no subsequent minimum investment.
See "Purchase and Redemption of Shares-- Purchase
Procedures."
Redemption of Investment: Investors may redeem all or any part of the value of
their accounts by instructing the proper Fund to
redeem shares. Redemptions may be requested by
telephone or by terminal access and are effected at
the net asset value per share next determined after
receipt of the request by the transfer agents.
Redemption proceeds will be wired to the investor's
designated bank account, and will be wired on the
same Business Day as the redemption is requested if
the request is received by the transfer agents before
2:30 p.m. Eastern Time with respect to the Prime
Fund, Treasury Fund and Government Fund, and before
11:30 a.m. Eastern Time with respect to the Treasury
Only Fund, on a Business Day. Shares for which
certificates have been issued may not be redeemed
unless the certificates have been submitted to the
transfer agents and endorsed for transfer.
A Fund may redeem shares in any account at net asset
value, without the investor's request, if the value
of the account is less than $500,000 as a result of
redemptions. See "Purchase and Redemption of Shares--
Redemption Procedures."
Custodian and Transfer
Agent: The Bank of New York acts as custodian for the Funds,
and Bank of America acts as sub-custodian for the
Prime and Treasury Funds. Concord Financial Services,
Inc., the Administrator's subsidiary, acts as
transfer agent and dividend disbursing agent for the
Funds' Horizon Shares and DST Systems, Inc. acts as
the Funds' transfer agent and dividend disbursing
agent for the Funds' Horizon Service Shares. Concord
Financial Services, Inc. also acts as sub-transfer
agent for certain of the Funds' Horizon Service Share
accounts.
4
<PAGE> 258
EXPENSE INFORMATION
The following table sets forth certain information regarding the shareholder
transaction expenses imposed by each Fund with respect to Horizon Shares and
Horizon Service Shares and (i) the estimated annual operating expenses expected
to be incurred by Horizon Shares of the Treasury Only Fund for the current
fiscal year and (ii) the annual operating expenses expected to be incurred by
the Horizon and Horizon Service Shares of the Prime, Treasury and Government
Funds and the Horizon Service Shares of the Treasury Only Fund for the current
fiscal year, which have been restated to assume that current fees had been in
effect during the previous fiscal year. Actual expenses may vary. Hypothetical
examples based on the table are also shown.
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------
PRIME TREASURY GOVERNMENT TREASURY ONLY
----------------- ----------------- ----------------- -----------------
HORIZON HORIZON HORIZON HORIZON
HORIZON SERVICE HORIZON SERVICE HORIZON SERVICE HORIZON SERVICE
SHARES SHARES* SHARES SHARES* SHARES SHARES* SHARES SHARES*
------ ------ ------ ------ ------ ------ ------ ------
SHAREHOLDER TRANSACTION EXPENSES
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Sales Load Imposed on Purchases.... None None None None None None None None
Sales Load Imposed on Reinvested
Dividends........................ None None None None None None None None
Deferred Sales Load................ None None None None None None None None
Redemption Fees.................... None None None None None None None None
<CAPTION>
ANNUAL/ESTIMATED ANNUAL OPERATING EXPENSES
(as a percentage of average net assets)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Management Fees (After Fee
Waivers)......................... .20% .20% .20% .20% .20% .20% .20% .20%
All Other Expenses................. .05% .30% .05% .30% .08% .33% .16% .41%
------ ------ ------ ------ ------ ------ ------ ------
Shareholder Service Payments..... -- 0.25% -- 0.25% -- 0.25% -- 0.25%
Other Expenses................... .05% .05% .05% .05% .08% .08% .16% .16%
------ ------ ------ ------ ------ ------ ------ ------
Total Operating Expenses (After Fee
Waivers)......................... .25% .50% .25% .50% .28% .53% .36% .61%
===== ===== ===== ===== ===== ===== ===== =====
</TABLE>
* The Company understands that institutions that enter into agreements
("Shareholder Service Agreements") with the Company ("Shareholder
Organizations") under the Company's Shareholder Services Plan (the "Plan")
may charge fees to their Customers who are the beneficial owners of Horizon
Service Shares in connection with their accounts. Each Fund's Horizon Service
Shares bear fees paid to Shareholder Organizations under the Plan at the
annual rate of up to .25% of the average daily net asset value of each
Fund's Horizon Service Shares.
- --------------------------------------------------------------------------------
5
<PAGE> 259
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1 3 5 10
EXAMPLES YEAR YEARS YEARS YEARS
--- ---- ---- ----
<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000 investment,
assuming (1) a 5% annual return and (2) redemption at the end
of each time period:
PRIME FUND
Horizon Shares............................................. $ 3 $ 8 $ 14 $ 32
Horizon Service Shares..................................... $ 5 $ 16 $ 28 $ 63
TREASURY FUND
Horizon Shares............................................. $ 3 $ 8 $ 14 $ 32
Horizon Service Shares..................................... $ 5 $ 16 $ 28 $ 63
GOVERNMENT FUND
Horizon Shares............................................. $ 3 $ 9 $ 16 $ 36
Horizon Service Shares..................................... $ 5 $ 17 $ 30 $ 66
TREASURY ONLY FUND
Horizon Shares............................................. $ 4 $ 12 $ 20 $ 46
Horizon Service Shares..................................... $ 6 $ 20 $ 34 $ 76
</TABLE>
- --------------------------------------------------------------------------------
The foregoing Expense Summary and Examples are intended to assist investors in
Horizon Shares and Horizon Service Shares in understanding the expenses the
classes will pay. Investors bear these expenses indirectly since they reduce the
amount of income paid by the Funds to investors as dividends. The investment
adviser and administrator may voluntarily waive a portion of their respective
fees and may voluntarily reimburse expenses for the Funds from time to time.
This voluntary waiver or reimbursement may be modified or terminated at any
time. See "Management of the Funds" and "Description of Shares" for more
complete descriptions of the various expenses referred to above.
THE EXAMPLES SET FORTH ABOVE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST
OR FUTURE INVESTMENT RETURNS AND OPERATING EXPENSES. ACTUAL INVESTMENT RETURNS
AND OPERATING EXPENSES MAY BE MORE OR LESS THAN THOSE SHOWN.
6
<PAGE> 260
FINANCIAL HIGHLIGHTS
On January 19, 1990 the Prime Fund and Treasury Fund of The Horizon Funds (the
"Predecessor Prime Fund" and the "Predecessor Treasury Fund") were combined with
the Money Market Fund and the Government Money Market Fund of the Company; the
Company changed the names of its resulting portfolios to "Prime Fund" and
"Treasury Fund;" and the Company began offering Horizon Shares and Horizon
Service Shares in such Funds. Prior to January 19, 1990, the Company offered a
single class of shares in each of the Prime Fund and the Treasury Fund, known as
"Pacific Horizon Shares," which are described in a separate Prospectus available
from the Distributor at the telephone number stated on the cover page.
The tables below set forth certain information concerning (i) the investment
results for the Horizon Shares and the Horizon Service Shares of the Predecessor
Prime Fund and Predecessor Treasury Fund for the periods ended on or before
January 19, 1990, and (ii) the investment results for the Horizon Shares and
Horizon Service Shares of the Prime Fund and Treasury Fund for the period
January 20, 1990 through February 28, 1990 and for the fiscal years ended
February 28, 1991, February 29, 1992, February 28, 1993, February 28, 1994 and
February 28, 1995. The information contained in the Financial Highlights has
been audited by Price Waterhouse LLP, independent accountants for both the
Predecessor Prime and Predecessor Treasury Funds and the Prime and Treasury
Funds, whose unqualified report insofar as it relates to the five year period
ended February 28, 1995 on the financial statements containing such information
is incorporated by reference in the Statement of Additional Information, which
may be obtained upon request. The Financial Highlights should be read in
conjunction with the financial statements and notes thereto and the unqualified
report of the independent accountants which are incorporated by reference in the
Statement of Additional Information.
7
<PAGE> 261
Selected Data for a Horizon Share and a Horizon Service Share Outstanding
Throughout Each of the Periods Indicated:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRIME FUND
---------------------------------------------------------------
YEAR ENDED
---------------------------------------------------------------
FEB. 28, FEB. 28, FEB. 28, FEB. 29, FEB. 28,
1995+++ 1994+++ 1993+++ 1992 1991
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
HORIZON SHARES:
Net asset value
per share,
beginning of
period.......... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- -------- -------- -------- --------
Income From
Investment
Operations:
Net investment
income........ 0.0461 0.0319 0.0372 0.0590 0.0794
Net realized
gain (loss) on
securities.... (0.0232) (0.0016) 0.0000 0.0005 (0.0001)
-------- -------- -------- -------- --------
Total income
from
investment
operations.... 0.0229 0.0303 0.0372 0.0595 0.0793
-------- -------- -------- -------- --------
Less dividends
from net
investment
income.......... (0.0454) (0.0319) (0.0372) (0.0589) (0.0794)
-------- -------- -------- -------- --------
Increase due to
voluntary
capital
contribution
from investment
adviser......... 0.0233 0.0000 0.0000 0.0000 0.0000
-------- -------- -------- -------- --------
Net change in net
asset value per
share........... 0.0008 (0.0016) 0.0000 0.0006 (0.0001)
-------- -------- -------- -------- --------
Net asset value
per share, end
of period....... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
========= ========= ========= ========= =========
Total return..... 4.63%*** 3.24% 3.78% 6.06% 8.23%
Ratios/Supplemental
Data:
Net assets, end
of period
(millions).... $ 622 $ 3,840 $ 10,301 $ 2,855 $ 487
Ratio of
expenses to
average net
assets........ 0.16%** 0.20%** 0.23% 0.24% 0.24%
Ratio of net
investment
income to
average net
assets........ 4.11%** 3.19%** 3.59% 5.59% 7.91%
<CAPTION>
JAN. 20, MAY 1, PERIOD
1990 1989 YEAR ENDED
THROUGH THROUGH ENDED APRIL
FEB. 28, JAN. 19, APRIL 30, 30,
1990 1990++ 1989++ 1988++*
----------- ----------- ----------- --------
<S> <C> <C> <C> <C>
HORIZON SHARES:
Net asset value
per share,
beginning of
period.......... $ 1.00 $ 1.00 $ 1.00 $ 1.00
----------- ----------- ----------- --------
Income From
Investment
Operations:
Net investment
income........ 0.0085 0.0655 0.0829 0.0557
Net realized
gain (loss) on
securities.... 0.0000 0.0000 0.0000 0.0000
----------- ----------- ----------- --------
Total income
from
investment
operations.... 0.0085 0.0655 0.0829 0.0557
----------- ----------- ----------- --------
Less dividends
from net
investment
income.......... (0.0085) (0.0655) (0.0829) (0.0557)
----------- ----------- ----------- --------
Increase due to
voluntary
capital
contribution
from investment
adviser......... 0.0000 0.0000 0.0000 0.0000
----------- ----------- ----------- --------
Net change in net
asset value per
share........... 0.0000 0.0000 0.0000 0.0000
----------- ----------- ----------- --------
Net asset value
per share, end
of period....... $ 1.00 $ 1.00 $ 1.00 $ 1.00
========= ========= ========= =========
Total return..... 0.90%++++ 6.69%++++ 8.61% 5.72%++++
Ratios/Supplement
Data:
Net assets, end
of period
(millions).... $ 405 $ 447 $ 303 $ 208
Ratio of
expenses to
average net
assets........ 0.28%+ 0.20%+** 0.20%** 0.20%+**
Ratio of net
investment
income to
average net
assets........ 8.09%+ 9.04%+** 8.47%** 6.90%+**
</TABLE>
- ---------------
* For the period July 10, 1987 (commencement of operations) through April 30,
1988.
** Net of fee waivers and/or expense reimbursements which had the effect of
reducing the ratio of expenses to average net assets and increasing the
ratio of net investment income to average net assets by 0.07%, 0.01%, 0.03%
(annualized), 0.12% and 0.07% (annualized) for the years or periods ended
February 28, 1995, February 28, 1994, January 19, 1990, April 30, 1989 and
April 30, 1988, respectively.
*** Total return includes the effect of a voluntary capital contribution from
the investment adviser. Without this capital contribution, the total return
would have been lower.
+ Annualized.
++ This information represents the results of operations of the Predecessor
Prime Fund, the former Horizon Prime Fund, the assets and liabilities of
which were transferred to the Pacific Horizon Prime Fund on January 19,
1990.
+++ Security Pacific National Bank served as investment adviser through April
21, 1992. Bank of America National Trust and Savings Association served as
investment adviser commencing April 22, 1992.
++++ Not annualized.
8
<PAGE> 262
<TABLE>
<CAPTION>
PRIME FUND
---------------------------------------------------------------
YEAR ENDED
---------------------------------------------------------------
FEB. 28, FEB. 28, FEB. 28, FEB. 29, FEB. 28,
1995+++ 1994+++ 1993+++ 1992 1991
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
HORIZON SERVICE
SHARES:
Net asset value
per share,
beginning of
period.......... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- -------- -------- -------- --------
Income From
Investment
Operations:
Net investment
income........ 0.0431 0.0294 0.0345 0.0565 0.0769
Net realized
gain (loss) on
securities.... (0.0227) (0.0016) 0.0000 0.0005 (0.0001)
-------- -------- -------- -------- --------
Total income
from
investment
operations.... 0.0204 0.0278 0.0345 0.0570 0.0768
-------- -------- -------- -------- --------
Less Dividends:
Dividends from
net investment
income........ (0.0429) (0.0294) (0.0347) (0.0564) (0.0769)
-------- -------- -------- -------- --------
Increase due to
voluntary
capital
contribution
from investment
adviser......... 0.0233 0.0000 0.0000 0.0000 0.0000
-------- -------- -------- -------- --------
Net change in net
asset value per
share........... 0.0008 (0.0016) (0.0002) 0.0006 (0.0001)
-------- -------- -------- -------- --------
Net asset value
per share, end
of period....... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
========= ========= ========= ========= =========
Total return..... 4.37%*** 2.98% 3.53% 5.79% 7.96%
Ratios/Supplemental
Data:
Net assets, end
of period
(millions).... $ 864 $ 839 $ 793 $ 859 $ 560
Ratio of
expenses to
average net
assets........ 0.44%** 0.45%** 0.48% 0.49% 0.49%
Ratio of net
investment
income to
average net
assets........ 4.31%** 2.94%** 3.49% 5.58% 7.64%
<CAPTION>
JAN. 20, MAY 1, PERIOD
1990 1989 YEAR ENDED
THROUGH THROUGH ENDED APRIL
FEB. 28, JAN. 19, APRIL 30, 30,
1990 1990++ 1989++ 1988++*
----------- ----------- ----------- --------
<S> <C> <C> <C> <C>
HORIZON SERVICE
SHARES:
Net asset value
per share,
beginning of
period.......... $ 1.00 $ 1.00 $ 1.00 $ 1.00
----------- ----------- ----------- --------
Income From
Investment
Operations:
Net investment
income........ 0.0082 0.0636 0.0804 0.0128
Net realized
gain (loss) on
securities.... 0.0000 0.0000 0.0000 0.0000
----------- ----------- ----------- --------
Total income
from
investment
operations.... 0.0082 0.0636 0.0804 0.0128
----------- ----------- ----------- --------
Less Dividends:
Dividends from
net investment
income........ (0.0082) (0.0636) (0.0804) (0.0128)
----------- ----------- ----------- --------
Increase due to
voluntary
capital
contribution
from investment
adviser......... 0.0000 0.0000 0.0000 0.0000
----------- ----------- ----------- --------
Net change in net
asset value per
share........... 0.0000 0.0000 0.0000 0.0000
----------- ----------- ----------- --------
Net asset value
per share, end
of period....... $ 1.00 $ 1.00 $ 1.00 $ 1.00
========= ========= ========= =========
Total return..... 0.87%++++ 6.50%++++ 8.35% 1.28%++++
Ratios/Supplement
Data:
Net assets, end
of period
(millions).... $ 330 $ 321 $ 164 $ 3
Ratio of
expenses to
average net
assets........ 0.53%+ 0.45%+** 0.45%** 0.45%+**
Ratio of net
investment
income to
average net
assets........ 7.84%+ 8.74%+** 8.63%** 6.49%+**
</TABLE>
- ---------------
* For the period February 18, 1988 (initial offering date of Horizon Service
Shares) through April 30, 1988.
** Net of fee waivers and expense reimbursements which had the effect of
reducing the ratio of expenses to average net assets and increasing the
ratio of net investment income to average net assets by 0.04%, 0.01%, 0.08%
(annualized), 0.12% and 0.08% (annualized) for the years or periods ended
February 28, 1995, February 28, 1994, January 19, 1990, April 30, 1989 and
April 30, 1988, respectively.
*** Total return includes the effect of a voluntary capital contribution from
the investment adviser. Without this capital contribution, the total return
would have been lower.
+ Annualized.
++ This information represents the results of operations of the Predecessor
Prime Fund, the former Horizon Prime Fund, the assets and liabilities of
which were transferred to the Pacific Horizon Prime Fund on January 19,
1990.
+++ Security Pacific National Bank served as investment adviser through April
21, 1992. Bank of America National Trust and Savings Association served as
investment adviser commencing April 22, 1992.
++++ Not annualized.
9
<PAGE> 263
<TABLE>
<CAPTION>
TREASURY FUND
------------------------------------------------------------
YEAR ENDED
------------------------------------------------------------
FEB. 28, FEB. 28, FEB. 28, FEB. 29, FEB. 28,
1995+++ 1994+++ 1993+++ 1992 1991
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
HORIZON SHARES:
Net asset value per
share, beginning of
period................. $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- -------- -------- -------- --------
Income From Investment
Operations:
Net investment
income............... 0.0437 0.0294 0.0341 0.0543 0.0764
Net realized gain
(loss) on
securities........... 0.0001 (0.0002) 0.0002 0.0003 0.0005
-------- -------- -------- -------- --------
Total income from
investment
operations........... 0.0438 0.0292 0.0343 0.0546 0.0769
-------- -------- -------- -------- --------
Less Dividends:
Dividends from net
investment income.... (0.0437) (0.0294) (0.0343) (0.0545) (0.0765)
-------- -------- -------- -------- --------
Net change in net asset
value per share........ 0.0001 (0.0002) 0.0000 0.0001 0.0004
-------- -------- -------- -------- --------
Net asset value per
share, end of period... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
========= ========= ========= ========= =========
Total return............ 4.46% 2.98% 3.48% 5.59% 7.92%
Ratios/Supplemental
Data:
Net assets, end of
period (millions).... $ 469 $ 487 $ 598 $ 432 $ 455
Ratio of expenses to
average net assets... 0.23% 0.23% 0.24% 0.24% 0.23%
Ratio of net investment
income to average net
assets............... 4.36% 2.94% 3.38% 5.44% 7.57%
<CAPTION>
JAN. 20, MAY 1,
1990 1989 YEAR PERIOD
THROUGH THROUGH ENDED ENDED
FEB. 28, JAN. 19, APRIL 30, APRIL 30,
1990 1990++ 1989++ 1988++*
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
HORIZON SHARES:
Net asset value per
share, beginning of
period................. $ 1.00 $ 1.00 $ 1.00 $ 1.00
----------- ----------- ----------- -----------
Income From Investment
Operations:
Net investment
income............... 0.0082 0.0631 0.0792 0.0527
Net realized gain
(loss) on
securities........... -- -- -- --
----------- ----------- ----------- -----------
Total income from
investment
operations........... 0.0082 0.0631 0.0792 0.0527
----------- ----------- ----------- -----------
Less Dividends:
Dividends from net
investment income.... (0.0082) (0.0631) (0.0792) (0.0527)
----------- ----------- ----------- -----------
Net change in net asset
value per share........ 0.0000 0.0000 0.0000 0.0000
----------- ----------- ----------- -----------
Net asset value per
share, end of period... $ 1.00 $ 1.00 $ 1.00 $ 1.00
========= ========= ========= =========
Total return............ 0.87% 6.44%++++ 8.21% 5.39%++++
Ratios/Supplemental
Data:
Net assets, end of
period (millions).... $ 257 $ 292 $ 239 $ 133
Ratio of expenses to
average net assets... 0.27%+ 0.20%+** 0.21%** 0.20%+**
Ratio of net investment
income to average net
assets............... 7.94%+ 8.65%+** 8.07%** 6.57%+**
</TABLE>
- ---------------
* For the period July 10, 1987 (commencement of operations) through April 30,
1988.
** Net of expense reimbursements which had the effect of reducing the ratio of
expenses to average net assets and increasing the ratio of net investment
income to average net assets by 0.12% (annualized), 0.16% and 0.15%
(annualized) for the years or periods ended January 19, 1990, April 30,
1989 and April 30, 1988, respectively.
+ Annualized.
++ This information represents the results of operations of the Predecessor
Treasury Fund, the former Horizon Treasury Fund, the assets and liabilities
of which were transferred to the Pacific Horizon Treasury Fund on
January 19, 1990.
+++ Security Pacific National Bank served as investment adviser through April
21, 1992. Bank of America National Trust and Savings Association served as
investment adviser commencing April 22, 1992.
++++ Not annualized.
10
<PAGE> 264
<TABLE>
<CAPTION>
TREASURY FUND
------------------------------------------------------------
YEAR ENDED
------------------------------------------------------------
FEB. 28, FEB. 28, FEB. 28, FEB. 29, FEB. 28,
1995+++ 1994+++ 1993+++ 1992 1991
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
HORIZON SERVICE
SHARES:
Net asset value per
share, beginning of
period............. $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
Income From
Investment
Operations:
Net investment
income........... 0.0412 0.0269 0.0316 0.0517 0.0739
Net realized gain
(loss) on
securities....... 0.0001 (0.0002) 0.0002 0.0004 0.0005
-------- -------- -------- -------- --------
Total income from
investment
operations....... 0.0413 0.0267 0.0318 0.0521 0.0744
-------- -------- -------- -------- --------
Less Dividends:
Dividends from net
investment
income........... (0.0412) (0.0269) (0.0318) (0.0520) (0.0740)
-------- -------- -------- -------- --------
Net change in net
asset value per
share.............. 0.0001 (0.0002) 0.0000 0.0001 0.0004
-------- -------- -------- -------- --------
Net asset value per
share, end of
period............. $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
========= ========= ========= ========= =========
Total return........ 4.20% 2.72% 3.23% 5.33% 7.65%
Ratios/Supplemental
Data:
Net assets, end of
period
(millions)....... $ 364 $ 541 $ 369 $ 381 $ 304
Ratio of expenses
to average net
assets........... 0.48% 0.48% 0.49% 0.49% 0.48%
Ratio of net
investment income
to average net
assets........... 4.01% 2.69% 3.28% 5.13% 7.31%
<CAPTION>
JAN. 20, MAY 1, PERIOD
1990 1989 YEAR ENDED
THROUGH THROUGH ENDED APRIL
FEB. 28, JAN. 19, APRIL 30, 30,
1990 1990++ 1989++ 1988++*
----------- ----------- ----------- --------
<S> <C> <C> <C> <C>
HORIZON SERVICE
SHARES:
Net asset value per
share, beginning of
period............. $ 1.00 $ 1.00 $ 1.00 $ 1.00
Income From
Investment
Operations:
Net investment
income........... 0.0080 0.0613 0.0767 0.0122
Net realized gain
(loss) on
securities....... -- -- -- --
----------- ----------- ----------- --------
Total income from
investment
operations....... 0.0080 0.0613 0.0767 0.0122
----------- ----------- ----------- --------
Less Dividends:
Dividends from net
investment
income........... (0.0080) (0.0613) (0.0767) (0.0122)
----------- ----------- ----------- --------
Net change in net
asset value per
share.............. 0.0000 0.0000 0.0000 0.0000
----------- ----------- ----------- --------
Net asset value per
share, end of
period............. $ 1.00 $ 1.00 $ 1.00 $ 1.00
========= ========= ========= =========
Total return........ 0.84%++++ 6.25%++++ 7.94% 1.52%++++
Ratios/Supplemental
Data:
Net assets, end of
period
(millions)....... $ 157 $ 166 $ 239 $ 133
Ratio of expenses
to average net
assets........... 0.52%+ 0.45%+** 0.46%** 0.45%+**
Ratio of net
investment income
to average net
assets........... 7.70%+ 8.31%+** 8.44%** 6.27%+**
</TABLE>
- ---------------
* For the period February 18, 1988 (initial offering date of Horizon Service
Shares) through April 30, 1988.
** Net of expense reimbursements which had the effect of reducing the ratio of
expenses to average net assets and increasing the ratio of net investment
income to average net assets by 0.12% (annualized), 0.16% and 0.10%
(annualized) for the years or periods ended January 19, 1990, April 30,
1989 and April 30 1988, respectively.
+ Annualized.
++ This information represents the results of operations of the Predecessor
Treasury Fund, the former Horizon Treasury Fund, the assets and liabilities
of which were transferred to the Pacific Horizon Treasury Fund on
January 19, 1990.
+++ Security Pacific National Bank served as investment adviser through April
21, 1992. Bank of America National Trust and Savings Association served as
investment adviser commencing April 22, 1992.
++++ Not annualized.
11
<PAGE> 265
The Government Fund and the Treasury Only Fund commenced operations on June 4,
1990 as separate investment portfolios (the "Predecessor Government Funds" and
"Predecessor Treasury Only Funds," respectively) of First Cash Funds of America
and First Funds of America, which were organized as Massachusetts business
trusts. On March 1, 1993 the Predecessor Government Funds and Predecessor
Treasury Only Funds were reorganized as the Government Fund and Treasury Only
Fund, respectively, of the Company. Prior to this reorganization, these
Predecessor Funds offered and sold shares of beneficial interest that were
similar to the Company's Horizon Service and Pacific Horizon Shares. Pacific
Horizon Shares of the Funds are described in a separate Prospectus available
from the Distributor by calling (800) 332-3863.
The tables below set forth certain information concerning the investment results
of (i) Horizon Service Shares and Horizon Shares of the Government Fund and
Horizon Service Shares of the Treasury Only Fund for the years or period ended
February 28, 1994 and February 28, 1995; and (ii) shares of the Predecessor
Government Fund and Predecessor Treasury Only Fund of First Cash Funds of
America, which offered and sold shares of beneficial interest similar to the
Company's Horizon Services Shares for the 11 month period ended February 28,
1993, the fiscal year ended March 31, 1992 and the fiscal period ended March 31,
1991. The information about the Government Fund and Treasury Only Fund has been
audited by Price Waterhouse LLP, independent accountants for these two Funds,
whose unqualified report thereon is incorporated by reference in the Statement
of Additional Information, which may be obtained upon request. The information
about the Predecessor Government and Predecessor Treasury Only Funds has been
audited by Deloitte & Touche LLP, independent accountants for these Predecessor
Funds for the periods indicated, whose unqualified report thereon is
incorporated by reference in the Statement of Additional Information. The
Financial Highlights should be read in conjunction with the financial statements
and notes thereto and the unqualified reports of the independent accountants
which are incorporated by reference in the Statement of Additional Information
with respect to the Government and Treasury Only Funds and Predecessor
Government and Predecessor Treasury Only Funds.
12
<PAGE> 266
Selected Data for a Share Outstanding Throughout Each of the Periods Indicated:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PREDECESSOR GOVERNMENT FUND
GOVERNMENT FUND ---------------------------------------
------------------------- JUNE 4,
MARCH 1, 1990
1993 (COMMENCEMENT
(COMMENCEMENT 11 MONTH OF
YEAR OF PERIOD YEAR OPERATIONS)
ENDED OPERATIONS) ENDED ENDED TO
FEB. 28, TO FEB. FEB. 28, MARCH 31, MARCH 31,
1995 28, 1994 1993 1992 1991
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
HORIZON SERVICE SHARES:
Net asset value per share, beginning of
period................................. $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
--------- --------- --------- --------- ---------
Income From Investment Operations:
Net Investment Income.................. 0.0429 0.0300 0.0303 0.0507 0.0599
Net realized loss on securities........ (0.0092) (0.0006) 0.0000 0.0000 0.0000
--------- --------- --------- --------- ---------
Total income from investment
operations........................... 0.0337 0.0294 0.0303 0.0507 0.0599
Less Dividends:
Dividends from net investment income... (0.0427) (0.0300) (0.0303) (0.0507) (0.0599)
Increase due to voluntary capital
contribution from investment adviser... 0.0085 0.0000 0.0000 0.0000 0.0000
--------- --------- --------- --------- ---------
Net change in net asset value per
share.................................. (0.0005) (0.0006) 0.0000 0.0000 0.0000
--------- --------- --------- --------- ---------
Net asset value per share, end of
period................................. $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======== ======== ======== ======== ========
Total Return............................. 4.35%** 3.04% 3.07%+++ 5.19% 6.15%+++
Ratios/Supplemental Data:
Net assets, end of period (000)........ $ 288,809 $ 326,017 $ 228,679 $ 116,604 $ 326,874
Ratio of expenses to average net
assets*.............................. 0.43% 0.53% 0.46%+ 0.46% 0.46%+
Ratio of net investment income to
average net assets*.................. 4.32% 2.99% 3.22%+ 5.27% 6.67%+
</TABLE>
- ---------------
* Net of fee waivers and expense reimbursements which had the effect of
reducing the ratio of expenses to average net assets and increasing the
ratio of net investment income to average net assets by 0.08% and 0.05% for
the years ended February 28, 1995 and February 28, 1994, respectively.
Reflects the Predecessor Government Fund's share of the expenses of the
Government Money Trust, in which the assets of the Predecessor Government
Fund were invested, as well as a voluntary waiver of fees by affiliates of
the Predecessor Government Fund and Trust. If the voluntary expense waiver
had not been in place, the annualized ratios of expenses to average net
assets would have been 0.58%, 0.59% and 0.58% for the year or periods ended
February 28, 1993, March 31, 1992 and March 31, 1991, respectively.
** Total return includes the effect of a voluntary capital contribution from
the investment adviser. Without this capital contribution, the total
return would have been lower.
+ Annualized.
+++ Not annualized.
13
<PAGE> 267
<TABLE>
<CAPTION>
GOVERNMENT FUND
---------------------------
FOR THE
PERIOD
JUNE 14,
1993
(INITIAL
ISSUANCE
OF
YEAR SHARES)
ENDED THROUGH
FEBRUARY FEBRUARY
28, 1995 28, 1994
--------- ---------
<S> <C> <C>
HORIZON SHARES:
Net asset value per share, beginning of period...................... $ 1.00 $ 1.00
--------- ---------
Income From Investment Operations:
Net investment income............................................. 0.0454 0.0227
Net realized loss on securities................................... (0.0092) (0.0006)
--------- ---------
Total income from investment operations........................... 0.0362 0.0221
Less Dividends:
Dividends from net investment income.............................. (0.0452) (0.0227)
Increase due to voluntary capital contribution from investment
adviser........................................................... 0.0085 0.0000
--------- ---------
Net change in net asset value per share............................. (0.0005) (0.0006)
--------- ---------
Net asset value per share, End of Period............................ $ 1.00 $ 1.00
======== ========
Total return........................................................ 4.61%** 2.29%+++
Ratios/Supplemental Data:
Net assets, end of period (000)................................... $ 235,285 $ 369,664
Ratio of expenses to average net assets*.......................... 0.17% 0.28%+
Ratio of net investment income to average net assets*............. 4.67% 3.17%+
</TABLE>
- ---------------
* Net of fee waivers and expense reimbursements which had the effect of
reducing the ratio of expenses to average net assets and increasing the
ratio of net investment income to average net assets by 0.08% and 0.002%
(annualized) for the year ended February 28, 1995 and the period ended
February 28, 1994, respectively.
** Total return includes the effect of a voluntary capital contribution from
the investment adviser. Without this capital contribution, the total
return would have been lower.
+ Annualized.
+++ Not annualized.
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<PAGE> 268
<TABLE>
<CAPTION>
TREASURY ONLY FUND
-------------------------
HORIZON PREDECESSOR TREASURY ONLY FUND
SERVICE ---------------------------------------
SHARES JUNE 4,
MARCH 1, 1990
1993 (COMMENCEMENT
(COMMENCEMENT 11-MONTH OF
YEAR OF PERIOD YEAR OPERATIONS)
ENDED OPERATIONS) ENDED ENDED TO
FEB. 28, TO FEB. FEB. 28, MARCH 31, MARCH 31,
1995 28, 1994 1993 1992 1991
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
HORIZON SERVICE SHARES
Net asset value per share, beginning of
period................................. $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
--------- --------- --------- --------- ---------
Income From Investment Operations:
Net investment income.................. 0.0391 0.0273 0.0279 0.0486 0.0571
Net realized loss on securities........ (0.0002) (0.0002) -- -- --
--------- --------- --------- --------- ---------
Total income from investment
operations........................... 0.0389 0.0271 0.0279 0.0486 0.0571
Less Dividends:
Dividends from net investment income... (0.0391) (0.0273) (0.0279) (0.0486) (0.0571)
--------- --------- --------- --------- ---------
Net change in net asset value per
share.................................. (0.0002) (0.0002) 0.0000 0.0000 0.0000
--------- --------- --------- --------- ---------
Net asset value per share, end of
period................................. $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======== ======== ======== ======== ========
Total return............................. 3.98% 2.76% 2.83%+++ 4.96% 5.86%+++
Ratios/Supplemental Data:
Net assets, end of period (000)........ $ 194,363 $ 271,588 $ 123,669 $ 154,811 $ 128,546
Ratio of expenses to average net
assets*.............................. 0.55% 0.39% 0.36%+ 0.36% 0.35%+
Ratio of net investment income to
average net assets*.................. 3.86% 2.73% 3.10%+ 4.74% 6.57%+
</TABLE>
- ---------------
* Net of fee waivers which had the effect of reducing the ratio of expenses to
average net assets and increasing the ratio of net investment income to
average net assets by 0.01% and 0.25% for the years ended February 28, 1995
and February 28, 1994, respectively. Reflects the Predecessor Treasury Only
Fund's share of the expenses of the Treasury Money Trust, in which the
assets of the Predecessor Treasury Only Fund were invested, as well as a
voluntary waiver of fees by affiliates of the Predecessor Treasury Only
Fund and Trust. If the voluntary expense waiver had not been in place, the
annualized ratios of expenses to average net assets would have been 0.61%,
0.60% and 0.64% for the year and periods ended February 28, 1993, March 31,
1992 and March 31, 1991, respectively.
+ Annualized.
+++ Not annualized.
YIELD INFORMATION. From time to time the "yield" or "effective yield" of a Fund
may be quoted in advertisements or reports to shareholders. Both yield figures
are based on historical earnings and are not intended to indicate future
performance. The "yield" of a Fund refers to the income generated by an
investment in the Fund over a seven-day period (which period will be stated in
the advertisement or report). This income is then "annualized"--that is, the
amount of income generated by the investment during that week is assumed to be
generated each week over a 52-week period and is shown as a percentage of the
investment. The "effective yield" is calculated similarly but, when annualized,
the income earned by an investment in the Fund is assumed to be reinvested. The
"effective yield" will be slightly higher than the "yield" because of the
compounding effect of this assumed reinvestment.
Additionally, the yields of each Fund may be compared to those of other mutual
funds with similar investment objectives and to other relevant indices or to
rankings prepared by independent services or other financial or industry
publications that monitor the performance of mutual funds. For example, the
Funds' yields may be compared to Donoghue's Money Fund Averages, which are
averages compiled by Donoghue's Money Fund Report. Yield data as reported in
national financial publications, including Money, Forbes, Barron's, The Wall
Street Journal and The New York Times, or in publications of a local or regional
nature, may also be used in comparing the yields of the Funds. A complete
listing of the indices, rankings and publications discussed above is contained
in the Statement of Additional Information.
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<PAGE> 269
Since yields fluctuate, yield data cannot necessarily be used to compare an
investment in the shares of a Fund with bank deposits, savings accounts and
similar investment alternatives which often provide an agreed or guaranteed
fixed yield for a stated period of time. Shareholders should remember that yield
is generally a function of the kind and quality of the instruments held in a
portfolio, portfolio maturity, operating expenses and market conditions. Any
fees charged by Bank of America or Shareholder Organizations directly to their
customer accounts in connection with investments in shares of the Funds (which
fees may include, for example, account maintenance fees, compensating balance
requirements or fees based upon account transactions, assets or income) will not
be included in the Funds' calculations of yield.
INVESTMENT OBJECTIVES AND POLICIES
This section describes the investment objective and policies of each Fund.
Assets of the Funds will be invested in dollar-denominated debt securities with
remaining maturities of thirteen months or less as defined by the Securities and
Exchange Commission, and the dollar-weighted average portfolio maturity of each
Fund will not exceed 90 days. All securities acquired by the Funds will be
determined by the investment adviser, under guidelines established by the
Company's Board of Directors, to present minimal credit risks. Securities
acquired by the Prime, Treasury, Government and Treasury Only Funds will be U.S.
Government securities or other "First Tier Securities" (as defined by the
Securities and Exchange Commission) of the types described below. First Tier
Securities consist either of instruments that are rated at the time of purchase
in the top rating category by one (if rated by only one) or more unaffiliated
nationally recognized statistical rating organizations ("NRSROs") including
Standard and Poor's Ratings Group, Division of McGraw Hill ("Standard and
Poor's"), Moody's Investor Service, Inc. ("Moody's"), Duff & Phelps Credit Co.
("Duff & Phelps") or Fitch Investors Service, Inc. ("Fitch") or are issued by
issuers with such ratings. The Appendix to the Statement of Additional
Information includes a description of the applicable NRSRO ratings. Unrated
instruments (including instruments with long-term but no short-term ratings)
purchased by a particular Fund will be of comparable quality to the rated
instruments that the Fund may purchase, as determined by the Funds' investment
adviser pursuant to guidelines approved by the Board of Directors.
PRIME FUND. The Prime Fund's investment objective is to seek high current
income and stability of principal. The Fund invests substantially all of its
assets in a diversified portfolio of U.S. dollar-denominated money market
instruments. Portfolio securities held by the Fund have remaining maturities of
thirteen months or less from the date of purchase by the Fund. (Portfolio
securities which are subject to repurchase agreements or have certain put or
demand features exercisable by the Fund within thirteen months, as well as
certain U.S. Government obligations with floating or variable interest rates,
may have longer maturities.)
In pursuing its investment objective, the Prime Fund invests in a broad range of
government, bank and commercial obligations that may be available in the money
markets. The money market instruments in which the Fund invests will generally
have neither as much risk nor as high a return as longer-term or lower-rated
instruments. In accordance with current regulations of the Securities and
Exchange Commission, the Fund intends to limit investments in the securities of
any single issuer (other than securities issued or guaranteed by the U.S.
Government, its agencies or instrumentalities) to not more than 5% of the Fund's
total assets at the time of purchase, provided that the Fund may invest up to
25% of its total assets in the securities of any one issuer for a period of up
to three business days.
The Prime Fund may purchase bank obligations such as certificates of deposit and
bankers' acceptances issued or supported by the credit of
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<PAGE> 270
domestic banks, foreign branches of domestic banks ("Euro CDs") or domestic
branches of foreign banks ("Yankee CDs" and "Yankee BAs"). Such banks must have
total assets at the time of purchase in excess of $2.5 billion. No more than 25%
of the Prime Fund's total assets at the time of purchase may be invested in
Yankee CDs and BAs and Euro CDs. The Fund may also make interest-bearing savings
deposits in such commercial banks in amounts not in excess of 5% of the Fund's
total assets.
The Prime Fund may be subject to additional investment risks because the Fund
may hold securities issued by foreign branches of domestic banks and domestic
branches of foreign banks (and, as described below, commercial paper issued by
foreign issuers). These risks 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 future political and economic developments, the possible
imposition of withholding taxes on interest income payable on the securities by
the particular country in which the branch is located, the possible seizure or
nationalization of foreign deposits, 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. In
addition, foreign branches of domestic banks and domestic branches of foreign
banks are not necessarily subject to the same regulatory requirements that apply
to domestic branches of domestic banks (such as reserve requirements, loan
limitations, examinations, accounting, auditing and recordkeeping requirements,
and public availability of information) and the Fund may experience difficulties
in obtaining or enforcing a judgment against the issuing bank.
The Prime Fund may purchase commercial paper, short-term notes and corporate
bonds that meet the Fund's maturity limitations. Commercial paper purchased by
the Prime Fund may include instruments issued by foreign issuers, such as
Canadian Commercial Paper ("CCP"), which is U.S. dollar-denominated commercial
paper issued by a Canadian corporation or a Canadian counterpart of a U.S.
corporation, and Europaper, which is U.S. dollar-denominated commercial paper of
a foreign issuer.
The Prime Fund may also invest in commercial paper issued in reliance on the
so-called "private placement" exemption from registration afforded by Section
4(2) of the Securities Act of 1933 ("Section 4(2) paper"). Section 4(2) paper is
restricted as to disposition under the Federal securities laws and generally is
sold to institutional investors such as the Prime Fund that agree that they are
purchasing the paper for investment and not with a view to public distribution.
Any resale by the purchaser must be in an exempt transaction. Section 4(2) paper
normally is resold to other institutional investors like the Fund through or
with the assistance of the issuer or investment dealers that make a market in
Section 4(2) paper. Section 4(2) paper will not be subject to the Fund's 10%
limitation on illiquid securities set forth below where the Board of Directors
or Bank of America (pursuant to guidelines adopted by the Board) determines that
a liquid trading market exists.
TREASURY FUND. The Treasury Fund's investment objective is to seek high current
income and stability of principal. The Fund invests solely in obligations issued
by the U.S. Treasury and repurchase agreements relating to such Treasury
obligations. Portfolio securities which are subject to repurchase agreements may
have remaining maturities of longer than thirteen months.
Examples of the types of U.S. Treasury obligations that may be held by the
Treasury Fund are U.S. Treasury bills and notes. Under normal market conditions,
100% of the total assets of the Fund will be invested in direct obligations of
the U.S. Treasury and repurchase agreements relating to such Treasury
obligations. Securities issued by the U.S. Government have historically involved
little risk of loss of principal if held to maturity and, in general, the
instruments held by the Fund will have neither as much risk nor as high a return
as longer term or non U.S. Government obligations.
17
<PAGE> 271
GOVERNMENT FUND. The investment objective of the Government Fund is to provide
shareholders with liquidity and as high a level of current income as is
consistent with the preservation of capital. The Government Fund seeks to
achieve this objective by investing in short-term debt obligations issued or
guaranteed as to interest and principal by the U.S. Government, its agencies,
authorities or instrumentalities and in repurchase agreements with respect to
such obligations.
The Government Fund may purchase certain agency securities (such as guaranteed
notes of the Federal Aviation Administration, Department of Defense, Bureau of
Indian Affairs and Private Export Funding Corporation) which often provide
higher yields than are available from the more common types of government-backed
investments. However, such specialized investments may only be available from a
few sources, in limited amounts, or only in very large denominations; they may
also require specialized capability in portfolio servicing and in legal matters
related to government guarantees. While frequently offering attractive yields,
the limited-activity markets of many of these securities means that if the
Government Fund were required to liquidate any of them it might not be able to
do so advantageously; accordingly, the Government Fund intends normally to hold
such securities to maturity or pursuant to repurchase agreements, and would
limit its investment in such securities (as well as repurchase agreements
maturing in more than seven days) to not more than 10% of the Fund's total
assets.
TREASURY ONLY FUND. The investment objective of the Treasury Only Fund is to
provide shareholders with liquidity and as high a level of current income as is
consistent with the preservation of capital. The Treasury Only Fund seeks to
achieve this objective by investing solely in obligations of the U.S. Treasury.
U.S. Treasury securities are backed by the "full faith and credit" of the U.S.
Government. U.S. Treasury securities include Treasury bills, Treasury notes and
Treasury bonds. While U.S. Treasury securities are guaranteed as to the timely
payment of principal and interest, the market value of such obligations is not
guaranteed and may rise and fall in response to changes in interest rates.
To increase income on portfolio securities, the Treasury Only Fund may lend its
portfolio securities to broker-dealers, banks and other institutional investors
pursuant to agreements requiring that the loans be continuously secured by
collateral equal at all times in value to at least the market value of the
securities loaned plus accrued interest. Collateral for such loans may include
cash or securities of the U.S. Treasury. Such loans will not be made if, as a
result, the aggregate of all outstanding loans of the Fund exceeds 33 1/3% of
the value of its total assets. There may be risks of delay in receiving
additional collateral or in recovering the securities loaned or even a loss of
rights in the collateral should the borrower of the securities fail financially.
Loans will be made only to borrowers deemed by the adviser to be of good
standing and when, in the adviser's judgment, the income to be earned from the
loan justifies the attendant risks.
COMMON INVESTMENT POLICIES
GOVERNMENT OBLIGATIONS. The Prime Fund and Government Fund may purchase
obligations issued or guaranteed by the U.S. Government or its agencies and
instrumentalities. Obligations of certain agencies and instrumentalities of the
U.S. Government, such as the Small Business Administration, are backed by the
full faith and credit of the United States. Others are backed by the right of
the issuer to borrow from the U.S. Treasury (such as obligations of the Federal
Home Loan Bank), by the discretionary authority of the U.S. Government to
purchase the agency's obligations (such as obligations of the Federal National
Mortgage Association), or only by the credit of the agency or instrumentality
issuing the obligation (such as the Student Loan Marketing Association).
Securities issued or guaranteed by the U.S. Government and its agencies and
instrumentalities have historically involved little risk of
18
<PAGE> 272
loss of principal if held to maturity. However, no assurance can be given that
the U.S. Government would provide financial support to any agency or
instrumentality if it is not obligated to do so by law.
Certain securities issued or guaranteed by all government agencies may be
prepaid by the issuer without penalty. Thus, when prevailing interest rates
decline, the value of these securities is not likely to rise on a comparable
basis with other debt securities that are not so prepayable. The proceeds of
prepayments and scheduled payments of principal of these securities will be
reinvested by a Fund at then-prevailing interest rates, which may be lower than
the rate of interest on the securities on which these payments were received.
"STRIPPED" SECURITIES. Each Fund may invest in "stripped" securities, which
are U.S. Treasury bonds and notes the unmatured interest coupons of which have
been separated from the underlying principal obligation. Stripped securities are
zero coupon obligations that are normally issued at a discount to their "face
value," and may exhibit greater price volatility than ordinary debt securities
because of the manner in which their principal and interest are returned to
investors. The Treasury and Treasury Only Funds may only invest in stripped
securities issued by the U.S. Treasury and recorded in the Federal Reserve
book-entry record keeping system. The Government Fund may invest no more than
35% of its assets in stripped securities that have been stripped by their
holder, typically a custodian bank or investment brokerage firm. A number of
securities firms and banks have stripped the interest coupons and resold them in
custodian receipt programs with different names such as Treasury Income Growth
Receipts ("TIGRS") and Certificates of Accrual on Treasuries ("CATS"). The
Government Fund intends to rely on the opinions of counsel to the sellers of
these certificates or other evidences of ownership of U.S. Treasury obligations
that, for Federal tax and securities purposes, purchasers of such certificates
most likely will be deemed the beneficial holders of the underlying U.S.
Government obligations. Privately-issued stripped securities such as TIGRS and
CATS are not themselves guaranteed by the U.S. Government, but the future
payment of principal or interest on U.S. Treasury obligations which they
represent is so guaranteed.
REPURCHASE AGREEMENTS. Each Fund (other than the Treasury Only Fund) may
agree to purchase securities from financial institutions, such as banks and
broker-dealers, as are deemed creditworthy by the Company's investment adviser
under guidelines approved by the Board of Directors, subject to the seller's
agreement to repurchase them at an agreed upon time and price ("repurchase
agreements"). Although the securities subject to a repurchase agreement may bear
maturities exceeding thirteen months, each Fund intends only to enter into
repurchase agreements having maturities not exceeding 60 days. Securities
subject to repurchase agreements are held either by the Company's custodian or
sub-custodian, or in the Federal Reserve/Treasury Book-Entry System. The seller
under a repurchase agreement will be required to maintain the value of the
securities subject to the agreement in an amount that exceeds the repurchase
price, and such value will be continuously monitored by the investment adviser
on an ongoing basis. Default by the seller would, however, expose a Fund to
possible loss because of adverse market action or delay in connection with the
disposition of the underlying obligations. Repurchase agreements are considered
to be loans under the Investment Company Act of 1940.
REVERSE REPURCHASE AGREEMENTS. The Funds may borrow monies for temporary
purposes by entering into reverse repurchase agreements in accordance with the
investment restrictions described below. Pursuant to such agreements, a Fund
would sell portfolio securities to banks, and with respect to the Prime and
Treasury Funds, other financial institutions, and agree to repurchase them at an
agreed upon date and price. At the time a Fund enters into a reverse repurchase
19
<PAGE> 273
agreement, it will place in a segregated custodial account liquid assets or high
grade debt securities having a value equal to or greater than the repurchase
price and the Company's investment adviser will continuously monitor the account
to ensure that the value is maintained. A Fund would only enter into reverse
repurchase agreements to avoid otherwise selling securities during unfavorable
market conditions to meet redemptions. Reverse repurchase agreements involve the
risk that the market value of the portfolio securities sold by a Fund may
decline below the price of the securities such Fund is obligated to repurchase.
Interest paid by a Fund in connection with a reverse repurchase agreement will
reduce the net investment income of such Fund. Reverse repurchase agreements are
considered to be borrowings under the Investment Company Act of 1940.
VARIABLE AND FLOATING RATE INSTRUMENTS. Securities purchased by the Funds may
include variable and floating rate instruments, which may have a stated maturity
in excess of the Fund's maturity limitations but which will, except for certain
U.S. Government obligations, permit a Fund to demand payment of the principal of
the instrument at least once every thirteen months upon not more than thirty
days' notice. Variable and floating rate instruments purchased by the Government
Fund will be U.S. Government agency securities with stated maturities of
typically up to 10 years, although stated maturities of up to 30 years are
possible. Variable and floating rate instruments may include variable amount
master demand notes that permit the indebtedness thereunder to vary in addition
to providing for periodic adjustments in the interest rate. There may be no
active secondary market with respect to a particular variable or floating rate
instrument. Nevertheless, the periodic readjustments of their interest rates
tend to assure that their value to a Fund will approximate their par value.
Illiquid variable and floating rate instruments (instruments which are not
payable upon seven days notice and do not have an active trading market) that
are acquired by the Funds are subject to a Fund's percentage limitations
regarding securities that are illiquid or not readily marketable. The Funds'
investment adviser will continuously monitor the creditworthiness of issuers of
variable and floating rate instruments in which the Funds invest, and their
ability to repay principal and interest.
Variable and floating rate instruments purchased by a Fund may include
participation certificates issued by trusts or financial institutions in
variable and floating rate obligations owned by such issuers or affiliated
organizations. A participation certificate gives a Fund 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. If the credit of the obligor is of minimal credit risk, no credit
support from a bank or other financial institution will be necessary. In other
circumstances, the participation certificate will be backed by an irrevocable
letter of credit or guarantee of a bank, or will be insured by an insurer, that
the Funds' investment adviser has determined meets the quality standards for the
Fund involved. If an interest is backed by an irrevocable letter of credit or
guarantee of a bank or is insured as described above, a Fund will usually have
the right to sell the interest back to the institution or draw on the letter of
credit or insurance policy on demand after a specified notice period, for all or
any part of the principal amount of the interest plus accrued interest. Although
a participation interest may be sold by a Fund, under normal circumstances they
will be held until maturity.
A Fund may also invest in obligations which provide for a variable or floating
interest rate which is determined through a periodic "auction process." From
time to time, holders of the obligations have the right to tender any such
obligations to a remarketing agent which then remarkets the obligations which
have been tendered and thereby determines a new interest rate for the following
period.
20
<PAGE> 274
WHEN-ISSUED PURCHASES, FORWARD COMMITMENTS AND DELAYED SETTLEMENTS. The Funds
may purchase securities on a "when-issued basis" and may purchase or sell
securities on a "forward commitment" or "delayed settlement" basis. When-issued
and forward commitment transactions, which involve a commitment by a Fund to
purchase or sell particular securities with payment and delivery taking place at
a future date (perhaps one or two months later), permit a Fund to lock in a
price or yield on a security it owns or intends to purchase or sell, regardless
of future changes in interest rates. Delayed settlement describes a securities
transaction in the secondary market for which settlement will occur sometime in
the future. When-issued, forward commitment and delayed settlement transactions
involve the risk, however, that the yield or price obtained in a transaction may
be less favorable than the yield or price available in the market when the
securities delivery takes place. The Funds' forward commitments, when-issued
purchases and delayed settlements are not expected to exceed 25% of the value of
the total assets of a particular Fund absent unusual market conditions. A Fund's
liquidity and the ability of the investment adviser to manage its portfolio may
be adversely affected in the event a Fund's forward commitments, commitments to
purchase when-issued securities and delayed settlements ever exceed 25% of the
value of its assets. The Funds do not intend to engage in these transactions for
speculative purposes but only in furtherance of their investment objectives.
INVESTMENT LIMITATIONS. The investment objectives of the Prime and Treasury
Funds (but not the Government and Treasury Only Funds) are fundamental policies
that may not be changed without a vote of the holders of a majority of the
particular Fund's outstanding shares (as defined in the Investment Company Act
of 1940). A Fund's policies may be changed by the Company's Board of Directors
without the affirmative vote of the holders of a majority of such Fund's
outstanding shares, except that the investment limitations set forth below may
not be changed without such a vote of shareholders. A description of certain
other fundamental investment limitations is contained in the Statement of
Additional Information.
PRIME FUND. The Prime Fund may not:
1. Purchase any securities which 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 or domestic bank certificates of deposit, bankers'
acceptances and repurchase agreements secured by instruments of domestic
branches of U.S. banks or obligations of 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) the industry
classification of utilities will be determined according to their service.
For example, gas, gas transmission, electric and gas, electric and telephone
will each be considered a separate industry.
PRIME FUND AND TREASURY FUND. Neither the Prime Fund nor the Treasury Fund
may:
1. Borrow money or issue senior securities, except that each Fund may borrow
from banks or enter into reverse repurchase agreements to meet redemptions or
for other temporary purposes in amounts up to 10% of its 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 amount borrowed or 10% of its total assets at the time
of such borrowing; or purchase securities at any time after such borrowings
(including reverse repurchase agreements) have been entered into and before
they are repaid.
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<PAGE> 275
2. Purchase securities without available market quotations which cannot be sold
without registration or the filing of a notification under Federal or state
securities laws, enter into repurchase agreements providing for settlement
more than seven days after notice, or purchase any other securities deemed
illiquid by the Directors if, as a result, such securities and repurchase
agreements would exceed 10% of the Fund's total assets.
The Prime Fund intends that, except as stated above under "Common Investment
Policies-- Variable and Floating Rate Instruments," variable amount master
demand notes with maturities of nine months or less, as well as any investments
in securities that are not registered under the Securities Act of 1933 but that
may be purchased by institutional buyers under Rule 144A and for which a liquid
trading market exists as determined by the Board of Directors or Bank of America
(pursuant to guidelines adopted by the Board) will not be subject to the 10%
limitation on illiquid securities set forth in Investment Limitation No. 2
above.
GOVERNMENT FUND AND TREASURY ONLY FUND. Neither the Government Fund nor the
Treasury Only Fund may:
1. Invest more than 10% of the Fund's net assets in securities that are not
readily marketable (such as repurchase agreements maturing in more than seven
days). If changes in the markets of certain securities cause a Fund to exceed
such 10% limit, the Fund will take steps to bring the aggregate amount of its
illiquid securities back below 10% of its net assets.
2. Borrow money, except that as a temporary measure for extraordinary or
emergency purposes each Fund may borrow from banks in an amount not to exceed
1/3 of the value of its net assets, including the amount borrowed; moreover,
neither Fund may purchase any securities at any time at which borrowings
exceed 5% of the total assets of the Fund (taken at market value) (it is
intended that each Fund would borrow money only from banks and only to
accommodate requests for withdrawals while effecting an orderly liquidation
of securities).
Pursuant to certain regulatory requirements, with regard to Investment
Limitation No. 2, the Government and Treasury Only Funds intend not to borrow
money for any purpose in excess of 10% of the Fund's total assets (taken at
cost). This 10% limitation is not a fundamental investment limitation of the
Government or Treasury Only Funds.
INVESTMENT DECISIONS. Investment decisions for each Fund are made independently
from those for other investment companies and accounts managed by Bank of
America and its affiliated entities. Such other investment companies and
accounts may also invest in the same securities as a Fund. When a purchase or
sale of the same security is made at substantially the same time on behalf of a
Fund and another investment company or account, available investments or
opportunities for sales will be allocated in a manner which Bank of America
believes to be equitable. In some instances, this investment procedure may
adversely affect the price paid or received by a Fund or the size of the
position obtained or sold by a Fund. In addition, in allocating purchase and
sale orders for portfolio securities (involving the payment of brokerage
commissions or dealer concessions), Bank of America may take into account the
sale of shares of a Fund by broker-dealers and other financial institutions
(including affiliates of Bank of America and the Distributor), provided Bank of
America believes that the quality of the transaction and the amount of the
commission are not less favorable than what they would be with any other
unaffiliated qualified firm.
MANAGEMENT OF THE FUNDS
BOARD OF DIRECTORS. The business of the Company is managed under the direction
of its Board of Directors. Information about the Directors and officers of the
Company is included in the Statement of Additional Information.
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<PAGE> 276
INVESTMENT ADVISER. Bank of America National Trust and Savings Association
("Bank of America") serves as investment adviser to each Fund. Bank of America,
which has principal offices located at 555 California Street, San Francisco,
California 94104, is a national banking association formed in 1904 which
provides commercial banking and trust business through an extensive system of
branches across the western United States. Bank of America's principal banking
affiliates operate branches in ten U.S. states as well as corporate banking and
business credit offices in major U.S. cities and branches, corporate offices and
representative offices in 37 countries. Bank of America and its affiliates have
over $50 billion under management, including over $10 billion in mutual funds.
Bank of America is a subsidiary of BankAmerica Corporation, a registered bank
holding company.
As investment adviser Bank of America manages the investments of the Funds and
is responsible for all purchases and sales of the Funds' portfolio securities.
For its investment advisory services Bank of America is entitled to receive a
fee accrued daily and payable monthly at the following annual rates: .10% of the
first $3 billion of each Fund's net assets, plus .09% of the next $2 billion of
each Fund's net assets, plus .08% of each Fund's net assets over $5 billion.
This amount may be reduced pursuant to certain undertakings by Bank of America
described below under "Fee Waivers." For the fiscal year ended February 28,
1995, the Prime Fund, Treasury Fund, Government Fund and the Treasury Only Fund
paid Bank of America advisory fees at the effective annual rates of .07%, .10%,
.05% and .10% of such Funds' respective net assets, and Bank of America waived
advisory fees at the effective annual rates of .03%, .00%, .05% and .00% of such
Funds' respective net assets.
ADMINISTRATOR. Concord Holding Corporation (the "Administrator") serves as the
Company's administrator and assists generally in supervising the Funds'
operations. The Administrator is a wholly-owned subsidiary of The BISYS Group,
Inc. Its offices are located at 125 West 55th Street, New York, New York 10019.
Under its basic administrative services agreement for the Funds, the
Administrator has agreed to provide facilities, equipment and personnel to carry
out administrative services that are for the benefit of all series of shares in
the Funds, including coordination of reports to shareholders and the Securities
and Exchange Commission; calculation of the net asset value of the Fund shares
and dividends and capital gains distributions to shareholders; payment of the
costs of maintaining the Funds' offices; preparation of tax returns; provision
of internal legal and accounting compliance services; maintenance (or oversight
of the maintenance by others approved by the Board of Directors) of the Funds'
books and records; and the provision of various services for shareholders who
have made a minimum investment of at least $500,000 including the provision of a
facility to receive purchase and redemption orders for the accounts of such
shareholders.
For its administrative services the Administrator is entitled to receive an
administration fee computed daily and payable monthly at the following annual
rates: .10% of the first $7 billion of each Fund's net assets, plus .09% of the
next $3 billion of each Fund's net assets, plus .08% of each Fund's net assets
over $10 billion. This amount may be reduced pursuant to certain undertakings by
the Administrator described below under "Fee Waivers." For the fiscal year ended
February 28, 1995, the Prime Fund, Treasury Fund, Government Fund and the
Treasury Only Fund paid the Administrator administration fees at the effective
annual rates of .07%, .10%, .07% and .10% of such Funds' respective net assets,
and the Administrator waived administration fees at an effective annual rates of
.03%, .00%, .03% and .00% of such Funds' respective net assets.
Pursuant to the authority granted in its agreement with the Company, the
Administrator has entered into an agreement with The Bank of New York under
which the bank performs certain of the services listed above--e.g. calculating
the net asset value of Fund shares and dividends to
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shareholders and maintaining the Funds' books and records. The Funds bear all
fees and expenses charged by the bank for these services.
DISTRIBUTOR. Concord Financial Group, Inc. (the "Distributor") is the principal
underwriter and distributor of shares of the Funds. The Distributor is a
wholly-owned subsidiary of the Administrator organized to distribute shares of
mutual funds to institutional and retail investors. Its offices are located at
125 West 55th Street, New York, New York 10019.
The Distributor makes a continuous offering of the Funds' shares and bears the
costs and expenses of printing and distributing to selected dealers and
prospective investors copies of any prospectuses, statements of additional
information and annual and interim reports of the Funds (after such items have
been prepared and set in type by the Funds) which are used in connection with
the offering of shares, and the costs and expenses of preparing, printing and
distributing any other literature used by the Distributor or furnished by it for
use by selected dealers in connection with the offering of the Funds' shares for
sale to the public.
CUSTODIAN AND TRANSFER AGENT. The Bank of New York, located at 90 Washington
Street, New York, New York 10286, serves as custodian for the Funds and Bank of
America serves as the Prime and Treasury Funds' sub-custodian. Concord Financial
Services, Inc., a wholly-owned subsidiary of the Administrator, located at First
and Market Building, 100 First Avenue, Suite 300, Pittsburgh, Pennsylvania,
15222, serves as the transfer agent and dividend disbursing agent for Horizon
Shares of the Funds and DST Systems, Inc., 811 Main, Kansas City, Missouri
64105-2005, serves as transfer agent and dividend disbursing agent for the
Funds' Horizon Service Shares. Concord Financial Services, Inc. also serves as
sub-transfer agent for certain Horizon Service Share accounts of the Funds. DST
Systems, Inc. and Concord Financial Services, Inc. are collectively referred to
as the "Transfer Agents." The Company has also entered a Cash Management and
Related Services Agreement with The Bank of New York pursuant to which The Bank
of New York receives and disburses funds in connection with the purchase and
redemption of, and the payment of dividends and other distributions with respect
to the Funds.
FEE WAIVERS. Except as noted in this Prospectus and the Statement of Additional
Information, the Funds' service contractors bear all expenses in connection with
the performance of their services and the Funds bear the expenses incurred in
their operations. From time to time during the course of the Funds' fiscal year,
the Administrator and/or Bank of America may voluntarily not receive payment of
fees and/or assume certain expenses of a Fund, while retaining the ability to be
reimbursed by the Fund for such amounts prior to the end of the fiscal year and,
subject to the expense limitations of certain states, to stop such fee waivers
and expense reimbursements at any time. This will have the effect of increasing
yield to investors at the time such fees are not received or amounts are assumed
and decreasing yield when such fees or amounts are reimbursed.
PURCHASE AND REDEMPTION OF SHARES
PURCHASE PROCEDURES. Fund shares are sold at the net asset value per share next
determined after receipt of a purchase order by the Transfer Agents. Purchase
orders placed directly with the Transfer Agents without the assistance of a
broker-dealer or other person are without charge. Broker-dealers (other than the
Distributor) and others who process purchase orders on behalf of customers may
charge a fee for their services.
Purchase orders for shares are accepted by the Funds only on a day on which both
the Funds' custodian and the New York Stock Exchange (the "Exchange") are open
for business (a "Business Day"), and must be transmitted to the Transfer Agents
by telephone c/o the Distributor (800-426-3863) or terminal access. An
investment in Horizon Shares and Horizon Service Shares of the Fund
automatically entitles the
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<PAGE> 278
investor to purchase Fund shares, subject to the minimum described below,
without charge by telephone unless they indicate otherwise in a written notice
to the Transfer Agents that they do not wish to use this telephone privilege.
Purchase orders for the Prime Fund, Treasury Fund and Government Fund received
by the Transfer Agents before 2:30 p.m. Eastern Time on a Business Day will be
executed as of 2:30 p.m. Eastern Time on such Business Day if payment is
received by 4:00 p.m. Eastern Time on that day. Purchase orders for the Treasury
Only Fund that are received before 11:30 a.m. Eastern Time on a Business Day
will be executed at such time on that day if payment is received by 4:00 p.m.
Eastern Time on such Business Day. Orders received after the times specified,
and orders for which payment has not been received by 4:00 p.m. Eastern Time,
will not be accepted. A Fund may in its discretion reject any order for shares.
Payment for orders which are not received or paid for in a timely manner or are
not accepted by a Fund will be returned after prompt notification to the sending
institution.
Payment for shares may be made only in Federal funds or other funds immediately
available to the Transfer Agents. The minimum initial investment for Horizon
Shares and Horizon Service Shares in any Fund is $500,000 (although
broker-dealers and other institutional investors may set a higher minimum for
their customers) and there is no minimum subsequent investment. The Funds
reserve the right to suspend the sale of shares to the public at any time, in
response to conditions in the securities markets or otherwise.
Federal regulations require that each investor provide a certified Taxpayer
Identification Number upon opening or reopening an account.
REDEMPTION PROCEDURES. Redemption orders for Horizon Shares and Horizon Service
Shares must be transmitted to the Transfer Agents by telephone c/o the
Distributor or terminal access in the manner described above under "Purchase
Procedures." Shares for which certificates have been issued may not be redeemed
unless the certificates have been submitted to the Transfer Agents and endorsed
for transfer. While each Fund seeks to maintain its net asset value per share at
$1.00 there can be no assurance that it will be able to do so, and the proceeds
paid upon redemption may be more or less than the amount invested depending upon
a share's net asset value at the time of redemption.
Redemption orders submitted directly to the Transfer Agents without the
assistance of a broker-dealer or other person, and orders submitted by the
Distributor for its own brokerage customers, are processed without charge.
Broker-dealers (other than the Distributor) and others who process redemption
orders on behalf of their customers may charge a fee for their services.
Redemption orders are effected at the net asset value per share next determined
after receipt of the order by the Transfer Agents. Payment for redeemed shares
for which a redemption order is received by the Transfer Agents prior to 2:30
p.m. Eastern Time with respect to the Prime Fund, Treasury Fund or Government
Fund, or before 11:30 a.m. Eastern Time with respect to the Treasury Only Fund,
on a Business Day is normally made in Federal funds wired to the redeeming
shareholder on the same Business Day. Payment for redeemed shares for which a
redemption order is received after the times stated above on a Business Day is
normally made in Federal funds wired to the redeeming shareholder on the next
Business Day following redemption. In order to allow Bank of America to most
effectively manage the Funds' portfolios, investors are urged to initiate
redemptions of shares as early in the day as possible and to notify the Transfer
Agents at least one day in advance of redemptions in excess of $5 million. Each
Fund reserves the right to wire redemption proceeds up to seven days after
receiving the redemption order if, in the judgment of the investment adviser, an
earlier payment could adversely affect the Fund. In making redemption requests
the names of the registered shareholders and their account numbers must be
supplied. An
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<PAGE> 279
investment in Horizon Shares and Horizon Service Shares automatically entitles
the investor to redeem shares, without charge, by telephone unless the investor
indicates through a written notice to the Transfer Agents that they do not wish
to use this telephone privilege. Neither the Funds, the Distributor nor the
Transfer Agents will be responsible for any loss or expense for acting upon any
telephone instructions that are reasonably believed to be genuine. In attempting
to confirm that telephone instructions are genuine, the Company will use such
procedures as are considered reasonable.
A Fund may suspend the right of redemption or postpone the date of payment upon
redemption (as well as suspend or postpone the recordation of the transfer of
its shares) for such periods as are permitted under the Investment Company Act
of 1940. Each Fund reserves the right to redeem shares in any account at their
net asset value if the value of the account is less than $500,000 as a result of
redemptions. The shareholder having the account will first be notified in
writing that its account has a value of less than $500,000 and will be allowed
60 days to make additional investments to bring the value of its account to
$500,000 before the redemption is processed by a Fund. In addition, a Fund may
redeem shares involuntarily under certain special circumstances described in the
Statement of Additional Information under "Purchase and Redemption of Shares."
NET ASSET VALUE. The net asset value per share of the Prime Fund, Treasury Fund
and Government Fund is determined on each Business Day as of 2:30 p.m. Eastern
Time and the close of regular trading hours on the Exchange (or 4:00 p.m.
Eastern Time if the Exchange is closed). The net asset value per share of the
Treasury Only Fund is determined on such Business Days as of 11:30 a.m. Eastern
Time. In computing net asset value, each Fund uses the amortized cost method of
valuation as described in the Statement of Additional Information under
"Purchase and Redemption of Shares." The net asset value per share for each Fund
for purposes of pricing purchase and redemption orders is determined
independently of that for other Funds.
DIVIDENDS AND DISTRIBUTIONS
The shareholders of a Fund are entitled to dividends and distributions arising
from the net investment income and net realized gains, if any, earned on
investments held by the Fund involved. Generally, each Fund's net income is
declared daily as a dividend. Shares begin accruing dividends on the day the
purchase order for the shares is executed and continue to accrue dividends
through and including the day before the redemption order for the shares is
executed. Dividends are paid within five business days after the end of each
month. Although the Funds do not expect to realize net long-term capital gains,
any such capital gains as may be realized will be distributed no more than twice
a year after reduction for any available capital loss carryforward.
Dividends are paid in the form of additional full and fractional shares of the
same series as the shares on which the dividends are declared at the net asset
value of such shares on the payment date, unless the shareholder elects to
receive dividends in cash. Reinvestment dividends receive the same tax treatment
as dividends paid in cash. Such election or any revocation thereof must be made
in writing to Pacific Horizon Funds, Inc.,--[specify the name of the Fund],
First and Market Building, 100 First Avenue, Suite 300, Pittsburgh, Pennsylvania
15222, and will become effective with respect to dividends paid after its
receipt by the dividend disbursing agent.
TAXES
FEDERAL. Management of the Company believes that each Fund qualified separately
for its last taxable year as a "regulated investment company" under the Internal
Revenue Code of 1986, as amended (the "Code") and it is intended that each Fund
will qualify as a regulated investment company as long as such qualification is
in the
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best interest of its shareholders. Such qualification generally relieves a Fund
of liability for federal income taxes to the extent its earnings are distributed
in accordance with the Code.
In connection with such tax qualification, each Fund contemplates declaring as
dividends at least 90% of its investment company taxable income for each taxable
year. An investor of any Fund who receives a dividend derived from investment
company taxable income (which includes any excess of net short-term capital gain
over net long-term capital loss) treats it as ordinary income in the computation
of his gross income, whether such dividend is paid in the form of cash or
additional shares of a Fund. Because all of the net investment income of the
Funds is expected to be derived from earned interest, it is anticipated that all
dividends paid by the Funds will be taxable as ordinary income to shareholders
who are not exempt from federal income taxes and that no part of any
distribution paid by the Funds will be eligible for the dividends received
deduction for corporations.
Although the Funds anticipate that they will not have net long-term capital
gain, any distribution of a Fund's excess of net long-term capital gain over its
net short-term capital loss will be taxable to shareholders of that Fund as
long-term capital gain regardless of how long the shareholder has held shares of
the Fund.
Dividends declared in December of any year payable to shareholders of record on
a specified date in December will be deemed for federal tax purposes to have
been paid by the Funds and received by the shareholders on December 31, if such
dividends are paid during January of the following year.
Shareholders will be advised at least annually as to the federal income tax
consequences of dividends and distributions made each year. The foregoing is
only a brief summary of some of the important Federal income tax considerations
generally affecting the Funds and their shareholders. Additional tax information
of relevance to particular investors is contained in the Statement of Additional
Information. Potential investors in the Funds should consult their tax advisers
with specific reference to their own tax situation.
STATE AND LOCAL. Investors are advised to consult their tax advisers concerning
the application of state and local taxes, which may have different consequences
from those of the federal income tax law described above.
DESCRIPTION OF SHARES
The Company was organized on October 27, 1982 as a Maryland corporation. The
Predecessor Prime Fund and Predecessor Treasury Fund originally commenced
operations on July 10, 1987 as separate portfolios of The Horizon Funds. On
January 19, 1990, the Predecessor Prime Fund and the Predecessor Treasury Fund
were combined with the Money Market Portfolio and Government Money Market
Portfolio, respectively, of the Company; the Company changed the names of its
resulting portfolios to "Prime Fund" and "Treasury Fund"; and the Company began
offering Horizon Shares and Horizon Service Shares in such Funds. The
Predecessor Government Funds and Predecessor Treasury Only Funds commenced
operations on June 4, 1990 as investment portfolios of First Cash Funds of
America and First Funds of America. On March 1, 1993 the Predecessor Government
Funds and Predecessor Treasury Only Funds were reorganized as new portfolios of
the Company.
The Company's charter authorizes the Board of Directors to issue up to two
hundred billion full and fractional shares of capital stock, and to classify and
reclassify any authorized and unissued shares into one or more classes of
shares. The Board of Directors may similarly classify or reclassify any class of
shares into one or more series.
Pursuant to such authority, the Board of Directors has authorized the issuance
of the following series of shares representing interests in the Funds, each of
which is classified as a diversified company under the Investment Company Act of
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1940: twenty-eight billion Horizon Shares, fifteen billion Horizon Service
Shares and fifteen billion Pacific Horizon Shares representing interests in the
Prime Fund; fourteen billion, four hundred million Horizon Shares, fifteen
billion Horizon Service Shares and fifteen billion Pacific Horizon Shares
representing interests in the Treasury Fund; seven billion Horizon Shares,
fifteen billion Horizon Service Shares and fifteen billion Pacific Horizon
Shares representing interests in the Government Fund, and seven billion Horizon
Shares, fifteen billion Horizon Service Shares and fifteen billion Pacific
Horizon Shares representing interests in the Treasury Only Fund. Pacific Horizon
Shares of these Funds are described in a separate Prospectus available from the
Distributor at the telephone number on the cover of this Prospectus. The Board
of Directors has also authorized the issuance of additional classes of shares
representing interests in other investment portfolios of the Company, which are
likewise described in separate Prospectuses available from the Distributor. This
Prospectus relates primarily to the Horizon Shares and Horizon Service Shares of
the Funds and describes only the investment objectives and policies, operations,
contracts and other matters relating to such shares.
Each Horizon Share, Horizon Service Share and Pacific Horizon Share in a Fund
has a par value of $.001, and, except as noted below, is entitled to participate
equally in the dividends and distributions declared by the Board of Directors
with respect to such Fund and in the net distributable assets of such Fund on
liquidation. Holders of a Fund's Horizon Service Shares bear the fees described
in the following section that are paid to Shareholder Organizations by the Fund
under the Company's Shareholder Services Plan. Similarly, holders of a Fund's
Pacific Horizon Shares bear the fees described in the Prospectuses for such
shares that are paid to Bank of America and the Administrator by the Fund under
the Company's Special Management Services Agreement for Pacific Horizon Shares.
The fees paid under the Special Management Services Agreement are for services
related to investor programs and facilities that are offered in connection with
Pacific Horizon Shares, and Bank of America and Concord do not receive similar
fees with respect to a Fund's Horizon Shares or Horizon Services Shares. As a
result, at any given time, the net yield on a Fund's Horizon Shares is expected
to be approximately .25% higher than the yield on that Fund's Horizon Service
Shares and .32% higher than the yield on the same Fund's Pacific Horizon Shares.
Standardized yield quotations will be computed separately for each series of
shares.
Shareholders are entitled to one vote for each full share held and fractional
votes for fractional shares held, and will vote in the aggregate and not by
class or series except as otherwise required by law or when class voting is
permitted by the Board of Directors. It is contemplated that all shareholders of
a Fund will vote together as a single class on matters relating to the Fund's
investment advisory agreement and on any change in its fundamental investment
limitations, and that only holders of Horizon Service Shares of a Fund will be
entitled to vote on matters submitted to a vote of shareholders pertaining to
the Fund's arrangements with Shareholder Organizations. Shares have no
preemptive rights and only such conversion and exchange rights as the Board may
grant at its discretion. When issued for payment as described in this
Prospectus, shares will be fully paid and nonassessable. Certificates for shares
will not be issued unless expressly requested in writing and will not be issued
for fractional shares.
The Company does not presently intend to hold annual meetings of shareholders
for the election of directors and other business unless and until such time as
less than a majority of the directors holding office have been elected by the
shareholders of the Company, at which time the directors then in office will
call a shareholders' meeting for the election of directors. Under certain
circumstances, however, shareholders have the right to call a meeting of
shareholders to consider the removal of one or more directors and such meetings
will be called when requested
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by the holders of record of 10% or more of the Company's outstanding shares of
common stock. To the extent required by law and the Company's undertaking with
the Securities and Exchange Commission, the Company will assist in shareholder
communications in such matters. Shares have cumulative voting rights to the
extent that may be required by applicable law.
SHAREHOLDER SERVICES PLAN. The Company has adopted the Plan pursuant to which
Horizon Service Shares are sold to Shareholder Organizations that enter into
Shareholder Service Agreements with the Company pursuant to the Plan. Such
Shareholder Organizations may include Bank of America, the Administrator and
their affiliates. The Shareholder Service Agreements require the Shareholder
Organizations to provide support services to their customers ("Customers") who
are beneficial owners of Horizon Service Shares in return for payment by the
respective Fund of up to .25% (on an annualized basis) of the average daily net
asset value of the Horizon Service Shares beneficially owned by Customers of the
Shareholder Organizations. Holders of a Fund's Horizon Service Shares will bear
all fees paid to Shareholder Organizations for their services with respect to
such shares. Such fees are not paid to Shareholder Organizations with respect to
Horizon Shares or the Funds' Pacific Horizon Shares. During the fiscal year
ended February 28, 1995, the Prime, Treasury, Government and Treasury Only Funds
made payments under the Plan at an effective annual rate of .25% of each such
Fund's respective average daily net asset value.
The services provided by Shareholder Organizations may include the following:
aggregating and processing purchase and redemption requests from Customers for
Horizon Service Shares and placing net purchase and redemption orders with the
Distributor; providing Customers with a service that invests the assets of their
accounts in Horizon Service Shares pursuant to specific or preauthorized
instructions; processing dividend payments from a Fund on behalf of Customers;
providing information periodically to Customers regarding their position in
Horizon Service Shares; arranging for bank wires; responding to Customer
inquiries regarding services performed by the Shareholder Organizations;
providing sub-accounting with respect to Horizon Service Shares beneficially
owned by Customers or the information necessary for subaccounting; forwarding
shareholder communications from a Fund to Customers; and other similar services
if requested by a Fund.
Each Fund will accrue payments made pursuant to the Plan daily. The Funds will
receive an undertaking from each Shareholder Organization waiving a portion of
any payment such Organization is entitled to receive pursuant to the Plan to the
extent necessary to assure that the payments made pursuant to the Plan which are
required to be accrued to the respective Fund's Horizon Service Shares on any
day do not exceed the income to be accrued to such shares on that day.
The Company understands that Shareholder Organizations may charge fees to their
Customers who are the beneficial owners of Horizon Service Shares in connection
with their Customer accounts. These fees would be in addition to any amounts
which may be received by a Shareholder Organization under a Shareholder Service
Agreement. Under the terms of the Shareholder Service Agreements, Shareholder
Organizations are required to disclose the compensation payable to them by the
Company and any other compensation payable by their Customers in connection with
the investment of their assets in the Funds. Customers of Shareholder
Organizations should read this Prospectus in light of the terms governing their
accounts with their Shareholder Organizations.
Conflict-of-interest restrictions may apply to an institution's receipt of
compensation paid by a Fund in connection with the investment of fiduciary funds
in Horizon Service Shares. Institutions, including banks regulated by the
Comptroller of the Currency, the Federal Reserve Board or the Federal Deposit
Insurance Corporation, and investment advisers and other money managers subject
to the jurisdiction of the Securities and
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Exchange Commission, the Department of Labor or state securities commissions,
are urged to consult their legal advisers before investing fiduciary funds in
Horizon Service Shares.
Banks may act as Shareholder Organizations. The Glass-Steagall Act and other
applicable laws, among other things, prohibit banks from engaging in the
business of underwriting securities. If a bank were prohibited from acting as a
Shareholder Organization, its shareholder clients would be permitted by the
Company to remain shareholders of the Funds and alternative means for continuing
the servicing of such shareholders would be sought. In such event, changes in
the operation of the Funds might occur and a shareholder serviced by such bank
might no longer be able to avail itself of any automatic investment or other
services then being provided by the bank. It is not expected that shareholders
would suffer any adverse financial consequences as a result of any of these
occurrences.
The Company will obtain a representation from Shareholder Organizations (as well
as from Bank of America and the Administrator) that they are or will be licensed
as dealers as required by applicable law or will not engage in activities which
would require them to be so licensed.
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PACIFIC HORIZON MUTUAL FUNDS
COPIPRM95P
<PAGE> 285
HORIZON SHARES
AND
HORIZON SERVICE SHARES
OF THE
PRIME FUND
TREASURY FUND
GOVERNMENT FUND
TREASURY ONLY FUND
PROSPECTUS
July 1, 1995
NOT FDIC INSURED
<PAGE> 286
PROSPECTUS
JULY 1, 1995
Horizon Shares and
Horizon Service Shares of the
TAX-EXEMPT MONEY FUND
Horizon Service Shares of the
CALIFORNIA TAX-EXEMPT MONEY MARKET FUND
(Investment Portfolios Offered by Pacific
Horizon Funds, Inc.)
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THIS PROSPECTUS APPLIES TO THE HORIZON SHARES AND HORIZON SERVICE SHARES OF THE
TAX-EXEMPT MONEY FUND AND THE HORIZON SERVICE SHARES OF THE CALIFORNIA
TAX-EXEMPT MONEY MARKET FUND (THE "FUNDS"), TWO NO-LOAD TAX-EXEMPT INVESTMENT
PORTFOLIOS OFFERED BY PACIFIC HORIZON FUNDS, INC. (THE "COMPANY"). HORIZON
SHARES AND HORIZON SERVICE SHARES MAY NOT BE PURCHASED BY INDIVIDUALS DIRECTLY,
BUT INSTITUTIONAL INVESTORS MAY PURCHASE SHARES FOR ACCOUNTS MAINTAINED BY
INDIVIDUALS. THE FUNDS ARE DESIGNED TO PROVIDE INSTITUTIONS WITH DAILY
LIQUIDITY. THE TAX-EXEMPT MONEY FUND IS A DIVERSIFIED INVESTMENT PORTFOLIO AND
THE CALIFORNIA TAX-EXEMPT MONEY MARKET FUND IS A NON-DIVERSIFIED INVESTMENT
PORTFOLIO.
THE INVESTMENT OBJECTIVE OF THE TAX-EXEMPT MONEY FUND IS TO PROVIDE AS HIGH A
LEVEL OF CURRENT INTEREST INCOME EXEMPT FROM FEDERAL INCOME TAXES AS IS
CONSISTENT WITH RELATIVE STABILITY OF PRINCIPAL. THE INVESTMENT OBJECTIVE OF THE
CALIFORNIA TAX-EXEMPT MONEY MARKET FUND IS TO SEEK AS HIGH A LEVEL OF CURRENT
INTEREST INCOME FREE OF FEDERAL INCOME TAX AND CALIFORNIA STATE PERSONAL INCOME
TAX AS IS CONSISTENT WITH THE PRESERVATION OF CAPITAL AND RELATIVE STABILITY OF
PRINCIPAL. THE FUNDS SEEK TO ACHIEVE THEIR OBJECTIVES BY INVESTING PRIMARILY IN
U.S. DOLLAR-DENOMINATED OBLIGATIONS THE INTEREST ON WHICH IS EXEMPT FROM REGULAR
FEDERAL INCOME TAX, AND IN THE CASE OF THE CALIFORNIA TAX-EXEMPT MONEY MARKET
FUND, IS ALSO EXEMPT FROM TAXATION UNDER THE LAWS OR CONSTITUTION OF CALIFORNIA.
PORTFOLIO SECURITIES HELD BY EACH FUND HAVE REMAINING MATURITIES OF THIRTEEN
MONTHS OR LESS FROM THE DATE OF PURCHASE BY THE FUND. PORTFOLIO SECURITIES WHICH
HAVE CERTAIN PUT OR DEMAND FEATURES EXERCISABLE BY THE FUND WITHIN THIRTEEN
MONTHS (AS WELL AS CERTAIN U.S. GOVERNMENT OBLIGATIONS WITH FLOATING OR VARIABLE
INTEREST RATES) AND SECURITIES HELD AS COLLATERAL FOR REPURCHASE AGREEMENTS MAY
HAVE LONGER MATURITIES.
BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION ("BANK OF AMERICA") ACTS
AS INVESTMENT ADVISER TO THE FUNDS. CONCORD FINANCIAL GROUP, INC. SPONSORS THE
FUNDS AND ACTS AS THEIR DISTRIBUTOR AND CONCORD HOLDING CORPORATION ACTS AS
THEIR ADMINISTRATOR, NEITHER OF WHICH IS AFFILIATED WITH BANK OF AMERICA.
THIS PROSPECTUS BRIEFLY SETS FORTH CERTAIN INFORMATION ABOUT THE FUNDS DESCRIBED
HEREIN THAT INVESTORS SHOULD KNOW BEFORE INVESTING. IT SHOULD BE READ AND
RETAINED FOR FUTURE REFERENCE. ADDITIONAL INFORMATION ABOUT THE FUNDS, CONTAINED
IN A STATEMENT OF ADDITIONAL INFORMATION DATED JULY 1, 1995 HAS BEEN FILED WITH
THE SECURITIES AND EXCHANGE COMMISSION AND IS AVAILABLE TO INVESTORS UPON
REQUEST AND WITHOUT CHARGE BY CALLING THE FUNDS' DISTRIBUTOR AT (800) 426-3863.
THE STATEMENT OF ADDITIONAL INFORMATION, AS IT MAY FROM TIME TO TIME BE REVISED,
IS INCORPORATED IN ITS ENTIRETY BY REFERENCE INTO THIS PROSPECTUS.
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Shares of the Funds are not bank deposits or obligations of or guaranteed or
endorsed by, Bank of America National Trust and Savings Association or any of
its affiliates, and are not federally insured by, guaranteed by, obligations of
or otherwise supported by the U.S. Government, the Federal Deposit Insurance
Corporation, the Federal Reserve Board or any other governmental agency. Each
Fund seeks to maintain its net asset value per share at $1.00 for purposes of
purchases and redemptions, although there can be no assurance that it will be
able to do so on a continuous basis. Investment in the Funds involves investment
risk, including the possible loss of principal amount invested.
- --------------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
<PAGE> 287
CONTENTS
<TABLE>
<S> <C>
EXPENSE INFORMATION 2
FINANCIAL HIGHLIGHTS 3
INVESTMENT OBJECTIVES AND
POLICIES 6
MUNICIPAL SECURITIES 8
OTHER INVESTMENT PRACTICES 9
SPECIAL CONSIDERATIONS AND RISKS 10
INVESTMENT LIMITATIONS 12
INVESTMENT DECISIONS 13
MANAGEMENT OF THE FUNDS 13
PURCHASE AND REDEMPTION OF SHARES 15
DIVIDENDS, DISTRIBUTIONS
AND TAXES 17
DESCRIPTION OF SHARES 18
- ------------------------------------------------------------------------------------------------------------------------
DISTRIBUTOR: INVESTMENT ADVISER:
Concord Financial Group, Inc. Bank of America National Trust and Savings Association
125 West 55th Street 555 California Street
New York, NY 10019 San Francisco, CA 94104
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 288
EXPENSE INFORMATION
The following table sets
forth certain information
regarding the shareholder
transaction expenses imposed
by each Fund and (i) the
annual operating expenses
incurred by the Tax-Exempt
Money Fund with respect to
its Horizon and Horizon
Service Shares during its
last fiscal year and, (ii)
the annual operating
expenses for the California
Tax-Exempt Money Market with
respect to its Horizon
Service Shares during its
last fiscal year. Actual
expenses may vary.
Hypothetical examples based
on the table are also shown.
<TABLE>
<CAPTION>
CALIFORNIA
TAX-EXEMPT
TAX-EXEMPT MONEY
MONEY MARKET
--------------- -----
HORIZON HORIZON
HORIZON SERVICE SERVICE
SHARES SHARES* SHARES*
----- ----- -----
<S> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Sales Load Imposed on Purchases........ None None None
Sales load Imposed on Reinvested
Dividends............................ None None None
Deferred Sales Load.................... None None None
Redemption Fees........................ None None None
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Management Fees........................ .20% .20% .20%
----- ----- -----
All Other Expenses..................... .08% .33% .35%
----- ----- -----
Shareholder Service Payments......... -- .25% .25%
Other Expenses....................... .08% .08% .10%
Total Fund Operating Expenses.......... .28% .53% .55%
===== ===== =====
</TABLE>
- -------------------------------------------
* The Company understands that institutions that enter into agreements
("Shareholder Service Agreements") with the Company ("Shareholder
Organizations") under the Company's Shareholder Services Plan (the "Plan") may
charge fees to their Customers who are the beneficial owners of Horizon
Service Shares in connection with their accounts. Each Fund's Horizon Service
Shares bear fees paid to Shareholder Organizations under the Plan at the
annual rate of up to .25% of the average daily net asset value of each Fund's
Horizon Service Shares.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
EXAMPLES 1 YEAR 3 YEARS 5 YEARS 10 YEARS
------- -------- -------- ---------
<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000 investment,
assuming (1) a 5% annual return and (2) redemption at the end
of each time period:
Tax-Exempt Money-Horizon Shares................................ $3 $ 9 $16 $36
Tax-Exempt Money-Horizon Service Shares........................ $5 $17 $30 $66
California Tax-Exempt Money Market-Horizon Service Shares...... $6 $18 $31 $69
</TABLE>
- --------------------------------------------------------------------------------
The foregoing Expense Summary and Examples are intended to assist investors in
Horizon Shares and Horizon Service Shares in understanding the expenses their
class will pay. Investors bear these expenses indirectly since they reduce the
amount of income paid by the Funds to investors as dividends. The investment
adviser and administrator may voluntarily waive a portion of their respective
fees and may voluntarily reimburse expenses from time to time. This voluntary
waiver or reimbursement may be modified or terminated at any time. See
"Management of the Funds" and "Description of Shares" for more complete
descriptions of the various expenses referred to above.
THE EXAMPLES SET FORTH ABOVE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST
OR FUTURE INVESTMENT RETURNS AND OPERATING EXPENSES. ACTUAL INVESTMENT RETURNS
AND OPERATING EXPENSES MAY BE MORE OR LESS THAN THOSE SHOWN.
<PAGE> 289
FINANCIAL HIGHLIGHTS
The Tax-Exempt Money Fund commenced operations on July 10, 1987 as a separate
investment portfolio (the "Predecessor Tax-Exempt Fund") of The Horizon Funds, a
Massachusetts business trust. On January 19, 1990, the Predecessor Tax-Exempt
Fund was reorganized as a new portfolio of the Company.
The table below sets forth certain information concerning (i) the investment
results of the Predecessor Tax-Exempt Fund for the periods ended on or before
April 30, 1989, (ii) the combined investment results of the Predecessor
Tax-Exempt Fund and the Tax-Exempt Money Fund for the period May 1, 1989 through
February 28, 1990, and (iii) the investment results of the Tax-Exempt Money Fund
for the fiscal years ended February 28, 1991, February 29, 1992, February 28,
1993, February 28, 1994 and February 28, 1995. The information contained in the
Financial Highlights has been audited by Price Waterhouse LLP, independent
accountants of both the Predecessor Tax-Exempt Fund and the Tax-Exempt Money
Fund, whose unqualified report insofar as it relates to the five year period
ended February 28, 1995 on the financial statements containing such information
is incorporated by reference in the Statement of Additional Information, which
may be obtained upon request. The Financial Highlights should be read in
conjunction with the financial statements and notes thereto and the unqualified
report of the independent accountants which are incorporated by reference in the
Statement of Additional Information.
Selected Data for a Horizon Share Outstanding Throughout Each of the Periods
Indicated:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
TAX-EXEMPT MONEY FUND
---------------------------------------------------------------------------------------------
YEAR ENDED MAY 1, YEAR
-------------------------------------------------------------- 1989 ENDED
FEBRUARY FEBRUARY FEBRUARY THROUGH APRIL
28, 28, 28, FEBRUARY FEBRUARY FEBRUARY 30,
1995+++ 1994+++ 1993+++ 29, 1992 28, 1991 28, 1990 1989++
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
HORIZON SHARES
Net asset value per share,
beginning of period........ $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- -------- -------- -------- -------- -------- --------
Income from Investment
Operations:
Net investment income...... 0.0285 0.0225 0.0269 0.0410 0.0557 0.0503 0.0577
Less Dividends:
Dividends from net
investment income........ (0.0285) (0.0225) (0.0269) (0.0410) (0.0557) (0.0503) (0.0577)
-------- -------- -------- -------- -------- -------- --------
Net change in net asset
value per share............ 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000
-------- -------- -------- -------- -------- -------- --------
Net asset value per share,
end of period.............. $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
========== ========== ========== ========== ========== ========== ==========
Total return................ 2.89% 2.27% 2.72% 4.18% 5.71% 5.15%++++ 5.93%
Ratios/Supplemental Data:
Net Assets, end of period
(000).................... $381,811 $514,663 $383,848 $345,221 $428,127 $355,656 $178,586
Ratio of expenses to
average net assets....... 0.28% 0.28%** 0.28% 0.28% 0.27%** 0.21%**+ 0.21%**
Ratio of net investment
income to average net
assets................... 2.81% 2.25%** 2.69% 4.12% 5.54%** 5.96%**+ 5.84%**
<CAPTION>
PERIOD
ENDED
APRIL
30,
1988*++
--------
<S> <C>
HORIZON SHARES
Net asset value per share,
beginning of period........ $ 1.00
--------
Income from Investment
Operations:
Net investment income...... 0.0392
Less Dividends:
Dividends from net
investment income........ (0.0389)
--------
Net change in net asset
value per share............ 0.0003
--------
Net asset value per share,
end of period.............. $ 1.00
==========
Total return................ 3.92%++++
Ratios/Supplemental Data:
Net Assets, end of period
(000).................... $104,358
Ratio of expenses to
average net assets....... 0.20%**+
Ratio of net investment
income to average net
assets................... 5.17%**+
</TABLE>
- ---------------
* For the period July 10, 1987 (commencement of operations) through April
30, 1988.
** Net of fee waivers which had the effect of reducing the ratio of
expenses to average net assets and increasing the ratio of net investment
income to average net assets by 0.01%, 0.02%, 0.07% (annualized), 0.19% and
0.23% (annualized) for the years or periods ended February 28, 1994,
February 28, 1991, February 28, 1990, April 30, 1989 and April 30, 1988,
respectively.
+ Annualized.
++ This information represents the results of operations of the former
Horizon Tax-Exempt Money Fund, the assets and liabilities of which were
transferred to the Pacific Horizon Funds, Inc.--Tax-Exempt Money Fund on
January 19, 1990. See Note 1 to the financial statements which are
incorporated by reference in the Statement of Additional Information.
+++ Security Pacific National Bank served as investment adviser through
April 21, 1992. Bank of America National Trust and Savings Association
served as investment adviser commencing April 22, 1992.
++++ Not annualized.
3
<PAGE> 290
Selected data for a Horizon Service Share outstanding throughout each of the
periods indicated:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
TAX-EXEMPT MONEY FUND
-----------------------------------------------------------------------------------------
MAY 1,
YEAR ENDED 1989 YEAR
----------------------------------------------------------- THROUGH ENDED
FEBRUARY FEBRUARY FEBRUARY FEBRUARY FEBRUARY FEBRUARY APRIL
28, 28, 28, 29, 28, 28, 30,
1995+++ 1994+++ 1993+++ 1992 1991 1990 1989++
------- ------- ------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
HORIZON SERVICE SHARES
Net asset value per share,
beginning of period............. $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
------- ------- ------- ------- ------- ------- --------
Income from Investment
Operations:
Net investment income........... 0.0260 0.0200 0.0244 0.0385 0.0532 0.0482 0.0552
Less Dividends:
Dividends from net investment
income........................ (0.0260) (0.0200) (0.0244) (0.0385) (0.0532) (0.0482) (0.0552)
------- ------- ------- ------- ------- ------- --------
Net change in net asset value per
share........................... 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000
------- ------- ------- ------- ------- ------- --------
Net asset value per share, end of
period.......................... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
========= ========= ========= ========= ========= ========= ==========
Total return..................... 2.63% 2.02% 2.47% 3.92% 5.45% 4.93% 5.66%
Ratios/Supplemental Data:
Net assets, end of period
(000)........................... $39,158 $48,328 $49,695 $47,230 $53,732 $36,538 $178,586
Ratio of expenses to average net
assets........................ 0.53% 0.53%** 0.53% 0.53% 0.52%** 0.46%**+ 0.46%**
Ratio of net investment income
to average net assets......... 2.57% 2.04%** 2.42% 3.88% 5.29%** 5.73%**+ 5.70%**
<CAPTION>
PERIOD
ENDED
APRIL
30,
1988*++
--------
<S> <C>
HORIZON SERVICE SHARES
Net asset value per share,
beginning of period............. $ 1.00
--------
Income from Investment
Operations:
Net investment income........... 0.0090
Less Dividends:
Dividends from net investment
income........................ (0.0090)
--------
Net change in net asset value per
share........................... 0.0000
--------
Net asset value per share, end of
period.......................... $ 1.00
==========
Total return..................... 0.90%
Ratios/Supplemental Data:
Net assets, end of period
(000)........................... $104,358
Ratio of expenses to average net
assets........................ 0.45%**+
Ratio of net investment income
to average net assets......... 4.54%**+
</TABLE>
- ---------------
* For the period February 18, 1988 (initial offering day, through
April 30, 1988).
** Net of expense reimbursements which had the effect of reducing the ratio
of expenses to average net assets and increasing the ratio of net
investment income to average net assets by 0.04%, 0.02%, 0.07%
(annualized), 0.19% and 0.16% (annualized) for the years or periods
ended February 28, 1994, February 28, 1991, February 28, 1990,
April 30, 1989 and April 30, 1988, respectively.
+ Annualized.
++ This information represents the results of operations of the former
Horizon Tax-Exempt Money Fund, the assets and liabilities of which were
transferred to the Pacific Horizon Funds Inc.--Horizon Tax-Exempt
Money Fund on January 19, 1990.
+++ Security Pacific National Bank served as investment adviser through
April 21, 1992. Bank of America National Trust and Savings Association
served as investment adviser commencing April 22, 1992.
++++ Not annualized.
4
<PAGE> 291
The California Tax-Exempt Money Market Fund commenced operations on December 6,
1989 as a portfolio of the Company with a single series of shares, Pacific
Horizon Shares. On March 1, 1993 the California Tax-Exempt Money Market Fund
also began offering Horizon Service Shares.
The table below sets forth certain information concerning the investment results
for Horizon Service Shares of the California Tax-Exempt Money Market Fund for
the fiscal years ended February 28, 1994 and February 28, 1995. The information
contained in the Financial Highlights has been audited by Price Waterhouse LLP,
independent accountants of the California Tax-Exempt Money Market Fund, whose
unqualified report thereon is incorporated by reference in the Statement of
Additional Information, which may be obtained upon request. The Financial
Highlights should be read in conjunction with the financial statements and notes
thereto and the unqualified report of independent accountants which are
incorporated by reference in the Statement of Additional Information.
Selected Data for a Horizon Service Share outstanding throughout the Period:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CALIFORNIA TAX-EXEMPT
MONEY MARKET FUND
-----------------------
YEAR YEAR
ENDED ENDED
FEBRUARY FEBRUARY
28, 1995 28, 1994
--------- ---------
<S> <C> <C>
HORIZON SERVICE SHARES
Net Asset Value per share, Beginning of Year.......................... $ 1.00 $ 1.00
Income from Investment Operations:
Net Investment Income............................................... 0.0256 0.0198
Net Realized Loss on Securities..................................... (0.0001) (0.0001)
Total Income from Investment Operations............................... 0.0255 0.0197
Less Dividends:
Dividends from Net Investment Income................................ (0.0256) (0.0198)
Net Change in Net Asset Value per share............................... (0.0001) (0.0001)
--------- ---------
Net Asset Value per share, End of Year................................ $ 1.00 $ 1.00
========= =========
Total Return.......................................................... 2.59% 2.00%
Ratios/Supplemental Data:
Net assets, end of year (000)....................................... $ 88,003 $ 123,746
Ratio of expenses to average net assets............................. 0.55% 0.53%*
Ratio of net investment income to average net assets................ 2.50% 1.98%*
</TABLE>
- ---------------
* Net of fee waivers and expense reimbursements by the Adviser and the
Administrator which had the effect of reducing the ratio of expenses to
average net assets and increasing the ratio of net investment income to
average net assets by 0.07%.
YIELD INFORMATION. From time to time the "yield," "effective yield" or
"tax-equivalent yield" of a Fund may be quoted in advertisements or reports to
shareholders. Each yield figure is based on historical earnings and is not
intended to indicate future performance. The "yield" of a Fund refers to the
income generated by an investment in the Fund over a seven-day period (which
period will be stated in the advertisement or report). This income is then
"annualized"--that is, the amount of income generated by the investment during
that week is assumed to be generated each week over a 52-week period and is
shown as a percentage of the investment. The "effective yield" is calculated
similarly but, when annualized, the income earned by an investment in the Fund
is assumed to be reinvested. The "effective yield" will be slightly higher than
the "yield" because of the compounding effect of this assumed reinvest-
5
<PAGE> 292
ment. A Fund's "tax-equivalent yield" shows the level of taxable yield needed to
produce an after-tax equivalent to the Fund's tax-free yield. This is done by
increasing the Fund's yield (calculated as above) by the amount necessary to
reflect the payment of Federal, and in the case of the California Tax-Exempt
Money Market Fund, California income tax at a stated tax rate. A Fund's
"tax-equivalent yield" will always be higher than its "yield."
Additionally, the yields of a Fund may be compared to those of other mutual
funds with similar investment objectives and to other relevant indices or to
rankings prepared by independent services or other financial or industry
publications that monitor the performance of mutual funds. For example, the
Funds' yields may be compared to Donoghue's Tax-Free Money Fund Average and
Donoghue's Money Fund Averages, which are averages compiled by Donoghue's Money
Fund Report. Yield data as reported in national financial publications,
including Money, Forbes, Barron's, Wall Street Journal and New York Times, or in
publications of a local or regional nature, may also be used in comparing the
yields of a Fund. A complete listing of the indices, rankings and publications
discussed above is contained in the Statement of Additional Information.
Since yields fluctuate, yield data cannot necessarily be used to compare an
investment in the shares of a Fund with bank deposits, savings accounts and
similar investment alternatives which often provide an agreed or guaranteed
fixed yield for a stated period of time. Shareholders should remember that yield
is generally a function of the kind and quality of the instruments held in a
portfolio, portfolio maturity, operating expenses and market conditions. Any
fees charged by Bank of America or Shareholder Organizations (defined below)
directly to their customer accounts in connection with investments in shares of
a Fund (which fees may include, for example, account maintenance fees,
compensating balance requirements or fees based upon account transactions,
assets or income) will not be included in the Fund's calculations of yield.
INVESTMENT OBJECTIVES AND POLICIES
IN GENERAL
This section describes the investment objectives and policies of the Funds.
Assets of the Funds will be invested in dollar-denominated debt securities with
remaining maturities of thirteen months or less as defined by the Securities and
Exchange Commission (the "SEC"'), and the dollar-weighted average portfolio
maturity of each Fund will not exceed 90 days. All securities acquired by the
Funds will be determined by the investment adviser, under guidelines established
by the Company's Board of Directors, to present minimal credit risks. Securities
acquired by the Tax-Exempt Money Fund will, under normal market conditions, be
"First Tier Securities" (as defined by the SEC), of the types described below.
During temporary defensive periods or if in the investment adviser's opinion
suitable First Tier Securities are not available for investment, however, the
Tax-Exempt Money Fund may also acquire "Eligible Securities" (as defined by the
SEC) of the types defined below. Securities acquired by the California
Tax-Exempt Money Market Fund will be Eligible Securities. First Tier Securities
consist of instruments that are rated at the time of purchase in the top rating
category by one (if rated by only one) or more unaffiliated nationally
recognized statistical rating organizations ("NRSROs") including Standard and
Poor's Ratings Group, Division of McGraw Hill ("Standard & Poor's"), Moody's
Investors Service, Inc. ("Moody's"), Duff & Phelps Credit Co. ("Duff & Phelps")
or Fitch Investors Service, Inc. ("Fitch") or issued by issuers with such
ratings. Eligible Securities consist either of instruments that are rated at the
time of purchase in the top two rating categories by one or more NRSROs, or are
issued by issuers with such ratings. The Appendix to the Statement of Additional
Information includes a description of the applicable NRSRO ratings. Unrated
instruments
6
<PAGE> 293
(including instruments with long-term but no short-term ratings) purchased by a
particular Fund will be of comparable quality to the rated instruments that the
Fund may purchase, as determined by the Funds' investment adviser pursuant to
guidelines approved by the Board of Directors.
TAX-EXEMPT MONEY FUND. The Tax-Exempt Money Fund's investment objective is to
provide as high a level of current interest income exempt form federal income
taxes as is consistent with relative stability of principal. The Fund invests
substantially all of its assets in a diversified portfolio of U.S.
dollar-denominated short-term obligations issued by or on behalf of states,
territories and possessions of the United States, the District of Columbia and
their political subdivisions, agencies, instrumentalities and authorities, the
interest on which, in the opinion of bond counsel to the issuer, is exempt from
regular federal income tax ("Municipal Securities"). Portfolio securities held
by the Fund have remaining maturities of thirteen months or less from the date
of purchase by the Fund. (Portfolio securities which have certain put or demand
features exercisable by the Fund within thirteen months, or are subject to
repurchase agreements may have longer maturities.)
As a matter of fundamental policy, under normal market conditions at least 80%
of the Fund's total assets will be invested in Municipal Securities (other than
private activity bonds, the interest on which is treated as a specific tax
preference item under the federal alternative minimum tax). The Fund may also
invest in taxable obligations and may hold uninvested cash reserves pending
investment, during temporary defensive periods or if, in the opinion of the
Fund's investment adviser, suitable tax-exempt obligations are not available.
Uninvested cash reserves will not earn income. Taxable obligations acquired by
the Fund will not exceed under normal market conditions 20% of the Fund's total
assets at the time of purchase. Such taxable obligations include obligations
issued or guaranteed by the U.S. Government, its agencies or instrumentalities
(some of which may be subject to repurchase agreements), certificates of deposit
and bankers' acceptances of selected banks and commercial paper. These
obligations are described further in the Statement of Additional Information.
CALIFORNIA TAX-EXEMPT MONEY MARKET FUND. The California Tax-Exempt Money Market
Fund's investment objective is to seek as high a level of current interest
income free of Federal income tax and California state personal income tax as is
consistent with the preservation of capital and relative stability of principal.
The Fund's assets are primarily invested in Municipal Securities issued by or on
behalf of the State of California and other governmental issuers. Municipal
Securities acquired by the Fund will generally have remaining maturities of
thirteen months or less.
As a matter of fundamental policy, under normal market conditions at least 80%
of the Fund's net assets will be invested in Municipal Securities, the interest
on which is exempt from taxation under the California Constitution or the laws
of California ("California Municipal Securities"). So long as at least 50% of
the Fund's total assets are invested in debt obligations, the interest on which
is exempt from taxation by the state of California ("California Exempt
Securities," which are generally limited to California Municipal Securities and
certain U.S. Government and U.S. Possession obligations) as of the end of each
quarter, dividends paid by the Fund which are derived from interest on
California Exempt Securities will be exempt from California state personal
income tax; if this policy is not achieved, no portion of the Fund's dividends
will be exempt from California state personal income tax. Dividends derived from
interest on Municipal Securities other than California Municipal Securities will
be subject to California state personal income tax. See "Taxes."
The Fund may hold uninvested cash reserves pending investment, during temporary
defensive periods, or if, in the opinion of the Fund's investment adviser,
suitable tax-exempt obligations are unavailable. In accordance with the Fund's
investment objective, and subject to the Fund's fundamental policy that under
normal market conditions 80% of its net assets be invested in California
Municipal Securities, invest-
7
<PAGE> 294
ments may be made in taxable obligations of up to thirteen months in maturity
if, for example, suitable tax-exempt obligations are unavailable or if
acquisition of U.S. Government or other taxable securities is deemed appropriate
for temporary defensive purposes. Such taxable obligations will be limited to
those that may be acquired by the Tax-Exempt Money Fund. Under normal market
conditions, the Fund anticipates that not more than 5% of its net assets will be
invested in any one category of taxable securities. Additionally, the Fund will
not invest more than 10% of its total assets in securities that are illiquid
because of absence of a readily available market or otherwise, including
repurchase agreements providing for settlement more than seven days after
notice.
MUNICIPAL SECURITIES
The two principal classifications of Municipal Securities which may be held by
the Funds 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 user of the facility being
financed. Private activity bonds are generally revenue securities, which are not
payable from the unrestricted revenues of the issuers, and the credit ratings of
such bonds are usually directly related to the credit ratings of the users of
the facilities involved. The Funds may also acquire "moral obligation"
securities, which are normally issued 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 which created the issuer.
Municipal Securities include debt obligations issued by governmental entities to
obtain funds for various public purposes, including the construction of a wide
range of public facilities, the refunding of outstanding obligations, the
payment of general operating expenses and the extension of loans to public
institutions and facilities. In addition, certain types of private activity
bonds are issued by or on behalf of public authorities to finance various
privately-operated facilities. Such obligations are included within the term
Municipal Securities if the interest paid thereon is exempt from regular Federal
income tax. Municipal Securities also include short-term tax anticipation notes,
bond anticipation notes, revenue anticipation notes and other forms of
short-term loan obligations. Such notes are issued with a short-term maturity in
anticipation of the receipt of tax funds, the proceeds of bond placements or
revenues. The Funds may also purchase tax-exempt commercial paper.
Securities acquired by the Funds may be in the form of custodial receipts
evidencing rights to receive a specific future interest payment, principal
payment or both on certain Municipal Securities. Such obligations are held in
custody by a bank on behalf of holders of the receipts. These custodial receipts
are known by various names, including "Municipal Receipts," "Municipal
Certificates of Accrual on Tax-Exempt Securities" ("M-CATS") and "Municipal
Zero-Coupon Receipts." A Fund may also purchase from time to time participation
interests in debt securities held by trusts or financial institutions. A
participation interest gives the Fund involved a specified undivided interest
(up to 100%) in the underlying obligation. Participation interests purchased by
a Fund may have fixed, floating or variable rates of interest, and will have
remaining maturities of thirteen months or less as determined in accordance with
the regulations of the Securities and Exchange Commission (although the
securities held by the issuer may have longer maturities). If a participation
interest is unrated, the investment adviser will have determined that the
interest is of comparable quality to those instru-
8
<PAGE> 295
ments in which the Fund involved may invest pursuant to guidelines approved by
the Company's Board of Directors. For certain participation interests, the Fund
involved will have the right to demand payment, on not more than 30 days'
notice, for all or any part of such participation interest, plus accrued
interest; as to these instruments, the Funds intend to exercise their right to
demand payment as needed to provide liquidity, to maintain or improve the
quality of their respective investment portfolios or upon a default (if
permitted under the terms of the instrument). Although a participation interest
may be sold by a Fund under normal circumstances they will be held until
maturity.
Opinions relating to the validity of Municipal Securities and to the exemption
of interest thereon from regular Federal income tax, (and, with respect to
California Municipal Securities, California state personal income tax), are
rendered by bond counsel to the respective issuers at the time of issuance.
Neither the Funds nor their investment adviser will review the proceedings
relating to the issuance of Municipal Securities or the bases for such opinions.
OTHER INVESTMENT PRACTICES
VARIABLE AND FLOATING RATE INSTRUMENTS. Securities purchased by the Funds may
include variable and floating rate instruments, which may have a stated maturity
in excess of the Funds' maturity limitations but which will, in such event and
except with respect to certain U.S. Government obligations purchased by the
Tax-Exempt Money Fund, permit the Fund involved to demand payment of the
principal of the instrument at least once every thirteen months upon not more
than thirty days notice. Such instruments may include variable amount master
demand notes that permit the indebtedness thereunder to vary, in addition to
providing for periodic adjustments in the interest rate. There may be no active
secondary market with respect to a particular variable or floating rate
instrument. Nevertheless, the periodic readjustments of their interest rates
tend to assure that their value to a Fund will approximate their par value.
Illiquid variable and floating rate instruments (instruments which are not
payable upon seven days notice and do not have an active trading market) that
are acquired by a Fund are subject to a Fund's percentage limitations on
illiquid investments. The Fund's investment adviser will continuously monitor
the creditworthiness of issuers of variable and floating rate instruments in
which the Funds invest, and their ability to repay principal and interest.
WHEN-ISSUED PURCHASES, FORWARD COMMITMENTS AND DELAYED SETTLEMENTS. The Funds
may purchase securities on a "when-issued" basis and may purchase or sell
securities on a "forward commitment" or "delayed settlement" basis. When-issued
and forward commitment transactions, which involve a commitment by a Fund to
purchase or sell particular securities with payment and delivery taking place at
a future date (perhaps one or two months later), permit the Fund to lock in a
price or yield on a security it owns or intends to purchase, regardless of
future changes in interest rates. Delayed settlement describes securities
transaction in the secondary market for which settlement will occur sometime in
the future. When-issued, forward commitment and delayed settlement transactions
involve the risk, however, that the yield or price obtained in a transaction may
be less favorable than the yield or price available in the market when the
securities delivery takes place. A Fund's forward commitments, when-issued
purchases and delayed settlements are not expected to exceed 25% of the value of
its total assets absent unusual market conditions. A Fund's liquidity and the
ability of the investment adviser to manage its portfolio may be adversely
affected in the event its forward commitments, commitments to purchase
when-issued securities and delayed settlements ever exceed 25% of the value of
its total assets. The Funds do not intend to engage in these transactions for
speculative purposes but only in furtherance of their respective investment
objectives.
"STAND-BY COMMITMENTS." The Funds may acquire "stand-by commitments" with
respect to
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Municipal Securities held in their respective portfolios. Under a stand-by
commitment, a dealer agrees to purchase at the Fund's option specified Municipal
Securities at a specified price. The Funds will acquire stand-by commitments
solely to facilitate portfolio liquidity and does not intend to exercise their
rights thereunder for trading purposes. The California Tax-Exempt Money Market
Fund expects that "stand-by commitments" will generally be available without the
payment of any direct or indirect consideration. However, if necessary or
advisable, that Fund will 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).
REPURCHASE AGREEMENTS. The Funds may agree to purchase securities from
financial institutions, such as banks and broker-dealers, as are deemed
creditworthy by the Company's investment adviser under guidelines approved by
the Board of Directors, subject to the seller's agreement to repurchase them at
an agreed upon time and price ("repurchase agreements"). Although the securities
subject to a repurchase agreement may bear maturities exceeding thirteen months,
the Funds intend only to enter into repurchase agreements having maturities not
exceeding 60 days. Securities subject to repurchase agreements are held either
by the Company's custodian, or sub-custodian, or in the Federal Reserve/Treasury
Book-Entry System. The seller under a repurchase agreement will be required to
maintain the value (including accrued interest) of the securities subject to the
agreement in an amount that exceeds the repurchase price, and such value will be
continuously monitored by the investment adviser on an ongoing basis. Default by
the seller would, however, expose the Fund involved to possible loss because of
adverse market action or delay in connection with the disposition of the
underlying obligations. Repurchase agreements are considered to be loans under
the Investment Company Act of 1940.
REVERSE REPURCHASE AGREEMENTS. The Funds may borrow monies for temporary
purposes by entering into reverse repurchase agreements in accordance with the
investment restrictions described below. Pursuant to such agreements, a Fund
would sell portfolio securities to financial institutions and agree to
repurchase them at an agreed upon date and price. At the time a Fund enters into
a reverse repurchase agreement, it will place in a segregated custodial account
liquid assets or high grade debt securities having a value equal to or greater
than the repurchase price and the investment adviser will continuously monitor
the account to ensure that the value is maintained. A Fund would only enter into
reverse repurchase agreements to avoid otherwise selling securities during
unfavorable market conditions to meet redemptions. Reverse repurchase agreements
involve the risk that the market value of the portfolio securities sold by the
Fund involved may decline below the price of the securities the Fund is
obligated to repurchase. Interest paid by a Fund in connection with a reverse
repurchase agreement will reduce the net investment income of the Fund. Reverse
repurchase agreements are considered to be borrowings under the Investment
Company Act of 1940. A Fund will not purchase securities while it has borrowings
(including reverse repurchase agreements) outstanding.
SPECIAL CONSIDERATIONS AND RISKS
In seeking to achieve their respective investment objectives the Funds may
invest in private activity bonds the interest on which, although exempt from
regular Federal income tax, may constitute an item of tax preference for
purposes of the Federal alternative minimum tax. See "Taxes." Investments in
such securities, however, will not exceed under normal market conditions 20% of
a Fund's total assets when added together with any taxable investments held by
the Fund. Moreover, although the Funds do not presently intend to do so on a
regular basis, they may invest more than 25% of their respective assets in
Municipal
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Securities the interest on which is paid solely from revenues of similar
projects if such investment is deemed necessary or appropriate by the investment
adviser. Additionally, although the Tax-Exempt Money Fund may invest more than
25% of its assets in Municipal Securities the issuers of which are located in
the same state, it does not presently intend to do so on a regular basis other
than issuers located in California. To the extent a Fund's assets are
concentrated in Municipal Securities payable from revenues on similar projects
or issued by issuers located in the same state, the Fund will be subject to the
peculiar economic, political and business risks presented by the laws and
economic conditions relating to such states and projects to a greater extent
than it would be if its assets were not so concentrated.
The California Tax-Exempt Money Market Fund is classified as a non-diversified
investment company under the Investment Company Act of 1940. 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 similar
objectives may be.
The Funds' concentration in California Municipal Securities raises additional
considerations. Payment of the interest on and the principal of these
obligations is dependent upon the continuing ability of California 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 the Funds' 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 California issues with the yield
of a more diversified portfolio including non-California issues before making an
investment decision.
Many of the Funds' Municipal Securities are likely to be obligations of
California governmental issuers which rely in whole or in part, directly or
indirectly, on real property taxes as a source of revenue. "Proposition
Thirteen" and similar California constitutional and statutory amendments and
initiatives in recent years have restricted the ability of California taxing
entities to increase real property tax revenues. Other initiative measures
approved by California voters in recent years, through limiting various other
taxes, have resulted in a substantial reduction in state revenues. Decreased
state revenues may result in reductions in allocations of state revenues to
local governments.
Because of the complex nature of the various initiatives mentioned above and
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 California governmental
entities, it is not presently possible to determine the impact of these
initiatives and related measures on the ability of California governmental
issuers to pay interest or repay principal on their obligations. There have,
however, been certain adverse developments with respect to Municipal Securities
of California governmental issuers over the past several years.
In addition to the various initiatives discussed above, economic factors such as
the reduction in defense spending, a decline in tourism and high levels of
unemployment have had an adverse impact on the economy of California. These
economic factors have reduced revenues to the state government at a time when
expenses of state government such as education costs, various welfare costs and
other expenses have been rising. Such economic factors have also adversely
impacted the ability of state and local California governmental entities to
repay debt.
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In addition to the risk of nonpayment of state and local California governmental
debt, if such debt declines in quality and is downgraded by the NRSROs, it may
become ineligible for purchase by the Funds pursuant to current Securities and
Exchange Commission regulations. Since there are large numbers of buyers of such
debt that are similarly restricted, the supply of Eligible Securities (as
defined above) could become inadequate at certain times. A more detailed
description of special factors affecting investments in California Municipal
Securities, of which investors should be aware, is set forth in the Statement of
Additional Information.
INVESTMENT LIMITATIONS
The investment objective of each Fund is a fundamental policy that may not be
changed without a vote of the holders of a majority of the particular Fund's
outstanding shares (as defined in the Investment Company Act of 1940). A Fund's
policies may be changed by the Company's Board of Directors without the
affirmative vote of the holders of a majority of such Fund's outstanding shares,
except that the investment limitations set forth below may not be changed
without such a vote of shareholders. A description of certain other fundamental
investment limitations is contained in the Statement of Additional Information.
The Tax-Exempt Money Fund may not:
1. Under normal circumstances invest less than 80% of its total assets in
Municipal Securities (other than private activity bonds the interest on which
may be subject to the federal alternative minimum tax).
2. Purchase any securities which would cause 25% or more of the value of its
total assets at the time of such purchase to be invested in the securities of
one or more issuers conducting their principal business activities in the
same industry; provided, however, that (a) there is no limitation with
respect to investments in Municipal Securities or obligations issued or
guaranteed by the Federal Government and its agencies and instrumentalities:
(b) although there is no limitation with respect to investments in
certificates of deposit and bankers' acceptances issued by domestic branches
of United States banks, no more than 10% of the total value of the Fund's
assets at the time of purchase may be invested in certificates of deposit and
bankers' acceptances issued by domestic branches of foreign banks and no more
than 25% of the total value of the Fund's assets at the time of purchase may
be invested in certificates of deposit and bankers' acceptances issued by
domestic branches of foreign banks and foreign branches of domestic banks;
(c) each utility service (such as gas, gas transmission, electric and
telephone service) will be considered a single industry for purposes of this
policy; and (d) 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 their parents.
3. Borrow money except from banks for temporary purposes and in amounts not in
excess of 10% of the value of the Fund's 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. (This borrowing provision is not for investment
leverage, but solely to facilitate management of the Fund's portfolio by
enabling the Fund to meet redemption requests when the liquidation of
portfolio securities is deemed to be disadvantageous or inconvenient. The
Fund will not purchase any securities while borrowings are outstanding.
Interest paid on borrowed funds will reduce the net investment income of the
Fund.)
4. Invest more than 10% of the value of its total assets in securities with
legal or contractual restrictions on resale (including repurchase
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agreements with terms greater than seven days).
The California Tax-Exempt Money Market Fund may not:
1. Under normal market conditions invest less than 80% of its net assets in
California Municipal Securities.
2. Purchase the securities of any issuer if as a result 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 or instrumentalities.
3. Borrow money or issue senior securities, except that the Fund may borrow from
banks or enter into a reverse repurchase agreement to meet redemptions or for
other temporary purposes in amounts up to 10% of its 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 its total assets at the time of such
borrowing.
INVESTMENT DECISIONS
Investment decisions for each Fund are made independently from those for other
investment companies and accounts managed by Bank of America and its affiliated
entities. Such other investment companies and accounts may also invest in the
same securities as a Fund. When a purchase or sale of the same security is made
at substantially the same time on behalf of a Fund and another investment
company or account, available investments or opportunities for sales will be
allocated in a manner which Bank of America believes to be equitable. In some
instances, this investment procedure may adversely affect the price paid or
received by a Fund or the size of the position obtained or sold by a Fund. In
addition, in allocating purchase and sale orders for portfolio securities
(involving the payment of brokerage commissions or dealer concessions), Bank of
America may take into account the sale of shares of a Fund by broker-dealers and
other financial institutions (including affiliates of Bank of America and the
Funds' distributor), provided Bank of America believes that the quality of the
transaction and the amount of the commission are not less favorable than what
they would be with any other unaffiliated qualified firm.
MANAGEMENT OF THE FUNDS
BOARD OF DIRECTORS. The business of the Company is managed under the direction
of its Board of Directors. Information about the Directors and officers of the
Company is included in the Statement of Additional Information.
INVESTMENT ADVISER. Bank of America National Trust and Savings Association
("Bank of America") serves as investment adviser to each Fund. Bank of America,
which has principal offices located at 555 California Street, San Francisco,
California 94104, is a national banking association formed in 1904 which
provides commercial banking and trust business through an extensive system of
branches across the western United States. Bank of America's principal banking
affiliates operate branches in ten U.S. states as well as corporate banking and
business credit offices in major U.S. cities and branches, corporate offices and
representative offices in 37 countries. Bank of America is the successor by
merger to Security Pacific National Bank ("Security Pacific"), which previously
served as investment adviser to the Company since it commenced operations in
1984. Bank of America and its affiliates have over $50 billion under management,
including over $10 billion in mutual funds. Bank of America is a subsidiary of
BankAmerica Corporation, a registered bank holding company.
As investment adviser Bank of America manages the Funds' investments and is
responsible for all
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purchases and sales of the Funds' portfolio securities. For its investment
advisory services Bank of America is entitled to receive a fee accrued daily and
payable monthly at the following annual rates: .10% of the first $3 billion of
each Fund's net assets, plus .09% of the next $2 billion of each Fund's average
daily net assets, plus .08% of each Fund's net assets over $5 billion. For the
fiscal year ended February 28, 1995, the Tax-Exempt Money Fund and the
California Tax-Exempt Money Market Fund paid Bank of America advisory fees at
the effective annual rates of .10% of their respective average net assets.
In addition, Bank of America is also entitled to fees under the Company's
Shareholder Services Plan described below and may receive fees charged directly
to its customers' accounts in connection with investments in Fund shares.
ADMINISTRATOR. Concord Holding Corporation (the "Administrator" ) serves as the
Company's administrator and assists generally in supervising the Funds'
operations. The Administrator is a wholly-owned subsidiary of The BISYS Group,
Inc. Its offices are located at 125 West 55th Street, New York, New York 10019.
Under its basic administrative services agreement for the Funds, the
Administrator has agreed to provide facilities, equipment and personnel to carry
out administrative services that are for the benefit of all series in the Funds,
including coordination of reports to shareholders and the Securities and
Exchange Commission; calculation of the net asset value of the Funds' shares and
dividends and capital gains distributions to shareholders; payment of the costs
of maintaining the Funds' offices; preparation of tax returns; provision of
internal legal and accounting compliance services; maintenance (or oversight of
the maintenance by others approved by the Board of Directors) of the Funds'
books and records; and the provision of various services for shareholders who
have made a minimum investment of at least $500,000 including the provision of a
facility to receive purchase and redemption orders for the accounts of such
shareholders.
For its administrative services the Administrator is entitled to receive an
administration fee computed daily and payable monthly at the following annual
rates: .10% of the first $7 billion of each Fund's average daily net assets,
plus .09% of the next $3 billion of each Fund's average daily net assets, plus
.08% of each Fund's average daily net assets over $10 billion. For the fiscal
year ended February 28, 1995, the Tax-Exempt Money Fund and California
Tax-Exempt Money Market Fund paid the Administrator administration fees at the
effective annual rates of .10% of their respective average daily net assets.
Pursuant to the authority granted in its agreement with the Company, the
Administrator has entered into an agreement with The Bank of New York under
which the bank performs certain of the services listed above--e.g. calculating
the net asset value of Fund shares and dividends to shareholders and maintaining
the Funds' books and records. The Funds bear all fees and expenses charged by
The Bank of New York for these services.
DISTRIBUTOR. Concord Financial Group, Inc. (the "Distributor") is the principal
underwriter and distributor of shares of the Funds. The Distributor is a
wholly-owned subsidiary of the Administrator organized to distribute shares of
mutual funds to institutional and retail investors. Its offices are located at
125 West 55th Street, New York, New York 10019.
The Distributor makes a continuous offering of the Funds' shares and bears the
costs and expenses of printing and distributing to selected dealers and
prospective investors copies of any prospectuses, statements of additional
information and annual and interim reports of the Funds (after such items have
been prepared and set in type by the Funds) that are used in connection with the
offering of shares, and the costs and expenses of preparing, printing and
distributing any other literature used by the Distributor or furnished by it for
use by selected dealers in connection with the offering of the Funds' shares for
sale to the public.
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CUSTODIAN AND TRANSFER AGENT. The Bank of New York, located at 90 Washington
Street, New York, New York 10286, serves as the Fund's custodian. Concord
Financial Services, Inc., a wholly-owned subsidiary of the Administrator,
located at First and Market Building, 100 First Avenue, Suite 300, Pittsburgh,
Pennsylvania 15222, serves as transfer agent and dividend disbursing agent for
Horizon Shares of the Tax-Exempt Money Fund. DST Systems, Inc. ("DST"), 811
Main, Kansas City, Missouri 64105-2005 serves as the Funds' transfer agent and
dividend disbursing agent for their Horizon Service Shares. Concord Financial
Services, Inc., also provides sub-transfer agency services to certain Horizon
Service Share accounts. DST Systems, Inc. and Concord Financial Services, Inc.
are collectively referred to as the "Transfer Agents." The Company has also
entered into a Cash Management and Related Services Agreement with The Bank of
New York pursuant to which The Bank of New York receives and disburses funds in
connection with the purchase and redemption of, and the payment of dividends and
other distributions with respect to, the Funds.
FEE WAIVERS. Except as noted in this Prospectus and the Statement of Additional
Information, the Funds' service contractors bear all expenses in connection with
the performance of their services and the Funds bear the expenses incurred in
their operations. From time to time during the course of the Funds' fiscal year,
the Administrator and/or Bank of America may voluntarily not receive payment of
fees and/or assume certain expenses of a Fund, while retaining the ability to be
reimbursed by that Fund for such amounts prior to the end of the fiscal year
and, subject to the expense limitations of certain states, to stop such fee
waivers and expense reimbursement at any time. This will have the effect of
increasing yield to investors at the time such fees are not received or amounts
are assumed and decreasing yield when such fees or amounts are reimbursed.
PURCHASE AND REDEMPTION OF SHARES
PURCHASE PROCEDURES. Fund shares are sold at the net asset value per share next
determined after receipt of a purchase order by the Transfer Agents. Purchase
orders placed directly with the Transfer Agents without the assistance of a
broker-dealer or other person are without charge. Broker-dealers (other than the
Fund's distributor) and others who process purchase orders on behalf of
customers may charge a fee for their services.
Purchase orders for shares are accepted by the Funds only on a day on which both
the Fund's custodian and the New York Stock Exchange (the "Exchange") are open
for business (a "Business Day"), and must be transmitted to the Transfer Agents
by telephone c/o the Distributor (800-426-3863) or terminal access. An
investment in Horizon Shares and Horizon Service Shares of the Fund
automatically entitles the investor to purchase Fund shares, subject to the
minimum described below, without charge, by telephone unless they indicate in a
written notice to the Transfer Agents that they do not wish to use this
telephone privilege.
Purchase orders for the Funds that are received by the Transfer Agents before
10:30 a.m. Eastern time (with respect to the California Tax-Exempt Money Market
Fund), or 12:00 noon Eastern time (with respect to the Tax-Exempt Money Fund) on
a Business Day will be executed at such time on that day if payment is received
by 4:00 p.m. Eastern time on such Business Day. Orders received after 10:30 a.m.
Eastern time (with respect to the California Tax-Exempt Money Market Fund), or
12:00 noon Eastern time (with respect to the Tax-Exempt Money Fund) on a
Business Day, and orders for which payment has not been received by 4:00 p.m.
Eastern time, will not be accepted. A Fund may in its discretion reject any
order for shares. Payment for orders which are not received or paid for in a
timely manner or are not accepted
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by a Fund will be returned after prompt notification to the sending institution.
Payment for shares may be made only in Federal funds or other funds immediately
available to the Transfer Agents. The minimum initial investment for Horizon
Shares and Horizon Service Shares in a Fund is $500,000 (although broker-dealers
and other institutional investors may set a higher minimum for their customers)
and there is no minimum subsequent investment. The Funds reserve the right to
suspend the sale of shares to the public at any time, in response to conditions
in the securities markets or otherwise.
Federal regulations require that each investor provide a certified Taxpayer
Identification Number upon opening or reopening an account.
REDEMPTION PROCEDURES. Redemption orders for Horizon Shares and Horizon Service
Shares must be transmitted to the Transfer Agents by telephone c/o the
Distributor or terminal access in the manner described above under "Purchase
Procedures." Shares for which certificates have been issued may not be redeemed
unless the certificates have been submitted to the Transfer Agents and endorsed
for transfer. While each Fund seeks to maintain its net asset value per share at
$1.00 there can be no assurance that it will be able to do so, and the proceeds
paid upon redemption may be more or less than the amount invested depending upon
a share's net asset value at the time of redemption.
Redemption orders submitted directly to the Transfer Agents without the
assistance of a broker-dealer or other person, and orders submitted by the
Distributor for its own brokerage customers, are processed without charge.
Broker-dealers (other than the Distributor) and others who process redemption
orders on behalf of their customers may charge a fee for their services.
Redemption orders are effected at the net asset value per share next determined
after receipt of the order by the Transfer Agents. Payment for redeemed shares
for which a redemption order is received by the Transfer Agents before Noon
Eastern time on a Business Day is normally made in Federal funds wired to the
redeeming shareholder on the same Business Day. Payment for redeemed shares for
which a redemption order is received after Noon Eastern time on a Business Day
is normally made in Federal funds wired to the redeeming shareholder on the next
Business Day following redemption. In order to allow Bank of America to most
effectively manage the Funds' portfolios, investors are urged to initiate
redemptions of shares as early in the day as possible and to notify the Transfer
Agents at least one day in advance of redemptions in excess of $5 million. Each
Fund reserves the right to wire redemption proceeds up to seven days after
receiving the redemption order if, in the judgment of the investment adviser, an
earlier payment could adversely affect the Funds. In making redemption requests
the names of the registered shareholders and their account numbers must be
supplied. An investment in Horizon Shares and Horizon Service Shares of the Fund
automatically entitles the investor to redeem shares, without charge, by
telephone unless the investor indicates through a written notice to the Transfer
Agents that they do not wish to use this telephone privilege. Neither the Fund,
the Distributor nor the Transfer Agents will be responsible for any loss or
expense for acting upon any telephone instructions that are reasonably believed
to be genuine. In attempting to confirm that telephone instructions are genuine,
the Company will use such procedures as are considered reasonable.
A Fund may suspend the right of redemption or postpone the date of payment upon
redemption (as well as suspend or postpone the recordation of the transfer of
its shares) for such periods as are permitted under the Investment Company Act
of 1940. Each Fund reserves the right to redeem shares in any account at their
net asset value if the value of the account is less than $500,000 as a result of
redemptions. The shareholder having the account will first be notified in
writing that its account has a value of less than $500,000 and will be allowed
60 days to make additional investments to bring the value of its
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account to $500,000 before the redemption is processed by a Fund. In addition, a
Fund may redeem shares involuntarily under certain special circumstances
described in the Statement of Additional Information under "Purchase and
Redemption of Shares."
NET ASSET VALUE. The net asset value per share of each Fund is determined on
each Business Day as of Noon Eastern time. In computing net asset value, each
Fund uses the amortized cost method of valuation as described in the Statement
of Additional Information under "Purchase and Redemption of Shares." The net
asset value per share for each Fund for purposes of pricing purchase and
redemption orders is determined independently.
DIVIDENDS, DISTRIBUTIONS AND TAXES
DIVIDENDS AND DISTRIBUTIONS. The shareholders of a Fund are entitled to
dividends and distributions arising from the net investment income and net
realized gains, if any, earned on investments held by the Fund involved.
Generally, each Fund's net income is declared daily as a dividend. Shares begin
accruing dividends on the day the purchase order for the shares is executed and
continue to accrue dividends through and including the day before the redemption
order for the shares is executed. Dividends are paid within five business days
after the end of each month. Although the Funds do not expect to realize net
long-term capital gains, any such capital gains as may be realized will be
distributed no more than twice a year after reduction for any available capital
loss carry forward.
Dividends are paid in the form of additional full and fractional shares of the
same series as the shares on which the dividends are declared at the net asset
value of such shares on the payment date, unless the shareholder elects to
receive dividends in cash. Reinvestment dividends receive the same tax treatment
as dividends paid in cash. Such election or any revocation thereof must be made
in writing to Pacific Horizon Funds, Inc.--[specify the name of the Fund], First
and Market Building, 100 First Avenue, Suite 300, Pittsburgh, Pennsylvania
15222, and will become effective with respect to dividends paid after its
receipt by the dividend disbursing agent.
TAXES. Management of the Company believes that each Fund qualified separately
for its last taxable year as a "regulated investment company" under the Internal
Revenue Code of 1986, as amended (the "Code") and it is intended that each Fund
will continue to qualify as a regulated investment company as long as such
qualification is in the best interest of its shareholders. Such qualification
generally relieves a Fund of liability for Federal income taxes, to the extent
its earnings are distributed in accordance with the Code. The policy of each
Fund is to pay to shareholders at least 90%, of its exempt-interest income net
of certain deductions, for each taxable year. Dividends derived from interest on
Municipal Securities (known as exempt-interest dividends) and paid to
shareholders typically will not be subject to regular federal income tax.
With respect to the California Tax-Exempt Money Market Fund, if, at the close of
each quarter of its taxable year, at least 50% of the value of the Fund's total
assets consists of California Exempt Securities and if the Fund qualifies as a
regulated investment company under the Code, then the Fund will be qualified to
pay dividends exempt from California state personal income tax to its
shareholders. If the Fund so qualifies, dividends derived from interest
attributable to California Exempt Securities will be exempt from California
state personal income tax. (Such treatment may not apply, however, to investors
who are "substantial users" or "related persons" with respect to facilities
financed by portfolio securities held by the California Tax-Exempt Money Market
Fund.) Any dividends paid to shareholders subject to California state franchise
tax or California state corporate income tax may be taxed as ordinary dividends
to such shareholders notwithstanding that all or a portion
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of such dividends are exempt from California state personal income tax.
Except as noted with respect to the California state personal income tax,
distributions of net investment income 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. Moreover, to the
extent, if any, that dividends paid to shareholders are derived from taxable
interest or from capital gains, such dividends will be subject to federal income
tax and California state personal income tax, whether or not such dividends are
reinvested.
The portion of dividends (if any) attributable to interest on certain private
activity bonds issued after August 7, 1986 must be included by shareholders as
an item of tax preference for purposes of determining liability (if any) for the
26% to 28% federal alternative minimum tax applicable to individuals and the 20%
federal alternative minimum tax and the environmental tax applicable to
corporations. Corporate shareholders must also take all exempt-interest
dividends into account in determining certain adjustments for federal
alternative minimum and environmental tax purposes. The environmental tax
applicable to corporations is imposed at the rate of .12% on the excess of the
corporation's modified federal alternative minimum taxable income over
$2,000,000. Shareholders receiving Social Security benefits should note that all
exempt-interest dividends will be taken into account in determining the tax
liability of such benefits.
Dividends declared in December of any year payable to shareholders of record on
a specified date in December will be deemed for federal tax purposes to have
been paid by a Fund and received by its shareholders on December 31, if such
dividends are paid during January of the following year.
OTHER STATE AND LOCAL TAXES. Investors are advised to consult their tax
advisers concerning the application of state and local taxes generally, which
may have different consequences from those of the Federal income tax and, with
respect to the California Tax-Exempt Money Market Fund, the California state
personal income tax described above. Exempt-interest dividends generally will be
exempt from state and local taxes as well. However, except as noted with respect
to California state personal income tax, dividends paid by the Funds may be
taxable to investors under state or local law as dividend income even though all
or a portion of such dividends may be derived from interest on obligations that,
if realized directly, would be exempt from such taxes.
GENERAL. Shareholders will be advised at least annually as to the federal
income tax and, with respect to the California Tax-Exempt Money Market Fund, the
California state personal income tax consequences of dividends and distributions
made each year. The foregoing is only a brief summary of some of the important
tax considerations generally affecting the respective Funds and their
shareholders. Additional tax information of relevance to particular investors,
including investors who may be "substantial users" or "related persons" with
respect to facilities financed by Municipal Securities, is contained in the
Statement of Additional Information. Potential investors in the Funds should
consult their tax advisers with specific reference to their own tax situation.
DESCRIPTION OF SHARES
The Company was organized on October 27, 1982 as a Maryland corporation, and is
registered under the Investment Company Act of 1940 as an open-end management
investment company. The Predecessor Tax-Exempt Fund originally commenced
operations on July 10, 1987 as a separate portfolio of The Horizon Funds. On
January 10, 1990, the Predecessor Tax-Exempt Fund was reorganized as the
Tax-Exempt Money
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Fund of the Company. The California Tax-Exempt Money Market Fund commenced
operations on December 6, 1989 as a portfolio of the Company with a single
series of shares, Pacific Horizon Shares. On March 1, 1993 the California Tax-
Exempt Money Market Fund began offering Horizon Service Shares.
The Company's charter authorizes the Board of Directors to issue up to two
hundred billion full and fractional shares of capital stock, and to classify and
reclassify any authorized and unissued shares into one or more classes of
shares. The Board of Directors may similarly classify or reclassify any class of
shares into one or more series. Pursuant to such authority, the Board of
Directors has authorized the issuance of three billion Horizon Shares, three
billion Horizon Service Shares and one billion, 500 million Pacific Horizon
Shares representing interests in the Tax-Exempt Money Fund and one billion
Horizon Service Shares and one billion Pacific Horizon Shares representing
interests in the California Tax-Exempt Money Market Fund. Pacific Horizon Shares
of the Funds are described in a separate Prospectus available from the
Distributor at the telephone number on the cover of this Prospectus. The Board
of Directors has also authorized the issuance of additional classes and series
of shares representing interests in other investment portfolios of the Company,
which are likewise described in separate Prospectuses available from the
Distributor. This Prospectus relates primarily to the Horizon Shares and Horizon
Service Shares of the Tax-Exempt Money Fund and the Horizon Service Shares of
the California Tax-Exempt Money Market Fund and describes only the investment
objectives and policies, operations, contracts and other matters relating to
such shares.
Each Horizon Share, Horizon Service Share and Pacific Horizon Share in a Fund
has a par value of $.001, and, except as noted below, is entitled to participate
equally in the dividends and distributions declared by the Board of Directors
with respect to such Fund and in the net distributable assets of such Fund on
liquidation. Holders of a Fund's Horizon Service Shares bear the fees described
in the following section that are paid to Shareholder Organizations by the Fund
under the Company's Shareholder Services Plan. Similarly, holders of a Fund's
Pacific Horizon Shares bear the fees described in the Prospectus for such shares
that are paid to Bank of America and the Administrator by the Fund under the
Company's Special Management Services Agreement for Pacific Horizon Shares. The
fees paid under the Special Management Services Agreement are for services
related to investor programs and facilities that are offered in connection with
Pacific Horizon Shares. Holders of Horizon Shares are not subject to fees such
as those paid under the Shareholder Services Plan or the Special Management
Services Agreement. As a result, at any given time, the net yield on a Fund's
Horizon Service Shares is expected to be approximately .07% higher than the
yield on the Fund's Pacific Horizon Shares and the net yield on the Tax-Exempt
Money Fund's Horizon Shares is expected to be approximately .32% higher than the
yield on its Pacific Horizon Shares. Standardized yield quotations will be
computed separately for each series of shares.
Shareholders are entitled to one vote for each full share held and fractional
votes for fractional shares held, and will vote in the aggregate and not by
class or series except as otherwise required by law or when class voting is
permitted by the Board of Directors. It is contemplated that all shareholders of
a Fund will vote together as a single class on matters relating to the Fund's
investment advisory agreement and on any change in its fundamental investment
limitations, and that only holders of Horizon Service Shares of a Fund will be
entitled to vote on matters submitted to a vote of shareholders pertaining to
the Fund's arrangements with Shareholder Organizations. Shares have no
preemptive rights and only such conversion and exchange rights as the Board may
grant at its discretion. When issued for payment as described in this
Prospectus, shares will be fully paid and non-assessable. Certificates for
shares will not be issued unless
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expressly requested in writing and will not be issued for fractional shares.
The Company does not presently intend to hold annual meetings of shareholders
for the election of directors and other business unless and until such time as
less than a majority of the directors holding office have been elected by the
shareholders of the Company, at which time the directors then in office will
call a shareholders' meeting for the election of directors. Under certain
circumstances, however, shareholders have the right to call a meeting of
shareholders to consider the removal of one or more directors and such meetings
will be called when requested by the holders of record of 10% or more of the
Company's outstanding shares of common stock. To the extent required by law and
the Company's undertaking with the Securities and Exchange Commission, the
Company will assist in shareholder communications in such matters. Shares have
cumulative voting rights to the extent that may be required by applicable law.
SHAREHOLDER SERVICES PLAN. The Company has adopted the Plan pursuant to which
Horizon Service Shares are sold to Shareholder Organizations that enter into
Shareholder Service Agreements with the Company pursuant to the Plan. Such
Shareholder Organizations may include Bank of America, the Administrator and
their affiliates. The Shareholder Service Agreements require the Shareholder
Organizations to provide support services to their customers ("Customers") who
are beneficial owners of Horizon Service Shares in return for payment by the
respective Fund of up to .25% (on an annualized basis) of the average daily net
asset value of the Horizon Service Shares beneficially owned by Customers of the
Shareholder Organizations. Holders of a Fund's Horizon Service Shares will bear
all fees paid to Shareholder Organizations for their services with respect to
such shares. Such fees are not paid to Shareholder Organizations with respect to
a Fund's Horizon Shares or Pacific Horizon Shares. During the fiscal year ended
February 28, 1995, the Tax-Exempt Money Fund and the California Tax-Exempt Money
Market Fund made payments under the Plan at the effective annual rates of .25%
of each such Fund's average daily net asset value.
The services provided by Shareholder Organizations may include the following:
aggregating and processing purchase and redemption requests from Customers for
Horizon Service Shares and placing net purchase and redemption orders with the
Distributor; providing Customers with a service that invests the assets of their
accounts in Horizon Service Shares pursuant to specific or preauthorized
instructions; processing dividend payments from a Fund on behalf of Customers;
providing information periodically to Customers regarding their position in
Horizon Service Shares; arranging for bank wires; responding to Customer
inquiries regarding services performed by the Shareholder Organizations;
providing sub-accounting with respect to Horizon Service Shares beneficially
owned by Customers or the information necessary for sub-accounting; forwarding
shareholder communications from a Fund to Customers; and other similar services
if requested by a Fund.
Each Fund will accrue payments made pursuant to the Plan daily. The Funds will
receive an undertaking from each Shareholder Organization waiving a portion of
any payment such Organization is entitled to receive pursuant to the Plan to the
extent necessary to assure that the payments made pursuant to the Plan which are
required to be accrued to the respective Fund's Horizon Service Shares on any
day do not exceed the income to be accrued to such shares on that day.
The Company understands that Shareholder Organizations may charge fees to their
Customers who are the beneficial owners of Horizon Service Shares in connection
with their Customer accounts. These fees would be in addition to any amounts
which may be received by a Shareholder Organization under a Shareholder Service
Agreement. Under the terms of the Shareholder Service Agreements, Shareholder
Organizations are required to disclose the compensation payable to them by the
Company and any other compensation payable by their Customers in
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connection with the investment of their assets in the Funds. Customers of
Shareholder Organizations should read this Prospectus in light of the terms
governing their accounts with their Shareholder Organizations.
Conflict-of-interest restrictions may apply to an institution's receipt of
compensation paid by a Fund in connection with the investment of fiduciary funds
in Horizon Service Shares. Institutions, including banks regulated by the
Comptroller of the Currency, the Federal Reserve Board or the Federal Deposit
Insurance Corporation, and investment advisers and other money managers subject
to the jurisdiction of the Securities and Exchange Commission, the Department of
Labor or state securities commissions, are urged to consult their legal advisers
before investing fiduciary funds in Horizon Service Shares.
BANKS MAY ACT AS SHAREHOLDER ORGANIZATIONS. The Glass-Steagall Act and other
applicable laws, among other things, prohibit banks from engaging in the
business of underwriting securities. If a bank were prohibited from acting as a
Shareholder Organization, its shareholder clients would be permitted by the
Company to remain shareholders of the Funds and alternative means for continuing
the servicing of such shareholders would be sought. In such event, changes in
the operation of the Funds might occur and a shareholder serviced by such bank
might no longer be able to avail itself of any automatic investment or other
services then being provided by the bank. It is not expected that shareholders
would suffer any adverse financial consequences as a result of any of these
occurrences.
The Company will obtain a representation from Shareholder Organizations (as well
as from Bank of America and the Administrator) that they are or will be licensed
as dealers as required by applicable law or will not engage in activities which
would require them to be so licensed.
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PACIFIC HORIZON MUTUAL FUNDS
COPITXM95P
<PAGE> 309
HORIZON SHARES
AND
HORIZON SERVICE SHARES
OF THE
TAX-EXEMPT MONEY FUND
HORIZON SERVICE SHARES
OF THE
CALIFORNIA TAX-EXEMPT
MONEY MARKET FUND
PROSPECTUS
July 1, 1995
NOT FDIC INSURED
<PAGE> 310
PACIFIC HORIZON FUNDS, INC.
(THE "COMPANY")
STATEMENT OF ADDITIONAL INFORMATION
STATEMENT OF ADDITIONAL INFORMATION
FOR
AGGRESSIVE GROWTH FUND
CALIFORNIA TAX-EXEMPT BOND FUND
U.S. GOVERNMENT SECURITIES FUND
CAPITAL INCOME FUND
JULY 1, 1995
(AS REVISED DECEMBER 8, 1995)
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
The Company............................................................... 2
Investment Objectives and Policies........................................ 2
Additional Purchase and Redemption Information............................ 51
Additional Information Concerning Taxes................................... 60
Management................................................................ 66
General Information....................................................... 87
Appendix A................................................................ A-1
Appendix B................................................................ B-1
</TABLE>
This Statement of Additional Information applies to the Pacific Horizon
Aggressive Growth Fund ("Aggressive Growth Fund"), Pacific Horizon California
Tax-Exempt Bond Fund ("California Tax-Exempt Bond Fund"), Pacific Horizon U.S.
Government Securities Fund ("U.S. Government Securities Fund") and Pacific
Horizon Capital Income Fund ("Capital Income Fund"), of the Company. This
Statement of Additional Information is meant to be read in conjunction with the
Prospectuses dated July 1, 1995, as they may from time to time be revised
(individually, a "Prospectus" and collectively, the "Prospectuses"), which
describe the particular Fund of the Company in which the investor is interested.
This Statement of Additional Information is incorporated by reference in its
entirety into each such Prospectus. Because this Statement of Additional
Information is not itself a prospectus, no investment in shares of any Fund
should be made solely upon the information contained herein. Copies of the
Prospectuses relating to the Company's Funds to which this Statement of
Additional Information relates may be obtained by calling Concord Financial
Group, Inc. at 800-332-3863. Capitalized terms used but not defined herein have
the same meaning as in the Prospectuses.
<PAGE> 311
THE COMPANY
The Company was organized on October 27, 1982 as a Maryland
corporation. The Aggressive Growth Fund commenced operations on March 30, 1984.
The California Tax-Exempt Bond Fund originally commenced operations on March 30,
1984 as a separate portfolio of Pacific Horizon Tax-Exempt Funds, Inc., which
subsequently changed its name to Pacific Horizon California Tax-Exempt Bond
Portfolio, Inc. (the "Predecessor California Tax-Exempt Bond Fund"). The Capital
Income Fund originally commenced operations on September 25, 1987 as The Total
Return Fund (the "Predecessor Capital Income Fund"), a separate portfolio of a
Massachusetts business trust named The Horizon Capital Funds. The U.S.
Government Securities Fund commenced operations on January 7, 1988, also as a
separate portfolio of The Horizon Capital Funds, under the name GNMA Extra Fund
(the "Predecessor GNMA Fund" or the "Predecessor U.S. Government Securities
Fund"). On January 1, 1989 the Predecessor Capital Income Fund and the
Predecessor GNMA Fund changed their names to the Pacific Horizon Convertible
Securities Fund and the Pacific Horizon GNMA Extra Fund. In January 1990 these
three Predecessor Funds were reorganized as portfolios of the Company. On June
28, 1991, the GNMA Extra Fund changed its name to the U.S. Government Securities
Fund and on September 16, 1991 the Convertible Securities Fund changed its name
to the Capital Income Fund.
The Company also offers other investment portfolios which are described
in separate Prospectuses and Statements of Additional Information. For
information concerning these other portfolios contact the Distributor at the
telephone number stated on the cover page of this Statement of Additional
Information.
INVESTMENT OBJECTIVES AND POLICIES
The Prospectus for each Fund describes the investment objective of the
Fund to which it applies. The following information supplements and should be
read in conjunction with the descriptions of the investment objective and
policies in the Prospectus for each Fund.
PORTFOLIO TRANSACTIONS
The portfolio turnover rate described in each Prospectus is calculated
by dividing the lesser of purchases or sales of portfolio securities for the
year by the monthly average value of the portfolio securities. The calculation
excludes all securities whose maturities at the time of acquisition were one
year or less. Portfolio turnover may vary greatly from year to year as well as
within a particular year, and may also be affected by cash requirements for
redemptions of shares and by requirements which enable the Company to receive
certain favorable tax treatment. Portfolio turnover will not be a
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limiting factor in making portfolio decisions. The portfolio turnover rate for
the Aggressive Growth Fund, U.S. Government Securities Fund and Capital Income
Fund may be particularly high. For the fiscal years ended February 28, 1995 and
1994, the portfolio turnover rates for the Aggressive Growth Fund were 92% and
43%, respectively; the portfolio turnover rates for the U.S. Government
Securities Fund were 189% and 255%, respectively; the portfolio turnover rates
for the California Tax-Exempt Bond Fund were 20% and 15%, respectively; and the
portfolio turnover rates for the Capital Income Fund were 94% and 103%,
respectively.
Subject to the general control of the Company's Board of Directors,
Bank of America National Trust and Savings Association ("Bank of America" or the
"investment adviser") is responsible for, makes decisions with respect to and
places orders for all purchases and sales of portfolio securities for each Fund.
Transactions on stock exchanges involve the payment of negotiated
brokerage commissions. There is generally no stated commission in the case of
securities traded in the over-the-counter market, but the price includes an
undisclosed commission or mark-up. The cost of securities purchased from
underwriters includes an underwriting commission or concession, and the prices
at which securities are purchased from and sold to dealers include a dealer's
mark-up or mark-down. Purchases and sales of portfolio securities for the U.S.
Government Securities Fund and California Tax-Exempt Bond Fund are normally
principal transactions without brokerage commissions. During the fiscal years
ended February 28, 1995, 1994 and 1993, the Aggressive Growth Fund paid
$631,202, $267,276 and $185,309, respectively, in brokerage commissions; and the
Capital Income Fund paid $207,310, $110,588 and $15,477, respectively, in
brokerage commissions. During these same three fiscal years, the California
Tax-Exempt Bond Fund and the U.S. Government Securities Fund paid no brokerage
commissions.
In executing portfolio transactions and selecting brokers or dealers,
it is the Company's policy to seek the best overall terms available. The
Investment Advisory Agreements between the Company and Bank of America provide
that, in assessing the best overall terms available for any transaction, Bank of
America shall consider factors it deems relevant, including the breadth of the
market in the security, the price of the security, the financial condition and
execution capability of the broker or dealer, and the reasonableness of the
commission, if any, for the specific transaction and on a continuing basis. In
addition, the Investment Advisory Agreements authorize Bank of America, subject
to the approval of the Board of the Company, to cause the Company to pay a
broker-dealer which furnishes brokerage and research services a higher
commission than that which might be charged by another broker-dealer for
effecting the
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same transaction, provided that such commission is deemed reasonable in terms of
either that particular transaction or the overall responsibilities of Bank of
America to the particular Fund or Company. Brokerage and research services may
include: (1) advice as to the value of securities, the advisability of investing
in, purchasing or selling securities and the availability of securities or
purchasers or sellers of securities; and (2) analyses and reports concerning
industries, securities, economic factors and trends, portfolio strategy and the
performance of accounts.
It is possible that certain of the brokerage and research services
received will primarily benefit one or more other investment companies or other
accounts for which investment discretion is exercised. Conversely, the Company
or any given Fund may be the primary beneficiary of the brokerage or research
services received as a result of portfolio transactions effected for such other
accounts or investment companies.
Brokerage and research services so received are in addition to and not
in lieu of services required to be performed by Bank of America and do not
reduce the advisory fee payable to Bank of America. Such services may be useful
to Bank of America in serving both the Company and other clients and,
conversely, services obtained by the placement of business of other clients may
be useful to Bank of America in carrying out its obligations to the Company. In
connection with its investment management services with respect to the Funds,
Bank of America will not acquire certificates of deposit or other securities
issued by itself or its affiliates, and will give no preference to certificates
of deposit or other securities issued by Service Organizations. In addition,
portfolio securities in general will be purchased from and sold to affiliates of
the Company, Bank of America, the Distributor and their affiliates acting as
principal, underwriter, syndicate member, market-maker, dealer, broker or in any
other similar capacity, provided such purchase, sale or dealing is permitted
under the Investment Company Act of 1940 (the "1940 Act") and the rules
thereunder.
A Fund may participate, if and when practicable, in bidding for the
purchase of securities of the U.S. Government and its agencies and
instrumentalities directly from an issuer in order to take advantage of the
lower purchase price available to members of a bidding group. A Fund will engage
in this practice only when Bank of America, in its sole discretion subject to
guidelines adopted by the Board of the Company, believes such practice to be in
the interest of the Fund.
To the extent permitted by law, Bank of America may aggregate the
securities to be sold or purchased on behalf of the Funds with those to be sold
or purchased for other investment companies or common trust funds in order to
obtain best execution.
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The Company is required to identify any securities of its regular
brokers or dealers (as defined in Rule 10b-1 under the Investment Company Act of
1940) or their parents held by the Company as of the close of its most recent
fiscal year. As of February 28, 1995: (a) the Treasury Fund held the following
securities, Repurchase Agreement with Goldman, Sachs & Co. in the principal
amount of $95,000,000; Repurchase Agreement with Merrill Lynch Government
Securities, Inc. in the principal amount of $95,000,000; (b) the Prime Fund held
the following securities, Merrill Lynch & Co., Inc., commercial paper in the
principal amount of $100,000,000; Goldman, Sachs Group L.P., Daily Variable Rate
Master Note in the principal amount of $120,000,000; Morgan Stanley Group, Inc.,
Daily Variable Rate Master Note in the principal amount of $120,000,000; Bear
Stearns Co., Inc., Series B, Monthly Variable Rate Note in the principal amount
of $100,000,000; Repurchase Agreement with Goldman, Sachs & Co. in the principal
amount of $120,000,000; (c) the Government Fund held the following securities,
Repurchase Agreement with Goldman, Sachs & Co. in the principal amount of
$40,000,000; Repurchase Agreement with Merrill Lynch Government Securities, Inc.
in the principal amount of $40,000,000; and (d) the Prime Value Fund held the
following securities, Merrill Lynch & Co., Inc., commercial paper in the
principal amount of $7,000,000; Goldman, Sachs Group L.P., Daily Variable Rate
Master Note in the principal amount of $7,000,000; Repurchase Agreement with
Dean Witter Reynolds, Inc. in the principal amount of $8,000,000; Repurchase
Agreement with Goldman, Sachs & Co. in the principal amount of $8,000,000.
Merrill Lynch & Co., Inc., Goldman Sachs & Co., Bear Stearns Co., Inc.,
Morgan Stanley & Co. Incorporated, Shearson Lehman Brothers, Inc. Dean Witter
Reynolds, Inc. and Paine Webber are considered to be regular brokers and dealers
of the Company.
It is possible that unregistered securities purchased by a Fund in
reliance upon Rule 144A under the Securities Act of 1933 (the "1933 Act") could
have the effect of increasing the level of the Fund's illiquidity to the extent
that qualified institutional buyers become, for a period, uninterested in
purchasing these securities.
TYPES OF OBLIGATIONS, INVESTMENT RISKS, AND OTHER INVESTMENT INFORMATION
The following discussion supplements the description of such
investments in the Prospectuses.
Bank Certificates of Deposit, Bankers' Acceptances and Time Deposits.
Except for the U.S. Government Securities Fund, certificates of deposit,
bankers' acceptances and time deposits are eligible investments for each of the
Funds as described in the Funds' Prospectuses. Certificates of deposit are
negotiable
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certificates issued against funds deposited in a commercial bank for a definite
period of time and earning a specified return. Bankers' acceptances are
negotiable drafts or bills of exchange, normally drawn by an importer or
exporter to pay for specific merchandise, which are "accepted" by a bank,
meaning, in effect, that the bank unconditionally agrees to pay the face value
of the instrument on maturity. Certificates of deposit and bankers acceptances
will be dollar-denominated obligations of domestic or foreign banks or financial
institutions with total assets at the time of purchase in excess of $2.5 billion
(including assets of both domestic and foreign branches).
Instruments issued by foreign banks or financial institutions may be
subject to investment risks that are different in some respects than the risks
associated with instruments issued by those U.S. domestic issuers. Such risks
include future political and economic developments, the possible imposition of
withholding taxes by the particular country in which the issuer is located on
interest income payable on the securities, the possible seizure or
nationalization of foreign deposits, 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.
Domestic banks and foreign banks are subject to different governmental
regulations with respect to the amount and types of loans which may be made and
interest rates which may be charged. In addition, the profitability of the
banking industry is dependent largely upon the availability and cost of funds
for the purpose of financing lending operations under prevailing money market
conditions. General economic conditions as well as exposure to credit losses
arising from possible financial difficulties of borrowers play an important part
in the operations of the banking industry.
As a result of federal and state laws and regulations, domestic banks
are, among other things, required to maintain specified levels of reserves,
limited in the amount which they can loan to a single borrower, and subject to
other regulations designed to promote financial soundness. However, such laws
and regulations do not necessarily apply to foreign bank obligations.
In addition to purchasing certificates of deposit and bankers
acceptances, to the extent permitted under their respective investment
objectives and policies stated above and in their Prospectuses, each Fund
(except the U.S. Government Securities Fund) may make interest-bearing time or
other interest-bearing deposits in commercial or savings banks. Time deposits
are non-negotiable deposits maintained at a banking institution for a specified
period of time at a specified interest rate.
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Commercial Paper and Short-Term Notes. The investment policies of the
Funds permit investment in commercial paper and short-term notes. Commercial
paper consists of unsecured promissory notes issued by corporations. Except as
noted below with respect to variable and floating rate instruments, issues of
commercial paper and short-term notes will normally have maturities of less than
9 months and fixed rates of return, although such instruments may have
maturities of up to one year.
Commercial paper and short-term notes will consist of issues rated at
the time of purchase A-2 or higher by Standard & Poor's Ratings Group, Division
of McGraw Hill ("S&P"), Prime-2 or higher by Moody's Investors Service, Inc.
("Moody's"), or similarly rated by another nationally recognized statistical
rating organization ("NRSRO") in the case of purchases by the Aggressive Growth
Fund and California Tax-Exempt Bond Fund, and A-1 or better by S&P, Prime-1 by
Moody's or similarly rated by another NRSRO in the case of purchases by the
Capital Income Fund; or if unrated, will be determined by Bank of America to be
of comparable quality under procedures established by the Board of Directors.
The U.S. Government Securities Fund may only invest in commercial paper rated
A-1 or better by S&P, Prime-1 by Moody's or similarly rated by another NRSRO.
These rating symbols are described in Appendix A.
Other Investment Companies. The U.S. Government Securities Fund may
under certain circumstances invest a portion of its assets in certain money
market funds. The Aggressive Growth Fund may acquire shares of closed-end
investment companies, including companies that invest in foreign issuers, but
only in furtherance of its investment objective. The 1940 Act prohibits each
Fund from investing more than 5% of the value of its total assets in any one
investment company, or more than 10% of the value of its total assets in
investment companies as a group, and also restricts its investment in any
investment company to 3% of the voting securities of such investment company. In
addition, no more than 10% of the outstanding voting stock of any one investment
company may be owned in the aggregate by the Funds and any other investment
company advised by the investment adviser. Investment in other investment
companies will involve payment of the Fund's pro rata share of advisory and
administration fees charged by such fund, in addition to those paid by the Fund.
Repurchase Agreements. Each Fund is permitted to enter into repurchase
agreements with respect to its portfolio securities. Pursuant to such
agreements, a Fund acquires securities from financial institutions such as banks
and broker-dealers as are deemed to be creditworthy subject to the seller's
agreement to repurchase and the agreement of the Fund to resell such securities
at a mutually agreed upon date and price. Although securities subject to a
repurchase agreement may bear
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maturities exceeding ten years, the Funds intend to only enter into repurchase
agreements having maturities not exceeding 60 days. The Funds are not permitted
to enter into repurchase agreements with Bank of America or its affiliates, and
will give no preference to repurchase agreements with Service Organizations. The
repurchase price generally equals the price paid by a Fund plus interest
negotiated on the basis of current short-term rates (which may be more or less
than the rate on the underlying portfolio security). Securities subject to
repurchase agreements will be held by a custodian or sub-custodian of the
Company or in the Federal Reserve/Treasury Book-Entry System. The seller under a
repurchase agreement will be required to deliver instruments the value of which
is 102% of the repurchase price (excluding accrued interest), provided that
notwithstanding such requirement, the adviser shall require that the value of
the collateral, after transaction costs (including loss of interest) reasonably
expected to be incurred on a default, shall be equal to or greater than the
resale price (including interest) provided in the agreement. If the seller
defaulted on its repurchase obligation, a Fund would suffer a loss because of
adverse market action or to the extent that the proceeds from a sale of the
underlying securities were less than the repurchase price under the agreement.
Bankruptcy or insolvency of such a defaulting seller may cause the particular
Fund's rights with respect to such securities to be delayed or limited.
Repurchase agreements are considered to be loans by a Fund under the 1940 Act.
U.S. Government Obligations. Each Fund is permitted to make investments
in U.S. Government obligations. Such obligations include Treasury bills,
certificates of indebtedness, notes and bonds, and issues of such entities as
the Government National Mortgage Association, Export-Import Bank of the United
States, Tennessee Valley Authority, Resolution Funding Corporation, Farmers Home
Administration, Federal Home Loan Banks, Federal Intermediate Credit Banks,
Federal Farm Credit Banks, Federal Land Banks, Federal Housing Administration,
Federal National Mortgage Association, Federal Home Loan Mortgage Corporation,
and the Student Loan Marketing Association. Treasury bills have maturities of
one year or less, Treasury notes have maturities of one to ten years and
Treasury bonds generally have maturities of more than ten years. Some of these
obligations, such as those of the Government National Mortgage Association, are
supported by the full faith and credit of the U.S. Treasury; others, such as
those of the Export-Import Bank of the United States, are supported by the right
of the issuer to borrow from the Treasury; others, such as those of the Federal
National Mortgage Association, are supported by the discretionary authority of
the U.S. Government to purchase the agency's obligations; still others, such as
those of the Student Loan Marketing Association, are supported only by the
credit of the instrumentality. No assurance can be given that the U.S.
Government would provide financial support to U.S. Government
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sponsored instrumentalities if it is not obligated to do so by law.
Variable and Floating Rate Instruments. As described in their
Prospectuses, the Aggressive Growth Fund and the California Tax-Exempt Bond Fund
may acquire variable and floating rate instruments. The U.S. Government
Securities Fund may invest in variable rate GNMA certificates, which are backed
by pools of variable rate mortgages and also in GNMA REMICs. The actual yield on
these instruments varies not only as a result of variations in the lives of the
underlying mortgages, but also as a result of changes in prevailing interest
rates. Such instruments are frequently not rated by credit rating agencies.
However, in determining the creditworthiness of unrated variable and floating
rate instruments and their eligibility for purchase by a Fund, Bank of America
will consider the earning power, cash flow and other liquidity ratios of the
issuers of such instruments (which include financial, merchandising, bank
holding and other companies) and will continuously monitor their financial
condition. An active secondary market may not exist with respect to particular
variable or floating rate instruments purchased by a Fund. The absence of such
an active secondary market could make it difficult to dispose of a variable or
floating rate instrument in the event the issuer of the instrument defaulted on
its payment obligation or during periods that the Fund is not entitled to
exercise its demand rights, and the Fund could, for these or other reasons,
suffer a loss to the extent of the default. Investments in illiquid variable and
floating rate instruments (instruments which are not payable upon seven days'
notice and do not have active trading markets) are subject to a Fund's
fundamental 10% limitation on illiquid securities. Variable and floating rate
instruments may be secured by bank letters of credit.
Zero Coupon Securities. The California Tax-Exempt Bond Fund may also
invest in zero coupon securities which pay no cash income and are sold at
substantial discounts from their value at maturity. When held to maturity, their
entire income, which consists of accretion of discount, comes from the
difference between the purchase price and their value at maturity.
The discount varies, depending on the time remaining until maturity or
cash payment date, prevailing interests rates, liquidity of the security and the
perceived credit quality of the issuer. The discount, in the absence of
financial difficulties of the issuer, decreases as the final maturity or cash
payment date of the security approaches. The market prices of zero coupon and
delayed interest securities are generally more volatile and more likely to
respond to changes in interest rates than the market prices of securities having
similar maturities and credit quality that pay interest periodically. Current
federal income tax law requires that a holder of a zero coupon
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security report as income each year the portion of the original issue discount
on such security (other than tax-exempt original issue discount from a zero
coupon security) that accrues that year, even though the holder receives no cash
payments of interest during the year. Zero coupon securities are subject to
greater market value fluctuations from changing interest rates than debt
obligations of comparable maturities which make current distributions of
interest (cash).
Reverse Repurchase Agreements. As described in the Prospectuses, each
Fund is permitted to borrow funds for temporary purposes by entering into
reverse repurchase agreements with such financial institutions as banks and
broker-dealers in accordance with the investment limitations described therein.
Whenever a Fund enters into a reverse repurchase agreement, it will place in a
segregated account maintained with its custodian liquid assets such as cash,
U.S. Government securities or other liquid high grade debt securities having a
value equal to the repurchase price (including accrued interest) and Bank of
America will subsequently continuously monitor the account for maintenance of
such equivalent value. The Funds intend to enter into reverse repurchase
agreements to avoid otherwise having to sell securities during unfavorable
market conditions in order to meet redemptions. Reverse repurchase agreements
are considered to be borrowings by a Fund under the 1940 Act.
Options Trading. The Aggressive Growth Fund may under certain
circumstances purchase put and call options. Such options may relate to
particular securities or to various stock indices. In addition, the Aggressive
Growth Fund may acquire options relating to foreign currencies in order to hedge
against changes in exchange rates. The Capital Income Fund and U.S. Government
Securities Fund may each invest up to 5% of its total assets in put options on
portfolio securities, but will do so only to protect against a decline in the
market value of the underlying security.
Options trading is a highly specialized activity which entails greater
than ordinary investment risks. Regardless of how much the market price of the
underlying security, index or currency increases or decreases, the option
buyer's risk is limited to the amount of the original investment for the
purchase of the option. However, options may be more volatile than the
underlying instruments, and therefore, on a percentage basis, an investment in
options may be subject to greater fluctuation than an investment in the
underlying instruments themselves. A listed call option for a particular
security or amount of currency gives the purchaser of the option the right to
buy from a clearing corporation, and a writer has the obligation to sell to the
clearing corporation the underlying security or currency amount at the stated
exercise price at any time prior to the expiration of the option, regardless of
the market price of the security or
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currency. The premium paid to the writer is in consideration for undertaking the
obligations under the option contract. A listed put option gives the purchaser
the right to sell to a clearing corporation the underlying security or amount of
currency at the stated exercise price at any time prior to the expiration date
of the option, regardless of the market price of the security or currency. In
contrast to an option on a particular security, an option on a stock index
provides the holder with the right to make or receive a cash settlement upon
exercise of the option. The amount of this settlement will be equal to the
difference between the closing price of the index at the time of exercise and
the exercise price of the option expressed in dollars, times a specified
multiple. As stated in its Prospectus, the U.S. Government Securities Fund may
also engage in unlisted, over-the-counter options. Unlisted options are not
subject to the protection afforded purchasers of options listed by the Options
Clearing Corporation, which performs the obligations of its members who fail to
do so in connection with the purchase or sale of options. Furthermore, it is the
position of the staff of the Securities and Exchange Commission that
over-the-counter options are illiquid. To the extent that a Fund invests in
options that are illiquid (including over-the-counter options), such investment
will be subject to the Fund's fundamental limitations on illiquid securities.
A Fund will continue to receive interest or dividend income on the
securities underlying such puts until they are exercised by the Fund. Any losses
realized by a Fund in connection with its purchase of put options will be
limited to the premiums paid by the Fund for the options plus any transaction
costs. A gain or loss may be wholly or partially offset by a change in the value
of the underlying security which the Fund owns.
The Aggressive Growth, Capital Income, and U.S. Government Securities
Funds are permitted to write call options if they are "covered." In the case of
a call option on a security, the option is "covered" if a Fund owns the security
underlying the call or has an absolute and immediate right to acquire that
security without additional cash consideration (or, if additional cash
consideration is required, cash or cash equivalents in such amount as are held
in a segregated account by its custodian) upon conversion or exchange of other
securities held by it. For a call option on an index, the option is covered if a
Fund maintains with its custodian cash or cash equivalents equal to the contract
value. A call option is also covered if a Fund holds a call on the same security
or index as the call written where the exercise price of the call held is (i)
equal to or less than the exercise price of the call written, or (ii) greater
than the exercise price of the call written provided the difference is
maintained by the Fund in cash or cash equivalents in a segregated account with
its custodian.
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The principal reason for writing call options on a securities portfolio
is the attempt to realize, through the receipt of premiums, a greater current
return than would be realized on the securities alone. In return for the
premium, the covered option writer gives up the opportunity for profit from a
price increase in the underlying security above the exercise price so long as
his obligation as a writer continues, but retains the risk of loss should the
price of the security decline. Unlike one who owns securities not subject to an
option, the covered option writer has no control over when it may be required to
sell its securities, since it may be assigned an exercise notice at any time
prior to the expiration of its obligation as a writer.
If a Fund desires to sell a particular security from its portfolio on
which it has written an option, the Fund will seek to effect a closing purchase
transaction prior to, or concurrently with, the sale of the security. In order
to close out a covered call option position, a Fund will enter into a "closing
purchase transaction" - the purchase of a call option on a security or stock
index with the same exercise price and expiration date as the call option which
it previously wrote on the same security or index. Closing transactions in
covered call options for the U.S. Government Securities Fund are usually
effected directly with the same broker-dealer that effected the original option
transaction.
When a Fund purchases a put or call option, the premium paid by it is
recorded as an asset of the Fund. When a Fund writes an option, an amount equal
to the net premium (the premium less the commission) received by the Fund is
included in the liability section of the statement of assets and liabilities as
a deferred credit. The amount of this asset or deferred credit will be
subsequently marked-to-market to reflect the current value of the option
purchased or written. The current value of the traded option is the last sale
price or, in the absence of a sale, the average of the closing bid and asked
prices. If an option purchased by a Fund expires unexercised, the Fund realizes
a loss equal to the premium paid. If a Fund enters into a closing sale
transaction on an option purchased by it, the Fund will realize a gain if the
premium received by it on the closing transaction is more than the premium paid
to purchase the option, or a loss if it is less. Moreover, because increases in
the market price of an option will generally reflect (although not necessarily
in direct proportion) increases in the market price of the underlying security
any loss resulting from a closing purchase transaction is likely to be offset in
whole or in part by appreciation of the underlying security if such security is
owned by the Fund. If an option written by a Fund expires on the stipulated
expiration date or if the Fund enters into a closing purchase transaction, it
will realize a gain (or loss if the cost of a closing purchase transaction
exceeds the net premium
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received when the option is sold) and the deferred credit related to such option
will be eliminated. If an option written by a Fund is exercised, the proceeds of
the sale will be increased by the net premium originally received and the Fund
will realize a gain or loss.
As noted previously, there are several risks associated with
transactions in options on securities, currencies and indices. For example,
there are significant differences between the securities, currencies and options
markets that could result in an imperfect correlation between these markets,
causing a given transaction not to achieve its objectives. In addition, a liquid
secondary market for particular options, whether traded over-the-counter or on a
national securities exchange ("Exchange") may be absent for reasons which
include the following: there may be insufficient trading interest in certain
options; restrictions may be imposed by an Exchange on opening transactions or
closing transactions or both; trading halts, suspensions or other restrictions
may be imposed with respect to particular classes or series of options or
underlying securities; unusual or unforeseen circumstances may interrupt normal
operations on an Exchange; the facilities of an Exchange or the Options Clearing
Corporation may not at all times be adequate to handle current trading volume;
or one or more Exchanges could, for economic or other reasons, decide or be
compelled at some future date to discontinue the trading of options (or a
particular class or series of options), in which event the secondary market on
that Exchange (or in that class or series of options) would cease to exist,
although outstanding options that had been issued by the Options Clearing
Corporation as a result of trades on that Exchange would continue to be
exercisable in accordance with their terms.
A decision as to whether, when and how to use options involves the
exercise of skill and judgment, and even a well-conceived transaction may be
unsuccessful to some degree because of market behavior or unexpected events.
Foreign Investments. The Aggressive Growth Fund may invest up to 20% of
its total assets, either directly, or indirectly through investments in American
Depository Receipts ("ADRs") and closed-end investment companies, in securities
issued by foreign companies wherever organized. The Capital Income Fund may
invest up to 10% of its total assets in Eurodollar Convertible Securities that
are convertible into or exchangeable for foreign equity securities represented
by listed ADRs. Interest and dividends on such Eurodollar securities are payable
in U.S. dollars outside of the United States.
ADRs are receipts issued by an American bank or trust company
evidencing ownership of underlying securities issued by a foreign issuer. ADRs
may be listed on a national securities
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exchange or may trade in the over-the-counter market. ADR prices are denominated
in United States dollars; the underlying security may be denominated in a
foreign currency. The underlying security may be subject to foreign government
taxes which would reduce the yield on such securities.
Investments in foreign securities involve certain inherent risks, such
as political or economic instability of the issuer or the country of issue, the
difficulty of predicting international trade patterns and the possibility of
imposition of exchange controls. Such securities may also be subject to greater
fluctuations in price than securities of domestic corporations. In addition,
there may be less publicly available information about a foreign company than
about a domestic company. Foreign companies generally are not subject to uniform
accounting, auditing and financial reporting standards comparable to those
applicable to domestic companies. Foreign brokerage commissions and custodian
fees are generally higher than in the United States. With respect to certain
foreign countries, there is a possibility of expropriation or confiscatory
taxation, or diplomatic developments which could affect investment in those
countries.
In considering whether to invest in the securities of a foreign
company, Bank of America considers such factors as the characteristics of the
particular company, differences between economic trends and the performance of
securities markets within the U.S. and those within other countries, and also
factors relating to the general economic, governmental and social conditions of
the country or countries where the company is located. The extent to which a
Fund will be invested in foreign companies and ADRs will fluctuate from time to
time within the percentage limits stated above depending on the investment
adviser's assessment of prevailing market, economic and other conditions.
When-Issued Securities, Forward Commitments and Delayed Settlements.
When a Fund agrees to purchase securities on a "when-issued," forward commitment
or delayed settlement basis, its custodian will set aside cash or liquid
portfolio securities equal to the amount of the commitment in a separate
account. Normally, the custodian will set aside portfolio securities to satisfy
a purchase commitment. In such a case, a Fund may be required subsequently to
place additional assets in the separate account in order to assure that the
value of the account remains equal to the amount of the commitment. The Funds do
not intend to engage in these transactions for speculative purposes but only in
furtherance of their investment objectives. Because a Fund will set aside cash
or liquid portfolio securities to satisfy its purchase commitments in the manner
described, its liquidity and the ability of the investment adviser to manage it
may be affected in the event the forward commitments, commitments to
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purchase when-issued securities and delayed settlements ever exceeded 25% of the
value of a Fund's assets.
A Fund will purchase securities on a when-issued, forward commitment or
delayed settlement basis only with the intention of completing the transaction.
If deemed advisable as a matter of investment strategy, however, a Fund may
dispose of or renegotiate a commitment after it is entered into, and may sell
securities it has committed to purchase before those securities are delivered to
the Fund on the settlement date. In these cases the Fund may realize a taxable
capital gain or loss.
When a Fund engages in when-issued, forward commitment and delayed
settlement transactions, it relies on the other party to consummate the trade.
Failure of such party to do so may result in the Fund's incurring a loss or
missing an opportunity to obtain a price considered to be advantageous.
The market value of the securities underlying a when-issued purchase,
forward commitment to purchase securities, or a delayed settlement and any
subsequent fluctuations in their market value is taken into account when
determining the market value of a Fund starting on the day the Fund agrees to
purchase the securities. A Fund does not earn interest on the securities it has
committed to purchase until they are paid for and delivered on the settlement
date.
Securities Lending. The Aggressive Growth, Capital Income and U.S.
Government Securities Funds may lend securities as described in their
Prospectuses. Such loans will be secured by cash or securities of the U.S.
Government and its agencies and instrumentalities, and additionally in the case
of the Aggressive Growth Fund by an irrevocable letter of credit issued by a
U.S. commercial bank that is a member of the Federal Reserve System or the
Federal Deposit Insurance Corporation and has total assets in the excess of $1.5
billion. The collateral must be at all times equal to at least the market value
of the securities loaned. The Fund will continue to receive interest or
dividends on the securities it loans, and will also earn interest on the
investment of any cash collateral. In the case of the Capital Income and U.S.
Government Securities Funds, cash collateral may be invested in short-term U.S.
Government securities, and in the case of the Aggressive Growth Fund cash
collateral may be invested in U.S. Treasury notes, certificates of deposit,
other high-grade, short-term obligations or interest-bearing cash equivalents.
Although voting rights, or rights to consent, attendant to securities loaned
pass to the borrower, such loans may be called at any time and will be called so
that the securities may be noted by a fund if a material event affecting the
investment is to occur.
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ADDITIONAL INFORMATION - CAPITAL INCOME FUND
As described in its Prospectus, the Capital Income Fund's investment
objective is to provide investors with a total investment return, comprised of
current income and capital appreciation, consistent with prudent investment
risk. The Capital Income Fund seeks to achieve this objective by investing in a
diversified portfolio consisting principally of convertible bonds and
convertible preferred stocks. As described in its Prospectus, the Fund may
invest in Eurodollar Convertible Securities, which are fixed income securities
of a U.S. or foreign issuer issued in U.S. dollars outside the United States and
carry certain conversion or exchange features. The interest and dividends on
these Eurodollar Convertibles are payable in U.S. dollars outside the United
States.
The Fund has adopted a fundamental policy that under normal market
conditions it will invest at least 65% of its total assets in Convertible
Securities. The Fund may convert Convertible Securities during periods when
market conditions are unfavorable for their disposition or as a result of
developments such as the issuer's call or a decline in the market liquidity for
such Convertible Securities. The securities obtained upon the conversion may be
retained for temporary periods of not greater than two months after conversion,
and during such periods such securities will be considered to be Convertible
Securities for purposes of complying with this policy. Conversions may also
occur when necessary to permit orderly disposition of the investment (for
example, where a more substantial market exists for the underlying security than
for a relatively thinly traded Convertible Security) or when a Convertible
Security reaches maturity or has been called for redemption.
Convertible Securities entitle the holder to receive interest paid or
accrued on debt or the dividends paid on preferred stock until the Convertible
Securities mature or are redeemed, converted or exchanged. Prior to conversion,
Convertible Securities have characteristics similar to ordinary debt securities
in that they normally provide a stable stream of income with generally higher
yields than those of common stock of the same or similar issuers. Convertible
Securities rank senior to common stock in a corporation's capital structure and
therefore generally entail less risk than the corporation's common stock,
although the extent to which such risk is reduced depends in large measure upon
the degree to which the Convertible Security sells above its value as a fixed
income security.
In selecting Convertible Securities for the Fund, the investment
adviser will consider, among other factors, its evaluation of the
creditworthiness of the issuers of the securities; the interest or dividend
income generated by the securities; the potential for capital appreciation of
the
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securities and the underlying common stocks; the prices of the securities
relative to other comparable securities and to the underlying common stocks;
whether the securities are entitled to the benefits of sinking funds or other
protective conditions; diversification of the Fund's portfolio as to issuers;
and whether the securities are rated by Moody's or Standard and Poor's and, if
so, the ratings assigned.
The value of Convertible Securities is a function of their investment
value (determined by yield in comparison with the yields of other securities of
comparable maturity and quality that do not have a conversion privilege) and
their conversion value (their worth, at market value, if converted into the
underlying common stock). The investment value of Convertible Securities is
influenced by changes in interest rates, with investment value declining as
interest rates increase and increasing as interest rates decline, and by the
credit standing of the issuer and other factors. The conversion value of
Convertible Securities is determined by the market price of the underlying
common stock. If the conversion value is low relative to the investment value,
the price of the Convertible Securities is governed principally by their
investment value. To the extent the market price of the underlying common stock
approaches or exceeds the conversion price, the price of the Convertible
Securities will be increasingly influenced by their conversion value. In
addition, Convertible Securities generally sell at a premium over their
conversion value determined by the extent to which investors place value on the
right to acquire the underlying common stock while holding fixed income
securities.
Capital appreciation for the Fund may result from an improvement in the
credit standing of an issuer whose securities are held in the Fund or from a
general lowering of interest rates, or a combination of both. Conversely, a
reduction in the credit standing of an issuer whose securities are held by the
Fund or a general increase in interest rates may be expected to result in
capital depreciation to the Fund.
In general, investments in high yielding fixed-income securities are
subject to a significant risk of a change in the credit rating or financial
condition of the issuing entity. Investments in high yielding fixed-income
securities of medium or lower quality are also likely to be subject to greater
market fluctuation and to greater risk of loss of income and principal due to
default than investments of higher rated fixed-income securities. Such high
yielding securities generally tend to reflect short-term corporate and market
developments to a greater extent than higher rated securities, which react more
to fluctuations in the general level of interest rates. The Fund seeks to reduce
risk to the investor by diversification, credit analysis and attention to
current developments in trends of both the economy and financial markets.
However, while
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diversification reduces the effect on the Fund of any single investment, it does
not reduce the overall risk of investing in lower rated securities.
In seeking to attain the investment objective of the Fund, the
investment adviser may consider both the relative risks and potential returns of
higher-rated and lower-rated securities. As a result, the Fund may hold
higher-rated fixed-income securities when the differential in return between
lower-rated and higher-rated securities narrows and the investment adviser
believes that the risk of loss of income and principal may be substantially
reduced with only a relatively small reduction in potential capital appreciation
and yield. The relative proportions of the types of securities in the Fund may
vary from time to time according to the prevailing and projected market and
economic conditions and other factors.
ADDITIONAL INFORMATION - AGGRESSIVE GROWTH FUND
The selection of investments for the Aggressive Growth Fund is the
result of a continuous study of trends in industries and companies, earning
power, growth features and other investment criteria. Fund holdings will consist
primarily of common stocks of companies that the investment adviser expects will
experience above-average growth in earnings and price. Most of these companies
will be smaller-capitalized organizations that have limited product lines,
markets and financial resources and are dependent upon a limited management
group. Examples of possible investments include emerging growth companies
employing new technology, initial public offerings of companies offering high
growth potential, or other corporations offering good potential for high growth
in market value. The securities of smaller companies may be subject to more
abrupt or erratic market movements than larger, more established companies both
because the securities typically are traded in lower volume and because the
issuers typically are subject to a greater degree to changes in earnings and
prospects. The Aggressive Growth Fund's net asset value per share is subject to
rapid substantial fluctuation because greater risk is assumed in order to seek
maximum growth.
Securities owned by the Aggressive Growth Fund may be traded only in
the over-the-counter market or on a regional securities exchange, may be listed
only in the quotation service commonly known as the "pink sheets," and may not
be traded every day or in the volume typical of trading on a national securities
exchange. As a result, the disposition by the Aggressive Growth Fund of
portfolio securities, to meet redemptions or otherwise, may require the Fund to
sell these securities at a discount from market prices, to sell during periods
when such disposition is not desirable, or to make many small sales over a
lengthy period of time.
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ADDITIONAL INFORMATION -- CALIFORNIA TAX-EXEMPT BOND FUND
Municipal Securities. The California Tax-Exempt Bond Fund currently
intends that 65% of its assets will be invested in municipal bonds under
ordinary market conditions. This is not, however, a fundamental investment
policy. As a matter of fundamental policy, under normal market conditions at
least 80% of the Fund's assets will be invested in California Municipal
Securities. The California Tax-Exempt Bond Fund's average weighted maturity will
vary in response to variations in comparative yields of differing maturities of
instruments, in accordance with the Fund's investment objective.
The two principal classifications of Municipal Securities that may be
held by the California Tax-Exempt Bond 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 user of the facility being financed.
Municipal Securities include debt obligations issued to obtain funds
for various public purposes, including the construction of a wide range of
public facilities, the refunding of outstanding obligations, the payment of
general operating expenses and the extension of loans to public institutions and
facilities. In addition, certain types of private activity bonds (including
industrial development bonds under prior law) are issued by or on behalf of
public authorities to finance various privately-operated facilities. Such
obligations are included within the term Municipal Securities if the interest
paid thereon is exempt from regular federal income tax.
The Fund may purchase short-term Tax Anticipation Notes, Bond
Anticipation Notes, Revenue Anticipation Notes and other forms of short-term
tax-exempt loans. Such notes are issued with a short-term maturity in
anticipation of the receipt of tax funds, the proceeds of bond placements or
other revenues. The Fund may also purchase tax-exempt commercial paper.
There are, of course, variations in the quality of Municipal
Securities, both within a particular classification and between classifications,
and the yields on Municipal Securities 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.
The ratings of Moody's, S&P, Fitch and D&P represent their opinions as to the
credit quality of Municipal Securities.
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It should be emphasized, however, that ratings are general and are not absolute
standards of quality, and Municipal Securities with the same maturity, interest
rate and rating may have different yields while Municipal Securities of the same
maturity and interest rate with different ratings may have the same yield.
Subsequent to its purchase by the Fund, an issue of Municipal Securities may
cease to be rated or its rating may be reduced below the minimum rating required
for purchase by the Fund. The Fund's investment adviser will consider such an
event in determining whether the Fund should continue to hold the obligation. As
stated in the Prospectus, the Fund is permitted to invest a portion of its
assets in non-investment grade securities. For a discussion of the risks
presented by investments in lower-rated fixed income securities, see "Investment
Objectives and Policies - Additional Information - Capital Income Fund" above.
An issuer's obligations under its Municipal 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. The power or ability of an issuer to meet its
obligations for the payment of interest on, and principal of, its Municipal
Securities may be materially adversely affected by litigation or other
conditions. Further, it should also be noted with respect to all Municipal
Securities 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 Securities to become taxable retroactive to the
date of issue.
Information about the financial condition of issuers of Municipal
Securities may be less available than about corporations a class of whose
securities is registered under the Securities Exchange Act of 1934.
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 Securities. For example, pursuant to federal tax
legislation passed in 1986, interest on certain private activity bonds must be
included in an investor's federal alternative minimum taxable income, and
corporate investors must include all tax-exempt interest in their federal
alternative minimum taxable income. (See the Fund's Prospectus under "MANAGEMENT
OF THE FUND -- Tax Information.") Moreover, with respect to Municipal Securities
issued by the State of California, the Fund cannot predict what legislation, if
any, may be proposed in the California
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Legislature as regards the California State personal 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 adversely affect the
availability of California Municipal Securities, in particular, and Municipal
Securities generally, for investment by the Fund and the liquidity and value of
the Fund. In such an event, the Fund would re-evaluate its investment objective
and policies and consider changes in its structure or possible dissolution.
Stand-By Commitments. The California Tax-Exempt Bond Fund may acquire
"stand-by commitments" with respect to Municipal Securities held in its
portfolio. Under a "stand-by commitment," a dealer agrees to purchase from the
Fund, at the Fund's option, specified Municipal Securities at a specified price.
"Stand-by commitments" acquired by the Fund may also be referred to in this
Statement of Additional Information as "put" options.
The amount payable to the Fund upon its exercise of a "stand-by
commitment" is normally (i) the Fund's acquisition cost of the Municipal
Securities (excluding any accrued interest which the Fund paid on their
acquisition), less any amortized market premium or 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. A "stand-by commitment" may be sold, transferred or assigned
by the Fund only with the instrument involved.
The Fund expects that "stand-by commitments" will generally be
available without the payment of any direct or indirect consideration. However,
if necessary or advisable, the 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). The total amount paid in either
manner for outstanding "stand-by commitments" held by the Fund will not exceed
1/2 of 1% of the value of its total assets calculated immediately after each
"stand-by commitment" is acquired.
The Fund intends to enter into "stand-by commitments" only with
dealers, banks and broker-dealers which, in the investment adviser's opinion,
present minimal credit risks. The Fund's reliance upon the credit of these
dealers, banks and broker-dealers is secured by the value of the underlying
Municipal Securities that are subject to a commitment.
The Fund would 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" would not affect
the valuation or assumed
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maturity of the underlying Municipal Securities, which would continue to be
valued in accordance with the ordinary method of valuation employed by the Fund.
"Stand-by commitments" which would be acquired by the Fund would be valued at
zero in determining net asset value. Where the Fund paid 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.
Custodial Receipts and Participation Interest. Securities acquired by
the Fund may be in the form of custodial receipts evidencing rights to receive a
specific future interest payment, principal payment or both on certain Municipal
Securities. Such obligations are held in custody by a bank on behalf of holders
of the receipts. These custodial receipts are known by various names, including
"Municipal Receipts", "Municipal Certificates of Accrual on Tax-Exempt
Securities" ("M-CATs") and "Municipal Zero-Coupon Receipts." Participation
interests that the Fund may acquire give the Fund an undivided interest in the
security or securities involved. Participation interests may have fixed,
floating or variable rates of interest, and will have remaining maturities of
thirteen months or less as determined in accordance with the regulations of the
Securities and Exchange Commission (although the securities held by the issuer
may have longer maturities). If a participation interest in unrated, the
investment adviser will have determined that the interest is of comparable
quality to those instruments in which the Fund may invest pursuant to guidelines
approved by the Board of Directors. For certain participation interests, the
Fund will have the right to demand payment, on not more than 30 days' notice,
for all or any part of the Fund's participation interest, plus accrued interest.
As to these instruments, the Fund intends to exercise its right to demand
payment as needed to provide liquidity, to maintain or improve the quality of
its investment portfolio or upon a default (if permitted under the terms of the
instrument).
Special Considerations Relating to California Municipal Securities.
ECONOMIC FACTORS. The Governor's 1993-1994 Budget, introduced on
January 8, 1993, proposed general fund expenditures of $37.3 billion, with
projected revenues of $39.9 billion. To balance the budget in the face of
declining revenues, the Governor proposed a series of revenue shifts from local
government, reliance on increased federal aid, and reductions in state spending.
The Department of Finance of the State of California's May Revision of
General Fund Revenues and Expenditures (the "May Revision"), released on May 20,
1993, projected the State would have an accumulated deficit of about $2.75
billion by June 30,
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1993, essentially unchanged from the prior year. The Governor proposed to
eliminate this deficit over an 18-month period. Unlike previous years, the
Governor's Budget and May Revision did not calculate a "gap" to be closed, but
rather set forth revenue and expenditure forecasts and proposals designed to
produce a balanced budget.
The 1993-1994 budget act (the "1993-94 Budget Act") was signed by the
Governor on June 30, 1993, along with implementing legislation. The Governor
vetoed about $71 million in spending.
The 1993-94 Budget Act was predicated on general fund revenues and
transfers estimated at $40.6 billion, $400 million below 1992-93 (and the second
consecutive year of actual decline). The principal reasons for declining revenue
were the continued weak economy and the expiration (or repeal) of three fiscal
steps taken in 1991--a half cent temporary sales tax, a deferral of operating
loss carryforwards, and repeal by initiative of a sales tax on candy and snack
foods.
The 1993-94 Budget Act also assumed special fund revenues of $11.9
billion, an increase of 2.9 percent over 1992-93.
The 1993-94 Budget Act includes general fund expenditures of $38.5
billion (a 6.3 percent reduction from projected 1992-93 expenditures of $41.1
billion), in order to keep a balanced budget within the available revenues. The
1993-94 Budget Act also included special fund expenditures of $12.1 billion, a
4.2 percent increase. The 1993-94 Budget Act reflected the following major
adjustments:
1. Changes in local government financing to shift about $2.6 billion in
property taxes from cities, counties, special districts and redevelopment
agencies to school and community college districts, thereby reducing general
fund support by an equal amount. About $2.5 billion is permanent, reflecting
termination of the State's "bailout" of local governments following the property
tax cuts of Proposition 13 in 1978 (See "Constitutional, Legislative and Other
Factors" below).
The property tax revenue losses for cities and counties were offset in
part by additional sales tax revenues and mandate relief.
2. The 1993-94 Budget Act projected K-12 Proposition 98 funding on a
cash basis at the same per-pupil level as 1992-93 by providing schools a $609
million loan payable from future years' Proposition 98 funds.
3. The 1993-94 Budget Act assumed receipt of about $692 million of aid
to the State from the federal government to
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offset health and welfare costs associated with foreign immigrants living in the
State, which would reduce a like amount of General Fund expenditures. About $411
million of this amount was one-time funding. Congress ultimately appropriated
only $450 million.
4. Reductions of $600 million in health and welfare programs and $400
million in support for higher education (partly offset by fee increases at all
three units of higher education) and various miscellaneous cuts (totalling
approximately $150 million) in State government services in many agencies, up to
15 percent.
5. A 2-year suspension of the renters' tax credit ($390 million
expenditure reduction in 1993-94).
6. Miscellaneous one-time items, including deferral of payment to the
Public Employees Retirement Fund ($339 million) and a change in accounting for
debt service from accrual to cash basis, saving $107 million.
The 1993-94 Budget Act contained no general fund tax/revenue increases
other than a two year suspension of the renters' tax credit. The 1993-1994
Budget Act suspended the 4 percent automatic budget reduction trigger, as was
done in 1992-1993, so cuts could be focused.
Administration reports during the course of the 1993-1994 Fiscal Year
indicated that while economic recovery appeared to have started in the second
half of the fiscal year, recessionary conditions continued longer than had been
anticipated when the 1993-1994 Budget Act was adopted. Overall, revenues for the
1993-1994 Fiscal Year were about $800 million lower than original projections,
and expenditures were about $780 million higher, primarily because of higher
health and welfare caseloads, lower property taxes which required greater State
support for K-14 education to make up the shortfall, and lower than anticipated
federal government payments for immigration-related costs. The reports in May
and June, 1994, indicated that revenues in the second half of the 1993-1994
Fiscal Year have been very close to the projections made in the Governor's
Budget of January 10, 1994, which is consistent with a slow turnaround in the
economy.
The Department of Finance's July 1994 Bulletin, including the final
June receipts, reported that June revenues were $114 million (2.5 percent) above
projection, with final end-of-year results at $377 million (about 1 percent)
above the May Revision projections. Part of this result was due to end-of-year
adjustments and reconciliations. Personal income tax and sales tax continued to
track projections very well. The largest factor in the higher than anticipated
revenues was from bank and
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corporation taxes, which were $140 million (18.4 percent) above projection in
June. While the higher June receipts are reflected in the actual 1993-94 Fiscal
Year cash flow results, and help the starting cash balance for the 1994-95
Fiscal Year, the Department of Finance has not adjusted any of its revenue
projections for the 1994-95 or 1995-96 Fiscal Years.
During the 1993-94 Fiscal Year, the State implemented the deficit
retirement plan, which was part of the 1993-94 Budget Act, by issuing $1.2
billion of revenue anticipation warrants in February 1994 maturing December 21,
1994. This borrowing reduced the cash deficit at the end of the 1993-94 Fiscal
Year. Nevertheless, because of the $1.5 billion variance from the original
1993-94 Budget Act assumptions, the General Fund ended the fiscal year at June
30, 1994 carrying forward an accumulated deficit of approximately $2 billion.
Because of the revenue shortfall and the State's reduced internal
borrowable cash resources, in addition to the $1.2 billion of revenue
anticipation warrants issued as part of the deficit retirement plan, the State
issued an additional $2.0 billion of revenue anticipation warrants, maturing
July 26, 1994, which were needed to fund the State's obligations and expenses
through the end of the 1993-94 Fiscal Year.
On January 17, 1994, a major earthquake measuring an estimated 6.8 on
the Richter Scale struck Los Angeles. Significant property damage to private and
public facilities occurred in a four-county area including northern Los Angeles
County, Ventura County, and parts of Orange and San Bernardino Counties, which
were declared as State and federal disaster areas by January 18. Current
estimates of total property damage (private and public) are in the range of $20
billion, but these estimates are still subject to change.
Despite such damage, on the whole, the vast majority of structures in
the areas, including large manufacturing and commercial buildings and all modern
high-rise offices, survived the earthquake with minimal or no damage, validating
the cumulative effect of strict building codes and thorough preparation for such
an emergency by the State and local agencies.
Damage to state-owned facilities included transportation corridors and
facilities such as Interstate Highways 5 and 10 and State Highways 14, 118 and
210. Major highways have now been reopened. The campus of California State
University at Northridge (very near the epicenter) suffered an estimated $350
million damage, resulting in temporary closure of the campus. It has reopened
using borrowed facilities elsewhere in the area and many temporary structures.
There was also some damage to the University of California at Los Angeles and to
an
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office building in Van Nuys (now open after a temporary closure). Overall,
except for the temporary road and bridge closures, and CSU-Northridge, the
earthquake did not and is not expected to significantly affect State government
operations.
The State in conjunction with the federal government is committed to
providing assistance to local governments, individuals and businesses suffering
damage as a result of the earthquake, as well as to provide for the repair and
replacement of State-owned facilities. The federal government will provide
substantial earthquake assistance.
The President immediately allocated some available disaster funds, and
Congress has approved additional funds for a total of at least $9.5 billion of
federal funds for earthquake relief, including assistance to homeowners and
small businesses, and costs for repair of damaged public facilities. The
Governor originally proposed that the State will have to pay about $1.9 billion
for earthquake relief costs, including a 10 percent match to some of the federal
funds, and costs for some programs not covered by the federal aid. The Governor
proposed to cover $1.05 billion of these costs from a general obligation bond
issue which was on the June 1994 ballot, but it was not approved by the voters.
The Governor subsequently announced that the State's share for transportation
projects would come from existing Department of Transportation funds (thereby
delaying other, non-earthquake related projects), that the State's share for
certain other costs (including local school building repairs) would come from
reallocating existing bond funds, and that a proposed program for homeowner and
small business aid supplemental to federal aid would have to be abandoned. Some
other costs will be borrowed from the federal government in a manner similar to
that used by the State of Florida after Hurricane Andrew; pursuant to Senate
Bill 2383, repayment will have to be addressed in 1995-96 or beyond. The 1995-96
Governor's Budget includes $60 million as the first repayment of an estimated
$121.4 million in loans prior to June 30, 1995.
The 1994-95 Fiscal Year represents the fourth consecutive year the
Governor and Legislature were faced with a very difficult budget environment to
produce a balanced budget. Many program cuts and budgetary adjustments have
already been made in the last three years. The Governor's Budget proposal, as
updated in May and June, 1994, recognized that the accumulated deficit could not
be repaid in one year, and proposed a two-year solution. The budget proposal
sets forth revenue and expenditure forecasts and revenue and expenditure
proposals which result in operating surpluses for the budget for both 1994-95
and 1995-96, and lead to the elimination of the accumulated budget deficit,
estimated at about $1.8 billion at June 30, 1994, by June 30, 1996.
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The 1994-95 Budget Act, signed by the Governor on July 8, 1994,
projects revenues and transfers of $41.9 billion, $2.1 billion higher than
revenues in 1993-94. This reflects the Administration's forecast of an improving
economy. Also included in this figure is a projected receipt of about $360
million from the Federal Government to reimburse the State's cost of
incarcerating undocumented immigrants. The State will not know how much the
Federal Government will actually provide until the Federal FY 1995 Budget is
completed. Completion of the Federal Budget is expected by October 1994. The
Legislature took no action on a proposal in the January 1994-95 Governor's
Budget to undertake an expansion of the transfer of certain programs to
counties, which would also have transferred to counties 0.5% of the State's
current sales tax.
The 1994-95 Budget Act projects Special Fund revenues of $12.1 billion,
a decrease of 2.4% from 1993-94 estimated revenues.
The 1994-95 Budget Act projects General Fund expenditures of $40.9
billion, an increase of $1.6 billion over 1993-94. The 1994-95 Budget Act also
projects Special Fund expenditures of $12.3 billion, a 4.7% decrease from
1993-94 estimated expenditures. The principal features of the 1994-95 Budget Act
were the following:
1. Receipt of additional federal aid in 1994-95 of about $400 million
for costs of refugee assistance and medical care for undocumented
immigrants, thereby offsetting a similar General Fund cost. The State will
not know how much of these funds it will receive until the Federal FY 1995
Budget is passed.
2. Reductions of approximately $1.1 billion in health and welfare
costs. A 2.3% reduction in Aid to Family with Dependent Children payments
(equal to about $56 million for the entire fiscal year) has been suspended
by court order.
3. A General Fund increase of approximately $38 million in support for
the University of California and $65 million for California State
University. It is anticipated that student fees for both the University of
California and the California State University will increase up to 10%.
4. Proposition 98 funding for K-14 schools is increased by $526 million
from 1993-94 levels, representing an increase for enrollment growth and
inflation. Consistent with previous budget agreements, Proposition 98
funding provides approximately $4,217 per student for K-12 schools, equal to
the level in the past three years.
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5. Legislation enacted with the Budget clarifies laws passed in 1992
and 1993 which require counties and other local agencies to transfer funds
to local school districts, thereby reducing State aid. Some counties had
implemented a method of making such transfers which provided less money for
schools if there were redevelopment agency projects. The new legislation
bans this method of transfer. If all counties had implemented this method,
General Fund aid to K-12 schools would have been $300 million higher in each
of the 1994-95 and 1995-96 Fiscal Years.
6. The 1994-95 Budget Act provides funding for anticipated growth in
the State's prison inmate population, including provisions for implementing
recent legislation (the so-called "Three Strikes" law) which requires
mandatory life prison terms for certain third-time felony offenders.
7. Additional miscellaneous cuts ($500 million) and fund transfers
($255 million) totalling in the aggregate approximately $755 million.
The 1994-95 Budget Act contains no tax increases. Under legislation
enacted for the 1993-94 Budget, the renters' tax credit was suspended for two
years (1993 and 1994). A ballot proposition to permanently restore the renters'
tax credit after this year failed at the June, 1994 election. The Legislature
enacted a further one-year suspension of the renters' tax credit, for 1995,
saving about $390 million in the 1995-96 Fiscal Year.
The 1994-95 Budget assumed that the State will use a cash flow
borrowing program in 1994-95 which combines one-year notes and two-year
warrants, which have now been issued. Issuance of warrants allows the State to
defer repayment of approximately $1.0 billion of its accumulated budget deficit
into the 1995-96 Fiscal Year.
The State's cash flow management plan for the 1994-95 fiscal year
included the issuance of $4.0 billion of revenue anticipation warrants on July
26, 1994, to mature on April 25, 1996, as part of a two-year plan to retire the
accumulated State budget deficit.
Because preparation of cash flow estimates for the 1995-96 Fiscal Year
necessarily entails greater risks of variance from assumptions, and because the
Governor's two-year budget plan assumes receipt of a large amount of federal aid
in the 1995-96 Fiscal Year for immigration-related costs which is uncertain, the
Legislature enacted a backup budget adjustment mechanism to mitigate possible
deviations from projected revenues, expenditures or internal borrowable
resources which might reduce available cash resources during the two-year plan,
so as to assure repayment of the warrants.
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Pursuant to Section 12467 of the California Government Code, enacted by
Chapter 135, Statutes of 1994 (the "Budget Adjustment Law"), the State
Controller was required to make a report by November 15, 1994 on whether the
projected cash resources for the General Fund as of June 30, 1995 will decrease
more than $430 million from the amount projected by the State in its official
statement in July, 1994 for the sale of $4,000,000,000 of Revenue Anticipation
Warrants. On November 15, 1994, the State Controller issued the report on the
State's cash position required by the Budget Adjustment Law. The report
indicated that the cash position of the General Fund on June 30, 1995 would be
$581 million better than was estimated in the July, 1994 cash flow projections
and therefore, no budget adjustment procedures will be invoked for the 1994-95
Fiscal Year. As explained earlier, the Law would only be implemented if the
State Controller estimated that borrowable resources on June 30, 1995 would be
at least $430 million lower than projected.
The State Controller's report identified a number of factors which have
led to the improved cash position of the State. Estimated revenues and transfers
for the 1994-95 Fiscal Year other than federal reimbursement for immigration
costs were up about $650 million. The largest portion of this was in higher bank
and corporation tax receipts, but all major tax sources were above original
projections. However, most of the federal immigration aid revenues projected in
connection with the 1994-95 Budget Act and in the July, 1994 cash flows will not
be received, as indicated above, leaving a net increase in revenues of $322
million.
On the expenditure side, the State Controller reported that estimated
reduced caseload growth in health and welfare programs, reduced school
enrollment growth, and an accounting adjustment reducing a transfer from the
General Fund to the Special Fund for Economic Uncertainties resulted in overall
General Fund expenditure reductions (again before adjusting for federal aid) of
$672 million. However, the July, 1994 cash flows projected that General Fund
health and welfare and education expenditures would be offset by the anticipated
receipt of $407 million in federal aid for illegal immigrant costs. The State
Controller now estimates that none of these funds will be received, so the net
reduction in General Fund expenditures is $265 million.
Finally, the State Controller indicated that a review of balances in
special funds available for internal borrowing resulted in an estimated
reduction of such borrowable resources of $6 million. The combination of these
factors results in the estimated improvement of the General Fund's cash position
of $581 million. The State Controller's revised cash flow projections for
1994-95 have allocated this improvement to two line items: an increase from $0
to $427 million in the estimated ending cash
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balance of the General Fund on June 30, 1995, and an increase in unused
borrowable resources of $154 million.
The State Controller's report indicated that there was no anticipated
cash impact in the 1994-95 Fiscal Year for recent initiatives on "three strikes"
criminal penalties and illegal immigration which were approved by voters on
November 8, 1994. At a hearing before a committee of the Legislature on November
15, 1994, both the Legislative Analyst and the Department of Finance concurred
in the reasonableness of the State Controller's report. (The Legislative Analyst
had issued a preliminary analysis on November 1, 1994 which reached a conclusion
very close to that of the State Controller.) The State Controller's report makes
no projections about whether the Law may have to be implemented in 1995-96.
However, both the State Controller and the Legislative Analyst in the November
15 hearing noted that the July, 1994 cash flows for the 1995-96 Fiscal Year
place continued reliance on large amounts of federal assistance for immigration
costs, which did not materialize this year, indicating significant budget
pressures for next year. The Department of Finance indicated that the budgetary
issues identified in the hearing would be addressed in the Governor's Budget
proposal for the 1995-96 Fiscal Year, which will be released in early January,
1995.
The 1995-96 Governor's Budget, discussed below, contains a reforecast
of revenues and expenditures for the 1994-95 Fiscal Year. The Department of
Finance Bulletins for February and March 1995 report that combined General Fund
revenues for February, 1995 were about $356 million below forecast, but combined
revenues for January and February were only about $82 million (or 0.3 percent)
below the 1995-96 Governor's Budget forecast. The largest component of the
decrease is attributable to personal income tax receipts, which were about $131
million (or 1.1 percent) below the two months' forecast. This decrease in
personal income tax receipts appears to be largely attributable to fourth
quarter 1994 activity, probably in the anticipation of tax reform, with some
taxpayers shifting income into 1995 to the extent possible. The withholding
component comprised $77 million of this shortfall, but the Department of Finance
does not yet view this as significant. Additionally, sales and use tax receipts
were very close to forecast for the two-month period, while bank and corporation
tax receipts were about $42 million (or 1.5 percent) below the two months'
forecast. Miscellaneous revenues were about $117 million (or 6.2 percent) above
forecast for the two months, but the Department of Finance is not yet able to
determine whether this gain is real, or is instead attributable to cash flow
factors.
Initial analysis of the federal Fiscal Year 1995 budget by the
Department of Finance indicates that about $98 million was appropriated for
California to offset costs of incarceration of
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undocumented and refugee immigrants, less than the $356 million which was
assumed in the State's 1994-95 Budget Act. Because of timing considerations in
applying for these federal funds, the Department estimates that about $33
million of these funds will be received during the State's 1994-95 Fiscal Year,
with the balance received in the following fiscal year. It does not appear that
the federal budget contains any of the additional $400 million in funding for
refugee assistance and health costs which were also assumed in the 1994-95
Budget Act, but the Department expects the State to continue its efforts to
obtain some or all of these federal funds.
On January 10, 1995, the Governor presented his 1995-96 Fiscal Year
Budget Proposal (the "Proposed Budget"). The Proposed Budget estimates General
Fund revenues and transfers of $42.5 billion (an increase of 0.2 percent over
1994-95). This nominal increase from the 1994-95 Fiscal Year reflects the
Governor's realignment proposal and the first year of his tax cut proposal (see
principal features of the Proposed Budget below for further discussions).
Without these two proposals, General Fund revenues would be projected at
approximately $43.8 billion, or an increase of 3.3 percent over 1994-95.
Expenditures are estimated at $41.7 billion (essentially unchanged from
1994-95). Special Fund revenues are estimated at $13.5 billion (10.7 percent
higher than 1994-95) and Special Fund expenditures are estimated at $13.8
billion (12.2 percent higher than 1994-95). The Proposed Budget projects that
the General Fund will end the fiscal year at June 30, 1996 with a budget surplus
in the Special Fund for Economic Uncertainties of about $92 million, or less
than 1 percent of General Fund expenditures, and will have repaid all of the
accumulated budget deficits.
The following are the principal features of the Proposed Budget:
1. The principal feature of the Proposed Budget is a proposed 15
percent cut in personal income and corporate tax rates, which would be
phased in at 5 percent per year starting in 1996. Existing personal income
tax rates, which are scheduled to drop from 11 percent top rate to 9.3
percent in 1996, would be continued during the time the overall tax cut
takes effect. This proposal would reduce General Fund revenues by $225
million in 1995-96, but the revenue reduction would reach $3.6 billion by
1998-99.
2. The Governor has proposed an expansion of the realignment program
between the State and counties, so that counties will take on greater
responsibility for welfare and social services, while the State will take on
increased funding of trial court costs. The proposal includes transfer of
about $1 billion of State revenues, from sales taxes and trial court funding
moneys, to counties. The net
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effect of the shifts, however, is estimated to save the General Fund about
$240 million.
3. The Governor proposes further cuts in health and welfare costs
totaling about $1.4 billion. Some of these cuts would require federal
legislative approval.
4. Proposition 98 funding for schools and community colleges will
increase by about $1.2 billion, reflecting strong General Fund revenue
growth. Per-pupil expenditures are projected to increase by $61 to $4,292.
For the first time in several years, a cost-of-living increase (2.2 percent)
is added to the enrollment growth factor. The Governor proposes to set aside
about $514 million of the Proposition 98 funding increase to repay prior
years' loans from the General Fund to schools. As the legality of these
loans is currently being challenged in a lawsuit, the Governor proposes to
set the amount aside in escrow until the litigation is resolved.
5. The Proposed Budget includes increases in funding for the University
of California ($63 million General Fund) and the California State University
system ($3 million General Fund). The Governor has proposed a four-year
funding "company" for the higher education units which includes both annual
increases in State funding and increases in student fees.
6. The Proposed Budget assumes receipt of $830 million in new federal
aid for costs of undocumented and refugee immigrants, above commitments
already made by the federal government. This amount is much less than an
estimated $2.8 billion which had been included in the Governor's pro-forma
two-year plan from last summer.
The Proposed Budget contains a cash flow projection (based on all the
assumptions described above) which shows about $1 billion of unused borrowable
resources at June 30, 1996, providing this amount of "cushion" before the budget
"trigger" would have to be invoked.
However, a report issued by the Legislative Analyst in February, 1995
notes that the Proposed Budget is subject to a number of major risks, including
receipt of the expected federal immigration aid and other federal actions to
allow health and welfare costs, and the outcome of several lawsuits concerning
previous budget actions which the State has lost at the trial court level, and
which are under appeal. This Analyst's Report also estimates that, despite more
favorable revenues, the two-year budget estimates made in July, 1994 are about
$2 billion out of balance, principally because federal immigration aid appears
likely to be much lower than previously estimated. This
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shortfall is much smaller than the State has faced in recent years, and has been
addressed in the Governor's Budget.
The Director of Finance is required to include updated cash-flow
statements for the 1994-95 and 1995-96 Fiscal Years in the May revision to the
1995-96 Fiscal Year budget proposal. By June 1, 1995, the State Controller must
concur with these updated statements or provide a revised estimate of the cash
condition of the General Fund for the 1994-95 and the 1995-96 Fiscal Years. For
the 1995-96 Fiscal Year, Chapter 135 prohibits any external borrowing as of June
30, 1996, thereby requiring the State to rely solely on internal borrowable
resources, expenditure reductions or revenue increases to eliminate any
projected cash flow shortfall.
Commencing on October 15, 1995, the State Controller will, in
conjunction with the Legislative Analyst's Office, review the estimated cash
condition of the General Fund for the 1995-96 Fiscal Year. The "1996 cash
shortfall" shall be the amount necessary to bring the balance of unused
borrowable resources on June 30, 1996 to zero. On or before December 1, 1995,
legislation must be enacted providing for sufficient General Fund expenditure
reductions, revenue increases, or both, to offset any such 1996 cash shortfall
identified by the State Controller. If such legislation is not enacted, within
five days thereafter the Director of Finance must reduce all General Fund
appropriations for the 1995-96 Fiscal Year, except the Required Appropriations,
by the percentage equal to the ratio of said 1996 cash shortfall to total
remaining General Fund appropriations for the 1995-96 Fiscal Year, excluding the
Required Appropriations.
On December 6, 1994, Orange County, California and its Investment Pool
(the "Pool") filed for bankruptcy under Chapter 9 of the United States
Bankruptcy Code. Approximately 187 California public entities, substantially all
of which are public agencies within the County, invested funds in the Pool. Many
of the agencies have various bonds, notes or other forms of indebtedness
outstanding, in some instances the proceeds of which were invested in the Pool.
Various investment advisors were employed by the County to restructure the Pool.
Such restructuring led to the sale of substantially all of the Pool's portfolio,
resulting in losses estimated to be approximately $1.7 billion or approximately
22% of amounts deposited by the Pool investors, including the County. It is
anticipated that such losses may result in delays or failures of the County as
well as investors in the Pool to make scheduled debt service payments. Further,
the County expects substantial budget deficits to occur in Fiscal Year 1995 with
possibly similar effects upon operations of investors in the Pool.
Investor access to monies in the Pool subsequent to the filing was
pursuant to Court order only and severely limited. On
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May 2, 1995, the Bankruptcy Court approved a comprehensive settlement agreement
(the "CSA") between the County and Pool investors which, among other things, (i)
established a formula for distribution of all available cash and securities from
the Pool to the Pool investors, including the County, (ii) established formulas
for distribution among certain settling Pool investors of several tranches of
new County obligations to be payable from, and in some instances secured by,
certain designated sources of potential recoveries on Pool related claims, and
(iii) designated certain outstanding short term note obligations of the County
to be senior to or on a parity with certain of the new County obligations. By
order dated May 22, 1995, following distribution of all available cash and
securities from the Pool to the Pool investors, including the County, the
Bankruptcy Court dismissed the bankruptcy filing of the Pool based upon the
Court's finding that the Pool was not eligible for relief under Chapter 9 of the
Bankruptcy Code because it is not a municipality and it has not been
specifically authorized to file under Chapter 9 as required by the Bankruptcy
Code.
Following its bankruptcy filing, the County has, with Bankruptcy Court
approval, made payments of scheduled principal and interest on its outstanding
obligations where no alternative source of payment (such as reserve funds on
deposit with indenture trustees, letters of credit, municipal bond insurance
policies or other alternative payment sources) were available. The County has
not replenished such reserve funds or reimbursed the issuers of such letters of
credit or municipal bond insurance policies. In addition, the County ceased
making set aside deposits for repayment of certain of its short term
indebtedness. The Bankruptcy Court subsequently ruled that the rights of the
holders of such short term indebtedness to require the set aside deposits from
County revenues received following the filing were cut off by operation of the
Bankruptcy Code. In addition, the County has failed to satisfy its obligation to
accept tenders of its $110,200,000 aggregate principal amount of Taxable Pension
Obligation Bonds, Series B used to finance County pension obligations. Interest
at a rate set pursuant to the bond documents has been timely paid on such
Pension Bonds. The failure to satisfy the contractual obligations discussed
above may constitute defaults under the documents governing such securities.
To June 30, 1995 there has been no default in payment of scheduled
interest and principal (excluding the tender payment described above) to holders
of County securities, although certain note issues are scheduled to mature at
various times thereafter and the Fund is unable to predict whether or to what
extent such notes will be timely paid by the County. On June 27, 1995, the
Bankruptcy Court approved a Stipulation and an Extension Agreement that, if they
both become effective, would offer to holders of certain short term note
obligations of the
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County ("Note Debt") who elect to be treated thereunder: (i) extension of
maturity dates to June 30, 1996; (ii) payment of monthly interest at a rate
below existing contract rates; (iii) accrual of monthly interest equal to the
difference between the amount paid and the contract rate, plus a settlement
adjustment of 0.95%; (iv) waiver of post-bankruptcy interest recapture or
disallowance; (v) waiver of defenses to repayment of the Note Debt claims based
on California limitations on municipal indebtedness; and (vi) allowance of the
Note Debt claims, subject to certain reserved rights. The treatment described in
the preceding sentence will be available to electing holders of Note Debt
provided that holders of at least 50% of the then issued and outstanding
aggregate principal amount of all Note Debt obligations elect such treatment. If
holders of at least 90% of the outstanding aggregate principal amount of all
Note Debt obligations elect such treatment, all of the Note Debt obligations
will be so treated. The Fund is unable to predict whether and to what extent
holders of Note Debt will elect to be treated under the Extension Agreement.
On June 27, 1995, the voters of Orange County rejected, by a
substantial majority of those voting, an increase of 0.50% in the sales tax
imposed throughout the County. Prior to the election, spokespersons for the
County had indicated that passage of the sales tax increase was an important
factor in the County's ability to restructure its finances in a manner that
would permit eventual payment in full of all County securities. The Fund is
unable to predict the effect of the defeat of the sales tax increase on the
ability of the County to restructure its obligations and otherwise manage its
affairs.
Both Standard & Poor's and Moody's Investors Service have suspended or
downgraded ratings on various debt securities of the County and certain of the
investors in the Pool and, following the defeat of the proposition submitted to
the voters on June 27, announced their intention to downgrade the County's debt
to default status, regardless of whether the Stipulation and Extension Agreement
receives approval by holders of the Note Debt. Such suspensions or downgradings
could affect both price and liquidity of such securities. The Fund is unable to
predict (i) the occurrence of covenant and/or payment defaults with respect to
obligations of the County and/or investors in the Pool or (ii) the financial
impact of any such defaults or credit rating suspensions or downgradings upon
the value of such securities.
As of the date of this Statement of Additional Information, the
California Tax-Exempt Bond Fund had investments issued by Orange County,
California totalling approximately 3% of its total assets as of this date. None
of these investments had failed to meet a scheduled interest payment and none of
these investments were obligations payable from the Pool.
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Constitutional, Legislative and Other Factors. Certain California
constitutional amendments, legislative measures, executive orders,
administrative regulations and voter initiatives could result in the adverse
effects described below. 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 and prospectuses relating to
securities offerings of the State of California and various local agencies in
California, available as of the date of the Prospectus and this Statement of
Additional Information. While the Company has not independently verified such
information, it has no reason to believe that such information is not correct in
all material respects.
Certain California Municipal Securities in the Fund may be obligations
of issuers which rely in whole or in part on California State revenues for
payment of these obligations. Property tax revenues and a portion of the State's
general fund surplus are distributed to counties, cities and their various
taxing entities and the State assumes certain obligations theretofore paid out
of local funds. Whether and to what extent a portion of the State's general fund
will be distributed in the future to counties, cities and their various
entities, is unclear.
In 1988, California enacted legislation providing for a water's-edge
combined reporting method if an election fee was paid and other conditions met.
On October 6, 1993, California Governor Pete Wilson signed Senate Bill 671
(Alquist) which modifies the unitary tax law by deleting the requirements that a
taxpayer electing to determine its income on a water's-edge basis pay a fee and
file a domestic disclosure spreadsheet and instead requiring an annual
information return. Significantly, the Franchise Tax Board can no longer
disregard a taxpayer's election. The Franchise Tax Board is reported to have
estimated state revenue losses from the Legislation as growing from $27 million
in 1993-94 to $616 million in 1999-2000, but others, including Assembly Speaker
Willie Brown, disagree with that estimate and assert that more revenue will be
generated for California, rather than less, because of an anticipated increase
in economic activity and additional revenue generated by the incentives in the
Legislation.
Certain California Municipal Securities in the Fund may be obligations
of issuers who rely in whole or in part on ad valorem real property taxes as a
source of revenue. On June 6, 1978, California voters approved an amendment to
the California Constitution known as Proposition 13, which added Article XIIIA
to the California Constitution. The effect of Article XIIIA is to limit ad
valorem taxes on real property and to restrict the ability of taxing entities to
increase real property tax revenues. On November 7, 1978, California voters
approved
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Proposition 8, and on June 3, 1986, California voters approved Proposition 46,
both of which amended Article XIIIA.
Section 1 of Article XIIIA limits the maximum ad valorem tax on real
property to 1% of full cash value (as defined in Section 2), to be collected by
the counties and apportioned according to law; provided that the 1% limitation
does not apply to ad valorem taxes or special assessments to pay the interest
and redemption charges on (i) any indebtedness approved by the voters prior to
July 1, 1978, or (ii) any bonded indebtedness for the acquisition or improvement
of real property approved on or after July 1, 1978, by two-thirds of the votes
cast by the voters voting on the proposition. Section 2 of Article XIIIA defines
"full cash value" to mean "the County Assessor's valuation of real property as
shown on the 1975/76 tax bill under 'full cash value' or, thereafter, the
appraised value of real property when purchased, newly constructed, or a change
in ownership has occurred after the 1975 assessment." The full cash value may be
adjusted annually to reflect inflation at a rate not to exceed 2% per year, or
reduction in the consumer price index or comparable local data, or reduced in
the event of declining property value caused by damage, destruction or other
factors. The California State Board of Equalization has adopted regulations,
binding on county assessors, interpreting the meaning of "change in ownership"
and "new construction" for purposes of determining full cash value of property
under Article XIIIA.
Legislation enacted by the California Legislature to implement Article
XIIIA (Statutes of 1978, Chapter 292, as amended) provides that notwithstanding
any other law, local agencies may not levy any ad valorem property tax except to
pay debt service on indebtedness approved by the voters prior to July 1, 1978,
and that each county will levy the maximum tax permitted by Article XIIIA of
$4.00 per $100 assessed valuation (based on the former practice of using 25%,
instead of 100%, of full cash value as the assessed value for tax purposes). The
legislation further provided that, for the 1978/79 fiscal year only, the tax
levied by each county was to be apportioned among all taxing agencies within the
county in proportion to their average share of taxes levied in certain previous
years. The apportionment of property taxes for fiscal years after 1978/79 has
been revised pursuant to Statutes of 1979, Chapter 282 which provides relief
funds from State moneys beginning in fiscal year 1979/80 and is designed to
provide a permanent system for sharing State taxes and budget funds with local
agencies. Under Chapter 282, cities and counties receive more of the remaining
property tax revenues collected under Proposition 13 instead of direct State
aid. School districts receive a correspondingly reduced amount of property
taxes, but receive compensation directly from the State and are given additional
relief. Chapter 282 does not affect the derivation of the base levy ($4.00 per
$100 assessed valuation) and the bonded debt tax rate.
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On November 6, 1979, an initiative known as "Proposition 4" or the
"Gann Initiative" was approved by the California voters, which added Article
XIIIB to the California Constitution. Under Article XIIIB, State and local
governmental entities have an annual "appropriations limit" and are not allowed
to spend certain moneys called "appropriations subject to limitation" in an
amount higher than the "appropriations limit." Article XIIIB does not affect the
appropriation of moneys which are excluded from the definition of
"appropriations subject to limitation," including debt service on indebtedness
existing or authorized as of January 1, 1979, or bonded indebtedness
subsequently approved by the voters. In general terms, the "appropriations
limit" is required to be based on certain 1978/79 expenditures, and is to be
adjusted annually to reflect changes in consumer prices, population and certain
services provided by these entities. Article XIIIB also provides that if these
entities' revenues in any year exceed the amounts permitted to be spent, the
excess is to be returned by revising tax rates or fee schedules over the
subsequent two years.
At the November 8, 1988 general election, California voters approved an
initiative known as Proposition 98. This initiative amends Article XIIIB to
require that (i) the California Legislature establish a prudent state reserve
fund in an amount as it shall deem reasonable and necessary and (ii) revenues in
excess of amounts permitted to be spent and which would otherwise be returned
pursuant to Article XIIIB by revision of tax rates or fee schedules, be
transferred and allocated (up to a maximum of 4%) to the State School Fund and
be expended solely for purposes of instructional improvement and accountability.
No such transfer or allocation of funds will be required if certain designated
state officials determine that annual student expenditures and class size meet
certain criteria as set forth in Proposition 98. Any funds allocated to the
State School Fund shall cause the appropriation limits established in Article
XIIIB to be annually increased for any such allocation made in the prior year.
Proposition 98 also amends Article XVI to require that the State of
California provide a minimum level of funding for public schools and community
colleges. Commencing with the 1988- 89 fiscal year, state monies to support
school districts and community college districts shall equal or exceed the
lesser of (i) an amount equalling the percentage of state general revenue bonds
for school and community college districts in fiscal year 1986-87, or (ii) an
amount equal to the prior year's state general fund proceeds of taxes
appropriated under Article XIIIB plus allocated proceeds of local taxes, after
adjustment under Article XIIIB. The initiative permits the enactment of
legislation, by a two-thirds vote, to suspend the minimum funding requirement
for one year.
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On June 30, 1989, the California Legislature enacted Senate
Constitutional Amendment 1, a proposed modification of the California
Constitution to alter the spending limit and the education funding provisions of
Proposition 98. Senate Constitutional Amendment 1, on the June 5, 1990 ballot as
Proposition 111, was approved by the voters and took effect on July 1, 1990.
Among a number of important provisions, Proposition 111 recalculates spending
limits for the State and for local governments, allows greater annual increases
in the limits, allows the averaging of two years' tax revenues before requiring
action regarding excess tax revenues, reduces the amount of the funding
guarantee in recession years for school districts and community college
districts (but with a floor of 40.9 percent of State general fund tax revenues),
removes the provision of Proposition 98 which included excess moneys transferred
to school districts and community college districts in the base calculation for
the next year, limits the amount of State tax revenue over the limit which would
be transferred to school districts and community college districts, and exempts
increased gasoline taxes and truck weight fees from the State appropriations
limit. Additionally, Proposition 111 exempts from the State appropriations limit
funding for capital outlays.
Article XIIIB, like Article XIIIA, may require further interpretation
by both the Legislature and the courts to determine its applicability to
specific situations involving the State and local taxing authorities. Depending
upon the interpretation, Article XIIIB may limit significantly a governmental
entity's ability to budget sufficient funds to meet debt service on bonds and
other obligations.
On November 4, 1986, California voters approved an initiative statute
known as Proposition 62. This initiative (i) requires that any tax for general
governmental purposes imposed by local governments be approved by resolution or
ordinance adopted by a two-thirds vote of the governmental entity's legislative
body and by a majority vote of the electorate of the governmental entity, (ii)
requires that any special tax (defined as taxes levied for other than general
governmental purposes) imposed by a local governmental entity be approved by a
two-thirds vote of the voters within that jurisdiction, (iii) restricts the use
of revenues from a special tax to the purposes or for the service for which the
special tax was imposed, (iv) prohibits the imposition of ad valorem taxes on
real property by local governmental entities except as permitted by Article
XIIIA, (v) prohibits the imposition of transaction taxes and sales taxes on the
sale of real property by local governments, (vi) requires that any tax imposed
by a local government on or after August 1, 1985 be ratified by a majority vote
of the electorate within two years of the adoption of the initiative or be
terminated by November 15, 1988, (vii) requires that, in the event a local
government fails to comply with the provisions of this measure, a
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reduction in the amount of property tax revenue allocated to such local
government occurs in an amount equal to the revenues received by such entity
attributable to the tax levied in violation of the initiative, and (viii)
permits these provisions to be amended exclusively by the voters of the State of
California.
In September 1988, the California Court of Appeal in City of
Westminster v. County of Orange, 204 Cal. App. 3d 623, 215 Cal. Rptr. 511 (Cal.
Ct. App. 1988), held that Proposition 62 is unconstitutional to the extent that
it requires a general tax by a general law city, enacted on or after August 1,
1985 and prior to the effective date of Proposition 62, to be subject to
approval by a majority of voters. The Court held that the California
Constitution prohibits the imposition of a requirement that local tax measures
be submitted to the electorate by either referendum or initiative. It is not
possible to predict the impact of this decision on charter cities, on special
taxes or on new taxes imposed after the effective date of Proposition 62.
On November 8, 1988, California voters approved Proposition 87.
Proposition 87 amended Article XVI, Section 16, of the California Constitution
by authorizing the California Legislature to prohibit redevelopment agencies
from receiving any of the property tax revenue raised by increased property tax
rates levied to repay bonded indebtedness of local governments which is approved
by voters on or after January 1, 1989. It is not possible to predict whether the
California Legislature will enact such a prohibition nor is it possible to
predict the impact of Proposition 87 on redevelopment agencies and their ability
to make payments on outstanding debt obligations.
Certain California Municipal Securities in the Fund may be obligations
which are payable solely from the revenues of health care institutions. Certain
provisions under California law may adversely affect these revenues and,
consequently, payment on those Municipal Securities.
The Federally sponsored Medicaid program for health care services to
eligible welfare beneficiaries in California is known as the Medi-Cal program.
Historically, the Medi-Cal program has provided for a cost-based system of
reimbursement for inpatient care furnished to Medi-Cal beneficiaries by any
hospital wanting to participate in the Medi-Cal program, provided such hospital
met applicable requirements for participation. California law now provides that
the State of California shall selectively contract with hospitals to provide
acute inpatient services to Medi-Cal patients. Medi-Cal contracts currently
apply only to acute inpatient services. Generally, such selective contracting is
made on a flat per diem payment basis for all services to Medi-Cal
beneficiaries, and generally such payment has not increased in relation to
inflation, costs or
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other factors. Other reductions or limitations may be imposed on payment for
services rendered to Medi-Cal beneficiaries in the future.
Under this approach, in most geographical areas of California, only
those hospitals which enter into a Medi-Cal contract with the State of
California will be paid for non-emergency acute inpatient services rendered to
Medi-Cal beneficiaries. The State may also terminate these contracts without
notice under certain circumstances and is obligated to make contractual payments
only to the extent the California legislature appropriates adequate funding
therefor.
California enacted legislation in 1982 that authorizes private health
plans and insurers to contract directly with hospitals for services to
beneficiaries on negotiated terms. Some insurers have introduced plans known as
"preferred provider organizations" ("PPOs"), which offer financial incentives
for subscribers who use only the hospitals which contract with the plan. Under
an exclusive provider plan, which includes most health maintenance organizations
("HMOs"), private payors limit coverage to those services provided by selected
hospitals. Discounts offered to HMOs and PPOs may result in payment to the
contracting hospital of less than actual cost and the volume of patients
directed to a hospital under an HMO or PPO contract may vary significantly from
projections. Often, HMO or PPO contracts are enforceable for a stated term,
regardless of provider losses or of bankruptcy of the respective HMO or PPO. It
is expected that failure to execute and maintain such PPO and HMO contracts
would reduce a hospital's patient base or gross revenues. Conversely,
participation may maintain or increase the patient base, but may result in
reduced payment and lower net income to the contracting hospitals.
These California Municipal Securities may also be insured by the State
of California pursuant to an insurance program implemented by the Office of
Statewide Health Planning and Development for health facility construction
loans. If a default occurs on insured California Municipal Securities, the State
Treasurer will issue debentures payable out of a reserve fund established under
the insurance program or will pay principal and interest on an unaccelerated
basis from unappropriated State funds. At the request of the Office of Statewide
Health Planning and Development, Arthur D. Little, Inc. prepared a study in
December 1983, to evaluate the adequacy of the reserve fund established under
the insurance program and based on certain formulations and assumptions found
the reserve fund substantially underfunded. In September of 1986, Arthur D.
Little, Inc. prepared an update of the study and concluded that an additional
10% reserve be established for "multi-level" facilities. For the balance of the
reserve fund, the update recommended maintaining the current reserve calculation
method.
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In March of 1990, Arthur D. Little, Inc. prepared a further review of the study
and recommended that separate reserves continue to be established for
"multi-level" facilities at a reserve level consistent with those that would be
required by an insurance company.
Certain California Municipal Securities in the Fund may be obligations
which are secured in whole or in part by a mortgage or deed of trust on real
property. California has five principal statutory provisions which limit the
remedies of a creditor secured by a mortgage or deed of trust. Two limit the
creditor's right to obtain a deficiency judgment, one limitation being based on
the method of foreclosure and the other on the type of debt secured. Under the
former, a deficiency judgment is barred when the foreclosure is accomplished by
means of a nonjudicial trustee's sale. Under the latter, a deficiency judgment
is barred when the foreclosed mortgage or deed of trust secures certain purchase
money obligations. Another California statute, commonly known as the "one form
of action" rule, requires creditors secured by real property to exhaust their
real property security by foreclosure before bringing a personal action against
the debtor. The fourth statutory provision limits any deficiency judgment
obtained by a creditor secured by real property following a judicial sale of
such property to the excess of the outstanding debt over the fair value of the
property at the time of the sale, thus preventing the creditor from obtaining a
large deficiency judgment against the debtor as the result of low bids at a
judicial sale. The fifth statutory provision gives the debtor the right to
redeem the real property from any judicial foreclosure sale as to which a
deficiency judgement may be ordered against the debtor.
Upon the default of a mortgage or deed of trust with respect to
California real property, the creditor's nonjudicial foreclosure rights under
the power of sale contained in the mortgage or deed of trust are subject to the
constraints imposed by California law upon transfers of title to real property
by private power of sale. During the three-month period beginning with the
filing of a formal notice of default, the debtor is entitled to reinstate the
mortgage by making any overdue payments. Under standard loan servicing
procedures, the filing of the formal notice of default does not occur unless at
least three full monthly payments have become due and remain unpaid. The power
of sale is exercised by posting and publishing a notice of sale for at least 20
days after expiration of the three-month reinstatement period. Therefore, the
effective minimum period for foreclosing on a mortgage could be in excess of
seven months after the initial default. Such time delays in collections could
disrupt the flow of revenues available to an issuer for the payment of debt
service on the outstanding obligations if such defaults occur with respect to a
substantial number of mortgages or deeds of trust securing an issuer's
obligations.
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In addition, a court could find that there is sufficient involvement of
the issuer in the nonjudicial sale of property securing a mortgage for such
private sale to constitute "state action," and could hold that the
private-right-of-sale proceedings violate the due process requirements of the
Federal or State Constitutions, consequently preventing an issuer from using the
nonjudicial foreclosure remedy described above.
Certain California Municipal Securities in the Fund may be obligations
which finance the acquisition of single family home mortgages for low and
moderate income mortgagors. These obligations may be payable solely from
revenues derived from the home mortgages, and are subject to California's
statutory limitations described above applicable to obligations secured by real
property. Under California antideficiency legislation, there is no personal
recourse against a mortgagor of a single family residence purchased with the
loan secured by the mortgage, regardless of whether the creditor chooses
judicial or nonjudicial foreclosure.
Under California law, mortgage loans secured by single-family
owner-occupied dwellings may be prepaid at any time. Prepayment charges on such
mortgage loans may be imposed only with respect to voluntary prepayments made
during the first five years during the term of the mortgage loan, and cannot in
any event exceed six months' advance interest on the amount prepaid in excess of
20% of the original principal amount of the mortgage loan. This limitation could
affect the flow of revenues available to an issuer for debt service on the
outstanding debt obligations which financed such home mortgages.
Other Investment Information. The investment adviser believes that it
is likely that sufficient California Municipal Securities will be available to
satisfy the investment objective, policies and limitations of the California
Tax-Exempt Bond Fund, and to enable the Fund to invest at least 50% of its total
assets in California Municipal Securities at the close of each of its fiscal
quarters. In meeting this investment policy the Fund may invest in Municipal
Securities which are private activity bonds (including industrial development
bonds under prior law) the interest on which is subject to the 26% to 28%
federal alternative minimum tax applicable to individuals and the 20% federal
alternative minimum tax and the environmental tax applicable to corporations.
The environmental tax applicable to corporations is imposed at the rate of .12%
on the excess of the corporations modified federal alternative minimum taxable
income over $2,000,000. Investments in such securities, however, will not exceed
under normal market conditions 20% of the Fund's total assets when added
together with any taxable investments held by the Fund. Moreover, although the
Fund does not presently intend to do so on a regular basis, it may invest more
than 25% of its assets in Municipal Securities the interest on which is paid
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solely from revenues of similar projects if such investment is deemed necessary
or appropriate by the Fund's investment adviser in light of the Fund's
investment objective and policies. To the extent that the Fund's assets are
concentrated in Municipal Securities 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.
If the Company's Board of Directors, after consultation with the
investment adviser, should for any reason determine that it is impracticable to
invest at least 50% of the Fund's total assets in California Municipal
Securities at the close of each quarter of the Fund's taxable year, the Board
would re-evaluate the Fund's investment objective and policies and consider
changes in its structure and name or possible dissolution.
OTHER INVESTMENT LIMITATIONS
The Fund's investment objectives are fundamental; the prospectus for
each Fund summarizes certain other fundamental policies that may not be changed
with respect to such Fund without the affirmative vote of the holders of the
majority of the Fund's outstanding shares (as defined below under "Additional
Information - Miscellaneous"). Similarly, the following enumerated additional
fundamental policies, as well as the Fund's investment objectives, may not be
changed with respect to each Fund without such a vote of shareholders.
THE AGGRESSIVE GROWTH FUND MAY NOT:
1. Purchase or sell real estate (however, the Fund may, to the extent
appropriate to its investment objective, purchase securities issued by companies
investing in real estate or interests therein).
2. Underwrite the securities of other issuers.
3. Purchase securities of companies for the purpose of exercising
control.
4. Purchase securities on margin, make short sales of securities or
maintain a short position, except that this limitation shall not apply to
transactions in futures contracts and related options.
5. Acquire any other investment company or investment company security
except in connection with a merger, consolidation, reorganization or acquisition
of assets or as may otherwise be permitted by the Investment Company Act of
1940.
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6. Purchase securities of any one issuer (other than obligations issued
or guaranteed by U.S. Government, its agencies or instrumentalities) if
immediately thereafter more than 15% of its total assets would be invested in
certificates of deposit or bankers' acceptances of any one bank, or more than 5%
of its total assets would be invested in other securities of any one bank or the
securities of any other issuer (except that up to 25% of the Fund's total assets
may be invested without regard to this limitation).
In accordance with current regulations of the Securities and Exchange
Commission, the Aggressive Growth Fund presently intends to limit its
investments in the securities of any single issuer to not more than 5% of its
total assets (measured at the time of purchase), except that up to 25% of the
Fund's total assets may be invested without regard to this limitation. This
intention is not, however, a fundamental policy of the Fund.
7. Purchase any securities which 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) the industry classification of utilities will
be determined according to their service. For example, gas, gas transmission,
electric and gas, electric and telephone will be considered a separate industry.
8. Borrow money or issue senior securities, except that the Fund may
borrow from banks or enter into reverse repurchase agreements to meet
redemptions or for other temporary purposes in amounts up to 10% of its 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 its total assets at the
time of such borrowing; or purchase securities at any time after such borrowings
(including reverse repurchase agreements) have been entered into and before they
are repaid. The Fund's transactions in futures and related options (including
the margin posted by the Fund in connection with such transactions) are not
subject to this investment limitation.
9. Make loans except that the fund may purchase or hold debt
instruments or enter into repurchase agreements pursuant to its investment
objective and policies and my lend portfolio securities in an amount not
exceeding 30% of its total assets.
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10. Purchase securities without available market quotations which
cannot be sold without registration or the filing of a notification under
Federal or state securities laws, enter into repurchase agreements providing for
settlement more than seven days after notice, or purchase any other securities
deemed illiquid by the Directors if, as a result, such securities and repurchase
agreements would exceed 10% of the Funds total value.
The Fund intends that variable amount master demand notes with
maturities of nine months or less, as well as any investments in securities that
are not registered under the 1933 Act but that may be purchased by institutional
buyers under Rule 144A and for which a liquid trading market exists as
determined by the Board of Directors or Bank of America (pursuant to guidelines
adopted by the Board), will not be subject to this 10% limitation or illiquid
securities.
11. Purchase or sell commodity contracts, or invest in oil, gas or
mineral exploration or development programs, except that the Fund may, to the
extent appropriate to its investment objective, purchase publicly traded
securities of companies engaging in whole or in part in such activities, and may
enter into futures contract and related options.
THE U.S. GOVERNMENT SECURITIES FUND AND CAPITAL INCOME FUND MAY NOT:
1. Purchase the securities of any issuer if as a result more than 5% of
the value of the Fund's total assets would be invested in the securities of such
issuer, except that up to 25% of the value of the Fund's total assets may be
invested without regard to this 5% limitation. Securities issued or guaranteed
by the United States Government or its agencies or instrumentalities are not
subject to this investment limitation.
2. Underwrite any issue of securities, except to the extent that the
purchase of securities directly from the issuer thereof in accordance with the
Fund's investment objective, policies and limitations may be deemed to be
underwriting.
3. Purchase or sell real estate, except that a Fund may, to the extent
appropriate to its investment objective, invest in GNMA Certificates and
securities issued by companies which invest in real estate or interests therein.
4. Purchase securities on margin (except for such short-term credits as
may be necessary for the clearance of transactions), make short sales of
securities or maintain a short position.
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5. Write or sell puts, calls, straddles, spreads or combinations
thereof, except that the Funds may write covered call options.
6. Purchase or sell commodities or commodity contracts, or invest in
oil, gas or mineral exploration or development programs, except that: (a) a Fund
may, to the extent appropriate to its investment objective, invest in securities
issued by companies which purchase or sell commodities or commodity contracts or
which invest in such programs; and (b) a Fund may purchase and sell futures
contracts and options on futures contracts.
7. Purchase securities of other investment companies, except (a)
securities of money-market funds, to the extent permitted by the Investment
Company Act of 1940, or (b) in connection with a merger, consolidation,
acquisition or reorganization.
8. Purchase any securities which would cause 25% or more of the value
of its total assets at the time of such purchase to be invested in the
securities of one or more issuers conducting their principal business activities
in the same industry; provided, however, that (a) there is no limitation with
respect to investments in obligations issued or guaranteed by the federal
government and its agencies and instrumentalities; (b) each utility (such as
gas, gas transmission, electric and telephone service) will be considered a
single industry for purposes of this policy; and (c) 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 their parents.
9. Purchase securities of any issuer if as a result the Fund will own
more than 10% of the voting securities of such issuer.
10. Purchase any securities which would cause 25% or more of the value
of its total assets at the time of such purchase to be invested in the
securities of one or more issuers conducting their principal business activities
in the same industry; provided, however, that (a) there is no limitation with
respect to investments in obligations issued or guaranteed by the federal
government and its agencies and instrumentalities (b) each utility (such as gas,
gas transmission, electric and telephone service) will be considered a single
industry for purposes of this policy; and (c) 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 their parents.
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11. Borrow money except from banks for temporary purposes and in an
amount not exceeding 10% of the value of the Fund's total assets, issue senior
securities (as defined in the Investment Company Act of 1940) 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. Borrowing
may take the form of sale of portfolio securities accompanied by a simultaneous
agreement as to their repurchase. (This borrowing provision is not for
investment leverage, but solely to facilitate management of the Fund's portfolio
by enabling the Fund to meet redemption requests when the liquidation of
portfolio securities is deemed to be disadvantageous or inconvenient. The Fund
will not purchase any securities while borrowing are outstanding. Interest paid
on borrowed funds will reduce the net investment income of the Fund.) For the
purpose of this restriction, collateral or escrow arrangements with respect to
margin for futures contracts are not deemed to be a pledge of assets, and
neither such arrangements nor the purchase of futures contracts are deemed to be
the issuance of a senior security.
12. Make loans, except that the Fund may purchase or hold debt
obligations in accordance with its investment objective, policies and
limitations; may enter into repurchase agreements with respect to securities;
and may lend portfolio securities against collateral consisting of cash or
securities of the U.S. Government and its agencies and its agencies and
instrumentalities which are consistent with its permitted investments.
13. Invest more than 10% of the value of its total assets in securities
with legal or contractual restrictions on resale (including repurchase
agreements with terms greater than seven days over the counter options and the
securities covering such options.)
The Fund intends that investments in securities that are not registered
under the 1933 Act but may be purchased by institutional buyers under Rule 144A
and for which a liquid trading market exists as determined by the Board of
Directors or Bank of America (pursuant to guidelines adopted by the Board), will
not be subject to this 10% limitation on illiquid securities.
14. Purchase securities of any issuer which has been in continuous
operation for less than three years (including operations of its predecessors),
except obligations issued or guaranteed by the U.S. government or its agencies.
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IN ADDITION:
1. Under normal market conditions the U.S. Government Securities Fund
may not invest less than 65% of its total assets in GNMA Certificates.
2. Under normal market conditions the Capital Income Fund may not
invest less than 65% of its total assets in Convertible Securities. For purposes
of this limitation, securities acquired upon the conversion of Convertible
Securities are deemed to be Convertible Securities for a period of two months
after the effective date of their conversion.
THE CALIFORNIA TAX-EXEMPT BOND FUND MAY NOT:
1. Make loans except that the Fund may purchase or hold debt
instruments and enter into repurchase agreements pursuant to its investment
objective and policies.
2. Purchase or sell real estate (however, the Fund may, to the extent
appropriate to its investment objective, purchase Municipal Securities secured
by real estate or interests therein or securities issued by companies investing
in real estate or interests therein).
3. Purchase securities on margin, make short sales of securities or
maintain a short position.
4. Underwrite the securities of other issuers.
5. Purchase securities of companies for the purpose of exercising
control.
6. Invest in industrial revenue bonds where the payment of principal
and interest are the responsibility of a company (including its predecessors)
with less than three years of continuous operation.
7. Purchase or sell commodity contracts, or invest in oil, gas or
mineral exploration or development programs (however, the Fund may, to the
extent appropriate to its investment objective, purchase publicly traded
securities of companies engaging in whole or in part in such activities).
8. Acquire any other investment company or investment company security
except in connection with a merger, consolidation, reorganization or acquisition
of assets.
9. Purchase securities while its borrowings (including reverse
repurchase agreements) are outstanding.
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10. Purchase securities of any one issuer (other than obligations
issued or guaranteed by the U.S. Government, its agencies or instrumentalities)
if immediately thereafter more than 15% of its total assets would be invested in
certificates of deposit or bankers' acceptances of any one bank, or more than 5%
of its total assets would be invested in other securities of any one bank or the
securities of any other issuer (except that up to 25% of the Fund's total assets
may be invested without regard to this limitation).
11. Purchase any securities which 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 this limitation shall not apply to Municipal Securities
or governmental guarantees of Municipal Securities; and provided, further, that
for the purpose of this limitation only, industrial development bonds that are
backed only by the assets and revenues of a nongovernmental user shall not be
deemed to be Municipal Securities.
12. Borrow money or issue senior securities, except that the Fund may
borrow from banks or enter into reverse repurchase agreements to meet
redemptions or for other temporary purposes in amounts up to 10% of its 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 its total assets at the
time of such borrowing.
13. Write or sell puts, calls, straddles, spreads, or combinations
thereof except that the Fund may acquire stand-by commitments with respect to
its Municipal Securities.
14. Invest more than 10% of its total assets in securities with legal
or contractual restrictions on resale or for which no readily available market
exists, including repurchase agreements providing for settlement more than seven
days after notice.
In accordance with current regulations of the Securities and Exchange
Commission, the California Tax-Exempt Bond Fund presently intends to limit its
investments in the securities of any single issuer to not more than 5% of its
total assets (measured at the time of purchase), except that up to 25% of the
Fund's total assets may be invested without regard to this limitation. This
intention is not, however, a fundamental policy of the Fund.
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* * *
If a percentage restriction is satisfied at the time of investment, a
later increase or decrease in such percentage resulting from a change in asset
value will not constitute a violation of such restriction.
For the purposes of Investment Limitation Paragraph 1 in the Aggressive
Growth and California Tax-Exempt Bond Funds' Prospectuses, Investment Limitation
Paragraph 2 in the Capital Income Fund's Prospectus, and Investment Limitation
Paragraph 8 in this Statement of Additional Information with respect to the
U.S. Government Securities Fund, the Funds treat, in accordance with the
current views of the staff of the Securities and Exchange Commission and as a
matter of non-fundamental policy that may be changed without a vote of
shareholders, all supranational organizations as a single industry and each
foreign government (and all of its agencies) as a separate industry.
In order to permit the sale of a Fund's shares in certain states, the
Company may make commitments more restrictive than the investment policies and
limitations described above. To permit the sale of the shares of the Capital
Income Fund and Aggressive Growth Fund in Texas, the Company has agreed to the
following additional restrictions with respect to such Funds:
1. The Funds will not invest more than 5% of their net assets in
warrants, of which not more than 2% may be warrants which are not listed on the
New York or American Stock Exchange.
2. The Funds will not invest in oil, gas or mineral leases.
3. The Funds will not invest more than 10% of their respective total
assets in illiquid securities including securities of foreign issuers which are
not listed on a recognized domestic or foreign securities exchange.
Should the Company determine that the above commitments or any other
commitment made to permit the sale of a Fund's shares in any state are no longer
in the best interests of the Fund, it will revoke the commitment by terminating
sales of the Fund's shares in the state involved.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
Information on how to purchase and redeem Fund shares, and how such
shares are priced, is included in the Prospectuses. Additional information is
contained below.
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VALUATION OF AGGRESSIVE GROWTH FUND
Portfolio securities are valued at the last sales price on the
securities exchange on which such securities are primarily traded or at the last
sales price obtained from the NASDAQ. Securities not listed on an exchange or
NASDAQ, or securities for which there were no transactions, are valued at the
average of the most recent bid and asked prices. Restricted securities,
securities for which market quotations are not readily available, and other
assets are valued at fair value, using methods determined under the supervision
of the Board of the Company. Valuation of options is described above under
"Investment Objectives and Policies--Options Trading." Short-term securities are
valued at amortized cost, which approximates market value. The amortized cost
method involves valuing a security at its cost on the date of purchase and
thereafter assuming a constant amortization to maturity of the difference
between the principal amount due at maturity and cost.
VALUATION OF CALIFORNIA TAX-EXEMPT BOND FUND
The Fund's assets are valued for purposes of pricing sales and
redemptions by an independent pricing service ("Service") approved by the
Company's Board of Directors. When, in the judgment of the Service, quoted bid
prices for portfolio securities are readily available and are representative of
the bid side of the market, these investments are valued at the mean between
quoted bid prices (as obtained by the Service from dealers in such securities)
and asked prices (as calculated by the Service based upon its evaluation of the
market for such securities). Other investments (which constitute a majority of
the Fund's securities) are carried at fair value as determined by the Service,
based on methods which include consideration of yields or prices of municipal
bonds of comparable quality, coupon, maturity and type; indications as to values
from dealers; and general market conditions. The Service may also employ
electronic data processing techniques and matrix systems to determine value.
Short-term securities are valued at amortized cost, which approximates market
value. The amortized cost method involves valuing a security at its cost on the
date of purchase and thereafter assuming a constant amortization to maturity of
the difference between the principal amount due at maturity and cost.
VALUATION OF CAPITAL INCOME FUND AND U.S. GOVERNMENT SECURITIES FUND
Portfolio securities for which market quotations are readily available
(other than debt securities with remaining maturities of 60 days or less) are
valued at the last reported sale price or (if none is available) the mean
between the current quoted bid and asked prices provided by investment dealers.
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Other securities and assets for which market quotations are not readily
available are valued at their fair value using methods determined under the
supervision of the Board of the Company. Debt securities with remaining
maturities of 60 days or less are valued on an amortized cost basis unless the
Board determines that such basis does not represent fair value at the time.
Under this method such securities are valued initially at cost on the date of
purchase or, in the case of securities purchased with more than 60 days to
maturity, are valued at their market or fair value each day until the 61st day
prior to maturity. Thereafter, absent unusual circumstances, a constant
proportionate amortization of any discount or premium is assumed until maturity
of the security.
A pricing service may be used to value certain portfolio securities
where the prices provided are believed to reflect the fair value of such
securities. In valuing securities the pricing service would normally take into
consideration such factors as yield, risk, quality, maturity, type of issue,
trading characteristics, special circumstances and other factors it deems
relevant in determining valuations for normal institutional-sized trading units
of debt securities and would not rely solely on quoted prices. The methods used
by the pricing service and the valuations so established will be utilized under
the general supervision of the Board. Valuation of options is described above
under "Investment Objectives and Policies - Options Trading".
SUPPLEMENTARY PURCHASE INFORMATION
For the purpose of applying the Right of Accumulation or Letter of
Intent privileges described in the Prospectuses, the scale of sales loads
applies to purchases made by any "purchaser," which term includes an individual
and/or spouse purchasing securities for his, her or their own account or for the
account of any minor children; or a trustee or other fiduciary account
(including a pension, profit-sharing or other employee benefit trust created
pursuant to a plan qualified under Section 401 of the Internal Revenue Code)
although more than one beneficiary is involved; or "a qualified group" which has
been in existence for more than six months and has not been organized for the
purpose of buying redeemable securities of a registered investment company at a
discount, provided that the purchases are made through a central administrator
or a single dealer, or by other means which result in economy of sales effort or
expense. A "qualified group" must have more than 10 members, must be available
to arrange for group meetings between representatives of the Funds and the
members, and must be able to arrange for mailings to members at reduced or no
cost to the Distributor. The value of shares eligible for the Right of
Accumulation privilege may also be used as a credit toward completion of the
Letter of Intent privilege. Such shares will be valued at their
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offering price prevailing on the date of submission of the Letter of Intent.
Distributions on shares held in escrow pursuant to the Letter of Intent
privilege will be credited to the shareholder, but such shares are not eligible
for a Fund's Exchange Privilege.
The computation of the hypothetical offering price per share for each
Fund based on the value of each Fund's net assets on February 28, 1995 and each
Fund's outstanding securities on such dates is as follows:
<TABLE>
<CAPTION>
U.S.
California Aggressive Government Capital
Tax-Exempt Growth Securities Income
Bond Fund Fund Fund Fund
---------- ---------- ---------- -------
<S> <C> <C> <C> <C>
Net Assets........... $194,600,802 $131,878,800 $87,354,230 $198,250,954
Outstanding
Securities.......... 27,334,647 6,398,371 9,382,386 14,529,185
Net Asset Value
Per Share........... $7.12 $20.61 $9.31 $13.65
Sales Charge,
4.50 percent
of offering
price (4.71
percent of net
asset value
per share).......... $0.34 $ 0.97 $0.44 $ 0.64
Offering
to Public........... $7.46 $21.58 $9.75 $14.29
</TABLE>
SUPPLEMENTARY REDEMPTION INFORMATION: CAPITAL INCOME FUND, U.S. GOVERNMENT
SECURITIES FUND AND CALIFORNIA TAX-EXEMPT BOND FUND
Shares in the Capital Income Fund, U.S. Government Securities Fund and
California Tax-Exempt Bond Fund for which orders for wire redemption are
received on a business day before the close of regular trading hours on the New
York Stock Exchange (currently 4:00 p.m. (Eastern Time)) will be redeemed as of
the close of regular trading hours on such Exchange and the proceeds of
redemption will normally be wired in federal funds on the next business day to
the commercial bank specified by the investor on the Account Application (or
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other bank of record on the investor's file with the Transfer Agent).
To qualify to use the wire redemption privilege, the payment for Fund shares
must be drawn on, and redemption proceeds paid to, the same bank and account as
designated on the Account Application (or other bank of record as described
above). If the proceeds of a particular redemption are to be wired to another
bank, the request must be in writing and signature guaranteed. Shares for which
orders for wire redemption are received after the close of regular trading
hours on the New York Stock Exchange or on a non-business day will be redeemed
as of the close of trading on such Exchange on the next day on which shares of
the particular Fund are priced and the proceeds will normally be wired in
federal funds on the next business day thereafter. Redemption proceeds will be
wired to a correspondent member bank if the investor's designated bank is not a
member of the Federal Reserve System. Immediate notification by the
correspondent bank to the investor's bank is necessary to avoid a delay in
crediting the funds to the investor's bank account. Proceeds of less than
$1,000 will be mailed to the investor's address.
To change the commercial bank or account designated to receive
redemption proceeds, a written request must be sent to the Company, c/o Pacific
Horizon Funds, Inc., P.O. Box 80221, Los Angeles, California 90080-9909. Such
request must be signed by each shareholder, with each signature guaranteed as
described in the Funds' Prospectuses. Guarantees must be signed by an authorized
signatory and "signature guaranteed" must appear with the signature. The
Transfer Agent may request further documentation from corporations, executors,
administrators, trustees or guardians, and will accept other suitable
verification arrangements from foreign investors, such as consular verification.
Investors in the U.S. Government Securities Fund and California
Tax-Exempt Bond Fund redeeming by Check generally will be subject to the same
rules and regulations that commercial banks apply to checking accounts, although
the election of this privilege creates only a shareholder-transfer agent
relationship with the Transfer Agent. An investor may deliver Checks directly to
the Transfer Agent, BISYS Fund Services Ohio, Inc., 3435 Stelzer Road, Columbus,
Ohio 43219-3035, in which case the proceeds will be mailed, wired or made
available at the Transfer Agent on the next business day. The Check delivered to
the Transfer Agent must be accompanied by a properly executed stock
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power form on which the investor's signature is guaranteed as described in the
Funds' Prospectuses.
Because dividends on the U.S. Government Securities Fund and California
Tax-Exempt Bond Fund accrue daily, Checks should not be used to close an account
as a small balance is likely to result.
Check redemption may be modified or terminated at any time by the
Company or the Transfer Agent upon notice to shareholders.
SUPPLEMENTARY PURCHASE AND REDEMPTION INFORMATION: ALL FUNDS
In General. As described in the Prospectuses, Fund shares may be
purchased directly by the public, by clients of Bank of America through their
qualified trust and agency accounts, or by clients of securities dealers,
financial institutions (including banks) and other industry professionals, such
as investment advisers, accountants and estate planning firms that have entered
into service and/or selling agreements with the Distributor. (The Distributor,
such institutions and professionals are collectively referred to as "Service
Organizations.") Bank of America and Service Organizations may impose minimum
customer account and other requirements in addition to those imposed by the Fund
and described in the respective Prospectuses. Purchase orders will be effected
only on business days.
Shares in each Fund are sold with a sales load. Service Organizations
may be paid by the Distributor at the Company's expense for shareholder
services. Depending on the terms of the particular account, Bank of America, its
affiliates, and Service Organizations also may charge their customers fees for
automatic investment, redemption and other services provided. Such fees may
include, for example, account maintenance fees, compensating balance
requirements or fees based upon account transactions, assets or income. Bank of
America or the particular Service Organization is responsible for providing
information concerning these services and any charges to any customer who must
authorize the purchase of Fund shares prior to such purchase.
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Persons wishing to purchase Company shares through their accounts at
Bank of America or a Service Organization should contact such entity directly
for appropriate instructions.
Initial purchases of shares into a new account may not be made by wire.
However, persons wishing to make a subsequent purchase of Company shares into an
already existing account by wire should telephone the Transfer Agent at (800)
346-2087. The investor's bank must be instructed to wire federal funds to the
Transfer Agent, referring in the wire to the particular Fund in which such
investment is to be made; the investor's portfolio account number; and the
investor's name.
The Transfer Agent may charge a fee to act as Custodian for IRAs,
payment of which could require the liquidation of shares. All fees charged are
described in the appropriate form. Shares may be purchased in connection with
these plans only by direct remittance to the Transfer Agent. Purchases for IRA
accounts will be effective only when payments received by the Transfer Agent are
converted into federal funds. Purchases for these plans may not be made in
advance of receipt of funds.
For processing redemptions, the Transfer Agent may request further
documentation from corporations, executors, administrators, trustees or
guardians. The Transfer Agent will accept other suitable verification
arrangements from foreign investors, such as consular verification.
Investors should be aware that if they have selected the TeleTrade
Privilege, any request for a wire redemption will be effected as a TeleTrade
transaction through the Automated Clearing House (ACH) system unless more prompt
transmittal is specifically requested. Redemption proceeds of a TeleTrade
transaction will be on deposit in the investor's account at the ACH member bank
normally two business days after receipt of the redemption request.
Exchange Privilege. Shareholders in the Pacific Horizon Family of Funds
have an exchange privilege whereby they may exchange all or part of their
Pacific Horizon Shares for shares of other investment portfolios in the Pacific
Horizon Family of Funds. Shareholders may also exchange all or a part of their
Pacific Horizon Shares for like shares of an investment portfolio of Time
Horizon Funds. By use of the exchange privilege, the investor authorizes the
Transfer Agent to act on telephonic, telegraphic or written exchange
instructions from any person representing himself or herself to be the investor
and believed by the Transfer Agent to be genuine. The Transfer Agent's records
of such instructions are binding. The exchange privilege may be modified or
terminated at any time upon notice to shareholders. For federal income tax
purposes, exchange transactions are treated as sales on which a purchaser will
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realize a capital gain or loss depending on whether the value of the shares
exchanged is more or less than his basis in such shares at the time of the
transaction.
Exchange transactions described in Paragraphs A, B, C and D below will
be made on the basis of the relative net asset values per share of the
investment portfolios involved in the transaction.
A. Shares of any investment portfolio purchased with a sales load, as well
as additional shares acquired through reinvestment of dividends or
distributions on such shares, may be exchanged without a sales load for
shares of any other investment portfolio in the Pacific Horizon Family
of Funds or the Time Horizon Funds.
B. Shares of any investment portfolio in the Pacific Horizon Family of
Funds or the Time Horizon Funds acquired by a previous exchange
transaction involving shares on which a sales load has directly or
indirectly been paid (e.g. shares purchased with a sales load or issued
in connection with an exchange transaction involving shares that had
been purchased with a sales load), as well as additional shares
acquired through reinvestment of dividends or distributions on such
shares, may be redeemed and the proceeds used to purchase without a
sales load shares of any other investment portfolio. To accomplish an
exchange transaction under the provisions of this Paragraph, investors
must notify the Transfer Agent of their prior ownership of shares and
their account number.
C. Shares of any investment portfolio in the Pacific Horizon Family of
Funds may be exchanged without a sales load for shares of any other
investment portfolio in the Family that is offered without a sales
load.
D. Shares of any investment portfolio in the Pacific Horizon Family of
Funds purchased without a sales load may be exchanged without a sales
load for shares in any other portfolio where the investor involved
maintained an account in the Pacific Horizon Family of Funds before
April 20, 1987 or was the beneficial owner of shares of Bunker Hill
Income Securities, Inc. on the date of its reorganization into the
Pacific Horizon Corporate Bond Fund.
Except as stated above, a sales load will be imposed when shares of any
investment portfolio in the Pacific Horizon Family of Funds that were purchased
or otherwise acquired without a sales load are exchanged for shares of another
investment
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portfolio in the Pacific Horizon Family or the Time Horizon Funds which are sold
with a sales load.
Exchange requests received on a business day prior to the time shares
of the investment portfolios involved in the request are priced will be
processed on the date of receipt. "Processing" a request means that shares in
the investment portfolio from which the shareholder is withdrawing an investment
will be redeemed at the net asset value per share next determined on the date of
receipt. Shares of the new investment portfolio into which the shareholder is
investing will also normally be purchased at the net asset value per share next
determined coincident to or after the time of redemption. Exchange requests
received on a business day after the time shares of the investment portfolios
involved in the request are priced will be processed on the next business day in
the manner described above.
Miscellaneous. Certificates for shares will not be issued.
Depending on the terms of the customer account at Bank of America or a
Service Organization, certain purchasers may arrange with the Company's
custodian for sub-accounting services paid by the Company without direct charge
to the purchaser.
A "business day" for purposes of processing share purchases and
redemptions received by the Transfer Agent at its Columbus office is a day on
which the New York Stock Exchange is open for trading. In 1996, the scheduled
holidays on which the New York Stock Exchange is closed are: New Year's Day,
Presidents' Day, Good Friday, Memorial Day (observed), Independence Day, Labor
Day, Thanksgiving Day and Christmas Day.
The Company may suspend the right of redemption or postpone the date of
payment for shares during any period when (a) trading on the New York Stock
Exchange is restricted by applicable rules and regulations of the Securities and
Exchange Commission; (b) the New York Stock Exchange is closed for other than
customary weekend and holiday closings; (c) the Securities and Exchange
Commission has by order permitted such suspension; or (d) an emergency exists as
determined by the Securities and Exchange Commission. (The Company may also
suspend or postpone the recordation of the transfer of its shares upon the
occurrence of any of the foregoing conditions.)
The Company's Charter permits its Board of Directors to require a
shareholder to redeem involuntarily shares in a Fund if the balance held of
record by the shareholder drops below $500 and such shareholder does not
increase such balance to $500 or more upon 60 days' notice. The Company will not
require a shareholder to redeem shares of a Fund if the balance held of record
by the shareholder is less than $500 solely because of a
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decline in the net asset value of the Fund's shares. The Company may also redeem
shares involuntarily if such redemption is appropriate to carry out the
Company's responsibilities under the 1940 Act.
If the Company's Board of Directors determines that conditions exist
which make payment of redemption proceeds wholly in cash unwise or undesirable,
the Company may make payment wholly or partly in securities or other property.
In such an event, a shareholder would incur transaction costs in selling the
securities or other property. The Company has committed that it will pay all
redemption requests by a shareholder of record in cash, limited in amount with
respect to each shareholder during any ninety-day period to the lesser of
$250,000 or 1% of the net asset value at the beginning of such period.
ADDITIONAL INFORMATION CONCERNING TAXES
FEDERAL - ALL FUNDS
Each Fund will be treated as a separate corporate entity under the
Internal Revenue Code of 1986, as amended (the "Code"), and intends to qualify
as a "regulated investment company." By following this policy, each Fund expects
to eliminate or reduce to a nominal amount the federal income taxes to which it
may be subject. If for any taxable year a Fund of the Company does not qualify
for the special federal tax treatment afforded regulated investment companies,
all of the Fund's taxable income would be subject to tax at regular corporate
rates (without any deduction for distributions to shareholders). In such event,
the Fund's dividend distributions (including amounts derived from interest on
Municipal Securities in the case of the California Tax-Exempt Bond Fund) to
shareholders would be taxable as ordinary income to the extent of the current
and accumulated earnings and profits of the particular Fund and would be
eligible for the dividends received deduction in the case of corporate
shareholders.
Qualification as a regulated investment company under the Code
requires, among other things, that each Fund distribute to its shareholders an
amount equal to at least the sum of 90% of its investment company taxable income
(if any) and 90% of its tax-exempt income (if any) net of certain deductions for
each taxable year. In general, a Fund's investment company taxable income will
be its taxable income, subject to certain adjustments and excluding the excess
of any net long-term capital gain for the taxable year over the net short-term
capital loss, if any, for such year. Each Fund of the Company intends to
distribute virtually all of its investment company taxable income (if any) for
each taxable year. To the extent such income is distributed by a Fund (whether
in cash or additional shares), it will be taxable to shareholders as ordinary
income.
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A Fund will not be treated as a regulated investment company under the
Code if 30% or more of the Fund's gross income for a taxable year is derived
from gains realized on the sale or other disposition of the following
investments held for less than three months (the "short-short test"): (1) stock
and securities (as defined in section 2(a)(36) of the 1940 Act); (2) options,
futures and forward contracts other than those on foreign currencies; and (3)
foreign currencies (and options, futures and forward contracts on foreign
currencies) that are not directly related to a Fund's principal business of
investing in stock and securities (and options and futures with respect to
stocks and securities). Interest (including original issue discount and accrued
market discount) received by a Fund upon maturity or disposition of a security
held for less than three months will not be treated as gross income derived from
the sale or other disposition of such security within the meaning of this
requirement. However, any other income which is attributable to realized market
appreciation will be treated as gross income from the sale or other disposition
of securities for this purpose. With respect to covered call options, if the
call is exercised by the holder, the premium and the price received on exercise
constitute the proceeds of sale, and the difference between the proceeds and the
cost of the securities subject to the call is capital gain or loss. Premiums
from expired call options written by a Fund and net gains from closing purchase
transactions are treated as short-term capital gains for federal income tax
purposes, and losses on closing purchase transactions are short-term capital
losses. See Appendix B -- "Accounting and Tax Treatment" -- for a general
discussion of the federal tax treatment of futures contracts, related options
thereon and other financial instruments, including their treatment under the
short- short test.
Any distribution of the excess of net long-term capital gains over net
short-term capital losses is taxable to shareholders as long-term capital gains,
regardless of how long the shareholder has held the distributing Fund's shares
and whether such gains are received in cash or additional Fund shares. The Fund
will designate such a distribution as a capital gain dividend in a written
notice mailed to shareholders after the close of the Fund's taxable year. It
should be noted that, upon the sale or exchange of Fund shares, if the
shareholder has not held such shares for more than six months, any loss on the
sale or exchange of those shares will be treated as long-term capital loss to
the extent of the capital gain dividends received with respect to the shares.
Ordinary income of individuals is taxable at a maximum nominal rate of
39.6%, but because of limitations on itemized deductions otherwise allowable and
the phase-out of personal exemptions, the maximum effective marginal rate of tax
for some taxpayers may be higher. An individual's long-term capital gains
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are taxable at a maximum nominal rate of 28%. For corporations, long-term
capital gains and ordinary income are both taxable at a maximum nominal rate of
35% (or at a maximum effective marginal rate of 39% in the case of corporations
having taxable income between $100,000 and $335,000).
A 4% non-deductible excise tax is imposed on regulated investment
companies that fail to currently distribute specified percentages of their
ordinary taxable income and capital gain net income (excess of capital gains
over capital losses). Each Fund intends to make sufficient distributions or
deemed distributions of its ordinary taxable income and any capital gain net
income prior to the end of each calendar year to avoid liability for this excise
tax.
The Company will be required in certain cases to withhold and remit to
the United States Treasury 31% of taxable dividends or 31% of gross sale
proceeds upon sale paid to shareholders who (i) have failed to provide either a
correct tax identification number in the manner provided, (ii) who are subject
to withholding by the Internal Revenue Service for failure to properly include
on their return payments of taxable interest or dividends or (iii) who have
failed to certify to the Company that they are subject to backup withholding
when required to do so or that they are "exempt recipients."
FEDERAL - CALIFORNIA TAX-EXEMPT BOND FUND
The Fund's policy is to pay each year as exempt- interest dividends
substantially all the Fund's Municipal Securities interest income net of certain
deductions. An exempt- interest dividend is any dividend or part thereof (other
than a capital gain dividend) paid by the Fund and designated as an
exempt-interest dividend in a written notice mailed to shareholders after the
close of the Fund's taxable year. However, the aggregate amount of dividends so
designated by the Fund cannot exceed the excess of the amount of interest exempt
from tax 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. The percentage of total dividends paid for any taxable year which
qualifies as exempt-interest dividends will be the same for all shareholders
receiving dividends from the Fund for such year. In order for the California
Tax-Exempt Bond Fund to pay exempt-interest dividends for any taxable year, at
the close of each quarter of its taxable year at least 50% of the aggregate
value of the Fund's assets must consist of exempt-interest obligations.
Exempt-interest dividends may be treated by shareholders of the
California Tax-Exempt Bond Fund as items of interest excludable from their gross
income under Section 103(a) of the Code. However, each shareholder is advised to
consult his
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or her tax adviser with respect to whether exempt-interest dividends would
retain the exclusion under Section 103(a) if such shareholder would be treated
as a "substantial user" or a "related person" to such user with respect to
facilities financed through any of the tax-exempt obligations held by the Fund.
A "substantial user" is defined under U.S. Treasury Regulations to include a
non-exempt person who regularly uses a part of such facilities in his or her
trade or business and whose gross revenues derived with respect to the
facilities financed by the issuance of bonds are more than 5% of the total
revenues derived by all users of such facilities, or who occupies more than 5%
of the usable area of such facilities or for whom such facilities or a part
thereof were specifically constructed, reconstructed or acquired. A "related
person" includes certain related natural persons, affiliated corporations,
partners and partnerships and S corporations and their shareholders.
Interest on indebtedness incurred by a shareholder to purchase or carry
shares generally is not deductible for federal income tax purposes. 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, however, 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 the investment company
regularly distributes at least 90% of its net tax-exempt interest. No such
regulations had been issued as of the date of this Statement of Additional
Information.
As discussed in the Prospectus for the California Tax- Exempt Bond
Fund, dividends attributable to interest on certain private activity bonds
issued after August 7, 1986 must be included by shareholders as an item of tax
preference for purposes of determining possible liability for the Federal
alternative minimum tax and the environmental tax applicable to corporations.
The alternative minimum tax rate for individuals is 26-28% and for corporations
is 20%. The environmental tax applicable to corporations is imposed at the rate
of .12% on the excess of the corporation's modified alternative minimum taxable
income over $2,000,000.
Income itself exempt from federal income taxation may be considered in
addition to adjusted gross income when determining whether Social Security
payments received by a shareholder are subject to federal income taxation.
STATE - CALIFORNIA TAX-EXEMPT BOND FUND
As a regulated investment company, the California Tax- Exempt Bond Fund
(the "Fund") will be relieved of liability for
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California state franchise and corporate income tax to the extent its earnings
are distributed to its shareholders. The Fund will be taxed on its undistributed
taxable income. If for any year the Fund does not qualify for the special tax
treatment afforded regulated investment companies, all of the Fund's taxable
income (including interest income on California Municipal Securities for
franchise tax purposes only) may be subject to California state franchise or
income tax at regular corporate rates.
If, at the close of each quarter of its taxable year, at least 50% of
the value of the total assets of a regulated investment company, or series
thereof, consists of obligations the interest on which, if held by an
individual, is exempt from taxation by California ("California Exempt
Securities"), then a regulated investment company, or series thereof, will be
qualified to pay dividends exempt from California state personal income tax to
its non-corporate shareholders (hereinafter referred to as "California
exempt-interest dividends"). For this purpose, California Exempt Securities are
generally limited to California Municipal Securities and certain U.S. Government
and U.S. Possession obligations. "Series" of a regulated investment company is
defined as a segregated portfolio of assets, the beneficial interest in which is
owned by the holders of an exclusive class or series of stock of the company.
The Fund intends to qualify under the above requirements so that it can pay
California exempt-interest dividends. If the Fund fails to so qualify, no part
of its dividends to shareholders will be exempt from the California state
personal income tax. The Fund may reject purchase orders for shares if it
appears desirable to avoid failing to so qualify.
Within 60 days after the close of its taxable year, the Fund will
notify each shareholder of the portion of the dividends paid by the Fund to the
shareholder with respect to such taxable year which is exempt from California
state personal income tax. The total amount of California exempt-interest
dividends paid by the Fund with respect to any taxable year cannot exceed the
excess of the amount of interest received by the Fund for such year on
California Exempt Securities over any amounts that, if the Fund were treated as
an individual, would be considered expenses related to tax-exempt income or
amortizable bond premium and would thus not be deductible under federal income
or California state personal income tax law. The percentage of total dividends
paid by the Fund with respect to any taxable year which qualifies as California
exempt-interest dividends will be the same for all shareholders receiving
dividends from the Fund with respect to such year.
In cases where shareholders are "substantial users" or "related
persons" with respect to California Exempt Securities held by the Fund, such
shareholders should consult their tax advisers to determine whether California
exempt-interest
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dividends paid by the Fund with respect to such obligations retain California
state personal income tax exclusion. In this connection rules similar to those
regarding the possible unavailability of federal exempt-interest dividend
treatment to "substantial users" are applicable for California state tax
purposes. See "Additional Information Concerning Taxes - Federal - California
Tax-Exempt Bond Fund" above.
To the extent, if any, dividends paid to shareholders are derived from
the excess of net long-term capital gains over net short-term capital losses,
such dividends will not constitute California exempt-interest dividends and will
generally be taxed as long-term capital gains under rules similar to those
regarding the treatment of capital gains dividends for federal income tax
purposes. See "Additional Information Concerning Taxes - Federal- All Funds"
above. Moreover, interest on indebtedness incurred by a shareholder to purchase
or carry Fund shares is not deductible for California state personal income tax
purposes if the Fund distributes California exempt-interest dividends during the
shareholder's taxable year.
The foregoing is only a summary of some of the important California
state personal income tax considerations generally affecting the Fund and its
shareholders. No attempt is made to present a detailed explanation of the
California state personal income tax treatment of the Fund or its shareholders,
and this discussion is not intended as a substitute for careful planning.
Further, it should be noted that the portion of any Fund dividends constituting
California exempt-interest dividends is excludable from income for California
state personal income tax purposes only. Any dividends paid to shareholders
subject to California state franchise tax or California state corporate income
tax may therefore be taxed as ordinary dividends to such purchasers
notwithstanding that all or a portion of such dividends is exempt from
California state personal income tax. Accordingly, potential investors in the
Fund, including, in particular, corporate investors which may be subject to
either California franchise tax or California corporate income tax, should
consult their tax advisers with respect to the application of such taxes to the
receipt of Fund dividends and as to their own California state tax situation, in
general.
OTHER INFORMATION
Depending upon the extent of activities in states and localities in
which its offices are maintained, in which its agents or independent contractors
are located or in which it is otherwise deemed to be conducting business, the
Funds may be subject to the tax laws of such states or localities.
Except as noted above with respect to California state personal income
taxation of dividends paid by the California Tax-
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<PAGE> 375
Exempt Bond Fund, income distributions may be taxable to shareholders 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 or U.S.
government obligations which, if realized directly, would be exempt from such
income taxes. Shareholders are advised to consult their tax advisers concerning
the application of state and local taxes.
The foregoing discussion is based on tax laws and regulations which are
in effect on the date of this Statement of Additional Information. Such laws and
regulations may be changed by legislative or administrative action. This
discussion is only a summary of some of the important tax considerations
generally affecting purchasers of Fund shares. No attempt is made to present a
detailed explanation of the federal income tax treatment of the Funds or their
shareholders, and this discussion is not intended as a substitute for careful
tax planning. Accordingly, potential purchasers of Fund shares should consult
their tax advisers with specific reference to their own tax situation.
MANAGEMENT
DIRECTORS AND OFFICERS OF THE COMPANY
The directors and officers of the Company, their addresses, ages and
principal occupations during the past five years are:
<TABLE>
<CAPTION>
Position with
Name and Address Age Company Principal Occupations
- ---------------- --- ------------- ---------------------
<S> <C> <C> <C>
Thomas M. Collins 61 Director Of counsel, law firm of
McDermott & Trayner McDermott & Trayner;
225 S. Lake Avenue Partner of the law firm
Suite 410 of Musick, Peeler &
Pasadena, CA 91101-3005 Garrett (until April,
1993); Trustee, Master
Investment Trust Series
I and Master Investment
Trust, Series II (registered
investment companies) (since
1993); former Director,
Bunker Hill Income
Securities, Inc. (registered
investment company) through
1991.
</TABLE>
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<PAGE> 376
<TABLE>
<CAPTION>
Position with
Name and Address Age Company Principal Occupations
- ---------------- --- ------------- ---------------------
<S> <C> <C> <C>
Douglas B. Fletcher 70 Vice Chairman Chairman of the Board
Fletcher Capital of the Board and Chief Executive
Advisors Incorporated Officer, Fletcher
4 Upper Newport Plaza Capital Advisors,
Suite 100 Incorporated, (registered
Newport Beach, CA 92660-2629 investment adviser)
1991 to date;
Partner, 1991
Newport Partners
(private venture
capital firm), 1981
to date; Chairman of
the Board and Chief
Executive Officer,
First Pacific
Advisors, Inc.
(registered
investment adviser)
and seven investment
companies under its
management, prior to
1983; former Allied
Member, New York
Stock Exchange;
Chairman of the
Board of FPA
Paramount Fund, Inc.
through 1984;
Director, TIS
Mortgage Investment
Company (real estate
investment trust);
Trustee and former
Vice Chairman of the
Board, Claremont
McKenna College;
Chartered Financial
Analyst.
Robert E. Greeley 62 Director Chairman, Page Mill
Page Mill Asset Asset Management (a
Management private investment
433 California Street company) since 1991;
Suite 900 Manager, Corporate
San Francisco, CA 94104 Investments, Hewlett
Packard Company from
1979 to 1991;
Trustee, Master
Investment Trust,
Series I and Master
Investment Trust,
Series II (since
1993); Director,
Morgan Grenfell
Small Cap Fund
(since 1986); former
Director, Bunker
Hill Income
Securities, Inc.
(since 1989)
(registered
investment
companies); former
Trustee, SunAmerica
Fund Group
(previously Equitec
</TABLE>
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<PAGE> 377
<TABLE>
<CAPTION>
Position with
Name and Address Age Company Principal Occupations
- ---------------- --- ------------- ---------------------
<S> <C> <C> <C>
Siebel Fund Group)
from 1984 to 1992.
Kermit O. Hanson 79 Director Vice Chairman of the
17760 14th Ave., N.W. Advisory Board, 1988 to
Seattle, WA 98177 date, Executive
Director, 1977 to
1988, Pacific Rim
Bankers Program (a
non-profit
educational
institution); Dean
Emeritus, 1981 to
date, Dean, 1964-81,
Graduate School of
Business
Administration,
University of
Washington;
Director, Washington
Federal Savings &
Loan Association;
Trustee, Seafirst
Retirement Funds
(since 1993)
(registered
investment company).
Cornelius J. Pings* 66 Chairman of President, Association
Association of American the Board and of American
Universities President Universities, February
One DuPont Circle 1993 to date; Provost,
Suite 730 1982 to January
Washington, DC 20036 1993, Senior Vice
President for
Academic Affairs,
1981 to January
1993, University of
Southern California;
Trustee, Master
Investment Trust,
Series I and Master
Investment Trust,
Series II (since
1995).
Kenneth L. Trefftzs 83 Director Private Investor;
11131 Briarcliff Drive formerly Distinguished
San Diego, CA 92131-1329 Emeritus Professor
of Finance and
Chairman of the
Department of
Finance and Business
Economics of the
Graduate School of
Business of the
University of
Southern California;
former Director,
Metro Goldwyn Mayer,
Inc.; Director,
Fremont General
Corporation
(insurance and
financial services
</TABLE>
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<PAGE> 378
<TABLE>
<CAPTION>
Position with
Name and Address Age Company Principal Occupations
- ---------------- --- ------------- ---------------------
<S> <C> <C> <C>
holding company);
Director, Source
Capital, Inc.
(closed-end
investment company);
Director of three
open-end investment
companies managed by
First Pacific
Advisors, Inc.;
formerly Chairman of
the Board of
Directors (or
Trustees) of
nineteen investment
companies managed by
American Capital
Asset Management,
Inc.
Richard E. Stierwalt Executive Chairman of the Board
125 W. 55th Street 40 Vice President and Chief Executive
New York, NY 10019 Officer, July 1993 to
date, prior thereto
Senior Director,
Managing Director
and Chief Executive
Officer of the
Administrator and
Distributor,
February 1987 to
July 1993;
President, Master
Investment Trust,
Series I, Master
Investment Trust,
Series II and
Seafirst Retirement
Funds (since 1993);
First Vice
President, Trust
Operation
Administration,
Security Pacific
National Bank,
1983-1987.
William B. Blundin 57 Executive Vice Vice Chairman, July 1993
125 W. 55th Street President to date, prior thereto
New York, NY 10019 Director and President
of the Administrator and
Distributor, February
1987 to July 1993;
Executive Vice
President, Master
Investment Trust, Series
II and Seafirst
Retirement Funds (since
1993); Senior Vice
President, Shearson
Lehman Brothers, 1978-
1987.
Irimga McKay 35 Vice Senior Vice President,
7863 Girard Avenue President July 1993 to date, prior
Suite 306 thereto First Vice
La Jolla, CA 92037 President of the
</TABLE>
-69-
<PAGE> 379
<TABLE>
<CAPTION>
Position with
Name and Address Age Company Principal Occupations
- ---------------- --- ------------- ---------------------
<S> <C> <C> <C>
Administrator and
Distributor, November
1988 to July 1993; Vice
President, Master
Investment Trust, Series
II and Seafirst
Retirement Funds (since
1993); Regional Vice
President, Continental
Equities, June 1987 to
November 1988; Assistant
Wholesaler, VMS Realty
Partners (a real estate
limited partnership), May
1986 to June 1987.
W. Eugene Spurbeck 39 Assistant Vice Manager of Client
BISYS Fund Services President Services of the
515 Figueroa Street Administrator (1993 to
Suite 335 date); Assistant Vice
Los Angeles, CA 92307 President, Master
Investment Trust, Series
II; Vice President,
Seafirst Retirement Funds
(since 1995); Vice
President of Retail
Lending Operations Banc
One (1989 to 1993).
Martin R. Dean 31 Treasurer Manager of Fund
3435 Stelzer Road Accounting of BISYS
Columbus, OH 43219 Fund Services, May 1994
to Present; Treasurer,
Master Investment Trust,
Series II and Seafirst
Retirement Funds (since
1995); Senior Manager at
KPMG Peat Marwick
previously 1990-1994.
W. Bruce McConnel, III 52 Secretary Partner of the law firm
1345 Chestnut Street of Drinker Biddle &
Philadelphia National Bank Reath. Secretary,
Building, Suite 1100 Master Investment Trust,
Philadelphia, PA 19107 Series I, Master
Investment Trust, Series
II and Seafirst
Retirement Funds
</TABLE>
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<PAGE> 380
<TABLE>
<CAPTION>
Position with
Name and Address Age Company Principal Occupations
- ---------------- --- ------------- ---------------------
<S> <C> <C> <C>
George O. Martinez 35 Assistant Senior Vice President
3435 Stelzer Road Secretary and Director of Legal
Columbus, OH 43219 and Compliance Services,
of the Administrator.
since April 1995;
Assistant Secretary,
Master Investment Trust,
Series II and Seafirst
Retirement Funds (since
1995); prior thereto,
Vice President and
Associate General
Counsel, Alliance Capital
Management, L.P.
</TABLE>
- --------------
* Mr. Pings is an "interested director" of the Company as defined in the 1940
Act.
The Audit Committee of the Board is comprised of all directors and is
chaired by Dr. Trefftzs. The Board does not
have an Executive Committee.
Each director is entitled to receive an annual fee of $25,000 plus
$1,000 for each day that a director participates in all or a part of a Board
meeting; the President receives an additional $20,000 per annum for his services
as President; Mr. Collins, in consideration of his years of service as President
and Chairman of the Board, receives an additional $40,000 per annum in severance
until February 28, 1997; each member of a Committee of the Board is entitled to
receive $1,000 for each Committee meeting they participate in (whether or not
held on the same day as a Board meeting); and each Chairman of a Committee of
the Board shall be entitled to receive an annual retainer of $1,000 for his
services as Chairman of the Committee. The Funds, and each other fund of the
Company, pays its proportionate share of these amounts based on relative net
asset values.
For the fiscal year ended February 28, 1995, the Company paid or
accrued for the account of its directors as a group for services in all
capacities a total of $334,168. Of that amount, $22,531, $23,089, $22,341 and
$22,020 of directors' compensation were allocated to the Aggressive Growth,
California Tax-Exempt Bond, U.S. Government Securities and Capital Income Funds,
respectively. Each director is also reimbursed for out-of-pocket expenses
incurred as a director. Drinker Biddle & Reath, of which Mr. McConnel is a
partner, receives legal fees as counsel to the Company. As of the date of this
Statement of Additional Information, the directors and officers of the
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<PAGE> 381
Company, as a group, own less than 1% of the outstanding shares of each of the
Company's investment portfolios.
Under a retirement plan approved by the Board of Directors, including a
majority of its directors who are not "interested persons" of the Company,
effective March 1, 1995, a director who dies or resigns after five years of
service is entitled to receive ten annual payments each equal to the greater of:
(i) 50% of the annual director's retainer that was payable by the Company during
the year of his/her death or resignation, or (ii) 50% of the annual director's
retainer then in effect for directors of the Company during the year of such
payment. A director who dies or resigns after nine years of service is entitled
to receive ten annual payments each equal to the greater of: (i) 100% of the
annual director's retainer that was payable by the Company during the year of
his/her death or resignation, or (ii) 100% of the annual director's retainer
then in effect for directors of the Company during the year of such payment.
Further, the amount payable each year to a director who dies or resigns is
increased by $1,000 for each year of service that the director provided as
Chairman of the Board.
Years of service for purposes of calculating the benefit described
above are based upon service as a director or Chairman after February 28, 1994.
Retirement benefits in which a director has become vested may not be reduced by
later Board action.
In lieu of receiving ten annual payments, a director may elect to
receive substantially equivalent benefits through a single-sum cash payment of
the present value of such benefits paid by the Company within 45 days of the
death or resignation of the director. The present value of such benefits is to
be calculated (i) based on the retainer that was payable by the Company during
the year of the director's death or resignation (and not on any retainer payable
to directors thereafter), and (ii) using the interest rate in effect as of the
date of the director's death or resignation by the Pension Benefit Guaranty
Corporation (or any successor thereto) for valuing immediate annuities under
terminating defined benefit pension plans. A director's election to receive a
single sum must be made in writing within the 30 calendar days after the date
the individual is first elected as a director.
In addition to the foregoing, the Board of Directors may, in its
discretion and in recognition of a director's period of service before March 1,
1994 as a director and possibly as Chairman, authorize the Company to pay a
retirement benefit following the director's death or resignation (unless the
director has vested benefits as a result of completing nine years of service).
Any such action shall be approved by the Board and by a majority of the
directors who are not "interested persons"
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<PAGE> 382
of the Company within 120 days following the director's death or resignation and
may be authorized as a single sum cash payment or as not more than ten annual
payments (beginning the first anniversary of the director's date of death or
resignation and continuing for one or more anniversary date(s) thereafter).
The obligation of the Company to pay benefits to a former director is
neither secured nor funded by the Company but shall be binding upon its
successors in interest. The payment of benefits under the retirement plan has no
priority or preference over the lawful claims of the Company's creditors or
shareholders, and the right to receive such payments is not assignable or
transferable by a director (or former director) other than by will, by the laws
of descent and distribution, or by the director's written designation of a
beneficiary.
The following chart provides certain information about the director
fees from the Company as of February 28, 1995:
<TABLE>
<CAPTION>
==============================================================================================================================
TOTAL
COMPENSATION
PENSION OR FROM
RETIREMENT ESTIMATED REGISTRANT
AGGREGATE BENEFITS ANNUAL AND FUND
COMPENSATION ACCRUED AS BENEFITS COMPLEX(*)
NAME OF PERSON/ FROM THE PART OF FUND UPON PAID TO
POSITION COMPANY EXPENSES RETIREMENT DIRECTORS
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Thomas M. Collins $100,000 $0 $0 $110,000
President and
Chairman of the
Board(+)
- ----------------------------------------------------------------------------------------------------------------------------
Douglas B. Fletcher $57,500 $0 $0 $57,500
Vice Chairman of
the Board
- ----------------------------------------------------------------------------------------------------------------------------
Robert E. Greeley(**) $57,500 $0 $0 $65,781
Director
- ----------------------------------------------------------------------------------------------------------------------------
Kermit O. Hanson $57,500 $0 $0 $63,500
Director
- ----------------------------------------------------------------------------------------------------------------------------
Cornelius J. Pings $57,500 $0 $0 $57,500
Director
- ----------------------------------------------------------------------------------------------------------------------------
Kenneth L. Trefftzs $57,500 $0 $0 $57,500
Director
============================================================================================================================
</TABLE>
- --------------
* The "Fund Complex" consists of the Company, Seafirst Retirement Funds, the
Master Investment Trust, Series I and Master Investment Trust, Series II.
** Mr. Greeley became a director of the Company on April 25, 1994.
+ Mr. Collins was President and Chairman of the Board of the Company until
August 31, 1995.
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<PAGE> 383
INVESTMENT ADVISER
Bank of America is the successor by merger to Security Pacific National
Bank ("Security Pacific"), which previously served as investment adviser to the
Company since the commencement of its operations. In the investment advisory
agreements, Bank of America has agreed to provide investment advisory services
as described in each Prospectus. Bank of America has also agreed to pay all
expenses incurred by it in connection with its activities under its agreements
other than the cost of securities, including brokerage commissions, if any,
purchased for the Funds. In rendering its advisory services, Bank of America may
utilize Bank officers from one or more of the departments of the Bank which are
authorized to exercise the fiduciary powers of Bank of America with respect to
the investment of trust assets. In some cases, these officers may also serve as
officers, and utilize the facilities, of wholly-owned subsidiaries and other
affiliates of Bank of America or its parent corporation. In addition, the
Investment Advisory Agreement with respect to the Capital Income Fund provides
that Bank of America may, in its discretion, provide advisory services through
its own employees or employees of one or more of its affiliates that are under
the common control of Bank of America's parent, BankAmerica Corporation;
provided such employees are under the management of Bank of America.
For the services provided and expenses assumed pursuant to the
investment advisory agreement, the Company has agreed to pay Bank of America
fees, accrued daily and payable monthly, at the annual rates of .45% of the net
assets of the Capital Income Fund; .60% of the net assets of the Aggressive
Growth Fund; .35% of the net assets of the U.S. Government Securities Fund; and
.40% of the net assets of the California Tax-Exempt Bond Fund. The fees payable
to Bank of America are not subject to reduction as the value of each Fund's net
assets increases. From time to time, Bank of America may waive fees or reimburse
the Company for expenses voluntarily or as required by certain state securities
laws.
For the fiscal years ended February 28, 1995, 1994 and 1993, advisory
fees (net of waivers) paid or payable to Bank of America were as follows:
Aggressive Growth Fund - $816,300, $1,016,640, and $903,058, respectively;
California Tax-Exempt Bond Fund - $606,131, $721,895 and $157,000, respectively;
Capital Income Fund - $572,638, $39,298 and $0, respectively; and U.S.
Government Securities Fund - $397,905, $507,308 and $45,386, respectively. For
the three fiscal years indicated, Bank of America did not waive any fees with
resect to the Aggressive Growth Fund; waived fees with respect to the California
Tax- Exempt Bond Fund in the amounts of $242,173, $190,993 and $500,267,
respectively; waived fees with respect to the Capital Income Fund in the amounts
of $359,205, $387,148 and $41,517
-74-
<PAGE> 384
respectively; and waived fees with respect to the U.S. Government Securities
Fund in the amounts of $0, $20,985 and $347,564, respectively. Additionally, for
the fiscal years ended February 28, 1995, 1994 and 1993, Bank of America assumed
certain operating expenses (excluding certain shareholder servicing and
distribution expenses described below) of the Capital Income Fund in the amount
of $0, $0 and $191,339, respectively.
See "Management - Administrator" for instances where the Funds'
investment adviser is required to make expense reimbursements to the Company.
The investment advisory agreements for the Funds provide that Bank of
America shall not be liable for any error of judgment or mistake of law or for
any loss suffered in connection with the performance of the investment advisory
agreements, except a loss resulting from a breach of fiduciary duty with respect
to the receipt of compensation for services or a loss resulting from willful
misfeasance, bad faith or negligence in the performance of its duties or from
reckless disregard by it of its duties and obligations thereunder.
THE GLASS-STEAGALL ACT AND PROPOSED LEGISLATION
The Glass-Steagall Act, among other things, prohibits banks from
engaging in the business of underwriting securities, although national and
state-chartered banks generally are permitted to purchase and sell securities
upon the order and for the account of their customers. In 1971, the United
States Supreme Court held in Investment Company Institute v. Camp that the
Glass-Steagall Act prohibits a national bank from operating a fund for the
collective investment of managing agency accounts. Subsequently, the Board of
Governors of the Federal Reserve System (the "Board") issued a regulation and
interpretation to the effect that the Glass-Steagall Act and such decision
forbid a bank holding company registered under the Federal Bank Holding Company
Act of 1956 (the "Holding Company Act") or any non-bank affiliate thereof from
sponsoring, organizing or controlling a registered, open-end investment company
continuously engaged in the issuance of its shares, but do not prohibit such a
holding company or affiliate from acting as investment adviser, transfer agent
and custodian to such an investment company. In 1981, the United States Supreme
Court held in Board of Governors of the Federal Reserve System v. Investment
Company Institute that the Board did not exceed its authority under the Holding
Company Act when it adopted its regulation and interpretation authorizing bank
holding companies and their non-bank affiliates to act as investment advisers to
registered closed-end investment companies.
Bank of America believes that if the question was properly presented, a
court should hold that Bank of America may
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perform the services for the Company contemplated by the investment advisory
agreement, the Prospectuses, and this Statement of Additional Information
without violation of the Glass-Steagall Act or other applicable banking laws or
regulations. It should be noted, however, that there have been no cases deciding
whether a national bank may perform services comparable to those performed by
Bank of America and that future changes in either federal or state statutes and
regulations relating to permissible activities of banks or trust companies and
their subsidiaries or affiliates, as well as further judicial or administrative
decisions or interpretations of present and future statutes and regulations,
could prevent Bank of America from continuing to perform such services for the
Company or from continuing to purchase Fund shares for the accounts of its
customers. (For a discussion of the Glass Steagall Act in connection with the
Company's Shareholder Service Plan, see "Plan Payments" in the Funds'
Prospectuses.)
On the other hand, as described herein, the Funds are currently
distributed by Concord Financial Group, Inc., and Concord Holding Corporation,
its parent, provides the Funds with administrative services. If current
restrictions under the Glass-Steagall Act preventing a bank from sponsoring,
organizing, controlling, or distributing shares of an investment company were
relaxed, the Company expects that Bank of America would consider the possibility
of offering to perform some or all of the services now provided by Concord
Holding Corporation or Concord Financial Group, Inc. From time to time,
legislation modifying such restriction has been introduced in Congress which, if
enacted, would permit a bank holding company to establish a non-bank subsidiary
having the authority to organize, sponsor and distribute shares of an investment
company. If this or similar legislation were enacted, the Company expects that
Bank of America's parent bank holding company would consider the possibility of
one of its non-bank subsidiaries offering to perform some or all of the services
now provided by Concord Holding Corporation or Concord Financial Group, Inc. It
is not possible, of course, to predict whether or in what form such legislation
might be enacted or the terms upon which Bank of America or such a non-bank
affiliate might offer to provide services for consideration by the Company's
Board of Directors.
ADMINISTRATOR
Concord Holding Corporation (the "Administrator"), with offices at 125
W. 55th Street, 11th Floor, New York, New York 10019 and 3435 Stelzer Road,
Columbus, Ohio 43219, is a wholly-owned subsidiary of The BISYS Group, Inc. The
Administrator also serves as administrator to several other investment
companies.
The Administrator provides administrative services to the Company as
described in the Funds' Prospectuses. Each
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<PAGE> 386
administration agreement will continue in effect until October 31, 1996 and
thereafter will be extended with respect to each Fund for successive periods of
one year, provided that each such extension is specifically approved (a) by vote
of a majority of those members of the Company's Board of Directors who are not
interested persons of any party to the agreement, cast in person at a meeting
called for the purpose of voting on such approval, and (b) the Company's Board
of Directors or by vote of a majority of the outstanding voting securities of
such Fund. The agreement is terminable at any time without penalty by the
Company's Board of Directors or by a vote of a majority of a Fund's outstanding
shares upon 60 days' notice to the Administrator, or by the Administrator upon
90 days' notice to the Company.
The Company has agreed to pay the Administrator a fee for its services
as Administrator, accrued daily and payable monthly, at the annual rates of .20%
percent of the average daily net assets of the U.S. Government Securities and
Capital Income Funds and .30% of the average daily net assets of the Aggressive
Growth and California Tax-Exempt Bond Funds. The fees payable to the
Administrator are not subject to reduction as the value of each Fund's net
assets increases. From time to time, the Administrator may waive fees or
reimburse the Company for expenses, either voluntarily or as required by certain
state securities laws.
For the fiscal years ended February 28, 1995, 1994 and 1993,
administration fees paid or payable to the Administrator (net of waivers) were
as follows: Aggressive Growth Fund - $408,150, $508,320 and $451,529,
respectively; California Tax- Exempt Bond Fund - $454,249, $541,341 and
$130,555, respectively; Capital Income Fund - $414,134, $17,466 and $0,
respectively; and U.S. Government Securities Fund - $227,374, $301,881 and
$116,483, respectively. For the fiscal years indicated, the Administrator did
not waive any administration fees with respect to the Aggressive Growth Fund;
waived $181,979, $143,325 and $362,395, respectively, in administration fees
with respect to the California Tax-Exempt Bond Fund; waived $0, $172,065 and
$18,452, respectively, in administration fees with respect to the Capital Income
Fund; and waived $0, $0 and $108,060, respectively, in administration fees with
respect to the U.S. Government Securities Fund. In addition, the Administrator
reimbursed operating expenses of the Capital Income Fund in the amount of $0 and
$33,887, respectively for the years ended February 28, 1995 and 1994.
If total expenses borne by any Fund in any fiscal year exceed the
expense limitations imposed by applicable state securities regulations, the
Company may deduct from the payments to be made with respect to such Fund to
Bank of America and the Administrator, respectively, or Bank of America and the
Administrator each will bear, the amount of such excess to the
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<PAGE> 387
extent required by such regulations in proportion to the fees otherwise payable
to them for such year. Such amount, if any, will be estimated, reconciled and
effected or paid, as the case may be, on a monthly basis. As of the date of this
Statement of Additional Information, the most restrictive expense limitation
that may be applicable to the Company limits aggregate annual expenses with
respect to a Fund, including management and advisory fees but excluding
interest, taxes, brokerage commissions, and certain other expenses, to 2-1/2% of
the first $30 million of its average daily net assets, 2% of the next $70
million, and 1-1/2% of its remaining average daily net assets. During the course
of the Company's fiscal year, the Administrator and Bank of America may assume
certain expenses and/or not receive payment of fees of one or more of the
Company's Funds, while retaining the ability to be reimbursed by such Funds for
such amounts prior to the end of the fiscal year. This will have the effect of
increasing yield to investors at the time such fees are not received or amounts
are assumed and decreasing yield when such fees or amounts are reimbursed.
The Administrator will bear all expenses in connection with the
performance of its services under the administration agreement with the
exception of the fees charged by The Bank of New York for certain fund
accounting services which are borne by the Funds. See "General
Information--Custodian and Transfer Agent" below. Expenses borne by the Funds
include taxes, interest, brokerage fees and commissions, if any, fees of Board
members who are not officers, directors, partners, employees or holders of 5% or
more of the outstanding voting securities of Bank of America or the
Administrator or any of their affiliates, Securities and Exchange Commission
fees and state securities qualification fees, advisory fees, administration
fees, charges of custodians, transfer and dividend disbursing agents' fees,
certain insurance premiums, outside auditing and legal expenses, costs of
maintaining corporate existence, costs attributable to investor services,
including without limitation telephone and personnel expenses, costs of
preparing and printing prospectuses and Statements of Additional Information for
regulatory purposes, cost of shareholders' reports and corporate meetings and
any extraordinary expenses. Certain shareholder servicing and/or distribution
fees in connection with the Company's shares are also paid by the Company. See
"Distributor and Plan Payments."
The administration agreements provide that the Administrator shall not
be liable for any error of judgment or mistake of law or any loss suffered by
the Company or the Portfolios in connection with the performance of the
administration agreements, except a loss resulting from willful misfeasance, bad
faith or negligence in the performance of its duties or from the reckless
disregard by it of its obligations and duties thereunder.
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<PAGE> 388
DISTRIBUTOR AND PLAN PAYMENTS
Concord Financial Group, Inc. (the "Distributor"), a wholly-owned
subsidiary of the Administrator, acts as distributor of the shares of the
Company. Shares are sold on a continuous basis by the Distributor. The
Distributor has agreed to use its best efforts to solicit orders for the sale of
the Company's shares although it is not obliged to sell any particular amount of
shares. The distribution agreement shall continue in effect with respect to each
Fund until October 31, 1996. Thereafter, if not terminated, the distribution
agreement shall continue automatically for successive terms of one year,
provided that such continuance is specifically approved at least annually (a) by
a vote of a majority of those members of the Board of Directors of the Company
who are not parties to the distribution agreement or "interested persons" of any
such party, cast in person at a meeting called for the purpose of voting on such
approval, and (b) by the Board of Directors of the Company or by vote of a
"majority of the outstanding voting securities" of the Funds as to which the
distribution agreement is effective; provided, however, that the distribution
agreement may be terminated by the Company at any time, without the payment of
any penalty, by vote of a majority of the entire Board of Directors of the
Company or by a vote of a "majority of the outstanding voting securities" of
such Funds on 60 days' written notice to the Distributor, or by the Distributor
at any time, without the payment of any penalty, on 90 days' written notice to
the Company. The agreement will automatically and immediately terminate in the
event of its "assignment".
For the fiscal year ended February 28, 1995, the Distributor received
sales loads in connection with share purchases as follows: Aggressive Growth
Fund -- $340,853; California Tax-Exempt Bond Fund -- $322,982; U.S. Government
Securities Fund -- $181,635; and Capital Income Fund -- $2,449,559. Of these
amounts, the Distributor and various affiliates of Bank of America retained
$60,878 and $257,259, respectively, with respect to the Aggressive Growth Fund;
$37,001 and $268,563, respectively, with respect to the California Tax- Exempt
Bond Fund; $21,022 and $90,642, respectively, with respect to the U.S.
Government Securities Fund; and $201,638 and $388,254, respectively, with
respect to the Capital Income Fund. The balance was paid to selling dealers. The
following table shows all sales loads, commissions and other compensation
received by the Distributor directly or indirectly from each of these Funds
during the fiscal year stated above:
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<TABLE>
<CAPTION>
Brokerage
Commis-
Net Under- sions in
writing Dis- Compensation connection Other
counts and on Redemption with Fund Compen-
Commissions and Repurchase Transactions sation(1)
----------- -------------- ------------ ---------
<S> <C> <C> <C> <C>
Concord Financial
Group, Inc.
Aggressive $60,878 $0 $0 $615,902
Growth Fund
California $37,001 $0 $0 $652,834
Tax-Exempt Bond Fund
U.S. Government $21,022 $0 $0 $234,560
Securities Fund
Capital Income $201,638 $0 $0 $456,942
Fund
</TABLE>
- --------------
(1) Represents the total of (i) amounts paid to the Administrator for
administrative services provided to the Fund (see "Management of the
Company-Administrator" above) and (ii) payments made under the Shareholder
Service Plan (see discussion in next section).
In addition to the sales loads described above, the Distributor is
entitled to payment by the Company for certain shareholder servicing expenses
under the Shareholder Service Plan (the "Plan") adopted by the Company. The
Funds have in the past had a Distribution Plan pursuant to which payments were
made for distribution and related expenses; however, effective July 1, 1993 the
Board of Directors eliminated the Distribution Plan.
Under the Shareholder Service Plan, the Company pays the Distributor,
with respect to the Funds for (a) nondistribution shareholder services provided
by the Distributor to Service Organizations and/or the beneficial owners of Fund
shares, including, but not limited to shareholder servicing provided by the
Distributor at facilities dedicated for Company use, provided such shareholder
servicing is not duplicative of the servicing otherwise provided on behalf of
the Funds, and (b) fees paid to Service Organizations (which may include the
Distributor itself) for the provision of support services for shareholders for
whom the Service Organization is the dealer of record or holder of record or
with whom the Service Organization has a servicing relationship ("Clients").
Support services provided by Service Organizations may include, among
other things: (i) establishing and maintaining accounts and records relating to
Clients that invest in Fund shares; (ii) processing dividend and distribution
payments from the Funds on behalf of Clients; (iii) providing information
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periodically to Clients regarding their positions in shares; (iv) arranging for
bank wires; (v) responding to Client inquiries concerning their investments in
Fund shares; (vi) providing the information to the Funds necessary for
accounting or subaccounting; (vii) if required by law, forwarding shareholder
communications from the Funds (such as proxies, shareholder reports, annual and
semi-annual financial statements and dividend, distribution and tax notices) to
Clients; (viii) assisting in processing exchange and redemption requests from
Clients; (ix) assisting Clients in changing dividend options, account
designations and addresses; and (x) providing such other similar services.
The Shareholder Service Plan provides that the Distributor is entitled
to receive payments for expenses on a monthly basis, at an annual rate not
exceeding .25% of the average daily net assets during such month of the
Aggressive Growth, California Tax-Exempt Bond, U.S. Government Securities and
Capital Income Funds for shareholder servicing expenses. The calculation of a
Fund's average daily net assets for these purposes does not include assets held
in accounts opened via a transfer of assets from trust and agency accounts of
Bank of America. Further, payments made out of or charged against the assets of
a particular Fund must be in payment for expenses incurred on behalf of the
Fund.
If in any month the Distributor expends or is due more monies than can
be immediately paid due to the percentage limitations described above, the
unpaid amount is carried forward from month to month while the Plan is in effect
until such time, if ever, when it can be paid in accordance with such percentage
limitations. Conversely, if in any month the Distributor does not expend the
entire amount then available under the Plan, and assuming that no unpaid amounts
have been carried forward and remain unpaid, then the amount not expended will
be a credit to be drawn upon by the Distributor to permit future payment.
However, any unpaid amounts or credits due under the Plans may not be "carried
forward" beyond the end of the fiscal year in which such amounts or credits due
are accrued.
For the fiscal year ended February 28, 1995, pursuant to the
Shareholder Service Plan, the Aggressive Growth Fund was charged $340,125, of
which amount $207,152, $0 and $61,145 was paid to the Distributor, Bank of
America and affiliates of Bank of America, respectively; the Capital Income Fund
was charged $517,667, of which amount $42,508, $0 and $333,632 was paid to the
Distributor, Bank of America and affiliates of Bank of America, respectively;
the U.S. Government Securities Fund was charged $284,218, of which amount
$7,186, $0 and $194,847 was paid to the Distributor, Bank of America and
affiliates of Bank of America, respectively; and the California Tax-Exempt Bond
Fund was charged $530,190 of which amount $198,585, $0 and $253,362
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<PAGE> 391
was paid to the Distributor, Bank of America and affiliates of
Bank of America, respectively.
The Company's Board of Directors has concluded that the Plan will
benefit the Funds and their shareholders. The Shareholder Service Plan is
subject to annual reapproval by a majority of the Non-Interested Plan Directors
and is terminable at any time with respect to any Fund by a vote of a majority
of such Directors or by vote of the holders of a majority of the shares of the
Fund involved. Any agreement entered into pursuant to the Plans with a Service
Organization is terminable with respect to any Fund without penalty, at any
time, by vote of a majority of the Non-Interested Plan Directors, by vote of the
holders of a majority of the shares of such Fund, by the Distributor or by the
Service Organization. Each agreement will also terminate automatically in the
event of its assignment.
The Company understands that Bank of America and/or some Service
Organizations may charge their clients a direct fee for administrative and
shareholder services in connection with the holding of Fund shares. These fees
would be in addition to any amounts which might be received under the Plans.
Small, inactive long-term accounts involving such additional charges may not be
in the best interest of shareholders.
YIELD AND TOTAL RETURN
From time to time, the yields and the total returns of the Funds may be
quoted in and compared to other mutual funds with similar investment objectives
in advertisements, shareholder reports or other communications to shareholders.
The Funds may also include calculations in such communications that describe
hypothetical investment results. (Such performance examples will be based on an
express set of assumptions and are not indicative of the performance of any
Fund.) Such calculations may from time to time include discussions or
illustrations of the effects of compounding in advertisements. "Compounding"
refers to the fact that, if dividends or other distributions on a Fund
investment are reinvested by being paid in additional Fund shares, any future
income or capital appreciation of a Fund would increase the value, not only of
the original Fund investment, but also of the additional Fund shares received
through reinvestment. As a result, the value of the Fund investment would
increase more quickly than if dividends or other distributions had been paid in
cash. The Funds may also include discussions or illustrations of the potential
investment goals of a prospective investor (including but not limited to tax
and/or retirement planning), investment management techniques, policies or
investment suitability of a Fund, economic conditions, legislative developments
(including pending legislation), the effects of inflation and historical
performance of various asset classes, including but not limited to stocks, bonds
and Treasury bills.
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From time to time advertisements or communications to shareholders may summarize
the substance of information contained in shareholder reports (including the
investment composition of a Fund), as well as the views of the investment
adviser as to current market, economic, trade and interest rate trends,
legislative, regulatory and monetary developments, investment strategies and
related matters believed to be of relevance to a Fund. The Funds may also
include in advertisements charts, graphs or drawings which illustrate the
potential risks and rewards of investment in various investment vehicles,
including but not limited to stocks, bonds, Treasury bills and shares of a Fund.
In addition, advertisements or shareholder communications may include a
discussion of certain attributes or benefits to be derived by an investment in a
Fund. Such advertisements or communications may include symbols, headlines or
other material which highlight or summarize the information discussed in more
detail therein. With proper authorization, a Fund may reprint articles (or
excerpts) written regarding the Fund and provide them to prospective
shareholders. Performance information with respect to the Funds is generally
available by calling (800) 346-2087.
Yield Calculations. The yield of a Fund is calculated by dividing the
net investment income per share (as described below) earned by the Fund during a
30-day (or one month) period by the maximum offering price per share on the last
day of the period and annualizing the result on a semi-annual basis by adding
one to the quotient, raising the sum to the power of six, subtracting one from
the result and then doubling the difference. The Fund's net investment income
per share earned during the period is based on the average daily number of
shares outstanding during the period entitled to receive dividends and includes
dividends and interest earned during the period minus expenses accrued for the
period, net of reimbursements. This calculation can be expressed as follows:
a-b
Yield = 2 ((----- + 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 outstanding during the
period that were entitled to receive dividends.
d = maximum offering price per share on the last day of the
period.
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<PAGE> 393
For the purpose of determining net investment income earned during the
period (variable "a" in the formula), dividend income on equity securities is
recognized by accruing 1/360 of the stated dividend rate of the security each
day. Except as noted below, interest earned on debt obligations is calculated by
computing the yield to maturity of each obligation based on the market value of
the obligation (including actual accrued interest) at the close of business on
the last business day of each month, or, with respect to obligations purchased
during the month, the purchase price (plus actual accrued interest), and
dividing the result by 360 and multiplying the quotient by the market value of
the obligation (including actual accrued interest) in order to determine the
interest income on the obligation for each day of the subsequent month that the
obligation is held. For purposes of this calculation, it is assumed that each
month contains 30 days. The maturity of an obligation with a call provision is
the next call date on which the obligation reasonably may be expected to be
called or, if none, the maturity date. With respect to debt obligations
purchased at a discount or premium, the formula generally calls for amortization
of the discount or premium. The amortization schedule will be adjusted monthly
to reflect changes in the market values of such debt obligations.
Interest earned on tax-exempt obligations that are issued without
original issue discount and have a current market discount is calculated by
using the coupon rate of interest instead of the yield to maturity. In the case
of tax-exempt obligations that are issued with original issue discount but which
have discounts based on current market value that exceed the then-remaining
portion of the original issue discount (market discount), the yield to maturity
is the imputed rate based on the original issue discount calculation. On the
other hand, in the case of tax-exempt obligations that are issued with original
issue discount but which have the discounts based on current market value that
are less than the then-remaining portion of the original issue discount (market
premium), the yield to maturity is based on the market value.
With respect to mortgage or other receivables-backed obligations which
are expected to be subject to monthly payments of principal and interest ("pay
downs"), (a) gain or loss attributable to actual monthly pay downs are accounted
for as an increase or decrease to interest income during the period; and (b) a
Fund or Portfolio may elect either (i) to amortize the discount and premium on
the remaining security, based on the cost of the security, to the weighted
average maturity date, if such information is available, or to the remaining
term of the security, if any, if the weighted average maturity date is not
available, or (ii) not to amortize discount or premium on the remaining
security.
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Undeclared earned income will be subtracted from the maximum offering
price per share (variable "d" in the formula). Undeclared earned income is the
net investment income which, at the end of the base period, has not been
declared as a dividend, but is reasonably expected to be and is declared and
paid as a dividend shortly thereafter. A Fund's maximum offering price per share
for purposes of the formula includes the maximum sales load imposed by the Fund
- -- currently 4.50% of the per share offering price.
Based on the foregoing calculations, the yields of the U.S. Government
Securities Fund and the Capital Income Fund (after fee waivers and expense
reimbursements by Bank of America and the Administrator) for the 30 day period
ended February 28, 1995 were 6.40% and 4.83%, respectively. Based on the
foregoing calculations the California Tax-Exempt Bond Fund's yield (after fee
waivers) for the 30 day period ended February 28, 1995 was 5.06% and its
"tax-equivalent" yield was 7.75%. The Fund's "tax- equivalent" yield is computed
by: (a) dividing the portion of the Fund's yield (calculated as above) that is
exempt from both federal and California state income taxes by one minus a stated
combined federal and California state income tax rate; (b) dividing the portion
of the Fund's yield (calculated as above) that is exempt from federal income tax
only by one minus a stated federal income tax rate; and (c) adding the figures
resulting from (a) and (b) above to that portion, if any, of the Fund's yield
that is not exempt from federal income tax. The combined federal and California
income tax rate used in calculating the Fund's "tax-equivalent" yield for the 30
day period ended February 28, 1995 was 34.70%.
Total Return Calculations. The Funds compute their average annual total
returns by determining the average annual compounded rates of return during
specified periods that equate the initial amount invested to the ending
redeemable value of such investment. This is done by dividing the ending
redeemable value of a hypothetical $1,000 initial payment by $1,000 and raising
the quotient to a power equal to one divided by the number of years (or
fractional portion thereof) covered by the computation and subtracting one from
the result. This calculation can be expressed as follows:
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<PAGE> 395
ERV (1/n)
T = [(-----) - 1]
P
Where: T = average annual total return.
ERV = ending redeemable value at the end of the period
covered by the computation of a hypothetical $1,000
payment made at the beginning of the period.
P = hypothetical initial payment of $1,000.
n = period covered by the computation, expressed in terms
of years.
The Funds compute their aggregate total returns by determining the
aggregate rates of return during specified periods that likewise equate the
initial amount invested to the ending redeemable value of such investment. The
formula for calculating aggregate total return is as follows:
ERV
aggregate total return = [(----- - 1)]
P
The calculations of average annual total return and aggregate total
return assume the reinvestment of all dividends and capital gain distributions
on the reinvestment dates during the period. The ending redeemable value
(variable "ERV" in each formula) is determined by assuming complete redemption
of the hypothetical investment and the deduction of all nonrecurring charges at
the end of the period covered by the computations. In addition, the Funds'
average annual total return and aggregate total return quotations reflect the
deduction of the maximum sales load charged in connection with the purchase of
Fund shares.
Based on the foregoing calculations, the average annual total returns
for the Aggressive Growth Fund for the one-year, five-year and ten year periods
ended February 28, 1995 were (7.93)%, 12.41% and 14.01%, respectively. The
aggregate total returns for the Aggressive Growth Fund for the same three
periods were (7.93)%, 79.52% and 271.40%, respectively.
Based on the foregoing calculations, the average annual total returns
(after fee waivers and expense reimbursements) for the Capital Income Fund for
the one-year period ended February 28, 1995, for the five-year period ended
February 28, 1995 and for the period September 25, 1987 (commencement of
operations) to
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February 28, 1995 were (9.86)%, 12.99% and 12.22%, respectively. The aggregate
total returns for the Capital Income Fund for the same three periods were
(9.86)%, 84.21% and 136%, respectively.
Based on the foregoing calculations, the average annual total returns
(after fee waivers and expense reimbursements) for the U.S. Government
Securities Fund for the one-year period ended February 28, 1995, for the
five-year period ended February 28, 1995 and for the period January 7, 1988
(commencement of operations) to February 28, 1995 were (4.21)%, 6.85% and 7.68%,
respectively. The aggregate total returns for the U.S. Government Securities
Fund for the same three periods were (4.21)%, 39.27% and 69.65%, respectively.
Based on the foregoing calculations, the average annual total returns
(after fee waivers) for the California Tax-Exempt Bond Fund for the one year,
five year and ten year periods ended February 28, 1995, were (4.16)%, 6.39%, and
8.04%, respectively. The aggregate total returns for the California Tax-Exempt
Bond Fund for the same three periods were (4.16)%, 36.33%, and 116.78%,
respectively.
The Funds may also advertise total return data without reflecting the
sales load imposed on the purchase of shares of the Funds in accordance with the
rules of the Securities and Exchange Commission. Quotations which do not reflect
the sales load will, of course, be higher than quotations which do.
GENERAL INFORMATION
DESCRIPTION OF SHARES
The Company is an open-end management investment company organized as a
Maryland corporation on October 27, 1982. The Fund's Charter authorizes the
Board of Directors to issue up to two hundred billion full and fractional common
shares. Pursuant to the authority granted in the Charter, the Board of Directors
has authorized the issuance of twenty-two classes of stock - Classes A through W
Common Stock, $.001 par value per share, representing interests in twenty-two
separate investment portfolios. Class D represents interests in the Aggressive
Growth Fund; Class E represents interests in the U.S. Government Securities
Fund; Class F represents interests in the Capital Income Fund; and Class G
represents interests in the California Tax-Exempt Bond Fund. The Company's
charter also authorizes the
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Board of Directors to classify or reclassify any particular class of the
Company's shares into one or more series.
Shares have no preemptive rights and only such conversion or exchange
rights as the Board may grant in its discretion. When issued for payment as
described in the Prospectuses, the Company's shares will be fully paid and
non-assessable. For information concerning possible restrictions upon the
transferability of the Company's shares and redemption provisions with respect
to such shares, see "Additional Purchase and Redemption Information."
Shareholders are entitled to one vote for each full share held, and
fractional votes for fractional shares held, and will vote in the aggregate and
not by class or series except as otherwise required by the 1940 Act or other
applicable law or when permitted by the Board of Directors. Shares have
cumulative voting rights to the extent they may be required by applicable law.
Rule 18f-2 under the 1940 Act provides that any matter required to be
submitted to the holders of the outstanding voting securities of an investment
company such as the Company shall not be deemed to have been effectively acted
upon unless approved by a majority of the outstanding shares of each Fund
affected by the matter. A Fund is affected by a matter unless it is clear that
the interests of each Fund in the matter are substantially identical or that the
matter does not affect any interest of the Fund. Under Rule 18f-2 the approval
of an investment advisory agreement or 12b-1 distribution plan or any change in
a fundamental investment policy would be effectively acted upon with respect to
a Fund only if approved by a majority of the outstanding shares of such Fund.
However, the rule also provides that the ratification of independent public
accountants, the approval of principal underwriting contracts and the election
of directors may be effectively acted upon by shareholders of the Company voting
without regard to particular Funds.
Notwithstanding any provision of Maryland law requiring a greater vote
of the Company's common stock (or of the shares of a Fund voting separately as a
class) in connection with any corporate action, unless otherwise provided by law
(for example, by Rule 18f-2 discussed above) or by the Company's Charter, the
Company may take or authorize such action upon the favorable vote of the holders
of more than 50% of the outstanding common stock of the Company voting without
regard to class.
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<PAGE> 398
REPORTS
Shareholders will receive unaudited semi-annual reports describing the
Company's investment operations and annual financial statements together with
the reports of the independent accountants of the Funds.
CUSTODIAN AND TRANSFER AGENT
The Company has appointed The Bank of New York, 90 Washington Street,
New York, New York 10286, as custodian for the Funds. The Bank of New York also
provides the Funds with certain accounting services pursuant to Fund Accounting
Services Agreements with the Administrator. Under the Fund Accounting Services
Agreement, The Bank of New York has agreed to provide certain accounting,
bookkeeping, pricing, dividend and distribution calculation services with
respect to the Company. The monthly fees charged by The Bank of New York under
the Fund Accounting Agreement are borne by the Funds. As custodian of the
Company's assets, The Bank of New York (i) maintains a separate account or
accounts in the name of the respective Funds, (ii) holds and disburses portfolio
securities; (iii) makes receipts and disbursements of money, (iv) collects and
receives income and other payments and distributions on account of portfolio
securities (v) responds to correspondence from security brokers and others
relating to their respective duties and (vi) makes periodic reports concerning
their duties.
BISYS Fund Services Ohio, Inc., 3435 Stelzer Road, Columbus, Ohio
43219-3035 serves as transfer and dividend disbursing agent for the Funds.
COUNSEL
Drinker Biddle & Reath (of which W. Bruce McConnel, III, Secretary of
the Company, is a partner), 1345 Chestnut Street, Suite 1100, Philadelphia,
Pennsylvania 19107, serves as counsel to the Company and will pass upon the
legality of the shares offered hereby. O'Melveny & Myers, 400 South Hope Street,
Los Angeles, California, acts as counsel to Bank of America and as special
California counsel for the California Tax-Exempt Bond Fund and has reviewed the
portions of the California Tax-Exempt Bond Fund's Prospectus and this Statement
of Additional Information concerning California taxes and the description of the
special considerations relating to California Municipal Securities.
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INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP independent accountants, with offices at 1177
Avenue of the Americas, New York, New York 10036, has been selected as
independent accountants of each Fund for the fiscal year ended February 28,
1996.
MISCELLANEOUS
As used in the Prospectuses and this Statement of Additional
Information, a "vote of a majority" of the outstanding shares of a Fund means
the affirmative vote of the lesser of (a) more than 50% of the outstanding
shares, the Portfolio of the Fund, or (b) 67% of the shares of the Fund or
series present at a meeting at which more than 50% of the outstanding shares of
the Fund are represented in person or by proxy.
At June 15, 1995, the name, address and share ownership of the entities
which held of record more than 5% of the outstanding Pacific Horizon Shares of
the Treasury Fund were as follows: BA Investment Services Inc., For the Benefit
of Clients, 555 California Street, 4th Floor, Department #4337, San Francisco,
CA 94104, 98,230,626.530 shares (7.70%); Bank of America State Trust Co., 299 N.
Euclid Avenue, Pasadena, CA 91101, 1,044,975,154.790 shares (82.00%); and
Hellman & Freidman Capital Partners II, Limited Partnership, Attention: Georgia
Lee, 1 Maritime Plaza, 12th Floor, San Francisco, CA 94111, 1,216,118,073.700
shares (095.42%).
At June 16, 1995, the name, address and share ownership of the entities
which held of record more than 5% of the outstanding Horizon Shares of the
Treasury Fund was as follows: Bank of America Trustee/Custodian for Investing in
Horizon Treasury, Attn: Eric Peterson, 701 S. Western Avenue, 2nd Floor,
Glendale, CA 91201, 398,540,438.170 shares (68.901%); Security Pacific State
Trust Co., Agreement for Sec. PACWA Participants, Attn: Cash Sweep Funds (L.
Goekjian), P.O. Box 91630, Pasadena, CA 91101, 94,279,024.120 shares (16.299%).
At June 16, 1995, the name, address and share ownership of the entities
which held beneficially more than 5% of the outstanding Horizon Service Shares
of the Treasury Fund were as follows: Bank of America FM&TS Operat CA, Attn: CTF
Unit, 701 South Western Avenue, Glendale, CA 91201, 65,745,555.320 shares
(23.658%); Bank of America Nevada Southern Comm. Bank, Attn: Dan Dykes, P.O. Box
98600, Las Vegas, NV 89193, 63,974,589.270 shares (23.020%). Security Pacific
State Trust Co., Agreement for Sec. PACWA Participants, Attn: Cash Sweep Funds,
P.O. Box 91630, Pasadena, CA 91101, 56,906,301.540 shares (20.477%); and
Security Pacific Cash Management, c/o Bank of America GPO M/C 5533, Attn: Liezel
Barangan, 1850 Gateway Boulevard, Concord, CA 94520, 77,003,300 shares
(27.709%). At June 15, 1995, the name, address
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and, share ownership of the entity which held of record more than 5% of the
outstanding Horizon Service Shares of the Treasury Fund was as follows: Omnibus
A/C for the Shareholder Accounts maintained by Concord Financial Services, Inc.,
Attn: Linda Zerbe, First and Market Building, 100 First Avenue, Suite 300,
Pittsburgh, PA 15222, 263,629,755.130 shares (65.51%). At June 15, 1995 the
name, address and share ownership of the entities which held of record more than
5% of the outstanding Pacific Horizon Shares of the Prime Fund were as follows:
BA Investment Services Inc., For the Benefit of Clients, 555 California Street,
4th Floor, Department #4337, San Francisco, CA 94104, 514,119,226.900 shares
(38.76%); Bank of America State Trust Co., 299 N. Euclid Avenue, Pasadena, CA
91101, 392,983,248.780 shares (29.63%); and Southwest Securities Inc., Attn:
Cashiering, 201 Elm Street, Suite 4300, Dallas, TX 75270, 169,018,910.270 shares
(12.74%). At June 16, 1995, the name, address and share ownership of the
entities which held of record more than 5% of the outstanding Horizon Shares of
the Prime Fund were as follows: Bank of America Trustee/Custodian for Investing
Horizon Prime, Attn: Eric Peterson, 701 S. Western Avenue, 2nd Floor, Glendale,
CA 91201, 385,058,852.030 shares (56.838%); and Bank of America NT&SA, Attn: Kay
Warren/Dept. #5596, 1455 Market Street, San Francisco, CA 94103, 57,300,000.00
shares (9.934%). At June 15, 1995, the name, address and share ownership of the
entity which held of record more than 5% of the outstanding Horizon Service
Shares of the Prime Fund were as follows: Omnibus A/C for the Shareholder
Accounts maintained by Concord Financial Services, Inc., Attn: Linda Zerbe,
First and Market Building, 100 First Avenue, Suite 300, Pittsburgh, PA 15222,
752,776,315.610 shares (70.26%).
At June 16, 1995, the name, address and share ownership of the entities
which held beneficially more than 5% of the outstanding Horizon Service Shares
of the Prime Fund were as follows: Bank of America NT&SA Financial Management
and Trust Services, 701 S. Western Avenue, Glendale, CA 91201, 74,038,082.090
shares (9.835%); Capital Network Services, Attn: Donna Novell, One Bush Street,
11th Floor, San Francisco, CA 94104, 86,407,261.23 shares (11.478%); Security
Pacific Cash Management, c/o Bank of America. GPO. M/C 5533 Attn: Liezel
Barangan, 1850 Gateway Boulevard, M/C 5533, Concord, CA 94520, 379,755,600.000
shares (50.447%); Security Pacific State Trust Co., Agreement for SecPAC WA
Participants, Attn: Cash Sweep Funds (L. Goekjian) P.O. Box 91630, Pasadena, CA
91101, 54,321,621.330 shares (7.216%); and Southwest Securities Inc., Attn: Mary
Lisenber, 1201 Elm Street, Suite 4300, Dallas, TX 75270, 130,146,660.030 shares
(17.289%).
At June 15, 1995, the name, address and share ownership of the entities
which held of record more than 5% of the outstanding Pacific Horizon Shares of
the Tax Exempt Money Fund were as follows: BA Investment Services, Inc., For the
Benefit
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of Clients, 555 California Street, 4th Floor, Department #4337, San Francisco,
CA 94104, 12,233,845.190 shares (39.73%); Southwest Securities Inc., Attn:
Cashiering, 1201 Elm Street, Suite 4300, Dallas, TX, 75270, 10,387,253.930
shares (33.73%); and Bank of America State Trust Co., 299 N. Euclid Avenue,
Pasadena, CA 91101, 6,515,635.730 shares (21.16%).
At June 16, 1995, the name, address and share ownership of the entities
which held of record more than 5% of the outstanding Horizon Shares of the Tax
Exempt Money Fund were as follows: Bank of America Custodian For Investing in
Horizon Tax Exempt Money Fund, Attn: Eric Peterson, 701 S. Western Avenue, 2nd
Floor, Glendale, CA 19201, 129,582,555.65 shares (38.576%); Continental Bank
National Association Custodian for the Benefit of Custodian Co. Attn: Mary
Chester, 231 South LaSalle Street, 6Q, Chicago, IL 60697, 152,699,416.270 shares
(45.458%); and Maine Midland Bank NA, Investment Services, 17th Floor, Attn:
Christine Mincel, One Marine Midland Center, Buffalo, NY 14203, 21,684,672.980
shares (6.455%).
At June 15, 1995, the name, address and share ownership of the entities
which held of record more than 5% of the outstanding shares of the Horizon
Service Shares of the Tax Exempt Money Fund were as follows: Furman C. Moseley
and Susan R. Moseley Tenn. In Common, 1201 3rd Avenue, Box 7C, Seattle, WA
98101, 4,165,513.060 shares (9.91%); Omnibus A/C for the shareholder accounts
maintained by Concord Financial Services Inc., Attn: Linda Zerbe, First and
Market Building, 100 First Avenue, Suite 300, Pittsburgh, PA 15222,
22,398,544.590 shares (53.31%); and Omnibus A/C for the Shareholder Accounts
maintained by Concord Financial Services Inc. Attn: First and Market Building,
100 First Avenue, Suite 300, Pittsburgh, PA 15222, 3,494,305.180 shares (8.31%).
At June 16, 1995, the name, address and share ownership of the entities which
held beneficially more than 5% of the outstanding Horizon Service Shares of the
Tax Exempt Money Fund were as follows: BA Investment Services Inc., 555
California Street, 4th Floor Dept. #4337, San Francisco, CA 94104, 1,362,028.590
shares (5.260%); Bank of America FM&TS Oper. CA, Attn: CTF Unit, 701 South
Western Avenue, Glendale, CA 91201, 2,293,907.40 shares (8.859%); and Southwest
Securities, Inc., Attn: Mary Lisenber, 1201 Elm Street, Suite 430, Dallas, TX
75270, 21,021,580.530 shares (81.187%). At June 15, 1955, the name, address and
share ownership of the entities which held of record more than 5% of the
outstanding Pacific Horizon Shares of the Government Fund were as follows: Bank
of America, NT&SA, The Private Bank, Attn: ACI Unit #8329, 701 S. Western
Avenue, Glendale, CA 91201, 79,875,532.090 shares (22.71%); Bank of America
State Trust Co., 299 N. Euclid Avenue., Pasadena, CA 91101, 64,756,966.280
shares (18.41%); and BA Investment Services Inc., For the Benefit of Clients,
555 California Street, 4th Floor, Department #4337, San Francisco, CA 94104,
170,940,404.650 shares (48.60%). At June 16, 1995, the
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name, address and share ownership of the entities which held of record more than
5% of the outstanding Horizon Shares of the Government Fund were as follows:
Bank of America NT&SA Trustee/Custodian for Investing in Horizon Shares of the
Government Fund, Attn: Cynthia Beauvais, 701 South Western Avenue., Glendale, CA
91201, 9,327,446.350 shares (5.028%); Bank of America State Trust, Attn: Rigo
Barrett, 299 N. Euclid Avenue, Pasadena, CA 91101, 28,063,486.740 shares
(15.129%); Capital Network Services, Attn: Donna Novell, One Bush Street, 11th
Floor, San Francisco, CA 94104, 24,227,801.980 shares (13.061%); County of
Orange, Matt Raabe, P.O. Box 4515, Santa Ana, CA 92702, 10,000,000.000 shares
(5.391%); Cypress Insurance Co., Attn: Larry Tetzloff, 9290 W. Dodge Road,
Omaha, NE 68124, 9,996,515.930 shares (5.389%); Harr & Co., c/o Bank of New
York, Attn: Bimal Sana, Spec. Prec. Dept., One Wall Street, 5th Floor, New York,
NY 10286, 14,000,000.000 shares (7.547%); Micron Electronics Inc., Attn: Debbie
Meigand, 900 East Karcher Road, Nanpa, ID 83687, 16,080,510.14 shares (8.669%);
and Silocin Magic Corp., Attn: Meng A. Lim, 20300 Stevens Creek Boulevard.,
Suite 400, Cupertino, CA 95014, 18,058,262.110 shares (9.735%). At June 15,
1995, the name, address and share ownership of the entities which held of record
more than 5% of the outstanding Horizon Service Shares of the Government Fund
were as follows: Spacelabs Medical, Inc., Attn: Scott Bender, P.O. Box 97013,
Redmond, WA 98073, 14,572,000.000 shares (5.70%); Good Health Plan of WA, Attn:
Tsai Cheng, 1501 9th Avenue, Suite 500, Seattle, WA 98101, 16,584,866.580 shares
(6.49%); Omnibus A/C for the Shareholder Accounts maintained by Concord.
Financial Services Inc., Attn: Linda Zerbe, First and Market Building, 100 First
Avenue, Suite 300, Pittsburgh, PA 15222, 68,555,257.020 shares (26.85%). At June
16, 1995, the name, address and share ownership of the entities which held
beneficially more than 5% of the Horizon Service Shares of the Government Fund
were as follows: Bank of America Nevada Southern Comm. Bank, Attn: Dan Dykes,
P.O. Box 98600, Las Vegas, NV 89193-8600, 35,849,966.050 shares (52.294%); and
Capital Network Services, Attn: Donna M. Howell, One Bush Street, 11th Floor,
San Francisco, CA 94104-4425, 23,929,840.440 shares (34.906%). At June 15, 1995,
the name, address and share ownership of the entities which held of record more
than 5% of the Pacific Horizon Shares of the Treasury Only Fund were as follows:
Bank of America NT&SA, the Private Bank, Attn: ACI Unit 48329, 701 South Western
Avenue, Glendale, CA 91201, 48,516,900.490 shares (31.68%) Bank of America State
Trust Co., 299 N. Euclid Avenue, Pasadena, CA 91101, 22,350,831.320 shares
(14.59%); and BA Investment Services Inc., For the Benefit of Clients, 555
California Street, 4th Floor, Department #4337, San Francisco, CA 94104,
69,016,521.500 shares (45.06%). At June 15, 1995, the name, address and share
ownership of the entities which held of record more than 5% of the outstanding
Horizon Service Shares of the Treasury Only Fund were as follows: National Home
Mortgage Corp., Attn: Mortgage Banking Treasury Operations, 5565 Morehouse
Drive, 3rd Floor, San
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Diego, CA 92121, 12,147.667,580 shares (9.42%); Comcare, Inc., 4001 N. 3rd
Street, Suite 120, Phoenix, AZ 85012, 26,230,243.620 shares (20.34%); and
Omnibus A/C For the Shareholder Accounts Maintained by Concord Financial
Services Inc., Attn: Linda Zerbe, First and Market Building, 100 First Avenue,
Suite 300, Pittsburgh, PA 15222, 21,883,084.450 shares (16.97%). At June 16,
1995, the name, address and share ownership of the entities which held
beneficially more than 5% of the outstanding Horizon Service Shares of the
Treasury Only Fund were as follows: BA Investment Service Inc., 555 California
Street, 4th Floor Dept. #4337, San Francisco, CA 94104, 6,403,628.120 shares
(28.679%); Bank of America NT&SA Trustee/Custodian for Investing in Horizon
Service Shares of the Treasury Only Fund, Attn: Cynthia Beauvais, 701 South
Western Avenue, Glendale, CA 91201, 3,501,414.020 shares (15.681%); Bank of
America State Trust, Attn: Rigo Barrett, 299 N. Euclid Avenue, Pasadena, CA
91101, 5,420,893.150 shares (24.277%); Fair Isaac & Co., Attn: Christine Tam,
120 North Redwood, San Rapheal, CA 94903-1996, 1,338,800.750 shares (5.996%);
Foothill/Eastern Transportation Corridor Agency, Attn: Laura Barker, 201 East
Sandpot, Suite 200, Santa Anna, CA 92707, 2,559,586.380 shares (11.463%); and
Nexus, Attn: Kathleen Menace, P.O. Box 60637, Sunnyvale, CA 94088-0637,
2,525,153.380 shares (11.309%). At June 15, 1995, the name, address and share
ownership of the entities which held of record more than 5% of the outstanding
Pacific Horizon Shares of the Prime Value Fund were as follows: BA Investment
Services Inc., For the Benefit of Clients, 555 California Street, 4th Floor,
Department #4337, San Francisco, CA 94104, 16,383,467.170 shares (26.45%); and
Bank of America State Trust Co., Attn: Leon Goekjian, P.O. Box 91630, Pasadena,
CA 91101, 45,078,465.290 shares (72.79%). At June 16, 1995, the name, address
and share ownership of the entity which held of record more than 5% of the
outstanding Horizon Shares of the Prime Value Fund was as follows: Tice & Co.,
c/o M&T, Attn: Cash Management Clerk, 8th Floor, P.O. Box 1377, Buffalo, NY
14240, 453,078,561.590 shares (93.510%). At June 15, 1995, the name, address and
share ownership of the entity which held of record more than 5% of the
outstanding shares of the Pacific Horizon Shares of the California Tax-Exempt
Money Market Fund was as follows: BA Investment Services Inc., For the Benefit
of Clients, 555 California Street, 4th Floor, Department #4337, San Francisco,
CA 94104, 204,443,886.590 shares (22.07%). At June 15, 1995, the name, address
and share ownership of the entities which held of record more than 5% of the
outstanding shares of the Horizon Service Shares of the California Tax-Exempt
Money Market Fund were as follows: Leo Zuckerman Trust, DTD 12-11-91,4444
Viewridge Avenue, San Diego, CA 92123, 4,850,877.280 shares (5.35%); and Omnibus
A/C for the Shareholder Accounts Maintained by Concord Financial Services Inc.
Attn: Linda Zerbe, First and Market Building, 100 First Avenue, Suite 300,
Pittsburgh, PA 15222, 13,391,453.970 shares (14.77%). At June 16, 1995, the
name, address and share ownership of the entity which held beneficially more
than 5% of the outstanding
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shares of the Horizon Service Shares of the California Tax-Exempt Money Market
Fund was as follows: BA Investment Services Inc., 555 California Street, 4th
Floor, Dept. #4337, San Francisco, CA 94109, 13,792,509.310 shares (99.206%). At
June 15, 1995, the name, address and shares ownership of the entities which held
of record more than 5% of the outstanding shares of the Flexible Bond Fund were
as follows: Peter F. Smith and Jacquelyn L. Smith, JTWROS, 1785 C. Blodgett
Road, Mount Vernon, WA 98273, 13,973.917 shares (5.58%); and BA Investment
Services, Inc., FBO 200724011, 185 Berry Street, 3rd Floor #2640, San Francisco,
CA 94104, 22,436.531 shares (8.96%). At June 15, 1995 the name, address and
share ownership of the entity which held of record more than 5% of the
outstanding shares of the Asset Allocation Fund was as follows: Bank of America,
Texas AATTEE. National-O'Neill Supplemental Savings Plan, Attn: Mutual Funds
(81-6-01005-0), P.O. Box 94627, Pasadena, CA 91109, 24,289,973 shares (5.07%).
At June 15, 1995 the name, address and share ownership of the entities which
held of record more than 5% of the outstanding shares of the National Municipal
Bond Fund were as follows: BA Investment Services, Inc. FBO 405084421, 555
California Street, 4th Floor, #2640, San Francisco, CA 94104, 26,336.154 shares
(8.31%); and BA Investment Services, Inc., FBO 405266591, 555 California Street,
4th Floor, #2640, San Francisco, CA 94104, 25,034.024 shares (7.90%). At June
15, 1995 the name, address and share ownership of the entities which held of
record more than 5% of the outstanding shares of the Corporate Bond Fund were as
follows: Dean Witter Reynolds Inc., 5 World Trade Center, 4th Floor, Attn: 5th O
Div., New York, NY 10048, 138,820.000 shares (6.93%); and Smith Barney Shearson,
Inc., 333 W. 39th Street, 8th Floor, New York, NY 10001, 148,925.482 shares
(7.43%).
At such date, no other person was known by the Company to hold of
record or beneficially more than 5% of the outstanding shares of any investment
portfolio of the Company.
The Prospectuses relating to the Funds and this Statement of Additional
Information omit certain information contained in the Company's registration
statement filed with the Securities and Exchange Commission. Copies of the
registration statement, including items omitted herein, may be obtained from the
Commission by paying the charges prescribed under its rules and regulations.
FINANCIAL STATEMENTS AND EXPERTS
The Annual Reports for each Fund for their fiscal year ended February
28, 1995 (the "Annual Reports") accompanies this Statement of Additional
Information. The financial statements and notes thereto in each Annual Report
are incorporated in this Statement of Additional Information by reference, and
have been audited by Price Waterhouse LLP, whose report thereon also
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appears in each Annual Report and is also incorporated herein by reference. Such
financial statements have been incorporated herein in reliance on the report of
Price Waterhouse LLP, independent accountants, given on the authority of said
firm as experts in auditing and accounting.
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APPENDIX A
COMMERCIAL PAPER RATINGS
A Standard & Poor's commercial paper rating is a current assessment of
the likelihood of timely payment of debt considered short-term in the relevant
market. The following summarizes the rating categories used by Standard and
Poor's for commercial paper:
"A-1" - Issue's degree of safety regarding timely payment is strong.
Those issues determined to possess extremely strong safety characteristics are
denoted "A-1+."
"A-2" - Issue's capacity for timely payment is satisfactory. However,
the relative degree of safety is not as high as for issues designated "A-1."
"A-3" - Issue has an adequate capacity for timely payment. It is,
however, somewhat more vulnerable to the adverse effects of changes and
circumstances than an obligation carrying a higher designation.
"B" - Issue has only a speculative capacity for timely payment.
"C" - Issue has a doubtful capacity for payment.
"D" - Issue is in payment default.
Moody's commercial paper ratings are opinions of the ability of issuers
to repay punctually promissory obligations not having an original maturity in
excess of 9 months. The following summarizes the rating categories used by
Moody's for commercial paper:
"Prime-1" - Issuer or related supporting institutions are considered to
have a superior capacity for repayment of short-term promissory obligations.
Prime-1 repayment capacity will normally be evidenced by the following
characteristics: leading market positions in well established industries; high
rates of return on funds employed; conservative capitalization structures with
moderate reliance on debt and ample asset protection; broad margins in earning
coverage of fixed financial charges and high internal cash generation; and well
established access to a range of financial markets and assured sources of
alternate liquidity.
"Prime-2" - Issuer or related supporting institutions are considered to
have a strong capacity for repayment of short-
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term promissory obligations. This will normally be evidenced by many of the
characteristics cited above but to a lesser degree. Earnings trends and coverage
ratios, while sound, will be more subject to variation. Capitalization
characteristics, while still appropriate, may be more affected by external
conditions. Ample alternative liquidity is maintained.
"Prime-3" - Issuer or related supporting institutions have an
acceptable capacity for repayment of short-term promissory obligations. The
effects of industry characteristics and market composition may be more
pronounced. Variability in earnings and profitability may result in changes in
the level of debt protection measurements and the requirement for relatively
high financial leverage. Adequate alternate liquidity is maintained.
"Not Prime" - Issuer does not fall within any of the Prime rating
categories.
The three rating categories of Duff & Phelps for investment grade
commercial paper and short-term debt are "D-1," "D-2" and "D-3." Duff & Phelps
employs three designations, "D- 1+," "D-1" and "D-1-," within the highest rating
category. The following summarizes the rating categories used by Duff & Phelps
for commercial paper:
"D-1+" - Debt possesses highest certainty of timely payment. Short-term
liquidity, including internal operating factors and/or access to alternative
sources of funds, is outstanding, and safety is just below risk-free U.S.
Treasury short-term obligations.
"D-1" - Debt possesses very high certainty of timely payment. Liquidity
factors are excellent and supported by good fundamental protection factors. Risk
factors are minor.
"D-1-" - Debt possesses high certainty of timely payment. Liquidity
factors are strong and supported by good fundamental protection factors. Risk
factors are very small.
"D-2" - Debt possesses good certainty of timely payment. Liquidity
factors and company fundamentals are sound. Although ongoing funding needs may
enlarge total financing requirements, access to capital markets is good. Risk
factors are small.
"D-3" - Debt possesses satisfactory liquidity, and other protection
factors qualify issue as investment grade. Risk factors are larger and subject
to more variation. Nevertheless, timely payment is expected.
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"D-4" - Debt possesses speculative investment characteristics.
Liquidity is not sufficient to ensure against disruption in debt service.
Operating factors and market access may be subject to a high degree of
variation.
"D-5" - Issuer has failed to meet scheduled principal and/or interest
payments.
Fitch short-term ratings apply to debt obligations that are payable on
demand or have original maturities of up to three years. The following
summarizes the rating categories used by Fitch for short-term obligations:
"F-1+" - Securities possess exceptionally strong credit quality. Issues
assigned this rating are regarded as having the strongest degree of assurance
for timely payment.
"F-1" - Securities possess very strong credit quality. Issues assigned
this rating reflect an assurance of timely payment only slightly less in degree
than issues rated "F-1+."
"F-2" - Securities possess good credit quality. Issues assigned this
rating have a satisfactory degree of assurance for timely payment, but the
margin of safety is not as great as the "F-1+" and "F-1" categories.
"F-3" - Securities possess fair credit quality. Issues assigned this
rating have characteristics suggesting that the degree of assurance for timely
payment is adequate; however, near-term adverse changes could cause these
securities to be rated below investment grade.
"F-S" - Securities possess weak credit quality. Issues assigned this
rating have characteristics suggesting a minimal degree of assurance for timely
payment and are vulnerable to near-term adverse changes in financial and
economic conditions.
"D" - Securities are in actual or imminent payment default.
Fitch may also use the symbol "LOC" with its short-term ratings to
indicate that the rating is based upon a letter of credit issued by a commercial
bank.
Thomson BankWatch short-term ratings assess the likelihood of an
untimely or incomplete payment of principal or interest of unsubordinated
instruments having a maturity of one year or less which is issued by United
States commercial banks, thrifts and non-bank banks; non-United States banks;
and broker-
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dealers. The following summarizes the ratings used by Thomson BankWatch:
"TBW-1" - This designation represents Thomson BankWatch's highest
rating category and indicates a very high degree of likelihood that principal
and interest will be paid on a timely basis.
"TBW-2" - This designation indicates that while the degree of safety
regarding timely payment of principal and interest is strong, the relative
degree of safety is not as high as for issues rated "TBW-1."
"TBW-3" - This designation represents the lowest investment grade
category and indicates that while the debt is more susceptible to adverse
developments (both internal and external) than obligations with higher ratings,
capacity to service principal and interest in a timely fashion is considered
adequate.
"TBW-4" - This designation indicates that the debt is regarded as
non-investment grade and therefore speculative.
IBCA assesses the investment quality of unsecured debt with an original
maturity of less than one year which is issued by bank holding companies and
their principal bank subsidiaries. The following summarizes the rating
categories used by IBCA for short-term debt ratings:
"A1" - Obligations are supported by the highest capacity for timely
repayment. Where issues possess a particularly strong credit feature, a rating
of A1+ is assigned.
"A2" - Obligations are supported by a good capacity for timely
repayment.
"A3" - Obligations are supported by a satisfactory capacity for timely
repayment.
"B" - Obligations for which there is an uncertainty as to the capacity
to ensure timely repayment.
"C" - Obligations for which there is a high risk of default or which
are currently in default.
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CORPORATE AND MUNICIPAL LONG-TERM DEBT RATINGS
The following summarizes the ratings used by Standard & Poor's for
corporate and municipal debt:
"AAA" - This designation represents the highest rating assigned by
Standard & Poor's to a debt obligation and indicates an extremely strong
capacity to pay interest and repay principal.
"AA" - Debt is considered to have a very strong capacity to pay
interest and repay principal and differs from AAA issues only in small degree.
"A" - Debt is considered to have a strong capacity to pay interest and
repay principal although such issues are somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions than debt in
higher-rated categories.
"BBB" - Debt is regarded as having an adequate capacity to pay interest
and repay principal. Whereas such issues normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher-rated categories.
"BB," "B," "CCC," "CC" and "C" - Debt is regarded, on balance, as
predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. "BB" indicates the
lowest degree of speculation and "C" the highest degree of speculation. While
such debt will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major risk exposures to adverse
conditions.
"BB" - Debt has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. The "BB"
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied "BBB-" rating.
"B" - Debt has a greater vulnerability to default but currently has the
capacity to meet interest payments and principal repayments. Adverse business,
financial or economic conditions will likely impair capacity or willingness to
pay interest and repay principal. The "B" rating category is also used for debt
subordinated to senior debt that is assigned an actual or implied "BB" or "BB-"
rating.
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"CCC" - Debt has a currently identifiable vulnerability to default, and
is dependent upon favorable business, financial and economic conditions to meet
timely payment of interest and repayment of principal. In the event of adverse
business, financial or economic conditions, it is not likely to have the
capacity to pay interest and repay principal. The "CCC" rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
"B" or "B-" rating.
"CC" - This rating is typically applied to debt subordinated to senior
debt that is assigned an actual or implied "CCC" rating.
"C" - This rating is typically applied to debt subordinated to senior
debt which is assigned an actual or implied "CCC-" debt rating. The "C" rating
may be used to cover a situation where a bankruptcy petition has been filed, but
debt service payments are continued.
"CI" - This rating is reserved for income bonds on which no interest is
being paid.
"D" - Debt is in payment default. This rating is used when interest
payments or principal payments are not made on the date due, even if the
applicable grace period has not expired, unless S & P believes such payments
will be made during such grace period. "D" rating is also used upon the filing
of a bankruptcy petition if debt service payments are jeopardized.
PLUS (+) OR MINUS (-) - The ratings from "AA" through "CCC" may be
modified by the addition of a plus or minus sign to show relative standing
within the major rating categories.
"r" - This rating is attached to highlight derivative, hybrid, and
certain other obligations that S & P believes may experience high volatility or
high variability in expected returns due to non-credit risks. Examples of such
obligations are: securities whose principal or interest return is indexed to
equities, commodities, or currencies; certain swaps and options; and interest
only and principal only mortgage securities.
The following summarizes the ratings used by Moody's for corporate and
municipal long-term debt:
"Aaa" - Bonds are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as "gilt
edged." Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
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"Aa" - Bonds are judged to be of high quality by all standards.
Together with the "Aaa" group they comprise what are generally known as high
grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in "Aaa" securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than in "Aaa"
securities.
"A" - Bonds possess many favorable investment attributes and are to be
considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment sometime in the future.
"Baa" - Bonds considered medium-grade obligations, i.e., they are
neither highly protected nor poorly secured. Interest payments and principal
security appear adequate for the present but certain protective elements may be
lacking or may be characteristically unreliable over any great length of time.
Such bonds lack outstanding investment characteristics and in fact have
speculative characteristics as well.
"Ba," "B," "Caa," "Ca," and "C" - Bonds that possess one of these
ratings provide questionable protection of interest and principal ("Ba"
indicates some speculative elements; "B" indicates a general lack of
characteristics of desirable investment; "Caa" represents a poor standing; "Ca"
represents obligations which are speculative in a high degree; and "C"
represents the lowest rated class of bonds). "Caa," "Ca" and "C" bonds may be in
default.
Con. (---) - Bonds for which the security depends upon the completion
of some act or the fulfillment of some condition are rated conditionally. These
are bonds secured by (a) earnings of projects under construction, (b) earnings
of projects unseasoned in operation experience, (c) rentals which begin when
facilities are completed, or (d) payments to which some other limiting condition
attaches. Parenthetical rating denotes probable credit stature upon completion
of construction or elimination of basis of condition.
Moody's applies numerical modifiers 1, 2 and 3 in each generic
classification from "Aa" to "B" in its bond rating system. The modifier 1
indicates that the issuer ranks in the higher end of its generic rating
category; the modifier 2 indicates a mid-range ranking; and the modifier 3
indicates that the issuer ranks at the lower end of its generic rating category.
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The following summarizes the long-term debt ratings used by Duff &
Phelps for corporate and municipal long-term debt:
"AAA" - Debt is considered to be of the highest credit quality. The
risk factors are negligible, being only slightly more than for risk-free U.S.
Treasury debt.
"AA" - Debt is considered of high credit quality. Protection factors
are strong. Risk is modest but may vary slightly from time to time because of
economic conditions.
"A" - Debt possesses protection factors which are average but adequate.
However, risk factors are more variable and greater in periods of economic
stress.
"BBB" - Debt possesses below average protection factors but such
protection factors are still considered sufficient for prudent investment.
Considerable variability in risk is present during economic cycles.
"BB," "B," "CCC," "DD," and "DP" - Debt that possesses one of these
ratings is considered to be below investment grade. Although below investment
grade, debt rated "BB" is deemed likely to meet obligations when due. Debt rated
"B" possesses the risk that obligations will not be met when due. Debt rated
"CCC" is well below investment grade and has considerable uncertainty as to
timely payment of principal, interest or preferred dividends. Debt rated "DD" is
a defaulted debt obligation, and the rating "DP" represents preferred stock with
dividend arrearages.
To provide more detailed indications of credit quality, the "AA," "A,"
"BBB," "BB" and "B" ratings may be modified by the addition of a plus (+) or
minus (-) sign to show relative standing within these major categories.
The following summarizes the highest four ratings used by Fitch for
corporate and municipal bonds:
"AAA" - Bonds considered to be investment grade and of the highest
credit quality. The obligor has an exceptionally strong ability to pay interest
and repay principal, which is unlikely to be affected by reasonably foreseeable
events.
"AA" - Bonds considered to be investment grade and of very high credit
quality. The obligor's ability to pay interest and repay principal is very
strong, although not quite as strong as bonds rated "AAA." Because bonds rated
in the "AAA" and "AA" categories are not significantly vulnerable to foreseeable
future developments, short-term debt of these issuers is generally rated "F1+."
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"A" - Bonds considered to be investment grade and of high credit
quality. The obligor's ability to pay interest and repay principal is considered
to be strong, but may be more vulnerable to adverse changes in economic
conditions and circumstances than bonds with higher ratings.
"BBB" - Bonds considered to be investment grade and of satisfactory
credit quality. The obligor's ability to pay interest and repay principal is
considered to be adequate. Adverse changes in economic conditions and
circumstances, however, are more likely to have an adverse impact on these
bonds, and therefore, impair timely payment. The likelihood that the ratings of
these bonds will fall below investment grade is higher than for bonds with
higher ratings.
"BB," "B," "CCC," "CC," "C," "DDD," "DD," and "D" Bonds that possess
one of these ratings are considered by Fitch to be speculative investments. The
ratings "BB" to "C" represent Fitch's assessment of the likelihood of timely
payment of principal and interest in accordance with the terms of obligation for
bond issues not in default. For defaulted bonds, the rating "DDD" to "D" is an
assessment of the ultimate recovery value through reorganization or liquidation.
To provide more detailed indications of credit quality, the Fitch
ratings from and including "AA" to "C" may be modified by the addition of a plus
(+) or minus (-) sign to show relative standing within these major rating
categories.
IBCA assesses the investment quality of unsecured debt with an original
maturity of more than one year which is issued by bank holding companies and
their principal bank subsidiaries. The following summarizes the rating
categories used by IBCA for long-term debt ratings:
"AAA" - Obligations for which there is the lowest expectation of
investment risk. Capacity for timely repayment of principal and interest is
substantial such that adverse changes in business, economic or financial
conditions are unlikely to increase investment risk substantially.
"AA" - Obligations for which there is a very low expectation of
investment risk. Capacity for timely repayment of principal and interest is
substantial. Adverse changes in business, economic or financial conditions may
increase investment risk albeit not very significantly.
"A" - Obligations for which there is a low expectation of investment
risk. Capacity for timely repayment of principal and interest is strong,
although adverse changes in business,
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economic or financial conditions may lead to increased investment risk.
"BBB" - Obligations for which there is currently a low expectation of
investment risk. Capacity for timely repayment of principal and interest is
adequate, although adverse changes in business, economic or financial conditions
are more likely to lead to increased investment risk than for obligations in
higher categories.
"BB," "B," "CCC," "CC," and "C" - Obligations are assigned one of these
ratings where it is considered that speculative characteristics are present.
"BB" represents the lowest degree of speculation and indicates a possibility of
investment risk developing. "C" represents the highest degree of speculation and
indicates that the obligations are currently in default.
IBCA may append a rating of plus (+) or minus (-) to a rating to denote
relative status within major rating categories.
Thomson BankWatch assesses the likelihood of an untimely repayment of
principal or interest over the term to maturity of long term debt and preferred
stock which are issued by United States commercial banks, thrifts and non-bank
banks; non-United States banks; and broker-dealers. The following summarizes the
rating categories used by Thomson BankWatch for long-term debt ratings:
"AAA" - This designation represents the highest category assigned by
Thomson BankWatch to long-term debt and indicates that the ability to repay
principal and interest on a timely basis is very high.
"AA" - This designation indicates a superior ability to repay principal
and interest on a timely basis with limited incremental risk versus issues rated
in the highest category.
"A" - This designation indicates that the ability to repay principal
and interest is strong. Issues rated "A" could be more vulnerable to adverse
developments (both internal and external) than obligations with higher ratings.
"BBB" - This designation represents Thomson BankWatch's lowest
investment grade category and indicates an acceptable capacity to repay
principal and interest. Issues rated "BBB" are, however, more vulnerable to
adverse developments (both internal and external) than obligations with higher
ratings.
"BB," "B," "CCC," and "CC," - These designations are assigned by
Thomson BankWatch to non-investment grade long-term
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debt. Such issues are regarded as having speculative characteristics regarding
the likelihood of timely payment of principal and interest. "BB" indicates the
lowest degree of speculation and "CC" the highest degree of speculation.
"D" - This designation indicates that the long-term debt is in default.
PLUS (+) OR MINUS (-) - The ratings from "AAA" through "CC" may include
a plus or minus sign designation which indicates where within the respective
category the issue is placed.
MUNICIPAL NOTE RATINGS
A Standard and Poor's rating reflects the liquidity concerns and market
access risks unique to notes due in three years or less. The following
summarizes the ratings used by Standard & Poor's Ratings Group for municipal
notes:
"SP-1" - The issuers of these municipal notes exhibit very strong or
strong capacity to pay principal and interest. Those issues determined to
possess overwhelming safety characteristics are given a plus (+) designation.
"SP-2" - The issuers of these municipal notes exhibit satisfactory
capacity to pay principal and interest.
"SP-3" - The issuers of these municipal notes exhibit speculative
capacity to pay principal and interest.
Moody's ratings for state and municipal notes and other short-term
loans are designated Moody's Investment Grade ("MIG") and variable rate demand
obligations are designated Variable Moody's Investment Grade ("VMIG"). Such
ratings recognize the differences between short-term credit risk and long-term
risk. The following summarizes the ratings by Moody's Investors Service, Inc.
for short-term notes:
"MIG-1"/"VMIG-1" - Loans bearing this designation are of the best
quality, enjoying strong protection by established cash flows, superior
liquidity support or demonstrated broad-based access to the market for
refinancing.
"MIG-2"/"VMIG-2" - Loans bearing this designation are of high quality,
with margins of protection ample although not so large as in the preceding
group.
"MIG-3"/"VMIG-3" - Loans bearing this designation are of favorable
quality, with all security elements accounted for but lacking the undeniable
strength of the preceding grades.
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Liquidity and cash flow protection may be narrow and market access for
refinancing is likely to be less well established.
"MIG-4"/"VMIG-4" - Loans bearing this designation are of adequate
quality, carrying specific risk but having protection commonly regarded as
required of an investment security and not distinctly or predominantly
speculative.
"SG" - Loans bearing this designation are of speculative quality and
lack margins of protection.
Fitch and Duff & Phelps use the short-term ratings described under
Commercial Paper Ratings for municipal notes.
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APPENDIX B
As stated in the Prospectuses, the Aggressive Growth Fund, U.S.
Government Securities Fund and Capital Income Fund, may enter into futures
contracts and options for hedging purposes. Such transactions are described in
this Appendix B.
I. INTEREST RATE FUTURES CONTRACTS
Use of Interest Rate Futures Contracts. Bond prices are established in
both the cash market and the futures market. In the cash market, bonds are
purchased and sold with payment for the full purchase price of the bond being
made in cash, generally within five business days after the trade. In the
futures market, only a contract is made to purchase or sell a bond in the future
for a set price on a certain date. Historically, the prices for bonds
established in the futures markets have tended to move generally in the
aggregate in concert with the cash market prices and have maintained fairly
predictable relationships. Accordingly, a Fund may use interest rate futures as
a defense, or hedge, against anticipated interest rate changes and not for
speculation. As described below, this would include the use of futures contract
sales to protect against expected increases in interest rates and futures
contract purchases to offset the impact of interest rate declines.
A Fund presently could accomplish a similar result to that which it
hopes to achieve through the use of futures contracts by selling bonds with long
maturities and investing in bonds with short maturities when interest rates are
expected to increase, or conversely, selling short-term bonds and investing in
long-term bonds when interest rates are expected to decline. However, because of
the liquidity that is often available in the futures market the protection is
more likely to be achieved, perhaps at a lower cost and without changing the
rate of interest being earned by a Fund, through using futures contracts.
Description of Interest Rate Futures Contracts. An interest rate
futures contract sale would create an obligation by a Fund, as seller, to
deliver the specific type of financial instrument called for in the contract at
a specific future time for a specified price. A futures contract purchase would
create an obligation by a Fund, as purchaser, to take delivery of the specific
type of financial instrument at a specific future time at a specific price. The
specific securities delivered or taken, respectively, at settlement date, would
not be determined until at or near that date. The determination would be in
accordance with the rules of the exchange on which the futures contract sale or
purchase was made.
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Although interest rate futures contracts by their terms call for actual
delivery or acceptance of securities, in most cases the contracts are closed out
before the settlement date without the making or taking of delivery of
securities. Closing out a futures contract sale is effected by the Fund's
entering into a futures contract purchase for the same aggregate amount of the
specific type of financial instrument and the same delivery date. If the price
in the sale exceeds the price in the offsetting purchase, the Fund is paid the
difference and thus realizes a gain. If the offsetting purchase price exceeds
the sale price, the Fund pays the difference and realizes a loss. Similarly, the
closing out of a futures contract purchase is effected by the Fund's entering
into a futures contract sale. If the offsetting sale price exceeds the purchase
price, the Fund realizes a gain, and if the purchase price exceeds the
offsetting sale price, the Fund realizes a loss.
Interest rate futures contracts are traded in an auction environment on
the floors of several exchanges principally, the Chicago Board of Trade and the
Chicago Mercantile Exchange. The Fund would deal only in standardized contracts
on recognized exchanges. Each exchange guarantees performance under contract
provisions through a clearing corporation, a nonprofit organization managed by
the exchange membership.
A public market now exists in futures contracts covering various
financial instruments including long-term United States Treasury bonds and
notes; Government National Mortgage Association (GNMA) modified pass-through
mortgage-backed securities; three-month United States Treasury bills; and
ninety-day commercial paper. A Fund may trade in any futures contract for which
there exists a public market, including, without limitation, the foregoing
instruments.
Examples of Futures Contract Sale. A Fund would engage in an interest
rate futures contract sale to maintain the income advantage from continued
holding of a long-term bond while endeavoring to avoid part or all of the loss
in market value that would otherwise accompany a decline in long-term securities
prices. Assume that the market value of a certain security in the Capital Income
Fund tends to move in concert with the futures market prices of long-term United
States Treasury bonds ("Treasury bonds"). The investment adviser wishes to fix
the current market value of this portfolio security until some point in the
future. Assume the portfolio security has a market value of 100, and the
investment adviser believes that, because of an anticipated rise in interest
rates, the value will decline to 95. The Capital Income Fund might enter into
futures contract sales of Treasury bonds for an equivalent of 98. If the market
value of the portfolio security does indeed decline from 100 to 95, the
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equivalent futures market price for the Treasury bonds might also decline from
98 to 93.
In that case, the five-point loss in the market value of the portfolio
security would be offset by the five-point gain realized by closing out the
futures contract sale. Of course, the futures market price of Treasury bonds
might well decline to more than 93 or to less than 93 because of the imperfect
correlation between cash and futures prices mentioned below.
The investment adviser could be wrong in its forecast of interest rates
and the equivalent futures market price could rise above 98. In this case, the
market value of the portfolio securities, including the portfolio security being
protected, would increase. The benefit of this increase would be reduced by the
loss realized on closing out the futures contract sale.
If interest rate levels did not change, the Fund in the above example
might incur a loss of 2 points (which might be reduced by an off-setting
transaction prior to the settlement date). In each transaction, transaction
expenses would also be incurred.
Examples of Futures Contract Purchase. A Fund would engage in an
interest rate futures contract purchase when it is not fully invested in
long-term bonds but wishes to defer for a time the purchase of long-term bonds
in light of the availability of advantageous interim investments, e.g.,
shorter-term securities whose yields are greater than those available on
long-term bonds. The Fund's basic motivation would be to maintain for a time the
income advantage from investing in the short-term securities; the Fund would be
endeavoring at the same time to eliminate the effect of all or part of an
expected increase in market price of the long-term bonds that the Fund may
purchase.
For example, assume that the market price of a long-term bond that the
Capital Income Fund may purchase, currently yielding 10%, tends to move in
concert with futures market prices of Treasury bonds. The investment adviser
wishes to fix the current market price (and thus 10% yield) of the long-term
bond until the time (four months away in this example) when it may purchase the
bond. Assume the long-term bond has a market price of 100, and the investment
adviser believes that, because of an anticipated fall in interest rates, the
price will have risen to 105 (and the yield will have dropped to about 9 1/2%)
in four months. The Fund might enter into futures contracts purchases of
Treasury bonds for an equivalent price of 98. At the same time, the Fund would
assign a pool of investments in short-term securities that are either maturing
in four months or earmarked for sale in four months, for purchase of the
long-term bond at an assumed market price of 100. Assume these short-term
securities
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are yielding 15%. If the market price of the long-term bond does indeed rise
from 100 to 105, the equivalent futures market price for Treasury bonds might
also rise from 98 to 103. In that case, the 5-point increase in the price that
the Capital Income Fund pays for the long-term bond would be offset by the
5-point gain realized by closing out the futures contract purchase.
The investment adviser could be wrong in its forecast of interest
rates; long-term interest rates might rise to above 10%; and the equivalent
futures market price could fall below 98. If short-term rates at the same time
fall to 10% or below, it is possible that the Fund would continue with its
purchase program for long-term bonds. The market price of available long-term
bonds would have decreased. The benefit of this price decrease, and thus yield
increase, will be reduced by the loss realized on closing out the futures
contract purchase.
If, however, short-term rates remained above available long-term rates,
it is possible that the Fund would discontinue its purchase program for
long-term bonds. The yield on short-term securities in the portfolio, including
those originally in the pool assigned to the particular long-term bond, would
remain higher than yields on long-term bonds. The benefit of this continued
incremental income will be reduced by the loss realized on closing out the
futures contract purchase. In each transaction, expenses would also be incurred.
II. STOCK INDEX FUTURES CONTRACTS
A stock index assigns relative values to the stocks included in the
index and the index fluctuates with changes in the market values of the stocks
included. A stock index futures contract is a bilateral agreement pursuant to
which two parties agree to take or make delivery of an amount of cash equal to a
specified dollar amount times the difference between the stock index value
(which assigns relative values to the common stocks included in the index) at
the close of the last trading day of the contract and the price at which the
futures contract is originally struck. No physical delivery of the underlying
stocks in the index is made. Some stock index futures contracts are based on
broad market indices, such as the Standard & Poor's 500 or the New York Stock
Exchange Composite Index. In contrast, certain exchanges offer futures contracts
on narrower market indices, such as the Standard & Poor's 100 or indices based
on an industry or market segment, such as oil and gas stocks. Futures contracts
are traded on organized exchanges regulated by the Commodity Futures Trading
Commission. Transactions on such exchanges are cleared through a clearing
corporation, which guarantees the performance of the parties to each contract.
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The Aggressive Growth Fund and Capital Income Fund will sell stock
index futures contracts in order to offset a decrease in market value of their
respective portfolio securities that might otherwise result from a market
decline. The Funds may do so either to hedge the value of their respective
portfolios as a whole, or to protect against declines, occurring prior to sales
of securities, in the value of the securities to be sold. Conversely, the Funds
will purchase stock index futures contracts in anticipation of purchases of
securities. In a substantial majority of these transactions, the Funds will
purchase such securities upon termination of the long futures position, but a
long futures position may be terminated without a corresponding purchase of
securities.
In addition, the Aggressive Growth Fund and Capital Income Fund may
utilize stock index futures contracts in anticipation of changes in the
composition of their respective portfolio holdings. For example, in the event
that a Fund expects to narrow the range of industry groups represented in its
holdings it may, prior to making purchases of the actual securities, establish a
long futures position based on a more restricted index, such as an index
comprised of securities of a particular industry group. The Funds may also sell
futures contracts in connection with this strategy, in order to protect against
the possibility that the value of the securities to be sold as part of the
restructuring of their respective portfolios will decline prior to the time of
sale.
The following are examples of transactions in stock index futures (net
of commissions and premiums, if any).
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ANTICIPATORY PURCHASE HEDGE: Buy the Future
Hedge Objective: Protect Against Increasing Price
<TABLE>
<CAPTION>
Portfolio Futures
--------- -------
<S> <C>
-Day Hedge is Placed-
Anticipate Buying $62,500 Buying 1 Index Futures
Aggressive Growth Fund at 125
Value of Futures =
$62,500/Contract
-Day Hedge is Lifted-
Buy Aggressive Growth Fund with Sell 1 Index Futures at 130
Actual Cost = $65,000 Value of Futures = $65,000/
Increase in Purchase Price = Contract
$2,500 Gain on Futures = $2,500
</TABLE>
HEDGING A STOCK PORTFOLIO: Sell the Future
Hedge Objective: Protect Against Declining
Value of the Fund
Factors:
Value of Stock Fund = $1,000,000
Value of Futures Contract = 125 x $500 = $62,500
Fund Beta Relative to the Index = 1.0
<TABLE>
<CAPTION>
Portfolio Futures
--------- -------
<S> <C>
-Day Hedge is Placed-
Anticipate Selling $1,000,000 Sell 16 Index Futures at 125
Aggressive Growth Fund Value of Futures = $1,000,000
-Day Hedge is Lifted-
Aggressive Growth Fund-Own Buy 16 Index Futures at 120
Stock with Value = $960,000 Value of Futures = $960,000
Loss in Fund Value = $40,000 Gain on Futures = $40,000
</TABLE>
If, however, the market moved in the opposite direction, that is,
market value decreased and a Fund had entered into an anticipatory purchase
hedge, or market value increased and a Fund had hedged its stock portfolio, the
results of the Fund's transactions in stock index futures would be as set forth
below.
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ANTICIPATORY PURCHASE HEDGE: Buy the Future
Hedge Objective: Protect Against Increasing Price
<TABLE>
<CAPTION>
Portfolio Futures
--------- -------
<S> <C>
-Day Hedge is Placed-
Anticipate Buying $62,500 Buying 1 Index Futures at 125
Aggressive Growth Fund Value of Futures = $62,500/
Contract
-Day Hedge is Lifted-
Buy Aggressive Growth Fund with Sell 1 Index Futures at 120
Actual Cost - $60,000 Value of Futures = $60,000/
Decrease in Purchase Price = $2,500 Contract
Loss on Futures = $2,500
</TABLE>
HEDGING A STOCK PORTFOLIO: Sell the Future
Hedge Objective: Protect Against Declining
Value of the Fund
Factors:
Value of Stock Fund = $1,000,000
Value of Futures Contract = 125 x $500 = $62,500
Fund Beta Relative to the Index = 1.0
<TABLE>
<CAPTION>
Portfolio Futures
--------- -------
<S> <C>
-Day Hedge is Placed-
Anticipate Selling $1,000,000 Sell 16 Index Futures at 125
Aggressive Growth Fund Value of Futures = $1,000,000
-Day Hedge is Lifted-
Aggressive Growth Fund-Own Buy 16 Index Futures at 130
Stock with Value = $1,040,000 Value of Futures = $1,040,000
Gain in Fund Value = $40,000 Loss of Futures = $40,000
</TABLE>
III. FUTURES CONTRACTS ON FOREIGN CURRENCIES
A futures contract on foreign currency creates a binding obligation on
one party to deliver, and a corresponding obligation on another party to accept
delivery of, a stated quantity of a foreign currency, for an amount fixed in
U.S. dollars. Foreign currency futures may be used by the Aggressive Growth Fund
to hedge against exposure to fluctuations in exchange rates between the U.S.
dollar and other currencies arising from multinational transactions.
IV. MARGIN PAYMENTS
Unlike when a Fund purchases or sells a security, no price is paid or
received by the Fund upon the purchase or sale of a futures contract. Initially,
the Fund will be required to
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deposit with the broker or in a segregated account with the Fund's custodian an
amount of cash or cash equivalents, the value of which may vary but is generally
equal to 10% or less of the value of the contract. This amount is known as
initial margin. The nature of initial margin in futures transactions is
different from that of margin in security transactions in that futures contract
margin does not involve the borrowing of funds by the customer to finance the
transactions. Rather, the initial margin is in the nature of a performance bond
or good faith deposit on the contract which is returned to the Fund upon
termination of the futures contract assuming all contractual obligations have
been satisfied. Subsequent payments, called variation margin, to and from the
broker, will be made on a daily basis as the price of the underlying instruments
fluctuates making the long and short positions in the futures contract more or
less valuable, a process known as marking-to-market. For example, when a Fund
has purchased a futures contract and the price of the contract has risen in
response to a rise in the underlying instruments, that position will have
increased in value and the Fund will be entitled to receive from the broker a
variation margin payment equal to that increase in value. Conversely, where a
Fund has purchased a futures contract and the price of the future contract has
declined in response to a decrease in the underlying instruments, the position
would be less valuable and the Fund would be required to make a variation margin
payment to the broker. At any time prior to expiration of the futures contract,
the investment adviser may elect to close the position by taking an opposite
position, subject to the availability of a secondary market, which will operate
to terminate the Fund's position in the futures contract. A final determination
of variation margin is then made, additional cash is required to be paid by or
released to the Fund, and the Fund realizes a loss or gain.
V. RISKS OF TRANSACTIONS IN FUTURES CONTRACTS
There are several risks in connection with the use of futures in the
Funds as a hedging device. One risk arises because of the imperfect correlation
between movements in the price of the future and movements in the price of the
securities which are the subject of the hedge. The price of the future may move
more than or less than the price of the securities being hedged. If the price of
the future moves less than the price of the securities which are the subject of
the hedge, the hedge will not be fully effective but, if the price of the
securities being hedged has moved in an unfavorable direction, the Fund would be
in a better position than if it had not hedged at all. If the price of the
securities being hedged has moved in a favorable direction, this advantage will
be partially offset by the loss on the future. If the price of the future moves
more than the price of the hedged securities, the Fund involved will experience
either a loss or gain on the future which will not be completely
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offset by movements in the price of the securities which are the subject of the
hedge. To compensate for the imperfect correlation of movements in the price of
securities being hedged and movements in the price of futures contracts, a Fund
may buy or sell futures contracts in a greater dollar amount than the dollar
amount of securities being hedged if the volatility over a particular time
period of the prices of such securities has been greater than the volatility
over such time period of the future, or if otherwise deemed to be appropriate by
the investment adviser. Conversely, a Fund may buy or sell fewer futures
contracts if the volatility over a particular time period of the prices of the
securities being hedged is less than the volatility over such time period of the
futures contract being used, or if otherwise deemed to be appropriate by the
investment adviser. It is also possible that, where the Fund has sold futures to
hedge its portfolio against a decline in the market, the market may advance and
the value of securities held in the Fund may decline. If this occurred, the Fund
would lose money on the future and also experience a decline in value in its
portfolio securities.
Where futures are purchased to hedge against a possible increase in the
price of securities before a Fund is able to invest its cash (or cash
equivalents) in securities (or options) in an orderly fashion, it is possible
that the market may decline instead; if the Fund then concludes not to invest in
securities or options at that time because of concern as to possible further
market decline or for other reasons, the Fund will realize a loss on the futures
contract that is not offset by a reduction in the price of securities purchased.
In instances involving the purchase of futures contracts by a Fund, an
amount of cash and cash equivalents, equal to the market value of the futures
contracts, will be deposited in a segregated account with the Fund's custodian
and/or in a margin account with a broker to collateralize the position.
In addition to the possibility that there may be an imperfect
correlation, or no correlation at all, between movements in the futures and the
securities being hedged, the price of futures may not correlate perfectly with
movement in the cash market due to certain market distortions. Rather than
meeting additional margin deposit requirements, investors may close futures
contracts through off-setting transactions which could distort the normal
relationship between the cash and futures markets. Second, with respect to
financial futures contracts, the liquidity of the futures market depends on
participants entering into off-setting transactions rather than making or taking
delivery. To the extent participants decide to make or take delivery, liquidity
in the futures market could be reduced thus producing distortions. Third, from
the point of
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view of speculators, the deposit requirements in the futures market are less
onerous than margin requirements in the securities market. Therefore, increased
participation by speculators in the futures market may also cause temporary
price distortions. Due to the possibility of price distortion in the futures
market, and because of the imperfect correlation between the movements in the
cash market and movements in the price of futures, a correct forecast of general
market trends or interest rate movements by the investment adviser may still not
result in a successful hedging transaction over a short time frame.
Positions in futures may be closed out only on an exchange or board of
trade which provides a secondary market for such futures. Although the Funds
intend to purchase or sell futures only on exchanges or boards of trade where
there appear to be active secondary markets, there is no assurance that a liquid
secondary market on any exchange or board of trade will exist for any particular
contract or at any particular time. In such event, it may not be possible to
close a futures investment position, and in the event of adverse price
movements, the Fund would continue to be required to make daily cash payments of
variation margin. However, in the event futures contracts have been used to
hedge portfolio securities, such securities will not be sold until the futures
contract can be terminated. In such circumstances, an increase in the price of
the securities, if any, may partially or completely offset losses on the futures
contract. However, as described above, there is no guarantee that the price of
the securities will in fact correlate with the price movements in the futures
contract and thus provide an offset on a futures contract.
Further, it should be noted that the liquidity of a secondary market in
a futures contract may be adversely affected by "daily price fluctuation limits"
established by commodity exchanges which limit the amount of fluctuation in a
futures contract price during a single trading day. Once the daily limit has
been reached in the contract, no trades may be entered into at a price beyond
the limit, thus preventing the liquidation of open futures positions.
Successful use of futures by a Fund is also subject to the investment
adviser's ability to predict correctly movements in the direction of the market.
For example, if a Fund has hedged against the possibility of a decline in the
market adversely affecting securities held by it and securities prices increase
instead, the Fund will lose part of all of the benefit to the increased value of
its securities which it has hedged because it will have offsetting losses in its
futures positions. In addition, in such situations, if the Fund has insufficient
cash, it may have to sell securities to meet daily variation margin
requirements. Such sales of securities may be, but will
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not necessarily be, at increased prices which reflect the rising market. A Fund
may have to sell securities at a time when it may be disadvantageous to do so.
VI. OPTIONS ON FUTURES CONTRACTS
Each Fund may purchase options on the futures contracts described
above. A futures option gives the holder, in return for the premium paid, the
right to buy (call) from or sell (put) to the writer of the option a futures
contract at a specified price at any time during the period of the option. Upon
exercise, the writer of the option is obligated to pay the difference between
the cash value of the futures contract and the exercise price. Like the buyer or
seller of a futures contract, the holder, or writer, of an option has the right
to terminate its position prior to the scheduled expiration of the option by
selling, or purchasing, an option of the same series, at which time the person
entering into the closing transaction will realize a gain or loss.
Investments in futures options involve some of the same considerations
that are involved in connection with investments in futures contracts (for
example, the existence of a liquid secondary market). In addition, the purchase
of an option also entails the risk that changes in the value of the underlying
futures contract will not be fully reflected in the value of the option
purchased. Depending on the pricing of the option compared to either the futures
contract upon which it is based, or upon the price of the securities being
hedged, an option may or may not be less risky than ownership of the futures
contract or such securities. In general, the market prices of options can be
expected to be more volatile than the market prices on the underlying futures
contract. Compared to the purchase or sale of futures contracts, however, the
purchase of call or put options on futures contracts may frequently involve less
potential risk to the Funds because the maximum amount at risk is the premium
paid for the options (plus transaction costs). Although permitted by their
fundamental investment policies, the Funds do not currently intend to write
futures options, and will not do so in the future absent any necessary
regulatory approvals.
VII. OTHER HEDGING TRANSACTIONS
The U.S. Government Securities Fund and Capital Income Fund presently
intend to use interest rate futures contracts, the Aggressive Growth Fund
presently intends to use stock index futures contract and foreign currency
futures contracts (and related options) in connection with their hedging
activities. Nevertheless, each of these Funds is authorized to enter into
hedging transactions in any other futures or options contracts which are
currently traded or which may subsequently become
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available for trading. Such instruments may be employed in connection with the
Funds' hedging strategies if, in the judgment of the investment adviser,
transactions therein are necessary or advisable.
VIII. ACCOUNTING AND TAX TREATMENT
Accounting for futures contracts and related options will be in
accordance with generally accepted accounting principles.
Generally, futures contracts and options on futures contracts held by a
Fund at the close of the Fund's taxable year will be treated for federal income
tax purposes as sold for their fair market value on the last business day of
such year, a process known as "marking-to-market." Forty percent of any gain or
loss resulting from such constructive sale will be treated as short-term capital
gain or loss and 60% of such gain or loss will be treated as long-term capital
gain or loss without regard to the length of time the Fund holds the futures
contract or option ("the 40%-60% rule"). The amount of any capital gain or loss
actually realized by a Fund in a subsequent sale or other disposition of those
futures contracts or options will be adjusted to reflect any capital gain or
loss taken into account by a Fund in a prior year as a result of the
constructive sale of the contracts or options. With respect to futures contracts
to sell, which will be regarded as parts of a "mixed straddle" because their
values fluctuate inversely to the values of specific securities held by a Fund,
losses as to such contracts to sell will be subject to certain loss deferral
rules which limit the amount of loss currently deductible on either part of the
straddle to the amount thereof which exceeds the unrecognized gain (if any) with
respect to the other part of the straddle, and to certain wash sales
regulations. Under short sales rules, which also will be applicable, the holding
period of the securities forming part of the straddle (if they have not been
held for the long-term holding period) will be deemed not to begin prior to
termination of the straddle. With respect to certain futures contracts and
related options, deductions for interest and carrying charges will not be
allowed. Notwithstanding the rules described above, with respect to futures
contracts to sell which are properly identified as such, a Fund may make an
election which will exempt (in whole or in part) those identified futures
contracts from being treated for federal income tax purposes as sold on the last
business day of the Fund's taxable year, but gains and losses will be subject to
such short sales, wash sales and loss deferral rules and the requirement to
capitalize interest and carrying charges. Under Temporary Regulations, a Fund
would be allowed (in lieu of the foregoing) to elect either (1) to offset gains
or losses from portions which are part of a mixed straddle by separately
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identifying each mixed straddle to which such treatment applies, or (2) to
establish a mixed straddle account for which gains and losses would be
recognized and offset on a periodic basis during the taxable year. Under either
election, the 40%-60% rule will apply to the net gain or loss attributable to
the futures contracts, but in the case of a mixed straddle account election, not
more than 50 percent of any net gain may be treated as long-term and no more
than 40 percent of any net loss may be treated as short-term.
Certain foreign currency contracts entered into by the Aggressive
Growth Fund may be subject to the "marking-to-market" process, but gain or loss
will be treated as 100% ordinary income or loss. To receive such federal income
tax treatment, a foreign currency contract must meet the following conditions:
(1) the contract must require delivery of a foreign currency of a type in which
regulated futures contracts are traded or upon which the settlement value of the
contract depends; (2) the contract must be entered into at arm's length at a
price determined by reference to the price in the interbank market; and (3) the
contract must be traded in the interbank market. The Treasury Department has
broad authority to issue regulations under the provisions respecting foreign
currency contracts. As of the date of this Statement of Additional Information,
the Treasury has not issued any such regulations. Foreign currency contracts
entered into by the Fund may result in the creation of one or more straddles for
federal income tax purposes, in which case certain loss deferral, short sales,
and wash sales rules and the requirement to capitalize interest and carrying
charges may apply.
With respect to the Aggressive Growth Fund and Capital Income Fund,
some investments may be subject to special rules which govern the federal income
tax treatment of certain transactions denominated in terms of a currency other
than the U.S. dollar or determined by reference to the value of one or more
currencies other than the U.S. dollar. The types of transactions covered by the
special rules include the following: (i) the acquisition of, or becoming the
obligor under, a bond or other debt instrument (including, to the extent
provided in Treasury regulations, preferred stock); (ii) the accruing of certain
trade receivables and payables; and (iii) the entering into or acquisition of
any forward contract, futures contract, option and similar financial instrument.
However, regulated futures contracts and non-equity options are generally not
subject to the special currency rules if they are or would be treated as sold
for their fair market value at year-end under the marking-to-market rules,
unless an election is made to have such currency rules apply. The disposition of
a currency other than the U.S. dollar by a U.S. taxpayer is also treated as a
transaction subject to the special currency rules. With respect
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to transactions covered by the special rules, foreign currency gain or loss is
calculated separately from any gain or loss on the underlying transaction and is
normally taxable as ordinary gain or loss. A taxpayer may elect to treat as
capital gain or loss foreign currency gain or loss arising from certain
identified forward contracts, futures contracts and options that are capital
assets in the hands of the taxpayer and which are not part of a straddle. In
accordance with Treasury regulations, certain transactions subject to the
special currency rules that are part of a "section 988 hedging transaction" (as
defined in the Code and the Treasury regulations) will be integrated and treated
as a single transaction or otherwise treated consistently for purposes of the
Code. "Section 988 hedging transactions" are not subject to the mark-to-market
or loss deferral rules under the Code. It is anticipated that some of the
non-U.S. dollar denominated investments and foreign currency contracts that such
Funds may make or may enter into will be subject to the special currency rules
described above. Gain or loss attributable to the foreign currency component of
transactions engaged in by a Fund which are not subject to special currency
rules (such as foreign equity investments other than certain preferred stocks)
will be treated as capital gain or loss and will not be segregated from the gain
or loss on the underlying transaction.
Qualification as a regulated investment company under the Code requires
that each Fund satisfy certain requirements with respect to the source of its
income during a taxable year. At least 90% of the gross income of each Fund must
be derived from dividends, interests, payments with respect to securities loans,
gains from the sale or other disposition of stock, securities or foreign
currencies, and other income (including but not limited to gains from options,
futures, or forward contracts) derived with respect to the Fund's business of
investing in such stock, securities or currencies. The Treasury Department may
by regulation exclude from qualifying income foreign currency gains which are
not directly related to a Fund's principal business of investing in stock or
securities, or options and futures with respect to stock or securities. Any
income derived by a Fund from a partnership or trust is treated for this purpose
as derived with respect to the Fund's business of investing in stock, securities
or currencies only to the extent that such income is attributable to items of
income which would have been qualifying income if realized by the Fund in the
same manner as by the partnership or trust.
An additional requirement for qualification as a regulated investment
company under the Code is that less than 30% of a Fund's gross income must be
derived from gains realized on the sale or other disposition of the following
investments held for less than three moths: (1) stock and securities (as defined
in section 2(a)(36) of the 1940 Act); (2) options, futures and
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forward contracts other than those on foreign currencies; and (3) foreign
currencies (and options, futures and forward contracts on foreign currencies)
that are not directly related to a Fund's principal business of investing in
stock and securities (and options and futures with respect to stocks and
securities). With respect to futures contracts and other financial instruments
subject to the marking-to-market rules, the Internal Revenue Service has ruled
in private letter rulings that a gain realized from such a futures contract or
financial instrument will be treated as being derived from a security held for
three months or more (regardless of the actual period for which the contract or
instrument is held) if the gain arises as a result of a constructive sale under
the marking-to-market rules, and will be treated as being derived from a
security held for less than three months only if the contract or instrument is
terminated (or transferred) during the taxable year (other than by reason of
marking-to-market) and less than three months have elapsed between the date the
contract or instrument is acquired and the termination date. In determining
whether the 30% test is met for a taxable year, increases and decreases in the
value of each Fund's futures contracts and other investments that qualify as
part of a "designated hedge," as defined in the Code, may be netted.
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PACIFIC HORIZON FUNDS, INC.
(THE "COMPANY")
PART B
STATEMENT OF ADDITIONAL INFORMATION
FOR
FLEXIBLE BOND FUND
BLUE CHIP FUND
ASSET ALLOCATION FUND
July 1, 1995
(as Revised December 8, 1995)
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
The Company............................................ 2
Investment Objectives And Policies..................... 2
Additional Purchase And Redemption Information......... 21
Additional Information Concerning Taxes................ 30
Management............................................. 33
General Information.................................... 58
Appendix A............................................. A-1
Appendix B............................................. B-1
</TABLE>
This Statement of Additional Information applies to the Pacific Horizon
Flexible Bond Fund ("Flexible Bond Fund"), Pacific Horizon Blue Chip Fund ("Blue
Chip Fund") and Pacific Horizon Asset Allocation Fund ("Asset Allocation Fund")
of the Company. This Statement of Additional Information is meant to be read in
conjunction with the Prospectuses dated July 1, 1995, as they may from time to
time be revised (individually, a "Prospectus" and collectively, the
"Prospectuses"), which describe the particular Fund of the Company in which the
investor is interested. This Statement of Additional Information is incorporated
by reference in its entirety into each such Prospectus. Because this Statement
of Additional Information is not itself a prospectus, no investment in shares of
any Fund should be made solely upon the information contained herein. Copies of
the Prospectuses relating to the Company's Funds to which this Statement of
Additional Information relates may be obtained by calling Concord Financial
Group, Inc. at 800-332-3863. Capitalized terms used but not defined herein have
the same meaning as in the Prospectuses.
<PAGE> 434
THE COMPANY
The Company was organized on October 27, 1982 as a Maryland
corporation. The Flexible Bond, Blue Chip and Asset Allocation Funds commenced
operations January 24, 1994, January 13, 1994 and January 18, 1994,
respectively. The Flexible Bond, Blue Chip and Asset Allocation Funds seek to
achieve their respective investment objectives by investing substantially all of
their assets in diversified investment portfolios (the "Portfolios") of an
open-end, management investment company having the same investment objective as
these Funds.
The Company also offers other investment portfolios which are described
in separate Prospectuses and Statements of Additional Information. For
information concerning these other portfolios contact the Distributor at the
telephone number stated on the cover page of this Statement of Additional
Information.
INVESTMENT OBJECTIVES AND POLICIES
The Prospectus for each Fund describes the investment objective of each
Fund and its corresponding Portfolio. Since the investment characteristics of
each Fund will correspond with its respective Portfolio, the following is a
discussion of the various investments and techniques employed by each Portfolio.
The following information supplements and should be read in conjunction with the
descriptions of the investment objective and policies in the Prospectus for each
Fund.
PORTFOLIO TRANSACTIONS
The portfolio turnover rate described in each Prospectus is calculated
by dividing the lesser of purchases or sales of portfolio securities for the
year by the monthly average value of the portfolio securities. The calculation
excludes all securities whose maturities at the time of acquisition were one
year or less. Portfolio turnover may vary greatly from year to year as well as
within a particular year, and may also be affected by cash requirements for
redemptions of shares and by requirements which enable the Company to receive
certain favorable tax treatment. Portfolio turnover will not be a limiting
factor in making portfolio decisions. For the fiscal year ended February 28,
1995, the portfolio turnover rates for the Portfolios corresponding to the
Flexible Bond, Blue Chip and Asset Allocation Funds were 240%, 44% and 142%,
respectively. For the period from December 6, 1993 (commencement of operations)
to February 28, 1994, the portfolio turnover rates for the Portfolio's
corresponding to the Flexible Bond, Blue Chip and Asset Allocation Funds were
32%, 86% and 67%, respectively.
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Subject to the general control of the Portfolios' Board of Trustees,
Bank of America National Trust and Savings Association ("Bank of America" or the
"investment adviser") is responsible for, makes decisions with respect to, and
places orders for, all purchases and sales of portfolio securities for each
Portfolio.
Transactions on stock exchanges involve the payment of negotiated
brokerage commissions. There is generally no stated commission in the case of
securities traded in the over-the-counter market, but the price includes an
undisclosed commission or mark-up. The cost of securities purchased from
underwriters includes an underwriting commission or concession, and the prices
at which securities are purchased from and sold to dealers include a dealer's
mark-up or mark-down. Purchases and sales of portfolio securities for the
Portfolio corresponding to the Flexible Bond Fund and the fixed income portion
of the Portfolio corresponding to the Asset Allocation Fund are normally
principal transactions without brokerage commissions. During the fiscal year
ended February 28, 1995, the Portfolios corresponding to the Blue Chip and Asset
Allocation Funds paid $202,817 and $152,778, respectively, in brokerage
commissions. For the period from December 6, 1993 (commencement of operations)
to February 28, 1994, the Portfolio's corresponding to the Blue Chip and Asset
Allocation Funds paid $270,323 and $21,798, respectively, in brokerage
commissions.
In executing portfolio transactions and selecting brokers or dealers,
it is the Portfolios' policy to seek the best overall terms available. The
Investment Advisory Agreement between the respective Portfolios and Bank of
America provides that, in assessing the best overall terms available for any
transaction, Bank of America shall consider factors it deems relevant, including
the breadth of the market in the security, the price of the security, the
financial condition and execution capability of the broker or dealer, and the
reasonableness of the commission, if any, for the specific transaction and on a
continuing basis. In addition, the Investment Advisory Agreement authorizes Bank
of America, subject to the approval of the Board of Trustees of the Portfolios
to cause the Portfolios to pay a broker-dealer which furnishes brokerage and
research services a higher commission than that which might be charged by
another broker-dealer for effecting the same transaction, provided that such
commission is deemed reasonable in terms of either that particular transaction
or the overall responsibilities of Bank of America to the particular Fund or
Portfolio. Brokerage and research services may include: (1) advice as to the
value of securities, the advisability of investing in, purchasing or selling
securities and the availability of securities or purchasers or sellers of
securities; and (2) analyses and reports
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concerning industries, securities, economic factors and trends, portfolio
strategy and the performance of accounts.
It is possible that certain of the brokerage and research services
received will primarily benefit one or more other investment companies or other
accounts for which investment discretion is exercised. Conversely, the Company
or any given Fund or Portfolio may be the primary beneficiary of the brokerage
or research services received as a result of portfolio transactions effected for
such other accounts or investment companies.
Brokerage and research services so received are in addition to and not
in lieu of services required to be performed by Bank of America and do not
reduce the advisory fee payable to Bank of America. Such services may be useful
to Bank of America in serving both the Company, the Portfolios and other clients
and, conversely, services obtained by the placement of business of other clients
may be useful to Bank of America in carrying out its obligations to the Company
and the Portfolios. In connection with its investment management services with
respect to the Funds and the Portfolios, Bank of America will not acquire
certificates of deposit or other securities issued by it or its affiliates, and
will give no preference to certificates of deposit or other securities issued by
Service Organizations. In addition, portfolio securities in general will be
purchased from and sold to affiliates of the Company, the Portfolios, Bank of
America, the Distributor and their affiliates acting as principal, underwriter,
syndicate member, market-maker, dealer, broker or in any similar capacity,
provided such purchase, sale or dealing is permitted under the Investment
Company Act of 1940 (the "1940 Act") and the rules thereunder.
The underlying Portfolios of the Flexible Bond, Blue Chip and Asset
Allocation Funds, may participate, if and when practicable, in bidding for the
purchase of securities of the U.S. Government and its agencies and
instrumentalities directly from an issuer in order to take advantage of the
lower purchase price available to members of a bidding group. A Portfolio will
engage in this practice only when Bank of America, in its sole discretion,
subject to guidelines adopted by the Board of Trustees of the Portfolios,
believes such practice to be in the interest of the Portfolios.
To the extent permitted by law, Bank of America may aggregate the
securities to be sold or purchased on behalf of the Portfolios with those to be
sold or purchased for other investment companies or common trust funds in order
to obtain best execution.
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The Company is required to identify any securities of its regular
brokers or dealers (as defined in Rule 10b-1 under the 1940 Act) or their
parents held by the Company as of the close of its most recent fiscal year. As
of February 28, 1995: (a) the Treasury Fund held the following securities,
Repurchase Agreement with Goldman, Sachs & Co. in the principal amount of
$95,000,000; Repurchase Agreement with Merrill Lynch Government Securities, Inc.
in the principal amount of $95,000,000; (b) the Prime Fund held the following
securities, Merrill Lynch & Co., Inc., commercial paper in the principal amount
of $100,000,000; Goldman, Sachs Group L.P., Daily Variable Rate Master Note in
the principal amount of $120,000,000; Morgan Stanley Group, Inc., Daily Variable
Rate Master Note in the principal amount of $120,000,000; Bear Stearns Co.,
Inc., Series B, Monthly Variable Rate Note in the principal amount of
$100,000,000; Repurchase Agreement with Goldman, Sachs & Co. in the principal
amount of $120,000,000; (c) the Government Fund held the following securities,
Repurchase Agreement with Goldman, Sachs & Co. in the principal amount of
$40,000,000; Repurchase Agreement with Merrill Lynch Government Securities, Inc.
in the principal amount of $40,000,000; and (d) the Prime Value Fund held the
following securities, Merrill Lynch & Co., Inc., commercial paper in the
principal amount of $7,000,000; Goldman, Sachs Group L.P., Daily Variable Rate
Master Note in the principal amount of $7,000,000; Repurchase Agreement with
Dean Witter Reynolds, Inc. in the principal amount of $8,000,000; Repurchase
Agreement with Goldman, Sachs & Co. in the principal amount of $8,000,000.
Merrill Lynch & Co., Inc., Goldman, Sachs & Co., Bear Stearns Co.,
Inc., Morgan Stanley & Co. Incorporated, Shearson Lehman Brothers, Inc., Dean
Witter Reynolds, Inc. and Paine Webber are considered to be regular brokers and
dealers of the Company.
TYPES OF OBLIGATIONS, INVESTMENT RISKS, AND OTHER INVESTMENT
INFORMATION
The following discussion supplements the descriptions of such
investments in the Prospectuses.
Bank Certificates of Deposit, Bankers' Acceptances and Time Deposits.
Certificates of deposit, bankers' acceptances and time deposits are eligible
investments for each of the Portfolios as described in the Funds' Prospectuses.
Certificates of deposit are negotiable certificates issued against funds
deposited in a commercial bank for a definite period of time and earning a
specified return. Bankers' acceptances are negotiable drafts or bills of
exchange, normally drawn by an importer or exporter to pay for specific
merchandise, which are "accepted" by a bank, meaning, in effect, that the bank
unconditionally agrees to pay
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the face value of the instrument on maturity. Certificates of deposit and
bankers acceptances will be obligations of domestic or foreign banks or
financial institutions with total assets at the time of purchase in excess of
$2.5 billion (including assets of both domestic and foreign branches). Time
deposits are non-negotiable deposits maintained at a banking institution for a
specified period of time at a specified interest rate. Obligations issued by the
International Bank for Reconstruction and Development, the Asian Development
Bank or the Inter-American Development Bank are not permissible investments for
the Portfolios.
Instruments issued by foreign banks or financial institutions may be
subject to investment risks that are different in some respects than the risks
associated with instruments issued by those U.S. domestic issuers. Such risks
include future political and economic developments, the possible imposition of
withholding taxes by the particular country in which the issuer is located on
interest income payable on the securities, the possible seizure or
nationalization of foreign deposits, 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.
Domestic banks and foreign banks are subject to different governmental
regulations with respect to the amount and types of loans which may be made and
interest rates which may be charged. In addition, the profitability of the
banking industry is dependent largely upon the availability and cost of funds
for the purpose of financing lending operations under prevailing money market
conditions. General economic conditions as well as exposure to credit losses
arising from possible financial difficulties of borrowers play an important part
in the operations of the banking industry.
As a result of federal and state laws and regulations, domestic banks
are, among other things, required to maintain specified levels of reserves,
limited in the amount which they can loan to a single borrower, and subject to
other regulations designed to promote financial soundness. However, such laws
and regulations do not necessarily apply to foreign bank obligations.
Commercial Paper and Short-Term Notes. The investment policies of the
Portfolios permit investment in commercial paper and short-term notes.
Commercial paper consists of unsecured promissory notes issued by corporations.
Except as noted below with respect to variable and floating rate instruments,
issues of commercial paper and short-term notes will normally have
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maturities of less than 9 months and fixed rates of return, although such
instruments may have maturities of up to one year.
Commercial paper and short-term notes will consist of issues rated at
the time of purchase A-2 or higher by Standard & Poor's Ratings Group, Division
of McGraw Hill ("S&P"), Prime-2 or higher by Moody's Investors Service, Inc.
("Moody's"), or similarly rated by another nationally recognized statistical
rating organization ("NRSRO"); or if unrated, will be determined by Bank of
America to be of comparable quality under procedures established by the Board of
Trustees of the Portfolios. These rating symbols are described in Appendix A.
Money Market Funds. The Portfolios may under certain circumstances
invest a portion of their assets in certain money market funds. The 1940 Act
prohibits each such Portfolio from investing more than 5% of the value of its
total assets in any one investment company, or more than 10% of the value of its
total assets in investment companies as a group, and also restricts its
investment in any investment company to 3% of the voting securities of such
investment company. Investment in a money market fund will involve payment of
the Portfolio's pro rata share of advisory and administration fees charged by
such fund, in addition to those paid by the Portfolio.
Repurchase Agreements. Each Portfolio is permitted to enter into
repurchase agreements with respect to its portfolio securities. Pursuant to such
agreements, a Portfolio acquires securities from financial institutions such as
banks and broker-dealers as are deemed to be creditworthy subject to the
seller's agreement to repurchase and the agreement of the Portfolio to resell
such securities at a mutually agreed upon date and price. Repurchase agreements
maturing in more than seven days will not exceed 10% of the value of the total
assets of that Portfolio. The Portfolios are not permitted to enter into
repurchase agreements with Bank of America or its affiliates, and will give no
preference to repurchase agreements with Service Organizations. The repurchase
price generally equals the price paid by a Portfolio plus interest negotiated on
the basis of current short-term rates (which may be more or less than the rate
on the underlying portfolio security). Securities subject to repurchase
agreements will be held by a custodian or sub-custodian of the Portfolio or in
the Federal Reserve/Treasury Book-Entry System. The seller under a repurchase
agreement will be required to deliver instruments the value of which is 102% of
the repurchase price (excluding accrued interest), provided that notwithstanding
such requirement, the adviser shall require that the value of the collateral,
after transactions costs (including loss of interest) reasonably expected to be
incurred on a default, shall be equal to or greater than the resale price
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(including interest) provided in the agreement. If the seller defaulted on its
repurchase obligation, a Portfolio would suffer a loss because of adverse market
action or to the extent that the proceeds from a sale of the underlying
securities were less than the repurchase price under the agreement. Bankruptcy
or insolvency of such a defaulting seller may cause the particular Portfolio's
rights with respect to such securities to be delayed or limited. Repurchase
agreements are considered to be loans by a Portfolio under the 1940 Act.
U.S. Government Obligations. Each Portfolio is permitted to make
investments in U.S. Government obligations. Such obligations include Treasury
bills, certificates of indebtedness, notes and bonds, and issues of such
entities as the Government National Mortgage Association, Export-Import Bank of
the United States, Tennessee Valley Authority, Resolution Funding Corporation,
Farmers Home Administration, Federal Home Loan Banks, Federal Intermediate
Credit Banks, Federal Farm Credit Banks, Federal Land Banks, Federal Housing
Administration, Federal National Mortgage Association, Federal Home Loan
Mortgage Corporation, and the Student Loan Marketing Association. Treasury bills
have maturities of one year or less, Treasury notes have maturities of one to
ten years and Treasury bonds generally have maturities of more than ten years.
Some of these obligations, such as those of the Government National Mortgage
Association, are supported by the full faith and credit of the U.S. Treasury;
others, such as those of the Export-Import Bank of the United States, are
supported by the right of the issuer to borrow from the Treasury; others, such
as those of the Federal National Mortgage Association, are supported by the
discretionary authority of the U.S. Government to purchase the agency's
obligations; still others, such as those of the Student Loan Marketing
Association, are supported only by the credit of the instrumentality. No
assurance can be given that the U.S. Government would provide financial support
to U.S. Government sponsored instrumentalities if it is not obligated to do so
by law.
Variable and Floating Rate Instruments. The Portfolios may acquire
variable and floating rate instruments. Such instruments are frequently not
rated by credit rating agencies. However, in determining the creditworthiness of
unrated variable and floating rate instruments and their eligibility for
purchase by a Portfolio, Bank of America will consider the earning power, cash
flow and other liquidity ratios of the issuers of such instruments (which
include financial, merchandising, bank holding and other companies) and will
continuously monitor their financial condition. An active secondary market may
not exist with respect to particular variable or floating rate instruments
purchased by a Portfolio. The absence of such an active
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secondary market could make it difficult to dispose of a variable or floating
rate instrument in the event the issuer of the instrument defaulted on its
payment obligation or during periods that the Portfolio is not entitled to
exercise its demand rights, and the Portfolio could, for these or other reasons,
suffer a loss to the extent of the default. Investments in illiquid variable and
floating rate instruments (instruments which are not payable upon seven days'
notice and do not have active trading markets) are subject to a Portfolio's
fundamental 10% limitation on illiquid securities. Variable and floating rate
instruments may be secured by bank letters of credit.
Reverse Repurchase Agreements. The Portfolios are permitted to borrow
funds for temporary purposes by entering into reverse repurchase agreements with
such financial institutions as banks and broker-dealers in accordance with the
investment limitations described therein. Whenever a Portfolio enters into a
reverse repurchase agreement, it will place in a segregated account maintained
with its custodian liquid assets such as cash, U.S. Government securities or
other liquid high grade debt securities having a value equal to the repurchase
price (including accrued interest) and Bank of America will subsequently
continuously monitor the account for maintenance of such equivalent value. The
Portfolios intend to enter into reverse repurchase agreements to avoid otherwise
having to sell securities during unfavorable market conditions in order to meet
redemptions. Reverse repurchase agreements are considered to be borrowings by a
Portfolio under the 1940 Act.
Options Trading. The Portfolios may each purchase put and call options.
Such options may relate to particular securities or to various stock indices.
The Portfolios presently intend that the aggregate value of any Portfolio's
assets subject to options will not exceed 5% of the value of its net assets. The
investment policies of the Portfolios provides that the aggregate value of any
Portfolio's assets subject to options may not exceed 25% of the value of its net
assets.
Options trading is a highly specialized activity which entails greater
than ordinary investment risks. Regardless of how much the market price of the
underlying security or index increases or decreases, the option buyer's risk is
limited to the amount of the original investment for the purchase of the option.
However, options may be more volatile than the underlying instruments, and
therefore, on a percentage basis, an investment in options may be subject to
greater fluctuation than an investment in the underlying instruments themselves.
A listed call option for a particular security gives the purchaser of the option
the right to buy from a clearing corporation, and a writer has the obligation to
sell to the clearing corporation the
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underlying security at the stated exercise price at any time prior to the
expiration of the option, regardless of the market price of the security. The
premium paid to the writer is in consideration for undertaking the obligations
under the option contract. A listed put option gives the purchaser the right to
sell to a clearing corporation the underlying security at the stated exercise
price at any time prior to the expiration date of the option, regardless of the
market price of the security. In contrast to an option on a particular security,
an option on a stock index provides the holder with the right to make or receive
a cash settlement upon exercise of the option. The amount of this settlement
will be equal to the difference between the closing price of the index at the
time of exercise and the exercise price of the option expressed in dollars,
times a specified multiple.
A Portfolio will continue to receive interest or dividend income on the
securities underlying such puts until they are exercised by the Portfolio. Any
losses realized by a Portfolio in connection with its purchase of put options
will be limited to the premiums paid by the Portfolio for the options plus any
transaction costs. A gain or loss may be wholly or partially offset by a change
in the value of the underlying security which the Portfolio owns.
The Portfolios are permitted to write call options if they are
"covered." In the case of a call option on a security, the option is "covered"
if a Portfolio owns the security underlying the call or has an absolute and
immediate right to acquire that security without additional cash consideration
(or, if additional cash consideration is required, cash or cash equivalents in
such amount as are held in a segregated account by its custodian) upon
conversion or exchange of other securities held by it. For a call option on an
index, the option is covered if a Portfolio maintains with its custodian cash or
cash equivalents equal to the contract value. A call option is also covered if a
Portfolio holds a call on the same security or index as the call written where
the exercise price of the call held is (i) equal to or less than the exercise
price of the call written, or (ii) greater than the exercise price of the call
written provided the difference is maintained by the Portfolio in cash or cash
equivalents in a segregated account with its custodian.
The principal reason for writing call options on a securities portfolio
is the attempt to realize, through the receipt of premiums, a greater current
return than would be realized on the securities alone. In return for the
premium, the covered option writer gives up the opportunity for profit from a
price increase in the underlying security above the exercise price so long as
his obligation as a writer continues, but
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retains the risk of loss should the price of the security decline. Unlike one
who owns securities not subject to an option, the covered option writer has no
control over when it may be required to sell its securities, since it may be
assigned an exercise notice at any time prior to the expiration of its
obligation as a writer.
If a Portfolio desires to sell a particular security it owns, on which
it has written an option, the Portfolio will seek to effect a closing purchase
transaction prior to, or concurrently with, the sale of the security. In order
to close out a covered call option position, a Portfolio will enter into a
"closing purchase transaction" - the purchase of a call option on a security or
stock index with the same exercise price and expiration date as the call option
which it previously wrote on the same security or index. If a Portfolio is
unable to effect a closing purchase transaction, it will not be able to sell a
security on which a call option has been written until the option expires or a
Portfolio delivers the underlying security upon exercise.
When a Portfolio purchases a put or call option, the premium paid by it
is recorded as an asset of the Portfolio. When a Portfolio writes an option, an
amount equal to the net premium (the premium less the commission) received by
the Portfolio is included in the liability section of the statement of assets
and liabilities as a deferred credit. The amount of this asset or deferred
credit will be subsequently marked-to-market to reflect the current value of
the option purchased or written. The current value of the traded option is the
last sale price or, in the absence of a sale, the average of the closing bid and
asked prices. If an option purchased by a Portfolio expires unexercised, the
Portfolio realizes a loss equal to the premium paid. If a Portfolio enters into
a closing sale transaction on an option purchased by it, the Portfolio will
realize a gain if the premium received by it on the closing transaction is more
than the premium paid to purchase the option, or a loss if it is less. Moreover,
because increases in the market price of an option will generally reflect
(although not necessarily in direct proportion) increases in the market price of
the underlying security any loss resulting from a closing purchase transaction
is likely to be offset in whole or in part by appreciation of the underlying
security owned by the Portfolio. If an option written by a Portfolio expires on
the stipulated expiration date or if the Portfolio enters into a closing
purchase transaction, it will realize a gain (or loss if the cost of a closing
purchase transaction exceeds the net premium received when the option is sold)
and the deferred credit related to such option will be eliminated. If an option
written by a Portfolio is exercised, the proceeds of the sale will be
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increased by the net premium originally received and the Portfolio will realize
a gain or loss.
As noted previously, there are several risks associated with
transactions in options on securities and indices. For example, there are
significant differences between the securities and options markets that could
result in an imperfect correlation between these markets, causing a given
transaction not to achieve its objectives. In addition, a liquid secondary
market for particular options, may be absent for reasons which include the
following: there may be insufficient trading interest in certain options;
restrictions may be imposed by a national securities exchange ("Exchange") on
opening transactions or closing transactions or both; trading halts, suspensions
or other restrictions may be imposed with respect to particular classes or
series of options or underlying securities; unusual or unforeseen circumstances
may interrupt normal operations on an Exchange; the facilities of an Exchange or
the Options Clearing Corporation may not at all times be adequate to handle
current trading volume; or one or more Exchanges could, for economic or other
reasons, decide or be compelled at some future date to discontinue the trading
of options (or a particular class or series of options), in which event the
secondary market on that Exchange (or in that class or series of options) would
cease to exist, although outstanding options that had been issued by the Options
Clearing Corporation as a result of trades on that Exchange would continue to be
exercisable in accordance with their terms.
A decision as to whether, when and how to use options involves the
exercise of skill and judgment, and even a well-conceived transaction may be
unsuccessful to some degree because of market behavior or unexpected events.
Futures. The Portfolio corresponding to the Asset Allocation Fund may
purchase and sell both interest rate and stock index futures contracts (as well
as purchase related options). Similarly, the Portfolio corresponding to the
Flexible Bond Fund may purchase and sell interest rate futures contracts (as
well as purchase related options) and the Portfolio corresponding to the Blue
Chip Fund may purchase and sell stock index futures contracts (as well as
related options).
A futures contract is a bilateral agreement pursuant to which two
parties agree to take or make delivery of an amount of cash equal to a specified
dollar amount times the difference between the value of a specified obligation
or stock index (which assigns relative values to the common stocks included in
the index) at the close of the last trading day of the contract and the price at
which the futures contract is originally struck. No physical delivery of the
underlying securities is normally made.
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<PAGE> 445
A Portfolio may not purchase or sell futures contracts and purchase related
options unless immediately after any such transaction the aggregate initial
margin that is required to be posted by that Portfolio under the rules of the
exchange on which the futures contract (or futures option) is traded, plus any
premiums paid by the Portfolio on its open futures options positions, does not
exceed 5% of the Portfolio's total assets, after taking into account any
unrealized profits and losses on the Portfolio's open contracts and excluding
the amount that a futures option is "in-the-money" at the time of purchase. An
option to buy a futures contract is "in-the-money" if the then current purchase
price of the contract that is subject to the option is less than the exercise or
strike price; an option to sell a futures contract is "in-the-money" if the
exercise or strike price exceeds the then current purchase price of the contract
that is the subject of the option.
Successful use of futures contracts by a Portfolio is subject to Bank
of America's ability to predict correctly movements in the direction of the
stock market or interest rates. There are several risks in connection with the
use of futures contracts by a Portfolio as a hedging devise. One risk arises
because of the imperfect correlation between movements in the price of the
futures contract and movements in the price of the securities which are the
subject of hedge. The price of the futures contract may move more than or less
than the price of the securities being hedged. If the price of the futures
contract moves less than the price of the securities which are the subject of
the hedge, the hedge will not be fully effective but, if the price of the
securities being hedged has moved in an unfavorable direction, a Portfolio would
be in a better position than if it had not hedged at all. If the price of the
securities being hedged has moved in a favorable direction, this advantage will
be partially offset by the loss on the futures contract. If the price of the
futures contract moves more than the price of the hedged securities, a Portfolio
involved will experience either a loss or gain on the futures contract which
will not be completely offset by movements in the price of the securities which
are the subject of the hedge.
It is also possible that, where a Portfolio has sold futures contracts
to hedge its portfolio against a decline in the market, the market may advance
and the value of securities held in a Portfolio may decline. If this occurred, a
Portfolio would lose money on the futures contract and also experience a decline
in value in its portfolio securities.
In addition to the possibility that there may be an imperfect
correlation, or no correlation at all, between movements in the futures contract
and the securities being
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hedged, the price of futures contracts may not correlate perfectly with movement
in the cash market due to certain market distortions. Due to the possibility of
price distortion in the futures market, and because of the imperfect correlation
between the movement in the cash market and movements in the price of futures
contracts, a correct forecast of general market trends or interest rate
movements by Bank of America may still not result in a successful hedging
transaction over a short time frame.
Positions in futures contracts may be closed out only on an exchange or
board of trade which provides a secondary market for such futures contracts.
Although the Portfolios intend to purchase or sell futures contracts only on
exchanges or boards of trade where there appear to be active secondary markets,
there is no assurance that a liquid secondary market on any exchange or board of
trade will exist for any particular contract or at any particular time. In such
event, it may not be possible to close a futures investment position, and in the
event of adverse price movements, a Portfolio would continue to be required to
make daily cash payments of variation margin. The liquidity of a secondary
market in a futures contract may in addition be adversely affected by "daily
price fluctuation limits" established by commodity exchanges which limit the
amount of fluctuation in a futures contract price during a single trading day.
Once the daily limit has been reached in the contract, no trades may be entered
into at a price beyond the limit, thus preventing the liquidation of open
futures positions.
For additional information concerning Futures and options thereon,
please see Appendix B to this Statement of Additional Information.
Foreign Investments. The Portfolios corresponding to the Flexible Bond
and Asset Allocation Funds may invest in securities of foreign issuers that may
or may not be publicly traded in the United States.
Investments in foreign securities involve certain inherent risks, such
as political or economic instability of the issuer or the country of issue, the
difficulty of predicting international trade patterns and the possibility of
imposition of exchange controls. Such securities may also be subject to greater
fluctuations in price than securities of domestic corporations. In addition,
there may be less publicly available information about a foreign company than
about a domestic company. Foreign companies generally are not subject to uniform
accounting, auditing and financial reporting standards comparable to those
applicable to domestic companies. Foreign brokerage commissions and custodian
fees are generally higher than in the United States. With respect to certain
foreign countries, there
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is a possibility of expropriation or confiscatory taxation, or diplomatic
developments which could affect investment in those countries.
In considering whether to invest in the securities of a foreign
company, Bank of America considers such factors as the characteristics of the
particular company, differences between economic trends and the performance of
securities markets within the U.S. and those within other countries, and also
factors relating to the general economic, governmental and social conditions of
the country or countries where the company is located. The extent to which a
Portfolio will be invested in foreign companies will fluctuate from time to time
within the percentage limits stated above depending on the investment adviser's
assessment of prevailing market, economic and other conditions.
Municipal Securities. The Portfolios corresponding to the Flexible Bond
and Asset Allocation Funds may invest in Municipal Securities. Municipal
Securities are debt obligations issued to obtain funds for various public
purposes, including the construction of a wide range of public facilities, the
refunding of outstanding obligations, the payment of general operating expenses
and the extension of loans to public institutions and facilities. In addition,
certain types of private activity bonds (including industrial development bonds
under prior law) are issued by or on behalf of public authorities to finance
various privately-operated facilities. Such obligations are included within the
term Municipal Securities if the interest paid thereon is exempt from regular
Federal income tax.
The Portfolios corresponding to the Flexible Bond and Asset Allocation
Funds may purchase short-term Tax Anticipation Notes, Bond Anticipation Notes,
Revenue Anticipation Notes and other forms of short-term tax-exempt loans. Such
notes are issued with a short-term maturity in anticipation of the receipt of
tax funds, the proceeds of bond placements or other revenues. The Portfolios may
also purchase tax-exempt commercial paper.
There are, of course, variations in the quality of Municipal
Securities, both within a particular classification and between classifications,
and the yields on Municipal Securities 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.
The ratings of Moody's, S&P, Fitch and D&P represent their opinions as to the
quality of Municipal Securities. It should be emphasized, however, that ratings
are general and are not absolute standards of quality, and Municipal Securities
with
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the same maturity, interest rate and rating may have different yields while
Municipal Securities of the same maturity and interest rate with different
ratings may have the same yield. Subsequent to its purchase by a Portfolio, an
issue of Municipal Securities may cease to be rated or its rating may be
reduced. The investment adviser will consider such an event in determining
whether the Portfolio should continue to hold the obligation.
An issuer's obligations under its Municipal 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. The power or ability of an issuer to meet its
obligations for the payment of interest on, and principal of, its Municipal
Securities may be materially adversely affected by litigation or other
conditions. Further, it should also be noted with respect to all Municipal
Securities 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 Securities to become taxable retroactive to the
date of issue.
Information about the financial condition of issuers of Municipal
Securities may be less available than about corporations a class of whose
securities is registered under the Securities Exchange Act of 1934.
When-Issued Securities and Forward Commitments. The Portfolios may
purchase securities on a "when-issued" basis and may purchase or sell securities
on a "forward commitment" basis. When a Portfolio agrees to purchase securities
on a "when-issued," or forward commitment basis, its custodian will set aside
cash or liquid portfolio securities equal to the amount of the commitment in a
separate account. Normally, the custodian will set aside portfolio securities to
satisfy a purchase commitment. In such a case, a Portfolio may be required
subsequently to place additional assets in the separate account in order to
assure that the value of the account remains equal to the amount of the
commitment. It may be expected that the net assets of a Portfolio (and the
corresponding Fund) will fluctuate to a greater degree when it sets aside
portfolio securities to cover such purchase commitments than when it sets aside
cash. The Portfolios do not intend to engage in these transactions for
speculative purposes but only in furtherance of their investment objectives.
Because a Portfolio will set aside cash or liquid portfolio securities to
satisfy its purchase commitments in the
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manner described, its liquidity and the ability of the investment adviser to
manage it may be affected in the event the forward commitments and commitments
to purchase when-issued securities ever exceeded 25% of the value of a
Portfolio's assets.
A Portfolio will purchase securities on a when-issued or forward
commitment basis only with the intention of completing the transaction. If
deemed advisable as a matter of investment strategy, however, a Portfolio may
dispose of or renegotiate a commitment after it is entered into, and may sell
securities it has committed to purchase before those securities are delivered to
the Portfolio on the settlement date. In these cases the Portfolio may realize a
taxable capital gain or loss.
When a Portfolio engages in when-issued and forward commitment
transactions, it relies on the other party to consummate the trade. Failure of
such party to do so may result in the Portfolio's incurring a loss or missing an
opportunity to obtain a price considered to be advantageous.
The market value of the securities underlying a when-issued purchase
or forward commitment transaction and any subsequent fluctuations in their
market value is taken into account when determining the market value of a
Portfolio starting on the day the Portfolio agrees to purchase the securities. A
Portfolio does not earn interest on the securities it has committed to purchase
until they are paid for and delivered on the settlement date.
OTHER INVESTMENT LIMITATIONS
The Prospectus for each Fund sets forth or summarizes certain
fundamental policies that may not be changed with respect to such Fund or its
corresponding Portfolio without the affirmative vote of the holders of the
majority of the Fund's outstanding shares or the Portfolio's outstanding
interests (as defined below under "General Information - Miscellaneous"). The
following is a complete list of fundamental policies which may not be changed
for any Fund or Portfolio without such a vote of shareholders or
interestholders.
NEITHER THE FLEXIBLE BOND, BLUE CHIP OR ASSET ALLOCATION FUNDS, NOR
THEIR CORRESPONDING PORTFOLIOS, MAY:
1. Purchase securities (except securities issued by the U.S.
Government, its agencies or instrumentalities) if, as a
result, more than 5% of its total assets will be invested in
the securities of any one issuer or it would own more than 10%
of the voting securities of such issuer,
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except that up to 25% of its total assets may be invested
without regard to these limitations; and provided that all of
its assets may be invested in a diversified, open-end
management investment company, or a series thereof, with
substantially the same investment objectives, policies and
restrictions without regard to the limitations set forth in
this paragraph;
2. Pledge, mortgage or hypothecate the assets of any Fund to any
extent greater than 10% of the value of the total assets of
that Fund.
3. Make loans to other persons, except that a Fund may make time
or demand deposits with banks, provided that time deposits
shall not have an aggregate value in excess of 10% of a Fund's
net assets, and may purchase bonds, debentures or similar
obligations that are publicly distributed, may loan portfolio
securities not in excess of 10% of the value of the total
assets of such Fund, and may enter into repurchase agreements
as long as repurchase agreements maturing in more than seven
days do not exceed 10% of the value of the total assets of a
Fund;
4. Purchase or sell commodities contracts, except that any Fund
may purchase or sell futures contracts on financial
instruments, such as bank certificates of deposit and U.S.
Government securities, foreign currencies and stock indexes
and options on any such futures if such options are written by
other persons and if (i) the futures or options are listed on
a national securities or commodities exchange, (ii) the
aggregate premiums paid on all such options that are held at
any time do not exceed 20% of the total net assets of that
Fund, and (iii) the aggregate margin deposits required on all
such futures or options thereon held at any time do not exceed
5% of the total assets of the Fund;
5. Purchase any securities for any Fund that would cause more
than 25% of the value of the Fund's total assets at the time
of such purchase to be invested in the securities of one or
more issuers conducting their principal activities in the same
industry; provided that there is no limitation with respect to
investments in obligations issued or guaranteed by the United
States Government, its
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agencies and instrumentalities; and provided further that a
Fund may invest all its assets in a diversified, open-end
management investment company, or a series thereof, with
substantially the same investment objectives, policies and
restrictions as the Fund without regard to the limitations set
forth in this paragraph (2).
6. Invest the assets of any Fund in nonmarketable securities that
are not readily marketable (including repurchase agreements
maturing in more than seven days, securities described in
restriction (2) in the Prospectus, restricted securities,
certain OTC options and securities used as cover for such
options and stripped mortgage-backed securities) to any extent
greater than 10% of the value of the total assets of that
Fund; provided, however, that a Fund may invest all its assets
in a diversified, open-end management investment company, or a
series thereof with substantially the same investment
objectives, policies and restrictions as the Fund, without
regard to the limitations set forth in this paragraph (3).
7. Borrow money for any Fund except for temporary emergency
purposes and then only in an amount not exceeding 5% of the
value of the total assets of that Fund. Borrowing shall, for
purposes of this paragraph, include reverse repurchase
agreements. Any borrowings, other than reverse repurchase
agreements, will be from banks. The Company will repay all
borrowings in any Fund before making additional investments
for that Fund and interest paid on such borrowings will reduce
income.
8. Issue senior securities.
9. Underwrite any issue of securities, provided, however, that a
Fund may invest all its assets in a diversified, open-end
management investment company, or a series thereof, having
substantially the same investment objectives, policies and
restrictions as such Fund, without regard to the limitations
set forth in this paragraph (6).
10. Purchase or sell real estate or real estate mortgage loans,
but this shall not prevent investments in instruments secured
by real estate
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or interests therein or in marketable securities of issuers
that engage in real estate operations.
11. Purchase on margin or sell short.
12. Purchase or retain securities of an issuer if those members of
the Board of the Company or the Portfolio, each of whom own
more than 1/2 of 1% of such securities, together own more than
5% of the securities of such issuer, provided, however, that a
Fund may invest all its assets in a diversified, open-end
management investment company, or a series thereof, having
substantially the same investment objectives, policies and
restrictions as such Fund, without regard to the limitations
set forth in this paragraph (9).
13. Purchase securities of any other investment company (except in
connection with a merger, consolidation, acquisition or
reorganization) if, immediately after such purchase, the
Company (and any companies controlled by it) would own in the
aggregate (i) more than 3% of the total outstanding voting
stock of such investment company, (ii) securities issued by
such investment company would have an aggregate value in
excess of 5% of the value of the total assets of the Company,
or (iii) securities issued by such investment company and all
other investment companies would have an aggregate value in
excess of 10% of the value of the total assets of the Company
provided, however, that a Fund may invest all its assets in a
diversified, open-end management investment company, or a
series thereof, having substantially the same investment
objectives, policies and restrictions as such Fund, without
regard to the limitations set forth in this paragraph (10).
14. Invest in or sell put, call, straddle or spread options or
interests in oil, gas or other mineral exploration or
development programs.
* * *
If a percentage restriction is satisfied at the time of investment, a
later increase or decrease in such percentage resulting from a change in asset
value will not constitute a violation of such restriction.
- 20 -
<PAGE> 453
The Funds and Portfolios treat, in accordance with the current views of
the Staff of the SEC and as a matter of non-fundamental policy that may be
changed without a vote of shareholders or interestholders, all supranational
organizations as a single industry and each foreign government (and all of its
agencies) as a separate industry.
In order to permit the sale of a Fund's shares in certain states, the
Company or Master Investment Trust, Series I (the "Master Trust") may make
commitments more restrictive than the investment policies and limitations
described above. As of the date of this Statement of Additional Information, the
following such commitments have been made:
1. The Portfolios will not invest more than 5% of the value of
their net assets in warrants, of which no more than 2% may be
warrants which are not listed on the New York or American
Stock Exchanges.
2. The Portfolios will not invest in oil, gas or other mineral
leases.
3. The Portfolios will not purchase or sell real property,
including limited partnership interests, but excluding readily
marketable interests in Real Estate Investment Trusts
("REITs") or readily marketable securities of companies that
invest in real estate in real estate limited partnerships.
4. The Portfolios have agreed to exclude any assets of a
Portfolio which are invested in the shares of any money market
mutual fund for the purposes of calculating that Portfolio's
investment advisory fee.
In the event that the Company or the Master Trust determines that any
such commitment is no longer in the best interests of a Portfolio, it may revoke
its commitment. In such event, the corresponding Fund may no longer be able to
sell its securities in such state.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
Information on how to purchase and redeem Fund shares, and how such
shares are priced, is included in the Prospectuses. The net asset values of the
Portfolios corresponding to the Flexible Bond, Blue Chip and Asset Allocation
Funds are determined at the same time and on the same days as the net asset
values per share of these respective Funds are determined. The
- 21 -
<PAGE> 454
net asset value of each of these three Funds is equal to the Fund's pro rata
share of the total investments and other assets of its corresponding Portfolio,
less any liabilities with respect to such Fund, including each Fund's pro rata
share of the Portfolio's liabilities. Additional information is contained below.
VALUATION OF THE CORRESPONDING PORTFOLIOS FOR THE FLEXIBLE BOND,
BLUE CHIP AND ASSET ALLOCATION FUNDS
Except for debt securities held by the Portfolios with remaining
maturities of 60 days or less, assets for which market quotations are available
are valued as follows: (a) each listed security is valued at its closing price
obtained from the primary exchange on which the security is listed, or, if there
were no sales on that day, at its last reported current closing price; (b) each
unlisted security is valued at the last current bid price (or last current sale
price, as applicable) obtained from the NASDAQ; (c) United States Government and
agency obligations are valued based upon bid quotations from the Federal Reserve
Bank for identical or similar obligations; and (d) short-term money market
instruments (such as certificates of deposit, bankers' acceptances and
commercial paper) are most often valued by bid quotations or by reference to bid
quotations of available yields for similar instruments of issuers with similar
credit ratings. The Board of Trustees of the Master Trust has determined that
the values obtained using the procedures described in (c) and (d) represent the
fair values of the securities valued by such procedures. Most of these prices
are obtained by PFPC, Inc. ("PFPC") from a service that collects and
disseminates such market prices. Bid quotations for short-term money market
instruments reported by such service are the bid quotations reported to it by
major dealers in such instruments.
Valuation of options is described above under "Investment Objectives
and Policies--Options Trading."
Debt securities held by the Portfolios with remaining maturities of 60
days or less are valued on the basis of amortized cost, which provides stability
of net asset value. Under this method of valuation, the security is initially
valued at cost on the date of purchase or, in the case of securities purchased
with more than 60 days remaining to maturity and to be valued on the amortized
cost basis only during the final 60 days of its maturity, the market value on
the 61st day prior to maturity. Thereafter the Master Trust assumes a constant
proportionate amortization in value until maturity of any discount or premium,
regardless of the impact of fluctuating interest rates on the market value of
the security, unless the Board of Trustees determines that amortized cost no
longer
- 22 -
<PAGE> 455
represents fair value. The Master Trust will monitor the market value of these
investments for the purpose of ascertaining whether any such circumstances
exist.
When approved by the Board of Trustees of the Master Trust, certain
securities may be valued on the basis of valuations provided by an independent
pricing service when such prices are believed to reflect the fair market value
of such securities. These securities may include those that have no available
recent market value, have few outstanding shares and therefore infrequent
trades, or for which there is a lack of consensus on the value, with quoted
prices covering a wide range. The lack of consensus might result from relatively
unusual circumstances such as no trading in the security for long periods of
time, or a company's involvement in merger or acquisition activity, with widely
varying valuations placed on the company's assets or stock. 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.
In the absence of an ascertainable market value, assets are valued at
their fair value as determined using methods and procedures reviewed and
approved by the Board of Trustees of the Master Trust.
SUPPLEMENTARY PURCHASE INFORMATION
For the purpose of applying the Right of Accumulation or Letter of
Intent privileges described in the Prospectuses, the scale of sales loads
applies to purchases made by any "purchaser," which term includes an individual
and/or spouse purchasing securities for his, her or their own account or for the
account of any minor children; or a trustee or other fiduciary account
(including a pension, profit-sharing or other employee benefit trust created
pursuant to a plan qualified under Section 401 of the Internal Revenue Code)
although more than one beneficiary is involved; or "a qualified group" which has
been in existence for more than six months and has not been organized for the
purpose of buying redeemable securities of a registered investment company at a
discount, provided that the purchases are made through a central administrator
or a single dealer, or by other means which result in economy of sales effort or
expense. A "qualified group" must have more than 10 members, must be available
to arrange for group meetings between representatives of the Funds and the
members, and must be able to arrange for mailings to members at reduced or no
cost to the Distributor.
- 23 -
<PAGE> 456
The value of shares eligible for the Right of Accumulation privilege may also be
used as a credit toward completion of the Letter of Intent privilege. Such
shares will be valued at their offering price prevailing on the date of
submission of the Letter of Intent. Distributions on shares held in escrow
pursuant to the Letter of Intent privilege will be credited to the shareholder,
but such shares are not eligible for a Fund's Exchange Privilege.
The computation of the hypothetical offering price per share of each
Fund based on the value of each Fund's net assets on February 28, 1995 and each
Fund's outstanding securities on such date is as follows:
<TABLE>
<CAPTION>
Flexible Bond Blue Chip Asset Allocation
Fund Fund Fund
------------- ---------- ----------------
<S> <C> <C> <C>
Net Assets $1,964,102 $6,001,990 $5,693,645
Outstanding Securities 208,132 379,730 375,911
Net Asset Value Per Share
Sales Charge, 4.50 $ 9.44 $ 15.81 $ 15.15
percent of offering price
(4.71 percent of net
asset value per share) $ 0.44 $ 0.74 $ 0.71
Offering Price to Public $ 9.88 $ 16.55 $ 15.86
</TABLE>
SUPPLEMENTARY REDEMPTION INFORMATION: ALL FUNDS
Shares in the Funds for which orders for wire redemption are received
on a business day before the close of regular trading hours on the New York
Stock Exchange (currently 4:00 p.m. Eastern Time) will be redeemed as of the
close of regular trading hours on such Exchange and the proceeds of redemption
will normally be wired in federal funds on the next business day to the
commercial bank specified by the investor on the Account Application (or other
bank of record on the investor's file with the Transfer Agent). To qualify to
use the wire redemption privilege, the payment for Fund shares must be drawn
on, and redemption proceeds paid to, the same bank and account as designated
on the Account Application (or other bank of record as described above). If the
proceeds of a particular redemption are to be wired to another bank, the
request must be in writing and signature guaranteed. Shares for which orders
for wire redemption are received after the close of regular trading hours on
the New York Stock Exchange
- 24 -
<PAGE> 457
or on a non-business day will be redeemed as of the close of trading on
such Exchange on the next day on which shares of the particular Fund are priced
and the proceeds will normally be wired in federal funds on the next business
day thereafter. Redemption proceeds will be wired to a correspondent member
bank if the investor's designated bank is not a member of the Federal Reserve
System. Immediate notification by the correspondent bank to the investor's bank
is necessary to avoid a delay in crediting the funds to the investor's bank
account. Proceeds of less than $1,000 will be mailed to the investor's address.
To change the commercial bank or account designated to receive
redemption proceeds, a written request must be sent to the Company, c/o Pacific
Horizon Funds, Inc., P.O. Box 80221, Los Angeles, California 90080-9909. Such
request must be signed by each shareholder, with each signature guaranteed as
described in the Funds' Prospectuses. Guarantees must be signed by an authorized
signatory and "signature guaranteed" must appear with the signature. The
Transfer Agent may request further documentation from corporations, executors,
administrators, trustees or guardians, and will accept other suitable
verification arrangements from foreign investors, such as consular verification.
SUPPLEMENTARY PURCHASE INFORMATION: ALL FUNDS
In General. As described in the Prospectuses, Fund shares may be
purchased directly by the public, by clients of Bank of America through their
qualified trust and agency accounts, or by clients of securities dealers,
financial institutions (including banks) and other industry professionals, such
as investment advisers, accountants and estate planning firms that have entered
into service and/or selling agreements with the Distributor. (The Distributor,
such institutions and professionals are collectively referred to as "Service
Organizations.") Bank of America and Service Organizations may impose minimum
customer account and other requirements in addition to those imposed by the Fund
and described in the respective Prospectuses. Purchase orders will be effected
only on business days.
- 25 -
<PAGE> 458
Shares in each Fund are sold with a sales load. Service Organizations
may be paid by the Distributor at the Company's expense for shareholder
services. Depending on the terms of the particular account, Bank of America, its
affiliates, and Service Organizations also may charge their customers fees for
automatic investment, redemption and other services provided. Such fees may
include, for example, account maintenance fees, compensating balance
requirements or fees based upon account transactions, assets or income. Bank of
America or the particular Service Organization is responsible for providing
information concerning these services and any charges to any customer who must
authorize the purchase of Fund shares prior to such purchase.
Persons wishing to purchase Company shares through their accounts at
Bank of America or a Service Organization should contact such entity directly
for appropriate instructions.
Initial purchases of shares into a new account may not be made by wire.
However, persons wishing to make a subsequent purchase of Company shares into an
already existing account by wire should telephone the Transfer Agent at (800)
346-2087. The investor's bank must be instructed to wire federal funds to the
Transfer Agent, referring in the wire to the particular Fund in which such
investment is to be made; the investor's portfolio account number; and the
investor's name.
The Transfer Agent may charge a fee to act as Custodian for IRAs,
payment of which could require the liquidation of shares. All fees charged are
described in the appropriate form. Shares may be purchased in connection with
these plans only by direct remittance to the Transfer Agent. Purchases for IRA
accounts will be effective only when payments received by the Transfer Agent are
converted into federal funds. Purchases for these plans may not be made in
advance of receipt of funds.
For processing redemptions, the Transfer Agent may request further
documentation from corporations, executors, administrators, trustees or
guardians. The Transfer Agent will accept other suitable verification
arrangements from foreign investors, such as consular verification.
- 26 -
<PAGE> 459
Investors should be aware that if they have selected the TeleTrade
Privilege, any request for a wire redemption will be effected as a TeleTrade
transaction through the Automated Clearing House (ACH) system unless more prompt
transmittal is specifically requested. Redemption proceeds of a TeleTrade
transaction will be on deposit in the investor's account at the ACH member bank
normally two business days after receipt of the redemption request.
Exchange Privilege. Shareholders in the Pacific Horizon Family of Funds
have an exchange privilege whereby they may exchange all or part of their
Pacific Horizon Shares for shares of other investment portfolios in the Pacific
Horizon Family of Funds. Shareholders may also exchange all or a part of their
Pacific Horizon Shares for like shares of an investment portfolio of Time
Horizon Funds. By use of the exchange privilege, the investor authorizes the
Transfer Agent to act on telephonic, telegraphic or written exchange
instructions from any person representing himself or herself to be the investor
and believed by the Transfer Agent to be genuine. The Transfer Agent's records
of such instructions are binding. The exchange privilege may be modified or
terminated at any time upon notice to shareholders. For federal income tax
purposes, exchange transactions are treated as sales on which a purchaser will
realize a capital gain or loss depending on whether the value of the shares
exchanged is more or less than his basis in such shares at the time of the
transaction.
Exchange transactions described in Paragraphs A, B, C and D below will
be made on the basis of the relative net asset values per share of the
investment portfolios involved in the transaction.
A. Shares of any investment portfolio purchased with a sales load, as well
as additional shares acquired through reinvestment of dividends or
distributions on such shares, may be exchanged without a sales load for
shares of any other investment portfolio in the Pacific Horizon Family
of Funds or Time Horizon Funds.
B. Shares of any investment portfolio in the Pacific Horizon Family of
Funds or Time Horizon Funds acquired by a previous exchange transaction
involving shares on which a sales load has directly or indirectly been
paid (e.g. shares purchased with a sales load or issued in connection
with an exchange transaction involving shares that had been purchased
with a sales load), as well as additional shares acquired through
reinvestment of dividends or distributions on such shares, may be
redeemed and the proceeds used to purchase without a
- 27 -
<PAGE> 460
sales load shares of any other investment portfolio. To accomplish an
exchange transaction under the provisions of this Paragraph, investors
must notify the Transfer Agent of their prior ownership of shares and
their account number.
C. Shares of any investment portfolio in the Pacific Horizon Family of
Funds may be exchanged without a sales load for shares of any other
investment portfolio in the Family that is offered without a sales
load.
D. Shares of any investment portfolio in the Pacific Horizon Family of
Funds purchased without a sales load may be exchanged without a sales
load for shares in any other portfolio where the investor involved
maintained an account in the Pacific Horizon Family of Funds before
April 20, 1987 or was the beneficial owner of shares of Bunker Hill
Income Securities, Inc. on the date of its reorganization into the
Pacific Horizon Corporate Bond Fund.
Except as stated above, a sales load will be imposed when shares of any
investment portfolio in the Pacific Horizon Family of Funds that were purchased
or otherwise acquired without a sales load are exchanged for shares of another
investment portfolio in the Pacific Horizon Family or Time Horizon Funds which
are sold with a sales load.
Exchange requests received on a business day prior to the time shares
of the investment portfolios involved in the request are priced will be
processed on the date of receipt. "Processing" a request means that shares in
the investment portfolio from which the shareholder is withdrawing an investment
will be redeemed at the net asset value per share next determined on the date of
receipt. Shares of the new investment portfolio into which the shareholder is
investing will also normally be purchased at the net asset value per share next
determined coincident to or after the time of redemption. Exchange requests
received on a business day after the time shares of the investment portfolios
involved in the request are priced will be processed on the next business day in
the manner described above.
Miscellaneous. Certificates for shares will not be issued.
Depending on the terms of the customer account at Bank of America or a
Service Organization, certain purchasers may arrange with the Company's
custodian for sub-accounting services paid by the Company without direct charge
to the purchaser.
- 28 -
<PAGE> 461
A "business day" for purposes of processing share purchases and
redemptions received by the Transfer Agent at its Columbus office is a day on
which the New York Stock Exchange is open for trading. In 1996, the holidays on
which the New York Stock Exchange is closed are: New Year's Day, Presidents'
Day, Good Friday, Memorial Day (observed), Independence Day, Labor Day,
Thanksgiving Day and Christmas Day.
The Company may suspend the right of redemption or postpone the date of
payment for shares during any period when (a) trading on the New York Stock
Exchange is restricted by applicable rules and regulations of the SEC; (b) the
New York Stock Exchange is closed for other than customary weekend and holiday
closings; (c) the SEC has by order permitted such suspension; or (d) an
emergency exists as determined by the SEC. (The Company may also suspend or
postpone the recordation of the transfer of its shares upon the occurrence of
any of the foregoing conditions.)
The Company's Charter permits its Board of Directors to require a
shareholder to redeem involuntarily shares in a Fund if the balance held of
record by the shareholder drops below $500 and such shareholder does not
increase such balance to $500 or more upon 60 days' notice. The Company will not
require a shareholder to redeem shares of a Fund if the balance held of record
by the shareholder is less than $500 solely because of a decline in the net
asset value of the Fund's shares. The Company may also redeem shares
involuntarily if such redemption is appropriate to carry out the Company's
responsibilities under the 1940 Act.
If the Company's Board of Directors determines that conditions exist
which make payment of redemption proceeds wholly in cash unwise or undesirable,
the Company may make payment wholly or partly in securities or other property.
Additionally, the Company has made an undertaking to the State of Texas that it
may only make payment of such proceeds wholly or in part in "readily marketable"
securities or other property. (If the Company determines that such undertaking
is no longer in its best interests, it will revoke such commitment. In such an
event, the Fund will no longer be able to sell its shares in the State of
Texas.) In such an event, a shareholder would incur transaction costs in selling
the securities or other property. The Company has committed that it will pay all
redemption requests by a shareholder of record in cash, limited in amount with
respect to each shareholder during any ninety-day period to the lesser of
$250,000 or 1% of the net asset value at the beginning of such period.
- 29 -
<PAGE> 462
ADDITIONAL INFORMATION CONCERNING TAXES
FEDERAL - ALL FUNDS
Each Fund will be treated as a separate corporate entity under the
Internal Revenue Code of 1986, as amended (the "Code"), and intends to qualify
as a "regulated investment company." By following this policy, each Fund expects
to eliminate or reduce to a nominal amount the federal income taxes to which it
may be subject. If for any taxable year a Fund of the Company does not qualify
for the special federal tax treatment afforded regulated investment companies,
all of the Fund's taxable income would be subject to tax at regular corporate
rates (without any deduction for distributions to shareholders). In such event,
the Fund's dividend distributions to shareholders would be taxable as ordinary
income to the extent of the current and accumulated earnings and profits of the
particular Fund and would be eligible for the dividends received deduction in
the case of corporate shareholders.
Qualification as a regulated investment company under the Code
requires, among other things, that each Fund distribute to its shareholders an
amount equal to at least the sum of 90% of its investment company taxable income
(if any) and 90% of its tax-exempt income (if any), net of certain deductions
for each taxable year. In general, a Fund's investment company taxable income
will be its taxable income, including dividends, interest, and short-term
capital gains (the excess of net short-term capital gain over net long-term
capital loss), subject to certain adjustments and excluding the excess of any
net long-term capital gain for the taxable year over the net short-term capital
loss, if any, for such year. A Fund will be taxed on its undistributed
investment company taxable income, if any. As stated, each Fund of the Company
intends to distribute at least 90% of its investment company taxable income (if
any) for each taxable year. To the extent such income is distributed by a Fund
(whether in cash or additional shares) it will be taxable to shareholders as
ordinary income.
A Fund will not be treated as a regulated investment company under the
Code if 30% or more of the Fund's gross income for a taxable year is derived
from gains realized on the sale or other disposition of the following
investments held for less than three months (the "Short-Short test"): (1) stock
and securities (as defined in section 2(a)(36) of the 1940 Act); (2) options,
futures and forward contracts other than those on foreign currencies; and (3)
foreign currencies (and options, futures and forward contracts on foreign
currencies) that are not directly related to a Fund's principal business of
investing in stock and securities (and options and futures with respect to
stocks and
- 30 -
<PAGE> 463
securities). Interest (including original issue discount and accrued market
discount) received by a Fund upon maturity or disposition of a security held for
less than three months will not be treated as gross income derived from the sale
or other disposition of such security within the meaning of this requirement.
However, any other income that is attributable to realized market appreciation
will be treated as gross income from the sale or other disposition of securities
for this purpose. With respect to covered call options, if the call is exercised
by the holder, the premium and the price received on exercise constitute the
proceeds of sale, and the difference between the proceeds and the cost of the
securities subject to the call is capital gain or loss. Premiums from expired
call options written by a Fund and net gains from closing purchase transactions
are treated as short-term capital gains for federal income tax purposes, and
losses on closing purchase transactions are short-term capital losses. See
Appendix B -- "Accounting and Tax Treatment" for a general discussion of the
federal tax treatment of futures contracts, related options thereon and other
financial instruments, including their treatment under the Short-Short test.
Any distribution of the excess of net long-term capital gains over net
short-term capital losses is taxable to shareholders as long-term capital gains,
regardless of how long the shareholder has held the distributing Fund's shares
and whether such gains are received in cash or additional Fund shares. The Fund
will designate such a distribution as a capital gain dividend in a written
notice mailed to shareholders after the close of the Fund's taxable year. It
should be noted that, upon the sale or exchange of Fund shares, if the
shareholder has not held such shares for longer than six months, any loss on the
sale or exchange of those shares will be treated as long-term capital loss to
the extent of the capital gain dividends received with respect to the shares.
Ordinary income of individuals is taxable at a maximum nominal rate of
39.6%, but because of limitations on itemized deductions otherwise allowable and
the phase-out of personal exemptions, the maximum effective marginal rate of tax
for some taxpayers may be higher. An individual's long-term capital gains are
taxable at a maximum nominal rate of 28%. For corporations, long-term capital
gains and ordinary income are both taxable at a maximum nominal rate of 35% (an
effective marginal rate of 39% applies in the case of corporations having
taxable income between $100,000 and $335,000).
A 4% non-deductible excise tax is imposed on regulated investment
companies that fail currently to distribute specific percentages of their
ordinary taxable income and capital gain net
- 31 -
<PAGE> 464
income (excess of capital gains over capital losses). Each Fund intends to make
sufficient distributions or deemed distributions of its ordinary taxable income
and any capital gain net income prior to the end of each calendar year to avoid
liability for this excise tax.
The Company will be required in certain cases to withhold and remit to
the United States Treasury 31% of taxable dividends or 31% of gross sale
proceeds upon sale paid to shareholders (i) who have failed to provide either a
correct tax identification number in the manner provided, (ii) who are subject
to withholding by the Internal Revenue Service for failure to properly include
on their return payments of taxable interest or dividends, or (iii) who have
failed to certify to the Company either that they are subject to backup
withholding when required to do so or that they are "exempt recipients."
TAXATION OF THE PORTFOLIOS
Management of the Portfolios corresponding to the Flexible Bond, Blue
Chip and Asset Allocation Funds intends for each Portfolio to be treated as a
partnership rather than as a regulated investment company or a corporation under
the Code. As partnerships under the Code, any interest, dividends, gains and
losses of the Portfolios will be deemed to have been "passed through" to their
investors regardless whether any amounts are actually distributed by the
Portfolios.
Each investor in a Portfolio will be taxable on its share (as
determined in accordance with the governing instruments of the Portfolio) of the
Portfolio's ordinary income and capital gains in determining its income tax
liability. The determination of such share will be made in accordance with the
Code and regulations promulgated thereunder. It is intended that each
Portfolio's assets, income and distributions will be managed in such a way that
an investor in a Portfolio will be able to satisfy the requirements of
Subchapter M of the Code, assuming that the investor invested all of its assets
in the Portfolio.
OTHER INFORMATION
Depending upon the extent of activities in states and localities in
which its offices are maintained, in which its agents or independent contractors
are located or in which it is otherwise deemed to be conducting business, the
Funds may be subject to the tax laws of such states or localities.
- 32 -
<PAGE> 465
Shareholders are advised to consult their tax advisers because state
and local tax consequences may be different from the federal tax consequences
described above.
The foregoing discussion is based on tax laws and regulations which are
in effect on the date of this Statement of Additional Information. Such laws and
regulations may be changed by legislative or administrative action. This
discussion is only a summary of some of the important tax considerations
generally affecting purchasers of Fund shares. No attempt is made to present a
detailed explanation of the federal income tax treatment of the Funds or their
shareholders, and this discussion is not intended as a substitute for careful
tax planning. Accordingly, potential purchasers of Fund shares should consult
their tax advisers with specific reference to their own tax situation.
MANAGEMENT
DIRECTORS AND OFFICERS OF THE COMPANY
The directors and officers of the Company, their addresses, ages and
principal occupations during the past five years are:
<TABLE>
<CAPTION>
Position with
-------------
Name and Address Age Company Principal Occupations
- ---------------- --- ------- ---------------------
<S> <C> <C> <C>
Thomas M. Collins 61 Director Of counsel, law firm of
McDermott & Trayner McDermott & Trayner;
225 S. Lake Avenue Partner of the law firm
Suite 410 of Musick, Peeler &
Pasadena, CA 91101-3005 Garrett (until April,
1993); Trustee, Master
Investment Trust Series I and
Master Investment Trust,
Series II (registered
investment companies) (since
1993); former Director, Bunker
Hill Income Securities, Inc.
(registered investment
company) through 1991.
</TABLE>
- 33 -
<PAGE> 466
<TABLE>
<CAPTION>
Position with
-------------
Name and Address Age Company Principal Occupations
- ---------------- --- ------- ---------------------
<S> <C> <C> <C>
Douglas B. Fletcher 70 Vice Chairman Chairman of the Board
Fletcher Capital of the Board and Chief Executive
Advisors Incorporated Officer, Fletcher
4 Upper Newport Plaza Capital Advisors,
Suite 100 Incorporated,
Newport Beach, CA 92660-2629 (registered
investment adviser) 1991
to date; Partner, 1991
Newport Partners (private
venture capital firm),
1981 to date; Chairman of
the Board and Chief
Executive Officer, First
Pacific Advisors, Inc.
(registered investment
adviser) and seven
investment companies
under its management,
prior to 1983; former
Allied Member, New York
Stock Exchange; Chairman
of the Board of FPA
Paramount Fund, Inc.
through 1984; Director,
TIS Mortgage Investment
Company (real estate
investment trust);
Trustee and former Vice
Chairman of the Board,
Claremont McKenna
College; Chartered
Financial Analyst.
Robert E. Greeley 62 Director Chairman, Page Mill
Page Mill Asset Asset Management (a
Management private investment
433 California Street company) since 1991;
Suite 900 Manager, Corporate
San Francisco, CA 94104 Investments, Hewlett
Packard Company from 1979
to 1991; Trustee, Master
Investment Trust, Series
I and Master Investment
Trust, Series II (since
1993); Director, Morgan
Grenfell Small Cap Fund
(since 1986); former
Director, Bunker Hill
Income Securities, Inc.
(since 1989) (registered
investment companies);
former Trustee,
</TABLE>
- 34 -
<PAGE> 467
<TABLE>
<CAPTION>
Position with
-------------
Name and Address Age Company Principal Occupations
- ---------------- --- ------- ---------------------
<S> <C> <C> <C>
SunAmerica Fund Group
(previously Equitec
Siebel Fund Group) from
1984 to 1992.
Kermit O. Hanson 79 Director Vice Chairman of the
17760 14th Ave., N.W. Advisory Board, 1988 to
Seattle, WA 98177 date, Executive
Director, 1977 to 1988,
Pacific Rim Bankers
Program (a non-profit
educational institution);
Dean Emeritus, 1981 to
date, Dean, 1964-81,
Graduate School of
Business Administration,
University of Washington;
Director, Washington
Federal Savings & Loan
Association; Trustee,
Seafirst Retirement Funds
(since 1993) (registered
investment company).
Cornelius J. Pings* 66 Chairman of President, Association
Association of American the Board and of American
Universities President Universities, February
One DuPont Circle 1993 to date; Provost,
Suite 730 1982 to January
Washington, DC 20036 1993, Senior Vice
President for Academic
Affairs, 1981 to January
1993, University of
Southern California;
Trustee, Master
Investment Trust, Series
I and Master Investment
Trust, Series II (since
1995).
Kenneth L. Trefftzs 83 Director Private Investor;
11131 Briarcliff Drive formerly Distinguished
San Diego, CA 92131-1329 Emeritus Professor
of Finance and Chairman
of the Department of
Finance and Business
Economics of the
Graduate School of
Business of the
University of Southern
California; former
</TABLE>
- 35 -
<PAGE> 468
<TABLE>
<CAPTION>
Position with
-------------
Name and Address Age Company Principal Occupations
- ---------------- --- ------- ---------------------
<S> <C> <C> <C>
Director, Metro Goldwyn
Mayer, Inc.; Director,
Fremont General
Corporation (insurance
and financial services
holding company);
Director, Source Capital,
Inc. (closed-end
investment company);
Director of three
open-end investment
companies managed by
First Pacific Advisors,
Inc.; formerly Chairman
of the Board of Directors
(or Trustees) of nineteen
investment companies
managed by American
Capital Asset Management,
Inc.
Richard E. Stierwalt 40 Executive Chairman of the Board
125 W. 55th Street Vice President and Chief Executive
New York, NY 10019 Officer, July 1993 to
date, prior thereto
Senior Director, Managing
Director and Chief
Executive Officer of the
Administrator and
Distributor, February
1987 to July 1993;
President, Master
Investment Trust, Series
I, Master Investment
Trust, Series II and
Seafirst Retirement Funds
(since 1993); First Vice
President, Trust
Operation Administration,
Security Pacific National
Bank, 1983-1987.
William B. Blundin 57 Executive Vice Vice Chairman, July 1993
125 W. 55th Street President to date, prior thereto
New York, NY 10019 Director and President
of the Administrator and
Distributor, February
1987 to July 1993;
Executive Vice
President, Master
Investment Trust, Series
II and Seafirst
Retirement Funds (since
1993); Senior Vice
</TABLE>
- 36 -
<PAGE> 469
<TABLE>
<CAPTION>
Position with
-------------
Name and Address Age Company Principal Occupations
- ---------------- --- ------- ---------------------
<S> <C> <C> <C>
President, Shearson
Lehman Brothers, 1978-
1987.
Irimga McKay 35 Vice Senior Vice President,
7863 Girard Avenue President July 1993 to date, prior
Suite 306 thereto First Vice
La Jolla, CA 92037 President of the
Administrator and
Distributor, November
1988 to July 1993; Vice
President, Master
Investment Trust, Series
II and Seafirst
Retirement Funds (since
1993); Regional Vice
President, Continental
Equities, June 1987 to
November 1988; Assistant
Wholesaler, VMS Realty
Partners (a real estate
limited partnership), May
1986 to June 1987.
W. Eugene Spurbeck 39 Assistant Vice Manager of Client
BISYS Fund Services President Services of the
515 Figueroa Street Administrator (1993 to
Suite 335 date); Assistant Vice
Los Angeles, CA 92307 President, Master
Investment Trust, Series
II; Vice President,
Seafirst Retirement Funds
(since 1995); Vice
President of Retail
Lending Operations Banc
One (1989 to 1993).
Martin R. Dean 31 Treasurer Manager of Fund
3435 Stelzer Road Accounting of BISYS
Columbus, OH 43219 Fund Services, May 1994
to Present; Treasurer,
Master Investment Trust,
Series II and Seafirst
Retirement Funds (since
1995); Senior Manager at
KPMG Peat Marwick
previously 1990-1994.
W. Bruce McConnel, III 52 Secretary Partner of the law firm
1345 Chestnut Street of Drinker Biddle &
Philadelphia National Bank Reath. Secretary,
Building, Suite 1100 Master Investment Trust,
Philadelphia, PA 19107 Series I, Master
Investment Trust, Series
</TABLE>
- 37 -
<PAGE> 470
<TABLE>
<CAPTION>
Position with
-------------
Name and Address Age Company Principal Occupations
- ---------------- --- ------- ---------------------
<S> <C> <C> <C>
II and Seafirst
Retirement Funds
George O. Martinez 35 Assistant Senior Vice President
3435 Stelzer Road Secretary and Director of Legal
Columbus, OH 43219 and Compliance Services,
of the Administrator.
since April 1995;
Assistant Secretary,
Master Investment Trust,
Series II and Seafirst
Retirement Funds (since
1995); prior thereto,
Vice President and
Associate General
Counsel, Alliance Capital
Management, L.P.
</TABLE>
- --------------------------------
* Mr. Pings is an "interested director" of the Company as defined in the
1940 Act.
The Audit Committee of the Board is comprised of all directors and is
chaired by Dr. Trefftzs. The Board does not have an Executive Committee.
Each director is entitled to receive an annual fee of $25,000 plus
$1,000 for each day that a director participates in all or a part of a Board
meeting; the President receives an additional $20,000 per annum for his services
as President; Mr. Collins, in consideration of his years of service as President
and Chairman of the Board, receives an additional $40,000 per annum in severance
until February 28, 1997; each member of a Committee of the Board is entitled to
receive $1,000 for each Committee meeting they participate in (whether or not
held on the same day as a Board meeting); and each Chairman of a Committee of
the Board shall be entitled to receive an annual retainer of $1,000 for his
services as Chairman of the Committee. The Funds, and each other fund of the
Company, pays its proportionate share of these amounts based on relative net
asset values.
For the fiscal year ended February 28, 1995, the Company paid or
accrued for the account of its directors as a group for services in all
capacities a total of $334,168. Of that amount, $18,530, $17,424 and $18,146 of
directors' compensation were allocated to the Flexible Bond, Blue Chip and Asset
Allocation Funds, respectively. Each director is also reimbursed for
out-of-pocket expenses incurred as a director. Drinker Biddle & Reath, of which
Mr. McConnel is a partner,
- 38 -
<PAGE> 471
receives legal fees as counsel to the Company. As of the date of this Statement
of Additional Information, the directors and officers of the Company, as a
group, own less than 1% of the outstanding shares of each of the Company's
investment portfolios.
Under a retirement plan approved by the Board, including a majority of
its directors who are not "interested persons" of the Company, effective March
1, 1995, a director who dies or resigns after five years of service is entitled
to receive ten annual payments each equal to the greater of: (i) 50% of the
annual director's retainer that was payable by the Company during the year of
his/her death or resignation, or (ii) 50% of the annual director's retainer then
in effect for directors of the Company during the year of such payment. A
director who dies or resigns after nine years of service is entitled to receive
ten annual payments each equal to the greater of: (i) 100% of the annual
director's retainer that was payable by the Company during the year of his/her
death or resignation, or (ii) 100% of the annual director's retainer then in
effect for directors of the Company during the year of such payment. Further,
the amount payable each year to a director who dies or resigns is increased by
$1,000 for each year of service that the director provided as Chairman of the
Board.
Years of service for purposes of calculating the benefit described
above are based upon service as a director or Chairman after February 28, 1994.
Retirement benefits in which a director has become vested may not be reduced by
later Board action.
In lieu of receiving ten annual payments, a director may elect to
receive substantially equivalent benefits through a single-sum cash payment of
the present value of such benefits paid by the Company within 45 days of the
death or resignation of the director. The present value of such benefits is to
be calculated (i) based on the retainer that was payable by the Company during
the year of the director's death or resignation (and not on any retainer payable
to directors thereafter), and (ii) using the interest rate in effect as of the
date of the director's death or resignation by the Pension Benefit Guaranty
Corporation (or any successor thereto) for valuing immediate annuities under
terminating defined benefit pension plans. A director's election to receive a
single sum must be made in writing within the 30 calendar days after the date
the individual is first elected as a director.
In addition to the foregoing, the Board of Directors may, in its
discretion and in recognition of a director's period of service before March 1,
1994 as a director and possibly as
- 39 -
<PAGE> 472
Chairman, authorize the Company to pay a retirement benefit following the
director's death or resignation (unless the director has vested benefits as a
result of completing nine years of service). Any such action shall be approved
by the Board and by a majority of the directors who are not "interested persons"
of the Company within 120 days following the director's death or resignation and
may be authorized as a single sum cash payment or as not more than ten annual
payments (beginning the first anniversary of the director's date of death or
resignation and continuing for one or more anniversary date(s) thereafter).
The obligation of the Company to pay benefits to a former director is
neither secured nor funded by this Company but shall be binding upon its
successors in interest. The payment of such benefits under the retirement plan
has no priority or preference over the lawful claims of the Company's creditors
or shareholders, and the right to receive such payments is not assignable or
transferable by a director (or former director) other than by will, by the laws
of descent and distribution, or by the director's written designation of a
beneficiary.
TRUSTEES AND OFFICERS OF MASTER INVESTMENT TRUST, SERIES I
The trustees and officers of Master Investment Trust, Series I, a
Delaware business trust of which the Portfolios are separate series, their
addresses, ages and principal occupation during the past five years are:
- 40 -
<PAGE> 473
<TABLE>
<CAPTION>
Position with
Name and Address Age the Master Trust Principal Occupations
- ---------------- --- ---------------- ---------------------
<S> <C> <C> <C>
Thomas M. Collins 61 Chairman of the See "Directors and
McDermott & Trayner Board Officers of the
255 South Lake Avenue, Company."
Suite 410
Pasadena, CA 91101
Michael Austin 59 Trustee Chartered Accountant;
Victory House, Trustee, Master
Nelson Quay Investment Trust, Series
Governor's Harbour II; Retired Partner, KPMG
Grand Cayman, Peat Marwick LLP.
Cayman Islands
British West Indies
Robert E. Greeley 62 Trustee See "Directors and
Page Mill Asset Officer of the Company."
Management
433 California Street
Suite 900
San Francisco, CA 94104
Robert A. Nathane* 70 Trustee Retired President, Laird
1200 Shenandoah Drive Norton Trust Company,
East Chairman of the Board of
Seattle, WA 98112 Advisors, Phoenix Venture
Funds; Trustee, Seafirst
Retirement Funds (since
1993); Trustee, Master
Investment Trust, Series
II (since 1993); former
Supervisor, Collective
Investment Trust for
Seafirst Retirement
Accounts; former Trustee,
First Funds of America
(registered investment
companies).
Cornelius J. Pings 66 Trustee See "Directors and
Association of American Officers of the
Universities Company."
One DuPont Circle
Suite 730
Washington, DC 20036
Richard E. Stierwalt 40 President See "Directors and
125 West 55th Street Officers of the
11th Floor Company."
New York, NY 10019
W. Bruce McConnel, III 52 Secretary See "Directors and
1345 Chestnut Street Officers of the
Philadelphia, PA 19107 Company."
</TABLE>
- 41 -
<PAGE> 474
<TABLE>
<CAPTION>
Position with
Name and Address Age the Master Trust Principal Occupations
- ---------------- --- ---------------- ---------------------
<S> <C> <C> <C>
Adrian J. Waters 32 Executive Vice Managing Director of
ITI House President, Concord Management
23 Earlsfort Terrace Treasurer and (Ireland) Limited since
Dublin 2, Ireland Assistant May 1993; Manager in
Secretary Investment Company
Industry Services Group,
Price Waterhouse, 1989-
1993; Member of Oliver
Freaney & Co./Spicer &
Oppenheim Chartered
Accountants, 1986-1989.
</TABLE>
- -----------------------------
* Mr. Nathane is an "interested trustee" of the Master Trust as defined in
the 1940 Act.
Each trustee receives an aggregate annual fee of $1,500 plus $500 per
meeting attended and $250 per day for each full day devoted to travel in
connection with each meeting attended, for his services as trustee of the Master
Trust. Each trustee is also reimbursed for out-of-pocket expenses incurred as a
trustee. The trustee's fees and reimbursements are allocated among all of the
Master Trust's Portfolios based on their relative net asset values. For its
fiscal year ended February 28, 1995, the Master Trust paid or accrued for the
account of its trustees as a group for services in all capacities a total of
$30,221; of that amount, $9,695, $9,195 and $9,670 were allocated to the
Portfolios corresponding to the Flexible Bond, Blue Chip and Asset Allocation
Funds.
The following chart provides certain information about the
director/trustee fees of the Company's and Master Trust's directors/trustees as
of February 28, 1995:
<TABLE>
<CAPTION>
============================================================================================================
TOTAL
COMPENSATION
PENSION OR FROM
RETIREMENT ESTIMATED REGISTRANT
AGGREGATE AGGREGATE BENEFITS ANNUAL AND FUND
COMPENSATION COMPENSATION ACCRUED AS BENEFITS COMPLEX*
NAME OF PERSON/ FROM THE FROM THE PART OF FUND UPON PAID TO
POSITION COMPANY MASTER TRUST EXPENSES RETIREMENT DIRECTORS
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Thomas M. Collins $100,000 $5,000 $0 $0 $110,000
President and
Chairman of the
Board+
- ------------------------------------------------------------------------------------------------------------
Douglas B. Fletcher $ 57,500 $0 $0 $0 $ 57,500
Vice Chairman of
the Board
============================================================================================================
</TABLE>
- 42 -
<PAGE> 475
<TABLE>
<CAPTION>
============================================================================================================
TOTAL
COMPENSATION
PENSION OR FROM
RETIREMENT ESTIMATED REGISTRANT
AGGREGATE AGGREGATE BENEFITS ANNUAL AND FUND
COMPENSATION COMPENSATION ACCRUED AS BENEFITS COMPLEX*
NAME OF PERSON/ FROM THE FROM THE PART OF FUND UPON PAID TO
POSITION COMPANY MASTER TRUST EXPENSES RETIREMENT DIRECTORS
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Robert E. Greeley** $57,500 $4,750 $0 $0 $65,781
Director
- ------------------------------------------------------------------------------------------------------------
Kermit O. Hanson $57,500 $0 $0 $0 $63,500
Director
- ------------------------------------------------------------------------------------------------------------
Cornelius J. Pings $57,500 $0 $0 $0 $57,500
Director
- ------------------------------------------------------------------------------------------------------------
Kenneth L. Trefftzs $57,500 $0 $0 $0 $57,500
Director
============================================================================================================
- ------------------------------
* The "Fund Complex" consists of the Company, Seafirst Retirement Funds, the Master Trust and
Master Investment Trust, Series II.
** Mr. Greeley became a director of the Company on April 25, 1994.
+ Mr. Collins was President and Chairman of the Board of the Company until August 31, 1995.
</TABLE>
INVESTMENT ADVISOR
Bank of America is the successor by merger to Security Pacific National
Bank ("Security Pacific"), which previously served as investment adviser to the
other investment portfolios of the Company since the commencement of its
operations. As described in the Prospectuses, the Funds have not retained the
services of an investment adviser since they seek to achieve their investment
objectives by investing all their assets in their corresponding Portfolio. In
the Investment Advisory Agreement with the Portfolios, Bank of America has
agreed to provide investment advisory services as described in each Prospectus.
Bank of America has also agreed to pay all expenses incurred by it in connection
with its activities under its agreements other than the cost of securities,
including brokerage commissions, if any, purchased for the Portfolios. In
rendering its advisory services, Bank of America may utilize Bank officers from
one or more of the departments of the Bank which are authorized to exercise the
fiduciary powers of Bank of America with respect to the investment of trust
assets. In some cases, these officers may also serve as officers, and utilize
the facilities, of wholly-owned subsidiaries and other affiliates of Bank of
America or its parent corporation. In addition, the agreement also provides that
Bank of America may, in its discretion, provide advisory services through its
own employees or employees of one or more of its affiliates that are under the
- 43 -
<PAGE> 476
common control of Bank of America's parent, BankAmerica Corporation; provided
such employees are under the management of Bank of America.
For the services provided and expenses assumed pursuant to the
investment advisory agreement, the Portfolios have agreed to pay Bank of America
investment advisory fees, accrued daily and paid monthly, at the annual rates of
.45% of the net assets of the Investment Grade Bond Portfolio (the Portfolio
corresponding to the Flexible Bond Fund); .75% of the net assets of the Blue
Chip Portfolio; and .55% of the net assets of the Asset Allocation Portfolio.
The fees payable to Bank of America are not subject to reduction as the value of
each Fund's or Portfolio's net assets increases. From time to time, Bank of
America may waive fees or reimburse the Portfolios for expenses voluntarily or
as required by certain state securities laws.
For the fiscal year ended February 28, 1995, Bank of America waived its
entire investment advisory fees in the amounts of $293,222, $1,091,132 and
$849,188 for the Portfolios corresponding to the Flexible Bond, Blue Chip and
Asset Allocation Funds, respectively. Additionally, for the periods indicated,
Bank of America assumed certain operating expenses with respect to the Flexible
Bond, Blue Chip and Asset Allocation Funds in the amounts of $207,033, $245,776
and $245,718, respectively.
For the period from December 6, 1993 (commencement of the Portfolios'
operations) to February 28, 1994, Bank of America waived its entire investment
advisory fees in the amounts of $84,856, $225,019 and $197,611 for the
Portfolios corresponding to the Flexible Bond, Blue Chip and Asset Allocation
Funds, respectively. Additionally, for the periods indicated, Bank of America
assumed certain operating expenses with respect to the Flexible Bond, Blue Chip
and Asset Allocation Funds in the amounts of $24,300, $31,726 and $28,384,
respectively.
See "Management - Administrator" for instances where the investment
adviser is required to make expense reimbursements to the Portfolios.
For the period from December 6, 1993 (commencement of operations)
through April 11, 1994, Bank of America had a Sub-Advisory Agreement with
Seattle Capital Management Company ("Seattle Capital") with respect to
management of the assets of the Portfolios corresponding to the Flexible Bond
Fund and of that portion of the assets of the Portfolio corresponding to the
Asset Allocation Fund which Bank of America determined from time to time to be
appropriate for investment in debt securities (including money market
instruments). The Sub-Advisory Agreement
- 44 -
<PAGE> 477
provided that Bank of America would pay Seattle Capital a monthly advisory fee
based upon the net assets of such Portfolios, at the annual rate of .45% of the
net assets of the Portfolio corresponding to the Flexible Bond Fund, and .55% of
that portion of the net assets of the Portfolio corresponding to the Asset
Allocation Fund managed by Seattle Capital. For the period December 6, 1993
(commencement of operations) through February 28, 1994, Bank of America paid
Seattle Capital sub-advisory fees of $0 and $0 for sub-advisory services to the
Investment Grade Bond and Asset Allocation Portfolios, respectively.
The Investment Advisory Agreements for the Portfolios provide that Bank
of America shall not be liable for any error of judgment or mistake of law or
for any loss suffered in connection with the performance of the investment
advisory agreements, except a loss resulting from a breach of fiduciary duty
with respect to the receipt of compensation for services or a loss resulting
from willful misfeasance, bad faith or negligence in the performance of its
duties or from reckless disregard by it of its duties and obligations
thereunder.
THE GLASS-STEAGALL ACT AND PROPOSED LEGISLATION
The Glass-Steagall Act, among other things, prohibits banks from
engaging in the business of underwriting securities, although national and
state-chartered banks generally are permitted to purchase and sell securities
upon the order and for the account of their customers. In 1971, the United
States Supreme Court held in Investment Company Institute v. Camp that the
Glass-Steagall Act prohibits a national bank from operating a fund for the
collective investment of managing agency accounts. Subsequently, the Board of
Governors of the Federal Reserve System (the "Board") issued a regulation and
interpretation to the effect that the Glass-Steagall Act and such decision
forbid a bank holding company registered under the Federal Bank Holding Company
Act of 1956 (the "Holding Company Act") or any non-bank affiliate thereof from
sponsoring, organizing or controlling a registered, open-end investment company
continuously engaged in the issuance of its shares, but do not prohibit such a
holding company or affiliate from acting as investment adviser, transfer agent
and custodian to such an investment company. In 1981, the United States Supreme
Court held in Board of Governors of the Federal Reserve System v. Investment
Company Institute that the Board did not exceed its authority under the Holding
Company Act when it adopted its regulation and interpretation authorizing bank
holding companies and their non-bank affiliates to act as investment advisers to
registered closed-end investment companies.
- 45 -
<PAGE> 478
Bank of America believes that if the question was properly presented, a
court should hold that Bank of America may perform the services for the
Portfolios and the Company contemplated by the Investment Advisory Agreement,
the Prospectuses, and this Statement of Additional Information without violation
of the Glass-Steagall Act or other applicable banking laws or regulations. It
should be noted, however, that there have been no cases deciding whether a
national bank may perform services comparable to those performed by Bank of
America and that future changes in either federal or state statutes and
regulations relating to permissible activities of banks or trust companies and
their subsidiaries or affiliates, as well as further judicial or administrative
decisions or interpretations of present and future statutes and regulations,
could prevent Bank of America from continuing to perform such services for the
Portfolios and the Company or from continuing to purchase Fund shares for the
accounts of its customers.
For a discussion of the Glass-Steagall Act in connection with the
Company's Shareholder Service Plans, see "Plan Payments" in the Funds'
Prospectuses.
On the other hand, as described herein, the Funds are currently
distributed by Concord Financial Group, Inc. Concord Holding Corporation, its
parent, either directly or through its off-shore subsidiary, provides the
Portfolios and the Funds with administrative services. If current restrictions
under the Glass-Steagall Act preventing a bank from sponsoring, organizing,
controlling, or distributing shares of an investment company were relaxed, the
Portfolios and the Company expect that Bank of America would consider the
possibility of offering to perform some or all of the services now provided by
Concord Holding Corporation or Concord Financial Group, Inc. From time to time,
legislation modifying such restriction has been introduced in Congress which, if
enacted, would permit a bank holding company to establish a non-bank subsidiary
having the authority to organize, sponsor and distribute shares of an investment
company. If this or similar legislation were enacted, the Portfolios and the
Company expect that Bank of America's parent bank holding company would consider
the possibility of one of its non-bank subsidiaries offering to perform some or
all of the services now provided by Concord Holding Corporation or Concord
Financial Group, Inc. It is not possible, of course, to predict whether or in
what form such legislation might be enacted or the terms upon which Bank of
America or such a non-bank affiliate might offer to provide services for
consideration by the Company's Board of Directors or the Portfolios' Board of
Trustees.
- 46 -
<PAGE> 479
ADMINISTRATOR
Concord Holding Corporation (the "Administrator"), with offices at 125
W. 55th Street, New York, New York 10019 and 3435 Stelzer Road, Columbus, Ohio
43219, is a wholly-owned subsidiary of The BISYS Group, Inc. The Administrator
also serves as administrator to several other investment companies.
The Administrator and its off-shore subsidiary provide administrative
services to the Company and the Portfolios as described in the Funds'
Prospectuses pursuant to separate administration agreements for the Company and
the Portfolios. The Portfolios' administration agreement will continue in
effect until October 31, 1996 and thereafter for successive periods of one year,
provided the agreement is not sooner terminated. The Portfolios' administration
agreement is terminable at any time with respect to any Portfolio by the
Portfolios' Board of Trustees or by a vote of a majority of that Portfolio's
outstanding interests upon 60 days' notice to the Administrator, or by the
Administrator upon 90 days' notice to the Portfolio. The Funds' administration
agreement will continue in effect until October 31, 1996 and thereafter will be
extended with respect to each Fund for successive periods of one year, provided
that each such extension is specifically approved (a) by vote of a majority of
those members of the Company's Board of Directors who are not interested persons
of any party to the agreement, cast in person at a meeting called for the
purpose of voting on such approval, and (b) the Company's Board of Directors or
by vote of a majority of the outstanding voting securities of such Fund. The
agreement is terminable at any time without penalty by the Company's Board of
Directors or by a vote of a majority of a Fund's outstanding shares upon 60
days' notice to the Administrator, or by the Administrator upon 90 days' notice
to the Company.
The Company has agreed to pay the Administrator a fee for its services
as Administrator, accrued daily and payable monthly, at the annual rates of .15%
of the average daily net assets of the Flexible Bond, Blue Chip, and Asset
Allocation Funds. In addition, the Portfolios that correspond to the Flexible
Bond, Blue Chip and Asset Allocation Funds have each agreed to pay the
Administrator a fee for its services as Administrator, accrued daily and payable
monthly, at the annual rate of .05% of the average daily net assets of the
respective Portfolio. The fees payable to the Administrator are not subject to
reduction as the value of the Funds' and the Portfolios' net assets increases.
From time to time, the Administrator may waive fees or reimburse the Portfolios
or the Company for expenses, either voluntarily or as required by certain state
securities laws.
- 47 -
<PAGE> 480
For the fiscal year ended February 28, 1995, the Administrator waived
its entire administration fees in the amounts of $33,431, $72,742 and $79,573
for the Portfolios corresponding to the Flexible Bond, Blue Chip and Asset
Allocation Funds, respectively.
For the period from December 6, 1993 (commencement of the Portfolios'
operations) to February 28, 1994, the Administrator waived its entire
administration fees in the amounts of $9,429, $15,001 and $17,965 for the
Portfolios corresponding to the Flexible Bond, Blue Chip and Asset Allocation
Funds, respectively.
For the fiscal year ended February 28, 1995, the Administrator waived
its entire administration fees in the amounts of $1,723, $5,833 and $4,703 for
the Flexible Bond, Blue Chip and Asset Allocation Funds, respectively.
For the period from the commencement of operations for the particular
Fund (January 24, 1994, January 13, 1994 and January 18, 1994 for the Flexible
Bond, Blue Chip and Asset Allocation Funds, respectively) to February 28, 1994,
the Administrator waived its entire administration fees in the amounts of $22,
$87 and $52 for the Flexible Bond, Blue Chip and Asset Allocation Funds,
respectively.
If total expenses borne by any Fund in any fiscal year exceed the
expense limitations imposed by applicable state securities regulations, the
Company and the Portfolio may deduct from the payments to be made with respect
to such Fund and its corresponding Portfolio to Bank of America and the
Administrator, respectively, or Bank of America and the Administrator will bear
the amount of such excess to the extent required by such regulations in
proportion to the fees otherwise payable to them for such year. Such amount, if
any, will be estimated, reconciled and effected or paid, as the case may be, on
a monthly basis. As of the date of this Statement of Additional Information,
the most restrictive expense limitation that may be applicable to the Company or
the Portfolios limits aggregate annual expenses with respect to a Fund
(including management, advisory fees and the Funds' pro-rata share of such
expenses of their corresponding Portfolios but excluding interest, taxes,
brokerage commissions, and certain other expenses) to 2-1/2% of the first $30
million of its average daily net assets, 2% of the next $70 million, and 1-1/2%
of its remaining average daily net assets. During the course of the Company's
fiscal year, the Administrator and Bank of America may assume certain expenses
and/or not receive payment of fees of one or more of the Portfolios or Funds,
while retaining the ability to be reimbursed by such Portfolios or Funds for
such amounts prior to the end of
- 48 -
<PAGE> 481
the fiscal year. This will have the effect of increasing yield to investors at
the time such fees are not received or amounts are assumed and decreasing yield
when such fees or amounts are reimbursed.
The Administrator will bear all expenses in connection with the
performance of its services under the administration agreements with the
exception of the fees charged by PFPC, for certain fund accounting services
which are borne by the Portfolios and the Funds. See "General
Information--Custodian and Transfer Agent" below. Expenses borne by the Funds
and Portfolios include taxes, interest, brokerage fees and commissions, if any,
fees of Board members who are not officers, directors, partners, employees or
holders of 5% or more of the outstanding voting securities of Bank of America or
the Administrator or any of their affiliates, Securities and Exchange Commission
fees and state securities qualification fees, advisory fees, administration
fees, charges of custodians, transfer and dividend disbursing agents' fees,
certain insurance premiums, outside auditing and legal expenses, costs of
maintaining corporate existence, costs attributable to investor services,
including without limitation telephone and personnel expenses, costs of
preparing and printing prospectuses and Statements of Additional Information for
regulatory purposes, cost of shareholders' reports and corporate meetings and
any extraordinary expenses. Certain shareholder servicing fees in connection
with the Company's shares are also paid by the Company. See "Distributor and
Plan Payments."
The administration agreements provide that the Administrator shall not
be liable for any error of judgment or mistake of law or any loss suffered by
the Company or the Portfolios in connection with the performance of the
administration agreements, except a loss resulting from willful misfeasance, bad
faith or negligence in the performance of its duties or from the reckless
disregard by it of its obligations and duties thereunder.
DISTRIBUTOR AND PLAN PAYMENTS
Concord Financial Group, Inc. (the "Distributor"), a wholly-owned
subsidiary of the Administrator, acts as distributor of the shares of the
Company. Shares are sold on a continuous basis by the Distributor. The
Distributor has agreed to use its best efforts to solicit orders for the sale of
the Company's shares although it is not obliged to sell any particular amount of
shares. The distribution agreement shall continue in effect with respect to
each Fund until October 31, 1996. Thereafter, if not terminated, the
distribution agreement shall continue automatically for successive terms of one
year, provided that
- 49 -
<PAGE> 482
such continuance is specifically approved at least annually (a) by a vote of a
majority of those members of the Board of Directors of the Company who are not
parties to the distribution agreement or "interested persons" of any such
party, cast in person at a meeting called for the purpose of voting on such
approval, and (b) by the Board of Directors of the Company or by vote of a
"majority of the outstanding voting securities" of the Funds as to which the
distribution agreement is effective; provided, however, that the distribution
agreement may be terminated by the Company at any time, without the payment of
any penalty, by vote of a majority of the entire Board of Directors of the
Company or by a vote of a "majority of the outstanding voting securities" of
such Funds on 60 days' written notice to the Distributor, or by the Distributor
at any time, without the payment of any penalty, on 90 days' written notice to
the Company. The agreement will automatically and immediately terminate in the
event of its "assignment."
For the fiscal year ended February 28, 1995, the Distributor received
$53,285, $186,628 and $114,338 in sales loads in connection with share purchases
of the Flexible Bond, Blue Chip and Asset Allocation Funds, respectively, of
which the Distributor and various affiliates of Bank of America retained $5,470
and $47,815 respectively, for the Flexible Bond Fund, $121,377 and $165,251,
respectively, for the Blue Chip Fund, and $30,504 and $83,884, respectively, for
the Asset Allocation Fund.
For the period from commencement of operations of the particular Fund
(January 14, 1994, January 13, 1994 and January 18, 1994 for Flexible Bond, Blue
Chip and Asset Allocation Funds, respectively) to February 28, 1994, the
Distributor received $14,623, $22,924 and $11,896 in sales loads in connection
with share purchases of the Flexible Bond, Blue Chip and Asset Allocation Funds,
respectively, of which the Distributor and various affiliates of Bank of America
retained $1,628 and $12,995, respectively, for the Flexible Bond Fund, $2,692
and $20,232, respectively, for the Blue Chip Fund, and $2,243 and $9,653,
respectively, for the Asset Allocation Fund.
The Distributor is entitled to payment by the Company for certain
shareholder servicing expenses in addition to the sales loads described above
and in the Prospectuses under the Shareholder Service Plan (the "Plan") adopted
by the Company. Under the Shareholder Service Plan, the Company pays the
Distributor, with respect to each of the Flexible Bond, Blue Chip and Asset
Allocation Funds, for (a) non-distribution shareholder services provided by the
Distributor to Service Organizations and/or the beneficial owners of Fund
shares, including, but not limited to shareholder servicing provided by the
Distributor at
- 50 -
<PAGE> 483
facilities dedicated for Company use, provided such shareholder servicing is
not duplicative of the servicing otherwise provided on behalf of the Funds, and
(b) fees paid to Service Organizations (which may include the Distributor
itself) for the provision of support services, based on the average daily value
of the Funds shares beneficially owned by shareholders for whom the Service
Organization is the dealer of record or holder of record or with whom the
Service Organization has a servicing relationship ("Clients").
Support services provided by Service Organizations may include, among
other things: (i) establishing and maintaining accounts and records relating to
Clients that invest in Fund shares; (ii) processing dividend and distribution
payments from the Funds on behalf of Clients; (iii) providing information
periodically to Clients regarding their positions in shares; (iv) arranging for
bank wires; (v) responding to Client inquiries concerning their investments in
Fund shares; (vi) providing the information to the Funds necessary for
accounting or subaccounting; (vii) if required by law, forwarding shareholder
communications from the Funds (such as proxies, shareholder reports, annual and
semi-annual financial statements and dividend, distribution and tax notices) to
Clients; (viii) assisting in processing exchange and redemption requests from
Clients; (ix) assisting Clients in changing dividend options, account
designations and addresses; and (x) providing such other similar services.
The Shareholder Service Plan provides that the Distributor is entitled
to receive payments for expenses on a monthly basis, at an annual rate not
exceeding .25% of the average daily net assets during such month of the Flexible
Bond, Blue Chip and Asset Allocation Funds, for shareholder servicing expenses.
The calculation of a Fund's average daily net assets for these purposes does not
include assets held in accounts opened via a transfer of assets from trust and
agency accounts of Bank of America. Further, payments made out of or charged
against the assets of a particular Fund must be in payment for expenses incurred
on behalf of the Fund.
If in any month the Distributor expends or is due more monies than can
be immediately paid due to the percentage limitations described above, the
unpaid amount is carried forward from month to month while the Plan is in effect
until such time, if ever, when it can be paid in accordance with such percentage
limitations. Conversely, if in any month the Distributor does not expend the
entire amount then available under the Plan, and assuming that no unpaid amounts
have been carried forward and remain unpaid, then the amount not expended will
be a credit to be drawn upon by the Distributor to permit future payment.
- 51 -
<PAGE> 484
However, any unpaid amounts or credits due under the Plan may not be "carried
forward" beyond the end of the fiscal year in which such amounts or credits due
are accrued.
For the fiscal year ended February 28, 1995, the Distributor waived all
fees due under the Plan in the amounts of $2,873, $9,721 and $7,754,
respectively for the Flexible Bond, Blue Chip and Asset Allocation Funds.
For the period from commencement of operations of the particular Fund
(January 24, 1994, January 13, 1994 and January 18, 1994 for Flexible Bond, Blue
Chip and Asset Allocation Funds, respectively) to February 28, 1994, the
Distributor waived all fees due under the Plan in the amounts of $36, $146 and
$86 respectively for the Flexible Bond, Blue Chip and Asset Allocation Funds.
Payments for Shareholder Service expenses are not subject to Rule 12b-1
(the "Rule") under the 1940 Act. (Although such provisions are not required by
the Rule, the Shareholder Service Plan contains similar provisions to the Rule,
including quarterly review by the Board of the Company of amounts expended and
the purposes for such expenditures, except that shareholder approval is not
required to increase materially the Shareholder Service expenses paid by the
Funds.)
The Shareholder Service Plans are subject to annual re-approval by a
majority of the directors who are neither "interested persons" (as that term is
defined in the 1940 Act) of the Company nor have any direct or indirect
financial interest in the operation of the Shareholder Service Plan (the
"Non-Interested Plan Directors") and are terminable at any time with respect to
any Fund by a vote of majority of such Directors or by vote of the holders of a
majority of the shares of the Fund involved. Any agreement entered into
pursuant to the Plans with a Service Organization is terminable with respect to
any Fund without penalty, at any time, by vote of a majority of the
Non-Interested Plan Directors, by vote of the holders of a majority of the
shares of such Fund, by the Distributor or by the Service Organization. Each
agreement will also terminate automatically in the event of its assignment.
The Company understands that Bank of America and/or some Service
Organizations may charge their clients a direct fee for administrative and
shareholder services in connection with the holding of Fund shares. These fees
would be in addition to any amounts which might be received under the Plans.
Small, inactive long-term accounts involving such additional charges may not be
in the best interest of shareholders.
- 52 -
<PAGE> 485
The following table shows all sales loads, commissions and other
compensation received by the Distributor directly or indirectly from each of
these Funds during their most recent fiscal year ended February 28, 1995:
<TABLE>
<CAPTION>
Brokerage
Net Under- Commissions
writing Dis- Compensation in connection
counts and on Redemption with Fund Other
Commissions and Repurchase Transactions Compensation(1)
------------ -------------- ------------- ---------------
<S> <C> <C> <C> <C>
Concord Financial
Group, Inc.
Flexible Bond $ 5,470 $0 $0 $0
Fund
Blue Chip Fund $121,377 $0 $0 $0
Asset Allocation $30,504 $0 $0 $0
Fund
</TABLE>
- -------------------
(1) Represents the total of (i) amounts paid to the Administrator
for administrative services provided to the Fund (see
"Management-Administrator" above) and (ii) payments made under the
Shareholder Service Plans (see discussion above).
YIELD AND TOTAL RETURN
From time to time, the yields and the total returns of the Funds may be
quoted in and compared to other mutual funds with similar investment objectives
in advertisements, shareholder reports or other communications to shareholders.
The Funds may also include calculations in such communications that describe
hypothetical investment results. (Such performance examples will be based on an
express set of assumptions and are not indicative of the performance of any
Fund.) Such calculations may from time to time include discussions or
illustrations of the effects of compounding in advertisements. "Compounding"
refers to the fact that, if dividends or other distributions on a Fund
investment are reinvested by being paid in additional Fund shares, any future
income or capital appreciation of a Fund would increase the value, not only of
the original Fund investment, but also of the additional Fund shares received
through reinvestment. As a result, the value of the Fund investment would
increase more quickly than if dividends or other distributions had been paid in
cash. The Funds may also include discussions or illustrations of the potential
investment goals of a prospective investor (including but not limited to tax
and/or retirement planning), investment management techniques, policies or
investment suitability of a Fund, economic conditions, legislative
- 53 -
<PAGE> 486
developments (including pending legislation), the effects of inflation and
historical performance of various asset classes, including but not limited to
stocks, bonds and Treasury bills. From time to time advertisements or
communications to shareholders may summarize the substance of information
contained in shareholder reports (including the investment composition of a Fund
and a Portfolio), as well as the views of the investment adviser as to current
market, economic, trade and interest rate trends, legislative, regulatory and
monetary developments, investment strategies and related matters believed to be
of relevance to a Fund. The Funds may also include in advertisements charts,
graphs or drawings which illustrate the potential risks and rewards of
investment in various investment vehicles, including but not limited to stocks,
bonds, Treasury bills and shares of a Fund. In addition, advertisements or
shareholder communications may include a discussion of certain attributes or
benefits to be derived by an investment in a Fund and may include testimonials
as to the investment adviser's capabilities by clients. Such advertisements or
communications may include symbols, headlines or other material which highlight
or summarize the information discussed in more detail therein. With proper
authorization, a Fund may reprint articles (or excerpts) written regarding the
Fund and provide them to prospective shareholders. Performance information with
respect to these Funds is generally available by calling (800) 346-2087.
Yield Calculations. The yield of a Fund is calculated by dividing the
net investment income per share (as described below) earned by the Fund during a
30-day (or one month) period by the maximum offering price per share on the last
day of the period and annualizing the result on a semi-annual basis by adding
one to the quotient, raising the sum to the power of six, subtracting one from
the result and then doubling the difference. The Fund's net investment income
per share earned during the period is based on the average daily number of
shares outstanding during the period entitled to receive dividends and includes
dividends and interest earned during the period minus expenses accrued for the
period, net of reimbursements. This calculation can be expressed as follows:
a-b
Yield = 2 [(----- + 1)(6) - 1]
cd
Where: a = dividends and interest earned during the period.
b = expenses accrued for the period (net of
reimbursements).
- 54 -
<PAGE> 487
c = the average daily number of shares outstanding during
the period that were entitled to receive dividends.
d = maximum offering price per share on the last day of the
period.
For the purpose of determining net investment income earned during the
period (variable "a" in the formula), dividend income on equity securities is
recognized by accruing 1/360 of the stated dividend rate of the security each
day. Except as noted below, interest earned on debt obligations is calculated
by computing the yield to maturity of each obligation based on the market value
of the obligation (including actual accrued interest) at the close of business
on the last business day of each month, or, with respect to obligations
purchased during the month, the purchase price (plus actual accrued interest),
and dividing the result by 360 and multiplying the quotient by the market value
of the obligation (including actual accrued interest) in order to determine the
interest income on the obligation for each day of the subsequent month that the
obligation is held. For purposes of this calculation, it is assumed that each
month contains 30 days. The maturity of an obligation with a call provision is
the next call date on which the obligation reasonably may be expected to be
called or, if none, the maturity date. With respect to debt obligations
purchased at a discount or premium, the formula generally calls for amortization
of the discount or premium. The amortization schedule will be adjusted monthly
to reflect changes in the market values of such debt obligations.
Interest earned on tax-exempt obligations that are issued without
original issue discount and have a current market discount is calculated by
using the coupon rate of interest instead of the yield to maturity. In the case
of tax-exempt obligations that are issued with original issue discount but which
have discounts based on current market value that exceed the then-remaining
portion of the original issue discount (market discount), the yield to maturity
is the imputed rate based on the original issue discount calculation. On the
other hand, in the case of tax-exempt obligations that are issued with original
issue discount but which have the discounts based on current market value that
are less than the then-remaining portion of the original issue discount (market
premium), the yield to maturity is based on the market value.
With respect to mortgage or other receivables-backed obligations which
are expected to be subject to monthly payments of principal and interest ("pay
downs"), (a) gain or loss attributable to actual monthly pay downs are accounted
for as an
- 55 -
<PAGE> 488
increase or decrease to interest income during the period; and (b) a Fund or
Portfolio may elect either (i) to amortize the discount and premium on the
remaining security, based on the cost of the security, to the weighted average
maturity date, if such information is available, or to the remaining term of
the security, if any, if the weighted average maturity date is not available,
or (ii) not to amortize discount or premium on the remaining security.
Undeclared earned income will be subtracted from the maximum offering
price per share (variable "d" in the formula). Undeclared earned income is the
net investment income which, at the end of the base period, has not been
declared as a dividend, but is reasonably expected to be and is declared and
paid as a dividend shortly thereafter. A Fund's maximum offering price per
share for purposes of the formula includes the maximum sales load imposed by the
Fund -- currently 4.50% of the per share offering price.
Based on the foregoing calculations, the yields of the Flexible Bond
and Asset Allocation Funds (after fee waivers and expense reimbursements) for
the 30 day period ended February 28, 1995 were 6.96% and 4.07%, respectively.
Total Return Calculations. The Funds compute their average annual
total returns by determining the average annual compounded rates of return
during specified periods that equate the initial amount invested to the ending
redeemable value of such investment. This is done by dividing the ending
redeemable value of a hypothetical $1,000 initial payment by $1,000 and raising
the quotient to a power equal to one divided by the number of years (or
fractional portion thereof) covered by the computation and subtracting one from
the result. This calculation can be expressed as follows:
ERV (1/n)
T = [(-----) - 1]
P
Where: T = average annual total return.
ERV = ending redeemable value at the end of
the period covered by the computation of a
hypothetical $1,000 payment made at the
beginning of the period.
- 56 -
<PAGE> 489
P = hypothetical initial payment of $1,000.
n = period covered by the computation, expressed
in terms of years.
The Funds compute their aggregate total returns by determining the
aggregate rates of return during specified periods that likewise equate the
initial amount invested to the ending redeemable value of such investment. The
formula for calculating aggregate total return is as follows:
ERV
aggregate total return = [(----- - 1)]
P
The calculations of average annual total return and aggregate total
return assume the reinvestment of all dividends and capital gain distributions
on the reinvestment dates during the period. The ending redeemable value
(variable "ERV" in each formula) is determined by assuming complete redemption
of the hypothetical investment and the deduction of all nonrecurring charges at
the end of the period covered by the computations. In addition, the Funds'
average annual total return and aggregate total return quotations reflect the
deduction of the maximum sales load charged in connection with the purchase of
Fund shares.
Based on the foregoing calculations, the average annual total returns
for the Flexible Bond Fund for the one year period ended February 28, 1995 and
for the period January 24, 1994 (commencement of operations) through February
28, 1994 were (2.33)% and (2.33)%, respectively. The aggregate total returns
for the Flexible Bond Fund for the same periods were (2.33)% and (5.54)%,
respectively.
Based on the foregoing calculations, the average annual total returns
for the Blue Chip Fund for the one year period ended February 28, 1995 and for
the period January 13, 1994 (commencement of operations) through February 28,
1994 were 2.75% and N/A, respectively. The aggregate total returns for the Blue
Chip Fund for the same periods were 2.75% and (4.69)%, respectively.
Based on the foregoing calculations, the average annual total returns
for the Asset Allocation Fund for the one year period ended February 28, 1995
and for the period January 18, 1994 (commencement of operations) through
February 28, 1994 were 0.30% and N/A, respectively. The aggregate total returns
for the Asset Allocation Fund for the same periods were 0.30% and (5.54)%,
respectively.
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<PAGE> 490
The Funds may also advertise total return data without reflecting the
sales load imposed on the purchase of shares of the Funds in accordance with the
rules of the Securities and Exchange Commission. Quotations which do not reflect
the sales load will, of course, be higher than quotations which do.
GENERAL INFORMATION
DESCRIPTION OF SHARES
The Company is an open-end management investment company organized as a
Maryland corporation on October 27, 1982. The Company's Charter authorizes the
Board of Directors to issue up to two hundred billion full and fractional common
shares. Pursuant to the authority granted in the Charter, the Board of Directors
has authorized the issuance of twenty-two classes of stock, Classes A through W
Common Stock, $.001 par value per share, representing interests in twenty-two
separate investment portfolios. Class M represents interests in the Flexible
Bond Fund; Class N represents interests in the Blue Chip Fund; and Class O
represents interests in the Asset Allocation Fund. The Company's charter also
authorizes the Board of Directors to classify or reclassify any particular class
of the Company's shares into one or more series.
Shares have no preemptive rights and only such conversion or exchange
rights as the Board may grant in its discretion. When issued for payment as
described in the Prospectuses, the Company's shares will be fully paid and
non-assessable. For information concerning possible restrictions upon the
transferability of the Company's shares and redemption provisions with respect
to such shares, see "Additional Purchase and Redemption Information."
Shareholders are entitled to one vote for each full share held, and
fractional votes for fractional shares held, and will vote in the aggregate and
not by class or series except as otherwise required by the 1940 Act or other
applicable law or when permitted by the Board of Directors. Shares have
cumulative voting rights to the extent they may be required by applicable law.
Rule 18f-2 under the 1940 Act provides that any matter required to be
submitted to the holders of the outstanding voting securities of an investment
company such as the Company shall not be deemed to have been effectively acted
upon unless approved by a majority of the outstanding shares of each Fund
affected by the matter. A Fund is affected by a matter unless it is clear that
the interests of each Fund in the matter are substantially
- 58 -
<PAGE> 491
identical or that the matter does not affect any interest of the Fund. Under
Rule 18f-2 the approval of an investment advisory agreement or 12b-1
distribution plan or any change in a fundamental investment policy would be
effectively acted upon with respect to a Fund only if approved by a majority of
the outstanding shares of such Fund. However, the rule also provides that the
ratification of independent public accountants, the approval of principal
underwriting contracts and the election of directors may be effectively acted
upon by shareholders of the Company voting without regard to particular Funds.
Notwithstanding any provision of Maryland law requiring a greater vote
of the Company's common stock (or of the shares of a Fund voting separately as a
class) in connection with any corporate action, unless otherwise provided by law
(for example, by Rule 18f-2 discussed above) or by the Company's Charter, the
Company may take or authorize such action upon the favorable vote of the holders
of more than 50% of the outstanding common stock of the Company voting without
regard to class.
THE PORTFOLIOS
The Portfolios are separate series of Master Investment Trust, Series
I, which was organized October 26, 1992 as a Delaware business trust. The Master
Trust's Declaration of Trust authorizes its Board of Trustees to issue an
unlimited number of shares of beneficial interest and to classify and reclassify
any authorized and unissued shares of beneficial interest into one or more
classes of shares. Investors in a Portfolio (such as the Flexible Bond, Blue
Chip or Asset Allocation Funds) are entitled to distributions arising from the
net investment income and net realized gains, if any, earned on investments held
by the Portfolio in which such investor holds beneficial interests. Investors
are also entitled to participate in the net distributable assets of the
Portfolio in which they hold beneficial interests on liquidation. Beneficial
interests have no preemptive rights, conversion or exchange rights.
CUSTODIAN, ACCOUNTING AGENT AND TRANSFER AGENT
The Company has appointed PNC Bank, N.A., Broad & Chestnut Streets,
Philadelphia, PA 19101 as custodian for the Flexible Bond, Blue Chip and Asset
Allocation Funds and their corresponding Portfolios. PFPC, 103 Bellevue
Parkway, Wilmington, DE 19809, provides these respective Funds and Portfolios
with certain accounting services pursuant to Fund Accounting Services Agreements
with the Administrator. Both PNC Bank, N.A. and PFPC are wholly owned
subsidiaries of PNC Bancorp, Inc., a bank holding company. Under the Fund
Accounting Services Agreement, PFPC has agreed to provide certain accounting,
- 59 -
<PAGE> 492
bookkeeping, pricing, dividend and distribution calculation services with
respect to the Company and the Portfolios. The monthly fees charged by PFPC
under the Fund Accounting Agreements are borne by the Funds and Portfolios. As
custodian of the Company's assets, PNC Bank, N.A., (i) maintains a separate
account or accounts in the name of the respective Funds and Portfolios, (ii)
holds and disburses portfolio securities; (iii) makes receipts and disbursements
of money, (iv) collects and receives income and other payments and distributions
on account of portfolio securities, (v) responds to correspondence from security
brokers and others relating to their respective duties and (vi) makes periodic
reports concerning their duties.
BISYS Fund Services Ohio, Inc., 3435 Stelzer Road, Columbus, Ohio
43219-3035 serves as transfer and dividend disbursing agent for the Funds.
COUNSEL
Drinker Biddle & Reath (of which W. Bruce McConnel, III, Secretary of
the Company, is a partner), 1345 Chestnut Street, Suite 1100, Philadelphia,
Pennsylvania 19107, serves as counsel to the Company and the Master Trust and
will pass upon the legality of the shares offered hereby.
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP with offices at 1177 Avenue of the Americas, New
York, New York 10036, has been selected as independent accountants of each Fund
and their corresponding Portfolios for the fiscal year ended February 28, 1996.
REPORTS
Shareholders will be sent unaudited semi-annual reports describing the
Portfolios' and the Funds' investment operations, and annual financial
statements together with the reports of the independent accountants of the
Portfolios and the Funds.
MISCELLANEOUS
As used in the Prospectuses and this Statement of Additional
Information, a "vote of a majority" of the outstanding shares of a Fund, a
Portfolio or a particular series means the affirmative vote of the lesser of (a)
more than 50% of the outstanding interests or shares of a Portfolio, Fund or
such series, or (b) 67% of the interests or shares of a Portfolio, Fund or
series present at a meeting at which more than 50% of the outstanding interests
or shares of a Portfolio, Fund or series are represented in person or by proxy.
- 60 -
<PAGE> 493
At June 15, 1995, the name, address and share ownership of the entities
which held of record more than 5% of the outstanding Pacific Horizon Shares of
the Treasury Fund were as follows: BA Investment Services Inc., For the Benefit
of Clients, 555 California Street, 4th Floor, Department #4337, San Francisco,
CA 94104, 98,230,626.530 shares (7.70%); Bank of America State Trust Co., 299 N.
Euclid Avenue, Pasadena, CA 91101, 1,044,975,154.790 shares (82.00%); and
Hellman & Freidman Capital Partners II, Limited Partnership, Attention: Georgia
Lee, 1 Maritime Plaza, 12th Floor, San Francisco, CA 94111, 1,216,118,073.700
shares (095.42%).
At June 16, 1995, the name, address and share ownership of the entities
which held of record more than 5% of the outstanding Horizon Shares of the
Treasury Fund was as follows: Bank of America Trustee/Custodian for Investing
in Horizon Treasury, Attn: Eric Peterson, 701 S. Western Avenue, 2nd Floor,
Glendale, CA 91201, 398,540,438.170 shares (68.901%); Security Pacific State
Trust Co., Agreement for Sec. PACWA Participants, Attn: Cash Sweep Funds (L.
Goekjian), P.O. Box 91630, Pasadena, CA 91101, 94,279,024.120 shares (16.299%).
At June 16, 1995, the name, address and share ownership of the entities
which held beneficially more than 5% of the outstanding Horizon Service Shares
of the Treasury Fund were as follows: Bank of America FM&TS Operat CA, Attn: CTF
Unit, 701 South Western Avenue, Glendale, CA 91201, 65,745,555.320 shares
(23.658%); Bank of America Nevada Southern Comm. Bank, Attn: Dan Dykes, P.O. Box
98600, Las Vegas, NV 89193, 63,974,589.270 shares (23.020%). Security Pacific
State Trust Co., Agreement for Sec. PACWA Participants, Attn: Cash Sweep Funds,
P.O. Box 91630, Pasadena, CA 91101, 56,906,301.540 shares (20.477%); and
Security Pacific Cash Management, c/o Bank of America - GPO M/C 5533, Attn:
Liezel Barangan, 1850 Gateway Boulevard, Concord, CA 94520, 77,003,300 shares
(27.709%). At June 15, 1995, the name, address and, share ownership of the
entity which held of record more than 5% of the outstanding Horizon Service
Shares of the Treasury Fund was as follows: Omnibus A/C for the Shareholder
Accounts maintained by Concord Financial Services, Inc., Attn: Linda Zerbe,
First and Market Building, 100 First Avenue, Suite 300, Pittsburgh, PA 15222,
263,629,755.130 shares (65.51%). At June 15, 1995 the name, address and share
ownership of the entities which held of record more than 5% of the outstanding
Pacific Horizon Shares of the Prime Fund were as follows: BA Investment
Services Inc., For the Benefit of Clients, 555 California Street, 4th Floor,
Department #4337, San Francisco, CA 94104, 514,119,226.900 shares (38.76%); Bank
of America State Trust Co., 299 N. Euclid Avenue, Pasadena, CA 91101,
392,983,248.780 shares (29.63%); and Southwest Securities Inc., Attn:
Cashiering, 201 Elm Street, Suite 4300, Dallas, TX 75270, 169,018,910.270
- 61 -
<PAGE> 494
shares (12.74%). At June 16, 1995, the name, address and share ownership of the
entities which held of record more than 5% of the outstanding Horizon Shares of
the Prime Fund were as follows: Bank of America Trustee/Custodian for Investing
Horizon Prime, Attn: Eric Peterson, 701 S. Western Avenue, 2nd Floor, Glendale,
CA 91201, 385,058,852.030 shares (56.838%); and Bank of America NT&SA, Attn: Kay
Warren/Dept. #5596, 1455 Market Street, San Francisco, CA 94103, 57,300,000.00
shares (9.934%). At June 15, 1995, the name, address and share ownership of the
entity which held of record more than 5% of the outstanding Horizon Service
Shares of the Prime Fund were as follows: Omnibus A/C for the Shareholder
Accounts maintained by Concord Financial Services, Inc., Attn: Linda Zerbe,
First and Market Building, 100 First Avenue, Suite 300, Pittsburgh, PA 15222,
752,776,315.610 shares (70.26%).
At June 16, 1995, the name, address and share ownership of the entities
which held beneficially more than 5% of the outstanding Horizon Service Shares
of the Prime Fund were as follows: Bank of America NT&SA Financial Management
and Trust Services, 701 S. Western Avenue, Glendale, CA 91201, 74,038,082.090
shares (9.835%); Capital Network Services, Attn: Donna Novell, One Bush Street,
11th Floor, San Francisco, CA 94104, 86,407,261.23 shares (11.478%); Security
Pacific Cash Management, c/o Bank of America. GPO. M/C 5533 Attn: Liezel
Barangan, 1850 Gateway Boulevard, M/C 5533, Concord, CA 94520, 379,755,600.000
shares (50.447%); Security Pacific State Trust Co., Agreement for SecPAC WA
Participants, Attn: Cash Sweep Funds (L. Goekjian) P.O. Box 91630, Pasadena, CA
91101, 54,321,621.330 shares (7.216%); and Southwest Securities Inc., Attn: Mary
Lisenber, 1201 Elm Street, Suite 4300, Dallas, TX 75270, 130,146,660.030 shares
(17.289%).
At June 15, 1995, the name, address and share ownership of the entities
which held of record more than 5% of the outstanding Pacific Horizon Shares of
the Tax-Exempt Money Fund were as follows: BA Investment Services, Inc., For
the Benefit of Clients, 555 California Street, 4th Floor, Department #4337, San
Francisco, CA 94104, 12,233,845.190 shares (39.73%); Southwest Securities Inc.,
Attn: Cashiering, 1201 Elm Street, Suite 4300, Dallas, TX, 75270, 10,387,253.930
shares (33.73%); and Bank of America State Trust Co., 299 N. Euclid Avenue,
Pasadena, CA 91101, 6,515,635.730 shares (21.16%).
At June 16, 1995, the name, address and share ownership of the
entities which held of record more than 5% of the outstanding Horizon Shares of
the Tax-Exempt Money Fund were as follows: Bank of America Custodian For
Investing in Horizon Tax- Exempt Money Fund, Attn: Eric Peterson, 701 S. Western
Avenue, 2nd Floor, Glendale, CA 19201, 129,582,555.65 shares (38.576%);
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<PAGE> 495
Continental Bank National Association Custodian for the Benefit of Custodian
Co. Attn: Mary Chester, 231 South LaSalle Street, 6Q, Chicago, IL 60697,
152,699,416.270 shares (45.458%); and Maine Midland Bank NA, Investment
Services, 17th Floor, Attn: Christine Mincel, One Marine Midland Center,
Buffalo, NY 14203, 21,684,672.980 shares (6.455%).
At June 15, 1995, the name, address and share ownership of the entities
which held of record more than 5% of the outstanding shares of the Horizon
Service Shares of the Tax-Exempt Money Fund were as follows: Furman C. Moseley
and Susan R. Moseley Tenn. In Common, 1201 3rd Avenue, Box 7C, Seattle, WA
98101, 4,165,513.060 shares (9.91%); Omnibus A/C for the shareholder accounts
maintained by Concord Financial Services Inc., Attn: Linda Zerbe, First and
Market Building, 100 First Avenue, Suite 300, Pittsburgh, PA 15222,
22,398,544.590 shares (53.31%); and Omnibus A/C for the Shareholder Accounts
maintained by Concord Financial Services Inc. Attn: First and Market Building,
100 First Avenue, Suite 300, Pittsburgh, PA 15222, 3,494,305.180 shares (8.31%).
At June 16, 1995, the name, address and share ownership of the entities which
held beneficially more than 5% of the outstanding Horizon Service Shares of the
Tax-Exempt Money Fund were as follows: BA Investment Services Inc., 555
California Street, 4th Floor Dept. #4337, San Francisco, CA 94104,
1,362,028.590 shares (5.260%); Bank of America FM&TS Oper. CA, Attn: CTF Unit,
701 South Western Avenue, Glendale, CA 91201, 2,293,907.40 shares (8.859%); and
Southwest Securities, Inc., Attn: Mary Lisenber, 1201 Elm Street, Suite 430,
Dallas, TX 75270, 21,021,580.530 shares (81.187%). At June 15, 1955, the name,
address and share ownership of the entities which held of record more than 5% of
the outstanding Pacific Horizon Shares of the Government Fund were as follows:
Bank of America, NT&SA, The Private Bank, Attn: ACI Unit #8329, 701 S. Western
Avenue, Glendale, CA 91201, 79,875,532.090 shares (22.71%); Bank of America
State Trust Co., 299 N. Euclid Avenue., Pasadena, CA 91101, 64,756,966.280
shares (18.41%); and BA Investment Services Inc., For the Benefit of Clients,
555 California Street, 4th Floor, Department #4337, San Francisco, CA 94104,
170,940,404.650 shares (48.60%). At June 16, 1995, the name, address and share
ownership of the entities which held of record more than 5% of the outstanding
Horizon Shares of the Government Fund were as follows: Bank of America NT&SA
Trustee/Custodian for Investing in Horizon Shares of the Government Fund, Attn:
Cynthia Beauvais, 701 South Western Avenue., Glendale, CA 91201, 9,327,446.350
shares (5.028%); Bank of America State Trust, Attn: Rigo Barrett, 299 N. Euclid
Avenue, Pasadena, CA 91101, 28,063,486.740 shares (15.129%); Capital Network
Services, Attn: Donna Novell, One Bush Street, 11th Floor, San Francisco, CA
94104, 24,227,801.980 shares (13.061%); County of Orange, Matt Raabe, P.O. Box
4515, Santa Ana, CA 92702,
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<PAGE> 496
10,000,000.000 shares (5.391%); Cypress Insurance Co., Attn: Larry Tetzloff,
9290 W. Dodge Road, Omaha, NE 68124, 9,996,515.930 shares (5.389%); Harr & Co.,
c/o Bank of New York, Attn: Bimal Sana, Spec. Prec. Dept., One Wall Street, 5th
Floor, New York, NY 10286, 14,000,000.000 shares (7.547%); Micron Electronics
Inc., Attn: Debbie Meigand, 900 East Karcher Road, Nanpa, ID 83687,
16,080,510.14 shares (8.669%); and Silocin Magic Corp., Attn: Meng A. Lim, 20300
Stevens Creek Boulevard., Suite 400, Cupertino, CA 95014, 18,058,262.110 shares
(9.735%). At June 15, 1995, the name, address and share ownership of the
entities which held of record more than 5% of the outstanding Horizon Service
Shares of the Government Fund were as follows: Spacelabs Medical, Inc., Attn:
Scott Bender, P.O. Box 97013, Redmond, WA 98073, 14,572,000.000 shares (5.70%);
Good Health Plan of WA, Attn: Tsai Cheng, 1501 9th Avenue, Suite 500, Seattle,
WA 98101, 16,584,866.580 shares (6.49%); Omnibus A/C for the Shareholder
Accounts maintained by Concord. Financial Services Inc., Attn: Linda Zerbe,
First and Market Building, 100 First Avenue, Suite 300, Pittsburgh, PA 15222,
68,555,257.020 shares (26.85%). At June 16, 1995, the name, address and share
ownership of the entities which held beneficially more than 5% of the Horizon
Service Shares of the Government Fund were as follows: Bank of America Nevada
Southern Comm. Bank, Attn: Dan Dykes, P.O. Box 98600, Las Vegas, NV 89193-8600,
35,849,966.050 shares (52.294%); and Capital Network Services, Attn: Donna M.
Howell, One Bush Street, 11th Floor, San Francisco, CA 94104-4425,
23,929,840.440 shares (34.906%). At June 15, 1995, the name, address and share
ownership of the entities which held of record more than 5% of the Pacific
Horizon Shares of the Treasury Only Fund were as follows: Bank of America NT&SA,
the Private Bank, Attn: ACI Unit 48329, 701 South Western Avenue, Glendale, CA
91201, 48,516,900.490 shares (31.68%) Bank of America State Trust Co., 299 N.
Euclid Avenue, Pasadena, CA 91101, 22,350,831.320 shares (14.59%); and BA
Investment Services Inc., For the Benefit of Clients, 555 California Street, 4th
Floor, Department #4337, San Francisco, CA 94104, 69,016,521.500 shares
(45.06%). At June 15, 1995, the name, address and share ownership of the
entities which held of record more than 5% of the outstanding Horizon Service
Shares of the Treasury Only Fund were as follows: National Home Mortgage Corp.,
Attn: Mortgage Banking Treasury Operations, 5565 Morehouse Drive, 3rd Floor, San
Diego, CA 92121, 12,147.667,580 shares (9.42%); Comcare, Inc., 4001 N. 3rd
Street, Suite 120, Phoenix, AZ 85012, 26,230,243.620 shares (20.34%); and
Omnibus A/C For the Shareholder Accounts Maintained by Concord Financial
Services Inc., Attn: Linda Zerbe, First and Market Building, 100 First Avenue,
Suite 300, Pittsburgh, PA 15222, 21,883,084.450 shares (16.97%). At June 16,
1995, the name, address and share ownership of the entities which held
beneficially more than 5% of the outstanding Horizon Service Shares of the
Treasury Only Fund were as follows:
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<PAGE> 497
BA Investment Service Inc., 555 California Street, 4th Floor Dept. #4337, San
Francisco, CA 94104, 6,403,628.120 shares (28.679%); Bank of America NT&SA
Trustee/Custodian for Investing in Horizon Service Shares of the Treasury Only
Fund, Attn: Cynthia Beauvais, 701 South Western Avenue, Glendale, CA 91201,
3,501,414.020 shares (15.681%); Bank of America State Trust, Attn: Rigo Barrett,
299 N. Euclid Avenue, Pasadena, CA 91101, 5,420,893.150 shares (24.277%); Fair
Isaac & Co., Attn: Christine Tam, 120 North Redwood, San Rapheal, CA 94903-1996,
1,338,800.750 shares (5.996%); Foothill/Eastern Transportation Corridor Agency,
Attn: Laura Barker, 201 East Sandpot, Suite 200, Santa Anna, CA 92707,
2,559,586.380 shares (11.463%); and Nexus, Attn: Kathleen Menace, P.O. Box
60637, Sunnyvale, CA 94088-0637, 2,525,153.380 shares (11.309%). At June 15,
1995, the name, address and share ownership of the entities which held of record
more than 5% of the outstanding Pacific Horizon Shares of the Prime Value Fund
were as follows: BA Investment Services Inc., For the Benefit of Clients, 555
California Street, 4th Floor, Department #4337, San Francisco, CA 94104,
16,383,467.170 shares (26.45%); and Bank of America State Trust Co., Attn: Leon
Goekjian, P.O. Box 91630, Pasadena, CA 91101, 45,078,465.290 shares (72.79%). At
June 16, 1995, the name, address and share ownership of the entity which held
of record more than 5% of the outstanding Horizon Shares of the Prime Value Fund
was as follows: Tice & Co., c/o M&T, Attn: Cash Management Clerk, 8th Floor,
P.O. Box 1377, Buffalo, NY 14240, 453,078,561.590 shares (93.510%). At June 15,
1995, the name, address and share ownership of the entity which held of record
more than 5% of the outstanding shares of the Pacific Horizon Shares of the
California Tax-Exempt Money Market Fund was as follows: BA Investment Services
Inc., For the Benefit of Clients, 555 California Street, 4th Floor, Department
#4337, San Francisco, CA 94104, 204,443,886.590 shares (22.07%). At June 15,
1995, the name, address and share ownership of the entities which held of record
more than 5% of the outstanding shares of the Horizon Service Shares of the
California Tax-Exempt Money Market Fund were as follows: Leo Zuckerman Trust,
DTD 12-11-91,4444 Viewridge Avenue, San Diego, CA 92123, 4,850,877.280 shares
(5.35%); and Omnibus A/C for the Shareholder Accounts Maintained by Concord
Financial Services Inc. Attn: Linda Zerbe, First and Market Building, 100 First
Avenue, Suite 300, Pittsburgh, PA 15222, 13,391,453.970 shares (14.77%). At June
16, 1995, the name, address and share ownership of the entity which held
beneficially more than 5% of the outstanding shares of the Horizon Service
Shares of the California Tax-Exempt Money Market Fund was as follows: BA
Investment Services Inc., 555 California Street, 4th Floor, Dept. #4337, San
Francisco, CA 94109, 13,792,509.310 shares (99.206%). At June 15, 1995, the
name, address and shares ownership of the entities which held of record more
than 5% of the outstanding shares of the Flexible Bond Fund were as follows:
Peter F. Smith and Jacquelyn L.
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<PAGE> 498
Smith, JTWROS, 1785 C. Blodgett Road, Mount Vernon, WA 98273, 13,973.917 shares
(5.58%); and BA Investment Services, Inc., FBO 200724011, 185 Berry Street, 3rd
Floor #2640, San Francisco, CA 94104, 22,436.531 shares (8.96%). At June 15,
1995 the name, address and share ownership of the entity which held of record
more than 5% of the outstanding shares of the Asset Allocation Fund was as
follows: Bank of America, Texas AATTEE. National-O'Neill Supplemental Savings
Plan, Attn: Mutual Funds (81-6-01005-0), P.O. Box 94627, Pasadena, CA 91109,
24,289,973 shares (5.07%). At June 15, 1995 the name, address and share
ownership of the entities which held of record more than 5% of the outstanding
shares of the National Municipal Bond Fund were as follows: BA Investment
Services, Inc. FBO 405084421, 555 California Street, 4th Floor, #2640, San
Francisco, CA 94104, 26,336.154 shares (8.31%); and BA Investment Services,
Inc., FBO 405266591, 555 California Street, 4th Floor, #2640, San Francisco, CA
94104, 25,034.024 shares (7.90%). At June 15, 1995 the name, address and share
ownership of the entities which held of record more than 5% of the outstanding
shares of the Corporate Bond Fund were as follows: Dean Witter Reynolds Inc.,
5 World Trade Center, 4th Floor, Attn: 5th O Div., New York, NY 10048,
138,820.000 shares (6.93%); and Smith Barney Shearson, Inc., 333 W. 39th Street,
8th Floor, New York, NY 10001, 148,925.482 shares (7.43%).
At such date, no other person was known by the Company to hold of
record or beneficially more than 5% of the outstanding shares of any investment
portfolio of the Company.
The Prospectuses relating to the Funds and this Statement of Additional
Information omit certain information contained in the Company's registration
statement filed with the SEC. Copies of the registration statement, including
items omitted herein, may be obtained from the Commission by paying the charges
prescribed under its rules and regulations.
FINANCIAL STATEMENTS AND EXPERTS
The Annual Reports for the Funds and the Portfolios for the fiscal year
ended February 28, 1995 accompanies this Statement of Additional Information.
The financial statements and notes thereto in the Annual Reports are
incorporated in this Statement of Additional Information by reference, and have
been audited by Price Waterhouse LLP, whose reports thereon also appear in such
Annual Reports and are also incorporated herein by reference. Such financial
statements have been incorporated herein in reliance on the reports of Price
Waterhouse LLP, independent accountants, given on the authority of said firm as
experts in auditing and accounting.
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APPENDIX A
COMMERCIAL PAPER RATINGS
A Standard & Poor's commercial paper rating is a current assessment of
the likelihood of timely payment of debt considered short-term in the relevant
market. The following summarizes the rating categories used by Standard and
Poor's for commercial paper:
"A-1" - Issue's degree of safety regarding timely payment is strong.
Those issues determined to possess extremely strong safety characteristics are
denoted "A-1+."
"A-2" - Issue's capacity for timely payment is satisfactory. However,
the relative degree of safety is not as high as for issues designated "A-1."
"A-3" - Issue has an adequate capacity for timely payment. It is,
however, somewhat more vulnerable to the adverse effects of changes and
circumstances than an obligation carrying a higher designation.
"B" - Issue has only a speculative capacity for timely payment.
"C" - Issue has a doubtful capacity for payment.
"D" - Issue is in payment default.
Moody's commercial paper ratings are opinions of the ability of issuers
to repay punctually promissory obligations not having an original maturity in
excess of 9 months. The following summarizes the rating categories used by
Moody's for commercial paper:
"Prime-1" - Issuer or related supporting institutions are considered to
have a superior capacity for repayment of short-term promissory obligations.
Prime-1 repayment capacity will normally be evidenced by the following
characteristics: leading market positions in well established industries; high
rates of return on funds employed; conservative capitalization structures with
moderate reliance on debt and ample asset protection; broad margins in earning
coverage of fixed financial charges and high internal cash generation; and well
established access to a range of financial markets and assured sources of
alternate liquidity.
"Prime-2" - Issuer or related supporting institutions are considered to
have a strong capacity for repayment of short-
A-1
<PAGE> 500
term promissory obligations. This will normally be evidenced by many of the
characteristics cited above but to a lesser degree. Earnings trends and
coverage ratios, while sound, will be more subject to variation.
Capitalization characteristics, while still appropriate, may be more affected
by external conditions. Ample alternative liquidity is maintained.
"Prime-3" - Issuer or related supporting institutions have an
acceptable capacity for repayment of short-term promissory obligations. The
effects of industry characteristics and market composition may be more
pronounced. Variability in earnings and profitability may result in changes in
the level of debt protection measurements and the requirement for relatively
high financial leverage. Adequate alternate liquidity is maintained.
"Not Prime" - Issuer does not fall within any of the Prime rating
categories.
The three rating categories of Duff & Phelps for investment grade
commercial paper and short-term debt are "D-1," "D-2" and "D-3." Duff & Phelps
employs three designations, "D-1+," "D-1" and "D-1-," within the highest rating
category. The following summarizes the rating categories used by Duff & Phelps
for commercial paper:
"D-1+" - Debt possesses highest certainty of timely payment. Short-term
liquidity, including internal operating factors and/or access to alternative
sources of funds, is outstanding, and safety is just below risk-free U.S.
Treasury short-term obligations.
"D-1" - Debt possesses very high certainty of timely payment. Liquidity
factors are excellent and supported by good fundamental protection factors. Risk
factors are minor.
"D-1-" - Debt possesses high certainty of timely payment. Liquidity
factors are strong and supported by good fundamental protection factors. Risk
factors are very small.
"D-2" - Debt possesses good certainty of timely payment. Liquidity
factors and company fundamentals are sound. Although ongoing funding needs may
enlarge total financing requirements, access to capital markets is good. Risk
factors are small.
"D-3" - Debt possesses satisfactory liquidity, and other protection
factors qualify issue as investment grade. Risk factors are larger and subject
to more variation. Nevertheless, timely payment is expected.
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<PAGE> 501
"D-4" - Debt possesses speculative investment characteristics.
Liquidity is not sufficient to ensure against disruption in debt service.
Operating factors and market access may be subject to a high degree of
variation.
"D-5" - Issuer has failed to meet scheduled principal and/or interest
payments.
Fitch short-term ratings apply to debt obligations that are payable on
demand or have original maturities of up to three years. The following
summarizes the rating categories used by Fitch for short-term obligations:
"F-1+" - Securities possess exceptionally strong credit quality. Issues
assigned this rating are regarded as having the strongest degree of assurance
for timely payment.
"F-1" - Securities possess very strong credit quality. Issues assigned
this rating reflect an assurance of timely payment only slightly less in degree
than issues rated "F-1+."
"F-2" - Securities possess good credit quality. Issues assigned this
rating have a satisfactory degree of assurance for timely payment, but the
margin of safety is not as great as the "F-1+" and "F-1" categories.
"F-3" - Securities possess fair credit quality. Issues assigned this
rating have characteristics suggesting that the degree of assurance for timely
payment is adequate; however, near-term adverse changes could cause these
securities to be rated below investment grade.
"F-S" - Securities possess weak credit quality. Issues assigned this
rating have characteristics suggesting a minimal degree of assurance for timely
payment and are vulnerable to near-term adverse changes in financial and
economic conditions.
"D" - Securities are in actual or imminent payment default.
Fitch may also use the symbol "LOC" with its short-term ratings to
indicate that the rating is based upon a letter of credit issued by a commercial
bank.
Thomson BankWatch short-term ratings assess the likelihood of an
untimely or incomplete payment of principal or interest of unsubordinated
instruments having a maturity of one year or less which is issued by United
States commercial banks, thrifts and non-bank banks; non-United States banks;
and broker-
A-3
<PAGE> 502
dealers. The following summarizes the ratings used by Thomson BankWatch:
"TBW-1" - This designation represents Thomson BankWatch's highest
rating category and indicates a very high degree of likelihood that principal
and interest will be paid on a timely basis.
"TBW-2" - This designation indicates that while the degree of safety
regarding timely payment of principal and interest is strong, the relative
degree of safety is not as high as for issues rated "TBW-1."
"TBW-3" - This designation represents the lowest investment grade
category and indicates that while the debt is more susceptible to adverse
developments (both internal and external) than obligations with higher ratings,
capacity to service principal and interest in a timely fashion is considered
adequate.
"TBW-4" - This designation indicates that the debt is regarded as
non-investment grade and therefore speculative.
IBCA assesses the investment quality of unsecured debt with an original
maturity of less than one year which is issued by bank holding companies and
their principal bank subsidiaries. The following summarizes the rating
categories used by IBCA for short-term debt ratings:
"A1" - Obligations are supported by the highest capacity for timely
repayment. Where issues possess a particularly strong credit feature, a rating
of A1+ is assigned.
"A2" - Obligations are supported by a good capacity for timely
repayment.
"A3" - Obligations are supported by a satisfactory capacity for timely
repayment.
"B" - Obligations for which there is an uncertainty as to the capacity
to ensure timely repayment.
"C" - Obligations for which there is a high risk of default or which
are currently in default.
A-4
<PAGE> 503
CORPORATE AND MUNICIPAL LONG-TERM DEBT RATINGS
The following summarizes the ratings used by Standard & Poor's for
corporate and municipal debt:
"AAA" - This designation represents the highest rating assigned by
Standard & Poor's to a debt obligation and indicates an extremely strong
capacity to pay interest and repay principal.
"AA" - Debt is considered to have a very strong capacity to pay
interest and repay principal and differs from AAA issues only in small degree.
"A" - Debt is considered to have a strong capacity to pay interest and
repay principal although such issues are somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions than debt in
higher-rated categories.
"BBB" - Debt is regarded as having an adequate capacity to pay interest
and repay principal. Whereas such issues normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher-rated categories.
"BB," "B," "CCC" "CC" and "C" - Debt is regarded, on balance, as
predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. "BB" indicates the
lowest degree of speculation and "C" the highest degree of speculation. While
such debt will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major risk exposures to adverse
conditions.
"BB" - Debt has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure
to adverse business, financial or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. The "BB"
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied "BBB-" rating.
"B" - Debt has a greater vulnerability to default but currently has the
capacity to meet interest payments and principal repayments. Adverse business,
financial or economic conditions will likely impair capacity or willingness to
pay interest and repay principal. The "B" rating category is also used for debt
subordinated to senior debt that is assigned an actual or implied "BB" or "BB-"
rating.
A-5
<PAGE> 504
"CCC" - Debt has a currently identifiable vulnerability to default, and
is dependent upon favorable business, financial and economic conditions to meet
timely payment of interest and repayment of principal. In the event of adverse
business, financial or economic conditions, it is not likely to have the
capacity to pay interest and repay principal. The "CCC" rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
"B" or "B-" rating.
"CC" - This rating is typically applied to debt subordinated to senior
debt that is assigned an actual or implied "CCC" rating.
"C" - This rating is typically applied to debt subordinated to senior
debt which is assigned an actual or implied "CCC-" debt rating. The "C" rating
may be used to cover a situation where a bankruptcy petition has been filed, but
debt service payments are continued.
"CI" - This rating is reserved for income bonds on which no interest is
being paid.
"D" - Debt is in payment default. This rating is used when interest
payments or principal payments are not made on the date due, even if the
applicable grace period has not expired, unless S & P believes such payments
will be made during such grace period. "D" rating is also used upon the filing
of a bankruptcy petition if debt service payments are jeopardized.
PLUS (+) OR MINUS (-) - The ratings from "AA" through "CCC" may be
modified by the addition of a plus or minus sign to show relative standing
within the major rating categories.
"r" - This rating is attached to highlight derivative, hybrid, and
certain other obligations that S & P believes may experience high volatility or
high variability in expected returns due to non-credit risks. Examples of such
obligations are: securities whose principal or interest return is indexed to
equities, commodities, or currencies; certain swaps and options; and interest
only and principal only mortgage securities.
The following summarizes the ratings used by Moody's for corporate and
municipal long-term debt:
"Aaa" - Bonds are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as "gilt
edged." Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
A-6
<PAGE> 505
"Aa" - Bonds are judged to be of high quality by all standards.
Together with the "Aaa" group they comprise what are generally known as high
grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in "Aaa" securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than in "Aaa"
securities.
"A" - Bonds possess many favorable investment attributes and are to be
considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment sometime in the future.
"Baa" - Bonds considered medium-grade obligations, i.e., they are
neither highly protected nor poorly secured. Interest payments and principal
security appear adequate for the present but certain protective elements may be
lacking or may be characteristically unreliable over any great length of time.
Such bonds lack outstanding investment characteristics and in fact have
speculative characteristics as well.
"Ba," "B," "Caa," "Ca," and "C" - Bonds that possess one of these
ratings provide questionable protection of interest and principal ("Ba"
indicates some speculative elements; "B" indicates a general lack of
characteristics of desirable investment; "Caa" represents a poor standing; "Ca"
represents obligations which are speculative in a high degree; and "C"
represents the lowest rated class of bonds). "Caa," "Ca" and "C" bonds may be in
default.
Con. (---) - Bonds for which the security depends upon the completion
of some act or the fulfillment of some condition are rated conditionally. These
are bonds secured by (a) earnings of projects under construction, (b) earnings
of projects unseasoned in operation experience, (c) rentals which begin when
facilities are completed, or (d) payments to which some other limiting condition
attaches. Parenthetical rating denotes probable credit stature upon completion
of construction or elimination of basis of condition.
Moody's applies numerical modifiers 1, 2 and 3 in each generic
classification from "Aa" to "B" in its bond rating system. The modifier 1
indicates that the issuer ranks in the higher end of its generic rating
category; the modifier 2 indicates a mid-range ranking; and the modifier 3
indicates that the issuer ranks at the lower end of its generic rating category.
A-7
<PAGE> 506
The following summarizes the long-term debt ratings used by Duff &
Phelps for corporate and municipal long-term debt:
"AAA" - Debt is considered to be of the highest credit quality. The
risk factors are negligible, being only slightly more than for risk-free U.S.
Treasury debt.
"AA" - Debt is considered of high credit quality. Protection factors
are strong. Risk is modest but may vary slightly from time to time because of
economic conditions.
"A" - Debt possesses protection factors which are average but adequate.
However, risk factors are more variable and greater in periods of economic
stress.
"BBB" - Debt possesses below average protection factors but such
protection factors are still considered sufficient for prudent investment.
Considerable variability in risk is present during economic cycles.
"BB," "B," "CCC," "DD," and "DP" - Debt that possesses one of these
ratings is considered to be below investment grade. Although below investment
grade, debt rated "BB" is deemed likely to meet obligations when due. Debt
rated "B" possesses the risk that obligations will not be met when due. Debt
rated "CCC" is well below investment grade and has considerable uncertainty as
to timely payment of principal, interest or preferred dividends. Debt rated "DD"
is a defaulted debt obligation, and the rating "DP" represents preferred stock
with dividend arrearages.
To provide more detailed indications of credit quality, the "AA," "A,"
"BBB," "BB" and "B" ratings may be modified by the addition of a plus (+) or
minus (-) sign to show relative standing within these major categories.
The following summarizes the highest four ratings used by Fitch for
corporate and municipal bonds:
"AAA" - Bonds considered to be investment grade and of the highest
credit quality. The obligor has an exceptionally strong ability to pay interest
and repay principal, which is unlikely to be affected by reasonably foreseeable
events.
"AA" - Bonds considered to be investment grade and of very high credit
quality. The obligor's ability to pay interest and repay principal is very
strong, although not quite as strong as bonds rated "AAA." Because bonds rated
in the "AAA" and "AA" categories are not significantly vulnerable to foreseeable
future developments, short-term debt of these issuers is generally rated "F-1+."
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"A" - Bonds considered to be investment grade and of high credit
quality. The obligor's ability to pay interest and repay principal is
considered to be strong, but may be more vulnerable to adverse changes in
economic conditions and circumstances than bonds with higher ratings.
"BBB" - Bonds considered to be investment grade and of satisfactory
credit quality. The obligor's ability to pay interest and repay principal is
considered to be adequate. Adverse changes in economic conditions and
circumstances, however, are more likely to have an adverse impact on these
bonds, and therefore, impair timely payment. The likelihood that the ratings of
these bonds will fall below investment grade is higher than for bonds with
higher ratings.
"BB," "B," "CCC," "CC," "C," "DDD," "DD," and "D" - Bonds that possess
one of these ratings are considered by Fitch to be speculative investments. The
ratings "BB" to "C" represent Fitch's assessment of the likelihood of timely
payment of principal and interest in accordance with the terms of obligation for
bond issues not in default. For defaulted bonds, the rating "DDD" to "D" is an
assessment of the ultimate recovery value through reorganization or liquidation.
To provide more detailed indications of credit quality, the Fitch
ratings from and including "AA" to "C" may be modified by the addition of a plus
(+) or minus (-) sign to show relative standing within these major rating
categories.
IBCA assesses the investment quality of unsecured debt with an original
maturity of more than one year which is issued by bank holding companies and
their principal bank subsidiaries. The following summarizes the rating
categories used by IBCA for long-term debt ratings:
"AAA" - Obligations for which there is the lowest expectation of
investment risk. Capacity for timely repayment of principal and interest is
substantial such that adverse changes in business, economic or financial
conditions are unlikely to increase investment risk substantially.
"AA" - Obligations for which there is a very low expectation of
investment risk. Capacity for timely repayment of principal and interest is
substantial. Adverse changes in business, economic or financial conditions may
increase investment risk albeit not very significantly.
"A" - Obligations for which there is a low expectation of investment
risk. Capacity for timely repayment of principal and interest is strong,
although adverse changes in business,
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economic or financial conditions may lead to increased investment risk.
"BBB" - Obligations for which there is currently a low expectation of
investment risk. Capacity for timely repayment of principal and interest is
adequate, although adverse changes in business, economic or financial conditions
are more likely to lead to increased investment risk than for obligations in
higher categories.
"BB," "B," "CCC," "CC," and "C" - Obligations are assigned one of these
ratings where it is considered that speculative characteristics are present.
"BB" represents the lowest degree of speculation and indicates a possibility of
investment risk developing. "C" represents the highest degree of speculation
and indicates that the obligations are currently in default.
IBCA may append a rating of plus (+) or minus (-) to a rating to denote
relative status within major rating categories.
Thomson BankWatch assesses the likelihood of an untimely repayment of
principal or interest over the term to maturity of long term debt and preferred
stock which are issued by United States commercial banks, thrifts and non-bank
banks; non-United States banks; and broker-dealers. The following summarizes
the rating categories used by Thomson BankWatch for long-term debt ratings:
"AAA" - This designation represents the highest category assigned by
Thomson BankWatch to long-term debt and indicates that the ability to repay
principal and interest on a timely basis is very high.
"AA" - This designation indicates a superior ability to repay principal
and interest on a timely basis with limited incremental risk versus issues rated
in the highest category.
"A" - This designation indicates that the ability to repay principal
and interest is strong. Issues rated "A" could be more vulnerable to adverse
developments (both internal and external) than obligations with higher ratings.
"BBB" - This designation represents Thomson BankWatch's lowest
investment grade category and indicates an acceptable capacity to repay
principal and interest. Issues rated "BBB" are, however, more vulnerable to
adverse developments (both internal and external) than obligations with higher
ratings.
"BB," "B," "CCC," and "CC" - These designations are assigned by Thomson
BankWatch to non-investment grade long-term
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debt. Such issues are regarded as having speculative characteristics regarding
the likelihood of timely payment of principal and interest. "BB" indicates the
lowest degree of speculation and "CC" the highest degree of speculation.
"D" - This designation indicates that the long-term debt is in default.
PLUS (+) OR MINUS (-) - The ratings from "AAA" through "CC" may include
a plus or minus sign designation which indicates where within the respective
category the issue is placed.
MUNICIPAL NOTE RATINGS
A Standard and Poor's rating reflects the liquidity concerns and market
access risks unique to notes due in three years or less. The following
summarizes the ratings used by Standard & Poor's Ratings Group for municipal
notes:
"SP-1" - The issuers of these municipal notes exhibit very strong or
strong capacity to pay principal and interest. Those issues determined to
possess overwhelming safety characteristics are given a plus (+) designation.
"SP-2" - The issuers of these municipal notes exhibit satisfactory
capacity to pay principal and interest.
"SP-3" - The issuers of these municipal notes exhibit speculative
capacity to pay principal and interest.
Moody's ratings for state and municipal notes and other short-term
loans are designated Moody's Investment Grade ("MIG") and variable rate demand
obligations are designated Variable Moody's Investment Grade ("VMIG"). Such
ratings recognize the differences between short-term credit risk and long-term
risk. The following summarizes the ratings by Moody's Investors Service, Inc.
for short-term notes:
"MIG-1"/"VMIG-1" - Loans bearing this designation are of the best
quality, enjoying strong protection by established cash flows, superior
liquidity support or demonstrated broad-based access to the market for
refinancing.
"MIG-2"/"VMIG-2" - Loans bearing this designation are of high quality,
with margins of protection ample although not so large as in the preceding
group.
"MIG-3"/"VMIG-3" - Loans bearing this designation are of favorable
quality, with all security elements accounted for but lacking the undeniable
strength of the preceding grades.
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Liquidity and cash flow protection may be narrow and market access for
refinancing is likely to be less well established.
"MIG-4"/"VMIG-4" - Loans bearing this designation are of adequate
quality, carrying specific risk but having protection commonly regarded as
required of an investment security and not distinctly or predominantly
speculative.
"SG" - Loans bearing this designation are of speculative quality and
lack margins of protection.
Fitch and Duff & Phelps use the short-term ratings described under
Commercial Paper Ratings for municipal notes.
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APPENDIX B
As stated in the Prospectuses, the Portfolios corresponding to the
Flexible Bond Fund, Blue Chip Fund and Asset Allocation Fund may enter into
futures contracts and options for hedging purposes. Such transactions are
described in this Appendix.
I. INTEREST RATE FUTURES CONTRACTS
Use of Interest Rate Futures Contracts. Bond prices are established in
both the cash market and the futures market. In the cash market, bonds are
purchased and sold with payment for the full purchase price of the bond being
made in cash, generally within five business days after the trade. In the
futures market, only a contract is made to purchase or sell a bond in the future
for a set price on a certain date. Historically, the prices for bonds
established in the futures markets have tended to move generally in the
aggregate in concert with the cash market prices and have maintained fairly
predictable relationships. Accordingly, a Portfolio may use interest rate
futures as a defense, or hedge, against anticipated interest rate changes and
not for speculation. As described below, this would include the use of futures
contract sales to protect against expected increases in interest rates and
futures contract purchases to offset the impact of interest rate declines.
A Portfolio presently could accomplish a similar result to that which
it hopes to achieve through the use of futures contracts by selling bonds with
long maturities and investing in bonds with short maturities when interest rates
are expected to increase, or conversely, selling short-term bonds and investing
in long-term bonds when interest rates are expected to decline. However,
because of the liquidity that is often available in the futures market the
protection is more likely to be achieved, perhaps at a lower cost and without
changing the rate of interest being earned by a Portfolio, through using futures
contracts.
Description of Interest Rate Futures Contracts. An interest rate
futures contract sale would create an obligation by a Portfolio, as seller, to
deliver the specific type of financial instrument called for in the contract at
a specific future time for a specified price. A futures contract purchase would
create an obligation by a Portfolio, as purchaser, to take delivery of the
specific type of financial instrument at a specific future time at a specific
price. The specific securities delivered or taken, respectively, at settlement
date, would not be determined until at or near that date. The determination
would be in accordance with the rules of the exchange on which the futures
contract sale or purchase was made.
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Although interest rate futures contracts by their terms call for actual
delivery or acceptance of securities, in most cases the contracts are closed out
before the settlement date without the making or taking of delivery of
securities. Closing out a futures contract sale is effected by the Portfolio's
entering into a futures contract purchase for the same aggregate amount of the
specific type of financial instrument and the same delivery date. If the price
in the sale exceeds the price in the offsetting purchase, the Portfolio is paid
the difference and thus realizes a gain. If the offsetting purchase price
exceeds the sale price, the Portfolio pays the difference and realizes a loss.
Similarly, the closing out of a futures contract purchase is effected by the
Portfolio's entering into a futures contract sale. If the offsetting sale price
exceeds the purchase price, the Portfolio realizes a gain, and if the purchase
price exceeds the offsetting sale price, the Portfolio realizes a loss.
Interest rate futures contracts are traded in an auction environment on
the floors of several exchanges - principally, the Chicago Board of Trade and
the Chicago Mercantile Exchange. A Portfolio would deal only in standardized
contracts on recognized exchanges. Each exchange guarantees performance under
contract provisions through a clearing corporation, a nonprofit organization
managed by the exchange membership.
A public market now exists in futures contracts covering various
financial instruments including long-term United States Treasury bonds and
notes; Government National Mortgage Association (GNMA) modified pass-through
mortgage-backed securities; three-month United States Treasury bills; and
ninety-day commercial paper. A Portfolio may trade in any futures contract for
which there exists a public market, including, without limitation, the foregoing
instruments.
Examples of Futures Contract Sale. A Portfolio would engage in an
interest rate futures contract sale to maintain the income advantage from
continued holding of a long-term bond while endeavoring to avoid part or all of
the loss in market value that would otherwise accompany a decline in long-term
securities prices. Assume that the market value of a certain security in the
Portfolio corresponding to the Flexible Bond Fund tends to move in concert with
the futures market prices of long-term United States Treasury bonds ("Treasury
bonds"). The investment adviser wishes to fix the current market value of this
portfolio security until some point in the future. Assume the portfolio
security has a market value of 100, and the investment adviser believes that,
because of an anticipated rise in interest rates, the value will decline to 95.
The Portfolio might enter into futures contract sales of Treasury bonds for an
equivalent of 98. If the market value of the portfolio security does indeed
decline
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from 100 to 95, the equivalent futures market price for the Treasury bonds might
also decline from 98 to 93.
In that case, the five-point loss in the market value of the portfolio
security would be offset by the five-point gain realized by closing out the
futures contract sale. Of course, the futures market price of Treasury bonds
might well decline to more than 93 or to less than 93 because of the imperfect
correlation between cash and futures prices mentioned below.
The investment adviser could be wrong in its forecast of interest rates
and the equivalent futures market price could rise above 98. In this case, the
market value of the portfolio securities, including the portfolio security being
protected, would increase. The benefit of this increase would be reduced by the
loss realized on closing out the futures contract sale.
If interest rate levels did not change, the Portfolio in the above
example might incur a loss of 2 points (which might be reduced by an off-setting
transaction prior to the settlement date). In each transaction, transaction
expenses would also be incurred.
Examples of Futures Contract Purchase. A Portfolio would engage in an
interest rate futures contract purchase when it is not fully invested in
long-term bonds but wishes to defer for a time the purchase of long-term bonds
in light of the availability of advantageous interim investments, e.g.,
shorter-term securities whose yields are greater than those available on
long-term bonds. The Portfolio's basic motivation would be to maintain for a
time the income advantage from investing in the short-term securities; the
Portfolio would be endeavoring at the same time to eliminate the effect of all
or part of an expected increase in market price of the long-term bonds that the
Portfolio may purchase.
For example, assume that the market price of a long-term bond that the
Portfolio corresponding to the Flexible Bond Fund may purchase, currently
yielding 10%, tends to move in concert with futures market prices of Treasury
bonds. The investment adviser wishes to fix the current market price (and thus
10% yield) of the long-term bond until the time (four months away in this
example) when it may purchase the bond. Assume the long-term bond has a market
price of 100, and the investment adviser believes that, because of an
anticipated fall in interest rates, the price will have risen to 105 (and the
yield will have dropped to about 9 1/2%) in four months. The Portfolio might
enter into futures contracts purchases of Treasury bonds for an equivalent price
of 98. At the same time, the Portfolio would assign a pool of investments in
short-term securities that are either maturing in four months or earmarked for
sale in four
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months, for purchase of the long-term bond at an assumed market price of 100.
Assume these short-term securities are yielding 15%. If the market price of the
long-term bond does indeed rise from 100 to 105, the equivalent futures market
price for Treasury bonds might also rise from 98 to 103. In that case, the
5-point increase in the price that the Portfolio pays for the long-term bond
would be offset by the 5-point gain realized by closing out the futures contract
purchase.
The investment adviser could be wrong in its forecast of interest
rates; long-term interest rates might rise to above 10%; and the equivalent
futures market price could fall below 98. If short-term rates at the same time
fall to 10% or below, it is possible that the Portfolio would continue with its
purchase program for long-term bonds. The market price of available long- term
bonds would have decreased. The benefit of this price decrease, and thus yield
increase, will be reduced by the loss realized on closing out the futures
contract purchase.
If, however, short-term rates remained above available long-term rates,
it is possible that the Portfolio would discontinue its purchase program for
long-term bonds. The yield on short-term securities in the portfolio, including
those originally in the pool assigned to the particular long-term bond, would
remain higher than yields on long-term bonds. The benefit of this continued
incremental income will be reduced by the loss realized on closing out the
futures contract purchase. In each transaction, expenses would also be
incurred.
II. STOCK INDEX FUTURES CONTRACTS
A stock index assigns relative values to the stocks included in the
index and the index fluctuates with changes in the market values of the stocks
included. A stock index futures contract is a bilateral agreement pursuant to
which two parties agree to take or make delivery of an amount of cash equal to a
specified dollar amount times the difference between the stock index value
(which assigns relative values to the common stocks included in the index) at
the close of the last trading day of the contract and the price at which the
futures contract is originally struck. No physical delivery of the underlying
stocks in the index is made. Some stock index futures contracts are based on
broad market indices, such as the Standard & Poor's 500 or the New York Stock
Exchange Composite Index. In contrast, certain exchanges offer futures
contracts on narrower market indices, such as the Standard & Poor's 100 or
indices based on an industry or market segment, such as oil and gas stocks.
Futures contracts are traded on organized exchanges regulated by the Commodity
Futures Trading Commission. Transactions on such exchanges are cleared through
a clearing corporation, which guarantees the performance of the parties to each
contract.
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The Portfolios corresponding to the Blue Chip Fund and Asset Allocation
Fund will sell stock index futures contracts in order to offset a decrease in
market value of their respective portfolio securities that might otherwise
result from a market decline. The Portfolios may do so either to hedge the
value of their respective portfolios as a whole, or to protect against declines,
occurring prior to sales of securities, in the value of the securities to be
sold. Conversely, the Portfolios will purchase stock index futures contracts in
anticipation of purchases of securities. In a substantial majority of these
transactions, the Portfolios will purchase such securities upon termination of
the long futures position, but a long futures position may be terminated without
a corresponding purchase of securities.
In addition, the Portfolios corresponding to the Blue Chip Fund and
Asset Allocation Fund may utilize stock index futures contracts in anticipation
of changes in the composition of their respective portfolio holdings. For
example, in the event that a Portfolio expects to narrow the range of industry
groups represented in its holdings it may, prior to making purchases of the
actual securities, establish a long futures position based on a more restricted
index, such as an index comprised of securities of a particular industry group.
The Portfolios may also sell futures contracts in connection with this strategy,
in order to protect against the possibility that the value of the securities to
be sold as part of the restructuring of their respective portfolios will decline
prior to the time of sale.
The following are examples of transactions in stock index futures (net
of commissions and premiums, if any).
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ANTICIPATORY PURCHASE HEDGE: Buy the Future
Hedge Objective: Protect Against Increasing Price
<TABLE>
<CAPTION>
Portfolio Futures
--------- -------
<S> <C>
-Day Hedge is Placed-
Anticipate Buying $62,500 Buying 1 Index Futures
Blue Chip Fund at 125
Value of Futures =
$62,500/Contract
-Day Hedge is Lifted-
Buy Blue Chip Fund with Sell 1 Index Futures at 130
Actual Cost = $65,000 Value of Futures = $65,000/
Increase in Purchase Price = Contract
$2,500 Gain on Futures = $2,500
HEDGING A STOCK PORTFOLIO: Sell the Future
Hedge Objective: Protect Against Declining
Value of the Fund
Factors:
Value of Stock Fund = $1,000,000
Value of Futures Contract = 125 x $500 = $62,500
Fund Beta Relative to the Index = 1.0
<CAPTION>
Portfolio Futures
--------- -------
<S> <C>
-Day Hedge is Placed-
Anticipate Selling $1,000,000 Sell 16 Index Futures at 125
Blue Chip Fund Value of Futures = $1,000,000
-Day Hedge is Lifted-
Blue Chip Fund-Own Buy 16 Index Futures at 120
Stock with Value = $960,000 Value of Futures = $960,000
Loss in Fund Value = $40,000 Gain on Futures = $40,000
</TABLE>
If, however, the market moved in the opposite direction, that
is, market value decreased and a Portfolio had entered into an anticipatory
purchase hedge, or market value increased and a Portfolio had hedged its stock
portfolio, the results of the Portfolio's transactions in stock index futures
would be as set forth below.
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ANTICIPATORY PURCHASE HEDGE: Buy the Future
Hedge Objective: Protect Against Increasing Price
<TABLE>
<CAPTION>
Portfolio Futures
--------- -------
<S> <C>
-Day Hedge is Placed-
Anticipate Buying $62,500 Buying 1 Index Futures at 125
Blue Chip Fund Value of Futures = $62,500/
Contract
-Day Hedge is Lifted-
Buy Blue Chip Fund with Sell 1 Index Futures at 120
Actual Cost - $60,000 Value of Futures = $60,000/
Decrease in Purchase Price = $2,500 Contract
Loss on Futures = $2,500
HEDGING A STOCK PORTFOLIO: Sell the Future
Hedge Objective: Protect Against Declining
Value of the Fund
Factors:
Value of Stock Fund = $1,000,000
Value of Futures Contract = 125 x $500 = $62,500
Fund Beta Relative to the Index = 1.0
<CAPTION>
Portfolio Futures
--------- -------
<S> <C>
-Day Hedge is Placed-
Anticipate Selling $1,000,000 Sell 16 Index Futures at 125
Blue Chip Fund Value of Futures = $1,000,000
-Day Hedge is Lifted-
Blue Chip Fund-Own Buy 16 Index Futures at 130
Stock with Value = $1,040,000 Value of Futures = $1,040,000
Gain in Fund Value = $40,000 Loss of Futures = $40,000
</TABLE>
III. MARGIN PAYMENTS
Unlike when a Portfolio purchases or sells a security, no price is paid
or received by the Portfolio upon the purchase or sale of a futures contract.
Initially, the Portfolio will be required to deposit with the broker or in a
segregated account with the Portfolio's custodian an amount of cash or cash
equivalents, the value of which may vary but is generally equal to 10% or less
of the value of the contract. This amount is known as initial margin. The
nature of initial margin in futures transactions is different from that of
margin in security transactions in that futures contract margin does not involve
the borrowing of funds by the customer to finance the transactions. Rather, the
initial margin is in the nature of a performance bond or good faith deposit on
the contract which is returned to the Portfolio upon termination of the futures
contract assuming all
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contractual obligations have been satisfied. Subsequent payments, called
variation margin, to and from the broker, will be made on a daily basis as the
price of the underlying instruments fluctuates making the long and short
positions in the futures contract more or less valuable, a process known as
marking-to-market. For example, when a Portfolio has purchased a futures
contract and the price of the contract has risen in response to a rise in the
underlying instruments, that position will have increased in value and the
Portfolio will be entitled to receive from the broker a variation margin payment
equal to that increase in value. Conversely, where a Portfolio has purchased a
futures contract and the price of the future contract has declined in response
to a decrease in the underlying instruments, the position would be less valuable
and the Portfolio would be required to make a variation margin payment to the
broker. At any time prior to expiration of the futures contract, the investment
advisor may elect to close the position by taking an opposite position, subject
to the availability of a secondary market, which will operate to terminate the
Portfolio's position in the futures contract. A final determination of
variation margin is then made, additional cash is required to be paid by or
released to the Portfolio, and the Portfolio realizes a loss or gain.
IV. RISKS OF TRANSACTIONS IN FUTURES CONTRACTS
There are several risks in connection with the use of futures in the
Portfolios as a hedging device. One risk arises because of the imperfect
correlation between movements in the price of the future and movements in the
price of the securities which are the subject of the hedge. The price of the
future may move more than or less than the price of the securities being hedged.
If the price of the future moves less than the price of the securities which are
the subject of the hedge, the hedge will not be fully effective but, if the
price of the securities being hedged has moved in an unfavorable direction, the
Portfolio would be in a better position than if it had not hedged at all. If
the price of the securities being hedged has moved in a favorable direction,
this advantage will be partially offset by the loss on the future. If the price
of the future moves more than the price of the hedged securities, the Portfolio
involved will experience either a loss or gain on the future which will not be
completely offset by movements in the price of the securities which are the
subject of the hedge. To compensate for the imperfect correlation of movements
in the price of securities being hedged and movements in the price of futures
contracts, a Portfolio may buy or sell futures contracts in a greater dollar
amount than the dollar amount of securities being hedged if the volatility over
a particular time period of the prices of such securities has been greater than
the volatility over such time period of the future, or if otherwise deemed to be
appropriate by the investment
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adviser. Conversely, a Portfolio may buy or sell fewer futures contracts if the
volatility over a particular time period of the prices of the securities being
hedged is less than the volatility over such time period of the futures contract
being used, or if otherwise deemed to be appropriate by the adviser. It is also
possible that, where the Portfolio has sold futures to hedge its portfolio
against a decline in the market, the market may advance and the value of
securities held in the Portfolio may decline. If this occurred, the Portfolio
would lose money on the future and also experience a decline in value in its
portfolio securities.
Where futures are purchased to hedge against a possible increase in the
price of securities before a Portfolio is able to invest its cash (or cash
equivalents) in securities (or options) in an orderly fashion, it is possible
that the market may decline instead; if the Portfolio then concludes not to
invest in securities or options at that time because of concern as to possible
further market decline or for other reasons, the Portfolio will realize a loss
on the futures contract that is not offset by a reduction in the price of
securities purchased.
In instances involving the purchase of futures contracts by a
Portfolio, an amount of cash and cash equivalents, equal to the market value of
the futures contracts, will be deposited in a segregated account with the
Portfolio's custodian and/or in a margin account with a broker to collateralize
the position and thereby insure that the use of such futures is unleveraged.
In addition to the possibility that there may be an imperfect
correlation, or no correlation at all, between movements in the futures and the
securities being hedged, the price of futures may not correlate perfectly with
movement in the cash market due to certain market distortions. Rather than
meeting additional margin deposit requirements, investors may close futures
contracts through off-setting transactions which could distort the normal
relationship between the cash and futures markets. Second, with respect to
financial futures contracts, the liquidity of the futures market depends on
participants entering into off-setting transactions rather than making or
taking delivery. To the extent participants decide to make or take delivery,
liquidity in the futures market could be reduced thus producing distortions.
Third, from the point of view of speculators, the deposit requirements in the
futures market are less onerous than margin requirements in the securities
market. Therefore, increased participation by speculators in the futures market
may also cause temporary price distortions. Due to the possibility of price
distortion in the futures market, and because of the imperfect correlation
between the movements in the cash market and movements in the price of
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futures, a correct forecast of general market trends or interest rate movements
by the adviser may still not result in a successful hedging transaction over a
short time frame.
Positions in futures may be closed out only on an exchange or board of
trade which provides a secondary market for such futures. Although the
Portfolios intend to purchase or sell futures only on exchanges or boards of
trade where there appear to be active secondary markets, there is no assurance
that a liquid secondary market on any exchange or board of trade will exist for
any particular contract or at any particular time. In such event, it may not be
possible to close a futures investment position, and in the event of adverse
price movements, the Portfolio would continue to be required to make daily cash
payments of variation margin. However, in the event futures contracts have been
used to hedge portfolio securities, such securities will not be sold until the
futures contract can be terminated. In such circumstances, an increase in the
price of the securities, if any, may partially or completely offset losses on
the futures contract. However, as described above, there is no guarantee that
the price of the securities will in fact correlate with the price movements in
the futures contract and thus provide an offset on a futures contract.
Further, it should be noted that the liquidity of a secondary market in
a futures contract may be adversely affected by "daily price fluctuation limits"
established by commodity exchanges which limit the amount of fluctuation in a
futures contract price during a single trading day. Once the daily limit has
been reached in the contract, no trades may be entered into at a price beyond
the limit, thus preventing the liquidation of open futures positions.
Successful use of futures by a Portfolio is also subject to the
investment adviser's ability to predict correctly movements in the direction of
the market. For example, if a Portfolio has hedged against the possibility of a
decline in the market adversely affecting securities held by it and securities
prices increase instead, the Portfolio will lose part of all of the benefit to
the increased value of its securities which it has hedged because it will have
offsetting losses in its futures positions. In addition, in such situations, if
the Portfolio has insufficient cash, it may have to sell securities to meet
daily variation margin requirements. Such sales of securities may be, but will
not necessarily be, at increased prices which reflect the rising market. A
Portfolio may have to sell securities at a time when it may be disadvantageous
to do so.
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V. OPTIONS ON FUTURES CONTRACTS
Each Portfolio may purchase options on the futures contracts described
above. A futures option gives the holder, in return for the premium paid, the
right to buy (call) from or sell (put) to the writer of the option a futures
contract at a specified price at any time during the period of the option. Upon
exercise, the writer of the option is obligated to pay the difference between
the cash value of the futures contract and the exercise price. Like the buyer
or seller of a futures contract, the holder, or writer, of an option has the
right to terminate its position prior to the scheduled expiration of the option
by selling, or purchasing, an option of the same series, at which time the
person entering into the closing transaction will realize a gain or loss.
Investments in futures options involve some of the same considerations
that are involved in connection with investments in futures contracts (for
example, the existence of a liquid secondary market). In addition, the purchase
of an option also entails the risk that changes in the value of the underlying
futures contract will not be fully reflected in the value of the option
purchased. Depending on the pricing of the option compared to either the futures
contract upon which it is based, or upon the price of the securities being
hedged, an option may or may not be less risky than ownership of the futures
contract or such securities. In general, the market prices of options can be
expected to be more volatile than the market prices on the underlying futures
contract. Compared to the purchase or sale of futures contracts, however, the
purchase of call or put options on futures contracts may frequently involve less
potential risk to the Portfolios because the maximum amount at risk is the
premium paid for the options (plus transaction costs). Although permitted by
their fundamental investment policies, the Portfolios do not currently intend to
write futures options, and will not do so in the future absent any necessary
regulatory approvals.
VI. OTHER HEDGING TRANSACTIONS
The Portfolios corresponding to the Blue Chip, Flexible Bond and Asset
Allocation Funds presently intend to use interest rate futures contracts and,
additionally, the Portfolios corresponding to the Blue Chip and Asset Allocation
Funds presently intend to use stock index futures contract in connection with
their hedging activities. Nevertheless, each of these Portfolios is authorized
to enter into hedging transactions in any other futures or options contracts
which are currently traded or which may subsequently become available for
trading. Such instruments may be employed in connection with the Portfolios'
hedging strategies if, in the judgment of the
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investment adviser, transactions therein are necessary or advisable.
VII. ACCOUNTING AND TAX TREATMENT
Accounting for futures contracts and related options will be in
accordance with generally accepted accounting principles.
Generally, futures contracts and options on futures contracts held by a
Portfolio at the close of the Portfolio's taxable year will be treated for
federal income tax purposes as sold for their fair market value on the last
business day of such year, a process known as "marking-to-market." Forty
percent of any gain or loss resulting from such constructive sale will be
treated as short-term capital gain or loss and 60% of such gain or loss will be
treated as long-term capital gain or loss without regard to the length of time
the Portfolio holds the futures contract or option ("the 40%-60% rule"). The
amount of any capital gain or loss actually realized by a Portfolio in a
subsequent sale or other disposition of those futures contracts or options will
be adjusted to reflect any capital gain or loss taken into account by a
Portfolio in a prior year as a result of the constructive sale of the contracts
or options. With respect to futures contracts to sell, which will be regarded
as parts of a "mixed straddle" because their values fluctuate inversely to the
values of specific securities held by a Portfolio, losses as to such contracts
to sell will be subject to certain loss deferral rules which limit the amount of
loss currently deductible on either part of the straddle to the amount thereof
which exceeds the unrecognized gain (if any) with respect to the other part of
the straddle, and to certain wash sales regulations. Under short sales rules,
which will also be applicable, the holding period of the securities forming part
of the straddle will (if they have not been held for the long-term holding
period) be deemed not to begin prior to termination of the straddle. With
respect to certain futures contracts and related options, deductions for
interest and carrying charges will not be allowed. Notwithstanding the rules
described above, with respect to futures contracts to sell which are properly
identified as such, a Portfolio may make an election which will exempt (in whole
or in part) those identified futures contracts from being treated for federal
income tax purposes as sold on the last business day of the Portfolio's taxable
year, but gains and losses will be subject to such short sales, wash sales and
loss deferral rules and the requirement to capitalize interest and carrying
charges. Under Temporary Regulations, a Portfolio would be allowed (in lieu of
the foregoing) to elect either (1) to offset gains or losses from portions which
are part of a mixed straddle by separately identifying each mixed straddle to
which such treatment applies, or (2) to establish a mixed straddle
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<PAGE> 523
account for which gains and losses would be recognized and offset on a periodic
basis during the taxable year. Under either election, the 40%-60% rule will
apply to the net gain or loss attributable to the futures contracts, but in the
case of a mixed straddle account election, not more than 50 percent of any net
gain may be treated as long-term and no more than 40 percent of any net loss may
be treated as short-term.
With respect to the Portfolios corresponding to the Flexible Bond Fund
and Asset Allocation Fund, some investments may be subject to special rules
which govern the federal income tax treatment of certain transactions
denominated in terms of a currency other than the U.S. dollar or determined by
reference to the value of one or more currencies other than the U.S. dollar. The
types of transactions covered by the special rules include the following: (i)
the acquisition of, or becoming the obligor under, a bond or other debt
instrument (including, to the extent provided in Treasury regulations, preferred
stock); (ii) the accruing of certain trade receivables and payables; and (iii)
the entering into or acquisition of any forward contract, futures contract,
option and similar financial instrument. However, regulated futures contracts
and non-equity options are generally not subject to the special currency rules
if they are or would be treated as sold for their fair market value at year-end
under the marking-to-market rules, unless an election is made to have such
currency rules apply. The disposition of a currency other than the U.S. dollar
by a U.S. taxpayer is also treated as a transaction subject to the special
currency rules. With respect to transactions covered by the special rules,
foreign currency gain or loss is calculated separately from any gain or loss on
the underlying transaction and is normally taxable as ordinary gain or loss. A
taxpayer may elect to treat as capital gain or loss foreign currency gain or
loss arising from certain identified forward contracts, futures contracts and
options that are capital assets in the hands of the taxpayer and which are not
part of a straddle. In accordance with Treasury regulations, certain
transactions subject to the special currency rules that are part of a "section
988 hedging transaction" (as defined in the Code and the Treasury regulations)
will be integrated and treated as a single transaction or otherwise treated
consistently for purposes of the Code. "Section 988 hedging transactions" are
not subject to the mark-to-market or loss deferral rules under the Code. It is
anticipated that some of the non-U.S. dollar denominated investments and foreign
currency contracts that such Funds may make or may enter into will be subject to
the special currency rules described above. Gain or loss attributable to the
foreign currency component of transactions engaged in by a Fund which are not
subject to special currency rules (such as foreign equity investments other than
certain preferred stocks) will be treated as capital gain or loss and will not
be segregated from the gain or loss on the underlying transaction.
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Qualification as a regulated investment company under the Code requires
that each Fund satisfy certain requirements with respect to the source of its
income during a taxable year. At least 90% of the gross income of each Fund
must be derived from dividends, interests, payments with respect to securities
loans, gains from the sale or other disposition of stock, securities or foreign
currencies, and other income (including but not limited to gains from options,
futures, or forward contracts) derived with respect to the Fund's business of
investing in such stock, securities or currencies. The Treasury Department may
by regulation exclude from qualifying income foreign currency gains which are
not directly related to a Fund's principal business of investing in stock or
securities, or options and futures with respect to stock or securities. Any
income derived by a Fund from a partnership or trust is treated as derived with
respect to the Fund's business of investing in stock, securities or currencies
only to the extent that such income is attributable to items of income which
would have been qualifying income if realized by the Fund in the same manner as
by the partnership or trust.
An additional requirement for qualification as a regulated investment
company under the Code is that less than 30% of a Fund's gross income must be
derived from gains realized on the sale or other disposition of the following
investments held for less than three moths: (1) stock and securities (as
defined in section 2(a)(36) of the Investment Company Act of 1940); (2) options,
futures and forward contracts other than those on foreign currencies; and (3)
foreign currencies (and options, futures and forward contracts on foreign
currencies) that are not directly related to a Fund's principal business of
investing in stock and securities (and options and futures with respect to
stocks and securities). With respect to futures contracts and other financial
instruments subject to the marking-to-market rules, the Internal Revenue Service
has ruled in private letter rulings that a gain realized from such a futures
contract or financial instrument will be treated as being derived from a
security held for three months or more (regardless of the actual period for
which the contract or instrument is held) if the gain arises as a result of a
constructive sale under the marking-to-market rules, and will be treated as
being derived from a security held for less than three months only if the
contract or instrument is terminated (or transferred) during the taxable year
(other than by reason of marking-to-market) and less than three months have
elapsed between the date the contract or instrument is acquired and the
termination date. In determining whether the 30% test is met for a taxable year,
increases and decreases in the value of each Fund's futures contracts and other
investments that qualify as part of a "designated hedge," as defined in the
Code, may be netted.
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PACIFIC HORIZON FUNDS, INC.
(THE "COMPANY")
PART B
STATEMENT OF ADDITIONAL INFORMATION
FOR THE
NATIONAL MUNICIPAL BOND FUND
JULY 1, 1995
(AS REVISED DECEMBER 8, 1995)
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
The Company . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Investment Objectives and Policies . . . . . . . . . . . . . . 2
Additional Purchase and Redemption Information . . . . . . . . 14
Additional Information Concerning Taxes . . . . . . . . . . . . 21
Management . . . . . . . . . . . . . . . . . . . . . . . . . . 24
General Information . . . . . . . . . . . . . . . . . . . . . . 46
Appendix A . . . . . . . . . . . . . . . . . . . . . . . . . . A-1
Appendix B . . . . . . . . . . . . . . . . . . . . . . . . . . B-1
</TABLE>
This Statement of Additional Information applies to the Pacific Horizon
National Municipal Bond Fund (the "Fund") of the Company. This Statement of
Additional Information is meant to be read in conjunction with the Prospectus
dated July 1, 1995, as may from time to time be revised (the "Prospectus"),
which describes the Fund. This Statement of Additional Information is
incorporated by reference in its entirety into the Prospectus. Because this
Statement of Additional Information is not itself a prospectus, no investment in
shares of the Fund should be made solely upon the information contained herein.
Copies of the Prospectus may be obtained by calling Concord Financial Group,
Inc. at 800-332-3863. Capitalized terms used but not defined herein have the
same meaning as in the Prospectus.
<PAGE> 526
THE COMPANY
The Company was organized on October 27, 1982 as a Maryland
corporation.
The Fund commenced operations on January 28, 1994. The Fund seeks to
achieve its investment objective by investing substantially all of its assets in
a diversified investment portfolio of an open-end management investment company
(the "Portfolio") having the same investment objective as that of the Fund.
The Company also offers other investment portfolios which are described
in separate Prospectuses and Statements of Additional Information. For
information concerning these other portfolios contact the Distributor at the
telephone number stated on the cover page of this Statement of Additional
Information.
INVESTMENT OBJECTIVES AND POLICIES
The Prospectus for the Fund describes the investment objective of the
Fund and the Portfolio. Since the investment characteristics of the Fund will
correspond to those of the Portfolio, the following is a discussion of the
various investments of and techniques employed by the Portfolio. The following
information supplements and should be read in conjunction with the description
of the investment objective and policies for the Portfolio in the Prospectus for
the Fund.
PORTFOLIO TRANSACTIONS
The portfolio turnover rate is calculated by dividing the lesser of
purchases or sales of portfolio securities for the year by the monthly average
value of the portfolio securities. The calculation excludes all securities whose
maturities at the time of acquisition were one year or less. Portfolio turnover
may vary greatly from year to year as well as within a particular year, and may
also be affected by cash requirements for redemptions of shares and by
requirements which enable the Company to receive certain favorable tax
treatment. Portfolio turnover will not be a limiting factor in making portfolio
decisions. For the fiscal year ended February 28, 1995, and for the period from
January 28, 1994 (commencement of operations) through February 28, 1994, the
portfolio turnover rate for the Portfolio was 6.19% and 0%, respectively.
Subject to the general control of the Portfolio's Board of Trustees,
Bank of America National Trust and Savings Association ("Bank of America" or the
"investment adviser") is responsible for, makes decisions with respect to, and
places orders for, all purchases and sales of portfolio securities for the
Portfolio. Securities purchased and sold by the Portfolio
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are generally principal transactions without brokerage commissions. The cost
of securities purchased by the Portfolio from underwriters generally includes
an underwriting commission or concession, and the prices at which securities
are purchased from and sold to dealers include a dealer's mark-up or mark-down.
For the fiscal year ended February 28, 1995, and for the period from January
28, 1994 (commencement of operations) through February 28, 1994, the Portfolio
paid no brokerage commissions.
In executing portfolio transactions and selecting brokers or dealers,
it is the Portfolio's policy to seek the best overall terms available. The
Investment Advisory Agreement between the Portfolio and Bank of America provides
that, in assessing the best overall terms available for any transaction, Bank of
America shall consider factors it deems relevant, including the breadth of the
market in the security, the price of the security, the financial condition and
execution capability of the broker or dealer, and the reasonableness of the
commission, if any, for the specific transaction and on a continuing basis. In
addition, the Investment Advisory Agreement authorizes Bank of America, subject
to the approval of the Board of Trustees of the Portfolio, to cause the
Portfolio to pay a broker-dealer which furnishes brokerage and research services
a higher commission than that which might be charged by another broker-dealer
for effecting the same transaction, provided that such commission is deemed
reasonable in terms of either that particular transaction or the overall
responsibilities of Bank of America to the Fund, Company or Portfolio. Brokerage
and research services may include: (1) advice as to the value of securities, the
advisability of investing in, purchasing or selling securities and the
availability of securities or purchasers or sellers of securities; and (2)
analyses and reports concerning industries, securities, economic factors and
trends, portfolio strategy and the performance of accounts.
It is possible that certain of the brokerage and research services
received will primarily benefit one or more other investment companies or other
accounts for which investment discretion is exercised. Conversely, the Portfolio
may be the primary beneficiary of the brokerage or research services received as
a result of portfolio transactions effected for such other accounts or
investment companies.
Brokerage and research services so received are in addition to and not
in lieu of services required to be performed by Bank of America and do not
reduce the advisory fee payable to Bank of America. Such services may be useful
to Bank of America in serving both the Company, the Portfolio and other clients
and, conversely, services obtained by the placement of business of other clients
may be useful to Bank of America in carrying out its obligations to the Company
and the Portfolio. In connection with its investment management services with
respect to the
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<PAGE> 528
Portfolio, Bank of America will not acquire certificates of deposit or other
securities issued by itself or its affiliates, and will give no preference to
certificates of deposit or other securities issued by Service Organizations.
In addition, portfolio securities in general will be purchased from and sold to
affiliates of the Company, the Portfolio, Bank of America, the Distributor and
their affiliates acting as principal, underwriter, syndicate member,
market-maker, dealer, broker or in any similar capacity, provided such
purchase, sale or dealing is permitted under the Investment Company Act of 1940
(the "1940 Act") and the rules thereunder.
The Portfolio may participate, if and when practicable, in bidding for
the purchase of securities of the U.S. Government and its agencies and
instrumentalities directly from an issuer in order to take advantage of the
lower purchase price available to members of a bidding group. The Portfolio will
engage in this practice only when Bank of America, in its sole discretion,
subject to guidelines adopted by the Board of Trustees of the Portfolio,
believes such practice to be in the interest of the Portfolio.
To the extent permitted by law, Bank of America may aggregate the
securities to be sold or purchased on behalf of the Portfolio with those to be
sold or purchased for other investment companies or common trust funds in order
to obtain best execution.
The Company is required to identify any securities of its regular
brokers or dealers (as defined in Rule 10b-1 under the 1940 Act or their parents
held by the Company as of the close of its most recent fiscal year. As of
February 28, 1995: (a) the Treasury Fund held the following securities,
Repurchase Agreement with Goldman, Sachs & Co. in the principal amount of
$95,000,000; Repurchase Agreement with Merrill Lynch Government Securities, Inc.
in the principal amount of $95,000,000; (b) the Prime Fund held the following
securities, Merrill Lynch & Co., Inc., commercial paper in the principal amount
of $l00,000,000; Goldman, Sachs Group L.P., Daily Variable Rate Master Note in
the principal amount of $120,000,000; Morgan Stanley Group, Inc., Daily Variable
Rate Master Note in the principal amount of $120,000,000; Bear Stearns Co.,
Inc., Series B, Monthly Variable Rate Note in the principal amount of
$100,000,000; Repurchase Agreement with Goldman, Sachs & Co. in the principal
amount of $120,000,000; (c) the Government Fund held the following securities,
Repurchase Agreement with Goldman, Sachs & Co. in the principal amount of
$40,000,000; Repurchase Agreement with Merrill Lynch Government Securities, Inc.
in the principal amount of $40,000,000; and (d) the Prime Value Fund held the
following securities, Merrill Lynch & Co., Inc., commercial paper in the
principal amount of $7,000,000; Goldman, Sachs Group L.P., Daily Variable Rate
Master Note in the principal amount of $7,000,000;
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<PAGE> 529
Repurchase Agreement with Dean Witter Reynolds, Inc. in the principal amount of
$8,000,000; Repurchase Agreement with Goldman, Sachs & Co. in the principal
amount of $8,000,000.
Merrill Lynch & Co., Inc., Goldman Sachs & Co., Bear Stearns Co., Inc.,
Morgan Stanley & Co. Incorporated, Shearson Lehman Brothers, Inc., Dean Witter
Reynolds, Inc. and Paine Webber are considered to be regular brokers and dealers
of the Company.
TYPES OF OBLIGATIONS, INVESTMENT RISKS, AND OTHER INVESTMENT INFORMATION
Municipal Securities. The Portfolio currently intends that under
ordinary market conditions 80% of its total assets will be invested in municipal
securities. This is not, however, a fundamental investment policy.
Municipal Securities are debt obligations issued to obtain funds for
various public purposes, including the construction of a wide range of public
facilities, the refunding of outstanding obligations, the payment of general
operating expenses and the extension of loans to public institutions and
facilities. In addition, certain types of private activity bonds (including
industrial development bonds under prior law) are issued by or on behalf of
public authorities to finance various privately-operated facilities. Such
obligations are included within the term Municipal Securities if the interest
paid thereon is exempt from regular Federal income tax.
The Portfolio may purchase short-term Tax Anticipation Notes, Bond
Anticipation Notes, Revenue Anticipation Notes and other forms of short-term
tax-exempt loans. Such notes are issued with a short-term maturity in
anticipation of the receipt of tax funds, the proceeds of bond placements or
other revenues. The Portfolio may also purchase tax-exempt commercial paper.
There are, of course, variations in the quality of Municipal
Securities, both within a particular classification and between classifications,
and the yields on Municipal Securities 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.
The ratings of Moody's Investors Service, Inc. ("Moody's"), Standard & Poor's
Ratings Group, Division of McGraw Hill ("S&P"), Fitch Investor's Service, Inc.
("Fitch") and Duff & Phelps Credit Rating Co. ( "D&P") represent their opinions
as to the quality of Municipal Securities. It should be emphasized, however,
that ratings are general and are not absolute standards of quality, and
Municipal Securities with the same maturity, interest rate and rating may have
different yields while
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<PAGE> 530
Municipal Securities of the same maturity and interest rate with different
ratings may have the same yield. Subsequent to its purchase by the Portfolio,
an issue of Municipal Securities may cease to be rated or its rating may be
reduced. The Portfolio's investment adviser will consider such an event in
determining whether the Portfolio should continue to hold the obligation.
An issuer's obligations under its Municipal 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. The power or ability of an issuer to meet its
obligations for the payment of interest on, and principal of, its Municipal
Securities may be materially adversely affected by litigation or other
conditions. Further, it should also be noted with respect to all Municipal
Securities 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 Securities to become taxable retroactive to the
date of issue.
Information about the financial condition of issuers of Municipal
Securities may be less available than about corporations a class of whose
securities is registered under the Securities Exchange Act of 1934.
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 Securities. For example, pursuant to federal tax
legislation passed in 1986, interest on certain private activity bonds must be
included in an investor's federal alternative minimum taxable income, and
corporate investors must include all tax-exempt interest in their federal
alternative minimum taxable income. (See the Fund's Prospectus under "Tax
Information.") Proposals to further restrict or eliminate the tax benefits of
municipal securities, while pending or if enacted, might materially adversely
affect the availability of Municipal Securities for investment by the Portfolio
and the liquidity and value of the Portfolio. In such an event, the Portfolio
and the Fund would re-evaluate its investment objective and policies and
consider changes in its structure or possible dissolution.
SHORT-TERM INVESTMENTS
As stated in the Fund's Prospectus, Bank of America may make short-term
investments pending investment, during temporary
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<PAGE> 531
defensive periods, or if, in the opinion of Bank of America, suitable
tax-exempt obligations are unavailable. The income earned from such
investments may be taxable and therefore not included in the "exempt-interest"
dividends the Fund may pay. The following discussion supplements the
description of such investments in the Prospectus.
Bank Certificates of Deposit and Bankers' Acceptances. Certificates of
deposit and bankers' acceptances are eligible investments for the Portfolio, as
described in the Fund's Prospectus. Certificates of deposit are negotiable
certificates issued against funds deposited in a commercial bank for a definite
period of time and earning a specified return. Bankers' acceptances are
negotiable drafts or bills of exchange, normally drawn by an importer or
exporter to pay for specific merchandise, which are "accepted" by a bank,
meaning, in effect, that the bank unconditionally agrees to pay the face value
of the instrument on maturity. Certificates of deposit and bankers acceptances
will be dollar-denominated obligations of domestic or foreign banks or
financial institutions with total assets at the time of purchase in excess of
$2.5 billion.
Commercial Paper and Short-Term Notes. The Portfolio may invest a
portion of its assets in commercial paper and short-term notes. Commercial paper
consists of unsecured promissory notes issued by corporations. Except as noted
below with respect to variable and floating rate instruments, issues of
commercial paper and short-term notes will normally have maturities of less than
9 months and fixed rates of return, although such instruments may have
maturities of up to one year. Commercial paper and short-term notes will consist
of issues rated at the time of purchase A-2 or higher by S&P, Prime-2 or higher
by Moody's, or similarly rated by another nationally recognized statistical
rating organization ("NRSRO"); or if unrated, will be determined by Bank of
America to be of comparable quality under procedures established by the Board of
Trustees of the Portfolio. These rating symbols are described in Appendix A.
Repurchase Agreements. The Portfolio is permitted to enter into
repurchase agreements with respect to its portfolio securities. Pursuant to such
agreements, the Portfolio acquires securities from financial institutions such
as banks and broker-dealers as are deemed to be creditworthy subject to the
seller's agreement to repurchase and the agreement of the Portfolio to resell
such securities at a mutually agreed upon date and price. Repurchase agreements
maturing in more than seven days will not exceed 15% of the value of the total
assets of the Portfolio. The Portfolio is not permitted to enter into repurchase
agreements with Bank of America or its affiliates, and will give no preference
to repurchase agreements with Service Organizations. The repurchase price
generally equals the price paid by the Portfolio plus interest negotiated on the
basis of
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<PAGE> 532
current short-term rates (which may be more or less than the rate on the
underlying portfolio security). Securities subject to repurchase agreements
will be held by the custodian or sub-custodian of the Portfolio or in the
Federal Reserve/Treasury Book-Entry System. The seller under a repurchase
agreement will be required to deliver instruments the value of which is 102% of
the repurchase price (excluding accrued interest), provided that
notwithstanding such requirement, the adviser shall require that the value of
the collateral, after transaction costs (including loss of interest) reasonably
expected to be incurred on a default, shall be equal to or greater than the
resale price (including interest) provided in the agreement. If the seller
defaulted on its repurchase obligation, the Portfolio would suffer a loss
because of adverse market action or to the extent that the proceeds from a sale
of the underlying securities were less than the repurchase price under the
agreement. Bankruptcy or insolvency of such a defaulting seller may cause the
Portfolio's rights with respect to such securities to be delayed or limited.
Income from repurchase agreements is taxable and therefore not included in the
"exempt-interest" dividends which the Fund will pay. Repurchase agreements are
considered to be loans by the Portfolio under the 1940 Act.
U.S. Government Obligations. The Portfolio is permitted to make
investments in U.S. Government obligations. Such obligations include Treasury
bills, certificates of indebtedness, notes and bonds, and issues of such
entities as the Government National Mortgage Association, Export-Import Bank of
the United States, Tennessee Valley Authority, Resolution Funding Corporation,
Farmers Home Administration, Federal Home Loan Banks, Federal Intermediate
Credit Banks, Federal Farm Credit Banks, Federal Land Banks, Federal Housing
Administration, Federal National Mortgage Association, Federal Home Loan
Mortgage Corporation, and the Student Loan Marketing Association. Treasury bills
have maturities of one year or less, Treasury notes have maturities of one to
ten years and Treasury bonds generally have maturities of more than ten years.
Some of these obligations, such as those of the Government National Mortgage
Association, are supported by the full faith and credit of the U.S. Treasury;
others, such as those of the Export-Import Bank of the United States, are
supported by the right of the issuer to borrow from the Treasury; others, such
as those of the Federal National Mortgage Association, are supported by the
discretionary authority of the U.S. Government to purchase the agency's
obligations; still others, such as those of the Student Loan Marketing
Association, are supported only by the credit of the instrumentality. No
assurance can be given that the U.S. Government would provide financial support
to U.S. Government sponsored instrumentalities if it is not obligated to do so
by law.
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<PAGE> 533
Reverse Repurchase Agreements. As described in the Prospectus, the
Portfolio is permitted to borrow funds for temporary purposes by entering into
reverse repurchase agreements with such financial institutions as banks and
broker-dealers in accordance with the investment limitations described therein.
Whenever the Portfolio enters into a reverse repurchase agreement, it will place
in a segregated account maintained with its custodian liquid assets such as
cash, U.S. Government securities or other liquid high grade debt securities
having a value equal to the repurchase price (including accrued interest) and
Bank of America will subsequently continuously monitor the account for
maintenance of such equivalent value. The Portfolio intends to enter into
reverse repurchase agreements to avoid otherwise having to sell securities
during unfavorable market conditions in order to meet redemptions. Reverse
repurchase agreements are considered to be borrowings by the Portfolio under the
1940 Act.
OTHER INVESTMENTS
Variable and Floating Rate Instruments. The Portfolio may acquire
variable and floating rate instruments. Such instruments are frequently not
rated by credit rating agencies. However, in determining the creditworthiness of
unrated variable and floating rate instruments and their eligibility for
purchase by the Portfolio, Bank of America will consider the earning power, cash
flow and other liquidity ratios of the issuers of such instruments (which
include financial, merchandising, bank holding and other companies) and will
continuously monitor their financial condition. An active secondary market may
not exist with respect to particular variable or floating rate instruments
purchased by the Portfolio. The absence of such an active secondary market could
make it difficult to dispose of a variable or floating rate instrument in the
event the issuer of the instrument defaulted on its payment obligation or during
periods that the Portfolio is not entitled to exercise its demand rights, and
the Portfolio could, for these or other reasons, suffer a loss to the extent of
the default. Investments in illiquid variable and floating rate instruments
(instruments which are not payable upon seven days' notice and do not have
active trading markets) are subject to the Portfolio's 15% limitation on
illiquid securities. Variable and floating rate instruments may be secured by
bank letters of credit.
Zero Coupon Securities. The Portfolio may invest in zero coupon
securities which pay no cash income and are sold at substantial discounts from
their value at maturity. When held to maturity, their entire income, which
consists of accretion of discount, comes from the difference between the
purchase price and their value at maturity.
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<PAGE> 534
The discount varies, depending on the time remaining until maturity or
cash payment date, prevailing interests rates, liquidity of the security and the
perceived credit quality of the issuer. The discount, in the absence of
financial difficulties of the issuer, decreases as the final maturity or cash
payment date of the security approaches. The market prices of zero coupon and
delayed interest securities are generally more volatile and more likely to
respond to changes in interest rates than the market prices of securities having
similar maturities and credit quality that pay interest periodically. Current
federal income tax law requires that a holder of a zero coupon security report
as income each year the portion of the original issue discount on such security
(other than tax-exempt original issue discount from a zero coupon security) that
accrues that year, even though the holder receives no cash payments of interest
during the year. Zero coupon securities are subject to greater market value
fluctuations from changing interest rates than debt obligations of comparable
maturities which make current distributions of interest (cash).
When-Issued Securities, Forward Commitments and Delayed Settlements.
The Portfolio may purchase securities on a "when-issued," forward commitment or
delayed settlement basis. When the Portfolio agrees to purchase securities on a
when-issued, forward commitment or delayed settlement basis, its custodian will
set aside cash or liquid portfolio securities equal to the amount of the
commitment in a separate account. Normally, the custodian will set aside
portfolio securities to satisfy a purchase commitment. In such a case, the
Portfolio may be required subsequently to place additional assets in the
separate account in order to assure that the value of the account remains equal
to the amount of the commitment. It may be expected that the net assets of the
Portfolio will fluctuate to a greater degree when it sets aside portfolio
securities to cover such purchase commitments than when it sets aside cash. The
Portfolio does not intend to engage in these transactions for speculative
purposes but only in furtherance of its investment objective. Because the
Portfolio will set aside cash or liquid portfolio securities to satisfy its
purchase commitments in the manner described, its liquidity and the ability of
the investment adviser to manage it may be affected in the event the forward
commitments, commitments to purchase when-issued securities and delayed
settlements ever exceeded 25% of the value of the Portfolio's net assets.
The Portfolio will purchase securities on a when-issued, forward
commitment or delayed settlement basis only with the intention of completing the
transaction. If deemed advisable as a matter of investment strategy, however,
the Portfolio may dispose of or renegotiate a commitment after it is entered
into, and may sell securities it has committed to purchase before those
securities are delivered to the Portfolio on the settlement date.
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In these cases the Portfolio may realize a taxable capital gain or loss.
When the Portfolio engages in when-issued, forward commitment and
delayed settlement transactions, it relies on the other party to consummate the
trade. Failure of such party to do so may result in the Portfolio's incurring a
loss or missing an opportunity to obtain a price considered to be advantageous.
Stand-By Commitments. The Portfolio may acquire "stand-by commitments"
with respect to Municipal Securities held in its portfolio. Under a "stand-by
commitment," a dealer agrees to purchase from the Portfolio, at the Portfolio's
option, specified Municipal Securities at a specified price. "Stand-by
commitments" acquired by the Portfolio may also be referred to in this Statement
of Additional Information as "put" options.
The amount payable to the Portfolio upon its exercise of a "stand-by
commitment" is normally (i) the Portfolio's acquisition cost of the Municipal
Securities (excluding any accrued interest which the Portfolio paid on their
acquisition), less any amortized market premium or plus any amortized market or
original issue discount during the period the Portfolio owned the securities,
plus (ii) all interest accrued on the securities since the last interest payment
date during that period. A "stand-by commitment" may be sold, transferred or
assigned by the Portfolio only with the instrument involved.
The Portfolio expects that "stand-by commitments" will generally be
available without the payment of any direct or indirect consideration. However,
if necessary or advisable, the Portfolio 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). The total amount paid in
either manner for outstanding "stand-by commitments" held by the Portfolio will
not exceed 1/2 of 1% of the value of its total assets calculated immediately
after each "stand-by commitment" is acquired.
The Portfolio intends to obtain "stand-by commitments" only from
dealers, banks and broker-dealers which, in the investment adviser's opinion,
present minimal credit risks. The Portfolio's reliance upon the credit of these
dealers, banks and broker-dealers is secured by the value of the underlying
Municipal Securities that are subject to a commitment.
The Portfolio would 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" would not affect
the valuation or assumed maturity of the underlying Municipal
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Securities, which would continue to be valued in accordance with the ordinary
method of valuation employed by the Portfolio. "Stand-by commitments" which
would be acquired by the Fund would be valued at zero in determining net asset
value. Where the Portfolio paid 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 Portfolio.
OTHER INVESTMENT LIMITATIONS
The Prospectus for the Fund sets forth or summarizes certain
fundamental policies that may not be changed with respect to the Fund or the
Portfolio without the affirmative vote of the holders of the majority of the
Fund's outstanding shares or the Portfolio's outstanding interests (as defined
below under "General Information - Shareholder Vote"). The following is a list
of additional fundamental policies which may not be changed with respect to the
Fund or the Portfolio without such a vote.
NEITHER THE FUND NOR THE PORTFOLIO MAY:
1. Invest 25% or more of its total assets in the securities of one or
more issuers conducting their principal business activities in the same
industry, except that this limitation shall not apply to Municipal Securities or
governmental guarantees of Municipal Securities, and that all of the assets of
the Fund may be invested in the Portfolio or another investment company.
2. Purchase or sell real estate (however, the Portfolio may, to the
extent appropriate to its investment objective, purchase securities issued by
the U.S. Government, its agencies and instrumentalities, purchase Municipal
Securities secured by real estate or interests therein or securities issued by
companies investing in real estate or interests therein).
3. Sell securities short or purchase securities on margin, except
such short-term credits as are necessary for the clearance of transactions. For
this purpose, the deposit or payment by the Portfolio for initial or maintenance
margin in connection with futures contracts is not considered to be the purchase
or sale of a security on margin.
4. Underwrite the securities of other issuers, except that all of the
assets of the Fund may be invested in the Portfolio or another investment
company.
5. Purchase securities of companies for the purpose of exercising
control.
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6. Purchase or sell commodity contracts, or invest in oil, gas or
mineral exploration or development programs (however, the Portfolio may, to the
extent appropriate to its investment objective, purchase publicly traded
securities of companies engaging in whole or in part in such activities), but
may enter into futures contracts and options thereon in accordance with its
Prospectus.
7. Acquire any other investment company or investment company
security except as provided for in the Investment Company Act of 1940; provided
that all of the assets of the Fund may be invested in the Portfolio or another
investment company.
8. Write or sell puts, calls, straddles, spreads, or combinations
thereof except that the Portfolio may acquire standby commitments with respect
to its Municipal Securities and may enter into futures contracts and options
thereon to the extent disclosed in the Prospectus and this Statement of
Additional Information.
If a percentage restriction is satisfied at the time of investment, a
later increase or decrease in such percentage resulting from a change in asset
value will not constitute a violation of such restriction.
In order to permit the Fund to sell its shares in certain states, the
Company or the Portfolio may make commitments more restrictive than the
investment policies and limitations described above. As of the date of this
Statement of Additional Information, the following such commitments have been
made:
1. The Portfolio will not invest in oil, gas or mineral leases.
2. The Portfolio will not purchase or sell real property, including
limited partnership interests, but excluding readily marketable
interests in real estate investment trusts ("REITS") or readily
marketable securities of companies that invest in real estate
investments in real estate limited partnerships.
3. The Portfolio will not purchase or retain the securities of any
issuer if the Officers or Trustees of the Portfolio or its
investment adviser, owning beneficially more than one half of one
percent of the securities of an issuer together own beneficially
more than 5% of the securities of that issuer.
4. The Portfolio will not invest more than 5% of its total assets in
the securities of issuers which
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together with any predecessors have a record of less than three
years continuous operation.
If the Portfolio determines that a commitment that has been made is no
longer in its best interests, it will revoke the commitment and notify the Fund
that it has done so. In such an event, the Fund may no longer be able to sell
its shares in the state where such commitment has been revoked.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
Information on how to purchase and redeem Fund shares, and how such
shares are priced, is included in the Prospectus. The net asset value of the
Portfolio is determined at the same time and on the same days as the net asset
values per share of the Fund is determined. The net asset value of the Fund is
equal to the Fund's pro rata share of the total investments and other assets of
the Portfolio, less any liabilities with respect to the Fund, including the
Fund's pro rata share of the Portfolio's liabilities. Additional information is
contained below.
The Fund's assets are valued for purposes of pricing sales and
redemptions by an independent pricing service ("Service") approved by the
Portfolio's Board of Trustees. When, in the judgment of the Service, quoted bid
prices for portfolio securities are readily available and are representative of
the bid side of the market, these investments are valued at the mean between
quoted bid prices (as obtained by the Service from dealers in such securities)
and asked prices (as calculated by the Service based upon its evaluation of the
market for such securities). Other investments are carried at fair value as
determined by the Service, based on methods which include consideration of
yields or prices of municipal bonds of comparable quality, coupon, maturity and
type; indications as to values from dealers; and general market conditions. The
Service may also employ electronic data processing techniques and matrix systems
to determine value. Short-term debt securities with remaining maturities of 60
days or less are valued at amortized cost, which approximates market value. The
amortized cost method involves valuing a security at its cost on the date of
purchase or, in the case of securities purchased with more than 60 days
remaining to maturity and to be valued on the amortized cost basis only during
the final 60 days of its maturity, the market value on the 61st day prior to
maturity. Thereafter the Master Trust assumes a constant amortization to
maturity of the difference between the principal amount due at maturity and
cost.
SUPPLEMENTARY PURCHASE INFORMATION
For the purpose of applying the Right of Accumulation or Letter of
Intent privileges described in the Prospectus, the
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scale of sales loads applies to purchases made by any "purchaser," which term
includes an individual and/or spouse purchasing securities for his, her or
their own account or for the account of any minor children; or a trustee or
other fiduciary account (including a pension, profit-sharing or other employee
benefit trust created pursuant to a plan qualified under Section 401 of the
Internal Revenue Code) although more than one beneficiary is involved; or "a
qualified group" which has been in existence for more than six months and has
not been organized for the purpose of buying redeemable securities of a
registered investment company at a discount, provided that the purchases are
made through a central administrator or a single dealer, or by other means
which result in economy of sales effort or expense. A "qualified group" must
have more than 10 members, must be available to arrange for group meetings
between representatives of the Fund and the members, and must be able to
arrange for mailings to members at reduced or no cost to the Distributor. The
value of shares eligible for the Right of Accumulation privilege may also be
used as a credit toward completion of the Letter of Intent privilege. Such
shares will be valued at their offering price prevailing on the date of
submission of the Letter of Intent. Distributions on shares held in escrow
pursuant to the Letter of Intent privilege will be credited to the shareholder,
but such shares are not eligible for the Fund's Exchange Privilege.
The computation of the hypothetical offering price per share for the
Fund based on the value of the Fund's net assets on February 28, 1995 and the
Fund's outstanding securities on such date is as follows:
NATIONAL MUNICIPAL BOND FUND
<TABLE>
<S> <C>
Net Assets $2,519,992
Outstanding Securities 261,439
Net Asset Value Per Share $ 9.64
Sales Charge - 4.50% of
offering price (4.71% of
net asset value per share) $ 0.45
Offering Price to Public $ 10.09
</TABLE>
SUPPLEMENTARY REDEMPTION INFORMATION
Shares of the Fund for which orders for wire redemption are received on
a business day before the close of regular trading hours on the New York Stock
Exchange (currently 4:00 p.m. (Eastern time) will be redeemed as of the close of
regular
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trading hours on such Exchange and the proceeds of redemption will
normally be wired in federal funds on the next business day to the commercial
bank specified by the investor on the Account Application (or other bank of
record on the investor's file with the Transfer Agent). To qualify to use the
wire redemption privilege, the payment for Fund shares must be drawn on, and
redemption proceeds paid to, the same bank and account as designated on the
Account Application (or other bank of record as described above). If the
proceeds of a particular redemption are to be wired to another bank, the
request must be in writing and signature guaranteed. Shares for which orders
for wire redemption are received after the close of regular trading hours on
the New York Stock Exchange or on a non-business day will be redeemed as of the
close of trading on such Exchange on the next day on which shares of the Fund
are priced and the proceeds will normally be wired in federal funds on the next
business day thereafter. Redemption proceeds will be wired to a correspondent
member bank if the investor's designated bank is not a member of the Federal
Reserve System. Immediate notification by the correspondent bank to the
investor's bank is necessary to avoid a delay in crediting the funds to the
investor's bank account. Proceeds of less than $1,000 will be mailed to the
investor's address.
To change the commercial bank or account designated to receive
redemption proceeds, a written request must be sent to the Company, c/o Pacific
Horizon Funds, Inc., P.O. Box 80221, Los Angeles, California 90080-9909. Such
request must be signed by each shareholder, with each signature guaranteed as
described in the Fund's Prospectus. Guarantees must be signed by an authorized
signatory and "signature guaranteed" must appear with the signature. The
Transfer Agent may request further documentation from corporations, executors,
administrators, trustees or guardians, and will accept other suitable
verification arrangements from foreign investors, such as consular verification.
Investors in the Fund redeeming by Check generally will be subject to
the same rules and regulations that commercial banks apply to checking accounts,
although the election of this privilege creates only a shareholder-transfer
agent relationship with the Transfer Agent. An investor may deliver Checks
directly
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<PAGE> 541
to the Transfer Agent, BISYS Fund Services Ohio, Inc., 3435 Stelzer Road,
Columbus Ohio 43219-3035, in which case the proceeds will be mailed, wired or
made available at the Transfer Agent on the next business day. The Check
delivered to the Transfer Agent must be accompanied by a properly executed
stock power form on which the investor's signature is guaranteed as described
in the Fund's Prospectus.
Because dividends on the Fund accrue daily, Checks should not be used
to close an account, as a small balance is likely to result.
Check redemption may be modified or terminated at any time by the
Company or the Transfer Agent upon notice to shareholders.
SUPPLEMENTARY PURCHASE AND REDEMPTION INFORMATION:
In General. As described in the Prospectus, Fund shares may be
purchased directly by the public, by clients of Bank of America through their
qualified trust and agency accounts, or by clients of securities dealers,
financial institutions (including banks) and other industry professionals, such
as investment advisers, accountants and estate planning firms that have entered
into service and/or selling agreements with the Distributor. (The Distributor,
such institutions and professionals are collectively referred to as "Service
Organizations.") Bank of America and Service Organizations may impose minimum
customer account and other requirements in addition to those imposed by the Fund
and described in the Prospectus. Purchase orders will be effected only on
business days.
Shares in the Fund are sold with a sales load. Service Organizations
may be paid by the Distributor at the Company's expense for shareholder
services. Depending on the terms of the particular account, Bank of America, its
affiliates, and Service Organizations also may charge their customers fees for
automatic investment, redemption and other services provided. Such fees may
include, for example, account maintenance fees, compensating balance
requirements or fees based upon account transactions, assets or income. Bank of
America or the particular Service Organization is responsible for providing
information concerning
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these services and any charges to any customer who must authorize the purchase
of Fund shares prior to such purchase.
Persons wishing to purchase Company shares through their accounts at
Bank of America or a Service Organization should contact such entity directly
for appropriate instructions.
Initial purchases of shares into a new account may not be made by wire.
However, persons wishing to make a subsequent purchase of Company shares into an
already existing account by wire should telephone the Transfer Agent at (800)
346-2087. The investor's bank must be instructed to wire federal funds to the
Transfer Agent, referring in the wire to the Fund; the investor's portfolio
account number; and the investor's name.
For processing redemptions, the Transfer Agent may request further
documentation from corporations, executors, administrators, trustees or
guardians. The Transfer Agent will accept other suitable verification
arrangements from foreign investors, such as consular verification.
Investors should be aware that if they have selected the TeleTrade
Privilege, any request for a wire redemption will be effected as a TeleTrade
transaction through the Automated Clearing House (ACH) system unless more prompt
transmittal is specifically requested. Redemption proceeds of a TeleTrade
transaction will be on deposit in the investor's account at the ACH member bank
normally two business days after receipt of the redemption request.
Exchange Privilege. Shareholders in the Pacific Horizon Family of Funds
have an exchange privilege whereby they may exchange all or part of their
Pacific Horizon Shares for shares of other investment portfolios in the Pacific
Horizon Family of Funds. Shareholders may also exchange all or a part of their
Pacific Horizon Shares for like shares of an investment portfolio of Time
Horizon Funds. By use of the exchange privilege, the investor authorizes the
Transfer Agent to act on telephonic, telegraphic or written exchange
instructions from any person representing himself or herself to be the investor
and believed by the Transfer Agent to be genuine. The Transfer Agent's records
of such instructions are binding. The exchange privilege may be modified or
terminated at any time upon notice to shareholders. For federal income tax
purposes, exchange transactions are treated as sales on which a purchaser will
realize a capital gain or loss depending on whether the value of the shares
exchanged is more or less than his basis in such shares at the time of the
transaction.
Exchange transactions described in Paragraphs A, B, C and D below will
be made on the basis of the relative net asset
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values per share of the investment portfolios involved in the transaction.
A. Shares of any investment portfolio purchased with a sales load, as
well as additional shares acquired through reinvestment of
dividends or distributions on such shares, may be exchanged
without a sales load for shares of any other investment portfolio
in the Pacific Horizon Family of Funds or the Time Horizon Funds.
B. Shares of any investment portfolio in the Pacific Horizon Family
of Funds or the Time Horizon Funds acquired by a previous exchange
transaction involving shares on which a sales load has directly or
indirectly been paid (e.g. shares purchased with a sales load or
issued in connection with an exchange transaction involving shares
that had been purchased with a sales load), as well as additional
shares acquired through reinvestment of dividends or distributions
on such shares, may be redeemed and the proceeds used to purchase
without a sales load shares of any other investment portfolio. To
accomplish an exchange transaction under the provisions of this
Paragraph, investors must notify the Transfer Agent of their prior
ownership of shares and their account number.
C. Shares of any investment portfolio in the Pacific Horizon Family
of Funds may be exchanged without a sales load for shares of any
other investment portfolio in the Family that is offered without a
sales load.
D. Shares of any investment portfolio in the Pacific Horizon Family
of Funds purchased without a sales load may be exchanged without a
sales load for shares in any other portfolio where the investor
involved maintained an account in the Pacific Horizon Family of
Funds before April 20, 1987 or was the beneficial owner of shares
of Bunker Hill Income Securities, Inc. on the date of its
reorganization into the Pacific Horizon Corporate Bond Fund.
Except as stated above, a sales load will be imposed when shares of any
investment portfolio in the Pacific Horizon Family of Funds that were purchased
or otherwise acquired without a sales load are exchanged for shares of another
investment portfolio in the Pacific Horizon Family or the Time Horizon Funds
which are sold with a sales load.
Exchange requests received on a business day prior to the time shares
of the investment portfolios involved in the request are priced will be
processed on the date of receipt. "Processing" a request means that shares in
the investment
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portfolio from which the shareholder is withdrawing an investment will be
redeemed at the net asset value per share next determined on the date of
receipt. Shares of the new investment portfolio into which the shareholder is
investing will also normally be purchased at the net asset value per share next
determined coincident to or after the time of redemption. Exchange requests
received on a business day after the time shares of the investment portfolios
involved in the request are priced will be processed on the next business day
in the manner described above.
Miscellaneous. Certificates for shares will not be issued.
Depending on the terms of the customer account at Bank of America or a
Service Organization, certain purchasers may arrange with the Company's
custodian for sub-accounting services paid by the Company without direct charge
to the purchaser.
A "business day" for purposes of processing share purchases and
redemptions received by the Transfer Agent at its Columbus office is a day on
which the New York Stock Exchange is open for trading. In 1996, the holidays on
which the New York Stock Exchange is closed are: New Year's Day, Presidents'
Day, Good Friday, Memorial Day (observed), Independence Day, Labor Day,
Thanksgiving Day and Christmas Day.
The Company may suspend the right of redemption or postpone the date of
payment for shares during any period when (a) trading on the New York Stock
Exchange is restricted by applicable rules and regulations of the Securities and
Exchange Commission; (b) the New York Stock Exchange is closed for other than
customary weekend and holiday closings; (c) the Securities and Exchange
Commission has by order permitted such suspension; or (d) an emergency exists as
determined by the Securities and Exchange Commission. (The Company may also
suspend or postpone the recordation of the transfer of its shares upon the
occurrence of any of the foregoing conditions.)
The Company's Charter permits its Board of Directors to require a
shareholder to redeem involuntarily shares in a Fund if the balance held of
record by the shareholder drops below $500 and such shareholder does not
increase such balance to $500 or more upon 60 days' notice. The Company will not
require a shareholder to redeem shares of the Fund if the balance held of record
by the shareholder is less than $500 solely because of a decline in the net
asset value of the Fund's shares. The Company may also redeem shares
involuntarily if such redemption is appropriate to carry out the Company's
responsibilities under the 1940 Act.
If the Company's Board of Directors determines that conditions exist
which make payment of redemption proceeds wholly
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<PAGE> 545
in cash unwise or undesirable, the Company may make payment wholly or partly in
securities or other property. Additionally, the Company has made an
undertaking to the State of Texas that it may only make payment of such
proceeds wholly or in part in "readily marketable" securities or other
property. (If the Company determines that such undertaking is no longer in its
best interests, it will revoke the commitment. In such an event, the Fund may
no longer be able to sell its shares in the State of Texas.) In such an event,
a shareholder would incur transaction costs in selling the securities or other
property. The Company has committed that it will pay all redemption requests
by a shareholder of record in cash, limited in amount with respect to each
shareholder during any ninety-day period to the lesser of $250,000 or 1% of the
net asset value at the beginning of such period.
ADDITIONAL INFORMATION CONCERNING TAXES
FEDERAL
The Fund will be treated as a separate corporate entity under the
Internal Revenue Code of 1986, as amended (the "Code"), and intends to qualify
as a "regulated investment company." By following this policy, the Fund expects
to eliminate or reduce to a nominal amount the federal income taxes to which it
may be subject. If for any taxable year the Fund does not qualify for the
special federal tax treatment afforded regulated investment companies, all of
the Fund's taxable income would be subject to tax at regular corporate rates
(without any deduction for distributions to shareholders). In such event, the
Fund's dividend distributions (including amounts derived from interest on
Municipal Securities i.e., exempt-interest dividends) to shareholders would be
taxable as ordinary income to the extent of the current and accumulated earnings
and profits of the Fund and would be eligible for the dividends received
deduction in the case of corporate shareholders.
Qualification as a regulated investment company under the Code
requires, among other things, that the Fund distribute to its shareholders an
amount equal to at least the sum of 90% of its investment company taxable income
(if any) and 90% of its tax-exempt income (if any), net of certain deductions
for each taxable year. The Fund's policy is to pay each year as exempt-interest
dividends substantially all the Fund's Municipal Securities interest income net
of certain deductions. An exempt-interest dividend is any dividend or part
thereof (other than a capital gain dividend) paid by the Fund and designated as
an exempt-interest dividend in a written notice mailed to shareholders after
the close of the Fund's taxable year. However, the aggregate amount of dividends
so designated by the Fund cannot exceed the excess of the amount of interest
exempt
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<PAGE> 546
from tax 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. The percentage of total dividends paid for any taxable year which
qualifies as exempt-interest dividends will be the same for all shareholders
receiving dividends from the Fund for such year. In order for the Fund to pay
exempt-interest dividends for any taxable year, at the close of each quarter of
its taxable year at least 50% of the aggregate value of the Fund's assets must
consist of exempt-interest obligations.
Exempt-interest dividends may be treated by shareholders of the Fund as
items of interest excludable from their gross income under Section 103(a) of the
Code. However, each shareholder is advised to consult his or her tax adviser
with respect to whether exempt-interest dividends would retain the exclusion
under Section 103(a) if such shareholder would be treated as a "substantial
user" or a "related person" to such user with respect to facilities financed
through any of the tax-exempt obligations held by the Fund. A "substantial user"
is defined under U.S. Treasury Regulations to include a non-exempt person who
regularly uses a part of such facilities in his or her trade or business and
whose gross revenues derived with respect to the facilities financed by the
issuance of bonds are more than 5% of the total revenues derived by all users of
such facilities, or who occupies more than 5% of the usable area of such
facilities or for whom such facilities or a part thereof were specifically
constructed, reconstructed or acquired. A "related person" includes certain
related natural persons, affiliated corporations, partners and partnerships and
S corporations and their shareholders.
In general, the Fund's investment company taxable income will be its
taxable income subject to certain adjustments and excluding the excess of any
net long-term capital gain for the taxable year over the net short-term capital
loss, if any, for such year. The Fund will be taxed on its undistributed
investment company taxable income, if any.
The Fund will not be treated as a regulated investment company under
the Code if 30% or more of the Fund's gross income for a taxable year is derived
from gains realized on the sale or other disposition of the following
investments held for less than three months (the "Short-Short test"): (1) stock
and securities (as defined in section 2(a)(36) of the 1940 Act); (2) options,
futures and forward contracts other than those on foreign currencies; and (3)
foreign currencies (and options, futures and forward contracts on foreign
currencies) that are not directly related to a Fund's principal business of
investing in stock and securities (and options and futures with respect to
stocks and securities). Interest (including original issue discount and accrued
market discount) received by a Fund upon maturity or
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<PAGE> 547
disposition of a security held for less than three months will not be treated
as gross income derived from the sale or other disposition of such security
within the meaning of this requirement. However, any other income that is
attributable to realized market appreciation will be treated as gross income
from the sale or other disposition of securities for this purpose. See
Appendix B -- "Accounting and Tax Treatment" for a general discussion of the
federal tax treatment of futures contracts, related options thereon and other
financial instruments, including their treatment under the Short-Short test.
Any distribution of the excess of net long-term capital gains over net
short-term capital losses is taxable to shareholders as long-term capital gains,
regardless of how long the shareholder has held the Fund's shares and whether
such gains are received in cash or additional Fund shares. The Fund will
designate such a distribution as a capital gain dividend in a written notice
mailed to shareholders after the close of the Fund's taxable year.
A 4% non-deductible excise tax is imposed on regulated investment
companies that fail currently to distribute specific percentages of their
ordinary taxable income and capital gain net income (excess of capital gains
over capital losses). The Fund intends to make sufficient distributions or
deemed distributions of its ordinary taxable income and any capital gain net
income prior to the end of each calendar year to avoid liability for this excise
tax.
The Company will be required in certain cases to withhold and remit to
the United States Treasury 31% of taxable dividends or 31% of gross sale
proceeds upon sale paid to shareholders (i) who have failed to provide either a
correct tax identification number in the manner provided, (ii) who are subject
to withholding by the Internal Revenue Service for failure to properly include
on their return payments of taxable interest or dividends, or (iii) who have
failed to certify to the Company either that they are subject to backup
withholding when they are required to do so or that they are "exempt
recipients."
At February 28, 1995, the Fund had capital loss carryforwards of
$3,632, which will expire in fiscal 2003. To the extent provided by the
regulations in the Code, these capital loss carryforwards will be used to offset
future capital gains on securities transactions. As such, it is probable that
the gains so offset will not be distributed to shareholders.
TAXATION OF THE PORTFOLIO
Management of the Portfolio intends for the Portfolio to be treated as
a partnership rather than as a regulated investment company or a corporation
under the Code. As a
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partnership under the Code, any interest, dividends, gains and losses of the
Portfolio will be deemed to have been "passed through" to its investors
regardless whether any amounts are actually distributed by the Portfolio.
Each investor in the Portfolio will be taxed on its share (as
determined in accordance with the governing instruments of the Portfolio) of the
Portfolio's ordinary income and capital gains in determining its income tax
liability. The determination of such share will be made in accordance with the
Code and regulations promulgated thereunder. It is intended that the Portfolio's
assets, income and distributions will be managed in such a way that an investor
in the Portfolio will be able to satisfy Code requirements applicable to
regulated investment companies, assuming that the investor invested all of its
assets in the Portfolio.
OTHER INFORMATION
Depending upon the extent of activities in states and localities in
which its offices are maintained, in which its agents or independent contractors
are located or in which it is otherwise deemed to be conducting business, the
Fund may be subject to the tax laws of such states or localities.
Because state and local tax consequences may be different from the
Federal tax consequences described above, shareholders are advised to consult
their tax advisers concerning the application of state and local taxes.
The foregoing discussion is based on tax laws and regulations which are
in effect on the date of this Statement of Additional Information. Such laws and
regulations may be changed by legislative or administrative action. This
discussion is only a summary of some of the important tax considerations
generally affecting purchasers of Fund shares. No attempt is made to present a
detailed explanation of the federal income tax treatment of the Funds or their
shareholders, and this discussion is not intended as a substitute for careful
tax planning. Accordingly, potential purchasers of Fund shares should consult
their tax advisers with specific reference to their own tax situation.
MANAGEMENT
DIRECTORS AND OFFICERS OF THE COMPANY
The directors and officers of the Company, their addresses, ages and
principal occupations during the past five years are:
-24-
<PAGE> 549
<TABLE>
<CAPTION>
Position with
Name and Address Age Company Principal Occupations
- ---------------- --- ------- ---------------------
<S> <C> <C> <C>
Thomas M. Collins 61 Director Of counsel, law firm of
McDermott & Trayner McDermott & Trayner;
225 S. Lake Avenue Partner of the law firm
Suite 410 of Musick, Peeler &
Pasadena, CA 91101-3005 Garrett (until April,
1993); Trustee, Master
Investment Trust Series I
and Master Investment
Trust, Series II
(registered investment
companies) (since 1993);
former Director, Bunker
Hill Income Securities,
Inc. (registered
investment company)
through 1991.
Douglas B. Fletcher 70 Vice Chairman Chairman of the Board and
Fletcher Capital of the Board Chief Executive Officer,
Advisors Incorporated Fletcher Capital
4 Upper Newport Plaza Advisors, Incorporated,
Suite 100 (registered investment
Newport Beach, CA 92660-2629 adviser) 1991 to date;
Partner, 1991 Newport
Partners (private venture
capital firm), 1981 to
date; Chairman of the
Board and Chief Executive
Officer, First Pacific
Advisors, Inc.
(registered investment
adviser) and seven
investment companies
under its management,
prior to 1983; former
Allied Member, New York
Stock Exchange; Chairman
of the Board of FPA
Paramount Fund, Inc.
through 1984; Director,
TIS Mortgage Investment
Company (real estate
investment trust);
Trustee and former Vice
Chairman of the Board,
Clare mont McKenna
College; Chartered
Financial Analyst.
Robert E. Greeley 62 Director Chairman, Page Mill
Page Mill Asset Asset Management (a
Management private investment
433 California Street company) since 1991;
Suite 900 Manager, Corporate
San Francisco, CA 94104 Investments, Hewlett
Packard Company from
</TABLE>
-25-
<PAGE> 550
<TABLE>
<CAPTION>
Position with
Name and Address Age Company Principal Occupations
- ---------------- --- ------- ---------------------
<S> <C> <C> <C>
1979 to 1991; Trustee,
Master Investment Trust,
Series I and Master
Investment Trust, Series
II (since 1993);
Director, Morgan Grenfell
Small Cap Fund (since
1986); former Director,
Bunker Hill Income
Securities, Inc. (since
1989) (registered
investment companies);
former Trustee,
SunAmerica Fund Group
(previously Equitec
Siebel Fund Group) from
1984 to 1992.
Kermit O. Hanson 79 Director Vice Chairman of the
17760 14th Ave., N.W. Advisory Board, 1988 to
Seattle, WA 98177 date, Executive Director,
1977 to 1988, Pacific Rim
Bankers Program (a
non-profit educational
institution); Dean
Emeritus, 1981 to date,
Dean, 1964-81, Graduate
School of Business
Administration,
University of Washington;
Director, Washington
Federal Savings & Loan
Association; Trustee,
Seafirst Retirement Funds
(since 1993) (registered
investment company).
Cornelius J. Pings* 66 Chairman of President, Association of
Association of American the Board and American Universities,
Universities President February 1993 to date;
One DuPont Circle Provost, 1982 to January
Suite 730 1993, Senior Vice
Washington, DC 20036 President for Academic
Affairs, 1981 to January
1993, University of
Southern California;
Trustee, Master
Investment Trust, Series
I and Master Investment
Trust, Series II (since
1995).
</TABLE>
-26-
<PAGE> 551
<TABLE>
<CAPTION>
Position with
Name and Address Age Company Principal Occupations
- ---------------- --- ------- ---------------------
<S> <C> <C> <C>
Kenneth L. Trefftzs 83 Director Private Investor;
11131 Briarcliff Drive formerly Distinguished
San Diego, CA 92131-1329 Emeritus Professor of
Finance and Chairman of
the Department of Finance
and Business Economics of
the Graduate School of
Business of the
University of Southern
California; former
Director, Metro Goldwyn
Mayer, Inc.; Director,
Fremont General
Corporation (insurance
and financial services
holding company);
Director, Source Capital,
Inc. (closed-end
investment company);
Director of three
open-end investment
companies managed by
First Pacific Advisors,
Inc.; formerly Chairman
of the Board of Directors
(or Trustees) of nineteen
investment companies
managed by American
Capital Asset Management,
Inc.
Richard E. Stierwalt 40 Executive Chairman of the Board and
125 W. 55th Street Vice President Chief Executive Officer,
New York, NY 10019 July 1993 to date, prior
thereto Senior Director,
Managing Director and
Chief Executive Officer
of the Administrator and
Distributor, February
1987 to July 1993;
President, Master
Investment Trust, Series
I, Master Investment
Trust, Series II and
Seafirst Retirement Funds
(since 1993); First Vice
President, Trust
Operation Administration,
Security Pacific National
Bank, 1983-1987.
</TABLE>
-27-
<PAGE> 552
<TABLE>
<CAPTION>
Position with
Name and Address Age Company Principal Occupations
- ---------------- --- ------- ---------------------
<S> <C> <C> <C>
William B. Blundin 57 Executive Vice Vice Chairman, July 1993
125 W. 55th Street President to date, prior thereto
New York, NY 10019 Director and President of
the Administrator and
Distributor, February
1987 to July 1993;
Executive Vice President,
Master Investment Trust,
Series II and Seafirst
Retirement Funds (since
1993); Senior Vice
President, Shearson
Lehman Brothers,
1978-1987.
Irimga McKay 35 Vice Senior Vice President,
7863 Girard Avenue President July 1993 to date, prior
Suite 306 thereto First Vice
La Jolla, CA 92037 President of the
Administrator and
Distributor, November
1988 to July 1993; Vice
President, Master
Investment Trust, Series
II and Seafirst
Retirement Funds (since
1993); Regional Vice
President, Continental
Equities, June 1987 to
November 1988; Assistant
Wholesaler, VMS Realty
Partners (a real estate
limited partnership), May
1986 to June 1987.
W. Eugene Spurbeck 39 Assistant Vice Manager of Client
BISYS Fund Services President Services of the
515 Figueroa Street Administrator (1993 to
Suite 335 date); Assistant Vice
Los Angeles, CA 92307 President, Master
Investment Trust, Series
II; Vice President,
Seafirst Retirement Funds
(since 1995); Vice
President of Retail
Lending Operations Banc
One (1989 to 1993).
Martin R. Dean 31 Treasurer Manager of Fund
3435 Stelzer Road Accounting of BISYS Fund
Columbus, OH 43219 Services, May 1994 to
Present; Treasurer,
Master Investment Trust,
Series II and Seafirst
Retirement Funds (since
1995); Senior Manager at
</TABLE>
-28-
<PAGE> 553
<TABLE>
<CAPTION>
Position with
Name and Address Age Company Principal Occupations
- ---------------- --- ------- ---------------------
<S> <C> <C> <C>
KPMG Peat Marwick
previously 1990-1994.
W. Bruce McConnel, III 52 Secretary Partner of the law firm
1345 Chestnut Street of Drinker Biddle &
Philadelphia National Bank Reath. Secretary,
Building, Suite 1100 Master Investment Trust,
Philadelphia, PA 19107 Series I, Master
Investment Trust, Series
II and Seafirst
Retirement Funds
George O. Martinez 35 Assistant Senior Vice President and
3435 Stelzer Road Secretary Director of Legal and
Columbus, OH 43219 Compliance Services, of
the Administrator. since
April 1995; Assistant
Secretary, Master
Investment Trust, Series
II and Seafirst
Retirement Funds (since
1995); prior thereto,
Vice President and
Associate General
Counsel, Alliance Capital
Management, L.P.
</TABLE>
- --------------
* Mr. Pings is an "interested director" of the Company as defined in the 1940
Act.
The Audit Committee of the Board is comprised of all directors and is
chaired by Dr. Trefftzs. The Board does not have an Executive Committee.
Each director is entitled to receive an annual fee of $25,000 plus
$1,000 for each day that a director participates in all or a part of a Board
meeting; the President receives an additional $20,000 per annum for his services
as President; Mr. Collins, in consideration of his years of service as President
and Chairman of the Board, receives an additional $40,000 per annum in severance
until February 28, 1997; each member of a Committee of the Board is entitled to
receive $1,000 for each Committee meeting they participate in (whether or not
held on the same day as a Board meeting); and each Chairman of a Committee of
the Board shall be entitled to receive an annual retainer of $1,000 for his
services as Chairman of the Committee. The Fund, and each other fund of the
Company, pays its proportionate share of these amounts based on relative net
asset values.
-29-
<PAGE> 554
For the fiscal year ended February 28, 1995, the Company paid or
accrued for the account of its directors as a group for services in all
capacities a total of $334,168. Of that amount, $27,065 was allocated to the
Fund. Each director is also reimbursed for out-of-pocket expenses incurred as a
director. Drinker Biddle & Reath, of which Mr. McConnel is a partner, receives
legal fees as counsel to the Company. As of the date of this Statement of
Additional Information, the directors and officers of the Company, as a group,
own less than 1% of the outstanding shares of each of the Company's investment
portfolios.
Under a retirement plan approved by the Board, including a majority of
its directors who are not "interested persons" of the Company, effective March
1, 1995, a director who dies or resigns after five years of service is entitled
to receive ten annual payments each equal to the greater of: (i) 50% of the
annual director's retainer that was payable by the Company during the year of
his/her death or resignation, or (ii) 50% of the annual director's retainer then
in effect for directors of the Company during the year of such payment. A
director who dies or resigns after nine years of service is entitled to receive
ten annual payments each equal to the greater of: (i) 100% of the annual
director's retainer that was payable by the Company during the year of his/her
death or resignation, or (ii) 100% of the annual director's retainer then in
effect for directors of the Company during the year of such payment. Further,
the amount payable each year to a director who dies or resigns is increased by
$1,000 for each year of service that the director provided as Chairman of the
Board.
Years of service for purposes of calculating the benefit described
above are based upon service as a director or Chairman after February 28, 1994.
Retirement benefits in which a director has become vested may not be reduced by
later Board action.
In lieu of receiving ten annual payments, a director may elect to
receive substantially equivalent benefits through a single-sum cash payment of
the present value of such benefits paid by the Company within 45 days of the
death or resignation of the director. The present value of such benefits is to
be calculated (i) based on the retainer that was payable by the Company during
the year of the director's death or resignation (and not on any retainer payable
to directors thereafter), and (ii) using the interest rate in effect as of the
date of the director's death or resignation by the Pension Benefit Guaranty
Corporation (or any successor thereto) for valuing immediate annuities under
terminating defined benefit pension plans. A director's election to receive a
single sum must be made in writing within the 30 calendar days after the date
the individual is first elected as a director.
-30-
<PAGE> 555
In addition to the foregoing, the Board of Directors may, in its
discretion and in recognition of a director's period of service before March 1,
1994 as a director and possibly as Chairman, authorize the Company to pay a
retirement benefit following the director's death or resignation (unless the
director has vested benefits as a result of completing nine years of service).
Any such action shall be approved by the Board and by a majority of the
directors who are not "interested persons" of the Company within 120 days
following the director's death or resignation and may be authorized as a single
sum cash payment or as not more than ten annual payments (beginning the first
anniversary of the director's date of death or resignation and continuing for
one or more anniversary date(s) thereafter).
The obligation of the Company to pay benefits to a former director is
neither secured nor funded by this Company but shall be binding upon its
successors in interest. The payment of such benefits under the retirement plan
has no priority or preference over the lawful claims of the Company's creditors
or shareholders, and the right to receive such payments is not assignable or
transferable by a director (or former director) other than by will, by the laws
of descent and distribution, or by the director's written designation of a
beneficiary.
TRUSTEES AND OFFICERS OF MASTER INVESTMENT TRUST, SERIES II
The trustees and officers of Master Investment Trust, Series II (the
"Master Trust"), a Delaware business trust of which the Portfolio is a series,
their addresses, ages and principal occupation during the past five years are:
<TABLE>
<CAPTION>
Position with
Name and Address Age Company Principal Occupation
- ---------------- --- ------- --------------------
<S> <C> <C> <C>
Thomas M. Collins 61 Chairman of the Board See "Directors and
McDermott & Trayner Officers of the
225 S. Lake Avenue, Company."
Suite 410
Pasadena, CA 91101-3005
Michael Austin 59 Trustee Chartered Accountant;
Victory House, Trustee, Master Investment
Nelson Quay Trust, Series I (since
Governor's Harbor 1993); Retired Partner,
Grand Cayman KPMG Peat Marwick LLP.
Cayman Islands
British West Indies
Robert E. Greeley 62 Trustee See "Directors and
Page Mill Asset Officers of
Management the Company."
433 California Street
Suite 900
San Francisco, CA 94101
</TABLE>
-31-
<PAGE> 556
<TABLE>
<CAPTION>
Position with
Name and Address Age Company Principal Occupations
- ---------------- --- ------- ---------------------
<S> <C> <C> <C>
Robert A. Nathane* 70 Trustee Retired President, Laird
1200 Shenandoah Drive Norton Trust Company,
East Chairman of the Board of
Seattle, WA 98112 Advisors, Phoenix Venture
Funds; Trustee, Master
Investment Trust, Series I
(since 1993); Trustee,
Seafirst Retirement Funds
(since 1993); former
Supervisor, Collective
Investment Trust for
Seafirst Retirement
Accounts; former Trustee,
First Funds of America
(registered investment
companies).
Cornelius J. Pings 66 Trustee See "Directors and
Association of American Officers of the
Universities Company."
One DuPont Circle
Suite 730
Washington, DC 20036
Richard E. Stierwalt 40 President See "Directors and
125 West 55th Street Officers of the
New York, NY 10019 Company."
William B. Blundin 57 Executive Vice President See "Directors and
125 West 55th Street Officers of the
New York, NY 10019 Company."
Irimga McKay 35 Vice President See "Directors and
7863 Girard Avenue Officers of the
Suite 306 Company."
La Jolla, CA 92037
W. Eugene Spurbeck 39 Assistant See "Directors and
BISYS Fund Services Vice President Officers of the
515 Figueroa Street Company."
Suite 335
Los Angeles, CA 92307
W. Bruce McConnel, III 52 Secretary See "Directors and
1345 Chestnut Street Officers of the
Philadelphia, PA 19107 Company."
Martin R. Dean 31 Treasurer See "Directors and
3435 Stelzer Road Officers of the
Columbus, OH 43219 Company."
George O. Martinez 35 Assistant Secretary See "Directors and
3435 Stelzer Road Officers of the
Columbus, OH 43219 Company."
</TABLE>
- --------------
* Mr. Nathane is an "interested trustee" of the Master Trust as defined in the
1940 Act.
-32-
<PAGE> 557
Each trustee receives an aggregate annual fee of $1,500 plus $500 per
meeting attended and $250 per day for each full day devoted to travel in
connection with each meeting attended, for his services as trustee of the
Portfolio. Each trustee is also reimbursed for out-of-pocket expenses incurred
as a trustee. Drinker Biddle & Reath, of which Mr. McConnel is a partner,
receives legal fees as counsel to the Trust. The trustees and officers of the
Master Trust, as a group, own less than 1% of the outstanding shares of the
Portfolio.
The following chart provides certain information about the
director/trustee fees of the Company's and Master Trust's directors/trustees as
of February 28, 1995:
<TABLE>
<CAPTION>
TOTAL
COMPENSATION
PENSION OR FROM
RETIREMENT ESTIMATED REGISTRANT
AGGREGATE AGGREGATE BENEFITS ANNUAL AND FUND
COMPENSATION COMPENSATION ACCRUED AS BENEFITS COMPLEX*
NAME OF PERSON/ FROM THE FROM THE PART OF FUND UPON PAID TO
POSITION COMPANY MASTER TRUST EXPENSES RETIREMENT DIRECTORS
- -------- ------- ------------ -------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Thomas M. Collins $100,000 $5,000 $0 $0 $110,000
President and
Chairman of the
Board+
Douglas B. Fletcher $ 57,500 $ 0 $0 $0 $ 57,500
Vice Chairman of
the Board
Robert E. Greeley** $ 57,500 $4,031 $0 $0 $ 65,781
Director
Kermit O. Hanson $ 57,500 $ 0 $0 $0 $ 63,500
Director
Cornelius J. Pings $ 57,500 $ 0 $0 $0 $ 57,500
Director
Kenneth L. Trefftzs $ 57,500 $ 0 $0 $0 $ 57,500
Director
</TABLE>
- --------------
* The "Fund Complex" consists of the Company, Seafirst Retirement Funds, the
Master Trust and Master Investment Trust, Series I.
** Mr. Greeley became a director of the Company on April 25, 1994.
+ Mr. Colllins was President and Chairman of the Board of the Company until
August 31, 1995.
-33-
<PAGE> 558
INVESTMENT ADVISOR
Bank of America is the successor by merger to Security Pacific National
Bank ("Security Pacific"), which previously served as investment adviser to the
other investment portfolios of the Company since the commencement of its
operations. As described in the Prospectus, the Fund has not retained the
services of an investment adviser since it seeks to achieve its investment
objective by investing all of its assets in the Portfolio. In the Investment
Advisory Agreement with the Master Trust, Bank of America has agreed to provide
investment advisory services as described in the Prospectus. Bank of America has
also agreed to pay all expenses incurred by it in connection with its activities
under its agreements other than the cost of securities, including brokerage
commissions, if any, purchased for the Portfolio. In rendering its advisory
services, Bank of America may utilize Bank officers from one or more of the
departments of the Bank which are authorized to exercise the fiduciary powers of
Bank of America with respect to the investment of trust assets. In some cases,
these officers may also serve as officers, and utilize the facilities, of
wholly-owned subsidiaries and other affiliates of Bank of America or its parent
corporation. For the services provided and expenses assumed pursuant to the
Investment Advisory Agreement for the Portfolio, the Master Trust has agreed to
pay Bank of America fees, accrued daily and payable monthly, at the annual rate
of .35% of the average net assets of the Portfolio.
For the fiscal year ended February 28, 1995, Bank of America waived its
entire investment advisory fee of $6,147, assumed certain operating expenses of
the Portfolio in the amount of $121,591, and assumed certain operating expenses
of the Fund in the amount of $180,700.
For the period from January 28, 1994 (commencement of operations)
through February 28, 1994, Bank of America waived its entire investment advisory
fees of $108, assumed certain operating expenses of the Portfolio in the amount
of $34,404, and assumed certain operating expenses of the Fund in the amount of
$18,272. The fees payable to Bank of America are not subject to reduction as the
value of the Portfolio's net assets increases. From time to time, Bank of
America may waive fees or reimburse the Company or the Portfolio for expenses
voluntarily or as required by certain state securities laws. See "Management -
Administrator" for instances where the Fund's Administrator is required to make
expense reimbursements to the Company.
The Investment Advisory Agreement for the Portfolio provides that Bank
of America shall not be liable for any error of judgment or mistake of law or
for any loss suffered in connection with the performance of the Investment
Advisory Agreement, except a loss resulting from a breach of fiduciary
-34-
<PAGE> 559
duty with respect to the receipt of compensation for services or a loss
resulting from willful misfeasance, bad faith or negligence in the performance
of its duties or from reckless disregard by it of its duties and obligations
thereunder.
THE GLASS-STEAGALL ACT AND PROPOSED LEGISLATION
The Glass-Steagall Act, among other things, prohibits banks from
engaging in the business of underwriting securities, although national and
state-chartered banks generally are permitted to purchase and sell securities
upon the order and for the account of their customers. In 1971, the United
States Supreme Court held in Investment Company Institute v. Camp that the
Glass-Steagall Act prohibits a national bank from operating a fund for the
collective investment of managing agency accounts. Subsequently, the Board of
Governors of the Federal Reserve System (the "Board") issued a regulation and
interpretation to the effect that the Glass-Steagall Act and such decision
forbid a bank holding company registered under the Federal Bank Holding Company
Act of 1956 (the "Holding Company Act") or any non-bank affiliate thereof from
sponsoring, organizing or controlling a registered, open-end investment company
continuously engaged in the issuance of its shares, but do not prohibit such a
holding company or affiliate from acting as investment adviser, transfer agent
and custodian to such an investment company. In 1981, the United States Supreme
Court held in Board of Governors of the Federal Reserve System v. Investment
Company Institute that the Board did not exceed its authority under the Holding
Company Act when it adopted its regulation and interpretation authorizing bank
holding companies and their non-bank affiliates to act as investment advisers to
registered closed-end investment companies.
Bank of America believes that if the question was properly presented, a
court should hold that Bank of America may perform the services for the
Portfolio contemplated by the Investment Advisory Agreement, the Prospectus, and
this Statement of Additional Information without violation of the Glass-Steagall
Act or other applicable banking laws or regulations. It should be noted,
however, that there have been no cases deciding whether a national bank may
perform services comparable to those performed by Bank of America and that
future changes in either federal or state statutes and regulations relating to
permissible activities of banks or trust companies and their subsidiaries or
affiliates, as well as further judicial or administrative decisions or
interpretations of present and future statutes and regulations, could prevent
Bank of America from continuing to perform such services for the Portfolio or
from continuing to purchase Fund shares for the accounts of its customers.
-35-
<PAGE> 560
For a discussion of the Glass-Steagall Act in connection with the
Company's Shareholder Service Plan, see "Plan Payments" in the Fund's
Prospectus.
On the other hand, as described herein, the Fund is currently
distributed by Concord Financial Group, Inc., and Concord Holding Corporation,
its parent, provides the Fund with administrative services. If current
restrictions under the Glass-Steagall Act preventing a bank from sponsoring,
organizing, controlling, or distributing shares of an investment company were
relaxed, the Portfolio and the Company expect that Bank of America would
consider the possibility of offering to perform some or all of the services now
provided by Concord Holding Corporation or Concord Financial Group, Inc. From
time to time, legislation modifying such restriction has been introduced in
Congress which, if enacted, would permit a bank holding company to establish a
non-bank subsidiary having the authority to organize, sponsor and distribute
shares of an investment company. If this or similar legislation were enacted,
the Portfolio and the Company expect that Bank of America's parent bank holding
company would consider the possibility of one of its non-bank subsidiaries
offering to perform some or all of the services now provided by Concord Holding
Corporation or Concord Financial Group, Inc. It is not possible, of course, to
predict whether or in what form such legislation might be enacted or the terms
upon which Bank of America or such a non-bank affiliate might offer to provide
services for consideration by the Portfolio's Board of Trustees or the Company's
Board of Directors.
ADMINISTRATOR
Concord Holding Corporation (the "Administrator"), with offices at 125
W. 55th Street, New York, New York 10019 and 3435 Stelzer Road, Columbus, Ohio
43219, is a wholly-owned subsidiary of The BISYS Group, Inc. The Administrator
also serves as administrator to several other investment companies.
The Administrator provides administrative services to the Company and
the Portfolio as described in the Fund's Prospectus pursuant to separate
administration agreements for the Company and the Portfolio. The Portfolio's
administration agreement will continue in effect until October 31, 1996, and
thereafter for successive periods of one year, provided the agreement is not
sooner terminated. The Portfolio's administration agreement is terminable at any
time by the Portfolio's Board of Trustees or by a vote of a majority of the
Portfolio's outstanding interests upon 60 days' notice to the Administrator, or
by the Administrator upon 90 days' notice to the Portfolio. The Fund's
administration agreement will continue in effect until October 31, 1996 and
thereafter will be extended for successive periods of one year, provided that
each such extension is specifically approved (a) by vote of a majority of
-36-
<PAGE> 561
those members of the Company's Board of Directors who are not interested
persons of any party to the agreement, cast in person at a meeting called for
the purpose of voting on such approval, and (b) the Company's Board of
Directors or by vote of a majority of the outstanding voting securities of the
Fund. The agreement is terminable at any time without penalty by the Company's
Board of Directors or by a vote of a majority of the Fund's outstanding shares
upon 60 days' notice to the Administrator, or by the Administrator upon 90
days' notice to the Company.
The Company has agreed to pay the Administrator a fee for its services
as Administrator, accrued daily and payable monthly, at the annual rates of .15%
of the average net assets of the Fund, and .05% of the average net assets of the
Portfolio. The fees payable to the Administrator are not subject to reduction as
the value of the Fund's and the Portfolio's net assets increases. From time to
time, the Administrator may waive fees or reimburse the Company and Portfolio
for expenses, either voluntarily or as required by certain state securities
laws.
For the fiscal year ended February 28, 1995, the Administrator waived
the administration fees due from the Portfolio and the Fund in the amounts of
$896 and $2,720, respectively.
For the period from January 28, 1994 (commencement of operations)
through February 28, 1994, the Administrator waived the administration fees due
from the Portfolio and the Fund in the amounts of $15 and $46, respectively.
If total expenses borne by the Fund in any fiscal year exceed the
expense limitations imposed by applicable state securities regulations, the
Company and the Master Trust may deduct from the payments to be made with
respect to the Fund and the Portfolio to Bank of America and the Administrator,
respectively, or Bank of America and the Administrator each will bear, the
amount of such excess to the extent required by such regulations in proportion
to the fees otherwise payable to them for such year. Such amount, if any, will
be estimated, reconciled and effected or paid, as the case may be, on a monthly
basis. As of the date of this Statement of Additional Information, the most
restrictive expense limitation that may be applicable to the Company limits
aggregate annual expenses with respect to the Fund (including management,
advisory fees and the Fund's pro rata shares of such expenses of the Portfolio,
but excluding interest, taxes, brokerage commissions, and certain other
expenses) to 2-1/2% of the first $30 million of its average daily net assets, 2%
of the next $70 million, and 1-1/2% of its remaining average daily net assets.
During the course of the Company's fiscal year, the Administrator and Bank of
America may assume certain expenses and/or not receive payment of fees of the
Fund or Portfolio, while retaining the ability to be reimbursed
-37-
<PAGE> 562
by the Fund or Portfolio for such amounts prior to the end of the fiscal year.
This will have the effect of increasing yield to investors at the time such
fees are not received or amounts are assumed and decreasing yield when such
fees or amounts are reimbursed.
The Administrator will bear all expenses in connection with the
performance of its services under the administration agreements with the
exception of the fees charged by PFPC, Inc. for certain fund accounting services
which are borne by the Fund and the Portfolio. Expenses borne by the Fund and/or
Portfolio include taxes, interest, brokerage fees and commissions, if any, fees
of Board members who are not officers, directors, partners, employees or holders
of 5% or more of the outstanding voting securities of Bank of America or the
Administrator or any of their affiliates, Securities and Exchange Commission
fees and state securities qualification fees, advisory fees, administration
fees, charges of custodians, transfer and dividend disbursing agents' fees,
certain insurance premiums, outside auditing and legal expenses, costs of
maintaining corporate existence, costs attributable to investor services,
including without limitation telephone and personnel expenses, costs of
preparing and printing prospectuses and Statements of Additional Information for
regulatory purposes, cost of shareholders' reports and corporate meetings and
any extraordinary expenses. Certain shareholder servicing fees in connection
with the Company's shares are also paid by the Company. See "Distributor and
Plan Payments."
The administration agreements provide that the Administrator shall not
be liable for any error of judgment or mistake of law or any loss suffered by
the Company or the Portfolio in connection with the performance of the
administration agreements, except a loss resulting from willful misfeasance, bad
faith or negligence in the performance of its duties or from the reckless
disregard by it of its obligations and duties thereunder.
DISTRIBUTOR AND PLAN PAYMENTS
Concord Financial Group, Inc. (the "Distributor"), a wholly-owned
subsidiary of the Administrator, acts as distributor of the shares of the
Company. Shares are sold on a continuous basis by the Distributor. The
Distributor has agreed to use its best efforts to solicit orders for the sale of
the Company's shares although it is not obliged to sell any particular amount of
shares. The distribution agreement shall continue in effect until October 31,
1996. Thereafter, if not terminated, the distribution agreement shall continue
automatically for successive terms of one year, provided that such continuance
is specifically approved at least annually (a) by a vote of a
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majority of those members of the Board of Directors of the Company who are not
parties to the distribution agreement or "interested persons" of any such
party, cast in person at a meeting called for the purpose of voting on such
approval, and (b) by the Board of Directors of the Company or by vote of a
"majority of the outstanding voting securities" of the Fund as to which the
distribution agreement is effective; provided, however, that the distribution
agreement may be terminated by the Company at any time, without the payment of
any penalty, by vote of a majority of the entire Board of Directors of the
Company or by a vote of a "majority of the outstanding voting securities" of
the Fund on 60 days' written notice to the Distributor, or by the Distributor
at any time, without the payment of any penalty, on 90 days' written notice to
the Company. The agreement will automatically and immediately terminate in the
event of its "assignment."
For the fiscal year ended January 28, 1995, the Distributor received
$85,535 in sales loads in connection with share purchases, of which the
Distributor and various affiliates of Bank of America retained $9,400 and
$74,860, respectively. The balance was paid to selling dealers.
For the period from January 28, 1994 (commencement of the Fund's
operations) through February 28, 1994, the Distributor received $23,828 in sales
loads in connection with share purchases, of which the Distributor and various
affiliates of Bank of America retained $2,650 and $21,178, respectively. The
balance was paid to selling dealers.
The Distributor is entitled to payment by the Company for certain
shareholder servicing expenses in addition to the sales loads described above
and in the Prospectus under the Shareholder Service Plan (the "Plan") adopted by
the Company. Under the Shareholder Service Plan, the Company pays the
Distributor, with respect to the Fund, for (a) non-distribution shareholder
services provided by the Distributor to Service Organizations and/or the
beneficial owners of Fund shares, including, but not limited to shareholder
servicing provided by the Distributor at facilities dedicated for Company use,
provided such shareholder servicing is not duplicative of the servicing
otherwise provided on behalf of the Fund, and (b) fees paid to Service
Organizations (which may include the Distributor itself) for the provision of
support service to the shareholders for whom the Service Organization is the
dealer of record or holder of record or with whom the Servicing Organization has
a servicing relationship ("Clients").
Support services provided by Service Organizations may include, among
other things: (i) establishing and maintaining accounts and records relating to
Clients that invest in Fund shares; (ii) processing dividend and distribution
payments from
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the Fund on behalf of Clients; (iii) providing information periodically to
Clients regarding their positions in shares; (iv) arranging for bank wires; (v)
responding to Client inquiries concerning their investments in Fund shares;
(vi) providing the information to the Fund necessary for accounting or
subaccounting; (vii) if required by law, forwarding shareholder communications
from the Fund (such as proxies, shareholder reports, annual and semi-annual
financial statements and dividend, distribution and tax notices) to Clients;
(viii) assisting in processing exchange and redemption requests from Clients;
(ix) assisting Clients in changing dividend options, account designations and
addresses; and (x) providing such other similar services.
The Shareholder Service Plan provides that the Distributor is entitled
to receive payments for expenses on a monthly basis, at an annual rate not
exceeding .25% of the average daily net assets of the Fund during such month for
shareholder servicing expenses. The calculation of a Fund's average daily net
assets for these purposes does not include assets held in accounts opened via a
transfer of assets from trust and agency accounts of Bank of America. Further,
payments made out of or charged against the assets of the Fund must be in
payment for expenses incurred on behalf of the Fund.
If in any month the Distributor expends or is due more monies than can
be immediately paid due to the percentage limitation described above, the unpaid
amount is carried forward from month to month while the Plan is in effect until
such time, if ever, when it can be paid in accordance with such percentage
limitations. Conversely, if in any month the Distributor does not expend the
entire amount then available under the Plan, and assuming that no unpaid amounts
have been carried forward and remain unpaid, then the amount not expended will
be a credit to be drawn upon by the Distributor to permit future payment.
However, any unpaid amounts or credits due under the Plan may not be "carried
forward" beyond the end of the fiscal year in which such amounts or credits due
are accrued.
For the fiscal year ended February 28, 1995, and for the period
January 28, 1994 (commencement of operations) through February 28, 1994, the
Distributor waived all shareholder servicing fees in the amounts of $4,533 and
$77, respectively.
Payments for shareholder service expenses under the Shareholder
Service Plan are not subject to Rule 12b-1 (the "Rule") under the 1940 Act.
Pursuant to the Shareholder Service Plan, the Distributor provides that a report
of the amounts expended under the Plan, and the purposes for which such
expenditures were incurred, will be made to the Board of Directors for its
review at least quarterly. In addition, the Plan provides that the selection
and nomination of the directors
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of the Company who are not "interested persons" of the Company have been
committed to the discretion of the directors who are neither "interested
persons" (as defined in the 1940 Act) of the Company nor have any direct or
indirect financial interest in the operation of the Shareholder Service Plan
(or related servicing agreements) (the "Non-Interested Plan Directors").
The Company's Board of Directors has concluded that there is a
reasonable likelihood that the Plan will benefit the Fund and its shareholders.
The Plan is subject to annual re-approval by a majority of the Non-Interested
Plan Directors and is terminable at any time with respect to the Fund by a vote
of a majority of such Directors or by vote of the holders of a majority of the
shares of the Fund. Any agreement entered into pursuant to the Plan with a
Service Organization is terminable with respect to the Fund without penalty, at
any time, by vote of a majority of the Non-Interested Plan Directors, by vote
of the holders of a majority of the shares of the Fund, by the Distributor or
by the Service Organization. Each agreement will also terminate automatically
in the event of its assignment.
The Company understands that Bank of America and/or some Service
Organizations may charge their clients a direct fee for administrative and
shareholder services in connection with the holding of Fund shares. These fees
would be in addition to any amounts which might be received under the Plans.
Small, inactive long-term accounts involving such additional charges may not be
in the best interest of shareholders.
The following table shows all sales loads, commissions and other
compensation received by the Distributor directly or indirectly from the Fund
during the most recent fiscal year ended February 28, 1995:
<TABLE>
<CAPTION>
Brokerage
Commis-
Net Under- sions in
writing Dis- Compensation connection
counts and on Redemption with Fund Other
Commissions and Repurchase Transactions Compensation(1)
----------- -------------- ------------ ---------------
<S> <C> <C> <C> <C>
Concord Financial
Group, Inc.
National Municipal
Bond Fund $9,400 $ 0 $ 0 $ 0
</TABLE>
- ---------------
(1) Represents the total of (i) amounts paid to the Administrator for
administrative services provided to the Fund (see
"Management-Administrator" above) and (ii) payments made under the
Shareholder Service Plan (see discussion above).
YIELD, TAX-EQUIVALENT YIELD AND TOTAL RETURN
From time to time, the yield, tax-equivalent yield and the total return
of the Fund may be quoted in and compared to
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<PAGE> 566
other mutual funds with similar investment objectives in advertisements,
shareholder reports or other communications to shareholders. The Fund may also
include calculations in such communications that describe hypothetical
investment results. (Such performance examples will be based on an express set
of assumptions and are not indicative of the performance of the Fund.) Such
calculations may from time to time include discussions or illustrations of the
effects of compounding in advertisements. "Compounding" refers to the fact
that, if dividends or other distributions on a Fund investment are reinvested
by being paid in additional Fund shares, any future income or capital
appreciation of the Fund would increase the value, not only of the original
Fund investment, but also of the additional Fund shares received through
reinvestment. As a result, the value of the Fund investment would increase
more quickly than if dividends or other distributions had been paid in cash.
The Fund may also include discussions or illustrations of the potential
investment goals of a prospective investor (including but not limited to tax
and/or retirement planning), investment management techniques, policies or
investment suitability of the Fund, economic conditions, legislative
developments (including pending legislation), the effects of inflation and
historical performance of various asset classes, including but not limited to
stocks, bonds and Treasury bills. From time to time advertisements or
communications to shareholders may summarize the substance of information
contained in shareholder reports (including the investment composition of the
Fund and a Portfolio), as well as the views of the Portfolio's investment
adviser as to current market, economic, trade and interest rate trends,
legislative, regulatory and monetary developments, investment strategies and
related matters believed to be of relevance to the Fund. The Fund may also
include in advertisements charts, graphs or drawings which illustrate the
potential risks and rewards of investment in various investment vehicles,
including but not limited to stocks, bonds, Treasury bills and shares of the
Fund. In addition, advertisements or shareholder communications may include a
discussion of certain attributes or benefits to be derived by an investment in
the Fund and may include testimonials as to the investment adviser's
capabilites by clients. Such advertisements or communications may include
symbols, headlines or other material which highlight or summarize the
information discussed in more detail therein. With proper authorization, the
Fund may reprint articles (or excerpts) written regarding the Fund and provide
them to prospective shareholders. Performance information with respect to the
Fund is generally available by calling (800) 346-2087.
Yield Calculations. The yield of the Fund is calculated by dividing
the net investment income per share (as described below) earned by the Fund
during a 30-day (or one month) period by the maximum offering price per share on
the last
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<PAGE> 567
day of the period and annualizing the result on a semi-annual basis by adding
one to the quotient, raising the sum to the power of six, subtracting one from
the result and then doubling the difference. The Fund's net investment income
per share earned during the period is based on the average daily number of
shares outstanding during the period entitled to receive dividends and includes
dividends and interest earned during the period minus expenses accrued for the
period, net of reimbursements. This calculation can be expressed as follows:
a-b
Yield = 2 [(----- + 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 outstanding
during the period that were entitled to receive
dividends.
d = maximum offering price per share on the last day
of the period.
For the purpose of determining net investment income earned during the
period (variable "a" in the formula), except as noted below, interest earned on
debt obligations is calculated by computing the yield to maturity of each
obligation based on the market value of the obligation (including actual accrued
interest) at the close of business on the last business day of each month, or,
with respect to obligations purchased during the month, the purchase price (plus
actual accrued interest), and dividing the result by 360 and multiplying the
quotient by the market value of the obligation (including actual accrued
interest) in order to determine the interest income on the obligation for each
day of the subsequent month that the obligation is held. For purposes of this
calculation, it is assumed that each month contains 30 days. The maturity of an
obligation with a call provision is the next call date on which the obligation
reasonably may be expected to be called or, if none, the maturity date. With
respect to debt obligations purchased at a discount or premium, the formula
generally calls for amortization of the discount or premium. The amortization
schedule will be adjusted monthly to reflect changes in the market values of
such debt obligations.
Interest earned on tax-exempt obligations that are issued without
original issue discount and have a current market discount is calculated by
using the coupon rate of interest
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<PAGE> 568
instead of the yield to maturity. In the case of tax-exempt obligations that
are issued with original issue discount but which have discounts based on
current market value that exceed the then-remaining portion of the original
issue discount (market discount), the yield to maturity is the imputed rate
based on the original issue discount calculation. On the other hand, in the
case of tax- exempt obligations that are issued with original issue discount
but which have the discounts based on current market value that are less than
the then-remaining portion of the original issue discount (market premium), the
yield to maturity is based on the market value.
With respect to mortgage or other receivables-backed obligations which
are expected to be subject to monthly payments of principal and interest ("pay
downs"), (a) gain or loss attributable to actual monthly pay downs are accounted
for as an increase or decrease to interest income during the period; and (b) the
Portfolio may elect either (i) to amortize the discount and premium on the
remaining security, based on the cost of the security, to the weighted average
maturity date, if such information is available, or to the remaining term of the
security, if any, if the weighted average maturity date is not available, or
(ii) not to amortize discount or premium on the remaining security.
Undeclared earned income will be subtracted from the maximum offering
price per share (variable "d" in the formula). Undeclared earned income is the
net investment income which, at the end of the base period, has not been
declared as a dividend, but is reasonably expected to be and is declared and
paid as a dividend shortly thereafter. The Fund's maximum offering price per
share for purposes of the formula includes the maximum sales load imposed by the
Fund -- currently 4.50% of the per share offering price.
The Fund's "tax-equivalent" yield is computed by dividing that portion
of the Fund's yield (calculated as above) that is tax exempt by one minus a
stated income tax rate and adding the product to that portion, if any, of the
Fund's computed yield that is not tax exempt. Tax-equivalent yields assume the
payment of Federal income taxes at the stated rate.
Based on the foregoing calculations, the Fund's yield and tax-
equivalent yield (after fee waivers and reimbursements) for the 30 day period
ended February 28, 1995 were 5.46% and 7.91%, respectively.
Total Return Calculations. The Fund may compute its average annual
total return by determining the average annual compounded rates of return during
specified periods that equate the initial amount invested to the ending
redeemable value of such investment. This is done by dividing the ending
redeemable
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<PAGE> 569
value of a hypothetical $1,000 initial payment by $1,000 and raising the
quotient to a power equal to one divided by the number of years (or fractional
portion thereof) covered by the computation and subtracting one from the
result. This calculation can be expressed as follows:
ERV (1/n)
T = [(-----) - 1]
P
Where: T = average annual total return.
ERV = ending redeemable value at the end
of the period covered by the
computation of a hypothetical $1,000
payment made at the beginning of the
period.
P = hypothetical initial payment of $1,000.
n = period covered by the computation,
expressed in terms of years.
The Fund computes its aggregate total return by determining the
aggregate rate of return during specified periods that likewise equates the
initial amount invested to the ending redeemable value of such investment. The
formula for calculating aggregate total return is as follows:
ERV
-----
aggregate total return = [( P - 1)]
The calculations of average annual total return and aggregate total
return assume the reinvestment of all dividends and capital gain distributions
on the reinvestment dates during the period. The ending redeemable value
(variable "ERV" in each formula) is determined by assuming complete redemption
of the hypothetical investment and the deduction of all nonrecurring charges at
the end of the period covered by the computations. In addition, the Fund's
average annual total return and aggregate total return quotations reflect the
deduction of the maximum sales load charged in connection with the purchase of
Fund shares.
Based on the foregoing calculations, the average annual total return
(after fee waivers and reimbursements) for the Fund for the one year period
ended February 28, 1995 and for the period January 28, 1994 (commencement of
operations) through February 28, 1995 were (1.84)% and (2.62)%, respectively.
Based on the foregoing calculations, the aggregate annual total return (after
fee waivers and reimbursements) for the Fund for the one
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<PAGE> 570
year period ended February 28, 1995 and for the period January 28, 1994
(commencement of operations) through February 28, 1995 were (1.84)% and
(2.82)%, respectively
The Fund may advertise total return data without reflecting the sales
load imposed on the purchase of shares of the Fund in accordance with the rules
of the Securities and Exchange Commission. Quotations which do not reflect the
sales load will, of course, be higher than quotations which do.
GENERAL INFORMATION
DESCRIPTION OF SHARES
The Company is an open-end management investment company organized as
a Maryland corporation on October 27, 1982. The Fund's Charter authorizes the
Board of Directors to issue up to two hundred billion full and fractional common
shares. Pursuant to the authority granted in the Charter, the Board of
Directors has authorized the issuance of twenty-two classes of stock - Classes A
through W Common Stock, $.001 par value per share, representing interests in
twenty-two separate investment portfolios. Class Q represents interests in the
National Municipal Bond Fund. The Company's charter also authorizes the Board
of Directors to classify or reclassify any particular class of the Company's
shares into one or more series.
Shares have no preemptive rights and only such conversion or exchange
rights as the Board may grant in its discretion. When issued for payment as
described in the Prospectus, the Company's shares will be fully paid and
non-assessable. For information concerning possible restrictions upon the
transferability of the Company's shares and redemption provisions with respect
to such shares, see "Additional Purchase and Redemption Information."
Shareholders are entitled to one vote for each full share held, and
fractional votes for fractional shares held, and will vote in the aggregate and
not by class or series except as otherwise required by the 1940 Act or other
applicable law or when permitted by the Board of Directors. Shares have
cumulative voting rights to the extent they may be required by applicable law.
Rule 18f-2 under the 1940 Act provides that any matter required to be
submitted to the holders of the outstanding voting securities of an investment
company such as the Company shall not be deemed to have been effectively acted
upon unless approved by a majority of the outstanding shares of each fund
affected by the matter. The Fund is affected by a matter unless it is clear
that the interests of each of the Company's funds in the matter are
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<PAGE> 571
substantially identical or that the matter does not affect any interest of the
Fund. Under Rule 18f-2 any change in a fundamental investment policy would be
effectively acted upon with respect to the Fund only if approved by a majority
of the outstanding shares of the Fund. However, the rule also provides that
the ratification of independent public accountants, the approval of principal
underwriting contracts and the election of directors may be effectively acted
upon by shareholders of the Company voting without regard to particular funds.
Notwithstanding any provision of Maryland law requiring a greater vote
of the Company's common stock (or of the shares of the Fund voting separately as
a class) in connection with any corporate action, unless otherwise provided by
law (for example, by Rule 18f-2 discussed above) or by the Company's Charter,
the Company may take or authorize such action upon the favorable vote of the
holders of more than 50% of the outstanding common stock of the Company voting
without regard to class.
THE PORTFOLIO
The Portfolio is a separate series of Master Investment Trust, Series
II, which was organized October 26, 1992 as a Delaware business trust. The
Master Trust's Declaration of Trust authorizes its Board of Trustees to issue an
unlimited number of interests of beneficial interest and to establish and
designate any unissued interests of one or more additional series of interests.
Investors in the Portfolio are entitled to distributions arising from the net
investment income and net realized gains, if any, earned on investments held by
the Portfolio. Investors are also entitled to participate in the net
distributable assets of the Portfolio on liquidation. Beneficial interests have
no preemptive, conversion or exchange rights.
REPORTS
Shareholders will receive unaudited semi-annual reports describing the
Portfolio's and the Fund's investment operations and annual financial statements
of the Portfolio and the Fund, audited by the independent accountants.
CUSTODIAN, ACCOUNTING AGENT AND TRANSFER AGENT
PNC Bank, National Association ("PNC") has been appointed custodian for
the Fund and the Portfolio. PFPC Inc., ("PFPC") 103 Bellevue Parkway,
Wilmington, DE 19809, provides the Fund and Portfolio with certain accounting
services pursuant to separate fund accounting services agreements with the
Administrator. Under the fund accounting services agreements, PFPC has agreed
to provide certain accounting, bookkeeping, pricing, dividend and distribution
calculation services with respect to the Company and the Portfolio,
respectively. The
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<PAGE> 572
monthly fees charged by PFPC under the fund accounting services agreements are
borne by the Fund and the Portfolio, respectively. As custodian of the assets
of the Fund and the Portfolio, PNC (i) maintains a separate account or accounts
in the name of the Fund and Portfolio (as applicable), (ii) holds and disburses
portfolio securities; (iii) makes receipts and disbursements of money, (iv)
collects and receives income and other payments and distributions on account of
portfolio securities, (v) responds to correspondence from security brokers and
others relating to its respective duties and (vi) makes periodic reports
concerning its respective duties.
BISYS Fund Services Ohio, Inc., 3435 Stelzer Road, Columbus, Ohio
43219-3035 serves as transfer and dividend disbursing agent for the Fund.
COUNSEL
Drinker Biddle & Reath (of which W. Bruce McConnel, III, Secretary of
the Company, is a partner), 1345 Chestnut Street, Suite 1100, Philadelphia,
Pennsylvania 19107, serves as counsel to the Company and the Master Trust and
will pass upon the legality of the shares offered hereby.
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP, with offices at 1177 Avenue of the Americas, New
York, New York 10036, has been selected as independent accountants of the Fund
and for the Portfolio.
SHAREHOLDER VOTE
As used in the Prospectus and this Statement of Additional Information,
a "vote of a majority" of the outstanding interests of the Portfolio, the
outstanding shares of the Fund or a particular series means the affirmative vote
of the lesser of (a) more than 50% of the outstanding interests of the
Portfolio, the outstanding shares of the Fund or such series, or (b) 67% of the
interests of the Portfolio, the shares of the Fund or such series present at a
meeting at which more than 50% of the outstanding interests of the Portfolio,
the outstanding shares of the Fund or series (as applicable) are represented in
person or by proxy.
At June 15, 1995, the name, address and share ownership of the entities
which held of record more than 5% of the outstanding Pacific Horizon Shares of
the Treasury Fund were as follows: BA Investment Services Inc., For the Benefit
of Clients, 555 California Street, 4th Floor, Department #4337, San Francisco,
CA 94104, 98,230,626.530 shares (7.70%); Bank of America State Trust Co., 299 N.
Euclid Avenue, Pasadena, CA 91101, 1,044,975,154.790 shares (82.00%); and
Hellman & Freidman
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<PAGE> 573
Capital Partners II, Limited Partnership, Attention: Georgia Lee, 1 Maritime
Plaza, 12th Floor, San Francisco, CA 94111, 1,216,118,073.700 shares (095.42%).
At June 16, 1995, the name, address and share ownership of the entities
which held of record more than 5% of the outstanding Horizon Shares of the
Treasury Fund was as follows: Bank of America Trustee/Custodian for Investing
in Horizon Treasury, Attn: Eric Peterson, 701 S. Western Avenue, 2nd Floor,
Glendale, CA 91201, 398,540,438.170 shares (68.901%); Security Pacific State
Trust Co., Agreement for Sec. PACWA Participants, Attn: Cash Sweep Funds (L.
Goekjian), P.O. Box 91630, Pasadena, CA 91101, 94,279,024.120 shares (16.299%).
At June 16, 1995, the name, address and share ownership of the entities
which held beneficially more than 5% of the outstanding Horizon Service Shares
of the Treasury Fund were as follows: Bank of America FM&TS Operat CA, Attn:
CTF Unit, 701 South Western Avenue, Glendale, CA 91201, 65,745,555.320 shares
(23.658%); Bank of America Nevada Southern Comm. Bank, Attn: Dan Dykes, P.O. Box
98600, Las Vegas, NV 89193, 63,974,589.270 shares (23.020%). Security Pacific
State Trust Co., Agreement for Sec. PACWA Participants, Attn: Cash Sweep Funds,
P.O. Box 91630, Pasadena, CA 91101, 56,906,301.540 shares (20.477%); and
Security Pacific Cash Management, c/o Bank of America - GPO M/C 5533, Attn:
Liezel Barangan, 1850 Gateway Boulevard, Concord, CA 94520, 77,003,300 shares
(27.709%). At June 15, 1995, the name, address and, share ownership of the
entity which held of record more than 5% of the outstanding Horizon Service
Shares of the Treasury Fund was as follows: Omnibus A/C for the Shareholder
Accounts maintained by Concord Financial Services, Inc., Attn: Linda Zerbe,
First and Market Building, 100 First Avenue, Suite 300, Pittsburgh, PA 15222,
263,629,755.130 shares (65.51%). At June 15, 1995 the name, address and share
ownership of the entities which held of record more than 5% of the outstanding
Pacific Horizon Shares of the Prime Fund were as follows: BA Investment
Services Inc., For the Benefit of Clients, 555 California Street, 4th Floor,
Department #4337, San Francisco, CA 94104, 514,119,226.900 shares (38.76%); Bank
of America State Trust Co., 299 N. Euclid Avenue, Pasadena, CA 91101,
392,983,248.780 shares (29.63%); and Southwest Securities Inc., Attn:
Cashiering, 201 Elm Street, Suite 4300, Dallas, TX 75270, 169,018,910.270 shares
(12.74%). At June 16, 1995, the name, address and share ownership of the
entities which held of record more than 5% of the outstanding Horizon Shares of
the Prime Fund were as follows: Bank of America Trustee/Custodian for Investing
Horizon Prime, Attn: Eric Peterson, 701 S. Western Avenue, 2nd Floor, Glendale,
CA 91201, 385,058,852.030 shares (56.838%); and Bank of America NT&SA, Attn: Kay
Warren/Dept. #5596, 1455 Market Street, San Francisco, CA 94103, 57,300,000.00
shares (9.934%). At June 15, 1995, the name, address and share ownership of the
entity which held of record more than 5% of the outstanding Horizon Service
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<PAGE> 574
Shares of the Prime Fund were as follows: Omnibus A/C for the Shareholder
Accounts maintained by Concord Financial Services, Inc., Attn: Linda Zerbe,
First and Market Building, 100 First Avenue, Suite 300, Pittsburgh, PA 15222,
752,776,315.610 shares (70.26%).
At June 16, 1995, the name, address and share ownership of the entities
which held beneficially more than 5% of the outstanding Horizon Service Shares
of the Prime Fund were as follows: Bank of America NT&SA Financial Management
and Trust Services, 701 S. Western Avenue, Glendale, CA 91201, 74,038,082.090
shares (9.835%); Capital Network Services, Attn: Donna Novell, One Bush Street,
11th Floor, San Francisco, CA 94104, 86,407,261.23 shares (11.478%); Security
Pacific Cash Management, c/o Bank of America. GPO. M/C 5533 Attn: Liezel
Barangan, 1850 Gateway Boulevard, M/C 5533, Concord, CA 94520, 379,755,600.000
shares (50.447%); Security Pacific State Trust Co., Agreement for SecPAC WA
Participants, Attn: Cash Sweep Funds (L. Goekjian) P.O. Box 91630, Pasadena, CA
91101, 54,321,621.330 shares (7.216%); and Southwest Securities Inc., Attn: Mary
Lisenber, 1201 Elm Street, Suite 4300, Dallas, TX 75270, 130,146,660.030 shares
(17.289%).
At June 15, 1995, the name, address and share ownership of the entities
which held of record more than 5% of the outstanding Pacific Horizon Shares of
the Tax-Exempt Money Fund were as follows: BA Investment Services, Inc., For
the Benefit of Clients, 555 California Street, 4th Floor, Department #4337, San
Francisco, CA 94104, 12,233,845.190 shares (39.73%); Southwest Securities Inc.,
Attn: Cashiering, 1201 Elm Street, Suite 4300, Dallas, TX, 75270, 10,387,253.930
shares (33.73%); and Bank of America State Trust Co., 299 N. Euclid Avenue,
Pasadena, CA 91101, 6,515,635.730 shares (21.16%).
At June 16, 1995, the name, address and share ownership of the
entities which held of record more than 5% of the outstanding Horizon Shares of
the Tax-Exempt Money Fund were as follows: Bank of America Custodian For
Investing in Horizon Tax-Exempt Money Fund, Attn: Eric Peterson, 701 S. Western
Avenue, 2nd Floor, Glendale, CA 19201, 129,582,555.65 shares (38.576%);
Continental Bank National Association Custodian for the Benefit of Custodian Co.
Attn: Mary Chester, 231 South LaSalle Street, 6Q, Chicago, IL 60697,
152,699,416.270 shares (45.458%); and Maine Midland Bank NA, Investment
Services, 17th Floor, Attn: Christine Mincel, One Marine Midland Center,
Buffalo, NY 14203, 21,684,672.980 shares (6.455%).
At June 15, 1995, the name, address and share ownership of the entities
which held of record more than 5% of the outstanding shares of the Horizon
Service Shares of the Tax-Exempt Money Fund were as follows: Furman C. Moseley
and Susan R. Moseley Tenn. In Common, 1201 3rd Avenue, Box 7C, Seattle, WA
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<PAGE> 575
98101, 4,165,513.060 shares (9.91%); Omnibus A/C for the shareholder accounts
maintained by Concord Financial Services Inc., Attn: Linda Zerbe, First and
Market Building, 100 First Avenue, Suite 300, Pittsburgh, PA 15222,
22,398,544.590 shares (53.31%); and Omnibus A/C for the Shareholder Accounts
maintained by Concord Financial Services Inc. Attn: First and Market Building,
100 First Avenue, Suite 300, Pittsburgh, PA 15222, 3,494,305.180 shares
(8.31%). At June 16, 1995, the name, address and share ownership of the
entities which held beneficially more than 5% of the outstanding Horizon
Service Shares of the Tax-Exempt Money Fund were as follows: BA Investment
Services Inc., 555 California Street, 4th Floor Dept. #4337, San Francisco, CA
94104, 1,362,028.590 shares (5.260%); Bank of America FM&TS Oper. CA, Attn: CTF
Unit, 701 South Western Avenue, Glendale, CA 91201, 2,293,907.40 shares
(8.859%); and Southwest Securities, Inc., Attn: Mary Lisenber, 1201 Elm Street,
Suite 430, Dallas, TX 75270, 21,021,580.530 shares (81.187%). At June 15,
1955, the name, address and share ownership of the entities which held of
record more than 5% of the outstanding Pacific Horizon Shares of the Government
Fund were as follows: Bank of America, NT&SA, The Private Bank, Attn: ACI Unit
#8329, 701 S. Western Avenue, Glendale, CA 91201, 79,875,532.090 shares
(22.71%); Bank of America State Trust Co., 299 N. Euclid Avenue., Pasadena, CA
91101, 64,756,966.280 shares (18.41%); and BA Investment Services Inc., For the
Benefit of Clients, 555 California Street, 4th Floor, Department #4337, San
Francisco, CA 94104, 170,940,404.650 shares (48.60%). At June 16, 1995, the
name, address and share ownership of the entities which held of record more
than 5% of the outstanding Horizon Shares of the Government Fund were as
follows: Bank of America NT&SA Trustee/Custodian for Investing in Horizon
Shares of the Government Fund, Attn: Cynthia Beauvais, 701 South Western
Avenue., Glendale, CA 91201, 9,327,446.350 shares (5.028%); Bank of America
State Trust, Attn: Rigo Barrett, 299 N. Euclid Avenue, Pasadena, CA 91101,
28,063,486.740 shares (15.129%); Capital Network Services, Attn: Donna Novell,
One Bush Street, 11th Floor, San Francisco, CA 94104, 24,227,801.980 shares
(13.061%); County of Orange, Matt Raabe, P.O. Box 4515, Santa Ana, CA 92702,
10,000,000.000 shares (5.391%); Cypress Insurance Co., Attn: Larry Tetzloff,
9290 W. Dodge Road, Omaha, NE 68124, 9,996,515.930 shares (5.389%); Harr & Co.,
c/o Bank of New York, Attn: Bimal Sana, Spec. Prec. Dept., One Wall Street, 5th
Floor, New York, NY 10286, 14,000,000.000 shares (7.547%); Micron Electronics
Inc., Attn: Debbie Meigand, 900 East Karcher Road, Nanpa, ID 83687,
16,080,510.14 shares (8.669%); and Silocin Magic Corp., Attn: Meng A. Lim,
20300 Stevens Creek Boulevard., Suite 400, Cupertino, CA 95014, 18,058,262.110
shares (9.735%). At June 15, 1995, the name, address and share ownership of
the entities which held of record more than 5% of the outstanding Horizon
Service Shares of the Government Fund were as follows: Spacelabs Medical, Inc.,
Attn: Scott Bender, P.O. Box 97013, Redmond, WA 98073, 14,572,000.000 shares
(5.70%); Good Health
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<PAGE> 576
Plan of WA, Attn: Tsai Cheng, 1501 9th Avenue, Suite 500, Seattle, WA 98101,
16,584,866.580 shares (6.49%); Omnibus A/C for the Shareholder Accounts
maintained by Concord. Financial Services Inc., Attn: Linda Zerbe, First and
Market Building, 100 First Avenue, Suite 300, Pittsburgh, PA 15222,
68,555,257.020 shares (26.85%). At June 16, 1995, the name, address and share
ownership of the entities which held beneficially more than 5% of the Horizon
Service Shares of the Government Fund were as follows: Bank of America Nevada
Southern Comm. Bank, Attn: Dan Dykes, P.O. Box 98600, Las Vegas, NV 89193-8600,
35,849,966.050 shares (52.294%); and Capital Network Services, Attn: Donna M.
Howell, One Bush Street, 11th Floor, San Francisco, CA 94104-4425,
23,929,840.440 shares (34.906%). At June 15, 1995, the name, address and share
ownership of the entities which held of record more than 5% of the Pacific
Horizon Shares of the Treasury Only Fund were as follows: Bank of America
NT&SA, the Private Bank, Attn: ACI Unit 48329, 701 South Western Avenue,
Glendale, CA 91201, 48,516,900.490 shares (31.68%) Bank of America State Trust
Co., 299 N. Euclid Avenue, Pasadena, CA 91101, 22,350,831.320 shares (14.59%);
and BA Investment Services Inc., For the Benefit of Clients, 555 California
Street, 4th Floor, Department #4337, San Francisco, CA 94104, 69,016,521.500
shares (45.06%). At June 15, 1995, the name, address and share ownership of
the entities which held of record more than 5% of the outstanding Horizon
Service Shares of the Treasury Only Fund were as follows: National Home
Mortgage Corp., Attn: Mortgage Banking Treasury Operations, 5565 Morehouse
Drive, 3rd Floor, San Diego, CA 92121, 12,147.667,580 shares (9.42%); Comcare,
Inc., 4001 N. 3rd Street, Suite 120, Phoenix, AZ 85012, 26,230,243.620 shares
(20.34%); and Omnibus A/C For the Shareholder Accounts Maintained by Concord
Financial Services Inc., Attn: Linda Zerbe, First and Market Building, 100
First Avenue, Suite 300, Pittsburgh, PA 15222, 21,883,084.450 shares (16.97%).
At June 16, 1995, the name, address and share ownership of the entities which
held beneficially more than 5% of the outstanding Horizon Service Shares of the
Treasury Only Fund were as follows: BA Investment Service Inc., 555 California
Street, 4th Floor Dept. #4337, San Francisco, CA 94104, 6,403,628.120 shares
(28.679%); Bank of America NT&SA Trustee/Custodian for Investing in Horizon
Service Shares of the Treasury Only Fund, Attn: Cynthia Beauvais, 701 South
Western Avenue, Glendale, CA 91201, 3,501,414.020 shares (15.681%); Bank of
America State Trust, Attn: Rigo Barrett, 299 N. Euclid Avenue, Pasadena, CA
91101, 5,420,893.150 shares (24.277%); Fair Isaac & Co., Attn: Christine Tam,
120 North Redwood, San Rapheal, CA 94903-1996, 1,338,800.750 shares (5.996%);
Foothill/Eastern Transportation Corridor Agency, Attn: Laura Barker, 201 East
Sandpot, Suite 200, Santa Anna, CA 92707, 2,559,586.380 shares (11.463%); and
Nexus, Attn: Kathleen Menace, P.O. Box 60637, Sunnyvale, CA 94088-0637,
2,525,153.380 shares (11.309%). At June 15, 1995, the name, address and share
ownership of the entities which held of record more than 5% of the outstanding
Pacific Horizon Shares of the Prime Value Fund
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<PAGE> 577
were as follows: BA Investment Services Inc., For the Benefit of Clients, 555
California Street, 4th Floor, Department #4337, San Francisco, CA 94104,
16,383,467.170 shares (26.45%); and Bank of America State Trust Co., Attn: Leon
Goekjian, P.O. Box 91630, Pasadena, CA 91101, 45,078,465.290 shares (72.79%). At
June 16, 1995, the name, address and share ownership of the entity which held of
record more than 5% of the outstanding Horizon Shares of the Prime Value Fund
was as follows: Tice & Co., c/o M&T, Attn: Cash Management Clerk, 8th Floor,
P.O. Box 1377, Buffalo, NY 14240, 453,078,561.590 shares (93.510%). At June 15,
1995, the name, address and share ownership of the entity which held of record
more than 5% of the outstanding shares of the Pacific Horizon Shares of the
California Tax-Exempt Money Market Fund was as follows: BA Investment Services
Inc., For the Benefit of Clients, 555 California Street, 4th Floor, Department
#4337, San Francisco, CA 94104, 204,443,886.590 shares (22.07%). At June 15,
1995, the name, address and share ownership of the entities which held of record
more than 5% of the outstanding shares of the Horizon Service Shares of the
California Tax-Exempt Money Market Fund were as follows: Leo Zuckerman Trust,
DTD 12-11-91,4444 Viewridge Avenue, San Diego, CA 92123, 4,850,877.280 shares
(5.35%); and Omnibus A/C for the Shareholder Accounts Maintained by Concord
Financial Services Inc. Attn: Linda Zerbe, First and Market Building, 100 First
Avenue, Suite 300, Pittsburgh, PA 15222, 13,391,453.970 shares (14.77%). At
June 16, 1995, the name, address and share ownership of the entity which held
beneficially more than 5% of the outstanding shares of the Horizon Service
Shares of the California Tax-Exempt Money Market Fund was as follows: BA
Investment Services Inc., 555 California Street, 4th Floor, Dept. #4337, San
Francisco, CA 94109, 13,792,509.310 shares (99.206%). At June 15, 1995, the
name, address and shares ownership of the entities which held of record more
than 5% of the outstanding shares of the Flexible Bond Fund were as follows:
Peter F. Smith and Jacquelyn L. Smith, JTWROS, 1785 C. Blodgett Road, Mount
Vernon, WA 98273, 13,973.917 shares (5.58%); and BA Investment Services, Inc.,
FBO 200724011, 185 Berry Street, 3rd Floor #2640, San Francisco, CA 94104,
22,436.531 shares (8.96%). At June 15, 1995 the name, address and share
ownership of the entity which held of record more than 5% of the outstanding
shares of the Asset Allocation Fund was as follows: Bank of America, Texas
AATTEE. National-O'Neill Supplemental Savings Plan, Attn: Mutual Funds
(81-6-01005-0), P.O. Box 94627, Pasadena, CA 91109, 24,289,973 shares (5.07%).
At June 15, 1995 the name, address and share ownership of the entities which
held of record more than 5% of the outstanding shares of the National Municipal
Bond Fund were as follows: BA Investment Services, Inc. FBO 405084421, 555
California Street, 4th Floor, #2640, San Francisco, CA 94104, 26,336.154 shares
(8.31%); and BA Investment Services, Inc., FBO 405266591, 555 California Street,
4th Floor, #2640, San Francisco, CA 94104, 25,034.024 shares (7.90%). At June
15, 1995 the name, address and share ownership of the entities which held
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<PAGE> 578
of record more than 5% of the outstanding shares of the Corporate Bond Fund were
as follows: Dean Witter Reynolds Inc., 5 World Trade Center, 4th Floor, Attn:
5th O Div., New York, NY 10048, 138,820.000 shares (6.93%); and Smith Barney
Shearson, Inc., 333 W. 39th Street, 8th Floor, New York, NY 10001, 148,925.482
shares (7.43%).
At such date, no other person was known by the Company to hold of
record or beneficially more than 5% of the outstanding shares of any other
investment portfolio of the Company.
The Prospectus relating to the Fund and this Statement of Additional
Information omit certain information contained in the Company's registration
statement filed with the Securities and Exchange Commission. Copies of the
registration statement, including items omitted herein, may be obtained from the
Commission by paying the charges prescribed under its rules and regulations.
FINANCIAL STATEMENTS AND EXPERTS
The Annual Report for the Fund and the Portfolio for the fiscal year
ended February 28, 1995 accompanies this Statement of Additional Information.
The financial statements and notes thereto in that Annual Report are
incorporated in this Statement of Additional Information by reference, and have
been audited by Price Waterhouse LLP, whose report thereon also appears in such
Annual Report and is also incorporated herein by reference. Such financial
statements have been incorporated herein in reliance on the report of Price
Waterhouse LLP, independent accountants, given on the authority of said firm as
experts in auditing and accounting.
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<PAGE> 579
APPENDIX A
COMMERCIAL PAPER RATINGS
A Standard & Poor's commercial paper rating is a current assessment of
the likelihood of timely payment of debt considered short-term in the relevant
market. The following summarizes the rating categories used by Standard and
Poor's for commercial paper:
"A-1" - Issue's degree of safety regarding timely payment is strong.
Those issues determined to possess extremely strong safety characteristics are
denoted "A-1+."
"A-2" - Issue's capacity for timely payment is satisfactory. However,
the relative degree of safety is not as high as for issues designated "A-1."
"A-3" - Issue has an adequate capacity for timely payment. It is,
however, somewhat more vulnerable to the adverse effects of changes and
circumstances than an obligation carrying a higher designation.
"B" - Issue has only a speculative capacity for timely payment.
"C" - Issue has a doubtful capacity for payment.
"D" - Issue is in payment default.
Moody's commercial paper ratings are opinions of the ability of issuers
to repay punctually promissory obligations not having an original maturity in
excess of 9 months. The following summarizes the rating categories used by
Moody's for commercial paper:
"Prime-1" - Issuer or related supporting institutions are considered to
have a superior capacity for repayment of short-term promissory obligations.
Prime-1 repayment capacity will normally be evidenced by the following
characteristics: leading market positions in well established industries; high
rates of return on funds employed; conservative capitalization structures with
moderate reliance on debt and ample asset protection; broad margins in earning
coverage of fixed financial charges and high internal cash generation; and well
established access to a range of financial markets and assured sources of
alternate liquidity.
"Prime-2" - Issuer or related supporting institutions are considered to
have a strong capacity for repayment of short-
A-1
<PAGE> 580
term promissory obligations. This will normally be evidenced by many of the
characteristics cited above but to a lesser degree. Earnings trends and
coverage ratios, while sound, will be more subject to variation.
Capitalization characteristics, while still appropriate, may be more affected
by external conditions. Ample alternative liquidity is maintained.
"Prime-3" - Issuer or related supporting institutions have an
acceptable capacity for repayment of short-term promissory obligations. The
effects of industry characteristics and market composition may be more
pronounced. Variability in earnings and profitability may result in changes in
the level of debt protection measurements and the requirement for relatively
high financial leverage. Adequate alternate liquidity is maintained.
"Not Prime" - Issuer does not fall within any of the Prime rating
categories.
The three rating categories of Duff & Phelps for investment grade
commercial paper and short-term debt are "D-1," "D-2" and "D-3." Duff & Phelps
employs three designations, "D-1+," "D-1" and "D-1-," within the highest rating
category. The following summarizes the rating categories used by Duff & Phelps
for commercial paper:
"D-1+" - Debt possesses highest certainty of timely payment. Short-
term liquidity, including internal operating factors and/or access to
alternative sources of funds, is outstanding, and safety is just below risk-free
U.S. Treasury short-term obligations.
"D-1" - Debt possesses very high certainty of timely payment.
Liquidity factors are excellent and supported by good fundamental protection
factors. Risk factors are minor.
"D-1-" - Debt possesses high certainty of timely payment. Liquidity
factors are strong and supported by good fundamental protection factors. Risk
factors are very small.
"D-2" - Debt possesses good certainty of timely payment. Liquidity
factors and company fundamentals are sound. Although ongoing funding needs may
enlarge total financing requirements, access to capital markets is good. Risk
factors are small.
"D-3" - Debt possesses satisfactory liquidity, and other protection
factors qualify issue as investment grade. Risk factors are larger and subject
to more variation. Nevertheless, timely payment is expected.
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<PAGE> 581
"D-4" - Debt possesses speculative investment characteristics.
Liquidity is not sufficient to ensure against disruption in debt service.
Operating factors and market access may be subject to a high degree of
variation.
"D-5" - Issuer has failed to meet scheduled principal and/or interest
payments.
Fitch short-term ratings apply to debt obligations that are payable on
demand or have original maturities of up to three years. The following
summarizes the rating categories used by Fitch for short-term obligations:
"F-1+" - Securities possess exceptionally strong credit quality.
Issues assigned this rating are regarded as having the strongest degree of
assurance for timely payment.
"F-1" - Securities possess very strong credit quality. Issues assigned
this rating reflect an assurance of timely payment only slightly less in degree
than issues rated "F-1+."
"F-2" - Securities possess good credit quality. Issues assigned this
rating have a satisfactory degree of assurance for timely payment, but the
margin of safety is not as great as the "F-1+" and "F-1" categories.
"F-3" - Securities possess fair credit quality. Issues assigned this
rating have characteristics suggesting that the degree of assurance for timely
payment is adequate; however, near-term adverse changes could cause these
securities to be rated below investment grade.
"F-S" - Securities possess weak credit quality. Issues assigned this
rating have characteristics suggesting a minimal degree of assurance for timely
payment and are vulnerable to near-term adverse changes in financial and
economic conditions.
"D" - Securities are in actual or imminent payment default.
Fitch may also use the symbol "LOC" with its short-term ratings to
indicate that the rating is based upon a letter of credit issued by a commercial
bank.
Thomson BankWatch short-term ratings assess the likelihood of an
untimely or incomplete payment of principal or interest of unsubordinated
instruments having a maturity of one year or less which is issued by United
States commercial banks, thrifts and non-bank banks; non-United States banks;
and broker-
A-3
<PAGE> 582
dealers. The following summarizes the ratings used by Thomson BankWatch:
"TBW-1" - This designation represents Thomson BankWatch's highest
rating category and indicates a very high degree of likelihood that principal
and interest will be paid on a timely basis.
"TBW-2" - This designation indicates that while the degree of safety
regarding timely payment of principal and interest is strong, the relative
degree of safety is not as high as for issues rated "TBW-1."
"TBW-3" - This designation represents the lowest investment grade
category and indicates that while the debt is more susceptible to adverse
developments (both internal and external) than obligations with higher ratings,
capacity to service principal and interest in a timely fashion is considered
adequate.
"TBW-4" - This designation indicates that the debt is regarded as non-
investment grade and therefore speculative.
IBCA assesses the investment quality of unsecured debt with an original
maturity of less than one year which is issued by bank holding companies and
their principal bank subsidiaries. The following summarizes the rating
categories used by IBCA for short-term debt ratings:
"A1" - Obligations are supported by the highest capacity for timely
repayment. Where issues possess a particularly strong credit feature, a rating
of A1+ is assigned.
"A2" - Obligations are supported by a good capacity for timely
repayment.
"A3" - Obligations are supported by a satisfactory capacity for timely
repayment.
"B" - Obligations for which there is an uncertainty as to the capacity
to ensure timely repayment.
"C" - Obligations for which there is a high risk of default or which
are currently in default.
A-4
<PAGE> 583
CORPORATE AND MUNICIPAL LONG-TERM DEBT RATINGS
The following summarizes the ratings used by Standard & Poor's for
corporate and municipal debt:
"AAA" - This designation represents the highest rating assigned by
Standard & Poor's to a debt obligation and indicates an extremely strong
capacity to pay interest and repay principal.
"AA" - Debt is considered to have a very strong capacity to pay
interest and repay principal and differs from AAA issues only in small degree.
"A" - Debt is considered to have a strong capacity to pay interest and
repay principal although such issues are somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions than debt in
higher-rated categories.
"BBB" - Debt is regarded as having an adequate capacity to pay interest
and repay principal. Whereas such issues normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher-rated categories.
"BB," "B," "CCC," "CC" and "C" - Debt is regarded, on balance, as
predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. "BB" indicates the
lowest degree of speculation and "C" the highest degree of speculation. While
such debt will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major risk exposures to adverse
conditions.
"BB" - Debt has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure
to adverse business, financial or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. The "BB"
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied "BBB-" rating.
"B" - Debt has a greater vulnerability to default but currently has the
capacity to meet interest payments and principal repayments. Adverse business,
financial or economic conditions will likely impair capacity or willingness to
pay interest and repay principal. The "B" rating category is also used for debt
subordinated to senior debt that is assigned an actual or implied "BB" or "BB-"
rating.
A-5
<PAGE> 584
"CCC" - Debt has a currently identifiable vulnerability to default, and
is dependent upon favorable business, financial and economic conditions to meet
timely payment of interest and repayment of principal. In the event of adverse
business, financial or economic conditions, it is not likely to have the
capacity to pay interest and repay principal. The "CCC" rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
"B" or "B-" rating.
"CC" - This rating is typically applied to debt subordinated to senior
debt that is assigned an actual or implied "CCC" rating.
"C" - This rating is typically applied to debt subordinated to senior
debt which is assigned an actual or implied "CCC-" debt rating. The "C" rating
may be used to cover a situation where a bankruptcy petition has been filed, but
debt service payments are continued.
"CI" - This rating is reserved for income bonds on which no interest is
being paid.
"D" - Debt is in payment default. This rating is used when interest
payments or principal payments are not made on the date due, even if the
applicable grace period has not expired, unless S & P believes such payments
will be made during such grace period. "D" rating is also used upon the filing
of a bankruptcy petition if debt service payments are jeopardized.
PLUS (+) OR MINUS (-) - The ratings from "AA" through "CCC" may be
modified by the addition of a plus or minus sign to show relative standing
within the major rating categories.
"r" - This rating is attached to highlight derivative, hybrid, and
certain other obligations that S & P believes may experience high volatility or
high variability in expected returns due to non-credit risks. Examples of such
obligations are: securities whose principal or interest return is indexed to
equities, commodities, or currencies; certain swaps and options; and interest
only and principal only mortgage securities.
The following summarizes the ratings used by Moody's for corporate and
municipal long-term debt:
"Aaa" - Bonds are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as "gilt
edged." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues.
A-6
<PAGE> 585
"Aa" - Bonds are judged to be of high quality by all standards.
Together with the "Aaa" group they comprise what are generally known as high
grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in "Aaa" securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than in "Aaa"
securities.
"A" - Bonds possess many favorable investment attributes and are to be
considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment sometime in the future.
"Baa" - Bonds considered medium-grade obligations, i.e., they are
neither highly protected nor poorly secured. Interest payments and principal
security appear adequate for the present but certain protective elements may be
lacking or may be characteristically unreliable over any great length of time.
Such bonds lack outstanding investment characteristics and in fact have
speculative characteristics as well.
"Ba," "B," "Caa," "Ca," and "C" - Bonds that possess one of these
ratings provide questionable protection of interest and principal ("Ba"
indicates some speculative elements; "B" indicates a general lack of
characteristics of desirable investment; "Caa" represents a poor standing; "Ca"
represents obligations which are speculative in a high degree; and "C"
represents the lowest rated class of bonds). "Caa," "Ca" and "C" bonds may be in
default.
Con. (---) - Bonds for which the security depends upon the completion
of some act or the fulfillment of some condition are rated conditionally. These
are bonds secured by (a) earnings of projects under construction, (b) earnings
of projects unseasoned in operation experience, (c) rentals which begin when
facilities are completed, or (d) payments to which some other limiting condition
attaches. Parenthetical rating denotes probable credit stature upon completion
of construction or elimination of basis of condition.
Moody's applies numerical modifiers 1, 2 and 3 in each generic
classification from "Aa" to "B" in its bond rating system. The modifier 1
indicates that the issuer ranks in the higher end of its generic rating
category; the modifier 2 indicates a mid-range ranking; and the modifier 3
indicates that the issuer ranks at the lower end of its generic rating category.
A-7
<PAGE> 586
The following summarizes the long-term debt ratings used by Duff &
Phelps for corporate and municipal long-term debt:
"AAA" - Debt is considered to be of the highest credit quality. The
risk factors are negligible, being only slightly more than for risk-free U.S.
Treasury debt.
"AA" - Debt is considered of high credit quality. Protection factors
are strong. Risk is modest but may vary slightly from time to time because of
economic conditions.
"A" - Debt possesses protection factors which are average but adequate.
However, risk factors are more variable and greater in periods of economic
stress.
"BBB" - Debt possesses below average protection factors but such
protection factors are still considered sufficient for prudent investment.
Considerable variability in risk is present during economic cycles.
"BB," "B," "CCC," "DD," and "DP" - Debt that possesses one of these
ratings is considered to be below investment grade. Although below investment
grade, debt rated "BB" is deemed likely to meet obligations when due. Debt
rated "B" possesses the risk that obligations will not be met when due. Debt
rated "CCC" is well below investment grade and has considerable uncertainty as
to timely payment of principal, interest or preferred dividends. Debt rated "DD"
is a defaulted debt obligation, and the rating "DP" represents preferred stock
with dividend arrearages.
To provide more detailed indications of credit quality, the "AA," "A,"
"BBB," "BB" and "B" ratings may be modified by the addition of a plus (+) or
minus (-) sign to show relative standing within these major categories.
The following summarizes the highest four ratings used by Fitch for
corporate and municipal bonds:
"AAA" - Bonds considered to be investment grade and of the highest
credit quality. The obligor has an exceptionally strong ability to pay interest
and repay principal, which is unlikely to be affected by reasonably foreseeable
events.
"AA" - Bonds considered to be investment grade and of very high credit
quality. The obligor's ability to pay interest and repay principal is very
strong, although not quite as strong as bonds rated "AAA." Because bonds rated
in the "AAA" and "AA" categories are not significantly vulnerable to foreseeable
future developments, short-term debt of these issuers is generally rated "F-1+."
A-8
<PAGE> 587
"A" - Bonds considered to be investment grade and of high credit
quality. The obligor's ability to pay interest and repay principal is
considered to be strong, but may be more vulnerable to adverse changes in
economic conditions and circumstances than bonds with higher ratings.
"BBB" - Bonds considered to be investment grade and of satisfactory
credit quality. The obligor's ability to pay interest and repay principal is
considered to be adequate. Adverse changes in economic conditions and
circumstances, however, are more likely to have an adverse impact on these
bonds, and therefore, impair timely payment. The likelihood that the ratings of
these bonds will fall below investment grade is higher than for bonds with
higher ratings.
"BB," "B," "CCC," "CC," "C," "DDD," "DD," and "D" - Bonds that possess
one of these ratings are considered by Fitch to be speculative investments. The
ratings "BB" to "C" represent Fitch's assessment of the likelihood of timely
payment of principal and interest in accordance with the terms of obligation for
bond issues not in default. For defaulted bonds, the rating "DDD" to "D" is an
assessment of the ultimate recovery value through reorganization or liquidation.
To provide more detailed indications of credit quality, the Fitch
ratings from and including "AA" to "C" may be modified by the addition of a plus
(+) or minus (-) sign to show relative standing within these major rating
categories.
IBCA assesses the investment quality of unsecured debt with an original
maturity of more than one year which is issued by bank holding companies and
their principal bank subsidiaries. The following summarizes the rating
categories used by IBCA for long-term debt ratings:
"AAA" - Obligations for which there is the lowest expectation of
investment risk. Capacity for timely repayment of principal and interest is
substantial such that adverse changes in business, economic or financial
conditions are unlikely to increase investment risk substantially.
"AA" - Obligations for which there is a very low expectation of
investment risk. Capacity for timely repayment of principal and interest is
substantial. Adverse changes in business, economic or financial conditions may
increase investment risk albeit not very significantly.
"A" - Obligations for which there is a low expectation of investment
risk. Capacity for timely repayment of principal and interest is strong,
although adverse changes in business,
A-9
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economic or financial conditions may lead to increased investment risk.
"BBB" - Obligations for which there is currently a low expectation of
investment risk. Capacity for timely repayment of principal and interest is
adequate, although adverse changes in business, economic or financial conditions
are more likely to lead to increased investment risk than for obligations in
higher categories.
"BB," "B," "CCC," "CC," and "C" - Obligations are assigned one of these
ratings where it is considered that speculative characteristics are present.
"BB" represents the lowest degree of speculation and indicates a possibility of
investment risk developing. "C" represents the highest degree of speculation
and indicates that the obligations are currently in default.
IBCA may append a rating of plus (+) or minus (-) to a rating to denote
relative status within major rating categories.
Thomson BankWatch assesses the likelihood of an untimely repayment of
principal or interest over the term to maturity of long term debt and preferred
stock which are issued by United States commercial banks, thrifts and non-bank
banks; non- United States banks; and broker-dealers. The following summarizes
the rating categories used by Thomson BankWatch for long-term debt ratings:
"AAA" - This designation represents the highest category assigned by
Thomson BankWatch to long-term debt and indicates that the ability to repay
principal and interest on a timely basis is very high.
"AA" - This designation indicates a superior ability to repay principal
and interest on a timely basis with limited incremental risk versus issues rated
in the highest category.
"A" - This designation indicates that the ability to repay principal
and interest is strong. Issues rated "A" could be more vulnerable to adverse
developments (both internal and external) than obligations with higher ratings.
"BBB" - This designation represents Thomson BankWatch's lowest
investment grade category and indicates an acceptable capacity to repay
principal and interest. Issues rated "BBB" are, however, more vulnerable to
adverse developments (both internal and external) than obligations with higher
ratings.
"BB," "B," "CCC," and "CC" - These designations are assigned by
Thomson BankWatch to non-investment grade long-term
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debt. Such issues are regarded as having speculative characteristics regarding
the likelihood of timely payment of principal and interest. "BB" indicates the
lowest degree of speculation and "CC" the highest degree of speculation.
"D" - This designation indicates that the long-term debt is in default.
PLUS (+) OR MINUS (-) - The ratings from "AAA" through "CC" may include
a plus or minus sign designation which indicates where within the respective
category the issue is placed.
MUNICIPAL NOTE RATINGS
A Standard and Poor's rating reflects the liquidity concerns and market
access risks unique to notes due in three years or less. The following
summarizes the ratings used by Standard & Poor's Ratings Group for municipal
notes:
"SP-1" - The issuers of these municipal notes exhibit very strong or
strong capacity to pay principal and interest. Those issues determined to
possess overwhelming safety characteristics are given a plus (+) designation.
"SP-2" - The issuers of these municipal notes exhibit satisfactory
capacity to pay principal and interest.
"SP-3" - The issuers of these municipal notes exhibit speculative
capacity to pay principal and interest.
Moody's ratings for state and municipal notes and other short-term
loans are designated Moody's Investment Grade ("MIG") and variable rate demand
obligations are designated Variable Moody's Investment Grade ("VMIG"). Such
ratings recognize the differences between short-term credit risk and long-term
risk. The following summarizes the ratings by Moody's Investors Service, Inc.
for short-term notes:
"MIG-1"/"VMIG-1" - Loans bearing this designation are of the best
quality, enjoying strong protection by established cash flows, superior
liquidity support or demonstrated broad-based access to the market for
refinancing.
"MIG-2"/"VMIG-2" - Loans bearing this designation are of high quality,
with margins of protection ample although not so large as in the preceding
group.
"MIG-3"/"VMIG-3" - Loans bearing this designation are of favorable
quality, with all security elements accounted for but lacking the undeniable
strength of the preceding grades.
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<PAGE> 590
Liquidity and cash flow protection may be narrow and market access for
refinancing is likely to be less well established.
"MIG-4"/"VMIG-4" - Loans bearing this designation are of adequate
quality, carrying specific risk but having protection commonly regarded as
required of an investment security and not distinctly or predominantly
speculative.
"SG" - Loans bearing this designation are of speculative quality and
lack margins of protection.
Fitch and Duff & Phelps use the short-term ratings described under
Commercial Paper Ratings for municipal notes.
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<PAGE> 591
APPENDIX B
As stated in the Prospectus, the Portfolio may enter into futures
contracts and options thereon for hedging purposes. Such transactions are
described in this Appendix B.
I. MUNICIPAL BOND INDEX FUTURES CONTRACTS
A municipal bond index assigns relative values to the bonds included in
the index and the index fluctuates with changes in the market values of the
bonds so included. The Chicago Board of Trade has designed a futures contract
based on the Bond Buyer Municipal Bond Index. This Index is composed of a
number of term revenue and general obligation bonds, and its composition is
updated regularly as new bonds meeting the criteria of the Index are issued and
existing bonds mature. The Index is intended to provide an accurate indicator
of trends and changes in the municipal bond market. Each bond in the Index is
independently priced by six dealer-to-dealer municipal bond brokers daily. The
prices are then averaged and multiplied by a coefficient. The coefficient is
used to maintain the continuity of the Index when its composition changes. The
Chicago Board of Trade, on which futures contracts based on this Index are
traded, as well as other U.S. commodities exchanges, are regulated by the
Commodity Futures Trading Commission. Transactions on such exchange are cleared
through a clearing corporation, which guarantees the performance of the parties
to each contract.
The Portfolio will sell index futures contracts in order to offset a
decrease in market value of its portfolio securities that might otherwise result
from a market decline. The Portfolio may do so either to hedge the value of its
portfolio as a whole, or to protect against declines, occurring prior to sales
of securities, in the value of the securities to be sold. Conversely, the
Portfolio will purchase index futures contracts in anticipation of purchases of
securities. In a substantial majority of these transactions, the Portfolio will
purchase such securities upon termination of the long futures position, but a
long futures position may be terminated without a corresponding purchase of
securities.
Closing out a futures contract sale prior to the settlement date may be
effected by the Portfolio's entering into a futures contract purchase for the
same aggregate amount of the index involved and the same delivery date. If the
price in the sale exceeds the price in the offsetting purchase, the Portfolio is
paid the difference and thus realizes a gain. If the offsetting purchase price
exceeds the sale price, the Portfolio pays the difference and realizes a loss.
Similarly, the closing out of a futures contract purchase is effected by the
Portfolio's
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entering into a futures contract sale. If the offsetting sale price exceeds
the purchase price, the Portfolio realizes a gain, and if the purchase price
exceeds the offsetting sale price, the Portfolio realizes a loss.
Example of a Municipal Bond Index Futures Contract
Consider a portfolio manager holding $1 million par value of each of
the following municipal bonds on February 2 in a particular year.
<TABLE>
<CAPTION>
Current Price
(points and
Maturity thirty-seconds
Issue Coupon Issue Date Date of a point)
- ----- ------ ---------- -------- --------------
<S> <C> <C> <C> <C>
Ohio HFA 9 3/8 5/05/83 5/1/13 94-2
NYS Power 9 3/4 5/24/83 1/1/17 102-0
San Diego, CA IDR 10 6/07/83 6/1/18 100-14
Muscatine, IA Elec 10 5/8 8/24/83 1/1/08 103-16
Mass Health & Ed 10 9/23/83 7/1/16 100-12
</TABLE>
The current value of the portfolio is $5,003,750.
To hedge against a decline in the value of the portfolio, resulting
from a rise in interest rates, the portfolio manager can use the municipal bond
index futures contract. The current value of the Municipal Bond Index is 86-09.
Suppose the portfolio manager takes a position in the futures market opposite to
his or her cash market position by selling 50 municipal bond index futures
contracts (each contract represents $100,000 in principal value) at this price.
On March 23, the bonds in the portfolio have the following values:
<TABLE>
<S> <C>
Ohio HFA 81-28
NYS Power 98-26
San Diego, CA IDB 98-11
Muscatine, IA Elec 99-24
Mass Health & Ed 97-18
</TABLE>
The bond prices have fallen, and the portfolio has sustained a loss of
$130,312. This would have been the loss incurred without hedging. However, the
Municipal Bond Index also has fallen, and its value stands at 83-27. Suppose
now the portfolio manager closes out his or her futures position by buying back
50 municipal bond index futures contracts at this price.
The following table provides a summary of transactions and the results
of the hedge.
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<PAGE> 593
<TABLE>
<CAPTION>
Cash Market Futures Market
----------- --------------
<S> <C> <C>
February 2 $5,003,750 long posi- Sell 50 Municipal Bond
tion in municipal futures contracts at
bonds 86-09
March 23 $4,873,438 long posi- Buy 50 Municipal Bond
tion in municipal futures contracts at
bonds 83-27
--------------------- ----------------------
$130,312 Loss $121,875 Gain
</TABLE>
While the gain in the futures market did not entirely offset the loss
in the cash market, the $8,437 loss is significantly lower than the loss which
would have been incurred without hedging.
The numbers reflected in this appendix do not take into account the
effect of brokerage fees or taxes.
II. MARGIN PAYMENTS.
Unlike when the Portfolio purchases or sells a security, no price is
paid or received by the Portfolio upon the purchase or sale of a futures
contract. Initially, the Portfolio will be required to deposit with the broker
or in a segregated account with the Portfolio's custodian an amount of cash or
cash equivalents, the value of which may vary but is based upon the value of the
contract. This amount is known as initial margin. The nature of initial margin
in futures transactions is different from that of margin in security
transactions in that futures contract margin does not involve the borrowing of
funds by the customer to finance the transactions. Rather, the initial margin
is in the nature of a performance bond or good faith deposit on the contract
which is returned to the Portfolio upon termination of the futures contract
assuming all contractual obligations have been satisfied. Subsequent payments,
called variation margin, to and from the broker, will be made on a daily basis
as the price of the underlying instruments fluctuates making the long and short
positions in the futures contract more or less valuable, a process known as
marking-to-market. For example, when the Portfolio has purchased a futures
contract and the price of the contract has risen in response to a rise in the
underlying instruments, that position will have increased in value and the
Portfolio will be entitled to receive from the broker a variation margin payment
equal to that increase in value. Conversely, where the Portfolio has purchased
a futures contract and the price of the future contract has declined in response
to a decrease in the underlying instruments, the position would be less valuable
and the Portfolio would be required to make a variation margin payment to the
broker. At any time prior to expiration of the futures contract, the adviser
may elect to
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close the position by taking an opposite position, subject to the availability
of a secondary market, which will operate to terminate the Portfolio's position
in the futures contract. A final determination of variation margin is then
made, additional cash is required to be paid by or released to the Portfolio,
and the Portfolio realizes a loss or gain.
III. RISKS OF TRANSACTIONS IN FUTURES CONTRACTS.
There are several risks in connection with the use of futures by the
Portfolio as a hedging device. One risk arises because of the imperfect
correlation between movements in the price of the future and movements in the
price of the securities which are the subject of the hedge. The price of the
future may move more than or less than the price of the securities being hedged.
If the price of the future moves less than the price of the securities which are
the subject of the hedge, the hedge will not be fully effective but, if the
price of the securities being hedged has moved in an unfavorable direction, the
Portfolio would be in a better position than if it had not hedged at all. If
the price of the securities being hedged has moved in a favorable direction,
this advantage will be partially offset by the loss on the future. If the price
of the future moves more than the price of the hedged securities, the Portfolio
involved will experience either a loss or gain on the future which will not be
completely offset by movements in the price of the securities which are the
subject of the hedge. To compensate for the imperfect correlation of movements
in the price of securities being hedged and movements in the price of futures
contracts, the Portfolio may buy or sell futures contracts in a greater dollar
amount than the dollar amount of securities being hedged if the volatility over
a particular time period of the prices of such securities has been greater than
the volatility over such time period of the future, or if otherwise deemed to be
appropriate by the investment adviser. Conversely, the Portfolio may buy or sell
fewer futures contracts if the volatility over a particular time period of the
prices of the securities being hedged is less than the volatility over such time
period of the futures contract being used, or if otherwise deemed to be
appropriate by the adviser. It is also possible that, where the Portfolio has
sold futures to hedge its portfolio against a decline in the market, the market
may advance and the value of securities held in the Portfolio may decline. If
this occurred, the Portfolio would lose money on the future and also experience
a decline in value in its portfolio securities.
Where futures are purchased to hedge against a possible increase in the
price of securities before the Portfolio is able to invest its cash (or cash
equivalents) in securities (or options) in an orderly fashion, it is possible
that the market
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<PAGE> 595
may decline instead; if the Portfolio then concludes not to invest in
securities or options at that time because of concern as to possible further
market decline or for other reasons, the Portfolio will realize a loss on the
futures contract that is not offset by a reduction in the price of securities
purchased.
In instances involving the purchase of futures contracts by the
Portfolio, an amount of cash and cash equivalents, equal to the market value of
the futures contracts, will be deposited in a segregated account with the
Portfolio's custodian and/or in a margin account with a broker to collateralize
the position and thereby insure that the use of such futures is unleveraged.
In addition to the possibility that there may be an imperfect
correlation, or no correlation at all, between movements in the futures and the
securities being hedged, the price of futures may not correlate perfectly with
movement in the cash market due to certain market distortions. Rather than
meeting additional margin deposit requirements, investors may close futures
contracts through off-setting transactions which could distort the normal
relationship between the cash and futures markets. Second, with respect to
financial futures contracts, the liquidity of the futures market depends on
participants entering into off-setting transactions rather than making or
taking delivery. To the extent participants decide to make or take delivery,
liquidity in the futures market could be reduced thus producing distortions.
Third, from the point of view of speculators, the deposit requirements in the
futures market are less onerous than margin requirements in the securities
market. Therefore, increased participation by speculators in the futures market
may also cause temporary price distortions. Due to the possibility of price
distortion in the futures market, and because of the imperfect correlation
between the movements in the cash market and movements in the price of futures,
a correct forecast of general market trends or interest rate movements by the
adviser may still not result in a successful hedging transaction over a short
time frame.
Positions in futures may be closed out only on an exchange or board of
trade which provides a secondary market for such futures. Although the
Portfolio intends to purchase or sell futures only on exchanges or boards of
trade where there appear to be active secondary markets, there is no assurance
that a liquid secondary market on any exchange or board of trade will exist for
any particular contract or at any particular time. In such event, it may not be
possible to close a futures investment position, and in the event of adverse
price movements, the Portfolio would continue to be required to make daily cash
payments of variation margin. However, in the event futures contracts have been
used to hedge portfolio securities, such
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<PAGE> 596
securities will not be sold until the futures contract can be terminated. In
such circumstances, an increase in the price of the securities, if any, may
partially or completely offset losses on the futures contract. However, as
described above, there is no guarantee that the price of the securities will in
fact correlate with the price movements in the futures contract and thus
provide an offset on a futures contract.
Further, it should be noted that the liquidity of a secondary market in
a futures contract may be adversely affected by "daily price fluctuation limits"
established by commodity exchanges which limit the amount of fluctuation in a
futures contract price during a single trading day. Once the daily limit has
been reached in the contract, no trades may be entered into at a price beyond
the limit, thus preventing the liquidation of open futures positions.
Successful use of futures by the Portfolio is also subject to the
investment adviser's ability to predict correctly movements in the direction of
the market. For example, if the Portfolio has hedged against the possibility of
a decline in the market adversely affecting securities held by it and securities
prices increase instead, the Portfolio will lose part of all of the benefit to
the increased value of its securities which it has hedged because it will have
offsetting losses in its futures positions. In addition, in such situations, if
the Portfolio has insufficient cash, it may have to sell securities to meet
daily variation margin requirements. Such sales of securities may be, but will
not necessarily be, at increased prices which reflect the rising market. The
Portfolio may have to sell securities at a time when it may be disadvantageous
to do so.
IV. OPTIONS ON FUTURES CONTRACTS.
The Portfolio may purchase options on the futures contracts described
above. A futures option gives the holder, in return for the premium paid, the
right to buy (call) from or sell (put) to the writer of the option a futures
contract at a specified price at any time during the period of the option. Upon
exercise, the writer of the option is obligated to pay the difference between
the cash value of the futures contract and the exercise price. Like the buyer
or seller of a futures contract, the holder, or writer, of an option has the
right to terminate its position prior to the scheduled expiration of the option
by selling, or purchasing, an option of the same series, at which time the
person entering into the closing transaction will realize a gain or loss.
Investments in futures options involve some of the same considerations
that are involved in connection with investments in futures contracts (for
example, the existence of a liquid
B-6
<PAGE> 597
secondary market). In addition, the purchase of an option also entails the
risk that changes in the value of the underlying futures contract will not be
fully reflected in the value of the option purchased. Depending on the pricing
of the option compared to either the futures contract upon which it is based,
or upon the price of the securities being hedged, an option may or may not be
less risky than ownership of the futures contract or such securities. In
general, the market prices of options can be expected to be more volatile than
the market prices on the underlying futures contract. Compared to the purchase
or sale of futures contracts, however, the purchase of call or put options on
futures contracts may frequently involve less potential risk to the Portfolio
because the maximum amount at risk is the premium paid for the options (plus
transaction costs).
V. ACCOUNTING AND TAX TREATMENT.
Accounting for futures contracts and related options will be in
accordance with generally accepted accounting principles.
Generally, futures contracts and options on futures contracts held by
the Portfolio at the close of the Portfolio's taxable year will be treated for
federal income tax purposes as sold for their fair market value on the last
business day of such year, a process known as "marking-to-market." Forty percent
of any gain or loss resulting from such constructive sale will be treated as
short-term capital gain or loss and 60% of such gain or loss will be treated as
long-term capital gain or loss without regard to the length of time the
Portfolio holds the futures contract or option ("the 40%-60% rule"). The amount
of any capital gain or loss actually realized by the Portfolio in a subsequent
sale or other disposition of those futures contracts or options will be adjusted
to reflect any capital gain or loss taken into account by the Portfolio in a
prior year as a result of the constructive sale of the contracts or options.
With respect to futures contracts to sell, which will be regarded as parts of a
"mixed straddle" because their values fluctuate inversely to the values of
specific securities held by the Portfolio, losses as to such contracts to sell
will be subject to certain loss deferral rules which limit the amount of loss
currently deductible on either part of the straddle to the amount thereof which
exceeds the unrecognized gain (if any) with respect to the other part of the
straddle, and to certain wash sales regulations. Under short sales rules, which
will also be applicable, the holding period of the securities forming part of
the straddle will (if they have not been held for the long-term holding period)
be deemed not to begin prior to termination of the straddle. With respect to
certain futures contracts and related options, deductions for interest and
carrying charges will not be allowed. Notwithstanding the rules described above,
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<PAGE> 598
with respect to futures contracts to sell which are properly identified as
such, the Portfolio may make an election which will exempt (in whole or in
part) those identified futures contracts from being treated for federal income
tax purposes as sold on the last business day of the Portfolio's taxable year,
but gains and losses will be subject to such short sales, wash sales and loss
deferral rules and the requirement to capitalize interest and carrying charges.
Under Temporary Regulations, the Portfolio would be allowed (in lieu of the
foregoing) to elect either (1) to offset gains or losses from portions which
are part of a mixed straddle by separately identifying each mixed straddle to
which such treatment applies, or (2) to establish a mixed straddle account for
which gains and losses would be recognized and offset on a periodic basis
during the taxable year. Under either election, the 40%-60% rule will apply to
the net gain or loss attributable to the futures contracts, but in the case of
a mixed straddle account election, not more than 50 percent of any net gain may
be treated as long-term and no more than 40 percent of any net loss may be
treated as short-term.
Qualification as a regulated investment company under the Code requires
that the Portfolio satisfy certain requirements with respect to the source of
its income during a taxable year. At least 90% of the gross income of the
Portfolio must be derived from dividends, interests, payments with respect to
securities loans, gains from the sale or other disposition of stock, securities
or foreign currencies, and other income (including but not limited to gains from
options, futures, or forward contracts) derived with respect to the Portfolio's
business of investing in such stock, securities or currencies. The Treasury
Department may by regulation exclude from qualifying income foreign currency
gains which are not directly related to a fund's principal business of investing
in stock or securities, or options and futures with respect to stock or
securities. Any income derived by a fund from a partnership or trust is treated
for this purpose as derived with respect to the fund's business of investing in
stock, securities or currencies only to the extent that such income is
attributable to items of income which would have been qualifying income if
realized by the fund in the same manner as by the partnership or trust.
An additional requirement for qualification as a regulated investment
company under the Code is that less than 30% of the Portfolio's gross income
must be derived from gains realized on the sale or other disposition of the
following investments held for less than three months: (1) stock and securities
(as defined in section 2(a)(36) of the Investment Company Act of 1940); (2)
options, futures and forward contracts other than those on foreign currencies;
and (3) foreign currencies (and options, futures and forward contracts on
foreign currencies) that are not directly related to a fund's principal
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<PAGE> 599
business of investing in stock and securities (and options and futures with
respect to stocks and securities). With respect to futures contracts and other
financial instruments subject to the marking-to-market rules, the Internal
Revenue Service has ruled in private letter rulings that a gain realized from
such a futures contract or financial instrument will be treated as being
derived from a security held for three months or more (regardless of the actual
period for which the contract or instrument is held) if the gain arises as a
result of a constructive sale under the marking-to-market rules, and will be
treated as being derived from a security held for less than three months only
if the contract or instrument is terminated (or transferred) during the taxable
year (other than by reason of marking-to-market) and less than three months
have elapsed between the date the contract or instrument is acquired and the
termination date. In determining whether the 30% test is met for a taxable
year, increases and decreases in the value of the Portfolio's futures contracts
and other investments that qualify as part of a "designated hedge," as defined
in the Code, may be netted.
B-9
<PAGE> 600
PACIFIC HORIZON FUNDS, INC.
(THE "COMPANY")
PART B
STATEMENT OF ADDITIONAL INFORMATION
FOR
PACIFIC HORIZON CORPORATE BOND FUND
JULY 1, 1995
(AS REVISED DECEMBER 8, 1995)
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
THE COMPANY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
INVESTMENT OBJECTIVE AND POLICIES . . . . . . . . . . . . . . . . . . . . . 2
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION . . . . . . . . . . . . . . 22
ADDITIONAL INFORMATION CONCERNING TAXES . . . . . . . . . . . . . . . . . . 29
MANAGEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
GENERAL INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
APPENDIX A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-1
APPENDIX B . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-1
</TABLE>
This Statement of Additional Information applies to the Pacific
Horizon Corporate Bond Fund (the "Fund") of the Company. This Statement of
Additional Information is meant to be read in conjunction with the Prospectus
dated July 1, 1995, as it may from time to time be revised (the "Prospectus"),
which describes the Fund. This Statement of Additional Information is
incorporated by reference in its entirety into the Prospectus. Because this
Statement of Additional Information is not itself a prospectus, no investment
in shares of the Fund should be made solely upon the information contained
herein. Copies of the Prospectus may be obtained by calling Concord Financial
Group, Inc. at 800-332-3863. Capitalized terms used but not defined herein
have the same meaning as in the Prospectus.
<PAGE> 601
THE COMPANY
The Company was organized on October 27, 1982 as a Maryland
corporation. The Fund originally commenced operations in 1973 as a
diversified, closed-end management investment company (that is, as an
investment company with non-redeemable shares) known as Bunker Hill Income
Securities, Inc. (the "Predecessor Fund"). On April 25, 1994 the Predecessor
Fund was reorganized as a separate portfolio of the Company and all of the
assets and liabilities of the Predecessor Fund were transferred to the Fund.
The Fund seeks to achieve its investment objective by investing substantially
all of its assets in a diversified investment portfolio of an open- end,
management investment company having the same investment objective as that of
the Fund.
Bank of America National Trust and Savings Association ("Bank of
America" or the "investment adviser") serves as investment adviser to the
Portfolio.
The Company also offers other investment portfolios which are
described in separate Prospectuses and Statements of Additional Information.
For information concerning these other portfolios contact the Distributor at
the telephone number stated on the cover page of this Statement of Additional
Information.
INVESTMENT OBJECTIVE AND POLICIES
The Prospectus for the Fund describes the investment objective of the
Fund and the Portfolio. Since the investment characteristics of the Fund will
correspond to those of the Portfolio, the following is a discussion of the
various investments of and techniques employed by the Portfolio. The following
information supplements and should be read in conjunction with the description
of the investment objective and policies for the Fund and the Portfolio in the
Prospectus for the Fund.
PORTFOLIO TRANSACTIONS
The portfolio turnover rate is calculated by dividing the lesser
of purchases or sales of portfolio securities for the year by the monthly
average value of the portfolio securities. The calculation excludes all
securities whose maturities at the time of acquisition were one year or less.
Portfolio turnover may vary greatly from year to year as well as within a
particular year, and may also be affected by cash requirements for redemptions
of shares and by requirements which enable the Company to receive certain
favorable tax treatment. Portfolio turnover will not be a limiting factor in
making portfolio decisions. For its fiscal year ended September 30, 1993, the
period from October 1, 1993 through April 24, 1994, the period April 25, 1994
(the date the Predecessor Fund was reorganized
-2-
<PAGE> 602
into the Fund) through September 30, 1994 and the period October 1, 1994 to
February 28, 1995, the portfolio turnover rates for the Predecessor Fund and
the Fund (as the case may be) were 154%, 15.7% (unannualized), N/A and N/A,
respectively. The portfolio turnover rate for the Portfolio was 51%
(unannualized) for the period from April 25, 1994 (commencement of operations)
through September 30, 1994 and 124% (unannualized) for the period from October
1, 1994 through February 28, 1995. The increase in portfolio turnover was
attributable to volatility in the market and good trading opportunities which
resulted in the increased opportunity to improve the relative value of the
Portfolio.
Subject to the general control of the Portfolio's Board of
Trustees, Bank of America is responsible for, makes decisions with respect to,
and places orders for, all purchases and sales of portfolio securities for the
Portfolio.
Transactions on stock exchanges involve the payment of negotiated
brokerage commissions. There is generally no stated commission in the case of
securities traded in the over-the-counter market, but the price includes an
undisclosed commission or mark-up. The cost of securities purchased by the
Portfolio from underwriters generally includes an underwriting commission or
concession, and the prices at which securities are purchased from and sold to
dealers include a dealer's mark-up or mark-down. Purchases and sales of
portfolio securities for the Predecessor Fund and the Portfolio are normally
principal transactions without brokerage commissions. During the three fiscal
years ended September 30, 1994 and the period October 1, 1994 to February 28,
1995, neither the Fund nor the Predecessor Fund paid any brokerage commissions.
In executing portfolio transactions and selecting brokers or
dealers, it is the Portfolio's policy to seek the best overall terms available.
The Investment Advisory Agreement between the Portfolio and Bank of America
provides that, in assessing the best overall terms available for any
transaction, Bank of America shall consider factors it deems relevant,
including the breadth of the market in the security, the price of the security,
the financial condition and execution capability of the broker or dealer, and
the reasonableness of the commission, if any, for the specific transaction and
on a continuing basis. In addition, the Investment Advisory Agreement
authorizes Bank of America subject to the approval of the Board of Trustees of
the Portfolio to cause the Portfolio to pay a broker-dealer which furnishes
brokerage and research services a higher commission than that which might be
charged by another broker-dealer for effecting the same transaction, provided
that such commission is deemed reasonable in terms of either that particular
transaction or the overall responsibilities of Bank of America to the Fund,
Company or Portfolio. Brokerage and research services may include: (1) advice
as to the value of securities, the
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advisability of investing in, purchasing or selling securities and the
availability of securities or purchasers or sellers of securities; and (2)
analyses and reports concerning industries, securities, economic factors and
trends, portfolio strategy and the performance of accounts.
It is possible that certain of the brokerage and research services
received will primarily benefit one or more other investment companies or other
accounts for which investment discretion is exercised. Conversely, the
Portfolio may be the primary beneficiary of the brokerage or research services
received as a result of portfolio transactions effected for such other accounts
or investment companies.
Brokerage and research services so received are in addition to and
not in lieu of services required to be performed by Bank of America and do not
reduce the advisory fee payable to Bank of America. Such services may be
useful to Bank of America in serving both the Company, the Portfolio and other
clients and, conversely, services obtained by the placement of business of
other clients may be useful to Bank of America in carrying out its obligations
to the Company and the Portfolio. In connection with its investment management
services with respect to the Portfolio, Bank of America will not acquire
certificates of deposit or other securities issued by it or its affiliates, and
will give no preference to certificates of deposit or other securities issued
by Service Organizations. In addition, portfolio securities in general will be
purchased from and sold to affiliates of the Company, the Portfolio, Bank of
America, the Distributor and their affiliates acting as principal underwriter,
syndicate member, market-maker, dealer, broker or in any similar capacity,
provided such purchase, sale or dealing is permitted under the Investment
Company Act of 1940 (the "1940 Act") and the rules thereunder.
The Portfolio may participate, if and when practicable, in bidding
for the purchase of securities of the U.S. Government and its agencies and
instrumentalities directly from an issuer in order to take advantage of the
lower purchase price available to members of a bidding group. The Portfolio
will engage in this practice only when Bank of America, in its sole discretion,
subject to guidelines adopted by the Board of Trustees of the Portfolio,
believes such practice to be in the interest of the Portfolio.
To the extent permitted by law, Bank of America may aggregate the
securities to be sold or purchased on behalf of the Portfolio with those to be
sold or purchased for other investment companies or common trust funds in order
to obtain best execution.
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The Company is required to identify any securities of its regular
brokers or dealers (as defined in Rule 10b-1 under the 1940 Act or their
parents held by the Company as of the close of its most recent fiscal year. As
of February 28, 1995: (a) the Treasury Fund held the following securities,
Repurchase Agreement with Goldman, Sachs & Co. in the principal amount of
$95,000,000; Repurchase Agreement with Merrill Lynch Government Securities,
Inc. in the principal amount of $95,000,000; (b) the Prime Fund held the
following securities, Merrill Lynch & Co., Inc., commercial paper in the
principal amount of $l00,000,000; Goldman, Sachs Group L.P., Daily Variable
Rate Master Note in the principal amount of $120,000,000; Morgan Stanley Group,
Inc., Daily Variable Rate Master Note in the principal amount of $120,000,000;
Bear Stearns Co., Inc., Series B, Monthly Variable Rate Note in the principal
amount of $100,000,000; Repurchase Agreement with Goldman, Sachs & Co. in the
principal amount of $120,000,000; (c) the Government Fund held the following
securities, Repurchase Agreement with Goldman, Sachs & Co. in the principal
amount of $40,000,000; Repurchase Agreement with Merrill Lynch Government
Securities, Inc. in the principal amount of $40,000,000; and (d) the Prime
Value Fund held the following securities, Merrill Lynch & Co., Inc., commercial
paper in the principal amount of $7,000,000; Goldman, Sachs Group L.P., Daily
Variable Rate Master Note in the principal amount of $7,000,000; Repurchase
Agreement with Dean Witter Reynolds, Inc. in the principal amount of
$8,000,000; Repurchase Agreement with Goldman, Sachs & Co. in the principal
amount of $8,000,000.
Merrill Lynch & Co., Inc., Goldman Sachs & Co., Bear Stearns Co.,
Inc., Morgan Stanley & Co. Incorporated, Shearson Lehman Brothers, Inc., Dean
Witter Reynolds, Inc. and Paine Webber are considered to be regular brokers and
dealers of the Company.
TYPES OF OBLIGATIONS, INVESTMENT RISKS, AND OTHER INVESTMENT INFORMATION
The following discussion supplements the description of such
investments in the Prospectus.
Bank Certificates of Deposit, Bankers' Acceptances and
Interest-Bearing Savings Deposits. Certificates of deposit, bankers'
acceptances and interest-bearing savings deposits are eligible investments for
the Portfolio as described in the Fund's Prospectus. Certificates of deposit
are negotiable certificates issued against funds deposited in a commercial bank
for a definite period of time and earning a specified return. Bankers'
acceptances are negotiable drafts or bills of exchange, normally drawn by an
importer or exporter to pay for specific merchandise, which are "accepted" by a
bank, meaning, in effect, that the bank unconditionally agrees to pay the face
value of the instrument on
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maturity. Interest-bearing savings deposits are non-negotiable deposits
maintained at a banking institution for a specified period of time at a
specified interest rate.
Commercial Paper. The investment policies of the Portfolio permit
investment in commercial paper. Commercial paper consists of unsecured
promissory notes issued by corporations. Issues of commercial paper will
normally have maturities of less than nine months and fixed rates of return,
although such instruments may have maturities of up to one year.
Convertible Securities. Convertible securities entitle the holder
to receive interest paid or accrued on debt or the dividend paid on preferred
stock until the convertible securities mature or are redeemed, converted or
exchanged. Prior to conversion, convertible securities have characteristics
similar to ordinary debt securities in that they normally provide a stable
stream of income with generally higher yields than those of common stock of the
same or similar issuers. Convertible securities rank senior to common stock in
a corporation's capital structure and therefore generally entail less risk than
the corporation's common stock, although the extent to which such risk is
reduced depends in large measure upon the degree to which the convertible
security sells above its value as a fixed income security.
In selecting convertible securities for the Portfolio, the
investment adviser will consider, among other factors, its evaluation of the
creditworthiness of the issuers of the securities; the interest or dividend
income generated by the securities; the potential for capital appreciation of
the securities and the underlying stocks; the prices of the securities relative
to other comparable securities and to the underlying stocks; whether the
securities are entitled to the benefits of sinking funds or other protective
conditions; diversification of the Portfolio as to issuers; and whether the
securities are rated by Moody's Investors Service, Inc. ("Moody's") or Standard
& Poor's Ratings Group, Division of McGraw Hill ("S&P") and, if so, the ratings
assigned.
The value of convertible securities is a function of their
investment value (determined by yield in comparison with the yields of other
securities of comparable maturity and quality that do not have a conversion
privilege) and their conversion value (their worth, at market value, if
converted into the underlying stock). The investment value of convertible
securities is influenced by changes in interest rates, with investment value
declining as interest rates increases and increasing as interest rates decline,
and by the credit standing of the issuer and other factors. The conversion
value of convertible securities is determined by the market price of the
underlying stock. If the conversion value is low relative to the
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investment value, the price of the convertible securities is governed
principally by their investment value. To the extent the market price of the
underlying stock approaches or exceeds the conversion price, the price of the
convertible securities will be increasingly influenced by their conversion
value. In addition, convertible securities generally sell at a premium over
their conversion value determined by the extent to which investors place value
on the right to acquire the underlying stock while holding fixed income
securities.
Repurchase Agreements. The Portfolio is permitted to enter into
repurchase agreements with respect to its portfolio securities. Pursuant to
such agreements, the Portfolio acquires securities from financial institutions
such as banks and broker-dealers as are deemed to be creditworthy subject to
the seller's agreement to repurchase and the agreement of the Portfolio to
resell such securities at a mutually agreed upon date and price. Although
securities subject to a repurchase agreement may bear maturities exceeding ten
years, the Portfolio intends to only enter into repurchase agreements having
maturities not exceeding 60 days. The Portfolio is not permitted to enter into
repurchase agreements with Bank of America or its affiliates, and will give no
preference to repurchase agreements with Service Organizations. The repurchase
price generally equals the price paid by the Portfolio plus interest negotiated
on the basis of current short-term rates (which may be more or less than the
rate on the underlying portfolio security). Securities subject to repurchase
agreements will be held by a custodian or sub-custodian of the Portfolio or in
the Federal Reserve/Treasury Book-Entry System. The seller under a repurchase
agreement will be required to deliver instruments the value of which is 102% of
the repurchase price (excluding accrued interest), provided that
notwithstanding such requirement, the advisor shall require that the value of
the collateral, after transaction costs (including loss of interest) reasonably
expected to be incurred on a default, shall be equal to or greater than the
resale price (including interest) provided in the agreement. If the seller
defaulted on its repurchase obligation, the Portfolio would suffer a loss
because of adverse market action or to the extent that the proceeds from a sale
of the underlying securities were less than the repurchase price under the
agreement. Bankruptcy or insolvency of such a defaulting seller may cause the
Portfolio's rights with respect to such securities to be delayed or limited.
Repurchase agreements are considered to be loans by the Portfolio under the
1940 Act.
U.S. Government Obligations. The Portfolio is permitted to make
investments in U.S. Government obligations. Such obligations include Treasury
bills, certificates of indebtedness, notes and bonds, and issues of such
entities as the Government National Mortgage Association, Export-Import Bank of
the United States, Tennessee Valley Authority, Resolution Funding
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Corporation, Farmers Home Administration, Federal Home Loan Banks, Federal
Intermediate Credit Banks, Federal Farm Credit Banks, Federal Land Banks,
Federal Housing Administration, Federal National Mortgage Association, Federal
Home Loan Mortgage Corporation, and the Student Loan Marketing Association.
Treasury bills have maturities of one year or less, Treasury notes have
maturities of one to ten years and Treasury bonds generally have maturities of
more than ten years. Some of these obligations, such as those of the
Governmental National Mortgage Association, are supported by the full faith and
credit of the U.S. Treasury; others, such as those of the Export-Import Bank of
the United States, are supported by the right of the issuer to borrow from the
Treasury; others, such as those of the Federal National Mortgage Association,
are supported by the discretionary authority of the U.S. Government to purchase
the agency's obligations; still others, such as those of the Student Loan
Marketing Association, are supported only by the credit of the instrumentality.
No assurance can be given that the U.S. Government would provide financial
support to U.S. Government sponsored instrumentalities if it is not obligated
to do so by law.
Asset-Backed Securities. The Portfolio may invest in asset-backed
securities, including mortgage-backed securities representing an undivided
ownership interest in a pool of mortgages, such as certificates of the
Government National Mortgage Association ("GNMA") and the Federal Home Loan
Mortgage Corporation ("FHLMC"). These certificates are in most cases
pass-through instruments, through which the holder receives a share of all
interest and principal payments from the mortgages underlying the certificate,
net of certain fees. The average life of a mortgage-backed security varies
with the underlying mortgage instruments, which have maximum maturities of 40
years. The average life is likely to be substantially less than the original
maturity of the mortgage pools underlying the securities as the result of
prepayments, mortgage refinancings or foreclosure. Mortgage prepayment rates
are affected by factors including the level of interest rates, general economic
conditions, the location and age of the mortgage and other social and
demographic conditions. Such prepayments are passed through to the registered
holder with the regular monthly payments of principal and interest and have the
effect of reducing future payments.
The Portfolio may also invest in non-mortgage backed securities
including interests in pools of receivables, such as motor vehicle installment
purchase obligations and credit card receivables. Such securities are
generally issued as pass-through certificates, which represent undivided
fractional ownership interests in the underlying pools of assets. Such
securities may also be debt instruments, which are also known as collateralized
obligations and are generally issued as the debt
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of a special purpose entity organized solely for the purpose of owning such
assets and issuing such debt. Non-mortgage backed securities are not issued or
guaranteed by the U.S. Government or its agencies or instrumentalities;
however, the payment of principal and interest on such obligations may be
guaranteed up to certain amounts and for a certain time period by a letter of
credit issued by a financial institution (such as a bank or insurance company)
unaffiliated with the issuers of such securities.
The purchase of non-mortgage backed securities raises
considerations peculiar to the financing of the instruments underlying such
securities. For example, most organizations that issue asset-backed securities
relating to motor vehicle installment purchase obligations perfect their
interests in the respective obligations only by filing a financing statement
and by having the servicer of the obligations, which is usually the originator,
take custody thereof. In such circumstances, if the servicer were to sell the
same obligations to another party, in violation of its duty not to do so, there
is a risk that such party could acquire an interest in the obligations superior
to that of the holders of the asset-backed securities. Also, although most of
the obligations grant a security interest in the motor vehicle being financed,
in most states the security interest in a motor vehicle must be noted on the
certificate of title to perfect such security interest against competing claims
of other parties. Due to the large number of vehicles involved, however, the
certificate of title to each vehicle financed, pursuant to the obligations
underlying the asset-backed securities, usually is not amended to reflect the
assignment of the seller's security interest for the benefit of the holders of
the asset-backed securities. Therefore, there is the possibility that
recoveries on repossessed collateral may not, in some cases, be available to
support payments on those securities. In addition, various state and federal
laws give the motor vehicle owner the right to assert against the holder of the
owner's obligation certain defenses such owner would have against the seller of
the motor vehicle. The assertion of such defenses could reduce payments on the
related asset-backed securities. Insofar as credit card receivables are
concerned, credit card holders are entitled to the protection of a number of
state and federal consumer credit laws, many of which give such holders the
right to set off certain amounts against balances owed on the credit card,
thereby reducing the amounts paid on such receivables. In addition, unlike
most other asset-backed securities, credit card receivables are unsecured
obligations of the cardholder.
The development of non-mortgage backed securities is at an early
stage compared to mortgage backed securities. While the market for
asset-backed securities is becoming increasingly liquid, the market for
mortgage backed securities issued by
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certain private organizations and non-mortgage backed securities is not as well
developed as that for mortgage backed securities guaranteed by government
agencies or instrumentalities. Bank of America intends to limit its purchases
of mortgage backed securities issued by certain private organizations and
non-mortgage backed securities to securities that are readily marketable at the
time of purchase.
Variable and Floating Rate Instruments. The Portfolio may acquire
variable and floating rate instruments. Such instruments are frequently not
rated by credit rating agencies. However, in determining the creditworthiness
of unrated variable and floating rate instruments and their eligibility for
purchase by the Portfolio, Bank of America will consider the earning power,
cash flow and other liquidity ratios of the issuers of such instruments (which
include financial, merchandising, bank holding and other companies) and will
continuously monitor their financial condition. An active secondary market may
not exist with respect to particular variable or floating rate instruments
purchased by the Portfolio. The absence of such an active secondary market
could make it difficult to dispose of a variable or floating rate instrument in
the event the issuer of the instrument defaulted on its payment obligation or
during periods that the Portfolio is not entitled to exercise its demand
rights, and the Portfolio could, for these or other reasons, suffer a loss to
the extent of the default. Investments in illiquid variable and floating rate
instruments (instruments which are not payable upon seven days' notice and do
not have active trading markets) are subject to the Portfolio's 15% limitation
on illiquid securities. Variable and floating rate instruments may be secured
by bank letters of credit.
Reverse Repurchase Agreements. As described in the Prospectus,
the Portfolio is permitted to borrow funds for temporary purposes by entering
into reverse repurchase agreements with such financial institutions as banks and
broker-dealers in accordance with the investment limitations described therein.
Reverse repurchase agreements are considered to be borrowings by the Portfolio
under the 1940 Act. Whenever the Portfolio enters into a reverse repurchase
agreement, it will place in a segregated account maintained with its custodian
liquid assets such as cash, U.S. Government securities or other liquid high
grade debt securities having a value equal to the repurchase price (including
accrued interest) and Bank of America will subsequently continuously monitor the
account for maintenance of such equivalent value. The Portfolio intends to
enter into reverse repurchase agreements to avoid otherwise having to sell
securities during unfavorable market conditions in order to meet redemptions.
Reverse repurchase agreements are considered to be borrowings by the Portfolio
under the 1940 Act.
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Writing Covered Options. The Portfolio may write (sell) covered
call and put options on any securities in which it may invest. All call
options written by the Portfolio are covered; the Portfolio may cover a call
option by owning the securities subject to the option so long as the option is
outstanding or using the other methods described below. The purpose of writing
covered call options is to realize greater income than would be realized on
portfolio securities transactions alone. However, in writing covered call
options for additional income, the Portfolio may forego the opportunity to
profit from an increase in the market price of the underlying security.
All put options written by the Portfolio would be covered; the
Portfolio may cover a put option by depositing with its custodian cash, U.S.
Government securities or other liquid high-grade debt securities (i.e.,
securities rated in one of the top three categories by Moody's or S&P, or, if
unrated, deemed by Bank of America to be of comparable credit quality) with a
value at least equal to the exercise price of the put option or using the other
methods described below. The purpose of writing such options is to generate
additional income for the Portfolio. However, in return for the option
premium, the Portfolio accepts the risk that it may be required to purchase the
underlying securities at a price in excess of the securities' market value at
the time of purchase.
In addition, a written call option or put option may be covered by
maintaining cash or high grade liquid debt securities (either of which may be
denominated in any currency) in a segregated account, by entering into an
offsetting forward contract and/or by purchasing an offsetting option or any
other option on the same or a related currency and/or by purchasing an
offsetting option or any other option which, by virtue of its exercise price or
otherwise, reduces the Portfolio's net exposure on its written option position.
The Portfolio may also write (sell) covered call and put options
on any securities index composed of securities in which it may invest. Options
on securities indices are similar to options on securities, except that the
exercise of securities index options requires cash payments and does not involve
the actual purchase or sale of securities. In addition, securities index
options are designed to reflect price fluctuations in a group of securities or
segment of the securities market rather than price fluctuations in a single
security.
The Portfolio may cover call options on a securities index by
owning securities whose price changes are expected to be similar to those of
the underlying index, or by having an absolute and immediate right to acquire
such securities without additional cash consideration (or for additional cash
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consideration held in a segregated account by its custodian) upon conversion or
exchange of other securities in its portfolio. The Portfolio may cover call
and put options on a securities index by maintaining cash or liquid high grade
debt securities with a value equal to the exercise price in a segregated
account with its custodian or by using the other methods described above.
The Portfolio may terminate its obligations under a written call
or put option by purchasing an option identical to the one it has written. Such
purchases are referred to as "closing purchase transactions."
Purchasing Options. The Portfolio may purchase put and call
options on any securities in which it may invest. The Portfolio would also be
able to enter into closing sale transactions in order to realize gains or
minimize losses on options it has purchased.
The Portfolio would normally purchase call options in anticipation
of an increase in the market value of securities of the type in which it may
invest. The purchase of a call option would entitle the Portfolio, in return
for the premium paid, to purchase specified securities at a specified price
during the option period. The Portfolio would ordinarily realize a gain if,
during the option period, the value of such securities exceeded the sum of the
exercise price, the premium paid and transaction costs. Otherwise the
Portfolios would realize either no gain or a loss on the purchase of the call
option.
The Portfolio would normally purchase put options in anticipation
of a decline in the market value of securities in its portfolio ("protective
puts") or in securities in which it may invest. The purchase of a put option
would entitle the Portfolio, in exchange for the premium paid, to sell
specified securities at a specified price during the option period. The
purchase of protective puts is designed to offset or hedge against a decline in
the market value of the Portfolio's securities. Put options may also be
purchased by the Portfolio for the purpose of affirmatively benefiting from a
decline in the price of securities which it does not own. The Portfolio would
ordinarily realize a gain if, during the option period, the value of the
underlying securities decreased below the exercise price sufficiently to more
than cover the premium and transaction costs. Otherwise the Portfolio would
realize either no gain or a loss on the purchase of the put option. Gains and
losses on the purchase of protective put options would tend to be offset by
countervailing changes in the value of underlying portfolio securities.
Transactions by the Portfolio in options on securities will be
subject to limitations established by each of the exchanges, boards of trade or
other trading facilities governing
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the maximum number of options in each class which may be written or purchased
by a single investor or group of investors acting in concert, regardless of
whether the options are written or purchased on the same or different
exchanges, board of trade or other trading facilities or are held or written in
one or more accounts or through one or more brokers. Thus, the number of
options which the Portfolio may write or purchase may be affected by options
written or purchased by other investment advisory clients of Bank of America.
An exchange, board of trade or other trading facility may order the liquidation
of positions found to be in excess of these limits, and it may impose certain
other sanctions.
Risks Associated with Options Transactions. There is no assurance
that a liquid secondary market on a domestic or foreign options exchange will
exist for any particular exchange-traded option or at any particular time.
Reasons for the absence of a liquid secondary market on an exchange include the
following: (i) there may be insufficient trading interest in certain options;
(ii) restrictions may be imposed by an exchange on opening transactions or
closing transactions or both; (iii) trading halts, suspensions or other
restrictions may be imposed with respect to particular classes or series of
options; (iv) unusual or unforeseen circumstances may interrupt normal
operations on an exchange; (v) the facilities of an exchange or the Options
Clearing Corporation may not at all times be adequate to handle current trading
volume; or (vi) one or more exchanges could, for economic or other reasons,
decide or be compelled at some future date to discontinue the trading of options
(or a particular class or series of options), in which event the secondary
market on that exchange (or in that class or series of options) would cease to
exist, although outstanding options on that exchange that had been issued by the
Options Clearing Corporation as result of trades on that exchange would continue
to be exercisable in accordance with their terms.
The Portfolio may purchase and sell both options that are traded
on United States and foreign exchanges and options traded over-the-counter with
broker-dealers who make markets in these options. The ability to terminate
over-the-counter options is more limited than with exchange-traded options and
may involve the risk that broker-dealers participating in such transactions will
not fulfill their obligations.
Futures Contracts and Options on Futures Contracts. The Portfolio
may engage in futures and related options transactions only for hedging purposes
as defined below or for non-hedging purposes to the extent permitted by
regulations of the Commodities Futures Trading Commission ("CFTC"). All futures
contracts entered into by the Portfolio would be traded on U.S. exchanges or
boards of trade that are licensed and regulated by the CFTC or on foreign
exchanges.
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<PAGE> 613
Futures Contracts. A futures contract may generally be described
as an agreement between two parties to buy and sell particular financial
instruments for an agreed price during a designated month (or to deliver the
final cash settlement price, in the case of a contract relating to an index or
otherwise not calling for physical delivery at the end of trading in the
contract).
When interest rates are rising or securities prices are falling,
the Portfolio can seek through the sale of futures contracts to offset a
decline in the value of its current portfolio securities. When rates are
falling or prices are rising, the Portfolio, through the purchase of futures
contracts, can attempt to secure better rates or prices than might later be
available in the market when it effects anticipated purchases.
Positions taken in the futures markets are not normally held to
maturity, but are instead liquidated through offsetting transactions which may
result in a profit or a loss. While the Portfolio's futures contracts on
securities will usually be liquidated in this manner, it may instead make or
take delivery of the underlying securities whenever it appears economically
advantageous for the Portfolio to do so. A clearing corporation associated
with the exchange on which futures on securities are traded guarantees that, if
still open, the sale or purchase will be performed on the settlement date.
Hedging Strategies. Hedging by use of futures contracts seeks to
establish more certainty than would otherwise be possible with respect to the
effective price rate or rate of return on portfolio securities or securities
that the Portfolio owns or proposed to acquire. The Portfolio may, for
example, take a "short" position in the futures market by selling futures
contracts in order to hedge against an anticipated rise in interest rates or a
decline in market prices that would adversely affect the dollar value of the
Portfolio's securities. Such futures contracts may include contracts for the
future delivery of securities held by the Portfolio or securities with
characteristics similar to those of the Portfolio's securities. If, in the
opinion of Bank of America, there is a sufficient degree of correlation between
price trends for the Portfolio's securities and futures contracts based on
other financial instruments, securities indices or other indices, the Portfolio
may also enter into such futures contracts as part of its hedging strategy.
Although under some circumstances prices of securities in the Portfolio's may
be more or less volatile than prices of such futures contract, Bank of America
will attempt to estimate the extent of this difference in volatility based on
historical patterns and to compensate for it by having the Portfolio enter into
a greater or lesser number of futures contracts or by attempting to achieve
only a partial hedge against price changes affecting the Portfolio's
securities. When hedging of this
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<PAGE> 614
character is successful, any depreciation in the value of portfolio securities
will substantially be offset by appreciation in the value of the futures
position. On the other hand, any unanticipated appreciation in the value of
the Portfolio's securities would be substantially offset by a decline in the
value of the futures position.
On other occasions, the Portfolio may take a "long" position by
purchasing such futures contracts. This would be done, for example, when the
Portfolio anticipates the subsequent purchase of particular securities when it
has the necessary cash, but expects the prices then available in the applicable
market to be less favorable than prices that are currently available.
Options on Futures Contracts. The acquisition of put and call
options on futures contracts will give the Portfolio the right (but not the
obligation), for a specified price, to sell or to purchase, respectively, the
underlying futures contract at any time during the option period. As the
purchaser of an option on a futures contract, the Portfolio obtains the benefit
of the futures position if prices move in a favorable direction but limits its
risk of loss in the event of an unfavorable price movement to the loss of the
premium and transaction costs.
The writing of a call option on a futures contract generates a
premium which may partially offset a decline in the value of the Portfolio's
assets. By writing a call option, the Portfolio becomes obligated, in exchange
for the premium, to sell a futures contract, which may have a value higher than
the exercise price. Conversely, the writing of a put option on a futures
contact generates a premium, which may partially offset an increase in the
price of securities that the Portfolio intends to purchase. However, the
Portfolio becomes obligated to purchase a futures contract, which may have a
value lower than the exercise price. Thus, the loss incurred by the Portfolio
in writing options on futures is potentially unlimited and may exceed the
amount of the premium received. The Portfolio will incur transaction costs in
connection with the writing of options on futures.
The holder or writer of an option on a futures contract may
terminate its position by selling or purchasing an offsetting option on the
same series. There is no guarantee that such closing transactions can be
effected. The Portfolio's ability to establish and close out positions on such
options will be subject to the development and maintenance of a liquid market.
Other Considerations. The Portfolio will engage in futures and
related options transactions only for hedging or non- hedging purposes in
accordance with CFTC regulations which permit principals of an investment
company registered under the 1940 Act to engage in such transactions without
registering as commodity
-15-
<PAGE> 615
pool operators. The Portfolio would determine that the price fluctuations in
the futures contracts and options on futures used for hedging purposes are
substantially related to price fluctuations in securities held by the Portfolio
or which it expects to purchase. Except as stated below, any futures
transactions would be entered into for traditional hedging purposes -- i.e.,
futures contracts would be sold to protect against a decline in the price of
securities that the Portfolio owned, or futures contracts would be purchased to
protect the Portfolio against an increase in the price of securities it
intended to purchase. As evidence of this hedging intent, the Portfolio
expects that on 75% or more of the occasions on which it takes a long futures
(or option) position (involving the purchase of futures contracts), the
Portfolio will have purchased, or will be in the process of purchasing,
equivalent amounts of related securities in the cash market at the time when
the futures (or option) position is closed out. However, in particular cases,
when it is deemed economically advantageous for the Portfolio to do so, a long
futures position may be terminated (or an option may expire) without the
corresponding purchase of securities.
As an alternative to literal compliance with the bona fide hedging
definition, a CFTC regulation permits the Portfolio to elect to comply with a
different test, under which the aggregate initial margin and premiums required
to establish non-hedging positions in futures contracts and options on futures
will not exceed 5 percent of the value of the net assets of the Portfolio,
after taking into account unrealized profits and losses on any such positions
and excluding the amount by which such options were in-the-money at the time of
purchase.
Transactions in futures contracts and options on futures involve
brokerage costs, require margin deposits and, in the case of contracts and
options obligating the Portfolio to purchase securities, require the Portfolio
to segregate, with its custodian, liquid high grade debt securities in an
amount equal to the underlying value of such contracts and options.
While transactions in futures contracts and options on futures may
reduce certain risks, such transactions themselves entail certain other risks.
Thus, while the Portfolio may benefit from the use of futures and options on
futures, unanticipated changes in interest rates or securities prices may result
in a poorer overall performance for the Portfolio than if it had not entered
into any futures contracts or options transactions. In the event of an
imperfect correlation between a futures position and a portfolio position which
is intended to be protected, the desired protection may not be obtained and the
Portfolio may be exposed to risk of loss.
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<PAGE> 616
Perfect correlation between the Portfolio's futures positions and
portfolio positions may be difficult to achieve because no futures contracts
based on corporate fixed-income securities are currently available.
Interest Rate and Currency Swaps. Inasmuch as interest rate and
currency swaps are entered into for hedging purposes or are offset by a
segregated account as described below, the Portfolio and Bank of America
believe that swaps do not constitute senior securities as defined in the Act
and, accordingly, will not treat them as being subject to the Portfolio's
borrowing restrictions. The net amount of the excess, if any, of the
Portfolio's obligations over its entitlements with respect to each interest
rate or currency swap will be accrued on a daily basis and an amount of cash or
liquid high grade debt securities (i.e., securities rated in one of the top
three ratings categories by Moody's or Standard & Poor's, or, if unrated,
deemed by Bank of America to be of comparable credit quality, having an
aggregate net asset value at least equal to such accrued excess will be
maintained in a segregated account by the Portfolio's custodian. The Portfolio
will not enter into any interest rate or currency swap unless the credit
quality of the unsecured senior debt or the claims-paying ability of the other
party thereto is considered to be investment grade by Bank of America. If
there were a default by the other party to such a transaction, the Portfolio
would have contractual remedies pursuant to the agreements related to the
transaction. The swap market has grown substantially in recent years with a
large number of banks and investment banking firms acting both as principals
and as agents utilizing standardized swap documentation. As a result, the swap
market has become relatively liquid in comparison with the markets for other
similar instruments which are traded in the interbank market.
Foreign Investments. In determining whether to invest in the
securities of foreign issuers, Bank of America will consider such factors as
the characteristics of the particular issuer, differences between economic
trends and the performance of securities markets within the U.S. and those
within other countries, and also factors relating to the general economic,
governmental and social conditions of the country or countries where the issuer
is located. The extent to which the Portfolio will be invested in foreign
issuers will fluctuate from time to time depending on Bank of America's
assessment of prevailing market, economic and other conditions.
Bonds of Supranational Entities. The Portfolio may invest in
bonds of supranational entities. A supranational entity is an entity
established or financially supported by the national governments of one or more
countries to promote reconstruction or development. Examples of supranational
entities include, among others, the World Bank, the European
-17-
<PAGE> 617
Economic Community, the European Coal and Steel Community, the European
Investment Bank, the Inter-American Development Bank, the Export-Import Bank
and the Asian Development Bank.
When-Issued Securities, Forward Commitments and Delayed
Settlements. When the Portfolio agrees to purchase securities on a
"when-issued," forward commitment or delayed settlement basis, its custodian
will set aside cash or liquid portfolio securities equal to the amount of the
commitment in a separate account. Normally, the custodian will set aside
portfolio securities to satisfy a purchase commitment. In such a case, the
Portfolio may be required subsequently to place additional assets in the
separate account in order to assure that the value of the account remains equal
to the amount of the commitment. It may be expected that the net assets of the
Portfolio will fluctuate to a greater degree when it sets aside portfolio
securities to cover such purchase commitments than when it sets aside cash.
The Portfolio does not intend to engage in these transactions for speculative
purposes but only in furtherance of its investment objective. Because the
Portfolio will set aside cash or liquid portfolio securities to satisfy its
purchase commitments in the manner described, its liquidity and the ability of
the investment adviser to manage it may be affected in the event the forward
commitments, commitments to purchase when-issued securities and delayed
settlements ever exceeded 25% of the value of the Portfolio's assets.
The Portfolio will purchase securities on a when-issued, forward
commitment or delayed settlement basis only with the intention of completing
the transaction. If deemed advisable as a matter of investment strategy,
however, the Portfolio may dispose of or renegotiate a commitment after it is
entered into, and may sell securities it has committed to purchase before those
securities are delivered to the Portfolio on the settlement date. In these
cases the Portfolio may realize a taxable capital gain or loss.
When the Portfolio engages in when-issued, forward commitment and
delayed settlement transactions, it relies on the other party to consummate the
trade. Failure of such party to do so may result in the Portfolio's incurring
a loss or missing an opportunity to obtain a price considered to be
advantageous.
The market value of the securities underlying a when-issued
purchase, forward commitment to purchase securities, or a delayed settlement
and any subsequent fluctuations in their market value is taken into account
when determining the market value of the Portfolio starting on the day the
Portfolio agrees to purchase the securities. The Portfolio does not earn
interest on the securities it has committed to purchase until they are paid for
and delivered on the settlement date.
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<PAGE> 618
Securities Lending. The Portfolio may lend securities as
described in its Prospectus. Such loans will be secured by cash or securities
of the U.S. Government and its agencies and instrumentalities. The collateral
must be at all times equal to at least the market value of the securities
loaned. The Portfolio will continue to receive interest or dividends on the
securities it loans, and will also earn interest on the investment of any cash
collateral. Cash collateral may be invested in short-term U.S. Government
securities, U.S. Treasury notes, certificates of deposit, other high-grade,
short-term obligations or interest-bearing cash equivalents. Although voting
rights, or rights to consent, attendant to securities loaned pass to the
borrower, such loans may be called at any time and will be called so that the
securities may be voted by the Portfolio if a material event affecting the
investment is to occur.
Illiquid Securities. It is possible that unregistered securities
purchased by the Portfolio in reliance upon rule 144A under the Securities Act
of 1933 could have the effect of increasing the level of the Portfolio's, and
correspondingly the Fund's, illiquidity to the extent that qualified
institutional buyers become, for a period, uninterested in purchasing these
securities.
OTHER INVESTMENT LIMITATIONS
The investment objectives of the Fund and the Portfolio are
fundamental; the Prospectus for the Fund sets forth or summarizes certain other
fundamental policies that may not be changed with respect to the Fund or the
Portfolio without the affirmative vote of the holders of the majority of the
Fund's outstanding shares or the Portfolio's outstanding interests (as defined
below under "General Information - Miscellaneous"). The following is a list of
additional fundamental policies which may not be changed with respect to the
Fund or the Portfolio without such a vote.
NEITHER THE FUND NOR THE PORTFOLIO MAY:
1. Purchase securities (except securities issued by the U.S.
Government, its agencies or instrumentalities) if, as a result more than 5% of
its total assets will be invested in the securities of any one issuer, except
that up to 25% of its total assets may be invested without regard to this 5%
limitation; provided that all of the assets of the Fund may be invested in the
Portfolio or another investment company.
2. Underwrite the securities of other issuers, provided that
all of the assets of the Fund may be invested in the Portfolio or another
investment company.
-19-
<PAGE> 619
3. Purchase or sell real estate, except that the Portfolio
may, to the extent appropriate to its investment objective, invest in securities
and instruments guaranteed by agencies or instrumentalities of the U.S.
Government and securities issued by companies which invest in real estate or
interests therein.
4. Purchase securities on margin (except for such short-term
credits as may be necessary for the clearance of transactions), make short sales
of securities or maintain a short position. For this purpose, the deposit or
payment by the Portfolio for initial or maintenance margin in connection with
futures contracts is not considered to be the purchase or sale of a security on
margin.
5. Write or sell puts, calls, straddles, spreads or
combinations thereof, except that it may engage in options transactions.
6. Purchase or sell commodities or commodity contracts, or
invest in oil, gas or mineral exploration or development programs, except that:
(a) it may, to the extent appropriate to its investment objective, invest in
securities issued by companies which purchase or sell commodities or commodity
contracts or which invest in such programs; and (b) it may purchase and sell
futures contracts and options on futures contracts.
7. Purchase securities of other investment companies, except
(a) in connection with a merger, consolidation, acquisition or reorganization;
(b) as may otherwise be permitted by the 1940 Act; provided that all of the
assets of the Fund may be invested in the Portfolio or another investment
company.
8. Purchase any securities which would cause 25% or more of
the value of its total assets at the time of such purchase to be invested in the
securities of one or more issuers conducting their principal business activities
in the same industry; provided, however, that (a) there is no limitation with
respect to investments in obligations issued or guaranteed by the federal
government and its agencies and instrumentalities; (b) each utility (such as
gas, gas transmission, electric and telephone service) will be considered a
single industry for purposes of this policy; and (c) 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 their parents.
9. Purchase securities of any issuer if as a result it would
own more than 10% of the voting securities of such issuer; provided that all of
the assets of the Fund may be invested in the Portfolio or another investment
company.
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<PAGE> 620
10. Borrow money for the purpose of obtaining investment
leverage or issue senior securities (as defined in the 1940 Act), provided that
the Fund and the Portfolio may borrow from banks for temporary purposes and in
an amount not exceeding 10% of the value of the total assets of the Fund or the
Portfolio; 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 its total assets at the time of
such borrowing. This restriction shall not apply to (a) the sale of portfolio
securities accompanied by a simultaneous agreement as to their repurchase, or
(b) transactions in currency, options, futures contracts and options on futures
contracts, or forward commitment transactions.
11. Make loans, except that it may purchase or hold debt
obligations in accordance with its investment objective, policies and
limitations; may enter into repurchase agreements with respect to securities;
and may lend portfolio securities against collateral consisting of cash or
securities of the U.S. Government and its agencies and instrumentalities which
are consistent with its permitted investments.
* * *
If a percentage restriction is satisfied at the time of
investment, a later increase or decrease in such percentage resulting from a
change in asset value will not constitute a violation of such restriction.
For the purposes of Investment Limitation 8 above, the Portfolio
and Fund treat, in accordance with the current views of the staff of the
Securities and Exchange Commission (the "SEC") and as a matter of
non-fundamental policy that may be changed without a vote of shareholders, all
supranational organizations as a single industry and each foreign government
(and all of its agencies) as a separate industry.
In order to permit the sale of the Fund's shares in certain
states, the Company may make commitments more restrictive than the investment
policies and limitations described above. As of the date of this Statement of
Additional Information, the following such commitments have been made: 1) that
the Fund will not purchase or retain the securities of any issuer if the
officers or directors or trustees of the Company, its advisors or managers of
the Fund, owning beneficially more than one half of one percent of the
securities of an issuer together own beneficially more than five percent of the
securities of that issuer; and 2) that the Fund will not invest more than 15% of
its total assets in the securities of issuers which together with any
predecessors have a record of less than three years continuous
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<PAGE> 621
operation or securities of issuers which are restricted as to disposition.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
Information on how to purchase and redeem Fund shares, and how
such shares are priced, is included in the Prospectus. The net asset value per
share of the Portfolio is determined at the same time and on the same days as
the net asset value per share of the Fund is determined. The net asset value of
the Fund is equal to the Fund's pro rata share of the total investments and
other assets of the Portfolio, less any liabilities with respect to the Fund,
including the Fund's pro rata share of the Portfolio's liabilities.
Portfolio securities for which market quotations are readily
available (other than debt securities with remaining maturities of 60 days or
less) are valued at the last reported sale price or (if none is available) the
mean between the current quoted bid and asked prices provided by investment
dealers. Other securities and assets for which market quotations are not
readily available are valued at their fair value using methods determined under
the supervision of the Board of Trustees of the Portfolio. Debt securities
with remaining maturities of 60 days or less are valued on an amortized cost
basis unless the Board determines that such basis does not represent fair value
at the time. Under this method such securities are valued initially at cost on
the date of purchase or, in the case of securities purchased with more than 60
days to maturity, are valued at their market or fair value each day until the
61st day prior to maturity. Thereafter, absent unusual circumstances, a
constant proportionate amortization of any discount or premium is assumed until
maturity of the security.
A pricing service may be used to value certain portfolio
securities where the prices provided are believed to reflect the fair value of
such securities. In valuing securities the pricing service would normally take
into consideration such factors as yield, risk, quality, maturity, type of
issue, trading characteristics, special circumstances and other factors it deems
relevant in determining valuations for normal institutional-sized trading units
of debt securities and would not rely on quoted prices. The methods used by the
pricing service and the valuations so established will be utilized under the
general supervision of the Board. Valuation of options is described above under
"Investment Objective and Policies - Options Trading".
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<PAGE> 622
SUPPLEMENTARY PURCHASE INFORMATION
For the purpose of applying the Right of Accumulation or Letter of
Intent privileges described in the Prospectus, the scale of sales loads applies
to purchases made by any "purchaser," which term includes an individual and/or
spouse purchasing securities for his, her or their own account or for the
account of any minor children; or a trustee or other fiduciary account
(including a pension, profit-sharing or other employee benefit trust created
pursuant to a plan qualified under Section 401 of the Internal Revenue Code)
although more than one beneficiary is involved; or "a qualified group" which
has been in existence for more than six months and has not been organized for
the purpose of buying redeemable securities of a registered investment company
at a discount, provided that the purchases are made through a central
administrator or a single dealer, or by other means which result in economy of
sales effort or expense. A "qualified group" must have more than 10 members,
must be available to arrange for group meetings between representatives of the
Fund and the members, and must be able to arrange for mailings to members at
reduced or no cost to the Distributor. The value of shares eligible for the
Right of Accumulation privilege may also be used as a credit toward completion
of the Letter of Intent privilege. Such shares will be valued at their
offering price prevailing on the date of submission of the Letter of Intent.
Distributions on shares held in escrow pursuant to the Letter of Intent
privilege will be credited to the shareholder, but such shares are not eligible
for the Fund's Exchange Privilege.
The computation of the hypothetical offering price per share for
the Fund based on the value of the Fund's net assets on February 28, 1995 and
the Fund's outstanding securities on such date is as follows:
Corporate Bond Fund
<TABLE>
<S> <C>
Net Assets . . . . . . . . . . . . . . . . . . . . $31,371,909
Outstanding Securities . . . . . . . . . . . . . . 2,087,480
Net Asset Value Per Share . . . . . . . . . . . . . $ 15.03
Sales Charge 4.50 percent
of offering price (4.71
percent of net asset value
per share) . . . . . . . . . . . . . . . . . . . . $ 0.71
Offering to Public . . . . . . . . . . . . . . . . $ 15.74
</TABLE>
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<PAGE> 623
SUPPLEMENTARY REDEMPTION INFORMATION
Shares in the Fund for which orders for wire redemption are
received on a business day before the close of regular trading hours on the New
York Stock Exchange (currently 4:00 p.m. Eastern time) will be redeemed as of
the close of regular trading hours on such Exchange and the proceeds of
redemption will normally be wired in federal funds on the next business day to
the commercial bank specified by the investor on the Account Application (or
other bank of record on the investor's file with the Transfer Agent). To
qualify to use the wire redemption privilege, the payment for Fund shares must
be drawn on, and redemption proceeds paid to, the same bank and account as
designated on the Account Application (or other bank of record as described
above). If the proceeds of a particular redemption are to be wired to another
bank, the request must be in writing and signature guaranteed. Shares for
which orders for wire redemption are received after the close of regular
trading hours on the New York Stock Exchange or on a non-business day will be
redeemed as of the close of trading on such Exchange on the next day on which
shares of the Fund are priced and the proceeds will normally be wired in
federal funds on the next business day thereafter. Redemption proceeds will
be wired to a correspondent member bank if the investor's designated bank is
not a member of the Federal Reserve System. Immediate notification by the
correspondent bank to the investor's bank is necessary to avoid a delay in
crediting the funds to the investor's bank account. Proceeds of less than
$1,000 will be mailed to the investor's address.
To change the commercial bank or account designated to receive
redemption proceeds, a written request must be sent to the Company, c/o Pacific
Horizon Funds, Inc., P.O. Box 80221, Los Angeles, California 90080-9909. Such
request must be signed by each shareholder, with each signature guaranteed as
described in the Fund's Prospectus. Guarantees must be signed by an authorized
signatory and "signature guaranteed" must appear with the signature. The
Transfer Agent may request further documentation from corporations, executors,
administrators, trustees or guardians, and will accept other suitable
verification arrangements from foreign investors, such as consular
verification.
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<PAGE> 624
Investors in the Fund redeeming by check generally will be subject
to the same rules and regulations that commercial banks apply to checking
accounts, although the election of this privilege creates only a
shareholder-transfer agent relationship with the Transfer Agent. An investor
may deliver checks directly to the Transfer Agent, BISYS Fund Services Ohio,
Inc., 3435 Stelzer Road, Columbus, Ohio 43219-3035, in which case the proceeds
will be mailed, wired or made available at the Transfer Agent on the next
business day. The check delivered to the Transfer Agent must be accompanied by
a properly executed stock power form on which the investor's signature is
guaranteed as described in the Fund's Prospectus.
Checks may not be used to close an account.
Check redemption may be modified or terminated at any time by the
Company or the Transfer Agent upon notice to shareholders.
SUPPLEMENTARY PURCHASE AND REDEMPTION INFORMATION
In General. As described in the Prospectus, Fund shares may be
purchased directly by the public, by clients of Bank of America through their
qualified trust and agency accounts, or by clients of securities dealers,
financial institutions (including banks) and other industry professionals, such
as investment advisers, accountants and estate planning firms that have entered
into service and/or selling agreements with the Distributor. (The Distributor,
such institutions and professionals are collectively referred to as "Service
Organizations.") Bank of America and Service Organizations may impose minimum
customer account and other requirements in addition to those imposed by the
Fund and described in the Prospectus. Purchase orders will be effected only on
business days.
Shares in the Fund are sold with a sales load, except such
exemptions as noted in the Prospectus. These exemptions to the
imposition of a sales load are due to the nature of the investors and/or the
reduced sales efforts that will be necessary in obtaining such investments.
Service Organizations may be paid by the Distributor at the Company's expense
for shareholder services. Depending on the terms of the particular account,
Bank of America, its affiliates, and Service Organizations also may charge
their customers fees
-25-
<PAGE> 625
for automatic investment, redemption and other services provided. Such fees
may include, for example, account maintenance fees, compensating balance
requirements or fees based upon account transactions, assets or income. Bank
of America or the particular Service Organization is responsible for providing
information concerning these services and any charges to any customer who must
authorize the purchase of Fund shares prior to such purchase.
Persons wishing to purchase Company shares through their accounts
at Bank of America or a Service Organization should contact such entity directly
for appropriate instructions.
Initial purchases of shares into a new account may not be made by
wire. However, persons wishing to make a subsequent purchase of Company shares
into an already existing account by wire should telephone the Transfer Agent at
(800) 346-2087. The investor's bank must be instructed to wire federal funds to
the Transfer Agent, referring in the wire to the Fund in which such investment
is to be made; the investor's portfolio account number; and the investor's name.
The Transfer Agent may charge a fee to act as Custodian for IRAs,
payment of which could require the liquidation of shares. All fees charged are
described in the appropriate form. Shares may be purchased in connection with
these plans only by direct remittance to the Transfer Agent. Purchases for IRA
accounts will be effective only when payments received by the Transfer Agent are
converted into federal funds. Purchases for these plans may not be made in
advance of receipt of funds.
For processing redemptions, the Transfer Agent may request further
documentation from corporations, executors, administrators, trustees or
guardians. The Transfer Agent will accept other suitable verification
arrangements from foreign investors, such as consular verification.
Investors should be aware that if they have selected the TeleTrade
Privilege, any request for a wire redemption will be effected as a TeleTrade
transaction through the Automated Clearing House (ACH) system unless more
prompt transmittal is specifically requested. Redemption proceeds of a
TeleTrade transaction will be on deposit in the investor's account at the ACH
member bank normally two business days after receipt of the redemption request.
Exchange Privilege. Shareholders in the Pacific Horizon Family of
Funds have an exchange privilege whereby they may exchange all or part of their
Pacific Horizon Shares for shares of other investment portfolios in the Pacific
Horizon Family of Funds. Shareholders may also exchange all or a part of their
Pacific Horizon shares for like shares of an investment
-26-
<PAGE> 626
portfolio of Time Horizon Funds. By use of the exchange privilege, the
investor authorizes the Transfer Agent to act on telephonic, telegraphic or
written exchange instructions from any person representing himself or herself
to be the investor and believed by the Transfer Agent to be genuine. The
Transfer Agent's records of such instructions are binding. The exchange
privilege may be modified or terminated at any time upon notice to
shareholders. For federal income tax purposes, exchange transactions are
treated as sales on which a purchaser will realize a capital gain or loss
depending on whether the value of the shares exchanged is more or less than his
basis in such shares at the time of the transaction.
Exchange transactions described in Paragraphs A, B, C and D below
will be made on the basis of the relative net asset values per share of the
investment portfolios involved in the transaction.
A. Shares of any investment portfolio purchased with a sales load, as
well as additional shares acquired through reinvestment of
dividends or distributions on such shares, may be exchanged
without a sales load for shares of any other investment portfolio
in the Pacific Horizon Family of Funds or the Time Horizon Funds.
B. Shares of any investment portfolio in the Pacific Horizon Family
of Funds or the Time Horizon Funds, acquired by a previous
exchange transaction involving shares on which a sales load has
directly or indirectly been paid (e.g. shares purchased with a
sales load or issued in connection with an exchange transaction
involving shares that had been purchased with a sales load), as
well as additional shares acquired through reinvestment of
dividends or distributions on such shares, may be redeemed and the
proceeds used to purchase without a sales load shares of any other
investment portfolio. To accomplish an exchange transaction under
the provisions of this Paragraph, investors must notify the
Transfer Agent of their prior ownership of shares and their
account number.
C. Shares of any investment portfolio in the Pacific Horizon Family
of Funds may be exchanged without a sales load for shares of any
other investment portfolio in the Family that is offered without a
sales load.
D. Shares of any investment portfolio in the Pacific Horizon Family
of Funds purchased without a sales load may be exchanged without a
sales load for shares in any other portfolio where the investor
involved maintained an account in the Pacific Horizon Family of
Funds before April 20, 1987 or was the beneficial owner of
-27-
<PAGE> 627
shares of Bunker Hill Income Securities, Inc. on the date of its
reorganization into the Fund.
Except as stated above, a sales load will be imposed when shares
of any investment portfolio in the Pacific Horizon Family of Funds that were
purchased or otherwise acquired without a sales load are exchanged for shares of
another investment portfolio in the Pacific Horizon Family or the Time Horizon
Funds, which are sold with a sales load.
Exchange requests received on a business day prior to the time
shares of the investment portfolios involved in the request are priced will be
processed on the date of receipt. "Processing" a request means that shares in
the investment portfolio from which the shareholder is withdrawing an
investment will be redeemed at the net asset value per share next determined on
the date of receipt. Shares of the new investment portfolio into which the
shareholder is investing will also normally be purchased at the net asset value
per share next determined coincident to or after the time of redemption.
Exchange requests received on a business day after the time shares of the
investment portfolios involved in the request are priced will be processed on
the next business day in the manner described above.
Miscellaneous. Certificates for shares will not be issued.
Depending on the terms of the customer account at Bank of America
or a Service Organization, certain purchasers may arrange with the Company's
custodian for sub-accounting services paid by the Company without direct charge
to the purchaser.
A "business day" for purposes of processing share purchases and
redemptions received by the Transfer Agent at its Columbus office is a day on
which the New York Stock Exchange is open for trading. In 1996, the holidays
on which the New York Stock Exchange is closed are: New Year's Day,
Presidents' Day, Good Friday, Memorial Day (observed), Independence Day, Labor
Day, Thanksgiving Day and Christmas Day.
The Company may suspend the right of redemption or postpone the
date of payment for shares during any period when (a) trading on the New York
Stock Exchange is restricted by applicable rules and regulations of the SEC;
(b) the New York Stock Exchange is closed for other than customary weekend and
holiday closings; (c) the SEC has by order permitted such suspension; or (d) an
emergency exists as determined by the SEC. (The Company may also suspend or
postpone the recordation of the transfer of its shares upon the occurrence of
any of the foregoing conditions.)
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<PAGE> 628
The Company's Charter permits its Board of Directors to require a
shareholder to redeem involuntarily shares in a Fund if the balance held of
record by the shareholder drops below $500 and such shareholder does not
increase such balance to $500 or more upon 60 days' notice. The Company will
not require a shareholder to redeem shares of the Fund if the balance held of
record by the shareholder is less than $500 solely because of a decline in the
net asset value of the Fund's shares. The Company may also redeem shares
involuntarily if such redemption is appropriate to carry out the Company's
responsibilities under the 1940 Act.
If the Company's Board of Directors determines that conditions
exist which make payment of redemption proceeds wholly in cash unwise or
undesirable, the Company may make payment wholly or partly in securities or
other property. In such an event, a shareholder would incur transaction costs
in selling the securities or other property. The Company has committed that it
will pay all redemption requests by a shareholder of record in cash, limited in
amount with respect to each shareholder during any ninety-day period to the
lesser of $250,000 or 1% of the net asset value at the beginning of such
period.
ADDITIONAL INFORMATION CONCERNING TAXES
FEDERAL
The Fund will be treated as a separate corporate entity under the
Internal Revenue Code of 1986, as amended (the "Code"), and intends to qualify
as a "regulated investment company." By following this policy, the Fund
expects to eliminate or reduce to a nominal amount the federal income taxes to
which it may be subject. If for any taxable year the Fund does not qualify for
the special federal tax treatment afforded regulated investment companies, all
of the Fund's taxable income would be subject to tax at regular corporate rates
(without any deduction for distributions to shareholders). In such event, the
Fund's dividend distributions to shareholders would be taxable as ordinary
income to the extent of the current and accumulated earnings and profits of the
Fund and would be eligible for the dividends received deduction in the case of
corporate shareholders.
Qualification as a regulated investment company under the Code
requires, among other things, that the Fund distribute to its shareholders an
amount equal to at least the sum of 90% of its investment company taxable
income (if any) and 90% of its tax- exempt income (if any), net of certain
deductions for each taxable year. In general, the Fund's investment company
taxable income will be its taxable income, including dividends, interest, and
short-term capital gains (the excess of net short-term
-29-
<PAGE> 629
capital gain over net long-term capital loss), subject to certain adjustments
and excluding the excess of net long-term capital gain, if any, for the taxable
year over the net short-term capital loss (if any), for such year. The Fund
will be taxed on its undistributed investment company taxable income, if any.
As stated, the Fund intends to distribute at least 90% of its investment
company taxable income (if any) for each taxable year. To the extent such
income is distributed by the Fund (whether in cash or additional shares), it
will be taxable to shareholders as ordinary income.
The Fund will not be treated as a regulated investment company
under the Code if 30% or more of the Fund's gross income for a taxable year is
derived from gains realized on the sale or other disposition of the following
investments held for less than three months (the "Short-Short test"): (1)
stock and securities (as defined in section 2(a)(36) of the 1940 Act); (2)
options, futures and forward contracts other than those on foreign currencies;
and (3) foreign currencies (and options, futures and forward contracts on
foreign currencies) that are not directly related to the Fund's principal
business of investing in stock and securities (and options and futures with
respect to stocks and securities). Interest (including original issue discount
and accrued market discount) received by the Fund upon maturity or disposition
of a security held for less than three months will not be treated as gross
income derived from the sale or other disposition of such security within the
meaning of this requirement. However, any other income that is attributable to
realized market appreciation will be treated as gross income from the sale or
other disposition of securities for this purpose. With respect to covered call
options, if the call is exercised by the holder, the premium and the price
received on exercise constitute the proceeds of sale, and the difference
between the proceeds and the cost of the securities subject to the call is
capital gain or loss. Premiums from expired call options written by a Fund and
net gains from closing purchase transactions are treated as short-term capital
gains for federal income tax purposes, and losses on closing purchase
transactions are short-term capital losses. See Appendix B -- "Accounting and
Tax Treatment" -- for a general discussion of the federal tax treatment of
futures contracts, related options thereon and other financial instruments,
including their treatment under the Short-Short test.
Any distribution of the excess of net long-term capital gains over
net short-term capital losses is taxable to shareholders as long-term capital
gains, regardless of how long the shareholder has held Fund shares and whether
such gains are received in cash or additional Fund shares. The Fund will
designate such a distribution as a capital gain dividend in a written notice
mailed to shareholders after the close of the Fund's taxable year. It should
be noted that, upon the sale or
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<PAGE> 630
exchange of Fund shares, if the shareholder has not held such shares for more
than six months, any loss on the sale or exchange of those shares will be
treated as long-term capital loss to the extent of the capital gain dividends
received with respect to the shares.
Ordinary income of individuals is taxable at a maximum nominal
rate of 39.6%, but because of limitations on itemized deductions otherwise
allowable and the phase-out of personal exemptions, the maximum effective
marginal rate of tax for some taxpayers may be higher. An individual's
long-term capital gains are taxable at a maximum nominal rate of 28%. For
corporations, long-term capital gains and ordinary income are both taxable at a
maximum nominal rate of 35% (or at a maximum effective marginal rate of 39%, in
the case of corporations having taxable income between $100,000 and $335,000).
A 4% non-deductible excise tax is imposed on regulated investment
companies that fail to currently distribute specific percentages of their
ordinary taxable income and capital gain net income (excess of capital gains
over capital losses). The Fund intends to make sufficient distributions or
deemed distributions of its ordinary taxable income and any capital gain net
income prior to the end of each calendar year to avoid liability for this
excise tax.
The Company will be required in certain cases to withhold and
remit to the United States Treasury 31% of taxable dividends or 31% of gross
sale proceeds upon sale paid to shareholders (i) who have failed to provide a
correct tax identification number in the manner required, (ii) who are subject
to withholding by the Internal Revenue Service for failure to properly include
on their return payments of taxable interest or dividends or (iii) who have
failed to certify to the Company either that they are subject to backup
withholding when required to do so or that they are "exempt recipients."
At February 28, 1995, the Fund had unused capital loss carryovers
of $8,305,224, some of which may be available to the Fund to offset any future
capital gains on securities transactions to the extent provided in the Code.
STATE
Depending upon the extent of activities in states and localities
in which its offices are maintained, in which its agents or independent
contractors are located or in which it is otherwise deemed to be conducting
business, the Fund may be subject to the tax laws of such states or localities.
Income distributions may be taxable to shareholders under state or
local law as dividend income even though all or a
-31-
<PAGE> 631
portion of such distributions may be derived from interest on tax-exempt
obligations or U.S. government obligations which, if realized directly, would
be exempt from such income taxes. Shareholders are advised to consult their
tax advisers concerning the application of state and local taxes.
TAXATION OF THE PORTFOLIO
Management of the Portfolio intends for the Portfolio to be
treated as a partnership (or, in the event that the Fund is the sole investor in
the Portfolio, as an agent or nominee) rather than as a regulated investment
company or a corporation under the Code. Under the rules applicable to a
partnership (or an agent or nominee) under the Code, any interest, dividends,
gains and losses of the Portfolio will be deemed to have been "passed through"
to its investors regardless of whether any amounts are actually distributed by
the Portfolio.
Each investor in the Portfolio will be taxed on its share (as
determined in accordance with the governing instruments of the Portfolio) of
the Portfolio's ordinary income and capital gains in determining its income tax
liability. The determination of such share will be made in accordance with the
Code and regulations promulgated thereunder. It is intended that the
Portfolio's assets, income and distributions will be managed in such a way that
an investor in the Portfolio will be able to satisfy the requirements of
Sub-chapter M of the Code, assuming that the investor invested all of its
assets in the Portfolio.
GENERAL
The foregoing discussion is based on tax laws and regulations
which are in effect on the date of this Statement of Additional Information.
Such laws and regulations may be changed by legislative or administrative
action. This discussion is only a summary of some of the important tax
considerations generally affecting purchasers of Fund shares. No attempt is
made to present a detailed explanation of the federal income tax treatment of
the Fund or its shareholders, and this discussion is not intended as a
substitute for careful tax planning. Accordingly, potential purchasers of Fund
shares should consult their tax advisers with specific reference to their own
tax situation.
-32-
<PAGE> 632
MANAGEMENT
DIRECTORS AND OFFICERS OF THE COMPANY
The directors and officers of the Company, their addresses, ages
and principal occupations during the past five years are:
<TABLE>
<CAPTION>
Position with
Name and Address Age Company Principal Occupations
- ---------------- --- ------- ---------------------
<S> <C> <C> <C>
Thomas M. Collins 61 Director Of counsel, law firm of
McDermott & Trayner McDermott & Trayner;
225 S. Lake Avenue Partner of the law firm
Suite 410 of Musick, Peeler &
Pasadena, CA 91101-3005 Garrett (until April,
1993); Trustee, Master
Investment Trust Series
I and Master Investment
Trust, Series II
(registered investment
companies) (since 1993);
former Director, Bunker
Hill Income Securities,
Inc. (registered
investment company)
through 1991.
Douglas B. Fletcher 70 Vice Chairman Chairman of the Board
Fletcher Capital of the Board and Chief Executive
Advisors Incorporated Officer, Fletcher
4 Upper Newport Plaza Capital Advisors,
Suite 100 Incorporated, (registered
Newport Beach, CA 92660-2629 investment adviser) 1991
to date;
Partner, 1991 Newport
Partners (private
venture capital firm),
1981 to date; Chairman
of the Board and Chief
Executive Officer, First
Pacific Advisors, Inc.
(registered investment
adviser) and seven
investment companies
under its management,
prior to 1983; former
Allied Member, New York
Stock Exchange; Chairman
of the Board of FPA
Paramount Fund, Inc.
through 1984; Director,
TIS Mortgage Investment
Company (real estate
investment trust);
Trustee and former Vice
Chairman of the Board,
</TABLE>
-33-
<PAGE> 633
<TABLE>
<CAPTION>
Position with
Name and Address Age Company Principal Occupations
- ---------------- --- ------- ---------------------
<S> <C> <C> <C>
Claremont McKenna
College; Chartered
Financial Analyst.
Robert E. Greeley 62 Director Chairman, Page Mill
Page Mill Asset Asset Management (a
Management private investment
433 California Street company) since 1991;
Suite 900 Manager, Corporate
San Francisco, CA 94104 Investments, Hewlett
Packard Company from
1979 to 1991; Trustee,
Master Investment Trust,
Series I and Master
Investment Trust, Series
II (since 1993);
Director, Morgan
Grenfell Small Cap Fund
(since 1986); former
Director, Bunker Hill
Income Securities, Inc.
(since 1989) (registered
investment companies);
former Trustee,
SunAmerica Fund Group
(previously Equitec
Siebel Fund Group) from
1984 to 1992.
Kermit O. Hanson 79 Director Vice Chairman of the
17760 14th Ave., N.W. Advisory Board, 1988 to
Seattle, WA 98177 date, Executive
Director, 1977 to 1988,
Pacific Rim Bankers
Program (a non-profit
educational
institution); Dean
Emeritus, 1981 to date,
Dean, 1964-81, Graduate
School of Business
Administration,
University of
Washington; Director,
Washington Federal
Savings & Loan
Association; Trustee,
Seafirst Retirement
Funds (since 1993)
(registered investment
company).
</TABLE>
-34-
<PAGE> 634
<TABLE>
<CAPTION>
Position with
Name and Address Age Company Principal Occupations
- ---------------- --- ------- ---------------------
<S> <C> <C> <C>
Cornelius J. Pings* 66 Chairman of President, Association
Association of American the Board and of American
Universities President Universities, February
One DuPont Circle 1993 to date; Provost,
Suite 730 1982 to January
Washington, DC 20036 1993, Senior Vice
President for Academic
Affairs, 1981 to January
1993, University of
Southern California;
Trustee, Master
Investment Trust, Series
I and Master Investment
Trust, Series II (since
1995).
Kenneth L. Trefftzs 83 Director Private Investor;
11131 Briarcliff Drive formerly Distinguished
San Diego, CA 92131-1329 Emeritus Professor
of Finance and Chairman
of the Department of
Finance and Business
Economics of the
Graduate School of
Business of the
University of Southern
California; former
Director, Metro Goldwyn
Mayer, Inc.; Director,
Fremont General
Corporation (insurance
and financial services
holding company);
Director, Source
Capital, Inc.
(closed-end investment
company); Director of
three open-end
investment companies
managed by First Pacific
Advisors, Inc.; formerly
Chairman of the Board of
Directors (or Trustees)
of nineteen investment
companies managed by
American Capital Asset
Management, Inc.
</TABLE>
-35-
<PAGE> 635
<TABLE>
<CAPTION>
Position with
Name and Address Age Company Principal Occupations
- ---------------- --- ------- ---------------------
<S> <C> <C> <C>
Richard E. Stierwalt Executive Chairman of the Board
125 W. 55th Street 40 Vice President and Chief Executive
New York, NY 10019 Officer, July 1993 to
date, prior thereto
Senior Director,
Managing Director and
Chief Executive Officer
of the Administrator and
Distributor, February
1987 to July 1993;
President, Master
Investment Trust, Series
I, Master Investment
Trust, Series II and
Seafirst Retirement
Funds (since 1993);
First Vice President,
Trust Operation
Administration, Security
Pacific National Bank,
1983-1987.
William B. Blundin 57 Executive Vice Vice Chairman, July 1993
125 W. 55th Street President to date, prior thereto
New York, NY 10019 Director and President
of the Administrator and
Distributor, February
1987 to July 1993;
Executive Vice
President, Master
Investment Trust, Series
II and Seafirst
Retirement Funds (since
1993); Senior Vice
President, Shearson
Lehman Brothers,
1978-1987.
Irimga McKay 35 Vice Senior Vice President,
7863 Girard Avenue President July 1993 to date, prior
Suite 306 thereto First Vice
La Jolla, CA 92037 President of the
Administrator and
Distributor, November
1988 to July 1993; Vice
President, Master
Investment Trust, Series
II and Seafirst
Retirement Funds (since
1993); Regional Vice
President, Continental
Equities, June 1987 to
November 1988; Assistant
</TABLE>
-36-
<PAGE> 636
<TABLE>
<CAPTION>
Position with
Name and Address Age Company Principal Occupations
- ---------------- --- ------- ---------------------
<S> <C> <C> <C>
Wholesaler, VMS Realty
Partners (a real estate
limited partnership),
May 1986 to June 1987.
W. Eugene Spurbeck 39 Assistant Vice Manager of Client
BISYS Fund Services President Services of the
515 Figueroa Street Administrator (1993 to
Suite 335 date); Assistant Vice
Los Angeles, CA 92307 President, Master
Investment Trust, Series
II; Vice President,
Seafirst Retirement
Funds (since 1995); Vice
President of Retail
Lending Operations Banc
One (1989 to 1993).
Martin R. Dean 31 Treasurer Manager of Fund
3435 Stelzer Road Accounting of BISYS
Columbus, OH 43219 Fund Services, May 1994
to Present; Treasurer,
Master Investment Trust,
Series II and Seafirst
Retirement Funds (since
1995); Senior Manager at
KPMG Peat Marwick
previously 1990-1994.
W. Bruce McConnel, III 52 Secretary Partner of the law firm
1345 Chestnut Street of Drinker Biddle &
Philadelphia National Bank Reath. Secretary,
Building, Suite 1100 Master Investment Trust,
Philadelphia, PA 19107 Series I, Master
Investment Trust, Series
II and Seafirst
Retirement Funds
George O. Martinez 35 Assistant Senior Vice President
3435 Stelzer Road Secretary and Director of Legal
Columbus, OH 43219 and Compliance Services,
of the Administrator.
since April 1995;
Assistant Secretary,
Master Investment Trust,
Series II and Seafirst
Retirement Funds (since
1995); prior thereto,
Vice President and
Associate General
Counsel, Alliance
Capital Management, L.P.
</TABLE>
- --------------------
* Mr. Pings is an "interested director" of the Company as defined in the
1940 Act.
-37-
<PAGE> 637
The Audit Committee of the Board is comprised of all directors and
is chaired by Dr. Trefftzs. The Board does not have an Executive Committee.
Each director is entitled to receive an annual fee of $25,000 plus
$1,000 for each day that a director participates in all or part of a Board
Meeting; the President receives an additional $20,000 per annum for his services
as President; Mr. Collins, in consideration of his years of service as President
and Chairman of the Board, receives an additional $40,000 per annum in severance
until February 28, 1997; each member of a Committee of the Board is entitled to
receive $1,000 for each Committee meeting they participate in (whether or not
held on the same day as a Board meeting); and each Chairman of a Committee of
the Board shall be entitled to receive an annual retainer of $1,000 for his
services as Chairman of the Committee. The Fund and each other fund of the
Company pays its proportionate share of these amounts based on relative net
asset values.
For the fiscal year ended February 28, 1995, the Company paid or
accrued for the account of its directors as a group for services in all
capacities a total of $334,168; of this amount $4,099 was allocated to the Fund.
Each director is also reimbursed for out-of-pocket expenses incurred as a
director. Drinker Biddle & Reath, of which Mr. McConnel is a partner, receives
legal fees as counsel to the Company. As of the date of this Statement of
Additional Information, the directors and officers of the Company, as a group,
owned less than 1% of the outstanding shares of each of the Company's investment
portfolios.
Under a retirement plan approved by the Board, including a
majority of its directors who are not "interested persons" of the Company,
effective March 1, 1995, a director who dies or resigns after five years of
service is entitled to receive ten annual payments each equal to the greater of:
(i) 50% of the annual director's retainer that was payable by the Company during
the year of his/her death or resignation, or (ii) 50% of the annual director's
retainer then in effect for directors of the Company during the year of such
payment. A director who dies or resigns after nine years of service is entitled
to receive ten annual payments each equal to the greater of: (i) 100% of the
annual director's retainer that was payable by the Company during the year of
his/her death or resignation, or (ii) 100% of the annual director's retainer
then in effect for directors of the Company during the year of such payment.
Further, the amount payable each year to a director who dies or resigns is
increased by $1,000 for each year of service that the director provided as
Chairman of the Board.
Years of service for purposes of calculating the benefit described
above are based upon service as a director or
-38-
<PAGE> 638
Chairman after February 28, 1994. Retirement benefits in which a director has
become vested may not be reduced by later Board action.
In lieu of receiving ten annual payments, a director may elect to
receive substantially equivalent benefits through a single-sum cash payment of
the present value of such benefits paid by the Company within 45 days of the
death or resignation of the director. The present value of such benefits is to
be calculated (i) based on the retainer that was payable by the Company during
the year of the director's death or resignation (and not on any retainer payable
to directors thereafter), and (ii) using the interest rate in effect as of the
date of the director's death or resignation by the Pension Benefit Guaranty
Corporation (or any successor thereto) for valuing immediate annuities under
terminating defined benefit pension plans. A director's election to receive a
single sum must be made in writing within the 30 calendar days after the date
the individual is first elected as a director.
In addition to the foregoing, the Board of Directors may, in its
discretion and in recognition of a director's period of service before March 1,
1994 as a director and possibly as Chairman, authorize the Company to pay a
retirement benefit following the director's death or resignation (unless the
director has vested benefits as a result of completing nine years of service).
Any such action shall be approved by the Board and by a majority of the
directors who are not "interested persons" of the Company within 120 days
following the director's death or resignation and may be authorized as a single
sum cash payment or as not more than ten annual payments (beginning the first
anniversary of the director's date of death or resignation and continuing for
one or more anniversary date(s) thereafter).
The obligation of the Company to pay benefits to a former director
is neither secured nor funded by this Company but shall be binding upon its
successors in interest. The payment of such benefits under the retirement plan
has no priority or preference over the lawful claims of the Company's creditors
or shareholders, and the right to receive such payments is not assignable or
transferable by a director (or former director) other than by will, by the laws
of descent and distribution, or by the director's written designation of a
beneficiary.
-39-
<PAGE> 639
TRUSTEES AND OFFICERS OF MASTER INVESTMENT TRUST, SERIES I
The trustees and officers of Master Investment Trust, Series I
(the "Master Trust"), a Delaware business trust of which the Portfolio is a
series, their addresses, ages and principal occupation during the past five
years are:
<TABLE>
<CAPTION>
Position with
Name and Address Age the Master Trust Principal Occupations
- ---------------- --- ---------------- ---------------------
<S> <C> <C> <C>
Thomas M. Collins 61 Chairman of See "Directors and
McDermott & Trayner the Board Officers of the
225 S. Lake Avenue, Company."
Suite 410
Pasadena, CA 91101-3005
Michael Austin 59 Trustee Chartered Accountant;
Victory House, Trustee, Master
Nelson Quay Investment Trust,
Governor's Harbour Series II (since 1993)
Grand Cayman Retired Partner, KPMG
Cayman Islands Peat Marwick LLP.
British West Indies
Robert E. Greeley 62 Trustee See "Directors and
Page Mill Asset Officers of the Company".
Management
433 California Street
Suite 900
San Francisco, CA 94104
Robert A. Nathane* 70 Trustee Retired President, Laird
1200 Shenandoah Drive East Norton Trust Company,
Seattle, WA 98112 Chairman of the Board of
Advisors, Phoenix Venture
Funds; Trustee, Seafirst
Retirement Funds; Trustee,
Master Investment Trust,
Series II (since 1993);
former Supervisor,
Collective Investment Trust
for Seafirst Retirement
Accounts; former Trustee,
First Funds of America
(registered investment
companies).
</TABLE>
<TABLE>
<CAPTION>
Position with
Name and Address Age the Master Trust Principal Occupations
- ---------------- --- ---------------- ---------------------
<S> <C> <C> <C>
Cornelius J. Pings 66 Trustee See "Directors and Officers of
Association of American the Company".
</TABLE>
-40-
<PAGE> 640
<TABLE>
<S> <C> <C> <C>
Universities
One DuPont Circle
Suite 730
Washington, DC 20036
Richard E. Stierwalt 40 President See "Directors and
125 West 55th Street Officers of the Company."
New York, NY 10019
Adrian J. Waters 32 Executive Vice Managing Director,
ITI House President, Concord Management
23 Earlsfort Terrace Treasurer and (Ireland) Ltd. since May
Dublin 2, Ireland Assistant 1993; Manager in the
Investment Secretary Company Industry Services
Group, Price Waterhouse
1989 to May 1993; Member of
Oliver Freaney and
Co./Spicer and Openheim
Chartered Accountants
1986-1989.
W. Bruce McConnel, III 52 Secretary See "Directors and
1345 Chestnut Street Officers of the Company."
Philadelphia, PA 19107
</TABLE>
____________________
* Mr. Nathane is an "interested trustee" of the Master Trust as defined
in the 1940 Act.
Each trustee receives an aggregate annual fee of $1500 plus $500 per
meeting attended and $250 for each full day spent in traveling to or from
meetings, for his services as trustee of the Master Trust. For the fiscal year
ended February 28, 1995, the Master Trust paid or accrued for the account of
its trustees as a group for services in all capacities a total of $30,221, of
this amount $1,661 was allocated to the Portfolio. Each trustee is also
reimbursed for out-of-pocket expenses incurred as a trustee. The trustees'
fees and reimbursements are allocated among all of the Master Trust's
portfolios based on relative net asset values.
-41-
<PAGE> 641
The following chart provides certain information about the
director/trustee fees of the Company's and Master Trust's directors/trustees as
of February 28, 1995:
<TABLE>
<CAPTION>
PENSION OR
RETIREMENT TOTAL
AGGREGATE BENEFITS COMPENSATION FROM
AGGREGATE COMPENSATION ACCRUED AS PART ESTIMATED REGISTRANT AND
NAME OF PERSON/ COMPENSATION FROM FROM THE OF FUND ANNUAL BENEFITS FUND COMPLEX*
POSITION THE COMPANY MASTER TRUST EXPENSES UPON RETIREMENT PAID TO DIRECTORS
--------------- ----------------- ------------ --------------- --------------- -----------------
<S> <C> <C> <C> <C> <C>
Thomas M. Collins $100,000 $5,000 $0 $0 $110,000
President and
Chairman of the
Board+
Douglas B. Fletcher $57,500 $0 $0 $0 $57,500
Vice Chairman of the
Board
Robert E. Greeley** $57,500 $4,750 $0 $0 $65,781
Director
Kermit O. Hanson $57,500 $0 $0 $0 $63,500
Director
Cornelius J. Pings $57,500 $0 $0 $0 $57,500
Director
Kenneth L. Trefftzs $57,500 $0 $0 $0 $57,500
Director
- --------------------
</TABLE>
* The "Fund Complex" consists of the Company, Seafirst Retirement Funds,
the Master Trust and Master Investment Trust, Series II.
** Mr. Greeley became a director of the Company on April 25, 1994.
+ Mr. Collins was President and Chairman of the Board of the Company
until August 31, 1995.
INVESTMENT ADVISER
Bank of America is the successor by merger to Security Pacific
National Bank ("Security Pacific"), which previously served as investment
adviser to the other investment portfolios of the Company since the
commencement of its operations. As described in the Prospectus, the Fund has
not retained the services of an investment adviser since it seeks to achieve
its investment objective by investing all of its assets in the
-42-
<PAGE> 642
Portfolio. In the Investment Advisory Agreement with the Master Trust, Bank of
America has agreed to provide investment advisory services to the Portfolio as
described in the Prospectus. Bank of America has also agreed to pay all
expenses incurred by it in connection with its activities under its agreement
other than the cost of securities, including brokerage commissions, if any,
purchased for the Portfolio. In rendering its advisory services, Bank of
America may utilize Bank officers from one or more of the departments of the
Bank which are authorized to exercise the fiduciary powers of Bank of America
with respect to the investment of trust assets. In some cases, these officers
may also serve as officers, and utilize the facilities, of wholly-owned
subsidiaries and other affiliates of Bank of America or its parent corporation.
For the services provided and expenses assumed pursuant to the Investment
Advisory Agreement for the Portfolio, the Master Trust has agreed to pay Bank
of America fees, accrued daily and payable monthly, at the annual rate of .45%
of the average daily net assets of the Portfolio. The fees payable to Bank of
America are not subject to reduction as the value of the Portfolio's net assets
increases. From time to time, Bank of America may waive fees or reimburse the
Company or the Portfolio for expenses voluntarily or as required by certain
state securities laws.
For the fiscal period October 1, 1994 through February 28, 1995,
Bank of America waived all advisory fees payable to it by the Portfolio,
amounting to $58,897. For the period April 25, 1994 (the date the Predecessor
Fund was reorganized into the Fund) through September 30, 1994, Bank of America
waived all advisory fees payable to it by the Portfolio, amounting to $73,575.
See "Management -- Administrator" for instances where the investment advisor is
required to make expense reimbursements to the Portfolio.
Prior to its reorganization into the Fund, the Predecessor Fund
was advised by Security Pacific Investment Management, Inc. ("SPIM"), an
affiliate of Bank of America, until December 8, 1993 when SPIM transferred its
rights and obligations under its advisory agreement with the Predecessor Fund
(the "Prior Agreement") to Bank of America, which thereafter served as
investment adviser. For the period October 1, 1993 through April 24, 1994 and
the fiscal years ended September 30, 1993 and 1992, the Predecessor Fund paid
$129,586, $228,245 and $218,010, respectively, in investment advisory fees to
SPIM (and Bank of America after December 8, 1993), pursuant to the Prior
Agreement.
The Investment Advisory Agreement between the Master Trust and Bank
of America (the "Investment Advisory Agreement") is dated October 25, 1993, as
amended through April 26, 1994. The Investment Advisory Agreement will be in
effect until October 31, 1995, and will continue in effect from year to year
thereafter only so long as such continuation is approved at least
-43-
<PAGE> 643
annually by (i) the Board of Trustees of the Master Trust or the vote of a
"majority," as defined in the 1940 Act, of the outstanding voting securities of
the Master Trust, and (ii) a majority of those trustees of the Master Trust who
are not "interested persons," as defined in the 1940 Act, of any party to the
Investment Advisory Agreement, acting in person at a meeting called for the
purpose of voting on such approval. The Investment Advisory Agreement will
terminate automatically in the event of its "assignment," as defined in the
1940 Act. In addition, the Investment Advisory Agreement is terminable at any
time without penalty upon 60 days' written notice by the Board of Trustees of
the Master Trust, by vote of the holders of a majority of the Portfolio's
outstanding voting securities, or by Bank of America.
The Investment Advisory Agreement for the Portfolio provides that
Bank of America shall not be liable for any error of judgment or mistake of law
or for any loss suffered in connection with the performance of the Investment
Advisory Agreement, except a loss resulting from a breach of fiduciary duty
with respect to the receipt of compensation for services or a loss resulting
from willful misfeasance, bad faith or negligence in the performance of its
duties or from reckless disregard by it of its duties and obligations
thereunder.
THE GLASS-STEAGALL ACT AND PROPOSED LEGISLATION
The Glass-Steagall Act, among other things, prohibits banks from
engaging in the business of underwriting securities, although national and
state-chartered banks generally are permitted to purchase and sell securities
upon the order and for the account of their customers. In 1971, the United
States Supreme Court held in Investment Company Institute v. Camp that the
Glass- Steagall Act prohibits a national bank from operating a fund for the
collective investment of managing agency accounts. Subsequently, the Board of
Governors of the Federal Reserve System (the "Board") issued a regulation and
interpretation to the effect that the Glass-Steagall Act and such decision
forbid a bank holding company registered under the Federal Bank Holding Company
Act of 1956 (the "Holding Company Act") or any non-bank affiliate thereof from
sponsoring, organizing or controlling a registered, open-end investment company
continuously engaged in the issuance of its shares, but do not prohibit such a
holding company or affiliate from acting as investment adviser, transfer agent
and custodian to such an investment company. In 1981, the United States
Supreme Court held in Board of Governors of the Federal Reserve System v.
Investment Company Institute that the Board did not exceed its authority under
the Holding Company Act when it adopted its regulation and interpretation
authorizing bank holding companies and their non-bank affiliates to act as
investment advisers to registered closed-end investment companies.
-44-
<PAGE> 644
Bank of America believes that if the question were properly
presented, a court should hold that Bank of America may perform the services
for the Portfolio contemplated by the Investment Advisory Agreement as
described in the Prospectus, and this Statement of Additional Information
without violation of the Glass-Steagall Act or other applicable banking laws or
regulations. It should be noted, however, that there have been no cases
deciding whether a national bank may perform services comparable to those
performed by Bank of America and that future changes in either federal or state
statutes and regulations relating to permissible activities of banks or trust
companies and their subsidiaries or affiliates, as well as further judicial or
administrative decisions or interpretations of present and future statutes and
regulations, could prevent Bank of America from continuing to perform such
services for the Portfolio or from continuing to purchase Fund shares for the
accounts of its customers. (For a discussion of the Glass Steagall Act in
connection with the Company's Shareholder Service Plan, see "Plan Payments" in
the Fund's Prospectus.)
On the other hand, as described herein, the Fund is currently
distributed by Concord Financial Group, Inc. Concord Holding Corporation, its
parent, either directly or through its off-shore subsidiary, provides the
Portfolio and the Fund with administrative services. If current restrictions
under the Glass-Steagall Act preventing a bank from sponsoring, organizing,
controlling, or distributing shares of an investment company were relaxed, the
Company and the Master Trust expect that Bank of America would consider the
possibility of offering to perform some or all of the services now provided by
Concord Holding Corporation or Concord Financial Group, Inc. From time to
time, legislation modifying such restriction has been introduced in Congress
which, if enacted, would permit a bank holding company to establish a non-bank
subsidiary having the authority to organize, sponsor and distribute shares of
an investment company. If this or similar legislation were enacted, the
Company and the Master Trust expect that Bank of America's parent bank holding
company would consider the possibility of one of its non-bank subsidiaries
offering to perform some or all of the services now provided by Concord Holding
Corporation or Concord Financial Group, Inc. It is not possible, of course, to
predict whether or in what form such legislation might be enacted or the terms
upon which Bank of America or such a non-bank affiliate might offer to provide
services for consideration by the Company's Board of Directors or the Master
Trust's Board of Trustees.
ADMINISTRATOR
Concord Holding Corporation (the "Administrator"), with offices at
125 W. 55th Street, New York, New York 10019 and 3435 Stelzer Road, Columbus,
Ohio 43219, is a wholly-owned subsidiary
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<PAGE> 645
of The BISYS Group, Inc. The Administrator also serves as administrator to
several other investment companies.
The Administrator (and/or its off-shore affiliate), provides
administrative services to the Company and the Portfolio as described in the
Fund's Prospectus pursuant to separate administration agreements for the
Company and the Master Trust. The Portfolio's administration agreement will
continue in effect until October 31, 1996 and thereafter for successive periods
of one year, provided the agreement is not sooner terminated. The Portfolio's
administration agreement is terminable at any time with respect to the
Portfolio by the Portfolio's Board of Directors or by a vote of a majority of
the Portfolio's outstanding interests upon 60 days' notice to the
Administrator, or by the Administrator upon 90 days' notice to the Portfolio.
The Fund's administration agreement will continue in effect until October 31,
1996 and thereafter will be extended for successive periods of one year,
provided that each such extension is specifically approved (a) by vote of a
majority of those members of the Company's Board of Directors who are not
interested persons of any party to the agreement, cast in person at a meeting
called for the purpose of voting on such approval, and (b) the Company's Board
of Directors or by vote of a majority of the outstanding voting securities of
the Fund. The agreement is terminable at any time without penalty by the
Company's Board of Directors or by a vote of a majority of the Fund's
outstanding shares upon 60 days' notice to the Administrator, or by the
Administrator upon 90 days' notice to the Company.
The Company has agreed to pay the Administrator a fee for its
services as Administrator, accrued daily and payable monthly, at the annual
rate of .15% of the average daily net assets of the Fund. Similarly, the
Portfolio has agreed to pay the Administrator a fee for its services, accrued
daily and payable monthly, at the annual rate of .05% of the average daily net
assets of the Portfolio. The fees payable to the Administrator are not subject
to reduction as the value of the Fund's and the Portfolio's net assets
increases. From time to time, the Administrator may waive fees or reimburse
the Portfolio or the Fund for expenses, either voluntarily or as required by
certain state securities laws.
For the fiscal period October 1, 1994 through February 28, 1995,
the Administrator waived all administration fees payable to it by the Portfolio
and the Fund, amounting to $6,544 and $19,569, respectively. For the period
April 25, 1994 (the date the Predecessor Fund was reorganized into the Fund)
through September 30, 1994, the Administrator waived all administration fees
payable to it by the Portfolio and the Fund, amounting to $8,175 and $24,407,
respectively.
-46-
<PAGE> 646
For the period October 1, 1993 through April 25, 1994, and the
fiscal years ended September 30, 1993 and 1992, SPIM, the former adviser to the
Predecessor Fund, and not the Predecessor Fund, paid Concord $26,157, $45,649
and $43,602, respectively, for certain administrative services provided to the
Predecessor Fund pursuant to a Sub-Administrative Agreement between SPIM and
Concord.
If total expenses borne directly or indirectly by the Fund in any
fiscal year exceed the expense limitations imposed by applicable state
securities regulations, the Company and the Portfolio may deduct from the
payments to be made by the Fund and the Portfolio to Bank of America and the
Administrator, respectively, or Bank of America and the Administrator each will
bear, the amount of such excess to the extent required by such regulations in
proportion to the fees otherwise payable to them for such year. Such amount,
if any, will be estimated, reconciled and effected or paid, as the case may be,
on a monthly basis. As of the date of this Statement of Additional
Information, the most restrictive expense limitation that may be applicable to
the Company or the Fund limits aggregate annual expenses with respect to the
Fund (including management and advisory fees and the Fund's pro-rata share of
such expenses of the Portfolio but excluding interest, taxes, brokerage
commissions, and certain other expenses) to 2-1/2% of the first $30 million of
its average daily net assets, 2% of the next $70 million, and 1-1/2% of its
remaining average daily net assets. During the course of the Company's fiscal
year, the Administrator and Bank of America may assume certain expenses and/or
not receive payment of fees of the Fund or Portfolio, while retaining the
ability to be reimbursed by the Fund or Portfolio for such amounts prior to the
end of the fiscal year. This will have the effect of increasing yield to
investors at the time such fees are not received or amounts are assumed and
decreasing yield when such fees or amounts are reimbursed.
The Administrator will bear all expenses in connection with the
performance of its services under the administration agreements with the
exception of the fees charged by PFPC, Inc. ("PFPC") for certain fund
accounting services which are borne by the Fund and the Portfolio. Expenses
borne by the Fund and/or Portfolio include taxes, interest, brokerage fees and
commissions, if any, fees of Board members who are not officers, directors,
partners, employees or holders of 5% or more of the outstanding voting
securities of Bank of America or the Administrator or any of their affiliates,
SEC fees and state securities qualification fees, advisory fees, administration
fees, charges of custodians, transfer and dividend disbursing agents' fees,
certain insurance premiums, outside auditing and legal expenses, costs of
maintaining corporate existence, costs attributable to investor services,
including without limitation telephone and personnel expenses, costs of
preparing and printing
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<PAGE> 647
prospectuses and Statements of Additional Information for regulatory purposes,
cost of shareholders' or interestholders reports and corporate meetings and any
extraordinary expenses. Certain shareholder servicing fees in connection with
the Company's shares are also paid by the Company. See "Distributor and Plan
Payments."
The administration agreements provide that the Administrator shall
not be liable for any error of judgment or mistake of law or any loss suffered
by the Company or the Portfolio in connection with the performance of the
administration agreements, except a loss resulting from willful misfeasance,
bad faith or negligence in the performance of its duties or from the reckless
disregard by it of its obligations and duties thereunder.
PFPC provides the Fund and Portfolio with certain accounting
services pursuant to separate fund accounting services agreements with the
Administrator. Under the fund accounting services agreements, PFPC has agreed
to provide certain accounting, bookkeeping, pricing, dividend and distribution
calculation services with respect to the Company and the Portfolio,
respectively. The monthly fees charged by PFPC under the fund accounting
services agreements are borne by the Fund and the Portfolio, respectively.
DISTRIBUTOR AND PLAN PAYMENTS
Concord Financial Group, Inc. (the "Distributor"), a wholly-owned
subsidiary of the Administrator, acts as distributor of the shares of the
Company. Shares are sold on a continuous basis by the Distributor. The
Distributor has agreed to use its best efforts to solicit orders for the sale
of the Company's shares although it is not obliged to sell any particular
amount of shares. The distribution agreement shall continue in effect until
October 31, 1996. Thereafter, if not terminated, the distribution agreement
shall continue automatically for successive terms of one year, provided that
such continuance is specifically approved at least annually (a) by a vote of a
majority of those members of the Board of Directors of the Company who are not
parties to the distribution agreement or "interested persons" of any such
party, cast in person at a meeting called for the purpose of voting on such
approval, and (b) by the Board of Directors of the Company or by vote of a
"majority of the outstanding voting securities" of the Fund as to which the
distribution agreement is effective; provided, however, that the distribution
agreement may be terminated by the Company at any time, without the payment of
any penalty, by vote of a majority of the entire Board of Directors of the
Company or by a vote of a "majority of the outstanding voting securities" of
the Fund on 60 days' written notice to the Distributor, or by the Distributor
at any time, without the payment of any penalty, on
-48-
<PAGE> 648
90 days' written notice to the Company. The agreement will automatically and
immediately terminate in the event of its "assignment."
For the period of October 1, 1994 through February 28, 1995, the
Distributor received $11,175 in sales loads in connection with share purchases,
of which the Distributor and various affiliates of Bank of America retained
$1,436 and $9,326, respectively. The balance was paid to selling dealers. For
the period April 25, 1994 (the date the Predecessor Fund reorganized into the
Fund) through September 30, 1994, the Distributor received $1,485 in sales
loads in connection with share purchases, of which the Distributor and various
affiliates of Bank of America retained $125 and $1,175, respectively. The
balance was paid to selling dealers. As the Predecessor Fund was a closed-end
fund, no commissions were earned during the period October 1, 1993 through
April 24, 1994.
The Distributor is entitled to payment by the Company for certain
shareholder servicing expenses, in addition to the sales load described above
and in the Prospectus, under the Shareholder Service Plan (the "Plan") adopted
by the Company. Under the Plan, the Company pays the Distributor, with respect
to the Fund for (a) non-distribution shareholder services provided by the
Distributor to Service Organizations and/or the beneficial owners of Fund
shares, including, but not limited to shareholder servicing provided by the
Distributor at facilities dedicated for Company use, provided such shareholder
servicing is not duplicative of the servicing otherwise provided on behalf of
the Fund, and (b) fees paid to Service Organizations (which may include the
Distributor itself) for the provision of support services for shareholders for
whom the Service Organization is the dealer of record or holder of record or
with whom the Service Organization has a servicing relationship ("Clients").
Support services provided by Service Organizations may include,
among other things: (i) establishing and maintaining accounts and records
relating to Clients that invest in Fund shares; (ii) processing dividend and
distribution payments from the Fund on behalf of Clients; (iii) providing
information periodically to Clients regarding their positions in shares; (iv)
arranging for bank wires; (v) responding to Client inquiries concerning their
investments in Fund shares; (vi) providing the information to the Fund
necessary for accounting or subaccounting; (vii) if required by law, forwarding
shareholder communications from the Fund (such as proxies, shareholder reports,
annual and semi-annual financial statements and dividend, distribution and tax
notices) to Clients; (viii) assisting in processing exchange and redemption
requests from Clients; (ix) assisting Clients in changing dividend options,
account designations and addresses; and (x) providing such other similar
services.
-49-
<PAGE> 649
The Shareholder Service Plan provides that the Distributor is
entitled to receive payments for expenses on a monthly basis, at an annual rate
not exceeding 0.25% of the average daily net assets of the Fund during such
month for shareholder servicing expenses. The calculation of a Fund's average
daily net assets for these purposes does not include assets held in accounts
opened via a transfer of assets from trust and agency accounts of Bank of
America. Further, payments made out of or charged against the assets of the
Fund must be in payment for expenses incurred on behalf of the Fund.
If in any month the Distributor expends or is due more monies than
can be immediately paid due to the percentage limitation described above, the
unpaid amount is carried forward from month to month while the Plan is in
effect until such time, if ever, when it can be paid in accordance with such
percentage limitations. Conversely, if in any month the Distributor does not
expend the entire amount then available under the Plan, and assuming that no
unpaid amounts have been carried forward and remain unpaid, then the amount not
expended will be a credit to be drawn upon by the Distributor to permit future
payment. However, any unpaid amounts or credits due under the Plan may not be
"carried forward" beyond the end of the fiscal year in which such amounts or
credits due are accrued.
For the period of October 1, 1994 through February 28, 1995, the
Distributor waived all Shareholder Service fees payable under the Plan in the
amount of $32,614. For the period April 25, 1994 (the date the Predecessor
Fund reorganized into the Fund) through September 30, 1994, the Distributor
waived all Shareholder Service fees payable under the Plan in the amount of
$40,679.
Payments for shareholder service expenses under the Shareholder
Service Plan are not subject to Rule 12b-1 (the "Rule") under the 1940 Act.
Pursuant to the Shareholder Service Plan, the Distributor provides that a
report of the amounts expended under the Plan, and the purposes for which such
expenditures were incurred, will be made to the Board of Directors for its
review at least quarterly. In addition, the Plan provides that the selection
and nomination of the directors of the Company who are not "interested persons"
of the Company have been committed to the discretion of the directors who are
neither "interested persons" (as defined in the 1940 Act of the Company nor
have any direct or indirect financial interest in the operation of the
Shareholder Service Plan (or related servicing agreements) (the "Non-Interested
Plan Directors").
The Plan is subject to annual reapproval by a majority of the
Non-Interested Plan Directors and is terminable at any time with respect to the
Fund by a vote of a majority of such
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<PAGE> 650
Directors or by vote of the holders of a majority of the shares of the Fund.
The Company understands that Bank of America, and/or some Service
Organizations may charge their clients a direct fee for administrative and
shareholder services in connection with the holding of Fund shares. These fees
would be in addition to any amounts which might be received under the Plan.
Small, inactive long-term accounts involving such additional charges may not be
in the best interest of shareholders.
The following table shows all sales loads, commissions and other
compensation received by the Distributor directly or indirectly from the Fund
during the fiscal period October 1, 1994 through February 28, 1995:
<TABLE>
<CAPTION>
Brokerage
Commis-
Net Under- sions in
writing Dis- Compensation connection Other
counts and on Redemption with Fund Compen-
Commissions and Repurchase Transactions sation(1)
------------ -------------- ------------ ---------
<S> <C> <C> <C> <C>
Concord Financial
Group, Inc. $1,436 $0 $0 $0
</TABLE>
___________________
(1) Represents the total of (i) amounts paid to the Administrator for
administrative services provided to the Fund (see "Management of the
Company-Administrator" above) and (ii) payments made under the
Shareholder Service Plan (see discussion above).
YIELD AND TOTAL RETURN
From time to time, the yield and the total return of the Fund may
be quoted in and compared to other mutual funds with similar investment
objectives in advertisements, shareholder reports or other communications to
shareholders. The Fund may also include calculations in such communications
that describe hypothetical investment results. (Such performance examples will
be based on an express set of assumptions and are not indicative of the
performance of the Fund.) Such calculations may from time to time include
discussions or illustrations of the effects of compounding in advertisements.
"Compounding" refers to the fact that, if dividends or other distributions on
the Fund investment are reinvested by being paid in additional Fund shares, any
future income or capital appreciation of the Fund would increase the value, not
only of the original Fund investment, but also of the additional Fund shares
received through reinvestment. As a result, the value of the Fund investment
would increase more quickly than if dividends or other distributions had been
paid in cash. The Fund may also include discussions or illustrations of the
potential investment goals of a prospective investor
-51-
<PAGE> 651
(including but not limited to tax and/or retirement planning), investment
management techniques, policies or investment suitability of the Fund, economic
conditions, legislative developments (including pending legislation), the
effects of inflation and historical performance of various asset classes,
including but not limited to stocks, bonds and Treasury bills. From time to
time advertisements or communications to shareholders may summarize the
substance of information contained in shareholder reports (including the
investment composition of the Fund and the Portfolio), as well as the views of
the Portfolio's investment adviser as to current market, economic, trade and
interest rate trends, legislative, regulatory and monetary developments,
investment strategies and related matters believed to be of relevance to the
Fund. The Fund may also include in advertisements charts, graphs or drawings
which illustrate the potential risks and rewards of investment in various
investment vehicles, including but not limited to stocks, bonds, Treasury bills
and shares of the Fund. In addition, advertisements or shareholder
communications may include a discussion of certain attributes or benefits to be
derived by an investment in the Fund and may include testimonials as to the
investment adviser's capabilites by clients. Such advertisements or
communications may include symbols, headlines or other material which highlight
or summarize the information discussed in more detail therein. With proper
authorization, the Fund may reprint articles (or excerpts) written regarding
the Fund and provide them to prospective shareholders. Performance information
with respect to the Fund is generally available by calling (800) 346-2087.
Yield Calculations. The yield of the Fund is calculated by
dividing the net investment income per share (as described below) earned by the
Fund during a 30-day (or one month) period by the maximum offering price per
share on the last day of the period and annualizing the result on a semi-annual
basis by adding one to the quotient, raising the sum to the power of six,
subtracting one from the result and then doubling the difference. The Fund's
net investment income per share earned during the period is based on the
average daily number of shares outstanding during the period entitled to
receive dividends and includes dividends and interest earned during the period
minus expenses accrued for the period, net of reimbursements. This calculation
can be expressed as follows:
a-b
Yield = 2 [(----- + 1)(6) - 1]
cd
Where: a = dividends and interest earned during the period.
b = expenses accrued for the period (net of
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<PAGE> 652
reimbursements).
c = the average daily number of shares outstanding during the
period that were entitled to receive dividends.
d = maximum offering price per share on the last day of the
period.
For the purpose of determining net investment income earned during
the period (variable "a" in the formula), dividend income on equity securities
is recognized by accruing 1/360 of the stated dividend rate of the security
each day. Except as noted below, interest earned on debt obligations is
calculated by computing the yield to maturity of each obligation based on the
market value of the obligation (including actual accrued interest) at the close
of business on the last business day of each month, or, with respect to
obligations purchased during the month, the purchase price (plus actual accrued
interest), and dividing the result by 360 and multiplying the quotient by the
market value of the obligation (including actual accrued interest) in order to
determine the interest income on the obligation for each day of the subsequent
month that the obligation is held. For purposes of this calculation, it is
assumed that each month contains 30 days. The maturity of an obligation with a
call provision is the next call date on which the obligation reasonably may be
expected to be called or, if none, the maturity date. With respect to debt
obligations purchased at a discount or premium, the formula generally calls for
amortization of the discount or premium. The amortization schedule will be
adjusted monthly to reflect changes in the market values of such debt
obligations.
Interest earned on tax-exempt obligations that are issued without
original issue discount and have a current market discount is calculated by
using the coupon rate of interest instead of the yield to maturity. In the
case of tax-exempt obligations that are issued with original issue discount but
which have discounts based on current market value that exceed the
then-remaining portion of the original issue discount (market discount), the
yield to maturity is the imputed rate based on the original issue discount
calculation. On the other hand, in the case of tax-exempt obligations that are
issued with original issue discount but which have the discounts based on
current market value that are less than the then-remaining portion of the
original issue discount (market premium), the yield to maturity is based on the
market value.
With respect to mortgage or other receivables-backed obligations
which are expected to be subject to monthly payments of principal and interest
("pay downs"), (a) gain or loss attributable to actual monthly pay downs are
accounted for as an
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<PAGE> 653
increase or decrease to interest income during the period; and (b) the
Portfolio may elect either (i) to amortize the discount and premium on the
remaining security, based on the cost of the security, to the weighted average
maturity date, if such information is available, or to the remaining term of
the security, if any, if the weighted average maturity date is not available,
or (ii) not to amortize discount or premium on the remaining security.
Undeclared earned income will be subtracted from the maximum
offering price per share (variable "d" in the formula). Undeclared earned
income is the net investment income which, at the end of the base period, has
not been declared as a dividend, but is reasonably expected to be and is
declared and paid as a dividend shortly thereafter. The Fund's maximum
offering price per share for purposes of the formula includes the maximum sales
load imposed by the Fund -- currently 4.50% of the per share offering price.
Based on the foregoing calculations, the yield (after fee waivers
and expense reimbursements) for the 30 day period ended February 28, 1995 was
6.72%.
Total Return Calculations. The Fund may compute its average
annual total return by determining the average annual compounded rates of return
during specified periods that equate the initial amount invested to the ending
redeemable value of such investment. This is done by dividing the ending
redeemable value of a hypothetical $1,000 initial payment by $1,000 and raising
the quotient to a power equal to one divided by the number of years (or
fractional portion thereof) covered by the computation and subtracting one from
the result. This calculation can be expressed as follows:
ERV 1/n
T = [(-----) - 1]
P
Where: T = average annual total return.
ERV = ending redeemable value at the end of the period
covered by the computation of a hypothetical $1,000
payment made at the beginning of the period.
P = hypothetical initial payment of $1,000.
n = period covered by the computation, expressed in
terms of years.
The Fund computes its aggregate total return by determining the
aggregate rate of return during specified periods
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<PAGE> 654
that likewise equates the initial amount invested to the ending redeemable
value of such investment. The formula for calculating aggregate total return
is as follows:
ERV
aggregate total return = [(----- - 1)]
P
The calculations of average annual total return and aggregate
total return assume the reinvestment of all dividends and capital gain
distributions on the reinvestment dates during the period. The ending
redeemable value (variable "ERV" in each formula) is determined by assuming
complete redemption of the hypothetical investment and the deduction of all
nonrecurring charges at the end of the period covered by the computations. In
addition, the Fund's average annual total return and aggregate total return
quotations reflect the deduction of the maximum sales load charged in connection
with the purchase of Fund shares.
Based on the foregoing calculations, the respective average annual
total return and aggregate total returns: for the Fund for the period from
October 1, 1994 through February 28, 1995 and for the period from October 1,
1994 through February 28, 1995 and for the period April 25, 1994 (the date the
Predecessor Fund was reorganized into the Fund) through February 28, 1995 were
N/A and 4.25%, and N/A% and 4.66%, respectively; for the Predecessor Fund for
the one, five and ten-year periods ended April 24, 1994 were 1.92% and 1.92%,
8.71% and 51.41%, and 11.79% and 203.74%, respectively; and for the Predecessor
Fund for the one, five and ten-year periods ended September 30, 1993 were
14.30% and 14.30%, 10.79% and 67.00%, and 11.15% and 188.02%, respectively.
The Fund may advertise total return data without reflecting the
sales load imposed on the purchase of shares of the Fund in accordance with the
rules of the Securities and Exchange Commission. Quotations which do not
reflect the sales load will, of course, be higher than quotations which do.
GENERAL INFORMATION
DESCRIPTION OF SHARES
The Company is an open-end management investment company organized
as a Maryland corporation on October 27, 1982. The Fund's Charter authorizes
the Board of Directors to issue up to two hundred billion full and fractional
common shares. Pursuant to the authority granted in the Charter, the Board of
Directors has authorized the issuance of twenty-two classes of stock - Classes
A through W Common Stock, $.001 par value per
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<PAGE> 655
share, representing interests in twenty-two separate investment portfolios.
Class W represents interests in the Corporate Bond Fund. The Company's charter
also authorizes the Board of Directors to classify or reclassify any particular
class of the Company's shares into one or more series.
Shares have no preemptive rights and only such conversion or
exchange rights as the Board may grant in its discretion. When issued for
payment as described in the Prospectus, the Company's shares will be fully paid
and non-assessable. For information concerning possible restrictions upon the
transferability of the Company's shares and redemption provisions with respect
to such shares, see "Additional Purchase and Redemption Information."
Shareholders are entitled to one vote for each full share held,
and fractional votes for fractional shares held, and will vote in the aggregate
and not by class or series except as otherwise required by the 1940 Act or other
applicable law or when permitted by the Board of Directors. Shares have
cumulative voting rights to the extent they may be required by applicable law.
Rule 18f-2 under the 1940 Act provides that any matter required to
be submitted to the holders of the outstanding voting securities of an
investment company such as the Company shall not be deemed to have been
effectively acted upon unless approved by a majority of the outstanding shares
of each fund affected by the matter. The Fund is affected by a matter unless
it is clear that the interests of each fund in the matter are substantially
identical or that the matter does not affect any interest of such portfolio.
Under Rule 18f-2 the approval of an investment advisory agreement or 12b-1
distribution plan or any change in a fundamental investment policy would be
effectively acted upon with respect to a portfolio only if approved by a
majority of the outstanding shares of such Portfolio. However, the rule also
provides that the ratification of independent public accountants, the approval
of principal underwriting contracts and the election of directors may be
effectively acted upon by shareholders of the Company voting without regard to
particular funds.
Notwithstanding any provision of Maryland law requiring a greater
vote of the Company's common stock (or of the shares of the Fund voting
separately as a class) in connection with any corporate action, unless
otherwise provided by law (for example, by Rule 18f-2 discussed above) or by
the Company's Charter, the Company may take or authorize such action upon the
favorable vote of the holders of more than 50% of the outstanding common stock
of the Company voting without regard to class.
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<PAGE> 656
THE PORTFOLIO
The Portfolio is a separate series of Master Investment Trust,
Series I, which was organized on October 26, 1992 as a Delaware business trust.
The Master Trust's Declaration of Trust authorizes its Board of Trustees to
issue an unlimited number of interests of beneficial interest and to establish
and designate any unissued interests of one or more additional series of
interests. Investors in the Portfolio are entitled to distributions arising
from the net investment income and net realized gains, if any, earned on
investments held by the Portfolio. Investors are also entitled to participate
in the net distributable assets of the Portfolio on liquidation. Beneficial
interests have no preemptive, conversion or exchange rights.
CUSTODIAN, ACCOUNTING AGENT AND TRANSFER AGENT
PNC Bank, National Association ("PNC") has been appointed
custodian for the Fund and the Portfolio. PFPC, Inc. ("PFPC"), 103 Bellevue
Parkway, Wilmington, DE 19809, provides the Fund with certain accounting
services pursuant to Fund Accounting Services Agreements with the Administrator.
Both PNC and PFPC are wholly-owned subsidiaries of PNC Bancorp, Inc., a bank
holding company. Under the Fund Accounting Services Agreement, PFPC has agreed
to provide certain accounting, bookkeeping, pricing, dividend and distribution
calculation services with respect to the Company and the Portfolio. The monthly
fees charged by PFPC under the Fund Accounting Agreements are borne by the Fund
and the Portfolio. As custodian of the assets of the Fund and the Portfolio,
PNC: (i) maintains a separate account or accounts in the name of the Fund and
Portfolio (as applicable); (ii) holds and disburses portfolio securities; (iii)
makes receipts and disbursements of money; (iv) collects and receives income and
other payments and distributions on account of portfolio securities; (v)
responds to correspondence from security brokers and others relating to its
respective duties; and (vi) makes periodic reports concerning its respective
duties.
BISYS Fund Services Ohio, Inc., 3435 Stelzer Road, Columbus, Ohio
43219-3035 serves as transfer and dividend disbursing agent for the Fund.
COUNSEL
Drinker Biddle & Reath (of which W. Bruce McConnel, III, Secretary
of the Company, is a partner), 1345 Chestnut Street, Suite 1100, Philadelphia,
Pennsylvania 19107, serves as counsel to the Company and the Master Trust and
will pass upon certain legal matters on their behalf.
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INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP with offices at 1177 Avenue of the Americas,
New York, New York 10036, has been selected as independent accountants of the
Fund and for the Portfolio.
REPORTS
Shareholders receive unaudited semi-annual reports describing the
Portfolio's and the Fund's investment operations and annual financial
statements together with the reports of the independent accountants of the
Portfolio and the Fund.
MISCELLANEOUS
As used in the Prospectus and this Statement of Additional
Information, a "vote of a majority" of the outstanding interests of the
Portfolio, the outstanding shares of the Fund or a particular series means the
affirmative vote of the lesser of (a) more than 50% of the outstanding
interests of the Portfolio, Fund or such series, or (b) 67% of the interests
of the Portfolio, the shares of the Fund or such series present at a meeting at
which more than 50% of the outstanding interests of the Portfolio, the
outstanding shares of the Fund or series are represented in person or by proxy.
At June 15, 1995, the name, address and share ownership of the
entities which held of record more than 5% of the oustanding Pacific Horizon
Shares of the Treasury Fund were as follows: BA Investment Services, Inc., For
the Benefit of clients, 555 California Street, 4th Floor, Department #4337, San
Francisco, CA 94104, 98,230,626.530 shares (7.70%); Bank of America State
Trust Co., 299 N. Euclid Avenue, Pasadena, CA l91101, 1,044,975,154.790 shares
(82.00%); and Hellman & Friedman Capital Partners II, Limited Partnership,
Attention: Georgia Lee, 1 Maritime Plaza, 12th Floor, San Francis, CA 94111,
1,216,118,073.700 shares (095.42%).
At June 15, 1995, the name, address and share ownership of the
entities which held of record more than 5% of the outstanding Pacific Horizon
Shares of the Treasury Fund were as follows: BA Investment Services Inc., For
the Benefit of Clients, 555 California Street, 4th Floor, Department #4337, San
Francisco, CA 94104, 98,230,626.530 shares (7.70%); Bank of America State Trust
Co., 299 N. Euclid Avenue, Pasadena, CA 91101, 1,044,975,154.790 shares
(82.00%); and Hellman & Freidman Capital Partners II, Limited Partnership,
Attention: Georgia Lee, 1 Maritime Plaza, 12th Floor, San Francisco, CA 94111,
1,216,118,073.700 shares (095.42%).
At June 16, 1995, the name, address and share ownership of the
entities which held of record more than 5% of the
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<PAGE> 658
outstanding Horizon Shares of the Treasury Fund was as follows: Bank of
America Trustee/Custodian for Investing in Horizon Treasury, Attn: Eric
Peterson, 701 S. Western Avenue, 2nd Floor, Glendale, CA 91201, 398,540,438.170
shares (68.901%); Security Pacific State Trust Co., Agreement for Sec. PACWA
Participants, Attn: Cash Sweep Funds (L. Goekjian), P.O. Box 91630, Pasadena,
CA 91101, 94,279,024.120 shares (16.299%).
At June 16, 1995, the name, address and share ownership of the
entities which held beneficially more than 5% of the outstanding Horizon
Service Shares of the Treasury Fund were as follows: Bank of America FM&TS
Operat CA, Attn: CTF Unit, 701 South Western Avenue, Glendale, CA 91201,
65,745,555.320 shares (23.658%); Bank of America Nevada Southern Comm. Bank,
Attn: Dan Dykes, P.O. Box 98600, Las Vegas, NV 89193, 63,974,589.270 shares
(23.020%). Security Pacific State Trust Co., Agreement for Sec. PACWA
Participants, Attn: Cash Sweep Funds, P.O. Box 91630, Pasadena, CA 91101,
56,906,301.540 shares (20.477%); and Security Pacific Cash Management, c/o Bank
of America - GPO M/C 5533, Attn: Liezel Barangan, 1850 Gateway Boulevard,
Concord, CA 94520, 77,003,300 shares (27.709%). At June 15, 1995, the name,
address and, share ownership of the entity which held of record more than 5% of
the outstanding Horizon Service Shares of the Treasury Fund was as follows:
Omnibus A/C for the Shareholder Accounts maintained by Concord Financial
Services, Inc., Attn: Linda Zerbe, First and Market Building, 100 First Avenue,
Suite 300, Pittsburgh, PA 15222, 263,629,755.130 shares (65.51%). At June 15,
1995 the name, address and share ownership of the entities which held of record
more than 5% of the outstanding Pacific Horizon Shares of the Prime Fund were
as follows: BA Investment Services Inc., For the Benefit of Clients, 555
California Street, 4th Floor, Department #4337, San Francisco, CA 94104,
514,119,226.900 shares (38.76%); Bank of America State Trust Co., 299 N. Euclid
Avenue, Pasadena, CA 91101, 392,983,248.780 shares (29.63%); and Southwest
Securities Inc., Attn: Cashiering, 201 Elm Street, Suite 4300, Dallas, TX
75270, 169,018,910.270 shares (12.74%). At June 16, 1995, the name, address
and share ownership of the entities which held of record more than 5% of the
outstanding Horizon Shares of the Prime Fund were as follows: Bank of America
Trustee/Custodian for Investing Horizon Prime, Attn: Eric Peterson, 701 S.
Western Avenue, 2nd Floor, Glendale, CA 91201, 385,058,852.030 shares
(56.838%); and Bank of America NT&SA, Attn: Kay Warren/Dept. #5596, 1455 Market
Street, San Francisco, CA 94103, 57,300,000.00 shares (9.934%). At June 15,
1995, the name, address and share ownership of the entity which held of record
more than 5% of the outstanding Horizon Service Shares of the Prime Fund were
as follows: Omnibus A/C for the Shareholder Accounts maintained by Concord
Financial Services, Inc., Attn: Linda Zerbe, First and Market Building, 100
First Avenue, Suite 300, Pittsburgh, PA 15222, 752,776,315.610 shares (70.26%).
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<PAGE> 659
At June 16, 1995, the name, address and share ownership of the
entities which held beneficially more than 5% of the outstanding Horizon
Service Shares of the Prime Fund were as follows: Bank of America NT&SA
Financial Management and Trust Services, 701 S. Western Avenue, Glendale, CA
91201, 74,038,082.090 shares (9.835%); Capital Network Services, Attn: Donna
Novell, One Bush Street, 11th Floor, San Francisco, CA 94104, 86,407,261.23
shares (11.478%); Security Pacific Cash Management, c/o Bank of America. GPO.
M/C 5533 Attn: Liezel Barangan, 1850 Gateway Boulevard, M/C 5533, Concord, CA
94520, 379,755,600.000 shares (50.447%); Security Pacific State Trust Co.,
Agreement for SecPAC WA Participants, Attn: Cash Sweep Funds (L. Goekjian) P.O.
Box 91630, Pasadena, CA 91101, 54,321,621.330 shares (7.216%); and Southwest
Securities Inc., Attn: Mary Lisenber, 1201 Elm Street, Suite 4300, Dallas, TX
75270, 130,146,660.030 shares (17.289%).
At June 15, 1995, the name, address and share ownership of the
entities which held of record more than 5% of the outstanding Pacific Horizon
Shares of the Tax-Exempt Money Fund were as follows: BA Investment Services,
Inc., For the Benefit of Clients, 555 California Street, 4th Floor, Department
#4337, San Francisco, CA 94104, 12,233,845.190 shares (39.73%); Southwest
Securities Inc., Attn: Cashiering, 1201 Elm Street, Suite 4300, Dallas, TX,
75270, 10,387,253.930 shares (33.73%); and Bank of America State Trust Co., 299
N. Euclid Avenue, Pasadena, CA 91101, 6,515,635.730 shares (21.16%).
At June 16, 1995, the name, address and share ownership of the
entities which held of record more than 5% of the outstanding Horizon Shares of
the Tax-Exempt Money Fund were as follows: Bank of America Custodian For
Investing in Horizon Tax- Exempt Money Fund, Attn: Eric Peterson, 701 S.
Western Avenue, 2nd Floor, Glendale, CA 19201, 129,582,555.65 shares (38.576%);
Continental Bank National Association Custodian for the Benefit of Custodian
Co. Attn: Mary Chester, 231 South LaSalle Street, 6Q, Chicago, IL 60697,
152,699,416.270 shares (45.458%); and Maine Midland Bank NA, Investment
Services, 17th Floor, Attn: Christine Mincel, One Marine Midland Center,
Buffalo, NY 14203, 21,684,672.980 shares (6.455%).
At June 15, 1995, the name, address and share ownership of the
entities which held of record more than 5% of the outstanding shares of the
Horizon Service Shares of the Tax-Exempt Money Fund were as follows: Furman C.
Moseley and Susan R. Moseley Tenn. In Common, 1201 3rd Avenue, Box 7C,
Seattle, WA 98101, 4,165,513.060 shares (9.91%); Omnibus A/C for the
shareholder accounts maintained by Concord Financial Services Inc., Attn: Linda
Zerbe, First and Market Building, 100 First Avenue, Suite 300, Pittsburgh, PA
15222, 22,398,544.590 shares (53.31%); and Omnibus A/C for the Shareholder
Accounts maintained by Concord Financial Services Inc. Attn: First and Market
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<PAGE> 660
Building, 100 First Avenue, Suite 300, Pittsburgh, PA 15222, 3,494,305.180
shares (8.31%). At June 16, 1995, the name, address and share ownership of the
entities which held beneficially more than 5% of the outstanding Horizon
Service Shares of the Tax-Exempt Money Fund were as follows: BA Investment
Services Inc., 555 California Street, 4th Floor Dept. #4337, San Francisco, CA
94104, 1,362,028.590 shares (5.260%); Bank of America FM&TS Oper. CA, Attn: CTF
Unit, 701 South Western Avenue, Glendale, CA 91201, 2,293,907.40 shares
(8.859%); and Southwest Securities, Inc., Attn: Mary Lisenber, 1201 Elm Street,
Suite 430, Dallas, TX 75270, 21,021,580.530 shares (81.187%). At June 15,
1955, the name, address and share ownership of the entities which held of
record more than 5% of the outstanding Pacific Horizon Shares of the Government
Fund were as follows: Bank of America, NT&SA, The Private Bank, Attn: ACI Unit
#8329, 701 S. Western Avenue, Glendale, CA 91201, 79,875,532.090 shares
(22.71%); Bank of America State Trust Co., 299 N. Euclid Avenue., Pasadena, CA
91101, 64,756,966.280 shares (18.41%); and BA Investment Services Inc., For the
Benefit of Clients, 555 California Street, 4th Floor, Department #4337, San
Francisco, CA 94104, 170,940,404.650 shares (48.60%). At June 16, 1995, the
name, address and share ownership of the entities which held of record more
than 5% of the outstanding Horizon Shares of the Government Fund were as
follows: Bank of America NT&SA Trustee/Custodian for Investing in Horizon
Shares of the Government Fund, Attn: Cynthia Beauvais, 701 South Western
Avenue., Glendale, CA 91201, 9,327,446.350 shares (5.028%); Bank of America
State Trust, Attn: Rigo Barrett, 299 N. Euclid Avenue, Pasadena, CA 91101,
28,063,486.740 shares (15.129%); Capital Network Services, Attn: Donna Novell,
One Bush Street, 11th Floor, San Francisco, CA 94104, 24,227,801.980 shares
(13.061%); County of Orange, Matt Raabe, P.O. Box 4515, Santa Ana, CA 92702,
10,000,000.000 shares (5.391%); Cypress Insurance Co., Attn: Larry Tetzloff,
9290 W. Dodge Road, Omaha, NE 68124, 9,996,515.930 shares (5.389%); Harr &
Co., c/o Bank of New York, Attn: Bimal Sana, Spec. Prec. Dept., One Wall
Street, 5th Floor, New York, NY 10286, 14,000,000.000 shares (7.547%); Micron
Electronics Inc., Attn: Debbie Meigand, 900 East Karcher Road, Nanpa, ID 83687,
16,080,510.14 shares (8.669%); and Silocin Magic Corp., Attn: Meng A. Lim,
20300 Stevens Creek Boulevard., Suite 400, Cupertino, CA 95014, 18,058,262.110
shares (9.735%). At June 15, 1995, the name, address and share ownership of
the entities which held of record more than 5% of the outstanding Horizon
Service Shares of the Government Fund were as follows: Spacelabs Medical, Inc.,
Attn: Scott Bender, P.O. Box 97013, Redmond, WA 98073, 14,572,000.000 shares
(5.70%); Good Health Plan of WA, Attn: Tsai Cheng, 1501 9th Avenue, Suite 500,
Seattle, WA 98101, 16,584,866.580 shares (6.49%); Omnibus A/C for the
Shareholder Accounts maintained by Concord. Financial Services Inc., Attn:
Linda Zerbe, First and Market Building, 100 First Avenue, Suite 300,
Pittsburgh, PA 15222, 68,555,257.020 shares (26.85%). At June 16, 1995, the
name, address and share
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<PAGE> 661
ownership of the entities which held beneficially more than 5% of the Horizon
Service Shares of the Government Fund were as follows: Bank of America Nevada
Southern Comm. Bank, Attn: Dan Dykes, P.O. Box 98600, Las Vegas, NV 89193-8600,
35,849,966.050 shares (52.294%); and Capital Network Services, Attn: Donna M.
Howell, One Bush Street, 11th Floor, San Francisco, CA 94104-4425,
23,929,840.440 shares (34.906%). At June 15, 1995, the name, address and share
ownership of the entities which held of record more than 5% of the Pacific
Horizon Shares of the Treasury Only Fund were as follows: Bank of America
NT&SA, the Private Bank, Attn: ACI Unit 48329, 701 South Western Avenue,
Glendale, CA 91201, 48,516,900.490 shares (31.68%) Bank of America State Trust
Co., 299 N. Euclid Avenue, Pasadena, CA 91101, 22,350,831.320 shares (14.59%);
and BA Investment Services Inc., For the Benefit of Clients, 555 California
Street, 4th Floor, Department #4337, San Francisco, CA 94104, 69,016,521.500
shares (45.06%). At June 15, 1995, the name, address and share ownership of
the entities which held of record more than 5% of the outstanding Horizon
Service Shares of the Treasury Only Fund were as follows: National Home
Mortgage Corp., Attn: Mortgage Banking Treasury Operations, 5565 Morehouse
Drive, 3rd Floor, San Diego, CA 92121, 12,147.667,580 shares (9.42%); Comcare,
Inc., 4001 N. 3rd Street, Suite 120, Phoenix, AZ 85012, 26,230,243.620 shares
(20.34%); and Omnibus A/C For the Shareholder Accounts Maintained by Concord
Financial Services Inc., Attn: Linda Zerbe, First and Market Building, 100
First Avenue, Suite 300, Pittsburgh, PA 15222, 21,883,084.450 shares (16.97%).
At June 16, 1995, the name, address and share ownership of the entities which
held beneficially more than 5% of the outstanding Horizon Service Shares of the
Treasury Only Fund were as follows: BA Investment Service Inc., 555 California
Street, 4th Floor Dept. #4337, San Francisco, CA 94104, 6,403,628.120 shares
(28.679%); Bank of America NT&SA Trustee/Custodian for Investing in Horizon
Service Shares of the Treasury Only Fund, Attn: Cynthia Beauvais, 701 South
Western Avenue, Glendale, CA 91201, 3,501,414.020 shares (15.681%); Bank of
America State Trust, Attn: Rigo Barrett, 299 N. Euclid Avenue, Pasadena, CA
91101, 5,420,893.150 shares (24.277%); Fair Isaac & Co., Attn: Christine Tam,
120 North Redwood, San Rapheal, CA 94903-1996, 1,338,800.750 shares (5.996%);
Foothill/Eastern Transportation Corridor Agency, Attn: Laura Barker, 201 East
Sandpot, Suite 200, Santa Anna, CA 92707, 2,559,586.380 shares (11.463%); and
Nexus, Attn: Kathleen Menace, P.O. Box 60637, Sunnyvale, CA 94088-0637,
2,525,153.380 shares (11.309%). At June 15, 1995, the name, address and share
ownership of the entities which held of record more than 5% of the outstanding
Pacific Horizon Shares of the Prime Value Fund were as follows: BA Investment
Services Inc., For the Benefit of Clients, 555 California Street, 4th Floor,
Department #4337, San Francisco, CA 94104, 16,383,467.170 shares (26.45%); and
Bank of America State Trust Co., Attn: Leon Goekjian, P.O. Box 91630, Pasadena,
CA 91101, 45,078,465.290 shares (72.79%). At June 16, 1995, the name, address
and share ownership of the entity which
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<PAGE> 662
held of record more than 5% of the outstanding Horizon Shares of the Prime
Value Fund was as follows: Tice & Co., c/o M&T, Attn: Cash Management Clerk,
8th Floor, P.O. Box 1377, Buffalo, NY 14240, 453,078,561.590 shares (93.510%).
At June 15, 1995, the name, address and share ownership of the entity which
held of record more than 5% of the outstanding shares of the Pacific Horizon
Shares of the California Tax-Exempt Money Market Fund was as follows: BA
Investment Services Inc., For the Benefit of Clients, 555 California Street,
4th Floor, Department #4337, San Francisco, CA 94104, 204,443,886.590 shares
(22.07%). At June 15, 1995, the name, address and share ownership of the
entities which held of record more than 5% of the outstanding shares of the
Horizon Service Shares of the California Tax-Exempt Money Market Fund were as
follows: Leo Zuckerman Trust, DTD 12-11-91,4444 Viewridge Avenue, San Diego,
CA 92123, 4,850,877.280 shares (5.35%); and Omnibus A/C for the Shareholder
Accounts Maintained by Concord Financial Services Inc. Attn: Linda Zerbe, First
and Market Building, 100 First Avenue, Suite 300, Pittsburgh, PA 15222,
13,391,453.970 shares (14.77%). At June 16, 1995, the name, address and share
ownership of the entity which held beneficially more than 5% of the outstanding
shares of the Horizon Service Shares of the California Tax-Exempt Money Market
Fund was as follows: BA Investment Services Inc., 555 California Street, 4th
Floor, Dept. #4337, San Francisco, CA 94109, 13,792,509.310 shares (99.206%).
At June 15, 1995, the name, address and shares ownership of the entities which
held of record more than 5% of the outstanding shares of the Flexible Bond Fund
were as follows: Peter F. Smith and Jacquelyn L. Smith, JTWROS, 1785 C.
Blodgett Road, Mount Vernon, WA 98273, 13,973.917 shares (5.58%); and BA
Investment Services, Inc., FBO 200724011, 185 Berry Street, 3rd Floor #2640,
San Francisco, CA 94104, 22,436.531 shares (8.96%). At June 15, 1995 the name,
address and share ownership of the entity which held of record more than 5% of
the outstanding shares of the Asset Allocation Fund was as follows: Bank of
America, Texas AATTEE. National-O'Neill Supplemental Savings Plan, Attn:
Mutual Funds (81-6-01005-0), P.O. Box 94627, Pasadena, CA 91109, 24,289,973
shares (5.07%). At June 15, 1995 the name, address and share ownership of the
entities which held of record more than 5% of the outstanding shares of the
National Municipal Bond Fund were as follows: BA Investment Services, Inc. FBO
405084421, 555 California Street, 4th Floor, #2640, San Francisco, CA 94104,
26,336.154 shares (8.31%); and BA Investment Services, Inc., FBO 405266591, 555
California Street, 4th Floor, #2640, San Francisco, CA 94104, 25,034.024 shares
(7.90%). At June 15, 1995 the name, address and share ownership of the
entities which held of record more than 5% of the outstanding shares of the
Corporate Bond Fund were as follows: Dean Witter Reynolds Inc., 5 World Trade
Center, 4th Floor, Attn: 5th O Div., New York, NY 10048, 138,820.000 shares
(6.93%); and Smith Barney Shearson, Inc., 333 W. 39th Street, 8th Floor, New
York, NY 10001, 148,925.482 shares (7.43%).
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<PAGE> 663
At such date, no other person was known by the Company to hold of
record or beneficially more than 5% of the outstanding shares of any other
investment portfolio of the Company.
The Prospectus relating to the Fund and this Statement of
Additional Information omit certain information contained in the Company's
registration statement filed with the SEC. Copies of the registration
statement, including items omitted herein, may be obtained from the Commission
by paying the charges prescribed under its rules and regulations.
FINANCIAL STATEMENTS AND EXPERTS
The Annual Report for the Fund and the Portfolio for the fiscal
period ended February 28, 1995 accompanies this Statement of Additional
Information. The financial statements and notes thereto in that Annual Report
are incorporated in this Statement of Additional Information by reference, and
have been audited by Price Waterhouse LLP, whose report thereon also appears in
such Annual Report and is also incorporated herein by reference. Such
financial statements have been incorporated herein in reliance on the report of
Price Waterhouse LLP, independent accountants, given on the authority of said
firm as experts in auditing and accounting.
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<PAGE> 664
APPENDIX A
COMMERCIAL PAPER RATINGS
A Standard & Poor's commercial paper rating is a current
assessment of the likelihood of timely payment of debt considered short-term in
the relevant market. The following summarizes the rating categories used by
Standard and Poor's for commercial paper:
"A-1" - Issue's degree of safety regarding timely payment is
strong. Those issues determined to possess extremely strong safety
characteristics are denoted "A-1+."
"A-2" - Issue's capacity for timely payment is satisfactory.
However, the relative degree of safety is not as high as for issues designated
"A-1."
"A-3" - Issue has an adequate capacity for timely payment. It is,
however, somewhat more vulnerable to the adverse effects of changes and
circumstances than an obligation carrying a higher designation.
"B" - Issue has only a speculative capacity for timely payment.
"C" - Issue has a doubtful capacity for payment.
"D" - Issue is in payment default.
Moody's commercial paper ratings are opinions of the ability of
issuers to repay punctually promissory obligations not having an original
maturity in excess of 9 months. The following summarizes the rating categories
used by Moody's for commercial paper:
"Prime-1" - Issuer or related supporting institutions are
considered to have a superior capacity for repayment of short- term promissory
obligations. Prime-1 repayment capacity will normally be evidenced by the
following characteristics: leading market positions in well established
industries; high rates of return on funds employed; conservative capitalization
structures with moderate reliance on debt and ample asset protection; broad
margins in earning coverage of fixed financial charges and high internal cash
generation; and well established access to a range of financial markets and
assured sources of alternate liquidity.
"Prime-2" - Issuer or related supporting institutions are
considered to have a strong capacity for repayment of short-
A-1
<PAGE> 665
term promissory obligations. This will normally be evidenced by many of the
characteristics cited above but to a lesser degree. Earnings trends and
coverage ratios, while sound, will be more subject to variation.
Capitalization characteristics, while still appropriate, may be more affected
by external conditions. Ample alternative liquidity is maintained.
"Prime-3" - Issuer or related supporting institutions have an
acceptable capacity for repayment of short-term promissory obligations. The
effects of industry characteristics and market composition may be more
pronounced. Variability in earnings and profitability may result in changes in
the level of debt protection measurements and the requirement for relatively
high financial leverage. Adequate alternate liquidity is maintained.
"Not Prime" - Issuer does not fall within any of the Prime rating
categories.
The three rating categories of Duff & Phelps for investment grade
commercial paper and short-term debt are "Duff 1," "D-2" and "D-3." D-&
Phelps employs three designations, "D-1+," "D-1" and "D-1-," within the highest
rating category. The following summarizes the rating categories used by D-&
Phelps for commercial paper:
"D-1+" - Debt possesses highest certainty of timely payment.
Short-term liquidity, including internal operating factors and/or access to
alternative sources of funds, is outstanding, and safety is just below
risk-free U.S. Treasury short-term obligations.
"D-1" - Debt possesses very high certainty of timely payment.
Liquidity factors are excellent and supported by good fundamental protection
factors. Risk factors are minor.
"D-1-" - Debt possesses high certainty of timely payment.
Liquidity factors are strong and supported by good fundamental protection
factors. Risk factors are very small.
"D-2" - Debt possesses good certainty of timely payment.
Liquidity factors and company fundamentals are sound. Although ongoing funding
needs may enlarge total financing requirements, access to capital markets is
good. Risk factors are small.
"D-3" - Debt possesses satisfactory liquidity, and other
protection factors qualify issue as investment grade. Risk factors are larger
and subject to more variation. Nevertheless, timely payment is expected.
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<PAGE> 666
"D-4" - Debt possesses speculative investment characteristics.
Liquidity is not sufficient to ensure against disruption in debt service.
Operating factors and market access may be subject to a high degree of
variation.
"D-5" - Issuer has failed to meet scheduled principal and/or
interest payments.
Fitch short-term ratings apply to debt obligations that are
payable on demand or have original maturities of up to three years. The
following summarizes the rating categories used by Fitch for short-term
obligations:
"F-1+" - Securities possess exceptionally strong credit quality.
Issues assigned this rating are regarded as having the strongest degree of
assurance for timely payment.
"F-1" - Securities possess very strong credit quality. Issues
assigned this rating reflect an assurance of timely payment only slightly less
in degree than issues rated "F-1+."
"F-2" - Securities possess good credit quality. Issues assigned
this rating have a satisfactory degree of assurance for timely payment, but the
margin of safety is not as great as the "F-1+" and "F-1" categories.
"F-3" - Securities possess fair credit quality. Issues assigned
this rating have characteristics suggesting that the degree of assurance for
timely payment is adequate; however, near-term adverse changes could cause
these securities to be rated below investment grade.
"F-S" - Securities possess weak credit quality. Issues assigned
this rating have characteristics suggesting a minimal degree of assurance for
timely payment and are vulnerable to near-term adverse changes in financial and
economic conditions.
"D" - Securities are in actual or imminent payment default.
Fitch may also use the symbol "LOC" with its short-term ratings to
indicate that the rating is based upon a letter of credit issued by a commercial
bank.
Thomson BankWatch short-term ratings assess the likelihood of an
untimely or incomplete payment of principal or interest of unsubordinated
instruments having a maturity of one year or less which is issued by United
States commercial banks, thrifts and non-bank banks; non-United States banks;
and broker-
A-3
<PAGE> 667
dealers. The following summarizes the ratings used by Thomson BankWatch:
"TBW-1" - This designation represents Thomson BankWatch's highest
rating category and indicates a very high degree of likelihood that principal
and interest will be paid on a timely basis.
"TBW-2" - This designation indicates that while the degree of
safety regarding timely payment of principal and interest is strong, the
relative degree of safety is not as high as for issues rated "TBW-1."
"TBW-3" - This designation represents the lowest investment grade
category and indicates that while the debt is more susceptible to adverse
developments (both internal and external) than obligations with higher ratings,
capacity to service principal and interest in a timely fashion is considered
adequate.
"TBW-4" - This designation indicates that the debt is regarded as
non-investment grade and therefore speculative.
IBCA assesses the investment quality of unsecured debt with an
original maturity of less than one year which is issued by bank holding
companies and their principal bank subsidiaries. The following summarizes the
rating categories used by IBCA for short-term debt ratings:
"A1" - Obligations are supported by the highest capacity for
timely repayment. Where issues possess a particularly strong credit feature, a
rating of A1+ is assigned.
"A2" - Obligations are supported by a good capacity for timely
repayment.
"A3" - Obligations are supported by a satisfactory capacity for
timely repayment.
"B" - Obligations for which there is an uncertainty as to the
capacity to ensure timely repayment.
"C" - Obligations for which there is a high risk of default or
which are currently in default.
A-4
<PAGE> 668
CORPORATE AND MUNICIPAL LONG-TERM DEBT RATINGS
The following summarizes the ratings used by Standard & Poor's for
corporate and municipal debt:
"AAA" - This designation represents the highest rating assigned by
Standard & Poor's to a debt obligation and indicates an extremely strong
capacity to pay interest and repay principal.
"AA" - Debt is considered to have a very strong capacity to pay
interest and repay principal and differs from AAA issues only in small degree.
"A" - Debt is considered to have a strong capacity to pay interest
and repay principal although such issues are somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions than debt
in higher-rated categories.
"BBB" - Debt is regarded as having an adequate capacity to pay
interest and repay principal. Whereas such issues normally exhibit adequate
protection parameters, adverse economic conditions or changing circumstances
are more likely to lead to a weakened capacity to pay interest and repay
principal for debt in this category than in higher-rated categories.
"BB," "B," "CCC," "CC" and "C" - Debt is regarded, on balance, as
predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. "BB" indicates the
lowest degree of speculation and "C" the highest degree of speculation. While
such debt will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major risk exposures to adverse
conditions.
"BB" - Debt has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure
to adverse business, financial or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. The "BB"
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied "BBB-" rating.
"B" - Debt has a greater vulnerability to default but currently
has the capacity to meet interest payments and principal repayments. Adverse
business, financial or economic conditions will likely impair capacity or
willingness to pay interest and repay principal. The "B" rating category is
also used for debt subordinated to senior debt that is assigned an actual or
implied "BB" or "BB-" rating.
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"CCC" - Debt has a currently identifiable vulnerability to
default, and is dependent upon favorable business, financial and economic
conditions to meet timely payment of interest and repayment of principal. In
the event of adverse business, financial or economic conditions, it is not
likely to have the capacity to pay interest and repay principal. The "CCC"
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied "B" or "B-" rating.
"CC" - Debt is typically applied to debt subordinated to senior
debt that is assigned an actual or implied "CCC" rating.
"C" - Debt is typically applied to debt subordinated to senior
debt which is assigned an actual or implied "CCC-" debt rating. The "C" rating
may be used to cover a situation where a bankruptcy petition has been filed, but
debt service payments are continued.
"CI" - This rating is reserved for income bonds on which no
interest is being paid.
"D" - Debt is in payment default and is used when interest
payments or principal payments are not made on the date due, even if the
applicable grace period has not expired, unless S & P believes such payments
will be made during such grace period. "D" rating is also used upon the filing
of a bankruptcy petition if debt service payments are jeopardized.
PLUS (+) OR MINUS (-) - The ratings from "AA" through "CCC" may be
modified by the addition of a plus or minus sign to show relative standing
within the major rating categories.
"r" - This rating is attached to highlight derivative, hybrid, and
certain other obligations that S & P believes may experience high volatility or
high variability in expected returns due to non-credit risks. Examples of such
obligations are: securities whose principal or interest return is indexed to
equities, commodities, or currencies; certain swaps and options; and interest
only and principal only mortgage securities.
The following summarizes the ratings used by Moody's for corporate
and municipal long-term debt:
"Aaa" - Bonds are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edged." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues.
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"Aa" - Bonds are judged to be of high quality by all standards.
Together with the "Aaa" group they comprise what are generally known as high
grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in "Aaa" securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than in "Aaa"
securities.
"A" - Bonds possess many favorable investment attributes and are
to be considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment sometime in the future.
"Baa" - Bonds considered medium-grade obligations, i.e., they are
neither highly protected nor poorly secured. Interest payments and principal
security appear adequate for the present but certain protective elements may be
lacking or may be characteristically unreliable over any great length of time.
Such bonds lack outstanding investment characteristics and in fact have
speculative characteristics as well.
"Ba," "B," "Caa," "Ca," and "C" - Bonds that possess one of these
ratings provide questionable protection of interest and principal ("Ba"
indicates some speculative elements; "B" indicates a general lack of
characteristics of desirable investment; "Caa" represents a poor standing; "Ca"
represents obligations which are speculative in a high degree; and "C"
represents the lowest rated class of bonds). "Caa," "Ca" and "C" bonds may be in
default.
Con. (---) - Bonds for which the security depends upon the
completion of some act or the fulfillment of some condition are rated
conditionally. These are bonds secured by (a) earnings of projects under
construction, (b) earnings of projects unseasoned in operation experience, (c)
rentals which begin when facilities are completed, or (d) payments to which
some other limiting condition attaches. Parenthetical rating denotes probable
credit stature upon completion of construction or elimination of basis of
condition.
Moody's applies numerical modifiers 1, 2 and 3 in each generic
classification from "Aa" to "B" in its bond rating system. The modifier 1
indicates that the company ranks in the higher end of its generic rating
category; the modifier 2 indicates a mid-range ranking; and the modifier 3
indicates that the issue ranks at the lower end of its generic rating category.
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The following summarizes the long-term debt ratings used by Duff &
Phelps for corporate and municipal long-term debt:
"AAA" - Debt is considered to be of the highest credit quality.
The risk factors are negligible, being only slightly more than for risk-free
U.S. Treasury debt.
"AA" - Debt is considered of high credit quality. Protection
factors are strong. Risk is modest but may vary slightly from time to time
because of economic conditions.
"A" - Debt possesses protection factors which are average but
adequate. However, risk factors are more variable and greater in periods of
economic stress.
"BBB" - Debt possesses below average protection factors but such
protection factors are still considered sufficient for prudent investment.
Considerable variability in risk is present during economic cycles.
"BB," "B," "CCC," "DD," and "DP" - Debt that possesses one of
these ratings is considered to be below investment grade. Although below
investment grade, debt rated "BB" is deemed likely to meet obligations when due.
Debt rated "B" possesses the risk that obligations will not be met when due.
Debt rated "CCC" is well below investment grade and has considerable uncertainty
as to timely payment of principal, interest or preferred dividends. Debt rated
"DD" is a defaulted debt obligation, and the rating "DP" represents preferred
stock with dividend arrearages.
To provide more detailed indications of credit quality, the "AA,"
"A," "BBB," "BB" and "B" ratings may be modified by the addition of a plus (+)
or minus (-) sign to show relative standing within these major categories.
The following summarizes the highest four ratings used by Fitch
for corporate and municipal bonds:
"AAA" - Bonds considered to be investment grade and of the highest
credit quality. The obligor has an exceptionally strong ability to pay
interest and repay principal, which is unlikely to be affected by reasonably
foreseeable events.
"AA" - Bonds considered to be investment grade and of very high
credit quality. The obligor's ability to pay interest and repay principal is
very strong, although not quite as strong as bonds rated "AAA." Because bonds
rated in the "AAA" and "AA" categories are not significantly vulnerable to
foreseeable future developments, short-term debt of these issuers is generally
rated "F-1+."
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"A" - Bonds considered to be investment grade and of high credit
quality. The obligor's ability to pay interest and repay principal is
considered to be strong, but may be more vulnerable to adverse changes in
economic conditions and circumstances than bonds with higher ratings.
"BBB" - Bonds considered to be investment grade and of
satisfactory credit quality. The obligor's ability to pay interest and repay
principal is considered to be adequate. Adverse changes in economic conditions
and circumstances, however, are more likely to have an adverse impact on these
bonds, and therefore, impair timely payment. The likelihood that the ratings of
these bonds will fall below investment grade is higher than for bonds with
higher ratings.
"BB," "B," "CCC," "CC," "C," "DDD," "DD," and "D" - Bonds that
possess one of these ratings are considered by Fitch to be speculative
investments. The ratings "BB" to "C" represent Fitch's assessment of the
likelihood of timely payment of principal and interest in accordance with the
terms of obligation for bond issues not in default. For defaulted bonds, the
rating "DDD" to "D" is an assessment of the ultimate recovery value through
reorganization or liquidation.
To provide more detailed indications of credit quality, the Fitch
ratings from and including "AA" to "C" may be modified by the addition of a
plus (+) or minus (-) sign to show relative standing within these major rating
categories.
IBCA assesses the investment quality of unsecured debt with an
original maturity of more than one year which is issued by bank holding
companies and their principal bank subsidiaries. The following summarizes the
rating categories used by IBCA for long-term debt ratings:
"AAA" - Obligations for which there is the lowest expectation of
investment risk. Capacity for timely repayment of principal and interest is
substantial such that adverse changes in business, economic or financial
conditions are unlikely to increase investment risk substantially.
"AA" - Obligations for which there is a very low expectation of
investment risk. Capacity for timely repayment of principal and interest is
substantial. Adverse changes in business, economic or financial conditions may
increase investment risk albeit not very significantly.
"A" - Obligations for which there is a low expectation of
investment risk. Capacity for timely repayment of principal and interest is
strong, although adverse changes in business,
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economic or financial conditions may lead to increased investment risk.
"BBB" - Obligations for which there is currently a low expectation
of investment risk. Capacity for timely repayment of principal and interest is
adequate, although adverse changes in business, economic or financial conditions
are more likely to lead to increased investment risk than for obligations in
higher categories.
"BB," "B," "CCC," "CC," and "C" - Obligations are assigned one of
these ratings where it is considered that speculative characteristics are
present. "BB" represents the lowest degree of speculation and indicates a
possibility of investment risk developing. "C" represents the highest degree
of speculation and indicates that the obligations are currently in default.
IBCA may append a rating of plus (+) or minus (-) to a rating to
denote relative status within major rating categories.
Thomson BankWatch assesses the likelihood of an untimely repayment
of principal or interest over the term to maturity of long term debt and
preferred stock which are issued by United States commercial banks, thrifts and
non-bank banks; non-United States banks; and broker-dealers. The following
summarizes the rating categories used by Thomson BankWatch for long-term debt
ratings:
"AAA" - This designation represents the highest category assigned
by Thomson BankWatch to long-term debt and indicates that the ability to repay
principal and interest on a timely basis is very high.
"AA" - This designation indicates a superior ability to repay
principal and interest on a timely basis with limited incremental risk versus
issues rated in the highest category.
"A" - This designation indicates that the ability to repay
principal and interest is strong. Issues rated "A" could be more vulnerable to
adverse developments (both internal and external) than obligations with higher
ratings.
"BBB" - This designation represents Thomson BankWatch's lowest
investment grade category and indicates an acceptable capacity to repay
principal and interest. Issues rated "BBB" are, however, more vulnerable to
adverse developments (both internal and external) than obligations with higher
ratings.
"BB," "B," "CCC," and "CC," - These designations are assigned by
Thomson BankWatch to non-investment grade long-term
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debt. Such issues are regarded as having speculative characteristics regarding
the likelihood of timely payment of principal and interest. "BB" indicates the
lowest degree of speculation and "CC" the highest degree of speculation.
"D" - This designation indicates that the long-term debt is in
default.
PLUS (+) OR MINUS (-) - The ratings from "AAA" through "CC" may
include a plus or minus sign designation which indicates where within the
respective category the issue is placed.
MUNICIPAL NOTE RATINGS
A Standard and Poor's rating reflects the liquidity concerns and
market access risks unique to notes due in three years or less. The following
summarizes the ratings used by Standard & Poor's Corporation for municipal
notes:
"SP-1" - The issuers of these municipal notes exhibit very strong
or strong capacity to pay principal and interest. Those issues determined to
possess overwhelming safety characteristics are given a plus (+) designation.
"SP-2" - The issuers of these municipal notes exhibit satisfactory
capacity to pay principal and interest.
"SP-3" - The issuers of these municipal notes exhibit speculative
capacity to pay principal and interest.
Moody's ratings for state and municipal notes and other short-term
loans are designated Moody's Investment Grade ("MIG") and variable rate demand
obligations are designated Variable Moody's Investment Grade ("VMIG"). Such
ratings recognize the differences between short-term credit risk and long-term
risk. The following summarizes the ratings by Moody's Investors Service, Inc.
for short-term notes:
"MIG-1"/"VMIG-1" - Loans bearing this designation are of the best
quality, enjoying strong protection by established cash flows, superior
liquidity support or demonstrated broad-based access to the market for
refinancing.
"MIG-2"/"VMIG-2" - Loans bearing this designation are of high
quality, with margins of protection ample although not so large as in the
preceding group.
"MIG-3"/"VMIG-3" - Loans bearing this designation are of favorable
quality, with all security elements accounted for but lacking the undeniable
strength of the preceding grades.
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Liquidity and cash flow protection may be narrow and market access for
refinancing is likely to be less well established.
"MIG-4"/"VMIG-4" - Loans bearing this designation are of adequate
quality, carrying specific risk but having protection commonly regarded as
required of an investment security and not distinctly or predominantly
speculative.
"SG" - Loans bearing this designation are of speculative quality
and lack margins of protection.
Fitch and Duff & Phelps use the short-term ratings described under
Commercial Paper Ratings for municipal notes.
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APPENDIX B
As stated in the Prospectus, the Portfolio may enter into futures
contracts and options for hedging purposes. Such transactions are described in
this Appendix.
I. INTEREST RATE FUTURES CONTRACTS
Use of Interest Rate Futures Contracts. Bond prices are
established in both the cash market and the futures market. In the cash
market, bonds are purchased and sold with payment for the full purchase price
of the bond being made in cash, generally within five business days after the
trade. In the futures market, only a contract is made to purchase or sell a
bond in the future for a set price on a certain date. Historically, the prices
for bonds established in the futures markets have tended to move generally in
the aggregate in concert with the cash market prices and have maintained fairly
predictable relationships. Accordingly, the Portfolio may use interest rate
futures as a defense, or hedge, against anticipated interest rate changes and
not for speculation. As described below, this would include the use of futures
contract sales to protect against expected increases in interest rates and
futures contract purchases to offset the impact of interest rate declines.
The Portfolio presently could accomplish a similar result to that
which it hopes to achieve through the use of futures contracts by selling bonds
with long maturities and investing in bonds with short maturities when interest
rates are expected to increase, or conversely, selling short-term bonds and
investing in long-term bonds when interest rates are expected to decline.
However, because of the liquidity that is often available in the futures market
the protection is more likely to be achieved, perhaps at a lower cost and
without changing the rate of interest being earned by the Portfolio, through
using futures contracts.
Description of Interest Rate Futures Contracts. An interest rate
futures contract sale would create an obligation by the Portfolio, as seller,
to deliver the specific type of financial instrument called for in the contract
at a specific future time for a specified price. A futures contract purchase
would create an obligation by the Portfolio, as purchaser, to take delivery of
the specific type of financial instrument at a specific future time at a
specific price. The specific securities delivered or taken, respectively, at
settlement date, would not be determined until at or near that date. The
determination would be in accordance with the rules of the exchange on which
the futures contract sale or purchase was made.
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Although interest rate futures contracts by their terms call for
actual delivery or acceptance of securities, in most cases the contracts are
closed out before the settlement date without the making or taking of delivery
of securities. Closing out a futures contract sale is effected by the
Portfolio's entering into a futures contract purchase for the same aggregate
amount of the specific type of financial instrument and the same delivery date.
If the price in the sale exceeds the price in the offsetting purchase, the
Portfolio is paid the difference and thus realizes a gain. If the offsetting
purchase price exceeds the sale price, the Portfolio pays the difference and
realizes a loss. Similarly, the closing out of a futures contract purchase is
effected by the Portfolio's entering into a futures contract sale. If the
offsetting sale price exceeds the purchase price, the Portfolio realizes a
gain, and if the purchase price exceeds the offsetting sale price, the
Portfolio realizes a loss.
Interest rate futures contracts are traded in an auction
environment on the floors of several exchanges - principally, the Chicago Board
of Trade and the Chicago Mercantile Exchange. The Portfolio would deal only in
standardized contracts on recognized exchanges. Each exchange guarantees
performance under contract provisions through a clearing corporation, a
nonprofit organization managed by the exchange membership.
A public market now exists in futures contracts covering various
financial instruments including long-term United States Treasury bonds and
notes; Government National Mortgage Association (GNMA) modified pass-through
mortgage-backed securities; three- month United States Treasury bills; and
ninety-day commercial paper. The Portfolio may trade in any futures contract
for which there exists a public market, including, without limitation, the
foregoing instruments.
Examples of Futures Contract Sale. The Portfolio would engage in
an interest rate futures contract sale to maintain the income advantage from
continued holding of a long-term bond while endeavoring to avoid part or all of
the loss in market value that would otherwise accompany a decline in long-term
securities prices. Assume that the market value of a certain security in the
Portfolio tends to move in concert with the futures market prices of long-term
United States Treasury bonds ("Treasury bonds"). The advisor wishes to fix the
current market value of this portfolio security until some point in the future.
Assume the portfolio security has a market value of 100, and the investment
adviser believes that, because of an anticipated rise in interest rates, the
value will decline to 95. The Portfolio might enter into futures contract
sales of Treasury bonds for an equivalent of 98. If the market value of the
portfolio security
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does indeed decline from 100 to 95, the equivalent futures market price for the
Treasury bonds might also decline from 98 to 93.
In that case, the five-point loss in the market value of the
portfolio security would be offset by the five-point gain realized by closing
out the futures contract sale. Of course, the futures market price of Treasury
bonds might well decline to more than 93 or to less than 93 because of the
imperfect correlation between cash and futures prices mentioned below.
The investment adviser could be wrong in its forecast of interest
rates and the equivalent futures market price could rise above 98. In this
case, the market value of the portfolio securities, including the portfolio
security being protected, would increase. The benefit of this increase would
be reduced by the loss realized on closing out the futures contract sale.
If interest rate levels did not change, the Portfolio in the above
example might incur a loss of 2 points (which might be reduced by an
off-setting transaction prior to the settlement date). In each transaction,
transaction expenses would also be incurred.
Examples of Futures Contract Purchase. The Portfolio would engage
in an interest rate futures contract purchase when it is not fully invested in
long-term bonds but wishes to defer for a time the purchase of long-term bonds
in light of the availability of advantageous interim investments, e.g.,
shorter-term securities whose yields are greater than those available on
long-term bonds. The Portfolio's basic motivation would be to maintain for a
time the income advantage from investing in the short-term securities; the
Portfolio would be endeavoring at the same time to eliminate the effect of all
or part of an expected increase in market price of the long-term bonds that the
Portfolio may purchase.
For example, assume that the market price of a long-term bond that
the Portfolio may purchase, currently yielding 10%, tends to move in concert
with futures market prices of Treasury bonds. The investment adviser wishes to
fix the current market price (and thus 10% yield) of the long-term bond until
the time (four months away in this example) when it may purchase the bond.
Assume the long-term bond has a market price of 100, and the investment adviser
believes that, because of an anticipated fall in interest rates, the price will
have risen to 105 (and the yield will have dropped to about 9 1/2%) in four
months. The Portfolio might enter into futures contracts purchases of Treasury
bonds for an equivalent price of 98. At the same time, the Portfolio would
assign a pool of investments in short-term securities that are either maturing
in four months or earmarked for sale in four months, for purchase of the
long-term bond at an
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assumed market price of 100. Assume these short-term securities are yielding
15%. If the market price of the long-term bond does indeed rise from 100 to
105, the equivalent futures market price for Treasury bonds might also rise
from 98 to 103. In that case, the 5-point increase in the price that the
Portfolio pays for the long-term bond would be offset by the 5-point gain
realized by closing out the futures contract purchase.
The investment adviser could be wrong in its forecast of interest
rates; long-term interest rates might rise to above 10%; and the equivalent
futures market price could fall below 98. If short-term rates at the same time
fall to 10% or below, it is possible that the Portfolio would continue with its
purchase program for long-term bonds. The market price of available long-term
bonds would have decreased. The benefit of this price decrease, and thus yield
increase, will be reduced by the loss realized on closing out the futures
contract purchase.
If, however, short-term rates remained above available long-term
rates, it is possible that the Portfolio would discontinue its purchase program
for long-term bonds. The yield on short-term securities in the portfolio,
including those originally in the pool assigned to the particular long-term
bond, would remain higher than yields on long-term bonds. The benefit of this
continued incremental income will be reduced by the loss realized on closing
out the futures contract purchase. In each transaction, expenses would also be
incurred.
II. MARGIN PAYMENTS
Unlike when a Portfolio purchases or sells a security, no price is
paid or received by the Portfolio upon the purchase or sale of a futures
contract. Initially, the Portfolio will be required to deposit with the broker
or in a segregated account with the Portfolio's custodian an amount of cash or
cash equivalents, the value of which may vary but is generally equal to 10% or
less of the value of the contract. This amount is known as initial margin.
The nature of initial margin in futures transactions is different from that of
margin in security transactions in that futures contract margin does not
involve the borrowing of funds by the customer to finance the transactions.
Rather, the initial margin is in the nature of a performance bond or good faith
deposit on the contract which is returned to the Portfolio upon termination of
the futures contract assuming all contractual obligations have been satisfied.
Subsequent payments, called variation margin, to and from the broker, will be
made on a daily basis as the price of the underlying instruments fluctuates
making the long and short positions in the futures contract more or less
valuable, a process known as marking-to-market. For example, when a Portfolio
has purchased a futures contract and the price of the contract has risen in
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response to a rise in the underlying instruments, that position will have
increased in value and the Portfolio will be entitled to receive from the
broker a variation margin payment equal to that increase in value. Conversely,
where a Portfolio has purchased a futures contract and the price of the future
contract has declined in response to a decrease in the underlying instruments,
the position would be less valuable and the Portfolio would be required to make
a variation margin payment to the broker. At any time prior to expiration of
the futures contract, the adviser may elect to close the position by taking an
opposite position, subject to the availability of a secondary market, which
will operate to terminate the Portfolio's position in the futures contract. A
final determination of variation margin is then made, additional cash is
required to be paid by or released to the Portfolio, and the Portfolio realizes
a loss or gain.
III. RISKS OF TRANSACTIONS IN FUTURES CONTRACTS.
There are several risks in connection with the use of futures in
the Portfolio as a hedging device. One risk arises because of the imperfect
correlation between movements in the price of the future and movements in the
price of the securities which are the subject of the hedge. The price of the
future may move more than or less than the price of the securities being
hedged. If the price of the future moves less than the price of the securities
which are the subject of the hedge, the hedge will not be fully effective but,
if the price of the securities being hedged has moved in an unfavorable
direction, the Portfolio would be in a better position than if it had not
hedged at all. If the price of the securities being hedged has moved in a
favorable direction, this advantage will be partially offset by the loss on the
future. If the price of the future moves more than the price of the hedged
securities, the Portfolio will experience either a loss or gain on the future
which will not be completely offset by movements in the price of the securities
which are the subject of the hedge. To compensate for the imperfect
correlation of movements in the price of securities being hedged and movements
in the price of futures contracts, a Portfolio may buy or sell futures
contracts in a greater dollar amount than the dollar amount of securities being
hedged if the volatility over a particular time period of the prices of such
securities has been greater than the volatility over such time period of the
future, or if otherwise deemed to be appropriate by the investment adviser.
Conversely, a Portfolio may buy or sell fewer futures contracts if the
volatility over a particular time period of the prices of the securities being
hedged is less than the volatility over such time period of the futures
contract being used, or if otherwise deemed to be appropriate by the investment
adviser. It is also possible that, where the Portfolio has sold futures to
hedge its portfolio against a decline in the market, the market
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may advance and the value of securities held in the Portfolio may decline. If
this occurred, the Portfolio would lose money on the future and also experience
a decline in value in its portfolio securities.
Where futures are purchased to hedge against a possible increase
in the price of securities before a Portfolio is able to invest its cash (or
cash equivalents) in securities (or options) in an orderly fashion, it is
possible that the market may decline instead; if the Portfolio then concludes
not to invest in securities or options at that time because of concern as to
possible further market decline or for other reasons, the Portfolio will realize
a loss on the futures contract that is not offset by a reduction in the price of
securities purchased.
In instances involving the purchase of futures contracts by a
Portfolio, an amount of cash and cash equivalents, equal to the market value of
the futures contracts, will be deposited in a segregated account with the
Portfolio's custodian and/or in a margin account with a broker to collateralize
the position and thereby insure that the use of such futures is unleveraged.
In addition to the possibility that there may be an imperfect
correlation, or no correlation at all, between movements in the futures and the
securities being hedged, the price of futures may not correlate perfectly with
movement in the cash market due to certain market distortions. Rather than
meeting additional margin deposit requirements, investors may close futures
contracts through off-setting transactions which could distort the normal
relationship between the cash and futures markets. Second, with respect to
financial futures contracts, the liquidity of the futures market depends on
participants entering into off-setting transactions rather than making or
taking delivery. To the extent participants decide to make or take delivery,
liquidity in the futures market could be reduced thus producing distortions.
Third, from the point of view of speculators, the deposit requirements in the
futures market are less onerous than margin requirements in the securities
market. Therefore, increased participation by speculators in the futures
market may also cause temporary price distortions. Due to the possibility of
price distortion in the futures market, and because of the imperfect
correlation between the movements in the cash market and movements in the price
of futures, a correct forecast of general market trends or interest rate
movements by the adviser may still not result in a successful hedging
transaction over a short time frame.
Positions in futures may be closed out only on an exchange or
board of trade which provides a secondary market for such futures. Although the
Portfolio intend to purchase or sell
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futures only on exchanges or boards of trade where there appear to be active
secondary markets, there is no assurance that a liquid secondary market on any
exchange or board of trade will exist for any particular contract or at any
particular time. In such event, it may not be possible to close a futures
investment position, and in the event of adverse price movements, the Portfolio
would continue to be required to make daily cash payments of variation margin.
However, in the event futures contracts have been used to hedge portfolio
securities, such securities will not be sold until the futures contract can be
terminated. In such circumstances, an increase in the price of the securities,
if any, may partially or completely offset losses on the futures contract.
However, as described above, there is no guarantee that the price of the
securities will in fact correlate with the price movements in the futures
contract and thus provide an offset on a futures contract.
Further, it should be noted that the liquidity of a secondary
market in a futures contract may be adversely affected by "daily price
fluctuation limits" established by commodity exchanges which limit the amount
of fluctuation in a futures contract price during a single trading day. Once
the daily limit has been reached in the contract, no trades may be entered into
at a price beyond the limit, thus preventing the liquidation of open futures
positions.
Successful use of futures by a Portfolio is also subject to the
investment adviser's ability to predict correctly movements in the direction of
the market. For example, if a Portfolio has hedged against the possibility of
a decline in the market adversely affecting securities held by it and
securities prices increase instead, the Portfolio will lose part of all of the
benefit to the increased value of its securities which it has hedged because it
will have offsetting losses in its futures positions. In addition, in such
situations, if the Portfolio has insufficient cash, it may have to sell
securities to meet daily variation margin requirements. Such sales of
securities may be, but will not necessarily be, at increased prices which
reflect the rising market. A Portfolio may have to sell securities at a time
when it may be disadvantageous to do so.
IV. OPTIONS ON FUTURES CONTRACTS.
The Portfolio may purchase options on the futures contracts
described above. A futures option gives the holder, in return for the premium
paid, the right to buy (call) from or sell (put) to the writer of the option a
futures contract at a specified price at any time during the period of the
option. Upon exercise, the writer of the option is obligated to pay the
difference between the cash value of the futures contract and the exercise
price. Like the buyer or seller of a futures contract,
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the holder, or writer, of an option has the right to terminate its position
prior to the scheduled expiration of the option by selling, or purchasing, an
option of the same series, at which time the person entering into the closing
transaction will realize a gain or loss.
Investments in futures options involve some of the same
considerations that are involved in connection with investments in futures
contracts (for example, the existence of a liquid secondary market). In
addition, the purchase of an option also entails the risk that changes in the
value of the underlying futures contract will not be fully reflected in the
value of the option purchased. Depending on the pricing of the option compared
to either the futures contract upon which it is based, or upon the price of the
securities being hedged, an option may or may not be less risky than ownership
of the futures contract or such securities. In general, the market prices of
options can be expected to be more volatile than the market prices on the
underlying futures contract. Compared to the purchase or sale of futures
contracts, however, the purchase of call or put options on futures contracts
may frequently involve less potential risk to the Portfolio because the maximum
amount at risk is the premium paid for the options (plus transaction costs).
V. ACCOUNTING AND TAX TREATMENT.
Accounting for futures contracts and related options will be in
accordance with generally accepted accounting principles.
Generally, futures contracts and options on futures contracts held
by the Portfolio at the close of the Portfolio's taxable year will be treated
for federal income tax purposes as sold for their fair market value on the last
business day of such year, a process known as "mark-to-market." Forty percent
of any gain or loss resulting from such constructive sale will be treated as
short-term capital gain or loss, and 60% of such gain or loss will be treated
as long-term capital gain or loss without regard to the length of time the
Portfolio holds the futures contract or option ("the 40%-60% rule"). The
amount of any capital gain or loss actually realized by a Portfolio in a
subsequent sale or other disposition of those futures contracts or options will
be adjusted to reflect any capital gain or loss taken into account by the
Portfolio in a prior year as a result of the constructive sale of the contracts
or options. With respect to futures contracts to sell, which are regarded as
parts of a "mixed straddle" because their values fluctuate inversely to the
values of specific securities held by the Portfolio, losses as to such
contracts to sell may be subject to certain loss deferral rules which limit the
amount of loss currently deductible on either part of the straddle to the
amount thereof
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<PAGE> 684
which exceeds the unrecognized gain (if any) with respect to the other part of
the straddle, and to certain wash sales regulations. Under short sales rules,
which will also be applicable, the holding period of the securities forming
part of the straddle will (if they have not been held for the long-term holding
period) be deemed not to begin prior to termination of the straddle. With
respect to certain futures contracts and related options, deductions for
interest and carrying charges will not be allowed. Notwithstanding the rules
described above, with respect to futures contracts to sell which are properly
identified as such, the Portfolio may make an election which will exempt (in
whole or in part) those identified futures contracts from being treated for
federal income tax purposes as sold on the last business day of the Portfolio's
taxable year, but gains and losses will be subject to such short sales, wash
sales and loss deferral rules and the requirement to capitalize interest and
carrying charges. Under Temporary Regulations, the Portfolio would be allowed
(in lieu of the foregoing) to elect either (1) to offset gains or losses from
portions which are part of a mixed straddle by separately identifying each
mixed straddle to which such treatment applies, or (2) to establish a mixed
straddle account for which gains and losses would be recognized and offset on a
periodic basis during the taxable year. Under either election, the 40%-60%
rule will apply to the net gain or loss attributable to the futures contracts,
but in the case of a mixed straddle account election, not more than 50 percent
of any net gain may be treated as long-term and no more than 40 percent of any
net loss may be treated as short-term.
Qualification as a regulated investment company under the Code
requires that the Fund satisfy certain requirements with respect to the source
of its income during a taxable year. At least 90% of the gross income of the
Fund must be derived from dividends, interests, payments with respect to
securities loans, gains from the sale or other disposition of stock, securities
or foreign currencies, and other income (including, but not limited to, gains
from options, futures, or forward contracts) derived with respect to the Fund's
business of investing in such stock, securities or currencies. The Treasury
Department may by regulation exclude from qualifying income foreign currency
gains that are not directly related to the Fund's principal business of
investing in stock or securities, or options and futures with respect to stock
or securities. Any income derived by the Portfolio from a partnership or trust
is treated for this purpose as derived with respect to the Portfolio's business
of investing in stock, securities or currencies only to the extent that such
income is attributable to items of income which would have been qualifying
income if realized by the Portfolio in the same manner as by the partnership or
trust.
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An additional requirement for qualification by the Fund as a
regulated investment company under the Code is the Short-Short test described
earlier in this Statement of Additional Information. With respect to futures
contracts and other financial instruments subject to the mark-to-market rules,
the Internal Revenue Service has ruled in private letter rulings that a gain
realized from such a futures contract or financial instrument will be treated
as being derived from a security held for three months or more (regardless of
the actual period for which the contract or instrument is held) if the gain
arises as a result of a constructive sale under the mark-to-market rules, and
will be treated as being derived from a security held for less than three
months only if the contract or instrument is terminated (or transferred) during
the taxable year (other than by reason of marking- to-market) and less than
three months have elapsed between the date the contract or instrument is
acquired and the termination date. In determining whether the Fund meets the
30% test for a taxable year, increases and decreases in the value of the
Portfolio's futures contracts and other investments that qualify as part of a
"designated hedge," as defined in the Code, may be netted.
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PACIFIC HORIZON FUNDS, INC.
PACIFIC HORIZON SHARES
OF THE
PRIME FUND, TREASURY FUND,
GOVERNMENT FUND, TREASURY ONLY FUND, TAX-EXEMPT MONEY FUND
AND CALIFORNIA TAX-EXEMPT MONEY MARKET FUND
(INVESTMENT PORTFOLIOS OF
PACIFIC HORIZON FUNDS, INC.)
STATEMENT OF ADDITIONAL INFORMATION
JULY 1, 1995
(AS REVISED JULY 10, JULY 12 AND DECEMBER 8, 1995)
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
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<S> <C>
THE COMPANY.............................................................. 2
INVESTMENT OBJECTIVES AND POLICIES....................................... 2
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION........................... 42
ADDITIONAL INFORMATION CONCERNING TAXES.................................. 50
MANAGEMENT OF THE FUNDS.................................................. 56
GENERAL INFORMATION...................................................... 77
APPENDIX A............................................................... A-1
</TABLE>
This Statement of Additional Information, which applies to the Pacific
Horizon Shares of the Prime Fund, Treasury Fund, Tax-Exempt Money Fund,
Government Fund, Treasury Only Fund and California Tax-Exempt Money Market Fund
(individually, a "Fund" and collectively, the "Funds") of Pacific Horizon Funds,
Inc. (the "Company"), is meant to be read in conjunction with the prospectuses
dated July 1, 1995 with respect to the Funds, as such prospectuses may from time
to time be revised (individually, a "Prospectus" and collectively, the
"Prospectuses"), describing the particular Fund of the Company in which the
investor is interested and is incorporated by reference in its entirety into
each such Prospectus. Because the Statement of Additional Information is not
itself a prospectus, no investment in shares of any Fund should be made solely
upon the information contained herein. Copies of the Prospectuses relating to
the Company's Pacific Horizon Shares may be obtained by calling Concord
Financial Group, Inc. at 800-332-3863. Capitalized terms used but not defined
herein have the same meaning as in the Prospectuses.
<PAGE> 687
THE COMPANY
The Company was organized on October 27, 1982 as a Maryland
corporation. On March 30, 1984, the Company commenced its public sale of shares
(Pacific Horizon Shares) in each of the Prime Fund and Treasury Fund, which were
originally called "Money Market Portfolio" and "Government Money Market
Portfolio," respectively. On January 19, 1990, the Prime Fund and Treasury Fund
of The Horizon Funds, a Massachusetts business trust (sometimes called the
"Predecessor Prime Fund" and "Predecessor Treasury Fund"), were combined with
the Money Market Portfolio and Government Money Market Portfolio, respectively,
of the Company; the Company changed the names of its resulting portfolios to
"Prime Fund" and "Treasury Fund"; and, in addition to continuing its offering of
Pacific Horizon Shares in such Funds, the Company began offering Horizon Shares
and Horizon Service Shares in the Prime and Treasury Funds. On January 19, 1990,
the Tax-Exempt Money Fund of The Horizon Funds (the "Predecessor Tax Exempt
Fund") was reorganized as a new portfolio of the Company. Each of these three
Predecessor Funds originally commenced operations on July 10, 1987. The
California Tax-Exempt Money Market Fund commenced its initial public offering of
shares on December 6, 1989. The Government Fund and Treasury Only Fund commenced
operations on June 4, 1990 as separate investment portfolios (the "Predecessor
Government Funds" and "Predecessor Treasury Only Funds," respectively) of First
Funds of America and First Cash Funds of America, which were organized as
Massachusetts business trusts. On March 1, 1993, the Predecessor Government
Funds and Predecessor Treasury Only Funds were reorganized as new portfolios of
the Company. Prior to this reorganization, these Predecessor Funds offered and
sold shares of beneficial interest that were similar to the Company's Pacific
Horizon Shares and Horizon Service Shares.
The Company offers other classes and series of shares, including
Horizon Shares and Horizon Service Shares, in the aforementioned funds and in
other investment portfolios which are described in separate Prospectuses and
Statements of Additional Information. For information concerning these other
shares contact the Distributor at the telephone number stated on the cover page
of this statement of additional information.
INVESTMENT OBJECTIVES AND POLICIES
The Prospectus for each Fund describes the investment objective of the
Fund to which it applies. The following information supplements and should be
read in conjunction with the descriptions of the investment objective and
policies in the Prospectus for each Fund.
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<PAGE> 688
PORTFOLIO TRANSACTIONS
Subject to the general control of the Company's Board of Directors,
Bank of America National Trust and Savings Association ("Bank of America") is
responsible for, makes decisions with respect to and places orders for all
purchases and sales of portfolio securities for each Fund. Securities purchased
and sold by each Fund are generally traded in the over-the-counter market on a
net basis (i.e., without commission) through dealers, or otherwise involve
transactions directly with the issuer of an instrument. During their last three
fiscal periods, the Funds did not pay any brokerage commissions. The cost of
securities purchased by the Funds from underwriters generally include an
underwriting commission or concession, and the prices at which securities are
purchased from and sold to dealers include a dealer's mark-up or mark-down.
In executing portfolio transactions and selecting brokers or dealers,
it is the Company's policy to seek the best overall terms available. The
investment advisory agreement between the Company and Bank of America provides
that, in assessing the best overall terms available for any transaction, Bank of
America shall consider factors it deems relevant, including the breadth of the
market in the security, the price of the security, the financial condition and
execution capability of the broker or dealer, and the reasonableness of the
commission, if any, for the specific transaction and on a continuing basis. In
addition, the investment advisory agreement authorizes Bank of America, subject
to the approval of the Company's Board of Directors, to cause the Company to pay
a broker-dealer which furnishes brokerage and research services a higher
commission than that which might be charged by another broker-dealer for
effecting the same transaction, provided that such commission is deemed
reasonable in terms of either that particular transaction or the overall
responsibilities of Bank of America to the particular Fund and the Company.
Brokerage and research services may include: (1) advice as to the value of
securities, the advisability of investing in, purchasing or selling securities
and the availability of securities or purchasers or sellers of securities and
(2) analyses and reports concerning industries, securities, economic factors and
trends, portfolio strategy and the performance of accounts.
The Directors will periodically review the commissions paid by the
Company to consider whether the commissions, if any, paid over representative
periods of time appear to be reasonable in relation to the benefits inuring to
the Company. It is possible that certain of the brokerage or research services
received will primarily benefit one or more other investment companies or other
accounts for which investment discretion is exercised. Conversely, the Company
or any given Fund may be the
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<PAGE> 689
primary beneficiary of the brokerage or research services received as a result
of portfolio transactions effected for such other accounts or investment
companies.
Brokerage or research services so received are in addition to and not
in lieu of services required to be performed by Bank of America and do not
reduce the advisory fee payable to Bank of America by the Company. Such services
may be useful to Bank of America in serving both the Company and other clients
and, conversely, services obtained by the placement of business of other clients
may be useful to Bank of America in carrying out its obligations to the Company.
The Company will not acquire certificates of deposit or other securities issued
by Bank of America or its affiliates, and will give no preference to
certificates of deposit or other securities issued by Service Organizations. In
addition, portfolio securities in general will be purchased from and sold to
Bank of America, Concord Financial Group, Inc. (the "Distributor") and their
affiliates acting as principal underwriter, syndicate member, market-maker,
dealer, broker or in any other similar capacity during the life of the
syndicate, provided such purchase, sale or dealing is permitted under the
Investment Company Act of 1940 and the rules thereunder.
A Fund's annual portfolio turnover rate is calculated by dividing the
lesser of purchases or sales of portfolio securities for the year by the monthly
average value of the Fund's portfolio securities. The calculation excludes all
securities the maturities of which at the time of acquisition were thirteen
months or less. The annual portfolio turnover rate is expected to be zero for
regulatory reporting purposes for all Funds.
A Fund may participate, if and when practicable, in bidding for the
purchase of securities directly from an issuer in order to take advantage of the
lower purchase price available to members of a bidding group. Any such Fund will
engage in this practice only when Bank of America, in its sole discretion,
subject to guidelines adopted by the Board of Directors, believes such practice
to be in the Fund's interest.
Subsequent to its purchase by a Fund, an issue of securities may cease
to be rated or its rating may be reduced below the minimum rating required for
purchase by the Fund. The Board of Directors or Bank of America, pursuant to
guidelines established by the Board, will promptly consider such an event in
determining whether the Fund involved should continue to hold the obligation but
will continue to hold the obligation only if retention is in accordance with the
interests of the Fund and applicable regulations of the Securities and Exchange
Commission. In addition, it is possible that unregistered securities
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<PAGE> 690
purchased by a Fund in reliance upon Rule 144A under the Securities Act of 1933
could have the effect of increasing the level of the Fund's illiquidity to the
extent that qualified institutional buyers become, for a period, uninterested in
purchasing these securities.
To the extent permitted by law, Bank of America may aggregate the
securities to be sold or purchased for a Fund with those to be sold or purchased
for other investment companies or common trust funds in order to obtain best
execution.
The Company is required to identify any securities of its regular
brokers or dealers (as defined in Rule 10b-1 under the Investment Company Act of
1940) or their parents held by the Company as of the close of its most recent
fiscal year. As of February 28, 1995: (a) the Treasury Fund held the following
securities, Repurchase Agreement with Goldman, Sachs & Co. in the principal
amount of $95,000,000; Repurchase Agreement with Merrill Lynch Government
Securities, Inc. in the principal amount of $95,000,000; (b) the Prime Fund held
the following securities, Merrill Lynch & Co., Inc., commercial paper in the
principal amount of $l00,000,000; Goldman, Sachs Group L.P., Daily Variable Rate
Master Note in the principal amount of $120,000,000; Morgan Stanley Group, Inc.,
Daily Variable Rate Master Note in the principal amount of $120,000,000; Bear
Stearns Co., Inc., Series B, Monthly Variable Rate Note in the principal amount
of $100,000,000; Repurchase Agreement with Goldman, Sachs & Co. in the principal
amount of $120,000,000; (c) the Government Fund held the following securities,
Repurchase Agreement with Goldman, Sachs & Co. in the principal amount of
$40,000,000; Repurchase Agreement with Merrill Lynch Government Securities, Inc.
in the principal amount of $40,000,000; and (d) the Prime Value Fund held the
following securities, Merrill Lynch & Co., Inc., commercial paper in the
principal amount of $7,000,000; Goldman, Sachs Group L.P., Daily Variable Rate
Master Note in the principal amount of $7,000,000; Repurchase Agreement with
Dean Witter Reynolds, Inc. in the principal amount of $8,000,000; Repurchase
Agreement with Goldman, Sachs & Co. in the principal amount of $8,000,000.
Merrill Lynch & Co., Inc., Goldman, Sachs & Co., Bear Stearns Co., Inc., Morgan
Stanley & Co. Incorporated, Shearson Lehman Brothers, Inc., Dean Witter
Reynolds, Inc. and Paine Webber are considered to be regular brokers and dealers
of the Company.
PORTFOLIO INSTRUMENTS
Certificates of Deposit, Bankers' Acceptances, Commercial Paper and
Short-Term Notes. Certificates of deposit are negotiable certificates issued
against funds deposited in a commercial bank for a definite period of time and
earning a specific return. Bankers' acceptances are negotiable deposits or
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<PAGE> 691
bills of exchange, normally drawn by an importer or exporter to pay for specific
merchandise, which are "accepted" by a bank (meaning, in effect, that the bank
unconditionally agrees to pay the face value of the instrument at maturity).
Certificates of deposit and bankers' acceptances acquired by a Fund will be
dollar-denominated obligations of domestic or foreign banks having total assets
at the time of purchase in excess of $2.5 billion (including assets of both
domestic and foreign branches). Commercial paper consists of unsecured
promissory notes issued by corporations. Short-term notes acquired by a Fund may
be issued by commercial or investment banking firms, financing companies or
industrial or manufacturing concerns. Commercial paper and short-term notes,
except for variable and floating rate instruments, will normally have maturities
of nine months or less, although such instruments may have maturities of up to
thirteen months. Commercial paper and short-term notes will consist of issues
which, with respect to the Prime Fund, Treasury Fund and Tax-Exempt Money Fund,
are "First Tier Securities" as defined by the Securities and Exchange Commission
and, with respect to the California Tax-Exempt Money Market Fund, are "Eligible
Securities" as defined by the Securities and Exchange Commission, provided,
however, that the Tax-Exempt Money Fund may also acquire securities that are
"Eligible Securities" during temporary defensive periods or if, in the
investment adviser's opinion, suitable First Tier Securities are not available
for investment. First Tier Securities consist of instruments that are either
rated at the time of purchase in the top rating category by one (if rated by
only one) or more unaffiliated nationally recognized statistical rating
organizations ("NRSROs") or issued by issuers with such ratings. Eligible
Securities consist of instruments that are either rated at the time of purchase
in the top two rating categories by one or more unaffiliated NRSROs or issued by
issuers with such ratings. See the Appendix to this Statement of Additional
Information for a description of the applicable NRSRO ratings. Unrated
instruments (including instruments with long-term but no short-term ratings)
purchased by a Fund will be of comparable quality as determined by Bank of
America pursuant to guidelines approved by the Board of Directors and Bank of
America.
A Fund holding Euro Cds, Yankee Cds, Yankee Bas or commercial paper of
foreign issuers may be subject to investment risks that are different in some
respects from those incurred by a Fund which invests only in obligations of
domestic branches of U.S. banks. Such risks include future political and
economic developments, the possible imposition of withholding taxes by the
particular country in which the issuer is located on interest income payable on
the securities, the possible seizure or nationalization of foreign deposits, the
possible establishment of exchange controls or the adoption of other foreign
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<PAGE> 692
governmental restrictions which might adversely affect the payment of principal
and interest on these securities.
Domestic banks and foreign banks are subject to different governmental
regulations with respect to the amount and types of loans which may be made and
interest rates which may be charged. In addition, the profitability of the
banking industry is dependent largely upon the availability and cost of funds
for the purpose of financing lending operations under prevailing money market
conditions. General economic conditions as well as exposure to credit losses
arising from possible financial difficulties of borrowers play an important part
in the operations of the banking industry.
As a result of federal and state laws and regulations, domestic banks
are, among other things, required to maintain specified levels of reserves,
limited in the amount which they can loan to a single borrower and subject to
other regulations designed to promote financial soundness. However, such laws
and regulations do not necessarily apply to the Euro Cds, Yankee Cds and Yankee
Bas that a Fund may acquire.
U.S. Government Obligations. Obligations of the U.S. Government and its
agencies and instrumentalities include Treasury bills, certificates of
indebtedness, notes and bonds, Treasury Strips, and issues of such entities as
the Federal Home Loan Banks, Federal Land Banks, Federal Housing Administration,
Farmers Home Administration, Export-Import Bank of the United States, Small
Business Administration, Government National Mortgage Association, General
Services Administration, Student Loan Marketing Association, Central Bank for
Cooperatives, Federal Home Loan Mortgage Corporation, Federal Intermediate
Credit Banks, Resolution Funding Corporation, Maritime Administration, Tennessee
Valley Authority and Federal National Mortgage Association. The Funds (other
than the Government Fund and Treasury Only Fund) will not acquire obligations
issued by the International Bank for Reconstruction and Development, the Asian
Development Bank or the Inter-American Development Bank; the Government Fund and
Treasury Only Fund may acquire such obligations in accordance with their
investment policies.
Government National Mortgage Association ("GNMA") certificates are U.S.
Government agency mortgage-backed securities representing part ownership of a
pool of mortgage loans. These loans, issued by lenders such as mortgage bankers,
commercial banks and savings and loan associations, are either insured by the
Federal Housing Administration or guaranteed by the Veterans Administration. A
"pool" or group of such mortgages is assembled and, after being approved by
GNMA, is offered to investors through securities dealers. Once approved by GNMA,
the timely payment of interest and principal on each mortgage is
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<PAGE> 693
guaranteed by GNMA and backed by the full faith and credit of the U.S.
Government. GNMA certificates differ from bonds in that principal is paid back
monthly by the borrower over the term of the loan rather than returned in a lump
sum at maturity. GNMA certificates are called "pass-through" securities because
both interest and principal payments (including prepayments) are passed through
to the holder of the certificate. In addition to GNMA certificates,
mortgage-backed securities issued by the Federal National Mortgage Association
("FNMA") and by the Federal Home Loan Mortgage Corporation ("FHLMC") may also be
acquired. Securities issued and guaranteed by FNMA and FHLMC are not backed by
the full faith and credit of the United States. If either fixed or variable rate
pass-through securities issued by the U.S. Government or its agencies or
instrumentalities are developed in the future, the Prime, Government, California
Tax-Exempt Money Market and Tax-Exempt Money Funds reserve the right to invest
in them, after making appropriate disclosure to investors. Certain securities
issued by all governmental agencies may be prepaid. Prepayment of mortgages
underlying most mortgage-backed securities may reduce their current yield and
total return. During periods of declining interest rates, such prepayments can
be expected to accelerate and the Funds would be required to reinvest the
proceeds at the lower interest rates then available.
Variable and Floating Rate Instruments. The Funds may acquire variable
and floating rate instruments as described in their Prospectuses. Variable and
floating rate instruments are frequently not rated by credit rating agencies;
however, unrated variable and floating rate instruments purchased by a Fund will
be determined by the investment adviser under guidelines established by the
Company's Board of Directors to be of comparable quality at the time of purchase
to rated instruments eligible for purchase by such Fund. In making such
determinations, the investment adviser will consider the earning power, cash
flows and other liquidity ratios of the issuers of such instruments (such
issuers include financial, merchandising, bank holding and other companies) and
will continuously monitor their financial condition. There may not be an active
secondary market with respect to a particular variable or floating rate
instrument purchased by a Fund. The absence of such an active secondary market
could make it difficult for a Fund to dispose of the variable or floating rate
instrument involved. In the event the issuer of the instrument defaulted on its
payment obligations, a Fund involved could, for this or other reasons, suffer a
loss to the extent of the default. Variable and floating rate instruments may be
secured by bank letters of credit and may have maturities of more than thirteen
months. In determining a Fund's average weighted maturity and whether a variable
or floating rate instrument has a remaining maturity of thirteen months or less,
each variable rate instrument having a demand feature that entitles the Fund to
receive the principal
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<PAGE> 694
amount thereof at any time, or at specified intervals not exceeding thirteen
months, in each case on not more than thirty days' notice, shall be deemed by
the Company to have a maturity equal to the longer of the period remaining until
its next interest rate adjustment or the period remaining until the principal
amount can be recovered through demand; each variable rate instrument not having
such a demand feature but having a stated maturity of thirteen months or less or
issued or guaranteed by the U.S. Government or its agencies will be deemed to
have a maturity equal to the period remaining until the next interest rate
adjustment; each floating rate instrument having a demand feature that entitles
the Fund to receive the principal amount thereof at any time, or at specified
intervals not exceeding thirteen months, in each case on not more than thirty
days' notice, shall be deemed to have a maturity equal to the period of time
remaining until the principal amount owed can be recovered through demand.
Variable and floating rate instruments which are not payable upon seven days'
notice and which do not have an active trading market are considered illiquid
securities.
Ratings and Issuer's Obligations. The ratings of Moody's Investors
Service, Inc. ("Moody's"), Standard & Poor's Ratings Group, Division of McGraw
Hill ("S&P"), Duff & Phelps Credit Rating Co. ("D&P"), Fitch Investors Service,
Inc. ("Fitch"), Thomson Bankwatch, Inc. ("Thomson") and IBCA Limited and IBCA
Inc. ("IBCA") represent their opinions as to the quality of debt securities.
However, ratings are general and are 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.
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 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 on, and principal of, its debt
securities may be materially adversely affected by litigation or other
conditions.
Municipal Securities. Substantially all of the assets of the Tax-Exempt
Money Fund and primarily all of the assets of the California Tax-Exempt Money
Market Fund will be invested in Municipal Securities. (In particular, the
Tax-Exempt Money Fund may concentrate more than 25% of its assets in California
Municipal Securities and the California Tax-Exempt Money Market
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<PAGE> 695
Fund intends that under normal market conditions at least 80% of its net assets
will be invested in California Municipal Securities.) Although the Prime Fund is
also authorized to invest in Municipal Securities under certain circumstances,
no more than 5% of the value of its net assets will be so invested.
Municipal Securities include debt obligations issued by governmental
entities to obtain funds for various public purposes, including the construction
of a wide range of public facilities, the refunding of outstanding obligations,
the payment of general operating expenses and the extension of loans to public
institutions and facilities. In addition, certain types of private activity
bonds are issued by or on behalf of public authorities to finance various
privately-operated facilities. Such obligations are included within the term
Municipal Securities if the interest paid thereon is exempt from regular federal
income tax. Municipal Securities also include short-term tax anticipation notes,
bond anticipation notes, revenue anticipation notes and other forms of
short-term loan obligations. Such notes are issued with a short-term maturity in
anticipation of the receipt of tax funds, the proceeds of bond placements or
other revenues. The Funds may also purchase tax-exempt commercial paper.
California Municipal Securities are Municipal Securities the interest on which
is exempt from taxation under the California Constitution or the laws of
California. Opinions relating to the validity of Municipal Securities and to the
exemption of interest thereon from federal income taxes and California state
personal income tax are rendered by bond counsel to the respective issuing
authorities at the time of issuance. Neither the Funds nor Bank of America will
review the proceedings relating to the issuance of Municipal Securities or the
bases for such opinions.
There are variations in the quality of Municipal Securities between
classifications (such as general obligation, revenue and moral obligation
issues) and within a particular classification, and the yields on Municipal
Securities 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. It should also be noted, with respect to
all Municipal Securities issued after August 15, 1986 (August 31, 1986 in the
case of certain bonds), that 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 Securities to become taxable
retroactive to the date of issue.
The payment of principal and interest on most Municipal Securities
purchased by the Funds will depend upon the ability of
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the issuers to meet their obligations. The District of Columbia, each state,
each of their political subdivisions, agencies, instrumentalities and
authorities and each multi-state agency of which a state is a member is a
separate "issuer" as that term is used in this Statement of Additional
Information and the Prospectuses. The non-governmental user of facilities
financed by private activity bonds is also considered to be an "issuer."
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 Securities. For example, pursuant to federal tax
legislation passed in 1986, interest on certain private activity bonds must be
included in an investor's federal alternative minimum taxable income, and
corporate investors must include all tax-exempt interest in their federal
alternative minimum taxable income. (See the Funds' Prospectuses under
"Dividends, Distributions and Taxes.") The Funds cannot predict what
legislation, if any, may be proposed in Congress or in the California
Legislature in the future as regards the federal and California state personal
income tax status of interest on Municipal Securities in general, or California
Municipal Securities in particular, or which proposals, if any, might be
enacted. Such proposals, if enacted, might materially adversely affect the
availability of Municipal Securities (and California Municipal Securities) for
investment by the California Tax-Exempt Money Market Fund and Tax-Exempt Money
Fund and the liquidity and value of such Funds' portfolios. In such an event the
Board of Directors would re-evaluate the Funds' investment objectives and
policies and consider changes in their structure or possible dissolution.
Repurchase Agreements. The Funds (other than the Treasury Only Fund)
may enter into repurchase agreements with respect to their portfolio securities
as indicated in their Prospectuses. Pursuant to such agreements, a Fund
purchases securities from financial institutions such as banks and
broker-dealers which are deemed to be creditworthy by the investment adviser
under guidelines approved by the Board of Directors, subject to the seller's
agreement to repurchase and the Fund's agreement to resell such securities at a
specified date and price. No Fund will enter into repurchase agreements with
Bank of America or Bank of America's affiliates, nor will any Fund give
preference to repurchase agreements with Service Organizations. The repurchase
price generally equals the price paid by the Fund plus interest negotiated on
the basis of current short-term rates (which may be more or less than the rate
on the underlying portfolio security). Securities subject to repurchase
agreements will be held by the Funds' custodian or a sub-custodian or in the
Federal Reserve/Treasury book-entry system, and a Fund will make payment for
such securities only upon receipt of evidence of physical delivery of the
securities or of
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such book entry. The seller under a repurchase agreement will be required to
deliver instruments the value of which is 102% of the repurchase price
(excluding accrued interest), provided that notwithstanding such requirement,
the advisor shall require that the value of the collateral, after transaction
costs (including loss of interest) reasonably expected to be incurred on a
default, shall be equal to or greater than the resale price (including interest)
provided in the agreement. If the seller defaulted on its repurchase obligation,
the Fund holding the repurchase agreement would suffer a loss to the extent that
the proceeds from a sale of the underlying securities were less than the
repurchase price under the agreement. Bankruptcy or insolvency of such a
defaulting seller may cause the particular Fund's rights with respect to such
securities to be delayed or limited. Repurchase agreements are considered to be
loans by a Fund under the Investment Company Act of 1940.
Reverse Repurchase Agreements. The Funds may also enter into reverse
repurchase agreements with respect to their securities. Whenever such a Fund
enters into a reverse repurchase agreement, it will place in a segregated
account maintained with the Funds' custodian liquid assets such as cash, U.S.
Government securities and other liquid high grade debt securities having a value
equal to the repurchase price (including accrued interest) and will subsequently
monitor the account for maintenance of such equivalent value. Reverse repurchase
agreements are considered to be borrowings by a Fund under the Investment
Company Act of 1940.
INVESTMENT PRACTICES
When-Issued Securities, Forward Commitments and Delayed Settlements.
The Funds may purchase securities on a "when- issued," forward commitment or
delayed settlement basis (i.e., for delivery beyond the normal settlement date
at a stated price and yield). When a Fund agrees to purchase securities on a
when- issued, forward commitment or delayed settlement basis, its custodian will
set aside cash or liquid portfolio securities equal to the amount of the
commitment in a separate account. Normally the custodian will set aside
portfolio securities to satisfy a purchase commitment, and in such a case a Fund
may be required subsequently to place additional assets (cash or liquid
securities) in the separate account so that the value of the account remains
equal to the amount of such Fund's commitment. The Funds do not intend to engage
in these transactions for speculative purposes but only in furtherance of their
investment objectives. Because a Fund will set aside cash or liquid investments
to satisfy its purchase commitments in the manner described, the Fund's
liquidity and the ability of the investment adviser to manage it may be affected
in the event the Fund's forward commitments, commitments to purchase when-issued
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securities and delayed settlements ever exceeded 25% of the value of its assets.
A Fund will purchase securities on a when-issued, forward commitment or
delayed settlement basis only with the intention of completing the transaction.
If deemed advisable as a matter of investment strategy, however, a Fund may
dispose of or renegotiate a commitment after it is entered into, and may sell
securities it has committed to purchase before those securities are delivered to
the Fund on the settlement date. In these cases the Fund may realize a taxable
capital gain or loss.
When a Fund engages in when-issued, forward commitment and delayed
settlement transactions, it relies on the other party to consummate the trade.
Failure of such party to do so may result in the Fund's incurring a loss or
missing an opportunity to obtain a price considered to be advantageous.
The market value of the securities underlying a when-issued purchase,
a forward commitment to purchase securities, or a delayed settlement and any
subsequent fluctuations on their market value is taken into account when
determining the market value of a Fund starting on the day the Fund agrees to
purchase the securities. The Fund does not earn interest on the securities it
has committed to purchase until they are paid for and delivered on the
settlement date.
Stand-By Commitments. The California Tax-Exempt Money Market Fund and
Tax-Exempt Money Fund may acquire "stand-by commitments" with respect to
Municipal Securities held in their respective portfolios. Under a "stand-by
commitment," a dealer agrees to purchase from a Fund, at the Fund's option,
specified Municipal Securities at a specified price.
The amount payable to the California Tax-Exempt Money Market Fund or
Tax-Exempt Money Fund upon its exercise of a "stand-by commitment" is normally
the amortized cost of the underlying instruments plus accrued interest, if any.
"Stand-by commitments" can be acquired when the remaining maturity of the
underlying Municipal Securities is not greater than thirteen months, and are
exercisable by a Fund at any time before the maturity of such obligations. In
determining net asset value, a Fund values Municipal Securities on the basis of
amortized cost without reference to the presence of the "stand-by commitment,"
as described below. A "stand-by commitment" may be sold, transferred or assigned
by a Fund only with the instrument involved.
The California Tax-Exempt Money Market Fund and Tax-Exempt Money Fund
expect that "stand-by commitments" will generally be available without the
payment of any direct or
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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). The total
amount paid in either manner for outstanding "stand-by commitments" held by a
Fund will not exceed 1/2 of 1% of the value of its total assets calculated
immediately after each "stand-by commitment" is acquired.
The California Tax-Exempt Money Market Fund and Tax-Exempt Money Fund
intend to enter into "stand-by commitments" only with dealers, banks and
broker-dealers which, in the investment adviser's opinion, present minimal
credit risks. A Fund's reliance upon the credit of these dealers, banks and
broker-dealers is secured by the value of the underlying Municipal Securities
that are subject to a commitment.
The California Tax-Exempt Money Market Fund and Tax- Exempt Money Fund
would acquire "stand-by commitments" solely to facilitate portfolio liquidity
and do not intend to exercise their rights thereunder for trading purposes. The
acquisition of a "stand-by commitment" would not affect the valuation or assumed
maturity of the underlying Municipal Securities, which would continue to be
valued at amortized cost in accordance with the ordinary method of valuation
employed by a Fund. "Stand-by commitments" which would be acquired by a Fund
would be valued at zero in determining net asset value. Where a Fund paid 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. "Stand-by commitments" would not affect a
Fund's average weighted maturity.
Loans of Securities - The Prime Fund, Government Fund and Treasury Only
Fund may lend their securities to brokers, dealers and financial institutions,
provided (1) the loan is secured continuously by collateral consisting of U.S.
Government securities (U.S. Treasury securities with respect to the Treasury
Only Fund) or cash or letters of credit which is marked to the market daily to
ensure that each loan is fully collateralized at all times; (2) the Fund
involved may at any time call the loan and obtain the return of the securities
loaned within five business days; (3) the Fund will receive any interest or
dividends paid on the securities loaned; and (4) the aggregate market value of
securities loaned will not at any time exceed 30% of the total assets of the
Fund (33-1/3% with respect to the Treasury Only Fund).
A Fund will earn income for lending its securities because cash
collateral pursuant to these loans will be invested
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in short term money market instruments. In connection with lending securities, a
Fund 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.
SPECIAL CONSIDERATIONS RELATING TO CALIFORNIA MUNICIPAL SECURITIES
ECONOMIC FACTORS. The Governor's 1993-1994 Budget, introduced on
January 8, 1993, proposed general fund expenditures of $37.3 billion, with
projected revenues of $39.9 billion. To balance the budget in the face of
declining revenues, the Governor proposed a series of revenue shifts from local
government, reliance on increased federal aid, and reductions in state spending.
The Department of Finance of the State of California's May Revision of
General Fund Revenues and Expenditures (the "May Revision"), released on May 20,
1993, projected the State would have an accumulated deficit of about $2.75
billion by June 30, 1993, essentially unchanged from the prior year. The
Governor proposed to eliminate this deficit over an 18-month period. Unlike
previous years, the Governor's Budget and May Revision did not calculate a "gap"
to be closed, but rather set forth revenue and expenditure forecasts and
proposals designed to produce a balanced budget.
The 1993-1994 budget act (the "1993-94 Budget Act") was signed by the
Governor on June 30, 1993, along with implementing legislation. The Governor
vetoed about $71 million in spending.
The 1993-94 Budget Act was predicated on general fund revenues and
transfers estimated at $40.6 billion, $400 million below 1992-93 (and the second
consecutive year of actual decline). The principal reasons for declining revenue
were the continued weak economy and the expiration (or repeal) of three fiscal
steps taken in 1991--a half cent temporary sales tax, a deferral of operating
loss carryforwards, and repeal by initiative of a sales tax on candy and snack
foods.
The 1993-94 Budget Act also assumed special fund revenues of $11.9
billion, an increase of 2.9 percent over 1992-93.
The 1993-94 Budget Act includes general fund expenditures of $38.5
billion (a 6.3 percent reduction from projected 1992-93 expenditures of $41.1
billion), in order to keep a balanced budget within the available revenues. The
1993-94 Budget Act also included special fund expenditures of
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$12.1 billion, a 4.2 percent increase. The 1993-94 Budget Act reflected the
following major adjustments:
1. Changes in local government financing to shift about $2.6 billion in
property taxes from cities, counties, special districts and redevelopment
agencies to school and community college districts, thereby reducing general
fund support by an equal amount. About $2.5 billion is permanent, reflecting
termination of the State's "bailout" of local governments following the property
tax cuts of Proposition 13 in 1978 (See "Constitutional, Legislative and Other
Factors" below).
The property tax revenue losses for cities and counties were offset in
part by additional sales tax revenues and mandate relief.
2. The 1993-94 Budget Act projected K-12 Proposition 98 funding on a
cash basis at the same per-pupil level as 1992-93 by providing schools a $609
million loan payable from future years' Proposition 98 funds.
3. The 1993-94 Budget Act assumed receipt of about $692 million of aid
to the State from the federal government to offset health and welfare costs
associated with foreign immigrants living in the State, which would reduce a
like amount of General Fund expenditures. About $411 million of this amount was
one-time funding. Congress ultimately appropriated only $450 million.
4. Reductions of $600 million in health and welfare programs and $400
million in support for higher education (partly offset by fee increases at all
three units of higher education) and various miscellaneous cuts (totalling
approximately $150 million) in State government services in many agencies, up to
15 percent.
5. A 2-year suspension of the renters' tax credit ($390 million
expenditure reduction in 1993-94).
6. Miscellaneous one-time items, including deferral of payment to the
Public Employees Retirement Fund ($339 million) and a change in accounting for
debt service from accrual to cash basis, saving $107 million.
The 1993-94 Budget Act contained no general fund tax/revenue increases
other than a two year suspension of the renters' tax credit. The 1993-1994
Budget Act suspended the 4 percent automatic budget reduction trigger, as was
done in 1992-1993, so cuts could be focused.
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Administration reports during the course of the 1993-1994 Fiscal Year
indicated that while economic recovery appeared to have started in the second
half of the fiscal year, recessionary conditions continued longer than had been
anticipated when the 1993-1994 Budget Act was adopted. Overall, revenues for the
1993-1994 Fiscal Year were about $800 million lower than original projections,
and expenditures were about $780 million higher, primarily because of higher
health and welfare caseloads, lower property taxes which required greater State
support for K-14 education to make up the shortfall, and lower than anticipated
federal government payments for immigration- related costs. The reports in May
and June, 1994, indicated that revenues in the second half of the 1993-1994
Fiscal Year have been very close to the projections made in the Governor's
Budget of January 10, 1994, which is consistent with a slow turnaround in the
economy.
The Department of Finance's July 1994 Bulletin, including the final
June receipts, reported that June revenues were $114 million (2.5 percent) above
projection, with final end-of-year results at $377 million (about 1 percent)
above the May Revision projections. Part of this result was due to end-of-year
adjustments and reconciliations. Personal income tax and sales tax continued to
track projections very well. The largest factor in the higher than anticipated
revenues was from bank and corporation taxes, which were $140 million (18.4
percent) above projection in June. While the higher June receipts are reflected
in the actual 1993-94 Fiscal Year cash flow results, and help the starting cash
balance for the 1994-95 Fiscal Year, the Department of Finance has not adjusted
any of its revenue projections for the 1994-95 or 1995-96 Fiscal Years.
During the 1993-94 Fiscal Year, the State implemented the deficit
retirement plan, which was part of the 1993-94 Budget Act, by issuing $1.2
billion of revenue anticipation warrants in February 1994 maturing December 21,
1994. This borrowing reduced the cash deficit at the end of the 1993-94 Fiscal
Year. Nevertheless, because of the $1.5 billion variance from the original
1993-94 Budget Act assumptions, the General Fund ended the fiscal year at June
30, 1994 carrying forward an accumulated deficit of approximately $2 billion.
Because of the revenue shortfall and the State's reduced internal
borrowable cash resources, in addition to the $1.2 billion of revenue
anticipation warrants issued as part of the deficit retirement plan, the State
issued an additional $2.0 billion of revenue anticipation warrants, maturing
July 26, 1994, which were needed to fund the State's obligations and expenses
through the end of the 1993-94 Fiscal Year.
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On January 17, 1994, a major earthquake measuring an estimated 6.8 on
the Richter Scale struck Los Angeles. Significant property damage to private and
public facilities occurred in a four-county area including northern Los Angeles
County, Ventura County, and parts of Orange and San Bernardino Counties, which
were declared as State and federal disaster areas by January 18. Current
estimates of total property damage (private and public) are in the range of $20
billion, but these estimates are still subject to change.
Despite such damage, on the whole, the vast majority of structures in
the areas, including large manufacturing and commercial buildings and all modern
high-rise offices, survived the earthquake with minimal or no damage, validating
the cumulative effect of strict building codes and thorough preparation for such
an emergency by the State and local agencies.
Damage to state-owned facilities included transportation corridors and
facilities such as Interstate Highways 5 and 10 and State Highways 14, 118 and
210. Major highways have now been reopened. The campus of California State
University at Northridge (very near the epicenter) suffered an estimated $350
million damage, resulting in temporary closure of the campus. It has reopened
using borrowed facilities elsewhere in the area and many temporary structures.
There was also some damage to the University of California at Los Angeles and to
an office building in Van Nuys (now open after a temporary closure). Overall,
except for the temporary road and bridge closures, and CSU-Northridge, the
earthquake did not and is not expected to significantly affect State government
operations.
The State in conjunction with the federal government is committed to
providing assistance to local governments, individuals and businesses suffering
damage as a result of the earthquake, as well as to provide for the repair and
replacement of State-owned facilities. The federal government will provide
substantial earthquake assistance.
The President immediately allocated some available disaster funds, and
Congress has approved additional funds for a total of at least $9.5 billion of
federal funds for earthquake relief, including assistance to homeowners and
small businesses, and costs for repair of damaged public facilities. The
Governor originally proposed that the State will have to pay about $1.9 billion
for earthquake relief costs, including a 10 percent match to some of the federal
funds, and costs for some programs not covered by the federal aid. The Governor
proposed to cover $1.05 billion of these costs from a general obligation bond
issue which was on the June 1994 ballot, but it was not approved by the voters.
The Governor subsequently announced that the State's
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share for transportation projects would come from existing Department of
Transportation funds (thereby delaying other, non-earthquake related projects),
that the State's share for certain other costs (including local school building
repairs) would come from reallocating existing bond funds, and that a proposed
program for homeowner and small business aid supplemental to federal aid would
have to be abandoned. Some other costs will be borrowed from the federal
government in a manner similar to that used by the State of Florida after
Hurricane Andrew; pursuant to Senate Bill 2383, repayment will have to be
addressed in 1995-96 or beyond. The 1995-96 Governor's Budget includes $60
million as the first repayment of an estimated $121.4 million in loans prior to
June 30, 1995.
The 1994-95 Fiscal Year represents the fourth consecutive year the
Governor and Legislature were faced with a very difficult budget environment to
produce a balanced budget. Many program cuts and budgetary adjustments have
already been made in the last three years. The Governor's Budget proposal, as
updated in May and June, 1994, recognized that the accumulated deficit could not
be repaid in one year, and proposed a two-year solution. The budget proposal
sets forth revenue and expenditure forecasts and revenue and expenditure
proposals which result in operating surpluses for the budget for both 1994-95
and 1995-96, and lead to the elimination of the accumulated budget deficit,
estimated at about $1.8 billion at June 30, 1994, by June 30, 1996.
The 1994-95 Budget Act, signed by the Governor on July 8, 1994,
projects revenues and transfers of $41.9 billion, $2.1 billion higher than
revenues in 1993-94. This reflects the Administration's forecast of an improving
economy. Also included in this figure is a projected receipt of about $360
million from the Federal Government to reimburse the State's cost of
incarcerating undocumented immigrants. The State will not know how much the
Federal Government will actually provide until the Federal FY 1995 Budget is
completed. Completion of the Federal Budget is expected by October 1994. The
Legislature took no action on a proposal in the January 1994-95 Governor's
Budget to undertake an expansion of the transfer of certain programs to
counties, which would also have transferred to counties 0.5% of the State's
current sales tax.
The 1994-95 Budget Act projects Special Fund revenues of $12.1 billion,
a decrease of 2.4% from 1993-94 estimated revenues.
The 1994-95 Budget Act projects General Fund expenditures of $40.9
billion, an increase of $1.6 billion over 1993-94. The 1994-95 Budget Act also
projects Special Fund expenditures of $12.3 billion, a 4.7% decrease from
1993-94
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estimated expenditures. The principal features of the 1994-95 Budget Act were
the following:
1. Receipt of additional federal aid in 1994-95 of about $400 million
for costs of refugee assistance and medical care for undocumented
immigrants, thereby offsetting a similar General Fund cost. The State will
not know how much of these funds it will receive until the Federal FY 1995
Budget is passed.
2. Reductions of approximately $1.1 billion in health and welfare
costs. A 2.3% reduction in Aid to Family with Dependent Children payments
(equal to about $56 million for the entire fiscal year) has been suspended
by court order.
3. A General Fund increase of approximately $38 million in support for
the University of California and $65 million for California State
University. It is anticipated that student fees for both the University of
California and the California State University will increase up to 10%.
4. Proposition 98 funding for K-14 schools is increased by $526 million
from 1993-94 levels, representing an increase for enrollment growth and
inflation. Consistent with previous budget agreements, Proposition 98
funding provides approximately $4,217 per student for K-12 schools, equal to
the level in the past three years.
5. Legislation enacted with the Budget clarifies laws passed in 1992
and 1993 which require counties and other local agencies to transfer funds
to local school districts, thereby reducing State aid. Some counties had
implemented a method of making such transfers which provided less money for
schools if there were redevelopment agency projects. The new legislation
bans this method of transfer. If all counties had implemented this method,
General Fund aid to K-12 schools would have been $300 million higher in each
of the 1994-95 and 1995-96 Fiscal Years.
6. The 1994-95 Budget Act provides funding for anticipated growth in
the State's prison inmate population, including provisions for implementing
recent legislation (the so-called "Three Strikes" law) which requires
mandatory life prison terms for certain third-time felony offenders.
7. Additional miscellaneous cuts ($500 million) and fund transfers
($255 million) totalling in the aggregate approximately $755 million.
The 1994-95 Budget Act contains no tax increases. Under legislation
enacted for the 1993-94 Budget, the renters'
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tax credit was suspended for two years (1993 and 1994). A ballot proposition to
permanently restore the renters' tax credit after this year failed at the June,
1994 election. The Legislature enacted a further one-year suspension of the
renters' tax credit, for 1995, saving about $390 million in the 1995-96 Fiscal
Year.
The 1994-95 Budget assumed that the State will use a cash flow
borrowing program in 1994-95 which combines one-year notes and two-year
warrants, which have now been issued. Issuance of warrants allows the State to
defer repayment of approximately $1.0 billion of its accumulated budget deficit
into the 1995-96 Fiscal Year.
The State's cash flow management plan for the 1994-95 fiscal year
included the issuance of $4.0 billion of revenue anticipation warrants on July
26, 1994, to mature on April 25, 1996, as part of a two-year plan to retire the
accumulated State budget deficit.
Because preparation of cash flow estimates for the 1995-96 Fiscal Year
necessarily entails greater risks of variance from assumptions, and because the
Governor's two-year budget plan assumes receipt of a large amount of federal aid
in the 1995-96 Fiscal Year for immigration-related costs which is uncertain, the
Legislature enacted a backup budget adjustment mechanism to mitigate possible
deviations from projected revenues, expenditures or internal borrowable
resources which might reduce available cash resources during the two-year plan,
so as to assure repayment of the warrants.
Pursuant to Section 12467 of the California Government Code, enacted by
Chapter 135, Statutes of 1994 (the "Budget Adjustment Law"), the State
Controller was required to make a report by November 15, 1994 on whether the
projected cash resources for the General Fund as of June 30, 1995 will decrease
more than $430 million from the amount projected by the State in its official
statement in July, 1994 for the sale of $4,000,000,000 of Revenue Anticipation
Warrants. On November 15, 1994, the State Controller issued the report on the
State's cash position required by the Budget Adjustment Law. The report
indicated that the cash position of the General Fund on June 30, 1995 would be
$581 million better than was estimated in the July, 1994 cash flow projections
and therefore, no budget adjustment procedures will be invoked for the 1994-95
Fiscal Year. As explained earlier, the Law would only be implemented if the
State Controller estimated that borrowable resources on June 30, 1995 would be
at least $430 million lower than projected.
The State Controller's report identified a number of factors which have
led to the improved cash position of the State. Estimated revenues and transfers
for the 1994-95 Fiscal
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Year other than federal reimbursement for immigration costs were up about $650
million. The largest portion of this was in higher bank and corporation tax
receipts, but all major tax sources were above original projections. However,
most of the federal immigration aid revenues projected in connection with the
1994-95 Budget Act and in the July, 1994 cash flows will not be received, as
indicated above, leaving a net increase in revenues of $322 million.
On the expenditure side, the State Controller reported that estimated
reduced caseload growth in health and welfare programs, reduced school
enrollment growth, and an accounting adjustment reducing a transfer from the
General Fund to the Special Fund for Economic Uncertainties resulted in overall
General Fund expenditure reductions (again before adjusting for federal aid) of
$672 million. However, the July, 1994 cash flows projected that General Fund
health and welfare and education expenditures would be offset by the anticipated
receipt of $407 million in federal aid for illegal immigrant costs. The State
Controller now estimates that none of these funds will be received, so the net
reduction in General Fund expenditures is $265 million.
Finally, the State Controller indicated that a review of balances in
special funds available for internal borrowing resulted in an estimated
reduction of such borrowable resources of $6 million. The combination of these
factors results in the estimated improvement of the General Fund's cash position
of $581 million. The State Controller's revised cash flow projections for
1994-95 have allocated this improvement to two line items: an increase from $0
to $427 million in the estimated ending cash balance of the General Fund on June
30, 1995, and an increase in unused borrowable resources of $154 million.
The State Controller's report indicated that there was no anticipated
cash impact in the 1994-95 Fiscal Year for recent initiatives on "three strikes"
criminal penalties and illegal immigration which were approved by voters on
November 8, 1994. At a hearing before a committee of the Legislature on November
15, 1994, both the Legislative Analyst and the Department of Finance concurred
in the reasonableness of the State Controller's report. (The Legislative Analyst
had issued a preliminary analysis on November 1, 1994 which reached a conclusion
very close to that of the State Controller.) The State Controller's report makes
no projections about whether the Law may have to be implemented in 1995-96.
However, both the State Controller and the Legislative Analyst in the November
15 hearing noted that the July, 1994 cash flows for the 1995-96 Fiscal Year
place continued reliance on large amounts of federal assistance for immigration
costs, which did not materialize this year, indicating significant budget
pressures for next year. The
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Department of Finance indicated that the budgetary issues identified in the
hearing would be addressed in the Governor's Budget proposal for the 1995-96
Fiscal Year, which was released in early January, 1995.
The 1995-96 Governor's Budget, discussed below, contains a reforecast
of revenues and expenditures for the 1994-95 Fiscal Year. The Department of
Finance Bulletins for February and March 1995 report that combined General Fund
revenues for February, 1995 were about $356 million below forecast, but combined
revenues for January and February were only about $82 million (or 0.3 percent)
below the 1995-96 Governor's Budget forecast. The largest component of the
decrease is attributable to personal income tax receipts, which were about $131
million (or 1.1 percent) below the two months' forecast. This decrease in
personal income tax receipts appears to be largely attributable to fourth
quarter 1994 activity, probably in the anticipation of tax reform, with some
taxpayers shifting income into 1995 to the extent possible. The withholding
component comprised $77 million of this shortfall, but the Department of Finance
does not yet view this as significant. Additionally, sales and use tax receipts
were very close to forecast for the two-month period, while bank and corporation
tax receipts were about $42 million (or 1.5 percent) below the two months'
forecast. Miscellaneous revenues were about $117 million (or 6.2 percent) above
forecast for the two months, but the Department of Finance is not yet able to
determine whether this gain is real, or is instead attributable to cash flow
factors.
Initial analysis of the federal Fiscal Year 1995 budget by the
Department of Finance indicates that about $98 million was appropriated for
California to offset costs of incarceration of undocumented and refugee
immigrants, less than the $356 million which was assumed in the State's 1994-95
Budget Act. Because of timing considerations in applying for these federal
funds, the Department estimates that about $33 million of these funds will be
received during the State's 1994-95 Fiscal Year, with the balance received in
the following fiscal year. It does not appear that the federal budget contains
any of the additional $400 million in funding for refugee assistance and health
costs which were also assumed in the 1994-95 Budget Act, but the Department
expects the State to continue its efforts to obtain some or all of these federal
funds.
On January 10, 1995, the Governor presented his 1995-96 Fiscal Year
Budget Proposal (the "Proposed Budget"). The Proposed Budget estimates General
Fund revenues and transfers of $42.5 billion (an increase of 0.2 percent over
1994-95). This nominal increase from the 1994-95 Fiscal Year reflects the
Governor's realignment proposal and the first year of his tax cut proposal (see
principal features of the Proposed Budget below for
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further discussions). Without these two proposals, General Fund revenues would
be projected at approximately $43.8 billion, or an increase of 3.3 percent over
1994-95. Expenditures are estimated at $41.7 billion (essentially unchanged from
1994-95). Special Fund revenues are estimated at $13.5 billion (10.7 percent
higher than 1994-95) and Special Fund expenditures are estimated at $13.8
billion (12.2 percent higher than 1994-95). The Proposed Budget projects that
the General Fund will end the fiscal year at June 30, 1996 with a budget surplus
in the Special Fund for Economic Uncertainties of about $92 million, or less
than 1 percent of General Fund expenditures, and will have repaid all of the
accumulated budget deficits.
The following are the principal features of the Proposed Budget:
1. The principal feature of the Proposed Budget is a proposed 15
percent cut in personal income and corporate tax rates, which would be
phased in at 5 percent per year starting in 1996. Existing personal income
tax rates, which are scheduled to drop from 11 percent top rate to 9.3
percent in 1996, would be continued during the time the overall tax cut
takes effect. This proposal would reduce General Fund revenues by $225
million in 1995-96, but the revenue reduction would reach $3.6 billion by
1998-99.
2. The Governor has proposed an expansion of the realignment program
between the State and counties, so that counties will take on greater
responsibility for welfare and social services, while the State will take on
increased funding of trial court costs. The proposal includes transfer of
about $1 billion of State revenues, from sales taxes and trial court funding
moneys, to counties. The net effect of the shifts, however, is estimated to
save the General Fund about $240 million.
3. The Governor proposes further cuts in health and welfare costs
totaling about $1.4 billion. Some of these cuts would require federal
legislative approval.
4. Proposition 98 funding for schools and community colleges will
increase by about $1.2 billion, reflecting strong General Fund revenue
growth. Per-pupil expenditures are projected to increase by $61 to $4,292.
For the first time in several years, a cost-of-living increase (2.2 percent)
is added to the enrollment growth factor. The Governor proposes to set aside
about $514 million of the Proposition 98 funding increase to repay prior
years' loans from the General Fund to schools. As the legality of these
loans is currently being challenged in a lawsuit, the
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Governor proposes to set the amount aside in escrow until the litigation is
resolved.
5. The Proposed Budget includes increases in funding for the University
of California ($63 million General Fund) and the California State University
system ($3 million General Fund). The Governor has proposed a four-year
funding "company" for the higher education units which includes both annual
increases in State funding and increases in student fees.
6. The Proposed Budget assumes receipt of $830 million in new federal
aid for costs of undocumented and refugee immigrants, above commitments
already made by the federal government. This amount is much less than an
estimated $2.8 billion which had been included in the Governor's pro-forma
two-year plan from last summer.
The Proposed Budget contains a cash flow projection (based on all the
assumptions described above) which shows about $1 billion of unused borrowable
resources at June 30, 1996, providing this amount of "cushion" before the budget
"trigger" would have to be invoked.
However, a report issued by the Legislative Analyst in February, 1995
notes that the Proposed Budget is subject to a number of major risks, including
receipt of the expected federal immigration aid and other federal actions to
allow health and welfare costs, and the outcome of several lawsuits concerning
previous budget actions which the State has lost at the trial court level, and
which are under appeal. This Analyst's Report also estimates that, despite more
favorable revenues, the two-year budget estimates made in July, 1994 are about
$2 billion out of balance, principally because federal immigration aid appears
likely to be much lower than previously estimated. This shortfall is much
smaller than the State has faced in recent years, and has been addressed in the
Governor's Budget.
The Director of Finance is required to include updated cash-flow
statements for the 1994-95 and 1995-96 Fiscal Years in the May revision to the
1995-96 Fiscal Year budget proposal. By June 1, 1995, the State Controller must
concur with these updated statements or provide a revised estimate of the cash
condition of the General Fund for the 1994-95 and the 1995-96 Fiscal Years. For
the 1995-96 Fiscal Year, Chapter 135 prohibits any external borrowing as of June
30, 1996, thereby requiring the State to rely solely on internal borrowable
resources, expenditure reductions or revenue increases to eliminate any
projected cash flow shortfall.
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Commencing on October 15, 1995, the State Controller will, in
conjunction with the Legislative Analyst's Office, review the estimated cash
condition of the General Fund for the 1995-96 Fiscal Year. The "1996 cash
shortfall" shall be the amount necessary to bring the balance of unused
borrowable resources on June 30, 1996 to zero. On or before December 1, 1995,
legislation must be enacted providing for sufficient General Fund expenditure
reductions, revenue increases, or both, to offset any such 1996 cash shortfall
identified by the State Controller. If such legislation is not enacted, within
five days thereafter the Director of Finance must reduce all General Fund
appropriations for the 1995-96 Fiscal Year, except the Required Appropriations,
by the percentage equal to the ratio of said 1996 cash shortfall to total
remaining General Fund appropriations for the 1995-96 Fiscal Year, excluding the
Required Appropriations.
On December 6, 1994, Orange County, California and its Investment Pool
(the "Pool") filed for bankruptcy under Chapter 9 of the United States
Bankruptcy Code. Approximately 187 California public entities, substantially all
of which are public agencies within the County, invested funds in the Pool. Many
of the agencies have various bonds, notes or other forms of indebtedness
outstanding, in some instances the proceeds of which were invested in the Pool.
Various investment advisors were employed by the County to restructure the Pool.
Such restructuring led to the sale of substantially all of the Pool's portfolio,
resulting in losses estimated to be approximately $1.7 billion or approximately
22% of amounts deposited by the Pool investors, including the County. It is
anticipated that such losses may result in delays or failures of the County as
well as investors in the Pool to make scheduled debt service payments. Further,
the County expects substantial budget deficits to occur in Fiscal Year 1995 with
possibly similar effects upon operations of investors in the Pool.
Investor access to monies in the Pool subsequent to the filing was
pursuant to Court order only and severely limited. On May 2, 1995, the
Bankruptcy Court approved a comprehensive settlement agreement (the "CSA")
between the County and Pool investors which, among other things, (i) established
a formula for distribution of all available cash and securities from the Pool to
the Pool investors, including the County, (ii) established formulas for
distribution among certain settling Pool investors of several tranches of new
County obligations to be payable from, and in some instances secured by, certain
designated sources of potential recoveries on Pool related claims, and (iii)
designated certain outstanding short term note obligations of the County to be
senior to or on a parity with certain of the new County obligations. By order
dated May 22, 1995, following distribution of all available cash and securities
from the Pool to the Pool investors, including the County, the
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Bankruptcy Court dismissed the bankruptcy filing of the Pool based upon the
Court's finding that the Pool was not eligible for relief under Chapter 9 of the
Bankruptcy Code because it is not a municipality and it has not been
specifically authorized to file under Chapter 9 as required by the Bankruptcy
Code.
Following its bankruptcy filing, the County has, with Bankruptcy Court
approval, made payments of scheduled principal and interest on its outstanding
obligations where no alternative source of payment (such as reserve funds on
deposit with indenture trustees, letters of credit, municipal bond insurance
policies or other alternative payment sources) were available. The County has
not replenished such reserve funds or reimbursed the issuers of such letters of
credit or municipal bond insurance policies. In addition, the County ceased
making set aside deposits for repayment of certain of its short term
indebtedness. The Bankruptcy Court subsequently ruled that the rights of the
holders of such short term indebtedness to require the set aside deposits from
County revenues received following the filing were cut off by operation of the
Bankruptcy Code. In addition, the County has failed to satisfy its obligation to
accept tenders of its $110,200,000 aggregate principal amount of Taxable Pension
Obligation Bonds, Series B used to finance County pension obligations. Interest
at a rate set pursuant to the bond documents has been timely paid on such
Pension Bonds. The failure to satisfy the contractual obligations discussed
above may constitute defaults under the document governing such securities.
To June 30, 1995 there has been no default in payment of scheduled
interest and principal (excluding the tender payment described above) to holders
of County securities, although certain note issues are scheduled to mature at
various times thereafter and the Fund is unable to predict whether or to what
extent such notes will be timely paid by the County. On June 27, 1995, the
Bankruptcy Court approved a Stipulation and an Extension Agreement that, if they
both become effective, would offer to holders of certain short term note
obligations of the County ("Note Debt") who elect to be treated thereunder: (i)
extension of maturity dates to June 30, 1996; (ii) payment of monthly interest
at a rate below existing contract rates; (iii) accrual of monthly interest equal
to the difference between the amount paid and the contract rate, plus a
settlement adjustment of 0.95%; (iv) waiver of post-bankruptcy interest
recapture or disallowance; (v) waiver of defenses to repayment of the Note Debt
claims based on California limitations on municipal indebtedness; and (vi)
allowance of the Note Debt claims, subject to certain reserved rights. The
treatment described in the preceding sentence will be available to electing
holders of Note Debt provided that holders of at least 50% of the then issued
and outstanding aggregate principal amount of all Note Debt
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obligations elect such treatment. If holders of at least 90% of the outstanding
aggregate principal amount of all Note Debt obligations elect such treatment,
all of the Note Debt obligations will be so treated. The Fund is unable to
predict whether and to what extent holders of Note Debt will elect to be treated
under the Extension Agreement.
On June 27, 1995, the voters of Orange County rejected, by a
substantial majority of those voting, an increase of 0.50% in the sales tax
imposed throughout the County. Prior to the election, spokespersons for the
County had indicated that passage of the sales tax increase was an important
factor in the County's ability to restructure its finances in a manner that
would permit eventual payment in full of all County securities. The Fund is
unable to predict the effect of the defeat of the sales tax increase on the
ability of the County to restructure its obligations and otherwise manage its
affairs.
Both Standard & Poor's and Moody's Investors Service have suspended or
downgraded ratings on various debt securities of the County and certain of the
investors in the Pool and, following the defeat of the proposition submitted to
the voters on June 27, announced their intention to downgrade the County's debt
to default status, regardless of whether the Stipulation and Extension Agreement
receives approval by holders of the Note Debt. Such suspensions or downgradings
could affect both price and liquidity of such securities. The Fund is unable to
predict (i) the occurrence of covenant and/or payment defaults with respect to
obligations of the County and/or investors in the Pool or (ii) the financial
impact of any such defaults or credit rating suspensions or downgradings upon
the value of such securities.
The California Tax-Exempt Money Market Fund currently holds an Orange
County Note, with a par value of $4,500,000 that matures on August 11, 1995. The
Orange County Note is supported by a Letter of Credit issued by PNC, Bank
("PNC"). BankAmerica Corporation has agreed to reimburse PNC for any payments
PNC may make under the Letter of Credit. The Letter of Credit expires after
August 11, 1995.
Constitutional, Legislative and Other Factors. Certain California
constitutional amendments, legislative measures, executive orders,
administrative regulations and voter initiatives could result in the adverse
effects described below. 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 and prospectuses relating to
securities offerings of the State of California and various local agencies in
California, available as of the date of the Funds' Prospectuses and this
Statement of Additional
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Information. While the Tax-Exempt Money Fund and California Tax-Exempt Money
Market Fund have not independently verified such information, they have no
reason to believe that such information is not correct in all material respects.
Certain California Municipal Securities in the Tax-Exempt Money Fund
and California Tax-Exempt Money Market Fund may be obligations of issuers which
rely in whole or in part on California State revenues for payment of these
obligations. Property tax revenues and a portion of the State's general fund
surplus are distributed to counties, cities and their various taxing entities
and the State assumes certain obligations theretofore paid out of local funds.
Whether and to what extent a portion of the State's general fund will be
distributed in the future to counties, cities and their various entities, is
unclear.
In 1988, California enacted legislation providing for a water's-edge
combined reporting method if an election fee was paid and other conditions met.
On October 6, 1993, California Governor Pete Wilson signed Senate Bill 671
(Alquist) which modifies the unitary tax law by deleting the requirements that a
taxpayer electing to determine its income on a water's-edge basis pay a fee and
file a domestic disclosure spreadsheet and instead requiring an annual
information return. Significantly, the Franchise Tax Board can no longer
disregard a taxpayer's election. The Franchise Tax Board is reported to have
estimated state revenue losses from the Legislation as growing from $27 million
in 1993-94 to $616 million in 1999-2000, but others, including Assembly Speaker
Willie Brown, disagree with that estimate and assert that more revenue will be
generated for California, rather than less, because of an anticipated increase
in economic activity and additional revenue generated by the incentives in the
Legislation.
Certain California Municipal Securities in the Tax-Exempt Money Fund
and California Tax-Exempt Money Market Fund may be obligations of issuers who
rely in whole or in part on ad valorem real property taxes as a source of
revenue. On June 6, 1978, California voters approved an amendment to the
California Constitution known as Proposition 13, which added Article XIIIA to
the California Constitution. The effect of Article XIIIA is to limit ad valorem
taxes on real property and to restrict the ability of taxing entities to
increase real property tax revenues. On November 7, 1978, California voters
approved Proposition 8 and on June 3, 1986, the California voters approved
Proposition 46, both of which amended Article XIIIA.
Section 1 of Article XIIIA limits the maximum ad valorem tax on real
property to 1% of full cash value (as defined in Section 2), to be collected by
the counties and apportioned
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according to law; provided that the 1% limitation does not apply to ad valorem
taxes or special assessments to pay the interest and redemption charges on (i)
any indebtedness approved by the voters prior to July 1, 1978, or (ii) any
bonded indebtedness for the acquisition or improvement of real property approved
on or after July 1, 1978, by two-thirds of the votes cast by the voters voting
on the proposition. Section 2 of Article XIIIA defines "full cash value" to mean
"the County Assessor's valuation of real property as shown on the 1975/76 tax
bill under 'full cash value' or, thereafter, the appraised value of real
property when purchased, newly constructed, or a change in ownership has
occurred after the 1975 assessment." The full cash value may be adjusted
annually to reflect inflation at a rate not to exceed 2% per year, or reduction
in the consumer price index or comparable local data, or reduced in the event of
declining property value caused by damage, destruction or other factors. The
California State Board of Equalization has adopted regulations, binding on
county assessors, interpreting the meaning of "change in ownership" and "new
construction" for purposes of determining full cash value of property under
Article XIIIA.
Legislation enacted by the California Legislature to implement Article
XIIIA (Statutes of 1978, Chapter 292, as amended) provides that notwithstanding
any other law, local agencies may not levy any ad valorem property tax except to
pay debt service on indebtedness approved by the voters prior to July 1, 1978,
and that each county will levy the maximum tax permitted by Article XIIIA of
$4.00 per $100 assessed valuation (based on the former practice of using 25%,
instead of 100%, of full cash value as the assessed value for tax purposes). The
legislation further provided that, for the 1978/79 fiscal year only, the tax
levied by each county was to be apportioned among all taxing agencies within the
county in proportion to their average share of taxes levied in certain previous
years. The apportionment of property taxes for fiscal years after 1978/79 has
been revised pursuant to Statutes of 1979, Chapter 282, which provides relief
funds from State moneys beginning in fiscal year 1979/80 and is designed to
provide a permanent system for sharing State taxes and budget funds with local
agencies. Under Chapter 282, cities and counties receive more of the remaining
property tax revenues collected under Proposition 13 instead of direct State
aid. School districts receive a correspondingly reduced amount of property
taxes, but receive compensation directly from the State and are given additional
relief. Chapter 282 does not affect the derivation of the base levy ($4.00 per
$100 assessed valuation) and the bonded debt tax rate.
On November 6, 1979, an initiative known as "Proposition 4" or the
"Gann Initiative" was approved by the California voters, which added Article
XIIIB to the California Constitution. Under Article XIIIB, State and local
governmental
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entities have an annual "appropriations limit" and are not allowed to spend
certain moneys called "appropriations subject to limitation" in an amount higher
than the "appropriations limit." Article XIIIB does not affect the appropriation
of moneys which are excluded from the definition of "appropriations subject to
limitation," including debt service on indebtedness existing or authorized as of
January 1, 1979, or bonded indebtedness subsequently approved by the voters. In
general terms, the "appropriations limit" is required to be based on certain
1978/79 expenditures, and is to be adjusted annually to reflect changes in
consumer prices, population and certain services provided by these entities.
Article XIIIB also provides that if these entities' revenues in any year exceed
the amounts permitted to be spent, the excess is to be returned by revising tax
rates or fee schedules over the subsequent two years.
At the November 8, 1988 general election, California voters approved an
initiative known as Proposition 98. This initiative amends Article XIIIB to
require that (i) the California Legislature establish a prudent state reserve
fund in an amount as it shall deem reasonable and necessary and (ii) revenues in
excess of amounts permitted to be spent and which would otherwise be returned
pursuant to Article XIIIB by revision of tax rates or fee schedules, be
transferred and allocated (up to a maximum of 4%) to the State School Fund and
be expended solely for purposes of instructional improvement and accountability.
No such transfer or allocation of funds will be required if certain designated
state officials determine that annual student expenditures and class size meet
certain criteria as set forth in Proposition 98. Any funds allocated to the
State School Fund shall cause the appropriation limits established in Article
XIIIB to be annually increased for any such allocation made in the prior year.
Proposition 98 also amends Article XVI to require that the State of
California provide a minimum level of funding for public schools and community
colleges. Commencing with the 1988-89 fiscal year, state monies to support
school districts and community college districts shall equal or exceed the
lesser of (i) an amount equalling the percentage of state general revenue bonds
for school and community college districts in fiscal year 1986-87, or (ii) an
amount equal to the prior year's state general fund proceeds of taxes
appropriated under Article XIIIB plus allocated proceeds of local taxes, after
adjustment under Article XIIIB. The initiative permits the enactment of
legislation, by a two-thirds vote, to suspend the minimum funding requirement
for one year.
On June 30, 1989, the California Legislature enacted Senate
Constitutional Amendment 1, a proposed modification of the California
Constitution to alter the spending limit and the
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education funding provisions of Proposition 98. Senate Constitutional Amendment
1, on the June 5, 1990 ballot as Proposition 111, was approved by the voters and
took effect on July 1, 1990. Among a number of important provisions, Proposition
111 recalculates spending limits for the State and for local governments, allows
greater annual increases in the limits, allows the averaging of two years' tax
revenues before requiring action regarding excess tax revenues, reduces the
amount of the funding guarantee in recession years for school districts and
community college districts (but with a floor of 40.9 percent of State general
fund tax revenues), removes the provision of Proposition 98 which included
excess moneys transferred to school districts and community college districts in
the base calculation for the next year, limits the amount of State tax revenue
over the limit which would be transferred to school districts and community
college districts, and exempts increased gasoline taxes and truck weight fees
from the State appropriations limit. Additionally, Proposition 111 exempts from
the State appropriations limit funding for capital outlays.
Article XIIIB, like Article XIIIA, may require further interpretation
by both the Legislature and the courts to determine its applicability to
specific situations involving the State and local taxing authorities. Depending
upon the interpretation, Article XIIIB may limit significantly a governmental
entity's ability to budget sufficient funds to meet debt service on bonds and
other obligations.
On November 4, 1986, California voters approved an initiative statute
known as Proposition 62. This initiative (i) requires that any tax for general
governmental purposes imposed by local governments be approved by resolution or
ordinance adopted by a two-thirds vote of the governmental entity's legislative
body and by a majority vote of the electorate of the governmental entity, (ii)
requires that any special tax (defined as taxes levied for other than general
governmental purposes) imposed by a local governmental entity be approved by a
two-thirds vote of the voters within that jurisdiction, (iii) restricts the use
of revenues from a special tax to the purposes or for the service for which the
special tax was imposed, (iv) prohibits the imposition of ad valorem taxes on
real property by local governmental entities except as permitted by Article
XIIIA, (v) prohibits the imposition of transaction taxes and sales taxes on the
sale of real property by local governments, (vi) requires that any tax imposed
by a local government on or after August 1, 1985 be ratified by a majority vote
of the electorate within two years of the adoption of the initiative or be
terminated by November 15, 1988, (vii) requires that, in the event a local
government fails to comply with the provisions of this measure, a reduction in
the amount of property tax revenue allocated to such local government occurs in
an amount equal to the revenues
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received by such entity attributable to the tax levied in violation of the
initiative, and (viii) permits these provisions to be amended exclusively by the
voters of the State of California.
In September 1988, the California Court of Appeal in City of
Westminster v. County of Orange, 204 Cal. App. 3d 623, 215 Cal. Rptr. 511 (Cal.
Ct. App. 1988), held that Proposition 62 is unconstitutional to the extent that
it requires a general tax by a general law city, enacted on or after August 1,
1985 and prior to the effective date of Proposition 62, to be subject to
approval by a majority of voters. The Court held that the California
Constitution prohibits the imposition of a requirement that local tax measures
be submitted to the electorate by either referendum or initiative. It is not
possible to predict the impact of this decision on charter cities, on special
taxes or on new taxes imposed after the effective date of Proposition 62.
On November 8, 1988, California voters approved Proposition 87.
Proposition 87 amended Article XVI, Section 16, of the California Constitution
by authorizing the California Legislature to prohibit redevelopment agencies
from receiving any of the property tax revenue raised by increased property tax
rates levied to repay bonded indebtedness of local governments which is approved
by voters on or after January 1, 1989. It is not possible to predict whether the
California Legislature will enact such a prohibition nor is it possible to
predict the impact of Proposition 87 on redevelopment agencies and their ability
to make payments on outstanding debt obligations.
Certain California Municipal Securities held by the Tax-Exempt Money
Fund and California Tax-Exempt Money Market Fund may be obligations which are
payable solely from the revenues of health care institutions. Certain provisions
under California law may adversely affect these revenues and, consequently,
payment on those Municipal Securities.
The Federally sponsored Medicaid program for health care services to
eligible welfare beneficiaries in California is known as the Medi-Cal program.
Historically, the Medi-Cal program has provided for a cost-based system of
reimbursement for inpatient care furnished to Medi-Cal beneficiaries by any
hospital wanting to participate in the Medi-Cal program, provided such hospital
met applicable requirements for participation. California law now provides that
the State of California shall selectively contract with hospitals to provide
acute inpatient services to Medi-Cal patients. Medi-Cal contracts currently
apply only to acute inpatient services. Generally, such selective contracting is
made on a flat per diem payment basis for all services to Medi-Cal
beneficiaries, and generally such payment has not increased in relation to
inflation, costs or
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other factors. Other reductions or limitations may be imposed on payment for
services rendered to Medi-Cal beneficiaries in the future.
Under this approach, in most geographical areas of California, only
those hospitals which enter into a Medi-Cal contract with the State of
California will be paid for non-emergency acute inpatient services rendered to
Medi-Cal beneficiaries. The State may also terminate these contracts without
notice under certain circumstances and is obligated to make contractual payments
only to the extent the California legislature appropriates adequate funding
therefor.
California enacted legislation in 1982 that authorizes private health
plans and insurers to contract directly with hospitals for services to
beneficiaries on negotiated terms. Some insurers have introduced plans known as
"preferred provider organizations" ("PPOs"), which offer financial incentives
for subscribers who use only the hospitals which contract with the plan. Under
an exclusive provider plan, which includes most health maintenance organizations
("HMOs"), private payors limit coverage to those services provided by selected
hospitals. Discounts offered to HMOs and PPOs may result in payment to the
contracting hospital of less than actual cost and the volume of patients
directed to a hospital under an HMO or PPO contract may vary significantly from
projections. Often, HMO or PPO contracts are enforceable for a stated term,
regardless of provider losses or of bankruptcy of the respective HMO or PPO. It
is expected that failure to execute and maintain such PPO and HMO contracts
would reduce a hospital's patient base or gross revenues. Conversely,
participation may maintain or increase the patient base, but may result in
reduced payment and lower net income to the contracting hospitals.
These California Municipal Securities may also be insured by the State
of California pursuant to an insurance program implemented by the Office of
Statewide Health Planning and Development for health facility construction
loans. If a default occurs on insured California Municipal Securities, the State
Treasurer will issue debentures payable out of a reserve fund established under
the insurance program or will pay principal and interest on an unaccelerated
basis from unappropriated State funds. At the request of the Office of Statewide
Health Planning and Development, Arthur D. Little, Inc. prepared a study in
December 1983, to evaluate the adequacy of the reserve fund established under
the insurance program and based on certain formulations and assumptions found
the reserve fund substantially underfunded. In September of 1986, Arthur D.
Little, Inc. prepared an update of the study and concluded that an additional
10% reserve be established for "multi-level" facilities. For the balance of the
reserve fund, the update
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recommended maintaining the current reserve calculation method. In March of
1990, Arthur D. Little, Inc. prepared a further review of the study and
recommended that separate reserves continue to be established for "multi-level"
facilities at a reserve level consistent with those that would be required by an
insurance company.
Certain California Municipal Securities in the Tax-Exempt Money Fund
and California Tax-Exempt Money Market Fund may be obligations which are secured
in whole or in part by a mortgage or deed of trust on real property. California
has five principal statutory provisions which limit the remedies of a creditor
secured by a mortgage or deed of trust. Two limit the creditor's right to obtain
a deficiency judgment, one limitation being based on the method of foreclosure
and the other on the type of debt secured. Under the former, a deficiency
judgment is barred when the foreclosure is accomplished by means of a
nonjudicial trustee's sale. Under the latter, a deficiency judgment is barred
when the foreclosed mortgage or deed of trust secures certain purchase money
obligations. Another California statute, commonly known as the "one form of
action" rule, requires creditors secured by real property to exhaust their real
property security by foreclosure before bringing a personal action against the
debtor. The fourth statutory provision limits any deficiency judgment obtained
by a creditor secured by real property following a judicial sale of such
property to the excess of the outstanding debt over the fair value of the
property at the time of the sale, thus preventing the creditor from obtaining a
large deficiency judgment against the debtor as the result of low bids at a
judicial sale. The fifth statutory provision gives the debtor the right to
redeem the real property from any judicial foreclosure sale as to which a
deficiency judgement may be ordered against the debtor.
Upon the default of a mortgage or deed of trust with respect to
California real property, the creditor's nonjudicial foreclosure rights under
the power of sale contained in the mortgage or deed of trust are subject to the
constraints imposed by California law upon transfers of title to real property
by private power of sale. During the three-month period beginning with the
filing of a formal notice of default, the debtor is entitled to reinstate the
mortgage by making any overdue payments. Under standard loan servicing
procedures, the filing of the formal notice of default does not occur unless at
least three full monthly payments have become due and remain unpaid. The power
of sale is exercised by posting and publishing a notice of sale for at least 20
days after expiration of the three-month reinstatement period. Therefore, the
effective minimum period for foreclosing on a mortgage could be in excess of
seven months after the initial default. Such time delays in collections could
disrupt the flow of revenues available to an issuer for the
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payment of debt service on the outstanding obligations if such defaults occur
with respect to a substantial number of mortgages or deeds of trust securing an
issuer's obligations.
In addition, a court could find that there is sufficient involvement of
the issuer in the nonjudicial sale of property securing a mortgage for such
private sale to constitute "state action," and could hold that the
private-right-of-sale proceedings violate the due process requirements of the
Federal or State Constitutions, consequently preventing an issuer from using the
nonjudicial foreclosure remedy described above.
Certain California Municipal Securities in the Tax-Exempt Money Fund
and California Tax-Exempt Money Market Fund may be obligations which finance the
acquisition of single family home mortgages for low and moderate income
mortgagors. These obligations may be payable solely from revenues derived from
the home mortgages, and are subject to California's statutory limitations
described above applicable to obligations secured by real property. Under
California antideficiency legislation, there is no personal recourse against a
mortgagor of a single family residence purchased with the loan secured by the
mortgage, regardless of whether the creditor chooses judicial or nonjudicial
foreclosure.
Under California law, mortgage loans secured by single-family
owner-occupied dwellings may be prepaid at any time. Prepayment charges on such
mortgage loans may be imposed only with respect to voluntary prepayments made
during the first five years during the term of the mortgage loan, and cannot in
any event exceed six months' advance interest on the amount prepaid in excess of
20% of the original principal amount of the mortgage loan. This limitation could
affect the flow of revenues available to an issuer for debt service on the
outstanding debt obligations which financed such home mortgages.
Other Investment Information. The investment adviser believes that it
is likely that sufficient Municipal Securities and California Municipal
Securities will be available to satisfy the investment objectives, policies and
limitations of the California Tax-Exempt Money Market Fund. In meeting its
investment policies the Fund may invest in Municipal Securities which are
private activity bonds (including industrial development bonds under prior law)
the interest on which is subject to the federal alternative minimum tax.
Investments in such securities, however, will not exceed under normal market
conditions 20% of the Fund's total assets when added together with any taxable
investments held by the Fund. Moreover, although the Fund does not presently
intend to do so on a regular basis, it may invest more than 25% of its assets in
Municipal Securities the interest on which is paid solely from revenues of
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<PAGE> 722
similar projects if such investment is deemed necessary or appropriate by the
Fund's investment adviser in light of the Fund's investment objective and
policies. To the extent that the Fund's assets are concentrated in Municipal
Securities 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.
INVESTMENT LIMITATIONS
The Prospectus for each Fund sets forth certain fundamental policies
that may not be changed with respect to such Fund without the affirmative vote
of the holders of the majority of the Fund's outstanding shares (as defined
below under "General Information - Miscellaneous"). Similarly, the following
enumerated additional fundamental policies may not be changed with respect to
any Fund without such a vote of shareholders.
A. The Prime Fund, Treasury Fund and California Tax-Exempt Money Market
Fund may not:
1. Purchase or sell real estate (however, a Fund may, to the extent
appropriate to its investment objective, purchase securities issued by companies
investing in real estate or interests therein and the California Tax-Exempt
Money Market Fund may purchase Municipal Securities secured by real estate or
interests therein).
2. Underwrite the securities of other issuers.
3. Purchase securities of companies for the purpose of exercising
control.
4. Purchase securities on margin, make short sales of securities or
maintain a short position.
5. Acquire any other investment company or investment company security
except in connection with a merger, consolidation, reorganization or acquisition
of assets.
6. Make loans except that (i) a Fund may purchase or hold debt
instruments and enter into repurchase agreements pursuant to its investment
objective and policies, and (ii) the Prime Fund may lend portfolio securities.
B. The Prime Fund may not:
1. Purchase securities of any one issuer (other than obligations issued
or guaranteed by the U.S. Government, its agencies or instrumentalities) if
immediately thereafter more than 15% of its total assets would be invested in
certificates of
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<PAGE> 723
deposit or bankers' acceptances of any one bank, or more than 5% of its total
assets would be invested in other securities of any one bank or the securities
of any other issuer (except that up to 25% of the Fund's total assets may be
invested without regard to this limitation).
C. In addition to the fundamental policies enumerated above, the
California Tax-Exempt Money Market Fund may not:
1. Invest in industrial revenue bonds where the payment of principal
and interest are the responsibility of a company (including its predecessors)
with less than three years of continuous operation.
2. Purchase or sell commodity contracts, or invest in oil, gas or
mineral exploration or development programs (however, the Fund may, to the
extent appropriate to its investment objective, purchase publicly traded
securities of companies engaging in whole or in part in such activities).
3. Purchase securities while its borrowings (including reverse
repurchase agreements) are outstanding.
4. Write or sell puts, calls, straddles, spreads, or combinations
thereof except that the Fund may acquire stand-by commitments with respect to
its Municipal Securities.
5. Purchase any securities which 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 this limitation shall not apply to Municipal Securities
or governmental guarantees of Municipal Securities; and provided, further, that
for the purpose of this limitation only, industrial development bonds that are
backed only by the assets and revenues of a non-governmental user shall not be
deemed to be Municipal Securities.
D. Neither the Government Fund nor the Treasury Only Fund may:
1. Purchase any security or evidence of interest therein on margin,
except that a Fund may obtain such short term credit as may be necessary for the
clearance of purchases and sales of securities.
2. Underwrite securities issued by other persons, except that all of
the assets of a Fund may be invested in a corresponding investment company with
the same investment objective and policies and except insofar as a Fund may
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<PAGE> 724
technically be deemed an underwriter under the Securities Act of 1933 in selling
a security.
3. Make loans to other persons except (a) through the lending of
securities held by a Fund, (b) through the use of fixed time deposits or
repurchase agreements or the purchase of short term obligations, or (c) by
purchasing all or a portion of an issue of debt securities of types commonly
distributed privately to financial institutions; for purposes of this investment
restriction the purchase of short-term commercial paper or a portion of an issue
of debt securities which are part of an issue to the public shall not be
considered the making of a loan.
4. Purchase or sell real estate (including limited partnership
interests but excluding securities secured by real estate or interests therein),
interests in oil, gas or mineral leases, commodities or commodity contracts in
the ordinary course of business (each Fund reserves the freedom of action to
hold and to sell real estate acquired as a result of the ownership of securities
by such Fund).
5. Issue any senior security (as that term is defined in the Investment
Company Act of 1940) if such issuance is specifically prohibited by the
Investment Company Act of 1940 or the rules and regulations promulgated
thereunder, except as appropriate to evidence a debt incurred without violating
Investment Restriction No. 2 as stated in the Funds' Prospectus regarding
borrowing.
6. Concentrate its investments in any particular industry (excluding
obligations of the U.S. Government, obligations of domestic banks, and
repurchase agreements), but if it is deemed appropriate for the achievement of
its investment objective, up to 25% of the assets of the Fund (taken at market
value at the time of each investment) may be invested in any one industry;
provided, that nothing in this investment restriction shall affect the Fund's
ability to invest a portion or all of its assets in a corresponding investment
company with the same investment objective and policies.
E. The Tax-Exempt Money Fund may not:
1. Purchase the securities of any issuer if as a result more than 5% of
the value of the Fund's total assets would be invested in the securities of such
issuer, except that up to 25% of the value of the Fund's total assets may be
invested without regard to this 5% limitation. Securities issued or guaranteed
by the United States Government or its agencies or instrumentalities are not
subject to this investment limitation. For purposes of this limitation and the
Fund's policy on
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<PAGE> 725
concentration of investments set forth in the Prospectus, a governmental agency,
authority, instrumentality or other political subdivision is deemed to be an
issuer, separate from the government creating such subdivision, if the security
issued by such subdivision is backed only by the assets and revenues of the
subdivision, and a guarantee of a security is not deemed to be a security issued
by the guarantor, provided that no more than 10% of the value of the Fund's
total assets is invested in securities issued or guaranteed by such guarantor.
2. Underwrite any issue of securities, except to the extent that the
purchase of securities directly from the issuer thereof in accordance with the
Fund's investment objective, policies and limitations may be deemed to be
underwriting.
3. Purchase or sell real estate, except that the Fund may, to the
extent appropriate to its investment objective, invest in securities issued by
companies which invest in real estate or interests therein.
4. Purchase securities on margin, make short sales of securities or
maintain a short position.
5. Write or sell puts, calls, straddles, spreads or combinations
thereof.
6. Purchase or sell commodities or commodity contracts, or invest in
oil, gas or mineral exploration or development programs, except that the Fund
may, to the extent appropriate to its investment objective, invest in securities
issued by companies which purchase or sell commodities or commodity contracts or
which invest in such programs.
7. Purchase securities of other investment companies, except in
connection with a merger, consolidation, acquisition or reorganization.
8. Make loans, except that the Fund may purchase or hold debt
obligations in accordance with its investment objective, policies and
limitations, and may enter into repurchase agreements with respect to
securities.
9. Purchase any securities which would cause 25% or more of the value
of its total assets at the time of such purchase to be invested in the
securities of one or more issuers conducting their principal business activities
in the same industry; provided, however, that (a) there is no limitation with
respect to investments in Municipal Securities or obligations issued or
guaranteed by the Federal Government and its agencies and instrumentalities; (b)
although there is no limitation with respect to investments in certificates of
deposit and bankers'
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<PAGE> 726
acceptances issued by domestic branches of United States banks, no more than 10%
of the total value of the Fund's assets at the time of purchase may be invested
in certificates of deposit and bankers' acceptances issued by domestic branches
of foreign banks and no more than 25% of the total value of the Fund's assets at
the time of purchase may be invested in certificates of deposit and bankers'
acceptances issued by domestic branches of foreign banks and foreign branches of
domestic banks; (c) each utility service (such as gas, gas transmission,
electric and telephone service) will be considered a single industry for
purposes of this policy; and (d) 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 their parents.
* * *
Interpretations: If a percentage restriction is satisfied at the time
of investment, a later increase or decrease in such percentage resulting from a
change in asset value will not constitute a violation of such restriction.
For purposes of Investment Limitation No. 1 relating to the Prime Fund
in the Prospectus for such Fund's Pacific Horizon Shares, Investment Limitation
No. 6 relating to the Government Fund and Treasury Only Fund in this Statement
of Additional Information, Investment Limitation No. 9 relating to the Tax-
Exempt Money Fund in this Statement of Additional Information and Investment
Limitation No. 5 relating to the California Tax-Exempt Money Market Fund in this
Statement of Additional Information, these Funds treat, in accordance with the
current views of the Securities and Exchange Commission and as a matter of non-
fundamental policy that may be changed without a vote of shareholders, all
supranational organizations as a single industry and each foreign government
(and all of its agencies) as a separate industry.
For purposes of Investment Limitation No. 1 of Paragraph B above, 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
non-governmental user, such non-governmental user. In certain circumstances, the
guarantor of a guaranteed security may also be considered to be an issuer in
connection with such guarantee. In addition, in accordance with current
regulations of the Securities and Exchange Commission, the Prime Fund presently
intends to limit its investments in the securities of any single issuer (other
than securities issued by the U.S. Government, its agencies or
instrumentalities) to not more than 5% of the Fund's total assets at the time of
purchase, provided that the Fund may invest up to
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<PAGE> 727
25% of its total assets in the securities of any one issuer for a period that
does not exceed three business days. For purposes of Investment Limitation No. 6
of Paragraph A, Investment Limitation No. 3 of Paragraph D and Investment
Limitation No. 8 of Paragraph E above, the Funds may hold debt instruments
whether such instruments are part of a public offering or privately negotiated.
In order to permit the sale of shares in certain states, a Fund may
make commitments more restrictive than the investment policies and limitations
described above. To permit the sale of shares of the Funds in Texas, the Company
has agreed to the following addition restrictions:
1. Such Funds will not invest in oil, gas or mineral leases.
2. Such Funds will not invest more than 5% of their net assets in
warrants (valued at the lower of cost or market), of which not more than 2% may
be warrants which are not listed on the New York or American Stock Exchanges.
Should a Fund determine that these commitments or any other commitments
are no longer in the best interests of the Fund, it will revoke such commitments
by terminating sales of its shares in the state involved.
The policies and practices stated in this sub-section are not
fundamental policies of the Funds.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
Information on how to purchase and redeem Company shares, and how such
shares are priced, is included in the Prospectuses. Additional information is
contained below.
NET ASSET VALUE
In General. Each Fund's net asset value per share is calculated by
dividing the total value of the assets belonging to the Fund, less the value of
any liabilities applicable to the Fund, by the total number of outstanding
shares of that Fund. Each Fund's net asset value is calculated separately from
each other Fund's net asset value. "Assets belonging to" a Fund consist of the
consideration received upon the issuance of shares representing interests in the
Fund together with all income, earnings, profits and proceeds derived from the
investment thereof, any proceeds from the sale, exchange or liquidation of such
investments, any funds or payments derived from any reinvestment of such
proceeds, and a portion of any general assets
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<PAGE> 728
of the Company not belonging to a particular Fund. Each Fund is charged with the
direct expenses of that Fund and with a share of the general expenses of the
Company. The determinations by the Board of Directors as to direct and allocable
expenses and the allocable portion of general assets with respect to the various
portfolios are conclusive. The expenses that are charged to a Fund are borne
equally by each share of the Fund except for certain payments that are borne
solely by Pacific Horizon Shares of the Funds and payments to Shareholder
Organizations that are borne solely by Horizon Service Shares of the Funds as
described in the Prospectuses for such Shares.
Amortized Cost Method. The Funds use the amortized cost method of
valuation in computing the net asset value of their shares for purposes of sales
and redemptions. Under this method a Fund values each of its portfolio
securities at cost on the date of purchase and thereafter assumes a constant
proportionate amortization of any discount or premium until maturity of the
security. As a result the value of a portfolio security for purposes of
determining net asset value normally does not change in response to fluctuating
interest rates. While the amortized cost method seems to provide certainty in
portfolio valuation it may result in periods during which values, as determined
by amortized cost, are higher or lower than the amount such Fund would receive
if it sold its portfolio securities. The market value of the securities in the
Funds can be expected to vary inversely with changes in prevailing interest
rates. Thus, if interest rates have increased from the time a security was
purchased, such security, if sold, might be sold at a price less than its
amortized cost. Similarly, if interest rates have declined from the time a
security was purchased, such security, if sold, might be sold at a price greater
than its amortized cost. In either instance, if the security is held to
maturity, no gain or loss will be realized.
In connection with their use of amortized cost valuation, the Funds
limit the dollar-weighted average maturity of their portfolios to not more than
90 days and do not purchase any instrument with a remaining maturity of greater
than 397 calendar days. The Company's Board of Directors has also established,
pursuant to rules promulgated by the Securities and Exchange Commission,
procedures that are intended to stabilize each Fund's net asset value per share
for purposes of sales and redemptions at $1.00. Such procedures include the
determination, at such intervals as the Board deems appropriate, of the extent,
if any, to which a Fund's net asset value per share calculated by using
available market quotations deviates from $1.00 per share. In the event such
deviation exceeds 1/2 of 1% the Board will promptly consider what action, if
any, should be initiated. If the Board believes that the amount of any deviation
may result in material dilution or other unfair results to investors or
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<PAGE> 729
existing shareholders, it will take such steps as it considers appropriate to
eliminate or reduce to the extent reasonably practicable any such dilution or
unfair results. These steps may include selling portfolio instruments prior to
maturity, shortening a Fund's average portfolio maturity, withholding or
reducing dividends, reducing the number of a Fund's outstanding shares without
monetary consideration or determining net asset value per share by using
available market quotations. If a Fund reduces the number of its outstanding
shares without monetary consideration it will mail written notice to
shareholders at least three business days before the redemption and in the
notice will state the reason for the redemption and the fact that the redemption
may result in a capital loss to shareholders.
The Funds' administrator, Concord Holding Corporation (the
"Administrator"), may use a pricing service to value certain portfolio
securities where the prices provided are believed to reflect the fair value of
such securities. In valuing a Fund's securities the pricing service would
normally take into consideration such factors as yield, risk, quality, maturity,
type of issue, trading characteristics, special circumstances and other factors
it deems relevant in determining valuations for normal institutional-sized
trading units of debt securities and would not rely on quoted prices. The
methods used by the pricing service and the valuations so established will be
utilized under the general supervision of the Company's Board of Directors.
Additionally, in determining market-based net asset value per share, all
portfolio securities for which market quotations (or appropriate substitutes
that reflect current market conditions) are not readily available, shall be
valued at their fair value as determined by the valuation committee in
accordance with procedures established by the Board of Directors.
PACIFIC HORIZON SHARES
Persons wishing to purchase Pacific Horizon Shares through their
accounts at Bank of America or a Service Organization should contact such entity
directly for appropriate instructions. Depending on the terms of the particular
account, Bank of America, its affiliates, and Service Organizations also may
charge their customers fees for automatic investment, redemption and other
services provided. Such fees may include, for example, account maintenance fees,
compensating balance requirements or fees based upon account transactions,
assets or income. Bank of America or the particular Service Organization is
responsible for providing information concerning these services and any charges
to any customers who must authorize the purchase of shares prior to such
purchase.
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<PAGE> 730
SUPPLEMENTARY PURCHASE INFORMATION
Initial purchases of Pacific Horizon Shares into a new account may not
be made by wire. However, persons wishing to make a subsequent purchase of
Pacific Horizon Shares into an already existing account by wire should telephone
the Transfer Agent at (800) 346-2087. The investor's bank must be instructed to
wire federal funds to the Transfer Agent, referring in the wire to the
particular Fund in which such investment is to be made; the investor's portfolio
account number; and the investor's name.
Shares may be purchased in connection with IRAs only by direct
remittance to the Transfer Agent. Purchases for IRA accounts will be effective
only when payments received by the Transfer Agent are converted into federal
funds. Purchases for these plans may not be made in advance of receipt of funds.
The Transfer Agent may charge a fee to act as custodian for IRAs, payment of
which could require the liquidation of shares. Pacific Horizon Shares of the
Prime Fund acquired through an exchange of Class B shares of an investment
portfolio of Time Horizon Funds liquidated by the Transfer Agent as fees for
custodial services to IRA accounts will not be subject to the contingent
deferred sales load. All fees charged are described in the appropriate form.
SUPPLEMENTARY REDEMPTION INFORMATION
Pacific Horizon Shares for which orders for wire redemption are
received on a business day before 2:30 p.m. (Eastern Time) with respect to the
Prime Fund, Treasury Fund or Government Fund, 11:30 a.m. (Eastern Time) with
respect to the Treasury Only Fund or 12:00 noon (Eastern Time) with respect to
the California Tax-Exempt Money Market Fund or Tax-Exempt Money Fund, will be
redeemed as of such time and the proceeds of redemption (less any applicable
contingent deferred sales load charged on Pacific Horizon Shares of the Prime
Fund acquired through an exchange of Class B shares of an investment portfolio
of Time Horizon Funds) will normally be wired in federal funds on the same
business day to the commercial bank specified by the investor on the Account
Application (or other bank of record on the investor's file with the Transfer
Agent). To qualify to use the wire redemption privilege, payment for shares must
be drawn on, and redemption proceeds paid to, the same bank and account as
designated on the Account Application (or other bank of record as described
above). If the proceeds of a particular redemption are to be wired to another
bank, the request must be in writing and signature guaranteed. Pacific Horizon
Shares for which orders for wire redemption are received on a business day after
the respective times stated above or on a non-business day will be redeemed as
of the next determination of net asset value for the Fund involved and the
proceeds of redemption (less any applicable
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<PAGE> 731
contingent deferred sales load charged on Pacific Horizon Shares of the Prime
Fund acquired through an exchange of Class B shares of an investment portfolio
of Time Horizon Funds) will normally be wired in federal funds on the next
business day after receipt of the redemption request. Redemption proceeds (less
any applicable contingent deferred sales load charged on Pacific Horizon Shares
of the Prime Fund acquired through an exchange of Class B shares of an
investment portfolio of Time Horizon Funds) will be wired to a correspondent
member bank if the investor's designated bank is not a member of the Federal
Reserve System. Immediate notification by the correspondent bank to the
investor's bank is necessary to avoid a delay in crediting the funds to the
investor's bank account. Proceeds of less than $1,000 will be mailed to the
investor's address.
To change the commercial bank or account designated to receive
redemption proceeds, a written request must be sent to the Company, c/o Pacific
Horizon Funds, Inc., P.O. Box 80221, Los Angeles, California 90080-9909. Such
request must be signed by each shareholder, with each signature guaranteed as
described in the Funds' Prospectuses. Guarantees must be signed by an authorized
signatory and "signature guaranteed" must appear with the signature. The
Transfer Agent may request further documentation from corporations, executors,
administrators, trustees or guardians, and will accept other suitable
verification arrangements from foreign investors, such as consular verification.
Investors redeeming by Check generally will be subject to the same
rules and regulations that commercial banks apply to checking accounts, although
the election of this privilege creates only a shareholder-transfer agent
relationship with the Transfer Agent. An investor may deliver Checks directly to
the Transfer Agent, BISYS Fund Services Ohio, Inc., 3435 Stelzer Road, Columbus,
Ohio 43219-3035, in which case the proceeds will be mailed, wired or made
available at the Transfer Agent on the next business day. The Check delivered to
the Transfer Agent must be accompanied by a properly executed stock power form
on which the investor's signature is guaranteed as described in the Funds'
Prospectuses.
Because dividends accrue daily and because a contingent deferred sales
load may be applicable, Checks should not be used to close an account. Check
redemption may be modified or terminated at any time by the Company or the
Transfer Agent upon notice to shareholders.
For processing redemptions, the Transfer Agent may request further
documentation from corporations, executors, administrators, trustees or
guardians. The Transfer Agent will
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<PAGE> 732
accept other suitable verification arrangements from foreign investors, such as
consular verification.
Investors should be aware that if they have selected the TeleTrade
Privilege, any request for a wire redemption will be effected as a TeleTrade
transaction through the Automated Clearing House (ACH) system unless more prompt
transmittal specifically is requested. Redemption proceeds of a TeleTrade
transaction will be on deposit in the investor's account at the ACH member bank
normally two business days after receipt of the redemption request.
Pacific Horizon Shares of the Prime Fund acquired through an exchange
of Class B shares of an investment portfolio of Time Horizon Funds are subject
to a contingent deferred sales load upon redemption. For purposes of computing
the contingent deferred sales load, the length of time of ownership will be
measured from the date of the original purchase of Class B shares and will not
include any period of ownership of the Pacific Horizon Shares of the Prime Fund.
Exchange Privilege. Shareholders in the Pacific Horizon Family of Funds
have an exchange privilege whereby they may exchange all or part of their
Pacific Horizon Shares for shares of other investment portfolios in the Pacific
Horizon Family of Funds or for like shares of any investment portfolio of Time
Horizon Funds. In addition, holders of Class B shares of an investment portfolio
of Time Horizon Funds may exchange such Class B shares for Pacific Horizon
Shares of the Pacific Horizon Prime Fund without the payment of any contingent
deferred sales load at the time the exchange is made. By use of the exchange
privilege, the investor authorizes the Transfer Agent to act on telephonic,
telegraphic or written exchange instructions from any person representing
himself to be the investor and believed by the Transfer Agent to be genuine. The
Transfer Agent's records of such instructions are binding. The exchange
privilege may be modified or terminated at any time upon notice to shareholders.
For federal income tax purposes, exchange transactions are treated as sales on
which a purchaser will realize a capital gain or loss depending on whether the
value of the shares exchanged is more or less than his basis in such shares at
the time of the transaction.
Exchange transactions described in Paragraphs A, B, C, D and E below
will be made on the basis of the relative net asset values per share of the
investment portfolios involved in the transaction.
A. Shares of any investment portfolio purchased with a sales load, as well
as additional shares acquired through reinvestment of dividends or
distributions on
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<PAGE> 733
such shares, may be exchanged without a sales load for shares of any
other investment portfolio in the Pacific Horizon Family of Funds or
Time Horizon Funds.
B. Pacific Horizon Shares of the Prime Fund ("Prime Shares") acquired
pursuant to an exchange transaction with Class B shares of an
investment portfolio of Time Horizon Funds will continue to be subject
to a contingent deferred sales load. However, Prime Shares that had
been acquired through an exchange of Class B shares of an investment
portfolio of Time Horizon Funds may be exchanged for other Class B
shares without the payment of a contingent deferred sales load at the
time of exchange. In determining the holding period for calculating
the contingent deferred sales load payable on redemption of Class B
shares, the holding period of the shares originally held will be added
to the holding period of the shares acquired through exchange unless
the Class B shares have been exchanged for Prime Shares.
C. Shares of any investment portfolio in the Pacific Horizon Family of
Funds or Time Horizon Funds acquired by a previous exchange transaction
involving shares on which a sales load has directly or indirectly been
paid (e.g. shares purchased with a sales load or issued in connection
with an exchange transaction involving shares that had been purchased
with a sales load), as well as additional shares acquired through
reinvestment of dividends or distributions on such shares, may be
redeemed and the proceeds used to purchase without a sales load shares
of any other investment portfolio. To accomplish an exchange
transaction under the provisions of this Paragraph, investors must
notify the Transfer Agent of their prior ownership of shares and their
account number.
D. Shares of any investment portfolio in the Pacific Horizon Family of
Funds may be exchanged without a sales load for shares of any other
investment portfolio in the Family that is offered without a sales
load.
E. Shares of any investment portfolio in the Pacific Horizon Family of
Funds purchased without a sales load may be exchanged without a sales
load for shares in any other portfolio where the investor involved
maintained an account in the Pacific Horizon Family of Funds before
April 20, 1987 or was the beneficial owner of shares of Bunker Hill
Income Securities, Inc. on the date of its reorganization into the
Company's Corporate Bond Fund.
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<PAGE> 734
Except as stated above, a sales load will be imposed when shares of any
investment portfolio in the Pacific Horizon Family of Funds that were purchased
or otherwise acquired without a sales load are exchanged for shares of another
investment portfolio in the Pacific Horizon Family (or for shares of any
investment portfolio of Time Horizon Funds) which are sold with a sales load.
Exchange requests received on a business day prior to the time shares
of the investment portfolios involved in the request are priced will be
processed on the date of receipt. "Processing" a request means that shares in
the investment portfolio from which the shareholder is withdrawing an investment
will be redeemed at the net asset value per share next determined on the date of
receipt. Shares of the new investment portfolio into which the shareholder is
investing will also normally be purchased at the net asset value per share next
determined coincident to or after the time of redemption. Exchange requests
received on a business day after the time shares of the investment portfolios
involved in the request are priced will be processed on the next business day in
the manner described above.
Miscellaneous. Certificates for shares will not be issued.
A "business day" for purposes of processing share purchases and
redemptions received by the Transfer Agent at its Columbus office is a day on
which both the Funds' custodian and the New York Stock Exchange are open for
trading, except a "business day" does not include Martin Luther King, Jr. Day,
Columbus Day or Veteran's Day. In 1996, the holidays on which the New York Stock
Exchange is closed are: New Year's Day, Presidents' Day, Good Friday, Memorial
Day (observed), Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
The Company may suspend the right of redemption or postpone the date of
payment for shares during any period when (a) trading on the New York Stock
Exchange is restricted by applicable rules and regulations of the Securities and
Exchange Commission; (b) the New York Stock Exchange is closed for other than
customary weekend and holiday closings; (c) the Securities and Exchange
Commission has by order permitted such suspension; or (d) an emergency exists as
determined by the Securities and Exchange Commission. (The Company may also
suspend or postpone the recordation of the transfer of its shares upon the
occurrence of any of the foregoing conditions.)
The Company's Charter permits its Board of Directors to require a
shareholder to redeem involuntarily shares in a Fund if the balance held of
record by the shareholder drops below $500 and such shareholder does not
increase such balance to $500 or
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<PAGE> 735
more upon 60 days' notice. The contingent deferred sales load with respect to
Pacific Horizon Shares of the Prime Fund acquired through an exchange of B
Shares of an investment portfolio of Time Horizon Funds is not charged on
involuntary redemptions. The Company will not require a shareholder to redeem
shares of a Fund if the balance held of record by the shareholder is less than
$500 solely because of a decline in the net asset value of the shares. The
Company may also redeem shares involuntarily if such redemption is appropriate
to carry out the Company's responsibilities under the Investment Company Act of
1940.
If the Company's Board of Directors determines that conditions exist
which make payment of redemption proceeds wholly in cash unwise or undesirable,
the Company may make payment wholly or partly in readily marketable securities
or other property. In such an event, a shareholder would incur transaction costs
in selling the securities or other property. The Company has committed that it
will pay all redemption requests by a shareholder of record in cash, limited in
amount with respect to each shareholder during any ninety-day period to the
lesser of $250,000 or 1% of the net asset value at the beginning of such period.
ADDITIONAL INFORMATION CONCERNING TAXES
The following is only a summary of certain additional considerations
generally affecting the Funds and their shareholders that are not described in
the Prospectuses for the Funds. No attempt is made to present a detailed
explanation of the tax treatment of the Funds or their shareholders, and the
discussion here and in the Prospectuses is not intended as a substitute for
careful tax planning. Investors are advised to consult their tax advisers with
specific reference to their own tax situations.
FEDERAL - ALL FUNDS
Each Fund will be treated as a separate corporate entity under the
Internal Revenue Code of 1986, as amended (the "Code"), and intends to qualify
as a "regulated investment company." By following this policy, each Fund expects
to eliminate or reduce to a nominal amount the federal income taxes to which it
may be subject. If for any taxable year a Fund of the Company does not qualify
for the special federal tax treatment afforded regulated investment companies,
all of the Fund's taxable income would be subject to tax at regular corporate
rates (without any deduction for distributions to shareholders). In such event,
the Fund's dividend distributions (including amounts derived from interest on
Municipal Securities in the case of the Tax-Exempt Money Fund and the California
Tax-Exempt Money Market Fund) to shareholders would be taxable as
-50-
<PAGE> 736
ordinary income to the extent of the current and accumulated earnings and
profits of the particular Fund and would be eligible for the dividends received
deduction in the case of corporate shareholders.
Qualification as a regulated investment company under the Code
requires, among other things, that each Fund distribute to its shareholders an
amount equal to at least the sum of 90% of its investment company taxable income
(if any) and 90% of its tax-exempt income (if any) net of certain deductions for
each taxable year. In general, a Fund's investment company taxable income will
be its taxable income, subject to certain adjustments and excluding the excess
of any net long-term capital gain for the taxable year over the net short-term
capital loss, if any, for such year. A Fund will be taxed on its undistributed
investment company taxable income, if any.
A Fund will not be treated as a regulated investment company under the
Code if 30% or more of the Fund's gross income for a taxable year is derived
from gains realized on the sale or other disposition of securities and certain
other investments held for less than three months (the "short-short test").
Interest (including original issue and accrued market discount) received by a
Fund upon maturity or disposition of a security held for less than three months
will not be treated as gross income derived from the sale or other disposition
of such security within the meaning of this requirement. However, any other
income that is attributable to realized market appreciation will be treated as
gross income from the sale or other disposition of securities for this purpose.
Any distribution of the excess of net long-term capital gains over net
short-term capital losses is taxable to shareholders as long-term capital gains,
regardless of how long the shareholder has held the distributing Fund's shares
and whether such gains are received in cash or additional Fund shares. The Fund
will designate such a distribution as a capital gains dividend in a written
notice mailed to shareholders after the close of the Fund's taxable year.
Ordinary income of individuals is taxable at a maximum nominal rate of
39.6%; however, because of limitations on itemized deductions otherwise
allowable and the phase-out of personal exemptions, the maximum nominal
effective marginal rate of tax for some taxpayers may be higher. An individual's
long-term capital gains are taxable at a maximum nominal rate of 28%. For
corporations, long-term capital gains and ordinary income are both taxable at a
maximum nominal rate of 35% (or at a maximum effective marginal rate of 39% in
the case of corporations having taxable income between $100,000 and $335,000).
-51-
<PAGE> 737
A 4% non-deductible excise tax is imposed on regulated investment
companies that fail to currently distribute specified percentages of their
ordinary taxable income for each calendar year and capital gain net income
(excess of capital gains over capital losses). Each Fund intends to make
sufficient distributions or deemed distributions of its ordinary taxable income
and any capital gain net income prior to the end of each calendar year to avoid
liability for this excise tax.
The Company will be required in certain cases to withhold and remit to
the United States Treasury 31% of taxable dividends or 31% of gross sale
proceeds paid to shareholders who (i) have failed to provide a correct tax
identification number in the manner required, (ii) who are subject to
withholding by the Internal Revenue Service for failure to properly include on
their return payments of taxable interest or dividends, or (iii) who have failed
to certify to the Company that they are not subject to backup withholding when
required to do so or that they are "exempt recipients."
At February 28, 1995, the Prime Fund, Treasury Fund, Government Fund,
Treasury Only Fund, Tax-Exempt Money Fund and the California Tax-Exempt Money
Market Fund had unused capital loss carryovers of approximately $2,764,492 (of
which $22,098 will expire in fiscal 1999, $1,171,786 will expire in fiscal 2002
and $1,570,608 will expire in fiscal 2003), $239,007 (which will expire in
fiscal 2002), $1,073,801 (of which $129,811 will expire in fiscal 2002 and
$943,990 will expire in fiscal 2003), $113,421 (of which $21,276 will expire in
fiscal 2002 and $92,145 will expire in fiscal 2003), $156,373 (of which $35,348
will expire in fiscal 1997, $16,664 will expire in fiscal 1998, $14,011 will
expire in fiscal 2000, $71,218 will expire in fiscal 2002 and $19,132 will
expire in fiscal 2003), and $12,116 (of which $5,893 will expire in fiscal 2001
and $6,223 will expire in fiscal 2002) available for federal income tax purposes
to be applied against future capital gains, if any.
FEDERAL - CALIFORNIA TAX-EXEMPT MONEY MARKET FUND AND TAX-EXEMPT MONEY FUND
The policy of the California Tax-Exempt Money Market Fund and the
Tax-Exempt Money Fund is to pay each year as exempt-interest dividends
substantially all the respective Fund's Municipal Securities interest income net
of certain deductions. An exempt-interest dividend is any dividend or part
thereof (other than a capital gains dividend) paid by a Fund and designated as
an exempt-interest dividend in a written notice mailed to shareholders after the
close of the Fund's taxable year. However, the aggregate amount of dividends so
designated by the Fund cannot exceed the excess of the amount of interest
-52-
<PAGE> 738
exempt from tax 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. The percentage of total dividends paid for any taxable
year which qualifies as exempt-interest dividends will be the same for all
shareholders receiving dividends from the Fund for such year. In order for the
California Tax-Exempt Money Market Fund and Tax-Exempt Money Fund to pay
exempt-interest dividends for any taxable year, at the close of each quarter of
its taxable year at least 50% of the aggregate value of the respective Fund's
assets must consist of exempt-interest obligations.
Exempt-interest dividends may be treated by shareholders of the
California Tax-Exempt Money Market Fund and Tax-Exempt Money Fund as items of
interest excludable from their gross income under Section 103(a) of the Code.
However, each shareholder is advised to consult his or her tax adviser with
respect to whether exempt-interest dividends would retain the exclusion under
Section 103(a) if such shareholder would be treated as a "substantial user" or a
"related person" to such user with respect to facilities financed through any of
the tax-exempt obligations held by the respective Funds. A "substantial user" is
defined under U.S. Treasury Regulations to include a non-exempt person who both
(1) regularly uses a part of such facilities in his or her trade or business and
(2) whose gross revenues derived with respect to the facilities financed by the
issuance of bonds are more than 5% of the total revenues derived by all users of
such facilities, who occupies more than 5% of the usable area of such facilities
or for whom such facilities or a part thereof were specifically constructed,
reconstructed or acquired. A "related person" includes certain related natural
persons, affiliated corporations, partners and partnerships and S corporations
and their shareholders.
Interest on indebtedness incurred by a shareholder to purchase or carry
shares of the Fund generally is not deductible for federal income tax purposes.
Income itself exempt from federal income taxation may be considered in
addition to adjusted gross income when determining whether Social Security
payments received by a shareholder are subject to federal income taxation.
CALIFORNIA - CALIFORNIA TAX-EXEMPT MONEY MARKET FUND
As a regulated investment company, the California Tax-Exempt Money
Market Fund will be relieved of liability for California State franchise and
corporate income tax to the extent its taxable income is distributed to its
shareholders. The Fund will be taxed on its undistributed taxable income. If for
any year the Fund does not qualify as a regulated investment company,
-53-
<PAGE> 739
all of its taxable income (including interest income on California Municipal
Securities for franchise tax purposes only) may be subject to California State
franchise or income tax at regular corporate rates.
If, at the close of each quarter of its taxable year, at least 50% of
the value of the total assets of a regulated investment company, or series
thereof, consists of obligations the interest on which, if held by an
individual, is exempt from taxation by California ("California Exempt
Securities"), then the regulated investment company, or series of that company,
will be qualified to pay dividends exempt from California state personal income
tax to its non-corporate shareholders (hereinafter referred to as "California
exempt-interest dividends"). For this purpose California Exempt Securities are
generally limited to California Municipal Securities and certain U.S. Government
and U.S. Possession obligations. "Series" of a regulated investment company is
defined as a segregated portfolio of assets, the beneficial interest in which is
owned by the holders of an exclusive class or series of stock of the company.
The California Tax-Exempt Money Market Fund intends to qualify under the above
requirements so that it can pay California exempt-interest dividends. If the
Fund does not so qualify, no part of its respective dividends to shareholders
will be exempt from the California state personal income tax.
Within 60 days after the close of its taxable year, the California
Tax-Exempt Money Market Fund will notify its shareholders of the portion of the
dividends paid by the Fund to each shareholder with respect to such taxable year
which is exempt from California state personal income tax. The total amount of
California exempt-interest dividends paid by the Fund with respect to any
taxable year cannot exceed the excess of the amount of interest received by the
Fund for such year on California Exempt Securities over any amounts that, if the
Fund were treated as an individual, would be considered expenses related to
tax-exempt income or amortizable bond premium and would thus not be deductible
under federal income or California state personal income tax law. The percentage
of total dividends paid for any taxable year which qualifies as California
exempt-interest dividends will be the same for all shareholders receiving
dividends from the Fund for such year.
In cases where shareholders are "substantial users" or "related
persons" with respect to California Exempt Securities held by the California
Tax-Exempt Money Market Fund, such shareholders should consult their tax
advisers to determine whether California exempt-interest dividends paid by the
Fund with respect to such obligations retain California state personal income
tax exclusion. In this connection rules similar to those regarding the possible
unavailability of federal exempt-interest
-54-
<PAGE> 740
dividend treatment to "substantial users" are applicable for California state
tax purposes. See "Additional Information Concerning Taxes - Federal -
California Tax-Exempt Money Market Fund" above.
To the extent, if any, dividends paid to shareholders are derived from
the excess of net long-term capital gains over net short-term capital losses,
such dividends will not constitute California exempt-interest dividends and
generally will be taxed as long-term capital gains under rules similar to those
regarding the treatment of capital gains dividends for federal income tax
purposes. See "Additional Information Concerning Taxes - Federal - All Funds"
above. Moreover, interest on indebtedness incurred by a shareholder to purchase
or carry California Tax-Exempt Money Market Fund shares is not deductible for
California state personal income tax purposes if the Fund distributes California
exempt-interest dividends during the shareholder's taxable year.
The foregoing is only a summary of some of the important California
state personal income tax considerations generally affecting the California
Tax-Exempt Money Market Fund and its shareholders. No attempt is made to present
a detailed explanation of the California state personal income tax treatment of
the Fund or its shareholders, and this discussion is not intended as a
substitute for careful planning. Further, it should be noted that the portion of
any Fund dividends constituting California exempt-interest dividends is
excludable from income for California state personal income tax purposes only.
Any dividends paid to shareholders subject to California state franchise tax or
California state corporate income tax may therefore be taxed as ordinary or
capital gains dividends to such purchasers notwithstanding that all or a portion
of such dividends is exempt from California state personal income tax.
Accordingly, potential investors in the Fund, including, in particular,
corporate investors which may be subject to either California franchise tax or
California corporate income tax, should consult their tax advisers with respect
to the application of such taxes to the receipt of Fund dividends and as to
their own California state tax situation, in general.
OTHER INFORMATION
Depending upon the extent of activities in states and localities in
which its offices are maintained, in which its agents or independent contractors
are located, or in which it is otherwise deemed to be conducting business, a
Fund may be subject to the tax laws of such states or localities.
Exempt-interest dividends will generally be exempt from state and local
taxes as well. However, except as noted above with respect to California state
personal income tax, in some
-55-
<PAGE> 741
situations income distributions may be taxable to shareholders of the Funds
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 or U.S.
Government obligations which, if realized directly, would be exempt from such
income taxes. Shareholders are advised to consult their tax advisers concerning
the application of state and local taxes.
The foregoing discussion is based on tax laws and regulations which are
in effect on the date of this Statement of Additional Information. Such laws and
regulations may be changed by legislative or administrative action.
MANAGEMENT OF THE FUNDS
DIRECTORS AND OFFICERS
The directors and officers of the Company, their addresses, ages, and
principal occupations during the past five years are:
<TABLE>
<CAPTION>
Position with
Name and Address Age Company Principal Occupations
- ---------------- --- ------------- ---------------------
<S> <C> <C> <C>
Thomas M. Collins 61 Director Of counsel, law firm of
McDermott & Trayner McDermott & Trayner;
225 S. Lake Avenue Partner of the law firm
Suite 410 of Musick, Peeler &
Pasadena, CA 91101-3005 Garrett (until April,
1993); Trustee, Master
Investment Trust Series I
and Master Investment
Trust, Series II
(registered investment
companies) (since 1993);
former Director, Bunker
Hill Income Securities,
Inc. (registered
investment company)
through 1991.
Douglas B. Fletcher 70 Vice Chairman Chairman of the Board
Fletcher Capital of the Board and Chief Executive
Advisors Incorporated Officer, Fletcher
4 Upper Newport Plaza Capital Advisors,
Suite 100 Incorporated, (registered
Newport Beach, CA 92660-2629 investment adviser) 1991
to date; Partner, 1991
Newport Partners (private
venture capital firm),
1981 to date; Chairman of
the Board and Chief
Executive
</TABLE>
-56-
<PAGE> 742
<TABLE>
<CAPTION>
Position with
Name and Address Age Company Principal Occupations
- ---------------- --- ------------- ---------------------
<S> <C> <C> <C>
Officer, First Pacific
Advisors, Inc.
(registered investment
adviser) and seven
investment companies
under its management,
prior to 1983; former
Allied Member, New York
Stock Exchange; Chairman
of the Board of FPA
Paramount Fund, Inc.
through 1984; Director,
TIS Mortgage Investment
Company (real estate
investment trust);
Trustee and former Vice
Chairman of the Board,
Claremont McKenna
College; Chartered
Financial Analyst.
Robert E. Greeley 62 Director Chairman, Page Mill
Page Mill Asset Asset Management (a
Management private investment
433 California Street company) since 1991;
Suite 900 Manager, Corporate
San Francisco, CA 94104 Investments, Hewlett
Packard Company from 1979
to 1991; Trustee, Master
Investment Trust, Series
I and Master Investment
Trust, Series II (since
1993); Director, Morgan
Grenfell Small Cap Fund
(since 1986); former
Director, Bunker Hill
Income Securities, Inc.
(since 1989) (registered
investment companies);
former Trustee,
SunAmerica Fund Group
(previously Equitec
Siebel Fund Group) from
1984 to 1992.
</TABLE>
-57-
<PAGE> 743
<TABLE>
<CAPTION>
Position with
Name and Address Age Company Principal Occupations
- ---------------- --- ------------- ---------------------
<S> <C> <C> <C>
Kermit O. Hanson 79 Director Vice Chairman of the
17760 14th Ave., N.W. Advisory Board, 1988 to
Seattle, WA 98177 date, Executive
Director, 1977 to 1988,
Pacific Rim Bankers
Program (a non-profit
educational institution);
Dean Emeritus, 1981 to
date, Dean, 1964-81,
Graduate School of
Business Administration,
University of Washington;
Director, Washington
Federal Savings & Loan
Association; Trustee,
Seafirst Retirement Funds
(since 1993) (registered
investment company).
Cornelius J. Pings* 66 Chairman of President, Association
Association of American the Board and of American
Universities President Universities, February
One DuPont Circle 1993 to date; Provost,
Suite 730 1982 to January
Washington, DC 20036 1993, Senior Vice
President for Academic
Affairs, 1981 to January
1993, University of
Southern California;
Trustee, Master
Investment Trust, Series
I and Master Investment
Trust, Series II (since
1995).
Kenneth L. Trefftzs 83 Director Private Investor;
11131 Briarcliff Drive formerly Distinguished
San Diego, CA 92131-1329 Emeritus Professor
of Finance and Chairman
of the Department of
Finance and Business
Economics of the Graduate
School of Business of the
University of Southern
California; former
Director, Metro Goldwyn
Mayer, Inc.; Director,
Fremont General
Corporation (insurance
and financial services
holding company);
Director, Source
</TABLE>
-58-
<PAGE> 744
<TABLE>
<CAPTION>
Position with
Name and Address Age Company Principal Occupations
- ---------------- --- ------------- ---------------------
<S> <C> <C> <C>
Capital, Inc. (closed-end
investment company);
Director of three
open-end investment
companies managed by
First Pacific Advisors,
Inc.; formerly Chairman
of the Board of Directors
(or Trustees) of nineteen
investment companies
managed by American
Capital Asset Management,
Inc.
Richard E. Stierwalt Executive Chairman of the Board
125 W. 55th Street 40 Vice President and Chief Executive
New York, NY 10019 Officer, July 1993 to
date, prior thereto
Senior Director, Managing
Director and Chief
Executive Officer of the
Administrator and
Distributor, February
1987 to July 1993;
President, Master
Investment Trust, Series
I, Master Investment
Trust, Series II and
Seafirst Retirement Funds
(since 1993); First Vice
President, Trust
Operation Administration,
Security Pacific National
Bank, 1983-1987.
William B. Blundin 57 Executive Vice Vice Chairman, July 1993
125 W. 55th Street President to date, prior thereto
New York, NY 10019 Director and President
of the Administrator and
Distributor, February
1987 to July 1993;
Executive Vice
President, Master
Investment Trust, Series
II and Seafirst
Retirement Funds (since
1993); Senior Vice
President, Shearson
Lehman Brothers, 1978-
1987.
Irimga McKay 35 Vice Senior Vice President,
7863 Girard Avenue President July 1993 to date, prior
Suite 306 thereto First Vice
La Jolla, CA 92037 President of the
</TABLE>
-59-
<PAGE> 745
<TABLE>
<CAPTION>
Position with
Name and Address Age Company Principal Occupations
- ---------------- --- ------------- ---------------------
<S> <C> <C> <C>
Administrator and
Distributor, November
1988 to July 1993; Vice
President, Master
Investment Trust, Series
II and Seafirst
Retirement Funds (since
1993); Regional Vice
President, Continental
Equities, June 1987 to
November 1988; Assistant
Wholesaler, VMS Realty
Partners (a real estate
limited partnership), May
1986 to June 1987.
W. Eugene Spurbeck 39 Assistant Vice Manager of Client
BISYS Fund Services President Services of the
515 Figueroa Street Administrator (1993 to
Suite 335 date); Assistant Vice
Los Angeles, CA 92307 President, Master
Investment Trust, Series
II; Vice President,
Seafirst Retirement Funds
(since 1995); Vice
President of Retail
Lending Operations Banc
One (1989 to 1993).
Martin R. Dean 31 Treasurer Manager of Fund
3435 Stelzer Road Accounting of BISYS
Columbus, OH 43219 Fund Services, May 1994
to Present; Treasurer,
Master Investment Trust,
Series II and Seafirst
Retirement Funds (since
1995); Senior Manager at
KPMG Peat Marwick
previously 1990-1994.
W. Bruce McConnel, III 52 Secretary Partner of the law firm
1345 Chestnut Street of Drinker Biddle &
Philadelphia National Bank Reath. Secretary,
Building, Suite 1100 Master Investment Trust,
Philadelphia, PA 19107 Series I, Master
Investment Trust, Series
II and Seafirst
Retirement Funds
</TABLE>
-60-
<PAGE> 746
<TABLE>
<CAPTION>
Position with
Name and Address Age Company Principal Occupations
- ---------------- --- ------------- ---------------------
<S> <C> <C> <C>
George O. Martinez 35 Assistant Senior Vice President
3435 Stelzer Road Secretary and Director of Legal
Columbus, OH 43219 and Compliance Services,
of the Administrator.
since April 1995;
Assistant Secretary,
Master Investment Trust,
Series II and Seafirst
Retirement Funds (since
1995); prior thereto,
Vice President and
Associate General
Counsel, Alliance Capital
Management, L.P.
</TABLE>
- --------------
* Mr. Pings is an "interested director" of the Company as defined in the 1940
Act.
The Audit Committee of the Board is comprised of all directors and is
chaired by Dr. Trefftzs. The Board does not have an Executive Committee.
Each director is entitled to receive an annual fee of $25,000 plus
$1,000 for each day that a director participates in all or a part of a Board
meeting; the President receives an additional $20,000 per annum for his services
as President; Mr. Collins, in consideration of his years of service as President
and Chairman of the Board, receives an additional $40,000 per annum in severance
until February 28, 1997; each member of a Committee of the Board is entitled to
receive $1,000 for each Committee meeting they participate in (whether or not
held on the same day as a Board meeting); and each Chairman of a Committee of
the Board shall be entitled to receive an annual retainer of $1,000 for his
services as Chairman of the Committee. The Funds, and each other Fund of the
Company, pays its proportionate share of these amounts based on relative net
asset values.
For the fiscal year ended February 28, 1995, the Company paid or
accrued for the account of its directors as a group for services in all
capacities a total of $334,168; of this total amount, the following amounts of
directors' compensation were allocated to the following Funds: Treasury Fund -
$22,408; Prime Fund - $23,318; Government Fund - $23,093; Treasury Only Fund -
$22,179; California Tax-Exempt Money Market Fund - $23,388; and Tax-Exempt Money
Fund - $21,538. Each director is also reimbursed for out-of-pocket expenses
incurred as a director. Drinker Biddle & Reath, of which Mr. McConnel is a
-61-
<PAGE> 747
partner, receives legal fees as counsel to the Company. As of the date of this
Statement of Additional Information, the directors and officers of the Company,
as a group, own less than 1% of the outstanding shares of each of the Company's
investment portfolios.
Under a retirement plan approved by the Board of Directors, including a
majority of its directors who are not "interested persons" of the Company, a
director who dies or resigns after five years of service is entitled to receive
ten annual payments each equal to the greater of: (i) 50% of the annual
director's retainer that was payable by the Company during the year of his/her
death or resignation, or (ii) 50% of the annual director's retainer then in
effect for directors of the Company during the year of such payment. A director
who dies or resigns after nine years of service is entitled to receive ten
annual payments each equal to the greater of: (i) 100% of the annual director's
retainer that was payable by the Company during the year of his/her death or
resignation, or (ii) 100% of the annual director's retainer then in effect for
directors of the Company during the year of such payment. Further, the amount
payable each year to a director who dies or resigns is increased by $1,000 for
each year of service that the director provided as Chairman of the Board.
Years of service for purposes of calculating the benefit described
above are based upon service as a director or Chairman after February 28, 1994.
Retirement benefits in which a director has become vested may not be reduced by
later Board action.
In lieu of receiving ten annual payments, a director may elect to
receive substantially equivalent benefits through a single-sum cash payment of
the present value of such benefits paid by the Company within 45 days of the
death or resignation of the director. The present value of such benefits is to
be calculated (i) based on the retainer that was payable by the Company during
the year of the director's death or resignation (and not on any retainer payable
to directors thereafter), and (ii) using the interest rate in effect as of the
date of the director's death or resignation by the Pension Benefit Guaranty
Corporation (or any successor thereto) for valuing immediate annuities under
terminating defined benefit pension plans. A director's election to receive a
single sum must be made in writing within the 30 calendar days after the date
the individual is first elected as a director.
In addition to the foregoing, the Board of Directors may, in its
discretion and in recognition of a director's period of service before March 1,
1994 as a director and possibly as Chairman, authorize the Company to pay a
retirement benefit
-62-
<PAGE> 748
following the director's death or resignation (unless the director has vested
benefits as a result of completing nine years of service). Any such action shall
be approved by the Board and by a majority of the directors who are not
"interested persons" of the Company within 120 days following the director's
death or resignation and may be authorized as a single sum cash payment or as
not more than ten annual payments (beginning the first anniversary of the
director's date of death or resignation and continuing for one or more
anniversary date(s) thereafter).
The obligation of the Company to pay benefits to a former director is
neither secured nor funded by the Company but shall be binding upon its
successors in interest. The payment of benefits under the retirement plan has no
priority or preference over the lawful claims of the Company's creditors or
shareholders, and the right to receive such payments is not assignable or
transferable by a director (or former director) other than by will, by the laws
of descent and distribution, or by the director's written designation of a
beneficiary.
The following chart provides certain information about the
director/trustee fees of the Company as of February 28, 1995.
<TABLE>
<CAPTION>
==============================================================================================================================
TOTAL
COMPENSATION
PENSION OR FROM
RETIREMENT ESTIMATED REGISTRANT
AGGREGATE BENEFITS ANNUAL AND FUND
COMPENSATION ACCRUED AS BENEFITS COMPLEX(*)
NAME OF PERSON/ FROM THE PART OF FUND UPON PAID TO
POSITION COMPANY EXPENSES RETIREMENT DIRECTORS
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Thomas M. Collins $100,000 $0 $0 $110,000
President and
Chairman of the
Board(+)
- ----------------------------------------------------------------------------------------------------------------------------
Douglas B. Fletcher $57,500 $0 $0 $57,500
Vice Chairman of
the Board
- ----------------------------------------------------------------------------------------------------------------------------
Robert E. Greeley(**) $57,500 $0 $0 $65,781
Director
- ----------------------------------------------------------------------------------------------------------------------------
Kermit O. Hanson $57,500 $0 $0 $63,500
Director
- ----------------------------------------------------------------------------------------------------------------------------
Cornelius J. Pings $57,500 $0 $0 $57,500
Director
- ----------------------------------------------------------------------------------------------------------------------------
Kenneth L. Trefftzs $57,500 $0 $0 $57,500
Director
============================================================================================================================
</TABLE>
- --------------
(*) The "Fund Complex" consists of the Company, Seafirst Retirement Funds,
Master Investment Trust, Series I and Master Investment Trust, Series II.
-63-
<PAGE> 749
(**) Mr. Greeley became a director of the Company on April 25, 1994.
(+) Mr. Collins was President and Chairman of the Board of the Company until
August 31, 1995
INVESTMENT ADVISER
Bank of America is the successor by merger to Security Pacific National
Bank ("Security Pacific"), which previously served as investment adviser to each
of the Funds, other than the Government and Treasury Only Funds, since the
commencement of their operations. In the investment advisory agreement, Bank of
America has agreed to provide investment advisory services as described in the
Prospectuses. Bank of America has also agreed to pay all expenses incurred by it
in connection with its activities under its agreement other than the cost of
securities, including brokerage commissions, if any, purchased for the Company.
In rendering its advisory services, Bank of America may utilize Bank officers
from one or more of the departments of the Bank which are authorized to exercise
the fiduciary powers of Bank of America with respect to the investment of trust
assets. In some cases, these officers may also serve as officers, and utilize
the facilities, of wholly-owned subsidiaries or other affiliates of Bank of
America or its parent corporation. For the services provided and expenses
assumed pursuant to the investment advisory agreement, the Company has agreed to
pay Bank of America fees, accrued daily and payable monthly, at the following
annual rates: .10% of the first $3 billion of each Fund's net assets, plus .09%
of the next $2 billion of each Fund's net assets, plus .08% of each Fund's net
assets over $5 billion. From time to time, Bank of America may waive fees or
reimburse the Company for expenses voluntarily or as required by certain state
securities laws.
For the fiscal years ended February 28, 1993, February 28, 1994 and
February 28, 1995, Bank of America (Security Pacific prior to April 22, 1992)
was paid, pursuant to the investment advisory agreements then in effect,
advisory fees net of fee waivers by the Prime Fund of $8,106,253, $11,293,545,
and $2,330,203, respectively; and by the Treasury Fund of $2,841,285,
$2,717,321, and $2,140,125, respectively. For the fiscal years indicated, Bank
of America (Security Pacific prior to April 22, 1992) did not effect any fee
waivers or expense reimbursements with respect to the Treasury Fund. For the
fiscal year ended February 28, 1994, Bank of America was paid advisory fees (net
of fee waivers or expense reimbursements) by the Government Fund and Treasury
Only Fund in the amount of $877,515 and $68,888, respectively. For this same
period, aggregate fee waivers and expense reimbursements for the Prime Fund,
Government Fund and Treasury Only Fund were $367,233, $6,537, and $127,607,
respectively. For the fiscal year ended February 28, 1995, Bank
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of America was paid advisory fees (net of fee waivers or expense reimbursements)
by the Government Fund and Treasury Only Fund in the amount of $321,634 and
$293,305, respectively. For this same period, aggregate fee waivers and expense
reimbursements for the Prime Fund, Government Fund and Treasury Only Fund were
$920,627, $327,740, and $8,313, respectively. For the fiscal years ended
February 28, 1993, February 28, 1994 and February 28, 1995, Bank of America
(Security Pacific prior to April 22, 1992) was paid, pursuant to the investment
advisory agreement then in effect, advisory fees by the Tax-Exempt Money Fund of
$470,031, $472,766, and $501,956, respectively. For the same fiscal years
indicated, Bank of America (Security Pacific prior to April 22, 1992) reimbursed
the Tax-Exempt Money Fund for expenses or waived fees in the amount of $3,692,
$23,524, and $11,611, respectively. For the fiscal years ended February 28,
1993, February 28, 1994, and February 28, 1995, Bank of America (Security
Pacific prior to April 22, 1992) was paid advisory fees (net of waivers and
expense reimbursements) of $22,306, $269,869, and $301,964, respectively, by the
California Tax-Exempt Money Market Fund. For the fiscal years indicated, Bank of
America's (Security Pacific's prior to April 22, 1992) aggregate fee waivers and
expense reimbursements with respect to the California Tax-Exempt Money Market
Fund were $82,350, $22,998, and $0, respectively.
For the period June 4, 1990 (commencement of operations) through March
31, 1991 (fiscal year end), for the fiscal year ended March 31, 1992 and for the
period April 1, 1992 through February 28, 1993, the Predecessor Treasury Only
Funds bore investment advisory fees pursuant to the investment advisory
agreement then in effect of $23,700, $70,579 and $61,676, respectively, and the
Predecessor Government Funds bore investment advisory fees pursuant to the
investment advisory agreement then in effect of $119,284, $361,035 and $308,729,
respectively. All of these fees were paid to Seattle Capital Management Company
(the "Former Adviser"), which is a wholly-owned, indirect subsidiary of
BankAmerica Corporation. For the periods and fiscal year referenced above, the
Former Adviser waived additional investment advisory fees of $65,805, $194,089
and $169,608, respectively, with respect to the Predecessor Treasury Only Funds,
and $178,928, $227,281 and $154,364, respectively, with respect to the
Predecessor Government Funds.
The Company's investment advisory agreement for the Funds provides that
Bank of America shall not be liable for any error of judgment or mistake of law
or for any loss suffered by the Company in connection with the performance of
the investment advisory agreement, except a loss resulting from a breach of
fiduciary duty with respect to the receipt of compensation for services or a
loss resulting from willful misfeasance, bad faith or negligence in the
performance of its duties or from reckless disregard by it of its duties and
obligations thereunder.
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THE GLASS-STEAGALL ACT AND PROPOSED LEGISLATION
The Glass-Steagall Act, among other things, prohibits banks from
engaging in the business of underwriting securities, although national and
state-chartered banks generally are permitted to purchase and sell securities
upon the order and for the account of their customers. In 1971, the United
States Supreme Court held in Investment Company Institute v. Camp that the
Glass-Steagall Act prohibits a bank from operating a fund for the collective
investment of managing agency accounts. Subsequently, the Board of Governors of
the Federal Reserve System (the "Board") issued a regulation and interpretation
to the effect that the Glass-Steagall Act and such decision forbid a bank
holding company registered under the Federal Bank Holding Company Act of 1956
(the "Holding Company Act") or any non-bank affiliate thereof from sponsoring,
organizing or controlling a registered, open-end investment company continuously
engaged in the issuance of its shares, but do not prohibit such a holding
company or affiliate from acting as investment adviser, transfer agent and
custodian to such an investment company. In 1981, the United States Supreme
Court held in Board of Governors of the Federal Reserve System v. Investment
Company Institute that the Board did not exceed its authority under the Holding
Company Act when it adopted its regulation and interpretation authorizing bank
holding companies and their non-bank affiliates to act as investment advisers to
registered closed-end investment companies.
Bank of America believes that if the question were properly presented,
a court should hold that Bank of America may perform the services for the
Company contemplated by the investment advisory agreement, the Prospectuses, and
this Statement of Additional Information without violation of the Glass-Steagall
Act or other applicable banking laws or regulations. It should be noted,
however, that there have been no cases deciding whether a bank may perform
services comparable to those performed by Bank of America and future changes in
either federal or state statutes and regulations relating to permissible
activities of banks or trust companies and their subsidiaries or affiliates, as
well as further judicial or administrative decisions or interpretations of
present and future statutes and regulations, could prevent Bank of America from
continuing to perform such services for the Company or from continuing to
purchase Company shares for the accounts of its customers.
On the other hand, as described herein, the Funds are currently
distributed by the Distributor, and the Administrator, its parent, provides the
Company with administrative services. If current restrictions under the
Glass-Steagall Act preventing a bank from sponsoring, organizing, controlling or
distributing
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shares of an investment company were relaxed, the Company expects that Bank of
America would consider the possibility of offering to perform some or all of the
services now provided by the Administrator or the Distributor. From time to
time, legislation modifying such restriction has been introduced in Congress
which, if enacted, would permit a bank holding company to establish a non-bank
subsidiary having the authority to organize, sponsor and distribute shares of an
investment company. If this or similar legislation were enacted, the Company
expects that Bank of America's parent bank holding company would consider the
possibility of one of its non-bank subsidiaries offering to perform some or all
of the services now provided by the Administrator or the Distributor. It is not
possible, of course, to predict whether or in what form such legislation might
be enacted or the terms upon which Bank of America or such a non-bank affiliate
might offer to provide services for consideration by the Company's Board of
Directors.
ADMINISTRATOR
Concord Holding Corporation (the "Administrator"), with principal
offices at 125 West 55th Street, 11th Floor, New York, New York 10019 and 3435
Stelzer Road, Columbus, Ohio 43219, is a wholly-owned subsidiary of The BISYS
Group, Inc. The Administrator also serves as administrator to several other
investment companies.
The Administrator provides administrative services for the Funds as
described in their Prospectuses pursuant to a Basic Administrative Services
Agreement. The agreement will continue in effect with respect to each Fund until
October 31, 1996 and thereafter will be extended with respect to each Fund for
successive periods of one year, provided that each such extension is
specifically approved (a) by vote of a majority of those members of the
Company's Board of Directors who are not interested persons of any party to the
agreement, cast in person at a meeting called for the purpose of voting on such
approval, and (b) the Company's Board of Directors or by vote of a majority of
the outstanding voting securities of such Fund. The agreement is terminable at
any time without penalty by the Company's Board of Directors or by a vote of a
majority of a Fund's outstanding shares upon 60 days' notice to the
Administrator, or by the Administrator upon 90 days' notice to the Company.
For its services under the Basic Administrative Services Agreement, the
Administrator is entitled to receive an administration fee, accrued daily and
payable monthly, at the following annual rates: .10% of the first $7 billion of
each Fund's net assets, plus .09% of the next $3 billion of each Fund's net
assets, plus .08% of each Fund's net assets over $10 billion. From time to time,
the Administrator may waive fees or
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reimburse the Company for expenses, either voluntarily or as required by certain
state securities laws.
For the fiscal years ended February 28, 1993, February 28, 1994 and
February 28, 1995, the Administrator earned, net of fees waived pursuant to the
administration agreements then in effect, administration fees of $8,835,608,
$12,158,419, and $2,366,035, respectively, from the Prime Fund; and $2,845,014,
$2,717,606, and $2,140,125, respectively, from the Treasury Fund. For the years
indicated, the Administrator did not effect any fee waivers or expense
reimbursements with respect to the Treasury Fund. For the years ended February
28, 1994 and February 28, 1995, the Administrator waived fees of $381,513 and
$949,233, respectively, with respect to the Prime Fund. For the fiscal years
ended February 28, 1993, February 28, 1994, and February 28, 1995, the
Administrator was paid, pursuant to the administration agreement then in effect,
administration fees (net of waivers) of $466,339, $472,766, and $501,956,
respectively by the Tax-Exempt Money Fund. For the fiscal years indicated, the
Administrator reimbursed the Tax-Exempt Money Fund for expenses or waived fees
in the amount of $3,692, $23,524, and $11,611, respectively. For the fiscal
years ended February 28, 1993, February 24, 1994, and February 28, 1995 the
Administrator was paid administrative fees (net of waivers) of $104,656,
$269,869, and $301,618, respectively, by the California Tax-Exempt Money Market
Fund. For the fiscal years indicated, aggregate expense reimbursements and fee
waivers by the Administrator with respect to the California Tax-Exempt Money
Market Fund were $0, $22,998, and $0, respectively.
For the fiscal year ended March 31, 1992 and for the fiscal period
April 1, 1992 through February 28, 1993, pursuant to the administration
agreements then in effect, Signature Broker-Dealer Services, Inc., the former
administrator of the Predecessor Government and Treasury Only Funds (the "Former
Administrator"), accrued direct and indirect administrative fees of $139,202 and
$120,608, respectively, with respect to the Predecessor Government Fund of First
Funds of America and $49,850 and $36,859, respectively, with respect to the
Predecessor Treasury Only Fund of First Funds of America. For the fiscal year
ended February 28, 1994, the Administrator earned administration fees (net of
fee waivers and expense reimbursements) in the amounts of $877,515 and $68,888,
respectively, by the Government Fund and Treasury Only Fund. For this same
period, aggregate expense reimbursements and fee waivers by the Administrator
with respect to the Government Fund and Treasury Only Fund were $6,537 and
$127,607, respectively. For the fiscal year ended February 28, 1995, the
Government Fund and Treasury Only Fund paid the Administrator (net of fee
waivers), $463,641 and $293,305, respectively. For this same period the
Administrator waived fees due from the Government Fund
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and Treasury Only Fund in the amounts of $185,733 and $8,313, respectively and
reimbursed the Funds $0 and $0, respectively.
The Administrator will bear all expenses in connection with the
performance of its services under its Basic Administrative Services Agreement
for the Funds with the exception of fees charged by The Bank of New York for
certain fund accounting services which are borne by the Funds. See "Custodian
and Transfer Agent" below. Expenses borne by the Company include taxes,
interest, brokerage fees and commissions, if any, fees of directors who are not
officers, directors, partners, employees or holders of 5% or more of the
outstanding voting securities of Bank of America or the Administrator or any of
their affiliates, Securities and Exchange Commission fees and state securities
qualification fees, advisory fees, fees payable under the Basic Administrative
Services Agreement and Special Management Services Agreement, charges of
custodians, transfer and dividend disbursing agents' fees, certain insurance
premiums, outside auditing and legal expenses, costs of maintaining corporate
existence, costs attributable to investor services, including without limitation
telephone and personnel expenses, costs of preparing and printing prospectuses
and statements of additional information for regulatory purposes, cost of
shareholders' reports and corporate meetings and any extraordinary expenses.
The Basic Administrative Services Agreement provides that the
Administrator shall not be liable for any error of judgment or mistake of law or
any loss suffered by any Fund in connection with the matters to which the
agreement relates, except a loss resulting from willful misfeasance, bad faith
or negligence in the performance of the Administrator's duties or from the
reckless disregard by the Administrator of its obligations and duties
thereunder.
Bank of America has received an option entitling it to purchase
approximately 4% of the Administrator's authorized common stock on or before
December 31, 1998.
SPECIAL MANAGEMENT SERVICES AGREEMENT
Bank of America and the Administrator provide services with respect to
the Funds' Pacific Horizon Shares as described in the Prospectuses pursuant to a
Special Management Services Agreement. The agreement has been entered into by
the Company pursuant to an exemptive order granted by the Securities and
Exchange Commission, and in approving the agreement, the Board of Directors
determined that there was a reasonable likelihood that it would be beneficial to
the Pacific Horizon Shares of each Fund. Under the exemptive order, the
agreement may not be amended to increase materially the amount payable
thereunder
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<PAGE> 755
unless approved by a majority vote of the Disinterested Directors (as defined
below) cast in person at a meeting called for the purpose of voting on the
amendment. The Board of Directors must be provided with and must review, at
least quarterly, a written report of all amounts expended pursuant to the
agreement.
The Special Management Services Agreement will continue in effect with
respect to each Fund until October 31, 1996 and thereafter for successive
periods of one year, provided such continuation is approved at least annually by
the Company's Board of Directors or by the vote of a majority of the outstanding
Pacific Horizon Shares of the particular Fund involved (as defined under
"General Information - Miscellaneous"), and by a majority of the directors who
are not interested persons of the Company and who have no direct or indirect
interest in the agreement (the "Disinterested Directors") by vote cast in person
at a meeting called for such purpose. The agreement is terminable at any time
with respect to any Fund by the Disinterested Directors, by vote of a majority
of the outstanding Pacific Horizon Shares of such Fund, by Bank of America, or
by the Administrator upon 60 days' notice to the other parties to the agreement.
For the services provided and expenses assumed pursuant to the Special
Management Services Agreement, Bank of America and the Administrator are
entitled to receive an aggregate fee at the annual rate of .32% of the average
daily net asset value of the Pacific Horizon Shares of each Fund (.35% for
California Tax-Exempt Money Market Fund). From time to time, Bank of America
and the Administrator may waive the fees payable to them under the agreement.
Bank of America and the Administrator bear all expenses in connection with the
performance of their services under the Special Management Services Agreement.
Bank of America is the successor party by merger to Security Pacific under the
Special Management Services Agreement.
For the fiscal years ended February 28, 1993, February 28, 1994 and
February 28, 1995 the Prime Fund incurred expenses under the Special Management
Services Agreement of $3,987,138, $3,802,465, and $3,464,984, respectively, of
which $94,904, $74,910, and $65,326, respectively, were earned by the
Administrator, $32,321, $28,260, and $18,906, respectively, were earned by Bank
of America (Security Pacific prior to April 22, 1992), $247,080, $258,016, and
$268,593, respectively, were earned by affiliates of the Administrator, and
$3,609,817, $3,440,348, and $3,112,159, respectively, were earned by affiliates
of Bank of America (Security Pacific prior to April 22, 1992); and the Treasury
Fund incurred expenses of $6,555,372, $5,303,956, and $3,830,002, respectively,
of which $33,101, $27,214, and $28,381, respectively, were earned by the
Administrator, $7,604, $12,977, and $9,031, respectively, were
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<PAGE> 756
earned by Bank of America (Security Pacific prior to April 22, 1992), $58,945,
$49,793, and $40,665, respectively, were earned by affiliates of the
Administrator, and $6,551,999, $5,171,092, and $3,751,925, respectively, were
earned by affiliates of Bank of America (Security Pacific prior to April 22,
1992). For the fiscal years ended February 28, 1993, February 28, 1994 and
February 28, 1995, the Tax-Exempt Money Fund incurred expenses under the
Agreement (before fee waivers) of $0, $92,174, and $135,034, respectively,
$6,165 of which was earned by the Administrator, $114 by Bank of America and
$212 by affiliates of Bank of America (Security Pacific prior to April 22, 1992)
for the fiscal year ended February 28, 1994 and $8,273 of which was earned by
the Administrator, $0 was earned by affiliates of the Administrator, $1,062 was
earned by Bank of America, and $125,664 was earned by affiliates of Bank of
America for the fiscal year ended February 28, 1995. For the fiscal years ended
February 28, 1993, February 28, 1994, and February 28, 1995, the California
Tax-Exempt Money Market Fund incurred expenses under the Agreement (before fee
waivers) of $334,900, $560,709, and $639,503, respectively, $52,328 of which was
earned by the Administrator and $282,572 of which was earned by Bank of America
(Security Pacific prior to April 22, 1992), for the fiscal year ended February
28, 1993, $40,295 of which was earned by the Administrator, $6,211 by affiliates
of the Administrator and $335,957 was earned by Bank of America (Security
Pacific prior to April 22, 1992) for the fiscal year ended February 28, 1994,
and $9,701 of which was earned by the Administrator, $21,474 was earned by
affiliates of the Administrator, $2,892 was earned by Bank of America, and
$605,436 of which was earned by affiliates of Bank of America for the fiscal
year ended February 28, 1995. For the fiscal years ended February 28, 1993,
February 28, 1994, and February 28, 1995, Bank of America (Security Pacific
prior to April 22, 1992) and the Administrator, and their respective affiliates,
did not waive any Special Management Services fees with respect to the Prime
Fund, Treasury Fund, California Tax- Exempt Money Market Fund, or Tax-Exempt
Money Fund.
For the fiscal year ended February 28, 1994 the Government Fund and
Treasury Only Fund incurred expenses of $408,322 and $214,153, respectively,
under the Agreement, of which $0 and $0, respectively, was earned by Bank of
America; $281 and $150, respectively, was earned by the Administrator; $407,992
and $208,813, respectively, was earned by affiliates of Bank of America; and $0
and $38, respectively, was earned by affiliates of the Administrator. For the
fiscal year ended February 28, 1995 the Government Fund and Treasury Only Fund
incurred expenses of $774,259 and $191,572, respectively, under the Agreement,
of which $0 and $1,581, respectively, was earned by Bank of America; $135 and
$1,779, respectively, was earned by the Administrator; $774,124 and $187,925,
respectively, was earned by affiliates of Bank of America; and $0 and $287,
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respectively, was earned by affiliates of the Administrator. First Funds of
America, pursuant to an Administrative Services Plan, had previously entered
into a shareholder servicing agreement with Bank of America (and prior to that
shareholder servicing agreement had entered into a shareholder servicing
agreement with Seattle-First National Bank, an affiliate of Bank of America).
Under the shareholder servicing agreement, Bank of America, as shareholder
servicing agent, or an affiliate of Bank of America pursuant to a
sub-shareholder servicing agreement, provided certain services to shareholders
in exchange for a fee from each Predecessor Fund of First Funds of America not
in excess of .50% of the average daily net assets of such Predecessor Fund. Such
fees were actually incurred by the Predecessor Government Fund of First Funds of
America at the effective annual rate of .32% of its average daily net assets and
by the Predecessor Treasury Only Fund of First Funds of America at the effective
annual rate of .15% of its average daily net assets. For the fiscal year ended
March 31, 1992 and for the period April 1, 1992 through February 28, 1993, the
Predecessor Government Fund and Predecessor Treasury Only Fund of First Funds of
America, respectively, accrued shareholder servicing fees of $703,607 (of which
$122,407 was waived) and $597,256 (of which $151,068 was waived), respectively,
and $105,265 (of which $69,650 was waived), and $246,982 (of which $132,116 was
waived), and $185,073 (of which $120,448 was waived), respectively. All
shareholder servicing fees were paid to Bank of America and/or its affiliates.
The Special Management Services Agreement provides that Bank of America
and the Administrator shall not be liable for any error of judgement or mistake
of law or any loss suffered by any Fund in connection with the matters to which
the agreement relates, except a loss resulting from willful misfeasance, bad
faith or negligence in the performance of their duties or from the reckless
disregard by them of their obligations and duties thereunder.
FEE WAIVERS AND EXPENSE REIMBURSEMENTS
If total expenses borne by any Fund in any fiscal year exceed the
expense limitations imposed by applicable state securities regulations, the
Company may deduct from the payments to be made with respect to such Fund to
Bank of America and the Administrator, respectively, or Bank of America and the
Administrator each will bear, the amount of such excess to the extent required
by such regulations. Such amount, if any, will be estimated and accrued daily
and paid on a monthly basis. As of the date of this Statement of Additional
Information, the most restrictive expense limitation that may be applicable to
the Company limits aggregate annual expenses with respect to a Fund, including
management and advisory fees but excluding interest,
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<PAGE> 758
taxes, brokerage commissions, and certain other expenses, to 2-1/2% of the
first $30 million of its average daily net assets, 2% of the next $70 million,
and 1-1/2% of its remaining average daily net assets. During the course of the
Company's fiscal year, the Administrator and Bank of America may assume certain
expenses and/or not receive payment of fees of one or more of the Company's
Funds, while retaining the ability to be reimbursed by such Funds for such
amounts prior to the end of the fiscal year. This will have the effect of
increasing yield to investors at the time such fees are not received or amounts
are assumed and decreasing yield when such fees or amounts are reimbursed.
DISTRIBUTOR
The Distributor acts as the exclusive distributor of the shares of each
of the Funds pursuant to a distribution agreement with the Company. Shares are
sold on a continuous basis by the Distributor as agent, although the Distributor
is not obliged to sell any particular amount of shares. No compensation is
payable by the Funds to the Distributor for its distribution services. The
distribution agreement shall continue in effect with respect to each Fund until
October 31, 1996. Thereafter, if not terminated, the distribution agreement
shall continue automatically for successive terms of one year, provided that
such continuance is specifically approved at least annually (a) by a vote of a
majority of those members of the Board of Directors of the Company who are not
parties to the distribution agreement or "interested persons" of any such party,
cast in person at a meeting called for the purpose of voting on such approval,
and (b) by the Board of Directors of the Company or by vote of a "majority of
the outstanding voting securities" of the Funds as to which the distribution
agreement is effective; provided, however, that the distribution agreement may
be terminated by the Company at any time, without the payment of any penalty, by
vote of a majority of the entire Board of Directors of the Company or by a vote
of a "majority of the outstanding voting securities" of such Funds on 60 days'
written notice to the Distributor, or by the Distributor at any time, without
the payment of any penalty, on 90 days' written notice to the Company. This
Agreement will automatically and immediately terminate in the event of its
"assignment."
For the period June 4, 1990 (commencement of operations) through March
31, 1991 (fiscal year end), the fiscal year ended March 31, 1992 and the period
April 1, 1992 through February 28, 1993, Signature Broker-Dealer Services, Inc.,
the former distributor of the Predecessor Government and Treasury Only Funds'
shares, was paid $5,500, $7,137 and $4,316, respectively by the Predecessor
Government Fund of First Funds of America and $4,211, $2,519 and $1,504,
respectively by the Predecessor Treasury Only Fund of First Funds of America as
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reimbursement for expenses related to the distribution of such Predecessor
Funds' shares. No such fees will be charged to the Government Fund or the
Treasury Only Fund or to any other Fund.
CUSTODIAN AND TRANSFER AGENT
The Bank of New York, 90 Washington Street, New York, New York 10286,
has been appointed by the Company as custodian for the Funds. Additionally,
BISYS Fund Services Ohio, Inc., 3435 Stelzer Road, Columbus, Ohio 43219-3035,
has been appointed as transfer and dividend disbursing agent. The Bank of New
York also provides the Company with certain accounting, bookkeeping, pricing,
and dividend and distribution calculation services pursuant to a fund accounting
services agreement with the Administrator. The monthly fees charged by the bank
under the fund accounting agreement are borne by the Funds. The Company and The
Bank of New York have appointed Bank of America to act as sub-custodian for the
Funds pursuant to a Sub-Custodian Agreement. As sub-custodian of the Company's
assets, Bank of America (i) maintains a separate account or accounts in the name
of the Company, (ii) holds and disburses portfolio securities on account of the
Company, (iii) makes receipts and disbursements of money on behalf of the
Company, (iv) collects and receives all income and other payments and
distributions on account of the Company's portfolio securities held by Bank of
America, (v) responds to correspondence from security brokers and others
relating to its duties and (vi) makes periodic reports to the Company's Board of
Directors concerning its duties thereunder. Under the Sub-Custodian Agreement,
the Company will reimburse Bank of America for its costs and expenses in
providing services thereunder. Bank of America is the successor to Security
Pacific under the Sub-Custodian Agreement. For the fiscal years ended February
28, 1993, February 28, 1994, and February 28, 1995, Bank of America (and
Security Pacific prior to April 22, 1992) in their capacity as sub-custodian,
did not hold any of the Company's assets and, accordingly, received no fees.
Bank of America and Seattle-First National Bank, an affiliate of Bank
of America, previously provided transfer agency, custodial and fund accounting
services for the Predecessor Government Funds and Predecessor Treasury Only
Funds. For the period June 4, 1990 (commencement of operations) through March
31, 1991 (fiscal year end), the fiscal year ended March 31, 1992 and the period
April 1, 1992 through February 28, 1993, Bank of America and Seattle-First
National Bank received directly and indirectly for such services $129,116,
$254,824 and $200,624, respectively, with respect to the Predecessor Government
Funds and $38,761, $114,630 and $100,225, respectively, with respect to the
Predecessor Treasury Only Funds.
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ADDITIONAL PERFORMANCE INFORMATION
The "yields" and "effective yields" of each Fund are calculated
according to formulas prescribed by the Securities and Exchange Commission. The
standardized seven-day yield for each Fund's series of shares is computed
separately for each series by determining the net change, exclusive of capital
changes, in the value of a hypothetical pre-existing account in the particular
Fund involved having a balance of one share at the beginning of the period,
dividing the net change in account value by the value of the account at the
beginning of the base period to obtain the base period return, and multiplying
the base period return by (365/7). The net change in the value of an account in
a Fund includes the value of additional shares purchased with dividends from the
original share, and dividends declared on both the original share and any such
additional shares, net of all fees, other than nonrecurring account or sales
charges, that are charged to all shareholder accounts in proportion to the
length of the base period and the Fund's average account size. The capital
changes to be excluded from the calculation of the net change in account value
are realized gains and losses from the sale of securities and unrealized
appreciation and depreciation. The effective annualized yields for each Fund are
computed by compounding a particular Fund's unannualized base period returns
(calculated as above) by adding 1 to the base period returns, raising the sums
to a power equal to 365 divided by 7, and subtracting 1 from the results. In
addition, the California Tax-Exempt Money Market Fund and Tax-Exempt Money Fund
may quote a standardized "tax-equivalent yield" which is computed by: (a)
dividing the portion of the Fund's yield (as calculated above) that is exempt
from federal, or in the case of the California Tax-Exempt Money Market Fund both
federal and California state, income tax by one minus a stated federal, or in
the case of the California Tax-Exempt Money Market Fund a stated combined
federal and California state, income tax rate; (b) with respect to the
California Tax-Exempt Money Market Fund dividing the portion of that Fund's
yield (as calculated above) that is exempt from federal income tax only by one
minus a stated federal income tax rate; and (c) adding the figure resulting from
(a) above (with respect to the Tax-Exempt Money Fund) or from (a) and (b) above
(with respect to the California Tax-Exempt Money Market Fund) to that portion,
if any, of the particular Fund's yield that is not exempt from federal income
tax. The fees which may be imposed by institutional investors directly on their
customers for cash management services are not reflected in the Funds'
calculations of yields.
The current yields for each of the Funds may be obtained by calling
(800) 227-1545. For the seven-day period ended February 28, 1995, the annualized
yields after fee waivers of the Pacific Horizon Shares of the Treasury Fund,
Prime Fund,
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Government Fund and Treasury Only Fund were 5.49%, 5.64%, 5.66% and 5.07%,
respectively; and the effective yields after fee waivers of such Funds' Pacific
Horizon Shares were 5.63%, 5.79%, 5.81% and 5.19%, respectively. For the
seven-day period ended February 28, 1995, the annualized yield, effective yield
and tax-equivalent yield (after fee waivers) were 3.36%, 3.41% and 5.15%,
respectively, for Pacific Horizon Shares of the California Tax-Exempt Money
Market Fund, and 3.41%, 3.46% and 4.94%, respectively, for Pacific Horizon
Shares of the Tax-Exempt Money Fund. The combined federal and California income
tax rate used in calculating the foregoing "tax-equivalent" yield of the
California Tax-Exempt Money Market Fund was 34.70%. The federal income tax rate
used in calculating the tax-equivalent yields of the Tax-Exempt Money Fund was
31%.
From time to time, the yields of the Funds may be quoted in and
compared to other mutual funds with similar investment objectives in
advertisements, shareholder reports or other communications to shareholders. The
Funds may also include calculations in such communications that describe
hypothetical investment results. (Such performance examples will be based on an
express set of assumptions and are not indicative of the performance of any
Fund.) Such calculations may from time to time include discussions or
illustrations of the effects of compounding in advertisements. "Compounding"
refers to the fact that, if dividends or other distributions on a Fund
investment are reinvested by being paid in additional Fund shares, any future
income of a Fund would increase the value of the Fund investment more quickly
than if dividends or other distributions had been paid in cash. The Funds may
also include discussions or illustrations of the potential investment goals of a
prospective investor (including but not limited to tax and/or retirement
planning), investment management techniques, policies or investment suitability
of a Fund, economic conditions, legislative developments (including pending
legislation), the effects of inflation and historical performance of various
asset classes. From time to time advertisements or communications to
shareholders may summarize the substance of information contained in shareholder
reports (including the investment composition of a Fund), as well as the views
of the investment adviser as to current market, economic, trade and interest
rate trends, legislative, regulatory and monetary developments, investment
strategies and related matters believed to be of relevance to a Fund. The Funds
may also include in advertisements charts, graphs or drawings which illustrate
the potential risks and rewards of investment in various investment vehicles. In
addition, advertisements or shareholder communications may include a discussion
of certain attributes or benefits to be derived by an investment in a Fund and
may include testimonials as to the investment adviser's capabilities by clients.
Such advertisements or communications may include symbols, headlines
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or other material which highlight or summarize the information discussed in more
detail therein. With proper authorization, a Fund may reprint articles (or
excerpts) written regarding the Fund and provide them to prospective
shareholders. Performance information with respect to the Funds is generally
available by calling (800) 346-2087.
In addition to the publications listed in the Funds' Prospectuses,
yield data as reported in the following publications may be used in comparing
the yields of the Funds to those of other mutual funds with similar investment
objectives: Business Week, Investor's Business Daily, Kiplinger, U.S. News,
Financial World, USA Today, Morningstar, Mutual Fund Monitor, and American
Banker.
GENERAL INFORMATION
DESCRIPTION OF SHARES
The Company is an open-end management investment company organized as a
Maryland corporation on October 27, 1982. The Fund's Charter authorizes the
Board of Directors to issue up to two hundred billion full and fractional shares
of capital stock. The Board of Directors has authorized the issuance of
twenty-two classes of stock - Classes A through W Common Stock, representing
interests in twenty-two separate investment portfolios. Each share of capital
stock has a par value of $.001. This Statement of Additional Information
describes the Pacific Horizon Shares of the Prime, Treasury, Government,
Treasury Only, Tax-Exempt Money and California Tax-Exempt Money Market Funds.
Shares have no preemptive rights and only such conversion or exchange
rights as the Board may grant in its discretion. When issued for payment as
described in its Prospectuses, the Company's shares will be fully paid and
non-assessable. For information concerning possible restrictions upon the
transferability of the Company's shares and redemption provisions with respect
to such shares, see "Additional Purchase and Redemption Information" in this
Statement of Additional Information.
The Funds' Horizon Shares and Horizon Service Shares differ from
Pacific Horizon Shares in the following respects. Only Pacific Horizon Shares
are subject to the Special Management Services fee described above, which is
payable at the rate of .32% (on an annualized basis) of the average daily net
asset value of the Pacific Horizon Shares that are outstanding from time to
time. Only Horizon Service Shares bear the fees payable under the Shareholder
Services Plan that has been adopted for
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Horizon Service Shares, which are payable at the rate of up to .25% (on an
annualized basis) of the average daily net asset value of the Horizon Service
Shares that are outstanding from time to time as described in the Prospectuses
for such shares. As a result, at any given time, the net yield on a Fund's
Pacific Horizon Shares will be approximately .32% lower than the yield on that
Fund's Horizon Shares and .07% lower than the yield on the Fund's Horizon
Service Shares. Standardized yield quotations will be computed separately for
each series of Shares.
Holders of the outstanding shares of a particular Fund will vote
together in the aggregate and not by class on all matters, except that only
Pacific Horizon Shares of a Fund will be entitled to vote on matters submitted
to a vote of shareholders pertaining to the Special Management Services
Agreement and only Horizon Service Shares of a Fund will be entitled to vote on
matters submitted to a vote of shareholders pertaining to the expenses that are
borne exclusively by such shares. Further, shareholders of all of the Funds, as
well as those of any other investment portfolio now or hereafter offered by the
Company, will vote together in the aggregate and not separately on a
Fund-by-Fund basis, except as otherwise required by law or when permitted by the
Board of Directors. Rule 18f-2 under the 1940 Act provides that any matter
required to be submitted to the holders of the outstanding voting securities of
an investment company such as the Company shall not be deemed to have been
effectively acted upon unless approved by a majority of the outstanding shares
of each Fund affected by the matter. A Fund is affected by a matter unless it is
clear that the interests of each Fund in the matter are substantially identical
or that the matter does not affect any interest of the Fund. Under the Rule, the
approval of an investment advisory agreement or any change in a fundamental
investment policy would be effectively acted upon with respect to a Fund only if
approved by a majority of the outstanding shares of such Fund. However, the Rule
also provides that the ratification of independent public accountants, the
approval of principal underwriting contracts and the election of directors may
be effectively acted upon by shareholders of the Company voting in the aggregate
without regard to particular Funds.
Notwithstanding any provision of Maryland law requiring a greater vote
of the Company's common stock (or of the shares of a Fund voting separately as a
class) in connection with any corporate action, unless otherwise provided by law
(for example, by Rule 18f-2 discussed above) or by the Company's Charter, the
Company may take or authorize such action upon the favorable vote of the holders
of more than 50% of the outstanding common stock of the Company voting without
regard to class.
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REPORTS
Shareholders will be sent unaudited semi-annual reports describing the
Funds' investment operations and annual financial statements together with a
report of independent accountants.
COUNSEL
Drinker Biddle & Reath (of which W. Bruce McConnel, III, Secretary of
the Company, is a partner), 1345 Chestnut Street, Philadelphia National Bank
Building, Philadelphia, Pennsylvania 19107, serves as counsel to the Company and
will pass upon the legality of the shares offered hereby. O'Melveny & Myers, 400
South Hope Street, Los Angeles, California 90071, acts as special California
counsel for the Company and has reviewed the portions of the Prospectus for the
California Tax-Exempt Money Market Fund and this Statement of Additional
Information concerning California taxes and the description of the special
considerations relating to California Municipal Securities.
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP, independent accountants, with offices at 1177
Avenue of the Americas, New York, New York 10036, has been selected as
independent accountants of each Fund for the fiscal year ending February 28,
1996. Deloitte & Touche LLP served as independent accountants for the
Predecessor Government Funds and Predecessor Treasury Only Funds for the
11-month period ended February 28, 1993, the fiscal year ended March 31, 1992
and the period from June 4, 1990 (commencement of operations) to March 31, 1991.
MISCELLANEOUS
As used in the Prospectuses and this Statement of Additional
Information, a "vote of a majority" of the outstanding shares of a Fund or a
particular series means, with respect to the approval of an investment advisory
agreement, a distribution plan or a change in a fundamental investment policy,
the affirmative vote of the lesser of (a) more than 50% of the outstanding
shares of the Fund or such series, or (b) 67% of the shares of the Fund or
series present at a meeting at which more than 50% of the outstanding shares of
the Fund or series are represented in person or by proxy.
At June 15, 1995, the name, address and share ownership of the entities
which held of record more than 5% of the outstanding Pacific Horizon Shares of
the Treasury Fund were as follows: BA Investment Services Inc., For the Benefit
of Clients, 555 California Street, 4th Floor, Department #4337, San Francisco,
CA 94104, 98,230,626.530 shares (7.70%); Bank of
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America State Trust Co., 299 N. Euclid Avenue, Pasadena, CA 91101,
1,044,975,154.790 shares (82.00%); and Hellman & Freidman Capital Partners II,
Limited Partnership, Attention: Georgia Lee, 1 Maritime Plaza, 12th Floor, San
Francisco, CA 94111, 1,216,118,073.700 shares (095.42%).
At June 16, 1995, the name, address and share ownership of the entities
which held of record more than 5% of the outstanding Horizon Shares of the
Treasury Fund was as follows: Bank of America Trustee/Custodian for Investing in
Horizon Treasury, Attn: Eric Peterson, 701 S. Western Avenue, 2nd Floor,
Glendale, CA 91201, 398,540,438.170 shares (68.901%); Security Pacific State
Trust Co., Agreement for Sec. PACWA Participants, Attn: Cash Sweep Funds (L.
Goekjian), P.O. Box 91630, Pasadena, CA 91101, 94,279,024.120 shares (16.299%).
At June 16, 1995, the name, address and share ownership of the entities
which held beneficially more than 5% of the outstanding Horizon Service Shares
of the Treasury Fund were as follows: Bank of America FM&TS Operat CA, Attn: CTF
Unit, 701 South Western Avenue, Glendale, CA 91201, 65,745,555.320 shares
(23.658%); Bank of America Nevada Southern Comm. Bank, Attn: Dan Dykes, P.O. Box
98600, Las Vegas, NV 89193, 63,974,589.270 shares (23.020%). Security Pacific
State Trust Co., Agreement for Sec. PACWA Participants, Attn: Cash Sweep Funds,
P.O. Box 91630, Pasadena, CA 91101, 56,906,301.540 shares (20.477%); and
Security Pacific Cash Management, c/o Bank of America - GPO M/C 5533, Attn:
Liezel Barangan, 1850 Gateway Boulevard, Concord, CA 94520, 77,003,300 shares
(27.709%). At June 15, 1995, the name, address and, share ownership of the
entity which held of record more than 5% of the outstanding Horizon Service
Shares of the Treasury Fund was as follows: Omnibus A/C for the Shareholder
Accounts maintained by Concord Financial Services, Inc., Attn: Linda Zerbe,
First and Market Building, 100 First Avenue, Suite 300, Pittsburgh, PA 15222,
263,629,755.130 shares (65.51%). At June 15, 1995 the name, address and share
ownership of the entities which held of record more than 5% of the outstanding
Pacific Horizon Shares of the Prime Fund were as follows: BA Investment Services
Inc., For the Benefit of Clients, 555 California Street, 4th Floor, Department
#4337, San Francisco, CA 94104, 514,119,226.900 shares (38.76%); Bank of America
State Trust Co., 299 N. Euclid Avenue, Pasadena, CA 91101, 392,983,248.780
shares (29.63%); and Southwest Securities Inc., Attn: Cashiering, 201 Elm
Street, Suite 4300, Dallas, TX 75270, 169,018,910.270 shares (12.74%). At June
16, 1995, the name, address and share ownership of the entities which held of
record more than 5% of the outstanding Horizon Shares of the Prime Fund were as
follows: Bank of America Trustee/Custodian for Investing Horizon Prime, Attn:
Eric Peterson, 701 S. Western Avenue, 2nd Floor, Glendale, CA 91201,
385,058,852.030 shares (56.838%); and Bank of America NT&SA, Attn: Kay
Warren/Dept. #5596, 1455 Market Street, San
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Francisco, CA 94103, 57,300,000.00 shares (9.934%). At June 15, 1995, the name,
address and share ownership of the entity which held of record more than 5% of
the outstanding Horizon Service Shares of the Prime Fund were as follows:
Omnibus A/C for the Shareholder Accounts maintained by Concord Financial
Services, Inc., Attn: Linda Zerbe, First and Market Building, 100 First Avenue,
Suite 300, Pittsburgh, PA 15222, 752,776,315.610 shares (70.26%).
At June 16, 1995, the name, address and share ownership of the entities
which held beneficially more than 5% of the outstanding Horizon Service Shares
of the Prime Fund were as follows: Bank of America NT&SA Financial Management
and Trust Services, 701 S. Western Avenue, Glendale, CA 91201, 74,038,082.090
shares (9.835%); Capital Network Services, Attn: Donna Novell, One Bush Street,
11th Floor, San Francisco, CA 94104, 86,407,261.23 shares (11.478%); Security
Pacific Cash Management, c/o Bank of America. GPO. M/C 5533 Attn: Liezel
Barangan, 1850 Gateway Boulevard, M/C 5533, Concord, CA 94520, 379,755,600.000
shares (50.447%); Security Pacific State Trust Co., Agreement for SecPAC WA
Participants, Attn: Cash Sweep Funds (L. Goekjian) P.O. Box 91630, Pasadena, CA
91101, 54,321,621.330 shares (7.216%); and Southwest Securities Inc., Attn: Mary
Lisenber, 1201 Elm Street, Suite 4300, Dallas, TX 75270, 130,146,660.030 shares
(17.289%).
At June 15, 1995, the name, address and share ownership of the entities
which held of record more than 5% of the outstanding Pacific Horizon Shares of
the Tax-Exempt Money Fund were as follows: BA Investment Services, Inc., For the
Benefit of Clients, 555 California Street, 4th Floor, Department #4337, San
Francisco, CA 94104, 12,233,845.190 shares (39.73%); Southwest Securities Inc.,
Attn: Cashiering, 1201 Elm Street, Suite 4300, Dallas, TX, 75270, 10,387,253.930
shares (33.73%); and Bank of America State Trust Co., 299 N. Euclid Avenue,
Pasadena, CA 91101, 6,515,635.730 shares (21.16%).
At June 16, 1995, the name, address and share ownership of the entities
which held of record more than 5% of the outstanding Horizon Shares of the
Tax-Exempt Money Fund were as follows: Bank of America Custodian For Investing
in Horizon Tax-Exempt Money Fund, Attn: Eric Peterson, 701 S. Western Avenue,
2nd Floor, Glendale, CA 19201, 129,582,555.65 shares (38.576%); Continental Bank
National Association Custodian for the Benefit of Custodian Co. Attn: Mary
Chester, 231 South LaSalle Street, 6Q, Chicago, IL 60697, 152,699,416.270 shares
(45.458%); and Maine Midland Bank NA, Investment Services, 17th Floor, Attn:
Christine Mincel, One Marine Midland Center, Buffalo, NY 14203, 21,684,672.980
shares (6.455%).
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At June 15, 1995, the name, address and share ownership of the entities
which held of record more than 5% of the outstanding shares of the Horizon
Service Shares of the Tax-Exempt Money Fund were as follows: Furman C. Moseley
and Susan R. Moseley Tenn. In Common, 1201 3rd Avenue, Box 7C, Seattle, WA
98101, 4,165,513.060 shares (9.91%); Omnibus A/C for the shareholder accounts
maintained by Concord Financial Services Inc., Attn: Linda Zerbe, First and
Market Building, 100 First Avenue, Suite 300, Pittsburgh, PA 15222,
22,398,544.590 shares (53.31%); and Omnibus A/C for the Shareholder Accounts
maintained by Concord Financial Services Inc. Attn: First and Market Building,
100 First Avenue, Suite 300, Pittsburgh, PA 15222, 3,494,305.180 shares (8.31%).
At June 16, 1995, the name, address and share ownership of the entities which
held beneficially more than 5% of the outstanding Horizon Service Shares of the
Tax-Exempt Money Fund were as follows: BA Investment Services Inc., 555
California Street, 4th Floor Dept. #4337, San Francisco, CA 94104, 1,362,028.590
shares (5.260%); Bank of America FM&TS Oper. CA, Attn: CTF Unit, 701 South
Western Avenue, Glendale, CA 91201, 2,293,907.40 shares (8.859%); and Southwest
Securities, Inc., Attn: Mary Lisenber, 1201 Elm Street, Suite 430, Dallas, TX
75270, 21,021,580.530 shares (81.187%). At June 15, 1955, the name, address and
share ownership of the entities which held of record more than 5% of the
outstanding Pacific Horizon Shares of the Government Fund were as follows: Bank
of America, NT&SA, The Private Bank, Attn: ACI Unit #8329, 701 S. Western
Avenue, Glendale, CA 91201, 79,875,532.090 shares (22.71%); Bank of America
State Trust Co., 299 N. Euclid Avenue., Pasadena, CA 91101, 64,756,966.280
shares (18.41%); and BA Investment Services Inc., For the Benefit of Clients,
555 California Street, 4th Floor, Department #4337, San Francisco, CA 94104,
170,940,404.650 shares (48.60%). At June 16, 1995, the name, address and share
ownership of the entities which held of record more than 5% of the outstanding
Horizon Shares of the Government Fund were as follows: Bank of America NT&SA
Trustee/Custodian for Investing in Horizon Shares of the Government Fund, Attn:
Cynthia Beauvais, 701 South Western Avenue., Glendale, CA 91201, 9,327,446.350
shares (5.028%); Bank of America State Trust, Attn: Rigo Barrett, 299 N. Euclid
Avenue, Pasadena, CA 91101, 28,063,486.740 shares (15.129%); Capital Network
Services, Attn: Donna Novell, One Bush Street, 11th Floor, San Francisco, CA
94104, 24,227,801.980 shares (13.061%); County of Orange, Matt Raabe, P.O. Box
4515, Santa Ana, CA 92702, 10,000,000.000 shares (5.391%); Cypress Insurance
Co., Attn: Larry Tetzloff, 9290 W. Dodge Road, Omaha, NE 68124, 9,996,515.930
shares (5.389%); Harr & Co., c/o Bank of New York, Attn: Bimal Sana, Spec. Prec.
Dept., One Wall Street, 5th Floor, New York, NY 10286, 14,000,000.000 shares
(7.547%); Micron Electronics Inc., Attn: Debbie Meigand, 900 East Karcher Road,
Nanpa, ID 83687, 16,080,510.14 shares (8.669%); and Silocin Magic Corp., Attn:
Meng A. Lim, 20300 Stevens Creek Boulevard., Suite
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400, Cupertino, CA 95014, 18,058,262.110 shares (9.735%). At June 15, 1995, the
name, address and share ownership of the entities which held of record more than
5% of the outstanding Horizon Service Shares of the Government Fund were as
follows: Spacelabs Medical, Inc., Attn: Scott Bender, P.O. Box 97013, Redmond,
WA 98073, 14,572,000.000 shares (5.70%); Good Health Plan of WA, Attn: Tsai
Cheng, 1501 9th Avenue, Suite 500, Seattle, WA 98101, 16,584,866.580 shares
(6.49%); Omnibus A/C for the Shareholder Accounts maintained by Concord.
Financial Services Inc., Attn: Linda Zerbe, First and Market Building, 100 First
Avenue, Suite 300, Pittsburgh, PA 15222, 68,555,257.020 shares (26.85%). At June
16, 1995, the name, address and share ownership of the entities which held
beneficially more than 5% of the Horizon Service Shares of the Government Fund
were as follows: Bank of America Nevada Southern Comm. Bank, Attn: Dan Dykes,
P.O. Box 98600, Las Vegas, NV 89193-8600, 35,849,966.050 shares (52.294%); and
Capital Network Services, Attn: Donna M. Howell, One Bush Street, 11th Floor,
San Francisco, CA 94104-4425, 23,929,840.440 shares (34.906%). At June 15, 1995,
the name, address and share ownership of the entities which held of record more
than 5% of the Pacific Horizon Shares of the Treasury Only Fund were as follows:
Bank of America NT&SA, the Private Bank, Attn: ACI Unit 48329, 701 South Western
Avenue, Glendale, CA 91201, 48,516,900.490 shares (31.68%) Bank of America State
Trust Co., 299 N. Euclid Avenue, Pasadena, CA 91101, 22,350,831.320 shares
(14.59%); and BA Investment Services Inc., For the Benefit of Clients, 555
California Street, 4th Floor, Department #4337, San Francisco, CA 94104,
69,016,521.500 shares (45.06%). At June 15, 1995, the name, address and share
ownership of the entities which held of record more than 5% of the outstanding
Horizon Service Shares of the Treasury Only Fund were as follows: National Home
Mortgage Corp., Attn: Mortgage Banking Treasury Operations, 5565 Morehouse
Drive, 3rd Floor, San Diego, CA 92121, 12,147.667,580 shares (9.42%); Comcare,
Inc., 4001 N. 3rd Street, Suite 120, Phoenix, AZ 85012, 26,230,243.620 shares
(20.34%); and Omnibus A/C For the Shareholder Accounts Maintained by Concord
Financial Services Inc., Attn: Linda Zerbe, First and Market Building, 100 First
Avenue, Suite 300, Pittsburgh, PA 15222, 21,883,084.450 shares (16.97%). At June
16, 1995, the name, address and share ownership of the entities which held
beneficially more than 5% of the outstanding Horizon Service Shares of the
Treasury Only Fund were as follows: BA Investment Service Inc., 555 California
Street, 4th Floor Dept. #4337, San Francisco, CA 94104, 6,403,628.120 shares
(28.679%); Bank of America NT&SA Trustee/Custodian for Investing in Horizon
Service Shares of the Treasury Only Fund, Attn: Cynthia Beauvais, 701 South
Western Avenue, Glendale, CA 91201, 3,501,414.020 shares (15.681%); Bank of
America State Trust, Attn: Rigo Barrett, 299 N. Euclid Avenue, Pasadena, CA
91101, 5,420,893.150 shares (24.277%); Fair Isaac & Co., Attn: Christine Tam,
120 North Redwood, San Rapheal, CA 94903-1996, 1,338,800.750
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shares (5.996%); Foothill/Eastern Transportation Corridor Agency, Attn: Laura
Barker, 201 East Sandpot, Suite 200, Santa Anna, CA 92707, 2,559,586.380 shares
(11.463%); and Nexus, Attn: Kathleen Menace, P.O. Box 60637, Sunnyvale, CA
94088-0637, 2,525,153.380 shares (11.309%). At June 15, 1995, the name, address
and share ownership of the entities which held of record more than 5% of the
outstanding Pacific Horizon Shares of the Prime Value Fund were as follows: BA
Investment Services Inc., For the Benefit of Clients, 555 California Street, 4th
Floor, Department #4337, San Francisco, CA 94104, 16,383,467.170 shares
(26.45%); and Bank of America State Trust Co., Attn: Leon Goekjian, P.O. Box
91630, Pasadena, CA 91101, 45,078,465.290 shares (72.79%). At June 16, 1995, the
name, address and share ownership of the entity which held of record more than
5% of the outstanding Horizon Shares of the Prime Value Fund was as follows:
Tice & Co., c/o M&T, Attn: Cash Management Clerk, 8th Floor, P.O. Box 1377,
Buffalo, NY 14240, 453,078,561.590 shares (93.510%). At June 15, 1995, the name,
address and share ownership of the entity which held of record more than 5% of
the outstanding shares of the Pacific Horizon Shares of the California
Tax-Exempt Money Market Fund was as follows: BA Investment Services Inc., For
the Benefit of Clients, 555 California Street, 4th Floor, Department #4337, San
Francisco, CA 94104, 204,443,886.590 shares (22.07%). At June 15, 1995, the
name, address and share ownership of the entities which held of record more than
5% of the outstanding shares of the Horizon Service Shares of the California
Tax-Exempt Money Market Fund were as follows: Leo Zuckerman Trust, DTD
12-11-91,4444 Viewridge Avenue, San Diego, CA 92123, 4,850,877.280 shares
(5.35%); and Omnibus A/C for the Shareholder Accounts Maintained by Concord
Financial Services Inc. Attn: Linda Zerbe, First and Market Building, 100 First
Avenue, Suite 300, Pittsburgh, PA 15222, 13,391,453.970 shares (14.77%). At June
16, 1995, the name, address and share ownership of the entity which held
beneficially more than 5% of the outstanding shares of the Horizon Service
Shares of the California Tax-Exempt Money Market Fund was as follows: BA
Investment Services Inc., 555 California Street, 4th Floor, Dept. #4337, San
Francisco, CA 94109, 13,792,509.310 shares (99.206%). At June 15, 1995, the
name, address and shares ownership of the entities which held of record more
than 5% of the outstanding shares of the Flexible Bond Fund were as follows:
Peter F. Smith and Jacquelyn L. Smith, JTWROS, 1785 C. Blodgett Road, Mount
Vernon, WA 98273, 13,973.917 shares (5.58%); and BA Investment Services, Inc.,
FBO 200724011, 185 Berry Street, 3rd Floor #2640, San Francisco, CA 94104,
22,436.531 shares (8.96%). At June 15, 1995 the name, address and share
ownership of the entity which held of record more than 5% of the outstanding
shares of the Asset Allocation Fund was as follows: Bank of America, Texas
AATTEE. National-O'Neill Supplemental Savings Plan, Attn: Mutual Funds
(81-6-01005-0), P.O. Box 94627, Pasadena, CA 91109, 24,289,973 shares (5.07%).
At June 15, 1995 the name, address and share
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ownership of the entities which held of record more than 5% of the outstanding
shares of the National Municipal Bond Fund were as follows: BA Investment
Services, Inc. FBO 405084421, 555 California Street, 4th Floor, #2640, San
Francisco, CA 94104, 26,336.154 shares (8.31%); and BA Investment Services,
Inc., FBO 405266591, 555 California Street, 4th Floor, #2640, San Francisco, CA
94104, 25,034.024 shares (7.90%). At June 15, 1995 the name, address and share
ownership of the entities which held of record more than 5% of the outstanding
shares of the Corporate Bond Fund were as follows: Dean Witter Reynolds Inc., 5
World Trade Center, 4th Floor, Attn: 5th O Div., New York, NY 10048, 138,820.000
shares (6.93%); and Smith Barney Shearson, Inc., 333 W. 39th Street, 8th Floor,
New York, NY 10001, 148,925.482 shares (7.43%).
At such dates, no other person was known by the Company to hold of
record or beneficially more than 5% of the outstanding shares of any investment
portfolio of the Company.
FINANCIAL STATEMENTS AND EXPERTS
The Annual Reports for each Fund for its fiscal year ended February 28,
1995 (the "Annual Report") accompanies this Statement of Additional Information.
The financial statements and notes thereto in each Annual Report are
incorporated in this Statement of Additional Information by reference, and have
been audited by Price Waterhouse LLP, whose report thereon also appears in each
Annual Report and is also incorporated herein by reference. Such financial
statements have been incorporated herein in reliance on the report of Price
Waterhouse LLP, independent accountants, given on the authority of said firm as
experts in auditing and accounting.
The financial highlights and financial statements for the 11-month
period ended February 28, 1993, the fiscal year ended March 31, 1992 and the
period June 4, 1990 through March 31, 1991 of the Predecessor Government Fund
and Predecessor Treasury Only Fund of First Cash Funds of America, as well as of
the Government Money Trust and Treasury Money Trust in which said Funds invested
included in the Prospectus for the Government Fund and Treasury Only Fund (with
regard to the financial highlights) and incorporated by reference in this
Statement of Additional Information (with regard to the financial statements),
have been audited by Deloitte & Touche LLP as set forth in their reports thereon
which are incorporated herein by reference. The financial statements and
financial highlights audited by Deloitte & Touche LLP have been incorporated
herein by reference (with regard to the financial statements) and included
herewith (with regard to the financial highlights) in reliance on the report
given on their authority as experts in accounting and auditing.
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APPENDIX A
COMMERCIAL PAPER RATINGS
A Standard & Poor's commercial paper rating is a current assessment of
the likelihood of timely payment of debt considered short-term in the relevant
market. The following summarizes the rating categories used by Standard and
Poor's for commercial paper:
"A-1" - Issue's degree of safety regarding timely payment is strong.
Those issues determined to possess extremely strong safety characteristics are
denoted "A-1+."
"A-2" - Issue's capacity for timely payment is satisfactory. However,
the relative degree of safety is not as high as for issues designated "A-1."
"A-3" - Issue has an adequate capacity for timely payment. It is,
however, somewhat more vulnerable to the adverse effects of changes and
circumstances than an obligation carrying a higher designation.
"B" - Issue has only a speculative capacity for timely payment.
"C" - Issue has a doubtful capacity for payment.
"D" - Issue is in payment default.
Moody's commercial paper ratings are opinions of the ability of issuers
to repay punctually promissory obligations not having an original maturity in
excess of 9 months. The following summarizes the rating categories used by
Moody's for commercial paper:
"Prime-1" - Issuer or related supporting institutions are considered to
have a superior capacity for repayment of short-term promissory obligations.
Prime-1 repayment capacity will normally be evidenced by the following
characteristics: leading market positions in well established industries; high
rates of return on funds employed; conservative capitalization structures with
moderate reliance on debt and ample asset protection; broad margins in earning
coverage of fixed financial charges and high internal cash generation; and well
established access to a range of financial markets and assured sources of
alternate liquidity.
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<PAGE> 772
"Prime-2" - Issuer or related supporting institutions are considered to
have a strong capacity for repayment of short-term promissory obligations. This
will normally be evidenced by many of the characteristics cited above but to a
lesser degree. Earnings trends and coverage ratios, while sound, will be more
subject to variation. Capitalization characteristics, while still appropriate,
may be more affected by external conditions. Ample alternative liquidity is
maintained.
"Prime-3" - Issuer or related supporting institutions have an
acceptable capacity for repayment of short-term promissory obligations. The
effects of industry characteristics and market composition may be more
pronounced. Variability in earnings and profitability may result in changes in
the level of debt protection measurements and the requirement for relatively
high financial leverage. Adequate alternate liquidity is maintained.
"Not Prime" - Issuer does not fall within any of the Prime rating
categories.
The three rating categories of Duff & Phelps for investment grade
commercial paper and short-term debt are "D-1," "D-2" and "D-3." Duff & Phelps
employs three designations, "D-1+," "D-1" and "D-1-," within the highest rating
category. The following summarizes the rating categories used by Duff & Phelps
for commercial paper:
"D-1+" - Debt possesses highest certainty of timely payment. Short-term
liquidity, including internal operating factors and/or access to alternative
sources of funds, is outstanding, and safety is just below risk-free U.S.
Treasury short-term obligations.
"D-1" - Debt possesses very high certainty of timely payment. Liquidity
factors are excellent and supported by good fundamental protection factors. Risk
factors are minor.
"D-1-" - Debt possesses high certainty of timely payment. Liquidity
factors are strong and supported by good fundamental protection factors. Risk
factors are very small.
"D-2" - Debt possesses good certainty of timely payment. Liquidity
factors and company fundamentals are sound. Although ongoing funding needs may
enlarge total financing requirements, access to capital markets is good. Risk
factors are small.
"D-3" - Debt possesses satisfactory liquidity, and other protection
factors qualify issue as investment grade. Risk
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<PAGE> 773
factors are larger and subject to more variation. Nevertheless, timely payment
is expected.
"D-4" - Debt possesses speculative investment characteristics.
Liquidity is not sufficient to ensure against disruption in debt service.
Operating factors and market access may be subject to a high degree of
variation.
"D-5" - Issuer has failed to meet scheduled principal and/or interest
payments.
Fitch short-term ratings apply to debt obligations that are payable on
demand or have original maturities of up to three years. The following
summarizes the rating categories used by Fitch for short-term obligations:
"F-1+" - Securities possess exceptionally strong credit quality. Issues
assigned this rating are regarded as having the strongest degree of assurance
for timely payment.
"F-1" - Securities possess very strong credit quality. Issues assigned
this rating reflect an assurance of timely payment only slightly less in degree
than issues rated "F-1+."
"F-2" - Securities possess good credit quality. Issues assigned this
rating have a satisfactory degree of assurance for timely payment, but the
margin of safety is not as great as the "F-1+" and "F-1" categories.
"F-3" - Securities possess fair credit quality. Issues assigned this
rating have characteristics suggesting that the degree of assurance for timely
payment is adequate; however, near-term adverse changes could cause these
securities to be rated below investment grade.
"F-S" - Securities possess weak credit quality. Issues assigned this
rating have characteristics suggesting a minimal degree of assurance for timely
payment and are vulnerable to near-term adverse changes in financial and
economic conditions.
"D" - Securities are in actual or imminent payment default.
Fitch may also use the symbol "LOC" with its short-term ratings to
indicate that the rating is based upon a letter of credit issued by a commercial
bank.
Thomson BankWatch short-term ratings assess the likelihood of an
untimely or incomplete payment of principal or interest of unsubordinated
instruments having a maturity of one
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<PAGE> 774
year or less which is issued by United States commercial banks, thrifts and
non-bank banks; non-United States banks; and broker-dealers. The following
summarizes the ratings used by Thomson BankWatch:
"TBW-1" - This designation represents Thomson BankWatch's highest
rating category and indicates a very high degree of likelihood that principal
and interest will be paid on a timely basis.
"TBW-2" - This designation indicates that while the degree of safety
regarding timely payment of principal and interest is strong, the relative
degree of safety is not as high as for issues rated "TBW-1."
"TBW-3" - This designation represents the lowest investment grade
category and indicates that while the debt is more susceptible to adverse
developments (both internal and external) than obligations with higher ratings,
capacity to service principal and interest in a timely fashion is considered
adequate.
"TBW-4" - This designation indicates that the debt is regarded as
non-investment grade and therefore speculative.
IBCA assesses the investment quality of unsecured debt with an original
maturity of less than one year which is issued by bank holding companies and
their principal bank subsidiaries. The following summarizes the rating
categories used by IBCA for short-term debt ratings:
"A1+" - Obligations supported by the highest capacity for timely
repayment.
"A1" - Obligations are supported by the highest capacity for timely
repayment.
"A2" - Obligations are supported by a satisfactory capacity for timely
repayment, although such capacity may be susceptible to adverse changes in
business, economic or financial conditions.
"A3" - Obligations are supported by a satisfactory capacity for timely
repayment. Such capacity is more susceptible to adverse changes in business,
economic or financial conditions than for obligations in higher categories.
"B" - Obligations for which the capacity for timely repayment is
susceptible to adverse changes in business, economic or financial conditions.
A-4
<PAGE> 775
"C" - Obligations for which there is an inadequate capacity to ensure
timely repayment.
"D" - Obligations which have a high risk of default or which are
currently in default.
CORPORATE AND MUNICIPAL LONG-TERM DEBT RATINGS
The following summarizes the ratings used by Standard & Poor's for
corporate and municipal debt:
"AAA" - This designation represents the highest rating assigned by
Standard & Poor's to a debt obligation and indicates an extremely strong
capacity to pay interest and repay principal.
"AA" - Debt is considered to have a very strong capacity to pay
interest and repay principal and differs from AAA issues only in small degree.
"A" - Debt is considered to have a strong capacity to pay interest and
repay principal although such issues are somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions than debt in
higher-rated categories.
"BBB" - Debt is regarded as having an adequate capacity to pay interest
and repay principal. Whereas such issues normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher-rated categories.
"BB," "B," "CCC," "CC" and "C" - Debt is regarded, on balance, as
predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. "BB" indicates the
lowest degree of speculation and "C" the highest degree of speculation. While
such debt will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major risk exposures to adverse
conditions.
"BB" - Debt has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. The "BB"
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied "BBB-" rating.
"B" - Debt has a greater vulnerability to default but currently has the
capacity to meet interest payments and
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<PAGE> 776
principal repayments. Adverse business, financial or economic conditions will
likely impair capacity or willingness to pay interest and repay principal. The
"B" rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied "BB" or "BB-" rating.
"CCC" - Debt has a currently identifiable vulnerability to default, and
is dependent upon favorable business, financial and economic conditions to meet
timely payment of interest and repayment of principal. In the event of adverse
business, financial or economic conditions, it is not likely to have the
capacity to pay interest and repay principal. The "CCC" rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
"B" or "B-" rating.
"CC" - This rating is typically applied to debt subordinated to senior
debt that is assigned an actual or implied "CCC" rating.
"C" - This rating is typically applied to debt subordinated to senior
debt which is assigned an actual or implied "CCC-" debt rating. The "C" rating
may be used to cover a situation where a bankruptcy petition has been filed, but
debt service payments are continued.
"CI" - This rating is reserved for income bonds on which no interest is
being paid.
"D" - Debt is in payment default. This rating is used when interest
payments or principal payments are not made on the date due, even if the
applicable grace period has not expired, unless S & P believes such payments
will be made during such grace period. "D" rating is also used upon the filing
of a bankruptcy petition if debt service payments are jeopardized.
PLUS (+) OR MINUS (-) - The ratings from "AA" through "CCC" may be
modified by the addition of a plus or minus sign to show relative standing
within the major rating categories.
"r" - This rating is attached to highlight derivative, hybrid, and
certain other obligations that S & P believes may experience high volatility or
high variability in expected returns due to non-credit risks. Examples of such
obligations are: securities whose principal or interest return is indexed to
equities, commodities, or currencies; certain swaps and options; and interest
only and principal only mortgage securities.
The following summarizes the ratings used by Moody's for corporate and
municipal long-term debt:
"Aaa" - Bonds are judged to be of the best quality. They carry the
smallest degree of investment risk and are
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<PAGE> 777
generally referred to as "gilt edged." Interest payments are protected by a
large or by an exceptionally stable margin and principal is secure. While the
various protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong position of such
issues.
"Aa" - Bonds are judged to be of high quality by all standards.
Together with the "Aaa" group they comprise what are generally known as high
grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in "Aaa" securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than in "Aaa"
securities.
"A" - Bonds possess many favorable investment attributes and are to be
considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment sometime in the future.
"Baa" - Bonds considered medium-grade obligations, i.e., they are
neither highly protected nor poorly secured. Interest payments and principal
security appear adequate for the present but certain protective elements may be
lacking or may be characteristically unreliable over any great length of time.
Such bonds lack outstanding investment characteristics and in fact have
speculative characteristics as well.
"Ba," "B," "Caa," "Ca," and "C" - Bonds that possess one of these
ratings provide questionable protection of interest and principal ("Ba"
indicates some speculative elements; "B" indicates a general lack of
characteristics of desirable investment; "Caa" represents a poor standing; "Ca"
represents obligations which are speculative in a high degree; and "C"
represents the lowest rated class of bonds). "Caa," "Ca" and "C" bonds may be in
default.
Con. (---) - Bonds for which the security depends upon the completion
of some act or the fulfillment of some condition are rated conditionally. These
are bonds secured by (a) earnings of projects under construction, (b) earnings
of projects unseasoned in operation experience, (c) rentals which begin when
facilities are completed, or (d) payments to which some other limiting condition
attaches. Parenthetical rating denotes probable credit stature upon completion
of construction or elimination of basis of condition.
Moody's applies numerical modifiers 1, 2 and 3 in each generic
classification from "Aa" to "B" in its bond rating system. The modifier 1
indicates that the issuer ranks in the
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<PAGE> 778
higher end of its generic rating category; the modifier 2 indicates a mid-range
ranking; and the modifier 3 indicates that the issuer ranks at the lower end of
its generic rating category.
The following summarizes the long-term debt ratings used by Duff &
Phelps for corporate and municipal long-term debt:
"AAA" - Debt is considered to be of the highest credit quality. The
risk factors are negligible, being only slightly more than for risk-free U.S.
Treasury debt.
"AA" - Debt is considered of high credit quality. Protection factors
are strong. Risk is modest but may vary slightly from time to time because of
economic conditions.
"A" - Debt possesses protection factors which are average but adequate.
However, risk factors are more variable and greater in periods of economic
stress.
"BBB" - Debt possesses below average protection factors but such
protection factors are still considered sufficient for prudent investment.
Considerable variability in risk is present during economic cycles.
"BB," "B," "CCC," "DD," and "DP" - Debt that possesses one of these
ratings is considered to be below investment grade. Although below investment
grade, debt rated "BB" is deemed likely to meet obligations when due. Debt rated
"B" possesses the risk that obligations will not be met when due. Debt rated
"CCC" is well below investment grade and has considerable uncertainty as to
timely payment of principal, interest or preferred dividends. Debt rated "DD" is
a defaulted debt obligation, and the rating "DP" represents preferred stock with
dividend arrearages.
To provide more detailed indications of credit quality, the "AA," "A,"
"BBB," "BB" and "B" ratings may be modified by the addition of a plus (+) or
minus (-) sign to show relative standing within these major categories.
The following summarizes the highest four ratings used by Fitch for
corporate and municipal bonds:
"AAA" - Bonds considered to be investment grade and of the highest
credit quality. The obligor has an exceptionally strong ability to pay interest
and repay principal, which is unlikely to be affected by reasonably foreseeable
events.
"AA" - Bonds considered to be investment grade and of very high credit
quality. The obligor's ability to pay interest and repay principal is very
strong, although not quite as strong
A-8
<PAGE> 779
as bonds rated "AAA." Because bonds rated in the "AAA" and "AA" categories are
not significantly vulnerable to foreseeable future developments, short-term debt
of these issuers is generally rated "F-1+."
"A" - Bonds considered to be investment grade and of high credit
quality. The obligor's ability to pay interest and repay principal is considered
to be strong, but may be more vulnerable to adverse changes in economic
conditions and circumstances than bonds with higher ratings.
"BBB" - Bonds considered to be investment grade and of satisfactory
credit quality. The obligor's ability to pay interest and repay principal is
considered to be adequate. Adverse changes in economic conditions and
circumstances, however, are more likely to have an adverse impact on these
bonds, and therefore, impair timely payment. The likelihood that the ratings of
these bonds will fall below investment grade is higher than for bonds with
higher ratings.
"BB," "B," "CCC," "CC," "C," "DDD," "DD," and "D" Bonds that possess
one of these ratings are considered by Fitch to be speculative investments. The
ratings "BB" to "C" represent Fitch's assessment of the likelihood of timely
payment of principal and interest in accordance with the terms of obligation for
bond issues not in default. For defaulted bonds, the rating "DDD" to "D" is an
assessment of the ultimate recovery value through reorganization or liquidation.
To provide more detailed indications of credit quality, the Fitch
ratings from and including "AA" to "C" may be modified by the addition of a plus
(+) or minus (-) sign to show relative standing within these major rating
categories.
IBCA assesses the investment quality of unsecured debt with an original
maturity of more than one year which is issued by bank holding companies and
their principal bank subsidiaries. The following summarizes the rating
categories used by IBCA for long-term debt ratings:
"AAA" - Obligations for which there is the lowest expectation of
investment risk. Capacity for timely repayment of principal and interest is
substantial such that adverse changes in business, economic or financial
conditions are unlikely to increase investment risk substantially.
"AA" - Obligations for which there is a very low expectation of
investment risk. Capacity for timely repayment of principal and interest is
substantial. Adverse changes in business, economic or financial conditions may
increase investment risk albeit not very significantly.
A-9
<PAGE> 780
"A" - Obligations for which there is a low expectation of investment
risk. Capacity for timely repayment of principal and interest is strong,
although adverse changes in business, economic or financial conditions may lead
to increased investment risk.
"BBB" - Obligations for which there is currently a low expectation of
investment risk. Capacity for timely repayment of principal and interest is
adequate, although adverse changes in business, economic or financial conditions
are more likely to lead to increased investment risk than for obligations in
higher categories.
"BB," "B," "CCC," "CC," and "C" - Obligations are assigned one of these
ratings where it is considered that speculative characteristics are present.
"BB" represents the lowest degree of speculation and indicates a possibility of
investment risk developing. "C" represents the highest degree of speculation and
indicates that the obligations are currently in default.
IBCA may append a rating of plus (+) or minus (-) to a rating to denote
relative status within major rating categories.
Thomson BankWatch assesses the likelihood of an untimely repayment of
principal or interest over the term to maturity of long term debt and preferred
stock which are issued by United States commercial banks, thrifts and non-bank
banks; non-United States banks; and broker-dealers. The following summarizes the
rating categories used by Thomson BankWatch for long-term debt ratings:
"AAA" - This designation represents the highest category assigned by
Thomson BankWatch to long-term debt and indicates that the ability to repay
principal and interest on a timely basis is extremely high.
"AA" - This designation indicates a very strong ability to repay
principal and interest on a timely basis with limited incremental risk compared
to issues rated in the highest category.
"A" - This designation indicates that the ability to repay principal
and interest is strong. Issues rated "A" could be more vulnerable to adverse
developments (both internal and external) than obligations with higher ratings.
"BBB" - This designation represents Thomson BankWatch's lowest
investment grade category and indicates an acceptable capacity to repay
principal and interest. Issues rated "BBB"
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<PAGE> 781
are, however, more vulnerable to adverse developments (both internal and
external) than obligations with higher ratings.
"BB," "B," "CCC," and "CC," - These designations are assigned by
Thomson BankWatch to non-investment grade long-term debt. Such issues are
regarded as having speculative characteristics regarding the likelihood of
timely payment of principal and interest. "BB" indicates the lowest degree of
speculation and "CC" the highest degree of speculation.
"D" - This designation indicates that the long-term debt is in default.
PLUS (+) OR MINUS (-) - The ratings from "AAA" through "CC" may include
a plus or minus sign designation which indicates where within the respective
category the issue is placed.
MUNICIPAL NOTE RATINGS
A Standard and Poor's rating reflects the liquidity concerns and market
access risks unique to notes due in three years or less. The following
summarizes the ratings used by Standard & Poor's Ratings Group for municipal
notes:
"SP-1" - The issuers of these municipal notes exhibit very strong or
strong capacity to pay principal and interest. Those issues determined to
possess overwhelming safety characteristics are given a plus (+) designation.
"SP-2" - The issuers of these municipal notes exhibit satisfactory
capacity to pay principal and interest.
"SP-3" - The issuers of these municipal notes exhibit speculative
capacity to pay principal and interest.
Moody's ratings for state and municipal notes and other short-term
loans are designated Moody's Investment Grade ("MIG") and variable rate demand
obligations are designated Variable Moody's Investment Grade ("VMIG"). Such
ratings recognize the differences between short-term credit risk and long-term
risk. The following summarizes the ratings by Moody's Investors Service, Inc.
for short-term notes:
"MIG-1"/"VMIG-1" - Loans bearing this designation are of the best
quality, enjoying strong protection by established cash flows, superior
liquidity support or demonstrated broad-based access to the market for
refinancing.
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<PAGE> 782
"MIG-2"/"VMIG-2" - Loans bearing this designation are of high quality,
with margins of protection ample although not so large as in the preceding
group.
"MIG-3"/"VMIG-3" - Loans bearing this designation are of favorable
quality, with all security elements accounted for but lacking the undeniable
strength of the preceding grades. Liquidity and cash flow protection may be
narrow and market access for refinancing is likely to be less well established.
"MIG-4"/"VMIG-4" - Loans bearing this designation are of adequate
quality, carrying specific risk but having protection commonly regarded as
required of an investment security and not distinctly or predominantly
speculative.
"SG" - Loans bearing this designation are of speculative quality and
lack margins of protection.
Fitch and Duff & Phelps use the short-term ratings described under
Commercial Paper Ratings for municipal notes.
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<PAGE> 783
PACIFIC HORIZON FUNDS, INC.
HORIZON SHARES AND
HORIZON SERVICE SHARES
OF THE
PRIME FUND, TREASURY FUND, GOVERNMENT FUND,
TREASURY ONLY FUND, TAX-EXEMPT MONEY FUND AND
CALIFORNIA TAX-EXEMPT MONEY MARKET FUND
JULY 1, 1995
(AS REVISED JULY 10 AND DECEMBER 8, 1995)
STATEMENT OF ADDITIONAL INFORMATION
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
The Company................................................................ 3
Investment Objectives and Policies......................................... 3
Purchase and Redemption of Shares.......................................... 43
Management of the Funds.................................................... 46
Taxes...................................................................... 62
Yield Information.......................................................... 68
General Information........................................................ 77
Appendix A................................................................. A-1
</TABLE>
-------------------------
This Statement of Additional Information applies to the Horizon Shares
and Horizon Service Shares of the Prime Fund, Treasury Fund, Government Fund,
Treasury Only Fund and Tax-Exempt Money Fund and the Horizon Service Shares of
the California Tax- Exempt Money Market Fund (the "Funds") of Pacific Horizon
Funds, Inc. (the "Company"). This Statement of Additional Information is meant
to be read in conjunction with the prospectuses dated July 1, 1995 with respect
to Horizon Shares and Horizon Service Shares of the Prime, Treasury, Government,
Treasury Only and Tax- Exempt Money Funds, and the Horizon Service Shares of the
California Tax-Exempt Money Market Fund, as the same may from time to time be
revised (individually, a "Prospectus" and
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<PAGE> 784
collectively, the "Prospectuses"), and is incorporated by reference in its
entirety into each such Prospectus. No Horizon Shares are offered in the
California Tax-Exempt Money Market Fund. Because this Statement of Additional
Information is not itself a Prospectus, no investment in shares of any Fund
should be made solely upon the information contained herein. Copies of the
Prospectuses relating to the Company's Horizon and Horizon Service Shares may be
obtained by calling Concord Financial Group, Inc. at (800) 426-3863. Capitalized
terms used but not defined herein have the same meanings as in the Prospectuses.
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<PAGE> 785
THE COMPANY
The Company was organized on October 27, 1982 as a Maryland corporation
and commenced operations on March 30, 1984. On January 19, 1990 the Prime Fund
and Treasury Fund of The Horizon Funds, a Massachusetts business trust
(sometimes called the "Predecessor Prime Fund" and "Predecessor Treasury Fund,"
respectively), were combined with the Money Market Portfolio and Government
Money Market Portfolio, respectively, of the Company; the Company changed the
names of its resulting portfolios to "Prime Fund" and "Treasury Fund"; and the
Company began offering Horizon Shares and Horizon Service Shares in such Funds.
On January 19, 1990 the Tax-Exempt Money Fund of The Horizon Funds (the
"Predecessor Tax-Exempt Fund") was reorganized as a new portfolio of the
Company. Each of these three Predecessor Funds originally commenced operations
on July 10, 1987. The California Tax-Exempt Money Market Fund commenced
operations on December 6, 1989 by offering a single series of shares known as
Pacific Horizon Shares and began offering Horizon Service Shares on March 1,
1993. The Government Fund and Treasury Only Fund commenced operations on June 4,
1990 as separate investment portfolios (the "Predecessor Government Funds" and
"Predecessor Treasury Only Funds," respectively) of First Cash Funds of America
and First Funds of America, which were organized as Massachusetts business
trusts. On March 1, 1993, the Predecessor Government Funds and Predecessor
Treasury Only Funds were reorganized as new portfolios of the Company. Prior to
this reorganization, these Predecessor Funds offered and sold shares of
beneficial interest that were similar to the Company's Horizon Service and
Pacific Horizon Shares.
The Company offers other classes and series of shares, including
Pacific Horizon Shares, in the aforementioned Funds and in other investment
portfolios which are described in separate Prospectuses and Statements of
Additional Information. For information concerning these other shares contact
the Distributor at the telephone number stated on the cover page of this
Statement of Additional Information.
INVESTMENT OBJECTIVES AND POLICIES
The Prospectus for each Fund describes the investment objective of the
Fund to which it applies. The following information supplements the descriptions
of the investment objective and policies in the Prospectuses for the Funds.
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<PAGE> 786
PORTFOLIO TRANSACTIONS
Subject to the general control of the Company's Board of Directors,
Bank of America National Trust and Savings Association ("Bank of America") is
responsible for, makes decisions with respect to and places orders for all
purchases and sales of portfolio securities for each Fund. Securities purchased
and sold by each Fund are generally traded in the over-the-counter market on a
net basis (i.e., without commission) through dealers, or otherwise involve
transactions directly with the issuer of an instrument. During their last three
fiscal periods, the Prime Fund, Treasury Fund, Government Fund, Treasury Only
Fund, Tax-Exempt Money Fund and California Tax-Exempt Money Market Fund did not
pay any brokerage commissions. The cost of securities purchased by the Funds
from underwriters generally includes an underwriting commission or concession,
and the prices at which securities are purchased from and sold to dealers
include a dealer's mark-up or mark-down.
In executing portfolio transactions and selecting brokers or dealers,
it is the Company's policy to seek the best overall terms available. The
investment advisory agreement between the Company and Bank of America provides
that, in assessing the best overall terms available for any transaction, Bank of
America shall consider factors it deems relevant, including the breadth of the
market in the security, the price of the security, the financial condition and
execution capability of the broker or dealer, and the reasonableness of the
commission, if any, for the specific transaction and on a continuing basis. In
addition, the investment advisory agreement authorizes Bank of America, subject
to the approval of the Company's Board of Directors, to cause the Company to pay
a broker-dealer which furnishes brokerage and research services a higher
commission than that which might be charged by another broker-dealer for
effecting the same transaction, provided that such commission is deemed
reasonable in terms of either that particular transaction or the overall
responsibilities of Bank of America to the particular Fund and the Company.
Brokerage and research services may include: (1) advice as to the value of
securities, the advisability of investing in, purchasing or selling securities
and the availability of securities or purchasers or sellers of securities, and
(2) analyses and reports concerning industries, securities, economic factors and
trends, portfolio strategy and the performance of accounts.
The Directors will periodically review the commissions paid by the
Company to consider whether the commissions, if any, paid over representative
periods of time appear to be reasonable in relation to the benefits inuring to
the Company. It is possible that certain of the supplementary research or other
services received will primarily benefit one or more other
-4-
<PAGE> 787
investment companies or other accounts for which investment discretion is
exercised. Conversely, the Company or any given Fund may be the primary
beneficiary of the research or services received as a result of portfolio
transactions effected for such other accounts or investment companies.
Brokerage or research services so received are in addition to and not
in lieu of services required to be performed by Bank of America and do not
reduce the advisory fee payable to Bank of America by the Company. Such services
may be useful to Bank of America in serving both the Company and other clients
and, conversely, supplemental information obtained by the placement of business
of other clients may be useful to Bank of America in carrying out its
obligations to the Company. The Company will not acquire certificates of deposit
or other securities issued by Bank of America or its affiliates, and will give
no preference to certificates of deposit or other securities issued by
Shareholder Organizations. In addition, portfolio securities in general will be
purchased from and sold to Bank of America, Concord Financial Group, Inc. (the
"Distributor") and their affiliates acting as principal underwriter, syndicate
member, market-maker, dealer, broker or in any other similar capacity, provided
such purchase, sale or dealing is permitted under the investment Company Act of
1940 and the rules thereunder.
A Fund's annual portfolio turnover rate is calculated by dividing the
lesser of purchases or sales of portfolio securities for the year by the monthly
average value of the Fund's portfolio securities. The calculation excludes all
securities the maturities of which at the time of acquisition were thirteen
months or less. There is not expected to be any portfolio turnover for the Funds
for regulatory reporting purposes.
A Fund may participate, if and when practicable, in bidding for the
purchase of securities directly from an issuer in order to take advantage of the
lower purchase price available to members of a bidding group. Any such Fund will
engage in this practice only when Bank of America, in its sole discretion,
subject to guidelines adopted by the Board of Directors, believes such practice
to be in the Fund's interest.
Subsequent to its purchase by a Fund, an issue of securities may cease
to be rated or its rating may be reduced below the minimum rating required for
purchase by the Fund. The Board of Directors or Bank of America, pursuant to
guidelines established by the Board, will promptly consider such an event in
determining whether the Fund involved should continue to hold the obligation,
but will only continue to hold the obligation if retention is in accordance with
the interests of the Fund and
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<PAGE> 788
applicable regulations of the Securities and Exchange Commission. In addition,
it is possible that unregistered securities purchased by a Fund in reliance upon
Rule 144A under the Securities Act of 1933 could have the effect of increasing
the level of the Fund's illiquidity to the extent that qualified institutional
buyers become, for a period, uninterested in purchasing these securities.
To the extent permitted by law, Bank of America may aggregate the
securities to be sold or purchased for a Fund with those to be sold or purchased
for other investment companies or common trust funds in order to obtain best
execution.
The Company is required to identify any securities of its regular
brokers or dealers (as defined in Rule 10b-1 under the Investment Company Act of
1940) or their parents held by the Company as of the close of its most recent
fiscal year. As of February 28, 1995: (a) the Treasury Fund held the following
securities, Repurchase Agreement with Goldman, Sachs & Co. in the principal
amount of $95,000,000; Repurchase Agreement with Merrill Lynch Government
Securities, Inc. in the principal amount of $95,000,000; (b) the Prime Fund held
the following securities, Merrill Lynch & Co., Inc., commercial paper in the
principal amount of $l00,000,000; Goldman, Sachs Group L.P., Daily Variable Rate
Master Note in the principal amount of $120,000,000; Morgan Stanley Group, Inc.,
Daily Variable Rate Master Note in the principal amount of $120,000,000; Bear
Stearns Co., Inc., Series B, Monthly Variable Rate Note in the principal amount
of $100,000,000; Repurchase Agreement with Goldman, Sachs & Co. in the principal
amount of $120,000,000; and (c) the Government Fund held the following
securities, Repurchase Agreement with Goldman, Sachs & Co. in the principal
amount of $40,000,000; Repurchase Agreement with Merrill Lynch Government
Securities, Inc. in the principal amount of $40,000,000. Merrill Lynch & Co.,
Inc., Goldman, Sachs & Co., Bear Stearns Co., Inc., Morgan Stanley & Co.
Incorporated, Shearson Lehman Brothers, Inc., Dean Witter Reynolds, Inc. and
Paine Webber are considered to be regular brokers and dealers of the Company.
PORTFOLIO INSTRUMENTS
CERTIFICATES OF DEPOSIT, BANKERS' ACCEPTANCES, COMMERCIAL PAPER AND
SHORT-TERM NOTES. Certificates of deposit are negotiable certificates issued
against funds deposited in a commercial bank for a definite period of time and
earning a specific return. Bankers' acceptances are negotiable deposits or bills
of exchange, normally drawn by an importer or exporter to pay for specific
merchandise, which are "accepted" by a bank (meaning, in effect, that the bank
unconditionally agrees to pay the face value of the instrument at maturity).
Certificates of
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<PAGE> 789
deposit and bankers' acceptances acquired by a Fund will be dollar-denominated
obligations of domestic or foreign banks having total assets at the time of
purchase (including assets of both domestic and foreign branches) in excess of
$2.5 billion. Commercial paper consists of unsecured promissory notes issued by
corporations. Short-term notes acquired by a Fund may be issued by commercial or
investment banking firms, financing companies or industrial or manufacturing
concerns. Commercial paper and short-term notes, except for variable and
floating rate instruments, will normally have maturities of nine months or less
and fixed rates of return, although such instruments may have maturities of up
to thirteen months. Commercial paper and short-term notes will consist of issues
which, with respect to the Prime, Treasury and Tax-Exempt Money Funds are "First
Tier Securities" as defined by the Securities and Exchange Commission and, with
respect to the California Tax-Exempt Money Market Fund are "Eligible Securities"
as defined by the Securities and Exchange Commission. During temporary defensive
periods or if in the investment adviser's opinion suitable First Tier Securities
are not available for investment, the Tax-Exempt Money Fund may also acquire
"Eligible Securities" as defined by the Securities and Exchange Commission.
First Tier Securities consist of instruments that are either rated at the time
of purchase in the top rating category by one or more unaffiliated nationally
recognized statistical rating organizations ("NRSROs") or issued by issuers with
such ratings. Eligible Securities consist of instruments that are either rated
at the time of purchase in the top two rating categories by one or more
unaffiliated NRSROs or issued by issuers with such ratings. See the Appendix to
this Statement of Additional Information for a description of the applicable
NRSRO ratings. Unrated instruments (including instruments with long-term but no
short-term ratings) purchased by a Fund will be of comparable quality as
determined by Bank of America pursuant to guidelines approved by the Board of
Directors and Bank of America.
A Fund holding Euro CDs, Yankee CDs, Yankee BAs, commercial paper or
other obligations of foreign issuers may be subject to investment risks that are
different in some respects from those incurred by a Fund which invests only in
obligations of domestic issuers. Such risks include future political and
economic developments, the possible imposition of withholding taxes by the
particular country in which the issuer is located on interest income payable on
the securities, the possible seizure or nationalization of foreign deposits, 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.
Domestic banks and foreign banks are subject to different governmental
regulations with respect to the amount and
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<PAGE> 790
types of loans which may be made and interest rates which may be charged. In
addition, the profitability of the banking industry is dependent largely upon
the availability and cost of funds for the purpose of financing lending
operations under prevailing money market conditions. General economic conditions
as well as exposure to credit losses arising from possible financial
difficulties of borrowers play an important part in the operations of the
banking industry.
As a result of federal and state laws and regulations, domestic banks
are, among other things, required to maintain specified levels of reserves,
limited in the amount which they can loan to a single borrower, and subject to
other regulations designed to promote financial soundness. However, such laws
and regulations do not necessarily apply to the Euro CDs, Yankee CDs, Yankee BAs
and other foreign bank obligations that a Fund may acquire.
U.S. GOVERNMENT OBLIGATIONS. Obligations of the U.S. Government and its
agencies and instrumentalities include Treasury bills, certificates of
indebtedness, notes and bonds, Treasury strips, and issues of such entities as
the Federal Home Loan Banks, Federal Land Banks, Federal Housing Administration,
Farmers Home Administration, Export-Import Bank of the United States, Small
Business Administration, Government National Mortgage Association, General
Services Administration, Student Loan Marketing Association, Central Bank for
Cooperatives, Federal Home Loan Mortgage Corporation, Federal Intermediate
Credit Banks, Maritime Administration, Resolution Funding Corporation, Tennessee
Valley Authority and Federal National Mortgage Association. The Prime, Treasury,
Tax-Exempt Money and California Tax-Exempt Money Market Funds will not acquire
obligations issued by the International Bank for Reconstruction and Development,
the Asian Development Bank or the Inter-American Development Bank; however, the
Government and Treasury Only Funds may acquire such obligations in accordance
with their investment policies.
Government National Mortgage Association ("GNMA") certificates are U.S.
Government agency mortgage-backed securities representing part ownership of a
pool of mortgage loans. These loans, issued by lenders such as mortgage bankers,
commercial banks and savings and loan associations, are either insured by the
Federal Housing Administration or guaranteed by the Veterans Administration. A
"pool" or group of such mortgages is assembled and, after being approved by
GNMA, is offered to investors through securities dealers. Once approved by GNMA,
the timely payment of interest and principal on each mortgage is guaranteed by
GNMA and backed by the full faith and credit of the U.S. Government. GNMA
certificates differ from bonds in that principal is paid back monthly by the
borrower over the term of
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<PAGE> 791
the loan rather than returned in a lump sum at maturity. GNMA certificates are
called "pass-through" securities because both interest and principal payments
(including prepayments) are passed through to the holder of the certificate. In
addition to GNMA certificates, mortgage-backed securities issued by the Federal
National Mortgage Association ("FNMA") and by the Federal Home Loan Mortgage
Corporation ("FHLMC") may also be acquired. Securities issued and guaranteed by
FNMA and FHLMC are not backed by the full faith and credit of the United States.
If either fixed or variable rate pass-through securities issued by the U.S.
Government or its agencies or instrumentalities are developed in the future, the
Prime, Government, Tax-Exempt Money and California Tax-Exempt Money Market Funds
reserve the right to invest in them, after making appropriate disclosure to
investors. Certain securities issued by all governmental agencies may be
prepaid. Prepayment of mortgages underlying most mortgage-backed securities may
reduce their current yield and total return. During periods of declining
interest rates, such prepayments can be expected to accelerate and the Funds
would be required to reinvest the proceeds at the lower interest rates then
available.
VARIABLE AND FLOATING RATE INSTRUMENTS. The Funds may acquire variable
and floating rate instruments as described in their Prospectuses. Variable and
floating rate instruments are frequently not rated by credit rating agencies;
however, unrated variable and floating rate instruments purchased by a Fund will
be determined by the investment adviser under guidelines established by the
Company's Board of Directors to be of comparable quality at the time of purchase
to rated instruments eligible for purchase by such Fund. In making such
determinations, the investment adviser will consider the earning power, cash
flows and other liquidity ratios of the issuers of such instruments (such
issuers include financial, merchandising, bank holding and other companies) and
will continuously monitor their financial condition. There may not be an active
secondary market with respect to a particular variable or floating rate
instrument purchased by a Fund. The absence of such an active secondary market
could make it difficult for a Fund to dispose of the variable or floating rate
instrument involved. In the event the issuer of the instrument defaulted on its
payment obligations, the Fund involved could, for this or other reasons, suffer
a loss to the extent of the default. Variable and floating rate instruments may
be secured by bank letters of credit and may have maturities of more than
thirteen months. In determining a Fund's average weighted maturity and whether a
variable or floating rate instrument has a remaining maturity of thirteen months
or less, each variable rate instrument having a demand feature that entitles the
Fund to receive the principal amount thereof at any time, or at specified
intervals not exceeding thirteen months, in each case on not more than thirty
days' notice, shall be deemed by the Company to have a maturity
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equal to the longer of the period remaining until its next interest rate
adjustment or the period remaining until the principal amount can be recovered
through demand; each variable rate instrument not having such a demand feature
but having a stated maturity of thirteen months or less or issued or guaranteed
by the U.S. Government or its agencies will be deemed to have a maturity equal
to the period remaining until the next interest rate adjustment; each floating
rate instrument having a demand feature that entitles the Fund to receive the
principal amount thereof at any time, or at specified intervals not exceeding
thirteen months, in each case on not more than thirty days' notice, shall be
deemed to have a maturity equal to the period of time remaining until the
principal amount owed can be recovered through demand. Variable and floating
rate instruments which are not payable upon seven days' notice and which do not
have an active trading market are considered illiquid securities.
RATINGS AND ISSUER'S OBLIGATIONS. The ratings of Moody's Investors
Service, Inc. ("Moody's"), Standard & Poor's Ratings Group, Division of McGraw
Hill ("S&P"), Duff & Phelps Credit Rating Co. ("D&P"), Fitch Investors Service,
Inc. ("Fitch"), Thomson Bankwatch, Inc. ("Thomson") and IBCA Limited and IBCA
Inc. ("IBCA") represent their opinions as to the quality of debt securities.
However, ratings are general and are 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.
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 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 on, and principal of, its debt
securities may be materially adversely affected by litigation or other
conditions.
MUNICIPAL SECURITIES. Substantially all of the assets of the
Tax-Exempt Money Fund and primarily all of the assets of the California
Tax-Exempt Money Market Fund are invested in "Municipal Securities" (securities
issued by or on behalf of states, territories and possessions of the United
States, the District of Columbia and their political subdivisions, authorities,
agencies and instrumentalities, the interest on which is exempt from regular
Federal income tax in the opinion of bond counselor to the issuer). The
Tax-Exempt Money Fund may
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<PAGE> 793
concentrate more than 25% of its assets in California Municipal Securities and
the California Tax-Exempt Money Market Fund intends that under normal market
conditions at least 80% of its net assets will be invested in California
Municipal Securities. Although the Prime Fund is also authorized to invest in
Municipal Securities under certain circumstances, no more than 5% of the value
of such Fund's net assets will be so invested at any one time. (The purchase of
Municipal Securities by the Prime Fund may be advantageous when, as a result of
prevailing economic, regulatory or other circumstances, the yield on such
securities, on a pre-tax basis, is comparable to that of other short-term money
market instruments that the Fund may purchase. Dividends paid by the Prime Fund
that are derived from interest on Municipal Securities would be taxable to the
Fund's shareholders for federal income tax purposes.)
Municipal Securities include debt obligations issued by governmental
entities to obtain funds for various public purposes, including the construction
of a wide range of public facilities, the refunding of outstanding obligations,
the payment of general operating expenses and the extension of loans to public
institutions and facilities. In addition certain types of private activity bonds
are issued by or on behalf of public authorities to finance various
privately-operated facilities. Municipal Securities also include short-term tax
anticipation notes, bond anticipation notes, revenue anticipation notes and
other forms of short-term loan obligations. Such notes are issued with a
short-term maturity in anticipation of the receipt of tax funds, the proceeds of
bond placements or other revenues.
There are variations in the quality of Municipal Securities between
classifications (such as general obligation, revenue and moral obligation
issues) and within a particular classification, and the yields on Municipal
Securities 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. It should also be noted, with respect to
all Municipal Securities issued after August 15, 1986 (August 31, 1986 in the
case of certain bonds), that 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 Securities to become taxable
retroactive to the date of issue.
The payment of principal and interest on most Municipal Securities
purchased by the Funds will depend upon the ability of the issuers to meet their
obligations. The District of Columbia, each state, each of their political
subdivisions, agencies, instrumentalities and authorities and each multi-state
agency of
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<PAGE> 794
which a state is a member is a separate "issuer" as that term is used in this
Statement of Additional Information and the Prospectuses. The non-governmental
user of facilities financed by private activity bonds is also considered to be
an "issuer."
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 Securities. For example, pursuant to federal tax
legislation passed in 1986, interest on certain private activity bonds must be
included in an investor's federal alternative minimum taxable income, and
corporate investors must include all tax-exempt interest in their federal
alternative minimum taxable income. (See the relevant Funds' Prospectuses under
"Taxes.") The Funds cannot predict what legislation, if any, may be proposed in
Congress or in the California legislature in the future as regards the federal
and California state personal income tax status of interest on Municipal
Securities in general, or California Municipal Securities in particular, or
which proposals, if any, might be enacted. Such proposals, if enacted, might
materially adversely affect the availability of Municipal Securities (and
California Municipal Securities) for investment by the Tax-Exempt Money Fund and
the California Tax-Exempt Money Market Fund and the liquidity and value of such
Funds' portfolios. In such an event the Board of Directors would reevaluate the
Funds' investment objectives and policies and consider changes in their
structure or possible dissolution.
REPURCHASE AGREEMENTS. The Prime Fund, Treasury Fund, Government Fund,
Tax-Exempt Money Fund and California Tax-Exempt Money Market Fund may enter into
repurchase agreements with respect to their portfolio securities as indicated in
their Prospectuses. Pursuant to such agreements, a Fund purchases securities
from financial institutions such as banks and broker-dealers which are deemed to
be creditworthy by the investment adviser under guidelines approved by the Board
of Directors, subject to the seller's agreement to repurchase and the Fund's
agreement to resell such securities at a specified date and price. No Fund will
enter into repurchase agreements with Bank of America or Bank of America's
affiliates, nor will any Fund give preference to repurchase agreements with
Shareholder Organizations. The repurchase price generally equals the price paid
by the Fund plus interest negotiated on the basis of current short-term rates
(which may be more or less than the rate on the underlying portfolio security).
Securities subject to repurchase agreements will be held by the Funds' custodian
or a sub-custodian or in the Federal Reserve/Treasury book-entry system, and a
Fund will make payment for such securities only upon receipt of evidence of
physical delivery of the securities or of such book entry. The seller under a
repurchase agreement will be required to deliver instruments the value of which
is 102% of the
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<PAGE> 795
repurchase price (excluding accrued interest), provided that notwithstanding
such requirement, the advisor shall require that the value of the collateral,
after transaction costs (including loss of interest) reasonably expected to be
incurred on a default, shall be equal to or greater than the resale price
(including interest) provided in the agreement. If the seller defaulted on its
repurchase obligation, the Fund holding the repurchase agreement would suffer a
loss to the extent that the proceeds from a sale of the underlying securities
were less than the repurchase price under the agreement. Bankruptcy or
insolvency of such a defaulting seller may cause the particular Fund's rights
with respect to such securities to be delayed or limited. Repurchase agreements
are considered to be loans by a Fund under the Investment Company Act of 1940.
REVERSE REPURCHASE AGREEMENTS. The Funds may also enter into reverse
repurchase agreements with respect to their securities. Whenever a Fund enters
into a reverse repurchase agreement, it will place in a segregated account
maintained with its custodian liquid assets such as cash, U.S. Government
securities and other liquid high-grade debt securities having a value equal to
the repurchase price (including accrued interest) and will subsequently monitor
the account for maintenance of such equivalent value. Reverse repurchase
agreements are considered to be borrowings by a Fund under the Investment
Company Act of 1940.
INVESTMENT PRACTICES
WHEN-ISSUED SECURITIES, FORWARD COMMITMENTS AND DELAYED SETTLEMENTS.
The Funds may purchase securities on a "when-issued," forward commitment or
delayed settlement basis (i.e., for delivery beyond the normal settlement date
at a stated price and yield). When a Fund agrees to purchase securities on a
when- issued, forward commitment or delayed settlement basis, its custodian will
set aside cash or liquid portfolio securities equal to the amount of the
commitment in a separate account. Normally the custodian will set aside
portfolio securities to satisfy a purchase commitment, and in such a case a Fund
may be required subsequently to place additional assets (cash or liquid
securities) in the separate account so that the value of the account remains
equal to the amount of such Fund's commitment. The Funds do not intend to engage
in these transactions for speculative purposes but only in furtherance of their
investment objectives. Because a Fund will set aside cash or liquid investments
to satisfy its purchase commitments in the manner described, the Fund's
liquidity and the ability of the investment adviser to manage it may be affected
in the event the Fund's forward commitments, commitments to purchase when-issued
securities and delayed settlements ever exceeded 25% of the value of its assets.
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<PAGE> 796
A Fund will purchase securities on a when-issued, forward commitment or
delayed settlement basis only with the intention of completing the transaction.
If deemed advisable as a matter of investment strategy, however, a Fund may
dispose of or renegotiate a commitment after it is entered into, and may sell
securities it has committed to purchase before those securities are delivered to
the Fund on the settlement date. In these cases the Fund may realize a taxable
capital gain or loss.
When a Fund engages in when-issued, forward commitment and delayed
settlement transactions, it relies on the other party to consummate the trade.
Failure of such party to do so may result in the Fund's incurring a loss or
missing an opportunity to obtain a price considered to be advantageous.
The market value of the securities underlying a when-issued purchase,
a forward commitment to purchase securities, or a delayed settlement and any
subsequent fluctuations in their market value is taken into account when
determining the market value of a Fund starting on the day the Fund agrees to
purchase the securities. The Fund does not earn interest on the securities it
has committed to purchase until they are paid for and delivered on the
settlement date.
STAND-BY COMMITMENTS. The Tax-Exempt Money Fund and California
Tax-Exempt Money Market Fund may acquire "stand-by commitments" with respect to
Municipal Securities held in their respective portfolios. Under a "stand-by
commitment," a dealer agrees to purchase from a Fund, at the Fund's option,
specified Municipal Securities at a specified price.
The amount payable to the Tax-Exempt Money Fund or the California
Tax-Exempt Money Market Fund upon its exercise of a "stand-by commitment" is
normally the amortized cost of the underlying instruments plus accrued interest,
if any. "Stand-by commitments" can be acquired when the remaining maturity of
the underlying Municipal Securities is not greater than thirteen months, and are
exercisable by a Fund at any time before the maturity of such obligations. In
determining net asset value, a Fund values Municipal Securities on the basis of
amortized cost without reference to the presence of the "stand-by commitment,"
as described below. A "stand-by commitment" may be sold, transferred or assigned
by a Fund only with the instrument involved.
The Tax-Exempt Money Fund and California Tax-Exempt Money Market Fund
expect 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
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<PAGE> 797
are acquired subject to the commitment (thus reducing the yield to maturity
otherwise available for the same securities). The total amount paid in either
manner for outstanding "stand-by commitments" held by a Fund will not exceed 1/2
of 1% of the value of its total assets calculated immediately after each
"stand-by commitment" is acquired.
The Tax-Exempt Money Fund and California Tax-Exempt Money Market Fund
intend to enter into "stand-by commitments" only with dealers, banks and
broker-dealers which, in the investment adviser's opinion, present minimal
credit risks. A Fund's reliance upon the credit of these dealers, banks and
broker-dealers is secured by the value of the underlying Municipal Securities
that are subject to a commitment.
The Tax-Exempt Money Fund or California Tax-Exempt Money Market Fund
would acquire "stand-by commitments" solely to facilitate portfolio liquidity
and do not intend to exercise their rights thereunder for trading purposes. The
acquisition of a "stand-by commitment" would not affect the valuation or assumed
maturity of the underlying Municipal Securities, which would continue to be
valued at amortized cost in accordance with the ordinary method of valuation
employed by a Fund. "Stand-by commitments" which would be acquired by a Fund
would be valued at zero in determining net asset value. Where a Fund paid 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. "Stand-by commitments" would not affect a
Fund's average weighted maturity.
LOANS OF SECURITIES. The Prime Fund, Government Fund and Treasury Only
Fund may lend their securities to brokers, dealers and financial institutions,
provided (1) the loan is secured continuously by collateral consisting of U.S.
Government securities (U.S. Treasury securities with respect to the Treasury
Only Fund) or cash or letters of credit which is marked to the market daily to
ensure that each loan is fully collateralized at all times; (2) the Fund
involved may at any time call the loan and obtain the return of the securities
loaned within five business days; (3) the Fund will receive any interest or
dividends paid on the securities loaned; and (4) the aggregate market value of
securities loaned will not at any time exceed 30% of the total assets of the
Fund (331/3% with respect to the Treasury Only 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. Loans of securities involve a
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risk that the borrower may fail to return the securities or may fail to provide
additional collateral.
SPECIAL CONSIDERATIONS RELATING TO CALIFORNIA MUNICIPAL SECURITIES
ECONOMIC FACTORS. The Governor's 1993-1994 Budget, introduced on
January 8, 1993, proposed general fund expenditures of $37.3 billion, with
projected revenues of $39.9 billion. To balance the budget in the face of
declining revenues, the Governor proposed a series of revenue shifts from local
government, reliance on increased federal aid, and reductions in state spending.
The Department of Finance of the State of California's May Revision of
General Fund Revenues and Expenditures (the "May Revision"), released on May 20,
1993, projected the State would have an accumulated deficit of about $2.75
billion by June 30, 1993, essentially unchanged from the prior year. The
Governor proposed to eliminate this deficit over an 18-month period. Unlike
previous years, the Governor's Budget and May Revision did not calculate a "gap"
to be closed, but rather set forth revenue and expenditure forecasts and
proposals designed to produce a balanced budget.
The 1993-1994 budget act (the "1993-94 Budget Act") was signed by the
Governor on June 30, 1993, along with implementing legislation. The Governor
vetoed about $71 million in spending.
The 1993-94 Budget Act was predicated on general fund revenues and
transfers estimated at $40.6 billion, $400 million below 1992-93 (and the second
consecutive year of actual decline). The principal reasons for declining revenue
were the continued weak economy and the expiration (or repeal) of three fiscal
steps taken in 1991--a half cent temporary sales tax, a deferral of operating
loss carryforwards, and repeal by initiative of a sales tax on candy and snack
foods.
The 1993-94 Budget Act also assumed special fund revenues of $11.9
billion, an increase of 2.9 percent over 1992-93.
The 1993-94 Budget Act includes general fund expenditures of $38.5
billion (a 6.3 percent reduction from projected 1992-93 expenditures of $41.1
billion), in order to keep a balanced budget within the available revenues. The
1993-94 Budget Act also included special fund expenditures of $12.1 billion, a
4.2 percent increase. The 1993-94 Budget Act reflected the following major
adjustments:
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1. Changes in local government financing to shift about $2.6 billion in
property taxes from cities, counties, special districts and redevelopment
agencies to school and community college districts, thereby reducing general
fund support by an equal amount. About $2.5 billion is permanent, reflecting
termination of the State's "bailout" of local governments following the property
tax cuts of Proposition 13 in 1978 (See "Constitutional, Legislative and Other
Factors" below).
The property tax revenue losses for cities and counties were offset in
part by additional sales tax revenues and mandate relief.
2. The 1993-94 Budget Act projected K-12 Proposition 98 funding on a
cash basis at the same per-pupil level as 1992-93 by providing schools a $609
million loan payable from future years' Proposition 98 funds.
3. The 1993-94 Budget Act assumed receipt of about $692 million of aid
to the State from the federal government to offset health and welfare costs
associated with foreign immigrants living in the State, which would reduce a
like amount of General Fund expenditures. About $411 million of this amount was
one-time funding. Congress ultimately appropriated only $450 million.
4. Reductions of $600 million in health and welfare programs and $400
million in support for higher education (partly offset by fee increases at all
three units of higher education) and various miscellaneous cuts (totalling
approximately $150 million) in State government services in many agencies, up to
15 percent.
5. A 2-year suspension of the renters' tax credit ($390 million
expenditure reduction in 1993-94).
6. Miscellaneous one-time items, including deferral of payment to the
Public Employees Retirement Fund ($339 million) and a change in accounting for
debt service from accrual to cash basis, saving $107 million.
The 1993-94 Budget Act contained no general fund tax/revenue increases
other than a two year suspension of the renters' tax credit. The 1993-1994
Budget Act suspended the 4 percent automatic budget reduction trigger, as was
done in 1992-1993, so cuts could be focused.
Administration reports during the course of the 1993-1994 Fiscal Year
indicated that while economic recovery appeared to have started in the second
half of the fiscal year, recessionary conditions continued longer than had been
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anticipated when the 1993-1994 Budget Act was adopted. Overall, revenues for the
1993-1994 Fiscal Year were about $800 million lower than original projections,
and expenditures were about $780 million higher, primarily because of higher
health and welfare caseloads, lower property taxes which required greater State
support for K-14 education to make up the shortfall, and lower than anticipated
federal government payments for immigration-related costs. The reports in May
and June, 1994, indicated that revenues in the second half of the 1993-1994
Fiscal Year have been very close to the projections made in the Governor's
Budget of January 10, 1994, which is consistent with a slow turnaround in the
economy.
The Department of Finance's July 1994 Bulletin, including the final
June receipts, reported that June revenues were $114 million (2.5 percent) above
projection, with final end-of-year results at $377 million (about 1 percent)
above the May Revision projections. Part of this result was due to end-of-year
adjustments and reconciliations. Personal income tax and sales tax continued to
track projections very well. The largest factor in the higher than anticipated
revenues was from bank and corporation taxes, which were $140 million (18.4
percent) above projection in June. While the higher June receipts are reflected
in the actual 1993-94 Fiscal Year cash flow results, and help the starting cash
balance for the 1994-95 Fiscal Year, the Department of Finance has not adjusted
any of its revenue projections for the 1994-95 or 1995-96 Fiscal Years.
During the 1993-94 Fiscal Year, the State implemented the deficit
retirement plan, which was part of the 1993-94 Budget Act, by issuing $1.2
billion of revenue anticipation warrants in February 1994 maturing December 21,
1994. This borrowing reduced the cash deficit at the end of the 1993-94 Fiscal
Year. Nevertheless, because of the $1.5 billion variance from the original
1993-94 Budget Act assumptions, the General Fund ended the fiscal year at June
30, 1994 carrying forward an accumulated deficit of approximately $2 billion.
Because of the revenue shortfall and the State's reduced internal
borrowable cash resources, in addition to the $1.2 billion of revenue
anticipation warrants issued as part of the deficit retirement plan, the State
issued an additional $2.0 billion of revenue anticipation warrants, maturing
July 26, 1994, which were needed to fund the State's obligations and expenses
through the end of the 1993-94 Fiscal Year.
On January 17, 1994, a major earthquake measuring an estimated 6.8 on
the Richter Scale struck Los Angeles. Significant property damage to private and
public facilities occurred in a four-county area including northern Los Angeles
County, Ventura County, and parts of Orange and San Bernardino
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Counties, which were declared as State and federal disaster areas by January 18.
Current estimates of total property damage (private and public) are in the range
of $20 billion, but these estimates are still subject to change.
Despite such damage, on the whole, the vast majority of structures in
the areas, including large manufacturing and commercial buildings and all modern
high-rise offices, survived the earthquake with minimal or no damage, validating
the cumulative effect of strict building codes and thorough preparation for such
an emergency by the State and local agencies.
Damage to state-owned facilities included transportation corridors and
facilities such as Interstate Highways 5 and 10 and State Highways 14, 118 and
210. Major highways have now been reopened. The campus of California State
University at Northridge (very near the epicenter) suffered an estimated $350
million damage, resulting in temporary closure of the campus. It has reopened
using borrowed facilities elsewhere in the area and many temporary structures.
There was also some damage to the University of California at Los Angeles and to
an office building in Van Nuys (now open after a temporary closure). Overall,
except for the temporary road and bridge closures, and CSU-Northridge, the
earthquake did not and is not expected to significantly affect State government
operations.
The State in conjunction with the federal government is committed to
providing assistance to local governments, individuals and businesses suffering
damage as a result of the earthquake, as well as to provide for the repair and
replacement of State-owned facilities. The federal government will provide
substantial earthquake assistance.
The President immediately allocated some available disaster funds, and
Congress has approved additional funds for a total of at least $9.5 billion of
federal funds for earthquake relief, including assistance to homeowners and
small businesses, and costs for repair of damaged public facilities. The
Governor originally proposed that the State will have to pay about $1.9 billion
for earthquake relief costs, including a 10 percent match to some of the federal
funds, and costs for some programs not covered by the federal aid. The Governor
proposed to cover $1.05 billion of these costs from a general obligation bond
issue which was on the June 1994 ballot, but it was not approved by the voters.
The Governor subsequently announced that the State's share for transportation
projects would come from existing Department of Transportation funds (thereby
delaying other, non-earthquake related projects), that the State's share for
certain other costs (including local school building repairs) would come from
reallocating existing bond funds, and that a proposed
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program for homeowner and small business aid supplemental to federal aid would
have to be abandoned. Some other costs will be borrowed from the federal
government in a manner similar to that used by the State of Florida after
Hurricane Andrew; pursuant to Senate Bill 2383, repayment will have to be
addressed in 1995-96 or beyond. The 1995-96 Governor's Budget includes $60
million as the first repayment of an estimated $121.4 million in loans prior to
June 30, 1995.
The 1994-95 Fiscal Year represents the fourth consecutive year the
Governor and Legislature were faced with a very difficult budget environment to
produce a balanced budget. Many program cuts and budgetary adjustments have
already been made in the last three years. The Governor's Budget proposal, as
updated in May and June, 1994, recognized that the accumulated deficit could not
be repaid in one year, and proposed a two-year solution. The budget proposal
sets forth revenue and expenditure forecasts and revenue and expenditure
proposals which result in operating surpluses for the budget for both 1994-95
and 1995-96, and lead to the elimination of the accumulated budget deficit,
estimated at about $1.8 billion at June 30, 1994, by June 30, 1996.
The 1994-95 Budget Act, signed by the Governor on July 8, 1994,
projects revenues and transfers of $41.9 billion, $2.1 billion higher than
revenues in 1993-94. This reflects the Administration's forecast of an improving
economy. Also included in this figure is a projected receipt of about $360
million from the Federal Government to reimburse the State's cost of
incarcerating undocumented immigrants. The State will not know how much the
Federal Government will actually provide until the Federal FY 1995 Budget is
completed. Completion of the Federal Budget is expected by October 1994. The
Legislature took no action on a proposal in the January 1994-95 Governor's
Budget to undertake an expansion of the transfer of certain programs to
counties, which would also have transferred to counties 0.5% of the State's
current sales tax.
The 1994-95 Budget Act projects Special Fund revenues of $12.1 billion,
a decrease of 2.4% from 1993-94 estimated revenues.
The 1994-95 Budget Act projects General Fund expenditures of $40.9
billion, an increase of $1.6 billion over 1993-94. The 1994-95 Budget Act also
projects Special Fund expenditures of $12.3 billion, a 4.7% decrease from
1993-94 estimated expenditures. The principal features of the 1994-95 Budget Act
were the following:
1. Receipt of additional federal aid in 1994-95 of about $400 million
for costs of refugee assistance and
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medical care for undocumented immigrants, thereby offsetting a similar
General Fund cost. The State will not know how much of these funds it will
receive until the Federal FY 1995 Budget is passed.
2. Reductions of approximately $1.1 billion in health and welfare
costs. A 2.3% reduction in Aid to Family with Dependent Children payments
(equal to about $56 million for the entire fiscal year) has been suspended
by court order.
3. A General Fund increase of approximately $38 million in support for
the University of California and $65 million for California State
University. It is anticipated that student fees for both the University of
California and the California State University will increase up to 10%.
4. Proposition 98 funding for K-14 schools is increased by $526 million
from 1993-94 levels, representing an increase for enrollment growth and
inflation. Consistent with previous budget agreements, Proposition 98
funding provides approximately $4,217 per student for K-12 schools, equal to
the level in the past three years.
5. Legislation enacted with the Budget clarifies laws passed in 1992
and 1993 which require counties and other local agencies to transfer funds
to local school districts, thereby reducing State aid. Some counties had
implemented a method of making such transfers which provided less money for
schools if there were redevelopment agency projects. The new legislation
bans this method of transfer. If all counties had implemented this method,
General Fund aid to K-12 schools would have been $300 million higher in each
of the 1994-95 and 1995-96 Fiscal Years.
6. The 1994-95 Budget Act provides funding for anticipated growth in
the State's prison inmate population, including provisions for implementing
recent legislation (the so-called "Three Strikes" law) which requires
mandatory life prison terms for certain third-time felony offenders.
7. Additional miscellaneous cuts ($500 million) and fund transfers
($255 million) totalling in the aggregate approximately $755 million.
The 1994-95 Budget Act contains no tax increases. Under legislation
enacted for the 1993-94 Budget, the renters' tax credit was suspended for two
years (1993 and 1994). A ballot proposition to permanently restore the renters'
tax credit after this year failed at the June, 1994 election. The Legislature
enacted a further one-year suspension of the renters' tax credit, for 1995,
saving about $390 million in the 1995-96 Fiscal Year.
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The 1994-95 Budget assumed that the State will use a cash flow
borrowing program in 1994-95 which combines one-year notes and two-year
warrants, which have now been issued. Issuance of warrants allows the State to
defer repayment of approximately $1.0 billion of its accumulated budget deficit
into the 1995-96 Fiscal Year.
The State's cash flow management plan for the 1994-95 fiscal year
included the issuance of $4.0 billion of revenue anticipation warrants on July
26, 1994, to mature on April 25, 1996, as part of a two-year plan to retire the
accumulated State budget deficit.
Because preparation of cash flow estimates for the 1995-96 Fiscal Year
necessarily entails greater risks of variance from assumptions, and because the
Governor's two-year budget plan assumes receipt of a large amount of federal aid
in the 1995-96 Fiscal Year for immigration-related costs which is uncertain, the
Legislature enacted a backup budget adjustment mechanism to mitigate possible
deviations from projected revenues, expenditures or internal borrowable
resources which might reduce available cash resources during the two-year plan,
so as to assure repayment of the warrants.
Pursuant to Section 12467 of the California Government Code, enacted by
Chapter 135, Statutes of 1994 (the "Budget Adjustment Law"), the State
Controller was required to make a report by November 15, 1994 on whether the
projected cash resources for the General Fund as of June 30, 1995 will decrease
more than $430 million from the amount projected by the State in its official
statement in July, 1994 for the sale of $4,000,000,000 of Revenue Anticipation
Warrants. On November 15, 1994, the State Controller issued the report on the
State's cash position required by the Budget Adjustment Law. The report
indicated that the cash position of the General Fund on June 30, 1995 would be
$581 million better than was estimated in the July, 1994 cash flow projections
and therefore, no budget adjustment procedures will be invoked for the 1994-95
Fiscal Year. As explained earlier, the Law would only be implemented if the
State Controller estimated that borrowable resources on June 30, 1995 would be
at least $430 million lower than projected.
The State Controller's report identified a number of factors which have
led to the improved cash position of the State. Estimated revenues and transfers
for the 1994-95 Fiscal Year other than federal reimbursement for immigration
costs were up about $650 million. The largest portion of this was in higher bank
and corporation tax receipts, but all major tax sources were above original
projections. However, most of the federal immigration aid revenues projected in
connection with the 1994-95 Budget Act and in the July, 1994 cash flows will not
be received,
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as indicated above, leaving a net increase in revenues of $322 million.
On the expenditure side, the State Controller reported that estimated
reduced caseload growth in health and welfare programs, reduced school
enrollment growth, and an accounting adjustment reducing a transfer from the
General Fund to the Special Fund for Economic Uncertainties resulted in overall
General Fund expenditure reductions (again before adjusting for federal aid) of
$672 million. However, the July, 1994 cash flows projected that General Fund
health and welfare and education expenditures would be offset by the anticipated
receipt of $407 million in federal aid for illegal immigrant costs. The State
Controller now estimates that none of these funds will be received, so the net
reduction in General Fund expenditures is $265 million.
Finally, the State Controller indicated that a review of balances in
special funds available for internal borrowing resulted in an estimated
reduction of such borrowable resources of $6 million. The combination of these
factors results in the estimated improvement of the General Fund's cash position
of $581 million. The State Controller's revised cash flow projections for
1994-95 have allocated this improvement to two line items: an increase from $0
to $427 million in the estimated ending cash balance of the General Fund on June
30, 1995, and an increase in unused borrowable resources of $154 million.
The State Controller's report indicated that there was no anticipated
cash impact in the 1994-95 Fiscal Year for recent initiatives on "three strikes"
criminal penalties and illegal immigration which were approved by voters on
November 8, 1994. At a hearing before a committee of the Legislature on November
15, 1994, both the Legislative Analyst and the Department of Finance concurred
in the reasonableness of the State Controller's report. (The Legislative Analyst
had issued a preliminary analysis on November 1, 1994 which reached a conclusion
very close to that of the State Controller.) The State Controller's report makes
no projections about whether the Law may have to be implemented in 1995-96.
However, both the State Controller and the Legislative Analyst in the November
15 hearing noted that the July, 1994 cash flows for the 1995-96 Fiscal Year
place continued reliance on large amounts of federal assistance for immigration
costs, which did not materialize this year, indicating significant budget
pressures for next year. The Department of Finance indicated that the budgetary
issues identified in the hearing would be addressed in the Governor's Budget
proposal for the 1995-96 Fiscal Year, which was released in early January, 1995.
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The 1995-96 Governor's Budget, discussed below, contains a reforecast
of revenues and expenditures for the 1994-95 Fiscal Year. The Department of
Finance Bulletins for February and March 1995 report that combined General Fund
revenues for February, 1995 were about $356 million below forecast, but combined
revenues for January and February were only about $82 million (or 0.3 percent)
below the 1995-96 Governor's Budget forecast. The largest component of the
decrease is attributable to personal income tax receipts, which were about $131
million (or 1.1 percent) below the two months' forecast. This decrease in
personal income tax receipts appears to be largely attributable to fourth
quarter 1994 activity, probably in the anticipation of tax reform, with some
taxpayers shifting income into 1995 to the extent possible. The withholding
component comprised $77 million of this shortfall, but the Department of Finance
does not yet view this as significant. Additionally, sales and use tax receipts
were very close to forecast for the two-month period, while bank and corporation
tax receipts were about $42 million (or 1.5 percent) below the two months'
forecast. Miscellaneous revenues were about $117 million (or 6.2 percent) above
forecast for the two months, but the Department of Finance is not yet able to
determine whether this gain is real, or is instead attributable to cash flow
factors.
Initial analysis of the federal Fiscal Year 1995 budget by the
Department of Finance indicates that about $98 million was appropriated for
California to offset costs of incarceration of undocumented and refugee
immigrants, less than the $356 million which was assumed in the State's 1994-95
Budget Act. Because of timing considerations in applying for these federal
funds, the Department estimates that about $33 million of these funds will be
received during the State's 1994-95 Fiscal Year, with the balance received in
the following fiscal year. It does not appear that the federal budget contains
any of the additional $400 million in funding for refugee assistance and health
costs which were also assumed in the 1994-95 Budget Act, but the Department
expects the State to continue its efforts to obtain some or all of these federal
funds.
On January 10, 1995, the Governor presented his 1995-96 Fiscal Year
Budget Proposal (the "Proposed Budget"). The Proposed Budget estimates General
Fund revenues and transfers of $42.5 billion (an increase of 0.2 percent over
1994-95). This nominal increase from the 1994-95 Fiscal Year reflects the
Governor's realignment proposal and the first year of his tax cut proposal (see
principal features of the Proposed Budget below for further discussions).
Without these two proposals, General Fund revenues would be projected at
approximately $43.8 billion, or an increase of 3.3 percent over 1994-95.
Expenditures are estimated at $41.7 billion (essentially unchanged from
1994-95). Special Fund revenues are estimated at $13.5 billion (10.7 percent
higher
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than 1994-95) and Special Fund expenditures are estimated at $13.8 billion (12.2
percent higher than 1994-95). The Proposed Budget projects that the General Fund
will end the fiscal year at June 30, 1996 with a budget surplus in the Special
Fund for Economic Uncertainties of about $92 million, or less than 1 percent of
General Fund expenditures, and will have repaid all of the accumulated budget
deficits.
The following are the principal features of the Proposed Budget:
1. The principal feature of the Proposed Budget is a proposed 15
percent cut in personal income and corporate tax rates, which would be
phased in at 5 percent per year starting in 1996. Existing personal income
tax rates, which are scheduled to drop from 11 percent top rate to 9.3
percent in 1996, would be continued during the time the overall tax cut
takes effect. This proposal would reduce General Fund revenues by $225
million in 1995-96, but the revenue reduction would reach $3.6 billion by
1998-99.
2. The Governor has proposed an expansion of the realignment program
between the State and counties, so that counties will take on greater
responsibility for welfare and social services, while the State will take on
increased funding of trial court costs. The proposal includes transfer of
about $1 billion of State revenues, from sales taxes and trial court funding
moneys, to counties. The net effect of the shifts, however, is estimated to
save the General Fund about $240 million.
3. The Governor proposes further cuts in health and welfare costs
totaling about $1.4 billion. Some of these cuts would require federal
legislative approval.
4. Proposition 98 funding for schools and community colleges will
increase by about $1.2 billion, reflecting strong General Fund revenue
growth. Per-pupil expenditures are projected to increase by $61 to $4,292.
For the first time in several years, a cost-of-living increase (2.2 percent)
is added to the enrollment growth factor. The Governor proposes to set aside
about $514 million of the Proposition 98 funding increase to repay prior
years' loans from the General Fund to schools. As the legality of these
loans is currently being challenged in a lawsuit, the Governor proposes to
set the amount aside in escrow until the litigation is resolved.
5. The Proposed Budget includes increases in funding for the University
of California ($63 million General Fund) and the California State University
system ($3 million
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General Fund). The Governor has proposed a four-year funding "company" for
the higher education units which includes both annual increases in State
funding and increases in student fees.
6. The Proposed Budget assumes receipt of $830 million in new federal
aid for costs of undocumented and refugee immigrants, above commitments
already made by the federal government. This amount is much less than an
estimated $2.8 billion which had been included in the Governor's pro-forma
two-year plan from last summer.
The Proposed Budget contains a cash flow projection (based on all the
assumptions described above) which shows about $1 billion of unused borrowable
resources at June 30, 1996, providing this amount of "cushion" before the budget
"trigger" would have to be invoked.
However, a report issued by the Legislative Analyst in February, 1995
notes that the Proposed Budget is subject to a number of major risks, including
receipt of the expected federal immigration aid and other federal actions to
allow health and welfare costs, and the outcome of several lawsuits concerning
previous budget actions which the State has lost at the trial court level, and
which are under appeal. This Analyst's Report also estimates that, despite more
favorable revenues, the two-year budget estimates made in July, 1994 are about
$2 billion out of balance, principally because federal immigration aid appears
likely to be much lower than previously estimated. This shortfall is much
smaller than the State has faced in recent years, and has been addressed in the
Governor's Budget.
The Director of Finance is required to include updated cash-flow
statements for the 1994-95 and 1995-96 Fiscal Years in the May revision to the
1995-96 Fiscal Year budget proposal. By June 1, 1995, the State Controller must
concur with these updated statements or provide a revised estimate of the cash
condition of the General Fund for the 1994-95 and the 1995-96 Fiscal Years. For
the 1995-96 Fiscal Year, Chapter 135 prohibits any external borrowing as of June
30, 1996, thereby requiring the State to rely solely on internal borrowable
resources, expenditure reductions or revenue increases to eliminate any
projected cash flow shortfall.
Commencing on October 15, 1995, the State Controller will, in
conjunction with the Legislative Analyst's Office, review the estimated cash
condition of the General Fund for the 1995-96 Fiscal Year. The "1996 cash
shortfall" shall be the amount necessary to bring the balance of unused
borrowable resources on June 30, 1996 to zero. On or before December 1, 1995,
legislation must be enacted providing for sufficient
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General Fund expenditure reductions, revenue increases, or both, to offset any
such 1996 cash shortfall identified by the State Controller. If such legislation
is not enacted, within five days thereafter the Director of Finance must reduce
all General Fund appropriations for the 1995-96 Fiscal Year, except the Required
Appropriations, by the percentage equal to the ratio of said 1996 cash shortfall
to total remaining General Fund appropriations for the 1995-96 Fiscal Year,
excluding the Required Appropriations.
On December 6, 1994, Orange County, California and its Investment Pool
(the "Pool") filed for bankruptcy under Chapter 9 of the United States
Bankruptcy Code. Approximately 187 California public entities, substantially all
of which are public agencies within the County, invested funds in the Pool. Many
of the agencies have various bonds, notes or other forms of indebtedness
outstanding, in some instances the proceeds of which were invested in the Pool.
Various investment advisors were employed by the County to restructure the Pool.
Such restructuring led to the sale of substantially all of the Pool's portfolio,
resulting in losses estimated to be approximately $1.7 billion or approximately
22% of amounts deposited by the Pool investors, including the County. It is
anticipated that such losses may result in delays or failures of the County as
well as investors in the Pool to make scheduled debt service payments. Further,
the County expects substantial budget deficits to occur in Fiscal Year 1995 with
possibly similar effects upon operations of investors in the Pool.
Investor access to monies in the Pool subsequent to the filing was
pursuant to Court order only and severely limited. On May 2, 1995, the
Bankruptcy Court approved a comprehensive settlement agreement (the "CSA")
between the County and Pool investors which, among other things, (i) established
a formula for distribution of all available cash and securities from the Pool to
the Pool investors, including the County, (ii) established formulas for
distribution among certain settling Pool investors of several tranches of new
County obligations to be payable from, and in some instances secured by, certain
designated sources of potential recoveries on Pool related claims, and (iii)
designated certain outstanding short term note obligations of the County to be
senior to or on a parity with certain of the new County obligations. By order
dated May 22, 1995, following distribution of all available cash and securities
from the Pool to the Pool investors, including the County, the Bankruptcy Court
dismissed the bankruptcy filing of the Pool based upon the Court's finding that
the Pool was not eligible for relief under Chapter 9 of the Bankruptcy Code
because it is not a municipality and it has not been specifically authorized to
file under Chapter 9 as required by the Bankruptcy Code.
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Following its bankruptcy filing, the County has, with Bankruptcy Court
approval, made payments of scheduled principal and interest on its outstanding
obligations where no alternative source of payment (such as reserve funds on
deposit with indenture trustees, letters of credit, municipal bond insurance
policies or other alternative payment sources) were available. The County has
not replenished such reserve funds or reimbursed the issuers of such letters of
credit or municipal bond insurance policies. In addition, the County ceased
making set aside deposits for repayment of certain of its short term
indebtedness. The Bankruptcy Court subsequently ruled that the rights of the
holders of such short term indebtedness to require the set aside deposits from
County revenues received following the filing were cut off by operation of the
Bankruptcy Code. In addition, the County has failed to satisfy its obligation to
accept tenders of its $110,200,000 aggregate principal amount of Taxable Pension
Obligation Bonds, Series B used to finance County pension obligations. Interest
at a rate set pursuant to the bond documents has been timely paid on such
Pension Bonds. The failure to satisfy the contractual obligations discussed
above may constitute defaults under the documents governing such securities.
To June 30, 1995 there has been no default in payment of scheduled
interest and principal (excluding the tender payment described above) to holders
of County securities, although certain note issues are scheduled to mature at
various times thereafter and the Fund is unable to predict whether or to what
extent such notes will be timely paid by the County. On June 27, 1995, the
Bankruptcy Court approved a Stipulation and an Extension Agreement that, if they
both become effective, would offer to holders of certain short term note
obligations of the County ("Note Debt") who elect to be treated thereunder: (i)
extension of maturity dates to June 30, 1996; (ii) payment of monthly interest
at a rate below existing contract rates; (iii) accrual of monthly interest equal
to the difference between the amount paid and the contract rate, plus a
settlement adjustment of 0.95%; (iv) waiver of post-bankruptcy interest
recapture or disallowance; (v) waiver of defenses to repayment of the Note Debt
claims based on California limitations on municipal indebtedness; and (vi)
allowance of the Note Debt claims, subject to certain reserved rights. The
treatment described in the preceding sentence will be available to electing
holders of Note Debt provided that holders of at least 50% of the then issued
and outstanding aggregate principal amount of all Note Debt obligations elect
such treatment. If holders of at least 90% of the outstanding aggregate
principal amount of all Note Debt obligations elect such treatment, all of the
Note Debt obligations will be so treated. The Fund is unable to predict whether
and to what extent holders of Note Debt will elect to be treated under the
Extension Agreement.
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On June 27, 1995, the voters of Orange County rejected, by a
substantial majority of those voting, an increase of 0.50% in the sales tax
imposed throughout the County. Prior to the election, spokespersons for the
County had indicated that passage of the sales tax increase was an important
factor in the County's ability to restructure its finances in a manner that
would permit eventual payment in full of all County securities. The Fund is
unable to predict the effect of the defeat of the sales tax increase on the
ability of the County to restructure its obligations and otherwise manage its
affairs.
Both Standard & Poor's and Moody's Investors Service have suspended or
downgraded ratings on various debt securities of the County and certain of the
investors in the Pool and, following the defeat of the proposition submitted to
the voters on June 27, announced their intention to downgrade the County's debt
to default status, regardless of whether the Stipulation and Extension Agreement
receives approval by holders of the Note Debt. Such suspensions or downgradings
could affect both price and liquidity of such securities. The Fund is unable to
predict (i) the occurrence of covenant and/or payment defaults with respect to
obligations of the County and/or investors in the Pool or (ii) the financial
impact of any such defaults or credit rating suspensions or downgradings upon
the value of such securities.
The California Tax-Exempt Money Market Fund currently holds an Orange
County Note, with a par value of $4,500,000 that matures on August 11, 1995. The
Orange County Note is supported by a Letter of Credit issued by PNC, Bank
("PNC"). BankAmerica Corporation has agreed to reimburse PNc for any payments
PNC may make under the Letter of Credit. The Letter of Credit expires after
August 11, 1995.
CONSTITUTIONAL, LEGISLATIVE AND OTHER FACTORS. Certain California
constitutional amendments, legislative measures, executive orders,
administrative regulations and voter initiatives could result in the adverse
effects described below. 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 and prospectuses relating to
securities offerings of the State of California and various local agencies in
California, available as of the date of the Tax-Exempt Money Fund's and
California Tax-Exempt Money Market Fund's Prospectus and this Statement of
Additional Information. While the Tax-Exempt Money Fund and California
Tax-Exempt Money Market Fund have not independently verified such information,
they have no reason to believe that such information is not correct in all
material respects.
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Certain California Municipal Securities in the Tax-Exempt Money Fund
and California Tax-Exempt Money Market Fund may be obligations of issuers which
rely in whole or in part on California State revenues for payment of these
obligations. Property tax revenues and a portion of the State's general fund
surplus are distributed to counties, cities and their various taxing entities
and the State assumes certain obligations theretofore paid out of local funds.
Whether and to what extent a portion of the State's general fund will be
distributed in the future to counties, cities and their various entities, is
unclear.
In 1988, California enacted legislation providing for a water's-edge
combined reporting method if an election fee was paid and other conditions met.
On October 6, 1993, California Governor Pete Wilson signed Senate Bill 671
(Alquist) which modifies the unitary tax law by deleting the requirements that a
taxpayer electing to determine its income on a water's-edge basis pay a fee and
file a domestic disclosure spreadsheet and instead requiring an annual
information return. Significantly, the Franchise Tax Board can no longer
disregard a taxpayer's election. The Franchise Tax Board is reported to have
estimated state revenue losses from the Legislation as growing from $27 million
in 1993-94 to $616 million in 1999-2000, but others, including Assembly Speaker
Willie Brown, disagree with that estimate and assert that more revenue will be
generated for California, rather than less, because of an anticipated increase
in economic activity and additional revenue generated by the incentives in the
Legislation.
Certain California Municipal Securities in the Tax-Exempt Money Fund
and California Tax-Exempt Money Market Fund may be obligations of issuers who
rely in whole or in part on ad valorem real property taxes as a source of
revenue. On June 6, 1978, California voters approved an amendment to the
California Constitution known as Proposition 13, which added Article XIIIA to
the California Constitution. The effect of Article XIIIA is to limit ad valorem
taxes on real property and to restrict the ability of taxing entities to
increase real property tax revenues. On November 7, 1978, California voters
approved Proposition 8 and on June 3, 1986, the California voters approved
Proposition 46, both of which amended Article XIIIA.
Section 1 of Article XIIIA limits the maximum ad valorem tax on real
property to 1% of full cash value (as defined in Section 2), to be collected by
the counties and apportioned according to law; provided that the 1% limitation
does not apply to ad valorem taxes or special assessments to pay the interest
and redemption charges on (i) any indebtedness approved by the voters prior to
July 1, 1978, or (ii) any bonded indebtedness for the acquisition or improvement
of real property approved on or
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after July 1, 1978, by two-thirds of the votes cast by the voters voting on the
proposition. Section 2 of Article XIIIA defines "full cash value" to mean "the
County Assessor's valuation of real property as shown on the 1975/76 tax bill
under `full cash value' or, thereafter, the appraised value of real property
when purchased, newly constructed, or a change in ownership has occurred after
the 1975 assessment." The full cash value may be adjusted annually to reflect
inflation at a rate not to exceed 2% per year, or reduction in the consumer
price index or comparable local data, or reduced in the event of declining
property value caused by damage, destruction or other factors. The California
State Board of Equalization has adopted regulations, binding on county
assessors, interpreting the meaning of "change in ownership" and "new
construction" for purposes of determining full cash value of property under
Article XIIIA.
Legislation enacted by the California Legislature to implement Article
XIIIA (Statutes of 1978, Chapter 292, as amended) provides that notwithstanding
any other law, local agencies may not levy any ad valorem property tax except to
pay debt service on indebtedness approved by the voters prior to July 1, 1978,
and that each county will levy the maximum tax permitted by Article XIIIA of
$4.00 per $100 assessed valuation (based on the former practice of using 25%,
instead of 100%, of full cash value as the assessed value for tax purposes). The
legislation further provided that, for the 1978/79 fiscal year only, the tax
levied by each county was to be apportioned among all taxing agencies within the
county in proportion to their average share of taxes levied in certain previous
years. The apportionment of property taxes for fiscal years after 1978/79 has
been revised pursuant to Statutes of 1979, Chapter 282, which provides relief
funds from State moneys beginning in fiscal year 1979/80 and is designed to
provide a permanent system for sharing State taxes and budget funds with local
agencies. Under Chapter 282, cities and counties receive more of the remaining
property tax revenues collected under Proposition 13 instead of direct State
aid. School districts receive a correspondingly reduced amount of property
taxes, but receive compensation directly from the State and are given additional
relief. Chapter 282 does not affect the derivation of the base levy ($4.00 per
$100 assessed valuation) and the bonded debt tax rate.
On November 6, 1979, an initiative known as "Proposition 4" or the
"Gann Initiative" was approved by the California voters, which added Article
XIIIB to the California Constitution. Under Article XIIIB, State and local
governmental entities have an annual "appropriations limit" and are not allowed
to spend certain moneys called "appropriations subject to limitation" in an
amount higher than the "appropriations limit." Article XIIIB does not affect the
appropriation of moneys which are excluded from the definition of
"appropriations subject to
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limitation," including debt service on indebtedness existing or authorized as of
January 1, 1979, or bonded indebtedness subsequently approved by the voters. In
general terms, the "appropriations limit" is required to be based on certain
1978/79 expenditures, and is to be adjusted annually to reflect changes in
consumer prices, population and certain services provided by these entities.
Article XIIIB also provides that if these entities' revenues in any year exceed
the amounts permitted to be spent, the excess is to be returned by revising tax
rates or fee schedules over the subsequent two years.
At the November 8, 1988 general election, California voters approved an
initiative known as Proposition 98. This initiative amends Article XIIIB to
require that (i) the California Legislature establish a prudent state reserve
fund in an amount as it shall deem reasonable and necessary and (ii) revenues in
excess of amounts permitted to be spent and which would otherwise be returned
pursuant to Article XIIIB by revision of tax rates or fee schedules, be
transferred and allocated (up to a maximum of 4%) to the State School Fund and
be expended solely for purposes of instructional improvement and accountability.
No such transfer or allocation of funds will be required if certain designated
state officials determine that annual student expenditures and class size meet
certain criteria as set forth in Proposition 98. Any funds allocated to the
State School Fund shall cause the appropriation limits established in Article
XIIIB to be annually increased for any such allocation made in the prior year.
Proposition 98 also amends Article XVI to require that the State of
California provide a minimum level of funding for public schools and community
colleges. Commencing with the 1988-89 fiscal year, state monies to support
school districts and community college districts shall equal or exceed the
lesser of (i) an amount equalling the percentage of state general revenue bonds
for school and community college districts in fiscal year 1986-87, or (ii) an
amount equal to the prior year's state general fund proceeds of taxes
appropriated under Article XIIIB plus allocated proceeds of local taxes, after
adjustment under Article XIIIB. The initiative permits the enactment of
legislation, by a two-thirds vote, to suspend the minimum funding requirement
for one year.
On June 30, 1989, the California Legislature enacted Senate
Constitutional Amendment 1, a proposed modification of the California
Constitution to alter the spending limit and the education funding provisions of
Proposition 98. Senate Constitutional Amendment 1, on the June 5, 1990 ballot as
Proposition 111, was approved by the voters and took effect on July 1, 1990.
Among a number of important provisions, Proposition 111 recalculates spending
limits for the State and
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for local governments, allows greater annual increases in the limits, allows the
averaging of two years' tax revenues before requiring action regarding excess
tax revenues, reduces the amount of the funding guarantee in recession years for
school districts and community college districts (but with a floor of 40.9
percent of State general fund tax revenues), removes the provision of
Proposition 98 which included excess moneys transferred to school districts and
community college districts in the base calculation for the next year, limits
the amount of State tax revenue over the limit which would be transferred to
school districts and community college districts, and exempts increased gasoline
taxes and truck weight fees from the State appropriations limit. Additionally,
Proposition 111 exempts from the State appropriations limit funding for capital
outlays.
Article XIIIB, like Article XIIIA, may require further interpretation
by both the Legislature and the courts to determine its applicability to
specific situations involving the State and local taxing authorities. Depending
upon the interpretation, Article XIIIB may limit significantly a governmental
entity's ability to budget sufficient funds to meet debt service on bonds and
other obligations.
On November 4, 1986, California voters approved an initiative statute
known as Proposition 62. This initiative (i) requires that any tax for general
governmental purposes imposed by local governments be approved by resolution or
ordinance adopted by a two-thirds vote of the governmental entity's legislative
body and by a majority vote of the electorate of the governmental entity, (ii)
requires that any special tax (defined as taxes levied for other than general
governmental purposes) imposed by a local governmental entity be approved by a
two-thirds vote of the voters within that jurisdiction, (iii) restricts the use
of revenues from a special tax to the purposes or for the service for which the
special tax was imposed, (iv) prohibits the imposition of ad valorem taxes on
real property by local governmental entities except as permitted by Article
XIIIA, (v) prohibits the imposition of transaction taxes and sales taxes on the
sale of real property by local governments, (vi) requires that any tax imposed
by a local government on or after August 1, 1985 be ratified by a majority vote
of the electorate within two years of the adoption of the initiative or be
terminated by November 15, 1988, (vii) requires that, in the event a local
government fails to comply with the provisions of this measure, a reduction in
the amount of property tax revenue allocated to such local government occurs in
an amount equal to the revenues received by such entity attributable to the tax
levied in violation of the initiative, and (viii) permits these provisions to be
amended exclusively by the voters of the State of California.
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<PAGE> 816
In September 1988, the California Court of Appeal in City of
Westminster v. County of Orange, 204 Cal. App. 3d 623, 215 Cal. Rptr. 511 (Cal.
Ct. App. 1988), held that Proposition 62 is unconstitutional to the extent that
it requires a general tax by a general law city, enacted on or after August 1,
1985 and prior to the effective date of Proposition 62, to be subject to
approval by a majority of voters. The Court held that the California
Constitution prohibits the imposition of a requirement that local tax measures
be submitted to the electorate by either referendum or initiative. It is not
possible to predict the impact of this decision on charter cities, on special
taxes or on new taxes imposed after the effective date of Proposition 62.
On November 8, 1988, California voters approved Proposition 87.
Proposition 87 amended Article XVI, Section 16, of the California Constitution
by authorizing the California Legislature to prohibit redevelopment agencies
from receiving any of the property tax revenue raised by increased property tax
rates levied to repay bonded indebtedness of local governments which is approved
by voters on or after January 1, 1989. It is not possible to predict whether the
California Legislature will enact such a prohibition nor is it possible to
predict the impact of Proposition 87 on redevelopment agencies and their ability
to make payments on outstanding debt obligations.
Certain California Municipal Securities held by the Tax-Exempt Money
Fund and California Tax-Exempt Money Market Fund may be obligations which are
payable solely from the revenues of health care institutions. Certain provisions
under California law may adversely affect these revenues and, consequently,
payment on those Municipal Securities.
The Federally sponsored Medicaid program for health care services to
eligible welfare beneficiaries in California is known as the Medi-Cal program.
Historically, the Medi-Cal program has provided for a cost-based system of
reimbursement for inpatient care furnished to Medi-Cal beneficiaries by any
hospital wanting to participate in the Medi-Cal program, provided such hospital
met applicable requirements for participation. California law now provides that
the State of California shall selectively contract with hospitals to provide
acute inpatient services to Medi-Cal patients. Medi-Cal contracts currently
apply only to acute inpatient services. Generally, such selective contracting is
made on a flat per diem payment basis for all services to Medi-Cal
beneficiaries, and generally such payment has not increased in relation to
inflation, costs or other factors. Other reductions or limitations may be
imposed on payment for services rendered to Medi-Cal beneficiaries in the
future.
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<PAGE> 817
Under this approach, in most geographical areas of California, only
those hospitals which enter into a Medi-Cal contract with the State of
California will be paid for non-emergency acute inpatient services rendered to
Medi-Cal beneficiaries. The State may also terminate these contracts without
notice under certain circumstances and is obligated to make contractual payments
only to the extent the California legislature appropriates adequate funding
therefor.
California enacted legislation in 1982 that authorizes private health
plans and insurers to contract directly with hospitals for services to
beneficiaries on negotiated terms. Some insurers have introduced plans known as
"preferred provider organizations" ("PPOs"), which offer financial incentives
for subscribers who use only the hospitals which contract with the plan. Under
an exclusive provider plan, which includes most health maintenance organizations
("HMOs"), private payors limit coverage to those services provided by selected
hospitals. Discounts offered to HMOs and PPOs may result in payment to the
contracting hospital of less than actual cost and the volume of patients
directed to a hospital under an HMO or PPO contract may vary significantly from
projections. Often, HMO or PPO contracts are enforceable for a stated term,
regardless of provider losses or of bankruptcy of the respective HMO or PPO. It
is expected that failure to execute and maintain such PPO and HMO contracts
would reduce a hospital's patient base or gross revenues. Conversely,
participation may maintain or increase the patient base, but may result in
reduced payment and lower net income to the contracting hospitals.
These California Municipal Securities may also be insured by the State
of California pursuant to an insurance program implemented by the Office of
Statewide Health Planning and Development for health facility construction
loans. If a default occurs on insured California Municipal Securities, the State
Treasurer will issue debentures payable out of a reserve fund established under
the insurance program or will pay principal and interest on an unaccelerated
basis from unappropriated State funds. At the request of the Office of Statewide
Health Planning and Development, Arthur D. Little, Inc. prepared a study in
December 1983, to evaluate the adequacy of the reserve fund established under
the insurance program and based on certain formulations and assumptions found
the reserve fund substantially underfunded. In September of 1986, Arthur D.
Little, Inc. prepared an update of the study and concluded that an additional
10% reserve be established for "multi-level" facilities. For the balance of the
reserve fund, the update recommended maintaining the current reserve calculation
method. In March of 1990, Arthur D. Little, Inc. prepared a further review of
the study and recommended that separate reserves continue to be established for
"multi-level" facilities at a
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<PAGE> 818
reserve level consistent with those that would be required by an insurance
company.
Certain California Municipal Securities in the Tax-Exempt Money Fund
and California Tax-Exempt Money Market Fund may be obligations which are secured
in whole or in part by a mortgage or deed of trust on real property. California
has five principal statutory provisions which limit the remedies of a creditor
secured by a mortgage or deed of trust. Two limit the creditor's right to obtain
a deficiency judgment, one limitation being based on the method of foreclosure
and the other on the type of debt secured. Under the former, a deficiency
judgment is barred when the foreclosure is accomplished by means of a
nonjudicial trustee's sale. Under the latter, a deficiency judgment is barred
when the foreclosed mortgage or deed of trust secures certain purchase money
obligations. Another California statute, commonly known as the "one form of
action" rule, requires creditors secured by real property to exhaust their real
property security by foreclosure before bringing a personal action against the
debtor. The fourth statutory provision limits any deficiency judgment obtained
by a creditor secured by real property following a judicial sale of such
property to the excess of the outstanding debt over the fair value of the
property at the time of the sale, thus preventing the creditor from obtaining a
large deficiency judgment against the debtor as the result of low bids at a
judicial sale. The fifth statutory provision gives the debtor the right to
redeem the real property from any judicial foreclosure sale as to which a
deficiency judgement may be ordered against the debtor.
Upon the default of a mortgage or deed of trust with respect to
California real property, the creditor's nonjudicial foreclosure rights under
the power of sale contained in the mortgage or deed of trust are subject to the
constraints imposed by California law upon transfers of title to real property
by private power of sale. During the three-month period beginning with the
filing of a formal notice of default, the debtor is entitled to reinstate the
mortgage by making any overdue payments. Under standard loan servicing
procedures, the filing of the formal notice of default does not occur unless at
least three full monthly payments have become due and remain unpaid. The power
of sale is exercised by posting and publishing a notice of sale for at least 20
days after expiration of the three-month reinstatement period. Therefore, the
effective minimum period for foreclosing on a mortgage could be in excess of
seven months after the initial default. Such time delays in collections could
disrupt the flow of revenues available to an issuer for the payment of debt
service on the outstanding obligations if such defaults occur with respect to a
substantial number of mortgages or deeds of trust securing an issuer's
obligations.
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<PAGE> 819
In addition, a court could find that there is sufficient involvement of
the issuer in the nonjudicial sale of property securing a mortgage for such
private sale to constitute "state action," and could hold that the
private-right-of-sale proceedings violate the due process requirements of the
Federal or State Constitutions, consequently preventing an issuer from using the
nonjudicial foreclosure remedy described above.
Certain California Municipal Securities in the Tax-Exempt Money Fund
and California Tax-Exempt Money Market Fund may be obligations which finance the
acquisition of single family home mortgages for low and moderate income
mortgagors. These obligations may be payable solely from revenues derived from
the home mortgages, and are subject to California's statutory limitations
described above applicable to obligations secured by real property. Under
California antideficiency legislation, there is no personal recourse against a
mortgagor of a single family residence purchased with the loan secured by the
mortgage, regardless of whether the creditor chooses judicial or nonjudicial
foreclosure.
Under California law, mortgage loans secured by single-family
owner-occupied dwellings may be prepaid at any time. Prepayment charges on such
mortgage loans may be imposed only with respect to voluntary prepayments made
during the first five years during the term of the mortgage loan, and cannot in
any event exceed six months' advance interest on the amount prepaid in excess of
20% of the original principal amount of the mortgage loan. This limitation could
affect the flow of revenues available to an issuer for debt service on the
outstanding debt obligations which financed such home mortgages.
INVESTMENT LIMITATIONS
The Prospectuses for each Fund sets forth certain fundamental policies
that may not be changed with respect to such Fund without the affirmative vote
of the holders of the majority of the Fund's outstanding shares (as defined
below under "Miscellaneous"). Similarly, the following enumerated additional
fundamental policies may not be changed with respect to a Fund without such a
vote of shareholders.
THE PRIME FUND MAY NOT:
1. Purchase securities of any one issuer (other than obligations issued
or guaranteed by the U.S. Government, its agencies or instrumentalities) if
immediately thereafter more than 15% of its total assets would be invested in
certificates of deposit or bankers' acceptances of any one bank, or more than 5%
of its total assets would be invested in other securities of any one bank or the
securities of any other issuer (except that up to
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25% of the Fund's total assets may be invested without regard to this
limitation).
In accordance with current regulations of the Securities and Exchange
Commission, the Prime Fund presently intends to limit its investments in the
securities of any single issuer (other than securities issued or guaranteed by
the U.S. Government, its agencies or instrumentalities) to not more than 5% of
the Fund's total assets at the time of purchase, provided that the Fund may
invest up to 25% of its total assets in the securities of any one issuer for a
period that does not exceed three business days. This intention is not, however,
a fundamental policy of the Fund.
THE PRIME FUND, TREASURY FUND AND CALIFORNIA TAX-EXEMPT MONEY MARKET FUND MAY
NOT:
1. Purchase or sell real estate (however, a Fund may, to the extent
appropriate to its investment objective, purchase securities issued by companies
investing in real estate or interests therein and the California Tax-Exempt
Money Market Fund may purchase Municipal Securities secured by real estate or
interests therein).
2. Underwrite the securities of other issuers.
3. Purchase securities of companies for the purpose of exercising
control.
4. Purchase securities on margin, make short sales of securities or
maintain a short position.
5. Acquire any other investment company or investment company security
except in connection with a merger, consolidation, reorganization or acquisition
of assets.
6. Make loans except that (i) a Fund may purchase or hold debt
instruments and enter into repurchase agreements pursuant to its investment
objective and policies, and (ii) the Prime Fund may lend portfolio securities.
NEITHER THE GOVERNMENT FUND NOR THE TREASURY ONLY FUND MAY:
1. Purchase any security or evidence of interest therein on margin,
except that a Fund may obtain such short term credit as may be necessary for the
clearance of purchases and sales of securities.
2. Underwrite securities issued by other persons, except that all of
the assets of a Fund may be invested in a corresponding investment company with
the same investment
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<PAGE> 821
objective and policies and except insofar as a Fund may technically be deemed an
underwriter under the Securities Act of 1933 in selling a security.
3. Make loans to other persons except (a) through the lending of
securities held by a Fund, (b) through the use of fixed time deposits or
repurchase agreements or the purchase of short term obligations, or (c) by
purchasing all or a portion of an issue of debt securities of types commonly
distributed privately to financial institutions; for purposes of this investment
restriction the purchase of short-term commercial paper or a portion of an issue
of debt securities which are part of an issue to the public shall not be
considered the making of a loan.
4. Purchase or sell real estate (including limited partnership
interests but excluding securities secured by real estate or interests therein),
interests in oil, gas or mineral leases, commodities or commodity contracts in
the ordinary course of business (each Fund reserves the freedom of action to
hold and to sell real estate acquired as a result of the ownership of securities
by such Fund).
5. Issue any senior security (as that term is defined in the Investment
Company Act of 1940) if such issuance is specifically prohibited by the
Investment Company Act of 1940 or the rules and regulations promulgated
thereunder, except as appropriate to evidence a debt incurred without violating
Investment Restriction No. 2 as stated in the Funds' Prospectus regarding
borrowing.
6. Concentrate its investments in any particular industry (excluding
obligations of the U.S. Government, obligations of domestic banks, and
repurchase agreements), but if it is deemed appropriate for the achievement of
its investment objective, up to 25% of the assets of the Fund (taken at market
value at the time of each investment) may be invested in any one industry;
provided, that nothing in this investment restriction shall affect the Fund's
ability to invest a portion or all of its assets in a corresponding investment
company with the same investment objective and policies.
THE TAX-EXEMPT MONEY FUND MAY NOT:
1. Purchase the securities of any issuer if as a result more than 5% of
the value of the Fund's total assets would be invested in the securities of such
issuer, except that up to 25% of the value of the Fund's total assets may be
invested without regard to this 5% limitation. Securities issued or guaranteed
by the United States Government or its agencies or instrumentalities are not
subject to this investment limitation.
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<PAGE> 822
For purposes of this limitation and the Fund's policy on concentration of
investments set forth in the Prospectus, a governmental agency, authority,
instrumentality or other political subdivision is deemed to be an issuer,
separate from the government creating such subdivision, if the security issued
by such subdivision is backed only by the assets and revenues of the
subdivision, and a guarantee of a security is not deemed to be a security issued
by the guarantor, provided that no more than 10% of the value of the Fund's
total assets is invested in securities issued or guaranteed by such guarantor.
2. Underwrite any issue of securities, except to the extent that the
purchase of securities directly from the issuer thereof in accordance with the
Fund's investment objective, policies and limitations may be deemed to be
underwriting.
3. Purchase or sell real estate, except that the Fund may, to the
extent appropriate to its investment objective, invest in securities issued by
companies which invest in real estate or interests therein.
4. Purchase securities on margin, make short sales of securities or
maintain a short position.
5. Write or sell puts, calls, straddles, spreads or combinations
thereof.
6. Purchase or sell commodities or commodity contracts, or invest in
oil, gas or mineral exploration or development programs, except that the Fund
may, to the extent appropriate to its investment objective, invest in securities
issued by companies which purchase or sell commodities or commodity contracts or
which invest in such programs.
7. Purchase securities of other investment companies, except in
connection with a merger, consolidation, acquisition or reorganization.
8. Make loans, except that the Fund may purchase or hold debt
obligations in accordance with its investment objective, policies and
limitations, and may enter into repurchase agreements with respect to
securities.
9. Purchase any securities which would cause 25% or more of the value
of its total assets at the time of such purchase to be invested in the
securities of one or more issuers conducting their principal business activities
in the same industry; provided, however, that (a) there is no limitation with
respect to investments in Municipal Securities or obligations issued or
guaranteed by the Federal Government and its agencies and instrumentalities; (b)
although there is no limitation with
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<PAGE> 823
respect to investments in certificates of deposit and bankers' acceptances
issued by domestic branches of United States banks, no more than 10% of the
total value of the Fund's assets at the time of purchase may be invested in
certificates of deposit and bankers' acceptances issued by domestic branches of
foreign banks and no more than 25% of the total value of the Fund's assets at
the time of purchase may be invested in certificates of deposit and bankers'
acceptances issued by domestic branches of foreign banks and foreign branches of
domestic banks; (c) each utility service (such as gas, gas transmission,
electric and telephone service) will be considered a single industry for
purposes of this policy; and (d) 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 their parents.
THE CALIFORNIA TAX-EXEMPT MONEY MARKET FUND MAY NOT:
1. Invest in industrial revenue bonds where the payment of principal
and interest are the responsibility of a company (including its predecessors)
with less than three years of continuous operation.
2. Purchase or sell commodity contracts, or invest in oil, gas or
mineral exploration or development programs (however, the Fund may, to the
extent appropriate to its investment objective, purchase publicly traded
securities of companies engaging in whole or in part in such activities).
3. Purchase securities while its borrowings (including reverse
repurchase agreements) are outstanding.
4. Write or sell puts, calls, straddles, spreads, or combinations
thereof except that the Fund may acquire stand-by commitments with respect to
its Municipal Securities.
5. Purchase any securities which 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 this limitation shall not apply to Municipal Securities
or governmental guarantees of Municipal Securities; and provided, further, that
for the purpose of this limitation only, industrial development bonds that are
backed only by the assets and revenues of a non-governmental user shall not be
deemed to be Municipal Securities.
* * *
If a percentage restriction is satisfied at the time of investment, a
later increase or decrease in such percentage
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<PAGE> 824
resulting from a change in asset value will not constitute a violation of such
restriction.
For purposes of Investment Limitation Paragraph 1 relating to the Prime
Fund in such Fund's Prospectus, Investment Limitation Paragraph 6 relating to
the Government Fund and Treasury Only Fund in this Statement of Additional
Information, Investment Limitation Paragraph 9 relating to the Tax-Exempt Money
Fund in this Statement of Additional Information and Investment Limitation
Paragraph 5 relating to the California Tax-Exempt Money Market Fund only in this
Statement of Additional Information, these Funds treat, in accordance with the
current views of the staff of the Securities and Exchange Commission and as a
matter of non-fundamental policy that may be changed without a vote of
shareholders, all supranational organizations as a single industry and each
foreign government (and all of its agencies) as a separate industry.
For purposes of Investment Limitation Paragraph 6 of this Statement of
Additional Information with respect to the Prime Fund, Treasury Fund and
California Tax-Exempt Money Market Fund, Investment Limitation Paragraph 3 of
this Statement of Additional Information with respect to the Government Fund and
Treasury Only Fund and Investment Limitation Paragraph 8 of this Statement of
Additional Information with respect to the Tax-Exempt Money Fund, the Funds may
hold debt instruments whether such instruments are part of a public offering or
privately negotiated.
In order to permit the sale of shares in certain states, a Fund may
make commitments more restrictive than the investment policies and limitations
described above. To permit the sale of the shares of the Funds in Texas, the
Company has agreed to the following additional restrictions:
1. The Funds will not invest in oil, gas or mineral leases.
2. The Funds will not invest more than 5% of their net assets in
warrants (valued at the lower of cost or market), of which not more than 2% may
be warrants which are not listed on the New York or American Stock Exchanges.
3. The Funds will not invest in real estate limited partnerships.
4. Any Horizon Shares of the Funds offered for sale to Texas residents
will generally be issued for cash only. Transactions involving the issuance of
Horizon Shares of such Funds for securities or assets other than cash will meet
the requirements of Section 123.2(4) of the Texas Blue Sky Regulations.
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<PAGE> 825
Should a Fund determine that these commitments or any other commitments
are no longer in the best interests of the Fund, it will revoke such commitments
by terminating sales of its shares in the state involved.
PURCHASE AND REDEMPTION OF SHARES
IN GENERAL
The Company or its transfer agent may require any information
reasonably necessary to evidence that a redemption has been duly authorized.
Under the Investment Company Act of 1940 any of the Funds may suspend the right
of redemption or postpone the date of payment upon redemption for any period
during which the New York Stock Exchange is closed (other than customary weekend
and holiday closings), during which trading on such Exchange is restricted,
during which an emergency exists (as determined by the Securities and Exchange
Commission by rule or regulation) as a result of which disposal or valuation of
portfolio securities is not reasonably practicable or for such other periods as
the Securities and Exchange Commission may permit. A Fund may also suspend or
postpone the recordation of the transfer of its shares upon the occurrence of
any of the foregoing conditions.
In addition a Fund may redeem shares involuntarily in certain instances
if such redemption is appropriate to carry out the Company's responsibilities
under the Investment Company Act of 1940. If the Board of Directors determines
that conditions exist which make payment of redemption proceeds wholly in cash
unwise or undesirable, a Fund may make payment wholly or partly in
readily-marketable securities or other property. In such an event a shareholder
would incur transaction costs in selling the securities or other property. See
"Net Asset Value" below for an example of when such form of payment might be
appropriate. The Company has committed that it will pay all redemption requests
by a shareholder of record in cash, limited in amount with respect to each
shareholder during any ninety-day period to the lesser of $250,000 or 1% of the
Company's net asset value at the beginning of such period.
Any institution purchasing shares on behalf of separate accounts will
be required to hold the shares in a single nominee name (a "Master Account").
Institutions investing in more than one Fund must maintain a separate Master
Account for each Fund. Institutions may arrange with the Funds' transfer agent
for certain sub-accounting services (such as purchase, redemption and dividend
record keeping).
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<PAGE> 826
NATIONAL BANKING REGULATIONS
The Comptroller of the Currency has ruled that a national bank may
invest in shares of an investment company to the extent that the portfolio of
such company consists of investments in which the bank might invest directly. As
a national bank could invest directly without limitation in general obligations
of the U.S. Treasury and the portfolios of the Treasury Fund and Treasury Only
Fund are limited to such investments, national banks may acquire shares of the
Treasury Fund and Treasury Only Fund without limitation.
In addition, the regulations of the Comptroller of the Currency provide
that funds held in a fiduciary capacity by a national bank approved by the
Comptroller to exercise fiduciary powers must be invested in accordance with the
instrument establishing the fiduciary relationship and local law. In the opinion
of the Company's counsel, the purchase of shares of the Funds by such national
banks acting on behalf of their fiduciary accounts is not contrary to applicable
regulations if consistent with the particular account and proper under the law
governing the administration of the account. Prospective investors should
consult their advisers regarding the law applicable to their purchase of shares.
NET ASSET VALUE
IN GENERAL. Each Fund's net asset value per share is calculated by
dividing the total value of the assets belonging to the Fund, less the value of
any liabilities applicable to the Fund, by the total number of outstanding
shares of that Fund. Each Fund's net asset value is calculated separately from
each other Fund's net asset value. "Assets belonging to" a Fund consist of the
consideration received upon the issuance of shares representing interests in the
Fund together with all income, earnings, profits and proceeds derived from the
investment thereof, any proceeds from the sale, exchange or liquidation of such
investments, any funds or payments derived from any reinvestment of such
proceeds, and a portion of any general assets of the Company not belonging to a
particular Fund. Each Fund is charged with the direct expenses of that Fund and
with a share of the general expenses of the Company. The determinations by the
Board of Directors as to direct and allocable expenses and the allocable portion
of general assets with respect to the various portfolios are conclusive. The
expenses that are charged to a Fund are borne equally by each share of the Fund
except for the payments to Service Organizations that are borne solely by
Horizon Service Shares and certain payments that are borne solely by Pacific
Horizon Shares as described in the Prospectuses for such Shares.
-44-
<PAGE> 827
A "business day" for purposes of processing share purchases and
redemptions received by the Transfer Agent at its Columbus office is a day on
which both the Funds' custodian and the New York Stock Exchange are open for
trading, except a "business day" does not include Martin Luther King, Jr. Day,
Columbus Day or Veteran's Day. In 1996 the holidays on which the New York Stock
Exchange is closed are: New Year's Day, President's Day, Good Friday, Memorial
Day (observed), Independence Day, Labor Day, Thanksgiving Day and Christmas.
AMORTIZED COST METHOD. The Funds use the amortized cost method of
valuation in computing the net asset value of their shares for purposes of sales
and redemptions. Under this method a Fund values each of its portfolio
securities at cost on the date of purchase and thereafter assumes a constant
proportionate amortization of any discount or premium until maturity of the
security. As a result the value of a portfolio security for purposes of
determining net asset value normally does not change in response to fluctuating
interest rates. While the amortized cost method seems to provide certainty in
portfolio valuation it may result in periods during which values, as determined
by amortized cost, are higher or lower than the amount such Fund would receive
if it sold its portfolio securities. The market value of the securities in the
Funds can be expected to vary inversely with changes in prevailing interest
rates. Thus, if interest rates have increased from the time a security was
purchased, such security, if sold, might be sold at a price less than its
amortized cost. Similarly, if interest rates have declined from the time a
security was purchased, such security, if sold, might be sold at a price greater
than its amortized cost. In either instance, if the security is held to
maturity, no gain or loss will be realized.
In connection with their use of amortized cost valuation, the Funds
limit the dollar-weighted average maturity of their portfolios to not more than
90 days and do not purchase any instrument with a remaining maturity of greater
than 397 calendar days. The Company's Board of Directors has also established,
pursuant to rules promulgated by the Securities and Exchange Commission,
procedures that are intended to stabilize each Fund's net asset value per share
for purposes of sales and redemptions at $1.00. Such procedures include the
determination, at such intervals as the Board deems appropriate, of the extent,
if any, to which a Fund's net asset value per share calculated by using
available market quotations deviates from $1.00 per share. In the event such
deviation exceeds 1/2 of 1% the Board will promptly consider what action, if
any, should be initiated. If the Board believes that the amount of any deviation
may result in material dilution or other unfair results to investors or existing
shareholders, it will take such steps as it considers appropriate to eliminate
or reduce to the extent reasonably
-45-
<PAGE> 828
practicable any such dilution or unfair results. These steps may include selling
portfolio instruments prior to maturity, shortening a Fund's average portfolio
maturity, withholding or reducing dividends, reducing the number of a Fund's
outstanding shares without monetary consideration or determining net asset value
per share by using available market quotations. If a Fund reduces the number of
its outstanding shares without monetary consideration it will mail written
notice to shareholders at least three business days before the redemption and in
the notice will state the reason for the redemption and the fact that the
redemption may result in a capital loss to shareholders.
The Funds' administrator, Concord Holding Corporation (the
"Administrator"), may use a pricing service to value certain portfolio
securities where the prices provided are believed by the Administrator pursuant
to guidelines adopted by the Board of Directors to reflect the fair value of
such securities. In valuing a Fund's securities, the pricing service would
normally take into consideration such factors as yield, risk, quality, maturity,
type of issue, trading characteristics, special circumstances and other factors
it deems relevant in determining valuations for normal institutional-sized
trading units of debt securities and would not rely on quoted prices. The
methods used by the pricing service and the valuations so established will be
utilized under the general supervision of the Company's Board of Directors.
Additionally, in determining market-based net asset value per share all
portfolio securities for which market quotations (or appropriate substitutes
that reflect current market conditions) are not readily available shall be
valued at their fair value as determined by the valuation committee in
accordance with procedures established by the Board of Directors.
MANAGEMENT OF THE FUNDS
Directors and Officers
The directors and officers of the Company, their addresses, ages, and
principal occupations during the past five years are:
<TABLE>
<CAPTION>
Position with
Name and Address Age Company Principal Occupations
- ---------------- --- ------------- ---------------------
<S> <C> <C> <C>
Thomas M. Collins 61 Director Of counsel, law firm of
McDermott & Trayner McDermott & Trayner;
225 S. Lake Avenue Partner of the law firm
Suite 410 of Musick, Peeler &
Pasadena, CA 91101-3005 Garrett (until April,
1993); Trustee, Master
</TABLE>
-46-
<PAGE> 829
<TABLE>
<CAPTION>
Position with
Name and Address Age Company Principal Occupations
- ---------------- --- ------------- ---------------------
<S> <C> <C> <C>
Investment Trust Series I
and Master Investment
Trust, Series II
(registered investment
companies) (since 1993);
former Director, Bunker
Hill Income Securities,
Inc. (registered
investment company)
through 1991.
Douglas B. Fletcher 70 Vice Chairman Chairman of the Board
Fletcher Capital of the Board and Chief Executive
Advisors Incorporated Officer, Fletcher
4 Upper Newport Plaza Capital Advisors,
Suite 100 Incorporated, (registered
Newport Beach, CA 92660-2629 investment adviser) 1991
to date; Partner, 1991
Newport Partners (private
venture capital firm),
1981 to date; Chairman of
the Board and Chief
Executive Officer, First
Pacific Advisors, Inc.
(registered investment
adviser) and seven
investment companies
under its management,
prior to 1983; former
Allied Member, New York
Stock Exchange; Chairman
of the Board of FPA
Paramount Fund, Inc.
through 1984; Director,
TIS Mortgage Investment
Company (real estate
investment trust);
Trustee and former Vice
Chairman of the Board,
Claremont McKenna
College; Chartered
Financial Analyst.
Robert E. Greeley 62 Director Chairman, Page Mill
Page Mill Asset Asset Management (a
Management private investment
433 California Street company) since 1991;
Suite 900 Manager, Corporate
San Francisco, CA 94104 Investments, Hewlett
Packard Company from
1979 to 1991; Trustee,
Master Investment Trust,
Series I and Master
</TABLE>
-47-
<PAGE> 830
<TABLE>
<CAPTION>
Position with
Name and Address Age Company Principal Occupations
- ---------------- --- ------------- ---------------------
<S> <C> <C> <C>
Investment Trust, Series
II (since 1993);
Director, Morgan Grenfell
Small Cap Fund (since
1986); former Director,
Bunker Hill Income
Securities, Inc. (since
1989) (registered
investment companies);
former Trustee,
SunAmerica Fund Group
(previously Equitec
Siebel Fund Group) from
1984 to 1992.
Kermit O. Hanson 79 Director Vice Chairman of the
17760 14th Ave., N.W. Advisory Board, 1988 to
Seattle, WA 98177 date, Executive
Director, 1977 to 1988,
Pacific Rim Bankers
Program (a non-profit
educational institution);
Dean Emeritus, 1981 to
date, Dean, 1964-81,
Graduate School of
Business Administration,
University of Washington;
Director, Washington
Federal Savings & Loan
Association; Trustee,
Seafirst Retirement Funds
(since 1993) (registered
investment company).
Cornelius J. Pings* 66 Chairman of President, Association
Association of American the Board and of American
Universities President Universities, February
One DuPont Circle 1993 to date; Provost,
Suite 730 1982 to January
Washington, DC 20036 1993, Senior Vice
President for Academic
Affairs, 1981 to January
1993, University of
Southern California;
Trustee, Master
Investment Trust, Series
I and Master Investment
Trust, Series II (since
1995).
</TABLE>
-48-
<PAGE> 831
<TABLE>
<CAPTION>
Position with
Name and Address Age Company Principal Occupations
- ---------------- --- ------------- ---------------------
<S> <C> <C> <C>
Kenneth L. Trefftzs 83 Director Private Investor;
11131 Briarcliff Drive formerly Distinguished
San Diego, CA 92131-1329 Emeritus Professor
of Finance and Chairman
of the Department of
Finance and Business
Economics of the Graduate
School of Business of the
University of Southern
California; former
Director, Metro Goldwyn
Mayer, Inc.; Director,
Fremont General
Corporation (insurance
and financial services
holding company);
Director, Source Capital,
Inc. (closed-end
investment company);
Director of three
open-end investment
companies managed by
First Pacific Advisors,
Inc.; formerly Chairman
of the Board of Directors
(or Trustees) of nineteen
investment companies
managed by American
Capital Asset Management,
Inc.
Richard E. Stierwalt Executive Chairman of the Board
125 W. 55th Street 40 Vice President and Chief Executive
New York, NY 10019 Officer, July 1993 to
date, prior thereto
Senior Director, Managing
Director and Chief
Executive Officer of the
Administrator and
Distributor, February
1987 to July 1993;
President, Master
Investment Trust, Series
I, Master Investment
Trust, Series II and
Seafirst Retirement Funds
(since 1993); First Vice
President, Trust
Operation Administration,
Security Pacific National
Bank, 1983-1987.
</TABLE>
-49-
<PAGE> 832
<TABLE>
<CAPTION>
Position with
Name and Address Age Company Principal Occupations
- ---------------- --- ------------- ---------------------
<S> <C> <C> <C>
William B. Blundin 57 Executive Vice Vice Chairman, July 1993
125 W. 55th Street President to date, prior thereto
New York, NY 10019 Director and President
of the Administrator and
Distributor, February
1987 to July 1993;
Executive Vice
President, Master
Investment Trust, Series
II and Seafirst
Retirement Funds (since
1993); Senior Vice
President, Shearson
Lehman Brothers, 1978-
1987.
Irimga McKay 35 Vice Senior Vice President,
7863 Girard Avenue President July 1993 to date, prior
Suite 306 thereto First Vice
La Jolla, CA 92037 President of the
Administrator and
Distributor, November
1988 to July 1993; Vice
President, Master
Investment Trust, Series
II and Seafirst
Retirement Funds (since
1993); Regional Vice
President, Continental
Equities, June 1987 to
November 1988; Assistant
Wholesaler, VMS Realty
Partners (a real estate
limited partnership), May
1986 to June 1987.
W. Eugene Spurbeck 39 Assistant Vice Manager of Client
BISYS Fund Services President Services of the
515 Figueroa Street Administrator (1993 to
Suite 335 date); Assistant Vice
Los Angeles, CA 92307 President, Master
Investment Trust, Series
II; Vice President,
Seafirst Retirement Funds
(since 1995); Vice
President of Retail
Lending Operations Banc
One (1989 to 1993).
</TABLE>
-50-
<PAGE> 833
<TABLE>
<CAPTION>
Position with
Name and Address Age Company Principal Occupations
- ---------------- --- ------------- ---------------------
<S> <C> <C> <C>
Martin R. Dean 31 Treasurer Manager of Fund
3435 Stelzer Road Accounting of BISYS
Columbus, OH 43219 Fund Services, May 1994
to Present; Treasurer,
Master Investment Trust,
Series II and Seafirst
Retirement Funds (since
1995); Senior Manager at
KPMG Peat Marwick
previously 1990-1994.
W. Bruce McConnel, III 52 Secretary Partner of the law firm
1345 Chestnut Street of Drinker Biddle &
Philadelphia National Bank Reath. Secretary,
Building, Suite 1100 Master Investment Trust,
Philadelphia, PA 19107 Series I, Master
Investment Trust, Series
II and Seafirst
Retirement Funds
George O. Martinez 35 Assistant Senior Vice President
3435 Stelzer Road Secretary and Director of Legal
Columbus, OH 43219 and Compliance Services,
of the Administrator.
since April 1995;
Assistant Secretary,
Master Investment Trust,
Series II and Seafirst
Retirement Funds (since
1995); prior thereto,
Vice President and
Associate General
Counsel, Alliance Capital
Management, L.P.
</TABLE>
- --------------
* Mr. Pings is an "interested director" of the Company as defined in the 1940
Act.
The Audit Committee of the Board is comprised of all directors and is
chaired by Dr. Trefftzs. The Board does not have an Executive Committee.
Each director is entitled to receive an annual fee of $25,000 plus
$1,000 for each day that a director participates in all or a part of a Board
meeting; the President receives an additional $20,000 per annum for his services
as President; Mr. Collins, in consideration of his years of service as President
and Chairman of the Board, receives an additional $40,000 per annum in severance
until February 28, 1997; each member of a Committee of the Board is entitled to
receive $1,000 for each Committee meeting they participate in (whether or not
held on the same day as a Board meeting); and each Chairman of a Committee of
-51-
<PAGE> 834
the Board shall be entitled to receive an annual retainer of $1,000 for his
services as Chairman of the Committee. The Funds, and each other Fund of the
Company, pays its proportionate share of these amounts based on relative net
asset values.
For the fiscal year ended February 28, 1995, the Company paid or
accrued for the account of its directors as a group for services in all
capacities a total of $334,168; of this amount, the following amounts of
directors' compensation were allocated to the following Funds: Treasury Fund -
$22,408; Prime Fund - $23,318; Government Fund - $23,093; Treasury Only Fund -
$22,179; Tax-Exempt Money Fund - $21,538; and California Tax-Exempt Money
Market Fund - $23,388. Each director is also reimbursed for out-of-pocket
expenses incurred as a director. Drinker Biddle & Reath, of which Mr. McConnel
is a partner, receives legal fees as counsel to the Company. As of the date of
this Statement of Additional Information, the directors and officers of the
Company, as a group, own less than 1% of the outstanding shares of each of the
Company's investment portfolios.
Under a retirement plan approved by the Board of Directors, including a
majority of its directors who are not "interested persons" of the Company, a
director who dies or resigns after five years of service is entitled to receive
ten annual payments each equal to the greater of: (i) 50% of the annual
director's retainer that was payable by the Company during the year of his/her
death or resignation, or (ii) 50% of the annual director's retainer then in
effect for directors of the Company during the year of such payment. A director
who dies or resigns after nine years of service is entitled to receive ten
annual payments each equal to the greater of: (i) 100% of the annual director's
retainer that was payable by the Company during the year of his/her death or
resignation, or (ii) 100% of the annual director's retainer then in effect for
directors of the Company during the year of such payment. Further, the amount
payable each year to a director who dies or resigns is increased by $1,000 for
each year of service that the director provided as Chairman of the Board.
Years of service for purposes of calculating the benefit described
above are based upon service as a director or Chairman after February 28, 1994.
Retirement benefits in which a director has become vested may not be reduced by
later Board action.
In lieu of receiving ten annual payments, a director may elect to
receive substantially equivalent benefits through a single-sum cash payment of
the present value of such benefits paid by the Company within 45 days of the
death or resignation of the director. The present value of such benefits is to
be
-52-
<PAGE> 835
calculated (i) based on the retainer that was payable by the Company during the
year of the director's death or resignation (and not on any retainer payable to
directors thereafter), and (ii) using the interest rate in effect as of the date
of the director's death or resignation by the Pension Benefit Guaranty
Corporation (or any successor thereto) for valuing immediate annuities under
terminating defined benefit pension plans. A director's election to receive a
single sum must be made in writing within the 30 calendar days after the date
the individual is first elected as a director.
In addition to the foregoing, the Board of Directors may, in its
discretion and in recognition of a director's period of service before March 1,
1994 as a director and possibly as Chairman, authorize the Company to pay a
retirement benefit following the director's death or resignation (unless the
director has vested benefits as a result of completing nine years of service).
Any such action shall be approved by the Board and by a majority of the
directors who are not "interested persons" of the Company within 120 days
following the director's death or resignation and may be authorized as a single
sum cash payment or as not more than ten annual payments (beginning the first
anniversary of the director's date of death or resignation and continuing for
one or more anniversary date(s) thereafter).
The obligation of the Company to pay benefits to a former director is
neither secured nor funded by the Company but shall be binding upon its
successors in interest. The payment of benefits under the retirement plan has no
priority or preference over the lawful claims of the Company's creditors or
shareholders, and the right to receive such payments is not assignable or
transferable by a director (or former director) other than by will, by the laws
of descent and distribution, or by the director's written designation of a
beneficiary.
The following chart provides certain information about the
director/trustee fees of the Company as of February 28, 1995.
<TABLE>
<CAPTION>
==============================================================================================================================
TOTAL
COMPENSATION
PENSION OR FROM
RETIREMENT ESTIMATED REGISTRANT
AGGREGATE BENEFITS ANNUAL AND FUND
COMPENSATION ACCRUED AS BENEFITS COMPLEX(*)
NAME OF PERSON/ FROM THE PART OF FUND UPON PAID TO
POSITION COMPANY EXPENSES RETIREMENT DIRECTORS
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Thomas M. Collins $100,000 $0 $0 $110,000
President and
Chairman of the
Board(+)
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
-53-
<PAGE> 836
<TABLE>
<CAPTION>
==============================================================================================================================
TOTAL
COMPENSATION
PENSION OR FROM
RETIREMENT ESTIMATED REGISTRANT
AGGREGATE BENEFITS ANNUAL AND FUND
COMPENSATION ACCRUED AS BENEFITS COMPLEX(*)
NAME OF PERSON/ FROM THE PART OF FUND UPON PAID TO
POSITION COMPANY EXPENSES RETIREMENT DIRECTORS
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Douglas B. Fletcher $57,500 $0 $0 $57,500
Vice Chairman of
the Board
- ----------------------------------------------------------------------------------------------------------------------------
Robert E. Greeley(**) $57,500 $0 $0 $65,781
Director
- ----------------------------------------------------------------------------------------------------------------------------
Kermit O. Hanson $57,500 $0 $0 $63,500
Director
- ----------------------------------------------------------------------------------------------------------------------------
Cornelius J. Pings $57,500 $0 $0 $57,500
Director
- ----------------------------------------------------------------------------------------------------------------------------
Kenneth L. Trefftzs $57,500 $0 $0 $57,500
Director
============================================================================================================================
</TABLE>
- --------------
(*) The "Fund Complex" consists of the Company, Seafirst Retirement Funds,
Master Investment Trust, Series I and Master Investment Trust, Series II.
(**) Mr. Greeley became a director of the Company on April 25, 1994.
(+) Mr. Collins was President and Chairman of the Board of the Company until
August 31, 1995.
INVESTMENT ADVISER
Bank of America is the successor by merger to Security Pacific National
Bank ("Security Pacific"), which previously served as investment adviser to each
of the Funds, other than the Government and Treasury Only Funds, since the
commencement of their operations. In the investment advisory agreement, Bank of
America has agreed to provide investment advisory services as described in the
Prospectuses. Bank of America has also agreed to pay all expenses incurred by it
in connection with its activities under its agreement other than the cost of
securities, including brokerage commissions, if any, purchased for the Company.
In rendering its advisory services, Bank of America may utilize Bank officers
from one or more of the departments of the Bank which are authorized to exercise
the fiduciary powers of Bank of America with respect to the investment of trust
assets. In some cases, these officers may also serve as officers, and utilize
the facilities, of wholly-owned subsidiaries or other affiliates of Bank of
America or its parent corporation. For the services provided and expenses
assumed pursuant to the investment advisory agreement, the Company has agreed to
pay Bank of America fees, accrued daily and payable monthly, at the following
annual rates, with respect to the Funds: .10% of the first $3 billion of each
Fund's net assets, plus .09% of the next $2 billion of each Fund's net assets,
plus .08% of each Fund's net assets over
-54-
<PAGE> 837
$5 billion. From time to time, Bank of America may waive fees or reimburse the
Company for expenses voluntarily or as required by certain state securities
laws.
For the fiscal years ended February 28, 1993, February 28, 1994, and
February 28, 1995, Bank of America (and Securities Pacific prior to April 22,
1992) were paid in the aggregate, pursuant to the investment advisory agreements
applicable to them, advisory fees (net of waivers) of $8,106,253, $11,293,545,
and $2,330,203, respectively, by the Prime Fund, $2,841,285, $2,717,321, and
$2,140,125, respectively, by the Treasury Fund and $466,339, $472,766, and
$501,956, respectively, by the Tax-Exempt Money Fund. For the fiscal years ended
February 28, 1993, February 28, 1994, and February 28, 1995, Bank of America
(and Security Pacific prior to April 22, 1992) were paid in the aggregate,
pursuant to the investment advisory agreements applicable to them, advisory fees
(net of waivers and expense reimbursements) of $22,306, $269,869, and $301,964,
respectively, by the California Tax-Exempt Money Market Fund. For the fiscal
years ended February 28, 1993, February 28, 1994, and February 28, 1995, Bank of
America (and Security Pacific prior to April 22, 1992) did not effect any fee
waivers or expense reimbursements with respect to the Treasury Fund but did
reimburse expenses or waive fees to the Prime Fund, in the aggregate, in the
amount of $0, $367,233, and $920,627, and the Tax-Exempt Money Fund, in the
amount of $3,692, $23,524, and $11,611, respectively. For the fiscal years ended
February 28, 1993, February 28, 1994, and February 28, 1995, Bank of America
(and Security Pacific prior to April 22, 1992) in the aggregate, waived fees and
reimbursed expenses with respect to the California Tax-Exempt Money Market Fund
in the amount of $82,350, $22,998, and $0, respectively.
For the fiscal year ended February 28, 1994, the Government Fund and
Treasury Only Fund paid Bank of America investment advisory fees (net of fee
waivers) of $877,515 and $68,888, respectively. For that same period Bank of
America waived fees and reimbursed the Government Fund and Treasury Only Fund in
the amounts of $6,537 and $127,607, respectively. For the fiscal year ended
February 28, 1995, the Government Fund and Treasury Only Fund paid Bank of
America investment advisory fees (net of fee waivers or expense reimbursements)
of $321,634 and $293,305, respectively. For that same period, Bank of America
waived fees of $8,313 for the Treasury Only Fund and waived fees of $313,740 and
reimbursed expenses to the Government Fund in the amount of $14,000. For the
fiscal year ended March 31, 1992 and the period April 1, 1992 through February
28, 1993, the Predecessor Treasury Only Funds bore investment advisory fees
pursuant to the investment advisory agreement then in effect of $70,579 and
$61,676, respectively, and the Predecessor Government Funds bore investment
advisory fees of $361,035 and $308,729,
-55-
<PAGE> 838
respectively. All of these fees were paid to Seattle Capital Management Company
(the "Former Adviser"), which is a wholly-owned, indirect subsidiary of
BankAmerica Corporation. For the periods and fiscal year referenced above, the
Former Adviser waived additional investment advisory fees of $194,089 and
$169,608, respectively, with respect to the Predecessor Treasury Only Funds, and
$227,281 and $154,364, respectively, with respect to the Predecessor Government
Funds.
The Company's investment advisory agreement for the Funds provides that
Bank of America shall not be liable for any error of judgment or mistake of law
or for any loss suffered by the Company in connection with the performance of
the investment advisory agreement, except a loss resulting from a breach of
fiduciary duty with respect to the receipt of compensation for services or a
loss resulting from willful misfeasance, bad faith or negligence in the
performance of its duties or from reckless disregard by it of its duties and
obligations thereunder.
THE GLASS-STEAGALL ACT AND PROPOSED LEGISLATION
The Glass-Steagall Act, among other things, prohibits banks from
engaging in the business of underwriting securities, although national and
state-chartered banks generally are permitted to purchase and sell securities
upon the order and for the account of their customers. In 1971, the United
States Supreme Court held in Investment Company Institute v. Camp that the
Glass-Steagall Act prohibits a bank from operating a fund for the collective
investment of managing agency accounts. Subsequently, the Board of Governors of
the Federal Reserve System (the "Board") issued a regulation and interpretation
to the effect that the Glass-Steagall Act and such decision forbid a bank
holding company registered under the Federal Bank Holding Company Act of 1956
(the "Holding Company Act") or any non-bank affiliate thereof from sponsoring,
organizing or controlling a registered, open-end investment company continuously
engaged in the issuance of its shares, but do not prohibit such a holding
company or affiliate from acting as investment adviser, transfer agent and
custodian to such an investment company. In 1981, the United States Supreme
Court held in Board of Governors of the Federal Reserve System v. Investment
Company Institute that the Board did not exceed its authority under the Holding
Company Act when it adopted its regulation and interpretation authorizing bank
holding companies and their non-bank affiliates to act as investment advisers to
registered closed-end investment companies.
Bank of America believes that if the question were properly presented,
a court should hold that Bank of America may perform the services for the
Company contemplated by the investment advisory agreement, the Prospectuses, and
this
-56-
<PAGE> 839
Statement of Additional Information without violation of the Glass-Steagall Act
or other applicable banking laws or regulations. It should be noted, however,
that there have been no cases deciding whether a bank may perform services
comparable to those performed by Bank of America and future changes in either
federal or state statutes and regulations relating to permissible activities of
banks or trust companies and their subsidiaries or affiliates, as well as
further judicial or administrative decisions or interpretations of present and
future statutes and regulations, could prevent Bank of America from continuing
to perform such services for the Company or from continuing to purchase Company
shares for the accounts of its customers.
For a discussion of the Glass-Steagall Act in connection with the
Company's Shareholder Services Plan, see "Shareholder Services Plan" in the
Prospectuses for Horizon Service Shares.
On the other hand, as described herein, the Funds are currently
distributed by the Distributor, and the Administrator, its parent, provides the
Company with administrative services. If current restrictions under the
Glass-Steagall Act preventing a bank from sponsoring, organizing, controlling or
distributing shares of an investment company were relaxed, the Company expects
that Bank of America would consider the possibility of offering to perform some
or all of the services now provided by the Administrator or the Distributor.
From time to time, legislation modifying such restriction has been introduced in
Congress which, if enacted, would permit a bank holding company to establish a
non-bank subsidiary having the authority to organize, sponsor and distribute
shares of an investment company. It is not possible, of course, to predict
whether or in what form such legislation might be enacted or the terms upon
which Bank of America or such a non-bank affiliate might offer to provide
services for consideration by the Company's Board of Directors.
ADMINISTRATOR
Concord Holding Corporation (the "Administrator"), with principal
offices at 125 West 55th Street, New York, New York 10019 and 3435 Stelzer Road,
Columbus, Ohio 43219, is a wholly-owned subsidiary of The BISYS Group, Inc. The
Administrator also serves as administrator to several other investment
companies.
The Administrator provides administrative services for the Funds as
described in their Prospectuses pursuant to a Basic Administrative Services
Agreement. The agreement will continue in effect with respect to each Fund until
October 31, 1996 and thereafter will be extended with respect to each Fund for
successive periods of one year, provided that each such extension
-57-
<PAGE> 840
is specifically approved (a) by vote of a majority of those members of the
Company's Board of Directors who are not interested persons of any party to the
agreement, cast in person at a meeting called for the purpose of voting on such
approval, and (b) the Company's Board of Directors or by vote of a majority of
the outstanding voting securities of such Fund. The agreement is terminable at
any time without penalty by the Company's Board of Directors or by a vote of a
majority of a Fund's outstanding shares upon 60 days' notice to the
Administrator, or by the Administrator upon 90 days' notice to the Company.
For its services under the Basic Administrative Services Agreement, the
Administrator is entitled to receive an administration fee, accrued daily and
payable monthly, at the following annual rates: .10% of the first $7 billion of
each Fund's net assets, plus .09% of the next $3 billion of each Fund's net
assets, plus .08% of each Fund's net assets over $10 billion. From time to time,
the Administrator may waive fees or reimburse the Company for expenses, either
voluntarily or as required by certain state securities laws.
For the fiscal years ended February 28, 1993, February 28, 1994, and
February 28, 1995 the Administrator was paid, pursuant to the administration
agreement then in effect, administration fees (net of waivers) of $8,835,608,
$12,158,419, and $2,366,035, respectively, by the Prime Fund, $2,845,014,
$2,717,606, and $2,140,125, respectively, by the Treasury Fund and $466,339,
$472,766, and $501,956, respectively, by the Tax-Exempt Money Fund. For the
fiscal years ended February 28, 1993, February 28, 1994, and February 28, 1995,
the Administrator was paid, pursuant to the administration agreement then in
effect, administrative fees (net of waivers) of $104,656, $269,869, and
$301,618, respectively, by the California Tax-Exempt Money Market Fund. For the
fiscal years ended February 28, 1993, February 28, 1994, and February 28, 1995,
the Administrator did not effect any fee waivers or expense reimbursements with
respect to the Treasury Fund but did reimburse the Prime Fund and Tax-Exempt
Money Fund for expenses or waive fees in the amount of $0, $381,513 and $949,233
and $3,692, $23,524, and $11,611, respectively. For the fiscal years ended
February 28, 1993, February 28, 1994, and February 28, 1995 aggregate fee
waivers and expense reimbursements by the Administrator with respect to the
California Tax-Exempt Money Market Fund were $0, $22,998, and $0, respectively.
For the fiscal year ended February 28, 1994, the Government Fund and
Treasury Only Fund paid the Administrator (net of fee waivers), $877,515 and
$68,888, respectively. For this same period the Administrator waived fees due
from the Government Fund and Treasury Only Fund in the amounts of $6,537 and
$127,607, respectively and reimbursed the Funds $0 and $0,
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respectively. For the fiscal year ended February 28, 1995, the Government Fund
and Treasury Only Fund paid the Administrator (net of fee waivers), $463,641 and
$293,305, respectively. For this same period the Administrator waived fees due
from the Government Fund and Treasury Only Fund in the amounts of $185,733 and
$8,313, respectively and reimbursed the Funds $0 and $0, respectively. For the
fiscal year ended March 31, 1992 and the fiscal period April 1, 1992 through
February 28, 1993, pursuant to the administration agreement then in effect,
Signature Broker-Dealer Services, Inc., the former administrator of the
Predecessor Government and Treasury Only Funds (the "Former Administrator"),
accrued direct and indirect administrative fees of $252,708 and $187,981,
respectively, with respect to the Predecessor Government Fund of First Cash
Funds of America and $126,430 and $117,319, respectively, with respect to the
Predecessor Treasury Only Fund of First Cash Funds of America.
If total expenses borne by any Fund in any fiscal year exceed the
expense limitations imposed by applicable state securities regulations, the
Company may deduct from the payments to be made with respect to such Fund to
Bank of America and the Administrator, respectively, or Bank of America and the
Administrator each will bear, the amount of such excess to the extent required
by such regulations. Such amount, if any, will be estimated and accrued daily
and paid on a monthly basis. As of the date of this Statement of Additional
Information, the most restrictive expense limitation that may be applicable to
the Company limits aggregate annual expenses with respect to a Fund, including
management and advisory fees but excluding interest, taxes, brokerage
commissions, and certain other expenses, to 2-1/2% of the first $30 million of
its average daily net assets, 2% of the next $70 million and 1-1/2% of its
remaining average daily net assets. During the course of the Company's fiscal
year, the Administrator and Bank of America may assume certain expenses and/or
not receive payment of fees of one or more of the Company's Funds, while
retaining the ability to be reimbursed by such Funds for such amounts prior to
the end of the fiscal year. This will have the effect of increasing yield to
investors at the time such fees are not received or amounts are assumed and
decreasing yield when such fees or amounts are reimbursed.
The Administrator will bear all expenses in connection with the
performance of its services under the Basic Administrative Services Agreement
for the Funds with the exception of fees charged by The Bank of New York for
certain fund accounting services which are borne by the Funds. See "Custodian
and Transfer Agent" below. Expenses borne by the Company include taxes,
interest, brokerage fees and commissions, if any, fees of directors who are not
officers, directors, partners, employees or holders of 5% or more of the
outstanding voting securities of Bank of America or the Administrator or any
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of their affiliates, Securities and Exchange Commission fees and state
securities qualification fees, advisory fees, administrative fees, fees payable
to Shareholder Organizations, charges of custodians, transfer and dividend
disbursing agents' fees, certain insurance premiums, outside auditing and legal
expenses, costs of maintaining corporate existence, costs attributable to
investor services, including without limitation telephone and personnel
expenses, costs of preparing and printing prospectuses and statements of
additional information for regulatory purposes, cost of shareholders' reports
and corporate meetings and any extraordinary expenses.
The Basic Administrative Services Agreement provides that the
Administrator shall not be liable for any error of judgment or mistake of law or
any loss suffered by any Fund in connection with the matters to which the
agreement relates, except a loss resulting from willful misfeasance, bad faith
or negligence in the performance of the Administrator's duties or from the
reckless disregard by the Administrator of its obligations and duties
thereunder.
Bank of America has received an option entitling it to purchase
approximately 4% of the Administrator's authorized common stock on or before
December 31, 1998.
DISTRIBUTOR
The Distributor acts as the exclusive distributor of the shares of each
of the Funds pursuant to a distribution agreement with the Company. Shares are
sold on a continuous basis by the Distributor as agent, although the Distributor
is not obliged to sell any particular amount of shares. No compensation is
payable by the Funds to the Distributor for its distribution services. The
distribution agreement shall continue in effect with respect to each Fund until
October 31, 1996. Thereafter, if not terminated, the distribution agreement
shall continue automatically for successive terms of one year, provided that
such continuance is specifically approved at least annually (a) by a vote of a
majority of those members of the Board of Directors of the Company who are not
parties to the distribution agreement or "interested persons" of any such party,
cast in person at a meeting called for the purpose of voting on such approval,
and (b) by the Board of Directors of the Company or by vote of a "majority of
the outstanding voting securities" of the Funds as to which the distribution
agreement is effective; provided, however, that the distribution agreement may
be terminated by the Company at any time, without the payment of any penalty, by
vote of a majority of the entire Board of Directors of the Company or by a vote
of a "majority of the outstanding voting securities" of such Funds on 60 days'
written notice to the Distributor, or by the Distributor at any time, without
the
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payment of any penalty, on 90 days' written notice to the Company. This
Agreement will automatically and immediately terminate in the event of its
"assignment."
For the period June 4, 1990 (commencement of operations) through March
31, 1991 (fiscal year end), the fiscal year ended March 31, 1992 and the period
April 1, 1992 through February 28, 1993, Signature Broker-Dealer Services, Inc.,
which also served as the former distributor of the Predecessor Government and
Treasury Only Funds' shares, was paid $2,814, $17,167 and $6,166, respectively
by the Predecessor Government Fund of First Cash Funds of America and $5,148,
$5,746 and $2,680, respectively by the Predecessor Treasury Only Fund of First
Cash Funds of America as reimbursement for expenses related to the distribution
of such Predecessor Funds' shares. No such fees will be charged to the
Government Fund or the Treasury Only Fund or to any other Fund.
CUSTODIAN AND TRANSFER AGENT
The Company has appointed The Bank of New York, 90 Washington Street,
New York, New York 10286, as custodian and Concord Financial Services, Inc., a
wholly-owned subsidiary of Concord Holding Corporation, located at First and
Market Building, 100 First Avenue, Suite 300, Pittsburgh, PA 15222, as transfer
and dividend disbursing agent for the Prime, Treasury, Government, Treasury Only
and Tax-Exempt Money Funds' Horizon Shares. BISYS Fund Services Ohio, Inc., 3435
Stelzer Road, Columbus, Ohio 43219-3035 serves as transfer and dividend
disbursing agent for the Funds' Horizon Service Shares. The Bank of New York
also provides the Company with certain accounting services pursuant to a fund
accounting services agreement with the Administrator. Under the fund accounting
services agreement, The Bank of New York has agreed to provide certain
accounting, bookkeeping, pricing, and dividend and distribution calculation
services with respect to the Company. The monthly fees charged by the bank under
the fund accounting agreement are borne by the Funds. The Company and The Bank
of New York have appointed Bank of America to act as sub-custodian pursuant to a
Sub-Custodian Agreement. As sub-custodian of the Company's assets, Bank of
America (i) maintains a separate account or accounts in the name of the Company,
(ii) holds and disburses portfolio securities on account of the Company, (iii)
makes receipts and disbursements of money on behalf of the Company, (iv)
collects and receives all income and other payments and distributions on account
of the Company's portfolio securities held by Bank of America, (v) responds to
correspondence from security brokers and others relating to its duties, and (vi)
makes periodic reports to the Company's Board of Directors concerning its duties
thereunder. Under the Sub-Custodian Agreement, the Company will reimburse Bank
of America for its costs and expenses in providing services
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thereunder. Bank of America is the successor to Security Pacific under the
Sub-Custodian Agreement. For the fiscal years ended February 28, 1993, February
28, 1994 and February 28, 1995, Bank of America (and Securities Pacific prior to
April 22, 1992), in their capacity as sub-custodian, did not hold any of the
Company's assets and, accordingly, received no fees. For its services as
transfer and dividend disbursing agent to the Horizon Shares of the Prime,
Treasury, Government, Treasury Only and Tax-Exempt Money Funds, Concord
Financial Services, Inc. receives a fee, payable monthly, at the annual rate of
$15,000 per Fund. Each Fund also reimburses Concord Financial Services, Inc. for
any out-of-pocket expenses incurred as transfer and dividend disbursing agent.
For the fiscal year ended February 28, 1995, Concord Financial Services, Inc.
received $27,063, $19,693, $17,873 and $18,221 from the Prime Fund, Treasury
Fund, Government Fund and Tax-Exempt Fund, respectively, for services as
transfer and dividend disbursing agent for such funds Horizon Shares.
Bank of America and Seattle-First National Bank, an affiliate of Bank
of America, previously provided transfer agency, custodial and fund accounting
services for the Predecessor Government Funds and Predecessor Treasury Only
Funds. For the period June 4, 1990 (commencement of operations) through March
31, 1991 (fiscal year end), the fiscal year ended March 31, 1992 and the period
April 1, 1992 through February 28, 1993, Bank of America and Seattle-First
National Bank received directly and indirectly for such services $129,116,
$254,824 and $200,624, respectively, with respect to the Predecessor Government
Funds and $38,761, $114,630 and $100,225, respectively, with respect to the
Predecessor Treasury Only Funds.
TAXES
The following is only a summary of certain additional considerations
generally affecting the Funds and their shareholders that are not described in
the Prospectuses for the Funds. No attempt is made to present a detailed
explanation of the tax treatment of the Funds or their shareholders, and the
discussion here and in the Prospectuses is not intended as a substitute for
careful tax planning. Investors are advised to consult their tax advisers with
specific reference to their own tax situations.
ALL FUNDS
Each Fund will be treated as a separate corporate entity under the
Internal Revenue Code of 1986, as amended (the "Code"), and intends to qualify
as a "regulated investment company." By following this policy, each Fund expects
to
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eliminate or reduce to a nominal amount the federal income taxes to which it may
be subject. If for any taxable year a Fund of the Company does not qualify for
the special federal tax treatment afforded regulated investment companies, all
of the Fund's taxable income would be subject to tax at regular corporate rates
(without any deduction for distributions to shareholders). In such event, the
Fund's dividend distributions (including amounts derived from interest on
Municipal Securities in the case of the Tax-Exempt Money Fund and California
Tax-Exempt Money Market Fund) to shareholders would be taxable as ordinary
income to the extent of the current and accumulated earnings and profits of the
particular Fund and would be eligible for the dividends received deduction in
the case of corporate shareholders.
Qualification as a regulated investment company under the Code
requires, among other things, that each Fund distribute to its shareholders an
amount equal to at least the sum of 90% of its investment company taxable income
(if any) and 90% of its tax-exempt income (if any) net of certain deductions for
each taxable year. In general, a Fund's investment company taxable income will
be its taxable income, subject to certain adjustments and excluding the excess
of any net long-term capital gain for the taxable year over the net short-term
capital loss, if any, for such year. A Fund will be taxed on its undistributed
investment company taxable income, if any.
A Fund will not be treated as a regulated investment company under the
Code if 30% or more of the Fund's gross income for a taxable year is derived
from gains realized on the sale or other disposition of securities and certain
other investments held for less than three months (the "short-short test").
Interest (including original issue and accrued market discount) received by a
Fund upon maturity or disposition of a security held for less than three months
will not be treated as gross income derived from the sale or other disposition
of such security within the meaning of this requirement. However, any other
income that is attributable to realized market appreciation will be treated as
gross income from the sale or other disposition of securities for this purpose.
Any distribution of the excess of net long-term capital gains over net
short-term capital losses is taxable to shareholders as long-term capital gains,
regardless of how long the shareholder has held the distributing Fund's shares
and whether such gains are received in cash or additional Fund shares. The Fund
will designate such a distribution as a capital gain dividend in a written
notice mailed to shareholders after the close of the Fund's taxable year.
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Ordinary income of individuals is taxable at a maximum nominal rate of
39.6%; however, because of limitations on itemized deductions otherwise
allowable and the phase-out of personal exemptions, the maximum effective
marginal rate of tax for some taxpayers may be higher. An individual's long-term
capital gains are taxable at a maximum nominal rate of 28%. For corporations,
long-term capital gains and ordinary income are both taxable at a maximum
nominal rate of 35% (or at a maximum effective marginal rate of 39% in the case
of corporations having taxable income between $100,000 and $335,000).
A 4% non-deductible excise tax is imposed on regulated investment
companies that fail to currently distribute specified percentages of their
ordinary taxable income for each calendar year and capital gain net income
(excess of capital gains over capital losses). Each Fund intends to make
sufficient distributions or deemed distributions of its ordinary taxable income
and any capital gain net income prior to the end of each calendar year to avoid
liability for this excise tax.
The Company will be required in certain cases to withhold and remit to
the United States Treasury 31% of taxable dividends or gross sale proceeds paid
to shareholders (i) who have failed to provide a correct tax identification
number in the manner required, (ii) who are subject to withholding by the
Internal Revenue Service for failure to properly include on their return
payments of taxable interest or dividends or (iii) who have failed to certify to
the Company that they are not subject to backup withholding when required to do
so or that they are "exempt recipients."
At February 28, 1995, the Prime Fund, Treasury Fund, Government Fund,
Treasury Only Fund, Tax-Exempt Money Fund and California Tax-Exempt Money Market
Fund had unused capital loss carryovers of approximately $2,764,492 (of which
$22,098 will expire in fiscal 1999, $1,171,786 will expire in fiscal 2002 and
$1,570,608 will expire in fiscal 2003), $239,007 (which will expire in fiscal
2002), $1,073,801 (of which $129,811 will expire in fiscal 2002 and $943,990
will expire in fiscal 2003), $113,421 (of which $21,276 will expire in fiscal
2002 and $92,145 will expire in fiscal 2003), $156,373 (of which $35,348 will
expire in fiscal 1997, $16,664 will expire in fiscal 1998, $14,011 will expire
in fiscal 2000, $71,218 will expire in fiscal 2002 and $19,132 will expire in
fiscal 2003) and $12,116 (of which $5,893 will expire in fiscal 2001, and $6,223
will expire in fiscal 2002 and $293,460 (of which $3,571 will expire in fiscal
2002 and $289,889 will expire in fiscal 2003), respectively, available for
federal income tax purposes to be applied against future capital gains, if any.
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FEDERAL - TAX-EXEMPT MONEY FUND AND CALIFORNIA TAX-EXEMPT MONEY MARKET FUND
The policy of the Tax-Exempt Money Fund and the California Tax-Exempt
Money Market Fund is to pay each year as exempt-interest dividends substantially
all the respective Fund's Municipal Securities interest income net of certain
deductions. An exempt-interest dividend is any dividend or part thereof (other
than a capital gains dividend) paid by a Fund and designated as an
exempt-interest dividend in a written notice mailed to shareholders after the
close of the Fund's taxable year. However, the aggregate amount of dividends so
designated by the Fund cannot exceed the excess of the amount of interest exempt
from tax 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. The percentage of total dividends paid for any taxable year which
qualifies as exempt-interest dividends will be the same for all shareholders
receiving dividends from the Fund for such year. In order for the Tax-Exempt
Money Fund and California Tax-Exempt Money Market Fund to pay exempt-interest
dividends for any taxable year, at the close of each quarter of the Fund's
taxable year at least 50% of the aggregate value of the Fund's assets must
consist of exempt-interest obligations.
Exempt-interest dividends may be treated by shareholders of the
Tax-Exempt Money Fund and the California Tax-Exempt Money Market Fund as items
of interest excludable from their gross income under Section 103(a) of the Code.
However, each shareholder is advised to consult his or her tax adviser with
respect to whether exempt-interest dividends would retain the exclusion under
Section 103(a) if such shareholder would be treated as a "substantial user" or a
"related person" to such user with respect to facilities financed through any of
the tax-exempt obligations held by the respective Funds. A "substantial user" is
defined under U.S. Treasury Regulations to include a non-exempt person who both
(1) regularly uses a part of such facilities in his or her trade or business and
(2) whose gross revenues derived with respect to the facilities financed by the
issuance of bonds are more than 5% of the total revenues derived by all users of
such facilities, who occupies more than 5% of the usable area of such facilities
or for whom such facilities or a part thereof were specifically constructed,
reconstructed or acquired. A "related person" includes certain related natural
persons, affiliated corporations, partners and partnerships and S corporations
and their shareholders. Interest on indebtedness incurred by a shareholder to
purchase or carry shares of the Fund generally is not deductible for federal
income tax purposes.
Income itself exempt from federal income taxation will be considered in
addition to adjusted gross income when
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determining whether Social Security payments received by a shareholder are
subject to federal income taxation.
CALIFORNIA - CALIFORNIA TAX-EXEMPT MONEY MARKET FUND
As a regulated investment company, the California Tax-Exempt Money
Market Fund will be relieved of liability for California state franchise and
corporate income tax to the extent the Fund's taxable income is distributed to
its shareholders. The Fund will be taxed on its undistributed taxable income. If
for any year the Fund does not qualify as a regulated investment company, all of
its taxable income (including interest income on California Municipal Securities
for franchise tax purposes only) may be subject to California state franchise or
income tax at regular corporate rates.
If, at the close of each quarter of its taxable year, at least 50% of
the value of the total assets of a regulated investment company, or series
thereof, consists of obligations the interest on which, if held by an
individual, is exempt from taxation by California ("California Exempt
Securities"), then the regulated investment company, or series of that company,
will be qualified to pay dividends exempt from California state personal income
tax to its non-corporate shareholders (hereinafter referred to as "California
exempt-interest dividends"). For this purpose, California Exempt Securities are
generally limited to California Municipal Securities and certain U.S. Government
and U.S. Possession obligations. "Series" of a regulated investment company is
defined as a segregated portfolio of assets, the beneficial interest in which is
owned by the holders of an exclusive class or series of stock of the company.
The California Tax-Exempt Money Market Fund intends to qualify under the above
requirements so that it can pay California exempt-interest dividends. If the
Fund does not so qualify, no part of its respective dividends to shareholders
will be exempt from the California state personal income tax.
Within sixty days after the close of its taxable year, the California
Tax-Exempt Money Market Fund will notify its respective shareholders of the
portion of the dividends paid by the Fund to each shareholder with respect to
such taxable year which is exempt from California state personal income tax. The
total amount of California exempt-interest dividends paid by the Fund with
respect to any taxable year cannot exceed the excess of the amount of interest
received by the Fund for such year on California Exempt Securities over any
amounts that, if the Fund were treated as an individual, would be considered
expenses related to tax exempt income or amortizable bond premium and would thus
not be deductible under federal income or California state personal income tax
law. The percentage of total dividends paid for any taxable year which qualifies
as California exempt-
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interest dividends will be the same for all shareholders receiving dividends
from the Fund for such year.
In cases where shareholders are "substantial users" or "related
persons" with respect to California Exempt Securities held by the California
Tax-Exempt Money Market Fund, such shareholders should consult their tax
advisers to determine whether California exempt-interest dividends paid by the
Fund with respect to such obligations retain California state personal income
tax exclusion. In this connection rules similar to those regarding the possible
unavailability of federal exempt-interest dividend treatment to "substantial
users" are applicable for California state tax purposes. See "Additional
Information Concerning Taxes - Federal - Tax-Exempt Money Fund and California
Tax-Exempt Money Market Fund" above. Interest on indebtedness incurred by a
shareholder to purchase or carry California Tax-Exempt Money Market Fund shares
is not deductible for California state personal income tax purposes if the Fund
distributes California exempt-interest dividends during the shareholder's
taxable year.
The foregoing is only a summary of some of the important California
state personal income tax considerations generally affecting the California
Tax-Exempt Money Market Fund and its shareholders. No attempt is made to present
a detailed explanation of the California state personal income tax treatment of
the Fund or its shareholders, and this discussion is not intended as a
substitute for careful planning. Further, it should be noted that the portion of
any Fund dividends constituting California exempt-interest dividends is
excludable from income for California state personal income tax purposes only.
Any dividends paid to shareholders subject to California state franchise tax or
California state corporate income tax may therefore be taxed as ordinary or
capital gains dividends to such purchasers notwithstanding that all or a portion
of such dividends is exempt from California state personal income tax.
Accordingly, potential investors in the Fund, including, in particular,
corporate investors which may be subject to either California franchise tax or
California corporate income tax, should consult their tax advisers with respect
to the application of such taxes to the receipt of Fund dividends and as to
their own California state tax situation, in general.
OTHER INFORMATION
Depending upon the extent of activities in states and localities in
which its offices are maintained, in which its agents or independent contractors
are located or in which it is otherwise deemed to be conducting business, a Fund
may be subject to the tax laws of such states or localities.
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Exempt-interest dividends generally will be exempt from state and local
taxes as well. However, except as noted above with respect to California state
personal income tax, in some situations income distributions may be taxable to
shareholders 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 or U.S. Government obligations which, if realized directly, would be
exempt from such income taxes. Shareholders are advised to consult their tax
advisers concerning the application of state and local taxes.
The foregoing discussion is based on tax laws and regulations which are
in effect on the date of this Statement of Additional Information. Such laws and
regulations may be changed by legislative or administrative action.
YIELD INFORMATION
The "yields" and "effective yields" of each Fund are calculated
according to formulas prescribed by the Securities and Exchange Commission. The
standardized seven-day yield for each Fund's series of shares is computed
separately for each series by determining the net change, exclusive of capital
changes, in the value of a hypothetical pre-existing account in the particular
Fund involved having a balance of one share at the beginning of the period,
dividing the net change in account value by the value of the account at the
beginning of the base period to obtain the base period return, and multiplying
the base period return by (365/7). The net change in the value of an account in
a Fund includes the value of additional shares purchased with dividends from the
original share, and dividends declared on both the original share and any such
additional shares, net of all fees, other than nonrecurring account or sales
charges, that are charged to all shareholder accounts in proportion to the
length of the base period and the Fund's average account size. The capital
changes to be excluded from the calculation of the net change in account value
are realized gains and losses from the sale of securities and unrealized
appreciation and depreciation. The effective annualized yields for each Fund are
computed by compounding a particular Fund's unannualized base period returns
(calculated as above) by adding 1 to the base period returns, raising the sums
to a power equal to 365 divided by 7, and subtracting 1 from the results. In
addition, the Tax-Exempt Money Fund and California Tax-Exempt Money Market Fund
may quote a standardized "tax-equivalent yield" for each of its series of shares
which is computed by: (a) dividing the portion of the Fund's yield (as
calculated above) for such series that is exempt from federal, or in the case of
the California Tax-Exempt Money Market Fund both federal and California state,
income tax by one minus a stated federal, or in the case of the California Tax-
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Exempt Money Market Fund a combined federal and California state, income tax
rate; (b) with respect to the California Tax-Exempt Money Market Fund dividing
the portion of that Fund's yield (as calculated above) that is exempt from
federal income tax only by one minus a federal income tax rate, and (c) adding
the figure resulting from (a) above (with respect to the Tax-Exempt Money Fund)
or from (a) and (b) above (with respect to the California Tax-Exempt Money
Market Fund) to that portion, if any, of the Fund's yield for such series of
shares that is not exempt from federal income tax. The fees which may be imposed
by institutions directly on their customers for cash management services are not
reflected in the Funds' calculations of yields.
Based on the foregoing calculations, for the seven-day period ended
February 28, 1995, the yield (and effective yield) for Horizon Shares and the
Horizon Service Shares of the Prime Fund, Treasury Fund, Government Fund,
Treasury Only Fund and Tax-Exempt Money Fund after fee waivers and expense
reimbursements by Bank of America and the Administrator, were as follows: Prime
Fund - Horizon Shares -- 5.96% (6.13%); Prime Fund - Horizon Service Shares --
5.71% (5.87%); Treasury Fund - Horizon Shares -- 5.81% (5.97%); Treasury Fund -
Horizon Service Shares -- 5.56% (5.71%); Government Fund - Horizon Shares --
5.98% (6.15%); Government Fund - Horizon Service Shares -- 5.73% (5.89%);
Treasury Only Fund - Horizon Service Shares -- 5.14% (5.26%); Tax-Exempt Money
Fund - Horizon Shares -- 3.73% (3.79%); and Tax-Exempt Money Fund - Horizon
Service Shares -- 3.48% (3.53%). For the same period, the tax-equivalent yield
for the Tax-Exempt Money Fund was 5.41% for Horizon Shares and 5.04% for Horizon
Service Shares. The federal income tax rate used in calculating the
tax-equivalent yields of the Tax-Exempt Money Fund was 31%. The annualized
yield, effective yield and tax-equivalent yield (after fee waivers and expense
reimbursements) for Horizon Service Shares of the California Tax-Exempt Money
Market Fund was 3.43%, 3.48% and 5.25%, respectively, for the seven-day period
ended February 28, 1995. The combined federal and California income tax rate
used in calculating the foregoing tax-equivalent yields was 34.70%.
From time to time, the yields of the Funds may be quoted in and
compared to other mutual funds with similar investment objectives in
advertisements, shareholder reports or other communications to shareholders. The
Funds may also include calculations in such communications that describe
hypothetical investment results. (Such performance examples will be based on an
express set of assumptions and are not indicative of the performance of any
Fund.) Such calculations may from time to time include discussions or
illustrations of the effects of compounding in advertisements. "Compounding"
refers to the fact that, if dividends or other distributions on a Fund
investment are reinvested by being paid in additional Fund shares, any
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future income of a Fund would increase the value of the Fund investment more
quickly than if dividends or other distributions had been paid in cash. The
Funds may also include discussions or illustrations of the potential investment
goals of a prospective investor (including but not limited to tax and/or
retirement planning), investment management techniques, policies or investment
suitability of a Fund, economic conditions, legislative developments (including
pending legislation), the effects of inflation and historical performance of
various asset classes. From time to time advertisements or communications to
shareholders may summarize the substance of information contained in shareholder
reports (including the investment composition of a Fund), as well as the views
of the investment adviser as to current market, economic, trade and interest
rate trends, legislative, regulatory and monetary developments, investment
strategies and related matters believed to be of relevance to a Fund. The Funds
may also include in advertisements charts, graphs or drawings which illustrate
the potential risks and rewards of investment in various investment vehicles. In
addition, advertisements or shareholder communications may include a discussion
of certain attributes or benefits to be derived by an investment in a Fund and
may include testimonials as to the investment adviser's capabilities by clients.
Such advertisements or communications may include symbols, headlines or other
material which highlight or summarize the information discussed in more detail
therein. With proper authorization, a Fund may reprint articles (or excerpts)
written regarding the Fund and provide them to prospective shareholders.
Performance information with respect to the Funds is generally available by
calling (800) 346-2087.
In addition to the publications listed in the Funds' Prospectuses,
yield data as reported in the following publications may be used in comparing
the yields of the Funds to those of other mutual funds with similar investment
objectives: Business Week, Investor's Business Daily, Kiplinger, U.S. News,
Financial World, USA Today, Morningstar, Mutual Fund Monitor, and American
Banker.
GENERAL INFORMATION
DESCRIPTION OF SHARES
The Company is an open-end management investment company organized as a
Maryland corporation on October 27, 1982. The Fund's Charter authorizes the
Board of Directors to issue up to two hundred billion full and fractional shares
of capital stock. The Board of Directors has authorized the issuance of
twenty-two classes of stock - Classes A through W, Common Stock representing
interests in twenty-two separate investment
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portfolios. Each share of capital stock has a par value of $.001. This Statement
of Additional Information describes the Horizon and Horizon Service Shares of
the Prime Fund, Treasury Fund, Government Fund, Treasury Only Fund, Tax-Exempt
Money Fund and California Tax-Exempt Money Market Fund (Horizon Service Shares
Only).
Shares have no preemptive rights and only such conversion or exchange
rights as the Board may grant in its discretion. When issued for payment as
described in its prospectuses, the Company's shares will be fully paid and
non-assessable. For information concerning possible restrictions upon the
transferability of the Company's shares and redemption provisions with respect
to such shares, see "Purchase and Redemption Information" in this Statement of
Additional Information.
The Funds' Horizon Shares and Horizon Service Shares differ from
Pacific Horizon Shares in the following respects. Only Pacific Horizon Shares
are subject to the Special Management Services fee described in the prospectuses
for such shares, which is payable at the rate of .32% (on an annualized basis)
of the average daily net asset value of the Pacific Horizon Shares that are
outstanding from time to time. Only Horizon Service Shares bear the fees payable
under the Shareholder Services Plan described below, which are payable at the
rate of up to .25% (on an annualized basis) of the average daily net asset value
of the Horizon Service Shares that are outstanding from time to time. As a
result, at any given time, the net yield on a Fund's Horizon Shares will be
approximately .25% higher than the yield on that Fund's Horizon Service Shares
and .32% higher than the yield on the same Fund's Pacific Horizon Shares.
Standardized yield quotations will be computed separately for each series of
shares.
Holders of all outstanding shares of a particular Fund will vote
together in the aggregate and not by class on all matters, except that only
Horizon Service Shares of a Fund will be entitled to vote on matters submitted
to a vote of shareholders pertaining to the Fund's payments to Service
Organizations and only Pacific Horizon Shares of a Fund will be entitled to vote
on matters submitted to a vote of shareholders pertaining to the expenses that
are borne exclusively by such shares. Further, shareholders of all of the Funds,
as well as those of any other investment portfolio now or hereafter offered by
the Company, will vote together in the aggregate and not separately on a
Fund-by-Fund basis, except as otherwise required by law or when permitted by the
Board of Directors. Rule 18f-2 under the 1940 Act provides that any matter
required to be submitted to the holders of the outstanding voting securities of
an investment company such as the Company shall not be deemed to have been
effectively acted upon unless approved by a majority of
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the outstanding shares of each Fund affected by the matter. A Fund is affected
by a matter unless it is clear that the interests of each Fund in the matter are
substantially identical or that the matter does not affect any interest of the
Fund. Under the Rule, the approval of an investment advisory agreement or any
change in a fundamental investment policy would be effectively acted upon with
respect to a Fund only if approved by a majority of the outstanding shares of
such Fund. However, the Rule also provides that the ratification of independent
public accountants, the approval of principal underwriting contracts and the
election of directors may be effectively acted upon by shareholders of the
Company voting in the aggregate without regard to particular Funds.
Notwithstanding any provision of Maryland law requiring a greater vote
of the Company's common stock (or of the shares of a Fund voting separately as a
class) in connection with any corporate action, unless otherwise provided by law
(for example, by Rule 18f-2 discussed above) or by the Company's Charter, the
Company may take or authorize such action upon the favorable vote of the holders
of more than 50% of the outstanding common stock of the Company voting without
regard to class.
HORIZON SERVICE SHARES
As stated in the Prospectuses for such Shares, Horizon Service Shares
are sold to institutions ("Service Organizations") which enter into service
agreements requiring them to provide support services to their customers who
beneficially own Horizon Service Shares in consideration of the Funds' payment
of up to .25% (on an annualized basis) of the average daily net asset value of
the Horizon Service Shares beneficially owned by the customers. For the fiscal
years ended February 28, 1993, February 28, 1994, and February 28, 1995,
payments to Shareholder Organizations totalled $1,935,140, $2,029,346 and
$2,115,780, respectively, with respect to the Horizon Service Shares of the
Prime Fund, $758,331, $1,231,895 and $989,269, respectively, with respect to
Horizon Service Shares of the Treasury Fund, and $118,727, $118,946 and
$103,606, respectively, with respect to the Horizon Service Shares of the
Tax-Exempt Money Fund. Of these amounts, for the fiscal years indicated,
$1,578,092, $940,512 and $391,875, respectively, $716,174, $1,160,141 and
$224,434, respectively, and $95,544, $56,412 and $28,442, respectively, were
paid to Bank of America (Security Pacific prior to April 22, 1992) and/or its
(their) affiliates with respect to the Prime Fund, Treasury Fund and Tax-Exempt
Money Fund, respectively, and $0 was paid to the Administrator and/or its
affiliates with respect to the Prime Fund, Treasury Fund and Tax-Exempt Money
Fund, respectively.
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For the fiscal year ended February 28, 1994, payments to Shareholder
Organizations totaled $884,419 and $323,937, respectively with respect to the
Government Fund and Treasury Only Fund. Of these amounts, $445,463 and $213,799,
respectively was paid by the Government Fund and Treasury Only Fund to Bank of
America and/or its affiliates, and $0 and $0, respectively was paid by the
Government Fund and Treasury Only Fund to the Administrator and/or its
affiliates. In addition, during the same period, Bank of America, the
Administrator and Service Organizations waived fees totaling $160,284 for the
Government Fund and $171,993 for the Treasury Only Fund. For the fiscal year
ended February 28, 1995, payments to Shareholder Organizations totaled $590,188
and $604,380, respectively, with respect to the Government Fund and Treasury
Only Fund. Of these amounts, $132,934 and $569,889, respectively, were paid by
the Government Fund and Treasury Only Fund to Bank of America and/or its
affiliates, and $0 was paid by the Government Fund and the Treasury Only Fund to
the Administrator and/or its affiliates.
Horizon Service Shares of the California Tax-Exempt Money Market Fund
were first offered on March 1, 1993. For the fiscal year ended February 28,
1994, payments to Service Organizations totalled $294,140. Of this amount
$226,495 was paid to Bank of America and/or its affiliates; and $0 was paid to
the Administrator and/or its affiliates. In addition, Bank of America, the
Administrator and/or its affiliates waived fees totaling $59,369. For the fiscal
year ended February 28, 1995, payments to Service Organizations totalled
$255,299 with respect to the California Tax-Exempt Money Market Fund. Of this
amount, $251,505 was paid to Bank of America and/or its affiliates, and $0 was
paid to the Administrator and/or its affiliates.
Services provided by Shareholder Organizations under service agreements
may include: (i) aggregating and processing purchase and redemption requests for
Horizon Service Shares from customers and placing net purchase and redemption
orders with the Distributor; (ii) providing customers with a service that
invests the assets of their accounts in Horizon Service Shares pursuant to
specific or pre-authorized instructions; (iii) processing dividend payments on
behalf of customers; (iv) providing information periodically to customers
showing their positions in Horizon Service Shares; (v) arranging for bank wires;
(vi) responding to customer inquiries relating to the services performed by the
Shareholder Organizations; (vii) providing subaccounting with respect to Horizon
Service Shares beneficially owned by customers or providing the information to
the Company necessary for subaccounting; (viii) if required by law, forwarding
shareholder communications from the Company (such as proxies, shareholder
reports, annual and semi-annual financial statements and dividend, distribution
and tax notices) to customers; (ix) forwarding to customers proxy statements and
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proxies containing any proposals regarding the Company's arrangements with
Shareholder Organizations; and (x) providing such other similar services as
requested by the Funds.
The Company's agreements with Shareholder Organizations are governed by
a Plan (called a "Shareholder Services Plan"). The Plan has been approved by the
Board of Directors of the Company, including a majority of the Directors who are
not "interested persons" of the Company as defined in the Investment Company Act
of 1940 and have no direct or indirect financial interest in the Plan or any
related service agreement (the "Disinterested Directors"). In approving the
Plan, the Directors determined that there was a reasonable likelihood that it
would be beneficial to each Fund and to the holders of its Horizon Service
Shares. The Plan will continue with respect to each Fund until October 31, 1996,
unless earlier terminated in accordance with its terms, and thereafter it will
continue in effect indefinitely provided that the Directors approve the Plan at
least annually in the manner described above.
Under the Plan, the Board of Directors must be provided with and must
review, at least quarterly, a written report of all amounts expended pursuant to
the Plan. The Plan and any service agreements implementing the Plan must be in
writing. The Plan may be terminated at any time with respect to any Fund by a
vote of the majority of the Disinterested Directors. Each service agreement
under the Plan is also terminable at any time without payment of any penalty by
a vote of a majority of the Disinterested Directors. Any material amendment of
the Plan must be approved by a majority vote of the Board of Directors and of
the Disinterested Directors cast in person at a meeting called for the purpose
of voting on the amendment.
With respect to the purchase or sale of portfolio securities and the
execution of portfolio transactions, no Fund will give preference to Shareholder
Organizations with which the Fund enters into service agreements.
First Cash Funds of America, pursuant to an Administrative Services
Plan, had previously entered into a shareholder servicing agreement with Bank of
America (and prior to that shareholder servicing agreement had entered into a
shareholder servicing agreement with Seattle-First National Bank, an affiliate
of Bank of America). Under the shareholder servicing agreement, Bank of America,
as shareholder servicing agent, or an affiliate of Bank of America pursuant to a
sub-shareholder servicing agreement, provided certain services to shareholders
in exchange for a fee from each Predecessor Fund of First Cash Funds of America
not in excess of .20% of the average daily net assets of such Predecessor Fund.
Such fees were actually incurred by the Predecessor Government Fund of First
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Cash Funds of America at the effective annual rate of .12% of its average daily
net assets and by the Predecessor Treasury Only Fund of First Cash Funds of
America at the effective annual rate of .06% of its average daily net assets for
the period ended February 28, 1993. For the period June 4, 1990 (commencement of
operations) through March 31, 1991 (fiscal year end), the fiscal year ended
March 31, 1992 and the period April 1, 1992 through February 28, 1993, the
Predecessor Government Fund and Predecessor Treasury Only Fund of First Cash
Funds of America, respectively, accrued shareholder servicing fees of $269,126
(of which $46,068 was waived), $501,845 (of which $170,760 was waived) and
$378,058 (of which $138,771 was waived), respectively, and $76,982 (of which
$69,283 was waived), $253,503 (of which $164,166 was waived) and $234,373 (of
which $160,559 was waived), respectively.
COUNSEL
Drinker Biddle & Reath (of which W. Bruce McConnel, III, Secretary of
the Company, is a partner), 1345 Chestnut Street, Philadelphia National Bank
Building, Philadelphia, Pennsylvania 19107, serves as counsel to the Company and
will pass upon the legality of the shares offered hereby. O'Melveny & Myers, 400
South Hope Street, Los Angeles, California 90071, acts as special California
counsel for the Company and has reviewed the portions of the Prospectus and
Statement of Additional Information for the California Tax-Exempt Money Market
Fund concerning California taxes and the description of the special
considerations relating to California Municipal Securities.
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP, with offices at 1177 Avenue of the Americas, New
York, New York 10036, has been selected as independent accountants of each Fund
for the fiscal year ending February 28, 1996. Deloitte & Touche LLP served as
independent accountants for the Predecessor Government Funds and Predecessor
Treasury Only Funds for the 11-month period ended February 28, 1993, the fiscal
year ended March 31, 1992 and the period from June 4, 1990 (commencement of
operations) through March 31, 1991.
REPORTS
Each Fund will send its shareholders unaudited semi-annual reports
including a description of the Fund's investments, and annual financial
statements together with a report of independent accountants.
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SHAREHOLDER VOTE
As used in the Prospectuses and this Statement of Additional
Information, a "vote of a majority" of the outstanding shares of a Fund or a
particular series means, with respect to the approval of an investment advisory
agreement, a distribution plan or a change in a fundamental investment policy,
the affirmative vote of the lesser of (a) more than 50% of the outstanding
shares of the Fund or of the series, or (b) 67% of the shares of the Fund or of
the series present at a meeting at which more than 50% of the outstanding shares
of the Fund or series are represented in person or by proxy.
At June 15, 1995, the name, address and share ownership of the entities
which held of record more than 5% of the outstanding Pacific Horizon Shares of
the Treasury Fund were as follows: BA Investment Services Inc., For the Benefit
of Clients, 555 California Street, 4th Floor, Department #4337, San Francisco,
CA 94104, 98,230,626.530 shares (7.70%); Bank of America State Trust Co., 299 N.
Euclid Avenue, Pasadena, CA 91101, 1,044,975,154.790 shares (82.00%); and
Hellman & Freidman Capital Partners II, Limited Partnership, Attention: Georgia
Lee, 1 Maritime Plaza, 12th Floor, San Francisco, CA 94111, 1,216,118,073.700
shares (095.42%).
At June 16, 1995, the name, address and share ownership of the entities
which held of record more than 5% of the outstanding Horizon Shares of the
Treasury Fund was as follows: Bank of America Trustee/Custodian for Investing in
Horizon Treasury, Attn: Eric Peterson, 701 S. Western Avenue, 2nd Floor,
Glendale, CA 91201, 398,540,438.170 shares (68.901%); Security Pacific State
Trust Co., Agreement for Sec. PACWA Participants, Attn: Cash Sweep Funds (L.
Goekjian), P.O. Box 91630, Pasadena, CA 91101, 94,279,024.120 shares (16.299%).
At June 16, 1995, the name, address and share ownership of the entities
which held beneficially more than 5% of the outstanding Horizon Service Shares
of the Treasury Fund were as follows: Bank of America FM&TS Operat CA, Attn: CTF
Unit, 701 South Western Avenue, Glendale, CA 91201, 65,745,555.320 shares
(23.658%); Bank of America Nevada Southern Comm. Bank, Attn: Dan Dykes, P.O. Box
98600, Las Vegas, NV 89193, 63,974,589.270 shares (23.020%). Security Pacific
State Trust Co., Agreement for Sec. PACWA Participants, Attn: Cash Sweep Funds,
P.O. Box 91630, Pasadena, CA 91101, 56,906,301.540 shares (20.477%); and
Security Pacific Cash Management, c/o Bank of America - GPO M/C 5533, Attn:
Liezel Barangan, 1850 Gateway Boulevard, Concord, CA 94520, 77,003,300 shares
(27.709%). At June 15, 1995, the name, address and, share ownership of the
entity which held of record more than 5% of the outstanding Horizon Service
Shares of the Treasury Fund was as follows: Omnibus A/C for the Shareholder
Accounts
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maintained by Concord Financial Services, Inc., Attn: Linda Zerbe, First and
Market Building, 100 First Avenue, Suite 300, Pittsburgh, PA 15222,
263,629,755.130 shares (65.51%). At June 15, 1995 the name, address and share
ownership of the entities which held of record more than 5% of the outstanding
Pacific Horizon Shares of the Prime Fund were as follows: BA Investment Services
Inc., For the Benefit of Clients, 555 California Street, 4th Floor, Department
#4337, San Francisco, CA 94104, 514,119,226.900 shares (38.76%); Bank of America
State Trust Co., 299 N. Euclid Avenue, Pasadena, CA 91101, 392,983,248.780
shares (29.63%); and Southwest Securities Inc., Attn: Cashiering, 201 Elm
Street, Suite 4300, Dallas, TX 75270, 169,018,910.270 shares (12.74%). At June
16, 1995, the name, address and share ownership of the entities which held of
record more than 5% of the outstanding Horizon Shares of the Prime Fund were as
follows: Bank of America Trustee/Custodian for Investing Horizon Prime, Attn:
Eric Peterson, 701 S. Western Avenue, 2nd Floor, Glendale, CA 91201,
385,058,852.030 shares (56.838%); and Bank of America NT&SA, Attn: Kay
Warren/Dept. #5596, 1455 Market Street, San Francisco, CA 94103, 57,300,000.00
shares (9.934%). At June 15, 1995, the name, address and share ownership of the
entity which held of record more than 5% of the outstanding Horizon Service
Shares of the Prime Fund were as follows: Omnibus A/C for the Shareholder
Accounts maintained by Concord Financial Services, Inc., Attn: Linda Zerbe,
First and Market Building, 100 First Avenue, Suite 300, Pittsburgh, PA 15222,
752,776,315.610 shares (70.26%).
At June 16, 1995, the name, address and share ownership of the entities
which held beneficially more than 5% of the outstanding Horizon Service Shares
of the Prime Fund were as follows: Bank of America NT&SA Financial Management
and Trust Services, 701 S. Western Avenue, Glendale, CA 91201, 74,038,082.090
shares (9.835%); Capital Network Services, Attn: Donna Novell, One Bush Street,
11th Floor, San Francisco, CA 94104, 86,407,261.23 shares (11.478%); Security
Pacific Cash Management, c/o Bank of America. GPO. M/C 5533 Attn: Liezel
Barangan, 1850 Gateway Boulevard, M/C 5533, Concord, CA 94520, 379,755,600.000
shares (50.447%); Security Pacific State Trust Co., Agreement for SecPAC WA
Participants, Attn: Cash Sweep Funds (L. Goekjian) P.O. Box 91630, Pasadena, CA
91101, 54,321,621.330 shares (7.216%); and Southwest Securities Inc., Attn: Mary
Lisenber, 1201 Elm Street, Suite 4300, Dallas, TX 75270, 130,146,660.030 shares
(17.289%).
At June 15, 1995, the name, address and share ownership of the entities
which held of record more than 5% of the outstanding Pacific Horizon Shares of
the Tax-Exempt Money Fund were as follows: BA Investment Services, Inc., For the
Benefit of Clients, 555 California Street, 4th Floor, Department #4337, San
Francisco, CA 94104, 12,233,845.190 shares (39.73%);
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Southwest Securities Inc., Attn: Cashiering, 1201 Elm Street, Suite 4300,
Dallas, TX, 75270, 10,387,253.930 shares (33.73%); and Bank of America State
Trust Co., 299 N. Euclid Avenue, Pasadena, CA 91101, 6,515,635.730 shares
(21.16%).
At June 16, 1995, the name, address and share ownership of the entities
which held of record more than 5% of the outstanding Horizon Shares of the
Tax-Exempt Money Fund were as follows: Bank of America Custodian For Investing
in Horizon Tax-Exempt Money Fund, Attn: Eric Peterson, 701 S. Western Avenue,
2nd Floor, Glendale, CA 19201, 129,582,555.65 shares (38.576%); Continental Bank
National Association Custodian for the Benefit of Custodian Co. Attn: Mary
Chester, 231 South LaSalle Street, 6Q, Chicago, IL 60697, 152,699,416.270 shares
(45.458%); and Maine Midland Bank NA, Investment Services, 17th Floor, Attn:
Christine Mincel, One Marine Midland Center, Buffalo, NY 14203, 21,684,672.980
shares (6.455%).
At June 15, 1995, the name, address and share ownership of the entities
which held of record more than 5% of the outstanding shares of the Horizon
Service Shares of the Tax-Exempt Money Fund were as follows: Furman C. Moseley
and Susan R. Moseley Tenn. In Common, 1201 3rd Avenue, Box 7C, Seattle, WA
98101, 4,165,513.060 shares (9.91%); Omnibus A/C for the shareholder accounts
maintained by Concord Financial Services Inc., Attn: Linda Zerbe, First and
Market Building, 100 First Avenue, Suite 300, Pittsburgh, PA 15222,
22,398,544.590 shares (53.31%); and Omnibus A/C for the Shareholder Accounts
maintained by Concord Financial Services Inc. Attn: First and Market Building,
100 First Avenue, Suite 300, Pittsburgh, PA 15222, 3,494,305.180 shares (8.31%).
At June 16, 1995, the name, address and share ownership of the entities which
held beneficially more than 5% of the outstanding Horizon Service Shares of the
Tax-Exempt Money Fund were as follows: BA Investment Services Inc., 555
California Street, 4th Floor Dept. #4337, San Francisco, CA 94104, 1,362,028.590
shares (5.260%); Bank of America FM&TS Oper. CA, Attn: CTF Unit, 701 South
Western Avenue, Glendale, CA 91201, 2,293,907.40 shares (8.859%); and Southwest
Securities, Inc., Attn: Mary Lisenber, 1201 Elm Street, Suite 430, Dallas, TX
75270, 21,021,580.530 shares (81.187%). At June 15, 1955, the name, address and
share ownership of the entities which held of record more than 5% of the
outstanding Pacific Horizon Shares of the Government Fund were as follows: Bank
of America, NT&SA, The Private Bank, Attn: ACI Unit #8329, 701 S. Western
Avenue, Glendale, CA 91201, 79,875,532.090 shares (22.71%); Bank of America
State Trust Co., 299 N. Euclid Avenue., Pasadena, CA 91101, 64,756,966.280
shares (18.41%); and BA Investment Services Inc., For the Benefit of Clients,
555 California Street, 4th Floor, Department #4337, San Francisco, CA 94104,
170,940,404.650 shares (48.60%). At June 16, 1995, the name, address and share
ownership of the entities
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which held of record more than 5% of the outstanding Horizon Shares of the
Government Fund were as follows: Bank of America NT&SA Trustee/Custodian for
Investing in Horizon Shares of the Government Fund, Attn: Cynthia Beauvais, 701
South Western Avenue., Glendale, CA 91201, 9,327,446.350 shares (5.028%); Bank
of America State Trust, Attn: Rigo Barrett, 299 N. Euclid Avenue, Pasadena, CA
91101, 28,063,486.740 shares (15.129%); Capital Network Services, Attn: Donna
Novell, One Bush Street, 11th Floor, San Francisco, CA 94104, 24,227,801.980
shares (13.061%); County of Orange, Matt Raabe, P.O. Box 4515, Santa Ana, CA
92702, 10,000,000.000 shares (5.391%); Cypress Insurance Co., Attn: Larry
Tetzloff, 9290 W. Dodge Road, Omaha, NE 68124, 9,996,515.930 shares (5.389%);
Harr & Co., c/o Bank of New York, Attn: Bimal Sana, Spec. Prec. Dept., One Wall
Street, 5th Floor, New York, NY 10286, 14,000,000.000 shares (7.547%); Micron
Electronics Inc., Attn: Debbie Meigand, 900 East Karcher Road, Nanpa, ID 83687,
16,080,510.14 shares (8.669%); and Silocin Magic Corp., Attn: Meng A. Lim, 20300
Stevens Creek Boulevard., Suite 400, Cupertino, CA 95014, 18,058,262.110 shares
(9.735%). At June 15, 1995, the name, address and share ownership of the
entities which held of record more than 5% of the outstanding Horizon Service
Shares of the Government Fund were as follows: Spacelabs Medical, Inc., Attn:
Scott Bender, P.O. Box 97013, Redmond, WA 98073, 14,572,000.000 shares (5.70%);
Good Health Plan of WA, Attn: Tsai Cheng, 1501 9th Avenue, Suite 500, Seattle,
WA 98101, 16,584,866.580 shares (6.49%); Omnibus A/C for the Shareholder
Accounts maintained by Concord. Financial Services Inc., Attn: Linda Zerbe,
First and Market Building, 100 First Avenue, Suite 300, Pittsburgh, PA 15222,
68,555,257.020 shares (26.85%). At June 16, 1995, the name, address and share
ownership of the entities which held beneficially more than 5% of the Horizon
Service Shares of the Government Fund were as follows: Bank of America Nevada
Southern Comm. Bank, Attn: Dan Dykes, P.O. Box 98600, Las Vegas, NV 89193-8600,
35,849,966.050 shares (52.294%); and Capital Network Services, Attn: Donna M.
Howell, One Bush Street, 11th Floor, San Francisco, CA 94104-4425,
23,929,840.440 shares (34.906%). At June 15, 1995, the name, address and share
ownership of the entities which held of record more than 5% of the Pacific
Horizon Shares of the Treasury Only Fund were as follows: Bank of America NT&SA,
the Private Bank, Attn: ACI Unit 48329, 701 South Western Avenue, Glendale, CA
91201, 48,516,900.490 shares (31.68%) Bank of America State Trust Co., 299 N.
Euclid Avenue, Pasadena, CA 91101, 22,350,831.320 shares (14.59%); and BA
Investment Services Inc., For the Benefit of Clients, 555 California Street, 4th
Floor, Department #4337, San Francisco, CA 94104, 69,016,521.500 shares
(45.06%). At June 15, 1995, the name, address and share ownership of the
entities which held of record more than 5% of the outstanding Horizon Service
Shares of the Treasury Only Fund were as follows: National Home Mortgage Corp.,
Attn: Mortgage Banking Treasury Operations, 5565 Morehouse Drive, 3rd Floor, San
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Diego, CA 92121, 12,147.667,580 shares (9.42%); Comcare, Inc., 4001 N. 3rd
Street, Suite 120, Phoenix, AZ 85012, 26,230,243.620 shares (20.34%); and
Omnibus A/C For the Shareholder Accounts Maintained by Concord Financial
Services Inc., Attn: Linda Zerbe, First and Market Building, 100 First Avenue,
Suite 300, Pittsburgh, PA 15222, 21,883,084.450 shares (16.97%). At June 16,
1995, the name, address and share ownership of the entities which held
beneficially more than 5% of the outstanding Horizon Service Shares of the
Treasury Only Fund were as follows: BA Investment Service Inc., 555 California
Street, 4th Floor Dept. #4337, San Francisco, CA 94104, 6,403,628.120 shares
(28.679%); Bank of America NT&SA Trustee/Custodian for Investing in Horizon
Service Shares of the Treasury Only Fund, Attn: Cynthia Beauvais, 701 South
Western Avenue, Glendale, CA 91201, 3,501,414.020 shares (15.681%); Bank of
America State Trust, Attn: Rigo Barrett, 299 N. Euclid Avenue, Pasadena, CA
91101, 5,420,893.150 shares (24.277%); Fair Isaac & Co., Attn: Christine Tam,
120 North Redwood, San Rapheal, CA 94903-1996, 1,338,800.750 shares (5.996%);
Foothill/Eastern Transportation Corridor Agency, Attn: Laura Barker, 201 East
Sandpot, Suite 200, Santa Anna, CA 92707, 2,559,586.380 shares (11.463%); and
Nexus, Attn: Kathleen Menace, P.O. Box 60637, Sunnyvale, CA 94088-0637,
2,525,153.380 shares (11.309%). At June 15, 1995, the name, address and share
ownership of the entity which held of record more than 5% of the outstanding
shares of the Pacific Horizon Shares of the California Tax-Exempt Money Market
Fund was as follows: BA Investment Services Inc., For the Benefit of Clients,
555 California Street, 4th Floor, Department #4337, San Francisco, CA 94104,
204,443,886.590 shares (22.07%). At June 15, 1995, the name, address and share
ownership of the entities which held of record more than 5% of the outstanding
shares of the Horizon Service Shares of the California Tax-Exempt Money Market
Fund were as follows: Leo Zuckerman Trust, DTD 12-11-91,4444 Viewridge Avenue,
San Diego, CA 92123, 4,850,877.280 shares (5.35%); and Omnibus A/C for the
Shareholder Accounts Maintained by Concord Financial Services Inc. Attn: Linda
Zerbe, First and Market Building, 100 First Avenue, Suite 300, Pittsburgh, PA
15222, 13,391,453.970 shares (14.77%). At June 16, 1995, the name, address and
share ownership of the entity which held beneficially more than 5% of the
outstanding shares of the Horizon Service Shares of the California Tax-Exempt
Money Market Fund was as follows: BA Investment Services Inc., 555 California
Street, 4th Floor, Dept. #4337, San Francisco, CA 94109, 13,792,509.310 shares
(99.206%). At June 15, 1995, the name, address and shares ownership of the
entities which held of record more than 5% of the outstanding shares of the
Flexible Bond Fund were as follows: Peter F. Smith and Jacquelyn L. Smith,
JTWROS, 1785 C. Blodgett Road, Mount Vernon, WA 98273, 13,973.917 shares
(5.58%); and BA Investment Services, Inc., FBO 200724011, 185 Berry Street, 3rd
Floor #2640, San Francisco, CA 94104, 22,436.531 shares (8.96%). At June 15,
1995 the name, address
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and share ownership of the entity which held of record more than 5% of the
outstanding shares of the Asset Allocation Fund was as follows: Bank of America,
Texas AATTEE. National-O'Neill Supplemental Savings Plan, Attn: Mutual Funds
(81-6-01005-0), P.O. Box 94627, Pasadena, CA 91109, 24,289,973 shares (5.07%).
At June 15, 1995 the name, address and share ownership of the entities which
held of record more than 5% of the outstanding shares of the National Municipal
Bond Fund were as follows: BA Investment Services, Inc. FBO 405084421, 555
California Street, 4th Floor, #2640, San Francisco, CA 94104, 26,336.154 shares
(8.31%); and BA Investment Services, Inc., FBO 405266591, 555 California Street,
4th Floor, #2640, San Francisco, CA 94104, 25,034.024 shares (7.90%). At June
15, 1995 the name, address and share ownership of the entities which held of
record more than 5% of the outstanding shares of the Corporate Bond Fund were as
follows: Dean Witter Reynolds Inc., 5 World Trade Center, 4th Floor, Attn: 5th O
Div., New York, NY 10048, 138,820.000 shares (6.93%); and Smith Barney Shearson,
Inc., 333 W. 39th Street, 8th Floor, New York, NY 10001, 148,925.482 shares
(7.43%).
At such dates, no other person was known by the Company to hold of
record or beneficially more than 5% of the outstanding shares of any investment
portfolio of the Company.
The Prospectuses relating to the Horizon Shares and Horizon Service
Shares and this Statement of Additional Information omit certain information
contained in the Company's registration statement filed with the Securities and
Exchange Commission. Copies of the registration statement, including items
omitted herein, may be obtained from the Commission by paying the charges
prescribed under its rules and regulations.
FINANCIAL STATEMENTS AND EXPERTS
The Annual Reports for each Fund for their fiscal year or periods ended
February 28, 1995 (the "Annual Reports") accompanies this Statement of
Additional Information. The financial statements and notes thereto in each
Annual Report are incorporated in this Statement of Additional Information by
reference, and have been audited by Price Waterhouse LLP, whose report thereon
also appears in each Annual Report and is also incorporated herein by reference.
Such financial statements have been incorporated herein in reliance on the
report of Price Waterhouse LLP, independent accountants, given on the authority
of said firm as experts in auditing and accounting.
The financial highlights and financial statements for the 11-month
period ended February 28, 1993, the fiscal year ended March 31, 1992 and the
period June 4, 1990 through March 31, 1991 of the Predecessor Government Fund
and Predecessor Treasury Only Fund of First Cash Funds of America, as well as of
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the Government Money Trust and Treasury Money Trust in which said Funds invested
included in the Prospectus for the Government Fund and Treasury Only Fund (with
regard to the financial highlights) and incorporated by reference in this
Statement of Additional Information (with regard to the financial statements),
have been audited by Deloitte & Touche LLP as set forth in their reports thereon
which are incorporated herein by reference. The financial statements and
financial highlights audited by Deloitte & Touche LLP have been incorporated
herein by reference (with regard to the financial statements) and included
herewith (with regard to the financial highlights) in reliance on the report
given on their authority as experts in accounting and auditing.
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APPENDIX A
COMMERCIAL PAPER RATINGS
A Standard & Poor's commercial paper rating is a current assessment of
the likelihood of timely payment of debt considered short-term in the relevant
market. The following summarizes the rating categories used by Standard and
Poor's for commercial paper:
"A-1" - Issue's degree of safety regarding timely payment is strong.
Those issues determined to possess extremely strong safety characteristics are
denoted "A-1+."
"A-2" - Issue's capacity for timely payment is satisfactory. However,
the relative degree of safety is not as high as for issues designated "A-1."
"A-3" - Issue has an adequate capacity for timely payment. It is,
however, somewhat more vulnerable to the adverse effects of changes and
circumstances than an obligation carrying a higher designation.
"B" - Issue has only a speculative capacity for timely payment.
"C" - Issue has a doubtful capacity for payment.
"D" - Issue is in payment default.
Moody's commercial paper ratings are opinions of the ability of issuers
to repay punctually promissory obligations not having an original maturity in
excess of 9 months. The following summarizes the rating categories used by
Moody's for commercial paper:
"Prime-1" - Issuer or related supporting institutions are considered to
have a superior capacity for repayment of short-term promissory obligations.
Prime-1 repayment capacity will normally be evidenced by the following
characteristics: leading market positions in well established industries; high
rates of return on funds employed; conservative capitalization structures with
moderate reliance on debt and ample asset protection; broad margins in earning
coverage of fixed financial charges and high internal cash generation; and well
established access to a range of financial markets and assured sources of
alternate liquidity.
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"Prime-2" - Issuer or related supporting institutions are considered to
have a strong capacity for repayment of short-term promissory obligations. This
will normally be evidenced by many of the characteristics cited above but to a
lesser degree. Earnings trends and coverage ratios, while sound, will be more
subject to variation. Capitalization characteristics, while still appropriate,
may be more affected by external conditions. Ample alternative liquidity is
maintained.
"Prime-3" - Issuer or related supporting institutions have an
acceptable capacity for repayment of short-term promissory obligations. The
effects of industry characteristics and market composition may be more
pronounced. Variability in earnings and profitability may result in changes in
the level of debt protection measurements and the requirement for relatively
high financial leverage. Adequate alternate liquidity is maintained.
"Not Prime" - Issuer does not fall within any of the Prime rating
categories.
The three rating categories of Duff & Phelps for investment grade
commercial paper and short-term debt are "D-1," "D-2" and "D-3." Duff & Phelps
employs three designations, "D-1+," "D-1" and "D-1-," within the highest rating
category. The following summarizes the rating categories used by Duff & Phelps
for commercial paper:
"D-1+" - Debt possesses highest certainty of timely payment. Short-term
liquidity, including internal operating factors and/or access to alternative
sources of funds, is outstanding, and safety is just below risk-free U.S.
Treasury short-term obligations.
"D-1" - Debt possesses very high certainty of timely payment. Liquidity
factors are excellent and supported by good fundamental protection factors. Risk
factors are minor.
"D-1-" - Debt possesses high certainty of timely payment. Liquidity
factors are strong and supported by good fundamental protection factors. Risk
factors are very small.
"D-2" - Debt possesses good certainty of timely payment. Liquidity
factors and company fundamentals are sound. Although ongoing funding needs may
enlarge total financing requirements, access to capital markets is good. Risk
factors are small.
"D-3" - Debt possesses satisfactory liquidity, and other protection
factors qualify issue as investment grade. Risk
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factors are larger and subject to more variation. Nevertheless, timely payment
is expected.
"D-4" - Debt possesses speculative investment characteristics.
Liquidity is not sufficient to ensure against disruption in debt service.
Operating factors and market access may be subject to a high degree of
variation.
"D-5" - Issuer has failed to meet scheduled principal and/or interest
payments.
Fitch short-term ratings apply to debt obligations that are payable on
demand or have original maturities of up to three years. The following
summarizes the rating categories used by Fitch for short-term obligations:
"F-1+" - Securities possess exceptionally strong credit quality. Issues
assigned this rating are regarded as having the strongest degree of assurance
for timely payment.
"F-1" - Securities possess very strong credit quality. Issues assigned
this rating reflect an assurance of timely payment only slightly less in degree
than issues rated "F-1+."
"F-2" - Securities possess good credit quality. Issues assigned this
rating have a satisfactory degree of assurance for timely payment, but the
margin of safety is not as great as the "F-1+" and "F-1" categories.
"F-3" - Securities possess fair credit quality. Issues assigned this
rating have characteristics suggesting that the degree of assurance for timely
payment is adequate; however, near-term adverse changes could cause these
securities to be rated below investment grade.
"F-S" - Securities possess weak credit quality. Issues assigned this
rating have characteristics suggesting a minimal degree of assurance for timely
payment and are vulnerable to near-term adverse changes in financial and
economic conditions.
"D" - Securities are in actual or imminent payment default.
Fitch may also use the symbol "LOC" with its short-term ratings to
indicate that the rating is based upon a letter of credit issued by a commercial
bank.
Thomson BankWatch short-term ratings assess the likelihood of an
untimely or incomplete payment of principal or interest of unsubordinated
instruments having a maturity of one
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year or less which is issued by United States commercial banks, thrifts and
non-bank banks; non-United States banks; and broker-dealers. The following
summarizes the ratings used by Thomson BankWatch:
"TBW-1" - This designation represents Thomson BankWatch's highest
rating category and indicates a very high degree of likelihood that principal
and interest will be paid on a timely basis.
"TBW-2" - This designation indicates that while the degree of safety
regarding timely payment of principal and interest is strong, the relative
degree of safety is not as high as for issues rated "TBW-1."
"TBW-3" - This designation represents the lowest investment grade
category and indicates that while the debt is more susceptible to adverse
developments (both internal and external) than obligations with higher ratings,
capacity to service principal and interest in a timely fashion is considered
adequate.
"TBW-4" - This designation indicates that the debt is regarded as
non-investment grade and therefore speculative.
IBCA assesses the investment quality of unsecured debt with an original
maturity of less than one year which is issued by bank holding companies and
their principal bank subsidiaries. The following summarizes the rating
categories used by IBCA for short-term debt ratings:
"A1+" - Obligations supported by the highest capacity for timely
repayment.
"A1" - Obligations are supported by the highest capacity for timely
repayment.
"A2" - Obligations are supported by a satisfactory capacity for timely
repayment, although such capacity may be susceptible to adverse changes in
business, economic or financial conditions.
"A3" - Obligations are supported by a satisfactory capacity for timely
repayment. Such capacity is more susceptible to adverse changes in business,
economic or financial conditions than for obligations in higher categories.
"B" - Obligations for which the capacity for timely repayment is
susceptible to adverse changes in business, economic or financial conditions.
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"C" - Obligations for which there is an inadequate capacity to ensure
timely repayment.
"D" - Obligations which have a high risk of default or which are
currently in default.
CORPORATE AND MUNICIPAL LONG-TERM DEBT RATINGS
The following summarizes the ratings used by Standard & Poor's for
corporate and municipal debt:
"AAA" - This designation represents the highest rating assigned by
Standard & Poor's to a debt obligation and indicates an extremely strong
capacity to pay interest and repay principal.
"AA" - Debt is considered to have a very strong capacity to pay
interest and repay principal and differs from AAA issues only in small degree.
"A" - Debt is considered to have a strong capacity to pay interest and
repay principal although such issues are somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions than debt in
higher-rated categories.
"BBB" - Debt is regarded as having an adequate capacity to pay interest
and repay principal. Whereas such issues normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher-rated categories.
"BB," "B," "CCC," "CC" and "C" - Debt is regarded, on balance, as
predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. "BB" indicates the
lowest degree of speculation and "C" the highest degree of speculation. While
such debt will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major risk exposures to adverse
conditions.
"BB" - Debt has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. The "BB"
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied "BBB-" rating.
"B" - Debt has a greater vulnerability to default but currently has the
capacity to meet interest payments and
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<PAGE> 870
principal repayments. Adverse business, financial or economic conditions will
likely impair capacity or willingness to pay interest and repay principal. The
"B" rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied "BB" or "BB-" rating.
"CCC" - Debt has a currently identifiable vulnerability to default, and
is dependent upon favorable business, financial and economic conditions to meet
timely payment of interest and repayment of principal. In the event of adverse
business, financial or economic conditions, it is not likely to have the
capacity to pay interest and repay principal. The "CCC" rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
"B" or "B-" rating.
"CC" - This rating is typically applied to debt subordinated to senior
debt that is assigned an actual or implied "CCC" rating.
"C" - This rating is typically applied to debt subordinated to senior
debt which is assigned an actual or implied "CCC-" debt rating. The "C" rating
may be used to cover a situation where a bankruptcy petition has been filed, but
debt service payments are continued.
"CI" - This rating is reserved for income bonds on which no interest is
being paid.
"D" - Debt is in payment default. This rating is used when interest
payments or principal payments are not made on the date due, even if the
applicable grace period has not expired, unless S & P believes such payments
will be made during such grace period. "D" rating is also used upon the filing
of a bankruptcy petition if debt service payments are jeopardized.
PLUS (+) OR MINUS (-) - The ratings from "AA" through "CCC" may be
modified by the addition of a plus or minus sign to show relative standing
within the major rating categories.
"r" - This rating is attached to highlight derivative, hybrid, and
certain other obligations that S & P believes may experience high volatility or
high variability in expected returns due to non-credit risks. Examples of such
obligations are: securities whose principal or interest return is indexed to
equities, commodities, or currencies; certain swaps and options; and interest
only and principal only mortgage securities.
The following summarizes the ratings used by Moody's for corporate and
municipal long-term debt:
"Aaa" - Bonds are judged to be of the best quality. They carry the
smallest degree of investment risk and are
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<PAGE> 871
generally referred to as "gilt edged." Interest payments are protected by a
large or by an exceptionally stable margin and principal is secure. While the
various protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong position of such
issues.
"Aa" - Bonds are judged to be of high quality by all standards.
Together with the "Aaa" group they comprise what are generally known as high
grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in "Aaa" securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than in "Aaa"
securities.
"A" - Bonds possess many favorable investment attributes and are to be
considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment sometime in the future.
"Baa" - Bonds considered medium-grade obligations, i.e., they are
neither highly protected nor poorly secured. Interest payments and principal
security appear adequate for the present but certain protective elements may be
lacking or may be characteristically unreliable over any great length of time.
Such bonds lack outstanding investment characteristics and in fact have
speculative characteristics as well.
"Ba," "B," "Caa," "Ca," and "C" - Bonds that possess one of these
ratings provide questionable protection of interest and principal ("Ba"
indicates some speculative elements; "B" indicates a general lack of
characteristics of desirable investment; "Caa" represents a poor standing; "Ca"
represents obligations which are speculative in a high degree; and "C"
represents the lowest rated class of bonds). "Caa," "Ca" and "C" bonds may be in
default.
Con. (---) - Bonds for which the security depends upon the completion
of some act or the fulfillment of some condition are rated conditionally. These
are bonds secured by (a) earnings of projects under construction, (b) earnings
of projects unseasoned in operation experience, (c) rentals which begin when
facilities are completed, or (d) payments to which some other limiting condition
attaches. Parenthetical rating denotes probable credit stature upon completion
of construction or elimination of basis of condition.
Moody's applies numerical modifiers 1, 2 and 3 in each generic
classification from "Aa" to "B" in its bond rating system. The modifier 1
indicates that the issuer ranks in the
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higher end of its generic rating category; the modifier 2 indicates a mid-range
ranking; and the modifier 3 indicates that the issuer ranks at the lower end of
its generic rating category.
The following summarizes the long-term debt ratings used by Duff &
Phelps for corporate and municipal long-term debt:
"AAA" - Debt is considered to be of the highest credit quality. The
risk factors are negligible, being only slightly more than for risk-free U.S.
Treasury debt.
"AA" - Debt is considered of high credit quality. Protection factors
are strong. Risk is modest but may vary slightly from time to time because of
economic conditions.
"A" - Debt possesses protection factors which are average but adequate.
However, risk factors are more variable and greater in periods of economic
stress.
"BBB" - Debt possesses below average protection factors but such
protection factors are still considered sufficient for prudent investment.
Considerable variability in risk is present during economic cycles.
"BB," "B," "CCC," "DD," and "DP" - Debt that possesses one of these
ratings is considered to be below investment grade. Although below investment
grade, debt rated "BB" is deemed likely to meet obligations when due. Debt rated
"B" possesses the risk that obligations will not be met when due. Debt rated
"CCC" is well below investment grade and has considerable uncertainty as to
timely payment of principal, interest or preferred dividends. Debt rated "DD" is
a defaulted debt obligation, and the rating "DP" represents preferred stock with
dividend arrearages.
To provide more detailed indications of credit quality, the "AA," "A,"
"BBB," "BB" and "B" ratings may be modified by the addition of a plus (+) or
minus (-) sign to show relative standing within these major categories.
The following summarizes the highest four ratings used by Fitch for
corporate and municipal bonds:
"AAA" - Bonds considered to be investment grade and of the highest
credit quality. The obligor has an exceptionally strong ability to pay interest
and repay principal, which is unlikely to be affected by reasonably foreseeable
events.
"AA" - Bonds considered to be investment grade and of very high credit
quality. The obligor's ability to pay interest and repay principal is very
strong, although not quite as strong
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as bonds rated "AAA." Because bonds rated in the "AAA" and "AA" categories are
not significantly vulnerable to foreseeable future developments, short-term debt
of these issuers is generally rated "F-1+."
"A" - Bonds considered to be investment grade and of high credit
quality. The obligor's ability to pay interest and repay principal is considered
to be strong, but may be more vulnerable to adverse changes in economic
conditions and circumstances than bonds with higher ratings.
"BBB" - Bonds considered to be investment grade and of satisfactory
credit quality. The obligor's ability to pay interest and repay principal is
considered to be adequate. Adverse changes in economic conditions and
circumstances, however, are more likely to have an adverse impact on these
bonds, and therefore, impair timely payment. The likelihood that the ratings of
these bonds will fall below investment grade is higher than for bonds with
higher ratings.
"BB," "B," "CCC," "CC," "C," "DDD," "DD," and "D" Bonds that possess
one of these ratings are considered by Fitch to be speculative investments. The
ratings "BB" to "C" represent Fitch's assessment of the likelihood of timely
payment of principal and interest in accordance with the terms of obligation for
bond issues not in default. For defaulted bonds, the rating "DDD" to "D" is an
assessment of the ultimate recovery value through reorganization or liquidation.
To provide more detailed indications of credit quality, the Fitch
ratings from and including "AA" to "C" may be modified by the addition of a plus
(+) or minus (-) sign to show relative standing within these major rating
categories.
IBCA assesses the investment quality of unsecured debt with an original
maturity of more than one year which is issued by bank holding companies and
their principal bank subsidiaries. The following summarizes the rating
categories used by IBCA for long-term debt ratings:
"AAA" - Obligations for which there is the lowest expectation of
investment risk. Capacity for timely repayment of principal and interest is
substantial such that adverse changes in business, economic or financial
conditions are unlikely to increase investment risk substantially.
"AA" - Obligations for which there is a very low expectation of
investment risk. Capacity for timely repayment of principal and interest is
substantial. Adverse changes in business, economic or financial conditions may
increase investment risk albeit not very significantly.
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<PAGE> 874
"A" - Obligations for which there is a low expectation of investment
risk. Capacity for timely repayment of principal and interest is strong,
although adverse changes in business, economic or financial conditions may lead
to increased investment risk.
"BBB" - Obligations for which there is currently a low expectation of
investment risk. Capacity for timely repayment of principal and interest is
adequate, although adverse changes in business, economic or financial conditions
are more likely to lead to increased investment risk than for obligations in
higher categories.
"BB," "B," "CCC," "CC," and "C" - Obligations are assigned one of these
ratings where it is considered that speculative characteristics are present.
"BB" represents the lowest degree of speculation and indicates a possibility of
investment risk developing. "C" represents the highest degree of speculation and
indicates that the obligations are currently in default.
IBCA may append a rating of plus (+) or minus (-) to a rating to denote
relative status within major rating categories.
Thomson BankWatch assesses the likelihood of an untimely repayment of
principal or interest over the term to maturity of long term debt and preferred
stock which are issued by United States commercial banks, thrifts and non-bank
banks; non-United States banks; and broker-dealers. The following summarizes the
rating categories used by Thomson BankWatch for long-term debt ratings:
"AAA" - This designation represents the highest category assigned by
Thomson BankWatch to long-term debt and indicates that the ability to repay
principal and interest on a timely basis is extremely high.
"AA" - This designation indicates a very strong ability to repay
principal and interest on a timely basis with limited incremental risk compared
to issues rated in the highest category.
"A" - This designation indicates that the ability to repay principal
and interest is strong. Issues rated "A" could be more vulnerable to adverse
developments (both internal and external) than obligations with higher ratings.
"BBB" - This designation represents Thomson BankWatch's lowest
investment grade category and indicates an acceptable capacity to repay
principal and interest. Issues rated "BBB"
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<PAGE> 875
are, however, more vulnerable to adverse developments (both internal and
external) than obligations with higher ratings.
"BB," "B," "CCC," and "CC," - These designations are assigned by
Thomson BankWatch to non-investment grade long-term debt. Such issues are
regarded as having speculative characteristics regarding the likelihood of
timely payment of principal and interest. "BB" indicates the lowest degree of
speculation and "CC" the highest degree of speculation.
"D" - This designation indicates that the long-term debt is in default.
PLUS (+) OR MINUS (-) - The ratings from "AAA" through "CC" may include
a plus or minus sign designation which indicates where within the respective
category the issue is placed.
MUNICIPAL NOTE RATINGS
A Standard and Poor's rating reflects the liquidity concerns and market
access risks unique to notes due in three years or less. The following
summarizes the ratings used by Standard & Poor's Ratings Group for municipal
notes:
"SP-1" - The issuers of these municipal notes exhibit very strong or
strong capacity to pay principal and interest. Those issues determined to
possess overwhelming safety characteristics are given a plus (+) designation.
"SP-2" - The issuers of these municipal notes exhibit satisfactory
capacity to pay principal and interest.
"SP-3" - The issuers of these municipal notes exhibit speculative
capacity to pay principal and interest.
Moody's ratings for state and municipal notes and other short-term
loans are designated Moody's Investment Grade ("MIG") and variable rate demand
obligations are designated Variable Moody's Investment Grade ("VMIG"). Such
ratings recognize the differences between short-term credit risk and long-term
risk. The following summarizes the ratings by Moody's Investors Service, Inc.
for short-term notes:
"MIG-1"/"VMIG-1" - Loans bearing this designation are of the best
quality, enjoying strong protection by established cash flows, superior
liquidity support or demonstrated broad-based access to the market for
refinancing.
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"MIG-2"/"VMIG-2" - Loans bearing this designation are of high quality,
with margins of protection ample although not so large as in the preceding
group.
"MIG-3"/"VMIG-3" - Loans bearing this designation are of favorable
quality, with all security elements accounted for but lacking the undeniable
strength of the preceding grades. Liquidity and cash flow protection may be
narrow and market access for refinancing is likely to be less well established.
"MIG-4"/"VMIG-4" - Loans bearing this designation are of adequate
quality, carrying specific risk but having protection commonly regarded as
required of an investment security and not distinctly or predominantly
speculative.
"SG" - Loans bearing this designation are of speculative quality and
lack margins of protection.
Fitch and Duff & Phelps use the short-term ratings described under
Commercial Paper Ratings for municipal notes.
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