<PAGE> 1
PROSPECTUS
JULY 1, 1996
PACIFIC HORIZON CORPORATE BOND FUND
PACIFIC HORIZON INTERMEDIATE BOND FUND
PACIFIC HORIZON U.S. GOVERNMENT SECURITIES FUND
Investment Portfolios Offered by Pacific Horizon
Funds, Inc.
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The PACIFIC HORIZON CORPORATE BOND FUND (the "Corporate Bond Fund") is a
diversified mutual fund whose investment objective is to provide investors with
high current income consistent with reasonable investment risk. The Corporate
Bond 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 Corporate Bond Fund may be suited for investors looking for high current
income who are willing to accept some price and yield fluctuations.
The PACIFIC HORIZON INTERMEDIATE BOND FUND, formerly Flexible Bond Fund (the
"Intermediate Bond Fund"), is a diversified mutual fund whose investment
objective is to obtain interest income and capital appreciation. The
Intermediate Bond Fund seeks its objective by investing in investment grade
intermediate and longer term bonds, including corporate and governmental fixed
income obligations and mortgage-backed securities.
The PACIFIC HORIZON U.S. GOVERNMENT SECURITIES FUND (the "U.S. Government
Securities Fund" and, collectively with the Corporate Bond and Intermediate Bond
Funds, the "Funds") 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 U.S. Government Securities
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 U.S. Government Securities 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.
UNLIKE MOST OTHER INVESTMENT COMPANIES WHICH INVEST DIRECTLY IN PORTFOLIO
SECURITIES, THE CORPORATE BOND AND INTERMEDIATE BOND FUNDS SEEK TO ACHIEVE THEIR
RESPECTIVE INVESTMENT OBJECTIVES BY INVESTING ALL THEIR INVESTABLE ASSETS IN
FUNDS OF AN OPEN-END, MANAGEMENT INVESTMENT COMPANY (THE "CORPORATE BOND MASTER
PORTFOLIO" WITH RESPECT TO THE CORPORATE BOND FUND AND THE "INTERMEDIATE BOND
MASTER PORTFOLIO" WITH RESPECT TO THE INTERMEDIATE BOND FUND, TOGETHER THE
"MASTER PORTFOLIOS" AND, COLLECTIVELY WITH THE U.S. GOVERNMENT SECURITIES FUND,
THE "PORTFOLIOS") HAVING THE SAME INVESTMENT OBJECTIVE AS THAT OF THE RESPECTIVE
CORPORATE BOND AND INTERMEDIATE BOND FUNDS. THE CORPORATE BOND AND INTERMEDIATE
BOND FUNDS WILL PURCHASE SHARES OF THE RESPECTIVE MASTER PORTFOLIOS AT NET ASSET
VALUE. THE NET ASSET VALUES OF THE CORPORATE BOND AND INTERMEDIATE BOND FUNDS
WILL RESPOND TO INCREASES AND DECREASES IN THE VALUE OF THE RESPECTIVE MASTER
PORTFOLIO'S SECURITIES. INVESTORS SHOULD CAREFULLY CONSIDER THIS INVESTMENT
APPROACH. SEE "OTHER INVESTMENT PRACTICES AND CONSIDERATIONS -- MASTER-FEEDER
STRUCTURE" ON PAGE 27 FOR ADDITIONAL INFORMATION REGARDING THIS STRUCTURE.
This Prospectus describes concisely the information about the Funds and the
Company that you should know before investing. Please read it carefully and
retain it for future reference. More information about the Funds 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, 1996 and is incorporated by reference into this Prospectus.
(Continued next page)
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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.
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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, other than those contained in this Prospectus, in the Statement
of Additional Information and the Funds' official sales literature, in
connection with the offering of the Funds' 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 Funds 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 Funds or the distributor to make such offer in such
jurisdiction.
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<PAGE> 2
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. Investment in the Funds involves investment
risk, including the possible loss of principal.
This Prospectus describes two classes of shares. A Shares are sold with a
front-end sales charge. K Shares are not subject to either a front-end sales
charge or a contingent deferred sales charge.
The Funds are 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 Portfolios' investment adviser. Based in San Francisco, California, Bank
of America and its affiliates have over $48 billion under management, including
over $12 billion in mutual funds.
<PAGE> 3
CONTENTS
<TABLE>
<S> <C> <C>
EXPENSE SUMMARY 2
FINANCIAL HIGHLIGHTS 7
FUND INVESTMENTS 12 INVESTMENT OBJECTIVES
12 TYPES OF INVESTMENTS
16 FUNDAMENTAL LIMITATIONS
17 OTHER INVESTMENT PRACTICES AND CONSIDERATIONS
SHAREHOLDER GUIDE 29 HOW TO BUY SHARES
29 What Is My Minimum Investment In The Funds?
29 What Alternative Sales Arrangements Are Available?
29 How Are Shares Priced?
33 How Do I Decide Whether To Buy A or K Shares?
34 How Can I Buy Shares?
35 What Price Will I Receive When I Buy Shares?
36 What Else Should I Know To Make A Purchase?
36 HOW TO SELL SHARES
36 How Do I Redeem My Shares?
38 What NAV Will I Receive For Shares I Want To Sell?
39 What Kind Of Paperwork Is Involved In Selling
Shares?
39 How Quickly Can I Receive My Redemption Proceeds?
39 Do I Have Any Reinstatement Privileges After I Have
Redeemed Shares?
DIVIDEND AND DISTRIBUTION
POLICIES 40
SHAREHOLDER SERVICES 40 CAN I USE THE FUNDS IN MY RETIREMENT PLAN?
40 CAN I EXCHANGE MY INVESTMENT FROM ONE FUND TO
ANOTHER?
41 WHAT IS TELETRADE?
42 CAN I ARRANGE TO HAVE AUTOMATIC INVESTMENTS MADE
42 WHAT IS DOLLAR COST AVERAGING AND HOW CAN I
IMPLEMENT IT?
42 CAN I ARRANGE PERIODIC WITHDRAWALS?
43 CAN MY DIVIDENDS FROM A FUND BE INVESTED IN OTHER
FUNDS?
43 IS THERE A SALARY DEDUCTION PLAN AVAILABLE?
THE BUSINESS OF THE FUNDS 43 FUND MANAGEMENT
43 Service Providers
TAX INFORMATION 46
MEASURING PERFORMANCE 47
DESCRIPTION OF SHARES 48
PLAN PAYMENTS 49
APPENDIX A 52
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DISTRIBUTOR: INVESTMENT ADVISER:
Concord Financial Group, Inc. Bank of America National Trust and Savings Association
3435 Stelzer Road 555 California Street
Columbus, OH 43219-3035 San Francisco, CA 94104
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</TABLE>
<PAGE> 4
EXPENSE SUMMARY
SHAREHOLDER TRANSACTION EXPENSES are charges you pay when buying or selling
shares of the Funds. The Funds offer two classes of shares. A Shares are offered
at net asset value plus a front-end sales charge (see page 29 of the Prospectus
for an explanation of net asset value per share) and are subject to a
shareholder servicing fee. K Shares are offered at net asset value with neither
a front-end sales charge nor a contingent deferred sales charge, but are subject
to distribution, administrative servicing and shareholder servicing fees.
ANNUAL FUND OPERATING EXPENSES include payments by the Funds and payments by the
Master Portfolios which are allocable to the Corporate Bond Fund and
Intermediate Bond Fund. Operating expenses include fees for portfolio
management, maintenance of shareholder accounts, general administration,
distribution (in the case of K Shares only), shareholder servicing, accounting
and other services.
Below is a summary of the shareholder transaction expenses imposed by the Funds
for A and K Shares; the operating expenses (including the operating expenses of
the Master Portfolio which are allocable to the Corporate Bond Fund and
Intermediate Bond Fund) expected to be incurred by A and K Shares of the
Corporate Bond Fund and Intermediate Bond Fund during the current fiscal year;
the operating expenses of the A Shares of the U.S. Government Securities Fund
incurred during its last fiscal year; and the operating expenses expected to be
incurred by the K Shares of the U.S. Government Securities Fund during the first
twelve months of operations. The information for the Corporate Bond Fund and
Intermediate Bond Fund 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. Expenses of the Corporate Bond Fund
are based upon expected costs for the Corporate Bond Fund and the Corporate Bond
Master Portfolio which will differ from the historical costs of the Corporate
Bond Fund's predecessor fund as a result of the change in organization of the
Corporate Bond Fund from a closed-end fund to an open-end fund.
CORPORATE BOND FUND
---------------------------------------------------------
<TABLE>
<CAPTION>
A SHARES K SHARES
-------- -------
<S> <C> <C> <C>
SHAREHOLDER TRANSACTION
EXPENSES
Maximum Sales Load Imposed
on Purchases
(as a percentage of
offering price) 4.50% None(2)
Sales Load Imposed on
Reinvested Dividends None None
Maximum Contingent Deferred
Sales Load (as a
percentage of original
purchase price or
redemption proceeds,
whichever is lower) None(1) None
Redemption Fees None None
Exchange Fee None None
ANNUAL FUND OPERATING
EXPENSES
(as a percentage of
average net assets)
Management Fees (After Fee
Waivers)+ 0% 0%
12b-1 Fee (After Fee
Waivers)* 0% 0.50%*
Administrative Services Fee
(After Fee Waivers)* 0% 0.50%*
Shareholder Services Fee* 0.25% 0.25%*
------
Total of all 12b-1 Fees OR
Administrative Services
Fees and Shareholder
Services Fees for K
Shares
(After Fee Waivers)* 0.75%*
Other Expenses+ 1.05% 1.05%
----- -----
Total Operating Expenses
(After Fee Waivers)+ 1.30% 1.80%
----- -----
----- -----
</TABLE>
----------------------------------------
(1) There is no front-end sales load on A Shares you purchase if you have either
a combined purchase of A Shares of the Company of $1,000,000 or more or if
the aggregate value of A Shares that you beneficially own in any Pacific
Horizon Fund or Time Horizon Fund, another open-end investment Company
managed by Bank of America (a "Time Horizon Fund"), equals or exceeds
$1,000,000 ("Large Purchase Exemption"). A Shares purchased under the Large
Purchase Exemption (except A Shares purchased under the Daily Advantage(R)
or Advantage Plus(TM) Programs) are subject to a contingent deferred sales
charge of 1.00% and 0.50%, respectively, on redemptions within one and two
years after purchase. The contingent deferred sales charge is paid to
Concord Financial Group, Inc. (the "Distributor"). A Shares cannot be
purchased under the Large Purchase Exemption if there is another no-load
exemption available. Accordingly, A Shares purchased
2
<PAGE> 5
under another no-load exemption are not subject to a contingent deferred
sales charge. Although no front-end sales load will be paid on shares
purchased under the Large Purchase Exemption, the Distributor will
compensate brokers whose customers purchase such shares at the following
rates: 1.00% of the amount under $3 million, 0.50% of the next $47 million
and 0.25% thereafter.
(2) Bank of America will compensate Seafirst Investment Services, Inc. ("SIS")
and BA Investment Services, Inc. ("BAIS") (BAIS and SIS are collectively
referred to herein as "Affiliated Brokers") for their customers who have
invested in a Fund and are participants in the Daily Advantage(R) Program.
The Affiliated Brokers will be compensated by Bank of America at the rate of
1.00% of the amount under $3 million, 0.50% of the next $47 million and
0.25% thereafter of combined Pacific Horizon Funds' and Time Horizon Funds'
K Shares in each Daily Advantage(R) Program.
+ Absent fee waivers, management fees for each class of the Fund would be 0.65%
of the average net assets (annualized), and "Total Operating Expenses" for
the Corporate Bond Fund's A and K Shares are estimated to be 1.80% and 2.55%
of average net assets (annualized), respectively.
* Absent fee waivers, 12b-1 fees or administrative services fees would be 0.75%
or 0.75%, respectively, of the average net assets (annualized) of the Fund's
K Shares. The total of all 12b-1 fees, administrative services fees and
shareholder services fees may not exceed, in the aggregate, the annual rate
of 1.00% of the average net assets of the Fund's K Shares. However, it is
expected that during the current fiscal year, such fees will not exceed 0.75%
of the average net assets of the Fund's K Shares. Because of the Rule 12b-1,
administrative and/or shareholder services fees paid by the Corporate Bond
Fund as shown in the above table, long-term K shareholders may pay more than
the economic equivalent of the maximum front-end sales charge permitted by
the National Association of Securities Dealers, Inc. For a further
description of shareholder transaction expenses and the Corporate Bond Fund's
operating expenses, see the sections entitled "Shareholder Guide," "The
Business of the Funds" and "Plan Payments" below.
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EXAMPLE: Assume the annual return is 5% and operating expenses are the same as
those stated above. For every $1,000 you invest, here is how much you would have
paid in total expenses if you closed your account after the number of years
indicated:
<TABLE>
<CAPTION>
AFTER 1 YEAR AFTER 3 YEARS AFTER 5 YEARS AFTER 10 YEARS
------------ ------------- ------------- --------------
<S> <C> <C> <C> <C>
A Shares(1) $ 58 $84 $ 113 $195
K Shares $ 18 $57 $ 97 $212
</TABLE>
(1) Assumes deduction at time of purchase of maximum applicable front-end sales
charge but does not assume deduction at redemption of maximum applicable
contingent deferred sales charge under the Large Purchase Exemption.
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3
<PAGE> 6
INTERMEDIATE BOND FUND
---------------------------------------------------------
<TABLE>
<CAPTION>
A SHARES K SHARES
<S> <C> <C> <C>
-------- -------
SHAREHOLDER TRANSACTION
EXPENSES
Maximum Sales Load Imposed
on Purchases (as a
percentage of offering
price) 4.50% None(2)
Sales Load Imposed on
Reinvested Dividends None None
Maximum Contingent Deferred
Sales Load (as a
percentage of original
purchase price or
redemption proceeds,
whichever is lower) None(1) None
Redemption Fees None None
Exchange Fee None None
ANNUAL FUND OPERATING
EXPENSES
(as a percentage of
average net assets)
Management Fees (After Fee
Waivers)+ 0% 0%
12b-1 Fee (After Fee
Waivers)* 0% 0.50%*
Administrative Services Fee
(After Fee Waivers)* 0% 0.50%*
Shareholder Services Fee* 0.25% 0.25%*
------
Total of all 12b-1 Fees OR
Administrative Services
Fees and Shareholder
Services Fees for K
Shares (After Fee
Waivers)* 0.75%*
Other Expenses (After
Expense Reimbursements)+ 0.55% 0.55%
----- -----
Total Operating Expenses
(After Fee Waivers and
Expense Reimbursements)+ 0.80% 1.30%
----- -----
----- -----
</TABLE>
----------------------------------------
(1) There is no front-end sales load on A Shares you purchase if you have either
a combined purchase of A Shares of the Company of $1,000,000 or more or if
the aggregate value of A Shares that you beneficially own in any Pacific
Horizon or Time Horizon Fund equals or exceeds $1,000,000 ("Large Purchase
Exemption"). A Shares purchased under the Large Purchase Exemption (except A
Shares purchased under the Daily Advantage(R) or Advantage Plus(TM)
Programs) are subject to a contingent deferred sales charge of 1.00% and
0.50%, respectively, on redemptions within one and two years after purchase.
The contingent deferred sales charge is paid to the Distributor. A Shares
cannot be purchased under the Large Purchase Exemption if there is another
no-load exemption available. Accordingly, A Shares purchased under another
no-load exemption are not subject to a contingent deferred sales charge.
Although no front-end sales load will be paid on shares purchased under the
Large Purchase Exemption, the Distributor will compensate brokers whose
customers purchase such shares at the following rates: 1.00% of the amount
under $3 million, 0.50% of the next $47 million and 0.25% thereafter.
(2) Bank of America will compensate Affiliated Brokers for their customers who
have invested in the Fund and are participants in the Daily Advantage(R)
Program. The Affiliated Brokers will be compensated by Bank of America at
the rate of 1.00% of the amount under $3 million, 0.50% of the next $47
million and 0.25% thereafter of combined Pacific Horizon Funds' and Time
Horizon Funds' K Shares in each Daily Advantage(R) Program.
+ Absent fee waivers, management fees for each class of the Fund would be 0.65%
of the average net assets (annualized); "Other Expenses" for the Intermediate
Bond Fund's A and K Shares are estimated to be 1.54% and 1.54%, respectively,
of average net assets (annualized); and "Total Operating Expenses" for the
Intermediate Bond Fund's A and K Shares are estimated to be 2.44% and 3.19% of
average net assets (annualized), respectively.
* Absent fee waivers, 12b-1 fees or administrative services fees would be 0.75%
or 0.75%, respectively, of the average net assets (annualized) of the Fund's K
Shares. The total of all 12b-1 fees, administrative services fees and
shareholder services fees may not exceed, in the aggregate, the annual rate of
1.00% of the average net assets of the Fund's K Shares. However, it is
expected that during the current fiscal year, such fees will not exceed 0.75%
of the average net assets of the Fund's K Shares. Because of the Rule 12b-1,
administrative and/or shareholder services fees paid by the Intermediate Bond
Fund as shown in the above table, long-term K shareholders may pay more than
the economic equivalent of the maximum front-end sales charge permitted by the
National Association of Securities Dealers, Inc. For a further description of
shareholder transaction expenses and the Intermediate Bond Fund's operating
expenses, see the sections entitled "Shareholder Guide," "The Business of the
Funds" and "Plan Payments" below.
4
<PAGE> 7
- --------------------------------------------------------------------------------
EXAMPLE: Assume the annual return is 5% and operating expenses are the same as
those stated above. For every $1,000 you invest, here is how much you would have
paid in total expenses if you closed your account after the number of years
indicated:
<TABLE>
<CAPTION>
AFTER 1 YEAR AFTER 3 YEARS AFTER 5 YEARS AFTER 10 YEARS
------------ ------------- ------------- --------------
<S> <C> <C> <C> <C>
A Shares(1) $ 53 $69 $87 $140
K Shares $ 13 $41 $71 $157
</TABLE>
(1) Assumes deduction at time of purchase of maximum applicable front-end sales
charge but does not assume deduction at redemption of maximum applicable
contingent deferred sales charge under the Large Purchase Exemption.
- --------------------------------------------------------------------------------
U.S. GOVERNMENT SECURITIES FUND
---------------------------------------------------------
<TABLE>
<CAPTION>
A SHARES K SHARES
-------- -------
<S> <C> <C> <C>
SHAREHOLDER TRANSACTION
EXPENSES
Maximum Sales Load Imposed
on Purchases (as a
percentage of offering
price) 4.50% None(2)
Sales Load Imposed on
Reinvested Dividends None None
Maximum Contingent Deferred
Sales Load (as a
percentage of original
purchase price or
redemption proceeds,
whichever is lower) None(1) None
Redemption Fees None None
Exchange Fee None None
ANNUAL FUND OPERATING
EXPENSES
(as a percentage of
average net assets)
Management Fees (After Fee
Waivers)+ 0.47% 0.47%
12b-1 Fee (After Fee
Waiver)* 0% 0.50%*
Administrative Services Fee
(After Fee Waivers)* 0% 0.50%*
Shareholder Services Fee* 0.25% 0.25%*
------
Total of all 12b-1 Fees OR
Administrative Services
Fees and Shareholder
Services Fees for K Shares
(After Fee Waivers)* 0.75%*
Other Expenses (After
Expense Reimbursements)+ 0.43% 0.43%*
----- -----
Total Operating Expenses
(After Fee Waivers and
Expense Reimbursements)+ 1.15% 1.65%
----- -----
----- -----
</TABLE>
----------------------------------------
(1) There is no front-end sales load on A Shares you purchase if you have either
a combined purchase of A Shares of the Company of $1,000,000 or more or if
the aggregate value of A Shares along with A Shares that you beneficially
own in any Pacific Horizon or Time Horizon Fund equals or exceeds $1,000,000
("Large Purchase Exemption"). A Shares purchased under the Large Purchase
Exemption (except A Shares purchased under the Daily Advantage(R) or
Advantage Plus(TM) Programs) are subject to a contingent deferred sales
charge of 1.00% and 0.50%, respectively, on redemptions within one and two
years after purchase. The contingent deferred sales charge is paid to the
Distributor. A Shares cannot be purchased under the Large Purchase Exemption
if there is another no-load exemption available. Accordingly, A Shares
purchased under another no-load exemption are not subject to a contingent
deferred sales charge. Although no front-end sales load will be paid on
shares purchased under the Large Purchase Exemption, the Distributor will
compensate brokers whose customers purchase such shares at the following
rates: 1.00% of the amount under $3 million, 0.50% of the next $47 million
and 0.25% thereafter.
(2) Bank of America will compensate Affiliated Brokers for their customers who
have invested in the Fund and are participants in the Daily Advantage(R)
Program. The Affiliated Brokers will be compensated by Bank of America at
the rate of 1.00% of the amount under $3 million, 0.50% of the next $47
million and 0.25% thereafter of combined Pacific Horizon Funds' and Time
Horizon Funds' K Shares in each Daily Advantage(R) Program.
+ Absent fee waivers and/or expense reimbursements, management fees for each
class of the Fund would be 0.55% of the average net assets (annualized);
"Other Expenses" for the U.S. Government Securities Fund's A and K Shares
would be 0.46% and 0.46%, respectively, of average net assets (annualized);
and "Total Operating Expenses" for the U.S. Government Securities Fund's A and
K Shares would be 1.26% and 2.01% of average net assets, respectively.
* Absent fee waivers, 12b-1 fees or administrative services fees would be
0.75% or 0.75%, respectively, of the average net assets (annualized) of the
Fund's K Shares. The total of all 12b-1 fees, administrative services fees
and shareholder services fees may not exceed, in the aggregate, the annual
rate
5
<PAGE> 8
of 1.00% of the average net assets of the Fund's K Shares. However, it is
expected that during the current fiscal year, such fees will not exceed
0.75% of the average net assets of the K Shares. Because of the Rule 12b-1,
administrative and/or shareholder services fees paid by the U.S. Government
Securities Fund as shown in the above table, long-term K shareholders may
pay more than the economic equivalent of the maximum front-end sales charge
permitted by the National Association of Securities Dealers, Inc. For a
further description of shareholder transaction expenses and the U.S.
Government Securities Fund's operating expenses, see the sections entitled
"Shareholder Guide," "The Business of the Funds" and "Plan Payments" below.
- --------------------------------------------------------------------------------
EXAMPLE: Assume the annual return is 5% and operating expenses are the same as
those stated above. For every $1,000 you invest, here is how much you would have
paid in total expenses if you closed your account after the number of years
indicated:
<TABLE>
<CAPTION>
AFTER 1 YEAR AFTER 3 YEARS AFTER 5 YEARS AFTER 10 YEARS
------------ ------------- ------------- --------------
<S> <C> <C> <C> <C>
A Shares(1) $ 56 $80 $ 105 $178
K Shares $ 17 $52 $ 90 $195
</TABLE>
(1) Assumes deduction at time of purchase of maximum applicable front-end sales
charge but does not assume deduction at redemption of maximum applicable
contingent deferred sales charge under the Large Purchase Exemption.
- --------------------------------------------------------------------------------
Note: The preceding operating expenses and examples 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 shareholder of the Funds.
MANAGEMENT FEES CONSIST OF:
- - an investment advisory fee payable at the annual rate of 0.45%, 0.45% and
0.35% of the Corporate Bond Master Portfolio's, Intermediate Bond Master
Portfolio's and U.S. Government Securities Fund's respective average daily net
assets; and
- - an administration fee payable at the annual rate of 0.15%, 0.15% and 0.20% of
the Corporate Bond, Intermediate Bond and U.S. Government Securities Funds'
respective average daily net assets and 0.05% of each Master Portfolio's
average daily net assets.
Currently, the most restrictive expense limitation limits each Fund's aggregate
annual expenses (including management fees and the Corporate Bond and
Intermediate Bond Fund's pro rata share of such expenses of the particular
Master Portfolio) to 2.5% of the first $30 million of each Fund's average daily
net assets, 2% of the next $70 million and 1.5% of each Fund's remaining average
daily net assets.
The Board of Directors of the Company believes that the aggregate per share
expenses of the Corporate Bond and Intermediate Bond Funds and the respective
Master Portfolios in which each Fund's assets are invested will be less than or
approximately equal to the expenses which the particular Fund would incur if the
Company retained the services of an investment adviser for that Fund and the
assets of that Fund were invested directly in the type of securities held by its
Master Portfolio. Further, the Directors believe that the shareholders of the
Corporate Bond and Intermediate Bond Funds may participate in the ownership of a
larger portfolio of securities than could be achieved directly by the Corporate
Bond and Intermediate Bond Funds. 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 Corporate Bond or Intermediate Bond Master
Portfolios will be realized, inasmuch as the Company is not aware of any other
potential investor in the Corpo-
6
<PAGE> 9
rate Bond and Intermediate Bond Master Portfolios.
The alternative sales arrangements permit you to choose the method of purchasing
shares that is most beneficial given the amount of the purchase, the length of
time you expect to hold the shares and other circumstances. You should determine
whether under your particular circumstances it is more advantageous to incur a
front-end sales charge and thereafter be subject to annual fees under a
Shareholder Services Plan, with respect to A Shares; or incur neither a
front-end sales charge nor a contingent deferred sales charge, but incur fees
under a Distribution Plan and/or an Administrative and Shareholder Services Plan
with respect to K Shares. K Shares, however, are only available for investment
by: (a) businesses or other organizations that participate in the Daily
Advantage(R) Program sponsored by Bank of America; (b) individuals investing
proceeds from a redemption of shares from another open-end investment company on
which such individual paid a front-end sales load if (i) such redemption
occurred within 30 days prior to the purchase order, and (ii) such other
open-end investment company was not distributed and advised by Concord Financial
Group, Inc. and Bank of America, respectively, or their affiliates; and (c)
accounts opened for IRA rollovers from a 401(k) plan in which the assets were
held in any Pacific Horizon or Time Horizon Fund and subsequent purchases into
an IRA rollover account opened as described above, so long as the original IRA
rollover account remains open on the Company's books. See the Section entitled
"How to Buy Shares" below.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
The Corporate Bond 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
"Corporate Predecessor Fund"). Following its initial public sale of common
shares in 1973, the Corporate Predecessor Fund did not regularly issue
additional common shares except in connection with dividend reinvestments. On
April 25, 1994, the Corporate 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 Corporate Predecessor Fund were transferred to the
Corporate Bond Master Portfolio. The Corporate Predecessor Fund received
investment advisory services from Bank of America.
The U.S. Government Securities Fund commenced operations on January 7, 1988 as
The Horizon Capital GNMA Extra Fund (the "Government Predecessor Fund"), a
separate portfolio of a Massachusetts business trust called The Horizon Capital
Funds. On January 1, 1989 the Government 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 U.S. Government Securities Fund
changed its name to the Pacific Horizon U.S. Government Securities Fund.
The tables below show certain information concerning the investment results of
the Corporate Predecessor Fund for the periods ended on or prior to September
30, 1993; the combined investment results of the Corporate Bond Fund and the
Corporate Predecessor Fund for the period October 1, 1993 through September 30,
1994; and the Corporate Bond Fund's investment results for the period October 1,
1994 through February 28, 1995 and the year ended February 29, 1996. The tables
below also show certain information concerning the Intermediate Bond Fund
(formerly, the Flexible Bond Fund) for the years and period indicated. The
tables below also show certain information concerning the investment results of
the Government Predecessor Fund for the periods
7
<PAGE> 10
ended on or prior to August 31, 1989, the combined results of the U.S.
Government Securities Fund and the Government Predecessor Fund for the period
September 1, 1989 through February 28, 1990 and the U.S. Government Securities
Fund's investment results for the six fiscal years in the six year period ended
February 29, 1996. During the periods shown, the Funds (and the Corporate
Predecessor Fund and Government Predecessor Fund) did not offer K Shares. Actual
investment results of the K Shares may be different. The information for the
years and periods indicated was audited by Price Waterhouse LLP, the independent
accountants for the Funds and the Predecessor Funds, whose unqualified reports
on the financial statements containing such information for the five fiscal
years or periods in the five year period ended February 29, 1996 are
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 into the Statement of
Additional Information. Further information about the performance of the Funds
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.
8
<PAGE> 11
PACIFIC HORIZON CORPORATE BOND FUND
Selected data for an A Share of common stock outstanding throughout each of the
periods indicated.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE
PERIOD
YEAR 10/1/94 YEAR ENDED SEPTEMBER 30
ENDED THROUGH -------------------------------------------------------------------------------
2/29/96 2/28/95 1994* 1993++ 1992++ 1991++ 1990++ 1989++ 1988++
------- ------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $ 15.03 $ 14.86 $ 16.94 $ 16.12 $ 15.22 $ 14.79 $ 17.02 $ 17.56 $ 17.56
------- ------- ------- ------- ------- ------- ------- ------- -------
Income From Investment
Operations:
Net investment income 0.98 0.45 1.58 1.34 1.48 1.68 1.85 1.98 1.88
Net realized and
unrealized gains
(losses) on
investments 1.11 0.17 (2.06) 0.82 0.95 0.52 (2.15) (0.65) 0.13
------- ------- ------- ------- ------- ------- ------- ------- -------
Total income (loss)
from investment
operations 2.09 0.62 (0.48) 2.16 2.43 2.20 (0.30) 1.33 2.01
Less Dividends and
Distributions:
Dividends to
shareholders from net
investment income (0.98) (0.45) (1.58) (1.34) (1.53) (1.77) (1.93) (1.87) (2.01)
Dividends to
shareholders in
excess of net
investment income (0.05) -- (0.02) -- -- -- -- -- --
------- ------- ------- ------- ------- ------- ------- ------- -------
Total Dividends and
Distributions: (1.03) (0.45) (1.60) (1.34) (1.53) (1.77) (1.93) (1.87) (2.01)
------- ------- ------- ------- ------- ------- ------- ------- -------
Net change in net
asset value 1.06 0.17 (2.08) 0.82 0.90 0.43 (2.23) (0.54) 0.00
Net asset value, end
of period $ 16.09 $ 15.03 $ 14.86 $ 16.94 $ 16.12 $ 15.22 $ 14.79 $ 17.02 $ 17.56
========= ========= ========= ========= ========= ========= ========= ========= =========
Total Return+ 14.12% 4.26% (2.29)% 7.05% 13.36% 36.64% (15.11)% 13.95% 0.10%
Ratios/Supplemental
Data:
Net assets, end of
year (000) $32,387 $31,372 $33,046 $46,999 $44,642 $41,807 $40,528 $46,426 $47,881
Ratio of expenses to
average net assets 1.33%** 1.04%=** 0.91%** 1.02% 1.09% 1.09% 1.06% 1.05% 1.02%
Ratio of net
investment income to
average net assets 6.12%** 7.32%=** 7.85%** 8.14% 9.42% 11.16% 11.65% 11.35% 10.63%
Portfolio Turnover N/A N/A N/A 154.34% 251.97% 54.79% 83.92% 88.48% 133.29%
<CAPTION>
1987++ 1986++
------- -------
<S> <C> <C>
Net asset value,
beginning of period $ 17.72 $ 16.85
------- -------
Income From Investment
Operations:
Net investment income 2.17 2.11
Net realized and
unrealized gains
(losses) on
investments (0.17) 0.92
------- -------
Total income (loss)
from investment
operations 2.00 3.03
Less Dividends and
Distributions:
Dividends to
shareholders from net
investment income (2.16) (2.16)
Dividends to
shareholders in
excess of net
investment income -- --
------- -------
Total Dividends and
Distributions: (2.16) (2.16)
------- -------
Net change in net
asset value (0.16) 0.87
Net asset value, end
of period $ 17.56 $ 17.72
========= =========
Total Return+ (6.03)% 37.57%
Ratios/Supplemental
Data:
Net assets, end of
year (000) $47,561 $45,138
Ratio of expenses to
average net assets 1.12% 0.93%
Ratio of net
investment income to
average net assets 12.04% 11.79%
Portfolio Turnover 79.41% 112.80%
</TABLE>
- ---------------
+ The total return figures do not include the effect of the maximum 4.50%
sales charge on A Shares and are not annualized for the period October 1,
1994 through February 28, 1995.
++ The financial highlights for the years ended September 30, 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 Corporate Bond Fund.
** Reflects the Corporate Bond Fund's proportionate share of the Corporate Bond
Master Portfolio's expenses and fee waivers and expense reimbursements by
the Corporate Bond Master Portfolio's investment advisor and administrator
and the Corporate Bond 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) for the periods ended
February 29, 1996 and February 28, 1995, and 0.16% for the period ended
February 28, 1994, respectively. Annualized.
= Annualized.
N/A Not applicable.
9
<PAGE> 12
INTERMEDIATE BOND FUND
Selected data for an A Share of common stock outstanding throughout each of the
periods indicated:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE YEAR FOR THE YEAR FOR THE PERIOD
ENDED ENDED JANUARY 24, 1994
FEBRUARY 29, FEBRUARY 28, (COMMENCEMENT OF OPERATIONS)
1996 1995 THROUGH FEBRUARY 28 1994
------------ ------------ ----------------------------
<S> <C> <C> <C>
Net asset value per share, beginning of
period $ 9.44 $ 9.81 $ 10.00
------------ ------------ -----------
Income from Investment Operations:
Net investment income 0.59 0.59 0.08
Net realized and unrealized gains (losses)
on securities 0.33 (0.37) (0.19)
------------ ------------ -----------
Total income (loss) from investment
operations 0.92 0.22 (0.11)
Less Dividends and Distributions:
Dividends to shareholders from net
investment income (0.59) (0.59) (0.08)
Distributions to shareholders from net
realized gains on securities (0.02) -- --
------------ ------------ -----------
Total dividends and distributions (0.61) (0.59) (0.08)
Net change in net asset value 0.31 (0.37) (0.19)
------------ ------------ -----------
Net asset value per share, end of period $ 9.75 $ 9.44 $ 9.81
========== ========== ===========
Total Return++ 10.45% 2.27% (1.10)%
Ratios/Supplemental Data:
Net assets, end of period (000) $ 13,179 $ 1,964 $ 356
Ratio of expenses to average net assets* 0.27% 0.00% 0.00
Ratio of net investment income to
average net assets* 6.13% 6.43% 5.70%+
</TABLE>
- ---------------
* Reflects the Intermediate Bond Fund's proportionate share of the Intermediate
Bond Master Portfolio's expenses and fee waivers and expense reimbursements
by the Intermediate Bond Master Portfolio's investment adviser and
administrator and the Intermediate Bond 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 4.73%, 17.95% and 160.20%
(annualized) for the periods ended February 29, 1996, 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 on A
Shares.
10
<PAGE> 13
U.S. GOVERNMENT SECURITIES FUND
Selected data for an A Share of common stock outstanding throughout each of the
periods indicated:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED PERIOD
--------------------------------------------------------------------------------------- ENDED
FEBRUARY 29, FEBRUARY 28, FEBRUARY 28, FEBRUARY 28, FEBRUARY 29, FEBRUARY 28, FEBRUARY 28,
1996 1995 1994 1993 1992 1991 1990**
------------ ------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net asset value per
share, beginning of
period $ 9.31 $ 9.85 $ 10.21 $ 10.22 $ 9.88 $ 9.59 $ 9.62
------------ ------------ ------------ ------------ ------------ ------ ------
Income from Investment
Operations:
Net investment income 0.61 0.55 0.45 0.70 0.81 0.87 0.44
Net realized and
unrealized gains
(losses) on securities 0.16 (0.54) (0.11) 0.37 0.37 0.29 (0.03)
------------ ------------ ------------ ------------ ------------ ------ ------
Total income from
investment operations 0.77 0.01 0.34 1.07 1.18 1.16 0.41
------------ ------------ ------------ ------------ ------------ ------ ------
Less Dividends and
Distributions:
Dividends to
shareholders from net
investment income (0.61) (0.52) (0.45) (0.70) (0.81) (0.87) (0.44)
Distributions to
shareholders from net
realized gains on
securities (0.01) -- (0.16) (0.38) (0.03) -- --
Tax return of capital (0.03) (0.03) (0.09) -- -- -- --
------------ ------------ ------------ ------------ ------------ ------ ------
Total dividends and
distributions (0.65) (0.55) (0.70) (1.08) (0.84) (0.87) (0.44)
------------ ------------ ------------ ------------ ------------ ------ ------
Net change in net asset
value per share 0.12 (0.54) (0.36) (0.01) 0.34 0.29 (0.03)
------------ ------------ ------------ ------------ ------------ ------ ------
Net asset value per
share, end of period $ 9.43 $ 9.31 $ 9.85 $ 10.21 $ 10.22 $ 9.88 $ 9.59
============= ============= ============= ============= ============= ============= =============
Total return++ 8.47% 0.30% 3.40% 10.92% 12.45% 12.73% 4.28%P==(a)
Ratios/Supplemental
Data:
Net assets, end of
period (000) $ 89,491 $ 87,354 $157,984 $119,127 $100,444 $7,466 $3,562
Ratio of expenses to
average net assets*** 1.15% 1.15% 0.96% 0.51% 0.37% 0.39% 0.51%+
Ratio of net investment
income to average net
assets*** 6.36% 5.57% 4.45% 6.80% 7.60% 8.88% 9.06%+
Portfolio turnover rate 137% 189% 255% 252% 165% 80% 4%
</TABLE>
<TABLE>
<CAPTION>
YEAR PERIOD
ENDED ENDED
AUGUST 31, AUGUST 31,
1989 1988**
------------ ------------
<S> <C> <C>
Net asset value per
share, beginning of
period $ 9.50 $ 9.55
------ ------
Income from Investment
Operations:
Net investment income 0.86 0.56
Net realized and
unrealized gains
(losses) on securities 0.12 (0.05)
------ ------
Total income from
investment operations 0.98 0.51
------ ------
Less Dividends and
Distributions:
Dividends to
shareholders from net
investment income (0.86) (0.56)
Distributions to
shareholders from net
realized gains on
securities -- --
Tax return of capital -- --
------ ------
Total dividends and
distributions (0.86) (0.56)
------ ------
Net change in net asset
value per share 0.12 (0.05)
------ ------
Net asset value per
share, end of period $ 9.62 $ 9.50
============= =============
Total return++ 10.81%(a) 5.34%==(a)
Ratios/Supplemental
Data:
Net assets, end of
period (000) 2,986 $1,784
Ratio of expenses to
average net assets*** 0.70% --
Ratio of net investment
income to average net
assets*** 9.02% 9.46%+
Portfolio turnover rate 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.
*** Includes fee waivers and expense reimbursements. 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 0.00%, 0.04%, 0.59%, 0.75%, 3.91%, 6.87% (annualized),
4.49% and 28.66% (annualized), for the fiscal years or periods ended
February 28, 1995, February 28, 1994, February 28, 1993, February 29, 1992,
February 28, 1991, February 28, 1990, August 31, 1989 and August 31, 1988,
respectively. For the fiscal year ended February 29, 1996, such fee waivers
and expense reimbursements had the effect of reducing the ratio of expenses
to average net assets by 0.11% and increasing the ratio of net investment
income to average net assets by 0.08%. During the fiscal year ended February
29, 1996, the Fund received credits from its custodian for interest earned
on uninvested cash balances which were used to offset custodian fees and
expenses. If such credits had not occurred, the ratio of expenses to average
net assets (without fee waivers and/or expense reimbursements) would have
been 1.26%. The ratio of net investment income to average net assets was not
affected by such credits.
+ Annualized.
++ The total return figures listed do not include the effect of the maximum
4.50% sales charge on A Shares.
+++ 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.
11
<PAGE> 14
- --------------------------------------------------------------------------------
FUND INVESTMENTS
- --------------------------------------------------------------------------------
---------------------------------------------------------
INVESTMENT OBJECTIVES
The Funds seek current income consistent with reasonable investment risk. The
Intermediate Bond Fund also seeks capital appreciation, while the Corporate Bond
Fund seeks to maximize current income and the U.S. Government Securities Fund
strives to maintain principal.
The CORPORATE BOND FUND seeks to achieve its objective through investment
primarily in a diversified portfolio of investment grade corporate debt
securities.
The INTERMEDIATE BOND 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 Intermediate Bond Fund may be appropriate for investors who
want interest income from a diversified portfolio of debt securities and capital
appreciation.
The U.S. GOVERNMENT SECURITIES 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 U.S. Government
Securities Fund may be appropriate for investors who want: (1) income from U.S.
Government securities to help meet today's expenses and (2) relative stability
of investment but are willing to accept some price and yield variations.
THE CORPORATE BOND AND INTERMEDIATE BOND FUNDS SEEK TO ACHIEVE THEIR RESPECTIVE
INVESTMENT OBJECTIVES BY INVESTING ALL OF THEIR INVESTABLE ASSETS IN THEIR
RESPECTIVE MASTER PORTFOLIOS. EACH MASTER PORTFOLIO HAS THE SAME INVESTMENT
OBJECTIVE AS ITS RESPECTIVE FUND. EITHER FUND MAY WITHDRAW ITS INVESTMENT IN ITS
RESPECTIVE MASTER PORTFOLIO AT ANY TIME, IF THE BOARD OF DIRECTORS OF THE
COMPANY DETERMINES THAT SUCH ACTION IS IN THE BEST INTERESTS OF THAT PARTICULAR
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 THAT
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 ITS
MASTER PORTFOLIO.
BECAUSE THE INVESTMENT CHARACTERISTICS OF THE CORPORATE BOND AND INTERMEDIATE
BOND FUNDS WILL CORRESPOND TO THOSE OF THE RESPECTIVE CORPORATE BOND AND
INTERMEDIATE BOND MASTER PORTFOLIOS, THE FOLLOWING IS A DISCUSSION OF THE
VARIOUS INVESTMENTS OF AND TECHNIQUES EMPLOYED BY THE CORPORATE BOND AND
INTERMEDIATE BOND MASTER PORTFOLIOS AND THE U.S. GOVERNMENT SECURITIES FUND.
WHILE EACH MASTER PORTFOLIO, AND THE U.S. GOVERNMENT SECURITIES FUND, STRIVES TO
ATTAIN ITS RESPECTIVE INVESTMENT OBJECTIVE, THERE CAN BE NO ASSURANCE THAT IT
WILL BE ABLE TO DO SO.
---------------------------------------------------------
TYPES OF INVESTMENTS
CORPORATE BOND MASTER PORTFOLIO --
GENERAL INVESTMENTS
The Corporate Bond Master 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
12
<PAGE> 15
convertible security may be retained for a period of time pending their orderly
disposition.
The Corporate Bond Master 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 Corporate Bond Master
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
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 Corporate Bond Master 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 Corporate Bond Master Portfolio may invest up to 25% of its total assets in
lower quality, higher yielding securities, often referred to as "junk bonds".
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.
For temporary defensive purposes, or at times when Bank of America believes such
a position is warranted by uncertain or unusual market conditions, the Corporate
Bond Master 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 Corporate Bond Master Portfolio
invests in such instruments, it will not be invested in accordance with the
investment policies designed for it to realize its investment objective.
In the event that the rating of any security held by the Corporate Bond Master
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 Corporate Bond Master
Portfolio's net asset value per share is expected to vary with changes in
interest rates. The value of the Corporate Bond
13
<PAGE> 16
Master 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 Corporate Bond Master Portfolio's earnings. In an effort
to preserve the capital of the Corporate Bond Master Portfolio when interest
rates are generally rising, Bank of America may shorten the average weighted
maturity of the securities in the Corporate Bond Master 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. Because securities with
shorter maturities, however, generally have a lower yield to maturity, the
Corporate Bond Master 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.
INTERMEDIATE BOND MASTER PORTFOLIO --
GENERAL INVESTMENTS
The Intermediate Bond Master 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. Under normal circumstances, at least 65% of the Intermediate Bond
Master Portfolio's net assets will be invested in investment grade bonds.
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 S&P, Duff & Phelps Credit Rating Co. ("D&P") or Fitch or Baa or
better by Moody's. While bonds with ratings of BBB or Baa 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 Intermediate Bond Master Portfolio may invest.
Corporate bonds will be diversified by investment in bonds issued by different
companies in different industries.
Under normal market and interest rate conditions, the investment adviser expects
that the Fund's average portfolio duration generally will be approximately the
same as the Lehman Brothers Intermediate Government/Corporate Bond Index. This
means that the Fund's net asset value fluctuation is expected to be similar to
the price fluctuation of the Lehman Brothers Intermediate Government/Corporate
Bond Index. Unlike maturity which indicates when the security repays principal,
"duration" incorporates the cash flows of all interest and principal payments
and the proceeds from calls and redemptions over the life of the security. These
payments are multiplied by the number of years over which they are received to
produce a value that is expressed in years (i.e., duration). In addition, under
normal market and interest rate conditions, the investment adviser expects that
the Fund's average portfolio maturity will be between three and six years.
Mortgage-backed securities, such as Government National Mortgage Association
("GNMA"), Federal National Mortgage Association ("FNMA") and Federal Home Loan
Mortgage Corporation ("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 Intermediate Bond Master 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 of principal
resulting from the refinancing of the underlying mortgages. The rate of such
prepayments of principal, and hence the life of the security, will primarily be
a function of current
14
<PAGE> 17
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.
The Intermediate Bond Master 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 Intermediate Bond Master 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
Intermediate Bond Master 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 Intermediate Bond Master 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 Intermediate Bond Master Portfolio, and capital
appreciation the secondary basis. The Intermediate Bond Master Portfolio will
attempt to achieve capital appreciation by moderate market timing in response to
anticipated interest rate changes. The Intermediate Bond Master 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.
As with the Corporate Bond Master Portfolio, the value of the securities held in
the Intermediate Bond Master 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 net assets of the Intermediate Bond Master Portfolio may be held in cash
equivalents as a temporary defensive strategy. To the extent that the
Intermediate Bond Master Portfolio invests in such instruments, it will not be
invested in accordance with the investment policies designed for it to realize
its investment objective. As described immediately above under "Corporate Bond
Master Portfolio" such cash equivalents may include 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.
U.S. GOVERNMENT SECURITIES FUND --
GENERAL INVESTMENTS
Certificates issued by GNMA ("GNMA Certificates") are backed by the full faith
and credit of the U.S. Government. Securities like those
15
<PAGE> 18
included in the U.S. Government Securities Fund's portfolio have historically
had a very low risk of loss of principal if held to maturity. As with the
Corporate Bond and Intermediate Bond Master Portfolios, due to changes in
interest rates, the market value of these securities and thus the U.S.
Government Securities Fund's net asset value per share is expected to vary. The
value of the U.S. Government Securities 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 U.S. Government Securities Fund's
dividends.
As a fundamental policy, the U.S. Government Securities 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 and Considerations" below. Examples of other types of U.S. Government
obligations that the U.S. Government Securities 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 U.S. Government Securities
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 or
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 U.S. Government Securities 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 U.S. Government Securities Fund
pays for its own operations). The U.S. Government Securities Fund may also hold
cash when Bank of America determines such a defensive position is warranted in
light of market conditions.
FUNDAMENTAL LIMITATIONS
The investment objective of the Portfolios may not be changed without a vote by
the holders of a majority of the outstanding shares of a Portfolio or of the
outstanding interests of a 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 Corporate Bond Fund nor the Corporate Bond Master 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. Make loans, although it may invest in debt securities, enter into repurchase
agreements and lend its portfolio securities as discussed herein; or
3. 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.
The Intermediate Bond Fund and the Intermediate Bond Master Portfolio may not:
1. Purchase securities (except securities issued by the U.S. Government, its
agencies or instrumentalities) if, as a result, more than 5% of its
16
<PAGE> 19
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 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.
The U.S. Government Securities Fund may not:
1. Under normal circumstances invest less than 65% of its total assets in GNMA
Certificates.
2. Make loans, although it may invest in debt securities, enter into repurchase
agreements and lend its portfolio securities.
3. Purchase or sell commodities or commodity contracts, or invest in oil, gas or
mineral exploration or development programs, except that: (a) 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; and (b) the Fund may purchase and sell
futures contracts and options on futures contracts.
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 fundamental investment limitations is set out in full in the
Statement of Additional Information.
OTHER INVESTMENT PRACTICES AND CONSIDERATIONS
GNMA CERTIFICATES. The Intermediate Bond Master Portfolio and the U.S.
Government Securities Fund may invest in GNMA Certificates. These 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 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 U.S. Government Securities Fund receives monthly payments
of principal and interest (less the fee mentioned above) from its investments in
GNMA Certificates. The actual yield on the Intermediate
17
<PAGE> 20
Bond Master Portfolio's and the U.S. Government Securities Fund's investments,
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 to
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 U.S. Government Securities 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 U.S.
Government Securities 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 Intermediate Bond Master Portfolio and the U.S. Government
Securities Fund will purchase GNMA Certificates known as "modified pass-through"
certificates, on which timely payment of principal and interest is guaranteed.
The Intermediate Bond Master Portfolio and the U.S. Government Securities 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 U.S. Government Securities 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.
ASSET-BACKED SECURITIES. The Corporate Bond and Intermediate Bond Master
Portfolios 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 Corporate Bond Master
Portfolio will either be issued or guaranteed by a U.S. Government entity or
rated
18
<PAGE> 21
AAA by S&P, Aaa by Moody's or have an equivalent rating from any other rating
agency.
FOREIGN SECURITIES. Subject to its investment objective and the policies stated
above, the Corporate Bond and Intermediate Bond Master Portfolios may invest in
securities of foreign issuers that may or may not be publicly traded in the
United States, such as 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 Corporate Bond and Intermediate Bond Master Portfolios to
invest no more than 20% and 25% of their respective net assets (at the time of
purchase) in foreign securities.
RISKS RELATED TO LOWER-RATED SECURITIES. While any investment carries some
risk, some of the risks associated with lower-rated securities are different
from the risks associated with investment grade securities. The risk of loss
through default is greater because lower-rated securities are usually unsecured
and are often subordinate to an issuer's other obligations. Additionally, the
issuers of these securities frequently have high debt levels and are thus more
sensitive to difficult economic conditions, individual corporate developments
and rising interest rates. Consequently, the market price of these securities,
and the net asset value of the Corporate Bond Master Portfolio's shares, may be
quite volatile.
RELATIVE YOUTH OF LOWER-RATED SECURITIES' MARKET. Because the market for
lower-rated securities, at least in its present size and form, is relatively
new, there remains some uncertainty about its performance level under adverse
market and economic environments. An economic downturn or increase in interest
rates could have a negative impact on both the market for lower-rated securities
(resulting in a greater number of bond defaults) and the value of lower-rated
securities held in the Corporate Bond Master Portfolio's portfolio.
SENSITIVITY TO INTEREST RATE AND ECONOMIC CHANGES. The economy and interest
rates can affect lower-rated securities differently than other securities. For
example, the prices of lower-rated securities are more sensitive to adverse
economic changes or individual corporate developments than are the prices of
higher-rated investments.
Also, during an economic downturn or a period in which interest rates are rising
significantly, highly leveraged issuers may experience financial difficulties,
which, in turn, would adversely affect their ability to service their principal
and interest payment obligations, meet projected business goals and obtain
additional financing.
If the issuer of a security defaults, the Corporate Bond Master Portfolio may
incur additional expenses to seek recovery. In addition, periods of economic
uncertainty would likely result in increased volatility for the market prices of
lower-rated securities as well as the Corporate Bond Master Portfolio's net
asset value. In general, both the prices and yields of lower-rated securities
will fluctuate.
LIQUIDITY AND VALUATION. In certain circumstances it may be difficult to
determine a security's fair value due to a lack of reliable objective
information. Such instances occur when there is not an established secondary
market for the security or the security is thinly traded. As a result, the
Corporate Bond Master Portfolio's valuation of a security and the price it is
actually able to obtain when it sells the security could differ.
Adverse publicity and investor perceptions, whether or not based on fundamental
analysis, may decrease the values and liquidity of lower-rated securities held
by the Corporate Bond Master Portfolio, especially in a thinly traded market.
Illiquid or restricted securities held by the Corporate Bond Master Portfolio
may involve special registration responsibilities, liabilities and costs, and
could involve other liquidity and valuation difficulties.
CONGRESSIONAL PROPOSALS. Current laws, as well as pending proposals, may have a
material impact on the market for lower-rated securities.
CREDIT RATINGS. S&P, Moody's and other nationally recognized statistical rating
organizations eval-
19
<PAGE> 22
uate the safety of a lower-rated security's principal and interest payments, but
do not address market value risk. Because the ratings of the rating agencies may
not always reflect current conditions and events, in addition to using
recognized rating agencies and other sources, Bank of America performs its own
analysis of the issuers whose lower-rated securities the Corporate Bond Master
Portfolio purchases. Because of this, the Corporate Bond Master Portfolio's
performance may depend more on the investment adviser's own credit analysis than
is the case for mutual funds investing in higher rated securities.
In selecting lower-rated securities, Bank of America considers factors such as
those relating to the creditworthiness of issuers, the ratings and performance
of the lower-rated securities, the protections afforded the lower-rated
securities and the diversity of the Corporate Bond Master Portfolio's portfolio.
Bank of America continuously monitors the issuers of lower-rated securities held
in the Corporate Bond Master Portfolio's portfolio for their ability to make
required principal and interest payments, as well as in an effort to control the
liquidity of the Corporate Bond Master Portfolio's portfolio so that it can meet
redemption requests.
If a portfolio security undergoes a rating revision, the Corporate Bond Master
Portfolio may continue to hold the security if Bank of America determines such
retention is warranted.
For your information, set forth below is the average distribution of ratings at
value for the Corporate Bond Master Portfolio's portfolio securities (including
commercial paper and nonconvertible bonds) for its last fiscal year:
<TABLE>
<CAPTION>
MOODY'S INVESTORS PERCENTAGE
SERVICE, INC. OF VALUE
- ------------------------------ ----------
<S> <C> <C>
Aaa 0.00%
Aa 11.93%
A 62.75%
Baa 25.32%
Ba or lower 0.00%
Not Rated 0.00%
Comparable to A 0.00%
Comparable to Baa 0.00%
Comparable to Ba or lower 0.00% 0.00%
----------
100.00%
========
</TABLE>
<TABLE>
<CAPTION>
STANDARD & POOR'S PERCENTAGE
CORPORATION OF VALUE
- ------------------------------ ----------
<S> <C> <C>
AAA 6.60%
AA 11.93%
A 54.85%
BBB 26.62%
BB or lower 0.00%
Not Rated 0.00%
Comparable to A 0.00%
Comparable to BBB 0.00%
Comparable to BB or lower 0.00% 0.00%
----------
100.00%
========
</TABLE>
These ratings are described in the Appendix to this Prospectus.
RISKS ASSOCIATED WITH HIGH YIELD/HIGH RISK SECURITIES, FOREIGN SECURITIES AND
ASSET-BACKED SECURITIES. A Master 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 rates and the possibility of adverse changes 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
20
<PAGE> 23
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 a Master Portfolio may be subject to greater price fluctuation than
securities of U.S. companies.
An asset-backed security's 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 mortgages, loans or
receivables. The proceeds of prepayments received by a Master Portfolio must be
reinvested in securities whose yields reflect interest rates prevailing at the
time. Thus, a Master 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 a Master Portfolio's experiencing difficulty
in valuing or liquidating such securities.
OPTIONS. The Corporate Bond Master 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. The Corporate Bond Master Portfolio's options transactions will be
limited as follows: a) not more than 5% of the total assets of the Corporate
Bond Master Portfolio may be invested in options; b) the obligations of the
Corporate Bond Master Portfolio under put options it writes may not exceed 50%
of its net assets; and c) the aggregate premiums on all options purchased by the
Corporate Bond Master Portfolio may not exceed 25% of its net assets. The
Intermediate Bond Master Portfolio may purchase put and call options on listed
securities so long as the aggregate of the premiums paid for options does not
exceed 2% of the net assets of the Intermediate Bond Master Portfolio. The
Intermediate Bond Master Portfolio may not write put options but may write fully
covered call options as long as the Intermediate Bond Master 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 Intermediate Bond Master Portfolio.
The U.S. Government Securities 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 U.S. Government Securities Fund will not exceed 25% of its total assets
(taken at market value on the date written) and options purchased by the U.S.
Government Securities Fund will not exceed 5% of its total assets.
Call options written by a Portfolio gives 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 a Portfolio is "covered" if the particular 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 a 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 than the exercise price of the call written if the difference is
maintained by the Portfolio in cash, government securi-
21
<PAGE> 24
ties or other high grade debt obligations in a segregated account with its
custodian.
Put options written by the Corporate Bond Master Portfolio give the holder the
right to sell the underlying security to the particular Portfolio at a stated
exercise price. A put option written by the Corporate Bond Master Portfolio is
"covered" if that 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 Portfolios may purchase put options to hedge against a decline in the value
of a portfolio. By using put options in this way, a 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. A Portfolio may
purchase call options to hedge against an increase in the price of securities or
indexes 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 a Portfolio upon exercise of the option. Unless the price of
the underlying security rises sufficiently, the option may expire worthless to
the Portfolio.
The restrictions discussed in "Options" do not apply to options on futures
contracts.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS. The Corporate Bond
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 and may purchase and write put and call options to buy or sell
futures contracts.
The Intermediate Bond Master Portfolio may purchase and sell interest rate
futures contracts (and 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 U.S. Government Securities 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 U.S. Government Securities Fund holds in its portfolio or intends to
sell.
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 securities
underlying the index is made. Options on futures contracts written or purchased
by a 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. A Portfolio may not purchase or
sell a futures contract or purchase a related option
22
<PAGE> 25
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 that Portfolio's total assets
(after taking into account certain technical adjustments). In order to prevent
leverage in connection with the purchase of futures contracts or call options
thereon by a 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, a 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 Corporate Bond Master Portfolio may enter
into interest rate and currency swaps for hedging purposes. The Corporate Bond
Master Portfolio will typically use interest rate swaps to shorten the effective
duration of its portfolio. An interest rate swap involves the exchange of a
Portfolio 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 Corporate Bond Master Portfolio 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 is
designed to protect the Corporate Bond Master Portfolio 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 Corporate Bond Master Portfolio will only enter into interest rate swaps on
a net basis, which means that the two payment streams are netted out, with the
Corporate Bond Master 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 Corporate Bond Master Portfolio is contractually
obligated to make. If the other party to an interest rate swap defaults, the
Corporate Bond Master Portfolio's risk of loss consists of the net amount of
interest payments that the Corporate Bond Master 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 are highly specialized activities which involve 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, a 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. A 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 securities are relatively new and still
developing. If a secondary market does not exist with respect to an option
purchased or written by a 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 a Portfolio would have to be
exercised in order for that Portfolio to realize any profit and (ii) a Portfolio
may not be able to sell portfolio securities covering an option written by it
until the option expires or it delivers
23
<PAGE> 26
the underlying futures contract upon exercise. Therefore, no assurance can be
given that a Portfolio will be able to utilize these instruments effectively for
the purposes set forth above.
PARTICIPATIONS. The Corporate Bond Master Portfolio may purchase from domestic
financial institutions participation interests in high quality debt securities.
A participation interest gives a 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 Corporate Bond Master 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 Corporate Bond Master
Portfolio will have the right to demand payment, on not more than 30 days'
notice, for all or any part of that Portfolio's participation interest in the
security, plus accrued interest. As to these instruments, the Corporate Bond
Master 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
Corporate Bond Master 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 Corporate Bond Master Portfolio
to obtain repayment might depend on the issuing financial institution.
VARIABLE RATE INSTRUMENTS. The Intermediate Bond Master Portfolio may invest in
variable and floating rate instruments, which may include master demand notes.
Although payable on demand by the Intermediate Bond Master 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 or the equivalent by another nationally recognized statistical rating
organization ("NRSRO"), (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. Each of the Portfolios may invest in securities
issued by other investment companies. The Portfolios may invest in securities of
other investment companies which seek to maintain a $1.00 net asset value per
share (i.e., "money market funds") (including money market funds advised by Bank
of America). The Intermediate Bond Master Portfolio may invest in money market
funds (including money market funds advised by Bank of America) which invest in
short-term debt securities, and the U.S. Government Securities Fund may invest
in money market funds eligible for investment by national banks that invest in
U.S. Government agency securities. No more than 10% of the value of each
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; except that if a pending exemptive order is granted by the SEC, with
respect to the investment in a money market mutual fund advised by Bank of
America, each of the Portfolios is permitted to invest the greater of 5% of its
respective net assets or $2.5 million. In addition, the Portfolios may hold no
more than 3% of the outstanding voting stock of any other investment Company. As
a shareholder of another investment company, the Portfolios would bear, along
with other shareholders, their pro rata portion of the other investment
company's expenses, including advisory fees.
REPURCHASE AGREEMENTS. The Portfolios may buy securities subject to the
seller's agreement to repurchase them at an agreed upon time and
24
<PAGE> 27
price. These transactions are known as repurchase agreements. The Portfolios
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 for the Portfolios 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 Portfolios would be exposed to possible loss due to adverse market action or
delays connected with the disposition of the underlying obligations.
The Intermediate Bond Master Portfolio will only enter into repurchase
agreements with a bank if it has a commercial paper rating of A-2 or better by
S&P or Prime-2 or better by Moody's, or the equivalent from another NRSRO or a
registered broker-dealer. Repurchase agreements maturing in more than seven days
are considered illiquid investments and investment in such repurchase agreements
along with any other illiquid securities will not exceed 10% of the value of the
net assets of the Intermediate Bond Master Portfolio. The Intermediate Bond
Master Portfolio will only enter into repurchase agreements for debt obligations
issued or guaranteed by the U.S. Government, its agencies or instrumentalities,
certificates of deposit, bankers' acceptances or commercial paper.
Repurchase agreements are considered to be loans under the Investment Company
Act of 1940 (the "1940 Act").
REVERSE REPURCHASE AGREEMENTS. The Portfolios may borrow money for temporary
purposes by entering into transactions called reverse repurchase agreements.
Under these agreements a 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 a 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 Bank of
America to make sure that an appropriate value is maintained. Reverse repurchase
agreements involve the risk that the value of portfolio securities a 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 Portfolios 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 a Portfolio's outstanding shares. A Portfolio will only
enter into reverse repurchase agreements to avoid the need to sell portfolio
securities to meet redemption requests during unfavorable market conditions.
The Intermediate Bond Master Portfolio will only enter into reverse repurchase
agreements with a bank if it has a commercial paper rating of A-2 or better by
S&P or Prime-2 or better by Moody's, or the equivalent from another NRSRO.
WHEN-ISSUED PURCHASES, FORWARD COMMITMENTS AND DELAYED SETTLEMENTS. The
Portfolios may purchase securities on a "when-issued" basis and purchase or sell
securities on a "forward commitment" basis. Additionally, the Corporate Bond
Master Portfolio and U.S. Government Securities Fund may purchase or sell
securities on a "delayed settlement" basis. When-issued and forward commitment
transactions, which involve a commitment by a Portfolio to purchase or sell
particular securities with payment and delivery taking place at a future date
(perhaps one or two months later), permit a 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 Portfolios will set aside in
a segre-
25
<PAGE> 28
gated 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 a 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, a 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 particular 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 by the
particular Portfolio if, as a result, the value of securities loaned by the
Corporate Bond Master Portfolio, the U.S. Government Securities Fund or the
Intermediate Bond Master Portfolio exceeds 30%, 30% and 10% of their respective
total assets. Securities loans will be fully collateralized.
ILLIQUID SECURITIES. The Corporate Bond and Intermediate Bond Master Portfolio
will not invest more than 15% of the value of its net 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 Corporate Bond and
Intermediate Bond Master Portfolio will take steps to reduce the aggregate
amount of illiquid securities as soon as is reasonably practicable. The
Corporate Bond Master 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 that Portfolio or Bank of
America (pursuant to guidelines adopted by the Board), will not be subject to
the Corporate Bond Master Portfolio's 15% limitation on illiquid securities.
This investment practice could have the effect of increasing the level of
illiquidity in the Corporate Bond Master Portfolio during any period that
institutional buyers under Rule 144A became uninterested in purchasing these
restricted securities.
PORTFOLIO TRANSACTIONS. Investment decisions for the Portfolios 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 Portfolios. When a
purchase or sale of the same security is made at substantially the same time on
behalf of the Portfolios 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 a Portfolio or the size of the
position obtained or sold by a 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 Portfolios'
distributor to the extent permitted by law), provided it believes the quality of
the transaction and the price to a Portfolio are not less favorable than what
they would be with any other qualified firm.
PORTFOLIO TURNOVER. The Portfolios' 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. 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
26
<PAGE> 29
are realized, distributions from those gains may be ordinary income for federal
tax purposes (see "Tax Information"). The Intermediate Bond Master Portfolio's
annual portfolio turnover is not expected to exceed 300%, although the
Portfolios' annual portfolio turnover rates will not be a limiting factor in
making investment decisions.
MASTER-FEEDER STRUCTURE. The Corporate Bond and Intermediate Bond Funds are
open-end investment portfolios that seek to achieve their investment objective
by investing all of their investable assets in each Fund's respective Master
Portfolio which has the same investment objective. A Fund may withdraw its
investment in the particular Master Portfolio at any time if the Board of
Directors of the Company determines that it is in the best interest of a 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 that 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 its
Master 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 Funds and the Master
Portfolios.
The Master Portfolios are separate series of Master Investment Trust, Series I
(the "Master Trust"), which is organized as a business trust under the laws of
Delaware. The Funds and other entities that may invest in the Master Portfolios
from time to time (e.g., other investment companies and commingled trust funds)
will each be liable for all obligations of their Master Portfolio. However, the
risk of a Fund's incurring financial loss on account of such liability is
limited to circumstances in which both inadequate insurance exists and a
Portfolio itself is unable to meet its obligations. Accordingly, the Company's
Board of Directors believes that neither a Fund nor its shareholders will be
adversely affected by reason of that Fund's investing in the particular Master
Portfolio. As stated above, the investment objective of a Fund and the
particular Master 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 Master Portfolio, without the vote of its interestholders. Whenever a Fund
is requested to vote on matters pertaining to the investment objective or a
fundamental policy of the corresponding Master 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. A 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 Master Portfolio could control the results of voting at the Master Portfolio
level in certain instances (e.g. a change in fundamental policies by the Master
Portfolio which was not approved by the Fund's shareholders). This could result
in a Fund's withdrawal of its investment in the Master 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 Master Portfolio could have an
adverse effect on the performance of the Master Portfolio and its 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 a
Master Portfolio will cause the Master Portfolio to terminate automatically in
120 days unless a Fund and any other investors in that Master Portfolio
unanimously agree to continue the business of the Master Portfolio. As a 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 Master
Portfolio, the Board of Directors of the Company would need to consider
alternative arrangements for that Fund, such as those described above. The
policy of a Fund, and other similar investment companies, to invest their
investable assets in trusts such as its corresponding Master Portfolio is a
relatively recent development in the mutual fund industry and,
27
<PAGE> 30
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
Master Portfolio which may have higher or lower fees and expenses than those of
its corresponding Fund and which may therefore have different performance
results than that Fund. Information concerning whether an investment in a Master
Portfolio may be available through another entity investing in a Master
Portfolio may be obtained by calling 800-332-3863.
28
<PAGE> 31
- --------------------------------------------------------------------------------
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 FUNDS?
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.
The minimum investment is $200 for BankAmericard
holders with an appropriate award certificate from
BankAmeriChoice Program.
** A regular IRA must be opened in conjunction with this account.
- ---------------------------------------------------------
WHAT ALTERNATIVE SALES ARRANGEMENTS
ARE AVAILABLE?
The Funds issue two classes of shares. A Shares are sold to investors choosing
the front-end sales charge alternative unless an exemption to the sales charge
is otherwise available. K Shares are neither subject to a front-end sales charge
nor a contingent deferred sales charge. K Shares, however, are sold only to: (a)
businesses and other organizations that participate in the Daily Advantage(R)
Program sponsored by Bank of America; (b) individuals investing proceeds from a
redemption of shares from another open-end investment company on which such
individual paid a front-end sales load if (i) such redemption occurred within 30
days prior to the purchase order, and (ii) such other open-end investment
company was not distributed and advised by Concord Financial Group, Inc. and
Bank of America, respectively, or their affiliates; and (c) accounts opened for
IRA rollovers from a 401(k) plan in which the assets were held in any Pacific
Horizon or Time Horizon Fund and subsequent purchases into an IRA rollover
account opened as described above, so long as the original IRA rollover account
remains open on the Company's books. The two classes of shares in each Fund
represent interests in the same portfolio of investments of the particular Fund,
have the same rights and are identical in all respects except as discussed
below. A Shares bear the expenses of a Shareholder Services Plan. K Shares bear
the expenses of a Distribution Plan and Administrative and Shareholder Services
Plan and have exclusive voting rights with respect to such Plans. The two
classes also have different exchange privileges, as described below. The net
income attributable to A and K Shares and the dividends payable on A and K
Shares will be reduced by the amount of the: (a) Shareholder Services Plan fees
attributable to A Shares, (b) Distribution Plan fees and Administrative and
Shareholder Services Plan fees attributable to K Shares, respectively, and (c)
the incremental expenses associated with such Plans.
HOW ARE SHARES PRICED?
Shares are purchased at their public offering price, which is based upon each
class' net asset value per share plus a front-end sales load on A Shares. Each
class calculates its net asset value ("NAV") as follows:
(Value of Assets Attributable to the Class) -
(Liabilities Attributable to the Class)
-------------------------------------------------------------
NAV =
Number of Outstanding Shares of the Class
29
<PAGE> 32
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 Master Portfolios' and the U.S. Government Securities 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 Master Portfolios or U.S.
Government Securities Fund, as appropriate, pursuant to procedures adopted by
the Master Portfolios' Board of Trustees or the U.S. Government Securities
Fund's Board of Directors. 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 price and yield
information, call (800) 346-2087.
The per share net asset values of A and K Shares will diverge due to the
different distribution and other expenses borne by the classes.
A SHARES SALES LOAD. The front-end sales load ("front-end sales load," "sales
load," "front-end sales charge," or "sales charge") for the A Shares of the
Funds begins at 4.50% and may decrease as the amount you invest increases, as
shown in the following chart:
---------------------------------------------------------
<TABLE>
<CAPTION>
DEALER'S
REALLOWANCE
AS A % OF AS A % OF AS A % OF
AMOUNT OF OFFERING NET 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 $1,000,000 1.00 1.01 0.90
$1,000,000 or more** 0.00 0.00 0.00
</TABLE>
* Dealer's reallowance may be changed periodically.
** See "Large Purchase Exemption" below for a description of the contingent
deferred sales charge.
From time to time, the Funds' 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 Funds.
LARGE PURCHASE EXEMPTION. The contingent deferred sales load discussed under
the Large Purchase Exemption does not apply to A Shares under the Daily
Advantage(R) or Advantage Plus(TM) Programs. To the extent that no other A share
no-load exemption is available, the foregoing schedule of sales loads does not
apply to purchases of A Shares of $1,000,000 or more or to purchases of A Shares
if the aggregate value of the A Shares that you beneficially own in any Pacific
Horizon or Time Horizon Fund equals or exceeds $1,000,000. If you accumulate
$1,000,000 or more of A Shares, on any additional purchase of A Shares, the
contingent deferred sales load described below will apply to such A Shares when
they are redeemed. In addition, if a customer purchases $1,000,000 or more of A
Shares and redeems such shares, a contingent deferred sales load will be imposed
as follows:
<TABLE>
<CAPTION>
NUMBER OF YEARS APPLICABLE CONTINGENT
ELAPSED SINCE PURCHASE DEFERRED SALES LOAD
- ---------------------- ----------------------
<S> <C>
1 year 1.0%
2 years 0.5%
3 years None
</TABLE>
30
<PAGE> 33
The contingent deferred sales load is imposed on the lesser of the current
market value or the cost of the shares being redeemed. This means that this
charge will not be imposed upon increases in net asset value above the initial
purchase price or upon reinvested dividends. In determining whether a contingent
deferred sales charge is applicable to a redemption of such shares, the
calculation will be made in a manner that results in the lowest possible rate.
It will be assumed that the redemption is made first of amounts representing
shares acquired pursuant to the reinvestment of dividends and distributions;
then of amounts representing the increase in net asset value of your holdings of
shares above the total amount of payments for the purchase of shares during the
preceding 2 years; then of amounts representing the cost of shares held beyond
the applicable contingent deferred sales charge period; and finally, of amounts
representing the cost of the shares held for the longest period of time. In
addition, no contingent deferred sales load will be imposed on redeemed A Shares
if a front-end sales load had been previously imposed on such shares. Although
no front-end sales load will be paid on Large Purchase Exemptions, the
Distributor will compensate brokers whose customers purchase shares at the
following rates: 1.00% of the amount under $3 million, 0.50% of the next $47
million and 0.25% thereafter.
K SHARES. Bank of America will compensate Affiliated Brokers for their
customers who invested in a Fund and are participants in the Daily Advantage(R)
Program. The Affiliated Brokers will be compensated by Bank of America at the
rate of 1.00% of the amount under $3 million, 0.50% of the next $47 million and
0.25% thereafter of combined Pacific Horizon Funds' and Time Horizon Funds' K
Shares in each Daily Advantage(R) Program.
WHEN NO FRONT-END 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 a registered investment adviser purchasing shares
for its own account or for an account for which it is authorized to make
investment decisions;
- - 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
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;
- - 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 a 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;
- - accounts open as of July 1, 1996, which were exempt from front-end sales loads
at the time the accounts were opened and where those exemptions are no longer
available for new account holders, so long as the accounts remain 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 shares of a Fund, 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, minor
children and grandchildren, as well as members of the Board of Directors of
Bank of America or any of its affiliates;
31
<PAGE> 34
- - registered representatives or full-time employees of broker-dealers having
agreements with the Funds' distributor pertaining to the sale of shares of a
Fund (and their spouses and minor children) to the extent permitted by such
organizations; and
- - holders of the BankAmericard with an appropriate award certificate from the
BankAmeriChoice Program (initial award only; a front-end sales load will apply
to subsequent purchases).
WHEN NO CONTINGENT DEFERRED SALES CHARGE IS APPLIED. To receive one of the
first three exemptions listed below, you must explain the status of your
redemption at the time you redeem your shares. The contingent deferred sales
charge with respect to A Shares purchased under the Large Purchase Exemption is
not charged on (1) exchanges described under "Shareholder Services -- Can I
Exchange My Investment From One Fund to Another?," (2) redemptions in connection
with minimum required distributions from IRA accounts due to a shareholder
reaching age 70- 1/2; (3) redemptions in connection with a shareholder's death
or disability (as defined in the Internal Revenue Code); and (4) involuntary
redemptions as a result of an account's net asset value remaining below $500
after sixty days' written notice. In addition, no contingent deferred sales
charge is charged on shares acquired through the reinvestment of dividends or
distributions.
RIGHTS OF ACCUMULATION. When buying A Shares in Pacific Horizon Funds, your
current aggregate investment determines the front-end 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 or Time Horizon Fund on which you paid a front-end 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). You may
also aggregate your investment in Pacific Horizon Funds and Time Horizon Funds
in order to qualify for the Large Purchase Exemption.
To qualify for a reduced sales load on A Shares, 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 Funds' distributor)
must notify the Funds' 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 A Shares carrying a sales load of the
Funds, the Pacific Horizon California Tax-Exempt Bond Fund, the Pacific Horizon
Aggressive Growth 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 additional A Shares of a
Fund carrying a sales load with a current value of $10,000, the sales 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 on A Shares 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 within a period of 13 months, beginning up to 90 days prior to the date of
the Letter's execution. A Shares carrying a sales load 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. Shares of Time Horizon Funds may be included when
determining reduced sales loads under the letter of intent program.
32
<PAGE> 35
While signing a Letter of Intent does not bind you to purchase, or the Company
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 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 DO I DECIDE WHETHER TO BUY A OR K SHARES?
You should determine whether under your particular circumstances it is more
advantageous to invest in A Shares and incur a front-end sales charge and an
ongoing Shareholder Services Plan fee; or invest in K Shares and incur neither a
front-end sales charge nor a contingent deferred sales charge. K Shares do incur
fees under a Distribution Plan and/or an Administrative and Shareholder Services
Plan. K Shares of a Fund, however, are only available to: (a) businesses or
other organizations that participate in the Daily Advantage Program sponsored by
Bank of America; (b) individuals investing proceeds from a redemption of shares
from another open-end investment company on which such individual paid a front-
end sales load if (i) such redemption occurred within 30 days prior to the
purchase order and (ii) such other open-end investment company was not
distributed and advised by Concord Financial Group, Inc. and Bank of America,
respectively, or their affiliates; and (c) accounts opened for IRA rollovers
from a 401(k) plan in which the assets were held in any Pacific Horizon or Time
Horizon Fund and subsequent purchases into an IRA rollover account opened as
described above, so long as the original IRA rollover account remains open on
the Company's books ("Qualified IRA Rollovers").
33
<PAGE> 36
HOW CAN I BUY SHARES?
The chart below provides more information regarding some of the different
methods for investing in the Fund.
- --------------------------------------------------------------------------------
TO BUY SHARES
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
OPENING AN ACCOUNT ADDING TO AN ACCOUNT
<S> <C> <C>
- --------------------------------------------------------------------------------------------------------
THROUGH BANK OF AMERICA, YOUR BROKER OR ANOTHER SERVICE ORGANIZATION
(ORDERS ARE NOT EFFECTIVE UNTIL RECEIVED BY THE FUND'S TRANSFER AGENT)
Contact them directly for Contact them directly for
instructions. instructions.
- --------------------------------------------------------------------------------------------------------
THROUGH THE DISTRIBUTOR
(IF YOU ARE OR WILL BE THE SHAREHOLDER OF RECORD ON THE COMPANY'S BOOKS)
BY MAIL
Complete Account Application Mail all subsequent
and mail it with a check investments to:
(payable to the appropriate
Fund) to the address on the Pacific Horizon Funds, Inc.
Account Application. File No. 54634
Los Angeles, CA 90074-4634
- --------------------------------------------------------------------------------------------------------
IN PERSON
BISYS Fund Services, Inc. Deliver Account Application Deliver your payment directly
3435 Stelzer Road and your payment directly to to the address on the left.
Columbus, OH 43219-3035 the address on the left.
- --------------------------------------------------------------------------------------------------------
BY WIRE
Initial purchases of shares Contact the Fund's transfer
into a new account may not be agent at 800-346-2087 for
made by wire. complete wiring instructions.
Instruct your bank to
transmit immediately
available funds for purchase
of Fund shares in your name.
Be sure to include your name
and your Fund account number.
Consult your bank for information on remitting funds by wire
and any associated bank charges.
</TABLE>
- --------------------------------------------------------------------------------
34
<PAGE> 37
- ------------------------------------------------------------------------------
TO BUY SHARES
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
OPENING AN ACCOUNT ADDING TO AN ACCOUNT
<S> <C> <C>
- --------------------------------------------------------------------------------------------------------
BY TELETRADE TeleTrade Privileges may not Purchases may be made in the
(a service permitting transfers be used to make an initial minimum amount of $500 and
of money from your purchase. the maximum amount of $50,000
checking, NOW or bank per transaction as soon as
money market account) appropriate information
regarding your bank account
has been established on your
Fund account. This
information may be provided
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 particular 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
Funds' transfer agent, BISYS Fund Services, Inc. (the "Transfer Agent"), at its
Columbus 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 Funds 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 the Transfer Agent's business
day. 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 the Transfer Agent's 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 Funds' 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
35
<PAGE> 38
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?
You must specify at the time of investment whether you are purchasing A or K
Shares. Certificates for shares will no longer be issued.
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 a Fund.
If you purchase or redeem shares directly from a 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
value of the shares you redeem may be more or less than your cost, depending on
a 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.
36
<PAGE> 39
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
THROUGH THE DISTRIBUTOR
(IF YOU ARE A SHAREHOLDER OF RECORD ON THE COMPANY'S BOOKS)
BY MAIL
Pacific Horizon Send a signed, written request (each owner, including each
Corporate Bond Fund, joint owner, must sign) to the Transfer Agent.
Intermediate Bond
Fund or U.S. Government If you hold stock certificates for the shares being
Securities Fund redeemed, make sure to endorse them for transfer, have your
P.O. Box 80221 signature on them guaranteed by your bank or another
Los Angeles, CA 90080-9909 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
BISYS Fund Services, Inc.
3435 Stelzer Road Deliver your signed, written request (each owner, including
Columbus, OH 43219-3035 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>
- --------------------------------------------------------------------------------
37
<PAGE> 40
- --------------------------------------------------------------------------------
TO SELL SHARES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<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) 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 Columbus
office. Although the Funds impose no charge when A Shares are redeemed (except
pursuant to the Large Purchase Exemption described above), 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 Funds impose no charge when K Shares are redeemed.
The Company reserves the right to redeem accounts (other than 401(k), 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. The
contingent deferred sales charge applicable to A Shares purchased under the
Large Purchase Exemption will not be imposed upon such involuntary redemptions.
38
<PAGE> 41
WHAT KIND OF PAPERWORK IS INVOLVED IN SELLING SHARES?
Redemption requests must be signed by each shareholder, including each joint
owner. When redeeming shares, you should indicate whether you are redeeming A or
K Shares. 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 a Fund receives payment
in cash or immediately available funds for the purchase of shares. The Company
may suspend the right of redemption or postpone the date of payment upon
redemption (as well as suspend the recordation of the transfer of shares) for
such periods as are permitted under the 1940 Act.
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 a
Fund, in shares of the same class of the Fund out of which you redeemed, in like
shares of another Fund in the Pacific Horizon Family of Funds or in like shares
of any investment portfolio of Time Horizon Funds within 90 days of your
redemption trade date without paying a sales load. Upon such a reinvestment, the
Funds' distributor will credit to your account any contingent deferred sales
charge imposed on any redeemed A Shares subject to the Large Purchase Exemption.
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.
39
<PAGE> 42
- --------------------------------------------------------------------------------
DIVIDEND AND DISTRIBUTION POLICIES
- --------------------------------------------------------------------------------
Shareholders of the Corporate Bond Fund and Intermediate Bond Fund are entitled
to dividends and distributions arising from the net investment income and net
realized gains, if any, earned on investments in the particular Master Portfolio
which are allocable to that Fund. The Corporate Bond Fund's, Intermediate Bond
Fund's and U.S. Government Securities Fund's net realized gains (after reduction
for capital loss carryforwards, if any) are distributed at least annually.
Dividends from each 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.
You will automatically receive dividends and capital gain distributions in
additional shares of the same class of shares of the Fund for which the dividend
was declared 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 A Fund Be Invested In
Other Funds?"
To elect to receive payment in cash, or to revoke such election, you must do so
in writing to the Transfer Agent, P.O. Box 80221, Los Angeles, California
90080-9909. 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, 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 FUNDS 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.
The contingent deferred sales charge with respect to A Shares subject to the
Large Purchase Exemption will not be charged on redemptions in connection with
minimum required distributions from an IRA due to a shareholder having reached
age 70-1/2. For details, contact the Funds' 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 should consult their tax advisers.
Additionally, K Shares are available to businesses and other organizations that
participate in the Daily Advantage(R) Program sponsored by Bank of America and
to Qualified IRA Rollovers.
CAN I EXCHANGE MY INVESTMENT FROM ONE FUND TO ANOTHER?
As a shareholder, you have the privilege of exchanging your shares for: like
shares of another Pacific Horizon Fund, or like shares of any Time Horizon Fund,
provided that such other shares
40
<PAGE> 43
may be legally sold in your state of residence. Specifically, A Shares may be
exchanged for other A Shares, and K Shares may be exchanged for other K Shares.
NO ADDITIONAL SALES LOAD WILL BE INCURRED WHEN EXCHANGING A SHARES PURCHASED
WITH A SALES LOAD FOR A SHARES OF ANOTHER LOAD FUND OF THE COMPANY OR TIME
HORIZON FUNDS.
Neither a contingent deferred sales load nor a front-end sales load will be
imposed if a shareholder who has entered a Fund under the Large Purchase
Exemption exchanges shares between Funds of the Company or Time Horizon Funds.
However, shares acquired in the exchange will remain subject to the contingent
deferred sales load discussed above. The contingent deferred sales load is
calculated as a percentage of the lesser of the current market value or the cost
of the shares being redeemed. This means that this charge will not be imposed
upon increases in net asset value above the initial purchase price or upon
reinvested dividends. In determining whether a contingent deferred sales charge
is applicable to a redemption of such shares, the calculation will be made in a
manner that results in the lowest possible rate. It will be assumed that the
redemption is made first of amounts representing shares acquired pursuant to the
reinvestment of dividends and distributions; then of amounts representing the
increase in net asset value of your holdings of shares above the total amount of
payments for the purchase of shares during the preceding 2 years; then of
amounts representing the cost of shares held beyond the applicable contingent
deferred sales charge period; and finally, of amounts representing the cost of
the shares held for the longest period of time.
An investment in a 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 Funds' 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."
An exchange is considered a sale of shares of a Fund and the purchase of shares
of another Fund and may result in a capital gain or loss for federal income tax
purposes.
If you would like more information on making an exchange, please read the
Statement of Additional Information and consult your Service Organization or the
Funds' distributor.
The Funds reserve 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
41
<PAGE> 44
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 caused by 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, including requesting certain personal
or account information to confirm the identity of the shareholder. 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 Funds
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
42
<PAGE> 45
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 signature guaranteed
written request to the Transfer Agent. Purchases of additional shares
concurrently with withdrawals are ordinarily not advantageous because of each
Fund's sales load. Use of this Plan may also be disadvantageous for A Shares
subject to the Large Purchase Exemption due to the potential need to pay a
contingent deferred sales charge.
CAN MY DIVIDENDS FROM A 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 FUNDS
- --------------------------------------------------------------------------------
FUND MANAGEMENT
The business affairs of Pacific Horizon Funds, Inc. 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 Portfolios. 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.
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<PAGE> 46
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, business
credit and thrift offices in major U.S. cities. In addition, it has branches,
corporate offices and representative offices in 36 foreign countries.
In separate advisory agreements with Master Trust and the Company (collectively,
the "Advisory Agreements"), Bank of America has agreed to manage the Portfolios'
investments and to be responsible for, place orders for, and make decisions with
respect to, all purchases and sales of the Portfolios' securities. The
investment advisory agreement with respect to the Intermediate Bond Master
Portfolio also provides that Bank of America may: 1) 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 and 2) employ a sub-adviser provided that Bank of America
remains fully responsible to the Intermediate Bond Master Portfolio for the acts
and omissions of the sub-adviser.
Since March 1996, portfolio management services for the Portfolios have been
conducted by an investment committee of the Fixed Income Division of the
Investment Management Services Group of Bank of America, and no one person is
primarily responsible for making recommendations to that committee.
For the services provided and expenses assumed under the Advisory Agreements,
Bank of America is entitled to receive a fee at the annual rate of 0.45% of each
of the Corporate Bond Master Portfolio's and Intermediate Bond Master
Portfolio's respective average daily net assets and 0.35% of the U.S. Government
Securities Fund's average daily net assets. These amounts may be reduced
pursuant to undertakings by Bank of America. (See the information below under
"Fee Waivers.") During the fiscal year ended February 29, 1996, Bank of America
waived its entire investment advisory fee payable by each of the Master
Portfolios. For the same period, the U.S. Government Securities Fund paid Bank
of America advisory fees at an effective annual rate of 0.30% of the Fund's
average daily net assets, and Bank of America waived a portion of its fee at an
effective annual rate of 0.05% of the Fund's average daily net assets.
In addition, Bank of America and its affiliates may be entitled to fees under
the Shareholder Services Plan, Distribution Plan, and Administrative and
Shareholder Services Plan as described under "Plan Payments," and may receive
fees charged directly to their accounts in connection with investments in shares
of the Funds.
ADMINISTRATOR
Concord Holding Corporation ("Concord") serves as Administrator of the Funds and
the Master Portfolios. Concord is an indirect, wholly owned subsidiary of The
BISYS Group, Inc. Its offices are located at 3435 Stelzer Road, Columbus, Ohio
43219-3035.
Under its administration agreements with the Company and Master Portfolios,
Concord has agreed to: pay the costs of maintaining the offices of the Company
and the Master Portfolios; 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
Funds, interestholders of the Master Portfolios and the Securities and Exchange
Commission; prepare tax returns; maintain the registration or qualification of
each Fund's shares for sale under state securities laws; maintain books and
records of the Funds and the Master Portfolios; calculate the net asset value of
the Funds and the Master Portfolios; calculate the dividends and capital gains
distributions paid to shareholders; serve as dividend disbursing agent for the
Master Portfolios; and generally assist in all aspects of the operations of the
Funds and the Master Portfolios.
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<PAGE> 47
For its services as administrator, Concord is entitled to receive an
administration fee from the U.S. Government Securities Fund at the annual rate
of 0.20% of such Fund's average daily net assets, and an administration fee at
the annual rate of 0.15% of each of the Corporate Bond Fund's and Intermediate
Bond Fund's respective average daily net assets. Concord also is entitled to
receive an administration fee from the Master Portfolio's net assets, at an
annual rate of 0.05% of each such Master 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
29, 1996, Concord waived its entire administration fee payable by the
Intermediate Bond Fund, Corporate Bond Fund and each of the Master Portfolios.
For the same period, Concord also reimbursed a portion of the operating expenses
with respect to the Corporate Bond Fund, the Corporate Bond Master Portfolio,
and the Intermediate Bond Fund. During the fiscal year ended February 29, 1996,
the U.S. Government Securities Fund paid Concord administration fees at an
effective annual rate of 0.17% of the Fund's average daily net assets, and
Concord waived a portion of its fee at an effective annual rate of 0.03% of the
Fund's average daily net assets.
Pursuant to the authority granted in its administration agreements, Concord has
entered into agreements with PFPC, Inc. ("PFPC") (with respect to the Corporate
Bond Fund, Intermediate Bond Fund and the Master Portfolios) and The Bank of New
York ("BONY") (with respect to the U.S. Government Securities Fund) under which
PFPC (and an offshore affiliate of PFPC) and BONY perform certain of the
services listed above including calculating the net asset value of the Funds and
the Master Portfolios, calculating dividends and capital gains distributions to
shareholders, and maintaining the books and records of the Funds and the Master
Portfolios. The Corporate Bond Fund, Intermediate Bond Fund and the Master
Portfolios bear all fees and expenses charged by PFPC, and the U.S. Government
Securities Fund bears all fees and expenses charged by BONY.
DISTRIBUTOR
Each Fund's shares are sold on a continuous basis by Concord Financial Group,
Inc. (the "Distributor"). The Distributor is an indirect, wholly owned
subsidiary of The BISYS Group, Inc. and is located at 3435 Stelzer Road,
Columbus, Ohio 43219-3035.
CUSTODIAN AND TRANSFER AGENT
PNC Bank, National Association, Broad and Chestnut Streets, Philadelphia,
Pennsylvania, 19101 serves as the Custodian of the Corporate Bond Fund,
Intermediate Bond Fund and the Master Portfolios. The Bank of New York, 90
Washington Street, New York, New York 10286, serves as Custodian of the U.S.
Government Securities Fund. BISYS Fund Services, Inc. is the transfer and
dividend disbursing agent for each of the Funds and is located at 3435 Stelzer
Road, Columbus, Ohio 43219-3035.
FEE WAIVERS
Except as noted in this Prospectus, the service contractors bear all expenses in
connection with the performance of their services and the Funds and Master
Portfolios 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 each Fund's
fiscal year, Bank of America, Concord and/or the Distributor may prospectively
choose not to receive fee payments and/or may assume certain expenses of the
Funds or Master Portfolios as a result of competitive pressures and in order to
preserve and protect the business and reputation of Concord and Bank of America.
However, the service providers retain the ability to discontinue such fee
waivers and/or expense reimbursements at any time.
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<PAGE> 48
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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.
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As with any investment, you should consider the tax implications of an
investment in the Funds. The following is only a brief summary of some of the
important tax considerations generally affecting the Funds and their
shareholders. Consult your tax adviser with specific reference to your own tax
situation.
FEDERAL TAXES
During its most recent taxable year, each Fund qualified separately as a
"regulated investment company" under the Internal Revenue Code of 1986, as
amended (the "Code"), and each Fund intends that it will so qualify in future
years as long as such qualification is in the best interests of its
shareholders. As a result of this qualification, each 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 Master Portfolios will not
be subject to federal income taxes. Each Master Portfolio intends to qualify as
a partnership (or other pass-through entity) for federal income tax purposes. As
such, the Master Portfolios are not subject to tax, and the Corporate Bond Fund
and Intermediate Bond Fund will be treated for federal income tax purposes as
recognizing a pro rata share of their corresponding Master Portfolio's income
and deductions and owning a pro rata share of their corresponding Master
Portfolio's assets. The Corporate Bond Fund's and Intermediate Bond Fund's
status as regulated investment companies is dependent on, among other things,
their corresponding Master 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) derived from
ordinary income and/or the excess of net short-term capital gains over net
long-term capital loss are taxable to you as ordinary income. The Company
expects that none of the dividends paid by the Funds will qualify for the
dividends received deduction for domestic corporations.
Any distribution you receive comprised of the excess of net long-term capital
gains over net short-term capital losses ("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 distribution paid to you by a 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 a Fund on or just before the
record date of a dividend, you should be aware that the amount of a forthcoming
dividend, 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. If you hold Fund 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 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
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<PAGE> 49
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 for the
purpose of calculating your gain or loss from the exchange. It may be included
in the tax basis of the new shares, subject to this same limitation.
Certain realized gains or losses on the sale or retirement of foreign bonds held
by the Corporate Bond Master 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 Corporate Bond 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 Corporate Bond 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 such federal tax consequences described above.
A substantial portion of the dividends that you receive from the U.S. Government
Securities Fund are derived from such 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.
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MEASURING PERFORMANCE
EACH 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.
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Average annual total return reflects the average annual percentage change in
value of an investment in a 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 a Fund over a specified 30-day
period.
Periodically, a 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 assume dividends and capital gains distributions
made by a Fund during the period are reinvested in Fund shares and include the
maximum front-end sales charge for A Shares. Each 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.
Each 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.
Each 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
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<PAGE> 50
that monitor mutual fund performance. For example, a Fund's total return may be
compared 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. Each
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 a 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 a 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 a Fund (e.g. account maintenance fees, compensating balance
requirements or fees based upon account transactions, assets or income).
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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 E Common Stock, 150 million shares of Class E -- Special Series 3 Common
Stock and 50 million shares of Class E -- Special Series 5 Common Stock,
representing interests in the U.S. Government Securities Fund; 40 million shares
of Class M Common Stock, 60 million shares of Class M -- Special Series 3 Common
Stock and 50 million shares of Class M -- Special Series 5 Common Stock,
representing interests in the Intermediate Bond Fund and 40 million shares of
Class W Common Stock, 60 million shares of Class W -- Special Series 3 Common
Stock and 50 million shares of Class W -- Special Series 3 Common Stock,
representing interests in the Corporate Bond Fund; and additional classes of
shares representing interests in other investment portfolios of the Company.
Class E, M and W Common Stock are the "A" Shares, Class E, M and W -- Special
Series 3 Common Stock are the "B" Shares and Class E, M and W -Special Series 5
Common Stock are the "K" Shares. As of the date of this Prospectus, B Shares
have not been offered to the public. The Board of Directors may similarly
classify or reclassify any class of shares (including unissued Class E Common
Stock, Class E -- Special Series 3 Common Stock, Class E -- Special Series 5
Common Stock, Class M Common Stock, Class M -- Special Series 3 Common Stock,
Class M -- Special Series 5 Common Stock, Class W Common Stock, Class
W -- Special Series 3 Common Stock or Class W -- Special Series 5 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 Funds are entitled to participate in the
dividends and distribu-
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<PAGE> 51
tions declared by the Board of Directors and in the net distributable assets of
the particular Fund upon 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). Only A Shares will vote on
matters relating solely to A Shares, and K Shares will vote on matters relating
solely to K Shares. The Funds do 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 Funds 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.
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PLAN PAYMENTS
THE COMPANY HAS ADOPTED A SHAREHOLDER SERVICES PLAN (THE "PLAN") FOR A SHARES
AND A DISTRIBUTION PLAN AND AN ADMINISTRATIVE AND SHAREHOLDER SERVICES
PLAN FOR K SHARES.
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The Company has adopted a Shareholder Services Plan for A Shares, under which
the A Shares of each Fund reimburse the Distributor for shareholder servicing
fees the Distributor pays to Service Organizations. The Company has adopted a
Distribution Plan pursuant to Rule 12b-1 under the 1940 Act under which the K
Shares of a Fund reimburse the Distributor for services rendered and costs
incurred in connection with distribution of the K Shares. The Company has also
adopted an Administrative and Shareholder Services Plan for K Shares, under
which K Shares of a Fund reimburse the Distributor for administrative and
shareholder servicing fees the Distributor pays to Service Organizations.
SHAREHOLDER SERVICES PLAN
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 a Fund for shareholder servicing expenses may not
exceed 0.25% (annualized) of the average daily net assets of such Fund's A
Shares. 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 29, 1996, the Distributor waived all payments under
the Plan with respect to the Corporate Bond and Intermediate Bond Funds. For the
same period, the U.S. Government Securities Fund made payments under the Plan at
an effective annual rate of 0.25% of such Fund's average daily net assets.
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<PAGE> 52
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 a Fund with respect to
the amount "carried forward."
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.
DISTRIBUTION PLAN AND ADMINISTRATIVE AND
SHAREHOLDER SERVICES PLAN
Under the Distribution Plan, each Fund pays the Distributor for distribution
expenses primarily intended to result in the sale of such Fund's K Shares. Such
distribution expenses include expenses incurred in connection with advertising
and marketing each Fund's K Shares; payments to Service Organizations for
assistance in connection with the distribution of K Shares; and expenses
incurred in connection with preparing, printing and distributing prospectuses
for the Funds (except those used for regulatory purposes, for solicitation or
distribution to existing or potential A shareholders, or for distribution to
existing K shareholders of the Funds) and in implementing and operating the
Distribution Plan.
Shareholder servicing expenses under the Administrative and Shareholder Services
Plan include, but are not limited to, expenses incurred in connection with
shareholder services provided by the Distributor and payments to Service
Organizations for the provision of support services with respect to the
beneficial owners of K Shares, such as assisting clients in processing exchange
and redemption requests and in changing dividend options and account
descriptions and responding to client inquiries concerning their investments.
Administrative servicing expenses under the Administrative and Shareholder
Services Plan include, but are not limited to, expenses incurred in connection
with administrative services provided by the Distributor and payments to Service
Organizations for the provision of administrative services to beneficial owners
of K Shares such as establishing and maintaining accounts and records relating
to their clients who invest in K Shares, providing information to the Funds
necessary for accounting or sub-accounting, and providing statements
periodically to clients showing their position in K Shares.
Under the Distribution Plan, payments by a Fund for distribution expenses may
not exceed 0.75% (annualized), of the average daily net assets of such Fund's K
Shares. Under the Administrative and Shareholder Services Plans, payments for
shareholder servicing expenses may not exceed 0.25% (annualized) of the average
daily net assets of such Fund's K Shares. Under the Administrative and
Shareholder Services Plan, payments for administrative servicing expenses may
not exceed 0.75% (annualized) of the average daily net assets of a Fund's K
Shares. The total of all 12b-1 fees, administrative services fees and
shareholder services fees may not exceed, in the aggregate, the annual rate of
1.00% of the average daily net assets of a Fund's K Shares. These amounts may be
reduced pursuant to undertakings by the Distributor. Payments for distribution
expenses under the Distribution Plan are subject to Rule 12b-1 under the 1940
Act. During the fiscal year ended February 29, 1996, no K Shares were offered by
the Company.
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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> 54
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APPENDIX A
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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 "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 "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
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<PAGE> 55
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
speculative 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 or
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.
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TFI-0001
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PACIFIC HORIZON MUTUAL FUNDS
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CORPORATE BOND FUND
INTERMEDIATE BOND FUND
U.S. GOVERNMENT
SECURITIES FUND
PROSPECTUS
July 1, 1996
NOT FDIC INSURED
<PAGE> 57
PROSPECTUS
JULY 1, 1996
PACIFIC HORIZON INTERNATIONAL EQUITY FUND
Investment Portfolio Offered by Pacific
Horizon Funds, Inc.
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The PACIFIC HORIZON INTERNATIONAL EQUITY FUND (the "Fund") is a diversified
mutual fund whose investment objective is to seek long-term capital growth
primarily through investments in foreign equity securities.
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 "MASTER PORTFOLIO") HAVING THE SAME INVESTMENT OBJECTIVE AS THAT OF THE
FUND. THE FUND WILL PURCHASE SHARES OF THE MASTER PORTFOLIO AT NET ASSET VALUE.
THE NET ASSET VALUE OF THE FUND WILL RESPOND TO INCREASES AND DECREASES IN THE
VALUE OF THE MASTER PORTFOLIO'S SECURITIES. INVESTORS SHOULD CAREFULLY CONSIDER
THIS INVESTMENT APPROACH. SEE "OTHER INVESTMENT PRACTICES AND
CONSIDERATIONS--MASTER-FEEDER STRUCTURE" ON PAGE 11 FOR ADDITIONAL INFORMATION
REGARDING THIS STRUCTURE.
This Prospectus describes two classes of shares. A Shares are sold with a
front-end sales charge. K Shares are not subject to either a front-end sales
charge or a contingent deferred sales charge.
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 $48 billion under management, including over $12 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, 1996 and is
incorporated by reference into this Prospectus.
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Shares of the Fund 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.
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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.
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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, other than those contained in this Prospectus, in the Statement
of Additional Information and the Fund's official sales literature, 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.
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<PAGE> 58
CONTENTS
<TABLE>
<S> <C> <C>
EXPENSE SUMMARY 2
FUND INVESTMENTS 5 INVESTMENT OBJECTIVE
5 TYPES OF INVESTMENTS
7 FUNDAMENTAL LIMITATIONS
7 OTHER INVESTMENT PRACTICES AND CONSIDERATIONS
SHAREHOLDER GUIDE 13 HOW TO BUY SHARES
13 What Is My Minimum Investment In The Fund?
13 What Alternative Sales Arrangements Are Available?
13 How Are Shares Priced?
17 How Do I Decide Whether To Buy A or K Shares?
18 How Can I Buy Shares?
19 What Price Will I Receive When I Buy Shares?
20 What Else Should I Know To Make A Purchase?
20 HOW TO SELL SHARES
20 How Do I Redeem My Shares?
22 What NAV Will I Receive For Shares I Want To Sell?
22 What Kind Of Paperwork Is Involved In
Selling Shares?
23 How Quickly Can I Receive My Redemption Proceeds?
23 Do I Have Any Reinstatement Privileges After
I Have Redeemed Shares?
DIVIDEND AND DISTRIBUTION 23
POLICIES
SHAREHOLDER SERVICES 24 CAN I USE THE FUND IN MY RETIREMENT PLAN?
24 CAN I EXCHANGE MY INVESTMENT FROM ONE FUND TO
ANOTHER?
25 WHAT IS TELETRADE?
26 CAN I ARRANGE TO HAVE AUTOMATIC INVESTMENTS MADE ON
A REGULAR BASIS?
26 WHAT IS DOLLAR COST AVERAGING AND HOW CAN I
IMPLEMENT IT?
26 CAN I ARRANGE PERIODIC WITHDRAWALS?
26 CAN MY DIVIDENDS FROM THE FUND BE INVESTED
IN OTHER FUNDS?
27 IS THERE A SALARY DEDUCTION PLAN AVAILABLE?
THE BUSINESS OF THE FUND 27 FUND MANAGEMENT
27 Service Providers
TAX INFORMATION 29
MEASURING PERFORMANCE 31
DESCRIPTION OF SHARES 32
PLAN PAYMENTS 33
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DISTRIBUTOR: INVESTMENT ADVISER:
Concord Financial Group, Inc. Bank of America National Trust and Savings Association
3435 Stelzer Road 555 California Street
Columbus, OH 43219-3035 San Francisco, CA 94104
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</TABLE>
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EXPENSE SUMMARY
SHAREHOLDER TRANSACTION EXPENSES are charges you pay when buying or selling
shares of the Fund. The Fund offers two classes of shares. A Shares are offered
at net asset value plus a front-end sales charge (see page 13 of the Prospectus
for an explanation of net asset value per share) and are subject to a
shareholder servicing fee. K Shares are offered at net asset value with neither
a front-end sales charge nor a contingent deferred sales charge, but are subject
to distribution, administrative servicing and shareholder servicing fees.
ANNUAL FUND OPERATING EXPENSES include payments by the Fund and payments by the
Master Portfolio which are allocable to the Fund. Operating expenses include
fees for portfolio management, maintenance of shareholder accounts, general
administration, distribution (in the case of K Shares only), shareholder
servicing, accounting and other services.
Below is a summary of the shareholder transaction expenses imposed by the Fund
for A and K Shares and their estimated operating expenses (including the
operating expenses of the Master Portfolio which are allocable to the Fund) for
the first twelve months of operations. Actual expenses may vary. A hypothetical
example based on the summary is also shown.
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<TABLE>
<CAPTION>
A SHARES K SHARES
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<S> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load Imposed
on Purchases (as a
percentage of offering
price) 4.50% None(2)
Sales Load Imposed on
Reinvested Dividends None None
Maximum Contingent Deferred
Sales Load (as a
percentage of original
purchase price or
redemption proceeds,
whichever is lower) None(1) None
Redemption Fees None None
Exchange Fee None None
ANNUAL FUND OPERATING EXPENSES
(as a percentage of
average net assets)
Management Fees (After Fee
Waivers)+ 0.30% 0.30%
12b-1 Fee (After Fee
Waivers)* 0% 0.50%*
Administrative Services Fee
(After Fee Waivers)* 0% 0.50%*
Shareholder Services Fee* 0.25% 0.25%*
Total of all 12b-1 Fees OR
Administrative Services
Fees and Shareholder
Services Fees for K
Shares (After Fee
Waivers)* 0.75%*
Other Expenses (After
Expense Reimbursements)+ 0.95% 0.95%
Total Operating Expenses
(After Fee Waivers and
Expense Reimbursements)+ 1.50% 2.00%
</TABLE>
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(1) There is no front-end sales load on A Shares you purchase if you have either
a combined purchase of A Shares of the Company of $1,000,000 or more or if
the aggregate value of A Shares that you beneficially own in any Pacific
Horizon Fund or Time Horizon Fund, another open-end investment company
managed by Bank of America (a "Time Horizon Fund"), equals or exceeds
$1,000,000 ("Large Purchase Exemption"). A Shares purchased under the Large
Purchase Exemption (except A Shares purchased under the Daily Advantage(R)
or Advantage Plus(TM) Programs) are subject to a contingent deferred sales
charge of 1.00% and 0.50%, respectively, on redemptions within one and two
years after purchase. The contingent deferred sales charge is paid to
Concord Financial Group, Inc. (the "Distributor"). A Shares cannot be
purchased under the Large Purchase Exemption if there is another no-load
exemption available. Accordingly, A Shares purchased under another no-load
exemption are not subject to a contingent deferred sales charge. Although no
front-end
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sales load will be paid on shares purchased under the Large Purchase
Exemption, the Distributor will compensate brokers whose customers purchase
such shares at the following rates: 1.00% of the amount under $3 million,
0.50% of the next $47 million and 0.25% thereafter.
(2) Bank of America will compensate Seafirst Investment Services, Inc. ("SIS")
and BA Investment Services, Inc. ("BAIS") (BAIS and SIS are collectively
referred to herein as "Affiliated Brokers") for their customers who have
invested in the Fund and are participants in the Daily Advantage(R) Program.
The Affiliated Brokers will be compensated by Bank of America at the rate of
1.00% of the amount under $3 million, 0.50% of the next $47 million and
0.25% thereafter of combined Pacific Horizon Funds' and Time Horizon Funds'
K Shares in each Daily Advantage(R) Program.
+ Absent fee waivers and/or expense reimbursement, management fees for each
class of the Fund would be 0.95% of the average net assets (annualized);
"Other Expenses" for the Fund's A and K Shares are estimated to be 1.22% and
1.22%, respectively, of average net assets (annualized); and "Total Operating
Expenses" for the Fund's A and K Shares are estimated to be 2.42% and 3.17%
of average net assets (annualized), respectively.
* Absent fee waivers, 12b-1 fees or administrative services fees would be 0.75%
or 0.75%, respectively, of the average net assets (annualized) of the Fund's
K Shares. The total of all 12b-1 fees, administrative services fees and
shareholder services fees may not exceed, in the aggregate, the annual rate
of 1.00% of the average net assets of the Fund's K Shares. However, it is
expected that during the current fiscal year, such fees will not exceed 0.75%
of the average net assets of the Fund's K Shares. Because of the Rule 12b-1,
administrative and/or shareholder services fees paid by the Fund as shown in
the above table, long-term K shareholders may pay more than the economic
equivalent of the maximum front-end sales charge permitted by the National
Association of Securities Dealers, Inc. 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" below.
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EXAMPLE: Assume the annual return is 5% and operating expenses are the same as
those stated above. For every $1,000 you invest, here is how much you would have
paid in total expenses if you closed your account after the number of years
indicated:
<TABLE>
<CAPTION>
AFTER 1 YEAR AFTER 3 YEARS
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<S> <C> <C>
A Shares(1) $ 60 $ 90
K Shares..................................................... $ 20 $ 63
</TABLE>
(1) Assumes deduction at time of purchase of maximum applicable front-end sales
charge but does not assume deduction at redemption of maximum applicable
contingent deferred sales charge under the Large Purchase Exemption.
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Note: The preceding operating expenses and example should not be considered a
representation of future investment returns and operating expenses. The Fund and
the Master Portfolio are new and the above figures are estimates for the first
twelve months of operations only. 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 0.75% of the Master
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 Master Portfolio's average daily net
assets.
Currently, the most restrictive expense limitation limits the Fund's aggregate
annual expenses (including management fees and the Fund's pro rata share of such
expenses of the Master Portfolio) to 2.5% of the first $30 million of the Fund's
average daily net assets, 2% of the next $70 million and 1.5% of the Fund's
remaining average daily net assets.
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<PAGE> 61
The Board of Directors of the Company believes that the aggregate per share
expenses of the Fund and the Master 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 Master Portfolio. Further, the Directors believe that the
shareholders of the Fund may 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 Master Portfolio will
be realized, inasmuch as the Company is not aware of any other potential
investor in the Master Portfolio.
The alternative sales arrangements permit you to choose the method of purchasing
shares that is most beneficial given the amount of the purchase, the length of
time you expect to hold the shares and other circumstances. You should determine
whether under your particular circumstances it is more advantageous to incur a
front-end sales charge and thereafter be subject to annual fees under a
Shareholder Services Plan, with respect to A Shares; or incur neither a
front-end sales charge nor a contingent deferred sales charge, but incur fees
under a Distribution Plan and/or an Administrative and Shareholder Services
Plan, with respect to K Shares. K Shares, however, are only available for
investment by: (a) businesses or other organizations that participate in the
Daily Advantage(R) Program sponsored by Bank of America; (b) individuals
investing proceeds from a redemption of shares from another open-end investment
company on which such individual paid a front-end sales load if (i) such
redemption occurred within 30 days prior to the purchase order, and (ii) such
other open-end investment company was not distributed and advised by Concord
Financial Group, Inc. and Bank of America, respectively, or their affiliates;
and (c) accounts opened for IRA rollovers from a 401(k) plan in which the assets
were held in any Pacific Horizon or Time Horizon Fund and subsequent purchases
into an IRA rollover account opened as described above, so long as the original
IRA rollover account remains open on the Company's books. See the section
entitled "How to Buy Shares" below.
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FUND INVESTMENTS
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INVESTMENT OBJECTIVE
The Pacific Horizon International Equity Fund seeks long-term capital growth by
investing primarily in foreign equity securities. The Fund may be appropriate
for investors who want to diversify their investments into foreign equity
markets and who are prepared to accept the risks entailed in such investments.
The Fund seeks to achieve its investment objective by investing all of its
investable assets in the Master Portfolio. The Master Portfolio has the same
investment objective as the Fund. WHILE THE MASTER 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
Master Portfolio, the following is a discussion of the various investments of
and techniques employed by the Master Portfolio.
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TYPES OF INVESTMENTS
IN GENERAL. During normal market conditions, the Master Portfolio will invest
at least 80% of its total assets in equity securities of companies that are
domiciled or have their principal activities in countries outside the United
States. Normally, the Master Portfolio will invest in equity securities of
companies in at least three different foreign countries. The domicile or the
location of the principal activities of a company will be the country under
whose laws the company is organized, in which the principal trading market for
the equity securities issued by the company is located, or in which the company
has over half of its assets or derives over half of its revenues or profits.
Equity securities in which the Master Portfolio may invest consist of common
stocks, preferred stocks, securities convertible into common stocks or preferred
stocks, and warrants to purchase such securities.
The Master Portfolio may invest up to 20% of its total assets (at the time of
purchase) in convertible bonds and debt securities. These debt obligations
include U.S. Government and foreign government securities and corporate debt
securities, including Samurai and Yankee bonds and Euro-bonds. The Master
Portfolio will limit its purchases of debt securities to investment grade
obligations. "Investment grade" debt refers to those securities rated within one
of the four highest ratings categories by Moody's Investors Service, Inc.
("Moody's") or 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, if unrated, deemed by Bank of America to be of equivalent
quality. Securities rated in the lowest category of investment grade, Baa by
Moody's or BBB by S&P, D&P or Fitch may have speculative characteristics.
In the event that the rating of any security held by the Master Portfolio falls
below the required rating, the Master Portfolio will not be obligated to dispose
of such security and may continue to hold the security if, in the opinion of
Bank of America, such investment is considered appropriate under the
circumstances.
The Master Portfolio may also invest, without limitation, in securities of
foreign issuers in the form of American Depository Receipts ("ADRs") or other
similar securities evidencing ownership of underlying securities issued by
foreign issuers. ADRs purchased for the Master Portfolio will be included as
part of the 80% of assets in foreign equity securities. These securities may not
necessarily be denominated in the same currency as the securities underlying the
ADRs. ADRs are receipts typically issued by a United States bank or trust
company evidencing ownership of the underlying foreign securities. Generally,
ADRs, in
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<PAGE> 63
registered form, are designed for use in U.S. securities markets.
During temporary defensive periods when Bank of America believes such a position
is warranted by uncertain or unusual market conditions, the Master Portfolio may
invest without limit in securities issued or guaranteed by the U.S. Government
(and its agencies and instrumentalities), foreign or domestic money market
instruments and investment grade debt securities, or may hold its assets in cash
(U.S. dollars, foreign currencies or multinational currency units).
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 the Fund's objective.
RISKS ASSOCIATED WITH FOREIGN SECURITIES AND CURRENCIES. Investments in
securities of foreign issuers carry certain risks not ordinarily associated with
investments in securities of domestic issuers. Such risks include future
political and economic developments, and the possible imposition of exchange
controls or other foreign governmental laws or restrictions. In addition, with
respect to certain countries, there is the possibility of expropriation of
assets, confiscatory taxation, political or social instability or diplomatic
developments which could adversely affect investments in those countries.
Because the Master Portfolio will invest heavily in securities denominated or
quoted in currencies other than the U.S. dollar, changes in foreign currency
exchange rates will, to the extent the Master Portfolio does not adequately
hedge against such fluctuations, affect the value of securities in the Master
Portfolio so far as U.S. investors are concerned. Foreign currency exchange
rates are determined by forces of supply and demand on the foreign exchange
markets and the regulatory control of the exchanges on which the currencies
trade. These forces are themselves affected by the international balance of
payments and other economic and financial conditions, government intervention,
speculation and other factors. Costs are incurred in connection with conversions
between various currencies.
There may be less publicly available information about a foreign company than
about a U.S. company, and foreign companies may not be subject to accounting,
auditing and financial reporting standards and requirements comparable to, or as
uniform as, those of U.S.-based companies. Foreign securities markets, while
growing in volume, have, for the most part, substantially less volume than U.S.
markets, and securities of many foreign companies are less liquid and their
prices more volatile than securities of comparable U.S.-based companies. There
is generally less government supervision and regulation of foreign exchanges,
brokers and issuers than there is in the United States. The Master Portfolio
might have greater difficulty taking appropriate legal action in a foreign court
than in a United States court.
The expense ratio of the Master Portfolio can be expected to be higher than that
of funds investing in domestic securities. The costs attributable to investing
abroad are usually higher for several reasons, such as the higher cost of
investment research, higher cost of custody of foreign securities, higher
commissions paid on comparable transactions on foreign markets and additional
costs arising from delays in settlements of transactions involving foreign
securities.
Interest and dividends payable on the Master Portfolio's foreign portfolio
securities may be subject to foreign withholding taxes. To the extent such taxes
are not offset by credits or deductions allowed to investors under U.S. federal
income tax provisions, they may reduce the net return to the Master Portfolios'
shareholders. See "Tax Information."
ADDITIONAL INVESTMENTS. When not invested in the securities described above,
the Master Portfo-
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<PAGE> 64
lio may invest in other types of securities subject to the limitations described
previously.
The Master Portfolio may purchase bank obligations including certificates of
deposit and bankers' acceptances issued by domestic or foreign banks or
financial institutions that have total assets of more than $2.5 billion. The
Master Portfolio may also make interest-bearing savings deposits in commercial
banks in amounts not exceeding 5% of its total assets.
Commercial paper rated in the top rating category by S&P, Moody's, D&P or Fitch
and unrated commercial paper determined to be of comparable quality by Bank of
America may also be purchased.
As noted above, the Master Portfolio may purchase obligations issued or
guaranteed by the U.S. Government, its agencies and instrumentalities.
Obligations of some of these agencies and instrumentalities, such as the Small
Business Administration or the Maritime Administration, are backed by the full
faith and credit of the U.S. Government; others, like the Federal National
Mortgage Association, are backed by the discretionary 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.
FUNDAMENTAL LIMITATIONS
The investment objective of the Fund and the Master 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 Master Portfolio, respectively.
Policies requiring such a vote to effect a change are known as "fundamental."
Included in the Fund's and the Master Portfolio's fundamental investment
limitations is the restriction that neither the Fund nor the Master Portfolio
may borrow money for the purpose of obtaining investment leverage or issue
senior securities (as defined in the Investment Company Act of 1940), provided
that the Fund and the Master 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 Master 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.
A complete list of the fundamental investment limitations is set out in full in
the Statement of Additional Information.
OTHER INVESTMENT PRACTICES AND CONSIDERATIONS
OPTIONS. The Master 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 Master Portfolio give the holder the right to buy
the underlying security from the Master Portfolio at a stated exercise price
upon exercising the option at any time prior to its expiration. A call option
written by the Master Portfolio is "covered" if the Master 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 Master 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 than the exercise price of the call written
if the difference is maintained by the Master Portfolio in cash, government
securities or other high grade debt obligations in a segregated account with its
custodian.
Put options written by the Master Portfolio give the holder the right to sell
the underlying security to the Master Portfolio at a stated exercise price. A
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<PAGE> 65
put option written by the Master Portfolio is "covered" if the Master 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 securities 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 Master Portfolio may purchase put options to hedge against a decline in the
value of its portfolio. By using put options in this way, the Master 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 Master Portfolio may purchase call options to hedge against an
increase in the price of securities that the Master 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 Master
Portfolio upon exercise of the option. Unless the price of the underlying
security rises sufficiently, the call option may expire worthless to the Master
Portfolio.
The Master Portfolio's options transactions will be limited as follows: a) not
more than 5% of the total assets of the Master Portfolio may be invested in
options; b) the obligations of the Master Portfolio under put options written by
the Master Portfolio may not exceed 50% of the Master Portfolio's net assets;
and c) the aggregate premiums on all options purchased by the Master Portfolio
may not exceed 25% of the Fund's net assets.
The Master Portfolio may buy put and call options on various stock indices. 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.
OPTIONS ON FOREIGN CURRENCIES. The Master Portfolio may purchase and write put
and call options on foreign currencies to increase the Master Portfolio's gross
income and for the purpose of protecting against declines in the United States
dollar value of foreign currency-denominated portfolio securities and against
increases in the United States dollar cost of such securities to be acquired. As
with other kinds of options, however, writing an option on a foreign currency
constitutes only a partial hedge, up to the amount of the premium received, and
the Master Portfolio could be required to purchase or sell foreign currencies at
disadvantageous exchange rates, thereby incurring losses. Purchasing an option
on a foreign currency may constitute an effective hedge against fluctuations in
exchange rates although, in the event of rate movements adverse to the Master
Portfolio's position, the Master Portfolio may forfeit the entire amount of the
premium paid plus related transaction costs. Options on foreign currencies
written or purchased by the Master Portfolio may be traded on United States and
foreign exchanges or over-the-counter. There is no specific percentage
limitation on the Master Portfolio's investments in options on foreign
currencies.
STOCK INDEX, INTEREST RATE AND FOREIGN CURRENCY FUTURES CONTRACTS AND
OPTIONS. The Master Portfolio may purchase and sell stock index, interest rate
and foreign currency futures contracts (as well as purchase related options) in
an effort to hedge against changes in the value of securities that the Master
Portfolio holds in its portfolio or which it intends to purchase, or as a
substitute for purchasing or selling the underlying security. Such changes could
occur as a result of market conditions or fluctuating currency exchange rates.
These transactions will only be entered into when
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<PAGE> 66
deemed appropriate by Bank of America to reduce the risks inherent in the
management of the Master Portfolio.
The Master 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 initial margin deposits on its existing futures positions
and the amount of premiums paid for related options does not exceed 5% of the
Master Portfolio'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.
POTENTIAL RISKS OF OPTIONS AND FUTURES. The successful use of the foregoing
investment techniques depends on the ability of Bank of America to forecast
interest rate and currency exchange rate movements correctly. Should interest or
exchange rates move in an unexpected manner, the Master Portfolio may not
achieve the anticipated benefits of futures contracts or options or may realize
losses and thus be in a worse position than if such strategies had not been
used. Unlike many exchange-traded futures contracts and options on futures
contracts, there are no daily price fluctuation limits with respect to options
on currencies, and adverse market movements could therefore continue to an
unlimited extent over a period of time. In addition, the correlation between
movements in the prices of such instruments and movements in the price of the
securities and currencies hedged or used for cover will not be perfect and could
produce unanticipated losses. The Master Portfolio's ability to dispose of its
positions in futures contracts, options and forward contracts will depend on the
availability of liquid markets in such instruments. Therefore, no assurance can
be given that the Master Portfolio will be able to utilize these instruments
effectively for the purposes set forth above. In order to prevent leverage in
connection with the purchase of futures contracts or call options thereon by the
Master 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 Master Portfolio's ability to
engage in options and futures transactions may be limited by tax considerations.
REPURCHASE AGREEMENTS. The Master Portfolio 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 Master 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 Master 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 Master 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 Master Portfolio may borrow money for
temporary purposes by entering into reverse repurchase agreements. Under these
agreements the Master Portfolio sells portfolio securities to financial
institutions (such as banks and broker-dealers) and agrees to buy them back at
an agreed upon time and price. When the Master 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 Bank of
America to make sure that an appropriate value is maintained. Reverse repurchase
agreements
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<PAGE> 67
involve the risk that the value of portfolio securities the Master Portfolio
relinquishes may decline below the price the Master Portfolio must pay when the
transaction closes. Reverse repurchase agreements are considered to be
borrowings by the Master 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 Master Portfolio's outstanding shares. The
Master 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 Master
Portfolio may purchase securities on a "when-issued" basis and purchase or sell
securities on a "forward commitment" basis. Additionally, the Master Portfolio
may purchase or sell securities on a "delayed settlement" basis. When-issued and
forward commitment transactions, which involve a commitment by the Master
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
Master 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 Master 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. When-issued purchases, forward commitments and
delayed settlements are not expected to exceed 25% of the Master Portfolio's
total assets under normal circumstances. These transactions will not be entered
into for speculative purposes, but primarily to hedge against anticipated
changes in interest rates.
SECURITIES LENDING. In order to earn additional income, the Master Portfolio
may lend its portfolio securities to financial institutions (such as banks and
brokers) 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 Master Portfolio. If the financial institution should become
bankrupt, however, the Master 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 Master Portfolio exceeds 30% of its total assets.
Securities loans will be fully collateralized.
INVESTMENT COMPANY SECURITIES. The Master Portfolio may acquire shares of open
and closed-end investment companies, including companies that invest in foreign
issuers and money market mutual funds advised by Bank of America, subject to the
requirements of applicable securities laws. No more than 10% of the value of the
Master 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; except that if a pending exemptive order is granted by the
Securities and Exchange Commission ("SEC"), with respect to the investment in a
money market mutual fund advised by Bank of America, the Master Portfolio is
permitted to invest the greater of 5% of its net assets or $2.5 million. In
addition, the Master Portfolio may hold no more than 3% of the outstanding
voting stock of any other investment company. Although these investment
companies may have policies that differ from the Master Portfolio's policies,
their management and other types of expenses will be similar to those borne by
the Master Portfolio. When the Master Portfolio 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 Master Portfolio pays in connection with its
own operations.
ILLIQUID SECURITIES. The Master Portfolio will not invest more than 15% of the
value of its net assets
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<PAGE> 68
(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
Master Portfolio will take steps to reduce the aggregate amount of illiquid
securities as soon as is reasonably practicable. The Master 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 or
Bank of America (pursuant to guidelines adopted by the Board), will not be
subject to the Master Portfolio's 15% limitation on illiquid securities. This
investment practice could have the effect of increasing the level of illiquidity
in the Master Portfolio during any period that institutional buyers under Rule
144A become uninterested in purchasing these securities.
PORTFOLIO TRANSACTIONS. Investment decisions for the Master 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 Master Portfolio. When a
purchase or sale of the same security is made at substantially the same time on
behalf of the Master 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 Master
Portfolio or the size of the position obtained or sold by the Master Portfolio.
From time to time, the Master Portfolio may pay brokerage commissions to an
affiliate of the Fund's distributor on securities acquired by the Master
Portfolio. In allocating purchase and sale orders for investment securities,
Bank of America may consider the sale of Fund shares by broker-dealers and other
financial institutions (including affiliates of Bank of America or the Fund's
distributor to the extent permitted by law), provided it believes the quality of
the transaction and the price to the Master Portfolio are not less favorable
than what they would be with any other qualified firm.
PORTFOLIO TURNOVER. The Master 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 Master
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 Master Portfolio's portfolio turnover
rate is not expected to exceed 75%, although portfolio turnover will not be a
limiting factor in making investment decisions for the Master Portfolio.
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 Master Portfolio which has the same investment objective. The Fund
may withdraw its investment in the Master 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
Master 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 Master
Portfolio.
The Master 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 Master Portfolio
from time to time (e.g., other investment companies and commingled trust funds)
will each be liable for all obligations of the Master Portfolio. However, the
11
<PAGE> 69
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
Master 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 Master
Portfolio. As stated above, the investment objective of the Fund and the Master
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 Master
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 Master 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
Master Portfolio could control the results of voting at the Master Portfolio
level in certain instances (e.g. a change in fundamental policies by the Master
Portfolio which was not approved by the Fund's shareholders). This could result
in the Fund's withdrawal of its investment in the Master 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 Master Portfolio could have an
adverse effect on the performance of the Master 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 Master Portfolio will cause the Master Portfolio to terminate automatically
in 120 days unless the Fund and any other investors in the Master Portfolio
unanimously agree to continue the business of the Master 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 a shareholders' meeting in connection with
such withdrawals. If unanimous agreement is not reached to continue the Master
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 Master 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
Master 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 Master Portfolio may
be available through another entity investing in the Master Portfolio may be
obtained by calling 800-332-3863.
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<PAGE> 70
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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. The minimum
investment is $200 for BankAmericard holders with an appropriate award
certificate from BankAmeriChoice Program.
** A regular IRA must be opened in conjunction with this account.
- ---------------------------------------------------------
WHAT ALTERNATIVE SALES ARRANGEMENTS ARE AVAILABLE?
The Fund issues two classes of shares. A Shares are sold to investors choosing
the front-end sales charge alternative unless an exemption to the sales charge
is otherwise available. K Shares are neither subject to a front-end sales charge
nor a contingent deferred sales charge. K Shares, however, are sold only to: (a)
businesses and other organizations that participate in the Daily Advantage(R)
Program sponsored by Bank of America; (b) individuals investing proceeds from a
redemption of shares from another open-end investment company on which such
individual paid a front-end sales load if (i) such redemption occurred within 30
days prior to the purchase order, and (ii) such other open-end investment
company was not distributed and advised by Concord Financial Group, Inc. and
Bank of America, respectively, or their affiliates; and (c) accounts opened for
IRA rollovers from a 401(k) plan in which the assets were held in any Pacific
Horizon or Time Horizon Fund and subsequent purchases into an IRA rollover
account opened as described above, so long as the original IRA rollover account
remains open on the Company's books. The two classes of shares in the Fund
represent interests in the same portfolio of investments of the Fund, have the
same rights and are identical in all respects except as discussed below. A
Shares bear the expenses of a Shareholder Services Plan. K Shares bear the
expenses of a Distribution Plan and/or Administrative and Shareholder Services
Plan and have exclusive voting rights with respect to such Plans. The two
classes also have different exchange privileges, as described below. The net
income attributable to A and K Shares and the dividends payable on A and K
Shares will be reduced by the amount of the: (a) Shareholder Services Plan fees
attributable to A Shares, (b) Distribution Plan fees and/or Administrative and
Shareholder Services Plan fees attributable to K Shares, respectively, and (c)
the incremental expenses associated with such Plans.
HOW ARE SHARES PRICED?
Shares are purchased at their public offering price, which is based upon each
class' net asset value per share plus a front-end sales load on A Shares. Each
class calculates its net asset value ("NAV") as follows:
(Value of Assets Attributable to the Class) -
(Liabilities Attributable to the Class)
NAV = -------------------------------------------------------------
Number of Outstanding Shares of the Class
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<PAGE> 71
Net asset value is determined as of 12:00 p.m. Eastern time on days the New York
Stock Exchange (the "Exchange") is open.
The Master 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 Master Portfolio pursuant to procedures adopted by the Master Portfolio's
Board of Trustees. Short-term debt securities are valued at amortized cost,
which approximates market value. Trading in foreign securities is generally
completed prior to the end of regular trading on the Exchange. Trading may occur
in foreign securities, however, on Saturdays and U.S. holidays and at other
times when the Exchange is closed. As a result, there may be delays in
reflecting changes in the market values of foreign securities in the calculation
of the net asset value per share of the Fund on days when net asset value is not
calculated and on which shareholders of the Fund cannot redeem due to changes in
values of securities traded in foreign markets. For further information about
valuing securities, see the Statement of Additional Information. For price
information call (800) 346-2087.
The per share net asset values of A and K Shares will diverge due to the
different distribution and other expenses borne by the classes.
A SHARES SALES LOAD. The front-end sales load ("front-end sales load," "sales
load," "front-end sales charge," or "sales charge") for the A Shares of 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
REALLOWANCE
AS A % OF AS A % OF AS A % OF
AMOUNT OF OFFERING NET 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 $1,000,000 1.00 1.01 0.90
$1,000,000 or more** 0.00 0.00 0.00
</TABLE>
* Dealer's reallowance may be changed periodically.
** See "Large Purchase Exemption" below for a description of the contingent
deferred sales charge.
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.
LARGE PURCHASE EXEMPTION. The contingent deferred sales load discussed under
the Large Purchase Exemption does not apply to A Shares purchased under the
Daily Advantage(R) or Advantage Plus(TM) Programs. To the extent that no other A
Share no-load exemption is available, the foregoing schedule of sales loads does
not apply to purchases of A Shares of $1,000,000 or more or to purchases of A
Shares if the aggregate value of the A Shares that you beneficially own in any
Pacific Horizon Fund or Time Horizon Fund equals or exceeds $1,000,000. If you
accumulate $1,000,000 or more of A Shares, on any additional purchase of A
Shares, the contingent deferred sales load described below will apply to such A
Shares when they are redeemed. In addition, if a customer purchases $1,000,000
or more of A Shares and redeems such shares, a contingent deferred sales load
will be imposed as follows:
<TABLE>
<CAPTION>
NUMBER OF YEARS APPLICABLE CONTINGENT
ELAPSED SINCE PURCHASE DEFERRED SALES LOAD
- ---------------------- ----------------------
<S> <C>
1 year 1.0%
2 years 0.5%
3 years None
</TABLE>
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<PAGE> 72
The contingent deferred sales load is imposed on the lesser of the current
market value or the cost of the shares being redeemed. This means that this
charge will not be imposed upon increases in net asset value above the initial
purchase price or upon reinvested dividends. In determining whether a contingent
deferred sales charge is applicable to a redemption of such shares, the
calculation will be made in a manner that results in the lowest possible rate.
It will be assumed that the redemption is made first of amounts representing
shares acquired pursuant to the reinvestment of dividends and distributions;
then of amounts representing the increase in net asset value of your holdings of
shares above the total amount of payments for the purchase of shares during the
preceding 2 years; then of amounts representing the cost of shares held beyond
the applicable contingent deferred sales charge period; and finally, of amounts
representing the cost of the shares held for the longest period of time. In
addition, no contingent deferred sales load will be imposed on redeemed A Shares
if a front-end sales load had been previously imposed on such shares. Although
no front-end sales load will be paid on Large Purchase Exemptions, the
Distributor will compensate brokers whose customers purchase shares at the
following rates: 1.00% of the amount under $3 million, 0.50% of the next $47
million and 0.25% thereafter.
K SHARES. Bank of America will compensate Affiliated Brokers for their
customers who invested in the Fund and are participants in the Daily Advantage
Program. The Affiliated Brokers will be compensated by Bank of America at the
rate of 1.00% of the amount under $3 million, 0.50% of the next $47 million and
0.25% thereafter of combined Pacific Horizon Funds' and Time Horizon Funds' K
Shares in each Daily Advantage(R) Program.
WHEN NO FRONT-END 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 a registered investment adviser purchasing shares
for its own account or for an account for which it is authorized to make
investment decisions;
- - 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
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;
- - 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;
- - accounts open as of July 1, 1996, which were exempt from front-end sales loads
at the time the accounts were opened and where those exemptions are no longer
available for new account holders, so long as the accounts remain 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, minor
children and grandchildren, as well as members of the Board of Directors of
Bank of America or any of its affiliates;
15
<PAGE> 73
- - 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
- - holders of the BankAmericard with an appropriate award certificate from the
BankAmeriChoice Program (initial award only; a front-end sales load will apply
to subsequent purchases).
WHEN NO CONTINGENT DEFERRED SALES CHARGE IS APPLIED. To receive one of the
first three exemptions listed below, you must explain the status of your
redemption at the time you redeem your shares. The contingent deferred sales
charge with respect to A Shares purchased under the Large Purchase Exemption is
not charged on (1) exchanges described under "Shareholder Services -- Can I
Exchange My Investment From One Fund to Another?;" (2) redemptions in connection
with minimum required distributions from IRA accounts due to a shareholder
reaching age 70 1/2; (3) redemptions in connection with a shareholder's death or
disability (as defined in the Internal Revenue Code); and (4) involuntary
redemptions as a result of an account's net asset value remaining below $500
after sixty days' written notice. In addition, no contingent deferred sales
charge is charged on shares acquired through the reinvestment of dividends or
distributions.
RIGHTS OF ACCUMULATION. When buying A Shares in Pacific Horizon Funds, your
current aggregate investment determines the front-end 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 or Time Horizon Fund on which you paid a front-end 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). You may
also aggregate your investment in Pacific Horizon Funds and Time Horizon Funds
in order to qualify for the Large Purchase Exemption.
To qualify for a reduced sales load on A Shares, 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 A Shares carrying a sales load 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 additional A
Shares of the Fund carrying a sales load with a current value of $10,000, the
sales 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 on A Shares 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 within a period of 13 months, beginning up to 90 days prior to the date of
the Letter's execution. A Shares carrying a sales load 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. Shares of Time Horizon Funds may be included when
determining reduced sales loads under the letter of intent program.
16
<PAGE> 74
While signing a Letter of Intent does not bind you to purchase, or the Company
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 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 DO I DECIDE WHETHER TO BUY A OR K SHARES?
You should determine whether under your particular circumstances it is more
advantageous to invest in A Shares and incur a front-end sales charge and an
ongoing shareholder services plan fee; or invest in K Shares and incur neither a
front-end sales charge nor a contingent deferred sales charge. K Shares do incur
fees under a Distribution Plan and/or an Administrative and Shareholder Services
Plan. K Shares of the Fund, however, are only available to: (a) businesses or
other organizations that participate in the Daily Advantage(R) Program sponsored
by Bank of America; (b) individuals investing proceeds from a redemption of
shares from another open-end investment company on which such individual paid a
front-end sales load if (i) such redemption occurred within 30 days prior to the
purchase order and (ii) such other open-end investment company was not
distributed and advised by Concord Financial Group, Inc. and Bank of America,
respectively, or their affiliates; and (c) accounts opened for IRA rollovers
from a 401(k) plan in which the assets were held in any Pacific Horizon or Time
Horizon Fund and subsequent purchases into an IRA rollover account opened as
described above, so long as the original IRA rollover account remains open on
the Company's books ("Qualified IRA Rollovers").
17
<PAGE> 75
HOW CAN I BUY SHARES?
The chart below provides more information regarding some of the different
methods for investing in the Fund.
- --------------------------------------------------------------------------------
TO BUY SHARES
-------------------------------------------------------------------------------
<TABLE>
<CAPTION>
OPENING AN ACCOUNT ADDING TO AN ACCOUNT
<S> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------
THROUGH BANK OF AMERICA, YOUR BROKER OR ANOTHER SERVICE ORGANIZATION
(ORDERS ARE NOT EFFECTIVE UNTIL RECEIVED BY THE FUND'S TRANSFER AGENT)
Contact them directly for Contact them directly for
instructions. instructions.
- -------------------------------------------------------------------------------------------------------
THROUGH THE DISTRIBUTOR
(IF YOU ARE OR WILL BE THE SHAREHOLDER OF RECORD ON THE COMPANY'S BOOKS)
BY MAIL
Complete Account Application Mail all subsequent
and mail it with a check investments to:
(payable to Pacific Horizon
International Equity Fund) to Pacific Horizon Funds, Inc.
the address on the Account File No. 54634
Application. Los Angeles, CA 90074-4634
- --------------------------------------------------------------------------------------------------------
IN PERSON
BISYS Fund Services, Inc. Deliver Account Application Deliver your payment directly
3435 Stelzer Road and your payment directly to to the address on the left.
Columbus, OH 43219-3035 the address on the left.
- --------------------------------------------------------------------------------------------------------
BY WIRE
Initial purchases of shares Contact the Fund's transfer
into a new account may not be agent at 800-346-2087 for
made by wire. complete wiring instructions.
Instruct your bank to
transmit immediately
available funds for purchase
of Fund shares in your name.
Be sure to include your name
and your Fund account number.
Consult your bank for information on remitting funds by wire
and any associated bank charges.
</TABLE>
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18
<PAGE> 76
- --------------------------------------------------------------------------------
TO BUY SHARES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
OPENING AN ACCOUNT ADDING TO AN ACCOUNT
<S> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------
BY TELETRADE TeleTrade Privileges may not Purchases may be made in the
(a service permitting transfers be used to make an initial minimum amount of $500 and
of money from your purchase. the maximum amount of $50,000
checking, NOW or bank per transaction as soon as
money market account) appropriate information
regarding your bank account
has been established on your
Fund account. This
information may be provided
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.
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.
- -------------------------------------------------------------------------------------------------------
</TABLE>
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 12:00 p.m. Eastern time after your purchase order is received in proper
form by the Fund's transfer agent, BISYS Fund Services, Inc. (the "Transfer
Agent"), at its Columbus 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 12:00 p.m. Eastern
time on a business day will be effected at the public offering price calculated
at 12:00 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. Except as provided in the following two sentences, if the order is not
received in proper form by a Service Organization by 12:00 p.m. Eastern time or
not received by the Transfer Agent by the close of the Transfer Agent's 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 12:00 p.m. Eastern time on a business
day will be effected as of 12:00 p.m.
19
<PAGE> 77
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?
You must specify at the time of investment whether you are purchasing A or K
Shares. Certificates for shares will not be issued.
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
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.
20
<PAGE> 78
- --------------------------------------------------------------------------------
TO SELL SHARES
-------------------------------------------------------------------------------
<TABLE>
<S> <C>
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.
</TABLE>
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
THROUGH THE DISTRIBUTOR
(IF YOU ARE A SHAREHOLDER OF RECORD ON THE COMPANY'S BOOKS)
BY MAIL
Pacific Horizon Send a signed, written request (each owner, including each
International Equity Fund joint owner, must sign) to the Transfer Agent.
c/o Pacific Horizon Funds,
Inc.
P.O. Box 80221
Los Angeles, CA 90080-9909
</TABLE>
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
IN PERSON
BISYS Fund Services, Inc.
3435 Stelzer Road Deliver your signed, written request (each owner, including
Columbus, OH 43219-3035 each joint owner, must sign) to the address on the left.
</TABLE>
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
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>
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21
<PAGE> 79
- --------------------------------------------------------------------------------
TO SELL SHARES
- --------------------------------------------------------------------------------
<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.
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 Columbus
office. Although the Fund itself imposes no charge when A Shares are redeemed
(except pursuant to the Large Purchase Exemption described above), 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 Funds impose no charge when K Shares are redeemed.
The Company reserves the right to redeem accounts (other than 401(k), 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. The
contingent deferred sales charge applicable to A Shares purchased under the
Large Purchase Exemption will not be imposed upon such involuntary redemptions.
WHAT KIND OF PAPERWORK IS INVOLVED IN SELLING SHARES?
Redemption requests must be signed by each shareholder, including each joint
owner. When redeeming shares, you should indicate whether you are redeeming A or
K Shares. Certain types of redemption requests 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.
22
<PAGE> 80
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. The Company
may suspend the right of redemption or postpone the date of payment upon
redemption (as well as suspend the recordation of the transfer of shares) for
such periods as are permitted under the 1940 Act.
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, in shares of the same class of the Fund out of which you redeemed, in like
shares of another Fund in the Pacific Horizon Family of Funds or in like shares
of any investment portfolio of Time Horizon Funds within 90 days of your
redemption trade date without paying a sales load. Upon such a reinvestment, the
Fund's distributor will credit to your account any contingent deferred sales
charge imposed on any redeemed A Shares subject to the Large Purchase Exemption.
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 and distributions arising
from the net investment income and net realized gains, if any, earned on
investments in the Master Portfolio which are allocable to the Fund. The Fund's
net income and net realized capital gains (if any) are distributed at least
annually. Distributions are paid within five business days after the end of the
year.
You will automatically receive dividends and capital gain distributions in
additional shares of the same class of shares of the Fund for which the dividend
was declared 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 A Fund Be Invested In
Other 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 80221, Los Angeles, California
90080-9909. The election or revocation will become effective with respect to
dividends paid after it is received by the Transfer Agent.
23
<PAGE> 81
- --------------------------------------------------------------------------------
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 FUNDS 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.
The contingent deferred sales charge with respect to A Shares subject to the
Large Purchase Exemption will not be charged on redemptions in connection with
minimum required distributions from an IRA due to a shareholder having reached
age 70-1/2. 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 should consult their tax advisers.
Additionally, K Shares are available to businesses and other organizations that
participate in the Daily Advantage(R) Program sponsored by Bank of America and
to Qualified IRA Rollovers.
CAN I EXCHANGE MY INVESTMENT FROM ONE
FUND TO ANOTHER?
As a shareholder, you have the privilege of exchanging your shares for: like
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.
Specifically, A Shares may be exchanged for other A Shares, and K Shares may be
exchanged for other K Shares. NO ADDITIONAL SALES LOAD WILL BE INCURRED WHEN
EXCHANGING A SHARES PURCHASED WITH A SALES LOAD FOR A SHARES OF ANOTHER LOAD
FUND OF THE COMPANY OR TIME HORIZON FUNDS.
Neither a contingent deferred sales load nor a front-end sales load will be
imposed if a shareholder who has entered a Fund under the Large Purchase
Exemption exchanges shares between Funds of the Company or Time Horizon Funds.
However, shares acquired in the exchange will remain subject to the contingent
deferred sales load discussed above. The contingent deferred sales load is
calculated as a percentage of the lesser of the current market value or the cost
of the shares being redeemed. This means that this charge will not be imposed
upon increases in net asset value above the initial purchase price or upon
reinvested dividends. In determining whether a contingent deferred sales charge
is applicable to a redemption of such shares, the calculation will be made in a
manner that results in the lowest possible rate. It will be assumed that the
redemption is made first of amounts representing shares acquired pursuant to the
reinvestment of dividends and distributions; then of amounts representing the
increase in net asset value of your holdings of shares above the total amount of
payments for the purchase of shares during the preceding 2 years; then of
amounts representing the cost of shares held beyond the applicable contingent
deferred sales charge period; and finally, of amounts representing the cost of
the shares held for the longest period of time.
24
<PAGE> 82
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."
An exchange is considered a sale of shares of a Fund and the purchase of shares
of another Fund and may result in a capital gain or loss for federal income tax
purposes.
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 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 caused by 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, including requesting certain personal
or account information to confirm the identity of the shareholder. 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.
25
<PAGE> 83
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 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 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. Use of this Plan may also be disadvantageous for A Shares
subject to the Large Purchase Exemption due to the potential need to pay a
contingent deferred sales charge.
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
26
<PAGE> 84
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 FUNDS
- --------------------------------------------------------------------------------
FUND MANAGEMENT
The business affairs of Pacific Horizon Funds, Inc. 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."
EXPENSES
Operating expenses borne by the Fund and the Master 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. Master 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 the Master
Portfolio bear the expenses incurred in their operations.
SERVICE PROVIDERS
INVESTMENT ADVISER
Bank of America serves as Investment Adviser of the Master 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, business
credit and thrift offices in major U.S. cities. In addition, it has branches,
corporate offices and representative offices in 36 foreign countries.
27
<PAGE> 85
In its advisory agreement, Bank of America has agreed to manage the Master
Portfolio's investments and to be responsible for, place orders for, and make
decisions with respect to, all purchases and sales of the Master Portfolio's
securities. The advisory 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 that Bank of America remains fully responsible to the Master Portfolio
for the acts and omissions of the sub-adviser.
Since the commencement of operations of the Fund, E. Keith Wirtz has been the
lead manager of the Master Portfolio, and Jeanne Howard and Bernard H. Taylor
co-manage and are primarily responsible for the day-to-day investment activities
of the Master Portfolio. Mr. Wirtz is a senior vice president and chief
investment officer of Bank of America, his employer since 1992. Previously, he
was trust investment manager with Security Pacific Bank for a ten year period.
Mr. Wirtz is a Chartered Financial Analyst. Ms. Howard joined Bank of America in
1992 and has been a co-manager and portfolio manager of Bank of America's
International Equity Common Trust Fund since its inception in 1993. Mr. Taylor
joined Bank of America in 1994 as Regional Investment Manager for the European
Investment Group in London. Prior to joining Bank of America, he managed client
assets for BSI-Thornhill for four years, was European Fund Manager for Hill
Samuel Investment Management Group for two years and had investment research and
analysis responsibilities for Mercantile and General Reinsurance Company for
three years.
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
Master Portfolio's average daily net assets. This fee is higher than that paid
by other investment companies but is comparable to 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").
In addition, Bank of America and its affiliates may be entitled to fees under
the Shareholder Services Plan, Distribution Plan and Administrative and
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 Master Portfolio. Concord is an indirect, wholly owned subsidiary of The
BISYS Group, Inc. Its offices are located at 3435 Stelzer Road, Columbus, Ohio
43219-3035.
Under its administration agreements with the Company and the Master Portfolio,
Concord has agreed to: pay the costs of maintaining the offices of the Company
and the Master 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 Master 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 Master Portfolio; calculate the net asset value of
the Fund and the Master Portfolio; calculate the dividends and capital gains
distributions paid to shareholders; serve as dividend disbursing agent for the
Master Portfolio; and generally assist in all aspects of the operations of the
Fund and the Master 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 Master Portfolio at
the annual rate of 0.05% of the Master Portfolio's average daily net assets.
28
<PAGE> 86
These amounts may be reduced pursuant to undertakings by Concord. (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 Master Portfolio,
calculating dividends and capital gains distributions to shareholders, and
maintaining the books and records of the Fund and the Master Portfolio. The Fund
and the Master 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 an indirect, wholly owned
subsidiary of The BISYS Group, Inc. and is located at 3435 Stelzer Road,
Columbus, Ohio 43219-3035.
CUSTODIAN AND TRANSFER AGENT
PNC Bank, National Association, Broad and Chestnut Streets, Philadelphia,
Pennsylvania, 19101 serves as the Custodian of the Fund and the Master
Portfolio. BISYS Fund Services, Inc. is the transfer and dividend disbursing
agent of the Fund and is located at 3435 Stelzer Road, Columbus, Ohio
43219-3035.
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 the Master
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 prospectively
choose not to receive fee payments and/or may assume certain Fund or Master
Portfolio expenses as a result of competitive pressures and in order to preserve
and protect the business and reputation of Concord and Bank of America. However,
the service providers retain the ability to discontinue such fee waivers and/or
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 FUNDS.
- --------------------------------------------------------------------------------
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
The Fund intends to qualify as a "regulated investment company" under the
Internal Revenue Code, as amended (the "Code"), for the current taxable year,
and the Fund intends that it will so qualify in future years as long as such
qualification is in the best interests of its 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 Master Portfolio will not be subject to federal income taxes.
The Master Portfolio intends to qualify as a partnership (or other pass-through
entity) for
29
<PAGE> 87
federal income tax purposes. As such, the Master 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 Master Portfolio's income and deductions and owning
its pro rata share of the Master Portfolio's assets. The Fund's status as a
regulated investment company is dependent on, among other things, the Master
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) derived from
ordinary income and/or the excess of net short-term capital gains over net
long-term capital loss are taxable to you as ordinary income. It is not
anticipated that any such distribution from the Fund will qualify for the
dividends received deduction allowed to corporations.
Any distribution you receive comprised of the excess of net long-term capital
gains over net short-term capital losses ("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 distribution 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. If you hold Fund 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 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 for the purpose of calculating your gain or loss from the exchange. It
may be included in the tax basis of the new shares, subject to this same
limitation.
Certain interest income and dividends earned by the Master Portfolio from
foreign securities is expected to be subject to foreign withholding taxes or
other taxes. So long as more than 50% of the value of the Fund's total assets at
the close of any taxable year consists of stock or securities of foreign
corporations, the Fund may elect, for U.S. federal income tax purposes, to treat
certain foreign taxes paid by it, including generally any withholding taxes and
other foreign income taxes, as paid by its shareholders. The Fund may make this
election. As a consequence, the amount of these foreign taxes paid by the Master
Portfolio will be included in the income of the Fund's shareholders pro rata (in
addition to taxable distributions actually received by them), and a shareholder
will be entitled either (a) to credit their proportionate amount of such taxes
against his U.S. federal income tax liabilities, or (b) if they itemize their
deductions, to deduct such proportionate amounts from their U.S. income.
Certain realized gains or losses on the sale or retirement of foreign bonds held
by the Master Portfolio, to the extent attributable to fluctuations in currency
or exchange rates, 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
30
<PAGE> 88
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 gains. 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.
The Fund will be required in certain cases to withhold and remit to the U.S.
Treasury 31% of the dividends paid to any investor (i) who has provided either
an incorrect Social Security Number or Taxpayer Identification Number or no
number at all, (ii) who is subject to withholding by the Internal Revenue
Service for failure properly to include on this return payments of interest or
dividends, or (iii) who has failed to certify to the Fund, when required to do
so, that he is not subject to backup withholding or that he is an "exempt
recipient."
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 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 assume dividends and capital gains distributions made
by the Fund during the period are reinvested in Fund shares, and include the
maximum front-end sales charge for A 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.
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 Europe, Asia
and Far East Index ("EAFE"); the Dow Jones Industrial Average; the Financial
Times World Stock Index; the Lipper International Fund Index; the Standard &
Poor's 500 Stock Index; 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
31
<PAGE> 89
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 40 million shares of Class
T Common Stock, 60 million shares of Class T--Special Series 3 Common Stock and
50 million shares of Class T--Special Series 5 Common Stock, representing
interests in the Fund; and additional classes of shares representing interests
in other investment portfolios of the Company. Class T Common Stock are the "A"
Shares; Class T--Special Series 3 Common Stock are the "B" Shares and Class
T--Special Series 5 Common Stock are the "K" Shares. As of the date of this
prospectus, B Shares have not been offered to the Public. The Board of Directors
may similarly classify or reclassify any class of shares (including unissued
Class T Common Stock, Class T--Special Series 3 Common Stock or Class T--Special
Series 5 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 upon 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). Only A Shares will vote on
matters relating solely to A Shares, and K Shares will vote on matters relating
solely to K Shares. 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.
32
<PAGE> 90
- --------------------------------------------------------------------------------
PLAN PAYMENTS
THE COMPANY HAS ADOPTED A SHAREHOLDER SERVICES PLAN (THE "PLAN") FOR A SHARES
AND A DISTRIBUTION PLAN AND AN ADMINISTRATIVE AND SHAREHOLDER SERVICES PLAN
FOR K SHARES.
- --------------------------------------------------------------------------------
The Company has adopted a Shareholder Services Plan for A Shares, under which
the A Shares of the Fund reimburse the Distributor for shareholder servicing
fees the Distributor pays to Service Organizations. The Company has adopted a
Distribution Plan pursuant to Rule 12b-1 under the 1940 Act under which the K
Shares of the Fund reimburse the Distributor for services rendered and costs
incurred in connection with distribution of the K Shares. The Company has also
adopted an Administrative and Shareholder Services Plan for K Shares, under
which K Shares of the Fund reimburse the Distributor for administrative and
shareholder servicing fees the Distributor pays to Service Organizations.
SHAREHOLDER SERVICES PLAN
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 average daily net assets of the Fund's A
Shares. 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.
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."
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.
DISTRIBUTION PLAN AND ADMINISTRATIVE AND SHAREHOLDER SERVICES PLAN
Under the Distribution Plan, the Fund pays the Distributor for distribution
expenses primarily intended to result in the sale of the Fund's K Shares. Such
distribution expenses include expenses incurred in connection with advertising
and marketing the Fund's K Shares; payments to Service Organizations for
assistance in connection with the distribution of K Shares; and expenses
incurred in connection with preparing, printing and distributing prospectuses
for the Fund (except those used for regulatory purposes, for solicitation or
distribution to existing or potential A shareholders, or for distribution to
existing K
33
<PAGE> 91
shareholders of the Fund) and in implementing and operating the Distribution
Plan.
Shareholder servicing expenses under the Administrative and Shareholder Services
Plan include, but are not limited to, expenses incurred in connection with
shareholder services provided by the Distributor and payments to Service
Organizations for the provision of support services with respect to the
beneficial owners of K Shares, such as assisting clients in processing exchange
and redemption requests and in changing dividend options and account
descriptions and responding to client inquiries concerning their investments.
Administrative servicing expenses under the Administrative Services Plan
include, but are not limited to, expenses incurred in connection with
administrative services provided by the Distributor and payments to Service
Organizations for the provision of administrative services to beneficial owners
of K Shares such as establishing and maintaining accounts and records relating
to their clients who invest in K Shares, providing information to the Fund
necessary for accounting or sub-accounting; and providing statements
periodically to clients showing their position in K Shares.
Under the Distribution Plan, payments by the Fund for distribution expenses may
not exceed 0.75% (annualized), of the average daily net assets of the Fund's K
Shares. Under the Administrative and Shareholder Services Plan, payments for
shareholder servicing expenses may not exceed 0.25% (annualized) of the average
daily net assets of the Fund's K Shares. Under the Administrative and
Shareholder Services Plan, payments for administrative servicing expenses may
not exceed 0.75% (annualized) of the average daily net assets of the Fund's K
Shares. The total of all 12b-1 fees, administrative services fees and
shareholder services fees may not exceed, in the aggregate, the annual rate of
1.00% of the average daily net assets of the Fund's K Shares. These amounts may
be reduced pursuant to undertakings by the Distributor. Payments for
distribution expenses under the Distribution Plan are subject to Rule 12b-1
under the 1940 Act.
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.
34
<PAGE> 92
IEQ-0001
- ----------------------------
PACIFIC HORIZON MUTUAL FUNDS
- ----------------------------
INTERNATIONAL
EQUITY FUND
PROSPECTUS
July 1, 1996
NOT FDIC INSURED
<PAGE> 93
PROSPECTUS
JULY 1, 1996
PACIFIC HORIZON ASSET ALLOCATION FUND
Investment Portfolio Offered by 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.
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 "MASTER PORTFOLIO") HAVING THE SAME INVESTMENT OBJECTIVE AS THAT OF THE
FUND. THE FUND WILL PURCHASE SHARES OF THE MASTER PORTFOLIO AT NET ASSET VALUE.
THE NET ASSET VALUE OF THE FUND WILL RESPOND TO INCREASES AND DECREASES IN THE
VALUE OF THE MASTER PORTFOLIO'S SECURITIES. INVESTORS SHOULD CAREFULLY CONSIDER
THIS INVESTMENT APPROACH. SEE "OTHER INVESTMENT PRACTICES AND
CONSIDERATIONS -- MASTER-FEEDER STRUCTURE" ON PAGE 11 FOR ADDITIONAL INFORMATION
REGARDING THIS STRUCTURE.
This Prospectus describes two classes of shares. A Shares are sold with a
front-end sales charge. K Shares are not subject to either a front-end sales
charge or a contingent deferred sales charge.
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 Master
Portfolio's investment adviser. Based in San Francisco, California, Bank of
America and its affiliates have over $48 billion under management, including
over $12 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, 1996 and is
incorporated by reference into this Prospectus.
- --------------------------------------------------------------------------------
Shares of the Fund 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, other than those contained in this Prospectus, in the Statement
of Additional Information and the Fund's official sales literature, 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> 94
CONTENTS
<TABLE>
<S> <C> <C>
EXPENSE SUMMARY 2
FINANCIAL HIGHLIGHTS 5
FUND INVESTMENTS 6 INVESTMENT OBJECTIVE
6 TYPES OF INVESTMENTS
7 FUNDAMENTAL LIMITATIONS
8 OTHER INVESTMENT PRACTICES AND CONSIDERATIONS
SHAREHOLDER GUIDE 13 HOW TO BUY SHARES
13 What Is My Minimum Investment In The Fund?
13 What Alternative Sales Arrangements Are Available?
13 How Are Shares Priced?
17 How Do I Decide Whether To Buy A or K Shares?
18 How Can I Buy Shares?
19 What Price Will I Receive When I Buy Shares?
20 What Else Should I Know To Make A Purchase?
20 HOW TO SELL SHARES
20 How Do I Redeem My Shares?
22 What NAV Will I Receive For Shares I Want To Sell?
22 What Kind Of Paperwork Is Involved In
Selling Shares?
23 How Quickly Can I Receive My Redemption Proceeds?
23 Do I Have Any Reinstatement Privileges After
I Have Redeemed Shares?
DIVIDEND AND DISTRIBUTION POLICIES 23
SHAREHOLDER SERVICES 24 CAN I USE THE FUND IN MY RETIREMENT PLAN?
24 CAN I EXCHANGE MY INVESTMENT FROM ONE FUND TO ANOTHER?
25 WHAT IS TELETRADE?
25 CAN I ARRANGE TO HAVE AUTOMATIC INVESTMENTS MADE ON A
REGULAR BASIS?
26 WHAT IS DOLLAR COST AVERAGING AND HOW CAN I IMPLEMENT
IT?
26 CAN I ARRANGE PERIODIC WITHDRAWALS?
26 CAN MY DIVIDENDS FROM THE FUND BE INVESTED
IN OTHER FUNDS?
27 IS THERE A SALARY DEDUCTION PLAN AVAILABLE?
THE BUSINESS OF THE FUND 27 FUND MANAGEMENT
27 Service Providers
TAX INFORMATION 29
MEASURING PERFORMANCE 30
DESCRIPTION OF SHARES 31
PLAN PAYMENTS 32
- ------------------------------------------------------------------------------------------------------------------------
DISTRIBUTOR: INVESTMENT ADVISER:
Concord Financial Group, Inc. Bank of America National Trust and Savings Association
3435 Stelzer Road 555 California Street
Columbus, OH 43219-3035 San Francisco, CA 94104
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 95
EXPENSE SUMMARY
SHAREHOLDER TRANSACTION EXPENSES are charges you pay when buying or selling
shares of the Fund. The Fund offers two classes of shares. A Shares are offered
at net asset value plus a front-end sales charge (see page 13 of the Prospectus
for an explanation of net asset value per share) and are subject to a
shareholder servicing fee. K Shares are offered at net asset value with neither
a front-end sales charge nor a contingent deferred sales charge, but are subject
to distribution, administrative servicing and shareholder servicing fees.
ANNUAL FUND OPERATING EXPENSES include payments by the Fund and payments by the
Master Portfolio which are allocable to the Fund. Operating expenses include
fees for portfolio management, maintenance of shareholder accounts, general
administration, distribution (in the case of K Shares only), shareholder
servicing, accounting and other services.
Below is a summary of the shareholder transaction expenses imposed by the Fund
for A and K Shares and their estimated operating expenses (including the
operating expenses of the Master 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> <C> <C>
A SHARES K SHARES
-------- --------
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load
Imposed on
Purchases (as a
percentage of
offering price) 4.50% None(2)
Sales Load Imposed on
Reinvested
Dividends None None
Maximum Contingent
Deferred Sales Load
(as a percentage of
original purchase
price or redemption
proceeds, whichever
is lower) None(1) None
Redemption Fees None None
Exchange Fee None None
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average
net assets)
Management Fees
(After Fee
Waivers)+ 0.33% 0.33%
12b-1 Fee (After Fee
Waivers)* 0% 0.50%*
Administrative
Services Fee (After
Fee Waivers)* 0% 0.50%*
Shareholder Services
Fee* 0.25% 0.25%*
-----
Total of all 12b-1
Fees OR
Administrative
Services Fees
and Shareholder
Services Fees
for K Shares
(After Fee
Waivers)* 0.75%*
Other Expenses
(After Expense
Reimbursements)+ 0.77% 0.77%
------ ------
Total Operating
Expenses
(After Fee Waivers
and Expense
Reimbursements)+ 1.35% 1.85%
------ ------
------ ------
</TABLE>
- --------------------------------------------------------------------------------
(1) There is no front-end sales load on A Shares you purchase if you have either
a combined purchase of A Shares of the Company of $1,000,000 or more or if
the aggregate value of A Shares that you beneficially own in any Pacific
Horizon Fund or Time Horizon Fund, another open-end investment company
managed by Bank of America (a "Time Horizon Fund"), equals or exceeds
$1,000,000 ("Large Purchase Exemption"). A Shares purchased under the Large
Purchase Exemption (except A Shares purchased under the Daily Advantage(R)
or Advantage Plus(TM) Programs) are subject to a contingent deferred sales
charge of
2
<PAGE> 96
1.00% and 0.50%, respectively, on redemptions within one and two years after
purchase. The contingent deferred sales charge is paid to Concord Financial
Group, Inc. (the "Distributor"). A Shares cannot be purchased under the
Large Purchase Exemption if there is another no-load exemption available.
Accordingly, A Shares purchased under another no-load exemption are not
subject to a contingent deferred sales charge. Although no front-end sales
load will be paid on shares purchased under the Large Purchase Exemption,
the Distributor will compensate brokers whose customers purchase such shares
at the following rates: 1.00% of the amount under $3 million, 0.50% of the
next $47 million and 0.25% thereafter.
(2) Bank of America will compensate Seafirst Investment Services, Inc. ("SIS")
and BA Investment Services, Inc. ("BAIS") (BAIS and SIS are collectively
referred to herein as "Affiliated Brokers") for their customers who have
invested in the Fund and are participants in the Daily Advantage(R) Program.
The Affiliated Brokers will be compensated by Bank of America at the rate of
1.00% of the amount under $3 million, 0.50% of the next $47 million and
0.25% thereafter of combined Pacific Horizon Funds' and Time Horizon Funds'
K Shares in each Daily Advantage(R) Program.
+ Absent fee waivers and/or expense reimbursements, management fees for each
class of the Fund would be 0.75% of the average net assets (annualized);
"Other Expenses" for the Fund's A and K Shares are estimated to be 0.92% and
0.92%, respectively, of average net assets (annualized); and "Total Operating
Expenses" for the Fund's A and K Shares are estimated to be 1.92% and 2.67%
of average net assets (annualized), respectively.
* Absent fee waivers, 12b-1 fees or administrative services fees would be 0.75%
or 0.75%, respectively, of the average net assets (annualized) of the Fund's
K Shares. The total of all 12b-1 fees, administrative services fees and
shareholder services fees may not exceed, in the aggregate, the annual rate
of 1.00% of the average net assets of the Fund's K Shares. However, it is
expected that during the current fiscal year, such fees will not exceed 0.75%
of the average net assets of the Fund's K Shares. Because of the Rule 12b-1,
administrative and/or shareholder services fees paid by the Fund as shown in
the above table, long-term K shareholders may pay more than the economic
equivalent of the maximum front-end sales charge permitted by the National
Association of Securities Dealers, Inc. 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" below.
- --------------------------------------------------------------------------------
EXAMPLE: Assume the Fund's annual return is 5% and operating expenses are the
same as those stated above. For every $1,000 you invest, here is how much you
would have paid in total expenses if you closed your account after the number of
years indicated:
<TABLE>
<S> <C> <C> <C> <C>
After 1 Yr After 3 Yrs After 5 Yrs After 10 Yrs
------------ ------------- ------------- --------------
A Shares(1) $58 $86 $116 $200
K Shares $19 $58 $100 $217
</TABLE>
(1) Assumes deduction at time of purchase of maximum applicable front-end sales
charge but does not assume deduction at redemption of maximum applicable
contingent deferred sales charge under the Large Purchase Exemption.
- --------------------------------------------------------------------------------
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 consist of:
- - an investment advisory fee payable at the annual rate of 0.55% of the Master
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 Master Portfolio's average daily net
assets.
Currently, the most restrictive expense limitation limits the Fund's aggregate
annual expenses (including management fees and the Fund's pro rata share of such
expenses of the Master Portfolio) to 2.5% of the first $30 million of the Fund's
3
<PAGE> 97
average daily net assets, 2% of the next $70 million and 1.5% of the Fund's
remaining average daily net assets.
The Board of Directors of the Company believes that the aggregate per share
expenses of the Fund and the Master 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 Master Portfolio. Further, the Directors believe that the
shareholders of the Fund may 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 Master Portfolio will
be realized, inasmuch as the Company is not aware of any other potential
investor in the Master Portfolio.
The alternative sales arrangements permit you to choose the method of purchasing
shares that is most beneficial given the amount of the purchase, the length of
time you expect to hold the shares and other circumstances. You should determine
whether under your particular circumstances it is more advantageous to incur a
front-end sales charge and thereafter be subject to annual fees under a
Shareholder Services Plan, with respect to A Shares; or incur neither a
front-end sales charge nor a contingent deferred sales charge, but incur fees
under a Distribution Plan and/or an Administrative and Shareholder Services
Plan, with respect to K Shares. K Shares, however, are only available for
investment by: (a) businesses or other organizations that participate in the
Daily Advantage(R) Program sponsored by Bank of America; (b) individuals
investing proceeds from a redemption of shares from another open-end investment
company on which such individual paid a front-end sales load if (i) such
redemption occurred within 30 days prior to the purchase order, and (ii) such
other open-end investment company was not distributed and advised by Concord
Financial Group, Inc. and Bank of America, respectively, or their affiliates;
and (c) accounts opened for IRA rollovers from a 401(k) plan in which the assets
were held in any Pacific Horizon or Time Horizon Fund and subsequent purchases
into an IRA rollover account opened as described above, so long as the original
IRA rollover account remains open on the Company's books. See the section
entitled "How To Buy Shares" below.
4
<PAGE> 98
FINANCIAL HIGHLIGHTS
The table below shows certain information concerning the investment results for
the Fund for the periods indicated. During the periods shown, the Fund did not
offer K Shares. Actual investment results of the K Shares may be different. 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 thereon which are incorporated by reference into 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 an A Share of common stock outstanding throughout each of the
periods indicated:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE PERIOD
JANUARY 18, 1994
FOR THE YEAR FOR THE YEAR (COMMENCEMENT OF
ENDED ENDED OPERATIONS) THROUGH
FEBRUARY 29, 1996 FEBRUARY 28, 1995 FEBRUARY 28, 1994
----------------- ----------------- -------------------
<S> <C> <C> <C>
Net asset value per share, beginning of period....... $ 15.15 $ 14.84 $ 15.00
----------------- ------- -------
Income from Investment Operations:
Net investment income.............................. 0.52 0.48 0.03
Net realized and unrealized gains (losses) on
securities....................................... 2.86 0.24 (0.19)
----------------- ------- -------
Total gain (loss) from investment operations....... 3.38 0.72 (0.16)
Less Dividends and Distributions:
Dividends to shareholders from net investment
income........................................... (0.53) (0.41) --
Distributions to shareholders from net realized
gains on securities.............................. (0.48) -- --
----------------- ------- -------
Total dividends and distributions.................. (1.01) (0.41) --
----------------- ------- -------
Net change in net asset value........................ 2.37 0.31 (0.16)
----------------- ------- -------
Net asset value per share, end of period............. $ 17.52 $ 15.15 $ 14.84
============== ============== ===============
Total Return+........................................ 22.80% 5.03% (1.07)%
Ratios/supplemental data:
Net assets, end of period (000).................... $22,355 $ 5,694 $ 666
Ratio of expenses to average net assets*........... 0.62% 0.00% 0.00%++
Ratio of net investment income to average net
assets*.......................................... 3.49% 4.25% 4.20%++
</TABLE>
- ---------------
* Reflects the Fund's proportionate share of the fee waivers and expense
reimbursements by the Master 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 2.30%, 7.89% and 83.95% (annualized) for the periods ended February
29, 1996, February 28, 1995 and February 28, 1994, respectively.
+ 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 on A
Shares.
++ Annualized.
5
<PAGE> 99
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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 MASTER
PORTFOLIO. THE MASTER PORTFOLIO HAS THE SAME INVESTMENT OBJECTIVE AS THE FUND.
WHILE THE MASTER 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
MASTER PORTFOLIO, THE FOLLOWING IS A DISCUSSION OF THE VARIOUS INVESTMENTS OF
AND TECHNIQUES EMPLOYED BY THE MASTER PORTFOLIO.
- --------------------------------------------------------------------------------
TYPES OF INVESTMENTS
IN GENERAL. The Master 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 Master 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 Master Portfolio may invest. Under normal market
conditions at least 25% of the Master Portfolio's total assets will be invested
in fixed income senior securities.
Mortgage-backed securities, such as Government National Mortgage Association
("GNMA"), Federal National Mortgage Association ("FNMA") and Federal Home Loan
Mortgage Corporation ("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 Master 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.
6
<PAGE> 100
During such periods, the reinvestment of prepayment proceeds will generally be
at lower rates than the rates on the prepaid obligations.
The Master 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 Master 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 Master 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 Master 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 Master 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 Master 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 Master
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 Master
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 Master 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,
7
<PAGE> 101
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 Master Portfolio may invest in securities of foreign issuers that
may or may not be publicly traded in the United States, such as 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 Master Portfolio
to invest no more than 25% of its net assets (at the time of purchase) in
foreign securities. The Master 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 Master Portfolio. In
addition, 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 Master Portfolio may purchase put and call options on listed
securities and stock indexes so long as the aggregate of the premiums paid for
options does not exceed 2% of the net assets of the Master Portfolio (this
restriction does not apply to options on futures contracts). Put options may be
purchased in order to protect the Master 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 Master
Portfolio may not write put options but may write fully covered call options as
long as the Master 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
Master Portfolio. For additional information relating to option trading
practices, including particular risks thereof, see the Statement of Additional
Information.
FUTURES. The Master 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 Master Portfolio or which it intends to purchase and where the transactions
are economically appropriate for the reduction of risks inher-
8
<PAGE> 102
ent in the ongoing management of the Master Portfolio. The Master 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 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 Master
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 Master Portfolio may invest in variable and
floating rate instruments, which may include master demand notes. Although
payable on demand by the Master 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 or the
equivalent by another nationally recognized statistical rating organization
("NRSRO"), (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 Master 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")
(including money market funds advised by Bank of America). No more than 10% of
the value of the Master 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; except that if a pending exemption order is
granted by the Securities and Exchange Commission ("SEC") with respect to the
investment in a money market mutual fund advised by Bank of America, the Master
Portfolio is permitted to invest in the greater of 5% of its net assets or $2.5
million. In addition, the Master Portfolio may hold no more than 3% of the
outstanding voting stock of any other investment company. As a shareholder of
another investment company, the Master Portfolio would bear, along with other
shareholders, its pro rata portion of the other investment company's expenses,
including advisory fees.
REPURCHASE AGREEMENTS. The Master Portfolio may enter into repurchase
agreements. Under these agreements, the Master 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 the equivalent by another NRSRO, 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 are considered illiquid investments and investment in such repurchase
agreements along with any other illiquid securities will not exceed 10% of the
value of the net assets of the Master 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 Master Portfolio's custodian or
its agent will have physical possession of the securities or the securities will
be transferred to the Master 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 Master Portfo-
9
<PAGE> 103
lio 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 of the securities by the Master
Portfolio may be delayed or denied.
REVERSE REPURCHASE AGREEMENTS. The Master Portfolio may enter into reverse
repurchase agreements. Under these arrangements, the Master Portfolio will sell
a security held by it 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 Master Portfolio relinquishes
may decline below the price the Master 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 Master
Portfolio's outstanding shares.
SECURITIES LENDING. In order to earn additional income, the Master 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 Master Portfolio. If the
broker-dealer should become bankrupt, however, the Master 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 Master Portfolio exceeds 10% of
its total assets. Securities loans will be fully collateralized.
ASSET-BACKED SECURITIES. The Master 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 Master Portfolio must be reinvested in
securities whose yields reflect interest rates prevailing at the time. Thus, the
Master 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 Master Portfolio's experiencing difficulty
in valuing or liquidating such securities.
10
<PAGE> 104
WHEN-ISSUED SECURITIES AND FORWARD COMMITMENTS. The Master 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 Master 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 Master 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 Master 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 Master Portfolio's when-issued purchases and forward
commitments are not to exceed 25% of the value of the Master Portfolio's total
assets absent unusual market conditions. The Master Portfolio does not intend to
engage in when-issued purchases and forward commitments for speculative purposes
but only in furtherance of its investment objective.
ILLIQUID SECURITIES. The Master Portfolio will not invest more than 10% of the
value of its net 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 Master Portfolio will take steps to reduce the aggregate amount
of illiquid securities as soon as is reasonably practicable.
SECURITIES ISSUED BY BANK OF AMERICA AND AFFILIATES. The Master Portfolio will
not invest in instruments or securities issued by Bank of America or any of its
affiliates.
MASTER PORTFOLIO TRANSACTIONS. Investment decisions for the Master 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 Master
Portfolio. When a purchase or sale of the same security is made at substantially
the same time on behalf of the Master 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
Master Portfolio or the size of the position obtained or sold by the Master
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 Master Portfolio are not less favorable than
what they would be with any other qualified firm.
PORTFOLIO TURNOVER. The Master 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
Master 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"). Master 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 Master Portfolio, which has the same investment objective. The Fund may
withdraw its investment in the Master Portfolio at any
11
<PAGE> 105
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 Master 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 Master Portfolio.
The Master 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 Master Portfolio
from time to time (e.g., other investment companies and commingled trust funds)
will each be liable for all obligations of the Master 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
Master 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 Master
Portfolio. As stated above, the investment objective of the Fund and the Master
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 Master
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 Master 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
Master Portfolio could control the results of voting at the Master Portfolio
level in certain instances (e.g. a change in fundamental policies by the Master
Portfolio which was not approved by the Fund's shareholders). This could result
in the Fund's withdrawal of its investment in the Master 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 Master Portfolio could have an
adverse effect on the performance of the Master 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 Master Portfolio will cause the Master Portfolio to terminate automatically
in 120 days unless the Fund and any other investors in the Master Portfolio
unanimously agree to continue the business of the Master 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 a shareholders' meeting in connection
with such withdrawals. If unanimous agreement is not reached to continue the
Master 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 Master 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
Master 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 Master Portfolio may
be available through another entity investing in the Master Portfolio may be
obtained by calling 800-332-3863.
12
<PAGE> 106
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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. The minimum
investment is $200 for BankAmericard holders with an appropriate award
certificate from BankAmeriChoice Program.
** A regular IRA must be opened in conjunction with this account.
- ---------------------------------------------------------
WHAT ALTERNATIVE SALES ARRANGEMENTS ARE AVAILABLE?
The Fund issues two classes of shares. A Shares are sold to investors choosing
the front-end sales charge alternative unless an exemption to the sales charge
is otherwise available. K Shares are neither subject to a front-end sales charge
nor a contingent deferred sales charge. K Shares, however, are sold only to: (a)
businesses and other organizations that participate in the Daily Advantage(R)
Program sponsored by Bank of America; (b) individuals investing proceeds from a
redemption of shares from another open-end investment company on which such
individual paid a front-end sales load if (i) such redemption occurred within 30
days prior to the purchase order, and (ii) such other open-end investment
company was not distributed and advised by Concord Financial Group, Inc. and
Bank of America, respectively, or their affiliates; and (c) accounts opened for
IRA rollovers from a 401(k) plan in which the assets were held in any Pacific
Horizon or Time Horizon Fund and subsequent purchases into an IRA rollover
account opened as described above, so long as the original IRA rollover account
remains open on the Company's books. The two classes of shares represent
interests in the same portfolio of investments of the Fund, have the same rights
and are identical in all respects except as discussed below. A Shares bear the
expenses of a Shareholder Services Plan. K Shares bear the expenses of a
Distribution Plan and/or Administrative and Shareholder Services Plan and have
exclusive voting rights with respect to such Plans. The two classes also have
different exchange privileges, as described below. The net income attributable
to A and K Shares and the dividends payable on A and K Shares will be reduced by
the amount of the: (a) Shareholder Services Plan fees attributable to A Shares,
(b) Distribution Plan fees and/or Administrative and Shareholder Services Plan
fees attributable to K Shares, respectively, and (c) the incremental expenses
associated with such Plans.
HOW ARE SHARES PRICED?
Shares are purchased at their public offering price, which is based upon each
class' net asset value per share plus a front-end sales load on A Shares. Each
class calculates its net asset value ("NAV") as follows:
(Value of Assets Attributable to the Class) -
(Liabilities Attributable to the Class)
--------------------------------------------------------
NAV =
Number of Outstanding Shares of the Class
Net asset value is determined as of the end of regular trading hours on the New
York Stock
13
<PAGE> 107
Exchange (the "Exchange") (currently 4:00 p.m. Eastern time) on days the
Exchange is open.
The Master 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 Master Portfolio pursuant to procedures adopted by the Master 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 price and yield
information call (800) 346-2087.
The per share net asset values of A and K Shares will diverge due to the
different distribution and other expenses borne by the classes.
A SHARES SALES LOAD. The front-end sales load ("front-end sales load," "sales
load," "front-end sales charge," or "sales charge") for the A Shares of 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
REALLOWANCE
AS A % OF AS A % OF AS A % OF
AMOUNT OF OFFERING NET 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
$1,000,000 1.00 1.01 0.90
$1,000,000 or more** 0.00 0.00 0.00
</TABLE>
* Dealer's reallowance may be changed periodically.
** See "Large Purchase Exemption" below for a description of the
contingent deferred sales charge.
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.
- ---------------------------------------------------------
- ---------------------------------------------------------
LARGE PURCHASE EXEMPTION. The contingent deferred sales load discussed under the
Large Purchase Exemption does not apply to A Shares purchased under the Daily
Advantage(R) or Advantage Plus(TM) Programs. To the extent that no other A share
no-load exemption is available, the foregoing schedule of sales loads does not
apply to purchases of A Shares of $1,000,000 or more or to purchases of A Shares
if the aggregate value of the A Shares that you beneficially own in any Pacific
Horizon Fund or Time Horizon Fund equals or exceeds $1,000,000. If you
accumulate $1,000,000 or more of A Shares, on any additional purchase of A
Shares, the contingent deferred sales load described below will apply to such A
Shares when they are redeemed. In addition, if a customer purchases $1,000,000
or more of A Shares and redeems such shares, a contingent deferred sales load
will be imposed as follows:
<TABLE>
<CAPTION>
NUMBER OF YEARS APPLICABLE CONTINGENT
ELAPSED SINCE PURCHASE DEFERRED SALES LOAD
- ----------------------- ----------------------
<S> <C>
1 year 1.0%
2 years 0.5%
3 years None
</TABLE>
The contingent deferred sales load is imposed on the lesser of the current
market value or the cost of the shares being redeemed. This means that this
charge will not be imposed upon increases in net asset value above the initial
purchase price or upon reinvested dividends. In determining whether a contingent
deferred sales charge is applicable to a redemption of such shares, the
calculation will be made in a manner that results in the lowest possible rate.
It will be assumed that the redemption is made first of amounts representing
shares acquired pursuant to the reinvestment of dividends and distributions;
then of amounts representing the increase in net asset value of your holdings of
shares above the total amount of payments for the purchase of shares during the
preceding 2 years; then of amounts representing the cost of shares held beyond
the applicable contingent deferred sales charge period; and finally, of amounts
representing the cost of the shares held for the longest period of time. In
addition, no contingent deferred sales load will be imposed on redeemed A Shares
if a front-end sales load had been previously imposed on
14
<PAGE> 108
such sales. Although no front-end sales load will be paid on Large Purchase
Exemptions, the Distributor will compensate brokers whose customers purchase
shares at the following rates: 1.00% of the amount under $3 million, 0.50% of
the next $47 million and 0.25% thereafter.
K SHARES. Bank of America will compensate Affiliated Brokers for their customers
who invested in the Fund and are participants in the Daily Advantage(R) Program.
The Affiliated Brokers will be compensated by Bank of America at the rate of
1.00% of the amount under $3 million, 0.50% of the next $47 million and 0.25%
thereafter of combined Pacific Horizon Funds' and Time Horizon Funds' K Shares
in each Daily Advantage(R) Program.
WHEN NO FRONT-END 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 a registered investment adviser purchasing shares
for its own account or for an account for which it is authorized to make
investment decisions;
- - 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
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;
- - 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;
- - accounts open as of July 1, 1996, which were exempt from front-end sales loads
at the time the accounts were opened and where those exemptions are no longer
available for new account holders, so long as the accounts remain 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, minor
children and grandchildren, 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
- - holders of the BankAmericard with an appropriate award certificate from the
BankAmeriChoice Program (initial award only; a front-end sales load will apply
to subsequent purchases).
WHEN NO CONTINGENT DEFERRED SALES CHARGE IS APPLIED. To receive one of the first
three exemptions listed below, you must explain the status of your redemption at
the time you redeem your shares. The contingent deferred sales charge with
respect to A Shares purchased under the Large Purchase Exemption is not charged
on (1) exchanges described under "Shareholder Services -- Can I Exchange My
Investment From One Fund to Another?"; (2) redemptions in connection with
minimum required distributions from IRA accounts due to a shareholder reaching
age 70 1/2; (3) redemptions in connection with a shareholder's death or
disability (as defined in the
15
<PAGE> 109
Internal Revenue Code); and (4) involuntary redemptions as a result of an
account's net asset value remaining below $500 after sixty days' written notice.
In addition, no contingent deferred sales charge is charged on shares acquired
through the reinvestment of dividends or distributions.
RIGHTS OF ACCUMULATION. When buying A Shares in Pacific Horizon Funds, your
current aggregate investment determines the front-end 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 or Time Horizon Fund on which you paid a front-end 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). You may
also aggregate your investment in Pacific Horizon Funds and Time Horizon Funds
in order to qualify for the Large Purchase Exemption.
To qualify for a reduced sales load on A Shares, 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 A Shares carrying a sales load 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 additional A
Shares of the Fund carrying a sales load with a current value of $10,000, the
sales 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 on A Shares 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 within a period of 13 months, beginning up to 90 days prior to the date of
the Letter's execution. A Shares carrying a sales load 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. Shares of Time Horizon Funds may be included when
determining reduced sales loads under the letter of intent program.
While signing a Letter of Intent does not bind you to purchase, or the Company
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 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
16
<PAGE> 110
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 DO I DECIDE WHETHER TO BUY A OR K SHARES?
You should determine whether under your particular circumstances it is more
advantageous to invest in A Shares and incur a front-end sales charge and an
ongoing Shareholder Services Plan fee; or invest in K Shares and incur neither a
front-end sales charge nor a contingent deferred sales charge. K Shares do incur
fees under a Distribution Plan and/or an Administrative and Shareholder Services
Plan. K Shares of the Fund, however, are only available to: (a) businesses or
other organizations that participate in the Daily Advantage(R) Program sponsored
by Bank of America; (b) individuals investing proceeds from a redemption of
shares from another open-end investment company on which such individual paid a
front-end sales load if (i) such redemption occurred within 30 days prior to the
purchase order and (ii) such other open-end investment company was not
distributed and advised by Concord Financial Group, Inc. and Bank of America,
respectively, or their affiliates; and (c) accounts opened for IRA rollovers
from a 401(k) plan in which the assets were held in any Pacific Horizon or Time
Horizon Fund and subsequent purchases into an IRA rollover account opened as
described above, so long as the original IRA rollover account remains open on
the Company's books ("Qualified IRA Rollovers").
17
<PAGE> 111
HOW CAN I BUY SHARES?
The chart below provides more information regarding some of the different
methods for investing in the Fund.
- --------------------------------------------------------------------------------
TO BUY SHARES
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
OPENING AN ACCOUNT ADDING TO AN ACCOUNT
<S> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------
THROUGH BANK OF AMERICA, YOUR BROKER OR ANOTHER SERVICE ORGANIZATION
(ORDERS ARE NOT EFFECTIVE UNTIL RECEIVED BY THE FUND'S TRANSFER AGENT)
Contact them directly for Contact them directly for
instructions. instructions.
THROUGH THE DISTRIBUTOR
(IF YOU ARE OR WILL BE THE SHAREHOLDER OF RECORD ON THE COMPANY'S BOOKS)
BY MAIL
Complete Account Application Mail all subsequent
and mail it with a check investments to:
(payable to Pacific Horizon
Asset Allocation Fund) to the Pacific Horizon Funds, Inc.
address on the Account File No. 54634
Application. Los Angeles, CA 90074-4634
- --------------------------------------------------------------------------------------------------------
IN PERSON
BISYS Fund Services, Inc. Deliver Account Application Deliver your payment directly
3435 Stelzer Road and your payment directly to to the address on the left.
Columbus, OH 43219-3035 the address on the left.
- --------------------------------------------------------------------------------------------------------
BY WIRE
Initial purchases of shares Contact the Fund's transfer
into a new account may not be agent at 800-346-2087 for
made by wire. complete wiring instructions.
Instruct your bank to
transmit immediately
available funds for purchase
of Fund shares in your name.
Be sure to include your name
and your Fund account number.
Consult your bank for information on remitting funds by wire
and any associated bank charges.
</TABLE>
- --------------------------------------------------------------------------------
18
<PAGE> 112
- --------------------------------------------------------------------------------
TO BUY SHARES
-------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
OPENING AN ACCOUNT ADDING TO AN ACCOUNT
<S> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------
BY TELETRADE TeleTrade Privileges may not Purchases may be made in the
(a service permitting transfers be used to make an initial minimum amount of $500 and
of money from your purchase. the maximum amount of $50,000
checking, NOW or bank per transaction as soon as
money market account) appropriate information
regarding your bank account
has been established on your
Fund account. This
information may be provided
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.
- ----
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.
- ----
</TABLE>
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, BISYS Fund Services, Inc. (the "Transfer Agent"), at its
Columbus 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 the Transfer Agent's business
day. 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 the Transfer Agent's 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
19
<PAGE> 113
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?
You must specify at the time of investment whether you are purchasing A or K
Shares. Certificates for shares will no longer be issued.
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
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.
20
<PAGE> 114
- --------------------------------------------------------------------------------
TO SELL SHARES
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
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.
</TABLE>
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
THROUGH THE DISTRIBUTOR
(IF YOU ARE A SHAREHOLDER OF RECORD ON THE COMPANY'S BOOKS)
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 Pacific Horizon Funds,
Inc. If you hold stock certificates for the shares being
P.O. Box 80221 redeemed, make sure to endorse them for transfer, have your
Los Angeles, CA 90080-9909 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.
</TABLE>
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
IN PERSON
BISYS Fund Services, Inc.
3435 Stelzer Road Deliver your signed, written request (each owner, including
Columbus, OH 43219-3035 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.
</TABLE>
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
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.
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TO SELL SHARES
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<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.
OTHER REDEMPTION OPTIONS, INCLUDING EXCHANGES AND AUTOMATIC WITHDRAWALS, ARE ALSO
AVAILABLE. PLEASE REFER TO THE SECTION ENTITLED "SHAREHOLDER SERVICES" FOR MORE INFORMATION.
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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 Columbus
office. Although the Fund itself imposes no charge when A Shares are redeemed
(except pursuant to the Large Purchase Exemption described above), 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 Fund imposes no charge when K Shares are redeemed.
The Company reserves the right to redeem accounts (other than 401(k), 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. The
contingent deferred sales charge applicable to A Shares purchased under the
Large Purchase Exemption will not be imposed upon such involuntary redemptions.
WHAT KIND OF PAPERWORK IS INVOLVED IN SELLING SHARES?
Redemption requests must be signed by each shareholder, including each joint
owner. When redeeming shares, you should indicate whether you are redeeming A or
K Shares. 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.
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<PAGE> 116
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. The Company
may suspend the right of redemption or postpone the date of payment upon
redemption (as well as suspend the recordation of the transfer of shares) for
such periods as are permitted under the 1940 Act.
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, in shares of the same class of the Fund out of which you redeemed, in like
shares of another Fund in the Pacific Horizon Family of Funds or in like shares
of any investment portfolio of Time Horizon Funds within 90 days of your
redemption trade date without paying a sales load. Upon such a reinvestment, the
Fund's distributor will credit to your account any contingent deferred sales
charge imposed on any redeemed A Shares subject to the Large Purchase Exemption.
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.
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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 Master 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 the quarter end.
You will automatically receive dividends and capital gain distributions in
additional shares of the same class of shares of the Fund for which the dividend
was declared 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 A Fund Be Invested In
Other 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 80221, Los Angeles, California
90080-9909. The election or revocation will become effective with respect to
dividends paid after it is received and processed by the Transfer Agent.
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<PAGE> 117
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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.
The contingent deferred sales charge with respect to A Shares subject to the
Large Purchase Exemption will not be charged on redemptions in connection with
minimum required distributions from an IRA due to a shareholder having reached
age 70-1/2. 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 should consult their tax advisers.
Additionally, K Shares are available to businesses and other organizations that
participate in the Daily Advantage(R) Program sponsored by Bank of America and
to Qualified IRA Rollovers.
CAN I EXCHANGE MY INVESTMENT FROM ONE FUND TO ANOTHER?
As a shareholder, you have the privilege of exchanging your shares for: like
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.
Specifically, A Shares may be exchanged for other A Shares and K Shares may be
exchanged for other K Shares. NO ADDITIONAL SALES LOAD WILL BE INCURRED WHEN
EXCHANGING A SHARES PURCHASED WITH A SALES LOAD FOR A SHARES OF ANOTHER LOAD
FUND OF THE COMPANY OR TIME HORIZON FUNDS.
Neither a contingent deferred sales load nor a front-end sales load will be
imposed if a shareholder who has entered a Fund under the Large Purchase
Exemption exchanges shares between Funds of the Company or Time Horizon Funds.
However, shares acquired in the exchange will remain subject to the contingent
deferred sales load discussed above. The contingent deferred sales load is
calculated as a percentage of the lesser of the current market value or the cost
of the shares being redeemed. This means that this charge will not be imposed
upon increases in net asset value above the initial purchase price or upon
reinvested dividends. In determining whether a contingent deferred sales charge
is applicable to a redemption of such shares, the calculation will be made in a
manner that results in the lowest possible rate. It will be assumed that the
redemption is made first of amounts representing shares acquired pursuant to the
reinvestment of dividends and distributions; then of amounts representing the
increase in net asset value of your holdings of shares above the total amount of
payments for the purchase of shares during the preceding 2 years; then of
amounts representing the cost of shares held beyond the applicable contingent
deferred sales charge period; and finally, of amounts representing the cost of
the shares held for the longest period of time.
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.
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<PAGE> 118
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."
An exchange is considered a sale of shares of a Fund and the purchase of shares
of another Fund and may result in a capital gain or loss for federal income tax
purposes.
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 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 caused by 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, including requesting certain personal
or account information to confirm the identity of the shareholder. If you should
experience difficulty in contacting the Transfer Agent to place telephone
redemptions (including telephon 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
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<PAGE> 119
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 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 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. Use of this Plan may also be disadvantageous for A Shares
subject to the Large Purchase Exemption due to the potential need to pay a
contingent deferred sales charge.
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.
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<PAGE> 120
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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THE BUSINESS OF THE FUND
FUND MANAGEMENT
The business affairs of Pacific Horizon Funds, Inc. 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 Master 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, business
credit and thrift offices in major U.S. cities. In addition, it has branches,
corporate offices and representative offices in 36 foreign countries.
In its advisory agreement, Bank of America has agreed to manage the Master
Portfolio's investments and to be responsible for, place orders for, and make
decisions with respect to, all purchases and sales of the Master Portfolio's
securities. The advisory 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 that Bank of America remains fully responsible to the Master 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
Master 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 Master Portfolio. Mr. Pyles has been the Master Portfolio's manager since
November 1994 and has been associated with Seattle-First National Bank, a wholly
owned 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
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<PAGE> 121
accounts for Bank of America. Mr. Vielhaber has been the Master Portfolio'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 Advisers 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
Master 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
29, 1996, the Master Portfolio paid Bank of America advisory fees at an
effective annual rate of 0.12% of the Master Portfolio's average daily net
assets, and Bank of America waived a portion of its fee at an effective annual
rate of 0.43% of the Master Portfolio's average daily net assets.
In addition, Bank of America and its affiliates may be entitled to fees under
the Shareholder Services Plan, Distribution Plan, and Administrative and
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 Master Portfolio. Concord is an indirect, wholly owned subsidiary of The
BISYS Group, Inc. Its offices are located at 3435 Stelzer Road, Columbus, Ohio
43219-3035.
Under its administration agreements with the Company and the Master Portfolio,
Concord has agreed to: pay the costs of maintaining the offices of the Company
and the Master 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 Master 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 Master Portfolio; calculate the net asset value of
the Fund and the Master Portfolio; calculate the dividends and capital gains
distributions paid to shareholders; serve as dividend disbursing agent for the
Master Portfolio; and generally assist in all aspects of the operations of the
Fund and the Master 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 Master Portfolio at
the annual rate of 0.05% of the Master 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
29, 1996, Concord waived its entire fee as administrator for the Fund and
reimbursed the Fund a portion of its operating expenses. For the same period,
the Master Portfolio paid Concord administration fees at an effective annual
rate of 0.01% of the Master Portfolio's average daily net assets, and Concord
waived a portion of its fee at an effective annual rate of 0.19% of the Master
Portfolio's average daily net assets.
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 Master Portfolio,
calculating dividends and capital gains distributions to shareholders, and
maintaining the books and records of the Fund and the Master Portfolio. The Fund
and the Master Portfolio bear all fees and expenses charged by PFPC for these
services.
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DISTRIBUTOR
The Fund's shares are sold on a continuous basis by Concord Financial Group,
Inc. (the "Distributor"). The Distributor is an indirect, wholly owned
subsidiary of The BISYS Group, Inc. and is located at 3435 Stelzer Road,
Columbus, OH 43219-3035.
CUSTODIAN AND TRANSFER AGENT
PNC Bank, National Association, Broad and Chestnut Streets, Philadelphia,
Pennsylvania, 19101 serves as the Custodian of the Fund and the Master
Portfolio. BISYS Fund Services, Inc. is the transfer and dividend disbursing
agent of the Fund and is located at 3435 Stelzer Road, Columbus, OH 43219-3035.
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 Master
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 prospectively
choose not to receive fee payments and/or may assume certain Fund or Master
Portfolio expenses as a result of competitive pressures and in order to preserve
and protect the business and reputation of Concord and Bank of America. However,
the service providers retain the ability to discontinue such fee waivers and/ or
expense reimbursements at any time.
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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 taxable year, the Fund qualified as a "regulated
investment company" under the Internal Revenue Code of 1986, as amended (the
"Code"), and the Fund intends that it will so qualify in future years as long as
such qualification is in the best interests of its 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 Master Portfolio will not be subject to federal income
taxes. The Master Portfolio intends to qualify as a partnership (or other
pass-through entity) for federal income tax purposes. As such, the Master
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 Master Portfolio's income
and deductions and owning its pro rata share of the Master Portfolio's assets.
The Fund's status as a regulated investment company is dependent on, among other
things, the Master Portfolio's continued qualification as a partnership (or
other pass-through entity) for federal income tax purposes.
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Distributions (whether received in cash or additional shares) derived from
ordinary income and/ or the excess of net short-term capital gains 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 distribution you receive comprised of the excess of net long-term capital
gains over net short-term capital losses ("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 distribution 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. If you hold Fund 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 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 for the purpose of calculating your gain or loss from the exchange. It
may be included in the tax basis of the new shares, subject to this same
limitation.
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.
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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 assume dividends and capital gains distributions
made by the Fund during the period are reinvested in Fund shares, and
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include the maximum front-end sales charge for A 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 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 40 million shares of Class
O Common Stock, 60 million shares of Class O -- Special Series 3 Common Stock
and 50 million shares of Class O -- Special Series 5 Common Stock, representing
interests in the Fund; and additional classes of shares representing interests
in other investment portfolios of the Company. Class O Common Stock are the "A"
Shares; Class O -- Special Series 3 Common Stock are the "B" Shares and Class O
Common Stock -- Special Series 5 Common Stock are the "K" Shares. As of the date
of this prospectus, B Shares have not been offered to the public. The Board of
Directors may similarly classify or reclassify any class of shares (including
unissued Class O Common Stock, Class O -- Special Series 3 Common Stock or Class
O -- Special Series 5 Common Stock) into
31
<PAGE> 125
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 upon 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). Only A Shares will vote on
matters relating solely to A Shares and K Shares will vote on matters relating
solely to K Shares. 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 SERVICES PLAN (THE "PLAN") FOR A SHARES
AND A
DISTRIBUTION PLAN AND AN ADMINISTRATIVE AND SHAREHOLDER SERVICES PLAN FOR K
SHARES.
The Company has adopted a Shareholder Services Plan for A Shares, under which
the A Shares of the Fund reimburse the Distributor for shareholder servicing
fees the Distributor pays to Service Organizations. The Company has adopted a
Distribution Plan pursuant to Rule 12b-1 under the 1940 Act under which the K
Shares of the Fund reimburse the Distributor for services rendered and costs
incurred in connection with distribution of the K Shares. The Company has also
adopted an Administrative and Shareholder Services Plan for K Shares, under
which K Shares of the Fund reimburse the Distributor for administrative and
shareholder servicing fees the Distributor pays to Service Organizations.
SHAREHOLDER SERVICES PLAN
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 average daily net assets of the Fund's A
Shares. 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
32
<PAGE> 126
year ended February 29, 1996, 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."
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.
DISTRIBUTION PLAN AND ADMINISTRATIVE AND
SHAREHOLDER SERVICES PLAN
Under the Distribution Plan, the Fund pays the Distributor for distribution
expenses primarily intended to result in the sale of the Fund's K Shares. Such
distribution expenses include expenses incurred in connection with advertising
and marketing the Fund's K Shares; payments to Service Organizations for
assistance in connection with the distribution of K Shares; and expenses
incurred in connection with preparing, printing and distributing prospectuses
for the Fund (except those used for regulatory purposes, for solicitation or
distribution to existing or potential A shareholders, or for distribution to
existing K shareholders of the Fund) and in implementing and operating the
Distribution Plan.
Shareholder servicing expenses under the Administrative and Shareholder Services
Plan include, but are not limited to, expenses incurred in connection with
shareholder services provided by the Distributor and payments to Service
Organizations for the provision of support services with respect to the
beneficial owners of K Shares, such as assisting clients in processing exchange
and redemption requests and in changing dividend options and account
descriptions and responding to client inquiries concerning their investments.
Administrative servicing expenses under the Administrative and Shareholder
Services Plan include, but are not limited to, expenses incurred in connection
with administrative services provided by the Distributor and payments to Service
Organizations for the provision of administrative services to beneficial owners
of K Shares such as establishing and maintaining accounts and records relating
to their clients who invest in K Shares, providing information to the Fund
necessary for accounting or sub-accounting, and providing statements
periodically to clients showing their position in K Shares.
Under the Distribution Plan, payments by the Fund for distribution expenses may
not exceed 0.75% (annualized), of the average daily net assets of the Fund's K
Shares. Under the Administrative and Shareholder Services Plan, payments for
shareholder servicing expenses may not exceed 0.25% (annualized) of the average
daily net assets of the Fund's K Shares. Under the Administrative and
Shareholder Services Plan, payments for administrative servicing expenses may
not exceed 0.75% (annualized) of the average daily net assets of the Fund's K
Shares. The total of all 12b-1 fees, administrative services fees and
shareholder services fees may not exceed, in the aggregate, the annual rate of
1.00% of the average daily net assets of the Fund's K Shares. These amounts may
be reduced pursuant to undertakings by the Distributor. Payments for
distribution expenses under the Distribution Plan are subject to Rule 12b-1
under the 1940 Act. During the fiscal year ended
33
<PAGE> 127
February 29, 1996, no K Shares were offered by the Company.
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.
34
<PAGE> 128
- ----------------------------
PACIFIC HORIZON MUTUAL FUNDS
- ----------------------------
ASSET ALLOCATION FUND
PROSPECTUS
JULY 1, 1996
NOT FDIC INSURED
<PAGE> 129
PROSPECTUS
JULY 1, 1996
PACIFIC HORIZON NATIONAL MUNICIPAL BOND FUND
PACIFIC HORIZON CALIFORNIA TAX-EXEMPT BOND FUND
Investment Portfolios Offered by Pacific Horizon
Funds, Inc.
- --------------------------------------------------------------------------------
The PACIFIC HORIZON NATIONAL MUNICIPAL BOND FUND (the "National Municipal Bond
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 National Municipal Bond Fund seeks to achieve its
objective through investment primarily in a diversified portfolio of investment
grade municipal debt securities.
The PACIFIC HORIZON CALIFORNIA TAX-EXEMPT BOND FUND (the "California Tax-Exempt
Bond Fund" and, collectively with the National Municipal Bond Fund, the "Funds")
is a diversified mutual fund whose investment objective is to provide its
shareholders with as high a level of current interest income free of Federal
income tax and California state personal income tax as is consistent with
prudent investment management and preservation of capital. In seeking its
investment objective, the California Tax-Exempt Bond Fund invests primarily in
municipal obligations issued by the state of California and other governmental
entities. The California Tax-Exempt Bond Fund may be suited for investors who
seek monthly income exempt from Federal and California income taxes and who are
willing to accept some price and yield variation while still maintaining
relative stability of principal.
This Prospectus describes two classes of shares. A Shares are sold with a
front-end sales charge. K Shares are not subject to either a front-end sales
charge or a contingent deferred sales charge.
The Funds are 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 Funds' investment adviser. Based in San Francisco, California, Bank of
America and its affiliates have over $48 billion under management, including
over $12 billion in mutual funds.
This Prospectus describes concisely the information about the Funds and the
Company that you should know before investing. Please read it carefully and
retain it for future reference.
More information about the Funds 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, 1996 and is
incorporated by reference into this Prospectus.
- --------------------------------------------------------------------------------
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. Investment in the Funds 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, other than those contained in this Prospectus, in the Statement
of Additional Information and the Funds' official sales literature, in
connection with the offering of the Funds' 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 Funds 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 Funds or the distributor to make such offer in such
jurisdiction.
- --------------------------------------------------------------------------------
<PAGE> 130
CONTENTS
<TABLE>
<CAPTION>
<S> <C> <C>
EXPENSE SUMMARY 2
FINANCIAL HIGHLIGHTS 5
FUND INVESTMENTS 9
9 TYPES OF INVESTMENTS
11 FUNDAMENTAL LIMITATIONS
12 OTHER INVESTMENT PRACTICES AND CONSIDERATIONS
SHAREHOLDER GUIDE 19
19 HOW TO BUY SHARES
19 What Is My Minimum Investment In The Funds?
19 What Alternative Sales Arrangements Are Available?
19 How Are Shares Priced?
22 How Do I Decide Whether To Buy A or K Shares?
23 How Can I Buy Shares?
24 What Price Will I Receive When I Buy Shares?
25 What Else Should I Know To Make A Purchase?
25 HOW TO SELL SHARES
25 How Do I Redeem My Shares?
27 What NAV Will I Receive For Shares I Want To Sell?
28 What Kind Of Paperwork Is Involved In Selling Shares?
28 How Quickly Can I Receive My Redemption Proceeds?
28 Do I Have Any Reinstatement Privileges After I Have
Redeemed Shares?
DIVIDEND AND DISTRIBUTION POLICIES 29
SHAREHOLDER SERVICES 29
29 CAN I EXCHANGE MY INVESTMENT FROM ONE FUND
TO ANOTHER?
30 WHAT IS TELETRADE?
31 CAN I ARRANGE TO HAVE AUTOMATIC INVESTMENTS MADE
ON A REGULAR BASIS?
31 WHAT IS DOLLAR COST AVERAGING AND HOW CAN I
IMPLEMENT IT?
31 CAN I ARRANGE PERIODIC WITHDRAWALS?
31 CAN MY DIVIDENDS FROM A FUND BE INVESTED IN
OTHER FUNDS?
32 IS THERE A SALARY DEDUCTION PLAN AVAILABLE?
THE BUSINESS OF THE FUNDS 32
32 FUND MANAGEMENT
32 Service Providers
TAX INFORMATION 34
MEASURING PERFORMANCE 36
DESCRIPTION OF SHARES 37
PLAN PAYMENTS 38
APPENDIX A 41
- ------------------------------------------------------------------------------------------------------------------------
DISTRIBUTOR: INVESTMENT ADVISER:
Concord Financial Group, Inc. Bank of America National Trust and Savings Association
3435 Stelzer Road 555 California Street
Columbus, OH 43219-3035 San Francisco, CA 94104
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 131
EXPENSE SUMMARY
SHAREHOLDER TRANSACTION EXPENSES are charges you pay when buying or selling
shares of the Funds. The Funds offer two classes of shares. A Shares are offered
at net asset value plus a front-end sales charge (see page 20 of the Prospectus
for an explanation of net asset value per share) and are subject to a
shareholder servicing fee. K Shares are offered at net asset value with neither
a sales charge nor a contingent deferred sales charge, but are subject to
distribution, administrative servicing and shareholder servicing fees.
ANNUAL FUND OPERATING EXPENSES include payments by the Funds for portfolio
management, maintenance of shareholder accounts, general administration,
distribution (in the case of K Shares only), shareholder servicing, accounting
and other services.
Below is a summary of the shareholder transaction expenses imposed for A and K
Shares by the National Municipal Bond Fund and their operating expenses expected
to be incurred during the current fiscal year, as well as a summary of the
shareholder transaction expenses imposed for A and K Shares by the California
Tax-Exempt Bond Fund; the operating expenses incurred by the A Shares of the
California Tax-Exempt Bond Fund during its last fiscal year; and the operating
expenses expected to be incurred by the K Shares of the California Tax-Exempt
Bond Fund during the first twelve months of operations. The information for the
National Municipal Bond Fund 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.
NATIONAL MUNICIPAL BOND FUND
- -------------------------------------------------------------
<TABLE>
<CAPTION>
A SHARES K SHARES
------- -------
<S> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load Imposed
on Purchases
(as a percentage of
offering price) 4.50% None
Sales Load Imposed on
Reinvested Dividends None None
Maximum Contingent Deferred
Sales Load
(as a percentage of
original purchase price or
redemption proceeds,
whichever is lower) None(1) None
Redemption Fees None None
Exchange Fee None None
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Management Fees
(After Fee Waivers)+ 0% 0%
12b-1 Fee (After Fee
Waivers)* 0% 0.50%
Administrative Services Fee
(After Fee Waivers)* 0% 0.50%
Shareholder Services Fee* 0.25% 0.25%
----
Total of all 12b-1 Fees OR
Administrative Services
Fees and Shareholder
Services Fees for K Shares
(After Fee Waivers)* 0.75%
Other Expenses
(After Expense
Reimbursements)+ 0.65% 0.65%
------ -------
Total Operating Expenses
(After Fee Waivers
and Expense
Reimbursements)+ 0.90% 1.40%
====== =======
</TABLE>
- -------------------------------------------------------------
(1) There is no front-end sales load on A Shares you purchase if you have either
a combined purchase of A Shares of the Company of $1,000,000 or more or if
the aggregate value of A Shares that you beneficially own in any Pacific
Horizon Fund or Time Horizon Fund, another open-end investment company
managed by Bank of America (a "Time Horizon Fund"), equals or exceeds
$1,000,000 ("Large Purchase Exemption"). A Shares purchased under the Large
Purchase Exemption are subject to a contingent deferred sales charge of
1.00% and 0.50%, respectively, on redemptions within one and two years after
purchase. The contingent deferred sales charge is paid to Concord Financial
Group, Inc. (the "Distributor"). A Shares cannot be purchased under the
Large Purchase Exemption if there is another no-load exemption available.
Accordingly, A Shares purchased under another no-load exemption are not
subject to a contingent deferred sales charge. Although no front-end sales
load will be paid on shares purchased under the Large Purchase Exemption,
the Distributor will compensate brokers whose customers purchase such shares
at the following rates: 1.00% of the amount under $3 million, 0.50% of the
next $47 million and 0.25% thereafter.
2
<PAGE> 132
+ Absent fee waivers and/or expense reimbursement, management fees for each
class of the Fund would be 0.55% of the average net assets (annualized) and
"Other Expenses" for the National Municipal Bond Fund's A and K Shares are
estimated to be 1.31% and 1.31%, respectively, of average net assets
(annualized). "Total Operating Expenses" for the National Municipal Bond
Fund's A and K Shares are estimated to be 2.11% and 2.86% of average net
assets (annualized), respectively.
* Absent fee waivers, 12b-1 fees or administrative services fees would be 0.75%
and 0.75%, respectively, of the average net assets (annualized) of the Fund's
K Shares. The total of all 12b-1 fees, administrative services fees and
shareholder services fees may not exceed, in the aggregate, the annual rate
of 1.00% of the average net assets of the National Municipal Bond Fund's K
Shares. However, it is expected that during the current fiscal year, such
fees will not exceed 0.75% of the average net assets of the Fund's K Shares.
Because of the Rule 12b-1, administrative and/or shareholder services fees
paid by the Fund as shown in the above table, long-term K shareholders may
pay more than the economic equivalent of the maximum front-end sales charge
permitted by the National Association of Securities Dealers, Inc. For a
further description of shareholder transaction expenses and the National
Municipal Bond Fund's operating expenses, see the sections entitled
"Shareholder Guide," "The Business of the Funds" and "Plan Payments" below.
- --------------------------------------------------------------------------------
EXAMPLE: Assume the annual return is 5% and operating expenses are the same as
those stated above. For every $1,000 you invest, here is how much you would have
paid in total expenses if you closed your account after the number of years
indicated:
<TABLE>
<CAPTION>
AFTER 1 YEAR AFTER 3 YEARS AFTER 5 YEARS AFTER 10 YEARS
------------ ------------- ------------- --------------
<S> <C> <C> <C> <C>
A Shares(1) $ 54 $72 $93 $151
K Shares........................... $ 14 $44 $77 $168
</TABLE>
(1) Assumes deduction at time of purchase of maximum applicable front-end sales
charge but does not assume deduction at redemption of maximum applicable
contingent deferred sales charge under the Large Purchase Exemption.
- --------------------------------------------------------------------------------
3
<PAGE> 133
CALIFORNIA TAX-EXEMPT BOND FUND
- --------------------------------------------------------------------
<TABLE>
<CAPTION>
A SHARES K SHARES
-------- -------
<S> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load Imposed
on Purchases
(as a percentage of
offering price) 4.50% None
Sales Load Imposed on
Reinvested Dividends None None
Maximum Contingent Deferred
Sales Load
(as a percentage of
original purchase price or
redemption proceeds,
whichever is lower) None(1) None
Redemption Fees None None
Exchange Fee None None
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Management Fees
(After Fee Waivers)+ 0.50% 0.50%
12b-1 Fee (After Fee
Waivers)* 0% 0.50%*
Administrative Services Fee
(After Fee Waivers)* 0% 0.50%*
Shareholder Services Fee* 0.25% 0.25%*
----
Total of all 12b-1 Fees OR
Administrative Services
Fees and Shareholder
Services Fees for K
Shares (After Fee
Waivers)* 0.75%
Other Expenses 0.19% 0.19%
------ -------
Total Operating Expenses
(After Fee Waivers)+ 0.94% 1.44%
====== =======
</TABLE>
- -------------------------------------------------------------
(1) There is no front-end sales load on A Shares you purchase if you have either
a combined purchase of A Shares of the Company of $1,000,000 or more or if
the aggregate value of A Shares that you beneficially own in any Pacific
Horizon Fund or Time Horizon Fund equals or exceeds $1,000,000 ("Large
Purchase Exemption"). A Shares purchased under the Large Purchase Exemption
are subject to a contingent deferred sales charge of 1.00% and 0.50%,
respectively, on redemptions within one and two years after purchase. The
contingent deferred sales charge is paid to the Distributor. A Shares cannot
be purchased under the Large Purchase Exemption if there is another no-load
exemption available. Accordingly, A Shares purchased under another no-load
exemption are not subject to a contingent deferred sales charge. Although no
front-end sales load will be paid on shares purchased under the Large
Purchase Exemption, the Distributor will compensate brokers whose customers
purchase such shares at the following rates: 1.00% of the amount under $3
million, 0.50% of the next $47 million and 0.25% thereafter.
+ Absent fee waivers, management fees would be 0.70% of the average net assets
(annualized). "Total Operating Expenses" for the California Tax-Exempt Bond
Fund's A and K Shares would be 1.14% and 1.89% of average net assets
(annualized), respectively.
* Absent fee waivers, 12b-1 fees or administrative services fees would be 0.75%
or 0.75%, respectively, of the average net assets (annualized)of the Fund's K
Shares. The total of all 12b-1 fees, administrative services fees and
shareholder services fees may not exceed, in the aggregate, the annual rate
of 1.00% of the average net assets of the Fund's K Shares. Because of the
Rule 12b-1, administrative and/or shareholder services fees paid by the
California Tax-Exempt Bond Fund as shown in the above table, long-term K
shareholders may pay more than the economic equivalent of the maximum
front-end sales charge permitted by the National Association of Securities
Dealers, Inc. For a further description of shareholder transaction expenses
and the California Tax-Exempt Bond Fund's operating expenses, see the
sections entitled "Shareholder Guide," "The Business of the Funds" and "Plan
Payments" below.
- --------------------------------------------------------------------------------
EXAMPLE: Assume the annual return is 5% and operating expenses are the same as
those stated above. For every $1,000 you invest, here is how much you would have
paid in total expenses if you closed your account after the number of years
indicated:
<TABLE>
<CAPTION>
AFTER 1 YEAR AFTER 3 YEARS AFTER 5 YEARS AFTER 10 YEARS
------------ ------------- ------------- --------------
<S> <C> <C> <C> <C>
A Shares(1) $ 54 $74 $95 $155
K Shares........................... $ 15 $46 $79 $172
</TABLE>
(1) Assumes deduction at time of purchase of maximum applicable front-end sales
charge but does not assume deduction at redemption of maximum applicable
contingent deferred sales charge under the Large Purchase Exemption.
- --------------------------------------------------------------------------------
Note: The preceding operating expenses and examples 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.
4
<PAGE> 134
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 shareholder of the Funds.
MANAGEMENT FEES CONSIST OF:
- - an investment advisory fee payable at the annual rate of 0.35% and 0.40% of
the National Municipal Bond Fund's and the California Tax-Exempt Bond Fund's
respective average daily net assets; and
- - an administration fee payable at the annual rate of 0.20% of the National
Municipal Bond Fund's average daily net assets and 0.30% of the California
Tax-Exempt Bond Fund's average daily net assets.
Currently, the most restrictive expense limitation limits each Fund's aggregate
annual expenses (including management fees) to 2.5% of the first $30 million of
each Fund's average daily net assets, 2% of the next $70 million and 1.5% of
each Fund's remaining average daily net assets.
The alternative sales arrangements permit you to choose the method of purchasing
shares that is most beneficial given the amount of the purchase, the length of
time you expect to hold the shares and other circumstances. You should determine
whether under your particular circumstances it is more advantageous to incur a
front-end sales charge and thereafter be subject to annual fees under a
Shareholder Services Plan, with respect to A Shares; or incur neither a
front-end sales charge nor a contingent deferred sales charge, but incur fees
under a Distribution Plan and/or an Administrative and Shareholder Services
Plan, with respect to K Shares. K Shares of the Funds, however, are only
available for investment by individuals that are investing proceeds from a
redemption of shares from another open-end investment company on which such
individual paid a front-end sales load if (i) such redemption occurred within 30
days prior to the purchase order and (ii) such other open-end investment company
was not distributed and advised by Concord Financial Group, Inc. and Bank of
America, respectively, or their affiliates. See the section entitled "How To Buy
Shares" below.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
The California Tax-Exempt Bond Fund commenced operations on March 30, 1984 as a
separate Maryland corporation called Pacific Horizon Tax-Exempt Fund, Inc. (the
"Predecessor Fund"). The Predecessor Fund subsequently changed its name to
Pacific Horizon California Tax-Exempt Bond Portfolio, Inc. On January 19, 1990,
the Predecessor Fund was reorganized as a separate portfolio of the Company.
Prior to July 1, 1996, the National Municipal Bond Fund operated as part of a
master feeder structure and invested all of its assets in a master portfolio
("Master Portfolio") which had an identical investment objective. On July 1,
1996, the National Municipal Fund withdrew its investment in the Master
Portfolio and began investing its assets directly in investment securities.
The table below shows certain information concerning the investment results for
the Funds for the periods indicated (including the Predecessor Fund's investment
results for the fiscal years ended on or prior to February 28, 1989, the
combined investment results of both the Predecessor Fund and the California
Tax-Exempt Bond Fund for the fiscal year ended February 28, 1990 and the
California Tax-Exempt Bond Fund's investment results for the six years in the
six year period ended February 29, 1996). During the periods shown the Funds
(and the Predecessor Fund, in the case of the California Tax-Exempt Bond Fund)
did not offer K Shares. Actual investment results of the K Shares may be
different. The information for each of the last five fiscal years ended February
29, 1996 has been audited by Price Waterhouse
5
<PAGE> 135
LLP, independent accountants, whose unqualified reports on the financial
statements containing such information for the five year period ended February
29, 1996 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 thereon which are incorporated by reference into the Statement of
Additional Information. Further information about the performance of the Funds
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 Funds free of charge by calling 800-332-3863.
6
<PAGE> 136
NATIONAL MUNICIPAL BOND FUND
Selected data for an A Share of common stock outstanding throughout each of the
periods indicated:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE PERIOD
JANUARY 28, 1994
(COMMENCEMENT OF
FOR THE YEAR ENDED FOR THE YEAR ENDED OPERATIONS) THROUGH
FEBRUARY 29, 1996 FEBRUARY 28, 1995 FEBRUARY 28, 1994
------------------ ------------------ -------------------
<S> <C> <C> <C>
Net asset value per share, beginning of period $ 9.64 $ 9.89 $ 10.00
------------------ ------------------ -------------------
Income from Investment Operations:
Net Investment income 0.54 0.50 0.01
Net realized and unrealized gains (losses)
on securities 0.51 (0.25) (0.11)
------------------ ------------------ -------------------
Total income (loss) from investment
operations 1.05 0.25 (0.10)
------------------ ------------------ -------------------
Less dividends to shareholders from net
investment income (0.54) (0.50) (0.01)
------------------ ------------------ -------------------
Net change in net asset value 0.51 (0.25) (0.11)
------------------ ------------------ -------------------
Net asset value per share, end of period $ 10.15 $ 9.64 $ 9.89
============== ============== ===============
Total Return- 11.16% 2.78% (1.00)%
Ratios/Supplemental Data:
Net assets, end of period (000) $ 12,242 $ 2,520 $ 733
Ratio of expenses to average net assets* 0.12% 0.00% 0.00%+
Ratio of net investment income to average
net assets* 5.24% 5.30% 1.15%+
</TABLE>
- ---------------
* Reflects the National Municipal Bond Fund's proportionate share of the Master
Portfolio's expenses and fee waivers and expense reimbursements by the Master
Portfolio's investment adviser and administrator and the National Municipal
Bond 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 2.59%, 17.46% and 170.99% (annualized) for the years ended February 29,
1996, 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 on A Shares, and is not annualized for the period ended February
28, 1994.
7
<PAGE> 137
CALIFORNIA TAX-EXEMPT BOND FUND
Selected data for an A Share of common stock outstanding throughout each of the
periods indicated.+
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED
-----------------------------------------------------------------------------------------------------------
FEB. 29, FEB. 28, FEB. 28, FEB. 28, FEB. 29, FEB. 28, FEB. 28, FEB. 28, FEB. 29, FEB. 28,
1996 1995 1994 1993+ 1992 1991 1990 1989 1988 1987
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset value per
share, beginning
of period $ 7.12 $ 7.49 $ 7.51 $ 7.07 $ 6.90 $ 6.84 $ 6.72 $ 6.87 $ 7.38 $ 7.07
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Income from
Investment
Operations:
Net investment
income 0.37 0.38 0.38 0.43 0.43 0.45 0.47 0.47 0.47 0.48
Net realized and
unrealized gains
(losses) on
securities 0.33 (0.37) 0.04 0.52 0.22 0.06 0.12 (0.15) (0.51) 0.31
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Total income from
investment
operations 0.70 0.01 0.42 0.95 0.65 0.51 0.59 0.32 (0.04) 0.79
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Less Dividends and
Distributions:
Dividends to
shareholders
from net
investment
income (0.37) (0.38) (0.38) (0.43) (0.43) (0.45) (0.47) (0.47) (0.47) (0.48)
Distributions to
shareholders
from net
realized gains
on securities -- -- (0.06) (0.08) (0.05) -- -- -- -- --
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Total dividends
and
distributions (0.37) (0.38) (0.44) (0.51) (0.48) (0.45) (0.47) (0.47) (0.47) (0.48)
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Net change in net
asset value per
share 0.33 (0.37) (0.02) 0.44 0.17 0.06 0.12 (0.15) (0.51) 0.31
Net asset value per
share, end of
period $ 7.45 $ 7.12 $ 7.49 $ 7.51 $ 7.07 $ 6.90 $ 6.84 $ 6.72 $ 6.87 $ 7.38
========== ========== ========== ========== ========== ========== ========== ========= ========= ==========
Total Return* 10.12% 0.36% 5.65% 14.01% 9.63% 7.72% 8.94% 4.90% (0.23%) 11.58%=
Ratios/Supplemental
Data:
Net assets, end of
period (000) $221,141 $194,601 $245,040 $189,419 $149,020 $107,815 $101,583 $ 88,678 $ 90,142 $109,055
Ratio of expenses to
average net assets 0.94%- 0.95%- 0.96%- 0.62%- 1.01%- 0.98%- 0.95%- 1.03% 1.10% 1.13%
Ratio of net
investment income
to average net
assets 5.11%- 5.43%- 4.96%- 5.95%- 6.05%- 6.57%- 6.81%- 6.93% 6.90% 6.76%
Portfolio turnover 57% 20% 15% 32% 24% 33% 58% 54% 30% 24%
</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/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 0.20%, 0.20%, 0.15%, 0.52%,
0.15%, 0.22% and 0.17% for the years ended February 29, 1996, February 28,
1995, February 28, 1994, February 28, 1993, February 29, 1992, February 28,
1991 and February 28, 1990, respectively.
= Unaudited.
* The total return figures presented do not include the effect of the maximum
4.50% sales charge on A Shares.
8
<PAGE> 138
- --------------------------------------------------------------------------------
FUND INVESTMENTS
- --------------------------------------------------------------------------------
---------------------------------------------------------
INVESTMENT OBJECTIVES
The Funds seek as high a level of current interest income free of Federal income
tax (and California state personal income tax in the case of the California
Tax-Exempt Bond Fund) as is consistent with prudent investment management and
preservation of capital. WHILE THE FUNDS STRIVE TO ATTAIN THEIR INVESTMENT
OBJECTIVES, THERE CAN BE NO ASSURANCE THAT THEY WILL BE ABLE TO DO SO.
NATIONAL MUNICIPAL BOND FUND
The National Municipal Bond Fund seeks to achieve its investment 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 National Municipal Bond Fund may be appropriate for investors
who want a high level of current interest income free from Federal income tax.
CALIFORNIA TAX-EXEMPT BOND FUND
The California Tax-Exempt Bond Fund seeks to achieve its investment 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 California Tax-Exempt Bond Fund may be appropriate for
California residents and other investors who want monthly income sheltered from
both Federal and California income taxes, greater diversification and liquidity
than could be achieved by an individual purchasing municipal bonds directly, and
relative stability of principal.
---------------------------------------------------------
TYPES OF INVESTMENTS
GENERAL INVESTMENTS
NATIONAL MUNICIPAL BOND FUND. The National Municipal Bond Fund's assets will be
primarily invested in debt obligations (at least 80% of the 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 National Municipal Bond
Fund'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 National Municipal Bond Fund'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 National Municipal Bond
Fund'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 National Municipal Bond Fund has no restrictions on the maturity
9
<PAGE> 139
of Municipal Securities in which it may invest. Accordingly, the National
Municipal Bond Fund 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 National Municipal Bond Fund's average weighted
maturity will vary in response to variations in comparative yields of differing
maturities of instruments, in accordance with the National Municipal Bond Fund's
investment objective.
The National Municipal Bond Fund may hold uninvested cash reserves pending
investment, during temporary defensive periods, or if, in the opinion of the
National Municipal Bond Fund's investment adviser, suitable tax-exempt
obligations are unavailable. In accordance with the National Municipal Bond
Fund'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 National Municipal Bond Fund
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 National Municipal Bond Fund
will pay.
The National Municipal Bond Fund may also make other investments as described
more fully below under "Other Investment Practices and Considerations."
CALIFORNIA TAX-EXEMPT BOND FUND. The California Tax-Exempt Bond Fund invests
primarily in Municipal Securities (at least 65% of its total assets under normal
circumstances) issued by California and other states, territories and
possessions of the U.S. and the District of Columbia, and their agencies,
authorities, instrumentalities and political sub-divisions, as long as these
instruments are free of Federal income tax.
Under normal market conditions, it is expected that at least 75% of the
California Tax-Exempt Bond Fund's total assets will consist of issues rated
investment grade or better by Moody's, S&P, D&P or 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 California Tax-Exempt Bond Fund'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
California Tax-Exempt Bond Fund'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 California Tax-Exempt Bond Fund has no
restrictions on the maturity of Municipal Securities in which it may invest.
Accordingly, the California Tax-Exempt Bond Fund 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 California
Tax-Exempt Bond Fund's average weighted maturity will vary in response to
variations in compara-
10
<PAGE> 140
tive yields of differing maturities of instruments, in accordance with the
California Tax-Exempt Bond Fund's investment objective.
As a fundamental policy, under normal circumstances at least 80% of the
California Tax-Exempt Bond Fund's assets will be invested in Municipal
Securities free from tax under the laws or Constitution of California
("California Municipal Securities"). In any event, in an effort to keep the
California Tax-Exempt Bond Fund's dividends free from California state personal
income tax, the California Tax-Exempt Bond Fund will endeavor to invest at least
50% of its total assets in obligations the interest on which (if held by an
individual) 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
fiscal quarter. If the California Tax-Exempt Bond Fund is able to do so, and
assuming the California Tax-Exempt Bond Fund otherwise qualifies, the dividends
that investors receive from the interest on those California Exempt Securities
will not be subject to that tax. However, if the California Tax-Exempt Bond Fund
is not able to achieve the 50% goal, no part of the California Tax-Exempt Bond
Fund's dividends will be exempt from California state personal income tax.
Dividends derived from Municipal Securities that are not California Municipal
Securities will be subject to California's state personal income tax.
Subject to the fundamental policy above, the California Tax-Exempt Bond Fund may
also make limited investments in taxable obligations. These taxable obligations,
which may have maturities of up to thirteen months, may include obligations
issued or guaranteed by the U.S. Government or its agencies or instrumentalities
(and repurchase agreements related to such obligations), CDs and bankers'
acceptances of select banks and commercial paper rated within the two highest
rating categories by any major rating service.
The California Tax-Exempt Bond Fund might purchase such taxable obligations if,
for example, suitable tax-exempt obligations cannot be found or if deemed
appropriate for temporary defensive purposes. To the extent that the California
Tax-Exempt Bond Fund 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 and California
income tax which the California Tax-Exempt Bond Fund will pay. The California
Tax-Exempt Bond Fund may also hold cash for temporary defensive purposes, prior
to making investments or if Bank of America believes suitable tax-exempt
investment opportunities are not available.
FUNDAMENTAL LIMITATIONS The investment objective of the Funds may not be
changed without a vote by the holders of a majority of the outstanding shares of
the particular Fund. Policies requiring such a vote to effect a change are known
as "fundamental." A number of the other fundamental investment limitations are
summarized below.
The National Municipal Bond Fund may not:
1. Purchase securities of any one issuer (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 another investment company.
2. Make loans except that the Fund may purchase or hold debt instruments and
enter into repurchase agreements pursuant to its investment objective and
policies.
3. Purchase or sell commodity contracts, or invest in oil, gas or mineral
exploration or development programs (however, the National Municipal Bond
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), but may
11
<PAGE> 141
enter into futures contracts and options thereon in accordance with its
Prospectus.
The California Tax-Exempt Bond Fund:
1. Under normal circumstances, will invest at least 80% of its assets in
California Municipal Securities.
2. Purchase securities of any one issuer (except securities 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).
3. May not make loans except that the Fund may purchase or hold debt instruments
and enter into repurchase agreements pursuant to its investment objective and
policies.
4. May not 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).
5. May not invest more than 10% of its total assets in certain instruments that
are illiquid.
A list of additional fundamental investment limitations is set out in the
Statement of Additional Information.
OTHER INVESTMENT PRACTICES
AND CONSIDERATIONS
MORE ON MUNICIPAL SECURITIES. The two main types of Municipal Securities are
"general obligation" securities (which are secured by the issuer's full faith,
credit and taxing power) and "revenue" securities (which are payable only from
revenues received from the operation of a particular facility or other specific
revenue source). A third type of Municipal Security, normally issued by special
purpose public authorities, is known as a "moral obligation" security because if
the issuer cannot meet its repayment obligations it then draws on a reserve
fund, the restoration of which is a moral, but not a legal requirement. Private
activity bonds which the Funds may hold are usually revenue securities that are
not payable from the unrestricted revenues of the issuer. The quality of these
bonds therefore is often directly related to the credit of the corporate user of
the facility being financed.
Municipal Securities purchased by the Funds may include both rated and unrated
variable and floating rate instruments. Although particular variable or floating
rate obligations often do not have an active secondary market, the periodic
readjustment of interest rates that these instruments undergo tends to assure
that their value to the Fund approximates their actual par value.
Opinions with respect to Municipal Securities regarding their validity and
exemption from Federal income tax (and California personal income tax where
applicable) are given by the issuer. The Funds and Bank of America will rely on
these opinions and do not intend to review the basis for them.
CUSTODIAL RECEIPTS AND PARTICIPATION INTERESTS. 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 Funds may also
purchase from time to time participation interests in debt securities held by
trusts or financial institutions. A participation interest gives the Funds 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
12
<PAGE> 142
have determined that the interest is of comparable quality to those instruments
in which the Funds may invest pursuant to guidelines approved by the Funds'
Board of Directors. For certain participation interests, the Funds will have the
right to demand payment, for all or any part of the Funds' participation
interest, plus accrued interest. As to these instruments, each 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).
WHEN-ISSUED, FORWARD COMMITMENTS AND DELAYED SETTLEMENTS. The Funds may
purchase Municipal Securities on a "when issued" basis and may purchase or sell
Municipal Securities on a "forward commitment" basis. The Funds may also
purchase or sell Municipal Securities on a "delayed settlement" basis.
When-issued and forward commitment transactions, which involve a commitment by
the Funds to purchase or sell particular securities with payment and delivery
taking place at a future date (perhaps one or two months later), permit the
Funds 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 Funds 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. Each 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 assets, a Fund's
liquidity and the ability of the investment adviser to manage the Fund might be
adversely affected. Each Fund 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 each 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.
STAND-BY COMMITMENTS. In addition, 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 respective rights thereunder for trading purposes. The Funds
expect that "stand-by commitments" will generally be available without the
payment of any direct or indirect consideration. However, if necessary or
advisable, the Funds 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 Funds 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
13
<PAGE> 143
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 Funds, upon redemption, depending on the redemption price.
ZERO COUPON SECURITIES. The Funds 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, a Fund will realize no cash until the cash
payment date and, if the issuer defaults, the Fund may obtain no return at all
on its respective investments. The Funds 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 Funds 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 Funds 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 Funds'
Board of Directors, 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 days are considered illiquid investments and
investment in such repurchase agreements along with any other illiquid
securities will not exceed 15% of the value of the net assets of the particular
Fund 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 particular 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 (the "1940 Act").
REVERSE REPURCHASE AGREEMENTS. The Funds may enter into reverse repurchase
agreements. At the time a Fund enters into a reverse repurchase agreement (an
agreement under which the Fund sells portfolio securities and agrees to
repurchase them at an agreed-upon date and price), it will place in a segregated
custodial account, liquid assets, such as U.S. Government securities or other
liquid high grade debt securities having a value equal to or greater than the
repurchase price (including accrued interest), and will subsequently
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 Fund may decline below the price of the securities the
Fund is obligated to repurchase. Reverse repurchase agreements are considered to
be borrowings by the Fund 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 outstanding shares.
FUTURES AND RELATED OPTIONS. The Funds may invest in futures contracts and
related 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, a Fund 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 Fund. If the
investment adviser expects interest rates to decline, a Fund may purchase a
futures contract, or may purchase a call option or sell a put option on such
futures con-
14
<PAGE> 144
tract, to protect against an increase in the price of securities which the Fund
intends to purchase.
Each Fund 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 Fund under the rules of the exchange
on which the futures contract (or futures option) is traded, plus any premiums
paid by the Fund on its open futures options positions, does not exceed 5% of
the Fund's total assets, after taking into account any unrealized profits and
losses on the Fund'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 National Municipal Bond Fund 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 National Municipal Bond Fund may invest, without limitation, in
industrial development bonds, which, although issued by industrial development
authorities, may be backed only by the assets and revenues of the
non-governmental users. In pursuing its investment objective, the California
Tax-Exempt Bond Fund may invest under normal market conditions up to 20% of its
total assets in taxable instruments, including private activity bonds. 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." In
addition, although the Funds do not presently intend to do so on a regular
basis, each may invest more than 25% of its assets in Municipal Securities the
interest on which comes solely from revenues of similar projects. When a Fund's
assets are concentrated in obligations payable from revenues of similar
projects, the Fund will be subject to the particular risks (including economic,
business and political risks) related to such projects to a greater extent than
if its assets were not so concentrated. The value of a Fund'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 a Fund will decline. If interest
rates fall, the values of outstanding bonds will generally increase. Changes in
the value of a Fund's securities arising from these or other factors will cause
changes in the net asset value per share of the Fund.
HIGH YIELD, HIGH RISK SECURITIES. Up to 25% of each Fund's total assets may be
invested in Municipal Securities rated below investment grade ("high yield, high
risk securities"), or in the case of the California Tax-Exempt Bond Fund, in
unrated securities determined to be of comparable quality.
RISKS RELATED TO HIGH YIELD, HIGH RISK SECURITIES. While any investment carries
some risk, some of the risks associated with high yield, high risk securities
are different from the risks associated with investment grade securities. The
risk of loss through default is greater because high yield, high risk securities
are usually unsecured and are often subordinate to an issuer's other
obligations. Additionally, the issuers of these securities frequently have high
debt levels and are thus more sensitive to difficult economic conditions,
individual corporate developments and rising interest rates. Consequently, the
market price of these securities, and the net asset value of each Fund's shares,
may be quite volatile.
15
<PAGE> 145
RELATIVE YOUTH OF HIGH YIELD, HIGH RISK SECURITIES' MARKET. Because the market
for high yield, high risk securities, at least in its present size and form, is
relatively new, there remains some uncertainty about its performance level under
adverse market and economic environments. An economic downturn or increase in
interest rates could have a negative impact on both the market for high yield,
high risk securities (resulting in a greater number of bond defaults) and the
value of high yield, high risk securities held in a Fund's portfolio.
SENSITIVITY TO INTEREST RATE AND ECONOMIC CHANGES. The economy and interest
rates can affect high yield, high risk securities differently than other
securities. For example, the prices of high yield, high risk securities are more
sensitive to adverse economic changes or individual corporate developments than
are the prices of higher-rated investments.
Also, during an economic downturn or a period in which interest rates are rising
significantly, highly leveraged issuers may experience financial difficulties,
which, in turn, would adversely affect their ability to service their principal
and interest payment obligations, meet projected business goals and obtain
additional financing.
If the issuer of a security defaults, a Fund may incur additional expenses to
seek recovery. In addition, periods of economic uncertainty would likely result
in increased volatility for the market prices of high yield, high risk
securities as well as a Fund's net asset value. In general, both the prices and
yields of high yield, high risk securities will fluctuate.
LIQUIDITY AND VALUATION. In certain circumstances it may be difficult to
determine a security's fair value due to a lack of reliable objective
information. Such instances occur when there is not an established secondary
market for the security or the security is thinly traded. As a result, a Fund's
valuation of a security and the price it is actually able to obtain when it
sells the security could differ.
Adverse publicity and investor perceptions, whether or not based on fundamental
analysis, may decrease the values and liquidity of high yield, high risk
securities held by a Fund, especially in a thinly traded market. Illiquid or
restricted securities held by a Fund may involve special registration
responsibilities, liabilities and costs, and could involve other liquidity and
valuation difficulties.
CONGRESSIONAL PROPOSALS. Current laws, as well as pending proposals, may have a
material impact on the market for high yield, high risk securities.
CREDIT RATINGS. S&P, Moody's, D&P and Fitch evaluate the safety of a high
yield, high risk security's principal and interest payments, but do not address
market value risk. Because the ratings of the rating agencies may not always
reflect current conditions and events, in addition to using recognized rating
agencies and other sources, Bank of America performs its own analysis of the
issuers whose high yield, high risk securities a Fund purchases. Because of
this, a Fund's performance may depend more on the investment adviser's own
credit analysis than is the case for mutual funds investing in higher rated
securities.
In selecting high yield, high risk securities, Bank of America considers factors
such as those relating to the creditworthiness of issuers, the ratings and
performance of the high yield, high risk securities, the protections afforded
the high yield, high risk securities and the diversity of a Fund's portfolio.
Bank of America continuously monitors the issuers of high yield, high risk
securities held in a Fund's portfolio for their ability to make required
principal and interest payments, as well as in an effort to control the
liquidity of a Fund's portfolio so that it can meet redemption requests.
The National Municipal Bond Fund will not invest in any security that has lower
than a C rating. The California Tax-Exempt Bond Fund may invest in Municipal
Securities rated C by Moody's, D by Standard & Poor's, D by Fitch or DD by Duff
& Phelps, or in unrated securities determined to be of comparable quality. The
National Municipal Bond Fund may retain a portfolio security whose rating has
been changed if Bank of America deems that retention of such security is
warranted. In general, lower rated debt securities are
16
<PAGE> 146
subject to risks of market fluctuation or default (due to changes in the credit
rating or financial condition of the issuer) that are significantly greater than
for securities in the higher rating categories of S&P's, Moody's, Duff & Phelps
or Fitch. Please refer to the description of municipal bond ratings in the
Appendix to the Prospectus.
For your information, set forth below is the average distribution of ratings at
value for the National Municipal Bond Fund's and the California Tax-Exempt Bond
Fund's portfolio securities (including commercial paper and nonconvertible
bonds) for their last fiscal year:
NATIONAL MUNICIPAL BOND FUND
<TABLE>
<CAPTION>
MOODY'S INVESTORS SERVICE, PERCENTAGE
INC. OF VALUE
- ----------------------------- ----------
<S> <C> <C>
Aaa 39.38%
Aa 19.43%
A 26.08%
Baa 7.85%
Ba or lower 0%
Not Rated 7.26%
Comparable to A 0%
Comparable to Baa 0%
Comparable to Ba or lower 0%
--------
100.00%
========
</TABLE>
<TABLE>
<CAPTION>
PERCENTAGE
STANDARD & POOR'S CORPORATION OF VALUE
- ----------------------------- ----------
<S> <C> <C>
AAA 40.03%
AA 22.92%
A 24.08%
BBB 7.19%
BB or lower 0%
Not Rated 5.78%
Comparable to A 0%
Comparable to BBB 0%
Comparable to BBB or lower 0%
--------
100.00%
========
</TABLE>
CALIFORNIA TAX-EXEMPT BOND FUND
<TABLE>
<CAPTION>
MOODY'S INVESTORS SERVICE, PERCENTAGE
INC. OF VALUE
- ----------------------------- ----------
<S> <C> <C>
Aaa 52.19%
Aa 14.80%
A 8.99%
Baa 8.47%
Ba or lower 0%
Not Rated 15.55%
Comparable to A 0%
Comparable to Baa 0%
Comparable to Ba or lower 0%
--------
100.00%
========
</TABLE>
<TABLE>
<CAPTION>
PERCENTAGE
STANDARD & POOR'S CORPORATION OF VALUE
- ----------------------------- ----------
<S> <C> <C>
AAA 54.04%
AA 17.09%
A 19.34%
BBB 1.23%
BB or lower 0%
Not Rated 8.29%
Comparable to A 0%
Comparable to BBB 0%
Comparable to BBB or lower 0%
--------
100.00%
========
</TABLE>
These ratings are described in the Appendix to this Prospectus.
PORTFOLIO TRANSACTIONS. Investment decisions for the Funds 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 equitably allocated pursuant to procedures of
Bank of America. 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.
In allocating purchase and sale orders for investment securities (involving the
payment of broker-
17
<PAGE> 147
age 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 particular Fund 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 a Fund
and may increase the proportion of the income received by the Fund which
constitutes taxable capital gains. To the extent capital gains are realized,
distributions by the particular Fund of its allocated share of such gains may be
ordinary income for 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 than would otherwise be the case. For the fiscal year ended February
29, 1996, the portfolio turnover rate of the Master Portfolio in which the Fund
invested in prior to July 1, 1996 was 37.11%. For further information concerning
portfolio turnover, see the Statement of Additional Information.
CALIFORNIA TAX-EXEMPT BOND FUND CONSIDERATIONS. The California Tax-Exempt Bond
Fund's concentration in California Municipal Securities raises additional
considerations. Payment of the interest and principal of these obligations
depends on the continuing ability of their issuers to meet their obligations
thereunder. Investors should consider the greater risk inherent in the
California Tax-Exempt Bond Fund's concentration in such obligations versus the
safety that comes with a less geographically concentrated investment portfolio,
and should compare the yield available on a portfolio of California issues with
the yield of a more diversified portfolio including non-California issues before
making an investment decision.
Many of the California Tax-Exempt Bond Fund's Municipal Securities are likely to
be obligations of California governmental issuers that rely to one extent or
another 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 initiatives 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 governmental entities,
the impact of these initiatives and related measures on the ability of
California governmental issuers to pay interest or repay principal on their
obligations is difficult to determine. 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 noted 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 California economy. In recent
years, these economic factors reduced revenues to the state government at a time
when expenses of state government such as education costs, various welfare costs
and other expenses were rising. Such economic factors adversely impacted the
ability of state and local California governmental entities to repay debt and
these factors, and others that cannot be predicted, may have an adverse impact
in the future.
A more detailed description of the special factors affecting investments in
California Municipal Securities is set forth in the Statement of Additional
Information.
18
<PAGE> 148
- --------------------------------------------------------------------------------
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 FUNDS?
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. The minimum
investment is $200 for BankAmericard holders with an appropriate award
certificate from BankAmeriChoice Program.
- ---------------------------------------------------------
WHAT ALTERNATIVE SALES ARRANGEMENTS ARE AVAILABLE?
The Funds issue two classes of shares. A Shares are sold to investors choosing
the front-end sales charge alternative. K Shares are neither subject to a
front-end sales charge nor a contingent deferred sales charge. K Shares,
however, are sold to individuals investing proceeds from a redemption of shares
from another open-end investment company on which such an individual paid a
front-end sales load if (i) such redemption occurred within 30 days prior to the
purchase order, and (ii) such other open-end investment company was not
distributed and advised by Concord Financial Group, Inc. and Bank of America,
respectively, or their affiliates. The two classes of shares in each Fund
represent interests in the same portfolio of investments of the particular Fund,
have the same rights and are identical in all respects except as discussed
below. A Shares bear the expenses of a Shareholder Services Plan. K Shares bear
the expenses of a Distribution Plan and/or Administrative and Shareholder
Services Plan and have exclusive voting rights with respect to such Plans. The
two classes also have different exchange privileges, as described below. The net
income attributable to A and K Shares and the dividends payable on A and K
Shares will be reduced by the amount of the: (a) Shareholder Services Plan fees
attributable to A Shares, (b) Distribution Plan fees and/or Administrative and
Shareholder Services Plan fees attributable to K Shares, respectively, and (c)
the incremental expenses associated with such Plans.
HOW ARE SHARES PRICED?
Shares are purchased at their public offering price, which is based upon each
class' net asset value per share plus a front-end sales load on the A Shares.
Each class calculates its net asset value ("NAV") as follows:
<TABLE>
<S> <C>
(Value of Assets Attributable to the Class)
- (Liabilities Attributable to the Class)
NAV = --------------------------------------------------
Number of Outstanding Shares of the Class
</TABLE>
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 Funds' 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 debt
securities are valued at amortized cost, which approximates market value. For
further information about valuing securities, see the Statement of Additional
Information. For price and yield information call (800) 346-2087.
19
<PAGE> 149
The per share net asset values of A and K Shares will diverge due to the
different distribution and other expenses borne by the classes.
A SHARES SALES LOAD. The front-end sales load ("front-end sales load," "sales
load," "front-end sales charge," or "sales charge") for the A Shares of the
Funds begins at 4.50% and may decrease as the amount you invest increases, as
shown in the following chart:
- ---------------------------------------------------------
<TABLE>
<CAPTION>
DEALER'S
REALLOWANCE
AS A % OF AS A % OF AS A % OF
AMOUNT OF OFFERING NET 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
$1,000,000 1.00 1.01 0.90
$1,000,000 or more** 0.00 0.00 0.00
</TABLE>
* Dealer's reallowance may be changed periodically.
** See "Large Purchase Exemption" below for a description of the
contingent deferred sales charge.
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.
- ---------------------------------------------------------
LARGE PURCHASE EXEMPTION. To the extent that no other A Share no-load exemption
is available, the foregoing schedule of sales loads does not apply to purchases
of A Shares of $1,000,000 or more or to purchases of A Shares if the aggregate
value of the A Shares that you beneficially own in any Pacific Horizon Fund or
Time Horizon Fund equals or exceeds $1,000,000. If you accumulate $1,000,000 or
more of A Shares, on any additional purchase of A Shares, the contingent
deferred sales load described below will apply to such A Shares when they are
redeemed. In addition, if a customer purchases $1,000,000 or more of A Shares
and redeems such shares, a contingent deferred sales load will be imposed as
follows:
<TABLE>
<CAPTION>
NUMBER OF YEARS APPLICABLE CONTINGENT
ELAPSED SINCE PURCHASE DEFERRED SALES LOAD
- ---------------------- ---------------------
<S> <C>
1 year 1.0%
2 years 0.5%
3 years None
</TABLE>
The contingent deferred sales load is imposed on the lesser of the current
market value or the cost of the shares being redeemed. This means that this
charge will not be imposed upon increases in net asset value above the initial
purchase price or upon reinvested dividends. In determining whether a contingent
deferred sales charge is applicable to a redemption of such shares, the
calculation will be made in a manner that results in the lowest possible rate.
It will be assumed that the redemption is made first of amounts representing
shares acquired pursuant to the reinvestment of dividends and distributions;
then of amounts representing the increase in net asset value of your holdings of
shares above the total amount of payments for the purchase of shares during the
preceding 2 years; then of amounts representing the cost of shares held beyond
the applicable contingent deferred sales charge period; and finally, of amounts
representing the cost of the shares held for the longest period of time. In
addition, no contingent deferred sales load will be imposed on redeemed A Shares
if a front-end sales load had been previously imposed on such shares. Although
no front-end sales load will be paid on Large Purchase Exemptions, the
Distributor will compensate brokers whose customers purchase shares at the
following rates: 1.00% of the amount under $3 million, 0.50% of the next $47
million and 0.25% thereafter.
WHEN NO FRONT-END 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 a registered investment adviser purchasing shares
for its own account or for an account for which it is authorized to make
investment decisions;
20
<PAGE> 150
- - 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
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;
- - 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 a 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;
- - accounts open as of July 1, 1996, which were exempt from front-end sales loads
at the time the accounts were opened and where those exemptions are no longer
available for new account holders, so long as the accounts remain 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 shares of a Fund, 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, minor
children and grandchildren, 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 Funds' distributor pertaining to the sale of shares of a
Fund (and their spouses and minor children) to the extent permitted by such
organizations; and
- - holders of the BankAmericard with an appro-priate award certificate from the
BankAmeriChoice Program (initial award only; a front-end sales load will apply
to subsequent purchases).
WHEN NO CONTINGENT DEFERRED SALES CHARGE IS APPLIED. To receive one of the
first three exemptions listed below, you must explain the status of your
redemption at the time you redeem your shares. The contingent deferred sales
charge with respect to A Shares purchased under the Large Purchase Exemption is
not charged on (1) exchanges described under "Shareholder Services -- Can I
Exchange My Investment From One Fund to Another?"; (2) redemptions in connection
with minimum required distributions from IRA accounts due to a shareholder
reaching age 70 1/2; (3) redemptions in connection with a shareholder's death or
disability (as defined in the Internal Revenue Code); and (4) involuntary
redemptions as a result of an account's net asset value remaining below $500
after sixty days' written notice. In addition, no contingent deferred sales
charge is charged on shares acquired through the reinvestment of dividends or
distributions.
RIGHTS OF ACCUMULATION. When buying A Shares in Pacific Horizon Funds, your
current aggregate investment determines the front-end 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 or Time Horizon Fund on which you paid a front-end 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). You may
also aggregate your investment in Pacific Horizon Funds and Time Horizon Funds
in order to qualify for the Large Purchase Exemption.
To qualify for a reduced sales load on A Shares, 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
21
<PAGE> 151
with the Funds' distributor) must notify the Funds' 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 A Shares carrying a sales load of the
Funds, 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 additional A Shares of a Fund carrying a sales load with a current
value of $10,000, the sales 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 on A Shares 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 within a period of 13 months, beginning up to 90 days prior to the date of
the Letter's execution. A Shares carrying a sales load 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. Shares of Time Horizon Funds may be included when
determining reduced sales loads under the letter of intent program.
While signing a Letter of Intent does not bind you to purchase, or the Company
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 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 DO I DECIDE WHETHER TO BUY
A OR K SHARES?
You should determine whether under your particular circumstances it is more
advantageous to invest in A Shares and incur a front-end sales charge and an
ongoing Shareholder Services Plan fee; or invest in K Shares and incur neither a
front-end sales charge nor a contingent deferred sales charge. K Shares do incur
fees under a Distribution Plan and/or an Administrative and Shareholder Services
Plan. K Shares, however, are only available to individuals investing proceeds
from a redemption of shares from another open-end investment company on which
such individual paid a front-end sales load if (i) such redemption occurred
within 30 days prior to the purchase order and (ii) such other open-end
investment company was not distributed and advised by Concord Financial Group,
Inc. and Bank of America, respectively, or their affiliates.
22
<PAGE> 152
HOW CAN I BUY SHARES?
The chart below provides more information regarding some of the different
methods for investing in the Funds.
- --------------------------------------------------------------------------------
TO BUY SHARES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
OPENING AN ACCOUNT ADDING TO AN ACCOUNT
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
THROUGH BANK OF AMERICA, YOUR BROKER OR ANOTHER SERVICE ORGANIZATION
(ORDERS ARE NOT EFFECTIVE UNTIL RECEIVED BY THE FUND'S TRANSFER AGENT)
Contact them directly for Contact them directly for
instructions. instructions.
- --------------------------------------------------------------------------------------------------------
THROUGH THE DISTRIBUTOR
(IF YOU ARE OR WILL BE THE SHAREHOLDER OF RECORD ON THE COMPANY'S BOOKS)
BY MAIL
Complete Account Application Mail all subsequent
and mail it with a check investments to:
(payable to the appropriate
Fund) to the address on the Pacific Horizon Funds, Inc.
Account Application. File No. 54634
Los Angeles, CA 90074-4634
- --------------------------------------------------------------------------------------------------------
IN PERSON
BISYS Fund Services, Inc. Deliver Account Application Deliver your payment directly
3435 Stelzer Road and your payment directly to to the address on the left.
Columbus, OH 43219-3035 the address on the left.
- --------------------------------------------------------------------------------------------------------
BY WIRE
Initial purchases of shares Contact the Fund's transfer
into a new account may not be agent at 800-346-2087 for
made by wire. complete wiring instructions.
Instruct your bank to
transmit immediately
available funds for purchase
of shares of a particular
Fund in your name.
Be sure to include your name
and your Fund account number.
Consult your bank for information on remitting funds by wire
and any associated bank charges.
</TABLE>
- --------------------------------------------------------------------------------
23
<PAGE> 153
- --------------------------------------------------------------------------------
TO BUY SHARES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
OPENING AN ACCOUNT ADDING TO AN ACCOUNT
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<S> <C> <C>
BY TELETRADE TeleTrade Privileges may not Purchases may be made in the
(a service permitting transfers be used to make an initial minimum amount of $500 and
of money from your purchase. the maximum amount of $50,000
checking, NOW or bank per transaction as soon as
money market account) appropriate information
regarding your bank account
has been established on your
Fund account. This
information may be provided
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.
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.
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WHAT PRICE WILL I RECEIVE WHEN I BUY SHARES?
Your shares will be purchased at the particular 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
Funds' transfer agent, BISYS Fund Services, Inc. (the "Transfer Agent"), at its
Columbus 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 the Transfer Agent's business
day. 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 the Transfer Agent's 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 Funds' 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
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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?
You must specify at the time of investment whether you are purchasing A or K
Shares. Certificates for shares will no longer be issued.
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 a Fund. If you purchase or redeem
shares directly from a 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
value of the shares you redeem may be more or less than your cost, depending on
a 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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TO SELL SHARES
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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.
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<TABLE>
<S> <C>
THROUGH THE DISTRIBUTOR
(IF YOU ARE A SHAREHOLDER OF RECORD ON THE COMPANY'S BOOKS)
BY MAIL
Pacific Horizon Send a signed, written request (each owner, including each
National Municipal Bond Fund joint owner, must sign) to the Transfer Agent.
or California Tax-Exempt If you hold stock certificates for the shares being
Bond Fund redeemed, make sure to endorse them for transfer, have your
c/o Pacific Horizon Funds, signature on them guaranteed by your bank or another
Inc. guarantor institution (as described in the section entitled
P.O. Box 80221 "What Kind Of Paperwork Is Involved In Selling Shares?") and
Los Angeles, CA 90080-9909 include them with your request.
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IN PERSON
BISYS Fund Services, Inc.
3435 Stelzer Road Deliver your signed, written request (each owner, including
Columbus, OH 43219-3035 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.
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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>
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<PAGE> 156
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TO SELL SHARES
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<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.
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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 information regarding your bank account has been established
money to your checking, NOW or on your Fund account. This information may be provided on
bank money 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>
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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 Columbus
office. Although the Funds impose no charge when A Shares are redeemed (except
pursuant to the Large Purchase Exemption described above), 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 Funds impose no charge when K Shares are redeemed.
The Company reserves the right to redeem accounts involuntarily if, after sixty
days' written
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<PAGE> 157
notice, the account's net asset value remains below a $500 minimum balance. The
contingent deferred sales charge applicable to A Shares purchased under the
Large Purchase Exemption will not be imposed upon such involuntary redemptions.
WHAT KIND OF PAPERWORK IS INVOLVED IN SELLING SHARES?
Redemption requests must be signed by each shareholder, including each joint
owner. When redeeming shares, you should indicate whether you are redeeming A or
K Shares. 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 a Fund receives payment
in cash or immediately available funds for the purchase of shares. The Company
may suspend the right of redemption or postpone the date of payment upon
redemption (as well as suspend the recordation of the transfer of shares) for
such periods as are permitted under the 1940 Act.
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 a
Fund, in shares of the same class of the Fund out of which you redeemed, in like
shares of another Fund in the Pacific Horizon Family of Funds or in like shares
of any investment portfolio of Time Horizon Funds within 90 days of your
redemption trade date without paying a sales load. Upon such a reinvestment, the
Funds' distributor will credit to your account any contingent deferred sales
charge imposed on any redeemed A Shares subject to the Large Purchase Exemption.
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.
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DIVIDEND AND DISTRIBUTION POLICIES
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Dividends from each 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. Each 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 A Fund Be
Invested In Other Funds?".
To elect to receive payment in cash, or to revoke such election, you must do so
in writing to the Transfer Agent, P.O. Box 80221, Los Angeles, California
90080-9909. The election or revocation will become effective with respect to
dividends paid after it is received by the Transfer Agent.
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SHAREHOLDER SERVICES
PACIFIC HORIZON FUNDS, INC. PROVIDES A VARIETY OF WAYS TO MAKE
MANAGING YOUR INVESTMENTS MORE CONVENIENT.
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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: like
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.
Specifically, A Shares may be exchanged for other A Shares and K Shares may be
exchanged for other K Shares. NO ADDITIONAL SALES LOAD WILL BE INCURRED WHEN
EXCHANGING A SHARES PURCHASED WITH A SALES LOAD FOR A SHARES OF ANOTHER LOAD
FUND OF THE COMPANY OR TIME HORIZON FUNDS.
Neither a contingent deferred sales load nor a front-end sales load will be
imposed if a shareholder who has entered a Fund under the Large Purchase
Exemption exchanges shares between Funds of the Company or Time Horizon Funds.
However, shares acquired in the exchange will remain subject to the contingent
deferred sales load discussed above. The contingent deferred sales load is
calculated as a percentage of the lesser of the current market value or the cost
of the shares being redeemed. This means that this charge will not be imposed
upon increases in net asset value above the initial purchase price or upon
reinvested dividends. In determining whether a contingent deferred sales charge
is applicable to a redemption of such shares, the calculation will be made in a
manner that results in the lowest possible rate. It will be assumed that the
redemption is made first of amounts representing shares acquired pursuant to the
reinvestment of dividends and distributions; then of amounts representing the
increase in net asset value of your holdings of shares above the total amount of
payments for the purchase of shares during the preceding 2 years; then of
amounts representing the cost of shares held beyond the applicable contingent
deferred sales charge
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<PAGE> 159
period; and finally, of amounts representing the cost of the shares held for the
longest period of time.
An investment in a 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 Funds' 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."
An exchange is considered a sale of shares of a Fund and the purchase of shares
of another Fund and may result in a capital gain or loss for federal income tax
purposes.
If you would like more information on making an exchange, please read the
Statement of Additional Information and consult your Service Organization or the
Funds' distributor.
The Funds reserve 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 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 caused by 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, including requesting certain personal
or account information to confirm the identity of the shareholder. 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.
30
<PAGE> 160
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 Funds
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 in a subsequent signature guaranteed
written request to the Transfer Agent. Purchases of additional shares
concurrently with withdrawals are ordinarily not advantageous because of each
Fund's sales load. Use of this Plan may also be disadvantageous for A Shares
subject to the Large Purchase Exemption due to the potential need to pay a
contingent deferred sales charge.
CAN MY DIVIDENDS FROM A 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
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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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THE BUSINESS OF THE FUNDS
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FUND MANAGEMENT
The business affairs of Pacific Horizon Funds, Inc. are managed under the
general supervision of its 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 serves as Investment Adviser of the Funds. 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, business
credit and thrift offices in major U.S. cities. In addition, it has branches,
corporate offices and representative offices in 36 foreign countries.
In its advisory agreement, Bank of America has agreed to manage the Funds'
investments and to be responsible for, place orders for, and make decisions with
respect to, all purchases and sales of the Funds' securities.
Kim Michalski is the person primarily responsible for the day-to-day investment
management of the California Tax-Exempt Bond Fund. Ms. Michalski has been the
Fund's manager since September of 1989. Ms. Michalski has been associated with
Bank of America (and Security Pacific National Bank before its merger with Bank
of America) since 1983. Her primary emphasis is in tax-exempt securities, and
she manages two mutual funds and two common trust funds.
Stephen P. Scharre is the person primarily responsible for the day-to-day
investment management of the National Municipal Bond Fund. Mr. Scharre has been
associated with Bank of America (and Security Pacific National Bank before its
merger with Bank of America) since 1984. Mr. Scharre is a Chartered Financial
Analyst and member of the Los Angeles Society of Financial Analysts. Mr. Scharre
manages tax-exempt and tax-advantaged portfolios, including common trust
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funds and several large institutional and high net worth accounts.
For the services provided and expenses assumed under the Advisory Agreements,
Bank of America is entitled to receive a fee at the annual rate of 0.35% and
0.40% of the National Municipal Bond Funds' and California Tax-Exempt Bond
Fund's average daily net assets, respectively. These amounts may be reduced
pursuant to undertakings by Bank of America. (See the information below under
"Fee Waivers"). During the fiscal year ended February 29, 1996, Bank of America
waived its entire fee as investment adviser to the Master Portfolio in which the
National Municipal Bond Fund previously invested its assets. For the same
period, the California Tax-Exempt Bond Fund paid Bank of America advisory fees
at an effective annual rate of 0.29% of the Fund's average daily net assets, and
Bank of America waived a portion of its fee at an effective annual rate of 0.11%
of the Fund's average daily net assets.
In addition, Bank of America and its affiliates may be entitled to fees under
the Shareholder Services Plan, Distribution Plan, and Administrative and
Shareholder Services Plan as described under "Plan Payments," and may receive
fees charged directly to their accounts in connection with investments in shares
of the Funds.
ADMINISTRATOR
Concord Holding Corporation ("Concord") serves as Administrator of the Funds.
Concord is an indirect, wholly owned subsidiary of The BISYS Group, Inc. Its
offices are located at 3435 Stelzer Road, Columbus, Ohio 43219-3035.
Under its administration agreement with the Company, Concord has agreed to: pay
the costs of maintaining the offices of the Company; 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 Funds and the Securities and Exchange Commission;
prepare tax returns; maintain the registration or qualification of each Fund's
shares for sale under state securities laws; maintain books and records of the
Funds; calculate the net asset value of the Funds; calculate the dividends and
capital gains distributions paid to shareholders; and generally assist in all
aspects of the operations of the Funds.
For its services as administrator, Concord is entitled to receive an
administration fee from the National Municipal Bond Fund at the annual rate of
0.20% of such Fund's average daily net assets, and an administration fee from
the California Tax-Exempt Bond Fund at the annual rate of 0.30% of such Fund'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 29, 1996, Concord waived its entire fee as administrator for
the Master Portfolio and the National Municipal Bond Fund. Additionally, for the
same period, Concord reimbursed the Master Portfolio for all of its other
operating costs and reimbursed the National Municipal Bond Fund for a portion of
its operating costs. During the fiscal year ended February 29, 1996, the
California Tax-Exempt Bond Fund paid Concord administration fees at an effective
annual rate of 0.21% of the Fund's average daily net assets, and Concord waived
a portion of its fee at an effective annual rate of 0.09% of such Fund's average
daily net assets.
Pursuant to the authority granted in its administration agreement, Concord has
entered into an agreement with The Bank of New York ("BONY"), under which BONY
performs certain of the services listed above, e.g., calculating the net asset
value of the Funds, calculating dividends and capital gains distributions to
shareholders and maintaining the books and records of the Funds. The National
Municipal Bond Fund and the California Tax-Exempt Bond Fund bear all fees and
expenses charged by BONY.
DISTRIBUTOR
Each Fund's shares are sold on a continuous basis by Concord Financial Group,
Inc. (the "Distributor"). The Distributor is an indirect, wholly owned
subsidiary of The BISYS Group, Inc. and is
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located at 3435 Stelzer Road, Columbus, Ohio 43219-3035.
CUSTODIAN AND TRANSFER AGENT
The Bank of New York, 90 Washington Street, New York, New York 10286, serves as
the Custodian of the National Municipal Bond Fund and California Tax-Exempt Bond
Fund. BISYS Fund Services, Inc. is the transfer and dividend disbursing agent of
the Funds and is located at 3435 Stelzer Road, Columbus, Ohio 43219-3035.
FEE WAIVERS
Except as noted in this Prospectus, the service contractors bear all expenses in
connection with the performance of their services, and the Funds 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 each Fund's fiscal year, Bank of
America, Concord and/or the Distributor may prospectively choose not to receive
fee payments and/or may assume certain expenses of the Funds as a result of
competitive pressures and in order to preserve and protect the business and
reputation of Concord and Bank of America. However, the service providers retain
the ability to discontinue such fee waivers and/or expense reimbursements at any
time.
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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 CHANGE OF SHARES IN THE FUNDS.
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As with any investment, you should consider the tax implications of an
investment in the Funds. The following is only a brief summary of some of the
important tax considerations generally affecting the Funds and their
shareholders. Consult your tax adviser with specific reference to your own tax
situation.
FEDERAL TAXES
During its most recent taxable year each Fund qualified separately as a
"regulated investment company" under the Internal Revenue Code of 1986, as
amended (the "Code"), and each Fund intends that it will so qualify in future
years as long as such qualification is in the best interest of its shareholders.
As a result of this qualification, each Fund generally is not required to pay
federal income taxes to the extent its earnings are distributed in accordance
with the Code.
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 loss, such dividends will be
subject to regular federal income tax and California state personal income tax,
whether or not the dividends are reinvested. Any distributions 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. Such dividends are
not eligible for the dividends received deduction allowed to corporations.
If, at the close of each quarter of its taxable year, at least 50% of the value
of the California Tax-Exempt Bond Fund's total assets consists of California
Exempt Securities, the California Tax-Exempt Bond Fund will be qualified to pay
dividends exempt from California state personal income tax to its shareholders.
The dividends
34
<PAGE> 164
exempt from that tax will be those that come from interest attributable to
California Municipal Securities and certain specified federal obligations. (Such
exemption 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 Bond Fund. Additional tax information
regarding "substantial users" and "related persons" can be found in the
Statement of Additional Information). If you are subject to California state
franchise tax or California state corporate income tax, your dividends may still
be taxed as ordinary or capital gain dividends, despite the personal income tax
exemption.
Distributions of net investment income from the California Tax-Exempt Bond Fund
may be subject to state or local taxes other than the California state personal
income tax under state or local law, even though all or a part of those
distributions may come from interest on tax-exempt obligations that, if you had
received them directly, would be exempt from such taxes. Consult your tax
adviser with special reference to your own tax situation.
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 also must
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.
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. 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.
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 for the purpose of calculating your gain or loss from the exchange. It
may be included in the tax basis of the new shares, subject to this same
limitation.
Interest on indebtedness incurred by you to purchase or carry Fund shares
generally is not deductible for federal income tax purposes.
A distribution paid to you by a 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 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.
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<PAGE> 165
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MEASURING PERFORMANCE
EACH 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.
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Average annual total return reflects the average annual percentage change in
value of an investment in a 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 a 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, a 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 assume dividends and
capital gains distributions made by a Fund during the period are reinvested in
Fund shares, and include the maximum front-end sales charge for A Shares. Each
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.
Each 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.
Each Fund calculates its "tax equivalent yield" by increasing its 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 a Fund's yield.
An investor in a Fund may find it particularly useful to compare a 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 FOLLOWING TABLE ILLUSTRATES FOR THE CALIFORNIA TAX-EXEMPT BOND FUND THE
DIFFERENCES BETWEEN HYPOTHETICAL TAX-FREE YIELDS AND TAX-EQUIVALENT YIELDS FOR
DIFFERENT TAX BRACKETS. YOU SHOULD BE AWARE, HOWEVER, THAT TAX BRACKETS CAN
CHANGE OVER TIME AND THAT YOUR TAX ADVISER SHOULD BE CONSULTED FOR SPECIFIC
YIELD CALCULATIONS. (THE FEDERAL TAX RATES USED BELOW ARE THOSE CURRENTLY
AVAILABLE FOR 1996, WHILE THE CALIFORNIA TAX RATES USED BELOW ARE THOSE
APPLICABLE FOR 1996.) THESE YIELDS ARE FOR ILLUSTRATIVE PURPOSES ONLY. THE
FEDERAL TAX BRACKETS USED UNDER "COMBINED CALIFORNIA & FEDERAL TAX BRACKET" TAKE
INTO EFFECT THE FULL DEDUCTION OF CALIFORNIA STATE TAXES FOR THE CALIFORNIA
TAX-EXEMPT BOND FUND BUT DO NOT TAKE INTO ACCOUNT THE EFFECT OF REDUCING THE
DEDUCTIBILITY OF ITEMIZED DEDUCTIONS FOR TAXPAYERS WITH ADJUSTED GROSS INCOME
OVER $114,700 OR THE POSSIBLE EFFECT OF THE FEDERAL ALTERNATIVE MINIMUM TAX.
ADDITIONALLY, EFFECTIVE TAX BRACKETS AND EQUIVALENT TAXABLE YIELDS MAY BE HIGHER
THAN THOSE SHOWN.
36
<PAGE> 166
<TABLE>
<CAPTION>
MARRIED FILING JOINTLY
- -----------------------------
COMBINED
CALIFORNIA
& FEDERAL TAX-FREE YIELD
TAX -------------------------------------------------------------------------
INCOME BRACKET 4.5% 5.0% 5.5% 6.0% 6.5% 7.0% 7.5% 8.0%
- ----------------------------- ---- ---- ----- ----- ----- ----- ----- -----
TAXABLE EQUIVALENT YIELD
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$9,333-22,118 16.70% 5.40% 6.00% 6.60% 7.20% 7.80% 8.40% 9.00% 9.60%
$22,119-34,906 18.40% 5.51% 6.13% 6.74% 7.35% 7.97% 8.58% 9.19% 9.80%
$34,907-36,000 20.10% 5.63% 6.26% 6.88% 7.51% 8.14% 8.78% 9.39% 10.01%
$36,001-48,456 32.32% 6.65% 7.39% 8.13% 8.87% 9.60% 10.34% 11.08% 11.82%
$48,457-61,240 33.76% 6.79% 7.55% 8.30% 9.08% 9.81% 10.57% 11.32% 12.08%
$61,241-91,850 34.70% 6.89% 7.66% 8.42% 9.19% 9.95% 10.72% 11.48% 12.25%
$91,851-140,000 37.42% 7.19% 7.99% 8.79% 9.59% 10.39% 11.19% 11.98% 12.78%
$140,001-212,380 41.95% 7.75% 8.61% 9.47% 10.34% 11.20% 12.06% 12.92% 13.78%
$212,381-250,000 42.40% 7.81% 8.68% 9.55% 10.42% 11.28% 12.15% 13.02% 13.89%
$250,001-424,760 45.64% 8.28% 9.20% 10.12% 11.04% 11.98% 12.88% 13.80% 14.72%
over 424,760 46.24% 8.37% 9.30% 10.23% 11.16% 12.09% 13.02% 13.95% 14.88%
</TABLE>
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, a 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.
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. Each
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 a 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 a 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 a Fund (e.g. account maintenance fees, compensating balance
requirements or fees based upon account transactions, assets or income).
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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: one hundred million
shares of Class G Common Stock, 150 million shares of Class G - Special Series 3
Common Stock and 50 million shares of
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<PAGE> 167
Class G -- Special Series 5 Common Stock, representing interests in the
California TaxExempt Bond Fund, and 40 million shares of Class Q Common Stock,
60 million shares of Class Q -- Special Series 3 Common Stock and 50 million
shares of Class Q -- Special Series 5 Common Stock, representing interests in
the National Municipal Bond Fund; and additional classes of shares representing
interests in other investment portfolios of the Company. Class G and Class Q
Common Stock are the "A" Shares, Class G -- Special Series 3 Common Stock and
Class Q -- Special Series 3 Common Stock are the "B" Shares and Class G --
Special Series 5 Common Stock and Class Q - Special Series 5 Common Stock are
the "K" Shares. As of the date of this prospectus, B Shares have not been
offered to the public. The Board of Directors may similarly classify or
reclassify any class of shares (including unissued Class G Common Stock, Class
G -- Special Series 3 Common Stock, Class G -- Special Series 5 Common Stock,
Class Q Common Stock, Class Q -- Special Series 3 Common Stock or Class
Q -- Special Series 5 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 Funds are entitled to participate in the
dividends and distributions declared by the Board of Directors and in the net
distributable assets of the particular Fund upon 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). Only A Shares will vote on
matters relating solely to A Shares and K Shares will vote on matters relating
solely to K Shares. The Funds do 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 Funds 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.
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PLAN PAYMENTS
THE COMPANY HAS ADOPTED A SHAREHOLDER SERVICES PLAN (THE "PLAN") FOR A SHARES
AND A
DISTRIBUTION PLAN AND AN ADMINISTRATIVE AND SHAREHOLDER SERVICES PLAN FOR K
SHARES.
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The Company has adopted a Shareholder Services Plan for A Shares, under which
the A Shares of each Fund reimburse the Distributor for shareholder servicing
fees the Distributor pays to Service Organizations. The Company has adopted a
Distribution Plan pursuant to Rule 12b-1 under the 1940 Act under which the K
Shares of the Fund reimburse the Distributor for services rendered and costs
incurred in connection with distribution of the K Shares. The Company has also
adopted
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<PAGE> 168
an Administrative and Shareholder Services Plan for K Shares, under which K
Shares of the Fund reimburse the Distributor for administrative and shareholder
servicing fees the Distributor pays to Service Organizations.
SHAREHOLDER SERVICES PLAN
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 a Fund for shareholder servicing expenses may not
exceed 0.25% (annualized) of the average daily net assets of such Fund's A
Shares. 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 29, 1996, the Distributor waived all payments under
the Plan with respect to the National Municipal Bond Fund. For the same period,
the California TaxExempt Bond Fund made payments under the Plan at the effective
annual rate of .25% of such Fund's average daily 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 a Fund with respect to
the amount "carried forward."
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.
DISTRIBUTION PLAN AND ADMINISTRATIVE AND SHAREHOLDER SERVICES PLAN
Under the Distribution Plan, each Fund pays the Distributor for distribution
expenses primarily intended to result in the sale of each Fund's K Shares. Such
distribution expenses include expenses incurred in connection with advertising
and marketing each Fund's K Shares; payments to Service Organizations for
assistance in connection with the distribution of K Shares; and expenses
incurred in connection with preparing, printing and distributing prospectuses
for the Funds (except those used for regulatory purposes, for solicitation or
distribution to existing or potential A shareholders or for distribution to
existing K shareholders of the Funds) and in implementing and operating the
Distribution Plan.
Shareholder servicing expenses under the Administrative and Shareholder Services
Plan include, but are not limited to, expenses incurred in connection with
shareholder services provided by the Distributor and payments to Service
Organizations for the provision of support services with respect to the
beneficial owners of K Shares, such as assisting clients in processing exchange
and redemption requests and in changing dividend options and account
descriptions and responding to client inquiries concerning their investments.
Administrative servicing expenses include, but are
39
<PAGE> 169
not limited to, expenses incurred in connection with administrative services
provided by the Distributor and payments to Service Organizations for the
provision of administrative services to beneficial owners of K Shares such as
establishing and maintaining accounts and records relating to their clients who
invest in K Shares, providing information to the Funds necessary for accounting
or subaccounting; and providing statements periodically to clients showing their
position in K Shares.
Under the Distribution Plan, payments by a Fund for distribution expenses may
not exceed 0.75% (annualized), of the average daily net assets of such Fund's K
Shares. Under the Administrative and Shareholder Services Plan, payments for
shareholder servicing expenses may not exceed 0.25% (annualized) of the average
daily net assets of such Fund's K Shares. Under the Administrative and
Shareholder Services Plan, payments for administrative servicing expenses may
not exceed 0.75% (annualized) of the average daily net assets of a Fund's K
Shares. The total of all 12b-1 fees, administrative services fees and
shareholder services fees may not exceed, in the aggregate, the annual rate of
1.00% of the average daily net assets of a Fund's K Shares. These amounts may be
reduced pursuant to undertakings by the Distributor. Payments for distribution
expenses under the Distribution Plan are subject to Rule 12b-1 under the 1940
Act. During the fiscal year ended February 29, 1996, no K Shares were offered by
the Company.
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> 170
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APPENDIX A
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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--possess many favorable investment attributes and are considered as
upper medium-grade obligations; Baa--considered 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 indicates a general lack of characteristics of
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.
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 "AAA" issues only in small degree. Debt rated "A" 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. Debt rated "BBB" 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. 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 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. Debt rated "CI" is reserved for
income bonds on which no interest is being paid. Debt rated "D" is in default.
The "D" 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 that such payments will be made during such grace period. 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. 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 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"
possess below average protection factors but such protection factors are still
considered sufficient for prudent investment. Considerable variability in risk
is present during economic
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<PAGE> 171
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 has
considerable uncertainty 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 "F-1+."
"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.
"BB," "B," "CCC," "CC," "C," "DDD," "DD," and "D" -- Debt that
possesses one of these ratings is considered by Fitch to be a speculative
investment. 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 Debt issues not in default. For defaulted Debt,
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.
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. The following summarizes the ratings by Moody's for 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. Loans
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<PAGE> 172
bearing the designation "SG" are of speculative quality and lack margins of
protection.
Standard & Poor's ratings for municipal notes are as follows: 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 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 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
short-term 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.
"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 "A-1+." 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 in
43
<PAGE> 173
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.
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 or related supporting institutions rated
"Prime-1" are considered to have a superior capacity for repayment of short-term
promissory obligations. Issuers or related supporting institutions rated
"Prime-2" are considered to have a strong capacity for repayment of short-term
promissory obligations. Issuers or related supporting institutions rated
"Prime-3" 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.
Issues rated "Not Prime" do not fall within any of the Prime rating categories.
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.
44
<PAGE> 174
TXI-0001
- ----------------------------
PACIFIC HORIZON MUTUAL FUNDS
- ----------------------------
NATIONAL MUNICIPAL
BOND FUND
CALIFORNIA TAX-EXEMPT
BOND FUND
PROSPECTUS
July 1, 1996
NOT FDIC INSURED
<PAGE> 175
PROSPECTUS
JULY 1, 1996
PACIFIC HORIZON ASSET ALLOCATION FUND
PACIFIC HORIZON CAPITAL INCOME FUND
Investment Portfolios offered by Pacific
Horizon Funds, Inc.
- --------------------------------------------------------------------------------
The PACIFIC HORIZON ASSET ALLOCATION FUND (the "Asset Allocation Fund") is a
diversified mutual fund whose investment objective is to obtain long-term growth
from capital appreciation and dividend and interest income. The Asset Allocation
Fund seeks to achieve its objective by actively allocating investments among the
three major asset categories: bonds, equity securities and cash equivalents.
The PACIFIC HORIZON CAPITAL INCOME FUND (the "Capital Income Fund" and,
collectively with the Asset Allocation Fund, the "Funds") is a diversified
mutual fund whose investment objective is to provide investors with a total
investment return, comprised of current income and capital appreciation,
consistent with prudent investment risk. In seeking its investment objective,
the Capital Income Fund invests in a diversified portfolio consisting
principally of convertible bonds and convertible preferred stocks of domestic
issuers.
UNLIKE MOST OTHER INVESTMENT COMPANIES WHICH INVEST DIRECTLY IN PORTFOLIO
SECURITIES, THE ASSET ALLOCATION 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 "MASTER PORTFOLIO" AND COLLECTIVELY WITH THE PACIFIC
HORIZON CAPITAL INCOME FUND, THE "PORTFOLIOS") HAVING THE SAME INVESTMENT
OBJECTIVE AS THAT OF THE ASSET ALLOCATION FUND. THE ASSET ALLOCATION FUND WILL
PURCHASE SHARES OF THE MASTER PORTFOLIO AT NET ASSET VALUE. THE NET ASSET VALUE
OF THE ASSET ALLOCATION FUND WILL RESPOND TO INCREASES AND DECREASES IN THE
VALUE OF THE MASTER PORTFOLIO'S SECURITIES. INVESTORS SHOULD CAREFULLY CONSIDER
THIS INVESTMENT APPROACH. SEE "OTHER INVESTMENT PRACTICES AND CONSIDERATIONS --
MASTER-FEEDER STRUCTURE" ON PAGE 21 FOR ADDITIONAL INFORMATION REGARDING
THIS STRUCTURE.
This Prospectus describes two classes of shares. A Shares are sold with a
front-end sales charge. K Shares are not subject to either a front-end sales
charge or a contingent deferred sales charge.
The Funds are 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 Portfolios' investment adviser.
- --------------------------------------------------------------------------------
Based in San Francisco, California, Bank of America and its affiliates have over
$48 billion under management, including over $12 billion in mutual funds.
This Prospectus describes concisely the information about the Funds and the
Company that you should know before investing. Please read it carefully and
retain it for future reference.
More information about the Funds 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, 1996 and is
incorporated by reference into this Prospectus.
- --------------------------------------------------------------------------------
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. Investment in the Funds 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, other than those contained in this Prospectus, in the Statement
of Additional Information and the Funds' official sales literature, in
connection with the offering of the Funds' 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 Funds 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 Funds or the distributor to make such offer in such
jurisdiction.
- --------------------------------------------------------------------------------
<PAGE> 176
CONTENTS
<TABLE>
<S> <C> <C>
EXPENSE SUMMARY 2
FINANCIAL HIGHLIGHTS 7
FUND INVESTMENTS 10 INVESTMENT OBJECTIVES
10 TYPES OF INVESTMENTS
15 FUNDAMENTAL LIMITATIONS
16 OTHER INVESTMENT PRACTICES AND CONSIDERATIONS
SHAREHOLDER GUIDE 23 HOW TO BUY SHARES
23 What Is My Minimum Investment In The Funds?
23 What Alternative Sales Arrangements Are Available?
23 How Are Shares Priced?
27 How Do I Decide Whether to Buy A or K Shares?
28 How Can I Buy Shares?
29 What Price Will I Receive When I Buy Shares?
30 What Else Should I Know To Make A Purchase?
30 HOW TO SELL SHARES
30 How Do I Redeem My Shares?
32 What NAV Will I Receive For Shares I Want To Sell?
32 What Kind Of Paperwork Is Involved In Selling Shares?
33 How Quickly Can I Receive My Redemption Proceeds?
33 Do I Have Any Reinstatement Privileges After I Have
Redeemed Shares?
DIVIDEND AND DISTRIBUTION
POLICIES 33
SHAREHOLDER SERVICES 34 CAN I USE THE FUNDS IN MY RETIREMENT PLAN?
34 CAN I EXCHANGE MY INVESTMENT FROM ONE FUND TO
ANOTHER?
35 WHAT IS TELETRADE?
36 CAN I ARRANGE TO HAVE AUTOMATIC INVESTMENTS MADE ON A
REGULAR BASIS?
36 WHAT IS DOLLAR COST AVERAGING AND HOW CAN I IMPLEMENT
IT?
36 CAN I ARRANGE PERIODIC WITHDRAWALS?
36 CAN MY DIVIDENDS FROM THE FUND BE INVESTED
IN OTHER FUNDS?
37 IS THERE A SALARY DEDUCTION PLAN AVAILABLE?
THE BUSINESS OF THE FUNDS 37 FUND MANAGEMENT
37 Service Providers
TAX INFORMATION 40
MEASURING PERFORMANCE 41
DESCRIPTION OF SHARES 42
PLAN PAYMENTS 43
APPENDIX A 46
- ------------------------------------------------------------------------------------------------------------------------
DISTRIBUTOR: INVESTMENT ADVISER:
Concord Financial Group, Inc. Bank of America National Trust and Savings Association
3435 Stelzer Road 555 California Street
Columbus, OH 43219-3035 San Francisco, CA 94104
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 177
EXPENSE SUMMARY
SHAREHOLDER TRANSACTION EXPENSES are charges you pay when buying or selling
shares of the Funds. The Funds offer two classes of shares. A Shares are offered
at net asset value plus a front-end sales charge (see page 23 of the Prospectus
for an explanation of net asset value per share) and are subject to a
shareholder servicing fee. K Shares are offered at net asset value with neither
a front-end sales charge nor a contingent deferred sales charge, but are subject
to distribution, administrative servicing and shareholder servicing fees.
ANNUAL FUND OPERATING EXPENSES include payments by the Funds and payments by the
Master Portfolio which are allocable to the Asset Allocation Fund. Operating
expenses include fees for portfolio management, maintenance of shareholder
accounts, general administration, distribution, (in the case of K shares)
shareholder servicing, accounting and other services.
Below is a summary of the shareholder transaction expenses imposed by the Funds
for A and K Shares; the estimated operating expenses for A and K Shares of the
Asset Allocation Fund (including the operating expenses of the Master Portfolio
which are allocable to the Asset Allocation Fund) expected to be incurred during
the current fiscal year; the operating expenses of the A Shares of the Capital
Income Fund incurred during its last fiscal year; and the operating expenses
expected to be incurred by the K Shares of the Capital Income Fund during the
first twelve months of operations. The information for the Asset Allocation Fund
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.
ASSET ALLOCATION FUND
---------------------------------------------------------
<TABLE>
<CAPTION>
A SHARES K SHARES
------- -------
<S> <C> <C> <C>
SHAREHOLDER TRANSACTION
EXPENSES
Maximum Sales Load Imposed
on Purchases
(as a percentage of
offering price) 4.50% None(2)
Sales Load Imposed on
Reinvested Dividends None None
Maximum Contingent Deferred
Sales Load
(as a percentage of
original purchase price or
redemption proceeds,
whichever is lower) None(1) None
Redemption Fees None None
Exchange Fee None None
ANNUAL FUND OPERATING
EXPENSES
(as a percentage of
average net assets)
Management Fees (After Fee
Waivers)+ 0.33% 0.33%
12b-1 Fee (After Fee
Waivers)* 0% 0.50%*
Administrative Services Fee
(After Fee Waivers)* 0% 0.50%*
Shareholder Services Fee* 0.25% 0.25%*
----
Total of 12b-1 fees OR
Administrative Services
Fees and Shareholder
Services Fees for K
Shares (After Fee
Waivers)* 0.75%*
Other Expenses
(After Expense
Reimbursements)+ 0.77% 0.77%
------- -------
Total Operating Expenses
(After Fee Waivers and
Expense Reimbursements)+ 1.35% 1.85%
------- -------
------- -------
</TABLE>
----------------------------------------
(1) There is no front-end sales load on A Shares you purchase if you have either
a combined purchase of A Shares of the Company of $1,000,000 or more or if
the aggregate value of A Shares that you beneficially own in any Pacific
Horizon Fund or Time Horizon Fund, another open-end investment company
managed by Bank of America (a "Time Horizon Fund"), equals or exceeds
$1,000,000 ("Large Purchase Exemption"). A Shares purchased under the Large
Purchase Exemption (except A Shares purchased under the Daily Advantage or
Advantage Plus Programs) are subject to a contingent deferred sales charge
of 1.00% and 0.50%, respectively, on redemptions within one and two years
after purchase. The contingent deferred sales charge is paid to Concord
Financial Group, Inc. (the
2
<PAGE> 178
"Distributor"). A Shares cannot be purchased under the Large Purchase
Exemption if there is another no-load exemption available. Accordingly, A
Shares purchased under another no-load exemption are not subject to a
contingent deferred sales charge. Although no front-end sales load will be
paid on shares purchased under the Large Purchase Exemption, the Distributor
will compensate brokers whose customers purchase such shares at the
following rates: 1.00% of the amount under $3 million, 0.50% of the next $47
million and 0.25% thereafter.
(2) Bank of America will compensate Seafirst Investment Services, Inc. ("SIS")
and BA Investment Services, Inc. ("BAIS") (BAIS and SIS are collectively
referred to herein as "Affiliated Brokers") for their customers who have
invested in a Fund and are participants in the Daily Advantage(R) Program.
The Affiliated Brokers will be compensated by Bank of America at the rate of
1.00% of the amount under $3 million, 0.50% of the next $47 million and
0.25% thereafter of combined Pacific Horizon Funds' and Time Horizon Funds'
K Shares in each Daily Advantage(R) Program.
+ Absent fee waivers and/or expense reimbursements, management fees for each
class of shares of the Fund would be 0.75% of the average net assets
(annualized); "Other Expenses" for the Asset Allocation Fund's A and K Shares
are estimated to be 0.92% and 0.92%, respectively, of average net assets
(annualized); and "Total Operating Expenses" for the Asset Allocation Fund's
A and K Shares are estimated to be 1.92% and 2.67% of average net assets
(annualized), respectively.
* Absent fee waivers, 12b-1 fees or administrative services fees would be 0.75%
or 0.75%, respectively, of the average net assets (annualized) of the Fund's
K Shares. The total of all 12b-1 fees, administrative services fees and
shareholder services fees may not exceed, in the aggregate, the annual rate
of 1.00% of the average net assets of the Fund's K Shares. However, it is
expected that during the current fiscal year, such fees will not exceed 0.75%
of the average net assets of the Fund's K Shares. Because of the Rule 12b-1,
administrative and/or shareholder services fees paid by the Asset Allocation
Fund as shown in the above table, long-term K shareholders may pay more than
the economic equivalent of the maximum front-end sales charge permitted by
the National Association of Securities Dealers, Inc. For further description
of shareholder transaction expenses and the Asset Allocation Fund's operating
expenses, see the sections entitled "Shareholder Guide," "The Business of the
Funds" and "Plan Payments" below.
- --------------------------------------------------------------------------------
EXAMPLE: Assume the annual return is 5% and operating expenses are the same as
those stated above. For every $1,000 you invest, here is how much you would have
paid in total expenses if you closed your account after the number of years
indicated:
<TABLE>
<CAPTION>
AFTER 1 YEAR AFTER 3 YEARS AFTER 5 YEARS AFTER 10 YEARS
------------ ------------- ------------- --------------
<S> <C> <C> <C> <C>
A Shares(1) $ 58 $86 $ 116 $200
K Shares $ 19 $58 $ 100 $217
</TABLE>
(1) Assumes deduction at time of purchase of maximum applicable front-end sales
charge but does not assume deduction at redemption of maximum applicable
contingent deferred sales charge under the Large Purchase Exemption.
- --------------------------------------------------------------------------------
3
<PAGE> 179
CAPITAL INCOME FUND
---------------------------------------------------------
<TABLE>
<CAPTION>
A SHARES K SHARES
-------- --------
<S> <C> <C> <C>
SHAREHOLDER TRANSACTION
EXPENSES
Maximum Sales Load Imposed
on Purchases
(as a percentage of
offering price) 4.50% None(2)
Sales Load Imposed on
Reinvested Dividends None None
Maximum Contingent Deferred
Sales Load None(1) None
(as a percentage of
original purchase price
or redemption proceeds,
whichever is lower)
Redemption Fees None None
Exchange Fee None None
ANNUAL FUND OPERATING
EXPENSES
(as a percentage of
average net assets)
Management Fees 0.65% 0.65%
12b-1 Fee (After Fee
Waivers)* 0% 0.50%*
Administrative Services Fee
(After Fee Waivers)* 0% 0.50%*
Shareholder Services Fee 0.25% 0.25%*
----
Total of all 12b-1 Fees OR
Administrative Services
Fees and Shareholder
Services Fees for K
Shares
(After Fee Waivers)* 0.75%*
Other Expenses
(After Expense
Reimbursements)+ 0.33% 0.33%
------- -------
Total Operating Expenses
(After Fee Waivers and
Expense Reimbursements)+ 1.23% 1.73%
------- -------
------- -------
</TABLE>
----------------------------------------
(1) There is no front-end sales load on A Shares you purchase if you have either
a combined purchase of A Shares of the Company of $1,000,000 or more or if
the aggregate value of A Shares that you beneficially own in any Pacific
Horizon Fund or Time Horizon Fund equals or exceeds $1,000,000 ("Large
Purchase Exemption"). A Shares purchased under the Large Purchase Exemption
(except A Shares purchased under the Daily Advantage(R) or Advantage
Plus(TM) Programs) are subject to a contingent deferred sales charge of
1.00% and 0.50%, respectively, on redemptions within one and two years after
purchase. The contingent deferred sales charge is paid to the Distributor. A
Shares cannot be purchased under the Large Purchase Exemption if there is
another no-load exemption available. Accordingly, A Shares purchased under
another no-load exemption are not subject to a contingent deferred sales
charge. Although no front-end sales load will be paid on shares purchased
under the Large Purchase Exemption, the Distributor will compensate brokers
whose customers purchase such shares at the following rates: 1.00% of the
amount under $3 million, 0.50% of the next $47 million and 0.25% thereafter.
(2) Bank of America will compensate Affiliated Brokers for their customers who
have invested in the Fund and are participants in the Daily Advantage(R)
Program. The Affiliated Brokers will be compensated by Bank of America at
the rate of 1.00% of the amount under $3 million, 0.50% of the next $47
million and 0.25% thereafter of combined Pacific Horizon Funds' and Time
Horizon Funds' K Shares in each Daily Advantage(R) Program.
+ Absent expenses paid by third parties, "Other Expenses" for the Fund's A and
K Shares would be 0.36% and 0.36%, respectively, of average net assets
(annualized); and "Total Operating Expenses" for the Fund's A and K Shares
would be 1.26% and 2.01% of average net assets (annualized), respectively.
* Absent fee waivers, 12b-1 fees or administrative services fees would be 0.75%
or 0.75%, respectively, of the average net assets (annualized) of the Fund's
K Shares. The total of all 12b-1 fees, administrative services fees and
shareholder services fees may not exceed, in the aggregate, the annual rate
of 1.00% of the average net assets of the Fund's K Shares. However, it is
expected that during the current fiscal year, such fees will not exceed 0.75%
of the average net assets of the Fund's K Shares. Because of the Rule 12b-1,
administrative and/or shareholder services fees paid by the Capital Income
Fund as shown in the above table, long-term K shareholders may pay more than
the economic equivalent of the maximum front-end sales charge permitted by
the National Association of Securities Dealers, Inc. For further description
of shareholder transaction expenses and the Capital Income Fund's operating
expenses, see the sections entitled "Shareholder Guide," "The Business of the
Funds" and "Plan Payments" below.
4
<PAGE> 180
- --------------------------------------------------------------------------------
EXAMPLE: Assume the annual return is 5% and operating expenses are the same as
those stated above. For every $1,000 you invest, here is how much you would have
paid in total expenses if you closed your account after the number of years
indicated:
<TABLE>
<CAPTION>
AFTER 1 YEAR AFTER 3 YEARS AFTER 5 YEARS AFTER 10 YEARS
------------ ------------- ------------- --------------
<S> <C> <C> <C> <C>
A Shares(1) $ 57 $82 $ 110 $187
K Shares $ 18 $54 $ 94 $204
</TABLE>
(1) Assumes deduction at time of purchase of maximum applicable front-end sales
charge but does not assume deduction at redemption of maximum applicable
contingent deferred sales charge under the Large Purchase Exemption.
- --------------------------------------------------------------------------------
Note: The preceding operating expenses and examples 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 shareholder of the Funds.
Management fees consist of:
- - an investment advisory fee payable at the annual rate of 0.55% and 0.45% of
the Master Portfolio's and the Capital Income Fund's respective average daily
net assets; and
- - an administration fee payable at the annual rate of 0.15% and 0.05% of the
Asset Allocation Fund's and the Master Portfolio's respective average daily
net assets and 0.20% of the Capital Income Fund's average daily net assets.
Currently, the most restrictive expense limitation limits each Fund's aggregate
annual expenses (including management fees and the Asset Allocation Fund's pro
rata share of such expenses of the Master Portfolio) to 2.5% of the first $30
million of each Fund's average daily net assets, 2% of the next $70 million and
1.5% of each Fund's remaining average daily net assets.
The Board of Directors of the Company believes that the aggregate per share
expenses of the Asset Allocation Fund and the Master Portfolio in which the
Asset Allocation Fund's assets are invested will be less than or approximately
equal to the expenses which the Asset Allocation Fund would incur if the Company
retained the services of an investment adviser for the Asset Allocation Fund and
the assets of the Asset Allocation Fund were invested directly in the type of
securities held by the Master Portfolio. Further, the Directors believe that the
shareholders of the Asset Allocation Fund may participate in the ownership of a
larger portfolio of securities than could be achieved directly by the Asset
Allocation 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 Master Portfolio will be realized, inasmuch as the Company is not
aware of any other potential investor in the Master Portfolio.
The alternative sales arrangements permit you to choose the method of purchasing
shares that is most beneficial given the amount of the purchase, the length of
time you expect to hold the shares and other circumstances. You should determine
whether under your particular circumstances it is more advantageous to incur a
front-end sales charge and thereafter be subject to annual fees under a
Shareholder Services Plan, with respect to A Shares; or incur neither a
front-end sales charge nor a contingent deferred sales charge, but incur fees
under a Distribution Plan and/or an Administrative and Shareholder Services
Plan, with respect to K Shares. K Shares, however, are only available for
investment by: (a) businesses or other organizations that participate in the
Daily Advantage(R) Program sponsored by Bank of America; (b) individuals
investing proceeds from a
5
<PAGE> 181
redemption of shares from another open-end investment company on which such
individual paid a front-end sales load if (i) such redemption occurred within 30
days prior to the purchase order, and (ii) such other open-end investment
company was not distributed and advised by Concord Financial Group, Inc. and
Bank of America, respectively, or their affiliates; and (c) accounts opened for
IRA rollovers from a 401(k) plan in which the assets were held in any Pacific
Horizon or Time Horizon Fund and subsequent purchases into an IRA rollover
account opened as described above, so long as the original IRA rollover account
remains open on the Company's books. See the section entitled "How to Buy
Shares" below.
6
<PAGE> 182
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
The Capital Income Fund commenced operations on September 25, 1987 as the Total
Return 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 Convertible Securities
Fund and on January 9, 1990 was reorganized as a portfolio of the Company. On
September 16, 1991, the Capital Income Fund changed its name to the Pacific
Horizon Capital Income Fund.
The tables below show certain information concerning the investment results for
the Funds for the periods indicated (including the Predecessor Fund's investment
results for the periods ending on or prior to August 31, 1989, the combined
investment results of the Capital Income Fund and the Predecessor Fund for the
period from September 1, 1989 through February 29, 1996 and the Capital Income
Fund's investment results for the six years in the period ended February 28,
1995). During the periods shown, the Funds (and the Predecessor Fund, in the
case of the Capital Income Fund) did not offer K Shares. Actual investment
results of the K Shares may be different. The information for each of the last
five fiscal periods ended February 29, 1996 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 into the Statement of
Additional Information. Further information about the performance of the Funds
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 Funds free of charge by calling 800-332-3863.
7
<PAGE> 183
ASSET ALLOCATION FUND
Selected data for an A Share of common stock outstanding throughout each of the
periods indicated:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE YEAR FOR THE YEAR FOR THE PERIOD
ENDED ENDED JANUARY 18, 1994
FEBRUARY 29, FEBRUARY 28, (COMMENCEMENT OF OPERATIONS)
1996 1995 THROUGH FEBRUARY 28, 1994
------------ ------------ ----------------------------
<S> <C> <C> <C>
Net asset value per share, beginning of
period $ 15.15 $ 14.84 $ 15.00
---------- ---------- -----------
Income from Investment Operations:
Net investment income 0.52 0.48 0.03
Net realized and unrealized gains (losses)
on securities $ 2.86 0.24 (0.19)
---------- ---------- -----------
Total gain (loss) from investment
operations $ 3.38 0.72 (0.16)
Less Dividends and Distributions:
Dividends to shareholders from net
investment income (0.53) (0.41) --
Distributions to shareholders from net
realized gains on securities (0.48) -- --
---------- ---------- -----------
Total dividends and distributions (1.01) (0.41) --
---------- ---------- -----------
Net change in net asset value $ 2.37 0.31 (0.16)
---------- ---------- -----------
Net asset value per share, end of period $ 17.52 $ 15.15 $ 14.84
========== ========== ===========
Total Return++ 22.80% 5.03% (1.07)%
Ratios/supplemental data:
Net assets, end of period (000) $ 22,355 $ 5,694 $ 666
Ratio of expenses to average net assets* 0.62% 0.00% 0.00%+
Ratio of net investment income to average
net assets* 3.49% 4.25% 4.20%+
</TABLE>
- ---------------
* Reflects the Asset Allocation Fund's proportionate share of the fee waivers
and expense reimbursements by the Master Portfolio's investment adviser and
administrator and the Asset Allocation 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 2.30%, 7.89% and 83.95%
(annualized) for the periods ended February 29, 1996, 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 on A
Shares.
8
<PAGE> 184
CAPITAL INCOME FUND
Selected data for an A Share of common stock outstanding throughout each of the
periods indicated:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED
---------------------------------------------------------------------------------------
FEBRUARY 29, FEBRUARY 28, FEBRUARY 28, FEBRUARY 28, FEBRUARY 29, FEBRUARY 28,
1996 1995 1994 1993++ 1992 1991
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value per share,
beginning of period $ 13.65 $ 15.42 $ 13.32 $ 12.01 $ 10.23 $ 9.83
------------ ------------ ------------ ------------ ------------ ------------
Income from Investment
Operations:
Net investment income 0.62 0.57 0.50 0.56 0.53 0.59
Net realized and unrealized
gains (losses) on securities 2.84 (1.43) 2.36 1.79 2.06 0.35
------------ ------------ ------------ ------------ ------------ ------------
Total income (loss) from
investment operations 3.46 (0.86) 2.86 2.35 2.59 0.94
------------ ------------ ------------ ------------ ------------ ------------
Less Dividends and
Distributions:
Dividends to shareholders
from net investment income (0.69) (0.54) (0.48) (0.60) (0.55) (0.54)
Distributions to shareholders
from net realized gains on
securities -- (0.37) (0.28) (0.44) (0.26) --
------------ ------------ ------------ ------------ ------------ ------------
Total dividends and
distributions (0.69) (0.91) (0.76) (1.04) (0.81) (0.54)
------------ ------------ ------------ ------------ ------------ ------------
Net change in net asset value
per share 2.77 (1.77) 2.10 1.31 1.78 0.40
------------ ------------ ------------ ------------ ------------ ------------
Net asset value per share, end
of period $ 16.42 $ 13.65 $ 15.42 $ 13.32 $ 12.01 $ 10.23
============= ============= ============= ============= ============= =============
Total return= 25.96% (5.61)% 21.85% 20.62% 26.21% 10.17%
Ratios/Supplemental Data:
Net assets, end of period
(000) $246,746 $198,251 $191,491 $ 19,613 $ 6,032 $ 1,186
Ratio of expenses to average
net assets*** 1.23% 0.97% 0.46% 0.07% -- --
Ratio of net investment
income to average net
assets*** 4.05% 4.48% 4.19% 5.00% 5.63% 6.32%
Portfolio turnover ratio 57% 94% 103% 216% 278% 236%
<CAPTION>
YEAR
PERIOD ENDED ENDED PERIOD ENDED
FEBRUARY 28, AUGUST 31, AUGUST 31,
1990** 1989 1988**
------------ ------------ ------------
<S> <C> <C> <C>
Net asset value per share,
beginning of period $ 10.88 $ 8.99 $ 9.55
------------ ------------ ------------
Income from Investment
Operations:
Net investment income 0.28 0.55 0.50
Net realized and unrealized
gains (losses) on securities (0.12) 1.96 (0.74)
------------ ------------ ------------
Total income (loss) from
investment operations 0.16 2.51 (0.24)
------------ ------------ ------------
Less Dividends and
Distributions:
Dividends to shareholders
from net investment income (0.31) (0.62) (0.32)
Distributions to shareholders
from net realized gains on
securities (0.90) -- --
------------ ------------ ------------
Total dividends and
distributions (1.21) (0.62) (0.32)
------------ ------------ ------------
Net change in net asset value
per share (1.05) 1.89 (0.56)
------------ ------------ ------------
Net asset value per share, end
of period $ 9.83 $ 10.88 $ 8.99
============= ============= =============
Total return= 1.46%== 29.34% (2.26%)==
Ratios/Supplemental Data:
Net assets, end of period
(000) $ 962 $ 688 $ 255
Ratio of expenses to average
net assets*** -- -- 0.35%+
Ratio of net investment
income to average net
assets*** 5.87%+ 6.26% 7.14%+
Portfolio turnover ratio 153% 253% 211%
</TABLE>
- ---------------
* For the period September 25, 1987 (commencement of operations) through
August 31, 1988.
** For the period September 1, 1989 through February 28, 1990.
*** Includes fee waivers and expense reimbursements. Such fee waivers and
expense reimbursements had the effect of decreasing the ratio of expenses to
average net assets by 0.17%, 0.74%, 3.27%, 6.23%, 14.64%, 27.82%
(annualized), 35.19% and 61.95% (annualized) for the fiscal years or periods
ended February 28, 1995, February 28, 1994, February 28, 1993, February 29,
1992, February 28, 1991, February 28, 1990, August 31, 1989 and August 31,
1988, respectively. During the fiscal year ended February 29, 1996, the Fund
received credits from its custodian for interest earned on uninvested cash
balances which were used to offset custodian fees and expenses. If such
credits had not occurred, the ratio of expenses to average net assets
(without fee waivers and/or expense reimbursements) would have been 1.26%.
The ratio of net investment income to average net assets was not affected.
+ Not 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.
= The total return figures listed do not include the effect of the maximum
4.50% sales charge on A Shares.
== Unannualized.
9
<PAGE> 185
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
FUND INVESTMENTS
- ---------------------------------------------------------
INVESTMENT OBJECTIVES
ASSET ALLOCATION FUND
The Asset Allocation Fund seeks to achieve long-term growth from capital
appreciation and dividend and interest income through a balanced approach to
investment using bonds, equity securities and cash equivalents. The Asset
Allocation Fund seeks to achieve its investment objective by investing all of
its investable assets in the Master Portfolio. The Master Portfolio has the same
investment objective as the Asset Allocation Fund.
The Asset Allocation Fund may be appropriate for investors who want long-term
capital appreciation and current dividend and interest income.
CAPITAL INCOME FUND
The Capital Income Fund seeks to provide investors with a total investment
return, comprised of current income and capital appreciation, consistent with
prudent investment risk by investing in a diversified portfolio consisting
principally of convertible bonds and convertible preferred stocks of domestic
issuers.
The Capital Income Fund may be appropriate for investors who are seeking a
highly competitive return over the long term comprised of current income and
capital appreciation and who are also willing to accept the relative risks
described in this Prospectus associated with seeking such returns.
WHILE THE FUNDS AND THE MASTER PORTFOLIO STRIVE TO ATTAIN THEIR INVESTMENT
OBJECTIVES, THERE CAN BE NO ASSURANCE THAT THEY WILL BE ABLE TO DO SO.
BECAUSE THE INVESTMENT CHARACTERISTICS OF THE ASSET ALLOCATION FUND WILL
CORRESPOND TO THOSE OF THE MASTER PORTFOLIO, THE FOLLOWING IS A DISCUSSION OF
THE VARIOUS INVESTMENTS OF AND TECHNIQUES EMPLOYED BY THE MASTER PORTFOLIO AND
THE CAPITAL INCOME FUND.
- ---------------------------------------------------------
TYPES OF INVESTMENTS
MASTER PORTFOLIO -- GENERAL INVESTMENTS.
The Master 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 Master 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 Master 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 Government National Mortgage Association
("GNMA"), Federal National Mortgage Association ("FNMA") and Federal Home Loan
Mortgage Corporation
10
<PAGE> 186
("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 Master 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 pay down 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.
The Master 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 Master 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 Master 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 Master 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 Master 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 Master Portfolio may also make other investments as described more fully
below under "Other Investment Practices and Considerations."
CAPITAL INCOME FUND -- GENERAL INVESTMENTS.
The convertible bonds and preferred stock ("Convertible Securities") held in the
Capital Income Fund's portfolio will, for the most part, be securities issued by
U.S. issuers. The Capital Income Fund has a fundamental policy that under normal
circumstances at least 65% of its total assets will be invested in Convertible
Securities. Up to 15% of its assets also may be held in Eurodollar Convertible
Securities.
The Company's Board of Directors will evaluate whether a satisfactory total
return has been achieved by comparing the Capital Income Fund's return against a
number of indices such as:
11
<PAGE> 187
- - the Standard & Poor's 500 Stock Index;
- - the Shearson Lehman Long-Term Government/Bond Index; and
- - the Lipper Convertible Bond Market Index.
Similar to straight debt obligations, convertible securities pay a fixed rate of
interest and return principal at maturity; unlike straight debt, they may be
converted into a set amount of corporate common stock. Investors should note
that the Capital Income Fund may convert its Convertible Securities when
conditions are not necessarily favorable for their disposition or because of
developments with respect to the issuers or trading markets of such Convertible
Securities. More information regarding Convertible Securities can be found
below.
In addition to Convertible Securities, and subject to the fundamental investment
policy above, the Capital Income Fund also may invest in:
- - securities issued or guaranteed by the U.S. Government (and its agencies and
instrumentalities);
- - nonconvertible bonds and dividend-paying equity securities that are
consistent with the Fund's investment objective;
- - options and futures; and
- - money market securities.
Notwithstanding the fundamental investment policy above, however, for temporary
defensive purposes at times when Bank of America believes such a position is
warranted by uncertain or unusual market conditions, the Capital Income Fund may
invest without limit in securities issued or guaranteed by the U.S. Government
(and its agencies and instrumentalities), money market securities and investment
grade debt securities, or may hold its assets in cash.
CONVERTIBLE SECURITIES. The Convertible Securities in which the Capital Income
Fund invests (including bonds, notes and preferred stock) are convertible into
common stock at a stated price within a specified period of time. When investing
in such Convertible Securities the Capital Income Fund is looking for the
opportunity, through the conversion feature, to participate in the capital
appreciation of the common stock into which the Convertible Securities are
convertible, while earning higher current income than is available from the
common stock.
Generally, Convertible Securities are not "investment grade" (that is, not rated
within the four highest rating categories by a nationally recognized statistical
rating organization such as S&P, D&P, Fitch or Moody's). Convertible Securities
acquired by the Capital Income Fund that are rated below investment grade, or
that are not rated, present greater risks as to the timely payment of principal
and interest (or dividends). The Capital Income Fund intends that the
Convertible Securities it purchases will be rated at least "B" by a nationally
recognized statistical rating organization, or that if the investment is unrated
it will be deemed of comparable quality by Bank of America.
For your information, set forth below is the average distribution of ratings at
value for the Capital Income Fund's portfolio securities (including commercial
paper and nonconvertible bonds) for its last fiscal year:
<TABLE>
<CAPTION>
MOODY'S INVESTORS PERCENTAGE
SERVICE, INC. OF VALUE
- ----------------------------------- ----------
<S> <C>
Aaa 0%
Aa 2.42%
A 16.42%
Baa 13.78%
Ba or lower 54.06%
Not Rated 13.32%
Comparable to Aaa 1.23%
Comparable to Aa 2.29%
Comparable to A 1.39%
Comparable to Baa 1.34%
Comparable to Ba or lower 7.07%
----------
100.00%
==========
</TABLE>
12
<PAGE> 188
<TABLE>
<CAPTION>
STANDARD & POOR'S PERCENTAGE
CORPORATION OF VALUE
- ------------------------------------ ----------
<S> <C>
AAA 0%
AA 2.29%
A 15.59%
BBB 17.97%
BB or lower 50.81%
Not Rated 13.34%
Comparable to AAA 1.23%
Comparable to AA 2.29%
Comparable to A 1.39%
Comparable to BBB 1.34%
Comparable to BBB or lower 7.09%
----------
100.00%
==========
</TABLE>
These ratings are described in the Appendix to this Prospectus.
RISKS RELATED TO LOWER-RATED SECURITIES. While any investment carries some
risk, some of the risks associated with lower-rated Convertible Securities are
different from the risks associated with investment grade securities. The risk
of loss through default is greater because lower-rated securities are usually
unsecured and are often subordinate to an issuer's other obligations.
Additionally, the issuers of these securities frequently have high debt levels
and are thus more sensitive to difficult economic conditions, individual
corporate developments and rising interest rates. Consequently, the market price
of these securities, and the net asset value of the Capital Income Fund's
shares, may be quite volatile.
RELATIVE YOUTH OF LOWER-RATED SECURITIES'
MARKET. Because the market for lower-rated securities, at least in its present
size and form, is relatively new, there remains some uncertainty about its
performance level under adverse market and economic environments. An economic
downturn or increase in interest rates could have a negative impact on both the
market for lower-rated securities (resulting in a greater number of bond
defaults) and the value of lower-rated securities held in the Capital Income
Fund's portfolio.
SENSITIVITY TO INTEREST RATE AND ECONOMIC
CHANGES. The economy and interest rates can affect lower-rated securities
differently than other securities. For example, the prices of lower-rated
securities are more sensitive to adverse economic changes or individual
corporate developments than are the prices of higher-rated investments.
Also, during an economic downturn or a period in which interest rates are rising
significantly, highly leveraged issuers may experience financial difficulties,
which, in turn, would adversely affect their ability to service their principal
and interest payment obligations, meet projected business goals and obtain
additional financing.
If the issuer of a security defaults, the Capital Income Fund may incur
additional expenses to seek recovery. In addition, periods of economic
uncertainty would likely result in increased volatility for the market prices of
lower-rated securities as well as the Capital Income Fund's net asset value. In
general, both the prices and yields of lower-rated securities will fluctuate.
LIQUIDITY AND VALUATION. In certain circumstances it may be difficult to
determine a security's fair value due to a lack of reliable objective
information. Such instances occur when there is not an established secondary
market for the security or the security is thinly traded. As a result, the
Capital Income Fund's valuation of a security and the price it is actually able
to obtain when it sells the security could differ.
Adverse publicity and investor perceptions, whether or not based on fundamental
analysis, may decrease the values and liquidity of lower-rated securities held
by the Capital Income Fund, especially in a thinly traded market. Illiquid or
restricted securities held by the Capital Income Fund may involve special
registration responsibilities, liabilities and costs, and could involve other
liquidity and valuation difficulties.
CONGRESSIONAL PROPOSALS. Current laws, as well as pending proposals, may have a
material impact on the market for lower-rated securities.
13
<PAGE> 189
CREDIT RATINGS. S&P, Moody's and other nationally recognized statistical rating
organizations evaluate the safety of a lower-rated security's principal and
interest payments, but do not address market value risk. Because the ratings of
the rating agencies may not always reflect current conditions and events, in
addition to using recognized rating agencies and other sources, Bank of America
performs its own analysis of the issuers whose lower-rated securities the
Capital Income Fund purchases. Because of this, the Capital Income Fund's
performance may depend more on the investment adviser's own credit analysis than
is the case for mutual funds investing in higher rated securities.
In selecting Convertible Securities, Bank of America considers factors such as
those relating to the creditworthiness of issuers, the ratings and performance
of the Convertible Securities, the protections afforded the Convertible
Securities and the diversity of the Capital Income Fund's portfolio. Bank of
America continuously monitors the issuers of lower-rated securities held in the
Capital Income Fund's portfolio for their ability to make required principal and
interest payments, as well as in an effort to control the liquidity of the
Capital Income Fund's portfolio so that it can meet redemption requests.
If a portfolio security undergoes a rating revision, the Capital Income Fund may
continue to hold the security if Bank of America determines such retention is
warranted.
CHARACTERISTICS OF CONVERTIBLE SECURITIES. Convertible Securities have unique
investment characteristics because they:
- - generally have higher yields than common stocks;
- - generally are less subject to a decline in value than their underlying common
stocks because of their fixed income characteristics; and
- - generally provide for the potential of capital appreciation if the market
value of their underlying common stock increases.
An issuer of a Convertible Security may have the option to redeem it at a price
established in the Convertible Security's governing instruments. If a
Convertible Security is called for redemption, the Capital Income Fund will have
to either permit the redemption, convert the Convertible Security into the
underlying common stock or sell the Convertible Security to a third party. Any
of these actions could adversely affect the Capital Income Fund's ability to
attain its objective.
The Capital Income Fund would convert a Convertible Security either to permit
the orderly disposition of the investment or when it has reached maturity or
been called for redemption. The Capital Income Fund might also convert a
Convertible Security if the underlying common stock's dividend rate increased
above the yield on the Convertible Security.
EURODOLLAR CONVERTIBLE SECURITIES. Eurodollar Convertibles, in which the
Capital Income Fund may invest up to 15% of its total assets, are fixed income
securities of a U.S. or foreign issuer that are issued in U.S. dollars outside
of the U.S. and are convertible into or exchangeable for specified equity
securities. Eurodollar Convertibles in which the Capital Income Fund invests
will be convertible into or exchangeable for foreign equity securities.
Investments in foreign issuers may be affected by changes in currency rates and
exchange control regulations. There is typically less publicly available
information about a foreign company than about a U.S. company, and foreign
brokerage commissions and custody fees are generally higher than in the U.S. In
addition, foreign companies may be subject to less stringent reserve, auditing
and reporting requirements than their U.S. counterparts, and their securities
may be less liquid and more volatile than those of U.S. issuers. Investments in
foreign securities are also subject to local political and economic
developments, expropriation or nationalization of assets and the imposition of
withholding taxes.
When not invested in Convertible Securities, the Capital Income Fund can invest
in other types of
14
<PAGE> 190
obligations subject to the limitations described previously.
The Capital Income Fund may purchase bank obligations including CDs and bankers'
acceptances issued by domestic branches of U.S. banks that have total assets of
more than $2.5 billion. The Capital Income Fund may also make interest-bearing
savings deposits in commercial banks in amounts not exceeding 5% of its total
assets.
Commercial paper rated in the top rating category by S&P, Moody's or other
rating agencies, and unrated commercial paper determined to be of comparable
quality by Bank of America, may also be purchased. In addition, the Capital
Income Fund may invest in debt securities rated BBB or higher by S&P or other
rating agencies or Baa or higher by Moody's. See "Convertible Securities" for
the rating requirements for convertible securities.
As noted above, the Capital Income Fund can purchase obligations issued or
guaranteed by the U.S. Government, its agencies and instrumentalities.
Obligations of some of these agencies and instrumentalities, such as the Small
Business Administration or 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 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 were not required to do so by law.
FUNDAMENTAL LIMITATIONS
The investment objective of the Funds and the Master Portfolio may not be
changed without a vote by the holders of a majority of the outstanding shares of
the particular Fund or of the outstanding interests of the Master Portfolio.
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 Asset Allocation Fund nor the Master 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 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.
15
<PAGE> 191
THE CAPITAL INCOME FUND:
1. Under normal circumstances, will invest at least 65% of its total assets
in Convertible Securities (including, for a period of two months following
their conversion, securities acquired upon conversion of Convertible
Securities).
2. May not make loans, although it may invest in debt securities, enter
into repurchase agreements and lend its portfolio securities as discussed
herein.
3. May not invest more than 10% of its total assets in certain illiquid
investments. Investors should note, however, that certain securities that
might otherwise be considered illiquid, particularly 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.
4. Purchase or sell commodities or commodity contracts, or invest in oil,
gas or mineral exploration or development programs, except that: (a) 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; and (b) the Fund may purchase and
sell futures contracts and options on futures contracts.
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 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 Master Portfolio may invest in securities of foreign issuers that may
or may not be publicly traded in the United States, such as 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 Master Portfolio to
invest no more than 25% of its net assets (at the time of purchase) in foreign
securities. The Master 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 Master Portfolio. In addition, 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.
VARIABLE RATE INSTRUMENTS. The Master Portfolio may invest in variable and
floating rate instruments, which may include master demand notes. Although
payable on demand by the Master 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 or the
equivalent by another nationally recognized statistical rating organization
("NRSRO"), (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).
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<PAGE> 192
INVESTMENT COMPANY SECURITIES. In connection with the management of its daily
cash position, the Portfolios 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")
(including money market funds advised by Bank of America). No more than 10% of
the value of a 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; except that if a pending exemptive order is granted by the
Securities and Exchange Commission ("SEC") with respect to the investment in a
money market mutual fund advised by Bank of America, a Portfolio is permitted to
invest the greater of 5% of its net assets or $2.5 million. A Portfolio may hold
no more than 3% of the outstanding voting stock of any other investment company.
As a shareholder of another investment company, the Master Portfolio would bear,
along with other shareholders, its pro rata portion of the other investment
company's expenses, including advisory fees.
ASSET-BACKED SECURITIES. The Master 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 Master Portfolio must be reinvested in
securities whose yields reflect interest rates prevailing at the time. Thus, the
Master Portfolio's ability to maintain a portfolio which includes high-yielding
asset-backed securities will be adversely affected to the extent reinvestment
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 Master Portfolio's experiencing difficulty
in valuing or liquidating such securities.
OPTIONS. The Master 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 Master Portfolio (this restriction
does not apply to options on futures contracts). Put options may be purchased in
order to protect the Master 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 Master Portfolio may not
write put options but may write fully covered call options as long as the Master
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 Master Portfolio.
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<PAGE> 193
The Capital Income 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 it owns (or which it may acquire through conversion or
exchange of other securities it owns) as a hedging technique. The aggregate
value of the Capital Income Fund's assets subject to options written may not
exceed 25% of its total assets (taken at market value on the date written) and
the aggregate premiums on options purchased by the Capital Income Fund will not
exceed 5% of its total assets.
Closing purchase transactions on previously written options may be entered into
by the Portfolios to realize a profit and/or to permit the Portfolios to write
another option on the underlying security. A Portfolio might write another
option on the underlying security in order to provide for a different exercise
price or expiration date. A 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 a Portfolio is exercised, the Portfolio 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 a Portfolio 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. A Portfolio 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 Portfolio 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 ASSOCIATED WITH OPTIONS. The Portfolios 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
a Portfolio to close out its option positions. There are no assurances 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 a Portfolio cannot close out an option, it will
not be able to sell the securities underlying the option until the option
expires or is exercised.
Furthermore, a Portfolio's ability to engage in transactions in options may be
limited by IRS requirements that a Portfolio receive less than 30% of its gross
income from certain securities, including options and futures contracts, held by
the Portfolio 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.
For additional information relating to option trading practices, including
particular risks thereof, see the Statement of Additional Information.
FUTURES. The Master Portfolio may purchase and sell both interest rate and
stock index futures contracts (as well as purchase related options). The Capital
Income Fund may enter into financial futures contracts (as well as purchase or
sell related options). The Portfolios may enter into transactions in futures and
related options in order to hedge against anticipated fluctuations or changes
resulting from relevant market conditions in the values of the securities held
by the particular Portfolio or that the Portfolio intends to purchase or sell,
and where the transactions are economically appropriate for the reduction of
risks inherent in the ongoing management of the particular Portfolio. Neither
Portfolio may purchase or sell a futures contract or a related option unless
immediately after any such transaction the sum of the aggregate amount of margin
deposits on its
18
<PAGE> 194
existing futures positions and the amount of premiums paid for related options
does not exceed 5% of a 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.
REPURCHASE AGREEMENTS. The Portfolios may buy securities subject to the
seller's agreement to repurchase them within a specified time at a fixed price
(equal to the purchase price plus interest). These transactions are known as
repurchase agreements. Under these agreements, the Master 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 the equivalent from another
NRSRO) or a registered broker-dealer. The Capital Income 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 Capital Income Fund intends
that such agreements will not have maturities longer than 60 days.
Repurchase agreements maturing in more than seven days are considered illiquid
investments and investment in such repurchase agreements along with any other
illiquid securities will not exceed 10% of the value of the net assets of a
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 particular Portfolio's custodian or its agent will have physical possession
of the securities or the securities will be transferred to such 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, a 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 of
the securities by a Portfolio may be delayed or denied. Repurchase agreements
are considered to be loans under the Investment Company Act of 1940 (the "1940
Act").
REVERSE REPURCHASE AGREEMENTS. The Portfolios may borrow money for temporary
purposes by entering into transactions called reverse repurchase agreements.
Under these arrangements, the Portfolios will sell portfolio securities to
either a bank (which, with respect to the Master Portfolio, 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 a Portfolio
relinquishes may decline below the price a Portfolio must pay when the
transaction closes. Borrowings may magnify the potential for gain or loss on
amounts invested resulting in an increase in the speculative character of a
Portfolio's outstanding shares.
When a 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 Bank of America to make sure that an
appropriate value is maintained. Reverse repurchase agreements are considered to
be borrowings under the 1940 Act. The Capital Income Fund will only enter into
reverse repurchase agreements to avoid the need to sell portfolio securities to
meet redemption requests during unfavorable market conditions.
SECURITIES LENDING. In order to earn additional income, each Portfolio may lend
its portfolio secu-
19
<PAGE> 195
rities to entities (broker-dealers, for the Master Portfolio, and financial
institutions, such as banks and brokers, for the Capital Income Fund) (and the
Capital Income Fund may lend its portfolio securities to financial institutions,
such as banks and brokers) that Bank of America considers to be of good
standing. With respect to the Master Portfolio, borrowers of portfolio
securities may not be affiliated directly or indirectly with the Company or the
Master Portfolio. If the broker-dealer should become bankrupt, however, a
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 Master Portfolio and
the Capital Income Fund exceeds 10% and 30% of their respective total assets.
Securities loans will be fully collateralized.
WHEN-ISSUED SECURITIES, FORWARD COMMITMENTS AND DELAYED SETTLEMENTS. The
Portfolios may purchase securities on a "when-issued" basis and may purchase or
sell securities on a "forward commitment" basis. Additionally, the Capital
Income Fund may purchase or sell securities on a "delayed settlement" basis.
When-issued and forward commitment transactions, which involve a commitment by a
Portfolio to purchase or sell particular securities with payment and delivery
taking place at a future date (perhaps one or two months later), permit a
Portfolio to lock-in a price or yield on a security, 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. 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. These
transactions are not to exceed 25% of the value of each Portfolio's total assets
absent unusual market conditions, and will not be entered into for speculative
purposes, but only in furtherance of each Portfolio's investment objective.
ILLIQUID SECURITIES. The Capital Income Fund will not invest more than 15% and
the Master Portfolio will not invest more than 10% of the value of its net
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, a
Portfolio will take steps to reduce the aggregate amount of illiquid securities
as soon as is reasonably practicable.
PORTFOLIO TRANSACTIONS. Investment decisions for the Portfolios 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 Portfolio. When a purchase
or sale of the same security is made at substantially the same time on behalf of
a 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 a 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 shares of the Funds by broker-dealers and other financial
institutions (including affiliates of Bank of America and the Funds' distributor
to the extent permitted by law), provided it believes the quality of the
transaction and the price to the particular Portfolio are not less favorable
than what they would be with any other unaffiliated qualified firm.
PORTFOLIO TURNOVER. The Master Portfolio's investment practices may result in
portfolio turnover greater than that of other mutual fund portfolios, and the
Capital Income Fund's investment practices may result in portfolio turnover that
is substantially greater than that of other mutual fund portfolios. Although no
commissions are paid on
20
<PAGE> 196
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 a 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 Portfolios.
MASTER-FEEDER STRUCTURE. The Asset Allocation Fund is an open-end investment
portfolio that seeks to achieve its investment objective by investing all of its
investable assets in the Master Portfolio, which has the same investment
objective. The Asset Allocation Fund may withdraw its investment in the Master
Portfolio at any time if the Board of Directors of the Company determines that
it is in the best interest of the Asset Allocation 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 Asset Allocation Fund in
another pooled investment entity having the same investment objective as the
Asset Allocation Fund or the hiring of an investment adviser to manage the Asset
Allocation Fund's assets in accordance with the investment policies described
above with respect to the Master 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 Asset Allocation Fund and the Master Portfolio.
The Master 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 Asset Allocation Fund and other entities that may invest in the
Master Portfolio from time to time (e.g., other investment companies and
commingled trust funds) will each be liable for all obligations of the Master
Portfolio. However, the risk of the Asset Allocation Fund's incurring financial
loss on account of such liability is limited to circumstances in which both
inadequate insurance exists and the Master Portfolio itself is unable to meet
its obligations. Accordingly, the Company's Board of Directors believes that
neither the Asset Allocation Fund nor its shareholders will be adversely
affected by reason of the Asset Allocation Fund's investing in the Master
Portfolio. As stated above, the investment objective of the Asset Allocation
Fund and the Master Portfolio is a fundamental policy and may not be changed, in
the case of the Asset Allocation Fund, without the vote of its shareholders or,
in the case of the Master Portfolio, without the vote of its interestholders.
Whenever the Asset Allocation Fund is requested to vote on matters pertaining to
the investment objective or a fundamental policy of the Master Portfolio, the
Asset Allocation Fund will hold a meeting of its shareholders and will cast its
vote in the same proportion as the votes cast by the Asset Allocation Fund's
shareholders. The Asset Allocation 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 Master Portfolio could control the results of voting at the Master Portfolio
level in certain instances (e.g. a change in fundamental policies by the Master
Portfolio which was not approved by the Asset Allocation Fund's shareholders).
This could result in the Asset Allocation Fund's withdrawal of its investment in
the Master Portfolio, and in increased costs and expenses for the Asset
Allocation Fund. Further, the withdrawal of other entities that may from time to
time invest in the Master Portfolio could have an adverse effect on the
performance of the Master Portfolio and the Asset Allocation 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 Master Portfolio will cause the Master Portfolio to terminate automatically
in 120 days unless the Asset Allocation Fund
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<PAGE> 197
and any other investors in the Master Portfolio unanimously agree to continue
the business of the Master Portfolio.
As the Asset Allocation 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 Master Portfolio, the Board of Directors of the Company would need
to consider alternative arrangements for the Asset Allocation Fund, such as
those described above. The policy of the Asset Allocation Fund, and other
similar investment companies, to invest their investable assets in trusts such
as the Master 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
Master Portfolio which may have higher or lower fees and expenses than those of
the Asset Allocation Fund and which may therefore have different performance
results than the Asset Allocation Fund. Information concerning whether an
investment in the Master Portfolio may be available through another entity
investing in the Master 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 FUNDS?
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.
The minimum investment is $200 for BankAmericard
holders with an appropriate award certificate from
BankAmeriChoice Program.
** A regular IRA must be opened in conjunction with this account.
- ---------------------------------------------------------
WHAT ALTERNATIVE SALES ARRANGEMENTS ARE AVAILABLE?
The Funds issue two classes of shares. A Shares are sold to investors choosing
the front-end sales charge alternative unless an exemption to the sales charge
is otherwise available. K Shares are neither subject to a front-end sales charge
nor a contingent deferred sales charge. K Shares, however, are sold only to: (a)
businesses and other organizations that participate in the Daily Advantage(R)
Program sponsored by Bank of America; (b) individuals investing proceeds from a
redemption of shares from another open-end investment company on which such
individual paid a front-end sales load if (i) such redemption occurred within 30
days prior to the purchase order, and (ii) such other open-end investment
company was not distributed and advised by Concord Financial Group, Inc. and
Bank of America, respectively, or their affiliates; and (c) accounts opened for
IRA rollovers from a 401(k) plan in which the assets were held in any Pacific
Horizon or Time Horizon Fund and subsequent purchases into an IRA rollover
account opened as described above, so long as the original IRA rollover account
remains open on the Company's books. The two classes of shares in each Fund
represent interests in the same portfolio of investments of the particular Fund,
have the same rights and are identical in all respects except as discussed
below. A Shares bear the expenses of a Shareholder Services Plan. K Shares bear
the expenses of a Distribution Plan and/or Administrative and Shareholder
Services Plan and have exclusive voting rights with respect to such Plans. The
two classes also have different exchange privileges, as described below. The net
income attributable to A and K Shares and the dividends payable on A and K
Shares will be reduced by the amount of the: (a) Shareholder Services Plan fees
attributable to A Shares, (b) Distribution Plan fees and/or Administrative and
Shareholder Services Plan fees attributable to K Shares, respectively, and (c)
the incremental expenses associated with such Plans.
HOW ARE SHARES PRICED?
Shares are purchased at their public offering price, which is based upon each
class' net asset value per share plus a front-end sales load on A Shares. Each
class calculates its net asset value ("NAV") as follows:
(Value of Assets Attributable to the Class) -
(Liabilities Attributable to the Class)
--------------------------------------------------------------
NAV =
Number of Outstanding Shares of the Class
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<PAGE> 199
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 Master Portfolio's and the Capital Income 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 Master Portfolio or Capital Income
Fund, as appropriate, pursuant to procedures adopted by the Master Portfolio's
Board of Trustees or the Capital Income Fund's Board of Directors. 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 price and yield information call (800) 346-2087.
The per share net asset values of A and K Shares will diverge due to the
different distribution and other expenses borne by the classes.
A SHARES SALES LOAD. The front-end sales load ("front-end sales load," "sales
load," "front-end sales charge," or "sales charge") for the A Shares of Funds
begins at 4.50% and may decrease as the amount you invest increases, as shown in
the following chart:
- -----------------------------------------------------------------------------
<TABLE>
<CAPTION>
DEALER'S
REALLOWANCE
AS A % OF AS A % OF AS A % OF
AMOUNT OF OFFERING NET 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 $1,000,000 1.00 1.01 0.90
$1,000,000 or more** 0.00 0.00 0.00
</TABLE>
* Dealer's reallowance may be changed periodically.
** See "Large Purchase Exemption" below for a description of contingent
deferred sales charge.
From time to time, the Funds' 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 Funds.
- -----------------------------------------------------------------------------
LARGE PURCHASE EXEMPTION. The contingent deferred sales load discussed under
the Large Purchase Exemption does not apply to A Shares purchased under the
Daily Advantage(R) or Advantage Plus(TM) Programs. To the extent that no other A
Share no-load exemption is available, the foregoing schedule of sales loads does
not apply to purchases of A Shares of $1,000,000 or more or to purchases of A
Shares if the aggregate value of the A Shares that you beneficially own in any
Pacific Horizon Fund or Time Horizon Fund equals or exceeds $1,000,000. If you
accumulate $1,000,000 or more of A Shares, on any additional purchase of A
Shares, the contingent deferred sales load described below will apply to such A
Shares when they are redeemed. In addition, if a customer purchases $1,000,000
or more of A Shares and redeems such shares, a contingent deferred sales load
will be imposed as follows:
24
<PAGE> 200
<TABLE>
<CAPTION>
NUMBER OF YEARS APPLICABLE CONTINGENT
ELAPSED SINCE PURCHASE DEFERRED SALES LOAD
- ---------------------- ----------------------
<S> <C>
1 year 1.0%
2 years 0.5%
3 years None
</TABLE>
The contingent deferred sales load is imposed on the lesser of the current
market value or the cost of the shares being redeemed. This means that this
charge will not be imposed upon increases in net asset value above the initial
purchase price or upon reinvested dividends. In determining whether a contingent
deferred sales charge is applicable to a redemption of such shares, the
calculation will be made in a manner that results in the lowest possible rate.
It will be assumed that the redemption is made first of amounts representing
shares acquired pursuant to the reinvestment of dividends and distributions;
then of amounts representing the increase in net asset value of your holdings of
shares above the total amount of payments for the purchase of shares during the
preceding 2 years; then of amounts representing the cost of shares held beyond
the applicable contingent deferred sales charge period; and finally, of amounts
representing the cost of the shares held for the longest period of time. In
addition, no contingent deferred sales load will be imposed on redeemed A Shares
if a front-end sales load had been previously imposed on such shares. Although
no front-end sales load will be paid on Large Purchase Exemptions, the
Distributor will compensate brokers whose customers purchase shares at the
following rates: 1.00% of the amount under $3 million, 0.50% of the next $47
million and 0.25% thereafter.
K SHARES. Bank of America will compensate Affiliated Brokers for their
customers who invested in a Fund and are participants in the Daily Advantage(R)
Program. The Affiliated Brokers will be compensated by Bank of America at the
rate of 1.00% of the amount under $3 million, 0.50% of the next $47 million and
0.25% thereafter of combined Pacific Horizon Funds' and Time Horizon Funds' K
Shares in each Daily Advantage(R) Program.
WHEN NO FRONT-END 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 a registered investment adviser purchasing shares
for its own account or for an account for which it is authorized to make
investment decisions;
- - 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
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;
- - 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 a 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;
- - accounts open as of July 1, 1996, which were exempt from front-end sales loads
at the time the accounts were opened and where those exemptions are no longer
available for new account holders, so long as the accounts remain 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 shares of a Fund, 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
25
<PAGE> 201
worked abroad) of Bank of America or any of its affiliates, and their parents,
spouses, minor children and grandchildren, 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 Funds' distributor pertaining to the sale of a Fund's
shares (and their spouses and minor children) to the extent permitted by such
organizations; and
- - holders of the BankAmericard with an appropriate award certificate from the
BankAmeriChoice Program (initial award only; a front-end sales load will apply
to subsequent purchases).
WHEN NO CONTINGENT DEFERRED SALES CHARGE IS APPLIED. To receive one of the
first three exemptions listed below, you must explain the status of your
redemption at the time you redeem your shares. The contingent deferred sales
charge with respect to A Shares purchased under the Large Purchase Exemption is
not charged on (1) exchanges described under "Shareholder Services -- Can I
Exchange My Investment From One Fund to Another?"; (2) redemptions in connection
with minimum required distributions from IRA accounts due to a shareholder
reaching age 70-1/2; (3) redemptions in connection with a shareholder's death or
disability (as defined in the Internal Revenue Code); and (4) involuntary
redemptions as a result of an account's net asset value remaining below $500
after sixty days' written notice. In addition, no contingent deferred sales
charge is charged on shares acquired through the reinvestment of dividends or
distributions.
RIGHTS OF ACCUMULATION. When buying A Shares in Pacific Horizon Funds, your
current aggregate investment determines the front-end 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 or Time Horizon Fund on which you paid a front-end 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). You may
also aggregate your investment in Pacific Horizon Funds and Time Horizon Funds
in order to qualify for the Large Purchase Exemption.
To qualify for a reduced sales load on A Shares, 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 Funds' distributor)
must notify the Funds' 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 A Shares carrying a sales load of the
Funds, the Pacific Horizon California Tax-Exempt Bond Fund, the Pacific Horizon
U.S. Government Securities 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 additional A Shares of a Fund carrying a sales load with a
current value of $10,000, the sales 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 on A Shares 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 within a period of 13 months, beginning up to 90 days prior to the date of
the Letter's execution. A Shares carrying a sales load 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
26
<PAGE> 202
reduced sales load applicable to shares purchased during the 90-day period
prior to the submission of your Letter of Intent. Shares of Time Horizon Funds
may be included when determining reduced sales loads under the letter of intent
program.
While signing a Letter of Intent does not bind you to purchase, or the Company
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 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 DO I DECIDE WHETHER TO BUY A OR K SHARES?
You should determine whether under your particular circumstances it is more
advantageous to invest in A Shares and incur a front-end sales charge and an
ongoing Shareholder Services Plan fee; or invest in K Shares and incur neither a
front-end sales charge nor a contingent deferred sales charge. K Shares do incur
fees under a Distribution Plan and/or an Administrative and Shareholder Services
Plan. K Shares of the Fund, however, are only available to: (a) businesses or
other organizations that participate in the Daily Advantage Program sponsored by
Bank of America; (b) individuals investing proceeds from a redemption of shares
from another open-end investment company on which such individual paid a
front-end sales load if (i) such redemption occurred within 30 days prior to the
purchase order and (ii) such other open-end investment company was not
distributed and advised by Concord Financial Group, Inc. and Bank of America,
respectively, or their affiliates; and (c) accounts opened for IRA rollovers
from a 401(k) plan in which the assets were held in any Pacific Horizon or Time
Horizon Fund and subsequent purchases into an IRA rollover account opened as
described above, so long as the original IRA rollover account remains open on
the Company's books ("Qualified IRA Rollovers").
27
<PAGE> 203
HOW CAN I BUY SHARES?
The chart below provides more information regarding some of the different
methods for investing in the Funds.
- --------------------------------------------------------------------------------
TO BUY SHARES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
OPENING AN ACCOUNT ADDING TO AN ACCOUNT
<S> <C> <C>
- --------------------------------------------------------------------------------------------------------
THROUGH BANK OF AMERICA, YOUR BROKER OR ANOTHER SERVICE ORGANIZATION
(ORDERS ARE NOT EFFECTIVE UNTIL RECEIVED BY THE FUND'S TRANSFER AGENT)
Contact them directly for Contact them directly for
instructions. instructions.
- --------------------------------------------------------------------------------------------------------
THROUGH THE DISTRIBUTOR
(IF YOU ARE OR WILL BE THE SHAREHOLDER OF RECORD ON THE COMPANY'S BOOKS)
BY MAIL
Complete Account Application Mail all subsequent
and mail it with a check investments to:
(payable to the appropriate
Fund) to the address on the Pacific Horizon Funds, Inc.
Account Application. File No. 54634
Los Angeles, CA 90074-4634
- --------------------------------------------------------------------------------------------------------
IN PERSON
BISYS Fund Services, Inc. Deliver Account Application Deliver your payment directly
3435 Stelzer Road and your payment directly to to the address on the left.
Columbus, OH 43219-3035 the address on the left.
- --------------------------------------------------------------------------------------------------------
BY WIRE
Initial purchases of shares Contact the Fund's transfer
into a new account may not be agent at 800-346-2087 for
made by wire. complete wiring instructions.
Instruct your bank to
transmit immediately
available funds for purchase
of shares of a particular
Fund in your name.
Be sure to include your name
and your Fund account number.
Consult your bank for information on remitting funds by wire
and any associated bank charges.
</TABLE>
- --------------------------------------------------------------------------------
28
<PAGE> 204
- --------------------------------------------------------------------------------
TO BUY SHARES
-------------------------------------------------------------------------------
<TABLE>
<CAPTION>
OPENING AN ACCOUNT ADDING TO AN ACCOUNT
<S> <C> <C>
- --------------------------------------------------------------------------------------------------------
BY TELETRADE TeleTrade Privileges may not Purchases may be made in the
(a service permitting transfers be used to make an initial minimum amount of $500 and
of money from your purchase. the maximum amount of $50,000
checking, NOW or bank per transaction as soon as
money market account) appropriate information
regarding your bank account
has been established on your
Fund account. This
information may be provided
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.
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.
- --------------------------------------------------------------------------------------------------------
</TABLE>
WHAT PRICE WILL I RECEIVE WHEN I BUY SHARES?
Your shares will be purchased at the particular 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, BISYS Fund Services, Inc. (the "Transfer Agent"), at its
Columbus 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 the Transfer Agent's business
day. 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 the Transfer Agent's 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 Funds' 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
29
<PAGE> 205
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?
You must specify at the time of investment whether you are purchasing A or K
Shares. Certificates for shares will no longer be issued.
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 a Fund. If you purchase or redeem
shares directly from a 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
value of the shares you redeem may be more or less than your cost, depending on
a 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.
30
<PAGE> 206
- --------------------------------------------------------------------------------
TO SELL SHARES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
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.
- --------------------------------------------------------------------------------
<S> <C>
THROUGH THE DISTRIBUTOR
(IF YOU ARE A SHAREHOLDER OF RECORD ON THE COMPANY'S BOOKS)
BY MAIL
Pacific Horizon Send a signed, written request (each owner, including each
Asset Allocation Fund or joint owner, must sign) to the Transfer Agent.
Capital Income Fund If you hold stock certificates for the shares being
c/o Pacific Horizon Funds, redeemed, make sure to endorse them for transfer, have your
Inc. signature on them guaranteed by your bank or another
P.O. Box 80221 guarantor institution (as described in the section entitled
Los Angeles, CA 90080-9909 "What Kind Of Paperwork Is Involved In Selling Shares?") and
include them with your request.
- --------------------------------------------------------------------------------
IN PERSON
BISYS Fund Services, Inc.
3435 Stelzer Road Deliver your signed, written request (each owner, including
Columbus, OH 43219-3035 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>
31
<PAGE> 207
- --------------------------------------------------------------------------------
TO SELL SHARES
- --------------------------------------------------------------------------------
<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.
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 Columbus
office. Although the Funds impose no charge when A Shares are redeemed (except
pursuant to the Large Purchase Exemption described above), 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 Funds impose no charge when K Shares are redeemed.
The Company reserves the right to redeem accounts (other than 401(k), 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. The
contingent deferred sales charge applicable to A Shares purchased under the
Large Purchase Exemption will not be imposed upon such involuntary redemptions.
WHAT KIND OF PAPERWORK IS INVOLVED IN SELLING SHARES?
Redemption requests must be signed by each shareholder, including each joint
owner. When redeeming shares, you should indicate whether you are redeeming A or
K Shares. 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
32
<PAGE> 208
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 a Fund receives payment
in cash or immediately available funds for the purchase of shares. The Company
may suspend the right of redemption or postpone the date of payment upon
redemption (as well as suspend the recordation of the transfer of shares) for
such periods as are permitted under the 1940 Act.
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 a
Fund, in shares of the same class of the Fund out of which you redeemed, in like
shares of another Fund in the Pacific Horizon Family of Funds or in like shares
of any investment portfolio of Time Horizon Funds within 90 days of your
redemption trade date without paying a sales load. Upon such a reinvestment, the
Funds' distributor will credit to your account any contingent deferred sales
charge imposed on any redeemed A Shares subject to the Large Purchase Exemption
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 Asset Allocation Fund are entitled to dividends and
distributions arising from the net investment income and net realized gains, if
any, earned on investments in the Master Portfolio which are allocable to that
Fund. A Fund's net income is declared and paid as a dividend on a quarterly
basis and net realized capital gains (if any) are distributed at least annually.
Dividends are paid within five business days after the quarter end.
You will automatically receive dividends and capital gain distributions in
additional shares of the same class of shares of the Fund for which the dividend
was declared 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 A Fund Be Invested In
Other Funds?"
33
<PAGE> 209
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 80221, Los Angeles, California
90080-9909. 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, 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 FUNDS 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.
The contingent deferred sales charge with respect to A Shares subject to the
Large Purchase Exemption will not be charged on redemptions in connection with
minimum required distributions from an IRA due to a shareholder having reached
age 70-1/2. For details, contact the Funds' 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 should consult their tax advisers.
Additionally, K Shares are available to businesses and other organizations that
participate in the Daily Advantage Program sponsored by Bank of America and to
Qualified IRA Rollovers.
CAN I EXCHANGE MY INVESTMENT FROM ONE FUND TO ANOTHER?
As a shareholder, you have the privilege of exchanging your shares for: like
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.
Specifically, A Shares may be exchanged for other A Shares and K Shares may be
exchanged for other K Shares. NO ADDITIONAL SALES LOAD WILL BE INCURRED WHEN
EXCHANGING A SHARES PURCHASED WITH A SALES LOAD FOR A SHARES OF ANOTHER LOAD
FUND OF THE COMPANY OR TIME HORIZON FUNDS.
Neither a contingent deferred sales load nor a front-end sales load will be
imposed if a shareholder who has entered a Fund under the Large Purchase
Exemption exchanges shares between Funds of the Company or Time Horizon Funds.
However, shares acquired in the exchange will remain subject to the contingent
deferred sales load discussed above. The contingent deferred sales load is
calculated as a percentage of the lesser of the current market value or the cost
of the shares being redeemed. This means that this charge will not be imposed
upon increases in net asset value above the initial purchase price or upon
reinvested dividends. In determining whether a contingent deferred sales charge
is applicable to a redemption of such shares, the calculation will be made in a
manner that results in the lowest possible rate. It will be assumed that the
redemption is made first of amounts representing shares acquired pursuant to the
reinvest-
34
<PAGE> 210
ment of dividends and distributions; then of amounts representing the increase
in net asset value of your holdings of shares above the total amount of payments
for the purchase of shares during the preceding 2 years; then of amounts
representing the cost of shares held beyond the applicable contingent deferred
sales charge period; and finally, of amounts representing the cost of the shares
held for the longest period of time.
An investment in a 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 Funds' 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."
An exchange is considered a sale of shares of a Fund and the purchase of shares
of another Fund and may result in a capital gain or loss for federal income tax
purposes.
If you would like more information on making an exchange, please read the
Statement of Additional Information and consult your Service Organization or the
Funds' distributor.
The Funds reserve 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 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 caused by 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, including requesting certain personal
or account information to confirm the identity of the shareholder. If you should
experience difficulty in contacting
35
<PAGE> 211
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 Funds
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 in a subsequent signature guaranteed
written request to the Transfer Agent. Purchases of additional shares
concurrently with withdrawals are ordinarily not advantageous because of each
Fund's sales load. Use of this Plan may also be disadvantageous for A Shares
subject to the Large Purchase Exemption due to the potential need to pay a
contingent deferred sales charge.
CAN MY DIVIDENDS FROM A 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
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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, a Fund may terminate your
participation after 30 days' notice.
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THE BUSINESS OF THE FUNDS
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FUND MANAGEMENT
The business affairs of Pacific Horizon Funds, Inc. 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 Portfolios. 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, business
credit and thrift offices in major U.S. cities. In addition, it has branches,
corporate offices and representative offices in 36 foreign countries.
In separate advisory agreements with Master Trust and the Company (collectively,
the "Advisory Agreements"), Bank of America has agreed to manage the Portfolios'
investments and to be responsible for, place orders for, and make decisions with
respect to, all purchases and sales of the Portfolios' securities. The Advisory
Agreements also provide that Bank of America may, in its discretion, provide
advisory services to the Portfolios through its own employees or employees of
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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 that Bank of America remains fully responsible to the Portfolios 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
Master 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 Master Portfolio. Mr. Pyles has been the Master Portfolio's manager since
November 1994 and has been associated with Seattle-First National Bank, a
wholly-owned 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 Master
Portfolio'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 Advisers since 1990, and Vice President and
Manager of Investments at Gibraltar Savings from 1986 to 1990.
Ed Cassens, Vice President and Senior Portfolio Manager of BofA Capital
Management, Inc. is primarily responsible for the day-to-day investment
activities of the Capital Income Fund. Mr. Cassens has been the Capital Income
Fund's manager since November 1994 and has been associated with Seattle-First
National Bank since 1966. Mr. Cassens currently manages Bank of America's EBT
Convertible Securities Trust and Convertible Securities Common Trust Fund and
has managed the Seafirst Equity Income Common Trust Fund since 1987.
For the services provided and expenses assumed under the Advisory Agreements,
Bank of America is entitled to receive a fee at the annual rate of 0.55% and
0.45% of the Master Portfolio's and Capital Income Fund's average daily net
assets, respectively. The fee with respect to the Master Portfolio 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. These amounts may be reduced pursuant to undertakings by Bank of
America. (See the information below under "Fee Waivers"). During the fiscal year
ended February 29, 1996, the Master Portfolio paid Bank of America advisory fees
at an effective annual rate of 0.12% of the Master Portfolio's average daily net
assets, and Bank of America waived a portion of its fee at an effective annual
rate of 0.43% of the Master Portfolio's average daily net assets. For the same
period, the Capital Income Fund paid Bank of America advisory fees at an
effective annual rate of 0.45% of the Capital Income Fund's average daily net
assets.
In addition, Bank of America and its affiliates may be entitled to fees under
the Shareholder Services Plan, Distribution Plan, and Administrative and
Shareholder Services Plan as described under "Plan Payments" below, and may
receive fees charged directly to their accounts in connection with investments
in shares of the Funds.
ADMINISTRATOR
Concord Holding Corporation ("Concord") serves as Administrator of the Funds and
the Master Portfolio. Concord is an indirect, wholly owned subsidiary of The
BISYS Group, Inc. Its offices are located at 3435 Stelzer Road, Columbus, Ohio
43219-3035.
Under its administration agreements with the Company and the Master Portfolio,
Concord has agreed to: pay the costs of maintaining the offices of the Company
and the Master Portfolio; provide a facility to receive purchase and redemption
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orders; provide statistical and research data, data processing services and
clerical services; coordinate the preparation of reports to shareholders of the
Funds, interestholders of the Master Portfolio and the Securities and Exchange
Commission; prepare tax returns; maintain the registration or qualification of
each Fund's shares for sale under state securities laws; maintain books and
records of the Funds and the Master Portfolio; calculate the net asset value of
the Funds and the Master Portfolio; calculate the dividends and capital gains
distributions paid to shareholders; serve as dividend disbursing agent for the
Master Portfolio; and generally assist in all aspects of the operations of the
Funds and the Master Portfolio.
For its services as administrator, Concord is entitled to receive an
administration fee from the Asset Allocation Fund at the annual rate of 0.15% of
such Fund's average daily net assets, and an administration fee from the Master
Portfolio at the annual rate of 0.05% of such Portfolio's average daily net
assets, and an administration fee from the Capital Income Fund at the annual
rate of .20% of such Fund'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 29, 1996, Concord waived
its entire fee as administrator for the Asset Allocation Fund, and reimbursed
the Fund for a portion of its operating expenses. For the same period, the
Master Portfolio paid Concord administration fees at an effective annual rate of
0.01% of the Master Portfolio's average daily net assets, and Concord waived a
portion of its fee at an effective annual rate of 0.19% of the Master
Portfolio's average daily net assets. During the fiscal year ended February 29,
1996, the Capital Income Fund paid Concord administration fees at an effective
annual rate of 0.20% of such Fund's average daily net assets.
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, (with respect to the Asset Allocation Fund and the
Master Portfolio) and The Bank of New York ("BONY") (with respect to the Capital
Income Fund) perform certain of the services listed above e.g., calculating the
net asset value of the Funds and the Master Portfolio, calculating dividends and
capital gains distributions to shareholders, and maintaining the books and
records of the Funds and the Master Portfolio. The Asset Allocation Fund and the
Master Portfolio bear all fees and expenses charged by PFPC, and the Capital
Income Fund bears all fees and expenses charged by BONY.
DISTRIBUTOR
Each Fund's shares are sold on a continuous basis by Concord Financial Group,
Inc. (the "Distributor"). The Distributor is an indirect, wholly owned
subsidiary of The BISYS Group, Inc. and is located at 3435 Stelzer Road,
Columbus, Ohio 43219-3035.
CUSTODIAN AND TRANSFER AGENT
PNC Bank, National Association, Broad and Chestnut Streets, Philadelphia,
Pennsylvania, 19101 serves as the Custodian of the Asset Allocation Fund and the
Master Portfolio. The Bank of New York, 90 Washington Street, New York, New York
10286, serves as the Custodian of the Capital Income Fund. BISYS Fund Services,
Inc. is the transfer and dividend disbursing agent for each of the Funds and is
located at 3435 Stelzer Road, Columbus, Ohio 43219-3035.
FEE WAIVERS
Except as noted in this Prospectus, the service contractors bear all expenses in
connection with the performance of their services, and the Funds and Master
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 each Fund's
fiscal year, Bank of America, Concord and/or the Distributor may
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prospectively choose not to receive fee payments and/or may assume certain
expenses of the Funds or the Master Portfolio expenses as a result of
competitive pressures and in order to preserve and protect the business and
reputation of Concord and Bank of America. However, the service providers retain
the ability to discontinue such fee waivers and/or expense reimbursements at any
time.
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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 FUNDS.
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As with any investment, you should consider the tax implications of an
investment in the Funds. The following is only a brief summary of some of the
important tax considerations generally affecting the Funds and their
shareholders. Consult your tax adviser with specific reference to your own tax
situation.
FEDERAL TAXES
During its most recent taxable year, each Fund qualified separately as a
"regulated investment company" under the Internal Revenue Code of 1986, as
amended (the "Code"), and each Fund intends that it will so qualify in future
years as long as such qualification is in the best interests of its
shareholders. As a result of this qualification, each 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 Master Portfolio will not
be subject to federal income taxes. The Master Portfolio intends to qualify as a
partnership (or other pass-through entity) for federal income tax purposes. As
such, the Master Portfolio is not subject to tax, and the Asset Allocation Fund
will be treated for federal income tax purposes as recognizing its pro rata
share of the Master Portfolio's income and deductions and owning its pro rata
share of the Master Portfolio's assets. The Asset Allocation Fund's status as a
regulated investment company is dependent on, among other things, the Master
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) derived from
ordinary income and/or the excess of net short-term capital gains 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 distribution you receive comprised of the excess of net long-term capital
gains over net short-term capital losses ("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 distribution paid to you by a 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 a Fund on or just before the
record date of a dividend, you should be aware that the amount of the
forthcoming dividend payment,
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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. If you hold Fund 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 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 for the purpose of calculating your gain or loss from the exchange. It
may be included in the tax basis of the new shares, subject to this same
limitation.
STATE AND LOCAL TAXES
A portion of the dividends that you receive may be derived from investments in
U.S. Government obligations. These dividends may not be entitled to the same
exemptions from state and local income 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.
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MEASURING PERFORMANCE
EACH 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.
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Average annual total return reflects the average annual percentage change in
value of an investment in a 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 a Fund over a specified 30-day
period.
Periodically, a 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 assume dividends and capital gains distributions
made by a Fund during the period are reinvested in Fund shares, and include the
maximum front-end sales charge for A Shares. Each 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.
Each 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.
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Each 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, a Fund's total
return may be compared 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. A 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 a 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 a 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).
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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 F Common Stock, 150 million shares of Class F -- Special Series 3 Common
Stock and 50 million shares of Class F -- Special Series 5 Common Stock,
representing interests in the Capital Income Fund; 40 million shares of Class O
Common Stock, 60 million shares of Class O -- Special Series 3 Common Stock and
50 million shares of Class O -- Special Series 5 Common Stock, representing
interests in the Asset Allocation Fund and additional classes of shares
representing interests in other investment portfolios of the Company. Class F
and Class O Common Stock are the "A" Shares, Class F -- Special Series 3 Common
Stock and Class O -- Special Series 3 Common Stock are the "B" Shares and Class
F -- Special Series 5 Common Stock and Class O -- Special Series 5 Common Stock
are the "K" Shares. As of the date of this prospectus, B Shares have not been
offered to the public. The Board of Directors may similarly classify or
reclassify any class of shares (including unissued Class O Common Stock, Class
O -- Special Series 3 Common Stock, Class O -- Special Series 5 Common Stock,
Class F Common Stock, Class F -- Special Series 3 Common Stock or Class
F -- Special Series 5 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.
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Shares representing interests in the Funds are entitled to participate in the
dividends and distributions declared by the Board of Directors and in the net
distributable assets of the particular Fund upon 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). Only A Shares will vote on
matters relating solely to A Shares and K Shares will vote on matters relating
solely to K Shares. The Funds do 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 Funds 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.
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PLAN PAYMENTS
THE COMPANY HAS ADOPTED A SHAREHOLDER SERVICES PLAN (THE "PLAN") FOR
A SHARES AND A DISTRIBUTION PLAN AND AN ADMINISTRATIVE AND
SHAREHOLDER SERVICES PLAN FOR K SHARES.
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The Company has adopted a Shareholder Services Plan for A Shares, under which
the A Shares of each Fund reimburse the Distributor for shareholder servicing
fees the Distributor pays to Service Organizations. The Company has adopted a
Distribution Plan pursuant to Rule 12b-1 under the 1940 Act under which the K
Shares of a Fund reimburse the Distributor for services rendered and costs
incurred in connection with distribution of the K Shares. The Company has also
adopted an Administrative and Shareholder Services Plan for K Shares, under
which K Shares of a Fund reimburse the Distributor for administrative and
shareholder servicing fees the Distributor pays to Service Organizations.
SHAREHOLDER SERVICES PLAN
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 a Fund for shareholder servicing expenses may not
exceed 0.25% (annualized) of the average daily net assets of
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such Fund's A Shares. 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 29, 1996, the Distributor waived all
payments under the Plan with respect to the Asset Allocation Fund. For the same
period, the Capital Income Fund made payments under the Plan at the effective
annual rate of 0.25% of the Capital Income Fund's average daily 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 a Fund with respect to
the amount "carried forward."
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.
DISTRIBUTION PLAN AND ADMINISTRATIVE AND SHAREHOLDER SERVICES PLAN
Under the Distribution Plan, each Fund pays the Distributor for distribution
expenses primarily intended to result in the sale of such Fund's K Shares. Such
distribution expenses include expenses incurred in connection with advertising
and marketing each Fund's K Shares; payments to Service Organizations for
assistance in connection with the distribution of K Shares; and expenses
incurred in connection with preparing, printing and distributing prospectuses
for the Funds (except those used for regulatory purposes, for solicitation or
distribution to existing or potential A shareholders, or for distribution to
existing K shareholders of the Funds) and in implementing and operating the
Distribution Plan.
Shareholder servicing expenses under the Administrative and Shareholder Services
Plan include, but are not limited to, expenses incurred in connection with
shareholder services provided by the Distributor and payments to Service
Organizations for the provision of support services with respect to the
beneficial owners of K Shares, such as assisting clients in processing exchange
and redemption requests and in changing dividend options and account
descriptions and responding to client inquiries concerning their investments.
Administrative servicing expenses under the Administrative and Shareholder
Services Plan include, but are not limited to, expenses incurred in connection
with administrative services provided by the Distributor and payments to Service
Organizations for the provision of administrative services to beneficial owners
of K Shares, such as establishing and maintaining accounts and records relating
to their clients who invest in K Shares, providing information to the Fund
necessary for accounting or sub-accounting and providing statements periodically
to clients showing their position in K Shares.
Under the Distribution Plan, payments by a Fund for distribution expenses may
not exceed 0.75% (annualized), of the average daily net assets of such Fund's K
Shares. Under the Administrative and Shareholder Services Plan, payments for
shareholder servicing expenses may not exceed 0.25% (annualized) of the average
daily net assets of such Fund's K Shares. Under the Administrative and
Shareholder Services Plan, payments for
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administrative servicing expenses may not exceed 0.75% (annualized) of the
average daily net assets of a Fund's K Shares. The total of all 12b-1 fees,
administrative services fees and shareholder services fees may not exceed, in
the aggregate, the annual rate of 1.00% of the average daily net assets of a
Fund's K Shares. These amounts may be reduced pursuant to undertakings by the
Distributor. Payments for distribution expenses under the Distribution Plan are
subject to Rule 12b-1 under the 1940 Act. During the fiscal year ended February
29, 1996, no K Shares were offered by the Company.
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
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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 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.
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 in a higher rated
category. Debt rated "BBB" 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 to repay
principal for debt in this category than in 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.
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.
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.
UNRATED SECURITIES
Unrated securities are securities which have not been rated by a nationally
recognized statistical rating organization.
46
<PAGE> 222
GRI-0001
- ----------------------------
PACIFIC HORIZON MUTUAL FUNDS
- ----------------------------
ASSET ALLOCATION FUND
CAPITAL INCOME FUND
PROSPECTUS
July 1, 1996
NOT FDIC INSURED
<PAGE> 223
PROSPECTUS
JULY 1, 1996
PACIFIC HORIZON BLUE CHIP FUND
PACIFIC HORIZON AGGRESSIVE GROWTH FUND
Investment Portfolios Offered by Pacific
Horizon Funds, Inc.
- --------------------------------------------------------------------------------
The PACIFIC HORIZON BLUE CHIP FUND (the "Blue Chip Fund") is a diversified
mutual fund whose investment objective is long-term capital appreciation through
investments in blue chip stocks.
UNLIKE MOST OTHER INVESTMENT COMPANIES WHICH INVEST DIRECTLY IN PORTFOLIO
SECURITIES, THE BLUE CHIP 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 "MASTER PORTFOLIO" AND, COLLECTIVELY WITH THE AGGRESSIVE
GROWTH FUND, THE "PORTFOLIOS") HAVING THE SAME INVESTMENT OBJECTIVE AS THAT OF
THE BLUE CHIP FUND. THE BLUE CHIP FUND WILL PURCHASE SHARES OF THE MASTER
PORTFOLIO AT NET ASSET VALUE. THE NET ASSET VALUE OF THE BLUE CHIP FUND WILL
RESPOND TO INCREASES AND DECREASES IN THE VALUE OF THE MASTER PORTFOLIO'S
SECURITIES. INVESTORS SHOULD CAREFULLY CONSIDER THIS INVESTMENT APPROACH. SEE
"OTHER INVESTMENT PRACTICES AND CONSIDERATIONS -- MASTER-FEEDER STRUCTURE" ON
PAGE 16 FOR ADDITIONAL INFORMATION REGARDING THIS STRUCTURE.
The PACIFIC HORIZON AGGRESSIVE GROWTH FUND (the "Aggressive Growth Fund" and,
collectively with the Blue Chip Fund, the "Funds") is a diversified mutual fund
whose investment objective is to maximize capital appreciation. In seeking its
investment objective, the Aggressive Growth Fund invests primarily in common
stocks and securities convertible into common stocks. Income received is
incidental to the Aggressive Growth Fund's objective of capital appreciation.
The Aggressive Growth Fund may be suited for investors who seek long-term
capital appreciation and can assume above average investment risk.
This Prospectus describes two classes of shares. A Shares are sold with a
front-end sales charge. K Shares are not subject to either a front-end sales
charge or a contingent deferred sales charge.
The Funds are 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 Portfolios' investment adviser. Based in San Francisco, California, Bank
of America and its affiliates have over $48 billion under management, including
over $12 billion in mutual funds.
This Prospectus describes concisely the information about the Funds and the
Company that you should know before investing. Please read it carefully and
retain it for future reference.
More information about the Funds 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, 1996 and is
incorporated by reference into this Prospectus.
- --------------------------------------------------------------------------------
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. Investment in the Funds 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, other than those contained in this Prospectus, in the Statement
of Additional Information and the Fund's official sales literature, in
connection with the offering of the Funds' 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 Funds 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 Funds or the distributor to make such offer in such
jurisdiction.
- --------------------------------------------------------------------------------
<PAGE> 224
CONTENTS
<TABLE>
<S> <C> <C>
EXPENSE SUMMARY 2
FINANCIAL HIGHLIGHTS 6
FUND INVESTMENTS 9 INVESTMENT OBJECTIVES
9 TYPES OF INVESTMENTS
10 FUNDAMENTAL LIMITATIONS
11 OTHER INVESTMENT PRACTICES AND CONSIDERATIONS
SHAREHOLDER GUIDE 18 HOW TO BUY SHARES
18 What Is My Minimum Investment In The Funds?
18 What Alternative Sales Arrangements are Available?
18 How Are Shares Priced?
22 How Do I Decide Whether To Buy A or K Shares?
23 How Can I Buy Shares?
24 What Price Will I Receive When I Buy Shares?
25 What Else Should I Know To Make A Purchase?
25 HOW TO SELL SHARES
25 How Do I Redeem My Shares?
27 What NAV Will I Receive For Shares I Want To Sell?
27 What Kind Of Paperwork Is Involved In Selling
Shares?
28 How Quickly Can I Receive My Redemption Proceeds?
28 Do I Have Any Reinstatement Privileges After I Have
Redeemed Shares?
DIVIDEND AND DISTRIBUTION 28
POLICIES
SHAREHOLDER SERVICES 29 CAN I USE THE FUNDS IN MY RETIREMENT PLAN?
29 CAN I EXCHANGE MY INVESTMENT FROM ONE FUND TO
ANOTHER?
30 WHAT IS TELETRADE?
31 CAN I ARRANGE TO HAVE AUTOMATIC INVESTMENTS MADE ON
A REGULAR BASIS?
31 WHAT IS DOLLAR COST AVERAGING AND HOW CAN I
IMPLEMENT IT?
31 CAN I ARRANGE PERIODIC WITHDRAWALS?
31 CAN MY DIVIDENDS FROM A FUND BE INVESTED IN OTHER
FUNDS?
32 IS THERE A SALARY DEDUCTION PLAN AVAILABLE?
THE BUSINESS OF THE FUNDS 32 FUND MANAGEMENT
32 Service Providers
TAX INFORMATION 35
MEASURING PERFORMANCE 36
DESCRIPTION OF SHARES 37
PLAN PAYMENTS 38
- ------------------------------------------------------------------------------------------------------------------------
DISTRIBUTOR: INVESTMENT ADVISER:
Concord Financial Group, Inc. Bank of America National Trust and Savings Association
3435 Stelzer Road 555 California Street
Columbus, OH 43219-3035 San Francisco, CA 94104
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 225
EXPENSE SUMMARY
SHAREHOLDER TRANSACTION EXPENSES are charges you pay when buying or selling
shares of the Funds. The Funds offer two classes of shares. A Shares are offered
at net asset value plus a front-end sales charge (see page 18 of the Prospectus
for an explanation of net asset value per share) and are subject to a
shareholder servicing fee. K Shares are offered at net asset value with neither
a front-end sales charge nor a contingent deferred sales charge, but are subject
to distribution, administrative servicing and shareholder servicing fees.
ANNUAL FUND OPERATING EXPENSES include payments by the Funds and payments by the
Master Portfolio which are allocable to the Blue Chip Fund. Operating expenses
include fees for portfolio management, maintenance of shareholder accounts,
general administration, distribution (in the case of K Shares only), shareholder
servicing, accounting and other services.
Below is a summary of the shareholder transaction expenses imposed by the Funds
for A and K Shares, the operating expenses of the A and K Shares of the Blue
Chip Fund (including the operating expenses of the Master Portfolio which are
allocable to the Blue Chip Fund) expected to be incurred during the current
fiscal year, the operating expenses incurred by the A Shares of the Aggressive
Growth Fund during its last fiscal year and the operating expenses expected to
be incurred by the K Shares of the Aggressive Growth Fund. The information for
the Blue Chip Fund 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.
BLUE CHIP FUND
---------------------------------------------------------
<TABLE>
<CAPTION>
A SHARES K SHARES
-------- ---------
<S> <C> <C> <C>
SHAREHOLDER TRANSACTION
EXPENSES
Maximum Sales Load Imposed
on Purchases
(as a percentage of
offering price) 4.50% None(2)
Sales Load Imposed on
Reinvested Dividends None None
Maximum Contingent
Deferred Sales Load (as a
percentage of original
purchase price or
redemption proceeds,
whichever is lower) None(1) None
Redemption Fees None None
Exchange Fee None None
ANNUAL FUND OPERATING
EXPENSES
(as a percentage of
average net assets)
Management Fees (After Fee
Waivers)+ 0.58% 0.58%
12b-1 Fee (After Fee
Waivers)* 0% 0.50%*
Administrative Services
Fee (After Fee Waivers)* 0% 0.50%*
Shareholder Services Fee* 0.25% 0.25%*
-------
Total of all 12b-1 Fees OR
Administrative Services
Fees and Shareholder
Services Fees for K Shares
(After Fee Waivers)* 0.75%*
All Other Expenses (After
Expense Reimbursements)+ 0.47% 0.47%
------- -------
Total Operating Expenses
(After Fee Waivers and
Expense
Reimbursements)+ 1.30% 1.80%
------- -------
------- -------
</TABLE>
---------------------------------------
(1) There is no front-end sales load on A Shares you purchase if you have either
a combined purchase of A Shares of the Company of $1,000,000 or more or if
the aggregate value of A Shares that you beneficially own in any Pacific
Horizon Fund or Time Horizon Fund, another open-end investment company
managed by Bank of America (a "Time Horizon Fund"), equals or exceeds
$1,000,000 ("Large Purchase Exemption"). A Shares purchased under the Large
Purchase Exemption (except A Shares purchased under the Daily Advantage(R)
or Advantage Plus(TM) Programs) are subject to a contingent deferred sales
charge of 1.00% and 0.50%, respectively, on redemptions within one and two
years after purchase. The contingent deferred sales charge is paid to
Concord Financial Group, Inc. (the "Distributor"). A Shares cannot be
purchased under the
2
<PAGE> 226
Large Purchase Exemption if there is another no-load exemption available.
Accordingly, A Shares purchased under another no-load exemption are not
subject to a contingent deferred sales charge. Although no front-end sales
load will be paid on shares purchased under the Large Purchase Exemption,
the Distributor will compensate brokers whose customers purchase such shares
at the following rates: 1.00% of the amount under $3 million, 0.50% of the
next $47 million and 0.25% thereafter.
(2) Bank of America will compensate Seafirst Investment Services, Inc. ("SIS")
and BA Investment Services, Inc. ("BAIS") (BAIS and SIS are collectively
referred to herein as "Affiliated Brokers") for their customers who have
invested in a Fund and are participants in the Daily Advantage(R) Program.
The Affiliated Brokers will be compensated by Bank of America at the rate of
1.00% of the amount under $3 million, 0.50% of the next $47 million and
0.25% thereafter of combined Pacific Horizon Funds' and Time Horizon Funds'
K Shares in each Daily Advantage(R) Program.
+ Absent fee waivers and/or expense reimbursement, management fees for each
class of shares of the Fund would be 0.95% of the average net assets
(annualized); "Other Expenses" for the Blue Chip Fund's A and K Shares are
estimated to be 0.47% and 0.47%, respectively, of average net assets
(annualized); and "Total Operating Expenses" for the Blue Chip Fund's A and K
Shares are estimated to be 1.67% and 2.42% of average net assets
(annualized), respectively.
* Absent fee waivers, 12b-1 fees or administrative services fees would be 0.75%
or 0.75%, respectively, of the average net assets (annualized) of the Fund's
K Shares. The total of all 12b-1 fees, administrative services fees and
shareholder services fees may not exceed, in the aggregate, the annual rate
of 1.00% of the average net assets of the Fund's K Shares. However, it is
expected that during the current fiscal year, such fees will not exceed 0.75%
of the average net assets of the Fund's K Shares. Because of the Rule 12b-1,
administrative and/or shareholder services fees paid by the Blue Chip Fund as
shown in the above table, long-term K shareholders may pay more than the
economic equivalent of the maximum front-end sales charge permitted by the
National Association of Securities Dealers, Inc. For a further description of
shareholder transaction expenses and the Blue Chip Fund's operating expenses,
see the sections entitled "Shareholder Guide," "The Business of the Funds"
and "Plan Payments" below.
- --------------------------------------------------------------------------------
EXAMPLE: Assume the annual return is 5% and operating expenses are the same as
those stated above. For every $1,000 you invest, here is how much you would have
paid in total expenses if you closed your account after the number of years
indicated:
<TABLE>
<CAPTION>
AFTER 1 YEAR AFTER 3 YEARS AFTER 5 YEARS AFTER 10 YEARS
------------ ------------- ------------- --------------
<S> <C> <C> <C> <C>
A Shares(1) $ 58 $84 $ 113 $195
K Shares........................... $ 18 $57 $ 97 $212
</TABLE>
(1) Assumes deduction at time of purchase of maximum applicable front-end sales
charge but does not assume deduction at redemption of maximum applicable
contingent deferred sales charge under the Large Purchase Exemption.
- --------------------------------------------------------------------------------
3
<PAGE> 227
AGGRESSIVE GROWTH FUND
---------------------------------------------------------
<TABLE>
<CAPTION>
A SHARES K SHARES
-------- --------
<S> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load Imposed
on Purchases (as a
percentage of offering
price) 4.50% None(2)
Sales Load Imposed on
Reinvested Dividends None None
Maximum Contingent Deferred
Sales Load (as a
percentage of original
purchase price or
redemption proceeds,
whichever is lower) None(1) None
Redemption Fees None None
Exchange Fee None None
ANNUAL FUND OPERATING EXPENSES
(as a percentage of
average net assets)
Management Fees 0.90% 0.90%
12b-1 Fee (After Fee
Waivers)* 0% 0.50%*
Administrative Services Fee
(After Fee Waivers)* 0% 0.50%*
Shareholder Services Fee* 0.25% 0.25%*
-----
Total of all 12b-1 Fees OR
Administrative Services
Fees and Shareholder
Services Fees for K
Shares
(After Fee Waivers)* 0.75%*
Other Expenses (After Expense
Reimbursements)+ 0.36% 0.36%
------- -------
Total Operating Expenses (After
Fee Waivers and Expense
Reimbursements)+ 1.51% 2.01%
------- -------
------- -------
</TABLE>
----------------------------------------
(1) There is no front-end sales load on A Shares you purchase if you have either
a combined purchase of A Shares of the Company of $1,000,000 or more or if
the aggregate value of A Shares that you beneficially own in any Pacific
Horizon Fund or Time Horizon Fund equals or exceeds $1,000,000 ("Large
Purchase Exemption"). A Shares purchased under the Large Purchase Exemption
(except A Shares purchased under the Daily Advantage(R) or Advantage
Plus(TM)Programs) are subject to a contingent deferred sales charge of 1.00%
and 0.50%, respectively, on redemptions within one and two years after
purchase. The contingent deferred sales charge is paid to the Distributor. A
Shares cannot be purchased under the Large Purchase Exemption if there is
another no-load exemption available. Accordingly, A Shares purchased under
another no-load exemption are not subject to a contingent deferred sales
charge. Although no front-end sales load will be paid on shares purchased
under the Large Purchase Exemption, the Distributor will compensate brokers
whose customers purchase such shares at the following rates: 1.00% of the
amount under $3 million, 0.50% of the next $47 million and 0.25% thereafter.
(2) Bank of America will compensate Affiliated Brokers for their customers who
have invested in a Fund and are participants in the Daily Advantage(R)
Program. The Affiliated Brokers will be compensated by Bank of America at
the rate of 1.00% of the amount under $3 million, 0.50% of the next $47
million and 0.25% thereafter of combined Pacific Horizon Funds' and Time
Horizon Funds' K Shares in each Daily Advantage(R) Program.
+ Absent expenses paid by third parties, "Other Expenses" for the Fund's A
and K Shares would be 0.49% and 0.49%, respectively, of average net assets
(annualized); and "Total Operating Expenses" for the Fund's A and K Shares
would be 1.64% and 2.39% of average net assets (annualized), respectively.
* Absent fee waivers, 12b-1 fees or administrative services fees would be
0.75% or 0.75%, respectively, of the average net assets (annualized) of the
Fund's K Shares. The total of all 12b-1 fees, administrative services fees
and shareholder services fees may not exceed, in the aggregate, the annual
rate of 1.00% of the average net assets of the Fund's K Shares. However, it
is expected that during the current fiscal year, such fees will not exceed
0.75% of the average net assets of the Fund's K Shares. Because of the Rule
12b-1, administrative and/or shareholder services fees paid by the
Aggressive Growth Fund as shown in the above table, long-term K shareholders
may pay more than the economic equivalent of the maximum front-end sales
charge permitted by the National Association of Securities Dealers, Inc. For
a further description of shareholder transaction expenses and the Aggressive
Growth Fund's operating expenses, see the sections entitled "Shareholder
Guide," "The Business of the Funds" and "Plan Payments" below.
- --------------------------------------------------------------------------------
EXAMPLE: Assume the annual return is 5% and operating expenses are the same as
those stated above. For every $1,000 you invest, here is how much you would have
paid in total expenses if you closed your account after the number of years
indicated.
<TABLE>
<CAPTION>
AFTER 1 YEAR AFTER 3 YEARS AFTER 5 YEARS AFTER 10 YEARS
------------ ------------- ------------- --------------
<S> <C> <C> <C> <C>
A Shares(1) $ 60 $91 $ 124 $217
K Shares........................... $ 20 $63 $ 108 $234
</TABLE>
(1) Assumes deduction at time of purchase of maximum applicable front-end sales
charge but does not assume deduction at redemption of maximum applicable
contingent deferred sales charge under the Large Purchase Exemption.
- --------------------------------------------------------------------------------
Note: The preceding operating expenses and examples 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.
4
<PAGE> 228
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 shareholder of the Funds.
MANAGEMENT FEES CONSIST OF:
- - an investment advisory fee payable at the annual rate of 0.75% and 0.60% of
the Master Portfolio's and the Aggressive Growth Fund's respective average
daily net assets; and
- - an administration fee payable at the annual rate of 0.15% and 0.05% of the
Blue Chip Fund's and the Master Portfolio's respective average daily net
assets and 0.30% of the Aggressive Growth Fund's average daily net assets.
Currently, the most restrictive expense limitation limits each Fund's aggregate
annual expenses (including management fees and the Blue Chip Fund's pro rata
share of such expenses of the Master Portfolio) to 2.5% of the first $30 million
of each Fund's average daily net assets, 2% of the next $70 million and 1.5% of
each Fund's remaining average daily net assets.
The Board of Directors of the Company believes that the aggregate per share
expenses of the Blue Chip Fund and the Master Portfolio in which the Blue Chip
Fund's assets are invested will be less than or approximately equal to the
expenses which the Blue Chip Fund would incur if the Company retained the
services of an investment adviser for the Blue Chip Fund and the assets of the
Blue Chip Fund were invested directly in the type of securities held by the
Master Portfolio. Further, the Directors believe that the shareholders of the
Blue Chip Fund may participate in the ownership of a larger portfolio of
securities than could be achieved directly by the Blue Chip 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 Master Portfolio will
be realized, inasmuch as the Company is not aware of any other potential
investor in the Master Portfolio.
The alternative sales arrangements permit you to choose the method of purchasing
shares that is most beneficial given the amount of the purchase, the length of
time you expect to hold the shares and other circumstances. You should determine
whether under your particular circumstances it is more advantageous to incur a
front-end sales charge, with respect to A Shares and thereafter be subject to
annual fees under a Shareholder Services Plan; or incur neither a front-end
sales charge or a contingent deferred sales charge, but incur fees under a
Distribution Plan and/or an Administrative and Shareholder Services Plan with
respect to K shares. K shares, however, are only available for investment by:
(a) businesses or other organizations that participate in the Daily Advantage(R)
Program sponsored by Bank of America; (b) individuals investing proceeds from a
redemption of shares from another open-end investment company on which such
individual paid a front-end sales load if (i) such redemption occurred within 30
days prior to the purchase order, and (ii) such other open-end investment
company was not distributed and advised by Concord Financial Group, Inc. and
Bank of America, respectively, or their affiliates; and (c) accounts opened for
IRA rollovers from a 401(k) plan in which the assets were held in any Pacific
Horizon or Time Horizon Fund and subsequent purchases into an IRA rollover
account opened as described above, so long as the original IRA rollover account
remains open on the Company's books. See the section entitled "How to Buy
Shares" below.
5
<PAGE> 229
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
The tables below show certain information concerning the investment results for
the Funds for the periods indicated. During the periods shown, the Funds did not
offer K Shares. Actual investment results of the K Shares may be different. The
information for each of the five fiscal years in the five year period ended
February 29, 1996 has been audited by Price Waterhouse LLP, independent
accountants, whose unqualified reports on the financial statements containing
such information are 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 into the Statement of
Additional Information. Further information about the performance of the Funds
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 Funds free of charge by calling 800-332-3863.
6
<PAGE> 230
BLUE CHIP FUND
Selected data for an A Share of common stock outstanding throughout each of the
periods indicated:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE YEAR FOR THE YEAR FOR THE PERIOD
ENDED ENDED JANUARY 13, 1994
FEBRUARY 29, FEBRUARY 28, (COMMENCEMENT OF OPERATIONS)
1996 1995 THROUGH FEBRUARY 28 1994
------------ ------------ ----------------------------
<S> <C> <C> <C>
Net asset value per share, beginning of
period $ 15.81 $ 14.97 $ 15.00
------------ ------------ -----------
Income from Investment Operations:
Net investment income 0.26 0.31 0.02
Net realized and unrealized gains (losses)
on securities 4.96 0.80 (0.05)
------------ ------------ -----------
Total gain from investment operations 5.22 1.11 (0.03)
------------ ------------ -----------
Less Dividends and Distributions:
Dividends to shareholders from net
investment income (0.28) (0.27) --
------------ ------------ -----------
Distributions to shareholders from net
realized gains on securities (0.22) -- --
------------ ------------ -----------
Total dividends and distributions (0.50) (0.27) --
------------ ------------ -----------
Net change in net asset value 4.72 0.84 (0.03)
------------ ------------ -----------
Net asset value per share, end of period $ 20.53 $ 15.81 $ 14.97
========== ========== ========================
Total Return* 33.39% 7.60% (0.20)%
Ratios/Supplemental Data:
Net assets, end of period (000) $ 66,933 $ 6,002 $ 1,180
Ratio of expenses to average net
assets** 0.83% 0.00% 0.00%+
Ratio of net investment income to
average net assets** 1.63% 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 on A
Shares.
** Reflects the Blue Chip Fund's proportionate share of the Master Portfolio's
expenses, the Master Portfolio's fee waivers and expense reimbursements by
the Master Portfolio's investment adviser and administrator and fee waivers
and expense reimbursements by the Blue Chip 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 1.45%, 6.32% and 55.00%
(annualized) for the periods ended February 29, 1996, February 28, 1995 and
February 28, 1994, respectively.
+ Annualized.
7
<PAGE> 231
AGGRESSIVE GROWTH FUND
Selected data for an A Share of common stock outstanding throughout each of the
periods indicated:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED
----------------------------------------------------------------------------------------------------------------------
FEB. 29, FEB. 28, FEB. 28, FEB. 28, FEB. 29, FEB. 28, FEB. 28, FEB. 28, FEB. 29, FEB. 28,
1996 1995 1994 1993+ 1992 1991 1990 1989 1988** 1987+++
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset
value
per
share,
beginning
of
period $ 20.61 $ 25.70 $ 24.68 $ 27.93 $ 22.51 $ 17.17 $ 14.49 $ 13.41 $ 17.67 $ 12.41
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Income
from
Investment
Operations:
Net
investment
income
(loss) (0.27) (0.22) (0.37) (0.26) (0.15) (0.17) (0.17) (0.06) 0.08 0.01
Net
realized
and
unrealized
gains
(losses)
on
securities 8.35 (0.95) 3.02 (2.26) 9.21 6.33 2.85 1.14 (3.37) 5.28
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Total
income
(loss)
from
investment
operations 8.08 (1.17) 2.65 (2.52) 9.06 6.16 2.68 1.08 (3.29) 5.29
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Less
Dividends
and
Distributions:
Dividends
to
shareholders
from net
investment
income -- -- -- -- -- -- -- -- (0.10) (0.03)
Distributions
to
shareholders
from net
realized
gains
on
securities (5.20) (3.92) (1.63) (0.73) (3.64) (0.82) -- -- (0.87) --
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Net
change
in net
asset
value
per
share 2.88 (5.09) 1.02 (3.25) 5.42 5.34 2.68 1.08 (4.26) 5.26
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Net asset
value
per
share,
end of
period $ 23.49 $ 20.61 $ 25.70 $ 24.68 $ 27.93 $ 22.51 $ 17.17 $ 14.49 $ 13.41 $ 17.67
========== ========== ========== ========== ========== ========== ========= ========= ========== ==========
Total
Return
(excludes
sales
charge)* 40.88% (3.59)% 10.54% (8.76)% 41.11% 37.01% 18.50% 8.05%= (18.42)%= 42.55%=
Ratios/
Supplemental
Data:
Net
assets,
end of
period
(000) $180,347 $131,879 $158,091 $159,517 $178,228 $107,421 $ 85,637 $ 91,487 $134,000 $169,489
Ratio of
expenses
to
average
net
assets 1.51%++ 1.46% 1.52% 1.49%++ 1.44%++ 1.55%++ 1.51%++ 1.28%++ 1.21%++ 1.20%++
Ratio of
net
investment
income
(loss)
to
average
net
assets 1.35%++ 1.04% 1.20% 1.15%++ 1.14%++ 0.85%++ 0.82%++ (0.30)%++ 0.55%++ 0.15%++
Portfolio
turnover
rate 93% 92% 43% 43% 73% 155% 175% 276% 384% 250%
</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.
++ Includes fee waivers and expense reimbursements. Such fee waivers and
expense reimbursements 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% 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 and February 28,
1987, respectively. During the fiscal year ended February 29, 1996, the Fund
received credits from its custodian for interest earned on uninvested cash
balances which were used to offset custodian fees and expenses. If such
credits had not occurred, the ratio of expenses to average net assets
(without fee waivers and/or expense reimbursements) would have been 1.64%.
The ratio of net investment income was not affected by such credits.
+++ Restated to reflect a 2-for-1 stock split at close of business on February
27, 1987.
= Unaudited.
* The total return figures presented do not include the effect of the maximum
4.50% sales charge on A Shares.
8
<PAGE> 232
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
FUND INVESTMENTS
- ---------------------------------------------------------
INVESTMENT OBJECTIVES
BLUE CHIP FUND
The Blue Chip Fund seeks to achieve long-term capital appreciation through
investments in blue chip stocks. The Blue Chip Fund may be appropriate for
investors who want the potential for capital appreciation over the long-term.
THE OBJECTIVE OF THE BLUE CHIP FUND IS TO PROVIDE INVESTORS WITH LONG-TERM
CAPITAL APPRECIATION THROUGH INVESTMENTS IN BLUE CHIP STOCKS. THE BLUE CHIP FUND
SEEKS TO ACHIEVE ITS INVESTMENT OBJECTIVE BY INVESTING ALL OF ITS INVESTABLE
ASSETS IN THE MASTER PORTFOLIO. THE MASTER PORTFOLIO HAS THE SAME INVESTMENT
OBJECTIVE AS THE BLUE CHIP FUND.
AGGRESSIVE GROWTH FUND
The Aggressive Growth Fund seeks to achieve maximum capital appreciation. In
seeking its investment objective, the Aggressive Growth Fund invests primarily
in common stocks and convertible securities of issuers from a variety of
industries that it is believed have the potential for above-average growth. Any
income received is incidental to capital appreciation. The Aggressive Growth
Fund may be appropriate for investors who want long-term asset growth and are
willing to accept stock market volatility and who want to participate in a
diversified portfolio of companies with strong growth potential.
WHILE EACH PORTFOLIO STRIVES TO ATTAIN ITS INVESTMENT OBJECTIVE, THERE CAN BE NO
ASSURANCE THAT IT WILL BE ABLE TO DO SO.
- ---------------------------------------------------------
TYPES OF INVESTMENTS
SINCE THE INVESTMENT CHARACTERISTICS OF THE BLUE CHIP FUND WILL CORRESPOND TO
THOSE OF THE MASTER PORTFOLIO, THE FOLLOWING IS A DISCUSSION OF THE VARIOUS
INVESTMENTS OF AND TECHNIQUES EMPLOYED BY THE MASTER PORTFOLIO AND THE
AGGRESSIVE GROWTH FUND.
GENERAL INVESTMENTS
MASTER PORTFOLIO. The Master 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 & Poor's 500 Index. The Master
Portfolio will hold approximately 100 stocks. The Master Portfolio expects that
under normal market conditions at least 80% of its total 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 (some of which may be subject to repurchase agreements),
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 Master Portfolio may also make other investments as described more fully
below under "Other Investment Practices and Considerations."
AGGRESSIVE GROWTH FUND. The Aggressive Growth Fund is a diversified portfolio
comprised mainly of common stocks and securities convertible into common stocks.
The Aggressive Growth Fund's 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,
9
<PAGE> 233
markets and financial resources, and are dependent upon a limited management
group. As a result of the Aggressive Growth Fund's investments, an investment in
the Aggressive Growth Fund involves substantial risks (see "Risk Factors"
below).
While the Aggressive Growth 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. However, as a matter of
fundamental policy, not less than 65% of the Aggressive Growth Funds'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 Aggressive Growth 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 Aggressive Growth 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 Aggressive Growth
Fund's total assets.)
The Aggressive Growth 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."
FUNDAMENTAL LIMITATIONS
The investment objective of the Funds and the Master Portfolio may not be
changed without a vote by the holders of a majority of the outstanding shares of
the particular Fund or of the outstanding interests of the Master 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 Blue Chip Fund nor the Master 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 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, for-
10
<PAGE> 234
eign 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.
The Aggressive Growth Fund may not:
1. Make loans, although it may invest in debt securities, enter into repurchase
agreements and lend its portfolio securities to a limited extent.
2. 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.
3. 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).
In addition, except for temporary defensive periods, the Aggressive Growth Fund
will invest at least 65% of its total assets in equity securities.
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 fundamental investment limitations is set out in the
Statement of Additional Information.
OTHER INVESTMENT PRACTICES AND CONSIDERATIONS
OPTIONS. The Master Portfolio may purchase put and call options on listed
securities and stock indexes so long as the aggregate of the premiums paid for
options does not exceed 2% of the net assets of the Master Portfolio (this
restriction does not apply to options on futures contracts). Put options may be
purchased in order to protect the Master 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 Master
Portfolio may not write put options but may write fully covered call options as
long as the Master 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
Master Portfolio.
The Aggressive Growth 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
Aggressive Growth Fund may acquire options relating to foreign currencies.
Premiums paid for options purchased by the Aggressive Growth Fund will not
exceed 5% of its net assets and securities subject to options written by the
Aggressive Growth 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.
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 to the writer at the stated exercise price at any time prior
to the expiration date of the option, regardless of the
11
<PAGE> 235
market price of the security. In contrast to an option on a particular security,
an option on a stock index provides the parties to the contract with the right
to receive or obligation to make a cash settlement upon exercise of the option
by its purchaser.
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, a Portfolio 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 Portfolio 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 Portfolio closes out the
option. In addition, except to the extent that a call option written by the
Portfolio on a particular index is covered by an option on the same index
purchased by the Portfolio, movements in the index may cause the Portfolio to
incur a loss. Such loss might be lessened to the extent that the value of the
securities held by the Portfolio changed during the time the option was
outstanding.
For additional information relating to option trading practices, including
particular risks thereof, see the Statement of Additional Information.
FUTURES. The Portfolios may purchase and sell stock index futures contracts (as
well as purchase related options) and, as relates to the Aggressive Growth Fund,
purchase and sell foreign currency futures contracts (as well as purchase
related options). The Portfolios may engage in futures transactions to hedge
against changes resulting from market conditions in the values of the securities
held by the particular Portfolio or which the Portfolio intends to purchase, or
in the case of the Aggressive Growth Fund, to protect against fluctuating
currency exchange rates. The Portfolios will only enter into these transactions
where they are economically appropriate for the reduction of risks inherent in
the ongoing management of the particular Portfolio.
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 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. A Portfolio may not purchase or sell a
futures contract or purchase related options unless immediately after any such
transaction 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.
SHORT-TERM OBLIGATIONS. Subject to the investment policies stated above, the
Master Portfolio may invest in short-term obligations such as variable and
floating rate instruments, including master demand notes. Although payable on
demand by the Master 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, or the equivalent from
another nationally recognized statistical rating organization ("NRSRO") (b) have
commercial paper rated at least Prime-2 by Moody's or A-2 by S&P, or the
equivalent by another NRSRO (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).
Money market instruments such as short-term bank time deposits, certificates of
deposit and bankers' acceptances, commercial paper, and obligations issued or
guaranteed by the U.S. Govern-
12
<PAGE> 236
ment, its agencies or instrumentalities as well as repurchase agreements and
variable and floating rate instruments, may be purchased by the Aggressive
Growth 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 Aggressive Growth Fund does not expect to
invest more than 5% of its total assets at any time in any particular type of
money market instrument.
INVESTMENT COMPANY SECURITIES. In connection with the management of its daily
cash position, the Portfolios 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")
(including money market funds advised by Bank of America). No more than 10% of
the value of a Portfolio's respective 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; except that if a pending exemptive
order is granted by the Securities and Exchange Commission ("SEC"), with respect
to the investment in a money market mutual fund advised by Bank of America, a
Portfolio is permitted to invest the greater of 5% of its net assets or $2.5
million. In addition, the Portfolios may each hold no more than 3% of the
outstanding voting stock of any other investment company. The Aggressive Growth
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 Aggressive Growth Fund's policies, their management and other
types of expenses will be similar to those borne by the Aggressive Growth Fund.
As a shareholder of another investment company, the Portfolios would bear, along
with other shareholders, their pro rata portion of the other investment
company's expenses, including advisory fees. Such expenses are in addition to
the expenses a Portfolio pays in connection with its own operations.
REPURCHASE AGREEMENTS. The Portfolios may also enter into repurchase agreements.
Under these agreements, the Master 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 the equivalent from another nationally recognized
statistical ratings organization) 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). The Aggressive Growth Fund may also acquire such
securities if rated within the two highest ratings categories. 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 are
considered illiquid investments and investment in such repurchase agreements
along with any other illiquid securities will not exceed 10% of the value of the
total assets of a 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 Portfolios' custodian or its agent will have physical
possession of the securities or the securities will be transferred to the
Portfolios' 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 Portfolios 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
13
<PAGE> 237
proceedings are commenced with respect to the seller, realization upon the
securities by the Portfolios may be delayed or denied.
REVERSE REPURCHASE AGREEMENTS. The Portfolios may enter into reverse repurchase
agreements. Under these arrangements, a 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, Prime-2 or better by Moody's or the equivalent by another NRSRO)
or a registered broker-dealer, with an agreement to repurchase the security on
an agreed date, price and interest payment. When a Portfolio 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 Portfolios relinquish may decline below the
price the Portfolios 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 particular Portfolio's outstanding
shares.
SECURITIES LENDING. In order to earn additional income, each 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 particular Portfolio. If the
broker-dealer should become bankrupt, however, a 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 exceeds 10% and 30% of the total assets of the Master
Portfolio and the Aggressive Growth Fund, respectively. Securities loans will be
fully collateralized.
WHEN-ISSUED PURCHASES, FORWARD COMMITMENTS AND DELAYED SETTLEMENTS. The
Aggressive Growth Fund and the Blue Chip Master Portfolio may purchase
securities on a "when-issued" basis and purchase or sell securities on a
"forward commitment" basis. Additionally, the Aggressive Growth Fund may
purchase or sell securities on a "delayed settlement" basis. When-issued and
forward commitment transactions, which involve a commitment by a Portfolio to
purchase or sell particular securities with payment and delivery taking place at
a future date (perhaps one or two months later), permit a 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
Portfolios 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. When-issued purchases, forward commitments and delayed settlements
are not expected to exceed 25% of the value of a 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.
DIVERSIFICATION. In compliance with current Securities and Exchange Commission
rules, the Aggressive Growth 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 Aggressive Growth Fund may have even greater risks than
investments in most other types of mutual funds. The Aggressive Growth Fund is
not a complete investment program, and it may not be appropriate for an investor
if he or she
14
<PAGE> 238
cannot bear financially the loss of at least a significant portion of his or her
investment. The Aggressive Growth 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 Aggressive Growth 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 Aggressive Growth Fund of portfolio
securities, to meet redemptions or otherwise, may require the Aggressive Growth
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 Portfolio'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.
SPECIAL RISKS ASSOCIATED WITH OPTIONS. A Portfolio 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 a
Portfolio 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 a Portfolio cannot close out an option, it will not be able
to sell the securities underlying the option until the option expires or is
exercised.
Furthermore, a Portfolio'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 a Portfolio for less than three
months. Bank of America does not believethat transactions in options will
significantly affect a Portfolio'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 TRANSACTIONS. Investment decisions for each 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 a Portfolio. When a purchase
or sale of the same security is made at substantially the same time on behalf of
a Portfolio and another investment company or account, available investments or
opportunities for sales will be equitably allocated pursuant to procedures of
Bank of
15
<PAGE> 239
America. In some instances, this investment procedure may adversely affect the
price paid or received by a Portfolio or the size of the position obtained or
sold by a 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 particular Portfolio are not less favorable
than what they would be with any other qualified firm.
PORTFOLIO TURNOVER. High portfolio turnover rates can result in corresponding
increases in brokerage commissions and other transaction costs. The Aggressive
Growth Fund's investment practices in particular, 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. Short-term capital gains realized from securities transactions
are taxable to shareholders as ordinary income.
MASTER-FEEDER STRUCTURE. The Blue Chip Fund is an open-end investment portfolio
that seeks to achieve its investment objective by investing all of its
investable assets in the Master Portfolio which has the same investment
objective. The Blue Chip Fund may withdraw its investment in the Master
Portfolio at any time if the Board of Directors of the Company determines that
it is in the best interest of the Blue Chip 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 Blue Chip Fund in another pooled
investment entity having the same investment objective as the Blue Chip Fund or
the hiring of an investment adviser to manage the Blue Chip Fund's assets in
accordance with the investment policies described above with respect to the
Master 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 Blue Chip Fund and the
Master Portfolio.
The Master 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 Blue Chip Fund and other entities that may invest in the Master
Portfolio from time to time (e.g., other investment companies and commingled
trust funds) will each be liable for all obligations of the Master Portfolio.
However, the risk of the Blue Chip Fund's incurring financial loss on account of
such liability is limited to circumstances in which both inadequate insurance
exists and the Master Portfolio itself is unable to meet its obligations.
Accordingly, the Company's Board of Directors believes that neither the Blue
Chip Fund nor its shareholders will be adversely affected by reason of the Blue
Chip Fund's investing in the Master Portfolio. As stated above, the investment
objective of the Blue Chip Fund and the Master Portfolio is a fundamental policy
and may not be changed, in the case of the Blue Chip Fund, without the vote of
its shareholders or, in the case of the Master Portfolio, without the vote of
its interestholders. Whenever the Blue Chip Fund is requested to vote on matters
pertaining to the investment objective or a fundamental policy of the Master
Portfolio, the Blue Chip Fund will hold a meeting of its shareholders and will
cast its vote in the same proportion as the votes cast by the Blue Chip Fund's
shareholders. The Blue Chip 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
Master Portfolio could control the results of voting at the Master Portfolio
level in certain instances (e.g., a change in fundamental policies by the Master
Portfolio which was not approved by the Blue Chip Fund's shareholders). This
could result in the Blue Chip Fund's withdrawal of its investment in the Master
Portfolio, and in increased costs and expenses for the Blue Chip Fund. Further,
the withdrawal of other entities that may from time to time invest in
16
<PAGE> 240
the Master Portfolio could have an adverse effect on the performance of the
Master Portfolio and the Blue Chip 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 Master Portfolio will cause the
Master Portfolio to terminate automatically in 120 days unless the Blue Chip
Fund and any other investors in the Master Portfolio unanimously agree to
continue the business of the Master Portfolio.
As the Blue Chip 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 Master Portfolio, the Board of Directors of the Company would need
to consider alternative arrangements for the Blue Chip Fund, such as those
described above. The policy of the Blue Chip Fund, and other similar investment
companies, to invest their investable assets in trusts such as the Master
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
Master Portfolio which may have higher or lower fees and expenses than those of
the Blue Chip Fund and which may therefore have different performance results
than the Blue Chip Fund. Information concerning whether an investment in the
Master Portfolio may be available through another entity investing in the Master
Portfolio may be obtained by calling 800-332-3863.
17
<PAGE> 241
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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 FUNDS?
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. The minimum
investment is $200 for BankAmericard holders with an appropriate award
certificate from BankAmeriChoice Program.
** A regular IRA must be opened in conjunction with this account.
- ---------------------------------------------------------
WHAT ALTERNATIVE SALES ARRANGEMENTS ARE AVAILABLE?
The Funds issue two classes of shares. A Shares are sold to investors choosing
the front-end sales charge alternative unless an exemption to the sales charge
is otherwise available. K Shares are neither subject to a front-end sales charge
nor a contingent deferred sales charge. K Shares, however, are sold only to: (a)
businesses and other organizations that participate in the Daily Advantage(R)
Program sponsored by Bank of America; (b) individuals investing proceeds from a
redemption of shares from another open-end investment company on which such
individual paid a front-end sales load if (i) such redemption occurred within 30
days prior to the purchase order, and (ii) such other open-end investment
company was not distributed and advised by Concord Financial Group, Inc. and
Bank of America, respectively, or their affiliates; and (c) accounts opened for
IRA rollovers from a 401(k) plan in which the assets were held in any Pacific
Horizon or Time Horizon Fund and subsequent purchases into an IRA rollover
account opened as described above, so long as the original IRA rollover account
remains open on the Company's books. The two classes of shares in each Fund
represent interests in the same portfolio of investments of the particular Fund,
have the same rights and are identical in all respects except as discussed
below. A Shares bear the expenses of a Shareholder Services Plan. K Shares bear
the expenses of a Distribution Plan and/or Administrative and Shareholder
Services Plan and have exclusive voting rights with respect to such Plans. The
two classes also have different exchange privileges, as described below. The net
income attributable to A and K Shares and the dividends payable on A and K
Shares will be reduced by the amount of the: (a) Shareholder Services Plan fees
attributable to A Shares, (b) Distribution Plan fees and/or Administrative and
Shareholder Services Plan fees attributable to K Shares, respectively, and (c)
the incremental expenses associated with such Plans.
HOW ARE SHARES PRICED?
Shares are purchased at their public offering price, which is based upon each
class' net asset value per share plus a front-end sales load on A Shares. Each
class calculates its net asset value ("NAV") as follows:
(Value of Assets Attributable to the Class) -
(Liabilities Attributable to the Class)
-------------------------------------------------------------
NAV =
Number of Outstanding Shares of the Class
18
<PAGE> 242
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 Master Portfolio's and the Aggressive Growth 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 Master Portfolio or Aggressive Growth
Fund, as appropriate, pursuant to procedures adopted by the Master Portfolio's
Board of Trustees or the Aggressive Growth Fund's Board of Directors. 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 price information call (800) 346-2087.
The per share net asset values of A and K Shares will diverge due to the
different distribution and other expenses borne by the classes.
A SHARES SALES LOAD. The front-end sales load ("front-end sales load," "sales
load," "front-end sales charge," or "sales charge") for the A Shares of the
Funds begins at 4.50% and may decrease as the amount you invest increases, as
shown in the following chart:
- ---------------------------------------------------------
<TABLE>
<CAPTION>
DEALER'S
REALLOWANCE
AS A % OF AS A % OF AS A % OF
AMOUNT OF OFFERING NET 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 $1,000,000 1.00 1.01 0.90
$1,000,000 or more** 0.00 0.00 0.00
</TABLE>
* Dealer's reallowance may be changed periodically.
** See "Large Purchase Exemption" below for a description of contingent
deferred sales charge.
From time to time, the Funds' 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 Funds.
LARGE PURCHASE EXEMPTION. The contingent deferred sales load discussed under the
Large Purchase Exemption does not apply to A Shares purchased under the Daily
Advantage(R) or Advantage Plus(TM) Programs. To the extent that no other A Share
no-load exemption is available, the foregoing schedule of sales loads does not
apply to purchases of A Shares of $1,000,000 or more or to purchases of A Shares
if the aggregate value of the A Shares that you beneficially own in any Pacific
Horizon Fund or Time Horizon Fund equals or exceeds $1,000,000. If you
accumulate $1,000,000 or more of A Shares, on any additional purchase of A
Shares, the contingent deferred sales load described below will apply to such A
Shares when they are redeemed. In addition, if a customer purchases $1,000,000
or more of A Shares and redeems such shares, a contingent deferred sales load
will be imposed as follows:
<TABLE>
<CAPTION>
NUMBER OF YEARS APPLICABLE CONTINGENT
ELAPSED SINCE PURCHASE DEFERRED SALES LOAD
- ---------------------- ----------------------
<S> <C>
1 year 1.0%
2 years 0.5%
3 years None
</TABLE>
19
<PAGE> 243
The contingent deferred sales load is imposed on the lesser of the current
market value or the cost of the shares being redeemed. This means that this
charge will not be imposed upon increases in net asset value above the initial
purchase price or upon reinvested dividends. In determining whether a contingent
deferred sales charge is applicable to a redemption of such shares, the
calculation will be made in a manner that results in the lowest possible rate.
It will be assumed that the redemption is made first of amounts representing
shares acquired pursuant to the reinvestment of dividends and distributions;
then of amounts representing the increase in net asset value of your holdings of
shares above the total amount of payments for the purchase of shares during the
preceding 2 years; then of amounts representing the cost of shares held beyond
the applicable contingent deferred sales charge period; and finally, of amounts
representing the cost of the shares held for the longest period of time. In
addition, no contingent deferred sales load will be imposed on redeemed A Shares
if a front-end sales load had been previously imposed on such shares. Although
no front-end sales load will be paid on Large Purchase Exemptions, the
Distributor will compensate brokers whose customers purchase shares at the
following rates: 1.00% of the amount under $3 million, 0.50% of the next $47
million and 0.25% thereafter.
K SHARES. Bank of America will compensate Affiliated Brokers for their
customers who invested in a Fund and are participants in the Daily Advantage(R)
Program. The Affiliated Brokers will be compensated by Bank of America at the
rate of 1.00% of the amount under $3 million, 0.50% of the next $47 million and
0.25% thereafter of combined Pacific Horizon Funds' and Time Horizon Funds' K
Shares in each Daily Advantage(R) Program.
WHEN NO FRONT-END 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 a registered investment adviser purchasing shares
for its own account or for an account for which it is authorized to make
investment decisions;
- - 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
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;
- - 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 a 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;
- - accounts open as of July 1, 1996, which were exempt from front-end sales loads
at the time the accounts were opened and where those exemptions are no longer
available for new account holders, so long as the accounts remain 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 shares of a Fund, 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, minor
children and grandchildren, as well as members of the Board of Directors of
Bank of America or any of its affiliates;
20
<PAGE> 244
- - registered representatives or full-time employees of broker-dealers having
agreements with the Funds' distributor pertaining to the sale of shares of a
Fund (and their spouses and minor children) to the extent permitted by such
organizations; and
- - holders of the BankAmericard with an appropriate award certificate from the
BankAmeriChoice Program (initial award only; a sales load will apply to
subsequent purchases).
WHEN NO CONTINGENT DEFERRED SALES CHARGE IS APPLIED. To receive one of the
first three exemptions listed below, you must explain the status of your
redemption at the time you redeem your shares. The contingent deferred sales
charge with respect to A Shares purchased under the Large Purchase Exemption is
not charged on (1) exchanges described under "Shareholder Services -- Can I
Exchange My Investment From One Fund to Another?"; (2) redemptions in connection
with minimum required distributions from IRA accounts due to a shareholder
reaching age 70 1/2; (3) redemptions in connection with a shareholder's death or
disability (as defined in the Internal Revenue Code); and (4) involuntary
redemptions as a result of an account's net asset value remaining below $500
after sixty days' written notice. In addition, no contingent deferred sales
charge is charged on shares acquired through the reinvestment of dividends or
distributions.
RIGHTS OF ACCUMULATION. When buying A Shares in Pacific Horizon Funds, your
current aggregate investment determines the front-end 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 or Time Horizon Fund on which you paid a front-end 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). You may
also aggregate your investment in Pacific Horizon Funds and Time Horizon Funds
in order to qualify for the Large Purchase Exemption.
To qualify for a reduced sales load on A Shares, 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 Funds' distributor)
must notify the Funds' 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 A Shares carrying a sales load of the
Funds, 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 additional A
Shares of a Fund carrying a sales load with a current value of $10,000, the
sales 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 on A Shares 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 within a period of 13 months, beginning up to 90 days prior to the date of
the Letter's execution. A Shares carrying a sales load 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. Shares of Time Horizon Funds may be included when
determining reduced sales loads under the letter of intent program.
21
<PAGE> 245
While signing a Letter of Intent does not bind you to purchase, or the Company
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 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 DO I DECIDE WHETHER TO BUY A OR K SHARES?
You should determine whether under your particular circumstances it is more
advantageous to invest in A Shares and incur a front-end sales charge and an
ongoing shareholder services fee; or invest in K Shares and incur neither a
front-end sales charge nor a contingent deferred sales charge. K Shares do incur
fees under a Distribution Plan and/or an Administrative and Shareholder Services
Plan. K Shares of the Funds, however, are only available to: (a) businesses or
other organizations that participate in the Daily Advantage(R) Program sponsored
by Bank of America; (b) individuals investing proceeds from a redemption of
shares from another open-end investment company on which such individual paid a
front-end sales load if (i) such redemption occurred within 30 days prior to the
purchase order, and (ii) such other open-end investment company was not
distributed and advised by Concord Financial Group, Inc. and Bank of America,
respectively, or their affiliates; and (c) accounts opened for IRA rollovers
from a 401(k) plan in which the assets were held in any Pacific Horizon or Time
Horizon Fund and subsequent purchases into an IRA rollover account opened as
described above, so long as the original IRA rollover account remains open on
the Company's books ("Qualified IRA Rollovers").
22
<PAGE> 246
HOW CAN I BUY SHARES?
The chart below provides more information regarding some of the different
methods for investing in the Funds.
- --------------------------------------------------------------------------------
TO BUY SHARES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
OPENING AN ACCOUNT ADDING TO AN ACCOUNT
<S> <C> <C>
- --------------------------------------------------------------------------------------------------------
THROUGH BANK OF AMERICA, YOUR BROKER OR ANOTHER SERVICE ORGANIZATION
(ORDERS ARE NOT EFFECTIVE UNTIL RECEIVED BY THE FUND'S TRANSFER AGENT)
Contact them directly for Contact them directly for
instructions. instructions.
- --------------------------------------------------------------------------------------------------------
THROUGH THE DISTRIBUTOR
(IF YOU ARE OR WILL BE THE SHAREHOLDER OF RECORD ON THE COMPANY'S BOOKS)
BY MAIL
Complete Account Application Mail all subsequent
and mail it with a check investments to:
(payable to the appropriate
Fund) to the address on the Pacific Horizon Funds, Inc.
Account Application. File No. 54634
Los Angeles, CA 90074-4634
- --------------------------------------------------------------------------------------------------------
IN PERSON
BISYS Fund Services, Inc. Deliver Account Application Deliver your payment directly
3435 Stelzer Road and your payment directly to to the address on the left.
Columbus, OH 43219-3035 the address on the left.
- --------------------------------------------------------------------------------------------------------
BY WIRE
Initial purchases of shares Contact the Fund's transfer
into a new account may not be agent at 800-346-2087 for
made by wire. complete wiring instructions.
Instruct your bank to
transmit immediately
available funds for purchase
of shares of a particular
Fund in your name.
Be sure to include your name
and your Fund account number.
Consult your bank for information on remitting funds by wire
and any associated bank charges.
</TABLE>
- --------------------------------------------------------------------------------
23
<PAGE> 247
- --------------------------------------------------------------------------------
TO BUY SHARES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
OPENING AN ACCOUNT ADDING TO AN ACCOUNT
<S> <C> <C>
- --------------------------------------------------------------------------------------------------------
BY TELETRADE TeleTrade Privileges may not Purchases may be made in the
(a service permitting transfers be used to make an initial minimum amount of $500 and
of money from your purchase. the maximum amount of $50,000
checking, NOW or bank per transaction as soon as
money market account) appropriate information
regarding your bank account
has been established on your
Fund account. This
information may be provided
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.
- ----
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.
- ----
</TABLE>
WHAT PRICE WILL I RECEIVE WHEN I BUY SHARES?
Your shares will be purchased at the particular 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
Funds' transfer agent, BISYS Fund Services, Inc. (the "Transfer Agent"), at its
Columbus 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 the Transfer Agent's business
day. 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 the Transfer Agent's 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 Funds' 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
24
<PAGE> 248
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?
You must specify at the time of investment whether you are purchasing A or K
Shares. Certificates for shares will no longer be issued.
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 a Fund. If you purchase or redeem
shares directly from a 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
value of the shares you redeem may be more or less than your cost, depending on
a 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.
25
<PAGE> 249
- --------------------------------------------------------------------------------
TO SELL SHARES
-------------------------------------------------------------------------------
<TABLE>
<S> <C>
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.
</TABLE>
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
THROUGH THE DISTRIBUTOR
(IF YOU ARE A SHAREHOLDER OF RECORD ON THE COMPANY'S BOOKS)
BY MAIL
Pacific Horizon Blue Chip Send a signed, written request (each owner, including each
Fund or Aggressive Growth Fund joint owner, must sign) to the Transfer Agent.
c/o Pacific Horizon Funds, If you hold stock certificates for the shares being
Inc. redeemed, make sure to endorse them for transfer, have your
P.O. Box 80221 signature on them guaranteed by your bank or another
Los Angeles, California 90080- guarantor institution (as described in the section entitled
9909 "What Kind Of Paperwork Is Involved In Selling Shares?") and
include them with your request.
</TABLE>
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
IN PERSON
BISYS Fund Services, Inc.
3435 Stelzer Road Deliver your signed, written request (each owner, including
Columbus, OH 43219-3035 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.
</TABLE>
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
BY WIRE
(Blue Chip Fund only) 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>
- --------------------------------------------------------------------------------
26
<PAGE> 250
- --------------------------------------------------------------------------------
TO SELL SHARES
- --------------------------------------------------------------------------------
<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.
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 Columbus
office. Although the Funds impose no charge when A Shares are redeemed (except
pursuant to the Large Purchase Exemption described above), 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 Funds impose no charge when K Shares are redeemed.
The Company reserves the right to redeem accounts (other than 401(k), 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. The
contingent deferred sales charge applicable to A Shares purchased under the
Large Purchase Exemption will not be imposed upon such involuntary redemptions.
WHAT KIND OF PAPERWORK IS INVOLVED IN SELLING SHARES?
Redemption requests must be signed by each shareholder, including each joint
owner. When redeeming shares, you should indicate whether you are redeeming A or
K Shares. 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.
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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 a Fund receives payment
in cash or immediately available funds for the purchase of shares. The Company
may suspend the right of redemption or postpone the date of payment upon
redemption (as well as suspend the recordation of the transfer of shares) for
such periods as are permitted under the 1940 Act.
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 a
Fund, in shares of the same class of the Fund out of which you redeemed, in like
shares of another Fund in the Pacific Horizon Family of Funds or in like shares
of any investment portfolio of Time Horizon Funds, within 90 days of your
redemption trade date without paying a sales load. Upon such a reinvestment, the
Funds' distributor will credit to your account any contingent deferred sales
charge imposed on any redeemed A Shares subject to the Large Purchase Exemption.
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.
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DIVIDEND AND DISTRIBUTION POLICIES
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Shareholders of the Blue Chip Fund are entitled to dividends arising from the
net investment income and net realized gains, if any, earned on investments in
the Master Portfolio which are allocable to that Fund. The Blue Chip and
Aggressive Growth Funds' net income is declared and paid as a dividend on a
quarterly and annual basis, respectively, 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 of the same class of shares of the Fund for which the dividend
was declared 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 A Fund Be Invested In
Other Funds?".
To elect to receive payment in cash, or to revoke such election, you must do so
in writing to the Transfer Agent, P.O. Box 80221, Los Angeles, California
90080-9909. The election or revocation will become effective with respect to
dividends paid after it is received by the Transfer Agent.
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SHAREHOLDER SERVICES
PACIFIC HORIZON FUNDS, INC. PROVIDES A VARIETY OF WAYS TO MAKE
MANAGING YOUR INVESTMENTS MORE CONVENIENT.
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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 FUNDS 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.
The contingent deferred sales charge with respect to A Shares subject to the
Large Purchase Exemption will not be charged on redemptions in connection with
minimum required distributions from an IRA due to a shareholder having reached
age 70- 1/2. For details, contact the Funds' 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 should consult their tax advisers.
Additionally, K Shares are available to businesses and other organizations that
participate in the Daily Advantage(R) Program sponsored by Bank of America and
to Qualified IRA Rollovers.
CAN I EXCHANGE MY INVESTMENT FROM ONE
FUND TO ANOTHER?
As a shareholder, you have the privilege of exchanging your shares for: like
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.
Specifically, A Shares may be exchanged for other A Shares and K Shares may be
exchanged for other K Shares. NO ADDITIONAL SALES LOAD WILL BE INCURRED WHEN
EXCHANGING A SHARES PURCHASED WITH A SALES LOAD FOR A SHARES OF ANOTHER LOAD
FUND OF THE COMPANY OR TIME HORIZON FUNDS.
Neither a contingent deferred sales load nor a front-end sales load will be
imposed if a shareholder who has entered a Fund under the Large Purchase
Exemption exchanges shares between Funds of the Company or Time Horizon Funds.
However, shares acquired in the exchange will remain subject to the contingent
deferred sales load discussed above. The contingent deferred sales load is
calculated as a percentage of the lesser of the current market value or the cost
of the shares being redeemed. This means that this charge will not be imposed
upon increases in net asset value above the initial purchase price or upon
reinvested dividends. In determining whether a contingent deferred sales charge
is applicable to a redemption of such shares, the calculation will be made in a
manner that results in the lowest possible rate. It will be assumed that the
redemption is made first of amounts representing shares acquired pursuant to the
reinvestment of dividends and distributions; then of amounts representing the
increase in net asset value of your holdings of shares above the total amount of
payments for the purchase of shares during the preceding 2 years; then of
amounts representing the cost of shares held beyond the applicable contingent
deferred sales charge period; and finally, of amounts representing the cost of
the shares held for the longest period of time.
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An investment in a 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 Funds' 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."
An exchange is considered a sale of shares of a Fund and the purchase of shares
of another Fund and may result in a capital gain or loss for federal income tax
purposes.
If you would like more information on making an exchange, please read the
Statement of Additional Information and consult your Service Organization or the
Funds' distributor.
The Funds reserve 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 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 caused by 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, including requesting certain personal
or account information to confirm the identity of the shareholder. 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.
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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 Funds
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 in a subsequent signature guaranteed
written request to the Transfer Agent. Purchases of additional shares
concurrently with withdrawals are ordinarily not advantageous because of each
Fund's sales load. Use of this Plan may also be disadvantageous for A Shares
subject to the Large Purchase Exemption due to the potential need to pay a
contingent deferred sales charge.
CAN MY DIVIDENDS FROM A
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
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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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THE BUSINESS OF THE FUNDS
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FUND MANAGEMENT
The business affairs of Pacific Horizon Funds, Inc. 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 Portfolios. 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, business
credit and thrift offices in major U.S. cities. In addition, it has branches,
corporate offices and representative offices in 36 countries.
In separate advisory agreements with Master Trust and the Company (collectively,
the "Advisory Agreements"), Bank of America has agreed to manage the Portfolios'
investments and to be responsible for, place orders for, and make decisions with
respect to, all purchases and sales of the Portfolios' securities. The advisory
agreement for the Master Portfolio also provides that Bank of America may: 1) 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 and 2) employ a sub-adviser provided that Bank of
America remains fully responsible to the Master Portfolio for the acts and
omissions of the sub-adviser.
Bank of America Illinois' Investment Advisors Division is responsible for the
day-to-day investment activities of the Master Portfolio. The investment
management team is headed by James Miller, Executive Vice President and Chief
Investment
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Officer of BofA Illinois (a wholly-owned subsidiary of Bank America
Corporation). 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.
Scott A. Billeadeau, Portfolio Manager, is primarily responsible for the
day-to-day investment activities of the Aggressive Growth Fund. Mr. Billeadeau
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 Agreements,
Bank of America is entitled to receive a fee at the annual rate of 0.75% and
0.60% of the Blue Chip and Aggressive Growth Funds' average daily net assets,
respectively. This fee with respect to the Master Portfolio 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
29, 1996, the Master Portfolio paid Bank of America advisory fees at an
effective annual rate of 0.20% of the Master Portfolio's average daily net
assets, and Bank of America waived a portion of its fee at an effective annual
rate of 0.55% of the Master Portfolio's average daily net assets. For the same
period, the Aggressive Growth Fund paid Bank of America advisory fees at an
effective annual rate of 0.60% of that Fund's average daily net assets.
In addition, Bank of America and its affiliates may be entitled to fees under
the Shareholder Services Plan, Distribution Plan, and Administrative and
Shareholder Services Plan as described under "Plan Payments," and may receive
fees charged directly to their accounts in connection with investments in shares
of the Funds.
ADMINISTRATOR
Concord Holding Corporation ("Concord") serves as Administrator of the Funds and
the Master Portfolio. Concord is an indirect, wholly owned subsidiary of The
BISYS Group, Inc. Its offices are located at 3435 Stelzer Road, Columbus, Ohio
43219-3035.
Under its administration agreements with the Company and the Master Portfolio,
Concord has agreed to: pay the costs of maintaining the offices of the Company
and the Master 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
Funds, interestholders of the Master Portfolio and the Securities and Exchange
Commission; prepare tax returns; maintain the registration or qualification of
each Fund's shares for sale under state securities laws; maintain books and
records of the Funds and the Master Portfolio; calculate the net asset value of
the Funds and the Master Portfolio; calculate the dividends and capital gains
distributions paid to shareholders; serve as dividend disbursing agent for the
Master Portfolio; and generally assist in all aspects of the operations of the
Funds and the Master Portfolio.
For its services as administrator, Concord is entitled to receive an
administration fee from the Blue Chip Fund at the annual rate of 0.15% of the
Fund's average daily net assets, an administration fee from the Master Portfolio
at the annual rate of 0.05% of such Portfolio's average daily net assets and an
administration fee from the Aggressive Growth Fund at the annual rate of 0.30%
of the Fund'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 29, 1996, Concord waived its entire fee as
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<PAGE> 257
administrator with respect to the Blue Chip Fund. For the same period, the
Master Portfolio paid administration fees at an effective annual rate of 0.01%
of the Master Portfolio's average daily net assets, and Concord waived a portion
of its fee with respect to the Master Portfolio at an effective annual rate of
0.19% of the Master Portfolio's average daily net assets. Additionally, Concord
reimbursed the Blue Chip Fund for a portion of its operating expenses incurred
during the fiscal year ended February 29, 1996. During the fiscal year ended
February 29, 1996, the Aggressive Growth Fund paid Concord administration fees
at an effective annual rate of 0.30% of that Fund's average daily net assets.
Pursuant to the authority granted in its administration agreements, Concord has
entered into agreements with PFPC, Inc. ("PFPC") (with respect to the Blue Chip
Fund and the Master Portfolio) and The Bank of New York ("BONY") (with respect
to the Aggressive Growth Fund) under which PFPC, and an off-shore affiliate of
PFPC, and BONY perform certain of the services listed above, e.g., calculating
the net asset value of the Funds and the Master Portfolio, calculating dividends
and capital gains distributions to shareholders, and maintaining the books and
records of the Funds and the Master Portfolio. The Funds and the Master
Portfolio bear all fees and expenses charged by PFPC for these services, and the
Aggressive Growth Fund bears all fees and expenses charged by BONY for these
services.
DISTRIBUTOR
Each Fund's shares are sold on a continuous basis by Concord Financial Group,
Inc. (the "Distributor"). The Distributor is an indirect, wholly owned
subsidiary of The BISYS Group, Inc. and is located at 3435 Stelzer Road,
Columbus, Ohio 43219-3035.
CUSTODIAN AND TRANSFER AGENT
PNC Bank, National Association, Broad and Chestnut Streets, Philadelphia,
Pennsylvania, 19101 serves as the Custodian of the Blue Chip Fund and the Master
Portfolio. The Bank of New York, 90 Washington Street, New York, New York 10286,
serves as the Custodian of the Aggressive Growth Fund. BISYS Fund Services, Inc.
is the transfer and dividend disbursing agent for each of the Funds and is
located at 3435 Stelzer Road, Columbus, Ohio 43219-3035.
FEE WAIVERS
Except as noted in this Prospectus, the service contractors bear all expenses in
connection with the performance of their services, and the Funds and Master
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 each Fund's
fiscal year, Bank of America, Concord and/or the Distributor may prospectively
choose not to receive fee payments and/or may assume certain expenses of the
Funds or the Master Portfolio as a result of competitive pressures and in order
to preserve and protect the business and reputation of Concord and Bank of
America. However, the service providers retain the ability to discontinue such
fee waivers and/or expense reimbursements at any time.
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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 FUNDS.
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As with any investment, you should consider the tax implications of an
investment in the Funds. The following is only a brief summary of some of the
important tax considerations generally affecting the Funds and their
shareholders. Consult your tax adviser with specific reference to your own tax
situation.
FEDERAL TAXES
During its most recent taxable year each Fund qualified separately as a
"regulated investment company" under the Internal Revenue Code of 1986, as
amended (the "Code"), and each Fund intends that it will so qualify in future
years as long as such qualification is in the best interest of its shareholders.
As a result of this qualification, each 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 Master Portfolio will not be subject to
federal income taxes. The Master Portfolio intends to qualify as a partnership
(or other pass-through entity) for federal income tax purposes. As such, the
Master Portfolio is not subject to tax, and the Blue Chip Fund will be treated
for federal income tax purposes as recognizing its pro rata share of the Master
Portfolio's income and deductions and owning its pro rata share of the Master
Portfolio's assets. The Blue Chip Fund's status as a regulated investment
company is dependent on, among other things, the Master 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) derived from
ordinary income and/or the excess of net short-term capital gains 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 distribution you receive comprised of the excess of net long-term capital
gains over net short-term capital losses ("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 distribution paid to you by a 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. If you hold Fund 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 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. How-
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ever, 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 for the purpose of
calculating your gain or loss from the exchange. It may be included in the tax
basis of the new shares subject to this same limitation.
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.
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MEASURING PERFORMANCE
EACH 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.
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Average annual total return reflects the average annual percentage change in
value of an investment in a Fund over the period being measured, while aggregate
total return reflects the total percentage change in value over the period being
measured.
Periodically, a 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 assume dividends and capital gains distributions made
by a Fund during the period are reinvested in Fund shares and include the
maximum front-end sales charge for A Shares. Each 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.
Each 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, a Fund's total
return may be compared 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. Each
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 a 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 a 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 a Fund (e.g. account maintenance fees, compensating balance requirements or
fees based upon account transactions, assets or income).
36
<PAGE> 260
- --------------------------------------------------------------------------------
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: 400 million shares of
Class D Common Stock, 600 million shares of Class D -- Special Series 3 Common
Stock and 50 million shares of Class D -- Special Series 5 Common Stock
representing interests in the Aggressive Growth Fund; 40 million shares of Class
N Common Stock, 60 million shares of Class N -- Special Series 3 Common Stock
and 50 million shares of Class N -- Special Series 5 Common Stock, representing
interests in the Blue Chip Fund as well as additional classes of shares
representing interests in other investment portfolios of the Company. Class D
and Class N Common Stock are the "A" Shares, Class D -- Special Series 3 Common
Stock and Class N -- Special Series 3 Common Stock are the "B" Shares and Class
D -- Special Series 5 Common Stock and Class N -- Special Series 5 Common Stock
are the "K" Shares. As of the date of this Prospectus, B Shares have not been
offered to the public. The Board of Directors may similarly classify or
reclassify any class of shares (including unissued Class D Common Stock, Class
D -- Special Series 3 Common Stock, Class D -- Special Series 5 Common Stock,
Class N Common Stock, Class N -- Special Series 3 Common Stock or Class
N -- Special Series 5 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 Funds are entitled to participate in the
dividends and distributions declared by the Board of Directors and in the net
distributable assets of the particular Fund upon 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). Only A Shares will vote on
matters relating solely to A Shares and K Shares will vote on matters relating
solely to K Shares. The Funds do 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 Funds 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.
37
<PAGE> 261
- --------------------------------------------------------------------------------
PLAN PAYMENTS THE COMPANY HAS ADOPTED A SHAREHOLDER SERVICES
PLAN (THE "PLAN") FOR A SHARES AND
A DISTRIBUTION PLAN AND AN ADMINISTRATIVE AND
SHAREHOLDER SERVICES PLAN FOR K SHARES.
- --------------------------------------------------------------------------------
The Company has adopted a Shareholder Services Plan for A Shares, under which
the A Shares of each Fund reimburse the Distributor for shareholder servicing
fees the Distributor pays to Service Organizations. The Company has adopted a
Distribution Plan pursuant to Rule 12b-1 under the 1940 Act under which the K
Shares of a Fund reimburse the Distributor for services rendered and costs
incurred in connection with distribution of the K Shares. The Company has also
adopted an Administrative and Shareholder Services Plan for K Shares, under
which K Shares of the Fund reimburse the Distributor for administrative and
shareholder servicing fees the Distributor pays to Service Organizations.
SHAREHOLDER SERVICES PLAN
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 a Fund for shareholder servicing expenses may not
exceed 0.25% (annualized) of the average daily net assets of such Fund's A
Shares. 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 29, 1996, the Distributor waived all payments under
the Plan with respect to the Blue Chip Fund. For the same period, the Aggressive
Growth Fund made payments under the Plan at an effective annual rate of 0.25% of
the Fund's average daily 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 a Fund with respect to
the amount "carried forward."
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.
DISTRIBUTION PLAN AND ADMINISTRATIVE AND SHAREHOLDER SERVICES PLAN
Under the Distribution Plan, each Fund pays the Distributor for distribution
expenses primarily intended to result in the sale of such Fund's K Shares. Such
distribution expenses include expenses incurred in connection with advertising
and marketing each Fund's K Shares; payments to Service Organizations for
assistance in connec-
38
<PAGE> 262
tion with the distribution of K Shares; and expenses incurred in connection with
preparing, printing and distributing prospectuses for the Funds (except those
used for regulatory purposes, for solicitation or distribution to existing or
potential A shareholders, or for distribution to existing K shareholders of the
Funds) and in implementing and operating the Distribution Plan.
Shareholder servicing expenses under the Administrative and Shareholder Services
Plan include, but are not limited to, expenses incurred in connection with
shareholder services provided by the Distributor and payments to Service
Organizations for the provision of support services with respect to the
beneficial owners of K Shares, such as assisting clients in processing exchange
and redemption requests and in changing dividend options and account
descriptions and responding to client inquiries concerning their investments.
Administrative servicing expenses under the Administrative and Shareholder
Services Plan include, but are not limited to, expenses incurred in connection
with administrative services provided by the Distributor and payments to Service
Organizations for the provision of administrative services to beneficial owners
of K Shares, such as establishing and maintaining accounts and records relating
to their clients who invest in K Shares, providing information to the Funds
necessary for accounting or sub-accounting, and providing statements
periodically to clients showing their position in K Shares.
Under the Distribution Plan, payments by a Fund for distribution expenses may
not exceed 0.75% (annualized), of the average daily net assets of such Fund's K
Shares. Under the Administrative and Shareholder Services Plan, payments for
shareholder servicing expenses may not exceed 0.25% (annualized), of the average
daily net assets of such Fund's K Shares. Under the Administrative and
Shareholder Services Plan, payments for administrative servicing expenses may
not exceed 0.75% (annualized) of the average daily net assets of a Fund's K
Shares. The total of all 12b-1 fees, administrative services fees and
shareholder services fees may not exceed, in the aggregate, the annual rate of
1.00% of the average daily net assets of a Fund's K Shares. These amounts may be
reduced pursuant to undertakings by the Distributor. Payments for distribution
expenses under the Distribution Plan are subject to Rule 12b-1 under the 1940
Act. During the fiscal year ended February 29, 1996, no K Shares were offered by
the Company.
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.
39
<PAGE> 263
GRW-0001
- ----------------------------
PACIFIC HORIZON MUTUAL FUNDS
- ----------------------------
BLUE CHIP FUND
AGGRESSIVE GROWTH
FUND
PROSPECTUS
July 1, 1996
NOT FDIC INSURED
<PAGE> 264
PROSPECTUS
SEAFIRST RETIREMENT FUNDS
Seafirst Retirement Funds (the "Trust") is a diversified, open-end
management investment company that offers Funds for investment by Eligible
Retirement Accounts. The Trust currently offers three Funds: the Bond, Blue Chip
and Asset Allocation Funds (collectively, the "Funds"), each with a different
investment objective, for the investment of retirement funds held in Eligible
Retirement Accounts. "Eligible Retirement Accounts" include (a) individual
retirement accounts for which Seattle-First National Bank ("Seafirst") or one of
its affiliates serves as trustee or custodian, and (b) qualified pension or
profit sharing trusts, including corporate pension or profit sharing trusts and
pension or profit sharing trusts benefiting one or more self-employed
individuals. See "How to Invest in the Trust," page 15.
The Bond Fund is a diversified mutual fund whose investment objective is to
obtain interest income and capital appreciation. The Bond Fund seeks its
investment objective by investing in investment grade intermediate and
longer-term bonds, including corporate and governmental fixed-income obligations
and mortgage-backed securities.
The Blue Chip Fund is a diversified mutual fund whose investment objective
is long-term capital appreciation through investment in blue chip stocks.
The Asset Allocation Fund is a diversified mutual fund whose investment
objective is to obtain long-term growth from capital appreciation and dividend
and interest income. The Asset Allocation Fund seeks to achieve its investment
objective by actively allocating investments among the three major asset
categories: bonds, equity securities and cash equivalents.
UNLIKE MOST OTHER INVESTMENT COMPANIES WHICH INVEST DIRECTLY IN PORTFOLIO
SECURITIES, EACH FUND SEEKS TO ACHIEVE ITS INVESTMENT OBJECTIVE BY INVESTING ALL
OF ITS INVESTABLE ASSETS IN A CORRESPONDING PORTFOLIO OF AN OPEN-END, MANAGEMENT
INVESTMENT COMPANY (THE "MASTER TRUST") HAVING THE SAME INVESTMENT OBJECTIVE AS
THAT OF THE FUND. EACH FUND WILL PURCHASE SHARES OF THE MASTER TRUST'S
CORRESPONDING PORTFOLIO AT NET ASSET VALUE. THE NET ASSET VALUE OF EACH FUND
WILL RESPOND TO INCREASES AND DECREASES IN THE VALUE OF THE CORRESPONDING
PORTFOLIO'S SECURITIES. INVESTORS SHOULD CAREFULLY CONSIDER THIS INVESTMENT
APPROACH. SEE "INVESTMENT OBJECTIVES AND POLICIES--SPECIAL CONSIDERATIONS" ON
PAGE 10 FOR ADDITIONAL INFORMATION REGARDING THIS STRUCTURE.
Bank of America National Trust and Savings Association ("Bank of America" or
the "investment adviser"), San Francisco, California, serves as the investment
adviser to the Master Trust.
This Prospectus describes concisely the information about the Funds and the
Trust that you should know before investing. Please read it carefully and retain
it for future reference.
More information about the Funds is contained in a Statement of Additional
Information that has been filed with the Securities and Exchange Commission. To
obtain a free copy call 800-323-9919. The Statement of Additional Information,
as it may be revised from time to time, is dated July 1, 1996 and is
incorporated by reference into this Prospectus.
SHARES OF THE FUNDS ARE NOT BANK DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED,
ENDORSED OR OTHERWISE SUPPORTED BY, BANK OF AMERICA, SEAFIRST OR ANY OF THEIR
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 FUNDS INVOLVES INVESTMENT RISK, INCLUDING THE POSSIBLE LOSS OF
PRINCIPAL AMOUNT INVESTED.
Shares of the Funds are sold without a sales charge and are available only
to Eligible Retirement Accounts.
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.
JULY 1, 1996
<PAGE> 265
TABLE OF CONTENTS
<TABLE>
<S> <C>
FUND EXPENSES................................................................. 1
FINANCIAL HIGHLIGHTS.......................................................... 3
THE TRUST..................................................................... 7
INVESTMENT OBJECTIVES AND POLICIES............................................ 7
The Bond Fund............................................................... 7
The Blue Chip Fund.......................................................... 9
The Asset Allocation Fund................................................... 9
Special Considerations...................................................... 10
Other Investment Practices.................................................. 11
INVESTMENT RESTRICTIONS....................................................... 14
HOW TO INVEST IN THE TRUST.................................................... 15
Eligibility for Admission................................................... 15
Establishing an IRA, SEP or Eligible Pension or Profit Sharing Trust........ 15
Investing in the Trust...................................................... 15
Reinvestment of Distributions............................................... 16
REDEMPTIONS................................................................... 16
EXCHANGES..................................................................... 16
VALUATION OF SHARES........................................................... 17
PERFORMANCE................................................................... 17
ADMINISTRATION OF THE TRUST................................................... 18
The Board of Trustees....................................................... 18
Administration Services..................................................... 18
Shareholder Service Plan.................................................... 19
Expenses of the Trust....................................................... 19
THE MASTER TRUST.............................................................. 20
The Investment Adviser...................................................... 20
The Master Trust Administration Agreement................................... 21
Custodian................................................................... 22
Expenses of the Master Trust................................................ 22
TAX INFORMATION............................................................... 22
OTHER INFORMATION............................................................. 22
Description of Shares and Voting Rights..................................... 22
Relationship to the Master Trust............................................ 23
</TABLE>
NO PERSON HAS BEEN AUTHORIZED IN CONNECTION WITH THE OFFERING MADE HEREBY
TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE
CONTAINED IN THIS PROSPECTUS AND THE STATEMENT OF ADDITIONAL INFORMATION, AND,
IF GIVEN OR MADE, SUCH REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A
SOLICITATION OF AN OFFER TO BUY, ANY SECURITIES OTHER THAN THE SECURITIES TO
WHICH IT RELATES, OR AN OFFER TO OR A SOLICITATION OF ANY PERSON IN ANY
JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION WOULD BE UNLAWFUL.
<PAGE> 266
FUND EXPENSES
The following is a table of shareholder transaction expenses and operating
expenses (including the operating expenses of the Master Trust which are
allocable to the Funds) expected to be incurred during the current fiscal year.
Actual expenses may vary. This information is provided to assist investors in
understanding the various costs and expenses that an investor in the Funds will
bear directly or indirectly. For more complete descriptions of these costs and
expenses, see "Administration of the Trust" in this Prospectus and the financial
statements incorporated by reference in the Statement of Additional Information.
<TABLE>
<CAPTION>
BLUE ASSET
BOND CHIP ALLOCATION
FUND FUND FUND
---- ---- ----------
<S> <C> <C> <C>
Shareholder transaction expenses(a):
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
Exchange fee......................................................... None None None
Annual fund operating expenses (as a percentage of average net assets):
Investment advisory fees(b) (after fee waivers)...................... None 0.58% 0.33%
12b-l fees........................................................... None None None
Other expenses (after reimbursement)(b)(c)........................... 0.95% 0.37% 0.62%
---- ---- ----------
Total fund operating expenses (after reimbursement).................. 0.95% 0.95% 0.95%
==== ==== =======
Example
You would pay the following expenses in each of the Funds on a $1,000
investment, assuming (1) a 5% annual return, and (2) redemption at the
end of each time period:
1 year.............................................................. $ 10 $ 10 $ 10
3 years............................................................. $ 30 $ 30 $ 30
5 years............................................................. $ 53 $ 53 $ 53
10 years............................................................. $117 $117 $117
</TABLE>
(a) Individual Retirement Accounts including those that do not invest in
the Funds, are charged certain fees: each pays a $15 annual maintenance
fee; and there is currently a $7 annual maintenance fee for a spousal
retirement account. Other Eligible Retirement Accounts may be charged
fees which vary according to the plan's sponsor.
(b) Bank of America is entitled to investment advisory fees from each of
the Bond, Blue Chip and Asset Allocation Portfolios at respective
annual rates of .45%, .75% and .55% of the average daily net assets of
such Portfolios. Other expenses include administration fees at the
Master Trust level, which Concord is entitled to receive at the annual
rate of 0.05% of each Portfolio's average daily net assets, and an
administration and transfer agent fee payable to Seafirst at the Fund
level at an annual rate of 0.29% of the average daily net assets.
(c) Seafirst has agreed to reimburse each Fund in such amounts as are
necessary to limit the expenses of the Fund in any year, including its
pro rata share of the expenses incurred by the Portfolio in which it
invests (but excluding interest, brokerage commissions, litigation
expenses and certain other items), to .95% of the average daily net
assets of the Fund at the current level of assets of the Portfolio in
which it invests. For the current fiscal year, other expenses absent
such reimbursements and waivers would be estimated at
1
<PAGE> 267
1.50%, 1.52% and 1.35% for the Bond, Blue Chip and Asset Allocation
Funds, respectively. See "Administration of the Trust--Expenses of the
Trust."
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.
The Board of Trustees believes that the aggregate per share expenses of
each Fund and the corresponding portfolios of the Master Trust in which each
Fund's assets are invested will be less than or approximately equal to the
expenses which the particular Fund would incur if the Trust 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 its corresponding portfolio.
Further, the Board believes that the shareholders of the Trust may participate
in the ownership of a larger portfolio of securities than could be achieved
directly by the Trust.
2
<PAGE> 268
FINANCIAL HIGHLIGHTS
The Funds commenced operations in March 1988 as separate investment
portfolios (the "Predecessor Funds") of Collective Investment Trust for Seafirst
Retirement Accounts, a collective investment trust established under the laws of
the State of Washington. On December 6, 1993, the Predecessor Funds were
reorganized as Funds of the Trust.
The tables below show certain information concerning the investment results
for the Funds for the periods indicated. The information for the periods ended
February 29, 1996 and February 28, 1995 and 1994 have been audited by Price
Waterhouse LLP, the Trust's independent accountants, whose unqualified report on
the financial statements containing such information is incorporated by
reference into the Statement of Additional Information.
The financial statements for the period January 1, 1993 through December 5,
1993, for the years ended December 31, 1992, 1991, 1990 and 1989, and for the
period from March 9, 1988 (commencement of operations) to December 31, 1988,
were audited by other independent accountants whose report dated December 30,
1993 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 Funds 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 Trust
free of charge by calling Retirement Services at 1-800-323-9919.
3
<PAGE> 269
BOND FUND
<TABLE>
<CAPTION>
FOR THE PERIOD FOR THE PERIOD YEARS ENDED
FOR THE YEAR FOR THE YEAR DEC. 6, 1993 JAN. 1, 1993 DECEMBER 31,
ENDED ENDED THROUGH THROUGH -------------------
FEB. 29, 1996 FEB. 28, 1995 FEB. 28, 1994 DEC. 5, 1993(1) 1992(1) 1991(1)
------------- ------------- -------------- --------------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of
period....................... $ 10.48 $ 11.00 $ 11.14 $ 10.99 $11.01 $10.40
------------- ------------- ------- ------- ------- -------
Income from investment
operations:
Net investment income.......... 0.64 0.61 0.12 0.58 0.67 0.72
Net realized and unrealized
gain (loss) on securities.... 0.39 (0.46) (0.14) 0.15 (0.02 ) 0.61
------------- ------------- ------- ------- ------- -------
Total income (loss) from
investment operations........ 1.03 0.15 (0.02) 0.73 0.65 1.33
------------- ------------- ------- ------- ------- -------
Less dividends and
distributions:
Dividends to shareholders
from net investment
income..................... (0.64) (0.61) (0.12) (0.58) (0.67 ) (0.72)
------------- ------------- ------- ------- ------- -------
Distributions to shareholders
from net realized gains...... -- (0.06) -- -- -- --
------------- ------------- ------- ------- ------- -------
Total dividends and
distributions................ (0.64) (0.67) (0.12) (0.58) (0.67 ) (0.72)
------------- ------------- ------- ------- ------- -------
Net asset value per share, end
of period.................... $ 10.87 $ 10.48 $ 11.00 $ 11.14 $10.99 $11.01
============ ============ ============= ============== ======= =======
Total Return................... 9.90% 1.57% (0.23)%(3) 6.80%(3) 6.04 % 13.28%
Ratios/supplemental data:
Net assets, end of period
(000)........................ $47,062 $55,791 $ 76,773 $82,970 $73,826 $53,469
Ratio of expenses to average
net assets................... 0.95(5) 0.83%(5) 0.95%(4,5) 0.95%(4) 0.95 % 0.66%
Ratio of net investment income
to average net assets........ 5.74%(5) 5.64%(5) 4.38%(4,5) 5.60%(4) 6.15 % 7.13%
Portfolio turnover rate........ N/A N/A N/A 95% 154 % 197%
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------
1990(1) 1989(1) 1988(1,2)
------- ------- ---------
<S> <C> <C> <C>
Net asset value, beginning of
period....................... $10.30 $ 9.98 $ 10.00
------- ------- ---------
Income from investment
operations:
Net investment income.......... 0.82 0.86 0.55
Net realized and unrealized
gain (loss) on securities.... 0.10 0.32 (0.02)
------- ------- ---------
Total income (loss) from
investment operations........ 0.92 1.18 0.53
------- ------- ---------
Less dividends and
distributions:
Dividends to shareholders
from net investment
income..................... (0.82 ) (0.86 ) (0.55)
------- ------- ---------
Distributions to shareholders
from net realized gains...... -- -- --
------- ------- ---------
Total dividends and
distributions................ (0.82 ) (0.86 ) (0.55)
------- ------- ---------
Net asset value per share, end
of period.................... $10.40 $10.30 $ 9.98
======= ======= =========
Total Return................... 9.43 % 12.23 % 6.49%(3)
Ratios/supplemental data:
Net assets, end of period
(000)........................ $9,445 $2,653 $ 1,318
Ratio of expenses to average
net assets................... 0.00 % 0.00 % 0.00%
Ratio of net investment income
to average net assets........ 8.31 % 8.61 % 7.06%(4)
Portfolio turnover rate........ 113 % 96 % 205%(4)
</TABLE>
- ---------------
(1) Represents activity of the Fund prior to the reorganization. Since the
operation and organization of the Fund was changed upon reorganization, this
activity may not be reflective of activity after the reorganization.
(2) From March 9, 1988 (commencement of operations) to December 31, 1988.
(3) For the period indicated, not annualized.
(4) Annualized.
(5) 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 0.61%, 0.58% and 0.84% (annualized) for the periods
ended February 29, 1996, February 28, 1995 and February 28, 1994,
respectively.
N/A--Not applicable.
4
<PAGE> 270
BLUE CHIP FUND
<TABLE>
<CAPTION>
FOR THE PERIOD FOR THE PERIOD YEARS ENDED
FOR THE YEAR FOR THE YEAR DEC. 6, 1993 JAN. 1, 1993 DECEMBER 31,
ENDED ENDED THROUGH THROUGH -------------------
FEB. 29, 1996 FEB. 28, 1995 FEB. 28, 1994 DEC. 5, 1993(1) 1992(1) 1991(1)
------------- ------------- -------------- --------------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period.... $ 17.35 $ 17.75 $ 17.34 $ 15.65 $15.17 $12.68
------------- ------------- -------------- --------------- ------- -------
Income from investment
operations:
Net investment income.... 0.31 0.28 0.05 0.29 0.30 0.33
Net realized and
unrealized gain (loss)
on securities.......... 5.35 0.88 0.37 1.69 0.48 2.49
------------- ------------- -------------- --------------- ------- -------
Total income (loss) from
investment
operations............. 5.66 1.16 0.42 1.98 0.78 2.82
------------- ------------- -------------- --------------- ------- -------
Less dividends and
distributions:
Dividends to
shareholders from net
investment income.... (0.31) (0.26) (0.01) (0.29) (0.30 ) (0.33)
------------- ------------- -------------- --------------- ------- -------
Distributions to
shareholders from net
realized gains......... (1.61) (1.30) -- -- -- --
------------- ------------- -------------- --------------- ------- -------
Total dividends and
distributions.......... (1.92) (1.56) (0.01) (0.29) (0.30 ) (0.33)
------------- ------------- -------------- --------------- ------- -------
Net asset value per
share, end of period... $ 21.09 $ 17.35 $ 17.75 $ 17.34 $15.65 $15.17
============ ============ ============= ============== ======= =======
Total Return............. 33.37% 6.95% 2.42%(3) 12.74%(3) 5.16 % 22.52%
Ratios/supplemental data:
Net assets, end of period
(000).................. $ 206,220 $ 151,267 $132,916 $ 123,257 $96,206 $49,838
Ratio of expenses to
average net assets..... 0.95%(5) 0.82%(5) 0.95%(4,5) 0.95%(4) 0.95 % 0.95%
Ratio of net investment
income to average net
assets................. 1.53%(5) 1.64%(5) 1.28%(4,5) 1.91%(4) 2.08 % 2.37%
Portfolio turnover
rate................... N/A N/A N/A 4% 27 % 16%
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------
1990(1) 1989(1) 1988(1,2)
------- ------- -------
<S> <C> <C> <C>
Net asset value,
beginning of period.... $13.35 $10.68 $10.00
------- ------- -------
Income from investment
operations:
Net investment income.... 0.44 0.51 0.36
Net realized and
unrealized gain (loss)
on securities.......... (0.67 ) 2.67 0.68
------- ------- -------
Total income (loss) from
investment
operations............. (0.23 ) 3.18 1.04
------- ------- -------
Less dividends and
distributions:
Dividends to
shareholders from net
investment income.... (0.44 ) (0.51 ) (0.36 )
------- ------- -------
Distributions to
shareholders from net
realized gains......... -- -- --
------- ------- -------
Total dividends and
distributions.......... (0.44 ) (0.51 ) (0.36 )
------- ------- -------
Net asset value per
share, end of period... $12.68 $13.35 $10.68
======= ======= =======
Total Return............. (1.79 %) 30.25 % 10.61 %(3)
Ratios/supplemental data:
Net assets, end of period
(000).................. $24,727 $8,782 $ 663
Ratio of expenses to
average net assets..... 0.57 % 0.00 % 0.00 %
Ratio of net investment
income to average net
assets................. 3.40 % 4.29 % 4.70 %(4)
Portfolio turnover
rate................... 22 % 38 % 41 %(4)
</TABLE>
- ---------------
(1) Represents activity of the Fund prior to the reorganization. Since the
operation and organization of the Fund was changed upon reorganization, this
activity may not be reflective of activity after the reorganization.
(2) From March 9, 1988 (commencement of operations) to December 31, 1988.
(3) For the period indicated, not annualized.
(4) Annualized.
(5) 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 0.59%, 0.80% and 0.93% (annualized) for the periods
ended February 29, 1996, February 28, 1995 and February 28, 1994,
respectively.
N/A--Not applicable.
5
<PAGE> 271
ASSET ALLOCATION FUND
<TABLE>
<CAPTION>
FOR THE PERIOD FOR THE PERIOD YEARS ENDED DECEMBER
FOR THE YEAR FOR THE YEAR DEC. 6, 1993 JAN. 1, 1993 31,
ENDED ENDED THROUGH THROUGH --------------------
FEB. 29, 1996 FEB. 28, 1995 FEB. 28, 1994 DEC. 5, 1993(1) 1992(1) 1991(1)
------------- ------------- -------------- --------------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of
period....................... $ 13.48 $ 13.94 $ 13.86 $ 12.99 $ 12.75 $11.30
------------- ------------- -------------- --------------- -------- -------
Income from investment
operations:
Net investment income.......... 0.47 0.46 0.05 0.43 0.46 0.56
Net realized and unrealized
gain (loss) on securities.... 2.49 0.12 0.08 0.87 0.24 1.45
------------- ------------- -------------- --------------- -------- -------
Total income from investment
operations................... 2.96 0.58 0.13 1.30 0.70 2.01
------------- ------------- -------------- --------------- -------- -------
Less dividends and
distributions:
Dividends to shareholders
from net investment
income..................... (0.47) (0.46) (0.05) (0.43) (0.46) (0.56)
------------- ------------- -------------- --------------- -------- -------
Distributions to shareholders
from net realized gains...... (1.01) (0.58) -- -- -- --
------------- ------------- -------------- --------------- -------- -------
Total dividends and
distributions................ (1.48) (1.04) (0.05) (0.43) (0.46) (0.56)
------------- ------------- -------------- --------------- -------- -------
Net asset value per share, end
of period.................... $ 14.96 $ 13.48 $ 13.94 $ 13.86 $ 12.99 $12.75
============ ============ ============= ============== ======== =======
Total Return................... 22.44% 4.49% 0.94%(3) 10.15%(3) 5.62% 18.11%
Ratios/supplemental data:
Net assets, end of period
(000)........................ $ 158,485 $ 145,132 $156,955 $ 149,719 $106,822 $47,825
Ratio of expenses to average
net assets................... 0.94%(5) 0.78%(5) 0.95%(4,5) 0.95%(4) 0.95% 0.95%
Ratio of net investment income
to average net assets........ 3.19%(5) 3.40%(5) 2.64%(4,5) 3.47%(4) 3.68% 4.72%
Portfolio turnover rate........ N/A N/A N/A 79% 171% 124%
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------
1990(1) 1989(1) 1988(1,2)
------- ------- -------
<S> <C> <C> <C>
Net asset value, beginning of
period....................... $11.47 $10.31 $10.00
------- ------- -------
Income from investment
operations:
Net investment income.......... 0.62 0.74 0.50
Net realized and unrealized
gain (loss) on securities.... (0.17 ) 1.16 0.31
------- ------- -------
Total income from investment
operations................... 0.45 1.90 0.81
------- ------- -------
Less dividends and
distributions:
Dividends to shareholders
from net investment
income..................... (0.62 ) (0.74 ) (0.50 )
------- ------- -------
Distributions to shareholders
from net realized gains...... -- -- --
------- ------- -------
Total dividends and
distributions................ (0.62 ) (0.74 ) (0.50 )
------- ------- -------
Net asset value per share, end
of period.................... $11.30 $11.47 $10.31
======= ======= =======
Total Return................... 4.21 % 18.94 % 8.23 %(3)
Ratios/supplemental data:
Net assets, end of period
(000)........................ $23,608 $8,013 $1,210
Ratio of expenses to average
net assets................... 0.58 % 0.00 % 0.00 %
Ratio of net investment income
to average net assets........ 5.58 % 7.07 % 6.94 %(4)
Portfolio turnover rate........ 121 % 71 % 23 %(4)
</TABLE>
- ---------------
(1) Represents activity of the Fund prior to the reorganization. Since the
operation and organization of the Fund was changed upon reorganization, this
activity may not be reflective of activity after the reorganization.
(2) From March 9, 1988 (commencement of operations) to December 31, 1988.
(3) For the period indicated, not annualized.
(4) Annualized.
(5) 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 0.48%, 0.60 and 0.69% (annualized) for the periods ended February
29, 1996, February 28, 1995 and February 28, 1994, respectively.
N/A--Not applicable.
6
<PAGE> 272
THE TRUST
The Trust is a business trust established under the laws of the State of
Delaware under a Declaration of Trust dated January 28, 1993. It is a
diversified, open-end management investment company registered with the
Securities and Exchange Commission. Only Eligible Retirement Accounts can invest
in the Trust. An individual for whose benefit an Eligible Retirement Account is
maintained, or who may be entitled to receive benefits from an Eligible
Retirement Account, is referred to as a "Participant."
INVESTMENT OBJECTIVES AND POLICIES
The Trust offers three Funds, each with a different investment objective,
for investment of retirement funds held in Eligible Retirement Accounts. An
individual establishing an Eligible Retirement Account may select one or more
Funds and may transfer retirement funds among the Funds. Each Fund is
represented by a separate series of shares of beneficial interest in the Trust.
The Funds seek to achieve their respective investment objectives by
investing all of their assets in corresponding portfolios of Master Investment
Trust, Series I (the "Master Trust"), an open-end management investment company
for which Bank of America acts as investment adviser. The portfolios have the
same investment objectives as the Funds and invest their assets in the portfolio
securities described below. There can be no assurance that the investment
objective of any Fund can be attained. The net asset value per share of the
Funds will fluctuate.
THE BOND FUND
The investment objective of the Bond Fund is to obtain interest income and
capital appreciation through investment 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. Assets of the Bond Fund are invested in the Investment Grade Bond
Portfolio of the Master Trust (the "Bond Portfolio"), which has the same
investment objective as the Bond Fund. Under normal circumstances, at least 65%
of the Bond Portfolio's net assets will be invested in bonds.
Investment grade bonds are bonds that are rated within the four highest
ratings 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"), Fitch Investors Service, Inc. ("Fitch") or Duff & Phelps Credit Rating
Co. ("Duff & Phelps") or Baa or better by Moody's Investors Service, Inc.
("Moody's"). (A description of applicable ratings is attached to the Statement
of Additional Information as Appendix A.) While bonds rated BBB or Baa 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 Bond Portfolio may
invest. Corporate Bonds will be diversified by investment in bonds issued by
different companies in different industries.
Under normal market and interest rate conditions, the investment adviser
expects that the Bond Portfolio's average portfolio duration generally will be
approximately the same as the Lehman Brothers Intermediate Government/Corporate
Bond Index. This means that the Bond Fund's, net asset value fluctuation is
expected to be similar to the price fluctuation of the Lehman Brothers
Intermediate Government/Corporate Bond Index. Unlike maturity which indicates
when the security repays principal, "duration" incorporates the cash flows of
all interest and principal payments and the proceeds from calls and redemptions
over the life of the security. These payments
7
<PAGE> 273
are multiplied by the number of years over which they are received to produce a
value that is expressed in years (i.e., duration).
Mortgage-backed securities, such as Government National Mortgage
Association ("GNMA"), Federal National Mortgage Association ("FNMA") and Federal
Home Loan Mortgage Corporation ("FHLMAC") 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 Bond 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 of principal 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.
The Bond Portfolio may invest in GNMA Certificates. These 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 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 actual yield on the Bond Portfolio's
investments, 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 to 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.
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 Bond Portfolio will purchase GNMA Certificates known as
"modified pass-through" certificates, on which timely payment of principal and
interest is guaranteed. The Bond Portfolio 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.
The Bond Portfolio may also invest, from time to time, in obligations
issued by state and local governmental issuers ("Municipal Securities"). The
purchase of such 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 Bond Portfolio are "general obligation" securities and "revenue"
securities. General obligation securities are secured by the issuer's pledge of
its
8
<PAGE> 274
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 Bond 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 Bond 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 Bond Portfolio and capital appreciation the secondary
basis. The Bond Portfolio will attempt to achieve capital appreciation by
moderate market timing in response to anticipated interest rate changes. The
Bond 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 Bond 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 net assets of the Bond Portfolio may be held in
cash equivalents as a temporary defensive strategy. To the extent that the Bond
Portfolio invests in cash equivalents, 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 BLUE CHIP FUND
The investment objective of the Blue Chip Fund is long-term capital
appreciation through investment in blue chip stocks. Assets of the Blue Chip
Fund are invested in the Blue Chip Portfolio of the Master Trust, which has the
same investment objective as the Blue Chip Fund. The Blue Chip 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 &
Poor's 500 Index. The Blue Chip Portfolio will hold approximately 100 stocks.
The Master Trust expects that under normal market conditions at least 80% of the
Blue Chip Portfolio's net assets will be invested in blue chip stocks and the
other 20% may be invested in cash equivalent securities of the type permitted to
be held by the Bond Portfolio (other than asset backed securities). The Blue
Chip Portfolio may make other investments as described more fully below under
"Other Investment Practices."
THE ASSET ALLOCATION FUND
The investment objective of the Asset Allocation Fund is to obtain
long-term growth from capital appreciation and dividend and interest income.
Assets of the Asset Allocation Fund are invested in the Asset Allocation
Portfolio of the Master Trust, which has the same investment objective as the
Asset Allocation Fund. The Asset Allocation Portfolio seeks to achieve its
objective through a balanced approach to investment using bonds, equity
securities and cash equivalents.
9
<PAGE> 275
Investments in equity securities will generally be limited to common stocks
of the same type in which the Blue Chip Portfolio invests. Bonds acquired by the
Asset Allocation Portfolio will be the same type of investment grade corporate
and governmental obligations, mortgage-backed securities and Municipal
Securities acquired by the Bond Portfolio. Unrated securities will be purchased
only if Bank of America determines they are of comparable quality to the rated
securities in which the Asset Allocation Portfolio may invest. Cash equivalents
are short-term, interest bearing instruments of the type permitted to be held by
the Bond Portfolio. Under normal market conditions at least 25% of the Asset
Allocation Portfolio's total assets will be invested in fixed-income senior
securities and no more than 35% of the Asset Allocation Portfolio's net assets
will be invested in mortgaged-backed securities. The Asset Allocation Portfolio
may make other investments as described more fully below under "Other Investment
Practices."
SPECIAL CONSIDERATIONS
IN GENERAL. Monies invested in the Funds are not insured deposits and are
subject to certain risks. Since each of the Portfolios will invest in different
types of investments, the risks of participating in the Trust will vary
depending on the Fund or Funds chosen by a Participant. Before investing, a
Participant should assess the risks associated with the types of investments
made by the Funds and the corresponding Portfolios.
MASTER-FEEDER STRUCTURE. As noted above, the Funds are series of an
open-end management investment company that seek to achieve their respective
investment objectives by investing all of their assets in corresponding
portfolios of the Master Trust, which have the same objectives as the Funds (see
"Investment Objectives and Policies" above). The Portfolios in turn hold
investment securities. Accordingly, the investment experience of each Fund will
correspond directly with the investment experience of the related Portfolio.
This structure is commonly known as a "master/feeder" structure. There can be no
assurance that any Portfolio or Fund will achieve its investment objective. Each
Portfolio's and Fund's investment objective is a fundamental policy which may
not be changed without the approval of the holders of a majority of the
outstanding shares or interests of the Fund or Portfolio, respectively, as
defined in the Investment Company Act of 1940, as amended (the "1940 Act").
The Funds and other entities that may invest in the Portfolios from time to
time (e.g., other investment companies and commingled trust funds) will each be
liable for all obligations of the Portfolios. However, the risk of a 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 Trust's Board of Trustees
believes that neither the Funds nor their shareholders will be adversely
affected by reason of the Funds investing in the Portfolio. The total withdrawal
by another investment company as an investor in a Portfolio will cause the
Portfolio to terminate automatically in 120 days, unless the corresponding Fund
and any other investors in the Portfolio unanimously agree to continue the
business of the Portfolio. If unanimous agreement is not reached to continue the
Portfolio, the Board of Trustees of the Trust would need to consider alternative
arrangements for the Fund, including investing all of the Fund's assets in
another investment company with the same investment objective as the Fund or
hiring an investment adviser to manage the Fund's assets in accordance with the
investment policies described herein. Failure by shareholders of a Fund to
approve a change in the investment objective and policies of a Fund parallel to
a change that has been approved by the shareholders of the corresponding
Portfolio could result in the Fund redeeming its shares of the Portfolio; this
could result in a distribution in kind to the Fund of the portfolio securities
of the Portfolio (rather than a cash distribution), causing the Fund to incur
brokerage fees or other transaction costs in converting such securities to cash,
reducing the diversification of the Fund's investments and adversely affecting
its liquidity. Other shareholders in the Portfolios may have a greater ownership
interest in the Portfolios than the Funds' interest, and could thus have
effective voting control over the operation of the Portfolios.
10
<PAGE> 276
The Trust's Board of Trustees believes that the Funds may achieve certain
efficiencies and economies of scale through the master/feeder structure, and
that the aggregate expenses of each Fund and the corresponding Portfolio will be
no greater than if the Fund invested directly in the securities held by the
Portfolio. However, other investment companies that offer their shares to the
public also may invest all or substantially all of their assets in the
Portfolios. Accordingly, there may be other investment companies through which
shareholders can invest indirectly in the Portfolios. The fees charged by such
other investment companies may be higher or lower than those charged by the
Funds, which may reflect, among other things, differences in the nature and
level of the services and features offered by such companies to their
shareholders (and as a result such other companies may have different
performance results than the Funds). Information about the availability of other
investment companies that invest in the Portfolios can be obtained by calling
1-800-323-9919.
A Fund may cease investing in a corresponding Portfolio only if the Board
of Trustees determines that such action is in the best interests of the Fund and
its shareholders, and only with the approval of such shareholders. In such
event, the Board of Trustees would consider alternative investments, including
investing all of the Fund's assets in another investment company with the same
investment objective as the Fund or hiring an investment adviser to manage the
Fund's assets in accordance with the investment policies described herein.
PORTFOLIO TURNOVER. 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 payment of more dealer mark-ups and mark-downs than would otherwise be
the case. Higher portfolio turnover rates can also result in corresponding
increases in brokerage commissions and other transaction costs. Since all
shareholders are tax exempt, no significant tax consequences result from
portfolio turnover. The investment adviser will not consider portfolio turnover
a limiting factor in making investment decisions for the Portfolios consistent
with its investment objective and policies.
In allocating purchase and sale orders for investment securities, 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 Funds'
distributor to the extent permitted by law), provided it believes the quality of
the transaction and the price to the Fund are not less favorable than what they
would be with any other qualified firm.
OTHER INVESTMENT PRACTICES
SECURITIES ISSUED BY BANK OF AMERICA, SEAFIRST AND AFFILIATES. A Portfolio
may not invest in instruments or securities issued by Bank of America, Seafirst
or any of their affiliates.
OPTIONS. A 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. A 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.
FUTURES. The Asset Allocation Portfolio may purchase and sell both
interest rate and stock index futures contracts (as well as purchase related
options) as a hedge against anticipated fluctuations or changes resulting from
relevant 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
such Portfolio. Similarly, the Bond Portfolio may purchase and sell interest
rate futures contracts (as well as purchase related options) and the Blue Chip
Portfolio may purchase and sell stock index futures contracts (as well as
purchase related options).
11
<PAGE> 277
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. A Portfolio may not purchase or sell a futures
contract and purchase related options unless immediately after any such
transaction 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).
VARIABLE RATE INSTRUMENTS. A Portfolio may invest in variable and floating
rate instruments, which may include master demand notes. Although payable on
demand by the investing Portfolio, master demand notes may not be marketable.
Consequently, the ability to redeem such notes depends 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 or the equivalent by another nationally
recognized statistical rating organization ("NRSRO"); (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 Portfolios 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")
(including money market funds advised by Bank of America). No more than 10% of
the value of each 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; except that if a pending exemptive order is granted
by the Securities and Exchange Commission, with respect to the investment in a
money market mutual fund advised by Bank of America, a Portfolio is permitted to
invest the greater of 5% of its net assets or $2.5 million. In addition, the
Portfolios may each hold no more than 3% of the outstanding voting stock of any
other investment company. As a shareholder of another investment company, a
Portfolio would bear, along with other shareholders, its pro rata portion of the
other investment company's expenses, including advisory fees.
REPURCHASE AGREEMENTS. A 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 the equivalent by another NRSRO, or a registered broker-dealer,
and the seller will agree to repurchase such securities within a specified time
at a fixed price (equal to the purchase price plus interest). Repurchase
agreements are considered to be loans under the 1940 Act. Repurchase agreements
maturing in more than seven days are considered to be illiquid investments and
investment in such repurchase agreements along with any other illiquid
securities will not exceed 10% of the value of the net assets of a 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 Master Trust's custodian or its agent will have physical possession of the
securities or the securities will be transferred to the Master Trust'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, a Portfolio may 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 collateralizing the repurchase agreement by the
Portfolio may be delayed or denied.
12
<PAGE> 278
REVERSE REPURCHASE AGREEMENTS. A 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 the
equivalent by another NRSRO, or a registered broker-dealer, with an agreement to
repurchase the security at an agreed date, price and interest payment. Reverse
repurchase agreements involve the possible risk that the value of portfolio
securities a 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 a Portfolio's outstanding shares.
SECURITIES LENDING. In order to earn additional income, a 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 Trust or such Portfolio. If the broker-dealer
should become bankrupt, however, the Portfolio could experience delays in
recovering its securities. A securities loan will be made only 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 Bond and Asset Allocation Portfolios may
purchase asset-backed securities. Asset-backed securities consist of undivided
fractional interest 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 issues
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 consumer loans or receivables by individuals, and the
certificate holder generally has no recourse to the entity that originated the
loan or receivables. The underlying loans or receivables 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 a 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
pool of loans or receivables 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 a Portfolio
experiencing difficulty in valuing or liquidating such securities.
WHEN-ISSUED SECURITIES AND FORWARD COMMITMENTS. The Asset Allocation and
Bond Portfolios 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 a 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 Asset Allocation and Bond Portfolios will set aside in
a segregated account cash or liquid securities equal to the purchase price of
any when-issued or forward commitment transactions. A Portfolio's when-issued
purchases and forward commitments will not exceed 25% of the value of such
Portfolio's
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total assets absent unusual market conditions. The Asset Allocation and Bond
Portfolios intend to engage in when-issued purchases and forward commitments
only in furtherance of their respective investment objectives and not for
speculative purposes.
FOREIGN SECURITIES. Subject to each Portfolio's investment objectives and
policies, a Portfolio may invest up to 25% of its net assets (at the time of
purchase) in securities of foreign issuers that may or may not be publicly
traded in the United States, such as 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
Portfolios purchasing these securities 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 a 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.
INVESTMENT RESTRICTIONS
The following restrictions are fundamental policies and cannot be changed
for any Fund without the approval of shareholders holding a majority of the
outstanding shares of that Fund. Absent such approval, the Trust may not:
(a) 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 (a), include reverse
repurchase agreements. Any borrowings, other than reverse repurchase agreements,
will be from banks. The Trust will repay all borrowings in any Fund before
making additional investments for that Fund and interest paid on such borrowings
will reduce income;
(b) Issue senior securities;
(c) 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; or
(d) Purchase on margin or sell short.
A complete list of the investment restrictions is set forth in the
Statement of Additional Information.
If a percentage restriction is adhered to at the time of investment, a
later increase or decrease in percentage resulting from a change in values of
assets will not constitute a violation of that restriction. The other investment
policies of the Funds may be changed without the approval of shareholders.
The Portfolios are subject to the same investment restrictions as the
Funds, except that the Portfolios are not permitted to invest all of their
assets in other investment companies.
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HOW TO INVEST IN THE TRUST
ELIGIBILITY FOR ADMISSION
Only Eligible Retirement Accounts are qualified to invest in the Trust.
Eligible Retirement Accounts include:
-- Individual Retirement Accounts, including rollover accounts
("IRAs"), and Simplified Employee Pension Plans ("SEPs") for which
Seafirst or one of its affiliates serves as a trustee or custodian
that are exempt under Section 408(e) and that are maintained in
conformity with Section 408(a) of the Internal Revenue Code
("Eligible IRAs"), and
-- Qualified pension or profit sharing trusts, including corporate
pension or profit-sharing trusts and pension or profit sharing
trusts benefiting one or more self-employed individuals (generally
referred to as H.R. 10 or Keogh plans) that are exempt under
Section 501(a) and that are maintained in conformity with Section
401(a) of the Internal Revenue Code ("Eligible Pension or Profit
Sharing Trusts").
Maintenance of Eligible Retirement Account status is a prerequisite to all
transactions with the Trust described below.
ESTABLISHING AN IRA, SEP OR ELIGIBLE PENSION OR PROFIT SHARING TRUST
A set of documents for establishing an IRA, SEP or Eligible Pension or
Profit Sharing Trust can be obtained from any branch or by calling
1-800-323-9919 in Washington and Alaska, or 1-800-441-8379 in Idaho.
INVESTING IN THE TRUST
An Eligible Retirement Account can direct the investment of the Account
assets into a Fund or Funds of the Trust using a form included with materials
for establishing an Eligible Retirement Account. The form can also be obtained
from any branch or by calling 1-800-323-9919 in Washington and Alaska, or
1-800-441-8379 in Idaho. The completed form can be returned in person at any
branch or be mailed in Washington to Retirement Services, P.O. Box 84248,
Seattle, Washington 98124, in Idaho to Retirement Services, P.O. Box 6900, Coeur
d'Alene, Idaho, 83814-2002, or in Alaska to Retirement Services, P.O. Box
107007, Anchorage, Alaska, 99510-7007.
The minimum initial investment for admission to a Fund is $500. There is no
minimum requirement for subsequent investments. The Trust reserves the right to
increase or decrease the minimum investment amounts. All assets will be invested
in full and fractional shares at a purchase price equal to the net asset value
per share next determined following receipt by the Trust of a shareholder's
satisfactorily completed investment instructions and payment. See "Valuation of
Shares." Investments are subject to determination by the Trust that the
investment instruction form has been properly completed.
Because shares are not transferable, certificates representing shares will
not be issued. All shares purchased are confirmed by mail to the shareholder and
are credited to the account of the shareholder on the Trust's books. The Trust
reserves the right in its sole discretion to (i) suspend the availability of its
shares and (ii) reject investment instructions when, in the judgment of the
Board of Trustees, such suspension or rejection is in the best interest of the
Trust.
Each Fund's shares are sold on a continuous basis by Concord Financial
Group, Inc. (the "Distributor"). The Distributor is an indirect wholly-owned
subsidiary of The BISYS Group, Inc., and is located at 3435 Stelzer Road,
Columbus, OH 43219.
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REINVESTMENT OF DISTRIBUTIONS
Any distributions made by the Asset Allocation Fund, the Blue Chip Fund, or
the Bond Fund will be made on the last business day of the month to shareholders
of record at the end of the prior business day. All distributions are
automatically reinvested in additional shares of the Fund making the
distribution. The Asset Allocation Fund and Bond Fund make monthly
distributions, and the Blue Chip Fund makes distributions at least annually, if
any.
REDEMPTIONS
All or a portion of the shares held in a Fund can be redeemed (sold) at any
time. Redemptions may be effected by writing in Washington to Retirement
Services, P.O. Box 84248, Seattle, Washington 98124, in Idaho to Retirement
Services, P.O. Box 6900, Coeur d'Alene, Idaho 83814-2002 or in Alaska to
Retirement Services, P.O. Box 107007, Anchorage, Alaska 99510-7007.
The redemption price will be the net asset value per share next determined
following receipt by the Trust of a shareholder's satisfactorily completed
instructions. See "Valuation of Shares." The value of a share upon redemption
may be more or less than the value when purchased, depending upon the net asset
value of the Fund at the time of the redemption. Redemptions are subject to
determination by the Trust that the investment instruction form or the
redemption request and other distribution documents, if any, are complete. While
payment for shares redeemed normally will be made in cash, if conditions exist
making payment in cash undesirable, the Trust may make payment for the shares
redeemed wholly or partly in securities or other property of the Fund, provided
that all distributions made as of any one valuation date shall be made pro rata
and on the same basis.
Payment for shares redeemed will normally be made to the trustee of the
shareholder within one business day of receipt by the Trust of redemption
instructions, but in no event will payment be made more than seven days after
receipt of redemption instructions except in the circumstances described below.
The payment may be delayed or the right of redemption suspended on bank holidays
or at a time when (a) trading on the New York Stock Exchange is restricted or
the Exchange is closed, for other than customary weekends and holidays, (b) an
emergency, as defined by rules of the Securities and Exchange Commission, exists
making disposal of portfolio securities or determination of the value of the net
assets of the Fund not reasonably practicable, or (c) the Securities and
Exchange Commission has by order permitted such suspension.
EXCHANGES
Shares in any Fund may be exchanged without cost for shares in any other
Fund, or for Pacific Horizon Shares of the Pacific Horizon Prime Fund, a money
market fund for which Bank of America acts as investment adviser (collectively,
the "Exchange Funds"). Exchanges may be effected by phone or by writing in
Washington to Retirement Services, P.O. Box 84248, Seattle, Washington 98124, in
Idaho to Retirement Services, P.O. Box 6900, Coeur d'Alene, Idaho 83814-2002, or
in Alaska to Retirement Services, P.O. Box 107007, Anchorage, Alaska 99510-7007.
To make an exchange by phone, call 1-800-323-9919 in Washington and Alaska, or
1-800-441-8379 in Idaho.
The Trust will act upon the instruction of any person by telephone, deemed
to be authorized, to exchange between Exchange Funds in an account. The Trust
will employ procedures designed to provide reasonable assurance that
instructions communicated by telephone are genuine and, if it does not do so, it
may be liable for any losses due to unauthorized or fraudulent instructions.
Calls may be recorded for the shareholder's protection. As a result of this
telephone exchange policy, the shareholder will bear the risk of loss, if any,
resulting from telephone instructions of a person reasonably believed to be a
shareholder. During times of severe market or economic changes, telephone
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exchanges may be difficult to implement. Therefore, it is recommended that you
send your exchange requests in writing.
Any exchange will be based on the respective net asset values of the shares
involved next determined after receipt by the Trust of a shareholder's
instructions for an exchange.
VALUATION OF SHARES
Net asset value per share for each Fund is determined by dividing the total
value of the Fund's assets, less any liabilities, by the number of outstanding
shares of the Fund. The value of the assets held in each Fund is determined as
of 1:00 p.m., Seattle, Washington time (or at such other time as may be
determined by the Board of Trustees) each day on which such value must be
determined in accordance with the 1940 Act.
As the assets of each Fund include its proportionate share of the assets
and liabilities of the corresponding Portfolio of the Master Trust, the value of
the Fund's assets depends on the net asset value per share of such Portfolio.
The net asset value per share of each Portfolio is determined in the same manner
as described above for the Funds. Except for debt securities held by a Portfolio
with remaining maturities of 60 days or less, assets for which market quotations
are available are valued at their market values based upon such market
quotations. Debt securities held by the Portfolios with remaining maturities of
60 days or less are valued on the basis of amortized cost. Amortized cost
valuation, which may be used as long as it approximates market value, involves
valuing a security at its cost on the date of purchase or, its market value on
the 61st day prior to maturity and adding or subtracting, ratably to maturity,
any discount or premium, regardless of the impact of fluctuating interest rates
on the market value of the security. 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 values of such securities. In the absence of an
ascertainable market value, assets are valued at the fair value using methods
and procedures reviewed and approved by the Board of Trustees of the Master
Trust.
PERFORMANCE
From time to time the Funds may advertise their yield or total return. Both
types of performance are based on historical earnings and are not intended to
indicate future performance. These yield and return figures are determined
according to a formula prescribed by the Securities and Exchange Commission.
To calculate yield, the Funds take the interest income (and dividend
income, if any) they earn from their portfolio investments for a 30-day period
(net of expenses). The Funds then divide such income by the number of Fund
shares entitled to receive distributions and express the result as an annualized
percentage rate based on each Fund's share price at the end of the 30-day
period. The effective yield is calculated similarly, but, when annualized, the
income earned by an investment in a 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. Also, because yield accounting
differs from methods used for other accounting purposes, a Fund's yield may not
equal the income reported on its financial statements.
Return is the change in value, including reinvested earnings, after
deductions of expenses, of a hypothetical $1,000 investment, and includes the
changes in share price. A cumulative total return reflects a Fund's performance
over a stated period of time. The Funds may also include in advertisements
performance rankings compiled by independent organizations (e.g., Lipper
Analytical Services, Inc.) which monitor mutual fund performance, and
performance comparisons with other types of investments. Rankings of companies
are historical and not intended to indicate future performance.
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ADMINISTRATION OF THE TRUST
THE BOARD OF TRUSTEES
The business and affairs of the Trust are managed under the direction of
its Board of Trustees. See "Management of the Trust" in the Statement of
Additional Information for information regarding the Trustees and officers of
the Trust.
ADMINISTRATION SERVICES
Under an Administration and Transfer Agency Agreement dated December 6,
1993 (the "Administration Agreement") between Seafirst and the Trust, Seafirst
is responsible for certain accounting, administrative, transfer agency, and
dividend disbursing services to the Trust. Pursuant to the Administration
Agreement, Seafirst is, subject to the authority of the Board of Trustees,
responsible for providing overall management of the Trust's business and affairs
(other than investment management services, which are performed by Bank of
America on behalf of the Portfolios of the Master Trust). For its services,
Seafirst is entitled to receive a fee from the Funds at an annual rate of .29%
of the average daily net asset value of the Funds, subject to the expense
limitation discussed below. During the fiscal year ended February 29, 1996, the
Bond, Asset Allocation and Blue Chip Funds paid administration fees to Seafirst
at an effective annual rate at .12%, .29% and .29% of such Fund's respective
average daily net assets, and Seafirst waived administration fees at an
effective annual rate of .17% of the Bond Fund's average daily net assets.
Individual Retirement Accounts, including those that do not invest in the
Funds, are charged certain fees: each pays a $15 annual maintenance fee; and
there is currently a $7 annual maintenance fee for a spousal retirement account.
Other Eligible Retirement Accounts may be charged fees which vary according to
the plan's sponsor.
Seafirst is a national banking association which provides commercial
banking and trust services throughout the State of Washington. The offices of
Seafirst are located at 701 Fifth Avenue, Seattle, Washington 98104. Seafirst is
a wholly-owned subsidiary of Seafirst Corporation, which is controlled by
BankAmerica Corporation, both of which are bank holding companies.
Concord provides officers and certain administrative and compliance
monitoring services to the Funds on behalf of Seafirst pursuant to a
Sub-Administration Agreement with Seafirst and is entitled to a fee from
Seafirst, at an annual rate of .06% of each Fund's average daily net assets.
Concord is an indirect, wholly-owned subsidiary of the BISYS Group, Inc. Its
offices are located at 3435 Stelzer Road, Columbus, OH 43219. For its services,
Concord is paid by Seafirst, not by the Trust. Concord also provides certain
administrative services to the Master Trust. See "The Master Trust--The Master
Trust Administration Agreement."
Pursuant to the authority granted in its Administration Agreement, Seafirst
has entered into a Sub-Accounting Services Agreement with PFPC, Inc. ("PFPC")
under which PFPC, and an offshore affiliate of PFPC, performs certain services,
e.g., calculating the net asset value of the Funds, calculating dividends and
capital gains distributions to shareholders, and maintaining the books and
records of the Funds. PFPC's offices are located at 103 Bellevue Parkway,
Wilmington, Delaware 19809. It is an indirect wholly-owned subsidiary of PNC
Bancorp, Inc., a bank holding company. For its services, PFPC is paid by
Seafirst, not by the Trust. PFPC also provides certain accounting services to
the Master Trust. See "The Master Trust--The Master Trust Administration
Agreement."
Seafirst is responsible for providing custodial services to the Trust.
Seafirst has entered into a Sub-Custodian Services Agreement with PNC BANK,
National Association, Broad and Chestnut Streets, Philadelphia, Pennsylvania,
19101, which provides these services to the Trust on behalf of Seafirst.
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SHAREHOLDER SERVICE PLAN
The Trust has adopted a Shareholder Service Plan (the "Plan") under which
the Funds pay the Distributor for shareholder servicing expenses the Distributor
pays to Service Organizations (which are institutions such as a bank or
broker-dealer that has entered into a selling and/or servicing agreement with
the Distributor).
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 a Fund for shareholder servicing expenses may
not exceed 0.25% (annualized) of the average daily net assets of such Fund's
shares. Excluded from this calculation, however, are all shares acquired via a
transfer of assets from trust and agency accounts at Seafirst. This amount may
be reduced pursuant to undertakings by the Distributor. During the fiscal year
ended February 29, 1996, each Fund made payments under the Plan at an effective
annual rate of .25% of the Funds' respective 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 a Fund with respect to
the amount "carried forward."
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 Trust shareholders and alternative means
for continuing the servicing of such shareholders would be sought. In such
event, changes in the operation of the Trust 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.
In connection with providing such services, Seafirst has represented that
it will not engage in activities which constitute acting as a broker or dealer
under state law unless it has obtained any necessary licenses to do so.
EXPENSES OF THE TRUST
Except as noted in this Prospectus, Seafirst bears all expenses in
connection with the performance of its services. All other costs and expenses of
operation of the Trust are paid by the Trust. The Funds also bear their pro rata
shares of expenses of the Portfolios (see "The Master Trust--Expenses of the
Master Trust").
Seafirst has agreed that if a Fund's expenses (excluding interest,
brokerage commissions, litigation expenses and certain other items), including
its pro rata share of the expenses incurred by the corresponding Portfolio, were
to exceed any limitations on expenses imposed by applicable state securities
laws, Seafirst will bear the amount of the excess, to the extent required by the
state limitations. Bank of America has agreed to reimburse Seafirst for any such
amounts. Currently, the only applicable state expense limitation is an annual
limitation equal to the sum of 2.5% of the first $30 million of a Fund's average
net assets, 2% of the next $70 million of average net assets, and 1.5% of the
remaining average net assets.
In addition, Seafirst has agreed to reimburse the Funds in such amounts as
are necessary to limit the expenses of the Funds, including their pro rata
shares of the expenses incurred by the corresponding Portfolios (but excluding
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interest, brokerage commissions, litigation expenses and certain other items),
to specified levels, depending on the levels of assets of the Portfolios in
which the Funds invest their assets. In any given fiscal year, Seafirst's
reimbursement will be in an amount sufficient to limit such expenses of each
Fund to .95%, .85% or .75% of the Fund's average daily net assets if the average
daily net assets of the Portfolio in which the Fund invests in such year is less
than $250 million, $250 million through $500 million, or more than $500 million,
respectively. Bank of America has agreed to reimburse Seafirst for any such
amounts. These reimbursement agreements by their terms will remain in effect
with respect to each Fund until such time as the Fund no longer invests
substantially all its assets in the corresponding Master Fund, or Seafirst or
Bank of America no longer provides services to the Fund or Master Fund,
respectively, whichever is earlier.
THE MASTER TRUST
Prior to December 6, 1993, Seafirst, as trustee of the Trust's predecessor,
Collective Investment Trust for Seafirst Retirement Accounts, provided
investment management services as well as administrative services. Since the
reorganization of the Collective Investment Trust on that date, the assets of
the Funds have been invested in the corresponding Portfolios of the Master
Trust, and the Trust has not employed an investment manager.
The Master Trust is a business trust which was established under the laws
of the State of Delaware in October 1992. The business and affairs of the Master
Trust are managed under the direction of its Board of Trustees. See "Management
of the Master Trust" in the Statement of Additional Information for information
regarding the Trustees and officers of the Master Trust. The offices of the
Master Trust are located in the Cayman Islands.
THE INVESTMENT ADVISER
Bank of America serves as the investment adviser to the Master Trust. Bank
of America is a subsidiary of BankAmerica Corporation, a registered bank holding
company. Its principal executive 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,
business credit and thrift offices in major U.S. cities and branches, corporate
offices and representative offices in 37 countries.
In the advisory agreement, Bank of America has agreed to manage each
Portfolio's investments and to be responsible for, place orders for, and make
decisions with respect to, all purchases and sales of the Portfolios'
securities. The advisory 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 Master Trust for the
acts and omissions of the sub-adviser.
Since March 1996, the Fixed Income Division of the Investment Management
Services Group of Bank of America is primarily responsible for the portfolio
management services of the Bond Portfolio, and no one person is primarily
responsible for making recommendations to that committee.
The Asset Allocation Committee of Bank of America's Global Investment
Management Division establishes general parameters for the selection of
securities for the Asset Allocation 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
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and fixed-income portions, respectively, of the Asset Allocation Portfolio. Mr.
Pyles has been the Asset Allocation Portfolio's manager since November 1994 and
has been associated with Seafirst, a wholly-owned 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 Asset Allocation Portfolio'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 Advisers since
1990.
Bank of America Illinois' Investment Advisory Division is responsible for
the day-to-day investment activities of the Blue Chip Portfolio. The investment
management team is headed by James Miller, Executive Vice President and Chief
Investment Officer of BofA Illinois Investment Management (a wholly-owned
subsidiary of Bank America Corporation). Mr. Miller has been manager of the Blue
Chip Portfolio since May 1, 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.
As compensation for its services under the advisory agreement, Bank of
America is entitled to receive a fee at the annual rate of .45% of the average
daily net assets of the Bond Portfolio, .55% of the average daily net assets of
the Asset Allocation Portfolio, and .75% of the average daily net assets of the
Blue Chip Portfolio. The fee paid by the Blue Chip Portfolio 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.
These amounts may be reduced pursuant to undertakings by Bank of America. During
the fiscal year ended February 29, 1996, Bank of America waived its entire fee
as investment advisor to the Bond Portfolio. Additionally, during the fiscal
year ended February 29, 1996, the Asset Allocation and Blue Chip Portfolios paid
Bank of America advisory fees at an effective annual rate of .12% and .20% of
such Portfolios' respective average daily net assets and Bank of America waived
advisory fees at an effective annual rate of .43% and .55% of such Portfolios'
respective average daily net assets.
Bank of America will pay expenses of all employees, office space and
facilities necessary to carry out its duties under the advisory agreement, and
all expenses incurred by it in connection with acting as investment adviser,
other than costs (including taxes and brokerage commissions) of securities
purchased for the Portfolios. All other expenses incurred in the investment
operations of the Master Trust are charged to the Portfolios. See
"Administration of the Trust--Expenses" above for a discussion of Bank of
America's agreement to reimburse Seafirst for certain amounts that Seafirst
reimburses to the Funds.
THE MASTER TRUST ADMINISTRATION AGREEMENT
Concord, through its offshore subsidiaries, is responsible for providing
administrative services to the Master Trust.
For its services as administrator, Concord is entitled to receive an
administration fee from the Master Trust at the annual rate of .05% of each
Portfolio's average daily net assets. During the fiscal year ended February 29,
1996, Concord waived its entire fee as administrator to the Bond Portfolio.
Additionally, during the fiscal year ended February 29, 1996, the Asset
Allocation and Blue Chip Portfolios paid administration fees at an effective
annual rate of .01% and .01% of such Portfolios' respective average daily net
assets, and Concord waived a portion of its fee at the effective annual rate of
.04% and .04% of such Portfolios' respective average daily net assets.
Pursuant to the authority granted in its administration agreement, Concord
has entered into an agreement with PFPC under which PFPC, and an off-shore
affiliate of PFPC, provides certain accounting, bookkeeping, pricing and
distribution calculation services to the Portfolios. The Master Trust bears the
fees and expenses charged by PFPC for its services.
21
<PAGE> 287
CUSTODIAN
PNC Bank, National Association, acts as custodian of the assets of the
Master Trust.
EXPENSES OF THE MASTER TRUST
Each Portfolio of the Master Trust is responsible for its operating
expenses, other than expenses assumed by Bank of America under the advisory
agreement and by Concord under the administration agreement. The expenses paid
by the Master Trust include but are not limited to advisory fees; brokerage fees
and commissions in connection with the purchase of portfolio securities;
administration fees; taxes, if any; custodian, legal and auditing fees; fees and
expenses of trustees who are not interested persons of Bank of America; printing
and other expenses relating to the Portfolios' operations; and any extraordinary
fees and expenses.
TAX INFORMATION
The Trust intends to qualify each Fund as a regulated investment company
under the Internal Revenue Code (the "Code"). Accordingly, so long as a Fund so
qualifies, it will not be subject to federal income taxes on its net investment
income and capital gains, if any, that it distributes to its shareholders in
accordance with the Code.
For federal income tax purposes, income earned by each Fund will not be
taxable to the Eligible Retirement Accounts that are its shareholders or to
Participants until a Participant receives, or is deemed under federal tax law to
have received, a distribution from the Participant's Eligible Retirement
Account. A distribution from the Participant's Eligible Retirement Account is a
payment or a deemed payment from the Eligible Retirement Account to the
Participant. A withdrawal by an Eligible Retirement Account from a Fund is a
payment by the Fund to a shareholder in redemption of shares of the Trust.
Therefore, withdrawals from a Fund can be made at any time by an Eligible
Retirement Account without penalty and without the amount withdrawn being
subject to federal income tax.
The Portfolios are not required to pay federal income taxes on their net
investment income and capital gains, because they are treated as partnerships
for tax purposes. Any interest, dividends and gains or losses of a Portfolio
will be deemed to have been "passed through" to the corresponding Fund and other
investors in the Portfolio, regardless of whether such interest, dividends or
gains have been distributed by the Portfolio or losses have been realized by the
Fund and such other investors.
The foregoing describes only the federal income tax status of the Funds and
the Portfolios. It does not describe the taxation of distributions from Seafirst
Retirement Accounts to Participants, nor applicable limitations on the
deductibility of contributions to such Accounts. Participants should consult
their tax advisors.
OTHER INFORMATION
DESCRIPTION OF SHARES AND VOTING RIGHTS
A shareholder exercises the voting rights of the shares and is entitled to
one vote for each full share (and a fractional vote for each fractional share)
outstanding on the books of the Trust in the name of such shareholder or its
nominee. The shares have noncumulative voting rights, which means that the
holders of more than 50% of the shares voting in the election for members of the
Board of Trustees can elect 100% of the members if they choose to do so. On any
matter submitted to a vote of shareholders, all shares of the Trust then issued,
outstanding and entitled to vote will be voted in the aggregate and not by Fund,
except (i) when required by the 1940 Act, shares shall be voted by Fund, and
(ii) when the matter affects an interest of less than all of the Funds, then
only
22
<PAGE> 288
shareholders that own shares of the affected Fund or Funds will be entitled to
vote. Shares vote in the aggregate on such matters as election of members of the
Board of Trustees and by Funds on such matters as the approval of investment
advisory arrangements and changing certain investment restrictions.
The Trust's Declaration of Trust requires the calling of a meeting of the
shareholders of the Trust when ordered by the Board of Trustees of the Trust or
when requested in writing by shareholders holding 10% of the shares entitled to
vote at the meeting. The Board of Trustees of the Trust has also undertaken to
call a meeting of the shareholders for the purpose of voting on the question of
removal of members of the Board of Trustees of the Trust upon the written
request of shareholders holding 10% of the shares entitled to vote at such a
meeting, and in connection with such a meeting to assist in communications among
such shareholders as required by the 1940 Act. Shareholder inquiries should be
in writing addressed to Retirement Services, Seafirst Bank, P.O. Box 84248,
Seattle, Washington 98124.
RELATIONSHIP TO THE MASTER TRUST
Whenever a Fund is requested to vote on matters pertaining to the Master
Trust or a corresponding Portfolio of the Master Trust, in the Fund's capacity
as an investor in such Portfolio, the Trust will hold a meeting of its
shareholders (or in the case of a matter pertaining only to a Portfolio, a
meeting of the shareholders of the corresponding Fund) and cast its vote in the
same proportions as the votes cast by such shareholders. The Trust 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.
END OF PROSPECTUS FOR SEAFIRST RETIREMENT FUNDS
23
<PAGE> 289
BEGINNING OF PROSPECTUS FOR PACIFIC HORIZON FUNDS, INC.
<PAGE> 290
PROSPECTUS
PRIME FUND
(An investment Portfolio Offered by Pacific Horizon Funds, Inc.)
THIS PROSPECTUS APPLIES TO THE PACIFIC HORIZON SHARES OF THE PRIME FUND (THE
"FUND"), A NO-LOAD DIVERSIFIED INVESTMENT PORTFOLIO OFFERED BY PACIFIC HORIZON
FUNDS, INC. (THE "COMPANY"). THE COMPANY IS REGISTERED UNDER THE INVESTMENT
COMPANY ACT OF 1940 AS AN OPEN-END MANAGEMENT INVESTMENT COMPANY. THE FUND IS
DESIGNED TO PROVIDE INVESTORS WITH DAILY LIQUIDITY.
THE INVESTMENT OBJECTIVE OF THE FUND IS TO SEEK HIGH CURRENT INCOME AND
STABILITY OF PRINCIPAL. THE FUND SEEKS TO ACHIEVE ITS INVESTMENT 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 AND REPURCHASE AGREEMENTS, IN
ADDITION TO OBLIGATIONS ISSUED OR GUARANTEED BY THE U.S. GOVERNMENT, ITS
AGENCIES OR INSTRUMENTALITIES.
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 (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.
PACIFIC HORIZON SHARES MAY BE PURCHASED DIRECTLY FROM CONCORD FINANCIAL
GROUP, INC., BY CLIENTS OF BANK OF AMERICA NATIONAL TRUST AND SAVINGS
ASSOCIATION THROUGH THEIR QUALIFIED TRUST AND AGENCY ACCOUNTS OR BY CLIENTS OF
CERTAIN OTHER FINANCIAL SERVICE ORGANIZATIONS, SUCH AS BANKS OR BROKER-DEALERS
("SERVICE ORGANIZATIONS").
BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION ("BANK OF AMERICA"),
SAN FRANCISCO, CALIFORNIA, ACTS AS INVESTMENT ADVISER TO THE FUND. CONCORD
FINANCIAL GROUP, INC. (THE "DISTRIBUTOR") SPONSORS THE FUND AND ACTS AS ITS
DISTRIBUTOR AND CONCORD HOLDING CORPORATION ACTS AS ITS ADMINISTRATOR, NEITHER
OF WHICH IS AFFILIATED WITH BANK OF AMERICA.
THIS PROSPECTUS BRIEFLY SETS FORTH CERTAIN INFORMATION ABOUT THE FUND THAT
YOU SHOULD KNOW BEFORE INVESTING. IT SHOULD BE READ AND RETAINED FOR FUTURE
REFERENCE. ADDITIONAL INFORMATION ABOUT THE FUND, CONTAINED IN A STATEMENT OF
ADDITIONAL INFORMATION DATED JULY 1, 1996 HAS BEEN FILED WITH THE SECURITIES AND
EXCHANGE COMMISSION AND IS AVAILABLE TO INVESTORS UPON REQUEST AND WITHOUT
CHARGE BY CALLING THE FUND'S DISTRIBUTOR AT (800) 332-3863. THE STATEMENT OF
ADDITIONAL INFORMATION, AS IT MAY FROM TIME TO TIME BE REVISED, IS INCORPORATED
IN ITS ENTIRETY BY REFERENCE INTO THIS PROSPECTUS AND DISCUSSES CERTAIN SUBJECTS
IN THIS PROSPECTUS FURTHER AS WELL AS OTHER MATTERS WHICH MAY BE OF INTEREST TO
INVESTORS.
Shares of the Fund 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. The
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 Fund involves investment
risk, including the possible loss of principal amount invested.
No person has been authorized to give any information or to make any
representations, other than those contained in this Prospectus, in the Statement
of Additional Information and the Fund's official sales literature, 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.
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.
JULY 1, 1996
<PAGE> 291
CONTENTS
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C>
Expense Summary.......................................................................... 2
Financial Highlights..................................................................... 3
Investment Objective and Policies........................................................ 4
Management of the Fund................................................................... 8
Purchases of Shares...................................................................... 10
Redemption of Shares..................................................................... 12
Shareholder Services..................................................................... 14
Dividends, Distributions and Taxes....................................................... 16
Description of Shares.................................................................... 17
Performance Calculations................................................................. 19
</TABLE>
DISTRIBUTOR: INVESTMENT ADVISER:
Concord Financial Group, Inc. Bank of America National Trust
3435 Stelzer Road and Savings Association
Columbus, OH 43219-3035 555 California Street
San Francisco, CA 94104
<PAGE> 292
EXPENSE SUMMARY
The following table sets forth certain information regarding the
shareholder transaction expenses imposed by the Fund with respect to Pacific
Horizon Shares and the annual operating expenses incurred by the Fund's Pacific
Horizon Shares during its last fiscal year. Actual expenses may vary. A
hypothetical example based on the table is also shown.
<TABLE>
<CAPTION>
PRIME
FUND
------
<S> <C> <C>
Shareholder Transaction Expenses
Sales Load Imposed on Purchases............................................ None
Sales Load Imposed on Reinvested Dividends................................. None
Deferred Sales Load(1)..................................................... None
Redemption Fees............................................................ None
Exchange Fee............................................................... None
Annual Fund Operating Expenses (as a percentage of average net assets)
Management Fees............................................................ .20%
Special Management Services Fee............................................ .32%
Other Expenses............................................................. .03%
---
All Other Expenses......................................................... .35%
------
Total Operating Expenses...................................................... .55%
========
</TABLE>
- ---------------
(1) No contingent deferred sales load is charged, except that Pacific Horizon
Shares of the Prime Fund acquired through an exchange of shares ("B Shares")
of the Time Horizon Funds (an open-end investment company managed by Bank of
America) offered with a contingent deferred sales charge ("CDSC") will be
subject to a CDSC of up to a maximum of 5% upon redemption in accordance
with the prospectus for the particular B Shares. See "Shareholder
Services -- Exchanges."
<TABLE>
<CAPTION>
Example 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:*........... $6 $18 $31 $69
</TABLE>
- ---------------
* Example does not include deduction at redemption of a CDSC for Pacific Horizon
Shares of the Prime Fund acquired through exchange of B Shares of the Time
Horizon Funds.
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 the class that investors bear either directly or
indirectly. Investors bear operating expenses indirectly since they reduce the
amount of income paid by the Fund to investors as dividends. From time to time,
the investment adviser and administrator may prospectively waive a portion of
their respective fees and/or assume certain expenses of the Fund. See
"Management of the Fund" and "Description of Shares" for a more complete
description of the expenses referred to above.
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.
2
<PAGE> 293
FINANCIAL HIGHLIGHTS
On March 30, 1984, the Company commenced its public sale of shares (Pacific
Horizon Shares) in the Prime Fund, which was originally called the "Money Market
Portfolio." On January 19, 1990, the Prime Fund of The Horizon Funds (the
"Predecessor Prime Fund") was combined with the Money Market Portfolio of the
Company; the Company changed the name of its resulting portfolio to "Prime
Fund;" and, in addition to continuing its offering of Pacific Horizon Shares in
such Fund and began offering Horizon Shares and Horizon Service Shares of the
Prime Fund. The Company has also classified an X and S Share class of the Prime
Fund. Horizon Shares, Horizon Service Shares, X Shares and S Shares are
described in separate prospectuses. The shares of each class of the Fund
represent equal pro rata interests in the Fund, except that they bear different
expenses which reflect the difference in the range of services provided to them.
Pacific Horizon Shares bear the expenses of a special management services
agreement at an annual rate not to exceed 0.32% of the average daily net asset
value of the Prime Fund's outstanding Pacific Horizon Shares. See "Description
of Shares" below for certain differences among the Pacific Horizon Shares,
Horizon Shares, Horizon Service Shares, S Shares and X Shares, including
differences relating to expenses.
The table below sets forth certain information concerning the investment
results of Pacific Horizon Shares of the Fund for the periods indicated. The
information contained in the Financial Highlights insofar as it pertains to each
of the five fiscal years in the five year period ended February 29, 1996 has
been audited by Price Waterhouse LLP, independent accountants of the Fund, whose
unqualified report on the financial statements containing such information is
incorporated by reference into the Statement of Additional Information, which
may be obtained upon request. The information contained in the Financial
Highlights for each of the three years in the period ended February 28, 1989 was
audited by other independent accountants whose report dated April 20, 1989
expressed an unqualified opinion on the statements containing such 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 into the Statement of Additional
Information.
Selected data for a Pacific Horizon Share outstanding throughout each of
the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED
-------------------------------------------------------------------------------------------------------------------
FEB. FEB. FEB. FEB. FEB. FEB. FEB. FEB. FEB. FEB.
29, 28, 28, 28, 29, 28, 28, 28, 29, 28,
1996+ 1995+ 1994+ 1993+ 1992 1991 1990 1989 1988 1987
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset
Value per
share,
Beginning of
Year........ $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Income from
Investment
Operations
Net
Investment
Income.... 0.0539 0.0424 0.0287 0.0340 0.0558 0.0762 0.0855 .0738 0.0643 0.0606
Net Realized
Gain
(Loss) on
Securities... 0.0004 (0.0227) (0.0016) 0.0000 0.0005 (0.0001) 0.0001 (0.0002) 0.0003 (0.0001)
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total Income
from
Investment
Operations... 0.0543 0.0197 0.0271 0.0340 0.0563 0.0761 0.0856 0.0736 0.0646 0.0605
Less
Dividends
from Net
Investment
Income...... (0.0539) (0.0422) (0.0287) (0.0341) (0.0557) (0.0762) (0.0855) (0.0738) (0.0643) (0.0606)
Increase Due
to Voluntary
Capital
Contribution
from
Investment
Advisor..... 0.0000 0.0233 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Net Change in
Net Asset
Value per
share....... 0.0004 0.0008 (0.0016) (0.0001) 0.0006 (0.0001) 0.0001 (0.0002) 0.0003 (0.0001)
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Net Asset
Value per
share, End
of Year..... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======== ======== ======== ======== ======== ======== ======== ======== ======== ========
Total
Return...... 5.53% 4.30%* 2.91% 3.45% 5.72% 7.89% 8.90% 7.63%++ 6.62%++ 6.23%++
Ratios/Supplemental
Data
Net Assets,
End of
Year
(millions).. $ 2,200 $ 1,129 $ 1,216 $ 992 $ 1,413 $ 1,086 $ 890 $ 921 $ 957 $ 484
Ratio of
Expenses
to Average
Net
Assets.... 0.55%** 0.51%** 0.52%** 0.55% 0.56% 0.56% 0.63% 0.63% 0.58% 0.57%
Ratio of Net
Investment
Income to
Average
Net
Assets.... 5.37%** 4.19%** 2.86%** 3.42% 5.51% 7.61% 8.52% 7.38% 6.42% 6.02%
</TABLE>
3
<PAGE> 294
- ---------------
<TABLE>
<C> <S>
* 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.
** Includes 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 0.01%, 0.05% and 0.01% for the
years ended February 29, 1996, February 28, 1995 and February 28, 1994, respectively.
+ 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.
++ Unaudited.
</TABLE>
INVESTMENT OBJECTIVE AND POLICIES
IN GENERAL. The Fund's investment objective is to seek high current income
and stability of principal. It seeks to achieve its investment objective by
investing 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 the Fund will not exceed
90 days. All securities acquired by the Fund 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 Fund will
be U.S. Government securities or other "First Tier 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
(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 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 the Fund will be of comparable
quality to the rated instruments that the Fund may purchase, as determined by
the Fund's investment adviser pursuant to guidelines approved by the Board of
Directors.
The 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 (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.
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 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 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 of up
to three business days.
The Fund may purchase bank obligations such as certificates of deposit and
bankers' acceptances issued or supported by the credit of domestic banks,
foreign branches of domestic banks ("Euro CDs") or domestic branches of foreign
banks ("Yankee CDs" and "Yankee BAs") or foreign branches of foreign banks
("Yankee Euros"). 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, Euro CDs and Yankee
Euros.
4
<PAGE> 295
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 Fund may be subject to additional investment risks because it may hold
securities issued by foreign branches of domestic banks, domestic branches of
foreign banks and foreign 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, domestic branches of foreign banks and foreign 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 Fund may purchase commercial paper, short-term notes and corporate
bonds that meet the Fund's maturity limitations. Commercial paper purchased by
the 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 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 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.
OTHER INVESTMENT PRACTICES
GOVERNMENT OBLIGATIONS. The 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 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 governmental 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
5
<PAGE> 296
payments of principal of these securities will be reinvested by the 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. The 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. 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"). 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. The 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,
the 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
deliver instruments the value of which is greater than the repurchase price.
Default by the seller would, however, expose the 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 Fund may borrow monies for temporary
purposes by entering into reverse repurchase agreements in accordance with the
investment restrictions described below. Pursuant to such agreements, the Fund
would sell portfolio securities to banks and other financial institutions, and
agree to repurchase them at an agreed upon date and price. At the time the 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 Company's investment
adviser will continuously monitor the account to ensure that the value is
maintained. The 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 may decline below the price
of the securities the Fund is obligated to repurchase. Interest paid by the 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.
VARIABLE AND FLOATING RATE INSTRUMENTS. Securities purchased by the Fund
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 the 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 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 the 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 Fund are subject to the Fund's percentage
limitations regarding securities that are illiquid or
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not readily marketable. The Fund's investment adviser will continuously monitor
the creditworthiness of issuers of variable and floating rate instruments in
which the Fund invests, and their ability to repay principal and interest.
Variable and floating rate instruments purchased by the 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 the 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 Fund's investment adviser has determined meets the quality standards for the
Fund. If a participation interest is backed by an irrevocable letter of credit
or guarantee of a bank or is insured as described above, the 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 participation interest plus
accrued interest. Although a participation interest may be sold by the Fund,
under normal circumstances they will be held until maturity.
The 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.
WHEN-ISSUED PURCHASES, FORWARD COMMITMENTS AND DELAYED SETTLEMENTS. The
Fund 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 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 or sell, regardless
of future changes in interest rates. Delayed settlement describes a securities
transaction in a 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 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. The Fund's liquidity and the
ability of its investment adviser to manage its portfolio may be adversely
affected in the event the Fund's forward commitments, commitments to purchase
when-issued securities and delayed settlements ever exceed 25% of the value of
its total assets. The Fund does not intend to engage in these transactions for
speculative purposes but only in furtherance of their investment objectives.
INVESTMENT LIMITATIONS. The Fund's investment objective is a fundamental
policy that may not be changed without a vote of the holders of a majority of
the Fund's outstanding shares (as defined in the Investment Company Act of
1940). The Fund's policies may be changed by the Company's Board of Directors
without the affirmative vote of the holders of a majority of the 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 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'
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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.
2. 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 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.
3. 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 Fund intends that, except as stated above under "Other Investment
Practices -- 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.
INVESTMENT DECISIONS. Investment decisions for the Fund are made
independently from those for other portfolios of the Company and other
investment companies and common trust funds managed by Bank of America and its
affiliated entities. Such other investment companies and common trust funds 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 portfolio, 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 the Fund or the size of the
position obtained or sold by the 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 the 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 FUND
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 Fund's investment
adviser. Bank of America, which has 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
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corporate banking, business credit and thrift offices in major U.S. cities. In
addition, it has branches, corporate offices and representative offices in 36
foreign 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 $48 billion under management, including
over $12 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 Fund
and is responsible for all purchases and sales of the Fund's 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 the Fund's net assets, plus .09% of the next $2
billion of the Fund's net assets, plus .08% of the Fund's net assets over $5
billion. For the fiscal year ended February 29, 1996, the Fund paid Bank of
America advisory fees at the effective annual rate of .10% of the Fund's average
daily net assets. This amount may be reduced pursuant to certain undertakings by
Bank of America described below under "Fee Waivers."
In addition, Bank of America is entitled to fees under the Company's
Special Management Services Agreement with respect to the Fund's Pacific Horizon
Shares. Bank of America and Service Organizations may also receive fees charged
directly to their customers' accounts in connection with investments in Pacific
Horizon shares of the Fund.
ADMINISTRATOR. Concord Holding Corporation (the "Administrator") serves as
the Company's administrator and assists generally in supervising the Fund's
operations. The Administrator is a wholly owned subsidiary of The BISYS Group,
Inc. Its offices are located at 3435 Stelzer Road, Columbus, OH 43219.
Under its Basic Administrative Services Agreement for the Fund, 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 Fund, including coordination of reports to shareholders and reports to the
Securities and Exchange Commission; calculation of the net asset value of Fund
shares and dividends and capital gains distributions to shareholders; payment of
the costs of maintaining the Fund's 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 Fund's 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.
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 the Fund's net assets, plus .09% of the
next $3 billion of the Fund's net assets, plus .08% of the Fund's net assets
over $10 billion. For the fiscal year ended February 29, 1996, the Fund paid the
Administrator administration fees at the effective annual rate of .10% of the
Fund's 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 Fund's books and records. The Fund bears 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 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
3435 Stelzer Road, Columbus, OH 43219.
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The Distributor makes a continuous offering of the Fund's 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 Fund (after such items have
been prepared and set in type by the Fund) 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 Fund's 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 Fund
and Bank of America serves as the Fund's sub-custodian. BISYS Fund Services,
Inc., 3435 Stelzer Road, Columbus, OH 43219 (the "Transfer Agent"), serves as
the Fund's 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 wire purchases and wire redemptions of and the payment of
dividends and other distributions with respect to the Fund's shares.
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 Fund's 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 Pacific Horizon
Shares; provide dedicated walk-in and telephone facilities to handle shareholder
inquiries and serve investor needs; develop and maintain the registration or
qualification of Pacific Horizon Shares for sale under state securities laws;
pay for the operation of arrangements that facilitate same-day share purchases
by customers of Bank of America through the use of a joint repurchase agreement
and assume the expense of payments made to third parties for services provided
in connection with the investments of their customers in 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 (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 rate of .32% of
the average net asset value of the Prime Fund's outstanding Pacific Horizon
Shares. For the fiscal year ended February 29, 1996, the Prime Fund paid
aggregate fees pursuant to the Special Management Services Agreement at the
effective annual rate of .32% of the average net assets of its Pacific Horizon
Shares. As stated below under "Description of Shares," such fees are borne by
the Fund's Pacific Horizon Shares are not paid with respect to the Fund's other
series of shares.
FEE WAIVERS. Except as noted in this Prospectus and the Statement of
Additional Information, the Fund's service contractors bear all expenses in
connection with the performance of their services and the Fund bears the
expenses incurred in its operations. From time to time during the course of the
Fund's fiscal year, Bank of America and/or the Administrator may prospectively
waive payment of fees and/or assume certain expenses of the Fund as a result of
competitive pressures and in order to protect the business and reputation of
Bank of America and the Administrator. This will have the effect of lowering the
overall expense ratio of the Fund and of increasing the 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 the Fund and of decreasing yield to
investors when such fees are not waived or amounts are not reimbursed.
PURCHASES 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 Service Organizations without a charge imposed by the
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Fund, although Bank of America and Service Organizations may charge a fee for
providing administrative services in connection with investments in shares of
the Fund. 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 Fund. The Fund reserves 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 make an initial purchase of shares by mail should
complete an Account Application and mail the Application and a check payable to
"Pacific Horizon Prime Fund" to the address on the Account Application. All
subsequent purchases of shares made by mail should be delivered to Pacific
Horizon Funds, Inc., File No. 54634, Los Angeles, California 90074-4634. Initial
purchases of shares into a new account may not be made by wire. However, an
investor desiring to make a subsequent purchase of shares into an already
existing account by wire should contact the Transfer Agent at (800) 346-2087 for
complete wiring instructions and request his bank to transmit immediately
available funds by wire for purchase of shares in the investor's name. It is
important that the wire include the investor's name and Fund account number. 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
3435 Stelzer Road, Columbus, OH 43219.
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 Fund's
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 Columbus 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 effected through automatic investment
transactions on behalf of Bank of America's trust and agency accounts are
received by Bank of America as sub-custodian for the Fund before 12:00 noon
(Pacific time) and are effected as of 4:00 p.m. (Eastern time) on the same day.
It is the responsibility of Bank of America or the Service Organization involved
to transmit orders for the 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.
The net asset value per share of the Pacific Horizon Shares of the Prime
Fund is the value of all securities and other assets owned by the Fund that are
allocable to such class, less the liabilities charged to such class, divided by
the number of outstanding shares of such class. The net asset value per share of
the 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). In computing net asset value, the Fund uses the amortized
cost method of valuation as described in the Statement of Additional Information
under "Additional Purchase and Redemption Information -- Valuation." The net
asset value per share for purposes of pricing purchase and redemption orders for
the Fund is determined independently of that for other portfolios of the
Company. For price and yield information call (800) 346-2087.
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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 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 the Fund entitles an
investor to purchase Fund shares (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 on 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 will be effected at the net asset value next
determined after receipt of payment by the Fund's Transfer Agent. The Company
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
other redemption methods must arrange with Bank of America or a 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. Pacific
Horizon Shares of the Fund acquired through exchange of B Shares of the Time
Horizon Funds are subject to a CDSC upon redemption in accordance with the
prospectus for the particular B Shares. For purposes of computing the CDSC, the
length of time of ownership will be measured from the date of the original
purchase of B Shares and will not include any period of ownership of the Pacific
Horizon Shares of the Fund. 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 one of the following
procedures.
REGULAR REDEMPTION. An investor may redeem shares in any amount by sending
a written request to the Prime Fund, c/o Pacific Horizon Funds, Inc., P.O. Box
80221, Los Angeles, CA 90080-9909. Redemption orders are effected upon receipt
by the Transfer Agent at its Columbus office. Redemption requests delivered to
the Company other than by mail must be delivered to the offices of the Transfer
Agent at 3435 Stelzer Road, Columbus, OH 43219. While the Company no longer
issues share certificates, shares for which certificates previously had been
issued may not be redeemed unless the certificates have been submitted to the
Transfer Agent and endorsed for transfer.
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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 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 60 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, including requesting certain
personal or account information to confirm the identity of the shareholder.
WIRE REDEMPTION. An investment in Pacific Horizon Shares of the Fund
automatically entitles an investor to redeem shares by wire unless he has
indicated 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 on the Account Application or in a subsequent signature guaranteed
letter of instruction to the Transfer Agent before shares may be redeemed by
wire. Shareholders may instruct the Transfer Agent to redeem shares in the 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 believed to be genuine 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 amount. Wire redemptions may be terminated or modified by
the Fund at any time. Shares issued in certificate form are not eligible for
wire redemption. A shareholder 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 in person to the Transfer Agent or by mail
as described above under "Regular Redemption." For additional information
concerning wire redemptions, 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 the Fund. Checks will
be sent only to the registered owner(s) and only to the address of record. The
Account Application 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 Fund to redeem a sufficient number of the
investor's shares to cover the amount of the Check and any applicable CDSC.
There is no charge to the investor for the use of the Checks;
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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
and because a CDSC may be applicable, Checks should not be used to close an
account. Shares for which stock certificates have been issued may not be
redeemed by Check.
OTHER REDEMPTION INFORMATION. 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. The Fund ordinarily 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 the 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 the Fund receives payment in cash
or immediately available funds for the purchase of shares. The Company may
suspend the right of redemption or postpone the date of payment upon redemption
(as well as suspend the recordation of the transfer of shares) for such periods
as are permitted under the 1940 Act. 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.
The Fund imposes no charge when shares are redeemed unless the shares have
been acquired through exchange of B Shares of the Time Horizon Funds, in which
case any applicable CDSC will be charged in accordance with the prospectus for
the particular B Shares. Additionally, 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 Fund reserves the right to redeem
accounts (other than non-working spousal IRA accounts) involuntarily, upon sixty
days' written notice, if the account's net asset value falls below the $500
minimum balance. A CDSC will not be imposed upon such involuntary redemptions.
SHAREHOLDER SERVICES
The services and privileges described under this heading are available only
to holders of the Fund's Pacific Horizon Shares and are not available to persons
who invest directly in Horizon Shares, Horizon Service Shares, X Shares or S
Shares of the Fund. Additionally, these services and privileges may not be
available to certain clients of Bank of America and particular Service
Organizations. 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.
INDIVIDUAL RETIREMENT ACCOUNTS ("IRAS"). The Company makes available IRAs,
including IRAs set up under a Simplified Employee Pension Plan ("SEP-IRAs") and
IRA "Rollover Accounts." For details contact the Distributor at (800) 332-3863.
The minimum initial investment for SEP-IRAs with more than one participant is
$2,500, with no minimum on subsequent purchases. The minimum initial investment
for IRAs and SEP-IRAs with only one participant is normally $500, with no
minimum on subsequent purchases. Individuals who open an IRA may also open a
non-working spousal IRA with a minimum investment of $250. The CDSC with respect
to Pacific Horizon Shares acquired through exchange of B Shares will not be
charged on redemptions in connection with minimum required distributions from an
IRA due to the shareholder having reached age 70 1/2. The investor should read
the IRA Disclosure Statement and the Bank Custodial Agreement for further
details as to eligibility, service fees and tax implications, and should consult
a tax adviser.
EXCHANGES. The Exchange Privilege enables an investor to exchange Pacific
Horizon Shares of the Fund for: like shares in another portfolio of the Company,
or like shares of any investment portfolio of Time Horizon Funds
14
<PAGE> 305
provided that (i) Pacific Horizon Shares of the Prime Fund acquired through an
exchange of B Shares of an investment portfolio of the Time Horizon Funds may
only be exchanged for B Shares of an investment portfolio of the Time Horizon
Funds, and (ii) such other shares may legally be sold in the state of the
investor's residence. An investment in Pacific Horizon Shares of the 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 that he does not wish to use 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. B Shares of the 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 Fund will
be subject to a CDSC upon redemption in accordance with the prospectus for the
particular B Shares. For purposes of computing the CDSC, the length of time of
ownership will be measured from the date of the original purchase of B shares
and will not include any period of ownership of the Pacific Horizon Shares of
the Fund. 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 Fund shares 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 front-end sales load, the applicable front-end 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
Exchange Privilege. The Company 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 will be given to shareholders of any material modification
or termination 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 (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
requirement 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. Such
applications are available 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 80221, Los Angeles, California
90080-9909 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 (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
15
<PAGE> 306
Program. An investor may elect at any time to terminate his participation by
notifying the appropriate federal agency. Further, the Company may terminate an
investor's participation upon 30 days' notice to the investor.
AUTOMATIC WITHDRAWAL PLAN. Investors having a $5,000 minimum account may
request withdrawal of a dollar amount in multiples of $50 on 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. Use of this Plan may be disadvantageous for shares acquired
through exchange of B Shares due to the potential need to pay a CDSC.
REINSTATEMENT PRIVILEGES. An investor may reinvest all or any portion of
his redemption proceeds received from the redemption of Pacific Horizon Shares
of the Prime Fund, which were acquired through exchange of B Shares of the Time
Horizon Funds, within 90 days of the redemption trade date. Such reinvestment
must be made in B Shares of an investment portfolio 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 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.
DIVIDENDS, DISTRIBUTIONS AND TAXES
DIVIDENDS AND DISTRIBUTIONS. The 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 held by the Fund. Generally, the
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 Fund does 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. Reinvested dividends receive the same tax treatment
as dividends paid in cash. Such election or any revocation thereof must be made
in writing to the Transfer Agent at P.O. Box 80221, Los Angeles, California
90080-9909, and will become effective with respect to dividends paid after its
receipt by the dividend disbursing agent.
16
<PAGE> 307
FEDERAL TAXES. During its most recent taxable year, the Fund qualified as
a "regulated investment company" under the Internal Revenue Code of 1986, as
amended (the "Code"), and the Fund intends to so qualify in future years, as
long as such qualification is in the best interest of its 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.
In connection with such tax qualification, the Fund contemplates declaring
as dividends at least 90% of its investment company taxable income for each
taxable year. An investor of the Fund who receives a dividend derived from
investment company taxable income (including any excess of net short-term
capital gain over net long-term capital loss) treats it as a receipt of ordinary
income in the computation of his gross income, whether such dividend is paid in
the form of cash or additional shares of the Fund. Because all of the net
investment income of the Fund is expected to be derived from earned interest, it
is anticipated that all dividends paid by the Fund 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 Fund will be eligible for the dividends
received deduction for corporations.
Although the Fund anticipates that it will not have net long-term capital
gain, any distribution of the Fund's excess of net long-term capital gain over
its net short-term capital loss will be taxable to shareholders of the Fund as
long-term capital gain, regardless of how long the shareholder has held shares
of the Fund.
Dividends declared in October, November or December of any calendar year
payable to shareholders of record on a specified date in such month will be
deemed for federal tax purposes to have been paid by the Funds and received by
the shareholders on December 31 of such year, as long as such dividends are paid
during January of the following year.
The foregoing is only a brief summary of some of the important federal
income tax considerations generally affecting the Fund and its shareholders, and
is based on federal tax laws and regulations which are in effect as of the date
of this Prospectus. Such laws and regulations may be changed by legislative or
administrative actions.
Potential investors in the Fund should consult their tax advisers with
specific reference to their own tax situation. Additional tax information of
relevance to particular investors is contained in the Statement of Additional
Information. Shareholders will be advised at least annually as to the federal
income tax consequences of distributions made each year.
STATE AND LOCAL TAXES. 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. On
March 30, 1984 the Company commenced its public sale of shares (Pacific Horizon
Shares) in the Prime Fund, which was originally called "Money Market Portfolio."
The Predecessor Prime Fund originally commenced operations on July 10, 1987 as a
separate portfolio of The Horizon Funds, a Massachusetts business trust. On
January 19, 1990, the Prime Fund of The Horizon Funds was combined with the
Money Market Portfolio of the Company; the Company changed the name of its
resulting portfolio to "Prime Fund"; and, in addition to continuing its offering
of Pacific Horizon Shares in such Fund, the Company began offering Horizon
Shares and Horizon Service Shares in the Fund. The Company has also classified
an X Share class and an S share class of the Fund. S Shares are offered to
customers who purchase such shares through cash management services such as a
sweep account offered by Bank of America, any of its banking affiliates and
certain other Service Organizations. X Shares are available only to qualified
retail customers who purchase such shares through a sweep account offered by BA
Investment Services, Inc. and certain
17
<PAGE> 308
other Service Organizations. Horizon and Horizon Service Shares may be purchased
by institutional investors for accounts maintained by individuals, but 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 the following series of shares representing interests in the Fund,
which is classified as a diversified company under the Investment Company Act of
1940: ten billion X Shares, ten billion S Shares, ten billion Pacific Horizon
Shares, eighteen billion Horizon Shares and ten billion Horizon Service Shares.
Horizon Shares, Horizon Service Shares, X Shares and S Shares of the Fund are
described in separate Prospectuses 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 Pacific Horizon Shares of the Fund and
describes only the investment objective and policies, operations, contracts and
other matters relating to such Shares.
Each X Share, S Share, Pacific Horizon Share, Horizon Share and Horizon
Service Share in the 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 the Fund and in the net distributable
assets of such Fund on liquidation. Holders of X Shares of the Fund bear the
fees described in the Prospectus relating to such shares that are paid to the
Distributor and Service Organizations by the Fund under the Company's
Distribution and Services Plan. Similarly, holders of the Fund's S Shares bear
the fees described in the Prospectus relating to such shares that are paid to
the Distributor and Service Organizations by the Fund under the same plan. The
fees paid under the Distribution and Services Plan are for distribution and
shareholder services paid to the Distributor and Service Organizations in
connection with S and X Shares of the Fund, and are not paid by the Fund's
Horizon, Horizon Service or Pacific Horizon Shares. Holders of the 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
Horizon Service Shares bear the fees described in the Prospectus relating to
such shares that are paid to shareholder organizations by the Fund under the
Company's Shareholder Services Plan. The fees paid under the Special Management
Services Agreement are for services provided by Bank of America and the
Administrator to holders of the Fund's Pacific Horizon Shares and are not borne
by the Fund's Horizon Shares, Horizon Service Shares, X Shares or S Shares. The
fees paid under the Shareholder Services Plan are for services provided by
shareholder organizations to their customers in connection with Horizon Service
Shares, and shareholder organizations do not receive similar fees with respect
to the Fund's X Shares, S Shares, Horizon Shares or Pacific Horizon Shares. As a
result of the different fees borne by the various series of shares in the Fund,
at any given time the net yield on the Fund's Pacific Horizon Shares generally
will be approximately .32% lower than the yield on the Fund's Horizon Shares,
.07% lower than the yield on the Fund's Horizon Service Shares, .23% higher than
the yield on the Fund's X Shares and .68% higher than the yield on the Fund's S
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 the 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. Only holders of Pacific Horizon Shares will be entitled
to vote on matters submitted to a vote of shareholders pertaining to the Fund's
Special Management Service Agreement. Only holders of Horizon Service Shares
will be entitled to vote on matters submitted to a vote of shareholders
pertaining to the Fund's
18
<PAGE> 309
Shareholder Service Plan. Only holders of particular S and X Shares, if affected
by changes to such Plan, will be entitled to vote on matters submitted to a vote
of shareholders pertaining to the Fund's Distribution and Services Plan relating
to the particular series. Shares have no pre-emptive 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.
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 the "yield" or "effective yield" of the 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 the 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 slightly higher
than the "yield" because of the compounding effect of this assumed reinvestment.
Additionally, the yields 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 Fund's 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 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 the 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 fee
charged by Bank of America or other institutional investors directly to their
customers 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 Fund's calculations of yield.
------------------------
Shareholder inquires should be addressed to the Distributor at the address
or telephone numbers stated on the inside cover of this Prospectus.
19
<PAGE> 310
RETIREMENT FUNDS
PROSPECTUSES
SEA-0006
9068 rev 7/96
----------------------------------------------------------------------------
Seafirst Retirement Funds
Prospectus Dated
July 1, 1996
- Bond Fund
- Blue Chip Fund
- Asset Allocation Fund
Pacific Horizon Funds, Inc.
Prospectus Dated
July 1, 1996
- Prime Fund
Call 1-800-323-9919
Speech or hearing impaired
TTY/TDD
users may call
1-800-232-6299
<PAGE> 311
PROSPECTUS
JULY 1, 1996
X Shares of the
PRIME FUND
TREASURY FUND
Pacific Horizon 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 X SHARES OF THE PRIME FUND AND TREASURY FUND AND
THE PACIFIC HORIZON SHARES OF THE PRIME FUND, TREASURY FUND, GOVERNMENT FUND AND
TREASURY ONLY FUND (THE "FUNDS"), FOUR NO-LOAD, DIVERSIFIED INVESTMENT
PORTFOLIOS OFFERED BY PACIFIC HORIZON FUNDS, INC. (THE "COMPANY"). THE COMPANY
IS REGISTERED UNDER THE INVESTMENT COMPANY ACT OF 1940 AS AN OPEN-END MANAGEMENT
INVESTMENT COMPANY. THE FUNDS ARE DESIGNED TO PROVIDE INVESTORS WITH DAILY
LIQUIDITY.
THE INVESTMENT OBJECTIVES OF THE PRIME FUND AND TREASURY FUND ARE TO SEEK HIGH
CURRENT INCOME AND STABILITY OF PRINCIPAL. THE PRIME FUND SEEKS TO ACHIEVE ITS
INVESTMENT 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 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 ITS INVESTMENT OBJECTIVE BY INVESTING SOLELY IN DIRECT OBLIGATIONS
ISSUED BY THE U.S. TREASURY AND REPURCHASE AGREEMENTS RELATING TO SUCH TREASURY
OBLIGATIONS. THE INVESTMENT OBJECTIVES OF THE GOVERNMENT FUND AND THE TREASURY
ONLY FUND ARE 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 ITS INVESTMENT 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 TREASURY ONLY FUND SEEKS TO ACHIEVE ITS
INVESTMENT OBJECTIVE BY INVESTING SOLELY IN OBLIGATIONS OF THE U.S. TREASURY.
THIS PROSPECTUS BRIEFLY SETS FORTH CERTAIN INFORMATION ABOUT THE FUNDS DESCRIBED
HEREIN THAT YOU 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, 1996 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) 332-3863. THE
STATEMENT OF ADDITIONAL INFORMATION, AS IT MAY FROM TIME TO TIME BE REVISED, IS
INCORPORATED IN ITS ENTIRETY BY REFERENCE INTO THIS PROSPECTUS AND DISCUSSES
CERTAIN SUBJECTS IN THIS PROSPECTUS FURTHER AS WELL AS OTHER MATTERS WHICH MAY
BE OF INTEREST TO INVESTORS.
(Continued next page)
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
No person has been authorized to give any information or to make any
representations, other than those contained in this Prospectus, in the Statement
of Additional Information and the Funds' official sales literature, in
connection with the offering of the Funds' 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 Funds 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 Funds or the distributor to make such offer in such
jurisdiction.
- --------------------------------------------------------------------------------
<PAGE> 312
CURRENTLY, X SHARES ARE AVAILABLE ONLY TO QUALIFIED RETAIL CUSTOMERS WHO
PURCHASE SUCH SHARES THROUGH A SWEEP ACCOUNT ("SWEEP ACCOUNT") OFFERED BY BA
INVESTMENT SERVICES, INC. ("BAIS") AND CERTAIN OTHER FINANCIAL SERVICE
ORGANIZATIONS, SUCH AS BANKS OR BROKER-DEALERS ("SERVICE ORGANIZATIONS"). A
SWEEP ACCOUNT COMBINES A BROKERAGE ACCOUNT (THE "TRANSACTION ACCOUNT") WITH A
DAILY SWEEP OF BALANCES TO OR FROM THE PRIME AND TREASURY FUNDS' X SHARES. BAIS
OR SERVICE ORGANIZATIONS, AS APPLICABLE, ARE RESPONSIBLE FOR PROVIDING PERSONS
INVESTING IN X SHARES THROUGH A SWEEP ACCOUNT WITH SWEEP ACCOUNT MATERIALS (THE
"SWEEP MATERIALS") DESCRIBING THE VARIOUS FEATURES AND OPERATIONS OF THE SWEEP
ACCOUNT. THE SWEEP MATERIALS SHOULD BE REVIEWED IN CONJUNCTION WITH THIS
PROSPECTUS.
PACIFIC HORIZON SHARES MAY BE PURCHASED DIRECTLY FROM CONCORD FINANCIAL GROUP,
INC., BY CLIENTS OF BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION
THROUGH THEIR QUALIFIED TRUST AND AGENCY ACCOUNTS OR BY CLIENTS OF SERVICE
ORGANIZATIONS.
BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION ("BANK OF AMERICA"), SAN
FRANCISCO, CALIFORNIA, ACTS AS INVESTMENT ADVISER TO THE FUNDS. CONCORD
FINANCIAL GROUP, INC. (THE "DISTRIBUTOR") 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.
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.
<PAGE> 313
CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
EXPENSE SUMMARY 2
FINANCIAL HIGHLIGHTS 4
INVESTMENT OBJECTIVES AND
POLICIES 9
COMMON INVESTMENT POLICIES 12
MANAGEMENT OF THE FUNDS 16
PURCHASES OF SHARES 19
REDEMPTION OF SHARES 21
SHAREHOLDER SERVICES 24
DIVIDENDS, DISTRIBUTIONS AND
TAXES 26
DESCRIPTION OF SHARES 27
PERFORMANCE CALCULATIONS 29
- ------------------------------------------------------------------------------------------------------------------------
DISTRIBUTOR: INVESTMENT ADVISER:
Concord Financial Group, Inc. Bank of America National Trust and Savings Association
3435 Stelzer Road 555 California Street
Columbus, OH 43219 San Francisco, CA 94104
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 314
EXPENSE SUMMARY
The following table sets forth certain information regarding the shareholder
transaction expenses imposed by the X Shares of the Prime and Treasury Funds and
Pacific Horizon Shares of the Prime, Treasury, Government and Treasury Only
Funds and the annual operating expenses 1) expected to be incurred by X Shares
of the Prime and Treasury Funds for the first twelve months of operations, and
2) incurred by the Pacific Horizon Shares of the Prime, Treasury, Government and
Treasury Only Funds during the last fiscal year. Actual expenses may vary.
Hypothetical examples based on the table are also shown.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRIME TREASURY GOVERNMENT TREASURY ONLY
FUND FUND FUND FUND
------------------ ------------------ ---------- -------------
PACIFIC PACIFIC PACIFIC PACIFIC
X HORIZON X HORIZON HORIZON HORIZON
SHARES(1) SHARES SHARES(1) SHARES SHARES SHARES
--------- ------- --------- ------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Sales Load Imposed on Purchases.......... None None None None None None
Sales Load Imposed on Reinvested
Dividends.............................. None None None None None None
Sales Load Imposed on Redemptions(2)..... None None None None None None
Deferred Sales Load(3)................... None None None None None None
Redemption Fees.......................... None None None None None None
Exchange Fees............................ None None None None None None
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Management Fees(4) (After Fee
Waivers)............................... .20% .20% .20% .20% .13%(6) .20%
Rule 12b-1 Fees.......................... .30%(5) 0% .30%(5) 0% 0% 0%
Special Management or Shareholder
Services Fees.......................... .25% .32% .25% .32% .32% .32%
All Other Expenses....................... .03% .03% .05% .05% .11% .11%
------- ------ ------- ------ -------- ---------
Total Operating Expenses (After Fee
Waivers)............................... .78% .55% .80% .57% .56%(6) .63%
======= ====== ======= ====== ======== =========
</TABLE>
(1) Additional fees charged by BAIS or Service Organizations related to the
Sweep Account are not included in this table. For additional information
with respect to Sweep Account fees and charges, including a description of
the services available to Sweep Account holders, you should refer to the
Sweep Materials.
(2) The Company reserves the right to impose a charge for wiring redemption
proceeds.
(3) No contingent deferred sales load is charged, except that Pacific Horizon
Shares of the Prime Fund acquired through an exchange of shares
("B Shares") of the Time Horizon Funds (an open-end investment company
managed by Bank of America) offered with a contingent deferred sales
charge ("CDSC") will be subject to a CDSC of up to a maximum of 5% upon
redemption in accordance with the prospectus for the particular B Shares.
See "Shareholder Services -- Exchanges."
(4) 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.
(5) Because of the Distribution Plan Payments paid by X Shares of the Prime
and Treasury Funds as shown in the above table, long-term Class X
shareholders may pay more than the economic equivalent of the maximum
front-end sales charge permitted by the National Association of
Securities, Dealers, Inc.
(6) Absent fee waivers, Management Fees and Total Operating Expenses would
have been .20%, and .63%, respectively, with respect to Pacific Horizon
Shares of the Government Fund.
- --------------------------------------------------------------------------------
2
<PAGE> 315
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
EXAMPLE 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:
PRIME FUND
X Shares.................................................... $8 $25 $43 $ 97
Pacific Horizon Shares*..................................... $6 $18 $31 $ 69
TREASURY FUND
X Shares.................................................... $8 $26 $44 $ 99
Pacific Horizon Shares...................................... $6 $18 $32 $ 71
GOVERNMENT FUND
Pacific Horizon Shares...................................... $6 $18 $31 $ 70
TREASURY ONLY FUND
Pacific Horizon Shares...................................... $6 $20 $35 $ 79
</TABLE>
- --------------------------------------------------------------------------------
* Example does not include deduction at redemption of a CDSC for Pacific Horizon
Shares of the Prime Fund acquired through exchange of B Shares of the Time
Horizon Funds.
The foregoing Expense Summary and Example are intended to assist investors in X
Shares of the Prime and Treasury Funds and Pacific Horizon Shares of the Prime,
Treasury, Government and Treasury Only Funds in understanding the various
shareholder transaction and operating expenses of each class that investors bear
either directly or indirectly. Investors bear operating expenses indirectly
since they reduce the amount of income paid by the Funds to investors as
dividends. From time to time, the investment adviser and administrator may
prospectively waive a portion of their respective fees and/or assume certain
expenses of the Funds. See "Management of the Funds" and "Description of Shares"
for more complete descriptions of the various expenses referred to above.
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.
3
<PAGE> 316
FINANCIAL HIGHLIGHTS
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 (the "Predecessor Prime Fund" and the "Predecessor Treasury
Fund") were combined with the Money Market Portfolio and Government Money Market
Portfolio 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 the Prime and Treasury Funds. The
Company has also classified an X Share and S Share class of the Prime and
Treasury Funds. Horizon Shares, Horizon Service Shares and S Shares of the Prime
and Treasury Funds are offered through another prospectus. The shares of each
class in a Fund represent equal pro rata interests in such Fund, except that
they bear different expenses which reflect the difference in the range of
services provided to them. X Shares bear the expense of a distribution and
services plan (the "Distribution and Services Plan") at an annual rate not to
exceed 0.55% of the average daily net asset value of the Prime and Treasury
Funds' outstanding X Shares. Pacific Horizon Shares bear the expense of a
special management services agreement at an annual rate not to exceed 0.32% of
the average daily net asset value of the Prime and Treasury Funds' outstanding
Pacific Horizon Shares. See "Description of Shares" below for certain
differences among the Pacific Horizon Shares, Horizon Shares, Horizon Service
Shares, S Shares and X Shares, including differences related to expenses.
The tables below set forth certain information concerning the investment results
of Pacific Horizon Shares of the Prime Fund and Treasury Fund for the periods
indicated. The information contained in the Financial Highlights insofar as it
pertains to each of the five fiscal years in the five year period ended February
29, 1996 has been audited by Price Waterhouse LLP, independent accountants for
these two Funds, whose unqualified report on the financial statements containing
such information, is incorporated by reference into the Statement of Additional
Information, which may be obtained upon request. The information contained in
the Financial Highlights for each of the three years in the period ended
February 28, 1989 was audited by other independent accountants whose report
thereon dated April 20, 1989 expressed an unqualified opinion on the statements
containing such 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 into the
Statement of Additional Information.
4
<PAGE> 317
Selected Data for a Pacific Horizon Share Outstanding throughout Each of the
Periods Indicated:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRIME FUND
---------------------------------------------------------------
YEAR ENDED
---------------------------------------------------------------
FEB. 29, FEB. 28, FEB. 28, FEB. 28, FEB. 29,
1996+ 1995+ 1994+ 1993+ 1992
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year............................ $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- -------- -------- -------- --------
Income from Investment Operations:
Net investment income......................................... 0.0539 0.0424 0.0287 0.0340 0.0558
Net realized gain (loss) on securities........................ 0.0004 (0.0227) (0.0016) 0.0000 0.0005
-------- -------- -------- -------- --------
Total income from investment operations...................... 0.0543 0.0197 0.0271 0.0340 0.0563
-------- -------- -------- -------- --------
Less Distributions:
Dividends from net investment income......................... (0.0539) (0.0422) (0.0287) (0.0341) (0.0557)
Increase due to voluntary capital contribution from
investment adviser.......................................... 0.0000 0.0233 0.0000 0.0000 0.0000
-------- -------- -------- -------- --------
Net change in net asset value per share....................... 0.0004 0.0008 (0.0016) (0.0001) 0.0006
-------- -------- -------- -------- --------
Net asset value per share, end of year........................ $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
========= ========= ========= ========= =========
Total return.................................................. 5.53% 4.30%** 2.91% 3.45% 5.72%
Ratios/Supplemental Data:
Net assets, end of year (millions).......................... $ 2,200 $ 1,129 $ 1,216 $ 992 $ 1,413
Ratio of expenses to average net assets..................... 0.55%* 0.51%* 0.52%* 0.55% 0.56%
Ratio of net investment income to average net assets........ 5.37%* 4.19%* 2.86%* 3.42% 5.51%
</TABLE>
<TABLE>
<CAPTION>
PRIME FUND
---------------------------------------------------------------
YEAR ENDED
---------------------------------------------------------------
FEB. 28, FEB. 28, FEB. 28, FEB. 29, FEB. 28,
1991 1990 1989 1988 1987
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year............................ $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- -------- -------- -------- --------
Income from Investment Operations:
Net investment income......................................... 0.0762 0.0855 0.0738 0.0643 0.0606
Net realized gain (loss) on securities........................ (0.0001) 0.0001 (0.0002) 0.0003 (0.0001)
-------- -------- -------- -------- --------
Total income from investment operations...................... 0.0761 0.0856 0.0736 0.0646 0.0605
-------- -------- -------- -------- --------
Less Distributions:
Dividends from net investment income......................... (0.0762) (0.0855) (0.0738) (0.0643) (0.0606)
Increase due to voluntary capital contribution from
investment adviser.......................................... 0.0000 0.0000 0.0000 0.0000 0.0000
-------- -------- -------- -------- --------
Net change in net asset value per share....................... (0.0001) 0.0001 (0.0002) 0.0003 (0.0001)
-------- -------- -------- -------- --------
Net asset value per share, end of year........................ $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
========= ========= ========= ========= =========
Total return.................................................. 7.89% 8.90% 7.63%++ 6.62%++ 6.23%++
Ratios/Supplemental Data:
Net assets, end of year (millions).......................... $ 1,086 $ 890 $ 921 $ 957 $ 484
Ratio of expenses to average net assets..................... 0.56% 0.63% 0.63% 0.58% 0.57%
Ratio of net investment income to average net assets........ 7.61% 8.52% 7.38% 6.42% 6.02%
</TABLE>
- ---------------
* Includes 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 0.01%, 0.05% and
0.01% for the years ended February 29, 1996, February 28, 1995 and
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.
+ 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.
++ Unaudited.
5
<PAGE> 318
<TABLE>
<CAPTION>
TREASURY FUND
------------------------------------------------------------
YEAR ENDED
------------------------------------------------------------
FEB. 29, FEB. 28, FEB. 28, FEB. 28, FEB. 29,
1996+ 1995+ 1994+ 1993+ 1992
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year............................ $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- -------- -------- -------- --------
Income from Investment Operations:
Net investment income......................................... 0.0527 0.0405 0.0262 0.0309 0.0512
Net realized gain (loss) on securities........................ 0.0011 0.0001 (0.0002) 0.0000 0.0002
-------- -------- -------- -------- --------
Total income from investment operations...................... 0.0538 0.0406 0.0260 0.0309 0.0514
-------- -------- -------- -------- --------
Less Dividends and Distributions:
Dividends from net investment income......................... (0.0527) (0.0405) (0.0262) (0.0311) (0.0513)
-------- -------- -------- -------- --------
Net change in net asset value per share....................... 0.0011 0.0001 (0.0002) (0.0002) 0.0001
-------- -------- -------- -------- --------
Net asset value per share, end of year........................ $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======== ======== ======== ======== ========
Total return.................................................. 5.40% 4.13% 2.65% 3.15% 5.25%
Ratios/Supplemental Data:
Net assets, end of year (millions)........................... $ 1,091 $ 1,132 $ 1,577 $ 1,746 $ 2,300
Ratio of expenses to average net assets..................... 0.57%* 0.55% 0.55% 0.56% 0.56%
Ratio of net investment income to average net assets........ 5.24%* 3.99% 2.62% 3.11% 5.07%
</TABLE>
<TABLE>
<CAPTION>
TREASURY FUND
------------------------------------------------------------
YEAR ENDED
------------------------------------------------------------
FEB. 28, FEB. 28, FEB. 28, FEB. 29, FEB. 28,
1991 1990 1989 1988 1987
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year............................ $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- -------- -------- -------- --------
Income from Investment Operations:
Net investment income......................................... 0.0731 0.0833 0.0712 0.0587 0.0604
Net realized gain (loss) on securities........................ 0.0006 0.0004 (0.0005) (0.0003) (0.0000)
-------- -------- -------- -------- --------
Total income from investment operations...................... 0.0737 0.0837 0.0707 0.0584 0.0604
-------- -------- -------- -------- --------
Less Dividends and Distributions:
Dividends from net investment income......................... (0.0733) (0.0830) (0.0709) (0.0587) (0.0604)
-------- -------- -------- -------- --------
Net change in net asset value per share....................... 0.0004 0.0007 (0.0002) 0.0003 0.0000
-------- -------- -------- -------- --------
Net asset value per share, end of year........................ $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======== ======== ======== ======== ========
Total return.................................................. 7.58% 8.62% 7.33%++ 6.08%++ 6.21%++
Ratios/Supplemental Data:
Net assets, end of year (millions)........................... $ 1,663 $ 1,144 $ 1,048 $ 947 $ 1,317
Ratio of expenses to average net assets..................... 0.55% 0.55% 0.54% 0.56% 0.55%
Ratio of net investment income to average net assets........ 7.29% 8.33% 7.14% 5.90% 5.99%
</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.
++ Unaudited.
* Includes 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 0.01% for the year ended
February 29, 1996.
6
<PAGE> 319
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 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 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 Pacific Horizon Shares and Horizon Service Shares.
Horizon Shares and Horizon Service Shares of the Government and Treasury Only
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) Pacific Horizon Shares of the Government Fund and the Treasury Only Fund
for the three years ended February 29, 1996; and (ii) shares of the Predecessor
Government Fund and Predecessor Treasury Only Fund of First Funds of America,
which offered and sold shares of beneficial interest similar to the Company's
Pacific Horizon 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 those two Funds, whose
unqualified report thereon is incorporated by reference into the Statement of
Additional Information, which may be obtained upon request. The information
about the Predecessor Government Fund and Predecessor Treasury Only Fund has
been audited by other independent accountants for these Predecessor Funds for
the periods indicated, whose unqualified report dated March 1, 1993 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 reports of independent accountants which are incorporated by
reference into the Statement of Additional Information with respect to the
Government and Treasury Only Funds.
7
<PAGE> 320
Selected Data for a Share Outstanding throughout Each of the Periods Indicated:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
GOVERNMENT FUND -- PACIFIC HORIZON SHARES PREDECESSOR GOVERNMENT FUND
----------------------------------------------------- ----------------------------------------------------
MARCH 1, 1993 JUNE 4, 1990
(COMMENCEMENT 11 MONTH (COMMENCEMENT OF
YEAR ENDED YEAR ENDED OF OPERATIONS) TO PERIOD ENDED YEAR ENDED OPERATIONS) TO
FEB. 29, 1996 FEB. 28, 1995 FEB. 28, 1994 FEB. 28, 1993 MARCH 31, 1992 MARCH 31, 1991
------------- ------------- ----------------- ------------- -------------- -----------------
<S> <C> <C> <C> <C> <C> <C>
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....... 0.0530 0.0421 0.0288 0.0275 0.0477 0.0575
Net realized
loss on
securities... (0.0004)+ (0.0091) (0.0006) -- -- --
------------- ------------- ----------------- ------------- -------------- -----------------
Total income
from
investment
operations... 0.0526 0.0330 0.0282 0.0275 0.0477 0.0575
------------- ------------- ----------------- ------------- -------------- -----------------
Less dividends
from net
investment
income......... (0.0524) (0.0420) (0.0288) (0.0275) (0.0477) (0.0575)
Increase due to
voluntary
capital
contribution
from investment
adviser........ 0.0000 0.0085 0.0000 0.0000 0.0000 0.0000
------------- ------------- ----------------- ------------- -------------- -----------------
Net change in net
asset value per
share.......... 0.0002 (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 $ 1.00
========== ========== ============ ========== =========== ============
Total return..... 5.37% 4.28%*** 2.92% 2.79%= 4.88% 5.90%=
Ratios/Supplemental
Data:
Net assets, end
of period
(millions)... $ 261,099 $ 354,828 $ 154,349 $ 102,576 $135,078 $ 145,388
Ratio of
expenses to
average net
assets*...... 0.56% 0.50% 0.60% 0.76%** 0.76% 0.74%**
Ratio of net
investment
income to
average net
assets*...... 5.34% 4.27% 2.88% 3.03%** 4.76% 6.57%**
</TABLE>
- ---------------
* Includes 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 0.07%, 0.08% and
0.002% for the years ended February 29, 1996, 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 Portfolio and Trust. If the voluntary expense
waiver had not been in place the annualized ratios of expenses to average
net assets would have been 0.94%, 0.91% and 0.91% for the periods ended
February 28, 1993, March 31, 1992 and March 31, 1991, respectively.
** Annualized.
*** 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.
= Not annualized.
+ Net realized loss for the period is a direct result of a decrease in
outstanding shares and the date of the gain realization.
8
<PAGE> 321
<TABLE>
<CAPTION>
TREASURY ONLY FUND -- PACIFIC HORIZON SHARES PREDECESSOR TREASURY ONLY FUND
--------------------------------------------------- ----------------------------------------------------
MARCH 1, 1993 JUNE 4, 1990
(COMMENCEMENT OF 11-MONTH (COMMENCEMENT OF
YEAR ENDED YEAR ENDED OPERATIONS) TO PERIOD ENDED YEAR ENDED OPERATIONS) TO
FEB. 29, 1996 FEB. 28, 1995 FEB. 28, 1994 FEB. 28, 1993 MARCH 31, 1992 MARCH 31, 1991
------------- ------------- ----------------- ------------- -------------- -----------------
<S> <C> <C> <C> <C> <C> <C>
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....... 0.0495 0.0384 0.0254 0.0264 0.0466 0.0554
Net realized
loss on
securities... 0.0003 (0.0002) (0.0002) -- -- --
------------- ------------- ----------------- ------------- -------------- -----------------
Total income from
investment
operations..... 0.0498 0.0382 0.0252 0.0264 0.0466 0.0554
------------- ------------- ----------------- ------------- -------------- -----------------
Less Dividends:
Dividends from
net
investment
income....... (0.0495) (0.0384) (0.0254) (0.0264) (0.0466) (0.0554)
------------- ------------- ----------------- ------------- -------------- -----------------
Net change in net
asset value per
share.......... 0.0003 (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 $ 1.00
========== ========== ============ ========== =========== ============
Total return..... 5.06% 3.90% 2.57% 2.67%= 4.76% 5.68%=
Ratios/Supplemental
Data:
Net assets, end
of period
(000)........ $ 274,282 $ 90,337 $ 72,120 $ 33,557 $ 41,637 $ 48,348
Ratio of
expenses to
average net
assets*...... 0.63% 0.62% 0.56% 0.56%** 0.56% 0.54%**
Ratio of net
investment
income to
average net
assets*...... 4.94% 3.90% 2.54% 2.86%** 4.66% 6.34%**
</TABLE>
- ---------------
* Includes 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 0.16% for the years ended February 28, 1995
and February 28, 1994, respectively. There were no fee waivers or expense
reimbursements during the fiscal year ended February 29, 1996. 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
Portfolio and Trust. If the voluntary expense waiver had not been in place,
the annualized ratios of expenses to average net assets would have been
0.99%, 0.94% and 0.98% for the periods ended February 28, 1993, March 31,
1992 and March 31, 1991, respectively.
** Annualized.
= Not annualized.
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 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") 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 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
9
<PAGE> 322
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 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. 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 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 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 domestic banks,
foreign branches of domestic banks ("Euro CDs") or domestic branches of foreign
banks ("Yankee CDs" and "Yankee BAs") or foreign branches of foreign banks
("Yankee Euros"). 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, Euro CDs and Yankee
Euros. The Fund may also make interest-bearing savings deposits in such
commercial banks in amounts not in excess of 5% of the Fund's net assets.
The Prime Fund may be subject to additional investment risks because the Fund
may hold securities issued by foreign branches of domestic banks, domestic
branches of foreign banks and foreign 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, domestic branches of foreign banks and foreign 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 Fund may include instruments
10
<PAGE> 323
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 Prime 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 direct 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 include 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.
GOVERNMENT FUND. The investment objective of the Government 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 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 net assets.
TREASURY ONLY FUND. The investment objective of the Treasury Only Fund is to
provide 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
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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 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 governmental 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. Govern-
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ment 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 deliver instruments the value
of which is greater than the repurchase price. 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
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 a Fund may
include variable and floating rate instruments, which may have a stated maturity
in excess of a 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
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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.
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 changes in interest rates. Delayed settlement describes a securities
transaction in a 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 its 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 total 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.
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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.
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 Govern-
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ment and Treasury Only Funds intend not to borrow money for any purpose in
excess of 10% of the Fund's total assets. 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 portfolios of the Company and other investment companies
and common trust funds managed by Bank of America and its affiliated entities.
Such other investment companies and common trust funds 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 portfolio,
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.
INVESTMENT ADVISER. Bank of America serves as the Funds' investment adviser.
Bank of America, which has 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, business credit and thrift offices in major U.S. cities. In addition,
it has branches, corporate offices and representative offices in 36 foreign
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 $48 billion under management, including over $12
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 29, 1996, the Prime Fund, Treasury Fund,
Government Fund and the Treasury Only Fund paid Bank of America advisory fees at
the effective annual rates of .10%, .10%, .06% and .10% of such Funds'
respective average daily net assets, and Bank of America waived advisory fees at
the effective annual rate of .04% of the Government Fund's average daily net
assets.
In addition, Bank of America is also entitled to fees under the Company's
Special Management Services Agreement with respect to the Funds' Pacific Horizon
Shares and may receive fees pursuant to the Distribution and Services Plan with
respect to the Prime and Treasury Funds' X Shares. Bank of America and Service
Organizations may also receive fees charged directly to their customers'
accounts in connection with investments in X Shares of the Prime and Treasury
Funds' and/or Pacific Horizon Shares of the Funds.
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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 3435 Stelzer Road, Columbus, OH 43219.
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 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.
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 29, 1996, the Prime Fund,
Treasury Fund, Government Fund and Treasury Only Fund paid the Administrator
administration fees at the effective annual rates of .10%, .10%, .07% and .10%
of such Funds' respective average daily net assets, and the Administrator waived
and/or reimbursed administration fees at the effective annual rate of .03% of
the Government Funds 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.
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 3435
Stelzer Road, Columbus, OH 43219.
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. BISYS Fund
Services, Inc., 3435 Stelzer Road, Columbus, OH 43219 (the "Transfer Agent"),
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 purchase and redemption of, and the payment of
dividends and other distributions with respect to the Funds' shares.
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DISTRIBUTION AND SERVICES PLAN. Under the Distribution and Services Plan, the
Prime and Treasury Funds pay the Distributor for distribution expenses primarily
intended to result in the sale of such Fund's X Shares and for shareholder
servicing expenses. Such distribution expenses include expenses incurred in
connection with advertising and marketing each Fund's X Shares; payments to
Service Organizations for assistance in connection with the distribution of X
Shares; and expenses incurred in connection with preparing, printing and
distributing prospectuses for the Funds (except those used for regulatory
purposes or for distribution to existing shareholders of the Funds) and in
implementing and operating the Distribution and Services Plan. Shareholder
servicing expenses include expenses incurred in connection with shareholder
services provided by the Distributor and payments to Service Organizations for
the provision of support services with respect to the beneficial owners of X
Shares, such as establishing and maintaining accounts and records relating to
their clients who invest in X Shares, assisting clients in processing exchange
and redemption requests, developing, maintaining and supporting systems
necessary to support Sweep Accounts and in changing dividend options and account
descriptions and responding to client inquiries concerning their investments.
Under the Distribution and Services Plan, payments by the Prime and Treasury
Funds for distribution expenses and shareholder servicing expenses may not
exceed the annual rate of 0.30% and 0.25%, respectively, of the average daily
net assets of such Fund's X Shares. These amounts may be reduced pursuant to
undertakings by the Distributor. Payments for distribution expenses under the
Distribution and Services Plan are subject to Rule 12b-1 under the 1940 Act. As
stated below under "Description of Shares," fees pursuant to the Distribution
and Services Plan are borne by the X and S Shares of the Prime and Treasury
Funds and are not paid with respect to such Funds' other series of shares.
The Company will obtain a representation from the Service Organizations (and
from Bank of America and the Distributor) 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. During the fiscal year ended February 29,
1996, no X Shares had been offered by the Company.
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 Pacific Horizon
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; with respect to the Prime
and Treasury Funds only, pay for the operation of arrangements that facilitate
same-day share purchases by customers of Bank of America through the use of a
joint repurchase agreement; 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 (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 rate of .32% of
the average net asset value of each Fund's outstanding Pacific Horizon Shares.
For the services provided and expenses assumed pursuant to the Special
Management Services Agreement, Bank of America and the Administrator received
for the fiscal year ended
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February 29, 1996 an aggregate fee at the annual rate of .32% of the average
daily net asset value of each of the Fund's Pacific Horizon Shares outstanding
from time to time. 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.
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,
Bank of America and/or the Administrator may prospectively waive payment of fees
and/or assume certain expenses of a Fund as a result of competitive pressures
and in order to protect the business and reputation of Bank of America and the
Administrator. 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 are not waived or amounts are not reimbursed.
PURCHASES OF SHARES
HOW X SHARES ARE PURCHASED. X Shares of the Prime and Treasury Funds are
offered by this Prospectus to customers of BAIS or Service Organizations that
establish a Sweep Account with BAIS or a Service Organization. Each Sweep
Account combines a Transaction Account with a periodic sweep of balances to or
from the Prime and Treasury Funds. Investors may open a Sweep Account by
completing and signing the Sweep Materials. The Sweep Materials contain
important information about the various features and operations of the Sweep
Account and should be reviewed in conjunction with this Prospectus.
X Shares may be purchased on any Business Day (as defined below) that BAIS or
the particular Service Organization, as applicable, is open for business by
making a deposit into your Transaction Account. On each day that both the Prime
and Treasury Fund's custodian and the New York Stock Exchange (the "Exchange")
are open for business (a "Business Day") and that BAIS or a Service Organization
is open for business, BAIS or a Service Organization computes the net amount of
all deposits, withdrawals, charges and credits made to and from a Transaction
Account in accordance with their Sweep Account procedures (the "Net Sweep
Amount"). If deposits and credits exceed withdrawals and charges, you authorize
BAIS or a Service Organization, on your behalf, to transmit a purchase order to
the Fund designated in your Sweep Account in the amount of that day's Net Sweep
Amount in accordance with the Sweep Account procedures of Bank of America or a
Service Organization. Your purchase order will be made effective and full and
fractional X Shares will be purchased at the net asset value per share next
determined after receipt by the Transfer Agent. It is the responsibility of BAIS
or a Service Organization to transmit orders for the purchases of X 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 BAIS or a Service Organization are executed only on
Business Days that BAIS or a Service Organization, respectively, is open for
business. Contact BAIS or your Service Organization for additional information
about BAIS's or the Service Organization's Sweep Account procedures.
HOW PACIFIC HORIZON SHARES ARE PURCHASED. 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 Service Organizations
without a charge imposed by the Funds, although Bank of America and Service
Organizations may charge a fee for providing administrative services in
connection with investments in Pacific Horizon Shares of the Funds. 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
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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 Pacific Horizon Shares through
their accounts at Bank of America or a Service Organization should contact such
entity directly for appropriate instructions. Other investors may purchase
Pacific Horizon Shares in the manner described below.
An investor desiring to make an initial purchase of Pacific Horizon Shares by
mail should complete an Account Application and mail the Application and a check
payable to the appropriate Fund of Pacific Horizon to the address on the Account
Application. All subsequent purchases of Pacific Horizon Shares of a Fund made
by mail should be delivered to Pacific Horizon Funds, Inc., File No. 54634, Los
Angeles, California 90074-4634. Initial purchases of Pacific Horizon shares into
a new account may not be made by wire. However, an investor desiring to make a
subsequent purchase of Pacific Horizon shares of a Fund into an already existing
account by wire should contact the Transfer Agent at (800) 346-2087 for complete
wiring instructions and request his bank to transmit immediately available funds
by wire for purchase of Pacific Horizon shares in the investor's name. It is
important that the wire include the investor's name and Fund account number. 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
3435 Stelzer Road, Columbus, OH 43219.
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 each Business Day at the net asset value
per share next determined after receipt by the Transfer Agent at its Columbus
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 effected
through automatic investment transactions on behalf of Bank of America's trust
and agency accounts are received by Bank of America as sub-custodian for the
Funds before 12:00 noon (Pacific time) and are effected as of 4:00 p.m. (Eastern
time) on the same day. It is the responsibility of Bank of America or the
Service Organization involved to transmit orders for the purchases of Pacific
Horizon 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.
TELETRADE. Although the privilege may not be used to make an initial purchase,
an investment in Pacific Horizon Shares of a Fund entitles an investor to
purchase Fund shares (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 on 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 will be effected at the net asset value
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next determined after receipt of payment by the Funds' Transfer Agent. The
Company 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.
NET ASSET VALUE. The net asset value per share of the X Shares of the Prime and
Treasury Funds and Pacific Horizon Shares of each Fund is the value of all
securities and other assets owned by a Fund that are allocable to a particular
class, less the liabilities charged to such class, divided by the number of
outstanding shares of such class. 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 "Additional Purchase and Redemption Information -- Valuation." The net
asset value per share for purposes of pricing purchase and redemption orders for
each Fund is determined independently of that for other portfolios of the
Company. For price and yield information call (800) 346-2087.
Federal regulations require that each investor provide a certified Taxpayer
Identification Number upon opening or reopening an account. See the Account
Application for Pacific Horizon Shares of the Funds and the Sweep Account
Application for X Shares of the Prime and Treasury Funds for further information
about this requirement.
The Company will obtain a representation from Service Organizations (as well as
from Bank of America and the Distributor) that they will be licensed as dealers
as required by applicable law or will not engage in activities which would
require them to be so licensed.
REDEMPTION OF SHARES
HOW X SHARES ARE REDEEMED. If, on any Business Day that BAIS or the particular
Service Organization is open for business, withdrawals from and charges to your
Sweep Account, including without limitation check transactions, exceed deposits
and credits, BAIS or the particular Service Organization, as applicable, will
transmit a redemption order on your behalf to the Prime or Treasury Fund, as
appropriate, in the dollar amount of that day's Net Sweep Amount. If your Sweep
Account with BAIS or a Service Organization, as applicable, is closed as
described in the Sweep Materials, BAIS or the Service Organization, as
applicable, transmits a redemption request on your behalf to the appropriate
Fund for the balance of X Shares of such Fund held through your Sweep Account.
Redemptions are effected by the Company on a business day at the net asset value
next determined after receipt of the redemption order by the Transfer Agent. It
is the responsibility of BAIS or the particular Service Organization to transmit
the redemption order and credit its customer's Transaction Account with the
redemption proceeds on a timely basis. BAIS or the Service Organization may
withhold redemption proceeds pending check collection or processing or for other
reasons all as set forth more fully in the Sweep Materials.
HOW PACIFIC HORIZON SHARES ARE REDEEMED. Investors whose Pacific Horizon Shares
are purchased through accounts at Bank of America or a Service Organization may
redeem all or part of such 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 other redemption methods must arrange with Bank of
America
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or a 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. Pacific Horizon Shares of the Prime Fund acquired through exchange of B
Shares of the Time Horizon Funds are subject to a CDSC upon redemption in
accordance with the prospectus for the particular B Shares. For purposes of
computing the CDSC, the length of time of ownership will be measured from the
date of the original purchase of B Shares and will not include any period of
ownership of the Pacific Horizon Shares of the Prime Fund. 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 one of the following procedures.
REGULAR REDEMPTION. An investor in Pacific Horizon Shares may redeem Pacific
Horizon Shares in any amount by sending a written request to the Prime Fund,
Treasury Fund, Government Fund or Treasury Only Fund, c/o Pacific Horizon Funds,
Inc., P.O. Box 80221, Los Angeles, CA 90080-9909. Redemption orders are effected
upon receipt by the Transfer Agent at its Columbus office. Redemption requests
delivered to the Company other than by mail must be delivered to the offices of
the Transfer Agent at 3435 Stelzer Road, Columbus, OH 43219. While the Company
no longer issues share certificates, Pacific Horizon Shares for which
certificates previously had 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 60 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 Pacific Horizon Shares in the same manner and
subject to the same limitations as described under "Purchases of Shares -- How
Pacific Horizon Shares Are Purchased -- 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. Pacific Horizon 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, including requesting certain personal
or account information to confirm the identity of the shareholder.
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
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on the Account Application or in a subsequent signature guaranteed letter of
instruction to the Transfer Agent before shares may be redeemed by wire.
Shareholders 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 believed to be genuine 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 amount. Wire redemptions may be terminated or modified by
a Fund at any time. Pacific Horizon Shares issued in certificate form are not
eligible for wire redemption. A shareholder 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 in person to the Transfer Agent or
by mail as described above under "Regular Redemption." For additional
information concerning wire redemptions, see the Statement of Additional
Information and the Funds' Account Application.
CHECK REDEMPTION. An investor in Pacific Horizon Shares may request on the
Account Application that the Company provide Redemption Checks ("Checks") drawn
on a Fund. Checks will be sent only to the registered owner(s) and only to the
address of record. The Account Application 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 Fund involved to redeem
a sufficient number of the investor's Pacific Horizon Shares to cover the amount
of the Check and any applicable CDSC with respect to the Prime Fund. 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 reasons. 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. Pacific Horizon Shares for which stock certificates have been
issued may not be redeemed by Check.
OTHER REDEMPTION INFORMATION -- X SHARES AND PACIFIC HORIZON SHARES. 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. 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 the 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 the Fund
receives payment in cash or immediately available funds for the purchase of
shares. The Company may suspend the right of redemption or postpone the date of
payment upon redemption (as well as suspend the recordation of the transfer of
shares) for such periods as are permitted under the 1940 Act. 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.
The Funds impose no charge when X Shares or Pacific Horizon Shares are redeemed
unless Pacific
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Horizon Shares of the Prime Fund have been acquired through exchange of B Shares
of the Time Horizon Funds, in which case any applicable CDSC will be charged in
accordance with the prospectus for the particular B Shares. Additionally, if
Pacific Horizon 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 Pacific Horizon Share accounts (other than
non-working spousal IRA accounts) involuntarily, upon sixty days' written
notice, if the account's net asset value falls below the $500 minimum balance. A
CDSC will not be imposed upon such involuntary redemptions with respect to the
Prime Fund.
SHAREHOLDER SERVICES
The services and privileges described under this heading are available only to
holders of the Funds' Pacific Horizon Shares and are not available to persons
who invest directly in Horizon or Horizon Service Shares of the Funds or in X
Shares or S Shares of the Prime and Treasury Funds. Additionally, these services
and privileges may not be available to certain clients of Bank of America and
particular Service Organizations. 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.
INDIVIDUAL RETIREMENT ACCOUNTS ("IRAS"). The Company makes available IRAs,
including IRAs set up under a Simplified Employee Pension Plan ("SEP-IRAs") and
IRA "Rollover Accounts." For details contact the Distributor at (800) 332-3863.
The minimum initial investment for SEP-IRAs with more than one participant is
$2,500, with no minimum on subsequent purchases. The minimum initial investment
for IRAs and SEP-IRAs with only one participant is normally $500, with no
minimum on subsequent purchases. Individuals who open an IRA may also open a
non-working spousal IRA with a minimum investment of $250. The CDSC with respect
to Pacific Horizon Shares acquired through exchange of B Shares will not be
charged on redemptions in connection with minimum required distributions from an
IRA due to the shareholder having reached age 70 1/2. The investor should read
the IRA Disclosure Statement and the Bank Custodial Agreement for further
details as to eligibility, service fees and tax implications, and should consult
a tax adviser.
EXCHANGES. 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, provided that
(i) Pacific Horizon Shares of the Prime Fund acquired through an exchange of B
Shares of an investment portfolio of the Time Horizon Funds may only be
exchanged for B Shares of an investment portfolio of the Time Horizon Funds, and
(ii) 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 indicates on the Account
Application or in a subsequent written notice to the Transfer Agent that he does
not wish to use 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. B Shares of the 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
particular B Shares. For purposes of computing the CDSC, the length of time of
ownership will be measured
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from the date of the original purchase of B shares and will not include any
period of ownership of the Pacific Horizon Shares of the Prime Fund. 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 Fund shares 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 front-end sales load, the applicable front-end 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 Exchange
Privilege. The Company 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 will be given to shareholders of any material modification or termination
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 (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
requirement 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. Such
applications are available 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 80221, Los Angeles, California
90080-9909 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 (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 the appropriate federal
agency. Further, the Company may terminate an investor's participation upon 30
days' notice to the investor.
AUTOMATIC WITHDRAWAL PLAN. Investors having a $5,000 minimum account may
request withdrawal of a dollar amount in multiples of $50 on 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. Use of this Plan may be disadvantageous for Pacific Horizon
Shares of the
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Prime Fund acquired through exchange of B Shares due to the potential need to
pay a CDSC.
REINSTATEMENT PRIVILEGES. An investor may reinvest all or any portion of his
redemption proceeds received from the redemption of Pacific Horizon Shares of
the Prime Fund, which were acquired through exchange of B Shares of the Time
Horizon Funds, within 90 days of the redemption trade date. Such reinvestment
must be made in B Shares of an investment portfolio 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 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.
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. However, holders of the Funds' Pacific
Horizon Shares may elect 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 the Transfer Agent at P.O. Box
80221, Los Angeles, California 90080-9909, and will become effective with
respect to dividends paid after its receipt by the dividend disbursing agent.
FEDERAL TAXES. During its most recent taxable year, each Fund qualified
separately as a "regulated investment company" under the Internal Revenue Code
of 1986, as amended (the "Code"), each Fund intends to so qualify in future
years, as long as such qualification is in the best interest of its
shareholders. As a result of this qualification, each Fund generally is not
required to pay 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 (including any excess of net short-term capital gain over
net long-term capital loss) treats it as a receipt of ordinary
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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 October, November, or December of any calendar 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 of such year, if such dividends are paid during
January of the following year.
The foregoing is only a brief summary of some of the important federal income
tax considerations generally affecting the Funds and their shareholders, and is
based on federal tax laws and regulations which are in effect as of the date of
this Prospectus. Such laws and regulations may be changed by legislative or
administrative actions. 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. Shareholders will be advised at least annually as to
the federal income tax consequences of distributions made each year.
STATE AND LOCAL TAXES. 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. 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. The Predecessor Prime Fund and Predecessor Treasury Fund
originally commenced operations on July 10, 1987 as separate portfolios of The
Horizon Funds, a Massachusetts business trust. On January 19, 1990, the
Predecessor Prime Fund and Predecessor Treasury Fund of The Horizon Funds 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. The
Predecessor Government Funds and Predecessor Treasury Only Funds commenced
operations on June 4, 1990 as investment portfolios of First Funds of America
and First Cash Funds of America. On March 1, 1993, the Predecessor Government
Funds and Predecessor Treasury Only Funds were reorganized as new portfolios of
the Company, offering Pacific Horizon Shares and Horizon Service Shares; the
Government Fund and Treasury Only Fund began offering Horizon Shares on June 14,
1993 and September 20, 1995, respectively. The Company has also classified an X
share class and an S share class of the Prime and Treasury Funds. S Shares are
offered to customers who purchase such shares through cash management services,
such as a sweep account offered by Bank of America, any of its banking
affiliates and certain other Service Organizations. Horizon and Horizon Service
Shares may be purchased by institutional investors for accounts maintained by
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individuals, but 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 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
1940: ten billion X Shares, ten billion S Shares, ten billion Pacific Horizon
Shares, eighteen billion Horizon Shares and ten billion Horizon Service Shares
representing interests in the Prime Fund; four billion, four hundred million X
Shares, ten billion S Shares, ten billion Pacific Horizon Shares, ten billion
Horizon Shares and ten billion Horizon Service Shares representing interests in
the Treasury Fund; fifteen billion Pacific Horizon Shares, seven billion Horizon
Shares and fifteen billion Horizon Service Shares representing interests in the
Government Fund; and fifteen billion Pacific Horizon Shares, seven billion
Horizon Shares and fifteen billion Horizon Service Shares representing interests
in the Treasury Only Fund. Horizon Shares and Horizon Service Shares of the
Funds and S Shares of the Prime and Treasury 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 Pacific
Horizon Shares of the Funds and X Shares of the Prime and Treasury Funds and
describes only the investment objectives and policies, operations, contracts and
other matters relating to such Shares.
Each X Share, S Share, 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 X Shares of the Prime and
Treasury Funds bear the fees described in this Prospectus that are paid to the
Distributor and Service Organizations by such Funds under the Company's
Distribution and Services Plan. Similarly, holders of such Funds' S Shares bear
the fees described in the Prospectus relating to such shares that are paid to
the Distributor and Service Organizations by such Funds under the same plan. The
fees paid under the Distribution and Services Plan are for distribution and
shareholder services paid to the Distributor and Service Organizations in
connection with S and X Shares of the Prime and Treasury Funds, and are not paid
by such Funds' Horizon, Horizon Service or Pacific Horizon Shares. 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 Horizon Service Shares bear the fees described in the
Prospectus for such shares that are paid to shareholder organizations by a Fund
under the Company's Shareholder Services Plan. The fees paid under the Special
Management Services Agreement are for services provided by Bank of America and
the Administrator to holders of the Funds' Pacific Horizon Shares and are not
borne by the Funds' Horizon Shares or Horizon Service Shares or by X Shares or S
Shares of the Prime and Treasury Funds. The fees paid under the Shareholder
Services Plan are for services provided by shareholder organizations to their
customers in connection with Horizon Service Shares, and shareholder
organizations do not receive similar fees with respect to the Funds' Horizon
Shares or Pacific Horizon Shares or the X Shares or S Shares of the Prime and
Treasury Funds. As a result of the different fees borne by the various series of
shares
28
<PAGE> 341
in a Fund, at any given time the net yield on a) the Prime and Treasury Funds' X
Shares generally will be approximately 0.23% lower than the yield on the same
Fund's Pacific Horizon Shares, 0.30% lower than the yield on the same Fund's
Horizon Service Shares, 0.55% lower than the yield on the same Fund's Horizon
Shares and 0.45% higher than the yield on the same Fund's S Shares; and b) a
Fund's Pacific Horizon Shares generally will be approximately 0.07% lower than
the yield on the same Fund's Horizon Service Shares, 0.32% lower than the yield
on the same Fund's Horizon Shares, and 0.23% and 0.68% higher than the yield on
the same Fund's X Shares and S Shares, respectively, with respect to the Prime
and Treasury Funds. 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. Only holders of Pacific Horizon Shares will be entitled to vote on
matters submitted to a vote of shareholders pertaining to the Funds' Special
Management Services Agreement. Only holders of Horizon Service Shares will be
entitled to vote on matters submitted to a vote of shareholders pertaining to
the Funds' Shareholder Service Plan. Only holders of particular S and X Shares,
if affected by changes to such Plan, will be entitled to vote on matters
submitted to a vote of shareholders pertaining to a Fund's Distribution and
Services Plan relating to the particular series. 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.
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 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 ser-
29
<PAGE> 342
vices 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.
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 other institutional investors directly to
their customers 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.
------------------------
Shareholder inquiries should be addressed to the Distributor at the address or
telephone numbers stated on the inside cover of this Prospectus.
30
<PAGE> 343
PRM-0017
- ----------------------------
PACIFIC HORIZON MUTUAL FUNDS
- ----------------------------
PRIME FUND
TREASURY FUND
GOVERNMENT FUND
TREASURY ONLY FUND
PROSPECTUS
July 1, 1996
NOT FDIC INSURED
<PAGE> 344
PROSPECTUS
JULY 1, 1996
Pacific Horizon Shares of the
TAX-EXEMPT MONEY FUND
CALIFORNIA TAX-EXEMPT
MONEY MARKET FUND
X Shares of the
CALIFORNIA TAX-EXEMPT MONEY MARKET FUND
Investment Portfolios Offered by Pacific Horizon Funds,
Inc.
- --------------------------------------------------------------------------------
THIS PROSPECTUS APPLIES TO THE X SHARES OF THE CALIFORNIA TAX-EXEMPT MONEY
MARKET FUND AND PACIFIC HORIZON SHARES OF THE TAX-EXEMPT MONEY FUND AND THE
CALIFORNIA TAX-EXEMPT MONEY MARKET FUND (THE "FUNDS"), TWO NO-LOAD TAX-EXEMPT
INVESTMENT PORTFOLIOS OFFERED BY PACIFIC HORIZON FUNDS, INC. (THE "COMPANY").
THE FUNDS ARE DESIGNED TO PROVIDE INVESTORS WITH DAILY LIQUIDITY. THE COMPANY IS
REGISTERED UNDER THE INVESTMENT COMPANY ACT OF 1940 AS AN OPEN-END MANAGEMENT
INVESTMENT COMPANY. 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.
THE CALIFORNIA TAX-EXEMPT MONEY MARKET FUND IS, AND THE TAX-EXEMPT MONEY FUND
MAY BE, CONCENTRATED IN SECURITIES ISSUED BY THE STATE OF CALIFORNIA OR ENTITIES
WITHIN THE STATE OF CALIFORNIA AND THE CALIFORNIA TAX-EXEMPT MONEY MARKET FUND
MAY INVEST A SIGNIFICANT PERCENTAGE OF ITS ASSETS IN A SINGLE ISSUER. THEREFORE,
INVESTMENT IN THE FUNDS MAY BE RISKIER THAN AN INVESTMENT IN OTHER TYPES OF
MONEY MARKET FUNDS.
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 IS
CONTAINED IN A STATEMENT OF ADDITIONAL INFORMATION DATED JULY 1, 1996 THAT HAS
BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION AND IS AVAILABLE UPON
REQUEST AND WITHOUT CHARGE BY CALLING THE FUND'S DISTRIBUTOR AT (800) 332-3863.
THE STATEMENT OF ADDITIONAL INFORMATION, AS IT MAY FROM TIME TO TIME BE REVISED,
IS INCORPORATED IN ITS ENTIRETY BY REFERENCE INTO THIS PROSPECTUS.
(Continued next page)
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
No person has been authorized to give any information or to make any
representations, other than those contained in this Prospectus, in the Statement
of Additional Information and the Funds' official sales literature, in
connection with the offering of the Funds' 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 Funds 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 Funds or the distributor to make such offer in such
jurisdiction.
- --------------------------------------------------------------------------------
<PAGE> 345
CURRENTLY, X SHARES ARE AVAILABLE ONLY TO QUALIFIED RETAIL CUSTOMERS WHO
PURCHASE SUCH SHARES THROUGH A SWEEP ACCOUNT ("SWEEP ACCOUNT") OFFERED BY BA
INVESTMENT SERVICES, INC. ("BAIS") AND CERTAIN OTHER FINANCIAL SERVICE
ORGANIZATIONS, SUCH AS BANKS OR BROKER-DEALERS ("SERVICE ORGANIZATIONS"). A
SWEEP ACCOUNT COMBINES A BROKERAGE ACCOUNT (THE "TRANSACTION ACCOUNT") WITH A
DAILY SWEEP OF BALANCES TO OR FROM THE CALIFORNIA TAX-EXEMPT MONEY MARKET FUND'S
X SHARES. BAIS OR SERVICE ORGANIZATIONS, AS APPLICABLE, ARE RESPONSIBLE FOR
PROVIDING PERSONS INVESTING IN X SHARES THROUGH A SWEEP ACCOUNT WITH SWEEP
ACCOUNT MATERIALS (THE "SWEEP MATERIALS") DESCRIBING THE VARIOUS FEATURES AND
OPERATIONS OF THE SWEEP ACCOUNT. THE SWEEP MATERIALS SHOULD BE REVIEWED IN
CONJUNCTION WITH THIS PROSPECTUS.
PACIFIC HORIZON SHARES MAY BE PURCHASED DIRECTLY FROM CONCORD FINANCIAL GROUP,
INC., BY CLIENTS OF BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION
THROUGH THEIR QUALIFIED TRUST AND AGENCY ACCOUNTS OR BY CLIENTS OF SERVICE
ORGANIZATIONS.
BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION ("BANK OF AMERICA"), SAN
FRANCISCO, CALIFORNIA, 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.
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.
<PAGE> 346
CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
EXPENSE SUMMARY 2
FINANCIAL HIGHLIGHTS 4
INVESTMENT OBJECTIVES AND
POLICIES 6
MANAGEMENT OF THE FUNDS 14
PURCHASE OF SHARES 17
REDEMPTION OF SHARES 20
SHAREHOLDER SERVICES 22
DIVIDENDS, DISTRIBUTIONS AND
TAXES 24
DESCRIPTION OF SHARES 25
PERFORMANCE CALCULATIONS 27
- ------------------------------------------------------------------------------------------------------------------------
DISTRIBUTOR: INVESTMENT ADVISER:
Concord Financial Group, Inc. Bank of America National Trust and Savings Association
3435 Stelzer Road 555 California Street
Columbus, OH 43219-3035 San Francisco, CA 94104
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 347
EXPENSE SUMMARY
The following table sets
forth certain information
regarding the shareholder
transaction expenses imposed
by X Shares of the
California Tax-Exempt Money
Market Fund and Pacific
Horizon Shares of the
Tax-Exempt Money Fund and
California Tax-Exempt Money
Market Fund and the annual
operating expenses 1)
expected to be incurred by X
Shares of the California
Tax-Exempt Money Market Fund
for the first twelve months
of operations, and 2)
incurred during the last
fiscal year with respect to
the Pacific Horizon Shares
of the California Tax-Exempt
Money Market Fund and Tax-
Exempt Money Fund. Actual
expenses may vary.
Hypothetical examples based
on the summary are also
shown.
-----------------------------------------------------
<TABLE>
<CAPTION>
TAX-
EXEMPT CALIFORNIA
MONEY TAX-EXEMPT MONEY
FUND MARKET
------- -------------------
PACIFIC PACIFIC
HORIZON X HORIZON
SHARES SHARES(1) 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
Sales Load Imposed on Redemptions(2)....... None None None
Deferred Sales Load........................ None None None
Redemption Fees............................ None None None
Exchange Fee............................... None None None
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Management Fees............................ .20% .20% .20%
Rule 12b-1 Fees............................ 0% .30%(3) 0%
Special Management or Shareholder Services
Fees (after waivers)..................... .32% .25% .32%(4)
All Other Expenses (after waivers)......... .11% .10% .10%
---- ----- ----
Total Operating Expenses (after
waivers)(4).............................. .63% .85% .62%(4)
====== ======== ======
</TABLE>
-------------------------------------------
(1) Additional fees charged by BAIS or Service
Organizations related to the Sweep Account are
not included in this table. For additional
information with respect to Sweep Account fees
and charges, including a description of the
services available to Sweep Account holders,
you should refer to the Sweep Materials.
(2) The Company reserves the right to impose a
charge for wiring redemption proceeds.
(3) Because of the Distribution Plan payments paid
by X Shares of the California Tax-Exempt Money
Market Fund as shown in the above table,
long-term Class X shareholders may pay more
than the economic equivalent of the maximum
front-end sales charge permitted by the
National Association of Securities Dealers,
Inc.
(4) Absent fee waivers, Special Management Fees and
Total Operating Expenses would have been .35%
and .65%, respectively, with respect to Pacific
Horizon Shares of the California Tax-Exempt
Money Market Fund.
<PAGE> 348
- --------------------------------------------------------------------------------
<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 Fund, Pacific Horizon Shares.................. $6 $20 $35 $ 79
California Tax-Exempt Money Market Fund X Shares............... $9 $27 $47 $105
Pacific Horizon Shares......................................... $6 $20 $35 $ 77
</TABLE>
- --------------------------------------------------------------------------------
The foregoing Expense Summary and Example are intended to assist investors in X
Shares of the California Tax-Exempt Money Market Fund and Pacific Horizon Shares
of the Tax-Exempt Money Fund and California Tax-Exempt Money Market Fund in
understanding the various shareholder transaction and operating expenses of each
class that investors bear either directly or indirectly. Investors bear
operating expenses indirectly since they reduce the amount of income paid by the
Funds to investors as dividends. From time to time, the investment adviser and
administrator may prospectively waive a portion of their respective fees and/or
assume certain expenses of the Funds. See "Management of the Funds" and
"Description of Shares" for more complete descriptions of the various expenses
referred to above.
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.
3
<PAGE> 349
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.
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. See
"Description of Shares" below for certain differences among the Pacific Horizon
Shares, Horizon Shares and Horizon Service Shares, including differences
relating to expenses.
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 for the years and periods indicated 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 for the five years in the
period ended February 29, 1996 is incorporated by reference into 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 ENDED YEAR ENDED PERIOD ENDED
FEBRUARY 29, FEBRUARY 28, FEBRUARY 28,
1996 1995 1994*
------------ ------------ ------------
<S> <C> <C> <C>
PACIFIC HORIZON SHARES:
Net asset value per share, beginning of period......... $ 1.00 $ 1.00 $ 1.00
------------ ------------ ------------
Income from Investment Operations:
Net investment income................................ 0.0327 0.0253 0.0124
Less Dividends:
Dividends from net investment income................. (0.0327) (0.0253) (0.0124)
------------ ------------ ------------
Net change in net asset value per share................ 0.0000 0.0000 0.0000
------------ ------------ ------------
Net asset value per share, end of period............... $ 1.00 $ 1.00 $ 1.00
========== ========== ==========
Total return........................................... 3.32% 2.56% 1.25%=
========== ========== ==========
Ratios/Supplemental Data:
Net assets, end of period (000)...................... $ 49,618 $ 37,454 $ 49,648
Ratio of expenses to average net assets.............. 0.63% 0.60% 0.60%+**
Ratio of net investment income to average net
assets............................................ 3.26% 2.47% 1.95%+**
</TABLE>
- ---------------
* For the period July 9, 1993 (initial offering date) through February 28,
1994.
** Includes 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.
4
<PAGE> 350
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 a second series of shares known as the Horizon Service Shares.
The Company has also classified, but has not yet offered, an X Share class and a
Horizon Share class of the California Tax-Exempt Money Market Fund. The shares
of each class in the California Tax-Exempt Money Market Fund represent equal pro
rata interests in such Fund, except that they bear different expenses which
reflect the difference in the range of services provided to them. X Shares bear
the expense of a distribution and services plan (the "Distribution and Services
Plan") at annual rates not to exceed 0.55% of the average daily net asset value
on the Fund's outstanding X Shares. Pacific Horizon Shares bear the expense of a
special management services agreement at an annual rate not to exceed 0.35% of
the average daily net asset value of the California Tax-Exempt Money Market
Fund's outstanding Pacific Horizon Shares. See "Description of Shares" below for
certain differences among the Pacific Horizon Shares, Horizon Shares, Horizon
Service Shares and X Shares, including differences relating to expenses.
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
insofar as it pertains to each of the five fiscal years in the five year period
ended February 29, 1996 has been audited by Price Waterhouse LLP, independent
accountants of the California Tax-Exempt Money Market 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.
5
<PAGE> 351
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 29, FEBRUARY 28, FEBRUARY 28, FEBRUARY 28, FEBRUARY 29, FEBRUARY 28, FEBRUARY 28,
1996++ 1995++ 1994++ 1993++ 1992 1991 1990*
------------ ------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <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 $ 1.00
------------ ------------ ------------ ------------ ------------ ------------ ------------
Income from Investment
Operations:
Net investment
income............... 0.0324 0.0249 0.0186 0.0224 0.0364 0.0495 0.0118
Net realized gain
(loss) on
securities........... (0.0001) (0.0001) 0.0002 (0.0002) 0.0000 (0.0001) 0.0000
------------ ------------ ------------ ------------ ------------ ------------ ------------
Total income from
investment
operations........... 0.0323 0.0248 0.0188 0.0222 0.0364 0.0494 0.0118
Less Dividends:
Dividends from net
investment income.... (0.0324) (0.0249) (0.0186) (0.0224) (0.0364) (0.0495) (0.0118)
------------ ------------ ------------ ------------ ------------ ------------ ------------
Net change in net asset
value per share........ (0.0001) (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 $ 1.00
=========== =========== =========== =========== =========== =========== ===========
Total return............. 3.29% 2.52% 1.88% 2.27% 3.70% 5.06% 1.18%=
Ratios/supplemental data:
Net assets, end of
period (000)......... $528,008 $186,643 $203,724 $128,448 $107,424 $118,816 $ 51,380
Ratio of expenses to
average net assets... 0.62% 0.62% 0.66%** 0.66%** 0.57%** 0.55%** 0.49%+**
Ratio of net investment
income to average net
assets............... 3.35% 2.48% 1.86%** 2.21%** 3.62%** 4.81%** 5.10%+**
</TABLE>
- ---------------
<TABLE>
<C> <S>
* For the period December 6, 1989 (commencement of operations) through February 28, 1990.
** Includes 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. For the fiscal year ended February 29, 1996, the
Fund received credits from its custodian for interest earned on uninvested cash balances which were used to offset custodian
fees and expenses. If such credits had not occurred, the ratio of expenses to average net assets (without fee waivers and/or
expense reimbursements) would have been 0.63%. The ratio of net investment income to average net assets was not affected.
+ 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.
</TABLE>
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
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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 & Poor's"), Moody's
Investors 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' acceptances of selected banks and commercial paper. Because the
Fund may invest in securities backed by banks and other financial institutions,
changes in the credit quality of these institutions could cause losses to the
Fund and affect its share price. 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
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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 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
include, without limitation, 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. Because the California Tax-Exempt Money
Market Fund may invest in securities backed by banks and other financial
institutions, changes in the credit quality of these institutions could cause
losses to the Fund and affect its share price. These obligations are further
described in the Statement of Additional Information. 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 net 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 which 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 may also require "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
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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." A 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 (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 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 such until
maturity 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.
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 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 creditworthiness of the issuers of such instruments
and their ability to repay principal and
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<PAGE> 355
interest will be continuously monitored by a 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" 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 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 take 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 portfolios may be adversely
affected in the event its forward commitments, when-issued purchases and delayed
settlements ever exceeded 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 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 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
deliver instruments the value of which is greater than the repurchase price.
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 continu-
10
<PAGE> 356
ously 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
The California Tax-Exempt Money Market Fund is, and the Tax-Exempt Money Fund
may be, concentrated in securities issued by the State of California or entities
within the State of California and the California Tax-Exempt Money Market Fund
may invest a significant percentage of its assets in a single issuer. Therefore,
investment in the Funds may be riskier than an investment in other types of
money market funds.
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 a 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 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 concentration in California Municipal Securities by the California
Tax-Exempt Money Market Fund and Tax-Exempt Money Fund 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 a Fund's concentration in such obligations versus the safety that
comes with a less geographically concentrated investment portfolio and should
compare the yield available on a portfolio of California issues with the yield
of a more diversified portfolio
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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. In recent
years, these economic factors reduced revenues to the state government at a time
when expenses of state government such as education costs, various welfare costs
and other expenses were rising. Such economic factors adversely impacted the
ability of state and local California governmental entities to repay debt and
these factors, and others that cannot be predicted, may have an adverse impact
in the future.
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 SEC 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
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<PAGE> 358
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 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
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<PAGE> 359
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 serves as the Funds' investment adviser.
Bank of America, which has 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, business credit and thrift offices in major U.S. cities. In addition,
it has branches, corporate offices and representative offices in 36 foreign
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 $48 billion under management, including over $12
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 29, 1996, 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 daily net assets.
In addition, Bank of America is also entitled to fees under the Company's
Special Management Services Agreement with respect to the Funds' Pacific Horizon
Shares and may receive fees pursuant to the Distribution and Services Plan with
respect to X Shares of the California Tax-Exempt Money Market Fund. Bank of
America and Service organizations may receive fees charged directly to their
customers' accounts in connection with investments in X Shares and/or Pacific
Horizon Shares of the Funds.
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 3435 Stelzer Road, Columbus, Ohio 43219.
Under its basic administrative services agreement for the Funds, the
Administrator has agreed to: provide facilities, equipment and personnel to
carry out administrative services for the benefit of all series in the Funds,
including coordination of the preparation of reports to shareholders and the
Securities and Exchange Commission; calculation of the net asset value of the
Funds' shares; calculation of dividends and capital gains distri-
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<PAGE> 360
butions 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 (such as the provision of a facility to receive
purchase and redemption orders for the accounts of such shareholders) for
shareholders who have made a minimum initial investment of at least $500,000.
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 29, 1996, the California
Tax-Exempt Money Market Fund and the Tax-Exempt Money 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 paid 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 3435
Stelzer Road, Columbus, Ohio 43219-3035.
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.
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. BISYS Fund
Services, Inc. (the "Transfer Agent"), 3435 Stelzer Road, Columbus, OH 43219,
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 purchase and redemption of and payment of dividends
and other distributions with respect to the Funds' shares.
DISTRIBUTION AND SERVICES PLAN. Under the Distribution and Services Plan, the
California Tax-Exempt Money Market Fund pays the Distributor for distribution
expenses primarily intended to result in the sale of such Fund X Shares and for
shareholder servicing expenses. Such distribution expenses include expenses
incurred in connection with advertising and marketing the California Tax-Exempt
Money Market Fund X Shares; payments to Service Organizations for assistance in
connection with the distribution of X Shares; and expenses incurred in
connection with preparing, printing and distributing prospectuses for the
California Tax-Exempt Money Market Fund (except those used for regulatory
purposes, or for distribution to existing shareholders of the Fund) and in
implementing and operating the Distribution and Services Plan. Shareholder
servicing expenses include expenses incurred in connection with shareholder
services provided
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by the Distributor and payments to Service Organizations for the provision of
support services with respect to the beneficial owners of X Shares, such as
establishing and maintaining accounts and records relating to their clients who
invest in X Shares, assisting clients in processing exchange and redemption
requests, developing, maintaining and supporting systems necessary to support
Sweep Accounts and in changing dividend options and account descriptions, and
responding to client inquiries concerning their investments.
Under the Distribution and Services Plan, payments by the California Tax-Exempt
Money Market Fund for distribution expenses and shareholder servicing expenses
may not exceed the annual rate of 0.30% and 0.25%, respectively, of the average
daily net assets of such Fund's X Shares. These amounts may be reduced pursuant
to undertakings by the Distributor. Payments for distribution expenses under the
Distribution and Services Plan are subject to Rule 12b-1 under the 1940 Act. As
stated below under "Description of Shares," fees pursuant to the Distribution
and Services Plan are borne by X Shares if the California Tax-Exempt Money
Market Fund and are not paid with respect to such Fund's other series of shares.
The Company will obtain a representation from the Service Organizations (and
from Bank of America and the Distributor) 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.
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 Pacific Horizon
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. For the fiscal year ended February 29, 1996, 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. 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.
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. Expenses can be reduced by voluntary fee waivers and expense
reimbursements by Bank of America and other service provides, as well as by
certain expense limitations imposed by state securities regulators. From time to
time during the course of each Funds'
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fiscal year, Bank of America and/or the Administrator may prospectively waive
payment of fees and/or reimburse certain expenses of a Fund as a result of
competitive pressures and in order to protect the business and reputation of
Bank of America and the Administrator. 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 waived or expenses are reimbursed and of
increasing the overall expense ratio of such Fund and of decreasing yield to
investors when such fees are not waived or amounts not 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
HOW X SHARES ARE PURCHASED. X Shares of the California Tax-Exempt Money Market
Fund are offered by this Prospectus to customers of BAIS or Service
Organizations that establish a Sweep Account with BAIS or a Service
Organization. Each Sweep Account combines a Transaction Account with a periodic
sweep of balances to or from the California Tax-Exempt Money Market Fund.
Investors may open a Sweep Account by completing and signing the Sweep
Materials. The Sweep Materials contain important information about the various
features and operations of the Sweep Account and should be reviewed in
conjunction with this Prospectus.
X Shares may be purchased on any Business Day (as defined below) that BAIS or
the particular Service Organization are open for business by making a deposit
into your Transaction Account. On each day that both the California Tax-Exempt
Money Market Fund's custodian and the New York Stock Exchange (the "Exchange")
are open for business (a "Business Day") and that BAIS or a Service Organization
is open for business, BAIS or a Service Organization computes the net amount of
all deposits, withdrawals, charges and credits made to and from a Transaction
Account in accordance with their Sweep Account procedures (the "Net Sweep
Amount"). If deposits and credits exceed withdrawals and charges, you authorize
BAIS or a Service Organization, on your behalf, to transmit a purchase order to
the Fund designated in your Sweep Account in the
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amount of that day's Net Sweep Amount in accordance with the Sweep Account
procedures of Bank of America or a Service Organization. Your purchase order
will be made effective and full and fractional X Shares will be purchased at the
net asset value per share next determined after receipt by the Transfer Agent.
It is the responsibility of BAIS or a Service Organization to transmit orders
for the purchases of X 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 BAIS or a Service
Organization are executed only on Business Days that BAIS or a Service
Organization, respectively, is open for business. Contact BAIS or your Service
Organization for additional information about BAIS's or the Service
Organization's Sweep Account procedures.
HOW PACIFIC HORIZON SHARES ARE PURCHASED
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 Service Organizations without a charge imposed by the Funds,
although Bank of America and Service Organizations may charge a fee for
providing administrative services in connection with investments in Pacific
Horizon Shares of the Funds. 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 Pacific Horizon Shares through their accounts at Bank of
America or a Service Organization should contact such entity directly for
appropriate instructions. Other investors may purchase Pacific Horizon Shares in
the manner described below.
An investor desiring to make an initial purchase of Pacific Horizon Shares by
mail should complete an Account Application and mail the Application and a check
payable to the appropriate Fund of Pacific Horizon to the address on the Account
Application. All subsequent purchases of Pacific Horizon Shares of a Fund made
by mail should be delivered to Pacific Horizon Funds, Inc., File No. 54634, Los
Angeles, California 90074-4634. Initial purchases of Pacific Horizon shares into
a new account may not be made by wire. However, an investor desiring to make a
subsequent purchase of Pacific Horizon shares of a Fund into an already existing
account by wire should contact the Transfer Agent at (800) 346-2087 for complete
wiring instructions and request his bank to transmit immediately available funds
by wire for purchase of Pacific Horizon shares in the investor's name. It is
important that the wire include the investor's name and Fund account number. 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
3435 Stelzer Road, Columbus, OH 43219.
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 each Business Day at the net asset value
per share next determined after receipt by the Transfer Agent at its Columbus
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. If an order is received by
the Transfer
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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, Pacific Horizon 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 the purchases of Pacific Horizon 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.
TELETRADE. Although the privilege may not be used to make an initial purchase,
an investment in Pacific Horizon Shares of a Fund entitles an investor to
purchase Fund shares (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 on 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 will be effected at the net asset value next determined
after receipt of payment by the Funds' Transfer Agent. The Company 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.
NET ASSET VALUE
The net asset value per share of the X Shares of the California Tax-Exempt Money
Market Fund and Pacific Horizon Shares of each Fund is the value of all
securities and other assets owned by a Fund that are allocable to a particular
class less the liabilities charged to such class, divided by the number of
outstanding shares of such class. The net asset value per share of each Fund is
determined on each Business Day as of 12:00 noon Eastern time. Each Fund seeks
to maintain a net asset value of $1.00 per share for purposes of purchases and
redemptions. In computing net asset value, each Fund values its portfolio
securities on the basis of amortized cost (as described in the Statement of
Additional Information under "Additional Purchase and Redemption
Information -- Valuation.") 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 is
determined independently of that for other portfolios of the Company. For voice
recorded price and yield information call (800) 346-2087.
Federal regulations require that each investor provide a certified Taxpayer
Identification Number upon opening or reopening an account. See the Account
Application for Pacific Horizon Shares of the Funds and the Sweep Account
Application for X Shares of the California Tax-Exempt Money Market Fund for
further information about this requirement.
The Company will obtain a representation from Service Organizations (as well as
from Bank of
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America and the Distributor) that they will be licensed as dealers as required
by applicable law or will not engage in activities which would require them to
be so licensed.
REDEMPTION OF SHARES
HOW X SHARES ARE REDEEMED
If, on any Business Day that BAIS or the particular Service Organization is open
for business, withdrawals from and charges to your Sweep Account, including
without limitation check transactions, exceed deposits and credits, BAIS or the
particular Service Organization, as applicable, will transmit a redemption order
on your behalf to the California Tax-Exempt Money Market Fund in the dollar
amount of that day's Net Sweep Amount. If your Sweep Account with BAIS or a
Service Organization, as applicable, is closed as described in the Sweep
Materials, BAIS or the Service Organization, as applicable, transmits a
redemption request on your behalf to the appropriate Fund for the balance of X
Shares of such Fund held through your Sweep Account. It is the responsibility of
BAIS or the particular Service Organization to transmit the redemption order and
credit its customer's Transaction Account with the redemption proceeds on a
timely basis. BAIS or the Service Organization may withhold redemption proceeds
pending check collection or processing or for other reasons all as set forth
more fully in the Sweep Materials.
HOW PACIFIC HORIZON SHARES ARE REDEEMED
Investors whose Pacific Horizon Shares are purchased through accounts at Bank of
America or a Service Organization may redeem all or part of such 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 other
redemption methods must arrange with Bank of America or a 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 Pacific Horizon Shares in any amount
by sending a written request to the Tax-Exempt Money Fund or California
Tax-Exempt Money Market Fund, c/o Pacific Horizon Funds, P.O. Box 80221, Los
Angeles, CA 90080-9909. Redemption orders are effected upon receipt by the
Transfer Agent at its Columbus office. Redemption requests delivered to the
Company other than by mail must be delivered to the offices of the Transfer
Agent at 3435 Stelzer Road, Columbus, OH 43219. While the Company no longer
issues share certificates, Pacific Horizon Shares for which certificates
previously had 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 60 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
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authorized signatory of the guarantor institution and "Signature Guaranteed"
must appear with the signature.
TELETRADE. An investor may redeem Pacific Horizon Shares in the same manner and
subject to the same limitations as described under "Purchases of Shares -- How
Pacific Horizon Shares Are Purchased -- 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. Pacific Horizon 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, including requesting certain personal
or account information to confirm the identity of the shareholder.
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 on the Account Application or in a subsequent signature guaranteed
letter of instruction to the Transfer Agent before shares may be redeemed by
wire. Shareholders 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 believed to be genuine 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 amount. Wire redemptions may be terminated or modified by
a Fund at any time. Pacific Horizon Shares issued in certificate form are not
eligible for wire redemption. A shareholder 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 in person to the Transfer Agent or
by mail as described above under "Regular Redemption." For additional
information concerning wire redemptions, see the Statement of Additional
Information and the Funds' Account Application.
CHECK REDEMPTION. An investor in Pacific Horizon Shares may request on the
Account Application that the Company provide Redemption Checks ("Checks") drawn
on a Fund. Checks will be sent only to the registered owner(s) and only to the
address of record. The Account Application 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 Fund involved to redeem
a sufficient number of the investor's Pacific Horizon Shares to cover the amount
of the Check. 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
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request of the investor, or if the Transfer Agent cannot honor a Check due to
insufficient funds or other valid reasons. Because dividends accrue daily,
Checks should not be used to close an account. Pacific Horizon Shares for which
stock certificates have been issued may not be redeemed by Check.
OTHER REDEMPTION INFORMATION -- X SHARES AND PACIFIC HORIZON SHARES. 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. 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 the 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 the Fund
receives payment in cash or immediately available funds for the purchase of
shares. The Company may suspend the right of redemption or postpone the date of
payment upon redemption (as well as suspend the recordation of the transfer of
shares) for such periods as are permitted under the 1940 Act. 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.
The Funds impose no charge when X Shares or Pacific Horizon Shares are redeemed.
However, if Pacific Horizon 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 Pacific Horizon
Share accounts involuntarily, upon sixty days' written notice, if the account's
net asset value falls below the $500 minimum balance.
SHAREHOLDER SERVICES
The services and privileges described under this heading are available only to
holders of the Funds' Pacific Horizon Shares and are not available to persons
who invest directly in Horizon or Horizon Service Shares of the Funds or in X
Shares of the California Tax-Exempt Money Market Fund. Additionally, these
services and privileges may not be available to certain clients of Bank of
America and particular Service Organizations. 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.
EXCHANGES. 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 Bank of America), 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 indicates on the Account Application or in a subsequent
written notice to the Transfer Agent that he does not wish to use 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
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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 Fund shares 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 Exchange Privilege.
The Company 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
will be given to shareholders of any material modification or termination 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 (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
requirement 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. Such
applications are available 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 80221, Los Angeles, California
90080-9909 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 (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 the appropriate federal
agency. Further, the Company may terminate an investor's participation upon 30
days' notice to the investor.
AUTOMATIC WITHDRAWAL PLAN. Investors having a $5,000 minimum account may
request withdrawal of a dollar amount in multiples of $50 on 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.
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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 the 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. However, holders of the Funds' Pacific
Horizon shares may elect 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 the Transfer Agent at P.O. Box
80221, Los Angeles, California 90080-9909, and will become effective with
respect to dividends paid after its receipt by the dividend disbursing agent.
TAXES. During the most recent taxable year, each Fund qualified separately as a
"regulated investment company" under the Internal Revenue Code of 1986, as
amended (the "Code"), and each Fund intends to so qualify in future years, as
long as such qualification is in the best interest of its shareholders. As a
result of this qualification, each Fund generally is not required to pay 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.
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 applicable to corporations. Corporate
shareholders also must take all exempt-interest dividends into account in deter-
24
<PAGE> 370
mining certain adjustments for federal alternative minimum tax purposes.
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 October, November or December of any calendar 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 of such year, if such dividends are paid during
January of the following year.
A shareholder will recognize a taxable capital gain or loss when redeeming or
exchanging shares, to the extent of any difference between the price at which
the shares are sold or exchanged and the price or prices at which the shares
were originally purchased. 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.
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 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.
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, a
Massachusetts business trust. 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 Market Fund were transferred to 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 began offering Horizon Service Shares. The Company
has also classified an X Share class and a Horizon Share class of the California
Tax-Exempt Money Market Fund. Hori-
25
<PAGE> 371
zon Shares and Horizon Service Shares may be purchased by institutional
investors for accounts maintained by individuals, but 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, 500 million Horizon Shares, 500 million Horizon Service
Shares, and 1 billion X Shares representing interests in the California
Tax-Exempt Money Market Fund. Horizon Service Shares and Horizon Shares of the
Tax-Exempt Money Fund and 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 and series 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 primarily to the X Shares of the California Tax-Exempt Money
Market Fund and Pacific Horizon Shares of the Tax-Exempt Money Fund and
California Tax-Exempt Money Market Fund and describes only the investment
objective, policies, operations and contracts relating to such shares.
Each X Share, 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 X Shares of the California Tax-Exempt Money
Market Fund bear the fees described in this Prospectus that are paid to the
Distributor and Service Organizations by such Fund under the Company's
Distribution and Services Plan. The fees paid under the Distribution and
Services Plan are for distribution and shareholder services paid to the
Distributor and Service Organizations in connection with X Shares of the
California Tax-Exempt Money Market Fund, and are not paid by such Fund's
Horizon, Horizon Service or Pacific Horizon Shares. 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. The fees paid under
the Special Management Services Agreement are for services provided by Bank of
America and the Administrator to holders of the Funds' Pacific Horizon Shares
and are not borne by the Funds' Horizon Shares, Horizon Service Shares or X
Shares of the California Tax-Exempt Money Market Fund. 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 a Fund under the Company's
Shareholder Services Plan. The fees paid under the Shareholder Services Plan are
for services provided by shareholder organizations to their customers in
connection with Horizon Service Shares, and are not paid by a Fund's Horizon
Shares, Pacific Horizon Shares, or X Shares. As a result of the different fees
borne by various series of shares of a Fund, at any given time the net yield on
a) the California Tax-Exempt Money Market Fund's X Shares generally will be
approximately 0.20% lower than the yield on the same Fund's Pacific Horizon
Shares, 0.55% lower than the yield on the same Fund's Horizon Shares, and 0.30%
lower than the yield on the same Fund's Horizon Services Shares, b) the
Tax-Exempt Money Fund's Pacific Horizon Shares generally will be approximately
0.32% lower than the yield on the same Fund's Horizon Shares, 0.07% lower than
the yield on the same Fund's Horizon Service Shares, and c) the Cali-
26
<PAGE> 372
fornia Tax-Exempt Money Market Fund's Pacific Horizon Shares generally will be
approximately 0.35% lower than the yield on the same Fund's Horizon Shares,
0.10% lower than the yield on the same Fund's Horizon Service Shares, and 0.20%
higher than the yield on the same Fund's X 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. Only holders of Pacific Horizon Shares will be entitled to vote on
matters submitted to a vote of shareholders pertaining to the Fund's Special
Management Services Agreement. Only holders of Horizon Service Shares will be
entitled to vote on matters submitted to a vote of shareholders pertaining to
the Funds' Shareholder Services Plan. Only holders of particular X Shares, if
affected by changes to such Plan, will be entitled to vote on matters submitted
to a vote of shareholders pertaining to the Distribution and Services Plan
relating to the particular series. 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.
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
27
<PAGE> 373
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 and 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 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.
28
<PAGE> 374
TXM-0006
- ----------------------------
PACIFIC HORIZON MUTUAL FUNDS
- ----------------------------
TAX-EXEMPT MONEY FUND
CALIFORNIA TAX-EXEMPT
MONEY MARKET FUND
PROSPECTUS
July 1, 1996
NOT FDIC INSURED
<PAGE> 375
PROSPECTUS
JULY 1, 1996
S Shares of the
PRIME FUND
TREASURY FUND
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 S SHARES OF THE PRIME FUND AND TREASURY FUND AND
HORIZON SHARES AND HORIZON SERVICE SHARES OF THE PRIME FUND, TREASURY FUND,
GOVERNMENT FUND AND TREASURY ONLY FUND (THE "FUNDS"), FOUR NO-LOAD DIVERSIFIED
INVESTMENT PORTFOLIOS OFFERED BY PACIFIC HORIZON FUNDS, INC. (THE "COMPANY").
THE COMPANY IS REGISTERED UNDER THE INVESTMENT COMPANY ACT OF 1940 AS AN
OPEN-END MANAGEMENT INVESTMENT COMPANY. THE FUNDS ARE DESIGNED TO PROVIDE
INSTITUTIONS WITH DAILY LIQUIDITY. AS OF THE DATE OF THIS PROSPECTUS, S SHARES
ARE NOT AVAILABLE FOR PURCHASE.
The investment objectives of the PRIME FUND and TREASURY FUND are to seek high
current income and stability of principal.
- - THE PRIME FUND SEEKS TO ACHIEVE ITS INVESTMENT 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 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 ITS INVESTMENT OBJECTIVE BY INVESTING
SOLELY IN DIRECT OBLIGATIONS ISSUED BY THE U.S. TREASURY AND REPURCHASE
AGREEMENTS RELATING TO SUCH TREASURY OBLIGATIONS.
- - The investment objectives of the GOVERNMENT FUND and TREASURY ONLY FUND are 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 ITS INVESTMENT 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 TREASURY ONLY FUND SEEKS TO ACHIEVE ITS INVESTMENT OBJECTIVE BY INVESTING
SOLELY IN OBLIGATIONS OF THE U.S. TREASURY.
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, 1996, 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.
(Continued next page)
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
No person has been authorized to give any information or to make any
representations, other than those contained in this Prospectus, in the Statement
of Additional Information and the Funds' official sales literature, in
connection with the offering of the Funds' 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 Funds 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 Funds or the distributor to make such offer in such
jurisdiction.
- --------------------------------------------------------------------------------
<PAGE> 376
S SHARES ARE AVAILABLE TO CUSTOMERS WHO PURCHASE SUCH SHARES THROUGH CASH
MANAGEMENT SERVICES, SUCH AS A SWEEP ACCOUNT ("SWEEP ACCOUNT") OFFERED BY BANK
OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION, ANY OF ITS BANKING AFFILIATES
("BANK OF AMERICA") AND CERTAIN OTHER FINANCIAL SERVICE ORGANIZATIONS, SUCH AS
BANKS OR BROKER-DEALERS ("SERVICE ORGANIZATIONS"). A SWEEP ACCOUNT COMBINES A
DEPOSIT ACCOUNT (THE "TRANSACTION ACCOUNT") WITH A DAILY SWEEP OF BALANCES TO OR
FROM THE PRIME AND TREASURY FUNDS' S SHARES. BANK OF AMERICA OR SERVICE
ORGANIZATIONS, AS APPLICABLE, ARE RESPONSIBLE FOR PROVIDING PERSONS INVESTING IN
S SHARES THROUGH A SWEEP ACCOUNT WITH SWEEP ACCOUNT MATERIALS (THE "SWEEP
MATERIALS") DESCRIBING THE VARIOUS FEATURES AND OPERATIONS OF THE SWEEP ACCOUNT.
THE SWEEP MATERIALS SHOULD BE REVIEWED IN CONJUNCTION WITH THIS PROSPECTUS.
HORIZON SHARES AND HORIZON SERVICE SHARES MAY NOT BE PURCHASED BY INDIVIDUALS
DIRECTLY, BUT INSTITUTIONAL INVESTORS MAY PURCHASE HORIZON AND HORIZON SERVICE
SHARES FOR ACCOUNTS MAINTAINED BY INDIVIDUALS.
BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION (THE "INVESTMENT
ADVISER") SAN FRANCISCO, CALIFORNIA ACTS AS INVESTMENT ADVISER TO THE FUNDS.
CONCORD FINANCIAL GROUP, INC. (THE "DISTRIBUTOR") SPONSORS THE FUNDS AND ACTS AS
THEIR DISTRIBUTOR AND CONCORD HOLDING CORPORATION ACTS AS THEIR ADMINISTRATOR,
NEITHER OF WHICH IS AFFILIATED WITH THE INVESTMENT ADVISER.
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.
<PAGE> 377
CONTENTS
<TABLE>
<S> <C>
SUMMARY 2
EXPENSE INFORMATION 6
FINANCIAL HIGHLIGHTS 8
INVESTMENT OBJECTIVES AND
POLICIES 18
MANAGEMENT OF THE FUNDS 25
PURCHASE AND REDEMPTION OF
SHARES 28
ADDITIONAL SHAREHOLDER
SERVICES 31
DIVIDENDS AND DISTRIBUTIONS 32
TAXES 32
DESCRIPTION OF SHARES 33
- ------------------------------------------------------------------------------------------------------------------------
DISTRIBUTOR: INVESTMENT ADVISER:
Concord Financial Group, Inc. Bank of America National Trust and Savings Association
3435 Stelzer Road 555 California Street
Columbus, OH 43219 San Francisco, CA 94104
FOR PURCHASE AND REDEMPTION ORDERS, YIELD INFORMATION AND
OTHER FUND INFORMATION CALL (800) 426-3863
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 378
SUMMARY
The following summary is qualified in its entirety by reference to the more
detailed information included elsewhere in the Prospectus.
S Shares, Horizon Shares and
Horizon Service Shares: The Prime Fund and the Treasury Fund each issue S
Shares, and each of the Funds issue Horizon Shares
and Horizon Service Shares. S Shares, Horizon
Shares and Horizon Service Shares each represent
interests in a particular Fund's investment
portfolio. S Shares, Horizon Shares and Horizon
Service Shares are identical in all respects except
that: 1) S Shares of the Prime and Treasury Funds
bear fees payable to the Distributor for
distribution and shareholder servicing expenses at
the annual rate of up to 0.75% and 0.25%
respectively of the average daily net assets of
such Fund's S Shares, and 2) Horizon Service Shares
bear fees payable by a Fund to institutional
investors ("Shareholder Organizations") at the
annual rate of up to 0.25% of the average daily net
asset value of such Fund's Horizon Service Shares
for support services provided by Shareholder
Organizations to the beneficial owners of such
shares pursuant to the Shareholder Services Plan.
In addition, S Shares of the Prime and Treasury
Funds have certain exclusive voting rights on
matters submitted to a vote of shareholders
pertaining to the Distribution and Services Plan
relating to a particular series of such funds, and
Horizon Service Shares have certain exclusive
voting rights on matters relating to the
Shareholder Services Plan adopted with respect to
such shares. 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 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 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
2
<PAGE> 379
obligations. The Treasury Only Fund seeks to
achieve this objective by investing 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 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.)
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 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,
domestic branches of foreign banks or foreign
branches of 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 (the "Investment Adviser") is the
investment adviser of each Fund. The Investment
Adviser 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. The Investment
Adviser's principal banking affiliates operate
branches in ten U.S. states as well as corporate
banking, business credit and thrift offices in
major U.S. cities. In addition, it has branches,
corporate offices and representative offices in 36
countries. The Investment Adviser 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. The
Investment Adviser and its affiliates have over $48
billion under management, including over $12
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
3
<PAGE> 380
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 the Investment
Adviser 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: As of the date of this Prospectus, S Shares are not
currently available for purchase. S Shares of the
Prime and Treasury Funds are available to customers
who purchase such shares through cash management
services, such as a sweep account ("Sweep Account")
offered by Bank of America National Trust and
Savings Association, any of its banking affiliates
("Bank of America") and certain other financial
service organizations, such as broker-dealers
("Service Organizations"). A Sweep Account combines
a deposit account (the "Transaction Account") with
a daily sweep of balances to or from the Prime and
Treasury Funds' S Shares. S Shares may be purchased
on any Business Day (as defined below) that Bank of
America or the particular Service Organization, as
applicable, are open for business by making a
deposit into your Transaction Account. All
transaction orders are processed by the Company at
the net asset value next determined after the order
is received. See "Purchase and Redemption of
Shares--How S Shares Are Purchased."
Horizon and Horizon Service Shares of each Fund may
be purchased by institutional investors for
accounts maintained by individuals by telephone or
terminal access order at the next determined net
asset value without a sales charge. Purchase orders
for Horizon and Horizon Service Shares of the Prime
Fund, Treasury Fund and Government Fund that are
received by the transfer agent 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 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 agent 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
4
<PAGE> 381
minimum investment. See "Purchase and Redemption of
Shares--How Horizon and Horizon Service Shares are
Purchased."
Redemption of Investment: With respect to S Shares of the Prime and Treasury
Fund, if withdrawals and charges to your Sweep
Account exceed deposits and credits, Bank of
America or the particular Service Organization, as
applicable, will transmit a redemption order on
your behalf to the appropriate Fund in the dollar
amount of that day's Net Sweep Amount. Redemptions
are effected by the Company on a Business Day at
the net asset value per share next determined after
receipt of the redemption order by the Transfer
Agent. See "Purchase and Redemption of Shares--How
S Shares Are Redeemed."
With respect to Horizon and Horizon Service Shares
of the Funds, 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 agent. 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 agent 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. While the Company no longer issues
share certificates, Horizon and Horizon Service
Shares for which certificates previously had been
issued may not be redeemed unless the certificates
have been submitted to the transfer agent and
endorsed for transfer.
A Fund may redeem Horizon and Horizon Service
Shares in any account at net asset value, without
the investor's request, if the value of the account
is less than $500 as a result of redemptions. See
"Purchase and Redemption of Shares--How Horizon and
Horizon Service Shares Are Redeemed."
Custodian and Transfer Agent:The Bank of New York acts as custodian for the
Funds, and Bank of America National Trust and
Savings Association acts as sub-custodian for the
Prime and Treasury Funds. BISYS Fund Services, Inc.
serves as the Funds' transfer and dividend
disbursing agent.
5
<PAGE> 382
EXPENSE INFORMATION
The following table sets forth certain information regarding the shareholder
transaction expenses imposed by S Shares of the Prime and Treasury Funds and
Horizon Shares and Horizon Service Shares of the Prime Fund, Treasury Fund,
Government Fund and Treasury Only Fund and the annual operating expenses 1)
expected to be incurred by S Shares of the Prime and Treasury Funds for the
first twelve months of operations and 2) incurred by the Horizon Shares and
Horizon Service Shares of the Prime, Treasury, Government and Treasury Only
Funds during the last 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
S HORIZON SERVICE S HORIZON SERVICE HORIZON SERVICE HORIZON SERVICE
SHARES(1) SHARES SHARES SHARES(1) SHARES SHARES SHARES SHARES SHARES SHARES
-------- ------ ------ -------- ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Sales Load Imposed on
Purchases.............. None None None None None None None None None None
Sales Load Imposed on
Reinvested Dividends... None None None None None None None None None None
Sales Load Imposed on
Redemptions(2)......... None None None None None None None None None None
Deferred Sales Load...... None None None None None None None None None None
Redemption Fees.......... None None None None None None None None None None
Exchange Fees............ None None None None None None None None None None
ANNUAL OPERATING EXPENSES
(as a percentage of average net assets)
Management Fees(3) (After
Fee Waivers)........... .20% .20% .20% .20% .20% .20% .13%(5) .13%(5) .20% .20%
Rule 12b-1 Fees(3)....... 0.75% 0% 0% 0.75% 0% 0% 0% 0% 0% 0%
Shareholder Services
Fees................... 0.25% 0% 0.25% 0.25% 0% 0.25% 0% 0.25% 0% 0.25%
All Other Expenses....... .03% .03% .03% .05% .05% .05% .11% .11% .11% .11%
------- ------ ------ ------- ------ ------ ------ ------ ------ ------
Total Operating
Expenses............... 1.23% .23% .48% 1.25% .25% .50% .24%(5) .49%(5) .31% .56%
------- ------ ------ ------- ------ ------ ------ ------ ------ ------
------- ------ ------ ------- ------ ------ ------ ------ ------ ------
</TABLE>
(1) Additional fees charged by Bank of America or Service Organizations related
to the Sweep Account are not included in this table. For additional
information with respect to Sweep Account fees and charges, including a
description of the services available to Sweep Account holders, you should
refer to the Sweep Materials.
(2) The Company reserves the right to impose a charge for wiring redemption
proceeds.
(3) 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.
(4) Because of the Distribution Plan Payment paid by S Shares of the Prime and
Treasury Funds as shown in the above table, long-term Class S shareholders
may pay more than the economic equivalent of the maximum front-end sales
charge permitted by the National Association of Securities, Dealers, Inc.
(5) Absent fee waivers, Management Fees and Total Operating Expenses would have
been .20% and .31%, respectively, with respect to Horizon Shares of the
Government Fund and .20% and .56%, respectively, with respect to Horizon
Service Shares of the Government Fund.
6
<PAGE> 383
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
EXAMPLE 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:
PRIME FUND
S Shares.................................................... $ 13 $39 $68 $149
Horizon Shares.............................................. $ 2 $ 7 $13 $ 29
Horizon Service Shares...................................... $ 5 $15 $27 $ 60
TREASURY FUND
S Shares.................................................... $ 13 $40 $69 $151
Horizon Shares.............................................. $ 3 $ 8 $14 $ 32
Horizon Service Shares...................................... $ 5 $16 $28 $ 63
GOVERNMENT FUND
Horizon Shares.............................................. $ 2 $ 8 $14 $ 31
Horizon Service Shares...................................... $ 5 $16 $27 $ 62
TREASURY ONLY FUND
Horizon Shares.............................................. $ 3 $ 9 $16 $ 37
Horizon Service Shares...................................... $ 6 $18 $31 $ 70
</TABLE>
- --------------------------------------------------------------------------------
The foregoing Expense Summary and Example are intended to assist investors in S
Shares of the Prime and Treasury Funds and Horizon Shares and Horizon Service
Shares of the Prime, Treasury, Government and Treasury Only Funds in
understanding the various shareholder transaction and operating expenses of each
class that investors bear either directly or indirectly. Investors bear
operating expenses indirectly since they reduce the amount of income paid by the
Funds to investors as dividends. From time to time, the investment adviser and
administrator may prospectively waive a portion of their respective fees and/or
assume certain expenses of the Funds. See "Management of the Funds" and
"Description of Shares" for more complete descriptions of the various expenses
referred to above.
THE EXAMPLE SET FORTH 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.
7
<PAGE> 384
FINANCIAL HIGHLIGHTS
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 (the "Predecessor Prime Fund" and the "Predecessor Treasury
Fund") were combined with the Money Market Portfolio and Government Money Market
Portfolio 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 the Prime and Treasury Funds. The
Company has classified an X Share and an S Share class of the Prime and Treasury
Funds. Pacific Horizon Shares of each Fund and X Shares of the Prime and
Treasury Funds are offered through another prospectus. The shares of each class
in a Fund represent equal pro rata interests in such Fund, except that they bear
different expenses which reflect the difference in the range of services
provided to them. S Shares bear the expense of a distribution and services plan
(the "Distribution and Services Plan") at an annual rate not to exceed 1.00% of
the average daily net asset value of the Prime and Treasury Funds' outstanding S
Shares. Horizon Service Shares bear the expense of a Shareholder Services Plan
(the "Plan") at an annual rate not to exceed 0.25% of the average daily net
asset value of the Prime, Treasury, Government and Treasury Only Funds'
outstanding Horizon Service Shares. See "Description of Shares" below for
certain differences among the Pacific Horizon Shares, Horizon Shares, Horizon
Service Shares, S Shares and X Shares, including differences related to
expenses.
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,
February 28, 1995 and February 29, 1996. The information contained in the
Financial Highlights insofar as it pertains to each of the five fiscal years in
the five year period ended February 29, 1996 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 on the financial statements containing such information is incorporated
by reference into 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 into the Statement of Additional
Information.
8
<PAGE> 385
Selected Data for a Share Outstanding Throughout Each of the Periods Indicated:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRIME FUND
--------------------------------------------------------------------------------------
JAN. 20,
YEAR ENDED 1990
------------------------------------------------------------------------- THROUGH
FEB. 29, FEB. 28, FEB. 28, FEB. 28, FEB. 29, FEB. 28, FEB. 28,
1996- 1995- 1994- 1993- 1992 1991 1990
-------- -------- -------- -------- -------- -------- --------
<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.................... 0.0571 0.0461 0.0319 0.0372 0.0590 0.0794 0.0085
Net realized gain (loss) on securities... 0.0004 (0.0232) (0.0016) 0.0000 0.0005 (0.0001) 0.0000
-------- -------- -------- -------- -------- -------- --------
Total income from investment
operations............................. 0.0575 0.0229 0.0303 0.0372 0.0595 0.0793 0.0085
Less Dividends:
Dividends from net investment income..... (0.0571) (0.0454) (0.0319) (0.0372) (0.0589) (0.0794) (0.0085)
Increase due to voluntary capital
contribution from investment adviser..... 0.0000 0.0233 0.0000 0.0000 0.0000 0.0000 0.0000
-------- -------- -------- -------- -------- -------- --------
Net change in net asset value per share... 0.0004 0.0008 (0.0016) 0.0000 0.0006 (0.0001) 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.............................. 5.86% 4.63%*** 3.24% 3.78% 6.06% 8.23% 0.90%=
Ratios/Supplemental Data:
Net assets, end of period (millions)..... $ 1,651 $ 622 $ 3,840 $ 10,301 $ 2,855 $ 487 $ 405
Ratio of expenses to average net
assets................................. 0.23%** 0.16%** 0.20%** 0.23% 0.24% 0.24% 0.28%+
Ratio of net investment income to average
net assets............................. 5.69%** 4.11%** 3.19%** 3.59% 5.59% 7.91% 8.09%+
<CAPTION>
MAY 1,
1989 YEAR PERIOD
THROUGH ENDED ENDED
JAN. 19, APRIL 30, APRIL 30,
1990++ 1989++ 1988++*
-------- --------- ---------
<S> <C> <C> <C>
HORIZON SHARES:
Net asset value per share,
beginning of period...................... $ 1.00 $ 1.00 $ 1.00
-------- --------- ---------
Income From Investment Operations:
Net investment income.................... 0.0655 0.0829 0.0557
Net realized gain (loss) on securities... 0.0000 0.0000 0.0000
-------- --------- ---------
Total income from investment
operations............................. 0.0655 0.0829 0.0557
Less Dividends:
Dividends from net investment income..... (0.0655) (0.0829) (0.0557)
Increase due to voluntary capital
contribution from investment adviser..... 0.0000 0.0000 0.0000
-------- --------- ---------
Net change in net asset value per share... 0.0000 0.0000 0.0000
-------- --------- ---------
Net asset value per share, end of
period................................... $ 1.00 $ 1.00 $ 1.00
======= ======== ========
Total return.............................. 6.69%= 8.61% 5.72%=
Ratios/Supplemental Data:
Net assets, end of period (millions)..... $ 447 $ 303 $ 208
Ratio of expenses to average net
assets................................. 0.20%+** 0.20%** 0.20%+**
Ratio of net investment income to average
net assets............................. 9.04%+** 8.47%** 6.90%+**
</TABLE>
- ---------------
* For the period July 10, 1987 (commencement of operations) through April 30,
1988.
** Includes 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 0.01%, 0.07%, 0.01%,
0.03% (annualized), 0.12% and 0.07% (annualized) for the years or periods
ended February 29, 1996, 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.
++ 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> 386
<TABLE>
<CAPTION>
PRIME FUND
--------------------------------------------------------------------------------------
JAN. 20,
YEAR ENDED 1990
------------------------------------------------------------------------- THROUGH
FEB. 29, FEB. 28, FEB. 28, FEB. 28, FEB. 29, FEB. 28, FEB. 28,
1996- 1995- 1994- 1993- 1992 1991 1990
-------- -------- -------- -------- -------- -------- --------
<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.................... 0.0546 0.0431 0.0294 0.0345 0.0565 0.0769 0.0082
Net realized gain (loss) on securities... 0.0004 (0.0227) (0.0016) 0.0000 0.0005 (0.0001) 0.0000
-------- -------- -------- -------- -------- -------- --------
Total income from investment
operations............................. 0.0550 0.0204 0.0278 0.0345 0.0570 0.0768 0.0082
Less Dividends:
Dividends from net investment income..... (0.0546) (0.0429) (0.0294) (0.0347) (0.0564) (0.0769) (0.0082)
Increase due to voluntary capital
contribution from investment adviser..... 0.0000 0.0233 0.0000 0.0000 0.0000 0.0000 0.0000
-------- -------- -------- -------- -------- -------- --------
Net change in net asset value per share... 0.0004 0.0008 (0.0016) (0.0002) 0.0006 (0.0001) 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.............................. 5.60% 4.37%*** 2.98% 3.53% 5.79% 7.96% 0.87%=
Ratios/Supplemental Data:
Net assets, end of period (millions)..... $ 1,561 $ 864 $ 839 $ 793 $ 859 $ 560 $ 330
Ratio of expenses to average net
assets................................. 0.48%** 0.44%** 0.45%** 0.48% 0.49% 0.49% 0.53%+
Ratio of net investment income to average
net assets............................. 5.44%** 4.31%** 2.94%** 3.49% 5.58% 7.64% 7.84%+
<CAPTION>
MAY 1,
1989 YEAR PERIOD
THROUGH ENDED ENDED
JAN. 19, APRIL 30, APRIL 30,
1990++ 1989++ 1988++*
-------- --------- ---------
<S> <C> <C> <C>
HORIZON SERVICE SHARES:
Net asset value per share,
beginning of period...................... $ 1.00 $ 1.00 $ 1.00
-------- --------- ---------
Income From Investment Operations:
Net investment income.................... 0.0636 0.0804 0.0128
Net realized gain (loss) on securities... 0.0000 0.0000 0.0000
-------- --------- ---------
Total income from investment
operations............................. 0.0636 0.0804 0.0128
Less Dividends:
Dividends from net investment income..... (0.0636) (0.0804) (0.0128)
Increase due to voluntary capital
contribution from investment adviser..... 0.0000 0.0000 0.0000
-------- --------- ---------
Net change in net asset value per share... 0.0000 0.0000 0.0000
-------- --------- ---------
Net asset value per share, end of
period................................... $ 1.00 $ 1.00 $ 1.00
======= ======== ========
Total return.............................. 6.50%= 8.35% 1.28%=
Ratios/Supplemental Data:
Net assets, end of period (millions)..... $ 321 $ 164 $ 3
Ratio of expenses to average net
assets................................. 0.45%+** 0.45%** 0.45%+**
Ratio of net investment income to average
net assets............................. 8.74%+** 8.63%** 6.49%+**
</TABLE>
- ---------------
* For the period February 18, 1988 (initial offering date of Horizon Service
Shares) through April 30, 1988.
** Includes 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 0.01%, 0.04%, 0.01%,
0.08% (annualized), 0.12% and 0.08% (annualized) for the years or periods
ended February 29, 1996, 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.
10
<PAGE> 387
<TABLE>
<CAPTION>
TREASURY FUND
---------------------------------------------------------------------------------------
JAN. 20,
YEAR ENDED 1990
-------------------------------------------------------------------------- THROUGH
FEB. 29, FEB. 28, FEB. 28, FEB. 28, FEB. 29, FEB. 28, FEB. 28,
1996- 1995- 1994- 1993- 1992 1991 1990
-------- -------- -------- -------- -------- -------- --------
<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................... 0.0559 0.0437 0.0294 0.0341 0.0543 0.0764 0.0082
Net realized gain (loss) on securities.. 0.0011 0.0001 (0.0002) 0.0002 0.0003 0.0005 --
-------- -------- -------- -------- -------- -------- --------
Total income from investment operations. 0.0570 0.0438 0.0292 0.0343 0.0546 0.0769 0.0082
Less Dividends:
Dividends from net investment income.... (0.0559) (0.0437) (0.0294) (0.0343) (0.0545) (0.0765) (0.0082)
-------- -------- -------- -------- -------- -------- --------
Net change in net asset value per share.. 0.0011 0.0001 (0.0002) 0.0000 0.0001 0.0004 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............................. 5.73% 4.46% 2.98% 3.48% 5.59% 7.92% 0.87%
Ratios/Supplemental Data:
Net assets, end of period (millions).... $ 722 $ 469 $ 487 $ 598 $ 432 $ 455 $ 257
Ratio of expenses to average net assets. 0.25%** 0.23% 0.23% 0.24% 0.24% 0.23% 0.27%+
Ratio of net investment income to average
net assets............................ 5.56%** 4.36% 2.94% 3.38% 5.44% 7.57% 7.94%+
<CAPTION>
MAY 1,
1989 YEAR PERIOD
THROUGH ENDED ENDED
JAN. 19, APRIL 30, APRIL 30,
1990++ 1989++ 1988++*
-------- --------- ---------
<S> <C> <C> <C>
HORIZON SHARES:
Net asset value per share,
beginning of period........................ $ 1.00 $ 1.00 $ 1.00
-------- --------- ---------
Income From Investment Operations:
Net investment income...................... 0.0631 0.0792 0.0527
Net realized gain (loss) on securities..... -- -- --
-------- --------- ---------
Total income from investment operations.... 0.0631 0.0792 0.0527
Less Dividends:
Dividends from net investment income....... (0.0631) (0.0792) (0.0527)
-------- --------- ---------
Net change in net asset value per share..... 0.0000 0.0000 0.0000
-------- --------- ---------
Net asset value per share, end of period.... $ 1.00 $ 1.00 $ 1.00
======= ======== ========
Total return................................ 6.44%= 8.21% 5.39%=
Ratios/Supplemental Data:
Net assets, end of period (millions)....... $ 292 $ 239 $ 133
Ratio of expenses to average net assets.... 0.20%+** 0.21%** 0.20%+**
Ratio of net investment income to average
net assets............................... 8.65%+** 8.07%** 6.57%+**
</TABLE>
- ---------------
* For the period July 10, 1987 (commencement of operations) through April 30,
1988.
** Includes 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 0.01%, 0.12% (annualized),
0.16% and 0.15% (annualized) for the years or periods ended February 29,
1996, 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> 388
<TABLE>
<CAPTION>
TREASURY FUND
---------------------------------------------------------------------------------------
JAN. 20,
YEAR ENDED 1990
-------------------------------------------------------------------------- THROUGH
FEB. 29, FEB. 28, FEB. 28, FEB. 28, FEB. 29, FEB. 28, FEB. 28,
1996- 1995- 1994- 1993- 1992 1991 1990
-------- -------- -------- -------- -------- -------- --------
<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................... 0.0534 0.0412 0.0269 0.0316 0.0517 0.0739 0.0080
Net realized gain (loss) on securities.. 0.0011 0.0001 (0.0002) 0.0002 0.0004 0.0005 --
-------- -------- -------- -------- -------- -------- --------
Total income from investment operations. 0.0545 0.0413 0.0267 0.0318 0.0521 0.0744 0.0080
Less Dividends:
Dividends from net investment income.... (0.0534) (0.0412) (0.0269) (0.0318) (0.0520) (0.0740) (0.0080)
-------- -------- -------- -------- -------- -------- --------
Net change in net asset value per share.. 0.0011 0.0001 (0.0002) 0.0000 0.0001 0.0004 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............................. 5.47% 4.20% 2.72% 3.23% 5.33% 7.65% 0.84%=
Ratios/Supplemental Data:
Net assets, end of period (millions).... $ 1,031 $ 364 $ 541 $ 369 $ 381 $ 304 $ 157
Ratio of expenses to average net assets. 0.50%** 0.48% 0.48% 0.49% 0.49% 0.48% 0.52%+
Ratio of net investment income to average
net assets............................ 5.31%** 4.01% 2.69% 3.28% 5.13% 7.31% 7.70%+
<CAPTION>
MAY 1,
1989 YEAR PERIOD
THROUGH ENDED ENDED
JAN. 19, APRIL 30, APRIL 30,
1990++ 1989++ 1988++*
-------- --------- ---------
<S> <C> <C> <C>
HORIZON SERVICE SHARES:
Net asset value per share,
beginning of period........................ $ 1.00 $ 1.00 $ 1.00
-------- --------- ---------
Income From Investment Operations:
Net investment income...................... 0.0613 0.0767 0.0122
Net realized gain (loss) on securities..... -- -- --
-------- --------- ---------
Total income from investment operations.... 0.0613 0.0767 0.0122
Less Dividends:
Dividends from net investment income....... (0.0613) (0.0767) (0.0122)
-------- --------- ---------
Net change in net asset value per share..... 0.0000 0.0000 0.0000
-------- --------- ---------
Net asset value per share, end of period.... $ 1.00 $ 1.00 $ 1.00
======= ======== ========
Total return................................ 6.25%= 7.94% 1.52%=
Ratios/Supplemental Data:
Net assets, end of period (millions)....... $ 166 $ 239 $ 133
Ratio of expenses to average net assets.... 0.45%+** 0.46%** 0.45%+**
Ratio of net investment income to average
net assets............................... 8.31%+** 8.44%** 6.27%+**
</TABLE>
- ---------------
* For the period February 18, 1988 (initial offering date of Horizon Service
Shares) through April 30, 1988.
** Includes 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 0.01%, 0.12% (annualized),
0.16% and 0.10% (annualized) for the years or periods ended February 29,
1996, 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.
12
<PAGE> 389
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, February 28, 1995 and February 29, 1996; (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 Service 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; and (iii) Horizon Shares of the Treasury Only Fund for the period
ended February 29, 1996. 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 Fund and Predecessor Treasury
Only Fund has been audited by other independent accountants for these
Predecessor Funds for the periods indicated, whose unqualified report dated
March 1, 1993 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 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.
13
<PAGE> 390
Selected Data for a Share Outstanding Throughout Each of the Periods Indicated:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
GOVERNMENT FUND PREDECESSOR GOVERNMENT FUND
--------------------------------------------------- ----------------------------------------------------
MARCH 1, 1993 JUNE 4, 1990
(COMMENCEMENT 11 MONTH (COMMENCEMENT
YEAR ENDED YEAR ENDED OF OPERATIONS) TO PERIOD ENDED YEAR ENDED OF OPERATIONS) TO
FEB. 29, 1996 FEB. 28, 1995 FEB. 28, 1994 FEB. 28, 1993 MARCH 31, 1992 MARCH 31, 1991
------------- ------------- ----------------- ------------- -------------- -----------------
<S> <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
------------- ------------- ----------------- ------------- -------------- -----------------
Income From
Investment
Operations:
Net investment
income........... 0.0537 0.0429 0.0300 0.0303 0.0507 0.0599
Net realized loss
on securities.... (0.0004)*** (0.0092) (0.0006) 0.0000 0.0000 0.0000
------------- ------------- ----------------- ------------- -------------- -----------------
Total income from
investment
operations....... 0.0533 0.0337 0.0294 0.0303 0.0507 0.0599
Less Dividends:
Dividends from net
investment
income........... (0.0531) (0.0427) (0.0300) (0.0303) (0.0507) (0.0599)
------------- ------------- ----------------- ------------- -------------- -----------------
Increase due to
voluntary capital
contribution from
investment
adviser............ 0.0000 0.0085 0.0000 0.0000 0.0000 0.0000
------------- ------------- ----------------- ------------- -------------- -----------------
Net change in net
asset value per
share.............. 0.0002 (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 $ 1.00
=========== =========== ============== =========== ============= ==============
Total return......... 5.44% 4.35%** 3.04% 3.07%= 5.19% 6.15%=
Ratios/Supplemental
Data:
Net assets, end of
period (000)..... $ 213,430 $ 288,809 $ 326,017 $ 228,679 $116,604 $ 326,874
Ratio of expenses
to average net
assets*.......... 0.49% 0.43% 0.48% 0.46%+ 0.46% 0.46%+
Ratio of net
investment income
to average net
assets*.......... 5.41% 4.32% 2.99% 3.22%+ 5.27% 6.67%+
</TABLE>
- ---------------
* Includes 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 0.07%, 0.08% and
0.05% for the years ended February 29, 1996, 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.
*** Net realized loss for the fiscal year ended February 29, 1996 is a direct
result of a decrease in outstanding shares between February 28, 1995 and the
date of the gain realization.
+ Annualized.
= Not annualized.
14
<PAGE> 391
<TABLE>
<CAPTION>
GOVERNMENT FUND
----------------------------------------------------------------------
FOR THE PERIOD JUNE 14, 1993
YEAR ENDED YEAR ENDED (INITIAL ISSUANCE OF SHARES)
FEBRUARY 29, 1996 FEBRUARY 28, 1995 THROUGH FEBRUARY 28, 1994
----------------- ----------------- ----------------------------
<S> <C> <C> <C>
HORIZON SHARES:
Net asset value per share, beginning of period...... $ 1.00 $ 1.00 $ 1.00
----------------- ----------------- -----------
Income From Investment Operations:
Net investment income............................. 0.0600 0.0454 0.0227
Net realized loss on securities................... (0.0042)*** (0.0092) (0.0006)
----------------- ----------------- -----------
Total income from investment operations........... 0.0558 0.0362 0.0221
Less Dividends:
Dividends from net investment income.............. (0.0556) (0.0452) (0.0227)
----------------- ----------------- -----------
Increase due to voluntary capital contribution from
investment adviser................................ 0.0000 0.0085 0.0000
----------------- ----------------- -----------
Net change in net asset value per share............. 0.0002 (0.0005) (0.0006)
----------------- ----------------- -----------
Net asset value per share, end of period............ $ 1.00 $ 1.00 $ 1.00
============ ============ ===================
Total return........................................ 5.71% 4.61%** 2.29%=
Ratios/Supplemental Data:
Net assets, end of period (000)................... $ 54,803 $ 235,285 $369,664
Ratio of expenses to average net assets*.......... 0.24% 0.17% 0.28%+
Ratio of net investment income to average net
assets*......................................... 5.66% 4.67% 3.17%+
</TABLE>
- ---------------
* Includes 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 0.06%, 0.08% and
0.002% (annualized) for the years ended February 29, 1996 and 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.
*** Net realized loss for the fiscal year ended February 29, 1996 is a direct
result of a decrease in outstanding shares between February 28, 1995 and the
date of the gain realization.
+ Annualized.
= Not annualized.
15
<PAGE> 392
<TABLE>
<CAPTION>
TREASURY ONLY FUND PREDECESSOR TREASURY ONLY FUND
--------------------------------------------------- ----------------------------------------------------
MARCH 1, 1993 JUNE 4, 1990
(COMMENCEMENT 11 MONTH (COMMENCEMENT
YEAR ENDED YEAR ENDED OF OPERATIONS) TO PERIOD ENDED YEAR ENDED OF OPERATIONS) TO
FEB. 29, 1996 FEB. 28, 1995 FEB. 28, 1994 FEB. 28, 1993 MARCH 31, 1992 MARCH 31, 1991
------------- ------------- ----------------- ------------- -------------- -----------------
<S> <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
------------- ------------- ----------------- ------------- -------------- -----------------
Income From
Investment
Operations:
Net investment
income........... 0.0502 0.0391 0.0273 0.0279 0.0486 0.0571
Net realized gain
(loss) on
securities....... 0.0003 (0.0002) (0.0002) -- -- --
------------- ------------- ----------------- ------------- -------------- -----------------
Total income from
investment
operations....... 0.0505 0.0389 0.0271 0.0279 0.0486 0.0571
Less Dividends:
Dividends from net
investment
income........... (0.0502) (0.0391) (0.0273) (0.0279) (0.0486) (0.0571)
------------- ------------- ----------------- ------------- -------------- -----------------
Net change in net
asset value per
share.............. 0.0003 (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 $ 1.00
=========== =========== ============== =========== ============= ==============
Total return......... 5.14% 3.98% 2.76% 2.83%= 4.96% 5.86%=
Ratios/Supplemental
Data:
Net assets, end of
period (000)..... $ 185,957 $ 194,363 $ 271,588 $ 123,669 $154,811 $ 128,546
Ratio of expenses
to average net
assets*.......... 0.56% 0.55% 0.39% 0.36%+ 0.36% 0.35%+
Ratio of net
investment income
to average net
assets*.......... 5.01% 3.86% 2.73% 3.10%+ 4.74% 6.57%+
</TABLE>
- ---------------
* Includes 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. There were no fee waivers or expense
reimbursements during the fiscal year ended February 29, 1996. 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.
16
<PAGE> 393
<TABLE>
<CAPTION>
TREASURY ONLY FUND
-----------------------------
PERIOD SEPTEMBER 20, 1995
(INITIAL ISSUANCE OF SHARES)
THROUGH FEBRUARY 29, 1996
-----------------------------
<S> <C>
HORIZON SHARES:
Net asset value per share, beginning of period......................... $ 1.00
-----------
Income From Investment Operations:
Net investment income................................................ 0.0227
Net realized loss on securities...................................... (0.0001)
-----------
Total income from investment operations.............................. 0.0226
Less Dividends:
Dividends from net investment income................................. (0.0227)
-----------
Net change in net asset value per share................................ (0.0001)
-----------
Net asset value per share, end of period............................... $ 1.00
=====================
Total return........................................................... 2.30%=
Ratios/Supplemental Data:
Net assets, end of period (000)...................................... $ 7,264
Ratio of expenses to average net assets.............................. 0.70%+*
Ratio of net investment income to average net assets................. 11.88%+*
</TABLE>
- ---------------
* There were no fee waivers or expense reimbursements during the period.
+ 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.
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. Sharehold-
17
<PAGE> 394
ers 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 the Investment Adviser or
institutional investors 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 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") 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 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 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. 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 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 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
18
<PAGE> 395
domestic banks, foreign branches of domestic banks ("Euro CDs") or domestic
branches of foreign banks ("Yankee CDs" and "Yankee BAs") or foreign branches of
foreign banks ("Yankee Euros"). 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, Euro CDs
and Yankee Euros. 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, domestic
branches of foreign banks and foreign 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, domestic branches of foreign banks and foreign 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 Prime 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 direct 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 include 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
19
<PAGE> 396
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.
GOVERNMENT FUND. The investment objective of the Government 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 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 net assets.
TREASURY ONLY FUND. The investment objective of the Treasury Only Fund is to
provide 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
20
<PAGE> 397
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 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 governmental 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 deliver instruments the value
of which is greater than the repurchase price. 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,
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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 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 a Fund may
include variable and floating rate instruments, which may have a stated maturity
in excess of a 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
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<PAGE> 399
remarkets the obligations which have been tendered and thereby determines a new
interest rate for the following period.
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 a 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 its 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 total 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
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<PAGE> 400
agreements) have been entered into and before they are repaid.
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 the Investment
Adviser (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 Portfolios of the Company, other investment companies and
common trust funds managed by the Investment Adviser and its affiliated
entities. Such other investment companies and common trust funds 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
portfolio, investment company or common trust fund, available investments or
opportunities for sales will be allocated in a manner which the Investment
Adviser 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), the Investment Adviser may take into account
the sale of shares of a Fund by broker-dealers and other financial institutions
(including affiliates of the Investment Adviser and the Distributor), provided
the Investment Adviser 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.
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<PAGE> 401
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 (the
"Investment Adviser") serves as investment adviser to each Fund. The Investment
Adviser, 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. The Investment Adviser's principal
banking affiliates operate branches in ten U.S. states as well as corporate
banking, business credit and thrift offices in major U.S. cities. In addition,
it has branches, corporate offices and representative offices in 36 countries.
The Investment Adviser 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. The Investment Adviser and its
affiliates have over $48 billion under management, including over $12 billion in
mutual funds. Bank of America is a subsidiary of BankAmerica Corporation, a
registered bank holding company.
The Investment Adviser manages the investments of the Funds and is responsible
for all purchases and sales of the Funds' portfolio securities. For its
investment advisory services the Investment Adviser 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 29, 1996, the Prime Fund, Treasury Fund,
Government Fund and the Treasury Only Fund paid the Investment Adviser advisory
fees at the effective annual rates of .10%, .10%, .06% and .10% of such Funds'
respective average daily net assets, and the Investment Adviser waived advisory
fees at the effective annual rates of .04% of the Government Fund's average
daily net assets.
In addition, Bank of America may receive fees under the Company's Shareholder
Services Plan with respect to the Funds' Horizon Service Shares and may receive
fees pursuant to the Distribution and Services Plan with respect to the Prime
and Treasury Funds' S Shares. Bank of America and Service Organizations may
receive fees charged directly to their customers' accounts in connection with
investments in S Shares of the Prime and Treasury Funds, and Bank of America and
Shareholder Organizations may receive fees charged directly to their customers'
accounts in connection with investments in Horizon Service Shares of the Funds.
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 3435 Stelzer Road, Columbus, OH 43219.
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 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
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<PAGE> 402
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 29, 1996, the Prime Fund, Treasury Fund, Government Fund and the
Treasury Only Fund paid the Administrator administration fees at the effective
annual rates of .10%, .10%, .07% and .10% of such Funds' respective average
daily net assets, and the Administrator waived administration and/ or reimbursed
expenses at the effective annual rates of .03% of the Government Fund's 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.
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 3435
Stelzer Road, Columbus, OH 43219.
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 National Trust and Savings Association serves as the Prime and Treasury
Funds' sub-custodian. BISYS Fund Services, Inc., 3435 Stelzer Road, Columbus, OH
43219 (the "Transfer Agent"), 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 purchase and
redemption of, and the payment of dividends and other distributions with respect
to the Funds' shares.
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 the Investment Adviser, 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
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<PAGE> 403
Funds' Pacific Horizon Shares. During the fiscal year ended February 29, 1996,
the Prime, Treasury, Government and Treasury Only Funds made payments under the
Plan at an effective annual rate of .25% of each 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 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 representation from Shareholder Organizations (as well
as from the Investment Adviser 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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DISTRIBUTION AND SERVICES PLAN. Under the Distribution and Services Plan, the
Prime and Treasury Funds pay the Distributor for distribution expenses primarily
intended to result in the sale of such Funds' S Shares and for shareholder
servicing expenses. Such distribution expenses include expenses incurred in
connection with advertising and marketing each Fund's Class S Shares; payments
to Service Organizations for assistance in connection with the distribution of S
Shares; and expenses incurred in connection with preparing, printing and
distributing prospectuses for the Funds (except those used for regulatory
purposes or for distribution to existing shareholders of the Funds) and in
implementing and operating the Distribution and Services Plan. Shareholder
servicing expenses include expenses incurred in connection with shareholder
services provided by the Distributor and payments to Service Organizations for
the provision of support services with respect to the beneficial owners of S
Shares, such as establishing and maintaining accounts and records relating to
their clients who invest in S Shares, assisting clients in processing exchange
and redemption requests, developing, maintaining and supporting systems
necessary to support cash management services, such as Sweep Accounts and/or in
changing dividend options and account descriptions and responding to client
inquiries concerning their investments.
Under the Distribution and Services Plan, payments by the Prime and Treasury
Funds for distribution expenses and shareholder servicing expenses may not
exceed the annual rate of up to 0.75% and 0.25%, respectively of the average
daily net assets of such Funds' S Shares. These amounts may be reduced pursuant
to undertakings by the Distributor. Payments for distribution expenses under the
Distribution and Services Plan are subject to Rule 12b-1 under the 1940 Act. As
stated below under "Description of Shares," fees pursuant to the Distribution
and Services Plan are borne by the S and X Shares of the Prime and Treasury
Funds and are not paid with respect to such Funds' other series of shares.
The Company will obtain a representation from the Service Organizations (and
from Bank of America and the Distributor) 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. During the fiscal year ended February 29,
1996, no S Shares had been offered by the Company.
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 the Investment Adviser may prospectively waive payment
of fees and/or assume certain expenses of a Fund as a result of competitive
pressures and in order to protect the business and reputation of the
Administrator and Investment Adviser. 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 are not waived or amounts are not reimbursed.
PURCHASE AND REDEMPTION OF SHARES
HOW S SHARES ARE PURCHASED. As of the date of this Prospectus, S Shares are not
available for purchase. S Shares of the Prime and Treasury Funds are offered by
this Prospectus to customers of Bank of America or Service Organizations that
establish cash management services, such as a Sweep Account with Bank of America
or a Service Organization. Each Sweep Account combines a Transaction Account
with a periodic sweep of balances to or from the Prime and Treasury Funds.
Investors may open a Sweep
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<PAGE> 405
Account by completing and signing the appropriate Sweep Materials. The Sweep
Materials contain important information about the various features and
operations of the Sweep Account and should be reviewed in conjunction with this
Prospectus.
S Shares may be purchased on any Business Day (as defined below) that Bank of
America or the particular Service Organization, as applicable, is open for
business by making a deposit into your Transaction Account. On each day that
both the Prime and Treasury Funds' custodian and the New York Stock Exchange
(the "Exchange") are open for business (a "Business Day") and Bank of America or
a Service Organization is open for business, Bank of America or a Service
Organization computes the net amount of all deposits, withdrawals, charges and
credits made to and from a Transaction Account in accordance with their Sweep
Account procedures (the "Net Sweep Amount"). If deposits and credits exceed
withdrawals and charges, you authorize Bank of America or a Service
Organization, on your behalf, to transmit a purchase order to the Fund
designated in your Sweep Account in the amount of that day's Net Sweep Amount in
accordance with the Sweep Account procedures of Bank of America or a Service
Organization. Your purchase order will be made effective and full and fractional
S Shares will be purchased at the net asset value per share next determined
after receipt by the Transfer Agent. It is the responsibility of Bank of America
or a Service Organization to transmit orders for the purchases of S 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 Business Days that Bank of America or a Service Organization,
respectively, is open for business. Contact Bank of America or your Service
Organization for additional information about Bank of America's or the Service
Organization's Sweep Account procedures.
HOW HORIZON AND HORIZON SERVICE SHARES ARE PURCHASED. Horizon and Horizon
Service Shares of the Funds are sold at the net asset value per share next
determined after receipt of a purchase order by the Transfer Agent. Purchase
orders placed directly with the Transfer Agent 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 Horizon and Horizon Service Shares are accepted by the Funds
only on Business Days, and must be transmitted to the Transfer Agent by
telephone c/o the Distributor (800-426-3863) or terminal access. An investment
in Horizon Shares and Horizon Service Shares of a Fund automatically entitles
the 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 Agent that they do not wish to use this telephone privilege.
Purchase orders for Horizon and Horizon Service Shares of the Prime Fund,
Treasury Fund and Government Fund received by the Transfer Agent 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
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<PAGE> 406
Transfer Agent. 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.
HOW S SHARES ARE REDEEMED. If, on any Business Day Bank of America or the
particular Service Organization, as applicable, is open for business,
withdrawals and charges to your Sweep Account, including without limitation
check transactions, exceed deposits and credits, Bank of America or the
particular Service Organization, as applicable, will transmit a redemption order
on your behalf to the Fund in the dollar amount of that day's Net Sweep Amount.
If your Sweep Account with Bank of America or the particular Service
Organization, as applicable, is closed as described in the Sweep Materials, Bank
of America or the particular Service Organization, as applicable, transmits a
redemption request on your behalf to the Fund for the balance of the S Shares of
the Fund held through your Sweep Account. Redemptions are effected by the
Company on a Business Day at the net asset value per share next determined after
receipt of the redemption order by the Transfer Agent. It is the responsibility
of Bank of America or the particular Service Organization to transmit the
redemption order and credit its customer's Transaction Account with the
redemption proceeds on a timely basis. Bank of America or the Service
Organization may withhold redemption proceeds pending check collection or
processing or for other reasons all as set forth more fully in the Sweep
Materials.
HOW HORIZON AND HORIZON SERVICE SHARES ARE REDEEMED. Redemption orders for
Horizon Shares and Horizon Service Shares must be transmitted to the Transfer
Agent by telephone c/o the Distributor or terminal access in the manner
described above under "Purchase and Redemption of Shares--How Horizon and
Horizon Service Shares Are Purchased." While the Company no longer issues share
certificates, Horizon and Horizon Service Shares for which certificates
previously had been issued may not be redeemed unless the certificates have been
submitted to the Transfer Agent 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 Agent 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 on a Business Day at the net asset value per
share next determined after receipt of the order by the Transfer Agent. Payment
for redeemed shares for which a redemption order is received by the Transfer
Agent 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 Agent at least one day in
30
<PAGE> 407
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
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 Agent that they do not wish
to use this telephone privilege. Neither the Funds, the Distributor nor the
Transfer Agent 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, including requesting certain personal
or account information to confirm the identify of the shareholder.
OTHER REDEMPTION INFORMATION--S SHARES AND HORIZON AND HORIZON SERVICE
SHARES. 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. 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. 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. During the period prior to the time
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.
Each Fund reserves the right to redeem Horizon and Horizon Service Shares in any
account at their net asset value if the value of the account is less than $500
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 and will be
allowed 60 days to make additional investments to bring the value of its account
to $500 before the redemption is processed by a Fund. In addition, a Fund may
redeem Horizon and Horizon Service Shares involuntarily under certain special
circumstances described in the Statement of Additional Information under
"Purchase and Redemption of Shares." The Funds impose no charge when S Shares,
Horizon Shares or Horizon Service Shares are redeemed.
NET ASSET VALUE. The net asset value per share of the S Shares of the Prime and
Treasury Funds and Horizon and Horizon Service Shares of each Fund is the value
of all securities and other assets owned by a Fund that are allocable to a
particular class, less the liabilities charged to such class, divided by the
number of outstanding shares of such class. 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 portfolios of the Company.
ADDITIONAL SHAREHOLDER SERVICES
Certain optional services available to persons who invest directly in Pacific
Horizon Shares of a Fund, including but not limited to certain exchange
privileges which allow shareholders to exchange their Fund shares for shares of
other funds in the Company, an automatic investment
31
<PAGE> 408
program, automatic withdrawal program, and direct deposit program, are not
available to persons who invest directly in Horizon or Horizon Service Shares of
the Funds or in X Shares or S Shares of the Prime and Treasury 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 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. However, holders of the Funds Horizon
and Horizon Service Shares may elect 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 the Transfer Agent
at P.O. Box 80221, Los Angeles, California 90080-9909, and will become effective
with respect to dividends paid after its receipt by the dividend disbursing
agent.
TAXES
FEDERAL. During its most recent taxable year, each Fund qualified separately as
a "regulated investment company" under the Internal Revenue Code of 1986, as
amended (the "Code"), and each Fund intends to so qualify in future years, as
long as such qualification is in the best interest of its shareholders. As a
result of this qualification, each Fund generally is not required to pay 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 (including any excess of net short-term capital gain over
net long-term capital loss) treats it as a receipt of 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 October, November or December of any calendar 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 of such year, if such dividends are paid during
January of the following year.
The foregoing is only a brief summary of some of the important federal income
tax considerations generally affecting the Funds and their shareholders, and is
based on federal tax laws and
32
<PAGE> 409
regulations which are in effect as of the date of this Prospectus. Such laws and
regulations may be changed by legislative or administrative actions. 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.
Shareholders will be advised at least annually as to the federal income tax
consequences of dividends and distributions made each year.
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. 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. The Predecessor Prime Fund and Predecessor Treasury Fund
originally commenced operations on July 10, 1987 as separate portfolios of The
Horizon Funds, a Massachusetts business trust. 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, 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. 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, offering Pacific Horizon Shares and Horizon Service Shares; the
Government Fund and Treasury Only Fund began offering Horizon Shares on June 14,
1993 and September 20, 1995, respectively. The Company has also classified an S
share class and X share class of the Prime and Treasury Funds. X Shares are
offered to retail customers who purchase such shares through a sweep account
offered by BA Investment Services, Inc. and certain Service Organizations.
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 Service Organizations.
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
1940: ten billion X Shares, ten billion S Shares, eighteen billion Horizon
Shares, ten billion Horizon Service Shares and ten billion Pacific Horizon
Shares representing interests in the Prime Fund; four billion, four hundred
million X Shares, ten billion S Shares, ten billion Horizon Shares, ten billion
Horizon Service Shares and ten 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 the
Funds and X Shares
33
<PAGE> 410
of the Prime and Treasury 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 S Shares of the Prime and Treasury Funds and
describes only the investment objectives and policies, operations, contracts and
other matters relating to such shares.
Each X Share, S Share, 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 S Shares of the Prime and
Treasury Funds bear the fees described in this Prospectus that are paid to the
Distributor and Service Organizations by such Funds under the Company's
Distribution and Services Plan. Similarly, holders of such Funds' X Shares bear
the fees described in the Prospectus relating to such shares that are paid to
the Distributor and Service Organizations by such Funds under the same plan. The
fees paid under the Distribution and Services Plan are for distribution and
shareholder services paid to the Distributor and Service Organizations in
connection with X and S Shares of the Prime and Treasury Funds, and are not paid
by such Funds' Horizon, Horizon Service or Pacific Horizon Shares. Holders of a
Fund's Horizon Service Shares bear the fees described in this Prospectus that
are paid to Shareholder Organizations by a 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 the
Investment Adviser and the Administrator by a Fund under the Company's Special
Management Services Agreement for Pacific Horizon Shares. The fees paid under
the Shareholder Services Plan are for services provided by Shareholder
Organizations to their customers in connection with Horizon Service Shares, and
Shareholder Organizations do not receive similar fees with respect to the Funds'
Horizon Shares or Pacific Horizon Shares or X Shares or S Shares of the Prime
and Treasury Funds. The fees paid under the Special Management Services
Agreement are for services provided by Bank of America and the Administrator to
holders of the Funds' Pacific Horizon Shares and are not borne by the Funds'
Horizon Shares or Horizon Service Shares or by X Shares or S Shares of the Prime
and Treasury Funds.
As a result of the different fees borne by the various series of shares in a
Fund, at any given time the net yield on a) the Prime and Treasury Funds' S
Shares generally will be approximately 0.68% lower than the yield on the same
Fund's Pacific Horizon Shares, 0.75% lower than the yield on the same Fund's
Horizon Service Shares, 1.00% lower than the yield on the same Fund's Horizon
Shares and 0.45% lower than the yield on the same Fund's X Shares; b) a Fund's
Horizon Shares generally will be approximately 0.25% higher than the yield on
the same Fund's Horizon Service Shares, 0.32% higher than the yield on the same
Fund's Pacific Horizon Shares, and 0.55% and 1.00% higher than the yield on the
same Fund's X Shares and S Shares, respectively, with respect to the Prime and
Treasury Funds; and c) a Fund's Horizon Service Shares generally will be
approximately 0.25% lower than the yield on the same Fund's Horizon Shares,
0.07% higher than the yield on the same Fund's Pacific Horizon Shares, and 0.30%
and 0.75% higher than the yield on the same Fund's X Shares and S Shares,
respectively, with respect to the Prime and Treasury Funds.
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
34
<PAGE> 411
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. Only holders of Horizon Service Shares will be entitled to vote on
matters submitted to a vote of shareholders pertaining to the Funds' Shareholder
Services Plan. Only holders of particular S and X Shares, if affected by changes
to such Plan, will be entitled to vote on matters submitted to a vote of
shareholders pertaining to a Fund's Distribution and Services Plan relating to
the particular series. Only holders of Pacific Horizon Shares will be entitled
to vote on matters submitted to a vote of shareholders pertaining to the Funds'
Special Management Services Agreement. 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.
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.
35
<PAGE> 412
IST-0025
- ----------------------------
PACIFIC HORIZON MUTUAL FUNDS
- ----------------------------
S SHARES OF THE
PRIME FUND
TREASURY FUND
HORIZON SHARES
AND
HORIZON SERVICE SHARES
OF THE
PRIME FUND
TREASURY FUND
GOVERNMENT FUND
TREASURY ONLY FUND
PROSPECTUS
July 1, 1996
NOT FDIC INSURED
<PAGE> 413
PROSPECTUS
JULY 1, 1996
Horizon Shares and
Horizon Service Shares of the
TAX-EXEMPT MONEY FUND AND THE
CALIFORNIA TAX-EXEMPT MONEY MARKET FUND
Investment Portfolios Offered by Pacific
Horizon Funds, Inc.
- --------------------------------------------------------------------------------
THIS PROSPECTUS APPLIES TO THE HORIZON SHARES AND HORIZON SERVICE SHARES OF THE
TAX-EXEMPT MONEY FUND AND THE CALIFORNIA TAX-EXEMPT MONEY MARKET FUND (THE
"FUNDS"), TWO NO-LOAD TAX-EXEMPT INVESTMENT PORTFOLIOS OFFERED BY PACIFIC
HORIZON FUNDS, INC. (THE "COMPANY"). THE COMPANY IS REGISTERED UNDER THE
INVESTMENT COMPANY ACT OF 1940 AS AN OPEN-END MANAGEMENT INVESTMENT 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.
THE CALIFORNIA TAX-EXEMPT MONEY MARKET FUND IS, AND THE TAX-EXEMPT MONEY FUND
MAY BE, CONCENTRATED IN SECURITIES ISSUED BY THE STATE OF CALIFORNIA OR ENTITIES
WITHIN THE STATE OF CALIFORNIA, AND THE CALIFORNIA TAX-EXEMPT MONEY MARKET FUND
MAY INVEST A SIGNIFICANT PERCENTAGE OF ITS ASSETS IN A SINGLE ISSUER. THEREFORE,
INVESTMENT IN THE FUNDS MAY BE RISKIER THAN AN INVESTMENT IN OTHER TYPES OF
MONEY MARKET FUNDS.
THIS PROSPECTUS BRIEFLY SETS FORTH CERTAIN INFORMATION ABOUT THE FUNDS DESCRIBED
HEREIN THAT INVESTORS SHOULD KNOW BEFORE INVESTING. IT SHOULD BE READ CAREFULLY
AND RETAINED FOR FUTURE REFERENCE. ADDITIONAL INFORMATION ABOUT THE FUNDS IS
CONTAINED IN A STATEMENT OF ADDITIONAL INFORMATION DATED JULY 1, 1996, THAT 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.
(Continued next page)
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
No person has been authorized to give any information or to make any
representations, other than those contained in this Prospectus, in the Statement
of Additional Information and the Funds' official sales literature, in
connection with the offering of the Funds' 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 Funds 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 Funds or the distributor to make such offer in such
jurisdiction.
- --------------------------------------------------------------------------------
<PAGE> 414
BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION ("BANK OF AMERICA"), SAN
FRANCISCO, CALIFORNIA ACTS AS INVESTMENT ADVISER TO THE FUNDS. CONCORD FINANCIAL
GROUP, INC. (THE "DISTRIBUTOR") 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.
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.
<PAGE> 415
CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
EXPENSE INFORMATION 2
FINANCIAL HIGHLIGHTS 3
INVESTMENT OBJECTIVES AND
POLICIES 7
MUNICIPAL SECURITIES 9
OTHER INVESTMENT PRACTICES 10
SPECIAL CONSIDERATIONS AND RISKS 11
INVESTMENT LIMITATIONS 13
INVESTMENT DECISIONS 14
MANAGEMENT OF THE FUNDS 14
PURCHASE AND REDEMPTION OF SHARES 16
DIVIDENDS, DISTRIBUTIONS AND
TAXES 18
DESCRIPTION OF SHARES 19
- ------------------------------------------------------------------------------------------------------------------------
DISTRIBUTOR: INVESTMENT ADVISER:
Concord Financial Group, Inc. Bank of America National Trust and Savings Association
3435 Stelzer Road 55 California Street
Columbus, OH 43219 San Francisco, California 94104
FOR PURCHASE AND REDEMPTION ORDERS, YIELD INFORMATION AND OTHER FUND INFORMATION
CALL (800) 426-3863
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 416
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, (ii) the
operating expenses expected
to be incurred for the next
twelve months by the
California Tax-Exempt Money
Market Fund with respect to
its Horizon Shares, and
(iii) the annual operating
expenses incurred by the
California Tax-Exempt Money
Market Fund 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 MONEY TAX-EXEMPT
MARKET FUND MONEY MARKET FUND
--------------------- ---------------------
HORIZON HORIZON
HORIZON SERVICE HORIZON SERVICE
SHARES SHARES(1) SHARES SHARES(1)
------- --------- ------- ---------
SHAREHOLDER TRANSACTION EXPENSES
<S> <C> <C> <C> <C> <C> <C>
Sales Load Imposed on
Purchases............ None None None None
Sales Load Imposed on
Reinvested
Dividends............ None None None None
Deferred Sales Load.... None None None None
Redemption Fees........ None None None None
<CAPTION>
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Management Fees........ .20% .20% .20% .20%
------ ------- ------ -------
All Other Expenses..... .11% .36% .10% .35%
------ ------- ------ -------
Shareholder Service
Payments........... -- .25% -- .25%
Other Expenses....... .11% .11% .10% .10%
Total Operating
Expenses............. .31% .56% .30% .55%
------ ------- ------ -------
------ ------- ------ -------
</TABLE>
-------------------------------------------
(1) 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 $10 $17 $39
Tax-Exempt Money-Horizon Service Shares........................ $6 $18 $31 $70
California Tax-Exempt Money Market-Horizon Shares.............. $3 $10 $17 $38
California Tax-Exempt Money Market-Horizon Service Shares...... $6 $18 $31 $69
</TABLE>
- --------------------------------------------------------------------------------
The foregoing Expense Summary and Example are intended to assist investors in
Horizon Shares and Horizon Service Shares in understanding the various
shareholder transaction and operating expenses of each class that investors bear
either directly or indirectly. Investors bear operating expenses indirectly
since they reduce the amount of income paid by the Funds to investors as
dividends. From time to time, the investment adviser and administrator may
prospectively waive a portion of their respective fees and/or assume certain
expenses of the Funds. This waiver or assumption of expenses 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.
2
<PAGE> 417
THE EXAMPLE ABOVE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
INVESTMENT RETURN AND OPERATING EXPENSES. ACTUAL INVESTMENT RETURNS AND
OPERATING EXPENSES MAY BE MORE OR LESS THAN THOSE SHOWN.
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.
On January 19, 1990, the Predecessor Tax-Exempt Fund was reorganized as a new
portfolio 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 a second series of shares known as the Horizon Service Shares.
The Company has also classified an X Share class and a Horizon Share class of
the California Tax-Exempt Money Market Fund.
The tables below show the following information concerning the investment
results for Horizon Shares and Horizon Service Shares: (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, February 28, 1995 and February 29, 1996. The tables
below also show 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, February 28, 1995 and February 29, 1996.
The information contained in the Financial Highlights for the five years ended
February 29, 1996 has been audited by Price Waterhouse LLP, independent
accountants for the Predecessor Tax-Exempt Fund, the Tax-Exempt Money Fund and
the California Tax-Exempt Money Market Fund. Price Waterhouse LLP's unqualified
report on the financial statements containing such information is incorporated
by reference into 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 thereon which are incorporated by reference in the Statement of
Additional Information. Further information about the performance of the Funds
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.
3
<PAGE> 418
Selected data for a Horizon Share outstanding throughout each of the periods
indicated:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
TAX-EXEMPT MONEY FUND
--------------------------------------------------------------------------------------------
YEAR ENDED
--------------------------------------------------------------------------------------------
FEBRUARY 29, FEBRUARY 28, FEBRUARY 28, FEBRUARY 28, FEBRUARY 29, FEBRUARY 28,
1996++ 1995++ 1994++ 1993++ 1992 1991
------------ ------------ ------------ ------------ ------------ ------------
<S> <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
------------ ------------ ------------ ------------ ------------ ------------
Income from Investment
Operations:
Net investment
income................. 0.0359 0.0285 0.0225 0.0269 0.0410 0.0557
Less dividends from net
investment income........ (0.0359) (0.0285) (0.0225) (0.0269) (0.0410) (0.0557)
------------ ------------ ------------ ------------ ------------ ------------
Net change in net asset
value per share.......... 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
============ ============ ============ ============ ============ ============
Total return.............. 3.65% 2.89% 2.27% 2.72% 4.18% 5.71%
Ratios/Supplemental Data:
Net assets, end of period
(000).................. $302,704 $381,811 $514,663 $383,848 $345,221 $428,127
Ratio of expenses to
average net assets..... 0.31% 0.28% 0.28%** 0.28% 0.28% 0.27%**
Ratio of net investment
income to average net
assets................. 3.58% 2.81% 2.25%** 2.69% 4.12% 5.54%**
<CAPTION>
MAY 1, 1989 YEAR PERIOD
THROUGH ENDED ENDED
FEBRUARY 28, APRIL 30, APRIL 30,
1990 1989- 1988*-
------------ --------- ---------
<S> <C> <C> <C>
HORIZON SHARES
Net asset value per share,
beginning of period...... $ 1.00 $ 1.00 $ 1.00
------------ --------- ---------
Income from Investment
Operations:
Net investment
income................. 0.0503 0.0577 0.0392
Less dividends from net
investment income........ (0.0503) (0.0577) (0.0389)
------------ --------- ---------
Net change in net asset
value per share.......... 0.0000 0.0000 0.0003
------------ --------- ---------
Net asset value per share,
end of period............ $ 1.00 $ 1.00 $ 1.00
============ ========= =========
Total return.............. 5.15%= 5.93% 3.92%=
Ratios/Supplemental Data:
Net assets, end of period
(000).................. $355,656 $178,586 $104,358
Ratio of expenses to
average net assets..... 0.21%**+ 0.21%** 0.20%**+
Ratio of net investment
income to average net
assets................. 5.96%**+ 5.84%** 5.17%**+
</TABLE>
- ---------------
* For the period July 10, 1987 (commencement of operations) through April 30,
1988.
** Includes fee waivers and expense reimbursements. 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 0.01% , 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 into 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.
4
<PAGE> 419
Selected data for a Horizon Service Share outstanding throughout each of the
periods indicated:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
TAX-EXEMPT MONEY FUND
--------------------------------------------------------------------------------------------
YEAR ENDED
--------------------------------------------------------------------------------------------
FEBRUARY 29, FEBRUARY 28, FEBRUARY 28, FEBRUARY 28, FEBRUARY 29, FEBRUARY 28,
1996++ 1995++ 1994++ 1993++ 1992 1991
------------ ------------ ------------ ------------ ------------ ------------
<S> <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
------ ------ ------ ------ ------ ------
Income from Investment
Operations:
Net investment
income............... 0.0334 0.0260 0.0200 0.0244 0.0385 0.0532
Less dividends from net
investment income...... (0.0334) (0.0260) (0.0200) (0.0244) (0.0385) (0.0532)
------ ------ ------ ------ ------ ------
Net change in net asset
value per share........ (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
============ ============ ============ ============ ============ ============
Total return............ 3.39% 2.63% 2.02% 2.47% 3.92% 5.45%
Ratios/Supplemental
Data:
Net assets, end of
period (000)......... $ 34,684 $ 39,158 $ 48,328 $ 49,695 $ 47,230 $ 53,732
Ratio of expenses to
average net assets... 0.56% 0.53% 0.53%** 0.53% 0.53% 0.52%**
Ratio of net investment
income to average net
assets............... 3.34% 2.57% 2.04%** 2.42% 3.88% 5.29%**
<CAPTION>
MAY 1, 1989 YEAR PERIOD
THROUGH ENDED ENDED
FEBRUARY 28, APRIL 30, APRIL 30,
1990 1989- 1988*-
------------ --------- ---------
<S> <C> <C> <C>
HORIZON SERVICE SHARES
Net asset value per
share, beginning of
period................. $ 1.00 $ 1.00 $ 1.00
------ --------- ---------
Income from Investment
Operations:
Net investment
income............... 0.0482 0.0552 0.0090
Less dividends from net
investment income...... (0.0482) (0.0552) (0.0090)
------ --------- ---------
Net change in net asset
value per share........ 0.0000 0.0000 0.0000
------ --------- ---------
Net asset value per
share, end of period... $ 1.00 $ 1.00 $ 1.00
============ ========= =========
Total return............ 4.93% 5.66% 0.90%
Ratios/Supplemental
Data:
Net assets, end of
period (000)......... $ 36,538 $178,586 $104,358
Ratio of expenses to
average net assets... 0.46%**+ 0.46%** 0.45%**+
Ratio of net investment
income to average net
assets............... 5.73%**+ 5.70%** 4.54%**+
</TABLE>
- ---------------
* For the period February 18, 1988 (initial offering day) through April 30,
1988.
** Includes fee waivers and expense reimbursements. 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 0.04% , 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.
5
<PAGE> 420
Selected data for a Horizon Service Share outstanding throughout each of the
periods indicated:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CALIFORNIA TAX-EXEMPT MONEY MARKET FUND
--------------------------------------------
YEAR ENDED YEAR ENDED YEAR ENDED
FEBRUARY 29, FEBRUARY 28, FEBRUARY 28,
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
HORIZON SERVICE SHARES
Net asset value per share, beginning of period.............. $ 1.00 $ 1.00 $ 1.00
------------ ------------ ------------
Income from Investment Operations:
Net investment income..................................... 0.0331 0.0256 0.0198
Net realized loss on securities........................... 0.0001 (0.0001) (0.0001)
------------ ------------ ------------
Total income from investment operations..................... 0.0332 0.0255 0.0197
Less dividends from net investment income................... (0.0331) (0.0256) (0.0198)
Net change in net asset value per share..................... 0.0001 (0.0001) (0.0001)
------------ ------------ ------------
Net asset value per share, end of period.................... $ 1.00 $ 1.00 $ 1.00
========== ========== ==========
Total Return................................................ 3.36% 2.59% 2.00%
Ratios/Supplemental Data:
Net assets, end of period (000)........................... $203,388 $ 88,003 $123,746
Ratio of expenses to average net assets................... 0.55%* 0.55% 0.53%**
Ratio of net investment income to average net assets...... 3.43%* 2.50% 1.98%**
</TABLE>
- ---------------
* Includes fee waivers and expense reimbursements. Such fee waivers and expense
reimbursements had the effect of increasing the ratio of net investment
income to average net assets by 0.01% for the fiscal year ended February 29,
1996. During the same period, the Fund received credits from its custodian
for interest earned on uninvested cash balances which were used to offset
custodian fees and expenses. If such credits had not occurred, the ratio of
expenses to average net assets (without fee waivers and/or expense
reimbursements) would have been 0.55%. The ratio of net investment income to
average net assets was not affected.
** Includes fee waivers and expense reimbursements. 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 0.07% for the fiscal year ended February 28, 1994.
YIELD INFORMATION. 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 this 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
Funds' yields may be compared to Donoghue's Tax-Free Money Fund Average and
Donoghue's Money Fund Averages, which
6
<PAGE> 421
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 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 defined 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 (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 authori-
7
<PAGE> 422
ties, 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. Because the
Fund may invest in securities backed by banks and other financial institutions,
changes in the credit quality of these institutions could cause losses to the
Fund and affect its share price. 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 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 "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
include, without limitation, 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
8
<PAGE> 423
banks and commercial paper. Because the California Tax-Exempt Money Market Fund
may invest in securities backed by banks and other financial institutions,
changes in the credit quality of these institutions could cause losses to the
Fund and affect its share price. These obligations are further described in the
Statement of Additional Information. 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 net 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, which are not payable from the unrestricted revenues of the issuers.
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 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
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." A 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 involved an 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 instruments in
9
<PAGE> 424
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 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 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 creditworthiness of the issuers of such instruments
and their ability to repay principal and interest will be continuously monitored
by a 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" 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
transactions 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 Munici-
10
<PAGE> 425
pal 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 Funds 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 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 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
deliver instruments the value of which is greater than the repurchase price.
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 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
"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 a 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 investment adviser. Additionally, although the Tax-Exempt
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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 California Tax-Exempt Money Market Fund is, and the Tax-Exempt Money Fund
may be, concentrated in securities issued by the State of California or entities
within the State of California, and the California Tax-Exempt Money Market Fund
may invest a significant percentage of its assets in a single issuer. Therefore,
investment in the Funds may be riskier than an investment in other types of
money market funds.
The concentration in California Municipal Securities by the California
Tax-Exempt Money Market Fund and the Tax-Exempt Money Fund 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 a Fund's concentration in such obligations versus the safety that
comes with a less geographically concentrated investment portfolio and should
compare the yield available on a portfolio of 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. In recent
years, these economic factors reduced revenues to the state government at a time
when expenses
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of state government such as education costs, various welfare costs and other
expenses were rising. Such economic factors adversely impacted the ability of
state and local California governmental entities to repay debt, and these
factors, and others that cannot be predicted, may have an adverse impact in the
future.
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 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 securi-
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ties 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 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 serves as the Funds' investment adviser.
Bank of America, which has its 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, business credit and thrift offices in major U.S. cities. In addition,
it has branches, corporate offices and representative offices in 36 foreign
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
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and its affiliates have over $48 billion under management, including over $12
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 average daily net assets, plus .09% of the next
$2 billion of each Fund's average daily net assets, plus .08% of each Fund's
average daily net assets over $5 billion. For the fiscal year ended February 29,
1996, 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 daily 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 3435 Stelzer Road, Columbus, Ohio 43219-3035.
Under its basic administrative services agreement for the Funds, the
Administrator has agreed to: provide the facilities, equipment and personnel
necessary to carry out administrative services for the benefit of all series in
the Funds; including coordination of the preparation of reports to shareholders
of the Funds and the Securities and Exchange Commission; calculation of the net
asset value of the Funds' shares; calculation of the 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; maintain (or oversight of the maintenance by others
approved by the Board of Directors) of the Funds' books and records; and
provision of various services for shareholders (such as the provision of a
facility to receive purchase and redemption orders) for shareholders who have
made a minimum investment of at least $500,000.
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 29, 1996, the California Tax-Exempt Money Market Fund and
the Tax-Exempt Money 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 paid 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 3435
Stelzer Road, Columbus, Ohio 43219-3035.
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
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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.
CUSTODIAN AND TRANSFER AGENT. The Bank of New York, located at 90 Washington
Street, New York, New York 10286, serves as the Funds' custodian. BISYS Fund
Services, Inc. (the "Transfer Agent"), 3435 Stelzer Road, Columbus, Ohio
43219-3035, serves as 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 purchase and redemption of, and the payment of
dividends and other distributions with respect to, the Funds' shares.
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. 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. From time to
time, during the course of each Fund's fiscal year, Bank of America and/or the
Administrator may prospectively waive payments of fees and/or reimburse certain
expenses of the Funds as a result of competitive pressures and in order to
preserve and protect the business and reputation of Bank of America and the
Administrator. This will have the effect of lowering the overall expense ratio
of such Fund and of increasing such Fund's yield to investors at the time such
fees are waived or expenses reimbursed, and of increasing the overall expense
ratio of such Fund and of decreasing yield to investors when such fees are not
waived or expenses not 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 Agent. Purchase
orders placed directly with the Transfer Agent 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 a Fund 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 Agent
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 investors to purchase Fund shares, subject to the minimum
described below, without charge, by telephone, unless they indicate in a written
notice to the Transfer Agent that they do not wish to use this telephone
privilege.
Purchase orders for the Funds that are 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 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.
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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 Agent. 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 Agent 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 Agent 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 Agent 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 Agent. Payment for redeemed shares
for which a redemption order is received by the Transfer Agent before 12:00 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 12:00 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
Agent 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
Funds automatically entitles investors to redeem shares, without charge, by
telephone, unless they indicate through a written notice to the Transfer Agent
that they do not wish to use this telephone privilege. Neither the Fund, the
Distributor nor the Transfer Agent 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, including
requesting certain personal or account information to confirm the identity of
the shareholder.
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 as a result of
redemptions. The shareholder
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having the account will first be notified in writing that its account has a
value of less than $500 and will be allowed 60 days to make additional
investments to bring the value of its account to $500 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 12:00 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. Reinvested dividends receive the same tax treatment
as dividends paid in cash. Such election or any revocation thereof must be made
in writing to the Transfer Agent at P.O. Box 80221, Los Angeles, California
90080-9909, and will become effective with respect to dividends paid after its
receipt by the dividend disbursing agent.
TAXES. During its most recent taxable year, each Fund qualified separately as a
"regulated investment company" under the Internal Revenue Code of 1986, as
amended (the "Code"), and the Funds intend that they will each so qualify in
future years as long as such qualification is in the best interests of its
shareholders. As a result of this qualification, each Fund generally is not
required to pay 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
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shareholders notwithstanding that all or a portion of such dividends are exempt
from California state personal income tax.
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 applicable to corporations. Corporate
shareholders also must take all exempt-interest dividends into account in
determining certain adjustments for federal alternative minimum tax purposes.
Shareholders receiving Social Security benefits should note that all
exempt-interest dividends will be taken into account in determining the tax
liability on such benefits.
Dividends declared in October, November or December of any calendar 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 of such year, 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, and is based on tax laws and regulations in effect as of the date
of this Prospectus. Such laws may be changed by administrative or legislative
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.
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, a
Massachusetts business trust. 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
Predecessor Tax-Exempt Fund were transferred to 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
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series of shares, Pacific Horizon Shares. On March 1, 1993 the California
Tax-Exempt Money Market Fund began offering Horizon Service Shares. The Company
has also classified an X Share class and a Horizon Share class of the California
Tax-Exempt Money Market Fund.
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 Tax-Exempt Money Fund: three billion Horizon
Shares, three billion Horizon Service Shares and one billion, 500 million
Pacific Horizon Shares and the following series of shares representing interests
in the California Tax-Exempt Money Market Fund: five hundred million Horizon
Shares, five hundred million Horizon Service Shares, one billion Pacific Horizon
Shares and one billion X Shares. Pacific Horizon Shares of the Funds and X
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 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 Funds and
describes only the investment objectives and policies, operations, contracts and
other matters relating to such shares.
Each Horizon Share, Horizon Service Share, Pacific Horizon Share, and X 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 only 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. Holders of Horizon Shares are not subject
to fees such as those paid under the Shareholder Services Plan or the Special
Management Services Agreement. Holders of the California Tax-Exempt Money Market
Fund's X Shares bear the fees as described in the Prospectus for such shares
that are paid to the Distributor and service organizations by the Fund under the
Company's Distribution and Services Plan. The fees paid under the Distribution
and Services Plan are for distribution and shareholder services paid to the
Distributor and service organizations in connection with X Shares and are not
paid by such Fund's Horizon, Horizon Service or Pacific Horizon Shares. As a
result of the different fees borne by various series of shares of a Fund, at any
given time, the net yields on the Fund's Horizon Shares are expected to be
approximately .25% higher than the yield on the Horizon Service Shares; .32%
higher than the yield on the Pacific Horizon Shares; and .55% higher than the
yield on the X Shares. In addition the net yield on a Horizon Service Share
generally will be 0.25% lower than the yield on a Fund's Horizon Share; 0.07%
higher than the yield on the same Fund's Pacific Horizon Shares and 0.30% higher
than the yield on a Fund's X 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
20
<PAGE> 435
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 Shareholder Services Plan. Only holders of Pacific Horizon Shares of
the Fund will be entitled to vote on matters submitted to a vote of shareholders
pertaining to the Fund's Special Management Services Agreement. Only holders of
X Shares, will be entitled to vote on matters submitted to a vote of
shareholders pertaining to the Fund's Distribution and Services Plan relating to
the particular series. 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.
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, Pacific Horizon Shares or X 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 the average daily net asset value of the Horizon Service
Shares.
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.
21
<PAGE> 436
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 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.
22
<PAGE> 437
IST-0025
- ----------------------------
PACIFIC HORIZON MUTUAL FUNDS
- ----------------------------
HORIZON SHARES
AND
HORIZON SERVICE SHARES
OF THE
TAX-EXEMPT MONEY FUND
AND THE
CALIFORNIA TAX-EXEMPT
MONEY MARKET FUND
PROSPECTUS
July 1, 1996
NOT FDIC INSURED
<PAGE> 438
PACIFIC HORIZON FUNDS, INC.
(THE "COMPANY")
STATEMENT OF ADDITIONAL INFORMATION
FOR
NATIONAL MUNICIPAL BOND FUND
CALIFORNIA TAX-EXEMPT BOND FUND
AGGRESSIVE GROWTH FUND
U.S. GOVERNMENT SECURITIES FUND
CAPITAL INCOME FUND
INTERMEDIATE BOND FUND
BLUE CHIP FUND
ASSET ALLOCATION FUND
CORPORATE BOND FUND
INTERNATIONAL EQUITY FUND
July 1, 1996
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
THE COMPANY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
INVESTMENT OBJECTIVES AND POLICIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67
ADDITIONAL INFORMATION CONCERNING TAXES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78
MANAGEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86
GENERAL INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 129
Appendix A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-1
Appendix B . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-1
</TABLE>
This Statement of Additional Information applies to A and K Shares of
the Pacific Horizon Aggressive Growth Fund, Pacific Horizon U.S. Government
Securities Fund, Pacific Horizon Capital Income Fund, Pacific Horizon National
Municipal Bond Fund and Pacific Horizon California Tax-Exempt Bond Fund
(collectively, the "Non-Feeder Funds"), Pacific Horizon Intermediate Bond Fund,
Pacific Horizon Blue Chip Fund, Pacific Horizon Asset Allocation Fund, Pacific
Horizon Corporate Bond Fund, Pacific Horizon International Equity Fund (the
"Feeder Funds" and, collectively with the Non-Feeder Funds, the "Funds") of
Pacific Horizon Funds, Inc. The Master Portfolios corresponding to the
Intermediate Bond Fund, Blue Chip Fund, Asset Allocation Fund, Corporate Bond
Fund and International Equity Fund are referred to individually as the
"Intermediate Bond Master Portfolio" "Blue Chip Master Portfolio," "Asset
Allocation Master Portfolio," "Corporate Bond Master Portfolio," and
"International Equity Master Portfolio" respectively, collectively as the
"Master Portfolios," and collectively with the Non-Feeder Funds, the
"Portfolios." The Company and Master Investment Trust, Series I ("Master Trust
I"), are collectively referred to herein as the "Companies." This Statement of
Additional Information is meant to be read in conjunction with the Prospectuses
dated July 1, 1996, as they may
<PAGE> 439
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 either A or K Shares of any Fund should be made solely upon the
information contained herein. Copies of the Prospectuses relating to Pacific
Horizon'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.
-2-
<PAGE> 440
THE COMPANY
The Company was organized on October 27, 1982 as a Maryland
corporation. The National Municipal Bond Fund, Aggressive Growth Fund,
Intermediate Bond Fund (formerly, Flexible Bond Fund), Blue Chip Fund, Asset
Allocation Fund and International Equity Fund commenced operations on January
28, 1994, March 31, 1984, January 24, 1994, January 13, 1994, January 18, 1994
and May 6, 1996, respectively. 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 Pacific Horizon. 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 Corporate Bond 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 "Corporate Predecessor Fund"). On April 25, 1994 the
Corporate Predecessor Fund was reorganized as a separate portfolio of the
Company and all of the assets and liabilities of the Corporate Predecessor Fund
were transferred to the Corporate Bond Fund. The Feeder Funds seek to achieve
their respective investment objectives by investing substantially all of their
assets in diversified investment portfolios of an open-end, management
investment company having the same investment objective as these Funds. Prior
to July 1, 1996, the National Municipal Bond Fund operated as part of a
master-feeder structure and invested all of its assets in a master portfolio
which had identical investment objectives. On July 1, 1996, the National
Municipal Bond Fund withdrew its assets from the master portfolio and invested
them directly in municipal securities. As of the date of this Statement of
Additional Information, no K Shares were offered or outstanding.
-3-
<PAGE> 441
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. Because the investment
characteristics of each Feeder Fund will correspond with its respective Master
Portfolio, the following is a discussion of the various investments and
techniques employed by each Master 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. 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 or periods indicated, the portfolio
turnover rates for the National Municipal Bond Fund, U.S. Government Securities
Fund, California Tax-Exempt Bond Fund, Capital Income Fund, Aggressive Growth
Fund, Intermediate Bond Master Portfolio, Blue Chip Master Portfolio, Asset
Allocation Master Portfolio and International Equity Master Portfolio were as
follows:
<TABLE>
<CAPTION>
Year Ended Year or Period Ended February
February 29, 1996 28, 1995
<S> <C> <C>
National Municipal Bond Fund* 37.11% 6.19%
U.S. Government Securities Fund 137% 189%
California Tax-Exempt Bond Fund 57% 20%
Capital Income Fund 57% 94%
</TABLE>
-4-
<PAGE> 442
<TABLE>
<CAPTION>
Year Ended Year or Period Ended
February 29, 1996 February 28, 1995
<S> <C> <C>
Aggressive Growth Fund 93% 92%
Intermediate Bond Master Portfolio 172% 240%
Blue Chip Master Portfolio 108% 44%
Asset Allocation Master Portfolio 157% 142%
International Equity Master Portfolio** N/A N/A
- --------------------
</TABLE>
* Until July 1, 1996, the National Municipal Bond Fund invested all of
its assets in the National Municipal Bond Portfolio of Master
Investment Trust, Series II (the "Municipal Master Portfolio").
Information contained in the chart above relates to the Municipal
Master Portfolio.
** The International Equity Master Portfolio commenced operations on May
6, 1996.
For the fiscal year and periods indicated, the portfolio
turnover rates for the Corporate Bond Master Portfolio and the Predecessor
Corporate Bond Fund were as follows:
<TABLE>
<CAPTION>
Period April 25,
1994 (the date
the Predecessor
Corporate Bond Fund
was reorganized into
Period October 1, the Corporate Period October 1,
1993 through Fund) through 1994 through Year Ended
April 24, 1994 September 30, 1994 February 28, 1995 February 29, 1996
<S> <C> <C> <C> <C>
Corporate Bond
Master Portfolio N/A 51%(1) 124%(1,2) 96%
Predecessor
Corporate Bond 16%(1) N/A N/A N/A
Fund
</TABLE>
- --------------------
1 Unannualized
2 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 Corporate
Bond Master Portfolio
Subject to the general control of the Company's Board of
Directors, and the Master Portfolios' Trustees, Bank of America National Trust
and Savings Association ("Bank of America"
-5-
<PAGE> 443
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 fixed income
securities are normally principal transactions without brokerage commissions.
For the fiscal years or periods indicated, the Aggressive
Growth Fund, Capital Income Fund, Blue Chip Master Portfolio, Asset Allocation
Master Portfolio, California Tax-Exempt Bond Fund, U.S. Government Securities
Fund, Intermediate Bond Master Portfolio, National Municipal Bond Fund and
International Equity Master Portfolio paid the following brokerage commissions:
<TABLE>
<CAPTION>
Year Ended Year Ended Year or Period* Ended
February 29, 1996 February 28, 1995 February 28, 1994
<S> <C> <C> <C>
Aggressive Growth Fund $369,002 $631,200 $267,276
Capital Income Fund $ 95,126 $207,310 $110,588
Blue Chip Master Portfolio $428,667 $202,817 $270,323
Asset Allocation Master $175,960 $152,778 $ 21,798
Portfolio
California Tax-Exempt Bond $0 $0 $0
Fund
U.S. Government Securities $0 $0 $0
Fund
Intermediate Bond Master $0 $0 $0
Portfolio
National Municipal Bond Fund+ $0 $0 $0
International Equity Master N/A N/A N/A
Portfolio
</TABLE>
-6-
<PAGE> 444
- --------------------
* The Intermediate Bond, Blue Chip and Asset Allocation Master
Portfolios commenced operations on December 6, 1993. The Municipal
Master Portfolio commenced operations on January 28, 1994. The
International Equity Master Portfolio commenced operations on May 6,
1996.
+ Until July 1, 1996, the National Municipal Bond Fund invested all of
its assets in the Municipal Master Portfolio. Information contained
in the chart above relates to the Municipal Master Portfolio.
During the fiscal years ended September 30, 1994, February 28,
1995 and February 29, 1996, neither the Corporate Bond Fund nor the Corporate
Predecessor Fund paid any 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 Agreements between the particular 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 particular Board, to
cause a 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 particular 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, a
particular Company or any given 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
-7-
<PAGE> 445
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
Companies, 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 Companies and the Portfolios. In
connection with its investment management services with respect to 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 Companies, 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.
A 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. A Portfolio will
engage in this practice only when Bank of America, in its sole discretion
subject to guidelines adopted by the particular Board, 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 Portfolios 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 Pacific Horizon as of the close of its most recent fiscal
year. As of February 29, 1996: (a) the Treasury Fund held the following
securities, Repurchase Agreement with Dean Witter, Reynolds, Inc. in the
principal amount of $130,000,000; Repurchase Agreement with Goldman Sachs & Co.
in the principal amount of $375,000,000; Repurchase Agreement with Merrill
Lynch & Co., Inc. in the principal amount of $130,000,000; and Repurchase
Agreement with Morgan Stanley, Inc. in the principal amount of $130,000,000;
(b) the Government Fund held the following securities, Repurchase Agreement
with Morgan Stanley Group in the principal amount of $20,000,000; (c) the Prime
Fund held the following securities, Merrill Lynch & Co., Inc. commercial paper
in the principal amount of $50,000,000; Bear Stearns Cos., Inc. monthly
variable rate obligation in the principal amount of $100,000,000; Merrill Lynch
& Co., Inc. monthly variable rate obligation in the principal amount of
-8-
<PAGE> 446
$50,000,000; Merrill Lynch & Co., Inc. quarterly variable rate obligation in
the principal amount of $50,000,000; Merrill Lynch & Co., Inc. quarterly
variable rate obligation in the principal amount of $50,000,000; Dean Witter
Discover & Co. quarterly variable rate obligation in the principal amount of
$50,000,000; Goldman Sachs Group L.P. master note in the principal amount of
$220,000,000; Morgan Stanley Group, Inc. master note in the principal amount of
$200,000,000, Repurchase Agreement with Dean Witter Reynolds, Inc. in the
principal amount of $105,000,000; Repurchase Agreement with Morgan Stanley
Group, Inc. in the principal amount of $105,000,000; Repurchase Agreement with
Morgan Stanley Group, Inc. in the principal amount of $105,000,000; (d) the
U.S. Government Securities Fund held the following securities, Merrill Lynch &
Co., Inc. commercial paper in the principal amount of $3,000,000; (e) the
Corporate Bond Master Portfolio held the following securities, Goldman Sachs
Group LP corporate obligation in the principal amount of $1,500,000; and Lehman
Brothers corporate obligation in the principal amount of $1,000,000; (f) the
Intermediate Bond Master Portfolio held the following securities, Morgan
Stanley Group medium term note in the amount of $2,000,000 and Merrill Lynch
Mtg. Inv. Inc $16,000 (g) the Blue Chip Master Portfolio held the following
securities, Dean Witter common stock in the principal amount of $2,821,875; and
(h) the Asset Allocation Master Portfolio held the following securities, Dean
Witter common stock in the principal amount of $1,085,750; Lehman Brothers
corporate obligations in the principal amount of $1,000,000; Morgan Stanley
Group medium term note in the principal amount of $1,500,000; Merrill Lynch &
Co., Inc. collateralized mortgage obligation in the principal amount of $8,000;
and Merrill Lynch commercial paper in the principal amount of $3,500,000.
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.
-9-
<PAGE> 447
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. Except for the U.S. Government Securities Fund (and the National
Municipal Bond Fund with respect to time deposits), certificates of deposit,
bankers' acceptances and time deposits are eligible investments for each
Portfolio 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 the face value
of the instrument on maturity. Certificates of Deposit and Bankers Acceptances
may only be purchased from domestic or foreign banks and financial institutions
having 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 Intermediate Bond, Blue Chip and Asset Allocation Master 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
-10-
<PAGE> 448
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
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 each
Portfolio other than the Capital Income and U.S. Government Securities Funds,
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 and U.S. Government
Securities Funds; or if unrated, will be determined by Bank of America to be of
comparable quality under procedures established by the particular Board.
Other Investment Companies. In connection with the management
of their daily cash position, the Aggressive Growth Fund, Capital Income Fund,
Corporate Bond Fund, National Municipal Bond Fund, Asset Allocation Master
Portfolio, Blue Chip Master Portfolio, Intermediate Bond Master Portfolio and
International Equity Master Portfolio may each invest in the securities of a
money market mutual fund (including money market mutual funds advised by Bank
of America). Such Funds are permitted to invest up to 5% of the value of their
respective total assets in the securities of a money market mutual fund; except
that if a pending exemptive order is granted by the Securities and Exchange
Commission ("SEC"), with respect to the investment in a money market mutual
fund advised by Bank of America, such Funds are permitted to invest the greater
of 5% of their respective net assets or $2.5 million. However, no more than
10% of such Fund's total assets may be invested in the securities of money
market mutual funds in the aggregate. Securities of other investment companies
will be acquired by the Aggressive Growth Fund, Capital Income Fund, Corporate
Bond Fund,
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National Municipal Bond Fund, Asset Allocation Master Portfolio, Blue Chip
Master Portfolio, Intermediate Bond Master Portfolio and International Equity
Master Portfolio within the limits prescribed by the Investment Company Act of
1940 and each Portfolio's applicable fundamental investment limitations. As a
shareholder of another investment company, a Fund would bear along with other
shareholders, its pro-rata portion of the other investment company's expenses,
including advisory fees. These expenses would be in addition to the advisory
and other expenses that the Fund bears directly in connection with its own
operations. The Aggressive Growth Fund may also acquire shares of closed-end
investment companies, including companies that invest in foreign issuers, but
only in furtherance of its investment objective. The International Equity
Master Portfolio may acquire shares of open and closed-end investment
companies.
The 1940 Act generally prohibits each 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. In addition, no more than 10% of
the outstanding voting stock of any one investment company may be owned in the
aggregate by the Portfolios and any other investment company advised by the
investment adviser.
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 which 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 Aggressive Growth, California Tax-Exempt Bond, U.S. Government
Securities and Capital Income Funds and the Corporate Bond and International
Equity Master Portfolios intend to only enter into repurchase agreements having
maturities not exceeding 60 days. Repurchase agreements maturing in more than
seven days are considered illiquid investments and investments in such
repurchase agreements along with any other illiquid securities will not exceed
10% of the value of the net assets of the Aggressive Growth, California
Tax-Exempt Bond, U.S. Government Securities or Capital Income Funds or the
Intermediate Bond, Blue Chip and Asset Allocation Master Portfolios, or 15% of
the net assets of the International Equity Master Portfolio or National
Municipal Bond Fund. 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
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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 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 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.
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Variable and Floating Rate Instruments. As described in their
Prospectuses, the Aggressive Growth Fund, National Municipal Bond Fund,
California Tax-Exempt Bond Fund, Intermediate Bond Master Portfolio, Blue Chip
Master Portfolio, Asset Allocation Master Portfolio, Corporate Bond Master
Portfolio and International Equity Master Portfolio may acquire variable and
floating rate instruments including with respect to the Asset Allocation, Blue
Chip and Intermediate Bond Master Portfolios, master demand notes. 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 variable and floating rate instruments varies not only as a
result of variations in the lives of the underlying securities, 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 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
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 15%
of net assets limitation on illiquid securities (10% with respect to the Asset
Allocation, Blue Chip and Intermediate Bond Master Portfolios). Variable and
floating rate instruments may be secured by bank letters of credit.
Municipal Securities. The California Tax-Exempt Bond Fund and
National Municipal Bond Fund currently intend that under ordinary market
conditions 65% and 80% of their respective total assets will be invested in
Municipal Securities. This is not, however, a fundamental investment policy.
As a matter of fundamental policy, under normal market conditions at least 80%
of the California Tax-Exempt Bond Fund's total 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 such Fund's investment
objective. The Intermediate Bond Master and Asset Allocation Master Portfolios
may also invest in Municipal
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Securities. The two principal classifications of Municipal Securities 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 service such as the user of the facility being financed.
Private activity bonds held by the Portfolios 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.
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 Intermediate Bond and Asset Allocation Master Portfolios
may also invest in "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 California Tax-Exempt Bond Fund and National Municipal
Bond Fund and the Intermediate Bond and Asset Allocation Master Portfolios 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. Those 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
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offering, the maturity of the obligation and the rating of the issue. The
ratings of Moody's, 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 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 a 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
particular Portfolio and the liquidity and value of the Portfolio. In such an
event, the particular
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Portfolio would re-evaluate its investment objective and policies and consider
changes in its structure or possible dissolution. Moreover, with respect to
Municipal Securities issued by the State of California, Pacific Horizon cannot
predict what legislation, if any, may be proposed in California.
Stand-By Commitments. The California Tax-Exempt Bond Fund and
National Municipal Bond 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 the particular Portfolio, at the
Portfolio's option, specified Municipal Securities at a specified price.
"Stand-by commitments" acquired by a Portfolio may also be referred to in this
Statement of Additional Information as "put" options.
The amount payable to the particular 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 Portfolios expect that "stand-by commitments" will
generally be available without the payment of any direct or indirect
consideration. However, if necessary or advisable, the Portfolios 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 Portfolio will not exceed 1/2 of 1% of the value of its total assets
calculated immediately after each "stand-by commitment" is acquired.
Each 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. A 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.
Each 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
Securities, which would continue to be valued in accordance with
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the ordinary method of valuation employed by the Portfolio. "Stand-by
commitments" which would be acquired by a Portfolio would be valued at zero in
determining net asset value. Where a 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.
Convertible Securities. The Capital Income Fund, Corporate
Bond Master Portfolio and International Equity Master Portfolio may invest in
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 a 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, S&P, D&P or Fitch 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 rise 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 investment value, the
price of the convertible securities is governed principally by their investment
value. To the extent the market
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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.
The Portfolios 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.
Asset-Backed Securities. The Corporate Bond and Intermediate
Bond Master Portfolio and U.S. Government Securities Fund 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.
There are a number of important differences between the
agencies and instrumentalities of the U.S. Government that issue
mortgage-related securities. Mortgage-related securities guaranteed by the
GNMA include GNMA Mortgage Pass-Through Certificates (also known as "Ginnie
Maes") which are guaranteed as to the timely payment of principal and interest
by GNMA and
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backed by the full faith and credit of the United States. GNMA is a
wholly-owned U.S. Government corporation within the Department of Housing and
Urban Development. GNMA certificates also are supported by the authority of
GNMA to borrow funds from the U.S. Treasury to make payments under its
guarantee. Mortgage-backed securities issued by the FNMA include FNMA
Guaranteed Mortgage Pass-Through Certificates (also known as "Fannie Maes")
which are solely the obligations of the FNMA and are not backed by or entitled
to the full faith and credit of the United States, but are supported by the
right of the issuer to borrow from the Treasury. FNMA is a
government-sponsored organization owned entirely by private stockholders.
Fannie Maes are guaranteed as to timely payment of the principal and interest
by FNMA. Mortgage-related securities issued by the FHLMC include FHLMC
Mortgage Participation Certificates (also known as "Freddie Macs" or "Pcs").
FHLMC is a corporate instrumentality of the United States, created pursuant to
an Act of Congress, which is owned entirely by Federal Home Loan Banks.
Freddie Macs are not guaranteed and do not constitute a debt or obligation of
the United States or of any Federal Home Loan Bank. Freddie Macs entitle the
holder to timely payment of interest, which is guaranteed by FHLMC. FHLMC
guarantees either ultimate collection or timely payment of all principal
payments on the underlying mortgage loans. When FHLMC does not guarantee
timely payment of principal, FHLMC may remit the amount due on account of its
guarantee of ultimate payment of principal at any time after default on an
underlying mortgage, but in no event later than one year after it becomes
payable.
The U.S. Government Securities Fund may invest in multiple
class pass-through securities, including collateralized mortgage obligations
("CMOs") and real estate mortgage investment conduits ("REMIC") pass-through or
participation certificates ("REMIC Certificates"). These multiple class
securities may be issued by U.S. Government agencies or instrumentalities,
including FNMA and FHLMC, or by trusts formed by private originators of, or
investors in, mortgage loans. In general, CMOs and REMICs are debt obligations
of a legal entity that are collateralized by, and multiple class pass-through
securities represent direct ownership interests in, a pool of residential
mortgage loans or mortgage pass-through securities (the "Mortgage Assets"), the
payments on which are used to make payments on the CMOs or multiple
pass-through securities. Investors may purchase beneficial interests in
REMICs, which are known as "regular" interests or "residual" interests. The
Fund does not intend to purchase residual interests.
Each class of CMOs or REMIC Certificates, often referred to as a
"tranche," is issued at a specific adjustable or fixed interest rate and must
be fully retired no later than its final distribution date. Principal
prepayments on the Mortgage Assets underlying the CMOs or REMIC Certificates
may cause some or all
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of the classes of CMOs or REMIC Certificates to be retired substantially
earlier than their final distribution dates. Generally, interest is paid or
accrues on all classes of CMOs or REMIC Certificates on a monthly basis.
The principal of and interest on the Mortgage Assets may be allocated
among the several classes of CMOs or REMIC Certificates in various ways. In
certain structures (known as "sequential pay" CMOs or REMIC Certificates),
payments of principal, including any principal prepayments, on the Mortgage
Assets generally are applied to the classes of CMOs or REMIC Certificates in
the order of their respective final distribution dates. Thus no payment of
principal will be made on any class of sequential pay CMOs or REMIC
Certificates until all other classes having an earlier final distribution date
have been paid in full.
Additional structures of CMOs or REMIC Certificates include, among
others, "parallel pay" CMOs and REMIC Certificates. Parallel pay CMOs or REMIC
Certificates are those which are structured to apply principal payments and
prepayments of the Mortgage Assets to two or more classes concurrently on a
proportionate or disproportionate basis. These simultaneous payments are taken
into account in calculating the final distribution date of each class.
A wide variety of REMIC Certificates may be issued in the parallel pay
or sequential pay structures. These securities include accrual certificates
(also known as "Z-Bonds"), which only accrue interest at a specified rate until
all other certificates having an earlier final distribution date have been
retired and are converted thereafter to an interest-paying security, and
planned amortization class ("PAC") certificates, which are parallel pay REMIC
Certificates which generally require that specified amounts of principal be
applied on each payment date to one or more classes of REMIC Certificates (the
"PAC Certificates"), even though all other principal payments and prepayments
of the Mortgage Assets are then required to be applied to one or more other
classes of the Certificates. The scheduled principal payments for the PAC
Certificates generally have the highest priority on each payment date after
interest due has been paid to all classes entitled to receive interest
currently. Shortfalls, if any, are added to the amount payable on the next
payment date. The PAC Certificate payment schedule is taken into account in
calculating the final distribution date of each class of PAC. In order to
create PAC tranches, one or more tranches generally must be created that absorb
most of the volatility in the underlying Mortgage Assets. These tranches tend
to have market prices and yields that are much more volatile than the PAC
classes.
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FNMA REMIC Certificates are issued and guaranteed as to timely
distribution of principal and interest by FNMA. In addition, FNMA will be
obligated to distribute on a timely basis to holders of FNMA REMIC Certificates
required installments of principal and interest and to distribute the principal
balance of each class of REMIC Certificates in full, whether or not sufficient
funds are otherwise available.
For FHLMC REMIC Certificates, FHLMC guarantees the timely payment of
interest, and also guarantees the ultimate payment of principal as payments are
required to be made on the underlying mortgage participation certificates
("Pcs"). Pcs represent undivided interests in specified level payment,
residential mortgages or participation therein purchased by FHLMC and placed in
a PC pool. With respect to principal payments on Pcs, FHLMC generally
guarantees ultimate collection of all principal of the related mortgage loans
without offset or deduction. FHLMC also guarantees timely payment of principal
on certain Pcs, referred to as "Gold Pcs."
The Corporate Bond and Intermediate Bond Master 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 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
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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 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 for the Corporate Bond Master
Portfolio 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.
Zero Coupon Securities. The California Tax-Exempt Bond Fund
and National Municipal Bond Fund 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.
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
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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).
Reverse Repurchase Agreements. As described in the
Prospectuses, each 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 a Fund or 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.
Each 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 a Fund under the 1940 Act.
Options Trading. A Portfolio may, under certain circumstances
and in accordance with investment limitations described in its prospectus,
engage in options trading. Such options may relate to U.S. and foreign
securities or to various stock indices. In addition, a Portfolio may acquire
options relating to foreign currencies in order to hedge against changes in
exchange rates. Such options may be traded on U.S. exchanges,
over-the-counter, and on foreign exchanges to the extent permitted by law.
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 premium paid 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
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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 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. Unlisted
options are not subject to the protections afforded purchases 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 SEC that over-the-counter
options are illiquid. To the extent that a Portfolio invests in options that
are illiquid (including over-the-counter options), such investment will be
subject to the Portfolio's limitations on illiquid securities.
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 Fund or
Portfolio owns.
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.
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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 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.
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
Fund 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 if such security is 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
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Portfolio is exercised, the proceeds of the sale will be 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, 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.
Futures. The Portfolios may engage in futures contracts. 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. 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,
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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 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, 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 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.
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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.
Options on Futures Contracts. The acquisition of put and call
options on a futures contract will give a 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 a Portfolio's assets. By
writing a call option, a Portfolio becomes obligated, in exchange for the
premium, to sell a futures contact, which may have a value higher than the
exercise price. Conversely, the writing of a put option on a futures contract
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 contact, 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. A Portfolio's ability to
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establish and close out positions on such options will be subject to the
development and maintenance of a liquid market.
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 Corporate Bond Master Portfolio and
Bank of America believe that swaps do not constitute senior securities as
defined in the 1940 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 Corporate Bond Master 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 Corporate Bond Master 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 Corporate Bond Master 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 standard 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 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.
Portfolios corresponding to the Corporate Bond, Intermediate
Bond, Asset Allocation and International Equity Master Portfolios may invest in
securities of foreign issuers that may or may not be publicly traded in the
United States. The Aggressive Growth Fund may invest up to 20% of its total
assets, either directly, or indirectly through investments in American
Depositary 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
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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 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. The extent to which a Portfolio will be invested in
foreign companies and ADRs will fluctuate from time to time within the limits
stated in the Prospectuses depending on the investment adviser's assessment of
prevailing market, economic and other conditions.
The International Equity Master Portfolio may purchase debt
obligations issued or guaranteed by governments (including states, provinces or
municipalities) of countries other than the United States, or by their
agencies, authorities or instrumentalities. The International Equity Master
Portfolio and the Corporate Bond Master Portfolio may purchase debt obligations
issued or guaranteed by supranational entities organized or supported by
several national governments, such as the International Bank for Reconstruction
and Development (the "World Bank"), the Inter- American Development Bank, the
Asian Development Bank and the European Investment Bank. The International
Equity Master Portfolio also may purchase debt obligations of foreign
corporations or financial institutions, such as Yankee bonds
(dollar-denominated bonds sold in the United States by non-U.S. issuers),
Samurai bonds (yen-denominated bonds sold in Japan by non-Japanese issuers and
Euro bonds (bonds not issued in the country (and possibly currency of the
country) of the issuer). The International Equity Master Portfolio's
investments will be allocated among securities denominated in the currencies of
a number of foreign countries and, within each such country, among different
types of debt securities. The percentage of assets invested in securities of a
particular country or denominated in a particular currency will vary in
accordance with Bank of America's assessment of the country's gross domestic
product, purchasing power parity and market capitalization and the relationship
of a country's currency to the United States dollar. Fundamental economic
strength, credit quality and interest rate trends will be the principal factors
considered by Bank of America in determining whether to increase or decrease
the emphasis placed upon a particular type of security within the International
Equity Master Portfolio.
Fixed commissions on foreign securities exchanges are
generally higher than negotiated commissions on U.S. exchanges, although the
Master Portfolios endeavor to achieve the most
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favorable net results on its portfolio transactions. There is generally less
government supervision and regulation of securities exchanges, brokers, dealers
and listed companies than in the United States. Mail service between the
United States and foreign countries may be slower or less reliable than within
the United States, thus increasing the risk of delayed settlements of portfolio
transactions or loss of certificates for portfolio securities.
Foreign markets also have different clearance and settlement
procedures, and in certain markets there have been times when settlements have
been unable to keep pace with the volume of securities transactions, making it
difficult to conduct such transactions. Such delays in settlement could result
in temporary periods when a portion of the assets of a Portfolio is uninvested
and no return is earned thereon. The inability of the Portfolios to make
intended security purchases due to settlement problems could cause a Portfolio
to miss attractive investment opportunities. Inability to dispose of portfolio
securities due to settlement problems could result either in losses to the
Portfolios due to subsequent declines in value of the portfolio securities, or,
if a Portfolio has entered into a contract to sell the securities, could result
in possible liability to the purchaser. Individual foreign economies may
differ favorably or unfavorably from the U.S. economy in such respects as
growth or gross national product, rate of inflation, capital reinvestment,
resource self-sufficiency and balance of payments position.
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.
Bonds of Supranational Entities. The Corporate Bond and
International Equity Master Portfolios 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 Economic Community, the
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European Coal and Steel Community, the European Investment Bank, the
Inter-American Development Bank, the Export-Import Bank and the Asian
Development Bank. The risks associated with investments in foreign issuers are
described above under "Foreign Investments." 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 Asset Allocation, Blue Chip and Intermediate Bond Master Portfolios.
When-Issued Securities, Forward Commitments and Delayed
Settlements. All Portfolios may agree to purchase securities on a
"when-issued," and "forward commitment" basis. All Portfolios except for the
Intermediate Bond, Blue Chip and Asset Allocation Master Portfolios may agree
to purchase securities on a "delayed settlement" basis. When a 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, 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 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 primarily
in order to hedge against anticipated changes in interest rates. 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 purchase when- issued securities and delayed
settlements ever exceeded 25% of the value of a Fund's assets.
A 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, 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, 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.
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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 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.
Securities Lending. The Aggressive Growth, Capital Income,
and U.S. Government Securities Funds and the Corporate Bond and International
Equity Master Portfolios 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 and is "marked to market" daily. 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. 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, International Equity Master Portfolio and Corporate Bond
Master Portfolio, cash collateral may be invested in short-term U.S. Government
securities, certificates of deposit, other high-grade, short- term obligations
or interest-bearing cash equivalents. Additionally, the International Equity
Master Portfolio may also invest cash collateral in U.S. Treasury notes.
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 a fund if a material event affecting the
investment is to occur.
Illiquid Securities. It is possible that unregistered
securities purchased by a Non-Feeder Fund, the Corporate Bond Master Portfolio
and the International Equity Master Portfolio in reliance upon Rule 144A under
the Securities Act of 1933 (the "1933 Act") could have the effect of increasing
the level of such Portfolio's illiquidity to the extent that qualified
institutional buyers become, for a period, uninterested in purchasing these
securities.
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ADDITIONAL INFORMATION - CORPORATE BOND FUND, CAPITAL INCOME FUND, NATIONAL
MUNICIPAL BOND FUND AND CALIFORNIA TAX- EXEMPT BOND 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 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
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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.
Custodial Receipts and Participation Interest. Securities
acquired by the California Tax-Exempt Bond Fund and National Municipal Bond
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 California Tax-Exempt Bond Fund and National
Municipal Bond Fund and the Corporate Bond Master Portfolio may acquire give
the Portfolios 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 SEC (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 each Portfolio may invest pursuant to
guidelines approved by the particular Board. For certain participation
interests, each Portfolio 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, each 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).
ADDITIONAL INFORMATION - ALL FUNDS
The investment adviser's own investment portfolios may include
bank certificates of deposit, bankers' acceptances,
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corporate debt obligations, equity securities and other investments any of
which may also be purchased by a Portfolio. The Portfolios may also invest in
securities, interests or obligations of companies or entities which have a
deposit, loan, commercial banking or other business relationship with Bank of
America or any of its affiliates (including outstanding loans to such issuers
which may be repaid in whole or in part with the proceeds of securities
purchased by a Portfolio).
SPECIAL CONSIDERATIONS RELATING TO CALIFORNIA MUNICIPAL SECURITIES
This summary does not purport to be a comprehensive
description of all relevant facts. Although the Company has no reason to
believe that the information summarized herein is not correct in all material
respects, this information has not been independently verified for accuracy or
thoroughness by the Company. Rather, the information presented herein has been
culled from official statements and prospectuses issued in connection with
various securities offerings of the State of California and local agencies in
California, available as of the date of this Statement of Additional
Information. Further, the estimates and projections presented herein should
not be construed as statements of fact. They are based upon assumptions which
may be affected by numerous factors and there can be no assurance that target
levels will be achieved.
ECONOMIC FACTORS. Fiscal Years Prior to 1994-95. By the
close of the 1989-90 Fiscal Year California's revenues had fallen below
projections, so that the State's budget reserve, the Special Fund for Economic
Uncertainties (the "Special Fund"), was fully depleted by June 30, 1990. A
recession which had begun in mid-1990, combined with higher health and welfare
costs driven by the State's rapid population growth, adversely affected General
Fund revenues, and raised expenditures above initial budget appropriations.
As a result of these factors and others, the State confronted
a period of budget imbalance lasting from the late 1980's through 1992-93.
During this difficult period, expenditures exceeded revenues in four out of six
years, and the State accumulated and sustained a budget deficit in the Special
Fund of approaching $2.8 billion at its peak on June 30, 1993. Thus, beginning
with the 1990-91 Fiscal Year and for each fiscal year thereafter, each budget
required multibillion dollar actions to bring projected revenues and
expenditures into balance. In this context, the Legislature and Governor
agreed on the following principal steps to produce Budget Acts in the years
1991-92 to 1993-94:
1. Significant cuts in health and welfare program
expenditures;
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2. Transfers of program responsibilities and funding
from the State to local governments (referred to as "realignment"), coupled
with some reduction in mandates on local government;
3. Transfer of about $3.6 billion in local property tax
revenues from cities, counties, redevelopment agencies and some other districts
to local school districts, thereby reducing State funding for schools under
Proposition 98;
4. Reduction in growth of support for higher education
programs, coupled with increases in student fees;
5. Revenue increases (particularly in the 1991-92 Fiscal
Year budget), most of which were for a short duration;
6. Increased reliance on aid from the federal government
to offset the costs of incarcerating, educating and providing health and
welfare services to illegal immigrants; and
7. Various one-time adjustments and accounting changes.
Despite these budget actions, the recession still produced
large, unanticipated deficits in the Special Fund. By the 1993-94 Fiscal Year,
the accumulated deficit was too large to be prudently retired in one year, so a
two- year program was implemented which used revenue anticipation warrants to
carry a portion of the deficit over the end of the fiscal year. When the
economy failed to recover sufficiently in 1993-94, a second two-year plan had
to be implemented in 1994-95.
Along with other factors such as the disbursement of funds to
local school districts "borrowed" from future fiscal years and hence not shown
in the annual budget, another consequence of the accumulated budget deficits
was to significantly reduce the State's cash resources available to pay its
ongoing obligations. When the Legislature and the Governor failed to adopt a
budget for the 1992-93 Fiscal Year which would have allowed the State to carry
out its normal annual cash flow borrowing to replenish its cash reserves, the
State Controller issued registered warrants to pay a variety of obligations
representing prior years' or continuing appropriations, and mandates from court
orders. Available funds were used to make constitutionally-mandated payments,
such as debt service on bonds and warrants. Between July 1 and September 4,
1992 the State Controller issued a total of approximately $3.8 billion of
registered warrants. After that date, all remaining outstanding registered
warrants (about $2.9 billion) were called for redemption from proceeds of the
issuance of 1992 Interim Notes.
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In late spring of 1992, the State Controller issued revenue
anticipation warrants maturing in the following fiscal year in order to pay the
State's continuing obligations. The State was forced to rely increasingly on
external debt markets to meet its cash needs. Consequently, a succession of
notes and warrants were issued in the period from June 1992 to July 1994 to pay
previously maturing notes or warrants. These borrowings were used in part to
spread out the repayment of the accumulated budget deficit over the end of a
fiscal year.
A key feature of the 1993-94 Budget Act was a plan to retire
the $2.8 billion budget deficit which had been accumulated by June 30, 1993
(the "Deficit Retirement Plan"). This 18-month plan used existing statutory
authority to borrow $2.8 billion externally. The 1993-94 Budget Act provided
that $1.6 billion of the deficit elimination loan would be repaid by December
23, 1993 from a portion of the proceeds of the $2.0 billion 1993 Revenue
Anticipation Warrants issued on June 23, 1993. Legislation enacted with the
1993-94 Budget Act directed the State Controller to issue $1.2 billion of
registered reimbursement warrants in the 1993-94 Fiscal Year to fund the
balance of the accumulated deficit. Pursuant to this directive, the State
issued $1.2 billion of 1994 Revenue Anticipation Warrants, Series A (the
"Series A Warrants") in February 1994, which matured on December 21, 1994. The
legislation also created a Deficit Retirement Fund within the State Treasury
and the State Controller transferred $1.2 billion from the General Fund to this
Deficit Retirement Fund to retire the Series A Warrants.
The Deficit Retirement Plan was designed to balance the budget
over the 1993-94 and 1994-95 Fiscal Years, and projected a General Fund balance
of $260 million by June 30, 1995. However, fiscal conditions did not improve
as projected and the revenue assumptions of the Deficit Retirement Plan could
not be met. Accordingly, the 1994-95 Budget Act anticipated deferring
retirement of about $1 billion of the carryover budget deficit to the 1995-96
Fiscal Year. This 22-month Deficit Reduction Plan relied on existing statutory
authority to borrow $4 billion externally, including approximately $1 billion
as carryover budget deficit. In addition, Chapter 136, Statutes of 1994,
created in the Warrant Payment Fund according to which the State Controller was
directed to transfer from the General Fund to the Warrant Payment Fund in four
equal installments the amount necessary to retire the $4.0 billion of revenue
anticipation warrants maturing on April 25, 1996.
1994-95 Fiscal Year. The 1994-95 Budget Act, signed by the
Governor on July 8, 1994, projected General Fund revenues and transfers of
$41.9 billion -- $2.1 billion more than actual revenues received in 1993-94 --
and expenditures of $40.9 billion which represented an increase of $1.6 billion
over the prior year.
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As a result of the improving economy, the Department of
Finance's final estimates for the fiscal year showed revenues and transfers of
$42.7 billion and expenditures of $42.0 billion, thus reducing the accumulated
budget deficit to about $600 million and reflecting the Administration's
forecast of an improving economy.
The principal features of the 1994-95 Budget Act were as
follows:
1. Receipt of additional federal aid of about $760
million for costs of refugee assistance and costs of incarceration and
medical care for illegal immigrants. Only about $33 million of this
amount was received, with about another $98 million scheduled to be
received in the 1995-96 Fiscal Year;
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 temporarily suspended by court order pending appeal;
3. A General Fund increase of approximately $38 million
in support for the University of California and $65 million for
California State University, accompanied by student fee increases for
both the University of California and California State University;
4. Proposition 98 funding for K-14 schools was increased
by $526 million from 1993-94 Fiscal Year levels, representing an
increase for enrollment growth and inflation. Consistent with
previous budget agreements, Proposition 98 funding provided
approximately $4,217 per student for K-12 schools, equal to the level
in the prior three years; and
5. Additional miscellaneous cuts ($500 million), fund
transfers ($255 million), and adjustment to prior years' legislation
concerning property tax shifts for local governments ($300 million).
The 1994-95 Budget Act contained no tax increases. Under
legislation enacted for the 1993-94 Budget Act, the renters' tax credit was
suspended for two years (1993 and 1994). 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 State's cash flow management plan for the 1994-95 Fiscal
Year included the issuance of $4.0 billion of Revenue Anticipation Warrants,
Series C and D, to mature on April 25,
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1996, as part of a two-year plan to retire the accumulated State budget
deficit. To assure repayment of these warrants, the Legislature enacted a
backup mechanism which could result in automatic expenditure cuts if projected
revenues did not meet certain targets (the "Budget Adjustment Law").
The third and last step in the Budget Adjustment Law process
occurred on October 16, 1995, when the State Controller issued a report (the
"October Trigger Report") reviewing the estimated cash condition of the General
Fund for the 1995-96 Fiscal Year. The State Controller estimated that the
General Fund would have at least $1.4 billion of internal cash resources on
June 30, 1996. Put another way, external borrowing would not be needed on June
30, 1996. As a result of this finding, certain provisions of the Budget
Adjustment Law, which could have ultimately led to automatic, across-the-board
cuts in the General Fund budget, will not have to be implemented. Likewise, an
earlier report issued on November 15, 1994, avoided implementation of any
automatic budget cuts in the 1994-95 fiscal year.
1995-96 Fiscal Year. With strengthening revenues and reduced
caseload growth based on an improving economy, the State entered the 1995-96
Fiscal Year budget negotiations with the smallest nominal "budget gap" to be
closed in many years. Nonetheless, serious policy differences between the
Governor and Legislature prevented timely enactment of the budget. The 1995-96
Budget Act was signed by the Governor on August 3, 1995, 34 days after the
start of the fiscal year. The Budget Act projected General Fund revenues and
transfers of $44.1 billion, a 3.5 percent increase from the prior year.
Expenditures were budgeted at $43.4 billion, a 4 percent increase. The
Department of Finance projected that after repaying the last of the carryover
budget deficit, there would be a positive balance of $28 million in the budget
reserve on June 30, 1996. The Budget Act also projected Special Fund revenues
of $12.7 billion and appropriated Special Fund expenditures of $13.0 billion.
The following are the principal features of the 1995-96 Budget
Act:
1. Proposition 98 funding for schools and community
colleges was originally budgeted to increase by about $1.0 billion
(General Fund) and $1.2 billion total above revised 1994-95 levels.
Because of higher than projected revenues in 1994-95, an additional
$543 million ($91 per K-12 ADA) was appropriated to the 1994- 95
Proposition 98 entitlement. A large part of this is a block grant of
about $54 per pupil for any onetime purpose. For the first time in
several years, a full 2.7 percent cost of living allowance was funded.
The budget compromise anticipates a settlement of the CTA v. Gould
litigation (discussed below). The
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Governor's 1996-97 Budget indicates that, with revenues even higher
than projected, Proposition 98 apportionments will exceed the amounts
originally budgeted, reaching a level of $4,500 per ADA;
2. Cuts in health and welfare costs totaling about $0.9
billion. Some of these cuts (totaling about $500 million) require
federal legislative or administrative approval, which was still
pending as of January 1996.
3. A 3.5 percent increase in funding for the University
of California ($90 million General Fund) and the California State
University system ($24 million General Fund), with no increases in
student fees;
4. The Budget assumed receipt of $473 million in new
federal aid for costs of illegal immigrants, above commitments already
made by the federal government. In the Governor's 1996-97 Budget, the
Administration revised this figure downward to $278 million; and
5. General Fund support for the Department of
Corrections is increased by about eight percent over the prior year,
reflecting estimates of increased prison population, but funding is
less than proposed in the 1995 Governor's Budget.
The Governor's Budget for the 1996-97 Fiscal Year, released on
January 10, 1996, updated the current year projections, so that revenues and
transfers are estimated to be $45.0 billion, and expenditures to be $44.2
billion. The Special Fund was projected to have a positive balance of about
$50 million at June 30, 1996, and on that date available internal borrowable
resources (available cash, after payment of all obligations due) will be about
$2.2 billion. The Administration projected it would issue up to $2.0 billion
of revenue anticipation notes to mature by June 30, 1996 to assist in cash flow
management for the final two months of the year.
1996-97 Fiscal Year. On January 10, 1996, the Governor
released his proposed budget for the next fiscal year (the "1996-97 Budget").
Based on projected revenues and transfers of about $45.6 billion, the Governor
requested total General Fund appropriations of about $45.2 billion which would
create a $400 million budget reserve in the Special Fund at June 30, 1997. The
Governor renewed a proposal for a 15 percent phased cut in individual and
corporate tax rates over three years (the budget proposal assumes this will be
enacted, reducing revenues in 1996-97 by about $600 million). There was also a
proposal to restructure trial court funding in a way which would result in a
$300 million decrease in General Fund revenues. The Governor
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requested legislation to make permanent a moratorium on cost of living
increases for welfare payments, and suspension of a renters tax credit, which
otherwise would go back into effect in the 1996-97 Fiscal Year. He further
proposed additional costs in certain health and welfare programs, and assumed
that costs previously approved by the Legislature will receive federal
approval. The Governor's Budget proposed increases in funding for K-12 schools
under Proposition 98, for State higher education systems (with a second year of
no student fee increases), and for corrections. The Governor's Budget projects
external cash flow borrowing of up to $3.2 billion, to mature by June 30, 1997.
The Orange County Bankruptcy. 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
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municipality and it has not been specifically authorized to file under Chapter
9 as required by the Bankruptcy Code.
On or about June 12, 1996 a plan of adjustment previously
confirmed by the bankruptcy court became effective for the County. Pursuant to
the plan, publicly held debt is to be paid in full, with municipal investors in
the Pool retaining an interest in litigation claims against third parties. The
plan was funded in substantial part by the sale of $900 million in new County
securities, securitizing substantially all unencumbered assets previously held
by the County.
Both S&P and Moody's 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. On July 18, 1995, S&P declared the Note Debt in
default in spite of the approval of the Stipulation and Extension Agreement.
S&P further stated that it had no reason to believe that the County would be
able to fulfill the terms of the Stipulation and Extension Agreement on June
30, 1996. Such suspensions or downgradings could affect both price and
liquidity of the County's 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 or
liquidity of such securities.
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.
Revenue Distribution. Certain California Municipal Securities
in the California Tax-Exempt Bond 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.
Senate Bill 671. 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, the Governor signed Senate
Bill 671 (Alquist) which modifies the unitary tax law by deleting the
requirements
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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, disagreed with that estimate and asserted 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.
Proposition 13. Certain California Municipal Securities in
the California Tax-Exempt Bond 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 was 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 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
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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.
Proposition 9. On November 6, 1979, an initiative known as
"Proposition 9" 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 service 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.
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.
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Proposition 98. On November 8, 1988, voters of the State
approved Proposition 98, a combined initiative constitutional amendment and
statute called the "Classroom Instructional Improvement and Accountability
Act." Proposition 98 changed State funding of public education below the
university level and the operation of the State Appropriations Limit, primarily
by guaranteeing K-14 schools a minimum share of General Fund revenues. Under
Proposition 98 (modified by Proposition 111 as discussed below), K-14 schools
are guaranteed the greater of (a) in general, a fixed percent of General Fund
revenues ("Test 1"), (b) the amount appropriated to K-14 schools in the prior
year, adjusted for changes in the cost of living (measured as in Article XIIIB
by reference to State per capita personal income) and enrollment ("Test 2"), or
(c) a third test, which would replace Test 2 in any year when the percentage
growth in per capita General Fund revenues from the prior year plus one half of
one percent is less than the percentage growth in State per capita personal
income ("Test 3"). Under Test 3, schools would receive the amount appropriated
in the prior year adjusted for changes in enrollment and per capita General
Fund revenues, plus an additional small adjustment factor. If Test 3 is used
in any year, the difference between Test 3 and Test 2 would become a "credit"
to schools which would be the basis of payments in future years when per
capital General Fund revenue growth exceeds per capita personal income growth.
Legislation adopted prior to the end of the 1988-89 Fiscal Year, implementing
Proposition 98, determined the K-14 schools' funding guarantee under Test 1 to
be 40.3 percent of the General Fund tax revenues, based on 1986-87
appropriations. However, that percent has been adjusted to approximately 35
percent to account for a subsequent redirection of local property taxes, since
such redirection directly affects the share of General Fund revenues to
schools.
Proposition 98 permits the Legislature by two-thirds vote of
both houses, with the Governor's concurrence, to suspend the K-14 schools'
minimum funding formula for a one-year period.
Proposition 98 also contains provisions transferring certain
State tax revenues in excess of the Article XIIIB limit to K-14 schools.
During the recent recession, General Fund revenues for several
years were less than originally projected, so that the original Proposition 98
appropriations turned out to be higher than the minimum percentage provided in
the law. The Legislature responded to these developments by designating the
"extra" Proposition 98 payments in one year as a "loan" from future years'
Proposition 98 entitlements, and also intended that the "extra" payments would
not be included in the Proposition 98 "base" for calculating future years'
entitlements. By implementing these actions, per-pupil funding from
Proposition 98
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sources stayed almost constant at approximately $4,220 from Fiscal Year 1991-92
to Fiscal Year 1993-94.
In 1992, a lawsuit was filed, California Teachers' Association
v. Gould, which challenged the validity of these off-budget loans. As part of
the negotiations leading to the 1995-96 Budget Act, an oral agreement was
reached to settle this case. It is expected that a formal settlement
reflecting these conditions will be entered into in the near future.
The oral agreement provides that both the State and K-14
schools share in the repayment of prior years' emergency loans to schools. Of
the total $1.76 billion in loans, the State will repay $935 million, while
schools will repay $825 million. The State share of the repayment will be
reflected as expenditures above the current Proposition 98 base circulation.
The schools' share of the repayment will count as appropriations that count
toward satisfying the Proposition 98 guarantee, or from "below" the current
base. Repayments are spread over the eight-year period of 1994-95 through
2001-02 to mitigate any adverse fiscal impact. Once a court settlement is
reached, and the Director of Finance certifies that such a settlement has
occurred, approximately $377 million in appropriations from the 1995-96 Fiscal
Year to schools will be disbursed in August 1996.
Proposition 111. 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.
Proposition 62. On November 4, 1986, California voters
approved an initiative statute known as Proposition 62. This initiative
provides the following: (i) requires that any tax for general governmental
purposes imposed by local governments be
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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.
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.
Proposition 87. 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 impossible 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.
Health Care Legislation. Certain California Municipal
Securities held by the California Tax-Exempt Bond Fund may be
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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.
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.
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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 reserve level consistent
with those that would be required by an insurance company.
Mortgages and Deeds. Certain California Municipal Securities
in the 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 provisions 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.
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<PAGE> 489
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. The
debtor may reinstate the mortgage, in the manner described above, up to five
business days prior to the scheduled sale date. 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.
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 California
Tax-Exempt Bond 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 then
only if the borrower prepays an amount in excess of 20% of the original
principal amount of the mortgage loan in a 12-month period; a prepayment charge
cannot in any event exceed six months' advance interest on the amount prepaid
during the 12-month period in
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excess of 20% of the original principal amount of the 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 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 Pacific Horizon'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
Tax-Exempt Bond Fund 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
A Fund's or Master Portfolio's investment objectives are
fundamental; the prospectus for each Fund or Master Portfolio summarizes
certain other fundamental policies that may not be changed with respect to such
Fund or Master Portfolio without the affirmative vote of the holders of the
majority of the Fund's or
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<PAGE> 491
Master Portfolio's outstanding shares (as defined below under "Additional
Information - Miscellaneous"). Similarly, the following enumerated additional
fundamental policies, as well as the Fund's or Master Portfolio's investment
objectives, may not be changed with respect to each Fund or Master Portfolio
without such a vote of shareholders.
The National Municipal Bond Fund may not:
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 the Municipal Securities and
that all of the assets of the Fund may be invested in another investment
company.
2. Purchase or sell real estate (However, the National
Municipal Bond Fund 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 National
Municipal Bond Fund for initial or maintenance margin in connection with future
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 another investment
company.
5. Purchase securities of companies for the purpose of
exercising control.
6. Purchase or sell commodity contracts, or invest in
oil, gas or mineral exploration or development programs. However, the National
Municipal Bond 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, 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 another
investment company.
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8. Write or sell puts, calls, straddles, spreads or
combinations thereof except that the National Municipal Bond Fund 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.
9. 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
National Municipal Bond Fund will not purchase securities while its borrowings
(including reverse repurchase agreements) are outstanding.
The International Equity Fund, Corporate Bond Fund and their
corresponding Master Portfolios may not:
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 Funds may be
invested in their respective Master Portfolio or another investment company.
2. Underwrite the securities of other issuers, provided
that all of the assets of the Funds may be invested in their respective Master
Portfolio or another investment company.
3. Purchase or sell real estate, except that each Master
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 a Master 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
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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 to
the extent permitted by the 1940 Act, except that the Corporate Bond Master
Portfolio may purchase securities of other investment companies in connection
with a merger, consolidation, acquisition or reorganization; or as may
otherwise be permitted by the 1940 Act; provided that all of the assets of the
Corporate Bond Fund may be invested in the Corporate Bond Master 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 each Fund may be invested in the respective Master
Portfolio or another investment company.
10. Borrow money for the purpose of obtaining investment
leverage or issue senior securities (as defined in the 1940 Act), provided that
each Fund and the respective Master Portfolio may borrow from banks for
temporary purposes and in an amount not exceeding 10% of the value of the total
assets of each Fund or the respective Master 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 with respect to the
International Equity Master Portfolio it may invest in debt securities,
repurchase agreements and securities loans and with
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respect to the Corporate Bond Master Portfolio 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.
Neither the Intermediate Bond, Blue Chip or Asset Allocation
Funds, nor their corresponding Master 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, 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;
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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 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 (5).
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 with
respect to such Fund (2) in the Prospectuses, 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 (6).
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. Pacific Horizon 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 (9).
10. Purchase or sell real estate or real estate mortgage
loans, but this shall not prevent investments in instruments secured by real
estate or interests therein or in marketable securities of issuers that engage
in real estate operations.
11. Purchase on margin or sell short.
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12. Purchase or retain securities of an issuer if those
members of the Board of Pacific Horizon or the Master 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 (12).
13. Purchase securities of any other investment company
(except in connection with a merger, consolidation, acquisition or
reorganization) if, immediately after such purchase, Pacific Horizon (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 Pacific Horizon, 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 Pacific
Horizon 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
(13).
14. Invest in or sell put, call, straddle or spread
options or interests in oil, gas or other mineral exploration or development
programs.
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,
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consolidation, reorganization or acquisition of assets or as may otherwise be
permitted by the Investment Company Act of 1940.
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 may 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 Fund's 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 on
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. 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
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borrowings 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.
11. 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.
12. 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.
13. 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.
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.
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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.
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,
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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.
* * *
With respect to the Aggressive Growth, National Municipal
Bond, California Tax-Exempt Bond, U.S. Government Securities, Capital Income,
Corporate Bond, Intermediate Bond, Blue Chip, International Equity and Asset
Allocation Funds, 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 P.1 in this
Statement of Additional Information with respect to the National Municipal Bond
Fund, investment limitation P.7 in this Statement of Additional Information
with respect to the Aggressive Growth Fund, investment limitation P.11 in this
Statement of Additional Information with respect to the California Tax-Exempt
Bond Fund, investment limitation P.8 in this Statement of Additional
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Information with respect to the U.S. Government Securities Fund, Capital Income
Fund, Corporate Bond Fund and its Master Portfolio and International Equity
Fund and its Master Portfolio and investment limitation P.5 in this Statement of
Additional Information with respect to the Intermediate Bond, Blue Chip and
Asset Allocation Funds and their Master Portfolios, respectively, the Funds
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, 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, Pacific Horizon and the Master Portfolios 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 or real estate limited partnerships.
4. The Portfolios have agreed to exclude any assets of a
Portfolio which are invested in the shares of any
mutual fund for the purposes of calculating that
Portfolio's investment advisory fee.
5. The Portfolios will not purchase or retain the
securities of any issuer if the Officers or Directors
or Trustees of the Master 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.
6. The Portfolios will not invest more than 5% of their
total assets in the securities of issuers which
together with any predecessors have a record of less
than three years continuous operation.
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7. The Portfolios 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 operation or securities
of issuers which are restricted as to disposition.
8. The Portfolios 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.
In the event that Pacific Horizon or the Master Trusts
determine that any such commitment is no longer in the best interests of a
Fund, 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. Additional
information is contained below. The net asset values of the Master Portfolios
corresponding to each of the Feeder Funds are determined at the same time and
on the same days as the net asset values per share of the respective Feeder
Funds are determined. The net asset value of each of the Feeder Funds is equal
to such Fund's pro rata share of the total investments and other assets of its
corresponding Master Portfolio, less any liabilities with respect to such
Feeder Fund, including each Feeder Fund's pro rata share of the Master
Portfolio's liabilities.
VALUATION OF THE 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 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
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amortization to maturity of the difference between the principal amount due at
maturity and cost.
VALUATION OF THE CALIFORNIA TAX-EXEMPT BOND FUND AND THE NATIONAL MUNICIPAL
BOND FUND
The California Tax-Exempt Bond Fund's and National Municipal
Bond Fund's assets are valued for purposes of pricing sales and redemptions by
an independent pricing service (the "Service") approved by the Board. 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 California Tax-Exempt
Bond 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 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 Company assumes a constant amortization to maturity of the difference
between the principal amount due at maturity and cost.
VALUATION OF CAPITAL INCOME FUND, U.S. GOVERNMENT SECURITIES FUND,
INTERNATIONAL EQUITY MASTER PORTFOLIO AND CORPORATE BOND MASTER PORTFOLIO
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 particular Board. 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
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<PAGE> 506
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 particular Board. Valuation of
options is described above under "Investment Objectives and Policies - Options
Trading."
VALUATION OF THE CORRESPONDING MASTER PORTFOLIOS FOR THE INTERMEDIATE BOND,
BLUE CHIP AND ASSET ALLOCATION FUNDS
Except for debt securities held by the Master 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 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
Master Trust I 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 Master Portfolios with remaining
maturities of 60 days or less are valued on the basis of amortized cost, which
provides stability of net asset value.
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<PAGE> 507
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 Master Trust I 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
represents fair value. Master Trust I 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 Master Trust I,
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 Master Trust I.
SUPPLEMENTARY PURCHASE INFORMATION
For the purpose of applying the Right of Accumulation or
Letter of Intent privileges available to certain shareholders as 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
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<PAGE> 508
wsecurities 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 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 A Shares for each Fund based on the value of the California Tax-Exempt Bond,
Aggressive Growth, U.S. Government Securities, Capital Income, Intermediate
Bond, Blue Chip, Asset Allocation, Corporate Bond and National Municipal Bond
Funds' net assets on February 29, 1996, the value of the International Equity
Fund's net assets at inception and each Fund's A Shares outstanding on such
date is as follows:
<TABLE>
<CAPTION>
U.S.
California Aggressive Government Capital Intermediate
Tax-Exempt Growth Securities Income Bond Blue Chip
Bond Fund Fund Fund Fund Fund Fund
---------- ------------ ----------- ------------ ----------- --------
<S> <C> <C> <C> <C> <C> <C>
Net Assets..... $221,141,347 $180,346,936 $89,490,931 $246,745,799 $13,179,399 $66,933,454
Outstanding
Securities.....
29,699,227 7,676,762 9,486,658 15,027,480 1,351,159 3,259,781
Net Asset Value
Per Share...... $ 7.45 $ 23.49 $ 9.43 $ 16.42 $ 9.75 $ 20.53
Sales Charge,
4.50 percent
of offering
price (4.71
percent of net
asset value
per share)..... $ 0.35 $ 1.11 $ 0.44 $ 0.77 $ 0.46 $ 0.97
Maximum
Offering Price
to Public...... $ 7.80 $ 24.60 $ 9.87 $ 17.19 $ 10.21 $ 21.50
<CAPTION>
Asset Corporate National International
Allocation Bond Municipal Equity
Fund Fund Bond Fund Fund
---------- ----------- ---------- -------------
<S> <C> <C> <C> <C>
Net Assets..... $22,354,673 $32,387,414 $12,242,403 $10.00
Outstanding
Securities.....
1,275,880 2,012,951 1,205,801 1
Net Asset Value
Per Share...... $ 17.52 $ 16.09 $ 10.15 $10.00
Sales Charge,
4.50 percent
of offering
price (4.71
percent of net
asset value
per share)..... $ 0.83 $ 0.76 $ 0.48 $ 0.47
Maximum
Offering Price
to Public...... $ 18.35 $ 16.85 $ 10.63 $10.47
</TABLE>
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<PAGE> 509
SUPPLEMENTARY REDEMPTION INFORMATION: CAPITAL INCOME FUND, U.S. GOVERNMENT
SECURITIES FUND, CALIFORNIA TAX-EXEMPT BOND FUND, INTERMEDIATE BOND FUND, BLUE
CHIP FUND, ASSET ALLOCATION FUND, CORPORATE BOND FUND, NATIONAL MUNICIPAL BOND
FUND AND INTERNATIONAL EQUITY FUND
Shares in the Capital Income Fund, U.S. Government Securities
Fund, California Tax-Exempt Bond Fund, Intermediate Bond Fund, Blue Chip Fund,
Asset Allocation Fund, Corporate Bond Fund and National Municipal 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 (less any applicable contingent deferred
sales charge on certain A Shares subject to the Large Purchase Exemption) 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). Shares in the
International Equity Fund for which orders for wire redemption are received on a
business day before 12:00 p.m. Eastern time will be redeemed as of 12:00 p.m.
and the proceeds of redemption (less any applicable contingent deferred sales
charge on certain A Shares subject to the Large Purchase Exemption) 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 12:00 p.m. for the International Equity Fund) or on a
non-business day will be redeemed as of the close of trading on such Exchange
(or 12:00 p.m. with respect to the International Equity Fund) on the next day on
which shares of the particular Fund are priced and the proceeds (less any
applicable contingent deferred sales charge on certain A Shares subject to the
Large Purchase Exemption) will normally be wired in federal funds on the next
business day thereafter. Redemption proceeds (less any applicable contingent
deferred sales charge on certain A Shares subject to the Large Purchase
Exemption) 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.
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<PAGE> 510
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, California
Tax-Exempt Bond Fund, Corporate Bond Fund and National Municipal 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, Inc., 3435 Stelzer Road, Columbus, Ohio 43219, 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. After
clearance, Checks will be returned to the investor.
Because dividends on the U.S. Government Securities Fund,
California Tax-Exempt Bond Fund, Corporate Bond Fund and National Municipal
Bond Fund are declared 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, A 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.") K Shares may only be purchased by: (a) businesses or other
organizations that participate in the Daily Advantage(R) Program sponsored by
Bank of America; (b) individuals investing proceeds from a redemption of shares
from another open-end investment company on which such individual paid a
front-end sales load if (i) such
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<PAGE> 511
redemption occurred within 30 days prior to the purchase order, and (ii) such
other open-end investment company was not distributed and advised by Concord
Financial Group, Inc. and Bank of America, respectively, or their affiliates;
and (c) accounts opened for IRA rollovers from a 401(k) plan in which the
assets were held in any Pacific Horizon or Time Horizon Fund and subsequent
purchases into an IRA rollover account opened as described above, so long as
the original IRA rollover account remains open. Bank of America and Service
Organizations may impose minimum customer account and other requirements in
addition to those imposed by the Funds and described in the respective
Prospectuses. Purchase orders will be effected only on business days.
A Shares in each Fund are sold with a sales load, except for
such exemptions as noted in the Prospectuses. A Shares which are subject to the
Large Purchase Exemption are also subject to a contingent deferred sales load.
The contingent deferred sales load discussed under the Large Purchase Exemption
does not apply to A Shares under the Daily Advantage or Advantage Plus Programs.
The exemptions to the imposition of a sales load on A Shares are due to the
nature of the investors and/or the reduced sales efforts that will be necessary
in obtaining such investments. A Shares are also subject to a shareholder
servicing fee. K Shares are offered at net asset value with neither a front-end
sales charge, nor a contingent deferred sales charge. K Shares are subject to a
distribution plan fee and an administrative and shareholder services fee.
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 or organizations 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.
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The Transfer Agent may charge a fee to act as Custodian for
IRAs, payment of which could require the liquidation of shares. Certain A
Shares subject to the Large Purchase Exemption liquidated by the Transfer Agent
as fees for custodial services to IRA accounts will not be subject to the
contingent deferred sales charge. 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.
Shares of the Funds will generally be issued for cash only and
that transactions involving the issuance of shares for securities or assets
other than cash will meet the requirements of Section 123.2(4) of Texas Blue
Sky Regulations. (If the Company determines that such undertaking is no longer
in its best interests, it will revoke such commitment. In such an event, the
Funds will no longer be able to sell their shares in the State of Texas.)
Exchange Privilege. Shareholders in the Pacific Horizon
Family of Funds have an exchange privilege whereby they may exchange all or
part of their shares for like shares of another investment portfolio in the
Pacific Horizon Family of Funds or 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
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more or less than his basis in such shares at the time of the transaction.
Exchange transactions described in Paragraphs A, B, C, D, E
and F below will be made on the basis of the relative net asset values per
share of the investment portfolios involved in the transaction.
A. 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 other A Shares of any
other investment portfolio in the Pacific Horizon Family of
Funds or for like shares of the Time Horizon Funds.
B. A Shares subject to the Large Purchase Exemption acquired
pursuant to an exchange transaction will continue to be
subject to any applicable contingent deferred sales charge.
However, A Shares subject to the Large Purchase Exemption that
have been acquired through an exchange of A Shares may be
exchanged for other A Shares or for like shares of Time
Horizon Funds without the payment of a contingent deferred
sales charge at the time of exchange. In determining the
holding period for calculating the contingent deferred sales
charge payable on redemption of A Shares, the holding period
of the shares originally held will be added to the holding
period of the shares acquired through exchange.
C. A Shares of any investment portfolio in the Pacific Horizon
Family of Funds or like shares of 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. A Shares purchased with a sales load or issued in
connection with an exchange transaction involving A 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 A Shares of any
other investment portfolio within 90 days of your redemption
trade date. 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. A 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
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in the Pacific Horizon Family of Funds that is offered without
a sales load.
E. A 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 A Shares in any other
portfolio in the Pacific Horizon Family of Funds.
F. K Shares of any investment portfolio in the Pacific Horizon
Family of Funds may be exchanged without a sales load for
other K Shares of any other investment portfolio in the
Pacific Horizon Family of Funds or for like shares of the Time
Horizon Funds.
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 A
Shares of another investment portfolio in the Pacific Horizon Family or for
like shares of 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.
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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 contingent
deferred sales charge with respect to certain A Shares subject to the Large
Purchase Exemption 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 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 Funds will no longer be able to sell their
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 - 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
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to which it may be subject. If for any taxable year a 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 in the case of the California Tax-Exempt Bond
Fund and the National Municipal 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, including dividends, interest, and
net 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 net long-term capital gain for the taxable year over the net
short-term capital loss for such year (if any). Each 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: (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) (the
"Short-Short test"). 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,
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<PAGE> 517
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 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 those 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). 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 (i) who have failed to provide a correct tax
identification number in the manner required, (ii) who are subject to
withholding by the
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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 or that they are
"exempt recipients."
At February 29, 1996, the U.S. Government Securities Fund had
capital loss carryovers of $8,325,087, which will expire in fiscal 2003; the
Capital Income Fund had capital loss carryovers of approximately $2,300,000 and
$600,000, which will expire in fiscal 2003 and 2004, respectively; and the
Corporate Bond Fund had capital loss carryovers of $7,554,997 of which
$827,887, $442,467, $5,401,993 and $882,650 will expire in fiscal 1997, 1998,
1999 and 2003, respectively. To the extent provided by the regulations of the
Code, these capital loss carryovers will be used to offset future net realized
gains on securities transactions. As such, it is probable that the gains so
offset will not be distributed to shareholders.
FEDERAL - CALIFORNIA TAX-EXEMPT BOND FUND AND NATIONAL MUNICIPAL BOND FUND
The California Tax-Exempt Bond Fund's and National Municipal
Bond 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 a Fund and designated as
an exempt-interest dividend in a written notice mailed to shareholders after
the close of such Fund's taxable year. However, the aggregate amount of
dividends so designated by a Fund cannot exceed the excess of the amount of
interest exempt from tax under Section 103 of the Code received by such Fund
during its 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 particular Fund for such
year. In order for a 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 such Fund's assets must consist of exempt-interest
obligations.
Exempt-interest dividends may be treated by shareholders of
the Funds 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
Funds. A "substantial user" is defined under U.S. Treasury Regulations to
include a non-exempt
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<PAGE> 519
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, 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.
A percentage of the interest on indebtedness incurred by a
shareholder to purchase or carry shares, equal to the percentage of the total
non-capital gain dividends distributed during the shareholder's taxable year
that are exempt-interest dividends, 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 applicable to individuals and corporations 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 California state
franchise and corporate income tax to the extent its earnings are distributed
to its shareholders. The Fund will
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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 dividends paid by the Fund with respect to such
obligations retain California state personal income tax exclusion. In this
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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.
TAXATION OF THE MASTER PORTFOLIOS
Management of the Master Portfolios corresponding to each of
the Feeder Funds intends for each Master Portfolio to be treated as a
partnership (or, in the event that a Feeder Fund is the sole investor in a
Master 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 of nominee) under the Code, any interest, dividends,
gains and losses of the Master Portfolios will be deemed to have been reported
as income/loss (i.e., "passed through") to their
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investors, regardless of whether any amounts are actually distributed by the
Master Portfolios.
Each investor in a Master Portfolio will be taxed on its share
(as determined in accordance with the governing instruments of the particular
Master Portfolio) of the Master 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 Master Portfolio's assets, income and distributions will
be managed in such a way that an investor in a Master 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 Master 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.
Except as noted above with respect to California state
personal income taxation of dividends paid by the California Tax-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.
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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,
Newport Beach, CA 92660-2629 (registered
investment adviser) 1991 to date;
Partner, 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.
</TABLE>
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<PAGE> 524
<TABLE>
<CAPTION>
Position with
Name and Address Age Company Principal Occupations
- ---------------- --- ------- ---------------------
<S> <C> <C> <C>
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).
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
</TABLE>
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<PAGE> 525
<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 (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.
Richard E. Stierwalt 40 Executive Vice President since April
125 W. 55th Street President 1996; prior thereto
New York, Ny 10019 Chairman of the Board
and Chief Executive
Officer, July 1993 to
April 1996, 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>
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<PAGE> 526
<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,
1230 Columbia Street President July 1993 to date, prior
5th Floor 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.
Stephanie L. Blaha 36 Assistant Vice Manager of Client
BISYS Fund Services President Services of the
3435 Stelzer Road Administrator, March
Columbus, OH 43219 1995 to date, prior thereto
Assistant Vice President of the
Administrator and Distributor,
October 1991 to March 1995; Vice
President, Seafirst Retirement
Funds, Master Investment Trust,
Series I and Master Investment
Trust, Series II (since 1996);
Account Manager, AT&T American
Transtech, Mutual Fund Division,
July 1989 to October 1991.
Mark E. Nagle 36 Treasurer Senior Vice President,
BISYS Fund Services Fund Accounting Services
3435 Stelzer Road The BISYS Group, Inc.,
Columbus, OH 43219 September 1995 to Present;
Treasurer, Seafirst Retirement
</TABLE>
-89-
<PAGE> 527
<TABLE>
<CAPTION>
Position with
-------------
Name and Address Age Company Principal Occupations
- ---------------- --- ------- ---------------------
<S> <C> <C> <C>
Funds and Master Investment Trust,
Series II (since 1996) Senior Vice
President Fidelity Institutional
Retirement Services (1993 to
September 1995); Fidelity
Accounting & Custody Services (1981
to 1993).
Martin R. Dean 31 Assistant Senior Compliance and
BISYS Fund Services Treasurer Registration Analyst, since
3435 Stelzer Road June 1996, prior thereto Manager
Columbus, OH 43219 of Fund Accounting of BISYS
Fund Services, May 1994 to June
1996; Assistant Treasurer, Seafirst
Retirement Funds and Master
Investment Trust, Series II (since 1996);
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.
Building, Suite 1100
Philadelphia, PA 19107
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, Seafirst Retirement
Funds and Master Investment Trust,
Series II (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
-90-
<PAGE> 528
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 recognition of his years of service
to the Company 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. Effective September 1,
1996, Mr. Trefftzs will become a director emeritus of the Company and will
receive a retirement benefit of $60,000 on January 1, 1997. 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 29, 1996, the Company paid
or accrued for the account of its directors as a group for services in all
capacities a total of $388,155. Of that amount, $7,990, $10,142, $6,043,
$10,810, $6,935, $6,354, $1,165, $5,228 and $2,910 of directors' compensation
were allocated to the Aggressive Growth, California Tax-Exempt Bond, U.S.
Government Securities, Capital Income, Intermediate Bond, Blue Chip, Asset
Allocation, Corporate Bond and National Municipal Bond Funds, respectively.
The International Equity Master Portfolio did not commence investment
operations until May 6, 1996. 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 served as Chairman of the
Board.
-91-
<PAGE> 529
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" 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.
TRUSTEES AND OFFICERS OF MASTER INVESTMENT TRUST, SERIES I
The trustees and officers of Master Investment Trust, Series I
("Master Trust I"), their addresses, age, and principal occupations during the
past five years are:
-92-
<PAGE> 530
<TABLE>
<CAPTION>
Position with
Name and Address Age Master Trust I Principal Occupation
- ---------------- --- -------------- --------------------
<S> <C> <C> <C>
Thomas M. Collins 61 Chairman of See "Directors and
McDermott & Trayner the Boards Officers of the
225 S. Lake Avenue, Company."
Suite 410
Pasadena, CA 91101-3005
Michael Austin 59 Trustee of Master Chartered Accountant; Trustee, Master
Victory House, Trust I Investment Trust, Series II (since 1993);
Nelson Quay Retired Partner, KPMC Peat Marwick LLP.
Governor's Harbour
Grand Cayman
Cayman Islands
British West Indies
Robert E. Greeley 62 Trustee of Master See "Directors and
Page Mill Asset Trust I Officers of the Company."
Management
433 California Street
Suite 900
San Francisco, CA 94104
Robert A. Nathane* 70 Trustee of Master Retired President, Laird
1200 Shenandoah Drive East Trust I 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).
Cornelius J. Pings 66 Trustee of Master See "Directors and Officers of
Association of American Trust I the Company".
Universities
One DuPont Circle
Suite 730
Washington, DC 20036
Richard E. Stierwalt 40 President of See "Directors and
125 West 55th Street Master Trust I 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
Secretary of Investment Company Industry
Master Trust I Services Group, Price
Waterhouse 1989 to May 1993; Member of
Oliver Freaney and Co./Spicer and Openheim
Chartered Accountants 1986-1989.
</TABLE>
-93-
<PAGE> 531
<TABLE>
<CAPTION>
Position with
Name and Address Age Master Trust I Principal Occupations
- ---------------- --- -------------- ---------------------
<S> <C> <C> <C>
Stephanie L. Blaha 36 Vice President of See "Directors and Officers of
BISYS Fund Services Master Trust I the Company."
3435 Stelzer Road
Columbus, OH 43219
W. Bruce McConnel, III 52 Secretary of See "Directors and
1345 Chestnut Street Master Trust I Officers of the Company."
Philadelphia, PA 19107
- -----------------------------
</TABLE>
* Mr. Nathane is an "interested trustee" of Master Trust I as defined in
the 1940 Act.
Each trustee receives an aggregate annual fee of $3,000 ($5,000 in the
case of any trustee who is not also a Director or Trustee of a feeder fund of
one of the portfolios) plus $500 per day for each travel day and each day of a
Board or committee meeting attended, for his services as trustee of each of
Master Trust I. Each trustee is also reimbursed for out-of-pocket expenses
incurred as a trustee. For its fiscal year ended February 29, 1996, Master
Trust I paid or accrued for the account of its trustees as a group for services
in all capacities a total of $14,525; of that amount, $3,499, $3,500, $3,500
and $4,026 were allocated to the Master Portfolios corresponding to the
Intermediate Bond, Blue Chip, Asset Allocation and Corporate Bond Funds,
respectively. The International Equity Master Portfolio did not commence
investment operations until May 6, 1996. The trustee's fees and reimbursements
are allocated among all of Master Trust I's portfolios based on their relative
net asset values. Drinker Biddle & Reath, of which Mr. McConnel is a partner,
receives legal fees as counsel to Master Trust I.
-94-
<PAGE> 532
The following chart provides certain information for the fiscal year ended
February 29, 1996 about the fees received by directors of the Company as
directors and/or officers of the Company and as directors and/or trustees of
the Fund Complex:
<TABLE>
<CAPTION>
PENSION OR
RETIREMENT TOTAL COMPENSATION
AGGREGATE BENEFITS ACCRUED ESTIMATED FROM REGISTRANT
COMPENSATION FROM AS PART OF FUND ANNUAL BENEFITS AND FUND COMPLEX**
NAME OF PERSON/ POSITION THE COMPANY EXPENSES* UPON RETIREMENT PAID TO DIRECTORS
<S> <C> <C> <C> <C>
Thomas M. Collins $76,215 $ 0 $ 0 $85,000
Director+
Douglas B. Fletcher $28,555 $ 0 $ 0 $29,055
Vice Chairman of the Board
Robert E. Greeley++ $31,395 $ 0 $ 0 $44,055
Director
Kermit O. Hanson $27,485 $ 0 $ 0 $32,055
Director
Cornelius J. Pings $29,555 $ 0 $ 0 $30,055
President and Chairman of
the Board+++
Kenneth L. Trefftzs $28,555 $ 0 $ 0 $29,055
Director
</TABLE>
- ------------------------------
* For the Fiscal year ended February 29, 1996, the Company accrued on
the part of all of the directors an aggregate of $65,739 in
retirement benefits.
** The "Fund Complex" consists of the Company, Seafirst Retirement Funds,
Master Trust I, Master Trust II, Time Horizon Funds and World Horizon
Funds.
+ Mr. Collins was President and Chairman of the Board of the Company
until August 31, 1995.
++ Mr. Greeley became a director of the Company on April 25, 1994.
+++ Mr. Pings became President and Chairman of the Board of the Company
effective September 1, 1995. At February 29, 1996, $10,000, $3,500 and
$3,500 in deferred compensation was payable to Mr. Pings for services
as President of the Company, trustee of Master I and trustee of
Master II, respectively.
-95-
<PAGE> 533
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. As described
in the Prospectuses, the Feeder Funds have not retained the services of an
investment adviser because they seek to achieve their investment objectives by
investing all their assets in their corresponding Master Portfolio. In the
Investment Advisory Agreements with the Companies, 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 Investment Advisory
Agreements with respect to the Capital Income, Intermediate Bond, Blue Chip,
Asset Allocation and International Equity Master Portfolios provide 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
particular investment advisory agreement, the Companies have agreed to pay Bank
of America fees, accrued daily and payable monthly, at the annual rates of .35%
of the net assets of each of the National Municipal Bond Fund and U.S.
Government Securities Fund; .40% of the net assets of the California Tax-Exempt
Bond Fund; .45% of the net assets of each of the Capital Income Fund,
Intermediate Bond Master Portfolio and Corporate Bond Master Portfolio; .55% of
the net assets of the Asset Allocation Master Portfolio; .60% of the net assets
of the Aggressive Growth Fund; and .75% of the net assets of the Blue Chip
Master Portfolio and International Equity Master Portfolio. The fees payable
to Bank of America are not subject to reduction as the value of each Fund's or
Master Portfolio's net assets increase. From time to time, Bank of America may
waive fees or reimburse a particular Fund or Master Portfolio for expenses
voluntarily or as required by certain state securities laws.
-96-
<PAGE> 534
For the fiscal years indicated, the following advisory fees
(net of waivers) were paid or payable to Bank of America by the Aggressive
Growth, California Tax-Exempt Bond, Capital Income and U.S. Government
Securities Funds as follows:
<TABLE>
<CAPTION>
Year Ended Year ended Year ended
February 29, February 28, February 28,
1996 1995 1994
<S> <C> <C> <C>
Aggressive Growth Fund $935,275 $816,300 $1,016,640
California Tax-Exempt Bond Fund $584,994 $606,131 $ 721,895
Capital Income Fund $992,349 $572,638 $ 39,298
U.S. Government Securities Fund $269,498 $397,905 $ 507,308
</TABLE>
For the fiscal years indicated, Bank of America waived
advisory fees with respect to the Aggressive Growth, California Tax-Exempt
Bond, Capital Income and U.S. Government Securities Funds as follows:
<TABLE>
<CAPTION>
Year Ended Year ended Year ended
February 29, February 28, February 28,
1996 1995 1994
<S> <C> <C> <C>
Aggressive Growth Fund $ 0 $ 0 $ 0
California Tax-Exempt Bond Fund $234,006 $242,173 $190,993
Capital Income Fund $ 0 $359,205 $387,148
U.S. Government Securities Fund $ 41,779 $ 0 $ 20,985
</TABLE>
Except as noted below, for the fiscal years indicated and for
the period from the commencement of operations through February 28, 1994, Bank
of America waived its entire advisory fee with respect to the Intermediate Bond
Master Portfolio, Blue Chip Master Portfolio, Asset Allocation Master Portfolio
and Municipal Master Portfolio as follows (No Advisory fee data is provided for
the International Equity Master Portfolio, since the International Equity
Master Portfolio did not commence operations until May 6, 1996):
-97-
<PAGE> 535
<TABLE>
<CAPTION>
Period from
commencement
of
operations(1)
Year ended Year ended through
February 29, February 28, February 28,
1996 1995 1994
<S> <C> <C> <C>
Intermediate Bond Master
$ 296,136 $ 293,222 $ 84,856
Portfolio
Blue Chip Master Portfolio $1,574,388(2) $ 1,091,132 $ 225,019
Asset Allocation Master Portfolio $ 913,660(2) $ 849,188 $ 197,611
Municipal Master Portfolio(3) $ 24,739 $ 6,147 $ 108
</TABLE>
Additionally, for the fiscal years indicated and for the
period from commencement of operations through February 28, 1994, Bank of
America assumed certain operating expenses of the Intermediate Bond Fund, Blue
Chip Fund, Asset Allocation Fund, Municipal Master Portfolio and National
Municipal Bond Fund as follows:
- --------------------
1. The Intermediate Bond Master Portfolio, Blue Chip Master
Portfolio and Asset Allocation Master Portfolio commenced
operations on December 6, 1993 and the Municipal Master
Portfolio commenced operations on January 28, 1994.
2. For the fiscal year ended February 29, 1996, Bank of America
waived $1,164,328 and $720,259, respectively, in advisory fees
with respect to the Blue Chip Master Portfolio and Asset
Allocation Master Portfolio.
3. Prior to July 1, 1996, the National Municipal Bond Fund invested
all of its assets in the Municipal Master Portfolio. On July 1,
1996, the National Municipal Bond Fund withdrew assets from the
Municipal Master Portfolio and invested them directly in
investment securities.
-98-
<PAGE> 536
<TABLE>
<CAPTION>
Period from
commencement of
Year ended February Year ended February operations through
29, 1996 28, 1995 February 28, 1994
<S> <C> <C> <C>
Intermediate Bond Fund $0 $207,033 $24,300
Blue Chip Fund $0 $245,776 $31,726
Asset Allocation Fund $0 $245,718 $28,384
Municipal Master Portfolio $0 $121,591 $34,404
National Municipal Bond Fund $0 $180,700 $18,272
</TABLE>
For the periods indicated, Bank of America waived its entire
advisory fee with respect to the Corporate Bond Master Portfolio as follows:
<TABLE>
<CAPTION>
Period April 25, 1994
(the date the
Predecessor Fund was
reorganized into the
Period October 1, 1994 Corporate Bond Fund)
Year ended February through February 28, through September 30,
29, 1996 1995 1994
<S> <C> <C> <C>
Corporate Bond Master $144,324 $58,897 $73,575
Portfolio
</TABLE>
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 Intermediate Bond Master Portfolio
and that portion of the assets of the Asset Allocation Master Portfolio 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 provided that Bank of America would pay Seattle Capital a monthly
advisory fee based upon the net assets of such Master Portfolios, at the annual
rate
-99-
<PAGE> 537
of .45% of the net assets of the Intermediate Bond Master Portfolio, and .55%
of that portion of the net assets of the Asset Allocation Master Portfolio
managed by Seattle Capital. For the period from December 6, 1993 (commencement
of operations) through February 28, 1994, Bank of America paid Seattle Capital
sub-advisory fees of $0 for sub-advisory services to the Intermediate Bond
Master and Asset Allocation Master Portfolios.
Prior to its reorganization into the Corporate Bond 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, the Predecessor Fund paid $129,586 in investment advisory fees to SPIM
(and Bank of America after December 8, 1993), pursuant to the Prior Agreement.
The Investment Advisory Agreements between Bank of America and
each Company will be in effect until October 31, 1996, and will continue in
effect with respect to a particular Master Portfolio or Fund from year to year
thereafter only so long as such continuation is approved at least annually by
(i) the Board of Trustees/Directors of the particular Company or the vote of a
"majority," as defined in the 1940 Act, of the outstanding voting securities of
such particular Master Portfolio or Fund, and (ii) a majority of those
trustees/directors of the particular Company who are not "interested persons,"
as defined in the 1940 Act, of any party to the particular Investment Advisory
Agreement, acting in person at a meeting called for the purpose of voting on
such approval. Each Investment Advisory Agreement will terminate automatically
in the event of its "assignment," as defined in the 1940 Act. In addition,
each Investment Advisory Agreement is terminable with respect to a particular
Master Portfolio or Fund at any time without penalty upon 60 days' written
notice by the Board of Trustees/Directors of the particular Company, by vote of
the holders of a majority of a particular Master Portfolio's or Fund's
outstanding voting securities, or by Bank of America.
See "Management - Administrator" for instances where the
investment adviser is required to make expense reimbursements to the Funds or
Master Portfolios.
The Investment Advisory Agreements 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
-100-
<PAGE> 538
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 of Governors") 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 of
Governors 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 Portfolios contemplated by the particular 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 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.)
<PAGE> 539
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
with respect to the Intermediate Bond Master Portfolio, International Equity
Master Portfolio, Blue Chip Master Portfolio, Asset Allocation Master Portfolio
and Corporate Bond Master Portfolio provides the Funds and Master Portfolios
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 Companies 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 Companies 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 a particular Company's Board of
Directors/Trustees.
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 an indirect wholly owned subsidiary of
The BISYS Group, Inc. The Administrator also serves as administrator to
several other investment companies.
The Administrator (and/or its off-shore affiliate with respect
to the Intermediate Bond Master Portfolio, Blue Chip Master Portfolio, Asset
Allocation Master Portfolio, Corporate Bond Master Portfolio and International
Equity Master Portfolio) provides administrative services to the Funds and the
Master Portfolios as described in the Funds' Prospectuses pursuant to separate
administration agreements for each Company. Each Master Portfolio's
administration agreement will continue in effect until October 31, 1996 and
thereafter for successive periods 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 Trustees of the particular Master Trust who are not
parties to the administration agreement or "interested persons" of any such
party, cast in person at a meeting called for the
-102-
<PAGE> 540
purpose of voting on such approval, and (b) by the Board of Trustees of the
particular Master Trust or by vote of a "majority of the outstanding voting
securities" of such Master Portfolio. Each Master Portfolio's administration
agreement is terminable at any time with respect to such Master Portfolio,
without penalty, by its Board of Trustees or by vote of a majority of such
Master Portfolio's outstanding voting securities upon 60 days' notice to the
Administrator, or by the Administrator, upon 90 days' written notice to such
Master Portfolio. The Company's 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 by (a) 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 vote of a
majority of the outstanding voting securities of any Fund upon 60 days' notice
to the Administrator, or by the Administrator upon 90 days' notice to the
Company.
The Companies have agreed to pay the Administrator fees for
its services as Administrator, accrued daily and payable monthly, at the annual
rates of .05% of the average daily net assets of the Intermediate Bond Master
Portfolio, Blue Chip Master Portfolio, Asset Allocation Master Portfolio,
Corporate Bond Master Portfolio and International Equity Master Portfolio; .15%
of the average daily net assets of the Intermediate Bond Fund, Blue Chip Fund,
Asset Allocation Fund, Corporate Bond Fund, National Municipal Bond Fund and
International Equity Master Portfolio; .20% of the average daily net assets of
the Government 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 and Master Portfolio's net assets increase. From time to time, the
Administrator may waive fees or reimburse a Fund or Master Portfolio for
expenses, either voluntarily or as required by certain state securities laws.
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<PAGE> 541
For the fiscal years indicated, the following administration
fees (net of waivers) were paid or payable to the Administrator by the
Aggressive Growth, California Tax-Exempt Bond, Capital Income and U.S.
Government Securities Funds as follows:
<TABLE>
<CAPTION>
Year ended February Year ended February Year ended February
29, 1996 28, 1995 28, 1994
<S> <C> <C> <C>
Aggressive Growth Fund $467,638 $408,150 $508,320
California Tax-Exempt Bond Fund $438,745 $454,249 $541,341
Capital Income Fund $441,044 $414,134 $ 17,466
U.S. Government Securities Fund $153,997 $227,374 $301,881
</TABLE>
For the fiscal years indicated, the Administrator waived
administration fees with respect to the Aggressive Growth, California
Tax-Exempt Bond, Capital Income and U.S. Government Securities Funds as
follows:
<TABLE>
<CAPTION>
Year ended February Year ended February Year ended February
29, 1996 28, 1995 28, 1994
<S> <C> <C> <C>
Aggressive Growth Fund $ 0 $ 0 $ 0
California Tax-Exempt Bond Fund $175,505 $181,979 $143,325
Capital Income Fund $ 0 $ 0 $172,065
U.S. Government Securities Fund $ 23,875 $ 0 $ 0
</TABLE>
Additionally, for the fiscal years indicated, the
Administrator reimbursed operating expenses of the Capital Income Fund, Blue
Chip Fund, Asset Allocation Fund, Intermediate Bond Fund, Municipal Master
Portfolio and Corporate Bond Master Portfolio as follows:
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<PAGE> 542
<TABLE>
<CAPTION>
Year ended February Year ended February Year or period (1) ended
29, 1996 28, 1995 February 28, 1994
<S> <C> <C> <C>
Capital Income Fund $ 0 $ 0 $33,887
Blue Chip Fund $150,472 $ 0 $ 0
Asset Allocation Fund $192,545 $ 0 $ 0
Intermediate Bond Fund $253,991 $ 0 $ 0
National Municipal Bond Fund $172,071 $ 0 $ 0
Municipal Master Portfolio(2) $169,773 $ 0 $ 0
Corporate Bond Master Portfolio $233,360 $ 0 $ 0
</TABLE>
Except as noted below, for the fiscal years indicated and for
the period from the commencement of operations through February 28, 1994, the
Administrator waived its entire administration fee with respect to the
Intermediate Bond Fund and the Intermediate Bond Master Portfolio, the Blue
Chip Fund and the Blue Chip Master Portfolio, the Asset Allocation Fund and the
Asset Allocation Master Portfolio and National Municipal Bond Fund and the
Municipal Master Portfolio as follows (No Administration fee data is provided
for the International Equity Fund and International Equity Master Portfolio,
since the International Equity Fund and International Equity Master Portfolio
did not commence operations until May 6, 1996):
____________________
1. The Blue Chip Fund Asset Allocation Fund, Intermediate Bond
Fund and Municipal Master Portfolio commenced operations on
January 13, 1994, January 18, 1994, January 24, 1994 and
January 28, 1994, respectively.
2. Prior to July 1, 1996, the National Municipal Bond Fund
invested all of its assets in the Municipal Master
Portfolio. On July 1, 1996, the National Municipal Bond
Fund withdrew its investment from the Municipal Master
Portfolio and invested directly in investment securities.
-105-
<PAGE> 543
<TABLE>
<CAPTION>
Period from commencement
Year Ended February Year ended February of operations (1) through
29, 1996 28, 1995 February 28, 1994
<S> <C> <C> <C>
Intermediate Bond Fund $ 9,952 $ 1,723 $ 22
Intermediate Bond Master $30,769 $33,431 $ 9,429
Portfolio
Blue Chip Fund $44,971 $ 5,833 $ 87
Blue Chip Master $ 104,889(2) $72,742 $15,001
Asset Allocation Fund $19,909 $ 4,703 $ 52
Asset Allocation Master $ 83,060(2) $79,573 $17,965
Portfolio
National Municipal Bond $10,543 $ 2,720 $ 46
Fund(3)
Municipal Master Portfolio $ 3,534 $ 896 $ 15
</TABLE>
____________________
1. The Intermediate Bond Fund, Blue Chip Fund, Asset Allocation
Fund and National Municipal Bond Fund commenced operations
on January 24, 1994, January 13, 1994, January 18, 1994 and
January 28, 1994, respectively. The Intermediate Bond
Master Portfolio, Blue Chip Master Portfolio and Asset
Allocation Master Portfolio commenced operations on December
6, 1993 and the Municipal Master Portfolio commenced
operations on January 28, 1994.
2. For the fiscal year ended February 29, 1996, the
Administration waived $77,922 and $65,491, respectively in
administration fees with respect to the Blue Chip Master
Portfolio and Asset Allocation Master Portfolio.
3. Prior to July 1, 1996, the National Municipal Bond Fund
invested all of its investment in the Municipal Master
Portfolio. On July 1, 1996, the National Municipal Bond
Fund withdrew its assets from the Municipal Master Portfolio
and invested directly in investment securities.
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<PAGE> 544
For the periods indicated, the Administrator waived its entire
administration fee with respect to the Corporate Bond Fund and the Corporate
Bond Master Portfolio as follows:
<TABLE>
<CAPTION>
Period April 25, 1994 (the
date the Predecessor Fund
Period October 1, was reorganized into the
Year ended February 1994 through February Corporate Bond Fund) through
29, 1996 28, 1995 September 30, 1994
<S> <C> <C> <C>
Corporate Bond Fund $48,108 $19,569 $24,407
Corporate Bond Master $16,036 $ 6,544 $ 8,175
Portfolio
</TABLE>
For the period October 1, 1993 through April 25, 1994, SPIM,
the former adviser to the Corporate Predecessor Fund, and not the Corporate
Predecessor Fund, paid Concord $26,157, for certain administrative services
provided to the Corporate Predecessor Fund pursuant to a Sub-Administrative
Agreement between SPIM and Concord.
If total expenses borne (directly or indirectly) by any Fund
in any fiscal year exceed the expense limitations imposed by applicable state
securities regulations, a Company may deduct from the payments to be made with
respect to such Fund and/or Master 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
a Company limits aggregate annual expenses with respect to a Fund, including
management and advisory fees and the Funds' pro rata share of such expenses of
their corresponding Master 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 prospectively waive payment of
fees and/or assume certain expenses of one or more of the Funds or
-107-
<PAGE> 545
Master Portfolios, as a result of competitive pressures and in order to
preserve and protect the business and reputation of the Administrator and Bank
of America. 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 The Bank of New York (with respect to the
Non-Feeder Funds) and PFPC (with respect to the Feeder Funds and their
corresponding Master Portfolios) for certain fund accounting services which are
borne by the Funds and Master Portfolios. See "General Information--Custodian
and Transfer Agent" below. Expenses borne by the Funds and Master 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, 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 prospectuses and
Statements of Additional Information for regulatory purposes, cost of
shareholders' and interestholders' reports and corporate meetings and any
extraordinary expenses. Certain shareholder servicing (and/or distribution
fees with respect to the Non-Feeder Funds) in connection with Pacific Horizon's
shares are also paid by Pacific Horizon. 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, the Funds, Master Trust I, or the Master 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.
PFPC (and an off-shore affiliate of PFPC with respect to the
Intermediate Bond Fund, Blue Chip Fund, Asset Allocation Fund and Corporate
Bond Fund and their corresponding Master Portfolios) provides the Feeder Funds
and their corresponding Master Portfolios 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
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<PAGE> 546
respect to the Feeder Funds and their corresponding Master Portfolios. The
monthly fees charged by PFPC under the fund accounting services agreements are
borne by the Feeder Funds and their corresponding Master Portfolios.
DISTRIBUTOR AND PLAN PAYMENTS
Concord Financial Group, Inc. (the "Distributor"), a wholly
owned subsidiary of the Administrator, acts as distributor of the shares of
Pacific Horizon. 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 Pacific Horizon'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
Pacific Horizon's Board of Directors 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 Pacific
Horizon's Board of Directors 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 Pacific Horizon at any time, without the payment of any penalty, by vote of
a majority of Pacific Horizon's entire Board of Directors 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 Pacific Horizon. The
agreement will automatically and immediately terminate in the event of its
"assignment".
For the fiscal years ended February 29, 1996, February 28,
1995 and the period from the commencement of operations through February 28,
1994, the Distributor received sales loads in connection with the purchase of
shares of the Aggressive Growth, California Tax-Exempt Bond, U.S. Government
Securities, Capital Income, Intermediate Bond, Blue Chip, Asset Allocation and
National Municipal Bond Funds as follows (No fees payable to the Distributor by
the International Equity Master Portfolio are described, since the
International Equity Master Portfolio did not commence operations until May 6,
1996):
-109-
<PAGE> 547
<TABLE>
<CAPTION>
Fiscal Year Ended February 29, 1996
-----------------------------------
Amount of Total
Amount of Total Sales Sales Load Retained
Total Sales Load Load Retained By By Affiliates of
Received By Distributor Distributor Bank of America
<S> <C> <C> <C>
Aggressive Growth Fund $ 805,092(1) $118,403 $ 653,024
California Tax-Exempt Bond Fund $1,180,348(1) $131,821 $1,048,152
U.S. Government Securities Fund $ 571,074(1) $ 63,560 $ 505,941
Capital Income Fund $1,746,063(1) $202,102 $1,493,113
Intermediate Bond Fund $ 460,801(1) $ 51,076 $ 408,407
Blue Chip Fund $2,138,130(1) $255,167 $1,875,240
Asset Allocation Fund $642,818(1) $ 69,818 $ 569,332
National Municipal $370,172(1) $ 40,099 $ 325,350
Bond Fund
</TABLE>
__________________________________
(1) Balance was paid to selling dealers.
-110-
<PAGE> 548
<TABLE>
<CAPTION>
Fiscal Year Ended February 28, 1995
-----------------------------------
Amount of Total
Amount of Total Sales Sales Load Retained
Total Sales Load Load Retained By By Affiliates of
Received By Distributor Distributor Bank of America
<S> <C> <C> <C>
Aggressive Growth Fund $ 340,853(1) $ 60,898 $257,259
California Tax-Exempt Bond Fund $ 322,982(1) $ 37,001 $268,563
U.S. Government Securities Fund $ 181,635(1) $ 21,022 $ 90,642
Capital Income Fund $2,449,559(1) $201,638 $388,254
Intermediate Bond Fund $ 53,285 $ 5,470 $ 47,815
Blue Chip Fund $ 186,628 $121,377 $165,251
Asset Allocation Fund $ 114,338 $ 30,504 $ 83,884
National Municipal Bond Fund $ 85,535(1) $ 9,400 $ 74,860
</TABLE>
__________________________________
(1) Balance was paid to selling dealers.
-111-
<PAGE> 549
<TABLE>
<CAPTION>
Period from Commencement of Operations*
through February 28, 1994
-------------------------
Amount of Total
Amount of Total Sales Sales Load Retained
Total Sales Load Load Retained By By Affiliates of
Received By Distributor Distributor Bank of America
<S> <C> <C> <C>
Intermediate Bond Fund $14,623 $1,628 $12,995
Blue Chip Fund $22,924 $2,692 $20,232
Asset Allocation Fund $11,896 $2,243 $ 9,653
National Municipal Bond Fund $23,828(1) $2,650 $21,178
</TABLE>
For the periods October 1, 1994 through February 28, 1995 and
April 25, 1994 (the date the Corporate Predecessor Fund reorganized into the
Corporate Bond Fund) through September 30, 1994, the Distributor received sales
loads in connection with the purchase of shares of the Corporate Bond Fund as
follows:
__________________________________
* The Intermediate Bond, Blue Chip, Asset Allocation and National
Municipal Bond Funds commenced operations on January 24, 1994, January
13, 1994, January 18, 1994 and January 28, 1994, respectively.
(1) Balance was paid to selling dealers.
-112-
<PAGE> 550
<TABLE>
<CAPTION>
Year ended February 29, 1996
Amount of Total
Amount of Total Sales Sales Load Retained
Total Sales Load Load Retained By By Affiliates of
Received By Distributor Distributor Bank of America
<S> <C> <C> <C>
Corporate Bond Fund $152,616 $17,586 $133,287
</TABLE>
<TABLE>
<CAPTION>
Period October 1, 1994 through
February 28, 1995
Amount of Total
Amount of Total Sales Sales Load Retained
Total Sales Load Load Retained By By Affiliates of
Received By Distributor Distributor Bank of America
<S> <C> <C> <C>
Corporate Bond Fund $11,175 $1,436 $9,326
</TABLE>
<TABLE>
<CAPTION>
Period April 25, 1994 (the date the Predecessor Fund reorganized into
the Corporate Bond Fund) through September 30, 1994
Amount of Total
Amount of Total Sales Sales Load Retained
Total Sales Load Load Retained By By Affiliates of
Received By Distributor Distributor Bank of America
<S> <C> <C> <C>
Corporate Bond Fund $1,485(1) $125 $1,175
</TABLE>
As the Corporate Predecessor Fund was a closed-end fund, no
commissions were paid during the period October 1, 1993 through April 24, 1994.
__________________________________
(1) Balance was paid to selling dealers.
-113-
<PAGE> 551
The following table shows all sales loads, commissions and
other compensation received by the Distributor directly or indirectly from each
of the Aggressive Growth Fund, California Tax-Exempt Bond Fund, U.S.
Government Securities Fund, Capital Income Fund, Intermediate Bond Fund, Blue
Chip Fund, Asset Allocation Fund, National Municipal Bond Fund and Corporate
Bond Fund during each fund's fiscal year ended February 29, 1996. As of
February 29, 1996, the International Equity Fund had not commenced operations.
<TABLE>
<CAPTION>
Brokerage
Commis-
Net Under- sions in
writing Dis- Compensation connection Other
counts and on Redemption with Fund Compen-
Commissions(1) and Repurchase(2) Transactions sation(3)
----------- -------------- ------------ ------
<S> <C> <C> <C> <C>
Concord Financial
Group, Inc.
Aggressive Growth Fund $118,403 $0 $0 $725,325
California Tax-Exempt Bond $131,821 $0 $0 $671,431
Fund
U.S. Government Securities $ 63,560 $0 $0 $171,254
Fund
Capital Income Fund $202,102 $0 $0 $505,751
Intermediate Bond Fund $ 51,076 $0 $0 $0
Blue Chip Fund $255,167 $0 $0 $0
Asset Allocation Fund $ 69,818 $0 $0 $0
National Municipal
Bond Fund $ 40,099 $0 $0 $0
Corporate Bond Fund $ 17,586 $0 $0 $0
</TABLE>
___________________
(1) Represents amounts received from front-end sales charge on A Shares.
(2) Represents amounts received from contingent deferred sales charges on
A Shares subject to the Large Purchase Exemption. The basis on which
such sales charges are paid is described in the Prospectuses. A
Shares were not subject to a contingent deferred sales charge during
the fiscal year covered by this chart.
(3) 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, Distribution Plan and Administrative and
Shareholder Services Plan (see discussion in next section) and
retained by the Distributor.
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<PAGE> 552
The Shareholder Services Plan. In addition to the sales loads
described above, the Distributor is entitled to payment by Pacific Horizon for
certain shareholder servicing expenses in addition to the sales loads on A
Shares described above and in the prospectus under the Shareholder Services
Plan (the "Plan") adopted by Pacific Horizon. The Non-Feeder 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
Company's Board of Directors eliminated the Distribution Plan.
Under the Shareholder Service Plan for A Shares, Pacific
Horizon pays the Distributor, with respect to the 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 facilities
dedicated for use by Pacific Horizon, 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 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 Services 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 A Shares of the Funds
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 a
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<PAGE> 553
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 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 29, 1996, the A Shares of
the Aggressive Growth, California Tax-Exempt Bond, Capital Income, U.S.
Government Securities, Intermediate Bond, Blue Chip, Asset Allocation,
Corporate Bond and National Municipal Bond Funds were charged the following
amounts pursuant to the Shareholder Service Plan:
<TABLE>
<CAPTION>
Amount of Total Amount of Total Amount of Total
Shareholder Service Shareholder Service Shareholder Service
Total Shareholder Fee Paid to Fee Paid to Bank of Fee Paid to Affiliates
Service Fee Distributor America of Bank of America
<S> <C> <C> <C> <C>
Aggressive Growth Fund $389,698 $257,687 $0 $110,825
California Tax-Exempt Bond Fund $511,875 $232,686 $0 $277,153
Capital Income Fund $551,305 $64,707 $0 $483,153
U.S. Government Securities Fund $222,341 $17,257 $0 $205,084
Intermediate Bond Fund $0 $0 $0 $0
Blue Chip Fund $0 $0 $0 $0
Asset Allocation Fund $0 $0 $0 $0
</TABLE>
-116-
<PAGE> 554
<TABLE>
<CAPTION>
Amount of Total Amount of Total Amount of Total
Shareholder Service Shareholder Service Shareholder Service
Total Shareholder Fee Paid to Fee Paid to Bank of Fee Paid to Affiliates
Service Fee Distributor America of Bank of America
<S> <C> <C> <C> <C>
Corporate Bond Fund $0 $0 $0 $0
National Municipal Bond Fund $0 $0 $0 $0
</TABLE>
As of February 29, 1996, the International Equity Master
Portfolio had not commenced operations.
For the fiscal years indicated and for the period from the
commencement of operations through February 28, 1994, the Distributor waived
all fees payable under the Shareholder Service Plan with respect to the
Intermediate Bond, Blue Chip, Asset Allocation and National Municipal Bond
Funds as follows:
<TABLE>
<CAPTION>
Period from
Commencement of
Year ended February Year Ended February Operations* through
29, 1996 28, 1995 February 28, 1994
<S> <C> <C> <C>
Intermediate Bond Fund $16,582 $2,873 $36
Blue Chip Fund $74,950 $9,721 $146
Asset Allocation Fund $33,182 $7,754 $86
National Municipal Bond Fund $17,571 $4,533 $77
</TABLE>
__________________________________
* The Intermediate Bond, Blue Chip, Asset Allocation and National
Municipal Bond Funds commenced operations on January 24, 1994, January
13, 1994, January 18, 1994 and January 28, 1994, respectively.
-117-
<PAGE> 555
For the fiscal year and the periods indicated, the
Distributor waived all fees payable under the Shareholder Service Plan
with respect to the Corporate Bond Fund as follows:
<TABLE>
<CAPTION>
Period April 25, 1994 (the
date the Predecessor Fund was
Period October 1, reorganized into the
Year ended February 29, 1994 through February Corporate Bond Fund) through
1996 28, 1995 September 30, 1994
<S> <C> <C> <C>
Corporate Bond Fund $80,246 $32,614 $40,679
</TABLE>
Payments for shareholder service expenses under the Plan are
not subject to Rule 12b-1 (the "Rule") under the 1940 Act. Pursuant to the
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 Pacific
Horizon who are not "interested persons" thereof have been committed to the
discretion of the directors who are neither "interested persons" (as defined in
the 1940 Act) of Pacific Horizon nor have any direct or indirect financial
interest in the operation of the Plan (or related servicing agreements) (the
"Non-Interested Plan Directors").
Pacific Horizon 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 A 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.
Pacific Horizon's Board of Directors has concluded that the
Plan will benefit the Funds and their A shareholders. 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 any Fund by a vote of majority of such
Directors or by vote of the holders of a majority of the A Shares of the Fund
involved. Any agreement entered into pursuant to the Plan with a Service
Organization is terminable with respect to any Fund without penalty, at any
time, by vote of the holders of a majority of the Non-Interested Plan
Directors, by vote of the holders of a majority of the A Shares of such Fund,
by the
-118-
<PAGE> 556
Distributor or by the Service Organization. Each agreement will also terminate
automatically in the event of its assignment.
The Distribution Plan and Administrative and Shareholder
Services Plan. The Distributor is also entitled to payment from the Company
for distribution fees pursuant to the Distribution Plan adopted on behalf of K
Shares. Under the Distribution Plan, the Company may pay the Distributor for:
(a) direct out-of-pocket promotional expenses incurred by the Distributor in
advertising and marketing K Shares; (b) expenses incurred in connection with
preparing, printing, mailing, and distributing or publishing advertisements and
sales literature for K Shares; expenses incurred in connection with printing
and mailing Prospectuses and Statements of Additional Information to other than
current K shareholders; (c) periodic payments or commissions to one or more
securities dealers, brokers, financial institutions or other industry
professionals, such as investment advisors, accountants, and estate planning
firms (severally, "a Distribution Organization") with respect to a Fund's K
Shares beneficially owned by customers for whom the Distribution Organization
is the Distribution Organization of record or holder of record of such K
Shares; (d) the direct or indirect cost of financing the payments or expenses
included in (a) and (c) above; or (e) for such other services as may be
construed, by any court or governmental agency or commission, including the
SEC, to constitute distribution services under the 1940 Act or rules and
regulations thereunder. With respect to K Shares, payments under the
Distribution Plan are not intended for distribution services to the extent they
are not permitted under the Employee Retirement Income Security Act of 1974, as
amended.
Pursuant to the Administrative and Shareholder Services Plan
with respect to K Shares, the Company may also pay securities dealers, brokers,
financial institutions or other industry professionals, such as investment
advisors, accountants, and estate planning firms (severally, a "Service
Organization") for support services provided with respect to its Client's K
Shares. Administrative and shareholder services provided may include some or
all of the following: (i) processing dividend and distribution payments from a
Fund on behalf of its Clients; (ii) providing statements periodically to its
Clients showing their positions in K Shares; (iii) arranging for bank wires;
(iv) responding to routine Client inquiries concerning their investment; (v)
providing the information to the Funds necessary for accounting or
sub-accounting; (vi) if required by law, forwarding shareholder communications
from a Fund (such as proxies, shareholder reports, annual and semi-annual
financial statements and dividend, distribution and tax notices) to its
Clients; (vii) aggregating and processing purchase, exchange, and redemption
requests from its Clients and placing net purchase, exchange, and redemption
orders for its Clients; (viii) providing Clients with a service that invests
the assets of their accounts
-119-
<PAGE> 557
pursuant to specific or pre-authorized instructions; (ix) establishing and
maintaining accounts and records relating to Clients; (x) assisting Clients in
changing dividend options, account designations and addresses; or (xi) other
similar services if requested by the Company.
The Distribution Plan provides that the Distributor is
entitled to receive payments on a monthly basis at an annual rate not exceeding
0.75% of the average daily net assets during such month of the outstanding K
Shares. In addition, under the Administrative and Shareholder Services Plan,
the Distributor is entitled to receive payments on a monthly basis for
administrative services and shareholder services at an annual rate not
exceeding 0.75% and 0.25%, respectively, of the average daily net assets during
such month of the outstanding K Shares. The total of all 12b-1 fees,
administrative service and shareholder service fees may not exceed, in the
aggregate, the annual rate of 1.00% of the average daily net assets of a Fund's
K Shares. The contingent deferred sales load discussed under the Large Purchase
Exemption does not apply to A Shares under the Daily Advantage or Advantage Plus
Programs.
Payments made out of or charged against the assets of a
particular class of shares of a particular Fund must be in payment for expenses
incurred on behalf of that class.
Payments for distribution expenses under the Distribution Plan
(the "12b-1 Plan") are subject to Rule 12b-1 (the "Rule") under the 1940 Act.
The Rule defines distribution expenses to include the cost of "any activity
which is primarily intended to result in the sale of [Company] shares." The
Rule provides, among other things, that an investment company may bear such
expenses only pursuant to a plan adopted in accordance with the Rule. In
accordance with the Rule, the 12b-1 Plan provides that a written report of the
amounts expended under the 12b-1 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 12b-1 Plan provides that it may
not be amended to increase materially the costs which a Fund may bear for
distribution pursuant to the 12b-1 Plan without shareholder approval and that
other material amendments of the 12b-1 Plan must be approved by a majority of
the Board of Directors, and by a majority 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 12b-1 Plan, or in
any agreements entered into in connection with the 12b-1 Plan, by vote cast in
person at a meeting called for the purpose of considering such amendments (the
"Non-Interested Plan Directors"). 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 Non-Interested Plan Directors.
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The Company's Board of Directors has concluded that there is a
reasonable likelihood that the 12b-1 Plan and the Administrative and
Shareholder Services Plan will benefit the Funds and their K shareholders. The
12b-1 Plan and the Administrative and Shareholder Services Plan are subject to
annual reapproval by a majority of the Company's Board of Directors, including
a majority of the Non-Interested Plan Directors and are terminable without
penalty at any time with respect to any Fund by a vote of a majority of the
Non-Interested Plan Directors or by vote of the holders of a majority of the
outstanding K Shares of the Fund involved. Any agreement entered into pursuant
to the 12b-1 Plan and the Administrative and Shareholder Services Plan 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 outstanding K Shares of such Fund, or by
the Service Organization. Each agreement will also terminate automatically in
the event of its assignment.
As of February 29, 1996, the Fund did not offer K Shares.
YIELD, TAX-EQUIVALENT YIELD AND TOTAL RETURN
From time to time, the yields, tax-equivalent yield (with
respect to the National Municipal and California Tax-Exempt Bond Funds) 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. From time to time advertisements or
communications to
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shareholders may summarize the substance of information contained in
shareholder reports (including the investment composition of a Fund and/or a
Master 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. Such advertisements or
communications may include symbols, headlines or other material which highlight
or summarize the information discussed in more detail therein. From time to
time, the investment adviser may enter into alliances with retirement plan
sponsors, including The Legend Group, and the Fund may in its advertisements or
sales literature include a discussion of certain attributes or benefits to be
derived from its relationship with such retirement plan sponsors. 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 for the respective share
classes of a Fund are 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 (including the maximum front-end
sales charge of an A 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 with respect to a particular class is based on the average daily number
of shares outstanding in the class during the period entitled to receive
dividends and includes dividends and interest earned during the period
attributable to that class minus expenses accrued for the period attributable
to that class, net of reimbursements. This calculation can be expressed as
follows:
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<TABLE>
<S> <C>
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.
</TABLE>
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
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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 Master 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 on A Shares -- currently 4.50% of the per share offering
price.
The National Municipal Bond Fund's "tax-equivalent" yield for
a particular class is computed by dividing that portion of the National
Municipal Bond Fund 's yield for a particular class (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 National Municipal Bond Fund's computed yield for
a particular class that is not tax-exempt. Tax-equivalent yields assume the
payment of Federal income taxes at the stated rate. The California Tax-Exempt
Bond Fund's "tax-equivalent" yield for a particular class is computed by: (a)
dividing the portion of the California Tax-Exempt Bond Fund's yield for a
particular class (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 California
Tax-Exempt Bond Fund's yield for a particular class (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 California Tax-Exempt Bond Fund's yield for a
particular class that is not exempt from Federal income tax. The combined
Federal and California income tax rate used in calculating the California
Tax-Exempt Bond Fund's "tax equivalent" yield for the 30-day period ended
February 29, 1996 was 34.7%.
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<PAGE> 562
Based on the foregoing calculations, the 30-day yields of the
A Shares of the U.S. Government Securities, Capital Income, Intermediate Bond,
Asset Allocation and Corporate Bond Funds (after fee waivers and expense
reimbursements) for the 30-day period ended February 29, 1996 were as follows:
<TABLE>
<CAPTION>
Yield
-----
<S> <C>
U.S. Government Securities Fund 5.55%
Capital Income Fund 2.91%
Intermediate Bond Fund 5.23%
Asset Allocation Fund 3.04%
Corporate Bond Fund 5.27%
</TABLE>
Based on the foregoing calculations, the A Shares of the
California Tax-Exempt Bond Fund's yield and tax-equivalent yield (after fee
waivers) and the A Shares of the National Municipal Bond Fund's yield and
tax-equivalent yield (after fee waivers and expense reimbursements) for the
30-day period ended February 29, 1996 were as follows:
<TABLE>
<CAPTION>
Yield Tax-Equivalent Yield
----- --------------------
<S> <C> <C>
California Tax-Exempt Bond Fund 4.60% 7.62%
National Municipal Bond Fund 5.01% 6.96%
</TABLE>
No K Shares were issued or outstanding during the 30-day
period ended February 29, 1996.
Total Return Calculations. The Funds compute their average
annual total returns separately for their separate share classes by determining
the average annual compounded rates of return during specified periods that
equate the initial amount invested in a particular share class to the ending
redeemable value of such investment in such class. 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> 563
<TABLE>
<CAPTION>
ERV 1/n
T = [(-----) - 1]
P
<S> <C>
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.
</TABLE>
The Funds compute their aggregate total returns separately for
their separate share classes by determining the aggregate rates of return
during specified periods that likewise equate the initial amount invested in a
particular share class to the ending redeemable value of such investment in the
class. The formula for calculating aggregate total return is as follows:
<TABLE>
<S> <C> <C>
ERV
aggregate total return = [(----- - 1)]
P
</TABLE>
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 front-end sales load charged in
connection with the purchase of A Shares.
Based on the foregoing calculations, the 1) average annual
total returns, and 2) the aggregate total returns for the A Shares of the
Aggressive Growth, Capital Income, U.S. Government Securities, California
Tax-Exempt Bond, Intermediate Bond, Blue Chip, Asset Allocation and National
Municipal Bond Funds for the years or periods indicated were as follows:
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<PAGE> 564
<TABLE>
<CAPTION>
Period from
One-Year Five-Year Ten-Year Commencement of
Period Ended Period Ended Period Ended Operations*
February 29, February 29, February 29, through February
1996 1996 1996 29, 1996
<S> <C> <C> <C> <C>
Aggressive Growth Fund 34.54% 13.03% 14.17% 19.19%
Capital Income Fund 20.29% 16.04% N/A 13.80%
(after fee waivers and
expense
reimbursements)
U.S. Government 3.59% 6.02% N/A 7.77%
Securities Fund (after
fee waivers and
expense
reimbursements)
California Tax-Exempt 5.17% 6.86% 6.68% 8.16%
Bond Fund (after fee
waivers)
Intermediate Bond Fund 5.48% N/A N/A 3.14%
Blue Chip Fund 27.39% N/A N/A 15.92%
Asset Allocation Fund 17.27% N/A N/A 9.83%
National Municipal 6.15% N/A N/A 3.77%
Bond Fund (after fee
waivers and expense
reimbursements)
</TABLE>
__________________________________
* The Aggressive Growth, Capital Income, U.S. Government Securities,
California Tax-Exempt Bond, Intermediate Bond, Blue Chip, Asset
Allocation and National Municipal Bond Funds commenced operations on
March 31, 1984, September 25, 1987, January 7, 1988, March 30, 1984,
January 24, 1994, January 13, 1994, January 18, 1994 and January 28,
1994, respectively.
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<PAGE> 565
<TABLE>
<CAPTION>
Aggregate Total Returns
One-Year Period Five-Year Ten-Year Period Period from
Ended Period Ended Ended Commencement of
February 29, February 29, February 29, Operations through
1996 1996 1996 February 29, 1996
<S> <C> <C> <C> <C>
Aggressive Growth Fund 34.54% 84.59% 276.58% 710.97%
Capital Income Fund 20.29% 110.61% N/A 197.61%
U.S. Government Securities 3.59% 34.01% N/A 84.02%
Fund
California Tax-Exempt Bond 5.17% 39.37% 91.00% 154.78%
Fund
Intermediate Bond Fund 5.48% N/A N/A 6.70%
Blue Chip Fund 27.39% N/A N/A 36.79%
Asset Allocation Fund 17.27% N/A N/A 21.83%
National Municipal Bond 6.15% N/A N/A 8.03%
Fund (after fee waivers
and expense reimbursements)
</TABLE>
Based on the foregoing calculations, the 1) average annual
total returns, and 2) the aggregate total returns for the A Shares of the
Corporate Bond Fund for the periods indicated were as follows:
<TABLE>
<CAPTION>
Average Annual Total Returns
April 25, 1994 (the date
the Corporate Predecessor
October 1, 1994 Fund was reorganized into
Year ended February through February 28, the Corporate Bond Fund)
29, 1996 1995 through February 28, 1995
<S> <C> <C> <C>
Corporate Bond Fund 8.99% N/A N/A
</TABLE>
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<PAGE> 566
<TABLE>
<CAPTION>
Aggregate Total Returns
April 25, 1994 (the date the
Predecessor Fund was
October 1, 1994 reorganized into the
Year ended February 29, through February 28, Corporate Bond Fund) through
1996 1995 February 28, 1995
<S> <C> <C> <C>
Corporate Bond Fund 8.99% 4.25% 4.66%
</TABLE>
Based on the foregoing calculations, the respective average
annual total returns and aggregate total returns for the Corporate Predecessor
Fund for the one, five and ten-year periods ended April 24, 1994 were 1.92%,
1.92% and 8.71% and 51.41%, 11.79% and 203.74%, respectively; and for the
Corporate Predecessor Fund for the one, five and ten-year periods ended
September 30, 1993 were 14.30%, 14.30% and 10.79% and 67.00%, 11.15% and
188.02%, respectively.
No K Shares of any of the Funds were outstanding during any of
the years or periods indicated.
The Funds may also advertise total return data without
reflecting sales charges in accordance with the rules of the SEC. Quotations
which do not reflect such sales charges will, of course, be higher than
quotations which do.
GENERAL INFORMATION
DESCRIPTION OF SHARES
Pacific Horizon is an open-end management investment company
organized as a Maryland corporation on October 27, 1982. Pacific Horizon'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 Class A Shares of the Aggressive Growth Fund, Class
D -- Special Series 3 represents interests in the B Shares of the Aggressive
Growth Fund and Class D -- Special Series 5 represents interests in the K
Shares of the Aggressive Growth Fund; Class E represents interests in the A
Shares of the U.S. Government Securities Fund,
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<PAGE> 567
Class E -- Special Series 3 represents interests in the B Shares of the U.S.
Government Securities Fund and Class E -- Special Series 5 represents interests
in the K Shares of the U.S. Government Securities Fund; Class F represents
interests in the A Shares of the Capital Income Fund, Class F -- Special Series
3 represents interests in the B Shares of the Capital Income Fund and Class F
- -- Special Series 5 represents interests in the K Shares of the Capital Income
Fund; Class G represents interests in the A Shares of the California Tax-Exempt
Bond Fund, Class G -- Special Series 3 represents interests in the B Shares of
the California Tax-Exempt Bond Fund and Class G -- Special Series 5 represents
interests in the K Shares of the California Tax-Exempt Bond Fund; Class M
represents interests in the A Shares of the Intermediate Bond Fund, Class M --
Special Series 3 represents interests in the B Shares of the Intermediate Bond
Fund and Class M -- Special Series 5 represents interests in the K Shares of
the Intermediate Bond Fund; Class N represents interests in the A Shares of the
Blue Chip Fund, Class N -- Special Series 3 represents interests in the B
Shares of the Blue Chip Fund and Class N -- Special Series 5 represents
interests in the K Shares of the Blue Chip Fund; Class O represents interests
in the A Shares of the Asset Allocation Fund, Class O -- Special Series 3
represents interests in the B Shares of the Asset Allocation Fund and Class O
- -- Special Series 5 represents interests in the K Shares of the Asset
Allocation Fund; Class Q represents interests in the A Shares of the National
Municipal Bond Fund, Class Q -- Special Series 3 represents interests in the B
Shares of the National Municipal Bond Fund and Class Q -- Special Series 5
represents interests in the K Shares of the National Municipal Bond Fund; Class
T represents interests in the A Shares of the International Equity Master
Portfolio, Class T -- Special Series 3 represents interests in the B Shares of
the International Equity Master Portfolio and Class T -- Special Series 5
represents interests in the K Shares of the International Equity Master
Portfolio. Class W represents interests in the A Shares of the Corporate Bond
Fund, Class W -- Special Series 3 represents interests in the B Shares of the
Corporate Bond Fund and Class W -- Special Series 5 represents interests in the
K Shares of the Corporate Bond Fund. B Shares have not been offered to the
public. Pacific Horizon's charter also authorizes the Board of Directors to
classify or reclassify any particular class of Pacific Horizon'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, Pacific Horizon's shares will be
fully paid and non-assessable. For information concerning possible
restrictions upon the transferability of Pacific Horizon's shares and
redemption provisions with respect to such shares, see "Additional Purchase and
Redemption Information."
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<PAGE> 568
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 Pacific Horizon 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 Pacific Horizon voting without regard to particular
Funds.
Notwithstanding any provision of Maryland law requiring a
greater vote of Pacific Horizon'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
Pacific Horizon's Charter, Pacific Horizon may take or authorize such action
upon the favorable vote of the holders of more than 50% of the outstanding
common stock of Pacific Horizon voting without regard to class.
THE MASTER PORTFOLIOS
The Intermediate Bond Master Portfolio, Blue Chip Master
Portfolio, Asset Allocation Master Portfolio, Corporate Bond Master Portfolio
and International Equity Master Portfolio are separate series of Master
Investment Trust, Series I. 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 Master Portfolio are entitled
to distributions arising from the net investment income and net realized gains,
if any, earned on investments held by the Master Portfolio. Investors are also
entitled to participate in the net distributable assets of the Master Portfolio
in which they hold beneficial interests on
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<PAGE> 569
liquidation. Beneficial interests have no preemptive rights, conversion or
exchange rights.
REPORTS
Shareholders will receive unaudited semi-annual reports
describing the Master Portfolio's and Fund's investment operations and annual
financial statements together with the reports of the independent accountants
of the Portfolios and the Funds.
CUSTODIAN, ACCOUNTING AGENT AND TRANSFER AGENT
The Bank of New York, 90 Washington Street, New York, New York
1028, has been appointed custodian for the Non-Feeder Funds. PNC Bank,
National Association, Broad and Chestnut Streets, Philadelphia, PA 19101 has
been appointed custodian for the Feeder Funds and their corresponding Master
Portfolios. The Bank of New York (with respect to the Non-Feeder Funds) and
PFPC (with respect to the Feeder Funds and their corresponding Master
Portfolios) provide the Funds and Master Portfolios with certain accounting
services pursuant to Fund Accounting Services Agreements with the
Administrator. Both PFPC, which is located at 103 Bellevue Parkway,
Wilmington, DE 19809, and PNC Bank, National Association are wholly owned
subsidiaries of PNC Bancorp, Inc., a bank holding company. Under separate Fund
Accounting Services Agreements, The Bank of New York and PFPC have agreed to
provide certain accounting, bookkeeping, pricing, dividend and distribution
calculation services with respect their respective Funds and Master Portfolios.
The monthly fees charged by The Bank of New York and PFPC under the Fund
Accounting Agreements are borne by the Funds and Master Portfolios. As
custodians, The Bank of New York and PNC Bank, N.A. each (i) maintain separate
account or accounts in the name of the respective Funds and/or Master
Portfolios, as appropriate (ii) hold and disburse portfolio securities; (iii)
make receipts and disbursements of money, (iv) collect and receive income and
other payments and distributions on account of portfolio securities, (v)
respond to correspondence from security brokers and others relating to their
respective duties and (vi) make periodic reports concerning their duties.
BISYS Fund Services, Inc., 3435 Stelzer Road, Columbus, Ohio
43219 serves as transfer and dividend disbursing agent for the Funds and Master
Portfolios.
COUNSEL
Drinker Biddle & Reath (of which W. Bruce McConnel, III,
Secretary of Pacific Horizon, is a partner), 1345 Chestnut Street, Suite 1100,
Philadelphia, Pennsylvania 19107, serves as counsel to the Companies and will
pass upon the legality of the
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<PAGE> 570
shares offered hereby. O'Melveny & Myers 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.
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP, independent accountants, with offices at
1177 Avenue of the Americas, New York, New York, has been selected as
independent accountants of each Fund and Master Portfolio for the fiscal year
ended February 28, 1996.
FINANCIAL STATEMENTS AND EXPERTS
The Annual Reports for each Fund for their fiscal year ended
February 29, 1996 (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. No other parts of the Annual Report are incorporated by reference
herein. 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.
MISCELLANEOUS
As used in the Prospectuses and this Statement of Additional
Information, a "vote of a majority" of the outstanding shares or interests of a
Fund, a Master Portfolio or a particular series means the affirmative vote of
the lesser of (a) more than 50% of the outstanding shares or interests of such
Fund, Master Portfolio or series or (b) 67% of the shares or interests of such
Fund, Master Portfolio or series present at a meeting at which more than 50% of
the outstanding shares or interests of such Fund, Master Portfolio or series
are represented in person or by proxy.
At June 15, 1996, the name, address and share ownership of the
entities which held as record owners more than 5% of the outstanding Pacific
Horizon Shares of the Treasury Only Fund were as follows: BA Investment
Services, Inc., For the Benefit of Clients, Attn: Unit #7852 - Bob Santilli,
P.O. Box 7042, San Francisco, CA 94120, 117,337,693.12 shares (44.18%); VAR &
Co., Attn: Linda Frintz, 180 E. 5th Street, 4th Floor, St. Paul, MN 55101,
20,631,603 shares (7.77%); BA Securities, Inc., 185 Berry Street, 3rd Floor,
San Francisco, CA 94107, 63,776,345.77 shares
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<PAGE> 571
(24.01%); and Hare & Co., Bank of New York and Short-Term Investment Funds,
Attn: Bimal Saha, One Wall Street, New York, NY 10286, 16,299,622.45 shares
(6.14%).
At June 15, 1996, the name, address and share ownership of the
entities which held as record owners more than 5% of the outstanding Horizon
Service Shares of the Treasury Only Fund were as follows: Omnibus Account 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, 36,255,145.71 shares (21.74%); Comcare, Inc., 4001 North
Third Street, Suite 120, Phoenix, AZ 85012, 18,013,864.56 shares (10.80%);
Comcare, Inc., 4001 North Third Street, Suite 120, Phoenix, AZ 85012,
13,759,642.80 shares (8.25%); Phillips Smith Specialty Retail Group III LP,
5080 Spectrum Drive, Suite 700, Dallas, TX 75248, 8,433,613.56 shares (5.06%);
and Omnibus Account for the Shareholder Accounts Maintained by Concord
Financial Services, Inc., Attn: Linda Zerbe, 100 First Avenue, Suite 300,
Pittsburgh, PA 15222, 42,331,589.86 shares (25.38%).
At June 15, 1996, the name, address and share ownership of the
entities which held as record owners more than 5% of the outstanding Pacific
Horizon Shares of the Treasury Fund were as follows: Hare & Co., Bank of New
York and Short Term Investment Funds, Attn: Bimal Saha, One Wall Street, New
York, NY 10286, 119,820,738.15 shares (11.98%); BA Investment Services, Inc.,
For the Benefit of Clients, Attn: Unit #7852 - Bob Santilli, P.O. Box 7042, San
Francisco, CA 94120, 214,999,785.48 shares (21.50%); and VAR & Co., Attn:
Linda Frintz, 180 E. 5th Street, 4th Floor, St. Paul, MN 55101, 555,776,087
shares (55.59%).
At June 15, 1996, the name, address and share ownership of the
entities which held as record owners more than 5% of the outstanding Horizon
Service Shares of the Treasury Fund were as follows: BISYS Fund Services, Inc.
Pittsburgh, FBO Sweep Customers, Attn: Linda Zerbe, 100 First Avenue, Suite
300, Pittsburgh, PA 15222, 146,093,204.24 shares (10.41%); and BISYS Fund
Services, Inc. Pittsburgh, FBO Sweep Customers, Attn: Linda Zerbe, 100 First
Avenue, Suite 300, Pittsburgh, PA 15222, 536,762,999.10 shares (38.23%).
At June 15, 1996, the name, address and share ownership of the
entities which held as beneficial owners more than 5% of the outstanding
Horizon Service Shares of the Treasury Fund were as follows: Bank of America
Financial Management and Trust Services, Attn: Common Trust Funds Unit 8329,
P.O. Box 3577, Terminal Annex, Los Angeles, CA 90051, 334,300,127.67 shares
(11.08%).
At June 15, 1996, the name, address and share ownership of the
entities which held as record owners more than 5% of the
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outstanding Horizon Shares of the Treasury Fund were as follows: Bank of
America TTEE/Cust. Invest. Hor. Treas., Attn: Common Trust Funds Unit 8329,
P.O. Box 3577, Terminal Annex, Los Angeles, CA 90051, 204,981,030.67 shares
(6.79%).
At June 15, 1996, the name, address and share ownership of the
entities which held as record owners more than 5% of the outstanding Pacific
Horizon Shares of the Government Fund were as follows: BA Investment Services,
Inc., For the Benefit of Clients, Attn: Unit #7852 - Bob Santilli, P.O. Box
7042, San Francisco, CA 94120, 96,024,272.20 shares (41.39%); VAR & Co., Attn:
Linda Frintz, 180 E. 5th Street, 4th Floor, St. Paul, MN 55101, 26,378,902
shares (11.37%); BA Securities, Inc., 185 Berry Street, 3rd Floor, San
Francisco, CA 94107, 50,140,615.12 shares (21.61%); and Bank of America
National Trust and Savings Association and Private Bank, Attn: ACI Unit 8329,
P.O. Box 3577, Terminal Annex, Los Angeles, CA 90051, 25,676,812.91 shares
(11.07%).
At June 15, 1996, the name, address and share ownership of the
entities which held as record owners more than 5% of the outstanding Horizon
Service Shares of the Government Fund were as follows: Toasty, Ltd., David
Jackson, Controller, Two Greenway Plaza, Suite 400, Houston, TX 77046,
20,229,783.50 shares (10.28%); Providence Health Care, Attn: Linda Lan Ha,
1501 4th Avenue, Suite 500, Seattle, WA 98101, 12,840,414.42 shares (6.52%);
and Omnibus Account 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, 36,650,485.52 shares (18.62%).
At June 15, 1996, the name, address and share ownership of the
entities which held as beneficial owners more than 5% of the outstanding
Horizon Service Shares of the Government Fund were as follows: Bank of America
Nevada Southern Commercial Bank, Attn: Cindy 2964, P.O. Box 98600, Las Vegas,
NV 89193, 28,581,824.10 shares (5.66%).
At June 15, 1996, the name, address and share ownership of the
entities which held as record owners more than 5% of the outstanding Horizon
Shares of the Government Fund were as follows: Sunquest Information Systems,
Inc., Attn: Trena Couch, 1407 Eisenhower Boulevard, Johnstown, PA 15904,
47,981,630.54 shares (9.51%).
At June 15, 1996, the name, address and share ownership of the
entities which held as record owners more than 5% of the outstanding Pacific
Horizon Shares of the Prime Fund were as follows: BA Securities, Inc., 185
Berry Street, 3rd Floor, San Francisco, CA 94107, 164,406,302.26 shares
(7.26%); Hare & Co., Bank of New York and Short Term Investment Funds, Attn:
Bimal Saha, One Wall Street, New York, NY 10286, 131,246,153.79 shares
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(5.80%); and BA Investment Services, Inc., For the Benefit of Clients, Attn:
Unit #7852 - Bob Santilli, P.O. Box 7042, San Francisco, CA 94120,
1,571,778,318.38 shares (69.43%).
At June 15, 1996, the name, address and share ownership of the
entities which held as record owners more than 5% of the outstanding Horizon
Service Shares of the Prime Fund were as follows: BISYS Fund Services, Inc.
Pittsburgh, FBO Sweep Customers, Attn: Linda Zerbe, 100 First Avenue, Suite
300, Pittsburgh, PA 15222, 944,998,928.53 shares (43.86%); and BISYS Fund
Services, Inc. Pittsburgh, FBO Sweep Customers, Attn: Linda Zerbe, 100 First
Avenue, Suite 300, Pittsburgh, PA 15222, 314,849,310.01 shares (14.61%).
At June 15, 1996, the name, address and share ownership of the
entities which held as beneficial owners more than 5% of the outstanding
Horizon Service Shares of the Prime Fund were as follows: Bank of America
National Trust and Savings Association, Financial Management & Trust Services,
Attn: Common Trust Funds Unit 8329, P.O. Box 3577, Terminal Annex, Los Angeles,
CA 90051, 372,642,105.21 shares (6.50%); and Security Pacific Cash Management,
c/o Bank of America GPO M/C 5533, Attn: Regina Olsen, 1850 Gateway Boulevard
M/C 5533, Concord, CA 94520, 505,465,000.00 shares (8.81%).
At June 15, 1996, the name, address and share ownership of the
entities which held as record owners 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, Attn: Unit #7852 - Bob Santilli,
P.O. Box 7042, San Francisco, CA 94120, 39,326,055.57 shares (82.50%); BA
Securities, Inc., 185 Berry Street, San Francisco, CA 94107, 2,901,660.15
shares (6.09%); and VAR & Co., Attn: Linda Frintz, 180 E. 5th Street, 4th
Floor, St. Paul, MN 55101, 3,263,084.00 shares (6.85%).
At June 15, 1996, the name, address and share ownership of the
entities which held as record owners more than 5% of the outstanding Horizon
Service Shares of the Tax-Exempt Money Fund were as follows: BISYS Fund
Services, Inc. Pittsburgh, FBO Sweep Customers, Attn: Linda Zerbe, 100 First
Avenue, Suite 300, Pittsburgh, PA 15222, 24,070,430.88 shares (29.78%); and
BISYS Fund Services, Inc. Pittsburgh, FBO Sweep Customers, Attn: Linda Zerbe,
100 First Avenue, Suite 300, Pittsburgh, PA 15222, 46,754,318.95 shares
(57.85%).
At June 15, 1996, the name, address and share ownership of the
entities which held as beneficial owners more than 5% of the outstanding
Horizon Service Shares of the Tax-Exempt Money Fund were as follows: Bank of
America Financial Management and Trust Services, Attn: Common Trust Funds Unit
8329, P.O. Box 3577, Terminal Annex, Los Angeles, CA 90051, 46,754,318.95
shares
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(11.91%); and BA Investment Services, Inc., Attn: Unit #7852 - Bob Santilli,
185 Berry Street, 3rd Floor, San Francisco, CA 94107, 22,564,375.21 shares
(5.75%).
At June 15, 1996, the name, address and share ownership of the
entities which held as record owners more than 5% of the outstanding Horizon
Shares of the Tax-Exempt Money Fund were as follows: Bank of America Cust. for
Invest. Hor T-E, Attn: Common Trust Funds Unit 8329, P.O. Box 3577, Terminal
Annex, Los Angeles, CA 90051, 62,696,306.62 shares (15.98%); and Continental
Bank National Association Cust, FBO Cust & Co., Attn: Mary Chester, 231 South
LaSalle Street 6Q, Chicago, IL 60697, 192,951,691.54 shares (49.19%).
At June 15, 1996, the name, address and share ownership of the
entities which held as record owners more than 5% of the outstanding Pacific
Horizon Shares of the California Tax-Exempt Money Market Fund were as follows:
BA Securities, Inc., 185 Berry Street, 3rd Floor, San Francisco, CA 94107,
190,453,613.81 shares (36.26%); BA Investment Services, Inc., For the Benefit
of Clients, Attn: Unit #7852 - Bob Santilli, P.O. Box 7042, San Francisco, CA
94120, 250,582,900.17 shares (47.71%); and Bank of America National Trust and
Savings Association and Private Bank, Attn: Common Trust Funds Unit 8329, P.O.
Box 3577 Terminal Annex, Los Angeles, CA 90051, 32,833,598.27 shares (6.25%).
At June 15, 1996, the name, address and share ownership of the
entities which held as record owners more than 5% of the outstanding Horizon
Service Shares of the California Tax-Exempt Money Market Fund were as follows:
BISYS Fund Services, Inc. Pittsburgh, FBO Sweep Customers, Attn: Linda Zerbe,
100 First Avenue, Suite 300, Pittsburgh, PA 15222, 81,355,203.78 shares
(33.55%); and BISYS Fund Services, Inc. Pittsburgh, FBO Sweep Customers, Attn:
Linda Zerbe, First and Market Building, 100 First Avenue, Suite 300,
Pittsburgh, PA 15222, 100,421,516.94 shares (41.41%).
At June 15, 1996, the name, address and share ownership of the
entities which held as beneficial owners more than 5% of the outstanding
Horizon Service Shares of the California Tax-Exempt Money Market Fund were as
follows: BA Investment Services, Inc., Attn: Unit #7852 - Bob Santilli, 185
Berry Street, 3rd Floor, San Francisco, CA 94107, 69,074,303.76 shares (9.00%);
and Bank of America National Trust and Savings Association TTEE/CUS, Attn:
Common Trust Funds Unit 8329, P.O. Box 3577, Terminal Annex, Los Angeles, CA
90051, 81,218,679.78 shares (10.58%).
At June 15, 1996, the name, address and share ownership of the
entities which held as record owners more than 5% of the outstanding A Shares
of the Corporate Bond Fund were as follows: Smith Barney, Inc., Custodian, 333
W. 34th Street, 3rd Floor, New
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York, NY 10001, 117,522.06 shares (6.09%); and Dean Witter Reynolds, Inc.,
Stock Record Department, 5th Floor, Attn: Al Dimino, 5 World Trade Center, New
York, NY 10048, 109,621 shares (5.68%).
At June 15, 1996, the name, address and share ownership of the
entities which held as record owners more than 5% of the outstanding Class A
Shares of the National Municipal Bond Fund were as follows: BA Investment
Services, Inc., FBO 406171021, 185 Berry Street, 3rd Floor, San Francisco, CA
94104, 113,038.79 shares (8.12%); and BA Investment Services, Inc., FBO
405084421, 555 California Street, 4th Floor, San Francisco, CA 94104, 86,266.56
shares (6.20%).
At June 15, 1996, the name, address and share ownership of the
entities which held as record owners more than 5% of the outstanding Class A
Shares of the International Equity Fund were as follows: Bank of America
National Trust and Savings Association, Agent for the Lee G. Paul Trust, The
Paul Family Trust, P.O. Box 3577, Terminal Annex, Los Angeles, CA 90051,
5,000.00 shares (6.17%); Bank of America National Trust and Savings
Association, Agent for the Norman and Margaret Oberstein Trust, P.O. Box 3577,
Terminal Annex, Los Angeles, CA 90051, 4,995.01 shares (6.16%); Bank of America
National Trust and Savings Association, Agent for the Norman S. Oberstein
Trust, A Prof. Law Corp., P.O. Box 3577, Terminal Annex, Los Angeles, CA
90051, 10,000.00 shares (12.34%); Bank of America National Trust and Savings
Association, Agent for the Widows/Orphans Aid Association Managed Agency for
SFPD, P.O. Box 3577, Terminal Annex, Los Angeles, CA 90051, 19,960.08 shares
(24.62%); and Bank of America National Trust and Savings Association, Agent for
the Robert & Antoinette Lepore Trust, the Lepore Family Trust, P.O. Box 3577,
Terminal Annex, Los Angeles, CA 90051, 19,970.05 shares (24.63%).
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 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.
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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 in
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> 577
"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> 578
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 generally 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
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<PAGE> 579
interest of unsubordinated instruments having a maturity of one year or less
which are 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.
A-4
<PAGE> 580
"B" - Obligations for which the capacity for timely repayment
is susceptible to adverse changes in business, economic or financial
conditions.
"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
A-5
<PAGE> 581
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.
"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 that 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.
A-6
<PAGE> 582
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.
"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
A-7
<PAGE> 583
probable credit stature upon completion of construction or elimination of basis
of condition.
(P)... - When applied to forward delivery bonds, indicates
that the rating is provisional pending delivery of the bonds. The rating may
be revised prior to delivery if changes occur in the legal documents or the
underlying credit quality of the bonds.
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
A-8
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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" - 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
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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, 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 other 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.
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<PAGE> 586
"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 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.
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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. 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> 588
APPENDIX B
As stated in the Prospectuses, the Portfolios, 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 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 Fund, 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. 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. 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 a
Portfolio 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. Such Portfolio might enter into futures
contract sales of Treasury bonds for an equivalent of 98. If the market value
of the portfolio security
B-2
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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. 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 a 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. 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.
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<PAGE> 592
The National Municipal Bond Fund 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 National Municipal Bond Fund will
purchase index futures contracts in anticipation of purchases of securities.
In a substantial majority of these transactions, the National Municipal Bond
Fund 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 National Municipal Bond Fund'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 National Municipal Bond Fund is paid the difference
and thus realizes a gain. If the offsetting purchase price exceeds the sale
price, the National Municipal Bond Fund pays the difference and realizes a
loss. Similarly, the closing out of a futures contract purchase is effected by
the National Municipal Bond Fund'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 National
Municipal Bond Fund 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
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<PAGE> 593
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.
<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.
III. 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
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<PAGE> 594
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.
The Aggressive Growth Fund and Capital Income Fund, Blue Chip
Master Portfolio, Asset Allocation Master Portfolio and International Equity
Master Portfolio 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 Aggressive Growth Fund and Capital Income
Fund, Blue Chip Master Portfolio, Asset Allocation Master Portfolio and
International Equity Master Portfolio 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.
B-7
<PAGE> 595
The following are examples of transactions in stock index
futures (net of commissions and premiums, if any).
B-8
<PAGE> 596
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 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.
B-9
<PAGE> 597
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>
IV. 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.
V. 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
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<PAGE> 598
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 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 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.
VI. 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
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<PAGE> 599
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 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 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
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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 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 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
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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.
VII. 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).
VIII. OTHER HEDGING TRANSACTIONS
The U.S. Government Securities Fund and Capital Income Fund
and the Blue Chip, Intermediate Bond, Asset Allocation and International Equity
Master Portfolios presently intend to use interest rate futures contracts, the
Aggressive Growth Fund and the Blue Chip, Asset Allocation and International
Equity Master Portfolios presently intend to use stock index futures contract
(and foreign currency futures contracts (and related options)
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with respect to the Aggressive Growth Fund and International Equity Master
Portfolio) 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
investment adviser, transactions therein are necessary or advisable.
IX. 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 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 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
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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 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 and the Intermediate Bond, Asset Allocation and International Equity
Master Portfolios, 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
or similar financial instrument. However, regulated futures contracts and
non-equity options are generally
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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.
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.
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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 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
ASSET ALLOCATION FUND
July 1, 1996
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
The Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Investment Objectives And Policies . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Additional Purchase And Redemption Information . . . . . . . . . . . . . . . . . . . . 24
Additional Information Concerning Taxes . . . . . . . . . . . . . . . . . . . . . . . . 33
Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
General Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65
Appendix A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-1
Appendix B . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-1
</TABLE>
This Statement of Additional Information applies to the A and K Shares
of the Pacific Horizon Asset Allocation Fund (the "Fund") of the Company. This
Statement of Additional Information is meant to be read in conjunction with the
Prospectus dated July 1, 1996, as it may from time to time be revised (the
"Prospectus"), and is incorporated by reference in its entirety into the
Prospectus. Because this Statement of Additional Information is not itself a
prospectus, no investment in either A or K Shares of the Fund should be made
solely upon the information contained herein. Copies of the Prospectus
relating to the Fund 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> 607
THE COMPANY
The Company was organized on October 27, 1982 as a Maryland
corporation. The Fund, which commenced operations on January 24, 1994, seeks
to achieve its investment objective by investing substantially all of its
assets in a diversified investment portfolio (the "Master Portfolio") of an
open-end, management investment company having the same investment objective as
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 its corresponding Master Portfolio. Since the investment
characteristics of the Fund will correspond with the Master Portfolio, the
following is a discussion of the various investments and techniques employed by
the Master Portfolio. The following information supplements and should be read
in conjunction with the descriptions of the investment objective and policies
in the Prospectus for the Fund. As of the date of this Statement of Additional
Information, no K Shares were offered or outstanding.
PORTFOLIO TRANSACTIONS
The portfolio turnover rate described in the 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 years
ended February 29, 1996 and February 28, 1995, the portfolio turnover rates for
the Master Portfolio were 157% and 142%, respectively.
Subject to the general control of the Master 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 Master Portfolio.
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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 fixed income portion of the Master Portfolio are normally
principal transactions without brokerage commissions.
For the fiscal years and period indicated, the Master
Portfolio paid the following brokerage commissions:
<TABLE>
<CAPTION>
Year Ended Year Ended Period(1) Ended
February 29, 1996 February 28, 1995 February 28, 1994
<S> <C> <C> <C>
Master Portfolio $175,960 $152,778 $ 21,798
</TABLE>
In executing portfolio transactions and selecting brokers or
dealers, it is the Master Portfolio's policy to seek the best overall terms
available. The Investment Advisory Agreement between the Master 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 Master Portfolio to cause the Master 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 Master 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,
- --------------------
1. The Master Portfolio commenced investment operations on December 6, 1993.
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<PAGE> 609
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 the Fund or Master 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 Master 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 Master Portfolio. In connection with its
investment management services with respect to the Fund and the Master
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 Master 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 Master 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 Master 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 Master Portfolio, believes such practice to be in the interest of the
Master Portfolio.
To the extent permitted by law, Bank of America may aggregate
the securities to be sold or purchased on behalf of the Master 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 29, 1996: (a) the Treasury Fund held the following
securities, Repurchase Agreement with Dean Witter, Reynolds, Inc. in the
principal amount of $130,000,000; Repurchase Agreement with Goldman Sachs & Co.
in the principal amount of $375,000,000; Repurchase Agreement with Merrill
Lynch & Co., Inc. in the principal amount of $130,000,000; and Repurchase
Agreement with Morgan Stanley, Inc. in the principal amount of $130,000,000;
(b) the Government Fund held the following securities, Repurchase Agreement
with Morgan Stanley Group in the principal amount of $20,000,000; (c) the Prime
Fund held the following securities, Merrill Lynch & Co., Inc. commercial paper
in the principal amount of $50,000,000; Bear Stearns Cos., Inc. monthly
variable rate obligation in the principal amount of $100,000,000; Merrill Lynch
& Co., Inc. monthly variable rate obligation in the principal amount of
$50,000,000; Merrill Lynch & Co., Inc. quarterly variable rate obligation in
the principal amount of $50,000,000; Merrill Lynch & Co., Inc. quarterly
variable rate obligation in the principal amount of $50,000,000; Dean Witter
Discover & Co. quarterly variable rate obligation in the principal amount of
$50,000,000; Goldman Sachs Group L.P. master note in the principal amount of
$220,000,000; Morgan Stanley Group, Inc. master note in the principal amount of
$200,000,000, Repurchase Agreement with Dean Witter Reynolds, Inc. in the
principal amount of $105,000,000; Repurchase Agreement with Morgan Stanley
Group, Inc. in the principal amount of $105,000,000; Repurchase Agreement with
Morgan Stanley Group, Inc. in the principal amount of $105,000,000; (d) the
U.S. Government Securities Fund held the following securities, Merrill Lynch &
Co., Inc. commercial paper in the principal amount of $3,000,000; (e) the
Corporate Bond master portfolio held the following securities, Goldman Sachs
Group LP corporate obligation in the principal amount of $1,500,000; and Lehman
Brothers corporate obligation in the principal amount of $1,000,000; (f) the
Intermediate Bond master portfolio held the following securities, Morgan
Stanley Group medium term note in the amount of $2,000,000 and Merrill Lynch
Mtg. Inv. Inc. $16,000; (g) the Blue Chip master portfolio held the following
securities, Dean Witter common stock in the principal amount of $2,821,875; and
(h) the Asset Allocation master portfolio held the following securities, Dean
Witter common stock in the principal amount of $1,085,750; Lehman Brothers
corporate obligations in the principal amount of $1,000,000; Morgan Stanley
Group medium term note in the principal amount of $1,500,000; Merrill Lynch &
Co., Inc. collateralized mortgage obligation in the principal amount of
$8,000; and Merrill Lynch commercial paper in the principal amount of
$3,500,000.
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<PAGE> 611
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 the Master 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 may only be purchased from
domestic or foreign banks and financial institutions having 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 Master Portfolio.
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
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<PAGE> 612
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 Master Portfolio 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"); 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 Master Portfolio. These rating symbols are described
in Appendix A.
Other Investment Companies. In connection with the Management
of its daily cash position, the Master Portfolio may invest in the securities
of a money mutual market fund (including money market mutual funds advised by
Bank of America). The Master Portfolio is permitted to invest up to 5% of the
value of its total assets in the securities of a money market mutual fund;
except that if a pending exemptive order is granted by the Securities and
Exchange Commission ("SEC"), with respect to the investment in a money market
mutual fund advised by Bank of America, the Master Portfolio is permitted to
invest the greater of 5% of its respective net assets or $2.5 million.
However, no more than 10% of the Master Portfolio's total assets may be
invested in the securities of money market mutual funds in the aggregate.
Securities of other investment companies will be acquired by the Master
Portfolio within the limits prescribed by the 1940 Act and the Master
Portfolio's fundamental investment limitations. As a shareholder of another
investment company, the Master Portfolio would bear along with other
shareholders, its pro-rata portion of the other investment company's expenses,
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including advisory fees. These expenses would be in addition to the advisory
and other expenses that the Master Portfolio bears directly in connection with
its own operations. The 1940 Act generally prohibits the Master 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. In
addition, no more than 10% of the outstanding voting stock of any one
investment company may be owned in the aggregate by the Master Portfolio and
any other investment company advised by the investment adviser.
Repurchase Agreements. The Master Portfolio is permitted to
enter into repurchase agreements with respect to its portfolio securities.
Pursuant to such agreements, the Master Portfolio acquires securities from
financial institutions such as banks and broker-dealers which are deemed to be
creditworthy subject to the seller's agreement to repurchase and the agreement
of the Master Portfolio to resell such securities at a mutually agreed upon
date and price. Repurchase agreements maturing in more than seven days are
considered illiquid investments and investments in such repurchase agreements
along with any other illiquid securities will not exceed 10% of the value of
the net assets of the Master Portfolio. The Master 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 Master 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 Master 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 Master
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 Master Portfolio's rights with respect to such
securities to be delayed or limited. Repurchase agreements are considered to
be loans by the Master Portfolio under the 1940 Act.
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U.S. Government Obligations. The Master 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. As described in the
Prospectus, the Master Portfolio may acquire variable and floating rate
instruments and master demand notes. 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 Master 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 Master 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 Master Portfolio is not entitled
to exercise its demand rights, and the Master 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 Master Portfolio's fundamental 10% of net
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assets 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 Master 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 Master 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
Master 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 Master Portfolio under the 1940 Act.
Options Trading. The Master Portfolio may, under certain
circumstances and in accordance with investment limitations described in its
prospectus, engage in options trading. Such options may relate to U.S. and
foreign securities or to various stock indices. The Master Portfolio presently
intends that the aggregate value of its assets subject to options will not
exceed 5% of the value of its net assets. The investment policies of the
Master Portfolio provide that the aggregate value of the Master 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 premium paid 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 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
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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. Unlisted options are not subject to the protections afforded
purchases 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 SEC that over-the-counter options are illiquid. To the extent that the
Master Portfolio invests in options that are illiquid (including
over-the-counter options), such investment will be subject to the Master
Portfolio's limitations on illiquid securities.
The Master Portfolio will continue to receive interest or
dividend income on the securities underlying such puts until they are exercised
by it. Any losses realized by the Master Portfolio in connection with its
purchase of put options will be limited to the premiums paid by the Master
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 Master Portfolio owns.
The Master Portfolio is permitted to write call options if
they are "covered." In the case of a call option on a security, the option is
"covered" if the Master 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 the Master Portfolio
maintains with its custodian cash or cash equivalents equal to the contract
value. A call option is also covered if the Master 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 Master 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 the Master Portfolio desires to sell a particular security
it owns, on which it has written an option, the Master 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, the
Master 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.
When the Master Portfolio purchases a put or call option, the
premium paid by it is recorded as an asset of the Master Portfolio. When the
Master Portfolio writes an option, an amount equal to the net premium (the
premium less the commission) received by the Master 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 the Master Portfolio expires unexercised, the Master
Portfolio realizes a loss equal to the premium paid. If the Master Portfolio
enters into a closing sale transaction on an option purchased by it, the Master
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 if such security is owned by the Master Portfolio.
If an option written by the Master Portfolio expires on the stipulated
expiration date or if the Master 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 the Master Portfolio is exercised, the proceeds of the sale will be
increased by the net premium originally received and the Master Portfolio will
realize a gain or loss.
As noted previously, there are several risks associated with
transactions in options on securities and indices. For
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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, 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.
Futures. The Master Portfolio may purchase and sell both
interest rate and stock index futures contracts (as well as purchase 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. The Master 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 Master Portfolio under the rules of the exchange
on which the futures contract (or futures option) is traded, plus any premiums
paid by the Master Portfolio on its open futures options positions, does not
exceed 5% of the Master Portfolio's total assets, after taking into account any
unrealized profits and losses on the Master 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
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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 the Master 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 the Master 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 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 Master 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 Master 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 Master 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 Master Portfolio may
decline. If this occurred, the Master 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 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 Master Portfolio
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intends 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, the Master 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.
Options on Futures Contracts. The acquisition of put and call
options on a futures contract will give the Master 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 Master Portfolio obtains the
benefit of the futures position of 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 Master
Portfolio's assets. By writing a call option, the Master 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 contract generates a premium, which may partially offset an
increase in the price of securities that the Master Portfolio intends to
purchase. However, the Master Portfolio becomes obligated to purchase a
futures contract, which may have a value lower than the exercise price. Thus,
the loss incurred by the Master Portfolio in writing options on futures is
potentially unlimited and may exceed the amount of the premium received. The
Master 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. A Master Portfolio's ability to establish and close out positions on
such options will be subject to the development and maintenance of a liquid
market.
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For additional information concerning Futures and options
thereon, please see Appendix B to this Statement of Additional Information.
Foreign Investments. The Master Portfolio 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 is a
possibility of expropriation or confiscatory taxation, or diplomatic
developments which could affect investment in those countries.
Fixed commissions on foreign securities exchanges are
generally higher than negotiated commissions on U.S. exchanges, although the
Master Portfolio endeavors to achieve the most favorable net results on its
portfolio transactions. There is generally less government supervision and
regulation of securities exchanges, brokers, dealers and listed companies than
in the United States. Mail service between the United States and foreign
countries may be slower or less reliable than within the United States, thus
increasing the risk of delayed settlements of portfolio transactions or loss of
certificates for portfolio securities.
Foreign markets also have different clearance and settlement
procedures, and in certain markets there have been times when settlements have
been unable to keep pace with the volume of securities transactions, making it
difficult to conduct such transactions. Such delays in settlement could result
in temporary periods when a portion of the assets of the Master Portfolio is
uninvested and no return is earned thereon. The inability of the Portfolios to
make intended security purchases due to settlement problems could cause the
Master Portfolio to miss attractive investment opportunities. Inability to
dispose of portfolio securities due to settlement problems could result either
in losses to the Master Portfolio due to subsequent declines in value of the
portfolio securities, or, if the Master Portfolio has entered into a contract
to sell the securities, could result in possible liability to the purchaser.
Individual
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foreign economies may differ favorably or unfavorably from the U.S. economy in
such respects as growth or gross national product, rate of inflation, capital
reinvestment, resource self-sufficiency and balance of payments position.
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 the Master 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 Master Portfolio 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 Master 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 Master 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, S&P, Fitch Investors 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
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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
Master 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 Master 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
Master Portfolio and the liquidity and value of the Master Portfolio. In such
an event, the Master Portfolio would re-evaluate its investment objective and
policies and consider changes in its structure or possible dissolution.
When-Issued Securities and Forward Commitments. The Master
Portfolio may purchase securities on a "when-issued" basis and may purchase or
sell securities on a "forward commitment"
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basis. When the Master 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, the Master 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 Master Portfolio
(and the 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 Master Portfolio does not intend to engage in these transactions for
speculative purposes but primarily in order to hedge against anticipated
changes in interest rates. Because the Master 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 and commitments to
purchase when-issued securities ever exceeded 25% of the value of the Master
Portfolio's assets.
The Master 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,
the Master 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 Master Portfolio on the settlement date. In
these cases the Master Portfolio may realize a taxable capital gain or loss.
When the Master 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 Master 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
the Master Portfolio starting on the day the Master Portfolio agrees to
purchase the securities. The Master Portfolio does not earn interest on the
securities it has committed to purchase until they are paid for and delivered
on the settlement date.
ADDITIONAL INFORMATION
The investment adviser's own investment portfolios may include
bank certificates of deposit, bankers' acceptances, corporate debt obligations,
equity securities and other
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<PAGE> 625
investments any of which may also be purchased by a fund of the Company. The
Master Portfolio may also invest in securities, interests or obligations of
companies or entities which have a deposit, loan, commercial banking or other
business relationship with Bank of America or any of its affiliates (including
outstanding loans to such issuers which may be repaid in whole or in part with
the proceeds of securities purchased by a fund of the Company).
OTHER INVESTMENT LIMITATIONS
The Fund's and Master Portfolio's investment objectives are
fundamental. The Prospectus for the Fund sets forth or summarizes certain
fundamental policies that may not be changed with respect to the Fund or the
Master Portfolio without the affirmative vote of the holders of the majority of
the Fund's outstanding shares or the Master Portfolio's outstanding interests
(as defined below under "General Information - Miscellaneous"). The following
enumerated additional fundamental policies, as well as the Fund's or Master
Portfolio's investment objectives, may not be changed for the Fund or the
Master Portfolio without such a vote of shareholders or interestholders.
NEITHER THE FUND NOR ITS CORRESPONDING MASTER 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. Pledge, mortgage or hypothecate the assets of the
Master Portfolio to any extent greater than 10% of
the value of the total assets of the Fund or the
Master Portfolio.
3. Make loans to other persons, except that the Master
Portfolio may make time or demand deposits with
banks, provided that time deposits shall not have an
aggregate value in excess of 10% of the Master
Portfolio's net assets, and may purchase
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<PAGE> 626
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 the Master Portfolio, 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 the
Master Portfolio;
4. Purchase or sell commodities contracts, except that
the Master Portfolio 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 the Master
Portfolio, 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 Master Portfolio;
5. Purchase any securities for the Master Portfolio that
would cause more than 25% of the value of the Master
Portfolio'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
agencies and instrumentalities; and provided further
that the Fund may invest all its assets in a
diversified, open-end management investment company,
or a series thereof, with substantially the same
investment objectives, policies and restrictions as
the Fund without regard to the limitations set forth
in this paragraph (5).
6. Invest the assets of the Master Portfolio 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
-21-
<PAGE> 627
of the Master Portfolio; provided, however, that the
Fund may invest all its assets in a diversified,
open-end management investment company, or a series
thereof with substantially the same investment
objectives, policies and restrictions as the Fund,
without regard to the limitations set forth in this
paragraph (6).
7. Borrow money for the Master Portfolio except for
temporary emergency purposes and then only in an
amount not exceeding 5% of the value of the total
assets of the Master Portfolio. 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 the Master
Portfolio before making additional investments for
the Master Portfolio and interest paid on such
borrowings will reduce income.
8. Issue senior securities.
9. Underwrite any issue of securities, provided,
however, that the 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
the Fund, without regard to the limitations set forth
in this paragraph (9).
10. Purchase or sell real estate or real estate mortgage
loans, but this shall not prevent investments in
instruments secured by real estate 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 Master
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
the 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 the Fund,
without regard to the limitations set forth in this
paragraph (12).
13. Purchase securities of any other investment company
(except in connection with a merger,
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<PAGE> 628
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 the
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 the Fund,
without regard to the limitations set forth in this
paragraph (13).
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.
The Fund and the Master Portfolio 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 the Fund's shares in certain
states, the Company or Master Investment Trust, Series I ("Master Trust I") 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 Master Portfolio will not invest more than 5% of
the value of its 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.
-23-
<PAGE> 629
2. The Master Portfolio will not invest in oil, gas or
other mineral leases.
3. The Master 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 or real estate limited partnerships.
4. The Master Portfolio has agreed to exclude any assets
of the Master Portfolio which are invested in the
shares of any mutual fund for the purposes of
calculating the Master Portfolio's investment
advisory fee.
5. The Master Portfolio will not invest more than 5% of
their total assets in the securities of issuers which
together with any predecessors have a record of less
than three years continuous operation.
6. The Master Portfolio 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 operation or securities
of issuers which are restricted as to disposition.
In the event that the Company or Master Trust I determines
that any such commitment is no longer in the best interests of the Master
Portfolio, it may revoke its commitment. In such event, the 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 Prospectus. The net asset value per
share of the Master 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 Master Portfolio, less any liabilities with
respect to the Fund, including the Fund's pro rata share of the Master
Portfolio's liabilities. Additional information is contained below.
-24-
<PAGE> 630
VALUATION OF THE MASTER PORTFOLIO
Except for debt securities held by the Master Portfolio 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 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
Master Trust I 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 Master Portfolio 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
Master Trust I 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 represents fair value.
Master Trust I 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 Master Trust I,
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
-25-
<PAGE> 631
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 Master Trust I.
SUPPLEMENTARY PURCHASE INFORMATION
For the purpose of applying the Right of Accumulation or
Letter of Intent privileges available to certain shareholders as 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
of an A Share for the Fund based on the value of the Fund's net assets on
February 29, 1996 and the Fund's A Shares outstanding on such date is as
follows:
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<PAGE> 632
<TABLE>
<CAPTION>
Asset Allocation
Fund
----------------
<S> <C>
Net Assets $22,354,673
Outstanding Securities 1,275,880
Net Asset Value Per Share $17.52
Sales Charge, 4.50 percent
of offering price (4.71 percent
of net asset value per share) $0.83
Maximum Offering Price to Public $18.35
</TABLE>
SUPPLEMENTARY REDEMPTION INFORMATION: ALL FUNDS
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 (less any applicable contingent deferred sales charge on certain A
Shares subject to the Large Purchase Exemption) 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 (less any
applicable contingent deferred sales charge on certain A Shares subject to the
Large Purchase Exemption) will normally be wired in federal funds on the next
business day thereafter. Redemption proceeds (less any applicable contingent
deferred sales charge on certain A Shares subject to the Large Purchase
Exemption) 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.
-27-
<PAGE> 633
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.
SUPPLEMENTARY PURCHASE INFORMATION
In General. As described in the Prospectus, A 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.") K Shares may only be purchased by: (a) businesses or other
organizations that participate in the Daily Advantage(R) Program sponsored by
Bank of America; (b) individuals investing proceeds from a redemption of shares
from another open-end investment company on which such individual paid a
front-end sales load if (i) such redemption occurred within 30 days prior to
the purchase order, and (ii) such other open-end investment company was not
distributed and advised by Concord Financial Group, Inc. and Bank of America,
respectively, or their affiliates; and (c) accounts opened for IRA rollovers
from a 401(k) plan in which the assets were held in any Pacific Horizon or Time
Horizon Fund and subsequent purchases into an IRA rollover account opened as
described above, so long as the original IRA rollover account remains open.
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.
A Shares in the Fund are sold with a sales load, except for
such exemptions as noted in the Prospectus. A Shares which are subject to the
Large Purchase Exemption are also subject to a contingent deferred sales load.
The contingent deferred sales load discussed under the Large Purchase Exemption
does not apply to A Shares under the Daily Advantage or Advantage Plus Programs.
These exemptions to the imposition of a sales load on A Shares are due to the
nature of the investors and/or the reduced sales efforts that will be necessary
in obtaining such investments. A Shares are also subject to a shareholder
servicing fee. K Shares are offered at net asset value with neither a
front-end sales charge nor a
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<PAGE> 634
contingent deferred sales charge. K Shares are subject to a distribution plan
fee and an administrative and shareholder services fee. 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 or organizations 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. Certain A
Shares subject to the Large Purchase Exemption liquidated by the Transfer Agent
as fees for custodial services to IRA accounts will not be subject to the
contingent deferred sales charge. 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.
Shares of the Funds will generally be issued for cash only and
that transactions involving the issuance of shares for securities or assets
other than cash will meet the requirements of Section 123.2(4) of Texas Blue
Sky Regulations. (If the Company determines that such undertaking is no longer
in its best interests, it will revoke such commitment. In such an event, the
Funds will no longer be able to sell their shares in the State of Texas.)
For processing redemptions, the Transfer Agent may request
further documentation from corporations, executors,
-29-
<PAGE> 635
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 shares for like shares of another investment portfolio in the
Pacific Horizon Family of Funds or 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, D, E
and F below will be made on the basis of the relative net asset values per
share of the investment portfolios involved in the transaction.
A. 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 other A Shares of any
other investment portfolio in the Pacific Horizon Family of
Funds or for like shares of Time Horizon Funds.
B. A Shares subject to the Large Purchase Exemption acquired
pursuant to an exchange transaction will continue to be
subject to any applicable contingent deferred sales charge.
However, A Shares subject to the Large Purchase Exemption that
have been acquired through an exchange of A Shares may be
exchanged for other A Shares or for like shares of Time
Horizon Funds without the payment of a contingent deferred
sales
-30-
<PAGE> 636
charge at the time of exchange. In determining the holding
period for calculating the contingent deferred sales charge
payable on redemption of A Shares, the holding period of the
shares originally held will be added to the holding period of
the shares acquired through exchange.
C. A Shares of any investment portfolio in the Pacific Horizon
Family of Funds or like shares of 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. A Shares purchased with a sales load or issued in
connection with an exchange transaction involving A 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 A Shares of any
other investment portfolio within 90 days of your redemption
trade date. 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. A 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 Pacific
Horizon Family of Funds that is offered without a sales load.
E. A 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 A Shares in any other
portfolio in the Pacific Horizon Family of Funds.
F. K Shares of any investment portfolio in the Pacific Horizon
Family of Funds may be exchanged without a sales load for
other K Shares of any other investment portfolio in the
Pacific Horizon Family of Funds or for like shares of the Time
Horizon Funds.
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 A
Shares of another investment portfolio in the Pacific Horizon Family or for
like shares 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
-31-
<PAGE> 637
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.)
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 contingent
deferred sales charge with respect to certain A Shares subject to the Large
Purchase Exemption 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 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.
-32-
<PAGE> 638
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.
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
net 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 net long-term capital gain for the taxable year over the net
short-term capital loss for such year (if any). The Fund will be taxed on its
undistributed investment company taxable income, if any. As
-33-
<PAGE> 639
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: (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) (the
"Short-Short Test"). 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 the 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 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 those
shares.
-34-
<PAGE> 640
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 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 when required to do so either that they are subject
to backup withholding or that they are "exempt recipients."
TAXATION OF THE MASTER PORTFOLIO
Management of the Master Portfolio intends for the Master
Portfolio to be treated as a partnership (or in the event that the Fund is the
sole investor in the Master 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 Master Portfolio will be deemed to
have been reported as income/loss (i.e., "passed through") to its investors,
regardless of whether any amounts are actually distributed by the Master
Portfolio.
Each investor in the Master Portfolio will be taxed on its
share (as determined in accordance with the governing instruments of the Master
Portfolio) of the Master 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 Master Portfolio's assets, income and
-35-
<PAGE> 641
distributions will be managed in such a way that an investor in the Master
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 Master 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.
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 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 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.
-36-
<PAGE> 642
MANAGEMENT
DIRECTORS AND OFFICERS OF THE COMPANY
The directors and officers of the Company, their addresses,
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, Incorporated,
Suite 100 (registered investment adviser) 1991
Newport Beach, CA 92660-2629 to date; Partner, 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.
</TABLE>
-37-
<PAGE> 643
<TABLE>
<CAPTION>
Position with
Name and Address Age Company Principal Occupations
- ---------------- --- ------- ---------------------
<S> <C> <C> <C>
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).
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
</TABLE>
-38-
<PAGE> 644
<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
(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.
Richard E. Stierwalt 40 Executive Vice President since April
125 W. 55th Street President 1996; prior thereto
New York, NY 10019 Chairman of the Board
and Chief Executive
Officer, July 1993 to
April 1996, 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>
-39-
<PAGE> 645
<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,
1230 Columbia Street President July 1993 to date, prior
5th Floor 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.
Stephanie L. Blaha 36 Assistant Vice Manager of Client
BISYS Fund Services President Services of the
3435 Stelzer Road Administrator, March
Columbus, OH 43219 1995 to date, prior thereto
Assistant Vice President of the
Administrator and Distributor,
October 1991 to March 1995; Vice
President, Seafirst Retirement
Funds, Master Investment Trust,
Series I and Master Investment Trust,
Series II (since 1996); Account
Manager, AT&T American Transtech,
Mutual Fund Division, July 1989 to
October 1991.
Mark E. Nagle 36 Treasurer Senior Vice President,
BISYS Fund Services Fund Accounting Services
3435 Stelzer Road The BISYS Group, Inc.,
Columbus, OH 43219 September 1995 to Present;
Treasurer, Seafirst Retirement
</TABLE>
-40-
<PAGE> 646
<TABLE>
<CAPTION>
Position with
Name and Address Age Company Principal Occupations
- ---------------- --- ------- ---------------------
<S> <C> <C> <C>
Funds and Master Investment Trust,
Series II (since 1996) Senior Vice
President Fidelity Institutional
Retirement Services (1993 to
September 1995); Fidelity
Accounting & Custody Services (1981
to 1993).
Martin R. Dean 31 Assistant Senior Compliance and
BISYS Fund Services Treasurer Registration Analyst, since
3435 Stelzer Road June 1996; prior thereto
Columbus, OH 43219 Manager of Fund Accounting of BISYS
Fund Services, May 1994 to June
1996; Assistant Treasurer, Seafirst
Retirement Funds and Master Investment
Trust, Series II (since 1996);
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 & Reath.
Philadelphia National Bank
Building, Suite 1100
Philadelphia, PA 19107
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, 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.
-41-
<PAGE> 647
Collins, in consideration of his years of service as President and Chairman of
the Board, receives an additional $40,000 per annum in recognition of his years
of service to the Company 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.
Effective September 1, 1996, Mr. Trefftzs will become a director emeritus of
the Company and will receive a retirement benefit of $60,000 on January 1,
1997. 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 29, 1996, the Company paid
or accrued for the account of its directors as a group for services in all
capacities a total of $388,155. Of that amount, $1,165 of directors'
compensation 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 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 served 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.
-42-
<PAGE> 648
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 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.
TRUSTEES AND OFFICERS OF MASTER TRUST I
The trustees and officers of Master Trust I, their addresses,
age, and principal occupations during the past five years are:
-43-
<PAGE> 649
<TABLE>
<CAPTION>
Position with
Name and Address Age Master Trust I Principal Occupation
- ---------------- --- -------------- --------------------
<S> <C> <C> <C>
Thomas M. Collins 61 Chairman of See "Directors and
McDermott & Trayner the Boards Officers of the
225 S. Lake Avenue, Company."
Suite 410
Pasadena, CA 91101-3005
Michael Austin 59 Trustee of Master Chartered Accountant; Trustee, Master
Investment Trust, Series II (since 1993);
Victory House, Trust I Retired Partner, KPMG
Nelson Quay Peat Marwick LLP.
Governor's Harbour
Grand Cayman
Cayman Islands
British West Indies
Robert E. Greeley 62 Trustee of Master See "Directors and
Page Mill Asset Trust I Officers of the Company."
Management
433 California Street
Suite 900
San Francisco, CA 94104
Robert A. Nathane* 70 Trustee of Master Retired President, Laird
1200 Shenandoah Drive East Trust I 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).
Cornelius J. Pings 66 Trustee of Master See "Directors and Officers of
Association of American Trust I the Company".
Universities
One DuPont Circle
Suite 730
Washington, DC 20036
Richard E. Stierwalt 40 President of See "Directors and
125 West 55th Street Master Trust I 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
Secretary of Investment Company Industry
Master Trust I Services Group, Price
Waterhouse 1989 to May 1993; Member of
Oliver Freaney and Co./Spicer and Openheim
Chartered Accountants 1986-1989.
Stephanie L. Blaha 36 Vice President of See "Directors and Officers of
BISYS Fund Services Master Trust I the Company."
</TABLE>
-44-
<PAGE> 650
<TABLE>
<CAPTION>
Position with
Name and Address Age Master Trust I Principal Occupations
- ---------------- --- -------------- ---------------------
<S> <C> <C> <C>
3435 Stelzer Road
Columbus, OH 43219
W. Bruce McConnel, III 52 Secretary of See "Directors and
1345 Chestnut Street Master Trust I Officers of the Company."
Philadelphia, PA 19107
</TABLE>
- -----------------------------
* Mr. Nathane is an "interested trustee" of Master Trust I as defined in
the 1940 Act.
Each trustee receives an aggregate annual fee of $3,000 ($5,000 in the
case of any trustee who is not also a Director or Trustee of a feeder fund of
one of the portfolios) plus $500 per day for each travel day and each day of a
Board or committee meeting attended, for his services as trustee of Master
Trust I. Each trustee is also reimbursed for out-of-pocket expenses incurred
as a trustee. For its fiscal year ended February 29, 1996, Master Trust I paid
or accrued for the account of its trustees as a group for services in all
capacities a total of $14,525; of that amount, $3,500 was allocated to the
Master Portfolio. The trustee's fees and reimbursements are allocated among
all of Master Trust I's portfolios based on their relative net asset values.
Drinker Biddle & Reath, of which Mr. McConnel is a partner, receives legal fees
as counsel to Master Trust I.
The following chart provides certain information as of February 29, 1996 about
the fees received by directors of the Company as directors and/or officers of
the Company and as directors and/or trustees of the Fund Complex:
-45-
<PAGE> 651
<TABLE>
<CAPTION>
PENSION OR TOTAL
RETIREMENT COMPENSATION FROM
AGGREGATE BENEFITS ACCRUED ESTIMATED ANNUAL REGISTRANT AND
COMPENSATION FROM AS PART OF FUND BENEFITS UPON FUND COMPLEX**
NAME OF PERSON/ POSITION THE COMPANY EXPENSES* RETIREMENT PAID TO DIRECTORS
<S> <C> <C> <C> <C>
Thomas M. Collins $76,215 $0 $0 $85,000
Director+
Douglas B. Fletcher $28,555 $0 $0 $29,055
Vice Chairman of the Board
Robert E. Greeley++ $31,395 $0 $0 $44,055
Director
Kermit O. Hanson $27,485 $0 $0 $32,055
Director
Cornelius J. Pings $29,555 $0 $0 $30,055
President and Chairman of
the Board+++
Kenneth L. Trefftzs $28,555 $0 $0 $29,055
Director
- ------------------------------
</TABLE>
* For the Fiscal year ended February 29, 1996, the Company accrued on the part
of all of the directors an aggregate of $65,739 in retirement benefits.
** The "Fund Complex" consists of the Company, Seafirst Retirement Funds,
Master Trust I, Master Investment Trust, Series II, Time Horizon Funds and
World Horizon Funds.
+ Mr. Collins was President and Chairman of the Board of the Company until
August 31, 1995.
++ Mr. Greeley became a director of the Company on April 25, 1994.
+++ Mr. Pings became President and Chairman of the Board of the Company
effective September 1, 1995. At February 29, 1996, $10,000, $3,500 and
$3,500 in deferred compensation was payable to Mr. Pings for services as
President of the Company, trustee of Master Trust I and Master Investment
Trust, Series II, respectively.
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. As described
in the Prospectus, the Fund has not retained the services of an investment
adviser since it seeks to achieve its investment objectives by investing all
its assets in the Master Portfolio. In the Investment Advisory Agreement with
the Master Portfolio, 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
agreement other than the cost of securities, including brokerage commissions,
if any, purchased for the Master 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.
-46-
<PAGE> 652
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 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 Master Portfolio has agreed to pay Bank of
America investment advisory fees, accrued daily and paid monthly, at the annual
rate of .55% of the net assets of the Master Portfolio. The fees payable to
Bank of America are not subject to reduction as the value of the Fund's or the
Master Portfolio's net assets increases. From time to time, Bank of America
may waive fees or reimburse the Master Portfolio for expenses voluntarily or as
required by certain state securities laws.
Except as noted below, for the fiscal years indicated and for
the period from the commencement of operations through February 28, 1994, Bank
of America waived its entire advisory fee with respect to the Master Portfolio
as follows:
<TABLE>
<CAPTION>
Period From
Commencement Of
Operations(1)
Year Ended Year Ended Through
February 29, 1996 February 28, 1995 February 28, 1994
<S> <C> <C> <C>
Master Portfolio $913,660(2) $849,188 $197,611
</TABLE>
- --------------------
1. The Master Portfolio commenced investment operations on December 6,
1993.
2. For the fiscal year ended February 29, 1996, Bank of America waived
$720,259 in advisory fees with respect to the Master Portfolio.
Additionally, for the fiscal years indicated and for the
period from the commencement of operations through February 28, 1994, Bank of
America assumed certain operating expenses of the Master Portfolio as follows:
-47-
<PAGE> 653
<TABLE>
<CAPTION>
Period From
Commencement Of
Operations(1)
Year Ended Year Ended Through
February 29, 1996 February 28, 1995 February 28, 1994
<S> <C> <C> <C>
Master Portfolio $0 $245,718 $28,384
</TABLE>
- --------------------
1. The Master Portfolio commenced investment operations on December 6,
1993.
See "Management - Administrator" for instances where the
investment adviser is required to make expense reimbursements to the Master
Portfolio.
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 that portion of the assets of the Master Portfolio
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 provided that Bank of America would pay Seattle Capital
a monthly advisory fee based upon the net assets of the Master Portfolio, at
the annual rate of .55% of that portion of the net assets of the Master
Portfolio 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 for sub-advisory services to the Master
Portfolio.
The Investment Advisory Agreement for the Master 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
-48-
<PAGE> 654
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 of Governors") 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 of Governors 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 Master Portfolio and the Company 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 Master Portfolio 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 Services Plans, 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
Master 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
-49-
<PAGE> 655
relaxed, the Master 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 Master 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 Company's Board of
Directors or the Master Portfolio's Board of Trustees.
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 an indirect 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 affiliate provide
administrative services to the Company and the Master Portfolio as described in
the Fund's Prospectus pursuant to separate administration agreements for the
Company and the Master Portfolio. The Master Portfolio's administration
agreement will continue in effect until October 31, 1996 and thereafter for
successive periods 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 Trustees of the Master Portfolio who are not parties to the
administration 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 Trustees of the Master Portfolio or by vote of a "majority of
the outstanding voting securities" of the Master Portfolio. The Master
Portfolio's administration agreement is terminable at any time with respect to
the Master Portfolio, without penalty, by its Board of Trustees or by a vote of
a majority of its outstanding interests upon 60 days' notice to the
Administrator, or by the Administrator, upon 90 days' notice to the Master
Portfolio. The Fund's administration agreement will continue in effect until
October 31, 1996 and thereafter will be extended with respect to the Fund for
successive periods of one year, provided that each such extension is
specifically approved by (a) a vote of a majority of those
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<PAGE> 656
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 vote of a majority of the outstanding voting securities of the Fund 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 Fund. In addition, the
Master Portfolio has 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 Master Portfolio. The fees payable to the
Administrator are not subject to reduction as the value of the Fund's and the
Master Portfolio's net assets increases. From time to time, the Administrator
may waive fees or reimburse the Fund or the Master Portfolio for expenses,
either voluntarily or as required by certain state securities laws.
Except as noted below, for the fiscal years indicated and for
the period from the commencement of operations through February 28, 1994, the
Administrator waived its entire administration fee with respect to the Fund and
the Master Portfolio as follows:
<TABLE>
<CAPTION>
Period From
Commencement Of
Operations(1)
Year Ended Year Ended Through
February 29, 1996 February 28, 1995 February 28, 1994
<S> <C> <C> <C>
Asset Allocation Fund $19,909 $ 4,703 $ 52
Master Portfolio $83,060(2) $79,573 $17,965
</TABLE>
- --------------------
1. The Fund and the Master Portfolio commenced investment operations on
January 18, 1994 and December 6, 1993, respectively.
2. For the fiscal year ended February 29, 1996 the Administrator waived
$65,491 in administration fees with respect to the Master Portfolio.
-51-
<PAGE> 657
Additionally, for the fiscal years indicated and for the
period from the commencement of operations through February 28, 1994, the
Administrator reimbursed the Fund for its operating expenses as follows:
<TABLE>
<CAPTION>
Period From
Commencement Of
Operations(1)
Year Ended Year Ended Through
February 29, 1996 February 28, 1995 February 28, 1994
<S> <C> <C> <C>
Asset Allocation Fund $192,545 $ 0 $ 0
- --------------------
</TABLE>
- -------------------------
1. The Fund commenced investment operations on January 18, 1994.
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 Master Portfolio may deduct from
the payments to be made with respect to the Fund and the Master 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 Fund or the Master Portfolio 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 Master 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 prospectively
waive payment of fees and/or assume certain expenses of the Master Portfolio or
Fund as a result of competitive pressures and in order to preserve and protect
the business and reputation of the Administrator and Bank of America. 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
-52-
<PAGE> 658
certain fund accounting services which are borne by the Master Portfolio and
the Fund. See "General Information--Custodian and Transfer Agent" below.
Expenses borne by the Fund and the Master 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 prospectuses and Statements of
Additional Information for regulatory purposes, cost of shareholders' and
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, the Fund, the Master Trust or the Master 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.
An off-shore affiliate of PFPC provides the Fund and the
Master 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 Funds and the Master Portfolio. The monthly fees charged by
PFPC under the fund accounting services agreements are borne by the Fund and
the Master Portfolios.
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 the Fund until October 31, 1996. Thereafter, if not terminated, the
distribution agreement shall continue automatically for successive terms of one
year, provided that
-53-
<PAGE> 659
such continuance is specifically approved at least annually by (a) 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 90 days' written notice to
the Company. The agreement will automatically and immediately terminate in the
event of its "assignment."
For the fiscal years indicated and or the period from
commencement of operations through February 18, 1994, the Distributor received
sales loads in connection with the purchase of shares of the Fund as follows:
<TABLE>
<CAPTION>
Amount of Total
Amount Of Total Sales Load
Total Sales Load Sales Load Retained By
Received By Retained Affiliates Of
Distributor By Distributor Bank of America
<S> <C> <C> <C>
Fiscal Year Ended $642,8186(2) $69,818 $569,332
February 29, 1996
Fiscal Year Ended $114,3386(2) $30,504 $ 83,884
February 28, 1995
Period from Commencement $ 11,896(2) $ 2,243 $ 9,653
Of Operations(1) Through
February 28, 1994
- --------------------
</TABLE>
- ---------------------
1. The Fund commenced investment operations on January 18, 1994.
2. 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 the
Fund during its fiscal year ended February 29, 1996.
-54-
<PAGE> 660
<TABLE>
<CAPTION>
Brokerage
Commissions
Net Underwriting Compensation In Connection
Discounts and on Redemption With Fund Other
Commissions(1) and Repurchase(2) Transactions Compensation(3)
<S> <C> <C> <C> <C>
Asset
Allocation
Fund $69,818 $ 0 $ 0 $ 0
</TABLE>
- --------------------
(1) Represents amounts received from front-end sales charge on A Shares.
(2) Represents amounts received from contingent deferred sales charges on
A Shares subject to the Large Purchase Exemption. The basis on which
such sales charges are paid is described in the Prospectus. A Shares
were not subject to a contingent deferred sales charge during the
fiscal year covered by this chart.
(3) 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 Services Plan, Distribution Plan and Administrative and
Shareholder Services Plan (see discussion in next section) and
retained by the Distributor.
The Shareholder Services Plan. In addition to the sales loads
described above, the Distributor is entitled to payment by the Company for
certain shareholder servicing expenses in addition to the sales loads on A
Shares described above and in the Prospectus under the Shareholder Services
Plan (the "Plan") adopted by the Company for its A Shares. Under the Plan for
A Shares, 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
-55-
<PAGE> 661
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.
The 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 A Shares of the Fund during such month
for shareholder servicing expenses. The calculation of the 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 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 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 29, 1996, the A Shares of
the Fund were charged the following amounts pursuant to the Plan:
-56-
<PAGE> 662
<TABLE>
<CAPTION>
Amount of
Amount of Amount of Total
Total Total Shareholder
Shareholder Shareholder Service Fee
Total Service Fee Service Fee Paid to
Shareholder Paid To Paid To Bank Affiliates of
Service Fee Distributor of America Bank of America
<S> <C> <C> <C> <C>
Asset $0 $0 $0 $0
Allocation
Fund
</TABLE>
For the fiscal years indicated and for the period from the
commencement of operations through February 28, 1994, the Distributor waived
all fees payable under the Plan with respect to the Fund as follows:
<TABLE>
<CAPTION>
Period From
Commencement Of
Year Ended Year Ended Operations(1) Through
February 29, 1996 February 28, 1995 February 28, 1994
<S> <C> <C> <C>
Asset
Allocation
Fund $33,182 $7,754 $ 86
</TABLE>
- --------------------
1. The Fund commenced investment operations on January 18, 1994.
Payments for shareholder service expenses under the Plan are
not subject to Rule 12b-1 (the "Rule") under the 1940 Act. Pursuant to the
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" thereof 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 Plan (or related servicing agreements) (the "Non-Interested
Plan Directors").
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 A 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.
-57-
<PAGE> 663
The Company's Board of Directors has concluded that the Plan
will benefit the Fund and its A shareholders. 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 Directors
or by vote of the holders of a majority of the A 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 A 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 Distribution Plan and Administrative and Shareholder
Services Plan. The Distributor is also entitled to payment from the Company
for distribution fees pursuant to the Distribution Plan adopted on behalf of K
Shares. Under the Distribution and Services Plan and Distribution Plan, the
Company may pay the Distributor for: (a) direct out-of-pocket promotional
expenses incurred by the Distributor in advertising and marketing K Shares; (b)
expenses incurred in connection with preparing, printing, mailing, and
distributing or publishing advertisements and sales literature for K Shares;
expenses incurred in connection with printing and mailing Prospectuses and
Statements of Additional Information to other than current K shareholders; (c)
periodic payments or commissions to one or more securities dealers, brokers,
financial institutions or other industry professionals, such as investment
advisors, accountants, and estate planning firms (severally, "a Distribution
Organization") with respect to a Fund's K Shares beneficially owned by
customers for whom the Distribution Organization is the Distribution
Organization of record or holder of record of such K Shares; (d) the direct or
indirect cost of financing the payments or expenses included in (a) and (c)
above; or (e) for such other services as may be construed, by any court or
governmental agency or commission, including the SEC, to constitute
distribution services under the 1940 Act or rules and regulations thereunder.
With respect to K Shares, payments under the Distribution Plan are not intended
for distribution services to the extent they are not permitted under the
Employee Retirement Income Security Act of 1974, as amended.
Pursuant to the Administrative and Shareholder Services Plan
with respect to K Shares, the Company may also pay securities dealers, brokers,
financial institutions or other industry professionals, such as investment
advisors, accountants, and estate planning firms (severally, a "Service
Organization") for support services provided with respect to its Client's K
Shares. Administrative and shareholder services provided may include some or
all of the following: (i) processing dividend and distribution payments from a
Fund on behalf of its Clients; (ii) providing statements periodically to its
Clients showing
-58-
<PAGE> 664
their positions in K Shares; (iii) arranging for bank wires; (iv) responding to
routine Client inquiries concerning their investment; (v) providing the
information to the Fund necessary for accounting or sub-accounting; (vi) 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 its Clients; (vii) aggregating and
processing purchase, exchange, and redemption requests from its Clients and
placing net purchase, exchange, and redemption orders for its Clients; (viii)
providing Clients with a service that invests the assets of their accounts
pursuant to specific or pre-authorized instructions; (ix) establishing and
maintaining accounts and records relating to Clients; (x) assisting Clients in
changing dividend options, account designations and addresses; or (xi) other
similar services if requested by the Company.
The Distribution Plan provides that the Distributor is
entitled to receive payments on a monthly basis at an annual rate not exceeding
0.75% of the average daily net assets during such month of the outstanding K
Shares. In addition, under the Administrative and Shareholder Services Plan,
the Distributor is entitled to receive payments on a monthly basis for
administrative services and shareholder services at an annual rate not
exceeding 0.75% and 0.25%, respectively, of the average daily net assets during
such month of the outstanding K Shares. The total of all 12b-1 fees,
administrative service and shareholder service fees may not exceed, in the
aggregate, the annual rate of 1.00% of the average daily net assets of the
Fund's K Shares. However, it is expected that during the current fiscal year,
such fees will not exceed 0.75% of the average net assets of the K Shares.
Payments made out of or charged against the assets of a
particular class of shares of the Fund must be in payment for expenses incurred
on behalf of that class.
Payments for distribution expenses under the Distribution Plan
(the "12b-1 Plan") are subject to Rule 12b-1 (the "Rule") under the 1940 Act.
The Rule defines distribution expenses to include the cost of "any activity
which is primarily intended to result in the sale of [Company] shares." The
Rule provides, among other things, that an investment company may bear such
expenses only pursuant to a plan adopted in accordance with the Rule. In
accordance with the Rule, the 12b-1 Plan provides that a written report of the
amounts expended under the 12b-1 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 12b-1 Plan provides that it may
not be amended to increase materially the costs which the Fund may bear for
distribution pursuant to the 12b-1 Plan without shareholder approval and that
other material amendments of the 12b-1 Plan must be approved by a majority of
the Board of Directors, and by a majority of the directors who are neither
-59-
<PAGE> 665
"interested persons" (as defined in the 1940 Act) of the Company nor have any
direct or indirect financial interest in the operation of the 12b-1 Plan, or in
any agreements entered into in connection with the 12b-1 Plan, by vote cast in
person at a meeting called for the purpose of considering such amendments (the
"Non-Interested Plan Directors"). 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 Non-Interested Plan Directors.
The Company's Board of Directors has concluded that there is a
reasonable likelihood that the 12b-1 Plan and the Administrative and
Shareholder Services Plan will benefit the Fund and its K shareholders. The
12b-1 Plan and the Administrative and Shareholder Services Plan are subject to
annual reapproval by a majority of the Company's Board of Directors, including
a majority of the Non-Interested Plan Directors and are terminable without
penalty at any time with respect to the Fund by a vote of a majority of the
Non-Interested Plan Directors or by vote of the holders of a majority of the
outstanding K Shares of the Fund. Any agreement entered into pursuant to the
12b-1 Plan and the Administrative and Shareholder Services 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 outstanding K Shares of the Fund, or by the
Service Organization. Each agreement will also terminate automatically in the
event of its assignment.
As of February 29, 1996, the Fund did not offer K Shares.
YIELD AND TOTAL RETURN
From time to time, the yields and the total returns 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
-60-
<PAGE> 666
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 the Master 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 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. Such advertisements or communications may include
symbols, headlines or other material which highlight or summarize the
information discussed in more detail therein. From time to time, the
investment adviser may enter into alliances with retirement plan sponsors,
including The Legend Group, and the Fund may in its advertisements and sales
literature include a discussion of certain attributes and benefits to be
derived from its relationship which such retirement plan sponsors. 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 for the respective share
classes 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 (including the maximum front-end
sales charge of an A 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 with respect to a particular class is based on the average daily number
of shares outstanding in the class during the period entitled to receive
dividends and includes dividends and interest earned during the period
attributable to that class minus expenses accrued for the period attributable
to that class, net of reimbursements. This calculation can be expressed as
follows:
-61-
<PAGE> 667
<TABLE>
<S> <C>
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.
</TABLE>
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
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<PAGE> 668
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 Fund or the Master 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 on A Shares -- currently 4.50% of the per share
offering price.
Based on the foregoing calculations, the 30-day yields of the
A Shares of the Fund (after fee waivers and expense reimbursements) for the 30
day period ended February 29, 1996 was 3.04%. No K Shares were issued or
outstanding during this period.
Total Return Calculations. The Fund computes its average
annual total returns separately for its separate share classes by determining
the average annual compounded rates of return during specified periods that
equate the initial amount invested in a particular share class to the ending
redeemable value of such investment in the class. 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:
<TABLE>
<S> <C>
ERV 1/n
T = [(-----) - 1]
P
</TABLE>
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<PAGE> 669
<TABLE>
<S> <C>
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.
</TABLE>
The Fund computes its aggregate total returns separately for
its separate share classes by determining the aggregate rates of return during
specified periods that likewise equate the initial amount invested in a
particular share class to the ending redeemable value of such investment in the
class. The formula for calculating aggregate total return is as follows:
<TABLE>
<S> <C> <C>
ERV
aggregate total return = [(----- - 1)]
P
</TABLE>
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 front-end sales load charged in
connection with the purchase of A Shares.
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Based on the foregoing calculations, the 1) average annual
total returns, and 2) the aggregate total returns for the A Shares of the Fund
for the year or period indicated were as follows:
<TABLE>
<CAPTION>
Average Total Returns
Period From
One-Year Commencement
Period Ended Of Operations(1)
February 29, Through
1996 February 29, 1996
<S> <C> <C>
Asset
Allocation
Fund 17.27% 9.83%
</TABLE>
- --------------------
1. The Fund commenced investment operations on January 18, 1994.
<TABLE>
<CAPTION>
Aggregate Total Returns
Period From
One-Year Commencement
Period Ended Of Operations
February 29, Through
1996 February 29, 1996
<S> <C> <C>
Asset
Allocation
Fund 17.27% 21.83%
</TABLE>
No K Shares of the Fund were issued or outstanding during
these periods.
The Fund may also advertise total return data without
reflecting sales charges in accordance with the rules of the SEC. 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
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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 O represents interests in the A Shares of the
Fund, Class O -- Special Series 3 represents interests in the B Shares of the
Fund and Class O -- Special Series 5 represents interest in the K Shares of the
Fund. B Shares have not been offered to the public. 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
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 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
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<PAGE> 672
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 MASTER PORTFOLIO
The Master Portfolio is a separate series of Master Trust I,
which was organized October 26, 1992 as a Delaware business trust. Master
Trust I'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 Master Portfolio are entitled to distributions arising from
the net investment income and net realized gains, if any, earned on investments
held by the Master Portfolio. Investors are also entitled to participate in
the net distributable assets of the Master Portfolio on liquidation.
Beneficial interests have no preemptive rights, conversion or exchange rights.
CUSTODIAN, ACCOUNTING AGENT AND TRANSFER AGENT
The Company has appointed PNC Bank, National Association,
Broad and Chestnut Streets, Philadelphia, PA 19101 ("PNC") as custodian for the
Fund and the Master Portfolio. PFPC, Bellevue Park Corporate Center, 400
Bellevue Parkway, Wilmington, DE 19809, provides the Fund and the Master
Portfolio with certain accounting services pursuant to 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 Master Portfolio. The monthly fees charged by PFPC under the
fund accounting servicing agreements are borne by the Fund and the Master
Portfolio, respectively. As custodian of the assets of the Fund and the Master
Portfolio, PNC (i) maintains a separate account or accounts in the name of the
Fund and the Master Portfolio, (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 its
respective duties.
BISYS Fund Services, Inc., 3435 Stelzer Road, Columbus, Ohio
43219 serves as transfer and dividend disbursing agent for the Fund and the
Master Portfolio.
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<PAGE> 673
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, Master
Trust I 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 the Master Portfolio for the fiscal year ended
February 28, 1997.
REPORTS
Shareholders will receive unaudited semi-annual reports
describing the Master Portfolio's and the Fund's investment operations, and
annual financial statements together with the reports of the Master Portfolio
and the Fund, audited by the independent accountants.
MISCELLANEOUS
As used in the Prospectus and this Statement of Additional
Information, a "vote of a majority" of the outstanding shares or interests of
the Fund, the Master Portfolio or a particular series means the affirmative
vote of the lesser of (a) more than 50% of the outstanding shares or interests
of the Fund, the Master Portfolio or series, or (b) 67% of the shares or
interests of the Fund, the Master Portfolio or series present at a meeting at
which more than 50% of the outstanding shares or interests of the Fund, the
Master Portfolio or series are represented in person or by proxy.
At June 15, 1996, the name, address and share ownership of the
entities which held as record owners more than 5% of the outstanding Pacific
Horizon Shares of the Treasury Only Fund were as follows: BA Investment
Services, Inc., For the Benefit of Clients, Attn: Unit #7852 - Bob Santilli,
P.O. Box 7042, San Francisco, CA 94120, 117,337,693.12 shares (44.18%); VAR &
Co., Attn: Linda Frintz, 180 E. 5th Street, 4th Floor, St. Paul, MN 55101,
20,631,603 shares (7.77%); BA Securities, Inc., 185 Berry Street, 3rd Floor,
San Francisco, CA 94107, 63,776,345.77 shares (24.01%); and Hare & Co., Bank of
New York and Short-Term Investment Funds, Attn: Bimal Saha, One Wall Street,
New York, NY 10286, 16,299,622.45 shares (6.14%).
At June 15, 1996, the name, address and share ownership of the
entities which held as record owners more than 5% of the outstanding Horizon
Service Shares of the Treasury Only Fund were
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<PAGE> 674
as follows: Omnibus Account 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, 36,255,145.71 shares (21.74%);
Comcare, Inc., 4001 North Third Street, Suite 120, Phoenix, AZ 85012,
18,013,864.56 shares (10.80%); Comcare, Inc., 4001 North Third Street, Suite
120, Phoenix, AZ 85012, 13,759,642.80 shares (8.25%); Phillips Smith Specialty
Retail Group III LP, 5080 Spectrum Drive, Suite 700, Dallas, TX 75248,
8,433,613.56 shares (5.06%); and Omnibus Account for the Shareholder Accounts
Maintained by Concord Financial Services, Inc., Attn: Linda Zerbe, 100 First
Avenue, Suite 300, Pittsburgh, PA 15222, 42,331,589.86 shares (25.38%).
At June 15, 1996, the name, address and share ownership of the
entities which held as record owners more than 5% of the outstanding Pacific
Horizon Shares of the Treasury Fund were as follows: Hare & Co., Bank of New
York and Short Term Investment Funds, Attn: Bimal Saha, One Wall Street, New
York, NY 10286, 119,820,738.15 shares (11.98%); BA Investment Services, Inc.,
For the Benefit of Clients, Attn: Unit #7852 - Bob Santilli, P.O. Box 7042, San
Francisco, CA 94120, 214,999,785.48 shares (21.50%); and VAR & Co., Attn:
Linda Frintz, 180 E. 5th Street, 4th Floor, St. Paul, MN 55101, 555,776,087
shares (55.59%).
At June 15, 1996, the name, address and share ownership of the
entities which held as record owners more than 5% of the outstanding Horizon
Service Shares of the Treasury Fund were as follows: BISYS Fund Services, Inc.
Pittsburgh, FBO Sweep Customers, Attn: Linda Zerbe, 100 First Avenue, Suite
300, Pittsburgh, PA 15222, 146,093,204.24 shares (10.41%); and BISYS Fund
Services, Inc. Pittsburgh, FBO Sweep Customers, Attn: Linda Zerbe, 100 First
Avenue, Suite 300, Pittsburgh, PA 15222, 536,762,999.10 shares (38.23%).
At June 15, 1996, the name, address and share ownership of the
entities which held as beneficial owners more than 5% of the outstanding
Horizon Service Shares of the Treasury Fund were as follows: Bank of America
Financial Management and Trust Services, Attn: Common Trust Funds Unit 8329,
P.O. Box 3577, Terminal Annex, Los Angeles, CA 90051, 334,300,127.67 shares
(11.08%).
At June 15, 1996, the name, address and share ownership of the
entities which held as record owners more than 5% of the outstanding Horizon
Shares of the Treasury Fund were as follows: Bank of America TTEE/Cust.
Invest. Hor. Treas., Attn: Common Trust Funds Unit 8329, P.O. Box 3577,
Terminal Annex, Los Angeles, CA 90051, 204,981,030.67 shares (6.79%).
At June 15, 1996, the name, address and share ownership of the
entities which held as record owners more than 5% of the
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<PAGE> 675
outstanding Pacific Horizon Shares of the Government Fund were as follows: BA
Investment Services, Inc., For the Benefit of Clients, Attn: Unit #7852 - Bob
Santilli, P.O. Box 7042, San Francisco, CA 94120, 96,024,272.20 shares
(41.39%); VAR & Co., Attn: Linda Frintz, 180 E. 5th Street, 4th Floor, St.
Paul, MN 55101, 26,378,902 shares (11.37%); BA Securities, Inc., 185 Berry
Street, 3rd Floor, San Francisco, CA 94107, 50,140,615.12 shares (21.61%); and
Bank of America National Trust and Savings Association and Private Bank, Attn:
ACI Unit 8329, P.O. Box 3577, Terminal Annex, Los Angeles, CA 90051,
25,676,812.91 shares (11.07%).
At June 15, 1996, the name, address and share ownership of the
entities which held as record owners more than 5% of the outstanding Horizon
Service Shares of the Government Fund were as follows: Toasty, Ltd., David
Jackson, Controller, Two Greenway Plaza, Suite 400, Houston, TX 77046,
20,229,783.50 shares (10.28%); Providence Health Care, Attn: Linda Lan Ha,
1501 4th Avenue, Suite 500, Seattle, WA 98101, 12,840,414.42 shares (6.52%);
and Omnibus Account 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, 36,650,485.52 shares (18.62%).
At June 15, 1996, the name, address and share ownership of the
entities which held as beneficial owners more than 5% of the outstanding
Horizon Service Shares of the Government Fund were as follows: Bank of America
Nevada Southern Commercial Bank, Attn: Cindy 2964, P.O. Box 98600, Las Vegas,
NV 89193, 28,581,824.10 shares (5.66%).
At June 15, 1996, the name, address and share ownership of the
entities which held as record owners more than 5% of the outstanding Horizon
Shares of the Government Fund were as follows: Sunquest Information Systems,
Inc., Attn: Trena Couch, 1407 Eisenhower Boulevard, Johnstown, PA 15904,
47,981,630.54 shares (9.51%).
At June 15, 1996, the name, address and share ownership of the
entities which held as record owners more than 5% of the outstanding Pacific
Horizon Shares of the Prime Fund were as follows: BA Securities, Inc., 185
Berry Street, 3rd Floor, San Francisco, CA 94107, 164,406,302.26 shares
(7.26%); Hare & Co., Bank of New York and Short Term Investment Funds, Attn:
Bimal Saha, One Wall Street, New York, NY 10286, 131,246,153.79 shares (5.80%);
and BA Investment Services, Inc., For the Benefit of Clients, Attn: Unit #7852
- - Bob Santilli, P.O. Box 7042, San Francisco, CA 94120, 1,571,778,318.38 shares
(69.43%).
At June 15, 1996, the name, address and share ownership of the
entities which held as record owners more than 5% of the outstanding Horizon
Service Shares of the Prime Fund were as
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follows: BISYS Fund Services, Inc. Pittsburgh, FBO Sweep Customers, Attn:
Linda Zerbe, 100 First Avenue, Suite 300, Pittsburgh, PA 15222, 944,998,928.53
shares (43.86%); and BISYS Fund Services, Inc. Pittsburgh, FBO Sweep Customers,
Attn: Linda Zerbe, 100 First Avenue, Suite 300, Pittsburgh, PA 15222,
314,849,310.01 shares (14.61%).
At June 15, 1996, the name, address and share ownership of the
entities which held as beneficial owners more than 5% of the outstanding
Horizon Service Shares of the Prime Fund were as follows: Bank of America
National Trust and Savings Association, Financial Management & Trust Services,
Attn: Common Trust Funds Unit 8329, P.O. Box 3577, Terminal Annex, Los Angeles,
CA 90051, 372,642,105.21 shares (6.50%); and Security Pacific Cash Management,
c/o Bank of America GPO M/C 5533, Attn: Regina Olsen, 1850 Gateway Boulevard
M/C 5533, Concord, CA 94520, 505,465,000.00 shares (8.81%).
At June 15, 1996, the name, address and share ownership of the
entities which held as record owners 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, Attn: Unit #7852 - Bob Santilli,
P.O. Box 7042, San Francisco, CA 94120, 39,326,055.57 shares (82.50%); BA
Securities, Inc., 185 Berry Street, San Francisco, CA 94107, 2,901,660.15
shares (6.09%); and VAR & Co., Attn: Linda Frintz, 180 E. 5th Street, 4th
Floor, St. Paul, MN 55101, 3,263,084.00 shares (6.85%).
At June 15, 1996, the name, address and share ownership of the
entities which held as record owners more than 5% of the outstanding Horizon
Service Shares of the Tax-Exempt Money Fund were as follows: BISYS Fund
Services, Inc. Pittsburgh, FBO Sweep Customers, Attn: Linda Zerbe, 100 First
Avenue, Suite 300, Pittsburgh, PA 15222, 24,070,430.88 shares (29.78%); and
BISYS Fund Services, Inc. Pittsburgh, FBO Sweep Customers, Attn: Linda Zerbe,
100 First Avenue, Suite 300, Pittsburgh, PA 15222, 46,754,318.95 shares
(57.85%).
At June 15, 1996, the name, address and share ownership of the
entities which held as beneficial owners more than 5% of the outstanding
Horizon Service Shares of the Tax-Exempt Money Fund were as follows: Bank of
America Financial Management and Trust Services, Attn: Common Trust Funds Unit
8329, P.O. Box 3577, Terminal Annex, Los Angeles, CA 90051, 46,754,318.95
shares (11.91%); and BA Investment Services, Inc., Attn: Unit #7852 - Bob
Santilli, 185 Berry Street, 3rd Floor, San Francisco, CA 94107, 22,564,375.21
shares (5.75%).
At June 15, 1996, the name, address and share ownership of the
entities which held as record owners more than 5% of the outstanding Horizon
Shares of the Tax-Exempt Money Fund were as
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<PAGE> 677
follows: Bank of America Cust. for Invest. Hor T-E, Attn: Common Trust Funds
Unit 8329, P.O. Box 3577, Terminal Annex, Los Angeles, CA 90051, 62,696,306.62
shares (15.98%); and Continental Bank National Association Cust, FBO Cust &
Co., Attn: Mary Chester, 231 South LaSalle Street 6Q, Chicago, IL 60697,
192,951,691.54 shares (49.19%).
At June 15, 1996, the name, address and share ownership of the
entities which held as record owners more than 5% of the outstanding Pacific
Horizon Shares of the California Tax-Exempt Money Market Fund were as follows:
BA Securities, Inc., 185 Berry Street, 3rd Floor, San Francisco, CA 94107,
190,453,613.81 shares (36.26%); BA Investment Services, Inc., For the Benefit
of Clients, Attn: Unit #7852 - Bob Santilli, P.O. Box 7042, San Francisco, CA
94120, 250,582,900.17 shares (47.71%); and Bank of America National Trust and
Savings Association and Private Bank, Attn: Common Trust Funds Unit 8329, P.O.
Box 3577 Terminal Annex, Los Angeles, CA 90051, 32,833,598.27 shares (6.25%).
At June 15, 1996, the name, address and share ownership of the
entities which held as record owners more than 5% of the outstanding Horizon
Service Shares of the California Tax-Exempt Money Market Fund were as follows:
BISYS Fund Services, Inc. Pittsburgh, FBO Sweep Customers, Attn: Linda Zerbe,
100 First Avenue, Suite 300, Pittsburgh, PA 15222, 81,355,203.78 shares
(33.55%); and BISYS Fund Services, Inc. Pittsburgh, FBO Sweep Customers, Attn:
Linda Zerbe, First and Market Building, 100 First Avenue, Suite 300,
Pittsburgh, PA 15222, 100,421,516.94 shares (41.41%).
At June 15, 1996, the name, address and share ownership of the
entities which held as beneficial owners more than 5% of the outstanding
Horizon Service Shares of the California Tax-Exempt Money Market Fund were as
follows: BA Investment Services, Inc., Attn: Unit #7852 - Bob Santilli, 185
Berry Street, 3rd Floor, San Francisco, CA 94107, 69,074,303.76 shares (9.00%);
and Bank of America National Trust and Savings Association TTEE/CUS, Attn:
Common Trust Funds Unit 8329, P.O. Box 3577, Terminal Annex, Los Angeles, CA
90051, 81,218,679.78 shares (10.58%).
At June 15, 1996, the name, address and share ownership of the
entities which held as record owners more than 5% of the outstanding A Shares
of the Corporate Bond Fund were as follows: Smith Barney, Inc., Custodian, 333
W. 34th Street, 3rd Floor, New York, NY 10001, 117,522.06 shares (6.09%); and
Dean Witter Reynolds, Inc., Stock Record Department, 5th Floor, Attn: Al
Dimino, 5 World Trade Center, New York, NY 10048, 109,621 shares (5.68%).
At June 15, 1996, the name, address and share ownership of the
entities which held as record owners more than 5% of the
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<PAGE> 678
outstanding Class A Shares of the National Municipal Bond Fund were as follows:
BA Investment Services, Inc., FBO 406171021, 185 Berry Street, 3rd Floor, San
Francisco, CA 94104, 113,038.79 shares (8.12%); and BA Investment Services,
Inc., FBO 405084421, 555 California Street, 4th Floor, San Francisco, CA 94104,
86,266.56 shares (6.20%).
At June 15, 1996, the name, address and share ownership of the
entities which held as record owners more than 5% of the outstanding Class A
Shares of the International Equity Fund were as follows: Bank of America
National Trust and Savings Association, Agent for the Lee G. Paul Trust, The
Paul Family Trust, P.O. Box 3577, Terminal Annex, Los Angeles, CA 90051,
5,000.00 shares (6.17%); Bank of America National Trust and Savings
Association, Agent for the Norman and Margaret Oberstein Trust, P.O. Box 3577,
Terminal Annex, Los Angeles, CA 90051, 4,995.01 shares (6.16%); Bank of America
National Trust and Savings Association, Agent for the Norman S. Oberstein
Trust, A Prof. Law Corp., P.O. Box 3577, Terminal Annex, Los Angeles, CA
90051, 10,000.00 shares (12.34%); Bank of America National Trust and Savings
Association, Agent for the Widows/Orphans Aid Association Managed Agency for
SFPD, P.O. Box 3577, Terminal Annex, Los Angeles, CA 90051, 19,960.08 shares
(24.62%); and Bank of America National Trust and Savings Association, Agent for
the Robert & Antoinette Lepore Trust, the Lepore Family Trust, P.O. Box 3577,
Terminal Annex, Los Angeles, CA 90051, 19,970.05 shares (24.63%).
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 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 SEC by
paying the charges prescribed under its rules and regulations.
FINANCIAL STATEMENTS AND EXPERTS
The Annual Reports for the Fund and the Master Portfolio for
the fiscal year ended February 29, 1996 (the "Annual Reports") accompany 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. No other parts of the Annual Report are incorporated by
reference herein. Such financial statements have been incorporated herein in
reliance on the reports of Price Waterhouse LLP, independent
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<PAGE> 679
accountants, given on the authority of said firm as experts in auditing and
accounting.
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<PAGE> 680
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 in
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 generally 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 are 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 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.
"C" - Obligations for which there is an inadequate capacity to
ensure timely repayment.
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"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 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
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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 that 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
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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.
(P)... - When applied to forward delivery bonds, indicates
that the rating is provisional pending delivery of the bonds. The rating may
be revised prior to delivery if changes occur in the legal documents or the
underlying credit quality of the bonds.
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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 other 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" are, however, more vulnerable to
adverse developments (both internal and external) than obligations with higher
ratings.
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"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.
"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.
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"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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APPENDIX B
As stated in the Prospectus, the Master Portfolio
corresponding to the 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, the Master 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 Master 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
Master Portfolio, through using futures contracts.
Description of Interest Rate Futures Contracts. An interest
rate futures contract sale would create an obligation by the Master 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 Master 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
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determination would be in accordance with the rules of the exchange on which
the futures contract sale or purchase was made.
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
Master 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 Master Portfolio is paid the difference and thus realizes a gain.
If the offsetting purchase price exceeds the sale price, the Master Portfolio
pays the difference and realizes a loss. Similarly, the closing out of a
futures contract purchase is effected by the Master Portfolio's entering into a
futures contract sale. If the offsetting sale price exceeds the purchase
price, the Master Portfolio realizes a gain, and if the purchase price exceeds
the offsetting sale price, the Master 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 Master 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 Master 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 Master 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 Master Portfolio corresponding to the Asset Allocation
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
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of 100, and the investment adviser believes that, because of an anticipated
rise in interest rates, the value will decline to 95. The Master 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 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 Master 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 Master 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 Master Portfolio's basic motivation would be
to maintain for a time the income advantage from investing in the short-term
securities; the Master 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 Master Portfolio may purchase.
For example, assume that the market price of a long-term bond
that the Master Portfolio corresponding to the Asset Allocation 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
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yield will have dropped to about 9 1/2%) in four months. The Master Portfolio
might enter into futures contracts purchases of Treasury bonds for an
equivalent price of 98. At the same time, the Master 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 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
Master 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 Master 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 Master 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
B-4
<PAGE> 696
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.
The Portfolio corresponding to the Asset Allocation Fund will
sell stock 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 Master Portfolio may do so either to hedge the value of its
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
Master Portfolio will purchase stock index futures contracts in anticipation of
purchases of securities. In a substantial majority of these transactions, the
Master 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.
In addition, the Master Portfolio corresponding to the Asset
Allocation Fund may utilize stock index futures contracts in anticipation of
changes in the composition of its portfolio holdings. For example, in the
event that the Master 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
Master Portfolio 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 its portfolio 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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<PAGE> 697
ANTICIPATORY PURCHASE HEDGE: Buy the Future
Hedge Objective: Protect Against Increasing Price
<TABLE>
<CAPTION>
Master Portfolio Futures
---------------- -------
<S> <C>
-Day Hedge is Placed-
Anticipate Buying $62,500 Buying 1 Index Futures
Asset Allocation Fund at 125
Value of Futures =
$62,500/Contract
-Day Hedge is Lifted-
Buy Asset Allocation 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>
Master Portfolio Futures
---------------- -------
<S> <C>
-Day Hedge is Placed-
Anticipate Selling $1,000,000 Sell 16 Index Futures at 125
Asset Allocation Fund Value of Futures = $1,000,000
-Day Hedge is Lifted-
Asset Allocation 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 the Master Portfolio had entered into an
anticipatory purchase hedge, or market value increased and the Master Portfolio
had hedged its stock portfolio, the results of the Master Portfolio's
transactions in stock index futures would be as set forth below.
B-6
<PAGE> 698
ANTICIPATORY PURCHASE HEDGE: Buy the Future
Hedge Objective: Protect Against Increasing Price
<TABLE>
<CAPTION>
Portfolio Futures
--------- -------
<S> <C> <C>
-Day Hedge is Placed-
Anticipate Buying $62,500 Buying 1 Index Futures at 125
Asset Allocation 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
</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
Asset Allocation Fund Value of Futures = $1,000,000
-Day Hedge is Lifted-
Asset Allocation 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 the Master Portfolio purchases or sells a
security, no price is paid or received by the Master Portfolio upon the
purchase or sale of a futures contract. Initially, the Master Portfolio will
be required to deposit with the broker or in a segregated account with the
Master 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 Master Portfolio upon
B-7
<PAGE> 699
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 Master 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 Master
Portfolio will be entitled to receive from the broker a variation margin
payment equal to that increase in value. Conversely, where the Master
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 Master 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 Master 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 Master Portfolio,
and the Master 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 Master 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 Master 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 Master 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
Master 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
B-8
<PAGE> 700
greater than the volatility over such time period of the future, or if
otherwise deemed to be appropriate by the investment adviser. Conversely, the
Master 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 Master 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 Master Portfolio may decline. If this occurred, the
Master 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 Master 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 Master
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 Master 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 Master 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 Master 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
B-9
<PAGE> 701
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 Master 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 Master 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 the Master Portfolio is also
subject to the investment adviser's ability to predict correctly movements in
the direction of the market. For example, if the Master Portfolio has hedged
against the possibility of a decline in the market adversely affecting
securities held by it and securities prices increase instead, the Master
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 Master 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 Master Portfolio
may have to sell securities at a time when it may be disadvantageous to do so.
B-10
<PAGE> 702
V. OPTIONS ON FUTURES CONTRACTS
The Master 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 Master Portfolio because the
maximum amount at risk is the premium paid for the options (plus transaction
costs). Although permitted by its fundamental investment policies, the Master
Portfolio does 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 Master Portfolio corresponding to the Asset Allocation
Fund presently intends to use interest rate futures contracts and,
additionally, the Master Portfolio corresponding to the Asset Allocation Fund
presently intends to use stock index futures contract in connection with its
hedging activities. Nevertheless, the Master Portfolio 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 Master Portfolio's hedging
strategies if, in
B-11
<PAGE> 703
the judgment of the 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 the Master Portfolio at the close of the Master 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 Master Portfolio holds the futures contract or
option ("the 40%-60% rule"). The amount of any capital gain or loss actually
realized by the Master 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 Master 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 Master 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 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, the Master 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 Master 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 Master 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
B-12
<PAGE> 704
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.
With respect to the Master Portfolio, 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
marking-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.
B-13
<PAGE> 705
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 months: (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).
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 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 Short-Short 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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<PAGE> 706
PACIFIC HORIZON FUNDS, INC.
PACIFIC HORIZON SHARES,
HORIZON SHARES,
HORIZON SERVICE SHARES, X SHARES AND S 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, 1996
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
Management of the Funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68
Yield Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74
General Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77
Appendix A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-1
</TABLE>
-------------------------
This Statement of Additional Information applies to the
Pacific Horizon Shares, 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, the X Shares of the Prime Fund,
Treasury Fund and California Tax-Exempt Money Market Fund and the S Shares of
the Prime Fund and Treasury 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, 1996 with respect to the
Funds, as the same may from time to time be revised (individually, a
-1-
<PAGE> 707
"Prospectus" and collectively, the "Prospectuses"), and 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 Pacific Horizon Shares, Horizon
Shares, Horizon Service Shares, X Shares and S Shares may be obtained by
calling Concord Financial Group, Inc. at (800) 332-3863. Capitalized terms
used but not defined herein have the same meanings as in the Prospectuses.
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<PAGE> 708
THE COMPANY
The Company was organized on October 27, 1982 as a Maryland
corporation and commenced its public sale of shares (Pacific Horizon Shares) on
March 30, 1984 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," 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 its initial public offering
of shares on December 6, 1989 by offering a single series of shares known as
Pacific Horizon Shares, began offering Horizon Service Shares on March 1, 1993.
As of the date of this Statement of Additional Information, the Company has
classified but not yet offered Horizon Shares of the California Tax-Exempt
Money Market Fund. 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. As of the date of this Statement of
Additional Information, X Shares and S Shares have been classified by the
Company, but have not yet been offered to the public.
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> 709
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
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<PAGE> 710
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 Service or Distribution Organizations (as defined below). 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 (the "1940
Act") 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> 711
applicable regulations of the SEC. In addition, 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.
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 1940 Act) or
their parents held by the Company as of the close of its most recent fiscal
year. As of February 29, 1996: (a) the Treasury Fund held the following
securities, Repurchase Agreement with Dean Witter Reynolds, Inc. in the
principal amount of $130,000,000; Repurchase Agreement with Goldman, Sachs &
Co. in the principal amount of $375,000,000; Repurchase Agreement with Merrill
Lynch & Co., Inc. in the principal amount of $130,000,000; and Repurchase
Agreement with Morgan Stanley, Inc. in the principal amount of $130,000,000;
(b) the Government Fund held the following securities, Repurchase Agreement
with Morgan Stanley Group in the principal amount of $20,000,000; (c) the Prime
Fund held the following securities, Merrill Lynch & Co., Inc. commercial paper
in the principal amount of $50,000,000; Bear Stearns Cos., Inc., monthly
variable rate obligation in the principal amount of $100,000,000; Merrill Lynch
& Co., Inc. monthly variable rate obligation in the principal amount of
$50,000,000; Merrill Lynch & Co., Inc. quarterly variable rate obligation in
the principal amount of $50,000,000; Merrill Lynch & Co., Inc. quarterly
variable rate obligation in the principal amount of $50,000,000; Dean Witter
Discover & Co., quarterly variable rate obligation in the principal amount of
$50,000,000; Goldman Sachs Group L.P. master note in the principal amount of
$220,000,000; Morgan Stanley Group, Inc., master note in the principal amount
of $200,000,000, Repurchase Agreement with Dean Witter Reynolds, Inc. in the
principal amount of $105,000,000; Repurchase Agreement with Morgan Stanley
Group, Inc. in the principal amount of $105,000,000; Repurchase Agreement with
Morgan Stanley Group, Inc. in the principal amount of $105,000,000; (d) the
U.S. Government Securities Fund held the following securities, Merrill Lynch &
Co., Inc. commercial paper in the principal amount of $3,000,000; (e) the
Corporate Bond Master Portfolio held the following securities, Goldman Sachs
Group LP corporate obligation in the principal amount $1,500,000; and Lehman
Brothers corporate obligation in the principal amount of $1,000,000; (f) the
Intermediate Bond Master Portfolio held the following securities Morgan Stanley
Group medium term note in the amount of $2,000,000; Merrill Lynch Mtg. Inv.
Inc., $16,000
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<PAGE> 712
(g) the Blue Chip Master Portfolio held the following securities, Dean Witter
common stock in the principal amount of $2,821,875; and (h) the Asset
Allocation Master Portfolio held the following securities, Dean Witter common
stock in the principal amount of $1,085,750; Lehman Brothers corporate
obligations in the principal amount of $1,000,000; Morgan Stanley Group medium
term note in the principal amount of $1,500,000; Merrill Lynch & Co., Inc.
collateralized mortgage obligation in the principal amount of $8,000; and
Merrill Lynch commercial paper in the principal amount of $3,500,000.
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 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 SEC and, with respect to the
California Tax-Exempt Money Market Fund are "Eligible Securities" as defined by
the SEC. 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
SEC. First Tier Securities consist of instruments that are either rated at the
time of purchase in the top rating category
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<PAGE> 713
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.
Holding Euro CDs, Yankee CDs, Yankee BAs, Yankee Euros,
commercial paper or other obligations of foreign issuers may subject a Fund 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 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, Yankee Euros 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,
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<PAGE> 714
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 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
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<PAGE> 715
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 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
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<PAGE> 716
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 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
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<PAGE> 717
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 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 "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 Tax-Exempt Money Fund
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<PAGE> 718
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 Distribution Organizations (as defined
below), Shareholder Organizations or 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 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 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 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 1940 Act.
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 cash, U.S. Government securities and
other liquid high-grade debt securities having a value equal to the repurchase
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<PAGE> 719
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.
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
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<PAGE> 720
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
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
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<PAGE> 721
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 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.
ADDITIONAL INFORMATION
The investment adviser's own investment portfolios may include
bank certificates of deposit, bankers' acceptances, corporate debt obligations,
equity securities and other investments any of which may also be purchased by a
fund of the Company. The Fund may also invest in securities, interests or
obligations of companies or entities which have a deposit, loan, commercial
banking or other business relationship with Bank of America or any of its
affiliates (including outstanding loans to such issuers which may be repaid in
whole or in part with the proceeds of securities purchased by a fund of the
Company).
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SPECIAL CONSIDERATIONS RELATING TO CALIFORNIA MUNICIPAL SECURITIES
This summary does not purport to be a comprehensive
description of all relevant facts. Although the Company has no reason to
believe that the information summarized herein is not correct in all material
respects, this information has not been independently verified for accuracy or
thoroughness by the Company. Rather, the information presented herein has been
culled from official statements and prospectuses issued in connection with
various securities offerings of the State of California and local agencies in
California, available as of the date of this Statement of Additional
Information. Further, the estimates and projections presented herein should
not be construed as statements of fact. They are based upon assumptions which
may be affected by numerous factors and there can be no assurance that target
levels will be achieved.
ECONOMIC FACTORS. Fiscal Years Prior to 1994-95. By the
close of the 1989-90 Fiscal Year California's revenues had fallen below
projections, so that the State's budget reserve, the Special Fund for Economic
Uncertainties (the "Special Fund") was fully depleted by June 30, 1990. A
recession which had begun in mid-1990, combined with higher health and welfare
costs driven by the State's rapid population growth, adversely affected General
Fund revenues, and raised expenditures above initial budget appropriations.
As a result of these factors and others, the State confronted
a period of budget imbalance lasting from the late 1980's through 1992-93.
During this difficult period, expenditures exceeded revenues in four out of six
years, and the State accumulated and sustained a budget deficit in the Special
Fund of approaching $2.8 billion at its peak on June 30, 1993. Thus, beginning
with the 1990-91 Fiscal Year and for each fiscal year thereafter, each budget
required multibillion dollar actions to bring projected revenues and
expenditures into balance. In this context, the Legislature and Governor
agreed on the following principal steps to produce Budget Acts in the years
1991-92 to 1993-94:
1. Significant cuts in health and welfare program
expenditures;
2. Transfers of program responsibilities and funding
from the State to local governments (referred to as "realignment"), coupled
with some reduction in mandates on local government;
3. Transfer of about $3.6 billion in local property tax
revenues from cities, counties, redevelopment agencies and
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some other districts to local school districts, thereby reducing State funding
for schools under Proposition 98;
4. Reduction in growth of support for higher education
programs, coupled with increases in student fees;
5. Revenue increases (particularly in the 1991-92 Fiscal
Year budget), most of which were for a short duration;
6. Increased reliance on aid from the federal government
to offset the costs of incarcerating, educating and providing health and
welfare services to illegal immigrants; and
7. Various one-time adjustments and accounting changes.
Despite these budget actions, the recession still produced
large, unanticipated deficits in the Special Fund. By the 1993-94 Fiscal Year,
the accumulated deficit was too large to be prudently retired in one year, so a
two-year program was implemented which used revenue anticipation warrants to
carry a portion of the deficit over the end of the fiscal year. When the
economy failed to recover sufficiently in 1993-94, a second two-year plan had
to be implemented in 1994-95.
Along with other factors such as the disbursement of funds to
local school districts "borrowed" from future fiscal years and hence not shown
in the annual budget, another consequence of the accumulated budget deficits
was to significantly reduce the State's cash resources available to pay its
ongoing obligations. When the Legislature and the Governor failed to adopt a
budget for the 1992-93 Fiscal Year which would have allowed the State to carry
out its normal annual cash flow borrowing to replenish its cash reserves, the
State Controller issued registered warrants to pay a variety of obligations
representing prior years' or continuing appropriations, and mandates from court
orders. Available funds were used to make constitutionally-mandated payments,
such as debt service on bonds and warrants. Between July 1 and September 4,
1992 the State Controller issued a total of approximately $3.8 billion of
registered warrants. After that date, all remaining outstanding registered
warrants (about $2.9 billion) were called for redemption from proceeds of the
issuance of 1992 Interim Notes.
In late spring of 1992, the State Controller issued revenue
anticipation warrants maturing in the following fiscal year in order to pay the
State's continuing obligations. The State was forced to rely increasingly on
external debt markets to meet its cash needs, consequently, a succession of
notes and warrants were issued in the period from June 1992 to July 1994 to pay
previously maturing notes or warrants. These borrowings were
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used in part to spread out the repayment of the accumulated budget deficit over
the end of a fiscal year.
A key feature of the 1993-94 Budget Act was a plan to retire
the $2.8 billion budget deficit which had been accumulated by June 30, 1993
(the "Deficit Retirement Plan"). This 18-month plan used existing statutory
authority to borrow $2.8 billion externally. The 1993-94 Budget Act provided
that $1.6 billion of the deficit elimination loan would be repaid by December
23, 1993 from a portion of the proceeds of the $2.0 billion 1993 Revenue
Anticipation Warrants issued on June 23, 1993. Legislation enacted with the
1993-94 Budget Act directed the State Controller to issue $1.2 billion of
registered reimbursement warrants in the 1993-94 Fiscal Year to fund the
balance of the accumulated deficit. Pursuant to this directive, the State
issued $1.2 billion of 1994 Revenue Anticipation Warrants, Series A (the
"Series A Warrants") in February 1994, which matured on December 21, 1994. The
legislation also created a Deficit Retirement Fund within the State Treasury
and the State Controller transferred $1.2 billion from the General Fund to the
Deficit Retirement Fund to retire the Series A Warrants.
The Deficit Retirement Plan was designed to balance the budget
over the 1993-94 and 1994-95 Fiscal Years, and projected a General Fund balance
of $260 million by June 30, 1995. However, fiscal conditions did not improve
as projected and the revenue assumptions of the Deficit Retirement Plan could
not be met. Accordingly, the 1994-95 Budget Act anticipated deferring
retirement of about $1 billion of the carryover budget deficit to the 1995-96
Fiscal Year. This 22-month Deficit Reduction Plan relied on existing statutory
authority to borrow $4 billion externally, including approximately $1 billion
as carryover budget deficit. In addition, Chapter 136, Statutes of 1994,
created in the Warrant Payment Fund according to which the State Controller was
directed to transfer from the General Fund to the Warrant Payment Fund in four
equal installments the amount necessary to retire the $4.0 billion of revenue
anticipation warrants maturing on April 25, 1996.
1994-95 Fiscal Year. The 1994-95 Budget Act, signed by the
Governor on July 8, 1994, projected General Fund revenues and transfers of
$41.9 billion -- $2.1 billion more than actual revenues received in 1993-94 --
and expenditures of $40.9 billion which represented an increase of $1.6 billion
over the prior year.
As a result of the improving economy, the Department of
Finance's final estimates for the fiscal year showed revenues and transfers of
$42.7 billion and expenditures of $42.0 billion, thus reducing the accumulated
budget deficit to about $600
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million and reflecting the Administration's forecast of an improving economy.
The principal features of the 1994-95 Budget Act were as
follows:
1. Receipt of additional federal aid of about $760
million for costs of refugee assistance and costs of incarceration and
medical care for illegal immigrants. Only about $33 million of this
amount was received, with about another $98 million scheduled to be
received in the 1995-96 Fiscal Year;
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 temporarily suspended by court order pending appeal;
3. A General Fund increase of approximately $38 million
in support for the University of California and $65 million for
California State University, accompanied by student fee increases for
both the University of California and California State University;
4. Proposition 98 funding for K-14 schools was increased
by $526 million from 1993-94 Fiscal Year levels, representing an
increase for enrollment growth and inflation. Consistent with
previous budget agreements, Proposition 98 funding provided
approximately $4,217 per student for K-12 schools, equal to the level
in the prior three years; and
5. Additional miscellaneous cuts ($500 million), fund
transfers ($255 million), and adjustment to prior years' legislation
concerning property tax shifts for local governments ($300 million).
The 1994-95 Budget Act contained no tax increases. Under
legislation enacted for the 1993-94 Budget Act, the renters' tax credit was
suspended for two years (1993 and 1994). 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 State's cash flow management plan for the 1994-95 Fiscal
Year included the issuance of $4.0 billion of Revenue Anticipation Warrants,
Series C and D, to mature on April 25, 1996, as part of a two-year plan to
retire the accumulated State budget deficit. To assure repayment of these
warrants, the Legislature enacted a backup mechanism which could result in
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automatic expenditure cuts if projected revenues did not meet certain targets
(the "Budget Adjustment Law").
The third and last step in the Budget Adjustment Law process
occurred on October 16, 1995, when the State Controller issued a report (the
"October Trigger Report") reviewing the estimated cash condition of the General
Fund for the 1995-96 Fiscal Year. The State Controller estimated that the
General Fund would have at least $1.4 billion of internal cash resources on
June 30, 1996. Put another way, external borrowing would not be needed on June
30, 1996. As a result of this finding, certain provisions of the Budget
Adjustment Law, which could have ultimately led to automatic, across-the-board
cuts in the General Fund budget, will not have to be implemented. Likewise, an
earlier report issued on November 15, 1994, avoided implementation of any
automatic budget cuts in the 1994-95 fiscal year.
1995-96 Fiscal Year. With strengthening revenues and reduced
caseload growth based on an improving economy, the State entered the 1995-96
Fiscal Year budget negotiations with the smallest nominal "budget gap" to be
closed in many years. Nonetheless, serious policy differences between the
Governor and Legislature prevented timely enactment of the budget. The 1995-96
Budget Act was signed by the Governor on August 3, 1995, 34 days after the
start of the fiscal year. The Budget Act projected General Fund revenues and
transfers of $44.1 billion, a 3.5 percent increase from the prior year.
Expenditures were budgeted at $43.4 billion, a 4 percent increase. The
Department of Finance projected that after repaying the last of the carryover
budget deficit, there would be a positive balance of $28 million in the budget
reserve on June 30, 1996. The Budget Act also projected Special Fund revenues
of $12.7 billion and appropriated Special Fund expenditures of $13.0 billion.
The following are the principal features of the 1995-96 Budget
Act:
1. Proposition 98 funding for schools and community
colleges was originally budgeted to increase by about $1.0 billion
(General Fund) and $1.2 billion total above revised 1994-95 levels.
Because of higher than projected revenues in 1994-95, an additional
$543 million ($91 per K-12 ADA) was appropriated to the 1994-95
Proposition 98 entitlement. A large part of this is a block grant of
about $54 per pupil for any onetime purpose. For the first time in
several years, a full 2.7 percent cost of living allowance was funded.
The budget compromise anticipates a settlement of the CTA v. Gould
litigation (discussed below). The Governor's 1996-97 Budget indicates
that, with revenues even higher than projected, Proposition 98
apportionments will
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exceed the amounts originally budgeted, reaching a level of $4,500 per
ADA;
2. Cuts in health and welfare costs totaling about $0.9
billion. Some of these cuts (totaling about $500 million) require
federal legislative or administrative approval, which was still
pending as of January 1996.
3. A 3.5 percent increase in funding for the University
of California ($90 million General Fund) and the California State
University system ($24 million General Fund), with no increases in
student fees;
4. The Budget assumed receipt of $473 million in new
federal aid for costs of illegal immigrants, above commitments already
made by the federal government. In the Governor's 1996-97 Budget, the
Administration revised this figure downward to $278 million; and
5. General Fund support for the Department of
Corrections is increased by about eight percent over the prior year,
reflecting estimates of increased prison population, but funding is
less than proposed in the 1995 Governor's Budget.
The Governor's Budget for the 1996-97 Fiscal Year, released on
January 10, 1996, updated the current year projections, so that revenues and
transfers are estimated to be $45.0 billion, and expenditures to be $44.2
billion. The Special Fund was projected to have a positive balance of about
$50 million at June 30, 1996, and on that date available internal borrowable
resource (available cash, after payment of all obligations due) will be about
$2.2 billion. The Administration projected it would issue up to $2.0 billion
of revenue anticipation notes to mature by June 30, 1996 to assist in cash flow
management for the final two months of the year.
1996-97 Fiscal Year. On January 10, 1996, the Governor
released his proposed budget for the next fiscal year (the "1996-97 Budget").
Based on projected revenues and transfers of about $45.6 billion, the Governor
requested total General Fund appropriations of about $45.2 billion which would
create a $400 million budget reserve in the Special Fund at June 30, 1997. The
Governor renewed a proposal for a 15 percent phased cut in individual and
corporate tax rates over three years (the budget proposal assumes this will be
enacted, reducing revenues in 1996-97 by about $600 million). There was also a
proposal to restructure trial court funding in a way which would result in a
$300 million decrease in General Fund revenues. The Governor requested
legislation to make permanent a moratorium on cost of living increases for
welfare payments, and suspension of a
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renters tax credit, which otherwise would go back into effect in the 1996-97
Fiscal Year. He further proposed additional costs in certain health and
welfare programs, and assumed that costs previously approved by the Legislature
will receive federal approval. The Governor's Budget proposed increases in
funding for K-12 schools under Proposition 98, for State higher education
systems (with a second year of no student fee increases), and for corrections.
The Governor's Budget projects external cash flow borrowing of up to $3.2
billion, to mature by June 30, 1997.
The Orange County Bankruptcy. 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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On or about June 12, 1996 a plan of adjustment previously
confirmed by the bankruptcy court became effective for the County. Pursuant to
the plan, publicly held debt is to be paid in full, with municipal investors in
the Pool retaining an interest in litigation claims against third parties. The
plan was funded in substantial part by the sale of $900 million in new County
securities, securitizing substantially all unencumbered assets previously held
by the County.
Both S&P and Moody's 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. On July 18, 1995, S&P declared the Note Debt in
default in spite of the approval of the Stipulation and Extension Agreement.
S&P further stated that it had no reason to believe that the County would be
able to fulfill the terms of the Stipulation and Extension Agreement on June
30, 1996. Such suspensions or downgradings could affect both price and
liquidity of the County's 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 or
liquidity of such securities.
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.
Revenue Distribution. Certain California Municipal Securities
in the 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.
Senate Bill 671. 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, the Governor 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
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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, disagreed with
that estimate and asserted 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.
Proposition 13. Certain California Municipal Securities in
the 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 was 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 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
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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.
Proposition 9. On November 6, 1979, an initiative known as
"Proposition 9" 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 service 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.
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.
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Proposition 98. On November 8, 1988, voters of the State
approved Proposition 98, a combined initiative constitutional amendment and
statute called the "Classroom Instructional Improvement and Accountability
Act." Proposition 98 changed State funding of public education below the
university level and the operation of the State Appropriations Limit, primarily
by guaranteeing K-14 schools a minimum share of General Fund revenues. Under
Proposition 98 (modified by Proposition 111 as discussed below), K-14 schools
are guaranteed the greater of (a) in general, a fixed percent of General Fund
revenues ("Test 1"), (b) the amount appropriated to K-14 schools in the prior
year, adjusted for changes in the cost of living (measured as in Article XIIIB
by reference to State per capita personal income) and enrollment ("Test 2"), or
(c) a third test, which would replace Test 2 in any year when the percentage
growth in per capita General Fund revenues from the prior year plus one half of
one percent is less than the percentage growth in State per capita personal
income ("Test 3"). Under Test 3, schools would receive the amount appropriated
in the prior year adjusted for changes in enrollment and per capita General
Fund revenues, plus an additional small adjustment factor. If Test 3 is used
in any year, the difference between Test 3 and Test 2 would become a "credit"
to schools which would be the basis of payments in future years when per
capital General Fund revenue growth exceeds per capita personal income growth.
Legislation adopted prior to the end of the 1988-89 Fiscal Year, implementing
Proposition 98, determined the K-14 schools' funding guarantee under Test 1 to
be 40.3 percent of the General Fund tax revenues, based on 1986-87
appropriations. However, that percent has been adjusted to approximately 35
percent to account for a subsequent redirection of local property taxes, since
such redirection directly affects the share of General Fund revenues to
schools.
Proposition 98 permits the Legislature by two-thirds vote of
both houses, with the Governor's concurrence, to suspend the K-14 schools'
minimum funding formula for a one-year period. Proposition 98 also contains
provisions transferring certain State tax revenues in excess of the Article
XIIIB limit to K-14 schools.
During the recent recession, General Fund revenues for several
years were less than originally projected, so that the original Proposition 98
appropriations turned out to be higher than the minimum percentage provided in
the law. The Legislature responded to these developments by designating the
"extra" Proposition 98 payments in one year as a "loan" from future years'
Proposition 98 entitlements, and also intended that the "extra" payments would
not be included in the Proposition 98 "base" for calculating future years'
entitlements. By implementing these actions, per-pupil funding from
Proposition 98
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sources stayed almost constant at approximately $4,220 from Fiscal Year 1991-92
to Fiscal Year 1993-94.
In 1992, a lawsuit was filed, California Teachers' Association
v. Gould, which challenged the validity of these off-budget loans. As part of
the negotiations leading to the 1995-96 Budget Act, an oral agreement was
reached to settle this case. It is expected that a formal settlement
reflecting these conditions will be entered into in the near future.
The oral agreement provides that both the State and K-14
schools share in the repayment of prior years' emergency loans to schools. Of
the total $1.76 billion in loans, the State will repay $935 million, while
schools will repay $825 million. The State share of the repayment will be
reflected as expenditures above the current Proposition 98 base circulation.
The schools' share of the repayment will count as appropriations that count
toward satisfying the Proposition 98 guarantee, or from "below" the current
base. Repayments are spread over the eight-year period of 1994-95 through
2001-02 to mitigate any adverse fiscal impact. Once a court settlement is
reached, and the Director of Finance certifies that such a settlement has
occurred, approximately $377 million in appropriations from the 1995-96 Fiscal
Year to schools will be disbursed in August 1996.
Proposition 111. 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.
Proposition 62. On November 4, 1986, California voters
approved an initiative statute known as Proposition 62. This initiative
provides the following: (i) requires that any tax for
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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.
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.
Proposition 87. 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 impossible 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.
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<PAGE> 735
Health Care Legislation. Certain California Municipal
Securities held by the 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.
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.
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<PAGE> 736
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 reserve level consistent
with those that would be required by an insurance company.
Mortgages and Deeds. Certain California Municipal Securities
in the 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 provisions 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
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<PAGE> 737
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. The
debtor may reinstate the mortgage, in the manner described above, up to five
business days prior to the scheduled sale date. 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.
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 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
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<PAGE> 738
years during the term of the mortgage loan, and then only if the borrower
prepays an amount in excess of 20% of the original principal amount of the
mortgage loan in a 12-month period; a prepayment charge cannot in any event
exceed six months' advance interest on the amount prepaid during the 12-month
period in excess of 20% of the original principal amount of the 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 Money Market 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 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 Pacific Horizon'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 California Tax-Exempt Money Market
Fund's total assets in California Municipal Securities at the close of each
quarter of the California Tax-Exempt Money Market 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.
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<PAGE> 739
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 25% of
the Fund's total assets may be invested without regard to this limitation).
In accordance with current regulations of the SEC,
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.
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<PAGE> 740
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 objective and policies and except insofar as a
Fund may technically be deemed an underwriter under the 1933 Act 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 1940 Act) if such issuance is specifically prohibited by the 1940 Act 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,
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<PAGE> 741
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. 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.
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<PAGE> 742
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' 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.
-37-
<PAGE> 743
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 resulting from a
change in asset value will not constitute a violation of such restriction.
For purposes of Investment Limitation P. 1 relating to the
Prime Fund in this Statement of Additional Information, Investment Limitation
P. 6 relating to the Government Fund and Treasury Only Fund in this Statement
of Additional Information, Investment Limitation P. 9 relating to the
Tax-Exempt Money Fund in this Statement of Additional Information and
Investment Limitation P. 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 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.
For purposes of Investment Limitation P. 6 of this Statement
of Additional Information with respect to the Prime Fund, Treasury Fund, and
California Tax-Exempt Money Market Fund, Investment Limitation P. 3 of this
Statement of Additional Information with respect to the Government Fund and
Treasury Only Fund and Investment Limitation P. 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:
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<PAGE> 744
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 purchase or sell real property,
including limited partnership interests.
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.
5. The Funds will not purchase or retain the securities
of any issuer if the Officers or Directors of the Company 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.
6. The Funds will not invest more than 5% of their total
assets in the securities of issuers which together with any predecessors have a
record of less than three years continuous operation.
7. The Funds will not invest more than 15% of their
total assets in the securities of issuers which together with any predecessors
have a record of less than three years continuous operation or securities of
issuers which are restricted as to disposition.
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 1940 Act 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
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<PAGE> 745
holiday closings), during which trading on such Exchange is restricted, during
which an emergency exists (as determined by the SEC 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 SEC 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 1940 Act. 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 offered by the
Company 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).
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
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<PAGE> 746
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 of the other of the Company's 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 re-investment 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
payments to Shareholder Organizations that are borne solely by Horizon Service
Shares and certain payments to Distribution or Service Organizations, including
BA Investment Services, Inc. ("BAIS"), that are borne solely by Pacific Horizon
Shares, X Shares and S Shares and Rule 12b-1 fees that are borne solely by X
Shares and S Shares of the Funds, as described in the Prospectuses for such
Shares.
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 Day.
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
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<PAGE> 747
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 SEC, 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 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
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<PAGE> 748
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.
SUPPLEMENTARY PURCHASE INFORMATION: PACIFIC HORIZON SHARES
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 the 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
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
-43-
<PAGE> 749
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 the 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 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 the 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 the 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
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<PAGE> 750
Transfer Agent, BISYS Fund Services, 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 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 the 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
-45-
<PAGE> 751
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 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 the
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
-46-
<PAGE> 752
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.
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.
PACIFIC HORIZON SHARES, X SHARES AND S 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. Persons wishing to establish a
Sweep Account at BAIS, with respect to X Shares, a Sweep Account at Bank of
America, with respect to S Shares or at certain other Service Organizations,
with respect to both X Shares and S Shares, should contact BAIS, Bank of
America or a Service Organization directly for appropriate instructions.
Depending on the terms of the
-47-
<PAGE> 753
Sweep Account, Bank of America, BAIS or its affiliates and or their affiliates
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, BAIS 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.
Miscellaneous. Certificates for shares will not be issued.
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 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 the 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.
-48-
<PAGE> 754
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; Partner of
225 S. Lake Avenue the law firm of Musick, Peeler &
Suite 410 Garrett (until April,
Pasadena, CA 91101-3005 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,
Newport Beach, CA 92660-2629 (registered
investment adviser) 1991
to date; partner,
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.
</TABLE>
-49-
<PAGE> 755
<TABLE>
<CAPTION>
Position with
-------------
Name and Address Age Company Principal Occupations
- ---------------- --- ------- ---------------------
<S> <C> <C> <C>
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).
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;
</TABLE>
-50-
<PAGE> 756
<TABLE>
<CAPTION>
Position with
-------------
Name and Address Age Company Principal Occupations
- ---------------- --- ------- ---------------------
<S> <C> <C> <C>
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.
Richard E. Stierwalt 40 Executive Vice President since April
125 W. 55th Street President 1996; prior thereto
York, NY 10019 Chairman of the Board
and Chief Executive
Officer, July 1993 to
April 1996, 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, Seafirst Retirement
Funds and Master Investment Trust,
Series II (since 1993); First Vice
President, Trust Operation
Administration, Security
</TABLE>
-51-
<PAGE> 757
<TABLE>
<CAPTION>
Position with
-------------
Name and Address Age Company Principal Occupations
- ---------------- --- ------- ---------------------
<S> <C> <C> <C>
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,
Seafirst Retirement Funds and
Master Investment Trust, Series II
(since 1993); Senior Vice President,
Shearson Lehman Brothers, 1978-
1987.
Irimga McKay 35 Vice Senior Vice President,
1230 Columbia Street President July 1993 to date, prior
5th Floor thereto First Vice
La Jolla, CA 92037 President of the
Administrator and Distributor,
November 1988 to July 1993;
Vice President, Seafirst Retirement
Funds and Master Investment Trust,
Series II (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.
Stephanie L. Blaha 36 Assistant Vice Manager of Client
BISYS Fund Services President Services of the
3435 Stelzer Road Administrator, March
Columbus, OH 43129 1995 to date, prior thereto
Assistant Vice President of the
Administrator and Distributor,
October 1991 to March 1995; Vice
President, Seafirst Retirement
Funds, Master Investment Trust,
Series I and Master Investment
Trust, Series II (since 1996);
Account Manager, AT&T American
Transtech, Mutual Fund Division,
July 1989 to October 1991.
</TABLE>
-52-
<PAGE> 758
<TABLE>
<CAPTION>
Position with
-------------
Name and Address Age Company Principal Occupations
- ---------------- --- ------- ---------------------
<S> <C> <C> <C>
Mark E. Nagle 36 Treasurer Senior Vice President,
BISYS Fund Services Fund Accounting Services
3435 Stelzer Road The BISYS Group, Inc.,
Columbus, OH 43219 September 1995 to Present;
Treasurer, Seafirst Retirement
Funds and Master Investment Trust,
Series II (since 1996) Senior Vice
President Fidelity Institutional
Retirement Services (1993 to
September 1995); Fidelity
Accounting & Custody Services (1981
to 1993).
Martin R. Dean 31 Assistant Senior Compliance and
3435 Stelzer Road Treasurer Registration Analyst since
Columbus, OH 43219 June 1996, prior thereto
Manager of Fund Accounting of BISYS
Fund Services, May 1994 to June
1996; Assistant Treasurer, Seafirst
Retirement Funds and Master Investment
Trust, Series II (since 1996);
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.
Building, Suite 1100
Philadelphia, PA 19107
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, Seafirst Retirement
Funds and Master Investment Trust,
Series II (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. The Board does not have an Executive Committee.
-53-
<PAGE> 759
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 recognition of his years of service to the Company 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. Effective September 1, 1996, Dr. Trefftzs will become a director
emeritus of the Company and will receive a retirement benefit of $60,000 on
January 1, 1997. 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 29, 1996, the Company paid
or accrued for the account of its directors as a group for services in all
capacities a total of $388,155. Of that amount, $158,820, $91,643, $26,561,
$15,418, $18,750 and $19,386 of directors' compensation were allocated to the
Prime, Treasury, Government, Treasury Only, Tax-Exempt Money and California
Tax-Exempt Money Market 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 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 served as Chairman of the
Board.
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<PAGE> 760
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" 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 as of
February 29, 1996 about the fees received by directors of the Company as
directors and/or officers of the Company and as directors and/or trustees of
the Fund Complex:
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<PAGE> 761
<TABLE>
<CAPTION>
PENSION OR TOTAL
RETIREMENT COMPENSATION FROM
AGGREGATE BENEFITS ACCRUED ESTIMATED ANNUAL REGISTRANT AND
COMPENSATION FROM AS PART OF FUND BENEFITS UPON FUND COMPLEX**
NAME OF PERSON/ THE COMPANY EXPENSES* RETIREMENT PAID TO DIRECTORS
POSITION
<S> <C> <C> <C> <C>
Thomas M. Collins $76,215 $ $ $85,000
Director+
Douglas B. Fletcher $28,555 $ $ $29,055
Vice Chairman of the Board
Robert E. Greeley++ $31,395 $ $ $44,055
Director
Kermit O. Hanson $27,485 $ $ $32,055
Director
Cornelius J. Pings $29,555 $ $ $30,055
President and Chairman of
the Board+++
Kenneth L. Trefftzs $28,555 $ $ $29,055
Director
- ------------------------------
</TABLE>
* For the fiscal year ended February 29, 1996, the Company accrued on the
part of all of the directors an aggregate of $65,739 in retirement
benefits.
** The "Fund Complex" consists of the Company, Seafirst Retirement Funds,
Master Investment Trust, Series I, Master Investment Trust, Series II,
Time Horizon Funds and World Horizon Funds.
+ Mr. Collins was President and Chairman of the Board of the Company
until August 31, 1995.
++ Mr. Greeley became a director of the Company on April 25, 1994.
+++ Mr. Pings became President and Chairman of the Board of the Company
effective September 1, 1995. At February 29, 1996, $10,000, $3,500
and $3,500 in deferred compensation was payable to Mr. Pings for
services as President of the Company, trustee of Master Investment
Trust, Series I and Master Investment Trust, Series II, respectively.
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.
-56-
<PAGE> 762
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, 1994, February 28,
1995 and February 29, 1996, Bank of America was paid in the aggregate, pursuant
to the investment advisory agreements applicable to them, advisory fees (net of
waivers) of $11,293,545, $2,330,203 and $3,964,899, respectively, by the Prime
Fund, $2,717,321, $2,140,125 and $2,446,958, respectively, by the Treasury Fund
and $472,766, $501,956 and $439,603, respectively, by the Tax-Exempt Money
Fund. For the fiscal years ended February 28, 1994, February 28, 1995 and
February 29, 1996, Bank of America was paid in the aggregate, pursuant to the
investment advisory agreements applicable to it, advisory fees (net of waivers
and expense reimbursements) of $269,869, $301,964 and $508,348, respectively,
by the California Tax-Exempt Money Market Fund. For the fiscal years ended
February 28, 1994, February 28, 1995 and February 29, 1996, Bank of America 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 $367,233, $920,627 and $0, and the Tax-Exempt
Money Fund, in the amount of $23,524, $11,611 and $0, respectively. For the
fiscal years ended February 28, 1994, February 28, 1995 and February 29, 1996,
Bank of America, in the aggregate, waived fees and reimbursed expenses with
respect to the California Tax-Exempt Money Market Fund in the amount of
$22,998, $0 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 February 29, 1996,
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the Government Fund and Treasury Only Fund paid Bank of America investment
advisory fees (net of fee waivers and expense reimbursements) of $390,929 and
$341,008, respectively. For that same period, Bank of America waived fees of
$276,490 and reimbursed expenses of $4,778 with respect to the Government Fund.
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 was 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
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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. If this or similar
legislation was 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 of 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 W. 55th Street, 11th Floor, New York, New York 10019,
and 3435 Stelzer Road, Columbus, Ohio 43219, is an indirect 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
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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 cause and 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, 1994, February 28,
1995 and February 29, 1996, the Administrator was paid, pursuant to the
administration agreement then in effect, administration fees (net of waivers)
of $12,158,419, $2,366,035 and $4,062,578, respectively, by the Prime Fund,
$2,717,606, $2,140,125 and $2,447,372, respectively, by the Treasury Fund and
$472,766, $501,956 and $439,603, respectively, by the Tax-Exempt Money Fund.
For the fiscal years ended February 28, 1994, February 28, 1995 and February
29, 1996, the Administrator was paid, pursuant to the administration agreement
then in effect, administrative fees (net of waivers) of $269,869, $301,964 and
$508,348, respectively, by the California Tax-Exempt Money Market Fund. For
the fiscal years ended February 28, 1994, February 28, 1995 and February 29,
1996, the Administrator did not effect any fee waivers with respect to the
Treasury Fund, but reimbursed operating expenses of $95,000 for the fiscal year
ended February 29, 1996. For the fiscal years ended February 28, 1994,
February 28, 1995 and February 29, 1996, the Administrator reimbursed the Prime
Fund and Tax-Exempt Money Fund for expenses or waived fees in the amount of
$381,513, $949,233 and $235,000 and $23,524, $11,611 and $0, respectively. For
the fiscal years ended February 28, 1994, February 28, 1995 and February 29,
1996 aggregate fee waivers and expense reimbursements by the Administrator with
respect to the California Tax-Exempt Money Market Fund were $22,998, $0 and
$5,000, respectively.
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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,
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 February 29, 1996, the Government Fund and Treasury Only
Fund paid the Administrator (net of fee waivers), $489,935 and $341,008,
respectively. For this same period, the Administrator waived fees due from the
Government Fund in the amount of $182,262.
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, SEC fees and state securities qualification fees,
advisory fees, fees payable under the Basic Administrative Services Agreement
and Special Management Services Agreement, fees payable to Shareholder,
Distribution and Service 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.
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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 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, 1994, February 28,
1995 and February 29, 1996, the Prime Fund incurred expenses under the Special
Management Services Agreement of $3,802,465, $3,464,984 and $5,244,694,
respectively, of which $74,910, $65,326 and $68,810, respectively, were earned
by the Administrator, $28,260, $18,906 and $4,193,897, respectively, were
earned by Bank of America, $258,016, $268,593 and $633,935, respectively, were
earned by affiliates of the Administrator, and $3,440,348, $3,112,159 and
$348,052, respectively, were earned by affiliates of Bank of America; and the
Treasury Fund incurred expenses of $5,303,956, $3,830,002 and 3,781,235,
respectively, of which $27,214, $28,381 and $30,679, respectively, were earned
by the Administrator, $12,977, $9,031 and $3,250,931, respectively, were earned
by Bank of America, $49,793, $40,665
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and $294,175, respectively, were earned by affiliates of the Administrator, and
$5,171,092, $3,751,925 and $205,450, respectively, were earned by affiliates of
Bank of America. For the fiscal years ended February 28, 1994, February 28,
1995 and February 29, 1996, the Tax-Exempt Money Fund incurred expenses under
the Agreement (before fee waivers) of $92,174, $135,034 and $151,128,
respectively, of which $6,165, $8,273 and $5,115, respectively, were earned by
the Administrator, $114, $1,062 and $145,543, respectively, were earned by Bank
of America, $212, $125,664 and $0, respectively, were earned by affiliates of
Bank of America and $0, $0 and $470, respectively, were earned by affiliates of
the Administrator. For the fiscal years ended February 28, 1994, February 28,
1995 and February 29, 1996, the California Tax-Exempt Money Market Fund
incurred expenses under the Agreement (before fee waivers) of $560,709,
$639,503 and $1,181,258, respectively, of which $40,295, $9,701 and $10,928,
respectively, were earned by the Administrator, $6,211, $21,474 and $49,396,
respectively, were earned by affiliates of the Administrator, $335,957, $2,892
and $959,655, respectively were earned by Bank of America and $0, $605,436 and
$0, respectively, were earned by affiliates of Bank of America. For the fiscal
years ended February 28, 1994, February 28, 1995 and February 29, 1996, Bank of
America 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, were
earned by Bank of America; $281 and $150, respectively, were earned by the
Administrator; $407,992 and $208,813, respectively, were earned by affiliates
of Bank of America; and $0 and $38, respectively, were 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, were
earned by Bank of America; $135 and $1,779, respectively, were earned by the
Administrator; $774,124 and $187,925, respectively, were earned by affiliates
of Bank of America; and $0 and $287, respectively, were earned by affiliates of
the Administrator. For the fiscal year ended February 29, 1996, the Government
Fund and Treasury Only Fund incurred expenses of $993,425 and $613,759,
respectively, under the Agreement, of which, $686,425 and $434,890,
respectively, were earned by Bank of America; $182 and $5,540, respectively,
were earned by the Administrator; $299,463 and $134,307, respectively, were
earned by affiliates of Bank of America; and $7,355 and $39,022 were earned by
affiliates of the Administrator.
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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, 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 prospectively waive payment of
fees and/or assume certain expenses of one or more of the Company's funds, as a
result of competitive pressures and in order to preserve and protect the
business and reputation of the Administrator and Bank of America. 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
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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."
The Distribution and Services Plan. The Distributor is also
entitled to payment from the Company for distribution and service fees pursuant
to the Distribution and Services Plan (the "12b-1 Plan") adopted on behalf of
the X Shares and S Shares. Under the 12b-1 Plan, the Company may pay the
Distributor for: (a) direct out-of-pocket promotional expenses incurred by the
Distributor in advertising and marketing X Shares and S Shares; (b) expenses
incurred in connection with preparing, printing, mailing, and distributing or
publishing advertisements and sales literature for X Shares and S Shares; (c)
expenses incurred in connection with printing and mailing Prospectuses and
Statements of Additional Information to other than current X or S shareholders;
(d) periodic payments or commissions to one or more securities dealers,
brokers, financial institutions or other industry professionals, such as
investment advisors, accountants, and estate planning firms (severally, "a
Distribution Organization") with respect to a Fund's X Shares and S Shares
beneficially owned by customers for whom the Distribution Organization is the
Distribution Organization of record or holder of record of such X Shares or S
Shares; (e) the direct or indirect cost of financing the payments or expenses
included in (a) and (d) above; or (f) for such other services as may be
construed, by any court or governmental agency or commission, including the
Securities and Exchange Commission, to constitute distribution services under
the 1940 Act or rules and regulations thereunder.
Pursuant to the 12b-1 Plan, the Company may also pay for
administrative support services provided with respect to a Distribution
Organizations customers ("Clients") X Shares and S Shares. Administrative
services provided may include some or all of the following: (i) processing
dividend and distribution payments from a Fund on behalf of its Clients; (ii)
providing information periodically to its Clients showing their positions in X
Shares and S Shares; (iii) arranging for bank wires; (iv) responding to routine
Client inquiries concerning their investment in X Shares and S Shares; (v)
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providing the information to the Funds necessary for accounting or
sub-accounting; (vi) if required by law, forwarding shareholder communications
from a Fund (such as proxies, shareholder reports, annual and semi-annual
financial statements and dividend, distribution and tax notices) to its
Clients; (vii) aggregating and processing purchase and redemption requests from
its Clients and placing net purchase and redemption orders for its Clients;
(viii) establishing and maintaining accounts and records relating to Clients
that invest in X Shares and S Shares; (ix) assisting Clients in changing
dividend options, account designations and addresses; (x) developing,
maintaining and operating systems necessary to support Sweep Accounts; or (xi)
other similar services if requested by the Company.
The 12b-1 Plan for X Shares and S Shares provides that the
Distributor is entitled to receive payments on a monthly basis at an annual
rate not exceeding 0.55% and 1.00% of the average daily net assets during such
month of the outstanding X Shares and S Shares, respectively, to which such
12b-1 Plan relates. Not more than 0.25% of such net assets will be used to
compensate Service Organizations for personal services provided to X and S
shareholders and/or the maintenance of such shareholders' accounts and not more
than 0.30% and 0.75% of such net assets of the X and S shareholders,
respectively, will be used for promotional and other primary distribution
activities.
Payments made out of or charged against the assets of a
particular class of shares of a particular Fund must be in payment for expenses
incurred on behalf of that class.
Payments for distribution expenses under the 12b-1 Plan are
subject to Rule 12b-1 (the "Rule") under the 1940 Act. The Rule defines
distribution expenses to include the cost of "any activity which is primarily
intended to result in the sale of [Company] shares." The Rule provides, among
other things, that an investment company may bear such expenses only pursuant
to a plan adopted in accordance with the Rule. In accordance with the Rule,
the 12b-1 Plan provides that a written report of the amounts expended under the
12b-1 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 12b-1 Plan provides that it may not be amended to increase materially the
costs which Shares of a Fund may bear for distribution pursuant to the 12b-1
Plan without shareholder approval and that other material amendments of the
12b-1 Plan must be approved by a majority of the Board of Directors, and by a
majority 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 12b-1 Plan, or in any agreements entered into
in connection with the 12b-1 Plan, by vote cast in person at a meeting called
for the purpose of
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<PAGE> 772
considering such amendments (the "Non-Interested Plan Directors"). 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 Non-Interested Plan Directors.
The Company's Board of Directors has concluded that there is a
reasonable likelihood that the 12b-1 Plan will benefit the Funds and their X
and S shareholders. The 12b-1 Plan is subject to annual reapproval by a
majority of the Company's Board of Directors, including a majority of the
Non-Interested Plan Directors and is terminable without penalty at any time
with respect to any Fund by a vote of a majority of the Non-Interested Plan
Directors or by vote of the holders of a majority of the outstanding X Shares
or S Shares of the Fund involved. Any agreement entered into pursuant to the
12b-1 Plan 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 outstanding X Shares or
S Shares of such Fund, or by the Service Organization. Each agreement will
also terminate automatically in the event of its assignment.
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. Additionally,
BISYS Fund Services, Inc., 3435 Stelzer Road, Columbus, Ohio 43219-3035 has
been appointed as transfer and dividend disbursing agent for the Company,
except that 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, provides transfer and dividend
disbursing agent services for the Funds' Horizon Shares. 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
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
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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, 1994, February 28, 1995 and February 29, 1996, Bank of America, in its
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, Tax-Exempt Money and California Tax-Exempt Money Market 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 agent. For
the fiscal year ended February 29, 1996, Concord Financial Services, Inc.
received $29,021, $21,919, $18,106 and $7,954 from the Prime Fund, Treasury
Fund, Government Fund and Treasury Only Fund, respectively, for services as
transfer agent for such funds Horizon Shares. As of February 29, 1996, Horizon
Shares of the California Tax-Exempt Money Market Funds were not offered and
accordingly, no payments for transfer agency services were made by the Fund.
In addition, BISYS Fund Services Inc. earned $137,212 for the period from
December 11, 1995 through February 29, 1996 for its services as transfer and
dividend disbursing agents for the Pacific Horizon Shares and Horizon Service
Shares of the Company. Prior to December 11, 1995, an unrelated party provided
these services.
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 does not
qualify for the special federal tax treatment afforded
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<PAGE> 774
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.
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
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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 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 or
that they are "exempt recipients."
At February 29, 1996, 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 $3,643,023 (of which $917,847 will expire in fiscal 2002 and
$2,725,176 will expire in fiscal 2003), $58,357 (which will expire in fiscal
2002), $951,218 (of which $7,228 will expire in fiscal 2002 and $943,990 will
expire in fiscal 2003), $64,205 (which will expire in fiscal 2003), $192,798
(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,
$19,132 will expire in fiscal 2003 and $36,425 will expire in fiscal 2004) and
$37,248 (of which $5,893 will expire in fiscal 2001, $6,223 will expire in
fiscal 2002 and $25,132 will expire in fiscal 2004), respectively, available
for federal income tax purposes to be applied against future capital gains, if
any.
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
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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 each Fund's taxable year at least 50% of
the aggregate value of each 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 a 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 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
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California Tax-Exempt Money Market Fund will be taxed on its undistributed
taxable income. If for any year the California Tax-Exempt Money Market 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 California Tax-Exempt Money Market 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 California Tax-Exempt Money Market Fund with respect to any taxable year
cannot exceed the excess of the amount of interest received by the California
Tax-Exempt Money Market Fund for such year on California Exempt Securities over
any amounts that, if the California Tax-Exempt Money Market 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
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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 California Tax-Exempt Money Market 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 California Tax-Exempt Money Market 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 California
Tax-Exempt Money Market 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 California Tax-Exempt
Money Market 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 California Tax-Exempt Money Market 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 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
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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 SEC. 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-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)
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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 institutional investors directly on their
customers for cash management services are not reflected in the Funds'
calculations of yields. The current yields for the Funds may be obtained by
calling (800) 227-1545
Based on the foregoing calculations, for the seven-day period
ended February 29, 1996, the yield (and effective yield) for Horizon Shares,
Horizon Service Shares and Pacific Horizon Shares of the Prime Fund, Treasury
Fund, Government Fund, Treasury Only Fund, and Tax-Exempt Money Fund after fee
waivers and/or expense reimbursements by Bank of America and the Administrator,
were as follows: Prime Fund - Horizon Shares -- 5.23% (5.36%); Prime Fund -
Horizon Service Shares -- 4.98% (5.10%); Prime Fund - Pacific Horizon Shares
- -- 4.91% (5.02%); Treasury Fund - Horizon Shares - - 5.11% (5.23%); Treasury
Fund - Horizon Service Shares -- 4.86% (4.97%); Treasury Fund - Pacific
Horizon Shares -- 4.79% (4.90%); Government Fund - Horizon Shares -- 5.03%
(5.15%); Government Fund - Horizon Service Shares -- 4.78% (4.89%); Government
Fund - Pacific Horizon Shares -- 4.72% (4.82%); Treasury Only Fund - Horizon
Service Shares -- 4.59% (4.69%); Treasury Only Fund - Pacific Horizon Shares --
4.52% (4.61%); Treasury Only Fund - Horizon Shares -- 4.84% (4.95%); Tax-Exempt
Money Fund - Horizon Shares -- 3.15% (3.19%); and Tax-Exempt Money Fund -
Horizon Service Shares -- 2.90% (2.93%); Tax-Exempt Money Fund - Pacific
Horizon Shares -- 2.83% (2.86%). For the same period, the tax-equivalent yield
for the Tax-Exempt Money Fund was 4.38%, 4.03% and 3.93% for Horizon Shares,
Horizon Service Shares and Pacific Horizon Shares, respectively. 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 and Pacific Horizon Shares of the California Tax-Exempt Money
Market Fund was 2.84%, 2.87% and 4.35%, and 2.77%, 2.80% and 4.24%,
respectively for the seven-day period ended February 29, 1996. The combined
federal and California income tax rate used in calculating the foregoing
tax-equivalent yields was 34.7%. As of February 29, 1996, Horizon Shares of
the California Tax-Exempt Money Market Fund were not offered and accordingly,
no yield information is available.
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
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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 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.
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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, Horizon Shares and Horizon
Service Shares of the Prime, Treasury, Government, Treasury Only, Tax-Exempt
Money and California Tax-Exempt Money Market Funds, the X Shares of the Prime
Fund, Treasury Fund and California Tax-Exempt Money Market Fund and the S
Shares of the Prime Fund and Treasury Fund.
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' Pacific Horizon Shares, Horizon Shares, Horizon
Service Shares, X Shares and S Shares differ in the following respects.
Pacific Horizon Shares bear the fees payable under a Special Management
Services Agreement, which are payable at the rate of up to .32% (on an
annualized basis) of the average daily net asset value of the Pacific Horizon
shares that are outstanding from time to time. Horizon Service Shares bear the
fees payable under a Shareholder Services Plan that 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. X Shares bear
the fees payable under the Distribution and Services Plan that has been adopted
for X Shares that are outstanding from time to time. S Shares bear the fees
payable under the Distribution and Services Plan that has been adopted for S
Shares, which are payable at the rate of up to 1.00% (on an annualized basis)
of the average daily net asset value of the S Shares that are outstanding from
time to time. Only Horizon Service Shares bear the fees payable under the
Shareholder Services Plan. Only Pacific Horizon Shares bear the fees payable
under the Special Management Services Agreement. Only X and S Shares bear the
fees payable under their respective Distribution and Services Plan. Due to the
different expenses
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borne by the respective classes of the Company, net yield for each class will
vary.
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 X Shares and S Shares of a Fund will be entitled to vote on matters
submitted to a vote of shareholders pertaining to their respective Distribution
and Services Plans, only Horizon Service Shares of a Fund will be entitled to
vote on matters submitted to a vote of shareholders pertaining to the Horizon
Service Shares' Shareholder Services Plan, and only Pacific Horizon Shares of a
Fund will be entitled to vote on matters submitted to a vote of shareholders
pertaining to the Pacific Horizon Funds' Special Management Services Agreement.
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.
HORIZON SERVICE SHARES
As stated in the Prospectuses for such Shares, Horizon Service
Shares are sold to Shareholder Organizations which enter into service
agreements requiring them to provide support
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<PAGE> 784
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, 1994, February
28, 1995 and February 29, 1996, payments to Shareholder Organizations totalled
$2,029,346, $2,115,780 and $3,119,024, respectively, with respect to the
Horizon Service Shares of the Prime Fund, $1,231,895, $989,269 and $1,703,233,
respectively, with respect to Horizon Service Shares of the Treasury Fund, and
$118,946, $103,606 and $113,492, respectively, with respect to the Horizon
Service Shares of the Tax-Exempt Money Fund. Of these amounts, for the fiscal
years indicated, $940,512, $391,875 and $3,065,147, respectively, $1,160,141,
$224,434 and $1,639,415, respectively, and $56,412, $28,442 and $108,762,
respectively, were paid to Bank of America and/or its 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.
For the fiscal year ended February 28, 1994, payments to
Shareholder Organizations totaled $884,419 and $323,937, respectively with
respect to the Horizon Service Shares of 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 Shareholder
Organizations waived fees totaling $160,284 for the Horizon Service Shares of
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 Horizon Service Shares
of 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.
For the fiscal year ended February 29, 1996, payments to Shareholder
Organizations totalled $608,863 and $369,104, respectively, with respect to the
Horizon Service Shares of the Government Fund and Treasury Only Fund. Of these
amounts $602,557 and $361,220, respectively, were paid by the Government Fund
and Treasury Only Fund to affiliates of Bank of America, and $0 was paid by the
Government Fund and Treasury Only Fund to the Administrator and/or its
affiliates.
For the fiscal year ended February 28, 1994, payments to
Shareholder Organizations totalled $294,140 with respect to
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the Horizon Service Shares of the California Tax-Exempt Money Market Fund. 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 Shareholder
Organizations totalled $255,299 with respect to the Horizon Service Shares of
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. For the fiscal year ended February 29, 1996, payments
to Shareholder Organizations totalled $348,568 with respect to the Horizon
Service Shares of the California Tax-Exempt Money Market Fund. Of this amount,
$346,675 was paid to affiliates of Bank of America, 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 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 Shareholder
Services 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 1940 Act and have no direct or indirect financial
interest in the Shareholder Services Plan or any related service agreement (the
"Disinterested Directors"). In approving the Shareholder Services 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
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Shareholder Services 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 Shareholder Services Plan at least annually in the manner described
above.
Under the Shareholder Services 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 Shareholder Services Plan. The
Shareholder Services Plan and any service agreements implementing the
Shareholder Services Plan must be in writing. The Shareholder Services 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
Shareholder Services 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 Shareholder Services 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.
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 LLP, 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.
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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 each Fund for the fiscal year ending February 28, 1997.
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.
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 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, 1996, the name, address and share ownership of the
entities which held as record owners more than 5% of the outstanding Pacific
Horizon Shares of the Treasury Only Fund were as follows: BA Investment
Services, Inc., For the Benefit of Clients, Attn: Unit #7852 - Bob Santilli,
P.O. Box 7042, San Francisco, CA 94120, 117,337,693.12 shares (44.18%); VAR &
Co., Attn: Linda Frintz, 180 E. 5th Street, 4th Floor, St. Paul, MN 55101,
20,631,603 shares (7.77%); BA Securities, Inc., 185 Berry Street, 3rd Floor,
San Francisco, CA 94107, 63,776,345.77 shares (24.01%); and Hare & Co., Bank of
New York and Short-Term Investment Funds, Attn: Bimal Saha, One Wall Street,
New York, NY 10286, 16,299,622.45 shares (6.14%).
At June 15, 1996, the name, address and share ownership of the
entities which held as record owners more than 5% of the outstanding Horizon
Service Shares of the Treasury Only Fund were as follows: Omnibus Account 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, 36,255,145.71 shares (21.74%); Comcare,
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Inc., 4001 North Third Street, Suite 120, Phoenix, AZ 85012, 18,013,864.56
shares (10.80%); Comcare, Inc., 4001 North Third Street, Suite 120, Phoenix, AZ
85012, 13,759,642.80 shares (8.25%); Phillips Smith Specialty Retail Group III
LP, 5080 Spectrum Drive, Suite 700, Dallas, TX 75248, 8,433,613.56 shares
(5.06%); and Omnibus Account for the Shareholder Accounts Maintained by Concord
Financial Services, Inc., Attn: Linda Zerbe, 100 First Avenue, Suite 300,
Pittsburgh, PA 15222, 42,331,589.86 shares (25.38%).
At June 15, 1996, the name, address and share ownership of the
entities which held as record owners more than 5% of the outstanding Pacific
Horizon Shares of the Treasury Fund were as follows: Hare & Co., Bank of New
York and Short Term Investment Funds, Attn: Bimal Saha, One Wall Street, New
York, NY 10286, 119,820,738.15 shares (11.98%); BA Investment Services, Inc.,
For the Benefit of Clients, Attn: Unit #7852 - Bob Santilli, P.O. Box 7042, San
Francisco, CA 94120, 214,999,785.48 shares (21.50%); and VAR & Co., Attn:
Linda Frintz, 180 E. 5th Street, 4th Floor, St. Paul, MN 55101, 555,776,087
shares (55.59%).
At June 15, 1996, the name, address and share ownership of the
entities which held as record owners more than 5% of the outstanding Horizon
Service Shares of the Treasury Fund were as follows: BISYS Fund Services, Inc.
Pittsburgh, FBO Sweep Customers, Attn: Linda Zerbe, 100 First Avenue, Suite
300, Pittsburgh, PA 15222, 146,093,204.24 shares (10.41%); and BISYS Fund
Services, Inc. Pittsburgh, FBO Sweep Customers, Attn: Linda Zerbe, 100 First
Avenue, Suite 300, Pittsburgh, PA 15222, 536,762,999.10 shares (38.23%).
At June 15, 1996, the name, address and share ownership of the
entities which held as beneficial owners more than 5% of the outstanding
Horizon Service Shares of the Treasury Fund were as follows: Bank of America
Financial Management and Trust Services, Attn: Common Trust Funds Unit 8329,
P.O. Box 3577, Terminal Annex, Los Angeles, CA 90051, 334,300,127.67 shares
(11.08%).
At June 15, 1996, the name, address and share ownership of the
entities which held as record owners more than 5% of the outstanding Horizon
Shares of the Treasury Fund were as follows: Bank of America TTEE/Cust.
Invest. Hor. Treas., Attn: Common Trust Funds Unit 8329, P.O. Box 3577,
Terminal Annex, Los Angeles, CA 90051, 204,981,030.67 shares (6.79%).
At June 15, 1996, the name, address and share ownership of the
entities which held as record owners more than 5% of the outstanding Pacific
Horizon Shares of the Government Fund were as follows: BA Investment Services,
Inc., For the Benefit of Clients, Attn: Unit #7852 - Bob Santilli, P.O. Box
7042, San
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Francisco, CA 94120, 96,024,272.20 shares (41.39%); VAR & Co., Attn: Linda
Frintz, 180 E. 5th Street, 4th Floor, St. Paul, MN 55101, 26,378,902 shares
(11.37%); BA Securities, Inc., 185 Berry Street, 3rd Floor, San Francisco, CA
94107, 50,140,615.12 shares (21.61%); and Bank of America National Trust and
Savings Association and Private Bank, Attn: ACI Unit 8329, P.O. Box 3577,
Terminal Annex, Los Angeles, CA 90051, 25,676,812.91 shares (11.07%).
At June 15, 1996, the name, address and share ownership of the
entities which held as record owners more than 5% of the outstanding Horizon
Service Shares of the Government Fund were as follows: Toasty, Ltd., David
Jackson, Controller, Two Greenway Plaza, Suite 400, Houston, TX 77046,
20,229,783.50 shares (10.28%); Providence Health Care, Attn: Linda Lan Ha,
1501 4th Avenue, Suite 500, Seattle, WA 98101, 12,840,414.42 shares (6.52%);
and Omnibus Account 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, 36,650,485.52 shares (18.62%).
At June 15, 1996, the name, address and share ownership of the
entities which held as beneficial owners more than 5% of the outstanding
Horizon Service Shares of the Government Fund were as follows: Bank of America
Nevada Southern Commercial Bank, Attn: Cindy 2964, P.O. Box 98600, Las Vegas,
NV 89193, 28,581,824.10 shares (5.66%).
At June 15, 1996, the name, address and share ownership of the
entities which held as record owners more than 5% of the outstanding Horizon
Shares of the Government Fund were as follows: Sunquest Information Systems,
Inc., Attn: Trena Couch, 1407 Eisenhower Boulevard, Johnstown, PA 15904,
47,981,630.54 shares (9.51%).
At June 15, 1996, the name, address and share ownership of the
entities which held as record owners more than 5% of the outstanding Pacific
Horizon Shares of the Prime Fund were as follows: BA Securities, Inc., 185
Berry Street, 3rd Floor, San Francisco, CA 94107, 164,406,302.26 shares
(7.26%); Hare & Co., Bank of New York and Short Term Investment Funds, Attn:
Bimal Saha, One Wall Street, New York, NY 10286, 131,246,153.79 shares (5.80%);
and BA Investment Services, Inc., For the Benefit of Clients, Attn: Unit #7852
- - Bob Santilli, P.O. Box 7042, San Francisco, CA 94120, 1,571,778,318.38 shares
(69.43%).
At June 15, 1996, the name, address and share ownership of the
entities which held as record owners more than 5% of the outstanding Horizon
Service Shares of the Prime Fund were as follows: BISYS Fund Services, Inc.
Pittsburgh, FBO Sweep Customers, Attn: Linda Zerbe, 100 First Avenue, Suite
300,
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Pittsburgh, PA 15222, 944,998,928.53 shares (43.86%); and BISYS Fund Services,
Inc. Pittsburgh, FBO Sweep Customers, Attn: Linda Zerbe, 100 First Avenue,
Suite 300, Pittsburgh, PA 15222, 314,849,310.01 shares (14.61%).
At June 15, 1996, the name, address and share ownership of the
entities which held as beneficial owners more than 5% of the outstanding
Horizon Service Shares of the Prime Fund were as follows: Bank of America
National Trust and Savings Association, Financial Management & Trust Services,
Attn: Common Trust Funds Unit 8329, P.O. Box 3577, Terminal Annex, Los Angeles,
CA 90051, 372,642,105.21 shares (6.50%); and Security Pacific Cash Management,
c/o Bank of America GPO M/C 5533, Attn: Regina Olsen, 1850 Gateway Boulevard
M/C 5533, Concord, CA 94520, 505,465,000.00 shares (8.81%).
At June 15, 1996, the name, address and share ownership of the
entities which held as record owners 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, Attn: Unit #7852 - Bob Santilli,
P.O. Box 7042, San Francisco, CA 94120, 39,326,055.57 shares (82.50%); BA
Securities, Inc., 185 Berry Street, San Francisco, CA 94107, 2,901,660.15
shares (6.09%); and VAR & Co., Attn: Linda Frintz, 180 E. 5th Street, 4th
Floor, St. Paul, MN 55101, 3,263,084.00 shares (6.85%).
At June 15, 1996, the name, address and share ownership of the
entities which held as record owners more than 5% of the outstanding Horizon
Service Shares of the Tax-Exempt Money Fund were as follows: BISYS Fund
Services, Inc. Pittsburgh, FBO Sweep Customers, Attn: Linda Zerbe, 100 First
Avenue, Suite 300, Pittsburgh, PA 15222, 24,070,430.88 shares (29.78%); and
BISYS Fund Services, Inc. Pittsburgh, FBO Sweep Customers, Attn: Linda Zerbe,
100 First Avenue, Suite 300, Pittsburgh, PA 15222, 46,754,318.95 shares
(57.85%).
At June 15, 1996, the name, address and share ownership of the
entities which held as beneficial owners more than 5% of the outstanding
Horizon Service Shares of the Tax-Exempt Money Fund were as follows: Bank of
America Financial Management and Trust Services, Attn: Common Trust Funds Unit
8329, P.O. Box 3577, Terminal Annex, Los Angeles, CA 90051, 46,754,318.95
shares (11.91%); and BA Investment Services, Inc., Attn: Unit #7852 - Bob
Santilli, 185 Berry Street, 3rd Floor, San Francisco, CA 94107, 22,564,375.21
shares (5.75%).
At June 15, 1996, the name, address and share ownership of the
entities which held as record owners more than 5% of the outstanding Horizon
Shares of the Tax-Exempt Money Fund were as follows: Bank of America Cust. for
Invest. Hor T-E, Attn: Common
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Trust Funds Unit 8329, P.O. Box 3577, Terminal Annex, Los Angeles, CA 90051,
62,696,306.62 shares (15.98%); and Continental Bank National Association Cust,
FBO Cust & Co., Attn: Mary Chester, 231 South LaSalle Street 6Q, Chicago, IL
60697, 192,951,691.54 shares (49.19%).
At June 15, 1996, the name, address and share ownership of the
entities which held as record owners more than 5% of the outstanding Pacific
Horizon Shares of the California Tax-Exempt Money Market Fund were as follows:
BA Securities, Inc., 185 Berry Street, 3rd Floor, San Francisco, CA 94107,
190,453,613.81 shares (36.26%); BA Investment Services, Inc., For the Benefit
of Clients, Attn: Unit #7852 - Bob Santilli, P.O. Box 7042, San Francisco, CA
94120, 250,582,900.17 shares (47.71%); and Bank of America National Trust and
Savings Association and Private Bank, Attn: Common Trust Funds Unit 8329, P.O.
Box 3577 Terminal Annex, Los Angeles, CA 90051, 32,833,598.27 shares (6.25%).
At June 15, 1996, the name, address and share ownership of the
entities which held as record owners more than 5% of the outstanding Horizon
Service Shares of the California Tax-Exempt Money Market Fund were as follows:
BISYS Fund Services, Inc. Pittsburgh, FBO Sweep Customers, Attn: Linda Zerbe,
100 First Avenue, Suite 300, Pittsburgh, PA 15222, 81,355,203.78 shares
(33.55%); and BISYS Fund Services, Inc. Pittsburgh, FBO Sweep Customers, Attn:
Linda Zerbe, First and Market Building, 100 First Avenue, Suite 300,
Pittsburgh, PA 15222, 100,421,516.94 shares (41.41%).
At June 15, 1996, the name, address and share ownership of the
entities which held as beneficial owners more than 5% of the outstanding
Horizon Service Shares of the California Tax-Exempt Money Market Fund were as
follows: BA Investment Services, Inc., Attn: Unit #7852 - Bob Santilli, 185
Berry Street, 3rd Floor, San Francisco, CA 94107, 69,074,303.76 shares (9.00%);
and Bank of America National Trust and Savings Association TTEE/CUS, Attn:
Common Trust Funds Unit 8329, P.O. Box 3577, Terminal Annex, Los Angeles, CA
90051, 81,218,679.78 shares (10.58%).
At June 15, 1996, the name, address and share ownership of the
entities which held as record owners more than 5% of the outstanding A Shares
of the Corporate Bond Fund were as follows: Smith Barney, Inc., Custodian, 333
W. 34th Street, 3rd Floor, New York, NY 10001, 117,522.06 shares (6.09%); and
Dean Witter Reynolds, Inc., Stock Record Department, 5th Floor, Attn: Al
Dimino, 5 World Trade Center, New York, NY 10048, 109,621 shares (5.68%).
At June 15, 1996, the name, address and share ownership of the
entities which held as record owners more than 5% of the
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outstanding Class A Shares of the National Municipal Bond Fund were as follows:
BA Investment Services, Inc., FBO 406171021, 185 Berry Street, 3rd Floor, San
Francisco, CA 94104, 113,038.79 shares (8.12%); and BA Investment Services,
Inc., FBO 405084421, 555 California Street, 4th Floor, San Francisco, CA 94104,
86,266.56 shares (6.20%).
At June 15, 1996, the name, address and share ownership of the
entities which held as record owners more than 5% of the outstanding Class A
Shares of the International Equity Fund were as follows: Bank of America
National Trust and Savings Association, Agent for the Lee G. Paul Trust, The
Paul Family Trust, P.O. Box 3577, Terminal Annex, Los Angeles, CA 90051,
5,000.00 shares (6.17%); Bank of America National Trust and Savings
Association, Agent for the Norman and Margaret Oberstein Trust, P.O. Box 3577,
Terminal Annex, Los Angeles, CA 90051, 4,995.01 shares (6.16%); Bank of America
National Trust and Savings Association, Agent for the Norman S. Oberstein
Trust, A Prof. Law Corp., P.O. Box 3577, Terminal Annex, Los Angeles, CA
90051, 10,000.00 shares (12.34%); Bank of America National Trust and Savings
Association, Agent for the Widows/Orphans Aid Association Managed Agency for
SFPD, P.O. Box 3577, Terminal Annex, Los Angeles, CA 90051, 19,960.08 shares
(24.62%); and Bank of America National Trust and Savings Association, Agent for
the Robert & Antoinette Lepore Trust, the Lepore Family Trust, P.O. Box 3577,
Terminal Annex, Los Angeles, CA 90051, 19,970.05 shares (24.63%).
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 Pacific Horizon Shares,
Horizon Shares, Horizon Service Shares, X Shares and S Shares 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 each Fund for their fiscal year ended
February 29, 1996 (the "Annual Reports") accompany this Statement of Additional
Information. The financial statements and notes thereto in each Annual Report
are incorporated into this Statement of Additional Information by reference.
The financial statements and notes in each Annual Report have been audited by
Price Waterhouse LLP, whose report thereon also appears in each Annual Report
and is also incorporated herein by
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reference. No other parts of the Annual Reports are incorporated by reference
herein. 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 in
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> 795
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> 796
"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 generally 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 are issued by United
States commercial banks, thrifts and non-bank banks; non-United States banks;
and broker-
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<PAGE> 797
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.
"C" - Obligations for which there is an inadequate capacity to
ensure timely repayment.
A-4
<PAGE> 798
"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 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
A-5
<PAGE> 799
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 that 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
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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.
(P)... - When applied to forward delivery bonds, indicates
that the rating is provisional pending delivery of the bonds. The rating may
be revised prior to delivery if changes occur in the legal documents or the
underlying credit quality of the bonds.
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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 other 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" are, however, more vulnerable to
adverse developments (both internal and external) than obligations with higher
ratings.
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"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.
"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.
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"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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